Commitments and Contingencies |
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Dec. 31, 2018 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Commitments and Contingencies |
Commitments and Contingencies
Commitments
Leases
Wyndham Hotels has noncancelable operating lease commitments covering various facilities and equipment. Future minimum lease payments required under noncancelable operating leases as of December 31, 2018 are as follows:
Wyndham Hotels incurred total rent expense of $8 million, $5 million and $4 million during 2018, 2017 and 2016, respectively.
Purchase Commitments
In the normal course of business, Wyndham Hotels makes various commitments to purchase goods or services and other capital expenditures from specific suppliers. Purchase commitments entered into by Wyndham Hotels aggregated $130 million as of December 31, 2018, of which $89 million was for information technology. In addition, the Company assumed a tax liability of $205 million related to the La Quinta acquisition which is expected to be paid in early 2019 to tax authorities and/or CorePoint.
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 $25 million and $3 million as of December 31, 2018 and December 31, 2017. The Company also had receivables of $21 million as of December 31, 2018 for certain matters which are covered by insurance and were included in other current assets on its Consolidated and Combined Balance Sheet. 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. As of December 31, 2018, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately $35 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.
Guarantees
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 December 31, 2018, the maximum potential amount of future payments that may be made under these guarantees was $103 million with a combined annual cap of $26 million. In 2018, the Company expensed $4 million related to such guarantees. These guarantees have a remaining life of approximately four to five years with a weighted average life of approximately four years.
In connection with its performance guarantees, as of December 31, 2018, the Company maintained a liability of $24 million, of which $15 million was included in other non-current liabilities and $9 million was included in accrued expenses and other current liabilities on its Consolidated and Combined Balance Sheet. As of December 31, 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 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 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 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, $2 million and $4 million for 2018, 2017 and 2016, respectively.
For guarantees subject to recapture provisions, the Company had a receivable of $46 million as of December 31, 2018, of which $45 million was included in other non-current assets and $1 million was included in other current assets on its 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 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. In addition, as of December 31, 2018 and 2017, the Company also had a receivable of $21 million and $19 million, respectively, of deferred hotel management fees included within other non-current assets on the Consolidated and Combined Balance Sheets. Such receivables are fully offset by the $21 million and $19 million of deferred hotel management fees which are included within deferred income with the Consolidated and Combined Balance Sheets.
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, completed the sale of Wyndham Worldwide’s 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 provided certain post-closing credit support in the form of guarantees to help ensure that the business meets the requirements of certain credit card service providers, travel association and regulatory authorities.
During the third quarter of 2018, the Company provided additional post-closing credit support to certain regulatory authorities and Platinum Equity, LLC in the form of guarantees and during the fourth quarter of 2018, the Company was released from a portion of the post-closing credit support guarantees.
Pursuant to the terms of the Separation and Distribution Agreement that was entered into in connection with the Company’s spin-off, the Company will assume one-third and Wyndham Destinations will assume two-thirds of losses that may be incurred by Wyndham Destinations or the Company in the event that these credit support arrangements are enforced or called upon by any beneficiary in respect of any indemnification claims made.
The table below summaries the post-closing credit support guarantees related to the sale of the European Vacation Rentals business, the fair values of such guarantees and the receivables from its former Parent representing two-thirds of such guarantees at December 31, 2018:
The fair value of the guarantees of $62 million was included in other non-current liabilities and the $41 million receivable from its former Parent was included in other non-current assets on its Consolidated and Combined Balance Sheet.
In connection with the sale of the European Vacation Rentals business, the former Parent had deposited $46 million in an escrow account for post-closing credit support to certain regulatory authorities. As a result of the Company providing the additional post-closing credit support during the third quarter of 2018, the $46 million escrow deposit was released to the Company’s former Parent. The Company is entitled to one-third of such escrow deposit refund and as a result, recorded a receivable of $15 million from its former Parent.
During the first quarter of 2019, the working capital adjustment associated with the sale of the European Vacation Rentals business was finalized, which allowed the Company to estimate the net proceeds that Wyndham Destination will generate from the sale of the business. Because the Company is entitled to one-third of the excess of net proceeds above a pre-set amount, the Company recorded a receivable of $24 million from its former Parent as of December 31, 2018. The Company’s total receivable of $39 million from its former Parent was included in current assets on its Consolidated and Combined Balance Sheet. Such 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.
License Agreement related to Wyndham Worldwide’s Sale of its European Vacation Rentals Business
In connection with its sale, the European Vacation Rentals business 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 $5 million of royalty fees related to this agreement in 2018.
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 amount of liabilities assumed by the Company in connection with the spin-off was $24 million as of December 31, 2018, which were included within other non-current liabilities. The Company also had an $11 million liability due to its former Parent primarily related to taxes which was included within current liabilities on its Consolidated and Combined Balance Sheet. In addition, the Company had $44 million of tax related receivables due from former Parent and subsidiaries as of December 31, 2018, which was included within current assets on its Consolidated and Combined Balance Sheet.
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