UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
| |
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
OR
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o | 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 001-32876
WYNDHAM DESTINATIONS, INC.
(Exact Name of Registrant as Specified in Its Charter)
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| | |
Delaware | | 20-0052541 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
| | |
6277 Sea Harbor Drive | | 32821 |
Orlando, Florida | | (Zip Code) |
(Address of Principal Executive Offices) | | |
(407) 626-5200
(Registrant’s Telephone Number, Including Area Code)
None
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
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 and posted 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, 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.
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| | | | | | | |
Large accelerated filer | þ | | | | | Accelerated filer | o |
Non-accelerated filer | o | | | |
| | | | | | Smaller reporting company | o |
| | | | | | Emerging growth company | o |
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 o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the last practicable date:
99,418,820 shares of common stock outstanding as of July 31, 2018.
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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GLOSSARY OF TERMS
The following terms and acronyms appear in the text of this report and have the definitions indicated below:
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Adjusted EBITDA | A non-GAAP measure, defined by the company as net income before depreciation and amortization, interest expense (excluding consumer financing interest), early extinguishment of debt, interest income (excluding consumer financing revenues) and income taxes, each of which is presented on the Condensed Consolidated Statements of Income. Adjusted EBITDA also excludes stock-based compensation costs, separation and restructuring costs, transaction costs, impairments, and items that meet the conditions of unusual and/or infrequent. |
AOCI Accumulated Other Comprehensive Income
Barclays Barclays Bank PLC’s
Board Board of Directors
Buyer Compass IV Limited, and affiliate of Platinum Equity, LLC
Company Wyndham Destinations, Inc. and its subsidiaries
EBITDA Earnings Before Income Taxes and Depreciation/Amortization
EPS Earnings Per Share
Exchange Act Securities Exchange Act of 1934
FASB Financial Accounting Standards Board
FICO Fair Isaac Corporation
GAAP Generally Accepted Accounting Principles in the United States
IRS United States Internal Revenue Service
La Quinta La Quinta Holdings Inc.
LIBOR London Interbank Offered Rate
Moody’s Moody’s Investors Service, Inc.
NM Not meaningful
NQ Non-Qualified stock options
PCAOB Public Company Accounting Oversight Board
PSU Performance-vested restricted Stock Units
RSU Restricted Stock Unit
S&P Standard & Poor’s Rating Services
SEC Securities and Exchange Commission
SPE Special Purpose Entity
SSAR Stock-Settled Appreciation Rights
U.S. United States of America
VIE Variable Interest Entity
VOI Vacation Ownership Interest
VPG Volume Per Guest
WAAM Wyndham Asset Affiliation Model
Wyndham Hotels Wyndham Hotels & Resorts, Inc.
Wyndham Destinations Wyndham Destinations, Inc.
Wyndham Worldwide Wyndham Worldwide Corporation
PART I — FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements (Unaudited).
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of Directors of
Wyndham Destinations, Inc.
Results of Review of Interim Financial Statements
We have reviewed the accompanying condensed consolidated balance sheet of Wyndham Destinations, Inc. (formerly Wyndham Worldwide Corporation) and subsidiaries (the "Company") as of June 30, 2018, the related condensed consolidated statements of income, comprehensive income and (deficit)/equity, for the three-month and six-month periods ended June 30, 2018 and 2017, and of cash flows for the six-month periods ended June 30, 2018 and 2017, 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, 2017, and the related consolidated statements of income, comprehensive income, cash flows and equity for the year then ended prior to reclassification for the discontinued operations described in Note 6 (not presented herein) and prior to retrospective adjustment for a change in the Company's method of accounting for revenue from contracts with customers under Financial Accounting Standards Board Accounting Standards Codification 606, Revenues from Contracts with Customers described in Note 2 (not presented herein); and in our report dated February 16, 2018, we expressed an unqualified opinion on those consolidated financial statements. We also audited the adjustments described in Note 6 and Note 2 that were applied to reclassify and retrospectively adjust the December 31, 2017, consolidated balance sheet of the Company (not presented herein). In our opinion, such adjustments are appropriate and have been properly applied to the previously issued consolidated balance sheet in deriving the accompanying retrospectively adjusted condensed consolidated balance sheet as of December 31, 2017.
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
Tampa, FL
August 9, 2018
WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net revenues | | | | | | | |
Service and membership fees | $ | 409 |
| | $ | 401 |
| | $ | 828 |
| | $ | 810 |
|
Vacation ownership interest sales | 462 |
| | 446 |
| | 820 |
| | 796 |
|
Consumer financing | 120 |
| | 114 |
| | 237 |
| | 224 |
|
Other | 16 |
| | 17 |
| | 29 |
| | 30 |
|
Net revenues | 1,007 |
| | 978 |
| | 1,914 |
| | 1,860 |
|
Expenses | | | | | | | |
Operating | 418 |
| | 415 |
| | 821 |
| | 810 |
|
Cost of vacation ownership interests | 47 |
| | 38 |
| | 78 |
| | 75 |
|
Consumer financing interest | 20 |
| | 19 |
| | 39 |
| | 37 |
|
Marketing and reservation | 155 |
| | 140 |
| | 286 |
| | 258 |
|
General and administrative | 133 |
| | 153 |
| | 286 |
| | 304 |
|
Separation and related costs | 133 |
| | — |
| | 163 |
| | — |
|
Asset impairments | — |
| | 135 |
| | — |
| | 140 |
|
Restructuring | — |
| | — |
| | — |
| | 6 |
|
Depreciation and amortization | 36 |
| | 33 |
| | 73 |
| | 65 |
|
Total expenses | 942 |
| | 933 |
| | 1,746 |
| | 1,695 |
|
Operating income | 65 |
| | 45 |
| | 168 |
| | 165 |
|
Other (income), net | (5 | ) | | (3 | ) | | (11 | ) | | (3 | ) |
Interest expense | 46 |
| | 39 |
| | 91 |
| | 73 |
|
Interest (income) | (2 | ) | | (1 | ) | | (3 | ) | | (3 | ) |
Income before income taxes | 26 |
| | 10 |
| | 91 |
| | 98 |
|
Provision/(benefit) for income taxes | 38 |
| | (4 | ) | | 62 |
| | (2 | ) |
(Loss)/income from continuing operations | (12 | ) | | 14 |
| | 29 |
| | 100 |
|
(Loss)/income from operations of discontinued businesses, net of income taxes | (42 | ) | | 71 |
| | (49 | ) | | 75 |
|
Income on disposal of discontinued businesses, net of income taxes | 432 |
| | — |
| | 432 |
| | — |
|
Net income | $ | 378 |
| | $ | 85 |
| | $ | 412 |
| | $ | 175 |
|
| | | | | | | |
Basic (loss)/earnings per share | | | | | | | |
Continuing operations | $ | (0.12 | ) | | $ | 0.13 |
| | $ | 0.29 |
| | $ | 0.95 |
|
Discontinued operations | 3.90 |
| | 0.69 |
| | 3.83 |
| | 0.72 |
|
| $ | 3.78 |
| | $ | 0.82 |
| | $ | 4.12 |
| | $ | 1.67 |
|
Diluted (loss)/earnings per share | | | | | | | |
Continuing operations | $ | (0.12 | ) | | $ | 0.13 |
| | $ | 0.29 |
| | $ | 0.95 |
|
Discontinued operations | 3.89 |
| | 0.68 |
| | 3.82 |
| | 0.72 |
|
| $ | 3.77 |
| | $ | 0.81 |
| | $ | 4.11 |
| | $ | 1.67 |
|
| | | | | | | |
Cash dividends declared per share | $ | 0.41 |
| | $ | 0.58 |
| | $ | 1.07 |
| | $ | 1.16 |
|
See Notes to Condensed Consolidated Financial Statements.
2
WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Net income | $ | 378 |
| | $ | 85 |
| | $ | 412 |
| | $ | 175 |
|
Other comprehensive (loss)/income, net of tax | | | | | | | |
Foreign currency translation adjustments | (33 | ) | | 40 |
| | (19 | ) | | 69 |
|
Unrealized gain on cash flow hedges | 1 |
| | — |
| | — |
| | — |
|
Defined benefit pension plans | 3 |
| | — |
| | 4 |
| | — |
|
Other comprehensive (loss)/income, net of tax | (29 | ) | | 40 |
| | (15 | ) | | 69 |
|
Comprehensive Income | $ | 349 |
| | $ | 125 |
| | $ | 397 |
| | $ | 244 |
|
See Notes to Condensed Consolidated Financial Statements.
3
WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
(Unaudited)
|
| | | | | | | |
| June 30,
2018 | | December 31,
2017 |
Assets | | | |
Cash and cash equivalents | $ | 155 |
| | $ | 48 |
|
Trade receivables, net | 206 |
| | 195 |
|
Vacation ownership contract receivables, net | 2,904 |
| | 2,901 |
|
Inventory | 1,243 |
| | 1,249 |
|
Prepaid expenses | 157 |
| | 118 |
|
Property and equipment, net | 764 |
| | 822 |
|
Goodwill | 940 |
| | 911 |
|
Other intangibles, net | 146 |
| | 143 |
|
Other assets | 560 |
| | 499 |
|
Assets of discontinued operations | — |
| | 3,564 |
|
Total assets | $ | 7,075 |
| | $ | 10,450 |
|
Liabilities and (Deficit)/Equity | | | |
Accounts payable | $ | 197 |
| | $ | 232 |
|
Deferred income | 592 |
| | 559 |
|
Accrued expenses and other liabilities | 1,031 |
| | 847 |
|
Non-recourse vacation ownership debt | 2,094 |
| | 2,098 |
|
Debt | 2,980 |
| | 3,908 |
|
Deferred income taxes | 701 |
| | 613 |
|
Liabilities of discontinued operations | — |
| | 1,419 |
|
Total liabilities | 7,595 |
| | 9,676 |
|
Commitments and contingencies (Note 14) |
| |
|
Stockholders' (deficit)/equity: | | | |
Preferred stock, $.01 par value, authorized 6,000,000 shares, none issued and outstanding | — |
| | — |
|
Common stock, $.01 par value, 600,000,000 shares authorized, 219,823,123 issued as of 2018 and 218,796,817 as of 2017 | 2 |
| | 2 |
|
Treasury stock, at cost – 120,111,812 shares as of 2018 and 118,887,441 shares as of 2017 | (5,837 | ) | | (5,719 | ) |
Additional paid-in capital | 4,051 |
| | 3,996 |
|
Retained earnings | 1,285 |
| | 2,501 |
|
Accumulated other comprehensive loss | (26 | ) | | (11 | ) |
Total stockholders’ (deficit)/equity | (525 | ) | | 769 |
|
Noncontrolling interest | 5 |
| | 5 |
|
Total (deficit)/equity | (520 | ) | | 774 |
|
Total liabilities and (deficit)/equity | $ | 7,075 |
| | $ | 10,450 |
|
See Notes to Condensed Consolidated Financial Statements.
4
WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
Operating Activities | | | |
Net income | $ | 412 |
| | $ | 175 |
|
(Income)/loss from operations of discontinued businesses, net of income taxes | 49 |
| | (75 | ) |
(Income) on disposal of discontinued businesses, net of income taxes | (432 | ) | | — |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 73 |
| | 65 |
|
Provision for loan losses | 218 |
| | 195 |
|
Deferred income taxes | 74 |
| | 21 |
|
Stock-based compensation | 109 |
| | 27 |
|
Asset impairments | 9 |
| | 140 |
|
Non-cash interest | 8 |
| | 11 |
|
Net change in assets and liabilities, excluding the impact of acquisitions and dispositions: | | | |
Trade receivables | (28 | ) | | 8 |
|
Vacation ownership contract receivables | (233 | ) | | (197 | ) |
Inventory | (64 | ) | | (53 | ) |
Deferred income | 42 |
| | 31 |
|
Accounts payable, accrued expenses, other assets and other liabilities | (144 | ) | | (117 | ) |
Net cash provided by operating activities - continuing operations | 93 |
| | 231 |
|
Net cash provided by operating activities - discontinued operations | 212 |
| | 431 |
|
Net cash provided by operating activities | 305 |
| | 662 |
|
Investing Activities | | | |
Property and equipment additions | (41 | ) | | (51 | ) |
Net assets acquired, net of cash acquired, and acquisition-related payments | (5 | ) | | (5 | ) |
Other, net | (6 | ) | | 13 |
|
Cash used in investing activities - continuing operations | (52 | ) | | (43 | ) |
Cash used in investing activities - discontinued operations | (672 | ) | | (26 | ) |
Net cash used in investing activities | (724 | ) | | (69 | ) |
Financing Activities | | | |
Proceeds from non-recourse vacation ownership debt | 924 |
| | 820 |
|
Principal payments on non-recourse vacation ownership debt | (931 | ) | | (912 | ) |
Proceeds from debt | 2,281 |
| | 564 |
|
Principal payments on debt | (2,491 | ) | | (604 | ) |
Repayments of commercial paper, net | (147 | ) | | (72 | ) |
Proceeds from notes issued and term loan | 300 |
| | 694 |
|
Repayment/repurchase of notes | (789 | ) | | (300 | ) |
Repayments of vacation ownership inventory arrangement | (7 | ) | | (22 | ) |
Dividends to shareholders | (114 | ) | | (125 | ) |
Cash transferred to Wyndham Hotels at spin-off | (495 | ) | | — |
|
Repurchase of common stock | (123 | ) | | (300 | ) |
Debt issuance costs | (9 | ) | | (7 | ) |
Net share settlement of incentive equity awards | (67 | ) | | (34 | ) |
Other, net | (2 | ) | | — |
|
Cash used in financing activities - continuing operations | (1,670 | ) | | (298 | ) |
Cash provided by/(used in) financing activities - discontinued operations | 2,066 |
| | (11 | ) |
Net cash provided by/(used in) financing activities | 396 |
| | (309 | ) |
Effect of changes in exchange rates on cash, cash equivalents and restricted cash | (6 | ) | | 11 |
|
Net change in cash, cash equivalents and restricted cash | (29 | ) | | 295 |
|
Cash, cash equivalents and restricted cash, beginning of period | 416 |
| | 333 |
|
Cash, cash equivalents and restricted cash, end of period | 387 |
| | 628 |
|
Less cash, cash equivalents and restricted cash of discontinued operations, end of period | — |
| | 310 |
|
Cash, cash equivalents and restricted cash of continuing operations, end of period | $ | 387 |
| | $ | 318 |
|
See Notes to Condensed Consolidated Financial Statements.
5
WYNDHAM DESTINATIONS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF (DEFICIT)/EQUITY
(In millions)
(Unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss)/ Income | | Non-controlling Interest | | Total Equity/(Deficit) |
Balance as of December 31, 2017 | 100 |
| | $ | 2 |
| | $ | (5,719 | ) | | $ | 3,996 |
| | $ | 2,501 |
| | $ | (11 | ) | | $ | 5 |
| | $ | 774 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 412 |
| | — |
| | — |
| | 412 |
|
Other comprehensive loss | — |
| | — |
| | — |
| | — |
| | — |
| | (15 | ) | | — |
| | (15 | ) |
Issuance of shares for RSU vesting | 1 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Net share settlement of stock-based compensation | — |
| | — |
| | — |
| | (67 | ) | | — |
| | — |
| | — |
| | (67 | ) |
Change in stock-based compensation | — |
| | — |
| | — |
| | 130 |
| | — |
| | — |
| | — |
| | 130 |
|
Change in stock-based compensation and impact of equity restructuring for Board of Directors | — |
| | — |
| | — |
| | (8 | ) | | — |
| | — |
| | — |
| | (8 | ) |
Repurchase of common stock | (1 | ) | | — |
| | (118 | ) | | — |
| | — |
| | — |
| | — |
| | (118 | ) |
Dividends | — |
| | — |
| | — |
| | — |
| | (110 | ) | | — |
| | — |
| | (110 | ) |
Cumulative-effective adjustment
| — |
| | — |
| | — |
| | — |
| | (19 | ) | | — |
| | — |
| | (19 | ) |
Spin-off of Wyndham Hotels | — |
| | | | — |
| |
| | (1,499 | ) | | — |
| | | | (1,499 | ) |
Balance as of June 30, 2018 | 100 |
|
| $ | 2 |
|
| $ | (5,837 | ) |
| $ | 4,051 |
|
| $ | 1,285 |
|
| $ | (26 | ) |
| $ | 5 |
| | $ | (520 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Common Stock | | Treasury Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive (Loss)/Income | | Non-controlling Interest | | Total Equity |
Balance as of December 31, 2016 | 106 |
| | $ | 2 |
| | $ | (5,118 | ) | | $ | 3,966 |
| | $ | 1,886 |
| | $ | (106 | ) | | $ | 4 |
| | $ | 634 |
|
Net income | — |
| | — |
| | — |
| | — |
| | 175 |
| | — |
| | — |
| | 175 |
|
Other comprehensive income | — |
| | — |
| | — |
| | — |
| | — |
| | 69 |
| | — |
| | 69 |
|
Net share settlement of stock-based compensation | — |
| | — |
| | — |
| | (34 | ) | | — |
| | — |
| | — |
| | (34 | ) |
Change in stock-based compensation | — |
| | — |
| | — |
| | 31 |
| | — |
| | — |
| | — |
| | 31 |
|
Change in stock-based compensation for Board of Directors | — |
| | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
Repurchase of common stock | (3 | ) | | — |
| | (300 | ) | | — |
| | — |
| | — |
| | — |
| | (300 | ) |
Dividends | — |
| | — |
| | — |
| | — |
| | (119 | ) | | — |
| | — |
| | (119 | ) |
Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | 1 |
|
Balance as of June 30, 2017 | 103 |
| | $ | 2 |
| | $ | (5,418 | ) | | $ | 3,964 |
| | $ | 1,942 |
| | $ | (37 | ) | | $ | 5 |
| | $ | 458 |
|
See Notes to Condensed Consolidated Financial Statements.
6
WYNDHAM DESTINATIONS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unless otherwise noted, all amounts are in millions, except share and per share amounts)
(Unaudited)
| |
1. | Background and Basis of Presentation |
Background
Wyndham Destinations, Inc., formerly known as Wyndham Worldwide Corporation, and its subsidiaries (collectively, “Wyndham Destinations” or the “Company”) is a global provider of hospitality services and products. The Company operates in two segments: Vacation Ownership and Exchange & Rentals. The Vacation Ownership segment develops, markets and sells vacation ownership interests (“VOIs”) to individual consumers, provides consumer financing in connection with the sale of VOIs and provides property management services at resorts. The Exchange & Rentals segment provides vacation exchange services and products to owners of VOIs and manages and markets vacation rental properties primarily on behalf of independent owners.
On May 31, 2018, the Company completed the previously announced spin-off of its hotel business into a separate publicly traded company, Wyndham Hotels & Resorts, Inc. (“Wyndham Hotels”). This transaction was effected through a pro rata distribution of the new hotel entity’s stock to existing Wyndham Destinations shareholders. In connection with the spin-off, the Company entered into certain agreements with Wyndham Hotels to implement the legal and structural separation, govern the relationship between the Company and Wyndham Hotels up to and after the completion of the separation, and allocate various assets, liabilities and obligations, including, among other things, employee benefits, intellectual property and tax-related assets and liabilities between the Company and Wyndham Hotels. The two public companies have entered into long-term exclusive license agreements to retain their affiliations with one of the industry’s top-rated loyalty programs, Wyndham Rewards, as well as to continue to collaborate on inventory-sharing and customer cross-sell initiatives.
On May 9, 2018, the Company completed the sale of its European vacation rentals business.
For all periods presented, the Company has classified the results of operations for its hotel business and its European vacation rentals business as discontinued operations. See further detail in Note 6—Discontinued Operations.
Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements in this Quarterly Report on Form 10-Q include the accounts and transactions of Wyndham Destinations, as well as the entities in which Wyndham Destinations directly or indirectly 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.”). All intercompany balances and transactions have been eliminated in the Condensed Consolidated Financial Statements. In addition, certain prior period amounts have been reclassified to comply with newly adopted accounting standards. See further detail in Note 2—New Accounting Pronouncements.
The Company changed its balance sheet presentation from classified (distinguishing between short-term and long-term accounts) to unclassified (no such distinction) in the second quarter of 2018. This change was prompted by the spin-off of Wyndham Hotels at which time the Company became predominantly a real-estate timeshare company. This presentation will conform to that of the Company’s peers within the timeshare industry. Both the December 31, 2017 and the June 30, 2018 Condensed Consolidated Balance Sheets have been presented in an unclassified format.
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 2017 Consolidated Financial Statements included in its Annual Report filed on Form 10-K with the Securities and Exchange Commission on February 16, 2018.
| |
2. | New Accounting Pronouncements |
Recently Issued Accounting Pronouncements
Leases. In February 2016, the Financial Accounting Standards Board (“FASB”) issued new guidance for lease accounting. This guidance along with its subsequent corresponding updates requires companies generally to recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. Progress continues with our implementation efforts, including the evaluation of the impact that adoption of this new guidance will have on our financial statements and disclosures. We expect that the new guidance for lease accounting will have a material effect on our consolidated balance sheets.
Financial Instruments - Credit Losses. In June 2016, the FASB issued guidance which amends the guidance on measuring credit losses on financial assets held at amortized cost. The guidance requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Simplifying the Test for Goodwill Impairment. In January 2017, the FASB issued guidance which simplifies the current two-step goodwill impairment test by eliminating Step 2 of the test. The guidance requires a one-step impairment test in which an entity compares the fair value of a reporting unit with its carrying amount and recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, if any. This guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years, and should be applied on a prospective basis. Early adoption is permitted for the interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Derivatives and Hedging - Targeted Improvements to Accounting for Hedging Activities. In August 2017, the FASB issued guidance intended to better align an entity’s risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. The guidance will expand and refine hedge accounting for both nonfinancial and financial risk components and align the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Reporting Comprehensive Income - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. In February 2018, the FASB issued guidance allowing for the reclassification of the stranded tax effects resulting from the implementation of the Tax Cuts and Jobs Act from accumulated other comprehensive income (“AOCI”) to retained earnings. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Stock Compensation - Improvements to Nonemployee Share-Based Payment Accounting. In June 2018, the FASB issued guidance intended to simplify nonemployee share-based payment accounting. This new guidance will more closely align the accounting for share-based payment awards issued to employees and nonemployees. This guidance is effective for fiscal years beginning after December 15, 2018 and for interim periods within those fiscal years, with early adoption permitted. The Company is currently evaluating the impact of the adoption of this guidance on its financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
Revenue from Contracts with Customers. In May 2014, the FASB issued guidance on revenue from contracts with customers. The guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The guidance also requires disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Entities have the option to apply the new guidance under a retrospective approach to each prior reporting period presented or a modified retrospective approach with the cumulative effect of initially applying the new guidance recognized at the date of initial application within the statement of financial
position. The Company adopted the guidance on January 1, 2018 utilizing the full retrospective transition method. This new guidance had a minimal impact on the Company’s continuing operations.
The tables below summarize the impact of the adoption of the new revenue standard and reclassifications related to discontinued operations on the Company’s Condensed Consolidated Income Statements:
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, 2017 |
Net revenues | Previously Reported Balance | | Discontinued Operations* | | New Revenue Standard Adjustment | | Adjusted Balance |
Service and membership fees | $ | 653 |
| | $ | (247 | ) | | $ | (5 | ) | | $ | 401 |
|
Vacation ownership interest sales | 448 |
| | (1 | ) | | (1 | ) | | 446 |
|
Franchise fees | 177 |
| | (177 | ) | | — |
| | — |
|
Consumer financing | 114 |
| | — |
| | — |
| | 114 |
|
Other | 87 |
| | (76 | ) | | 6 |
| | 17 |
|
Net revenues | 1,479 |
| | (501 | ) | | — |
| | 978 |
|
Expenses | | | | | | | |
Operating | 654 |
| | (230 | ) | | (9 | ) | | 415 |
|
Cost of vacation ownership interests | 38 |
| | — |
| | — |
| | 38 |
|
Consumer financing interest | 19 |
| | — |
| | — |
| | 19 |
|
Marketing and reservation | 231 |
| | (96 | ) | | 5 |
| | 140 |
|
General and administrative | 191 |
| | (40 | ) | | 2 |
| | 153 |
|
Asset impairments | 135 |
| | — |
| | — |
| | 135 |
|
Depreciation and amortization | 66 |
| | (33 | ) | | — |
| | 33 |
|
Total expenses | 1,334 |
| | (399 | ) | | (2 | ) | | 933 |
|
Operating income | 145 |
| | (102 | ) | | 2 |
| | 45 |
|
Other (income), net | (3 | ) | | — |
| | — |
| | (3 | ) |
Interest expense | 39 |
| | — |
| | — |
| | 39 |
|
Interest (income) | (2 | ) | | 1 |
| | — |
| | (1 | ) |
Income before income taxes | 111 |
| | (103 | ) | | 2 |
| | 10 |
|
Provision/(benefit) for income taxes | 33 |
| | (38 | ) | | 1 |
| | (4 | ) |
Income from continuing operations | 78 |
| | (65 | ) | | 1 |
| | 14 |
|
Income from operations of discontinued businesses, net of income taxes | — |
| | 65 |
| | 6 |
| | 71 |
|
Net income | $ | 78 |
| | $ | — |
| | $ | 7 |
| | $ | 85 |
|
| | | | | | | |
Basic earnings per share | | | | | | | |
Continuing operations | $ | 0.75 |
| | $ | (0.63 | ) | | $ | 0.01 |
| | $ | 0.13 |
|
Discontinued operations | — |
| | 0.63 |
| | 0.06 |
| | 0.69 |
|
| $ | 0.75 |
| | $ | — |
| | $ | 0.07 |
| | $ | 0.82 |
|
Diluted earnings per share | | | | | | | |
Continuing operations | $ | 0.75 |
| | $ | (0.62 | ) | | $ | — |
| | $ | 0.13 |
|
Discontinued operations | — |
| | 0.62 |
| | 0.06 |
| | 0.68 |
|
| $ | 0.75 |
| | $ | — |
| | $ | 0.06 |
| | $ | 0.81 |
|
*Excludes the impact of the new revenue standard.
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
Net revenues | Previously Reported Balance | | Discontinued Operations* | | New Revenue Standard Adjustment | | Adjusted Balance |
Service and membership fees | $ | 1,289 |
| | $ | (465 | ) | | $ | (14 | ) | | $ | 810 |
|
Vacation ownership interest sales | 798 |
| | — |
| | (2 | ) | | 796 |
|
Franchise fees | 318 |
| | (318 | ) | | — |
| | — |
|
Consumer financing | 224 |
| | — |
| | — |
| | 224 |
|
Other | 169 |
| | (149 | ) | | 10 |
| | 30 |
|
Net revenues | 2,798 |
| | (932 | ) | | (6 | ) | | 1,860 |
|
Expenses | | | | | | | |
Operating | 1,254 |
| | (427 | ) | | (17 | ) | | 810 |
|
Cost of vacation ownership interests | 75 |
| | — |
| | — |
| | 75 |
|
Consumer financing interest | 37 |
| | — |
| | — |
| | 37 |
|
Marketing and reservation | 426 |
| | (176 | ) | | 8 |
| | 258 |
|
General and administrative | 383 |
| | (83 | ) | | 4 |
| | 304 |
|
Asset impairments | 140 |
| | — |
| | — |
| | 140 |
|
Restructuring | 7 |
| | (1 | ) | | — |
| | 6 |
|
Depreciation and amortization | 128 |
| | (63 | ) | | — |
| | 65 |
|
Total expenses | 2,450 |
| | (750 | ) | | (5 | ) | | 1,695 |
|
Operating income | 348 |
| | (182 | ) | | (1 | ) | | 165 |
|
Other (income), net | (4 | ) | | 1 |
| | — |
| | (3 | ) |
Interest expense | 73 |
| | — |
| | — |
| | 73 |
|
Interest (income) | (4 | ) | | 1 |
| | — |
| | (3 | ) |
Income before income taxes | 283 |
| | (184 | ) | | (1 | ) | | 98 |
|
Provision/(benefit) for income taxes | 64 |
| | (66 | ) | | — |
| | (2 | ) |
Income from continuing operations | 219 |
| | (118 | ) | | (1 | ) | | 100 |
|
Income from operations of discontinued businesses, net of income taxes | — |
| | 118 |
| | (43 | ) | | 75 |
|
Net income | $ | 219 |
| | $ | — |
| | $ | (44 | ) | | $ | 175 |
|
| | | | | | | |
Basic earnings per share | | | | | | | |
Continuing operations | $ | 2.10 |
| | $ | (1.13 | ) | | $ | (0.02 | ) | | $ | 0.95 |
|
Discontinued operations | — |
| | 1.13 |
| | (0.41 | ) | | 0.72 |
|
| $ | 2.10 |
| | $ | — |
| | $ | (0.43 | ) | | $ | 1.67 |
|
Diluted earnings per share | | | | | | | |
Continuing operations | $ | 2.09 |
| | $ | (1.12 | ) | | $ | (0.02 | ) | | $ | 0.95 |
|
Discontinued operations | — |
| | 1.12 |
| | (0.40 | ) | | 0.72 |
|
| $ | 2.09 |
| | $ | — |
| | $ | (0.42 | ) | | $ | 1.67 |
|
*Excludes the impact of the new revenue standard.
|
| | | | | | | | | | | | | | | |
| Year Ended December 31, 2017 |
Net revenues | Previously Reported Balance | | Discontinued Operations* | | New Revenue Standard
Adjustment | | Adjusted Balance |
Service and membership fees | $ | 1,895 |
| | $ | (269 | ) | | $ | (27 | ) | | $ | 1,599 |
|
Vacation ownership interest sales | 1,689 |
| | — |
| | (5 | ) | | 1,684 |
|
Franchise fees | 695 |
| | (695 | ) | | — |
| | — |
|
Consumer financing | 463 |
| | — |
| | — |
| | 463 |
|
Other | 334 |
| | (297 | ) | | 23 |
| | 60 |
|
Net revenues | 5,076 |
| | (1,261 | ) | | (9 | ) | | 3,806 |
|
Expenses | | | | | | | |
Operating | 2,194 |
| | (523 | ) | | (35 | ) | | 1,636 |
|
Cost of vacation ownership interests | 150 |
| | — |
| | — |
| | 150 |
|
Consumer financing interest | 74 |
| | — |
| | — |
| | 74 |
|
Marketing and reservation | 773 |
| | (247 | ) | | 20 |
| | 546 |
|
General and administrative | 648 |
| | (75 | ) | | 7 |
| | 580 |
|
Separation and related costs | 51 |
| | (25 | ) | | — |
| | 26 |
|
Asset impairments | 246 |
| | (41 | ) | | — |
| | 205 |
|
Restructuring | 15 |
| | (1 | ) | | — |
| | 14 |
|
Depreciation and amortization | 213 |
| | (77 | ) | | — |
| | 136 |
|
Total expenses | 4,364 |
| | (989 | ) | | (8 | ) | | 3,367 |
|
Operating income | 712 |
| | (272 | ) | | (1 | ) | | 439 |
|
Other (income), net | (27 | ) | | (1 | ) | | — |
| | (28 | ) |
Interest expense | 156 |
| | (1 | ) | | — |
| | 155 |
|
Interest (income) | (7 | ) | | 1 |
| | — |
| | (6 | ) |
Income before income taxes | 590 |
| | (271 | ) | | (1 | ) | | 318 |
|
(Benefit) from income taxes | (229 | ) | | (101 | ) | | 2 |
| (a) | (328 | ) |
Income from continuing operations | 819 |
| | (170 | ) | | (3 | ) | | 646 |
|
Income from operations of discontinued businesses, net of income taxes | 53 |
| | 170 |
| | (14 | ) | | 209 |
|
Net income | 872 |
| | — |
| | (17 | ) | | 855 |
|
Net income attributable to noncontrolling interest | (1 | ) | | — |
| | — |
| | (1 | ) |
Net income attributable to Wyndham Destinations shareholders | $ | 871 |
| | $ | — |
| | $ | (17 | ) | | $ | 854 |
|
| | | | | | | |
Basic earnings per share | | | | | | | |
Continuing operations | $ | 7.94 |
| | $ | (1.65 | ) | | $ | (0.03 | ) | | $ | 6.26 |
|
Discontinued operations | 0.52 |
| | 1.65 |
| | (0.14 | ) | | 2.03 |
|
| $ | 8.46 |
| | $ | — |
| | $ | (0.17 | ) | | $ | 8.29 |
|
Diluted earnings per share | | | | | | | |
Continuing operations | $ | 7.89 |
| | $ | (1.64 | ) | | $ | (0.03 | ) | | $ | 6.22 |
|
Discontinued operations | 0.51 |
| | 1.64 |
| | (0.14 | ) | | 2.01 |
|
| $ | 8.40 |
| | $ | — |
| | $ | (0.17 | ) | | $ | 8.23 |
|
*Excludes the impact of the new revenue standard.
| |
(a) | Includes a $3 million deferred tax provision resulting from a reduction in deferred tax assets recorded in connection with the retrospective adoption of the new revenue standard and the impact of the lower U.S. corporate income tax rate from the enactment of the U.S. Tax Cuts and Jobs Act. |
The table below summarizes the impact of the adoption of the new revenue standard on the Company’s Condensed Consolidated Balance Sheet:
|
| | | | | | | | | | | | | | | |
| December 31, 2017 |
Assets | Previously Reported Balance | | Discontinued Operations* | | New Revenue Standard
Adjustment | | Adjusted Balance |
Cash and cash equivalents | $ | 100 |
| | $ | (52 | ) | | $ | — |
| | $ | 48 |
|
Trade receivables, net | 385 |
| | (194 | ) | | 4 |
| | 195 |
|
Vacation ownership contract receivables, net | 2,901 |
| | — |
| | — |
| | 2,901 |
|
Inventory | 1,249 |
| | — |
| | — |
| | 1,249 |
|
Prepaid expenses | 144 |
| | (27 | ) | | 1 |
| | 118 |
|
Property and equipment, net | 1,081 |
| | (259 | ) | | — |
| | 822 |
|
Goodwill | 1,336 |
| | (425 | ) | | — |
| | 911 |
|
Other intangibles, net | 1,084 |
| | (941 | ) | | — |
| | 143 |
|
Other assets | 694 |
| | (217 | ) | | 22 |
| | 499 |
|
Assets of discontinued operations | 1,429 |
| | 2,115 |
| | 20 |
| | 3,564 |
|
Total assets | $ | 10,403 |
| | $ | — |
| | $ | 47 |
| | $ | 10,450 |
|
Liabilities and Equity | | | | | | | |
Accounts payable | $ | 256 |
| | $ | (24 | ) | | $ | — |
| | $ | 232 |
|
Deferred income | 657 |
| | (139 | ) | | 41 |
| | 559 |
|
Accrued expenses and other liabilities | 1,094 |
| | (236 | ) | | (11 | ) | | 847 |
|
Non-recourse vacation ownership debt | 2,098 |
| | — |
| | — |
| | 2,098 |
|
Debt | 3,909 |
| | (1 | ) | | — |
| | 3,908 |
|
Deferred income taxes | 790 |
| | (191 | ) | | 14 |
| | 613 |
|
Liabilities of discontinued operations | 716 |
| | 591 |
| | 112 |
| | 1,419 |
|
Total liabilities | 9,520 |
| | — |
| | 156 |
| | 9,676 |
|
Stockholders' equity | | | | | | | |
Preferred stock, $.01 par value, authorized 6,000,000 shares, none issued and outstanding | — |
| | — |
| | — |
| | — |
|
Common stock, $.01 par value, 600,000,000 shares authorized, 218,796,817 issued in 2017 | 2 |
| | — |
| | — |
| | 2 |
|
Treasury stock, at cost – 118,887,441 shares in 2017 | (5,719 | ) | | — |
| | — |
| | (5,719 | ) |
Additional paid-in capital | 3,996 |
| | — |
| | — |
| | 3,996 |
|
Retained earnings | 2,609 |
| | — |
| | (108 | ) | | 2,501 |
|
Accumulated other comprehensive loss | (10 | ) | | — |
| | (1 | ) | | (11 | ) |
Total stockholders’ equity | 878 |
| | — |
| | (109 | ) | | 769 |
|
Noncontrolling interest | 5 |
| | — |
| | — |
| | 5 |
|
Total equity | 883 |
| | — |
| | (109 | ) | | 774 |
|
Total liabilities and equity | $ | 10,403 |
| | $ | — |
| | $ | 47 |
| | $ | 10,450 |
|
*Excludes the impact of the new revenue standard.
In addition, the cumulative impact to the Company’s retained earnings at January 1, 2016, was a decrease of $90 million.
Intra-Entity Transfers of Assets Other Than Inventory. In October 2016, the FASB issued guidance which requires companies to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance requires the modified retrospective approach and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2018, as required, which resulted in a cumulative-effect change to retained earnings of $19 million.
Clarifying the Definition of a Business. In January 2017, the FASB issued guidance clarifying the definition of a business, which assists entities when evaluating whether transactions should be accounted for as acquisitions of businesses or assets. This guidance is effective on a prospective basis for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the guidance on January 1, 2018, as required. There was no material impact on its Condensed Consolidated Financial Statements and related disclosures.
Compensation - Stock Compensation. In May 2017, the FASB issued guidance which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This guidance is effective for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2018, as required. There was no material impact on its Condensed Consolidated Financial Statements and related disclosures.
Statement of Cash Flows. In August 2016, the FASB issued guidance intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance requires the retrospective transition method and is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2018, as required.
Restricted Cash. In November 2016, the FASB issued guidance which requires amounts generally described as restricted cash be included with cash and cash equivalents when reconciling the total beginning and ending amounts for the periods shown on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with early adoption permitted. The Company adopted the guidance on January 1, 2018, as required, using a retrospective transition method. The impact of this guidance resulted in escrow deposits and restricted cash being included with cash, cash equivalents and restricted cash on the Condensed Consolidated Statements of Cash Flows.
The table below summarizes the effects of the new statement of cash flows and restricted cash guidance on the Company’s Condensed Consolidated Statements of Cash Flows:
|
| | | | | | | | | | | | | | | |
| Six Months Ended June 30, 2017 |
Increase/(decrease): | Previously Reported Balance | | Discontinued Operations | | New Accounting Standard Adjustment | | Adjusted Balance |
Operating Activities | $ | 663 |
| | $ | (431 | ) | | $ | (1 | ) | | $ | 231 |
|
Investing Activities | (133 | ) | | 26 |
| | 64 |
| | (43 | ) |
|
| | | | | | | | | | | | | | | |
| As of June 30, 2017 |
| Previously Reported Balance | | Discontinued Operations | | New Restricted Cash Standard Adjustment | | Adjusted Balance |
Cash, cash equivalents and restricted cash, beginning of period | $ | 185 |
| | $ | — |
| | $ | 148 |
| | $ | 333 |
|
Cash, cash equivalents and restricted cash, end of period | 415 |
| | (310 | ) | | 213 |
| | 318 |
|
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the Condensed Consolidated Balance Sheets that comprise the total of the cash, cash equivalents and restricted cash shown within the Condensed Consolidated Statements of Cash Flows:
|
| | | | |
| | June 30,
2018 |
Cash and cash equivalents | | $ | 155 |
|
Restricted cash included in other assets | | 232 |
|
Total cash, cash equivalents and restricted cash | | $ | 387 |
|
| | |
| | December 31,
2017 |
Cash and cash equivalents | | $ | 48 |
|
Restricted cash included in other assets | | 171 |
|
Cash, cash equivalents and restricted cash included in assets of discontinued operations | | 197 |
|
Total cash, cash equivalents and restricted cash | | $ | 416 |
|
Vacation Ownership
The Company develops, markets and sells VOIs to individual consumers, provides property management services at resorts and provides consumer financing in connection with the sale of VOIs. The Company’s sales of VOIs are either cash sales or developer-financed sales. Developer financed sales are typically collateralized by the underlying VOI. Revenue is recognized on VOI sales upon transfer of control, which is defined as the point in time when a binding sales contract has been executed, the financing contract has been executed for the remaining transaction price, the statutory rescission period has expired and the transaction price has been deemed to be collectible.
For developer-financed sales, the Company reduces the VOI sales transaction price by an estimate of uncollectible consideration at the time of the sale. The Company’s estimates of uncollectible amounts are based largely on the results of the Company’s static pool analysis which relies on historical payment data by customer class.
In connection with entering into a VOI sale, the Company may provide its customers with certain non-cash incentives, such as credits for future stays at its resorts. For those VOI sales, the Company bifurcates the sale and allocates the sales price between the VOI sale and the non-cash incentive. Non-cash incentives generally have expiration periods of 18 months or less and are recognized at a point in time upon transfer of control.
The Company provides day-to-day property management services including oversight of housekeeping services, maintenance and certain accounting and administrative services for property owners’ associations and clubs. These services may also include reservation and resort renovation activities. Such agreements are generally for terms of one year or less, and are renewed automatically on an annual basis. The Company’s management agreements contain cancellation clauses, which allow for either party to cancel the agreement, by either a majority board vote or a majority vote of non-developer interests. The Company receives fees for such property management services which are collected monthly in advance and are based upon total costs to operate such resorts (or as services are provided in the case of resort renovation activities). Fees for property management services typically approximate 10% of budgeted operating expenses. The Company is entitled to consideration for reimbursement of costs incurred on behalf of the property owners’ association in providing the management services (“reimbursable revenue”). The Company reduces its management fees for amounts it has paid to the property owners’ association that reflect maintenance fees for VOIs for which it retains ownership, as the Company has concluded that such payments are consideration payable to a customer.
Exchange & Rentals
As a provider of vacation exchange services, the Company enters into affiliation agreements with developers of vacation ownership properties to allow owners of VOIs to trade their intervals for intervals at other properties affiliated with the Company’s vacation exchange brands and, for some members, for other leisure-related services and products. Additionally, as a marketer of vacation rental properties, generally the Company enters into contracts for exclusive periods of time with property owners to market the rental of such properties to rental customers.
The Company’s vacation exchange brands derive a majority of revenues from membership dues and fees for facilitating members trading of their intervals. Revenues from membership dues represent the fees paid by members or affiliated clubs on their behalf. The Company recognizes revenues from membership dues paid by the member on a straight-line basis over the membership period as the performance obligations are fulfilled through delivery of publications, if applicable, and by providing access to other travel-related products and services. Consideration paid by affiliated clubs for memberships are recognized as revenue over the term of the contract with the affiliated club in proportion to the estimated average monthly member count. Such estimates are adjusted periodically for changes in the actual and forecasted member activity. For additional fees, members have the right to exchange their intervals for intervals at other properties affiliated with the Company’s vacation exchange networks and, for certain members, for other leisure-related services and products. Fees for facilitating exchanges are recognized as revenue, net of expected cancellations, when these transactions have been confirmed to the member.
The Company’s vacation exchange brands also derive revenues from: (i) additional services, programs with affiliated resorts, club servicing and loyalty programs and (ii) additional exchange-related products that provide members with the ability to protect trading power or points, extend the life of deposits, and combine two or more deposits for the opportunity to exchange into intervals with higher trading power. Other vacation exchange related product fees are deferred and recognized as revenue upon the occurrence of a future exchange, other related transaction or event.
The Company earns revenue from its RCI Elite Rewards co–branded credit card program which is primarily generated by cardholder spending and the enrollment of new cardholders. The advance payments received under the program are recognized as a contract liability. The program primarily contains two performance obligations: (i) brand performance services, for which revenue is recognized over the contract term on a straight-line basis, and (ii) issuance and redemption of loyalty points, for which revenue is recognized over time based upon the redemption pattern of the loyalty points earned under the program including an estimate of loyalty points that will expire without redemption.
The Company’s vacation rental brands derive revenue from fees associated with the rental of vacation rental properties on behalf of independent owners. The Company remits the rental fee received from the renter to the independent owner, net of the Company’s agreed-upon fee. The related revenue from such fees, net of expected refunds, is recognized over the renter’s stay. The Company’s vacation rental brands also derive revenues from additional services delivered to independent owners, vacation rental guests, and property owners’ associations that are generally recognized when the service is delivered.
Contract Liabilities
Contract liabilities generally represent payments or consideration received in advance for goods or services that the Company has not yet transferred to the customer. Contract liabilities as of June 30, 2018 and December 31, 2017 are as follows:
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| | | | | | | | |
Contract Liabilities | | June 30, 2018 | | December 31, 2017 |
Deferred subscription revenue | | $ | 233 |
| | $ | 229 |
|
Deferred VOI trial package revenue | | 110 |
| | 108 |
|
Deferred VOI incentive revenue | | 98 |
| | 102 |
|
Deferred exchange-related revenue | | 60 |
| | 63 |
|
Deferred vacation rental revenue | | 62 |
| | 38 |
|
Deferred co-branded credit card programs revenue | | 14 |
| | 13 |
|
Deferred other revenue | | 15 |
| | 3 |
|
Total | | $ | 592 |
| | $ | 556 |
|
In the Company’s vacation ownership business, deferred VOI trial package revenue represents consideration received in advance for a trial VOI, which allows customers to utilize a vacation package typically within one year of purchase. Deferred VOI incentive revenue represents payments received in advance for additional travel-related services and products at the time of a VOI sale. Revenue is recognized when a customer utilizes the additional services and products, which is typically within one year of the VOI sale.
Within the Company’s vacation exchange business, deferred subscription revenue represents billings and payments received in advance from members and affiliated clubs for memberships in the Company’s vacation exchange programs which are recognized in future periods. Deferred exchange-related revenue primarily represent payments received in advance from members for the right to exchange their intervals for intervals at other properties affiliated with the Company’s vacation exchange networks and for other leisure-related services and products which are generally recognized as revenue within one year. In the Company's vacation rentals business, deferred vacation rental revenue represent billings and payments received in advance of a customer’s rental stay which are generally recognized as revenue within one year.
Capitalized Contract Costs
The Company’s vacation ownership business incurs certain direct and incremental selling costs in connection with VOI trial package and incentive revenues. Such costs are capitalized and subsequently amortized over the utilization period, which is typically within one year of the sale. As of June 30, 2018 and December 31, 2017, these capitalized costs were $42 million and $44 million, respectively, and are included within other assets on the Condense Consolidated Balance Sheet.
The Company’s vacation exchange and vacation rentals businesses incur certain direct and incremental selling costs to obtain contracts with customers in connection with subscription revenues, exchange–related revenues, and vacation rental revenues. Such costs, which are primarily comprised of commissions paid to internal and external parties and credit card processing fees, are deferred at the inception of the contract and recognized when the benefit is transferred to the customer. As of June 30, 2018 and December 31, 2017, these capitalized costs were $22 million and $9 million, respectively.
Practical Expedients
The Company has not adjusted the consideration for the effects of a significant financing component if it expected, at contract inception, that the period between when the Company satisfied the performance obligation and when the customer paid for that good or service was one year or less.
For contracts with customers that were modified before the beginning of the earliest reporting period presented, the Company did not retrospectively restate the revenue associated with the contract for those modifications. Instead, it reflected the aggregate effect of all prior modifications in determining (i) the performance obligations and transaction prices and (ii) the allocation of such transaction prices to the performance obligations.
Performance Obligations
A performance obligation is a promise in a contract with a customer to transfer a distinct good or service to the 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:
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| | | | | | | | | | | | | | | | | | | | |
| | 7/1/2018- 6/30/2019 |
| 7/1/2019- 6/30/2020 |
| 7/1/2020- 6/30/2021 |
| Thereafter |
| Total |
Subscription revenue | | $ | 130 |
| | $ | 55 |
| | $ | 27 |
| | $ | 21 |
| | $ | 233 |
|
VOI trial package revenue | | 110 |
| | — |
| | — |
| | — |
| | 110 |
|
VOI incentive revenue | | 98 |
| | — |
| | — |
| | — |
| | 98 |
|
Exchange-related revenue | | 54 |
| | 4 |
| | 1 |
| | 1 |
| | 60 |
|
Vacation rental revenue | | 62 |
| | — |
| | — |
| | — |
| | 62 |
|
Co-branded credit card programs revenue | | 6 |
| | 4 |
| | 2 |
| | 2 |
| | 14 |
|
Other revenue | | 15 |
| | — |
| | — |
| | — |
| | 15 |
|
Total | | $ | 475 |
| | $ | 63 |
| | $ | 30 |
| | $ | 24 |
| | $ | 592 |
|
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:
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| | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2018 | | 2017 | | 2018 | | 2017 |
Vacation Ownership | | | | | | | | |
Vacation ownership interest sales | | $ | 462 |
| | $ | 446 |
| | $ | 820 |
| | $ | 796 |
|
Property management fees and reimbursable revenues | | 162 |
| | 164 |
| | 325 |
| | 327 |
|
Consumer financing | | 120 |
| | 114 |
| | 237 |
| | 224 |
|
Wyndham Asset Affiliation Model (“WAAM”) fee-for-service commissions | | 10 |
| | 4 |
| | 20 |
| | 7 |
|
Ancillary revenues | | 16 |
| | 17 |
| | 29 |
| | 30 |
|
Total Vacation Ownership | | 770 |
| | 745 |
| | 1,431 |
| | 1,384 |
|
| | | | | | | | |
Exchange & Rentals | | | | | | | | |
Exchange revenues | | 166 |
| | 165 |
| | 354 |
| | 352 |
|
Vacation rental revenues | | 47 |
| | 46 |
| | 85 |
| | 84 |
|
Ancillary revenues | | 25 |
| | 23 |
| | 45 |
| | 41 |
|
Total Exchange & Rentals | | 238 |
| | 234 |
| | 484 |
| | 477 |
|
| | | | | | | | |
Corporate and Other | | | | | | | | |
Eliminations | | (1 | ) | | (1 | ) | | (1 | ) | | (1 | ) |
| | | | | | | | |
Net Revenues | | $ | 1,007 |
| | $ | 978 |
| | $ | 1,914 |
| | $ | 1,860 |
|
The computation of basic and diluted earnings 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):
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 |
| 2017 | | 2018 | | 2017 |
(Loss)/income from continuing operations | $ | (12 | ) | | $ |