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 September 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, |
|
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 every Interactive Data File required to be submitted 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 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.
Large Accelerated Filer |
☒ |
Accelerated Filer |
☐ |
Non-Accelerated Filer |
☐ |
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 $0.01 per share, as of October 26, 2018 was 96,911,130.
FORM 10-Q TABLE OF CONTENTS
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Item 1. |
2 |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
37 |
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Item 3. |
54 |
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Item 4. |
55 |
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Item 1. |
56 |
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Item 1A. |
56 |
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Item 2. |
56 |
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Item 3. |
56 |
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Item 4. |
56 |
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Item 5. |
56 |
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Item 6. |
57 |
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1
HILTON GRAND VACATIONS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
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September 30, |
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December 31, |
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2018 |
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2017 |
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(unaudited) |
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ASSETS |
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Cash and cash equivalents |
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$ |
145 |
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$ |
246 |
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Restricted cash |
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67 |
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51 |
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Accounts receivable, net of allowance for doubtful accounts of $12 and $9 |
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151 |
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112 |
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Timeshare financing receivables, net |
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1,103 |
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1,071 |
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Inventory |
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582 |
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509 |
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Property and equipment, net |
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538 |
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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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121 |
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44 |
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TOTAL ASSETS (variable interest entities - $691 and $471) |
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$ |
2,813 |
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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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$ |
337 |
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$ |
339 |
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Advanced deposits |
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100 |
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104 |
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Debt, net |
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530 |
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482 |
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Non-recourse debt, net |
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806 |
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583 |
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Deferred revenues |
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263 |
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109 |
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Deferred income tax liabilities |
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215 |
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249 |
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Total liabilities (variable interest entities - $688 and $455) |
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2,251 |
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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 September 30, 2018 and December 31, 2017 |
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— |
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— |
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Common stock, $0.01 par value; 3,000,000,000 authorized shares, 96,906,759 issued and outstanding as of September 30, 2018 and 99,136,304 issued and outstanding as of December 31, 2017 |
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1 |
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1 |
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Additional paid-in capital |
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174 |
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162 |
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Accumulated retained earnings |
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387 |
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|
355 |
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Total equity |
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562 |
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|
518 |
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TOTAL LIABILITIES AND EQUITY |
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$ |
2,813 |
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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 September 30, |
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Nine Months Ended September 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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$ |
99 |
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$ |
145 |
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$ |
427 |
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$ |
406 |
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Sales, marketing, brand and other fees |
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152 |
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127 |
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423 |
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401 |
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Financing |
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40 |
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38 |
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117 |
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109 |
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Resort and club management |
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40 |
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|
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37 |
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116 |
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108 |
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Rental and ancillary services |
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60 |
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45 |
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164 |
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138 |
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Cost reimbursements |
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36 |
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34 |
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110 |
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102 |
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Total revenues |
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427 |
|
|
|
426 |
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1,357 |
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1,264 |
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Expenses |
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Cost of VOI sales |
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29 |
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40 |
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109 |
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107 |
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Sales and marketing |
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174 |
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171 |
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528 |
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492 |
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Financing |
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12 |
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11 |
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35 |
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32 |
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Resort and club management |
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11 |
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12 |
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33 |
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32 |
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Rental and ancillary services |
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37 |
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30 |
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|
95 |
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88 |
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General and administrative |
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31 |
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23 |
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84 |
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75 |
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Depreciation and amortization |
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9 |
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7 |
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25 |
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21 |
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License fee expense |
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25 |
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22 |
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73 |
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65 |
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Cost reimbursements |
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36 |
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34 |
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110 |
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|
102 |
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Total operating expenses |
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364 |
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350 |
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1,092 |
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1,014 |
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Gain on foreign currency transactions |
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— |
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1 |
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— |
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1 |
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Interest expense |
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(7 |
) |
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(7 |
) |
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(22 |
) |
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(21 |
) |
Equity in earnings from unconsolidated affiliates |
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1 |
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1 |
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— |
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1 |
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Other loss |
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(1 |
) |
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— |
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(1 |
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— |
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Income before income taxes |
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56 |
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71 |
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242 |
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231 |
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Income tax expense |
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(15 |
) |
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(28 |
) |
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(64 |
) |
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(87 |
) |
Net income |
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$ |
41 |
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$ |
43 |
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$ |
178 |
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$ |
144 |
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Earnings per share: |
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Basic |
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$ |
0.42 |
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$ |
0.43 |
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$ |
1.82 |
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$ |
1.45 |
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Diluted |
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$ |
0.42 |
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$ |
0.43 |
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$ |
1.81 |
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$ |
1.44 |
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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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Nine Months Ended September 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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$ |
178 |
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$ |
144 |
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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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25 |
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21 |
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Amortization of deferred financing costs and other |
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4 |
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4 |
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Provision for loan losses |
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50 |
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45 |
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Gain on foreign currency transactions |
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— |
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(1 |
) |
Other loss |
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1 |
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— |
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Share-based compensation |
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13 |
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13 |
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Deferred tax benefits |
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(21 |
) |
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(5 |
) |
Equity in earnings from unconsolidated affiliates |
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— |
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(1 |
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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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(39 |
) |
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19 |
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Timeshare financing receivables, net |
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(83 |
) |
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(75 |
) |
Inventory |
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(15 |
) |
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38 |
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Purchases of real estate for future conversion to inventory |
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(299 |
) |
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— |
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Other assets |
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(61 |
) |
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(11 |
) |
Accounts payable, accrued expenses and other |
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(15 |
) |
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96 |
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Advanced deposits |
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13 |
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(1 |
) |
Deferred revenues |
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42 |
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13 |
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Net cash (used in) provided by operating activities |
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(205 |
) |
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|
299 |
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Investing Activities |
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Capital expenditures for property and equipment |
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(29 |
) |
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(25 |
) |
Software capitalization costs |
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(12 |
) |
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(12 |
) |
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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(40 |
) |
Net cash used in investing activities |
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(35 |
) |
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(77 |
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Financing Activities |
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Issuance of debt |
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215 |
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— |
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Issuance of non-recourse debt |
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|
663 |
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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 debt |
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(168 |
) |
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(7 |
) |
Repayment of non-recourse debt |
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(436 |
) |
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(428 |
) |
Debt issuance costs |
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(6 |
) |
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(5 |
) |
Proceeds from stock options exercises |
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— |
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|
1 |
|
Payment of withholding taxes on vesting of restricted stock units |
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(4 |
) |
|
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— |
|
Capital contribution |
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3 |
|
|
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— |
|
Net cash provided by (used in) financing activities |
|
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155 |
|
|
|
(89 |
) |
Net (decrease) increase in cash, cash equivalents and restricted cash |
|
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(85 |
) |
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|
133 |
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Cash, cash equivalents and restricted cash, beginning of period |
|
|
297 |
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|
|
151 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
212 |
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$ |
284 |
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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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|
|
178 |
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|
178 |
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Activity related to share-based compensation |
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— |
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— |
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9 |
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|
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— |
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|
9 |
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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 |
) |
|
|
(112 |
) |
Revenue recognition cumulative-effect adjustment |
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— |
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— |
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|
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— |
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|
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(38 |
) |
|
|
(38 |
) |
Capital contribution |
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— |
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|
— |
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|
3 |
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|
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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 |
|
|
|
4 |
|
Balance as of September 30, 2018 |
|
|
97 |
|
|
$ |
1 |
|
|
$ |
174 |
|
|
$ |
387 |
|
|
$ |
562 |
|
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 September 30, 2018, we had 51 properties, comprised of 8,367 units, located in the United States (“U.S.”), Japan 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 September 30, 2018 and 2017, we incurred $38 million and $39 million, respectively, and for the nine months ended September 30, 2018 and 2017, we incurred $135 million and $137 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 reported results as of and for the three and nine months ended September 30, 2018 reflects the application of ASC 606 while the reported financial position as of December 31, 2017 and results for the three and nine months ended September 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.”
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 on variable consideration 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 in such contracts is satisfied when customers stay at our property; therefore, we recognize revenue for th ese 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 po rtfolio 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 are classified as Sales and marketing expense in our unaudited condensed consolidated statements of operations.
8
As of September 30, 2018, the ending asset balance for cost to obtain a contract was $ 24 million. For the three and nine months ended September 30, 2018, the related amortization or incurred expense was $ 1 million and $ 2 0 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. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment as operating cash flows and those in excess of that amount will be treated as returns of investment as investing cash flows. 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 as clarified 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 expect to elect the initial application on January 1, 2019 and not to recast the comparative periods in transition but recognize a cumulative-effect adjustment to retained earnings as of January 1, 2019. We will choose to elect 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.
In August 2018, the FASB issued ASU 2018-13 (“ASU 2018-13”), Fair Value Measurement (Topic 8420): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement.” ASU 2018-13 modifies the requirements associated with the hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. The provisions of this ASU are effective for reporting periods after December 15, 2019; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15 (“ASU 2018-15”), Customer’s Accounting Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. ASU 2018-15 generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. The provisions of this ASU are effective for reporting periods after December 15, 2019; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.
9
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. |
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 |
|
10
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 September 30, 2018 |
|
|
Nine Months Ended September 30, 2018 |
|
||
($ in millions) |
|
|
|
|
|
|
|
|
Real Estate and Financing Segment |
|
|
|
|
|
|
|
|
Sales of VOIs, net |
|
$ |
99 |
|
|
$ |
427 |
|
Sales, marketing, brand and other fees |
|
|
152 |
|
|
|
423 |
|
Interest income |
|
|
35 |
|
|
|
103 |
|
Other financing revenue |
|
|
5 |
|
|
|
14 |
|
Real estate and financing segment revenues |
|
$ |
291 |
|
|
$ |
967 |
|
|
|
Three Months Ended September 30, 2018 |
|
|
Nine Months Ended September 30, 2018 |
|
||
($ in millions) |
|
|
|
|
|
|
|
|
Resort Operations and Club Management Segment |
|
|
|
|
|
|
|
|
Club management |
|
$ |
25 |
|
|
$ |
71 |
|
Resort management |
|
|
15 |
|
|
|
45 |
|
Rental (1) |
|
|
53 |
|
|
|
144 |
|
Ancillary services |
|
|
7 |
|
|
|
20 |
|
Resort operations and club management segment revenues |
|
$ |
100 |
|
|
$ |
280 |
|
(1) |
Includes intersegment eliminations. |
Contract Balances
The following table provides information on our accounts receivable and contract asset from contracts with customers which are included in Accounts Receivable, net on our condensed consolidated balance sheets:
($ in millions) |
|
January 1, 2018 |
|
|
September 30, 2018 |
|
||
Receivables (1) |
|
$ |
97 |
|
|
$ |
135 |
|
Contract asset |
|
|
— |
|
|
|
5 |
|
(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 nine months ended September 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
January 1, 2018 |
|
|
Additions |
|
|
Subtractions |
|
|
September 30, 2018 |
|
||||
Contract liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Advanced deposits |
|
$ |
87 |
|
|
$ |
128 |
|
|
$ |
(115 |
) |
|
$ |
100 |
|
Deferred revenue (1) |
|
|
197 |
|
|
|
256 |
|
|
|
(215 |
) |
|
|
238 |
|
Club Bonus Point incentive liability (2) |
|
|
52 |
|
|
|
39 |
|
|
|
(31 |
) |
|
|
60 |
|
(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 nine months ended September 30, 2018 that was included in the contract liabilities balance at January 1, 2018 was approximately $58 million and $202 million, respectively.
11
Accounts receivable for the nine months ended September 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 th e right to consideration becomes unconditional and is only contingent on the passage of time. For the nine months ended September 30, 2018, there were no associated impairment losses. Refer to Note 5: Timeshare Financing Receivables for information on bala nces 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.
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 future.
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 September 30, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
Remaining |
|
|
Expected Recognition Period |
|
|||
($ in millions) |
|
Performance Obligation |
|
|
|
Q4 2018 |
|
||
Deferred revenues |
|
$ |
154 |
|
|
|
$ |
154 |
|
Deferred expenses |
|
|
72 |
|
|
|
|
72 |
|
The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of September 30, 2018:
($ in millions) |
|
Remaining Transaction Price |
|
|
Recognition Period |
|
Recognition Method |
|
Advanced deposits |
|
$ |
100 |
|
|
18 months |
|
Upon customer stays |
Club activation fees |
|
|
61 |
|
|
7 years |
|
Straight-line basis over average inventory holding period |
Club Bonus Points |
|
|
60 |
|
|
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 nine months ended September 30, 2018, as well as the cash flows for the nine months ended September 30, 2018, to the previous accounting guidance:
|
|
September 30, 2018 |
|
|||||||||
|
|
As Reported |
|
|
Effects of ASC 606 |
|
|
Previous Accounting Guidance |
|
|||
(in millions) |
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
145 |
|
|
$ |
— |
|
|
$ |
145 |
|
Restricted cash |
|
|
67 |
|
|
|
— |
|
|
|
67 |
|
Accounts receivable, net of allowance for doubtful accounts |
|
|
151 |
|
|
|
(5 |
) |
|
|
146 |
|
Timeshare financing receivables, net |
|
|
1,103 |
|
|
|
— |
|
|
|
1,103 |
|
Inventory |
|
|
582 |
|
|
|
(47 |
) |
|
|
535 |
|
Property and equipment, net |
|
|
538 |
|
|
|
— |
|
|
|
538 |
|
Investment in unconsolidated affiliates |
|
|
33 |
|
|
|
— |
|
|
|
33 |
|
Intangible assets, net |
|
|
73 |
|
|
|
— |
|
|
|
73 |
|
Other assets |
|
|
121 |
|
|
|
(20 |
) |
|
|
101 |
|
TOTAL ASSETS |
|
$ |
2,813 |
|
|
$ |
(72 |
) |
|
$ |
2,741 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other |
|
$ |
337 |
|
|
$ |
(29 |
) |
|
$ |
308 |
|
Advanced deposits |
|
|
100 |
|
|
|
17 |
|
|
|
117 |
|
Debt, net |
|
|
530 |
|
|
|
— |
|
|
|
530 |
|
Non-recourse debt, net |
|
|
806 |
|
|
|
— |
|
|
|
806 |
|
Deferred revenues |
|
|
263 |
|
|
|
(142 |
) |
|
|
121 |
|
Deferred income tax liabilities |
|
|
215 |
|
|
|
30 |
|
|
|
245 |
|
Total liabilities |
|
|
2,251 |
|
|
|
(124 |
) |
|
|
2,127 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none issued or outstanding as of September 30, 2018 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock, $0.01 par value; 3,000,000,000 authorized shares, 96,906,759 issued and outstanding as of September 30, 2018 |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Additional paid-in capital |
|
|
174 |
|
|
|
— |
|
|
|
174 |
|
Accumulated retained earnings |
|
|
387 |
|
|
|
52 |
|
|
|
439 |
|
Total equity |
|
|
562 |
|
|
|
52 |
|
|
|
614 |
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
2,813 |
|
|
$ |
(72 |
) |
|
$ |
2,741 |
|
13
Total reported assets and liabilities were $ 72 million and $ 124 million, respectively, greater than the balance if the previous accounting guidance were in effect as of September 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 vaca tion packages proportionally as our customers redeem their packages.
|
|
Three Months Ended September 30, 2018 |
|
|||||||||
($ in millions) |
|
As Reported |
|
|
Effects of ASC 606 |
|
|
Previous Accounting Guidance |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOIs, net |
|
$ |
99 |
|
|
$ |
58 |
|
|
$ |
157 |
|
Sales, marketing, brand and other fees |
|
|
152 |
|
|
|
(2 |
) |
|
|
150 |
|
Financing |
|
|
40 |
|
|
|
— |
|
|
|
40 |
|
Resort and club management |
|
|
40 |
|
|
|
— |
|
|
|
40 |
|
Rental and ancillary services |
|
|
60 |
|
|
|
— |
|
|
|
60 |
|
Cost reimbursements |
|
|
36 |
|
|
|
— |
|
|
|
36 |
|
Total revenues |
|
|
427 |
|
|
|
56 |
|
|
|
483 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
29 |
|
|
|
18 |
|
|
|
47 |
|
Sales and marketing |
|
|
174 |
|
|
|
11 |
|
|
|
185 |
|
Financing |
|
|
12 |
|
|
|
— |
|
|
|
12 |
|
Resort and club management |
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
Rental and ancillary services |
|
|
37 |
|
|
|
— |
|
|
|
37 |
|
General and administrative |
|
|
31 |
|
|
|
— |
|
|
|
31 |
|
Depreciation and amortization |
|
|
9 |
|
|
|
— |
|
|
|
9 |
|
License fee expense |
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
Cost reimbursements |
|
|
36 |
|
|
|
— |
|
|
|
36 |
|
Total operating expenses |
|
|
364 |
|
|
|
29 |
|
|
|
393 |
|
Interest expense |
|
|
(7 |
) |
|
|
— |
|
|
|
(7 |
) |
Equity in earnings from unconsolidated affiliates |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Other loss |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Income before income taxes |
|
|
56 |
|
|
|
27 |
|
|
|
83 |
|
Income tax expense |
|
|
(15 |
) |
|
|
(6 |
) |
|
|
(21 |
) |
Net income |
|
$ |
41 |
|
|
$ |
21 |
|
|
$ |
62 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.42 |
|
|
$ |
0.21 |
|
|
$ |
0.63 |
|
Diluted |
|
$ |
0.42 |
|
|
$ |
0.21 |
|
|
$ |
0.63 |
|
14
|
Nine Months Ended September 30, 2018 |
|
||||||||||
($ in millions) |
|
As Reported |
|
|
Effects of ASC 606 |
|
|
Previous Accounting Guidance |
|
|||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOIs, net |
|
$ |
427 |
|
|
$ |
30 |
|
|
$ |
457 |
|
Sales, marketing, brand and other fees |
|
|
423 |
|
|
|
4 |
|
|
|
427 |
|
Financing |
|
|
117 |
|
|
|
— |
|
|
|
117 |
|
Resort and club management |
|
|
116 |
|
|
|
— |
|
|
|
116 |
|
Rental and ancillary services |
|
|
164 |
|
|
|
— |
|
|
|
164 |
|
Cost reimbursements |
|
|
110 |
|
|
|
— |
|
|
|
110 |
|
Total revenues |
|
|
1,357 |
|
|
|
34 |
|
|
|
1,391 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
109 |
|
|
|
16 |
|
|
|
125 |
|
Sales and marketing |
|
|
528 |
|
|
|
14 |
|
|
|
542 |
|
Financing |
|
|
35 |
|
|
|
— |
|
|
|
35 |
|
Resort and club management |
|
|
33 |
|
|
|
— |
|
|
|
33 |
|
Rental and ancillary services |
|
|
95 |
|
|
|
— |
|
|
|
95 |
|
General and administrative |
|
|
84 |
|
|
|
— |
|
|
|
84 |
|
Depreciation and amortization |
|
|
25 |
|
|
|
— |
|
|
|
25 |
|
License fee expense |
|
|
73 |
|
|
|
— |
|
|
|
73 |
|
Cost reimbursements |
|
|
110 |
|
|
|
— |
|
|
|
110 |
|
Total operating expenses |
|
|
1,092 |
|
|
|
30 |
|
|
|
1,122 |
|
Interest expense |
|
|
(22 |
) |
|
|
— |
|
|
|
(22 |
) |
Other loss |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Income before income taxes |
|
|
242 |
|
|
|
4 |
|
|
|
246 |
|
Income tax expense |
|
|
(64 |
) |
|
|
(1 |
) |
|
|
(65 |
) |
Net income |
|
$ |
178 |
|
|
$ |
3 |
|
|
$ |
181 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
1.82 |
|
|
$ |
0.03 |
|
|
$ |
1.85 |
|
Diluted |
|
$ |
1.81 |
|
|
$ |
0.03 |
|
|
$ |
1.84 |
|
The following summarizes the significant changes to our condensed consolidated statement of operations for the three and nine months ended September 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, net, 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 offs etting shifts in cash flows throughout net income and various changes in working capital balances.
|
|
Nine Months Ended September 30, 2018 |
|
|||||
($ in millions) |
|
As Reported |
|
|
Previous Accounting Guidance |
|
||
Net income |
|
$ |
178 |
|
|
$ |
181 |
|
Adjustments to reconcile net income to net used in by operating activities |
|
|
74 |
|
|
|
74 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable, net |
|
|
(39 |
) |
|
|
(35 |
) |
Timeshare financing receivables, net |
|
|
(83 |
) |
|
|
(83 |
) |
Inventory |
|
|
(15 |
) |
|
|
1 |
|
Purchases of real estate for future conversion to inventory |
|
|
(299 |
) |
|
|
(299 |
) |
Other assets |
|
|
(61 |
) |
|
|
(56 |
) |
Accounts payable, accrued expenses and other |
|
|
(15 |
) |
|
|
(15 |
) |
Advanced deposits |
|
|
13 |
|
|
|
13 |
|
Deferred revenues |
|
|
42 |
|
|
|
14 |
|
Net cash used in operating activities |
|
$ |
(205 |
) |
|
$ |
(205 |
) |
Note 4: Restricted Cash
Restricted cash was as follows:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Escrow deposits on VOI sales |
|
$ |
40 |
|
|
$ |
29 |
|
Reserves related to non-recourse debt (1) |
|
|
27 |
|
|
|
22 |
|
|
|
$ |
67 |
|
|
$ |
51 |
|
(1) |
See Note 12: Debt & Non-recourse Debt for further discussion. |
Note 5: Timeshare Financing Receivables
Timeshare financing receivables were as follows:
|
|
September 30, 2018 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized (1) |
|
|
Total |
|
|||
Timeshare financing receivables |
|
$ |
705 |
|
|
$ |
567 |
|
|
$ |
1,272 |
|
Less: allowance for loan loss |
|
|
(47 |
) |
|
|
(122 |
) |
|
|
(169 |
) |
|
|
$ |
658 |
|
|
$ |
445 |
|
|
$ |
1,103 |
|
|
|
December 31, 2017 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized (1) |
|
|
Total |
|
|||
Timeshare financing receivables |
|
$ |
471 |
|
|
$ |
741 |
|
|
$ |
1,212 |
|
Less: allowance for loan loss |
|
|
(27 |
) |
|
|
(114 |
) |
|
|
(141 |
) |
|
|
$ |
444 |
|
|
$ |
627 |
|
|
$ |
1,071 |
|
(1) |
Includes amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility ("Timeshare Facility") as well as amounts held as future collateral for upcoming securitization. |
16
As of September 30, 2018 and December 31, 2017, we had $198 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 for estimated defaults as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale.
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 September 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 7.8 years and maturities through 2030.
In September 2018, we completed a securitization of $350 million of gross timeshare financing receivables and issued approximately $268 million of 3.54 percent notes, $54 million of 3.70 percent notes and $28 million of 4.0 percent notes, which have a stated maturity date of February 25, 2032. The securitization transaction did not qualify as a sale and, accordingly, no gain or loss was recognized. The transaction is considered a secured borrowing; therefore, the proceeds from the transaction are presented as non-recourse debt (collectively, the “Securitized Debt”). The proceeds were primarily used to pay down a portion of our Timeshare Facility and general corporate operating expenses.
Our timeshare financing receivables as of September 30, 2018 mature as follows:
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2018 (remaining) |
|
$ |
22 |
|
|
$ |
26 |
|
|
$ |
48 |
|
2019 |
|
|
90 |
|
|
|
46 |
|
|
|
136 |
|
2020 |
|
|
90 |
|
|
|
50 |
|
|
|
140 |
|
2021 |
|
|
89 |
|
|
|
54 |
|
|
|
143 |
|
2022 |
|
|
86 |
|
|
|
58 |
|
|
|
144 |
|
Thereafter |
|
|
328 |
|
|
|
333 |
|
|
|
661 |
|
|
|
|
705 |
|
|
|
567 |
|
|
|
1,272 |
|
Less: allowance for loan loss |
|
|
(47 |
) |
|
|
(122 |
) |
|
|
(169 |
) |
|
|
$ |
658 |
|
|
$ |
445 |
|
|
$ |
1,103 |
|
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:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
FICO score |
|
|
|
|
|
|
|
|
700+ |
|
$ |
826 |
|
|
$ |
770 |
|
600-699 |
|
|
236 |
|
|
|
225 |
|
<600 |
|
|
28 |
|
|
|
28 |
|
No score (1) |
|
|
182 |
|
|
|
189 |
|
|
|
$ |
1,272 |
|
|
$ |
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
17
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.
As of September 30, 2018 and December 31, 2017, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $69 million and $49 million, respectively. The following tables detail an aged analysis of our gross timeshare financing receivables balance:
|
|
September 30, 2018 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Current |
|
$ |
697 |
|
|
$ |
489 |
|
|
$ |
1,186 |
|
31 - 90 days past due |
|
|
4 |
|
|
|
13 |
|
|
|
17 |
|
91 - 120 days past due |
|
|
2 |
|
|
|
4 |
|
|
|
6 |
|
121 days and greater past due |
|
|
2 |
|
|
|
61 |
|
|
|
63 |
|
|
|
$ |
705 |
|
|
$ |
567 |
|
|
$ |
1,272 |
|
|
|
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:
|
|
September 30, 2018 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Balance as of December 31, 2017 |
|
$ |
27 |
|
|
$ |
114 |
|
|
$ |
141 |
|
Write-offs |
|
|
— |
|
|
|
(22 |
) |
|
|
(22 |
) |
Securitization |
|
|
30 |
|
|
|
(30 |
) |
|
|
— |
|
Provision for loan loss (1) |
|
|
(10 |
) |
|
|
60 |
|
|
|
50 |
|
Balance as of September 30, 2018 |
|
$ |
47 |
|
|
$ |
122 |
|
|
$ |
169 |
|
|
|
September 30, 2017 |
|
|||||||||
($ in millions) |
|
Securitized and Pledged |
|
|
Unsecuritized |
|
|
Total |
|
|||
Balance as of December 31, 2016 |
|
$ |
9 |
|
|
$ |
111 |
|
|
$ |
120 |
|
Write-offs |
|
|
— |
|
|
|
(27 |
) |
|
|
(27 |
) |
Securitization |
|
|
28 |
|
|
|
(28 |
) |
|
|
— |
|
Provision for loan loss (1) |
|
|
(8 |
) |
|
|
53 |
|
|
|
45 |
|
Balance as of September 30, 2017 |
|
$ |
29 |
|
|
$ |
109 |
|
|
$ |
138 |
|
(1) |
Includes incremental provision for loan loss, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables. |
18
Inventory was as follows:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Completed unsold VOIs |
|
$ |
233 |
|
|
$ |
191 |
|
Construction in process |
|
|
76 |
|
|
|
60 |
|
Land, infrastructure and other |
|
|
273 |
|
|
|
258 |
|
|
|
$ |
582 |
|
|
$ |
509 |
|
We benefited from $10 million in costs of sales true-ups relating to VOI products for the nine months ended September 30, 2018, which resulted in a $10 million increase to the carrying value of inventory as of September 30, 2018. We benefited from $4 million in costs of sales true-ups relating to VOI products for the year ended December 31, 2017, which resulted in a $4 million increase to the carrying value of inventory as of December 31, 2017. Shown below are expenses incurred, recorded in Cost of VOI sales , related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Cost of VOI sales related to fee-for-service upgrades |
|
$ |
8 |
|
|
$ |
8 |
|
|
$ |
23 |
|
|
$ |
28 |
|
Note 7: Property and Equipment
Property and equipment were as follows:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Land |
|
|
268 |
|
|
|
53 |
|
Building and leasehold improvements |
|
|
286 |
|
|
|
182 |
|
Furniture and equipment |
|
|
56 |
|
|
|
48 |
|
Construction in progress |
|
|
8 |
|
|
|
20 |
|
|
|
|
618 |
|
|
|
303 |
|
Accumulated depreciation |
|
|
(80 |
) |
|
|
(65 |
) |
|
|
$ |
538 |
|
|
$ |
238 |
|
In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory. In September 2018, we acquired land in Honolulu, Hawaii for $123 million which will be used to construct a timeshare resort. Both transactions were accounted for as an asset acquisition with purchase price being allocated to land, building and leasehold improvements and furniture and equipment.
Note 8: Consolidated Variable Interest Entities
As of September 30, 2018 and December 31, 2017, we consolidated four and three, respectively, variable interest entities (“VIEs”) that issued Securitized Debt, backed by pledged assets consisting primarily of a pool of timeshare financing receivables, which is without recourse to us. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we are required to replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only the assets of our VIEs are available to settle the obligations of the respective entities.
19
Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Restricted cash |
|
$ |
23 |
|
|
$ |
18 |
|
Timeshare financing receivables, net |
|
|
658 |
|
|
|
445 |
|
Non-recourse debt (1) |
|
|
686 |
|
|
|
454 |
|
(1) |
Net of deferred financing costs. |
During the nine months ended September 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.
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 nine months ended September 30, 2018, we received cash distributions of $13 million from our investment in BRE Ace LLC, also a non-consolidated VIE, of which $10 million was considered a return of investment.
We held investments in our two unconsolidated affiliates with aggregated debt balances of $483 million and $488 million as of September 30, 2018 and December 31, 2017, respectively. The debt is secured by their assets and is 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 $41 million as of September 30, 2018 and December 31, 2017, respectively and (ii) receivables for commission and other fees earned under a fee-for-service arrangement. See Note 17: Related Party Transactions for additional information.
Note 10: Other Assets
Other assets were as follows:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Inventory deposits |
|
$ |
43 |
|
|
$ |
— |
|
Deferred selling, marketing, general and administrative expenses |
|
|
22 |
|
|
|
3 |
|
Prepaid expenses |
|
|
28 |
|
|
|
18 |
|
Other |
|
|
28 |
|
|
|
23 |
|
|
|
$ |
121 |
|
|
$ |
44 |
|
In February 2018, we entered into a commitment to acquire $41 million of real estate for future conversion to timeshare inventory. 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 of which we made an initial deposit of $2 million. Both transactions were recorded as inventory deposits.
20
Deferred revenues were as follows:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Deferred VOI sales |
|
$ |
174 |
|
|
$ |
45 |
|
Club activation fees |
|
|
61 |
|
|
|
54 |
|
Club membership fees |
|
|
15 |
|
|
|
— |
|
Other |
|
|
13 |
|
|
|
10 |
|
|
|
$ |
263 |
|
|
$ |
109 |
|
Note 12: Debt & Non-recourse Debt
Debt
The following table details our outstanding debt balance and its associated interest rates:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Debt (1) |
|
|
|
|
|
|
|
|
Senior secured credit facilities: |
|
|
|
|
|
|
|
|
Term loan with an average rate of 4.511%, due 2021 |
|
$ |
182 |
|
|
$ |
190 |
|
Revolver with an average rate of 4.511%, due 2021 |
|
|
55 |
|
|
|
— |
|
Senior notes with a rate of 6.125%, due 2024 |
|
|
300 |
|
|
|
300 |
|
|
|
|
537 |
|
|
|
490 |
|
Less: unamortized deferred financing costs and discount (2)(3) |
|
|
(7 |
) |
|
|
(8 |
) |
|
|
$ |
530 |
|
|
$ |
482 |
|
(1) |
For the nine months ended September 30, 2018 and year ended December 31, 2017, weighted average interest rates were 5.412 percent and 5.229 percent, respectively. |
(2) |
Amount includes deferred financing costs related to our term loan and senior notes of $1 million and $6 million, respectively, as of September 30, 2018 and $1 million and $7 million, respectively, as of December 31, 2017. |
(3) |
Amount does not include deferred financing costs of $1 million as of September 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 nine months ended September 30, 2018, we borrowed $215 million and repaid $160 million under the revolving credit facility with an interest rate based on one month LIBOR plus 2.25 percent.
As of September 30, 2018 and December 31, 2017, we had $1 million of outstanding letter of credit under the revolving credit facility. We were in compliance with all applicable financial covenants as of September 30, 2018.
Non-recourse Debt
The following table details our outstanding non-recourse debt balance and its associated interest rates:
|
|
September 30, |
|
|
December 31, |
|
||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
Non-recourse debt (1) |
|
|
|
|
|
|
|
|
Timeshare Facility with an average rate of 3.302%, due 2021 |
|
$ |
120 |
|
|
$ |
129 |
|
Securitized Debt with a rate of 2.280%, due 2026 |
|
|
38 |
|
|
|
54 |
|
Securitized Debt with an average rate of 1.810%, due 2026 |
|
|
82 |
|
|
|
112 |
|
Securitized Debt with an average rate of 2.711%, due 2028 |
|
|
224 |
|
|
|
293 |
|
Securitized Debt with an average rate of 3.602%, due 2032 |
|
|
350 |
|
|
|
— |
|
|
|
|
814 |
|
|
|
588 |
|
Less: unamortized deferred financing costs (2) |
|
|
(8 |
) |
|
|
(5 |
) |
|
|
$ |
806 |
|
|
$ |
583 |
|
21
(1) |
For the nine months ended September 30, 2018 and year ended December 31, 2017, weighted average interest rates were 3.070 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 September 30, 2018 and December 31, 2017, respectively, relating to our Timeshare Facility included in Other Assets in our condensed consolidated balance sheets. |
In September 2018, we completed a securitization of $350 million of gross timeshare financing receivables and issued approximately $268 million of 3.54 percent notes, $54 million of 3.70 percent notes and $28 million of 4.0 percent notes due February 2032. In connection with the securitization, we incurred $4 million in debt issuance costs recorded in other assets. The Securitized Debt is backed by pledged assets, consisting primarily of a pool of timeshare financing receivables secured by first mortgages or deeds of trust on timeshare interest. The Securitized Debt is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral to the debt. The proceeds from the securitization were primarily used to pay down a portion of our Timeshare Facility and general corporate operating expenses.
The Timeshare Facility is a non-recourse obligation with a borrowing capacity of $450 million 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. During the nine months ended September 30, 2018, we borrowed $313 million and repaid $322 million under the Timeshare Facility.
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 $27 million and $22 million as of September 30, 2018 and December 31, 2017, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.
Debt Maturities
The contractual maturities of our debt and non-recourse debt as of September 30, 2018 were as follows:
($ in millions) |
|
Debt |
|
|
Non-recourse Debt |
|
|
Total |
|
|||
Year |
|
|
|
|
|
|
|
|
|
|
|
|
2018 (remaining) |
|
$ |
2 |
|
|
$ |
44 |
|
|
$ |
46 |
|
2019 |
|
|
10 |
|
|
|
189 |
|
|
|
199 |
|
2020 |
|
|
10 |
|
|
|
166 |
|
|
|
176 |
|
2021 |
|
|
215 |
|
|
|
208 |
|
|
|
423 |
|
2022 |
|
|
— |
|
|
|
64 |
|
|
|
64 |
|
Thereafter |
|
|
300 |
|
|
|
143 |
|
|
|
443 |
|
|
|
$ |
537 |
|
|
$ |
814 |
|
|
$ |
1,351 |
|
Note 13: Fair Value Measurements
The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:
|
|
September 30, 2018 |
|
|||||||||
|
|
|
|
|
|
Hierarchy Level |
|
|||||
($ in millions) |
|
Carrying Amount |
|
|
Level 1 |
|
|
Level 3 |
|
|||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Timeshare financing receivables, net (1) |
|
$ |
1,103 |
|
|
$ |
— |
|
|
$ |
1,339 |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Debt, net (2) |
|
|
530 |
|
|
|
309 |
|
|
|
244 |
|
Non-recourse debt, net (2) |
|
|
806 |
|
|
|
— |
|
|
|
796 |
|
_____________________
22
(2) |
Carrying amount net of unamortized deferred financing costs and discount. |
|
|
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. |
Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable 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 September 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 nine months ended September 30, 2018 and 2017 was approximately 27 percent and 38 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 September 30, 2018, there has been no adjustment to the provisional amounts of the Act’s effects on the one-time repatriation tax as we continue to expect to report approximately $1 million or less (net of applicable foreign tax credit) as the one-time deemed repatriation transition tax on unrepatriated foreign earnings upon our filing of the 2017 federal income tax return. Upon the enactment of the Act on December 22, 2017, we have re-measured certain deferred tax assets and liabilities using the new corporate tax rate of 21 percent, rather than the previous corporate tax rate of 35 percent, resulting in a $132 million decrease in our income tax expense for the year ended December 31, 2017. As of September 30, 2018, the re-measurement of our deferred tax balances continues to remain provisional without additional change as we continue to monitor additional guidance from the U.S. Department of the Treasury.
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 September 30, 2018, we have an insignificant amount of GILTI tax net of applicable foreign tax credit.
23
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 September 30, 2018 and 2017 and $13 million during the nine months ended September 30, 2018 and 2017. As of September 30, 2018, unrecognized compensation costs for unvested awards were approximately $20 million, which is expected to be recognized over a weighted average period of 2.0 years. As of September 30, 2018, there were 7,324,752 shares of common stock available for future issuance.
RSUs
During the nine months ended September 30, 2018, we issued 290,786 RSUs with a weighted average grant date fair value of $45.90, which generally vest in equal annual installments over three years from the date of grant.
Options
During the nine months ended September 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.
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 September 30, 2018, we had 373,282 options outstanding that were exercisable.
Performance Shares
During the nine months ended September 30, 2018, we issued 92,578 PSUs with a weighted average grant date fair value of $42.94. The PSUs are settled at the end of a three-year performance period, with 70 percent of the PSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization. This metric is further adjusted by sales of VOIs under construction. The remaining 30 percent of the PSUs are subject to the achievement of certain VOI sales targets. We determined that the performance conditions for these awards are probable of achievement and, as of September 30, 2018, we recognized compensation expense based on the number of PSUs we expect to vest.
24
The following table presents the calculation of our basic and diluted earnings per share (“EPS”). The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended September 30, 2018 is 96,840,685 and 97,432,015, respectively, and for the nine months ended September 30, 2018 is 97,407,644 and 98,142,238, respectively. The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended September 30, 2017 was 98,981,557 and 99,730,483, respectively, and for the nine months ended September 30, 2017 was 98,916,894 and 99,530,534, respectively.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
($ and shares outstanding in millions, except per share amounts) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Basic EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (1) |
|
$ |
41 |
|
|
$ |
43 |
|
|
$ |
178 |
|
|
$ |
144 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
97 |
|
|
|
99 |
|
|
|
97 |
|
|
|
99 |
|
Basic EPS |
|
$ |
0.42 |
|
|
$ |
0.43 |
|
|
$ |
1.82 |
|
|
$ |
1.45 |
|
Diluted EPS: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income (1) |
|
$ |
41 |
|
|
$ |
43 |
|
|
$ |
178 |
|
|
$ |
144 |
|
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
97 |
|
|
|
100 |
|
|
|
98 |
|
|
|
100 |
|
Diluted EPS |
|
$ |
0.42 |
|
|
$ |
0.43 |
|
|
$ |
1.81 |
|
|
$ |
1.44 |
|
(1) |
Net income for the three months ended September 30, 2018 and 2017 was $40,533,279 and $42,700,978, respectively, and for the nine months ended September 30, 2018 and 2017 was $177,564,538 and $143,742,500, respectively. |
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 nine months ended September 30, 2018, we excluded 533,721 and 359,127 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.
25
On March 19, 2018, the r epurchase was completed and the shares were retired.
The Blackstone Group
In September 2017, Blackstone completed the sale of substantially all of our common stock that it owned and ceased to be a related party. For the three and nine months ended September 30, 2017, we earned $42 million and $135 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, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.” During the three months ended September 30, 2018, we recorded $1 million in Equity in earnings from unconsolidated affiliates included in our condensed consolidated statements of operation. There was no Equity in earnings from unconsolidated affiliates for the nine months ended September 30, 2018. Additionally, we earn commissions and other fees related to a fee-for-service agreement with the investee to sell VOIs at Elara, by Hilton Grand Vacations. These amounts are summarized in the following table and included in our condensed consolidated statements of operations as of the date they became a related party.
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Commission and other fees |
|
$ |
32 |
|
|
$ |
43 |
|
|
$ |
96 |
|
|
$ |
43 |
|
Also related to the fee-for-service agreement, as of September 30, 2018, we have outstanding receivables of $27 million.
1776 Holding, LLC
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 nine months ended September 30, 2018, we recorded less than $1 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. |
26
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 September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing |
|
$ |
291 |
|
|
$ |
310 |
|
|
$ |
967 |
|
|
$ |
916 |
|
Resort operations and club management (1)(2) |
|
|
108 |
|
|
|
90 |
|
|
|
304 |
|
|
|
270 |
|
Total segment revenues |
|
|
399 |
|
|
|
400 |
|
|
|
1,271 |
|
|
|
1,186 |
|
Cost reimbursements |
|
|
36 |
|
|
|
34 |
|
|
|
110 |
|
|
|
102 |
|
Intersegment eliminations (1)(2) |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
(24 |
) |
|
|
(24 |
) |
Total revenues |
|
$ |
427 |
|
|
$ |
426 |
|
|
$ |
1,357 |
|
|
$ |
1,264 |
|
(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 $7 million for the three months ended September 30, 2018 and 2017, respectively, and $24 million and $23 million for the nine months ended September 30, 2018 and 2017, respectively. |
(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 $1 million for the three and nine months ended September 30, 2017. |
The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:
|
|
Three Months Ended September 30, |
|
|
Nine Months Ended September 30, |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
2018 |
|
|
2017 |
|
||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing (1) |
|
$ |
67 |
|
|
$ |
81 |
|
|
$ |
274 |
|
|
$ |
263 |
|
Resort operations and club management (1) |
|
|
62 |
|
|
|
50 |
|
|
|
179 |
|
|
|
153 |
|
Segment Adjusted EBITDA |
|
|
129 |
|
|
|
131 |
|
|
|
453 |
|
|
|
416 |
|
General and administrative |
|
|
(31 |
) |
|
|
(23 |
) |
|
|
(84 |
) |
|
|
(75 |
) |
Depreciation and amortization |
|
|
(9 |
) |
|
|
(7 |
) |
|
|
(25 |
) |
|
|
(21 |
) |
License fee expense |
|
|
(25 |
) |
|
|
(22 |
) |
|
|
(73 |
) |
|
|
(65 |
) |
Gain on foreign currency transactions |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Interest expense |
|
|
(7 |
) |
|
|
(7 |
) |
|
|
(22 |
) |
|
|
(21 |
) |
Income tax expense |
|
|
(15 |
) |
|
|
(28 |
) |
|
|
(64 |
) |
|
|
(87 |
) |
Equity in earnings from unconsolidated affiliates |
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Other loss |
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
Other adjustment items |
|
|
(1 |
) |
|
|
(3 |
) |
|
|
(6 |
) |
|
|
(5 |
) |
Net income |
|
$ |
41 |
|
|
$ |
43 |
|
|
$ |
178 |
|
|
$ |
144 |
|
(1) |
Includes intersegment eliminations. Refer to our table presenting revenues by reportable segment above for additional discussion. |
27
Note 19: Commitments and Continge ncies
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 September 30, 2018, we were committed to purchase approximately $501 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 the nine months ended September 30, 2018 and 2017, we purchased $18 million and $9 million, respectively, of VOI inventory as required under our commitments. As of September 30, 2018, our remaining obligation pursuant to these arrangements was expected to be incurred as follows:
($ in millions) |
|
Purchase Obligations |
|
|
Year |
|
|
|
|
2018 (remaining) |
|
$ |
— |
|
2019 |
|
|
127 |
|
2020 |
|
|
160 |
|
2021 |
|
|
79 |
|
2022 |
|
|
52 |
|
Thereafter |
|
|
83 |
|
Total |
|
$ |
501 |
|
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 September 30, 2018, will not have a material effect on our unaudited condensed consolidated financial statements.
28
Note 20: Condensed Consolidating Guarantor Financial Information
The following schedules present the condensed consolidating financial information as of September 30, 2018 and December 31, 2017 and for the three and nine months ended September 30, 2018 and 2017 for the Parent, Subsidiary Issuers, Guarantors and Non-Guarantors.
|
|
September 30, 2018 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
134 |
|
|
$ |
11 |
|
|
$ |
— |
|
|
$ |
145 |
|
Restricted cash |
|
|
— |
|
|
|
— |
|
|
|
41 |
|
|
|
26 |
|
|
|
— |
|
|
|
67 |
|
Accounts receivable, net |
|
|
— |
|
|
|
— |
|
|
|
154 |
|
|
|
9 |
|
|
|
(12 |
) |
|
|
151 |
|
Timeshare financing receivables, net |
|
|
— |
|
|
|
— |
|
|
|
267 |
|
|
|
836 |
|
|
|
— |
|
|
|
1,103 |
|
Inventory |
|
|
— |
|
|
|
— |
|
|
|
558 |
|
|
|
24 |
|
|
|
— |
|
|
|
582 |
|
Property and equipment, net |
|
|
— |
|
|
|
— |
|
|
|
533 |
|
|
|
5 |
|
|
|
— |
|
|
|
538 |
|
Investment in unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
33 |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
Intangible assets, net |
|
|
— |
|
|
|
— |
|
|
|
73 |
|
|
|
— |
|
|
|
— |
|
|
|
73 |
|
Other assets |
|
|
— |
|
|
|
1 |
|
|
|
70 |
|
|
|
50 |
|
|
|
— |
|
|
|
121 |
|
Investments in subsidiaries |
|
|
562 |
|
|
|
1,091 |
|
|
|
143 |
|
|
|
— |
|
|
|
(1,796 |
) |
|
|
— |
|
TOTAL ASSETS |
|
$ |
562 |
|
|
$ |
1,092 |
|
|
$ |
2,006 |
|
|
$ |
961 |
|
|
$ |
(1,808 |
) |
|
$ |
2,813 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
337 |
|
|
$ |
12 |
|
|
$ |
(12 |
) |
|
$ |
337 |
|
Advanced deposits |
|
|
— |
|
|
|
— |
|
|
|
100 |
|
|
|
— |
|
|
|
— |
|
|
|
100 |
|
Debt, net |
|
|
— |
|
|
|
530 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
530 |
|
Non-recourse debt, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
806 |
|
|
|
— |
|
|
|
806 |
|
Deferred revenues |
|
|
— |
|
|
|
— |
|
|
|
263 |
|
|
|
— |
|
|
|
— |
|
|
|
263 |
|
Deferred income tax liabilities |
|
|
— |
|
|
|
— |
|
|
|
215 |
|
|
|
— |
|
|
|
— |
|
|
|
215 |
|
Total equity |
|
|
562 |
|
|
|
562 |
|
|
|
1,091 |
|
|
|
143 |
|
|
|
(1,796 |
) |
|
|
562 |
|
TOTAL LIABILITIES AND EQUITY |
|
$ |
562 |
|
|
$ |
1,092 |
|
|
$ |
2,006 |
|
|
$ |
961 |
|
|
$ |
(1,808 |
) |
|
$ |
2,813 |
|
29
|
|
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 |
|
30
|
For the Three Months Ended September 30, 2018 |
|
||||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
97 |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
99 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
151 |
|
|
|
1 |
|
|
|
— |
|
|
|
152 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
17 |
|
|
|
26 |
|
|
|
(3 |
) |
|
|
40 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
40 |
|
|
|
— |
|
|
|
— |
|
|
|
40 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
59 |
|
|
|
1 |
|
|
|
— |
|
|
|
60 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
35 |
|
|
|
1 |
|
|
|
— |
|
|
|
36 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
399 |
|
|
|
31 |
|
|
|
(3 |
) |
|
|
427 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
29 |
|
|
|
— |
|
|
|
— |
|
|
|
29 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
172 |
|
|
|
2 |
|
|
|
— |
|
|
|
174 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
11 |
|
|
|
(3 |
) |
|
|
12 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
36 |
|
|
|
1 |
|
|
|
— |
|
|
|
37 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
1 |
|
|
|
— |
|
|
|
31 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
9 |
|
|
|
— |
|
|
|
— |
|
|
|
9 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
35 |
|
|
|
1 |
|
|
|
— |
|
|
|
36 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
351 |
|
|
|
16 |
|
|
|
(3 |
) |
|
|
364 |
|
Interest expense |
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
Equity in earnings from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Other loss |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Income (loss) before income taxes |
|
|
— |
|
|
|
(7 |
) |
|
|
48 |
|
|
|
15 |
|
|
|
— |
|
|
|
56 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
|
|
— |
|
|
|
— |
|
|
|
(15 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(7 |
) |
|
|
33 |
|
|
|
15 |
|
|
|
— |
|
|
|
41 |
|
Equity in earnings from subsidiaries |
|
|
41 |
|
|
|
48 |
|
|
|
15 |
|
|
|
— |
|
|
|
(104 |
) |
|
|
— |
|
Net income |
|
$ |
41 |
|
|
$ |
41 |
|
|
$ |
48 |
|
|
$ |
15 |
|
|
$ |
(104 |
) |
|
$ |
41 |
|
31
|
For the Three Months Ended September 30, 2017 |
|
||||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
137 |
|
|
$ |
8 |
|
|
$ |
— |
|
|
$ |
145 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
133 |
|
|
|
— |
|
|
|
(6 |
) |
|
|
127 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
19 |
|
|
|
21 |
|
|
|
(2 |
) |
|
|
38 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
37 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
44 |
|
|
|
1 |
|
|
|
— |
|
|
|
45 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
404 |
|
|
|
30 |
|
|
|
(8 |
) |
|
|
426 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
40 |
|
|
|
— |
|
|
|
— |
|
|
|
40 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
172 |
|
|
|
5 |
|
|
|
(6 |
) |
|
|
171 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
4 |
|
|
|
9 |
|
|
|
(2 |
) |
|
|
11 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
12 |
|
|
|
— |
|
|
|
— |
|
|
|
12 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
— |
|
|
|
— |
|
|
|
30 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
23 |
|
|
|
— |
|
|
|
— |
|
|
|
23 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
7 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
34 |
|
|
|
— |
|
|
|
— |
|
|
|
34 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
344 |
|
|
|
14 |
|
|
|
(8 |
) |
|
|
350 |
|
Gain on foreign currency transaction |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Interest expense |
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
Equity in earnings from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Income (loss) before income taxes |
|
|
— |
|
|
|
(7 |
) |
|
|
62 |
|
|
|
16 |
|
|
|
— |
|
|
|
71 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(27 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
(28 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(7 |
) |
|
|
35 |
|
|
|
15 |
|
|
|
— |
|
|
|
43 |
|
Equity in earnings from subsidiaries |
|
|
43 |
|
|
|
50 |
|
|
|
15 |
|
|
|
— |
|
|
|
(108 |
) |
|
|
— |
|
Net income |
|
$ |
43 |
|
|
$ |
43 |
|
|
$ |
50 |
|
|
$ |
15 |
|
|
$ |
(108 |
) |
|
$ |
43 |
|
32
|
|
For the Nine Months Ended September 30, 2018 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
422 |
|
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
427 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
424 |
|
|
|
3 |
|
|
|
(4 |
) |
|
|
423 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
54 |
|
|
|
68 |
|
|
|
(5 |
) |
|
|
117 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
116 |
|
|
|
— |
|
|
|
— |
|
|
|
116 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
162 |
|
|
|
2 |
|
|
|
— |
|
|
|
164 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
107 |
|
|
|
3 |
|
|
|
— |
|
|
|
110 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
1,285 |
|
|
|
81 |
|
|
|
(9 |
) |
|
|
1,357 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
|
|
109 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
526 |
|
|
|
6 |
|
|
|
(4 |
) |
|
|
528 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
26 |
|
|
|
(5 |
) |
|
|
35 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
33 |
|
|
|
— |
|
|
|
— |
|
|
|
33 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
93 |
|
|
|
2 |
|
|
|
— |
|
|
|
95 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
83 |
|
|
|
1 |
|
|
|
— |
|
|
|
84 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
25 |
|
|
|
— |
|
|
|
— |
|
|
|
25 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
73 |
|
|
|
— |
|
|
|
— |
|
|
|
73 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
107 |
|
|
|
3 |
|
|
|
— |
|
|
|
110 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
1,063 |
|
|
|
38 |
|
|
|
(9 |
) |
|
|
1,092 |
|
Interest expense |
|
|
— |
|
|
|
(22 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(22 |
) |
Other loss |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Income (loss) before income taxes |
|
|
— |
|
|
|
(22 |
) |
|
|
221 |
|
|
|
43 |
|
|
|
— |
|
|
|
242 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(64 |
) |
|
|
— |
|
|
|
— |
|
|
|
(64 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(22 |
) |
|
|
157 |
|
|
|
43 |
|
|
|
— |
|
|
|
178 |
|
Equity in earnings from subsidiaries |
|
|
178 |
|
|
|
200 |
|
|
|
43 |
|
|
|
— |
|
|
|
(421 |
) |
|
|
— |
|
Net income |
|
$ |
178 |
|
|
$ |
178 |
|
|
$ |
200 |
|
|
$ |
43 |
|
|
$ |
(421 |
) |
|
$ |
178 |
|
33
|
|
For the Nine Months Ended September 30, 2017 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales of VOI’s, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
380 |
|
|
$ |
26 |
|
|
$ |
— |
|
|
$ |
406 |
|
Sales, marketing, license and other fees |
|
|
— |
|
|
|
— |
|
|
|
407 |
|
|
|
2 |
|
|
|
(8 |
) |
|
|
401 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
50 |
|
|
|
64 |
|
|
|
(5 |
) |
|
|
109 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
106 |
|
|
|
2 |
|
|
|
— |
|
|
|
108 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
136 |
|
|
|
2 |
|
|
|
— |
|
|
|
138 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
99 |
|
|
|
3 |
|
|
|
— |
|
|
|
102 |
|
Total revenues |
|
|
— |
|
|
|
— |
|
|
|
1,178 |
|
|
|
99 |
|
|
|
(13 |
) |
|
|
1,264 |
|
Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
— |
|
|
|
— |
|
|
|
105 |
|
|
|
2 |
|
|
|
— |
|
|
|
107 |
|
Sales and marketing |
|
|
— |
|
|
|
— |
|
|
|
487 |
|
|
|
13 |
|
|
|
(8 |
) |
|
|
492 |
|
Financing |
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
24 |
|
|
|
(5 |
) |
|
|
32 |
|
Resort and club management |
|
|
— |
|
|
|
— |
|
|
|
30 |
|
|
|
2 |
|
|
|
— |
|
|
|
32 |
|
Rental and ancillary service |
|
|
— |
|
|
|
— |
|
|
|
87 |
|
|
|
1 |
|
|
|
— |
|
|
|
88 |
|
General and administrative |
|
|
— |
|
|
|
— |
|
|
|
72 |
|
|
|
3 |
|
|
|
— |
|
|
|
75 |
|
Depreciation and amortization |
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
|
— |
|
|
|
— |
|
|
|
21 |
|
License fee expense |
|
|
— |
|
|
|
— |
|
|
|
65 |
|
|
|
— |
|
|
|
— |
|
|
|
65 |
|
Cost reimbursements |
|
|
— |
|
|
|
— |
|
|
|
99 |
|
|
|
3 |
|
|
|
— |
|
|
|
102 |
|
Total operating expenses |
|
|
— |
|
|
|
— |
|
|
|
979 |
|
|
|
48 |
|
|
|
(13 |
) |
|
|
1,014 |
|
Gain on foreign currency transactions |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Interest expense |
|
|
— |
|
|
|
(21 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21 |
) |
Equity in earnings from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Income (loss) before income taxes |
|
|
— |
|
|
|
(21 |
) |
|
|
201 |
|
|
|
51 |
|
|
|
— |
|
|
|
231 |
|
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
(86 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
(87 |
) |
Income (loss) before equity in earnings (loss) from subsidiaries |
|
|
— |
|
|
|
(21 |
) |
|
|
115 |
|
|
|
50 |
|
|
|
— |
|
|
|
144 |
|
Equity in earnings from subsidiaries |
|
|
144 |
|
|
|
165 |
|
|
|
50 |
|
|
|
— |
|
|
|
(359 |
) |
|
|
— |
|
Net income |
|
$ |
144 |
|
|
$ |
144 |
|
|
$ |
165 |
|
|
$ |
50 |
|
|
$ |
(359 |
) |
|
$ |
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
|
|
For the Nine Months Ended September 30, 2018 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities |
|
$ |
— |
|
|
$ |
(20 |
) |
|
$ |
10 |
|
|
$ |
(241 |
) |
|
$ |
46 |
|
|
$ |
(205 |
) |
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment |
|
|
— |
|
|
|
— |
|
|
|
(25 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(29 |
) |
Software capitalization costs |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
Return of investment from unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
Investment in unconsolidated affiliate |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
Net cash used in investing activities |
|
|
— |
|
|
|
— |
|
|
|
(31 |
) |
|
|
(4 |
) |
|
|
— |
|
|
|
(35 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of debt |
|
|
— |
|
|
|
215 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
215 |
|
Issuance of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
663 |
|
|
|
— |
|
|
|
663 |
|
Repurchase and retirement of common stock |
|
|
— |
|
|
|
(112 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(112 |
) |
Repayment of debt |
|
|
— |
|
|
|
(168 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(168 |
) |
Repayment of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(436 |
) |
|
|
— |
|
|
|
(436 |
) |
Debt issuance costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6 |
) |
|
|
— |
|
|
|
(6 |
) |
Payment of withholding taxes on vesting of restricted stock units |
|
|
— |
|
|
|
(4 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4 |
) |
Capital contribution |
|
|
— |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3 |
|
Intercompany transfers |
|
|
— |
|
|
|
86 |
|
|
|
(63 |
) |
|
|
23 |
|
|
|
(46 |
) |
|
|
— |
|
Net cash provided by (used in) financing activities |
|
|
— |
|
|
|
20 |
|
|
|
(63 |
) |
|
|
244 |
|
|
|
(46 |
) |
|
|
155 |
|
Net decrease in cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
— |
|
|
|
(84 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
(85 |
) |
Cash, cash equivalents and restricted cash, beginning of period |
|
|
— |
|
|
|
— |
|
|
|
259 |
|
|
|
38 |
|
|
|
— |
|
|
|
297 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
175 |
|
|
$ |
37 |
|
|
$ |
— |
|
|
$ |
212 |
|
35
|
|
For the Nine Months Ended September 30, 2017 |
|
|||||||||||||||||||||
($ in millions) |
|
Parent |
|
|
Issuers |
|
|
Guarantors |
|
|
Non- Guarantors |
|
|
Eliminations |
|
|
Total |
|
||||||
Operating Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
— |
|
|
$ |
(16 |
) |
|
$ |
135 |
|
|
$ |
190 |
|
|
$ |
(10 |
) |
|
$ |
299 |
|
Investing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures for property and equipment |
|
|
— |
|
|
|
— |
|
|
|
(23 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(25 |
) |
Software capitalization costs |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
Investment in unconsolidated affiliates |
|
|
— |
|
|
|
— |
|
|
|
(40 |
) |
|
|
— |
|
|
|
— |
|
|
|
(40 |
) |
Net cash used in investing activities |
|
|
— |
|
|
|
— |
|
|
|
(75 |
) |
|
|
(2 |
) |
|
|
— |
|
|
|
(77 |
) |
Financing Activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
350 |
|
|
|
— |
|
|
|
350 |
|
Repayment of debt |
|
|
— |
|
|
|
(7 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7 |
) |
Repayment of non-recourse debt |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(428 |
) |
|
|
— |
|
|
|
(428 |
) |
Debt issuance costs |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5 |
) |
|
|
— |
|
|
|
(5 |
) |
Proceeds from stock option exercises |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Intercompany transfers |
|
|
— |
|
|
|
23 |
|
|
|
60 |
|
|
|
(93 |
) |
|
|
10 |
|
|
|
— |
|
Net cash (used in) provided by financing activities |
|
|
— |
|
|
|
16 |
|
|
|
61 |
|
|
|
(176 |
) |
|
|
10 |
|
|
|
(89 |
) |
Net increase in cash, cash equivalents and restricted cash |
|
|
— |
|
|
|
— |
|
|
|
121 |
|
|
|
12 |
|
|
|
— |
|
|
|
133 |
|
Cash, cash equivalents and restricted cash, beginning of period |
|
|
— |
|
|
|
— |
|
|
|
128 |
|
|
|
23 |
|
|
|
— |
|
|
|
151 |
|
Cash, cash equivalents and restricted cash, end of period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
249 |
|
|
$ |
35 |
|
|
$ |
— |
|
|
$ |
284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 21: Subsequent Events
In October 2018, the construction on a property in Hawaii was completed and the deferred revenue and direct related costs of $154 million and $72 million, respectively, will be recognized in the fourth quarter.
36
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 our Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, “Part II-Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended September 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.
37
“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 nine months ended September 30, 2018, among other new developments and asset acquisitions, we added two new resorts in New York and one resort in Odawara, Japan, representing 265 units. As of September 30, 2018, we have 51 properties, 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 September 30, 2018, we have approximately 304,000 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 nine months ended September 30, 2018, sales from fee-for-service, just-in-time and developed inventory sources were 55 percent, 22 percent and 23 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 66 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.
38
We originate loans for members purchasing our developed and acquired inventory which generate interest income. Our loans are collate ralized 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:
|
|
Nine Months Ended September 30, |
|
|||||
|
|
2018 |
|
|
2017 |
|
||
Weighted average FICO score |
|
|
748 |
|
|
|
738 |
|
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.
39
Key Business and Financi al 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), 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.
40
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.
Related Party Transaction
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.
41
Investment in Unconsolidated Affiliates
On March 23, 2018, we entered into an agreement with SCG 1776, LLC, a Delaware limited liability company, an affiliate 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 percent interest in 1776 Holding, LLC, which will construct an approximately 99-unit timeshare resort in Charleston, South Carolina.
Property and Equipment, Inventory and Other Assets
In February 2018, we entered into a commitment to acquire $41 million of real estate for future conversion to timeshare inventory and was recorded in Other assets in our unaudited condensed consolidated financial statements.
In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory.
In June 2018, we entered into a commitment to purchase inventory for $52 million in multiple phases through year 2021. In September 2018, the first phase closed for $13 million and was recorded in Inventory in our unaudited condensed consolidated financial statements.
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 of which we made an initial deposit of $2 million which was recorded as in Other assets in our unaudited condensed consolidated financial statements.
In September 2018, we acquired land in Honolulu, Hawaii for $123 million which will be used to construct a timeshare resort.
See Note 7: Property and Equipment and Note 10: Other Assets in our unaudited condensed consolidated financial statements for additional information.
Debt and Non-recourse Debt
In September 2018, we completed a securitization of $350 million of gross timeshare financing receivables and issued approximately $268 million of 3.54 percent notes, $54 million of 3.70 percent notes and $28 million of 4.0 percent notes due February 2032. In connection with the transaction we incurred $4 million of debt issuance costs. The proceeds from the securitization were used to pay down a portion of our Timeshare Facility and general corporate operating expenses.
In March 2018, we extended the commitment termination dated on our Timeshare Facility to March 2020. The maturity date was extended 12 months from the commitment date to March 2021. As a result of the extension, we incurred $2 million in debt issuance costs recorded in other assets. During the nine months ended September 30, 2018, we borrowed $313 million and repaid $322 million under the Timeshare Facility.
During the nine months ended September 30, 2018, we borrowed $215 million and repaid $160 million under our revolving credit facility.
See Note 12: Debt and Non-recourse debt in our unaudited condensed consolidated financial statements for additional information.
Other
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.
In September 2018, Hurricane Florence made landfall in the Carolinas causing flooding along coastal areas. Although certain of our resorts in South Carolina were temporarily closed during the aftermath of Hurricane Florence, neither HGV’s operations or financial performance were significantly impacted by this storm.
42
We adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The reported results for the three and nine months ended September 30, 2018 reflects the application of ASC 606 while the reported results for the three and nine months ended September 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 $8 million of costs associated with the spin-off transaction. |
43
Supplemental Information Regarding the Adoption of ASC 606
During periods of construction, we defer revenues and certain related direct expenses from the sales of VOIs until construction is completed. The following tables provide supplemental information for project(s) under construction or completed for the periods presented under the previous accounting guidance:
|
|
2018 |
|
|||||||||||||||||
($ in millions) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|||||
Sales of VOIs (1) |
|
$ |
59 |
|
|
$ |
(87 |
) |
|
$ |
58 |
|
|
$ |
— |
|
|
$ |
30 |
|
Cost of VOI sales (1) |
|
|
18 |
|
|
|
(20 |
) |
|
|
18 |
|
|
|
— |
|
|
|
16 |
|
Sales, marketing, general and administrative expense (1) |
|
|
8 |
|
|
|
(11 |
) |
|
|
8 |
|
|
|
— |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of projects in sales and under construction |
|
|
2 |
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
N/A |
|
(1) |
Amounts represent increases (decreases) from current accounting guidance to previous accounting guidance. |
In all quarters presented for 2017, we deferred revenue and related direct expenses from sales of VOIs for one project under construction.
|
|
2017 |
|
|||||||||||||||||
($ in millions) |
|
First Quarter |
|
|
Second Quarter |
|
|
Third Quarter |
|
|
Fourth Quarter |
|
|
Full Year |
|
|||||
Sales of VOIs (1) |
|
$ |
9 |
|
|
$ |
13 |
|
|
$ |
11 |
|
|
$ |
17 |
|
|
$ |
50 |
|
Cost of VOI sales (1) |
|
|
5 |
|
|
|
3 |
|
|
|
3 |
|
|
|
5 |
|
|
|
16 |
|
Sales, marketing, general and administrative expense (1) |
|
|
1 |
|
|
|
2 |
|
|
|
2 |
|
|
|
2 |
|
|
|
7 |
|
(1) |
Amounts represent increases from current accounting guidance to previous accounting guidance. |
Three and Nine Months Ended September 30, 2018 Compared with the Three and Nine Months Ended September 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 September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing |
|
$ |
291 |
|
|
$ |
310 |
|
|
$ |
(19 |
) |
|
|
(6.1 |
)% |
|
$ |
967 |
|
|
$ |
916 |
|
|
$ |
51 |
|
|
|
5.6 |
% |
Resort operations and club management |
|
|
108 |
|
|
|
90 |
|
|
|
18 |
|
|
|
20.0 |
|
|
|
304 |
|
|
|
270 |
|
|
|
34 |
|
|
|
12.6 |
|
Segment revenues |
|
|
399 |
|
|
|
400 |
|
|
|
(1 |
) |
|
|
(0.3 |
) |
|
|
1,271 |
|
|
|
1,186 |
|
|
|
85 |
|
|
|
7.2 |
|
Cost reimbursements |
|
|
36 |
|
|
|
34 |
|
|
|
2 |
|
|
|
5.9 |
|
|
|
110 |
|
|
|
102 |
|
|
|
8 |
|
|
|
7.8 |
|
Intersegment eliminations (1) |
|
|
(8 |
) |
|
|
(8 |
) |
|
|
— |
|
|
|
— |
|
|
|
(24 |
) |
|
|
(24 |
) |
|
|
— |
|
|
|
— |
|
Total revenues |
|
$ |
427 |
|
|
$ |
426 |
|
|
$ |
1 |
|
|
|
0.2 |
|
|
$ |
1,357 |
|
|
$ |
1,264 |
|
|
$ |
93 |
|
|
|
7.4 |
|
(1) |
Refer to Note 18: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations. |
44
The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Net Income |
|
$ |
41 |
|
|
$ |
43 |
|
|
$ |
(2 |
) |
|
|
(4.7 |
)% |
|
$ |
178 |
|
|
$ |
144 |
|
|
$ |
34 |
|
|
|
23.6 |
% |
Interest expense |
|
|
7 |
|
|
|
7 |
|
|
|
— |
|
|
|
— |
|
|
|
22 |
|
|
|
21 |
|
|
|
1 |
|
|
|
4.8 |
|
Income tax expense |
|
|
15 |
|
|
|
28 |
|
|
|
(13 |
) |
|
|
(46.4 |
) |
|
|
64 |
|
|
|
87 |
|
|
|
(23 |
) |
|
|
(26.4 |
) |
Depreciation and amortization |
|
|
9 |
|
|
|
7 |
|
|
|
2 |
|
|
|
28.6 |
|
|
|
25 |
|
|
|
21 |
|
|
|
4 |
|
|
|
19.0 |
|
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated affiliates |
|
|
1 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
(0.5 |
) |
|
|
3 |
|
|
|
2 |
|
|
|
1 |
|
|
|
50 |
|
EBITDA |
|
|
73 |
|
|
|
87 |
|
|
|
(14 |
) |
|
|
(16.1 |
) |
|
|
292 |
|
|
|
275 |
|
|
|
17 |
|
|
|
6.2 |
|
Other loss |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM (1) |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM (1) |
|
||
Gain on foreign currency transactions |
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
100.0 |
|
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
100.0 |
|
Share-based compensation expense |
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
13 |
|
|
|
13 |
|
|
|
— |
|
|
|
— |
|
Other adjustment items (2) |
|
|
1 |
|
|
|
3 |
|
|
|
(2 |
) |
|
|
66.7 |
|
|
|
11 |
|
|
|
7 |
|
|
|
4 |
|
|
|
57.1 |
|
Adjusted EBITDA |
|
$ |
80 |
|
|
$ |
94 |
|
|
$ |
(14 |
) |
|
|
(14.9 |
) |
|
$ |
317 |
|
|
$ |
294 |
|
|
$ |
23 |
|
|
|
7.8 |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
(2) |
Includes costs associated with the spin-off transaction of $2 million for both three months ended September 30, 2018 and 2017 and $9 million and $5 million for the nine months ended September 30, 2018 and 2017, respectively. |
The following table shows our segment Adjusted EBITDA to Adjusted EBITDA.
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Adjusted EBITDA: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate sales and financing (2) |
|
$ |
67 |
|
|
$ |
81 |
|
|
$ |
(14 |
) |
|
|
(17.3 |
)% |
|
$ |
274 |
|
|
$ |
263 |
|
|
$ |
11 |
|
|
|
4.2 |
% |
Resort operations and club management (2) |
|
|
62 |
|
|
|
50 |
|
|
|
12 |
|
|
|
24.0 |
|
|
|
179 |
|
|
|
153 |
|
|
|
26 |
|
|
|
17.0 |
|
Segment Adjusted EBITDA |
|
|
129 |
|
|
|
131 |
|
|
|
(2 |
) |
|
|
(1.5 |
) |
|
|
453 |
|
|
|
416 |
|
|
|
37 |
|
|
|
8.9 |
|
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA from unconsolidated affiliates |
|
|
2 |
|
|
|
3 |
|
|
|
(1 |
) |
|
|
(33.3 |
) |
|
|
3 |
|
|
|
3 |
|
|
|
— |
|
|
|
— |
|
License fee expense |
|
|
(25 |
) |
|
|
(22 |
) |
|
|
(3 |
) |
|
|
13.6 |
|
|
|
(73 |
) |
|
|
(65 |
) |
|
|
(8 |
) |
|
|
12.3 |
|
General and administrative (3) |
|
|
(26 |
) |
|
|
(18 |
) |
|
|
(8 |
) |
|
|
44.4 |
|
|
|
(66 |
) |
|
|
(60 |
) |
|
|
(6 |
) |
|
|
10.0 |
|
Adjusted EBITDA |
|
$ |
80 |
|
|
$ |
94 |
|
|
$ |
(14 |
) |
|
|
(14.9 |
) |
|
$ |
317 |
|
|
$ |
294 |
|
|
$ |
23 |
|
|
|
7.8 |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
(2) Includes intersegment eliminations and other adjustments.
(3) Excludes share-based compensation and other adjustment items.
Real Estate Sales and Financing
Real estate sales and financing segment revenues decreased by $19 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) a $18 million decrease in sales revenue and (ii) a $3 million decrease in marketing revenue and other fees, partially offset by an increase of $2 million in financing revenue. The decrease in sales revenue of $18 million was primarily related to the deferral of revenue recognition on a project under construction, partially offset by a $28 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. The decrease in marketing revenue was partially due to the recognition of certain sales incentives on a net versus gross basis as a result of ASC 606. The increase in financing revenue was primarily due to an increase in interest income from higher outstanding timeshare financing receivables balances. Real
45
estate sales and financing segment Adjusted EBITDA decreased by $14 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the decrease in revenue associated with the segment discussed above as well as a $4 million increase in sales and marketing and financing expenses, partially o ffset by a $11 million decrease in cost of VOI sales.
Real estate sales and financing segment revenues increased by $51 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) a $61 million increase in sales revenue and (ii) a $8 million increase in financing revenue, partially offset by a decrease of $18 million in marketing revenue and other fees. The increase in sales revenue of $61 million was primarily due to (i) an 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 $40 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 receivable balances. The decrease in marketing revenue was primarily due to (i) 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 and (ii) recognition of certain sales incentives on a net versus gross basis as a result of ASC 606. Real estate sales and financing segment Adjusted EBITDA increased by $11 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to the increase in revenues associated with the segment discussed above, partially offset by (i) a $39 million increase in sales and marketing and financing expense and (ii) a $2 million increase in cost of VOI sales.
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 by $18 million for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $3 million in resort and club management revenues primarily due to an increase in Club members and (ii) an increase of $15 million in rental and ancillary services revenues as a result of higher rental room revenue from transient guests primarily due to the acquisition of an operating hotel in New York City, New York in June 2018 (see Recent Events for additional information) and higher club inventory rentals at our developed and fee-for-service properties. Resort operations and club management segment Adjusted EBITDA increased by $12 million for the three months ended September 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 $6 million in segment expenses.
Resort operations and club management segment revenues increased by $34 million for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $8 million in resort and club management revenues primarily due to an increase in Club members and (ii) an increase of $26 million in rental and ancillary services revenues as a result of higher rental room revenue from transient guests primarily due to the acquisition of an operating hotel in New York City, New York in June 2018 (see Recent Events for additional information) and higher club inventory rentals at our developed and fee-for-service properties. Resort operations and club management segment Adjusted EBITDA increased by $26 million for the nine months ended September 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 $8 million in segment expenses. Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.
46
Real Estate Sales and Financing Segment
Real Estate
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions, except Tour flow and VPG) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Sales of VOIs, net |
|
$ |
99 |
|
|
$ |
145 |
|
|
$ |
(46 |
) |
|
|
(31.7 |
)% |
|
$ |
427 |
|
|
$ |
406 |
|
|
$ |
21 |
|
|
|
5.2 |
% |
Adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fee-for-service sales (2) |
|
|
211 |
|
|
|
169 |
|
|
|
42 |
|
|
|
24.9 |
|
|
|
574 |
|
|
|
508 |
|
|
|
66 |
|
|
|
13.0 |
|
Loan loss provision |
|
|
20 |
|
|
|
19 |
|
|
|
1 |
|
|
|
5.3 |
|
|
|
50 |
|
|
|
45 |
|
|
|
5 |
|
|
|
11.1 |
|
Reportability and other (3) |
|
|
34 |
|
|
|
(7 |
) |
|
|
41 |
|
|
NM (1) |
|
|
|
(1 |
) |
|
|
(23 |
) |
|
|
22 |
|
|
NM (1) |
|
||
Contract sales |
|
$ |
364 |
|
|
$ |
326 |
|
|
$ |
38 |
|
|
|
11.7 |
|
|
$ |
1,050 |
|
|
$ |
936 |
|
|
$ |
114 |
|
|
|
12.2 |
|
Tour flow |
|
|
94,816 |
|
|
|
87,346 |
|
|
|
7,470 |
|
|
|
8.6 |
|
|
|
266,785 |
|
|
|
246,865 |
|
|
|
19,920 |
|
|
|
8.1 |
|
VPG |
|
$ |
3,648 |
|
|
$ |
3,555 |
|
|
$ |
93 |
|
|
|
2.6 |
|
|
$ |
3,732 |
|
|
$ |
3,590 |
|
|
$ |
142 |
|
|
|
4.0 |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
(2) |
Represents contract sales from fee-for-service properties on which we earn commissions and brand fees. |
(3) |
Includes adjustments for revenue recognition, including deferrals related to sales of VOIs under construction and rescission, sales incentives, as well as adjustments related to granting credit to customers for their existing ownership when upgrading into fee-for-service and developed projects. |
Contract sales increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to an increase in tour flow which drives the increase in marketing expense. VPG increased due to a 0.2 percent and 1.0 percent increase in average transaction price for the three and nine months ended September 30, 2018, respectively.
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Sales of VOIs, net |
|
$ |
99 |
|
|
$ |
145 |
|
|
$ |
(46 |
) |
|
|
(31.7 |
)% |
|
$ |
427 |
|
|
$ |
406 |
|
|
$ |
21 |
|
|
|
5.2 |
% |
Sales, marketing, brand and other fees |
|
|
152 |
|
|
|
127 |
|
|
|
25 |
|
|
|
19.7 |
|
|
|
423 |
|
|
|
401 |
|
|
|
22 |
|
|
|
5.5 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing revenue and other fees |
|
|
31 |
|
|
|
34 |
|
|
|
(3 |
) |
|
|
(8.8 |
) |
|
|
91 |
|
|
|
109 |
|
|
|
(18 |
) |
|
|
(16.5 |
) |
Sales revenue |
|
|
220 |
|
|
|
238 |
|
|
|
(18 |
) |
|
|
(7.6 |
) |
|
|
759 |
|
|
|
698 |
|
|
|
61 |
|
|
|
8.7 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of VOI sales |
|
|
29 |
|
|
|
40 |
|
|
|
(11 |
) |
|
|
(27.5 |
) |
|
|
109 |
|
|
|
107 |
|
|
|
2 |
|
|
|
1.9 |
|
Sales and marketing expense, net (1) |
|
|
135 |
|
|
|
132 |
|
|
|
3 |
|
|
|
2.3 |
|
|
|
413 |
|
|
|
363 |
|
|
|
50 |
|
|
|
13.8 |
|
Real estate margin |
|
$ |
56 |
|
|
$ |
66 |
|
|
|
(10 |
) |
|
|
(15 |
) |
|
$ |
237 |
|
|
$ |
228 |
|
|
$ |
9 |
|
|
|
3.9 |
|
Real estate margin percentage |
|
|
25.5 |
% |
|
|
27.7 |
% |
|
|
|
|
|
|
|
|
|
|
31.2 |
% |
|
|
32.7 |
% |
|
|
|
|
|
|
|
|
(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 decreased for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the deferral of revenue recognition from the sales of a project under construction, partially offset by a $28 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. Cost of VOI sales decreased for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to the deferral of direct expenses from the sales of a project under construction. Sales and marketing expense, net increased for the three months ended September 30, 2018, compared to the same period in 2017, primarily due to higher sales and marketing expense which drove higher contract sales.
Sales revenue increased for the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) a $112 million increase related to revenue recognized from the completion of a timeshare resort under
47
construction partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $40 million increase in commission and brand fees 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 nine months ended September 30, 2018, compared to the same period in 2017, primarily as a result of (i) higher expenses as a result of the completio n of a resort which was previously deferred, partially offset by deferred expenses from sales of a project under construction, (ii) a $10 million reduction of marketing revenue due to a one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages and (iii) higher sales and marketing expense which drove higher contract sales.
The decrease in real estate margin and margin percentage for the three months ended September 30, 2018, as well as real estate margin percentage for the nine months ended September 30, 2018, compared to the same periods in 2017, was primarily due to the aforementioned decreases in revenue associated with the deferral of revenues and direct expenses of a timeshare resort under construction for which certain indirect selling costs are not deferred. The increase in real estate margin for the nine months ended September 30, 2018, compared to the same period in 2017, is primarily due to an increase in revenue, partially offset by an increase in expense.
Financing
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Interest income |
|
$ |
35 |
|
|
$ |
33 |
|
|
$ |
2 |
|
|
|
6.1 |
% |
|
$ |
103 |
|
|
$ |
97 |
|
|
$ |
6 |
|
|
|
6.2 |
% |
Other financing revenue |
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
12 |
|
|
|
2 |
|
|
|
16.7 |
|
Financing revenue |
|
|
40 |
|
|
|
38 |
|
|
|
2 |
|
|
|
5.3 |
|
|
|
117 |
|
|
|
109 |
|
|
|
8 |
|
|
|
7.3 |
|
Consumer financing interest expense |
|
|
6 |
|
|
|
6 |
|
|
|
— |
|
|
|
— |
|
|
|
16 |
|
|
|
16 |
|
|
|
— |
|
|
|
— |
|
Other financing expense |
|
|
6 |
|
|
|
5 |
|
|
|
1 |
|
|
|
20.0 |
|
|
|
19 |
|
|
|
16 |
|
|
|
3 |
|
|
|
18.8 |
|
Financing expense |
|
|
12 |
|
|
|
11 |
|
|
|
1 |
|
|
|
9.1 |
|
|
|
35 |
|
|
|
32 |
|
|
|
3 |
|
|
|
9.4 |
|
Financing margin |
|
$ |
28 |
|
|
$ |
27 |
|
|
$ |
1 |
|
|
|
3.7 |
|
|
$ |
82 |
|
|
$ |
77 |
|
|
$ |
5 |
|
|
|
6.5 |
|
Financing margin percentage |
|
|
70.0 |
% |
|
|
71.1 |
% |
|
|
|
|
|
|
|
|
|
|
70.1 |
% |
|
|
70.6 |
% |
|
|
|
|
|
|
|
|
Financing revenue increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to an increase of $2 million and $6 million, respectively, in interest income resulting from a higher average outstanding timeshare financing receivables balance during the three and nine months ended September 30, 2018. Financing margin increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned increases in revenue, partially offset by expense. Financing margin percentage remaining relatively flat for the three and nine months ended September 30, 2018.
Resort Operations and Club Management Segment
Resort and Club Management
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Club management revenue |
|
$ |
25 |
|
|
$ |
22 |
|
|
$ |
3 |
|
|
|
13.6 |
% |
|
$ |
71 |
|
|
$ |
63 |
|
|
$ |
8 |
|
|
|
12.7 |
% |
Resort management revenue |
|
|
15 |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
45 |
|
|
|
45 |
|
|
|
— |
|
|
|
— |
|
Resort and club management revenues |
|
|
40 |
|
|
|
37 |
|
|
|
3 |
|
|
|
8.1 |
|
|
|
116 |
|
|
|
108 |
|
|
|
8 |
|
|
|
7.4 |
|
Club management expense |
|
|
6 |
|
|
|
7 |
|
|
|
(1 |
) |
|
|
(14.3 |
) |
|
|
19 |
|
|
|
18 |
|
|
|
1 |
|
|
|
5.6 |
|
Resort management expense |
|
|
5 |
|
|
|
5 |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
14 |
|
|
|
— |
|
|
|
— |
|
Resort and club management expenses |
|
|
11 |
|
|
|
12 |
|
|
|
(1 |
) |
|
|
(8.3 |
) |
|
|
33 |
|
|
|
32 |
|
|
|
1 |
|
|
|
3.1 |
|
Resort and club management margin |
|
$ |
29 |
|
|
$ |
25 |
|
|
$ |
4 |
|
|
|
16.0 |
|
|
$ |
83 |
|
|
$ |
76 |
|
|
$ |
7 |
|
|
|
9.2 |
|
Resort and club management margin percentage |
|
|
72.5 |
% |
|
|
67.6 |
% |
|
|
|
|
|
|
|
|
|
|
71.6 |
% |
|
|
70.4 |
% |
|
|
|
|
|
|
|
|
Resort and club management revenues increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to a trailing twelve months increase of approximately 21,000 in Club members and higher rates pertaining to annual dues and transaction fees.
48
Resort and club management margin and margin percentage increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned increases in revenues.
Rental and Ancillary Services
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Rental revenues |
|
$ |
53 |
|
|
$ |
39 |
|
|
$ |
14 |
|
|
|
35.9 |
% |
|
$ |
144 |
|
|
$ |
120 |
|
|
$ |
24 |
|
|
|
20.0 |
% |
Ancillary services revenues |
|
|
7 |
|
|
|
6 |
|
|
|
1 |
|
|
|
16.7 |
|
|
|
20 |
|
|
|
18 |
|
|
|
2 |
|
|
|
11.1 |
|
Rental and ancillary services revenues |
|
|
60 |
|
|
|
45 |
|
|
|
15 |
|
|
|
33.3 |
|
|
|
164 |
|
|
|
138 |
|
|
|
26 |
|
|
|
18.8 |
|
Rental expenses |
|
|
30 |
|
|
|
25 |
|
|
|
5 |
|
|
|
20.0 |
|
|
|
78 |
|
|
|
73 |
|
|
|
5 |
|
|
|
6.8 |
|
Ancillary services expense |
|
|
7 |
|
|
|
5 |
|
|
|
2 |
|
|
|
40.0 |
|
|
|
17 |
|
|
|
15 |
|
|
|
2 |
|
|
|
13.3 |
|
Rental and ancillary services expenses |
|
|
37 |
|
|
|
30 |
|
|
|
7 |
|
|
|
23.3 |
|
|
|
95 |
|
|
|
88 |
|
|
|
7 |
|
|
|
8.0 |
|
Rental and ancillary services margin |
|
$ |
23 |
|
|
$ |
15 |
|
|
$ |
8 |
|
|
|
53.3 |
|
|
$ |
69 |
|
|
$ |
50 |
|
|
$ |
19 |
|
|
|
38.0 |
|
Rental and ancillary services margin percentage |
|
|
38.3 |
% |
|
|
33.3 |
% |
|
|
|
|
|
|
|
|
|
|
42.1 |
% |
|
|
36.2 |
% |
|
|
|
|
|
|
|
|
Rental and ancillary services revenues increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to an increase of $14 million and $24 million, respectively, in rental revenues as a result of higher rental room revenue from transient guests due to the acquisition of an operating hotel in New York City, New York in June 2018 (see Recent Events for additional information) and higher club inventory rentals at our developed and fee-for-service properties.
Rental and ancillary services margin and margin percentage increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primary due to the aforementioned increases in revenues.
Other Operating Expenses
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
General and administrative |
|
$ |
31 |
|
|
$ |
23 |
|
|
$ |
8 |
|
|
|
34.8 |
% |
|
$ |
84 |
|
|
$ |
75 |
|
|
$ |
9 |
|
|
|
12.0 |
% |
Depreciation and amortization |
|
|
9 |
|
|
|
7 |
|
|
|
2 |
|
|
|
28.6 |
|
|
|
25 |
|
|
|
21 |
|
|
|
4 |
|
|
|
19.0 |
|
License fee expense |
|
|
25 |
|
|
|
22 |
|
|
|
3 |
|
|
|
13.6 |
|
|
|
73 |
|
|
|
65 |
|
|
|
8 |
|
|
|
12.3 |
|
Other operating expenses increased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to (i) higher consulting and software license fees relating to the Oracle cloud based information system implemented during second quarter of 2018, (ii) higher depreciation and amortization due to additional software placed into service and (iii) higher license fee expense as a result of increases in revenues subject to license fees.
Non-Operating Expenses
|
|
Three Months Ended September 30, |
|
|
Variance |
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||||||
Interest expense |
|
$ |
7 |
|
|
$ |
7 |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
22 |
|
|
$ |
21 |
|
|
$ |
1 |
|
|
|
4.8 |
% |
Equity in earnings from unconsolidated affiliates |
|
|
(1 |
) |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(100.0 |
) |
Gain on foreign currency transactions |
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(100.0 |
) |
|
|
— |
|
|
|
(1 |
) |
|
|
1 |
|
|
|
(100.0 |
) |
Other loss |
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM (1) |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
|
NM (1) |
|
||
Income tax expense |
|
|
15 |
|
|
|
28 |
|
|
|
(13 |
) |
|
|
(46.4 |
) |
|
|
64 |
|
|
|
87 |
|
|
|
(23 |
) |
|
|
(26.4 |
) |
49
(1) |
Fluctuation in terms of percentage change is not meaningful. |
Equity in earnings 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 audited consolidated financial statements for additional information.
Income tax expense decreased for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily due to a decrease in the corporate income tax rate as a result of the Tax Cut and Jobs Act that was enacted on December 22, 2017.
Liquidity and Capital Resources
Overview
As of September 30, 2018, we had total cash and cash equivalents of $212 million, including $67 million of restricted cash. The restricted cash balance relates to escrowed cash from our sales of our VOIs and reserves related to our non-recourse debt. See Note 12: Debt and Non-Recourse Debt in our unaudited condensed consolidated financial statements for additional information.
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, purchase commitments (near and long-term) and costs associated with potential acquisitions and development projects.
We finance our business activities primarily with existing cash and cash equivalents, cash generated from our operations and through periodic securitizations of our timeshare financing receivables. We believe that this cash will be adequate to meet anticipated requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs and capital expenditures for the foreseeable future. The objectives of our cash management policy are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments.
Sources and Uses of Our Cash
The following table summarizes our net cash flows and key metrics related to our liquidity:
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||
Net cash (used in) provided by: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
(205 |
) |
|
$ |
299 |
|
|
$ |
(504 |
) |
|
NM (1) |
|
|
Investing activities |
|
|
(35 |
) |
|
|
(77 |
) |
|
|
42 |
|
|
|
(54.5 |
)% |
Financing activities |
|
|
155 |
|
|
|
(89 |
) |
|
|
244 |
|
|
NM (1) |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
Operating Activities
Cash flow (used in) 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
50
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.
Net cash flows (used in) provided by operating activities decreased by $504 million during the nine months ended September 30, 2018, compared to the same period in 2017, primarily due to (i) purchases of real estate for future conversion to inventory of $299 million, (ii) deposits of $43 million related to an inventory purchase commitments, (iii) a federal tax payment of $63 million made in January 2018 that was deferred from 2017 pursuant to a tax relief program for regions impacted by Hurricane Irma (iv) an increase in inventory spending and (v) a license fee payment pertaining to the amount accrued in the fourth quarter of 2017.
The following table exhibits our VOI inventory spending for the nine months ended September 30, 2018 and 2017:
|
|
Nine Months Ended September 30, |
|
|||||
($ in millions) |
|
2018 |
|
|
2017 |
|
||
VOI spending - owned properties |
|
$ |
77 |
|
|
$ |
31 |
|
VOI spending - fee-for-service upgrades |
|
|
35 |
|
|
|
41 |
|
Real estate for future conversion into inventory |
|
|
299 |
|
|
|
— |
|
Inventory deposits |
|
|
43 |
|
|
|
— |
|
Total VOI inventory spending |
|
$ |
454 |
|
|
$ |
72 |
|
Investing Activities
The following table summarizes our net cash used in investing activities:
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||
Capital expenditures for property and equipment |
|
$ |
(29 |
) |
|
$ |
(25 |
) |
|
$ |
(4 |
) |
|
|
16.0 |
% |
Software capitalization costs |
|
|
(12 |
) |
|
|
(12 |
) |
|
|
— |
|
|
|
— |
|
Return of investment from unconsolidated affiliates |
|
|
11 |
|
|
|
— |
|
|
|
11 |
|
|
NM (1) |
|
|
Investment in unconsolidated affiliates |
|
|
(5 |
) |
|
|
(40 |
) |
|
|
35 |
|
|
|
(87.5 |
) |
Net cash used in investing activities |
|
$ |
(35 |
) |
|
$ |
(77 |
) |
|
$ |
42 |
|
|
|
(54.5 |
) |
(1) |
Fluctuation in terms of percentage change is not meaningful. |
The change in net cash used in investing activities for the nine months ended September 30, 2018, compared to the same period in 2017, was primarily due to (i) a reduction in investment in unconsolidated affiliates and (ii) an $11 million distribution received from our 25 percent interest in BRE Ace LLC, partially offset by higher capital expenditures for property and equipment.
Our capital expenditures include spending related to technology, buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.
51
The following table summarizes our net provided by cash (used in) financing activities:
|
|
Nine Months Ended September 30, |
|
|
Variance |
|
||||||||||
($ in millions) |
|
2018 |
|
|
2017 |
|
|
$ |
|
|
% |
|
||||
Issuance of debt |
|
$ |
215 |
|
|
$ |
— |
|
|
$ |
215 |
|
|
NM (1) |
|
|
Issuance of non-recourse debt |
|
|
663 |
|
|
|
350 |
|
|
|
313 |
|
|
|
89.4 |
% |
Repurchase and retirement of common stock |
|
|
(112 |
) |
|
|
— |
|
|
|
(112 |
) |
|
NM (1) |
|
|
Repayment of debt |
|
|
(168 |
) |
|
|
(7 |
) |
|
|
(161 |
) |
|
NM (1) |
|
|
Repayment of non-recourse debt |
|
|
(436 |
) |
|
|
(428 |
) |
|
|
(8 |
) |
|
|
1.9 |
|
Debt issuance costs |
|
|
(6 |
) |
|
|
(5 |
) |
|
|
(1 |
) |
|
|
20.0 |
|
Proceeds from stock option exercises |
|
|
— |
|
|
|
1 |
|
|
|
(1 |
) |
|
|
(100.0 |
) |
Payment of withholding taxes on vesting of restricted stock units |
|
|
(4 |
) |
|
|
— |
|
|
|
(4 |
) |
|
NM (1) |
|
|
Capital contribution |
|
|
3 |
|
|
|
— |
|
|
|
3 |
|
|
NM (1) |
|
|
Net cash provided by (used in) financing activities |
|
$ |
155 |
|
|
$ |
(89 |
) |
|
$ |
244 |
|
|
NM (1) |
|
(1) |
Fluctuation in terms of percentage change is not meaningful. |
The change in net cash provided by (used in) financing activities for the nine months ended September 30, 2018, compared to the same period in 2017, was primarily due to (i) borrowings of $215 million and $313 million, respectively, under our revolving credit facility and Timeshare Facility to facilitate the funding of development and asset acquisitions (see Recent Events for additional information) as well as working capital needs, (ii) the issuance of $350 million securitized debt at favorable interest rates, of which $322 million was used to repay a portion of our Timeshare Facility for collateral utilized in the securitization, (iii) the repurchase of 2,500,000 shares of our common stock from HNA (see Recent Events for additional information), (iv) repayments $114 million under our other securitized debts and (vi) repayments of $160 million and $8 million, respectively, under our revolving credit facility and senior secured term loan.
Contractual Obligations
The following table summarizes our significant contractual obligations as of September 30, 2018:
|
|
Payments Due by Period |
|
|||||||||||||||||
($ in millions) |
|
Total |
|
|
Less Than 1 Year |
|
|
1-3 Years |
|
|
3-5 Years |
|
|
More Than 5 Years |
|
|||||
Debt (1) |
|
$ |
683 |
|
|
$ |
39 |
|
|
$ |
76 |
|
|
$ |
247 |
|
|
$ |
321 |
|
Non-recourse debt (1) |
|
|
879 |
|
|
|
189 |
|
|
|
449 |
|
|
|
131 |
|
|
|
110 |
|
Purchase commitments |
|
|
501 |
|
|
|
127 |
|
|
|
239 |
|
|
|
100 |
|
|
|
35 |
|
Total contractual obligations |
|
$ |
2,063 |
|
|
$ |
355 |
|
|
$ |
764 |
|
|
$ |
478 |
|
|
$ |
466 |
|
(1) |
Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 2.26 percent as of September 30, 2018. |
As of September 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 September 30, 2018 consisted of $501 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.
52
In October 2018, the construction on a property in Hawaii was completed, and the deferred revenue and direct related costs of $154 million and $72 million, respectively, will be recognized in the fourth quarter.
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.
53
We are exposed to market risk from changes in interest rates and currency exchange rates. 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 rates are 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 may 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 September 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 |
|
|
11.893 |
% |
|
$ |
22 |
|
|
$ |
90 |
|
|
$ |
90 |
|
|
$ |
89 |
|
|
$ |
86 |
|
|
$ |
328 |
|
|
$ |
705 |
|
|
$ |
741 |
|
Fixed-rate unsecuritized timeshare financing receivables |
|
|
12.682 |
% |
|
|
26 |
|
|
|
46 |
|
|
|
50 |
|
|
|
54 |
|
|
|
58 |
|
|
|
333 |
|
|
|
567 |
|
|
|
598 |
|
Liabilities: (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-rate debt |
|
|
3.964 |
% |
|
|
44 |
|
|
|
189 |
|
|
|
166 |
|
|
|
88 |
|
|
|
64 |
|
|
|
443 |
|
|
|
994 |
|
|
|
985 |
|
Variable-rate debt (4) |
|
|
4.105 |
% |
|
|
2 |
|
|
|
10 |
|
|
|
10 |
|
|
|
335 |
|
|
|
— |
|
|
|
— |
|
|
|
357 |
|
|
|
364 |
|
(1) |
Weighted-average interest rate as of September 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 $237 million and non-recourse debt of $120 million as of September 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.
54
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Accounting Officer (person currently performing functions similar to those performed by a principal 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 Accounting Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Accounting 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 Accounting Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during the three months ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
55
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 September 30, 2018 will not have a material effect on our unaudited condensed consolidated financial statements.
As of September 30, 2018, there have been no material changes from the risk factors previously disclosed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2017 and in Item 1A of Part II of our Quarterly Report on Form 10-Q for the period ended June 30, 2018, in each case under the heading “Risk Factors.” These risk factors may be important to understanding statements in this Form 10-Q and should be read in conjunction with the condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
The risks described in our Annual Report on Form 10-K for the year ended December 31, 2017 and in our Quarterly Report on Form 10-Q for the period ended June 30, 2018 contain forward-looking statements, and they may not be the only risks facing the Company. The business, financial condition and operating results of the Company can be affected by the risk factors described in the foregoing reports and by other factors currently unknown or that management presently believes not to be material. Any one or more of such factors could, directly or indirectly, cause the Company’s actual financial condition and operating results to vary materially from past, or from anticipated future, financial condition and operating results. Any of these factors, in whole or in part, could materially and adversely affect the Company’s business, financial condition, operating results and the trading price of our common stock. Because of these factors affecting the Company’s financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
None.
None.
Not applicable.
None.
56
Exhibit No. |
|
Description |
|
|
|
|
|
10.1 |
|
||
|
|
|
|
10.2 |
|
||
|
|
|
|
10.3 |
|
||
|
|
|
|
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. |
|
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101.DEF |
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XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB |
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XBRL Taxonomy Label Linkbase Document. |
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101.PRE |
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XBRL Taxonomy Presentation Linkbase Document. |
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Denotes management contract or compensatory plan or arrangement. |
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Filed herewith. |
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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 1 st day of November 2018.
HILTON GRAND VACATIONS INC. |
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By: |
/s/ Mark D. Wang |
Name: |
Mark D. Wang |
Title: |
President and Chief Executive Officer
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By: |
/s/ Allen J. Klingsick |
Name: |
Allen J. Klingsick |
Title: |
Senior Vice President and Chief Accounting Officer (currently performing functions substantially similar to those performed by a Principal Financial Officer) |
Exhibit 10.3
WBD (US) 41989445v3
HILTON RESORTS CORPORATION
(As Amended and Restated Effective as of September 1, 2018)
EXECUTIVE DEFERRED COMPENSATION PLAN
Table of Contents
ARTICLE I TITLE AND DEFINITIONS |
1 |
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Section 1.1 |
Title.1 |
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Section 1.2 |
Definitions.1 |
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ARTICLE II PARTICIPATION |
5 |
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ARTICLE III DEFERRAL ELECTIONS |
5 |
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Section 3.1 |
Elections to Defer Compensation.5 |
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Section 3.2 |
Distribution Elections.7 |
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Section 3.3 |
Investment Elections.8 |
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Section 3.4 |
Subsequent Elections.9 |
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ARTICLE IV DISTRIBUTION OPTION ACCOUNTS |
9 |
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Section 4.1 |
Compensation Deferrals.9 |
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Section 4.2 |
Company Contribution.10 |
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Section 4.3 |
Investment Return.10 |
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ARTICLE V VESTING |
11 |
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Section 5.1 |
Compensation Deferral.11 |
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Section 5.2 |
Company Contribution.11 |
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ARTICLE VI DISTRIBUTIONS |
11 |
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Section 6.1 |
Form and Timing of Distributions - Generally.11 |
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Section 6.2 |
Small Benefit Cashout.12 |
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Section 6.3 |
In–Service Distribution Account Payouts.12 |
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Section 6.4 |
Financial Hardship of Participant.13 |
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Section 6.5 |
Permissible Distribution Event.13 |
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Section 6.6 |
Payment by Trust.13 |
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Section 6.7 |
Inability to Locate Participant.14 |
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ARTICLE VII CHANGE IN CONTROL |
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ARTICLE VIII DEATH BENEFITS |
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ARTICLE IX CLAIMS PROCEDURES |
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Section 9.1 |
Claims.14 |
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Section 9.2 |
Appeal.15 |
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ARTICLE X ADMINISTRATION |
15 |
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Section 10.1 |
Administrator.15 |
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Section 10.2 |
Administrator Action.16 |
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Section 10.3 |
Powers and Duties of the Administrator.16 |
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Section 10.4 |
Construction and Interpretation.17 |
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Section 10.5 |
Information.17 |
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Section 10.6 |
Compensation, Expenses and Indemnity.17 |
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ARTICLE XI MISCELLANEOUS |
17 |
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Section 11.1 |
Unsecured General Creditor.17 |
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Section 11.2 |
Restriction Against Assignment.18 |
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Section 11.3 |
Withholding.18 |
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Section 11.4 |
Amendment, Modification, Suspension or Termination.18 |
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Section 11.5 |
Governing Law.18 |
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Section 11.6 |
Receipt or Release.19 |
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Section 11.7 |
Payments on Behalf of Persons Under Incapacity.19 |
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Section 11.8 |
Headings.19 |
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ii
2017 EXECUTIVE DEFERRED COMPENSATION PLAN
WHEREAS, Hilton Resorts Corporation hereby establishes a deferred compensation plan (the “Plan”), effective as of the Effective Date, for deferrals with respect to Compensation to be earned or to be otherwise paid on or after the Effective Date, to provide supplemental retirement income benefits for a select group of management and highly compensated employees through deferrals of base salary and bonus compensation and, to the extent applicable, Company contributions; and
WHEREAS, as of the Effective Date, the account balances of certain participants in the Prior Plan were transferred to an Account under this Plan (the “Transferred Balances”). The Transferred Balances are balances deferred by “HGV Employees” under the Prior Plan, and the time and form of payment of the Transferred Balances shall be the same under this Plan as under the Prior Plan; and
WHEREAS, the Company wishes to amend and restate the Plan in its entirety effective as of September 1, 2018 to update the Plan for Section 409A (as defined below) best practices, and to make various other changes as set forth herein.
NOW, THEREFORE, the Plan is hereby amended and restated in its entirety, on the terms and conditions hereinafter set forth:
ARTICLE I
TITLE AND DEFINITIONS
This Plan shall be known as the Hilton Resorts Corporation 2017 Executive Deferred Compensation Plan.
Whenever the following words and phrases are used in this Plan, with the first letter capitalized, they shall have the meanings specified below.
“Administrator” shall mean the Person or Persons appointed by the Committee to administer the Plan in accordance with Article X, or such Person or Person’s delegate.
“Base Salary Deferral” shall mean that portion of Base Salary as to which an Eligible Employee has made an irrevocable election to defer receipt of until the date specified under the In-Service Distribution Option, the Separation Distribution Option, and/or as otherwise specified under this Plan.
“Beneficiary” or “Beneficiaries” shall mean the Person or Persons, including a trustee, personal representative or other fiduciary, last designated in writing by a Participant in accordance with procedures established by the Administrator to receive all of the benefits specified hereunder in the event of the Participant’s death. No Beneficiary designation shall become effective until it
1
is filed with the Administrator. If there is no Beneficiary designation in effect, or if there is no surviving designated Beneficiary, then the Participant’s surviving spouse shall be the Beneficiary. If there is no surviving spouse to receive any benefits payable in accordance with the preceding sentence, the duly appointed and currently acting personal representative of the Participant’s estate (which shall include either the Participant’s probate estate or living trust) shall be the Beneficiary. In any case where there is no such personal representative of the Participant’s estate duly appointed and acting in that capacity within 90 days after the Participant’s death (or such extended period as the Administrator determines is reasonably necessary to allow such personal representative to be appointed, but not to exceed 180 days after the Participant’s death), then Beneficiary shall mean the Person or Persons who can verify by affidavit or court order to the satisfaction of the Administrator that they are legally entitled to receive the benefits specified hereunder. In the event any amount is payable under the Plan to a minor, payment shall not be made to the minor, but instead be paid (i) to that Person’s living parent(s) to act as custodian, (ii) if that Person’s parents are then divorced, and one parent is the sole custodial parent, to such custodial parent, or (iii) if no parent of that Person is then living, to a custodian selected by the Administrator to hold the funds for the minor under the Uniform Transfers or Gifts to Minors Act in effect in the jurisdiction in which the minor resides. If no parent is living and the Administrator decides not to select another custodian to hold the funds for the minor, then payment shall be made to the duly appointed and currently acting guardian of the estate for the minor or, if no guardian of the estate for the minor is duly appointed and currently acting within 60 days after the date the amount becomes payable, payment shall be deposited with the court having jurisdiction over the estate of the minor.
“Bonus Compensation Deferral” shall mean that portion of Bonus Compensation as to which an Eligible Employee has made an irrevocable election to defer receipt of until the date specified under the In-Service Distribution Option and/or as otherwise specified under this Plan.
“Change in Control” shall mean a “Change in Control” under the Company’s 2017 Omnibus Incentive Plan, as amended from time to time, which also constitutes a “change in control event” under Section 409A.
“Code” shall mean the Internal Revenue Code of 1986, as amended.
“Committee” shall mean the Compensation Committee of the Board of Directors of the Company, or if no such committee exists, the full Board of Directors of the Company.
“Company” shall mean Hilton Resorts Corporation, any successor corporation and each corporation which is a member of a controlled group of corporations (within the meaning of Section 414(b) or (c) of the Code) of which Hilton Resorts Corporation is a component member.
“Company Contribution” shall equal the amount described in Section 4.2, if any.
“Compensation” shall mean the total salary paid to the Eligible Employee, including cash bonuses, in a Plan Year. An Eligible Employee’s “Compensation” shall consist of the Eligible Employee’s “Base Salary” as in effect from time to time during a Plan Year and the Eligible Employee’s “Bonus Compensation” which shall equal the amount of any cash incentive to be paid to an Eligible Employee under an incentive plan maintained by the Company and any other cash bonus of any kind.
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“Compensation Deferral” means that portion of Compensation as to which a Participant has made an irrevocable election to defer receipt until the date specified under the In-Service Distribution Option, the Separation Distribution Option, and/or as otherwise specified under this Plan.
“Disabled” or “Disability” shall mean that a Participant is disabled due to sickness or injury which qualifies the Participant for disability payments under the Company’s long term disability plan. A Participant shall be considered totally and permanently disabled on the date the Participant qualifies for such long term disability payments.
“Distribution Option” shall mean the two distribution options which are available under the Plan, consisting of the Separation Distribution Option and the In-Service Distribution Option.
“Distribution Option Account” or “Accounts” shall mean, with respect to a Participant, the Separation Distribution Account and/or the In-Service Distribution Account(s) established on the books of account of the Company, pursuant to Article IV, for each Participant.
“Effective Date” shall mean the “Distribution Date” as defined in the Distribution Agreement by and among Hilton Worldwide Holdings Inc., Park Hotels & Resorts Inc., and the Company, dated as of January 3, 2017.
“Eligible Employee” shall mean (i) officers of the Company at the Vice President level or higher, or (ii) Highly Compensated Employees who are selected by the Administrator to participate in the Plan pursuant to Article II.
“Enrollment Agreement” shall mean the authorization form which an Eligible Employee files with the Administrator to participate in the Plan and, with respect to the Plan Year in which the Effective Date occurs, the authorization form as in effect under the Prior Plan.
“ERISA” shall mean the Employee Retirement Income Security Act of 1974, as amended.
“Fund” or “Funds” shall mean one or more of the investments selected by the Administrator pursuant to Section 3.3(a).
“HGV Employees” shall mean (i) any individual designated as an “HGV Employee” in the Employee Matters Agreement by and between Hilton Worldwide Holdings Inc., Park Hotels & Resorts Inc., and the Company, dated as of January 3, 2017, and (ii) any individual who is an Eligible Employee and who commences employment with the Company upon or following the date hereof.
“Highly Compensated Employee” shall mean an employee of the Company who the Administrator, in its discretion, anticipates will receive Compensation in excess of the salary limitation contained in Section 401(a)(17) of the Code for the applicable Plan Year or who the Administrator otherwise determines to be a highly compensated employee or member of a select group of management within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.
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“In-Service Distribution Account” or “Accounts” shall mean the Account(s) maintained for a Participant to which Compensation Deferrals and Company Contributions are credited pursuant to the In-Service Distribution Option.
“In-Service Distribution Option” shall mean the Distribution Option pursuant to which benefits are payable in accordance with Article VI.
“Investment Return” shall mean, for each Fund, an amount equal to the net investment performance of such Fund on a given day, as determined by the Administrator.
“Participant” shall mean any Eligible Employee who elects to defer Compensation in accordance with Section 3.1.
“Person” shall mean any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust (charitable or non-charitable), unincorporated organization, or other form of business entity.
“Plan” shall mean the Hilton Resorts Corporation 2017 Executive Deferred Compensation Plan set forth herein, in effect as of the Effective Date, or as amended from time to time.
“Plan Year” shall mean the 12 consecutive month period beginning on a January 1.
“Prior Plan” shall mean the Hilton Hotels 2005 Executive Deferred Compensation Plan, as amended.
“Retirement” shall mean a Participant’s Separation from Service (for reasons other than death) on or after the combination of the Participant’s age and Years of Vesting Service equals at least 55.
“Section 409A” means Section 409A of the Code and the treasury regulations promulgated thereunder.
“Separation Date” shall mean the date a Participant incurs a Separation from Service.
“Separation Distribution Account” shall mean the Account maintained for a Participant to which Compensation Deferrals and Company Contributions are credited pursuant to the Separation Distribution Option.
“Separation Distribution Option” shall mean the Distribution Option pursuant to which benefits are payable in accordance with Article VI.
“Separation from Service” shall mean a Participant’s separation from service with the Company within the meaning of Section 409A.
“Unforeseeable Financial Emergency” shall mean: (i) a severe financial hardship to the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, beneficiary, or a dependent (as defined in Code Section 152(a)) of the Participant, loss of the Participant’s property due to casualty, the imminent foreclosure of or eviction from the
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Participant’s primary residence, the need to pay medical expenses (including nonrefundable deductibles) or prescription drug medications, the need to pay for funeral expenses of a spouse, beneficiary, or dependent, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant; or (ii) such other definition of “unforeseeable emergency” within the meaning of Code Section 409A(a)(2)(B)(ii).
“Year of Vesting Service” shall mean a “Year of Vesting Service” as determined for purposes of the 401(k) defined contribution savings plan in which such Participant participates or most recently participated.
Except as otherwise expressly provided for herein, prior to December 31 of each Plan Year, the Administrator shall designate which Highly Compensated Employees shall become Eligible Employees for the following Plan Year. An Eligible Employee designated as a Participant shall thereafter, unless otherwise determined by the Administrator, be eligible to make a Compensation Deferral for each Plan Year. Participation in the Plan shall be made conditional upon an Eligible Employee’s acknowledgement, in writing or by making a deferral election under the Plan, that all decisions and determinations of the Administrator shall be final and binding on the Participant, the Participant’s beneficiaries and any other Person having or claiming an interest under the Plan.
As of the Effective Date, each HGV Employee with respect to whom a Transferred Balance is transferred to the Plan shall become a Participant in the Plan.
ARTICLE III
DEFERRAL ELECTIONS
Section 3.1 Elections to Defer Compensation.
(a) Each Eligible Employee may elect to make a Compensation Deferral by filing with the Administrator an election that conforms to the requirements set forth in this Article III, on an Enrollment Agreement provided by the Administrator, no later than December 31 of the Plan Year preceding the Plan Year for which the Compensation is to be earned and specifying whether the Participant elects a Base Salary Deferral or a Bonus Compensation Deferral or a combination, the Distribution Option Accounts to which such amounts will be credited, the form and timing of distribution and such other information as the Administrator shall require; provided, however, that for the Plan Year in which the Effective Date occurs, a deferral election under the Prior Plan shall be treated as a deferral election under this Section 3.1(a) and be given continuing effect under this Plan after the Effective Date for the remainder of such Plan Year.
(i) Notwithstanding (a) above, if an Eligible Employee’s Bonus Compensation is “performance-based compensation” as contemplated by Section 409A, the Administrator may allow the Eligible Employee to elect to defer all or a portion of such Eligible Employee’s Bonus Compensation for a Plan Year at a time determined by the Administrator, which may be no less than six months before the end of the applicable Plan Year in which such Bonus Compensation is to be earned.
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(ii) The Eligible Employee shall elect to allocate such Eligible Employee’s Compensation Deferrals (and any Company Contributions that may be credited with respect thereto) between the Distribution Options in whole percentage increments; provided that one hundred percent (100%) of such Deferrals (and Company Contributions) may be allocated to one or the other of the Distribution Options.
(iii) The Administrator may establish minimum or maximum amounts that may be deferred under this Section and may change such standards from time to time; provided, however, in no event may an Eligible Employee’s Base Salary Deferrals exceed eighty percent (80%) of Base Salary. Any such limits shall be communicated by the Administrator to the Participants prior to the commencement of a Plan Year. No Participant may have more than one Separation Distribution Account.
(b) Notwithstanding anything herein to the contrary, no Eligible Employee shall be permitted to defer Compensation which the Administrator reasonably determines is required to pay the Eligible Employee’s portion of payroll and other taxes and contributions towards benefits (including, but not limited to, medical, life, dental and disability) provided to the Eligible Employee and such Eligible Employee’s dependents.
(c) Any Compensation Deferral made under Section 3.1(a) above shall remain in effect and be irrevocable, notwithstanding any change in a Participant’s Compensation, for the entire Plan Year for which it is effective. A new Compensation Deferral election must be made for each Plan Year during which a Participant wishes to defer Compensation. If a Participant elects to allocate all or a portion of such Participant’s Compensation Deferrals to an In-Service Distribution Account, that election will remain effective only for the Plan Year to which the Enrollment Agreement relates. If the Participant does not elect an in-service distribution date for deferrals to the In-Service Distribution Account in a subsequent Plan Year, such deferrals shall automatically be allocated to the Participant’s Separation Distribution Account. Compensation Deferral elections shall be made on an Enrollment Agreement filed with the Administrator by December 31 of a Plan Year (or such earlier date as may be designated by the Administrator) to make a Compensation Deferral for Compensation to be earned on or after January 1 of the immediately following Plan Year .
(d) The Administrator may, in its discretion, permit individuals who first become Eligible Employees after the beginning of a Plan Year, including individuals who become Eligible Employees because they are promoted or hired by the Company on or after January 1 of a Plan Year to a position which has been designated by the Administrator as an Eligible Employee, to enroll in the Plan for that Plan Year by filing a completed and fully executed Enrollment Agreement as soon as practicable following the date the Eligible Employee is notified of such Eligible Employee’s eligibility but, in any event, within 30 days after such date. Notwithstanding the foregoing, however, any Enrollment Agreement executed by an Eligible Employee, pursuant to this Section, to make a Compensation Deferral shall apply only to Compensation earned by the Eligible Employee after the date on which such Enrollment Agreement is filed.
(e) All deferral elections under the Plan shall be made in accordance with Section 409A.
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Section 3.2 Distribution Elections .
Subject to Section 3.4, in the Enrollment Agreement, each Eligible Employee shall select the form and the timing of payment with respect to the Eligible Employee’s Compensation Deferral. An Eligible Employee’s deferral election under this Article III shall not be effective unless and until the Eligible Employee makes the required distribution elections under this Section 3.2. Each Eligible Employee shall make the following form and timing of payment elections:
(a) Retirement . An Eligible Employee shall elect the form of payment in which amounts credited to the Eligible Employee’s Distribution Option Accounts shall be paid where (i) the Eligible Employee’s Separation Date occurs on or after eligibility for Retirement and (ii) the aggregate amount of the Eligible Employee’s Distribution Option Accounts as of the last business day of the month following the month in which the Separation Date occurs exceeds the applicable small benefit cashout amount described under Section 6.2(a). The Eligible Employee may elect a lump sum, or quarterly, semi-annual or annual installments payable over 5, 10, 15 or 20 years. This form of payment election shall apply to all Compensation Deferrals credited on behalf of the Eligible Employee to such Eligible Employee’s Separation Distribution Account in any Plan Year in which the Eligible Employee makes Compensation Deferrals under this Plan, subject to change only in accordance with Section 3.4 below. In the event that an Eligible Employee fails to elect a form of payment for Distribution Option Accounts upon a Separation from Service after eligibility for Retirement, all Compensation Deferrals shall be paid as a lump sum in accordance with Section 6.1. In the event the amount to be distributed from a Participant’s Distribution Option Accounts upon a Separation from Service after eligibility for Retirement does not exceed the applicable small benefit cashout amount described under Section 6.2(a), the Participant’s Distribution Option Accounts shall be paid in a lump sum in accordance with Section 6.2(a) without regard to the Participant’s actual form of payment election.
(b) In-Service Distribution . An Eligible Employee shall elect (i) the form of payment in which amounts credited to the Eligible Employee’s In-Service Distribution Account, if applicable, shall be paid where the amount to be distributed exceeds the applicable small benefit cashout amount described under Section 6.2(b) and (ii) the Plan Year in which such payment shall commence; provided that the Plan Year selected in (ii) may not be prior to either of (A) the third Plan Year following the Plan Year in which the Compensation Deferral is made or (B) the Plan Year in which any such amount will become vested. The Eligible Employee may elect a lump sum, or quarterly, semi-annual or annual installments payable over 2, 3, 4 or 5 years. This election shall apply only to the Compensation Deferrals credited on behalf of the Eligible Employee to the In-Service Distribution Account created pursuant to the Enrollment Form to which such Compensation Deferrals relate, except to the extent changed pursuant to a subsequent election in accordance with Section 3.4 below. In the event the amount to be distributed from a Participant’s In-Service Distribution Account does not exceed the applicable small benefit cashout amount described under Section 6.2(b), the Participant’s In-Service Distribution Account shall be paid in a lump sum in accordance with Section 6.2(b) without regard to the Participant’s actual form of payment election(s). If a Participant incurs a Separation from Service prior to the in-service distribution date elected by the Participant with respect to the Participant’s In-Service Distribution Account, the Participant’s distribution election with respect to such In-Service Distribution Account shall become invalid and distribution shall instead be made in accordance with the Participant’s elections under Section 3.2(a), 3.2(c) or 3.4, as applicable.
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(c) Separation from Service . An Eligible Employee shall elect the form of payment in which amounts credited to the Eligible Employee’s Separation Distribution Account, if applicable, shall be paid where (i) the Eligible Employee’s Separation Date occurs prior to eligibility for Retirement, and (ii) the aggregate amount of the Eligible Employee’s Distribution Option Accounts as of the last business day of the month following the month in which the Separation Date occurs exceeds the applicable small benefit cashout amount described under Section 6.2(a) . The Eligible Employee may elect a lump sum or annual installments payable over 5 years. This election shall apply to all Compensation Deferrals credited on behalf of the Eligible Employee to such Eligible Employee’s Separation Distribution Account in any Plan Year in which Compensation Deferrals are made under this Plan, subject to change only in accordance with Section 3.4 below. In the event that an Eligible Employee fails to elect a form of payment for Distribution Option Accounts upon Separation from Service before eligibility for Retirement, all Compensation Deferrals shall be paid as a lump sum in accordance with Section 6.1. In the event the amount to be distributed from a Participant’s Distribution Option Accounts upon a Separation from Service before eligibility for Retirement does not exceed the applicable small benefit cashout amount described under Section 6.2 (a) , the Participant’s Distribution Option Accounts shall be paid in a lump sum in accordance with Section 6.2 (a) without regard to the Participant’s actual form of payment election.
Section 3.3 Investment Elections.
(a) At the time of making the deferral elections described in Section 3.1 and the distribution elections described in Section 3.2, the Participant shall designate, in a manner prescribed by the Administrator, which Funds the Participant’s Accounts will be deemed to be invested in for purposes of determining the Investment Return to be credited to those Accounts. The Funds shall be as selected by the Administrator from time to time and the Administrator may add, change, or delete Funds at any time. In making the designation pursuant to this Section 3.3, the Participant may specify that all or any whole percentage of the Participant’s Accounts be deemed to be invested in one or more of the Funds. A Participant may change the designation made under this Section 3.3, in a manner prescribed by the Administrator, on any business day. Such change shall be effective as soon as administratively feasible after it is received.
(b) If a Participant fails to elect a type of Fund under this Section 3.3, he or she shall be deemed to have elected the Fund designated by the Administrator.
(c) Although the Participant may designate the Funds according to Section 3.3(a) above, the Administrator shall select, from time to time, in its sole discretion, for each of the Funds described in Section 3.3(a) above, a commercially available mutual fund or contract or an investment fund established with and administered by an investment manager selected by the Administrator. The Investment Return of each such commercially available mutual fund, contract or investment fund shall be used to determine the amount of earnings to be credited to Participants’ Accounts under Article IV although nothing set forth in this Plan shall require an actual investment of monies in any such mutual fund or in any other Fund designated as a deemed investment vehicle for Compensation Deferrals.
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Section 3.4 Subsequent Elections .
The Administrator may establish rules allowing a Participant to make a subsequent election to postpone payment of Compensation Deferrals under the Participant’s In-Service Distribution Account(s) and/or such Participant’s Separation Distribution Account, in accordance with the rules in this Section 3.4; provided that any such subsequent election shall be made in accordance with the requirements of Section 409A and that no subsequent election may result in an impermissible acceleration of payment as described in Section 409A. The following rules shall apply to subsequent elections under the Plan:
(a) With respect to Compensation Deferrals under an In-Service Distribution Account, a Participant may make a subsequent election to defer the payment to a later Plan Year or to change the form of payment applicable to such In-Service Distribution Account; provided that (i) the subsequent election must be made at least 12 months prior to the January in which the first scheduled payment was to occur, (ii) the subsequent election may not take effect until at least 12 months after the date on which the election is made, and (iii) except with respect to an election related to payment upon an Unforeseeable Financial Emergency, the first payment with respect to which such election is made must be deferred for a period of not less than five years from the date such payment would otherwise have been made.
(b) A Participant may make a subsequent election to change the form or time at which Compensation Deferrals credited to a Participant’s Separation Distribution Account will be paid; provided that (i) the subsequent election may not take effect until at least 12 months after the date on which the election is made, and (ii) except with respect to an election related to payment upon an Unforeseeable Financial Emergency or death, the first payment with respect to which such election is made must be deferred for a period of five years from the date such payment would have otherwise have been made. Participants shall be permitted to make only one subsequent election to change the form or time of payment of their Separation Distribution Account.
ARTICLE IV
DISTRIBUTION OPTION ACCOUNTS
Section 4.1 Compensation Deferrals.
(a) The Administrator shall establish and maintain separate Distribution Option Accounts with respect to a Participant. A Participant’s Distribution Option Accounts may consist of a Separation Distribution Account and/or one or more In-Service Distribution Account(s), as elected by the Participant. Each Participant’s Distribution Option Accounts shall be further divided into separate subaccounts (“subaccounts”), each of which corresponds to a Fund elected by the Participant pursuant to Section 3.3(a).
(b) Unless otherwise specified by the Committee, as soon as practicable after the end of each regular Company payroll period, the Administrator shall credit the subaccounts of the Participant’s Distribution Option Account with an amount equal to the Base Salary and/or Bonus Compensation that would otherwise have been earned for such payroll period in accordance with the Distribution Option irrevocably elected by the Participant in the Enrollment Agreement and in accordance with the Participant’s investment elections under Section 3.3(a). Any amount
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once taken into account as Base Salary and/or Bonus Compensation for purposes of this Plan shall not be taken into account thereafter. The Participant’s Distribution Option Accounts shall be reduced by the amount of payments made by the Company to the Participant or the Participant’s Beneficiary pursuant to this Plan.
(c) As of the Effective Date, a Participant’s account balances, if any, under the Prior Plan shall be transferred to this Plan as follows:
(i) A Transferred Balance attributable to amounts credited to the Participant under the Prior Plan shall be transferred to the Participant’s Account under this Plan, and credited to a Separation Distribution Account and/or In-Service Distribution Account (or other subaccount), as previously credited under the Prior Plan. Following the transfer of a Transferred Balance, the Company shall be responsible under this Plan for the payment of all Transferred Balances.
(ii) The Participant’s investment elections with respect to any Transferred Balance shall be mapped to the available investment options as directed by the Administrator.
Section 4.2 Company Contribution.
From time-to-time and in its sole discretion, the Committee may provide that Company Contributions be credited to some or all Participants, according to the terms and conditions determined by the Committee.
Section 4.3 Investment Return.
Each subaccount of a Participant’s Distribution Option Account shall, as of each business day, be credited with earnings and debited with losses in an amount equal to that determined by multiplying the balance credited to such subaccount as of the previous day by the Investment Return for the corresponding Fund pursuant to Section 3.3(a).
Section 5.1 Compensation Deferral.
A Participant’s Compensation Deferral credited to the Participant’s Distribution Option Account shall be 100% vested at all times.
Section 5.2 Company Contribution.
(a) Unless otherwise specified by the Committee, Company Contributions credited to a Participant’s Distribution Option Account, if any, shall be 100% vested at all times. To be clear, the Committee shall at all times retain the discretion to apply a vesting schedule to Company Contributions at the time credited to a Participant’s Distribution Option Account.
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(b) In the event Company Contributions are subject to a vesting schedule pursuant to the discretion granted to the Committee in Section 5.2(a), then notwithstanding such vesting schedule, a Participant’s Distribution Option Account balance shall be fully vested and nonforfeitable in its entirety should: (i) the Participant die while providing service to the Company, (ii) the Participant become Disabled while providing service to the Company, or (iii) there occur a Change in Control.
(c) When a Participant incurs a Separation Date, the portion of the Company Contribution credited to such Participant’s Distribution Option Account which is not vested, if any, shall immediately be forever forfeited to the Company, and the Company shall have no obligation to the Participant (or Beneficiary) with respect to such forfeited amount.
Section 6.1 Form and Timing of Distributions - Generally.
(a) Subject to Section 6.2(a), in the case of a Participant whose Separation Date occurs on or after eligibility for Retirement, the Participant’s Separation Distribution Account shall be distributed in the form elected by the Participant, or the default form provided in the event a Participant fails to make an election, pursuant to Sections 3.2 and 3.4, as applicable, and shall be paid, or commence to be paid, within 30 days following the end of the twelfth full calendar month after the Participant has a Separation from Service, unless payment is deferred pursuant to Section 3.4. Any unvested portion of any Distribution Option Account shall be forfeited in accordance with Section 5.2.
(b) Subject to Section 6.2(b), if a Participant has not incurred a Separation from Service as of the date an In-Service Distribution Account is to be distributed pursuant to the applicable election made under Section 3.2 or 3.4, the Participant’s In-Service Distribution Account shall be paid to the Participant, or commence to be paid, as described under Section 6.3.
(c) If the Participant incurs a Separation from Service after distribution has commenced in accordance with this Section 6.1(c) but prior to the date on which the Participant’s In-Service Distribution Account(s) is fully distributed, distribution of the remaining amounts held in the Participant’s In-Service Distribution Account(s) shall continue to be distributed in accordance with the Participant’s election for such Participant’s In-Service Distribution Account.
(d) Subject to Section 6.2, in the case of a Participant whose Separation Date occurs prior to the earliest date on which the Participant is eligible for Retirement, other than by reason of death, the vested portion of a Participant’s Distribution Option Accounts shall be distributed in the form elected by the Participant, or the default form provided in the event a Participant fails to make an election, pursuant to Sections 3.2 and 3.4, as applicable, and shall be paid or commence to be paid within 30 days following the end of the twelfth full calendar month after the Participant has a Separation from Service, unless payment is deferred pursuant to Section 3.4. Any unvested portion of any Distribution Option Account shall be forfeited in accordance with Section 5.2.
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Section 6.2 Small Benefit Cashout .
(a) Notwithstanding any provision of the Plan or election by a Participant to the contrary, in the event the value of the vested portion of a Participant’s Separation Distribution Account does not exceed $100,000 (taking into account all deferrals made to the Eligible Employee’s Separation Distribution Account) as of the last business day of the month following the month in which the Participant’s Separation Date occurs, then the total vested portion of the Participant’s Account shall be paid in a single lump sum within 30 days following the end of the twelfth full calendar month after the Participant has a Separation from Service.
(b) Notwithstanding any provision of the Plan or election by a Participant to the contrary, in the event the value of the vested portion of a Participant’s In-Service Distribution Account does not exceed $25,000 (applied on an Account by Account basis) as of the date the first installment under such Account would become distributable, then the total vested portion of such Account shall be paid in a single lump sum as set forth under Section 6.3(a).
Section 6.3 In–Service Distribution Account Payouts.
(a) Unless otherwise specified in Section 6.1 or Section 6.2 hereof, any lump sum benefit payable under this Article VI shall be paid in January of the Plan Year elected by the Participant pursuant to Sections 3.2(b) and 3.4, as applicable, in an amount equal to the vested value of the portion of such Distribution Option Account being distributed as of the business day the Funds are deemed to be liquidated to make the payment.
(b) Subject to Section 6.2(b), installment payments, if any, payable under this Section 6.3(b) shall commence in January of the Plan Year elected by the Participant pursuant to Sections 3.2(b) and 3.4, as applicable, in an amount equal to (i) the vested value of such portion of such Distribution Option Account being distributed as of the business day the Funds are deemed to be liquidated to make the payment, divided by (ii) the number of installment payments elected by the Participant in the applicable Enrollment Agreement with respect to an In-Service Distribution Account or in the distribution election form filed pursuant to Section 3.2(b). The remaining installments shall be paid in an amount equal to (x) the vested value of such portion of the Distribution Option Account being distributed as of the business day the Funds are deemed to be liquidated to make the payment divided by (y) the number of installments remaining.
Section 6.4 Financial Hardship of Participant.
(a) At any time prior to commencement of payment pursuant to this Article VI, a Participant may request payment to the Participant of all or a portion of the amounts that the Participant has deferred under the Plan. The decision to approve or deny such a request shall be in the absolute discretion of the Administrator. However, such a request shall be approved only upon a finding that the Participant has suffered an Unforeseeable Financial Emergency, and then only in an amount necessary to eliminate such Unforeseeable Financial Emergency plus amounts necessary to pay taxes reasonably anticipated as a result of the distribution, after taking into account the extent to which such hardship is or may be relieved through reimbursement or compensation by insurance or by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship). In the event such a request is
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approved, payment of all or a portion of the amounts previously deferred by the Participant, with credited interest, to the extent approved by the Administrator, shall be made as soon as practicable to the Participant. Amounts otherwise payable to a Participant hereunder shall be adjusted (as determined by the Administrator in its absolute discretion) to take into account such Unforeseeable Financial Emergency payment. The Administrator shall administer hardship distribution requests consistently with Section 409A.
(b) If a Participant elects to take an Unforeseeable Financial Emergency distribution prior to June 30 of any Plan Year, the Participant’s deferral election shall be cancelled for the Plan Year in which the distribution occurs with respect to all Base Salary and Bonus Compensation not yet earned. If a Participant elects to take an Unforeseeable Financial Emergency distribution on or after June 30 of any Plan Year, the Participant’s deferral election shall be cancelled for the Plan Year in which such distribution occurs with respect to all salary and bonuses not yet earned, and the Participant shall be suspended from participation in the Plan for the following Plan Year. If the Participant wishes to commence making a Compensation Deferral after the period during which the Participant’s deferral election is cancelled pursuant to this Section 6.4(b), the Participant may make a new deferral election in accordance with the requirements of Section 3.1.
Section 6.5 Permissible Distribution Event.
Notwithstanding any provision of the Plan to the contrary, no distributions shall be made except upon a specified date or event as permitted pursuant to Section 409A.
The Company may cause the payment of benefits under this Plan to be made in whole or in part by the trustee of a trust designated by the Committee (the “Trust”). The Administrator may direct the Trustee to pay the Participant’s or Beneficiary’s benefit at the time and in the amount described herein. In the event the amounts allocated to the Participant under the Trust are not sufficient to provide the full amount of benefit payable to the Participant, the Company shall pay the remainder of such benefit.
Section 6.7 Inability to Locate Participant.
In the event that the Administrator is unable to locate a Participant or Beneficiary within two years following the date the Participant was to commence receiving payment, the entire amount allocated to the Participant’s Deferral Account and Company Contribution Account shall be forfeited. If, after such forfeiture, the Participant or Beneficiary later claims such benefit, such benefit shall be reinstated without interest or earnings from the date payment was to commence pursuant to the Participant’s elections under Sections 3.2 and 3.4, as applicable.
In the event of a Change in Control, all Participants shall receive a distribution of 100% of the Participant’s Distribution Option Accounts at the time of the distribution. Such distribution shall be made in a lump sum within 30 days following the date the Change in Control is
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consummated, in an amount equal to the value of such Distribution Option Accounts as of the business day the Funds are deemed to be liquidated to make the payment.
Upon the death of a Participant before the Participant’s Distribution Option Account(s) has been paid in full (either in a lump sum or installment payments), the Participant’s Beneficiary shall receive the balance of the Participant’s vested Account as of the date of death, as adjusted by subsequent gains or losses prior to distribution, in the form of a lump sum payment as soon as reasonably practicable following the date of the Participant’s death (but in no event after December 31 of the calendar year following the calendar year in which death occurs ).
A Participant or, following the Participant’s death, a Beneficiary (collectively referred to in this section as “Claimant”) may submit a claim for benefits under the Plan. Any claim for benefits under this Plan shall be made in writing to the Administrator. If such claim for benefits is wholly or partially denied, the Administrator shall, within 90 days after receipt of the claim, notify the Claimant of the denial of the claim unless special circumstances require an extension of time for processing the claim, which extension shall not exceed 180 days from receipt of the claim. If such extension is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial 90-day period and shall indicate the special circumstances requiring an extension of time and the date by which the Administrator expects to render a final decision. A notice of denial shall be in writing, shall be written in a manner calculated to be understood by the Claimant, and shall contain the specific reason or reasons for denial of the claim, a specific reference to the pertinent Plan provisions upon which the denial is based, a description of the additional material or information (if any) necessary to perfect the claim, together with an explanation of why such material or information is necessary, and an explanation of the claims review procedure set forth below, including a statement of the Claimant’s right to bring a civil action under section 502(a) of ERISA following an adverse benefit determination on review.
Within 60 days after the receipt by a Claimant of a written notice of denial of a claim, the Claimant may file a written request with the Administrator that it conduct a full and fair review of the denial of the claim for benefits. The Claimant, or duly authorized representative, shall receive, upon request and free of charge, reasonable access to, and copies of, all documents, records and other information relevant to the Claimant’s claim for benefits. The Claimant, or duly authorized representative may also submit written comments, documents, records and other information relating to the claim for benefits, and the review will take into account such items whether or not they were considered in the initial benefit determination.
The Administrator shall deliver to the Claimant, or authorized representative, a written decision on the claim within 60 days after the receipt of the request for review, except that if there
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are special circumstances that require an extension of time, the 60-day period may be extended to 120 days. If such extension is required, written notice shall be furnished to the Claimant, or authorized representative, prior to the termination of the initial 60-day period and shall indicate the special circumstances requiring an extension of time and the date by which the final decision will be rendered. The decision shall be written in a manner calculated to be understood by the Claimant, include the specific reason or reasons for the decision, include a statement that the Claimant is entitled to receive upon request and free of charge, access to and copies of all documents and other information relevant to the claim, contain a specific reference to the pertinent Plan provisions upon which the decision is based, and include a statement describing any voluntary appeal procedures offered by the Plan and a statement of the Claimant’s right to bring an action under section 502(a) of ERISA.
The Administrator, in determining claims for benefits, shall have the complete discretion to review and determine related factual questions, to construe the terms of the Plan, and to bind the Company with respect to the Plan.
The Plan shall be administered by the Administrator. The Administrator shall be appointed by, and serve at the pleasure of, the Committee, provided that if no Administrator is designated, the Plan shall be administered by the Committee. The number of members comprising the Administrator shall be determined by the Committee which may from time to time vary the number of members. A member of the Administrator may resign by delivering a written notice of resignation to the Committee. The Committee may remove any member by delivering a certified copy of its resolution of removal to such member. Vacancies in the membership of the Administrator shall be filled promptly by the Committee.
Section 10.2 Administrator Action.
The Administrator shall act at meetings by affirmative vote of a majority of the members of the Administrator. Any action permitted to be taken at a meeting may be taken without a meeting if, prior to such action, a written consent to the action is signed by all members of the Administrator and such written consent is filed with the minutes of the proceedings of the Administrator. A member of the Administrator shall not vote or act upon any matter which relates solely to such member as a Participant. Any member or members of the Administrator may execute any certificate or other written direction on behalf of the Administrator.
Section 10.3 Powers and Duties of the Administrator.
(a) The Administrator, on behalf of the Participants and their Beneficiaries, shall enforce the Plan in accordance with its terms, shall be charged with the general administration of the Plan, and shall have all powers necessary to accomplish its purposes, including, but not by way of limitation, the following:
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(i) To select the mutual funds, contracts or investment funds to be the Funds in accordance with Section 3.3(a) and (b) hereof;
(ii) To construe and interpret the terms and provisions of this Plan; reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan; and to make factual determinations;
(iii) To compute and certify to the amount and kinds of benefits payable to Participants and their Beneficiaries;
(iv) To maintain all records that may be necessary for the administration of the Plan;
(v) To provide for the disclosure of all information and the filing or provision of all reports and statements to Participants, Beneficiaries or governmental agencies as shall be required by law;
(vi) To make and publish such rules for the regulation of the Plan and procedures for the administration of the Plan as are not inconsistent with the terms hereof; and
(vii) To appoint a plan administrator or any other agent, and to delegate to them such powers and duties in connection with the administration of the Plan as the Administrator may from time to time prescribe.
(viii) On behalf of the Company, to select those Highly Compensated Employees who shall be Eligible Employees.
Section 10.4 Construction and Interpretation.
(a) The Administrator shall have full discretion to construe and interpret the terms and provisions of this Plan, which interpretation or construction shall be final and binding on all parties, including but not limited to, the Company and any Participant or Beneficiary. The Administrator shall administer such terms and provisions in a uniform and nondiscriminatory manner and in full accordance with any and all laws applicable to the Plan.
(b) Nothing contained in the Plan shall be construed to prevent the Company from taking any action which is deemed by it to be appropriate or in its best interest. No Participant, Beneficiary, or other Person shall have any claim against the Company as a result of such action. Any decisions, actions or interpretations to be made under the Plan by the Company or the Committee, or the Administrator acting on behalf of the Company, shall be made in its respective sole discretion, not as a fiduciary, need not be uniformly applied to similarly situated individuals and shall be final, binding and conclusive on all Persons interested in the Plan.
To enable the Administrator to perform its functions, the Company shall supply full and timely information to the Administrator on all matters relating to the Compensation of all
16
Participants, their death, Disability, or other cause of termination, and such other pertinent facts as the Administrator may require.
Section 10.6 Compensation, Expenses and Indemnity.
(a) The Administrator is authorized at the expense of the Company to employ such legal counsel as it may deem advisable to assist in the performance of its duties hereunder. Expenses and fees in connection with the administration of the Plan shall be paid by the Company.
(b) To the extent permitted by applicable state law, the Company shall indemnify and save harmless the Administrator and each member thereof, the Committee and any delegate of the Administrator who is an employee of the Company against any and all expenses, liabilities and claims, including legal fees to defend against such liabilities and claims arising out of their discharge in good faith of responsibilities under or incident to the Plan, other than expenses and liabilities arising out of willful misconduct. This indemnity shall not preclude such further indemnities as may be available under insurance purchased by the Company or provided by the Company under any bylaw, agreement or otherwise, as such indemnities are permitted under state law.
Section 11.1 Unsecured General Creditor.
Participants and their Beneficiaries, heirs, successors, and assigns shall have no legal or equitable rights, claims, or interest in any specific property or assets of the Company. No assets of the Company shall be held under any trust, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan. Any and all of the Company’s assets shall be, and remain, the general unpledged, unrestricted assets of the Company. The Company’s obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future, and the rights of the Participants and Beneficiaries shall be no greater than those of unsecured general creditors.
Section 11.2 Restriction Against Assignment.
The Company shall pay all amounts payable hereunder only to the Persons designated by the Plan and not to any other Persons. No part of a Participant’s Accounts shall be liable for the debts, contracts, or engagements of any Participant, the Participant’s Beneficiary, or successors in interest, nor shall a Participant’s Accounts be subject to execution by levy, attachment, or garnishment or by any other legal or equitable proceeding, nor shall any such Person have any right to alienate, anticipate, commute, pledge, encumber, or assign any benefits or payments hereunder in any manner whatsoever. If any Participant, Beneficiary or successor in interest is adjudicated bankrupt or purports to anticipate, alienate, sell, transfer, assign, pledge, encumber or charge any distribution or payment from the Plan, voluntarily or involuntarily, the Administrator, in its discretion, may cancel such distribution or payment (or any part thereof) to or for the benefit of such Participant, Beneficiary or successor in interest in such mariner as the Administrator shall direct.
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There shall be deducted from each payment made under the Plan or any other compensation payable to the Participant (or Beneficiary) all taxes which are required to be withheld by the Company in respect to such payment or this Plan. The Company shall have the right to reduce any payment (or compensation) by the amount of cash sufficient to provide the amount of said taxes.
Section 11.4 Amendment, Modification, Suspension or Termination.
The Committee or the Board of Directors of the Company may at any time, or from time to time, in its sole discretion amend or terminate the Plan in any manner that the Committee or the Board of Directors of the Company deems appropriate, including amending or terminating outstanding deferral elections, if necessary or appropriate to comply with changes to applicable law, without the consent of any Participant; provided, however, that no amendment shall reduce any benefits accrued under the terms of the Plan as of the date of amendment. In the event the Committee or the Board of Directors of the Company acts to terminate and liquidate the Plan in accordance with Treasury regulations Section 1.409A-3(j)(4)(ix), distribution to Participant shall be made in accordance with Article 6, unless otherwise required in order to comply with Section 409A.
This Plan shall be construed, governed and administered in accordance with the laws of the State of Delaware (including its statute of limitations and all substantive and procedural law, and without regard to its conflict of laws provisions), except as to matters of federal law.
Section 11.6 Receipt or Release.
Any payment to a Participant or the Participant’s Beneficiary in accordance with the provisions of the Plan shall, to the extent thereof, be in full satisfaction of all claims against the Administrator, the Company and the Trustee. The Administrator may require such Participant or Beneficiary, as a condition precedent to such payment, to execute a receipt and release to such effect.
Section 11.7 Payments on Behalf of Persons Under Incapacity.
In the event that any amount becomes payable under the Plan to a Person who, in the sole judgement of the Administrator, is considered by reason of physical or mental condition to be unable to give a valid receipt therefore, the Administrator may direct that such payment be made to any Person found by the Administrator, in its sole judgement, to have assumed the care of such Person. Any payment made pursuant to such determination shall constitute a full release and discharge of the Administrator and the Company.
Headings and subheadings in this Plan are inserted for convenience of reference only and are not to be considered in the construction of the provisions hereof.
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[ signature page to follow ]
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IN WITNESS WHEREOF, the Company has caused this document to be executed by its duly authorized officer to be effective on this September 1 , 201 8 .
HILTON RESORTS CORPORATION
By: /s/ Mark Wang
Name: Mark Wang
Its: President
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 September 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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November 1, 2018 |
Exhibit 31.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Allen J. Klingsick, Senior Vice President and Chief Accounting Officer of Hilton Grand Vacations Inc., currently performing functions substantially similar to those performed by a Principal Financial Officer, certify that:
1. |
I have reviewed this Quarterly Report on Form 10-Q for the quarter ended September 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/ Allen J. Klingsick |
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Allen J. Klingsick |
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Senior Vice President and Chief Accounting Officer (currently performing functions substantially similar to those performed by a Principal Financial Officer) |
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November 1, 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 September 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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November 1, 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 quarterly period ended September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Allen J. Klingsick, Senior Vice President and Chief Accounting Officer of the Company, currently performing functions substantially similar to those performed by a Principal Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, certify 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/ Allen J. Klingsick |
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Allen J. Klingsick |
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Senior Vice President and Chief Accounting Officer (currently performing functions substantially similar to those performed by a Principal Financial Officer) |
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November 1, 2018 |
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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.