Commitments and Contingencies |
9 Months Ended |
|---|---|
Sep. 30, 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 $6 million and $25 million as of September 30, 2019 and December 31, 2018, respectively. The Company also had receivables of $1 million and $21 million as of September 30, 2019 and December 31, 2018, 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 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 September 30, 2019, the potential exposure resulting from adverse outcomes of such legal proceedings could, in the aggregate, range up to approximately $10 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 September 30, 2019, the maximum potential amount of future payments that may be made under these guarantees was $47 million with a combined annual cap of $26 million. These guarantees have a remaining life of approximately less than one to five years with a weighted average life of approximately four years.
During the third quarter of 2019, the Company entered into an agreement with an effective date of January 1, 2020, to terminate an unprofitable hotel-management agreement which contains operating performance guarantees and covers eight hotel properties. Upon the effective date of this termination arrangement, the Company will no longer be required to fund any operating shortfalls for this agreement.
During the second quarter of 2019, the Company determined that it expects to exit an unprofitable hotel-management agreement initiated in 2013. In conjunction with this management agreement, which was subject to recapture provisions and covers 22 hotels, the Company’s guarantee obligations have been exhausted, and the Company has elected not to support further out-of-pocket payments by its subsidiary to the hotels’ owner. The Company expects that this will result in the hotel-management agreement, including the Company’s ability to recapture out-of-pocket payments it had made to the hotels’ owner, being terminated. As a result of the decision to no longer support out-of-pocket payments and other factors, $48 million of receivables became fully impaired and were written off. Wyndham Hotels believes that the expected termination of the hotel-management agreement will not result in a material adverse effect on the Company. During the second quarter, the Company also wrote off a $10 million guarantee asset and derecognized a $13 million guarantee liability related to such management agreement. As such, the Company recorded a total net non-cash charge of $45 million which is reported within impairment, net on the Condensed Consolidated Statement of Income.
Subsequent to the effective dates of the termination agreements discussed above, the maximum potential amount of future payments that may be made under the Company's remaining hotel-management agreement with a performance guarantee will be $25 million, with an annual cap of $5 million.
In connection with its remaining performance guarantee, as of September 30, 2019, the Company maintained a liability of $13 million, comprised of deferred management fees and a guarantee liability, which was included in accrued expenses and other current liabilities on its Condensed Consolidated Balance Sheet. As of September 30, 2019, the Company had no assets related to these 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 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 Sheet. Such assets were amortized on a straight-line basis over the life of the agreements. The amortization expense for the performance guarantees noted above was less than $1 million and $1 million for the three and nine months ended September 30, 2019 and 2018, respectively.
For guarantees subject to recapture provisions, the Company had receivables of $5 million as of September 30, 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. 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 were subject to recapture and which the Company believed will be recoverable from future operating performance.
As of December 31, 2018, the Company also had receivables of $21 million of deferred hotel management fees which were included within other non-current assets on the Condensed Consolidated Balance Sheets and were fully offset by $21 million of deferred hotel management fees which were included within deferred income with the Condensed Consolidated Balance Sheets. These amounts were fully written off as of June 30, 2019.
Credit Support Provided and Other Indemnifications relating to Wyndham Worldwide’s Sale of its European Vacation Rentals Business
In May 2018, Wyndham Worldwide completed the sale of its 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 September 30, 2019, the Company had outstanding guarantees with a notional value of $127 million and a fair value of $61 million. The Company also 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 $61 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 Company was entitled to one-third of the excess of net proceeds from the sale above a pre-set amount. Accordingly, the Company had a net receivable of $40 million as of December 31, 2018, which it received from its former Parent during the second quarter of 2019. Such amount was included within capital contribution from former Parent on the Company’s Condensed Consolidated and Combined Statement of Cash Flows.
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