UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM10-Q

(Mark One)

For the quarterly period ended June 30, 20172018

or

For the transition period fromfrom_________ to ________

Commission file number001-37794

Hilton Grand Vacations Inc.

(Exact Name of Registrant as Specified in Its Charter)

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 RegulationS-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, anon-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 Rule12b-2 of the Exchange Act. (Check one):

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 inRule 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, 20172018 was 99,082,128.96,897,051.

HILTON GRAND VACATIONS INC.

FORM10-Q TABLE OF CONTENTS

PART I FINANCIALFINANCIAL INFORMATION

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in millions)

See notes to unaudited condensed consolidated financial statements.

HILTON GRAND VACATIONS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization and Basis of Presentation

OurSpin-off from Hilton Worldwide Holdings Inc. Business

On January 3, 2017, the previously announcedspin-off was completed by way of a pro rata distribution of Hilton Grand Vacations Inc.’s (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) common stock to Hilton Worldwide Holdings Inc. (“Former Hilton Parent” and together with its then consolidated subsidiaries, “Hilton”) stockholders. Each Hilton stockholder received one share of our common stock for every ten shares of Hilton common stock. As a result of thespin-off, we became a separate publicly-traded company on the New York Stock Exchange under the ticker symbol “HGV,” and Hilton did not retain any ownership interest in our company.

In connection with the completion of thespin-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 brand. The unaudited condensed consolidated financial statements reflect the effect of these agreements. For the three months ended June 30, 2017 and 2016, we incurred $40 million and $44 million, respectively, and for the six months ended June 30, 2017 and 2016, we incurred $98 million and $104 million, respectively, in costs relating to the agreements entered with Hilton. SeeKey Agreements Related to theSpin-Offsection inPart I - Item 1. Businessof our Annual Report on Form10-K for the year ended December 31, 2016 for further information.

Prior to thespin-off, Hilton maintained a share-based compensation plan for the benefit of its officers, directors and employees which was presented as a component ofNet transfers (to) from Parent,a financing activity, on the condensed consolidated statements of cash flows. Subsequent to thespin-off, share-based compensation expense is presented as a component of operating activities on the condensed consolidated statements of cash flows.

Our Business

Hilton Grand Vacations 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 our 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, 2017,2018, we had 48 timeshare51 properties, comprised of 8,1018,367 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 andas well as all entities in which we have a controlling financial interest.  ThroughIn our opinion, the date of thespin-off, theaccompanying unaudited condensed consolidated financial statements presented herein were prepared onreflect all adjustments, including normal recurring items, considered necessary for a stand-alone basisfair presentation of the interim periods.  All material intercompany transactions and were derived from the unaudited consolidated financial statements and accounting records of Hilton.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, 2016,2017, included in our Annual Report on Form10-K filed with the SEC on March 2, 2017.1, 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.

The accompanying unaudited condensed consolidated financial statements,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 our opinion, reflect all adjustments, including normal recurring items, considered necessary for a fair presentationwhich the cumulative effect of applying the interim periods. All material intercompany transactions and balances have been eliminated in consolidation.

We review our estimate of the expected redemption of expired prepaid discounted vacation packages (“packages”) on an ongoing basis. We only reduce the liability for expired packages when a package is redeemed or the likelihood of redemption is remote. This review considers factors such as historical experience, current business practices for pursuing individuals to redeem expired packages and the sufficiency and reliability of data available following a change in those redemption business practices. Previously, we concluded that redemption of an expired package was remote once a packagenew standard has been expiredrecognized 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.

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 therefore retained the liability until six months after expiration. During the review in the second quarter of 2017, we determined we now had sufficiently reliable updated information under current business practices to revise our estimate of expired packages that we expect to redeem. As a result, we changed our accounting estimate for expected redemptions of expired packages to relieve a portion of the remaining liability at expiration and recorded an $11 million reduction to theAdvanced Deposits liability, with corresponding increases toSales, marketing, brand and other feesrevenue of $10 million andAccounts payable, accrued expenses and otherresults for the related sales tax liability of $1 million. As a result, for thethree and six months ended June 30, 2017 our net income increased by $10 millionwere prepared under the guidance of ASC 605, Revenue Recognition (“ASC 605”) and basic and diluted earnings per share increased by $0.10.ASC 978-605, Real Estate – Time-Sharing Activities, Revenue Recognition, which is also referred to herein as the “previous accounting guidance.”

Note 2: Recently IssuedSummary of Significant Accounting PronouncementsPolicies

Adopted Accounting StandardsRevenue Recognition

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)No. 2016-09 (“ASU2016-09”), Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. ASU2016-09 includes provisions intended to simplify several aspects of the accounting and presentation of share-based payments. These provisions include the recognition of the income tax effects of awards in the consolidated statement of operations when the awards vest or are settled, permitting an employer to withhold shares in an amount up to the employee’s maximum individual tax rate without resulting in liability classification of the award, permitting entities to make a policy election to account for forfeitures as they occur, and changes to the classificationof tax-related cash flows resulting from share-based payments and cash payments made to taxing authorities on the employee’s behalf on the statement of cash flows. This ASU2016-09 was effective for reporting periods beginning after December 15, 2016. We adopted ASU2016-09 retrospectively as of January 1, 2017 and have applied to all periods hereinaccordance with no material impact to our unaudited condensed consolidated financial statements.

In November 2016, the FASB issued ASUNo. 2016-18, (“ASU2016-18”)Statement of Cash Flows (Topic 230): Restricted Cash.This ASUASC 606, revenue is intended to provide guidance on the presentation of restricted cash or restricted cash equivalents and reduce the diversity in practice. This ASU requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconcilingbeginning-of-period andend-of-period total amounts on the statement of cash flows. We elected, as permitted by the standard, to early adopt ASU2016-18 retrospectively as of January 1, 2017 and have applied it to all periods presented herein. The adoption of ASU2016-18 did not have a material impact to our unaudited condensed consolidated financial statements. The effect of the adoption of ASU2016-18 on our condensed consolidated statements of cash flows was to include restricted cash balances in the beginning and end of period balances of cash and cash equivalent and restricted cash. The change in restricted cash was previously disclosed in operating activities and financing activities in the condensed consolidated statements of cash flows.

In January 2017, the FASB issued ASUNo. 2017-01 (“ASU2017-01”),Business Combinations (Topic 804): Clarifying the Definition of a Business. This ASU clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions or disposals of assets or businesses. We elected, as permitted by the standard, to early adopt ASU2017-01 prospectively as of January 1, 2017. The adoption of ASU2017-01 did not have a material impact to our unaudited condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In May 2014, the FASB issued ASUNo. 2014-09 (“ASU2014-09”),Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements inRevenue Recognition (Topic 605), and requires entities to recognize revenue in a way that depictsrecognized upon the transfer of control of promised goods orservicesor 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.

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.

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.

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.

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.

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.

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 goodsin 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 services.less. Subsequent to ASU2014-09, 2016-02, the FASB has issued several related ASUs amendingASU No. 2018-01 (“ASU 2018-01”) Leases (Topic 842): Land Easement Practical Expedient for Transition which clarifies the original ASU.

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 retrospectively or using a modified retrospective approach for reporting periods beginning after December 15, 2017.

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 by analyzing both transactional and analytical data for eachstatements.

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 our revenue streams.specific guidance related to attribution of compensation cost. The following is a statuscost of our evaluation of impacts by significant revenue stream:

Wenonemployee awards will continue to evaluate and disclose expected impacts that ASU2014-09 will have on our unaudited condensed consolidated financial statementsbe recorded as more information becomes available. A determination as to whether we will applyif the retrospectivegrantor had paid cash for the goods or modified retrospective adoption methodservices. In addition, the contractual term will be made once our qualitative evaluation is complete and we commence quantifyingable to be used in lieu of an expected term in the expected impacts later this year.

In August 2016, the FASB issued ASUoption-pricing model for nonemployee awards.No. 2016-15 T (“ASU2016-15”),Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. Thehe provisions of this ASU are effective for reporting periods beginning after December 15, 2017;2018; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

InNote 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 2017,1, 2018 was recorded as an adjustment to retained earnings as of the FASB issued ASUadoption date. The following unaudited cumulative adjustments were made to the condensed consolidated balance sheet as of January 1, 2018:

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

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 (“ASU2017-03”),Accounting Changes and Error Corrections (Topic 250)(ii) Resort operations and Investments - Equity Methodclub management. Please refer to Note 18: Business Segments below for more details related to our segments.

Contract Balances

The following table provides information on our accounts receivable and Joint Ventures (Topic 323). ASUcontract asset from contracts with customers:

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

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: 2017-03Timeshare Financing Receivables requires registrantsfor 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.  

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:

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

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

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 future period. given annual period, which is resolved on a monthly basis over the contract term.

Impact of New Revenue Guidance on Financial Statement Line Items

The SEC staff expectsfollowing tables compare the additional qualitative disclosuresreported 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 includethe previous accounting guidance: