UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2018
or
☐ |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from_________ to ________
Commission file number 001-37794
Hilton Grand Vacations Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware |
81-2545345 |
(State or Other Jurisdiction of |
(I.R.S. Employer |
Incorporation or Organization) |
Identification No.) |
6355 MetroWest Boulevard, Suite 180, |
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Orlando, Florida |
32835 |
(Address of Principal Executive Offices) |
(Zip Code) |
Registrant’s Telephone Number, Including Area Code (407) 613-3100
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement 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 definitions of “large accelerated filer,” “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) |
Smaller Reporting Company |
☐ |
Emerging Growth Company |
☐ |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 27, 2018 was 96,897,051.
FORM 10-Q TABLE OF CONTENTS
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Item 1. |
2 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
36 |
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Item 3. |
52 |
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Item 4. |
53 |
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Item 1. |
54 |
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Item 1A. |
54 |
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Item 2. |
54 |
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Item 3. |
54 |
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Item 4. |
54 |
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Item 5. |
54 |
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Item 6. |
55 |
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1
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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June 30, |
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December 31, |
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2018 |
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2017 |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
131 |
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$ |
246 |
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Restricted cash |
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72 |
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51 |
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Accounts receivable, net of allowance for doubtful accounts of $10 and $9 |
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138 |
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112 |
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Timeshare financing receivables, net |
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1,089 |
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1,071 |
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Inventory |
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544 |
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509 |
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Property and equipment, net |
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411 |
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238 |
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Investment in unconsolidated affiliates |
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33 |
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41 |
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Intangible assets, net |
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73 |
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72 |
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Other assets |
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117 |
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44 |
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TOTAL ASSETS (variable interest entities - $390 and $471) |
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$ |
2,608 |
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$ |
2,384 |
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LIABILITIES AND EQUITY |
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Liabilities: |
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Accounts payable, accrued expenses and other |
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$ |
299 |
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$ |
339 |
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Advanced deposits |
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95 |
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104 |
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Debt, net |
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637 |
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482 |
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Non-recourse debt, net |
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604 |
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583 |
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Deferred revenues |
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226 |
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109 |
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Deferred income tax liabilities |
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230 |
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249 |
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Total liabilities (variable interest entities - $376 and $455) |
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2,091 |
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1,866 |
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Commitments and contingencies - see Note 19 |
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Equity: |
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Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of June 30, 2018 and December 31, 2017 |
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— |
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— |
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Common stock, $0.01 par value; 3,000,000,000 authorized shares, 96,897,051 issued and outstanding as of June 30, 2018 and 99,136,304 issued and outstanding as of December 31, 2017 |
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1 |
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1 |
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Additional paid-in capital |
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170 |
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162 |
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Accumulated retained earnings |
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346 |
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355 |
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Total equity |
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517 |
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518 |
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TOTAL LIABILITIES AND EQUITY |
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$ |
2,608 |
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$ |
2,384 |
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See notes to unaudited condensed consolidated financial statements.
2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in millions, except per share amounts)
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Three Months Ended June 30, |
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Six Months Ended June 30, |
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2018 |
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2017 |
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2018 |
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2017 |
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Revenues |
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Sales of VOIs, net |
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$ |
250 |
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$ |
143 |
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$ |
328 |
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$ |
261 |
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Sales, marketing, brand and other fees |
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146 |
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144 |
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271 |
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274 |
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Financing |
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39 |
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36 |
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77 |
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71 |
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Resort and club management |
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37 |
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35 |
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76 |
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71 |
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Rental and ancillary services |
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53 |
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47 |
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104 |
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93 |
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Cost reimbursements |
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38 |
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34 |
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74 |
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68 |
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Total revenues |
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563 |
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439 |
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930 |
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838 |
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Expenses |
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Cost of VOI sales |
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61 |
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34 |
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80 |
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67 |
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Sales and marketing |
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193 |
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169 |
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354 |
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321 |
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Financing |
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12 |
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11 |
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23 |
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21 |
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Resort and club management |
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11 |
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10 |
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22 |
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20 |
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Rental and ancillary services |
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30 |
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31 |
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58 |
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58 |
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General and administrative |
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30 |
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29 |
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53 |
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52 |
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Depreciation and amortization |
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8 |
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7 |
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16 |
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14 |
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License fee expense |
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25 |
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23 |
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48 |
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43 |
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Cost reimbursements |
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38 |
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34 |
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74 |
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68 |
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Total operating expenses |
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408 |
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348 |
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728 |
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664 |
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Interest expense |
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(8 |
) |
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(7 |
) |
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(15 |
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(14 |
) |
Equity in losses from unconsolidated affiliates |
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(2 |
) |
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— |
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(1 |
) |
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— |
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Other gain, net |
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1 |
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— |
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— |
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— |
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Income before income taxes |
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146 |
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84 |
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186 |
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160 |
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Income tax expense |
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(39 |
) |
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(33 |
) |
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(49 |
) |
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(59 |
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Net income |
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$ |
107 |
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$ |
51 |
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$ |
137 |
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$ |
101 |
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Earnings per share: |
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Basic |
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$ |
1.10 |
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$ |
0.51 |
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$ |
1.40 |
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$ |
1.02 |
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Diluted |
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$ |
1.10 |
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$ |
0.51 |
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$ |
1.39 |
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$ |
1.02 |
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See notes to unaudited condensed consolidated financial statements.
3
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in millions)
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Six Months Ended June 30, |
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2018 |
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2017 |
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Operating Activities |
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Net income |
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$ |
137 |
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$ |
101 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: |
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Depreciation and amortization |
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16 |
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14 |
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Amortization of deferred financing costs and other |
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3 |
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3 |
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Provision for loan losses |
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30 |
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27 |
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Share-based compensation |
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8 |
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8 |
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Deferred income (benefit) taxes |
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(6 |
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1 |
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Equity in losses from unconsolidated affiliates |
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1 |
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— |
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Distributions received from unconsolidated affiliates |
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2 |
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— |
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Net changes in assets and liabilities: |
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Accounts receivable, net |
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(26 |
) |
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— |
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Timeshare financing receivables, net |
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(48 |
) |
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(35 |
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Inventory |
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11 |
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22 |
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Purchase of operating property for future conversion to inventory |
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(176 |
) |
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— |
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Other assets |
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(58 |
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(19 |
) |
Accounts payable, accrued expenses and other |
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(42 |
) |
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36 |
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Advanced deposits |
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8 |
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(3 |
) |
Deferred revenues |
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4 |
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22 |
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Other |
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2 |
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— |
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Net cash (used in) provided by operating activities |
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(134 |
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177 |
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Investing Activities |
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Capital expenditures for property and equipment |
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(20 |
) |
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(15 |
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Software capitalization costs |
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(9 |
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(6 |
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Return of investment from unconsolidated affiliates |
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11 |
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— |
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Investment in unconsolidated affiliates |
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(5 |
) |
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— |
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Net cash used in investing activities |
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(23 |
) |
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(21 |
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Financing Activities |
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Issuance of debt |
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160 |
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— |
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Issuance of non-recourse debt |
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100 |
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350 |
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Repurchase and retirement of common stock |
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(112 |
) |
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— |
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Repayment of non-recourse debt |
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(80 |
) |
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(395 |
) |
Repayment of debt |
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(5 |
) |
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(5 |
) |
Debt issuance costs |
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(2 |
) |
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(5 |
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Proceeds from stock options exercises |
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— |
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1 |
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Payment of withholding taxes on vesting of restricted stock units |
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(1 |
) |
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— |
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Capital contribution |
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3 |
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— |
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Net cash provided by (used in) financing activities |
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63 |
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(54 |
) |
Net (decrease) increase in cash, cash equivalents and restricted cash |
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(94 |
) |
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102 |
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Cash, cash equivalents and restricted cash, beginning of period |
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297 |
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151 |
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Cash, cash equivalents and restricted cash, end of period |
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$ |
203 |
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$ |
253 |
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Supplemental disclosure of non-cash operating activities: |
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Cumulative effect of adoption of new accounting standards |
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$ |
38 |
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— |
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See notes to unaudited condensed consolidated financial statements.
4
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(in millions)
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Additional |
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Accumulated |
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Common Stock |
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Paid-in |
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Retained |
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Total |
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Shares |
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Amount |
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Capital |
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Earnings |
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Equity |
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Balance as of December 31, 2017 |
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|
99 |
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$ |
1 |
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$ |
162 |
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$ |
355 |
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$ |
518 |
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Net income |
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— |
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— |
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— |
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|
137 |
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137 |
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Activity related to share-based compensation |
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— |
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— |
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5 |
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— |
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5 |
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Repurchase and retirement of common stock |
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(2 |
) |
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— |
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(3 |
) |
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(109 |
) |
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(112 |
) |
Revenue recognition cumulative-effect adjustment |
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— |
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— |
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— |
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(38 |
) |
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(38 |
) |
Capital contribution |
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— |
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— |
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3 |
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— |
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3 |
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Other |
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— |
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— |
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3 |
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1 |
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|
4 |
|
Balance as of June 30, 2018 |
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|
97 |
|
|
$ |
1 |
|
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$ |
170 |
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$ |
346 |
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$ |
517 |
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See notes to unaudited condensed consolidated financial statements.
5
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: Organization
Our Business
Hilton Grand Vacations Inc. (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our operations primarily consist of: selling vacation ownership intervals (“VOIs”) for us and third parties; operating resorts; financing and servicing loans provided to consumers for their timeshare purchases; and managing our points-based Hilton Grand Vacations Club exchange program (the “Club”). As of June 30, 2018, we had 51 properties, comprised of 8,367 units, located in the United States (“U.S.”) and Europe.
Our Spin-off from Hilton Worldwide Holdings Inc.
On January 3, 2017, the previously announced spin-off of Hilton Grand Vacations from Hilton Worldwide Holdings Inc. (“Hilton”) was completed. As a result of the spin-off, we became an independent public company, and our common stock is listed on the New York Stock Exchange under the symbol “HGV.” Following the spin-off, Hilton did not retain any ownership interest in our company. In connection with the completion of the spin-off, we entered into agreements with Hilton (who at the time was a related party) and other third parties, including licenses to use the Hilton Grand Vacations brand. The unaudited condensed consolidated financial statements reflect the effect of these agreements. For the three months ended June 30, 2018 and 2017, we incurred $38 million and $40 million, respectively, and for the six months ended June 30, 2018 and 2017, we incurred $97 million and $98 million, respectively, in costs relating to the agreements entered with Hilton. See Key Agreements Related to the Spin-Off section in Part I - Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2017 for further information.
Note 2: Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest. In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.
On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”). We adopted ASC 606 using the modified retrospective method in which the cumulative effect of applying the new standard has been recognized at the date of initial application with an adjustment to our opening balance of retained earnings. This approach applies to all contracts as of January 1, 2018. The new standard, as amended, replaces all current U.S. GAAP guidance on this topic and eliminates all industry-specific guidance.
6
The repor ted results as of and for the three and six months ended June 30, 2018 reflects the application of ASC 606 while the reported financial position as of December 31, 2017 and results for the three and six months ended June 30, 2017 were prepared under the gu idance of ASC 605, Revenue Recognition (“ASC 605”) and ASC 978-605, Real Estate – Time-Sharing Activities, Revenue Recognition , which is also referred to herein as the “previous accounting guidance.”
Summary of Significant Accounting Policies
Revenue Recognition
In accordance with ASC 606, revenue is recognized upon the transfer of control of promised goods or services to customers in an amount that reflects the consideration we expect to receive in exchange for those products or services. To achieve the core principle of the new guidance, we take the following steps: (i) identify the contract with the customer; (ii) determine whether the promised goods or services are separate performance obligations in the contract; (iii) determine the transaction price, including considering the constraint on variable consideration; (iv) allocate the transaction price to the performance obligations in the contract based on the standalone selling price or estimated standalone selling price of the good or service; and (v) recognize revenue when (or as) we satisfy each performance obligation.
Contracts with Multiple Performance Obligations
A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. For arrangements that contain multiple goods or services, we determine whether such goods or services are distinct performance obligations that should be accounted for separately in the arrangement. When allocating the transaction price in the arrangement, we may not have observable standalone sales for all the performance obligations in these contracts; therefore, we exercise significant judgement when determining the standalone selling price of certain performance obligations. In order to estimate the standalone selling prices, we primarily rely on the expected cost plus margin and adjusted market assessment approaches. We then recognize the revenue allocated to each performance obligation as the related performance obligation is satisfied as discussed below.
|
• |
Sales of VOIs, net — Customers who purchase vacation ownership products, whether paid in cash or financed, enter into multiple contracts, which we combine and account for as a single contract. Revenue from VOI sales is recognized at the point in time when control of the VOI is transferred to the customer which is when the customer has executed a binding sales contract, collectability is reasonably assured, the purchaser’s period to cancel for a refund has expired and the customer has the right to use the VOI. Revenue from sales of VOIs under construction is deferred until the point in time when construction activities are deemed to be completed, occupancy of the development is permissible, and the above criteria has been met. For financed sales, we estimate the variable consideration to be received under such contracts and recognize revenue net of amounts deemed uncollectible as the VOI is returned to inventory upon customer default. Variable consideration which has not been included within the transaction price is presented as a reserve on the financing receivable. See Note 5: Timeshare Financing Receivables for more information regarding our estimate of variable consideration. |
We award Club Bonus Points (“Bonus Points”) to our customers as an incentive for purchasing a VOI. These Bonus Points are valid for a maximum of two years and may be redeemed for reservations at Club resorts, hotel reservations within Hilton’s system, and VOI exchanges with other third-party vacation ownership exchanges. At the time of the VOI sale, we estimate the fair value of the incentives to be redeemed, including an adjustment for breakage, to determine the standalone selling price of the first day incentive (“FDI”). We defer a portion of the total transaction price for the combined VOI contract as a liability for the FDI and recognize the corresponding revenue at the point in time when the customer receives the benefits of the FDI, which is upon the customer’s redemption of the Bonus Points. At that time, we also determine whether we are principal or agent for the redeemed good or service and recognize revenue on a gross or net basis accordingly.
|
• |
Sales, marketing, brand and other fees — We enter into contracts with third-party developers to sell VOIs on their behalf through fee-for-service agreements for which we earn sales commissions and other fees. These commissions are variable as they are based on the sales and marketing results, which are subject to the constraint and resolved on a monthly basis over the contract term. We estimate such commissions to the extent that it is probable that a significant reversal of such revenue will not occur and recognize the commissions as the developer receives and consumes the benefits of the services. Any changes in these estimates would affect revenue and earnings in the period such variances are realized. |
7
Additionally, we enter into contracts to sell prepaid vacation packages. Our obligation i n such contracts is satisfied when customers stay at our property; therefore, we recognize revenue for these packages when they are redeemed. On a portfolio basis, we exercise judgement to estimate the amount of expected breakage related to unused prepaid vacation packages and recognize such breakage in proportion to the pattern of packages utilized by our portfolio of customers.
|
• |
Financing — We offer financing as an option to qualifying customers purchasing our VOI. Revenue from the financing of timeshare sales is recognized on the accrual method as earned based on the outstanding principal, interest rate and terms stated in each individual financing agreement. We also recognize revenue from servicing the loans provided by third-party developers to purchasers of their VOIs over the period services are rendered. The adoption of ASC 606 had no impact to the current financing revenue recognition method. |
|
• |
Resort and club management — As part of our VOI sales, our customers enter into a Club arrangement which gives the customer an annual allotment of Club points that allow the customer to exchange the Club points for a number of vacation options. We manage the Club, receiving Club activation fees, annual dues and transaction fees from member exchanges. Club activation fees and the member's first year of annual dues are paid at the time of the VOI sale. The Club activation fee relates to activities we are required to undertake at or near contract inception to fulfill the contract, and does not result in the transfer of a promised good or service. Since our customers are granted the opportunity to renew their membership on an annual basis for no additional activation fee, we defer and amortize the activation fee on a straight-line basis over the seven year average inventory holding period. Annual dues for membership renewals are billed each year, and we recognize revenue from these annual dues over the period services are rendered. A member may elect to enter into an optional exchange transaction with their allotted Club points at which point the member pays their required transaction fee. This option does not represent a material right as the transactions are priced at their standalone selling price. Revenue related to the transaction is recognized when the services are rendered. |
As part of our resort operations, we contract with homeowner’s associations (“HOAs”) to provide day-to-day-management services, including housekeeping services, operation of a reservation system, maintenance, and certain accounting and administrative services. We receive compensation for such management services, which is generally based on a percentage of costs to operate the resorts, on a monthly basis. These fees represent a form of variable consideration and are estimated and recognized over time as the HOAs receive and consume the benefits of the management services. Management fees received related to the portion of unsold VOIs at each resort which we own are recognized on a net basis given we retain these VOIs in our inventory.
|
• |
Rental and ancillary services — Our rental and ancillary services consist primarily of rental revenues on unoccupied vacation ownership units and ancillary revenues. Rental revenue is recognized when occupancy has occurred. Advance deposits on the rental unit and the corresponding revenue is deferred and recognized upon the customer’s vacation stay. Ancillary revenues consist of food and beverage, retail, spa offerings and other guest services. We recognize ancillary revenue when goods have been provided and/or services have been rendered. |
We account for rental operations of unsold VOIs, including accommodations provided through the use of our vacation sampler programs, as incidental operations. Incremental carrying costs in excess of incremental revenues are recognized in the period incurred. In all periods presented, incremental carrying costs exceeded incremental revenues and all revenues and expenses are recognized in the period earned or incurred.
|
• |
Cost reimbursements — As part of our management agreements with HOAs, we receive cost reimbursements for performing the day to day management services, including direct and indirect costs that HOAs and developers reimburse to us. These costs primarily consist of payroll and payroll related costs for management of the HOAs and other services we provide where we are the employer. Cost reimbursements are based upon actual expenses with no added margin, and are billed to the HOA on a monthly basis. We recognize cost reimbursements when we incur the related reimbursable costs as the HOA receives and consumes the benefits of the management services. |
We capitalize all incremental costs incurred to obtain a contract when such costs would not have been incurred if the contract had not been obtained. We elect to expense costs incurred to obtain a contract when the amortization period would be one year or less. Commissions for VOI sales for resorts under construction are expensed when the associated VOI revenue is recognized which is upon completion of the resort. These commissions can be found in Sales and marketing expense in our unaudited condensed consolidated statements of operations.
8
As of June 30, 2018, the ending asset balance for cost to obtain a contract was $17 million. For the three and six m onths ended June 30, 2018, the related amortization expense was $20 million and $19 million, respectively, with no associated impairment losses.
Recently Issued Accounting Pronouncements Other Than ASC 606
Adopted Accounting Standards
In August 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments , which in part requires entities to assess whether distributions of cash from unconsolidated entities represent a return on the investment or a return of the investment, to appropriately classify the distributions in the statement of cash flows. We have made an accounting policy election to use the cumulative earnings approach to determine whether the distributions are returns on the investment and accordingly classified as operating cash flows. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment and those in excess of that amount will be treated as returns of investment. On January 1, 2018, we adopted ASU 2016-15 which had no impact to our historical consolidated financial statements.
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842) , which supersedes existing guidance on accounting for leases in Leases (Topic 840). Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. Subsequent to ASU 2016-02, the FASB has issued ASU No. 2018-01 (“ASU 2018-01”) Leases (Topic 842): Land Easement Practical Expedient for Transition which clarifies the application of lease easements and eases adoption efforts for some land easements. The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. We are currently evaluating the package of practical expedients available to us upon adoption and are assessing lease software solutions. We continue to evaluate the effect that this ASU will have on our consolidated financial statements.
In June 2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”) , Compensation – Stock Compensation (Topic 718). Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions, with the exception of specific guidance related to attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. T he provisions of this ASU are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.
Note 3: Revenue from Contracts with Customers
Financial Statement Impact of Adopting ASC 606
The cumulative effect of applying the new guidance to all contracts with customers as of January 1, 2018 was recorded as an adjustment to retained earnings as of the adoption date. The following unaudited cumulative adjustments were made to the condensed consolidated balance sheet as of January 1, 2018:
|
• |
Sales of VOIs, net — Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. Under ASC 606, the timing of revenue recognition for Sales of VOIs under construction and all related direct costs have been deferred until construction is complete. |
|
• |
Sales, marketing, brand and other fees — Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration. Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages. |
9
The table below shows the adjustments that were made to the condensed consolidated balance sheet as of January 1, 2018:
|
|
December 31, 2017 |
|
|
Adjustments |
|
|
January 1, 2018 |
|
|||
($ in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
246 |
|
|
$ |
— |
|
|
$ |
246 |
|
Restricted cash |
|
|
51 |
|
|
|
— |
|
|
|
51 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
112 |
|
|
|
— |
|
|
|
112 |
|
Timeshare financing receivables, net |
|
|
1,071 |
|
|
|
— |
|
|
|
1,071 |
|
Inventory |
|
|
509 |
|
|
|
30 |
|
|
|
539 |
|
Property and equipment, net |
|
|
238 |
|
|
|
— |
|
|
|
238 |
|
Investment in unconsolidated affiliate |
|
|
41 |
|
|
|
— |
|
|
|
41 |
|
Intangible assets, net |
|
|
72 |
|
|
|
— |
|
|
|
72 |
|
Other assets |
|
|
44 |
|
|
|
16 |
|
|
|
60 |
|
TOTAL ASSETS |
|
$ |
2,384 |
|
|
$ |
46 |
|
|
$ |
2,430 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other |
|
$ |
339 |
|
|
$ |
2 |
|
|
$ |
341 |
|
Advanced deposits |
|
|
104 |
|
|
|
(17 |
) |
|
|
87 |
|
Debt, net |
|
|
482 |
|
|
|
— |
|
|
|
482 |
|
Non-recourse debt, net |
|
|
583 |
|
|
|
— |
|
|
|
583 |
|
Deferred revenues |
|
|
109 |
|
|
|
112 |
|
|
|
221 |
|
Deferred income tax liabilities |
|
|
249 |
|
|
|
(13 |
) |
|
|
236 |
|
Total liabilities |
|
|
1,866 |
|
|
|
84 |
|
|
|
1,950 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of December 31, 2017 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 99,136,304 issued and outstanding as of December 31, 2017 |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Additional paid-in capital |
|
|
162 |
|
|
|
— |
|
|
|
162 |
|
Accumulated retained earnings |
|
|
355 |
|
|
|
(38 |
) |
|
|
317 |
|
Total equity |
|
|
518 |
|
|
|
(38 |
) |
|
|
480 |
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
2,384 |
|
|
$ |
46 |
|
|
$ |
2,430 |
|
Disaggregation of Revenue
The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following two segments: (i) Real estate sales and financing and (ii) Resort operations and club management . Please refer to Note 18: Business Segments below for more details related to our segments.
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2018 |
|
||
($ in millions) |
|
|
|
|
|
|
|
|
Real Estate and Financing Segment |
|
|
|
|
|
|
|
|
Sales of VOIs, net |
|
$ |
250 |
|
|
$ |
328 |
|
Sales, marketing, brand and other fees |
|
|
146 |
|
|
|
271 |
|
Interest income |
|
|
34 |
|
|
|
68 |
|
Other financing revenue |
|
|
5 |
|
|
|
9 |
|
Real estate and financing segment revenues |
|
$ |
435 |
|
|
$ |
676 |
|
10
|
|
Three Months Ended June 30, 2018 |
|
|
Six Months Ended June 30, 2018 |
|
||
($ in millions) |
|
|
|
|
|
|
|
|
Resort Operations and Club Management Segment |
|
|
|
|
|
|
|
|
Club management |
|
$ |
23 |
|
|
$ |
46 |
|
Resort management |
|
|
14 |
|
|
|
30 |
|
Rental (1) |
|
|
46 |
|
|
|
91 |
|
Ancillary services |
|
|
7 |
|
|
|
13 |
|
Resort operations and club management segment revenues |
|
$ |
90 |
|
|
$ |
180 |
|
(1) |
Includes intersegment eliminations. |
Contract Balances
The following table provides information on our accounts receivable and contract asset from contracts with customers:
($ in millions) |
|
January 1, 2018 |
|
|
June 30, 2018 |
|
||
Receivables, which are included in Accounts receivable, net (1) |
|
$ |
97 |
|
|
$ |
117 |
|
Contract asset, which is included in Accounts receivable, net |
|
|
— |
|
|
3 |
|
(1) |
Does not include financing receivables from sales of VOI. See Note 5: Timeshare Financing Receivables for additional information. |
The following table presents changes in our contract liabilities for the six months ended June 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
January 1, 2018 |
|
|
Additions |
|
|
Subtractions |
|
|
June 30, 2018 |
|
||||
Contract liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced deposits |
|
$ |
87 |
|
|
$ |
84 |
|
|
$ |
(76 |
) |
|
$ |
95 |
|
Deferred revenue (1) |
|
|
197 |
|
|
|
198 |
|
|
|
(191 |
) |
|
|
204 |
|
Club Bonus Point incentive liability (2) |
|
|
52 |
|
|
|
26 |
|
|
|
(22 |
) |
|
|
56 |
|
(1) |
The deferred revenues balance is primarily comprised of (i) sales of VOI under construction, (ii) Club activation fees that are paid at the closing of a VOI purchase, which grants access to our points-based Club and (iii) annual dues for Club membership renewals. |
(2) |
Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our unaudited condensed consolidated balance sheets. This liability is comprised of revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements. |
Revenue earned during the three and six months ended June 30, 2018 that was included in the contract liabilities balance at January 1, 2018 was approximately $144 million and $179 million, respectively.
Accounts receivable for the six months ended June 30, 2018 include amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and are realized when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. For the six months ended June 30, 2018, there were no associated impairment losses. Refer to Note 5: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our Timeshare financing receivables.
Contract asset relates to incentive fees that can be earned for meeting certain target on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the incentive fee period.
11
Contract liabilities include payments received or due in advance of satisfying our performance obligations, offset by revenues recognized. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues and the liability for Club Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the fu ture.
Transaction Price Allocated to Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Club Bonus Points that may be redeemed in the future.
The following table includes revenue and direct costs expected to be recognized in the future related to sales of VOIs under construction as of June 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Expected Recognition Period |
|
||||||
($ in millions) |
|
Performance Obligation |
|
|
Q3 2018 |
|
|
Q4 2018 |
|
|||
Deferred revenues |
|
$ |
109 |
|
|
$ |
— |
|
|
$ |
109 |
|
Deferred expenses |
|
|
52 |
|
|
|
— |
|
|
52 |
|
The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of June 30, 2018:
($ in millions) |
|
Remaining Transaction Price |
|
|
Recognition Period |
|
Recognition Method |
|
Advanced deposits |
|
$ |
95 |
|
|
18 months |
|
Upon customer stays |
Club activation fees |
|
|
58 |
|
|
7 years |
|
Straight-line basis over average inventory holding period |
Club Bonus Points |
|
|
56 |
|
|
24 months |
|
Upon redemption |
ASC 606 provides certain practical expedients that facilitate the disclosure around performance obligations. We have elected the following practical expedients options:
|
• |
to not disclose the variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation for which revenue recognition criteria have been met; and |
|
• |
to not disclose the transaction price allocated to remaining performance obligations that are part of a contract that has an original expected duration of one year or less. |
Our performance obligations under the management service arrangements and fee-for-service arrangements are satisfied over time and the related fees represent variable consideration that meets the first practical expedient option. Fees for management services are variable consideration as these fees are based off of costs to operate the resorts in a given annual period, which is resolved on a monthly basis over the contract term.
12
Impact of New Revenue Guidance on Financial Statement Line Items
The following tables compare the reported condensed consolidated balance sheet and statement of operations as of and for the three and six months ended June 30, 2018 as well as the cash flows for the six months ended June 30, 2018, to the previous accounting guidance:
|
|
June 30, 2018 |
|
|||||||||
|
|
As Reported |
|
|
Effects of ASC 606 |
|
|
Previous Accounting Guidance |
|
|||
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
131 |
|
|
$ |
— |
|
|
$ |
131 |
|
Restricted cash |
|
|
72 |
|
|
|
— |
|
|
|
72 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
138 |
|
|
|
— |
|
|
|
138 |
|
Timeshare financing receivables, net |
|
|
1,089 |
|
|
|
— |
|
|
|
1,089 |
|
Inventory |
|
|
544 |
|
|
|
(28 |
) |
|
|
516 |
|
Property and equipment, net |
|
|
411 |
|
|
|
— |
|
|
|
411 |
|
Investment in unconsolidated affiliates |
|
|
33 |
|
|
|
— |
|
|
|
33 |
|
Intangible assets, net |
|
|
73 |
|
|
|
— |
|
|
|
73 |
|
Other assets |
|
|
117 |
|
|
|
(12 |
) |
|
|
105 |
|
TOTAL ASSETS |
|
$ |
2,608 |
|
|
$ |
(40 |
) |
|
$ |
2,568 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other |
|
$ |
299 |
|
|
$ |
(7 |
) |
|
$ |
292 |
|
Advanced deposits |
|
|
95 |
|
|
|
17 |
|
|
|
112 |
|
Debt, net |
|
|
637 |
|
|
|
— |
|
|
|
637 |
|
Non-recourse debt, net |
|
|
604 |
|
|
|
— |
|
|
|
604 |
|
Deferred revenues |
|
|
226 |
|
|
|
(84 |
) |
|
|
142 |
|
Deferred income tax liabilities |
|
|
230 |
|
|
|
13 |
|
|
|
243 |
|
Total liabilities |
|
|
2,091 |
|
|
|
(61 |
) |
|
|
2,030 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of June 30, 2018 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 96,897,051 issued and outstanding as of June 30, 2018 |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Additional paid-in capital |
|
|
170 |
|
|
|
— |
|
|
|
170 |
|
Accumulated retained earnings |
|
|
346 |
|
|
|
21 |
|
|
|
367 |
|
Total equity |
|
|
517 |
|
|
|
21 |
|
|
|
538 |
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
2,608 |
|
|
$ |
(40 |
) |
|
$ |
2,568 |
|
13
Total reported assets and liabilities were $40 million and $61 million, respectively, greater than the balance if the previous accounting guidance were in ef fect as of June 30, 2018. This was primarily due to the deferral of all direct costs and revenue recognition for Sales of VOIs until construction is complete. In addition, total reported liabilities were partially offset by releasing the advanced deposits liability to recognize expected breakage revenue on prepaid vacation packages proportionally as our customers redeem their packages.
|
|
Three Months Ended June 30, 2018 |
|
|||||||||
($ in millions) |
|
As Reported |
|
|
Effects of ASC 606 |
|
|
Previous Accounting Guidance |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOIs, net |
|
$ |
250 |
|
|
$ |
(87 |
) |
|
$ |
163 |
|
Sales, marketing, brand and other fees |
|
|
146 |
|
|
|
2 |
|
|
|
148 |
|
Financing |
|
|
39 |
|
|
|
— |
|
|
|
39 |
|
Resort and club management |
|
|
37 |
|
|
|
— |
|
|
|
37 |
|
Rental and ancillary services |
|
|
53 |
|
|
|
— |
|
|
|
53 |
|
Cost reimbursements |
|
|
38 |
|
|
|
— |
|
|
|
38 |
|
Total revenues |
|
|
563 |
|
|
|
(85 |
) |
|
|
478 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
61 |
|
|
|
(20 |
) |
|
|
41 |
|
Sales and marketing |
|
|
193 |
|
|
|
(9 |
) |
|
|
184 |
|
Financing |
|
|
12 |
|
|
|
— |
|
|
|
12 |
|
Resort and club management |
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
Rental and ancillary services |
|
|
30 |
|
|
|
— |
|
|
|
30 |
|
General and administrative |
|
|
30 |
|
|
|
— |
|
|
|
30 |
|
Depreciation and amortization |
|
|
8 |
|
|
|
— |
|
|
|
8 |
|
License fee expense |
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
Cost reimbursements |
|
|
38 |
|
|
|
— |
|
|
|
38 |
|
Total operating expenses |
|
|
408 |
|
|
|
(29 |
) |
|
|
379 |
|
Interest expense |
|
|
(8 |
) |
|
|
— |
|
|
|
(8 |
) |
Equity in losses from unconsolidated affiliates |
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
Other gain, net |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Income before income taxes |
|
|
146 |
|
|
|
(56 |
) |
|
|
90 |
|
Income tax expense |
|
|
(39 |
) |
|
|
14 |
|
|
|
(25 |
) |
Net income (loss) |
|
$ |
107 |
|
|
$ |
(42 |
) |
|
$ |
65 |
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.10 |
|
|
$ |
(0.43 |
) |
|
$ |
0.67 |
|
Diluted |
|
$ |
1.10 |
|
|
$ |
(0.44 |
) |
|
$ |
0.66 |
|
14
|
Six Months Ended June 30, 2018 |
|
||||||||||
($ in millions) |
|
As Reported |
|
|
Effects of ASC 606 |
|
|
Previous Accounting Guidance |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOIs, net |
|
$ |
328 |
|
|
$ |
(28 |
) |
|
$ |
300 |
|
Sales, marketing, brand and other fees |
|
|
271 |
|
|
|
6 |
|
|
|
277 |
|
Financing |
|
|
77 |
|
|
|
— |
|
|
|
77 |
|
Resort and club management |
|
|
76 |
|
|
|
— |
|
|
|
76 |
|
Rental and ancillary services |
|
|
104 |
|
|
|
— |
|
|
|
104 |
|
Cost reimbursements |
|
|
74 |
|
|
|
— |
|
|
|
74 |
|
Total revenues |
|
|
930 |
|
|
|
(22 |
) |
|
|
908 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
80 |
|
|
|
(2 |
) |
|
|
78 |
|
Sales and marketing |
|
|
354 |
|
|
|
3 |
|
|
|
357 |
|
Financing |
|
|
23 |
|
|
|
— |
|
|
|
23 |
|
Resort and club management |
|
|
22 |
|
|
|
— |
|
|
|
22 |
|
Rental and ancillary services |
|
|
58 |
|
|
|
— |
|
|
|
58 |
|
General and administrative |
|
|
53 |
|
|
|
— |
|
|
|
53 |
|
Depreciation and amortization |
|
|
16 |
|
|
|
— |
|
|
|
16 |
|
License fee expense |
|
|
48 |
|
|
|
— |
|
|
|
48 |
|
Cost reimbursements |
|
|
74 |
|
|
|
— |
|
|
|
74 |
|
Total operating expenses |
|
|
728 |
|
|
|
1 |
|
|
|
729 |
|
Interest expense |
|
|
(15 |
) |
|
|
— |
|
|
|
(15 |
) |
Equity in losses from unconsolidated affiliates |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Income before income taxes |
|
|
186 |
|
|
|
(23 |
) |
|
|
163 |
|
Income tax expense |
|
|
(49 |
) |
|
|
5 |
|
|
|
(44 |
) |
Net income (loss) |
|
$ |
137 |
|
|
$ |
(18 |
) |
|
$ |
119 |
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.40 |
|
|
$ |
(0.18 |
) |
|
$ |
1.22 |
|
Diluted |
|
$ |
1.39 |
|
|
$ |
(0.18 |
) |
|
$ |
1.21 |
|
The following summarizes the significant changes to our condensed consolidated statement of operations for the three and six months ended June 30, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if we had continued to recognize revenues under the previous accounting guidance:
|
• |
Under ASC 606, the timing of revenue recognition for Sales of VOIs under construction and all related direct costs have been deferred until construction is complete. Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. This resulted in a lower Sales of VOIs, Cost of VOI sales and Total operating expenses ; |
|
• |
Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages. Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration ; and |
|
• |
Under ASC 606, certain sales incentives where we are acting as the agent are recognized on a net basis, therefore, resulted in a lower Sales, marketing, brand and other fees and Total operating expenses . Under the previous accounting guidance, we recognized certain sales incentives on a gross basis which resulted in higher Sales, marketing, brand and other fees and Total operating expenses . |
15
The adoption of ASC 606 had no impact on our total cash flows provided by operating activities or used by investing and financing activities. ASC 606 resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.
|
|
Six Months Ended June 30, 2018 |
|
|||||
($ in millions) |
|
As Reported |
|
|
Previous Accounting Guidance |
|
||
Net income |
|
$ |
137 |
|
|
$ |
119 |
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
54 |
|
|
|
54 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(26 |
) |
|
|
(26 |
) |
Timeshare financing receivables, net |
|
|
(48 |
) |
|
|
(48 |
) |
Inventory |
|
|
11 |
|
|
|
9 |
|
Purchase of operating property for future conversion to inventory |
|
|
(176 |
) |
|
|
(176 |
) |
Other assets |
|
|
(58 |
) |
|
|
(61 |
) |
Accounts payable, accrued expenses and other |
|
|
(42 |
) |
|
|
(48 |
) |
Advanced deposits |
|
|
8 |
|
|
|
8 |
|
Deferred revenues |
|
|
4 |
|
|
|
33 |
|
Other |
|
|
2 |
|
|
|
2 |
|
Net cash used in operating activities |
|
$ |
(134 |
) |
|
$ |
(134 |
) |
Note 4: Restricted Cash
Restricted cash was as follows:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Escrow deposits on VOI sales |
|
$ |
49 |
|
|
$ |
29 |
|
Reserves related to non-recourse debt (1) |
|
|
23 |
|
|
|
22 |
|
|
|
$ |
72 |
|
|
$ |
51 |
|
(1) |
See Note 12: Debt & Non-recourse Debt for further discussion. |
Note 5: Timeshare Financing Receivables
Timeshare financing receivables were as follows:
|
|
June 30, 2018 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Timeshare financing receivables |
|
$ |
388 |
|
|
$ |
858 |
|
|
$ |
1,246 |
|
Less: allowance for loan loss |
|
|
(20 |
) |
|
|
(137 |
) |
|
|
(157 |
) |
|
|
$ |
368 |
|
|
$ |
721 |
|
|
$ |
1,089 |
|
|
|
December 31, 2017 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Timeshare financing receivables |
|
$ |
471 |
|
|
$ |
741 |
|
|
$ |
1,212 |
|
Less: allowance for loan loss |
|
|
(27 |
) |
|
|
(114 |
) |
|
|
(141 |
) |
|
|
$ |
444 |
|
|
$ |
627 |
|
|
$ |
1,071 |
|
16
The interest rate charged on the notes correlates to the risk profile of the borrower at the time of purchase and the percentage of the purchase that is financed, among other factors. As of June 30, 2018, our timeshare financing receivables had interest rates ranging from 5.3 percent to 20.5 percent, a weighted average interest rate of 12.2 percent, a weighted average remaining term of 7.7 years and maturities through 2029.
A portion of our timeshare financing receivables is used as collateral to secure a non-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) with a borrowing capacity of $450 million. As of June 30, 2018 and December 31, 2017, we had $250 million and $143 million, respectively, of gross timeshare financing receivables securing the outstanding debt balance of our Timeshare Facility. We recognize interest income on our timeshare financing receivables as earned. We record an estimate of variable consideration as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale.
Our timeshare financing receivables as of June 30, 2018 mature as follows:
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2018 (remaining) |
|
$ |
33 |
|
|
$ |
48 |
|
|
$ |
81 |
|
2019 |
|
|
65 |
|
|
|
70 |
|
|
|
135 |
|
2020 |
|
|
63 |
|
|
|
77 |
|
|
|
140 |
|
2021 |
|
|
58 |
|
|
|
83 |
|
|
|
141 |
|
2022 |
|
|
51 |
|
|
|
90 |
|
|
|
141 |
|
Thereafter |
|
|
118 |
|
|
|
490 |
|
|
|
608 |
|
|
|
|
388 |
|
|
|
858 |
|
|
|
1,246 |
|
Less: allowance for loan loss |
|
|
(20 |
) |
|
|
(137 |
) |
|
|
(157 |
) |
|
|
$ |
368 |
|
|
$ |
721 |
|
|
$ |
1,089 |
|
We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the credit quality of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for determining our allowance for loan loss on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. 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 assumed default rates, 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.
Our gross timeshare financing receivables balances by FICO score were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
FICO score |
|
|
|
|
|
|
|
|
700+ |
|
$ |
812 |
|
|
$ |
770 |
|
600-699 |
|
|
231 |
|
|
|
225 |
|
<600 |
|
|
28 |
|
|
|
28 |
|
No score (1) |
|
|
175 |
|
|
|
189 |
|
|
|
$ |
1,246 |
|
|
$ |
1,212 |
|
(1) |
Timeshare financing receivables without a FICO score are primarily related to foreign borrowers. |
We apply payments we receive for loans, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a loan is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for loans for which we had previously ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.
17
As of June 30, 2018 and December 31, 2017, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $64 million and $49 million, respectively. The following tab les detail an aged analysis of our gross timeshare financing receivables balance:
|
|
June 30, 2018 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Current |
|
$ |
379 |
|
|
$ |
787 |
|
|
$ |
1,166 |
|
31 - 90 days past due |
|
|
5 |
|
|
|
11 |
|
|
|
16 |
|
91 - 120 days past due |
|
|
2 |
|
|
|
3 |
|
|
|
5 |
|
121 days and greater past due |
|
|
2 |
|
|
|
57 |
|
|
|
59 |
|
|
|
$ |
388 |
|
|
$ |
858 |
|
|
$ |
1,246 |
|
|
|
December 31, 2017 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Current |
|
$ |
462 |
|
|
$ |
685 |
|
|
$ |
1,147 |
|
31 - 90 days past due |
|
|
6 |
|
|
|
10 |
|
|
|
16 |
|
91 - 120 days past due |
|
|
1 |
|
|
|
4 |
|
|
|
5 |
|
121 days and greater past due |
|
|
2 |
|
|
|
42 |
|
|
|
44 |
|
|
|
$ |
471 |
|
|
$ |
741 |
|
|
$ |
1,212 |
|
The changes in our allowance for loan loss were as follows:
|
|
June 30, 2018 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Balance as of December 31, 2017 |
|
$ |
27 |
|
|
$ |
114 |
|
|
$ |
141 |
|
Write-offs |
|
|
— |
|
|
|
(14 |
) |
|
|
(14 |
) |
Provision for loan loss (1) |
|
|
(7 |
) |
|
|
37 |
|
|
|
30 |
|
Balance as of June 30, 2018 |
|
$ |
20 |
|
|
$ |
137 |
|
|
$ |
157 |
|
|
|
June 30, 2017 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Balance as of December 31, 2016 |
|
$ |
9 |
|
|
$ |
111 |
|
|
$ |
120 |
|
Write-offs |
|
|
— |
|
|
|
(17 |
) |
|
|
(17 |
) |
Securitization |
|
|
28 |
|
|
|
(28 |
) |
|
|
— |
|
Provision for loan loss (1) |
|
|
(4 |
) |
|
|
31 |
|
|
|
27 |
|
Balance as of June 30, 2017 |
|
$ |
33 |
|
|
$ |
97 |
|
|
$ |
130 |
|
(1) |
Includes activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables, net of incremental provision for loan loss. |
Note 6: Inventory
Inventory was as follows:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Completed unsold VOIs |
|
$ |
215 |
|
|
$ |
191 |
|
Construction in process |
|
|
63 |
|
|
|
60 |
|
Land, infrastructure and other |
|
|
266 |
|
|
|
258 |
|
|
|
$ |
544 |
|
|
$ |
509 |
|
18
We benefited from $12 million in costs of sales true-ups relating to VOI products for the six months ended June 30, 2018, which resulted in a $12 million increase to the carrying value of inventory as of June 30, 2018. We benefited from $4 million in costs of sales true-ups re lating to VOI products for the year ended December 31, 2017, which resulted in a $4 million increase to the carrying value of inventory as of December 31, 2017. Shown below are expenses incurred, recorded in Cost of VOI sales , related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Cost of VOI sales related to fee-for-service upgrades |
|
$ |
9 |
|
|
$ |
9 |
|
|
$ |
15 |
|
|
$ |
20 |
|
Note 7: Property and Equipment
Property and equipment were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Land |
|
|
146 |
|
|
|
53 |
|
Building and leasehold improvements |
|
|
279 |
|
|
|
182 |
|
Furniture and equipment |
|
|
55 |
|
|
|
48 |
|
Construction in progress |
|
|
5 |
|
|
|
20 |
|
|
|
|
485 |
|
|
|
303 |
|
Accumulated depreciation |
|
|
(74 |
) |
|
|
(65 |
) |
|
|
$ |
411 |
|
|
$ |
238 |
|
In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory. The transaction was accounted for as an asset acquisition with all of the purchase price allocated to Land, Building and leasehold improvements and Furniture and equipment.
Note 8: Consolidated Variable Interest Entities
As of June 30, 2018 and December 31, 2017, we consolidated three variable interest entities (“VIEs”), that issued Securitized Debt, backed by pledged assets consisting primarily of a pool of timeshare financing receivables, which is without recourse to us. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we are required to replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only assets of our VIEs are available to settle the obligations of the respective entities.
Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Restricted cash |
|
$ |
14 |
|
|
$ |
18 |
|
Timeshare financing receivables, net |
|
|
368 |
|
|
|
445 |
|
Non-recourse debt (1) |
|
|
375 |
|
|
|
454 |
|
(1) |
Net of deferred financing costs. |
During the six months ended June 30, 2018 and 2017, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.
19
Note 9: Investment in Unconsolidated Affiliates
In March 2018, we entered into an agreement with SCG 1776, LLC, an affiliate of Strand Capital Group, LLC and formed 1776 Holding, LLC, a VIE. Because we are not the primary beneficiary, we do not consolidate 1776 Holding, LLC. Pursuant to the agreement, we contributed $5 million in cash for a 50 percent interest in 1776 Holding, LLC, which will construct an approximately 99-unit timeshare resort in Charleston, South Carolina. Our investment in 1776 Holdings, LLC is included in the condensed consolidated balance sheets as Investment in unconsolidated affiliates .
During the six months ended June 30, 2018, we received a cash distributions of $13 million from our investment in BRE Ace LLC, also a VIE, of which $11 million was considered a return of investment.
We held investments in our two unconsolidated affiliates with aggregated debt balances of $489 million and $488 million as of June 30, 2018 and December 31, 2017, respectively. The debt is secured by their assets and are without recourse to us. Our maximum exposure to loss as a result of our investment interests in the two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investments which totals $33 million and $41 million as of June 30, 2018 and December 31, 2017, respectively and (ii) receivables for commission and other fees earned under a fee-for-service arrangement. See Note 17: Related Party Transactions for additional information.
Note 10: Other Assets
Other assets were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Inventory deposits |
|
$ |
44 |
|
|
$ |
— |
|
Deferred selling, marketing, general and administrative expenses |
|
|
15 |
|
|
|
3 |
|
Prepaid expenses |
|
|
35 |
|
|
|
18 |
|
Other |
|
|
23 |
|
|
|
23 |
|
|
|
$ |
117 |
|
|
$ |
44 |
|
Note 11: Deferred Revenues
Deferred revenues were as follows:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Deferred VOI sales |
|
$ |
130 |
|
|
$ |
45 |
|
Club activation fees |
|
|
59 |
|
|
|
54 |
|
Club membership fees |
|
|
28 |
|
|
|
— |
|
Other |
|
|
9 |
|
|
|
10 |
|
|
|
$ |
226 |
|
|
$ |
109 |
|
20
Note 12: Debt & Non-recourse Debt
Debt
The following table details our outstanding debt balance and its associated interest rates:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Debt (1) |
|
|
|
|
|
|
|
|
Senior secured credit facilities: |
|
|
|
|
|
|
|
|
Term loan with an average rate of 4.340%, due 2021 |
|
$ |
185 |
|
|
$ |
190 |
|
Revolver with an average rate of 4.340%, due 2021 |
|
|
160 |
|
|
|
— |
|
Senior notes with a rate of 6.125%, due 2024 |
|
|
300 |
|
|
|
300 |
|
|
|
|
645 |
|
|
|
490 |
|
Less: unamortized deferred financing costs and discount (2)(3) |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
$ |
637 |
|
|
$ |
482 |
|
(1) |
For the six months ended June 30, 2018 and year ended December 31, 2017, weighted average interest rates were 5.170 percent and 5.229 percent, respectively. |
(2) |
Amount includes deferred financing costs of $1 million and $7 million as of both June 30, 2018 and December 31, 2017, respectively, relating to our term loan and senior notes. |
(3) |
Amount does not include deferred financing costs of $1 million as of June 30, 2018 and $2 million as of December 31, 2017, relating to our revolving facility included in Other Assets in our condensed consolidated balance sheets. |
During the three months ended June 30, 2018, we borrowed $160 million under the revolving credit facility. The interest rate on the revolving credit facility is based on one-month LIBOR plus 2.25 percent.
As of June 30, 2018 and December 31, 2017, we had $1 million of outstanding letter of credit under the revolving credit facility. We were in compliance with all applicable financial covenants as of June 30, 2018.
Non-recourse Debt
The following table details our outstanding non-recourse debt balance and its associated interest rates:
|
|
June 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Non-recourse debt (1) |
|
|
|
|
|
|
|
|
Timeshare Facility with an average rate of 3.187%, due 2021 |
|
$ |
229 |
|
|
$ |
129 |
|
Securitized Debt with an average rate of 2.447%, due 2028 |
|
|
379 |
|
|
|
459 |
|
|
|
|
608 |
|
|
|
588 |
|
Less: unamortized deferred financing costs (2) |
|
|
(4 |
) |
|
|
(5 |
) |
|
|
$ |
604 |
|
|
$ |
583 |
|
(1) |
For the six months ended June 30, 2018 and year ended December 31, 2017, weighted average interest rates were 2.725 percent and 2.492 percent, respectively. |
(2) |
Amount relates to Securitized Debt only and does not include deferred financing costs of $3 million and $2 million as of June 30, 2018 and December 31, 2017, respectively, relating to our Timeshare Facility included in Other Assets in our condensed consolidated balance sheets. |
21
The Timeshare Facility is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. In March 2018, we extended the commitment termination date to March 2020. The maturity date was extended 12 months from the commitment date to March 2021. As a result of this extension, we incurred $2 million in debt issuance costs recorded in other assets. On May 31, 2018, we borrowed $100 million under the Timeshare Fac ility.
We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility and Securitized Debt into depository accounts maintained by third parties. On a monthly basis, the depository accounts are utilized to make required principal, interest and other payments due under the respective loan agreements. The balances in the depository accounts were $23 million and $22 million as of June 30, 2018 and December 31, 2017, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of June 30, 2018 were as follows:
($ in millions) |
|
Debt |
|
|
Non-recourse Debt |
|
|
Total |
|
|||
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2018 (remaining) |
|
$ |
5 |
|
|
$ |
63 |
|
|
$ |
68 |
|
2019 |
|
|
10 |
|
|
|
122 |
|
|
|
132 |
|
2020 |
|
|
10 |
|
|
|
89 |
|
|
|
99 |
|
2021 |
|
|
320 |
|
|
|
262 |
|
|
|
582 |
|
2022 |
|
|
— |
|
|
|
26 |
|
|
|
26 |
|
Thereafter |
|
|
300 |
|
|
|
46 |
|
|
|
346 |
|
|
|
$ |
645 |
|
|
$ |
608 |
|
|
$ |
1,253 |
|
Note 13: Fair Value Measurements
The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:
|
|
June 30, 2018 |
|
|||||||||
|
|
|
|
|
|
Hierarchy Level |
|
|||||
($ in millions) |
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 3 |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables, net (1) |
|
$ |
1,089 |
|
|
$ |
— |
|
|
$ |
1,303 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net (2) |
|
|
637 |
|
|
|
309 |
|
|
|
348 |
|
Non-recourse debt, net (2) |
|
|
604 |
|
|
|
— |
|
|
|
597 |
|
|
|
December 31, 2017 |
|
|||||||||
|
|
|
|
|
|
Hierarchy Level |
|
|||||
($ in millions) |
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 3 |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables, net (1) |
|
$ |
1,071 |
|
|
$ |
— |
|
|
$ |
1,292 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net (2) |
|
|
482 |
|
|
|
329 |
|
|
|
194 |
|
Non-recourse debt, net (2) |
|
|
583 |
|
|
|
— |
|
|
|
577 |
|
(1) |
Carrying amount net of allowance for loan loss. |
(2) |
Carrying amount net of unamortized deferred financing costs and discount. |
22
Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considera ble judgment is necessary to interpret market data and develop the estimated fair values. The table above excludes cash and cash equivalents, restricted cash, accounts receivable, accounts payable, advance deposits and accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
The estimated fair values of our timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and loan terms respective to the portfolio based on current market assumptions for similar types of arrangements.
The estimated fair values of our Level 1 debt was based on prices in active debt markets. The estimated fair value of our Level 3 debt and non-recourse debt were as follows:
|
• |
Debt - based on indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates. |
|
• |
Non-recourse debt - based on projected future cash flows discounted at risk-adjusted rates. |
We do not have any assets or liabilities measured at fair value on a recurring basis as of June 30, 2018.
Note 14: Income Taxes
At the end of each quarter, we estimate the effective tax rate expected to be applied for the full year. The effective income tax rate is determined by the level and composition of pre-tax income or loss, which is subject to federal, foreign, state and local income taxes. The effective income tax rate for the six months ended June 30, 2018 and 2017 was approximately 26 percent and 37 percent, respectively, which decreased primarily due to a decrease in the federal corporate income tax rate as a result of the Tax Cut and Jobs Act (the “Act”) that was passed on December 22, 2017.
We are applying the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”) when accounting for the enactment-date effects of the Act. As of June 30, 2018, there has been no adjustment to the provisional amounts of the Act’s effects on the one-time repatriation tax and the existing deferred tax balances as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
Furthermore, we have not yet elected an accounting policy to account for the tax upon Global Intangible Low-Taxed Income (“GILTI”) in either of the following ways: 1) as a period charge in the future period the tax arises or 2) as part of deferred taxes related to the investment or subsidiary, given the complexities of the GILTI taxation. As of June 30, 2018, we have an insignificant amount of GILTI tax net of applicable foreign tax credit.
Note 15: Share-Based Compensation
Stock Plan
We issue time-vesting restricted stock units (“RSUs”), time and performance-vesting restricted stock units (“PSUs”) and nonqualified stock options (“options”) to certain employees and directors. We recognized share-based compensation expense of $5 million during the three months ended June 30, 2018 and 2017 and $8 million during the six months ended June 30, 2018 and 2017. As of June 30, 2018, unrecognized compensation costs for unvested awards were approximately $24 million, which is expected to be recognized over a weighted average period of 2.0 years. As of June 30, 2018, there were 7,062,074 shares of common stock available for future issuance.
RSUs
During the six months ended June 30, 2018, we issued 286,315 RSUs with a weighted average grant date fair value of $45.98, which generally vest in equal annual installments over three years from the date of grant.
Options
During the six months ended June 30, 2018 , we issued 312,141 options with a weighted average exercise price of $46.48, which vest over three years from the date of the grant.
23
The weighted average grant date fair value of these options was $14.78, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility (1) |
|
|
26.6 |
% |
Dividend yield (2) |
|
|
— |
% |
Risk-free rate (3) |
|
|
2.7 |
% |
Expected term (in years) (4) |
|
|
6.0 |
|
(1) |
Due to limited trading history for our common stock, we did not have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of our share price. As a result, we used an average historical volatility of our peer group over a time period consistent with its expected term assumption. Our peer group was determined based upon companies in our industry with similar business models and is consistent with those used to benchmark its executive compensation. |
(2) |
At the date of grant we had no plans to pay dividends during the expected term of these options. |
(3) |
Based on the yields of U.S. Department of Treasury instruments with similar expected lives on the date of grant. |
(4) |
Estimated using the average of the vesting periods and the contractual term of the options. |
As of June 30, 2018, we had 385,207 options outstanding that were exercisable.
Performance Shares
During the six months ended June 30, 2018, we issued 92,578 PSUs with a weighted average grant date fair value of $42.94. The PSUs are settled at the end of a three-year performance period, with 70 percent of the PSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization. This metric is further adjusted by sales of VOIs under construction. The remaining 30 percent of the PSUs are subject to the achievement of certain VOI sales targets. We determined that the performance conditions for these awards are probable of achievement and, as of June 30, 2018, we recognized compensation expense based on the number of PSUs we expect to vest.
Note 16: Earnings Per Share
The following table presents the calculation of our basic and diluted earnings per share (“EPS”). The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended June 30, 2018 is 96,774,130 and 97,463,820, respectively, and six months ended June 30, 2018 is 97,692,558 and 98,474,971, respectively. The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended June 30, 2017 was 98,959,438 and 99,529,301, respectively and for the six months ended June 30, 2017 was 98,881,494 and 99,442,829, respectively.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
($ and shares outstanding in millions, except per share amounts) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (1) |
|
$ |
107 |
|
|
$ |
51 |
|
|
$ |
137 |
|
|
$ |
101 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
97 |
|
|
|
99 |
|
|
|
98 |
|
|
|
99 |
|
Basic EPS |
|
$ |
1.10 |
|
|
$ |
0.51 |
|
|
$ |
1.40 |
|
|
$ |
1.02 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (1) |
|
$ |
107 |
|
|
$ |
51 |
|
|
$ |
137 |
|
|
$ |
101 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
97 |
|
|
|
100 |
|
|
|
98 |
|
|
|
99 |
|
Diluted EPS |
|
$ |
1.10 |
|
|
$ |
0.51 |
|
|
$ |
1.39 |
|
|
$ |
1.02 |
|
(1) |
Net income for the three months ended June 30, 2018 and 2017 was $106,861,230 and $50,828,907, respectively, and for the six months ended June 30, 2018 and 2017 was $137,031,259 and $101,041,522, respectively. |
24
The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period.
For the three and six months ended June 30, 2018, we excluded 533,609 and 341,246 share-based compensation awards, respectively, because their effect would have been anti-dilutive under the treasury stock method.
Note 17: Related Party Transactions
HNA Tourism Group Co., Ltd.
On March 13, 2018, we and HNA Tourism Group Co., Ltd. (“HNA”) and HNA HLT Holdco I LLC (the “Selling Stockholder”), an affiliate of HNA, entered into a Master Amendment and Option Agreement (the “Master Amendment and Option Agreement”) to make certain amendments to the Stockholders Agreement, dated October 24, 2016, between us and HNA (the “Stockholders Agreement”) and the Registration Rights Agreement, dated October 24, 2016, between us and HNA (the “Registration Rights Agreement”), among other things, (i) to permit the sale of up to all 24,750,000 shares of our common stock owned by the Selling Stockholder prior to the expiration of the two-year restricted period originally contained in the Stockholders Agreement, (ii) grant us a right to repurchase up to 4,340,000 shares of our common stock held by the Selling Stockholder, (iii) provide that HNA has customary “demand” registration rights effective March 13, 2018, (iv) require HNA to pay all expenses incurred under the Registration Rights Agreement for registrations or offerings occurring prior to a certain date and (v) eliminate HNA’s right to designate a certain number of directors to our board of directors. We exercised the repurchase option from the Selling Stockholder with respect to 2,500,000 shares at a price of approximately $44.75 per share.
On March 14, 2018, HGV and HNA entered into an underwriting agreement with several underwriters, pursuant to which the underwriters agreed to purchase from the Selling Stockholder 22,250,000 shares of common stock, $0.01 par value per share, of the Company at a price of approximately $44.75 per share. The sale was completed on March 19, 2018; consequently, HNA ceased to be a related party. We did not receive any proceeds from the sale.
On March 19, 2018, the repurchase was completed and the shares were retired.
The Blackstone Group
In September 2017, Blackstone completed the sale of substantially all of our common stock and ceased to be a related party. For the three and six months ended June 30, 2017, we earned $42 million and $93 million, respectively, in commission and other fees related to a fee-for-service arrangement with Blackstone affiliates to sell VOIs on their behalf.
BRE Ace LLC
In July 2017, we acquired a 25 percent ownership interest in BRE Ace LLC, a VIE. During the three and six months ended June 30, 2018, we recorded $2 million and $1 million, respectively, in Equity in losses from unconsolidated affiliates , included in our condensed consolidated statements of operations. Additionally, we earn commissions and other fees related to a fee-for-service agreement to sell VOIs at Elara, by Hilton Grand Vacations. These amounts are summarized in the following table and included in our condensed consolidated statements of operations as of the date they became a related party.
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Commission and other fees |
|
$ |
32 |
|
|
$ |
— |
|
|
$ |
64 |
|
|
$ |
— |
|
Also related to the fee-for-service agreement, as of June 30, 2018, we have outstanding receivables of $33 million.
25
On March 23, 2018, we entered into an agreement with SCG 1776, LLC to form 1776 Holding, LLC. In conjunction with this agreement we contributed $5 million in cash for a 50 percent ownership interest in 1776 Holding LLC. For the three and six months ended June 30, 2018, we recorded less than a million loss included in the condensed consolidated statements of operations as Equity in losses from unconsolidated affiliates. See Note 9: Investment in Unconsolidated Affiliates for additional information.
Note 18: Business Segments
We operate our business through the following two segments:
|
• |
Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of VOIs and revenue from servicing the loans. We also generate fee revenue from servicing the loans provided by third-party developers to purchasers of their VOIs. |
|
• |
Resort operations and club management – We manage the Club, earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We earn fees for managing the timeshare properties. We generate rental revenue from unit rentals of unsold inventory and inventory made available due to ownership exchanges under our Club program. We also earn revenue from food and beverage, retail and spa outlets at our timeshare properties. |
The performance of our operating segments is evaluated primarily based on adjusted earnings before interest expense (excluding non-recourse debt), taxes, depreciation and amortization (“EBITDA”). We define Adjusted EBITDA as EBITDA which has been further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.
We do not include equity in earnings (losses) from unconsolidated affiliate in our measures of segment revenues. The following table presents revenues for our reportable segments reconciled to consolidated amounts:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing |
|
$ |
435 |
|
|
$ |
323 |
|
|
$ |
676 |
|
|
$ |
606 |
|
Resort operations and club management (1) |
|
|
98 |
|
|
|
92 |
|
|
|
196 |
|
|
|
180 |
|
Total segment revenues |
|
|
533 |
|
|
|
415 |
|
|
|
872 |
|
|
|
786 |
|
Cost reimbursements |
|
|
38 |
|
|
|
34 |
|
|
|
74 |
|
|
|
68 |
|
Intersegment eliminations (1)(2) |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
(16 |
) |
|
|
(16 |
) |
Total revenues |
|
$ |
563 |
|
|
$ |
439 |
|
|
$ |
930 |
|
|
$ |
838 |
|
(1) |
Includes charges to the real estate sales and financing segment from the resort operations and club management segment for discounted stays at properties resulting from marketing packages. These charges totaled $8 million and $10 million for the three months ended June 30, 2018 and 2017, respectively, and $16 million for both six months ended June 30, 2018 and 2017. |
(2) |
Includes charges to the real estate sales and financing segment from the resort operations and club management segment for the rental of model units to show prospective buyers. These charges totaled less than $1 million for each of the three and six months ended June 30, 2018 and 2017. |
26
The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing (1) |
|
$ |
163 |
|
|
$ |
99 |
|
|
$ |
207 |
|
|
$ |
182 |
|
Resort operations and club management (1) |
|
|
58 |
|
|
|
52 |
|
|
|
117 |
|
|
|
103 |
|
Segment Adjusted EBITDA |
|
|
221 |
|
|
|
151 |
|
|
|
324 |
|
|
|
285 |
|
General and administrative |
|
|
(30 |
) |
|
|
(29 |
) |
|
|
(53 |
) |
|
|
(52 |
) |
Depreciation and amortization |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(16 |
) |
|
|
(14 |
) |
License fee expense |
|
|
(25 |
) |
|
|
(23 |
) |
|
|
(48 |
) |
|
|
(43 |
) |
Other gain, net |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Interest expense |
|
|
(8 |
) |
|
|
(7 |
) |
|
|
(15 |
) |
|
|
(14 |
) |
Income tax expense |
|
|
(39 |
) |
|
|
(33 |
) |
|
|
(49 |
) |
|
|
(59 |
) |
Equity in losses from unconsolidated affiliates |
|
|
(2 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
Other adjustment items |
|
|
(3 |
) |
|
|
(1 |
) |
|
|
(5 |
) |
|
|
(2 |
) |
Net income |
|
$ |
107 |
|
|
$ |
51 |
|
|
$ |
137 |
|
|
$ |
101 |
|
(1) |
Includes intersegment eliminations. Refer to our table presenting revenues by reportable segment above for additional discussion. |
Note 19: Commitments and Contingencies
We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of June 30, 2018, we were committed to purchase approximately $464 million of inventory and land over a period of seven years. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. During each of the six months ended June 30, 2018 and 2017, we purchased $4 million of VOI inventory as required under our commitments. As of June 30, 2018, our remaining obligation pursuant to these arrangements was expected to be incurred as follows:
($ in millions) |
|
Purchase Obligations |
|
|
Year |
|
|
|
|
2018 (remaining) |
|
$ |
13 |
|
2019 |
|
|
247 |
|
2020 |
|
|
23 |
|
2021 |
|
|
63 |
|
2022 |
|
|
35 |
|
Thereafter |
|
|
83 |
|
Total |
|
$ |
464 |
|
We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which possible losses are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2018, will not have a material effect on our unaudited condensed consolidated financial statements.
27
Note 20: Condensed Consolidating Guarantor Financial Information
The following schedules present the condensed consolidating financial information as of June 30, 2018 and December 31, 2017 and for the three and six months ended June 30, 2018 and 2017 for the Parent, Subsidiary Issuers, Guarantors and Non-Guarantors.
|
|
June 30, 2018 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
120 |
|
|
$ |
11 |
|
|
$ |
— |
|
|
$ |
131 |
|
Restricted cash |
|
|
— |
|
|
|
— |
|
|
|
49 |
|
|
|
23 |
|
|
|
— |
|
|
|
72 |
|
Accounts receivable, net |
|
|
— |
|
|
|
— |
|
|
|
138 |
|
|
|
8 |
|
|
|
(8 |
) |
|
|
138 |
|
Timeshare financing receivables, net |
|
|
— |
|
|
|
— |
|
|
|
296 |
|
|
|
793 |
|
|
|
— |
|
|
|
1,089 |
|
Inventory |
|
|
— |
|
|
|
— |
|
|
|
533 |
|
|
|
11 |
|
|
|
— |
|
|
|
544 |
|
Property and equipment, net |
|
|
— |
|
|
|
— |
|
|
|
407 |
|
|
|
4 |
|
|
|
— |
|
|
|
411 |
|
Investment in unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
33 |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
Intangible assets, net |
|
|
— |
|
|
|
— |
|
|
|
73 |
|
|
|
— |
|
|
|
— |
|
|
|
73 |
|
Other assets |
|
|
— |
|
|
|
1 |
|
|
|
66 |
|
|
|
50 |
|
|
|
— |
|
|
|
117 |
|
Investments in subsidiaries |
|
|
517 |
|
|
|
1,153 |
|
|
|
290 |
|
|
|
— |
|
|
|
(1,960 |
) |
|
|
— |
|
TOTAL ASSETS |
|
$ |
517 |
|
|
$ |
1,154 |
|
|
$ |
2,005 |
|
|
$ |
900 |
|
|
$ |
(1,968 |
) |
|
$ |
2,608 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
301 |
|
|
$ |
6 |
|
|
$ |
(8 |
) |
|
$ |
299 |
|
Advanced deposits |
|
|
— |
|
|
|
— |
|
|
|
95 |
|
|
|
— |
|
|
|
— |
|
|
|
95 |
|
Debt, net |
|
|
— |
|
|
|
637 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
637 |
|
Non-recourse debt, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
604 |
|
|
|
— |
|
|
|
604 |
|
Deferred revenues |
|
|
— |
|
|
|
— |
|
|
|
226 |
|
|
|
— |
|
|
|
— |
|
|
|
226 |
|
Deferred income tax liabilities |
|
|
— |
|
|
|
— |
|
|
|
230 |
|
|
|
— |
|
|
|
— |
|
|
|
230 |
|
Total equity |
|
|
517 |
|
|
|
517 |
|
|
|
1,153 |
|
|
|
290 |
|
|
|
(1,960 |
) |
|
|
517 |
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
517 |
|
|
$ |
1,154 |
|
|
$ |
2,005 |
|
|
$ |
900 |
|
|
$ |
(1,968 |
) |
|
$ |
2,608 |
|
28
|
|
December 31, 2017 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
230 |
|
|
$ |
16 |
|
|
$ |
— |
|
|
$ |
246 |
|
Restricted cash |
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
|
22 |
|
|
|
— |
|
|
|
51 |
|
Accounts receivable, net |
|
|
— |
|
|
|
— |
|
|
|
113 |
|
|
|
5 |
|
|
|
(6 |
) |
|
|
112 |
|
Timeshare financing receivables, net |
|
|
— |
|
|
|
— |
|
|
|
457 |
|
|
|
614 |
|
|
|
— |
|
|
|
1,071 |
|
Inventory |
|
|
— |
|
|
|
— |
|
|
|
509 |
|
|
|
— |
|
|
|
— |
|
|
|
509 |
|
Property and equipment, net |
|
|
— |
|
|
|
— |
|
|
|
232 |
|
|
|
6 |
|
|
|
— |
|
|
|
238 |
|
Investment in unconsolidated affiliate |
|
|
— |
|
|
|
— |
|
|
|
41 |
|
|
|
— |
|
|
|
— |
|
|
|
41 |
|
Intangible assets, net |
|
|
— |
|
|
|
— |
|
|
|
72 |
|
|
|
— |
|
|
|
— |
|
|
|
72 |
|
Other assets |
|
|
— |
|
|
|
2 |
|
|
|
36 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
44 |
|
Investments in subsidiaries |
|
|
518 |
|
|
|
999 |
|
|
|
81 |
|
|
|
— |
|
|
|
(1,598 |
) |
|
|
— |
|
TOTAL ASSETS |
|
$ |
518 |
|
|
$ |
1,001 |
|
|
$ |
1,800 |
|
|
$ |
670 |
|
|
$ |
(1,605 |
) |
|
$ |
2,384 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
338 |
|
|
$ |
7 |
|
|
$ |
(7 |
) |
|
$ |
339 |
|
Advanced deposits |
|
|
— |
|
|
|
— |
|
|
|
104 |
|
|
|
— |
|
|
|
— |
|
|
|
104 |
|
Debt, net |
|
|
— |
|
|
|
482 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
482 |
|
Non-recourse debt, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
583 |
|
|
|
— |
|
|
|
583 |
|
Deferred revenues |
|
|
— |
|
|
|
— |
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
|
|
109 |
|
Deferred income tax liabilities |
|
|
— |
|
|
|
— |
|
|
|
250 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
249 |
|
Total equity |
|
|
518 |
|
|
|
518 |
|
|
|
999 |
|
|
|
81 |
|
|
|
(1,598 |
) |
|
|
518 |
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
518 |
|
|
$ |
1,001 |
|
|
$ |
1,800 |
|
|
$ |
670 |
|
|
$ |
(1,605 |
) |
|
$ |
2,384 |
|
29
|
For the Three Months Ended June 30, 2018 |
|
||||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
248 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
250 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
147 |
|
|
|
1 |
|
|
|
(2 |
) |
|
|
146 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
23 |
|
|
|
(1 |
) |
|
|
39 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
37 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
53 |
|
|
|
— |
|
|
|
— |
|
|
|
53 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
1 |
|
|
|
— |
|
|
|
38 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
539 |
|
|
|
27 |
|
|
|
(3 |
) |
|
|
563 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
61 |
|
|
|
— |
|
|
|
— |
|
|
|
61 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
193 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
193 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
5 |
|
|
|
8 |
|
|
|
(1 |
) |
|
|
12 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
30 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
30 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
1 |
|
|
|
— |
|
|
|
38 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
400 |
|
|
|
11 |
|
|
|
(3 |
) |
|
|
408 |
|
Interest expense |
|
|
— |
|
|
|
(8 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(8 |
) |
Equity in losses from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
Other gain, net |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Income (loss) before income taxes |
|
|
— |
|
|
|
(8 |
) |
|
|
138 |
|
|
|
16 |
|
|
|
— |
|
|
|
146 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(39 |
) |
|
|
— |
|
|
|
— |
|
|
|
(39 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(8 |
) |
|
|
99 |
|
|
|
16 |
|
|
|
— |
|
|
|
107 |
|
Equity in earnings from subsidiaries |
|
|
107 |
|
|
|
115 |
|
|
|
16 |
|
|
|
— |
|
|
|
(238 |
) |
|
|
— |
|
Net income |
|
$ |
107 |
|
|
$ |
107 |
|
|
$ |
115 |
|
|
$ |
16 |
|
|
$ |
(238 |
) |
|
$ |
107 |
|
30
|
For the Three Months Ended June 30, 2017 |
|
||||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
140 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
143 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
140 |
|
|
|
2 |
|
|
|
2 |
|
|
|
144 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
21 |
|
|
|
(1 |
) |
|
|
36 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
35 |
|
|
|
— |
|
|
|
— |
|
|
|
35 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
46 |
|
|
|
1 |
|
|
|
— |
|
|
|
47 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
32 |
|
|
|
2 |
|
|
|
— |
|
|
|
34 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
409 |
|
|
|
29 |
|
|
|
1 |
|
|
|
439 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
33 |
|
|
|
1 |
|
|
|
— |
|
|
|
34 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
164 |
|
|
|
3 |
|
|
|
2 |
|
|
|
169 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
8 |
|
|
|
(1 |
) |
|
|
11 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
1 |
|
|
|
— |
|
|
|
10 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
1 |
|
|
|
— |
|
|
|
31 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
3 |
|
|
|
— |
|
|
|
29 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
23 |
|
|
|
— |
|
|
|
— |
|
|
|
23 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
32 |
|
|
|
2 |
|
|
|
— |
|
|
|
34 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
328 |
|
|
|
19 |
|
|
|
1 |
|
|
|
348 |
|
Interest expense |
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
Income (loss) before income taxes |
|
|
— |
|
|
|
(7 |
) |
|
|
81 |
|
|
|
10 |
|
|
|
— |
|
|
|
84 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(37 |
) |
|
|
4 |
|
|
|
— |
|
|
|
(33 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(7 |
) |
|
|
44 |
|
|
|
14 |
|
|
|
— |
|
|
|
51 |
|
Equity in earnings from subsidiaries |
|
|
51 |
|
|
|
58 |
|
|
|
14 |
|
|
|
— |
|
|
|
(123 |
) |
|
|
— |
|
Net income |
|
$ |
51 |
|
|
$ |
51 |
|
|
$ |
58 |
|
|
$ |
14 |
|
|
$ |
(123 |
) |
|
$ |
51 |
|
31
|
|
For the Six Months Ended June 30, 2018 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
325 |
|
|
$ |
3 |
|
|
$ |
— |
|
|
$ |
328 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
273 |
|
|
|
2 |
|
|
|
(4 |
) |
|
|
271 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
42 |
|
|
|
(2 |
) |
|
|
77 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
103 |
|
|
|
1 |
|
|
|
— |
|
|
|
104 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
72 |
|
|
|
2 |
|
|
|
— |
|
|
|
74 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
886 |
|
|
|
50 |
|
|
|
(6 |
) |
|
|
930 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
80 |
|
|
|
— |
|
|
|
— |
|
|
|
80 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
354 |
|
|
|
4 |
|
|
|
(4 |
) |
|
|
354 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
15 |
|
|
|
(2 |
) |
|
|
23 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
|
1 |
|
|
|
— |
|
|
|
58 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
53 |
|
|
|
— |
|
|
|
— |
|
|
|
53 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
48 |
|
|
|
— |
|
|
|
— |
|
|
|
48 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
72 |
|
|
|
2 |
|
|
|
— |
|
|
|
74 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
712 |
|
|
|
22 |
|
|
|
(6 |
) |
|
|
728 |
|
Interest expense |
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
Equity in losses from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Income (loss) before income taxes |
|
|
— |
|
|
|
(15 |
) |
|
|
173 |
|
|
|
28 |
|
|
|
— |
|
|
|
186 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(49 |
) |
|
|
— |
|
|
|
— |
|
|
|
(49 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(15 |
) |
|
|
124 |
|
|
|
28 |
|
|
|
— |
|
|
|
137 |
|
Equity in earnings from subsidiaries |
|
|
137 |
|
|
|
152 |
|
|
|
28 |
|
|
|
— |
|
|
|
(317 |
) |
|
|
— |
|
Net income |
|
$ |
137 |
|
|
$ |
137 |
|
|
$ |
152 |
|
|
$ |
28 |
|
|
$ |
(317 |
) |
|
$ |
137 |
|
32
|
|
For the Six Months Ended June 30, 2017 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
243 |
|
|
$ |
18 |
|
|
$ |
— |
|
|
$ |
261 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
274 |
|
|
|
2 |
|
|
|
(2 |
) |
|
|
274 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
31 |
|
|
|
43 |
|
|
|
(3 |
) |
|
|
71 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
69 |
|
|
|
2 |
|
|
|
— |
|
|
|
71 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
92 |
|
|
|
1 |
|
|
|
— |
|
|
|
93 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
|
3 |
|
|
|
— |
|
|
|
68 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
774 |
|
|
|
69 |
|
|
|
(5 |
) |
|
|
838 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
|
2 |
|
|
|
— |
|
|
|
67 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
315 |
|
|
|
8 |
|
|
|
(2 |
) |
|
|
321 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
15 |
|
|
|
(3 |
) |
|
|
21 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
2 |
|
|
|
— |
|
|
|
20 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
57 |
|
|
|
1 |
|
|
|
— |
|
|
|
58 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
49 |
|
|
|
3 |
|
|
|
— |
|
|
|
52 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
43 |
|
|
|
— |
|
|
|
— |
|
|
|
43 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
|
3 |
|
|
|
— |
|
|
|
68 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
635 |
|
|
|
34 |
|
|
|
(5 |
) |
|
|
664 |
|
Interest expense |
|
|
— |
|
|
|
(14 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(14 |
) |
Income (loss) before income taxes |
|
|
— |
|
|
|
(14 |
) |
|
|
139 |
|
|
|
35 |
|
|
|
— |
|
|
|
160 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(59 |
) |
|
|
— |
|
|
|
— |
|
|
|
(59 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(14 |
) |
|
|
80 |
|
|
|
35 |
|
|
|
— |
|
|
|
101 |
|
Equity in earnings from subsidiaries |
|
|
101 |
|
|
|
115 |
|
|
|
35 |
|
|
|
— |
|
|
|
(251 |
) |
|
|
— |
|
Net income |
|
$ |
101 |
|
|
$ |
101 |
|
|
$ |
115 |
|
|
$ |
35 |
|
|
$ |
(251 |
) |
|
$ |
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
|
|
For the Six Months Ended June 30, 2018 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
— |
|
|
$ |
(14 |
) |
|
$ |
42 |
|
|
$ |
(205 |
) |
|
$ |
43 |
|
|
$ |
(134 |
) |
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment |
|
|
— |
|
|
|
— |
|
|
|
(18 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(20 |
) |
Software capitalization costs |
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9 |
) |
Return of investment from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
Investment in unconsolidated affiliate |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Net cash used in investing activities |
|
|
— |
|
|
|
— |
|
|
|
(21 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(23 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt |
|
|
— |
|
|
|
160 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
160 |
|
Issuance of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
100 |
|
|
|
— |
|
|
|
100 |
|
Repurchase and retirement of common stock |
|
|
— |
|
|
|
(112 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(112 |
) |
Repayment of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(80 |
) |
|
|
— |
|
|
|
(80 |
) |
Repayment of debt |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Debt issuance costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
— |
|
|
|
(2 |
) |
Payment of withholding taxes on vesting of restricted stock units |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Capital contribution |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Intercompany transfers |
|
|
— |
|
|
|
(31 |
) |
|
|
(111 |
) |
|
|
185 |
|
|
|
(43 |
) |
|
|
— |
|
Net cash provided by (used in) financing activities |
|
|
— |
|
|
|
14 |
|
|
|
(111 |
) |
|
|
203 |
|
|
|
(43 |
) |
|
|
63 |
|
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
— |
|
|
|
(90 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(94 |
) |
Cash, cash equivalents and restricted cash, beginning of period |
|
|
— |
|
|
|
— |
|
|
|
259 |
|
|
|
38 |
|
|
|
— |
|
|
|
297 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
169 |
|
|
$ |
34 |
|
|
$ |
— |
|
|
$ |
203 |
|
34
|
|
For the Six Months Ended June 30, 2017 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
98 |
|
|
$ |
139 |
|
|
$ |
(61 |
) |
|
$ |
177 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment |
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
Software capitalization costs |
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
Net cash used in investing activities |
|
|
— |
|
|
|
— |
|
|
|
(21 |
) |
|
|
— |
|
|
|
— |
|
|
|
(21 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
350 |
|
|
|
— |
|
|
|
350 |
|
Repayment of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(395 |
) |
|
|
— |
|
|
|
(395 |
) |
Repayment of debt |
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Debt issuance costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
Proceeds from stock option exercises |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Intercompany transfers |
|
|
— |
|
|
|
4 |
|
|
|
10 |
|
|
|
(75 |
) |
|
|
61 |
|
|
|
— |
|
Net cash (used in) provided by financing activities |
|
|
— |
|
|
|
(1 |
) |
|
|
11 |
|
|
|
(125 |
) |
|
|
61 |
|
|
|
(54 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
— |
|
|
|
88 |
|
|
|
14 |
|
|
|
— |
|
|
|
102 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
— |
|
|
|
— |
|
|
|
128 |
|
|
|
23 |
|
|
|
— |
|
|
|
151 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
216 |
|
|
$ |
37 |
|
|
$ |
— |
|
|
$ |
253 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21: Subsequent Events
In July 2018, we executed a sale and purchase agreement to acquire a portion of an operating hotel for future conversion to timeshare inventory for $50 million. In connection with the executed sale and purchase agreement, we made an initial deposit of $2 million.
35
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2017.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our management’s beliefs, expectations and assumptions and information currently available to our management, and are subject to risks and uncertainties. Actual results could differ materially because of factors such as: inherent business, financial and operating risks of the timeshare industry; adverse economic or market conditions that may affect the purchasing and vacationing decisions of consumers or otherwise harm our business; intense competition in the timeshare industry, which could lead to lower revenue or operating margins; the termination of material fee-for-service agreements with third parties; the ability of the Company to manage risks associated with our international activities, including complying with laws and regulations affecting our international operations; exposure to increased economic and operational uncertainties from expanding global operations, including the effects of foreign currency exchange; potential liability under anti-corruption and other laws resulting from our global operations; changes in tax rates and exposure to additional tax liabilities; the impact of future changes in legislation, regulations or accounting pronouncements; acquisitions, joint ventures, and strategic alliances that that may not result in expected benefits and that may have an adverse effect on our business; our dependence on development activities to secure inventory; cyber-attacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position; disclosure of personal data that could cause liability and harm to our reputation; abuse of our advertising or social platforms that may harm our reputation or user engagement; outages, data losses, and disruptions of our online services; claims against us that may result in adverse outcomes in legal disputes; risks associated with our debt agreements and instruments, including variable interest rates, operating and financial restrictions, and our ability to service our indebtedness; the continued service and availability of key executives and employees; and catastrophic events or geopolitical conditions that may disrupt our business. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.
You should not put undue reliance on any forward-looking statements in this Quarterly Report on Form 10-Q. The risk factors discussed in our filings with the Securities and Exchange Commission, including “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, “Part II-Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and those described from time to time in our future reports could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. We undertake no obligation to publicly update or review any forward-looking statement or information to conform to actual results, whether as a result of new information, future developments, changes in the Company’s expectations, or otherwise, except as required by law.
Terms Used in this Quarterly Report on Form 10-Q
Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Hilton Grand Vacations,” “HGV,” “the Company,” “we,” “us” and “our” refer to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. Except where the context requires otherwise, references to our “properties” and “rooms” refer to the timeshare properties managed, franchised, owned or leased by us. Of these properties and rooms, a portion are directly owned or leased by us or joint ventures in which we have an interest and the remaining properties and rooms are owned by third-party owners.
“Developed” refers VOI inventory that is sourced from projects developed by HGV.
“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.
36
“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.
“VOI” refers to vacation ownership intervals.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and financial measures that are not calculated in accordance with U.S. GAAP, including contract sales, sales revenue, real estate margin, tour flow, volume per guest, transient rate, earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and segment Adjusted EBITDA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Business and Financial Metrics and Terms Used by Management” and “-Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.
Overview
Our Business
We are a rapidly growing timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. During the six months ended June 30, 2018, through new developments and asset acquisition, we added two new resorts in New York and one resort in Odawara, Japan, representing 265 units. As of June 30, 2018, we have 51 resorts, representing 8,367 units, which are located in iconic vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas, and feature spacious, condominium-style accommodations with superior amenities and quality service. As of June 30, 2018, we have approximately 298,000 Hilton Grand Vacations Club (the “Club”) members. Club members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 14 industry-leading brands across more than 5,000 properties, as well as numerous experiential vacation options, such as cruises and guided tours.
We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.
Real Estate Sales and Financing
Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week annually at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcing VOIs through fee-for-service and just-in-time agreements with third-party developers and have successfully transformed from a capital-intensive business to one that is highly capital-efficient. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs and Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory by us with the sale to purchasers. Sales of owned inventory, including purchased just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.
For the six months ended June 30, 2018, sales from fee-for-service, just-in-time and developed inventory sources were 53 percent, 26 percent and 21 percent, respectively, of contract sales. See “—Real Estate Sales Metrics” for additional discussion of contract sales. Based on our trailing twelve months sales pace, we have access to approximately six years of future inventory, with capital efficient arrangements representing approximately 77 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets.
37
We originate loans for members purchasing our developed and acquired inventory which generate interest income. Our loans are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum .
The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted average FICO score for new loans to U.S. and Canadian borrowers at the time of origination were as follows:
|
|
Six Months Ended June 30, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
Weighted average FICO score |
|
|
749 |
|
|
|
745 |
|
Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Club.
Some of our loans have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and cash deposits. For additional information see Note 5: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.
In addition, we earn fees from servicing our securitized loan portfolio and the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs.
Resort Operations and Club Management
We enter into a management agreement with the homeowners’ association (“HOA”) of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprising owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term.
We also manage and operate the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Club members. When an owner purchases a VOI, he or she is generally automatically enrolled in the Club and given an annual allotment of points that allow the member to exchange his or her annual usage rights in the VOI that they own for a number of vacation and travel options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.
We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our Club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.
38
Key Business and Financial Metrics and Terms Used by Management
Real Estate Sales Metrics
The following are not recognized terms under U.S. GAAP:
|
• |
Contract sales represents the total amount of VOI products under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under U.S. GAAP and should not be considered in isolation or as an alternative to Sales of VOIs, net or any other comparable operating measure derived in accordance with U.S. GAAP. Contract sales differ from revenues from the Sales of VOIs, net that we report in our condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives and other administrative fee revenues. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business. |
|
• |
Sales revenue represents sale of VOIs, net and commissions and brand fees earned from the sale of fee-for-service intervals. |
|
• |
Real estate margin represents sales revenue less the cost of VOI sales and sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs. |
|
• |
Tour flow represents the number of sales presentations given at our sales centers during the period. |
|
• |
Volume per guest (“VPG”) represents the sales attributable to tours at our sales locations and is calculated by dividing Contract sales, excluding telesales, by tour flow. We consider VPG to be an important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with closing rate. |
Resort and Club Management and Rental Metrics
|
• |
Transient rate represents the total rental room revenue for transient guests divided by total number of transient room nights sold in a given period and excludes room rentals associated with marketing programs, owner usage and the redemption of Club Bonus Points. |
For further information see Item 8. Financial Statements and Supplementary Data - Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2017.
EBITDA and Adjusted EBITDA
EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income (loss), before interest expense on debt (excluding non-recourse debt), a provision for income taxes and depreciation and amortization. Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.
EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.
39
EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:
|
• |
EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs; |
|
• |
EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding interest expense on non-recourse debt), or the cash requirements necessary to service interest or principal payments on our indebtedness; |
|
• |
EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes; |
|
• |
EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; |
|
• |
EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations; |
|
• |
EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and |
|
• |
EBITDA and Adjusted EBITDA may be calculated differently from other companies in our industry limiting their usefulness as comparative measures. |
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
Recent Events
On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”)). We adopted ASC 606 using the modified retrospective method in which the cumulative effect of applying the new standard has been recognized at the date of initial application with an adjustment to our opening balance of retained earnings. This approach applies to all contracts as of January 1, 2018. See Note 2 : Basis of Presentation and Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements for additional information.
On March 13, 2018, we and HNA Tourism Group Co., Ltd. (“HNA”) and HNA HLT Holdco I LLC (the “Selling Stockholder”), an affiliate of HNA, entered into a Master Amendment and Option Agreement (the “Master Amendment and Option Agreement”) to make certain amendments to the Stockholders Agreement, dated October 24, 2016, between us and HNA (the “Stockholders Agreement”) and the Registration Rights Agreement, dated October 24, 2016, between us and HNA (the “Registration Rights Agreement”), among other things, (i) to permit the sale of up to all 24,750,000 shares of our common stock owned by the Selling Stockholder prior to the expiration of the two-year restricted period originally contained in the Stockholders Agreement, (ii) grant us a right to repurchase up to 4,340,000 shares of our common stock held by the Selling Stockholder, (iii) provide that HNA has customary “demand” registration rights effective March 13, 2018, (iv) require HNA to pay all expenses incurred under the Registration Rights Agreement for registrations or offerings occurring prior to a certain date and (v) eliminate HNA’s right to designate a certain number of directors to our board of directors. We exercised the repurchase option from the Selling Stockholder with respect to 2,500,000 shares at a price of approximately $44.75 per share.
On March 14, 2018, HGV and HNA entered into an underwriting agreement with several underwriters, pursuant to which the underwriters agreed to purchase from the Selling Stockholder 22,250,000 shares of common stock, $0.01 par value per share, of the Company at a price of approximately $44.75 per share. The sale was completed on March 19, 2018; consequently, HNA ceased to be a related party. We did not receive any proceeds from the sale.
On March 19, 2018, the repurchase was completed and the shares were retired.
40
On March 23, 2018, we entered into an agreement with SCG 1776, LLC, a Delaware limited liability company, an af filiate of Strand Capital Group, LLC and formed 1776 Holding, LLC, a variable interest entity. Because we are not the primary beneficiary, we do not consolidate 1776 Holding, LLC. Pursuant to the agreement, we contributed $5 million in cash for a 50 percen t interest in 1776 Holding, LLC, which will construct an approximately 99-unit timeshare resort in Charleston, South Carolina.
In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory. The transaction was accounted for as an asset acquisition with all of the purchase price allocated to Land, Building and leasehold improvements and Furniture and equipment.
During the three months ended June 30, 2018, we borrowed $160 million under our revolving credit facility and $100 million under our timeshare facility. See Note 12: Debt and Non-recourse debt in our unaudited condensed consolidated financial statements for additional information.
In May 2018, Kilauea volcano erupted on the southern end of the Big Island of Hawaii forcing two thousand residents to evacuate. Our three Waikoloa resorts are on the Big Island’s western coast, approximately 100 miles from Kilauea volcano. The eruption has not had a material impact on our operations.
Results of Operations
We adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The reported results for the three and six months ended June 30, 2018 reflects the application of ASC 606 while the reported results for the three and six months ended June 30, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”) and ASC 978-605, Real Estate – Time-Sharing Activities, Revenue Recognition , which is also referred to herein as the “previous accounting guidance.”
The following table shows the impact that ASC 606 would have had to our quarterly and annual 2017 operating results, EBITDA and Adjusted EBITDA if we had adopted ASC 606 utilizing the full retrospective method of adoption. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 3: Revenue from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.
|
|
2017 Results Adjusted for ASC 606 Adoption |
|
|||||||||||||||||
(in millions, except per share data) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|||||
Total revenues |
|
$ |
387 |
|
|
$ |
414 |
|
|
$ |
411 |
|
|
$ |
424 |
|
|
$ |
1,636 |
|
Total operating expenses |
|
|
307 |
|
|
|
340 |
|
|
|
342 |
|
|
|
344 |
|
|
|
1,333 |
|
Net income |
|
|
47 |
|
|
|
41 |
|
|
|
39 |
|
|
|
166 |
|
|
|
293 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.48 |
|
|
$ |
0.41 |
|
|
$ |
0.39 |
|
|
$ |
1.67 |
|
|
$ |
2.95 |
|
Diluted |
|
$ |
0.48 |
|
|
$ |
0.41 |
|
|
$ |
0.39 |
|
|
$ |
1.66 |
|
|
$ |
2.94 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
47 |
|
|
$ |
41 |
|
|
$ |
39 |
|
|
$ |
166 |
|
|
$ |
293 |
|
Interest expense |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
6 |
|
|
|
27 |
|
Income tax expense (benefit) |
|
|
26 |
|
|
|
26 |
|
|
|
25 |
|
|
|
(92 |
) |
|
|
(15 |
) |
Depreciation and amortization |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
6 |
|
|
|
27 |
|
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
2 |
|
|
|
1 |
|
|
|
3 |
|
|
EBITDA |
|
|
87 |
|
|
|
81 |
|
|
|
80 |
|
|
|
87 |
|
|
|
335 |
|
Other (gain) loss, net |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
— |
|
Share-based compensation expense |
|
|
3 |
|
|
|
5 |
|
|
|
5 |
|
|
|
2 |
|
|
|
15 |
|
Other adjustment items (1) |
|
|
1 |
|
|
|
3 |
|
|
|
3 |
|
|
|
5 |
|
|
|
12 |
|
Adjusted EBITDA |
|
$ |
91 |
|
|
$ |
89 |
|
|
$ |
87 |
|
|
$ |
95 |
|
|
$ |
362 |
|
(1) |
For the year ended December 31, 2017, amount includes $8 million of costs associated with the spin-off transaction. |
41
Supplemental Information Regarding the Adoption of ASC 606
The following tables provide supplemental information for project(s) under construction or completed for the periods presented under the previous accounting guidance:
|
|
2018 |
|
|||||||||||||||||
($ in millions) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|||||
Sales of VOIs |
|
$ |
59 |
|
|
$ |
(87 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(28 |
) |
Cost of VOI sales |
|
|
(18 |
) |
|
|
20 |
|
|
|
— |
|
|
|
— |
|
|
|
2 |
|
Sales, marketing, general and administrative expense |
|
|
(8 |
) |
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
During the first quarter of 2018, we deferred revenue and related direct expenses from the sales of VOIs for two projects under construction until construction is completed. During the second quarter of 2018, we recognized revenue and related direct expenses for a completed project, partially offset by the deferred revenue and related direct expenses from the sales of VOIs for one project under construction.
|
|
2017 |
|
|||||||||||||||||
($ in millions) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|||||
Sales of VOIs |
|
$ |
9 |
|
|
$ |
13 |
|
|
$ |
11 |
|
|
$ |
17 |
|
|
$ |
50 |
|
Cost of VOI sales |
|
|
(5 |
) |
|
|
(3 |
) |
|
|
(3 |
) |
|
|
(5 |
) |
|
|
(16 |
) |
Sales, marketing, general and administrative expense |
|
|
(1 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(2 |
) |
|
|
(7 |
) |
In all quarters presented for 2017, we deferred revenue and related direct expenses from sales of VOIs for one project under construction.
Three and Six Months Ended June 30, 2018 Compared with the Three and Six Months Ended June 30, 2017
Segment Results
We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 18: Business Segments in our unaudited condensed consolidated financial statements. We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment revenues. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses it to manage our business and material limitations on its usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment:
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing |
|
$ |
435 |
|
|
$ |
323 |
|
|
$ |
112 |
|
|
|
34.7 |
% |
|
$ |
676 |
|
|
$ |
606 |
|
|
$ |
70 |
|
|
|
11.6 |
% |
Resort operations and club management |
|
|
98 |
|
|
|
92 |
|
|
|
6 |
|
|
|
6.5 |
|
|
|
196 |
|
|
|
180 |
|
|
|
16 |
|
|
|
8.9 |
|
Segment revenues |
|
|
533 |
|
|
|
415 |
|
|
|
118 |
|
|
|
28.4 |
|
|
|
872 |
|
|
|
786 |
|
|
|
86 |
|
|
|
10.9 |
|
Cost reimbursements |
|
|
38 |
|
|
|
34 |
|
|
|
4 |
|
|
|
11.8 |
|
|
|
74 |
|
|
|
68 |
|
|
|
6 |
|
|
|
8.8 |
|
Intersegment eliminations (1) |
|
|
(8 |
) |
|
|
(10 |
) |
|
|
2 |
|
|
|
(20.0 |
) |
|
|
(16 |
) |
|
|
(16 |
) |
|
|
— |
|
|
|
— |
|
Total revenues |
|
$ |
563 |
|
|
$ |
439 |
|
|
$ |
124 |
|
|
|
28.2 |
|
|
$ |
930 |
|
|
$ |
838 |
|
|
$ |
92 |
|
|
|
11.0 |
|
(1) |
Refer to Note 18: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations. |
42
The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Net Income |
|
$ |
107 |
|
|
$ |
51 |
|
|
$ |
56 |
|
|
NM (1) |
|
|
$ |
137 |
|
|
$ |
101 |
|
|
$ |
36 |
|
|
|
35.6 |
% |
|
Interest expense |
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
|
|
14.3 |
% |
|
|
15 |
|
|
|
14 |
|
|
|
1 |
|
|
|
7.1 |
|
Income tax expense |
|
|
39 |
|
|
|
33 |
|
|
|
6 |
|
|
|
18.2 |
|
|
|
49 |
|
|
|
59 |
|
|
|
(10 |
) |
|
|
(16.9 |
) |
Depreciation and amortization |
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
|
|
14.3 |
|
|
|
16 |
|
|
|
14 |
|
|
|
2 |
|
|
|
14.3 |
|
Interest expense, depreciation and amortization included in equity in losses from unconsolidated affiliates |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM (1) |
|
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
NM (1) |
|
||
EBITDA |
|
|
163 |
|
|
|
98 |
|
|
|
65 |
|
|
|
66.3 |
|
|
|
219 |
|
|
|
188 |
|
|
|
31 |
|
|
|
16.5 |
|
Other gain, net |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
NM (1) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Share-based compensation expense |
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
8 |
|
|
|
8 |
|
|
|
— |
|
|
|
— |
|
Other adjustment items (2) |
|
|
8 |
|
|
|
3 |
|
|
|
5 |
|
|
NM (1) |
|
|
|
10 |
|
|
|
4 |
|
|
|
6 |
|
|
NM (1) |
|
||
Adjusted EBITDA |
|
$ |
175 |
|
|
$ |
106 |
|
|
$ |
69 |
|
|
|
65.1 |
|
|
$ |
237 |
|
|
$ |
200 |
|
|
$ |
37 |
|
|
|
18.5 |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
(2) |
Includes costs associated with the spin-off transaction of $5 million and $2 million for the three months ended June 30, 2018 and 2017, respectively, and $7 million and $3 million for the six months ended June 30, 2018 and 2017, respectively. |
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing (1) |
|
$ |
163 |
|
|
$ |
99 |
|
|
$ |
64 |
|
|
|
64.6 |
% |
|
$ |
207 |
|
|
$ |
182 |
|
|
$ |
25 |
|
|
|
13.7 |
% |
Resort operations and club management (1) |
|
|
58 |
|
|
|
52 |
|
|
|
6 |
|
|
|
11.5 |
|
|
|
117 |
|
|
|
103 |
|
|
|
14 |
|
|
|
13.6 |
|
Segment Adjusted EBITDA |
|
|
221 |
|
|
|
151 |
|
|
|
70 |
|
|
|
46.4 |
|
|
|
324 |
|
|
|
285 |
|
|
|
39 |
|
|
|
13.7 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from unconsolidated affiliates |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
NM (1) |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM (1) |
|
||
License fee expense |
|
|
(25 |
) |
|
|
(23 |
) |
|
|
(2 |
) |
|
|
8.7 |
|
|
|
(48 |
) |
|
|
(43 |
) |
|
|
(5 |
) |
|
|
11.6 |
|
General and administrative (2) |
|
|
(20 |
) |
|
|
(22 |
) |
|
|
2 |
|
|
|
(9.1 |
) |
|
|
(40 |
) |
|
|
(42 |
) |
|
|
2 |
|
|
|
(4.8 |
) |
Adjusted EBITDA |
|
$ |
175 |
|
|
$ |
106 |
|
|
$ |
69 |
|
|
|
65.1 |
|
|
$ |
237 |
|
|
$ |
200 |
|
|
$ |
37 |
|
|
|
18.5 |
|
(1) |
Includes intersegment eliminations and other adjustments. |
(2) |
Excludes share-based compensation and other adjustment items. |
Real Estate Sales and Financing
Real estate sales and financing segment revenues increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) a $119 million increase in sales revenue and (ii) a $3 million increase in financing revenue, partially offset by a decrease of $10 million in marketing revenue. The increase in sales revenue consists of (i) a $132 million increase related to revenue recognized from the completion of a timeshare resort under construction, partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $12 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. The increase in financing revenue was primarily due to an increase in interest income from higher outstanding timeshare financing receivables balances. The decrease in marketing revenue was due to a $10 million one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages. Real estate sales and financing segment Adjusted EBTIDA increased by $64 million for the three months ended June 30, 2018, compared to same period in 2017, primarily due to the increase in revenues associated with the segment discussed above, partially offset by (i) a $25 million increase in sales and marketing and financing expenses and $27 million increase in cost of VOI sales. See Note 2: Basis of Presentation and Summary of
43
Signi ficant Accounting Policies and Note 3: Revenues from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.
Real estate sales and financing segment revenues increased for the six months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) a $79 million increase in sales revenue and (ii) a $6 million increase in financing revenue, partially offset by a decrease of $15 million in marketing revenue. The increase in sales revenue consists of i) a $123 million increase related to revenue recognized from the completion of a timeshare resort under construction, partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $12 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. The increase in financing revenue was primarily due to an increase in interest income from higher outstanding timeshare financing receivables balances. The decrease in marketing revenue was primarily due to a $10 million one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages. Real estate sales and financing segment Adjusted EBTIDA increased by $25 million for the six months ended June 30, 2018, compared to same period in 2017, primarily due to the increase in revenues associated with the segment discussed above, partially offset by (i) a $35 million increase in sales and marketing and financing expenses and (ii) a $13 million increase in costs of VOI sales. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 3: Revenues from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.
Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.
Resort Operations and Club Management
Resort operations and club management segment revenues increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $2 million in resort and club management revenues from the launch of new properties subsequent to the second quarter of 2017 as well as an increase in Club members and (ii) an increase of $6 million in rental and ancillary services revenues as a result of higher transient room and club inventory rentals at our developed and fee-for-service properties. Resort operations and club management segment Adjusted EBITDA increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to the increases in revenues associated with the segment.
Resort operations and club management segment revenues increased for the six months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $5 million in resort and club management revenues from the launch of new properties subsequent to the second quarter of 2017 as well as an increase in Club members and (ii) an increase of $11 million in rental and ancillary services revenues as a result of higher transient room and club inventory rentals at our developed and fee-for-service properties. Resort operations and club management segment Adjusted EBITDA increased for the six months ended June 30, 2018, compared to the same period in 2017, primarily due to the increases in revenues associated with the segment, partially offset by an increase of $2 million in segment expenses. Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.
Real Estate Sales and Financing Segment
Real Estate
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions, except Tour flow and VPG) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Sales of VOIs, net |
|
$ |
250 |
|
|
$ |
143 |
|
|
$ |
107 |
|
|
|
74.8 |
% |
|
$ |
328 |
|
|
$ |
261 |
|
|
$ |
67 |
|
|
|
25.7 |
% |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee-for-service sales (1) |
|
|
193 |
|
|
|
166 |
|
|
|
27 |
|
|
|
16.3 |
|
|
|
363 |
|
|
|
339 |
|
|
|
24 |
|
|
|
7.1 |
|
Loan loss provision |
|
|
18 |
|
|
|
15 |
|
|
|
3 |
|
|
|
20.0 |
|
|
|
30 |
|
|
|
26 |
|
|
|
4 |
|
|
|
15.4 |
|
Reportability and other (2) |
|
|
(104 |
) |
|
|
(1 |
) |
|
|
(103 |
) |
|
NM (1) |
|
|
|
(35 |
) |
|
|
(16 |
) |
|
|
(19 |
) |
|
NM (1) |
|
||
Contract sales |
|
$ |
357 |
|
|
$ |
323 |
|
|
$ |
34 |
|
|
|
10.5 |
|
|
$ |
686 |
|
|
$ |
610 |
|
|
$ |
76 |
|
|
|
12.5 |
|
Tour flow |
|
|
94,269 |
|
|
|
87,114 |
|
|
|
7,155 |
|
|
|
8.2 |
|
|
|
171,969 |
|
|
|
159,519 |
|
|
|
12,450 |
|
|
|
7.8 |
|
VPG |
|
$ |
3,597 |
|
|
$ |
3,503 |
|
|
$ |
94 |
|
|
|
2.7 |
|
|
$ |
3,778 |
|
|
$ |
3,609 |
|
|
$ |
169 |
|
|
|
4.7 |
|
(1) |
Represents contract sales from fee-for-service properties on which we earn commissions and brand fees. |
44
Contract sales increased for the three and six months ended June 30, 2018, compared to the same period in 2017, primarily due to an increase in tour flow which correlates to the increase in marketing expense. VPG increased due to a 0.7 percent and 1.1 percent increase in average transaction price for the three and six months ended June 30, 2018, respectively.
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Sales of VOIs, net |
|
$ |
250 |
|
|
$ |
143 |
|
|
$ |
107 |
|
|
|
74.8 |
% |
|
$ |
328 |
|
|
$ |
261 |
|
|
$ |
67 |
|
|
|
25.7 |
% |
Sales, marketing, brand and other fees |
|
|
146 |
|
|
|
144 |
|
|
|
2 |
|
|
|
1.4 |
|
|
|
271 |
|
|
|
274 |
|
|
|
(3 |
) |
|
|
(1.1 |
) |
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing revenue and other fees |
|
|
33 |
|
|
|
43 |
|
|
|
(10 |
) |
|
|
(23.3 |
) |
|
|
60 |
|
|
|
75 |
|
|
|
(15 |
) |
|
|
(20.0 |
) |
Sales revenue |
|
|
363 |
|
|
|
244 |
|
|
|
119 |
|
|
|
48.8 |
|
|
|
539 |
|
|
|
460 |
|
|
|
79 |
|
|
|
17.2 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
61 |
|
|
|
34 |
|
|
|
27 |
|
|
|
79.4 |
|
|
|
80 |
|
|
|
67 |
|
|
|
13 |
|
|
|
19.4 |
|
Sales and marketing expense, net (1) |
|
|
152 |
|
|
|
120 |
|
|
|
32 |
|
|
|
26.7 |
|
|
|
278 |
|
|
|
231 |
|
|
|
47 |
|
|
|
20.3 |
|
Real estate margin |
|
$ |
150 |
|
|
$ |
90 |
|
|
$ |
60 |
|
|
|
66.7 |
|
|
$ |
181 |
|
|
$ |
162 |
|
|
$ |
19 |
|
|
|
11.7 |
|
Real estate margin percentage |
|
|
41.3 |
% |
|
|
36.9 |
% |
|
|
|
|
|
|
|
|
|
|
33.6 |
% |
|
|
35.2 |
% |
|
|
|
|
|
|
|
|
(1) |
Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers. In December 2017, we revised our definition of Sales and marketing expense, net to include revenues associated with sales incentives, title service and document compliance revenue to better align with how we evaluate the results of our real estate operations. This adjustment was retrospectively applied to prior period(s) to conform to current presentation. |
Sales revenue increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily as a result of (i) a $132 million and $123 million, respectively, increase related to revenue recognized from the completion of a timeshare resort under construction, partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $12 million increase in commission and brand fees for both three and six months ended June 30, 2018, due to higher fee-for-service sales primarily related to a new resort in South Carolina. Cost of VOI sales and Sales and marketing expense, net , increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily as a result of (i) higher expenses as a result of the completion of a resort which was previously deferred and (ii) a $10 million reduction of marketing revenue for both three and six months ended June 30, 2018 due to a one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages.
The increase in real estate margin and margin percentage for the three months ended June 30, 2018, as well as real estate margin for the six months ended June 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned increases in sales revenue, partially offset by the increase in Cost of VOI sales and Sales and marketing expense from the completion of a resort in New York. The decrease in real estate margin percentage for the six months ended June 30, 2018, compared to the same period in 2017, is primarily due to an increase in sales and marketing expense, net as well as Costs of VOI sales . See Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 3: Revenues from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.
45
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Interest income |
|
$ |
34 |
|
|
$ |
32 |
|
|
$ |
2 |
|
|
|
6.3 |
% |
|
$ |
68 |
|
|
$ |
64 |
|
|
$ |
4 |
|
|
|
6.3 |
% |
Other financing revenue |
|
|
5 |
|
|
|
4 |
|
|
|
1 |
|
|
|
25.0 |
|
|
|
9 |
|
|
|
7 |
|
|
|
2 |
|
|
|
28.6 |
|
Financing revenue |
|
|
39 |
|
|
|
36 |
|
|
|
3 |
|
|
|
8.3 |
|
|
|
77 |
|
|
|
71 |
|
|
|
6 |
|
|
|
8.5 |
|
Consumer financing interest expense |
|
|
6 |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
10 |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
Other financing expense |
|
|
6 |
|
|
|
5 |
|
|
|
1 |
|
|
|
20.0 |
|
|
|
13 |
|
|
|
11 |
|
|
|
2 |
|
|
|
18.2 |
|
Financing expense |
|
|
12 |
|
|
|
11 |
|
|
|
1 |
|
|
|
9.1 |
|
|
|
23 |
|
|
|
21 |
|
|
|
2 |
|
|
|
9.5 |
|
Financing margin |
|
$ |
27 |
|
|
$ |
25 |
|
|
$ |
2 |
|
|
|
8.0 |
|
|
$ |
54 |
|
|
$ |
50 |
|
|
$ |
4 |
|
|
|
8.0 |
|
Financing margin percentage |
|
|
69.2 |
% |
|
|
69.4 |
% |
|
|
|
|
|
|
|
|
|
|
70.1 |
% |
|
|
70.4 |
% |
|
|
|
|
|
|
|
|
Financing revenue increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to an increase of $2 million and $4 million, respectively, in interest income resulting from a higher average outstanding timeshare financing receivables balance during the three and six months ended June 30, 2018. Financing margin increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned revenue increase, partially offset by increase in segment expense.
Resort Operations and Club Management Segment
Resort and Club Management
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Club management revenue |
|
$ |
23 |
|
|
$ |
20 |
|
|
$ |
3 |
|
|
|
15.0 |
% |
|
$ |
46 |
|
|
$ |
41 |
|
|
$ |
5 |
|
|
|
12.2 |
% |
Resort management revenue |
|
|
14 |
|
|
|
15 |
|
|
|
(1 |
) |
|
|
(6.7 |
) |
|
|
30 |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
Resort and club management revenues |
|
|
37 |
|
|
|
35 |
|
|
|
2 |
|
|
|
5.7 |
|
|
|
76 |
|
|
|
71 |
|
|
|
5 |
|
|
|
7.0 |
|
Club management expense |
|
|
7 |
|
|
|
6 |
|
|
|
1 |
|
|
|
16.7 |
|
|
|
13 |
|
|
|
11 |
|
|
|
2 |
|
|
|
18.2 |
|
Resort management expense |
|
|
4 |
|
|
|
4 |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
9 |
|
|
|
— |
|
|
|
— |
|
Resort and club management expenses |
|
|
11 |
|
|
|
10 |
|
|
|
1 |
|
|
|
10.0 |
|
|
|
22 |
|
|
|
20 |
|
|
|
2 |
|
|
|
10.0 |
|
Resort and club management margin |
|
$ |
26 |
|
|
$ |
25 |
|
|
$ |
1 |
|
|
|
4.0 |
|
|
$ |
54 |
|
|
$ |
51 |
|
|
$ |
3 |
|
|
|
5.9 |
|
Resort and club management margin percentage |
|
|
70.3 |
% |
|
|
71.4 |
% |
|
|
|
|
|
|
|
|
|
|
71.1 |
% |
|
|
71.8 |
% |
|
|
|
|
|
|
|
|
Resort and club management revenues increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to (i) a trailing twelve months increase of approximately 20,000 in Club members and higher rates pertaining to annual dues and transaction fees and (ii) an increase in resort management revenue from the launch of new properties subsequent to the second quarter of 2017.
Resort and club management margin increased for the three months and six months ended June 30, 2018, compared to the same periods in 2017, due to the aforementioned increases in segment revenues, partially offset by a $1 million and $2 million, respectively, increase in segment expenses due to increase in costs for servicing additional Club members and properties. Resort and club management margin percentage decreased for the three and six months ended June 30, 2018, compared to the same periods in 2017 primarily due to increase in aforementioned segment expenses.
46
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Rental revenues |
|
$ |
46 |
|
|
$ |
40 |
|
|
$ |
6 |
|
|
|
15.0 |
% |
|
$ |
91 |
|
|
$ |
81 |
|
|
$ |
10 |
|
|
|
12.3 |
% |
Ancillary services revenues |
|
|
7 |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
12 |
|
|
|
1 |
|
|
|
8.3 |
|
Rental and ancillary services revenues |
|
|
53 |
|
|
|
47 |
|
|
|
6 |
|
|
|
12.8 |
|
|
|
104 |
|
|
|
93 |
|
|
|
11 |
|
|
|
11.8 |
|
Rental expenses |
|
|
25 |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
48 |
|
|
|
48 |
|
|
|
— |
|
|
|
— |
|
Ancillary services expense |
|
|
5 |
|
|
|
6 |
|
|
|
(1 |
) |
|
|
(16.7 |
) |
|
|
10 |
|
|
|
10 |
|
|
|
— |
|
|
|
— |
|
Rental and ancillary services expenses |
|
|
30 |
|
|
|
31 |
|
|
|
(1 |
) |
|
|
(3.2 |
) |
|
|
58 |
|
|
|
58 |
|
|
|
— |
|
|
|
— |
|
Rental and ancillary services margin |
|
$ |
23 |
|
|
$ |
16 |
|
|
$ |
7 |
|
|
|
43.8 |
|
|
$ |
46 |
|
|
$ |
35 |
|
|
$ |
11 |
|
|
|
31.4 |
|
Rental and ancillary services margin percentage |
|
|
43.4 |
% |
|
|
34.0 |
% |
|
|
|
|
|
|
|
|
|
|
44.2 |
% |
|
|
37.6 |
% |
|
|
|
|
|
|
|
|
Rental and ancillary services revenues increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to an increase of $6 million and $10 million, respectively, in rental revenues as a result of higher transient room and club inventory rentals at our developed and fee-for-service properties.
Rental and ancillary services margin and margin percentage increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, due to the aforementioned increases in segment revenues.
Other Operating Expenses
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
General and administrative |
|
$ |
30 |
|
|
$ |
29 |
|
|
$ |
1 |
|
|
|
3.4 |
% |
|
$ |
53 |
|
|
$ |
52 |
|
|
$ |
1 |
|
|
|
1.9 |
% |
Depreciation and amortization |
|
|
8 |
|
|
|
7 |
|
|
|
1 |
|
|
|
14.3 |
|
|
|
16 |
|
|
|
14 |
|
|
|
2 |
|
|
|
14.3 |
|
License fee expense |
|
|
25 |
|
|
|
23 |
|
|
|
2 |
|
|
|
8.7 |
|
|
|
48 |
|
|
|
43 |
|
|
|
5 |
|
|
|
11.6 |
|
Other operating expenses increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to higher license fee expense as a result of increases in revenues subject to license fees and higher depreciation and amortization due to additional software placed into service.
Non-Operating Expenses
|
|
Three Months Ended June 30, |
|
|
Variance |
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Interest expense |
|
$ |
8 |
|
|
$ |
7 |
|
|
$ |
1 |
|
|
|
14.3 |
% |
|
$ |
15 |
|
|
$ |
14 |
|
|
$ |
1 |
|
|
|
7.1 |
% |
Equity in losses from unconsolidated affiliates |
|
|
2 |
|
|
|
— |
|
|
|
2 |
|
|
NM (1) |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM (1) |
|
||
Other gain, net |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
NM (1) |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Income tax expense |
|
|
39 |
|
|
|
33 |
|
|
|
6 |
|
|
|
18.2 |
|
|
|
49 |
|
|
|
59 |
|
|
|
(10 |
) |
|
|
(16.9 |
) |
(1) |
Fluctuation in terms of percentage change is not meaningful. |
Equity in losses from unconsolidated affiliates relates primarily to our 25 percent interest in BRE Ace LLC. See Note 9: Investment in unconsolidated affiliate in our Annual Report on Form 10-K for the year ended December 31, 2017 in our unaudited condensed consolidated financial statements for additional information.
47
Income tax expense increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to a large increase in pre-tax book income offset by a reduction in th e corporate income tax rate as a result of the Tax Cut and Jobs Act enacted on December 22, 2017. The decrease in income tax expense for the six months ended June 30, 2018, compared to the same period in 2017, is primarily due to a decrease in the corpora te income tax rate as a result of the Tax Cut and Jobs Act that enacted on December 22, 2017.
Liquidity and Capital Resources
Overview
As of June 30, 2018, we had total cash and cash equivalents of $203 million, including $72 million of restricted cash. The restricted cash balance relates to escrowed cash from our sales of our VOIs and reserves related to our non-recourse debt. See Note 12: Debt and Non-Recourse Debt in our unaudited condensed consolidated financial statements for additional information.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, purchase commitments (near and long-term) and costs associated with potential acquisitions and development projects.
We finance our business activities primarily with existing cash and cash equivalents, cash generated from our operations and through securitizations of our timeshare financing receivables. We believe that this cash will be adequate to meet anticipated requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs and capital expenditures for the foreseeable future. The objectives of our cash management policy are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments.
Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our liquidity:
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||
Net cash provided by (used in): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(134 |
) |
|
$ |
177 |
|
|
$ |
(311 |
) |
|
NM (1) |
|
|
Investing activities |
|
|
(23 |
) |
|
|
(21 |
) |
|
|
(2 |
) |
|
|
9.5 |
% |
Financing activities |
|
|
63 |
|
|
|
(54 |
) |
|
|
117 |
|
|
NM (1) |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
Operating Activities
Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations and providing related ancillary services. Cash flows used in operating activities primarily include spending for the acquisition of inventory, development of new phases of existing resorts and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs: the degree to which our owners finance their purchase and our owners’ repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale.
48
Net cash flows provided by operating activities dec reased by $311 million during the six months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) a purchase of an operating hotel for future conversion to inventory of $176 million made in June 2018, (ii) a deposit payment of $41 million related to an inventory purchase commitment, (iii) a federal tax payment of $63 million made in January 2018 that was deferred from 2017 pursuant to a tax relief program for regions impacted by Hurricane Irma (iv) an increase in inventory spending and (v) a license fee payment pertaining to the fourth quarter of 2017.
The following table exhibits our VOI inventory spending for the six months ended June 30, 2018 and 2017:
|
|
Six Months Ended June 30, |
|
|||||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
VOI spending - owned properties |
|
$ |
49 |
|
|
$ |
18 |
|
VOI spending - fee-for-service upgrades |
|
|
13 |
|
|
|
28 |
|
Property for future conversion into inventory |
|
|
176 |
|
|
|
— |
|
Total VOI inventory spending |
|
$ |
238 |
|
|
$ |
46 |
|
Investing Activities
The following table summarizes our net cash used in investing activities:
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||
Capital expenditures for property and equipment |
|
$ |
(20 |
) |
|
$ |
(15 |
) |
|
$ |
(5 |
) |
|
|
33.3 |
% |
Software capitalization costs |
|
|
(9 |
) |
|
|
(6 |
) |
|
|
(3 |
) |
|
|
50.0 |
|
Return of investment from unconsolidated affiliates |
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
|
NM (1) |
|
|
Investment in unconsolidated affiliates |
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
|
NM (1) |
|
|
Net cash used in investing activities |
|
$ |
(23 |
) |
|
$ |
(21 |
) |
|
$ |
(2 |
) |
|
|
9.5 |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
The change in net cash used in investing activities for the six months ended June 30, 2018, compared to the same period in 2017, was primarily due to (i) higher capital expenditures for property, equipment and software and (ii) a $5 million investment in SCG 1776 LLC, partially offset by an $11 million distribution received from our 25 percent interest in BRE Ace LLC. See Recent Events for additional information.
Our capital expenditures include spending related to technology, buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.
49
The following table summarizes our net cash used in financing activities:
|
|
Six Months Ended June 30, |
|
|
Variance |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||
Issuance of debt |
|
$ |
160 |
|
|
$ |
— |
|
|
$ |
160 |
|
|
NM (1) |
|
|
Issuance of non-recourse debt |
|
|
100 |
|
|
|
350 |
|
|
|
(250 |
) |
|
|
(71.4 |
)% |
Repurchase and retirement of common stock |
|
|
(112 |
) |
|
|
— |
|
|
|
(112 |
) |
|
NM (1) |
|
|
Repayment of non-recourse debt |
|
|
(80 |
) |
|
|
(395 |
) |
|
|
315 |
|
|
|
(79.7 |
) |
Repayment of debt |
|
|
(5 |
) |
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
Debt issuance costs |
|
|
(2 |
) |
|
|
(5 |
) |
|
|
3 |
|
|
|
(60.0 |
) |
Proceeds from stock option exercises |
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(100.0 |
) |
Payment of withholding taxes on vesting of restricted stock units |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
NM (1) |
|
|
Capital contribution |
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
NM (1) |
|
|
Net cash provided by (used in) financing activities |
|
$ |
63 |
|
|
$ |
(54 |
) |
|
$ |
117 |
|
|
NM (1) |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
The change in net cash used in financing activities for the six months ended June 30, 2018, compared to the same period in 2017, was primarily due to (i) the repurchase of 2,500,000 shares of our common stock from HNA (see Recent Events for additional information), (ii) a $260 million additional borrowing under the revolving credit agreement and timeshare facility and (iii) an $80 million repayment of our non-recourse debt. During the six months ended June 30, 2017, we issued $350 million in non-recourse securitized debt and used the proceeds to pay down a portion of our timeshare facility and $395 million repayment of our non-recourse debt.
Contractual Obligations
The following table summarizes our significant contractual obligations as of June 30, 2018:
|
|
Payments Due by Period |
|
|||||||||||||||||
($ in millions) |
|
Total |
|
|
Less Than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More Than 5 Years |
|
|||||
Debt (1) |
|
$ |
813 |
|
|
$ |
43 |
|
|
$ |
85 |
|
|
$ |
359 |
|
|
$ |
326 |
|
Non-recourse debt (1) |
|
|
647 |
|
|
|
133 |
|
|
|
194 |
|
|
|
283 |
|
|
|
37 |
|
Purchase commitments |
|
|
464 |
|
|
|
82 |
|
|
|
264 |
|
|
|
83 |
|
|
|
35 |
|
Total contractual obligations |
|
$ |
1,924 |
|
|
$ |
258 |
|
|
$ |
543 |
|
|
$ |
725 |
|
|
$ |
398 |
|
(1) |
Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 2.09 percent as of June 30, 2018. |
As of June 30, 2018, our contractual obligations relating to our operating leases has not materially changed from what was reported in our Annual Report on Form 10-K for the year ended December 31, 2017.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of June 30, 2018 consisted of $464 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under the Hilton Grand Vacations brand. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 19: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.
50
In July 2018, we executed a sale and purchase agreement to acquire a portion of an operating hotel for future conversion to timeshare inventory for $50 million. In connection with the executed sale and purchase agreement, we made an initial deposit of $2 million.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2017. We have updated our revenue recognition policies in conjunction with our adoption of ASC 606 as further described in Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements.
51
We are exposed to market risk from changes in interest rates, currency exchange rates and debt prices. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.
Interest Rate Risk
We are exposed to interest rate risk on our variable-rate debt, comprised of the term loans, revolver and our timeshare facility, of which the timeshare facility is without recourse to us. The interest rate is based on one-month LIBOR and we are most vulnerable to changes in this rate.
We intend to securitize timeshare financing receivables in the asset-backed financing market periodically. We expect to secure fixed-rate funding to match our fixed-rate timeshare financing receivables. However, if we have variable-rate debt in the future, we will monitor the interest rate risk and evaluate opportunities to mitigate such risk through the use of derivative instruments.
To the extent we utilize variable-rate indebtedness in the future, any increase in interest rates beyond amounts covered under any corresponding derivative financial instruments, particularly if sustained, could have an adverse effect on our net income, cash flows and financial position. Hedging transactions we enter into may not adequately mitigate the adverse effects of interest rate increases or that counterparties in those transactions will honor their obligations.
The following table sets forth the contractual maturities, weighted-average interest rates and the total fair values as of June 30, 2018, for our financial instruments that are materially affected by interest rate risk:
|
|
|
|
|
|
Maturities by Period |
|
|||||||||||||||||||||||||||||
($ in millions) |
|
Weighted Average Interest Rate (1) |
|
|
2018 |
|
|
2019 |
|
|
2020 |
|
|
2021 |
|
|
2022 |
|
|
There- after |
|
|
Total (2) |
|
|
Fair Value |
|
|||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate securitized timeshare financing receivables |
|
|
11.939 |
% |
|
$ |
33 |
|
|
$ |
65 |
|
|
$ |
63 |
|
|
$ |
58 |
|
|
$ |
51 |
|
|
$ |
118 |
|
|
$ |
388 |
|
|
$ |
413 |
|
Fixed-rate unsecuritized timeshare financing receivables |
|
|
12.321 |
% |
|
|
48 |
|
|
|
70 |
|
|
|
77 |
|
|
|
83 |
|
|
|
90 |
|
|
|
490 |
|
|
|
858 |
|
|
|
890 |
|
Liabilities: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
|
4.071 |
% |
|
|
63 |
|
|
|
122 |
|
|
|
89 |
|
|
|
33 |
|
|
|
26 |
|
|
|
346 |
|
|
|
679 |
|
|
|
677 |
|
Variable-rate debt (4) |
|
|
3.881 |
% |
|
|
5 |
|
|
|
10 |
|
|
|
10 |
|
|
|
549 |
|
|
|
— |
|
|
|
— |
|
|
|
574 |
|
|
|
577 |
|
(1) |
Weighted-average interest rate as of June 30, 2018. |
(2) |
Amount excludes unamortized deferred financing costs. |
(3) |
Includes debt and non-recourse debt. |
(4) |
Variable-rate debt includes principal outstanding debt of $345 million and non-recourse debt of $229 million as of June 30, 2018. See Note 12: Debt & Non-recourse Debt in our unaudited condensed consolidated financial statements for additional information. |
Foreign Currency Exchange Rate Risk
Though the majority of our operations are conducted in United States dollar (“U.S. dollar”), we are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from our timeshare financing receivables denominated in Japanese yen, the value of which could change materially in reference to our reporting currency, the U.S. dollar. A 10 percent increase in the foreign exchange rate of Japanese yen to U.S. dollar would increase our gross timeshare financing receivables by less than $1 million.
52
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
In conjunction with our separation from Hilton, during the second quarter of 2018, we implemented a suite of Oracle cloud based information systems including Enterprise Resource Planning, Enterprise Performance Management, and Human Capital Management (collectively, “Oracle Cloud”). Oracle Cloud allows us to benefit from its enhanced security features and seamless data integration. Concurrent with the transition to the cloud platform, we are updating our internal control over financial reporting, as necessary, which will require testing for effectiveness during the third and fourth quarters of 2018. We do not believe this implementation will have an adverse effect on our internal control over financial reporting.
There were no other changes in our internal control over financial reporting that occurred during the three months ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
53
We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2018 will not have a material effect on our unaudited condensed consolidated financial statements.
Set forth below are the material changes to the risk factors discussed in Item 1A of Part 1 of the Annual Report on Form 10-K for the year ended December 31, 2017. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed below and in Item 1A of Part 1 of the Annual Report on Form 10-K for the year ended December 31, 2017, which could materially and adversely affect our business, financial condition, results of operations and stock price. The risks described below and in the Annual Report on Form 10-K are not the only risks facing HGV. Additional risks and uncertainties not presently known to management or that management presently believes not to be material may also result in material and adverse effects on our business, financial condition, results of operations and stock price.
The European Union’s new data protection regulations could have a material adverse effect on the Company’s business, results of operations and financial condition.
The recently enacted EU General Data Protection Regulation (the “GDPR”) imposes significant obligations to businesses that sell products or services to EU customers or otherwise control or process personal data of EU residents. Complying with the GDPR could increase our compliance cost, or adversely impact the marketing of our products and services to customers in the EU and our overall business. In addition, the GDPR imposes fines and penalties for noncompliance, including fines of up to 4 percent of annual worldwide revenue. If we fail to comply with the requirements of the GDPR, we could face significant administrative and monetary sanctions, which could materially adversely impact our results of operations and financial condition.
None.
None.
Not applicable.
None.
54
Exhibit No. |
|
Description |
|
|
|
|
|
10.1 |
|
||
|
|
|
|
10.2 |
|
||
|
|
|
|
10.3 |
|
||
|
|
|
|
10.4 |
|
||
|
|
|
|
11.1 |
|
||
|
|
|
|
31.1 |
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2 |
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1 |
|
||
|
|
|
|
32.2 |
|
||
|
|
|
|
101.INS |
|
XBRL Instance Document. |
|
|
|
|
|
101.SCH |
|
XBRL Taxonomy Extension Schema Document. |
|
|
|
|
|
101.CAL |
|
XBRL Taxonomy Calculation Linkbase Document. |
|
|
|
|
|
101.DEF |
|
XBRL Taxonomy Extension Definition Linkbase Document. |
|
|
|
|
|
101.LAB |
|
XBRL Taxonomy Label Linkbase Document. |
|
|
|
|
|
101.PRE |
|
XBRL Taxonomy Presentation Linkbase Document. |
|
|
|
|
* |
Denotes management contract or compensatory plan or arrangement. |
** |
Filed herewith. |
55
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 2 nd day of August, 2018.
HILTON GRAND VACATIONS INC. |
|
|
|
By: |
/s/ Mark D. Wang |
Name: |
Mark D. Wang |
Title: |
President and Chief Executive Officer |
|
|
By: |
/s/ James E. Mikolaichik |
Name: |
James E. Mikolaichik |
Title: |
Executive Vice President and Chief Financial Officer |
Exhibit 10.4
OMNIBUS
Amendment No. 9 to
Receivables Loan Agreement
AMENDMENT NO. 4 TO
SALE AND CONTRIBUTION AGREEMENT
This OMNIBUS Amendment no. 9 to Receivables Loan Agreement AND AMENDMENT NO. 4 TO SALE AND CONTRIBUTION AGREEMENT (this “ Amendment ”) , effective as of May 14, 2018 (the “ Effective Date ”), is executed by and among HILTON GRAND VACATIONS TRUST I LLC, a Delaware limited liability company (together with its successors and assigns, the “ Borrower ”), HILTON RESORTS CORPORATION, a Delaware corporation (the “ Seller ”), WELLS FARGO BANK, NATIONAL ASSOCIATION, a national banking association, as Paying Agent and Securities Intermediary, the financial institutions signatory hereto as Managing Agents, the financial institutions signatory hereto as Conduit Lenders, the financial institutions signatory hereto as Committed Lenders and DEUTSCHE BANK SECURITIES, INC., as Administrative Agent. Capitalized terms used, but not otherwise defined herein, shall have the meanings ascribed thereto in the “Receivables Loan Agreement” (defined below).
WITNESSETH:
WHEREAS, the Borrower, the Managing Agents party thereto, the Administrative Agent, Wells Fargo Bank National Association, as Securities Intermediary and Paying Agent, the Conduit Lenders party thereto, and the Committed Lenders party thereto are parties to that certain Receivables Loan Agreement dated as of May 9, 2013 (as amended, restated, supplemented or otherwise modified from time to time, the “ Receivables Loan Agreement ”);
WHEREAS, the Borrower and Seller are party to that certain Sale and Contribution Agreement, dated as of May 9, 2013 (as amended, restated, supplemented or otherwise modified from time to time, the “ Sale and Contribution Agreement ”); and
WHEREAS, as provided herein, the parties hereto have agreed to provide certain waivers under the Receivables Loan Agreement and Sale and Contribution Agreement and amend certain provisions of the Receivables Loan Agreement and the Sale and Contribution Agreement, each as further described below;
NOW, THEREFORE, in consideration of the premises and the mutual agreements hereinafter set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows:
SECTION 1. Annual Financial Statements . The Administrative Agent and the Majority Managing Agents agree that the financial statements and related compliance certificate with respect to the Seller and its Subsidiaries on a consolidated basis as at the end of the 2017 fiscal year delivered to the Borrower on March 30, 2018 are in compliance with Section 4.2(a)(ii) and 4.2(b) of the Sale and Contribution Agreement.
SECTION 2. Amendment to the Receivables Loan Agreement . Effective as of the Effective Date, and subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, the Receivables Loan Agreement is hereby amended as follows:
2.1 Annex 2 to Exhibit I to the Receivables Loan Agreement is hereby amended to replace the Notice A ddress es for Hilton Grand Vacations Trust I LLC and Grand Vacations Services LLC with the following:
HILTON GRAND VACATIONS TRUST I LLC
6355 Metro West Blvd, Suite 180
#1549
Orlando, FL 32835
Attn: VP Treasury
Grand Vacations Services LLC
5323 Millenia Lakes Blvd
Suite 400
Orlando, FL 32839
Attn: General Counsel
2.2 Schedule III to the Receivables Loan Agreement is hereby amended to replace the Notice Addresses for Hilton Grand Vacations Trust I LLC and Grand Vacation Services, LLC with the following:
Borrower
Hilton Grand Vacations Trust I LLC
6355 Metro West Blvd, Suite 180
#1549
Orlando, FL 32835
Attention: VP Treasury
Telephone: 407.722.3100
Facsimile: 407.722.3776
Servicer :
Grand Vacations Services, LLC,
as Servicer
Attention: VP Treasury
6355 Metro West Blvd., Suite 180
Orlando, FL 32835
Phone: (407) 722-3270
Fax: (407) 722-3032
SECTION 3. Amendment to the Sale and Contribution Agreement . Effective as of the Effective Date, and subject to the satisfaction of the conditions precedent set forth in Section 4 hereof, the Sale and Contribution Agreement is hereby amended as follows:
3.1 Exhibit D to the Sale and Contribution Agreement is hereby amended to replace the Notice Addresses for Hilton Resorts Corporation and Hilton Grand Vacations Trust I LLC with the following:
Hilton Resorts Corporation
5323 Millenia Lakes Blvd
Suite 400
Orlando, FL 32839
Attn: General Counsel
Tel. 407.722.3100
Fax: 407.722.3776
2
Hilton Grand Vacations Trust I LLC
6355 Metro West Blvd, Suite 180
#1549
Orlando, FL 32835
Attn: VP Treasury
Tel. 407.722.3100
Fax: 407.722.3776
3.2 Section 4.2(a) of the Sale and Contribution Agreement is amended and restated in its entirety as follows:
“(i) within sixty (60) days after the end of each of the first three quarterly fiscal periods of each fiscal year of the Seller, the unaudited balance sheet of the Seller and its Subsidiaries on a consolidated basis as at the end of such period and the related unaudited consolidated statements of income for the Seller and its Subsidiaries for such period and the portion of the fiscal year through the end of such period; and
(ii) within one hundred and five (105) days after the end of each fiscal year of the Seller, the audited balance sheet of the Seller and its Subsidiaries on a consolidated basis as at the end of such fiscal year and the related audited consolidated statements of income for the Seller and its Subsidiaries and, if prepared, related notes, shareholders' equity and retained earnings and of cash flows for the Seller and its Subsidiaries on a consolidated basis for such year, accompanied by an opinion thereon of independent certified public accountants of recognized national standing, which opinion shall not be qualified as to scope of audit or going concern and shall state that each of the aforementioned statements fairly presents the financial condition and results of operations of the Seller and its Subsidiaries on a consolidated basis at the end of, and for, such fiscal year in accordance with GAAP, containing a footnote stating that, in making the examination necessary for their opinion, they obtained no knowledge, except as specifically stated, of any Default or Event of Default; provided, however , that such statements of the Seller and its Subsidiaries shall not be required to be audited or accompanied by an opinion thereon if the annual financial statement information of the Seller and its Subsidiaries is included in the consolidated audit of Hilton Grand Vacations Inc.”
SECTION 4. Conditions Precedent . This Amendment shall become effective on the Effective Date upon the satisfaction of the Administrative Agent having received counterparts of this Amendment executed by each of the parties hereto.
SECTION 5. Representations, Warranties and Confirmations . The Borrower hereby represents and warrants that:
5.1 It has the power and is duly authorized, including by all limited liability company action on its part, to execute and deliver this Amendment.
5.2 This Amendment has been duly and validly executed and delivered by it.
5.3 This Amendment, the Sale and Contribution Agreement and Receivables Loan Agreement as amended hereby, constitute legal, valid and binding obligations of the Borrower and are enforceable against the Borrower in accordance with their terms.
3
5.4 Immediately prior, and after giving all effect, to this Amendment, the covenants, representations and warranties of the Borrower set forth in the Receivables Loan Agreement are true and correct in all material respects as of the date hereof (except to the extent such representations or warranties relate solely to an earlier date and then as of such date).
5.5 Immediately prior, and after giving all effect, to this Amendment, no event, condition or circumstance has occurred and is continuing which constitutes a Servicer Termination Event, Unmatured Servicer Termination Event, Default or Event of Default.
SECTION 6. Delivery of Executed Amendment . The Borrower covenants and agrees that it will deliver an executed copy of this Amendment to the Servicer, the Paying Agent, the Backup Servicer and the Custodian promptly following the effectiveness hereof.
SECTION 7. Entire Agreement . The parties hereto hereby agree that this Amendment constitutes the entire agreement concerning the subject matter hereof and supersedes any and all written and/or oral prior agreements, negotiations, correspondence, understandings and communications.
SECTION 8. Effectiveness of Amendment . Except as expressly amended by the terms of this Amendment, all terms and conditions of the Sale and Contribution Agreement or the Receivables Loan Agreement, as applicable, shall remain in full force and effect and are hereby ratified and confirmed. This Amendment shall not operate as a consent, waiver, amendment or other modification of any other term or condition set forth in the Sale and Contribution Agreement or the Receivables Loan Agreement or any right, power or remedy of the Administrative Agent or any Managing Agent or Lender under the Sale and Contribution Agreement or the Receivables Loan Agreement, except as expressly modified hereby. Upon the effectiveness of this Amendment, each reference in the Sale and Contribution Agreement or the Receivables Loan Agreement to “this Agreement”, “this Sale and Contribution Agreement” or “this Receivables Loan Agreement” or words of like import shall mean and be references to the Sale and Contribution Agreement or the Receivables Loan Agreement, as applicable, as amended hereby, and each reference in any other Facility Document to the Sale and Contribution Agreement or Receivables Loan Agreement or to any terms defined in the Sale and Contribution Agreement or Receivables Loan Agreement which are modified hereby shall mean and be references to the Sale and Contribution Agreement or Receivables Loan Agreement, as applicable, or to such terms as modified hereby.
SECTION 9. GOVERNING LAW . THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK .
SECTION 10. Binding Effect . This Amendment shall be binding upon and shall be enforceable by parties hereto and their respective successors and permitted assigns.
SECTION 11. Headings . The Section headings herein are for convenience only and will not affect the construction hereof.
SECTION 12. Novation . This Amendment does not constitute a novation or termination of the Receivables Loan Agreement, the Sale and Contribution Agreement or any Facility Document and all obligations thereunder are in all respects continuing with only the terms thereof being modified as provided herein.
4
SECTION 13. Counterparts . This Amendment may be executed in any number of counterparts, each of which so executed will be deemed to be an original, but all such counterparts will together constitute but one and the same instrument. Delivery of an executed counterpart of a signature page to this Amendment by facsimile or by electronic mail in a “.pdf” file shall be effective as delivery of a manually executed counterpart of this Amendment.
SECTION 14. Fees, Costs and Expenses . The Borrower agrees to pay on demand all reasonable fees and out-of-pocket expenses of Sidley Austin LLP, counsel for the Administrative Agent, incurred in connection with the preparation, execution and delivery of this Amendment and the other instruments and documents to be delivered in connection herewith.
Signature Pages Follow
5
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective authorized officers as of the date first above written.
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HILTON GRAND VACATIONS TRUST I LLC, as Borrower |
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By: |
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/s/ Charles Corbin |
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Name: |
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Charles Corbin |
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Title: |
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EVP & Secretary |
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HILTON RESORTS CORPORATION, as Seller |
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By: |
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/s/ Charles Corbin |
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Name: |
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Charles Corbin |
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Title: |
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EVP & Secretary |
Signature Page to Omnibus Amendment No. 9 to Receivables Loan Agreement and Amendment No. 4 to Sale and Contribution Agreement
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Deutsche Bank SECURITIES, INC. , as Administrative Agent |
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By: |
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/s/ Nicole Byrns |
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Name: |
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Nicole Byrns |
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Title: |
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Director |
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By: |
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/s/ Suji Kang |
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Name: |
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Suji Kang |
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Title: |
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Vice President |
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DEUTSCHE BANK AG, NEW YORK BRANCH as a Committed Lender and a Managing Agent |
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By: |
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/s/ Nicole Byrns |
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Name: |
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Nicole Byrns |
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Title: |
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Director |
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By: |
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/s/ Rob Sannicandro |
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Name: |
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Rob Sannicandro |
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Title: |
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Director |
Signature Page to Omnibus Amendment No. 9 to Receivables Loan Agreement and Amendment No. 4 to Sale and Contribution Agreement
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BANK OF AMERICA, N.A., as a Committed Lender and a Managing Agent |
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By: |
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/s/ Carl W. Anderson |
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Name: |
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Carl W. Anderson |
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Title: |
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Managing Director |
Signature Page to Omnibus Amendment No. 9 to Receivables Loan Agreement and Amendment No. 4 to Sale and Contribution Agreement
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BARCLAYS BANK PLC, as a Committed Lender and a Managing Agent |
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By: |
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/s/ Chin-Yong Choe |
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Name: |
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Chin-Yong Choe |
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Title: |
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Director |
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SHEFFIELD RECEIVABLES COMPANY LLC, as a Conduit Lender |
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By: |
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Barclays Bank PLC, |
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as attorney-in-fact |
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By: |
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/s/ Chin-Yong Choe |
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Name: |
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Chin-Yong Choe |
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Title: |
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Director |
Signature Page to Omnibus Amendment No. 9 to Receivables Loan Agreement and Amendment No. 4 to Sale and Contribution Agreement
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WELLS FARGO BANK, NATIONAL ASSOCIATION, as a Committed Lender and a Managing Agent |
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By: |
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/s/ Leigh Poltrack |
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Name: |
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Leigh Poltrack |
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Title: |
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Vice President |
Signature Page to Omnibus Amendment No. 9 to Receivables Loan Agreement and Amendment No. 4 to Sale and Contribution Agreement
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SUNTRUSTBANK, as a Committed Lender and a Managing Agent |
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By: |
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/s/ Emily Shields |
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Name: |
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Emily Shields |
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Title: |
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First Vice President |
Signature Page to Omnibus Amendment No. 9 to Receivables Loan Agreement and Amendment No. 4 to Sale and Contribution Agreement
Exhibit 31.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Mark D. Wang, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 of Hilton Grand Vacations Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
By: |
/s/ Mark D. Wang |
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Mark D. Wang |
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President and Chief Executive Officer (Principal Executive Officer) |
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August 2, 2018 |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, James E. Mikolaichik, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018 of Hilton Grand Vacations Inc.; |
2. |
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. |
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. |
The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
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a. |
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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b. |
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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c. |
Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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d. |
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
5. |
The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
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a. |
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
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b. |
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
By: |
/s/ James E. Mikolaichik |
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James E. Mikolaichik |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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August 2, 2018 |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Hilton Grand Vacations Inc. (the “Company”) for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Mark D. Wang, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
By: |
/s/ Mark D. Wang |
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Mark D. Wang |
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President and Chief Executive Officer (Principal Executive Officer) |
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August 2, 2018 |
A signed original of this certification required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY
ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Hilton Grand Vacations Inc. (the “Company”) for the quarter ended June 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James E. Mikolaichik, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1. |
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. |
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
By: |
/s/ James E. Mikolaichik |
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James E. Mikolaichik |
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Executive Vice President and Chief Financial Officer |
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(Principal Financial Officer) |
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August 2, 2018 |
A signed original of this certification required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. The foregoing certification is being furnished solely pursuant to 18 U.S.C. Section 1350 and is not being filed as part of the Report or as a separate disclosure document.