Commitments and Contingencies |
9 Months Ended |
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Sep. 30, 2018 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies |
Commitments and Contingencies
The Company is involved in claims, legal and regulatory proceedings, and governmental inquiries related to the Company’s business.
Litigation
Wyndham Hotels 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, 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, fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes. The Company will assume 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.
Wyndham Hotels 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, Wyndham Hotels 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. Wyndham Hotels 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.
Wyndham Hotels believes that it has adequately accrued for such matters with reserves of $28 million and $3 million as of September 30, 2018 and December 31, 2017. For matters not requiring accrual, Wyndham Hotels believes that such matters will not have a material effect on its results of operations, financial position or cash flows based on information currently available. However, litigation is inherently unpredictable and, although Wyndham Hotels 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 Wyndham Hotels with respect to earnings and/or cash flows in any given reporting period. The Company had receivables of $25 million as of September 30, 2018 for certain matters which are covered by insurance and were included in other current assets on its Condensed Consolidated and Combined Balance Sheet. As of September 30, 2018, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to $28 million in excess of recorded accruals. However, Wyndham Hotels does not believe that the impact of such litigation will result in a material liability to Wyndham Hotels in relation to its combined financial position or liquidity.
Hotel Management Guarantees
The Company has 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 would be 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 be able to recapture all or a portion of the shortfall payments in the event that future operating results exceed targets. The original terms of the Company’s existing guarantees range from nine to ten years. As of September 30, 2018, the maximum potential amount of future payments that may be made under these guarantees was $104 million with a combined annual cap of $26 million. These guarantees have a remaining life of approximately four to six years with a weighted average life of approximately five years.
In connection with its performance guarantees, as of September 30, 2018, the Company maintained a liability of $23 million, of which $15 million was included in other non-current liabilities and $8 million was included in accrued expenses and other current liabilities on its Condensed Consolidated and Combined Balance Sheet. As of September 30, 2018, the Company also had a corresponding $11 million asset related to these guarantees, of which $10 million was included in other non-current assets and $1 million was included in other current assets on its Condensed Consolidated and Combined Balance Sheet. As of December 31, 2017, the Company maintained a liability of $23 million, of which $16 million was included in other non-current liabilities and $7 million was included in accrued expenses and other current liabilities on its Condensed Consolidated and Combined Balance Sheet. As of December 31, 2017, the Company also had a corresponding $12 million asset related to the guarantees, of which $1 million was included in other current assets and $11 million was included in other non-current assets on its Condensed Consolidated and Combined Balance Sheet. Such assets are being amortized on a straight-line basis over the life of the agreements. The amortization expense for the performance guarantees noted above was $1 million for the three months ended September 30, 2018 and 2017, and $1 million and $3 million for the nine months ended September 30, 2018 and 2017, respectively.
For guarantees subject to recapture provisions, the Company had a receivable of $44 million as of September 30, 2018, of which $42 million was included in other non-current assets and $2 million was included in other current assets on its Condensed Consolidated and Combined Balance Sheet. As of December 31, 2017, the Company had a receivable of $41 million which was included in other non-current assets on its Condensed Consolidated and Combined Balance Sheet. Such receivables were the result of payments made to date that are subject to recapture and which the Company believes will be recoverable from future operating performance.
Credit Support Provided and Other Indemnifications relating to Wyndham Worldwide’s Sale of its European Vacation Rentals Business
In May 2018, Wyndham Destination Network, LLC (“WDN”), a subsidiary of Wyndham Worldwide Corporation, and certain other Parent subsidiaries, completed the previously announced sale of the European Vacation Rentals business to Compass IV Limited, an affiliate of Platinum Equity, LLC.
In connection with the sale of the European Vacation Rentals business, the Company has provided certain post-closing credit support in the form of guarantees of up to approximately $87 million to ensure that the business meets the requirements of certain credit card service providers, travel association and regulatory authorities. The fair value of the Company's post-closing credit support of $87 million in guarantees resulted in the Company recording a liability of $41 million and a $27 million receivable from its former Parent representing two-thirds of such guarantee.
In addition, WDN has agreed that either it or Wyndham Hotels will provide an additional $46 million in post-closing credit support to certain regulatory authorities by September 30, 2018. In connection with such additional post-closing credit support, former Parent has deposited $46 million in escrow account funding. The escrow account funding will be released to Wyndham Destinations to the extent alternative post-closing credit support is provided by September 30, 2018, and the Company may receive one-third of any amount received in respect to the release of the escrow account. During third quarter 2018, the Company provided $46 million of credit support and recorded a liability of $22 million for the fair value of such credit support. Wyndham Destinations is responsible for two-thirds of such guarantee, and thus the Company recorded a receivable for two-thirds of the fair value of the guarantee, which amounted to $15 million. In connection with the alternative post-closing credit support, the Company also provided a guarantee in favor of Platinum Equity, LLC as credit support.
As a result of the Company providing the credit support, the escrow deposit of $46 million was released to the Company’s former Parent. The Company is entitled to one-third of the escrow deposit and recorded a receivable of approximately $15 million from Wyndham Destinations. This receivable will be settled with the Company’s former Parent in conjunction with the final calculation of the net proceeds from the sale of the European Vacation Rentals business to Compass IV Limited. Such post-closing credit support may be called if the European Vacation Rentals business fails to meets its primary obligation to pay amounts when due. Compass IV Limited has provided an indemnity to Wyndham Worldwide Corporation in the event that the post-closing credit support is enforced or called upon. Pursuant to the terms of the Separation and Distribution Agreement that was entered into in connection with the Distribution, the Company will assume one-third and Wyndham Destinations will assume two-thirds of any such losses actually incurred by Wyndham Destinations or the Company in the event that these credit support arrangements are enforced or called upon by any beneficiary and of any amounts received by Wyndham Destinations in respect of any indemnification claims made.
The total fair value of the Company’s post-closing credit support guarantees amounted to $63 million and was included in other non-current liabilities, and a $42 million receivable from its former Parent representing two-thirds of such guarantee which was included in other non-current assets on its Condensed Consolidated and Combined Balance Sheet.
License Agreement related to Wyndham Worldwide’s Sale of its European Vacation Rentals Business
In connection with its sale, the European Vacation Rentals business has entered into a 20-year agreement under which it will pay Wyndham Hotels a royalty fee of 1% of net revenue for the right to use the “by Wyndham” endorser brand. The Company recorded $3 million and $4 million of royalty fees related to this agreement for the three and nine months ended September 30, 2018, respectively.
Transfer of Former Parent Liabilities and Issuances of Guarantees to Former Parent and Affiliates
Upon the distribution of the Company’s common stock to Wyndham Worldwide shareholders, the Company entered into certain guarantee commitments with its former Parent. These guarantee arrangements relate to certain former Parent contingent tax and other corporate liabilities. The Company assumed and is responsible for one-third of such contingent liabilities while its former Parent is responsible for the remaining two-thirds. The remaining amount of liabilities which were assumed by the Company in connection with the spin-off was $27 million as of September 30, 2018, of which $26 million was included within other non-current liabilities and $1 million was included within current liabilities on its Condensed Consolidated and Combined Balance Sheet. In addition, the Company had $32 million of receivables due from former Parent and subsidiaries relating to income taxes as of September 30, 2018, which was included within current assets on its Condensed Consolidated and Combined Balance Sheet.
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