NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except per share amounts)
1. Background and Basis of Presentation
Background
Travel + Leisure Co. and its subsidiaries (collectively, “Travel + Leisure Co.,” or the “Company”) is a global provider of hospitality services and travel products. The Company has two reportable segments: Vacation Ownership and Travel and Membership.
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. Due to changes in organizational structure in the second quarter of 2022, the management of the Extra Holidays business was transitioned to the Vacation Ownership segment. As such, the Company reclassified the results of the Extra Holidays business, which was previously reported within the Travel and Membership segment, into the Vacation Ownership segment. Prior period segment information has been updated to reflect this change.
The Travel and Membership segment operates a variety of travel businesses, including three vacation exchange brands, travel technology platforms, travel memberships, and direct-to-consumer rentals. This segment is comprised of the Exchange and Travel Club business lines.
Impact of COVID-19
The results of operations for the years ended December 31, 2022, 2021, and 2020 include impacts related to the novel coronavirus global pandemic (“COVID-19”). These COVID-19 impacts were significantly negative for the travel industry, the Company, its customers, and employees during the earlier stages of the pandemic, but had a substantially lower impact during 2022. See Note 24—COVID-19 Related Items for additional details on the impact COVID-19 had on the Company.
Basis of Presentation
The accompanying Consolidated Financial Statements in this Annual Report on Form 10-K 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 Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). All intercompany balances and transactions have been eliminated in the Consolidated Financial Statements. In addition, prior period segment results have been updated to reflect the aforementioned reclassification of the Extra Holidays business into the Vacation Ownership segment.
The Company presents an unclassified balance sheet which conforms to that of the Company’s peers and industry practice.
In presenting the 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 Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of annual results reported.
2. Summary of Significant Accounting Policies
PRINCIPLES OF CONSOLIDATION
When evaluating an entity for consolidation, the Company first determines whether an entity is a variable interest entity (“VIE”). If the entity is deemed to be a VIE, the Company consolidates those VIEs for which the Company is the primary beneficiary. The Company will also consolidate an entity not deemed a VIE upon determination that the Company has a controlling financial interest. For entities where the Company does not have a controlling financial interest, the investments in such entities are accounted for using the equity or cost method, as appropriate.
REVENUE RECOGNITION
Refer to Note 3—Revenue Recognition for full details of the Company’s revenue recognition policies.
CASH AND CASH EQUIVALENTS
The Company considers highly-liquid investments purchased with an original maturity of three months or less to be cash equivalents.
RESTRICTED CASH
The largest portion of the Company’s restricted cash relates to securitizations. The remaining portion is comprised of escrow deposits and insurance funds on deposit.
Securitizations. In accordance with the contractual requirements of the Company’s various vacation ownership contract receivables (“VOCR”) securitizations, a dedicated lockbox account, subject to a blocked control agreement, is established for each securitization. At each month end, the total cash in the collection account from the previous month is analyzed and a monthly servicer report is prepared by the Company. This report details how much cash should be remitted to the note holders for principal and interest payments, and any cash remaining is transferred by the trustee to the Company. Additionally, as required by various securitizations, the Company holds an agreed-upon percentage of the aggregate outstanding principal balances of the VOI contract receivables collateralizing the asset-backed notes in a segregated trust account as credit enhancement. Each time a securitization closes and the Company receives cash from the note holders, a portion of the cash is deposited in the trust account. As of December 31, 2022 and 2021, restricted cash for securitizations totaled $83 million and $84 million.
Escrow Deposits. Laws in most United States (“U.S.”) states require the escrow of down payments on VOI sales, with the typical requirement mandating that the funds be held in escrow until the rescission period expires. As sales transactions are consummated, down payments are collected and are subsequently placed in escrow until the rescission period has expired. Rescission periods vary by state, but range on average from five to seven calendar days. In certain states, the escrow laws require that 100% of VOI purchaser funds (excluding interest payments, if any) be held in escrow until the deeding process is complete. Where possible, the Company utilizes surety bonds in lieu of escrow deposits. Similarly, laws in certain U.S. states require the escrow of advance deposits received from guests for vacations paid and not yet traveled through the Company’s Travel and Membership businesses. Such amounts are required to be held in escrow until the legal restriction expires, which varies from state to state. Escrow deposits were $48 million and $42 million as of December 31, 2022 and 2021.
Funds on Deposit. The Company operates a captive insurance company which provides property insurance to Travel + Leisure Co. and its affiliates. Amounts received are maintained by a third party and released from this account as necessary to pay claims. Funds on deposit were $7 million and $2 million as of December 31, 2022 and 2021.
RECEIVABLE VALUATION
Trade receivables
The Company provides for estimated bad debts based on its assessment of the ultimate ability to realize receivables, considering historical collection experience, the economic environment, and specific customer information. When the Company determines that an account is not collectible, the account is written-off to the allowance for doubtful accounts. The following table illustrates the Company’s allowance for doubtful accounts activity from continuing operations (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 199 | | | $ | 221 | | | $ | 154 | |
| Bad debt expense | 83 | | | 127 | | | 125 | |
| Write-offs | (114) | | | (149) | | | (58) | |
| | | | | |
| Ending balance | $ | 168 | | | $ | 199 | | | $ | 221 | |
Vacation ownership contract receivables
In the Vacation Ownership segment, the Company provides for estimated VOCR defaults at the time of VOI sales by recording a provision for loan losses as a reduction of Vacation ownership interest sales on the Consolidated Statements of Income/(Loss). The Company assesses the adequacy of the allowance for loan losses related to these VOIs using a technique referred to as a static pool analysis. This analysis is based upon the historical performance of similar VOCRs and
incorporates more recent history of default information. Management prepares a model to track defaults for each year’s sales over the entire life of the contract receivable as a means to project future expected losses. A qualitative assessment is also performed to determine whether any external economic conditions or internal portfolio characteristics indicate an adjustment is necessary to reflect expected impacts on the contract receivables portfolio. If current or expected future conditions differ from the conditions in effect when the historical experience was generated, the Company adjusts the allowance for loan losses to reflect the expected effects of the current environment on the collectability of VOCRs. Due to the economic disruption resulting from COVID-19, during 2020 the Company estimated an additional loan loss allowance related to the impacts on its owners’ ability to repay their contract receivables. For additional details on the Company’s vacation ownership contract receivables, including information on the related allowances and the impact of COVID-19, see Note 9—Vacation Ownership Contract Receivables.
INVENTORY
Inventory primarily consists of completed VOIs, VOIs under construction, land held for future VOI development, vacation exchange credits, and real estate interests sold subject to conditional repurchase. The Company applies the relative sales value method for relieving VOI inventory and recording the related cost of sales. Under the relative sales value method, cost of sales is recorded using a percentage ratio of total estimated development cost and VOI revenue, including estimated future revenue, incorporating factors such as changes in prices and the recovery of VOIs, generally as a result of contract receivable defaults. The effect of such changes in estimates under the relative sales value method is accounted for in each period as a current-period adjustment to inventory and cost of sales. Inventory is stated at the lower of cost, including capitalized interest, property taxes, and certain other carrying costs incurred during the construction process, or estimated fair value less costs to sell. There was no capitalized interest applied to inventory during 2022 and 2021. Capitalized interest related to inventory was less than $1 million during 2020.
PROPERTY AND EQUIPMENT
Property and equipment (including leasehold improvements) are recorded at cost and presented net of accumulated depreciation and amortization. Depreciation, recorded as a component of Depreciation and amortization on the Consolidated Statements of Income/(Loss), is computed utilizing the straight-line method over the lesser of the lease terms or estimated useful lives of the related assets. Amortization of leasehold improvements, also recorded as a component of Depreciation and amortization, is computed utilizing the straight-line method over the lesser of the estimated benefit period of the related assets or the lease terms. Useful lives are generally 30 years for buildings, up to 20 years for leasehold improvements, up to 30 years for vacation rental properties, and range from three to seven years for furniture, fixtures and equipment.
The Company capitalizes the costs of software developed for internal use in accordance with the guidance for accounting for costs of computer software developed or obtained for internal use. Capitalization of software costs developed for internal use commences during the development phase of the project. The Company amortizes software developed or obtained for internal use on a straight-line basis over its estimated useful life, which is generally three to five years, with the exception of certain enterprise resource planning, reservation, and inventory management software, which is up to 10 years. Such amortization commences when the software is substantially ready for its intended use.
The net carrying value of software developed or obtained for internal use was $145 million and $156 million as of December 31, 2022 and 2021. Capitalized interest was $1 million, less than $1 million, and $1 million during 2022, 2021, and 2020.
DERIVATIVE INSTRUMENTS
The Company uses derivative instruments as part of its overall strategy to manage its exposure to market risks primarily associated with fluctuations in foreign currency exchange rates and interest rates. As a matter of policy, the Company does not use derivatives for trading or speculative purposes. All derivatives are recorded at fair value either as assets or liabilities. Changes in fair value of derivatives not designated as hedging instruments and of derivatives designated as fair value hedging instruments are recognized in Operating income/(loss) and net interest expense, based upon the nature of the hedged item, on the Consolidated Statements of Income/(Loss). Changes in fair value of derivatives designated as cash flow hedging instruments are recorded as components of other comprehensive income. Amounts included in other comprehensive income are reclassified into earnings in the same period during which the hedged item affects earnings.
INCOME TAXES
The Company recognizes deferred tax assets and liabilities using the asset and liability method, under which deferred tax assets and liabilities are calculated based upon the temporary differences between the financial statement and income tax bases of assets and liabilities using currently enacted tax rates. These differences are based upon estimated differences between the book and tax basis of the assets and liabilities for the Company as of December 31, 2022 and 2021. The Company recognizes the effects of changes in tax laws, or rates, as a component of income taxes from continuing operations within the period that includes the enactment date.
The Company’s deferred tax assets are recorded net of a valuation allowance when, based on the weight of available evidence, it is more likely than not that some portion or all of the recorded deferred tax assets will not be realized in future periods. Decreases to the valuation allowance are recorded as reductions to the Company’s provision for income taxes, and increases to the valuation allowance result in additional provision for income taxes. The realization of the Company’s deferred tax assets, net of the valuation allowance, is primarily dependent on estimated future taxable income. A change in the Company’s estimate of future taxable income may require a change to the valuation allowance.
For tax positions the Company has taken or expects to take in a tax return, the Company applies a more likely than not threshold, under which the Company must conclude that a tax position is more likely than not to be sustained, assuming that the position will be examined by the appropriate taxing authority that has full knowledge of all relevant information, in order to recognize or continue to recognize the benefit. In determining the Company’s provision for income taxes, the Company uses judgment, reflecting its estimates and assumptions, in applying the more likely than not threshold. The Company classifies interest and penalties associated with unrecognized tax benefits as a component of Provision/(benefit) for income taxes on the Consolidated Statements of Income/(Loss).
ADVERTISING EXPENSE
Advertising costs are expensed in the period incurred. Advertising costs were $30 million, $33 million, and $26 million in 2022, 2021, and 2020.
STOCK-BASED COMPENSATION
The Company measures all stock-based compensation awards using a fair value method and records the related expense in its Consolidated Statements of Income/(Loss).
LONG-LIVED ASSETS
Assets such as customer lists, management agreements, and trademarks acquired by the Company are classified as intangible assets and recorded at their fair value as of the date of the acquisition and categorized as having either a finite life or an indefinite life. Assets deemed to have a finite life are assigned an appropriate useful life and amortized on a straight-line basis.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company has goodwill and other indefinite-lived intangible assets recorded in connection with business combinations. The Company annually in the fourth quarter, or more frequently if circumstances indicate that the value of goodwill may be impaired, reviews the reporting units’ carrying values. This is done either by performing a qualitative assessment or a quantitative assessment, with an impairment being recognized only if a reporting unit’s fair value is less than carrying value. In any given year the Company can elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is in excess of its carrying value. If it is not more likely than not that the fair value is in excess of the carrying value, or the Company elects to bypass the qualitative assessment, it would utilize the quantitative assessment. The qualitative factors evaluated include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance, and the Company’s historical share price as well as other industry-specific considerations.
Goodwill and other intangible assets with indefinite lives are not subject to amortization. However, goodwill and other intangibles with indefinite lives are subject to fair value-based rules for measuring impairment, and resulting write-downs, if any, are reflected in Asset impairments/(recoveries), net on the Consolidated Statements of Income/(Loss). The Company has goodwill recorded at reporting units comprising its Vacation Ownership and Travel and Membership reportable segments. The Company completed its annual goodwill impairment test by performing a qualitative analysis for each of its reporting units as of October 1, 2022 and determined that no impairment exists.
The Company also evaluates the recoverability of its other long-lived assets, including property and equipment and amortizable intangible assets, if circumstances indicate impairment may have occurred. This analysis is performed by comparing the respective carrying values of the assets to the current and expected future cash flows, on an undiscounted basis, to be generated from such assets. Property and equipment is evaluated separately within each segment. If such analysis indicates that the carrying value of these assets is not recoverable, the carrying value of such assets is reduced to fair value.
ACCOUNTING FOR RESTRUCTURING ACTIVITIES
The Company’s restructuring activities require it to make significant estimates in several areas including (i) expenses for severance and related benefit costs, (ii) the ability to generate sublease income, as well as its ability to terminate lease obligations, and (iii) contract terminations. The amount that the Company accrued as of December 31, 2022, represents its best estimate of the obligations incurred in connection with these actions, but could change due to various factors including market conditions or the outcome of negotiations with third parties.
RECENTLY ADOPTED ACCOUNTING PRONOUNCEMENTS
Contract Assets and Contract Liabilities from Contracts with Customers Acquired in a Business Combination. In October 2021, the Financial Accounting Standards Board (“FASB”) issued guidance which requires companies to apply Accounting Standards Codification (“ASC”) 606 - Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities from contracts with customers acquired in a business combination. This creates an exception to the general recognition and measurement principle in ASC 805 - Business Combinations. This generally will result in companies recognizing contract assets and contract liabilities at amounts consistent with those recorded by the acquiree immediately before the acquisition date. This guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The amendments should be applied prospectively to business combinations occurring on or after the effective date. Early adoption is permitted. The Company early adopted this guidance during 2022, and it did not have a material impact on the Company's Consolidated Financial Statements and related disclosures.
Government Assistance. In November 2021, FASB issued guidance which requires business entities to provide certain disclosures when they have received government assistance and used a grant or contribution accounting model by analogy to other accounting guidance. The guidance became effective for financial statements issued for annual periods beginning after December 15, 2021. The adoption of this guidance did not have a material impact on the Company’s Consolidated Financial Statements or related disclosures.
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 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 Consolidated Statements of Income/(Loss). Property management revenues, which are comprised of management fee revenue and reimbursable revenue, were (in millions) (a):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Management fee revenue | $ | 413 | | | $ | 378 | | | $ | 343 | |
| Reimbursable revenues | 350 | | | 313 | | | 252 | |
| Property management revenues | $ | 763 | | | $ | 691 | | | $ | 595 | |
(a)Reflects the impact of reclassifying the Extra Holidays business from the Travel and Membership segment to the Vacation Ownership segment.
One of the associations that the Company manages paid its Travel and Membership segment $31 million for exchange services during 2022, $30 million during 2021, and $27 million during 2020.
Travel and Membership
Travel and Membership derives a majority of its revenues from membership dues and fees for facilitating members’ trading of their timeshare 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 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 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 travel club members. Revenue is recognized when these transactions have been confirmed, net of expected cancellations.
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.
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. Revenues from other vacation exchange-related product fees are deferred and recognized upon the occurrence of a future exchange, event, or other related transaction.
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 service 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 consisted of (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Deferred subscription revenue | $ | 164 | | | $ | 166 | |
| Deferred VOI trial package revenue | 101 | | | 85 | |
| Deferred VOI incentive revenue | 70 | | | 55 | |
Deferred exchange-related revenue (a) | 53 | | | 61 | |
| Deferred co-branded credit card programs revenue | 9 | | | 12 | |
| Deferred other revenue | 3 | | | 3 | |
| Total | $ | 400 | | | $ | 382 | |
(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 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, but may extend longer for certain programs. 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, but may extend longer for certain programs.
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 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 and rent travel accommodations which are recognized on a straight-line basis over the contract period, generally within one year. Deferred revenue also includes other leisure-related service and product revenues which are recognized as customers utilize the associated benefits.
Changes in contract liabilities for the periods presented were as follows (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 382 | | | $ | 448 | | | $ | 539 | |
| Additions | 273 | | | 247 | | | 223 | |
| Revenue recognized | (255) | | | (313) | | | (314) | |
| | | | | |
| | | | | |
| Ending balance | $ | 400 | | | $ | 382 | | | $ | 448 | |
Capitalized Contract Costs
The 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 December 31, 2022 and 2021, these capitalized costs were $35 million and $28 million and are included within Other assets on the Consolidated Balance Sheets.
The 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 December 31, 2022, these capitalized costs were $18 million, of which $11 million was included in Prepaid expenses and $7 million was included in Other assets on the Consolidated Balance Sheets. As of December 31, 2021, these capitalized costs were $19 million, of which $11 million was included in Prepaid expenses and $8 million was included in Other assets on the 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 will satisfy the performance obligation and when the customer will pay for that good or service will be 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): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2023 | | 2024 | | 2025 | | Thereafter | | Total |
| Subscription revenue | $ | 95 | | | $ | 38 | | | $ | 16 | | | $ | 15 | | | $ | 164 | |
| VOI trial package revenue | 94 | | | 3 | | | 2 | | | 2 | | | 101 | |
| VOI incentive revenue | 70 | | | — | | | — | | | — | | | 70 | |
| Exchange-related revenue | 50 | | | 3 | | | — | | | — | | | 53 | |
| Co-branded credit card programs revenue | 3 | | | 3 | | | 3 | | | — | | | 9 | |
| Other revenue | 3 | | | — | | | — | | | — | | | 3 | |
| Total | $ | 315 | | | $ | 47 | | | $ | 21 | | | $ | 17 | | | $ | 400 | |
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): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Vacation Ownership | | | | | |
Vacation ownership interest sales (b) | $ | 1,484 | | | $ | 1,176 | | | $ | 505 | |
| Property management fees and reimbursable revenues | 763 | | | 691 | | | 595 | |
| Consumer financing | 406 | | | 404 | | | 467 | |
| Fee-for-Service commissions | 116 | | | 101 | | | 22 | |
| Ancillary revenues | 66 | | | 51 | | | 48 | |
| Total Vacation Ownership | 2,835 | | | 2,423 | | | 1,637 | |
| | | | | |
| Travel and Membership | | | | | |
| Transaction revenues | 519 | | | 503 | | | 292 | |
| Subscription revenues | 184 | | | 176 | | | 160 | |
| Ancillary revenues | 32 | | | 35 | | | 76 | |
| Total Travel and Membership | 735 | | | 714 | | | 528 | |
| | | | | |
| Corporate and other | | | | | |
| | | | | |
| Eliminations | (3) | | | (3) | | | (5) | |
| Total Corporate and other | (3) | | | (3) | | | (5) | |
| | | | | |
| Net revenues | $ | 3,567 | | | $ | 3,134 | | | $ | 2,160 | |
(a)This table reflects the reclassification of the Extra Holidays business from the Travel and Membership segment into the Vacation Ownership segment for all periods presented. The Extra Holidays business revenue is included within Property management fees and reimbursable revenues.
(b)The Company increased its loan loss allowance by $205 million during 2020, due to an expected increase in net new defaults driven by higher unemployment associated with COVID-19, which is reflected as a reduction to Vacation ownership interest sales on the Consolidated Statements of Income/(Loss). During 2021, the Company analyzed the adequacy of this COVID-19 related allowance consistent with past methodology, resulting in the release of $91 million which is reflected as an increase in Vacation ownership interest sales on the Consolidated Statements of Income/(Loss).
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): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Net income/(loss) from continuing operations attributable to Travel + Leisure Co. shareholders | $ | 356 | | | $ | 313 | | | $ | (253) | |
| | | | | |
| Gain/(loss) on disposal of discontinued business attributable to Travel + Leisure Co. shareholders, net of income taxes | 1 | | | (5) | | | (2) | |
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 357 | | | $ | 308 | | | $ | (255) | |
| | | | | |
Basic earnings/(loss) per share (a) | | | | | |
| Continuing operations | $ | 4.27 | | | $ | 3.62 | | | $ | (2.95) | |
| Discontinued operations | 0.01 | | | (0.06) | | | (0.02) | |
| $ | 4.28 | | | $ | 3.56 | | | $ | (2.97) | |
Diluted earnings/(loss) per share (a) | | | | | |
| Continuing operations | $ | 4.23 | | | $ | 3.58 | | | $ | (2.95) | |
| Discontinued operations | 0.01 | | | (0.06) | | | (0.02) | |
| $ | 4.24 | | | $ | 3.52 | | | $ | (2.97) | |
| | | | | |
| Basic weighted average shares outstanding | 83.4 | | | 86.5 | | | 86.1 | |
RSUs (b), PSUs (c) and NQs (d) | 0.8 | | | 0.8 | | | — | |
Diluted weighted average shares outstanding (e) | 84.2 | | | 87.3 | | | 86.1 | |
| | | | | |
| Dividends: | | | | | |
Cash dividends per share (f) | $ | 1.60 | | | $ | 1.25 | | | $ | 1.60 | |
| Aggregate dividends paid to shareholders | $ | 135 | | | $ | 109 | | | $ | 138 | |
(a)Earnings/(loss) per share amounts are calculated using whole numbers.
(b)Excludes 0.7 million, 0.4 million, and 1.1 million of restricted stock units (“RSUs”) that would have been anti-dilutive to EPS for the years 2022, 2021, and 2020, of which 0.2 million would have been dilutive during 2020 had the Company not been in a net loss position. These shares could potentially dilute EPS in the future.
(c)Excludes performance-vested restricted stock units (“PSUs”) of 0.5 million, 0.4 million, and 0.3 million for the years 2022, 2021, and 2020, as the Company had not met the required performance metrics. These PSUs could potentially dilute EPS in the future.
(d)Excludes 1.6 million, 1.4 million, and 2.1 million of outstanding non-qualified stock options (“NQs”) that would have been anti-dilutive to EPS for the years 2022, 2021, and 2020. These outstanding NQs 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.
(f)During 2022, the Company paid cash dividends of $0.40 per share for all four quarters. During 2021, the Company paid cash dividends of $0.30 per share for the first, second, and third quarters, and $0.35 per share for the fourth quarter. The Company paid cash dividends of $0.50 per share for the first and second quarters, and $0.30 per share for the third and fourth quarters of 2020.
Share Repurchase Program
During 2022, the Company’s Board of Directors increased the authorization for the Company’s share repurchase program by $500 million. Proceeds received from stock option exercises have increased the repurchase capacity by $81 million since the inception of this program. As of December 31, 2022, the Company had $477 million of remaining availability under this program.
The following table summarizes stock repurchase activity under the current share repurchase program (in millions): | | | | | | | | | | | |
| Shares | | Cost |
| As of December 31, 2021 | 111.8 | | | $ | 5,753 | |
| Repurchases | 8.2 | | | 351 | |
| As of December 31, 2022 | 120.0 | | | $ | 6,104 | |
5. Acquisitions
Assets acquired and liabilities assumed in business combinations were recorded on the Consolidated Balance Sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of businesses acquired by the Company have been included in the Consolidated Statements of Income/(Loss) since their respective dates of acquisition. The excess of the purchase price over the estimated fair values of the underlying assets acquired and liabilities assumed was allocated to goodwill. In certain circumstances, the allocations of the excess purchase price were based upon preliminary estimates and assumptions. Accordingly, the allocations may be subject to revision when the Company receives final information, including appraisals and other analyses. Any revisions to the fair values during the measurement period will be recorded by the Company as further adjustments to the purchase price allocations. Although, in certain circumstances, the Company has substantially integrated the operations of its acquired businesses, additional future costs relating to such integration may occur. These costs may result from integrating operating systems, relocating employees, closing facilities, reducing duplicative efforts, and exiting and consolidating other activities. These costs will be recorded on the Consolidated Statements of Income/(Loss) as expenses.
2022 ACQUISITIONS
Other. During the third quarter of 2022, the Company completed a business acquisition at its Travel and Membership segment for $2 million. The preliminary purchase price allocations resulted in the recognition of (i) $1 million of definite lived intangibles with a weighted average life of seven years (ii) $1 million of goodwill; and (iii) $1 million of deferred other revenue.
2021 ACQUISITIONS
Travel + Leisure. On January 5, 2021, the Company acquired the Travel + Leisure brand from Dotdash Meredith (formerly Meredith Corporation) for $100 million, $35 million of which was paid at closing and is reflected as cash used in Investing activities on the Consolidated Statements of Cash Flows. The Company made additional payments of $20 million in each of 2021 and 2022, the majority of which is reflected as cash used in Financing activities on the Consolidated Statements of Cash Flows. 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.
2019 ACQUISITIONS
Alliance Reservations Network. On August 7, 2019, the Company acquired all of the equity of Alliance Reservations Network (“ARN”). ARN, which is reported within the Travel and Membership segment, 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). The fair value of purchase consideration was comprised of: (i) $48 million paid in cash at closing and $11 million paid in each of 2020 and 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.
During 2022, the Company reduced its accrual for contingent consideration by $10 million to reflect the fair value based on expected performance. This amount was included within Other income, net on the Consolidated Statements of Income/(Loss).
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. Prior to their classification as discontinued
operations, the hotel business comprised the Hotel Group segment and the European vacation rentals business was part of the Travel and Membership segment.
During 2022, the Company had $5 million of Net cash used in investing activities from discontinued operations on the Consolidated Statements of Cash Flows which included $6 million related to the settlement of post-closing adjustment claims associated with the sale of the European vacation rentals business (see Note 27—Transactions with Former Parent and Former Subsidiaries for additional details) partially offset by $1 million of tax refunds related to various pre-sale tax items included in Gain/(loss) on disposal of discontinued business, net of income taxes on the Consolidated Statements of Income/(Loss).
During 2021, the Company recognized a loss on disposal of discontinued business, net of income taxes of $5 million as a result of entering into a settlement agreement for post-closing adjustment claims related to the sale of the European vacation rentals business. See Note 27—Transactions with Former Parent and Former Subsidiaries for additional information. The Company had no cash flow activity related to discontinued operations during 2021.
During 2020, the Company recognized a $2 million loss on disposal of discontinued business, net of income taxes resulting from a tax audit related to the European vacation rentals business and had $5 million of Net cash used in investing activities from discontinued operations for the year ended December 31, 2020 associated with the sale of the European vacation rentals business.
The Company does not expect to incur significant ongoing gains and/or losses for the aforementioned discontinued operations.
7. Intangible Assets
Intangible assets consisted of (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of December 31, 2022 | | As of December 31, 2021 |
| Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount | | Gross
Carrying
Amount | | Accumulated
Amortization | | Net
Carrying
Amount |
| Unamortized Intangible Assets: | | | | | | | | | | | |
| Goodwill | $ | 955 | | | | | | | $ | 961 | | | | | |
Trademarks (a) | $ | 144 | | | | | | | $ | 146 | | | | | |
| Amortized Intangible Assets: | | | | | | | | | | | |
Customer lists (b) | $ | 75 | | | $ | 37 | | | $ | 38 | | | $ | 75 | | | $ | 31 | | | $ | 44 | |
Management agreements (c) | 50 | | | 35 | | | 15 | | | 52 | | | 34 | | | 18 | |
Trademarks (d) | 9 | | | 6 | | | 3 | | | 8 | | | 5 | | | 3 | |
Other (e) | 8 | | | 1 | | | 7 | | | 8 | | | — | | | 8 | |
| $ | 142 | | | $ | 79 | | | $ | 63 | | | $ | 143 | | | $ | 70 | | | $ | 73 | |
(a)Comprised of trademarks and trade names the Company has acquired that are expected to generate future cash flows for an indefinite period of time. During 2022, the Company recorded a $2 million trade name impairment at the Travel and Membership segment.
(b)Amortized between 4 to 15 years with a weighted average life of 12 years.
(c)Amortized between 5 to 25 years with a weighted average life of 17 years.
(d)Amortized between 7 to 8 years with a weighted average life of 8 years.
(e)Includes business contracts, which are amortized between 10 to 69 years with a weighted average life of 58 years.
Goodwill
During the fourth quarters of 2022, 2021, and 2020, the Company performed its annual goodwill impairment test and determined no impairment existed as the fair value of goodwill at its reporting units was in excess of the carrying value.
The changes in the carrying amount of goodwill are as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2021 | | | | Goodwill Acquired During 2022 | | | | Foreign Exchange | | Balance as of December 31, 2022 |
| Travel and Membership | $ | 934 | | | | | $ | 1 | | | | | $ | (7) | | | $ | 928 | |
| Vacation Ownership | 27 | | | | | — | | | | | — | | | 27 | |
| Total Company | $ | 961 | | | | | $ | 1 | | | | | $ | (7) | | | $ | 955 | |
Amortizable Intangible Assets
Amortization expense relating to amortizable intangible assets is included as a component of Depreciation and amortization on the Consolidated Statements of Income/(Loss) and was as follows (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Customer lists | $ | 6 | | | $ | 6 | | | $ | 6 | |
| Management agreements | 1 | | | 3 | | | 3 | |
| Other | 2 | | | — | | | 1 | |
| Total | $ | 9 | | | $ | 9 | | | $ | 10 | |
Based on the Company’s amortizable intangible assets as of December 31, 2022, the Company expects related amortization expense for the next five years as follows (in millions): | | | | | |
| Amount |
| 2023 | $ | 9 | |
| 2024 | 8 | |
| 2025 | 8 | |
| 2026 | 8 | |
| 2027 | 7 | |
8. Income Taxes
The income tax provision/(benefit) attributable to continuing operations consisted of the following (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Current | | | | | |
| Federal | $ | 83 | | | $ | 111 | | | $ | 42 | |
| State | 23 | | | 27 | | | 12 | |
| Foreign | 28 | | | 17 | | | 11 | |
| 134 | | | 155 | | | 65 | |
| Deferred | | | | | |
| Federal | 2 | | | (38) | | | (82) | |
| State | (6) | | | (2) | | | (3) | |
| Foreign | — | | | 1 | | | (3) | |
| (4) | | | (39) | | | (88) | |
| Provision/(benefit) for income taxes | $ | 130 | | | $ | 116 | | | $ | (23) | |
Pre-tax income/(loss) for domestic and foreign operations attributable to continuing operations consisted of the following (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Domestic | $ | 326 | | | $ | 314 | | | $ | (326) | |
| Foreign | 160 | | | 115 | | | 50 | |
| Income/(loss) before income taxes | $ | 486 | | | $ | 429 | | | $ | (276) | |
Deferred income tax assets and liabilities were comprised of the following (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Deferred income tax assets: | | | |
| Provision for doubtful accounts and loan loss allowance for vacation ownership contract receivables | $ | 179 | | | $ | 180 | |
| Foreign tax credit carryforward | 69 | | | 77 | |
| Accrued liabilities and deferred income | 76 | | | 76 | |
| Other comprehensive income | 78 | | | 73 | |
| Net operating loss carryforward | 33 | | | 33 | |
| | | |
| Tax basis differences in assets of foreign subsidiaries | 12 | | | 11 | |
| Other | 88 | | | 89 | |
Valuation allowance (a) | (151) | | | (156) | |
| Deferred income tax assets | 384 | | | 383 | |
| | | |
| Deferred income tax liabilities: | | | |
| Installment sales of vacation ownership interests | 701 | | | 700 | |
| Depreciation and amortization | 220 | | | 227 | |
| Other comprehensive income | 57 | | | 53 | |
| Estimated VOI recoveries | 47 | | | 46 | |
| Other | 15 | | | 18 | |
| Deferred income tax liabilities | 1,040 | | | 1,044 | |
| Net deferred income tax liabilities | $ | 656 | | | $ | 661 | |
| | | |
| Reported in: | | | |
| Other assets | $ | 23 | | | $ | 25 | |
| Deferred income taxes | 679 | | | 686 | |
| Net deferred income tax liabilities | $ | 656 | | | $ | 661 | |
(a) The valuation allowance of $151 million at December 31, 2022, relates to foreign tax credits, net operating loss carryforwards, and certain deferred tax assets of $52 million, $20 million, and $79 million. The valuation allowance of $156 million at December 31, 2021, relates to foreign tax credits, net operating loss carryforwards, and certain deferred tax assets of $56 million, $21 million, and $79 million. The valuation allowance will be reduced when and if the Company determines it is more likely than not that the related deferred income tax assets will be realized.
As of December 31, 2022, the Company’s net operating loss carryforwards primarily relate to state and foreign net operating losses of $17 million and $14 million. The state net operating losses are due to expire at various dates, but no later than 2042 for those that cannot be carried forward indefinitely. The majority of the foreign net operating losses can be carried forward indefinitely. As of December 31, 2022, the Company had $69 million of foreign tax credits. These foreign tax credits expire between the 2022 and 2032 tax years.
The Company’s effective income tax rate differs from the U.S. federal statutory rate as follows: | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Federal statutory rate | 21.0% | | 21.0% | | 21.0% |
| State and local income taxes, net of federal tax benefits | 2.4 | | 4.5 | | (0.9) |
| Taxes on foreign operations at rates different than U.S. federal statutory rates | (2.0) | | (3.2) | | (0.9) |
| Taxes on foreign income, net of tax credits | 3.1 | | 3.5 | | 0.2 |
| Valuation allowance | (0.2) | | 1.8 | | (7.1) |
| | | | | |
| | | | | |
| Installment sale interest | 1.1 | | 1.3 | | (0.8) |
| Other | 1.3 | | (1.9) | | (3.2) |
| 26.7% | | 27.0% | | 8.3% |
The following table summarizes the activity related to the Company’s unrecognized tax benefits (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| | 2022 | | 2021 | | 2020 |
| Beginning balance | $ | 27 | | | $ | 26 | | | $ | 29 | |
| Increases related to tax positions taken during a prior period | — | | | 2 | | | — | |
| Increases related to tax positions taken during the current period | 2 | | | 2 | | | 2 | |
| | | | | |
| Decreases related to tax positions taken during a prior period | (3) | | | — | | | (2) | |
| Decreases as a result of a lapse of the applicable statute of limitations | (1) | | | (3) | | | (3) | |
| Ending balance | $ | 25 | | | $ | 27 | | | $ | 26 | |
The gross amount of the unrecognized tax benefits that, if recognized, would affect the Company’s effective tax rate were $20 million, $22 million, and $22 million as of December 31, 2022, 2021, and 2020. The Company records potential penalties and interest as a component of Provision/(benefit) for income taxes on the Consolidated Statements of Income/(Loss) related to these unrecognized tax benefits. During 2022, penalties and interest decreased by $1 million. During 2021 and 2020 penalties and interest increased by $1 million in each respective year. The Company had a liability for potential penalties of $4 million as of December 31, 2022, 2021, and 2020, and potential interest of $10 million, $11 million, and $10 million as of December 31, 2022, 2021, and 2020. Such liabilities are reported as a component of Accrued expenses and other liabilities on the Consolidated Balance Sheets.
The Company believes that it is reasonably possible that its unrecognized tax benefits could decrease by $2 million within 12 months of the current reporting date due to the expiration of certain statutes of limitations. The Company does not expect other changes to the unrecognized tax benefits balance to be significant.
The Company files U.S. federal and state, and foreign income tax returns in jurisdictions with varying statutes of limitations. With few exceptions, the Company is no longer subject to U.S. federal income tax examinations for years prior to 2019 and state and local income tax examinations prior to 2016. In significant foreign jurisdictions, generally years prior to 2015 are no longer subject to income tax examinations by their respective tax authorities.
The Company asserts that substantially all undistributed foreign earnings will be reinvested indefinitely as of December 31, 2022. In the event the Company determines not to continue to assert that all or part of its undistributed foreign earnings are permanently reinvested, such a determination in the future could result in the accrual and payment of additional foreign withholding taxes, as well as U.S. taxes on currency transaction gains and losses, the determination of which is not practicable.
The Company made cash income tax payments, net of refunds, of $153 million, $110 million, and $50 million during 2022, 2021, and 2020. In addition, the Company made cash income tax payments, net of refunds, of $8 million during 2020 related to discontinued operations. Such payments exclude income tax related payments made to or refunded by the Company’s former parent Cendant and Wyndham Hotels.
9. Vacation Ownership Contract Receivables
The Company generates VOCRs by extending financing to the purchasers of its VOIs. Vacation ownership contract receivables, net consisted of the following (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Vacation ownership contract receivables: | | | |
Securitized (a) | $ | 2,164 | | | $ | 2,061 | |
Non-securitized (b) | 747 | | | 758 | |
| Vacation ownership contract receivables, gross | 2,911 | | | 2,819 | |
| Less: allowance for loan losses | 541 | | | 510 | |
| Vacation ownership contract receivables, net | $ | 2,370 | | | $ | 2,309 | |
(a)Excludes $17 million of accrued interest on VOCRs as of both December 31, 2022 and 2021, which are included in Trade receivables, net on the Consolidated Balance Sheets.
(b)Excludes $7 million and $5 million of accrued interest on VOCRs as of December 31, 2022 and 2021, which are included in Trade receivables, net on the Consolidated Balance Sheets.
Principal payments due on the Company’s VOCRs during each of the five years subsequent to December 31, 2022, and thereafter are as follows (in millions): | | | | | | | | | | | | | | | | | | |
| | Securitized | | Non -
Securitized | | Total |
| 2023 | | $ | 208 | | | $ | 80 | | | $ | 288 | |
| 2024 | | 222 | | | 81 | | | 303 | |
| 2025 | | 234 | | | 89 | | | 323 | |
| 2026 | | 244 | | | 94 | | | 338 | |
| 2027 | | 237 | | | 97 | | | 334 | |
| Thereafter | | 1,019 | | | 306 | | | 1,325 | |
| | $ | 2,164 | | | $ | 747 | | | $ | 2,911 | |
During 2022, 2021, and 2020, the Company’s securitized VOCRs generated interest income of $292 million, $304 million, and $391 million. Such interest income is included within Consumer financing revenue on the Consolidated Statements of Income/(Loss).
During 2022, 2021, and 2020, the Company had net VOCR originations of $1.14 billion, $780 million, and $481 million and received principal collections of $771 million, $815 million, and $718 million. The weighted average interest rate on outstanding VOCRs was 14.6%, 14.5%, and 14.4% during 2022, 2021, and 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, 2019 | $ | 747 | |
| Provision for loan losses, net | 415 | |
| Contract receivables write-offs, net | (469) | |
| Allowance for loan losses as of December 31, 2020 | 693 | |
| Provision for loan losses, net | 129 | |
| Contract receivables write-offs, net | (312) | |
| Allowance for loan losses as of December 31, 2021 | 510 | |
| Provision for loan losses, net | 302 | |
| Contract receivables write-offs, net | (271) | |
| Allowance for loan losses as of December 31, 2022 | $ | 541 | |
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. The Company based its COVID-19 loan loss estimate upon historical data on the relationship between unemployment rates and net new defaults observed during the most recent recession in 2008. 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 of vacation ownership interests on the Consolidated Statements of Income/(Loss). Since the first quarter of 2020, the Company has performed quarterly evaluations of the impact of COVID-19 on its owners’ ability to repay contract receivables and, as a result of improvements in net new defaults and lower than expected unemployment rates, reduced this allowance. The total impact of COVID-19 on owners’ ability to repay contract receivables for the year ended December 31, 2020, is reflected as a $205 million reduction to Vacation ownership interest sales and a $48 million reduction to Cost of vacation ownership interests on the Consolidated Statements of Income/(Loss). During 2021 the Company released a portion of its COVID-19 related allowance which is reflected as a $91 million increase to Vacation ownership interest sales and a $33 million increase to Cost of vacation ownership interests on the Consolidated Statements of Income/(Loss). After considering write-offs and the allowance for remaining likely defaults associated with loans that were granted payment deferrals, the Company has not had a COVID-19 related allowance since December 31, 2021.
The Company recorded net provisions for loan losses of $302 million and $129 million as a reduction of net revenues during the years ended December 31, 2022 and 2021, 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 available).
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 December 31, 2022 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| Current | $ | 1,674 | | | $ | 700 | | | $ | 93 | | | $ | 142 | | | $ | 143 | | | $ | 2,752 | |
| 31 - 60 days | 24 | | | 32 | | | 11 | | | 5 | | | 1 | | | 73 | |
| 61 - 90 days | 16 | | | 20 | | | 7 | | | 2 | | | — | | | 45 | |
| 91 - 120 days | 12 | | | 17 | | | 10 | | | 2 | | | — | | | 41 | |
Total (a) | $ | 1,726 | | | $ | 769 | | | $ | 121 | | | $ | 151 | | | $ | 144 | | | $ | 2,911 | |
| | | | | | | | | | | |
| As of December 31, 2021 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| Current | $ | 1,630 | | | $ | 734 | | | $ | 98 | | | $ | 72 | | | $ | 169 | | | $ | 2,703 | |
| 31 - 60 days | 17 | | | 24 | | | 10 | | | 3 | | | 1 | | | 55 | |
| 61 - 90 days | 9 | | | 12 | | | 7 | | | 1 | | | — | | | 29 | |
| 91 - 120 days | 9 | | | 12 | | | 9 | | | 1 | | | 1 | | | 32 | |
Total (a) | $ | 1,665 | | | $ | 782 | | | $ | 124 | | | $ | 77 | | | $ | 171 | | | $ | 2,819 | |
(a)Includes contracts under temporary deferment (up to 180 days) of $7 million as of December 31, 2021. There were no contracts under temporary deferment as of December 31, 2022.
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 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.
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 December 31, 2022 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| 2022 | $ | 745 | | | $ | 291 | | | $ | 19 | | | $ | 87 | | | $ | 52 | | | $ | 1,194 | |
| 2021 | 275 | | | 149 | | | 30 | | | 8 | | | 19 | | | 481 | |
| 2020 | 134 | | | 60 | | | 12 | | | 5 | | | 15 | | | 226 | |
| 2019 | 198 | | | 97 | | | 23 | | | 16 | | | 21 | | | 355 | |
| 2018 | 162 | | | 74 | | | 16 | | | 13 | | | 14 | | | 279 | |
| Prior | 212 | | | 98 | | | 21 | | | 22 | | | 23 | | | 376 | |
| Total | $ | 1,726 | | | $ | 769 | | | $ | 121 | | | $ | 151 | | | $ | 144 | | | $ | 2,911 | |
| | | | | | | | | | | |
| As of December 31, 2021 |
| 700+ | | 600-699 | | <600 | | No Score | | Asia Pacific | | Total |
| 2021 | $ | 534 | | | $ | 221 | | | $ | 11 | | | $ | 11 | | | $ | 38 | | | $ | 815 | |
| 2020 | 224 | | | 105 | | | 17 | | | 6 | | | 38 | | | 390 | |
| 2019 | 324 | | | 168 | | | 37 | | | 19 | | | 33 | | | 581 | |
| 2018 | 234 | | | 117 | | | 25 | | | 14 | | | 24 | | | 414 | |
| 2017 | 157 | | | 76 | | | 15 | | | 11 | | | 14 | | | 273 | |
| Prior | 192 | | | 95 | | | 19 | | | 16 | | | 24 | | | 346 | |
| Total | $ | 1,665 | | | $ | 782 | | | $ | 124 | | | $ | 77 | | | $ | 171 | | | $ | 2,819 | |
10. Inventory
Inventory consisted of the following (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Completed VOI inventory | $ | 982 | | | $ | 998 | |
| Estimated VOI recoveries | 192 | | | 187 | |
| VOI construction in process | 14 | | | 13 | |
| Vacation exchange credits and other | 4 | | | 4 | |
| Land held for VOI development | 1 | | | 1 | |
Inventory sold subject to repurchase | — | | | 13 | |
| Total inventory | $ | 1,193 | | | $ | 1,216 | |
As VOI inventory is completed it is transferred into property and equipment until such units are registered and made available for sale. Once registered and available for sale, the units are then transferred back into completed inventory. The Company had net transfers of VOI inventory to property and equipment of $19 million and $75 million during 2022 and 2021.
During 2020, as a result of resort closures and cancellations surrounding COVID-19, the Company recorded a $48 million reduction to exchange inventory consisting of costs previously incurred by RCI to provide enhanced out-of-network travel options to members. The write-off was included within Operating expenses on the Consolidated Statements of Income/(Loss). The Company utilized the remaining inventory to maximize exchange supply for its members.
Inventory Obligations
The Company has entered into inventory sale transactions with third-party developers for which the Company has conditional rights and 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): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Atlanta (a) (b) | | Las Vegas (a) | | Moab (a) | | Orlando (a) | | Other (c) | | Total |
| December 31, 2020 | $ | — | | | $ | 13 | | | $ | 31 | | | $ | 22 | | | $ | 17 | | | $ | 83 | |
| Purchases | — | | | 2 | | | 25 | | | 2 | | | 70 | | | 99 | |
| Payments | — | | | (2) | | | (56) | | | (24) | | | (86) | | | (168) | |
| December 31, 2021 | — | | | 13 | | | — | | | — | | | 1 | | | 14 | |
| Purchases | 67 | | | 52 | | | — | | | — | | | 56 | | | 175 | |
| Payments | (67) | | | (35) | | | — | | | — | | | (50) | | | (152) | |
| December 31, 2022 | $ | — | | | $ | 30 | | | $ | — | | | $ | — | | | $ | 7 | | | $ | 37 | |
(a)Included in Accrued expenses and other liabilities on the Consolidated Balance Sheets.
(b)Represents vacation ownership inventory and property and equipment in Atlanta, Georgia, acquired from a third-party developer.
(c)Included in Accounts payable on the Consolidated Balance Sheets.
In connection with an inventory sale transaction, the Company has committed to repurchase completed property located in Las Vegas, Nevada, from a third-party developer. The maximum potential future payments that the Company may be required to make under this commitment was $30 million as of December 31, 2022.
11. Property and Equipment, net
Property and equipment, net consisted of the following (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Capitalized software | $ | 724 | | | $ | 707 | |
Building and leasehold improvements (a) | 671 | | | 653 | |
| Furniture, fixtures and equipment | 192 | | | 204 | |
| Land | 30 | | | 30 | |
| Finance leases | 27 | | | 20 | |
| Construction in progress | 8 | | | 18 | |
| Total property and equipment | 1,652 | | | 1,632 | |
| Less: accumulated depreciation and amortization | 994 | | | 943 | |
| Property and equipment, net | $ | 658 | | | $ | 689 | |
(a)Includes $242 million and $225 million of unregistered VOI inventory as of December 31, 2022 and 2021.
During 2022, 2021, and 2020, the Company recorded depreciation and amortization expense of $110 million, $115 million, and $117 million related to property and equipment. As of December 31, 2022 and 2021, the Company had accrued capital expenditures of $4 million and $1 million.
12. 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 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 one 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.
The table below presents information related to the lease costs for finance and operating leases (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Operating lease cost | $ | 23 | | | $ | 22 | | | $ | 30 | |
| | | | | |
| Short-term lease cost | $ | 13 | | | $ | 13 | | | $ | 14 | |
| | | | | |
| Finance lease cost: | | | | | |
| Amortization of right-of-use assets | $ | 5 | | | $ | 4 | | | $ | 3 | |
| Interest on lease liabilities | 1 | | | — | | | — | |
| Total finance lease cost | $ | 6 | | | $ | 4 | | | $ | 3 | |
The table below presents the lease-related assets and liabilities recorded on the Consolidated Balance Sheets: | | | | | | | | | | | | | | | | | |
| | | As of December 31, |
| Balance Sheet Classification | | 2022 | | 2021 |
| Operating Leases (in millions): | | | | | |
| Operating lease right-of-use assets | Other assets | | $ | 62 | | | $ | 79 | |
| Operating lease liabilities | Accrued expenses and other liabilities | | $ | 111 | | | $ | 136 | |
| | | | | |
| Finance Leases (in millions): | | | | | |
Finance lease assets (a) | Property and equipment, net | | $ | 12 | | | $ | 10 | |
| Finance lease liabilities | Debt | | $ | 11 | | | $ | 9 | |
| | | | | |
| Weighted Average Remaining Lease Term: | | | | | |
| Operating leases | | | 5.6 years | | 6.4 years |
| Finance leases | | | 2.7 years | | 2.6 years |
| Weighted Average Discount Rate: | | | | | |
Operating leases (b) | | | 5.9 | % | | 5.8 | % |
| Finance leases | | | 5.4 | % | | 4.4 | % |
(a)Presented net of accumulated depreciation.
(b)Upon adoption of the 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): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
| Operating cash outflows from operating leases | $ | 32 | | | $ | 36 | | | $ | 36 | |
| Operating cash outflows from finance leases | 1 | | | — | | | — | |
| Financing cash outflows from finance leases | 6 | | | 4 | | | 4 | |
| Right-of-use assets obtained in exchange for lease obligations: | | | | | |
| Operating leases | $ | 2 | | | $ | 7 | | | $ | 3 | |
| Finance leases | 8 | | | 6 | | | 6 | |
The table below presents maturities of lease liabilities as of December 31, 2022 (in millions): | | | | | | | | | | | |
| Operating Leases | | Finance
Leases |
| 2023 | $ | 31 | | | $ | 6 | |
| 2024 | 29 | | | 4 | |
| 2025 | 24 | | | 2 | |
| 2026 | 14 | | | 1 | |
| 2027 | 13 | | | — | |
| Thereafter | 21 | | | — | |
| Total minimum lease payments | 132 | | | 13 | |
| Less: amount of lease payments representing interest | (21) | | | (2) | |
| Present value of future minimum lease payments | $ | 111 | | | $ | 11 | |
Due to the impact of COVID-19 during 2020, the Company decided to abandon the remaining portion of its administrative offices in New Jersey. In 2020, 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 at its Travel and Membership segment. Additionally during 2020, the Company incurred $5 million of impairment charges related to right-of-use assets at closed sales centers within its Vacation Ownership segment, and $1 million of restructuring charges at each of the Vacation Ownership and corporate segments related to right-of-use assets at its corporate headquarters.
13. Other Assets
Other assets consisted of the following (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Non-trade receivables, net | $ | 65 | | | $ | 57 | |
| Right-of-use assets | 62 | | | 79 | |
| Deferred costs | 49 | | | 53 | |
Capitalized contract costs (a) | 42 | | | 36 | |
| Deferred tax asset | 23 | | | 25 | |
| Deposits | 22 | | | 20 | |
| Investments | 18 | | | 21 | |
| Marketable securities | 12 | | | 27 | |
| Derivatives | 12 | | | 2 | |
| Tax receivables | 3 | | | 5 | |
| Other | 16 | | | 14 | |
| $ | 324 | | | $ | 339 | |
(a)Includes certain direct and incremental selling costs in connection with VOI trial package, incentive, subscription, and exchange–related revenues. See Note 3—Revenue Recognition for additional details.
14. Accrued Expenses and Other Liabilities
Accrued expenses and other liabilities consisted of the following (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| Accrued payroll and related costs | $ | 214 | | | $ | 209 | |
Lease liabilities (a) | 111 | | | 136 | |
| Accrued taxes | 80 | | | 106 | |
| Guarantees | 68 | | | 67 | |
| Accrued interest | 52 | | | 53 | |
| Resort related obligations | 45 | | | 54 | |
| Payables associated with separation and sale of business activities | 41 | | | 39 | |
| Accrued advertising and marketing | 38 | | | 34 | |
Inventory sale obligation (b) | 30 | | | 13 | |
Restructuring liabilities (c) | 26 | | | 22 | |
| Deferred consideration | 24 | | | 52 | |
| Accrued VOI maintenance fees | 21 | | | 29 | |
| Accrued legal and professional fees | 21 | | | 21 | |
| Derivative contract liabilities | 13 | | | 1 | |
| Customer advances | 12 | | | 10 | |
| | | |
| Accrued legal settlements | 3 | | | 19 | |
| | | |
| Accrued other | 77 | | | 74 | |
| $ | 876 | | | $ | 939 | |
(a)See Note 12—Leases for details.
(b)See Note 10—Inventory for details.
(c)See Note 26—Restructuring for details.
15. Debt
The Company’s indebtedness consisted of the following (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Non-recourse vacation ownership debt: (a) | | | |
Term notes (b) | $ | 1,545 | | | $ | 1,614 | |
USD bank conduit facility (due July 2024) (c) | 321 | | | 190 | |
AUD/NZD bank conduit facility (due December 2024) (d) | 107 | | | 130 | |
| Total | $ | 1,973 | | | $ | 1,934 | |
| | | |
Debt: (e) | | | |
$1.0 billion secured revolving credit facility (due October 2026) (f) | $ | — | | | $ | — | |
$300 million secured term loan B (due May 2025) (g) | 286 | | | 288 | |
$300 million secured incremental term loan B (due December 2029) (h) | 288 | | | — | |
$400 million 3.90% secured notes (due March 2023) (i) | 400 | | | 401 | |
| $300 million 5.65% secured notes (due April 2024) | 299 | | | 299 | |
$350 million 6.60% secured notes (due October 2025) (j) | 346 | | | 345 | |
| $650 million 6.625% secured notes (due July 2026) | 645 | | | 643 | |
$400 million 6.00% secured notes (due April 2027) (k) | 406 | | | 407 | |
| $650 million 4.50% secured notes (due December 2029) | 642 | | | 641 | |
| $350 million 4.625% secured notes (due March 2030) | 346 | | | 346 | |
| Finance leases | 11 | | | 9 | |
| | | |
| Total | $ | 3,669 | | | $ | 3,379 | |
(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 $2.29 billion and $2.17 billion of underlying gross VOCRs and related assets (which legally are not assets of the Company) as of December 31, 2022 and 2021.
(b)The carrying amounts of the term notes are net of deferred financing costs of $18 million as of both December 31, 2022 and 2021.
(c)The Company has a borrowing capacity of $600 million under the USD bank conduit facility through July 2024. Borrowings under this facility are required to be repaid as the collateralized receivables amortize but no later than August 2025.
(d)The Company has a borrowing capacity of 200 million Australian dollars (“AUD”) and 25 million New Zealand dollars (“NZD”) under the AUD/NZD bank conduit facility through December 2024. Borrowings under this facility are required to be repaid no later than January 2027.
(e)The carrying amounts of the secured notes and term loan are net of unamortized discounts of $23 million and $20 million as of December 31, 2022 and 2021, and net of unamortized debt financing costs of $10 million and $8 million as of December 31, 2022 and 2021.
(f)The weighted average effective interest rate on borrowings from this facility was 7.53% and 3.19% as of December 31, 2022 and 2021.
(g)The weighted average effective interest rate on borrowings from this facility was 4.01% and 2.39% as of December 31, 2022 and 2021.
(h)The weighted average effective interest rate on borrowings from this facility was 8.24% as of December 31, 2022.
(i)Includes less than $1 million and $2 million of unamortized gains from the settlement of a derivative as of December 31, 2022 and 2021.
(j)Includes $3 million and $4 million of unamortized losses from the settlement of a derivative as of December 31, 2022 and 2021.
(k)Includes $7 million and $9 million of unamortized gains from the settlement of a derivative as of December 31, 2022 and 2021.
Maturities and Capacity
The Company’s outstanding indebtedness as of December 31, 2022, matures as follows (in millions): | | | | | | | | | | | | | | | | | |
| Non-recourse Vacation Ownership Debt | | Debt | | Total |
| Within 1 year | $ | 218 | | | $ | 411 | |
| $ | 629 | |
| Between 1 and 2 years | 219 | | | 309 | | | 528 | |
| Between 2 and 3 years | 511 | | | 631 | | | 1,142 | |
| Between 3 and 4 years | 214 | | | 648 | | | 862 | |
| Between 4 and 5 years | 200 | | | 408 | | | 608 | |
| Thereafter | 611 | | | 1,262 | | | 1,873 | |
| $ | 1,973 | | | $ | 3,669 | | | $ | 5,642 | |
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 December 31, 2022, the available capacity under the Company’s borrowing arrangements was as follows (in millions): | | | | | | | | | | | |
| Non-recourse Conduit Facilities (a) | | Revolving Credit Facilities (b) |
| Total capacity | $ | 752 | | | $ | 1,000 | |
| Less: outstanding borrowings | 428 | | | — | |
| | | |
| Available capacity | $ | 324 | | | $ | 1,000 | |
(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.
Non-recourse Vacation Ownership Debt
As discussed in Note 16—Variable Interest Entities, the Company issues debt through the securitization of VOCRs.
Sierra Timeshare 2022-1 Receivables Funding, LLC. On March 23, 2022, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2022-1 Receivables Funding LLC, with an initial principal amount of $275 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 3.84%. The advance rate for this transaction was 98%. As of December 31, 2022, the Company had $170 million of outstanding borrowings under these term notes, net of debt issuance costs.
Sierra Timeshare 2022-2 Receivables Funding LLC. On July 21, 2022, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2022-2 Receivables Funding LLC, with an initial principal amount of $275 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 5.7%. The advance rate for this transaction was 90.5%. As of December 31, 2022, the Company had $205 million of outstanding borrowings under these term notes, net of debt issuance costs.
Sierra Timeshare 2022-3 Receivables Funding LLC. On October 20, 2022, the Company closed on a placement of a series of term notes payable, issued by Sierra Timeshare 2022-3 Receivables Funding LLC, with an initial principal amount of $250 million, secured by VOCRs and bearing interest at a weighted average coupon rate of 6.91%. The advance rate for this transaction was 87.5%. As of December 31, 2022, the Company had $220 million of outstanding borrowings under these term notes, net of debt issuance costs.
Term Notes. In addition to the 2022 term notes described above, as of December 31, 2022, the Company had $950 million of outstanding non-recourse borrowings, net of debt issuance costs, under term notes entered into prior to December 31, 2021. The Company’s non-recourse term notes include fixed and floating rate term notes for which the weighted average interest rate was 4.2%, 3.9%, and 4.5% during 2022, 2021, and 2020.
USD bank conduit facility. On March 4, 2022, the Company renewed its USD timeshare receivables conduit facility, extending the end of the commitment period from October 2022 to July 2024. The renewal included a reduction of the USD borrowing capacity from $800 million to $600 million. This capacity reduction was made in an effort to reduce fees associated with unused capacity. The facility bears interest based on a mixture of variable commercial paper rates plus a spread for certain participating banks and the Daily Simple Secured Overnight Financing Rate (“SOFR”) plus a spread for other participating banks. Borrowings under this facility are required to be repaid as the collateralized receivables amortize, no later than August 2025. As of December 31, 2022, the Company had $321 million of outstanding borrowings under this facility.
AUD/NZD bank conduit facility. On December 21, 2022, the Company renewed its AUD/NZD timeshare receivables conduit facility, extending the end of the commitment period from April 2023 to December 2024. The renewal included a reduction of the AUD borrowing capacity from A$250 million to A$200 million and a reduction of the NZD borrowing capacity from NZ$48 million to NZ$25 million. These capacity reductions were made in an effort to reduce fees associated with unused capacity. The facility is secured by VOCRs and bears interest at variable rates based on the Bank Bill Swap Bid Rate plus 2.0%. Borrowings under this facility are required to be repaid no later than January 2027. As of December 31, 2022, the Company had $107 million of outstanding borrowings under this facility.
As of December 31, 2022, the Company’s non-recourse vacation ownership debt of $1.97 billion was collateralized by $2.29 billion of underlying gross VOCRs and related assets. Additional usage of the Company’s non-recourse bank conduit facilities is subject to the Company’s ability to provide additional assets to collateralize such facilities. The combined weighted average interest rate on the Company’s total non-recourse vacation ownership debt was 4.2%, 4.0%, and 4.2% during 2022, 2021, and 2020.
Debt
$1.0 billion Revolving Credit Facility and $300 million Term Loan B. The Company has a credit agreement with Bank of America, N.A. as administrative agent and collateral agent. The agreement provides for senior secured credit facilities in the amount of $1.3 billion, consisting of the secured term loan B of $300 million maturing in 2025 and a secured revolving facility of $1.0 billion maturing in 2026. As of December 31, 2022, the Company’s interest rate per annum applicable to term loan B is equal to, at the Company’s option, either a base rate plus a margin of 1.25% or the London Interbank Offered Rate (“LIBOR”) plus a margin of 2.25%. The interest rate per annum applicable to borrowings under the revolving credit facility 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 first-lien leverage ratio of Travel + Leisure Co. and its restricted subsidiaries. The LIBOR rate with respect to either term loan B or the revolving credit facility borrowings are subject to a floor of 0.00%. The Company is also subject to a commitment fee for the unused portion of its revolving credit facility. This fee is based upon the first-lien leverage ratio and ranges from 0.25% to 0.35% per annum of the unused balance.
As of December 31, 2022, the security agreement that exists in connection with the credit agreement names Bank of America N.A. as collateral agent on behalf of the secured parties (as defined in the security agreement), and has been in force since May 31, 2018. The security agreement grants a security interest in the collateral of the Company (as defined in the security agreement) and includes the holders of Travel + Leisure Co.'s outstanding secured notes, as “secured parties.” These noteholders share equally and ratably in the collateral (as defined in the security agreement) owned by the Company for so long as the indebtedness under the credit agreement is secured by such collateral.
The interest rates increased for certain of the outstanding secured notes that were impacted by the rating agency downgrades of the Company’s corporate notes. Pursuant to the terms of the indentures governing such rating sensitive
series of notes, the interest rate on each such series of notes may be subject to future increases or decreases, as a result of future downgrades or upgrades to the credit ratings of such notes by Standard & Poor’s Rating Services (“S&P”), Moody’s Investors Service, Inc. (“Moody’s”), or a substitute rating agency. Since issuance, the interest rates on the impacted notes have increased 150 basis points as of December 31, 2022, with a maximum potential for additional increase of 50 basis points.
Incremental Term Loan B. On December 14, 2022, the Company amended the credit agreement governing its revolving credit facility and term loan B (“Third Amendment”). The Third Amendment provides for an incremental term loan B of $300 million, which will mature on December 14, 2029. The incremental term loan B bears interest, at the Company’s option, at a rate of (a) Base Rate (which is the highest of Bank of America’s prime rate, the federal funds rate plus 0.50%, and the Term SOFR (as defined in the Company’s existing Credit Agreement) one month rate, inclusive of the SOFR Adjustment (defined as 0.10% per annum in the Company’s Credit Agreement), plus 1.00% (subject in each case to a floor of 0.50%)), plus an applicable rate of 3.00%, or (b) the Term SOFR rate, inclusive of the SOFR Adjustment, plus an applicable rate of 4.00% (subject to a floor of 0.50%). The incremental term loan B amortizes in equal quarterly installments of 0.25% of the initial principal amount, starting with the first full fiscal quarter after the closing date. The incremental term loan B was issued with an original issue discount of 97.5%. Proceeds for the facility were $289 million, which were net of the discount, arrangement fees, and structuring fees. Debt discount and deferred financing costs were collectively $12 million, which will be amortized over the life of the notes.
As of December 31, 2022, the Company had $3.08 billion of outstanding secured notes issued prior to December 31, 2021. Interest on these notes is payable semi-annually in arrears. The notes are redeemable at the Company’s option at a redemption price equal to the greater of (i) the sum of the principal being redeemed, and (ii) a “make-whole” price specified in the indenture of the notes, plus, in each case, accrued and unpaid interest. These notes rank equally in right of payment with all of the Company’s other secured indebtedness.
Deferred Financing Costs
The Company classifies debt issuance costs related to its revolving credit facilities and the bank conduit facilities within Other assets on the Consolidated Balance Sheets. Such costs were $9 million and $10 million as of December 31, 2022 and 2021.
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 no less than 2.50 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.
During 2021, the Company renewed the credit agreement governing the revolving credit facilities and term loan B (“Second Amendment”). The Second Amendment terminated the relief period restrictions adopted in the July 15, 2020 first amendment as a result of the COVID-19 pandemic. Beginning in the third quarter of 2022, the Second Amendment returned the first lien leverage ratio financial covenant to not exceed 4.25 to 1.0 and reestablished the interest coverage ratio (as defined in the credit agreement) of no less than 2.50 to 1.0, the levels in place prior to COVID-19.
As of December 31, 2022, the Company’s interest coverage ratio was 4.83 to 1.0 and the first lien leverage ratio was 3.54 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 December 31, 2022, the Company was in compliance with all of the financial covenants described above.
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 VOCR 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 December 31, 2022, all of the Company’s securitized loan pools were in compliance with applicable contractual triggers.
Interest Expense
The Company incurred interest expense of $195 million during 2022, consisting of interest on debt, excluding non-recourse vacation ownership debt, and including an offset of $1 million of capitalized interest. Cash paid related to such interest was $189 million.
The Company incurred interest expense of $198 million during 2021, consisting of interest on debt, excluding non-recourse vacation ownership debt, and including an offset of less than $1 million of capitalized interest. Cash paid related to such interest was $207 million.
The Company incurred interest expense of $192 million during 2020, consisting of interest on debt, excluding non-recourse vacation ownership debt, and including an offset of $1 million of capitalized interest. Cash paid related to such interest was $163 million.
Interest expense incurred in connection with the Company’s non-recourse vacation ownership debt was $79 million, $81 million, and $101 million during 2022, 2021, and 2020, and is reported within Consumer financing interest on the Consolidated Statements of Income/(Loss). Cash paid related to such interest was $51 million, $56 million, and $74 million during 2022, 2021, and 2020.
16. Variable Interest Entities
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 deemed to be a VIE, the Company consolidates those VIEs for which the Company 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 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 to the Company for principal and interest.
The assets and liabilities of these vacation ownership SPEs are as follows (in millions): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
Securitized contract receivables, gross (a) | $ | 2,164 | | | $ | 2,061 | |
Securitized restricted cash (b) | 83 | | | 84 | |
Interest receivables on securitized contract receivables (c) | 17 | | | 17 | |
Other assets (d) | 25 | | | 4 | |
| Total SPE assets | 2,289 | | | 2,166 | |
Non-recourse term notes (e)(f) | 1,545 | | | 1,614 | |
Non-recourse conduit facilities (e) | 428 | | | 320 | |
Other liabilities (g) | 5 | | | 2 | |
| Total SPE liabilities | 1,978 | | | 1,936 | |
| SPE assets in excess of SPE liabilities | $ | 311 | | | $ | 230 | |
(a)Included in Vacation ownership contract receivables, net on the Consolidated Balance Sheets.
(b)Included in Restricted cash on the Consolidated Balance Sheets.
(c)Included in Trade receivables, net on the Consolidated Balance Sheets.
(d)Primarily includes deferred financing costs for the bank conduit facility and a security investment asset, which is included in Other assets on the Consolidated Balance Sheets.
(e)Included in Non-recourse vacation ownership debt on the Consolidated Balance Sheets.
(f)Includes deferred financing costs of $18 million as of both December 31, 2022 and 2021, 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 Consolidated Balance Sheets.
In addition, the Company has VOCRs that have not been securitized through bankruptcy-remote SPEs. Such gross receivables were $747 million and $758 million as of December 31, 2022 and 2021. 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): | | | | | | | | | | | |
| As of December 31, |
| 2022 | | 2021 |
| SPE assets in excess of SPE liabilities | $ | 311 | | | $ | 230 | |
| Non-securitized contract receivables | 747 | | | 758 | |
| Less: allowance for loan losses | 541 | | | 510 | |
| Total, net | $ | 517 | | | $ | 478 | |
17. 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 interest rate caps and foreign exchange forward contracts. See Note 18—Financial Instruments for additional details.
As of December 31, 2022, the Company had foreign exchange contracts resulting in less than $1 million of assets which are included within Other assets and $1 million of liabilities which are included in Accrued expenses and other liabilities on the Consolidated Balance Sheets. 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 December 31, 2022 and 2021.
For assets and liabilities that are measured using quoted prices in active markets, the fair value is the published market price per unit multiplied by the number of units held without consideration of transaction costs. Assets and liabilities that are measured using other significant observable inputs are valued by reference to similar assets and liabilities. For these items, a significant portion of fair value is derived by reference to quoted prices of similar assets and liabilities in active markets. For assets and liabilities that are measured using significant unobservable inputs, fair value is primarily derived using a fair value model, such as a discounted cash flow model.
The fair value of financial instruments is generally determined by reference to market values resulting from trading on a national securities exchange or in an over-the-counter market. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques, as appropriate. The carrying amounts of cash
and cash equivalents, restricted cash, trade receivables, accounts payable, and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities.
The carrying amounts and estimated fair values of all other financial instruments were as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 | | December 31, 2021 |
| Carrying
Amount | | Estimated Fair Value | | Carrying
Amount | | Estimated Fair Value |
| Assets | | | | | | | |
| Vacation ownership contract receivables, net (Level 3) | $ | 2,370 | | | $ | 2,639 | | | $ | 2,309 | | | $ | 2,858 | |
| Liabilities | | | | | | | |
| Debt (Level 2) | $ | 5,642 | | | $ | 5,356 | | | $ | 5,313 | | | $ | 5,514 | |
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).
During 2019, the Company closed on the sale of its North American vacation rentals business for $162 million. After customary closing adjustments, the Company received $156 million in cash and $10 million in Vacasa LLC (“Vacasa”) equity. During the fourth quarter of 2021, Vacasa merged with a publicly traded special purpose acquisition company and began trading on the Nasdaq Global Select market. As of December 31, 2021, the fair value of the Company’s investment in Vacasa was $13 million, as measured using quoted prices in the active market (Level 1); representing an increase of $9 million during 2021 which was reflected as a $6 million recovery within Asset impairments/(recoveries), net, and $3 million of Other income, net on the Consolidated Statements of Income/(Loss). During 2022, the Company sold all of its equity in Vacasa for $8 million resulting in a $5 million loss, which was included within Other income, net on the Consolidated Statements of Income/(Loss).
18. Financial Instruments
The designation of a derivative instrument as a hedge and its ability to meet the hedge accounting criteria determine how the change in fair value of the derivative instrument will be reflected on the Consolidated Financial Statements. A derivative qualifies for hedge accounting if, at inception, the derivative is expected to be highly effective in offsetting the underlying hedged cash flows or fair value, and the hedge documentation standards are fulfilled at the time the Company enters into the derivative contract. A hedge is designated as a cash flow hedge based on the exposure being hedged. The asset or liability value of the derivative will change in tandem with its fair value. Changes in fair value for qualifying cash flow hedges, are recorded in Accumulated other comprehensive loss (“AOCL”). The derivative’s gain or loss is released from AOCL to match the timing of the underlying hedged cash flows effect on earnings. A hedge is designated as a fair value hedge when the derivative is used to manage an exposure to changes in the fair value of a recognized asset or liability. For fair value hedges, the portion of the gain or loss on the derivative instrument designated as a fair value hedge will be recognized in earnings. The Company concurrently records changes in the value of the hedged asset or liability via a basis adjustment to the hedged item. These two changes in fair value offset one another in whole or in part and are reported in the same statement of income line item as the hedged risk.
The Company reviews the effectiveness of its hedging instruments on an ongoing basis, recognizes current period hedge ineffectiveness immediately in earnings and discontinues hedge accounting for any hedge that it no longer considers to be highly effective. The Company recognizes changes in fair value for derivatives not designated as hedges or those not qualifying for hedge accounting in current period earnings. Upon termination of cash flow hedges, the Company releases gains and losses from AOCL based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected time frame. Such untimely transactions require the Company to immediately recognize in earnings gains and losses previously recorded in AOCL.
Changes in interest rates and foreign exchange rates expose the Company to market risk. The Company periodically uses cash flow and fair value hedges as part of its overall strategy to manage its exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, the Company only enters into transactions that it believes will be highly effective at offsetting the underlying risk and it does not use derivatives for trading or speculative purposes. The Company uses the following derivative instruments to mitigate its foreign currency exchange rate and interest rate risks:
Foreign Currency Risk
The Company has foreign currency rate exposure to exchange rate fluctuations worldwide with particular exposure to the Euro, British pound sterling, Australian and Canadian dollars, Danish krone, and 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 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 December 31, 2022, the Company had no interest rate derivatives designated as fair value or cash flow hedges.
There were no losses on derivatives recognized in AOCL for the years ended December 31, 2022, 2021, or 2020.
The following table summarizes information regarding the gains recognized in income on the Company’s freestanding derivatives (in millions): | | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| 2022 | | 2021 | | 2020 |
| Non-designated hedging instruments | | | | | |
Foreign exchange contracts (a) | $ | — | | | $ | 1 | | | $ | 3 | |
(a)Included within Operating expenses on the Consolidated Statements of Income/(Loss), which is primarily offset by changes in the value of the underlying assets and liabilities.
Credit Risk and Exposure
The Company is exposed to counterparty credit risk in the event of nonperformance by counterparties to various agreements and sales transactions. The Company manages such risk by evaluating the financial position and creditworthiness of such counterparties and by requiring collateral in instances in which financing is provided. The Company mitigates counterparty credit risk associated with its derivative contracts by monitoring the amounts at risk with each counterparty to such contracts, periodically evaluating counterparty creditworthiness and financial position, and where possible, dispersing its risk among multiple counterparties.
As of December 31, 2022, there were no significant concentrations of credit risk with any individual counterparty or groups of counterparties. However, 17% of the Company’s outstanding VOCRs portfolio relates to customers who reside in California. With the exception of the financing provided to customers of its vacation ownership businesses, the Company does not normally require collateral or other security to support credit sales.
Market Risk
The Company is subject to risks relating to the geographic concentrations of (i) areas in which the Company is currently developing and selling vacation ownership properties, (ii) sales offices in certain vacation areas, and (iii) customers of the
Company’s vacation ownership business, which in each case, may result in the Company’s results of operations being more sensitive to local and regional economic conditions and other factors, including competition, extreme weather conditions and other natural disasters, and economic downturns, than the Company’s results of operations would be, absent such geographic concentrations. Local and regional economic conditions and other factors may differ materially from prevailing conditions in other parts of the world. Nevada, Florida, and California are examples of areas with concentrations of sales offices. For the year ended December 31, 2022, the Company generated 15%, 15%, and 11% of its VOI sales revenues in sales offices located in Nevada, Florida, and California.
Included within the Consolidated Statements of Income/(Loss) are net revenues generated in the state of Florida of 15%, 15%, and 18% during 2022, 2021, and 2020; net revenues generated in Nevada of 11%, 10%, and 6%; and net revenues generated in California of 9%, 10%, and 12% during these periods.
19. Commitments and Contingencies
COMMITMENTS
Leases
The Company is committed to making finance and operating lease payments covering various facilities and equipment. Total future minimum lease obligations are $145 million, including finance leases, operating leases, leases signed but not yet commenced, and leases with a lease term of less than 12 months. See Note 12—Leases for additional detail.
Purchase Commitments
In the normal course of business, the Company makes various commitments to purchase goods or services from specific suppliers, including those related to vacation ownership resort development and other capital expenditures. Purchase commitments made by the Company as of December 31, 2022, aggregated to $762 million, of which $575 million were for marketing-related activities and $112 million were for information technology activities.
Inventory Sold Subject to Conditional Repurchase
In the normal course of business, the Company makes various commitments to repurchase completed vacation ownership properties from third-party developers. Inventory sold subject to conditional repurchase made by the Company as of December 31, 2022 aggregated to $30 million. See Note 10—Inventory for additional detail.
Letters of Credit
As of December 31, 2022, the Company had $34 million of irrevocable standby letters of credit outstanding, none of which were under its revolving credit facilities. As of December 31, 2021, the Company had $36 million of irrevocable standby letters of credit outstanding, of which $2 million were under its revolving credit facilities. The letters of credit issued during 2022 and 2021 also supported the securitization of VOCR fundings, certain insurance policies, and development activity at the Company’s Vacation Ownership segment.
Surety Bonds
A portion of the Company’s vacation ownership sales and developments are supported by surety bonds provided by affiliates of certain insurance companies in order to meet regulatory requirements of certain states. In the ordinary course of the Company’s business, it has assembled commitments from 12 surety providers in the amount of $2.3 billion, of which the Company had $455 million outstanding as of December 31, 2022. The availability, terms and conditions, and pricing of bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity, and the Company’s corporate credit rating. If the bonding capacity is unavailable or, alternatively, the terms and conditions and pricing of the bonding capacity are unacceptable to the Company, its vacation ownership business could be negatively impacted.
LITIGATION
The Company is involved in claims, legal and regulatory proceedings, and governmental inquiries related to 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 $3 million and $19 million as of December 31, 2022 and 2021. 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 December 31, 2022, it is estimated that the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $13 million in excess of recorded accruals. Such reserves 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 27—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.
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, customer data safeguards, 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 receives offsetting indemnifications from third-parties and/or 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 10—Inventory for additional details.
In connection with the Company’s vacation ownership inventory sale transactions, for which it has conditional rights and conditional obligations to repurchase the completed properties, the Company was required to maintain an investment-grade credit rating from at least one rating agency. See Note 27—Transactions with Former Parent and Former Subsidiaries for additional details.
As part of the Fee-for-Service program, the Company may guarantee to reimburse the developer a certain payment or to purchase inventory from the developer, for a percentage of the original sale price if certain future conditions exist. As of December 31, 2022, the maximum potential future payments that the Company may be required to make under these guarantees is $51 million. As of December 31, 2022 and 2021, the Company had no recognized liabilities in connection with these guarantees. For information on guarantees and indemnifications related to the Company’s former parent and subsidiaries see Note 27—Transactions with Former Parent and Former Subsidiaries.
20. Accumulated Other Comprehensive Income/(Loss)
The components of accumulated other comprehensive income/(loss) are as follows (in millions): | | | | | | | | | | | | | | | | | | | | | | | |
| Pretax | Foreign Currency Translation Adjustments | | Unrealized (Losses)/Gains on Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive (Loss)/Income |
| Balance as of December 31, 2019 | $ | (148) | | | $ | (1) | | | $ | 1 | | | $ | (148) | |
| Other comprehensive income/(loss) | 35 | | | — | | | (1) | | | 34 | |
| | | | | | | |
| Balance as of December 31, 2020 | (113) | | | (1) | | | — | | | (114) | |
| Other comprehensive income/(loss) | (32) | | | — | | | — | | | (32) | |
| | | | | | | |
| Balance as of December 31, 2021 | (145) | | | (1) | | | — | | | (146) | |
| Other comprehensive income/(loss) | (33) | | | 1 | | | — | | | (32) | |
| | | | | | | |
| Balance as of December 31, 2022 | $ | (178) | | | $ | — | | | $ | — | | | $ | (178) | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Tax | Foreign Currency Translation Adjustments | | Unrealized (Losses)/Gains on Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive (Loss)/Income |
| Balance as of December 31, 2019 | $ | 95 | | | $ | 1 | | | $ | — | | | $ | 96 | |
| Other comprehensive income/(loss) | 2 | | | — | | | — | | | 2 | |
| | | | | | | |
| Balance as of December 31, 2020 | 97 | | | 1 | | | — | | | 98 | |
| Other comprehensive income/(loss) | — | | | — | | | — | | | — | |
| | | | | | | |
| Balance as of December 31, 2021 | 97 | | | 1 | | | — | | | 98 | |
| Other comprehensive income/(loss) | 2 | | | (1) | | | — | | | 1 | |
| | | | | | | |
| Balance as of December 31, 2022 | $ | 99 | | | $ | — | | | $ | — | | | $ | 99 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Net of Tax | Foreign Currency Translation Adjustments | | Unrealized (Losses)/Gains on Cash Flow Hedges | | Defined Benefit Pension Plans | | Accumulated Other Comprehensive (Loss)/Income |
| Balance as of December 31, 2019 | $ | (53) | | | $ | — | | | $ | 1 | | | $ | (52) | |
| Other comprehensive income/(loss) | 37 | | | — | | | (1) | | | 36 | |
| | | | | | | |
| Balance as of December 31, 2020 | (16) | | | — | | | — | | | (16) | |
| Other comprehensive income/(loss) | (32) | | | — | | | — | | | (32) | |
| | | | | | | |
| Balance as of December 31, 2021 | (48) | | | — | | | — | | | (48) | |
| Other comprehensive income/(loss) | (31) | | | — | | | — | | | (31) | |
| | | | | | | |
| Balance as of December 31, 2022 | $ | (79) | | | $ | — | | | $ | — | | | $ | (79) | |
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.
The Company's policy for releasing disproportionate income tax effects from AOCL utilizes the aggregate approach.
There were no reclassifications out of AOCL during 2022 or 2021.
21. Stock-Based Compensation
The Company has a stock-based compensation plan available to grant RSUs, PSUs, stock-settled appreciation rights, 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 December 31, 2022, 10.8 million shares remain available.
Incentive Equity Awards Granted by the Company
During the year ended December 31, 2022, the Company granted incentive equity awards to key employees and senior officers of $34 million in the form of RSUs and $13 million in the form of PSUs. Of these awards, the majority of RSUs will vest ratably over a period of four years. The majority of PSUs will cliff vest on the third anniversary of the grant date, contingent upon the Company achieving certain performance metrics.
During the year ended December 31, 2021, the Company granted incentive equity awards of $35 million in the form of RSUs, $7 million in the form of PSUs, and $2 million in the form of stock options. During 2020, the Company granted incentive equity awards of $35 million in the form of RSUs, $8 million in the form of PSUs, and $8 million in the form of stock options.
The activity related to incentive equity awards granted by the Company to key employees and senior officers for the year ended December 31, 2022, consisted of the following (in millions, except grant prices):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Balance as of December 31, 2021 | | Granted | | Vested/Exercised (a) | | Cancelled / Forfeited (b) | | Balance as of December 31, 2022 | |
| RSUs | | | | | | | | | | | |
| Number of RSUs | | 1.8 | | | 0.7 | | | (0.5) | | | (0.2) | | | 1.8 | | (c) |
| Weighted average grant price | | $ | 47.83 | | | $ | 51.37 | | | $ | 47.63 | | | $ | 47.97 | | | $ | 48.79 | | |
| | | | | | | | | | | |
| PSUs | | | | | | | | | | | |
| Number of PSUs | | 0.4 | | | 0.3 | | | — | | | (0.2) | | | 0.5 | | (d) |
| Weighted average grant price | | $ | 48.18 | | | $ | 52.87 | | | $ | — | | | $ | 45.11 | | | $ | 51.26 | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| NQs | | | | | | | | | | | |
| Number of NQs | | 2.3 | | | — | | | — | | | — | | | 2.3 | | (e) |
| Weighted average grant price | | $ | 45.32 | | | $ | — | | | $ | — | | | $ | — | | | $ | 45.36 | | |
(a)Upon exercise of NQs and vesting of RSUs and PSUs, the Company issues new shares to participants.
(b)The Company recognizes cancellations and forfeitures as they occur.
(c)Aggregate unrecognized compensation expense related to RSUs was $50 million as of December 31, 2022, which is expected to be recognized over a weighted average period of 2.5 years.
(d)Aggregate unrecognized compensation expense related to PSUs that are probable of vesting was $14 million as of December 31, 2022, which is expected to be recognized over a weighted average period of 2.0 years. The maximum amount of compensation expense associated with PSUs that are not probable of vesting could range up to $20 million which would be recognized over a weighted average period of 1.3 years.
(e)There were 1.4 million NQs which were exercisable as of December 31, 2022. These NQs will expire over a weighted average period of 6.1 years and carry a weighted average grant date fair value of $8.52. Unrecognized compensation expense for the NQs was $4 million as of December 31, 2022, which is expected to be recognized over a weighted average period of 1.7 years.
The Company did not grant any stock options during 2022. The fair value of stock options granted by the Company during 2021 and 2020 were estimated on the dates of these grants 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 (a) | 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% |
(a)The maximum contractual term for these options is 10 years.
The total intrinsic value of exercised options were less than $1 million and $1 million during 2022 and 2021. There were no options exercised during 2020. The fair value of shares that vested during 2022, 2021, and 2020 were $33 million, $33 million, and $12 million.
Stock-Based Compensation Expense
The Company recorded stock-based compensation expense of $45 million, $32 million, and $20 million during 2022, 2021, and 2020, related to the incentive equity awards granted to key employees, senior officers, and non-employee directors. During 2022, such stock-based compensation expense includes $3 million which has been classified within Restructuring on the Consolidated Statements of Income/(Loss). The Company recognized $12 million, $9 million, and $2 million of associated tax benefits during 2022, 2021, and 2020.
The Company paid $7 million, $9 million, and $2 million of taxes for the net share settlement of incentive equity awards that vested during 2022, 2021, and 2020. Such amounts are included within Financing activities on the Consolidated Statements of Cash Flows.
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 from the fair market value at the grant date. The Company issued 0.3 million, 0.1 million, and 0.2 million shares during 2022, 2021, and 2020 and recognized $1 million of compensation expense related to grants under this plan in each period. The value of shares issued under this plan was $9 million, $8 million, and $7 million during 2022, 2021, and 2020.
22. Employee Benefit Plans
Defined Contribution Benefit Plans
Travel + Leisure Co. sponsors domestic defined contribution savings plans and a domestic deferred compensation plan that provide eligible employees of the Company an opportunity to accumulate funds for retirement. The Company matches the contributions of participating employees on the basis specified by each plan. The Company’s cost for these plans was $31 million, $27 million, and $19 million during 2022, 2021, and 2020.
In addition, the Company contributes to several foreign employee benefit contributory plans which also provide eligible employees with an opportunity to accumulate funds for retirement. The Company’s contributory cost for these plans was $8 million, $6 million, and $7 million during 2022, 2021, and 2020.
Defined Benefit Pension Plans
The Company sponsors defined benefit pension plans for certain foreign subsidiaries. Under these plans, benefits are based on an employee’s years of credited service and a percentage of final average compensation or as otherwise described by the plan. The Company had $5 million and $4 million of net pension liability as of December 31, 2022 and 2021, included within Accrued expenses and other liabilities on the Consolidated Balance Sheets. The Company had no unrecognized gains as of December 31, 2022 and less than $1 million of unrecognized gains as of December 31, 2021 included within Accumulated other comprehensive loss on the Consolidated Balance Sheets.
The Company’s policy is to contribute amounts sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws and additional amounts that the Company determines to be appropriate. The Company recognized no pension expense related to these plans during 2022, 2021, or 2020.
23. Segment Information
The Company has two reportable segments: Vacation Ownership and Travel and Membership. Due to changes in organizational structure in the second quarter of 2022, the management of the Extra Holidays business was transitioned to the Vacation Ownership segment. As such, the Company reclassified the results of the Extra Holidays business, which was previously reported within the Travel and Membership segment, into the Vacation Ownership segment. Prior period segment information has been updated to reflect this change. 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, asset impairments/recoveries, 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 assets and 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.
The following tables present the Company’s segment information (in millions):
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Net revenues | 2022 | | 2021 | | 2020 |
| Vacation Ownership | $ | 2,835 | | | $ | 2,423 | | | $ | 1,637 | |
| Travel and Membership | 735 | | | 714 | | | 528 | |
| Total reportable segments | 3,570 | | | 3,137 | | | 2,165 | |
Corporate and other (a) | (3) | | | (3) | | | (5) | |
| Total Company | $ | 3,567 | | | $ | 3,134 | | | $ | 2,160 | |
| | | | | |
| Year Ended December 31, |
| Reconciliation of Net income to Adjusted EBITDA | 2022 | | 2021 | | 2020 |
| Net income/(loss) attributable to Travel + Leisure Co. shareholders | $ | 357 | | | $ | 308 | | | $ | (255) | |
| | | | | |
| | | | | |
| (Gain)/loss on disposal of discontinued business, net of income taxes | (1) | | | 5 | | | 2 | |
| Provision/(benefit) for income taxes | 130 | | | 116 | | | (23) | |
| Depreciation and amortization | 119 | | | 124 | | | 126 | |
| Interest expense | 195 | | | 198 | | | 192 | |
| Interest (income) | (6) | | | (3) | | | (7) | |
| | | | | |
| Stock-based compensation | 42 | | | 32 | | | 20 | |
Restructuring (b) | 14 | | | (1) | | | 39 | |
Asset impairments/(recoveries), net (c) | 11 | | | (5) | | | 57 | |
| Loss/(gain) on equity investment | 5 | | | (3) | | | — | |
COVID-19 related costs (d) | 2 | | | 3 | | | 56 | |
| Legacy items | 1 | | | 4 | | | 4 | |
| Exchange inventory write-off | — | | | — | | | 48 | |
| Fair value change in contingent consideration | (10) | | | — | | | — | |
| Adjusted EBITDA | $ | 859 | | | $ | 778 | | | $ | 259 | |
| | | | | |
| Year Ended December 31, |
| Adjusted EBITDA | 2022 | | 2021 | | 2020 |
| Vacation Ownership | $ | 665 | | | $ | 569 | | | $ | 121 | |
| Travel and Membership | 268 | | | 271 | | | 191 | |
| Total reportable segments | 933 | | | 840 | | | 312 | |
Corporate and other (a) | (74) | | | (62) | | | (53) | |
| Total Company | $ | 859 | | | $ | 778 | | | $ | 259 | |
(a)Includes the elimination of transactions between segments.
(b)Includes $3 million of stock-based compensation expense for the year ended December 31, 2022 associated with the 2022 restructuring plans.
(c)Includes $1 million of inventory impairments for the year ended December 31, 2022, included in Cost of vacation ownership interests on the Consolidated Statements of Income/(Loss). Includes $5 million of bad debt expense related to a note receivable for the year ended December 31, 2020, included in Operating expenses on the Consolidated Statements of Income/(Loss).
(d)Includes expenses related to COVID-19 testing and other expenses associated with the Company’s return-to-work program in 2022. In 2021 and 2020, this includes severance and other employee costs associated with layoffs due to the COVID-19 workforce reduction offset in part by U.S. and international government employee retention credits.
| | | | | | | | | | | |
| As of December 31, |
Segment Assets (a) | 2022 | | 2021 |
| Vacation Ownership | $ | 4,826 | | | $ | 4,760 | |
| Travel and Membership | 1,335 | | | 1,397 | |
| Total reportable segments | 6,161 | | | 6,157 | |
| Corporate and other | 596 | | | 431 | |
| | | |
| Total Company | $ | 6,757 | | | $ | 6,588 | |
(a)Excludes investment in consolidated subsidiaries.
| | | | | | | | | | | | | | | | | |
| Year Ended December 31, |
| Capital Expenditures | 2022 | | 2021 | | 2020 |
| Vacation Ownership | $ | 32 | | | $ | 34 | | | $ | 41 | |
| Travel and Membership | 17 | | | 17 | | | 21 | |
| Total reportable segments | 49 | | | 51 | | | 62 | |
| Corporate and other | 3 | | | 6 | | | 7 | |
| Total Company | $ | 52 | | | $ | 57 | | | $ | 69 | |
The geographic segment information provided below is classified based on the geographic location of the Company’s subsidiaries (in millions): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net Revenues | | Net Long-lived Assets |
| Year Ended December 31, | | As of December 31, |
| 2022 | | 2021 | | 2020 | | 2022 | | 2021 |
| United States | $ | 3,166 | | | $ | 2,753 | | | $ | 1,904 | | | $ | 1,572 | | | $ | 1,574 | |
| All other countries | 401 | | | 381 | | | 256 | | | 248 | | | 295 | |
| Total | $ | 3,567 | | | $ | 3,134 | | | $ | 2,160 | | | $ | 1,820 | | | $ | 1,869 | |
24. COVID-19 Related Items
During the year ended December 31, 2022, the Company had $2 million of employee compensation related and other expenses at its corporate operations directly related to COVID-19. These costs are included within COVID-19 related costs on the Consolidated Statements of Income/(Loss).
For the year ended December 31, 2021, the Company’s financial statements included impacts 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 | | $ | (91) | | | $ | — | | | $ | — | | | $ | (91) | | | Vacation ownership interest sales |
| Recoveries | | 33 | | | — | | | — | | | 33 | | | Cost of vacation ownership interests |
| | | | | | | | | | |
| Employee compensation related and other | | 3 | | | — | | | 1 | | | 4 | | | COVID-19 related costs |
| Asset recoveries | | — | | | (6) | | | — | | | (6) | | | Asset impairments/(recoveries), net |
| | | | | | | | | | |
| Lease-related | | (1) | | | — | | | — | | | (1) | | | Restructuring |
| Total COVID-19 | | $ | (56) | | | $ | (6) | | | $ | 1 | | | $ | (61) | | | |
For the year ended December 31, 2020, the Company’s financial statements included impacts 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 | | $ | 205 | | | $ | — | | | $ | — | | | $ | 205 | | | Vacation ownership interest sales |
| Recoveries | | (48) | | | — | | | — | | | (48) | | | Cost of vacation ownership interests |
| | | | | | | | | | |
| Employee compensation related and other | | 65 | | | 9 | | | 14 | | | 88 | | | COVID-19 related costs |
| Asset impairments | | 21 | | | 34 | | | 1 | | | 56 | | | Asset impairments/(recoveries), net and Operating expenses |
| Exchange inventory write-off | | — | | | 48 | | | — | | | 48 | | | Operating expenses |
| Lease-related | | 14 | | | 22 | | | — | | | 36 | | | Restructuring |
| Total COVID-19 | | $ | 257 | | | $ | 113 | | | $ | 15 | | | $ | 385 | | | |
Allowance for loan losses — Due to the economic downturn resulting from COVID-19 during 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. During 2020, the total impact of this COVID-19 related allowance and subsequent adjustments resulted in a $205 million COVID-19 related provision, which was reflected as a reduction to Vacation ownership interest sales and $48 million of estimated recoveries, which were reflected as a reduction to Cost of vacation ownership interests on the Consolidated Statements of Income/(Loss). The net negative impact of these adjustments on Adjusted EBITDA was $157 million for the year ended December 31, 2020.
During the year ended December 31, 2021, the Company analyzed the adequacy of this COVID-19 related allowance consistent with past methodology, and due to the improvement in net new defaults the Company reduced this allowance resulting in an increase of $91 million to Vacation ownership interest sales and a corresponding increase of $33 million to Cost of vacation ownership interests. The net positive impact of these adjustments on Adjusted EBITDA was $58 million for the year ended December 31, 2021. Refer to Note 9—Vacation Ownership Contract Receivables for additional details.
Asset impairments/(recoveries) — During 2020, the Company incurred $56 million of COVID-19 related impairments, including $51 million recorded within Asset impairments/(recoveries), net and $5 million included in Operating expenses on the Consolidated Statements of Income/(Loss). Refer to Note 25—Impairments and Other Charges for additional details. During 2021, the Company reversed $6 million of asset impairments related to its previously impaired equity investment in Vacasa. Refer to Note 17—Fair Value for additional details.
Exchange inventory write-off — During 2020, the Company wrote-off $48 million of exchange inventory as discussed in Note 10—Inventory.
Lease-related — During 2020, the Company recognized $36 million of restructuring charges including $22 million related to the New Jersey lease discussed in Note 26—Restructuring and $12 million related to the renegotiation of an agreement.
Employee compensation related and other — During 2022 these costs were related to COVID-19 testing and other expenses associated with the Company’s return-to-work program.
During 2021 these costs included $3 million of professional and other costs and $1 million of severance and other employee costs resulting from layoffs, salary, and benefits continuation at the Vacation Ownership segment. These costs were inclusive of $2 million of employee retention credits earned in connection with government programs for the year ended December 31, 2021.
During 2020, these costs included $71 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 $26 million of employee retention credits earned in connection with government programs, primarily the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act for which there are no additional requirements or restrictions. Employee compensation related and other costs also included $17 million related to renegotiating or exiting certain agreements and other professional fees in 2020.
In connection with COVID-19 related actions taken by the Company, it recorded employee-related liabilities which are included within Accrued expenses and other liabilities on the Consolidated Balance Sheets. The activity associated with these COVID-19 related liabilities is summarized as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability as of | | 2020 Activity | | | | Liability as of |
| December 31, 2019 | | Costs Recognized | | Cash Payments | | Other (a) | | | | December 31, 2020 |
| COVID-19 employee-related | $ | — | | | $ | 71 | | | $ | (64) | | | $ | (1) | | | | | $ | 6 | |
| Ending balance | $ | — | | | $ | 71 | | | $ | (64) | | | $ | (1) | | | | | $ | 6 | |
| | | | | | | | | | | |
| Liability as of | | 2021 Activity | | | | Liability as of |
| December 31, 2020 | | Costs Recognized | | Cash Payments | | Other | | | | December 31, 2021 |
| COVID-19 employee-related | $ | 6 | | | $ | 1 | | | $ | (6) | | | $ | — | | | | | $ | 1 | |
| Ending balance | $ | 6 | | | $ | 1 | | | $ | (6) | | | $ | — | | | | | $ | 1 | |
| | | | | | | | | | | |
| Liability as of | | 2022 Activity | | | | Liability as of |
| December 31, 2021 | | Costs Recognized | | Cash Payments | | Other | | | | December 31, 2022 |
| COVID-19 employee-related | $ | 1 | | | $ | 2 | | | $ | (3) | | | $ | — | | | | | $ | — | |
| Ending balance | $ | 1 | | | $ | 2 | | | $ | (3) | | | $ | — | | | | | $ | — | |
(a)Includes employee-related write-offs.
25. Impairments and Other Charges
Impairments
During 2022, the Company recorded $10 million of impairments within Asset impairments/(recoveries), net on the Consolidated Statements of Income/(Loss). These impairments include a $9 million loss on the sale at the Vacation Ownership segment related to certain property sold for $22 million, made up of $17 million in cash and a $5 million promissory note. The Company also recorded a $2 million impairment of fixed assets at the Vacation Ownership segment and a $2 million trade name impairment at the Travel and Membership segment. These impairments were offset by $3 million of asset recoveries, primarily related to previously impaired land which was sold during 2022.
During 2021, the Company had net asset recoveries of $5 million driven by the $6 million reversal of a 2020 COVID-19 related impairment of the Vacasa equity investment at the Travel and Membership segment. This reversal was partially offset by less than $1 million of impairments at the Vacation Ownership segment. This activity was recorded within Asset impairments/(recoveries), net on the Consolidated Statements of Income/(Loss).
During 2020, the Company recorded $52 million of asset impairments, $51 million of which were COVID-19 related. During the period, the Company recorded a $24 million impairment at the Travel and Membership segment related to the New Jersey lease discussed in Note 26—Restructuring and the associated furniture, fixtures and equipment; $10 million of impairments were driven by right-to-use leases and related fixed assets within the Vacation Ownership segment; $6 million of impairments at the Vacation Ownership segment related to prepaid development costs and undeveloped land; a $6 million impairment for the Vacasa equity investment held at the Travel and Membership segment; a $4 million trade name impairment at the Travel and Membership segment; and $1 million of impairments at the corporate segment. In addition to the COVID-19 related impairments mentioned above, the Company also recorded a $1 million impairment charge at the Vacation Ownership segment unrelated to COVID-19. This activity was recorded within Asset impairments/(recoveries), net on the Consolidated Statements of Income/(Loss).
Other Charges
During 2022, the Company recorded a $1 million inventory impairment at the Vacation Ownership segment included within Cost of vacation ownership interests on the Consolidated Statements of Income/(Loss).
26. Restructuring
2022 Restructuring Plans
During 2022, the Company incurred $14 million of restructuring charges. These charges are associated with certain positions that were made redundant based upon changes to the organizational structure of the Company, primarily within the Travel and Membership segment. The charges consisted of (i) $9 million of personnel costs at the Travel and Membership segment (ii) $3 million of lease and personnel-related costs at the Vacation Ownership segment, and (iii) $2 million of personnel-related costs at the Company’s corporate operations. These restructuring charges included $3 million of accelerated stock-based compensation expense. All material initiative and related expenses have been incurred as of December 31, 2022. The 2022 restructuring liability was reduced by $5 million of cash payments during the year ended December 31, 2022. The majority of the remaining 2022 restructuring liability of $7 million is expected to be paid in 2023 with lease-related payments continuing through 2025.
2020 Restructuring Plans
During 2020, the Company recorded $37 million of restructuring charges, most of which were COVID-19 related. These charges included $22 million at the Travel and Membership segment associated with the Company’s decision to abandon the remaining portion of its administrative offices in New Jersey, and $14 million of lease-related charges due to the renegotiation of an agreement and facility-related restructuring charges associated with closed sales centers at the Vacation Ownership segment. This restructuring liability was reduced by $3 million, $5 million, and $12 million of cash payments during the years ended December 31, 2022, 2021 and 2020. The remaining 2020 restructuring liability of $19 million is lease-related and is expected to be paid by the end of 2029.
The activity associated with all of the Company’s restructuring plans is summarized by category as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability as of | | 2020 Activity | | Liability as of |
| December 31, 2019 | | Costs
Recognized | | Cash
Payments | | Other | | December 31, 2020 |
| Facility-related | $ | — | | | $ | 24 | | | $ | (1) | | | $ | — | | | $ | 23 | |
| Personnel-related | 7 | | | 3 | | (a) | (9) | | | — | | | 1 | |
| Marketing-related | — | | | 12 | | | (10) | | | — | | | 2 | |
| $ | 7 | | | $ | 39 | | | $ | (20) | | | $ | — | | | $ | 26 | |
| | | | | | | | | |
| Liability as of | | 2021 Activity | | Liability as of |
| December 31, 2020 | | Costs
Recognized | | Cash
Payments | | Other | | December 31, 2021 |
| Facility-related | $ | 23 | | | $ | — | | | $ | (1) | | | $ | — | | | $ | 22 | |
| Personnel-related | 1 | | | — | | | (1) | | | — | | | — | |
| Marketing-related | 2 | | | (1) | | (b) | (4) | | | 3 | | (c) | — | |
| $ | 26 | | | $ | (1) | | | $ | (6) | | | $ | 3 | | | $ | 22 | |
| | | | | | | | | |
| Liability as of | | 2022 Activity | | Liability as of |
| December 31, 2021 | | Costs
Recognized | | Cash
Payments | | Other | | December 31, 2022 |
| Facility-related | $ | 22 | | | $ | 1 | | | $ | (4) | | | $ | 1 | | | $ | 20 | |
| Personnel-related | — | | | 13 | | | (4) | | | (3) | | (d) | 6 | |
| | | | | | | | | |
| $ | 22 | | | $ | 14 | | | $ | (8) | | | $ | (2) | | | $ | 26 | |
(a)Includes $2 million of restructuring charges related to 2019 Restructuring Plans which have been fully repaid.
(b)Includes $1 million reversal of expense related to the reimbursement of prepaid licensing fees that were previously written-off at the Vacation Ownership segment.
(c)Includes $2 million reimbursement of termination payments and $1 million reimbursement of license fees at the Vacation Ownership segment.
(d)Represents $3 million of accelerated stock-based compensation expense included in Additional paid-in capital on the Consolidated Balance Sheets.
27. 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, now Avis Budget Group), 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 December 31, 2022 and 2021 the Cendant separation and related liabilities were $15 million and $13 million, all of which were tax related liabilities. These liabilities are included within Accrued expenses and other liabilities on the 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.
The Company and Wyndham Hotels entered into a letter agreement during 2021 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 the 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 Spin-off, 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 prior to the Spin-off.
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. During 2020, the Company recognized transition service agreement expenses of less than $1 million, included in General and administrative expense on the 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-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 at December 31, 2022. 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 December 31, 2022. The Company has a $14 million receivable from Wyndham Hotels for its portion of the guarantee.
During 2020, the Company recorded a $2 million loss on disposal resulting from a tax audit, net of Wyndham Hotels’ one-third share related to the European vacation rentals business. This additional expense was included within Gain/(loss) on disposal of discontinued business, net of income taxes on the Consolidated Statements of Income/(Loss).
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 £61 million ($81 million USD) on a perpetual basis. These guarantees totaled £47 million ($39 million USD) at December 31, 2022. Travel + Leisure Co. is responsible for two-thirds of these guarantees.
As part of this agreement Wyndham Hotels was required to maintain minimum credit ratings which increased to Ba1 for Moody’s and BB+ for 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 would be shared two-thirds by Travel + Leisure Co. and one-third by Wyndham Hotels, as the selling entity, Travel + Leisure Co. was 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. During 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 surety bond and letter of credit were released during 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 December 31, 2022, 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 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 £35 million ($44 million USD) related to the sale of the European vacation rentals business. During 2021, the Company entered into a settlement agreement which received regulatory approval during 2022 to settle these post-closing adjustment claims for £5 million ($7 million USD); one-third of which was the responsibility of Wyndham Hotels. During the third quarter of 2022, the Company made this settlement payment which was included within Net cash used in investing activities from discontinued operations on the Consolidated Statements of Cash Flows, and received $2 million from Wyndham Hotels for their one-third portion which was included within Net cash provided by operating activities on the Consolidated Statements of Cash Flows. This matter is now resolved and no further payments are required.
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 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 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 against certain claims and assessments, including income tax and other tax matters related to the operations of the North American vacation 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 Consolidated Balance Sheets as of December 31, 2022.
In connection with the sale of the North American vacation 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 2021, transition service
agreement expenses were less than $1 million and transition service agreement income was less than $1 million. During 2020, transition service agreement expenses were $1 million and transition service agreement income was $2 million. Transition service agreement expenses were included in General and administrative expense and transition service income was included in Other revenue on the Consolidated Statements of Income/(Loss). These transition services ended in February 2021.
28. Related Party Transactions
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 related to this timesharing arrangement during the years ended December 31, 2022, 2021, and 2020.
During 2021, the Company sold a parcel of land in Crossville, Tennessee, that was no longer core to the Company’s operations to a former executive of the Company for less than $1 million.
During 2020, the Company sold parcels of land in Shawnee, Pennsylvania, that were no longer core to the Company’s operations to a former executive of the Company for less than $1 million.
In 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. In 2020, the Company acquired the completed vacation ownership property for $45 million. This agreement was subsequently amended during 2021, increasing the purchase to $47 million.
29. Subsequent Events
On January 3, 2023, the Company acquired the Playbook365 business for $6 million of cash paid at closing and contingent consideration of up to $24 million based on the achievement of certain financial and operational metrics. Playbook365 is a youth and amateur sports management platform. This platform will integrate with ARN’s event lodging management platform to create an all-in-one solution in the youth sports market. This acquisition was made to broaden the products and services offered by ARN. The Company is currently in the process of determining the initial purchase accounting for this transaction and expects to complete the preliminary allocation of the purchase consideration to the assets acquired and liabilities assumed by the end of 2023. This business will be included within the Travel and Membership segment.