Attached files

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EX-32.1 - EX-32.1 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex321_6.htm
EX-31.2 - EX-31.2 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex312_7.htm
EX-31.1 - EX-31.1 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex311_8.htm
EX-32.2 - EX-32.2 - STARWOOD HOTEL & RESORTS WORLDWIDE, INChot-ex322_9.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 March 31, 2016

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:

169,537,647 shares of common stock, par value $0.01 per share, outstanding as of April 29, 2016.

 

 

 

 

 

 

 


TABLE OF CONTENTS

 

 

 

PART I.  Financial Information

 

Page

 

 

 

 

 

Item 1.

 

Financial Statements

 

2

 

 

Consolidated Balance Sheets as of March 31, 2016 and December 31, 2015

 

3

 

 

Consolidated Statements of Income for the Three Months Ended March 31, 2016 and 2015

 

4

 

 

Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2016 and 2015

 

5

 

 

Consolidated Condensed Statements of Cash Flows for the Three Months Ended March 31, 2016 and 2015

 

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

 

34

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

 

PART II.  Other Information

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

35

Item 1A.

 

Risk Factors

 

35

Item 6.

 

Exhibits

 

36

 

 

 

 


 

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, 2015, filed on February 25, 2016. 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 months ended March 31, 2016 are not necessarily indicative of results to be expected for the full fiscal year ending December 31, 2016.

 

 

 

2


 

 

STARWOOD HOTELS & RESORTS WORLDWIDE, INC.

CONSOLIDATED BALANCE SHEETS

(In millions, except share data)

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

 

 

(Unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

1,180

 

 

$

1,048

 

Restricted cash

 

 

68

 

 

 

54

 

Accounts receivable, net of allowance for doubtful accounts of $83 and $78

 

 

671

 

 

 

690

 

Inventories

 

 

355

 

 

 

319

 

Securitized vacation ownership notes receivable, net of

   allowance for doubtful accounts of $2 and $2

 

 

31

 

 

 

32

 

Prepaid expenses and other

 

 

175

 

 

 

152

 

Total current assets

 

 

2,480

 

 

 

2,295

 

Investments

 

 

197

 

 

 

183

 

Plant, property and equipment, net

 

 

2,068

 

 

 

2,144

 

Goodwill and intangible assets, net

 

 

1,948

 

 

 

1,908

 

Deferred income taxes

 

 

757

 

 

 

747

 

Other assets

 

 

867

 

 

 

839

 

Securitized vacation ownership notes receivable, net

 

 

127

 

 

 

141

 

Total assets

 

$

8,444

 

 

$

8,257

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

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

 

$

34

 

 

$

33

 

Accounts payable

 

 

115

 

 

 

98

 

Current maturities of long-term securitized vacation ownership debt

 

 

45

 

 

 

48

 

Accrued expenses

 

 

1,399

 

 

 

1,354

 

Accrued salaries, wages and benefits

 

 

325

 

 

 

400

 

Accrued taxes and other

 

 

312

 

 

 

303

 

Total current liabilities

 

 

2,230

 

 

 

2,236

 

Long-term debt

 

 

2,318

 

 

 

2,144

 

Long-term securitized vacation ownership debt

 

 

111

 

 

 

123

 

Deferred income taxes

 

 

31

 

 

 

34

 

Other liabilities

 

 

2,407

 

 

 

2,421

 

Total liabilities

 

 

7,097

 

 

 

6,958

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

 

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

   shares; outstanding 169,537,501 and 168,754,605 shares

   at March 31, 2016 and December 31, 2015, respectively

 

 

2

 

 

 

2

 

Additional paid-in capital

 

 

115

 

 

 

115

 

Accumulated other comprehensive loss

 

 

(645

)

 

 

(668

)

Retained earnings

 

 

1,872

 

 

 

1,847

 

Total Starwood stockholders’ equity

 

 

1,344

 

 

 

1,296

 

Noncontrolling interest

 

 

3

 

 

 

3

 

Total equity

 

 

1,347

 

 

 

1,299

 

Total liabilities and equity

 

$

8,444

 

 

$

8,257

 

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

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

Owned, leased and consolidated joint venture hotels

 

$

265

 

 

$

316

 

Vacation ownership and residential sales and services

 

 

185

 

 

 

187

 

Management fees, franchise fees and other income

 

 

256

 

 

 

240

 

Other revenues from managed and franchised properties

 

 

698

 

 

 

672

 

 

 

 

1,404

 

 

 

1,415

 

Costs and Expenses

 

 

 

 

 

 

 

 

Owned, leased and consolidated joint venture hotels

 

 

217

 

 

 

262

 

Vacation ownership and residential sales and services

 

 

142

 

 

 

137

 

Selling, general, administrative and other

 

 

86

 

 

 

91

 

Restructuring and other special charges (credits), net

 

 

39

 

 

 

31

 

Depreciation

 

 

62

 

 

 

62

 

Amortization

 

 

8

 

 

 

7

 

Other expenses from managed and franchised properties

 

 

698

 

 

 

672

 

 

 

 

1,252

 

 

 

1,262

 

Operating income

 

 

152

 

 

 

153

 

Equity earnings and gains from unconsolidated ventures, net

 

 

12

 

 

 

15

 

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

 

 

(23

)

 

 

(31

)

Gain (loss) on asset dispositions and impairments, net

 

 

2

 

 

 

14

 

Income from continuing operations before taxes and noncontrolling interests

 

 

143

 

 

 

151

 

Income tax expense

 

 

(53

)

 

 

(52

)

Income from continuing operations

 

 

90

 

 

 

99

 

Discontinued operations:

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Net income attributable to Starwood

 

$

90

 

 

$

99

 

Earnings Per Share — Basic

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.54

 

 

$

0.59

 

Discontinued operations

 

 

 

 

 

 

Net income

 

$

0.54

 

 

$

0.59

 

Earnings Per Share — Diluted

 

 

 

 

 

 

 

 

Continuing operations

 

$

0.53

 

 

$

0.58

 

Discontinued operations

 

 

 

 

 

 

Net income

 

$

0.53

 

 

$

0.58

 

Weighted average number of shares

 

 

167

 

 

 

170

 

Weighted average number of shares assuming dilution

 

 

168

 

 

 

171

 

Dividends declared per share

 

$

0.375

 

 

$

0.375

 

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

 

 

March 31,

 

 

2016

 

 

2015

 

Net income

$

90

 

 

$

99

 

Other comprehensive income (loss), net of taxes:

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

25

 

 

 

(112

)

Defined benefit pension and postretirement plans activity

 

1

 

 

 

1

 

Hedging activities

 

(3

)

 

 

1

 

Total other comprehensive income (loss), net of taxes

 

23

 

 

 

(110

)

Total comprehensive income (loss)

 

113

 

 

 

(11

)

Comprehensive (income) loss attributable

   to noncontrolling interests

 

 

 

 

 

Foreign currency translation adjustments attributable

   to noncontrolling interests

 

 

 

 

 

Comprehensive income (loss) attributable to Starwood

$

113

 

 

$

(11

)

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)

 

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

90

 

 

$

99

 

Adjustments to net income:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

70

 

 

 

69

 

Amortization of deferred gains

 

 

(21

)

 

 

(22

)

(Gain) loss on asset dispositions and impairments, net

 

 

(2

)

 

 

(14

)

Stock-based compensation expense

 

 

13

 

 

 

14

 

Excess stock-based compensation tax benefit

 

 

 

 

 

(7

)

Distributions in (deficit) excess of equity earnings

 

 

(4

)

 

 

(8

)

Deferred income tax expense

 

 

9

 

 

 

41

 

Other non-cash adjustments to net income

 

 

21

 

 

 

(16

)

Decrease (increase) in restricted cash

 

 

(14

)

 

 

23

 

Other changes in working capital

 

 

(77

)

 

 

(114

)

Securitized VOI notes receivable activity, net

 

 

15

 

 

 

19

 

Unsecuritized VOI notes receivable activity, net

 

 

(28

)

 

 

(18

)

Accrued income taxes and other

 

 

(24

)

 

 

(11

)

Cash from operating activities

 

 

48

 

 

 

55

 

Investing Activities

 

 

 

 

 

 

 

 

Purchases of plant, property and equipment

 

 

(35

)

 

 

(51

)

Proceeds from asset sales, net of transaction costs

 

 

83

 

 

 

 

Acquisitions, net of acquired cash

 

 

(50

)

 

 

(4

)

Issuance of notes receivable, net

 

 

(11

)

 

 

(5

)

Distributions from investments, net

 

 

 

 

 

31

 

Other, net

 

 

31

 

 

 

4

 

Cash from (used for) investing activities

 

 

18

 

 

 

(25

)

Financing Activities

 

 

 

 

 

 

 

 

Commercial paper, net

 

 

183

 

 

 

(172

)

Long-term debt issued

 

 

 

 

 

9

 

Long-term debt repaid

 

 

(20

)

 

 

(4

)

Long-term securitized debt repaid

 

 

(15

)

 

 

(20

)

Dividends paid

 

 

(68

)

 

 

(64

)

Proceeds from employee stock option exercises

 

 

3

 

 

 

11

 

Excess stock-based compensation tax benefit

 

 

 

 

 

7

 

Share repurchases

 

 

 

 

 

(123

)

Other, net

 

 

(22

)

 

 

(25

)

Cash from (used for) financing activities

 

 

61

 

 

 

(381

)

Exchange rate effect on cash and cash equivalents

 

 

5

 

 

 

(11

)

Increase (decrease) in cash and cash equivalents

 

 

132

 

 

 

(362

)

Cash and cash equivalents — beginning of period

 

 

1,048

 

 

 

935

 

Cash and cash equivalents — end of period

 

$

1,180

 

 

$

573

 

Supplemental Disclosures of Cash Flow Information

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$

15

 

 

$

51

 

Income taxes, net of refunds

 

$

36

 

 

$

21

 

 

 

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 1,308 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 March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09, “Compensation - Stock Compensation (Topic 718) Improvements to Employee Share-Based Payment Accounting.” The amendments in this topic are intended to simplify several aspects of the accounting for share-based payment award transactions and are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods, with early adoption permitted. We are still assessing the timing of adoption and the potential impact that ASU No. 2016-09 will have on our financial statements and disclosures.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)”, which supersedes existing guidance on accounting for leases and generally requires all leases to be recognized on the balance sheet and is effective for reporting periods beginning after December 15, 2018, with early adoption permitted. The amendments in this ASU are to be applied using a modified retrospective approach. We are still assessing the timing of adoption and the potential impact that ASU No. 2016-02 will have on our financial statements and disclosures.

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 May 2014, the FASB issued 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, with two transition methods of adoption allowed. In July 2015, the FASB approved a one-year deferral of this standard, with a revised effective date for reporting periods beginning after December 15, 2017. 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.

Adopted Accounting Standards

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 adopted this ASU prospectively on January 1, 2016. The adoption of this update did not 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

7


 

and are effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. We adopted this ASU on January 1, 2016 and retrospectively applied the standard to the December 31, 2015 balance sheet by reclassifying approximately $11 million from other assets to long-term debt and long-term securitized vacation ownership debt.

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 adopted this ASU on January 1, 2016. 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

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Income from continuing operations

 

$

90

 

 

$

99

 

Weighted average common shares for basic earnings per share

 

 

167

 

 

 

170

 

Effect of dilutive stock options and restricted stock awards

 

 

1

 

 

 

1

 

Weighted average common shares for diluted earnings per share

 

 

168

 

 

 

171

 

Basic earnings per share

 

$

0.54

 

 

$

0.59

 

Diluted earnings per share

 

$

0.53

 

 

$

0.58

 

 

Approximately 1.1 million shares and 0.8 million shares for the three months ended March 31, 2016 and 2015, respectively, were excluded from the computation of diluted shares, as their impact would have been anti-dilutive.

 

 

Note 4.

Asset Dispositions and Impairments

During the three months ended March 31, 2016, we sold one hotel for cash proceeds net of closing costs of approximately $79 million subject to a long-term management agreement. The sale resulted in a pre-tax gain of approximately $5 million, which we deferred and are recognizing into management fees, franchise fees and other income over the initial term of the management agreement.

Additionally, during the three months ended March 31, 2016, we recorded a net gain of $2 million, primarily related to the reduction of an obligation associated with a previous disposition.

Subsequent to March 31, 2016, management received approval to commit to a plan to sell two foreign wholly-owned hotels, entered into a definitive purchase and sale agreement and received a non-refundable deposit. These hotels are expected to be sold in the second quarter of 2016 subject to long-term management agreements. We believe that this will result in the recognition of a gain on the sale which will be more than offset by the realization of a significant cumulative translation adjustment loss due to substantial liquidation.

During the three months ended March 31, 2015, we recorded a $17 million gain related to the sale of a minority partnership interest in a hotel.

 

 

Note 5.

Transfers of Financial Assets

We have variable interests in the entities associated with our three 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 $2 million and $3 million and during the three months ended March 31, 2016 and 2015, respectively. We have been able to resell the VOIs underlying the VOI notes repurchased or replaced under these provisions without incurring significant

8


 

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 $6 million and $8 million during the three months ended March 31, 2016 and 2015, 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):

 

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Vacation ownership loans – securitized

 

$

158

 

 

$

173

 

Vacation ownership loans – unsecuritized

 

 

463

 

 

 

443

 

 

 

 

621

 

 

 

616

 

Less: current portion

 

 

 

 

 

 

 

 

Vacation ownership loans – securitized

 

 

(31

)

 

 

(32

)

Vacation ownership loans – unsecuritized

 

 

(44

)

 

 

(41

)

 

 

$

546

 

 

$

543

 

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

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Vacation ownership loans – securitized

 

$

6

 

 

$

9

 

Vacation ownership loans – unsecuritized

 

 

15

 

 

 

12

 

 

 

$

21

 

 

$

21

 

 


9


 

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

 

 

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

2016

 

$

25

 

 

$

40

 

 

$

65

 

2017

 

 

32

 

 

 

49

 

 

 

81

 

2018

 

 

29

 

 

 

48

 

 

 

77

 

2019

 

 

26

 

 

 

50

 

 

 

76

 

2020

 

 

23

 

 

 

52

 

 

 

75

 

Thereafter

 

 

36

 

 

 

305

 

 

 

341

 

Balance at March 31, 2016

 

$

171

 

 

$

544

 

 

$

715

 

Weighted average interest rates at March 31, 2016

 

 

13.22

%

 

 

12.94

%

 

 

13.00

%

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 March 31, 2016 and December 31, 2015, the average estimated default rate for our pools of receivables was approximately 9.1% and 9.1%, respectively.

 

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

 

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

Balance at December 31, 2015

 

$

15

 

 

$

77

 

 

$

92

 

Provisions for loan losses

 

 

 

 

 

8

 

 

 

8

 

Write-offs

 

 

 

 

 

(6

)

 

 

(6

)

Other

 

 

(2

)

 

 

2

 

 

 

 

Balance at March 31, 2016

 

$

13

 

 

$

81

 

 

$

94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2014

 

$

28

 

 

$

68

 

 

$

96

 

Provisions for loan losses

 

 

(1

)

 

 

4

 

 

 

3

 

Write-offs

 

 

 

 

 

(6

)

 

 

(6

)

Other

 

 

(3

)

 

 

3

 

 

 

 

Balance at March 31, 2015

 

$

24

 

 

$

69

 

 

$

93

 

 

We use the origination of the notes by brand (Sheraton, Westin, and Other) and the Fair Isaac Corporation (FICO) scores of the buyers as the primary credit quality indicators to calculate the loan loss reserve for the vacation ownership notes, as we believe there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership property they have acquired, supplemented by the FICO scores of the buyers. In addition to quantitatively calculating the loan loss reserve based on our static pool analysis, we supplement the process by evaluating certain qualitative data, including the aging of the respective receivables and current default trends by brand and origination year.


10


 

Balances of our VOI notes receivable by brand and by FICO score were as follows (in millions):

 

 

 

As of March 31, 2016

 

 

 

700+

 

 

600-699

 

 

<600

 

 

No Score

 

 

Total

 

Sheraton

 

$

165

 

 

$

145

 

 

$

13

 

 

$

62

 

 

$

385

 

Westin

 

 

191

 

 

 

88

 

 

 

5

 

 

 

33

 

 

 

317

 

Other

 

 

7

 

 

 

2

 

 

 

 

 

 

4

 

 

 

13

 

 

 

$

363

 

 

$

235

 

 

$

18

 

 

$

99

 

 

$

715

 

 

 

 

As of December 31, 2015

 

 

 

700+

 

 

600-699

 

 

<600

 

 

No Score

 

 

Total

 

Sheraton

 

$

165

 

 

$

145

 

 

$

14

 

 

$

60

 

 

$

384

 

Westin

 

 

185

 

 

 

89

 

 

 

5

 

 

 

32

 

 

 

311

 

Other

 

 

7

 

 

 

2

 

 

 

 

 

 

4

 

 

 

13

 

 

 

$

357

 

 

$

236

 

 

$

19

 

 

$

96

 

 

$

708

 

 

Given the significance of our pools of VOI notes receivable, a change in the projected default rate can have a significant impact to our loan loss reserve requirements, with a 0.1% change estimated to have an impact of approximately $5 million.

We consider a VOI note receivable delinquent when it is more than 30 days outstanding. Delinquent notes receivable amounted to $45 million and $46 million as of March 31, 2016 and December 31, 2015, respectively. All delinquent loans are placed on nonaccrual status, and we do not resume interest accrual until payment is made. We consider loans to be in default upon reaching 120 days outstanding, at which point, we generally commence the repossession process. Uncollectible VOI notes receivable are charged off when title to the unit is returned to us. We generally do not modify vacation ownership notes that become delinquent or upon default.

Past due balances of VOI notes receivable were as follows (in millions):

 

 

 

 

Total

Receivables

 

 

Current

 

 

Delinquent

 

 

 

 

 

 

 

 

 

 

 

30-59 Days

 

 

60-89 Days

 

 

>90 Days

 

 

Total

 

As of March 31, 2016

 

$

715

 

 

$

670

 

 

$

9

 

 

$

7

 

 

$

29

 

 

$

45

 

As of December 31, 2015

 

$

708

 

 

$

662

 

 

$

12

 

 

$

7

 

 

$

27

 

 

$

46

 

 

 

Note 7.

Debt

Long-term debt and short-term borrowings consisted of the following, excluding securitized vacation ownership debt (in millions):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Senior Credit Facility:

 

 

 

 

 

 

 

 

Revolving Credit Facility, maturing 2020

 

$

 

 

$

 

Senior Notes, interest at 6.75%, maturing 2018

 

 

373

 

 

 

372

 

Senior Notes, interest at 7.15%, maturing 2019

 

 

211

 

 

 

209

 

Senior Notes, interest at 3.125%, maturing 2023

 

 

346

 

 

 

346

 

Senior Notes, interest at 3.75%, maturing 2025

 

 

344

 

 

 

344

 

Senior Notes, interest at 4.50%, maturing 2034

 

 

289

 

 

 

289

 

Capital lease obligations

 

 

159

 

 

 

169

 

Commercial paper, weighted average interest at

   0.781% at March 31, 2016

 

 

591

 

 

 

408

 

Mortgages and other, interest rates ranging from

   non-interest bearing to 3.65%, various maturities

 

 

39

 

 

 

40

 

 

 

 

2,352

 

 

 

2,177

 

Less current maturities

 

 

(34

)

 

 

(33

)

Long-term debt

 

$

2,318

 

 

$

2,144

 

 

11


 

 

Note 8.

Securitized Vacation Ownership Debt

As discussed in Note 5, our VIEs associated with the securitization of our VOI notes receivable are consolidated in our financial statements. Long-term and short-term securitized vacation ownership debt consisted of the following (in millions):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

2010 securitization, interest rates ranging from 3.65% to 4.75%, maturing 2021

 

 

43

 

 

 

48

 

2011 securitization, interest rates ranging from 3.67% to 4.82%, maturing 2025

 

 

56

 

 

 

61

 

2012 securitization, interest rates ranging from 2.00% to 2.76%, maturing 2023

 

 

57

 

 

 

62

 

 

 

 

156

 

 

 

171

 

Less current maturities

 

 

(45

)

 

 

(48

)

Long-term securitized debt

 

$

111

 

 

$

123

 

 

 

 

Note 9.

Other Liabilities

Other liabilities consisted of the following (in millions):

 

 

 

March 31,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Deferred gains on asset sales

 

$

1,328

 

 

$

1,329

 

SPG point liability (a)

 

 

818

 

 

 

830

 

Deferred revenue

 

 

43

 

 

 

46

 

Benefit plan liabilities

 

 

44

 

 

 

45

 

Deferred rent

 

 

26

 

 

 

27

 

Insurance reserves

 

 

48

 

 

 

47

 

Other

 

 

100

 

 

 

97

 

 

 

$

2,407

 

 

$

2,421

 

 

 

(a)

Includes the actuarially determined liability and certain deferred revenues related to the Starwood Preferred Guest program.

Deferred Gains. We defer gains realized in connection with the sale of a property that we continue to manage through a long-term management agreement and recognize the gains over the initial term of the related agreement (see Note 4). As of March 31, 2016 and December 31, 2015, we had total deferred gains of approximately $1,412 million and $1,412 million, respectively, included in accrued expenses and other liabilities in our consolidated balance sheets. Amortization of deferred gains is included in management fees, franchise fees and other income in our consolidated statements of income and totaled approximately $21 million and $22 million in the three months ended March 31, 2016 and 2015, respectively.

Frequent Guest Program. Starwood Preferred Guest (SPG) is our frequent guest incentive marketing program. SPG members earn points based on spending at our owned, managed and franchised hotels, as incentives to first-time buyers of VOIs and residences, and through participation in affiliated partners’ programs such as co-branded credit cards and airline travel. Points can be redeemed at substantially all of our owned, leased, managed and franchised hotels as well as through other redemption opportunities with third parties, such as conversion to airline miles.

We charge our owned, leased, managed and franchised hotels the cost of operating the SPG program, including the estimated cost of our future redemption obligation, based on a percentage of our SPG members’ qualified expenditures. Our management and franchise agreements require that we are reimbursed for the costs of operating the SPG program, including marketing, promotions and communications and performing member services for the SPG members. As points are earned, we increase the SPG point liability for the amount of cash we receive from our managed and franchised hotels related to the future redemption obligation. For our owned hotels, we record an expense for the amount of our future redemption obligation with the offset to the SPG point liability. When points are redeemed by the SPG members, the hotels recognize revenue and the SPG point liability is reduced.

Through the services of third-party actuarial analysts, we determine the value of the future redemption obligation based on statistical formulas which project the timing of future point redemptions based on historical experience, including an estimate of the “breakage” for points that will never be redeemed, and an estimate of the points that will eventually be redeemed as well as the cost of reimbursing hotels and other third parties for other point redemption opportunities.

12


 

We consolidate the assets and liabilities of the SPG program including the liability associated with the future redemption obligation which is included in other long-term liabilities and accrued expenses in the consolidated balance sheets. The total actuarially determined liability as of March 31, 2016 and December 31, 2015, was $1,195 million and $1,219 million, respectively, of which $481 million and $491 million, respectively, was included in accrued expenses.

 

 

Note 10.

Restructuring and Other Special Charges (Credits), Net

Restructuring and other special charges (credits), net were $39 million and $31 million for the three months ended March 31, 2016 and 2015, respectively. These net charges (credits) are not recorded in our reportable segment earnings.

During the three months ended March 31, 2016, we recorded $8 million in net restructuring charges and $31 million of other special charges. The restructuring charges are primarily related to costs associated with our cost savings initiatives announced in 2015. Other special charges primarily consist of $19 million of costs primarily associated with professional fees related to the planned merger with Marriott International, Inc. (Marriott) (see Note 20), $7 million of costs related to the planned separation, distribution, and subsequent merger of our vacation ownersh