As filed with the Securities and Exchange Commission as of May 5, 2017

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

 

Commission File No. 1‑34062

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ILG, Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	26‑2590997 (I.R.S. Employer Identification No.)
6262 Sunset Drive, Miami, FL (Address of Registrant’s principal executive offices)	33143 (Zip Code)

 

(305) 666‑1861

(Registrant’s telephone number, including area code)

(Former name or former address, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):

Large accelerated filer ☒	Accelerated filer ☐	Non‑accelerated filer ☐ (Do not check if a smaller reporting company)

 

If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. Yes ☐ No ☒

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

As of May 2, 2017, 124,768,184 shares of the registrant’s common stock were outstanding.

 

 

 

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TABLE OF CONTENTS

 

 

 

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PART I—FINANCIAL STATEMENTS

Item 1. Consolidated Financial Statements

ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(In millions, except share and per share data)

(Unaudited)

		Three Months Ended
		March 31,
		2017			2016
Revenues:
Service and membership related		$	126		$	112
Sales of vacation ownership products, net			110			9
Rental and ancillary services			107			26
Consumer financing			21			2
Cost reimbursements			88			37
Total revenues			452			186
Operating costs and expenses:
Cost of service and membership related sales			32			24
Cost of vacation ownership product sales			27			6
Cost of sales of rental and ancillary services			78			14
Cost of consumer financing			6			—
Cost reimbursements			88			37
Royalty fee expense			10			2
Selling and marketing expense			73			17
General and administrative expense			54			38
Amortization expense of intangibles			5			3
Depreciation expense			15			5
Total operating costs and expenses			388			146
Operating income			64			40
Other income (expense):
Interest expense			(5)			(6)
Other income, net			10			1
Equity in earnings from unconsolidated entities			1			1
Total other income (expense), net			6			(4)
Earnings before income taxes and noncontrolling interests			70			36
Income tax provision			(25)			(13)
Net income			45			23
Net income attributable to noncontrolling interests			(1)			(1)
Net income attributable to common stockholders		$	44		$	22
Earnings per share attributable to common stockholders:
Basic		$	0.36		$	0.38
Diluted		$	0.35		$	0.38
Weighted average number of shares of common stock outstanding (in 000's):
Basic			123,998			57,619
Diluted			125,582			57,954
Dividends declared per share of common stock		$	0.15		$	0.12

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

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ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)

		Three Months Ended
		March 31,
		2017			2016
Net income		$	45		$	23
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax			6			(5)
Total comprehensive income, net of tax			51			18
Less: Net income attributable to noncontrolling interests, net of tax			(1)			(1)
Less: Other comprehensive income (loss) attributable to noncontrolling interests			—			(1)
Total comprehensive loss attributable to noncontrolling interests			(1)			(2)
Comprehensive income attributable to common stockholders		$	50		$	16

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

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ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

 

		(Unaudited)
		March 31,			December 31,
		2017			2016
ASSETS
Cash and cash equivalents		$	171		$	126
Restricted cash and cash equivalents (including $14 and $32 in variable interest entities, "VIEs," respectively)			66			114
Accounts receivable, net of allowance for doubtful accounts of $0.7 and $0.4, respectively			122			97
Vacation ownership mortgages receivable, net of allowance of $2 and $1, respectively (including a net $55 and $59 in VIEs, respectively)			84			87
Vacation ownership inventory			295			197
Prepaid income taxes			37			47
Prepaid expenses			79			49
Other current assets (including $3 of interest receivable in VIEs)			31			29
Total current assets			885			746
Restricted cash and cash equivalents (including $2 in VIEs)			4			4
Vacation ownership mortgages receivable, net of allowance of $27 and $21, respectively  (including a net $357 and $370 in VIEs, respectively)			627			632
Vacation ownership inventory			134			189
Investments in unconsolidated entities			60			59
Property and equipment, net			604			580
Goodwill			559			558
Intangible assets, net			449			453
Deferred income taxes			10			9
Other non-current assets			72			74
TOTAL ASSETS		$	3,404		$	3,304
LIABILITIES AND EQUITY
LIABILITIES:
Accounts payable, trade		$	55		$	64
Current portion of securitized debt from VIEs			105			111
Deferred revenue			130			87
Accrued compensation and benefits			66			70
Accrued expenses and other current liabilities (including a net $1 of interest payable in VIEs)			222			187
Total current liabilities			578			519
Long-term debt			601			580
Securitized debt from VIEs			293			319
Income taxes payable, non-current			5			5
Other long-term liabilities			48			47
Deferred revenue			82			79
Deferred income taxes			173			161
Total liabilities			1,780			1,710
Redeemable noncontrolling interest			1			1
Commitments and contingencies
STOCKHOLDERS' EQUITY:
Preferred stock—authorized 25,000,000 shares, of which 100,000 shares are designated Series A Junior Participating Preferred Stock; $0.01 par value; none issued and outstanding			—			—
Common stock—authorized 300,000,000 shares; $0.01 par value; issued 133,822,999 and 133,545,864 shares, respectively			1			1
Treasury stock— 9,037,627 and 8,878,489 shares at cost, respectively			(139)			(136)
Additional paid-in capital			1,263			1,262
Retained earnings			517			492
Accumulated other comprehensive loss			(46)			(52)
Total ILG stockholders’ equity			1,596			1,567
Noncontrolling interests			27			26
Total equity			1,623			1,593
TOTAL LIABILITIES AND EQUITY		$	3,404		$	3,304

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

 

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ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

(In millions, except share data)

(Unaudited)

																											Accumulated
								Total ILG													Additional						Other
		Total			Noncontrolling			Stockholders’			Common Stock					Treasury Stock					Paid-in			Retained			Comprehensive
		Equity			Interests			Equity			Amount			Shares		Amount			Shares		Capital			Earnings			Loss
Balance as of December 31, 2016		$	1,593		$	26		$	1,567		$	1		133,545,864		$	(136)		8,878,489		$	1,262		$	492		$	(52)
Net income			45			1			44			—		—			—		—			—			44			—
Other comprehensive loss, net of tax			6			—			6			—		—			—		—			—		—	—		—	6
Non-cash compensation expense			6			—			6			—		—			—		—			6		—	—		—	—
Issuance of common stock upon vesting of RSUs, net of withholding taxes			(6)			—			(6)			—		277,047			—		—			(6)		—	—		—	—
Issuance of restricted stock for converted shares in connection with the acquisition of Vistana			—			—			—			—		(2,535)			—		—			—		—	—		—	—
Dividends declared on common stock			(18)			—			(18)			—		2,623			—		—			1		—	(19)		—	—
Treasury stock purchases			(3)			—			(3)			—		—			(3)		159,138			—			—			—
Balance as of March 31, 2017		$	1,623		$	27		$	1,596		$	1		133,822,999		$	(139)		9,037,627		$	1,263		$	517		$	(46)

 

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

 

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ILG, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)

 

		Three Months Ended March 31,
		2017			2016
Cash flows from operating activities:
Net income		$	45		$	23
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization expense of intangibles			5			3
Amortization of debt issuance costs			1			—
Depreciation expense			15			5
Allowance for losses on originated loans			7			—
Allowance for impairment on acquired loans			2			—
Accretion of mortgages receivable			2			—
Non-cash compensation expense			6			3
Deferred income taxes			12			1
Equity in earnings from unconsolidated entities			(1)			(1)
Changes in operating assets and liabilities:
Restricted cash			30			5
Accounts receivable			(25)			(36)
Vacation ownership mortgages receivable (originations)			(75)			(6)
Vacation ownership mortgages receivable (collections)			69			5
Vacation ownership inventory (additions)			(59)			—
Vacation ownership inventory (disposals)			24			2
Prepaid expenses and other current assets			(32)			(4)
Prepaid income taxes and income taxes payable			10			12
Accounts payable and other current liabilities			16			3
Deferred income			44			23
Other, net			(8)			2
Net cash provided by operating activities			88			40
Cash flows from investing activities:
Capital expenditures			(22)			(7)
Investments in unconsolidated entities			—			(5)
Investment in financing receivables			—			(2)
Other			—			1
Net cash used in investing activities			(22)			(13)
Cash flows from financing activities:
Borrowings (payments) on revolving credit facility, net			20			(13)
Payments on securitized debt			(32)			—
Decrease in restricted cash			18			—
Purchases of treasury stock			(3)			—
Dividend payments to stockholders			(19)			(7)
Withholding taxes on vesting of restricted stock units			(4)			(1)
Net cash used in financing activities			(20)			(21)
Effect of exchange rate changes on cash and cash equivalents			(1)			(2)
Net increase in cash and cash equivalents			45			4
Cash and cash equivalents at beginning of period			126			93
Cash and cash equivalents at end of period		$	171		$	97
Supplemental disclosures of cash flow information:
Interest paid, net of amounts capitalized		$	2		$	1
Income taxes paid, net of refunds		$	3		$	—

 

The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.

 

 

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NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Organization

ILG, Inc. is a leading provider of professionally delivered vacation experiences and the exclusive global licensee for the Hyatt ® , Sheraton ®   and Westin ® brands in vacation ownership. We operate in the following two segments: Vacation Ownership (VO) and Exchange and Rental.

Vacation Ownership engages in sales, marketing, financing and development of vacation ownership interests (VOIs); the management of vacation ownership resorts; and related services to owners and associations. The Vacation Ownership operating segment consists of the VOI sales and financing business of Vistana Signature Experiences (Vistana) and Hyatt Vacation Ownership (HVO) as well as the management related lines of business of Vistana, HVO, Vacation Resorts International (VRI), Trading Places International (TPI), and VRI Europe.

Exchange and Rental offers access to vacation accommodations and other travel-related transactions and services to members of our programs and other leisure travelers, by providing vacation exchange services and vacation rentals, working with resort developers, homeowners’ associations (HOAs) and operating vacation rental properties. The Exchange and Rental operating segment consists of Interval International (referred to as Interval), the Vistana Signature Network, the Hyatt Residence Club, the TPI exchange business, and Aqua-Aston Holdings, Inc. (Aqua-Aston).

ILG was incorporated as a Delaware corporation in May 2008 under the name Interval Leisure Group, Inc. and commenced trading on The NASDAQ Stock Market in August 2008 under the symbol "IILG" and now trades under “ILG.”

On May 11, 2016, we acquired the vacation ownership business of Starwood Hotels & Resorts Worldwide, LLC (Starwood), now known as Vistana. In connection with the acquisition, Vistana entered into an exclusive, 80 - year global license agreement with Starwood for the use of the Sheraton ® and Westin ® brands in vacation ownership. The global license agreement may also be extended for two 30 – year terms, subject to meeting certain sales performance tests. Also, Vistana has the non-exclusive license for the existing St. Regis ® and The Luxury Collection ® vacation ownership properties and an affiliation with the Starwood Preferred Guest program.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of ILG’s management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not indicative of the results that may be expected for a full year.

Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of ILG, our wholly‑owned subsidiaries, and companies in which we have a controlling interest, including variable interest entities (“VIEs”) where

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we are the primary beneficiary in accordance with consolidation guidance. All significant intercompany balances and transactions have been eliminated in these condensed consolidated financial statements. References in these financial statements to net income attributable to common stockholders and ILG stockholders’ equity do not include noncontrolling interests, which represent the outside ownership of our consolidated non‑wholly owned entities and are reported separately.

The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2016 Annual Report on Form 10‑K.

  Seasonality

Revenue at ILG is influenced by the seasonal nature of travel. Within our Vacation Ownership segment, our sales and financing business experiences a modest impact from seasonality, with higher sales volumes during the traditional vacation periods. Our vacation ownership management businesses by and large do not experience significant seasonality, with the exception of our resort operations revenue which tends to be higher in the first quarter.

 

Within our Exchange and Rental segment, we recognize exchange and Getaway revenue based on confirmation of the vacation, with the first quarter generally experiencing higher revenue and the fourth quarter generally experiencing lower revenue. Remaining rental revenue is recognized based on occupancy. For the vacation rental business, the first and third quarters generally generate higher revenue as a result of increased leisure travel to our Hawaii‑based managed properties during these periods, and the second and fourth quarters generally generate lower revenue.

 

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

Our significant accounting policies were described in Note 2 to our audited consolidated financial statements included in our 2016 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the three months ended March 31, 2017.  

 

Accounting Estimates

ILG’s management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”). These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.

Significant estimates underlying the accompanying condensed consolidated financial statements include:

 

In the opinion of ILG’s management, the assumptions underlying the condensed consolidated financial statements of ILG and its subsidiaries are reasonable.

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Earnings per Share

Basic earnings per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of RSUs and restricted stock using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. The computations of diluted earnings per share available to common stockholders do not include approximately 0.8 million RSUs and restricted shares for the three months ended March 31, 2017 and 0.6 million RSUs for the three months ended March 31, 2016, as the effect of their inclusion would have been antidilutive to earnings per share.

The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows (in thousands):

		Three Months Ended March 31,
		2017		2016
Basic weighted average shares of common stock outstanding		123,998		57,619
Net effect of common stock equivalents assumed to be vested related to RSUs and restricted stock		1,584		335
Diluted weighted average shares of common stock outstanding		125,582		57,954

 

Earnings per share for the three month ended March 31, 2017 and 2016 are as follows (in thousands, except per share data):

		Three Months Ended
		March 31,
		2017		2016
Net income attributable to common stockholders	$	44,211	$	22,179
Weighted average number of shares of common stock outstanding:
Basic		123,998		57,619
Diluted		125,582		57,954
Earnings per share attributable to common stockholders:
Basic	$	0.36	$	0.38
Diluted	$	0.35	$	0.38

 

Recent Accounting Pronouncements: General

With the exception of those discussed below, there are no recent accounting pronouncements or changes in accounting pronouncements since the recent accounting pronouncements described in our 2016 Annual Report on Form 10 K that are of significance, or potential significance, to ILG based on our current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement.

In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities”. The FASB is issuing this ASU to amend the amortization period for certain purchased callable debt securities held at a premium. Prior to the issuance of the ASU, GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are currently assessing the future impact of this accounting standard update on our consolidated financial statements.

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In February 2017, the FASB issued ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. The FASB issued this ASU to clarify the scope of subtopic 610-20, which was issued in May 2014 as part of Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The effective date and transition requirements of these amendments are the same as the effective date and transition requirements of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". We plan to adopt this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. We are currently assessing the future impact of this accounting standard update on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350),” to simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. An entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The update is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323).” ASU 2017-03 states that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by clarifying the definition of a business. The definition of a business affects many areas of accounting including acquisition, disposals, goodwill and consolidation. This amendment covers Phase 1 of a three phase project. The update is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this update should be applied prospectively on or after the effective date. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230).” This ASU requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The update is effective for annual periods beginning after December 15, 2017, including interim periods within those periods.  We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”) as part of the Board’s initiative to reduce complexity in accounting standards.  This ASU eliminates an exception in ASC 740, which prohibits the immediate recognition of income tax consequences of intra-entity asset transfers other than inventory.  Under ASU 2016-16, entities will be required to recognize the immediate current and deferred income tax effects of intra-entity asset transfers, which often involve a subsidiary of a company transferring intellectual property to another subsidiary.  For public entities, the new guidance will be effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods.  This ASU’s amendments should be applied on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption.  We are currently assessing the future impact of this accounting standard update on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230).”  This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash

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receipts and cash payments are presented and classified in the statement of cash flows under existing guidance. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326).” This ASU amends the Board’s guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the current expected credit losses model) that is based on an expected losses model rather than an incurred losses model. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of GAAP by decreasing the number of impairment models that entities use to account for debt instruments. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements as we currently apply an expected losses model against our outstanding vacation ownership mortgages receivable.

In February 2016, the FASB issued ASU 2016‑02, “Leases (Topic 842)” (“ASU 2016‑02”). ASU 2016‑02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance will be effective for public entities for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption of ASU 2016‑02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.

In January 2016, the FASB issued ASU 2016‑01, “Financial Instruments—Overall (Subtopic 825‑10),” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of financial instruments. The amendments in this update are effective for fiscal years beginning after December 31, 2017, including interim periods within those fiscal years. We are currently assessing the future impact of this new accounting standard update on our consolidated financial statements.

Recent Accounting Pronouncements: Revenue Recognition

In May 2014, the FASB issued ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”). The FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (i) remove inconsistencies and weaknesses in revenue requirements; (ii) provide a more robust framework for addressing revenue issues; (iii) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (iv) provide more useful information to users of financial statements through improved disclosure requirements; and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB amended the FASB Accounting Standards Codification (“Codification”) and created a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance in ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry specific guidance throughout the Industry Topics of the Codification. Additionally, ASU 2014‑09 supersedes some cost guidance included in Subtopic 605‑35, Revenue Recognition—Construction‑Type and Production‑Type Contracts. The ASU is effective for fiscal years beginning after December 15, 2017 (and interim periods within that period).

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In periods subsequent to the initial issuance of this ASU, the FASB has issued additional ASU’s clarifying items within Topic 606, as follows:

We are currently in the process of completing our qualitative evaluation of ASU 2014-09, including identifying the potential differences in the timing and/or method of revenue recognition for our contracts and, ultimately, the expected impact on our business processes, systems and controls. As part of this evaluation, we are reviewing customer contracts and applying the five-step model of the new standard to each contact type identified that’s associated to our material revenue streams and will compare the results to our current accounting practices.

We currently expect possible areas of impact will include (i) timing adjustments to membership fee revenue resulting from estimating variable consideration, (ii) gross versus net presentation changes which would not impact profitability, (iii) capitalization of certain incremental costs to obtain a contract and (iv) the instances in which we can apply the percentage of completion revenue recognition method when construction of a vacation ownership project is not complete. We continue to evaluate the potential effects of adopting this standard and expect to complete our evaluation from a qualitative perspective during the first half of 2017. Consequently, given the complexities of this new standard, we are unable to determine, at this time, whether adoption of this standard will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.

We plan to adopt this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. A determination as to whether we will apply the retrospective or modified retrospective adoption method will be made once our qualitative evaluation is complete and we commence quantifying the expected impacts.

Adopted Accounting Pronouncements

In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810),” to amend the existing guidance issued with ASU 2015-02. This ASU is being issued to amend the consolidation guidance on how a reporting entity, that is the single decision maker of a VIE, should treat indirect interests in the entity held through related parties that are under common control with the reporting entity, when determining whether it is the primary beneficiary of that VIE. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

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In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payments Accounting” (“ASU 2016-03”), to simplify the current accounting for Stock Compensation. The areas for simplification in this update involve several aspects of the accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. In accordance with this ASU, during the current period, ILG included a net benefit of $1 million within the income tax provision. In addition, with the adoption of this ASU, we elected to account for forfeitures when they occur, so therefore, effective January 1, 2017, we will no longer estimate the number of awards that are expected to vest. We also elected the prospective transition method for the presentation of excess tax benefits within the statement of cash flows. As such, the excess tax benefits from stock based awards was presented as part of the operating activities within the current period Condensed Consolidated Statements of Cash Flows and the prior period was not adjusted. Overall, the adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

In March 2016, the FASB issued ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323)” (“ASU 2016-07”). The amendments in this ASU require, among other items, that an equity method investor add the cost of acquiring an additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting, as well as eliminates certain other existing requirements. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.

NOTE 3—BUSINESS COMBINATION

On May 11, 2016, we completed the acquisition of Vistana from wholly‑owned subsidiaries of Starwood as discussed in Note 1 to these condensed consolidated financial statements. As part of the acquisition, ILG acquired 100% of the voting equity interests of Vistana and issued approximately 72.4 million shares of ILG common stock to the holders who received Vistana common stock in the spin-off. These shares were valued at $1 billion based on ILG’s closing stock price of $14.24 on May 11, 2016.

The Vistana acquisition is recorded on our condensed consolidated balance sheet as of May 11, 2016 based upon estimated fair values as of such date. The results of operations related to this business are included in our condensed consolidated statements of income beginning on May 12, 2016 and within our Exchange and Rental and Vacation Ownership segments for segment reporting purposes on the basis of its respective business activities.

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Purchase Price Allocation

The following table presents the preliminary allocation of total purchase price consideration to the assets acquired and liabilities assumed, based on their estimated fair values as of their respective acquisition dates (in millions):

		Preliminary PPA			Adjustments to PPA (3)			Revised Preliminary PPA (4)
Cash		$	45		$	—		$	45
Vacation ownership inventory			221			7			228
Vacation ownership mortgages receivable			712			(19)			693
Other current assets			143			1			144
Intangibles			241			(3)			238
Property plant and equipment			465			(10)			455
Other non-current assets			24			(9)			15
Deferred revenue			(60)			(4)			(64)
Securitized debt			(154)			—			(154)
Other current liabilities (2)			(187)			11			(176)
Other non-current liabilities			(98)			(2)			(100)
Gain on bargain purchase (1)			(197)			34			(163)
Net assets acquired		$	1,155		$	6		$	1,161

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The purchase price allocated to the fair value of identifiable intangible assets associated with the Vistana acquisition is as follows (in millions):

		Fair Value			Useful Life (years)
Resort management contracts		$	118		26
Customer relationships			119		25
Other			1		< 1
Total		$	238

In connection with the Vistana acquisition we recorded identifiable intangible assets of $238 million, all of which were definite-lived intangible assets, related to Vistana’s membership base in their Vistana Signature Network (described in table above as customer relationships) and their resort management contracts.

The valuation of the assets acquired and liabilities assumed in connection with this acquisition was based on fair values at the acquisition date. The assets purchased and liabilities assumed for the Vistana acquisition have been reflected in the accompanying condensed consolidated balance sheets as of March 31, 2017 and December 31, 2016. The measurement period with respect to this acquisition was considered closed as of December 31, 2016, with the exception of tax related items which are pending additional analysis of tax attributes and tax returns, which will not be made available until sometime in 2017.  Consequently, with respect to tax related items, the purchase price allocation disclosed herein (as well as the related gain on bargain purchase) remains provisional at this time and subject to further adjustment

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to reflect new information obtained about factors and circumstances that existed as of the acquisition date that if known would have affected the measurement of the amounts recognized as of that date, while the measurement period remains open.

Results of operations

Related to the Vistana acquisition, revenue and net income of  $266 million and $22 million, respectively, were recognized in our condensed consolidated statement of income for the three months ended March 31, 2017.

Pro forma financial information (unaudited)

The following unaudited pro forma financial information presents the consolidated results of ILG and Vistana as if the acquisition had occurred on January 1, 2015, the beginning of the last full fiscal year prior to the May 11, 2016 acquisition date. The pro forma results presented below for the three months ended March 31, 2016 are based on the historical financial statements of ILG and Vistana, adjusted to reflect the purchase method of accounting, with ILG as accounting acquirer. The pro forma information is not necessarily indicative of the consolidated results of operations that might have been achieved for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. It does not reflect cost savings expected to be realized from the elimination of certain expenses and from synergies expected to be created or the costs to achieve such cost savings or synergies, if any. Income taxes do not reflect the amounts that would have resulted had ILG and Vistana filed consolidated income tax returns during the periods presented. Pro forma adjustments are tax -effected at ILG's estimated statutory tax rate of 37.2% for the 2016 period.

		Three Months Ended March 31,
(In millions, except per share data)		2017			2016
Revenue		$	452		$	431
Net income attributable to common stockholders		$	44		$	37
Earnings per share:
Basic		$	0.36		$	0.29
Diluted		$	0.35		$	0.29

 

 

 

NOTE 4—RESTRICTED CASH

Restricted cash consists of the following (in millions):

		March 31,			December 31,
		2017			2016
Escrow deposits on vacation ownership products		$	38		$	67
Securitization VIEs			16			34
Other			16			17
Total restricted cash		$	70		$	118

Restricted cash associated with escrow deposits on vacation ownership products represents amounts that are held in escrow until statutory requirements for release are satisfied, at which time that cash is no longer restricted. Restricted cash of securitization VIEs represents cash held in accounts related to vacation ownership mortgages receivable securitizations, which is generally used to pay down securitized vacation ownership debt in the period following the quarter in which the cash is received.

 

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NOTE 5—VACATION OWNERSHIP MORTGAGES RECEIVABLE

Vacation ownership mortgages receivable is comprised of various mortgage loans related to our financing of vacation ownership interval sales. As part of our acquisitions of HVO and Vistana, we acquired existing portfolios of vacation ownership mortgages receivable. These loans are accounted for using the expected cash flows method of recognizing discount accretion based on the acquired loans’ expected cash flows pursuant to ASC 310-30, “Loans acquired with deteriorated credit quality.” At acquisition, we recorded these acquired loans at fair value, including a credit discount or premium, as applicable, which is accreted as an adjustment to yield over the loans’ estimated life. Originated loans as of March 31, 2017 and December 31, 2016 represent vacation ownership mortgages receivable originated by ILG, or more specifically our Vacation Ownership segment, subsequent to the acquisitions of HVO and Vistana on October 1, 2014 and May 11, 2016, respectively.

Vacation ownership mortgages receivable carrying amounts as of March 31, 2017 and December 31, 2016 were as follows (in millions):

		March 31,									December 31,
		2017									2016
		Securitized			Unsecuritized (2)			Total			Securitized			Unsecuritized (2)			Total
Acquired vacation ownership mortgages receivable (1)		$	398		$	104		$	502		$	419		$	127		$	546
Originated vacation ownership mortgages receivable (1)			16			224			240			11			184			195
Less: allowance for impairment on acquired loans			—			(2)			(2)			—			—			—
Less: allowance for losses on originated loans			(2)			(27)			(29)			(1)			(21)			(22)
Net vacation ownership mortgages receivable		$	412		$	299		$	711		$	429		$	290		$	719

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The fair value of our acquired loans as of the respective acquisition dates were determined by use of a discounted cash flow approach which calculates a present value of expected future cash flows based on scheduled principal and interest payments over the term of the respective loans, while considering anticipated defaults and early repayments determined based on historical experience. Consequently, the fair value of these acquired loans recorded on our condensed consolidated balance sheet as of the acquisition date includes an estimate for future loan losses which becomes the historical cost basis for that existing portfolio going forward. As of March 31, 2017 and December 31, 2016, the contractual outstanding balance of the acquired loans, which represents contractually-owed future principal amounts, was $419 million and $466 million, respectively.

The table below (in millions) presents a rollforward from December 31, 2016 of the accretable yield (interest income) expected to be earned related to our acquired loans, as well as the amount of non-accretable difference at the end of the period. Nonaccretable difference represents estimated contractually required payments in excess of estimated cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the carrying amount of the acquired loans.

		Three Months Ended
Accretable Yield		March 31, 2017
Balance, beginning of period		$	157
Accretion			(15)
Reclassification from nonaccretable difference			1
Balance, end of period		$	143
Nonaccretable difference, end of period balance		$	36

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The accretable yield is recognized into interest income (within consolidated revenue) over the estimated life of the acquired loans using the level yield method. The accretable yield may change in future periods due to changes in the anticipated remaining life of the acquired loans, which may alter the amount of future interest income expected to be collected, and changes in expected future principal and interest cash collections which impacts the nonaccretable difference.

Vacation ownership mortgages receivable as of March 31, 2017 are scheduled to mature as follows (in millions):

		Vacation Ownership Mortgages Receivable
		Acquired						Originated
Twelve month period ending March 31,		Securitized Loans			Unsecuritized Loans			Securitized Loans			Unsecuritized Loans			Total
2018		$	43		$	12		$	2		$	18		$	75
2019			42			11			1			14			68
2020			42			10			1			15			68
2021			41			10			1			17			69
2022			38			11			2			19			70
2022 and thereafter			116			44			9			141			310
Total			322			98			16			224			660
Plus: net premium on acquired loans (1)			76			6			—			—			82
Less: allowance for impairment on acquired loans			—			(2)			—			—			(2)
Less: allowance for losses on originated loans			—			—			(2)			(27)			(29)
Net vacation ownership mortgages receivable		$	398		$	102		$	14		$	197		$	711
Weighted average stated interest rate as of March 31, 2017			13.4%						13.5%
Range of stated interest rates as of March 31, 2017			9.9% to 15.9%						10.9% to 15.9%

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Collectability

We assess our vacation ownership mortgages receivable portfolio of loans for collectability on an aggregate basis. Estimates of uncollectability pertaining to our originated loans are recorded as provisions in the vacation ownership mortgages receivable allowance for loan losses. For originated loans, we record an estimate of uncollectability as a reduction of sales of vacation ownership products in the accompanying condensed consolidated statements of income at the time revenue is recognized on a vacation ownership product sale. We evaluate our originated loan portfolio collectively as it is comprised of homogeneous, smaller-balance, vacation ownership mortgages receivable. We use a technique referred to as static pool analysis, which tracks uncollectibles over the entire life of those mortgages receivable, as the basis for determining our general reserve requirements on our vacation ownership mortgages receivable. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio, including defaults, aging, and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio. As of March 31, 2017 allowance for loan losses of $29 million for uncollectability was recorded against our vacation ownership mortgages receivable for estimated losses related solely to our originated loans. Our allowance for loan losses as of December 31, 2016 was $22 million; the change in 2017 principally pertains to additional loan loss provision recorded against sales of vacation ownership products on our condensed consolidated income statement during the period.

Our acquired loans are remeasured at period end based on expected future cash flows which uses an estimated measure of anticipated defaults. We consider the allowance for loan losses on our originated loans and estimates of defaults used in the remeasurements of our acquired loans to be adequate and based on the economic environment and our assessment of the future collectability of the outstanding loans.