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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 June 30, 2021
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 001-38432
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(s) | 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:
93,523,120 shares of common stock outstanding as of June 30, 2021.
TABLE OF CONTENTS
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PART I | FINANCIAL INFORMATION | |
Item 1. | | |
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Item 2. | | |
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Item 3. | | |
Item 4. | | |
PART II | OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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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 June 30, 2021, the related condensed consolidated statements of income/(loss), comprehensive income/(loss), and equity for the three-month and six-month periods ended June 30, 2021 and 2020, and of cash flows for the six-month periods ended June 30, 2021 and 2020, and the related notes (collectively referred to as the “interim financial statements”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheet of the Company as of December 31, 2020, and the related consolidated and combined statements of income/(loss), comprehensive income/(loss), cash flows, and equity for the year then ended (not presented herein); and in our report dated February 12, 2021, 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, 2020, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
Basis for Review Results
The interim financial statements are the responsibility of the Company’s management. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our reviews in accordance with standards of the PCAOB. A review of interim financial statements consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
/s/ Deloitte & Touche LLP
New York, New York
July 29, 2021
WYNDHAM HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME/(LOSS)
(In millions, except per share amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net revenues | | | | | | | |
Royalties and franchise fees | $ | 122 | | | $ | 61 | | | $ | 200 | | | $ | 154 | |
Marketing, reservation and loyalty | 119 | | | 82 | | | 204 | | | 188 | |
Management and other fees | 30 | | | 6 | | | 50 | | | 38 | |
License and other fees | 20 | | | 21 | | | 40 | | | 42 | |
Other | 30 | | | 22 | | | 60 | | | 53 | |
Fee-related and other revenues | 321 | | | 192 | | | 554 | | | 475 | |
Cost reimbursements | 85 | | | 66 | | | 155 | | | 192 | |
Net revenues | 406 | | | 258 | | | 709 | | | 667 | |
Expenses | | | | | | | |
Marketing, reservation and loyalty | 105 | | | 85 | | | 198 | | | 204 | |
Operating | 31 | | | 23 | | | 58 | | | 57 | |
General and administrative | 27 | | | 26 | | | 51 | | | 54 | |
Cost reimbursements | 85 | | | 66 | | | 155 | | | 192 | |
Depreciation and amortization | 24 | | | 25 | | | 47 | | | 49 | |
Separation-related | 1 | | | — | | | 3 | | | 1 | |
Impairments, net | — | | | 206 | | | — | | | 206 | |
Restructuring | — | | | 16 | | | — | | | 29 | |
Transaction-related, net | — | | | 5 | | | — | | | 13 | |
| | | | | | | |
Total expenses | 273 | | | 452 | | | 512 | | | 805 | |
Operating income/(loss) | 133 | | | (194) | | | 197 | | | (138) | |
Interest expense, net | 22 | | | 28 | | | 51 | | | 54 | |
Early extinguishment of debt | 18 | | | — | | | 18 | | | — | |
Income/(loss) before income taxes | 93 | | | (222) | | | 128 | | | (192) | |
Provision for/(benefit from) income taxes | 25 | | | (48) | | | 35 | | | (40) | |
Net income/(loss) | $ | 68 | | | $ | (174) | | | $ | 93 | | | $ | (152) | |
| | | | | | | |
Earnings/(loss) per share | | | | | | | |
Basic | $ | 0.73 | | | $ | (1.86) | | | $ | 0.99 | | | $ | (1.63) | |
Diluted | 0.73 | | | (1.86) | | | 0.99 | | | (1.63) | |
See Notes to Condensed Consolidated Financial Statements.
2
WYNDHAM HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income/(loss) | $ | 68 | | | $ | (174) | | | $ | 93 | | | $ | (152) | |
Other comprehensive income/(loss), net of tax | | | | | | | |
Foreign currency translation adjustments | 1 | | | 1 | | | 2 | | | (2) | |
Unrealized gains/(losses) on cash flow hedges | 4 | | | (2) | | | 17 | | | (38) | |
Other comprehensive income/(loss), net of tax | 5 | | | (1) | | | 19 | | | (40) | |
Comprehensive income/(loss) | $ | 73 | | | $ | (175) | | | $ | 112 | | | $ | (192) | |
See Notes to Condensed Consolidated Financial Statements.
3
WYNDHAM HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except per share amounts)
(Unaudited)
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Assets | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 103 | | | $ | 493 | |
Trade receivables, net | 298 | | | 295 | |
Prepaid expenses | 52 | | | 45 | |
Other current assets | 63 | | | 67 | |
Total current assets | 516 | | | 900 | |
Property and equipment, net | 267 | | | 278 | |
Goodwill | 1,525 | | | 1,525 | |
Trademarks, net | 1,202 | | | 1,203 | |
Franchise agreements and other intangibles, net | 493 | | | 512 | |
Other non-current assets | 238 | | | 226 | |
Total assets | $ | 4,241 | | | $ | 4,644 | |
Liabilities and stockholders' equity | | | |
Current liabilities: | | | |
Current portion of long-term debt | $ | 21 | | | $ | 21 | |
Accounts payable | 33 | | | 28 | |
Deferred revenues | 80 | | | 71 | |
Accrued expenses and other current liabilities | 227 | | | 226 | |
Total current liabilities | 361 | | | 346 | |
Long-term debt | 2,071 | | | 2,576 | |
Deferred income taxes | 368 | | | 359 | |
Deferred revenues | 160 | | | 158 | |
Other non-current liabilities | 221 | | | 242 | |
Total liabilities | 3,181 | | | 3,681 | |
Commitments and contingencies (Note 11) | | | |
Stockholders’ equity: | | | |
Preferred stock, $0.01 par value, authorized 6.0 shares, none issued and outstanding | — | | | — | |
Common stock, $0.01 par value, authorized 600.0 shares, 101.2 and 100.8 issued and outstanding at June 30, 2021 and December 31, 2020 | 1 | | | 1 | |
Treasury stock, at cost – 7.7 shares at June 30, 2021 and December 31, 2020 | (408) | | | (408) | |
Additional paid-in capital | 1,519 | | | 1,504 | |
Accumulated deficit | (19) | | | (82) | |
Accumulated other comprehensive loss | (33) | | | (52) | |
Total stockholders’ equity | 1,060 | | | 963 | |
Total liabilities and stockholders' equity | $ | 4,241 | | | $ | 4,644 | |
See Notes to Condensed Consolidated Financial Statements.
4
WYNDHAM HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| | | | | | | | | | | |
| Six Months Ended June 30, |
| 2021 | | 2020 |
Operating activities | | | |
Net income/(loss) | $ | 93 | | | $ | (152) | |
Adjustments to reconcile net income/(loss) to net cash provided by/(used in) operating activities: | | | |
Depreciation and amortization | 47 | | | 49 | |
Provision for doubtful accounts | 14 | | | 21 | |
Impairments, net | — | | | 209 | |
Deferred income taxes | 3 | | | (47) | |
Stock-based compensation | 13 | | | 10 | |
Loss on early extinguishment of debt | 18 | | | — | |
Net change in assets and liabilities: | | | |
Trade receivables | (16) | | | (44) | |
Prepaid expenses | (7) | | | (3) | |
Other current assets | 4 | | | (3) | |
Accounts payable, accrued expenses and other current liabilities | 6 | | | (51) | |
Deferred revenues | 11 | | | (22) | |
Payments of development advance notes, net | (16) | | | (6) | |
Other, net | 10 | | | (1) | |
Net cash provided by/(used in) operating activities | 180 | | | (40) | |
Investing activities | | | |
Property and equipment additions | (17) | | | (18) | |
Issuance of loans, net | — | | | (1) | |
Other, net | (1) | | | — | |
Net cash used in investing activities | (18) | | | (19) | |
Financing activities | | | |
Proceeds from borrowings | 45 | | | 744 | |
Principal payments on long-term debt | (566) | | | (18) | |
| | | |
Dividends to shareholders | (30) | | | (38) | |
Repurchases of common stock | — | | | (50) | |
Net share settlement of incentive equity awards | (6) | | | (4) | |
Other, net | 5 | | | (4) | |
Net cash (used in)/provided by financing activities | (552) | | | 630 | |
Effect of changes in exchange rates on cash, cash equivalents and restricted cash | — | | | (1) | |
Net (decrease)/increase in cash, cash equivalents and restricted cash | (390) | | | 570 | |
Cash, cash equivalents and restricted cash, beginning of period | 493 | | | 94 | |
Cash, cash equivalents and restricted cash, end of period | $ | 103 | | | $ | 664 | |
See Notes to Condensed Consolidated Financial Statements.
5
WYNDHAM HOTELS & RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Accumulated Deficit | | Accumulated Other Comprehensive Loss | | Total Equity |
Balance as of December 31, 2020 | 93 | | | $ | 1 | | | $ | (408) | | | $ | 1,504 | | | $ | (82) | | | $ | (52) | | | $ | 963 | |
Net income | — | | | — | | | — | | | — | | | 24 | | | — | | | 24 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 14 | | | 14 | |
Dividends | — | | | — | | | — | | | — | | | (15) | | | — | | | (15) | |
Net share settlement of incentive equity awards | — | | | — | | | — | | | (5) | | | — | | | — | | | (5) | |
Change in deferred compensation | — | | | — | | | — | | | 5 | | | — | | | — | | | 5 | |
Exercise of stock options | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
Other | — | | | — | | | — | | | — | | | 1 | | | — | | | 1 | |
Balance as of March 31, 2021 | 93 | | | 1 | | | (408) | | | 1,508 | | | (72) | | | (38) | | | 991 | |
Net income | — | | | — | | | — | | | — | | | 68 | | | — | | | 68 | |
Other comprehensive income | — | | | — | | | — | | | — | | | — | | | 5 | | | 5 | |
Dividends | — | | | — | | | — | | | — | | | (15) | | | — | | | (15) | |
Net share settlement of incentive equity awards | — | | | — | | | — | | | (1) | | | — | | | — | | | (1) | |
Change in deferred compensation | — | | | — | | | — | | | 8 | | | — | | | — | | | 8 | |
Exercise of stock options | — | | | — | | | — | | | 4 | | | — | | | — | | | 4 | |
Issuance of shares for restricted stock units vesting | 1 | | | — | | | — | | | — | | | — | | | — | | | — | |
Balance as of June 30, 2021 | 94 | | | $ | 1 | | | $ | (408) | | | $ | 1,519 | | | $ | (19) | | | $ | (33) | | | $ | 1,060 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings/(Accumulated Deficit) | | Accumulated Other Comprehensive 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 | |
Net loss | — | | | — | | | — | | | — | | | (174) | | | — | | | (174) | |
Other comprehensive loss | — | | | — | | | — | | | — | | | — | | | (1) | | | (1) | |
Dividends | — | | | — | | | — | | | — | | | (8) | | | — | | | (8) | |
Net share settlement of incentive equity awards | — | | | — | | | — | | | (2) | | | — | | | — | | | (2) | |
Change in deferred compensation | — | | | — | | | — | | | 6 | | | — | | | — | | | 6 | |
Other | — | | | — | | | — | | | (1) | | | 1 | | | — | | | — | |
Balance as of June 30, 2020 | 93 | | | $ | 1 | | | $ | (408) | | | $ | 1,493 | | | $ | (86) | | | $ | (67) | | | $ | 933 | |
See Notes to Condensed Consolidated Financial Statements.
6
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)
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 nearly 95 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 (“U.S. GAAP”). 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 2020 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 adopted accounting pronouncements
Simplifying the Accounting for Income Taxes. On December 18, 2019, the Financial Accounting Standards Board (“FASB”) issued guidance which simplifies the accounting standards for income taxes. The amendment clarifies and simplifies aspects of the accounting for income taxes to help promote consistent application of U.S. GAAP by eliminating certain exceptions to the general principles of ASC 740, Income Taxes. This guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2021, as required. There was no material impact on the Company's Condensed Consolidated Financial Statements and related disclosures as a result of adopting this new standard.
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 June 30, 2021 and December 31, 2020 are as follows:
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
Deferred initial franchise fee revenues | $ | 143 | | | $ | 136 | |
Deferred loyalty program revenues | 76 | | | 75 | |
| | | |
Deferred other revenues | 21 | | | 18 | |
Total | $ | 240 | | | $ | 229 | |
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.
As a result of the negative impact that the coronavirus pandemic (“COVID-19”) had on travel demand in 2020, the Company’s assumptions related to redemptions, including estimated member redemption rate, member redemption pattern, and the estimated cost to satisfy such redemptions, changed. Accordingly, the Company recognized a $16 million cumulative adjustment, which resulted in an increase to loyalty revenues during the second quarter of 2020. Such increase is included within marketing, reservation and loyalty and other revenues on the Condensed Consolidated Statement of Income/(Loss) during the three and six months ended June 30, 2020.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 7/1/2021 - 6/30/2022 | | 7/1/2022 - 6/30/2023 | | 7/1/2023 - 6/30/2024 |
| Thereafter |
| Total |
Initial franchise fee revenues | $ | 23 | | | $ | 9 | | | $ | 8 | | | $ | 103 | | | $ | 143 | |
Loyalty program revenues | 44 | | | 22 | | | 8 | | | 2 | | | 76 | |
| | | | | | | | | |
Other revenues | 13 | | | 1 | | | 1 | | | 6 | | | 21 | |
Total | $ | 80 | | | $ | 32 | | | $ | 17 | | | $ | 111 | | | $ | 240 | |
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 June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Hotel Franchising | | | | | | | |
Royalties and franchise fees | $ | 115 | | | $ | 59 | | | $ | 190 | | | $ | 144 | |
Marketing, reservation and loyalty | 119 | | | 82 | | | 204 | | | 187 | |
License and other fees | 20 | | | 21 | | | 40 | | | 42 | |
Other | 29 | | | 20 | | | 58 | | | 52 | |
Total Hotel Franchising | 283 | | | 182 | | | 492 | | | 425 | |
| | | | | | | |
Hotel Management | | | | | | | |
Royalties and franchise fees | 7 | | | 2 | | | 10 | | | 10 | |
Marketing, reservation and loyalty | — | | | — | | | — | | | 1 | |
Owned hotel revenues | 21 | | | 2 | | | 34 | | | 23 | |
Management fees | 9 | | | 4 | | | 16 | | | 15 | |
Cost reimbursements | 85 | | | 66 | | | 155 | | | 192 | |
Other | 1 | | | 2 | | | 2 | | | 1 | |
Total Hotel Management | 123 | | | 76 | | | 217 | | | 242 | |
| | | | | | | |
Net revenues | $ | 406 | | | $ | 258 | | | $ | 709 | | | $ | 667 | |
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 June 30, 2021 and December 31, 2020, capitalized contract costs were $33 million, of which $7 million for both periods was included in other current assets and $26 million for both periods, was included in other non-current assets on its Condensed Consolidated Balance Sheets.
The computation of basic and diluted earnings/(loss) 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 June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Net income/(loss) | $ | 68 | | | $ | (174) | | | $ | 93 | | | $ | (152) | |
| | | | | | | |
Basic weighted average shares outstanding | 93.6 | | 93.3 | | 93.5 | | 93.5 |
Stock options and restricted stock units (“RSUs”) (a) | 0.5 | | — | | 0.4 | | — |
Diluted weighted average shares outstanding | 94.1 | | 93.3 | | 93.9 | | 93.5 |
| | | | | | | |
Earnings/(loss) per share: | | | | | | | |
Basic | $ | 0.73 | | | $ | (1.86) | | | $ | 0.99 | | | $ | (1.63) | |
Diluted | 0.73 | | | (1.86) | | | 0.99 | | | (1.63) | |
| | | | | | | |
Dividends: | | | | | | | |
Cash dividends declared per share | $ | 0.16 | | | $ | 0.08 | | | $ | 0.32 | | | $ | 0.40 | |
Aggregate dividends paid to shareholders | $ | 15 | | | $ | 8 | | | $ | 30 | | | $ | 38 | |
_____________________
(a) Due to the anti-dilutive effect resulting from the reported net loss for the three and six months ended June 30, 2020, 0.1 million of anti-dilutive shares were omitted from the calculation of weighted average shares outstanding for those periods.
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 December 31, 2020 | 7.7 | | | $ | 408 | | | $ | 53.43 | |
For the six months ended June 30, 2021 | — | | | — | | | — | |
As of June 30, 2021 | 7.7 | | | $ | 408 | | | $ | 53.43 | |
The Company had $191 million of remaining availability under its program as of June 30, 2021.
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 a $2 million income tax benefit) cumulative effect adjustment to retained earnings at January 1, 2020.
The following table sets forth the activity in the Company's allowance for doubtful accounts on trade accounts receivables for the six months ended:
| | | | | | | | | | | |
| 2021 | | 2020 |
Balance as of January 1, | $ | 72 | | $ | 47 |
Cumulative effect of change in accounting standard | — | | 12 |
Provision for doubtful accounts | 14 | | 21 |
Bad debt write-offs | (8) | | (13) |
Balance as of June 30, | $ | 78 | | $ | 67 |
Property and equipment
As a result of the impact COVID-19 had on the Company’s results during 2020, the Company evaluated the recoverability of its net property and equipment associated with its two owned hotels for impairment in 2020 and believed that it was more likely than not that the carrying value of those assets were recoverable from future expected cash flows, on an undiscounted basis, from such assets. Due to the ongoing recovery of travel demand in 2021 and the favorable impact it had on the Company's operations, the Company believes there were no events that would indicate that an impairment to such property and equipment may have occurred in the six months ended June 30, 2021.
Although the Company believes that it is more likely than not that the carrying values of its net property and equipment for its two owned hotels are not impaired, the impact of COVID-19 and the ultimate duration remains highly uncertain. Should there be a resurgence of the virus which results in new government restrictions and slows the ongoing recovery from the effects of the pandemic, the Company's results of operations may be negatively impacted and the property and equipment associated with its owned hotels may be exposed to impairment.
Property and equipment, net as of June 30, 2021 and December 31, 2020 was $267 million and $278 million, respectively.
Intangible assets
Goodwill
The Company evaluates the carrying value of its goodwill in each of its reporting units (i) hotel franchising, (ii) hotel management and (iii) owned hotels, compared to their respective estimated fair values on an annual basis during the fourth quarter of every year, or more frequently if circumstances indicate that the fair value of goodwill may be impaired, to the reporting units’ carrying values as required by guidance. As a result of the impact COVID-19 had on the hospitality industry during 2020, the Company performed a quantitative impairment analysis on its goodwill in the second quarter of 2020. As a result of such analyses, during the second quarter of 2020, the Company incurred a $14 million charge to fully write-down the goodwill balance for its owned hotel reporting unit. Such charge was reported within impairments, net on the Condensed Consolidated Statement of Income/(Loss) and was charged to the hotel management segment. The Company performed its annual impairment assessment of its goodwill as of October 1, 2020 and determined that no impairments existed and that the fair values of its hotel franchising and hotel management reporting units substantially exceeded their carrying values.
As a result of the impact COVID-19 had on the hospitality industry during 2020, the Company performed a qualitative assessment of its remaining goodwill for its hotel franchising and hotel management reporting units as of March 31, September 30, and December 31, 2020. Through such assessments, the Company determined that it was more likely than not that the fair value of its hotel franchising and hotel management reporting units continued to significantly exceed their carrying values. Due to the ongoing recovery of travel demand in 2021 and the favorable impact it had on the Company's operations, the Company believes there were no events that would indicate that an impairment may have occurred to its goodwill for its hotel franchising or hotel management reporting units in the six months ended June 30, 2021.
Other Intangibles
As a result of the impact COVID-19 had on the Company’s results during 2020, the Company evaluated the carrying value of each of its other indefinite-lived intangible assets compared to their respective estimated fair values in 2020. During the second quarter of 2020, the Company determined through such analyses that certain of its trademarks were impaired. Accordingly, the Company recorded impairment charges of $191 million to reduce the carrying value of those trademarks to
their estimated fair values. Such charges were reported within impairments, net on the Condensed Consolidated Statement of Income/(Loss) and were charged to the hotel franchising segment. Additionally, the Company performed its annual impairment assessment of its other indefinite-lived intangible assets as of October 1, 2020 and determined that no additional impairments exist. Additionally, the Company performed a qualitative assessment of its other indefinite-lived intangible assets as of March 31, and June 30, 2021 and determined through such assessments, that it was more likely than not that the fair value of such indefinite-lived intangible assets were in excess of their carrying values.
The Company also evaluated the recoverability of each of its definite-lived intangible assets by performing a qualitative assessment during each of the quarters in 2020 to determine if circumstances indicated that impairment may have occurred in 2020 and performed a quantitative impairment assessment for a management contract and certain franchise agreements during the fourth quarter of 2020. As a result of these assessments, the Company determined these assets were not impaired. Due to the ongoing recovery of travel demand in 2021 and the favorable impact it had on the Company's operations, the Company believes there were no events that would indicate that an impairment may have occurred to its franchise agreements or management contracts in the six months ended June 30, 2021.
The following table details impairment charges related to intangible assets recorded in the second quarter of 2020:
| | | | | | | | | | | | | | | | | | | | |
Intangible Asset | | Book Value | | Impairment Charges | | Adjusted Fair Value |
Owned hotel reporting unit goodwill | | $ | 14 | | | $ | (14) | | | $ | — | |
La Quinta trademark | | 710 | | | (155) | | | 555 | |
Other trademarks (a) | | 103 | | | (36) | | | 67 | |
Total | | $ | 827 | | | $ | (205) | | | $ | 622 | |
_____________________
(a) Represents the impairments of three of the Company's trademarks.
Should there be a resurgence of the virus which results in new government restrictions and slows the ongoing recovery from the effects of the pandemic, the Company's results of operations may be negatively impacted and its intangible assets within its hotel franchising and hotel management reporting units may be exposed to future impairments. 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 its remaining goodwill, trademarks, franchise agreements and management contracts, which would adversely impact earnings.
Intangible assets as of June 30, 2021 and December 31, 2020 consisted of the following:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Gross Carrying Amount | | Accumulated Impairment | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Impairment | | Net Carrying Amount |
Goodwill | $ | 1,539 | | | $ | 14 | | | $ | 1,525 | | | $ | 1,539 | | | $ | 14 | | | $ | 1,525 | |
| | | | | | | | | | | |
| June 30, 2021 | | December 31, 2020 |
| Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Unamortized intangible assets: | | | | | | | | | | | |
Trademarks | | | | | $ | 1,201 | | | | | | | $ | 1,202 | |
| | | | | | | | | | | |
Amortized intangible assets: | | | | | | | | | | | |
Franchise agreements | $ | 895 | | | $ | 500 | | | $ | 395 | | | $ | 895 | | | $ | 487 | | | $ | 408 | |
Management agreements | 136 | | | 38 | | | 98 | | | 136 | | | 33 | | | 103 | |
Trademarks | 2 | | | 1 | | | 1 | | | 2 | | | 1 | | | 1 | |
Other | 1 | | | 1 | | | — | | | 1 | | | — | | | 1 | |
| $ | 1,034 | | | $ | 540 | | | $ | 494 | | | $ | 1,034 | | | $ | 521 | | | $ | 513 | |
| | |
7. FRANCHISING, MARKETING AND RESERVATION ACTIVITIES |
Royalties and franchise fee revenues on the Condensed Consolidated Statements of Income/(Loss) include initial franchise fees of $4 million and $5 million for the three months ended June 30, 2021 and 2020, respectively, and $7 million and $8 million for the six months ended June 30, 2021 and 2020, respectively.
In accordance with its franchise agreements, generally the Company is contractually obligated to expend the marketing and reservation fees it collects from franchisees for the operation of an international, centralized, brand-specific reservation system and for marketing purposes such as advertising, promotional and co-marketing programs, and training for the respective franchisees.
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 its brands, in building a new hotel to be flagged under one of its brands or in assisting in other franchisee expansion efforts. Provided the franchisee/hotel owner is in compliance with the terms of the franchise/management agreement, all or a portion of the development advance notes may be forgiven by the Company over the period of the franchise/management agreement, which typically ranges from 10 to 20 years. Otherwise, the related principal is due and payable to the Company. In certain instances, the Company may earn interest on unpaid franchisee development advance notes.
The Company recorded the following related to development advance notes on the Condensed Consolidated Financial Statements:
| | | | | | | | | | | |
Condensed Consolidated Balance Sheets: | June 30, 2021 | | December 31, 2020 |
Development advance notes (a) | $ | 101 | | | $ | 92 | |
_____________________
(a) Included within other non-current assets.
| | | | | | | | | | | | | | | | | | | | | | | |
Condensed Consolidated Statements of Income/(Loss): | Three Months Ended June 30, | | Six Months Ended June 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
Forgiveness of notes (a) | $ | 2 | | | $ | 2 | | | $ | 4 | | | $ | 4 | |
Bad debt expense related to notes | — | | | — | | | — | | | 1 | |
| | | | | | | |
______________________
(a) Amounts are recorded as a reduction of royalties and franchise fees and marketing, reservation and loyalty revenues.
| | | | | | | | | | | |
Condensed Consolidated Statements of Cash Flows: | Six Months Ended June 30, |
| 2021 | | 2020 |
Payments of development advance notes | $ | (17) | | | $ | (6) | |
Proceeds from development advance notes | 1 | | | — | |
Payments of development advance notes, net | $ | (16) | | | $ | (6) | |
| | | |
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 Wyndham Worldwide (“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 $13 million and $2 million for the six months ended June 30, 2021 and 2020, respectively.
The Company’s effective tax rates were a 26.9% tax provision on pre-tax income and a 21.6% tax benefit on pre-tax loss during the three months ended June 30, 2021 and 2020, respectively. The Company’s effective tax rates were a 27.3% tax provision on pre-tax income and a 20.8% tax benefit on pre-tax loss during the six months ended June 30, 2021 and 2020,
respectively. The increases in both periods were primarily related to goodwill impairment charges that are nondeductible for tax purposes in 2020 and the absence in 2021 of nonrecurring foreign and state tax benefits.
La Quinta Holdings, Inc. (“LQ”) and then affiliated entities in existence prior to their acquisition by the Company are currently under audit by the Internal Revenue Service (“IRS”) for tax years ended December 31, 2010 to December 31, 2016. The IRS has proposed adjustments for tax years 2010 to 2013 relating to entities that rem