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EX-31.2 - EX-31.2 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex312_7.htm
EX-32.2 - EX-32.2 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex322_9.htm
EX-10.1 - EX-10.1 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex101_307.htm
EX-32.1 - EX-32.1 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex321_8.htm
EX-31.1 - EX-31.1 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex311_6.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2015

OR

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:  1-7959

 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

(Exact name of Registrant as specified in its charter)

 

 

Maryland

 

52-1193298

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. employer

identification no.)

One StarPoint

Stamford, CT 06902

(Address of principal executive offices, including zip code)

(203) 964-6000

(Registrant’s telephone number, including area code)

 

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  x    No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of ‘‘large accelerated filer,”  “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

x

 

 

 

Accelerated filer

 

o

 

 

 

 

 

 

 

 

 

Non-accelerated filer

 

¨

 

(Do not check if a smaller reporting company)

 

Smaller reporting company

 

¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x

Indicate the number of shares outstanding of the issuer’s classes of common stock, as of the latest practicable date:

170,379,295 shares of common stock, par value $0.01 per share, outstanding as of July 24, 2015.

 

 

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I.  Financial Information

 

Page

 

 

 

 

 

Item 1.

 

Financial Statements

 

2

 

 

Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014

 

3

 

 

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2015 and 2014

 

4

 

 

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2015 and 2014

 

5

 

 

Consolidated Condensed Statements of Cash Flows for the Six Months Ended June 30, 2015 and 2014

 

6

 

 

Notes to Consolidated Financial Statements

 

7

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

22

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

 

38

Item 4.

 

Controls and Procedures

 

38

 

 

 

 

 

 

 

PART II.  Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

39

Item 1A.

 

Risk Factors

 

39

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

39

Item 6.

 

Exhibits

 

40

 

 

 

 


 

PART I.  FINANCIAL INFORMATION

Item 1.

Financial Statements.

The following unaudited consolidated financial statements of Starwood Hotels & Resorts Worldwide, Inc. (“we”, “us” or the “Company”) are provided pursuant to the requirements of this Item.  In the opinion of management, all adjustments necessary for fair presentation, consisting of normal recurring adjustments, have been included.  The consolidated financial statements presented herein have been prepared in accordance with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2014 filed on February 25, 2015.  See the notes to consolidated financial statements for the basis of presentation.  Certain reclassifications have been made to the prior year’s financial statements to conform to the current year presentation.  The consolidated financial statements should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this filing.  Results for the three and six months ended June 30, 2015 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2015.

 

 

 

2


 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

735

 

 

$

935

 

Restricted cash

 

 

42

 

 

 

84

 

Accounts receivable, net of allowance for doubtful accounts of $72 and $63

 

 

675

 

 

 

661

 

Inventories

 

 

246

 

 

 

236

 

Securitized vacation ownership notes receivable, net of allowance for doubtful

   accounts of $3 and $4

 

 

44

 

 

 

47

 

Deferred income taxes

 

 

171

 

 

 

199

 

Prepaid expenses and other

 

 

182

 

 

 

159

 

Total current assets

 

 

2,095

 

 

 

2,321

 

Investments

 

 

204

 

 

 

214

 

Plant, property and equipment, net

 

 

2,320

 

 

 

2,634

 

Goodwill and intangible assets, net

 

 

1,912

 

 

 

1,956

 

Deferred income taxes

 

 

579

 

 

 

596

 

Other assets

 

 

750

 

 

 

711

 

Securitized vacation ownership notes receivable, net

 

 

193

 

 

 

227

 

Total assets

 

$

8,053

 

 

$

8,659

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Short-term borrowings and current maturities of long-term debt

 

$

299

 

 

$

297

 

Accounts payable

 

 

94

 

 

 

101

 

Current maturities of long-term securitized vacation ownership debt

 

 

57

 

 

 

73

 

Accrued expenses

 

 

1,324

 

 

 

1,307

 

Accrued salaries, wages and benefits

 

 

373

 

 

 

416

 

Accrued taxes and other

 

 

261

 

 

 

256

 

Total current liabilities

 

 

2,408

 

 

 

2,450

 

Long-term debt

 

 

1,841

 

 

 

2,398

 

Long-term securitized vacation ownership debt

 

 

151

 

 

 

176

 

Deferred income taxes

 

 

35

 

 

 

38

 

Other liabilities

 

 

2,274

 

 

 

2,069

 

Total liabilities

 

 

6,709

 

 

 

7,131

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

Common stock; $0.01 par value; authorized 1,000,000,000 shares;

   outstanding 170,603,937 and 172,694,299 shares at June 30, 2015 and

   December 31, 2014, respectively

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

74

 

 

 

47

 

Accumulated other comprehensive loss

 

 

(598

)

 

 

(508

)

Retained earnings

 

 

1,863

 

 

 

1,984

 

Total Starwood stockholders’ equity

 

 

1,341

 

 

 

1,525

 

Noncontrolling interests

 

 

3

 

 

 

3

 

Total equity

 

 

1,344

 

 

 

1,528

 

Total liabilities and equity

 

$

8,053

 

 

$

8,659

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

 

3


 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share data)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned, leased and consolidated joint venture hotels

 

$

356

 

 

$

414

 

 

$

672

 

 

$

778

 

Vacation ownership and residential sales and services

 

 

170

 

 

 

171

 

 

 

357

 

 

 

345

 

Management fees, franchise fees and other income

 

 

256

 

 

 

260

 

 

 

496

 

 

 

508

 

Other revenues from managed and franchised properties

 

 

699

 

 

 

694

 

 

 

1,371

 

 

 

1,366

 

 

 

 

1,481

 

 

 

1,539

 

 

 

2,896

 

 

 

2,997

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Owned, leased and consolidated joint venture hotels

 

 

265

 

 

 

314

 

 

 

527

 

 

 

615

 

Vacation ownership and residential sales and services

 

 

126

 

 

 

125

 

 

 

263

 

 

 

253

 

Selling, general, administrative and other

 

 

99

 

 

 

102

 

 

 

190

 

 

 

197

 

Restructuring and other special charges (credits), net

 

 

23

 

 

 

(3

)

 

 

54

 

 

 

(3

)

Depreciation

 

 

65

 

 

 

63

 

 

 

127

 

 

 

123

 

Amortization

 

 

8

 

 

 

7

 

 

 

15

 

 

 

15

 

Other expenses from managed and franchised properties

 

 

699

 

 

 

694

 

 

 

1,371

 

 

 

1,366

 

 

 

 

1,285

 

 

 

1,302

 

 

 

2,547

 

 

 

2,566

 

Operating income

 

 

196

 

 

 

237

 

 

 

349

 

 

 

431

 

Equity earnings and gains from unconsolidated ventures, net

 

 

11

 

 

 

9

 

 

 

26

 

 

 

18

 

Interest expense, net of interest income of $1, $1, $2 and $2

 

 

(27

)

 

 

(23

)

 

 

(58

)

 

 

(46

)

Gain (loss) on asset dispositions and impairments, net

 

 

 

 

 

3

 

 

 

14

 

 

 

(33

)

Income from continuing operations before taxes and

   noncontrolling interests

 

 

180

 

 

 

226

 

 

 

331

 

 

 

370

 

Income tax expense

 

 

(44

)

 

 

(73

)

 

 

(96

)

 

 

(81

)

Income from continuing operations

 

 

136

 

 

 

153

 

 

 

235

 

 

 

289

 

Discontinued operations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain on dispositions, net of tax expense (benefit) of $0, $0, $0

   and $(1)

 

 

 

 

 

 

 

 

 

 

 

1

 

Net income attributable to Starwood

 

$

136

 

 

$

153

 

 

$

235

 

 

$

290

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share – Basic

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.80

 

 

$

0.81

 

 

$

1.38

 

 

$

1.52

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.01

 

Net income

 

$

0.80

 

 

$

0.81

 

 

$

1.38

 

 

$

1.53

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings Per Share – Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.79

 

 

$

0.80

 

 

$

1.37

 

 

$

1.51

 

Discontinued operations

 

 

 

 

 

 

 

 

 

 

 

0.01

 

Net income

 

$

0.79

 

 

$

0.80

 

 

$

1.37

 

 

$

1.52

 

Weighted average number of shares

 

 

169

 

 

 

190

 

 

 

170

 

 

 

190

 

Weighted average number of shares assuming dilution

 

 

170

 

 

 

191

 

 

 

171

 

 

 

191

 

Dividends declared per share

 

$

0.375

 

 

$

1.00

 

 

$

0.75

 

 

$

2.00

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

 

4


 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Net income

 

$

136

 

 

$

153

 

 

$

235

 

 

$

290

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

23

 

 

 

4

 

 

 

(89

)

 

 

4

 

Defined benefit pension and postretirement plans activity

 

 

 

 

 

1

 

 

 

1

 

 

 

1

 

Hedging activities

 

 

(3

)

 

 

 

 

 

(2

)

 

 

 

Total other comprehensive income (loss), net of taxes

 

 

20

 

 

 

5

 

 

 

(90

)

 

 

5

 

Total comprehensive income

 

 

156

 

 

 

158

 

 

 

145

 

 

 

295

 

Comprehensive income attributable to noncontrolling

   interests

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments attributable to

   noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Starwood

 

$

156

 

 

$

158

 

 

$

145

 

 

$

295

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

 

5


 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2015

 

 

2014

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

235

 

 

$

290

 

Adjustments to net income:

 

 

 

 

 

 

 

 

Discontinued operations:

 

 

 

 

 

 

 

 

Gain on dispositions, net

 

 

 

 

 

(1

)

Depreciation and amortization

 

 

142

 

 

 

138

 

Amortization of deferred gains

 

 

(44

)

 

 

(43

)

Non-cash portion of restructuring and other special charges (credits), net

 

 

7

 

 

 

(3

)

(Gain) loss on asset dispositions and impairments, net

 

 

(14

)

 

 

33

 

Stock-based compensation expense

 

 

26

 

 

 

24

 

Excess stock-based compensation tax benefit

 

 

(7

)

 

 

(8

)

Distributions in excess (deficit) of equity earnings

 

 

(12

)

 

 

(2

)

Deferred income tax expense (benefit)

 

 

33

 

 

 

(20

)

Other non-cash adjustments to net income

 

 

(1

)

 

 

18

 

Decrease (increase) in restricted cash

 

 

55

 

 

 

(14

)

Other changes in working capital

 

 

(92

)

 

 

(26

)

Securitized VOI notes receivable activity, net

 

 

38

 

 

 

50

 

Unsecuritized VOI notes receivable activity, net

 

 

(36

)

 

 

(47

)

Accrued income taxes and other

 

 

30

 

 

 

47

 

Cash from operating activities

 

 

360

 

 

 

436

 

 

 

 

 

 

 

 

 

 

Investing Activities

 

 

 

 

 

 

 

 

Purchases of plant, property and equipment

 

 

(103

)

 

 

(165

)

Proceeds from asset sales, net of transaction costs

 

 

527

 

 

 

225

 

Acquisitions, net of acquired cash

 

 

(26

)

 

 

(17

)

Issuance of notes receivable, net

 

 

(12

)

 

 

 

Distributions from investments, net

 

 

31

 

 

 

3

 

Other, net

 

 

2

 

 

 

 

Cash from investing activities

 

 

419

 

 

 

46

 

 

 

 

 

 

 

 

 

 

Financing Activities

 

 

 

 

 

 

 

 

Commercial paper, net

 

 

(569

)

 

 

 

Revolving credit facility and short-term borrowings, net

 

 

(4

)

 

 

 

Decrease in restricted cash

 

 

 

 

 

94

 

Long-term debt issued

 

 

10

 

 

 

4

 

Long-term debt repaid

 

 

(2

)

 

 

(1

)

Long-term securitized debt repaid

 

 

(41

)

 

 

(55

)

Dividends paid

 

 

(133

)

 

 

(381

)

Proceeds from employee stock option exercises

 

 

13

 

 

 

20

 

Excess stock-based compensation tax benefit

 

 

7

 

 

 

8

 

Share repurchases

 

 

(228

)

 

 

(170

)

Other, net

 

 

(24

)

 

 

(20

)

Cash used for financing activities

 

 

(971

)

 

 

(501

)

Exchange rate effect on cash and cash equivalents

 

 

(8

)

 

 

 

Increase in cash and cash equivalents

 

 

(200

)

 

 

(19

)

Cash and cash equivalents - beginning of period

 

 

935

 

 

 

616

 

Cash and cash equivalents - end of period

 

$

735

 

 

$

597

 

 

 

 

 

 

 

 

 

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

96

 

 

$

36

 

Income taxes, net of refunds

 

$

60

 

 

$

82

 

Non-cash capital lease obligation

 

$

 

 

$

153

 

 

The accompanying notes to financial statements are an integral part of the above statements.

 

 

6


 

Note 1.

Basis of Presentation

The accompanying consolidated financial statements represent the consolidated financial position and consolidated results of operations of Starwood Hotels & Resorts Worldwide, Inc. and our subsidiaries.  We are one of the world’s largest hotel and leisure companies.  Our principal business is hotels and leisure, which is comprised of a worldwide hospitality network of 1,249 full-service hotels, vacation ownership resorts and residential developments primarily serving two markets:  luxury and upper-upscale. The principal operations of Starwood Vacation Ownership, Inc. (SVO) include the development and operation of vacation ownership resorts; and marketing, selling and financing of vacation ownership interests (VOIs) in the resorts.

The consolidated financial statements include our assets, liabilities, revenues and expenses and those of our controlled subsidiaries and partnerships.  In consolidating, all material intercompany transactions are eliminated.  We have evaluated all subsequent events through the date the consolidated financial statements were filed with the Securities and Exchange Commission.

Following the guidance for noncontrolling interests in Accounting Standards Codification (ASC) Topic 810, Consolidation, references in this report to our earnings per share, net income and stockholders’ equity attributable to Starwood’s common stockholders do not include amounts attributable to noncontrolling interests.

 

 

Note 2.

Recently Issued Accounting Standards

Future Accounting Standards

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).”  This topic provides for five principles which should be followed to determine the appropriate amount and timing of revenue recognition for the transfer of goods and services to customers.  The principles in this ASU should be applied to all contracts with customers regardless of industry.  The amendments in this ASU are effective for reporting periods beginning after December 15, 2017, with two transition methods of adoption allowed.  Early adoption is permitted for annual periods beginning after December 16, 2016.  We plan to adopt this ASU on January 1, 2018.  We are still evaluating the financial statement impacts of the guidance in this ASU and determining which transition method we will utilize.

In August 2014, the FASB issued ASU No. 2014-15, “Presentation of Financial Statements- Going Concern (Subtopic 205-40) Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.”  This update provides guidance on management’s responsibility to evaluate whether there is substantial doubt about the ability to continue as a going concern and to provide related interim and annual footnote disclosures.  The amendments in this ASU are effective for reporting periods ending after December 15, 2016, and we plan to adopt this ASU for the annual period ending on December 31, 2016.  We do not believe the adoption of this update will have a material impact on our financial statements.

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810) Amendments to the Consolidation Analysis.”  The amendments in this update are intended to improve and simplify targeted areas of the consolidation guidance and are effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted.  We plan to adopt this ASU on January 1, 2016.  We do not believe the adoption of this update will have a material impact on our financial statements.

In April 2015, the FASB issued ASU No. 2015-03, “Interest- Imputation of Interest (Subtopic 835-30) Simplifying the Presentation of Debt Issuance Costs.”  The amendments in this topic are intended to simplify the presentation of debt issuance costs and are effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted.  We plan to adopt this ASU on January 1, 2016.  We do not believe the adoption of this update will have a material impact on our financial statements.

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles- Goodwill and Other- Internal – Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement.” The amendments in this topic are intended to provide guidance about whether a cloud computing arrangement includes a software license.  This update is effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted.  We plan to adopt this ASU prospectively on January 1, 2016.  We do not believe the adoption of this update will have a material impact on our financial statements.

Adopted Accounting Standards

In January 2015, the FASB issued ASU No. 2015-01, “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.”  This topic eliminates from U.S. GAAP the concept of extraordinary items.  This update is effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted, and we adopted this ASU on a prospective basis on January 1, 2015.  The adoption of this update did not have a material impact on our financial statements.

7


 

In January 2014, the FASB issued ASU No. 2014-04, “Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40) Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.”  This topic clarifies when an in-substance repossession or foreclosure occurs and requires certain additional interim and annual disclosures related to such activity.  The amendments in this ASU are effective for reporting periods beginning after December 15, 2014, and we adopted this ASU on a prospective basis on January 1, 2015.  The adoption of this update did not have a material impact on our financial statements.

 

 

Note 3.

Earnings per Share

The following is a reconciliation of basic earnings per share to diluted earnings per share for income from continuing operations attributable to our common stockholders (in millions, except per share data):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Income from continuing operations

 

$

136

 

 

$

153

 

 

$

235

 

 

$

289

 

Weighted average common shares for basic earnings per

   share

 

 

169

 

 

 

190

 

 

 

170

 

 

 

190

 

Effect of dilutive stock options and restricted stock awards

 

 

1

 

 

 

1

 

 

 

1

 

 

 

1

 

Weighted average common shares for diluted earnings per

   share

 

 

170

 

 

 

191

 

 

 

171

 

 

 

191

 

Basic earnings per share

 

$

0.80

 

 

$

0.81

 

 

$

1.38

 

 

$

1.52

 

Diluted earnings per share

 

$

0.79

 

 

$

0.80

 

 

$

1.37

 

 

$

1.51

 

 

Approximately 0.7 million shares for the three months ended June 30, 2014, and 0.3 million shares and 0.5 million shares for six months ended June 30, 2015 and 2014, respectively, were excluded from the computation of diluted shares, as their impact would have been anti-dilutive.  An insignificant amount of shares were excluded from the computation of diluted shares for the three months ended June 30, 2015.

 

 

Note 4.

Asset Dispositions and Impairments

During the three months ended June 30, 2015, we sold three wholly-owned hotels for cash proceeds net of closing costs of approximately $527 million.  Two of these hotels were sold subject to long-term management agreements.  The sale of these hotels resulted in pre-tax gains of approximately $240 million, which we deferred and are recognizing into management fees, franchise fees and other income over the initial term of the management agreements.  The other hotel was sold subject to a long-term franchise agreement and resulted in a pre-tax gain of approximately $4 million, which we recorded in the gain (loss) on asset dispositions and impairments, net line item.  These gains were partially offset by a loss of $4 million primarily related to asset dispositions and impairments associated with certain hotel renovations.

Additionally, during the six months ended June 30, 2015, we recorded a $17 million gain related to the sale of a minority partnership interest in a hotel, partially offset by a loss of $3 million, primarily related to asset dispositions and impairments associated with certain hotel renovations.

During the six months ended June 30, 2014, we sold two wholly-owned hotels for cash proceeds net of closing costs of approximately $223 million.  One of these hotels was sold subject to a long-term management agreement.  The sale of this hotel resulted in a pre-tax gain of approximately $91 million, which we deferred and are recognizing into management fees, franchise fees and other income over the initial term of the management agreement.  The other hotel was sold subject to a long-term franchise agreement and resulted in a pre-tax loss of $6 million, which was recorded to the gain (loss) on asset dispositions and impairments, net line item in the first quarter of 2014 when we entered into the purchase and sale agreement and received a non-refundable deposit.  During the six months ended June 30, 2014, we also recorded a $7 million impairment associated with one of our foreign unconsolidated joint ventures, which we recorded to the gain (loss) on asset dispositions and impairments, net line item.

Additionally, during the six months ended June 30, 2014, we converted a leased hotel to a managed hotel, subject to a long-term management agreement, and recognized a pre-tax loss of $21 million, which was recorded to the gain (loss) on asset dispositions and impairments, net line item.  We provided financing to the hotel owner in the form of a note receivable to fund the transaction price.  We will provide additional financing over the next few years to fund a significant renovation of the hotel.

 

 

8


 

Note 5.

Transfers of Financial Assets

We have variable interests in the entities associated with our four outstanding securitization transactions.  As these securitizations consist of similar, homogenous loans, they have been aggregated for disclosure purposes.  We applied the variable interest model and determined we are the primary beneficiary of these variable interest entities (VIEs).  In making this determination, we evaluated the activities that significantly impact the economics of the VIEs, including the management of the securitized notes receivable and any related non-performing loans.  We are the servicer of the securitized mortgage receivables.  We also have the option, subject to certain limitations, to repurchase or replace VOI notes receivable that are in default at their outstanding principal amounts.  Such activity totaled $3 million and $6 million and during the three and six months ended June 30, 2015, respectively, compared to $5 million and $9 million during the three and six months ended June 30, 2014.  We have been able to resell the VOIs underlying the VOI notes repurchased or replaced under these provisions without incurring significant losses.  We hold the risk of potential loss (or gain), as the last to be paid out by proceeds of the VIEs under the terms of the agreements.  As such, we hold both the power to direct the activities of the VIEs and obligation to absorb the losses (or benefits) from the VIEs.

The securitization agreements are without recourse to us, except for breaches of representations and warranties.  We have the right to fund defaults at our option, subject to certain limitations, and we intend to do so until the debt is extinguished to maintain the credit rating of the underlying notes.

Upon transfer of VOI notes receivable to the VIEs, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the VIE creditors.  The VIEs utilize trusts which have ownership of cash balances that also have restrictions, the amounts of which are reported in restricted cash.  Our interests in trust assets are subordinate to the interests of third-party investors and, as such, may not be realized by us if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts’ debt (see Note 8).  We are contractually obligated to receive the excess cash flows (spread between the collections on the notes and third party obligations defined in the securitization agreements) from the VIEs.  Such activity totaled $8 million and $16 million during the three and six months ended June 30, 2015, respectively, compared to $10 million and $21 million during the three and six months ended June 30, 2014, respectively, and is classified in cash and cash equivalents.

 

 

Note 6.

Vacation Ownership Notes Receivable

Notes receivable (net of reserves) related to our vacation ownership loans consisted of the following (in millions):

 

 

 

June 30,

 

 

December 31,

 

 

 

2015

 

 

2014

 

Vacation ownership loans – securitized

 

$

237

 

 

$

274

 

Vacation ownership loans – unsecuritized

 

 

358

 

 

 

331

 

 

 

 

595

 

 

 

605

 

Less: current portion

 

 

 

 

 

 

 

 

Vacation ownership loans – securitized

 

 

(44

)

 

 

(47

)

Vacation ownership loans – unsecuritized

 

 

(38

)

 

 

(36

)

 

 

$

513

 

 

$

522

 

 

We include the current and long-term maturities of unsecuritized VOI notes receivable in accounts receivable and other assets, respectively, in our consolidated balance sheets.

We record interest income associated with VOI notes in our vacation ownership and residential sales and services line item in our consolidated statements of income.  Interest income related to our VOI notes receivable was as follows (in millions):

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

Vacation ownership loans – securitized

 

$

9

 

 

$

11

 

 

$

18

 

 

$

24

 

Vacation ownership loans – unsecuritized

 

 

11

 

 

 

9

 

 

 

23

 

 

 

17

 

 

 

$

20

 

 

$

20

 

 

$

41

 

 

$

41

 

 

9


 

The following table presents future maturities of gross VOI notes receivable (in millions) and interest rates:

 

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

2015

 

$

24

 

 

$

29

 

 

$

53

 

2016

 

 

48

 

 

 

33

 

 

 

81

 

2017

 

 

45

 

 

 

36

 

 

 

81

 

2018

 

 

38

 

 

 

37

 

 

 

75

 

2019

 

 

33

 

 

 

40

 

 

 

73

 

Thereafter

 

 

70

 

 

 

252

 

 

 

322

 

Balance at June 30, 2015

 

$

258

 

 

$

427

 

 

$

685

 

Weighted average interest rates at June 30, 2015

 

 

13.07

%

 

 

13.07

%

 

 

13.07

%

Range of interest rates

 

6.0% to 17.0%

 

 

5.0% to 17.0%

 

 

5.0% to 17.0%

 

 

For the vacation ownership and residential segment, we record an estimate of expected uncollectibility on our VOI notes receivable as a reduction of revenue at the time we recognize profit on a timeshare sale.  We hold large amounts of homogeneous VOI notes receivable and, therefore, assess uncollectibility based on pools of receivables.  In estimating loss reserves, we use a technique referred to as static pool analysis, which tracks uncollectible notes for each year’s sales over the life of the respective notes and projects an estimated default rate that is used in the determination of our loan loss reserve requirements.  As of June 30, 2015 and December 31, 2014, the average estimated default rate for our pools of receivables was approximately 9.1% and 9.2%, respectively.

The activity and balances for our loan loss reserve were as follows (in millions):

 

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

Balance at March 31, 2015

 

$

24

 

 

$

69

 

 

$

93

 

Provisions for loan losses

 

 

 

 

 

5

 

 

 

5

 

Write-offs

 

 

 

 

 

(8

)

 

 

(8

)

Other

 

 

(3

)

 

 

3

 

 

 

 

Balance at June 30, 2015

 

$

21

 

 

$

69

 

 

$

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

28

 

 

$

68

 

 

$

96

 

Provisions for loan losses

 

 

(1

)

 

 

9

 

 

 

8

 

Write-offs

 

 

 

 

 

(14

)

 

 

(14

)

Other

 

 

(6

)

 

 

6

 

 

 

 

Balance at June 30, 2015

 

$

21

 

 

$

69

 

 

$

90

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2014

 

$

38

 

 

$

63

 

 

$

101

 

Provisions for loan losses

 

 

 

 

 

5

 

 

 

5

 

Write-offs

 

 

 

 

 

(6

)

 

 

(6

)

Other

 

 

(5

)

 

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