NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
Wyndham Worldwide Corporation (“Wyndham” or the “Company”) is a global provider of hospitality services and products. The accompanying Consolidated Financial Statements include the accounts and transactions of Wyndham, as well as the entities in which Wyndham directly or indirectly has a controlling financial interest. The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in the Consolidated Financial Statements.
In presenting the Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of annual results reported.
Business Description
The Company operates in the following business segments:
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•
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Hotel Group
—primarily franchises hotels in the upscale, upper midscale, midscale, economy and extended stay segments and provides hotel management services for full-service and select limited-service hotels.
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•
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Destination Network
—provides vacation exchange services and products to owners of intervals of vacation ownership interests (“VOIs”), manages and markets vacation rental properties primarily on behalf of independent owners.
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•
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Vacation Ownership
—develops, markets and sells VOIs to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts.
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2.
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Summary of Significant Accounting Policies
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PRINCIPLES OF CONSOLIDATION
When evaluating an entity for consolidation, the Company first determines whether an entity is within the scope of the guidance for consolidation of variable interest entities (“VIE”) and if it is deemed to be a VIE. If the entity is considered to be a VIE, the Company determines whether it would be considered the entity’s primary beneficiary. The Company consolidates those VIEs for which it has determined that it is the primary beneficiary. The Company will consolidate an entity not deemed a VIE upon a determination that it has a controlling financial interest. For entities where the Company does not have a controlling financial interest, the investments in such entities are classified as available-for-sale securities or accounted for using the equity or cost method, as appropriate.
REVENUE RECOGNITION
Hotel Group
The principal source of revenues from franchising hotels is ongoing royalty fees, which are typically a percentage of gross room revenues of each franchised hotel and are recognized as revenue upon becoming due from the franchisee. An estimate of uncollectible ongoing royalty fees is charged to bad debt expense and included in operating expenses on the Consolidated Statements of Income. Hotel Group revenues also include initial franchise fees, which are recognized as revenues when all material services or conditions have been substantially performed, which is either when a franchised hotel opens for business or when a franchise agreement is terminated after it has been determined that the franchised hotel will not open.
The Company’s franchise agreements also require the payment of marketing and reservation fees, which are intended to reimburse the Company for expenses associated with operating an international, centralized, brand-specific reservations system, e-commerce channels such as the Company’s brand.com websites, as well as access to third-party distribution channels, such as online travel agents, advertising and marketing programs, global sales efforts, operations support, training and other related services. Marketing and reservation fees are recognized as revenue upon becoming due from the franchisee. An estimate of uncollectible ongoing marketing and reservation fees is charged to bad debt expense and included in marketing and reservation expenses in the Consolidated Statements of Income.
Generally, the Company is contractually obligated to expend the marketing and reservation fees it collects from franchisees in accordance with the franchise agreements; as such, revenues earned in excess of costs incurred are accrued as a liability for future marketing or reservation costs. Costs incurred in excess of revenues earned are expensed as incurred. In accordance with its franchise agreements, the Company includes an allocation of costs required to carry out marketing and reservation activities within marketing and reservation expenses.
The Company also earns revenues from its Wyndham Rewards loyalty program when a member stays at a participating hotel. These revenues are derived from a fee the Company charges based upon a percentage of room revenues generated from such stay. These fees are to reimburse the Company for expenses associated with member redemptions and activities that are related to the overall administering and marketing of the program. This fee is recognized as revenue upon becoming due from the franchisee. Since the Company is obligated to expend the fees it collects from franchisees, revenues earned in excess of costs incurred are accrued as a liability for future costs to support the program. In addition, the Company earns revenue from its co-branded Wyndham Rewards credit card program which is primarily generated by cardholder spending and the enrollment of new cardholders. The advance payments received under the Company’s co-branded credit program are deferred and recognized as earned over the term of the arrangement.
The Company also provides management services for hotels under management contracts, which offer all the benefits of a global brand and a full range of management, marketing and reservation services. In addition to the standard franchise services described above, the Company’s hotel management business provides hotel owners with professional oversight and comprehensive operations support services such as hiring, training and supervising the managers and employees that operate the hotels as well as annual budget preparation, financial analysis and extensive food and beverage services. The Company’s standard management agreement typically has a term of up to
25
years. The Company’s management fees are comprised of base fees, which are typically a specified percentage of gross revenues from hotel operations, and incentive fees, which are typically a specified percentage of a hotel’s gross operating profit. Management fee revenues are recognized as the services are performed and when the earnings process is complete and are recorded as a component of franchise fee revenues on the Consolidated Statements of Income. Management fee revenues were
$22 million
,
$23 million
and
$11 million
during
2016
,
2015
and
2014
, respectively. The Company also recognizes as revenue reimbursable payroll costs for operational employees at certain of the Company’s managed hotels. Although these costs are funded by hotel owners, accounting guidance requires the Company to report these fees on a gross basis as both revenues and expenses. The revenues are recorded as a component of service and membership fees while the offsetting expenses are reflected as a component of operating expenses on the
Consolidated Statements of Income. As such, there is no effect on the Company’s operating income. Revenues related to these reimbursable payroll costs were
$271 million
,
$273 million
and
$148 million
in
2016
,
2015
and
2014
, respectively and are reported as a component of service and membership fees on the Consolidated Statements of Income.
The Company also earns revenues from hotel ownership. The Company’s ownership portfolio is limited to two hotels in locations where it has developed timeshare units. Revenues earned from the Company’s owned hotels consist primarily of (i) gross room night rentals, (ii) food and beverage services and (iii) on-site spa, casino, golf and shop revenues. These revenues are recognized upon the completion of services to its guests.
Destination Network
As a provider of vacation exchange services, the Company enters into affiliation agreements with developers of vacation ownership properties to allow owners of intervals of VOIs to trade their intervals for intervals at other properties affiliated with the Company’s RCI brand and, for some members, for other leisure-related services and products. Additionally, as a marketer of vacation rental properties, generally the Company enters into contracts for exclusive periods of time with property owners to market the rental of such properties to rental customers.
The Company’s RCI brand derives a majority of its revenues from annual membership dues and exchange fees from RCI members trading their intervals. Revenues from annual membership dues represent the annual fees from RCI members who, for additional fees, have the right to exchange their intervals for intervals at other properties affiliated with the Company’s exchange network and, for certain members, for other leisure-related services and products. The Company recognizes revenues from annual membership dues on a straight-line basis over the membership period during which delivery of publications, if applicable, and other services are provided to the members. Exchange fees are generated when members exchange their intervals for intervals at other properties affiliated with the Company’s exchange network or for other leisure-related services and products. The Company also offers other exchange related products that provide RCI members the ability to (i) purchase trading power or points protection, (ii) extend the life of deposits and (iii) combine two or more deposits for the opportunity to exchange into intervals with higher trading power. Exchange fees and other exchange related product fees are recognized as revenues, net of expected cancellations, when these transactions have been confirmed to the member.
The Company’s vacation rental brands primarily derive their revenues from fees, which generally average between
20%
and
45%
of the gross booking fees. For properties which the Company owns, manages or operates under long-term capital and operating leases (which represent less than
10%
of the Company’s portfolio), the Company receives
100%
of the revenues. The majority of the time, the Company acts on behalf of the owners of the rental properties to generate the Company’s fees. The Company provides reservation services to the independent property owners and receives the agreed-upon fee for the services provided. The Company remits the gross rental fee received from the renter to the independent property owner, net of the Company’s agreed-upon fee. Revenues from such fees that are recognized in the period that the rental reservation is made and are recorded net of expected cancellations.
Cancellations for
2016
,
2015
and
2014
each totaled less than
4%
of rental transactions booked. Upon confirmation of the rental reservation, the rental customer and property owner generally have a direct relationship for additional services to be performed. The Company also earns rental fees in connection with properties which it owns, manages or operates and such fees are recognized ratably over the rental customer’s stay, as this is the point at which the service is rendered. The Company’s revenues are earned when evidence of an arrangement exists, delivery has occurred or the services have been rendered, the seller’s price to the buyer is fixed or determinable, and collectability is reasonably assured.
Vacation Ownership
The Company develops, markets and sells VOIs to individual consumers, provides property management services at resorts and provides consumer financing in connection with the sale of VOIs. The Company’s vacation ownership business derives the majority of its revenues from sales of VOIs and other revenues from consumer financing and property management. The Company’s sales of VOIs are either cash sales or developer-financed sales. In order for the Company to recognize revenues from VOI sales under the full accrual method of accounting described in the guidance for sales of real estate for fully constructed inventory, a binding sales contract must have been executed, the statutory rescission period must have expired (after which time the purchasers are not entitled to a refund except for non-delivery by the Company), receivables must have been deemed collectible and the remainder of the Company’s obligations must have been substantially completed. In addition, before the Company recognizes any revenues from VOI sales, the purchaser of the VOI must have met the initial investment criteria and, as applicable, the continuing investment criteria, by executing a legally binding financing contract. A purchaser has met the initial investment criteria when a minimum down payment of
10%
is received by the Company.
In accordance with the guidance for accounting for real estate time-sharing transactions, the Company must also take into consideration the fair value of certain incentives provided to the purchaser when assessing the adequacy of the purchaser’s initial investment. In those cases where financing is provided to the purchaser by the Company, the purchaser is obligated to remit monthly payments under financing contracts that represent the purchaser’s continuing investment.
If all of the criteria for a VOI sale to qualify under the full accrual method of accounting have been met, as discussed above, except that construction of the VOI purchased is not complete, the Company recognizes revenues using the percentage-of-completion (“POC”) method of accounting provided that the preliminary construction phase is complete and that a minimum sales level has been met (to assure that the property will not revert to a rental property). The preliminary stage of development is deemed to be complete when the engineering and design work is complete, the construction contracts have been executed, the site has been cleared, prepared and excavated, and the building foundation is complete. The completion percentage is determined by the proportion of real estate inventory costs incurred to total estimated costs. These estimated costs are based upon historical experience and the related contractual terms. The remaining revenues and related costs of sales, including commissions and direct expenses, are deferred and recognized as the remaining costs are incurred. As of
December 31, 2016
and
2015
, there were
no
revenues deferred under the POC method of accounting. During
2015
, gross VOI sales were increased by
$13 million
representing the net change in revenues that was deferred under the POC method of accounting. During
2014
, revenues that were deferred under the POC method of accounting were
$12 million
.
The Company also offers consumer financing as an option to customers purchasing VOIs, which are typically collateralized by the underlying VOI. The contractual terms of Company-provided financing agreements require that the contractual level of annual principal payments be sufficient to amortize the loan over a customary period for the VOI being financed, which is generally
10 years
and payments under the financing contracts begin within
45 days
of the sale and receipt of the minimum down payment of
10%
. An estimate of uncollectible amounts is recorded at the time of the sale with a charge to the provision for loan losses, which is classified as a reduction of VOI sales on the Consolidated Statements of Income. The interest income earned from the financing arrangements is earned on the principal balance outstanding over the life of the arrangement and is recorded within consumer financing on the Consolidated Statements of Income.
The Company also provides day-to-day-management services, including oversight of housekeeping services, maintenance and certain accounting and administrative services for property owners’ associations and clubs. In some cases, the Company’s employees serve as officers and/or directors of these associations and clubs in accordance with their by-laws and associated regulations. The Company receives fees for such property management services which are generally based upon total costs to operate such resorts. Fees for property management services typically approximate
10%
of budgeted operating expenses. 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
$660 million
,
$615 million
and
$581 million
during
2016
,
2015
and
2014
, respectively. Management fee revenues were
$287 million
,
$275 million
and
$288 million
during
2016
,
2015
and
2014
, respectively. Reimbursable revenues, which are based upon certain reimbursable costs with no added margin, were
$373 million
,
$340 million
and
$293 million
during
2016
,
2015
and
2014
, respectively. These reimbursable costs principally relate to the payroll costs for management of the associations, club and resort properties where the Company is the employer and are reflected as a component of operating expenses on the Consolidated Statements of Income. One of the associations that the Company manages paid its Wyndham Destination Network segment
$26 million
,
$24 million
, and
$19 million
for exchange services during
2016
,
2015
and
2014
, respectively.
Other Items
The Company records marketing and reservation revenues, Wyndham Rewards revenues, RCI Elite Rewards revenues and hotel/property management services revenues for its Hotel Group, Destination Network and Vacation Ownership 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.
Deferred Income
Deferred income, as of December 31, consisted of:
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|
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|
|
2016
|
|
2015
|
Membership and exchange fees
|
$
|
248
|
|
|
$
|
260
|
|
VOI trial and incentive fees
|
165
|
|
|
153
|
|
Vacation rental fees
|
112
|
|
|
110
|
|
Initial franchise fees
|
52
|
|
|
53
|
|
Credit card fees
|
49
|
|
|
43
|
|
Other fees
|
71
|
|
|
62
|
|
Total deferred income
|
697
|
|
|
681
|
|
Less: Current deferred income
|
500
|
|
|
483
|
|
Non-current deferred income
|
$
|
197
|
|
|
$
|
198
|
|
Deferred membership and exchange fees consist primarily of payments made in advance for annual memberships that are recognized over the term of the membership period, which is typically
one
to
three
years. Deferred VOI trial fees are payments received in advance for a trial VOI, which allows customers to utilize a VOI typically within
one year
of purchase. Deferred incentive fees represent payments received in advance for additional travel related services and products at the time of a VOI sale. Revenue is recognized when a customer utilizes the additional services and products, which is typically within
two years
of a VOI sale. Deferred vacation rental fees represent payments received in advance of a rental customer’s stay that are recognized as revenue when the rental stay occurs, which is typically within
six months
of the confirmation date. Deferred initial franchise fees are recognized when all material services or conditions have been performed which is typically within
two years
. Deferred credit card fees represents payments received in advance from the Company’s co-branded credit card partners primarily for card member activity, which is typically recognized within
one year
.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities using the asset and liability method, under which deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. These differences are based upon estimated differences between the book and tax basis of the assets and liabilities for the Company as of
December 31, 2016
and
2015
.
The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Company’s provision for income taxes and increases to the valuation allowance result in additional provision for income taxes. The realization of the Company’s deferred tax assets, net of the valuation allowance, is primarily dependent on estimated future taxable income. A change in the Company’s estimate of future taxable income may require an addition to or reduction from the valuation allowance.
For tax positions the Company has taken or expects to take in a tax return, the Company applies a more likely than not threshold, under which the Company 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 the Company’s provision for income taxes, the Company uses judgment, reflecting its estimates and assumptions, in applying the more likely than not threshold.
CASH AND CASH EQUIVALENTS
The Company considers highly-liquid investments purchased with an original maturity of
three months
or less to be cash equivalents.
RESTRICTED CASH
The largest portion of the Company’s restricted cash relates to securitizations. The remaining portion is comprised of cash held in escrow accounts primarily related to the Company’s destination network and vacation ownership businesses.
Securitizations: In accordance with the contractual requirements of the Company’s various vacation ownership contract receivable securitizations, a dedicated lockbox account, subject to a blocked control agreement, is established for each securitization. At each month end, the total cash in the collection account from the previous month is analyzed and a monthly servicer report is prepared by the Company, which details how much cash should be remitted to the note holders for principal
and interest payments, and any cash remaining is transferred by the trustee back to the Company. Additionally, as required by various securitizations, the Company holds an agreed-upon percentage of the aggregate outstanding principal balances of the VOI contract receivables collateralizing the asset-backed notes in a segregated trust (or reserve) account as credit enhancement. Each time a securitization closes and the Company receives cash from the note holders, a portion of the cash is deposited in the reserve account. Such amounts were
$90 million
and
$92 million
, of which
$75 million
and
$73 million
is recorded within other current assets and
$15 million
and
$19 million
is recorded within other non-current assets as of
December 31, 2016
and
2015
, respectively, on the Consolidated Balance Sheets.
Escrow Deposits: Laws in most U.S. states require the escrow of down payments on VOI sales, with the typical requirement mandating that the funds be held in escrow until the rescission period expires. As sales transactions are consummated, down payments are collected and are subsequently placed in escrow until the rescission period has expired. Depending on the state, the rescission period can be as short as
3
calendar days or as long as
15
calendar days. In certain states, the escrow laws require that
100%
of VOI purchaser funds (excluding interest payments, if any), be held in escrow until the deeding process is complete. Where possible, the Company utilizes surety bonds in lieu of escrow deposits. Similarly, laws in certain U.S. states require the escrow of advance deposits received from guests for vacation rental transactions. Such amounts are mandated to be held in escrow until the legal restriction expires, which varies from state to state. Escrow deposits were
$59 million
as of both
December 31, 2016
and
2015
which are recorded within other current assets on the Consolidated Balance Sheets.
RECEIVABLE VALUATION
Trade receivables
The Company provides for estimated bad debts based on its assessment of the ultimate realizability of receivables, considering historical collection experience, the economic environment and specific customer information. When the Company determines that an account is not collectible, the account is written-off to the allowance for doubtful accounts. The following table illustrates the Company’s allowance for doubtful accounts activity for the year ended December 31:
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|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Beginning balance
|
$
|
150
|
|
|
$
|
169
|
|
|
$
|
209
|
|
Bad debt expense
|
48
|
|
|
51
|
|
|
48
|
|
Write-offs
|
(70
|
)
|
|
(71
|
)
|
|
(86
|
)
|
Translation and other adjustments
|
15
|
|
|
1
|
|
|
(2
|
)
|
Ending balance
|
$
|
143
|
|
|
$
|
150
|
|
|
$
|
169
|
|
Vacation ownership contract receivables
In the Company’s Vacation Ownership segment, the Company provides for estimated vacation ownership contract receivable 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. The Company assesses the adequacy of the allowance for loan losses based on the historical performance of similar vacation ownership contract receivables. The Company uses a technique referred to as static pool analysis, which tracks defaults for each year’s sales over the entire life of those contract receivables. The Company considers current defaults, past due aging, historical write-offs of contracts and consumer credit scores (FICO scores) in the assessment of borrower’s credit strength and expected loan performance. The Company also considers 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, the Company adjusts the allowance for loan losses to reflect the expected effects of the current environment on the collectability of the Company’s vacation ownership contract receivables.
LOYALTY PROGRAMS
The Company operates a number of loyalty programs including Wyndham Rewards, RCI Elite Rewards and other programs. Wyndham Rewards members primarily accumulate points by staying in hotels franchised under one of the Company’s hotel group brands. Wyndham Rewards and RCI Elite Rewards members accumulate points by purchasing everyday services and products utilizing their co-branded credit cards.
Members may redeem their points for hotel stays, airline tickets, rental cars, resort vacations, electronics, sporting goods, movie and theme park tickets, gift certificates, vacation ownership maintenance fees and annual membership dues and exchange fees for transactions. The points cannot be redeemed for cash. The Company earns revenue from these programs (i) when a member stays at a participating hotel, from a fee charged by the Company to the franchisee, which is based upon a percentage of room revenues generated from such stay or (ii) based upon a percentage of the members’ spending on the co-branded credit cards and such revenues are paid to the Company by a third-party issuing bank. The Company also incurs costs to support these programs, which primarily relate to marketing expenses to promote the programs, costs to administer the programs and costs of members’ redemptions.
As members earn points through the Company’s loyalty programs, the Company records a liability for the estimated future redemption costs, which is calculated based on (i) an estimated cost per point and (ii) an estimated redemption rate of the overall points earned, which is determined through historical experience, current trends and the use of an actuarial analysis. Revenues relating to the Company’s loyalty programs, which are recorded in other revenues in the Consolidated Statements of Income and amounted to
$159 million
,
$152 million
and
$142 million
, while total expenses amounted to
$134 million
,
$119 million
and
$112 million
during
2016
,
2015
and
2014
, respectively. The liability for estimated future redemption costs as of
December 31, 2016
and
2015
amounted to
$77 million
and
$67 million
, respectively, and is included in accrued expenses and other current liabilities and other non-current liabilities in the Consolidated Balance Sheets.
INVENTORY
Inventory primarily consists of real estate and development costs of completed VOIs, VOIs under construction, land held for future VOI development, vacation ownership properties, vacation credits and inventory sold subject to conditional repurchase. The Company applies the relative sales value method for relieving VOI inventory and recording the related cost of sales. Under the relative sales value method, cost of sales is calculated as a percentage of net sales using a cost-of-sales percentage ratio of total estimated development cost to total estimated VOI revenue, including estimated future revenue and incorporating factors such as changes in prices and the recovery of VOIs generally as a result of contract receivable defaults. The effect of such changes in estimates under the relative sales value method is accounted for on a retrospective basis through corresponding current-period adjustments to inventory and cost of sales. Inventory is stated at the lower of cost, including capitalized interest, property taxes and certain other carrying costs incurred during the construction process, or estimated fair value less costs to sell. Capitalized interest was
$1 million
,
$3 million
and
$2 million
in
2016
,
2015
and
2014
, respectively.
ADVERTISING EXPENSE
Advertising costs are generally expensed in the period incurred. Advertising expenses, which are primarily recorded within marketing and reservation expenses on the Consolidated Statements of Income, were
$167 million
,
$172 million
and
$170 million
in
2016
,
2015
and
2014
, respectively.
USE OF ESTIMATES AND ASSUMPTIONS
The preparation of the Consolidated Financial Statements requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in the Consolidated Financial Statements and accompanying notes. Although these estimates and assumptions are based on the Company’s knowledge of current events and actions the Company may undertake in the future, actual results may ultimately differ from estimates and assumptions.
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments as part of its overall strategy to manage its exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. As a matter of policy, the Company does not use derivatives for trading or speculative purposes. All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated as hedging instruments and of derivatives designated as fair value hedging instruments are recognized currently in operating income and net interest expense, based upon the nature of the hedged item, in the Consolidated Statements of Income. The effective portion of changes in fair value of derivatives designated as cash flow hedging instruments is recorded as a component of other comprehensive income. The ineffective portion is reported immediately in earnings as a component of operating expense, based upon the nature of the hedged item. Amounts included in other comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings.
PROPERTY AND EQUIPMENT
Property and equipment (including leasehold improvements) are recorded at cost, and presented net of accumulated depreciation and amortization. Depreciation, recorded as a component of depreciation and amortization on the Consolidated Statements of Income, is computed utilizing the straight-line method over the lesser of the lease terms or estimated useful lives
of the related assets. Amortization of leasehold improvements, also recorded as a component of depreciation and amortization, is computed utilizing the straight-line method over the lesser of the estimated benefit period of the related assets or the lease terms. Useful lives are generally
30
years for buildings, up to
20
years for leasehold improvements, from
15
to
30
years for vacation rental properties and from
3
to
7
years for furniture, fixtures and equipment.
The Company capitalizes the costs of software developed for internal use in accordance with the guidance for accounting for costs of computer software developed or obtained fo
r internal use. Capitalization of software developed for internal use commences during the development phase of the pro
ject. The Company amortizes software developed or obtained for internal use on a straight-line basis over its estimated useful life which is generally
3
to
5
years, with the exception of certain enterprise resource planning and reservation and inventory management software which is generally
7 years
. Such amortization commences when the software is substantially ready for use.
The net carrying value of software developed or obtained for internal use was
$230 million
and
$223 million
as of
December 31, 2016
and
2015
, respectively. Capitalized interest was
$4 million
during
2016
,
2015
and
2014
.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has goodwill and other indefinite-lived intangible assets recorded in connection with business combinations. The Company annually (during the fourth quarter of each year subsequent to completing the Company’s annual forecasting process), or more frequently if circumstances indicate that the value of goodwill may be impaired, reviews the reporting units’ carrying values as required by the guidance for goodwill and other indefinite-lived intangible assets. In accordance with the guidance, the Company has determined that its reporting units are the same as its reportable segments.
Under current accounting guidance, goodwill and other intangible assets with indefinite lives are not subject to amortization. However, goodwill and other intangibles with indefinite lives are subject to fair value-based rules for measuring impairment, and resulting write-downs, if any, are reflected in operating expense. The Company has goodwill recorded at its hotel group, destination network and vacation ownership reporting units. The Company completed its annual goodwill impairment test by performing a qualitative analysis for each of its reporting units as of October 1,
2016
and determined that no impairment exists.
The Company also evaluates the recoverability of its 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.
ACCOUNTING FOR RESTRUCTURING ACTIVITIES
The Company’s restructuring activities require it to make significant estimates in several areas including (i) expenses for
severance and related benefit costs, (ii) the ability to generate sublease income, as well as its ability to terminate lease
obligations and (iii) contract terminations. The amount that the Company has accrued as of December 31, 2016 represents its
best estimate of the obligations incurred in connection with these actions, but could be subject to change due to various factors
including market conditions and the outcome of negotiations with third parties.
GUARANTEES
The Company may enter into performance guarantees related to certain hotels that it manages. The Company records a liability for the fair value of these performance guarantees at their inception date. The corresponding offset is recorded to other assets. For performance guarantees not subject to a recapture provision, the Company amortizes the liability for the fair value of the guarantee over the term of the guarantee using a systematic and rational approach. On a quarterly basis, the Company evaluates the likelihood of funding under a guarantee. To the extent the Company determines an obligation to fund under a guarantee is both probable and estimable, the Company will record a separate contingent liability. The expense related to this separate contingent liability is recognized in the period that the Company determines funding is probable for that period.
For performance guarantees subject to a recapture provision, the Company records a liability for the fair value of these performance guarantees at their inception date. To the extent the Company is required to fund an obligation under a guarantee subject to a recapture provision, the Company records a receivable for amounts expected to be recovered in the future. On a quarterly basis, the Company evaluates the likelihood of recovering such receivables.
ACCUMULATED OTHER COMPREHENSIVE INCOME
Accumulated other comprehensive income (“AOCI”) consists of accumulated foreign currency translation adjustments, accumulated unrealized gains and losses on derivative instruments designated as cash flow hedges and pension related costs. Foreign currency translation adjustments exclude income taxes related to indefinite investments in foreign subsidiaries. Assets and liabilities of foreign subsidiaries having non-U.S.-dollar functional currencies are translated at exchange rates at the Consolidated Balance Sheet dates. Revenues and expenses are translated at average exchange rates during the periods presented. The gains or losses resulting from translating foreign currency financial statements into U.S. dollars, net of hedging gains or losses and taxes, are included in AOCI on the Consolidated Balance Sheets. Gains or losses resulting from foreign currency transactions are included in the Consolidated Statements of Income.
STOCK-BASED COMPENSATION
In accordance with the guidance for stock-based compensation, the Company measures all employee stock-based compensation awards using a fair value method and records the related expense in its Consolidated Statements of Income.
EQUITY EARNINGS AND OTHER INCOME
The Company applies the equity method of accounting when it has the ability to exercise significant influence over operating and financial policies of an investee. The Company recorded
$2 million
of net earnings from such investments during
2016
,
2015
and
2014
in other income, net on the Consolidated Statements of Income.
During
2016
, the Company recorded
$20 million
of income primarily related to (i) settlements of business disruption claims related to the Gulf of Mexico oil spill in 2010, (ii) settlements of various other business interruption claims received, (iii) the sale of non-strategic assets, (iv) a gain from a bargain purchase on an acquisition of a vacation rentals business and (v) other miscellaneous royalties at its vacation ownership business. During
2015
, the Company recorded
$15 million
of income primarily related to the settlement of a business disruption claim related to the Gulf of Mexico oil spill in 2010, the sale of non-strategic assets and other miscellaneous royalties at its vacation ownership business. During
2014
, the Company recorded
$5 million
of income primarily related to the sale of non-strategic assets and other miscellaneous royalties at its vacation ownership business.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Revenue from Contracts with Customers.
In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the Statement of Consolidated Financial Position. The Company currently expects to adopt the new guidance utilizing the full retrospective transition method on its effective date of January 1, 2018.
The initial analysis identifying areas that will be impacted by the new guidance is substantially complete, and the Company is currently analyzing the potential impacts to the Consolidated Financial Statements and related disclosures. The Company believes the most significant impacts relating to its Hotel Group segment are the accounting for initial fees, upfront costs and marketing and reservations expenses. The Company expects royalty and marketing and reservation fees to remain substantially unchanged. Specifically, under the new guidance, the Company expects (i) initial fees to be recognized ratably over the life of the noncancelable period of the franchise agreement, (ii) incremental upfront contract costs to be deferred and expensed over the life of the noncancelable period of the franchise agreement and (iii) marketing and reservations revenues earned in excess of costs incurred will no longer be accrued as a liability for future marketing or reservation costs; marketing or reservation costs incurred in excess of revenues earned will continue to be expensed as incurred.
The Company believes the most significant impacts relating to its Destination Network segment are the accounting for vacation rental revenues and other vacation exchange related product fees. Specifically, under the new guidance, the Company expects (i) approximately thirty percent of its vacation rental revenue will no longer be recognized in the period that the rental reservation is booked and, instead, will be recognized over the term of the guest stay and (ii) other vacation exchange related products fees to be deferred and recognized upon the occurrence of a future vacation exchange or other transaction. The Company expects vacation exchange transaction fees to remain substantially unchanged. The Company is continuing to evaluate the potential impacts of this new guidance on its vacation exchange membership fees.
The Company expects the recognition of its Vacation Ownership segment revenues to remain substantially unchanged. However, the Company is continuing its assessment specifically on the accounting for collectability of VOI sales revenue based on pending industry clarification which may identify other impacts. The Company does expect revenue from certain travel packages utilized to market its VOI products to be presented on a gross basis within other revenues.
The Company is continuing to evaluate the potential impacts of this new guidance on its Wyndham Rewards loyalty program and as well as its co-branded credit card programs at the Company’s Hotel Group and Destination Network segments.
Simplifying the Measurement of Inventory. In July 2015, the FASB issued guidance related to simplifying the measurement of inventory. This guidance requires an entity to measure inventory at the lower of cost or net realizable value, which consists of the estimated selling prices in the ordinary course of business, less reasonably predictable cost of completion, disposal, and transportation. This guidance is effective prospectively for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company believes the adoption of this guidance will not have a material impact on the Consolidated Financial Statements.
Leases.
In February 2016, the FASB issued guidance which requires companies generally to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements
.
Compensation - Stock Compensation.
In March 2016, the FASB issued guidance
which is intended to simplify several
aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The adoption of this new guidance is expected to impact the Company's provision for income taxes on its Consolidated Statements of Income and its operating and financing cash flows on its Consolidated Statements of Cash Flows. The Company will adopt the new guidance on January 1, 2017, using a modified retrospective transition approach. The impact of this new guidance will result in excess tax benefits from stock-based compensation being recorded within operating activities on its Consolidated Statements of Cash Flows. The magnitude of such impacts are dependent upon the Company's future grants of stock-based compensation, the Company's stock price in relation to the fair value of awards on grant date, and the exercise behavior of the Company's equity compensation holders.
Financial Instruments - Credit Losses
. In June 2016, the FASB issued guidance which amends the guidance on measuring credit losses on financial assets held at amortized cost. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
Statement of Cash Flows
. In August 2016, the FASB issued guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance requires the retrospective transition method and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company believes the impact of this new guidance will result in development advance notes and escrow deposits being recorded within operating activities and securitization restricted cash being recorded within financing activities on its Consolidated Statements of Cash Flows. The following table summarizes the effect of the new guidance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
Increase/(decrease):
|
2016
|
|
2015
|
|
2014
|
Operating Activities
|
$
|
(9
|
)
|
|
$
|
(8
|
)
|
|
$
|
(2
|
)
|
Investing Activities
|
6
|
|
|
4
|
|
|
6
|
|
Financing Activities
|
3
|
|
|
4
|
|
|
(4
|
)
|
Intra-Entity Transfers of Assets Other Than Inventory
. In October 2016, the FASB issued guidance which requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance requires the modified retrospective approach and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
Restricted Cash
. In November 2016, the FASB issued guidance which requires amounts generally described as restricted cash and cash equivalents be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company will adopt this new guidance on January 1, 2018, using a retrospective transition method. As such, restricted cash of
$149 million
and
$151 million
, as of December 31, 2016 and 2015, respectively, will be included within total beginning and ending cash and cash equivalents amounts on the Company’s Consolidated Statements of Cash Flows.
Clarifying the Definition of a Business
. In January 2017, the FASB issued guidance clarifying the definition of a business, which assists entities when evaluating whether transactions should be accounted for as acquisitions of businesses or assets. This guidance is effective on a prospective basis for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on the Consolidated Financial Statements.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity
. In April 2014, the FASB issued guidance on reporting discontinued operations and disclosures of disposals of components of an entity. This guidance changes the criteria for determining which disposals can be presented as discontinued operations and enhances the related disclosure requirements. This guidance is effective for fiscal years beginning after December 15, 2014 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2015, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
Disclosure of Uncertainties About an Entity’s Ability to Continue as a Going Concern
. In August 2014, the FASB issued guidance on disclosure of uncertainties about an entity’s ability to continue as a going concern. This guidance addresses management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. Management’s evaluation should be based on relevant conditions and events that are known and reasonably knowable at the date that the financial statements are issued. This guidance is effective for fiscal years ending after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. The Company early adopted the guidance on January 1, 2015. There was no impact on the Consolidated Financial Statements resulting from the adoption.
Consolidation.
In February 2015, the FASB issued guidance related to management’s evaluation of consolidation for certain legal entities. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2015. The Company adopted the guidance on January 1, 2016, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement
. In April 2015, the FASB issued guidance on determining whether a cloud computing arrangement contains a software license that should be accounted for as internal-use software. If a cloud computing arrangement does not contain a software license, it should be accounted for as a service contract. This guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2016, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
Simplifying the Presentation of Debt Issuance Costs.
In April 2015, the FASB issued guidance on the presentation of debt issuance costs. The guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. In August 2015, the FASB further clarified its issued guidance by stating that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred issuance costs ratably over the term of the line-of-credit arrangements. This guidance required retrospective application and is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2016, as required. Refer to the table below for the retrospective effect on the December 31, 2015 Consolidated Balance Sheet.
Simplifying the Accounting for Measurement-Period Adjustments.
In September 2015, the FASB issued guidance simplifying the accounting for measurement-period adjustments related to a business combination. The guidance requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. This guidance is effective for fiscal years beginning after December 15, 2015 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2016, as required. There was no material impact on the Consolidated Financial Statements resulting from the adoption.
Income Taxes.
In November 2015, the FASB issued guidance on the balance sheet classification of deferred taxes. The guidance requires deferred tax assets and liabilities to be classified as non-current in the Consolidated Balance Sheet. The guidance is effective for fiscal years beginning after December 15, 2016 and for interim periods within those fiscal years, with early adoption permitted. This guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company early adopted the guidance on a retrospective basis on June 30, 2016. Refer to the table below for the retrospective effect on the December 31, 2015 Consolidated Balance Sheet.
The table below summarizes the changes to the Company’s December 31, 2015 Consolidated Balance Sheet as a result of the adoption of the following Accounting Standards Updates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
Previously Reported Balance
|
|
Simplifying the Presentation of Debt Issuance Costs
|
|
Balance Sheet Classification of Deferred Taxes
|
|
Adjusted Balance
|
Assets
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Deferred income taxes
|
|
$
|
126
|
|
|
$
|
—
|
|
|
$
|
(126
|
)
|
|
$
|
—
|
|
Total current assets
|
|
1,869
|
|
|
—
|
|
|
(126
|
)
|
|
1,743
|
|
Other non-current assets
|
|
360
|
|
|
(27
|
)
|
|
28
|
|
|
361
|
|
Total assets
|
|
9,716
|
|
|
(27
|
)
|
|
(98
|
)
|
|
9,591
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity
|
|
|
|
|
|
|
|
|
Long-term securitized vacation ownership debt
|
|
$
|
1,921
|
|
|
$
|
(24
|
)
|
|
$
|
—
|
|
|
$
|
1,897
|
|
Long-term debt
|
|
3,034
|
|
|
(3
|
)
|
|
—
|
|
|
3,031
|
|
Deferred income taxes
|
|
1,252
|
|
|
—
|
|
|
(98
|
)
|
|
1,154
|
|
Total liabilities
|
|
8,763
|
|
|
(27
|
)
|
|
(98
|
)
|
|
8,638
|
|
Total liabilities and equity
|
|
9,716
|
|
|
(27
|
)
|
|
(98
|
)
|
|
9,591
|
|
The computation of basic and diluted earnings per share (“EPS”) is based on net income attributable to Wyndham shareholders divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively.
The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
Net income attributable to Wyndham shareholders
|
$
|
611
|
|
|
$
|
612
|
|
|
$
|
529
|
|
Basic weighted average shares outstanding
|
110
|
|
|
118
|
|
|
125
|
|
Stock-settled appreciation rights (“SSARs”), RSUs
(a)
and PSUs
(b)
|
1
|
|
|
1
|
|
|
2
|
|
Diluted weighted average shares outstanding
|
111
|
|
|
119
|
|
|
127
|
|
Earnings per share:
|
|
|
|
|
|
Basic
|
$
|
5.56
|
|
|
$
|
5.18
|
|
|
$
|
4.22
|
|
Diluted
|
5.53
|
|
|
5.14
|
|
|
4.18
|
|
Dividends:
|
|
|
|
|
|
Cash dividends per share
(c)
|
$
|
2.00
|
|
|
$
|
1.68
|
|
|
$
|
1.40
|
|
Aggregate dividends paid to shareholders
|
223
|
|
|
202
|
|
|
179
|
|
|
|
(a)
|
Excludes
1.0 million
and
0.4 million
of restricted stock units (“RSUs”) for the years ended
2016
and
2015
, respectively, that would have been anti-dilutive to EPS. Includes unvested dilutive RSUs which are subject to future forfeitures.
|
|
|
(b)
|
Excludes performance vested restricted stock units (“PSUs”) of
0.6 million
for the years ended
2016
and
2015
and
0.4 million
for the year ended
2014
, as the Company had not met the required performance metrics.
|
|
|
(c)
|
For each of the quarterly periods ended March 31, June 30, September 30 and December 31,
2016
,
2015
and
2014
, the Company paid cash dividends of
$0.50
,
$0.42
and
$0.35
per share, respectively.
|
Stock Repurchase Programs
On
February 8, 2016
the Company’s Board of Directors authorized an increase of
$1.0 billion
to the Company’s existing stock repurchase program. As of
December 31, 2016
, the total authorization of the current program was
$5.0 billion
. The Company had
$741 million
of remaining availability in its program as of
December 31, 2016
.
The following table summarizes stock repurchase activity under the current stock repurchase program (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Cost
|
|
Average Price Per Share
|
As of December 31, 2015
|
79.2
|
|
|
$
|
3,712
|
|
|
$
|
46.85
|
|
For the year ended December 31, 2016
|
8.9
|
|
|
625
|
|
|
70.35
|
|
As of December 31, 2016
|
88.1
|
|
|
$
|
4,337
|
|
|
49.22
|
|
As of
December 31, 2016
, the Company has repurchased under its current and prior stock repurchase plans, a total of
113 million
shares at an average price of
$45.47
for a cost of
$5.1 billion
since its separation from Cendant (“Separation”).
Assets acquired and liabilities assumed in business combinations were recorded on the Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Consolidated Statements of Income since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price are based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values during the measurement period will be recorded by the Company as further adjustments to the purchase price allocations. Although, in certain circumstances, the Company has substantially integrated the operations of its acquired businesses, additional future costs relating to such integration may occur. These costs may result from integrating operating systems, relocating employees, closing facilities, reducing duplicative efforts and exiting and consolidating other activities. These costs will be recorded on the Consolidated Statements of Income as expenses.
2016 ACQUISITIONS
Fen Hotels.
During November 2016, the Company completed the acquisition of Fen Hotels, a hotel management company with a focus in the Latin America region, for
$70 million
, net of cash acquired. This acquisition is consistent with the Company’s strategy to expand its managed portfolio within its hotel group business. The acquisition resulted in the addition of two brands (Dazzler and Esplendor) to the Company’s portfolio. The preliminary purchase price allocation resulted in the recognition of (i)
$48 million
of goodwill, none of which is expected to be deductible for tax purposes, (ii)
$26 million
of definite-lived intangible assets, of which
$10 million
was for trademarks, with a weighted average life of
20 years
, (iii)
$1 million
of other assets and (iv)
$5 million
of liabilities, all of which were assigned to the Company’s Hotel Group segment. This acquisition was not material to the Company’s results of operations, financial position or cash flows.
Blue Chip Holidays
. During November 2016, the Company completed the acquisition of Blue Chip Holidays, a United Kingdom vacation rentals business, for
$24 million
, net of cash acquired. The preliminary purchase price allocation resulted in the recognition of (i)
$21 million
of goodwill, none of which is expected to be deductible for tax purposes, (ii)
$6 million
of definite-lived intangible assets with a weighted average life of
12 years
, (iii)
$3 million
of other assets, (iv)
$2 million
of trademarks and (iv)
$8 million
of liabilities, all of which were assigned to the Company’s Destination Network segment. This acquisition was not material to the Company’s results of operations, financial position or cash flows.
Other.
During
2016
, the Company completed
eight
other acquisitions for a total of
$39 million
, net of cash acquired. The Company’s Destination Network segment completed
five
acquisitions for
$20 million
, net of cash acquired and recorded contingent consideration of
$10 million
. The preliminary purchase price allocations resulted primarily in the recognition of (i)
$21 million
of other assets, (ii)
$17 million
of property and equipment, (iii)
$17 million
of definite-lived intangible assets with a weighted average life of
8
years, (iv)
$13 million
of goodwill, the majority of which is not expected to be deductible for tax purposes and (v)
$37 million
of liabilities. In addition, one acquisition resulted in a bargain purchase gain of
$2 million
, which was recognized within other (income)/expense, net in the Company’s Consolidated Statement of Income. Additionally, the Company’s Vacation Ownership segment completed
three
acquisitions for
$19 million
. The preliminary purchase price allocations resulted primarily in the recognition of
$15 million
of property and equipment and
$4 million
of inventory. These acquisitions were not material to the Company’s results of operations, financial position or cash flows.
2015 ACQUISITIONS
Dolce Hotels and Resorts.
During January
2015
, the Company completed the acquisition of Dolce Hotels and Resorts
(“Dolce”), a manager of properties focused on group accommodations. This acquisition is consistent with the Company’s strategy to expand its managed portfolio within its hotel group business. The net consideration of
$57 million
was comprised of
$52 million
in cash, net of cash acquired, for the equity of Dolce and
$5 million
related to debt repaid at closing. The purchase price allocation resulted in the recognition of
$29 million
of goodwill, none of which is expected to be deductible for tax purposes,
$28 million
of definite-lived intangible assets with a weighted average life of
15 years
and
$14 million
of trademarks. In addition, the fair value of assets acquired and liabilities assumed resulted in
$9 million
of other assets and
$23 million
of liabilities, all of which were assigned to the Company’s Hotel Group segment. This acquisition was not material to the Company’s results of operations, financial position or cash flows.
Other.
During
2015
, the Company completed
five
acquisitions for a total of
$38 million
, net of cash acquired. The preliminary purchase price allocations resulted in the recognition of (i)
$12 million
of property and equipment, all of which was allocated to the Company’s Vacation Ownership segment, and (ii)
$19 million
of goodwill, of which
$13 million
is expected to be deductible for tax purposes, and
$13 million
of definite-lived intangible assets with a weighted average life of
10 years
, both of which were allocated to the Company’s Destination Network segment. These acquisitions were not material to the Company’s results of operations, financial position or cash flows.
2014 ACQUISITIONS
During
2014
, the Company completed
four
acquisitions for
$32 million
, net of cash acquired, and paid an additional
$2 million
of contingent consideration related to prior year acquisitions. The purchase price allocations resulted in the recognition of
$14 million
of property,
$9 million
of inventory and
$3 million
of definite-lived intangible assets with a weighted average life of
13 years
, all of which were allocated to the Company’s Vacation Ownership segment. In addition, the Company recognized
$2 million
of goodwill, none of which is expected to be deductible for tax purposes, and
$3 million
of definite-lived intangible assets with a weighted average life of
12 years
, both of which were allocated to the Company’s Destination Network segment. These acquisitions were not material to the Company’s results of operations, financial position or cash flows.
Intangible assets consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
As of December 31, 2015
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
Carrying
Amount
|
Unamortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
$
|
1,603
|
|
|
|
|
|
|
$
|
1,563
|
|
|
|
|
|
Trademarks
(a)
|
$
|
720
|
|
|
|
|
|
|
$
|
723
|
|
|
|
|
|
Amortized Intangible Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Franchise agreements
(b)
|
$
|
594
|
|
|
$
|
401
|
|
|
$
|
193
|
|
|
$
|
594
|
|
|
$
|
386
|
|
|
$
|
208
|
|
Management agreements
(c)
|
168
|
|
|
54
|
|
|
114
|
|
|
153
|
|
|
46
|
|
|
107
|
|
Trademarks
(d)
|
20
|
|
|
6
|
|
|
14
|
|
|
8
|
|
|
5
|
|
|
3
|
|
Other
(e)
|
148
|
|
|
62
|
|
|
86
|
|
|
148
|
|
|
66
|
|
|
82
|
|
|
$
|
930
|
|
|
$
|
523
|
|
|
$
|
407
|
|
|
$
|
903
|
|
|
$
|
503
|
|
|
$
|
400
|
|
|
|
(a)
|
Comprised of various trade names (primarily including the Wyndham Hotels and Resorts, Ramada, Days Inn, RCI, Landal GreenParks, Baymont Inn & Suites, Microtel Inns & Suites, Hawthorn by Wyndham, TRYP by Wyndham, Dolce Hotels and Resorts and Hoseasons trade names) that the Company has acquired. These trade names are expected to generate future cash flows for an indefinite period of time.
|
|
|
(b)
|
Generally amortized over a period ranging from
20
to
40 years
with a weighted average life of
35 years
.
|
|
|
(c)
|
Generally amortized over a period ranging from
10
to
20 years
with a weighted average life of
15 years
.
|
|
|
(d)
|
Generally amortized over a period of
3
to
20
years with a weighted average life of
13 years
.
|
|
|
(e)
|
Includes customer lists and business contracts, generally amortized over a period ranging from
7
to
20 years
with a weighted average life of
14 years
.
|
Goodwill
During the fourth quarters of
2016
,
2015
and
2014
, the Company performed its annual goodwill impairment test and determined that no impairment existed as the fair value of goodwill at its reporting units was in excess of the carrying value.
The changes in the carrying amount of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
Goodwill Acquired
During 2016
|
|
Foreign
Exchange
|
|
Balance as of December 31, 2016
|
Hotel Group
|
$
|
329
|
|
|
$
|
48
|
|
|
$
|
—
|
|
|
$
|
377
|
|
Destination Network
|
1,207
|
|
|
34
|
|
|
(42
|
)
|
|
1,199
|
|
Vacation Ownership
|
27
|
|
|
—
|
|
|
—
|
|
|
27
|
|
Total Company
|
$
|
1,563
|
|
|
$
|
82
|
|
|
$
|
(42
|
)
|
|
$
|
1,603
|
|
Amortization expense relating to amortizable intangible assets was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Franchise agreements
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
15
|
|
Management agreements
|
11
|
|
|
10
|
|
|
8
|
|
Other
|
12
|
|
|
12
|
|
|
14
|
|
Total
(*)
|
$
|
38
|
|
|
$
|
37
|
|
|
$
|
37
|
|
(*)
Included as a component of depreciation and amortization on the Consolidated Statements of Income.
Based on the Company’s amortizable intangible assets as of
December 31, 2016
, the Company expects related amortization expense as follows:
|
|
|
|
|
|
Amount
|
2017
|
$
|
40
|
|
2018
|
38
|
|
2019
|
37
|
|
2020
|
36
|
|
2021
|
34
|
|
|
|
6.
|
Franchising and Marketing/Reservation Activities
|
Franchise fee revenues of
$677 million
,
$674 million
and
$632 million
on the Consolidated Statements of Income for
2016
,
2015
and
2014
, respectively, include initial franchise fees of
$15 million
,
$12 million
and
$12 million
, respectively.
As part of ongoing franchise fees, the Company receives marketing and reservation fees from its hotel group franchisees, which generally are calculated based on a specified percentage of gross room revenues. Such fees totaled
$310 million
,
$313 million
and
$294 million
during
2016
,
2015
and
2014
, respectively, and are recorded within franchise fees on the Consolidated Statements of Income. In accordance with the franchise agreements, generally the Company is contractually obligated to expend the marketing and reservation fees it collects from franchisees for the operation of an international, centralized, brand-specific reservation system and for marketing purposes such as advertising, promotional and co-marketing programs, and training for the respective franchisees. Additionally, the Company is required to provide certain services to its franchisees, including referrals, technology and volume purchasing.
The Company may, at its discretion, provide development advance notes to certain franchisees or hotel owners in its managed business in order to assist such franchisees/hotel owners in converting to one of the Company’s brands, building a new hotel to be flagged under one of the Company’s brands or in assisting in other franchisee expansion efforts. Provided the franchisee/hotel owner is in compliance with the terms of the franchise/management agreement, all or a portion of the development advance notes may be forgiven by the Company over the period of the franchise/management agreement, which typically ranges from
10
to
20
years. Otherwise, the related principal is due and payable to the Company. In certain instances, the Company may earn interest on unpaid franchisee development advance notes. Such interest was not significant during
2016
,
2015
or
2014
. Development advance notes recorded on the Consolidated Balance Sheets amounted to
$73 million
and
$81 million
as of
December 31, 2016
and
2015
, respectively, and are classified within other non-current assets on the Consolidated Balance Sheets. During
2016
,
2015
and
2014
, the Company recorded
$7 million
,
$8 million
and
$9 million
, respectively, related to the forgiveness of these notes. Such amounts are recorded as a reduction of franchise fees on the Consolidated Statements of Income. In addition, the Company received development advance note repayments of
$3 million
during
2016
and
$6 million
during
2015
and
2014
, which are reported as proceeds from development advance notes on the Consolidated Statements of Cash Flows. The Company recorded
$1 million
during
2016
and
2015
and less than
$1 million
during
2014
of bad debt expenses related to development advance notes that were due and payable within its hotel group business. Such expenses were reported within operating expenses on the Consolidated Statements of Income.
The income tax provision consists of the following for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Current
|
|
|
|
|
|
Federal
|
$
|
161
|
|
|
$
|
182
|
|
|
$
|
176
|
|
State
|
22
|
|
|
31
|
|
|
40
|
|
Foreign
|
52
|
|
|
51
|
|
|
53
|
|
|
235
|
|
|
264
|
|
|
269
|
|
Deferred
|
|
|
|
|
|
Federal
|
80
|
|
|
34
|
|
|
53
|
|
State
|
16
|
|
|
8
|
|
|
(1
|
)
|
Foreign
|
(3
|
)
|
|
(2
|
)
|
|
(5
|
)
|
|
93
|
|
|
40
|
|
|
47
|
|
Provision for income taxes
|
$
|
328
|
|
|
$
|
304
|
|
|
$
|
316
|
|
Pre-tax income for domestic and foreign operations consisted of the following for the year ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Domestic
|
$
|
754
|
|
|
$
|
745
|
|
|
$
|
681
|
|
Foreign
|
186
|
|
|
171
|
|
|
164
|
|
Pre-tax income
|
$
|
940
|
|
|
$
|
916
|
|
|
$
|
845
|
|
Deferred Taxes
The Company adopted the guidance on the balance sheet classification of deferred taxes on June 30, 2016. As a result, the Company retrospectively applied the guidance to its December 31, 2015 Consolidated Balance Sheet. See Note 2 - Summary of Significant Accounting Policies for additional information regarding the adoption of the new guidance.
Deferred income tax assets and liabilities, as of December 31, are comprised of the following:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Deferred income tax assets:
|
|
|
|
Net operating loss carryforward
|
$
|
49
|
|
|
$
|
54
|
|
Foreign tax credit carryforward
|
84
|
|
|
89
|
|
Tax basis differences in assets of foreign subsidiaries
|
27
|
|
|
35
|
|
Accrued liabilities and deferred income
|
185
|
|
|
185
|
|
Provision for doubtful accounts and loan loss reserves for vacation ownership contract receivables
|
304
|
|
|
300
|
|
Other comprehensive income
|
118
|
|
|
73
|
|
Other
|
14
|
|
|
15
|
|
Valuation allowance
(*)
|
(35
|
)
|
|
(31
|
)
|
Deferred income tax assets
|
746
|
|
|
720
|
|
|
|
|
|
Deferred income tax liabilities:
|
|
|
|
Depreciation and amortization
|
738
|
|
|
734
|
|
Installment sales of vacation ownership interests
|
1,038
|
|
|
984
|
|
Estimated VOI recoveries
|
97
|
|
|
90
|
|
Other comprehensive income
|
20
|
|
|
19
|
|
Other
|
37
|
|
|
19
|
|
Deferred income tax liabilities
|
1,930
|
|
|
1,846
|
|
Net deferred income tax liabilities
|
$
|
1,184
|
|
|
$
|
1,126
|
|
|
|
|
|
Reported in:
|
|
|
|
Other non-current assets
|
$
|
30
|
|
|
$
|
28
|
|
Deferred income taxes
|
1,214
|
|
|
1,154
|
|
Net deferred income tax liabilities
|
$
|
1,184
|
|
|
$
|
1,126
|
|
|
|
(*)
|
The valuation allowance of
$35 million
at
December 31, 2016
relates to foreign tax credits, net operating loss carryforwards and certain deferred tax assets of
$11 million
,
$22 million
and
$2 million
, respectively. The valuation allowance of
$31 million
at
December 31, 2015
relates to foreign tax credits, net operating loss carryforwards and certain deferred tax assets of
$10 million
,
$19 million
and
$2 million
, respectively. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized.
|
As of
December 31, 2016
, the Company’s net operating loss carryforwards primarily relate to state net operating losses which are due to expire at various dates, but no later than
2036
. As of
December 31, 2016
, the Company had
$84 million
of foreign tax credits. The foreign tax credits primarily expire in
2025
.
No provision has been made for U.S. federal deferred income taxes on
$948 million
of accumulated and undistributed earnings of certain foreign subsidiaries as of
December 31, 2016
since it is the present intention of management to reinvest the undistributed earnings indefinitely in those foreign operations. The determination of the amount of unrecognized U.S. federal deferred income tax liability for unremitted earnings is not practicable as a result of the large number of assumptions necessary to compute the tax. These earnings could become subject to additional taxes if remitted as dividends; the resulting U.S. income tax liabilities could be offset, in whole or in part, by credits allowable for taxes paid to foreign jurisdictions.
The Company’s effective income tax rate differs from the U.S. federal statutory rate as follows for the year ended December 31:
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Federal statutory rate
|
35.0%
|
|
35.0%
|
|
35.0%
|
State and local income taxes, net of federal tax benefits
|
2.2
|
|
2.8
|
|
3.0
|
Taxes on foreign operations at rates different than U.S. federal statutory rates
|
(2.5)
|
|
(1.4)
|
|
(1.9)
|
Taxes on foreign income, net of tax credits
|
(1.7)
|
|
(0.6)
|
|
(4.6)
|
Valuation allowance
|
0.6
|
|
(2.7)
|
|
4.0
|
Other
|
1.3
|
|
0.1
|
|
1.9
|
|
34.9%
|
|
33.2%
|
|
37.4%
|
The Company’s effective tax rate increased from
33.2%
in
2015
to
34.9%
in
2016
primarily due to a lower tax benefit in 2016 resulting from changes in the Company’s valuation allowance, partially offset by a benefit from an increase in foreign tax credits.
The following table summarizes the activity related to the Company’s unrecognized tax benefits:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Beginning balance
|
$
|
35
|
|
|
$
|
35
|
|
|
$
|
36
|
|
Increases related to tax positions taken during a prior period
|
2
|
|
|
6
|
|
|
5
|
|
Increases related to tax positions taken during the current period
|
8
|
|
|
6
|
|
|
4
|
|
Decreases related to settlements with taxing authorities
|
(2
|
)
|
|
(2
|
)
|
|
(1
|
)
|
Decreases as a result of a lapse of the applicable statute of limitations
|
(2
|
)
|
|
(9
|
)
|
|
(7
|
)
|
Decreases related to tax positions taken during a prior period
|
(2
|
)
|
|
(1
|
)
|
|
(2
|
)
|
Ending balance
|
$
|
39
|
|
|
$
|
35
|
|
|
$
|
35
|
|
The gross amount of the unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate was
$39 million
as of
December 31, 2016
and
$35 million
as of both
December 31, 2015
and
2014
. The Company recorded both accrued interest and penalties related to unrecognized tax benefits as a component of provision for income taxes on the Consolidated Statements of Income. The Company also accrued potential penalties and interest related to these unrecognized tax benefits of
$3 million
during
2016
and
$4 million
during both
2015
and
2014
. The Company had a liability for potential penalties of
$5 million
as of
December 31, 2016
and
$4 million
as of both
December 31, 2015
and
2014
and potential interest of
$6 million
as of both
December 31, 2016
and
2015
and
$5 million
as of
December 31, 2014
. Such liabilities are reported as a component of accrued expenses and other current liabilities and other non-current liabilities on the Consolidated Balance Sheets. The Company does not expect the unrecognized tax benefits to change significantly over the next
12 months
.
The Company files U.S., state, and foreign income tax returns in jurisdictions with varying statutes of limitations. The
2013
through
2016
tax years generally remain subject to examination by federal tax authorities. The
2009
through
2016
tax years generally remain subject to examination by many state tax authorities. In significant foreign jurisdictions, the
2008
through
2016
tax years generally remain subject to examination by their respective tax authorities. The statute of limitations is scheduled to expire within
12 months
of the reporting date in certain taxing jurisdictions and the Company believes that it is reasonably possible that the total amount of its unrecognized tax benefits could decrease by
$3 million
to
$6 million
.
The Company made cash income tax payments, net of refunds, of
$196 million
,
$239 million
and
$249 million
during
2016
,
2015
and
2014
, respectively. Such payments exclude income tax related payments made to or refunded by former Parent.
|
|
8.
|
Vacation Ownership Contract Receivables
|
The Company generates vacation ownership contract receivables by extending financing to the purchasers of its VOIs. As of December 31, current and long-term vacation ownership contract receivables, net consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Current vacation ownership contract receivables:
|
|
|
|
Securitized
|
$
|
235
|
|
|
$
|
248
|
|
Non-securitized
|
84
|
|
|
81
|
|
|
319
|
|
|
329
|
|
Less: Allowance for loan losses
|
57
|
|
|
57
|
|
Current vacation ownership contract receivables, net
|
$
|
262
|
|
|
$
|
272
|
|
Long-term vacation ownership contract receivables:
|
|
|
|
Securitized
|
$
|
2,254
|
|
|
$
|
2,214
|
|
Non-securitized
|
825
|
|
|
748
|
|
|
3,079
|
|
|
2,962
|
|
Less: Allowance for loan losses
|
564
|
|
|
524
|
|
Long-term vacation ownership contract receivables, net
|
$
|
2,515
|
|
|
$
|
2,438
|
|
Principal payments that are contractually due on the Company’s vacation ownership contract receivables during the next 12 months are classified as current on the Consolidated Balance Sheets. Principal payments due on the Company’s vacation ownership contract receivables during each of the five years subsequent to
December 31, 2016
and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized
|
|
Non -
Securitized
|
|
Total
|
2017
|
$
|
235
|
|
|
$
|
84
|
|
|
$
|
319
|
|
2018
|
242
|
|
|
85
|
|
|
327
|
|
2019
|
254
|
|
|
87
|
|
|
341
|
|
2020
|
272
|
|
|
91
|
|
|
363
|
|
2021
|
289
|
|
|
96
|
|
|
385
|
|
Thereafter
|
1,197
|
|
|
466
|
|
|
1,663
|
|
|
$
|
2,489
|
|
|
$
|
909
|
|
|
$
|
3,398
|
|
During
2016
,
2015
and
2014
, the Company’s securitized vacation ownership contract receivables generated interest income of
$332 million
,
$333 million
and
$300 million
, respectively.
During
2016
,
2015
and
2014
, the Company originated vacation ownership contract receivables of
$1,225 million
,
$1,091 million
and
$1,013 million
, respectively, and received principal collections of
$820 million
,
$796 million
and
$792 million
, respectively. The weighted average interest rate on outstanding vacation ownership contract receivables was
13.9%
,
13.8%
and
13.6%
as of
December 31, 2016
,
2015
and
2014
, respectively.
The activity in the allowance for loan losses on vacation ownership contract receivables was as follows:
|
|
|
|
|
|
Amount
|
Allowance for loan losses as of December 31, 2013
|
$
|
566
|
|
Provision for loan losses
|
260
|
|
Contract receivables written off, net
|
(245
|
)
|
Allowance for loan losses as of December 31, 2014
|
581
|
|
Provision for loan losses
|
248
|
|
Contract receivables write-offs, net
|
(248
|
)
|
Allowance for loan losses as of December 31, 2015
|
581
|
|
Provision for loan losses
|
342
|
|
Contract receivables write-offs, net
|
(302
|
)
|
Allowance for loan losses as of December 31, 2016
|
$
|
621
|
|
Credit Quality for Financed Receivables and the Allowance for Credit Losses
The basis of the differentiation within the identified class of financed VOI contract receivable is the consumer’s FICO score. A FICO score is a branded version of a consumer credit score widely used within the U.S. by the largest banks and lending institutions. FICO scores range from
300
–
850
and are calculated based on information obtained from one or more of the three major U.S. credit reporting agencies that compile and report on a consumer’s credit history. The Company updates its records for all active VOI contract receivables with a balance due on a rolling monthly basis so as to ensure that all VOI contract receivables are scored at least every six months. The Company groups all VOI contract receivables into five different categories: FICO scores ranging from 700 to 850, 600 to 699, Below 600, No Score (primarily comprised of consumers for whom a score is not readily available, including consumers declining access to FICO scores and non U.S. residents) and Asia Pacific (comprised of receivables in the Company’s Wyndham Vacation Resort Asia Pacific business for which scores are not readily available).
The following table details an aged analysis of financing receivables using the most recently updated FICO scores (based on the policy described above):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,733
|
|
|
$
|
1,010
|
|
|
$
|
149
|
|
|
$
|
120
|
|
|
$
|
232
|
|
|
$
|
3,244
|
|
31 - 60 days
|
19
|
|
|
32
|
|
|
17
|
|
|
4
|
|
|
2
|
|
|
74
|
|
61 - 90 days
|
11
|
|
|
16
|
|
|
11
|
|
|
3
|
|
|
1
|
|
|
42
|
|
91 - 120 days
|
8
|
|
|
14
|
|
|
13
|
|
|
2
|
|
|
1
|
|
|
38
|
|
Total
|
$
|
1,771
|
|
|
$
|
1,072
|
|
|
$
|
190
|
|
|
$
|
129
|
|
|
$
|
236
|
|
|
$
|
3,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2015
|
|
700+
|
|
600-699
|
|
<600
|
|
No Score
|
|
Asia Pacific
|
|
Total
|
Current
|
$
|
1,623
|
|
|
$
|
1,023
|
|
|
$
|
163
|
|
|
$
|
115
|
|
|
$
|
231
|
|
|
$
|
3,155
|
|
31 - 60 days
|
16
|
|
|
25
|
|
|
17
|
|
|
5
|
|
|
2
|
|
|
65
|
|
61 - 90 days
|
10
|
|
|
14
|
|
|
11
|
|
|
3
|
|
|
1
|
|
|
39
|
|
91 - 120 days
|
7
|
|
|
11
|
|
|
11
|
|
|
2
|
|
|
1
|
|
|
32
|
|
Total
|
$
|
1,656
|
|
|
$
|
1,073
|
|
|
$
|
202
|
|
|
$
|
125
|
|
|
$
|
235
|
|
|
$
|
3,291
|
|
The Company ceases to accrue interest on VOI contract receivables once the contract has remained delinquent for greater than
90 days
. At greater than
120 days
, the VOI contract receivable is written off to the allowance for loan losses. In accordance with its policy, the Company assesses the allowance for loan losses using a static pool methodology and thus does not assess individual loans for impairment separate from the pool.
Inventory, as of December 31, consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land held for VOI development
|
$
|
146
|
|
|
$
|
136
|
|
VOI construction in process
|
59
|
|
|
62
|
|
Inventory sold subject to conditional repurchase
|
163
|
|
|
155
|
|
Completed VOI inventory
|
667
|
|
|
604
|
|
Estimated VOI recoveries
|
256
|
|
|
242
|
|
Destination network vacation credits and other
|
59
|
|
|
60
|
|
Total inventory
|
1,350
|
|
|
1,259
|
|
Less: Current portion
(*)
|
315
|
|
|
295
|
|
Non-current inventory
|
$
|
1,035
|
|
|
$
|
964
|
|
|
|
(*)
|
Represents inventory that the Company expects to sell within the next 12 months.
|
During
2016
and
2015
, the Company transferred
$50 million
and
$70 million
from property and equipment to VOI inventory, respectively. In addition to the inventory obligations listed below, as of
December 31, 2016
, the Company had
$8 million
of inventory accruals included in accounts payable on the Consolidated Balance Sheet. As of
December 31, 2015
, the Company had
$27 million
of inventory accruals, of which
$20 million
was included in accrued expenses and other current liabilities and
$7 million
was included in accounts payable.
Inventory Sale Transaction
During
2015
, the Company sold real property located in St. Thomas, U.S. Virgin Islands (“St. Thomas”) to a third-party developer, consisting of
$80 million
of vacation ownership inventory, in exchange for
$80 million
in cash consideration, of which
$70 million
was received in 2015 and
$10 million
was received in 2016. During the second quarter of 2016, the Company received
$10 million
of additional cash consideration from the third-party developer for the vacation ownership inventory property under development in St. Thomas. During 2013, the Company sold real property located in Las Vegas, Nevada and Avon, Colorado to a third-party developer, consisting of vacation ownership inventory and property and equipment.
The Company recognized no gain or loss on these sales transactions. In accordance with the agreements with the third-party developers, the Company has conditional rights and conditional obligations to repurchase the completed properties from the developers subject to the properties conforming to the Company's vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. Under the sale of real estate accounting guidance, the conditional rights and obligations of the Company constitute continuing involvement and thus the Company was unable to account for these transactions as a sale.
During 2014, the Company acquired the property located in Avon, Colorado from the third-party developer. In connection with this purchase, the Company had an outstanding inventory obligation of
$32 million
as of both
December 31, 2016
and
December 31, 2015
, of which
$11 million
was included within accrued expenses and other current liabilities and
$21 million
was included within other non-current liabilities on the Consolidated Balance Sheets.
In connection with the Las Vegas, Nevada and St. Thomas properties, the Company had outstanding inventory obligations of
$166 million
as of
December 31, 2016
, of which
$74 million
was included within accrued expenses and other current liabilities and
$92 million
was included within other non-current liabilities on the Consolidated Balance Sheet. During
2016
, the Company paid
$49 million
to the third-party developer of which,
$18 million
was for vacation ownership inventory located in Las Vegas, Nevada and St. Thomas,
$26 million
was for its obligation under the vacation ownership inventory arrangements and
$5 million
was for accrued interest. In connection with these transactions, the Company also acquired
$35 million
of inventory developed by the third-party developer during the fourth quarter of 2016 which will be paid during 2017. As of
December 31, 2015
, the Company had an outstanding inventory obligation related to the Las Vegas property of
$157 million
, of which
$33 million
was included within accrued expenses and other current liabilities and
$124 million
was included within other non-current liabilities on the Consolidated Balance Sheet.
The Company has guaranteed to repurchase the completed properties located in Las Vegas, Nevada and St. Thomas from the third-party developers subject to the properties meeting the Company’s vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party. The maximum potential future payments that the Company could be required to make under these commitments was
$238 million
as of
December 31, 2016
.
|
|
10.
|
Property and Equipment, net
|
Property and equipment, net, as of December 31, consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Land
|
$
|
167
|
|
|
$
|
171
|
|
Buildings and leasehold improvements
|
862
|
|
|
867
|
|
Capitalized software
|
753
|
|
|
762
|
|
Furniture, fixtures and equipment
|
494
|
|
|
529
|
|
Capital leases
|
208
|
|
|
202
|
|
Construction in progress
|
131
|
|
|
164
|
|
|
2,615
|
|
|
2,695
|
|
Less: Accumulated depreciation and amortization
|
1,275
|
|
|
1,296
|
|
|
$
|
1,340
|
|
|
$
|
1,399
|
|
During
2016
,
2015
and
2014
, the Company recorded depreciation and amortization expense of
$214 million
,
$197 million
and
$196 million
, respectively, related to property and equipment. As of
December 31, 2016
and
2015
, the Company had accrued property and equipment of
$5 million
and
$7 million
, respectively.
Other current assets, as of December 31, consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Securitization restricted cash
|
$
|
75
|
|
|
$
|
73
|
|
Escrow deposit restricted cash
|
59
|
|
|
59
|
|
Deferred costs
|
52
|
|
|
53
|
|
Non-trade receivables, net
|
40
|
|
|
32
|
|
Short-term investments
|
14
|
|
|
12
|
|
Tax receivables
|
12
|
|
|
11
|
|
Assets held for sale
|
10
|
|
|
2
|
|
Other
|
34
|
|
|
24
|
|
|
$
|
296
|
|
|
$
|
266
|
|
|
|
12.
|
Accrued Expenses and Other Current Liabilities
|
Accrued expenses and other current liabilities, as of December 31, consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Accrued payroll and related
|
$
|
225
|
|
|
$
|
274
|
|
Accrued taxes
|
137
|
|
|
102
|
|
Inventory sale and repurchase obligations
(a)
|
85
|
|
|
44
|
|
Accrued advertising and marketing
|
57
|
|
|
65
|
|
Accrued loyalty programs
|
46
|
|
|
37
|
|
Accrued interest
|
44
|
|
|
49
|
|
Accrued legal settlements
|
40
|
|
|
29
|
|
Accrued VOI maintenance fees
|
25
|
|
|
26
|
|
Accrued separation
(b)
|
10
|
|
|
19
|
|
Accrued other
|
166
|
|
|
182
|
|
|
$
|
835
|
|
|
$
|
827
|
|
|
|
(a)
|
See Note 9 - Inventory.
|
|
|
(b)
|
See Note 23 - Separation Adjustments and Transactions with Former Parent and Subsidiaries.
|
|
|
13.
|
Long-Term Debt and Borrowing Arrangements
|
The Company’s indebtedness, as of December 31, consisted of:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
Securitized vacation ownership debt
:
(a)
|
|
|
|
Term notes
(b)
|
$
|
1,857
|
|
|
$
|
1,867
|
|
Bank conduit facility (due August 2018)
|
284
|
|
|
239
|
|
Total securitized vacation ownership debt
|
2,141
|
|
|
2,106
|
|
Less: Current portion of securitized vacation ownership debt
|
195
|
|
|
209
|
|
Long-term securitized vacation ownership debt
|
$
|
1,946
|
|
|
$
|
1,897
|
|
Long-term debt
:
(c)
|
|
|
|
Revolving credit facility (due July 2020)
|
$
|
14
|
|
|
$
|
7
|
|
Commercial paper
|
427
|
|
|
109
|
|
Term loan (due March 2021)
|
323
|
|
|
—
|
|
$315 million 6.00% senior unsecured notes (due December 2016)
(d)
|
—
|
|
|
316
|
|
$300 million 2.95% senior unsecured notes (due March 2017)
|
300
|
|
|
299
|
|
$14 million 5.75% senior unsecured notes (due February 2018)
|
14
|
|
|
14
|
|
$450 million 2.50% senior unsecured notes (due March 2018)
|
449
|
|
|
448
|
|
$40 million 7.375% senior unsecured notes (due March 2020)
|
40
|
|
|
40
|
|
$250 million 5.625% senior unsecured notes (due March 2021)
|
248
|
|
|
247
|
|
$650 million 4.25% senior unsecured notes (due March 2022)
(e)
|
648
|
|
|
648
|
|
$400 million 3.90% senior unsecured notes (due March 2023)
(f)
|
407
|
|
|
408
|
|
$350 million 5.10% senior unsecured notes (due October 2025)
(g)
|
338
|
|
|
337
|
|
Capital leases
|
143
|
|
|
153
|
|
Other
|
20
|
|
|
49
|
|
Total long-term debt
|
3,371
|
|
|
3,075
|
|
Less: Current portion of long-term debt
|
34
|
|
|
44
|
|
Long-term debt
|
$
|
3,337
|
|
|
$
|
3,031
|
|
|
|
(a)
|
Represents non-recourse debt that is securitized through bankruptcy-remote special purpose entities (“SPEs”), the creditors of which have no recourse to the Company for principal and interest. These outstanding borrowings (which legally are not liabilities of the Company) are collateralized by
$2,601 million
and
$2,576 million
of underlying gross vacation ownership contract receivables and related assets (which legally are not assets of the Company) as of
December 31, 2016
and
2015
, respectively.
|
|
|
(b)
|
The carrying amounts of the term notes are net of debt issuance costs of
$24 million
as of both
December 31, 2016
and
2015
.
|
|
|
(c)
|
The carrying amounts of the senior unsecured notes are net of unamortized discounts of
$11 million
and
$14 million
as of
December 31, 2016
and
2015
, respectively. The carrying amounts of the senior unsecured notes and term loan are net of debt issuance costs of
$4 million
and
$3 million
as of
December 31, 2016
and
2015
, respectively.
|
|
|
(d)
|
Includes
$1 million
of unamortized gains from the settlement of a derivative as of
December 31, 2015
.
|
|
|
(e)
|
Includes
$2 million
of unamortized gains from the settlement of a derivative as of both
December 31, 2016
and
2015
.
|
|
|
(f)
|
Includes
$9 million
and
$11 million
of unamortized gains from the settlement of a derivative as of
December 31, 2016
and
2015
, respectively.
|
|
|
(g)
|
Includes
$9 million
and
$10 million
of unamortized losses from the settlement of a derivative as of
December 31, 2016
and
2015
, respectively.
|
Maturities and Capacity
The Company’s outstanding debt as of
December 31, 2016
matures as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securitized Vacation Ownership Debt
|
|
Long-Term Debt
|
|
Total
|
Within 1 year
|
$
|
195
|
|
|
$
|
334
|
|
(*)
|
$
|
529
|
|
Between 1 and 2 years
|
206
|
|
|
478
|
|
|
684
|
|
Between 2 and 3 years
|
413
|
|
|
30
|
|
|
443
|
|
Between 3 and 4 years
|
206
|
|
|
526
|
|
|
732
|
|
Between 4 and 5 years
|
220
|
|
|
533
|
|
|
753
|
|
Thereafter
|
901
|
|
|
1,470
|
|
|
2,371
|
|
|
$
|
2,141
|
|
|
$
|
3,371
|
|
|
$
|
5,512
|
|
|
|
(*)
|
Includes
$300 million
of senior unsecured notes that the Company classified as long-term debt as it has the intent to refinance such debt on a long-term basis and the ability to do so with available capacity under its revolving credit facility.
|
Debt maturities of the securitized vacation ownership debt are based on the contractual payment terms of the underlying vacation ownership contract receivables. As such, actual maturities may differ as a result of prepayments by the vacation ownership contract receivable obligors.
As of
December 31, 2016
, the available capacity under the Company’s borrowing arrangements was as follows:
|
|
|
|
|
|
|
|
|
|
|
Securitized Bank
Conduit Facility
(a)
|
|
Revolving
Credit Facility
|
|
Total Capacity
|
$
|
650
|
|
|
$
|
1,500
|
|
|
Less: Outstanding Borrowings
|
284
|
|
|
14
|
|
|
Letters of credit
|
—
|
|
|
1
|
|
|
Commercial paper borrowings
|
—
|
|
|
427
|
|
(b)
|
Available Capacity
|
$
|
366
|
|
|
$
|
1,058
|
|
|
|
|
(a)
|
The capacity of this facility is subject to the Company’s ability to provide additional assets to collateralize additional securitized borrowings.
|
|
|
(b)
|
The Company considers outstanding borrowings under its commercial paper programs to be a reduction of the available capacity of its revolving credit facility.
|
Securitized Vacation Ownership Debt
As discussed in Note 14 — Variable Interest Entities, the Company issues debt through the securitization of vacation ownership contract receivables.
Sierra Timeshare 2016-1 Receivables Funding, LLC.
During
March, 2016
, the Company closed a series of term notes payable, Sierra Timeshare 2016-1 Receivables Funding, LLC, with an initial principal amount of
$425 million
, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of
3.20%
. The advance rate for this transaction was
88.85%
. As of
December 31, 2016
, the Company had
$264 million
of outstanding borrowings under these term notes, net of debt issuance costs.
Sierra Timeshare 2016-2 Receivables Funding, LLC.
During
July, 2016
, the Company closed a series of term notes payable, Sierra Timeshare 2016-2 Receivables Funding, LLC, with an initial principal amount of
$375 million
, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of
2.42%
. The advance rate for this transaction was
90%
. As of
December 31, 2016
, the Company had
$285 million
of outstanding borrowings under these term notes, net of debt issuance costs.
Sierra Timeshare 2016-3 Receivables Funding, LLC.
During
October, 2016
, the Company closed a series of term notes payable, Sierra Timeshare 2016-3 Receivables Funding LLC, with an initial principal amount of
$325 million
, which are secured by vacation ownership contract receivables and bear interest at a weighted average coupon rate of
2.47%
. The advance rate for this transaction was
90%
. As of
December 31, 2016
, the Company had
$293 million
of outstanding borrowings under these term notes, net of debt issuance costs.
As of
December 31, 2016
, the Company had
$1,015 million
of outstanding borrowings under term notes entered into prior to
December 31, 2015
.
The Company’s securitized term notes include fixed and floating rate term notes for which the weighted average interest rate was
3.6%
,
3.5%
and
3.7%
during
2016
,
2015
and
2014
, respectively.
Sierra Timeshare Conduit Receivables Funding II, LLC.
During
August 2016
, the Company renewed its securitized timeshare receivables conduit facility for a
two
-year period through
August 2018
. The facility has a total capacity of
$650 million
and bears interest at variable rates based on commercial paper rates and LIBOR rates plus a spread. The bank conduit facility had a weighted average interest rate of
3.7%
during both
2016
and
2015
and
3.4%
during
2014
.
As of
December 31, 2016
, the Company’s securitized vacation ownership debt of
$2,141 million
is collateralized by
$2,601 million
of underlying gross vacation ownership contract receivables and related assets. Additional usage of the capacity of the Company’s bank conduit facility is subject to the Company’s ability to provide additional assets to collateralize such facility. The combined weighted average interest rate on the Company’s total securitized vacation ownership debt was
3.6%
,
3.5%
and
3.7%
during
2016
,
2015
and
2014
, respectively.
Long-Term Debt
Term Loan.
During March 2016, the Company entered into a five-year
$325 million
term loan agreement which matures on March 24, 2021. The term loan currently bears interest at LIBOR plus a spread. The term loan had a weighted average interest rate of
2.14%
during
2016
. The term loan can be paid at the Company’s option in whole or in part at any time prior to maturity. The interest on the term loan will be subject to adjustments from time to time if there are downgrades to the Company’s credit ratings. The term loan requires principal payments, payable in equal quarterly installments, of
5%
per annum of the original loan balance, commencing with the third anniversary of the loan, and
10%
per annum of the original loan balance commencing with the fourth anniversary of the loan, with the remaining balance payable at maturity.
Revolving Credit Facility.
During
March 2015
, the Company replaced its
$1.5 billion
revolving credit facility expiring on July 15, 2018 with a
$1.5 billion
five
-year revolving credit facility that expires on
July 15, 2020
. This facility is subject to a fee of
20
basis points based on total capacity and bears interest at LIBOR plus
130
basis points on outstanding borrowings. The facility fee and interest rate are dependent on the Company’s credit ratings. The available capacity of the facility also supports the Company’s commercial paper programs.
Commercial Paper.
The Company maintains U.S. and European commercial paper programs with a total capacity of
$750 million
and
$500 million
, respectively. The maturities of U.S. and European commercial paper notes will vary, but may not exceed
366 days
and
364 days
, respectively, from the date of issue. As of
December 31, 2016
, the Company had outstanding borrowings of
$427 million
at a weighted average rate of
1.36%
, all of which was under its U.S. commercial paper program. As of
December 31, 2015
, the Company had
$109 million
of outstanding borrowings at a weighted average interest rate of
1.07%
, all under its U.S. commercial paper program. The Company considers outstanding borrowings under its commercial paper programs to be a reduction of available capacity on its revolving credit facility.
The commercial paper notes are sold at a discount from par or will bear interest at a negotiated rate. While outstanding commercial paper borrowings generally have short-term maturities, the Company classifies the outstanding borrowings as long-term debt based on its intent to refinance the outstanding borrowings on a long-term basis and the ability to do so with its revolving credit facility.
2.95% Senior Unsecured Notes.
The Company’s
$300 million
2.95%
senior unsecured notes due in March 2017 are classified as long-term as it has the intent to refinance such debt on a long-term basis and the ability to do so with its available capacity under the Company’s revolving credit facility.
As of
December 31, 2016
, the Company had
$2,443 million
of outstanding senior unsecured notes issued prior to
December 31, 2015
. Interest is payable semi-annually in arrears on the notes. The notes are redeemable at the Company’s option at any time, in whole or in part, at the stated redemption prices plus accrued interest through the redemption dates. These notes rank equally in right of payment with all of the Company’s other senior unsecured indebtedness.
Destination Network Capital Leases.
The Company leases vacation homes located in European holiday parks as part of its destination network business. The majority of these leases are recorded as capital lease obligations with corresponding assets classified within property and equipment, net on the Consolidated Balance Sheets. Such capital lease obligations had a weighted average interest rate of
4.6%
during
2016
and
4.5%
during
2015
and
2014
.
Capital Lease.
The Company leases its Corporate headquarters in Parsippany NJ. The lease is recorded as a capital lease obligation with a corresponding capital lease asset which is recorded net of deferred rent.
Such capital lease had an interest rate of
4.5%
during
2016
,
2015
and
2014
.
Other.
During January 2013, the Company entered into an agreement with a third-party partner whereby the partner acquired Midtown 45 through an SPE. The SPE financed the purchase with a
$115 million
four
-year mortgage note, provided by related parties of such partner. The note accrues interest at
4.5%
and the principal and interest are payable semi-annually, commencing on July 24, 2013. In addition,
$9 million
of mandatorily redeemable equity of the SPE was classified as long-term debt. As of
December 31, 2016
,
$15 million
of the four-year mortgage note and
$2 million
of mandatorily redeemable equity were outstanding. As of
December 31, 2015
,
$42 million
of the four-year mortgage note and
$4 million
of mandatorily redeemable equity were outstanding. See Note 14 - Variable Interest Entities for more detailed information.
Fair Value Hedges
. During
2013
, the Company entered into fixed to variable interest rate swap agreements (“the Swaps”) on its
3.90%
and
4.25%
senior unsecured notes with notional amounts of
$400 million
and
$100 million
, respectively. The fixed interest rates on these notes were effectively modified to a variable LIBOR-based index. During
May 2015
, the Company terminated the Swaps and received
$17 million
of cash which was included within other, net in operating activities on the Consolidated Statements of Cash Flows. The Company had
$11 million
and
$13 million
of deferred gains as of
December 31, 2016
and
2015
, respectively. Such gains were included within long-term debt on the Consolidated Balance Sheets. Such gains will be recognized within interest expense on the Consolidated Statements of Income over the remaining life of the senior unsecured notes.
Interest Swap Agreements
. During 2015, the Company settled interest swap agreements on its
5.10%
senior unsecured notes resulting in a payment of
$10 million
which was included within other, net in operating activities on the Consolidated Statement of Cash Flows. As of
December 31, 2016
and
2015
, the Company had a
$9 million
and
$10 million
deferred loss, respectively which was included within long-term debt on the Consolidated Balance Sheets. Such loss is being amortized over the remaining life of the senior unsecured notes within interest expense on the Consolidated Statements of Income.
Deferred Financing Costs
The Company adopted the guidance on the presentation of debt issuance costs on January 1, 2016, as required. As a result, the Company retrospectively applied the guidance to its December 31, 2015 Consolidated Balance Sheet. In addition, the Company has elected to continue to classify debt issuance costs related to the revolving credit facility and the bank conduit facility within other non-current assets on the Consolidated Balance Sheet. See Note 2 - Summary of Significant Accounting Policies for additional information regarding the adoption of the new guidance.
Early Extinguishment of Debt
During 2016, the Company redeemed the remaining portion of its
6.00%
senior unsecured notes for a total of
$327 million
. As a result, the Company incurred an
$11 million
loss, which is included within early extinguishment of debt on the Consolidated Statement of Income.
Interest Expense
The Company incurred non-securitized interest expense of
$136 million
during
2016
. Such amount consisted primarily of interest on long-term debt, partially offset by
$5 million
of capitalized interest. Such amounts are included within interest expense on the Consolidated Statement of Income. Cash paid related to interest on the Company’s non-securitized debt was
$136 million
.
The Company incurred non-securitized interest expense of
$125 million
during
2015
. Such amount consisted primarily of interest on long-term debt, partially offset by
$7 million
of capitalized interest. Such amounts are included within interest expense on the Consolidated Statement of Income. Cash paid related to interest on the Company’s non-securitized debt was
$118 million
.
The Company incurred non-securitized interest expense of
$113 million
during
2014
. Such amount consisted primarily of interest on long-term debt, partially offset by
$6 million
of capitalized interest and
$2 million
of gains resulting from the ineffectiveness of the fair value hedges. Such amounts are included within interest expense on the Consolidated Statement of Income. Cash paid related to interest on the Company’s non-securitized debt was
$119 million
.
Interest expense incurred in connection with the Company’s securitized vacation ownership debt was
$75 million
,
$74 million
and
$71 million
during
2016
,
2015
and
2014
, respectively, and is recorded within consumer financing interest on the Consolidated Statements of Income. Cash paid related to such interest was
$51 million
,
$56 million
and
$53 million
during
2016
,
2015
and
2014
, respectively.
|
|
14.
|
Variable Interest Entities
|
The Company pools qualifying vacation ownership contract receivables and sells them to bankruptcy-remote entities. Vacation ownership contract receivables qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. Vacation ownership contract receivables are securitized through bankruptcy-remote SPEs that are consolidated within the Consolidated Financial Statements. As a result, the Company does not recognize gains or losses resulting from these securitizations at the time of sale to the SPEs. Interest income is recognized when earned over the contractual life of the vacation ownership contract receivables. The Company services the securitized vacation ownership contract receivables pursuant to servicing agreements negotiated on an arms-length basis based on market conditions. The activities of these SPEs are limited to (i) purchasing vacation ownership contract receivables from the Company’s vacation ownership subsidiaries, (ii) issuing debt securities and/or borrowing under a conduit facility to fund such purchases and (iii) entering into derivatives to hedge interest rate exposure. The bankruptcy-remote SPEs are legally separate from the Company. The receivables held by the bankruptcy-remote SPEs are not available to creditors of the Company and legally are not assets of the Company. Additionally, the non-recourse debt that is securitized through the SPEs is legally not a liability of the Company and thus, the creditors of these SPEs have no recourse to the Company for principal and interest.
The assets and liabilities of these vacation ownership SPEs are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Securitized contract receivables, gross
(a)
|
$
|
2,489
|
|
|
$
|
2,462
|
|
Securitized restricted cash
(b)
|
90
|
|
|
92
|
|
Interest receivables on securitized contract receivables
(c)
|
21
|
|
|
20
|
|
Other assets
(d)
|
4
|
|
|
5
|
|
Total SPE assets
|
2,604
|
|
|
2,579
|
|
Securitized term notes
(e)(f)
|
1,857
|
|
|
1,867
|
|
Securitized conduit facilities
(e)
|
284
|
|
|
239
|
|
Other liabilities
(g)
|
2
|
|
|
2
|
|
Total SPE liabilities
|
2,143
|
|
|
2,108
|
|
SPE assets in excess of SPE liabilities
|
$
|
461
|
|
|
$
|
471
|
|
|
|
(a)
|
Included in current (
$235 million
and
$248 million
as of
December 31, 2016
and
2015
, respectively) and non-current (
$2,254 million
and
$2,214 million
as of
December 31, 2016
and
2015
, respectively) vacation ownership contract receivables on the Consolidated Balance Sheets.
|
|
|
(b)
|
Included in other current assets (
$75 million
and
$73 million
as of
December 31, 2016
and
2015
, respectively) and other non-current assets (
$15 million
and
$19 million
as of
December 31, 2016
and
2015
, respectively) on the Consolidated Balance Sheets.
|
|
|
(c)
|
Included in trade receivables, net on the Consolidated Balance Sheets.
|
|
|
(d)
|
Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which is included in other non-current assets on the Consolidated Balance Sheets.
|
|
|
(e)
|
Included in current (
$195 million
and
$209 million
as of
December 31, 2016
and
2015
, respectively) and long-term (
$1,946 million
and
$1,897 million
as of
December 31, 2016
and
2015
, respectively) securitized vacation ownership debt on the Consolidated Balance Sheets.
|
|
|
(f)
|
Includes deferred financing costs of
$24 million
as of both
December 31, 2016
and
2015
, related to securitized debt.
|
|
|
(g)
|
Primarily includes accrued interest on securitized debt, which is included in accrued expenses and other current liabilities on the Consolidated Balance Sheets.
|
In addition, the Company has vacation ownership contract receivables that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were
$909 million
and
$829 million
as of
December 31, 2016
and
2015
, respectively. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
SPE assets in excess of SPE liabilities
|
$
|
461
|
|
|
$
|
471
|
|
Non-securitized contract receivables
|
909
|
|
|
829
|
|
Less: Allowance for loan losses
|
621
|
|
|
581
|
|
Total, net
|
$
|
749
|
|
|
$
|
719
|
|
Midtown 45, NYC Property
During January 2013, the Company entered into an agreement with a third-party partner whereby the partner acquired the Midtown 45 property in New York City through an SPE. The Company is managing and operating the property for rental purposes while the Company converts it into VOI inventory. The SPE financed the acquisition and planned renovations with a four-year mortgage note and mandatorily redeemable equity provided by related parties of such partner. At the time of the agreement, the Company committed to purchase such VOI inventory from the SPE over a four-year period which will be used to repay the four-year mortgage note and the mandatorily redeemable equity of the SPE. The Company is considered to be the primary beneficiary of the SPE and therefore, the Company consolidated the SPE within its financial statements.
The assets and liabilities of the SPE are as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
Receivable for leased property and equipment
(a)
|
$
|
16
|
|
|
$
|
47
|
|
Total SPE assets
|
16
|
|
|
47
|
|
Accrued expenses and other current liabilities
|
—
|
|
|
1
|
|
Long-term debt
(b)
|
17
|
|
|
46
|
|
Total SPE liabilities
|
17
|
|
|
47
|
|
SPE deficit
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
|
(a)
|
Represents a receivable for assets leased to the Company which are reported within property and equipment, net on the Company’s Consolidated Balance Sheets.
|
|
|
(b)
|
As of
December 31, 2016
, included
$15 million
relating to a four-year mortgage note due in 2017 and
$2 million
of mandatorily redeemable equity, both of which are included in current portion of long-term debt on the Consolidated Balance Sheet. As of
December 31, 2015
, included
$42 million
relating to a four-year mortgage note due in 2017 and
$4 million
of mandatorily redeemable equity; of which
$29 million
was included in current portion of long-term debt on the Consolidated Balance Sheet.
|
During
2016
and
2015
, the SPE conveyed
$28 million
and
$23 million
, respectively of property and equipment to the Company. In addition, the Company subsequently transferred
$36 million
and
$55 million
of property and equipment to VOI inventory during the year ended
December 31, 2016
and
2015
, respectively.
The Company measures its financial assets and liabilities at fair value on a recurring basis and utilizes the fair value hierarchy to determine such fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value driver is observable.
Level 3: Unobservable inputs used when little or no market data is available. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement falls has been determined based on the lowest level input (closest to Level 3) that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
As of
December 31, 2016
, the Company had foreign exchange contracts resulting in
$1 million
of assets which are included within other current assets and
$1 million
of liabilities which are included within accrued expenses and other current liabilities on the Consolidated Balance Sheet. As of
December 31, 2015
, the Company had foreign exchange contracts resulting in
$2 million
of assets which are included within other current assets and
$3 million
of liabilities which are included within accrued expenses and other current liabilities on the Consolidated Balance Sheet. On a recurring basis, such assets and liabilities are remeasured at estimated fair value (all of which are Level 2) and thus are equal to the carrying value.
The Company’s derivative instruments primarily consist of pay-fixed/receive-variable interest rate swaps, pay-variable/receive-fixed interest rate swaps, interest rate caps, foreign exchange forward contracts and foreign exchange average rate forward contracts (see Note 16 – Financial Instruments for more detail). For assets and liabilities that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using other significant observable inputs are valued by reference to similar assets and liabilities. For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets and liabilities in active markets. For assets and liabilities that are measured using significant unobservable inputs, fair value is primarily derived using a fair value model, such as a discounted cash flow model.
The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The carrying amounts of cash and cash equivalents, restricted cash, trade receivables, accounts payable and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amounts and estimated fair values of all other financial instruments are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
December 31, 2015
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
|
Carrying
Amount
|
|
Estimated Fair Value
|
Assets
|
|
|
|
|
|
|
|
Vacation ownership contract receivables, net
|
$
|
2,777
|
|
|
$
|
3,344
|
|
|
$
|
2,710
|
|
|
$
|
3,272
|
|
Debt
|
|
|
|
|
|
|
|
Total debt
|
5,512
|
|
|
5,579
|
|
|
5,181
|
|
|
5,234
|
|
The Company estimates the fair value of its vacation ownership contract receivables using a discounted cash flow model which it believes is comparable to the model that an independent third-party would use in the current market. The model uses Level 3 inputs consisting of default rates, prepayment rates, coupon rates and loan terms for the contract receivables portfolio as key drivers of risk and relative value that, when applied in combination with pricing parameters, determines the fair value of the underlying contract receivables.
The Company estimates the fair value of its securitized vacation ownership debt by obtaining Level 2 inputs comprised of indicative bids from investment banks that actively issue and facilitate the secondary market for timeshare securities. The Company estimates the fair value of its other long-term debt, excluding capital leases, using Level 2 inputs based on indicative bids from investment banks and determines the fair value of its senior notes using quoted market prices (such senior notes are not actively traded).
|
|
16.
|
Financial Instruments
|
The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the change in fair value of the derivative instrument will be reflected in the Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows or fair value and the hedge documentation standards are fulfilled at the time the Company enters into the derivative contract. A hedge is designated as a cash flow hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. Changes in fair value, for the effective portion of qualifying hedges, are recorded in AOCI. The derivative’s gain or loss is released from AOCI to match the timing of the underlying hedged cash flows effect on earnings.
The Company reviews the effectiveness of its hedging instruments on an ongoing basis, recognizes current period hedge ineffectiveness immediately in earnings and discontinues hedge accounting for any hedge that it no longer considers to be highly effective. The Company recognizes changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, the Company releases gains and losses from AOCI based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected time frame. Such untimely transactions require the Company to immediately recognize in earnings gains and losses previously recorded in AOCI.
Changes in interest rates and foreign exchange rates expose the Company to market risk. The Company also uses cash flow hedges as part of its overall strategy to manage its exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, the Company only enters into transactions that it believes will be highly effective at offsetting the underlying risk and it does not use derivatives for trading or speculative purposes.
The Company uses the following derivative instruments to mitigate its foreign currency exchange rate and interest rate risks:
Foreign Currency Risk
The Company has foreign currency rate exposure to exchange rate fluctuations worldwide with particular exposure to the British pound, Euro, Canadian and Australian dollar. The Company uses freestanding foreign currency forward contracts to manage a portion of its exposure to changes in foreign currency exchange rates associated with its foreign currency denominated receivables, payables and forecasted earnings of foreign subsidiaries. Additionally, the Company uses foreign currency forward contracts designated as cash flow hedges to manage a portion of its exposure to changes in forecasted foreign currency denominated vendor payments. The amount of gains or losses relating to contracts designated as cash flow hedges that the Company expects to reclassify from AOCI to earnings over the next
12 months
is not material.
Interest Rate Risk
A portion of the debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include swaps and interest rate caps. The derivatives used to manage the risk associated with the Company’s floating rate debt include freestanding derivatives and derivatives designated as cash flow hedges. The Company also uses swaps to convert specific fixed-rate debt into variable-rate debt (i.e., fair value hedges) to manage the overall interest cost. For relationships designated as fair value hedges, changes in fair value of the derivatives are recorded in income with offsetting adjustments to the carrying amount of the hedged debt. The amount of gains or losses that the Company expects to reclassify from AOCI to earnings during the next
12 months
is not material.
The following table summarizes information regarding the gains/(losses) recognized in AOCI for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Designated hedging instruments
|
|
|
|
|
|
Interest rate contracts
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
(4
|
)
|
Foreign exchange contracts
|
—
|
|
|
3
|
|
|
2
|
|
Total
|
$
|
—
|
|
|
$
|
7
|
|
|
$
|
(2
|
)
|
The following table summarizes information regarding the gains/(losses) recognized in income on the Company’s freestanding derivatives for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
Non-designated hedging instruments
|
|
|
|
|
|
Foreign exchange contracts
(*)
|
$
|
(17
|
)
|
|
$
|
(15
|
)
|
|
$
|
(21
|
)
|
|
|
(*)
|
Included within operating expenses on the Consolidated Statements of Income, which is primarily offset by changes in the value of the underlying assets and liabilities.
|
Credit Risk and Exposure
The Company is exposed to counterparty credit risk in the event of nonperformance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral in instances in which financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the amounts at risk with each counterparty to such contracts, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties.
As of
December 31, 2016
, there were no significant concentrations of credit risk with any individual counterparty or groups of counterparties. However, approximately
19%
of the Company’s outstanding vacation ownership contract receivables portfolio relates to customers who reside in California. With the exception of the financing provided to customers of its vacation ownership businesses, the Company does not normally require collateral or other security to support credit sales.
Market Risk
The Company is subject to risks relating to the geographic concentrations of (i) areas in which the Company is currently developing and selling vacation ownership properties, (ii) sales offices in certain vacation areas and (iii) customers of the Company’s vacation ownership business, which in each case, may result in the Company’s results of operations being more sensitive to local and regional economic conditions and other factors, including competition, natural disasters and economic downturns, than the Company’s results of operations would be, absent such geographic concentrations. Local and regional economic conditions and other factors may differ materially from prevailing conditions in other parts of the world. Florida, California and Nevada are examples of areas with concentrations of sales offices. For the year ended
December 31, 2016
, approximately
12%
,
10%
and
14%
of the Company’s VOI sales revenues were generated in sales offices located in Florida, California and Nevada, respectively.
Included within the Consolidated Statements of Income is net revenues generated from transactions in the state of Florida of approximately
14%
,
15%
and
14%
during
2016
,
2015
and
2014
, respectively, and
12%
of net revenues generated from transactions in the state of California during each of
2016
,
2015
and
2014
.
|
|
17.
|
Commitments and Contingencies
|
C
OMMITMENTS
Leases
The Company is committed to making rental payments under noncancelable operating leases covering various facilities and equipment. Future minimum lease payments required under noncancelable operating leases as of
December 31, 2016
are as follows:
|
|
|
|
|
|
Noncancelable
Operating
Leases
|
2017
|
$
|
93
|
|
2018
|
66
|
|
2019
|
56
|
|
2020
|
41
|
|
2021
|
34
|
|
Thereafter
|
184
|
|
|
474
|
|
The Company incurred total rental expense of
$81 million
during
2016
and
$83 million
during both
2015
and
2014
.
Purchase Commitments
In the normal course of business, the Company makes various commitments to purchase goods or services from specific suppliers, including those related to vacation ownership resort development and other capital expenditures. Purchase commitments made by the Company as of
December 31, 2016
aggregated
$568 million
, of which
$209 million
were related to the development of vacation ownership properties,
$152 million
were for information technology activities, and
$97 million
were for marketing related activities.
Letters of Credit
As of
December 31, 2016
, the Company had
$69 million
of irrevocable standby letters of credit outstanding, of which
$1 million
were under its revolving credit facility. As of
December 31, 2015
, the Company had
$63 million
of irrevocable standby letters of credit outstanding, of which
$1 million
were under its revolving credit facility. Such letters of credit issued during
2016
and
2015
primarily supported the securitization of vacation ownership contract receivables fundings, certain insurance policies and development activity at the Company’s vacation ownership business.
Surety Bonds
A portion of the Company’s vacation ownership sales and developments are supported by surety bonds provided by affiliates of certain insurance companies in order to meet regulatory requirements of certain states. In the ordinary course of the Company’s business, it has assembled commitments from
12
surety providers in the amount of
$1.3 billion
, of which the Company had
$488 million
outstanding as of
December 31, 2016
. 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 the Company’s corporate credit rating. If the bonding capacity is unavailable or, alternatively, the terms and conditions and pricing of the bonding capacity are unacceptable to the Company, its vacation ownership business could be negatively impacted.
LITIGATION
The Company is involved in claims, legal and regulatory proceedings and governmental inquiries related to the Company’s business.
Wyndham Worldwide Corporation Litigation
The Company is involved in claims, legal and regulatory proceedings and governmental inquiries arising in the ordinary course of its business including but not limited to: for its hotel group business-breach of contract, fraud and bad faith claims between franchisors and franchisees in connection with franchise agreements and with owners in connection with management contracts, negligence, breach of contract, fraud, employment, consumer protection and other statutory claims asserted in connection with alleged acts or occurrences at owned, franchised or managed properties or in relation to guest reservations and bookings; for its destination network business-breach of contract, fraud and bad faith claims by affiliates and customers in connection with their respective agreements, negligence, breach of contract, fraud, consumer protection and other statutory claims asserted by members and guests for alleged injuries sustained at or acts or occurrences related to affiliated resorts and vacation rental properties and consumer protection and other statutory claims asserted by consumers; for its vacation ownership business-breach of contract, bad faith, conflict of interest, fraud, consumer protection and other statutory claims by property owners’ associations, owners and prospective owners in connection with the sale or use of VOIs or land, or the management of vacation ownership resorts, construction defect claims relating to vacation ownership units or resorts, and negligence, breach of contract, fraud, consumer protection and other statutory claims by guests for alleged injuries sustained at or acts or occurrences related to vacation ownership units or resorts; and for each of its businesses, bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters which may include claims of wrongful termination, retaliation, discrimination, harassment and wage and hour claims, claims of infringement upon third parties’ intellectual property rights, claims relating to information security, privacy and consumer protection, fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes.
The Company records an accrual for legal contingencies when it determines, after consultation with outside counsel, that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, the Company evaluates, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, the Company’s ability to make a reasonable estimate of loss. The Company reviews these accruals each reporting period and makes revisions based on changes in facts and circumstances including changes to its strategy in dealing with these matters.
The Company believes that it has adequately accrued for such matters with reserves of
$40 million
and
$29 million
as of
December 31, 2016
and
2015
, res
pectively.
Such reserves are exclusive of matters relating to the Company’s Separation. For matters not requiring accrual, the Company believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although the Company believes that its accruals are adequate and/or that it has valid defenses in these matters, unfavorable results could occur. As such, an adverse outcome from such proceedings for which claims are awarded in excess of the amounts accrued, if any, could be material to the Company with respect to earnings and/or cash flows in any given reporting period. The Company had receivables of
$20 million
as of December 31, 2016 for certain matters which are covered by insurance and were included in other current assets on its Consolidated Balance Sheet. As of
December 31, 2016
, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to
$37 million
in excess of recorded accruals. However, the Company does not believe that the impact of such litigation should result in a material liability to the Company in relation to its consolidated financial position or liquidity.
Cendant Litigation
Under the Separation agreement, the Company agreed to be responsible for
37.5%
of certain of Cendant’s contingent and other corporate liabilities and associated costs, including certain contingent litigation. Since the Separation, Cendant settled the majority of the lawsuits pending on the date of the Separation. See also Note 23 - Separation Adjustments and Transactions with Former Parent and Subsidiaries regarding contingent litigation liabilities resulting from the Separation.
G
UARANTEES
/
INDEMNIFICATIONS
Standard Guarantees/Indemnifications
In the ordinary course of business, the Company enters into agreements that contain standard guarantees and indemnities whereby the Company indemnifies 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 the Company’s 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. While a majority of these guarantees and indemnifications extend only for the duration of the underlying agreement, some survive the expiration of the agreement. The Company is 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, the Company maintains insurance coverage that may mitigate any potential payments.
Other Guarantees/Indemnifications
Hotel Group
From time to time, the Company may enter into a hotel management agreement that provides the hotel owner with a guarantee of a certain level of profitability based upon various metrics. Under such an agreement, the Company would be required to compensate such hotel owner for any profitability shortfall over the life of the management agreement up to a specified aggregate amount. For certain agreements, the Company may be able to recapture all or a portion of the shortfall payments in the event that future operating results exceed targets. The original terms of the Company’s existing guarantees range from
8
to
10 years
. As of
December 31, 2016
, the maximum potential amount of future payments that may be made under these guarantees was
$127 million
with a combined annual cap of
$31 million
. These guarantees have a remaining life of
4
to
8
years with a weighted average life of approximately
6 years
.
In connection with such performance guarantees, as of
December 31, 2016
, the Company maintained a liability of
$24 million
, of which
$17 million
was included in other non-current liabilities and
$7 million
was included in accrued expenses and other current liabilities on its Consolidated Balance Sheet. As of
December 31, 2016
, the Company also had a corresponding
$32 million
asset related to these guarantees, of which
$28 million
was included in other non-current assets and
$4 million
was included in other current assets on its Consolidated Balance Sheet. As of
December 31, 2015
, the Company maintained a liability of
$25 million
, of which
$24 million
was included in other non-current liabilities and
$1 million
was included in accrued expenses and other current liabilities on its Consolidated Balance Sheet. As of
December 31, 2015
, the Company also had a corresponding
$35 million
asset related to the guarantees, of which
$31 million
was included in other non-current assets and
$4 million
was included in other current assets on its Consolidated Balance Sheet. Such assets are being amortized on a straight-line basis over the life of the agreements. The amortization expense for the assets noted above was
$4 million
during both
2016
and
2015
.
For guarantees subject to recapture provisions, the Company had a receivable of
$36 million
as of
December 31, 2016
, which was included in other non-current assets on its Consolidated Balance Sheet. As of
December 31, 2015
, the Company had a receivable of
$32 million
, of which
$1 million
was included in other current assets and
$31 million
was included in other non-current assets on its Consolidated Balance Sheet. Such receivables were the result of payments made to date that are subject to recapture and which the Company believes will be recoverable from future operating performance.
Vacation Ownership
In the ordinary course of business, the Company’s 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. The Company 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, the Company will agree to reimburse certain owner associations up to
75%
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 the discretion of the Company on an annual basis). The maximum potential future payments that the Company could be required to make under these guarantees were approximately
$370 million
as of
December 31, 2016
. The Company 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 the Company. Additionally, should the Company be required to fund the deficit through the payment of any owners’ assessments under these guarantees, the Company would be permitted access to the property for its own use and may use that property to engage in revenue-producing activities, such as rentals. During
2016
,
2015
and
2014
, the Company made payments related to these guarantees of
$13 million
,
$15 million
and
$17 million
, respectively. As of
December 31, 2016
and
2015
, the Company maintained a liability in connection with these guarantees of
$33 million
and
$34 million
, respectively, on its Consolidated Balance Sheets.
The Company has guaranteed to repurchase completed properties located in Las Vegas, Nevada and St. Thomas from third-party developers subject to the properties meeting the Company’s vacation ownership resort standards and provided that the third-party developers have not sold the properties to another party (see Note 9 - Inventory).
As part of WAAM Fee-for-Service, the Company may guarantee to reimburse the developer a certain payment or to purchase from the developer, inventory associated with the developer’s resort property for a percentage of the original sale price if certain future conditions exist. As of
December 31, 2016
the maximum potential future payments that the Company could be required to make under these guarantees were approximately
$49 million
. As of
December 31, 2016
and
2015
, the Company had no recognized liabilities in connection with these guarantees.
|
|
18.
|
Accumulated Other Comprehensive (Loss)/Income
|
The components of AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pretax
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains/(Losses) on Cash Flow Hedges
|
|
Defined Benefit Pension Plans
|
|
AOCI
|
Balance as of December 31, 2013
|
$
|
111
|
|
|
$
|
(8
|
)
|
|
$
|
(4
|
)
|
|
$
|
99
|
|
Period change
|
(124
|
)
|
|
—
|
|
|
(8
|
)
|
|
(132
|
)
|
Balance as of December 31, 2014
|
(13
|
)
|
|
(8
|
)
|
|
(12
|
)
|
|
(33
|
)
|
Period change
|
(126
|
)
|
|
8
|
|
|
3
|
|
|
(115
|
)
|
Balance as of December 31, 2015
|
(139
|
)
|
|
—
|
|
|
(9
|
)
|
|
(148
|
)
|
Period change
|
(86
|
)
|
|
—
|
|
|
2
|
|
|
(84
|
)
|
Balance as of December 31, 2016
|
$
|
(225
|
)
|
|
$
|
—
|
|
|
$
|
(7
|
)
|
|
$
|
(232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains/(Losses) on Cash Flow Hedges
|
|
Defined Benefit Pension Plans
|
|
AOCI
|
Balance as of December 31, 2013
|
$
|
18
|
|
|
$
|
4
|
|
|
$
|
1
|
|
|
$
|
23
|
|
Period change
|
32
|
|
|
—
|
|
|
2
|
|
|
34
|
|
Balance as of December 31, 2014
|
50
|
|
|
4
|
|
|
3
|
|
|
57
|
|
Period change
|
20
|
|
|
(3
|
)
|
|
—
|
|
|
17
|
|
Balance as of December 31, 2015
|
70
|
|
|
1
|
|
|
3
|
|
|
74
|
|
Period change
|
46
|
|
|
—
|
|
|
(1
|
)
|
|
45
|
|
Balance as of December 31, 2016
|
$
|
116
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net of Tax
|
Foreign Currency Translation Adjustments
|
|
Unrealized Gains/(Losses) on Cash Flow Hedges
|
|
Defined Benefit Pension Plans
|
|
AOCI
|
Balance as of December 31, 2013
|
$
|
129
|
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
|
$
|
122
|
|
Period change
|
(92
|
)
|
|
—
|
|
|
(6
|
)
|
|
(98
|
)
|
Balance as of December 31, 2014
|
37
|
|
|
(4
|
)
|
|
(9
|
)
|
|
24
|
|
Period change
|
(106
|
)
|
|
5
|
|
|
3
|
|
|
(98
|
)
|
Balance as of December 31, 2015
|
(69
|
)
|
|
1
|
|
|
(6
|
)
|
|
(74
|
)
|
Period change
|
(40
|
)
|
|
—
|
|
|
1
|
|
|
(39
|
)
|
Balance as of December 31, 2016
|
$
|
(109
|
)
|
|
$
|
1
|
|
|
$
|
(5
|
)
|
|
$
|
(113
|
)
|
Currency translation adjustments exclude income taxes related to investments in foreign subsidiaries where the Company intends to reinvest the undistributed earnings indefinitely in those foreign operations.
|
|
19.
|
Stock-Based Compensation
|
The Company has a stock-based compensation plan available to grant RSUs, SSARs, PSUs and other stock-based awards to key employees, non-employee directors, advisors and consultants. Under the Wyndham Worldwide Corporation 2006 Equity and Incentive Plan, as amended, a maximum of
36.7 million
shares of common stock may be awarded. As of
December 31, 2016
,
15.8 million
shares remained available.
Incentive Equity Awards Granted by the Company
The activity related to incentive equity awards granted by the Company for the year ended
December 31, 2016
consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RSUs
|
|
PSUs
|
|
SSARs
|
|
Number of RSUs
|
|
Weighted Average Grant Price
|
|
Number of PSUs
|
|
Weighted Average Grant Price
|
|
Number of SSARs
|
|
Weighted Average Exercise Price
|
Balance as of December 31, 2015
|
1.6
|
|
|
$
|
73.75
|
|
|
0.6
|
|
|
$
|
73.60
|
|
|
0.8
|
|
|
$
|
46.45
|
|
Granted
(a)
|
0.9
|
|
|
71.63
|
|
|
0.2
|
|
|
71.65
|
|
|
0.1
|
|
|
71.65
|
|
Vested/exercised
|
(0.7
|
)
|
|
65.55
|
|
|
(0.2
|
)
|
|
60.24
|
|
|
(0.4
|
)
|
|
28.60
|
|
Canceled
|
(0.1
|
)
|
|
76.68
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Balance as of December 31, 2016
|
1.7
|
|
(b)(c)
|
75.81
|
|
|
0.6
|
|
(d)
|
77.84
|
|
|
0.5
|
|
(e)(f)
|
68.78
|
|
|
|
(a)
|
Primarily represents awards granted by the Company on
February 25, 2016
.
|
|
|
(b)
|
Aggregate unrecognized compensation expense related to RSUs was
$90 million
as of
December 31, 2016
, which is expected to be recognized over a weighted average period of
2.5 years
.
|
|
|
(c)
|
Approximately
1.7 million
RSUs outstanding as of
December 31, 2016
are expected to vest over time.
|
|
|
(d)
|
Maximum aggregate unrecognized compensation expense related to PSUs was
$25 million
as of
December 31, 2016
, which is expected to be recognized over a weighted average period of
1.8
years.
|
|
|
(e)
|
Aggregate unrecognized compensation expense related to SSARs was
$3 million
as of
December 31, 2016
, which is expected to be recognized over a weighted average period of
2.5 years
.
|
|
|
(f)
|
Approximately
0.2 million
SSARs are exercisable as of
December 31, 2016
. The Company assumes that all unvested SSARs are expected to vest over time. SSARs outstanding as of
December 31, 2016
had an intrinsic value of
$6 million
and have a weighted average remaining contractual life of
3.4 years
.
|
During
2016
,
2015
and
2014
, the Company granted incentive equity awards totaling
$64 million
,
$61 million
and
$54 million
, respectively, to the Company’s key employees and senior officers of Wyndham in the form of RSUs and SSARs. The
2016
,
2015
and
2014
awards will vest ratably over a period of
four
years. In addition, during
2016
,
2015
and
2014
, the Company approved grants of incentive equity awards totaling
$17 million
,
$16 million
and
$14 million
respectively, to key employees and senior officers of Wyndham in the form of PSUs. These awards cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics.
The fair value of SSARs granted by the Company during
2016
,
2015
and
2014
was estimated on the date of the grant using the Black-Scholes option-pricing model with the relevant weighted average assumptions outlined in the table below. Expected volatility is based on both historical and implied volatilities of the Company’s stock over the estimated expected life of the SSARs. The expected life represents the period of time the SSARs are expected to be outstanding and is based on historical experience given consideration to the contractual terms and vesting periods of the SSARs. The risk free interest rate is based on yields on U.S. Treasury strips with a maturity similar to the estimated expected life of the SSARs. The projected dividend yield was based on the Company’s anticipated annual dividend divided by the price of the Company’s stock on the date of the grant.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SSARs Issued in
|
|
2016
|
|
2015
|
|
2014
|
Grant date fair value
|
$
|
13.70
|
|
|
$
|
18.55
|
|
|
$
|
20.36
|
|
Grant date strike price
|
$
|
71.65
|
|
|
$
|
91.81
|
|
|
$
|
72.97
|
|
Expected volatility
|
27.81
|
%
|
|
25.38
|
%
|
|
35.86
|
%
|
Expected life
|
5.2 years
|
|
|
5.1 years
|
|
|
5.1 years
|
|
Risk free interest rate
|
1.33
|
%
|
|
1.64
|
%
|
|
1.54
|
%
|
Projected dividend yield
|
2.79
|
%
|
|
1.83
|
%
|
|
1.92
|
%
|
Stock-Based Compensation Expense
The Company recorded stock-based compensation expense of
$68 million
,
$58 million
and
$57 million
during
2016
,
2015
and
2014
, respectively, related to the incentive equity awards granted to key employees and senior officers by the Company. During
2016
,
2015
and
2014
, the Company increased its pool of excess tax benefits available to absorb tax deficiencies (“APIC Pool”) by
$9 million
,
$17 million
and
$34 million
, respectively, due to the vesting of RSUs and PSUs, as well as the exercise of SSARs. As of
December 31, 2016
, the Company’s APIC Pool balance was
$138 million
.
The Company paid
$36 million
,
$42 million
and
$64 million
of taxes for the net share settlement of incentive equity awards during
2016
,
2015
and
2014
, respectively. Such amounts are included within financing activities on the Consolidated Statements of Cash Flows.
|
|
20.
|
Employee Benefit Plans
|
Defined Contribution Benefit Plans
Wyndham sponsors domestic defined contribution savings plans and a domestic deferred compensation plan that provide eligible employees of the Company an opportunity to accumulate funds for retirement. The Company matches the contributions of participating employees on the basis specified by each plan. The Company’s cost for these plans was
$36 million
during both
2016
and
2015
and
$31 million
during
2014
.
In addition, the Company contributes to several foreign employee benefit contributory plans which also provide eligible employees with an opportunity to accumulate funds for retirement. The Company’s contributory cost for these plans was
$22 million
during
2016
and
$21 million
during both
2015
and
2014
.
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans for certain foreign subsidiaries. Under these plans, benefits are based on an employee’s years of credited service and a percentage of final average compensation or as otherwise described by the plan. As of
December 31, 2016
and
2015
, the Company’s net pension liability of
$13 million
and
$15 million
, respectively, is reported as other non-current liabilities on the Consolidated Balance Sheets. As of
December 31, 2016
, the Company recorded
$5 million
, within AOCI on the Consolidated Balance Sheet as an unrecognized loss. As of
December 31, 2015
, the Company
recorded
$1 million
and
$8 million
within AOCI on the Consolidated Balance Sheet as an unrecognized prior service credit and unrecognized loss, respectively.
The Company’s policy is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts that the Company determines to be appropriate. The Company recorded pension expense of
$3 million
during each of
2016
,
2015
and
2014
.
The reportable segments presented below represent the Company’s operating segments for which separate financial information is available and which is utilized on a regular basis by its chief operating decision maker to assess performance and to allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon net revenues and “EBITDA”, which is defined 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, each of which is presented on the Consolidated Statements of Income. The Company believes that EBITDA is a useful measure of performance for its industry segments which, when considered with GAAP measures, the Company believes gives a more complete understanding of its operating performance. The Company’s presentation of EBITDA may not be comparable to similarly-titled measures used by other companies.
YEAR ENDED OR AS OF DECEMBER 31,
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel Group
|
|
Destination Network
|
|
Vacation
Ownership
|
|
Corporate
and
Other
(e)
|
|
Total
|
Net revenues
(a)
|
$
|
1,309
|
|
|
$
|
1,571
|
|
|
$
|
2,794
|
|
|
$
|
(75
|
)
|
|
$
|
5,599
|
|
EBITDA
|
391
|
|
|
356
|
|
|
694
|
|
|
(110
|
)
|
|
1,331
|
|
Depreciation and amortization
|
75
|
|
|
92
|
|
|
53
|
|
|
32
|
|
|
252
|
|
Segment assets
|
1,943
|
|
|
2,564
|
|
|
5,060
|
|
|
252
|
|
|
9,819
|
|
Capital expenditures
|
42
|
|
|
62
|
|
|
68
|
|
|
19
|
|
|
191
|
|
YEAR ENDED OR AS OF DECEMBER 31,
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel Group
|
|
Destination Network
|
|
Vacation
Ownership
|
|
Corporate
and
Other
(e)
|
|
Total
|
Net revenues
(b)
|
$
|
1,297
|
|
|
$
|
1,538
|
|
|
$
|
2,772
|
|
|
$
|
(71
|
)
|
|
$
|
5,536
|
|
EBITDA
|
349
|
|
|
367
|
|
|
687
|
|
|
(137
|
)
|
|
1,266
|
|
Depreciation and amortization
|
69
|
|
|
90
|
|
|
47
|
|
|
28
|
|
|
234
|
|
Segment assets
(d)
|
1,832
|
|
|
2,656
|
|
|
4,928
|
|
|
175
|
|
|
9,591
|
|
Capital expenditures
|
52
|
|
|
67
|
|
|
81
|
|
|
22
|
|
|
222
|
|
YEAR ENDED OR AS OF DECEMBER 31,
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hotel Group
|
|
Destination Network
|
|
Vacation
Ownership
|
|
Corporate
and
Other
(e)
|
|
Total
|
Net revenues
(c)
|
$
|
1,101
|
|
|
$
|
1,604
|
|
|
$
|
2,638
|
|
|
$
|
(62
|
)
|
|
$
|
5,281
|
|
EBITDA
|
327
|
|
|
335
|
|
|
660
|
|
|
(141
|
)
|
|
1,181
|
|
Depreciation and amortization
|
61
|
|
|
96
|
|
|
47
|
|
|
29
|
|
|
233
|
|
Segment assets
(d)
|
1,755
|
|
|
2,693
|
|
|
4,868
|
|
|
252
|
|
|
9,568
|
|
Capital expenditures
|
55
|
|
|
74
|
|
|
85
|
|
|
21
|
|
|
235
|
|
|
|
(a)
|
Includes
$67 million
of intercompany segment revenues in the Company’s Hotel Group segment comprised of (i)
$56 million
of intersegment licensing fees for use of the Wyndham trade name, (ii)
$4 million
of room revenues at a Company owned hotel and (iii)
$7 million
of other fees primarily associated with the Wyndham Rewards program. Such revenues are offset in expenses at the Company’s Vacation Ownership segment. In addition, includes $
8 million
of intercompany segment revenues in the Company’s Destination Network segment for call center services provided to the Company’s Hotel Group segment.
|
|
|
(b)
|
Includes
$71 million
of intercompany segment revenues in the Company’s Hotel Group segment comprised of (i)
$57 million
of intersegment licensing fees for use of the Wyndham trade name, (ii)
$8 million
of room revenues at a Company owned hotel and (iii)
$6 million
of other fees primarily associated with the Wyndham Rewards program. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.
|
|
|
(c)
|
Includes
$62 million
of intercompany segment revenues in the Company’s Hotel Group segment comprised of (i)
$41 million
of intersegment licensing fees for use of the Wyndham trade name, (ii)
$8 million
of room revenues at a Company owned hotel, (iii)
$7 million
of hotel management reimbursable fees and (iv)
$6 million
of other revenues primarily associated with the Wyndham Rewards program. Such revenues are offset in expenses at the Company’s Vacation Ownership segment.
|
|
|
(d)
|
Reflects the impact of the adoption of the new accounting standards related to the balance sheet classification of deferred taxes and the presentation of debt issuance costs during 2016. See Note 2 - Summary of Significant Accounting Policies for additional information regarding the adoption of this guidance.
|
|
|
(e)
|
Includes the elimination of transactions between segments.
|
Provided below is a reconciliation of EBITDA to net income attributable to Wyndham shareholders.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2016
|
|
2015
|
|
2014
|
EBITDA
|
$
|
1,331
|
|
|
$
|
1,266
|
|
|
$
|
1,181
|
|
Depreciation and amortization
|
252
|
|
|
234
|
|
|
233
|
|
Interest expense
|
136
|
|
|
125
|
|
|
113
|
|
Early extinguishment of debt
|
11
|
|
|
—
|
|
|
—
|
|
Interest income
|
(8
|
)
|
|
(9
|
)
|
|
(10
|
)
|
Income before income taxes
|
940
|
|
|
916
|
|
|
845
|
|
Provision for income taxes
|
328
|
|
|
304
|
|
|
316
|
|
Net income
|
612
|
|
|
612
|
|
|
529
|
|
Net income attributable to noncontrolling interest
|
(1
|
)
|
|
—
|
|
|
—
|
|
Net income attributable to Wyndham shareholders
|
$
|
611
|
|
|
$
|
612
|
|
|
$
|
529
|
|
The geographic segment information provided below is classified based on the geographic location of the Company’s subsidiaries.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
United
Kingdom
|
|
Netherlands
|
|
All Other
Countries
|
|
Total
|
Year Ended or As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
4,238
|
|
|
$
|
243
|
|
|
$
|
253
|
|
|
$
|
865
|
|
|
$
|
5,599
|
|
Net long-lived assets
|
|
2,945
|
|
|
378
|
|
|
269
|
|
|
478
|
|
|
4,070
|
|
Year Ended or As of December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
4,248
|
|
|
$
|
272
|
|
|
$
|
239
|
|
|
$
|
777
|
|
|
$
|
5,536
|
|
Net long-lived assets
|
|
2,992
|
|
|
410
|
|
|
285
|
|
|
398
|
|
|
4,085
|
|
Year Ended or As of December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
Net revenues
|
|
$
|
3,892
|
|
|
$
|
298
|
|
|
$
|
276
|
|
|
$
|
815
|
|
|
$
|
5,281
|
|
Net long-lived assets
|
|
3,011
|
|
|
433
|
|
|
317
|
|
|
404
|
|
|
4,165
|
|
|
|
22.
|
Restructuring, Impairments and Other Charges
|
2016 Restructuring Plans
During 2016, the Company recorded
$15 million
of charges related to restructuring initiatives, primarily focused on enhancing organizational efficiency and rationalizing existing facilities which included the closure of
four
vacation ownership sales offices. In connection with these initiatives, the Company initially recorded
$12 million
of personnel-related costs, a
$2 million
non-cash charge and
$2 million
of facility-related expenses. It subsequently reversed
$1 million
of previously recorded personnel-related costs and reduced its liability with
$5 million
of cash payments The remaining liability of
$8 million
as of
December 31, 2016
is expected to be paid primarily by the end of 2017.
Total restructuring costs by segment are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel-related
(a)
|
|
Facility-related
|
|
Asset Impairments
(b)
|
|
Total
|
Hotel Group
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Destination Network
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Vacation Ownership
|
4
|
|
|
2
|
|
|
2
|
|
|
8
|
|
|
$
|
11
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
15
|
|
(a)
Represents severance costs incurred across the Company’s businesses resulting from a reduction of
524
employees.
(b)
Represents the write-off of assets from sales office closures.
2015 Restructuring Plans
During 2015, the Company recorded
$6 million
of restructuring charges resulting from a realignment of brand services and call center operations within its hotel group business, a rationalization of international operations within its destination network business and a reorganization of the sales function within its vacation ownership business. In connection with these initiatives, the Company initially recorded
$7 million
of personnel-related costs and a
$1 million
non-cash asset impairment charge associated with a facility. It subsequently reversed
$2 million
of previously recorded personnel-related costs and reduced its liability with
$2 million
of cash payments. During
2016
, the Company paid its remaining liability with
$3 million
of cash payments.
Total restructuring costs by segment by are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personnel-related
(a)
|
|
Asset Impairment
(b)
|
|
Total
|
Hotel Group
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Destination Network
|
1
|
|
|
1
|
|
|
2
|
|
Vacation Ownership
|
1
|
|
|
—
|
|
|
1
|
|
|
$
|
5
|
|
|
$
|
1
|
|
|
$
|
6
|
|
(a)
Represents severance cost incurred across the Company’s businesses resulting from a reduction of
361
employees.
(b)
Represents the non-cash asset impairment charge associated with a facility.
2014 Restructuring Plans
During 2014, the Company implemented restructuring initiatives at its destination network and hotel group businesses, primarily focused on improving the alignment of the organizational structure of each business with their strategic objectives. In connection with these initiatives, the Company recorded
$6 million
of personnel-related costs, a
$5 million
non-cash charge to write-off information technology assets and
$1 million
of costs related to contract terminations. During
2015
, the Company reduced its remaining liability with
$6 million
of cash payments and reversed
$1 million
related to previously recorded contract termination costs.
The Company has additional restructuring plans which were implemented prior to 2014. During 2016, the Company reduced its liability for such plans with
$1 million
of cash payments. The remaining liability of
$1 million
as of
December 31, 2016
, all of which is related to leased facilities, is expected to be paid by 2020.
The activity associated with all of the Company’s restructuring plans is summarized by category as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
December 31,
2013
|
|
2014 Activity
|
|
Liability as of
December 31,
2014
|
|
|
Costs
Recognized
|
|
Cash
Payments
|
|
Other
|
|
Personnel-Related
|
$
|
6
|
|
|
$
|
6
|
|
(a)
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
6
|
|
Facility-Related
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4
|
|
Contract Terminations
|
1
|
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
(c)
|
1
|
|
Asset Impairments
|
—
|
|
|
5
|
|
(b)
|
—
|
|
|
(5
|
)
|
(b)
|
—
|
|
|
$
|
11
|
|
|
$
|
12
|
|
|
$
|
(6
|
)
|
|
$
|
(6
|
)
|
|
$
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
December 31,
2014
|
|
2015 Activity
|
|
Liability as of
December 31,
2015
|
|
|
Costs
Recognized
|
|
Cash
Payments
|
|
Other
|
|
Personnel-Related
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
3
|
|
Facility-Related
|
4
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
2
|
|
Contract Terminations
|
1
|
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
(d)
|
—
|
|
Asset Impairment
|
—
|
|
|
1
|
|
|
—
|
|
|
(1
|
)
|
(e)
|
—
|
|
|
$
|
11
|
|
|
$
|
6
|
|
|
$
|
(10
|
)
|
|
$
|
(2
|
)
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability as of
December 31,
2015
|
|
2016 Activity
|
|
Liability as of
December 31,
2016
|
|
|
Costs
Recognized
|
|
Cash
Payments
|
|
Other
|
|
Personnel-Related
|
$
|
3
|
|
|
$
|
11
|
|
|
$
|
(8
|
)
|
|
$
|
—
|
|
|
$
|
6
|
|
Facility-Related
|
2
|
|
|
2
|
|
|
(1
|
)
|
|
—
|
|
|
3
|
|
Asset Impairments
|
—
|
|
|
2
|
|
|
—
|
|
|
(2
|
)
|
(f)
|
—
|
|
|
$
|
5
|
|
|
$
|
15
|
|
|
$
|
(9
|
)
|
|
$
|
(2
|
)
|
|
$
|
9
|
|
|
|
(a)
|
Represents severance costs of
$4 million
and
$2 million
at the Company’s destination network and hotel group businesses, respectively, resulting from a reduction of
122
employees.
|
|
|
(b)
|
Represents the non-cash write-off of assets related to an information technology project at the Company’s destination network business.
|
|
|
(c)
|
Represents a reversal of previously recorded expenses at the Company’s hotel group business.
|
|
|
(d)
|
Represents a reversal of a portion of previously recorded expenses at the Company’s destination network business.
|
|
|
(e)
|
Represents the non-cash asset impairment charge associated with a facility at the Company's destination network business.
|
|
|
(f)
|
Represents the write-off of assets from sales office closures at the Company's vacation ownership business.
|
Loss on Sale
During 2014, the Company sold its U.K.-based camping business at its destination network business resulting in a
$20 million
loss. As a result of this transaction, the Company received
$1 million
of cash, net, reduced its net assets by
$11 million
, wrote-off
$6 million
of foreign currency translation adjustments and recorded a
$4 million
indemnification liability. Such loss is recorded within loss on sale and asset impairments on the Consolidated Statement of Income.
Impairments
During 2015, the Company recorded a
$7 million
non-cash impairment charge at its hotel group business related to the write-down of terminated in-process technology projects resulting from the decision to outsource its reservation system to a third-party partner. Such charge is recorded within loss on sale and asset impairments on the Consolidated Statement of Income.
During 2014, the Company recorded a
$7 million
non-cash impairment charge related to the write-down of an equity investment at its destination network business which was the result of a reduction in the fair value of the entity in which the Company has a minority ownership position. In addition, the Company recorded an
$8 million
non-cash impairment charge at its hotel group business related to the write-down of an investment in a joint venture, which was the result of the joint venture’s recurring losses and negative operating cash flows. Such amounts are recorded within loss on sale and asset impairments on the Consolidated Statement of Income.
Other Charges
During
2016
, the Company incurred a
$24 million
foreign exchange loss, primarily impacting cash, resulting from the Venezuelan government’s decision to devalue the exchange rate of its currency. Such loss is recorded within operating expenses on the Consolidated Statement of Income.
During
2016
, the Company recorded an additional
$7 million
charge related to the termination of a management contract at its hotel group business. During the third quarter of
2015
, the Company recorded a
$14 million
charge associated with the anticipated termination of such management contract. These charges were recorded within operating expenses on the Consolidated Statements of Income.
|
|
23.
|
Separation Adjustments and Transactions with Former Parent and
Subsidiaries
|
Transfer of Cendant Corporate Liabilities and Issuance
of Guarantees to Cendant and Affiliates
Pursuant to the Separation and Distribution Agreement, upon the distribution of the Company’s common stock to Cendant shareholders, the Company entered into certain guarantee commitments with Cendant (pursuant to the assumption of certain liabilities and the obligation to indemnify Cendant, Realogy and Travelport for such liabilities) and guarantee commitments related to deferred compensation arrangements with each of Cendant and Realogy. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and Cendant contingent and other corporate liabilities, of which the Company assumed and is responsible for
37.5%
while Realogy is responsible for the remaining
62.5%
. The remaining amount of liabilities which were assumed by the Company in connection with the Separation was
$23 million
and
$34 million
as of
December 31, 2016
and
2015
, respectively. These amounts were comprised of certain Cendant corporate liabilities which were recorded on the books of Cendant as well as additional liabilities which were established for guarantees issued at the date of Separation, related to unresolved contingent matters and others that could arise during the guarantee period. Regarding the guarantees, if any of the companies responsible for all or a portion of such liabilities were to default in its payment of costs or expenses related to any such liability, the Company would be responsible for a portion of the defaulting party or parties’ obligation(s). The Company also provided a default guarantee related to certain deferred compensation arrangements related to certain current and former senior officers and directors of Cendant, Realogy and Travelport. These arrangements were valued upon the Separation in accordance with the guidance for guarantees and recorded as liabilities on the Consolidated Balance Sheets. To the extent such recorded liabilities are not adequate to cover the ultimate payment amounts, such excess will be reflected as an expense to the results of operations in future periods.
As a result of the sale of Realogy on April 10, 2007, Realogy was required to post a letter of credit in an amount acceptable to the Company and Avis Budget Group (formerly known as Cendant) to satisfy its obligations for the Cendant legacy contingent liabilities. As of
December 31, 2016
, the letter of credit was
$53 million
.
As of
December 31, 2016
, the Company had
$23 million
of Separation related liabilities, comprised of
$20 million
for tax liabilities,
$1 million
for other contingent and corporate liabilities and
$2 million
of liabilities where the calculated guarantee amount exceeded the contingent liability assumed at the Separation Date. In connection with these liabilities, as of
December 31, 2016
,
$10 million
is recorded in accrued expenses and other current liabilities and
$13 million
is recorded in other non-current liabilities on the Consolidated Balance Sheet. During 2016, the Company recognized an
$11 million
benefit from an adjustment to certain contingent liabilities resulting from the Separation which was recorded in general and administrative expenses on the Consolidated Statement of Income. As of December 31, 2015, the Company had
$34 million
of Separation related liabilities of which
$19 million
was recorded in accrued expenses and other current liabilities and
$15 million
was recorded in other non-current liabilities on the Consolidated Balance Sheet. The Company will indemnify Cendant for these contingent liabilities and therefore any payments made to the third-party would be through the former Parent. The actual timing of payments relating to these liabilities is dependent on a variety of factors beyond the Company’s control. In addition, the Company had
$1 million
of receivables due from former Parent and subsidiaries primarily relating to income taxes, as of
December 31, 2016
and
2015
, which is recorded in other current assets on the Consolidated Balance Sheets.
Prior to the Separation, the Company and Realogy were included in the consolidated federal and state income tax returns of Cendant through the Separation date for the 2006 period then ended. The Company is generally liable for
37.5%
of certain contingent tax liabilities. In addition, each of the Company, Cendant and Realogy may be responsible for
100%
of certain of Cendant’s tax liabilities that will provide the responsible party with a future, offsetting tax benefit.
|
|
24.
|
Selected Quarterly Financial Data - (unaudited)
|
Provided below is selected unaudited quarterly financial data for
2016
and
2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenues
|
|
|
|
|
|
|
|
Hotel Group
|
$
|
295
|
|
|
$
|
334
|
|
|
$
|
364
|
|
|
$
|
316
|
|
Destination Network
|
385
|
|
|
384
|
|
|
486
|
|
|
317
|
|
Vacation Ownership
|
641
|
|
|
705
|
|
|
744
|
|
|
705
|
|
Corporate and Other
(*)
|
(18
|
)
|
|
(20
|
)
|
|
(21
|
)
|
|
(18
|
)
|
|
$
|
1,303
|
|
|
$
|
1,403
|
|
|
$
|
1,573
|
|
|
$
|
1,320
|
|
EBITDA
|
|
|
|
|
|
|
|
Hotel Group
|
$
|
84
|
|
|
$
|
101
|
|
|
$
|
107
|
|
|
$
|
99
|
|
Destination Network
|
81
|
|
|
85
|
|
|
138
|
|
|
53
|
|
Vacation Ownership
|
136
|
|
|
187
|
|
|
189
|
|
|
182
|
|
Corporate and Other
(*)
|
(34
|
)
|
|
(33
|
)
|
|
(32
|
)
|
|
(12
|
)
|
|
267
|
|
|
340
|
|
|
402
|
|
|
322
|
|
Less: Depreciation and amortization
|
62
|
|
|
63
|
|
|
63
|
|
|
65
|
|
Interest expense
|
33
|
|
|
34
|
|
|
34
|
|
|
34
|
|
Early extinguishment of debt
|
11
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Interest income
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Income before income taxes
|
163
|
|
|
245
|
|
|
307
|
|
|
225
|
|
Provision for income taxes
|
67
|
|
|
89
|
|
|
110
|
|
|
61
|
|
Net income
|
96
|
|
|
156
|
|
|
197
|
|
|
164
|
|
Net income attributable to noncontrolling interest
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
Net income attributable to Wyndham Shareholders
|
$
|
96
|
|
|
$
|
156
|
|
|
$
|
196
|
|
|
$
|
164
|
|
Per share information
|
|
|
|
|
|
|
|
Basic
|
$
|
0.85
|
|
|
$
|
1.40
|
|
|
$
|
1.79
|
|
|
$
|
1.54
|
|
Diluted
|
0.84
|
|
|
1.39
|
|
|
1.78
|
|
|
1.53
|
|
Diluted weighted average shares outstanding
|
114
|
|
|
112
|
|
|
110
|
|
|
108
|
|
Note: The sum of the quarters may not agree to the Consolidated Statement of Income for the year ended
December 31, 2016
due to rounding.
(*)
Includes the elimination of transactions between segments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net revenues
|
|
|
|
|
|
|
|
Hotel Group
|
$
|
292
|
|
|
$
|
334
|
|
|
$
|
357
|
|
|
$
|
314
|
|
Destination Network
|
369
|
|
|
383
|
|
|
476
|
|
|
310
|
|
Vacation Ownership
|
617
|
|
|
699
|
|
|
750
|
|
|
706
|
|
Corporate and Other
(*)
|
(16
|
)
|
|
(18
|
)
|
|
(19
|
)
|
|
(19
|
)
|
|
$
|
1,262
|
|
|
$
|
1,398
|
|
|
$
|
1,564
|
|
|
$
|
1,311
|
|
EBITDA
|
|
|
|
|
|
|
|
Hotel Group
|
$
|
76
|
|
|
$
|
96
|
|
|
$
|
83
|
|
|
$
|
94
|
|
Destination Network
|
105
|
|
|
84
|
|
|
134
|
|
|
44
|
|
Vacation Ownership
|
130
|
|
|
182
|
|
|
200
|
|
|
174
|
|
Corporate and Other
(*)
|
(34
|
)
|
|
(30
|
)
|
|
(35
|
)
|
|
(37
|
)
|
|
277
|
|
|
332
|
|
|
382
|
|
|
275
|
|
Less: Depreciation and amortization
|
56
|
|
|
58
|
|
|
59
|
|
|
61
|
|
Interest expense
|
26
|
|
|
30
|
|
|
33
|
|
|
37
|
|
Interest income
|
(3
|
)
|
|
(2
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Income before income taxes
|
198
|
|
|
246
|
|
|
292
|
|
|
179
|
|
Provision for income taxes
|
76
|
|
|
87
|
|
|
102
|
|
|
39
|
|
Net income
|
$
|
122
|
|
|
$
|
159
|
|
|
$
|
190
|
|
|
$
|
140
|
|
Per share information
|
|
|
|
|
|
|
|
Basic
|
$
|
1.01
|
|
|
$
|
1.34
|
|
|
$
|
1.62
|
|
|
$
|
1.22
|
|
Diluted
|
1.00
|
|
|
1.33
|
|
|
1.61
|
|
|
1.21
|
|
Diluted weighted average shares outstanding
|
122
|
|
|
120
|
|
|
118
|
|
|
116
|
|
Note: The sum of the quarters may not agree to the Consolidated Statement of Income for the year ended
December 31, 2015
due to rounding.
(*)
Includes the elimination of transactions between segments.
Dividend Increase Authorization
On February 10, 2017, the Company's Board of Directors authorized an increase of the quarterly dividend to
$0.58
per share.