TRAVEL + LEISURE CO. BUSINESS AND OVERVIEW We are a global provider of hospitality services and products and operate our business in the following two segments: • Vacation Ownership-develops, markets and sells vacation ownership
interests ("VOIs") to individual consumers, provides consumer financing in
connection with the sale of VOIs, and provides property management
services at resorts.
• Vacation Exchange-provides vacation exchange services and products to
owners of VOIs.
European Vacation Rentals Business Sale
We sold our European vacation rentals business on May 9, 2018 . This sale
resulted in final net proceeds of $1.06 billion and a 2018 after-tax gain of
$456 million , net of $139 million in taxes. During 2019, we recognized an
additional $18 million gain, related to $12 million of tax benefits associated
with additional foreign tax credit utilization and lower than anticipated state
income taxes, as well as $6 million in returned escrow for an expired guarantee
and other changes in expired guarantees. We have provided post-closing credit
support in order to ensure that Compass IV Limited , an affiliate of Platinum
Equity, LLC ("Compass") meets the requirements of certain service providers and
regulatory authorities. The results of operations of this business through the
date of sale have been classified as discontinued operations on the Consolidated
Financial Statements.
Hotel Business Spin-off
We completed the spin-off of our hotel business on May 31, 2018 ("Spin-off").
This Spin-off resulted in our operations being held by two separate, publicly
traded companies, Wyndham Destinations, Inc. ("Wyndham Destinations") and
Wyndham Hotels & Resorts, Inc. ("Wyndham Hotels "). The two public companies have
entered into long-term exclusive license agreements to retain their affiliations
with one of the industry's top-rated loyalty programs, Wyndham Rewards, as well
as to continue to collaborate on inventory-sharing and customer cross-sell
initiatives. This transaction is expected to result in enhanced strategic and
management focus on the core business and growth of each company; more efficient
capital allocation, direct access to capital and expanded growth opportunities
for each company; the ability to implement a tailored approach to recruiting and
retaining employees at each company; improved investor understanding of the
business strategy and operating results of each company; and enhanced investor
choice by offering investment opportunities in separate entities. This
transaction was effected through a pro rata distribution of the new hotel
entity's stock to existing Wyndham Destinations shareholders. The new hotel
company was named Wyndham Hotels . As a result of the Spin-off, we have
classified the results of operations of our hotel business as discontinued
operations on the Consolidated Financial Statements.
Alliance Reservations Network Acquisition
On August 7, 2019 , we acquired Alliance Reservations Network ("ARN") for $102
million ($97 million net of cash acquired). ARN provides private-label travel
booking technology solutions. This acquisition was made to accelerate growth at
RCI by increasing the offerings available to its members and affiliates. We have
recognized the assets and liabilities of ARN based on estimates of their
acquisition date fair values. ARN is reported within the Vacation Exchange
segment.
North American Vacation Rentals Business Sale
During 2018, we decided to explore strategic alternatives for the North American
vacation rentals business and on October 22, 2019 , we closed on the sale of this
business for $162 million . The assets and liabilities of this business were
classified as held-for-sale on the December 31, 2018 Consolidated Balance
Sheet. This business did not meet the criteria to be classified as a
discontinued operation; therefore, the results of operations through the date of
sale are reflected within continuing operations on the Consolidated Statements
of Income.
La Quinta Acquisition
In January 2018 , we entered into an agreement with La Quinta Holdings Inc. ("La
Quinta") to acquire its hotel franchising and management businesses for $1.95
billion . At the time we entered into this agreement, we obtained financing
commitments of $2.0 billion in the form of an unsecured bridge term loan, which
was subsequently replaced with net cash proceeds from the issuance of $500
million unsecured notes, a $1.6 billion term loan and a $750 million revolving
credit facility, which was undrawn. This acquisition closed on May 30, 2018 ,
prior to the Spin-off on May 31, 2018 . Upon completion of the Spin-off, La
Quinta became a wholly-owned subsidiary of Wyndham Hotels and the associated
debt was transferred to Wyndham Hotels .
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Tax Cuts and Jobs Act OnDecember 22, 2017 , the Tax Cuts and Jobs Act of 2017 was enacted in the Unites States of America ("U.S."). This law, also commonly referred to as "U.S. tax reform," significantly changedU.S. corporate income tax laws by, among other changes, imposing a one-time mandatory tax on previously deferred earnings of foreign subsidiaries, reducing theU.S. corporate income tax rate from 35% to 21% starting onJanuary 1, 2018 , creating a territorial tax system which generally eliminatesU.S. federal income taxes on dividends from foreign subsidiaries, eliminating or limiting the deduction of certain expenses, and requiring a minimum tax on earnings generated by foreign subsidiaries. The Tax Cuts and Jobs Act significantly impacted our effective tax rate, cash tax expenses and deferred income tax balances. SEGMENT OVERVIEW Vacation Ownership We develop, market and sell VOIs to individual consumers, provide consumer financing in connection with the sale of VOIs, and provide property management services at resorts. Our sales of VOIs are either cash sales or developer-financed sales. Developer financed sales are typically collateralized by the underlying VOI. Revenue is recognized on VOI sales upon transfer of control, which is defined as the point in time when a binding sales contract has been executed, the financing contract has been executed for the remaining transaction price, the statutory rescission period has expired, and the transaction price has been deemed to be collectible. For developer-financed sales, we reduce the VOI sales transaction price by an estimate of uncollectible consideration at the time of the sale. Our estimates of uncollectible amounts are based largely on the results of our static pool analysis which relies on historical payment data by customer class. In connection with entering into a VOI sale, we may provide our customers with certain non-cash incentives, such as credits for future stays at our resorts. For those VOI sales, we bifurcate the sale and allocate the sales price between the VOI sale and the non-cash incentive. Non-cash incentives generally have expiration periods of 18 months or less and are recognized at a point in time upon transfer of control. We provide day-to-day property management services including oversight of housekeeping services, maintenance, and certain accounting and administrative services for property owners' associations and clubs. These services may also include reservation and resort renovation activities. Such agreements are generally for terms of one year or less, and are renewed automatically on an annual basis. Our management agreements contain cancellation clauses, which allow for either party to cancel the agreement, by either a majority board vote or a majority vote of non-developer interests. We receive fees for such property management services which are collected monthly in advance and are based upon total costs to operate such resorts (or as services are provided in the case of resort renovation activities). Fees for property management services typically approximate 10% of budgeted operating expenses. We are entitled to consideration for reimbursement of costs incurred on behalf of the property owners' association in providing the management services ("reimbursable revenue"). These reimbursable costs principally relate to the payroll costs for management of the associations, club and resort properties where we are the employer and are reflected as a component of Operating expenses on the Consolidated Statements of Income. We reduce management fees for amounts paid to the property owners' association that reflect maintenance fees for VOIs for which we retain ownership, as we have concluded that such payments are consideration payable to a customer. Property management fee revenues are recognized when the services are performed and are recorded as a component of Service and membership fees on the Consolidated Statements of Income. Property management revenues, which are comprised of management fee revenue and reimbursable revenue, were$702 million ,$665 million , and$649 million during 2019, 2018, and 2017. Management fee revenues were$394 million ,$314 million , and$285 million during 2019, 2018, and 2017. Reimbursable revenues were$308 million ,$351 million , and$364 million during 2019, 2018, and 2017. One of the associations that we manage paid our Vacation Exchange segment$29 million for exchange services during each of the years 2019, 2018, and 2017. Within our Vacation Ownership segment, we measure operating performance using the following key operating statistics: (i) gross VOI sales including Fee-for-Service sales before the effect of loan loss provisions, (ii) tours, which represents the number of tours taken by guests in our efforts to sell VOIs, and (iii) volume per guest ("VPG"), which represents revenue per guest and is calculated by dividing the gross VOI sales (excluding tele-sales upgrades, which are non-tour upgrade sales) by the number of tours. 40
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Vacation Exchange As a provider of vacation exchange services, we enter into affiliation agreements with developers of vacation ownership properties to allow owners of VOIs to trade their intervals for intervals at other properties affiliated with our vacation exchange network and, for some members, for other leisure-related services and products. Our vacation exchange business derives a majority of revenues from membership dues and fees for facilitating members' trading of their intervals. Revenues from membership dues represent the fees paid by members or affiliated clubs on their behalf. We recognize revenues from membership dues paid by the member on a straight-line basis over the membership period as the performance obligations are fulfilled through delivery of publications, if applicable, and by providing access to travel-related products and services. Estimated net contract consideration payable by affiliated clubs for memberships is recognized as revenue over the term of the contract with the affiliated club in proportion to the estimated average monthly member count. Such estimates are adjusted periodically for changes in the actual and forecasted member activity. For additional fees, members have the right to exchange their intervals for intervals at other properties affiliated with our vacation exchange networks and, for certain members, for other leisure-related services and products. We also derive revenue from facilitating bookings of travel accommodations for both members and non-members. Revenue is recognized when these transactions have been confirmed, net of expected cancellations. Our vacation exchange business also derives revenues from programs with affiliated resorts, club servicing, and loyalty programs; and additional exchange-related products that provide members with the ability to protect trading power or points, extend the life of deposits, and combine two or more deposits for the opportunity to exchange into intervals with higher trading power. Other vacation exchange related product fees are deferred and recognized as revenue upon the occurrence of a future exchange, other related transaction or event. Prior to the sale of our vacation rental businesses, we derived revenue from fees associated with the rental of vacation properties managed and marketed byWyndham Destinations, Inc. on behalf of independent owners. We remitted the rental fee received from the renter to the independent owner, net of our agreed-upon fee. The related revenue from such fees, net of expected refunds, was recognized over the renter's stay. Our vacation rental businesses also derived revenues from additional services delivered to independent owners, vacation rental guests, and property owners' associations which were generally recognized when the service was delivered. Within our Vacation Exchange segment, we measure operating performance using the following key operating statistics: (i) average number of vacation exchange members, which represents paid members in our vacation exchange programs who are current on their annual membership dues, or within the allowed grace period, and are entitled, for additional fees, to exchange their intervals for intervals at other properties affiliated with our exchange network and, for certain members, for other leisure-related services and products, and (ii) exchange revenue per member, which represents total revenue from fees associated with memberships, exchange transactions, and other services for the period divided by the average number of vacation exchange members during the period. Other Items InDecember 2019 , a strain of coronavirus was reported to have surfaced inChina , resulting in travel bans invoked against Chinese residents. These travel bans, as well as cancellations by non-Chinese customers due to concerns of the virus, have caused minor impacts to our operations inSouth Asia andAustralia to date. Our annual revenues inSouth Asia andAustralia represent approximately 6% of our total revenues. Although the impact has been minor to date, the extent to which the coronavirus may impact our financial condition or results of operations is uncertain. We will continue to monitor events closely and work with heath authorities to ensure the safety of our owners, guests, and employees. We record property management services revenues and RCI Elite Rewards revenues for our Vacation Ownership and Vacation Exchange segments in accordance with the guidance for reporting revenues gross as a principal versus net as an agent, which requires that these revenues be recorded on a gross basis. Discussed below are our consolidated results of operations and the results of operations for each of our reportable segments. These reportable segments represent our operating segments for which discrete financial information is available and which are utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying the reportable segments, we also consider the nature of services provided by our operating segments. Management uses net revenues and Adjusted EBITDA to assess the performance of the reportable segments. We define Adjusted EBITDA as Net income before Depreciation and amortization, Interest expense (excluding Consumer financing interest), Early extinguishment of debt, Interest income (excluding Consumer financing revenues) and income taxes. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, transaction costs, impairments, gains and losses on sale/ 41
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disposition of business, and items that meet the conditions of unusual and/or infrequent. We believe that Adjusted EBITDA is a useful measure of performance for our segments which, when considered with the Generally Accepted Accounting Principles in theU.S. ("GAAP") measures, we believe gives a more complete understanding of our operating performance. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies. OPERATING STATISTICS
The table below presents our operating statistics for the years ended
Year Ended December 31,
2019 2018 % Change (g)
Vacation Ownership (a)
Gross VOI sales (in millions) (b) (h)
945 904 4.5
Volume Per Guest ("VPG") (d) $ 2,381 $ 2,392 (0.4)
Vacation Exchange (a)
Average number of members (in 000s) (e) 3,887 3,847 1.0
Exchange revenue per member (f)
(a) Includes the impact from acquisitions from the acquisition dates forward.
(b) Represents total sales of VOIs, including sales under the Fee-for-Service
program, before the effect of loan loss provisions. We believe that Gross
VOI sales provide an enhanced understanding of the performance of our
vacation ownership business because it directly measures the sales volume of
this business during a given reporting period.
(c) Represents the number of tours taken by guests in our efforts to sell VOIs.
(d) VPG is calculated by dividing Gross VOI sales (excluding tele-sales
upgrades, which are non-tour upgrade sales) by the number of tours.
Tele-sales upgrades were
We have excluded tele-sales upgrades in the calculation of VPG because
tele-sales upgrades are generated by a different marketing channel. We
believe that VPG provides an enhanced understanding of the performance ofour vacation ownership business because it directly measures the efficiency
of this business's tour selling efforts during a given reporting period.
(e) Represents paid members in our vacation exchange programs who are current on
their annual membership dues or within the allowed grace period.
(f) Represents total revenues generated from fees associated with memberships,
exchange transactions, and other servicing for the period divided by the
average number of vacation exchange members during the period.
(g) Change percentages may not calculate due to rounding.
(h) The following table provides a reconciliation of Vacation ownership interest
sales, net to Gross VOI sales for the years ended December 31 , (in
millions):
2019 2018
Vacation ownership interest sales, net
479 456
Gross VOI sales, net of Fee-for-Service sales 2,327 2,225
Fee-for-Service sales (1) 28 46
Gross VOI sales $ 2,355 $ 2,271
(1) Represents total sales of VOIs through our Fee-for-Service programs
where inventory is sold through our sales and marketingchannels for
a commission. Fee-for-Service commission revenues were $18 million
and $31 million during 2019 and 2018. These commissions are reported
within Service and membership fees on the Consolidated
Statements of
Income.
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RESULTS OF OPERATIONS
Our consolidated results for the years ended
Year Ended December 31,
Favorable/
2019 2018 (Unfavorable)
Net revenues $ 4,043 $ 3,931 $ 112
Expenses 3,299 3,408 109
Gain on sale of business (68 ) - 68
Operating income 812 523 289
Other (income), net (23 ) (38 ) (15 )
Interest expense 162 170 8
Interest (income) (7 ) (5 ) 2
Income before income taxes 680 396 284
Provision for income taxes 191 130 (61 )
Net income from continuing operations 489 266 223
Loss from operations of discontinued
businesses, net of income taxes - (50 ) 50
Gain on disposal of discontinued business, net
of income taxes 18 456 (438 )
Net income attributable to Wyndham Destinations
shareholders $ 507 $ 672 $ (165 )
Net revenues increased $112 million during 2019 compared with 2018. Revenue
growth of $133 million (3.4%) was offset by unfavorable foreign currency impact
of $21 million (0.5%). Excluding foreign currency impact, the increase in net
revenues was the result of:
• $149 million of higher revenues in our vacation ownership business due to an
increase in net VOI sales, property management, and consumer financing
revenues; partially offset by
•
the sale of North American vacation rentals in
offset by increases in ancillary revenues driven by the acquisition of ARN.
Expenses decreased$109 million during 2019 compared with 2018. The decrease in expenses of$94 million (2.8%) was impacted by favorable foreign currency of$15 million (0.4%). Excluding foreign currency impact, the decrease in expenses was the result of: •$178 million decrease in separation costs related to the Spin-off of Wyndham
Hotels;
•
vacation rentals business in
•
conveyance of a portion of the
rentals as held-for-sale and the subsequent sale of this business; partially
offset by
•
segment as a result of higher tour volume and an increase in licensing fees
for the use of the Wyndham tradename;
•
of inventory in 2019;
•
by higher revenues at our Vacation Ownership segment, partially offset by
lower operating costs associated with lower revenues at our Vacation Exchange
segment; and
•
Gain on sale of business was
Other income, net of other expense decreased
Interest expense decreased
Our effective tax rate was 28.1% in 2019 compared to 32.8% in 2018. The 2018 effective tax rate was higher due to significant increases in the valuation allowance related to foreign tax credits and net operating losses.
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Our 2019 results of operations reflect a negative impact from hurricane Dorian. We estimate that the hurricane reduced revenues, Adjusted EBITDA, and net income by$20 million ,$11 million , and$8 million . Our 2018 results of operations reflect the negative impact from 2018 hurricanes Florence and Michael, and the lingering effects of 2017 hurricane Maria. We estimate that the 2018 hurricanes reduced revenues, Adjusted EBITDA, and net income by$23 million ,$16 million , and$11 million . Additionally, we estimate that hurricane Maria reduced 2018 revenues, Adjusted EBITDA, and net income by$12 million ,$11 million , and$7 million . During 2018, there was a loss from operations of discontinued businesses, net of income taxes of$50 million associated with the completion of the Spin-off and the sale of the European vacation rentals business. Gain on disposal of discontinued businesses, net of income taxes was$18 million during 2019 mainly due to tax benefits associated with additional foreign tax credit utilization, lower than anticipated state income taxes, and the release of funds held in escrow related to the sale of the European vacation rentals business in 2018. The$456 million gain recognized in 2018 represents the gain on sale of the European vacation rentals business.
As a result of these items, Net income attributable to
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Following is a discussion of the 2019 results of each of our segments compared
to 2018 (in millions):
Year Ended December 31,
Net revenues 2019 2018
Vacation Ownership $ 3,151 $ 3,016
Vacation Exchange 898 918
Total reportable segments 4,049 3,934
Corporate and other (a) (6 ) (3 )
Total Company $ 4,043 $ 3,931
Year Ended December 31,
Reconciliation of Net income to Adjusted EBITDA 2019 2018
Net income attributable toWyndham Destinations shareholders$ 507 $ 672 Gain on disposal of discontinued business, net of income taxes (18 ) (456 ) Loss from operations of discontinued businesses, net of income taxes - 50 Provision for income taxes 191 130 Depreciation and amortization 121 138 Interest expense 162 170 Interest (income) (7 ) (5 ) Gain on sale of business (68 ) - Separation and related costs (b) 45 223 Restructuring 9 16 Asset impairments 27 (4 ) Legacy items (c) 1 1 Acquisition and divestiture related costs 1 - Stock-based compensation 20 23 Value-added tax refund - (16 ) Adjusted EBITDA$ 991 $ 942 Year Ended December 31, Adjusted EBITDA 2019 2018 Vacation Ownership$ 756 $ 731 Vacation Exchange 289 278 Total reportable segments 1,045 1,009 Corporate and other (a) (54 ) (67 )Total Company $ 991 $ 942
(a) Includes the elimination of transactions between segments.
(b) Includes
for the years ended 2019 and 2018.
(c) Represents the resolution of and adjustment to certain contingent
liabilities resulting from our separation from Cendant.
Vacation Ownership
Net revenues increased $135 million and Adjusted EBITDA increased $25 million
during 2019 compared with 2018. Revenue growth of $149 million (4.9%) was offset
by unfavorable foreign currency impact of $14 million (0.5%). Adjusted EBITDA
growth of $30 million (4.1%) was offset by unfavorable foreign currency impact
of $5 million (0.7%).
Net revenue growth excluding the impact of currency was driven by:
• $111 million increase in gross VOI sales, net of Fee-for-Service sales,
driven by a 4.5% increase in tours, resulting from our continued focus on
new owner generation; partially offset by a
provision for loan losses due to higher gross VOI sales and the impact of
higher defaults;
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•$40 million increase in property management revenues due to higher management fees;
•
weighted average interest rate earned on a larger average portfolio
balance; and
•
•$14 million decrease in commission revenues as a result of lower Fee-for-Service VOI sales. In addition to the drivers mentioned above, Adjusted EBITDA excluding the impact of currency was further impacted by: •$63 million increase in marketing costs due to higher tour volume and an
increase in licensing fees for the use of the Wyndham tradename;
•
VOI sales;
•
an increase in the weighted average interest rate and a higher average
loan balance on our non-recourse debt;
•
•
sales; and
•
offset by
• $12 million decrease in commission expenses as a result of lower
Fee-for-Service VOI sales.
Vacation Exchange
Net revenues decreased $20 million and Adjusted EBITDA increased $11 million
during 2019 compared with 2018. Revenue decrease of $13 million (1.4%) was
impacted by unfavorable foreign currency of $7 million (0.8%). Adjusted EBITDA
growth of $16 million (5.8%) was offset by unfavorable foreign currency of $5
million (1.8%).
Decreases in net revenues excluding the impact of currency were driven by:
•
of the North American vacation rentals business in
•
a change in customer mix, lower inventory levels, and higher other product
revenue; partially offset by
•
newly-acquired ARN business; partially offset by the
ancillary revenue generated by the North American vacations rentals
business and the
which were discontinued as a result of the Spin-off.
In addition to the drivers mentioned above, 2019 Adjusted EBITDA, excluding the impact of currency, was further impacted by: •$35 million decrease in costs due to the sale of the North American vacation rentals business inOctober 2019 ; •$10 million decrease in general and administrative expenses due to lower information technology costs and employee-related costs; and
•
service revenues; partially offset by
•
ARN business.
Corporate and other
Corporate and other Adjusted EBITDA increased $13 million during 2019 compared
with 2018. Adjusted EBITDA growth of $9 million (13.4%) was impacted by
favorable foreign currency of $4 million (6.0%). The remaining growth in
Adjusted EBITDA was primarily due to lower employee-related costs as a result of
a smaller corporate presence after the Spin-off of Wyndham Hotels .
For comparative review of our consolidated results of operations and the results
of operations of our reportable segments for the fiscal years ended December 31,
2018 and 2017, refer to Part II, Item 7 of our Annual Report filed on Form 10-K
with the Securities and Exchange Commission ("SEC") on February 26, 2019 .
DISCONTINUED OPERATIONS
We sold our European vacation rentals business on May 9, 2018 . This sale
resulted in final net proceeds of $1.06 billion and a 2018 after-tax gain of
$456 million , net of $139 million in taxes. During 2019 we recognized an
additional $18 million gain, related to $12 million of tax benefits associated
with additional foreign tax credit utilization and lower than anticipated state
income taxes, as well as $6 million in returned escrow for an expired guarantee
and other changes in expired guarantees. We have provided post-closing credit
support in order to ensure that Compass meets the requirements of certain
service providers
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and regulatory authorities. The results of operations of this business have been classified as discontinued operations on the Consolidated Financial Statements.
We completed the Spin-off of our hotel business onMay 31, 2018 , which resulted in our operations being held by two separate, publicly traded companies. The two public companies have entered into long-term exclusive license agreements to retain their affiliations with one of the industry's top-rated loyalty programs, Wyndham Rewards, as well as to continue to collaborate on inventory-sharing and customer cross-sell initiatives. As a result of the Spin-off, we have classified the results of operations of our hotel business as discontinued operations on the Consolidated Financial Statements.
During 2018 there was a
SEPARATION AND TRANSACTION COSTS During 2019, we incurred$45 million of expenses in connection with the Spin-off completed onMay 31, 2018 , which are reflected within continuing operations. These separation costs were related to stock compensation, severance and other employee costs, as well as impairment charges due to the write-off of right-of-use assets and furniture, fixtures and equipment as a result of our abandoning portions of our administrative offices inNew Jersey . This decision was part of our continued focus on rationalizing existing facilities in order to reduce our corporate footprint. These expenses also include additional impairment charges associated with the write-off of assets and liabilities related to the early termination of an operating lease inChicago, Illinois , offset by an indemnification receivable fromWyndham Hotels . Refer to Note 13-Leases to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for additional detail regarding these impairments. During 2018, we incurred$223 million of expenses in connection with the Spin-off which are reflected within continuing operations and include related costs of the Spin-off, of which$217 million were related to stock compensation modification expense, severance and other employee costs offset, in part, by favorable foreign currency. In addition, these costs include certain impairment charges related to the separation including property sold toWyndham Hotels .
Additionally, during 2018, we incurred
During 2017, we incurred$26 million of expenses associated with the planned Spin-off and the exploration of strategic alternatives for the European vacation rentals business which are reflected within continuing operations. Additionally, during 2017 we also incurred$40 million of separation related costs that are included within discontinued operations. These costs include legal, consulting and auditing fees, stock compensation modification expense, severance and other employee-related costs. RESTRUCTURING PLANS During 2019, we recorded$5 million of charges related to restructuring initiatives, most of which are personnel-related resulting from a reduction of approximately 100 employees. This action is primarily focused on enhancing organizational efficiency and rationalizing operations. The charges consisted of (i)$2 million at our Vacation Ownership segment, (ii)$2 million at our Vacation Exchange segment, and (iii)$1 million at our corporate operations. We reduced the restructuring liability by$1 million of cash payments during 2019. The remaining 2019 restructuring liability of$4 million is expected to be paid by the end of 2021. During 2018, we recorded$16 million of charges related to restructuring initiatives, all of which are personnel-related resulting from a reduction of approximately 500 employees. This action was primarily focused on enhancing organizational efficiency and rationalizing operations. The charges consisted of (i)$11 million at our Vacation Ownership segment, (ii)$4 million at our Vacation Exchange segment, and (iii)$1 million at our corporate operations. During 2019, we incurred an additional$3 million of restructuring expenses at our Vacation Ownership segment and an additional$1 million at our corporate operations. We reduced the restructuring liability by$13 million and$4 million of cash payments during 2019 and 2018. The remaining 2018 restructuring liability of$3 million is expected to be paid by the end of 2021. During 2017, we recorded$14 million of charges related to restructuring initiatives, all of which were personnel-related resulting from a reduction of approximately 200 employees. The charges consisted of (i)$8 million at our Vacation Exchange segment which primarily focused on enhancing organizational efficiency and rationalizing our operations, and (ii)$6 million at 47
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our corporate operations which focused on rationalizing our sourcing function and outsourcing certain information technology functions. During 2017, we reduced the restructuring liability by$11 million , of which$10 million was in cash payments and$1 million was through the issuance ofWyndham Worldwide Corporation stock. During 2018, we further reduced the restructuring liability by$3 million of cash payments. The 2017 restructuring liability was paid in full as ofDecember 31, 2018 .
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Financial Condition
December 31, December 31,
(In millions) 2019 2018 Change
Total assets $ 7,453 $ 7,158 $ 295
Total liabilities 7,977 7,727 250
Total deficit (524 ) (569 ) 45
Total assets increased
issuance;
•
new VOI originations, partially offset by principal payments and loan loss
provision;
•
implementation and other contractual arrangements;
•
acquisition of ARN; and
•
right-of-use assets recorded in 2019 related to the adoption of the new
Leases accounting standard, an increase in tax receivables, and non-trade
receivables.
Such increases in assets were partially offset by
Total liabilities increased$250 million fromDecember 31, 2018 , toDecember 31, 2019 , due to: •$184 million increase in Non-recourse vacation ownership debt due to$130
million increase in non-recourse term notes and
conduit borrowings;
•
notes, partially offset by repayment of the revolving credit facility; and
•
VOIs and a decrease in valuation allowances on certain deferred income tax
assets.
Such increases in liabilities were partially offset by $165 million decrease in
Liabilities of held-for-sale business related to the sale of the North American
vacation rentals business.
Total deficit decreased $45 million from December 31, 2018 , to December 31,
2019 , due to $507 million of Net income attributable to Wyndham Destinations
shareholders, and $41 million of Additional paid-in capital mainly due to
changes in stock based compensation, issuance of common stock under our employee
stock purchase plan and the acquisition of ARN; partially offset by $340 million
treasury stock repurchases and $167 million of dividends.
Liquidity and Capital Resources
Currently, our financing needs are supported by cash generated from operations
and borrowings under our revolving credit facility as well as the issuance of
secured debt. In addition, we use our conduit facilities and non-recourse debt
borrowings to finance our vacation ownership contract receivables ("VOCR"). We
believe that our net cash from operations, cash and cash equivalents, access to
our revolving credit facilities, conduit facilities, and continued access to the
debt markets provide us with sufficient liquidity to meet our ongoing cash needs
for the foreseeable future.
Following the Spin-off, our corporate notes were downgraded by Standard & Poor's
Ratings Services ("S&P") and Moody's Investors Service, Inc. ("Moody's"). As a
result of such notes being downgraded, pursuant to the terms of the indentures
governing our series of notes, the 4.15% Notes due 2024 (the "2024 Notes") were
increased to 5.40%, the 5.10% Notes due 2025 (the "2025 Notes") were increased
to 6.35%, and the 4.50% Notes due 2027 (the "2027 Notes") were increased to
5.75% per annum. Pursuant to the terms of the indentures governing such series
of notes, the interest rate on each such series of notes may be subject to
future increases or decreases, as a result of future downgrades or upgrades to
the credit ratings of such notes by S&P, Moody's or a substitute rating agency.
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Our five-year revolving credit facility, which expires inMay 2023 , has a total capacity of$1.0 billion and available capacity of$983 million , net of letters of credit, as ofDecember 31, 2019 . Our non-recourse timeshare receivablesU.S. dollars ("USD") bank conduit facility, with a borrowing capability of$800 million throughAugust 2021 , had$292 million of available capacity as ofDecember 31, 2019 . Borrowings under this facility are required to be repaid as the collateralized receivables amortize, but no later thanSeptember 2022 . Our non-recourse timeshare receivables Australian andNew Zealand dollars ("AUD" and "NZD") bank conduit facility has a borrowing capability ofA$255 million and NZ$48 million throughSeptember 2021 and available capacity of$147 million as ofDecember 31, 2019 . Borrowings under this facility are required to be repaid no later thanSeptember 2023 . We may, from time to time, depending on market conditions and other factors, repurchase our outstanding indebtedness, whether or not such indebtedness trades above or below its face amount, for cash and/or in exchange for other securities or other consideration, in each case in open market purchases and/or privately negotiated transactions. We are currently evaluating the impact of the transition from theLondon Interbank Offered Rate ("LIBOR") as an interest rate benchmark to other potential alternative reference rates, including but not limited to the Secured Overnight Financing Rate ("SOFR"). Currently, we have debt and derivative instruments in place that reference LIBOR-based rates. The transition from LIBOR is estimated to take place after 2021 and management will continue to actively assess the related opportunities and risks involved in this transition. CASH FLOWS The following table summarizes the changes in cash, cash equivalents and restricted cash between 2019 and 2018 (in millions). For a comparative review of the fiscal years endedDecember 31, 2018 and 2017, refer to the Cash Flows section in Part II, Item 7 of our Annual Report on Form 10-K filed with theSEC onFebruary 26, 2019 . Year Ended December 31, 2019 2018 Change Cash provided by/(used in) Operating activities: Continuing operations$ 453 $ 292 $ 161 Discontinued operations (1 ) 150 (151 ) Investing activities: Continuing operations (44 ) (99 ) 55 Discontinued operations (22 ) (626 ) 604 Financing activities: Continuing operations (289 ) (1,786 ) 1,497 Discontinued operations - 2,066 (2,066 ) Effects of changes in exchange rates on cash and cash equivalents 1 (9 ) 10 Net change in cash, cash equivalents and restricted cash$ 98 $ (12 ) $ 110 Operating Activities Net cash provided by operating activities from continuing operations was$453 million for the year endedDecember 31, 2019 , compared to$292 million in the prior year. This$161 million increase in 2019 was driven by a$223 million increase in net income from continuing operations;$83 million decrease in cash utilized for working capital (net cash inflow due to the net change in assets and liabilities); partially offset by a$145 million decrease in non-cash add-back items mainly due to lower stock-based compensation expense, the gain on sale of the North American vacation rentals business, and deferred income taxes. Net cash used in operating activities from discontinued operations was$1 million for the year endedDecember 31, 2019 , compared to$150 million of cash provided by operating activities from discontinued operations in the prior year. Prior year cash inflows were driven by$406 million of net income from discontinued operations,$172 million in cash provided by working capital, partially offset by$428 million in non-cash add-back items mainly due to the Gain on disposal of discontinued businesses, net of income taxes. 49
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Table of Contents Investing Activities Net cash used in investing activities from continuing operations was$44 million for the year endedDecember 31, 2019 , compared to$99 million in the prior year. The decrease in 2019 was primarily due to$106 million of net proceeds from the sale of the North American vacation rentals business in 2019, partially offset by$46 million higher cash used in business acquisitions due to ARN and$9 million higher additions of property and equipment. Net cash used in investing activities from discontinued operations was$22 million for the year endedDecember 31, 2019 , compared to$626 million in the prior year. Cash used in investing activities from discontinued operations in 2019 related to the sale of the European vacation rentals business. Cash used in investing activities from discontinued operations in the prior year was driven by$1.7 billion cash used to acquire La Quinta, partially offset by$1.1 billion of cash proceeds from the sale of the European vacation rentals business. Financing Activities Net cash used in financing activities from continuing operations was$289 million for the year endedDecember 31, 2019 , compared to$1.79 billion in the prior year. The decrease in 2019 was primarily due to$1.0 billion of lower net non-recourse debt and debt payments;$407 million of lower cash transfers toWyndham Hotels associated with the Spin-off;$56 million of lower net share settlement payments; and$28 million lower dividends paid due to 2018's inclusion of dividends paid byWyndham Worldwide Corporation ("Wyndham Worldwide"). Net cash provided by financing activities for discontinued operations was$2.07 billion , for the year endedDecember 31, 2018 , related to borrowings associated with the La Quinta acquisition. Capital Deployment We focus on deploying capital for the highest possible returns. Ultimately, our business objective is to grow our business while optimizing cash flow and Adjusted EBITDA. We intend to continue to invest in select capital and technological improvements across our business. We may also seek to strategically grow the business through merger and acquisition activities. Finally, we intend to continue to return value to shareholders through the repurchase of common stock and payment of dividends. During 2019, we invested$214 million in vacation ownership development projects (inventory). We believe that our vacation ownership business currently has adequate finished inventory on our balance sheet to support vacation ownership sales for at least the next year. The average inventory spend on vacation ownership development projects for the five-year period from 2020 through 2024 is expected to be$260 million annually. After factoring in the anticipated additional average annual spending, we expect to have adequate inventory to support vacation ownership sales through at least the next four to five years. During 2019, we invested$108 million for capital expenditures, primarily on information technology enhancement and facility related projects. During 2020, we anticipate investing$115 million to$125 million on capital expenditures. In connection with our focus on optimizing cash flow, we are continuing our asset-light efforts in vacation ownership by seeking opportunities with financial partners whereby they make strategic investments to develop assets on our behalf. We refer to this as Just-in-Time. The partner may invest in new ground-up development projects or purchase from us, for cash, existing in-process inventory which currently resides on our balance sheet. The partner will complete the development of the project and we may purchase finished inventory at a future date as needed or as obligated under the agreement. We expect that the majority of the expenditures that will be required to pursue our capital spending programs, strategic investments and vacation ownership development projects will be financed with cash flow generated through operations. We expect that additional expenditures will be financed with general secured corporate borrowings, including through the use of available capacity under our revolving credit facility. Stock Repurchase Program OnAugust 20, 2007 , our Board of Directors ("Board") authorized a stock repurchase program that enables us to purchase our common stock. The Board has since increased the capacity of the program eight times, most recently inOctober 2017 by$1.0 billion , bringing the total authorization under the current program to$6.0 billion . Proceeds received from stock option exercises have increased the repurchase capacity by$78 million since the inception of this program. We had$476 million of remaining availability in our program as ofDecember 31, 2019 . 50
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Under our current share repurchase program, we repurchased 7.6 million shares at an average price of$44.63 for a cost of$340 million during the year endedDecember 31, 2019 . The amount and timing of specific repurchases are subject to market conditions, applicable legal requirements and other factors. Repurchases may be conducted in the open market or in privately negotiated transactions.
Dividends
For each of the quarterly periods in 2019, we paid cash dividends of$0.45 per share. During the quarterly period endedMarch 31, 2018 ,Wyndham Worldwide paid cash dividends of$0.66 per share, and in each of the quarterly periods endedJune 30 ,September 30 , andDecember 31, 2018 , we paid cash dividends of$0.41 per share. The dividend of$0.66 per share was declared byWyndham Worldwide prior to the Spin-off. For each of the quarterly periods in 2017,Wyndham Worldwide paid cash dividends of$0.58 per share. The aggregate of dividends paid to shareholders for 2019, 2018, and 2017, were$166 million ,$194 million , and$242 million . Our ongoing dividend policy is to grow our dividend at the rate of growth of our earnings at a minimum, with the exception of the adjustment during 2018 as a result of the Spin-off. The declaration and payment of future dividends to holders of our common stock are at the discretion of our Board and depend upon many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. There is no assurance that a payment of a dividend will occur in the future. Foreign Earnings Although the one-time mandatory deemed repatriation tax during 2017 and the territorial tax system created as a result ofU.S. tax reform generally eliminateU.S. federal income taxes on dividends from foreign subsidiaries, we assert that substantially all of the undistributed foreign earnings of$739 million will be reinvested indefinitely as ofDecember 31, 2019 . In the event we determine not to continue to assert that all or part of our undistributed foreign earnings are permanently reinvested, such a determination in the future could result in the accrual and payment of additional foreign withholding taxes, as well asU.S. taxes on currency transaction gains and losses, the determination of which is not practicable. LONG-TERM DEBT COVENANTS The revolving credit facilities and term loan B are subject to covenants including the maintenance of specific financial ratios as defined in the credit agreement. The financial ratio covenants consist of a minimum interest coverage ratio of at least 2.5 to 1.0 as of the measurement date and a maximum first lien leverage ratio not to exceed 4.25 to 1.0 as of the measurement date. The interest coverage ratio is calculated by dividing consolidated EBITDA (as defined in the credit agreement) by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing 12-month basis preceding the measurement date. As ofDecember 31, 2019 , our interest coverage ratio was 6.5 to 1.0. The first lien leverage ratio is calculated by dividing consolidated first lien debt (as defined in the credit agreement) as of the measurement date by consolidated EBITDA (as defined in the credit agreement) as measured on a trailing 12-month basis preceding the measurement date. As ofDecember 31, 2019 , our first lien leverage ratio was 2.7 to 1.0. These ratios do not include interest expense or indebtedness related to any qualified securitization financing (as defined in the credit agreement). As ofDecember 31, 2019 , we were in compliance with all of the financial covenants described above. Each of our non-recourse securitized term notes, and the bank conduit facilities contain various triggers relating to the performance of the applicable loan pools. If the VOCRs pool that collateralizes one of our securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As ofDecember 31, 2019 , all of our securitized loan pools were in compliance with applicable contractual triggers.
For additional details regarding our credit facilities, term loan B, and non-recourse debt see Note 16-Debt to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K.
LIQUIDITY
Our vacation ownership business finances certain of its VOCRs through (i) asset-backed conduit facilities and (ii) term asset-backed securitizations, all of which are non-recourse to us with respect to principal and interest.
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We believe that our USD bank conduit facility with an extended term throughAugust 2021 and our AUD/NZD bank conduit facility, with a term throughSeptember 2021 , amounting to a combined capacity of$1.01 billion , along with our ability to issue term asset-backed securities, should provide sufficient liquidity for our expected sales pace, and we expect to have available liquidity to finance the sale of VOIs for the foreseeable future. As ofDecember 31, 2019 , we had$439 million of availability under these asset-backed conduit facilities. Any disruption to the asset-backed securities market could adversely impact our future ability to obtain asset-backed financings. Our liquidity position may also be negatively affected by unfavorable conditions in the capital markets in which we operate or if our VOCRs portfolios do not meet specified portfolio credit parameters. Our liquidity as it relates to our VOCRs securitization program could be adversely affected if we were to fail to renew or replace our conduit facilities on their expiration dates, or if a particular receivables pool were to fail to meet certain ratios, which could occur in certain instances if the default rates or other credit metrics of the underlying VOCRs deteriorate. Our ability to sell securities backed by our VOCRs depends on the continued ability and willingness of capital market participants to invest in such securities. We primarily utilize surety bonds in our vacation ownership business for sales and development transactions in order to meet regulatory requirements of certain states. In the ordinary course of our business, we have assembled commitments from 13 surety providers in the amount of$2.4 billion , of which we had$301 million outstanding as ofDecember 31, 2019 . The availability, terms and conditions, and pricing of bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. If the bonding capacity is unavailable or, alternatively, the terms and conditions and pricing of the bonding capacity are unacceptable to us, our vacation ownership business could be negatively impacted. Our secured debt is rated Ba2 with a "stable outlook" by Moody's Investors Service, BB- with a "positive outlook" by Standard and Poor's, and BB+ with a "stable outlook" byFitch Rating Agency . A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal by the assigning rating organization. Reference in this report to any such credit rating is intended for the limited purpose of discussing or referring to aspects of our liquidity and of our costs of funds. Any reference to a credit rating is not intended to be any guarantee or assurance of, nor should there be any undue reliance upon, any credit rating or change in credit rating, nor is any such reference intended as any inference concerning future performance, future liquidity or any future credit rating.
SEASONALITY
We experience seasonal fluctuations in our net revenues and net income from sales of VOIs and vacation exchange fees. Revenues from sales of VOIs are generally higher in the third quarter than in other quarters due to increased leisure travel. Revenues from vacation exchange fees are generally highest in the first quarter, which is generally when members of our vacation exchange business book their vacations for the year. The seasonality of our business may cause fluctuations in our quarterly operating results. As we expand into new markets and geographical locations, we may experience increased or different seasonality dynamics that create fluctuations in operating results different from the fluctuations we have experienced in the past. COMMITMENTS AND CONTINGENCIES From time to time, we are involved in claims, legal and regulatory proceedings, and governmental inquiries related to our business, none of which, in the opinion of management, is expected to have a material effect on our results of operations or financial condition. See Note 20-Commitments and Contingencies to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a description of claims and legal actions arising in the ordinary course of our business along with our guarantees and indemnifications and Note 28-Transactions with Former Parent and Former Subsidiaries to the Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K for a description of our obligations regarding Cendant contingent litigation, matters related toWyndham Hotels , matters related to the European vacation rentals business, and matters related to the North American vacation rentals business. 52
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CONTRACTUAL OBLIGATIONS The following table summarizes the future contractual obligations of our continuing operations for the 12-month periods beginning onJanuary 1st of each of the years set forth below (in millions): 2020 2021 2022 2023 2024 Thereafter Total Non-recourse debt (a)$ 216 $ 717 $ 220 $ 223 $ 237 $ 928 $ 2,541 Debt 40 249 649 404 298 1,389 3,029
Interest on debt (b) 240 218 178 142
115 171 1,064 Finance leases 2 2 1 - - - 5
Operating leases (c) 35 34 31 29
28 75 232
Purchase commitments (d) 245 185 121 114
115 484 1,264 Inventory sold subject to conditional repurchase (e) 38 56 30 - - - 124 Separation liabilities (f) 1 12 - - - 2 15 Other (g) 24 10 10 - - - 44 Total (h)$ 841 $ 1,483 $ 1,240 $ 912 $ 793 $ 3,049 $ 8,318
(a) Represents debt that is securitized through bankruptcy-remote special
purpose entities the creditors of which have no recourse to us for principal
and interest.
(b) Includes interest on both debt and non-recourse debt; estimated using the
stated interest rates on our debt and non-recourse debt.
(c) Represents all operating leases including those with a lease of 12 months or
less.
(d) Includes (i) $1.03 billion for marketing related activities, (ii) $120
million relating to the development of vacation ownership properties, and
(iii) $47 million for information technology activities.
(e) Represents obligations to repurchase completed vacation ownership properties
from third-party developers (see Note 11-Inventory to the Consolidated
Financial Statements included in Item 8 of this Annual Report on Form 10-K
for further detail) of which
expenses and other liabilities and
payable on the Consolidated Balance Sheets included in Item 8 of this Annual
Report on Form 10-K.
(f) Represents liabilities which we assumed and are responsible for pursuant to
the Cendant separation and Spin-off of the hotel business (See Note
28-Transactions with Former Parent and Former Subsidiaries to the
Consolidated Financial Statements included in Item 8 of this Annual Report
on Form 10-K for further detail).
(g) Represents future consideration to be paid for the acquisition of ARN (See
Note 5-Acquisitions to the Consolidated Financial Statements included in
Item 8 of this Annual Report on Form 10-K for further detail).
(h) Excludes a
not reasonably estimable to determine the periods in which such liability
would be settled with the respective tax authorities.
In addition to the amounts shown in the table above and in connection with our
separation from Cendant, we entered into certain guarantee commitments with
Cendant (pursuant to our assumption of certain liabilities and our obligation to
indemnify Cendant, Realogy and Travelport for such liabilities) and guarantee
commitments related to deferred compensation arrangements with each of Cendant
and Realogy. For information on matters related to our former parent and
subsidiaries see Note 28-Transactions with Former Parent and Former Subsidiaries
to the Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K.
OTHER COMMERCIAL COMMITMENTS AND OFF-BALANCE SHEET ARRANGEMENTS
Standard Guarantees/Indemnifications. In the ordinary course of business, we
enter into agreements that contain standard guarantees and indemnities whereby
we indemnify another party for specified breaches of, or third-party claims
relating to, an underlying agreement. Such underlying agreements are typically
entered into by one of our subsidiaries. The various underlying agreements
generally govern purchases, sales or outsourcing of products or services, leases
of real estate, licensing of software and/or development of vacation ownership
properties, access to credit facilities, derivatives, and issuances of debt
securities. Also in the ordinary course of business, we provide corporate
guarantees for our operating business units relating to merchant credit-card
processing for prepaid customer stays and other deposits. While a majority of
these guarantees and indemnifications extend only for the duration of the
underlying agreement, some survive the expiration of the agreement. We are not
able to estimate the maximum potential amount of future payments to be made
under these guarantees and indemnifications as the triggering events are not
predictable. In certain cases we maintain insurance coverage that may mitigate
any potential payments.
Other Guarantees/Indemnifications. In the ordinary course of business, our
vacation ownership business provides guarantees to certain owners' associations
for funds required to operate and maintain vacation ownership properties in
excess of assessments collected from owners of the VOIs. We may be required to
fund such excess as a result of unsold company-owned VOIs or failure by owners
to pay such assessments. In addition, from time to time, we will agree to
reimburse certain owner associations
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up to 80% of their uncollected assessments. These guarantees extend for the duration of the underlying subsidy or similar agreement (which generally approximate one year and are renewable at our discretion on an annual basis). The maximum potential future payments that we could be required to make under these guarantees was$398 million as ofDecember 31, 2019 . We would only be required to pay this maximum amount if none of the assessed owners paid their assessments. Any assessments collected from the owners of the VOIs would reduce the maximum potential amount of future payments to be made by us. Additionally, should we be required to fund the deficit through the payment of any owners' assessments under these guarantees, we would be permitted access to the property for our own use and may use that property to engage in revenue-producing activities, such as rentals. During 2019, 2018, and 2017, we made payments related to these guarantees of$11 million ,$10 million , and$11 million . As ofDecember 31, 2019 and 2018, we maintained a liability in connection with these guarantees of$21 million and$33 million on our Consolidated Balance Sheets. We guarantee our Vacation Ownership subsidiary's obligations to repurchase completed property inLas Vegas, Nevada , from third-party developers subject to the property meeting our vacation ownership resort standards and provided that the third-party developers have not sold the property to another party. The maximum potential future payments that we may be required to make under these commitments was$124 million as ofDecember 31, 2019 . As part of the Fee-for-Service program, we may guarantee to reimburse the developer a certain payment or to purchase inventory from the developer, for a percentage of the original sale price if certain future conditions exist. As ofDecember 31, 2019 , the maximum potential future payments that we may be required to make under these guarantees is$38 million . As ofDecember 31, 2019 and 2018, we had no recognized liabilities in connection with these guarantees. In connection with our vacation ownership inventory sale transactions, for which we have conditional rights and conditional obligations to repurchase the completed properties, we are required to maintain an investment-grade credit rating from at least one rating agency. As a result of the Spin-off, we failed to maintain an investment-grade credit rating with at least one rating agency, which triggered a default. During 2018, we agreed to pay$8 million in fees in lieu of posting collateral in favor of the development partner in an amount equal to the remaining obligations under the agreements.
Securitizations. We pool qualifying VOCRs and sell them to bankruptcy-remote
entities, all of which are consolidated into the accompanying Consolidated
Balance Sheets as of
Letters of Credit. As ofDecember 31, 2019 , we had$60 million of irrevocable standby letters of credit outstanding, of which$17 million were under our revolving credit facilities. As ofDecember 31, 2018 , we had$70 million of irrevocable standby letters of credit outstanding, of which$35 million were under our revolving credit facility. Such letters of credit issued during 2019 and 2018 primarily supported the securitization of VOCRs funding, certain insurance policies and development activity in our vacation ownership business.
Surety Bonds. As of
CRITICAL ACCOUNTING POLICIES
In presenting our financial statements in conformity with GAAP, we are required
to make estimates and assumptions that affect the amounts reported therein.
Several of the estimates and assumptions we are required to make relate to
matters that are inherently uncertain as they pertain to future events. However,
events that are outside of our control cannot be predicted and, as such, they
cannot be contemplated in evaluating such estimates and assumptions. If there is
a significant unfavorable change to current conditions, it could result in a
material impact to our consolidated results of operations, financial position,
and liquidity. We believe that the estimates and assumptions we used when
preparing our financial statements were the most appropriate at that time. In
addition to our significant accounting policies referenced in Note 2-Summary of
Significant Accounting Policies to the Consolidated Financial Statements
included in Item 8 of this Annual Report on Form 10-K, presented below are those
accounting policies that we believe require subjective and complex judgments
that could potentially affect reported results. However, the majority of our
businesses operate in environments where we are paid a fee for a service
performed, and therefore the results of the majority of our recurring operations
are recorded in our financial statements using accounting policies that are not
particularly subjective, nor complex.
Vacation Ownership Revenue Recognition. Our sales of VOIs are either cash sales
or developer-financed sales. Developer financed sales are typically
collateralized by the underlying VOI. Revenue is recognized on VOI sales upon
transfer of control, which is defined as the point in time when a binding sales
contract has been executed, the financing contract has been executed for the
remaining transaction price, the statutory rescission period has expired, and
the transaction price has been deemed to be
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collectible. For developer-financed sales, we reduce the VOI sales transaction
price by an estimate of uncollectible consideration at the time of the sale. Our
estimates of uncollectible amounts are based largely on the results of our
static pool analysis which relies on historical payment data by customer class.
In connection with entering into a VOI sale, we may provide our customers with
certain non-cash incentives, such as credits for future stays at our resorts.
For those VOI sales, we bifurcate the sale and allocate the sales price between
the VOI sale and the non-cash incentive. Non-cash incentives generally have
expiration periods of 18 months or less and are recognized at a point in time
upon transfer of control.
Allowance for Loan Losses. In our Vacation Ownership segment, we provide for
estimated VOCR defaults at the time of VOI sales by recording a provision for
loan losses as a reduction of VOI sales on the Consolidated Statements of
Income. We assess the adequacy of the allowance for loan losses based on the
historical performance of similar VOCRs. We use a technique referred to as
static pool analysis, which tracks defaults for each year's sales over the
entire life of those contract receivables. We consider current defaults, past
due aging, historical write-offs of contracts and consumer credit scores (Fair
Isaac Corporation "FICO" scores) in the assessment of a borrower's credit
strength, down payment amount and expected loan performance. We also consider
whether the historical economic conditions are comparable to current economic
conditions. If current or expected future conditions differ from the conditions
in effect when the historical experience was generated, we adjust the allowance
for loan losses to reflect the expected effects of the current environment on
the collectability of our VOCRs.
Inventory. Our inventory primarily consists of completed VOIs, VOIs under
construction, land held for future VOI development, vacation credits and real
estate interests sold subject to conditional repurchase. We carry our inventory
at the lower of cost, or estimated fair value less costs to sell, which can
result in impairment charges and/or recoveries of previous impairments. Cost of
VOIs includes all costs directly associated with the acquisition, development
and construction of the underlying resort property, including capitalized
interest, property taxes and certain other carrying costs incurred during the
construction process.
We use the relative sales value method of costing and relieving our VOI
inventory. This method requires us to make estimates subject to significant
uncertainty, including future sales prices and volumes as well as credit losses
and related inventory recoveries. The impact of any changes in estimates under
the relative sales value method is recorded in Cost of vacation ownership
interests on the Consolidated Statements of Income in order to retrospectively
adjust the margin previously recorded subject to those estimates.
Impairment of Long-Lived Assets. With regard to the goodwill and other
indefinite-lived intangible assets recorded in connection with business
combinations, we annually (during the fourth quarter of each year subsequent to
completing our annual forecasting process), or more frequently if circumstances
indicate that the value of goodwill may be impaired, review the reporting units'
carrying values as required by the guidance for goodwill and other intangible
assets. This is done either by performing a qualitative assessment or utilizing
the two-step process, with an impairment being recognized only where the fair
value is less than carrying value. In any given year we can elect to perform a
qualitative assessment to determine whether it is more likely than not that the
fair value of a reporting unit is in excess of its carrying value. If it is not
more likely than not that the fair value is in excess of the carrying value, or
we elect to bypass the qualitative assessment, we would utilize the two-step
process. The qualitative factors evaluated include macroeconomic conditions,
industry and market considerations, cost factors, overall financial performance,
our historical share price as well as other industry-specific considerations. We
performed a qualitative assessment for impairment on each reporting unit's
goodwill. Based on the results of our qualitative assessments performed during
the fourth quarter of 2019, we determined that no impairment existed, nor do we
believe there is a material risk of it being impaired in the near term at our
exchange or vacation ownership reporting units. To the extent estimated
market-based valuation multiples and/or discounted cash flows are revised
downward, we may be required to write-down all or a portion of goodwill, which
would adversely impact earnings.
We also determine whether the carrying value of other indefinite-lived
intangible assets is impaired on an annual basis or more frequently if
indicators of potential impairment exist. Application of the other
indefinite-lived intangible assets impairment test requires judgment in the
assumptions underlying the approach used to determine fair value. The fair value
of each other indefinite-lived intangible asset is estimated using a discounted
cash flow methodology. This analysis requires significant judgments, including
anticipated market conditions, operating expense trends, estimation of future
cash flows, which are dependent on internal forecasts, and estimation of
long-term rate of growth. The estimates used to calculate the fair value of
other indefinite-lived intangible assets change from year to year based on
operating results and market conditions. Changes in these estimates and
assumptions could materially affect the determination of fair value and the
other indefinite-lived intangible assets impairment.
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We also evaluate the recoverability of our other long-lived assets, including
property and equipment and amortizable intangible assets, if circumstances
indicate impairment may have occurred, pursuant to guidance for impairment or
disposal of long-lived assets. This analysis is performed by comparing the
respective carrying values of the assets to the current and expected future cash
flows, on an undiscounted basis, to be generated from such assets. Property and
equipment is evaluated separately within each segment. If such analysis
indicates that the carrying value of these assets is not recoverable, the
carrying value of such assets is reduced to fair value.
Business Combinations. A component of our growth strategy has been to acquire
and integrate businesses that complement our existing operations. We account for
business combinations in accordance with the guidance for business combinations
and related literature. Accordingly, we allocate the purchase price of acquired
companies to the tangible and intangible assets acquired and liabilities assumed
based upon their estimated fair values at the date of purchase. The difference
between the purchase price and the fair value of the net assets acquired is
recorded as goodwill.
In determining the fair values of assets acquired and liabilities assumed in a
business combination, we use various recognized valuation methods including
present value modeling and referenced market values (where available). Further,
we make assumptions within certain valuation techniques including discount rates
and timing of future cash flows. Valuations are performed by management or
independent valuation specialists under management's supervision, where
appropriate. We believe that the estimated fair values assigned to the assets
acquired and liabilities assumed are based on reasonable assumptions that
marketplace participants would use. However, such assumptions are inherently
uncertain and actual results could differ from those estimates.
Guarantees. In the ordinary course of business, we enter into agreements that
contain standard guarantees and indemnities whereby we indemnify another party
for specified breaches of, or third-party claims relating to, an underlying
agreement. Such underlying agreements are typically entered into by one of our
subsidiaries. The various underlying agreements generally govern purchases,
sales or outsourcing of products or services, leases of real estate, licensing
of software and/or development of vacation ownership properties, access to
credit facilities, derivatives and issuances of debt securities. Also in the
ordinary course of business, we provide corporate guarantees for our operating
business units relating to merchant credit-card processing for prepaid customer
stays and other deposits. While a majority of these guarantees and
indemnifications extend only for the duration of the underlying agreement, some
survive the expiration of the agreement. We are not able to estimate the maximum
potential amount of future payments to be made under these guarantees and
indemnifications as the triggering events are not predictable. In certain cases,
we maintain insurance coverage that may mitigate any potential payments.
Income Taxes. We recognize deferred tax assets and liabilities based on the
differences between the financial statement carrying amounts and the tax basis
of assets and liabilities using currently enacted tax rates. We recognize the
effects of changes in tax laws, or rates, as a component of income taxes from
continuing operations within the period that includes the enactment date. We
regularly review our deferred tax assets to assess their potential realization
and establish a valuation allowance for portions of such assets that we believe
will not be ultimately realized. In performing this review, we make estimates
and assumptions regarding projected future taxable income, the expected timing
of the reversals of existing temporary differences and the implementation of tax
planning strategies. A change in these assumptions may increase or decrease our
valuation allowance resulting in an increase or decrease in our effective tax
rate, which could materially impact our results of operations.
For tax positions we have taken or expect to take in our 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 recognize or 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.
Refer to Note 2-Summary of Significant Accounting Policies and Note 9-Income
Taxes to the Consolidated Financial Statements included in Item 8 of this Annual
Report on Form 10-K for additional detail.
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