10-Q 1 hgv-10q_20180630.htm 10-Q -2018 Q2 hgv-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________ to ________

Commission file number 001-37794

 

 

Hilton Grand Vacations Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

81-2545345

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

6355 MetroWest Boulevard, Suite 180,

 

Orlando, Florida

32835

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code (407) 613-3100

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

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

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

(Do not check if a smaller reporting company)

Smaller Reporting Company

Emerging Growth Company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of July 27, 2018 was 96,897,051.

 

 

 


 

HILTON GRAND VACATIONS INC.

FORM 10-Q TABLE OF CONTENTS

 

 

 

 

1


 

PART I FINANCIAL INFORMATION

Item 1.

Financial Statements

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

131

 

 

$

246

 

Restricted cash

 

 

72

 

 

 

51

 

Accounts receivable, net of allowance for doubtful accounts of $10 and $9

 

 

138

 

 

 

112

 

Timeshare financing receivables, net

 

 

1,089

 

 

 

1,071

 

Inventory

 

 

544

 

 

 

509

 

Property and equipment, net

 

 

411

 

 

 

238

 

Investment in unconsolidated affiliates

 

 

33

 

 

 

41

 

Intangible assets, net

 

 

73

 

 

 

72

 

Other assets

 

 

117

 

 

 

44

 

TOTAL ASSETS (variable interest entities - $390 and $471)

 

$

2,608

 

 

$

2,384

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

299

 

 

$

339

 

Advanced deposits

 

 

95

 

 

 

104

 

Debt, net

 

 

637

 

 

 

482

 

Non-recourse debt, net

 

 

604

 

 

 

583

 

Deferred revenues

 

 

226

 

 

 

109

 

Deferred income tax liabilities

 

 

230

 

 

 

249

 

Total liabilities (variable interest entities - $376 and $455)

 

 

2,091

 

 

 

1,866

 

Commitments and contingencies - see Note 19

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 300,000,000 authorized shares, none

   issued or outstanding as of June 30, 2018 and December 31, 2017

 

 

 

 

 

 

Common stock, $0.01 par value; 3,000,000,000 authorized shares,

   96,897,051 issued and outstanding as of June 30, 2018 and

   99,136,304 issued and outstanding as of December 31, 2017

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

170

 

 

 

162

 

Accumulated retained earnings

 

 

346

 

 

 

355

 

Total equity

 

 

517

 

 

 

518

 

TOTAL LIABILITIES AND EQUITY

 

$

2,608

 

 

$

2,384

 

 

See notes to unaudited condensed consolidated financial statements.

2


 

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

250

 

 

$

143

 

 

$

328

 

 

$

261

 

Sales, marketing, brand and other fees

 

 

146

 

 

 

144

 

 

 

271

 

 

 

274

 

Financing

 

 

39

 

 

 

36

 

 

 

77

 

 

 

71

 

Resort and club management

 

 

37

 

 

 

35

 

 

 

76

 

 

 

71

 

Rental and ancillary services

 

 

53

 

 

 

47

 

 

 

104

 

 

 

93

 

Cost reimbursements

 

 

38

 

 

 

34

 

 

 

74

 

 

 

68

 

Total revenues

 

 

563

 

 

 

439

 

 

 

930

 

 

 

838

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

61

 

 

 

34

 

 

 

80

 

 

 

67

 

Sales and marketing

 

 

193

 

 

 

169

 

 

 

354

 

 

 

321

 

Financing

 

 

12

 

 

 

11

 

 

 

23

 

 

 

21

 

Resort and club management

 

 

11

 

 

 

10

 

 

 

22

 

 

 

20

 

Rental and ancillary services

 

 

30

 

 

 

31

 

 

 

58

 

 

 

58

 

General and administrative

 

 

30

 

 

 

29

 

 

 

53

 

 

 

52

 

Depreciation and amortization

 

 

8

 

 

 

7

 

 

 

16

 

 

 

14

 

License fee expense

 

 

25

 

 

 

23

 

 

 

48

 

 

 

43

 

Cost reimbursements

 

 

38

 

 

 

34

 

 

 

74

 

 

 

68

 

Total operating expenses

 

 

408

 

 

 

348

 

 

 

728

 

 

 

664

 

Interest expense

 

 

(8

)

 

 

(7

)

 

 

(15

)

 

 

(14

)

Equity in losses from unconsolidated affiliates

 

 

(2

)

 

 

 

 

 

(1

)

 

 

 

Other gain, net

 

 

1

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

146

 

 

 

84

 

 

 

186

 

 

 

160

 

Income tax expense

 

 

(39

)

 

 

(33

)

 

 

(49

)

 

 

(59

)

Net income

 

$

107

 

 

$

51

 

 

$

137

 

 

$

101

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.10

 

 

$

0.51

 

 

$

1.40

 

 

$

1.02

 

Diluted

 

$

1.10

 

 

$

0.51

 

 

$

1.39

 

 

$

1.02

 

 

See notes to unaudited condensed consolidated financial statements.

3


 

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Operating Activities

 

 

 

 

 

 

 

 

Net income

 

$

137

 

 

$

101

 

Adjustments to reconcile net income to net cash (used in) provided by

   operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16

 

 

 

14

 

Amortization of deferred financing costs and other

 

 

3

 

 

 

3

 

Provision for loan losses

 

 

30

 

 

 

27

 

Share-based compensation

 

 

8

 

 

 

8

 

Deferred income (benefit) taxes

 

 

(6

)

 

 

1

 

Equity in losses from unconsolidated affiliates

 

 

1

 

 

 

 

Distributions received from unconsolidated affiliates

 

 

2

 

 

 

 

Net changes in assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(26

)

 

 

 

Timeshare financing receivables, net

 

 

(48

)

 

 

(35

)

Inventory

 

 

11

 

 

 

22

 

Purchase of operating property for future conversion to inventory

 

 

(176

)

 

 

 

Other assets

 

 

(58

)

 

 

(19

)

Accounts payable, accrued expenses and other

 

 

(42

)

 

 

36

 

Advanced deposits

 

 

8

 

 

 

(3

)

Deferred revenues

 

 

4

 

 

 

22

 

Other

 

 

2

 

 

 

 

Net cash (used in) provided by operating activities

 

 

(134

)

 

 

177

 

Investing Activities

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(20

)

 

 

(15

)

Software capitalization costs

 

 

(9

)

 

 

(6

)

Return of investment from unconsolidated affiliates

 

 

11

 

 

 

 

Investment in unconsolidated affiliates

 

 

(5

)

 

 

 

Net cash used in investing activities

 

 

(23

)

 

 

(21

)

Financing Activities

 

 

 

 

 

 

 

 

Issuance of debt

 

 

160

 

 

 

 

Issuance of non-recourse debt

 

 

100

 

 

 

350

 

Repurchase and retirement of common stock

 

 

(112

)

 

 

 

Repayment of non-recourse debt

 

 

(80

)

 

 

(395

)

Repayment of debt

 

 

(5

)

 

 

(5

)

Debt issuance costs

 

 

(2

)

 

 

(5

)

Proceeds from stock options exercises

 

 

 

 

 

1

 

Payment of withholding taxes on vesting of restricted stock units

 

 

(1

)

 

 

 

Capital contribution

 

 

3

 

 

 

 

Net cash provided by (used in) financing activities

 

 

63

 

 

 

(54

)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

 

(94

)

 

 

102

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

297

 

 

 

151

 

Cash, cash equivalents and restricted cash, end of period

 

$

203

 

 

$

253

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash operating activities:

 

 

 

 

 

 

 

 

Cumulative effect of adoption of new accounting standards

 

$

38

 

 

 

 

 

See notes to unaudited condensed consolidated financial statements.

4


 

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Total

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance as of December 31, 2017

 

 

99

 

 

$

1

 

 

$

162

 

 

$

355

 

 

$

518

 

Net income

 

 

 

 

 

 

 

 

 

 

 

137

 

 

 

137

 

Activity related to share-based compensation

 

 

 

 

 

 

 

 

5

 

 

 

 

 

 

5

 

Repurchase and retirement of common stock

 

 

(2

)

 

 

 

 

 

(3

)

 

 

(109

)

 

 

(112

)

Revenue recognition cumulative-effect

   adjustment

 

 

 

 

 

 

 

 

 

 

 

(38

)

 

 

(38

)

Capital contribution

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

3

 

Other

 

 

 

 

 

 

 

 

3

 

 

 

1

 

 

 

4

 

Balance as of June 30, 2018

 

 

97

 

 

$

1

 

 

$

170

 

 

$

346

 

 

$

517

 

 

See notes to unaudited condensed consolidated financial statements.

5


 

HILTON GRAND VACATIONS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization

Our Business

Hilton Grand Vacations Inc. (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our operations primarily consist of: selling vacation ownership intervals (“VOIs”) for us and third parties; operating resorts; financing and servicing loans provided to consumers for their timeshare purchases; and managing our points-based Hilton Grand Vacations Club exchange program (the “Club”). As of June 30, 2018, we had 51 properties, comprised of 8,367 units, located in the United States (“U.S.”) and Europe.

Our Spin-off from Hilton Worldwide Holdings Inc.

On January 3, 2017, the previously announced spin-off of Hilton Grand Vacations from Hilton Worldwide Holdings Inc. (“Hilton”) was completed. As a result of the spin-off, we became an independent public company, and our common stock is listed on the New York Stock Exchange under the symbol “HGV.”  Following the spin-off, Hilton did not retain any ownership interest in our company.   In connection with the completion of the spin-off, we entered into agreements with Hilton (who at the time was a related party) and other third parties, including licenses to use the Hilton Grand Vacations brand. The unaudited condensed consolidated financial statements reflect the effect of these agreements. For the three months ended June 30, 2018 and 2017, we incurred $38 million and $40 million, respectively, and for the six months ended June 30, 2018 and 2017, we incurred $97 million and $98 million, respectively, in costs relating to the agreements entered with Hilton. See Key Agreements Related to the Spin-Off section in Part I - Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2017 for further information.

 

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest.  In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods.  All material intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2017, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2018.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”). We adopted ASC 606 using the modified retrospective method in which the cumulative effect of applying the new standard has been recognized at the date of initial application with an adjustment to our opening balance of retained earnings. This approach applies to all contracts as of January 1, 2018. The new standard, as amended, replaces all current U.S. GAAP guidance on this topic and eliminates all industry-specific guidance.

6


 

The reported results as of and for the three and six months ended June 30, 2018 reflects the application of ASC 606 while the reported financial position as of December 31, 2017 and results for the three and six months ended June 30, 2017 were prepared under the 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 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 these packages when they are redeemed. On a portfolio basis, we exercise judgement to estimate the amount of expected breakage related to unused prepaid vacation packages and recognize such breakage in proportion to the pattern of packages utilized by our portfolio of customers.

 

Financing — We offer financing as an option to qualifying customers purchasing our VOI. Revenue from the financing of timeshare sales is recognized on the accrual method as earned based on the outstanding principal, interest rate and terms stated in each individual financing agreement. We also recognize revenue from servicing the loans provided by third-party developers to purchasers of their VOIs over the period services are rendered.  The adoption of ASC 606 had no impact to the current financing revenue recognition method.

 

 

Resort and club management — As part of our VOI sales, our customers enter into a Club arrangement which gives the customer an annual allotment of Club points that allow the customer to exchange the Club points for a number of vacation options. We manage the Club, receiving Club activation fees, annual dues and transaction fees from member exchanges. Club activation fees and the member's first year of annual dues are paid at the time of the VOI sale. The Club activation fee relates to activities we are required to undertake at or near contract inception to fulfill the contract, and does not result in the transfer of a promised good or service. Since our customers are granted the opportunity to renew their membership on an annual basis for no additional activation fee, we defer and amortize the activation fee on a straight-line basis over the seven year average inventory holding period. Annual dues for membership renewals are billed each year, and we recognize revenue from these annual dues over the period services are rendered. A member may elect to enter into an optional exchange transaction with their allotted Club points at which point the member pays their required transaction fee. This option does not represent a material right as the transactions are priced at their standalone selling price. Revenue related to the transaction is recognized when the services are rendered.

As part of our resort operations, we contract with homeowner’s associations (“HOAs”) to provide day-to-day-management services, including housekeeping services, operation of a reservation system, maintenance, and certain accounting and administrative services. We receive compensation for such management services, which is generally based on a percentage of costs to operate the resorts, on a monthly basis. These fees represent a form of variable consideration and are estimated and recognized over time as the HOAs receive and consume the benefits of the management services. Management fees received related to the portion of unsold VOIs at each resort which we own are recognized on a net basis given we retain these VOIs in our inventory.

 

Rental and ancillary services — Our rental and ancillary services consist primarily of rental revenues on unoccupied vacation ownership units and ancillary revenues. Rental revenue is recognized when occupancy has occurred. Advance deposits on the rental unit and the corresponding revenue is deferred and recognized upon the customer’s vacation stay. Ancillary revenues consist of food and beverage, retail, spa offerings and other guest services. We recognize ancillary revenue when goods have been provided and/or services have been rendered.

 

We account for rental operations of unsold VOIs, including accommodations provided through the use of our vacation sampler programs, as incidental operations. Incremental carrying costs in excess of incremental revenues are recognized in the period incurred. In all periods presented, incremental carrying costs exceeded incremental revenues and all revenues and expenses are recognized in the period earned or incurred.

 

 

Cost reimbursements — As part of our management agreements with HOAs, we receive cost reimbursements for performing the day to day management services, including direct and indirect costs that HOAs and developers reimburse to us. These costs primarily consist of payroll and payroll related costs for management of the HOAs and other services we provide where we are the employer. Cost reimbursements are based upon actual expenses with no added margin, and are billed to the HOA on a monthly basis. We recognize cost reimbursements when we incur the related reimbursable costs as the HOA receives and consumes the benefits of the management services.

We capitalize all incremental costs incurred to obtain a contract when such costs would not have been incurred if the contract had not been obtained. We elect to expense costs incurred to obtain a contract when the amortization period would be one year or less. Commissions for VOI sales for resorts under construction are expensed when the associated VOI revenue is recognized which is upon completion of the resort. These commissions can be found in Sales and marketing expense in our unaudited condensed consolidated statements of operations.

8


 

As of June 30, 2018, the ending asset balance for cost to obtain a contract was $17 million. For the three and six months ended June 30, 2018, the related amortization expense was $20 million and $19 million, respectively, with no associated impairment losses.

Recently Issued Accounting Pronouncements Other Than ASC 606

Adopted Accounting Standards

In August 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, which in part requires entities to assess whether distributions of cash from unconsolidated entities represent a return on the investment or a return of the investment, to appropriately classify the distributions in the statement of cash flows. We have made an accounting policy election to use the cumulative earnings approach to determine whether the distributions are returns on the investment and accordingly classified as operating cash flows. Under the cumulative earnings approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment and those in excess of that amount will be treated as returns of investment. On January 1, 2018, we adopted ASU 2016-15 which had no impact to our historical consolidated financial statements.  

Accounting Standards Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02 (“ASU 2016-02”), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840). Under the new provisions, all lessees will report a right-of-use asset and a liability for the obligation to make payments for all leases with the exception of those leases with a term of 12 months or less. Subsequent to ASU 2016-02, the FASB has issued ASU No. 2018-01 (“ASU 2018-01”) Leases (Topic 842): Land Easement Practical Expedient for Transition which clarifies the application of lease easements and eases adoption efforts for some land easements.  The provisions of ASU 2016-02 are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of this ASU are to be applied using a modified retrospective approach. We are currently evaluating the package of practical expedients available to us upon adoption and are assessing lease software solutions.  We continue to evaluate the effect that this ASU will have on our consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07 (“ASU 2018-07”), Compensation – Stock Compensation (Topic 718). Under the new guidance, the existing employee guidance will apply to nonemployee share-based transactions, with the exception of specific guidance related to attribution of compensation cost. The cost of nonemployee awards will continue to be recorded as if the grantor had paid cash for the goods or services. In addition, the contractual term will be able to be used in lieu of an expected term in the option-pricing model for nonemployee awards. The provisions of this ASU are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.  

Note 3: Revenue from Contracts with Customers

Financial Statement Impact of Adopting ASC 606

The cumulative effect of applying the new guidance to all contracts with customers as of January 1, 2018 was recorded as an adjustment to retained earnings as of the adoption date. The following unaudited cumulative adjustments were made to the condensed consolidated balance sheet as of January 1, 2018:

 

Sales of VOIs, net — Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. Under ASC 606, the timing of revenue recognition for Sales of VOIs under construction and all related direct costs have been deferred until construction is complete.

 

 

Sales, marketing, brand and other fees — Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration. Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages.

9


 

The table below shows the adjustments that were made to the condensed consolidated balance sheet as of January 1, 2018:

 

 

 

December 31, 2017

 

 

Adjustments

 

 

January 1, 2018

 

($ in millions)

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

246

 

 

$

 

 

$

246

 

Restricted cash

 

 

51

 

 

 

 

 

 

51

 

Accounts receivable, net of allowance for doubtful  accounts

 

 

112

 

 

 

 

 

 

112

 

Timeshare financing receivables, net

 

 

1,071

 

 

 

 

 

 

1,071

 

Inventory

 

 

509

 

 

 

30

 

 

 

539

 

Property and equipment, net

 

 

238

 

 

 

 

 

 

238

 

Investment in unconsolidated affiliate

 

 

41

 

 

 

 

 

 

41

 

Intangible assets, net

 

 

72

 

 

 

 

 

 

72

 

Other assets

 

 

44

 

 

 

16

 

 

 

60

 

TOTAL ASSETS

 

$

2,384

 

 

$

46

 

 

$

2,430

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

339

 

 

$

2

 

 

$

341

 

Advanced deposits

 

 

104

 

 

 

(17

)

 

 

87

 

Debt, net

 

 

482

 

 

 

 

 

 

482

 

Non-recourse debt, net

 

 

583

 

 

 

 

 

 

583

 

Deferred revenues

 

 

109

 

 

 

112

 

 

 

221

 

Deferred income tax liabilities

 

 

249

 

 

 

(13

)

 

 

236

 

Total liabilities

 

 

1,866

 

 

 

84

 

 

 

1,950

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 300,000,000 authorized

   shares, none issued or outstanding as of December 31,

   2017

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 3,000,000,000 authorized

   shares, 99,136,304 issued and outstanding as of

   December 31, 2017

 

 

1

 

 

 

 

 

 

1

 

Additional paid-in capital

 

 

162

 

 

 

 

 

 

162

 

Accumulated retained earnings

 

 

355

 

 

 

(38

)

 

 

317

 

Total equity

 

 

518

 

 

 

(38

)

 

 

480

 

TOTAL LIABILITIES AND EQUITY

 

$

2,384

 

 

$

46

 

 

$

2,430

 

Disaggregation of Revenue

The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following two segments: (i) Real estate sales and financing and (ii) Resort operations and club management. Please refer to Note 18: Business Segments below for more details related to our segments.

 

 

 

Three Months Ended

June 30, 2018

 

 

Six Months Ended

June 30, 2018

 

($ in millions)

 

 

 

 

 

 

 

 

Real Estate and Financing Segment

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

250

 

 

$

328

 

Sales, marketing, brand and other fees

 

 

146

 

 

 

271

 

Interest income

 

 

34

 

 

 

68

 

Other financing revenue

 

 

5

 

 

 

9

 

Real estate and financing segment revenues

 

$

435

 

 

$

676

 

10


 

 

 

 

Three Months Ended

June 30, 2018

 

 

Six Months Ended

June 30, 2018

 

($ in millions)

 

 

 

 

 

 

 

 

Resort Operations and Club Management Segment

 

 

 

 

 

 

 

 

Club management

 

$

23

 

 

$

46

 

Resort management

 

 

14

 

 

 

30

 

Rental (1)

 

 

46

 

 

 

91

 

Ancillary services

 

 

7

 

 

 

13

 

Resort operations and club management segment revenues

 

$

90

 

 

$

180

 

 

(1)

Includes intersegment eliminations.

 

Contract Balances

The following table provides information on our accounts receivable and contract asset from contracts with customers:

($ in millions)

 

January 1, 2018

 

 

June 30, 2018

 

Receivables, which are included in Accounts receivable, net(1)

 

$

97

 

 

$

117

 

Contract asset, which is included in Accounts receivable, net

 

 

 

 

3

 

 

(1)

Does not include financing receivables from sales of VOI.  See Note 5: Timeshare Financing Receivables for additional information.

 

The following table presents changes in our contract liabilities for the six months ended June 30, 2018.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

($ in millions)

 

January 1, 2018

 

 

Additions

 

 

Subtractions

 

 

June 30, 2018

 

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advanced deposits

 

$

87

 

 

$

84

 

 

$

(76

)

 

$

95

 

Deferred revenue(1)

 

 

197

 

 

 

198

 

 

 

(191

)

 

 

204

 

Club Bonus Point incentive liability(2)

 

 

52

 

 

 

26

 

 

 

(22

)

 

 

56

 

 

(1)

The deferred revenues balance is primarily comprised of (i) sales of VOI under construction, (ii) Club activation fees that are paid at the closing of a VOI purchase, which grants access to our points-based Club and (iii) annual dues for Club membership renewals.

(2)

Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our unaudited condensed consolidated balance sheets. This liability is comprised of revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.

 

Revenue earned during the three and six months ended June 30, 2018 that was included in the contract liabilities balance at January 1, 2018 was approximately $144 million and $179 million, respectively.

Accounts receivable for the six months ended June 30, 2018 include amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and are realized when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. For the six months ended June 30, 2018, there were no associated impairment losses. Refer to Note 5: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our Timeshare financing receivables.

Contract asset relates to incentive fees that can be earned for meeting certain target on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the incentive fee period.  

11


 

Contract liabilities include payments received or due in advance of satisfying our performance obligations, offset by revenues recognized.  Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues and the liability for Club Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the 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 June 30, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Remaining

 

 

Expected Recognition Period

 

($ in millions)

 

Performance

Obligation

 

 

Q3 2018

 

 

Q4 2018

 

Deferred revenues

 

$

109

 

 

$

 

 

$

109

 

Deferred expenses

 

 

52

 

 

 

 

 

52

 

The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of June 30, 2018:

 

($ in millions)

 

Remaining

Transaction Price

 

 

Recognition Period

 

Recognition Method

Advanced deposits

 

$

95

 

 

18 months

 

Upon customer stays

Club activation fees

 

 

58

 

 

7 years

 

Straight-line basis over average inventory holding

    period

Club Bonus Points

 

 

56

 

 

24 months

 

Upon redemption

 

ASC 606 provides certain practical expedients that facilitate the disclosure around performance obligations. We have elected the following practical expedients options:

 

 

to not disclose the variable consideration allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation for which revenue recognition criteria have been met; and

 

to not disclose the transaction price allocated to remaining performance obligations that are part of a contract that has an original expected duration of one year or less.

Our performance obligations under the management service arrangements and fee-for-service arrangements are satisfied over time and the related fees represent variable consideration that meets the first practical expedient option. Fees for management services are variable consideration as these fees are based off of costs to operate the resorts in a given annual period, which is resolved on a monthly basis over the contract term.

 

12


 

Impact of New Revenue Guidance on Financial Statement Line Items

The following tables compare the reported condensed consolidated balance sheet and statement of operations as of and for the three and six months ended June 30, 2018 as well as the cash flows for the six months ended June 30, 2018, to the previous accounting guidance:

 

 

June 30, 2018

 

 

 

As Reported

 

 

Effects of ASC 606

 

 

Previous

Accounting

Guidance

 

(in millions)

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

131

 

 

$

 

 

$

131

 

Restricted cash

 

 

72

 

 

 

 

 

 

72

 

Accounts receivable, net of allowance for doubtful accounts

 

 

138

 

 

 

 

 

 

138

 

Timeshare financing receivables, net

 

 

1,089

 

 

 

 

 

 

1,089

 

Inventory

 

 

544

 

 

 

(28

)

 

 

516

 

Property and equipment, net

 

 

411

 

 

 

 

 

 

411

 

Investment in unconsolidated affiliates

 

 

33

 

 

 

 

 

 

33

 

Intangible assets, net

 

 

73

 

 

 

 

 

 

73

 

Other assets

 

 

117

 

 

 

(12

)

 

 

105

 

TOTAL ASSETS

 

$

2,608

 

 

$

(40

)

 

$

2,568

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

299

 

 

$

(7

)

 

$

292

 

Advanced deposits

 

 

95

 

 

 

17

 

 

 

112

 

Debt, net

 

 

637

 

 

 

 

 

 

637

 

Non-recourse debt, net

 

 

604

 

 

 

 

 

 

604

 

Deferred revenues

 

 

226

 

 

 

(84

)

 

 

142

 

Deferred income tax liabilities

 

 

230

 

 

 

13

 

 

 

243

 

Total liabilities

 

 

2,091

 

 

 

(61

)

 

 

2,030

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 300,000,000 authorized shares,

   none issued or outstanding as of June 30, 2018

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 3,000,000,000 authorized shares,

   96,897,051 issued and outstanding as of June 30, 2018

 

 

1

 

 

 

 

 

 

1

 

Additional paid-in capital

 

 

170

 

 

 

 

 

 

170

 

Accumulated retained earnings

 

 

346

 

 

 

21

 

 

 

367

 

Total equity

 

 

517

 

 

 

21

 

 

 

538

 

TOTAL LIABILITIES AND EQUITY

 

$

2,608

 

 

$

(40

)

 

$

2,568

 

 

13


 

Total reported assets and liabilities were $40 million and $61 million, respectively, greater than the balance if the previous accounting guidance were in effect as of June 30, 2018. This was primarily due to the deferral of all direct costs and revenue recognition for Sales of VOIs until construction is complete. In addition, total reported liabilities were partially offset by releasing the advanced deposits liability to recognize expected breakage revenue on prepaid vacation packages proportionally as our customers redeem their packages.

 

 

 

Three Months Ended June 30, 2018

 

($ in millions)

 

As Reported

 

 

Effects of ASC 606

 

 

Previous

Accounting

Guidance

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

250

 

 

$

(87

)

 

$

163

 

Sales, marketing, brand and other fees

 

 

146

 

 

 

2

 

 

 

148

 

Financing

 

 

39

 

 

 

 

 

 

39

 

Resort and club management

 

 

37

 

 

 

 

 

 

37

 

Rental and ancillary services

 

 

53

 

 

 

 

 

 

53

 

Cost reimbursements

 

 

38

 

 

 

 

 

 

38

 

Total revenues

 

 

563

 

 

 

(85

)

 

 

478

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

61

 

 

 

(20

)

 

 

41

 

Sales and marketing

 

 

193

 

 

 

(9

)

 

 

184

 

Financing

 

 

12

 

 

 

 

 

 

12

 

Resort and club management

 

 

11

 

 

 

 

 

 

11

 

Rental and ancillary services

 

 

30

 

 

 

 

 

 

30

 

General and administrative

 

 

30

 

 

 

 

 

 

30

 

Depreciation and amortization

 

 

8

 

 

 

 

 

 

8

 

License fee expense

 

 

25

 

 

 

 

 

 

25

 

Cost reimbursements

 

 

38

 

 

 

 

 

 

38

 

Total operating expenses

 

 

408

 

 

 

(29

)

 

 

379

 

Interest expense

 

 

(8

)

 

 

 

 

 

(8

)

Equity in losses from unconsolidated affiliates

 

 

(2

)

 

 

 

 

 

(2

)

Other gain, net

 

 

1

 

 

 

 

 

 

1

 

Income before income taxes

 

 

146

 

 

 

(56

)

 

 

90

 

Income tax expense

 

 

(39

)

 

 

14

 

 

 

(25

)

Net income (loss)

 

$

107

 

 

$

(42

)

 

$

65

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.10

 

 

$

(0.43

)

 

$

0.67

 

Diluted

 

$

1.10

 

 

$

(0.44

)

 

$

0.66

 

 


14


 

 

 

Six Months Ended June 30, 2018

 

($ in millions)

 

As Reported

 

 

Effects of ASC 606

 

 

Previous

Accounting

Guidance

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

328

 

 

$

(28

)

 

$

300

 

Sales, marketing, brand and other fees

 

 

271

 

 

 

6

 

 

 

277

 

Financing

 

 

77

 

 

 

 

 

 

77

 

Resort and club management

 

 

76

 

 

 

 

 

 

76

 

Rental and ancillary services

 

 

104

 

 

 

 

 

 

104

 

Cost reimbursements

 

 

74

 

 

 

 

 

 

74

 

Total revenues

 

 

930

 

 

 

(22

)

 

 

908

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

80

 

 

 

(2

)

 

 

78

 

Sales and marketing

 

 

354

 

 

 

3

 

 

 

357

 

Financing

 

 

23

 

 

 

 

 

 

23

 

Resort and club management

 

 

22

 

 

 

 

 

 

22

 

Rental and ancillary services

 

 

58

 

 

 

 

 

 

58

 

General and administrative

 

 

53

 

 

 

 

 

 

53

 

Depreciation and amortization

 

 

16

 

 

 

 

 

 

16

 

License fee expense

 

 

48

 

 

 

 

 

 

48

 

Cost reimbursements

 

 

74

 

 

 

 

 

 

74

 

Total operating expenses

 

 

728

 

 

 

1

 

 

 

729

 

Interest expense

 

 

(15

)

 

 

 

 

 

(15

)

Equity in losses from unconsolidated affiliates

 

 

(1

)

 

 

 

 

 

(1

)

Income before income taxes

 

 

186

 

 

 

(23

)

 

 

163

 

Income tax expense

 

 

(49

)

 

 

5

 

 

 

(44

)

Net income (loss)

 

$

137

 

 

$

(18

)

 

$

119

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.40

 

 

$

(0.18

)

 

$

1.22

 

Diluted

 

$

1.39

 

 

$

(0.18

)

 

$

1.21

 

 

The following summarizes the significant changes to our condensed consolidated statement of operations for the three and six months ended June 30, 2018 as a result of the adoption of ASC 606 on January 1, 2018 compared to if we had continued to recognize revenues under the previous accounting guidance:

 

Under ASC 606, the timing of revenue recognition for Sales of VOIs under construction and all related direct costs have been deferred until construction is complete. Under the previous accounting guidance, we recognized revenue for sales of VOIs under construction in accordance with the percentage of completion method. This resulted in a lower Sales of VOIs, Cost of VOI sales and Total operating expenses;

 

Under ASC 606, using a portfolio approach, we have recognized the expected breakage revenue on packages not expected to be redeemed as Sales, marketing, brand and other fees proportionately when our other customers redeem their packages. Under the previous accounting guidance, we recognized breakage revenue from prepaid vacation packages when the likelihood of redemption was remote post expiration; and

 

Under ASC 606, certain sales incentives where we are acting as the agent are recognized on a net basis, therefore, resulted in a lower Sales, marketing, brand and other fees and Total operating expenses.  Under the previous accounting guidance, we recognized certain sales incentives on a gross basis which resulted in higher Sales, marketing, brand and other fees and Total operating expenses.

15


 

The adoption of ASC 606 had no impact on our total cash flows provided by operating activities or used by investing and financing activities. ASC 606 resulted in offsetting shifts in cash flows throughout net income and various changes in working capital balances.

 

 

Six Months Ended June 30, 2018

 

($ in millions)

 

As Reported

 

 

Previous

Accounting

Guidance

 

Net income

 

$

137

 

 

$

119

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

54

 

 

 

54

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(26

)

 

 

(26

)

Timeshare financing receivables, net

 

 

(48

)

 

 

(48

)

Inventory

 

 

11

 

 

 

9

 

Purchase of operating property for future conversion to inventory

 

 

(176

)

 

 

(176

)

Other assets

 

 

(58

)

 

 

(61

)

Accounts payable, accrued expenses and other

 

 

(42

)

 

 

(48

)

Advanced deposits

 

 

8

 

 

 

8

 

Deferred revenues

 

 

4

 

 

 

33

 

Other

 

 

2

 

 

 

2

 

Net cash used in operating activities

 

$

(134

)

 

$

(134

)

 

Note 4: Restricted Cash

Restricted cash was as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Escrow deposits on VOI sales

 

$

49

 

 

$

29

 

Reserves related to non-recourse debt(1)

 

 

23

 

 

 

22

 

 

 

$

72

 

 

$

51

 

 

(1)

See Note 12: Debt & Non-recourse Debt for further discussion.

Note 5: Timeshare Financing Receivables

Timeshare financing receivables were as follows:

 

 

 

June 30, 2018

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Timeshare financing receivables

 

$

388

 

 

$

858

 

 

$

1,246

 

Less: allowance for loan loss

 

 

(20

)

 

 

(137

)

 

 

(157

)

 

 

$

368

 

 

$

721

 

 

$

1,089

 

 

 

 

December 31, 2017

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Timeshare financing receivables

 

$

471

 

 

$

741

 

 

$

1,212

 

Less: allowance for loan loss

 

 

(27

)

 

 

(114

)

 

 

(141

)

 

 

$

444

 

 

$

627

 

 

$

1,071

 

 

16


 

The interest rate charged on the notes correlates to the risk profile of the borrower at the time of purchase and the percentage of the purchase that is financed, among other factors. As of June 30, 2018, our timeshare financing receivables had interest rates ranging from 5.3 percent to 20.5 percent, a weighted average interest rate of 12.2 percent, a weighted average remaining term of 7.7 years and maturities through 2029.

A portion of our timeshare financing receivables is used as collateral to secure a non-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) with a borrowing capacity of $450 million. As of June 30, 2018 and December 31, 2017, we had $250 million and $143 million, respectively, of gross timeshare financing receivables securing the outstanding debt balance of our Timeshare Facility. We recognize interest income on our timeshare financing receivables as earned. We record an estimate of variable consideration as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale.

Our timeshare financing receivables as of June 30, 2018 mature as follows:

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

2018 (remaining)

 

$

33

 

 

$

48

 

 

$

81

 

2019

 

 

65

 

 

 

70

 

 

 

135

 

2020

 

 

63

 

 

 

77

 

 

 

140

 

2021

 

 

58

 

 

 

83

 

 

 

141

 

2022

 

 

51

 

 

 

90

 

 

 

141

 

Thereafter

 

 

118

 

 

 

490

 

 

 

608

 

 

 

 

388

 

 

 

858

 

 

 

1,246

 

Less: allowance for loan loss

 

 

(20

)

 

 

(137

)

 

 

(157

)

 

 

$

368

 

 

$

721

 

 

$

1,089

 

 

We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the credit quality of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for determining our allowance for loan loss on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.

Our gross timeshare financing receivables balances by FICO score were as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

FICO score

 

 

 

 

 

 

 

 

700+

 

$

812

 

 

$

770

 

600-699

 

 

231

 

 

 

225

 

<600

 

 

28

 

 

 

28

 

No score(1)

 

 

175

 

 

 

189

 

 

 

$

1,246

 

 

$

1,212

 

 

(1)

Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.

We apply payments we receive for loans, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a loan is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for loans for which we had previously ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.

17


 

As of June 30, 2018 and December 31, 2017, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $64 million and $49 million, respectively. The following tables detail an aged analysis of our gross timeshare financing receivables balance:

 

 

 

June 30, 2018

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Current

 

$

379

 

 

$

787

 

 

$

1,166

 

31 - 90 days past due

 

 

5

 

 

 

11

 

 

 

16

 

91 - 120 days past due

 

 

2

 

 

 

3

 

 

 

5

 

121 days and greater past due

 

 

2

 

 

 

57

 

 

 

59

 

 

 

$

388

 

 

$

858

 

 

$

1,246

 

 

 

 

December 31, 2017

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Current

 

$

462

 

 

$

685

 

 

$

1,147

 

31 - 90 days past due

 

 

6

 

 

 

10

 

 

 

16

 

91 - 120 days past due

 

 

1

 

 

 

4

 

 

 

5

 

121 days and greater past due

 

 

2

 

 

 

42

 

 

 

44

 

 

 

$

471

 

 

$

741

 

 

$

1,212

 

 

The changes in our allowance for loan loss were as follows:

 

 

 

June 30, 2018

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Balance as of December 31, 2017

 

$

27

 

 

$

114

 

 

$

141

 

Write-offs

 

 

 

 

 

(14

)

 

 

(14

)

Provision for loan loss(1)

 

 

(7

)

 

 

37

 

 

 

30

 

Balance as of June 30, 2018

 

$

20

 

 

$

137

 

 

$

157

 

 

 

 

June 30, 2017

 

($ in millions)

 

Securitized

and Pledged

 

 

Unsecuritized

 

 

Total

 

Balance as of December 31, 2016

 

$

9

 

 

$

111

 

 

$

120

 

Write-offs

 

 

 

 

 

(17

)

 

 

(17

)

Securitization

 

 

28

 

 

 

(28

)

 

 

 

Provision for loan loss(1)

 

 

(4

)

 

 

31

 

 

 

27

 

Balance as of June 30, 2017

 

$

33

 

 

$

97

 

 

$

130

 

 

(1)

Includes activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables, net of incremental provision for loan loss.

Note 6: Inventory

Inventory was as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Completed unsold VOIs

 

$

215

 

 

$

191

 

Construction in process

 

 

63

 

 

 

60

 

Land, infrastructure and other

 

 

266

 

 

 

258

 

 

 

$

544

 

 

$

509

 

 

18


 

We benefited from $12 million in costs of sales true-ups relating to VOI products for the six months ended June 30, 2018, which resulted in a $12 million increase to the carrying value of inventory as of June 30, 2018. We benefited from $4 million in costs of sales true-ups 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 June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Cost of VOI sales related to fee-for-service upgrades

 

$

9

 

 

$

9

 

 

$

15

 

 

$

20

 

 

Note 7: Property and Equipment

 

Property and equipment were as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Land

 

 

146

 

 

 

53

 

Building and leasehold improvements

 

 

279

 

 

 

182

 

Furniture and equipment

 

 

55

 

 

 

48

 

Construction in progress

 

 

5

 

 

 

20

 

 

 

 

485

 

 

 

303

 

Accumulated depreciation

 

 

(74

)

 

 

(65

)

 

 

$

411

 

 

$

238

 

In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory. The transaction was accounted for as an asset acquisition with all of the purchase price allocated to Land, Building and leasehold improvements and Furniture and equipment.  

 

Note 8: Consolidated Variable Interest Entities

As of June 30, 2018 and December 31, 2017, we consolidated three variable interest entities (“VIEs”), that issued Securitized Debt, backed by pledged assets consisting primarily of a pool of timeshare financing receivables, which is without recourse to us. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we are required to replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only assets of our VIEs are available to settle the obligations of the respective entities.

Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Restricted cash

 

$

14

 

 

$

18

 

Timeshare financing receivables, net

 

 

368

 

 

 

445

 

Non-recourse debt(1)

 

 

375

 

 

 

454

 

 

(1)

Net of deferred financing costs.

During the six months ended June 30, 2018 and 2017, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

 

19


 

Note 9: Investment in Unconsolidated Affiliates

 

In March 2018, we entered into an agreement with SCG 1776, LLC, an affiliate of Strand Capital Group, LLC and formed 1776 Holding, LLC, a VIE. Because we are not the primary beneficiary, we do not consolidate 1776 Holding, LLC. Pursuant to the agreement, we contributed $5 million in cash for a 50 percent interest in 1776 Holding, LLC, which will construct an approximately 99-unit timeshare resort in Charleston, South Carolina. Our investment in 1776 Holdings, LLC is included in the condensed consolidated balance sheets as Investment in unconsolidated affiliates.  

 

During the six months ended June 30, 2018, we received a cash distributions of $13 million from our investment in BRE Ace LLC, also a VIE, of which $11 million was considered a return of investment.  

 

We held investments in our two unconsolidated affiliates with aggregated debt balances of $489 million and $488 million as of June 30, 2018 and December 31, 2017, respectively. The debt is secured by their assets and are without recourse to us. Our maximum exposure to loss as a result of our investment interests in the two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investments which totals $33 million and $41 million as of June 30, 2018 and December 31, 2017, respectively and (ii) receivables for commission and other fees earned under a fee-for-service arrangement.  See Note 17:  Related Party Transactions for additional information.  

 

Note 10: Other Assets

 

Other assets were as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Inventory deposits

 

$

44

 

 

$

 

Deferred selling, marketing, general and administrative expenses

 

 

15

 

 

 

3

 

Prepaid expenses

 

 

35

 

 

 

18

 

Other

 

 

23

 

 

 

23

 

 

 

$

117

 

 

$

44

 

 

Note 11:  Deferred Revenues

Deferred revenues were as follows:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Deferred VOI sales

 

$

130

 

 

$

45

 

Club activation fees

 

 

59

 

 

 

54

 

Club membership fees

 

 

28

 

 

 

 

Other

 

 

9

 

 

 

10

 

 

 

$

226

 

 

$

109

 

 

20


 

Note 12: Debt & Non-recourse Debt

Debt

The following table details our outstanding debt balance and its associated interest rates:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Debt(1)

 

 

 

 

 

 

 

 

Senior secured credit facilities:

 

 

 

 

 

 

 

 

Term loan with an average rate of 4.340%, due 2021

 

$

185

 

 

$

190

 

Revolver with an average rate of 4.340%, due 2021

 

 

160

 

 

 

 

Senior notes with a rate of 6.125%, due 2024

 

 

300

 

 

 

300

 

 

 

 

645

 

 

 

490

 

Less: unamortized deferred financing costs and discount(2)(3)

 

 

(8

)

 

 

(8

)

 

 

$

637

 

 

$

482

 

 

(1)

For the six months ended June 30, 2018 and year ended December 31, 2017, weighted average interest rates were 5.170 percent and 5.229 percent, respectively.

(2)

Amount includes deferred financing costs of $1 million and $7 million as of both June 30, 2018 and December 31, 2017, respectively, relating to our term loan and senior notes.  

(3)

Amount does not include deferred financing costs of $1 million as of June 30, 2018 and $2 million as of December 31, 2017, relating to our revolving facility included in Other Assets in our condensed consolidated balance sheets.

During the three months ended June 30, 2018, we borrowed $160 million under the revolving credit facility.  The interest rate on the revolving credit facility is based on one-month LIBOR plus 2.25 percent.

As of June 30, 2018 and December 31, 2017, we had $1 million of outstanding letter of credit under the revolving credit facility. We were in compliance with all applicable financial covenants as of June 30, 2018.

Non-recourse Debt

The following table details our outstanding non-recourse debt balance and its associated interest rates:

 

 

 

June 30,

 

 

December 31,

 

($ in millions)

 

2018

 

 

2017

 

Non-recourse debt(1)

 

 

 

 

 

 

 

 

Timeshare Facility with an average rate of 3.187%, due 2021

 

$

229

 

 

$

129

 

Securitized Debt with an average rate of 2.447%, due 2028

 

 

379

 

 

 

459

 

 

 

 

608

 

 

 

588

 

Less: unamortized deferred financing costs(2)

 

 

(4

)

 

 

(5

)

 

 

$

604

 

 

$

583

 

 

(1)

For the six months ended June 30, 2018 and year ended December 31, 2017, weighted average interest rates were 2.725 percent and 2.492 percent, respectively.

(2)

Amount relates to Securitized Debt only and does not include deferred financing costs of $3 million and $2 million as of June 30, 2018 and December 31, 2017, respectively, relating to our Timeshare Facility included in Other Assets in our condensed consolidated balance sheets.

21


 

The Timeshare Facility is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. In March 2018, we extended the commitment termination date to March 2020. The maturity date was extended 12 months from the commitment date to March 2021. As a result of this extension, we incurred $2 million in debt issuance costs recorded in other assets.  On May 31, 2018, we borrowed $100 million under the Timeshare 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 $23 million and $22 million as of June 30, 2018 and December 31, 2017, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.

Debt Maturities

The contractual maturities of our debt and non-recourse debt as of June 30, 2018 were as follows:

 

($ in millions)

 

Debt

 

 

Non-recourse

Debt

 

 

Total

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

2018 (remaining)

 

$

5

 

 

$

63

 

 

$

68

 

2019

 

 

10

 

 

 

122

 

 

 

132

 

2020

 

 

10

 

 

 

89

 

 

 

99

 

2021

 

 

320

 

 

 

262

 

 

 

582

 

2022

 

 

 

 

 

26

 

 

 

26

 

Thereafter

 

 

300

 

 

 

46

 

 

 

346

 

 

 

$

645

 

 

$

608

 

 

$

1,253

 

 

Note 13: Fair Value Measurements

The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:

 

 

 

June 30, 2018

 

 

 

 

 

 

 

Hierarchy Level

 

($ in millions)

 

Carrying

Amount

 

 

Level 1

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Timeshare financing receivables, net(1)

 

$

1,089

 

 

$

 

 

$

1,303

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Debt, net(2)

 

 

637

 

 

 

309

 

 

 

348

 

Non-recourse debt, net(2)

 

 

604

 

 

 

 

 

 

597

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

Hierarchy Level

 

($ in millions)

 

Carrying

Amount

 

 

Level 1

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Timeshare financing receivables, net(1)

 

$

1,071

 

 

$

 

 

$

1,292

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Debt, net(2)

 

 

482

 

 

 

329

 

 

 

194

 

Non-recourse debt, net(2)

 

 

583

 

 

 

 

 

 

577

 

 

(1)

Carrying amount net of allowance for loan loss.

(2)

Carrying amount net of unamortized deferred financing costs and discount.

22


 

Our estimates of the fair values were determined using available market information and appropriate valuation methods. 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 June 30, 2018.

Note 14: Income Taxes

At the end of each quarter, we estimate the effective tax rate expected to be applied for the full year. The effective income tax rate is determined by the level and composition of pre-tax income or loss, which is subject to federal, foreign, state and local income taxes. The effective income tax rate for the six months ended June 30, 2018 and 2017 was approximately 26 percent and 37 percent, respectively, which decreased primarily due to a decrease in the federal corporate income tax rate as a result of the Tax Cut and Jobs Act (the “Act”) that was passed on December 22, 2017.

 

We are applying the guidance in SEC Staff Accounting Bulletin 118 (“SAB 118”) when accounting for the enactment-date effects of the Act.  As of June 30, 2018, there has been no adjustment to the provisional amounts of the Act’s effects on the one-time repatriation tax and the existing deferred tax balances as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Furthermore, we have not yet elected an accounting policy to account for the tax upon Global Intangible Low-Taxed Income (“GILTI”) in either of the following ways: 1) as a period charge in the future period the tax arises or 2) as part of deferred taxes related to the investment or subsidiary, given the complexities of the GILTI taxation.  As of June 30, 2018, we have an insignificant amount of GILTI tax net of applicable foreign tax credit.

Note 15: Share-Based Compensation

Stock Plan

We issue time-vesting restricted stock units (“RSUs”), time and performance-vesting restricted stock units (“PSUs”) and nonqualified stock options (“options”) to certain employees and directors. We recognized share-based compensation expense of $5 million during the three months ended June 30, 2018 and 2017 and $8 million during the six months ended June 30, 2018 and 2017. As of June 30, 2018, unrecognized compensation costs for unvested awards were approximately $24 million, which is expected to be recognized over a weighted average period of 2.0 years. As of June 30, 2018, there were 7,062,074 shares of common stock available for future issuance.

RSUs

During the six months ended June 30, 2018, we issued 286,315 RSUs with a weighted average grant date fair value of $45.98, which generally vest in equal annual installments over three years from the date of grant.

Options

During the six months ended June 30, 2018, we issued 312,141 options with a weighted average exercise price of $46.48, which vest over three years from the date of the grant.

23


 

The weighted average grant date fair value of these options was $14.78, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

Expected volatility(1)

 

 

26.6

%

Dividend yield(2)

 

 

%

Risk-free rate(3)

 

 

2.7

%

Expected term (in years)(4)

 

 

6.0

 

 

(1)

Due to limited trading history for our common stock, we did not have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of our share price. As a result, we used an average historical volatility of our peer group over a time period consistent with its expected term assumption. Our peer group was determined based upon companies in our industry with similar business models and is consistent with those used to benchmark its executive compensation.

(2)

At the date of grant we had no plans to pay dividends during the expected term of these options.

(3)

Based on the yields of U.S. Department of Treasury instruments with similar expected lives on the date of grant.

(4)

Estimated using the average of the vesting periods and the contractual term of the options.

As of June 30, 2018, we had 385,207 options outstanding that were exercisable.

Performance Shares

During the six months ended June 30, 2018, we issued 92,578 PSUs with a weighted average grant date fair value of $42.94. The PSUs are settled at the end of a three-year performance period, with 70 percent of the PSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization. This metric is further adjusted by sales of VOIs under construction. The remaining 30 percent of the PSUs are subject to the achievement of certain VOI sales targets.  We determined that the performance conditions for these awards are probable of achievement and, as of June 30, 2018, we recognized compensation expense based on the number of PSUs we expect to vest.

Note 16: Earnings Per Share

The following table presents the calculation of our basic and diluted earnings per share (“EPS”).  The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended June 30, 2018 is 96,774,130 and 97,463,820, respectively, and six months ended June 30, 2018 is 97,692,558 and 98,474,971, respectively.  The weighted average shares outstanding used to compute basic EPS and diluted EPS for the three months ended June 30, 2017 was 98,959,438 and 99,529,301, respectively and for the six months ended June 30, 2017 was 98,881,494 and 99,442,829, respectively.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ and shares outstanding in millions, except per share amounts)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income(1)

 

$

107

 

 

$

51

 

 

$

137

 

 

$

101

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

97

 

 

 

99

 

 

 

98

 

 

 

99

 

Basic EPS

 

$

1.10

 

 

$

0.51

 

 

$

1.40

 

 

$

1.02

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income(1)

 

$

107

 

 

$

51

 

 

$

137

 

 

$

101

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

97

 

 

 

100

 

 

 

98

 

 

 

99

 

Diluted EPS

 

$

1.10

 

 

$

0.51

 

 

$

1.39

 

 

$

1.02

 

 

(1)

Net income for the three months ended June 30, 2018 and 2017 was $106,861,230 and $50,828,907, respectively, and for the six months ended June 30, 2018 and 2017 was $137,031,259 and $101,041,522, respectively. 

24


 

The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period.

For the three and six months ended June 30, 2018, we excluded 533,609 and 341,246 share-based compensation awards, respectively, because their effect would have been anti-dilutive under the treasury stock method.

Note 17: Related Party Transactions

HNA Tourism Group Co., Ltd.

On March 13, 2018, we and HNA Tourism Group Co., Ltd. (“HNA”) and HNA HLT Holdco I LLC (the “Selling Stockholder”), an affiliate of HNA, entered into a Master Amendment and Option Agreement (the “Master Amendment and Option Agreement”) to make certain amendments to the Stockholders Agreement, dated October 24, 2016, between us and HNA (the “Stockholders Agreement”) and the Registration Rights Agreement, dated October 24, 2016, between us and HNA (the “Registration Rights Agreement”), among other things, (i) to permit the sale of up to all 24,750,000 shares of our common stock owned by the Selling Stockholder prior to the expiration of the two-year restricted period originally contained in the Stockholders Agreement, (ii) grant us a right to repurchase up to 4,340,000 shares of our common stock held by the Selling Stockholder, (iii) provide that HNA has customary “demand” registration rights effective March 13, 2018, (iv) require HNA to pay all expenses incurred under the Registration Rights Agreement for registrations or offerings occurring prior to a certain date and (v) eliminate HNA’s right to designate a certain number of directors to our board of directors. We exercised the repurchase option from the Selling Stockholder with respect to 2,500,000 shares at a price of approximately $44.75 per share.  

On March 14, 2018, HGV and HNA entered into an underwriting agreement with several underwriters, pursuant to which the underwriters agreed to purchase from the Selling Stockholder 22,250,000 shares of common stock, $0.01 par value per share, of the Company at a price of approximately $44.75 per share.  The sale was completed on March 19, 2018; consequently, HNA ceased to be a related party.  We did not receive any proceeds from the sale.

On March 19, 2018, the repurchase was completed and the shares were retired.  

The Blackstone Group

 

In September 2017, Blackstone completed the sale of substantially all of our common stock and ceased to be a related party. For the three and six months ended June 30, 2017, we earned $42 million and $93 million, respectively, in commission and other fees related to a fee-for-service arrangement with Blackstone affiliates to sell VOIs on their behalf.  

 

BRE Ace LLC

 

In July 2017, we acquired a 25 percent ownership interest in BRE Ace LLC, a VIE. During the three and six months ended June 30, 2018, we recorded $2 million and $1 million, respectively, in Equity in losses from unconsolidated affiliates, included in our condensed consolidated statements of operations.  Additionally, we earn commissions and other fees related to a fee-for-service agreement to sell VOIs at Elara, by Hilton Grand Vacations.  These amounts are summarized in the following table and included in our condensed consolidated statements of operations as of the date they became a related party.  

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Commission and other fees

 

$

32

 

 

$

 

 

$

64

 

 

$

 

 

Also related to the fee-for-service agreement, as of June 30, 2018, we have outstanding receivables of $33 million.  

 

25


 

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 six months ended June 30, 2018, we recorded less than a million loss included in the condensed consolidated statements of operations as Equity in losses from unconsolidated affiliates. See Note 9: Investment in Unconsolidated Affiliates for additional information.

Note 18: Business Segments

We operate our business through the following two segments:

 

Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of VOIs and revenue from servicing the loans. We also generate fee revenue from servicing the loans provided by third-party developers to purchasers of their VOIs.

 

Resort operations and club management – We manage the Club, earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We earn fees for managing the timeshare properties. We generate rental revenue from unit rentals of unsold inventory and inventory made available due to ownership exchanges under our Club program. We also earn revenue from food and beverage, retail and spa outlets at our timeshare properties.

The performance of our operating segments is evaluated primarily based on adjusted earnings before interest expense (excluding non-recourse debt), taxes, depreciation and amortization (“EBITDA”). We define Adjusted EBITDA as EBITDA which has been further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.

We do not include equity in earnings (losses) from unconsolidated affiliate in our measures of segment revenues. The following table presents revenues for our reportable segments reconciled to consolidated amounts:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing

 

$

435

 

 

$

323

 

 

$

676

 

 

$

606

 

Resort operations and club management(1)

 

 

98

 

 

 

92

 

 

 

196

 

 

 

180

 

Total segment revenues

 

 

533

 

 

 

415

 

 

 

872

 

 

 

786

 

Cost reimbursements

 

 

38

 

 

 

34

 

 

 

74

 

 

 

68

 

Intersegment eliminations(1)(2)

 

 

(8

)

 

 

(10

)

 

 

(16

)

 

 

(16

)

Total revenues

 

$

563

 

 

$

439

 

 

$

930

 

 

$

838

 

 

 

(1)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for discounted stays at properties resulting from marketing packages. These charges totaled $8 million and $10 million for the three months ended June 30, 2018 and 2017, respectively, and $16 million for both six months ended June 30, 2018 and 2017.

(2)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for the rental of model units to show prospective buyers. These charges totaled less than $1 million for each of the three and six months ended June 30, 2018 and 2017.  

26


 

The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

($ in millions)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing(1)

 

$

163

 

 

$

99

 

 

$

207

 

 

$

182

 

Resort operations and club management(1)

 

 

58

 

 

 

52

 

 

 

117

 

 

 

103

 

Segment Adjusted EBITDA

 

 

221

 

 

 

151

 

 

 

324

 

 

 

285

 

General and administrative

 

 

(30

)

 

 

(29

)

 

 

(53

)

 

 

(52

)

Depreciation and amortization

 

 

(8

)

 

 

(7

)

 

 

(16

)

 

 

(14

)

License fee expense

 

 

(25

)

 

 

(23

)

 

 

(48

)

 

 

(43

)

Other gain, net

 

 

1

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(8

)

 

 

(7

)

 

 

(15

)

 

 

(14

)

Income tax expense

 

 

(39

)

 

 

(33

)

 

 

(49

)

 

 

(59

)

Equity in losses from unconsolidated affiliates

 

 

(2

)

 

 

 

 

 

(1

)

 

 

 

Other adjustment items

 

 

(3

)

 

 

(1

)

 

 

(5

)

 

 

(2

)

Net income

 

$

107

 

 

$

51

 

 

$

137

 

 

$

101

 

 

(1)

Includes intersegment eliminations. Refer to our table presenting revenues by reportable segment above for additional discussion.

Note 19: Commitments and Contingencies

We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of June 30, 2018, we were committed to purchase approximately $464 million of inventory and land over a period of seven years. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. During each of the six months ended June 30, 2018 and 2017, we purchased $4 million of VOI inventory as required under our commitments. As of June 30, 2018, our remaining obligation pursuant to these arrangements was expected to be incurred as follows:

 

($ in millions)

 

Purchase

Obligations

 

Year

 

 

 

 

2018 (remaining)

 

$

13

 

2019

 

 

247

 

2020

 

 

23

 

2021

 

 

63

 

2022

 

 

35

 

Thereafter

 

 

83

 

Total

 

$

464

 

 

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which possible losses are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2018, will not have a material effect on our unaudited condensed consolidated financial statements.

27


 

Note 20: Condensed Consolidating Guarantor Financial Information

The following schedules present the condensed consolidating financial information as of June 30, 2018 and December 31, 2017 and for the three and six months ended June 30, 2018 and 2017 for the Parent, Subsidiary Issuers, Guarantors and Non-Guarantors.

 

 

 

June 30, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

 

 

$

120

 

 

$

11

 

 

$

 

 

$

131

 

Restricted cash

 

 

 

 

 

 

 

 

49

 

 

 

23

 

 

 

 

 

 

72

 

Accounts receivable, net

 

 

 

 

 

 

 

 

138

 

 

 

8

 

 

 

(8

)

 

 

138

 

Timeshare financing receivables, net

 

 

 

 

 

 

 

 

296

 

 

 

793

 

 

 

 

 

 

1,089

 

Inventory

 

 

 

 

 

 

 

 

533

 

 

 

11

 

 

 

 

 

 

544

 

Property and equipment, net

 

 

 

 

 

 

 

 

407

 

 

 

4

 

 

 

 

 

 

411

 

Investment in unconsolidated affiliates

 

 

 

 

 

 

 

 

33

 

 

 

 

 

 

 

 

 

33

 

Intangible assets, net

 

 

 

 

 

 

 

 

73

 

 

 

 

 

 

 

 

 

73

 

Other assets

 

 

 

 

 

1

 

 

 

66

 

 

 

50

 

 

 

 

 

 

117

 

Investments in subsidiaries

 

 

517

 

 

 

1,153

 

 

 

290

 

 

 

 

 

 

(1,960

)

 

 

 

TOTAL ASSETS

 

$

517

 

 

$

1,154

 

 

$

2,005

 

 

$

900

 

 

$

(1,968

)

 

$

2,608

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued

   expenses and other

 

$

 

 

$

 

 

$

301

 

 

$

6

 

 

$

(8

)

 

$

299

 

Advanced deposits

 

 

 

 

 

 

 

 

95

 

 

 

 

 

 

 

 

 

95

 

Debt, net

 

 

 

 

 

637

 

 

 

 

 

 

 

 

 

 

 

 

637

 

Non-recourse debt, net

 

 

 

 

 

 

 

 

 

 

 

604

 

 

 

 

 

 

604

 

Deferred revenues

 

 

 

 

 

 

 

 

226

 

 

 

 

 

 

 

 

 

226

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

230

 

 

 

 

 

 

 

 

 

230

 

Total equity

 

 

517

 

 

 

517

 

 

 

1,153

 

 

 

290

 

 

 

(1,960

)

 

 

517

 

TOTAL LIABILITIES AND EQUITY

 

$

517

 

 

$

1,154

 

 

$

2,005

 

 

$

900

 

 

$

(1,968

)

 

$

2,608

 

28


 

 

 

 

December 31, 2017

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

 

$

 

 

$

230

 

 

$

16

 

 

$

 

 

$

246

 

Restricted cash

 

 

 

 

 

 

 

 

29

 

 

 

22

 

 

 

 

 

 

51

 

Accounts receivable, net

 

 

 

 

 

 

 

 

113

 

 

 

5

 

 

 

(6

)

 

 

112

 

Timeshare financing receivables, net

 

 

 

 

 

 

 

 

457

 

 

 

614

 

 

 

 

 

 

1,071

 

Inventory

 

 

 

 

 

 

 

 

509

 

 

 

 

 

 

 

 

 

509

 

Property and equipment, net

 

 

 

 

 

 

 

 

232

 

 

 

6

 

 

 

 

 

 

238

 

Investment in unconsolidated affiliate

 

 

 

 

 

 

 

 

41

 

 

 

 

 

 

 

 

 

41

 

Intangible assets, net

 

 

 

 

 

 

 

 

72

 

 

 

 

 

 

 

 

 

72

 

Other assets

 

 

 

 

 

2

 

 

 

36

 

 

 

7

 

 

 

(1

)

 

 

44

 

Investments in subsidiaries

 

 

518

 

 

 

999

 

 

 

81

 

 

 

 

 

 

(1,598

)

 

 

 

TOTAL ASSETS

 

$

518

 

 

$

1,001

 

 

$

1,800

 

 

$

670

 

 

$

(1,605

)

 

$

2,384

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued

   expenses and other

 

$

 

 

$

1

 

 

$

338

 

 

$

7

 

 

$

(7

)

 

$

339

 

Advanced deposits

 

 

 

 

 

 

 

 

104

 

 

 

 

 

 

 

 

 

104

 

Debt, net

 

 

 

 

 

482

 

 

 

 

 

 

 

 

 

 

 

 

482

 

Non-recourse debt, net

 

 

 

 

 

 

 

 

 

 

 

583

 

 

 

 

 

 

583

 

Deferred revenues

 

 

 

 

 

 

 

 

109

 

 

 

 

 

 

 

 

 

109

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

250

 

 

 

(1

)

 

 

 

 

 

249

 

Total equity

 

 

518

 

 

 

518

 

 

 

999

 

 

 

81

 

 

 

(1,598

)

 

 

518

 

TOTAL LIABILITIES AND EQUITY

 

$

518

 

 

$

1,001

 

 

$

1,800

 

 

$

670

 

 

$

(1,605

)

 

$

2,384

 

 

29


 

 

 

For the Three Months Ended June 30, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOI’s, net

 

$

 

 

$

 

 

$

248

 

 

$

2

 

 

$

 

 

$

250

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

147

 

 

 

1

 

 

 

(2

)

 

 

146

 

Financing

 

 

 

 

 

 

 

 

17

 

 

 

23

 

 

 

(1

)

 

 

39

 

Resort and club management

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

 

 

 

37

 

Rental and ancillary service

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

53

 

Cost reimbursements

 

 

 

 

 

 

 

 

37

 

 

 

1

 

 

 

 

 

 

38

 

Total revenues

 

 

 

 

 

 

 

 

539

 

 

 

27

 

 

 

(3

)

 

 

563

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

61

 

 

 

 

 

 

 

 

 

61

 

Sales and marketing

 

 

 

 

 

 

 

 

193

 

 

 

2

 

 

 

(2

)

 

 

193

 

Financing

 

 

 

 

 

 

 

 

5

 

 

 

8

 

 

 

(1

)

 

 

12

 

Resort and club management

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Rental and ancillary service

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

General and administrative

 

 

 

 

 

 

 

 

30

 

 

 

 

 

 

 

 

 

30

 

Depreciation and amortization

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

License fee expense

 

 

 

 

 

 

 

 

25

 

 

 

 

 

 

 

 

 

25

 

Cost reimbursements

 

 

 

 

 

 

 

 

37

 

 

 

1

 

 

 

 

 

 

38

 

Total operating expenses

 

 

 

 

 

 

 

 

400

 

 

 

11

 

 

 

(3

)

 

 

408

 

Interest expense

 

 

 

 

 

(8

)

 

 

 

 

 

 

 

 

 

 

 

(8

)

Equity in losses from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

(2

)

Other gain, net

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Income (loss) before income taxes

 

 

 

 

 

(8

)

 

 

138

 

 

 

16

 

 

 

 

 

 

146

 

Income tax expense

 

 

 

 

 

 

 

 

(39

)

 

 

 

 

 

 

 

 

(39

)

Income (loss) before equity in earnings

   (loss) from subsidiaries

 

 

 

 

 

(8

)

 

 

99

 

 

 

16

 

 

 

 

 

 

107

 

Equity in earnings from subsidiaries

 

 

107

 

 

 

115

 

 

 

16

 

 

 

 

 

 

(238

)

 

 

 

Net income

 

$

107

 

 

$

107

 

 

$

115

 

 

$

16

 

 

$

(238

)

 

$

107

 

 

30


 

 

 

For the Three Months Ended June 30, 2017

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOI’s, net

 

$

 

 

$

 

 

$

140

 

 

$

3

 

 

$

 

 

$

143

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

140

 

 

 

2

 

 

 

2

 

 

 

144

 

Financing

 

 

 

 

 

 

 

 

16

 

 

 

21

 

 

 

(1

)

 

 

36

 

Resort and club management

 

 

 

 

 

 

 

 

35

 

 

 

 

 

 

 

 

 

35

 

Rental and ancillary service

 

 

 

 

 

 

 

 

46

 

 

 

1

 

 

 

 

 

 

47

 

Cost reimbursements

 

 

 

 

 

 

 

 

32

 

 

 

2

 

 

 

 

 

 

34

 

Total revenues

 

 

 

 

 

 

 

 

409

 

 

 

29

 

 

 

1

 

 

 

439

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

33

 

 

 

1

 

 

 

 

 

 

34

 

Sales and marketing

 

 

 

 

 

 

 

 

164

 

 

 

3

 

 

 

2

 

 

 

169

 

Financing

 

 

 

 

 

 

 

 

4

 

 

 

8

 

 

 

(1

)

 

 

11

 

Resort and club management

 

 

 

 

 

 

 

 

9

 

 

 

1

 

 

 

 

 

 

10

 

Rental and ancillary service

 

 

 

 

 

 

 

 

30

 

 

 

1

 

 

 

 

 

 

31

 

General and administrative

 

 

 

 

 

 

 

 

26

 

 

 

3

 

 

 

 

 

 

29

 

Depreciation and amortization

 

 

 

 

 

 

 

 

7

 

 

 

 

 

 

 

 

 

7

 

License fee expense

 

 

 

 

 

 

 

 

23

 

 

 

 

 

 

 

 

 

23

 

Cost reimbursements

 

 

 

 

 

 

 

 

32

 

 

 

2

 

 

 

 

 

 

34

 

Total operating expenses

 

 

 

 

 

 

 

 

328

 

 

 

19

 

 

 

1

 

 

 

348

 

Interest expense

 

 

 

 

 

(7

)

 

 

 

 

 

 

 

 

 

 

 

(7

)

Income (loss) before income taxes

 

 

 

 

 

(7

)

 

 

81

 

 

 

10

 

 

 

 

 

 

84

 

Income tax expense

 

 

 

 

 

 

 

 

(37

)

 

 

4

 

 

 

 

 

 

(33

)

Income (loss) before equity in earnings

   (loss) from subsidiaries

 

 

 

 

 

(7

)

 

 

44

 

 

 

14

 

 

 

 

 

 

51

 

Equity in earnings from subsidiaries

 

 

51

 

 

 

58

 

 

 

14

 

 

 

 

 

 

(123

)

 

 

 

Net income

 

$

51

 

 

$

51

 

 

$

58

 

 

$

14

 

 

$

(123

)

 

$

51

 

31


 

 

 

 

For the Six Months Ended June 30, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOI’s, net

 

$

 

 

$

 

 

$

325

 

 

$

3

 

 

$

 

 

$

328

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

273

 

 

 

2

 

 

 

(4

)

 

 

271

 

Financing

 

 

 

 

 

 

 

 

37

 

 

 

42

 

 

 

(2

)

 

 

77

 

Resort and club management

 

 

 

 

 

 

 

 

76

 

 

 

 

 

 

 

 

 

76

 

Rental and ancillary service

 

 

 

 

 

 

 

 

103

 

 

 

1

 

 

 

 

 

 

104

 

Cost reimbursements

 

 

 

 

 

 

 

 

72

 

 

 

2

 

 

 

 

 

 

74

 

Total revenues

 

 

 

 

 

 

 

 

886

 

 

 

50

 

 

 

(6

)

 

 

930

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

80

 

 

 

 

 

 

 

 

 

80

 

Sales and marketing

 

 

 

 

 

 

 

 

354

 

 

 

4

 

 

 

(4

)

 

 

354

 

Financing

 

 

 

 

 

 

 

 

10

 

 

 

15

 

 

 

(2

)

 

 

23

 

Resort and club management

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Rental and ancillary service

 

 

 

 

 

 

 

 

57

 

 

 

1

 

 

 

 

 

 

58

 

General and administrative

 

 

 

 

 

 

 

 

53

 

 

 

 

 

 

 

 

 

53

 

Depreciation and amortization

 

 

 

 

 

 

 

 

16

 

 

 

 

 

 

 

 

 

16

 

License fee expense

 

 

 

 

 

 

 

 

48

 

 

 

 

 

 

 

 

 

48

 

Cost reimbursements

 

 

 

 

 

 

 

 

72

 

 

 

2

 

 

 

 

 

 

74

 

Total operating expenses

 

 

 

 

 

 

 

 

712

 

 

 

22

 

 

 

(6

)

 

 

728

 

Interest expense

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

 

 

 

(15

)

Equity in losses from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Income (loss) before income taxes

 

 

 

 

 

(15

)

 

 

173

 

 

 

28

 

 

 

 

 

 

186

 

Income tax expense

 

 

 

 

 

 

 

 

(49

)

 

 

 

 

 

 

 

 

(49

)

Income (loss) before equity in earnings

   (loss) from subsidiaries

 

 

 

 

 

(15

)

 

 

124

 

 

 

28

 

 

 

 

 

 

137

 

Equity in earnings from subsidiaries

 

 

137

 

 

 

152

 

 

 

28

 

 

 

 

 

 

(317

)

 

 

 

Net income

 

$

137

 

 

$

137

 

 

$

152

 

 

$

28

 

 

$

(317

)

 

$

137

 

32


 

 

 

 

For the Six Months Ended June 30, 2017

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOI’s, net

 

$

 

 

$

 

 

$

243

 

 

$

18

 

 

$

 

 

$

261

 

Sales, marketing, license and other fees

 

 

 

 

 

 

 

 

274

 

 

 

2

 

 

 

(2

)

 

 

274

 

Financing

 

 

 

 

 

 

 

 

31

 

 

 

43

 

 

 

(3

)

 

 

71

 

Resort and club management

 

 

 

 

 

 

 

 

69

 

 

 

2

 

 

 

 

 

 

71

 

Rental and ancillary service

 

 

 

 

 

 

 

 

92

 

 

 

1

 

 

 

 

 

 

93

 

Cost reimbursements

 

 

 

 

 

 

 

 

65

 

 

 

3

 

 

 

 

 

 

68

 

Total revenues

 

 

 

 

 

 

 

 

774

 

 

 

69

 

 

 

(5

)

 

 

838

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

65

 

 

 

2

 

 

 

 

 

 

67

 

Sales and marketing

 

 

 

 

 

 

 

 

315

 

 

 

8

 

 

 

(2

)

 

 

321

 

Financing

 

 

 

 

 

 

 

 

9

 

 

 

15

 

 

 

(3

)

 

 

21

 

Resort and club management

 

 

 

 

 

 

 

 

18

 

 

 

2

 

 

 

 

 

 

20

 

Rental and ancillary service

 

 

 

 

 

 

 

 

57

 

 

 

1

 

 

 

 

 

 

58

 

General and administrative

 

 

 

 

 

 

 

 

49

 

 

 

3

 

 

 

 

 

 

52

 

Depreciation and amortization

 

 

 

 

 

 

 

 

14

 

 

 

 

 

 

 

 

 

14

 

License fee expense

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

 

 

 

43

 

Cost reimbursements

 

 

 

 

 

 

 

 

65

 

 

 

3

 

 

 

 

 

 

68

 

Total operating expenses

 

 

 

 

 

 

 

 

635

 

 

 

34

 

 

 

(5

)

 

 

664

 

Interest expense

 

 

 

 

 

(14

)

 

 

 

 

 

 

 

 

 

 

 

(14

)

Income (loss) before income taxes

 

 

 

 

 

(14

)

 

 

139

 

 

 

35

 

 

 

 

 

 

160

 

Income tax expense

 

 

 

 

 

 

 

 

(59

)

 

 

 

 

 

 

 

 

(59

)

Income (loss) before equity in earnings

   (loss) from subsidiaries

 

 

 

 

 

(14

)

 

 

80

 

 

 

35

 

 

 

 

 

 

101

 

Equity in earnings from subsidiaries

 

 

101

 

 

 

115

 

 

 

35

 

 

 

 

 

 

(251

)

 

 

 

Net income

 

$

101

 

 

$

101

 

 

$

115

 

 

$

35

 

 

$

(251

)

 

$

101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

33


 

 

 

 

For the Six Months Ended June 30, 2018

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash (used in) provided by operating

   activities

 

$

 

 

$

(14

)

 

$

42

 

 

$

(205

)

 

$

43

 

 

$

(134

)

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property and

   equipment

 

 

 

 

 

 

 

 

(18

)

 

 

(2

)

 

 

 

 

 

(20

)

Software capitalization costs

 

 

 

 

 

 

 

 

(9

)

 

 

 

 

 

 

 

 

(9

)

Return of investment from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Investment in unconsolidated affiliate

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

(5

)

Net cash used in investing activities

 

 

 

 

 

 

 

 

(21

)

 

 

(2

)

 

 

 

 

 

(23

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of debt

 

 

 

 

 

160

 

 

 

 

 

 

 

 

 

 

 

 

160

 

Issuance of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

100

 

 

 

 

 

 

100

 

Repurchase and retirement of common stock

 

 

 

 

 

(112

)

 

 

 

 

 

 

 

 

 

 

 

(112

)

Repayment of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

(80

)

 

 

 

 

 

(80

)

Repayment of  debt

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

(5

)

Debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

(2

)

 

 

 

 

 

(2

)

Payment of withholding taxes on vesting of

   restricted stock units

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

(1

)

Capital contribution

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

3

 

Intercompany transfers

 

 

 

 

 

(31

)

 

 

(111

)

 

 

185

 

 

 

(43

)

 

 

 

Net cash provided by (used in) financing

   activities

 

 

 

 

 

14

 

 

 

(111

)

 

 

203

 

 

 

(43

)

 

 

63

 

Net increase (decrease) in cash,

   cash equivalents and restricted cash

 

 

 

 

 

 

 

 

(90

)

 

 

(4

)

 

 

 

 

 

(94

)

Cash, cash equivalents and restricted cash,

   beginning of period

 

 

 

 

 

 

 

 

259

 

 

 

38

 

 

 

 

 

 

297

 

Cash, cash equivalents and restricted cash,

   end of period

 

$

 

 

$

 

 

$

169

 

 

$

34

 

 

$

 

 

$

203

 

 

34


 

 

 

 

For the Six Months Ended June 30, 2017

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

 

 

$

1

 

 

$

98

 

 

$

139

 

 

$

(61

)

 

$

177

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property and

   equipment

 

 

 

 

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

(15

)

Software capitalization costs

 

 

 

 

 

 

 

 

(6

)

 

 

 

 

 

 

 

 

(6

)

Net cash used in investing activities

 

 

 

 

 

 

 

 

(21

)

 

 

 

 

 

 

 

 

(21

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

350

 

 

 

 

 

 

350

 

Repayment of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

(395

)

 

 

 

 

 

(395

)

Repayment of debt

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

 

 

 

(5

)

Debt issuance costs

 

 

 

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

Proceeds from stock option exercises

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Intercompany transfers

 

 

 

 

 

4

 

 

 

10

 

 

 

(75

)

 

 

61

 

 

 

 

Net cash (used in) provided by financing

   activities

 

 

 

 

 

(1

)

 

 

11

 

 

 

(125

)

 

 

61

 

 

 

(54

)

Net increase in cash, cash equivalents and

   restricted cash

 

 

 

 

 

 

 

 

88

 

 

 

14

 

 

 

 

 

 

102

 

Cash, cash equivalents and restricted cash,

   beginning of period

 

 

 

 

 

 

 

 

128

 

 

 

23

 

 

 

 

 

 

151

 

Cash, cash equivalents and restricted cash,

   end of period

 

$

 

 

$

 

 

$

216

 

 

$

37

 

 

$

 

 

$

253

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Note 21: Subsequent Events

 

In July 2018, we executed a sale and purchase agreement to acquire a portion of an operating hotel for future conversion to timeshare inventory for $50 million.  In connection with the executed sale and purchase agreement, we made an initial deposit of $2 million.

 

35


 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2017.

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our management’s beliefs, expectations and assumptions and information currently available to our management, and are subject to risks and uncertainties. Actual results could differ materially because of factors such as: inherent business, financial and operating risks of the timeshare industry; adverse economic or market conditions that may affect the purchasing and vacationing decisions of consumers or otherwise harm our business; intense competition in the timeshare industry, which could lead to lower revenue or operating margins; the termination of material fee-for-service agreements with third parties; the ability of the Company to manage risks associated with our international activities, including complying with laws and regulations affecting our international operations; exposure to increased economic and operational uncertainties from expanding global operations, including the effects of foreign currency exchange; potential liability under anti-corruption and other laws resulting from our global operations; changes in tax rates and exposure to additional tax liabilities; the impact of future changes in legislation, regulations or accounting pronouncements; acquisitions, joint ventures, and strategic alliances that that may not result in expected benefits and that may have an adverse effect on our business; our dependence on development activities to secure inventory; cyber-attacks and security vulnerabilities that could lead to reduced revenue, increased costs, liability claims, or harm to our reputation or competitive position; disclosure of personal data that could cause liability and harm to our reputation; abuse of our advertising or social platforms that may harm our reputation or user engagement; outages, data losses, and disruptions of our online services; claims against us that may result in adverse outcomes in legal disputes; risks associated with our debt agreements and instruments, including variable interest rates, operating and financial restrictions, and our ability to service our indebtedness; the continued service and availability of key executives and employees; and catastrophic events or geopolitical conditions that may disrupt our business. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “outlook,” “believes,” “expects,” “potential,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” “predicts,” “intends,” “plans,” “estimates,” “anticipates” or the negative version of these words or other comparable words.

 

You should not put undue reliance on any forward-looking statements in this Quarterly Report on Form 10-Q. The risk factors discussed in our filings with the Securities and Exchange Commission, including “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2017, “Part II-Item 1A. Risk Factors” of this Quarterly Report on Form 10-Q for the quarter ended June 30, 2018, and those described from time to time in our future reports could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. We undertake no obligation to publicly update or review any forward-looking statement or information to conform to actual results, whether as a result of new information, future developments, changes in the Company’s expectations, or otherwise, except as required by law.

Terms Used in this Quarterly Report on Form 10-Q

Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Hilton Grand Vacations,” “HGV,” “the Company,” “we,” “us” and “our” refer to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. Except where the context requires otherwise, references to our “properties” and “rooms” refer to the timeshare properties managed, franchised, owned or leased by us. Of these properties and rooms, a portion are directly owned or leased by us or joint ventures in which we have an interest and the remaining properties and rooms are owned by third-party owners.

“Developed” refers VOI inventory that is sourced from projects developed by HGV.

“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.

36


 

“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.

“VOI” refers to vacation ownership intervals.

Non-GAAP Financial Measures

This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and financial measures that are not calculated in accordance with U.S. GAAP, including contract sales, sales revenue, real estate margin, tour flow, volume per guest, transient rate, earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA and segment Adjusted EBITDA. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Key Business and Financial Metrics and Terms Used by Management” and “-Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.

Overview

Our Business

We are a rapidly growing timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. During the six months ended June 30, 2018, through new developments and asset acquisition, we added two new resorts in New York and one resort in Odawara, Japan, representing 265 units. As of June 30, 2018, we have 51 resorts, representing 8,367 units, which are located in iconic vacation destinations such as the Hawaiian Islands, New York City, Orlando and Las Vegas, and feature spacious, condominium-style accommodations with superior amenities and quality service. As of June 30, 2018, we have approximately 298,000 Hilton Grand Vacations Club (the “Club”) members. Club members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 14 industry-leading brands across more than 5,000 properties, as well as numerous experiential vacation options, such as cruises and guided tours.

We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.

Real Estate Sales and Financing

Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week annually at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcing VOIs through fee-for-service and just-in-time agreements with third-party developers and have successfully transformed from a capital-intensive business to one that is highly capital-efficient. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs and Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory by us with the sale to purchasers. Sales of owned inventory, including purchased just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.

For the six months ended June 30, 2018, sales from fee-for-service, just-in-time and developed inventory sources were 53 percent, 26 percent and 21 percent, respectively, of contract sales. See “—Real Estate Sales Metrics” for additional discussion of contract sales. Based on our trailing twelve months sales pace, we have access to approximately six years of future inventory, with capital efficient arrangements representing approximately 77 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets.

37


 

We originate loans for members purchasing our developed and acquired inventory which generate interest income. Our loans are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum.

The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted average FICO score for new loans to U.S. and Canadian borrowers at the time of origination were as follows:  

 

 

 

Six Months Ended June 30,

 

 

 

2018

 

 

2017

 

Weighted average FICO score

 

 

749

 

 

 

745

 

 

Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Club.

Some of our loans have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and cash deposits. For additional information see Note 5: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.

In addition, we earn fees from servicing our securitized loan portfolio and the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs.

Resort Operations and Club Management

We enter into a management agreement with the homeowners’ association (“HOA”) of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprising owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term.

We also manage and operate the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Club members. When an owner purchases a VOI, he or she is generally automatically enrolled in the Club and given an annual allotment of points that allow the member to exchange his or her annual usage rights in the VOI that they own for a number of vacation and travel options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.

We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our Club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.

38


 

Key Business and Financial Metrics and Terms Used by Management

Real Estate Sales Metrics

The following are not recognized terms under U.S. GAAP:

 

Contract sales represents the total amount of VOI products under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales is not a recognized term under U.S. GAAP and should not be considered in isolation or as an alternative to Sales of VOIs, net or any other comparable operating measure derived in accordance with U.S. GAAP. Contract sales differ from revenues from the Sales of VOIs, net that we report in our condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives and other administrative fee revenues. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business.

 

Sales revenue represents sale of VOIs, net and commissions and brand fees earned from the sale of fee-for-service intervals.

 

Real estate margin represents sales revenue less the cost of VOI sales and sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs.

 

Tour flow represents the number of sales presentations given at our sales centers during the period.

 

Volume per guest (“VPG”) represents the sales attributable to tours at our sales locations and is calculated by dividing Contract sales, excluding telesales, by tour flow. We consider VPG to be an important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with closing rate.

Resort and Club Management and Rental Metrics

 

Transient rate represents the total rental room revenue for transient guests divided by total number of transient room nights sold in a given period and excludes room rentals associated with marketing programs, owner usage and the redemption of Club Bonus Points.

For further information see Item 8. Financial Statements and Supplementary Data - Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2017.

EBITDA and Adjusted EBITDA

EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income (loss), before interest expense on debt (excluding non-recourse debt), a provision for income taxes and depreciation and amortization. Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

39


 

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:

 

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding interest expense on non-recourse debt), or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

 

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

 

EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and

 

EBITDA and Adjusted EBITDA may be calculated differently from other companies in our industry limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

 

Recent Events

On January 1, 2018, we adopted Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (commonly referred to as Accounting Standards Codification (“ASC”) Topic 606 (“ASC 606”)). We adopted ASC 606 using the modified retrospective method in which the cumulative effect of applying the new standard has been recognized at the date of initial application with an adjustment to our opening balance of retained earnings. This approach applies to all contracts as of January 1, 2018. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements for additional information.

On March 13, 2018, we and HNA Tourism Group Co., Ltd. (“HNA”) and HNA HLT Holdco I LLC (the “Selling Stockholder”), an affiliate of HNA, entered into a Master Amendment and Option Agreement (the “Master Amendment and Option Agreement”) to make certain amendments to the Stockholders Agreement, dated October 24, 2016, between us and HNA (the “Stockholders Agreement”) and the Registration Rights Agreement, dated October 24, 2016, between us and HNA (the “Registration Rights Agreement”), among other things, (i) to permit the sale of up to all 24,750,000 shares of our common stock owned by the Selling Stockholder prior to the expiration of the two-year restricted period originally contained in the Stockholders Agreement, (ii) grant us a right to repurchase up to 4,340,000 shares of our common stock held by the Selling Stockholder, (iii) provide that HNA has customary “demand” registration rights effective March 13, 2018, (iv) require HNA to pay all expenses incurred under the Registration Rights Agreement for registrations or offerings occurring prior to a certain date and (v) eliminate HNA’s right to designate a certain number of directors to our board of directors. We exercised the repurchase option from the Selling Stockholder with respect to 2,500,000 shares at a price of approximately $44.75 per share.  

On March 14, 2018, HGV and HNA entered into an underwriting agreement with several underwriters, pursuant to which the underwriters agreed to purchase from the Selling Stockholder 22,250,000 shares of common stock, $0.01 par value per share, of the Company at a price of approximately $44.75 per share.  The sale was completed on March 19, 2018; consequently, HNA ceased to be a related party.  We did not receive any proceeds from the sale.

On March 19, 2018, the repurchase was completed and the shares were retired.  

40


 

On March 23, 2018, we entered into an agreement with SCG 1776, LLC, a Delaware limited liability company, an 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.  

In June 2018, we acquired an operating hotel in New York City, New York for $176 million for future conversion to timeshare inventory. The transaction was accounted for as an asset acquisition with all of the purchase price allocated to Land, Building and leasehold improvements and Furniture and equipment.  

During the three months ended June 30, 2018, we borrowed $160 million under our revolving credit facility and $100 million under our timeshare facility.  See Note 12: Debt and Non-recourse debt in our unaudited condensed consolidated financial statements for additional information.

In May 2018, Kilauea volcano erupted on the southern end of the Big Island of Hawaii forcing two thousand residents to evacuate.  Our three Waikoloa resorts are on the Big Island’s western coast, approximately 100 miles from Kilauea volcano. The eruption has not had a material impact on our operations.  

Results of Operations

We adopted ASC 606 as of January 1, 2018 using the modified retrospective method. The reported results for the three and six months ended June 30, 2018 reflects the application of ASC 606 while the reported results for the three and six months ended June 30, 2017 were prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”) and ASC 978-605, Real Estate – Time-Sharing Activities, Revenue Recognition, which is also referred to herein as the “previous accounting guidance.”

The following table shows the impact that ASC 606 would have had to our quarterly and annual 2017 operating results, EBITDA and Adjusted EBITDA if we had adopted ASC 606 utilizing the full retrospective method of adoption. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 3: Revenue from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.

 

 

 

2017 Results Adjusted for ASC 606 Adoption

 

(in millions, except per share data)

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

 

Full Year

 

Total revenues

 

$

387

 

 

$

414

 

 

$

411

 

 

$

424

 

 

$

1,636

 

Total operating expenses

 

 

307

 

 

 

340

 

 

 

342

 

 

 

344

 

 

 

1,333

 

Net income

 

 

47

 

 

 

41

 

 

 

39

 

 

 

166

 

 

 

293

 

Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.48

 

 

$

0.41

 

 

$

0.39

 

 

$

1.67

 

 

$

2.95

 

Diluted

 

$

0.48

 

 

$

0.41

 

 

$

0.39

 

 

$

1.66

 

 

$

2.94

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

47

 

 

$

41

 

 

$

39

 

 

$

166

 

 

$

293

 

Interest expense

 

 

7

 

 

 

7

 

 

 

7

 

 

 

6

 

 

 

27

 

Income tax expense (benefit)

 

 

26

 

 

 

26

 

 

 

25

 

 

 

(92

)

 

 

(15

)

Depreciation and amortization

 

 

7

 

 

 

7

 

 

 

7

 

 

 

6

 

 

 

27

 

Interest expense, depreciation and amortization

     included in equity in earnings from

     unconsolidated affiliates

 

 

 

 

 

 

 

2

 

 

 

1

 

 

 

3

 

EBITDA

 

 

87

 

 

 

81

 

 

 

80

 

 

 

87

 

 

 

335

 

Other (gain) loss, net

 

 

 

 

 

 

 

 

(1

)

 

 

1

 

 

 

 

Share-based compensation expense

 

 

3

 

 

 

5

 

 

 

5

 

 

 

2

 

 

 

15

 

Other adjustment items (1)

 

 

1

 

 

 

3

 

 

 

3

 

 

 

5

 

 

 

12

 

Adjusted EBITDA

 

$

91

 

 

$

89

 

 

$

87

 

 

$

95

 

 

$

362

 

 

(1)

For the year ended December 31, 2017, amount includes $8 million of costs associated with the spin-off transaction.

41


 

Supplemental Information Regarding the Adoption of ASC 606

The following tables provide supplemental information for project(s) under construction or completed for the periods presented under the previous accounting guidance:  

 

 

2018

 

($ in millions)

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

 

Full Year

 

Sales of VOIs

 

$

59

 

 

$

(87

)

 

$

 

 

$

 

 

$

(28

)

Cost of VOI sales

 

 

(18

)

 

 

20

 

 

 

 

 

 

 

 

 

2

 

Sales, marketing, general and administrative

   expense

 

 

(8

)

 

 

11

 

 

 

 

 

 

 

 

 

3

 

 

During the first quarter of 2018, we deferred revenue and related direct expenses from the sales of VOIs for two projects under construction until construction is completed.  During the second quarter of 2018, we recognized revenue and related direct expenses for a completed project, partially offset by the deferred revenue and related direct expenses from the sales of VOIs for one project under construction.

 

 

2017

 

($ in millions)

 

First

Quarter

 

 

Second

Quarter

 

 

Third

Quarter

 

 

Fourth

Quarter

 

 

Full Year

 

Sales of VOIs

 

$

9

 

 

$

13

 

 

$

11

 

 

$

17

 

 

$

50

 

Cost of VOI sales

 

 

(5

)

 

 

(3

)

 

 

(3

)

 

 

(5

)

 

 

(16

)

Sales, marketing, general and administrative

   expense

 

 

(1

)

 

 

(2

)

 

 

(2

)

 

 

(2

)

 

 

(7

)

In all quarters presented for 2017, we deferred revenue and related direct expenses from sales of VOIs for one project under construction.

Three and Six Months Ended June 30, 2018 Compared with the Three and Six Months Ended June 30, 2017  

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 18: Business Segments in our unaudited condensed consolidated financial statements. We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment revenues. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses it to manage our business and material limitations on its usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment:

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing

 

$

435

 

 

$

323

 

 

$

112

 

 

 

34.7

%

 

$

676

 

 

$

606

 

 

$

70

 

 

 

11.6

%

Resort operations and club

   management

 

 

98

 

 

 

92

 

 

 

6

 

 

 

6.5

 

 

 

196

 

 

 

180

 

 

 

16

 

 

 

8.9

 

Segment revenues

 

 

533

 

 

 

415

 

 

 

118

 

 

 

28.4

 

 

 

872

 

 

 

786

 

 

 

86

 

 

 

10.9

 

Cost reimbursements

 

 

38

 

 

 

34

 

 

 

4

 

 

 

11.8

 

 

 

74

 

 

 

68

 

 

 

6

 

 

 

8.8

 

Intersegment eliminations(1)

 

 

(8

)

 

 

(10

)

 

 

2

 

 

 

(20.0

)

 

 

(16

)

 

 

(16

)

 

 

 

 

 

 

Total revenues

 

$

563

 

 

$

439

 

 

$

124

 

 

 

28.2

 

 

$

930

 

 

$

838

 

 

$

92

 

 

 

11.0

 

 

(1)

Refer to Note 18: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations.

42


 

The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Net Income

 

$

107

 

 

$

51

 

 

$

56

 

 

NM(1)

 

 

$

137

 

 

$

101

 

 

$

36

 

 

 

35.6

%

Interest expense

 

 

8

 

 

 

7

 

 

 

1

 

 

 

14.3

%

 

 

15

 

 

 

14

 

 

 

1

 

 

 

7.1

 

Income tax expense

 

 

39

 

 

 

33

 

 

 

6

 

 

 

18.2

 

 

 

49

 

 

 

59

 

 

 

(10

)

 

 

(16.9

)

Depreciation and amortization

 

 

8

 

 

 

7

 

 

 

1

 

 

 

14.3

 

 

 

16

 

 

 

14

 

 

 

2

 

 

 

14.3

 

Interest expense, depreciation and

   amortization included in equity in

   losses from unconsolidated

   affiliates

 

 

1

 

 

 

 

 

 

1

 

 

NM(1)

 

 

 

2

 

 

 

 

 

 

2

 

 

NM(1)

 

EBITDA

 

 

163

 

 

 

98

 

 

 

65

 

 

 

66.3

 

 

 

219

 

 

 

188

 

 

 

31

 

 

 

16.5

 

Other gain, net

 

 

(1

)

 

 

 

 

 

(1

)

 

NM(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation expense

 

 

5

 

 

 

5

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

 

 

 

 

 

 

Other adjustment items(2)

 

 

8

 

 

 

3

 

 

 

5

 

 

NM(1)

 

 

 

10

 

 

 

4

 

 

 

6

 

 

NM(1)

 

Adjusted EBITDA

 

$

175

 

 

$

106

 

 

$

69

 

 

 

65.1

 

 

$

237

 

 

$

200

 

 

$

37

 

 

 

18.5

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.

(2)

Includes costs associated with the spin-off transaction of $5 million and $2 million for the three months ended June 30, 2018 and 2017, respectively, and $7 million and $3 million for the six months ended June 30, 2018 and 2017, respectively.

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing(1)

 

$

163

 

 

$

99

 

 

$

64

 

 

 

64.6

%

 

$

207

 

 

$

182

 

 

$

25

 

 

 

13.7

%

Resort operations and club

   management(1)

 

 

58

 

 

 

52

 

 

 

6

 

 

 

11.5

 

 

 

117

 

 

 

103

 

 

 

14

 

 

 

13.6

 

Segment Adjusted EBITDA

 

 

221

 

 

 

151

 

 

 

70

 

 

 

46.4

 

 

 

324

 

 

 

285

 

 

 

39

 

 

 

13.7

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from

   unconsolidated affiliates

 

 

(1

)

 

 

 

 

 

(1

)

 

NM(1)

 

 

 

1

 

 

 

 

 

 

1

 

 

NM(1)

 

License fee expense

 

 

(25

)

 

 

(23

)

 

 

(2

)

 

 

8.7

 

 

 

(48

)

 

 

(43

)

 

 

(5

)

 

 

11.6

 

General and administrative(2)

 

 

(20

)

 

 

(22

)

 

 

2

 

 

 

(9.1

)

 

 

(40

)

 

 

(42

)

 

 

2

 

 

 

(4.8

)

Adjusted EBITDA

 

$

175

 

 

$

106

 

 

$

69

 

 

 

65.1

 

 

$

237

 

 

$

200

 

 

$

37

 

 

 

18.5

 

 

(1)

Includes intersegment eliminations and other adjustments.

(2)

Excludes share-based compensation and other adjustment items.

Real Estate Sales and Financing

Real estate sales and financing segment revenues increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) a $119 million increase in sales revenue and (ii) a $3 million increase in financing revenue, partially offset by a decrease of $10 million in marketing revenue.  The increase in sales revenue consists of (i) a $132 million increase related to revenue recognized from the completion of a timeshare resort under construction, partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $12 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. The increase in financing revenue was primarily due to an increase in interest income from higher outstanding timeshare financing receivables balances.  The decrease in marketing revenue was due to a $10 million one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages.  Real estate sales and financing segment Adjusted EBTIDA increased by $64 million for the three months ended June 30, 2018, compared to same period in 2017, primarily due to the increase in revenues associated with the segment discussed above, partially offset by (i) a $25 million increase in sales and marketing and financing expenses and $27 million increase in cost of VOI sales. See Note 2: Basis of Presentation and Summary of

43


 

Significant Accounting Policies and Note 3: Revenues from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.

Real estate sales and financing segment revenues increased for the six months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) a $79 million increase in sales revenue and (ii) a $6 million increase in financing revenue, partially offset by a decrease of $15 million in marketing revenue.  The increase in sales revenue consists of i) a $123 million increase related to revenue recognized from the completion of a timeshare resort under construction, partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $12 million increase in commission and brand fees due to higher fee-for-service sales primarily related to a new resort in South Carolina. The increase in financing revenue was primarily due to an increase in interest income from higher outstanding timeshare financing receivables balances. The decrease in marketing revenue was primarily due to a $10 million one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages.  Real estate sales and financing segment Adjusted EBTIDA increased by $25 million for the six months ended June 30, 2018, compared to same period in 2017, primarily due to the increase in revenues associated with the segment discussed above, partially offset by (i) a $35 million increase in sales and marketing and financing expenses and (ii) a $13 million increase in costs of VOI sales. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 3: Revenues from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.

Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.

Resort Operations and Club Management

Resort operations and club management segment revenues increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $2 million in resort and club management revenues from the launch of new properties subsequent to the second quarter of 2017 as well as an increase in Club members and (ii) an increase of $6 million in rental and ancillary services revenues as a result of higher transient room and club inventory rentals at our developed and fee-for-service properties.  Resort operations and club management segment Adjusted EBITDA increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to the increases in revenues associated with the segment.

Resort operations and club management segment revenues increased for the six months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) an increase of $5 million in resort and club management revenues from the launch of new properties subsequent to the second quarter of 2017 as well as an increase in Club members and (ii) an increase of $11 million in rental and ancillary services revenues as a result of higher transient room and club inventory rentals at our developed and fee-for-service properties.  Resort operations and club management segment Adjusted EBITDA increased for the six months ended June 30, 2018, compared to the same period in 2017, primarily due to the increases in revenues associated with the segment, partially offset by an increase of $2 million in segment expenses.  Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.

Real Estate Sales and Financing Segment

Real Estate

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions, except Tour flow and VPG)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Sales of VOIs, net

 

$

250

 

 

$

143

 

 

$

107

 

 

 

74.8

%

 

$

328

 

 

$

261

 

 

$

67

 

 

 

25.7

%

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee-for-service sales(1)

 

 

193

 

 

 

166

 

 

 

27

 

 

 

16.3

 

 

 

363

 

 

 

339

 

 

 

24

 

 

 

7.1

 

Loan loss provision

 

 

18

 

 

 

15

 

 

 

3

 

 

 

20.0

 

 

 

30

 

 

 

26

 

 

 

4

 

 

 

15.4

 

Reportability and other(2)

 

 

(104

)

 

 

(1

)

 

 

(103

)

 

NM(1)

 

 

 

(35

)

 

 

(16

)

 

 

(19

)

 

NM(1)

 

Contract sales

 

$

357

 

 

$

323

 

 

$

34

 

 

 

10.5

 

 

$

686

 

 

$

610

 

 

$

76

 

 

 

12.5

 

Tour flow

 

 

94,269

 

 

 

87,114

 

 

 

7,155

 

 

 

8.2

 

 

 

171,969

 

 

 

159,519

 

 

 

12,450

 

 

 

7.8

 

VPG

 

$

3,597

 

 

$

3,503

 

 

$

94

 

 

 

2.7

 

 

$

3,778

 

 

$

3,609

 

 

$

169

 

 

 

4.7

 

 

(1)

Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.

44


 

(2)

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 projects.

Contract sales increased for the three and six months ended June 30, 2018, compared to the same period in 2017, primarily due to an increase in tour flow which correlates to the increase in marketing expense. VPG increased due to a 0.7 percent and 1.1 percent increase in average transaction price for the three and six months ended June 30, 2018, respectively.

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Sales of VOIs, net

 

$

250

 

 

$

143

 

 

$

107

 

 

 

74.8

%

 

$

328

 

 

$

261

 

 

$

67

 

 

 

25.7

%

Sales, marketing, brand and other fees

 

 

146

 

 

 

144

 

 

 

2

 

 

 

1.4

 

 

 

271

 

 

 

274

 

 

 

(3

)

 

 

(1.1

)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing revenue and other fees

 

 

33

 

 

 

43

 

 

 

(10

)

 

 

(23.3

)

 

 

60

 

 

 

75

 

 

 

(15

)

 

 

(20.0

)

Sales revenue

 

 

363

 

 

 

244

 

 

 

119

 

 

 

48.8

 

 

 

539

 

 

 

460

 

 

 

79

 

 

 

17.2

 

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

61

 

 

 

34

 

 

 

27

 

 

 

79.4

 

 

 

80

 

 

 

67

 

 

 

13

 

 

 

19.4

 

Sales and marketing expense, net(1)

 

 

152

 

 

 

120

 

 

 

32

 

 

 

26.7

 

 

 

278

 

 

 

231

 

 

 

47

 

 

 

20.3

 

Real estate margin

 

$

150

 

 

$

90

 

 

$

60

 

 

 

66.7

 

 

$

181

 

 

$

162

 

 

$

19

 

 

 

11.7

 

Real estate margin percentage

 

 

41.3

%

 

 

36.9

%

 

 

 

 

 

 

 

 

 

 

33.6

%

 

 

35.2

%

 

 

 

 

 

 

 

 

 

(1)

Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers. In December 2017, we revised our definition of Sales and marketing expense, net to include revenues associated with sales incentives, title service and document compliance revenue to better align with how we evaluate the results of our real estate operations. This adjustment was retrospectively applied to prior period(s) to conform to current presentation.

Sales revenue increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily as a result of (i) a $132 million and $123 million, respectively, increase related to revenue recognized from the completion of a timeshare resort under construction, partially offset by an increase in sales from a project under construction which are deferred until construction is completed and (ii) a $12 million increase in commission and brand fees for both three and six months ended June 30, 2018, due to higher fee-for-service sales primarily related to a new resort in South Carolina.  Cost of VOI sales and Sales and marketing expense, net, increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily as a result of (i) higher expenses as a result of the completion of a resort which was previously deferred and (ii) a $10 million reduction of  marketing revenue for both three and six months ended June 30, 2018 due to a one-time benefit recognized in the second quarter of 2017 related to a reduction of expected redemptions of expired discounted vacation packages.

The increase in real estate margin and margin percentage for the three months ended June 30, 2018, as well as real estate margin for the six months ended June 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned increases in sales revenue, partially offset by the increase in Cost of VOI sales and Sales and marketing expense from the completion of a resort in New York.  The decrease in real estate margin percentage for the six months ended June 30, 2018, compared to the same period in 2017, is primarily due to an increase in sales and marketing expense, net as well as Costs of VOI sales. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies and Note 3: Revenues from Contracts with Customers in our unaudited condensed consolidated financial statements for additional information.

45


 

Financing

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Interest income

 

$

34

 

 

$

32

 

 

$

2

 

 

 

6.3

%

 

$

68

 

 

$

64

 

 

$

4

 

 

 

6.3

%

Other financing revenue

 

 

5

 

 

 

4

 

 

 

1

 

 

 

25.0

 

 

 

9

 

 

 

7

 

 

 

2

 

 

 

28.6

 

Financing revenue

 

 

39

 

 

 

36

 

 

 

3

 

 

 

8.3

 

 

 

77

 

 

 

71

 

 

 

6

 

 

 

8.5

 

Consumer financing interest expense

 

 

6

 

 

 

6

 

 

 

 

 

 

 

 

 

10

 

 

 

10

 

 

 

 

 

 

 

Other financing expense

 

 

6

 

 

 

5

 

 

 

1

 

 

 

20.0

 

 

 

13

 

 

 

11

 

 

 

2

 

 

 

18.2

 

Financing expense

 

 

12

 

 

 

11

 

 

 

1

 

 

 

9.1

 

 

 

23

 

 

 

21

 

 

 

2

 

 

 

9.5

 

Financing margin

 

$

27

 

 

$

25

 

 

$

2

 

 

 

8.0

 

 

$

54

 

 

$

50

 

 

$

4

 

 

 

8.0

 

Financing margin percentage

 

 

69.2

%

 

 

69.4

%

 

 

 

 

 

 

 

 

 

 

70.1

%

 

 

70.4

%

 

 

 

 

 

 

 

 

 

Financing revenue increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to an increase of $2 million and $4 million, respectively, in interest income resulting from a higher average outstanding timeshare financing receivables balance during the three and six months ended June 30, 2018. Financing margin increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to the aforementioned revenue increase, partially offset by increase in segment expense.

Resort Operations and Club Management Segment

Resort and Club Management

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Club management revenue

 

$

23

 

 

$

20

 

 

$

3

 

 

 

15.0

%

 

$

46

 

 

$

41

 

 

$

5

 

 

 

12.2

%

Resort management revenue

 

 

14

 

 

 

15

 

 

 

(1

)

 

 

(6.7

)

 

 

30

 

 

 

30

 

 

 

 

 

 

 

Resort and club management

   revenues

 

 

37

 

 

 

35

 

 

 

2

 

 

 

5.7

 

 

 

76

 

 

 

71

 

 

 

5

 

 

 

7.0

 

Club management expense

 

 

7

 

 

 

6

 

 

 

1

 

 

 

16.7

 

 

 

13

 

 

 

11

 

 

 

2

 

 

 

18.2

 

Resort management expense

 

 

4

 

 

 

4

 

 

 

 

 

 

 

 

 

9

 

 

 

9

 

 

 

 

 

 

 

Resort and club management

   expenses

 

 

11

 

 

 

10

 

 

 

1

 

 

 

10.0

 

 

 

22

 

 

 

20

 

 

 

2

 

 

 

10.0

 

Resort and club management

   margin

 

$

26

 

 

$

25

 

 

$

1

 

 

 

4.0

 

 

$

54

 

 

$

51

 

 

$

3

 

 

 

5.9

 

Resort and club management margin

   percentage

 

 

70.3

%

 

 

71.4

%

 

 

 

 

 

 

 

 

 

 

71.1

%

 

 

71.8

%

 

 

 

 

 

 

 

 

 

Resort and club management revenues increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to (i) a trailing twelve months increase of approximately 20,000 in Club members and higher rates pertaining to annual dues and transaction fees and (ii) an increase in resort management revenue from the launch of new properties subsequent to the second quarter of 2017.  

 

Resort and club management margin increased for the three months and six months ended June 30, 2018, compared to the same periods in 2017, due to the aforementioned increases in segment revenues, partially offset by a $1 million and $2 million, respectively, increase in segment expenses due to increase in costs for servicing additional Club members and properties.  Resort and club management margin percentage decreased for the three and six months ended June 30, 2018, compared to the same periods in 2017 primarily due to increase in aforementioned segment expenses.

46


 

Rental and Ancillary Services

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Rental revenues

 

$

46

 

 

$

40

 

 

$

6

 

 

 

15.0

%

 

$

91

 

 

$

81

 

 

$

10

 

 

 

12.3

%

Ancillary services revenues

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

 

13

 

 

 

12

 

 

 

1

 

 

 

8.3

 

Rental and ancillary services

   revenues

 

 

53

 

 

 

47

 

 

 

6

 

 

 

12.8

 

 

 

104

 

 

 

93

 

 

 

11

 

 

 

11.8

 

Rental expenses

 

 

25

 

 

 

25

 

 

 

 

 

 

 

 

 

48

 

 

 

48

 

 

 

 

 

 

 

Ancillary services expense

 

 

5

 

 

 

6

 

 

 

(1

)

 

 

(16.7

)

 

 

10

 

 

 

10

 

 

 

 

 

 

 

Rental and ancillary services

   expenses

 

 

30

 

 

 

31

 

 

 

(1

)

 

 

(3.2

)

 

 

58

 

 

 

58

 

 

 

 

 

 

 

Rental and ancillary services

   margin

 

$

23

 

 

$

16

 

 

$

7

 

 

 

43.8

 

 

$

46

 

 

$

35

 

 

$

11

 

 

 

31.4

 

Rental and ancillary services

   margin percentage

 

 

43.4

%

 

 

34.0

%

 

 

 

 

 

 

 

 

 

 

44.2

%

 

 

37.6

%

 

 

 

 

 

 

 

 

 

Rental and ancillary services revenues increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to an increase of $6 million and $10 million, respectively, in rental revenues as a result of higher transient room and club inventory rentals at our developed and fee-for-service properties.  

 

Rental and ancillary services margin and margin percentage increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, due to the aforementioned increases in segment revenues.

Other Operating Expenses

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

General and administrative

 

$

30

 

 

$

29

 

 

$

1

 

 

 

3.4

%

 

$

53

 

 

$

52

 

 

$

1

 

 

 

1.9

%

Depreciation and amortization

 

 

8

 

 

 

7

 

 

 

1

 

 

 

14.3

 

 

 

16

 

 

 

14

 

 

 

2

 

 

 

14.3

 

License fee expense

 

 

25

 

 

 

23

 

 

 

2

 

 

 

8.7

 

 

 

48

 

 

 

43

 

 

 

5

 

 

 

11.6

 

 

Other operating expenses increased for the three and six months ended June 30, 2018, compared to the same periods in 2017, primarily due to higher license fee expense as a result of increases in revenues subject to license fees and higher depreciation and amortization due to additional software placed into service.

 

Non-Operating Expenses

 

 

 

Three Months Ended June 30,

 

 

Variance

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

 

2018

 

 

2017

 

 

$

 

 

%

 

Interest expense

 

$

8

 

 

$

7

 

 

$

1

 

 

 

14.3

%

 

$

15

 

 

$

14

 

 

$

1

 

 

 

7.1

%

Equity in losses from

   unconsolidated affiliates

 

 

2

 

 

 

 

 

 

2

 

 

NM(1)

 

 

 

1

 

 

 

 

 

 

1

 

 

NM(1)

 

Other gain, net

 

 

(1

)

 

 

 

 

 

(1

)

 

NM(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

39

 

 

 

33

 

 

 

6

 

 

 

18.2

 

 

 

49

 

 

 

59

 

 

 

(10

)

 

 

(16.9

)

 

(1)

Fluctuation in terms of percentage change is not meaningful.

Equity in losses from unconsolidated affiliates relates primarily to our 25 percent interest in BRE Ace LLC. See Note 9: Investment in unconsolidated affiliate in our Annual Report on Form 10-K for the year ended December 31, 2017 in our unaudited condensed consolidated financial statements for additional information.

47


 

Income tax expense increased for the three months ended June 30, 2018, compared to the same period in 2017, primarily due to a large increase in pre-tax book income offset by a reduction in the corporate income tax rate as a result of the Tax Cut and Jobs Act enacted on December 22, 2017.  The decrease in income tax expense for the six months ended June 30, 2018, compared to the same period in 2017, is primarily due to a decrease in the corporate income tax rate as a result of the Tax Cut and Jobs Act that enacted on December 22, 2017.

Liquidity and Capital Resources

Overview

As of June 30, 2018, we had total cash and cash equivalents of $203 million, including $72 million of restricted cash. The restricted cash balance relates to escrowed cash from our sales of our VOIs and reserves related to our non-recourse debt. See Note 12: Debt and Non-Recourse Debt in our unaudited condensed consolidated financial statements for additional information.  

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, purchase commitments (near and long-term) and costs associated with potential acquisitions and development projects.

We finance our business activities primarily with existing cash and cash equivalents, cash generated from our operations and through securitizations of our timeshare financing receivables. We believe that this cash will be adequate to meet anticipated requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs and capital expenditures for the foreseeable future. The objectives of our cash management policy are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments.

Sources and Uses of Our Cash

The following table summarizes our net cash flows and key metrics related to our liquidity:

 

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

(134

)

 

$

177

 

 

$

(311

)

 

NM(1)

 

Investing activities

 

 

(23

)

 

 

(21

)

 

 

(2

)

 

 

9.5

%

Financing activities

 

 

63

 

 

 

(54

)

 

 

117

 

 

NM(1)

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.

Operating Activities

 

Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations and providing related ancillary services. Cash flows used in operating activities primarily include spending for the acquisition of inventory, development of new phases of existing resorts and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs: the degree to which our owners finance their purchase and our owners’ repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale.

 

48


 

Net cash flows provided by operating activities decreased by $311 million during the six months ended June 30, 2018, compared to the same period in 2017, primarily due to (i) a purchase of an operating hotel for future conversion to inventory of $176 million made in June 2018, (ii) a deposit payment of $41 million related to an inventory purchase commitment, (iii) a federal tax payment of $63 million made in January 2018 that was deferred from 2017 pursuant to a tax relief program for regions impacted by Hurricane Irma (iv) an increase in inventory spending and (v) a license fee payment pertaining to the fourth quarter of 2017.

 

The following table exhibits our VOI inventory spending for the six months ended June 30, 2018 and 2017:

 

 

 

Six Months Ended June 30,

 

($ in millions)

 

2018

 

 

2017

 

VOI spending - owned properties

 

$

49

 

 

$

18

 

VOI spending - fee-for-service upgrades

 

 

13

 

 

 

28

 

Property for future conversion into inventory

 

 

176

 

 

 

 

Total VOI inventory spending

 

$

238

 

 

$

46

 

Investing Activities

The following table summarizes our net cash used in investing activities:

 

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

Capital expenditures for property and equipment

 

$

(20

)

 

$

(15

)

 

$

(5

)

 

 

33.3

%

Software capitalization costs

 

 

(9

)

 

 

(6

)

 

 

(3

)

 

 

50.0

 

Return of investment from unconsolidated affiliates

 

 

11

 

 

 

 

 

 

11

 

 

NM(1)

 

Investment in unconsolidated affiliates

 

 

(5

)

 

 

 

 

 

(5

)

 

NM(1)

 

Net cash used in investing activities

 

$

(23

)

 

$

(21

)

 

$

(2

)

 

 

9.5

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.

The change in net cash used in investing activities for the six months ended June 30, 2018, compared to the same period in 2017, was primarily due to (i) higher capital expenditures for property, equipment and software and (ii) a $5 million investment in SCG 1776 LLC, partially offset by an $11 million distribution received from our 25 percent interest in BRE Ace LLC.  See Recent Events for additional information.

Our capital expenditures include spending related to technology, buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.

49


 

Financing Activities

The following table summarizes our net cash used in financing activities:

 

 

 

Six Months Ended June 30,

 

 

Variance

 

($ in millions)

 

2018

 

 

2017

 

 

$

 

 

%

 

Issuance of debt

 

$

160

 

 

$

 

 

$

160

 

 

NM(1)

 

Issuance of non-recourse debt

 

 

100

 

 

 

350

 

 

 

(250

)

 

 

(71.4

)%

Repurchase and retirement of common stock

 

 

(112

)

 

 

 

 

 

(112

)

 

NM(1)

 

Repayment of non-recourse debt

 

 

(80

)

 

 

(395

)

 

 

315

 

 

 

(79.7

)

Repayment of debt

 

 

(5

)

 

 

(5

)

 

 

 

 

 

 

Debt issuance costs

 

 

(2

)

 

 

(5

)

 

 

3

 

 

 

(60.0

)

Proceeds from stock option exercises

 

 

 

 

 

1

 

 

 

(1

)

 

 

(100.0

)

Payment of withholding taxes on vesting of restricted

   stock units

 

 

(1

)

 

 

 

 

 

(1

)

 

NM(1)

 

Capital contribution

 

 

3

 

 

 

 

 

 

3

 

 

NM(1)

 

Net cash provided by (used in) financing activities

 

$

63

 

 

$

(54

)

 

$

117

 

 

NM(1)

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.

The change in net cash used in financing activities for the six months ended June 30, 2018, compared to the same period in 2017, was primarily due to (i) the repurchase of 2,500,000 shares of our common stock from HNA (see Recent Events for additional information), (ii) a $260 million additional borrowing under the revolving credit agreement and timeshare facility and (iii) an $80 million repayment of our non-recourse debt.  During the six months ended June 30, 2017, we issued $350 million in non-recourse securitized debt and used the proceeds to pay down a portion of our timeshare facility and $395 million repayment of our non-recourse debt.

Contractual Obligations

The following table summarizes our significant contractual obligations as of June 30, 2018:

 

 

 

Payments Due by Period

 

($ in millions)

 

Total

 

 

Less Than 1

Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More Than 5

Years

 

Debt(1)

 

$

813

 

 

$

43

 

 

$

85

 

 

$

359

 

 

$

326

 

Non-recourse debt(1)

 

 

647

 

 

 

133

 

 

 

194

 

 

 

283

 

 

 

37

 

Purchase commitments

 

 

464

 

 

 

82

 

 

 

264

 

 

 

83

 

 

 

35

 

Total contractual obligations

 

$

1,924

 

 

$

258

 

 

$

543

 

 

$

725

 

 

$

398

 

  

(1)

Includes principal, as well as estimated interest payments. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 2.09 percent as of June 30, 2018.

 

As of June 30, 2018, our contractual obligations relating to our operating leases has not materially changed from what was reported in our Annual Report on Form 10-K for the year ended December 31, 2017.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of June 30, 2018 consisted of $464 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under the Hilton Grand Vacations brand. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 19: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.

50


 

Subsequent Events

 

In July 2018, we executed a sale and purchase agreement to acquire a portion of an operating hotel for future conversion to timeshare inventory for $50 million.  In connection with the executed sale and purchase agreement, we made an initial deposit of $2 million.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2017. We have updated our revenue recognition policies in conjunction with our adoption of ASC 606 as further described in Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our unaudited condensed consolidated financial statements.

 

51


 

ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk from changes in interest rates, currency exchange rates and debt prices. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

Interest Rate Risk

We are exposed to interest rate risk on our variable-rate debt, comprised of the term loans, revolver and our timeshare facility, of which the timeshare facility is without recourse to us. The interest rate is based on one-month LIBOR and we are most vulnerable to changes in this rate.

We intend to securitize timeshare financing receivables in the asset-backed financing market periodically. We expect to secure fixed-rate funding to match our fixed-rate timeshare financing receivables. However, if we have variable-rate debt in the future, we will monitor the interest rate risk and evaluate opportunities to mitigate such risk through the use of derivative instruments.

To the extent we utilize variable-rate indebtedness in the future, any increase in interest rates beyond amounts covered under any corresponding derivative financial instruments, particularly if sustained, could have an adverse effect on our net income, cash flows and financial position. Hedging transactions we enter into may not adequately mitigate the adverse effects of interest rate increases or that counterparties in those transactions will honor their obligations.

The following table sets forth the contractual maturities, weighted-average interest rates and the total fair values as of June 30, 2018, for our financial instruments that are materially affected by interest rate risk:

 

 

 

 

 

 

 

Maturities by Period

 

($ in millions)

 

Weighted

Average

Interest

Rate(1)

 

 

2018

 

 

2019

 

 

2020

 

 

2021

 

 

2022

 

 

There-

after

 

 

Total(2)

 

 

Fair

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate securitized timeshare

   financing receivables

 

 

11.939

%

 

$

33

 

 

$

65

 

 

$

63

 

 

$

58

 

 

$

51

 

 

$

118

 

 

$

388

 

 

$

413

 

Fixed-rate unsecuritized

   timeshare financing

   receivables

 

 

12.321

%

 

 

48

 

 

 

70

 

 

 

77

 

 

 

83

 

 

 

90

 

 

 

490

 

 

 

858

 

 

 

890

 

Liabilities:(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

 

4.071

%

 

 

63

 

 

 

122

 

 

 

89

 

 

 

33

 

 

 

26

 

 

 

346

 

 

 

679

 

 

 

677

 

Variable-rate debt(4)

 

 

3.881

%

 

 

5

 

 

 

10

 

 

 

10

 

 

 

549

 

 

 

 

 

 

 

 

 

574

 

 

 

577

 

 

(1)

Weighted-average interest rate as of June 30, 2018.

(2)

Amount excludes unamortized deferred financing costs.

(3)

Includes debt and non-recourse debt.

(4)

Variable-rate debt includes principal outstanding debt of $345 million and non-recourse debt of $229 million as of June 30, 2018. See Note 12: Debt & Non-recourse Debt in our unaudited condensed consolidated financial statements for additional information.

Foreign Currency Exchange Rate Risk

Though the majority of our operations are conducted in United States dollar (“U.S. dollar”), we are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from our timeshare financing receivables denominated in Japanese yen, the value of which could change materially in reference to our reporting currency, the U.S. dollar. A 10 percent increase in the foreign exchange rate of Japanese yen to U.S. dollar would increase our gross timeshare financing receivables by less than $1 million.

52


 

ITEM 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated.  In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our  Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  

Changes in Internal Control Over Financial Reporting

 

In conjunction with our separation from Hilton, during the second quarter of 2018, we implemented a suite of Oracle cloud based information systems including Enterprise Resource Planning, Enterprise Performance Management, and Human Capital Management (collectively, “Oracle Cloud”).  Oracle Cloud allows us to benefit from its enhanced security features and seamless data integration. Concurrent with the transition to the cloud platform, we are updating our internal control over financial reporting, as necessary, which will require testing for effectiveness during the third and fourth quarters of 2018.  We do not believe this implementation will have an adverse effect on our internal control over financial reporting.

 

There were no other changes in our internal control over financial reporting that occurred during the three months ended June 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

53


 

PART II OTHER INFORMATION

Item 1.

Legal Proceedings

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has also identified certain other legal matters where we believe an unfavorable outcome is reasonably possible and/or for which are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2018 will not have a material effect on our unaudited condensed consolidated financial statements.  

Item 1A.

Risk Factors

 

Set forth below are the material changes to the risk factors discussed in Item 1A of Part 1 of the Annual Report on Form 10-K for the year ended December 31, 2017. In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed below and in Item 1A of Part 1 of the Annual Report on Form 10-K for the year ended December 31, 2017, which could materially and adversely affect our business, financial condition, results of operations and stock price. The risks described below and in the Annual Report on Form 10-K are not the only risks facing HGV. Additional risks and uncertainties not presently known to management or that management presently believes not to be material may also result in material and adverse effects on our business, financial condition, results of operations and stock price.

The European Union’s new data protection regulations could have a material adverse effect on the Company’s business, results of operations and financial condition.

The recently enacted EU General Data Protection Regulation (the “GDPR”) imposes significant obligations to businesses that sell products or services to EU customers or otherwise control or process personal data of EU residents. Complying with the GDPR could increase our compliance cost, or adversely impact the marketing of our products and services to customers in the EU and our overall business. In addition, the GDPR imposes fines and penalties for noncompliance, including fines of up to 4 percent of annual worldwide revenue.  If we fail to comply with the requirements of the GDPR, we could face significant administrative and monetary sanctions, which could materially adversely impact our results of operations and financial condition.  

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.

54


 

Item 6.Exhibits

 

Exhibit

No.

 

Description

 

 

 

 

10.1

 

Form of Nonqualified Stock Option Agreement for Mark Wang (incorporated by reference to Exhibit 10.2 to Hilton Grand Vacations Inc.’s amended Current Report on Form 8-K/A (File No. 001-37794) filed on May 16, 2018).*

 

 

 

10.2

  

Form of Restricted Stock Unit Agreement for Mark Wang  (incorporated by reference to Exhibit 10.3 to Hilton Grand Vacations Inc.’s amended Current Report on Form 8-K/A (File No. 001-37794) filed on May 16, 2018).*  

 

 

 

10.3

 

Form of Performance and Service Based Restricted Stock Unit Agreement for Mark Wang  (incorporated by reference to Exhibit 10.4 to Hilton Grand Vacations Inc.’s amended Current Report on Form 8-K/A (File No. 001-37794) filed on May 16, 2018).*  

 

 

 

10.4

 

Omnibus Amendment No. 9 to Receivables Loan Agreement, Amendment No. 4 to Sale And Contribution Agreement effective as of May 14, 2018 by and among Hilton Grand Vacations Trust I LLC, as borrower, Hilton Resorts Corporation, as seller, Wells Fargo Bank, National Association, as paying agent and securities intermediary, the financial institutions signatory thereto as managing agents, the financial institutions signatory thereto as conduit lenders, the financial institutions signatory thereto as committed lenders, and Deutsche Bank Securities, Inc., as administrative agent. **

 

 

 

11.1

 

Statement regarding computation of earnings per share. See condensed consolidated statements of operations on page 3 of this Form 10-Q

 

 

 

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

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS

 

XBRL Instance Document.

 

 

 

101.SCH

 

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

XBRL Taxonomy Calculation Linkbase Document.

 

 

 

101.DEF

 

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

XBRL Taxonomy Label Linkbase Document.

 

 

 

101.PRE

 

XBRL Taxonomy Presentation Linkbase Document.

 

 

 

 

*

Denotes management contract or compensatory plan or arrangement.

**  

Filed herewith.

 

 

55


 

SIGNATURES

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 2nd day of August, 2018.

 

HILTON GRAND VACATIONS INC.

 

 

By:

/s/ Mark D. Wang 

Name:

Mark D. Wang

Title:

President and Chief Executive Officer

 

 

By:

/s/ James E. Mikolaichik 

Name:

James E. Mikolaichik

Title:

Executive Vice President and Chief Financial Officer