Travel + Leisure(TNL) - 2022 Q4 - Annual Report

PART I Business Travel + Leisure Co. operates as a membership and leisure travel company through its Vacation Ownership and Travel and Membership segments Company Overview Travel + Leisure Co. is a leading membership and leisure travel company with two primary business segments, Wyndham Destinations and Travel and Membership - The company operates through two main business segments: Wyndham Destinations (Vacation Ownership) and Travel and Membership (Exchange and Travel Club)[19] - Wyndham Destinations is the world's largest vacation ownership company with 816,000 owners and over 245 resorts[19] - The Travel and Membership segment includes RCI, the world's largest exchange company with 3.5 million members and over 4,100 affiliated resorts[19] - In 2022, the company generated 42% of its revenues from the sale of vacation ownership interests and 45% from fee-for-service businesses[23] - The company derived 89% of its 2022 revenues from the United States and 11% internationally[24] Vacation Ownership The Vacation Ownership segment generates revenue from VOI sales, financing, and property management, with a key strategy of selling upgrades to its existing owner base - As of December 31, 2022, the company had more than 245 vacation ownership resorts and 816,000 owners[28] - VOI upgrade sales to existing owners represented 70% of net VOI sales in 2022[36] - The company offers consumer financing for up to 10 years with a typical minimum down payment of 10%; the average down payment on financed VOI sales was 19% in 2022[40] - In 2022, 64% of gross VOI sales (net of Fee-for-Service sales) were financed, totaling $1.14 billion in receivables[41] - As of December 31, 2022, 94% of the company's loan portfolio was current (not more than 30 days past due)[43] - Property management fees are generally based on total operating costs and typically approximate 10% of budgeted operating expenses[44] Travel and Membership The Travel and Membership segment generates revenue from membership dues and transaction fees through its RCI exchange network and various travel clubs - The RCI exchange network has 3.5 million paid members and relationships with over 4,100 affiliated resorts in 104 countries[51][52] - The average annual member retention rate for the exchange business over the last three years was 84%[51] - The segment's strategy includes expanding B2B travel club solutions and growing a direct-to-consumer travel club under the Travel + Leisure brand[55][56] - Revenues are primarily derived from annual membership dues and fees for facilitating exchange and non-exchange transactions[57] Human Capital The company employed over 18,200 associates globally as of year-end 2022, with a focus on employee development and performance-based compensation Employee Distribution as of Dec 31, 2022 | Category | Number of Associates | | :--- | :--- | | Total Global Associates | >18,200 | | - Vacation Ownership | 14,000 | | - Travel and Membership | 2,300 | | - Corporate Group | 1,900 | | - Outside the U.S. | >3,700 | - Less than 1% of associates are subject to collective bargaining agreements[77] - 43% of associates participate in a variable pay incentive program as of year-end 2022[80] - The company offers an Employee Stock Purchase Plan, available to 89% of associates, allowing the purchase of company stock at a 10% discount[79] Environmental, Social, and Governance (ESG) The company's "Full Circle" ESG strategy focuses on environmental protection, community support, and fostering an inclusive culture - Key environmental goals include a 40% reduction in GHG emissions intensity and a 35% reduction in water withdrawal per square foot by 2025, compared to a 2010 baseline[88][90] - As of December 31, 2021, the company had achieved a 39% reduction in Scope 1 + Scope 2 GHG emissions intensity and a 21% reduction in water withdrawal per square foot compared to its 2010 baseline[88] - Approximately 35% of managed properties are in Tier I windstorm areas, 20% in high flood risk areas, and 20% in high-risk wildfire-prone states, indicating significant exposure to climate-related risks[90] Global Workforce Gender Distribution (as of Dec 31, 2022) | Level | Female | Male | Undeclared | | :--- | :--- | :--- | :--- | | Below Director | 54% | 44% | 2% | | Director and above | 39% | 60% | 1% | U.S. Workforce Ethnic Diversity Distribution (as of Dec 31, 2022) | Level | White | Diverse | Undeclared | | :--- | :--- | :--- | :--- | | Below Director | 46% | 52% | 2% | | Director and above | 76% | 23% | 1% | Key Agreements Related to the Spin-Off Following the 2018 spin-off, key agreements govern the ongoing relationship with Wyndham Hotels, including liability allocation and trademark licensing - Travel + Leisure Co. assumed two-thirds and Wyndham Hotels assumed one-third of certain shared contingent corporate liabilities incurred prior to the spin-off[104][168] - The Tax Matters Agreement specifies that Wyndham Hotels will bear one-third and Travel + Leisure Co. two-thirds of the combined U.S. federal income tax liability for periods when Wyndham Hotels was part of the consolidated group[108] - A 100-year license agreement grants Travel + Leisure Co. the right to use the "Wyndham" trademark in its vacation ownership and exchange businesses, with an option to extend for 30 years[109] Risk Factors The company faces material risks related to its business operations, the 2018 spin-off, and its common stock Risks Related to Our Business and Our Industry The company's performance is subject to significant business and industry risks, including competition, cybersecurity threats, and dependency on the travel industry - The company faces risks that it may not achieve the expected objectives of the Travel + Leisure brand acquisition, and the brand's value could be negatively impacted if the media properties operated by Dotdash Meredith deteriorate[112][114] - The timeshare and leisure travel industries are highly competitive, which could reduce fee structures and adversely impact profits[115][118] - Revenues are highly dependent on the travel industry, which can be disrupted by economic slowdowns, inflation, terrorism, war, pandemics, and severe weather events associated with climate change[127][128] - Failure to protect internal or customer data from cyber-attacks could disrupt business, damage reputation, and lead to significant costs, fines, or lawsuits[135] - The company is subject to risks from its vacation ownership receivables portfolio, including defaults by purchasers, which could necessitate increased loan loss reserves[142] - Significant indebtedness exposes the company to risks such as increased interest costs, potential default if covenants are breached, and reduced cash flow for other operational needs[145][146] - The COVID-19 pandemic has had, and could in the future have, a significant negative effect on operations due to travel restrictions, health concerns, and economic impacts[164] Risks Related to the Spin-Off The company faces ongoing risks from its 2018 spin-off, including its reliance on Wyndham Hotels and shared contingent liabilities - The company's success depends in part on its ongoing relationship with Wyndham Hotels, including brand licensing and the Wyndham Rewards loyalty program[167] - The company is responsible for two-thirds of certain contingent corporate liabilities of Wyndham Worldwide incurred prior to the spin-off, with Wyndham Hotels responsible for the remaining one-third[168] - If the spin-off transaction fails to qualify as a tax-free reorganization for U.S. federal income tax purposes, the company and its shareholders could be required to pay substantial taxes[171][174] General Risk Factors Related to Our Common Stock Investors in the company's common stock face risks including price volatility, anti-takeover provisions, and uncertainty regarding future capital returns - The trading price of the company's common stock is subject to fluctuation due to company performance, industry trends, economic conditions, and overall market volatility[175] - Corporate governance provisions and Delaware law may deter or delay a potential takeover, which could be seen as beneficial by some shareholders[176] - The continuation of dividend payments and the share repurchase program is not guaranteed and is subject to the Board of Directors' discretion based on financial conditions and other factors[177] Unresolved Staff Comments The company reports no unresolved staff comments from the SEC - None[178] Properties The company operates from a leased corporate headquarters in Orlando, Florida, with numerous owned and leased properties globally supporting its business segments - Corporate headquarters are located in a leased office at 6277 Sea Harbor Drive in Orlando, Florida[179] - The Vacation Ownership business utilizes 160 marketing and sales offices, with 116 in the U.S. and the remainder in various international locations[180] - The Travel and Membership business owns one property in Indianapolis, Indiana, and one in Mexico, in addition to its leased offices[181] Legal Proceedings The company is involved in various legal matters in the ordinary course of business, none of which are expected to be materially adverse - The company is involved in various claims and lawsuits arising in the ordinary course of business, none of which are expected to have a material adverse effect on its financial results[182] Mine Safety Disclosures This item is not applicable to the company - Not applicable[183] PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE under TNL, and in Q4 2022, it repurchased 2.9 million shares, with its five-year total return underperforming the S&P Midcap 400 - The company's common stock is listed on the NYSE under the ticker symbol TNL[186] Issuer Purchases of Equity Securities (Q4 2022) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | October 2022 | 1,159,600 | $37.71 | | November 2022 | 1,053,096 | $37.49 | | December 2022 | 684,602 | $36.79 | | Total Q4 | 2,897,298 | $37.41 | - As of December 31, 2022, approximately $477 million remained available for purchase under the company's Share Repurchase Program[187] 5-Year Cumulative Total Return Comparison | Index | 2017 | 2022 | Total Return | | :--- | :--- | :--- | :--- | | Travel + Leisure Co. | $100.00 | $83.37 | -16.6% | | S&P Midcap 400 | $100.00 | $138.34 | +38.3% | | S&P Hotels, Resorts & Cruise Lines | $100.00 | $75.57 | -24.4% | Management's Discussion and Analysis of Financial Condition and Results of Operations In 2022, strong leisure travel demand drove revenue and net income growth, supported by a strong liquidity position and significant capital returns to shareholders Results of Operations Net revenues increased to $3.57 billion in 2022, driven by strong performance in the Vacation Ownership segment, resulting in a net income of $357 million Consolidated Results of Operations (2022 vs. 2021) | Metric (in millions) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net revenues | $3,567 | $3,134 | $433 | | Operating income | $653 | $618 | $35 | | Net income attributable to shareholders | $357 | $308 | $49 | Key Operating Statistics (2022 vs. 2021) | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Vacation Ownership | | | | | Gross VOI sales (in millions) | $1,982 | $1,491 | 33.0% | | Tours (in 000s) | 561 | 451 | 24.4% | | Volume Per Guest (VPG) | $3,426 | $3,143 | 9.0% | | Travel and Membership | | | | | Total transactions (in 000s) | 1,731 | 1,688 | 2.5% | | Average number of exchange members (in 000s) | 3,524 | 3,721 | (5.3%) | Adjusted EBITDA by Segment (2022 vs. 2021) | Segment (in millions) | 2022 | 2021 | | :--- | :--- | :--- | | Vacation Ownership | $665 | $569 | | Travel and Membership | $268 | $271 | | Corporate and other | ($74) | ($62) | | Total Company | $859 | $778 | Financial Condition Total assets and liabilities increased in 2022, driven by higher cash balances and an incremental term loan borrowing, respectively Balance Sheet Summary (as of Dec 31) | (In millions) | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Total assets | $6,757 | $6,588 | $169 | | Total liabilities | $7,661 | $7,382 | $279 | | Total deficit | ($904) | ($794) | ($110) | - The increase in total assets was driven by a $181 million increase in Cash and cash equivalents and a $61 million increase in Vacation ownership contract receivables, net[231] - The increase in total liabilities was primarily due to a $290 million increase in Debt from an incremental term loan B borrowing[231] Liquidity and Capital Resources The company maintains a strong liquidity position with significant cash reserves and full availability on its revolving credit facility as of year-end 2022 - As of December 31, 2022, the company had $550 million of Cash and cash equivalents and $1.0 billion of available capacity under its revolving credit facility[235][236] - In December 2022, the company entered into a third amendment to its credit agreement, providing for an incremental term loan B borrowing of $300 million due 2029[240] Material Future Contractual Obligations (as of Dec 31, 2022) | (In millions) | 2023 | 2024 | 2025 | 2026 | 2027 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $411 | $309 | $636 | $654 | $403 | $1,285 | $3,698 | | Non-recourse debt | $226 | $224 | $514 | $215 | $201 | $611 | $1,991 | | Interest on debt | $286 | $261 | $220 | $157 | $107 | $154 | $1,185 | | Purchase commitments | $177 | $146 | $136 | $129 | $86 | $88 | $762 | | Operating leases | $31 | $29 | $24 | $14 | $13 | $21 | $132 | - The company utilizes surety bonds for its Vacation Ownership business, with commitments from 12 providers totaling $2.3 billion, of which $455 million was outstanding as of December 31, 2022[255] Cash Flows In 2022, operating cash flow decreased due to working capital changes, while financing cash use was lower due to net debt proceeds compared to net repayments in 2021 Summary of Cash Flows (Year Ended Dec 31) | (In millions) | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $442 | $568 | | Net cash used in investing activities | ($50) | ($93) | | Net cash used in financing activities | ($196) | ($1,288) | | Net change in cash, cash equivalents and restricted cash | $191 | ($820) | - The company repurchased 8.2 million shares for $351 million in 2022[273] - The company paid cash dividends of $1.60 per share, totaling $135 million, in 2022[275] Critical Accounting Estimates The company's financial statements rely on critical accounting estimates, most significantly the allowance for loan losses on its vacation ownership receivables - The allowance for loan losses on VOCRs is the most significant estimate, based on a static pool analysis of historical defaults, FICO scores, and economic conditions; the year-end allowance has ranged from 18.1% to 19.5% of gross VOCRs over the past five years, with an exception of 21.8% in 2020 due to COVID-19[282][284][285] - VOI inventory is valued using the relative sales value method, which requires estimates of future sales prices, volumes, and credit losses[286] - Goodwill and other indefinite-lived intangible assets are tested for impairment annually or more frequently if indicators exist, requiring significant judgments about future cash flows and market conditions[287] - The company regularly reviews deferred tax assets for realizability and establishes a valuation allowance based on projections of future taxable income[292] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risks stem from interest rate and foreign currency fluctuations, which it manages using derivative instruments - The company's principal market exposures are interest rate and foreign currency rate risks[295] - As of December 31, 2022, the company had $1.002 billion in variable rate borrowings ($428 million non-recourse and $574 million corporate)[298] - A 100-basis point change in underlying interest rates would result in a $4 million change in annual consumer financing interest expense and a $6 million change in annual corporate debt interest expense[298] - The company expects to replace LIBOR with Term SOFR as the benchmark rate for its revolving credit facility and Term Loan B in the first quarter of 2023[296][260] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and the independent auditor's report for the fiscal years 2020 through 2022 Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on the financial statements and internal controls, identifying the Allowance for Loan Losses as a critical audit matter - The independent auditor, Deloitte & Touche LLP, issued an unqualified (clean) opinion on the financial statements and the effectiveness of internal control over financial reporting[305] - The audit identified the 'Allowance for Loan Losses' as a Critical Audit Matter, highlighting the complex and subjective judgments required to predict losses over the life of contract receivables[311][312][313] Consolidated Financial Statements The consolidated financial statements detail the company's performance, showing net revenues of $3.57 billion and net income of $357 million for 2022 Consolidated Statement of Income (Year Ended Dec 31) | (In millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net revenues | $3,567 | $3,134 | $2,160 | | Operating income/(loss) | $653 | $618 | ($105) | | Net income/(loss) attributable to shareholders | $357 | $308 | ($255) | | Diluted EPS | $4.24 | $3.52 | ($2.97) | Consolidated Balance Sheet (As of Dec 31) | (In millions) | 2022 | 2021 | | :--- | :--- | :--- | | Cash and cash equivalents | $550 | $369 | | Vacation ownership contract receivables, net | $2,370 | $2,309 | | Total assets | $6,757 | $6,588 | | Non-recourse vacation ownership debt | $1,973 | $1,934 | | Debt | $3,669 | $3,379 | | Total liabilities | $7,661 | $7,382 | | Total deficit | ($904) | ($794) | Consolidated Statement of Cash Flows (Year Ended Dec 31) | (In millions) | 2022 | 2021 | 2020 | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $442 | $568 | $374 | | Net cash used in investing activities | ($50) | ($93) | ($65) | | Net cash (used in)/provided by financing activities | ($196) | ($1,288) | $502 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies and financial data, including revenue recognition, debt structure, and segment information Disaggregation of Net Revenues by Segment (2022) | (In millions) | Vacation Ownership | Travel and Membership | | :--- | :--- | :--- | | Vacation ownership interest sales | $1,484 | - | | Property management & reimbursable revenues | $763 | - | | Consumer financing | $406 | - | | Transaction revenues | - | $519 | | Subscription revenues | - | $184 | | Total Net Revenues | $2,835 | $735 | Vacation Ownership Contract Receivables (as of Dec 31, 2022) | (In millions) | Amount | | :--- | :--- | | Vacation ownership contract receivables, gross | $2,911 | | Less: allowance for loan losses | $541 | | Vacation ownership contract receivables, net | $2,370 | Debt Summary (as of Dec 31, 2022) | (In millions) | Amount | | :--- | :--- | | Non-recourse vacation ownership debt | $1,973 | | Corporate Debt (Term Loans, Notes, etc.) | $3,669 | | Total Debt | $5,642 | - In 2021, the company released $91 million of its COVID-19 related loan loss allowance, positively impacting revenue, due to improved portfolio performance; no COVID-19 specific allowance remained as of year-end 2021[409][519] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting and financial disclosure - None[556] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The principal executive and financial officers concluded that disclosure controls and procedures were effective as of December 31, 2022[557] - Management's assessment, based on the COSO framework, concluded that internal control over financial reporting was effective as of December 31, 2022[558] Other Information The company reports no other information for this item - None[561] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to the company - Not applicable[562] PART III Part III incorporates by reference information from the company's 2023 Proxy Statement regarding governance, compensation, and security ownership Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[565][566][567] Executive Compensation Information regarding director and executive compensation is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[570] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of year-end 2022, 5.0 million securities were issuable under approved equity compensation plans, with 10.8 million available for future issuance Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be issued upon exercise (millions) | Weighted-average exercise price of options | Securities remaining available for future issuance (millions) | | :--- | :--- | :--- | :--- | | Approved by security holders | 5.0 | $45.36 | 10.8 | - Additional information regarding security ownership is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[573] Certain Relationships and Related Transactions and Director Independence Information regarding related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[574] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement - Information required by this item is incorporated by reference from the Proxy Statement for the 2023 Annual Meeting of Shareholders[575] PART IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the report - This section lists all financial statements, schedules, and exhibits filed with the report[577] - Financial statement schedule II, related to valuation and qualifying accounts, was omitted because the information is included in the notes to the financial statements[578] Form 10-K Summary The company provides no summary for this item - None[588]