NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The consolidated financial statements present the results of operations, financial position and cash flows of Marriott Vacations Worldwide Corporation (referred to in this report as (i) “we,” “us,” “Marriott Vacations Worldwide,” “MVW,” or “the Company,” which includes our consolidated subsidiaries except where the context of the reference is to a single corporate entity, or (ii) “MVWC,” which shall refer only to Marriott Vacations Worldwide Corporation, without its consolidated subsidiaries). In order to make this report easier to read, we refer throughout to (i) our Consolidated Financial Statements as our “Financial Statements,” (ii) our Consolidated Statements of Income as our “Income Statements,” (iii) our Consolidated Balance Sheets as our “Balance Sheets,” and (iv) our Consolidated Statements of Cash Flows as our “Cash Flows.” References throughout to numbered “Footnotes” refer to the numbered Notes in these Notes to Consolidated Financial Statements, unless otherwise noted. We also refer to Marriott International, Inc. as “Marriott International” and Marriott International’s Marriott Bonvoy customer loyalty program as “Marriott Bonvoy.” We use certain other terms that are defined within these Financial Statements.
The Financial Statements presented herein and discussed below include 100 percent of the assets, liabilities, revenues, expenses, and cash flows of Marriott Vacations Worldwide, all entities in which Marriott Vacations Worldwide has a controlling voting interest (“subsidiaries”), and those variable interest entities (“VIEs”) for which Marriott Vacations Worldwide is the primary beneficiary in accordance with consolidation accounting guidance. References in these Financial Statements to net (loss) income attributable to common shareholders and MVW shareholders’ equity do not include noncontrolling interests, which represent the outside ownership of our consolidated non-wholly owned entities and are reported separately. Intercompany accounts and transactions between consolidated entities have been eliminated in consolidation.
These Financial Statements reflect our financial position, results of operations, and cash flows as prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, revenue recognition, allocations of the purchase price paid in business combinations, cost of vacation ownership products, inventory valuation, goodwill and intangibles valuation, property and equipment valuation, accounting for acquired vacation ownership notes receivable, vacation ownership notes receivable reserves, income taxes, and loss contingencies. The uncertainty created by the COVID-19 pandemic (as defined below), and efforts to mitigate it, has made it more challenging to make these estimates. Accordingly, ultimate results could differ from these estimated amounts.
We have reclassified certain prior year amounts to conform with our current year presentation.
COVID-19 Pandemic Update
In March 2020, the World Health Organization declared the coronavirus (COVID-19) outbreak a global pandemic (“COVID-19,” “the COVID-19 pandemic,” “the pandemic,” or “the virus”), and since then the world has been, and continues to be, impacted by this virus. National, federal, state, and local governments have since implemented various travel restrictions, border closings, restrictions on public gatherings, mandatory quarantines, shelter-in-place mandates and limitations on business operations. The COVID-19 pandemic had a swift and unexpected adverse impact on the global economic landscape, with an especially significant adverse impact on the travel and hospitality industries.
The results of operations for 2020 include impacts related to the COVID-19 pandemic, which have been significantly adverse for our business. The COVID-19 pandemic and measures to prevent or slow the spread of the virus impacted our businesses in a number of ways. In our vacation ownership segment, due to low occupancy rates and based on various governmental mandates and advisories, we closed all of our sales centers and several of our resorts and reduced operations and amenities at our resorts over the course of 2020. These actions led to a material decrease in contract sales and rental revenues from our vacation ownership business. In our Exchange & Third-Party Management business, the closures of certain affiliated resorts and managed properties had an adverse impact on our business, and the closure of a large number of resorts, and their decision not to take reservations, during a portion of the year resulted in a decrease in management and exchange revenues.
In response to the evolving situation and in anticipation of continued possible disruptions, we took action to implement various cost saving measures and to preserve liquidity through restructuring our workforce and corporate debt. See Footnote 3 “Restructuring Charges” for more information about the restructuring charges recorded as a result of the COVID-19 pandemic. Also see Footnote 17 “Debt” for information on the steps taken to preserve liquidity during these uncertain times.
Acquisition of ILG
On September 1, 2018 (the “Acquisition Date”), we completed the acquisition of ILG, LLC, formerly known as ILG, Inc. (“ILG”), through a series of transactions (the “ILG Acquisition”), after which ILG became our indirect wholly-owned subsidiary. We refer to our business associated with brands that existed prior to the ILG Acquisition as “Legacy-MVW” and to ILG’s business and brands that we acquired as “Legacy-ILG.” See Footnote 4 “Acquisitions and Dispositions” for more information on the ILG Acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Revenue Recognition
We account for revenue in accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”).
Sale of Vacation Ownership Products
We market and sell vacation ownership products in our Vacation Ownership segment. Vacation ownership products include deeded vacation ownership products, deeded beneficial interests, rights to use real estate and other interests in trusts that solely hold real estate (collectively “vacation ownership products” or “VOIs”). Vacation ownership products may be sold for cash or we may provide financing.
In connection with the sale of vacation ownership products, we provide sales incentives to certain purchasers and, in certain cases, membership in a brand affiliated club. Non-cash incentives typically include Marriott Bonvoy points, Hyatt’s customer loyalty program points (“World of Hyatt” points), or an alternative sales incentive that we refer to as “plus points.” Plus points are redeemable for stays at our resorts or for use in an exclusive selection of travel packages provided by affiliate tour operators (the “Explorer Collection”), generally up to two years from the date of issuance. Typically, sales incentives are only awarded if the sale is closed.
Upon execution of a legal sales agreement, we typically receive an upfront deposit from our customer with the remainder of the purchase price for the vacation ownership product to either be collected at closing (“cash contract”) or financed by the customer through our financing programs (“financed contract”). Refer to “Financing Revenues” below for further information regarding financing terms. Customer deposits received for contracts are recorded as Advance deposits on our Balance Sheets until the point in time at which control of the vacation ownership product has transferred to the customer.
Our assessment of collectibility of the transaction price for sales of vacation ownership products is aligned with our credit granting policies for financed contracts. In determining the consideration to which we expect to be entitled for financed contracts, we include estimated variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on the customer class and the results of our static pool analyses, which rely on historical payment data by customer class as described in “Loan Loss Reserves” below. Variable consideration which has not been included within the transaction price is presented as a reserve on vacation ownership notes receivable. Revisions to estimates of variable consideration from the sale of vacation ownership products impact the reserve on vacation ownership notes receivable and can increase or decrease revenue. Revenues were reduced during 2020 by $79 million due to changes in our estimates of variable consideration for performance obligations that were satisfied in prior periods. See Footnote 7 “Vacation Ownership Notes Receivable” for information on increases to our vacation ownership notes receivable reserve attributable to the COVID-19 pandemic. In addition, we account for cash incentives provided to customers as a reduction of the transaction price. Refer to “Arrangements with Multiple Performance Obligations” below for a description of our methods of allocating transaction price to each performance obligation.
We evaluated our business practices, and the underlying risks and rewards associated with vacation ownership products and the respective timing that such risks and rewards are transferred to the customer in determining the point in time at which control of the vacation ownership product is transferred to the customer. Based upon the different terms of the contracts with the customer and business practices, we transfer control of the vacation ownership product at different times for Legacy-MVW and Legacy-ILG. We recognize revenue on the sale of Legacy-MVW vacation ownership products at closing. We recognize revenue on the sale of Legacy-ILG vacation ownership products upon expiration of the rescission period.
Revenue for non-cash incentives, such as plus points, is recorded as Deferred revenue on our Balance Sheets at closing and is recognized as rental revenue upon transfer of control to the customer, which typically occurs upon delivery of the incentive, or at the point in time when the incentive is redeemed. For non-cash incentives provided by third parties (i.e. Marriott Bonvoy points, World of Hyatt points or third-party Explorer Collection offerings), we evaluated whether we control the underlying good or service prior to delivery to the customer. We concluded that we are an agent for those non-cash incentives which we do not control prior to delivery and as such record the related revenue net of the related cost upon recognition.
Management and Exchange Revenues and Cost Reimbursements Revenues
Ancillary Revenues
Ancillary revenues consist of goods and services that are sold or provided by us at food and beverage outlets, golf courses and other retail and service outlets located at our resorts. Payments for such goods and services are generally received at the point of sale in the form of cash or credit card charges. For goods and services sold, we evaluate whether we control the underlying goods or services prior to delivery to the customer. For transactions where we do not control the goods or services prior to delivery, the related revenue is recorded net of the related cost upon recognition. We recognize ancillary revenue at the point in time when goods have been provided and/or services have been rendered.
Management Fee Revenues and Cost Reimbursements Revenues
We provide day-to-day-management services, including housekeeping services, operation of reservation systems, maintenance and certain accounting and administrative services for property owners’ associations, condominium owners and hotels.
We generate revenue from fees we earn for managing vacation ownership resorts, clubs, owners’ associations, condominiums and hotels. In our Vacation Ownership segment, these fees are earned regardless of usage or occupancy and are typically based on either a percentage of the budgeted costs to operate the resorts or a fixed fee arrangement (“VO management fee revenues”). In our Exchange & Third-Party Management segment, we earn base management fees which are typically either (i) fixed amounts, (ii) amounts based on a percentage of adjusted gross lodging revenue, or (iii) various revenue sharing agreements based on stated formulas (“Base management fee revenues”) and incentive management fees, which are generally a percentage of either operating profits or improvement in operating profits (“Incentive management fees”). In addition, we receive reimbursement of costs incurred on behalf of our customers, which consist of actual expenses with no added margin (“cost reimbursements”). Vacation Ownership segment cost reimbursements revenues exclude amounts that we have paid to the property owners’ associations related to maintenance fees for unsold vacation ownership products, as we have concluded that such payments are consideration payable to a customer.
Management fees are collected over time or upfront depending upon the specific management contract. Cost reimbursements are received over time and considered variable consideration. We have determined that a significant financing component does not exist as a substantial amount of the consideration promised by the customer is paid when the associated variable consideration is determined.
We evaluated the nature of the management services provided and concluded that the management services constitute a series of distinct services to be accounted for as a single performance obligation transferred over time. We use an input method, the number of days that management services are provided, to recognize VO management fee revenues and Base management fee revenues, which is consistent with the pattern of transfer to the customers who receive and consume the benefits as services are provided each day. We recognize Incentive management fees as earned throughout the incentive period based on actual results, which is subject to estimation of the transaction price.
Any consideration we receive in advance of services being rendered is recorded as Deferred revenue on our Balance Sheets and is recognized ratably across the service period to which it relates. We recognize variable consideration for Cost reimbursements revenues when the reimbursable costs are incurred.
Other Services Revenues
Other services revenues includes revenues from membership fees, club dues and additional fees for services we provide to customers. Membership fees and club dues are received in advance of providing access to the exchange services, are recorded as Deferred revenue on our Balance Sheets and are earned regardless of whether exchange services are provided. Generally, Interval International memberships are cancellable and refundable on a pro-rata basis, with the exception of the Interval International network’s Platinum tier which is non-refundable. Transaction-based fees are typically collected at a point in time.
We have determined that exchange services constitute a stand-ready obligation for us to provide unlimited access to exchange services over a defined period of time, when and if a customer (or customer of a customer) requests. We have determined that customers benefit from the stand-ready obligation evenly throughout the period in which the customer has access to exchange services and as such, recognize membership fees and club dues on a straight-line basis over the related period of time.
Transaction-based fees are recognized as revenue at the point in time at which the relevant goods or services are transferred to the customer. For transaction-based fees, we evaluate whether we control the underlying goods or services prior to delivery to the customer. Transaction-based fees from exchanges and other transactions in our Exchange & Third-Party Management segment are generally recognized when confirmation of the transaction is provided and services have been rendered. For transactions where we do not control the goods or services prior to delivery, the related revenue is recorded net of the related cost upon recognition.
Financing Revenues
We offer consumer financing as an option to qualifying customers purchasing vacation ownership products, which is collateralized by the underlying vacation ownership products. We recognize interest income on an accrual basis. The contractual terms of the financing agreements require that the contractual level of annual principal payments be sufficient to amortize the loan over a customary period for the vacation ownership product being financed, which is generally ten years. Generally, payments commence under the financing contracts 30 to 60 days after closing. We record the difference between the vacation ownership note receivable and the variable consideration included in the transaction price for the sale of the related vacation ownership product as a reserve on our vacation ownership notes receivable. We earn interest income from the financing arrangements on the principal balance outstanding over the life of the arrangement and record that interest income in Financing revenues on our Income Statements.
In addition, we recognize interest income related to our acquired vacation ownership notes receivable using the level yield method. See Footnote 7 “Vacation Ownership Notes Receivable” for additional information related to the accounting for our acquired vacation ownership notes receivable.
Financing revenues include transaction-based fees we charge to owners and other third parties for services. We recognize fee revenues when services have been rendered.
Rental Revenues
In our Vacation Ownership segment, we generate revenue from rentals of inventory that we hold for sale as interests in our vacation ownership programs, inventory that we control because our owners have elected alternative usage options permitted under our vacation ownership programs and rentals of owned-hotel properties. In our Exchange & Third-Party Management segment, we offer vacation rental opportunities for managed properties and to members of the Interval International network and certain other membership programs from seasonal oversupply or underutilized space, as well as sourced resort accommodations.
We receive payments for rentals primarily through credit card charges. We generally recognize rental revenues when occupancy has occurred, which is consistent with the period in which the customer benefits from such service. For certain rental revenues associated with our Exchange & Third-Party Management segment, revenue is recognized when confirmation of the transaction is provided as we concluded we are an agent for these transactions. We recognize rental revenue from the utilization of plus points issued in connection with the sale of vacation ownership products as described in “Sale of Vacation Ownership Products” above.
We also generate revenues from vacation packages sold to our customers. The packages have an expiration period of six to twenty-four months, and payments for such packages are non-refundable and generally paid by the customer in advance. Payments received in advance are recorded as Advance deposits on our Balance Sheets, until the revenue is recognized, when occupancy has occurred. For rental revenues associated with vacation ownership products which we own and which are registered and held for sale, to the extent that the proceeds are less than costs, revenues are reported net in accordance with ASC Topic 978, “Real Estate – Time-Sharing Activities.”
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. In cases where the standalone selling price is not readily available, we generally determine the standalone selling prices utilizing the adjusted market approach, using prices from similar contracts, our historical pricing on similar contracts, our internal marketing and selling data and other internal and external inputs we deem to be appropriate. Significant judgment is required in determining the standalone selling price under the adjusted market approach.
Receivables, Contract Assets & Contract Liabilities
As discussed above, the payment terms and conditions in our customer contracts vary. In some cases, customers prepay for their goods and services; in other cases, after appropriate credit evaluations, payment is due in arrears. When the timing of our delivery of goods and services is different from the timing of the payments made by customers, we recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance or when we have a right to consideration that is unconditional before the transfer of goods or services to a customer). Receivables are recorded when the right to consideration becomes unconditional. Contract liabilities are recognized as revenue as (or when) we perform under the contract. See Footnote 5 “Revenue” for additional information related to our receivables, contract assets and contract liabilities.
Costs Incurred to Sell Vacation Ownership Products
We charge marketing and sales costs we incur to sell vacation ownership products to expense when incurred.
(Loss) Earnings Per Share Attributable to Common Shareholders
Basic (loss) earnings per share attributable to common shareholders is calculated by dividing the (loss) earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted (loss) earnings per share attributable to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted earnings per share attributable to common shareholders by application of the treasury stock method. Any potentially dilutive equity-based compensation awards are excluded from the calculation for periods when there is a net loss attributable to common shareholders to avoid anti-dilutive effects.
Business Combinations
We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. We recognize as goodwill the amount by which the purchase price of an acquired entity exceeds the net of the fair values assigned to the assets acquired and liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods including the income, cost and market approaches. Further, we make assumptions within certain valuation techniques, including discount rates, royalty rates, and the amount and timing of future cash flows. We record the net assets and results of operations of an acquired entity in our Financial Statements from the acquisition date. We initially perform these valuations based upon preliminary estimates and assumptions by management or independent valuation specialists under our supervision, where appropriate, and make revisions as estimates and assumptions are finalized. We expense acquisition-related costs as we incur them.
As part of our accounting for business combinations we are required to determine the useful lives of identifiable intangible assets recognized separately from goodwill. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the acquired business. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized. We base the estimate of the useful life of an intangible asset on an analysis of all pertinent factors, in particular, all of the following factors with no one factor being more presumptive than the other:
•The expected use of the asset.
•The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate.
•Any legal, regulatory, or contractual provisions that may limit the useful life.
•Our own historical experience in renewing or extending similar arrangements, consistent with our intended use of the asset, regardless of whether those arrangements have explicit renewal or extension provisions.
•The effects of obsolescence, demand, competition, and other economic factors.
•The level of maintenance expenditures required to obtain the expected future cash flows from the asset.
If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon; that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the acquired business.
Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired entity and are inherently uncertain. Examples of critical estimates in accounting for acquisitions include but are not limited to future expected cash flows from sales of products and services and related contracts and agreements and discount and long-term growth rates. Unanticipated events and circumstances may occur which could affect the accuracy or validity of our assumptions, estimates or actual results.
Additionally, when acquiring a company that has recorded deferred revenue in its historical, pre-acquisition financial statements, we are required as part of purchase accounting to re-measure the deferred revenue as of the acquisition date. Deferred revenue is re-measured to represent solely the cost that relates to the associated legal performance obligation which we assumed as part of the acquisition, plus a normal profit margin representing the level of effort or risk assumed. Legal performance obligations that simply relate to the passage of time would not result in recognized deferred revenue as there is little to no associated cost. This purchase accounting treatment typically results in lower amounts of revenue recognized in a reporting period following the acquisition than would have otherwise been recognized on a historical basis.
Variable Interest Entities
We consolidate entities under our control, including VIEs where we are deemed to be the primary beneficiary. In accordance with the applicable accounting guidance for the consolidation of VIEs, we analyze our variable interests, including loans, guarantees and equity investments, to determine if an entity in which we have a variable interest is a VIE. Our analysis includes both quantitative and qualitative reviews. We base our quantitative analysis on the forecasted cash flows of the entity, and our qualitative analysis on our review of the design of the entity, its organizational structure including decision-making ability, and relevant financial agreements. We also use our qualitative analyses to determine if we must consolidate a VIE because we are its primary beneficiary.
Fair Value Measurements
We have several financial instruments that we must measure at fair value on a recurring basis. See Footnote 8 “Financial Instruments” for further information. We also apply the provisions of fair value measurement to various non-recurring measurements for our financial and non-financial assets and liabilities.
The applicable accounting standards define fair value as the price that would be received upon selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). We measure fair value of our assets and liabilities using inputs from the following three levels of the fair value hierarchy:
•Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access at the measurement date.
•Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
•Level 3 includes unobservable inputs that reflect our assumptions about what factors market participants would use in pricing the asset or liability. We develop these inputs based on the best information available, including our own data.
Cash and Cash Equivalents
We consider all highly liquid investments with an initial purchase maturity of three months or less at the date of purchase to be cash equivalents.
Restricted Cash
Restricted cash primarily consists of cash restricted for use by consolidated property owners’ associations which is designated for resort operations and other specific uses, such as reserves, cash held in a reserve account related to vacation ownership notes receivable securitizations, cash collected for maintenance fees to be remitted to property owners’ associations, and deposits received and held in escrow, primarily associated with the sale of vacation ownership products.
Accounts Receivable
Accounts receivable are stated at amounts due from customers, principally resort developers, members and managed properties, net of a reserve for credit losses. Accounts receivable outstanding longer than the contractual payment terms are considered past due. We determine our credit loss reserve for accounts receivable by considering a number of factors, including the length of time accounts receivable are past due, previous loss history, our judgment as to the specific customer’s current ability to pay its obligation and the condition of the general economy. We write off accounts receivable when they become uncollectible once we have exhausted all means of collection. Accounts receivable is presented net of a reserve for credit losses of $15 million and $12 million at December 31, 2020 and December 31, 2019, respectively. Accounts receivable also includes interest receivable on vacation ownership notes receivable. Write-offs of interest receivable are recorded as a reversal of previously recorded interest income.
Acquired Vacation Ownership Notes Receivable Reserve for Credit Losses
As part of the ILG Acquisition, we acquired existing portfolios of vacation ownership notes receivable. At acquisition, we recorded these vacation ownership notes receivable at fair value. Upon adoption of ASU 2016-13 (as defined below) on January 1, 2020, we account for these acquired vacation ownership notes receivable using the purchased credit deteriorated assets provision of the current expected credit loss model, whereby we established a reserve for credit losses and a corresponding increase in the book value of the acquired vacation ownership notes receivable, resulting in no impact to the recorded balance. The estimates of the reserve for credit losses on the acquired vacation ownership notes receivable are based on default rates that are an output of our static pool analyses. Any changes in the reserve for credit losses are recorded as Financing expenses on our Income Statements.
In addition, we established a noncredit discount of $2 million, which represents the difference between the amortized cost basis and the par value of our acquired vacation ownership notes receivable. The noncredit discount will be amortized to interest expense over the contractual life of the acquired vacation ownership notes receivable and is recorded as Financing expenses on our Income Statements.
For additional information on our acquired vacation ownership notes receivable, including information on the related reserves and the impact of the COVID-19 pandemic, see Footnote 7 “Vacation Ownership Notes Receivable.”
Originated Vacation Ownership Notes Receivable Reserve
We record the difference between the vacation ownership note receivable and the variable consideration included in the transaction price for the sale of the related vacation ownership product as a reserve on our originated vacation ownership notes receivable. See “Financing Revenues” above for further information.
Although we consider loans to owners to be past due if we do not receive payment within 30 days of the due date, we suspend accrual of interest only on those loans that are over 90 days past due. For Legacy-MVW vacation ownership notes receivable, we consider loans over 150 days past due to be in default and fully reserve such amounts. For Legacy-ILG vacation ownership notes receivable we consider loans over 120 days past due to be in default and fully reserve such amounts. We apply payments we receive for vacation ownership notes receivable on non-accrual status first to interest, then to principal and any remainder to fees. We resume accruing interest when vacation ownership notes receivable are less than 90 days past due. We do not accept payments for vacation ownership notes receivable during the foreclosure process unless the amount is sufficient to pay all past due principal, interest, fees and penalties owed and fully reinstate the note. We write off vacation ownership notes receivable against the reserve once we receive title to the vacation ownership products through the foreclosure or deed-in-lieu process or, in certain circumstances, when revocation is complete.
For additional information on our originated vacation ownership notes receivable, including information on the related reserves and the impact of the COVID-19 pandemic, see Footnote 7 “Vacation Ownership Notes Receivable.”
Inventory
Our inventory consists primarily of completed vacation ownership products and vacation ownership products under construction. We carry our inventory at the lower of (1) cost, including costs of improvements and amenities incurred subsequent to acquisition, capitalized interest and real estate taxes plus other costs incurred during construction, or (2) estimated fair value, less costs to sell, which can result in impairment charges and/or recoveries of previous impairments.
We account for vacation ownership inventory and cost of vacation ownership products in accordance with the authoritative guidance for accounting for real estate time-sharing transactions, which defines a specific application of the relative sales value method for reducing vacation ownership inventory and recording cost of sales as described in our policy for revenue recognition for vacation ownership products. Also, pursuant to the guidance for accounting for real estate time-sharing transactions, we do not reduce inventory for cost of vacation ownership products related to variable consideration which has not been included within the transaction price (accordingly, no adjustment is made when inventory is reacquired upon default of the related receivable). These standards provide for changes in estimates within the relative sales value calculations to be accounted
for as real estate inventory true-ups, which we refer to as product cost true-up activity, and are recorded in Cost of vacation ownership product expenses on the Income Statements to retrospectively adjust the margin previously recorded subject to those estimates. For 2020, 2019 and 2018, product cost true-up activity relating to vacation ownership products increased carrying values of inventory by $6 million, $8 million and $6 million, respectively.
Property and Equipment
Property and equipment includes our sales centers, golf courses, information technology, including internally developed capitalized software, and other assets used in the normal course of business, as well as land held for future vacation ownership product development and undeveloped, and partially developed land parcels that are not part of an approved development plan and do not meet the criteria to be classified as held for sale. In addition, fully developed vacation ownership interests are classified as property and equipment until they are registered for sale. We record property and equipment at cost, including interest and real estate taxes incurred during active development. We capitalize the cost of improvements that extend the useful life of property and equipment when incurred. We expense all repair and maintenance costs as incurred. We compute depreciation using the straight-line method over the estimated useful lives of the assets (three to forty years), and we amortize leasehold improvements over the shorter of the asset life or lease term.
We also capitalize certain qualified costs incurred in connection with the development of internal use software. Capitalization of internal use software costs begins when the preliminary project stage is completed, management with the relevant authority authorizes and commits to the funding of the software project, and it is probable that the project will be completed and the software will be used to perform the function intended.
Leases
We account for leases in accordance with ASC Topic 842, “Leases” (“ASC 842”). We determine if an arrangement is or contains a lease at contract inception. Operating leases include lease arrangements for various land, corporate facilities, real estate and equipment. We also have a long-term land lease for land underlying an operating hotel. Corporate facilities leases are for office space, including our corporate headquarters in Orlando, Florida. Other operating leases are primarily for office, off-site sales centers and retail space, as well as various equipment supporting our operations, with varying terms and renewal option periods.
Finance leases include lease arrangements for ancillary and operations space. In addition, we also lease various equipment supporting our operations and classify these leases as finance leases in accordance with ASC 842. The depreciable life of these assets is limited to the expected lease term, unless there is a transfer of title or purchase option reasonably certain of exercise.
Right-of-use assets and lease liabilities are recognized based on the present value of lease payments over the lease term at commencement date. Short-term leases, which have an initial term of a year or less, are not recorded on the balance sheet. For purposes of calculating lease liabilities, lease terms may be deemed to include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Macro-economic conditions are the primary factor used to estimate whether an option to extend a lease term will be exercised or not. Because the rate implicit in our leases is not readily determinable, we use our incremental borrowing rate as the discount rate, which approximates the interest rate at which we could borrow on a collateralized basis with similar terms and payments and in similar economic environments. Right-of-use assets exclude the unamortized portion of lease incentives received. Certain of our lease agreements include variable rental payments that are based on a percentage of retail sales over contractual levels and others include rental payments adjusted periodically for inflation. Additionally, with respect to our real estate leases, we do not separate lease and non-lease components.
Impairment of Long-Lived Assets and Other Intangible Assets
We assess long-lived assets, including property and equipment, leases, and definite-lived intangible assets, for recoverability when changes in circumstances indicate the carrying value may not be recoverable, for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect will be generated by the asset group. If the comparison indicates that the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.
We assess indefinite-lived intangible assets for potential impairment and continued indefinite use annually, or more frequently if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible is less than its carrying amount. If the carrying value of the asset exceeds the fair value, we recognize an impairment loss in the amount of that excess.
We recorded $3 million of impairment charges for property and equipment during 2020. See Footnote 13 “Intangible Assets” for additional information on our intangibles, including the impairment charges recorded during the year ended December 31, 2020.
Goodwill
We perform an annual review for the potential impairment of the carrying value of goodwill in the fourth quarter, or more frequently if events or circumstances indicate a possible impairment. For purposes of evaluating goodwill for impairment, we have two reporting units, which are also our reportable operating segments. In evaluating goodwill for impairment, we may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount.
Qualitative factors that we consider include, for example, macroeconomic and industry conditions, overall financial performance, and other relevant entity-specific events. If the qualitative assessment is not conclusive, then a quantitative impairment analysis for goodwill is performed at the reporting unit level. We may also choose to perform this quantitative impairment analysis instead of the qualitative analysis. The quantitative impairment analysis compares the fair value of the reporting unit, determined using the income and/or market approach, to its recorded amount. If the recorded amount exceeds the fair value, then a goodwill impairment charge is recorded for the difference up to the recorded amount of goodwill.
We calculate the estimated fair value of a reporting unit using a weighting of the income and market approaches. For the income approach, we use internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow new units; and estimated discount rates. For the market approach, we use internal analyses based primarily on market comparables. We base these assumptions on our historical data and experience, third-party appraisals, industry projections, micro and macro general economic condition projections, and our expectations.
See Footnote 12 “Goodwill” for additional information on our goodwill, including the impairment charges recorded during the year ended December 31, 2020.
Convertible Senior Notes
In accounting for the 1.50% Convertible Senior Notes due 2022 (the “2022 Convertible Notes”), we bifurcated the liability and equity components. The carrying amount of the liability component was calculated by measuring the fair value of a similar liability that does not have an associated convertible feature. The carrying amount of the equity component representing the conversion option was determined by deducting the fair value of the liability component from the par value of the 2022 Convertible Notes. The excess of the principal amount of the liability over its carrying amount is amortized to interest expense over the term of the 2022 Convertible Notes using the effective interest method. The equity component is not remeasured as long as it continues to meet the conditions for equity classification. In accounting for the issuance costs related to the 2022 Convertible Notes, we allocated the total amount incurred to the liability and equity components based on their relative values. Issuance costs attributable to the liability component are amortized to interest expense over the term of the 2022 Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in additional paid-in capital within shareholders’ equity. See Footnote 17 “Debt” for more information.
Derivative Instruments
We record derivatives at fair value. The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how we reflect the change in fair value of the derivative instrument in our Financial Statements. A derivative qualifies for hedge accounting if we expect it to be highly effective in offsetting the underlying hedged exposure and we fulfill the hedge documentation requirements. We may designate a hedge as a cash flow hedge, fair value hedge, or a net investment in non-U.S. operations hedge based on the exposure we are hedging. If a qualifying hedge is deemed effective, we record changes in fair value in other comprehensive income.
We assess the effectiveness of our hedging instruments quarterly, recognize current period hedge ineffectiveness immediately in earnings, and discontinue hedge accounting for any hedge that we no longer consider to be highly effective. We recognize changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings.
We are exposed to market risk from changes in interest rates, currency exchange rates and debt prices. We manage our exposure to these risks by monitoring available financing alternatives, through pricing policies that may take into account currency exchange rates, and by entering into derivative arrangements. As a matter of policy, we only enter into transactions that we believe will be highly effective at offsetting the underlying risk, and we do not use derivatives for trading or speculative purposes.
Loss Contingencies
We are subject to various legal proceedings and claims in the normal course of business, the outcomes of which are subject to significant uncertainty. We record an accrual for loss contingencies when we determine that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations we evaluate, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, our ability to make a reasonable estimate of the loss. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.
Defined Contribution Plan
We administer and maintain a defined contribution plan for the benefit of all employees meeting certain eligibility requirements who elect to participate in the plan. Contributions are determined based on a specified percentage of salary deferrals by participating employees. We recognized compensation expense (net of cost reimbursements from property owners’ associations) for our participating employees totaling $12 million in 2020, $19 million in 2019 and $11 million in 2018.
Deferred Compensation Plan
Certain members of our senior management have the opportunity to participate in the Marriott Vacations Worldwide Deferred Compensation Plan (the “Deferred Compensation Plan”), which we maintain and administer. Under both the Deferred Compensation Plan and the Marriott International EDC (as defined below) participating employees are able to defer payment and income taxation of a portion of their salary and bonus. It also provides participants with the opportunity for long-term capital appreciation by crediting their accounts with notional earnings.
Prior to the spin-off of MVW from Marriott International (the “Marriott Spin-Off”), certain members of our senior management had the opportunity to participate in the Marriott International, Inc. Executive Deferred Compensation Plan (the “Marriott International EDC”), which Marriott International maintains and administers. Subsequent to the Marriott Spin-Off, we remain liable to reimburse Marriott International for distributions to participants that were employees of Marriott Vacations Worldwide at the time of the Marriott Spin-Off including earnings thereon.
To support our ability to meet a portion of our obligations under the Deferred Compensation Plan, we acquired company owned insurance policies (the “COLI policies”) on the lives of certain participants in the Deferred Compensation Plan, the proceeds of which are intended to be aligned with the investment alternatives elected by plan participants and are payable to a rabbi trust with the Company as grantor. For both 2020 and 2019, participants were able to select a rate of return based on market-based investment alternatives for up to 100 percent of their contributions and existing balances, with one of those options being a fixed rate of return of 3.5 percent.
We consolidate the liabilities of the Deferred Compensation Plan and the related assets, which consist of the COLI policies held in the rabbi trust. The rabbi trust is considered a VIE. We are considered the primary beneficiary of the rabbi trust because we direct the activities of the trust and are the beneficiary of the trust. At December 31, 2020, the value of the assets held in the rabbi trust was $54 million, which is included in the Other line within assets on our Balance Sheets.
Share-Based Compensation Costs
During the second quarter of 2020, our shareholders approved the Marriott Vacations Worldwide Corporation 2020 Equity Incentive Plan (the “MVW Equity Plan”), which supersedes both the Marriott Vacations Worldwide Corporation Stock and Cash Incentive Plan and the Interval Leisure Group, Inc. 2013 Stock and Incentive Plan (collectively, the “Prior Plans”). No new awards will be granted under the Prior Plans and all awards that were granted under the Prior Plans will remain outstanding and continue to be governed by the Prior Plans.
The MVW Equity Plan was established in order to compensate our employees and directors by granting them equity awards such as restricted stock units (“RSUs”), stock appreciation rights (“SARs”) and stock options.
We follow the provisions of ASC Topic 718, “Compensation—Stock Compensation,” which requires that a company measure the expense of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. Generally, share-based awards granted to our employees, other than RSUs with performance vesting conditions, vest ratably over a four-year period. For share-based awards with service-only vesting conditions, we record compensation expense on a straight-line basis over the requisite service period. For RSUs with performance vesting conditions, the number of RSUs earned, if any, is determined following the end of a performance period (typically three years) based upon the cumulative achievement over that period of specific quantitative operating financial measures and we recognize compensation expense once it is probable that the corresponding performance condition will be achieved.
SARs awarded under the MVW Equity Plan are granted at exercise prices or strike prices equal to the market price of our common stock on the date of grant (this price is referred to as the “base value”). SARs generally expire ten years after the date of grant and both vest and become exercisable in cumulative installments of one quarter of the grant at the end of each of
the first four years following the date of grant. Upon exercise of SARs, our employees and non-employee directors receive a number of shares of our common stock equal to the number of SARs being exercised, multiplied by the quotient of (a) the market price of the common stock on the date of exercise (this price is referred to as the “final value”) minus the base value, divided by (b) the final value.
We recognize the expense associated with these awards on our Income Statements based on the fair value of the awards as of the date that the share-based awards are granted and adjust that expense to the estimated number of awards that we expect will vest or be earned. The fair value of RSUs represents the number of awards granted multiplied by the average of the high and low market price of our common stock on the date the awards are granted reduced by the present value of the dividends expected to be paid on the shares during the vesting period, discounted at a risk-free interest rate. We generally determine the fair value of SARs using the Black-Scholes option valuation model which incorporates assumptions about expected volatility, risk free interest rate, dividend yield and expected term. We will issue shares from authorized shares upon the exercise of SARs or stock options held by our employees and directors.
For share-based awards granted to non-employee directors, we recognize compensation expense on the grant date based on the fair value of the awards as of that date. See Footnote 19 “Share-Based Compensation” for more information on the MVW Equity Plan.
Non-U.S. Operations
The U.S. dollar is the functional currency of our consolidated entities operating in the United States. The functional currency for our consolidated entities operating outside of the United States is generally the currency of the economic environment in which the entity primarily generates and expends cash. For consolidated entities whose functional currency is not the U.S. dollar, we translate their financial statements into U.S. dollars. We translate assets and liabilities at the exchange rate in effect as of the financial statement date and translate Income Statement accounts using the weighted average exchange rate for the period. We include translation adjustments from currency exchange and the effect of exchange rate changes on intercompany transactions of a long-term investment nature as a separate component of equity. We report gains and losses from currency exchange rate changes related to intercompany receivables and payables that are not of a long-term investment nature, as well as gains and losses from non-U.S. currency transactions, in the (Losses) gains and other (expense) income, net line on our Income Statements.
Income Taxes
We file income tax returns, including with respect to our subsidiaries, in various jurisdictions around the world. We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
Changes in existing tax laws and rates, their related interpretations, and the uncertainty generated by the current economic environment may affect the amounts of deferred tax liabilities or the valuations of deferred tax assets over time. Our accounting for deferred tax consequences represents management’s best estimate of future events that can be appropriately reflected in the accounting estimates.
We record a valuation allowance on deferred taxes if we determine it is more likely than not that we will not fully realize the future benefit of deferred tax assets. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which impacts the provision for income taxes.
We file tax returns after the close of our fiscal year end and adjust our estimated tax receivable or liability to the actual tax receivable or due per the filed tax returns. Historically, we have not experienced significant differences between our estimates of provision for income tax and actual amounts incurred.
For purposes of Global Intangible Low-Taxed Income (“GILTI”), we have elected to use the period cost method and therefore have not recorded deferred taxes for basis differences expected to reverse in future periods.
For tax positions we have taken, or expect to take, in a tax return we apply a more likely than not threshold, under which we must conclude a tax position is more likely than not to be sustained, assuming that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information, in order to continue to recognize the benefit. In determining our provision for income taxes, we use judgment, reflecting our estimates and assumptions, in applying the more likely than not threshold. Based on our evaluations of tax positions, we believe that potential tax exposures have been recorded appropriately. Additionally, we recognize accrued interest and penalties related to our unrecognized tax benefits as a component of tax expense.
For information about income taxes, deferred tax assets and liabilities, and uncertain tax benefits, see Footnote 6 “Income Taxes.”
New Accounting Standards
Accounting Standards Update 2016-13 – “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”)
In the first quarter of 2020, we adopted Accounting Standards Update (“ASU”) 2016-13, which replaced the incurred loss impairment methodology in then-current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update was intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The current expected credit loss model provides that an initial estimate of expected credit losses over the contractual life of the financial instrument is reflected in the allowance for credit losses and any changes to that estimate are recognized as adjustments to the allowance. ASU 2016-13 did not have a material impact on our financial statements or disclosures upon adoption, primarily as most of our vacation ownership notes receivable are recorded net of an allowance that is calculated in accordance with ASC 606.
Vacation Ownership Notes Receivable
Our originated vacation ownership notes receivable are recorded net of a reserve that is calculated in accordance with ASC 606, so there was no material impact upon adoption of ASU 2016-13. Our acquired vacation ownership notes receivable have historically been accounted for using the expected cash flow method of recognizing discount accretion based on the expected cash flows of those instruments. Upon adoption of ASU 2016-13, we established a reserve for credit losses and a corresponding increase in the book value of the acquired vacation ownership notes receivable, resulting in no impact to the recorded balance. In addition, we recorded a noncredit discount of $2 million, which represents the difference between the amortized cost basis and the par value of our acquired vacation ownership notes receivable. The noncredit discount will be amortized to interest expense over the contractual life of the acquired vacation ownership notes receivable and is recorded as Financing expenses on our Income Statements. For additional information on our vacation ownership notes receivable, including information on the related reserves, see Footnote 7 “Vacation Ownership Notes Receivable.”
Accounts Receivable
Our Accounts receivable include amounts due from customers, principally credit card receivables, and amounts due from resort developers, members and managed properties. These amounts are typically due within one year and are presented net of a reserve for credit losses. Subsequent to our adoption of ASU 2016-13, we estimate expected credit losses for our accounts receivable by considering a number of factors, including previous loss history and the condition of the general economy, as well as any other significant events that may impact the collectibility of the specific accounts receivable. Accounts receivable also includes interest receivable on vacation ownership notes receivable. Write-offs of interest receivable are recorded as a reversal of previously recorded interest income. There was no material impact to our financial statements or disclosures as a result of our adoption of ASU 2016-13 for accounts receivable, and no material change in our reserve for credit losses during 2020.
Accounting Standards Update 2020-09 – “Debt (Topic 470) – Amendments to SEC Paragraphs Pursuant to SEC Release No. 33-10762” (“ASU 2020-09”)
In March 2020, the Securities and Exchange Commission (the “SEC”) issued a final rule which simplifies the disclosure requirements related to registered securities under Rule 3-10 of Regulation S-X (the “SEC Final Rule”). The SEC Final Rule replaces the requirement for a parent entity to provide detailed disclosures regarding subsidiary issuers and guarantors of registered debt offerings within the footnotes to the consolidated financial statements. Under the SEC Final Rule, a parent entity is required to present summarized financial information of the issuers’ and guarantors’ balance sheets and statements of operations on a consolidated basis. It also requires qualitative disclosures with respect to information about guarantors and the terms and conditions of guarantees. These disclosures may be provided outside the footnotes to a company’s consolidated financial statements. In October 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-09 to reflect the SEC’s new disclosure rules on guaranteed debt securities offerings. We early adopted the reporting requirements of the SEC Final Rule as reflected in ASU 2020-09 in the first quarter of 2020 and elected to provide these disclosures within Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Future Adoption of Accounting Standards
Accounting Standards Update 2019-12 – “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”)
In December 2019, the FASB issued ASU 2019-12, which amends and simplifies existing guidance in an effort to reduce the complexity of accounting for income taxes while maintaining or enhancing the helpfulness of information provided to financial statement users. This update is effective for fiscal years beginning after December 15, 2020, including interim periods therein, with early adoption permitted. We expect to adopt ASU 2019-12 commencing in fiscal year 2021 and continue to evaluate the impact that adoption of this update will have on our financial statements and disclosures. We do not anticipate a material change upon adoption.
Accounting Standards Update 2020-04 – “Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”)
In March 2020, the FASB issued ASU 2020-04, as amended, which provides optional expedients and exceptions to existing guidance on contract modifications and hedge accounting in an effort to ease the financial reporting burdens related to the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates. This update can be adopted no later than December 1, 2022, with early adoption permitted. We expect to adopt ASU 2020-04 in fiscal year 2022 and continue to evaluate the impact that adoption of this update will have on our financial statements and disclosures.
Accounting Standards Update 2020-06 – “Debt — Debt With Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”)
In August 2020, the FASB issued ASU 2020-06, which amends and simplifies existing guidance in an effort to reduce the complexity of accounting for convertible instruments and to provide financial statement users with more meaningful information. ASU 2020-06 is effective for fiscal years beginning after December 15, 2021, including interim periods therein, with early adoption permitted for fiscal years beginning after December 15, 2020. This update may be applied retrospectively or on a modified retrospective basis with the cumulative effect recognized as an adjustment to the opening balance of retained earnings on the date of adoption. Additionally, this update provides for a one-time irrevocable election by entities to apply the fair value option in accordance with ASC Topic 825-10, “Financial Instruments - Overall,” for any liability-classified convertible securities, with the difference between the carrying amount and the fair value recorded as a cumulative-effect adjustment to opening retained earnings as of the beginning of the period of adoption. We are evaluating the impact that ASU 2020-06, including the timing of implementation, will have on our financial statements and disclosures. In accordance with ASU 2020-06, we will be required to calculate diluted earnings per share under the “if-converted” method. Under the “if-converted” method, diluted earnings per share would generally be calculated assuming that all of the convertible notes were converted solely into shares of common stock at the beginning of the reporting period, unless the result would be anti-dilutive. The application of the “if-converted” method may reduce our reported diluted earnings per share.
3. RESTRUCTURING CHARGES
As a result of the COVID-19 pandemic, in September 2020 a workforce reduction plan was approved, which impacted approximately 3,000 associates beginning in November 2020. We expect that we will incur approximately $30 to $35 million in total restructuring and related charges, primarily related to employee severance and benefit costs. In connection with this plan, we have recorded the following on our Income Statement for the year ended December 31, 2020:
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|
|
|
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|
|
|
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|
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|
|
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|
|
|
($ in millions)
|
Vacation Ownership
|
|
Exchange & Third-Party Management
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|
Corporate and Other
|
|
Total
|
Cost reimbursement revenues
|
$
|
4
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Cost reimbursement expenses
|
$
|
(4)
|
|
|
$
|
(2)
|
|
|
$
|
—
|
|
|
$
|
(6)
|
|
Restructuring
|
$
|
15
|
|
|
$
|
4
|
|
|
$
|
6
|
|
|
$
|
25
|
|
The following table presents our restructuring reserve activity during the year ended December 31, 2020:
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|
|
|
|
|
|
|
|
|
($ in millions)
|
Employee Termination Costs
|
|
|
|
|
Balance at December 31, 2019
|
$
|
—
|
|
|
|
|
|
Charges
|
25
|
|
|
|
|
|
Cash Payments
|
(8)
|
|
|
|
|
|
Other
|
—
|
|
|
|
|
|
Balance at December 31, 2020
|
$
|
17
|
|
|
|
|
|
4. ACQUISITIONS AND DISPOSITIONS
Acquisitions
New York, New York
During the first quarter of 2020, we acquired 57 completed vacation ownership units, as well as office and ancillary space, located at our Marriott Vacation Club Pulse, New York City property for $89 million, of which $22 million was a prepayment for future tranches of completed vacation ownership units and $20 million was paid in December 2019. We accounted for the transaction as an asset acquisition with the purchase price allocated to Other assets ($22 million) and Property and equipment ($67 million).
See Footnote 20 “Variable Interest Entities” for information on our remaining commitment to purchase future inventory and additional information on our activities relating to the VIE involved in this transaction.
San Francisco, California
During the first quarter of 2020, we acquired 34 completed vacation ownership units located at our Marriott Vacation Club Pulse, San Francisco property for $26 million, of which $5 million was a prepayment for future tranches of completed vacation ownership units. We accounted for the transaction as an asset acquisition with the purchase price allocated to Inventory ($18 million), Other assets ($5 million), and Property and equipment ($3 million).
See Footnote 20 “Variable Interest Entities” for information on our remaining commitment to purchase future inventory and additional information on our activities relating to the VIE involved in this transaction.
During the third quarter of 2019, we acquired 78 completed vacation ownership units and a sales gallery located at our Marriott Vacation Club Pulse, San Francisco resort for $58 million. We accounted for the transaction as an asset acquisition with the purchase price allocated to Inventory ($48 million) and Property and equipment ($10 million).
Marco Island, Florida
During the fourth quarter of 2018, we acquired 92 completed vacation ownership units for $83 million and during the first quarter of 2018, we acquired 20 completed vacation ownership units for $24 million. Both transactions were accounted for as asset acquisitions with all of the purchase price allocated to Inventory.
ILG Acquisition
We completed the acquisition of ILG on September 1, 2018. The following table presents the fair value of each type of consideration transferred in the ILG Acquisition, as finalized at September 30, 2019.
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(in millions, except per share amounts)
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|
Equivalent shares of Marriott Vacations Worldwide common stock issued in exchange for ILG outstanding shares
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20.5
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|
Marriott Vacations Worldwide common stock price per share as of Acquisition Date
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$
|
119.00
|
|
Fair value of Marriott Vacations Worldwide common stock issued in exchange for ILG outstanding shares
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2,441
|
|
Cash consideration to ILG shareholders, net of cash acquired of $154 million
|
1,680
|
|
Fair value of ILG equity-based awards attributed to pre-combination service
|
64
|
|
Total consideration transferred, net of cash acquired
|
4,185
|
|
Noncontrolling interests
|
32
|
|
|
$
|
4,217
|
|
Fair Values of Assets Acquired and Liabilities Assumed
The following table presents the fair values of the assets that we acquired and the liabilities that we assumed on the Acquisition Date.
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|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
September 1, 2018
(as finalized)
|
Vacation ownership notes receivable
|
|
|
|
|
$
|
753
|
|
Inventory
|
|
|
|
|
484
|
|
Property and equipment
|
|
|
|
|
382
|
|
Intangible assets
|
|
|
|
|
1,145
|
|
Other assets
|
|
|
|
|
707
|
|
Deferred revenue
|
|
|
|
|
(291)
|
|
Deferred taxes
|
|
|
|
|
(138)
|
|
Debt
|
|
|
|
|
(392)
|
|
Securitized debt from VIEs
|
|
|
|
|
(718)
|
|
Other liabilities
|
|
|
|
|
(605)
|
|
Net assets acquired
|
|
|
|
|
1,327
|
|
Goodwill(1)
|
|
|
|
|
2,890
|
|
|
|
|
|
|
$
|
4,217
|
|
_________________________
(1)Goodwill is calculated as total consideration transferred, net of cash acquired, less identified net assets acquired and it represents the value that we expect to obtain from synergies and growth opportunities from our combined operations, and is not deductible for tax purposes. See Footnote 12 “Goodwill” for additional information on our goodwill.
We valued acquired vacation ownership notes receivables, which consisted of loans to customers who purchased vacation ownership products and chose to finance their purchase, using a discounted cash flow model, under which we calculated a present value of expected future cash flows over the term of the respective vacation ownership notes receivable (Level 3). We valued acquired inventory, which consisted of completed unsold VOIs and vacation ownership projects under construction, using an income approach, which is primarily based on significant Level 3 assumptions, such as estimates of future income growth, capitalization rates, discount rates and capital expenditure needs of the relevant properties. We valued acquired property and equipment, which included four owned hotels, using a combination of the income, cost, and market approaches, which are primarily based on significant Level 3 assumptions, such as estimates of future income growth, capitalization rates, discount rates and capital expenditure needs of the hotels. We valued deferred revenue, primarily related to membership fees, which are deferred and recognized over the terms of the applicable memberships, utilizing Level 3 inputs based on a review of existing deferred revenue balances against legal performance obligations. We estimated deferred income taxes based on statutory rates in the jurisdictions of the legal entities where the acquired assets and liabilities are recorded.
We valued the senior unsecured notes assumed using a quoted market price, which is considered a Level 2 input as it is observable in the market; however these notes had only a limited trading volume and as such this fair value estimate is not necessarily indicative of the value at which these notes could be retired or transferred. The carrying value of the outstanding balance on the revolving credit facility that was acquired, which was extinguished and repaid in full upon completion of the ILG Acquisition, approximated fair value, as the contractual interest rate was variable plus an applicable margin based credit rating (Level 3 input). We valued assumed securitized debt from VIEs using a discounted cash flow model. The significant assumptions in our analysis include default rates, prepayment rates, bond interest rates and other structural factors (Level 3 inputs).
The following table presents the fair values ILG’s identified intangible assets and their related estimated useful lives as of the Acquisition Date.
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|
|
|
|
|
|
|
|
|
|
($ in millions)
|
September 1, 2018
(as finalized)
|
|
Useful Life
(in years)
|
Member relationships
|
$
|
671
|
|
|
15 to 20
|
Management contracts
|
357
|
|
|
15 to 25
|
Management contracts(1)
|
35
|
|
|
indefinite
|
Trade names and trademarks
|
82
|
|
|
indefinite
|
|
$
|
1,145
|
|
|
|
_________________________
(1)These management contracts were entirely related to the VRI Europe business, which we disposed of in the fourth quarter of 2018. The indefinite-lived management contracts, by their terms, continued beyond the then foreseeable horizon. There were no legal, regulatory, contractual, competitive, economic or other factors which limited the period of time over which these resort management contracts were expected to contribute future cash flows.
We valued member relationships and management contracts using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. We valued trade names and trademarks using the relief-from-royalty method, which applies an estimated royalty rate to forecasted future cash flows, discounted to present value. These valuation approaches utilize Level 3 inputs.
Pro Forma Results of Operations
The following unaudited pro forma information presents the combined results of operations of Marriott Vacations Worldwide and ILG as if we had completed the ILG Acquisition on December 30, 2016, the last day of our 2016 fiscal year, but using our fair values of assets and liabilities as of the Acquisition Date. As required by GAAP, these unaudited pro forma results do not reflect any synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined company would have been if the ILG Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations. The unaudited pro forma results below include $54 million of ILG acquisition-related costs.
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|
|
|
|
|
|
|
|
|
($ in millions, except per share data)
|
|
2018
|
|
|
Revenues
|
|
$
|
4,216
|
|
|
|
Net income
|
|
$
|
210
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
211
|
|
|
|
EARNINGS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
|
|
|
|
|
Basic
|
|
$
|
4.49
|
|
|
|
Diluted
|
|
$
|
4.38
|
|
|
|
Dispositions
During the third quarter of 2020, we recorded a loss of $5 million in the (Losses) gains and other (expense) income, net line on our Income Statement for the year ended December 31, 2020 relating to the redemption of our interest in a joint venture in our Exchange & Third-Party Management segment which was consolidated under the voting interest model. We received nominal cash proceeds and a note receivable which we measured at a fair value of $1 million using Level 3 inputs.
Additionally, during the third quarter of 2020, we disposed of excess Vacation Ownership segment land parcels in Orlando, Florida and Steamboat Springs, Colorado for combined proceeds of $15 million, as part of our strategic decision to reduce holdings in markets where we have excess supply, as discussed further below. We recorded a combined net gain of $6 million in the (Losses) gains and other (expense) income, net line on our Income Statement for year ended December 31, 2020 relating to these transactions.
2019 Strategy Change
As a result of the ILG Acquisition, we performed a comprehensive review to evaluate the strategic fit of the land holdings and operating hotels in our Vacation Ownership segment. A key focus of our comprehensive review was to evaluate opportunities to reduce holdings in markets where we have excess supply so that future inventory spend can be focused on markets that create incremental cost-effective sales locations in areas of high customer demand. We evaluated each asset in the context of its current and anticipated product form, our inventory needs and our operating strategy.
As a result of the change in our development strategy, in the third quarter of 2019, we recorded a non-cash impairment charge of $72 million, of which $61 million related to land and land improvements associated with future phases of three existing resorts, primarily attributable to the fact that the book values of these assets include the historical allocations of common costs incurred when we built the infrastructure of these resorts, $9 million related to a land parcel held for future development and $2 million related to an ancillary business, as the book values of these assets were in excess of the estimated fair values of these assets. We also reviewed the remainder of the assets identified for disposition and determined that no other impairment charges were necessary.
We used a combination of the market and income approaches to estimate the fair value of these assets. Under the market approach, a Level 2 input, fair value is measured through an analysis of sales and offerings of comparable property which are adjusted to reflect differences between the asset being valued and the comparable assets, such as location, time and terms of sales, utility and physical characteristics. Under the income approach, a Level 3 input, fair value is measured through a discounted cash flow. Under the income approach, we contemplated alternative uses to comply with the highest and best use provisions of ASC 820.
During the fourth quarter of 2019, we disposed of excess land parcels in Cancun, Mexico and Avon, Colorado for proceeds of $62 million, of which $8 million is deferred until certain conditions associated with the sale have been met, as part of our strategic decision to reduce holdings in markets where we have excess supply. We recorded a combined net gain of $19 million in the (Losses) gains and other (expense) income, net line on our Income Statement for the year ended December 31, 2019.
VRI Europe
As part of the ILG Acquisition, we acquired a 75.5 percent interest in VRI Europe Limited (“VRI Europe”), a joint venture comprised of a European vacation ownership resort management business, which was consolidated by MVW under the voting interest model. During the fourth quarter of 2018, we sold our interest in VRI Europe to an affiliate of the noncontrolling interest holder for our book value of $63 million, of which we received $40 million in cash in 2018. In addition, we recorded a receivable of $6 million due in 2019 and a note receivable of $17 million due in 2020 relating to the transaction, both of which were received in 2019.
5. REVENUE
Sources of Revenue by Segment
The following tables detail the sources of revenue by segment for each of the last three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
($ in millions)
|
Vacation Ownership
|
|
Exchange & Third-Party Management
|
|
Corporate and Other
|
|
Total
|
Sale of vacation ownership products
|
$
|
546
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
546
|
|
|
|
|
|
|
|
|
|
Ancillary revenues
|
89
|
|
|
1
|
|
|
—
|
|
|
90
|
|
Management fee revenues
|
149
|
|
|
17
|
|
|
(22)
|
|
|
144
|
|
Exchange and other services revenues
|
118
|
|
|
193
|
|
|
210
|
|
|
521
|
|
Management and exchange
|
356
|
|
|
211
|
|
|
188
|
|
|
755
|
|
|
|
|
|
|
|
|
|
Rental
|
239
|
|
|
37
|
|
|
—
|
|
|
276
|
|
|
|
|
|
|
|
|
|
Cost reimbursements
|
1,124
|
|
|
59
|
|
|
(141)
|
|
|
1,042
|
|
Revenue from contracts with customers
|
2,265
|
|
|
307
|
|
|
47
|
|
|
2,619
|
|
|
|
|
|
|
|
|
|
Financing
|
265
|
|
|
2
|
|
|
—
|
|
|
267
|
|
Total Revenues
|
$
|
2,530
|
|
|
$
|
309
|
|
|
$
|
47
|
|
|
$
|
2,886
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
($ in millions)
|
Vacation Ownership
|
|
Exchange & Third-Party Management
|
|
Corporate and Other
|
|
Total
|
Sale of vacation ownership products
|
$
|
1,354
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,354
|
|
|
|
|
|
|
|
|
|
Ancillary revenues
|
224
|
|
|
4
|
|
|
—
|
|
|
228
|
|
Management fee revenues
|
144
|
|
|
46
|
|
|
(13)
|
|
|
177
|
|
Exchange and other services revenues
|
120
|
|
|
248
|
|
|
176
|
|
|
544
|
|
Management and exchange
|
488
|
|
|
298
|
|
|
163
|
|
|
949
|
|
|
|
|
|
|
|
|
|
Rental
|
512
|
|
|
61
|
|
|
—
|
|
|
573
|
|
|
|
|
|
|
|
|
|
Cost reimbursements
|
1,136
|
|
|
91
|
|
|
(119)
|
|
|
1,108
|
|
Revenue from contracts with customers
|
3,490
|
|
|
450
|
|
|
44
|
|
|
3,984
|
|
|
|
|
|
|
|
|
|
Financing
|
271
|
|
|
4
|
|
|
—
|
|
|
275
|
|
Total Revenues
|
$
|
3,761
|
|
|
$
|
454
|
|
|
$
|
44
|
|
|
$
|
4,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
($ in millions)
|
Vacation Ownership
|
|
Exchange & Third-Party Management
|
|
Corporate and Other
|
|
Total
|
Sale of vacation ownership products
|
$
|
990
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
990
|
|
|
|
|
|
|
|
|
|
Ancillary revenues
|
160
|
|
|
1
|
|
|
—
|
|
|
161
|
|
Management fee revenues
|
114
|
|
|
30
|
|
|
(4)
|
|
|
140
|
|
Exchange and other services revenues
|
85
|
|
|
78
|
|
|
35
|
|
|
198
|
|
Management and exchange
|
359
|
|
|
109
|
|
|
31
|
|
|
499
|
|
|
|
|
|
|
|
|
|
Rental
|
352
|
|
|
18
|
|
|
1
|
|
|
371
|
|
|
|
|
|
|
|
|
|
Cost reimbursements
|
920
|
|
|
33
|
|
|
(28)
|
|
|
925
|
|
Revenue from contracts with customers
|
2,621
|
|
|
160
|
|
|
4
|
|
|
2,785
|
|
|
|
|
|
|
|
|
|
Financing
|
182
|
|
|
1
|
|
|
—
|
|
|
183
|
|
Total Revenues
|
$
|
2,803
|
|
|
$
|
161
|
|
|
$
|
4
|
|
|
$
|
2,968
|
|
Timing of Revenue from Contracts with Customers by Segment
The following tables detail the timing of revenue from contracts with customers by segment for each of the last three fiscal years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
($ in millions)
|
Vacation Ownership
|
|
Exchange & Third-Party Management
|
|
Corporate and Other
|
|
Total
|
Services transferred over time
|
$
|
1,616
|
|
|
$
|
156
|
|
|
$
|
47
|
|
|
$
|
1,819
|
|
Goods or services transferred at a point in time
|
649
|
|
|
151
|
|
|
—
|
|
|
800
|
|
Revenue from contracts with customers
|
$
|
2,265
|
|
|
$
|
307
|
|
|
$
|
47
|
|
|
$
|
2,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
($ in millions)
|
Vacation Ownership
|
|
Exchange & Third-Party Management
|
|
Corporate and Other
|
|
Total
|
Services transferred over time
|
$
|
1,896
|
|
|
$
|
194
|
|
|
$
|
44
|
|
|
$
|
2,134
|
|
Goods or services transferred at a point in time
|
1,594
|
|
|
256
|
|
|
—
|
|
|
1,850
|
|
Revenue from contracts with customers
|
$
|
3,490
|
|
|
$
|
450
|
|
|
$
|
44
|
|
|
$
|
3,984
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
($ in millions)
|
Vacation Ownership
|
|
Exchange & Third-Party Management
|
|
Corporate and Other
|
|
Total
|
Services transferred over time
|
$
|
1,467
|
|
|
$
|
95
|
|
|
$
|
4
|
|
|
$
|
1,566
|
|
Goods or services transferred at a point in time
|
1,154
|
|
|
65
|
|
|
—
|
|
|
1,219
|
|
Revenue from contracts with customers
|
$
|
2,621
|
|
|
$
|
160
|
|
|
$
|
4
|
|
|
$
|
2,785
|
|
Receivables from Contracts with Customers, Contract Assets, & Contract Liabilities
The following table shows the composition of our receivables from contracts with customers and contract liabilities. We had no contract assets at either December 31, 2020 or December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At December 31, 2020
|
|
At December 31, 2019
|
Receivables
|
|
|
|
Accounts receivable
|
$
|
150
|
|
|
$
|
166
|
|
Vacation ownership notes receivable, net
|
1,840
|
|
|
2,233
|
|
|
$
|
1,990
|
|
|
$
|
2,399
|
|
|
|
|
|
Contract Liabilities
|
|
|
|
Advance deposits
|
$
|
147
|
|
|
$
|
187
|
|
Deferred revenue
|
488
|
|
|
433
|
|
|
$
|
635
|
|
|
$
|
620
|
|
Revenue recognized during the year ended December 31, 2020 that was included in our contract liabilities balance at December 31, 2019 was $355 million.
Remaining Performance Obligations
Our remaining performance obligations represent the expected transaction price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the contracts. At December 31, 2020, approximately 82 percent of this amount is expected to be recognized as revenue over the next two years.
Accounts Receivable
Accounts receivable is comprised of amounts due from customers, primarily property owners’ associations, resort developers and members, credit card receivables, interest receivables, amounts due from taxing authorities, indemnification assets, and other miscellaneous receivables. The following table shows the composition of our accounts receivable balances:
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At December 31, 2020
|
|
At December 31, 2019
|
Receivables from contracts with customers
|
$
|
150
|
|
|
$
|
166
|
|
Interest receivable
|
13
|
|
|
16
|
|
Tax receivable
|
60
|
|
|
82
|
|
Indemnification asset
|
15
|
|
|
38
|
|
Employee tax credit receivable
|
19
|
|
|
—
|
|
Other
|
19
|
|
|
21
|
|
|
$
|
276
|
|
|
$
|
323
|
|
6. INCOME TAXES
Income Tax Provision
The following table presents the components of our (losses) earnings before income taxes for the last three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
2018
|
United States
|
|
$
|
(255)
|
|
|
$
|
190
|
|
|
$
|
108
|
|
Non-U.S. jurisdictions
|
|
(85)
|
|
|
35
|
|
|
(5)
|
|
|
|
$
|
(340)
|
|
|
$
|
225
|
|
|
$
|
103
|
|
Our benefit from (provision for) income taxes for the last three years consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
|
2018
|
Current
|
– U.S. Federal
|
|
$
|
31
|
|
|
$
|
(12)
|
|
|
$
|
17
|
|
|
– U.S. State
|
|
1
|
|
|
(29)
|
|
|
(1)
|
|
|
– Non-U.S.
|
|
11
|
|
|
(36)
|
|
|
(10)
|
|
|
|
|
43
|
|
|
(77)
|
|
|
6
|
|
|
|
|
|
|
|
|
|
Deferred
|
– U.S. Federal
|
|
26
|
|
|
(28)
|
|
|
(46)
|
|
|
– U.S. State
|
|
9
|
|
|
17
|
|
|
(9)
|
|
|
– Non-U.S.
|
|
6
|
|
|
5
|
|
|
(2)
|
|
|
|
|
41
|
|
|
(6)
|
|
|
(57)
|
|
|
|
|
$
|
84
|
|
|
$
|
(83)
|
|
|
$
|
(51)
|
|
U.S. Tax Law Update
We have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020. As of December 31, 2020, we evaluated the income tax provisions of the CARES Act and have determined there to be a 6.0 percent benefit to the December 31, 2020 tax rate. We will continue to evaluate the income tax provisions of the CARES Act and monitor the developments in the jurisdictions where we have significant operations for tax law changes that could have additional income tax accounting and disclosure implications.
Reconciliation of U.S. Federal Statutory Income Tax Rate to Actual Income Tax Rate
The following table reconciles the U.S. statutory income tax rate to our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
U.S. statutory income tax rate
|
|
21.0%
|
|
21.0%
|
|
21.0%
|
U.S. state income taxes, net of U.S. federal tax benefit
|
|
4.5
|
|
4.2
|
|
4.2
|
Share-based compensation, net of Section 162(m) limitation(1)
|
|
0.2
|
|
0.7
|
|
3.6
|
Transaction costs(2)
|
|
—
|
|
—
|
|
4.7
|
Other permanent differences(3)
|
|
(8.0)
|
|
3.9
|
|
4.2
|
Impact related to the CARES Act of 2020
|
|
6.0
|
|
—
|
|
—
|
Impact related to the Tax Cuts and Jobs Act of 2017
|
|
—
|
|
—
|
|
1.2
|
Foreign tax rate changes
|
|
0.4
|
|
—
|
|
(0.1)
|
Non-U.S. income (loss)(4)
|
|
2.4
|
|
2.2
|
|
3.9
|
Foreign tax credits
|
|
—
|
|
(6.3)
|
|
(1.4)
|
Unrecognized tax benefits
|
|
5.2
|
|
3.1
|
|
—
|
Change in valuation allowance(5)
|
|
(7.5)
|
|
7.0
|
|
8.6
|
Other items
|
|
0.4
|
|
1.1
|
|
(0.1)
|
Effective rate
|
|
24.6%
|
|
36.9%
|
|
49.8%
|
_________________________
(1)The 2018 increase is attributable to non-deductible executive compensation under provisions of the Tax Cuts and Jobs Act of 2017.
(2)Attributed to non-deductible transaction costs incurred as a result of the ILG Acquisition.
(3)The 2020 change is primarily attributable to non-deductible goodwill impairment recorded due to the impact of COVID-19. For 2019 and 2018, primarily due to non-deductible meal and entertainment expenses and new foreign tax provisions, under provisions of the Tax Cuts and Jobs Act of 2017.
(4)Attributed to the difference between U.S. and foreign income tax rates and other foreign adjustments.
(5)In 2020, primarily attributable to the increase of the valuation allowance on Spanish and Mexican entities and to losses and future deductions in foreign jurisdictions for which a tax benefit has not been recognized through establishment of valuation allowances. In 2019, primarily attributable to foreign tax credit carryforwards in the branch and treaty baskets and losses and future deductions in foreign jurisdictions for which a tax benefit has not been recognized through establishment of valuation allowances. In 2018, primarily attributable to losses and future deductions in foreign jurisdictions for which a tax benefit has not been recognized through establishment of valuation allowances.
For the years ended December 31, 2020, 2019 and 2018, the provision for income taxes included $4 million, $2 million, and $2 million of excess tax benefits resulting from equity incentive plan activities, respectively.
We conduct business in countries that grant “holidays” from income taxes for ten to thirty year periods. These holidays expire through 2034.
Other
We finalized our purchase price accounting for the ILG Acquisition during 2019 and established a reserve for non-income tax issues related to Legacy-ILG. As of December 31, 2020, the balance of this reserve was $46 million. We expect that we will be indemnified for liabilities of $8 million in connection with these non-income tax matters pursuant to a Tax Matters Agreement dated May 11, 2016 by and among Starwood Hotels & Resorts Worldwide, Inc. (“Starwood”), Vistana Signature Experiences, Inc. (“Vistana”), and Interval Leisure Group, Inc. (“Interval Leisure Group”), and consequently have recorded a corresponding indemnification asset.
Deferred Income Taxes
The following table presents the significant components of our deferred tax assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
At Year-End 2020
|
|
At Year-End 2019
|
Deferred Tax Assets
|
|
|
|
|
Inventory
|
|
$
|
83
|
|
|
$
|
117
|
|
Reserves
|
|
98
|
|
|
77
|
|
Deferred revenue
|
|
12
|
|
|
14
|
|
Property and equipment
|
|
72
|
|
|
74
|
|
|
|
|
|
|
Net operating loss and capital loss carryforwards
|
|
98
|
|
|
61
|
|
Tax credits
|
|
31
|
|
|
37
|
|
Right-of-use asset
|
|
2
|
|
|
3
|
|
Other, net
|
|
113
|
|
|
95
|
|
Deferred tax assets
|
|
509
|
|
|
478
|
|
Less valuation allowance
|
|
(106)
|
|
|
(97)
|
|
Net deferred tax assets
|
|
403
|
|
|
381
|
|
|
|
|
|
|
Deferred Tax Liabilities
|
|
|
|
|
Long lived intangible assets
|
|
(233)
|
|
|
(244)
|
|
Deferred sales of vacation ownership interests
|
|
(362)
|
|
|
(363)
|
|
Right-of-use liability
|
|
(2)
|
|
|
(3)
|
|
Other, net
|
|
(43)
|
|
|
(42)
|
|
Deferred tax liabilities
|
|
(640)
|
|
|
(652)
|
|
|
|
|
|
|
Total net deferred tax liabilities
|
|
$
|
(237)
|
|
|
$
|
(271)
|
|
Valuation allowances are provided when it is considered more likely than not that deferred tax assets will not be realized. In 2020 we established an additional valuation allowance of $12 million on foreign net tax assets.
We have $70 million of foreign net operating loss carryforwards, some of which begin expiring in 2021; however, a significant portion of these have indefinite carryforward periods. We have $15 million of federal net operating losses and $11 million of state net operating loss carryforwards, none of which will expire within the next five years. We have U.S. federal foreign tax credit carryforwards of $20 million, federal capital loss carryforwards of $1 million, and $11 million of state tax credit carryforwards.
As a result of the Tax Cuts and Jobs Act of 2017, distribution of profits from non-U.S. subsidiaries are not expected to cause a significant incremental U.S. tax impact in the future. However, distributions may be subject to non-U.S. withholding taxes if profits are distributed from certain jurisdictions. Our present intention is to indefinitely reinvest residual historic undistributed accumulated earnings associated with certain foreign subsidiaries. We have not provided for deferred taxes on outside basis differences in our investments in these foreign subsidiaries, and such estimates are not practicable to be determined.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits (excluding interest and penalties) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Unrecognized tax benefit at beginning of year
|
$
|
21
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Increases related to tax positions taken during a prior period
|
6
|
|
|
18
|
|
|
—
|
|
Increases related to tax positions taken during the current period
|
2
|
|
|
1
|
|
|
—
|
|
Decreases related to settlements with taxing authorities
|
(14)
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
Decreases as a result of a lapse of the applicable statute of limitations
|
(1)
|
|
|
—
|
|
|
—
|
|
Unrecognized tax benefit at end of year
|
$
|
14
|
|
|
$
|
21
|
|
|
$
|
2
|
|
The total unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, were $14 million at December 31, 2020 and $21 million at December 31, 2019. The total amount of gross interest and penalties accrued were $25 million at December 31, 2020 and $41 million at December 31, 2019. We anticipate $4 million of unrecognized tax benefits, including interest and penalties, to be indemnified pursuant to a Tax Matters Agreement dated May 11, 2016 by and among Starwood Hotels & Resorts Worldwide, Inc., Vistana Signature Experiences, Inc., and Interval Leisure Group, Inc., and consequently have recorded a corresponding indemnification asset. The unrecognized tax benefit, including accrued interest and penalties are included in other liabilities on the consolidated balance sheet.
Our income tax returns are subject to examination by relevant tax authorities. Certain of our returns are being audited in various jurisdictions for tax years 2012 through 2018. The amount of the unrecognized tax benefit may increase or decrease within the next twelve months as a result of audits or audit settlements.
7. VACATION OWNERSHIP NOTES RECEIVABLE
The following table shows the composition of our vacation ownership notes receivable balances, net of reserves:.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
($ in millions)
|
Originated
|
|
Acquired
|
|
Total
|
|
Originated
|
|
Acquired(1)
|
|
Total
|
Securitized
|
$
|
1,220
|
|
|
$
|
273
|
|
|
$
|
1,493
|
|
|
$
|
1,378
|
|
|
$
|
372
|
|
|
$
|
1,750
|
|
Non-securitized
|
|
|
|
|
|
|
|
|
|
|
|
Eligible for securitization(2)
|
126
|
|
|
2
|
|
|
128
|
|
|
155
|
|
|
10
|
|
|
165
|
|
Not eligible for securitization(2)
|
185
|
|
|
34
|
|
|
219
|
|
|
261
|
|
|
57
|
|
|
318
|
|
Subtotal
|
311
|
|
|
36
|
|
|
347
|
|
|
416
|
|
|
67
|
|
|
483
|
|
|
$
|
1,531
|
|
|
$
|
309
|
|
|
$
|
1,840
|
|
|
$
|
1,794
|
|
|
$
|
439
|
|
|
$
|
2,233
|
|
_________________________
(1)Net of impairment of $7 million recognized in 2019, prior to the adoption of ASU 2016-13 on January 1, 2020.
(2)Refer to Footnote 8 “Financial Instruments” for discussion of eligibility of our vacation ownership notes receivable for securitization.
We reflect interest income associated with vacation ownership notes receivable in our Income Statements in the Financing revenues caption. The following table summarizes interest income associated with vacation ownership notes receivable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Interest income associated with vacation ownership notes receivable — securitized
|
$
|
239
|
|
|
$
|
232
|
|
|
$
|
151
|
|
Interest income associated with vacation ownership notes receivable — non-securitized
|
18
|
|
|
32
|
|
|
24
|
|
Total interest income associated with vacation ownership notes receivable
|
$
|
257
|
|
|
$
|
264
|
|
|
$
|
175
|
|
COVID-19 Impact on Vacation Ownership Notes Receivable Reserves
As a result of higher actual and projected default activity related predominantly to the COVID-19 pandemic, we evaluated our vacation ownership notes receivable reserves initially using the 2008/2009 financial crisis as a reference point. As a result, we increased our vacation ownership notes receivable reserves by $52 million in the first quarter of 2020. We monitored actual delinquency and default activity throughout the remainder of 2020. Taking into account higher than previously expected default activity experienced, we increased our vacation ownership notes receivable reserves by $17 million in the fourth quarter of 2020. In total, the reserve adjustments made during 2020 were reflected as a $59 million reduction to Sale of vacation ownership products, a $10 million increase in Financing expenses, and a $19 million reduction in Cost of vacation ownership products on our Income Statement for the year ended December 31, 2020.
Acquired Vacation Ownership Notes Receivable
Acquired vacation ownership notes receivable represent vacation ownership notes receivable acquired as part of the ILG Acquisition. The following table shows future contractual principal payments, as well as interest rates, for our non-securitized and securitized acquired vacation ownership notes receivable at December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Vacation Ownership Notes Receivable
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
2021
|
$
|
4
|
|
|
$
|
42
|
|
|
$
|
46
|
|
2022
|
4
|
|
|
38
|
|
|
42
|
|
2023
|
4
|
|
|
38
|
|
|
42
|
|
2024
|
4
|
|
|
36
|
|
|
40
|
|
2025
|
4
|
|
|
33
|
|
|
37
|
|
Thereafter
|
16
|
|
|
86
|
|
|
102
|
|
Balance at December 31, 2020
|
$
|
36
|
|
|
$
|
273
|
|
|
$
|
309
|
|
Weighted average stated interest rate
|
13.5%
|
|
13.5%
|
|
13.5%
|
Range of stated interest rates
|
3.0% to 17.9%
|
|
6.0% to 15.9%
|
|
3.0% to 17.9%
|
The following table summarizes the activity related to our acquired vacation ownership notes receivable reserve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Vacation Ownership Notes Receivable Reserve
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
Balance at December 31, 2019, as reported
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Impact of adoption of ASU 2016-13
|
29
|
|
|
26
|
|
|
55
|
|
Opening Balance at January 1, 2020
|
29
|
|
|
26
|
|
|
55
|
|
Securitizations
|
(1)
|
|
|
1
|
|
|
—
|
|
Clean-up call
|
1
|
|
|
(1)
|
|
|
—
|
|
Write-offs
|
(18)
|
|
|
—
|
|
|
(18)
|
|
Recoveries
|
9
|
|
|
—
|
|
|
9
|
|
Defaulted vacation ownership notes receivable repurchase activity(1)
|
17
|
|
|
(17)
|
|
|
—
|
|
Increase in vacation ownership notes receivable reserve(2)
|
2
|
|
|
12
|
|
|
14
|
|
Balance at December 31, 2020
|
$
|
39
|
|
|
$
|
21
|
|
|
$
|
60
|
|
_________________________
(1)Decrease in securitized vacation ownership notes receivable reserve and increase in non-securitized vacation ownership notes receivable reserve was attributable to the transfer of the reserve when we voluntarily repurchased defaulted securitized vacation ownership notes receivable.
(2)Increase in vacation ownership notes receivable reserve includes $10 million ($8 million non-securitized and $2 million securitized) attributable to the increased reserve as a result of the COVID-19 pandemic.
Originated Vacation Ownership Notes Receivable
Originated vacation ownership notes receivable represent vacation ownership notes receivable originated by Legacy-ILG subsequent to the Acquisition Date and all Legacy-MVW vacation ownership notes receivable. The following table shows future principal payments, net of reserves, as well as interest rates, for our non-securitized and securitized originated vacation ownership notes receivable at December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Vacation Ownership Notes Receivable
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
2021
|
$
|
39
|
|
|
$
|
126
|
|
|
$
|
165
|
|
2022
|
32
|
|
|
127
|
|
|
159
|
|
2023
|
27
|
|
|
130
|
|
|
157
|
|
2024
|
25
|
|
|
131
|
|
|
156
|
|
2025
|
25
|
|
|
135
|
|
|
160
|
|
Thereafter
|
163
|
|
|
571
|
|
|
734
|
|
Balance at December 31, 2020
|
$
|
311
|
|
|
$
|
1,220
|
|
|
$
|
1,531
|
|
Weighted average stated interest rate
|
12.6%
|
|
12.7%
|
|
12.7%
|
Range of stated interest rates
|
0.0% to 18.0%
|
|
0.0% to 17.5%
|
|
0.0% to 18.0%
|
The following table summarizes the activity related to our originated vacation ownership notes receivable reserve.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Vacation Ownership Notes Receivable Reserve
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
Balance at December 31, 2017
|
$
|
58
|
|
|
$
|
61
|
|
|
$
|
119
|
|
Increase in vacation ownership notes receivable reserve
|
57
|
|
|
7
|
|
|
64
|
|
Securitizations
|
(39)
|
|
|
39
|
|
|
—
|
|
Clean-up call
|
1
|
|
|
(1)
|
|
|
—
|
|
Write-offs
|
(43)
|
|
|
—
|
|
|
(43)
|
|
Defaulted vacation ownership notes receivable repurchase activity(1)
|
27
|
|
|
(27)
|
|
|
—
|
|
Balance at December 31, 2018
|
61
|
|
|
79
|
|
|
140
|
|
Increase in vacation ownership notes receivable reserve
|
94
|
|
|
18
|
|
|
112
|
|
Securitizations
|
(81)
|
|
|
81
|
|
|
—
|
|
Clean-up call
|
24
|
|
|
(24)
|
|
|
—
|
|
Write-offs
|
(48)
|
|
|
—
|
|
|
(48)
|
|
Defaulted vacation ownership notes receivable repurchase activity(1)
|
40
|
|
|
(40)
|
|
|
—
|
|
Balance at December 31, 2019
|
90
|
|
|
114
|
|
|
204
|
|
Increase in vacation ownership notes receivable reserve(2)
|
87
|
|
|
50
|
|
|
137
|
|
Securitizations
|
(70)
|
|
|
70
|
|
|
—
|
|
Clean-up call
|
37
|
|
|
(37)
|
|
|
—
|
|
Write-offs
|
(31)
|
|
|
—
|
|
|
(31)
|
|
Defaulted vacation ownership notes receivable repurchase activity(1)
|
80
|
|
|
(80)
|
|
|
—
|
|
Balance at December 31, 2020
|
$
|
193
|
|
|
$
|
117
|
|
|
$
|
310
|
|
_________________________
(1)Decrease in securitized vacation ownership notes receivable reserve and increase in non-securitized vacation ownership notes receivable reserve was attributable to the transfer of the reserve when we voluntarily repurchased defaulted securitized vacation ownership notes receivable.
(2)Increase in vacation ownership notes receivable reserve includes $59 million ($32 million non-securitized and $27 million securitized) attributable to the increased reserve as a result of the COVID-19 pandemic.
Credit Quality of Vacation Ownership Notes Receivable
Legacy-MVW Vacation Ownership Notes Receivable
For both Legacy-MVW non-securitized and securitized vacation ownership notes receivable, we estimated average remaining default rates of 6.74 percent and 7.04 percent as of December 31, 2020 and December 31, 2019, respectively. A 0.5 percentage point increase in the estimated default rate would have resulted in an increase in the related vacation ownership notes receivable reserve of $6 million and $8 million as of December 31, 2020 and December 31, 2019, respectively.
We use the aging of the vacation ownership notes receivable as the primary credit quality indicator for our Legacy-MVW vacation ownership notes receivable, as historical performance indicates that there is a relationship between the default behavior of borrowers and the age of the receivable associated with the vacation ownership interest.
The following table shows our recorded investment in non-accrual Legacy-MVW vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy-MVW Vacation Ownership Notes Receivable
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
Investment in vacation ownership notes receivable on non-accrual status at year-end 2020
|
$
|
100
|
|
|
$
|
14
|
|
|
$
|
114
|
|
Investment in vacation ownership notes receivable on non-accrual status at year-end 2019
|
$
|
43
|
|
|
$
|
11
|
|
|
$
|
54
|
|
|
|
|
|
|
|
The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-MVW vacation ownership notes receivable as of December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy-MVW Vacation Ownership Notes Receivable
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
|
Non-Securitized
|
|
Securitized
|
|
Total
|
31 – 90 days past due
|
$
|
8
|
|
|
$
|
25
|
|
|
$
|
33
|
|
|
$
|
7
|
|
|
$
|
33
|
|
|
$
|
40
|
|
91 – 150 days past due
|
5
|
|
|
14
|
|
|
19
|
|
|
4
|
|
|
11
|
|
|
15
|
|
Greater than 150 days past due
|
95
|
|
|
—
|
|
|
95
|
|
|
39
|
|
|
—
|
|
|
39
|
|
Total past due
|
108
|
|
|
39
|
|
|
147
|
|
|
50
|
|
|
44
|
|
|
94
|
|
Current
|
231
|
|
|
1,011
|
|
|
1,242
|
|
|
222
|
|
|
1,254
|
|
|
1,476
|
|
Total vacation ownership notes receivable
|
$
|
339
|
|
|
$
|
1,050
|
|
|
$
|
1,389
|
|
|
$
|
272
|
|
|
$
|
1,298
|
|
|
$
|
1,570
|
|
The following table details the origination year of our Legacy-MVW vacation ownership notes receivable as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy-MVW Vacation Ownership Notes Receivable
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
Year of Origination
|
|
|
|
|
|
2020
|
$
|
156
|
|
|
$
|
86
|
|
|
$
|
242
|
|
2019
|
73
|
|
|
384
|
|
|
457
|
|
2018
|
43
|
|
|
247
|
|
|
290
|
|
2017
|
21
|
|
|
150
|
|
|
171
|
|
2016
|
11
|
|
|
70
|
|
|
81
|
|
2015 & Before
|
35
|
|
|
113
|
|
|
148
|
|
|
$
|
339
|
|
|
$
|
1,050
|
|
|
$
|
1,389
|
|
Legacy-ILG Vacation Ownership Notes Receivable
At December 31, 2020 and December 31, 2019, the weighted average FICO score within our consolidated Legacy-ILG vacation ownership notes receivable pools was 708 and 712, respectively, based upon the outstanding vacation ownership notes receivable balance at time of origination. The average estimated rate for all future defaults for our Legacy-ILG consolidated outstanding pool of vacation ownership notes receivable was 14.63 percent as of December 31, 2020, and 12.65 percent as of December 31, 2019. A 0.5 percentage point increase in the estimated default rate on the Legacy-ILG vacation ownership notes receivable would have resulted in an increase in the related vacation ownership notes receivable reserve of $3 million and $2 million as of December 31, 2020 and December 31, 2019, respectively.
We use the origination of the vacation ownership notes receivable by brand (Westin, Sheraton, Hyatt) and the FICO scores of the customer as the primary credit quality indicators for our Legacy-ILG vacation ownership notes receivable, as historical performance indicates that there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership interest they have acquired, supplemented by the FICO scores of the customers.
The following table shows our recorded investment in non-accrual Legacy-ILG vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy-ILG Vacation Ownership Notes Receivable
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
Investment in vacation ownership notes receivable on non-accrual status at year-end 2020
|
$
|
109
|
|
|
$
|
12
|
|
|
$
|
121
|
|
Investment in vacation ownership notes receivable on non-accrual status at year-end 2019
|
$
|
40
|
|
|
$
|
9
|
|
|
$
|
49
|
|
The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-ILG vacation ownership notes receivable as of December 31, 2020 and December 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Legacy-ILG Vacation Ownership Notes Receivable
|
|
As of December 31, 2020
|
|
As of December 31, 2019
|
($ in millions)
|
Non-Securitized
|
|
Securitized
|
|
Total
|
|
Non-Securitized
|
|
Securitized
|
|
Total
|
31 – 90 days past due
|
$
|
8
|
|
|
$
|
19
|
|
|
$
|
27
|
|
|
$
|
11
|
|
|
$
|
18
|
|
|
$
|
29
|
|
91 – 120 days past due
|
2
|
|
|
7
|
|
|
9
|
|
|
3
|
|
|
6
|
|
|
9
|
|
Greater than 120 days past due
|
107
|
|
|
5
|
|
|
112
|
|
|
37
|
|
|
3
|
|
|
40
|
|
Total past due
|
117
|
|
|
31
|
|
|
148
|
|
|
51
|
|
|
27
|
|
|
78
|
|
Current
|
123
|
|
|
550
|
|
|
673
|
|
|
250
|
|
|
539
|
|
|
789
|
|
Total vacation ownership notes receivable
|
$
|
240
|
|
|
$
|
581
|
|
|
$
|
821
|
|
|
$
|
301
|
|
|
$
|
566
|
|
|
$
|
867
|
|
The following tables show the Legacy-ILG acquired vacation ownership notes receivable by brand and FICO score, before reserves. Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Vacation Ownership Notes Receivable as of December 31, 2020
|
($ in millions)
|
700 +
|
|
600 - 699
|
|
< 600
|
|
No Score
|
|
Total
|
Westin
|
$
|
81
|
|
|
$
|
48
|
|
|
$
|
4
|
|
|
$
|
11
|
|
|
$
|
144
|
|
Sheraton
|
81
|
|
|
73
|
|
|
13
|
|
|
31
|
|
|
198
|
|
Hyatt
|
12
|
|
|
9
|
|
|
1
|
|
|
—
|
|
|
22
|
|
Other
|
2
|
|
|
1
|
|
|
—
|
|
|
2
|
|
|
5
|
|
|
$
|
176
|
|
|
$
|
131
|
|
|
$
|
18
|
|
|
$
|
44
|
|
|
$
|
369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Vacation Ownership Notes Receivable as of December 31, 2019
|
($ in millions)
|
700 +
|
|
600 - 699
|
|
< 600
|
|
No Score
|
|
Total
|
Westin
|
$
|
103
|
|
|
$
|
57
|
|
|
$
|
4
|
|
|
$
|
13
|
|
|
$
|
177
|
|
Sheraton
|
95
|
|
|
83
|
|
|
15
|
|
|
37
|
|
|
230
|
|
Hyatt
|
15
|
|
|
10
|
|
|
1
|
|
|
—
|
|
|
26
|
|
Other
|
3
|
|
|
1
|
|
|
—
|
|
|
2
|
|
|
6
|
|
|
$
|
216
|
|
|
$
|
151
|
|
|
$
|
20
|
|
|
$
|
52
|
|
|
$
|
439
|
|
The following table details the origination year of our Legacy-ILG acquired vacation ownership notes receivable by brand and FICO score as of December 31, 2020. Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Vacation Ownership Notes Receivable - Westin
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 & Prior
|
|
Total
|
700 +
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
22
|
|
|
$
|
14
|
|
|
$
|
23
|
|
|
$
|
81
|
|
600 - 699
|
—
|
|
|
—
|
|
|
11
|
|
|
13
|
|
|
9
|
|
|
15
|
|
|
48
|
|
< 600
|
—
|
|
|
—
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
4
|
|
No Score
|
—
|
|
|
—
|
|
|
3
|
|
|
3
|
|
|
2
|
|
|
3
|
|
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
39
|
|
|
$
|
25
|
|
|
$
|
41
|
|
|
$
|
144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Vacation Ownership Notes Receivable - Sheraton
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 & Prior
|
|
Total
|
700 +
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
23
|
|
|
$
|
14
|
|
|
$
|
21
|
|
|
$
|
81
|
|
600 - 699
|
—
|
|
|
—
|
|
|
19
|
|
|
19
|
|
|
12
|
|
|
23
|
|
|
73
|
|
< 600
|
—
|
|
|
—
|
|
|
8
|
|
|
2
|
|
|
1
|
|
|
2
|
|
|
13
|
|
No Score
|
—
|
|
|
—
|
|
|
9
|
|
|
9
|
|
|
5
|
|
|
8
|
|
|
31
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
59
|
|
|
$
|
53
|
|
|
$
|
32
|
|
|
$
|
54
|
|
|
$
|
198
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquired Vacation Ownership Notes Receivable - Hyatt and Other
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 & Prior
|
|
Total
|
700 +
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
$
|
6
|
|
|
$
|
14
|
|
600 - 699
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
4
|
|
|
10
|
|
< 600
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
No Score
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
$
|
13
|
|
|
$
|
27
|
|
The following tables show the Legacy-ILG originated vacation ownership notes receivable by brand and FICO score, before reserves. Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Vacation Ownership Notes Receivable as of December 31, 2020
|
($ in millions)
|
700 +
|
|
600 - 699
|
|
< 600
|
|
No Score
|
|
Total
|
Westin
|
$
|
109
|
|
|
$
|
52
|
|
|
$
|
6
|
|
|
$
|
23
|
|
|
$
|
190
|
|
Sheraton
|
106
|
|
|
72
|
|
|
16
|
|
|
43
|
|
|
237
|
|
Hyatt
|
16
|
|
|
8
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
$
|
231
|
|
|
$
|
132
|
|
|
$
|
22
|
|
|
$
|
66
|
|
|
$
|
451
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Vacation Ownership Notes Receivable as of December 31, 2019
|
($ in millions)
|
700 +
|
|
600 - 699
|
|
< 600
|
|
No Score
|
|
Total
|
Westin
|
$
|
122
|
|
|
$
|
46
|
|
|
$
|
5
|
|
|
$
|
25
|
|
|
$
|
198
|
|
Sheraton
|
97
|
|
|
61
|
|
|
13
|
|
|
37
|
|
|
208
|
|
Hyatt
|
16
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
$
|
235
|
|
|
$
|
113
|
|
|
$
|
18
|
|
|
$
|
62
|
|
|
$
|
428
|
|
The following tables detail the origination year of our Legacy-ILG originated vacation ownership notes receivable by brand and FICO score as of December 31, 2020. Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Vacation Ownership Notes Receivable - Westin
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 & Prior
|
|
Total
|
700 +
|
$
|
35
|
|
|
$
|
60
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
109
|
|
600 - 699
|
14
|
|
|
31
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
52
|
|
< 600
|
2
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
No Score
|
11
|
|
|
11
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
$
|
62
|
|
|
$
|
105
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Vacation Ownership Notes Receivable - Sheraton
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 & Prior
|
|
Total
|
700 +
|
$
|
35
|
|
|
$
|
56
|
|
|
$
|
15
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
106
|
|
600 - 699
|
20
|
|
|
40
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
72
|
|
< 600
|
5
|
|
|
9
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
No Score
|
11
|
|
|
26
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
43
|
|
|
$
|
71
|
|
|
$
|
131
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
237
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Originated Vacation Ownership Notes Receivable - Hyatt
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
|
2017
|
|
2016
|
|
2015 & Prior
|
|
Total
|
700 +
|
$
|
5
|
|
|
$
|
9
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16
|
|
600 - 699
|
3
|
|
|
4
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
< 600
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
No Score
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
8
|
|
|
$
|
13
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24
|
|
8. FINANCIAL INSTRUMENTS
The following table shows the carrying values and the estimated fair values of financial assets and liabilities that qualify as financial instruments, determined in accordance with the authoritative guidance for disclosures regarding the fair value of financial instruments. Considerable judgment is required in interpreting market data to develop estimates of fair value. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. The table excludes Cash and cash equivalents, Restricted cash, Accounts receivable, Accounts payable, Advance deposits and Accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2020
|
|
At December 31, 2019
|
($ in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Vacation ownership notes receivable
|
$
|
1,840
|
|
|
$
|
1,886
|
|
|
$
|
2,233
|
|
|
$
|
2,264
|
|
Other assets
|
60
|
|
|
60
|
|
|
45
|
|
|
45
|
|
|
$
|
1,900
|
|
|
$
|
1,946
|
|
|
$
|
2,278
|
|
|
$
|
2,309
|
|
|
|
|
|
|
|
|
|
Securitized debt, net
|
$
|
(1,588)
|
|
|
$
|
(1,653)
|
|
|
$
|
(1,871)
|
|
|
$
|
(1,924)
|
|
2025 Notes, net
|
(494)
|
|
|
(533)
|
|
|
—
|
|
|
—
|
|
2026 Notes, net
|
(744)
|
|
|
(784)
|
|
|
(742)
|
|
|
(824)
|
|
2028 Notes, net
|
(346)
|
|
|
(359)
|
|
|
(345)
|
|
|
(358)
|
|
Term Loan, net
|
(873)
|
|
|
(864)
|
|
|
(881)
|
|
|
(899)
|
|
Revolving Corporate Credit Facility, net
|
—
|
|
|
—
|
|
|
(27)
|
|
|
(27)
|
|
2022 Convertible notes, net
|
(215)
|
|
|
(262)
|
|
|
(207)
|
|
|
(247)
|
|
|
$
|
(4,260)
|
|
|
$
|
(4,455)
|
|
|
$
|
(4,073)
|
|
|
$
|
(4,279)
|
|
Vacation Ownership Notes Receivable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2020
|
|
At December 31, 2019
|
($ in millions)
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
Vacation ownership notes receivable
|
|
|
|
|
|
|
|
Securitized
|
$
|
1,493
|
|
|
$
|
1,530
|
|
|
$
|
1,750
|
|
|
$
|
1,771
|
|
|
|
|
|
|
|
|
|
Eligible for securitization
|
128
|
|
|
137
|
|
|
165
|
|
|
175
|
|
Not eligible for securitization
|
219
|
|
|
219
|
|
|
318
|
|
|
318
|
|
Non-securitized
|
347
|
|
|
356
|
|
|
483
|
|
|
493
|
|
|
$
|
1,840
|
|
|
$
|
1,886
|
|
|
$
|
2,233
|
|
|
$
|
2,264
|
|
We estimate the fair value of our vacation ownership notes receivable that have been securitized using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model uses default rates, prepayment rates, coupon rates, and loan terms for our securitized vacation ownership notes receivable portfolio as key drivers of risk and relative value to determine the fair value of the underlying vacation ownership notes receivable. We concluded that this fair value measurement should be categorized within Level 3.
Due to factors that impact the general marketability of our vacation ownership notes receivable that have not been securitized, as well as current market conditions, we bifurcate our non-securitized vacation ownership notes receivable at each balance sheet date into those eligible and not eligible for securitization using criteria applicable to current securitization transactions in the asset-backed securities (“ABS”) market. Generally, vacation ownership notes receivable are considered not eligible for securitization if any of the following attributes are present: (1) payments are greater than 30 days past due; (2) the first payment has not been received; or (3) the collateral is located in Asia or Europe. In some cases, eligibility may also be determined based on the credit score of the borrower, the remaining term of the loans and other similar factors that may reflect investor demand in a securitization transaction or the cost to effectively securitize the vacation ownership notes receivable.
The table above shows the bifurcation of our vacation ownership notes receivable that have not been securitized into those eligible and not eligible for securitization based upon the aforementioned eligibility criteria. We estimate the fair value of the portion of our vacation ownership notes receivable that have not been securitized that we believe will ultimately be securitized in the same manner as vacation ownership notes receivable that have been securitized. We value the remaining vacation ownership notes receivable that have not been securitized at their carrying value, rather than using our pricing model. We believe that the carrying value of these particular vacation ownership notes receivable approximates fair value because the stated, or otherwise imputed, interest rates of these loans are consistent with current market rates and the reserve for these vacation ownership notes receivable appropriately accounts for risks in default rates, prepayment rates, discount rates, and loan terms. We concluded that this fair value measurement should be categorized within Level 3.
Other Assets
Other assets include $54 million of company owned insurance policies (the “COLI policies”), acquired on the lives of certain participants in the Marriott Vacations Worldwide Deferred Compensation Plan, that are held in a rabbi trust. The carrying value of the COLI policies is equal to their cash surrender value (Level 2 inputs). In addition, we have investments in marketable securities of $6 million that are marked to market using quoted market prices (Level 1 inputs).
Securitized Debt
We generate cash flow estimates by modeling all bond tranches for our active vacation ownership notes receivable securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in our analysis include default rates, prepayment rates, bond interest rates, and other structural factors, which we use to estimate the projected cash flows. In order to estimate market credit spreads by rating, we obtain indicative credit spreads from investment banks that actively issue and facilitate the market for vacation ownership securities and determine an average credit spread by rating level of the different tranches. We then apply those estimated market spreads to swap rates in order to estimate an underlying discount rate for calculating the fair value of the active bonds payable. We concluded that this fair value measurement should be categorized within Level 3.
2025 Notes, 2026 Notes, and 2028 Notes
We estimate the fair value of our 2025 Notes, 2026 Notes, and 2028 Notes (each as defined in Footnote 17 “Debt”) using quoted market prices as of the last trading day for the quarter; however these notes have only a limited trading history and volume, and as such this fair value estimate is not necessarily indicative of the value at which these notes could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 2.
Term Loan
We estimate the fair value of our Term Loan (as defined in Footnote 17 “Debt”) using quotes from securities dealers as of the last trading day for the quarter; however these notes have only a limited trading history and volume, and as such this fair value estimate is not necessarily indicative of the value at which the Term Loan could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 3.
Revolving Corporate Credit Facility
We estimate that the fair value of our Revolving Corporate Credit Facility (as defined in Footnote 17 “Debt”) approximates its gross carrying value as the contractual interest rate is variable plus an applicable margin. We concluded that this fair value measurement should be categorized within Level 3.
2022 Convertible Notes
We estimate the fair value of our 2022 Convertible Notes using quoted market prices as of the last trading day for the quarter; however these notes have only a limited trading history and volume and as such this fair value estimate is not necessarily indicative of the value at which the 2022 Convertible Notes could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 2. The difference between the carrying value and the fair value is primarily attributed to the underlying conversion feature and the spread between the conversion price and the market value of the shares underlying the 2022 Convertible Notes.
9. EARNINGS PER SHARE
Basic (loss) earnings per common share attributable to common shareholders is calculated by dividing net (loss) or income attributable to common shareholders by the weighted average number of shares of common stock outstanding during the reporting period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per common share attributable to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period, except in periods when there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted earnings per common share applicable to common shareholders by application of the treasury stock method using average market prices during the period.
Our calculation of diluted (loss) earnings per share attributable to common shareholders reflects our intent to settle conversions of the 2022 Convertible Notes through a combination settlement, which contemplates repayment in cash of the principal amount and repayment in shares of our common stock of any excess of the conversion value over the principal amount (the “conversion premium”). Therefore, we include only the shares that may be issued with respect to any conversion premium in total dilutive weighted average shares outstanding, which we calculate using the treasury stock method. As no conversion premium existed as of December 31, 2020, December 31, 2019, or December 31, 2018, there was no dilutive impact from the 2022 Convertible Notes for 2020, 2019, or 2018.
The shares issuable on exercise of the 2022 Warrants (as defined in Footnote 17 “Debt”) sold in connection with the issuance of the 2022 Convertible Notes will not impact the total dilutive weighted average shares outstanding unless and until the price of our common stock exceeds the strike price. If and when the price of our common stock exceeds the strike price of the 2022 Warrants, we will include the dilutive effect of the additional shares that may be issued upon exercise of the 2022 Warrants in total dilutive weighted average shares outstanding, which we calculate using the treasury stock method. The 2022 Convertible Note Hedges purchased in connection with the issuance of the 2022 Convertible Notes are considered to be anti-dilutive and do not impact our calculation of diluted earnings per share attributable to common shareholders for any periods presented herein.
The table below illustrates the reconciliation of the earnings and number of shares used in our calculation of basic and diluted (loss) earnings per share attributable to common shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except per share amounts)
|
|
2020
|
|
2019(1)
|
|
2018(1)
|
Computation of Basic (Loss) Earnings Per Share Attributable to Common Shareholders
|
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
(275)
|
|
|
$
|
138
|
|
|
$
|
55
|
|
Shares for basic (loss) earnings per share
|
|
41.3
|
|
|
43.9
|
|
|
33.3
|
|
Basic (loss) earnings per share
|
|
$
|
(6.65)
|
|
|
$
|
3.13
|
|
|
$
|
1.64
|
|
Computation of Diluted (Loss) Earnings Per Share Attributable to Common Shareholders
|
|
|
Net (loss) income attributable to common shareholders
|
|
$
|
(275)
|
|
|
$
|
138
|
|
|
$
|
55
|
|
Shares for basic (loss) earnings per share
|
|
41.3
|
|
|
43.9
|
|
|
33.3
|
|
Effect of dilutive shares outstanding(2)
|
|
|
|
|
|
|
Employee stock options and SARs
|
|
—
|
|
|
0.3
|
|
|
0.4
|
|
Restricted stock units
|
|
—
|
|
|
0.3
|
|
|
0.3
|
|
Shares for diluted (loss) earnings per share
|
|
41.3
|
|
|
44.5
|
|
|
34.0
|
|
Diluted (loss) earnings per share
|
|
$
|
(6.65)
|
|
|
$
|
3.09
|
|
|
$
|
1.61
|
|
_________________________
(1)The computations of diluted earnings per share attributable to common shareholders exclude approximately 345,000 and 165,000 shares of common stock, the maximum number of shares issuable as of December 31, 2019 and December 31, 2018, respectively, upon the vesting of certain performance-based awards, because the performance conditions required to be met for the shares subject to such awards to vest were not achieved by the end of the reporting period.
(2)Amounts exclude all potentially dilutive equity-based compensation awards for periods when there is a net loss attributable to common shareholders.
In accordance with the applicable accounting guidance for calculating earnings per share, for each of the years ended December 31, 2019 and December 31, 2018, we excluded from our calculation of diluted earnings per share 56,649 shares underlying SARs that may settle in shares of common stock because the exercise price of $143.38 of such SARs was greater than the average market price for each of the applicable periods.
10. INVENTORY
The following table shows the composition of our inventory balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
At Year-End 2020
|
|
At Year-End 2019
|
Finished goods(1)
|
|
$
|
749
|
|
|
$
|
782
|
|
Work-in-progress
|
|
—
|
|
|
69
|
|
Real estate inventory
|
|
749
|
|
|
851
|
|
Other
|
|
10
|
|
|
8
|
|
|
|
$
|
759
|
|
|
$
|
859
|
|
_________________________
(1)Represents completed inventory that is registered for sale as vacation ownership interests and inventory expected to be acquired pursuant to estimated future foreclosures.
We value vacation ownership interests at the lower of cost or fair market value less costs to sell, in accordance with applicable accounting guidance, and we record operating supplies at the lower of cost (using the first-in, first-out method) or net realizable value.
In addition to the above, at December 31, 2020 and December 31, 2019, we had $162 million and $55 million, respectively, of completed vacation ownership units which are classified as a component of Property and equipment until the time at which they are legally registered for sale as vacation ownership products. We also had $43 million and $38 million of deposits on future purchases of inventory at December 31, 2020 and December 31, 2019, respectively, which are included in the Other assets line on our Balance Sheets. Additionally, during the year ended December 31, 2020, we recorded $6 million of inventory impairments.
11. PROPERTY AND EQUIPMENT
The following table details the composition of our property and equipment balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
At Year-End 2020
|
|
At Year-End 2019
|
Land and land improvements
|
|
$
|
285
|
|
|
$
|
267
|
|
Buildings and leasehold improvements
|
|
482
|
|
|
389
|
|
Furniture, fixtures and other equipment
|
|
95
|
|
|
94
|
|
Information technology
|
|
322
|
|
|
312
|
|
Construction in progress
|
|
68
|
|
|
62
|
|
|
|
1,252
|
|
|
1,124
|
|
Accumulated depreciation
|
|
(461)
|
|
|
(406)
|
|
|
|
$
|
791
|
|
|
$
|
718
|
|
12. GOODWILL
The following table details the carrying amount of our goodwill at December 31, 2020 and December 31, 2019, and reflects goodwill attributed to the ILG Acquisition, which was allocated to our Vacation Ownership and our Exchange & Third-Party Management reporting units.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Vacation Ownership Segment
|
|
Exchange & Third-Party Management Segment
|
|
Total Consolidated
|
Balance at December 31, 2018
|
$
|
2,448
|
|
|
$
|
380
|
|
|
$
|
2,828
|
|
Measurement period adjustments
|
(4)
|
|
|
66
|
|
|
62
|
|
Foreign exchange adjustments
|
1
|
|
|
1
|
|
|
2
|
|
Balance at December 31, 2019
|
2,445
|
|
|
447
|
|
|
2,892
|
|
Impairment
|
—
|
|
|
(73)
|
|
|
(73)
|
|
Foreign exchange adjustments
|
—
|
|
|
(2)
|
|
|
(2)
|
|
Balance at December 31, 2020
|
$
|
2,445
|
|
|
$
|
372
|
|
|
$
|
2,817
|
|
Q1 2020
In connection with the preparation of our Financial Statements for the first quarter of 2020, we initially concluded that it was more likely than not that the fair value of both of our reporting units was below their respective carrying amounts. The factors that led to this conclusion were related to the COVID-19 pandemic and included: (i) the substantial decline in our stock price and market capitalization; (ii) the closure of substantially all of our Vacation Ownership reporting unit sales centers; (iii) the government stay-at-home orders in place in many of the jurisdictions in which we operate; (iv) our planned furloughs and reduced work schedule arrangements; (v) the impact of travel restrictions on the hospitality industry; and (vi) the macroeconomic fallout from the COVID-19 pandemic.
We utilized a combination of the income and market approaches to estimate the fair value of our reporting units (Level 3). We concluded that there was no impairment of the Vacation Ownership reporting unit as declines in expected future operating results were not substantial enough to cause the fair value of the reporting unit to be below its carrying amount. We recognized a non-cash impairment charge of $73 million in the Impairment line on our Income Statement during the first quarter of 2020 related to the Exchange & Third-Party Management reporting unit, which was primarily driven by the change in expected future operating results as a result of the impact of the COVID-19 pandemic.
Q2 2020 and Q3 2020
In connection with the preparation of our Financial Statements for the second and third quarters of 2020, we concluded that an interim quantitative impairment test was required for our Exchange & Third-Party Management reporting unit because of the impairment charge we recognized for this reporting unit in the first quarter of 2020. We utilized a combination of the income and market approaches to estimate the fair value of this reporting unit (Level 3) consistent with the methodology used in the first quarter of 2020. We concluded that there was no further impairment of the Exchange & Third-Party Management reporting unit as of the end of each of the second and third quarters of 2020 from the first quarter of 2020, as future expected operating results had improved slightly in comparison to the projections used in the first quarter, resulting in a fair value of the reporting unit in excess of its carrying amount. We performed a qualitative analysis of the impact of recent events, including business and industry specific considerations, on the fair value of our Vacation Ownership reporting unit as of the end of each of the second and third quarters of 2020 and determined that an interim quantitative impairment test was not required.
Q4 2020
We performed our annual goodwill impairment test as of October 1, 2020 and prepared a quantitative assessment for both the Vacation Ownership and the Exchange & Third-Party Management reporting units. We utilized a combination of the income and market approaches to estimate the fair value of this reporting unit (Level 3) consistent with the methodology used in the first quarter of 2020. For each reporting unit, the fair value of the reporting unit was in excess of the carrying value and therefore we concluded there was no further impairment.
Given the continued impact of the COVID-19 pandemic, in connection with the preparation of our Financial Statements for the year ended December 31, 2020, we performed a qualitative analysis of each of our reporting units as of the end of the fourth quarter, considering recent events and determined that interim quantitative impairment tests were not required. While the goodwill of our reporting units are not impaired at December 31, 2020, we cannot assure you that goodwill will not be impaired in future periods. We will continue to monitor the operating results, cash flow forecasts and impact from changes in market conditions, as well as impacts of COVID-19 for these reporting units.
13. INTANGIBLE ASSETS
The following table details the composition of our intangible asset balances:
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
Definite-lived intangible assets
|
|
|
|
Member relationships
|
$
|
671
|
|
|
$
|
671
|
|
Management contracts
|
351
|
|
|
351
|
|
|
1,022
|
|
|
1,022
|
|
Accumulated amortization
|
(134)
|
|
|
(77)
|
|
|
888
|
|
|
945
|
|
Indefinite-lived intangible assets
|
|
|
|
Trade names and trademarks
|
64
|
|
|
82
|
|
|
$
|
952
|
|
|
$
|
1,027
|
|
Definite-Lived Intangible Assets
Definite-lived intangible assets, all of which were acquired as part of the ILG Acquisition, are amortized on a straight-line basis over their estimated useful lives, ranging from 15 to 25 years. We recorded amortization expense of $57 million in 2020, $59 million in 2019, and $19 million in 2018 in the Depreciation and amortization line of our Income Statements. For these assets, we estimate that our aggregate amortization expense will be $57 million for each of the next five fiscal years.
Indefinite-Lived Intangibles
The following table summarizes the activity related to our indefinite-lived intangible assets, all of which are related to the Exchange & Third-Party Management segment.
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Trade Names and Trademarks
|
Balance at December 31, 2019
|
|
$
|
82
|
|
Impairment
|
|
(18)
|
|
Balance at December 31, 2020
|
|
$
|
64
|
|
In connection with the preparation of the financial statements for the first quarter of 2020, we concluded that it was more likely than not that the fair value of our indefinite lived intangibles was below their carrying amounts. The factors that led to this conclusion were related to the COVID-19 pandemic and included: (i) the government stay-at-home orders in place in many of the jurisdictions in which we operate; (ii) the impact of travel restrictions on the hospitality industry; and (iii) the macroeconomic fallout from the COVID-19 pandemic.
We used the relief of royalty method in calculating the fair value of the trade names and trademarks (Level 3). We recognized a non-cash impairment charge of $18 million in the Impairment line on our Income Statement during the first quarter of 2020, which was primarily attributed to the decline in estimated near-term revenues and related recovery of long-term revenues attributed to the impact of the COVID-19 pandemic.
We performed our annual impairment test of indefinite lived intangible assets as of October 1, 2020 consistent with the methodology used in the first quarter of 2020 and determined that the fair value of our indefinite lived intangibles was above their carrying amounts.
14. CONTINGENCIES AND COMMITMENTS
Commitments and Letters of Credit
As of December 31, 2020, we had the following commitments outstanding:
•We have various contracts for the use of information technology hardware and software that we use in the normal course of business. Our aggregate commitments under these contracts were $85 million, of which we expect $34 million, $26 million, $16 million, $6 million, and $3 million will be paid in 2021, 2022, 2023, 2024, and 2025, respectively.
•We have various commitments to acquire real estate for use in our Vacation Ownership segment via our involvement with VIEs. Refer to Footnote 20 “Variable Interest Entities” for additional information and our activities relating to the VIEs involved in these transactions.
•We have a remaining commitment to purchase 88 vacation ownership units located in Bali, Indonesia for use in our Vacation Ownership segment, contingent upon completion of construction to agreed-upon standards. We expect to complete the acquisition in 2021 and to make the remaining payments with respect to these units when specific construction milestones are completed, as follows: $21 million in 2021 and $2 million in 2022.
Surety bonds issued as of December 31, 2020 totaled $75 million, the majority of which were requested by federal, state or local governments in connection with our operations.
As of December 31, 2020, we had $3 million of letters of credit outstanding under our Revolving Corporate Credit Facility (as defined in Footnote 17 “Debt”). In addition, as of December 31, 2020, we had $2 million in letters of credit outstanding related to and in lieu of reserves required for several vacation ownership notes receivable securitization transactions outstanding. These letters of credit are not issued pursuant to, nor do they impact our borrowing capacity under, the Revolving Corporate Credit Facility.
We estimate the cash outflow associated with completing the phases of our existing portfolio of vacation ownership projects currently under development will be approximately $3 million, of which $2 million is included within liabilities on our Balance Sheet at December 31, 2020. This estimate is based on our current development plans, which remain subject to change, and we expect the phases currently under development will be completed by the end of 2021.
Guarantees
Certain of our rental management agreements in our Exchange & Third-Party Management segment provide for owners of properties we manage to receive specified percentages or guaranteed amounts of the rental revenue generated under our management. In these cases, the operating expenses for the rental operations are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages or guaranteed amounts, and our vacation rental business either retains the balance (if any) as its fee or makes up the deficit. At December 31, 2020, our maximum exposure under fixed dollar guarantees was $24 million, of which $10 million, $6 million, $3 million, $2 million, $1 million, and $2 million relate to 2021, 2022, 2023, 2024, 2025, and thereafter, respectively. Based on the impact of the COVID-19 pandemic on our rental operations, we declared the occurrence of a force majeure event under many of these agreements, generally effective as of April 1, 2020. As a result, owner distributions made under such agreements will be paid on a net operating income basis, rather than as guaranteed amounts, until such time as force majeure event conditions abate.
Loss Contingencies
In March 2017, RCHFU, L.L.C. and other owners at The Ritz-Carlton Club, Aspen Highlands (“RCC Aspen Highlands”) filed a complaint in an action pending in the U.S. District Court for the District of Colorado against us and certain third parties, alleging that their fractional interests were devalued by the affiliation of the RCC Aspen Highlands and other Ritz-Carlton Clubs with our points-based Marriott Vacation Club Destinations (“MVCD”) program. The plaintiffs are seeking compensatory damages, disgorgement, punitive damages, fees and costs. A trial is scheduled to begin in January 2022.
In May 2016, a purported class-action lawsuit was filed in the U.S. District Court for the Middle District of Florida by Anthony and Beth Lennen against us and certain third parties. The complaint challenged the characterization of the beneficial interests in the MVCD trust that are sold to customers as real estate interests under Florida law, the structure of the trust, and associated operational aspects of the trust. The plaintiffs sought declaratory relief, an unwinding of the MVCD product, and punitive damages. In August 2019, the District Court granted our motion for judgment on the pleadings and dismissed the case. The plaintiffs have appealed the ruling.
In February 2019, the owners’ association for the St. Regis NY Club filed a lawsuit in the Supreme Court for the State of New York, New York County, Commercial Division against ILG and several of its subsidiaries and certain third parties. The operative complaint alleges that the defendants breached their fiduciary duties related to sale and rental practices, aided and abetted certain breaches of fiduciary duty, engaged in self-dealing as the sponsor and manager of the club, tortiously interfered with the management agreement, was unjustly enriched, and engaged in anticompetitive conduct. The plaintiff is seeking unspecified damages, punitive damages and disgorgement of payments under the management and purchase agreements.
In April 2019, a purported class-action lawsuit was filed by Alan and Marjorie Helman and others against us in the Superior Court of the Virgin Islands, Division of St. Thomas alleging that their fractional interests were devalued by the affiliation of The Ritz-Carlton Club, St. Thomas and other Ritz-Carlton Clubs with our MVCD program. The lawsuit was subsequently removed to the U.S. District Court for the District of the Virgin Islands. The plaintiffs are seeking unspecified damages, disgorgement of profits, fees and costs.
In May 2019, the G.A. Resort Condominium Association Inc., the owners’ association for the fractional owners at the Hyatt Residence Club Grand Aspen resort (“HRC Grand Aspen”) filed a lawsuit against us in the District Court for the County of Pitkin, Colorado relating to the transfer of ownership of developer-owned fractional interests at HRC Grand Aspen to the HPC Trust Club for sale and use as a part of the Hyatt Residence Club Portfolio Program. The lawsuit was subsequently removed to the U.S. District Court for the District of Colorado. The plaintiff is seeking termination of the management agreement with the owners’ association, the annulment of certain amendments to governing documents at HRC Grand Aspen, the removal of fractional interests at HRC Grand Aspen from the HPC Trust Club, unspecified damages, disgorgement of profits, fees and costs. In November 2020, the District Court granted our motion to dismiss and dismissed the case. The plaintiffs have appealed the ruling.
We believe we have meritorious defenses to the claims in each of the above matters and intend to vigorously defend each matter.
In the ordinary course of our business, various claims and lawsuits have been filed or are pending against us. A number of these lawsuits and claims may exist at any given time. Additionally, the COVID-19 pandemic may give rise to various claims and lawsuits from owners, members and other parties. We record and accrue for legal contingencies when we determine that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, we evaluate, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, our ability to make a reasonable estimate of loss. We review these accruals each reporting period and make revisions based on changes in facts and circumstances.
We have not accrued for any of the pending matters described above and we cannot estimate a range of the potential liability associated with these pending matters, if any, at this time. We have accrued for other claims and lawsuits, but the amount accrued is not material individually or in the aggregate. For matters not requiring accrual, we do not believe that the ultimate outcome of such matters, individually and in the aggregate, will materially harm our financial position, cash flows, or overall trends in results of operations based on information currently available. However, legal proceedings are inherently uncertain, and while we believe that our accruals are adequate and/or we have valid defenses to the claims asserted, unfavorable rulings could occur that could, individually or in the aggregate, have a material adverse effect on our business, financial condition, or operating results.
15. LEASES
The following table presents the carrying values of our leases and the classification on our Balance Sheet.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Balance Sheet Classification
|
|
At December 31, 2020
|
|
At December 31, 2019
|
Operating lease assets
|
Other assets
|
|
$
|
131
|
|
|
$
|
142
|
|
Finance lease assets
|
Property and equipment
|
|
8
|
|
|
13
|
|
|
|
|
$
|
139
|
|
|
$
|
155
|
|
|
|
|
|
|
|
Operating lease liabilities
|
Accrued liabilities
|
|
$
|
138
|
|
|
$
|
151
|
|
Finance lease liabilities
|
Debt
|
|
8
|
|
|
14
|
|
|
|
|
$
|
146
|
|
|
$
|
165
|
|
The following table presents the lease costs and the classification on our Income Statements for the years ended December 31, 2020 and December 31, 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Income Statement Classification
|
|
2020
|
|
2019
|
Operating lease cost
|
Marketing and sales expense
General and administrative expense
|
|
$
|
36
|
|
|
$
|
33
|
|
Finance lease cost
|
|
|
|
|
|
Amortization of right-of-use assets
|
Depreciation and amortization
|
|
5
|
|
|
5
|
|
Interest on lease liabilities
|
Financing expense
|
|
1
|
|
|
1
|
|
Variable lease cost
|
Marketing and sales expense
|
|
2
|
|
|
5
|
|
|
|
|
$
|
44
|
|
|
$
|
44
|
|
The following table presents the maturity of our operating and financing lease liabilities as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
Operating Leases
|
|
Finance Leases
|
|
Total
|
2021
|
$
|
27
|
|
|
$
|
4
|
|
|
$
|
31
|
|
2022
|
22
|
|
|
3
|
|
|
25
|
|
2023
|
20
|
|
|
1
|
|
|
21
|
|
2024
|
18
|
|
|
—
|
|
|
18
|
|
2025
|
16
|
|
|
—
|
|
|
16
|
|
Thereafter
|
134
|
|
|
1
|
|
|
135
|
|
Total lease payments
|
237
|
|
|
9
|
|
|
246
|
|
Less: Imputed interest
|
(99)
|
|
|
(1)
|
|
|
(100)
|
|
|
$
|
138
|
|
|
$
|
8
|
|
|
$
|
146
|
|
Lease Term and Discount Rate
The following table presents additional information about our lease obligations.
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2020
|
|
At December 31, 2019
|
Weighted-average remaining lease term
|
|
|
|
Operating leases
|
19.1 years
|
|
10.5 years
|
Finance leases
|
3.0 years
|
|
1.0 years
|
Weighted-average discount rate
|
|
|
|
Operating leases
|
5.8%
|
|
6.1%
|
Finance leases
|
3.9%
|
|
4.9%
|
Other Information
The following table presents supplemental cash flow information for 2020 and 2019.
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
Cash paid for amounts included in measurement of lease liabilities
|
|
|
|
Operating cash flows for finance leases
|
$
|
1
|
|
|
$
|
1
|
|
Operating cash flows for operating leases
|
$
|
41
|
|
|
$
|
39
|
|
Financing cash flows for finance leases
|
$
|
11
|
|
|
$
|
12
|
|
|
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
|
|
Operating leases
|
$
|
27
|
|
|
$
|
33
|
|
Finance leases
|
$
|
7
|
|
|
$
|
3
|
|
Leases That Have Not Yet Commenced
During the first quarter of 2020, we entered into a finance lease arrangement for our new global headquarters in Orlando, Florida. The new office building is currently expected to be completed in 2024, at which time the lease term will commence and a right-of-use asset and corresponding liability will be recorded on our balance sheet. The initial lease term is approximately 16 years with total lease payments of $129 million over the aforementioned period. During 2020, in response to the COVID-19 pandemic and our ongoing evaluation of future space needs, we entered into a standstill arrangement with the developer/lessor, which expires in June 2021. The agreement provides for a standstill on certain project spending, extends certain deliverable dates pertaining to the development and lease, and grants us a limited termination option in exchange for reimbursement of certain developer soft costs.
16. SECURITIZED DEBT
The following table provides detail on our securitized debt, net of unamortized debt discount and issuance costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At December 31, 2020
|
|
At December 31, 2019
|
Vacation ownership notes receivable securitizations, gross(1)
|
$
|
1,604
|
|
|
$
|
1,850
|
|
Unamortized debt discount and issuance costs
|
(16)
|
|
|
(18)
|
|
|
|
1,588
|
|
|
1,832
|
|
|
|
|
|
|
Warehouse Credit Facility, gross
|
—
|
|
|
21
|
|
Unamortized debt issuance costs(2)
|
—
|
|
|
(2)
|
|
|
|
—
|
|
|
19
|
|
|
|
|
|
|
Other
|
—
|
|
|
20
|
|
|
|
$
|
1,588
|
|
|
$
|
1,871
|
|
_________________________
(1)Interest rates as of December 31, 2020 range from 2.3% to 4.4%, with a weighted average interest rate of 2.8%
(2)Excludes $1 million of unamortized debt issuance costs as of December 31, 2020, as no cash borrowings were outstanding on the Warehouse Credit Facility at that time
All of our securitized debt is non-recourse to us. See Footnote 20 “Variable Interest Entities” for a discussion of the collateral for the non-recourse debt associated with our securitized debt.
The following table shows scheduled future principal payments for our securitized debt as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
Vacation Ownership Notes Receivable Securitizations
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
Payments Year
|
|
|
|
|
|
|
|
2021
|
$
|
170
|
|
|
|
|
|
|
|
2022
|
171
|
|
|
|
|
|
|
|
2023
|
175
|
|
|
|
|
|
|
|
2024
|
176
|
|
|
|
|
|
|
|
2025
|
181
|
|
|
|
|
|
|
|
Thereafter
|
731
|
|
|
|
|
|
|
|
|
$
|
1,604
|
|
|
|
|
|
|
|
Vacation Ownership Notes Receivable Securitizations
Each of the securitized vacation ownership notes receivable transactions contains various triggers relating to the performance of the underlying vacation ownership notes receivable. If a pool of securitized vacation ownership notes receivable fails to perform within the pool’s established parameters (default or delinquency thresholds vary by transaction), transaction provisions effectively redirect the monthly excess spread we would otherwise receive from that pool (attributable to the interests we retained) to accelerate the principal payments to investors (taking into account the subordination of the different tranches to the extent there are multiple tranches) until the performance trigger is cured. During 2020, and as of December 31, 2020, no securitized vacation ownership notes receivable pools were out of compliance with their respective established parameters. As of December 31, 2020, we had 12 securitized vacation ownership notes receivable pools outstanding.
As the contractual terms of the underlying securitized vacation ownership notes receivable determine the maturities of the non-recourse debt associated with them, actual maturities may occur earlier than shown below due to prepayments by the vacation ownership notes receivable obligors.
During the third quarter of 2020, we completed the securitization of a pool of $383 million of vacation ownership notes receivable. In connection with the securitization, investors purchased in a private placement $375 million in vacation ownership loan backed notes from MVW 2020-1 LLC (the “2020-1 LLC”). Four classes of vacation ownership loan backed notes were issued by the 2020-1 LLC: $238 million of Class A Notes, $72 million of Class B Notes, $44 million of Class C Notes, and $21 million of Class D Notes. The Class A Notes have an interest rate of 1.74 percent, the Class B Notes have an interest rate of 2.73 percent, the Class C Notes have an interest rate of 4.21 percent, and the Class D Notes have an interest rate of 7.14 percent, for an overall weighted average interest rate of 2.53 percent. Of the $375 million in proceeds from the transaction, $300 million was used to repay all outstanding amounts previously drawn under the Warehouse Credit Facility, as defined below, $7 million was used to pay transaction expenses and fund required reserves, and the remainder will be used for general corporate purposes.
Warehouse Credit Facility
Our warehouse credit facility (the “Warehouse Credit Facility”), which has a borrowing capacity of $350 million, allows for the securitization of vacation ownership notes receivable on a revolving non-recourse basis. The Warehouse Credit Facility terminates on December 20, 2021, and if not renewed prior to termination, any amounts outstanding thereunder would become due and payable 13 months after termination, at which time all principal and interest collected with respect to the vacation ownership notes receivable held in the Warehouse Credit Facility would be redirected to the lenders to pay down the outstanding debt under the facility. The advance rate for vacation ownership notes receivable securitized using the Warehouse Credit Facility varies based on the characteristics of the securitized vacation ownership notes receivable. We also pay unused facility and other fees under the Warehouse Credit Facility. We generally expect to securitize our vacation ownership notes receivable, including any vacation ownership notes receivable held in the Warehouse Credit Facility, in the ABS market at least once per year.
During the first quarter of 2020, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $240 million. The average advance rate was 84 percent, which resulted in gross proceeds of $202 million. Net proceeds were $201 million due to the funding of reserve accounts of $1 million.
During the second quarter of 2020, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $132 million. The average advance rate was 86 percent, which resulted in gross proceeds of $113 million. Net proceeds were $113 million due to the funding of reserve accounts of less than $1 million.
Additionally, during the second quarter of 2020, we amended our Warehouse Credit Facility to increase the borrowing capacity by $181 million, to $531 million. As part of this amendment, the interest rate increased from primarily LIBOR plus 1.1% to primarily LIBOR plus 1.4%. During the third quarter of 2020, we terminated the additional $181 million capacity of the Warehouse Credit Facility.
17. DEBT
The following table provides detail on our debt balances, net of unamortized debt discount and issuance costs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At December 31, 2020
|
|
At December 31, 2019
|
Senior Secured Notes
|
|
|
|
|
2025 Notes
|
$
|
500
|
|
|
$
|
—
|
|
|
Unamortized debt discount and issuance costs
|
(6)
|
|
|
—
|
|
|
|
494
|
|
|
—
|
|
|
|
|
|
|
Senior Unsecured Notes
|
|
|
|
|
2026 Notes
|
750
|
|
|
750
|
|
|
Unamortized debt discount and issuance costs
|
(6)
|
|
|
(8)
|
|
|
|
744
|
|
|
742
|
|
|
|
|
|
|
|
2028 Notes
|
350
|
|
|
350
|
|
|
Unamortized debt discount and issuance costs
|
(4)
|
|
|
(5)
|
|
|
|
346
|
|
|
345
|
|
|
|
|
|
|
Corporate Credit Facility
|
|
|
|
|
Term Loan
|
884
|
|
|
893
|
|
|
Unamortized debt discount and issuance costs
|
(11)
|
|
|
(12)
|
|
|
|
873
|
|
|
881
|
|
|
|
|
|
|
|
Revolving Corporate Credit Facility
|
—
|
|
|
30
|
|
|
Unamortized debt issuance costs(1)
|
—
|
|
|
(3)
|
|
|
|
—
|
|
|
27
|
|
|
|
|
|
|
2022 Convertible Notes
|
230
|
|
|
230
|
|
Unamortized debt discount and issuance costs
|
(15)
|
|
|
(23)
|
|
|
|
215
|
|
|
207
|
|
|
|
|
|
|
Finance leases
|
8
|
|
|
14
|
|
|
|
$
|
2,680
|
|
|
$
|
2,216
|
|
_________________________
(1)Excludes $3 million of unamortized debt issuance costs as of December 31, 2020, as no cash borrowings were outstanding on the Revolving Corporate Credit Facility, as defined below, at that time.
The following table shows scheduled future principal payments for our debt, excluding finance leases, as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2025 Notes
|
|
2026 Notes
|
|
2028 Notes
|
|
Term Loan(1)
|
|
|
|
2022 Convertible Notes
|
|
Total
|
Payments Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
|
|
$
|
—
|
|
|
$
|
9
|
|
2022
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
|
|
230
|
|
|
239
|
|
2023
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
|
|
—
|
|
|
9
|
|
2024
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
|
|
—
|
|
|
9
|
|
2025
|
500
|
|
|
—
|
|
|
—
|
|
|
848
|
|
|
|
|
—
|
|
|
848
|
|
Thereafter
|
—
|
|
|
750
|
|
|
350
|
|
|
—
|
|
|
|
|
—
|
|
|
1,100
|
|
|
$
|
500
|
|
|
$
|
750
|
|
|
$
|
350
|
|
|
$
|
884
|
|
|
|
|
$
|
230
|
|
|
$
|
2,214
|
|
_________________________
(1)Subsequent to the end of 2020, we elected to repay $100 million of the principal of our Term Loan.
Senior Secured Notes
In the second quarter of 2020, we issued $500 million aggregate principal amount of 6.125% Senior Secured Notes due September 15, 2025 (the “2025 Notes”). The 2025 Notes are pari passu with, and secured by the same collateral as, our Corporate Credit Facility. We pay interest on the 2025 Notes on May 15 and November 15 of each year, commencing on November 15, 2020. We received net proceeds of approximately $493 million from the offering of the 2025 Notes, after deducting offering expenses and the underwriting discount, which were used to repay all amounts outstanding at that time on the Revolving Corporate Credit Facility. We may redeem some or all of the 2025 Notes prior to maturity under the terms provided in the indenture.
Senior Unsecured Notes
Our Senior Unsecured Notes, as further discussed below, include the following:
•$750 million aggregate principal amount of 6.500% Senior Unsecured Notes due 2026 issued in the third quarter of 2018 with a maturity date of September 15, 2026 (the “2026 Notes”); and
•$350 million aggregate principal amount of 4.750% Senior Unsecured Notes due 2028 issued in the fourth quarter of 2019 with a maturity date of January 15, 2028 (the “2028 Notes”).
2026 Notes
We issued the 2026 Notes under an indenture dated August 23, 2018 with The Bank of New York Mellon Trust, as trustee. We received net proceeds of $742 million from the offering, after deducting the underwriting discount and estimated expenses. We used these proceeds, together with the borrowings under the Term Loan (defined below) primarily to finance the cash component of the consideration paid in the ILG Acquisition to ILG shareholders, certain fees and expenses we incurred in connection with the ILG Acquisition and working capital. We pay interest on the 2026 Notes on March 15 and September 15 of each year, commencing on March 15, 2019. We may redeem some or all of the 2026 Notes prior to maturity under the terms provided in the indenture.
2028 Notes
We issued the 2028 Notes under an indenture dated October 1, 2019 with The Bank of New York Mellon Trust, as trustee. We received net proceeds of $346 million from the offering, after deducting the underwriting discount and estimated expenses. The net proceeds from the 2028 Notes were used (i) to redeem all of the outstanding 5.625% Senior Unsecured Notes due 2023 assumed in connection with the ILG Acquisition (the “IAC Notes”), (ii) to redeem all of the outstanding 5.625% Senior Unsecured Notes due 2023 offered in exchange for the IAC Notes during the third quarter of 2018 (the “Exchange Notes”), (iii) to repay a portion of the outstanding borrowings under our Revolving Corporate Credit Facility, (iv) to pay transaction expenses and fees in connection with each of the foregoing and (v) for general corporate purposes. We pay interest on the 2028 Notes on March 15 and September 15 of each year, commencing on March 15, 2020. We may redeem some or all of the 2028 Notes prior to maturity under the terms provided in the indenture.
Corporate Credit Facility
Our corporate credit facility (“Corporate Credit Facility”), which provides support for our business, including ongoing liquidity and letters of credit, includes a $900 million term loan facility (the “Term Loan”), which matures on August 31, 2025, and a revolving credit facility with a borrowing capacity of $600 million (the “Revolving Corporate Credit Facility”), including a letter of credit sub-facility of $75 million, that terminates on August 31, 2023.
The Term Loan bears interest at LIBOR plus 1.75 percent. Borrowings under the Revolving Corporate Credit Facility generally bear interest at a floating rate plus an applicable margin that varies from 0.50 percent to 2.75 percent depending on the type of loan and our credit rating. In addition, we pay a commitment fee on the unused availability under the Revolving Corporate Credit Facility at a rate that varies from 20 to 40 basis points per annum, also depending on our credit rating.
Any amounts borrowed under that facility, as well as obligations with respect to letters of credit issued pursuant to that facility, are secured by a perfected first priority security interest in substantially all of the assets of the borrower under, and guarantors of, that facility (which include Marriott Vacations Worldwide and each of our direct and indirect, existing and future, domestic subsidiaries, excluding certain bankruptcy remote special purpose subsidiaries), in each case including inventory, subject to certain exceptions.
In May 2020, we entered into a waiver (the “Waiver”) to the agreement that governs our Corporate Credit Facility. The Waiver, among other things, suspends the requirement to comply with the leverage covenant in the Revolving Corporate Credit Facility, commencing with the fiscal quarter ending June 30, 2020. The initial suspension period included in the Waiver was up to four quarters, however, in February 2021, subsequent to the end of 2020, we further amended the agreement governing our Corporate Credit Facility to extend the suspension period included in the Waiver through the end of 2021. We are required to maintain monthly minimum liquidity of at least $300 million until the later of December 31, 2021 or the end of the suspension period. In addition, for the duration of the period during which the waiver of the leverage covenant remains in effect, we are prohibited from making certain restricted payments, including share repurchases and dividends. If we are not in compliance with the leverage covenant at the end of the suspension period, we will seek to negotiate with our lenders to amend such covenant, as needed.
Prior to 2020, we entered into $250 million of interest rate swaps under which we pay a fixed rate of 2.9625 percent and receive a floating interest rate through September 2023 and $200 million of interest rate swaps under which we pay a fixed rate of 2.2480 percent and receive a floating interest rate through April 2024, in each case to hedge a portion of our interest rate risk on the Term Loan. We also entered into a $100 million interest rate collar with a cap strike rate of 2.5000 percent and a floor strike rate of 1.8810 percent through April 2024 to further hedge our interest rate risk on the Term Loan. Both the interest rate swaps and the interest rate collar have been designated and qualify as cash flow hedges of interest rate risk and recorded in Other liabilities on our Balance Sheet as of December 31, 2020 and December 31, 2019. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income for presentation purposes.
The following table reflects the activity in accumulated other comprehensive loss related to our derivative instruments during 2020, 2019 and 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Derivative Instrument Adjustment, Beginning of Year
|
$
|
(21)
|
|
|
$
|
(6)
|
|
|
$
|
—
|
|
Other comprehensive loss before reclassifications
|
(18)
|
|
|
(15)
|
|
|
(6)
|
|
Reclassification to Income Statement
|
—
|
|
|
—
|
|
|
—
|
|
Net other comprehensive loss
|
(18)
|
|
|
(15)
|
|
|
(6)
|
|
Derivative Instrument Adjustment, End of Year
|
$
|
(39)
|
|
|
$
|
(21)
|
|
|
$
|
(6)
|
|
2022 Convertible Notes
During 2017, we issued an aggregate principal amount of $230 million of 2022 Convertible Notes that bear interest at a rate of 1.50 percent, payable in cash semi-annually. The 2022 Convertible Notes mature on September 15, 2022, unless repurchased or converted in accordance with their terms prior to that date.
The conversion rate is subject to adjustment for certain events as described in the indenture governing the notes, and was subject to adjustment as of December 31, 2020 to 6.8115 shares of common stock per $1,000 principal amount of 2022 Convertible Notes (equivalent to a conversion price of approximately $146.81 per share of our common stock), as a result of the $0.54 per share quarterly dividends declared during the first quarter of 2020, which was greater than the quarterly dividend when the 2022 Convertible Notes were issued. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our intent to settle conversions of
the 2022 Convertible Notes through combination settlement, which contemplates repayment in cash of the principal amount and repayment in shares of our common stock of any excess of the conversion value over the principal amount.
Holders may convert their 2022 Convertible Notes prior to June 15, 2022 only under certain circumstances. We may not redeem the 2022 Convertible Notes prior to their maturity date. If we undergo a fundamental change, as described in the indenture, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their 2022 Convertible Notes, at a repurchase price equal to 100 percent of the principal amount of the 2022 Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date. If certain fundamental changes referred to in the indenture as make-whole fundamental changes occur, the conversion rate applicable to the 2022 Convertible Notes may increase.
As of December 31, 2020, the effective interest rate was 4.7 percent and the remaining debt discount amortization period was 1.7 years.
The following table shows the net carrying value of the 2022 Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At December 31, 2020
|
|
At December 31, 2019
|
Liability component
|
|
|
|
Principal amount
|
$
|
230
|
|
|
$
|
230
|
|
Unamortized debt discount
|
(13)
|
|
|
(20)
|
|
Unamortized debt issuance costs
|
(2)
|
|
|
(3)
|
|
Net carrying amount of the liability component
|
$
|
215
|
|
|
$
|
207
|
|
|
|
|
|
Carrying amount of equity component, net of issuance costs
|
$
|
33
|
|
|
$
|
33
|
|
The following table shows interest expense information related to the 2022 Convertible Notes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Contractual interest expense
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
3
|
|
Amortization of debt discount
|
7
|
|
|
6
|
|
|
6
|
|
Amortization of debt issuance costs
|
1
|
|
|
2
|
|
|
1
|
|
|
$
|
11
|
|
|
$
|
11
|
|
|
$
|
10
|
|
See Footnote 23 “Subsequent Events” for information on convertible notes, convertible note hedges and warrants issued subsequent to the end of 2020.
2022 Convertible Note Hedges and Warrants
In connection with the offering of the 2022 Convertible Notes, we concurrently entered into the following privately-negotiated separate transactions: convertible note hedge transactions with respect to our common stock (“2022 Convertible Note Hedges”), initially covering a total of approximately 1.55 million shares of our common stock, and warrant transactions (“2022 Warrants”), whereby we sold to the counterparties to the 2022 Convertible Note Hedges warrants to acquire approximately 1.55 million shares of our common stock at an initial strike price of $176.68 per share. As of December 31, 2020, no 2022 Convertible Note Hedges or 2022 Warrants have been exercised. The 2022 Warrants will expire in ratable portions on a series of expiration dates commencing on December 15, 2022.
The 2022 Convertible Notes, the 2022 Convertible Note Hedges and the 2022 Warrants are transactions that are separate from each other. Holders of any such instrument have no rights with respect to the other instruments.
Finance Leases
See Footnote 15 “Leases” for information on our finance leases.
Security and Guarantees
Amounts borrowed under the Corporate Credit Facility and the 2025 Notes, as well as obligations with respect to letters of credit issued pursuant to the Corporate Credit Facility, are secured by a perfected first priority security interest in substantially all of the assets of the borrowers under, and guarantors of, that facility (which include MVWC and certain of our direct and indirect, existing and future, domestic subsidiaries, excluding certain bankruptcy remote special purpose subsidiaries), in each case including inventory, subject to certain exceptions. In addition, the Corporate Credit Facility, the 2025 Notes, the 2026 Notes and the 2028 Notes are guaranteed by MVWC and certain of our direct and indirect, existing and future, domestic subsidiaries, excluding bankruptcy remote special purpose subsidiaries.
18. SHAREHOLDERS’ EQUITY
Marriott Vacations Worldwide has 100,000,000 authorized shares of common stock, par value of $0.01 per share. At December 31, 2020, there were 75,279,061 shares of Marriott Vacations Worldwide common stock issued, of which 41,094,248 shares were outstanding and 34,184,813 shares were held as treasury stock. At December 31, 2019, there were 75,020,272 shares of Marriott Vacations Worldwide common stock issued, of which 41,582,096 shares were outstanding and 33,438,176 shares were held as treasury stock. Marriott Vacations Worldwide has 2,000,000 authorized shares of preferred stock, par value of $0.01 per share, none of which were issued or outstanding as of December 31, 2020 or December 31, 2019.
Share Repurchase Program
The following table summarizes the share repurchase activity under our share repurchase program, which expired on December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions, except per share amounts)
|
|
Number of
Shares
Repurchased
|
|
Cost of Shares
Repurchased
|
|
Average Price
Paid per Share
|
As of December 31, 2019
|
|
16,418,950
|
|
|
$
|
1,258
|
|
|
$
|
76.60
|
|
For the year ended December 31, 2020
|
|
769,935
|
|
|
82
|
|
|
106.60
|
|
As of December 31, 2020
|
|
17,188,885
|
|
|
$
|
1,340
|
|
|
$
|
77.95
|
|
Dividends
We declared cash dividends to holders of common stock during the year ended December 31, 2020 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Declaration Date
|
|
Shareholder Record Date
|
|
Distribution Date
|
|
Dividend per Share
|
February 14, 2020
|
|
February 27, 2020
|
|
March 12, 2020
|
|
$0.54
|
Due to the impact of the COVID-19 pandemic, we temporarily suspended cash dividends. Any future dividend payments will be subject to both the restrictions imposed under the Waiver and other agreements covering our debt, Board approval, and there can be no assurance that we will pay dividends in the future.
Noncontrolling Interests
Property Owners’ Associations
We consolidate certain property owners’ associations. Noncontrolling interests represents the portion of the property owners’ associations related to individual or third-party vacation ownership interest owners. Noncontrolling interests of $31 million and $12 million, as of December 31, 2020 and December 31, 2019, respectively, are included on our Balance Sheets as a component of equity.
19. SHARE-BASED COMPENSATION
The MVW Equity Plan is maintained for the benefit of our officers, directors and employees. Under the MVW Equity Plan, we are authorized to award: (1) RSUs of our common stock, (2) SARs relating to our common stock, and (3) stock options to purchase our common stock. A total of 1.8 million shares are authorized for issuance pursuant to grants under the MVW Equity Plan. As of December 31, 2020, approximately 1.7 million shares were available for grants under the MVW Equity Plan.
The following table details our share-based compensation expense related to award grants to our officers, directors, and employees:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Service-based RSUs
|
$
|
22
|
|
|
$
|
17
|
|
|
$
|
12
|
|
Performance-based RSUs
|
9
|
|
|
7
|
|
|
7
|
|
ILG Acquisition Converted RSUs
|
2
|
|
|
10
|
|
|
13
|
|
|
33
|
|
|
34
|
|
|
32
|
|
SARs
|
4
|
|
|
3
|
|
|
3
|
|
Stock options
|
—
|
|
|
—
|
|
|
—
|
|
|
$
|
37
|
|
|
$
|
37
|
|
|
$
|
35
|
|
The following table details our deferred compensation costs related to unvested awards:
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At Year-End 2020(1)
|
|
At Year-End 2019
|
Service-based RSUs
|
$
|
27
|
|
|
$
|
17
|
|
Performance-based RSUs
|
6
|
|
|
10
|
|
ILG Acquisition Converted RSUs
|
—
|
|
|
3
|
|
|
33
|
|
|
30
|
|
SARs
|
1
|
|
|
1
|
|
Stock options
|
—
|
|
|
—
|
|
|
$
|
34
|
|
|
$
|
31
|
|
_________________________
(1)As of December 31, 2020, the weighted average remaining term for RSU grants outstanding at year-end 2020 was one to two years and we expect that deferred compensation expense will be recognized over a weighted average period of one to three years.
Restricted Stock Units
We have issued RSUs that vest over time, which we refer to as service-based RSUs, and RSUs that vest based on performance with respect to established criteria, which we refer to as performance-based RSUs.
The following table shows the changes in our outstanding RSUs and the associated weighted average grant-date fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
Service-based
|
|
Performance-based
|
|
Total
|
|
Number of RSUs
|
|
Weighted Average Grant-Date Fair Value Per RSU
|
|
Number of RSUs
|
|
Weighted Average Grant-Date Fair Value Per RSU
|
|
Number of RSUs
|
|
Weighted Average Grant-Date Fair Value Per RSU
|
Outstanding at year-end 2019
|
648,575
|
|
$
|
85.87
|
|
|
489,322
|
|
$
|
101.35
|
|
|
1,137,897
|
|
$
|
92.53
|
|
Granted
|
348,890
|
|
$
|
98.51
|
|
|
177,208
|
|
$
|
90.82
|
|
|
526,098
|
|
$
|
95.92
|
|
Distributed
|
(192,337)
|
|
$
|
94.80
|
|
|
(65,863)
|
|
$
|
93.41
|
|
|
(258,200)
|
|
$
|
94.44
|
|
Forfeited
|
(21,639)
|
|
$
|
98.02
|
|
|
(50,496)
|
|
$
|
94.32
|
|
|
(72,135)
|
|
$
|
95.43
|
|
Outstanding at year-end 2020
|
783,489
|
|
$
|
88.98
|
|
|
550,171
|
|
$
|
99.56
|
|
|
1,333,660
|
|
$
|
93.34
|
|
The weighted average grant-date fair value per RSU granted in 2019 and 2018 was $92.53 and $120.04, respectively. The fair value of the RSUs which vested in 2020 was $30 million, and included $6 million related to RSUs converted from ILG equity-based RSUs to MVW equity-based RSUs in the ILG Acquisition. The fair value of the RSUs which vested in 2019 was $34 million, and included $15 million related to RSUs converted in the ILG Acquisition. The fair value of the RSUs which vested in 2018 was $48 million, and included $24 million related to RSUs converted in the ILG Acquisition.
Stock Appreciation Rights
The following table shows the changes in our outstanding SARs and the associated weighted average exercise prices:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
Number of
SARs
|
|
Weighted Average Exercise Price Per SAR
|
Outstanding at year-end 2019
|
|
696,147
|
|
$
|
68.18
|
|
Granted
|
|
116,434
|
|
|
$
|
96.82
|
|
Exercised
|
|
(184,118)
|
|
|
$
|
29.85
|
|
Forfeited or expired
|
|
(6,361)
|
|
|
$
|
97.95
|
|
Outstanding at year-end 2020(1)(2)
|
|
622,102
|
|
$
|
84.58
|
|
_________________________
(1)As of December 31, 2020, outstanding SARs had a total intrinsic value of $33 million and a weighted average remaining term of 6 years.
(2)As of December 31, 2020, 381,067 SARs with a weighted average exercise price of $72.57, an aggregate intrinsic value of $25 million and a weighted average remaining contractual term of 5 years were exercisable.
The weighted average grant-date fair value per SAR granted in 2020, 2019, and 2018 was $29.63, $28.89, and $44.75, respectively. The intrinsic value of SARs which vested in 2020, 2019, and 2018, was $4 million, $4 million, and less than $1 million, respectively. The aggregate intrinsic value of SARs which were exercised in 2020, 2019, and 2018 was $19 million, $11 million, and $2 million, respectively.
We use the Black-Scholes model to estimate the fair value of the SARs granted. The expected stock price volatility was calculated based on the average of the historical and implied volatility from our stock price. The average expected life was calculated using the simplified method, as we have insufficient historical information to provide a basis for estimating average expected life. The risk-free interest rate was calculated based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The dividend yield assumption listed below is based on the expectation of future payouts.
The following table outlines the assumptions used to estimate the fair value of grants in 2020, 2019, and 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
Expected volatility
|
38.81%
|
|
31.10%
|
|
30.78%
|
Dividend yield
|
2.13%
|
|
1.76%
|
|
1.11%
|
Risk-free rate
|
0.96%
|
|
2.59%
|
|
2.68%
|
Expected term (in years)
|
6.25
|
|
6.25
|
|
6.25
|
Stock Options
We may grant non-qualified stock options to employees and non-employee directors at exercise prices or strike prices equal to the market price of our common stock on the date of grant.
There were no outstanding or exercisable stock options held by our employees at year-end 2020 or 2019, and no stock options were granted to our employees in 2020, 2019, or 2018. At December 31, 2020, approximately 700 stock options were outstanding and exercisable with a weighted average exercise price per option of $23.46 and a weighted average remaining life of less than one year.
Employee Stock Purchase Plan
During 2015, the Board of Directors adopted, and our shareholders subsequently approved, the Marriott Vacations Worldwide Corporation Employee Stock Purchase Plan (the “ESPP”), which became effective during 2015. A total of 500,000 shares of common stock may be purchased under the ESPP. The ESPP allows eligible employees to purchase shares of our common stock at a price per share not less than 95% of the fair market value per share of common stock on the purchase date, up to a maximum threshold established by the plan administrator for the offering period.
20. VARIABLE INTEREST ENTITIES
Variable Interest Entities Related to Our Vacation Ownership Notes Receivable Securitizations
We periodically securitize, without recourse, through bankruptcy remote special purpose entities, notes receivable originated in connection with the sale of vacation ownership products. These vacation ownership notes receivable securitizations provide funding for us and transfer the economic risks and substantially all the benefits of the consumer loans we originate to third parties. In a vacation ownership notes receivable securitization, various classes of debt securities issued by a special purpose entity are generally collateralized by a single tranche of transferred assets, which consist of vacation ownership notes receivable. With each vacation ownership notes receivable securitization, we may retain a portion of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized vacation ownership notes receivable or, in some cases, overcollateralization and cash reserve accounts.
We created these bankruptcy remote special purpose entities to serve as a mechanism for holding assets and related liabilities, and the entities have no equity investment at risk, making them VIEs. We continue to service the vacation ownership notes receivable, transfer all proceeds collected to these special purpose entities, and retain rights to receive benefits that are potentially significant to the entities. Accordingly, we concluded that we are the entities’ primary beneficiary and, therefore, consolidate them. There is no noncontrolling interest balance related to these entities and the creditors of these entities do not have general recourse to us.
As part of the ILG Acquisition, we acquired the variable interests in the entities associated with ILG’s outstanding vacation ownership notes receivable securitization transactions. As these vacation ownership notes receivable securitizations are similar in nature to the Legacy-MVW vacation ownership notes receivable securitizations, they have been aggregated for disclosure purposes.
The following table shows consolidated assets, which are collateral for the obligations of these VIEs, and consolidated liabilities included on our Balance Sheet at December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Vacation Ownership
Notes Receivable
Securitizations
|
|
Warehouse
Credit
Facility
|
|
Total
|
Consolidated Assets
|
|
|
|
|
|
|
Vacation ownership notes receivable, net of reserves
|
|
$
|
1,493
|
|
|
$
|
—
|
|
|
$
|
1,493
|
|
Interest receivable
|
|
11
|
|
|
—
|
|
|
11
|
|
Restricted cash
|
|
68
|
|
|
—
|
|
|
68
|
|
Total
|
|
$
|
1,572
|
|
|
$
|
—
|
|
|
$
|
1,572
|
|
Consolidated Liabilities
|
|
|
|
|
|
|
Interest payable
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Securitized debt
|
|
1,604
|
|
|
—
|
|
|
1,604
|
|
Total
|
|
$
|
1,605
|
|
|
$
|
—
|
|
|
$
|
1,605
|
|
The following table shows the interest income and expense recognized as a result of our involvement with these VIEs during 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Vacation Ownership
Notes Receivable
Securitizations
|
|
Warehouse
Credit
Facility
|
|
Total
|
Interest income
|
|
$
|
222
|
|
|
$
|
17
|
|
|
$
|
239
|
|
Interest expense to investors
|
|
$
|
51
|
|
|
$
|
4
|
|
|
$
|
55
|
|
Debt issuance cost amortization
|
|
$
|
7
|
|
|
$
|
1
|
|
|
$
|
8
|
|
Administrative expenses
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
The following table shows cash flows between us and the vacation ownership notes receivable securitization VIEs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
Cash Inflows
|
|
|
|
|
Net proceeds from vacation ownership notes receivable securitizations
|
|
$
|
371
|
|
|
$
|
815
|
|
Principal receipts
|
|
487
|
|
|
477
|
|
Interest receipts
|
|
218
|
|
|
214
|
|
Reserve release
|
|
16
|
|
|
184
|
|
Total
|
|
1,092
|
|
|
1,690
|
|
Cash Outflows
|
|
|
|
|
Principal to investors
|
|
(509)
|
|
|
(507)
|
|
Voluntary repurchases of defaulted vacation ownership notes receivable
|
|
(95)
|
|
|
(54)
|
|
Voluntary clean-up call
|
|
(18)
|
|
|
(22)
|
|
Interest to investors
|
|
(49)
|
|
|
(49)
|
|
Funding of restricted cash
|
|
(20)
|
|
|
(169)
|
|
Total
|
|
(691)
|
|
|
(801)
|
|
Net Cash Flows
|
|
$
|
401
|
|
|
$
|
889
|
|
Under the terms of our vacation ownership notes receivable securitizations, we have the right to substitute loans for, or repurchase, defaulted loans at our option, subject to certain limitations. We made voluntary repurchases of defaulted vacation ownership notes receivable, net of substitutions, of $95 million during 2020, $54 million during 2019 and $31 million during 2018. We also made voluntary repurchases, net of substitutions, of $383 million, $356 million and $39 million of other non-defaulted vacation ownership notes receivable during 2020, 2019 and 2018, respectively, to retire previous vacation ownership notes receivable securitizations. Our maximum exposure to potential loss relating to the special purpose entities that purchase, sell, and own these vacation ownership notes receivable is the overcollateralization amount (the difference between the loan collateral balance and the balance on the outstanding vacation ownership notes receivable), plus cash reserves and any residual interest in future cash flows from collateral.
The following table shows cash flows between us and the Warehouse Credit Facility VIE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2020
|
|
2019
|
Cash Inflows
|
|
|
|
|
Proceeds from vacation ownership notes receivable securitizations
|
|
$
|
315
|
|
|
$
|
202
|
|
Principal receipts
|
|
34
|
|
|
14
|
|
Interest receipts
|
|
17
|
|
|
13
|
|
Reserve release
|
|
2
|
|
|
2
|
|
Total
|
|
368
|
|
|
231
|
|
Cash Outflows
|
|
|
|
|
Principal to investors
|
|
(33)
|
|
|
(12)
|
|
Voluntary repurchases of defaulted vacation ownership notes receivable
|
|
(3)
|
|
|
—
|
|
Repayment of Warehouse Credit Facility
|
|
(300)
|
|
|
(285)
|
|
Interest to investors
|
|
(4)
|
|
|
(4)
|
|
Funding of restricted cash
|
|
(2)
|
|
|
(2)
|
|
Total
|
|
(342)
|
|
|
(303)
|
|
Net Cash Flows
|
|
$
|
26
|
|
|
$
|
(72)
|
|
Other Variable Interest Entities
We have a commitment to purchase an operating property located in San Francisco, California, that we currently manage as Marriott Vacation Club Pulse, San Francisco. We expect to acquire the operating property over time and as of December 31, 2020 are committed to make payments for the operating property as follows: $32 million in 2021, $24 million in 2022, and $32 million in 2023. See Footnote 4 “Acquisitions and Dispositions” for information on the purchases that occurred during 2020 and 2019. We are required to purchase the property from the third party developer unless the developer has sold the property to another party. The property is held by a VIE for which we are not the primary beneficiary as we cannot prevent the VIE from selling the property to another party at a higher price. Accordingly, we have not consolidated the VIE. As of December 31, 2020, our Balance Sheet reflected $2 million in Accounts Receivable, including a note receivable of less than $1 million, and $5 million in Other assets for a deposit related to the acquisition of a portion of this property. We believe that our maximum exposure to loss as a result of our involvement with this VIE is approximately $7 million as of December 31, 2020. Subsequent to the end of 2020, we fulfilled our outstanding commitment to purchase 44 completed vacation ownership units for $34 million. We accounted for this purchase as an asset acquisition with the purchase price allocated to Inventory ($29 million) and Other assets ($5 million).
We have a commitment to purchase an operating property located in New York, New York, that we currently manage as Marriott Vacation Club Pulse, New York City. See Footnote 4 “Acquisitions and Dispositions” for information on the purchase that occurred during 2020. We are required to purchase the completed property from the third-party developer unless the developer has sold the property to another party. The property is held by a VIE for which we are not the primary beneficiary as we cannot prevent the VIE from selling the property at a higher price. Accordingly, we have not consolidated the VIE. As of December 31, 2020, our Balance Sheet reflected $22 million in Other assets for a deposit related to the acquisition of the remainder of this property which was completed in January 2021, and a note receivable of less than $1 million that is included in the Accounts receivable line. We believe that our maximum exposure to loss as a result of our involvement with this VIE is approximately $23 million as of December 31, 2020. Subsequent to the end of 2020, we fulfilled our outstanding commitment to purchase the remaining 120 completed vacation ownership units for $98 million. We accounted for this purchase as an asset acquisition with the purchase price allocated to Property and equipment.
We have a commitment to purchase a property located in Waikiki, Hawaii, which we assigned to a third party during 2020. If we are unable to negotiate a capital efficient inventory arrangement, we are committed to purchase the property, in its then current form, for $98 million in 2021, unless it has been sold to another party. The property is held by a VIE for which we are not the primary beneficiary as we do not control the operations of the VIE. Accordingly, we have not consolidated the VIE. As of December 31, 2020, our Balance Sheet reflected $1 million in Accounts Receivable, including a note receivable of less than $1 million. We believe that our maximum exposure to loss as a result of our involvement with this VIE is approximately $1 million as of December 31, 2020.
21. BUSINESS SEGMENTS
We define our reportable segments based on the way in which the chief operating decision maker (“CODM”), currently our chief executive officer, manages the operations of the Company for purposes of allocating resources and assessing performance. We operate in two operating and reportable business segments:
•Vacation Ownership includes a diverse portfolio of resorts that includes seven vacation ownership brands licensed under exclusive, long-term relationships with Marriott International and Hyatt Hotels Corporation. We are the exclusive worldwide developer, marketer, seller, and manager of vacation ownership and related products under the Marriott Vacation Club, Grand Residences by Marriott, Sheraton Vacation Club, Westin Vacation Club, and Hyatt Residence Club brands, as well as under Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand. We are also the exclusive worldwide developer, marketer, and seller of vacation ownership and related products under The Ritz-Carlton Destination Club brand, we have the non-exclusive right to develop, market, and sell whole ownership residential products under The Ritz-Carlton Residences brand and have a license to use the St. Regis brand for specified fractional ownership resorts.
Our Vacation Ownership segment generates most of its revenues from four primary sources: selling vacation ownership products; managing vacation ownership resorts, clubs, and owners’ associations; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory.
•Exchange & Third-Party Management includes exchange networks and membership programs, as well as management of resorts and lodging properties. We provide these services through a variety of brands including Interval International, Trading Places International, Vacation Resorts International, and Aqua-Aston. Exchange & Third-Party Management revenue generally is fee-based and derived from membership, exchange and rental transactions, property and association management, and other related products and services.
Our CODM evaluates the performance of our segments based primarily on the results of the segment without allocating corporate expenses or income taxes. We do not allocate corporate interest expense or indirect general and administrative expenses to our segments. We include interest income specific to segment activities within the appropriate segment. We allocate depreciation, other gains and losses, equity in earnings or losses from our joint ventures, and noncontrolling interest to each of our segments as appropriate. Corporate and other represents that portion of our results that are not allocable to our segments, including those relating to consolidated property owners’ associations, as our CODM does not use this information to make operating segment resource allocations. Prior year segment information has been reclassified to conform to the current reportable segment presentation.
Our CODM uses Adjusted EBITDA to evaluate the profitability of our operating segments, and the components of net income attributable to common shareholders excluded from Adjusted EBITDA are not separately evaluated. Adjusted EBITDA is defined as net income attributable to common shareholders, before interest expense (excluding consumer financing interest expense associated with term loan securitization transactions), income taxes, depreciation and amortization, excluding share-based compensation expense and adjusted for certain items that affect the comparability or our operating performance. Our reconciliation of the aggregate amount of Adjusted EBITDA for our reportable segments to consolidated net (loss) income attributable to common shareholders is presented below.
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Vacation Ownership
|
$
|
2,530
|
|
|
$
|
3,761
|
|
|
$
|
2,803
|
|
Exchange & Third-Party Management
|
309
|
|
|
454
|
|
|
161
|
|
Total segment revenues
|
2,839
|
|
|
4,215
|
|
|
2,964
|
|
Corporate and other
|
47
|
|
|
44
|
|
|
4
|
|
|
$
|
2,886
|
|
|
$
|
4,259
|
|
|
$
|
2,968
|
|
Adjusted EBITDA and Reconciliation to Net Income Attributable to Common Shareholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Adjusted EBITDA Vacation Ownership
|
$
|
229
|
|
|
$
|
794
|
|
|
$
|
511
|
|
Adjusted EBITDA Exchange & Third-Party Management
|
119
|
|
|
183
|
|
|
77
|
|
Reconciling items:
|
|
|
|
|
|
Corporate and other
|
(113)
|
|
|
(219)
|
|
|
(169)
|
|
Interest expense
|
(150)
|
|
|
(132)
|
|
|
(54)
|
|
Tax benefit (provision)
|
84
|
|
|
(83)
|
|
|
(51)
|
|
Depreciation and amortization
|
(123)
|
|
|
(141)
|
|
|
(62)
|
|
Share-based compensation expense
|
(37)
|
|
|
(37)
|
|
|
(35)
|
|
Certain items
|
(284)
|
|
|
(227)
|
|
|
(162)
|
|
Net income attributable to common shareholders
|
$
|
(275)
|
|
|
$
|
138
|
|
|
$
|
55
|
|
Depreciation and Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Vacation Ownership
|
$
|
71
|
|
|
$
|
68
|
|
|
$
|
37
|
|
Exchange & Third-Party Management
|
19
|
|
|
47
|
|
|
16
|
|
Total segment depreciation
|
90
|
|
|
115
|
|
|
53
|
|
Corporate and other
|
33
|
|
|
26
|
|
|
9
|
|
|
$
|
123
|
|
|
$
|
141
|
|
|
$
|
62
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At December 31, 2020
|
|
At December 31, 2019
|
Vacation Ownership
|
$
|
6,859
|
|
|
$
|
7,345
|
|
Exchange & Third-Party Management
|
951
|
|
|
1,162
|
|
Total segment assets
|
7,810
|
|
|
8,507
|
|
Corporate and other
|
1,088
|
|
|
707
|
|
|
$
|
8,898
|
|
|
$
|
9,214
|
|
Capital Expenditures (including inventory)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
Vacation Ownership
|
$
|
191
|
|
|
$
|
266
|
|
|
$
|
245
|
|
Exchange & Third-Party Management
|
7
|
|
|
14
|
|
|
5
|
|
Total segment capital expenditures
|
198
|
|
|
280
|
|
|
250
|
|
Corporate and other
|
4
|
|
|
13
|
|
|
2
|
|
|
$
|
202
|
|
|
$
|
293
|
|
|
$
|
252
|
|
Geographic Information
We conduct business globally, and our operations outside the United States represented approximately 10 percent, 11 percent, and 13 percent of our revenues, excluding cost reimbursements, for 2020, 2019, and 2018, respectively.
Revenues (excluding cost reimbursements)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
2020
|
|
2019
|
|
2018
|
United States
|
$
|
1,664
|
|
|
$
|
2,810
|
|
|
$
|
1,780
|
|
All other countries
|
180
|
|
|
341
|
|
|
263
|
|
|
$
|
1,844
|
|
|
$
|
3,151
|
|
|
$
|
2,043
|
|
Fixed Assets
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
At December 31, 2020
|
|
At December 31, 2019
|
United States
|
$
|
640
|
|
|
$
|
560
|
|
All other countries
|
151
|
|
|
158
|
|
|
$
|
791
|
|
|
$
|
718
|
|
22. QUARTERLY RESULTS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020(1)
|
($ in millions, except per share data)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
Revenues
|
$
|
1,010
|
|
|
$
|
480
|
|
|
$
|
649
|
|
|
$
|
747
|
|
|
$
|
2,886
|
|
Expenses
|
$
|
(1,060)
|
|
|
$
|
(521)
|
|
|
$
|
(673)
|
|
|
$
|
(730)
|
|
|
$
|
(2,984)
|
|
Net loss attributable to common shareholders
|
$
|
(106)
|
|
|
$
|
(70)
|
|
|
$
|
(62)
|
|
|
$
|
(37)
|
|
|
$
|
(275)
|
|
Loss per share attributable to common shareholders
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
(2.56)
|
|
|
$
|
(1.68)
|
|
|
$
|
(1.51)
|
|
|
$
|
(0.88)
|
|
|
$
|
(6.65)
|
|
Diluted
|
$
|
(2.56)
|
|
|
$
|
(1.68)
|
|
|
$
|
(1.51)
|
|
|
$
|
(0.88)
|
|
|
$
|
(6.65)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019(1)
|
($ in millions, except per share data)
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Fiscal
Year
|
Revenues
|
$
|
1,034
|
|
|
$
|
1,043
|
|
|
$
|
1,066
|
|
|
$
|
1,116
|
|
|
$
|
4,259
|
|
Expenses
|
$
|
(943)
|
|
|
$
|
(900)
|
|
|
$
|
(996)
|
|
|
$
|
(962)
|
|
|
$
|
(3,801)
|
|
Net income (loss) attributable to common shareholders
|
$
|
24
|
|
|
$
|
49
|
|
|
$
|
(9)
|
|
|
$
|
74
|
|
|
$
|
138
|
|
Earnings (loss) per share attributable to common shareholders
|
|
|
|
|
|
|
|
|
|
Basic
|
$
|
0.52
|
|
|
$
|
1.11
|
|
|
$
|
(0.21)
|
|
|
$
|
1.74
|
|
|
$
|
3.13
|
|
Diluted
|
$
|
0.51
|
|
|
$
|
1.10
|
|
|
$
|
(0.21)
|
|
|
$
|
1.71
|
|
|
$
|
3.09
|
|
_______________________
(1)The sum of the earnings per share attributable to common shareholders for the four quarters differs from annual earnings per share attributable to common shareholders due to the required method of computing the weighted average shares in interim periods.
23. SUBSEQUENT EVENTS
Acquisition of Welk Resorts
On January 26, 2021, subsequent to the end of 2020, we entered into a definitive agreement to acquire Welk Resorts, one of the largest independent timeshare companies in North America, for approximately $430 million, including approximately 1.4 million shares of our common stock. The acquisition is expected to close early in the second quarter of 2021.
Issuance of Convertible Notes
During the first quarter of 2021, we issued $575 million aggregate principal amount of 0.00% Convertible Senior Notes due 2026 (the “2026 Convertible Notes”). The 2026 Convertible Notes will not bear regular interest and will mature on January 15, 2026, unless earlier repurchased or converted.
On or after October 15, 2025, and prior to the close of business on the second scheduled trading day immediately preceding the stated maturity date of the 2026 Convertible Notes, holders may convert their 2026 Convertible Notes at their option. The 2026 Convertible Notes are convertible at an initial rate of 5.8476 shares of common stock per $1,000 principal amount of 2026 Convertible Notes (equivalent to an initial conversion price of $171.01 per share of our common stock). The conversion rate is subject to adjustment for certain events as described in the Indenture. Upon conversion, we will pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock, at our election. It is our intent to settle conversions of the 2026 Convertible Notes through combination settlement, which contemplates repayment in cash of the principal amount and repayment in shares of our common stock of any excess of the conversion value over the principal amount.
In connection with the offering of the 2026 Convertible Notes, we entered into privately-negotiated convertible note hedge transactions with respect to our common stock with certain counterparties (the “2026 Convertible Note Hedges”), covering a total of 3.4 million shares of our common stock at a cost of approximately $100 million. Concurrently with the entry into the 2026 Convertible Note Hedges, we separately entered into privately-negotiated warrant transactions (the “2026 Warrants”), whereby we sold to the counterparties to the 2026 Convertible Note Hedges warrants to acquire, collectively, subject to anti-dilution adjustments, approximately 3.4 million shares of our common stock at an initial strike price of $213.76 per share. We received aggregate proceeds of approximately $70 million from the sale of the 2026 Warrants to the counterparties. Taken together, the 2026 Convertible Note Hedges and the 2026 Warrants are generally expected to reduce the potential dilution to our common stock (or, in the event the conversion of the 2026 Convertible Notes is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the 2026 Convertible Notes.