Commitments and Contingencies |
3 Months Ended |
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Mar. 31, 2019 | |
| Commitments and Contingencies Disclosure [Abstract] | |
| Commitments and Contingencies |
Commitments and Contingencies
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, 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, fiduciary duty/trust claims, tax claims, environmental claims and landlord/tenant disputes.
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.
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 $14 million and $25 million as of March 31, 2019 and December 31, 2018. The Company also had receivables of $9 million and $21 million as of March 31, 2019 and December 31, 2018 for certain matters which are covered by insurance and were included in other current assets on its Condensed Consolidated Balance Sheets. 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 March 31, 2019, 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, 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 March 31, 2019, the maximum potential amount of future payments that may be made under these guarantees was $97 million with a combined annual cap of $26 million. 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 March 31, 2019, the Company maintained a liability of $25 million, of which $15 million was included in other non-current liabilities and $10 million was included in accrued expenses and other current liabilities on its Condensed Consolidated Balance Sheet. As of March 31, 2019, the Company also had a corresponding $10 million asset related to these guarantees which was included in other non-current assets on its Condensed Consolidated Balance Sheet. 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 Condensed Consolidated Balance Sheet. As of December 31, 2018, the Company also had a corresponding $11 million asset related to the guarantees, of which $1 million was included in other current assets and $10 million was included in other non-current assets on its Condensed Consolidated Balance Sheets. 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 and less than $1 million for the three months ended March 31, 2019 and 2018, respectively.
For guarantees subject to recapture provisions, the Company had receivables of $50 million as of March 31, 2019, which were included in other non-current assets on its Condensed Consolidated Balance Sheet. As of December 31, 2018, the Company had receivables of $46 million, of which $45 million were included in other non-current assets and $1 million was included in other current assets on its Condensed Consolidated 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 the event the Company chooses not to fund any future operating shortfalls under those management agreements, the owners of the hotels may terminate the agreements, which would eliminate the Company’s ability to realize its receivables. As of March 31, 2019 and December 31, 2018, the Company also had receivables of $20 million and $21 million, respectively, of deferred hotel management fees which are included within other non-current assets on the Condensed Consolidated Balance Sheets. As of March 31, 2019 and December 31, 2018, such receivables are fully offset by $20 million and $21 million, respectively, of deferred hotel management fees which are included within deferred income with the Condensed Consolidated 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.
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.
As of March 31, 2019, there were $130 million of outstanding guarantees provided by the Company. Such guarantees had a fair value of $62 million, and the Company had an offsetting $41 million receivable from its former Parent representing two-thirds of the fair value of the guarantees. 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 Condensed Consolidated Balance Sheets.
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, which was included in current assets as of March 31, 2019 on its Condensed Consolidated Balance Sheet. Such receivable is expected to be settled in the second quarter of 2019.
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 Destinations will generate from the sale of the business. The Company is entitled to one-third of the excess of net proceeds above a pre-set amount. The Company expects to receive $24 million from its former Parent and, as such, the Company has a net receivable of $24 million which was included in current assets on its Condensed Consolidated Balance Sheet as of March 31, 2019. Such net receivable consisted of a $70 million receivable from former Parent, partially offset by a $46 million payable to its former Parent related to income taxes on the sale, both of which, are expected to be settled in the second quarter of 2019.
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 March 31, 2019 and 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 Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018. In addition, the Company had $44 million of tax related receivables due from former Parent and subsidiaries as of March 31, 2019 and December 31, 2018, which was included within current assets on its Condensed Consolidated Balance Sheets.
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