Travel & Leisure Co. - Quarter Report: 2021 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
☑ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-32876
TRAVEL + LEISURE CO.
(Exact Name of Registrant as Specified in Its Charter)
Delaware | 20-0052541 | ||||||||||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||||||||||
6277 Sea Harbor Drive | 32821 | ||||||||||
Orlando, | Florida | (Zip Code) | |||||||||
(Address of Principal Executive Offices) | |||||||||||
(407) 626-5200
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
Common Stock, $0.01 par value per share | TNL | New York Stock Exchange | ||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☑ | Accelerated filer | ☐ | ||||||||||||||||||||
| Non-accelerated filer | ☐ | ||||||||||||||||||||||
Smaller reporting company | ☐ | ||||||||||||||||||||||
Emerging growth company | ☐ | ||||||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☑
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
86,356,226 shares of common stock outstanding as of September 30, 2021.
Table of Contents
| Page | ||||||||
| PART I | FINANCIAL INFORMATION | |||||||
| Item 1. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART II | OTHER INFORMATION | |||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| Item 5. | ||||||||
| Item 6. | ||||||||
1
GLOSSARY OF TERMS
The following terms and acronyms appear in the text of this report and have the definitions indicated below:
| Adjusted EBITDA | A non-GAAP measure, defined by the Company as Net income/(loss) from continuing operations before Depreciation and amortization, Interest expense (excluding Consumer financing interest), early extinguishment of debt, Interest income (excluding Consumer financing revenues) and income taxes. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, legacy items, transaction costs for acquisitions and divestitures, impairments, gains and losses on sale/disposition of business, and items that meet the conditions of unusual and/or infrequent. Legacy items include the resolution of and adjustments to certain contingent liabilities related to acquisitions of continuing businesses and dispositions, including the separation of Wyndham Hotels and Cendant, and the sale of the vacation rentals businesses. | ||||
| AOCL | Accumulated Other Comprehensive Loss | ||||
| ARN | Alliance Reservations Network | ||||
| ARPA | American Rescue Plan Act of 2021 | ||||
| AUD | Australian Dollar | ||||
| Awaze | Awaze Limited, formerly Compass IV Limited, an affiliate of Platinum Equity, LLC | ||||
| Board | Board of Directors | ||||
| CARES Act | Coronavirus Aid, Relief, and Economic Security Act | ||||
| Company | Travel + Leisure Co. and its subsidiaries | ||||
| COVID-19 | Novel coronavirus global pandemic | ||||
| Credit Agreement Amendment | The first amendment to the Company’s credit agreement governing its revolving credit facility and term loan B | ||||
| EPS | Earnings/(loss) Per Share | ||||
| FASB | Financial Accounting Standards Board | ||||
| GAAP | Generally Accepted Accounting Principles in the United States | ||||
| LIBOR | London Interbank Offered Rate | ||||
| Meredith | Meredith Corporation | ||||
| NQ | Non-Qualified stock options | ||||
| NZD | New Zealand Dollar | ||||
| PCAOB | Public Company Accounting Oversight Board | ||||
| PSU | Performance-vested restricted Stock Units | ||||
| Relief Period | Relief period of the Credit Agreement Amendment | ||||
| RSU | Restricted Stock Unit | ||||
| S&P | Standard & Poor’s Rating Services | ||||
| SEC | Securities and Exchange Commission | ||||
| SPE | Special Purpose Entity | ||||
| Spin-off | Spin-off of Wyndham Hotels & Resorts, Inc. | ||||
| SSAR | Stock-Settled Appreciation Rights | ||||
| Travel + Leisure Co. | Travel + Leisure Co. and its subsidiaries | ||||
| Vacasa | Vacasa LLC | ||||
| VIE | Variable Interest Entity | ||||
| VOCR | Vacation Ownership Contract Receivable | ||||
| VOI | Vacation Ownership Interest | ||||
| VPG | Volume Per Guest | ||||
| Wyndham Hotels | Wyndham Hotels & Resorts, Inc. | ||||
2
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of Travel + Leisure Co.
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Travel + Leisure Co. and subsidiaries (the "Company") as of September 30, 2021, the related condensed consolidated statements of income/(loss), comprehensive income/(loss), and deficit for the three-month and nine-month periods ended September 30, 2021 and 2020, and cash flows for the nine-month periods ended September 30, 2021 and 2020, and the related notes (collectively referred to as the "interim financial statements"). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated statements of (loss)/income, comprehensive (loss)/income, cash flows and equity/(deficit) for the year then ended (not presented herein); and in our report dated February 24, 2021, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
The interim financial statements are the responsibility of the Company's management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Deloitte & Touche LLP
Tampa, FL
October 27, 2021
3
TRAVEL + LEISURE CO.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
(In millions, except per share amounts)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net revenues | |||||||||||||||||||||||
| Service and membership fees | $ | 378 | $ | 291 | $ | 1,114 | $ | 845 | |||||||||||||||
| Vacation ownership interest sales | 344 | 196 | 810 | 273 | |||||||||||||||||||
| Consumer financing | 103 | 115 | 304 | 360 | |||||||||||||||||||
| Other | 14 | 12 | 36 | 37 | |||||||||||||||||||
| Net revenues | 839 | 614 | 2,264 | 1,515 | |||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Operating | 352 | 263 | 992 | 861 | |||||||||||||||||||
| Cost/(recovery) of vacation ownership interests | 43 | 22 | 105 | (26) | |||||||||||||||||||
| Consumer financing interest | 19 | 26 | 63 | 76 | |||||||||||||||||||
| General and administrative | 106 | 101 | 325 | 295 | |||||||||||||||||||
| Marketing | 101 | 84 | 261 | 247 | |||||||||||||||||||
| Depreciation and amortization | 31 | 32 | 93 | 94 | |||||||||||||||||||
| COVID-19 related costs | 1 | 14 | 3 | 81 | |||||||||||||||||||
| Asset impairments | — | 6 | — | 50 | |||||||||||||||||||
| Restructuring | — | 2 | (1) | 27 | |||||||||||||||||||
| Total expenses | 653 | 550 | 1,841 | 1,705 | |||||||||||||||||||
| Operating income/(loss) | 186 | 64 | 423 | (190) | |||||||||||||||||||
| Other (income), net | — | (5) | (2) | (11) | |||||||||||||||||||
| Interest expense | 47 | 52 | 147 | 138 | |||||||||||||||||||
| Interest (income) | (1) | (2) | (1) | (5) | |||||||||||||||||||
| Income/(loss) before income taxes | 140 | 19 | 279 | (312) | |||||||||||||||||||
| Provision/(benefit) for income taxes | 39 | (21) | 76 | (54) | |||||||||||||||||||
| Net income/(loss) from continuing operations | 101 | 40 | 203 | (258) | |||||||||||||||||||
| Loss on disposal of discontinued business, net of income taxes | — | — | (2) | — | |||||||||||||||||||
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 101 | $ | 40 | $ | 201 | $ | (258) | |||||||||||||||
| Basic earnings/(loss) per share | |||||||||||||||||||||||
| Continuing operations | $ | 1.16 | $ | 0.47 | $ | 2.35 | $ | (3.00) | |||||||||||||||
| Discontinued operations | — | — | (0.02) | — | |||||||||||||||||||
| $ | 1.16 | $ | 0.47 | $ | 2.33 | $ | (3.00) | ||||||||||||||||
| Diluted earnings/(loss) per share | |||||||||||||||||||||||
| Continuing operations | $ | 1.15 | $ | 0.47 | $ | 2.33 | $ | (3.00) | |||||||||||||||
| Discontinued operations | — | — | (0.03) | — | |||||||||||||||||||
| $ | 1.15 | $ | 0.47 | $ | 2.30 | $ | (3.00) | ||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
4
TRAVEL + LEISURE CO.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In millions)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 101 | $ | 40 | $ | 201 | $ | (258) | |||||||||||||||
| Other comprehensive (loss)/income, net of tax | |||||||||||||||||||||||
| Foreign currency translation adjustments, net of tax | (15) | 21 | (26) | (4) | |||||||||||||||||||
| Other comprehensive (loss)/income, net of tax | (15) | 21 | (26) | (4) | |||||||||||||||||||
| Comprehensive income/(loss) | $ | 86 | $ | 61 | $ | 175 | $ | (262) | |||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
5
TRAVEL + LEISURE CO.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
| September 30, 2021 | December 31, 2020 | ||||||||||
| Assets | |||||||||||
| Cash and cash equivalents | $ | 346 | $ | 1,196 | |||||||
| Restricted cash (VIE - $94 as of 2021 and $92 as of 2020) | 128 | 121 | |||||||||
| Trade receivables, net | 125 | 115 | |||||||||
| Vacation ownership contract receivables, net (VIE - $2,136 as of 2021 and $2,458 as of 2020) | 2,292 | 2,482 | |||||||||
| Inventory | 1,270 | 1,347 | |||||||||
| Prepaid expenses | 196 | 204 | |||||||||
| Property and equipment, net | 678 | 666 | |||||||||
| Goodwill | 962 | 964 | |||||||||
| Other intangibles, net | 222 | 131 | |||||||||
| Other assets | 382 | 387 | |||||||||
| Total assets | $ | 6,601 | $ | 7,613 | |||||||
| Liabilities and (deficit) | |||||||||||
| Accounts payable | $ | 60 | $ | 62 | |||||||
| Accrued expenses and other liabilities | 953 | 929 | |||||||||
| Deferred income | 394 | 447 | |||||||||
| Non-recourse vacation ownership debt (VIE) | 1,957 | 2,234 | |||||||||
| Debt | 3,386 | 4,184 | |||||||||
| Deferred income taxes | 700 | 725 | |||||||||
| Total liabilities | 7,450 | 8,581 | |||||||||
| Commitments and contingencies (Note 16) | |||||||||||
| Stockholders' (deficit): | |||||||||||
| Preferred stock, $0.01 par value, authorized 6,000,000 shares, none issued and outstanding | — | — | |||||||||
| Common stock, $0.01 par value, 600,000,000 shares authorized, 222,180,902 issued as of 2021 and 221,755,960 as of 2020 | 2 | 2 | |||||||||
| Treasury stock, at cost – 135,824,676 shares as of 2021 and 2020 | (6,508) | (6,508) | |||||||||
| Additional paid-in capital | 4,180 | 4,157 | |||||||||
| Retained earnings | 1,511 | 1,390 | |||||||||
| Accumulated other comprehensive loss | (42) | (16) | |||||||||
| Total stockholders’ (deficit) | (857) | (975) | |||||||||
| Noncontrolling interest | 8 | 7 | |||||||||
| Total (deficit) | (849) | (968) | |||||||||
| Total liabilities and (deficit) | $ | 6,601 | $ | 7,613 | |||||||
See Notes to Condensed Consolidated Financial Statements.
6
TRAVEL + LEISURE CO.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Operating activities | |||||||||||
| Net income/(loss) | $ | 201 | $ | (258) | |||||||
| Loss on disposal of discontinued business, net of income taxes | 2 | — | |||||||||
| Adjustments to reconcile net income/(loss) to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 93 | 94 | |||||||||
| Provision for loan losses | 120 | 391 | |||||||||
| Deferred income taxes | (27) | (134) | |||||||||
| Stock-based compensation | 24 | 14 | |||||||||
| Asset impairments | — | 50 | |||||||||
| Non-cash lease expense | 13 | 19 | |||||||||
| Non-cash interest | 17 | 16 | |||||||||
| Other, net | 5 | (2) | |||||||||
| Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: | |||||||||||
| Trade receivables | (9) | 24 | |||||||||
| Vacation ownership contract receivables | 60 | 205 | |||||||||
| Inventory | (14) | (107) | |||||||||
| Deferred income | (58) | (60) | |||||||||
| Accounts payable, accrued expenses, prepaid expenses, other assets and other liabilities | 8 | (28) | |||||||||
| Net cash provided by operating activities | 435 | 224 | |||||||||
| Investing activities | |||||||||||
| Property and equipment additions | (40) | (56) | |||||||||
| Acquisitions | (37) | — | |||||||||
| Purchase of investments | — | (50) | |||||||||
| Other, net | — | 8 | |||||||||
| Net cash used in investing activities | (77) | (98) | |||||||||
| Financing activities | |||||||||||
| Proceeds from non-recourse vacation ownership debt | 930 | 1,462 | |||||||||
| Principal payments on non-recourse vacation ownership debt | (1,202) | (1,556) | |||||||||
| Proceeds from debt | 10 | 1,065 | |||||||||
| Principal payments on debt | (561) | (521) | |||||||||
| Proceeds from notes issued | — | 643 | |||||||||
| Repayment of notes | (252) | (42) | |||||||||
| Repayments of vacation ownership inventory arrangement | — | (10) | |||||||||
| Payment of deferred acquisition consideration | (30) | (11) | |||||||||
| Dividends to shareholders | (79) | (112) | |||||||||
| Proceeds from issuance of common stock | 7 | 4 | |||||||||
| Repurchase of common stock | — | (128) | |||||||||
| Debt issuance/modification costs | (9) | (17) | |||||||||
| Net share settlement of incentive equity awards | (9) | (2) | |||||||||
| Net cash (used in)/provided by financing activities | (1,195) | 775 | |||||||||
| Effect of changes in exchange rates on cash, cash equivalents and restricted cash | (6) | (5) | |||||||||
| Net change in cash, cash equivalents and restricted cash | (843) | 896 | |||||||||
| Cash, cash equivalents and restricted cash, beginning of period | 1,317 | 502 | |||||||||
| Cash, cash equivalents and restricted cash, end of period | 474 | 1,398 | |||||||||
| Less: Restricted cash | 128 | 122 | |||||||||
| Cash and cash equivalents | $ | 346 | $ | 1,276 | |||||||
See Notes to Condensed Consolidated Financial Statements.
7
TRAVEL + LEISURE CO.
CONDENSED CONSOLIDATED STATEMENTS OF DEFICIT
(In millions)
(Unaudited)
| Common Shares Outstanding | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-controlling Interest | Total Deficit | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2020 | 86 | $ | 2 | $ | (6,508) | $ | 4,157 | $ | 1,390 | $ | (16) | $ | 7 | $ | (968) | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 29 | — | — | 29 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (13) | — | (13) | |||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | 3 | — | — | — | 3 | |||||||||||||||||||||||||||||||||||||||
| Net share settlement of stock-based compensation | — | — | — | (7) | — | — | — | (7) | |||||||||||||||||||||||||||||||||||||||
| Change in stock-based compensation | — | — | — | 7 | — | — | — | 7 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.30 per share) | — | — | — | — | (27) | — | — | (27) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2021 | 86 | 2 | (6,508) | 4,160 | 1,392 | (29) | 7 | (976) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 72 | — | — | 72 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 2 | — | 2 | |||||||||||||||||||||||||||||||||||||||
| Stock option exercises | — | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Net share settlement of stock-based compensation | — | — | — | (2) | — | — | — | (2) | |||||||||||||||||||||||||||||||||||||||
| Employee stock purchase program issuances | — | — | — | 3 | — | — | — | 3 | |||||||||||||||||||||||||||||||||||||||
| Change in stock-based compensation | — | — | — | 9 | — | — | — | 9 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.30 per share) | — | — | — | — | (27) | — | — | (27) | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2021 | 86 | 2 | (6,508) | 4,171 | 1,437 | (27) | 7 | (918) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 101 | — | — | 101 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (15) | — | (15) | |||||||||||||||||||||||||||||||||||||||
| Change in stock-based compensation | — | — | — | 8 | — | — | — | 8 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.30 per share) | — | — | — | — | (27) | — | — | (27) | |||||||||||||||||||||||||||||||||||||||
| Non-controlling interest ownership change | — | — | — | — | — | — | 1 | 1 | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2021 | 86 | $ | 2 | $ | (6,508) | $ | 4,180 | $ | 1,511 | $ | (42) | $ | 8 | $ | (849) | ||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
8
TRAVEL + LEISURE CO.
CONDENSED CONSOLIDATED STATEMENTS OF DEFICIT
(In millions)
(Unaudited)
| Common Shares Outstanding | Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Non-controlling Interest | Total Deficit | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2019 | 88 | $ | 2 | $ | (6,383) | $ | 4,118 | $ | 1,785 | $ | (52) | $ | 6 | $ | (524) | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (134) | — | — | (134) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (65) | — | (65) | |||||||||||||||||||||||||||||||||||||||
| Change in stock-based compensation | — | — | — | 1 | — | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | (3) | — | (125) | — | — | — | — | (125) | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.50 per share) | — | — | — | — | (44) | — | — | (44) | |||||||||||||||||||||||||||||||||||||||
| Balance as of March 31, 2020 | 85 | 2 | (6,508) | 4,119 | 1,607 | (117) | 6 | (891) | |||||||||||||||||||||||||||||||||||||||
| Net loss | — | — | — | — | (164) | — | — | (164) | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 40 | — | 40 | |||||||||||||||||||||||||||||||||||||||
| Net share settlement of stock-based compensation | — | — | — | (2) | — | — | — | (2) | |||||||||||||||||||||||||||||||||||||||
| Employee stock purchase program issuances | — | — | — | 4 | — | — | — | 4 | |||||||||||||||||||||||||||||||||||||||
| Change in stock-based compensation | — | — | — | 7 | — | — | — | 7 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.50 per share) | — | — | — | — | (44) | — | — | (44) | |||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2020 | 85 | 2 | (6,508) | 4,128 | 1,399 | (77) | 6 | (1,050) | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 40 | — | — | 40 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 21 | — | 21 | |||||||||||||||||||||||||||||||||||||||
| Issuance of shares | 1 | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||
| Change in stock-based compensation | — | — | — | 6 | — | — | — | 6 | |||||||||||||||||||||||||||||||||||||||
| Dividends ($0.30 per share) | — | — | — | — | (26) | — | — | (26) | |||||||||||||||||||||||||||||||||||||||
| Acquisition of a business | — | — | — | 14 | — | — | — | 14 | |||||||||||||||||||||||||||||||||||||||
| Non-controlling interest ownership change | — | — | — | — | — | — | 1 | 1 | |||||||||||||||||||||||||||||||||||||||
| Other | — | — | — | — | 1 | — | — | 1 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2020 | 86 | $ | 2 | $ | (6,508) | $ | 4,148 | $ | 1,414 | $ | (56) | $ | 7 | $ | (993) | ||||||||||||||||||||||||||||||||
See Notes to Condensed Consolidated Financial Statements.
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TRAVEL + LEISURE CO.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
(Unaudited)
1. Background and Basis of Presentation
Background
On January 5, 2021, Wyndham Destinations, Inc. acquired the Travel + Leisure brand and related assets from Meredith Corporation. The aggregate purchase price was $100 million, of which $35 million was paid at closing with an additional $20 million paid during the second quarter of 2021. The remaining payments are to be completed by June 2024. In connection with this acquisition, Wyndham Destinations, Inc. changed its name to Travel + Leisure Co. and its ticker symbol to TNL on February 17, 2021.
Travel + Leisure Co. and its subsidiaries (collectively, “Travel + Leisure Co.,” or the “Company,” formerly Wyndham Destinations, Inc.) is a global provider of hospitality services and travel products. The Company has two reportable segments: Vacation Ownership (formerly Wyndham Vacation Clubs) and Travel and Membership (formerly Panorama or Vacation Exchange). In connection with the Travel + Leisure brand acquisition the Company updated the names and composition of its reportable segments to better align with how the segments are managed.
The Vacation Ownership segment develops, markets and sells vacation ownership interests (“VOIs”) to individual consumers, provides consumer financing in connection with the sale of VOIs, and provides property management services at resorts. This segment is wholly comprised of the Wyndham Destinations business line, formerly Wyndham Vacation Clubs. The following brands operate under the Wyndham Destinations business line: Club Wyndham, WorldMark by Wyndham, Shell Vacations Club, Margaritaville Vacation Club by Wyndham, and Presidential Reserve by Wyndham.
The Travel and Membership segment operates a variety of travel businesses, including three vacation exchange brands, a home exchange network, travel technology platforms, travel memberships, and direct-to-consumer rentals. This segment is comprised of the Panorama and new Travel + Leisure Group business lines. With the formation of Travel + Leisure Group, the Company decided that the operations of its Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of this new business line and therefore transitioned the management of the Extra Holidays business to the Travel and Membership segment. As such, the Company reclassified the results of its Extra Holidays business, which was previously reported within the Vacation Ownership segment, into the Travel and Membership segment. Prior period segment information has been restated to reflect this change. The following brands operate under the Panorama business line: RCI, Panorama Travel Solutions, Alliance Reservations Network (“ARN”), 7Across, The Registry Collection, and Love Home Swap. The Travel + Leisure Group operates go.travelandleisure.com, Travel + Leisure Travel Clubs, and Extra Holidays brands.
Impact of COVID-19
The results of operations for the three and nine months ended September 30, 2021 and 2020 include impacts related to the novel coronavirus global pandemic (“COVID-19”), which have been significantly negative for the travel industry, the Company, its customers, and employees. In response to COVID-19, the Vacation Ownership segment temporarily closed its resorts in mid-March 2020 across the globe and suspended its sales and marketing operations. In the Travel and Membership segment, affiliate resort closures and regional travel restrictions contributed to decreased bookings and increased cancellations. As a result, the Company significantly reduced its workforce and furloughed thousands of associates in the second quarter of 2020. As of September 30, 2021, the Company has reopened all of the resorts and sales offices in North America that it expects to reopen. The remaining closed resorts and sales offices that the Company intends to reopen are located in the South Pacific and are expected to reopen in 2021, contingent upon the lifting of government imposed travel restrictions. As a result of these reopenings the majority of the Company’s furloughed employees have returned to work.
As a precautionary measure to enhance liquidity, in the first quarter of 2020 the Company drew down its $1.0 billion revolving credit facility and suspended its share repurchase activity, and in the third quarter of 2020 amended the credit agreement governing its revolving credit facility and term loan B, which provided flexibility during the relief period spanning from July 15, 2020 through April 1, 2022, or upon earlier termination by the Company. The Company has since repaid its $1.0 billion revolving credit facility. See Note 10—Debt for additional details. On October 22, 2021, the Company renewed the credit agreement governing its $1.0 billion revolving credit facility and term loan B. This renewal updated the terms and maturity date of the revolving credit facility, extending the maturity date to October 2026. In
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addition, this renewal terminated the relief period and restrictions regarding share repurchases, dividends, and acquisitions established by the 2020 amendment. See Note 25—Subsequent Events for additional details.
Given these significant COVID-19 related events, the Company’s revenues were negatively impacted and while revenues are continuing to recover, not all product and service lines have yet reached pre-pandemic levels. The Company reversed $12 million and $28 million of COVID-19 charges during the three and nine months ended September 30, 2021, compared to $31 million and $377 million of charges incurred for the same periods last year. The $12 million and $28 million of net reversals during the three and nine months ended September 30, 2021 were primarily due to $21 million and $47 million of releases of the COVID-19 related allowance for loan losses, as the Company has continued to experience improvements in net new defaults. In connection with this allowance release, the Company recorded $8 million and $17 million of costs of vacation ownership interests during the three and nine months ended September 30, 2021 representing the associated reduction in estimated recoveries. Refer to Note 20—COVID-19 Related Items for additional details.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q include the accounts and transactions of Travel + Leisure Co., as well as the entities in which Travel + Leisure Co. directly or indirectly has a controlling financial interest. The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with Generally Accepted Accounting Principles in the U.S. (“GAAP”). All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements. In addition, prior period segment results have been restated to reflect the aforementioned reclassification of the Extra Holidays business into the Travel and Membership segment.
The Company presents an unclassified balance sheet which conforms to that of the Company’s peers and industry practice.
In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates and assumptions. In management’s opinion, the Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2020 Consolidated Financial Statements included in its Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 24, 2021.
2. New Accounting Pronouncements
Recently Issued Accounting Pronouncements
Reference Rate Reform. In March 2020, the Financial Accounting Standards Board (“FASB”) issued guidance, amended in January 2021, which provides optional expedients and exceptions for applying GAAP to contract modifications and hedging relationships, subject to meeting certain criteria that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued. This guidance became effective on March 12, 2020, and will apply through December 31, 2022. The transition from LIBOR based benchmark is expected to begin January 1, 2022 and to be completed when U.S. Dollar (“USD”) LIBOR rates are phased out by June 30, 2023. The Company is currently evaluating the impact of the transition from LIBOR on its financial statements and related disclosures and the related impact of this guidance on the transition. The Company adopted appropriate LIBOR replacement rate transition language into the agreements for the renewal of its USD bank conduit facility in 2020 and the renewal of the credit agreement governing the revolving credit facility and term loan B which closed on October 22, 2021. These agreements represented the Company’s largest exposure to LIBOR. The Company intends to include such language in its other relevant agreements prior to the end of 2021. See Note 25—Subsequent Events for additional details.
Recently Adopted Accounting Pronouncements
Simplifying the Accounting for Income Taxes. In December 2019, the FASB issued guidance to simplify the accounting for income taxes and clarify the financial statement presentation for tax benefits related to tax deductible dividends. This guidance became effective for fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. The adoption of this guidance did not have a material impact on the Company’s Condensed Consolidated Financial Statements and related disclosures.
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3. Revenue Recognition
Vacation Ownership
The Company 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. The Company’s sales of VOIs are either cash sales or developer-financed sales. Developer-financed sales are typically collateralized by the underlying VOI. Revenue is recognized on VOI sales upon transfer of control, which is defined as the point in time when a binding sales contract has been executed, the financing contract has been executed for the remaining transaction price, the statutory rescission period has expired, and the transaction price has been deemed to be collectible.
For developer-financed sales, the Company reduces the VOI sales transaction price by an estimate of uncollectible consideration at the time of the sale. The Company’s estimates of uncollectible amounts are based largely on the results of the Company’s static pool analysis which relies on historical payment data by customer class.
In connection with entering into a VOI sale, the Company may provide its customers with certain non-cash incentives, such as credits for future stays at its resorts. For those VOI sales, the Company bifurcates the sale and allocates the sales price between the VOI sale and the non-cash incentive. Non-cash incentives generally have expiration periods of 18 months or less and are recognized at a point in time upon transfer of control.
The Company provides day-to-day property management services including oversight of housekeeping services, maintenance, and certain accounting and administrative services for property owners’ associations and clubs. These services may also include reservation and resort renovation activities. Such agreements are generally for terms of one year or less, and are renewed automatically on an annual basis. The Company’s management agreements contain cancellation clauses, which allow for either party to cancel the agreement, by either a majority board vote or a majority vote of non-developer interests. The Company receives fees for such property management services which are collected monthly in advance and are based upon total costs to operate such resorts (or as services are provided in the case of resort renovation activities). Fees for property management services typically approximate 10% of budgeted operating expenses. The Company is entitled to consideration for reimbursement of costs incurred on behalf of the property owners’ association in providing management services (“reimbursable revenue”). 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 Condensed Consolidated Statements of Income/(Loss). The Company reduces its management fees for amounts it has paid to the property owners’ association that reflect maintenance fees for VOIs for which it retains ownership, as the Company has concluded that such payments are consideration payable to a customer.
Property management fee revenues are recognized when the services are performed and are recorded as a component of Service and membership fees on the Condensed Consolidated Statements of Income/(Loss). Property management revenues, which are comprised of management fee revenue and reimbursable revenue were (in millions)(a):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Management fee revenues | $ | 89 | $ | 83 | $ | 268 | $ | 249 | |||||||||||||||
| Reimbursable revenues | 82 | 63 | 221 | 189 | |||||||||||||||||||
| Property management revenues | $ | 171 | $ | 146 | $ | 489 | $ | 438 | |||||||||||||||
(a)Reflects the impact of reclassifying the Extra Holidays business line from the Vacation Ownership segment to Travel and Membership.
One of the associations that the Company manages paid its Travel and Membership segment $9 million and $7 million for exchange services during the three months ended September 30, 2021 and 2020, and $23 million and $20 million during nine months ended September 30, 2021 and 2020.
Travel and Membership
As a provider of vacation exchange services, the Company enters into affiliation agreements with developers of vacation ownership properties to allow owners of VOIs to trade their intervals for intervals at other properties affiliated with the Company’s vacation exchange network and, for some members, for other leisure-related services and products.
Travel and Membership derives a majority of revenues from membership dues and fees for facilitating members’ trading of their intervals. Revenues from membership dues represent the fees paid by members or affiliated clubs on their behalf. The Company recognizes revenues from membership dues paid by the member on a straight-line basis over the membership
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period as the performance obligations are fulfilled through delivery of publications, if applicable, and by providing access to travel-related products and services. Estimated net contract consideration payable by affiliated clubs for memberships is recognized as revenue over the term of the contract with the affiliated club in proportion to the estimated average monthly member count. Such estimates are adjusted periodically for changes in the actual and forecasted member activity. For additional fees, members have the right to exchange their intervals for intervals at other properties affiliated with the Company’s vacation exchange networks and, for certain members, for other leisure-related services and products. The Company also derives revenue from facilitating bookings of travel accommodations for both members and non-members. Revenue is recognized when these transactions have been confirmed, net of expected cancellations.
The Company’s vacation exchange business also derives revenues from programs with affiliated resorts, club servicing, and loyalty programs; and additional exchange-related products that provide members with the ability to protect trading power or points, extend the life of deposits, and combine two or more deposits for the opportunity to exchange into intervals with higher trading power. Other vacation exchange related product fees are deferred and recognized as revenue upon the occurrence of a future exchange, event, or other related transaction.
The Company also derives revenue from other travel products and services, enabled as a result of the 2019 acquisition of ARN and via the Company’s resort services solution business, optimizing business to business (“B2B”) capabilities, and integration for consumer travel planning. The Company’s relationships and buying power with major travel suppliers provide its partners with access to exclusive travel inventory. The Company’s affiliates and members have access to inventory from accommodation wholesalers, airfare, and rental car providers.
The Company earns revenue from its RCI Elite Rewards co–branded credit card program, which is primarily generated by cardholder spending and the enrollment of new cardholders. The advance payments received under the program are recognized as a contract liability until the Company’s performance obligations have been satisfied. The primary performance obligation for the program relates to brand performance services. Total contract consideration is estimated and recognized on a straight-line basis over the contract term.
Other Items
The Company records property management services revenues for its Vacation Ownership segment and RCI Elite Rewards revenues for its Travel and Membership segment gross as a principal.
Contract Liabilities
Contract liabilities generally represent payments or consideration received in advance for goods or services that the Company has not yet transferred to the customer.
Contract liabilities as of September 30, 2021 and December 31, 2020, were as follows (in millions):
| September 30, 2021 | December 31, 2020 | |||||||||||||
| Deferred subscription revenue | $ | 170 | $ | 176 | ||||||||||
| Deferred VOI trial package revenue | 88 | 115 | ||||||||||||
Deferred exchange-related revenue (a) | 64 | 59 | ||||||||||||
| Deferred VOI incentive revenue | 57 | 74 | ||||||||||||
| Deferred co-branded credit card programs revenue | 13 | 16 | ||||||||||||
| Deferred other revenue | 2 | 8 | ||||||||||||
| Total | $ | 394 | $ | 448 | ||||||||||
(a)Includes contractual liabilities to accommodate members for cancellations initiated by the Company due to unexpected events. These amounts are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
In the Company’s Vacation Ownership business, deferred VOI trial package revenue represents consideration received in advance for a trial VOI, which allows customers to utilize a vacation package typically within one year of purchase. Deferred VOI incentive revenue represents 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 one year of the VOI sale.
Within the Company’s Travel and Membership business, deferred subscription revenue represents billings and payments received in advance from members and affiliated clubs for memberships in the Company’s travel programs which are
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recognized in future periods. Deferred revenue primarily represents payments received in advance from members for the right to access the Company’s vacation travel network to book vacation exchanges, rent travel accommodations, and for other leisure-related services and products revenue is recognized on a straight-line basis over the contract period which is generally within one year. Changes in contract liabilities for the nine months ended September 30, 2021 and 2020, follow (in millions):
| 2021 | 2020 | |||||||||||||
| Beginning balance | $ | 448 | $ | 539 | ||||||||||
| Additions | 199 | 180 | ||||||||||||
| Revenue recognized | (253) | (235) | ||||||||||||
| Ending balance | $ | 394 | $ | 484 | ||||||||||
Capitalized Contract Costs
The Company’s Vacation Ownership segment incurs certain direct and incremental selling costs in connection with VOI trial package and incentive revenues. Such costs are capitalized and subsequently amortized over the utilization period, which is typically within one year of the sale. As of September 30, 2021 and December 31, 2020, these capitalized costs were $29 million and $41 million and are included within Other assets on the Condensed Consolidated Balance Sheets.
The Company’s Travel and Membership segment incurs certain direct and incremental selling costs to obtain contracts with customers in connection with subscription revenues and exchange–related revenues. Such costs, which are primarily comprised of commissions paid to internal and external parties and credit card processing fees, are deferred at the inception of the contract and recognized when the benefit is transferred to the customer. As of September 30, 2021 and December 31, 2020, these capitalized costs were $17 million and $16 million; and are included within Other assets on the Condensed Consolidated Balance Sheets.
Practical Expedients
The Company has not adjusted the consideration for the effects of a significant financing component if it expected, at contract inception, that the period between when the Company satisfied the performance obligation and when the customer paid for that good or service was one year or less.
Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the customer. The consideration received from a customer is allocated to each distinct performance obligation and recognized as revenue when, or as, each performance obligation is satisfied.
The following table summarizes the Company’s remaining performance obligations for the 12-month periods set forth below (in millions):
| 10/1/2021 - 9/30/2022 | 10/1/2022 - 9/30/2023 | 10/1/2023 - 9/30/2024 | Thereafter | Total | ||||||||||||||||||||||||||||
| Subscription revenue | $ | 100 | $ | 37 | $ | 17 | $ | 16 | $ | 170 | ||||||||||||||||||||||
| VOI trial package revenue | 88 | — | — | — | 88 | |||||||||||||||||||||||||||
| Exchange-related revenue | 60 | 3 | 1 | — | 64 | |||||||||||||||||||||||||||
| VOI incentive revenue | 57 | — | — | — | 57 | |||||||||||||||||||||||||||
| Co-branded credit card programs revenue | 3 | 3 | 3 | 4 | 13 | |||||||||||||||||||||||||||
| Other revenue | 2 | — | — | — | 2 | |||||||||||||||||||||||||||
| Total | $ | 310 | $ | 43 | $ | 21 | $ | 20 | $ | 394 | ||||||||||||||||||||||
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Disaggregation of Net Revenues
The table below presents a disaggregation of the Company’s net revenues from contracts with customers by major services and products for each of the Company’s segments (in millions)(a):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Vacation Ownership | |||||||||||||||||||||||
Vacation ownership interest sales (b) | $ | 344 | $ | 196 | $ | 810 | $ | 273 | |||||||||||||||
| Property management fees and reimbursable revenues | 171 | 146 | 489 | 438 | |||||||||||||||||||
| Consumer financing | 103 | 115 | 304 | 360 | |||||||||||||||||||
| Fee-for-Service commissions | 28 | 6 | 69 | 10 | |||||||||||||||||||
| Ancillary revenues | 14 | 12 | 36 | 35 | |||||||||||||||||||
| Total Vacation Ownership | 660 | 475 | 1,708 | 1,116 | |||||||||||||||||||
| Travel and Membership | |||||||||||||||||||||||
| Transaction revenues | 133 | 86 | 418 | 227 | |||||||||||||||||||
| Subscription revenues | 43 | 43 | 127 | 120 | |||||||||||||||||||
| Ancillary revenues | 9 | 16 | 28 | 64 | |||||||||||||||||||
| Total Travel and Membership | 185 | 145 | 573 | 411 | |||||||||||||||||||
| Corporate and other | |||||||||||||||||||||||
| Eliminations | (6) | (6) | (17) | (12) | |||||||||||||||||||
| Total Corporate and other | (6) | (6) | (17) | (12) | |||||||||||||||||||
| Net revenues | $ | 839 | $ | 614 | $ | 2,264 | $ | 1,515 | |||||||||||||||
(a)This table reflects the reclassification of Extra Holidays from the Vacation Ownership segment into the Travel and Membership segment for all periods presented. Extra Holidays revenue is included within Transaction revenues.
(b)The Company recorded a COVID-19 related provision for loan losses of $225 million in the first quarter of 2020, due to an expected increase in defaults driven by higher unemployment associated with COVID-19, which is reflected as a reduction to Vacation ownership interest sales on the Condensed Consolidated Statements of Income/(Loss) during the nine months ended September 30, 2020. During 2021, the Company analyzed the adequacy of this COVID-19 related allowance consistent with past methodology, resulting in a $21 million and $47 million release which is reflected as an increase in Vacation ownership interest sales on the Condensed Consolidated Statements of Income/(Loss) during the three and nine months ended September 30, 2021.
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4. Earnings/(Loss) Per Share
The computations of basic and diluted earnings/(loss) per share (“EPS”) are based on Net income/(loss) attributable to Travel + Leisure Co. shareholders divided by the basic weighted average number of common shares and diluted weighted average number of common shares outstanding. The following table sets forth the computations of basic and diluted EPS (in millions, except per share data):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Net income/(loss) from continuing operations attributable to Travel + Leisure Co. shareholders | $ | 101 | $ | 40 | $ | 203 | $ | (258) | |||||||||||||||
| Loss on disposal of discontinued business attributable to Travel + Leisure Co. shareholders, net of income taxes | — | — | (2) | — | |||||||||||||||||||
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 101 | $ | 40 | $ | 201 | $ | (258) | |||||||||||||||
Basic earnings/(loss) per share (a) | |||||||||||||||||||||||
| Continuing operations | $ | 1.16 | $ | 0.47 | $ | 2.35 | $ | (3.00) | |||||||||||||||
| Discontinued operations | — | — | (0.02) | — | |||||||||||||||||||
| $ | 1.16 | $ | 0.47 | $ | 2.33 | $ | (3.00) | ||||||||||||||||
Diluted earnings/(loss) per share (a) | |||||||||||||||||||||||
| Continuing operations | $ | 1.15 | $ | 0.47 | $ | 2.33 | $ | (3.00) | |||||||||||||||
| Discontinued operations | — | — | (0.03) | — | |||||||||||||||||||
| $ | 1.15 | $ | 0.47 | $ | 2.30 | $ | (3.00) | ||||||||||||||||
| Basic weighted average shares outstanding | 86.6 | 85.9 | 86.5 | 86.1 | |||||||||||||||||||
Stock-settled appreciation rights (“SSARs”), RSUs,(b) PSUs (c) and NQs (d) | 0.8 | 0.2 | 0.8 | — | |||||||||||||||||||
Diluted weighted average shares outstanding (e) | 87.4 | 86.1 | 87.3 | 86.1 | |||||||||||||||||||
| Dividends: | |||||||||||||||||||||||
| Aggregate dividends paid to shareholders | $ | 26 | $ | 26 | $ | 79 | $ | 112 | |||||||||||||||
(a)Earnings/(loss) per share amounts are calculated using whole numbers.
(b)Excludes 0.4 million and 0.3 million of anti-dilutive restricted stock units (“RSUs”) for the three and nine months ended September 30, 2021. Excludes 1.0 million and 1.1 million of anti-dilutive RSUs for the three and nine months ended September 30, 2020, of which 0.1 million would have been dilutive for the nine months ended September 30, 2020 had the Company not been in a net loss position during the period. These shares could potentially dilute EPS in the future.
(c)Excludes performance-vested restricted stock units (“PSUs”) of 0.4 million for both the three and nine months ended September 30, 2021, as the Company had not met the required performance metrics. Excludes 0.3 million PSUs for both the three and nine months ended September 30, 2020, as the Company has not met the required performance metrics. These PSUs could potentially dilute EPS in the future.
(d)Excludes 1.4 million of outstanding non-qualified stock option (“NQs”) awards that would have been anti-dilutive to EPS for both the three and nine months ended September 30, 2021. Excludes 2.3 million and 2.1 million of outstanding NQ awards that would have been anti-dilutive to EPS for the three and nine months ended September 30, 2020. These outstanding stock option awards could potentially dilute EPS in the future.
(e)The dilutive impact of the Company’s potential common stock is computed utilizing the treasury stock method using average market prices during the period.
Stock Repurchase Program
The following table summarizes stock repurchase activity under the current stock repurchase program (in millions):
| Shares | Cost | ||||||||||
| As of December 31, 2020 | 111.3 | $ | 5,727 | ||||||||
| Repurchases | — | — | |||||||||
| As of September 30, 2021 | 111.3 | $ | 5,727 | ||||||||
Proceeds received from stock option exercises increase the repurchase capacity under the program. Cash proceeds received from stock option exercises during the nine months ended September 30, 2021 were $4 million. As of September 30, 2021,
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the Company had $354 million of remaining availability under its program. In March 2020, the Company suspended its share repurchase activity due to the uncertainty resulting from COVID-19. On July 15, 2020, the Company amended the credit agreement for its revolving credit facility and term loan B. The amendment placed the Company into a relief period from July 15, 2020 through April 1, 2022 (“Relief Period”) that prohibited the use of cash for share repurchases during this period. On October 22, 2021, the Company renewed its credit agreement governing its revolving credit facility and term loan B, which terminated the Relief Period and eliminated the Relief Period restrictions regarding share repurchases and dividends. See Note 25—Subsequent Events for additional details.
5. Acquisitions
Travel + Leisure. On January 5, 2021, the Company acquired the Travel + Leisure brand from Meredith Corporation for $100 million, of which the Company paid $35 million at closing and an additional $20 million during the second quarter of 2021. The remaining payments are to be completed by June 2024. This transaction was accounted for as an asset acquisition, with the full consideration allocated to the related trademark indefinite-lived intangible asset. The Company acquired the Travel + Leisure brand to accelerate its strategic plan to broaden its reach with the launch of new travel services, expand its membership travel business, and amplify the global visibility of its leisure travel products.
Alliance Reservations Network. On August 7, 2019, the Company acquired all of the equity of ARN. ARN provides private-label travel booking technology solutions. This acquisition was undertaken for the purpose of accelerating growth at Travel and Membership by increasing the offerings available to its members and affiliates. ARN was acquired for $102 million ($97 million net of cash acquired), subject to customary post-closing adjustments based on final valuation information and additional analysis. The fair value of purchase consideration was comprised of: (i) $70 million paid in cash, $11 million of which was paid during the third quarter of 2021; (ii) $24 million of Travel + Leisure Co. stock (721,450 shares at a weighted average price per share of $32.51); and (iii) $10 million of contingent consideration based on achieving certain financial and operational metrics.
6. Discontinued Operations
During 2018, the Company completed the spin-off of its hotel business (“Spin-off”) Wyndham Hotels & Resorts, Inc. (“Wyndham Hotels”) and the sale of its European vacation rentals business. As a result, the Company has classified the results of operations for these businesses as discontinued operations in its Condensed Consolidated Financial Statements and related notes. Discontinued operations include direct expenses clearly identifiable to the businesses being discontinued. The Company does not expect to incur significant ongoing expenses classified as discontinued operations except for certain tax adjustments that may be required as final tax returns are completed. The Company recognized a Loss on disposal of discontinued business, net of income taxes of $2 million during the nine months ended September 30, 2021.
7. Vacation Ownership Contract Receivables
The Company generates vacation ownership contract receivables (“VOCRs”) by extending financing to the purchasers of its VOIs. Vacation ownership contract receivables, net consisted of (in millions):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Vacation ownership contract receivables: | |||||||||||
Securitized (a) | $ | 2,136 | $ | 2,458 | |||||||
Non-securitized (b) | 721 | 717 | |||||||||
| Vacation ownership contract receivables, gross | 2,857 | 3,175 | |||||||||
| Less: Allowance for loan losses | 565 | 693 | |||||||||
| Vacation ownership contract receivables, net | $ | 2,292 | $ | 2,482 | |||||||
(a)Excludes $17 million and $23 million of accrued interest on securitized VOCRs as of September 30, 2021 and December 31, 2020, which are included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
(b)Excludes $5 million and $9 million of accrued interest on non-securitized VOCRs as of September 30, 2021 and December 31, 2020, which are included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
During the three and nine months ended September 30, 2021, the Company’s securitized VOCRs generated interest income of $76 million and $232 million. During the three and nine months ended September 30, 2020, the Company’s securitized VOCRs generated interest income of $92 million and $303 million. Such interest income is included within Consumer financing revenue on the Condensed Consolidated Statements of Income/(Loss).
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During the nine months ended September 30, 2021 and 2020, the Company originated VOCRs of $544 million and $338 million, and received principal collections of $604 million and $543 million. The weighted average interest rate on outstanding VOCRs was 14.5% and 14.4% as of September 30, 2021 and December 31, 2020.
The activity in the allowance for loan losses on VOCRs was as follows (in millions):
| Amount | |||||
| Allowance for loan losses as of December 31, 2020 | $ | 693 | |||
| Provision for loan losses, net | 120 | ||||
| Contract receivables write-offs, net | (248) | ||||
| Allowance for loan losses as of September 30, 2021 | $ | 565 | |||
| Amount | |||||
| Allowance for loan losses as of December 31, 2019 | $ | 747 | |||
| Provision for loan losses, net | 391 | ||||
| Contract receivables write-offs, net | (350) | ||||
| Allowance for loan losses as of September 30, 2020 | $ | 788 | |||
Due to the economic downturn resulting from COVID-19 during the first quarter of 2020, the Company evaluated the potential impact of COVID-19 on its owners’ ability to repay their contract receivables and as a result of current and projected unemployment rates at that time, the Company recorded a COVID-19 related allowance for loan losses. This allowance consisted of a $225 million COVID-19 related provision, which was reflected as a reduction to Vacation ownership interest sales and $55 million of estimated recoveries, which were reflected as a reduction to Cost/(recovery) of vacation ownership interests on the Condensed Consolidated Statements of Income/(Loss). During 2021, the Company analyzed the adequacy of the COVID-19 related allowance consistent with past methodology, and due to improvement in net new defaults the Company reduced the allowance resulting in a $21 million and $47 million increase to Vacation ownership interest sales and a corresponding $8 million and $17 million increase to Cost/(recovery) of vacation ownership interests during the three and nine months ended September 30, 2021 on the Condensed Consolidated Statements of Income/(Loss).
Estimating the amount of the COVID-19 related allowance involves the use of significant estimates and assumptions. Management based its estimates upon historical data on the relationship between unemployment rates and net new defaults observed during the most recent recession in 2008. Specifically, historical data indicated that net new defaults did not return to prior levels until 15-20 months after the peak in unemployment. As of September 30, 2021, given the significant amount of government assistance provided to consumers during the pandemic, the Company estimated default rates would remain elevated for approximately six months as these programs expire. The Company will continue to monitor this allowance as more information becomes available.
The Company recorded net provisions for loan losses of $49 million and $120 million as a reduction of net revenues during the three and nine months ended September 30, 2021, and $45 million and $391 million for the three and nine months ended September 30, 2020, inclusive of the aforementioned COVID-19 related adjustments.
Credit Quality for Financed Receivables and the Allowance for Credit Losses
The basis of the differentiation within the identified class of financed VOI contract receivables is the consumer’s Fair Isaac Corporation (“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 to 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 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, from 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 Vacation Ownership Asia Pacific business for which scores are not readily available).
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The following table details an aging analysis of financing receivables using the most recently updated FICO scores, based on the policy described above (in millions):
| As of September 30, 2021 | |||||||||||||||||||||||||||||||||||
| 700+ | 600-699 | <600 | No Score | Asia Pacific | Total | ||||||||||||||||||||||||||||||
| Current | $ | 1,639 | $ | 756 | $ | 108 | $ | 75 | $ | 176 | $ | 2,754 | |||||||||||||||||||||||
| 31 - 60 days | 16 | 20 | 10 | 2 | 1 | 49 | |||||||||||||||||||||||||||||
| 61 - 90 days | 8 | 11 | 6 | 1 | 1 | 27 | |||||||||||||||||||||||||||||
| 91 - 120 days | 8 | 9 | 9 | 1 | — | 27 | |||||||||||||||||||||||||||||
Total (a) | $ | 1,671 | $ | 796 | $ | 133 | $ | 79 | $ | 178 | $ | 2,857 | |||||||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
| 700+ | 600-699 | <600 | No Score | Asia Pacific | Total | ||||||||||||||||||||||||||||||
| Current | $ | 1,706 | $ | 835 | $ | 160 | $ | 96 | $ | 221 | $ | 3,018 | |||||||||||||||||||||||
| 31 - 60 days | 20 | 25 | 13 | 4 | 2 | 64 | |||||||||||||||||||||||||||||
| 61 - 90 days | 13 | 18 | 12 | 3 | 1 | 47 | |||||||||||||||||||||||||||||
| 91 - 120 days | 12 | 16 | 14 | 3 | 1 | 46 | |||||||||||||||||||||||||||||
Total (a) | $ | 1,751 | $ | 894 | $ | 199 | $ | 106 | $ | 225 | $ | 3,175 | |||||||||||||||||||||||
(a)Includes contracts under temporary deferment (up to 180 days). As of September 30, 2021 and December 31, 2020, contracts under deferment total $9 million and $37 million.
The Company ceases to accrue interest on VOI contract receivables once the contract has remained delinquent for greater than 90 days and reverses all of the associated accrued interest recognized to date against interest income included within Consumer financing revenue on the Condensed Consolidated Statements of Income/(Loss). 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.
The following table details the year of origination of financing receivables using the most recently updated FICO scores, based on the policy described above (in millions):
| As of September 30, 2021 | |||||||||||||||||||||||||||||||||||
| 700+ | 600-699 | <600 | No Score | Asia Pacific | Total | ||||||||||||||||||||||||||||||
| 2021 | $ | 406 | $ | 157 | $ | 5 | $ | 7 | $ | 29 | $ | 604 | |||||||||||||||||||||||
| 2020 | 259 | 125 | 19 | 6 | 42 | 451 | |||||||||||||||||||||||||||||
| 2019 | 363 | 190 | 41 | 21 | 37 | 652 | |||||||||||||||||||||||||||||
| 2018 | 257 | 129 | 29 | 15 | 26 | 456 | |||||||||||||||||||||||||||||
| 2017 | 172 | 85 | 17 | 12 | 16 | 302 | |||||||||||||||||||||||||||||
| Prior | 214 | 110 | 22 | 18 | 28 | 392 | |||||||||||||||||||||||||||||
| Total | $ | 1,671 | $ | 796 | $ | 133 | $ | 79 | $ | 178 | $ | 2,857 | |||||||||||||||||||||||
| As of December 31, 2020 | |||||||||||||||||||||||||||||||||||
| 700+ | 600-699 | <600 | No Score | Asia Pacific | Total | ||||||||||||||||||||||||||||||
| 2020 | $ | 424 | $ | 173 | $ | 11 | $ | 17 | $ | 55 | $ | 680 | |||||||||||||||||||||||
| 2019 | 476 | 269 | 67 | 27 | 70 | 909 | |||||||||||||||||||||||||||||
| 2018 | 339 | 183 | 50 | 21 | 36 | 629 | |||||||||||||||||||||||||||||
| 2017 | 220 | 115 | 31 | 16 | 22 | 404 | |||||||||||||||||||||||||||||
| 2016 | 128 | 63 | 16 | 10 | 16 | 233 | |||||||||||||||||||||||||||||
| Prior | 164 | 91 | 24 | 15 | 26 | 320 | |||||||||||||||||||||||||||||
| Total | $ | 1,751 | $ | 894 | $ | 199 | $ | 106 | $ | 225 | $ | 3,175 | |||||||||||||||||||||||
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8. Inventory
Inventory consisted of (in millions):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Completed VOI inventory | $ | 1,021 | $ | 1,049 | |||||||
| Estimated VOI recoveries, net | 204 | 246 | |||||||||
| VOI construction in process | 27 | 30 | |||||||||
| Inventory sold subject to repurchase | 13 | 13 | |||||||||
| Vacation exchange credits and other | 4 | 8 | |||||||||
| Land held for VOI development | 1 | 1 | |||||||||
| Total inventory | $ | 1,270 | $ | 1,347 | |||||||
The Company had net transfers of VOI inventory to property and equipment of $56 million and $28 million during the nine months ended September 30, 2021 and 2020.
During 2020, as a result of resort closures and cancellations surrounding COVID-19, the Company recorded $48 million of reductions to exchange inventory consisting of costs previously incurred by RCI to provide enhanced out-of-network travel
options to members. These write-offs were included within Operating expenses on the Condensed Consolidated Statements of Income/(Loss), $38 million during the first quarter of 2020 and $10 million during the third quarter of 2020. The Company anticipates that remaining inventory will be fully utilized to maximize exchange supply for its members in 2021 and beyond.
Inventory Sale Transactions
During 2020, the Company acquired properties in Orlando, Florida, and Moab, Utah, from third-party developers for vacation ownership inventory and property and equipment.
During 2013, the Company sold real property located in Las Vegas, Nevada, to a third-party developer, consisting of vacation ownership inventory and property and equipment. The Company recognized no gain or loss on this sale transaction.
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.
The following table summarizes the activity related to the Company’s inventory obligations (in millions):
Las Vegas (a) | Moab (a) | Orlando (a) | Other (b) | Total | |||||||||||||||||||||||||
| December 31, 2020 | $ | 13 | $ | 31 | $ | 22 | $ | 17 | $ | 83 | |||||||||||||||||||
| Purchases | 2 | 25 | 1 | 55 | 83 | ||||||||||||||||||||||||
| Payments | (2) | (56) | (5) | (61) | (124) | ||||||||||||||||||||||||
| September 30, 2021 | $ | 13 | $ | — | $ | 18 | $ | 11 | $ | 42 | |||||||||||||||||||
| December 31, 2019 | $ | 43 | $ | — | $ | — | $ | 6 | $ | 49 | |||||||||||||||||||
| Purchases | 15 | 37 | 44 | 87 | 183 | ||||||||||||||||||||||||
| Payments | (39) | — | (22) | (83) | (144) | ||||||||||||||||||||||||
| September 30, 2020 | $ | 19 | $ | 37 | $ | 22 | $ | 10 | $ | 88 | |||||||||||||||||||
(a)Included in Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
(b)Included in Accounts payable on the Condensed Consolidated Balance Sheets.
The Company has committed to repurchase the completed property located in Las Vegas, Nevada, from a third-party developer subject to the property meeting the Company’s vacation ownership resort standards and provided that the third-party developer has not sold the property to another party. The maximum potential future payments that the Company may be required to make under this commitment was $65 million as of September 30, 2021.
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9. Property and Equipment
Property and equipment, net, consisted of (in millions):
| September 30, 2021 | December 31, 2020 | ||||||||||
| Capitalized software | $ | 714 | $ | 694 | |||||||
| Building and leasehold improvements | 636 | 591 | |||||||||
| Furniture, fixtures and equipment | 207 | 207 | |||||||||
| Land | 30 | 30 | |||||||||
| Construction in progress | 18 | 12 | |||||||||
| Finance leases | 17 | 14 | |||||||||
| Total property and equipment | 1,622 | 1,548 | |||||||||
| Less: Accumulated depreciation and amortization | 944 | 882 | |||||||||
| Property and equipment, net | $ | 678 | $ | 666 | |||||||
10. Debt
The Company’s indebtedness consisted of (in millions):
| September 30, 2021 | December 31, 2020 | ||||||||||
Non-recourse vacation ownership debt: (a) | |||||||||||
Term notes (b) | $ | 1,505 | $ | 1,893 | |||||||
USD bank conduit facility (due October 2022) (c) | 314 | 168 | |||||||||
AUD/NZD bank conduit facility (due April 2023) (d) | 138 | 173 | |||||||||
| Total | $ | 1,957 | $ | 2,234 | |||||||
Debt: (e) | |||||||||||
$1.0 billion secured revolving credit facility (due May 2023) (f) | $ | — | $ | 547 | |||||||
$300 million secured term loan B (due May 2025) (g) | 289 | 291 | |||||||||
$250 million 5.625% secured notes (due March 2021) | — | 250 | |||||||||
$650 million 4.25% secured notes (due March 2022) (h) | 650 | 650 | |||||||||
$400 million 3.90% secured notes (due March 2023) (i) | 402 | 402 | |||||||||
| $300 million 5.65% secured notes (due April 2024) | 299 | 299 | |||||||||
$350 million 6.60% secured notes (due October 2025) (j) | 345 | 344 | |||||||||
| $650 million 6.625% secured notes (due July 2026) | 642 | 641 | |||||||||
$400 million 6.00% secured notes (due April 2027) (k) | 407 | 408 | |||||||||
| $350 million 4.625% secured notes (due March 2030) | 345 | 345 | |||||||||
| Finance leases | 7 | 7 | |||||||||
| Total | $ | 3,386 | $ | 4,184 | |||||||
(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 $2.25 billion and $2.57 billion of underlying gross VOCRs and related assets (which legally are not assets of the Company) as of September 30, 2021 and December 31, 2020.
(b)The carrying amounts of the term notes are net of deferred financing costs of $16 million and $21 million as of September 30, 2021 and December 31, 2020.
(c)The Company has a borrowing capacity of $800 million under the USD bank conduit facility through October 2022. Borrowings under this facility are required to be repaid as the collateralized receivables amortize but no later than November 2023.
(d)The Company has a borrowing capacity of 250 million Australian dollars (“AUD”) and 48 million New Zealand dollars (“NZD”) under the AUD/NZD bank conduit facility through April 2023. Borrowings under this facility are required to be repaid no later than May 2025.
(e)The carrying amounts of the secured notes and term loan are net of unamortized discounts of $14 million and $16 million as of September 30, 2021 and December 31, 2020, and net of unamortized debt financing costs of $6 million and $7 million as of September 30, 2021 and December 31, 2020.
(f)The weighted average effective interest rate on borrowings from this facility were 3.19% and 3.02% as of September 30, 2021 and December 31, 2020. In late March 2020, the Company drew down its $1.0 billion secured revolving credit facility as a precautionary measure due to COVID-19. As of September 30, 2021, these borrowings have been repaid. On October 22, 2021, the Company renewed this facility, extending the commitment period through October 2026. See Note 25—Subsequent Events for additional details.
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(g)The weighted average effective interest rate on borrowings from this facility was 2.39% and 2.93% as of September 30, 2021 and December 31, 2020.
(h)Includes less than $1 million of unamortized gains from the settlement of a derivative as of September 30, 2021 and December 31, 2020.
(i)Includes $2 million and $3 million of unamortized gains from the settlement of a derivative as of September 30, 2021 and December 31, 2020.
(j)Includes $4 million and $5 million of unamortized losses from the settlement of a derivative as of September 30, 2021 and December 31, 2020.
(k)Includes $10 million and $11 million of unamortized gains from the settlement of a derivative as of September 30, 2021 and December 31, 2020.
Sierra Timeshare 2021-1 Receivables Funding LLC
On March 8, 2021, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2021-1 Receivables Fundings LLC, with an initial principal amount of $500 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 1.57%. The advance rate for this transaction was 98%.
AUD/NZD Bank Conduit Renewal
On April 27, 2021, the Company renewed its AUD/NZD timeshare receivables conduit facility, extending the end of the commitment period from September 2021 to April 2023. The renewal includes a reduction of the AUD borrowing capacity from A$255 million to A$250 million, while the NZD capacity remains unchanged at NZ$48 million. The renewal bears interest at variable rates based on the Bank Bill Swap Bid Rate plus 1.65%.
Maturities and Capacity
The Company’s outstanding debt as of September 30, 2021, matures as follows (in millions):
| Non-recourse Vacation Ownership Debt | Debt | Total | |||||||||||||||
| Within 1 year | $ | 292 | $ | 656 | $ | 948 | |||||||||||
| Between 1 and 2 years | 484 | 407 | 891 | ||||||||||||||
| Between 2 and 3 years | 191 | 303 | 494 | ||||||||||||||
| Between 3 and 4 years | 192 | 280 | 472 | ||||||||||||||
| Between 4 and 5 years | 208 | 987 | 1,195 | ||||||||||||||
| Thereafter | 590 | 753 | 1,343 | ||||||||||||||
| $ | 1,957 | $ | 3,386 | $ | 5,343 | ||||||||||||
Required principal payments on the non-recourse vacation ownership debt are based on the contractual repayment terms of the underlying VOCRs. Actual maturities may differ as a result of prepayments by the VOCR obligors.
As of September 30, 2021, available capacity under the Company’s borrowing arrangements was as follows (in millions):
Non-recourse Conduit Facilities (a) | Revolving Credit Facilities (b) | ||||||||||
| Total capacity | $ | 1,017 | $ | 1,000 | |||||||
| Less: Outstanding borrowings | 452 | — | |||||||||
| Less: Letters of credit | — | 51 | |||||||||
| Available capacity | $ | 565 | $ | 949 | |||||||
(a)Consists of the Company’s USD bank conduit facility and AUD/NZD bank conduit facility. The capacity of these facilities is subject to the Company’s ability to provide additional assets to collateralize additional non-recourse borrowings.
(b)Consists of the Company’s $1.0 billion secured revolving credit facility.
Debt Covenants
The revolving credit facilities and term loan B are subject to covenants including the maintenance of specific financial ratios as defined in the credit agreement. The financial ratio covenants consist of a minimum interest coverage ratio of at least 2.5 to 1.0 as of the measurement date and a maximum first lien leverage ratio not to exceed 4.25 to 1.0 as of the measurement date. The interest coverage ratio is calculated by dividing consolidated EBITDA (as defined in the credit agreement) by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing 12-month basis preceding the measurement date. The first lien leverage ratio is calculated by dividing consolidated first lien debt (as defined in the credit agreement) as of the measurement date by consolidated EBITDA (as defined in the credit agreement) as measured on a trailing 12-month basis preceding the measurement date.
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On July 15, 2020, the Company entered into an amendment to the Company’s credit agreement governing its revolving credit facility and term loan B (“Credit Agreement Amendment”). The Credit Agreement Amendment established a Relief Period with respect to the Company’s secured revolving credit facility, which commenced on July 15, 2020 and was scheduled to end on April 1, 2022. The Credit Agreement Amendment increased the existing leverage-based financial covenant of 4.25 to 1.0 by varying levels for each applicable quarter during the Relief Period. The maximum first lien leverage ratio for the test period ending September 30, 2021 was 6.75 to 1.0.
Beginning in the first quarter of 2021, and extending through the third quarter of 2021, the Credit Agreement Amendment provided that consolidated EBITDA (as defined in the credit agreement), for the purposes of the first lien leverage ratio, was to be measured based on the greater of either a trailing 12-months preceding the measurement date basis or an annualized basis. In addition, the Credit Agreement Amendment, among other changes, increased the interest rate applicable to borrowings under the Company’s secured revolving credit facility utilizing a tiered pricing grid based on the Company’s first lien leverage ratio in any quarter it exceeds 4.25 to 1.0, until the end of the Relief Period; added a new minimum liquidity covenant, tested quarterly until the end of the Relief Period, of (i) $250 million plus (ii) 50% of the aggregate amount of dividends paid after the effective date of the Credit Agreement Amendment and on or prior to the last day of the relevant fiscal quarter; and required the Company to maintain an interest coverage ratio (as defined in the credit agreement) of not less than 2.0 to 1.0. Finally, the Credit Agreement Amendment amended the definition of “Material Adverse Effect” in the credit agreement to take into consideration the impacts of the COVID-19 pandemic during the Relief Period. The Relief Period included certain restrictions on the use of cash including the prohibition of share repurchases. Additionally, the amendment limited the payout of dividends during the Relief Period to not exceed $0.50 per share, the rate in effect prior to the amendment.
As of September 30, 2021, the Company’s interest coverage ratio was 3.6 to 1.0 and the first lien leverage ratio was 4.2 to 1.0. These ratios do not include interest expense or indebtedness related to any qualified securitization financing (as defined in the credit agreement). As of September 30, 2021, the Company was in compliance with the financial covenants described above. Under the Credit Agreement Amendment, when the first lien leverage ratio exceeds 4.25 to 1.0, the interest rate on revolver borrowings increases, and the Company is subject to higher fees associated with its letters of credit, both of which are based on a tiered pricing grid. Given the first lien leverage ratio of 5.4 to 1.0 at December 31, 2020, the Company became subject to higher fees associated with letters of credit and the interest rate on the revolver borrowings increased 25 basis points effective March 2, 2021.
On October 22, 2021, the Company renewed the credit agreement governing its revolving credit facility and term loan B. This renewal terminated the Relief Period and reestablished the tiered pricing grid that was in place prior to the Credit Agreement Amendment. The interest rate on revolver borrowings and fees associated with letters of credit are subject to future changes based on the Company’s first lien leverage ratio which could serve to further reduce the interest rate if the ratio were to decrease to 3.75 to 1.0 or below. Additionally, the renewal eliminated restrictions regarding share repurchases, dividends, acquisitions, and the Relief Period minimum liquidity covenant. See Note 25—Subsequent Events for additional details.
Each of the Company’s non-recourse, securitized term notes, and the bank conduit facilities contain various triggers relating to the performance of the applicable loan pools. If the VOCRs pool that collateralizes one of the Company’s securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As of September 30, 2021, all of the Company’s securitized loan pools were in compliance with applicable contractual triggers.
Interest Expense
The Company incurred interest expense of $47 million and $147 million during the three and nine months ended September 30, 2021. Such amounts consisted primarily of interest on debt, excluding non-recourse vacation ownership debt, and included an offset of less than $1 million of capitalized interest during both the three and nine months ended September 30, 2021. Cash paid related to such interest was $160 million during the nine months ended September 30, 2021.
The Company incurred interest expense of $52 million and $138 million during the three and nine months ended September 30, 2020. Such amounts consisted primarily of interest on debt, excluding non-recourse vacation ownership debt, and included an offset of less than $1 million and $1 million of capitalized interest during the three and nine months
23
ended September 30, 2020. Cash paid related to such interest was $126 million during the nine months ended September 30, 2020.
Interest expense incurred in connection with the Company’s non-recourse vacation ownership debt was $19 million and $63 million during the three and nine months ended September 30, 2021, and $26 million and $76 million during the three and nine months ended September 30, 2020, and is recorded within Consumer financing interest on the Condensed Consolidated Statements of Income/(Loss). Cash paid related to such interest was $44 million and $56 million for the nine months ended September 30, 2021 and 2020.
11. Variable Interest Entities
In accordance with the applicable accounting guidance for the consolidation of a variable interest entity (“VIE”), the Company analyzes its variable interests, including loans, guarantees, SPEs, and equity investments, to determine if an entity in which the Company has a variable interest is 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 into its financial statements those VIEs for which it has determined that it is the primary beneficiary.
Vacation Ownership Contract Receivables Securitizations
The Company pools qualifying VOCRs and sells them to bankruptcy-remote entities. VOCRs qualify for securitization based primarily on the credit strength of the VOI purchaser to whom financing has been extended. VOCRs are securitized through bankruptcy-remote SPEs that are consolidated within the Company’s Condensed 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 VOCRs. The Company services the securitized VOCRs pursuant to servicing agreements negotiated on an arm’s-length basis based on market conditions. The activities of these SPEs are limited to (i) purchasing VOCRs 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 against the Company for principal and interest.
The assets and liabilities of these vacation ownership SPEs are as follows (in millions):
| September 30, 2021 | December 31, 2020 | ||||||||||
Securitized contract receivables, gross (a) | $ | 2,136 | $ | 2,458 | |||||||
Securitized restricted cash (b) | 94 | 92 | |||||||||
Interest receivables on securitized contract receivables (c) | 17 | 23 | |||||||||
Other assets (d) | 6 | 5 | |||||||||
| Total SPE assets | 2,253 | 2,578 | |||||||||
Non-recourse term notes (e) (f) | 1,505 | 1,893 | |||||||||
Non-recourse conduit facilities (e) | 452 | 341 | |||||||||
Other liabilities (g) | 7 | 2 | |||||||||
| Total SPE liabilities | 1,964 | 2,236 | |||||||||
| SPE assets in excess of SPE liabilities | $ | 289 | $ | 342 | |||||||
(a)The Company does not allocate allowance for loan losses to SPEs. This amount is included in Vacation ownership contract receivables, net on the Condensed Consolidated Balance Sheets.
(b)Included in Restricted cash on the Condensed Consolidated Balance Sheets.
(c)Included in Trade receivables, net on the Condensed Consolidated Balance Sheets.
(d)Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which is included in Other assets on the Condensed Consolidated Balance Sheets.
(e)Included in Non-recourse vacation ownership debt on the Condensed Consolidated Balance Sheets.
(f)Includes deferred financing costs of $16 million and $21 million as of September 30, 2021 and December 31, 2020, related to non-recourse debt.
(g)Primarily includes accrued interest on non-recourse debt, which is included in Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
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In addition, the Company has VOCRs that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $721 million and $717 million as of September 30, 2021 and December 31, 2020. A summary of total vacation ownership receivables and other securitized assets, net of securitized liabilities and the allowance for loan losses, is as follows (in millions):
| September 30, 2021 | December 31, 2020 | ||||||||||
| SPE assets in excess of SPE liabilities | $ | 289 | $ | 342 | |||||||
| Non-securitized contract receivables | 721 | 717 | |||||||||
| Less: Allowance for loan losses | 565 | 693 | |||||||||
| Total, net | $ | 445 | $ | 366 | |||||||
12. Fair Value
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.
The Company’s derivative instruments currently consist of foreign exchange forward contracts and interest rate caps.
As of September 30, 2021, the Company had foreign exchange contracts which resulted in less than $1 million of assets which are included within Other assets and $1 million of liabilities which are included within Accrued expenses and other liabilities on the Condensed 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 impact of interest rate caps was immaterial as of September 30, 2021 and 2020.
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.
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The carrying amounts and estimated fair values of all other financial instruments were as follows (in millions):
| September 30, 2021 | December 31, 2020 | ||||||||||||||||||||||
| Carrying Amount | Estimated Fair Value | Carrying Amount | Estimated Fair Value | ||||||||||||||||||||
| Assets | |||||||||||||||||||||||
| Vacation ownership contract receivables, net (Level 3) | $ | 2,292 | $ | 2,893 | $ | 2,482 | $ | 3,035 | |||||||||||||||
| Liabilities | |||||||||||||||||||||||
| Debt (Level 2) | $ | 5,343 | $ | 5,603 | $ | 6,418 | $ | 6,705 | |||||||||||||||
The Company estimates the fair value of its VOCRs 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 non-recourse 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 debt, excluding finance leases, using Level 2 inputs based on indicative bids from investment banks and determines the fair value of its secured notes using quoted market prices (such secured notes are not actively traded).
13. Derivative Instruments and Hedging Activities
Foreign Currency Risk
The Company has foreign currency rate exposure to exchange rate fluctuations worldwide with particular exposure to the euro, British pound, Australian and Canadian dollars, and the Mexican peso. 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 has used 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 Accumulated other comprehensive loss (“AOCL”) 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 periodically uses financial derivatives to strategically adjust its mix of fixed to floating rate debt. The derivative instruments utilized include interest rate swaps which convert fixed–rate debt into variable–rate debt (i.e. fair value hedges) and interest rate caps (undesignated 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. As of September 30, 2021 and 2020, the Company had no fair value interest rate hedges.
Losses on derivatives recognized in AOCL for the three and nine months ended September 30, 2021 and 2020, were not material.
14. Income Taxes
The Company files U.S. federal, state and foreign income tax returns in jurisdictions with varying statutes of limitations. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2016. In addition, with few exceptions, the Company is no longer subject to state, local or foreign income tax examinations for years prior to 2011.
The Company’s effective tax rate was 27.9% and (110.5)% for the three months ended September 30, 2021 and 2020; and 27.2% and 17.3% for the nine months ended September 30, 2021 and 2020. The effective tax rates during the three and nine months ended September 30, 2020 were significantly impacted by COVID-19, leading to a mix of earnings in higher tax rate jurisdictions and losses in lower tax rate jurisdictions that significantly reduced the Company’s overall effective tax rate in 2020. During the three months ended September 30, 2020, the Company reported a tax benefit on pre-tax income resulting from the true-up of applying the revised forecasted effective tax rate to the prior quarter’s losses.
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The Company made income tax payments, net of tax refunds, of $91 million and $47 million during the nine months ended September 30, 2021 and 2020.
Tax positions are reviewed at least quarterly and adjusted as new information becomes available. The recoverability of deferred tax assets is evaluated by assessing the adequacy of future expected taxable income from all sources, including reversal of taxable temporary differences, available tax planning strategies and forecasted operating earnings. These estimates of future taxable income inherently require significant judgment. To the extent it is considered more likely than not that a deferred tax asset will be not recovered, a valuation allowance is established. Due to various factors including negative impacts of COVID-19, the Company had net increases in its valuation allowances related to foreign tax credits and other deferred assets of $3 million and $8 million during the nine months ended September 30, 2021 and 2020.
On March 11, 2021, the American Rescue Plan Act of 2021 (“ARPA”) was signed into law, which is the latest stimulus package to provide COVID-19 relief. ARPA includes an extension of the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act Employee Retention Tax Credit until December 31, 2021. In addition to the expansion of the employee retention credit (among other provisions), ARPA includes several revenue-raising and business tax provisions. One such provision that will impact the Company is the expansion of the limitation of compensation deductions above $1 million for certain covered employees of publicly held corporations. Effective for taxable years after December 31, 2026, ARPA expands the limitation to cover the next five highest compensated employees.
On March 27, 2020, the CARES Act was established to provide emergency assistance and health care for individuals, families, and businesses affected by COVID-19 and generally support the U.S. economy. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, and technical corrections to tax depreciation methods for qualified improvement property. The Company has deferred certain social security payments and had additional depreciation deductions relating to qualified improvement property.
The Company recorded $3 million and $24 million of employee retention tax credits for the three and nine months ended September 30, 2020, and an additional $2 million of employee retention tax credits during the nine months ended September 30, 2021, including credits from similar programs outside the U.S.
While the Company continues to review and consider any available benefits under the CARES Act, ARPA, or similar legislation that may be enacted in response to COVID-19 for which it qualifies, the Company cannot predict the manner in which such benefits will be allocated or administered and cannot assure that it will be able to receive such benefits in a timely manner.
15. Leases
The Company leases property and equipment under finance and operating leases for its corporate headquarters, administrative functions, marketing and sales offices, and various other facilities and equipment. For leases with terms greater than 12 months, the Company records the related asset and obligation at the present value of lease payments over the term. Many of its leases include rental escalation clauses, lease incentives, renewal options and/or termination options that are factored into the Company’s determination of lease payments. The Company elected the hindsight practical expedient to determine the reasonably certain lease term for existing leases. The Company also made an accounting policy election to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments on a straight-line basis over the lease term in the Condensed Consolidated Statements of Income/(Loss).
When available, the Company uses the rate implicit in the lease to discount lease payments to present value; however, most of its leases do not provide a readily determinable implicit rate. Therefore, the Company must estimate its incremental borrowing rate to discount the lease payments based on information available at lease commencement. The majority of the Company’s leases have remaining lease terms of to 20 years, some of which include options to extend the leases for up to 10 years, and some of which include options to terminate the leases within one year.
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The table below presents certain information related to the lease costs for finance and operating leases (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2021 | 2020 | 2021 | 2020 | ||||||||||||||||||||
| Operating lease cost | $ | 5 | $ | 7 | $ | 17 | $ | 24 | |||||||||||||||
| Short-term lease cost | $ | 3 | $ | 4 | $ | 10 | $ | 11 | |||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Amortization of right-of-use assets | $ | 1 | $ | 1 | $ | 3 | $ | 2 | |||||||||||||||
| Interest on lease liabilities | — | — | — | — | |||||||||||||||||||
| Total finance lease cost | $ | 1 | $ | 1 | $ | 3 | $ | 2 | |||||||||||||||
The table below presents the lease-related assets and liabilities recorded on the Condensed Consolidated Balance Sheets:
| Balance Sheet Classification | September 30, 2021 | December 31, 2020 | |||||||||||||||
| Operating leases (in millions): | |||||||||||||||||
| Operating lease right-of-use assets | Other assets | $ | 82 | $ | 92 | ||||||||||||
| Operating lease liabilities | Accrued expenses and other liabilities | $ | 141 | $ | 157 | ||||||||||||
| Finance leases (in millions): | |||||||||||||||||
Finance lease assets (a) | Property and equipment, net | $ | 8 | $ | 8 | ||||||||||||
| Finance lease liabilities | Debt | $ | 7 | $ | 7 | ||||||||||||
| Weighted average remaining lease term: | |||||||||||||||||
| Operating leases | 6.6 years | 7.1 years | |||||||||||||||
| Finance leases | 2.5 years | 2.6 years | |||||||||||||||
| Weighted average discount rate: | |||||||||||||||||
Operating leases (b) | 5.8 | % | 5.9 | % | |||||||||||||
| Finance leases | 4.7 | % | 5.6 | % | |||||||||||||
(a)Presented net of accumulated depreciation.
(b)Upon adoption of the new lease standard, discount rates used for existing leases were established at January 1, 2019.
The table below presents supplemental cash flow information related to leases (in millions):
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2021 | 2020 | ||||||||||
| Cash paid for amounts included in the measurement of lease liabilities: | |||||||||||
| Operating cash flows from operating leases | $ | 28 | $ | 28 | |||||||
| Operating cash flows from finance leases | — | — | |||||||||
| Financing cash flows from finance leases | 3 | 3 | |||||||||
| Right-of-use assets obtained in exchange for lease obligations: | |||||||||||
| Operating leases | $ | 6 | $ | 9 | |||||||
| Finance leases | 3 | 6 | |||||||||
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The table below presents maturities of lease liabilities as of September 30, 2021 (in millions):
| Operating Leases | Finance Leases | ||||||||||
| Three months ending December 31, 2021 | $ | 8 | $ | 1 | |||||||
| 2022 | 31 | 4 | |||||||||
| 2023 | 29 | 2 | |||||||||
| 2024 | 28 | 1 | |||||||||
| 2025 | 24 | — | |||||||||
| Thereafter | 50 | — | |||||||||
| Total minimum lease payments | 170 | 8 | |||||||||
| Less: Amount of lease payments representing interest | (29) | (1) | |||||||||
| Present value of future minimum lease payments | $ | 141 | $ | 7 | |||||||
Due to the impact of COVID-19 during the second quarter of 2020, the Company decided to abandon the remaining portion of its administrative offices in New Jersey. The Company was also notified that Wyndham Hotels exercised its early termination rights under the sublease agreement for this building. As a result, the Company recorded $22 million of restructuring charges associated with non-lease components of the office space and $24 million of impairment charges associated with the write-off of right-of-use assets and furniture, fixtures and equipment. During the third quarter of 2020, the Company incurred $5 million of impairment charges related to right-of-use assets at closed sales centers within its Vacation Ownership segment.
16. Commitments and Contingencies
The Company is involved in claims, legal and regulatory proceedings, and governmental inquiries related to its business, none of which, in the opinion of management, is expected to have a material effect on the Company’s results of operations or financial condition.
Travel + Leisure Co. Litigation
The Company may be from time to time 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 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 or in relation to guest reservations and bookings; and negligence, breach of contract, fraud, consumer protection and other statutory claims by guests and other consumers for alleged injuries sustained at or acts or occurrences related to vacation ownership units or resorts or in relation to guest reservations and bookings; for its Travel and Membership 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, guests and other consumers for alleged injuries sustained at or acts or occurrences related to affiliated resorts, or in relation to guest reservations and bookings; and for each of its businesses, bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters including but not limited to, claims of wrongful termination, retaliation, discrimination, harassment and wage and hour claims, whistleblower 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 where appropriate, 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 fiscal quarter 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 $15 million and $13 million as of September 30, 2021 and December 31, 2020. 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. As of September 30, 2021, it is estimated that the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $35 million in
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excess of recorded accruals. Such reserves and potential exposure are exclusive of matters relating to the Company’s separation from Cendant, matters relating to the Spin-off, matters relating to the sale of the European vacation rentals business, and matters relating to the sale of the North American vacation rentals business, which are discussed in Note 23—Transactions with Former Parent and Former Subsidiaries. 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 and/or liquidity.
For matters deemed reasonably possible, therefore 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. As of September 30, 2021, it is estimated that the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to an amount of $1 million.
GUARANTEES/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. Also in the ordinary course of business, the Company provides corporate guarantees for its operating business units relating to merchant credit-card processing for prepaid customer stays and other deposits. While a majority of these guarantees and indemnifications extend only for the duration of the underlying agreement, some survive the expiration of the agreement. 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 and Indemnifications
Vacation Ownership
The Company has committed to repurchase completed property located in Las Vegas, Nevada, from a third-party developer subject to such property meeting the Company’s vacation ownership resort standards and provided that the third-party developer has not sold such property to another party. See Note 8—Inventory for additional details.
For information on guarantees and indemnifications related to the Company’s former parent and subsidiaries see Note 23—Transactions with Former Parent and Former Subsidiaries.
17. Accumulated Other Comprehensive (Loss)/Income
The components of accumulated other comprehensive loss are as follows (in millions):
| Foreign | Unrealized | Defined | Accumulated | ||||||||||||||||||||
| Currency | (Losses)/Gains | Benefit | Other | ||||||||||||||||||||
| Translation | on Cash Flow | Pension | Comprehensive | ||||||||||||||||||||
| Pretax | Adjustments | Hedges | Plans | (Loss)/Income | |||||||||||||||||||
| Balance, December 31, 2020 | $ | (113) | $ | (1) | $ | — | $ | (114) | |||||||||||||||
| Other comprehensive loss | (27) | — | — | (27) | |||||||||||||||||||
| Balance, September 30, 2021 | $ | (140) | $ | (1) | $ | — | $ | (141) | |||||||||||||||
| Tax | |||||||||||||||||||||||
| Balance, December 31, 2020 | $ | 97 | $ | 1 | $ | — | $ | 98 | |||||||||||||||
| Other comprehensive loss | 1 | — | — | 1 | |||||||||||||||||||
| Balance, September 30, 2021 | $ | 98 | $ | 1 | $ | — | $ | 99 | |||||||||||||||
| Net of Tax | |||||||||||||||||||||||
| Balance, December 31, 2020 | $ | (16) | $ | — | $ | — | $ | (16) | |||||||||||||||
| Other comprehensive loss | (26) | — | — | (26) | |||||||||||||||||||
| Balance, September 30, 2021 | $ | (42) | $ | — | $ | — | $ | (42) | |||||||||||||||
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| Foreign | Unrealized | Defined | Accumulated | ||||||||||||||||||||
| Currency | (Losses)/Gains | Benefit | Other | ||||||||||||||||||||
| Translation | on Cash Flow | Pension | Comprehensive | ||||||||||||||||||||
| Pretax | Adjustments | Hedges | Plans | (Loss)/Income | |||||||||||||||||||
| Balance, December 31, 2019 | $ | (148) | $ | (1) | $ | 1 | $ | (148) | |||||||||||||||
| Other comprehensive loss | (6) | — | — | (6) | |||||||||||||||||||
| Balance, September 30, 2020 | $ | (154) | $ | (1) | $ | 1 | $ | (154) | |||||||||||||||
| Tax | |||||||||||||||||||||||
| Balance, December 31, 2019 | $ | 95 | $ | 1 | $ | — | $ | 96 | |||||||||||||||
| Other comprehensive income | 2 | — | — | 2 | |||||||||||||||||||
| Balance, September 30, 2020 | $ | 97 | $ | 1 | $ | — | $ | 98 | |||||||||||||||
| Net of Tax | |||||||||||||||||||||||
| Balance, December 31, 2019 | $ | (53) | $ | — | $ | 1 | $ | (52) | |||||||||||||||
| Other comprehensive loss | (4) | — | — | (4) | |||||||||||||||||||
| Balance, September 30, 2020 | $ | (57) | $ | — | $ | 1 | $ | (56) | |||||||||||||||
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.
There were no reclassifications out of AOCL for the nine months ended September 30, 2021 or 2020.
18. Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, PSUs, SSARs, NQs, and other stock-based awards to key employees, non-employee directors, advisors, and consultants.
The Wyndham Worldwide Corporation 2006 Equity and Incentive Plan was originally adopted in 2006 and was amended and restated in its entirety and approved by shareholders on May 17, 2018, (the “Amended and Restated Equity Incentive Plan”). Under the Amended and Restated Equity Incentive Plan, a maximum of 15.7 million shares of common stock may be awarded. As of September 30, 2021, 11.3 million shares remain available.
Incentive Equity Awards Granted by the Company
During the nine months ended September 30, 2021, the Company granted incentive equity awards to key employees and senior officers totaling $34 million in the form of RSUs, $7 million in the form of PSUs, and $2 million in the form of stock options. Of these awards, the NQs and the majority of RSUs will vest ratably over a period of four years. The PSUs will cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics.
During the nine months ended September 30, 2020, the Company granted incentive equity awards to key employees and senior officers totaling $35 million in the form of RSUs, $8 million in the form of PSUs, and $8 million in the form of stock options.
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The activity related to incentive equity awards granted to the Company’s key employees and senior officers by the Company for the nine months ended September 30, 2021, consisted of the following (in millions, except grant prices):
| Balance, December 31, 2020 | Granted | Vested/Exercised (a) | Forfeitures (b) | Balance, September 30, 2021 | |||||||||||||||||||||||||||||||
| RSUs | |||||||||||||||||||||||||||||||||||
| Number of RSUs | 1.6 | 0.6 | (0.4) | — | 1.8 | (c) | |||||||||||||||||||||||||||||
| Weighted average grant price | $ | 38.22 | $ | 58.61 | $ | 44.71 | $ | — | $ | 47.73 | |||||||||||||||||||||||||
| PSUs | |||||||||||||||||||||||||||||||||||
| Number of PSUs | 0.3 | 0.1 | — | — | 0.4 | (d) | |||||||||||||||||||||||||||||
| Weighted average grant price | $ | 42.57 | $ | 59.00 | $ | — | $ | — | $ | 48.18 | |||||||||||||||||||||||||
| SSARs | |||||||||||||||||||||||||||||||||||
| Number of SSARs | 0.2 | — | (0.2) | — | — | (e) | |||||||||||||||||||||||||||||
| Weighted average grant price | $ | 34.51 | $ | — | $ | 34.51 | $ | — | $ | — | |||||||||||||||||||||||||
| NQs | |||||||||||||||||||||||||||||||||||
| Number of NQs | 2.3 | 0.1 | (0.1) | — | 2.3 | (f) | |||||||||||||||||||||||||||||
| Weighted average grant price | $ | 44.15 | $ | 59.00 | $ | 44.50 | $ | — | $ | 45.32 | |||||||||||||||||||||||||
(a)Upon exercise of NQs and SSARs and upon vesting of RSUs and PSUs, the Company issues new shares to participants.
(b)The Company recognizes forfeitures as they occur.
(c)Aggregate unrecognized compensation expense related to RSUs was $58 million as of September 30, 2021, which is expected to be recognized over a weighted average period of 2.6 years.
(d)There was no unrecognized compensation expense related to PSUs as these awards were not probable of vesting as of September 30, 2021. The maximum amount of compensation expense associated with these awards would be $8 million which would be recognized over a weighted average period of 2.3 years.
(e)As of September 30, 2021, all SSARs had been exercised and thus there was no unrecognized compensation expense.
(f)There were 0.9 million NQs which were exercisable as of September 30, 2021. These exercisable NQs will expire over a weighted average period of 7.2 years and carry a weighted average grant date fair value of $8.39. Unrecognized compensation expense for NQs was $9 million as of September 30, 2021, which is expected to be recognized over a weighted average period of 2.5 years.
The fair values of stock options granted by the Company during 2021 and 2020 were estimated on the date of grant using the Black-Scholes option-pricing model with the relevant weighted average assumptions outlined in the table below. Expected volatility was based on both historical and implied volatilities of the Company’s stock and the stock of comparable companies over the estimated expected life for options. The expected life represents the period of time these awards are expected to be outstanding. 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 options. 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.
| Stock Options | 2021 | 2020 | |||||||||||||||
| Grant date fair value | $18.87 | $7.27 | - | $7.28 | |||||||||||||
| Grant date strike price | $59.00 | $41.04 | |||||||||||||||
| Expected volatility | 44.80% | 32.60% | - | 32.88% | |||||||||||||
| Expected life | 6.25 years | 6.25 | - | 7.50 years | |||||||||||||
| Risk-free interest rate | 1.09% | 0.95% | - | 1.03% | |||||||||||||
| Projected dividend yield | 3.12% | 4.87% | |||||||||||||||
Stock-Based Compensation Expense
The Company recorded stock-based compensation expense of $8 million and $24 million during the three and nine months ended September 30, 2021, and $6 million and $14 million during the three and nine months ended September 30, 2020, related to incentive equity awards granted to key employees, senior officers, and non-employee directors.
The Company paid $9 million and $2 million of taxes for the net share settlement of incentive equity awards that vested during the nine months ended September 30, 2021 and 2020.
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Employee Stock Purchase Plan
The Company has an employee stock purchase plan which allows eligible employees to purchase common shares of Company stock through payroll deductions at a 10% discount off the fair market value at the grant date. The Company issued 0.1 million shares and recognized less than $1 million of compensation expense related to grants under this plan during both the nine months ended September 30, 2021 and 2020.
19. Segment Information
The Company has two reportable segments: Vacation Ownership (formerly Wyndham Vacation Clubs) and Travel and Membership (formerly Panorama or Vacation Exchange). In connection with the Travel + Leisure brand acquisition the Company updated the names and composition of its segments to better align with how the segments are managed. The Vacation Ownership segment 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. The Travel and Membership segment operates a variety of travel businesses, including three vacation exchange brands, a home exchange network, travel technology platforms, travel memberships, and direct-to-consumer rentals. With the formation of Travel + Leisure Group the Company decided that the operations of its Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of this new business line and therefore transitioned the management of the Extra Holidays business to the Travel and Membership segment. As such, the Company reclassified the results of its Extra Holidays business, which was previously reported within the Vacation Ownership segment, into the Travel and Membership segment. This change is reflected in all periods reported. The reportable segments presented below are those for which discrete financial information is available and which are utilized on a regular basis by the 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 uses net revenues and Adjusted EBITDA to assess the performance of the reportable segments. Adjusted EBITDA is defined by the Company as Net income/(loss) from continuing operations before Depreciation and amortization, Interest expense (excluding Consumer financing interest), early extinguishment of debt, Interest income (excluding Consumer financing revenues) and income taxes. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, legacy items, transaction costs for acquisitions and divestitures, impairments, gains and losses on sale/disposition of business, and items that meet the conditions of unusual and/or infrequent. Legacy items include the resolution of and adjustments to certain contingent liabilities related to acquisitions of continuing businesses and dispositions, including the separation of Wyndham Hotels and Cendant, and the sale of the vacation rentals businesses. The Company believes that Adjusted EBITDA is a useful measure of performance for its segments which, when considered with GAAP measures, the Company believes gives a more complete understanding of its operating performance. The Company’s presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.
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The following tables present the Company’s segment information (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| Net revenues | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Vacation Ownership | $ | 660 | $ | 475 | $ | 1,708 | $ | 1,116 | |||||||||||||||
| Travel and Membership | 185 | 145 | 573 | 411 | |||||||||||||||||||
| Total reportable segments | 845 | 620 | 2,281 | 1,527 | |||||||||||||||||||
Corporate and other (a) | (6) | (6) | (17) | (12) | |||||||||||||||||||
| Total Company | $ | 839 | $ | 614 | $ | 2,264 | $ | 1,515 | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| Reconciliation of Net income/(loss) to Adjusted EBITDA | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 101 | $ | 40 | $ | 201 | $ | (258) | |||||||||||||||
| Loss on disposal of discontinued business, net of income taxes | — | — | 2 | — | |||||||||||||||||||
| Provision/(benefit) for income taxes | 39 | (21) | 76 | (54) | |||||||||||||||||||
| Depreciation and amortization | 31 | 32 | 93 | 94 | |||||||||||||||||||
| Interest expense | 47 | 52 | 147 | 138 | |||||||||||||||||||
| Interest (income) | (1) | (2) | (1) | (5) | |||||||||||||||||||
| Stock-based compensation | 8 | 6 | 24 | 14 | |||||||||||||||||||
| Legacy items | 2 | 1 | 6 | 2 | |||||||||||||||||||
COVID-19 related costs (b) | 1 | 13 | 3 | 51 | |||||||||||||||||||
Asset impairments (c) | — | 6 | — | 54 | |||||||||||||||||||
| Exchange inventory write-off | — | 10 | — | 48 | |||||||||||||||||||
| Restructuring | — | 2 | (1) | 27 | |||||||||||||||||||
| Adjusted EBITDA | $ | 228 | $ | 139 | $ | 550 | $ | 111 | |||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| Adjusted EBITDA | 2021 | 2020 | 2021 | 2020 | |||||||||||||||||||
| Vacation Ownership | $ | 177 | $ | 93 | $ | 377 | $ | 6 | |||||||||||||||
| Travel and Membership | 68 | 62 | 218 | 142 | |||||||||||||||||||
| Total reportable segments | 245 | 155 | 595 | 148 | |||||||||||||||||||
Corporate and other (a) | (17) | (16) | (45) | (37) | |||||||||||||||||||
| Total Company | $ | 228 | $ | 139 | $ | 550 | $ | 111 | |||||||||||||||
(a)Includes the elimination of transactions between segments.
(b)Reflects severance and other employee costs associated with layoffs due to the COVID-19 workforce reduction offset in part by employee retention credits received in connection with the U.S. CARES Act, ARPA, and similar international programs for wages paid to certain employees despite having operations suspended. This amount does not include costs associated with idle pay.
(c)Includes $5 million of bad debt expense related to a note receivable for the nine months ended September 30, 2020, included in Operating expenses on the Condensed Consolidated Statements of Income/(Loss).
Segment Assets (a) | September 30, 2021 | December 31, 2020 | |||||||||
| Vacation Ownership | $ | 4,738 | $ | 5,000 | |||||||
| Travel and Membership | 1,456 | 1,372 | |||||||||
| Total reportable segments | 6,194 | 6,372 | |||||||||
| Corporate and other | 407 | 1,241 | |||||||||
| Total Company | $ | 6,601 | $ | 7,613 | |||||||
(a)Excludes investment in consolidated subsidiaries.
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20. COVID-19 Related Items
During the three months ended September 30, 2021, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
| Vacation Ownership | Travel and Membership | Corporate | Consolidated | Income Statement Classification | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Provision | $ | (21) | $ | — | $ | — | $ | (21) | Vacation ownership interest sales | |||||||||||||||||||||||
| Recoveries | 8 | — | — | 8 | Cost/(recovery) of vacation ownership interests | |||||||||||||||||||||||||||
| Employee compensation related and other | 1 | — | — | 1 | COVID-19 related costs | |||||||||||||||||||||||||||
| Total COVID-19 | $ | (12) | $ | — | $ | — | $ | (12) | ||||||||||||||||||||||||
During the nine months ended September 30, 2021, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
| Vacation Ownership | Travel and Membership | Corporate | Consolidated | Income Statement Classification | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Provision | $ | (47) | $ | — | $ | — | $ | (47) | Vacation ownership interest sales | |||||||||||||||||||||||
| Recoveries | 17 | — | — | 17 | Cost/(recovery) of vacation ownership interests | |||||||||||||||||||||||||||
| Employee compensation related and other | 2 | — | 1 | 3 | COVID-19 related costs | |||||||||||||||||||||||||||
| Lease related | (1) | — | — | (1) | Restructuring | |||||||||||||||||||||||||||
| Total COVID-19 | $ | (29) | $ | — | $ | 1 | $ | (28) | ||||||||||||||||||||||||
During the three months ended September 30, 2020, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
| Vacation Ownership | Travel and Membership | Corporate | Consolidated | Income Statement Classification | ||||||||||||||||||||||||||||
| Employee compensation related and other | $ | 11 | $ | 1 | $ | 2 | $ | 14 | COVID-19 related costs | |||||||||||||||||||||||
| Exchange inventory write-off | — | 10 | — | 10 | Operating expenses | |||||||||||||||||||||||||||
| Asset impairments | 6 | — | — | 6 | Asset impairments | |||||||||||||||||||||||||||
| Lease related | 1 | — | — | 1 | Restructuring | |||||||||||||||||||||||||||
| Total COVID-19 | $ | 18 | $ | 11 | $ | 2 | $ | 31 | ||||||||||||||||||||||||
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During the nine months ended September 30, 2020, the Company had expenses directly related to COVID-19 as detailed in the table below (in millions):
| Vacation Ownership | Travel and Membership | Corporate | Consolidated | Income Statement Classification | ||||||||||||||||||||||||||||
| Allowance for loan losses: | ||||||||||||||||||||||||||||||||
| Provision | $ | 225 | $ | — | $ | — | $ | 225 | Vacation ownership interest sales | |||||||||||||||||||||||
| Recoveries | (55) | — | — | (55) | Cost/(recovery) of vacation ownership interests | |||||||||||||||||||||||||||
| Employee compensation related and other | 62 | 6 | 13 | 81 | COVID-19 related costs | |||||||||||||||||||||||||||
| Asset impairments | 20 | 34 | — | 54 | Asset impairments/ Operating expenses | |||||||||||||||||||||||||||
| Exchange inventory write-off | — | 48 | — | 48 | Operating expenses | |||||||||||||||||||||||||||
| Lease related | 2 | 22 | — | 24 | Restructuring | |||||||||||||||||||||||||||
| Total COVID-19 | $ | 254 | $ | 110 | $ | 13 | $ | 377 | ||||||||||||||||||||||||
Allowance for loan losses - Due to the closure of resorts and sales centers and the economic downturn resulting from COVID-19 during the first quarter of 2020, the Company evaluated the potential impact of COVID-19 on its owners’ ability to repay their contract receivables and as a result of higher unemployment, the Company recorded a COVID-19 related allowance for loan losses. This allowance consisted of a $225 million COVID-19 related provision, which was reflected as a reduction to Vacation ownership interest sales and $55 million of estimated recoveries, which were reflected as a reduction to Cost/(recovery) of vacation ownership interests on the Condensed Consolidated Statements of Income/(Loss). The net negative impact of this COVID-19 related provision on Adjusted EBITDA was $170 million for the nine months ended September 30, 2020.
During 2021, the Company analyzed the adequacy of the COVID-19 related allowance consistent with past methodology, and due to the improvement in net new defaults the Company reduced this allowance resulting in a $21 million and $47 million increase to Vacation ownership interest sales during the three and nine months ended September 30, 2021 and a corresponding $8 million and $17 million increase to Cost/(recovery) of vacation ownership interests on the Condensed Consolidated Statements of Income/(Loss). The net positive impact of these adjustments on Adjusted EBITDA was $13 million and $30 million for the three and nine months ended September 30, 2021. The Company will continue to monitor this reserve as more information becomes available. Refer to Note 7—Vacation Ownership Contract Receivables for additional details.
Employee compensation related and other - During the three and nine months ended September 30, 2020, these costs included $9 million and $68 million related to severance and other employee costs resulting from the layoffs, salary and benefits continuation for certain employees while operations were suspended, and vacation payments associated with furloughed employees. These costs are inclusive of $3 million and $24 million of employee retention credits earned in connection with government programs, primarily the CARES Act.
Employee compensation related and other costs also included $5 million and $13 million of expenses during the three and nine months ended September 30, 2020 related to renegotiating or exiting certain agreements and other professional fees.
During the three and nine months ended September 30, 2021, the Company incurred an additional $1 million and $3 million employee related costs associated with benefits continuation, inclusive of $2 million of employee retention credits earned in connection with government programs for the nine months ended September 30, 2021.
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In connection with these actions the Company recorded COVID-19 employee-related liabilities which are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets. The activity associated with these COVID-19 related liabilities is summarized as follows (in millions):
| Liability as of | Liability as of | ||||||||||||||||||||||
| December 31, 2020 | Costs Recognized | Cash Payments | September 30, 2021 | ||||||||||||||||||||
| COVID-19 employee-related | $ | 6 | $ | 1 | $ | (6) | $ | 1 | |||||||||||||||
| $ | 6 | $ | 1 | $ | (6) | $ | 1 | ||||||||||||||||
Asset impairments - During the three and nine months ended September 30, 2020, the Company incurred $6 million and $54 million of COVID-19 related impairments. These impairments include $6 million and $49 million recorded within Asset impairments on the Condensed Consolidated Statements of Income/(Loss) during each period as discussed in Note 21—Impairments, and $5 million included in Operating expenses during the nine months ended September 30, 2020.
Exchange inventory write-off - During the three and nine months ended September 30, 2020, the Company wrote-off $10 million and $48 million of exchange inventory, which is included in Operating expenses on the Condensed Consolidated Statements of Income/(Loss) as discussed in Note 8—Inventory.
Lease related - The Company also recognized $24 million of restructuring charges during the nine months ended September 30, 2020. This was driven by $22 million related to the New Jersey lease discussed in Note 22—Restructuring.
21. Impairments
During the three and nine months ended September 30, 2020, the Company recorded $6 million and $50 million of asset impairments, of which $6 million and $49 million were COVID-19 related. In the first quarter of 2020, there were $6 million of impairments at the Vacation Ownership segment related to prepaid development costs and undeveloped land and $4 million at the Travel and Membership segment related to the Love Home Swap trade name. In the second quarter of 2020, the Company recorded a $24 million impairment at the Travel and Membership segment related to the New Jersey lease and related fixed assets discussed in Note 22—Restructuring, a $6 million impairment for equity investments held at the Travel and Membership segment, and a $3 million impairment at the Vacation Ownership segment related to lease assets and furniture, fixtures and equipment. During the third quarter of 2020, $6 million of impairments were driven by leases and related fixed assets within the Vacation Ownership segment due to sales center closures. These impairments are included within the Asset impairments on the Condensed Consolidated Statements of Income/(Loss). The Company also recorded additional impairments of less than $1 million at the Vacation Ownership segment that were unrelated to COVID-19.
There were no impairment charges for the three and nine months ended September 30, 2021.
22. Restructuring
2020 Restructuring Plans
During 2020, the Company recorded $37 million of restructuring charges, $36 million of which were COVID-19 related. Due to the impact of COVID-19, the Company decided in the second quarter of 2020 to abandon the remaining portion of its administrative offices in New Jersey. The Company was notified in the second quarter of 2020 that Wyndham Hotels exercised its early termination rights under the sublease agreement. As a result, the Company recorded $22 million of restructuring charges associated with non-lease components of the office space and $24 million of impairment charges associated with the write-off of right-of-use assets and furniture, fixtures and equipment at its Travel and Membership segment. The Company also recognized $12 million of lease-related charges due to the renegotiation of an agreement and $2 million of facility-related restructuring charges associated with closed sales centers at its Vacation Ownership segment. The Travel and Membership segment additionally recognized $1 million in employee-related expenses associated with the consolidation of a shared service center. During 2020, the Company reduced its restructuring liability by $12 million of cash payments. The remaining 2020 restructuring liability of $27 million is expected to be paid by the end of 2027.
The Company implemented other restructuring plans prior to 2020. The remaining liability of less than $1 million as of September 30, 2021, is mostly personnel-related and is expected to be paid by the end of 2021.
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The activity associated with the Company’s restructuring plans is summarized as follows (in millions):
| Liability as of | Liability as of | ||||||||||||||||||||||||||||
| December 31, 2020 | Costs Recognized | Cash Payments | Other | September 30, 2021 | |||||||||||||||||||||||||
| Personnel-related | $ | 1 | $ | — | $ | (1) | $ | — | $ | — | |||||||||||||||||||
| Facility-related | 23 | — | — | — | 23 | ||||||||||||||||||||||||
| Marketing-related | 2 | (1) | (a) | — | 3 | (b) | 4 | ||||||||||||||||||||||
| $ | 26 | $ | (1) | $ | (1) | $ | 3 | $ | 27 | ||||||||||||||||||||
(a)Includes $1 million reversal of expense related to the reimbursement of prepaid licensing fees that were previously written-off at the Vacation Ownership segment.
(b)Includes $2 million reimbursement of termination payments and $1 million reimbursement of license fees at the Vacation Ownership segment.
23. Transactions with Former Parent and Former Subsidiaries
Matters Related to Cendant
Pursuant to the Separation and Distribution Agreement with Cendant (the Company’s former parent company), the Company entered into certain guarantee commitments with Cendant and Cendant’s former subsidiary, Realogy. These guarantee arrangements primarily relate to certain contingent litigation liabilities, contingent tax liabilities, and Cendant contingent and other corporate liabilities, of which Wyndham Worldwide Corporation assumed 37.5% of the responsibility while Cendant’s former subsidiary Realogy is responsible for the remaining 62.5%. In connection with the Spin-off, Wyndham Hotels agreed to retain one-third of Cendant’s contingent and other corporate liabilities and associated costs; therefore, Travel + Leisure Co. is effectively responsible for 25% of such matters subsequent to the separation. Since Cendant’s separation, Cendant has settled the majority of the lawsuits that were pending on the date of the separation.
As of September 30, 2021, the Cendant separation and related liabilities of $13 million are comprised of $13 million for tax related liabilities and less than $1 million for other contingent and corporate liabilities. As of December 31, 2020, the Company had $13 million of Cendant separation-related liabilities. These liabilities are included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets.
Matters Related to Wyndham Hotels
In connection with the Spin-off on May 31, 2018, Travel + Leisure Co. entered into several agreements with Wyndham Hotels that govern the relationship of the parties following the separation including the Separation and Distribution Agreement, the Employee Matters Agreement, the Tax Matters Agreement, the Transition Services Agreement and the License, Development and Noncompetition Agreement.
On January 4, 2021, the Company and Wyndham Hotels entered into a letter agreement pursuant to which, among other
things Wyndham Hotels waived its right to enforce certain noncompetition covenants in the License, Development and Noncompetition Agreement.
In accordance with these agreements governing the relationship between Travel + Leisure Co. and Wyndham Hotels, Travel + Leisure Co. assumed two-thirds and Wyndham Hotels assumed one-third of certain contingent corporate liabilities of the Company incurred prior to the distribution, including liabilities of the Company related to certain terminated or divested businesses, certain general corporate matters, and any actions with respect to the separation plan. Likewise, Travel + Leisure Co. is entitled to receive two-thirds and Wyndham Hotels is entitled to receive one-third of the proceeds from certain contingent corporate assets of the Company arising or accrued prior to the distribution.
Travel + Leisure Co. entered into a transition service agreement with Wyndham Hotels, pursuant to which the companies agreed to provide each other certain transitional services including human resources, facilities, payroll, tax, information technology, information management and related services, treasury, finance, sourcing, and employee benefits administration on an interim, transitional basis. For both the three and nine months ended September 30, 2020, transition service agreement expenses were less than $1 million and included within General and administrative expense on the Condensed Consolidated Statements of Income/(Loss). These transition services ended in 2020.
Matters Related to the European Vacation Rentals Business
In connection with the sale of the Company’s European vacation rentals business to Awaze Limited (“Awaze”), formerly Compass IV Limited, an affiliate of Platinum Equity, LLC, the Company and Wyndham Hotels agreed to certain post-
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closing credit support for the benefit of certain credit card service providers, a British travel association, and certain regulatory authorities to allow them to continue providing services or regulatory approval to the business. Post-closing credit support may be called if the business fails to meet its primary obligation to pay amounts when due. Awaze has provided an indemnification to Travel + Leisure Co. in the event that the post-closing credit support is enforced or called upon.
At closing, the Company agreed to provide additional post-closing credit support to a British travel association and regulatory authority. An escrow was established at closing, of which $46 million was subsequently released in exchange for a secured bonding facility and a perpetual guarantee denominated in pound sterling of $46 million. The estimated fair value of the guarantee was $22 million as of September 30, 2021. The Company maintains a $7 million receivable from Wyndham Hotels for its portion of the guarantee.
In addition, the Company agreed to indemnify Awaze against certain claims and assessments, including income tax, value-added tax and other tax matters, related to the operations of the European vacation rentals business for the periods prior to the transaction. The estimated fair value of the indemnifications was $42 million at September 30, 2021. The Company has a $14 million receivable from Wyndham Hotels for its portion of the guarantee.
Wyndham Hotels provided certain post-closing credit support primarily for the benefit of a British travel association in the form of guarantees which are mainly denominated in pound sterling of up to an approximate $81 million on a perpetual basis. These guarantees totaled $39 million at September 30, 2021. Travel + Leisure Co. is responsible for two-thirds of these guarantees.
As part of this agreement Wyndham Hotels is required to maintain minimum credit ratings which increased to Ba1 for Moody’s Investors Services and BB+ for Standard & Poor’s Rating Services (“S&P”) on May 9, 2020. In April 2020, S&P downgraded Wyndham Hotels’ credit rating from BB+ to BB. Although any ultimate exposure relative to indemnities retained from the European vacation rentals sale will be shared two-thirds by Travel + Leisure Co. and one-third by Wyndham Hotels, as the selling entity, Travel + Leisure Co. is responsible for administering additional security to enhance corporate guarantees in the event either company falls below a certain credit rating threshold. As a result of the Wyndham Hotels credit ratings downgrade, during 2020, the Company posted a £58 million surety bond and a £36 million letter of credit ($78 million and $48 million as of September 30, 2021). During the third quarter of 2021, S&P upgraded Wyndham Hotels’ credit rating to BB+. In connection with the upgrade of Wyndham Hotels’ credit rating and as part of the settlement of other claims, the Company and the beneficiary of the bond have agreed to the release of the security in the fourth quarter of 2021.
The estimated fair value of the guarantees and indemnifications for which Travel + Leisure Co. is responsible related to the sale of the European vacation rentals business at September 30, 2021, including the two-thirds portion related to guarantees provided by Wyndham Hotels, totaled $90 million and was recorded in Accrued expenses and other liabilities and total receivables of $21 million were included in Other assets on the Condensed Consolidated Balance Sheets, representing the portion of these guarantees and indemnifications for which Wyndham Hotels is responsible.
During 2019, Awaze proposed certain post-closing adjustments of $44 million related to the sale of the European vacation rentals business. On October 22, 2021, the Company entered into a letter of intent to settle these post-closing adjustment claims for an immaterial amount, one-third of which is the responsibility of Wyndham Hotels.
Travel + Leisure Co. entered into a transition service agreement with Awaze, pursuant to which the companies agreed to provide each other certain transitional services including human resources, facilities, payroll, tax, information technology, information management and related services, treasury, finance, and sourcing on an interim, transitional basis. During both the three and nine months ended September 30, 2020, transition service agreement expenses were less than $1 million and transition service agreement income was less than $1 million. Transition service agreement expenses were included in General and administrative expense and transition service income was included in Net revenues on the Condensed Consolidated Statements of Income/(Loss). These transition services ended in 2020.
Matters Related to the North American Vacation Rentals Business
In connection with the sale of the North American vacation rentals business, the Company agreed to indemnify Vacasa LLC (“Vacasa”) against certain claims and assessments, including income tax and other tax matters related to the operations of the North American vacations rentals business for the periods prior to the transaction. The estimated fair value of the indemnifications was $2 million, which was included in Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets at September 30, 2021.
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In connection with the sale of the North American vacations rentals business in the fourth quarter of 2019, the Company entered into a transition service agreement with Vacasa, pursuant to which the companies agreed to provide each other certain transitional services including human resources, facilities, payroll, information technology, information management and related services, treasury, and finance on an interim, transitional basis. During the nine months ended September 30, 2021, transition service agreement expenses were less than $1 million and transition service agreement income was less than $1 million. During the three and nine months ended September 30, 2020, transition service agreement expenses were less than $1 million and $1 million and transition service agreement income was less than $1 million and $1 million. Transition service agreement expenses were included in General and administrative expense and transition service income was included in Other revenue on the Condensed Consolidated Statements of Income/(Loss). These transition services ended in February 2021.
24. Related Party Transactions
In March 2019, the Company entered into an agreement with a former executive of the Company whereby the former executive through an SPE would develop and construct VOI inventory located in Orlando, Florida. On July 8, 2020, the Company acquired the completed vacation ownership property for $45 million. This agreement was subsequently amended increasing the purchase to $47 million.
The Company occasionally sublets an aircraft from its former CEO and current Chairman of the Board of Directors for business travel through a timesharing arrangement. The Company incurred less than $1 million of expenses during the nine months ended September 30, 2021 and 2020.
25. Subsequent Events
Revolving Credit Facility Renewal
On October 22, 2021, the Company renewed the credit agreement governing its $1.0 billion revolving credit facility and term loan B, extending the end of the commitment period of the revolving credit facility from May 2023 to October 2026. This renewal terminated the Relief Period established by the July 15, 2020 Credit Agreement Amendment. The renewal stipulates a first lien leverage ratio financial covenant not to exceed 4.75 to 1.0 commencing with the December 31, 2021 period through June 30, 2022, after which time it will return to 4.25 to 1.0, the level in existence prior to the effective date of the Credit Agreement Amendment. The renewal also increased the interest coverage ratio (as defined in the Credit Agreement) to 2.5 to 1.0, the level existing prior to the effective date of the Credit Agreement Amendment, and eliminated restrictions regarding share repurchases, dividends, acquisitions, and the Relief Period minimum liquidity covenant.
The renewal reestablishes the annual interest rate in existence prior to the Credit Agreement Amendment which is equal to, at the Company’s option, either a base rate plus a margin ranging from 0.75% to 1.25% or LIBOR plus a margin ranging from 1.75% to 2.25%, in either case based upon the Company’s first lien leverage ratio.
Sierra Timeshare 2021-2 Receivables Funding LLC
On October 26, 2021, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2021-2 Receivables Fundings LLC, with an initial principal amount of $350 million, secured by vacation ownership contract receivables and bearing interest at a weighted average coupon rate of 1.82%. The advance rate for this transaction was 98%.
Post-Closing Adjustments for the Sale of the European Vacation Rentals Business
During 2019, Awaze proposed certain post-closing adjustments of $44 million related to the sale of the European vacation rentals business. On October 22, 2021, the Company entered into a letter of intent to settle these post-closing adjustment claims for an immaterial amount, one-third of which is the responsibility of Wyndham Hotels.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
FORWARD-LOOKING STATEMENTS
This report includes “forward-looking statements” as that term is defined by the Securities and Exchange Commission (“SEC”). Forward-looking statements are any statements other than statements of historical fact, including statements regarding our expectations, beliefs, hopes, intentions or strategies regarding the future. In some cases, forward-looking statements can be identified by the use of words such as “may,” “will,” “expects,” “should,” “believes,” “plans,” “anticipates,” “estimates,” “predicts,” “potential,” “continue,” “future” or other words of similar meaning. Forward-looking statements are subject to risks and uncertainties that could cause actual results of Travel + Leisure Co. and its subsidiaries (“Travel + Leisure Co.” or “we”) to differ materially from those discussed in, or implied by, the forward-looking statements. Factors that might cause such a difference include, but are not limited to, uncertainty with respect to our ability to realize the benefits of the Travel + Leisure brand acquisition; the scope and duration of the novel coronavirus global pandemic (“COVID-19”), any resurgences and the pace of recovery; the timing of the widespread distribution and use of an effective vaccine or treatment for COVID-19; the potential impact of governmental, business and individuals’ actions in response to the COVID-19 pandemic and our related contingency plans, including reductions in investment in our business, vacation ownership interest sales and tour flow, and consumer demand and liquidity; our ability to comply with financial and restrictive covenants under our indebtedness and our ability to access capital on reasonable terms, at a reasonable cost or at all; our ability and the ability of Wyndham Hotels & Resorts, Inc. (“Wyndham Hotels”) to maintain credit ratings; general economic conditions and unemployment rates, the performance of the financial and credit markets, the competition in and the economic environment for the leisure travel industry; risks associated with employees working remotely or operating with a reduced workforce; the impact of war, terrorist activity, political strife, severe weather events and other natural disasters, and pandemics (including COVID-19) or threats of pandemics; operating risks associated with the Vacation Ownership and Travel and Membership segments; uncertainties related to strategic transactions, including the spin-off of our hotels business, Wyndham Hotels, and any potential impact on our relationships with our customers, suppliers, employees and others with whom we have relationships, and possible disruption to our operations; our ability to execute on our strategy; the timing and amount of future dividends and share repurchases, if any, and those other factors disclosed as risks under “Risk Factors” in documents we have filed with the SEC, including in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on February 24, 2021. We caution readers that any such statements are based on currently available operational, financial and competitive information, and they should not place undue reliance on these forward-looking statements, which reflect management’s opinion only as of the date on which they were made. Except as required by law, we undertake no obligation to review or update these forward-looking statements to reflect events or circumstances as they occur.
BUSINESS AND OVERVIEW
We are a global provider of hospitality services and travel products and operate our business in the following two segments:
•Vacation Ownership (formerly Wyndham Vacation Clubs)—develops, markets and sells vacation ownership interests (“VOIs”) to individual consumers, provides consumer financing in connection with the sale of VOIs, and provides property management services at resorts. This segment is wholly comprised of our Wyndham Destinations business line. The following brands operate under the Wyndham Destinations business line: Club Wyndham, WorldMark by Wyndham, Shell Vacations Club, Margaritaville Vacation Club by Wyndham, and Presidential Reserve by Wyndham.
•Travel and Membership (formerly Panorama or Vacation Exchange)—operates a variety of travel businesses, including three vacation exchange brands, a home exchange network, travel technology platforms, travel memberships, and direct-to-consumer rentals. This segment is comprised of our Panorama and Travel + Leisure Group business lines. The following brands operate under the Panorama business line: RCI, Panorama Travel Solutions, Alliance Reservations Network (“ARN”), 7Across, The Registry Collection, and Love Home Swap. The Travel + Leisure Group operates the go.travelandleisure.com, Travel + Leisure Travel Clubs, and Extra Holidays brands.
Travel + Leisure Brand Acquisition
On January 5, 2021, Wyndham Destinations, Inc. acquired the Travel + Leisure brand and related assets from Meredith Corporation (“Meredith”) for $100 million, of which we paid $35 million at closing and an additional $20 million during the second quarter of 2021. The remaining payments are to be completed by June 2024. This acquisition included Travel + Leisure’s branded travel clubs and their nearly 60,000 members. We acquired the Travel + Leisure brand to accelerate our strategic plan to broaden our reach with the launch of new travel services, expand our membership travel business, and amplify the global visibility of our leisure travel products. Meredith will continue to operate and monetize Travel + Leisure’s branded multi-platform media assets across multiple channels under a 30-year royalty-free, renewable licensing relationship. In connection with this acquisition, on February 17, 2021, Wyndham Destinations, Inc. was renamed Travel + Leisure Co. and continues to trade on the New York Stock Exchange under the new ticker symbol TNL.
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In connection with the Travel + Leisure brand acquisition we updated the names and composition of our reportable segments to better align with how they are managed. We created the Travel + Leisure Group which falls under the Travel and Membership segment along with the Panorama business line. With the formation of Travel + Leisure Group, we decided that the operations of our Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of this new business line and therefore transitioned the management of our Extra Holidays business to the Travel and Membership segment. As such, we reclassified the results of our Extra Holidays business, which were previously reported within the Vacation Ownership segment, into the Travel and Membership segment.
Impact of COVID-19 on Our Business
The results of operations for the three and nine months ended September 30, 2021 and 2020 include impacts related to the novel coronavirus global pandemic (“COVID-19”), which have been significantly negative for the travel industry, our company, our customers, and our employees.
Our response to COVID-19 initially focused on the health and safety of our owners, members, guests, and employees when we closed the majority of our resorts and sales centers in early 2020. As a result, we significantly reduced our workforce and furloughed thousands of employees. As of September 30, 2021, we had reopened all of the resorts and sales offices in North America that we expect to reopen. The remaining closed resorts and sales offices that we intend to reopen are located in the South Pacific and are expected to reopen in 2021, contingent upon the lifting of government imposed travel restrictions. As a result of reopening substantially all of our resorts, the majority of furloughed employees have returned to work.
Given the significant impacts of COVID-19 on our business, our revenues have been negatively impacted. While revenues are continuing to recover, not all product and service lines have yet reached pre-pandemic levels, and we believe that COVID-19 will continue to have an adverse effect on our financial condition and results of operations in the near term. Despite some volatility with recent spikes in COVID-19 case-counts as a result of variants, in general, we are seeing a broad increase in consumer confidence as well as a reduction in travel restrictions. These factors combined with progress in the roll-out of vaccinations have continued to help travel sentiment improve. We expect that further improvements in travel sentiment will help with a broader recovery of our business.
Similar to the impact on revenue, COVID-19 also had a significant impact on our expenses. During the three and nine months ended September 30, 2020, we incurred $31 million and $377 million of COVID-19 related charges. During the three and nine months ended September 30, 2021 we reversed $12 million and $28 million of COVID-19 charges, primarily due to the COVID-19 related allowance for loan losses on vacation ownership contract receivables (“VOCRs”). We believe our COVID-19 related expenses will continue to be at a significantly lower level than we experienced in 2020. See Note 20—COVID-19 Related Items to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details on the impact COVID-19 had on our business.
Included in the $377 million of COVID-19 related charges during the nine months ended September 30, 2020 was a $225 million COVID-19 related loan loss provision recorded as a result of our evaluation of the impact of COVID-19 on our owners’ ability to repay their VOCRs. As we began to see an improvement in net new defaults and lower than expected unemployment rates, we reduced this provision by $20 million in the fourth quarter of 2020. During 2021, as a result of continued improvement in net new defaults, we further reduced this provision by $47 million during the nine months ended September 30, 2021.
As of September 30, 2021, given the significant amount of government assistance provided to consumers during the pandemic, we expect default risk to remain elevated for approximately six months as those programs expire. If unemployment rates or our collection experience for our VOCRs differ significantly from current expectations, we may need to further increase or decrease our allowance for loan losses for VOCRs.
As a precautionary measure to enhance liquidity during the pandemic, in the first quarter of 2020, we drew down our $1.0 billion revolving credit facility and suspended share repurchase activity. In the third quarter of 2020, we amended the credit agreement governing our revolving credit facility and term loan B, which provided financial covenant flexibility during the relief period spanning from July 15, 2020 through April 1, 2022 (the “Relief Period”). During the Relief Period we were prohibited from using cash for share repurchases but maintained our ability to pay dividends and make investments in our business. During 2021 we repaid our $1.0 billion revolving credit facility and our $250 million 5.625% secured notes which came due in March 2021. On October 22, 2021, we renewed the credit agreement governing our revolving credit facility and term loan B, which terminated the Relief Period, establishing new thresholds for our financial covenant ratios and eliminating
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the restrictions regarding share repurchases, dividends, and acquisitions established by the 2020 amendment. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal.
During 2020 we successfully executed $900 million of securitization financings and issued $650 million of senior secured notes due 2026 with an interest rate of 6.625%. In the first quarter of 2021 we closed on a $500 million securitization financing at a more favorable cost than any securitization transaction we have completed in the past. On October 26, 2021 we closed on a $350 million securitization financing, see Note 25—Subsequent Events to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. These transactions together with improving operational results reinforce our expectation that we will be able to maintain adequate liquidity.
As part of our reopening strategy, we focused on higher margin owner business by leveraging our owner upgrade pipeline. Prior to the pandemic, just under 40% of our sales transactions were to lower margin new owners as compared to 30% in the third quarter of 2021.
We also raised our credit standards and directed our marketing efforts towards higher Fair Isaac Corporation (“FICO”) scores, which we expect will continue to strengthen our receivables portfolio going forward. Additionally, we closed certain unprofitable marketing and sales locations and shifted marketing channels and resources to our most productive channels. All of these changes were designed to result in higher volume per guest (“VPG”), which is a measure of sales efficiency and is strongly correlated to profitability.
For certain of the events, uncertainties, trends, and risks associated with the impact of the COVID-19 pandemic on our future results and financial condition, see “Risks Related to the COVID-19 Pandemic” included in Part I, Item 1A in the Annual Report filed on Form 10-K with the SEC on February 24, 2021.
RESULTS OF OPERATIONS
We have two reportable segments: Vacation Ownership (formerly Wyndham Vacation Clubs) and Travel and Membership (formerly Panorama or Vacation Exchange). In connection with the Travel + Leisure brand acquisition and creation of the Travel + Leisure Group business line, we decided that the operations of our Extra Holidays business, which focuses on direct to consumer bookings, better aligns with the operations of the new Travel + Leisure Group business line and therefore transitioned the management of this business to the Travel and Membership segment. As such, we reclassified the results of our Extra Holidays business, which was previously reported within the Vacation Ownership segment, into the Travel and Membership segment. This change is reflected in all periods reported. The reportable segments presented below are those for which discrete financial information is available and which are utilized on a regular basis by our chief operating decision maker to assess performance and to allocate resources. In identifying the reportable segments, we also consider the nature of services provided by our operating segments. Management uses net revenues and Adjusted EBITDA to assess the performance of the reportable segments. We define Adjusted EBITDA as Net income/(loss) from continuing operations before Depreciation and amortization, Interest expense (excluding Consumer financing interest), early extinguishment of debt, Interest income (excluding Consumer financing revenues) and income taxes. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, legacy items, transaction costs for acquisitions and divestitures, impairments, gains and losses on sale/disposition of business, and items that meet the conditions of unusual and/or infrequent. Legacy items include the resolution of and adjustments to certain contingent liabilities related to acquisitions of continuing businesses and dispositions, including the separation of Wyndham Hotels and Cendant, and the sale of the vacation rentals businesses. We believe that Adjusted EBITDA is a useful measure of performance for our segments which, when considered with GAAP measures, we believe gives a more complete understanding of our operating performance. Our presentation of Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.
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OPERATING STATISTICS
The table below presents our operating statistics for the three months ended September 30, 2021 and 2020. These operating statistics are the drivers of our revenues and therefore provide an enhanced understanding of our businesses. Refer to the Three Months Ended September 30, 2021 vs. Three Months Ended September 30, 2020 section for a discussion on how these operating statistics affected our business for the periods presented.
| Three Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | % Change (h) | |||||||||||||||
| Vacation Ownership | |||||||||||||||||
Gross VOI sales (in millions) (a) (i) | $ | 440 | $ | 256 | 72.3 | ||||||||||||
Tours (in 000s) (b) | 129 | 80 | 61.5 | ||||||||||||||
Volume Per Guest (“VPG”) (c) | $ | 3,233 | $ | 3,039 | 6.4 | ||||||||||||
Travel and Membership (d) | |||||||||||||||||
Transactions (in 000s) (e) | |||||||||||||||||
| Exchange | 256 | 214 | 19.9 | ||||||||||||||
| Non-exchange | 214 | 142 | 51.1 | ||||||||||||||
| Total transactions | 470 | 356 | 32.3 | ||||||||||||||
Revenue per transaction(f) | |||||||||||||||||
| Exchange | $ | 339 | $ | 300 | 13.2 | ||||||||||||
| Non-exchange | $ | 214 | $ | 157 | 36.1 | ||||||||||||
| Total revenue per transaction | $ | 282 | $ | 243 | 16.2 | ||||||||||||
Average number of exchange members (in 000s) (g) | 3,895 | 3,680 | 5.8 | ||||||||||||||
(a)Represents total sales of VOIs, including sales under the Fee-for-Service program before the effect of loan loss provisions. We believe that Gross VOI sales provide an enhanced understanding of the performance of our Vacation Ownership business because it directly measures the sales volume of this business during a given reporting period.
(b)Represents the number of tours taken by guests in our efforts to sell VOIs.
(c)VPG is calculated by dividing Gross VOI sales (excluding tele-sales upgrades, which are non-tour upgrade sales) by the number of tours. We believe that VPG provides an enhanced understanding of the performance of our Vacation Ownership business because it directly measures the efficiency of this business’ tour selling efforts during a given reporting period.
(d)Includes the impact from acquisitions from the acquisition dates forward.
(e)Represents the number of vacation bookings recognized as revenue during the period, net of cancellations.
(f)Represents transactional revenue divided by transactions.
(g)Represents paid members in our vacation exchange programs who are current on their annual membership dues or within the allowed grace period.
(h)Percentage of change may not calculate due to rounding.
(i)The following table provides a reconciliation of Vacation ownership interest sales, net to Gross VOI sales for the three months ended September 30, 2021 and 2020 (in millions):
| 2021 | 2020 | ||||||||||
| Vacation ownership interest sales, net | $ | 344 | $ | 196 | |||||||
| Loan loss provision | 49 | 45 | |||||||||
| Gross VOI sales, net of Fee-for-Service sales | 393 | 241 | |||||||||
Fee-for-Service sales (1) | 47 | 15 | |||||||||
| Gross VOI sales | $ | 440 | $ | 256 | |||||||
(1)Represents total sales of VOIs through our Fee-for-Service programs where inventory is sold through our sales and marketing channels for a commission. There were $28 million and $6 million Fee-for-Service commission revenues for the three months ended September 30, 2021 and 2020. These commissions are reported within Service and membership fees on the Condensed Consolidated Statements of Income/(Loss) included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Our 2020 operating statistics include the impacts of COVID-19 which were significantly negative for the travel industry, our company, our customers, and our employees. In response to COVID-19, our Vacation Ownership segment temporarily closed its resorts in mid-March 2020 across the globe and suspended its sales and marketing operations. These closures resulted in lower tours which negatively impacted gross VOI sales. In our Travel and Membership segment, affiliate resort closures and regional travel restrictions contributed to decreased bookings and increased cancellations, which resulted in lower transactions and revenue per transaction during 2020. Given the pace of COVID-19 vaccinations in the U.S., reduced travel restrictions, increased consumer confidence and pent-up leisure travel demand, we experienced significant improvements in VOI sales, tours, VPG, the number of Travel and Membership transactions, revenue per transaction, and average number of exchange
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members, finishing the first nine months of 2021 with increased momentum in these areas; however, not all product and service lines have yet returned to pre-pandemic levels. We expect the impact of COVID-19 on our operating statistics to continue through the remainder of 2021; however we do not expect to incur the level of COVID-19 expenses that we did in 2020.
THREE MONTHS ENDED SEPTEMBER 30, 2021 VS. THREE MONTHS ENDED SEPTEMBER 30, 2020
Our consolidated results are as follows (in millions):
| Three Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | Favorable/(Unfavorable) | |||||||||||||||
| Net revenues | $ | 839 | $ | 614 | $ | 225 | |||||||||||
| Expenses | 653 | 550 | (103) | ||||||||||||||
| Operating income | 186 | 64 | 122 | ||||||||||||||
| Other (income), net | — | (5) | (5) | ||||||||||||||
| Interest expense | 47 | 52 | 5 | ||||||||||||||
| Interest (income) | (1) | (2) | (1) | ||||||||||||||
| Income before income taxes | 140 | 19 | 121 | ||||||||||||||
| Provision/(benefit) for income taxes | 39 | (21) | (60) | ||||||||||||||
| Net income attributable to Travel + Leisure Co. shareholders | $ | 101 | $ | 40 | $ | 61 | |||||||||||
Net revenues increased $225 million for the three months ended September 30, 2021, compared with the same period last year. In the third quarter of 2021, we analyzed the adequacy of the COVID-19 related allowance consistent with past methodology, and as a result of the improvements in net new defaults, we released $21 million of the COVID-19 related allowance which positively impacted revenues and recorded a corresponding $8 million increase in cost of vacation ownership interests representing the associated reduction in estimated recoveries. The net positive impact of the COVID-19 related allowance release on Adjusted EBITDA was $13 million.
Revenue growth of $224 million (36.5%) was favorably impacted by foreign currency of $1 million (0.2%). Excluding the impacts of foreign currency and the COVID-19 related provision release discussed above, the remaining revenue increase was primarily the result of:
•$164 million of increased revenues at our Vacation Ownership segment primarily due to an increase in gross VOI sales, property management revenues, and commission revenues as a result of the ongoing recovery of our operations from the impact of COVID-19; partially offset by a decrease in consumer financing revenues driven by a lower average portfolio balance; and
•$39 million of increased revenues at our Travel and Membership segment driven by higher vacation transaction revenues as we continue to recover from the impacts of COVID-19.
Expenses increased $103 million for the three months ended September 30, 2021, compared with the same period last year. The increase in expenses of $102 million (18.5%) was unfavorably impacted by foreign currency of $1 million (0.2%). Excluding the foreign currency impact, the increase in expenses was primarily the result of:
•$30 million increase in sales and commission expenses at the Vacation Ownership segment due to higher gross VOI sales;
•$28 million increase in operating costs in support of higher Travel and Membership revenues;
•$21 million increase in the cost of VOIs sold primarily due to higher gross VOI sales and an $8 million reduction in estimated recoveries related to the partial release of our COVID-19 related provision;
•$20 million increase in property management expenses due to higher management fees and reimbursable expenses;
•$16 million increase in marketing costs in support of increased revenue;
•$13 million increase in commission expense as a result of higher Fee-for-Service VOI sales;
•$9 million increase in maintenance fees on unsold inventory; and
•$6 million increase in general and administrative expenses primarily due to higher employee-related costs.
These increases were partially offset by:
•$30 million decrease in COVID-19 related costs including employee compensation related costs ($13 million); the write-down of exchange inventory ($10 million); impairments ($6 million); and
•$7 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance.
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Interest expense decreased $5 million for the three months ended September 30, 2021 compared with the same period last year primarily due to repayment of the revolving credit facility and $250 million 5.625% notes in the first quarter of 2021.
Our effective tax rates were 27.9% and (110.5)% during the three months ended September 30, 2021 and 2020. The effective tax rate in the current year returned to a more normalized range after being significantly impacted in 2020 by COVID-19. Our effective tax rate in 2020 was significantly reduced due to a shift in the mix of earnings in higher tax rate jurisdictions and losses in lower tax rate jurisdictions. During the third quarter of 2020, we reported a tax benefit on pre-tax income resulting from the true-up of applying the revised forecasted effective tax rate to the prior quarter’s losses.
As a result of these items, Net income attributable to Travel + Leisure Co. shareholders increased $61 million for the three months ended September 30, 2021 as compared to the same period last year.
Our segment results are as follows (in millions):
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| Net revenues | 2021 | 2020 | ||||||||||||
| Vacation Ownership | $ | 660 | $ | 475 | ||||||||||
| Travel and Membership | 185 | 145 | ||||||||||||
| Total reportable segments | 845 | 620 | ||||||||||||
Corporate and other (a) | (6) | (6) | ||||||||||||
| Total Company | $ | 839 | $ | 614 | ||||||||||
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| Reconciliation of Net income to Adjusted EBITDA | 2021 | 2020 | ||||||||||||
| Net income attributable to Travel + Leisure Co. shareholders | $ | 101 | $ | 40 | ||||||||||
| Provision/(benefit) for income taxes | 39 | (21) | ||||||||||||
| Depreciation and amortization | 31 | 32 | ||||||||||||
| Interest expense | 47 | 52 | ||||||||||||
| Interest (income) | (1) | (2) | ||||||||||||
| Stock-based compensation | 8 | 6 | ||||||||||||
| Legacy items | 2 | 1 | ||||||||||||
COVID-19 related costs (b) | 1 | 13 | ||||||||||||
| Asset impairments | — | 6 | ||||||||||||
| Exchange inventory write-off | — | 10 | ||||||||||||
| Restructuring | — | 2 | ||||||||||||
| Adjusted EBITDA | $ | 228 | $ | 139 | ||||||||||
| Three Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| Adjusted EBITDA | 2021 | 2020 | ||||||||||||
| Vacation Ownership | $ | 177 | $ | 93 | ||||||||||
| Travel and Membership | 68 | 62 | ||||||||||||
| Total reportable segments | 245 | 155 | ||||||||||||
Corporate and other (a) | (17) | (16) | ||||||||||||
| Total Company | $ | 228 | $ | 139 | ||||||||||
(a)Includes the elimination of transactions between segments.
(b)Reflects severance and other costs associated with layoffs due to the COVID-19 workforce reduction offset in part by employee retention credits received in connection with the U.S. Coronavirus Aid, Relief, and Economic Security (“CARES”) Act, the American Rescue Plan Act of 2021 (“ARPA”), and similar international programs for wages paid to certain employees despite having operations suspended. This amount does not include costs associated with idle pay.
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Vacation Ownership
Net revenues increased $185 million (38.9%) and Adjusted EBITDA increased $84 million (90.3%) during the three months ended September 30, 2021, compared with the same period of 2020. Net revenue and Adjusted EBITDA growth were not materially impacted by foreign currency.
The net revenue increase was primarily driven by:
•$152 million increase in gross VOI sales, net of Fee-for-Service sales, due to the ongoing recovery of our operations from the impact of COVID-19;
•$25 million increase in property management revenues primarily due to higher management fees and reimbursable revenues; and
•$22 million increase in commission revenues as a result of higher Fee-for-Service VOI sales.
These increases were partially offset by:
•$12 million decrease in consumer financing revenues primarily due to a lower average portfolio balance; and
•$4 million increase in our provision for loan losses inclusive of a $21 million release of our COVID-19 related allowance.
In addition to the drivers above, Adjusted EBITDA was further impacted by:
•$30 million increase in sales and commission expenses due to higher gross VOI sales;
•$21 million increase in the cost of VOIs sold primarily due to higher gross VOI sales and an $8 million reduction in estimated recoveries related to the partial release of our COVID-19 related provision;
•$20 million increase in property management expenses primarily due to higher management fees and reimbursable expenses;
•$13 million increase in marketing costs in support of increased revenue;
•$13 million increase in commission expense as a result of higher Fee-for-Service VOI sales; and
•$9 million increase in maintenance fees on unsold inventory.
These increases were partially offset by a $7 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance.
Travel and Membership
Net revenues increased $40 million and Adjusted EBITDA increased $6 million during the three months ended September 30, 2021, compared with the same period of 2020. Revenue growth of $39 million (26.9%) was favorably impacted by foreign currency of $1 million (0.7%). The Adjusted EBITDA growth of $6 million (9.7%) was not materially impacted by foreign currency.
Increases in net revenues excluding the impact of foreign currency were due to higher transaction revenue. Transactions increased 32% compared to the prior year as we continue to see recovery from the impact of COVID-19.
In addition to the revenue change explained above, Adjusted EBITDA, excluding the impact of foreign currency, was further impacted by the following operational costs in support of higher revenue:
•$24 million increase in cost of sales;
•$4 million increase in other operational expenses; and
•$3 million increase in marketing expense.
Corporate and other
Corporate Adjusted EBITDA decreased $1 million for the three months ended September 30, 2021 compared to 2020.
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NINE MONTHS ENDED SEPTEMBER 30, 2021 VS. NINE MONTHS ENDED SEPTEMBER 30, 2020
Our consolidated results are as follows (in millions):
| Nine Months Ended September 30, | |||||||||||||||||
| 2021 | 2020 | Favorable/(Unfavorable) | |||||||||||||||
| Net revenues | $ | 2,264 | $ | 1,515 | $ | 749 | |||||||||||
| Expenses | 1,841 | 1,705 | (136) | ||||||||||||||
| Operating income/(loss) | 423 | (190) | 613 | ||||||||||||||
| Other (income), net | (2) | (11) | (9) | ||||||||||||||
| Interest expense | 147 | 138 | (9) | ||||||||||||||
| Interest (income) | (1) | (5) | (4) | ||||||||||||||
| Income/(loss) before income taxes | 279 | (312) | 591 | ||||||||||||||
| Provision/(benefit) for income taxes | 76 | (54) | (130) | ||||||||||||||
| Net income/(loss) from continuing operations | 203 | (258) | 461 | ||||||||||||||
| Loss on disposal of discontinued business, net of income taxes | (2) | — | (2) | ||||||||||||||
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 201 | $ | (258) | $ | 459 | |||||||||||
Net revenues increased $749 million for the nine months ended September 30, 2021 compared with the same period last year. In the first quarter of 2020, we evaluated the potential impact of COVID-19 on our owner’s ability to repay their contract receivable and as a result of current and anticipated unemployment rates at that time, we recorded a $225 million COVID-19 related provision, which negatively impacted revenues, and a corresponding $55 million benefit to cost of vacation ownership interests, representing estimated recoveries related to this provision. These adjustments negatively impacted prior year Adjusted EBITDA by $170 million. During the nine months ended September 30, 2021, we analyzed the adequacy of the COVID-19 related allowance consistent with past methodology, resulting in a $47 million release, which positively impacted revenues, and a corresponding $17 million increase in cost of vacation ownership interests, representing the associated reduction in estimated recoveries. The net positive impact of the COVID-19 related allowance release on Adjusted EBITDA was $30 million.
Total revenue growth of $738 million (48.7%) was favorably impacted by foreign currency of $11 million (0.7%). Excluding the impacts of foreign currency and the COVID-19 related provision adjustments discussed above, the increase in net revenues was primarily the result of:
•$313 million of increased revenues at our Vacation Ownership segment primarily due to an increase in gross VOI sales, higher commission and property management revenues as a result of the ongoing recovery of our operations from the impact of COVID-19; partially offset by a decrease in consumer financing revenues driven by a lower average portfolio balance; and
•$158 million of increased revenues at our Travel and Membership segment driven by higher vacation transaction revenues as we continue to recover from the impacts of COVID-19, partially offset by a decrease in subscription revenues driven by lower new owner sales in the timeshare industry.
Expenses increased $136 million for the nine months ended September 30, 2021 compared with the same period last year. The increase in expenses of $127 million (7.4%) was unfavorably impacted by foreign currency of $9 million (0.5%). Excluding the foreign currency impact, the increase in expenses was primarily the result of:
•$130 million increase in the cost of VOIs sold primarily due to higher gross VOI sales, the absence of a $55 million benefit recorded in the prior year representing estimated recoveries related to the COVID-19 related provision, and a $17 million increase associated with the COVID-19 related provision release in the current year;
•$80 million increase in operating costs in support of higher Travel and Membership revenues;
•$41 million increase in commission expense as a result of higher Fee-for-Service VOI sales;
•$35 million increase in property management expenses due to higher management fees and reimbursable expenses;
•$29 million increase in general and administrative expenses primarily due to higher employee-related costs;
•$27 million increase in sales and commission expenses the Vacation Ownership segment primarily due to higher gross VOI sales; and
•$13 million increase in marketing costs in support of increased revenue.
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These increases were partially offset by:
•$205 million decrease in COVID-19 related costs including employee compensation related costs ($78 million); impairments ($54 million); the write-down of exchange inventory ($48 million) and restructuring charges ($25 million); and
•$13 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance.
Other income, net of other expenses decreased $9 million for the nine months ended September 30, 2021 compared with the same period last year, primarily due to lower business interruption recoveries in 2021.
Interest expense increased $9 million for the nine months ended September 30, 2021 compared with the same period last year primarily due to interest on the $650 million 6.625% secured notes issued during the third quarter of 2020, partially offset by repayment of the revolving credit facility and $250 million 5.625% notes in the first quarter of 2021.
Our effective tax rates were 27.2% and 17.3% for the nine months ended September 30, 2021 and 2020. The effective tax rate in the current year returned to a more normalized range after being significantly impacted in 2020 by COVID-19. Our effective tax rate in 2020 was significantly reduced due to a shift in the mix of earnings in higher tax rate jurisdictions and losses in lower tax rate jurisdictions.
As a result of these items, Net income attributable to Travel + Leisure Co. shareholders was $201 million for the nine months ended September 30, 2021, as compared to a Net loss attributable to Travel + Leisure Co. shareholders of $258 million during the same period last year.
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Our segment results are as follows (in millions):
| Nine Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| Net Revenues | 2021 | 2020 | ||||||||||||
| Vacation Ownership | $ | 1,708 | $ | 1,116 | ||||||||||
| Travel and Membership | 573 | 411 | ||||||||||||
| Total reportable segments | 2,281 | 1,527 | ||||||||||||
Corporate and other (a) | (17) | (12) | ||||||||||||
| Total Company | $ | 2,264 | $ | 1,515 | ||||||||||
| Nine Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| Reconciliation of Net income to Adjusted EBITDA | 2021 | 2020 | ||||||||||||
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 201 | $ | (258) | ||||||||||
| Loss on disposal of discontinued business, net of income taxes | 2 | — | ||||||||||||
| Provision/(benefit) for income taxes | 76 | (54) | ||||||||||||
| Depreciation and amortization | 93 | 94 | ||||||||||||
| Interest expense | 147 | 138 | ||||||||||||
| Interest (income) | (1) | (5) | ||||||||||||
| Stock-based compensation | 24 | 14 | ||||||||||||
| Legacy items | 6 | 2 | ||||||||||||
COVID-19 related costs (b) | 3 | 51 | ||||||||||||
Asset impairments (c) | — | 54 | ||||||||||||
| Exchange inventory write-off | — | 48 | ||||||||||||
| Restructuring | (1) | 27 | ||||||||||||
| Adjusted EBITDA | $ | 550 | $ | 111 | ||||||||||
| Nine Months Ended | ||||||||||||||
| September 30, | ||||||||||||||
| Adjusted EBITDA | 2021 | 2020 | ||||||||||||
| Vacation Ownership | $ | 377 | $ | 6 | ||||||||||
| Travel and Membership | 218 | 142 | ||||||||||||
| Total reportable segments | 595 | 148 | ||||||||||||
Corporate and other (a) | (45) | (37) | ||||||||||||
| Total Company | $ | 550 | $ | 111 | ||||||||||
(a)Includes the elimination of transactions between segments.
(b)Reflects severance and other employee costs associated with layoffs due to the COVID-19 workforce reduction offset in part by employee retention credits received in connection with the U.S. CARES Act, ARPA, and similar international programs for wages paid to certain employees despite having operations suspended. This amount does not include costs associated with idle pay.
(c)Includes $5 million of bad debt expense related to a note receivable for the nine months ended September 30, 2021, included in Operating expenses on the Condensed Consolidated Statements of Income/(Loss) included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Vacation Ownership
Net revenues increased $592 million and Adjusted EBITDA increased $371 million during the nine months ended September 30, 2021 compared with the same period of 2020. The net revenue growth of $585 million (52.4%) was favorably impacted by foreign currency of $7 million (0.6%) and the total Adjusted EBITDA growth of $369 million (6,150.0%) was favorably impacted by foreign currency of $2 million (33.3%).
The net revenue increase excluding the impact of foreign currency was primarily driven by:
•$272 million decrease in our provision for loan losses primarily due to the COVID-19 related allowance adjustments ($225 million provision recorded in the first quarter of 2020 and $47 million release during 2021);
•$262 million increase in gross VOI sales, net of Fee-for-Service sales, due to the ongoing recovery of our operations from the impact of COVID-19;
•$60 million increase in commission revenues as a result of higher Fee-for-Service VOI sales; and
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•$47 million increase in property management revenues primarily due to higher management fees and reimbursable revenues.
These increases were partially offset by a $56 million decrease in consumer financing revenues primarily due to a lower average portfolio balance.
In addition to the drivers above, Adjusted EBITDA excluding the impact of foreign currency was further impacted by:
•$130 million increase in the cost of VOIs sold primarily due to higher gross VOI sales, the absence of a $55 million benefit recorded in the first quarter of 2020 representing estimated recoveries related to the COVID-19 related provision, and a $17 million reduction in estimated recoveries related to the partial release of our COVID-19 related provision;
•$41 million increase in commission expense as a result of higher Fee-for-Service VOI sales;
•$35 million increase in property management expenses primarily due to higher management fees and reimbursable expenses;
•$27 million increase in sales and commission expenses due to higher gross VOI sales;
•$11 million increase in general and administrative expenses primarily due to higher employee-related costs;
•$8 million increase in marketing costs in support of increased revenue; and
•$7 million of lower proceeds from business interruption claims.
These increased expenses were partially offset by:
•$29 million decrease in COVID-19 related costs associated with workforce reduction; and
•$13 million decrease in consumer financing interest expense primarily due to a lower average non-recourse debt balance.
Travel and Membership
Net revenues increased $162 million and Adjusted EBITDA increased $76 million during the nine months ended September 30, 2021 compared with the same period of 2020. Revenue growth of $158 million (38.4%) was favorably impacted by foreign currency of $4 million (1.0%). Adjusted EBITDA growth of $77 million (54.2%) was unfavorably impacted by foreign currency of $1 million (0.7%).
Increases in net revenues excluding the impact of foreign currency were primarily driven by:
•$165 million increase in transaction revenue driven by an increase in vacation transactions booked as we continue to recover from the impacts of COVID-19; partially offset by
•$7 million decrease in subscription revenue due to a 2.6% decrease in the average member count in our exchange business driven by lower new owner sales in the timeshare industry.
In addition to the revenue changes explained above, Adjusted EBITDA excluding the impact of foreign currency was further impacted by the following operational costs in support of increased revenues:
•$80 million increase in cost of sales; and
•$5 million increase in marketing expense.
These increased expenses were partially offset by a $5 million decrease in general and administrative expenses resulting from staff reductions and cost savings initiatives implemented after the first quarter of 2020.
Corporate and other
Corporate Adjusted EBITDA decreased $8 million for the nine months ended September 30, 2021 compared to 2020 and was favorably impacted by foreign currency of $1 million. The decrease in Adjusted EBITDA of $9 million was primarily due to higher employee-related costs.
RESTRUCTURING PLANS
During 2020, we recorded $37 million of restructuring charges, $36 million of which were COVID-19 related. Due to the impact of COVID-19, we decided in the second quarter of 2020 to abandon the remaining portion of our administrative offices in New Jersey. We were notified in the second quarter of 2020 that Wyndham Hotels exercised its early termination rights under the sublease agreement. As a result, we recorded $22 million of restructuring charges associated with non-lease components of the office space and $24 million of impairment charges associated with the write-off of right-of-use assets and furniture, fixtures and equipment at the Travel and Membership segment. We also recognized $12 million of lease-related charges due to the renegotiation of an agreement and $2 million of facility-related restructuring charges associated with closed
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sales centers at the Vacation Ownership segment. The Travel and Membership segment additionally recognized $1 million in employee-related expenses associated with the consolidation of a shared service center. We reduced our restructuring liability by $12 million of cash payments in 2020 and another $1 million of cash payments during the nine months ended September 30, 2021. We also reversed $1 million of expense related to the reimbursement of prepaid licensing fees that were previously written-off, and increased the liability by $3 million of cash reimbursements during the current period at our Vacation Ownership segment. The remaining 2020 restructuring liability of $27 million is expected to be paid by the end of 2027.
We have other restructuring plans implemented prior to 2020. The remaining liability of less than $1 million as of September 30, 2021, is mostly personnel-related and is expected to be paid by the end of 2021.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Financial Condition
| (In millions) | September 30, 2021 | December 31, 2020 | Change | ||||||||||||||
| Total assets | $ | 6,601 | $ | 7,613 | $ | (1,012) | |||||||||||
| Total liabilities | 7,450 | 8,581 | (1,131) | ||||||||||||||
| Total (deficit) | (849) | (968) | 119 | ||||||||||||||
Total assets decreased by $1.01 billion from December 31, 2020 to September 30, 2021, primarily due to:
•$850 million decrease in Cash and cash equivalents primarily due to net repayments on the revolving credit facility, notes, and non-recourse debt, interest payments, payments associated with the acquisition of the Travel + Leisure brand, and dividend payments, partially offset by VOCR principal collections;
•$190 million decrease in Vacation ownership contract receivables, net, primarily due to principal collections and allowance for loan losses, partially offset by higher net VOI originations; and
•$77 million decrease in Inventory driven by VOI sales and lower estimated VOI recoveries, partially offset by purchases.
These decreases were partially offset by a $91 million increase in Other intangibles, net primarily related to the acquisition of the Travel + Leisure brand from Meredith.
Total liabilities decreased by $1.13 billion from December 31, 2020 to September 30, 2021, primarily due to:
•$53 million decrease in Deferred income due to increased usage of deferred VOI trial packages and VOI incentives as a result of owners and members returning to vacation as COVID-19 travel restrictions lifted;
•$277 million decrease in Non-recourse vacation ownership debt due to net repayments;
•$798 million decrease in Debt due to net repayments on the revolving credit facility and the $250 million notes repaid in March 2021; and
•$25 million decrease in Deferred income taxes, primarily due to installment sales partially offset by the allowance for bad debt.
These decreases were partially offset by a $24 million increase in Accrued expenses and other liabilities, primarily due to increases in employee related expenses and the purchase liability related to the acquisition of the Travel + Leisure brand, partially offset by decreases in accrued marketing, inventory obligations, accrued interest, and lease liabilities.
Total deficit decreased $119 million from December 31, 2020 to September 30, 2021, primarily due to $201 million of Net income attributable to Travel + Leisure Co. shareholders; partially offset by $81 million of dividends.
Liquidity and Capital Resources
Currently, our financing needs are supported by cash generated from operations and borrowings under our revolving credit facility as well as the issuance of secured debt. In addition, we use our bank conduit facilities and non-recourse debt borrowings to finance our VOCRs. We believe that our net cash from operations, cash and cash equivalents, access to our revolving credit facilities and bank conduit facilities, and continued access to the debt markets provide us with sufficient liquidity to meet our ongoing cash needs for the foreseeable future, inclusive of the $650 million 4.25% secured notes which come due in March 2022.
As a precautionary measure at the onset of the global pandemic, in March 2020 we fully drew down our revolving credit facility. Based on the recovery of our business to date, our strong liquidity position and ability to access secured debt capital
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markets, during 2021 we fully repaid the remaining outstanding revolver balance. The revolving credit facility has a total capacity of $1.0 billion. As of September 30, 2021, we had $949 million of available capacity, net of letters of credit.
We repaid our $250 million 5.625% secured notes which came due in March 2021.
On July 15, 2020, we amended our credit agreement governing our revolving credit facility and term loan B (“Credit Agreement Amendment”). The Credit Agreement Amendment established a Relief Period with respect to our secured revolving credit facility, which commenced on July 15, 2020, and was scheduled to end on April 1, 2022. Among other changes, this amendment added a new minimum liquidity covenant, tested quarterly until the end of the Relief Period, of (i) $250 million plus (ii) 50% of the aggregate amount of dividends paid after the effective date of the Credit Agreement Amendment and on or prior to the last day of the relevant fiscal quarter. On October 22, 2021, we renewed the credit agreement governing our revolving credit facility and term loan B which resulted in the termination of this Relief Period and extends the commitment period for the revolving credit facility from May 2023 to October 2026. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal.
During 2020 we successfully executed $900 million of securitization financings and issued $650 million senior secured notes due 2026 with an interest rate of 6.625%. We plan to continue to use our conduit facilities and non-recourse debt borrowings to finance VOCRs. During the first quarter of 2021, we closed on our first securitization financing transaction of the year. High demand allowed us to upsize the transaction and we closed on a $500 million securitization financing at a 98% advance rate and a company record low weighted average yield of 1.57%. We also called the notes issued in the securitization financing transaction that we closed in April of 2020 and included that collateral in the 2021 transaction, reducing the interest rate going forward on our non-recourse debt. On October 26, 2021, we closed on an additional $350 million securitization financing at a 98% advance rate and a weighted average yield of 1.82% (see Note 25—Subsequent Events to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details). These transactions positively impact our liquidity and reinforce our expectation that we will maintain adequate liquidity.
Our non-recourse timeshare receivables U.S. dollars (“USD”) bank conduit facility has a borrowing capacity of $800 million through October 2022, and had $486 million of available capacity as of September 30, 2021. Borrowings under this facility are required to be repaid as the collateralized receivables amortize, but no later than November 2023.
Our non-recourse timeshare receivables Australian and New Zealand dollars (“AUD” and “NZD”) bank conduit facility has a borrowing capacity of A$250 million and NZ$48 million through April 2023 and had available capacity of $79 million as of September 30, 2021. Borrowings under this facility are required to be repaid no later than May 2025.
We may, from time to time, depending on market conditions and other factors, repurchase our outstanding indebtedness, whether or not such indebtedness trades above or below its face amount, for cash and/or in exchange for other securities or other consideration, in each case in open market purchases and/or privately negotiated transactions.
We are currently evaluating the impact of the transition from the London Interbank Offered Rate (“LIBOR”) as an interest rate benchmark to other potential alternative reference rates, including but not limited to the Secured Overnight Financing Rate. Currently, we have debt and derivative instruments in place that reference LIBOR-based rates. Although certain of these LIBOR based obligations provide for alternative methods of calculating the related interest rate payable (including transition to an alternative benchmark rate) if LIBOR is not reported, uncertainty as to the extent and manner of future changes may result in interest rates and/or payments that are higher than, lower than, or that do not otherwise correlate over time with the interest rates and/or payments that would have been made on our obligations if LIBOR was available in its current form. The transition from LIBOR based benchmark rates is expected to begin January 1, 2022 and be completed when USD LIBOR rates are phased out by June 30, 2023. Management will continue to actively assess the related opportunities and risks involved in this transition.
We adopted appropriate LIBOR replacement rate transition language into the agreements for the renewal of our USD bank conduit facility in 2020 and the renewal of the credit agreement governing the revolving credit facility and term loan B which closed on October 22, 2021. These agreements represented our largest exposure to LIBOR. We intend to include such language in our other relevant agreements prior to the end of 2021.
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CASH FLOW
The following table summarizes the changes in cash, cash equivalents and restricted cash during the nine months ended September 30, 2021 and 2020 (in millions):
| 2021 | 2020 | Change | |||||||||||||||
| Cash provided by/(used in): | |||||||||||||||||
| Operating activities | $ | 435 | $ | 224 | $ | 211 | |||||||||||
| Investing activities | (77) | (98) | 21 | ||||||||||||||
| Financing activities | (1,195) | 775 | (1,970) | ||||||||||||||
| Effects of changes in exchange rates on cash and cash equivalents | (6) | (5) | (1) | ||||||||||||||
| Net change in cash, cash equivalents and restricted cash | $ | (843) | $ | 896 | $ | (1,739) | |||||||||||
Operating Activities
Net cash provided by operating activities was $435 million for the nine months ended September 30, 2021, compared to $224 million in the prior year. This $211 million increase was driven by a $459 million increase in net income; partially offset by a $203 million decrease in non-cash add-back items primarily due to a lower provision for loan losses and asset impairments, partially offset by deferred income taxes, and a $47 million increase in cash utilized for working capital.
Investing Activities
Net cash used in investing activities was $77 million for the nine months ended September 30, 2021, compared to $98 million in the prior year. This decrease was primarily related to $50 million of net investment purchases in 2020; partially offset by $37 million of cash payments for the acquisition of the Travel + Leisure brand in 2021.
Financing Activities
Net cash used in financing activities was $1.2 billion for the nine months ended September 30, 2021, compared to net cash provided by financing activities of $775 million in the prior year. The variance was primarily due to the drawdown of the $1.0 billion secured revolving credit facility and $650 million note issuance in the prior year. During 2021 we had $250 million increased repayments on the revolving credit facility and notes, $178 million of higher net repayments of non-recourse debt, and a $19 million increase in deferred consideration payments mainly associated with the acquisition of the Travel + Leisure brand; partially offset by a $128 million decrease in share repurchases, and $33 million of decreased dividend payments.
Capital Deployment
We focus on deploying capital for the highest possible returns. Ultimately, our business objective is to grow our business while optimizing cash flow and Adjusted EBITDA. We intend to continue to invest in select capital and technological improvements across our business. We may also seek to strategically grow the business through merger and acquisition activities. As part of our merger and acquisition strategy, we have made, and expect to continue to make, acquisition proposals and enter into non-binding letters of intent, allowing us to conduct due diligence on a confidential basis. A potential transaction contemplated by a letter of intent may never reach the point where we enter into a definitive agreement, nor can we predict the timing of such a potential transaction. We also seek to maintain a first lien leverage ratio below 4.25 to 1.0. Finally, over the long term we intend to continue to return value to shareholders through the repurchase of common stock and payment of dividends. All future declarations of quarterly cash dividends are subject to final approval by the Board of Directors (“Board”).
During the nine months ended September 30, 2021, we spent $122 million on vacation ownership development projects (inventory). We expect that our Vacation Ownership business currently has adequate finished inventory to support vacation ownership sales for several years. During 2021, we anticipate spending between $160 million and $180 million on vacation ownership development projects. The average inventory spend on vacation ownership development projects for the four-year period 2022 through 2025 is expected to be between $140 million and $170 million annually. After factoring in the anticipated additional average annual spending, we expect to have adequate inventory to support vacation ownership sales through at least the next four to five years.
During the nine months ended September 30, 2021, we spent $40 million on capital expenditures primarily for information technology and sales center improvement projects. During 2021, we anticipate spending between $60 million and $65 million on capital expenditures.
In connection with our focus on optimizing cash flow, we are continuing our asset-light efforts in Vacation Ownership by seeking opportunities with financial partners whereby they make strategic investments to develop assets on our behalf. We refer to this as Just-in-Time. The partner may invest in new ground-up development projects or purchase from us, for cash, existing
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in-process inventory which currently resides on our Condensed Consolidated Balance Sheets. The partner will complete the development of the project and we may purchase finished inventory at a future date as needed or as obligated under the agreement.
We expect that the majority of the expenditures required to pursue our capital spending programs, strategic investments and vacation ownership development projects will be financed with cash flow generated through operations and cash and cash equivalents. Additional expenditures are expected to be financed with general corporate borrowings.
Stock Repurchase Program
On August 20, 2007, our Board authorized a stock repurchase program that enables us to purchase our common stock. The Board has since increased the capacity of the program eight times, most recently in October 2017 by $1.0 billion, bringing the total authorization under the current program to $6.0 billion. Proceeds received from stock option exercises increase our repurchase capacity under the program. We had $354 million of remaining availability in our program as of September 30, 2021.
The amount and timing of specific repurchases are subject to applicable legal requirements and other factors, including capital allocation priorities and market conditions. Repurchases may be conducted in the open market or in privately negotiated transactions. We suspended share repurchase activity in March 2020 due to uncertainty associated with COVID-19. On July 15, 2020, we amended the credit agreement for our revolving credit facility and term loan B. Among other changes, the Credit Agreement Amendment placed us into a Relief Period from July 15, 2020 through April 1, 2022 that prohibited the use of cash for share repurchases during this period. On October 22, 2021, we renewed the credit agreement governing our revolving credit facility and term loan B. The renewal eliminated the Relief Period restrictions on share repurchases, among other changes, and we expect to resume our share repurchase program in the 2021 fourth quarter. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal.
Dividends
During the quarterly periods ended March 31, June 30, and September 30, 2021, we paid cash dividends of $0.30 per share ($79 million in aggregate). During the quarterly periods ended March 31, and June 30, 2020, we paid cash dividends of $0.50 per share, and in the quarterly period ended September 30, 2020, we paid cash dividends of $0.30 per share ($112 million in aggregate). On July 15, 2020, we amended the credit agreement governing our revolving credit facility and term loan B. Among other changes, the amendment placed us into a Relief Period which added a new minimum liquidity covenant, tested quarterly until the end of the Relief Period, of (i) $250 million plus (ii) 50% of the aggregate amount of dividends paid after the amendment effective date and on or prior to the last day of the relevant fiscal quarter. Additionally, the amendment limited the payout of dividends during the Relief Period to not exceed $0.50 per share, the rate in effect prior to the amendment. On October 22, 2021, we renewed the credit agreement governing our revolving credit facility and term loan B. This terminated the Relief Period which, among other changes, eliminated the restrictions on dividends and the Relief Period minimum liquidity covenant established by the 2020 amendment. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal.
Although our quarterly dividend was reduced during the third quarter of 2020 due to the impact of COVID-19, our long-term plan is to grow our dividend at the rate of growth of our earnings at a minimum. The declaration and payment of future dividends to holders of our common stock are at the discretion of our Board and depend upon many factors, including our financial condition, earnings, capital requirements of our business, covenants associated with certain debt obligations, legal requirements, regulatory constraints, industry practice and other factors that our Board deems relevant. There is no assurance that a payment of a dividend will occur in the future.
LONG-TERM DEBT COVENANTS
The revolving credit facilities and term loan B are subject to covenants including the maintenance of specific financial ratios as defined in the credit agreement. The financial ratio covenants consist of a minimum interest coverage ratio and a maximum first lien leverage ratio. The interest coverage ratio is calculated by dividing consolidated EBITDA (as defined in the credit agreement) by consolidated interest expense (as defined in the credit agreement), both as measured on a trailing 12-month basis preceding the measurement date. The first lien leverage ratio is calculated by dividing consolidated first lien debt (as defined in the credit agreement) as of the measurement date by consolidated EBITDA (as defined in the credit agreement) as measured on a trailing 12-month basis preceding the measurement date, or on an annualized basis as allowed for certain test periods during the Relief Period.
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The global spread of COVID-19 significantly impacted the travel industry, our company, our customers, and our employees. Our response to COVID-19 initially focused on the health and safety of our owners, members, guests and employees, when we closed the majority of our resorts and sales centers. We were also keenly focused on preserving cash, cutting costs and managing liquidity. While we have reopened all of the resorts and sales offices in North America that we expect to reopen, and expect to reopen our remaining locations in the South Pacific later this year, the continued impact of COVID-19 on our industry and business has led to a higher first lien leverage ratio which has begun to decrease and we expect will continue to decrease over time as the recovery in leisure travel continues. On July 15, 2020, we amended the credit agreement governing the revolving credit facility and term loan B. This amendment increased the maximum first lien leverage ratio and decreased the minimum interest coverage ratio allowed during the specified Relief Period, which was scheduled to continue through the first quarter of 2022. The Credit Agreement Amendment included certain restrictions on the use of cash during the Relief Period, including the prohibition of share repurchases and added a minimum liquidity covenant, which was to be tested quarterly and required us to maintain an interest coverage ratio (as defined in the credit agreement) of not less than 2.0 to 1.0. The maximum first lien leverage ratio for the test period ending September 30, 2021 was 6.75 to 1.0.
As of September 30, 2021, our first lien leverage ratio was 4.2 to 1.0 and our interest coverage ratio was 3.6 to 1.0. These ratios do not include interest expense or indebtedness related to any qualified securitization financing (as defined in the credit agreement). As of September 30, 2021, we were in compliance with the financial covenants described above. Under the Credit Agreement Amendment, when the first lien leverage ratio exceeds 4.25 to 1.0, the interest rate on revolver borrowings increases, and we are subject to higher fees associated with our letters of credit based on a tiered pricing grid. Given the first lien leverage ratio of 5.4 to 1.0 at December 31, 2020, we became subject to higher fees associated with letters of credit and the interest rate on the revolver borrowings increased 25 basis points effective March 2, 2021.
On October 22, 2021, we renewed the credit agreement governing our revolving credit facility and term loan B. This renewal terminated the Relief Period and reestablished the tiered pricing grid that was in place prior to the Credit Agreement Amendment. The interest rate on revolver borrowings and fees associated with letters of credit are subject to future changes based on our first lien leverage ratio which could serve to further reduce this rate if this ratio were to decrease to 3.75 to 1.0 or below. Additionally, the renewal eliminated restrictions regarding share repurchases, dividends, acquisitions, and the Relief Period minimum liquidity covenant established by the 2020 amendment. See Other Information included in Part II, Item 5 of this Quarterly Report on Form 10-Q for additional details on the renewal.
Each of our non-recourse, securitized term notes, and the bank conduit facilities contain various triggers relating to the performance of the applicable loan pools. If the VOCRs pool that collateralizes one of our securitization notes fails to perform within the parameters established by the contractual triggers (such as higher default or delinquency rates), there are provisions pursuant to which the cash flows for that pool will be maintained in the securitization as extra collateral for the note holders or applied to accelerate the repayment of outstanding principal to the note holders. As of September 30, 2021, all of our securitized loan pools were in compliance with applicable contractual triggers.
For additional details regarding our credit facilities, term loan B, and non-recourse debt see Note 10—Debt to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
LIQUIDITY
Our Vacation Ownership business finances certain of its VOCRs through (i) asset-backed conduit facilities and (ii) term asset-backed securitizations, all of which are non-recourse to us with respect to principal and interest.
We believe that our USD bank conduit facility with a term through October 2022, and our AUD/NZD bank conduit facility, with a term through April 2023, amounting to a combined capacity of $1.02 billion, along with our ability to issue term asset-backed securities, should provide sufficient liquidity for our expected sales pace, and we expect to have available liquidity to finance the sale of VOIs for the foreseeable future. As of September 30, 2021, we had $565 million of availability under these asset-backed conduit facilities.
Our liquidity position may be negatively affected by unfavorable conditions in the capital markets in which we operate or if our VOCRs portfolios do not meet specified portfolio credit parameters. Our liquidity, as it relates to our VOCRs securitization program, could be adversely affected if we were to fail to renew or replace our conduit facilities on their expiration dates, or if a particular receivables pool were to fail to meet certain ratios, which could occur in certain instances if the default rates or other credit metrics of the underlying VOCRs deteriorate. Our ability to sell securities backed by our VOCRs depends on the continued ability and willingness of capital market participants to invest in such securities.
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During 2020 we completed $900 million of securitization financings and during the first quarter of 2021 we closed on a $500 million securitization financing at a 98% advance rate and a company record low weighted average yield of 1.57%. We also called the notes issued in the securitization financing transaction that we closed in April of 2020 and included that collateral in the 2021 transaction, reducing the interest rate going forward on our non-recourse debt. On October 26, 2021, we closed on an additional $350 million securitization financing at a 98% advance rate and a weighted average yield of 1.82%. See Note 25—Subsequent Events to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for additional details. These transactions positively impact our liquidity and reinforce our expectation that we will maintain adequate liquidity.
We primarily utilize surety bonds in our Vacation Ownership business for sales and development transactions in order to meet regulatory requirements of certain states. In the ordinary course of our business, we have assembled commitments from 12 surety providers in the amount of $2.3 billion, of which we had $297 million outstanding as of September 30, 2021. The availability, terms and conditions and pricing of bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. If the bonding capacity is unavailable or, alternatively, the terms and conditions and pricing of the bonding capacity are unacceptable to us, our Vacation Ownership business could be negatively impacted.
Our secured debt is rated Ba3 with a “negative outlook” by Moody’s Investors Service, BB- with a “negative outlook” by Standard & Poor’s Rating Services, and BB+ with a “negative outlook” by Fitch Rating Agency. A security rating is not a recommendation to buy, sell or hold securities and is subject to revision or withdrawal by the assigning rating organization. Reference in this report to any such credit rating is intended for the limited purpose of discussing or referring to aspects of our liquidity and of our costs of funds. Any reference to a credit rating is not intended to be any guarantee or assurance of, nor should there be any undue reliance upon, any credit rating or change in credit rating, nor is any such reference intended as any inference concerning future performance, future liquidity or any future credit rating. For information regarding the impact of our credit rating downgrade and credit rating downgrade of Wyndham Hotels, see Note 23—Transactions with Former Parent and Former Subsidiaries - Matters Related to the European Vacation Rentals Business to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
SEASONALITY
We experience seasonal fluctuations in our net revenues and net income from sales of VOIs and vacation exchange fees. Revenues from sales of VOIs are generally higher in the third quarter than in other quarters due to increased leisure travel. Revenues from vacation exchange fees are generally highest in the first quarter, which is generally when members of our vacation exchange business book their vacations for the year. Our seasonality has been and could continue to be impacted by COVID-19.
The seasonality of our business may cause fluctuations in our quarterly operating results. As we expand into new markets and geographical locations, we may experience increased or different seasonality dynamics that create fluctuations in operating results different from the fluctuations we have experienced in the past.
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CONTRACTUAL OBLIGATIONS
The following table summarizes our future contractual obligations for the 12-month periods set forth below (in millions):
| 10/1/21 - 9/30/22 | 10/1/22 - 9/30/23 | 10/1/23 - 9/30/24 | 10/1/24 - 9/30/25 | 10/1/25 - 9/30/26 | Thereafter | Total | |||||||||||||||||||||||||||||||||||
| Debt | $ | 652 | $ | 405 | $ | 302 | $ | 280 | $ | 987 | $ | 753 | $ | 3,379 | |||||||||||||||||||||||||||
Non-recourse debt (a) | 292 | 484 | 191 | 192 | 208 | 590 | 1,957 | ||||||||||||||||||||||||||||||||||
Purchase commitments (b) | 268 | 129 | 101 | 98 | 123 | 192 | 911 | ||||||||||||||||||||||||||||||||||
Interest on debt (c) | 218 | 183 | 153 | 137 | 92 | 75 | 858 | ||||||||||||||||||||||||||||||||||
| Operating leases | 32 | 30 | 28 | 26 | 16 | 38 | 170 | ||||||||||||||||||||||||||||||||||
Inventory sold subject to conditional repurchase (d) | 35 | 30 | — | — | — | — | 65 | ||||||||||||||||||||||||||||||||||
Separation liabilities (e) | 1 | 12 | — | — | — | 2 | 15 | ||||||||||||||||||||||||||||||||||
| Finance leases | 4 | 2 | 1 | — | — | — | 7 | ||||||||||||||||||||||||||||||||||
Other (f) | 20 | 25 | 10 | — | — | — | 55 | ||||||||||||||||||||||||||||||||||
Total (g) | $ | 1,522 | $ | 1,300 | $ | 786 | $ | 733 | $ | 1,426 | $ | 1,650 | $ | 7,417 | |||||||||||||||||||||||||||
(a)Represents debt that is securitized through bankruptcy-remote special purpose entities the creditors of which have no recourse to us for principal and interest.
(b)Includes (i) $720 million for marketing-related activities; (ii) $79 million relating to the development of vacation ownership properties, of which $18 million is included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets included in Part I, Item 1 of this Quarterly Report on Form 10-Q; and (iii) $35 million for information technology activities.
(c)Includes interest on debt, non-recourse debt, and finance leases; estimated using the stated interest rates on our debt and non-recourse debt.
(d)Represents obligations to repurchase completed vacation ownership properties from third-party developers (See Note 8—Inventory to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail) of which $13 million was included within Accrued expenses and other liabilities on the Condensed Consolidated Balance Sheets included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
(e)Represents liabilities which we assumed and are responsible for pursuant to the Cendant Separation and spin-off of Wyndham Hotels (See Note 23—Transactions with Former Parent and Former Subsidiaries to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further details).
(f)Represents future consideration to be paid for the acquisitions of ARN and the Travel + Leisure brand (See Note 5—Acquisitions to the Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for further detail).
(g)Excludes a $42 million liability for unrecognized tax benefits associated with the accounting guidance for uncertainty in income taxes since it is not reasonably estimable to determine the periods in which such liability would be settled with the respective tax authorities.
COMMITMENTS AND CONTINGENCIES
From time to time, we are involved in claims, legal and regulatory proceedings, and governmental inquiries related to our business, none of which, in the opinion of management, is expected to have a material effect on our results of operations or financial condition. See Note 16—Commitments and Contingencies to the Condensed Consolidated Financial Statements for a description of claims and legal actions arising in the ordinary course of our business along with our guarantees and indemnifications and Note 23—Transactions with Former Parent and Former Subsidiaries to the Condensed Consolidated Financial Statements for a description of our obligations regarding Cendant contingent litigation, matters related to Wyndham Hotels, matters related to the European vacation rentals business, and matters related to the North American vacation rentals business. Both notes are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
CRITICAL ACCOUNTING POLICIES
In presenting our Condensed Consolidated Financial Statements in conformity with generally accepted accounting principles, we are required to make estimates and assumptions that affect the amounts reported therein. Several of the estimates and assumptions we are required to make relate to matters that are inherently uncertain as they pertain to future events. However, events that are outside of our control cannot be predicted and, as such, they cannot be contemplated in evaluating such estimates and assumptions. If there is a significant unfavorable change to current conditions, it could result in a material impact to our consolidated results of operations, financial position, and liquidity. We believe that the estimates and assumptions we used when preparing our Condensed Consolidated Financial Statements were the most appropriate at that time. These Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Annual Report filed on Form 10-K with the SEC on February 24, 2021, which includes a description of our critical accounting policies that involve subjective and complex judgments that could potentially affect reported results.
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Item 3. Quantitative and Qualitative Disclosures about Market Risks.
We assess our market risks based on changes in interest and foreign currency exchange rates utilizing a sensitivity analysis that measures the potential impact in earnings, fair values and cash flows based on a hypothetical 10% change (increase and decrease) in interest and foreign currency exchange rates. We used September 30, 2021 market rates to perform a sensitivity analysis separately for each of our market risk exposures. The estimates assume instantaneous, parallel shifts in interest rate yield curves and exchange rates. We have determined, through such analyses, that a hypothetical 10% change in the interest rates would have resulted in a less than $1 million increase or decrease in annual consumer financing interest expense and total interest expense. We have determined that a hypothetical 10% change in the foreign currency exchange rates would have resulted in an approximate increase or decrease to the fair value of our outstanding forward foreign currency exchange contracts of $4 million, which would generally be offset by an opposite effect on the underlying exposure being economically hedged. As such, we believe that a 10% change in interest rates or foreign currency exchange rates would not have a material effect on our prices, earnings, fair values, or cash flows.
Our variable rate borrowings, which include our term loan, non-recourse conduit facilities and revolving credit facility, expose us to risks caused by fluctuations in the applicable interest rates. The total outstanding balance of such variable rate borrowings at September 30, 2021, was $452 million in non-recourse debt and $289 million in corporate debt. A 100 basis point change in the underlying interest rates would result in a $5 million increase or decrease in annual consumer financing interest expense and a $3 million increase or decrease in our annual debt interest expense.
Item 4. Controls and Procedures.
(a)Disclosure Controls and Procedures. As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our principal executive and principal financial officers, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13(a)-15(e) of the Securities Exchange Act of 1934 (the “Exchange Act”)). Based on such evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures were designed and functioning effectively to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.
(b)Internal Control Over Financial Reporting. There have been no changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the period to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. As of September 30, 2021, we utilized the criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
As a result of COVID-19, most of our employees began working remotely in late March 2020, and a significant portion of them continue to work remotely. We have not identified any material changes in our disclosure controls and procedures, nor our internal control over financial reporting, as a result of this change. We are continually monitoring and assessing the COVID-19 situation to minimize the impact on the design and operating effectiveness of our internal controls.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
We are involved in various claims and lawsuits arising in the ordinary course of business, none of which, in the opinion of management, is expected to have a material adverse effect on our results of operations or financial condition. See Note 16—Commitments and Contingencies to the Condensed Consolidated Financial Statements for a description of claims and legal actions arising in the ordinary course of our business and Note 23—Transactions with Former Parent and Former Subsidiaries to the Condensed Consolidated Financial Statements for a description of our obligations regarding Cendant contingent litigation, matters related to Wyndham Hotels & Resorts, Inc., matters related to the European vacation rentals business, and matters related to the North American vacation rentals business. Both notes are included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
Item 1A. Risk Factors.
The discussion of our business and operations should be read together with the risk factors contained in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the Securities and Exchange Commission on February 24, 2021, which describe various risks and uncertainties to which we are or may become subject. These risks and uncertainties have the potential to affect our business, financial condition, results of operations, cash flows, strategies or prospects in a material and adverse manner. As of September 30, 2021, there have been no material changes to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Below is a summary of our common stock repurchases by month for the quarter ended September 30, 2021:
ISSUER PURCHASES OF EQUITY SECURITIES
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plan | Approximate Dollar Value of Shares that May Yet Be Purchased Under Plan | ||||||||||
| July 2021 | — | $ | — | — | $ | 354,258,231 | ||||||||
| August 2021 | — | — | — | $ | 354,258,231 | |||||||||
| September 2021 | — | — | — | $ | 354,258,231 | |||||||||
| Total | — | $ | — | — | $ | 354,258,231 | ||||||||
On August 20, 2007, our Board of Directors (“Board”) authorized the repurchase of our common stock (the “Share Repurchase Program”). Under the Share Repurchase Program, we are authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The Share Repurchase Program has no time limit and may be suspended or discontinued completely at any time. The Board has since increased the capacity of the Share Repurchase Program eight times, most recently on October 23, 2017, by $1.0 billion, bringing the total authorization under the program to $6.0 billion. Proceeds received from stock option exercises increase our repurchase capacity under the program. Under our current and prior stock repurchase plans, the total authorization is $6.8 billion. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Stock Repurchase Program,” included in Part I, Item 2 of this Quarterly Report on Form 10-Q for further information on the Share Repurchase Program.
For a description of limitations on the payment of our dividends, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Dividends,” included in Part I, Item 2 of this Quarterly Report on Form 10-Q.
Item 3. Defaults upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
On October 22, 2021, Travel + Leisure Co. (the “Borrower”) entered into the Second Amendment (the “Second Amendment”) to the Credit Agreement, dated as of May 31, 2021, with Bank of America, N.A., as administrative agent, the several lenders and letter of credit issuers from time to time party thereto, and the other parties thereto (as amended, restated, amended and restated, supplemented or otherwise modified from time to time, the “Credit Agreement”), which initially provided for senior secured credit facilities in an aggregate principal amount of $1.3 billion, consisting of (i) a term loan in an aggregate principal amount of $300 million maturing in May 2025 and (ii) a revolving credit facility in an aggregate principal amount of $1.0 billion maturing in May 2023. The Borrower previously amended the Credit Agreement on July 15, 2020, when it entered into the First Amendment (the “First Amendment”) to the Credit Agreement to, among other things, increase the leverage-based financial covenant ratio, increase the interest rate applicable to borrowings under the revolving credit facility, add a new minimum liquidity covenant, modify certain negative covenants (including with respect to restrictions on permitted acquisitions and restricted payments) and lower the Interest Coverage Ratio (as defined in the Credit Agreement) during the period from July 15, 2020 through April 1, 2022.
Among other things, the Second Amendment:
•provides that the revolving credit facility will mature in October 2026;
•removes the First Amendment’s negative covenant modifications, including restrictions on the use of cash for repurchases of equity securities of the Company;
•resets the leverage-based financial covenant ratio to 4.75:1.0 through the second quarter of 2022 and 4.25:1.0 thereafter;
•reverts to the interest rate applicable to borrowings under the revolving credit facility place prior to the First Amendment;
•provides for an Interest Coverage Ratio of 2.5:1.0, the level existing prior to the First Amendment; and
•removes the minimum liquidity covenant imposed by the First Amendment.
Additionally, the First Amendment includes customary London Interbank Offered Rate (“LIBOR”) transition language providing for alternate interest rate options upon the cessation of LIBOR publication. The $1.0 billion aggregate commitment amount of the revolving credit facility remains unchanged. In addition, the maturity date of the term loan B under the Credit Agreement remains unchanged.
The foregoing summary description of the Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of such agreement, a copy of which is filed as Exhibit 10.1 to this Quarterly Report on Form 10-Q and is incorporated herein by reference.
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Item 6. Exhibits.
| Exhibit No. | Description | ||||
| 3.1 | |||||
| 3.2 | |||||
| 3.3 | |||||
| 3.4 | |||||
| 10.1* | |||||
| 15* | |||||
| 31.1* | |||||
| 31.2* | |||||
| 32** | |||||
| 101.INS* | Inline XBRL Instance Document | ||||
| 101.SCH* | Inline XBRL Taxonomy Extension Schema Document | ||||
| 101.CAL* | Inline XBRL Taxonomy Extension Calculation Linkbase Document | ||||
| 101.DEF* | Inline XBRL Taxonomy Extension Definition Linkbase Document | ||||
| 101.LAB* | Inline XBRL Taxonomy Extension Label Linkbase Document | ||||
| 101.PRE* | Inline XBRL Taxonomy Extension Presentation Linkbase Document | ||||
| 104* | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | ||||
* Filed with this report
** Furnished with this report
† Management contract or compensatory plan or arrangement
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| TRAVEL + LEISURE CO. | ||||||||
| Date: October 27, 2021 | By: | /s/ Michael A. Hug | ||||||
| Michael A. Hug | ||||||||
| Chief Financial Officer | ||||||||
| Date: October 27, 2021 | By: | /s/ Elizabeth E. Dreyer | ||||||
| Elizabeth E. Dreyer | ||||||||
| Chief Accounting Officer | ||||||||
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