Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

Form 10-Q


☑	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2020


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 001-38432

Wyndham Hotels & Resorts, Inc.

(Exact Name of Registrant as Specified in Its Charter)



Delaware		82-3356232
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

22 Sylvan Way		07054
Parsippany,	New Jersey	(Zip Code)
(Address of Principal Executive Offices)

(973) 753-6000

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock	WH	New York Stock Exchange

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No þ

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:

93,090,521 shares of common stock outstanding as of March 31, 2020.

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TABLE OF CONTENTS



		Page
PART I	FINANCIAL INFORMATION
Item 1.	Condensed Consolidated Financial Statements (Unaudited)	1
	Report of Independent Registered Public Accounting Firm	1
	Condensed Consolidated Statements of Income	2
	Condensed Consolidated Statements of Comprehensive Income (Loss)	3
	Condensed Consolidated Balance Sheets	4
	Condensed Consolidated Statements of Cash Flows	5
	Condensed Consolidated Statements of Equity	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
	Forward-Looking Statements	21
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	31
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	34
	Signatures	35

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PART I — FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited).

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Wyndham Hotels & Resorts, Inc.

Results of Review of Interim Financial Statements

We have reviewed the accompanying condensed consolidated balance sheet of Wyndham Hotels & Resorts, Inc. and subsidiaries (the “Company”) as of March 31, 2020, the related condensed consolidated statements of income, comprehensive income (loss), cash flows, and equity for the three-month period ended March 31, 2020 and 2019, and the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2019, and the related consolidated and combined statements of income, comprehensive income, cash flows, and equity for the year then ended (not presented herein); and in our report dated February 13, 2020, we expressed an unqualified opinion (which included an emphasis of a matter paragraph relating to expense allocations for certain corporate functions and services historically provided by Wyndham Worldwide Corporation) on those consolidated and combined financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2019, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

Basis for Review Results

The interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ Deloitte & Touche LLP

New York, New York

May 5, 2020

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WYNDHAM HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended March 31,
	2020		2019
Net revenues
Royalties and franchise fees	$	92	$	101
Marketing, reservation and loyalty	106		113
Management and other fees	32		39
License and other revenues from former Parent	21		29
Cost reimbursements	126		155
Other	33		31
Net revenues	410		468
Expenses
Marketing, reservation and loyalty	118		129
Operating	35		43
General and administrative	28		34
Cost reimbursements	126		155
Depreciation and amortization	25		29
Restructuring	13		—
Transaction-related, net	8		7
Separation-related	1		21
Total expenses	354		418
Operating income	56		50
Interest expense, net	25		24
Income before income taxes	31		26
Provision for income taxes	9		5
Net income	$	22	$	21

Earnings per share
Basic	$	0.23	$	0.22
Diluted	0.23		0.22

See Notes to Condensed Consolidated Financial Statements.

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WYNDHAM HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)

(Unaudited)



	Three Months Ended March 31,
	2020			2019
Net income	$	22		$	21
Other comprehensive loss, net of tax
Foreign currency translation adjustments	(3		)	1
Unrealized losses on cash flow hedges	(36		)	(8		)
Other comprehensive loss, net of tax	(39		)	(7		)
Comprehensive (loss) income	$	(17	)	$	14

See Notes to Condensed Consolidated Financial Statements.

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WYNDHAM HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except per share amounts)

(Unaudited)



	March 31, 2020			December 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	749		$	94
Trade receivables, net	296			304
Prepaid expenses	54			48
Other current assets	48			53
Total current assets	1,147			499
Property and equipment, net	299			307
Goodwill	1,539			1,539
Trademarks, net	1,395			1,395
Franchise agreements and other intangibles, net	542			551
Other non-current assets	236			242
Total assets	$	5,158		$	4,533
Liabilities and equity
Current liabilities:
Current portion of long-term debt	$	21		$	21
Accounts payable	41			30
Deferred revenues	121			132
Accrued expenses and other current liabilities	232			279
Total current liabilities	415			462
Long-term debt	2,831			2,101
Deferred income taxes	376			387
Deferred revenues	159			151
Other non-current liabilities	265			220
Total liabilities	4,046			3,321
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock, $.01 par value, authorized 6.0 shares, none issued and outstanding	—			—
Common stock, $.01 par value, authorized 600.0 shares, 100.7 and 100.6 issued and outstanding at March 31, 2020 and December 31, 2019	1			1
Treasury stock, at cost – 7.7 and 6.8 shares at March 31, 2020 and December 31, 2019	(408		)	(363		)
Additional paid-in capital	1,490			1,488
Retained earnings	95			113
Accumulated other comprehensive income (loss)	(66		)	(27		)
Total stockholders’ equity	1,112			1,212
Total liabilities and equity	$	5,158		$	4,533

See Notes to Condensed Consolidated Financial Statements.

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WYNDHAM HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Three Months Ended March 31,
	2020			2019
Operating activities
Net income	$	22		$	21
Adjustments to reconcile net income to net cash provided by/(used in) operating activities:
Depreciation and amortization	25			29
Deferred income taxes	2			3
Stock-based compensation	4			5
Net change in assets and liabilities:
Trade receivables	(5		)	(3		)
Prepaid expenses	(6		)	(14		)
Other current assets	(8		)	(1		)
Accounts payable, accrued expenses and other current liabilities	(14		)	(13		)
Deferred income	(2		)	(8		)
Payments of development advance notes	(3		)	(6		)
Other, net	2			(6		)
Net cash provided by operating activities	17			7
Investing activities
Property and equipment additions	(7		)	(9		)
Other, net	—			(2		)
Net cash used in investing activities	(7		)	(11		)
Financing activities
Proceeds from borrowings	744			—
Finance lease payments	(1		)	(1		)
Principal payments on long-term debt	(14		)	(4		)
Dividends to shareholders	(30		)	(28		)
Repurchases of common stock	(50		)	(45		)
Net share settlement of incentive equity awards	(2		)	—
Net cash provided by/(used in) financing activities	647			(78		)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash	(2		)	—
Net increase/(decrease) in cash, cash equivalents and restricted cash	655			(82		)
Cash, cash equivalents and restricted cash, beginning of period	94			366
Cash, cash equivalents and restricted cash, end of period	$	749		$	284

See Notes to Condensed Consolidated Financial Statements.

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WYNDHAM HOTELS & RESORTS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions)

(Unaudited)



	Common Shares Outstanding		Common Stock		Treasury Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance as of December 31, 2019	94		$	1	$	(363	)	$	1,488		$	113		$	(27	)	$	1,212
Net income	—		—		—			—			22			—			22
Other comprehensive loss	—		—		—			—			—			(39		)	(39		)
Dividends	—		—		—			—			(30		)	—			(30		)
Repurchase of common stock	(1	)	—		(45		)	—			—			—			(45		)
Net share settlement of incentive equity awards	—		—		—			(2		)	—			—			(2		)
Change in deferred compensation	—		—		—			4			—			—			4
Cumulative effect of change in accounting standard	—		—					—			(10		)	—			(10		)
Balance as of March 31, 2020	93		$	1	$	(408	)	$	1,490		$	95		$	(66	)	$	1,112



	Common Shares Outstanding		Common Stock		Treasury Stock			Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Equity
Balance as of December 31, 2018	98		$	1	$	(119	)	$	1,475	$	69		$	(8	)	$	1,418
Net income	—		—		—			—		21			—			21
Other comprehensive loss	—		—		—			—		—			(7		)	(7		)
Dividends	—		—		—			—		(29		)	—			(29		)
Repurchase of common stock	(1	)	—		(44		)	—		—			—			(44		)
Change in deferred compensation	—		—		—			5		—			—			5
Other	—		—		(1		)	1		—			—			—
Balance as of March 31, 2019	97		$	1	$	(164	)	$	1,481	$	61		$	(15	)	$	1,364

See Notes to Condensed Consolidated Financial Statements.

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WYNDHAM HOTELS & RESORTS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unless otherwise noted, all amounts are in millions, except share and per share amounts)

(Unaudited)

1. BASIS OF PRESENTATION

Wyndham Hotels & Resorts, Inc. (collectively with its consolidated subsidiaries, “Wyndham Hotels” or the “Company”) is a leading global hotel franchisor, licensing its renowned hotel brands to hotel owners in approximately 90 countries around the world.

The Condensed Consolidated Financial Statements have been prepared on a stand-alone basis. The Condensed Consolidated Financial statements include Wyndham Hotels’ assets, liabilities, revenues, expenses and cash flows and all entities in which Wyndham Hotels has a controlling financial interest. The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America. All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements.

In presenting the Condensed Consolidated Financial Statements, management makes estimates and assumptions that affect the amounts reported and related disclosures. Estimates, by their nature, are based on judgment and available information. Accordingly, actual results could differ from those estimates. In management’s opinion, the Condensed Consolidated Financial Statements contain all normal recurring adjustments necessary for a fair presentation of interim results reported. The results of operations reported for interim periods are not necessarily indicative of the results of operations for the entire year or any subsequent interim period. These Condensed Consolidated Financial Statements should be read in conjunction with the Company’s 2019 Consolidated and Combined Financial Statements included in its most recent Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”) and any subsequent reports filed with the SEC.

Business description

Wyndham Hotels operates in the following segments:


•	Hotel Franchising — licenses the Company’s lodging brands and provides related services to third-party hotel owners and others.


•	Hotel Management — provides hotel management services for full-service and limited-service hotels as well as two hotels that are owned by the Company.

2. NEW ACCOUNTING PRONOUNCEMENTS

Recently issued accounting pronouncements

Reference Rate Reform: Facilitation of the Effects of Reference Rate Reform on Financial Reporting. In March 2020, the Financial Accounting Standards Board (the "FASB") issued optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. Generally Accepted Accounting Principles ("GAAP") to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating its contracts and the optional expedients provided by the new standard.

Recently adopted accounting pronouncements

Measurement of Credit Losses on Financial Instruments. In June 2016, the FASB issued guidance to replace the existing methodology for estimating credit losses with a methodology that reflects lifetime expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company

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adopted the guidance on January 1, 2020, as required using the modified retrospective approach through a cumulative-effect adjustment to retained earnings as of the effective date to align the Company’s current processes for establishing an allowance for credit losses with the new guidance. See Note 5 - Accounts Receivable for the impact of adoption.

Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued guidance which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. The Company adopted the guidance on January 1, 2020, as required. There was no material impact on its Condensed Consolidated Financial Statements and related disclosures.

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. In August 2018, the FASB issued guidance to address a customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract. The guidance aligns the requirements for capitalizing implementation costs incurred in such arrangements with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. This guidance should be applied on either a retrospective or prospective basis. The Company adopted the guidance using the prospective approach on January 1, 2020. There was no material impact on its Condensed Consolidated Financial Statements and related disclosures.

3. REVENUE RECOGNITION

Deferred revenues

Deferred revenues, or contract liabilities, generally represent payments or consideration received in advance for goods or services that the Company has not yet provided to the customer. Deferred revenues as of March 31, 2020 and December 31, 2019 are as follows:



	March 31, 2020		December 31, 2019
Deferred initial franchise fee revenues	$	138	$	136
Deferred loyalty program revenues	88		86
Deferred co-branded credit card program revenues	28		34
Deferred hotel management fee revenues	1		—
Deferred other revenues	25		27
Total	$	280	$	283

Deferred initial franchise fees represent payments received in advance from prospective franchisees upon the signing of a franchise agreement and are generally recognized to revenue within 12 years. Deferred loyalty revenues represent the portion of loyalty program fees charged to franchisees, net of redemption costs, that have been deferred and will be recognized over time based upon loyalty point redemption patterns. Deferred co-branded credit card program revenue represents payments received in advance from the Company’s co-branded credit card partners primarily for card member activity, which is typically recognized within one year.

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Performance obligations

A performance obligation is a promise in a contract to transfer a distinct good or service to a 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 twelve-month periods set forth below:



	4/1/2020- 3/31/2021		4/1/2021- 3/31/2022		4/1/2022- 3/31/2023		Thereafter		Total
Initial franchise fee revenues	$	21	$	10	$	8	$	99	$	138
Loyalty program revenues	54		22		10		2		88
Co-branded credit card program revenues	28		—		—		—		28
Hotel management fee revenues	1		—		—		—		1
Other revenues	17		1		1		6		25
Total	$	121	$	33	$	19	$	107	$	280

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:



	Three Months Ended March 31,
	2020		2019
Hotel Franchising
Royalties and franchise fees	$	84	$	99
Marketing, reservation and loyalty	106		112
License and other revenues from former Parent	21		29
Other	32		29
Total Hotel Franchising	243		269

Hotel Management
Royalties and franchise fees	8		2
Marketing, reservation and loyalty	—		1
Owned hotel revenues	22		26
Management fees	10		13
Cost reimbursements	126		155
Other	1		—
Total Hotel Management	167		197

Corporate and Other	—		2

Net revenues	$	410	$	468

Capitalized contract costs

The Company incurs certain direct and incremental sales commissions costs in order to obtain hotel franchise and management contracts. Such costs are capitalized and subsequently amortized beginning upon hotel opening over the first non-cancellable period of the agreement. In the event an agreement is terminated prior to the end of the first non-cancellable period, any unamortized cost is immediately expensed. In addition, the Company also capitalizes costs associated with the sale and installation of property management systems to its franchisees, which are amortized over the remaining non-cancellable period of the franchise agreement. As of March 31, 2020 and December 31, 2019, capitalized contract costs were $32 million and $33 million, respectively, of which $8 million in both years, were included in other current assets, and $24 million and $25 million, respectively, were included in other non-current assets on its Condensed Consolidated Balance Sheets.

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4. EARNINGS PER SHARE

The computation of basic and diluted earnings per share (“EPS”) is based on net income divided by the basic weighted average number of common shares and diluted weighted average number of common shares, respectively.

The following table sets forth the computation of basic and diluted EPS (in millions, except per share data):



	Three Months Ended March 31,
	2020		2019
Net income	$	22	$	21

Basic weighted average shares outstanding	93.7		97.9
Stock options and restricted stock units (“RSUs”)	0.2		0.3
Diluted weighted average shares outstanding	93.9		98.2

Earnings per share:
Basic	$	0.23	$	0.22
Diluted	0.23		0.22

Dividends:
Cash dividends declared per share	$	0.32	$	0.29
Aggregate dividends paid to shareholders	$	30	$	28

Stock repurchase program

The following table summarizes stock repurchase activity under the current stock repurchase program (in millions, except per share data):



	Shares	Cost		Average Price Per Share
As of January 1, 2020	6.8	$	363	$	53.67
For the three months ended March 31, 2020	0.9	45		51.57
As of March 31, 2020	7.7	$	408	$	53.43

The Company had $191 million of remaining availability under its program as of March 31, 2020. On March 17, 2020, the Company suspended its share repurchase activity.

5. ACCOUNTS RECEIVABLE

Allowance for doubtful accounts

The Company generates trade receivables in the ordinary course of its business and provides for estimated bad debts on such receivables. The Company adopted the new accounting guidance, ASU 2016-13, Measurement of Credit Losses on Financial Instruments on January 1, 2020. As a result of adopting the new guidance, the Company recorded a $10 million (net of $2 million of an income tax benefit) cumulative effect adjustment to retained earnings at January 1, 2020. Since adoption, the Company measures the expected credit losses of its receivables on a collective (pool) basis which aggregates receivables with similar risk characteristics and uses historical collection attrition rates for periods ranging from seven to ten years to estimate its expected credit losses. As such, the Company measures the expected credit losses of its receivables by segment and geographical area. Beginning January 1, 2020, the Company provides an estimate of expected credit losses for its receivables immediately upon origination or acquisition and may adjust this estimate in subsequent reporting periods as required. When the Company determines that an account is not collectible, the account is written-off to the allowance for doubtful accounts. The Company also considers whether the historical economic conditions are comparable to current economic conditions. If current or expected future conditions differ from the conditions in effect when the historical

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experience was generated, the Company would adjust the allowance for doubtful accounts to reflect the expected effects of the current environment on the collectability of the Company’s trade receivables which may be material.

The following table sets forth the activity in the Company's allowance for doubtful accounts on trade accounts receivables for the three months ended:



	March 31, 2020
Beginning balance	$	47
Cumulative effect of change in accounting standard	12
Provision for doubtful accounts	12
Bad debt write-offs	(13		)
Ending balance	$	58

Notes receivable

The Company had notes receivables of $21 million, net of a $1 million allowance as of March 31, 2020 and for a significant portion of such notes receivables, the Company has received personal guarantees from the owners of these hotels. In addition, the Company had $17 million of notes receivables which also have a full offset in deferred revenues.

6. LONG-LIVED ASSETS

Property, plant and equipment

As a result of the coronavirus pandemic, (“COVID-19”) and the related governmental preventative and protective actions to slow the spread of COVID-19, the travel industry is experiencing a sharp decline in travel demand. As a result, during the first quarter of 2020, the Company temporarily closed its two owned hotels indefinitely. Due to the temporary closure of such hotels, the Company has evaluated the recoverability of its net property plant and equipment associated with its two owned hotels for impairment and believes that it is more likely than not that the carrying value of those assets are recoverable from future expected cash flows, on an undiscounted basis, from such assets.

Although the Company believes that it is more likely than not that the carrying values of its net property, plant and equipment for its two owned hotels are not impaired, the impact of COVID-19 and the ultimate duration remains highly uncertain. Should the current effects of COVID-19 persist for a prolonged duration, the Company's results of operations may continue to be negatively impacted and the property, plant and equipment associated with its owned hotels may be exposed to impairment.

Property, plant and equipment, net as of March 31, 2020 and December 31, 2019 was $299 million and $307 million, respectively.

Intangible assets

As a result of COVID-19 and the significant negative impact it has had on travel demand, the Company performed a qualitative assessment of its intangible assets. The Company has determined through its analysis that it is more likely than not that the fair value of each of its goodwill and trademarks and the future expected cash flows on an undiscounted basis for its franchise agreements and management contracts are in excess of their carrying values. Although the Company believes that such intangible assets are not impaired, the impact of COVID-19 and the ultimate duration remains highly uncertain. Should the current effects of COVID-19 persist for a prolonged duration, the Company's results of operations may continue to be negatively impacted and certain intangible assets may be exposed to impairments at the Company's (i) hotel franchising, (ii) hotel management and (iii) owned hotel reporting units. To the extent estimated market-based valuation multiples and/or discounted cash flows are revised downward, the Company may be required to write-down all or a portion of goodwill, trademarks, franchise agreements and management contracts, which would adversely impact earnings.

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Intangible assets as of March 31, 2020 and December 31, 2019 consisted of the following:



	March 31, 2020						December 31, 2019
	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Unamortized intangible assets:
Goodwill	$	1,539					$	1,539
Trademarks	$	1,393					$	1,393
Amortized intangible assets:
Franchise agreements	$	895	$	467	$	428	$	895	$	460	$	435
Management agreements	137		25		112		137		23		114
Trademarks	3		1		2		3		1		2
Other	3		1		2		3		1		2
	$	1,038	$	494	$	544	$	1,038	$	485	$	553

7. FRANCHISING, MARKETING AND RESERVATION ACTIVITIES

Royalties and franchise fee revenues on the Condensed Consolidated Statements of Income include initial franchise fees of $3 million and $4 million for the three months ended March 31, 2020 and 2019, respectively.

In accordance with its franchise agreements, generally Wyndham Hotels is contractually obligated to expend the marketing and reservation fees it collects from franchisees for the operation of an international, centralized, brand-specific reservation system and for marketing purposes such as advertising, promotional and co-marketing programs, and training for the respective franchisees. Additionally, the Company is required to provide certain services to its franchisees, including technology and purchasing programs.

Development advance notes

The Company may, at its discretion, provide development advance notes to certain franchisees or hotel owners in order to assist them in converting to one of Wyndham Hotels’ brands, in building a new hotel to be flagged under one of Wyndham Hotels’ brands or in assisting in other franchisee expansion efforts. Provided the franchisee/hotel owner is in compliance with the terms of the franchise/management agreement, all or a portion of the development advance notes may be forgiven by Wyndham Hotels over the period of the franchise/management agreement, which typically ranges from 10 to 20 years. Otherwise, the related principal is due and payable to Wyndham Hotels. In certain instances, Wyndham Hotels may earn interest on unpaid franchisee development advance notes.

As a result of COVID-19 and the significant negative impact it has had on travel demand, the Company performed a qualitative assessment on its development advance notes and determined that it is more likely than not that the carrying value of those assets are recoverable from future expected cash flows as of March 31, 2020.

The following table sets forth the amounts recorded on the Company's Condensed Consolidated Financial Statements related to development advance notes:



Condensed Consolidated Balance Sheets:	March 31, 2020		December 31, 2019
Development advance notes ^(a)	$	84	$	84

_____________________


(a)	Included within other non-current assets.

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Condensed Consolidated Statements of Income:	Three Months Ended March 31,
	2020		2019
Forgiveness of notes ^(a)	$	2	$	2
Bad debt expense related to notes	1		1

______________________


(a)	Amounts are recorded as a reduction of royalties and franchise fees and marketing, reservation and loyalty revenues.

8. INCOME TAXES

The Company files income tax returns in the U.S. federal and state jurisdictions, as well as in foreign jurisdictions. Through May 31, 2018, the Company was part of a consolidated U.S. federal income tax return and consolidated and combined state returns with its former Parent. The Company is no longer subject to U.S. federal income tax examinations for years prior to 2015. The Company is no longer subject to state and local, or foreign, income tax examinations for years prior to 2010.

The Company made cash income tax payments, net of refunds, of $3 million and $6 million for the three months ended March 31, 2020 and 2019, respectively.

The Company’s effective tax rates were 29.0% and 19.2% during the three months ended March 31, 2020 and 2019, respectively. The increase was primarily related to non-deductible restructuring charges in 2020 combined with the absence of the favorable tax impact from a settlement with state taxing authorities in the first quarter of 2019.

9. LONG-TERM DEBT AND BORROWING ARRANGEMENTS

The Company’s indebtedness consisted of:



	March 31, 2020				December 31, 2019
Long-term debt: ^(a)	Amount		Weighted Average Rate ^(b)		Amount		Weighted Average Rate ^(b)
$750 million revolving credit facility (due May 2023)	$	734	2.47	%	$	—
Term loan (due May 2025)	1,564		3.50	%	1,568		4.00	%
5.375% senior unsecured notes (due April 2026)	495		5.38	%	494		5.38	%
Finance leases	59		4.50	%	60		4.50	%
Total long-term debt	2,852				2,122
Less: Current portion of long-term debt	21				21
Long-term debt	$	2,831			$	2,101

______________________


(a)	The carrying amount of the term loan and senior unsecured notes are net of deferred debt issuance costs of $17 million and $18 million as of March 31, 2020 and December 31, 2019, respectively.


(b)	Weighted average interest rates are based on period-end balances, including the effects from hedging.

Maturities and capacity

The Company’s outstanding debt as of March 31, 2020 matures as follows:



	Long-Term Debt
Within 1 year	$	21
Between 1 and 2 years	21
Between 2 and 3 years	21
Between 3 and 4 years	756
Between 4 and 5 years	10
Thereafter	2,023
Total	$	2,852

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As of March 31, 2020, the available capacity under the Company’s revolving credit facility was as follows:



	Revolving Credit Facility
Total capacity	$	750
Less: Borrowings	734
Less: Letters of credit	15
Available capacity	$	1

Deferred debt issuance costs

The Company classifies deferred debt issuance costs related to its revolving credit facility within other non-current assets on the Condensed Consolidated Balance Sheets. Such deferred debt issuance costs were $4 million as of March 31, 2020 and December 31, 2019.

Cash flow hedge

In 2018, the Company hedged a portion of its $1.6 billion term loan. As of March 31, 2020, the pay-fixed/receive-variable interest rate swaps hedge $1.1 billion of the Company’s term loan interest rate exposure, of which $600 million expires in the second quarter of 2024 and has a weighted average fixed rate of 2.54% and $500 million expires in the fourth quarter of 2024 and has a weighted average fixed rate of 1.50%. The variable rates of the swap agreements are based on one-month LIBOR. The aggregate fair value of these interest rate swaps was a liability of $82 million and $34 million as of March 31, 2020 and December 31, 2019, respectively, which was included within other non-current liabilities on the Condensed Consolidated Balance Sheets. The effect of interest rate swaps on interest expense, net on the Condensed Consolidated Statements of Income was $2 million of expense for the three months ended March 31, 2020 and not material for the three months ended March 31, 2019. There was no hedging ineffectiveness recognized in the three months ended March 31, 2020 and 2019. The Company expects to reclassify approximately $11 million from accumulated other comprehensive income ("AOCI") to interest expense during the next 12 months.

Interest expense, net

Wyndham Hotels incurred net interest expense of $25 million and $24 million for the three months ended March 31, 2020 and 2019, respectively. Cash paid related to such interest was $17 million and $18 million for the three months ended March 31, 2020 and 2019, respectively.

10. FAIR VALUE

Wyndham Hotels 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. Wyndham Hotels’ 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 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, trade receivables, accounts payable and accrued expenses and other current liabilities approximate fair value due to the short-term maturities of these assets and liabilities. The carrying amounts and estimated fair values of all other financial instruments are as follows:

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	March 31, 2020
	Carrying Amount		Estimated Fair Value
Debt	$	2,852	$	2,627

The Company estimates the fair value of its debt using Level 2 inputs based on indicative bids from investment banks or quoted market prices with the exception of finance leases, which are estimated at carrying value.

Financial instruments

Changes in interest rates and foreign exchange rates expose the Company to market risk. The Company uses cash flow hedges as part of its overall strategy to manage its exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. As a matter of policy, the Company only enters into transactions that it believes will be highly effective at offsetting the underlying risk, and it does not use derivatives for trading or speculative purposes. The Company estimates the fair value of its derivatives using Level 2 inputs.

Interest rate risk

A portion of debt used to finance the Company’s operations is exposed to interest rate fluctuations. The Company uses various hedging strategies and derivative financial instruments to create a desired mix of fixed and floating rate assets and liabilities. Derivative instruments currently used in these hedging strategies include interest rate swaps. The derivatives used to manage the risk associated with the Company’s floating rate debt are derivatives designated as cash flow hedges. See Note 9 - Long-Term Debt and Borrowing Arrangements for the impact of such cash flow hedges.

Foreign currency risk

The Company has foreign currency rate exposure to exchange rate fluctuations worldwide, particularly with respect to the Canadian Dollar, the Chinese Yuan, the Euro, the British Pound and the Argentine Peso. The Company uses foreign currency forward contracts at various times to manage and reduce the foreign currency exchange rate risk associated with its foreign currency denominated receivables and payables, forecasted royalties and forecasted earnings and cash flows of foreign subsidiaries and other transactions. Losses recognized in income from freestanding foreign currency exchange contracts were $2 million and $1 million for the three months ended March 31, 2020 and 2019, respectively.

As required, the Company began accounting for Argentina as a highly inflationary economy as of July 1, 2018. Foreign currency exchange losses related to Argentina were not material for the three months ended March 31, 2020 and $1 million for the three months ended March 31, 2019. Such losses are included in operating expenses in the Condensed Consolidated Statements of Income.

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 often 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.

11. COMMITMENTS AND CONTINGENCIES

Litigation

The Company is involved, at times, in claims, legal and regulatory proceedings and governmental inquiries arising in the ordinary course of its business, including but not limited to: breach of contract, fraud and bad faith claims with franchisees in connection with franchise agreements and with owners in connection with management contracts, as well as negligence, breach of contract, fraud, employment, consumer protection and other statutory claims asserted in connection with alleged acts or occurrences at owned, franchised or managed properties or in relation to guest reservations and bookings. The Company may also at times be involved in claims, legal and regulatory proceedings and governmental inquiries relating to bankruptcy proceedings involving efforts to collect receivables from a debtor in bankruptcy, employment matters, claims of infringement upon third parties’ intellectual property rights, claims relating to information security, privacy and consumer protection,

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fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes. Along with many of its competitors, the Company and/or certain of its subsidiaries have been named as defendants in litigation matters filed in state and federal courts, alleging statutory and common law claims related to purported incidents of sex trafficking at certain franchised and managed hotel facilities. These matters are in the pleading or discovery stages at this time. As of March 31, 2020, the Company is aware of approximately 30 cases filed naming the Company and/or subsidiaries. Based upon the status of these matters, the Company has not made a determination as to the likelihood of loss of any one of these matters and is unable to estimate a range of losses at this time.

The Company records an accrual for legal contingencies when it determines, after consultation with outside counsel, that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, the Company evaluates, among other things, the degree of probability of an unfavorable outcome, and when it is probable that a liability has been incurred, its ability to make a reasonable estimate of loss. The Company reviews these accruals each reporting period and makes revisions based on changes in facts and circumstances, including changes to its strategy in dealing with these matters.

The Company believes that it has adequately accrued for such matters with reserves of $6 million and $7 million as of March 31, 2020 and December 31, 2019, respectively. The Company also had receivables of $1 million and $2 million as of March 31, 2020 and December 31, 2019, respectively, for certain matters which are covered by insurance and were included in other current assets on its Condensed Consolidated Balance Sheets. 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 March 31, 2020, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately $5 million in excess of recorded accruals. However, the Company does not believe that the impact of such litigation will result in a material liability to the Company in relation to its combined financial position or liquidity.

Guarantees

Hotel-management guarantees

The Company had previously entered into hotel-management agreements that provide the hotel owner with a guarantee of a certain level of profitability based upon various metrics. Under such agreements, the Company was required to compensate the hotel owner for any profitability shortfall over the life of the management agreement up to a specified aggregate amount. For certain agreements, the Company may have been able to recapture all or a portion of the shortfall payments in the event that future operating results exceed targets.

During 2019, the Company determined it would exit two unprofitable hotel-management agreements. In connection with such hotel-management agreements, the Company had a $10 million liability as of December 31, 2019, which was included in accrued expenses and other current liabilities on the Condensed Consolidated Balance Sheet and was paid in the first quarter of 2020.

As of March 31, 2020, the Company only had one remaining performance guarantee. The maximum potential amount of future payments that may be made under this guarantee was $20 million with an annual cap of $5 million. This guarantee has a remaining life of approximately four years and is subject to recapture provisions in the event that future operating results exceed targets. To reflect these recapture provisions, the Company had a receivable of $4 million as of March 31, 2020, all of which was included in other non-current assets on its Condensed Consolidated Balance Sheet and $5 million as of December 31, 2019, of which $1 million was included in other current assets and $4 million was included in other non-current assets on its Condensed Consolidated Balance Sheet. Such receivable was the result of payments made to date that were subject to recapture and which the Company believes will be recoverable from future operating performance. As a result of the impacts of COVID-19, there are no payments required under the guarantee due to a force majeure provision in the hotel-management agreement.

Separation-related guarantees

The Company assumed one-third of certain contingent and other corporate liabilities of Wyndham Worldwide incurred prior to the spin-off, including liabilities of Wyndham Worldwide related to, arising out of or resulting from certain terminated or divested businesses, certain general corporate matters of Wyndham Worldwide and any actions with respect to the separation plan or the distribution made or brought by any third party.

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12. STOCK-BASED COMPENSATION

The Company has a stock-based compensation plan available to grant non-qualified stock options, incentive stock options, stock-settled appreciation rights (“SSARs”), RSUs, performance-vesting restricted stock units (“PSUs”) and other stock-based awards to key employees, non-employee directors, advisors and consultants. Under the Wyndham Hotels & Resorts, Inc. 2018 Equity and Incentive Plan (“Stock Plan”), which became effective on May 14, 2018, a maximum of 10.0 million shares of common stock may be awarded. As of March 31, 2020, 5.7 million shares remained available.

Incentive equity awards granted by the Company

Wyndham Hotels’ Board of Directors approved incentive equity award grants to employees of Wyndham Hotels in the form of RSUs, stock options and PSUs.

The activity related to the Company’s incentive equity awards for the three months ended March 31, 2020 consisted of the following:



	RSUs					PSUs
	Number of RSUs			Weighted Average Grant Price		Number of PSUs		Weighted Average Grant Price
Balance as of December 31, 2019	0.8			$	55.75	0.1		$	52.44
Granted ^(a)	0.5			53.40		0.1		53.40
Vested	(0.1	)		53.14		—		—
Canceled	(0.1	)		56.02		—		—
Balance as of March 31, 2020	1.1		^(b)	$	55.02	0.2	^(c)	$	52.94

______________________


(a)	Represents awards granted by the Company in February 2020.


(b)	RSUs outstanding as of March 31, 2020 are expected to vest over time and have an aggregate unrecognized compensation expense of $53 million, which is expected to be recognized over a weighted average period of 3.2 years.


(c)	PSUs outstanding as of March 31, 2020 are expected to vest over time and have an aggregate unrecognized compensation expense of $10 million, which may be recognized over a weighted average period of 2.4 years.

The activity related to stock options granted by the Company for the three months ended March 31, 2020 consisted of the following:



	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (Years)	Aggregate Intrinsic Value (in millions)
Outstanding as of December 31, 2019	0.9		$	56.96
Granted	0.6		53.40
Exercised	—		—
Canceled	—		—
Expired	—		—
Outstanding as of March 31, 2020	1.5		$	55.51	6.3	$	—
Unvested as of March 31, 2020	1.2	^(a)	$	55.13	6.2	$	—
Exercisable as of March 31, 2020	0.3		$	57.15	6.4	$	—

______________________


(a)	Unvested options as of March 31, 2020 are expected to vest over time and have an aggregate unrecognized compensation expense of $11 million, which is expected to be recognized over a weighted average period of 3.2 years.

The fair value of stock options granted by the Company during 2020 and 2019 were estimated on the date of the grant using the Black-Scholes option-pricing model with the relevant assumptions outlined in the table below. Expected volatility is based on both historical and implied volatilities of the stock of comparable companies over the estimated expected life of the options. The expected life represents the period of time the options 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

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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.



	2020	2019
Grant date fair value	$8.59	$10.46
Grant date strike price	$53.40	$52.44
Expected volatility	24.30%	22.24%
Expected life	4.25 years	6.25 years
Risk-free interest rate	1.21%	2.63%
Projected dividend yield	2.40%	2.21%

Stock-based compensation expense

Stock-based compensation expense was $4 million and $5 million for the three months ended March 31, 2020 and 2019, respectively. For the three months ended March 31, 2019, $2 million was recorded within separation-related costs on the Condensed Consolidated Statements of Income.

13. SEGMENT INFORMATION

The reportable segments presented below represent the Company's operating segments for which separate financial information is available and is utilized on a regular basis by its chief operating decision maker to assess performance and allocate resources. In identifying its reportable segments, the Company also considers the nature of services provided by its operating segments. Management evaluates the operating results of each of its reportable segments based upon net revenues and “adjusted EBITDA”, which is defined as net income excluding interest expense, depreciation and amortization, impairment charges, restructuring and related charges, contract termination costs, transaction-related items (acquisition-, disposition- or separation-related), foreign currency impacts of highly inflationary countries, stock-based compensation expense and income taxes. Wyndham Hotels believes that adjusted EBITDA is a useful measure of performance for its segments which, when considered with U.S. GAAP measures, allows a more complete understanding of its operating performance. The Company uses these measures internally to assess operating performance, both absolutely and in comparison to other companies, and to make day to day operating decisions, including in the evaluation of selected compensation decisions. The Company's presentation of adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.



	Three Months Ended March 31,
	2020					2019
	Net Revenues		Adjusted EBITDA			Net Revenues		Adjusted EBITDA
Hotel Franchising	$	243	$	108		$	269	$	113
Hotel Management	167		17			197		16
Total Reportable Segments	410		125			466		129
Corporate and Other	—		(18		)	2		(18		)
Total Company	$	410	$	107		$	468	$	111

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The table below is a reconciliation of net income to adjusted EBITDA.



	Three Months Ended March 31,
	2020		2019
Net income	$	22	$	21
Provision for income taxes	9		5
Depreciation and amortization	25		29
Interest expense, net	25		24
Stock-based compensation expense	4		3
Restructuring costs	13		—
Transaction-related expenses, net	8		7
Separation-related expenses	1		21
Foreign currency impact of highly inflationary countries	—		1
Adjusted EBITDA	$	107	$	111

14. OTHER EXPENSES AND CHARGES

Restructuring

The Company incurred $13 million of charges during the three months ended March 31, 2020, related to restructuring initiatives implemented in response to COVID-19. These initiatives resulted in a reduction of 262 employees and are comprised of employee separation costs. As a result, the Company recorded charges of $7 million to its Hotel Franchising segment, $5 million to its Corporate and Other segment and the remainder to its Hotel Management segment. In addition, during the fourth quarter of 2019, the Company had implemented restructuring initiatives, primarily focused on enhancing its organizational efficiency and rationalizing its operations. Below is the activity for the three months ended March 31, 2020 relating to restructuring activities by plan:



			2020 Activity
	Liability as of December 31, 2019		Costs Recognized		Cash Payments			Other ^(a)	Liability as of March 31, 2020
2019 Plan - personnel-related	$	8	$	—	$	(5	)