As filed with the Securities and Exchange Commission as of November 8, 2017May 4, 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q
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(Mark One) |
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended | |
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 No. 1‑34062
ILG, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 26‑2590997 |
6262 Sunset Drive, Miami, FL | 33143 |
(305) 666‑1861
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, a smaller reporting company or an emerging growth company. See definition of “accelerated filer,” “large accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act. (Check one):
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Large accelerated filer ☒ | Accelerated filer ☐ | Non‑accelerated filer ☐ |
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Smaller reporting company ☐ | Emerging growth company ☐ |
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If an emerging growth company, indicate by checkmark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒
As of November 3, 2017, 124,047,884May 1, 2018, 124,320,709 shares of the registrant’s common stock were outstanding.
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3 | ||
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| 7 | |
| 8 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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Item 1. Consolidated Financial Statements
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except share and per share data)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
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| September 30, |
| September 30, |
| March 31, | ||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
Revenues: |
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Service and membership related |
| $ | 119 |
| $ | 119 |
| $ | 366 |
| $ | 340 |
| $ | 152 |
| $ | 127 |
Sales of vacation ownership products, net |
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| 118 |
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| 96 |
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| 351 |
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| 154 |
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| 123 |
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| 105 |
Rental and ancillary services |
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| 95 |
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| 92 |
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| 298 |
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| 181 |
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| 118 |
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| 107 |
Consumer financing |
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| 23 |
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| 23 |
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| 66 |
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| 37 |
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| 24 |
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| 21 |
Cost reimbursements |
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| 91 |
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| 88 |
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| 267 |
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| 189 |
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| 65 |
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| 84 |
Total revenues |
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| 446 |
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| 418 |
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| 1,348 |
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| 901 |
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| 482 |
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| 444 |
Operating costs and expenses: |
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Cost of service and membership related sales |
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| 33 |
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| 30 |
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| 97 |
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| 82 |
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| 64 |
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| 35 |
Cost of vacation ownership product sales |
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| 17 |
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| 31 |
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| 73 |
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| 56 |
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| 39 |
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| 25 |
Cost of sales of rental and ancillary services |
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| 78 |
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| 67 |
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| 235 |
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| 123 |
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| 72 |
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| 77 |
Cost of consumer financing |
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| 7 |
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| 4 |
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| 20 |
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| 7 |
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| 8 |
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| 6 |
Cost reimbursements |
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| 91 |
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| 88 |
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| 267 |
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| 189 |
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| 65 |
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| 84 |
Royalty fee expense |
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| 11 |
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| 9 |
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| 32 |
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| 16 |
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| 11 |
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| 10 |
Selling and marketing expense |
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| 77 |
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| 66 |
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| 230 |
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| 125 |
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| 78 |
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| 70 |
General and administrative expense |
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| 58 |
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| 56 |
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| 170 |
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| 148 |
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| 59 |
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| 54 |
Amortization expense of intangibles |
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| 5 |
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| 6 |
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| 15 |
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| 14 |
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| 5 |
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| 5 |
Depreciation expense |
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| 15 |
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| 14 |
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| 44 |
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| 28 |
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| 15 |
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| 15 |
Total operating costs and expenses |
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| 392 |
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| 371 |
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| 1,183 |
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| 788 |
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| 416 |
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| 381 |
Operating income |
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| 54 |
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| 47 |
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| 165 |
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| 113 |
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| 66 |
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| 63 |
Other income (expense): |
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Interest income |
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| — |
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| — |
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| 1 |
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| 1 | ||||||
Interest expense |
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| (7) |
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| (6) |
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| (20) |
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| (18) |
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| (7) |
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| (5) |
Gain on bargain purchase |
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| — |
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| (9) |
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| 2 |
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| 188 | ||||||
Other income (expense), net |
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| (1) |
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| (4) |
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| 6 |
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| (2) | ||||||
Other income, net |
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| 5 |
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| 10 | ||||||||||||
Equity in earnings from unconsolidated entities |
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| 1 |
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| 2 |
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| 4 |
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| 4 |
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| 1 |
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| 2 |
Total other income (expense), net |
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| (7) |
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| (17) |
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| (7) |
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| 173 |
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| (1) |
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| 7 |
Earnings before income taxes and noncontrolling interests |
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| 47 |
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| 30 |
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| 158 |
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| 286 |
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| 65 |
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| 70 |
Income tax benefit (provision) |
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| (17) |
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| 2 |
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| (55) |
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| (46) | ||||||
Income tax provision |
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| (20) |
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| (25) | ||||||||||||
Net income |
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| 30 |
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| 32 |
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| 103 |
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| 240 |
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| 45 |
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| 45 |
Net income attributable to noncontrolling interests |
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| (1) |
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| — |
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| (2) |
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| (2) |
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| (2) |
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| (1) |
Net income attributable to common stockholders |
| $ | 29 |
| $ | 32 |
| $ | 101 |
| $ | 238 |
| $ | 43 |
| $ | 44 |
Earnings per share attributable to common stockholders: |
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Basic |
| $ | 0.24 |
| $ | 0.26 |
| $ | 0.81 |
| $ | 2.55 |
| $ | 0.35 |
| $ | 0.35 |
Diluted |
| $ | 0.23 |
| $ | 0.25 |
| $ | 0.80 |
| $ | 2.53 |
| $ | 0.34 |
| $ | 0.35 |
Weighted average number of shares of common stock outstanding (in 000's): |
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Weighted average number of shares of common stock outstanding (in thousands): |
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Basic |
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| 124,122 |
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| 124,762 |
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| 124,168 |
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| 93,157 |
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| 123,826 |
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| 123,998 |
Diluted |
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| 126,002 |
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| 125,763 |
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| 125,908 |
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| 93,858 |
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| 125,751 |
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| 125,582 |
Dividends declared per share of common stock |
| $ | 0.15 |
| $ | 0.12 |
| $ | 0.45 |
| $ | 0.36 |
| $ | 0.175 |
| $ | 0.15 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
3
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
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| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
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| September 30, |
| September 30, |
| March 31, | ||||||||||||
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| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
Net income |
| $ | 30 |
| $ | 32 |
| $ | 103 |
| $ | 240 |
| $ | 45 |
| $ | 45 |
Other comprehensive income, net of tax: |
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Foreign currency translation adjustments, net of tax |
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| 5 |
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| (6) |
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| 21 |
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| (20) |
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| 8 |
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| 6 |
Total comprehensive income, net of tax |
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| 35 |
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| 26 |
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| 124 |
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| 220 |
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| 53 |
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| 51 |
Less: Net income attributable to noncontrolling interests, net of tax |
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| (1) |
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| — |
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| (2) |
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| (2) | ||||||
Less: Other comprehensive loss (income) attributable to noncontrolling interests |
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| (1) |
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| 1 |
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| (3) |
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| 4 | ||||||
Total comprehensive loss (income) attributable to noncontrolling interests |
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| (2) |
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| 1 |
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| (5) |
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| 2 | ||||||
Less: Net income attributable to noncontrolling interests |
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| (2) |
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| (1) | ||||||||||||
Less: Other comprehensive income attributable to noncontrolling interests |
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| (1) |
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| — | ||||||||||||
Total comprehensive income attributable to noncontrolling interests |
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| (3) |
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| (1) | ||||||||||||
Comprehensive income attributable to common stockholders |
| $ | 33 |
| $ | 27 |
| $ | 119 |
| $ | 222 |
| $ | 50 |
| $ | 50 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
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| (Unaudited) |
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| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
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| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
ASSETS |
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Cash and cash equivalents |
| $ | 211 |
| $ | 126 |
| $ | 158 |
| $ | 122 |
Restricted cash and cash equivalents |
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| 135 |
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| 114 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $0.4 for each date |
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| 111 |
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| 97 | ||||||
Vacation ownership mortgages receivable, net of allowance of $3 and $1, respectively (including a net $67 and $59 in VIEs, respectively) |
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| 82 |
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| 87 | ||||||
Restricted cash and cash equivalents (including $18 and $19 in variable interest entities, "VIEs," respectively) |
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| 252 |
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| 227 | ||||||
Accounts receivable, net of allowance for doubtful accounts of $13 for both periods |
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| 125 |
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| 121 | ||||||
Vacation ownership mortgages receivable, net of allowance of $5 and $4, respectively (including a net $59 and $61 in VIEs, respectively) |
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| 82 |
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| 79 | ||||||
Vacation ownership inventory |
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| 411 |
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| 197 |
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| 497 |
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| 496 |
Prepaid income taxes |
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| 28 |
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| 47 |
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| 39 |
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| 58 |
Prepaid expenses |
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| 55 |
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| 49 |
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| 105 |
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| 64 |
Other current assets (including $4 and $3 of interest receivables in VIEs, respectively) |
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| 33 |
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| 29 | ||||||
Other current assets (including $3 and $4 of interest receivables in VIEs, respectively) |
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| 33 |
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| 33 | ||||||
Total current assets |
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| 1,066 |
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| 746 |
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| 1,291 |
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| 1,200 |
Restricted cash and cash equivalents |
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| 4 |
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| 4 | ||||||
Vacation ownership mortgages receivable, net of allowance of $42 and $21, respectively (including a net $500 and $370 in VIEs, respectively) |
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| 631 |
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| 632 | ||||||
Restricted cash and cash equivalents (including $1 in variable interest entities, "VIEs" for both periods) |
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| 4 |
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| 3 | ||||||
Vacation ownership mortgages receivable, net of allowance of $58 and $51, respectively (including a net $459 and $498 in VIEs, respectively) |
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| 651 |
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| 658 | ||||||
Vacation ownership inventory |
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| 115 |
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| 189 |
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| 60 |
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| 60 |
Investments in unconsolidated entities |
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| 57 |
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| 59 |
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| 54 |
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| 55 |
Property and equipment, net |
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| 599 |
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| 580 |
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| 621 |
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| 616 |
Goodwill |
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| 564 |
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| 558 |
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| 565 |
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| 564 |
Intangible assets, net |
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| 444 |
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| 453 |
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| 438 |
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| 440 |
Deferred income taxes |
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| 9 |
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| 9 | ||||||
Other non-current assets |
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| 90 |
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| 74 |
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| 86 |
|
| 91 |
TOTAL ASSETS |
| $ | 3,579 |
| $ | 3,304 |
| $ | 3,770 |
| $ | 3,687 |
LIABILITIES AND EQUITY |
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LIABILITIES: |
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Accounts payable, trade |
| $ | 54 |
| $ | 64 |
| $ | 52 |
| $ | 46 |
Current portion of securitized debt from VIEs |
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| 163 |
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| 111 |
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| 135 |
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| 146 |
Deferred revenue |
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| 100 |
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| 87 |
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| 224 |
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| 162 |
Accrued compensation and benefits |
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| 73 |
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| 70 |
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| 68 |
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| 72 |
Accrued expenses and other current liabilities (including a net $1 of interest payables in VIEs) |
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| 220 |
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| 187 | ||||||
Accrued expenses and other current liabilities (including a net $1 of interest payables in VIEs for both periods) |
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| 249 |
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| 215 | ||||||
Total current liabilities |
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| 610 |
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| 519 |
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| 728 |
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| 641 |
Long-term debt |
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| 513 |
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| 580 |
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| 563 |
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| 562 |
Securitized debt from VIEs |
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| 490 |
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| 319 |
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| 395 |
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| 429 |
Income taxes payable, non-current |
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| 5 |
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| 5 |
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| 2 |
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| 11 |
Other long-term liabilities |
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| 70 |
|
| 47 |
|
| 119 |
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| 118 |
Deferred revenue |
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| 78 |
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| 79 |
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| 84 |
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| 76 |
Deferred income taxes |
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| 172 |
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| 161 |
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| 140 |
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| 133 |
Total liabilities |
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| 1,938 |
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| 1,710 |
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| 2,031 |
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| 1,970 |
Redeemable noncontrolling interest |
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| 1 |
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| 1 |
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| 1 |
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| 1 |
Commitments and contingencies |
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EQUITY: |
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Preferred stock—authorized 25,000,000 shares, of which 100,000 shares are designated Series A Junior Participating Preferred Stock; $0.01 par value; none issued and outstanding |
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| — |
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| — |
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| — |
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| — |
Common stock—authorized 300,000,000 shares; $0.01 par value; issued 133,990,665 and 133,545,864 shares, respectively |
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| 1 |
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| 1 | ||||||
Treasury stock— 9,987,627 and 8,878,489 shares at cost, respectively |
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| (164) |
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| (136) | ||||||
Common stock—authorized 300,000,000 shares; $0.01 par value; issued 134,308,206 and 134,053,132 shares, respectively |
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| 1 |
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| 1 | ||||||
Treasury stock— 9,987,627 shares at cost each period |
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| (164) |
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| (164) | ||||||
Additional paid-in capital |
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| 1,274 |
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| 1,262 |
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| 1,277 |
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| 1,278 |
Retained earnings |
|
| 535 |
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| 492 |
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| 610 |
|
| 597 |
Accumulated other comprehensive loss |
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| (34) |
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| (52) |
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| (26) |
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| (33) |
Total ILG stockholders’ equity |
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| 1,612 |
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| 1,567 |
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| 1,698 |
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| 1,679 |
Noncontrolling interests |
|
| 28 |
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| 26 |
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| 40 |
|
| 37 |
Total equity |
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| 1,640 |
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| 1,593 |
|
| 1,738 |
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| 1,716 |
TOTAL LIABILITIES AND EQUITY |
| $ | 3,579 |
| $ | 3,304 |
| $ | 3,770 |
| $ | 3,687 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
5
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(In millions, except share data)
(Unaudited)
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| Accumulated | |
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| Total ILG |
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| Additional |
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| Other | ||||
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| Total |
| Noncontrolling |
| Stockholders’ |
| Common Stock |
| Treasury Stock |
| Paid-in |
| Retained |
| Comprehensive | ||||||||||||
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| Equity |
| Interests |
| Equity |
| Amount |
| Shares |
| Amount |
| Shares |
| Capital |
| Earnings |
| Loss | ||||||||
Balance as of December 31, 2016 |
| $ | 1,593 |
| $ | 26 |
| $ | 1,567 |
| $ | 1 |
| 133,545,864 |
| $ | (136) |
| 8,878,489 |
| $ | 1,262 |
| $ | 492 |
| $ | (52) |
Net income |
|
| 103 |
|
| 2 |
|
| 101 |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 101 |
|
| — |
Other comprehensive income, net of tax |
|
| 21 |
|
| 3 |
|
| 18 |
|
| — |
| — |
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| — |
| — |
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| — |
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| — |
|
| 18 |
Non-cash compensation expense |
|
| 18 |
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| — |
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| 18 |
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| — |
| — |
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| — |
| — |
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| 18 |
|
| — |
|
| — |
Dividends paid to noncontrolling interest |
|
| (3) |
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| (3) |
|
| — |
|
| — |
| — |
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| — |
| — |
|
| — |
|
| — |
|
| — |
Cancellation of restricted stock for converted shares |
|
| — |
|
| — |
|
| — |
|
| — |
| (34,813) |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
Issuance of common stock upon vesting of RSUs, net of withholding taxes |
|
| (6) |
|
| — |
|
| (6) |
|
| — |
| 474,557 |
|
| — |
| — |
|
| (6) |
|
| — |
|
| — |
Deferred stock compensation expense |
|
| (2) |
|
| — |
|
| (2) |
|
| — |
| — |
|
| — |
| — |
|
| (2) |
|
| — |
|
| — |
Dividends declared on common stock |
|
| (56) |
|
| — |
|
| (56) |
|
| — |
| 5,057 |
|
| — |
| — |
|
| 2 |
|
| (58) |
|
| — |
Treasury stock purchases |
|
| (28) |
|
| — |
|
| (28) |
|
| — |
| — |
|
| (28) |
| 1,109,138 |
|
| — |
|
| — |
|
| — |
Balance as of September 30, 2017 |
| $ | 1,640 |
| $ | 28 |
| $ | 1,612 |
| $ | 1 |
| 133,990,665 |
| $ | (164) |
| 9,987,627 |
| $ | 1,274 |
| $ | 535 |
| $ | (34) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated | |
|
|
|
|
|
|
| Total ILG |
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
| Other | ||||
|
| Total |
| Noncontrolling |
| Stockholders’ |
| Common Stock |
| Treasury Stock |
| Paid-in |
| Retained |
| Comprehensive | ||||||||||||
|
| Equity |
| Interests |
| Equity |
| Amount |
| Shares |
| Amount |
| Shares |
| Capital |
| Earnings |
| Loss | ||||||||
Balance as of December 31, 2017 |
| $ | 1,716 |
| $ | 37 |
| $ | 1,679 |
| $ | 1 |
| 134,053,132 |
| $ | (164) |
| 9,987,627 |
| $ | 1,278 |
| $ | 597 |
| $ | (33) |
Net income |
|
| 45 |
|
| 2 |
|
| 43 |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 43 |
|
| — |
Cumulative adjustment related to change in accounting principle |
|
| (7) |
|
| — |
|
| (7) |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| (7) |
|
| — |
Other comprehensive income, net of tax |
|
| 8 |
|
| 1 |
|
| 7 |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 7 |
Non-cash compensation expense |
|
| 6 |
|
| — |
|
| 6 |
|
| — |
| — |
|
| — |
| — |
|
| 6 |
|
| — |
|
| — |
Issuance of restricted stock for converted shares in connection with the Vistana acquisition |
|
| — |
|
| — |
|
| — |
|
| — |
| (160,532) |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
Issuance of common stock upon vesting of RSUs, net of withholding taxes |
|
| (8) |
|
| — |
|
| (8) |
|
| — |
| 415,318 |
|
| — |
| — |
|
| (8) |
|
| — |
|
| — |
Dividends declared on common stock |
|
| (22) |
|
| — |
|
| (22) |
|
| — |
| 288 |
|
| — |
| — |
|
| 1 |
|
| (23) |
|
| — |
Balance as of March 31, 2018 |
| $ | 1,738 |
| $ | 40 |
| $ | 1,698 |
| $ | 1 |
| 134,308,206 |
| $ | (164) |
| 9,987,627 |
| $ | 1,277 |
| $ | 610 |
| $ | (26) |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
6
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
|
|
|
|
|
| ||||||
|
| Nine Months Ended |
|
|
|
|
|
| ||||
|
| September 30, |
| Three Months Ended March 31, | ||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 103 |
| $ | 240 |
| $ | 45 |
| $ | 45 |
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangibles |
|
| 15 |
|
| 14 |
|
| 5 |
|
| 5 |
Amortization of debt issuance costs |
|
| 2 |
|
| — |
|
| 1 |
|
| 1 |
Depreciation expense |
|
| 44 |
|
| 28 |
|
| 15 |
|
| 15 |
Allowance for losses on originated loans |
|
| 26 |
|
| 12 |
|
| 9 |
|
| 7 |
Allowance for impairment on acquired loans |
|
| 5 |
|
| — |
|
| 2 |
|
| 2 |
Impairment on vacation ownership inventory |
|
| 4 |
|
| — | ||||||
Accretion of mortgages receivable |
|
| 4 |
|
| — |
|
| 1 |
|
| 2 |
Non-cash compensation expense |
|
| 18 |
|
| 13 |
|
| 6 |
|
| 6 |
Deferred income taxes |
|
| 12 |
|
| (26) |
|
| 7 |
|
| 12 |
Equity in earnings from unconsolidated entities |
|
| (4) |
|
| (4) |
|
| (1) |
|
| (2) |
Gain on bargain purchase of Vistana acquisition |
|
| (2) |
|
| (188) | ||||||
Changes in operating assets and liabilities, and other: |
|
|
|
|
|
| ||||||
Restricted cash |
|
| 38 |
|
| (2) | ||||||
Distributions from investments in unconsolidated entities |
|
| 2 |
|
| — | ||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||||||
Accounts receivable |
|
| 7 |
|
| (6) |
|
| (44) |
|
| (25) |
Vacation ownership mortgages receivable (originations) |
|
| (257) |
|
| (117) |
|
| (82) |
|
| (76) |
Vacation ownership mortgages receivable (collections) |
|
| 218 |
|
| 105 |
|
| 71 |
|
| 69 |
Vacation ownership inventory (additions) |
|
| (179) |
|
| (105) |
|
| (21) |
|
| (59) |
Vacation ownership inventory (disposals) |
|
| 66 |
|
| 42 |
|
| 34 |
|
| 22 |
Vacation ownership inventory related insurance proceeds |
|
| 19 |
|
| — | ||||||
Vacation ownership consolidated HOAs related insurance proceeds |
|
| 23 |
|
| — | ||||||
Prepaid expenses and other current assets |
|
| (11) |
|
| 4 |
|
| (39) |
|
| (33) |
Prepaid income taxes and income taxes payable |
|
| 18 |
|
| 13 |
|
| 8 |
|
| 10 |
Accounts payable and other current liabilities |
|
| 19 |
|
| 50 |
|
| 23 |
|
| 16 |
Deferred income |
|
| 11 |
|
| (3) |
|
| 68 |
|
| 49 |
Other, net |
|
| 1 |
|
| 4 |
|
| — |
|
| (8) |
Net cash provided by operating activities |
|
| 158 |
|
| 74 | ||||||
Net cash and restricted cash provided by operating activities |
|
| 152 |
|
| 58 | ||||||
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
| (80) |
|
| (42) |
|
| (16) |
|
| (22) |
Acquisitions of assets |
|
| — |
|
| (77) | ||||||
Investments in unconsolidated entities |
|
| — |
|
| (5) | ||||||
Other, net |
|
| 1 |
|
| (4) | ||||||
Net cash used in investing activities |
|
| (79) |
|
| (128) |
|
| (16) |
|
| (22) |
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Payments on revolving credit facility, net |
|
| (69) |
|
| — | ||||||
Payments of debt issuance costs |
|
| (3) |
|
| (7) | ||||||
Proceeds from securitized debt |
|
| 325 |
|
| 375 | ||||||
Borrowings on revolving credit facility, net |
|
| — |
|
| 20 | ||||||
Payments on securitized debt |
|
| (100) |
|
| (56) |
|
| (45) |
|
| (32) |
Increase in restricted cash |
|
| (58) |
|
| (26) | ||||||
Payment to former Vistana owner for subsidiary financing obligation |
|
| — |
|
| (24) | ||||||
Purchases of treasury stock |
|
| (28) |
|
| (100) |
|
| — |
|
| (3) |
Dividend payments to stockholders |
|
| (56) |
|
| (37) |
|
| (22) |
|
| (19) |
Dividend payments to noncontrolling interest |
|
| (3) |
|
| (2) | ||||||
Withholding taxes on vesting of restricted stock units and restricted stock |
|
| (6) |
|
| (2) |
|
| (8) |
|
| (4) |
Net cash provided by financing activities |
|
| 2 |
|
| 121 | ||||||
Effect of exchange rate changes on cash and cash equivalents |
|
| 4 |
|
| (2) | ||||||
Net increase in cash and cash equivalents |
|
| 85 |
|
| 65 | ||||||
Cash and cash equivalents at beginning of period |
|
| 126 |
|
| 93 | ||||||
Cash and cash equivalents at end of period |
| $ | 211 |
| $ | 158 | ||||||
|
|
|
|
|
|
| ||||||
Net cash and restricted cash used in financing activities |
|
| (75) |
|
| (38) | ||||||
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| 1 |
|
| (1) | ||||||
Net increase (decrease) in cash, cash equivalents and restricted cash |
|
| 62 |
|
| (3) | ||||||
Cash, cash equivalents and restricted cash at beginning of period |
|
| 352 |
|
| 244 | ||||||
Cash, cash equivalents and restricted cash at end of period |
| $ | 414 |
| $ | 241 | ||||||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock in connection with Vistana acquisition |
| $ | — |
| $ | 1,031 | ||||||
Interest paid, net of amounts capitalized |
| $ | 20 |
| $ | 14 |
| $ | 5 |
| $ | 2 |
Income taxes paid, net of refunds |
| $ | 25 |
| $ | 60 |
| $ | 5 |
| $ | 3 |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
7
ILG, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017MARCH 31, 2018
(Unaudited)
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
Organization
ILG, Inc. is a leading provider of professionally delivered vacation experiences and the exclusive global licensee for the Hyatt®, Sheraton® and Westin® brands in vacation ownership. We operate in the following two segments: Vacation Ownership (VO) and Exchange and Rental.
Vacation OwnershipOur VO segment engages in sales, marketing, financing and development of vacation ownership interests (VOIs); the management of vacation ownership resorts; and related services to owners and associations. The Vacation OwnershipVO operating segment consists of the VOI sales and financing business of Vistana Signature Experiences (Vistana) and Hyatt Vacation Ownership (HVO) as well as the management related lines of business of Vistana, HVO, Vacation Resorts International (VRI), Trading Places International (TPI), VRI Europe and VRI Europe.certain homeowners’ associations (HOAs) under our control.
Our Exchange and Rental segment offers access to vacation accommodations and other travel-related transactions and services to members of our programs and other leisure travelers, by providing vacation exchange services and vacation rentals, working with resort developers, homeowners’ associations (HOAs)HOAs and operating vacation rental properties. The Exchange and Rental operating segment consists of Interval International (referred to as Interval), the Vistana Signature Network, the Hyatt Residence Club, the TPI exchange business, and Aqua-Aston Holdings, Inc. (Aqua-Aston).
ILG was incorporated as a Delaware corporation in May 2008 under the name Interval Leisure Group, Inc. and commenced trading on The NASDAQ Stock Market in August 2008 under the symbol "IILG", and now trades under “ILG.”
On May 11, 2016, we acquired the vacation ownership business of Starwood Hotels & Resorts Worldwide, LLC (Starwood), now known as Vistana. In connection with the acquisition, Vistana entered into an exclusive, 80 - year global license agreement with Starwood for the use of the Sheraton® and Westin® brands in vacation ownership. The global license agreement may also be extended for two 30 – year terms, subject to meeting certain sales performance tests. Also, Vistana has the non-exclusive license for the existing St. Regis® and The Luxury Collection® vacation ownership properties and an affiliation with the Starwood Preferred Guest program.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of ILG’s management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not indicative of the results that may be expected for a full year.
For the nine months ended September 30, 2017 and 2016, individual
8
Individual amounts presented herein by quarter in our interim financial statements may not add to the year-to-date amount due to rounding and, in the case of per share amounts, differences in the average common shares outstanding during each period.
8
our adoption of ASC 606. See Note 3 for additional information.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of ILG, our wholly‑owned subsidiaries, and companies in which we have a controlling interest, including variable interest entities (“VIEs”) where we are the primary beneficiary in accordance with consolidation guidance. All significant intercompany balances and transactions have been eliminated in these condensed consolidated financial statements. References in these financial statements to net income attributable to common stockholders and ILG stockholders’ equity do not include noncontrolling interests, which represent the outside ownership of our consolidated non‑wholly owned entities and are reported separately.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 20162017 Annual Report on Form 10‑K.
Seasonality
Revenue at ILG is influenced by the seasonal nature of travel. Within our Vacation OwnershipVO segment, our sales and financing business experiences a modest impact from seasonality, with higher sales volumes during the traditional vacation periods. Our vacation ownership management businesses by and large do not experience significant seasonality, with the exception of our resort operations revenue which tends to be higher in the first quarter.
Within our Exchange and Rental segment, we recognize exchange and Getaway revenue based on confirmation of the vacation, with the first quarter generally experiencing higher revenue and the fourth quarter generally experiencing lower revenue. Remaining rental revenue is recognized based on occupancy. For the vacation rental business, the first and third quarters generally generate higher revenue as a result of increased leisure travel to our Hawaii‑based managed properties during these periods, and the second and fourth quarters generally generate lower revenue.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies were described in Note 2 toaccompanying our audited consolidated financial statements included in our 20162017 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the ninethree months ended September 30, 2017.March 31, 2018 other than changes related to the adoption of ASU 2014‑09, “Revenue from Contracts with Customers (Topic 606) (“ASU 2014‑09”). See Note 3 for further details and related disclosures.
Accounting Estimates
ILG’s management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.
9
Significant estimates underlying the accompanying condensed consolidated financial statements include:
· | the recovery of long‑lived assets as well as goodwill and other intangible assets; |
· | purchase price allocations of business combinations; |
· | allowance for loan |
· | accounting for acquired vacation ownership mortgages receivable; |
|
|
· | cost of vacation ownership product sales related estimates included in our relative sales value calculation, such as future projected sales revenue and expected project costs to complete; |
9
· | the accounting for income taxes including deferred income taxes and related valuation allowances; |
· | the determination of deferred membership revenue and deferred membership costs; and |
· |
|
In the opinion of ILG’s management, the assumptions underlying the condensed consolidated financial statements of ILG and its subsidiaries are reasonable.
Earnings per Share
Basic earnings per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of RSUs and restricted stock using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. The computations of diluted earnings per share available to common stockholders exclude 0.30.6 million and 0.40.8 million RSUs and restricted shares for the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, respectively, as the effect of their inclusion would have been antidilutive to earnings per share. The antidilutive effect for the quarters ended September 30, 2016 and 2017 was inconsequential.
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
| Three Months Ended | |||||||||
|
| September 30, |
|
| September 30, |
| March 31, | |||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| 2018 |
|
| 2017 |
Basic weighted average shares of common stock outstanding |
| 124,122 |
|
| 124,762 |
|
| 124,168 |
|
| 93,157 |
| 123,826 |
|
| 123,998 |
Net effect of common stock equivalents assumed to be vested related to RSUs and restricted stock |
| 1,880 |
|
| 1,001 |
|
| 1,740 |
|
| 701 |
| 1,925 |
|
| 1,584 |
Diluted weighted average shares of common stock outstanding |
| 126,002 |
|
| 125,763 |
|
| 125,908 |
|
| 93,858 |
| 125,751 |
|
| 125,582 |
10
Earnings per share for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 are as follows (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Nine Months Ended |
| Three Months Ended | |||||||||
|
| September 30, |
|
| September 30, |
| March 31, | |||||||||
|
| 2017 |
|
| 2016 |
|
| 2017 |
|
| 2016 |
| 2018 |
|
| 2017 |
Net income attributable to common stockholders | $ | 29,314 |
| $ | 31,913 |
| $ | 100,898 |
| $ | 237,500 | $ | 42,909 |
| $ | 43,993 |
Weighted average number of shares of common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 124,122 |
|
| 124,762 |
|
| 124,168 |
|
| 93,157 |
| 123,826 |
|
| 123,998 |
Diluted |
| 126,002 |
|
| 125,763 |
|
| 125,908 |
|
| 93,858 |
| 125,751 |
|
| 125,582 |
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 0.24 |
| $ | 0.26 |
| $ | 0.81 |
| $ | 2.55 | $ | 0.35 |
| $ | 0.35 |
Diluted | $ | 0.23 |
| $ | 0.25 |
| $ | 0.80 |
| $ | 2.53 | $ | 0.34 |
| $ | 0.35 |
Recent Accounting Pronouncements: General
With the exception of those discussed below, there are no recent accounting pronouncements or changes in accounting pronouncements since the recent accounting pronouncements described in our 20162017 Annual Report on Form
10
10-K that are of significance, or potential significance, to ILG based on our current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement, and may include certain accounting standards also disclosed in our 2017 Annual Report on Form 10-K which have not yet been adopted.
In February 2016, the FASB issued ASU 2016‑02, “Leases (Topic 842)” (“ASU 2016‑02”). ASU 2016‑02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance will be effective for public entities for annual periods beginning after December 15, 2018 and interim periods therein. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements; however, we do expect our balance sheet presentation to be impacted upon adoption due to the recognition of right-of-use assets and lease liabilities for operating leases.
Adopted Accounting Pronouncements: General
In March 2018, the FASB issued ASU 2018-05, “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. The guidance amends SEC paragraphs in Accounting Standards Codification (ASC or Codification) 740, Income Taxes, to reflect SEC Staff Accounting Bulletin (SAB) 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act (the “Tax Reform Act”) in the period of enactment. For further discussion please see Note 19. This ASU was effective immediately and the adoption of this guidance did not have a material impact on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting” to clarify when to account for a change to the terms or conditions of a share-based payment award as a modification. Under this new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The guidance is effective prospectively for annual periods beginning on or after December 15, 2017. Early adoption is permitted. We do not anticipate theThe adoption of this guidance will have a material impact on our consolidated financial statements.
In March 2017, the FASB issued ASU No. 2017-08, “Receivables—Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities”. The FASB issued this ASU to amend the amortization period for certain purchased callable debt securities held at a premium. Prior to the issuance of the ASU, GAAP excludes certain callable debt securities from consideration of early repayment of principal even if the holder is certain that the call will be exercised. As a result, upon the exercise of a call on a callable debt security held at a premium, the unamortized premium is recorded as a loss in earnings. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We dodid not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.
In February 2017, the FASB issued ASU No. 2017-05, “Other Income – Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”. The FASB issued this ASU to clarify the scope of subtopic 610-20, which was
11
issued in May 2014 as part of Accounting Standards Update (ASU) No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The effective date and transition requirements of these amendments are the same as the effective date and transition requirements of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)". We plan to adopt this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018. We do not anticipate theThe adoption of this guidance will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, “Intangibles—Goodwill and Other (Topic 350),” to simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. An entity will no longer determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. The update is effective for annual periods beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We dodid not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-03, “Accounting Changes and Error Corrections (Topic 250) and Investments—Equity Method and Joint Ventures (Topic 323).” ASU 2017-03 states that a registrant should evaluate ASUs that have not yet been adopted to determine the appropriate financial statement disclosures about the potential material effects of those ASUs on the financial statements when adopted. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805),” to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses by clarifying the definition of a business. The definition of a business affects many areas of accounting including acquisition, disposals, goodwill and consolidation. This amendment covers Phase 1 of a three phase project. The update is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The
11
amendments in this update should be applied prospectively on or after the effective date. We do not anticipate theThe adoption of this guidance willdid not have a material impact on our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, “Statement of Cash Flows (Topic 230).” This ASU requires that a statement of cash flows explains the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The update is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. We do not anticipate theThe adoption of this guidance willdid not have a material impact on our consolidated financial statements. The effect of the adoption of ASU 2016-18 on our consolidated statements of cash flows was to include restricted cash balances in the beginning and end of period balances of cash and cash equivalents and restricted cash. The change in restricted cash was previously disclosed in operating activities and financing activities in the consolidated statements of cash flows.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”) as part of the Board’s initiative to reduce complexity in accounting standards. This ASU eliminates an exception in ASC 740, which prohibits the immediate recognition of income tax consequences of intra-entity asset transfers other than inventory. Under ASU 2016-16, entities will be required to recognize the immediate current and deferred income tax effects of intra-entity asset transfers, which often involve a subsidiary of a company transferring intellectual property to another subsidiary. For public entities, the new guidance will beis effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. This ASU’s amendments should be applied on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. We do not anticipateIn accordance with this ASU, during the current period we recorded a cumulative adjustment of approximately $7 million to opening retained earnings. The adoption of this guidance willdid not have a material impact on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230).” This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under existing guidance. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. We do not anticipate theThe adoption of this guidance willdid not have a material impact on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326).” This ASU amends the Board’s guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the current expected credit losses model) that is based on an expected losses model rather than an incurred losses model. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of GAAP by decreasing the number of impairment models that entities use to account for debt instruments. The update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. We do not anticipate the adoption of this guidance will have a material impact on our consolidated financial statements as we currently apply an expected losses model against our outstanding vacation ownership mortgages receivable.
In February 2016, the FASB issued ASU 2016‑02, “Leases (Topic 842)” (“ASU 2016‑02”). ASU 2016‑02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new guidance will be effective for public entities for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption of ASU 2016‑02 as of its issuance is permitted. The new leases standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. We are currently evaluating the methods and impact of adopting this new standard on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016‑01, “Financial Instruments—Overall (Subtopic 825‑10),” which amends the guidance in U.S. GAAP on the classification and measurement of financial instruments. Although the ASU retains many current requirements, it significantly revises an entity’s accounting related to (1) the classification and measurement of investments in equity securities and (2) the presentation of certain fair value changes for financial liabilities measured at fair value. The ASU also amends certain disclosure requirements associated with the fair value of
12
financial instruments. The amendments in this update are effective for fiscal years beginning after December 31, 2017,
12
including interim periods within those fiscal years. We do not anticipate theThe adoption of this guidance willdid not have a material impact on our consolidated financial statements.
RecentAdopted Accounting Pronouncements: Revenue Recognition
In May 2014, the FASB issued ASU 2014‑09 “Revenue from Contracts with Customers (Topic(otherwise known as ASC 606) (“ASU 2014‑09”). The FASB and the International Accounting Standards Board (“IASB”) initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (i) remove inconsistencies and weaknesses in revenue requirements; (ii) provide a more robust framework for addressing revenue issues; (iii) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (iv) provide more useful information to users of financial statements through improved disclosure requirements; and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB amended the FASB Accounting Standards Codification (“Codification”) and created a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance in ASU 2014‑09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry specific guidance throughout the Industry Topics of the Codification. Additionally, ASU 2014‑09 supersedes some cost guidance included in Subtopic 605‑35, Revenue Recognition—Construction‑Type and Production‑Type Contracts. The ASU is effective for fiscal years beginning after December 15, 2017 (and interim periods within that period).
In periods subsequent to the initial issuance of this ASU, the FASB has issued additional ASU’s clarifying items within Topic 606, as follows:
· | In August 2015, the FASB issued ASU 2015-14, "Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date," which defers by one year the effective date of ASU 2014-09, "Revenue from Contracts with Customers (Topic 606)" to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. |
· | In March 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations” (“ASU 2016-08”). The amendments in ASU 2016-08 serve to clarify the implementation guidance on principal vs. agent considerations. |
· | In April 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”). The purpose of ASU 2016-10 is to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance (while retaining the related principles for those areas). |
· | In May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). The purpose of ASU 2016-12 is to address certain issues identified to improve Topic 606 by enhancing guidance on assessing collectability, presentation of sales taxes and other similar taxes collected from customers, noncash consideration and completed contracts and contract modifications at transition. |
· | In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which amends certain aspects of the Board’s new revenue standard, ASU 2014-09. This ASU addresses thirteen specific issues pertaining to Topic 606, Revenue from Contracts with Customers. |
Our qualitative evaluationWe have adopted this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, as of ASU 2014-09 is substantially complete. Our qualitative evaluation included identifyingJanuary 1, 2018, using the potential differences in the timing and/or method of revenue recognitionretrospective adoption method. See Note 3 for our contracts and, ultimately, the expected impact on our business processes, systems and controls. As part of this evaluation, we are reviewing customer contracts and applying the five-step model of the new standard to each contact type identified that’s associatedfurther details.
13
NOTE 3—REVENUE RECOGNITION
The core principle of the guidance in ASC 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. We recognize all revenue related to contracts with customers in accordance with ASC 606. We elected to apply ASC 606, and all related ASUs, using the retrospective adoption method. Under this method, we revised our material revenue streamsconsolidated financial statements for the years ended December 31, 2016 and will compare the results to our current accounting practices. We currently expect possible2017, and applicable interim periods within those years, as if ASC 606 had been effective for those periods. The major areas of impact will include:in applying ASC 606 include the following:
| earlier recognition of certain VOI sales where the transaction price was deemed collectable yet we were deferring recognition due to specific buyers’ commitment requirements under legacy GAAP (also known as buyers’ commitment deferral or BCD); |
2. | gross versus net presentation changes, which |
| classification of certain trial vacation package sales which |
| capitalization of certain incremental costs to obtain a contract related to trial vacation package sales; |
| the instances in which we can apply the percentage of completion revenue recognition method when construction of a vacation ownership project is not complete; and |
| classification of certain |
We continue to evaluate the quantitative effects of adopting this standard. Consequently, given the complexities of this new standard, we are unable to determine, at this time, whether adoption of this standard will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.
At this time, we plan to adopt this standard, as well as other clarifications and technical guidance issued by the FASB related to this new revenue standard, on January 1, 2018, using the retrospective adoption method. However, we will continue to re-evaluate this determination through adoption.
Adopted Accounting Pronouncements
In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810),” to amend the existing guidance issued with ASU 2015-02. This ASU is being issued to amend the consolidation guidance on how a reporting entity, that is the single decision maker of a VIE, should treat indirect interests in the entity held through related parties that are under common control with the reporting entity, when determining whether it is the primary beneficiary of that VIE. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718) Improvements to Employee Share-Based Payments Accounting” (“ASU 2016-03”), to simplify the current accounting for Stock Compensation. The areas for simplification in this update involve several aspects of the accounting for share based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Under the new guidance, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital. Instead, all excess tax benefits and tax deficiencies should be recognized as income tax expense or benefit in the income statement. In accordance with this ASU, for the nine months ended September 30, 2017, ILG included a net benefit of $2 million within the income tax provision. In addition, with the adoption of this ASU, we elected to account for forfeitures when they occur, so therefore, effective January 1, 2017, we no longer estimate the number of awards that are expected to vest. We also elected the prospective transition method for the presentation of excess tax benefits within the statement of cash flows. As such, the excess tax benefits from stock based awards was presented as part of the operating activities within the current period Condensed Consolidated Statements of Cash Flows, and the prior period was not adjusted. Overall, the adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
In March 2016, the FASB issued ASU 2016-07, “Investments – Equity Method and Joint Ventures (Topic 323)” (“ASU 2016-07”). The amendments in this ASU require, among other items, that an equity method investor add the cost of acquiring an additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting, as well as eliminates certain other existing requirements. The adoption of this guidance did not have a material impact on our condensed consolidated financial statements.
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NOTE 3—BUSINESS COMBINATION
On May 11, 2016, we completedThe tables below summarizes the acquisition of Vistana from wholly‑owned subsidiaries of Starwood as discussed in Note 1adjustments that were made to theseour condensed consolidated financial statements. As partstatement of income for the acquisition, ILG acquired 100% of the voting equity interests of Vistanathree months ended March 31, 2017 and issued approximately 72.4 million shares of ILG common stock to the holders who received Vistana common stock in the spin-off. These shares were valued at $1 billion based on ILG’s closing stock price of $14.24 on May 11, 2016.
The Vistana acquisition is recorded on our condensed consolidated balance sheet as of May 11, 2016 based upon estimated fair values as of such date. The results of operations related to this business are includedDecember 31, 2017, on a line item basis (USD in our condensed consolidated statements of income beginning on May 12, 2016 and within our Exchange and Rental and Vacation Ownership segments for segment reporting purposes on the basis of its respective business activities.
Purchase Price Allocation (PPA)
The following table presents the final allocation of total purchase price consideration to the assets acquired and liabilities assumed, based on their estimated fair values as of their respective acquisition dates (in millions)millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
| Preliminary PPA |
| Adjustments to PPA(3) |
| Revised Final PPA(4) | |||
Cash |
| $ | 45 |
| $ | — |
| $ | 45 |
Vacation ownership inventory |
|
| 221 |
|
| 7 |
|
| 228 |
Vacation ownership mortgages receivable |
|
| 712 |
|
| (19) |
|
| 693 |
Other current assets |
|
| 143 |
|
| 3 |
|
| 146 |
Intangibles |
|
| 241 |
|
| (3) |
|
| 238 |
Property plant and equipment |
|
| 465 |
|
| (10) |
|
| 455 |
Other non-current assets |
|
| 24 |
|
| (9) |
|
| 15 |
Deferred revenue |
|
| (60) |
|
| (4) |
|
| (64) |
Securitized debt |
|
| (154) |
|
| — |
|
| (154) |
Other current liabilities(2) |
|
| (187) |
|
| 11 |
|
| (176) |
Other non-current liabilities |
|
| (98) |
|
| (2) |
|
| (100) |
Gain on bargain purchase(1) |
|
| (197) |
|
| 32 |
|
| (165) |
Net assets acquired |
| $ | 1,155 |
| $ | 6 |
| $ | 1,161 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (As reported) |
|
|
|
|
|
|
|
|
| (Restated) |
|
| Three Months Ended March 31, 2017 |
| Reclassification Adjustments (1) |
| BCD |
| Percentage of Completion Related |
| Other (2) |
| Three Months Ended March 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Service and membership related |
| 126 |
| 1 |
| — |
| — |
| — |
| 127 |
Sales of vacation ownership products, net |
| 110 |
| (1) |
| 1 |
| (5) |
| — |
| 105 |
Rental and ancillary services |
| 107 |
| — |
| — |
| — |
| — |
| 107 |
Cost reimbursements |
| 88 |
| (4) |
| — |
| — |
| — |
| 84 |
Total revenues |
| 452 |
| (4) |
| 1 |
| (5) |
| — |
| 444 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service and membership related sales |
| 32 |
| 3 |
| — |
| — |
| — |
| 35 |
Cost of vacation ownership products sales |
| 27 |
| — |
| — |
| (2) |
| — |
| 25 |
Cost of sales of rental and ancillary services |
| 78 |
| (1) |
| — |
| — |
| — |
| 77 |
Cost reimbursements |
| 88 |
| (4) |
| — |
| — |
| — |
| 84 |
Selling and marketing expense |
| 73 |
| (2) |
| — |
| — |
| (1) |
| 70 |
Total operating costs and expenses |
| 388 |
| (4) |
| — |
| (2) |
| (1) |
| 381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in earnings from unconsolidated entities |
| 1 |
| — |
| 1 |
| — |
| — |
| 2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes and noncontrolling interest |
| 70 |
| — |
| 2 |
| (3) |
| 1 |
| 70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (provision) |
| (25) |
| — |
| (1) |
| 1 |
| — |
| (25) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to common stockholders |
| 44 |
| — |
| 1 |
| (2) |
| 1 |
| 44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 0.36 |
|
|
|
|
|
|
|
|
| 0.35 |
Diluted |
| 0.35 |
|
|
|
|
|
|
|
|
| 0.35 |
(1) |
|
(2) | Includes |
|
|
|
|
15
|
|
|
|
|
|
|
|
|
|
| (As reported) |
|
|
|
|
| (Restated) |
|
| December 31, 2017 |
| BCD |
| Other (3) |
| December 31, 2017 |
|
|
|
|
|
|
|
|
|
Vacation ownership mortgages receivable, net (current) |
| 78 |
| 1 |
| — |
| 79 |
Vacation ownership inventory |
| 499 |
| (3) |
| — |
| 496 |
Prepaid expenses |
| 62 |
| (2) |
| 4 |
| 64 |
Other current assets |
| 32 |
| - |
| 1 |
| 33 |
Total current assets |
| 1,199 |
| (4) |
| 5 |
| 1,200 |
Vacation ownership mortgages receivable, net (noncurrent) |
| 644 |
| 14 |
| — |
| 658 |
Investment in unconsolidated entities |
| 54 |
| 1 |
| — |
| 55 |
TOTAL ASSETS |
| 3,671 |
| 11 |
| 5 |
| 3,687 |
|
|
|
|
|
|
|
|
|
Deferred revenue |
| 162 |
| — |
| — |
| 162 |
Accrued expenses and other current liabilities |
| 217 |
| (2) |
| — |
| 215 |
Total current liabilities |
| 643 |
| (2) |
| — |
| 641 |
Deferred income taxes |
| 128 |
| 4 |
| 1 |
| 133 |
TOTAL LIABILITIES |
| 1,967 |
| 2 |
| 1 |
| 1,970 |
|
|
|
|
|
|
|
|
|
Retained earnings |
| 584 |
| 9 |
| 4 |
| 597 |
Total shareholders’ equity |
| 1,666 |
| 9 |
| 4 |
| 1,679 |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY |
| 3,671 |
| 11 |
| 5 |
| 3,687 |
(3) | Includes impact on condensed consolidated balance sheet for all items described above, except BCD. |
ThePerformance obligations and accounting policies
Vacation Ownership
Revenue from the VO segment is derived principally from sales of VOIs and related fees earned by Vistana and HVO, interest income earned for financing these sales, maintenance fees, fees for vacation ownership resort and homeowners’ association management services, and rental and ancillary revenues, including from hotels owned by Vistana and HVO.
Sales of VOIs
We enter into contracts for the purchase price allocated toof VOIs which include (i) the fair valuesale of identifiable intangible assets associated with the Vistana acquisition is as follows (in millions):
|
|
|
|
|
|
|
| Fair Value |
| Useful Life (years) | |
|
|
|
|
|
|
Resort management contracts |
| $ | 118 |
| 26 |
Customer relationships |
|
| 119 |
| 25 |
Other |
|
| 1 |
| < 1 |
Total |
| $ | 238 |
|
|
In connection withVOI, (ii) membership in the Vistana acquisition we recorded identifiable intangible assets of $238 million, all of which were definite-lived intangible assets, related to Vistana’s membership base in their Vistana Signature Network (described in table above as customer relationships)or Hyatt Residence Club, and their resort management contracts.
The valuation of(iii) potential incentives for purchasing the assets acquired and liabilities assumed in connection with this acquisition was based on fair values atVOI. See the acquisition date. The assets purchased and liabilities assumed for the Vistana acquisition have been reflected in the accompanying condensed consolidated balance sheets. The measurement period was closed as of December 31, 2016 for all balance sheet items except those that are tax-related for which the measurement period closed on May 11, 2017.
Results of operations
Related to the Vistana acquisition,Membership fee revenue of $268 million and $242 million was recognized in our condensed consolidated statement of income for the three months ended September 30, 2017 and 2016, respectively. Revenue of $806 million and $365 million was recognized in our condensed consolidated statement of income for the nine months ended September 30, 2017 and 2016, respectively.
Related to the Vistana acquisition, net income of $15 million and $11 million was recognized in our condensed consolidated statement of income for the three months ended September 30, 2017 and 2016, respectively. Net income of $53 million and $17 million was recognized in our condensed consolidated statement of income for the nine months ended September 30, 2017 and 2016, respectively.
Pro forma financial information (unaudited)
The following unaudited pro forma financial information presents the consolidated results of ILG and Vistana as if the acquisition had occurred on January 1, 2015, the beginning of the last full fiscal year prior to the May 11, 2016 acquisition date. The pro forma results presentedsection below for the threerevenue recognition treatment of the club membership fees.
Consolidated VOI sales are recognized and nine months ended September 30, 2017included in revenues once control of the VOI has transferred and 2016the purchaser secures the benefits of ownership, which occurs after a binding sales contract has been executed, collectability is reasonably assured, the rescission period has expired, and construction is complete. The agreement for sale generally provides for a down payment and a note secured by a mortgage payable in monthly installments, including interest, over a typical term ranging from 5 -15 years. Customer deposits relating to contracts cancelled after the applicable rescission period are basedforfeited and recorded in revenue at the time of forfeiture.
The provision for loan losses is recorded as an adjustment to sales of VOIs in the consolidated income statements rather than as an adjustment to bad debt expense, as the default on the historical financial statementsVOI is deemed to be a right of ILG and Vistana (where applicable), adjusted to reflectreturn. We record an estimate of loan losses at the purchase method of accounting, with ILG as accounting acquirer. The pro forma information is not necessarily indicativetime of the consolidated resultsVOI sale and recognize revenue net of operations that mightamounts deemed uncollectible.
We at times offer several types of sales incentives, including SPG and World of Hyatt points, a bonus week, and down payment credits to buyers. Revenue from sales incentives is recognized when the incentive is provided to the owner of the VOI. If the owner finances the VOI, the incentive may not be provided until six payments have been achievedmade. For our primary incentives, SPG and World of Hyatt points, we act as an agent and therefore, recognize revenue for the periods or dates indicated, nor is it necessarily indicative of the future results of the combined company. It does not reflect cost savings expected to be realized from the elimination of certain expenses and from synergies expected to be created or the costs to achieve such cost savings or synergies, if any. Income taxes do not reflect the amounts that would have resulted had ILG and Vistana filed consolidated income tax returns during the pre-acquisition periods presented. The 2016 periods and the 2017 nine month period have been adjusted to eliminate the respective adjustments recorded to our pre-tax gainthese incentives on bargaina net basis.
16
We routinely sell trial vacation packages where we provide our customers with a stay at a resort and offer a discount on a future VOI sale. The future discount is accounted for as a material right, which is recognized when the purchaser buys a VOI or the discount expires, both of which occur at the time of stay. Our customers have the option to pay upfront for these packages or finance these packages through us. In the case of unused trial vacation packages, we recognize revenue upon forfeiture as we do not expect a significant amount of breakage to occur.
Management fee and other revenue
Management fees and other revenue in this segment consist of annual maintenance fees, service fees and base management fees, as applicable. Annual maintenance fees are amounts paid by VOI owners for maintaining and operating the respective properties, which includes management services, and are recognized on a straight‑line basis over the respective annual maintenance period. Our day-to-day management services include activities such as 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 either a percentage of the budgeted cost to operate such resorts or a fixed fee arrangement, on a monthly basis as the services are performed. We generally recognize management fee revenue on a gross basis except for management fees associated with VOIs which remain in our inventory.
Resort operations revenue
Our resort operations performance obligations are largely comprised of transient rental income at our vacation ownership and owned-hotel properties. We may receive payment for these services upfront or at the time of the stay. We record rental revenue when occupancy has occurred or, in the case of unused prepaid rental deposits, upon forfeiture. Other ancillary services revenue consists of goods and services that are sold or provided by us at restaurants, golf courses and other retail and service outlets located at developed resorts. We receive payment and recognize ancillary services revenue when goods have been provided and/or services have been rendered.
Exchange and Rental
Membership fee revenue
Revenue from membership fees from our Exchange and Rental segment is deferred and recognized over the terms of the applicable memberships, typically ranging from one to five years, on a straight‑line basis. When multiple member benefits and services are provided over the term of the membership, revenue is recognized for each separable deliverable ratably over the membership period, as applicable. Membership fees are paid up front at the beginning of the applicable membership period. Generally, memberships are cancelable and refundable on a pro‑rata basis, with the exception of Interval Network’s Platinum tier which is non‑refundable.
Transaction revenue
Revenue from exchanges, Getaway transactions and other fee-based services provided to members of our networks is recognized when confirmation of the transaction is provided and services have been rendered, as the earnings process is complete. Reservation servicing fees are generally received on a monthly basis and revenue is recognized when the service is performed or on a straight‑line basis over the applicable service period.
Club rental revenue
Club rental revenue represents rentals generated by the Vistana Signature Network and Hyatt Residence Club mainly to monetize inventory at their vacation ownership resorts to provide exchanges for our members through hotel loyalty programs. We recognize revenue for such rentals when occupancy has occurred.
17
Rental management revenue
Revenue from our vacation rental management businesses is comprised of base management fees which are typically either (i) fixed amounts, (ii) amounts based on a percentage of adjusted gross lodging revenue, or (iii) various revenue sharing arrangements with condominium owners based on stated formulas. We generally receive payment from the rental management services on a monthly basis as the services are performed. Base management fees are recognized when earned in accordance with the terms of the contract (i.e., over time as we perform the management services). Incentive management fees for certain hotels and condominium resorts are generally a percentage of either operating profits or improvement in operating profits. We recognize incentive management fees as earned throughout the incentive period based on actual results which are trued‑up at the culmination of the incentive period. Determining the amount of the transaction price related to the incentive management fees may require us to estimate the variable consideration related to the incentive fees based on generated budgets and forecasts until such time as the actual amounts are known (typically at end of calendar year). Such variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal of the related revenue will not occur. Service fee revenue is based on the services provided to owners including reservations, sales and marketing, property accounting and information technology services, either internally or through third party providers. Service fee revenue is recognized when the service is provided. We are considered an agent for these services, and will therefore recognize revenue from the service fees on a net basis per the terms of the respective agreement.
General
Cost reimbursement revenue
Represents the compensation and other employee-related costs directly associated with managing properties that are included in both revenue and cost of sales and that are passed on to the property owners or homeowner associations without mark-up. Cost reimbursement revenue of the Vacation Ownership segment also includes reimbursement of sales and marketing expenses, without mark-up, pursuant to contractual arrangements. Such cost reimbursements are recognized gross when the related services are performed.
Deferred revenue in a business combination
When we acquire a business which records deferred revenue on its historical financial statements, we are required to re‑measure that deferred revenue as of the acquisition date pursuant to rules related to accounting for business combinations, as described further below. The post‑acquisition impact of that remeasurement results in recognizing revenue which solely comprises the cost of the associated legal performance obligation we assumed as part of the acquisition, plus a normal profit margin. This purchase accounting treatment typically results in lower amounts of revenue recognized in a reporting period following the acquisition than would have otherwise been recognized on a historical basis.
Contracts with multiple performance obligations
When we enter into an arrangement which contains multiple promises, we are required to determine whether the promises in these arrangements should be treated as separate performance obligations for revenue recognition purposes and, if so, how the transaction price should be allocated to each performance obligation. We analyze our contracts upon execution to determine the appropriate revenue recognition accounting treatment. Our determination of whether to recognize revenue for separate performance obligation will depend on the terms and specifics of our products and arrangements as well as the nature of changes to our existing products and services, if any. The transaction price is allocated to such distinct performance obligations in accordance with their standalone selling price. As we have observable standalone sales of each of our performance obligations, we utilize the observable standalone selling price for purposes of this allocation and we do not exercise significant judgement in determining these standalone selling prices. The allocation of the total transaction price to the various performance obligations does not change the total revenue recognized from a transaction or arrangement, but may impact the timing of revenue recognition.
18
Sales type taxes
All taxable revenue transactions are presented on a netpro forma presentation. This adjustment‑of‑tax basis.
Costs to Obtain or Fulfill a Contract
We capitalize the incremental costs of obtaining a contract when those costs would not have been incurred if the contract had not been obtained, in accordance with ASC Subtopic 340-40, Other Assets and Deferred Costs – Revenue from Contracts with Customers (“ASC 340-40”). Direct costs of acquiring members (primarily commissions) are deferred and amortized on a straight‑line basis over the terms of the applicable membership period. We also capitalize commissions related to the sale of prepaid vacation packages. These commissions are expensed when the purchaser stays at the property. If a contract is cancelled, we charge the unrecoverable direct selling costs to expense at cancellation.
The ending asset balance related to costs to obtain a contract as of March 31, 2018 and December 31, 2017 were $23 million and $19 million, respectively, and total amortization was tax-effected at an estimated effective tax rate of 35%$2 million for the 2016three months ended March 31, 2018. There were no associated impairment losses.
We apply a practical expedient to expense costs as incurred for costs to obtain a contract when the amortization period would have been one year or less.
We capitalize certain costs incurred to fulfill our contracts with customers, which primarily consists of membership fulfillment and member resort directory costs for active members. Membership fulfillment costs are amortized over the applicable membership term, and costs associated with directories are amortized over the period of benefit.
The ending asset balance for fulfillment costs as of March 31, 2018 and December 31, 2017 were $7 million and $9 million, respectively, and total amortization was $1 million for the three months ended March 31, 2018. There were no associated impairment losses.
19
Disaggregation of revenue
The following table presents our condensed consolidated income statement revenues disaggregated by type and reportable segments for the quarters ended March 31, 2018 and 2017 periods.(in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, |
| Nine Months Ended September 30, | |||||||
(In millions, except per share data) |
| 2017 |
| 2016 |
| 2017 |
| 2016 | |||
Revenue |
| $ | 446 |
| $ | 427 | $ | 1,348 |
| $ | 1,272 |
Net income attributable to common stockholders |
| $ | 29 |
| $ | 30 | $ | 99 |
| $ | 86 |
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.24 |
| $ | 0.24 | $ | 0.80 |
| $ | 0.67 |
Diluted |
| $ | 0.23 |
| $ | 0.24 | $ | 0.79 |
| $ | 0.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended March 31, 2018 |
|
|
|
|
|
| For the Three Months Ended March 31, 2017 |
|
|
| ||||||||||||||||||||||||
|
|
| Service and membership related |
|
| Sales of vacation ownership products |
|
| Rental and ancillary services |
|
| Consumer financing |
|
| Cost reimbursements |
|
| Total |
|
|
| Service and membership related |
|
| Sales of vacation ownership products |
|
| Rental and ancillary services |
|
| Consumer financing |
|
| Cost reimbursements |
|
| Total |
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
| $ | — |
| $ | — |
| $ | 63 |
| $ | — |
| $ | — |
| $ | 63 |
|
| $ | — |
| $ | — |
| $ | 58 |
| $ | — |
| $ | — |
| $ | 58 |
Management fee revenue |
|
| 57 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 57 |
|
|
| 30 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 30 |
Sales of vacation ownership products, net |
|
| — |
|
| 123 |
|
| — |
|
| — |
|
| — |
|
| 123 |
|
|
| — |
|
| 105 |
|
| — |
|
| — |
|
| — |
|
| 105 |
Consumer financing revenue |
|
| — |
|
| — |
|
| — |
|
| 24 |
|
| — |
|
| 24 |
|
|
| — |
|
| — |
|
| — |
|
| 21 |
|
| — |
|
| 21 |
Cost reimbursement revenue |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 44 |
|
| 44 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 58 |
|
| 58 |
Total Vacation Ownership revenue |
|
| 57 |
|
| 123 |
|
| 63 |
|
| 24 |
|
| 44 |
|
| 311 |
|
|
| 30 |
|
| 105 |
|
| 58 |
|
| 21 |
|
| 58 |
|
| 272 |
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
|
| 40 |
|
| — |
|
| 19 |
|
| — |
|
| — |
|
| 59 |
|
|
| 42 |
|
| — |
|
| 17 |
|
| — |
|
| — |
|
| 59 |
Membership fee revenue |
|
| 36 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 36 |
|
|
| 36 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 36 |
Ancillary member revenue |
|
| 2 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2 |
|
|
| 2 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 2 |
Total member revenue |
|
| 78 |
|
| — |
|
| 19 |
|
| — |
|
| — |
|
| 97 |
|
|
| 80 |
|
| — |
|
| 17 |
|
| — |
|
| — |
|
| 97 |
Club rental revenue |
|
| — |
|
| — |
|
| 34 |
|
| — |
|
| — |
|
| 34 |
|
|
| — |
|
| — |
|
| 30 |
|
| — |
|
| — |
|
| 30 |
Other revenue |
|
| 4 |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 5 |
|
|
| 4 |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 5 |
Rental management revenue |
|
| 13 |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 14 |
|
|
| 13 |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 14 |
Cost reimbursement revenue |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 21 |
|
| 21 |
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| 26 |
|
| 26 |
Total Exchange and Rental revenue |
|
| 95 |
|
| — |
|
| 55 |
|
| — |
|
| 21 |
|
| 171 |
|
|
| 97 |
|
| — |
|
| 49 |
|
| — |
|
| 26 |
|
| 172 |
Total ILG revenue |
| $ | 152 |
| $ | 123 |
| $ | 118 |
| $ | 24 |
| $ | 65 |
| $ | 482 |
|
| $ | 127 |
| $ | 105 |
| $ | 107 |
| $ | 21 |
| $ | 84 |
| $ | 444 |
OtherContract balances
On April 1, 2017, ILG gainedThe following table provides information about receivables, contracts assets, and contract liabilities from our contracts with customers (in millions):
|
|
|
|
|
|
|
|
| March 31, |
| December 31, | ||
|
| 2018 |
| 2017 | ||
Accounts receivable, net of allowance for doubtful accounts |
| $ | 125 |
| $ | 121 |
Vacation ownership mortgages receivable, net of allowance |
| $ | 733 |
| $ | 737 |
Contract liabilities(1) |
| $ | 292 |
| $ | 232 |
(1) Of this amount, $44 million of revenue recognized in the ability to appointthree months ended March 31, 2018 were included in the majority of the board of Great Destinations Inc., a fee-for-service, real-estate brokerage firm that specializes in reselling resort timeshare properties on behalf of independent homeowners’ associations of which we own 50% of the equity, thereby acquiring control of the joint venture. Consequently, we consolidated the business into our consolidated financial statementscontract liabilities balance as of December 31, 2017.
Receivables as of March 31, 2018 and December 31, 2017 include amounts related to our contractual right to consideration for completed performance obligations, and are realized when the date control was obtained. In connectionassociated cash is received. Amounts related to our contract assets, aside from those in table above, as of March 31, 2018 and December 31, 2017, are negligible. There were no associated impairment losses. Contract liabilities include payments received in advance of performance under the contract and are realized with the step-acquisitionassociated revenue recognized under the contract.
Transaction price allocated to remaining performance obligations
As of March 31, 2018, we have approximately $114 million of revenue expected to be recognized from remaining performance obligations that are unsatisfied (or partially unsatisfied). This revenue is primarily related to membership fees and fixed management fees which are recognized ratably as the performance obligation is satisfied. We expect to recognize this investment we recorded goodwillrevenue over the next one to eight years.
20
We have elected the assets acquired and liabilities assumed in connection with this event was based on fair values at April 1, 2017. No other intangible assets apart from goodwill were established. The measurement period pertainingfollowing optional exemptions related to this acquisition is deemed closed as of September 30, 2017.the remaining transaction price disclosure:
1) | Not to include variable consideration that is 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 the criteria in ASC 606-10-32-40 have been met. |
· | This optional exemption applies to our management services which are satisfied over time and are substantially the same in any given period. Management fees are variable as these fees are based on a percentage of the budgeted cost to operate resorts. These fees are resolved on a monthly basis as revenue is recognized. |
2) | Not to disclose the amount of the transaction price allocated to the remaining performance obligations and an explanation of when the entity expects to recognize that amount as revenue for the reporting periods prior to the period of adoption. |
NOTE 4—RESTRICTED CASH
Restricted cash consists of the following (in millions):
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|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Escrow deposits on vacation ownership products |
| $ | 29 |
| $ | 67 |
| $ | 49 |
| $ | 70 |
HOAs |
|
| 163 |
|
| 137 | ||||||
Securitization VIEs |
|
| 92 |
|
| 34 |
|
| 19 |
|
| 20 |
Other |
|
| 18 |
|
| 17 |
|
| 25 |
|
| 3 |
Total restricted cash |
| $ | 139 |
| $ | 118 |
| $ | 256 |
| $ | 230 |
Restricted cash associated with escrow deposits on vacation ownership products represents amounts that are held in escrow until statutory requirements for release are satisfied, at which time that cash is no longer restricted. Restricted cash of securitization VIEs represents cash held in accounts related to vacation ownership mortgages receivable securitizations, which is generally used to pay down securitized vacation ownership debt in the period following the quarter in which the cash is received.
HOAs restricted cash predominantly pertains to maintenance fees collected from their respective owners which are designated for resort operations and HOA specific uses, such as reserves, and not freely available for immediate or general business use at ILG’s discretion.
17
NOTE 5—VACATION OWNERSHIP MORTGAGES RECEIVABLE
Vacation ownership mortgages receivable is comprised of various mortgage loans related to our financing of vacation ownership interval sales. As part of our acquisitions of HVO and Vistana, we acquired existing portfolios of vacation ownership mortgages receivable. These loans are accounted for using the expected cash flows method of recognizing discount accretion based on the acquired loans’ expected cash flows pursuant to ASC 310-30, “Loans acquired with deteriorated credit quality.” At acquisition, we recorded these acquired loans at fair value, including a credit discount or premium, as applicable, which is accreted as an adjustment to yield over the loans’ estimated life. Originated loans as of September 30, 2017March 31, 2018 and December 31, 20162017 represent vacation ownership mortgages receivable
21
originated by ILG, or more specifically our Vacation Ownership segment, subsequent to the acquisitions of HVO and Vistana on October 1, 2014 and May 11, 2016, respectively.
Vacation ownership mortgages receivable carrying amounts as of September 30, 2017March 31, 2018 and December 31, 20162017 were as follows (in millions):
|
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|
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|
|
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||||||||||||||||||||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||||||||||||||||||||||||
|
| Securitized |
| Unsecuritized(2) |
| Total |
| Securitized |
| Unsecuritized(2) |
| Total |
| Securitized |
| Unsecuritized(2) |
| Total |
| Securitized |
| Unsecuritized(2) |
| Total | ||||||||||||
Acquired vacation ownership mortgages receivable(1) |
| $ | 375 |
| $ | 44 |
| $ | 419 |
| $ | 419 |
| $ | 127 |
| $ | 546 |
| $ | 313 |
| $ | 37 |
| $ | 350 |
| $ | 345 |
| $ | 38 |
| $ | 383 |
Originated vacation ownership mortgages receivable(1) |
|
| 226 |
| 118 |
|
| 344 |
|
| 11 |
| 184 |
|
| 195 |
|
| 239 |
| 213 |
|
| 452 |
|
| 251 |
|
| 163 |
|
| 414 | |||
Less: allowance for impairment on acquired loans |
|
| (4) |
| (1) |
|
| (5) |
|
| — |
| — |
|
| — |
|
| (5) |
| (1) |
|
| (6) |
|
| (4) |
|
| (1) |
|
| (5) | |||
Less: allowance for losses on originated loans |
|
| (30) |
|
| (15) |
|
| (45) |
|
| (1) |
|
| (21) |
|
| (22) |
|
| (29) |
|
| (34) |
|
| (63) |
|
| (33) |
|
| (22) |
|
| (55) |
Net vacation ownership mortgages receivable |
| $ | 567 |
| $ | 146 |
| $ | 713 |
| $ | 429 |
| $ | 290 |
| $ | 719 |
| $ | 518 |
| $ | 215 |
| $ | 733 |
| $ | 559 |
| $ | 178 |
| $ | 737 |
(1) | At various interest rates with varying payment terms through |
(2) | As of |
The fair value of our acquired loans as of the respective acquisition dates werewas determined by use of a discounted cash flow approach which calculates a present value of expected future cash flows based on scheduled principal and interest payments over the term of the respective loans, while considering anticipated defaults and early repayments determined based on historical experience. Consequently, the fair value of these acquired loans recorded on our condensed consolidated balance sheet as of the acquisition date includesincluded an estimate for future loan losses which becomes the historical cost basis for that existing portfolio going forward. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, the contractual outstanding balance of the acquired loans, which represents contractually-owed future principal amounts, was $334$260 million and $466$296 million, respectively.
The table below (in millions) presents a rollforward from December 31, 20162017 of the accretable yield (interest income) expected to be earned related to our acquired loans, as well as the amount of non-accretable difference at the end of the period. Nonaccretable difference represents estimated contractually required payments in excess of estimated
18
cash flows expected to be collected. The accretable yield represents the excess of estimated cash flows expected to be collected over the carrying amount of the acquired loans.
|
|
|
|
|
|
|
|
| Nine Months Ended |
| Three Months Ended | ||
Accretable Yield |
| September 30, 2017 |
| March 31, 2018 | ||
Balance, beginning of period |
| $ | 156 |
| $ | 99 |
Accretion |
|
| (42) |
|
| (11) |
Reclassification from nonaccretable difference |
|
| (3) |
|
| (2) |
Balance, end of period |
| $ | 111 |
| $ | 86 |
Nonaccretable difference, end of period balance |
| $ | 35 |
| $ | 30 |
The accretable yield is recognized into interest income (within consolidated revenue) over the estimated life of the acquired loans using the level yield method. The accretable yield may change in future periods due to changes in the anticipated remaining life of the acquired loans, which may alter the amount of future interest income expected to be
22
collected, and changes in expected future principal and interest cash collections which impactsimpact the nonaccretable difference.
Vacation ownership mortgages receivable as of September 30, 2017March 31, 2018 are scheduled to mature as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Vacation Ownership Mortgages Receivable |
| Vacation Ownership Mortgages Receivable | ||||||||||||||||||||||||||
|
| Acquired |
| Originated |
|
|
|
| Acquired |
| Originated |
|
|
| ||||||||||||||||
Twelve month period ending September 30, |
| Securitized Loans |
| Unsecuritized Loans |
| Securitized Loans |
| Unsecuritized Loans |
| Total | ||||||||||||||||||||
2018 |
| $ | 41 |
| $ | 5 |
| $ | 14 |
| $ | 9 |
| $ | 69 | |||||||||||||||
Twelve month period ending March 31, |
| Securitized Loans |
| Unsecuritized Loans |
| Securitized Loans |
| Unsecuritized Loans |
| Total | ||||||||||||||||||||
2019 |
|
| 40 |
|
| 4 |
|
| 15 |
|
| 7 |
|
| 66 |
| $ | 35 |
| $ | 4 |
| $ | 15 |
| $ | 17 |
| $ | 71 |
2020 |
|
| 40 |
|
| 4 |
|
| 17 |
|
| 8 |
|
| 69 |
|
| 34 |
| 3 |
|
| 17 |
| 13 |
|
| 67 | ||
2021 |
|
| 38 |
|
| 4 |
|
| 19 |
|
| 9 |
|
| 70 |
|
| 33 |
| 4 |
|
| 19 |
| 14 |
|
| 70 | ||
2022 |
|
| 35 |
|
| 5 |
|
| 21 |
|
| 10 |
|
| 71 |
|
| 31 |
| 3 |
|
| 22 |
| 16 |
|
| 72 | ||
2023 and thereafter |
|
| 102 |
|
| 15 |
|
| 140 |
|
| 75 |
|
| 332 | |||||||||||||||
2023 |
|
| 28 |
| 3 |
|
| 24 |
| 18 |
|
| 73 | |||||||||||||||||
2024 and thereafter |
|
| 73 |
|
| 9 |
|
| 142 |
|
| 135 |
|
| 359 | |||||||||||||||
Total |
|
| 296 |
|
| 37 |
|
| 226 |
|
| 118 |
|
| 677 |
|
| 234 |
| 26 |
|
| 239 |
| 213 |
|
| 712 | ||
Plus: net premium on acquired loans(1) |
|
| 79 |
|
| 7 |
|
| — |
|
| — |
|
| 86 | |||||||||||||||
Plus: net premium on acquired loans(1) |
|
| 79 |
| 11 |
|
| — |
| — |
|
| 90 | |||||||||||||||||
Less: allowance for impairment on acquired loans |
|
| (4) |
|
| (1) |
|
| — |
|
| — |
|
| (5) |
|
| (5) |
| (1) |
|
| — |
| — |
|
| (6) | ||
Less: allowance for losses on originated loans |
|
| — |
|
| — |
|
| (30) |
|
| (15) |
|
| (45) |
|
| — |
|
| — |
|
| (29) |
|
| (34) |
|
| (63) |
Net vacation ownership mortgages receivable |
| $ | 371 |
| $ | 43 |
| $ | 196 |
| $ | 103 |
| $ | 713 |
| $ | 308 |
| $ | 36 |
| $ | 210 |
| $ | 179 |
| $ | 733 |
Weighted average stated interest rate as of September 30, 2017 |
|
| 13.3% |
|
| 13.3% |
|
|
| |||||||||||||||||||||
Range of stated interest rates as of September 30, 2017 |
|
| 8.0% to 15.90% |
|
| 10.90% to 15.90% |
|
|
| |||||||||||||||||||||
Weighted average stated interest rate as of March 31, 2018 |
|
| 13.3% |
|
| 13.5% |
|
|
| |||||||||||||||||||||
Range of stated interest rates as of March 31, 2018 |
|
| 8.00% to 15.90% |
|
| 9.90% to 15.90% |
|
|
|
(1) | The difference between the contractual principal amount of acquired loans of |
Collectability
We assess our vacation ownership mortgages receivable portfolio of loans for collectability on an aggregate basis. Estimates of uncollectability pertaining to our originated loans are recorded as provisions in the vacation ownership mortgages receivable allowance for loan losses. For originated loans, we record an estimate of uncollectability as a reduction of sales of vacation ownership products in the accompanying condensed consolidated statements of income at the time revenue is recognized on a vacation ownership product sale. We evaluate our originated loan portfolio collectively as it is comprised of homogeneous, smaller-balance, vacation ownership mortgages receivable. We use a technique referred to as static pool analysis, which tracks uncollectibles over the entire life of those mortgages receivable, as the basis for determining our general reserve requirements on our vacation ownership
19
mortgages receivable. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio, including defaults, aging, and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio. As of September 30, 2017,March 31, 2018, an allowance for loan losses of $45$63 million for uncollectability was recorded against our vacation ownership mortgages receivable for estimated losses related solely to our originated loans. Our allowance for loan losses as of December 31, 20162017 was $22$55 million; the change in 20172018 principally pertains to additional loan loss provision recorded against sales of vacation ownershipVO products on our condensed consolidated income statement during the period consistent with a comparatively larger outstandingand adjusted through our periodic static pool analysis. This analysis tracks uncollectibles over the entire life of those mortgages receivable, and forms the basis for determining our general reserve requirements on our originated receivables balance.VO mortgages receivable.
Our acquired loans are remeasured at period end based on expected future cash flows which uses an estimated measure of anticipated defaults. We consider the allowance for loan losses on our originated loans and estimates of
23
defaults used in the remeasurements of our acquired loans to be adequate and based on the economic environment and our assessment of the future collectability of the outstanding loans.
We use the origination of the notes by brand (Hyatt, Sheraton, Westin and other) and the FICO scores of the buyers as the primary credit quality indicators to calculate the allowance for loan losses for our originated vacation ownership mortgages receivable, as we believe there is a relationship between the default behavior of borrowers and the brand associated with the vacation ownership property they have acquired, supplemented by the FICO scores of the buyers. In addition to quantitatively calculating the allowance based on our static pool analysis, we supplement the process by evaluating certain qualitative data, including the aging of the respective receivables, current default trends by brand and origination year and various macroeconomic indicators.
At September 30, 2017,March 31, 2018, the weighted average FICO score within our consolidated loan pools was 712 based upon the outstanding loan balance at time of origination. The average estimated rate for all future defaults for our consolidated outstanding pool of loans as of September 30, 2017March 31, 2018 was 11.2%11.4%.
Balances of our vacation ownership mortgages receivable by brand and by FICO score (at time of loan origination) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of September 30, 2017 |
|
| As of March 31, 2018 | ||||||||||||||||||||||||
|
| 700+ |
| 600-699 |
| <600 |
| No Score(1) |
| Total |
| 700+ |
| 600-699 |
| <600 |
| No Score(1) |
| Total | ||||||||||
Westin |
| $ | 193 |
| $ | 93 |
| $ | 4 |
| $ | 27 |
| $ | 317 |
| $ | 205 |
| $ | 97 |
| $ | 5 |
| $ | 32 |
| $ | 339 |
Sheraton |
|
| 168 |
|
| 150 |
|
| 13 |
|
| 64 |
|
| 395 |
|
| 175 |
|
| 153 |
|
| 17 |
|
| 69 |
|
| 414 |
Hyatt |
|
| 21 |
|
| 14 |
|
| 2 |
|
| 1 |
|
| 38 |
|
| 23 |
|
| 14 |
|
| 2 |
|
| 1 |
|
| 40 |
Other |
|
| 5 |
|
| 1 |
|
| - |
|
| 2 |
|
| 8 |
|
| 5 |
|
| 1 |
|
| - |
|
| 3 |
|
| 9 |
Vacation ownership mortgages receivable, gross |
| $ | 387 |
| $ | 258 |
| $ | 19 |
| $ | 94 |
| $ | 758 |
| $ | 408 |
| $ | 265 |
| $ | 24 |
| $ | 105 |
| $ | 802 |
(1) | Mortgages receivable with no FICO score primarily relate to non-U.S. resident borrowers. |
On an ongoing basis, we monitor credit quality of our vacation ownership mortgages receivable portfolio based on payment activity as follows:
· | Current—The consumer’s note is in good standing as payments and reporting are current per the terms contractually stipulated in the agreement. |
· | Delinquent—We consider a vacation ownership mortgage receivable to be delinquent based on the contractual terms of each individual financing agreement. |
· | Non‑performing—Our vacation ownership mortgages receivable are generally considered non‑performing if interest or principal is more than 30 days past due. All non‑performing loans are placed on non‑accrual status and we do not resume interest accrual until the receivable becomes contractually current. We apply payments we receive for vacation ownership notes receivable on non‑performing status first to interest, then to principal, and any remainder to fees. |
20
In the event of a default, we generally have the right to recover the mortgaged VOIs and consider loans to be in default upon reaching 120 days outstanding. Our aged analysis of delinquent vacation ownershipVO mortgages receivable and the gross
24
balance of vacation ownershipVO mortgages receivable greater than 120 days past‑due, as of September 30, 2017March 31, 2018 and December 31, 2016,2017, for our originated loans are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Delinquent |
|
| Defaulted(1) |
|
|
| |||||||
|
| Receivables |
|
| Current |
| 30-59 Days |
| 60-89 Days |
| 90-119 Days |
| ≥120 |
|
| Total Delinquent & Defaulted | ||||||
Originated Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017 |
| $ | 344 |
|
| $ | 331 |
| $ | 4 |
| $ | 3 |
| $ | 2 |
| $ | 4 |
| $ | 13 |
December 31, 2016 |
| $ | 195 |
|
| $ | 190 |
| $ | 2 |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Delinquent |
|
| Defaulted(1) |
|
|
| |||||||
|
| Receivables |
|
| Current |
| 30-59 Days |
| 60-89 Days |
| 90-119 Days |
| ≥120 |
|
| Total Delinquent & Defaulted | ||||||
Originated Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018 |
| $ | 452 |
|
| $ | 431 |
| $ | 6 |
| $ | 3 |
| $ | 3 |
| $ | 9 |
| $ | 21 |
December 31, 2017 |
| $ | 414 |
|
| $ | 394 |
| $ | 6 |
| $ | 5 |
| $ | 3 |
| $ | 6 |
| $ | 20 |
(1) | Mortgages receivable equal to or greater than 120 days are considered defaulted and have been fully reserved in our allowance of loan losses for originated loans. |
NOTE 6—VACATION OWNERSHIP INVENTORY
Our inventory consists of completed unsold vacation ownership interests, with an operating cycle that generally exceeds twelve months, and vacation ownership projects under construction. On our condensed consolidated balance sheet, completed unsold vacation ownership interests are presented as a current asset, while vacation ownership projects under construction are presented as a non-current asset given this inventory is in the development stage of its operating cycle.
As of September 30, 2017March 31, 2018 and December 31, 2016,2017, vacation ownership inventory is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Completed unsold vacation ownership interests (current asset) |
| $ | 411 |
| $ | 197 |
| $ | 493 |
| $ | 492 |
Vacation ownership projects construction in process (non-current asset) |
|
| 115 |
|
| 189 |
|
| 60 |
|
| 60 |
Other |
|
| 4 |
|
| 4 | ||||||
Total vacation ownership inventory |
| $ | 526 |
| $ | 386 |
| $ | 557 |
| $ | 556 |
The increase in inventoryInventory as of September 30, 2017 fromMarch 31, 2018 remained relatively consistent with our balance as of December 31, 2016 largely pertains to2017. This quarter’s inventory activity reflects our ongoing development activities in particular relatedprimarily pertaining to our Sheraton Kauai Resort, the rebuilding work at The Westin Los CabosSt. John Resort Villas, & Spa, The Westin Nanea Ocean Villas, The Westin Desert Willow, The Westin Resort and Spa, Cancun, andan additional phase at the Sheraton Steamboat Resort Villas,Hyatt Residence Club Bonita Springs, Coconut Plantation; among other resorts to a lesser extent. This increase was partly offset by the inventory impairment described below.
Impairment event
In September 2017, Hurricanes Irma and Maria affected several Vistana and HVO resorts and sales centers. In particular, resorts in Florida, the U.S. Virgin Islands, and Puerto Rico were in the path of these storms. As a consequence of these weather events, we recorded an estimated vacation ownership inventory impairment charge of $9 million in the quarter pertaining to our St. John resort, of which $5 million is offset by expected insurance proceeds deemed probable of collection. This impairment charge and related expected insurance recovery pertains to our Vacation Ownership segment and are presented within general and administrative expenses in our condensed consolidated income statements for the three and nine months ended September 30, 2017. We used an income approach with Level 3 inputs as our valuation method to estimate the fair value of the related vacation ownership inventory. The estimates used in this valuation are subject to refinement as additional information becomes available with regards to repairs and reconstruction plans for this resort. Our Puerto Rico resort is predominately sold-out and, consequently, our unsold vacation ownership inventory balance is inconsequential.
21
NOTE 7—INVESTMENTS IN UNCONSOLIDATED ENTITIES
Our investments in unconsolidated entities, recorded under the equity method of accounting in accordance with guidance in ASC 323, “Investments—Equity Method and Joint Ventures,” primarily consists of an ownership interest in Maui Timeshare Venture, LLC, a joint venture to develop and operate a Hyatt-branded vacation ownership resort in Hawaii, and Vistana’s Harborside at Atlantis joint venture which performs sales, marketing and management services for a vacation ownership resort in the Bahamas. Our equity income from investments in unconsolidated entities, recorded in equity in earnings from unconsolidated entities in the accompanying condensed consolidated statement of income, was $1 million and $2 million for the three months ended September 30,March 31, 2018 and 2017, and 2016, and $4 million for eachrespectively.
25
Our ownership percentages of the Maui Timeshare Venture and Harborside investments are 33% and 50%, respectively, and ownership percentagespercentage of the other investments range fromis 25% to 50%. The carrying value of our investments in unconsolidated entities as of September 30, 2017March 31, 2018 and December 31, 20162017 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
| ||
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Maui Timeshare Venture, LLC |
| $ | 45 |
| $ | 42 |
| $ | 42 |
| $ | 42 |
Harborside at Atlantis joint venture |
| 11 |
|
| 12 | |||||||
Harborside at Atlantis |
| 11 |
|
| 11 | |||||||
Other |
|
| 1 |
|
| 5 |
|
| 1 |
|
| 2 |
Total |
| $ | 57 |
| $ | 59 | ||||||
Total investments in unconsolidated entities |
| $ | 54 |
| $ | 55 |
The change in Other investments from December 31, 2016 in the above table reflects the consolidation of our Great Destinations joint venture, as further discussed in Note 3 of these condensed consolidated financial statements.
NOTE 8—PROPERTY AND EQUIPMENT
Property and equipment, net is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Computer equipment |
| $ | 42 |
| $ | 37 |
| $ | 44 |
| $ | 43 |
Capitalized software (including internally developed software) |
|
| 170 |
|
| 150 |
|
| 182 |
|
| 177 |
Land, buildings and leasehold improvements |
|
| 408 |
|
| 368 |
|
| 443 |
|
| 431 |
Land held for development |
|
| 56 |
|
| 56 |
|
| 56 |
|
| 56 |
Furniture, fixtures and other equipment |
|
| 65 |
|
| 52 |
|
| 76 |
|
| 72 |
Construction projects in progress |
|
| 21 |
|
| 47 |
|
| 21 |
|
| 20 |
Other projects in progress |
|
| 48 |
|
| 37 |
|
| 37 |
|
| 40 |
Total property and equipment |
|
| 810 |
|
| 747 |
|
| 859 |
|
| 839 |
Less: accumulated depreciation and amortization |
|
| (211) |
|
| (167) |
|
| (238) |
|
| (223) |
Total property and equipment, net |
| $ | 599 |
| $ | 580 |
| $ | 621 |
| $ | 616 |
The increase in property and equipment as of September 30, 2017March 31, 2018 from December 31, 20162017 is in large part attributable to our development activities duringactivities. These pertain to the period at The Westin Los Cabos Resort Villas & Spa and The Westin Nanea Ocean Villas with regards todevelopment of assets primarily used to support those marketing and sales locationsactivities and resort operations.
operations at the Sheraton Kauai Resort and The Westin Resort and Spa, Cancun, in addition to ongoing rebuilding of The Westin St. John Resort Villas. The increase to property and equipment was partly offset by transfers to inventory (non-current) related to the conversion activities atof the Sheraton Steamboat Resort Villas and The Westin Resort and Spa, Cancun, as well as a $12 million disposal of long-lived assets attributable to our Westin resort in St. John due to the weather events discussed in Note 6. This disposal pertains to our Vacation Ownership segment and was fully offset by expected insurance proceeds deemed probable of collection.
22
Additionally, our categorization of property and equipment as of December 31, 2016 presented in the table above contains certain recategorizations for purposes of consistency; specifically, amounts were recategorized from furniture, fixtures and other equipment to other classifications.Kauai Resort.
NOTE 9—GOODWILL AND OTHER INTANGIBLE ASSETS
Pursuant to FASB guidance as codified within ASC 350, “Intangibles—Goodwill and Other,” goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date.
ILG is comprised of two operating and reportable segments: Vacation Ownership and Exchange and Rental, each of which contain two reporting units as follows:
|
|
|
OPERATING SEGMENTS | ||
Vacation Ownership |
| Exchange and Rental |
VO management reporting unit |
| Exchange reporting unit |
VO sales and financing reporting unit |
| Rental reporting unit |
26
The following tables present the balance of goodwill by reporting unit, including the changes in carrying amount of goodwill, as of September 30, 2017March 31, 2018 and December 31, 20162017 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
| ||||||||||||
|
| Balance as of |
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of |
| Balance as of |
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of | ||||||||||
|
| January 1, 2017 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| September 30, 2017 |
| January 1, 2018 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| March 31, 2018 | ||||||||||||
VO management |
| $ | 35 |
| $ | — |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 37 |
| $ | 37 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | 38 |
VO sales and financing |
|
| 7 |
|
| 4 |
|
| — |
|
| — |
|
| — |
|
| 11 |
|
| 11 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 11 |
Exchange |
|
| 496 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 496 |
|
| 496 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 496 |
Rental |
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
Total |
| $ | 558 |
| $ | 4 |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 564 | ||||||||||||||||||
Total goodwill |
| $ | 564 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| $ | 565 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
| ||
|
| Balance as of |
|
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of |
| Balance as of |
|
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of | ||||||||
|
| January 1, 2016 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| December 31, 2016 |
| January 1, 2017 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| December 31, 2017 | ||||||||||||
VO management |
| $ | 38 |
| $ | — |
| $ | — |
| $ | (3) |
| $ | — |
| $ | 35 |
| $ | 35 |
| $ | — |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 37 |
VO sales and financing |
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
| 7 |
|
| 4 |
|
| — |
|
| — |
|
| — |
|
| 11 |
Exchange |
|
| 496 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 496 |
|
| 496 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 496 |
Rental |
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
Total |
| $ | 561 |
| $ | — |
| $ | — |
| $ | (3) |
| $ | — |
| $ | 558 | ||||||||||||||||||
Total goodwill |
| $ | 558 |
| $ | 4 |
| $ | — |
| $ | 2 |
| $ | — |
| $ | 564 |
The $6$1 million increase in our goodwill balance as of September 30, 2017March 31, 2018 from December 31, 2016 consists of $4 million of additional goodwill recorded as part of the consolidation of our Great Destinations joint venture, as further
23
discussed in Note 3, and $2 million2017 is related to foreign currency translation of goodwill carried on the books of an ILG entity whose functional currency is not the US dollar.
Other Intangible Assets
The balance of other intangible assets, net as of September 30, 2017March 31, 2018 and December 31, 20162017 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Intangible assets with indefinite lives |
| $ | 119 |
| $ | 114 |
| $ | 123 |
| $ | 120 |
Intangible assets with definite lives, net |
|
| 325 |
|
| 339 |
|
| 315 |
|
| 320 |
Total intangible assets, net |
| $ | 444 |
| $ | 453 |
| $ | 438 |
| $ | 440 |
The $5$3 million increase in our indefinite‑lived intangible assets during the ninethree months ended September 30, 2017March 31, 2018 pertains to associated foreign currency translation of intangible assets carried on the books of an ILG entity whose functional currency is not the US dollar.
At September 30, 2017March 31, 2018 and December 31, 2016,2017, intangible assets with indefinite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
|
| December 31, |
|
| March 31, |
|
| December 31, |
|
|
| 2017 |
|
| 2016 |
|
| 2018 |
|
| 2017 |
Resort management contracts |
| $ | 75 |
| $ | 70 |
| $ | 79 |
| $ | 76 |
Trade names and trademarks |
|
| 44 |
|
| 44 |
|
| 44 |
|
| 44 |
Total |
| $ | 119 |
| $ | 114 | ||||||
Total intangible assets with indefinite lives |
| $ | 123 |
| $ | 120 |
27
At September 30,March 31, 2018, intangible assets with definite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
| Cost |
| Accumulated Amortization |
| Net | |||
Customer relationships |
| $ | 287 |
| $ | (145) |
| $ | 142 |
Purchase agreements |
|
| 76 |
|
| (76) |
|
| — |
Resort management contracts |
|
| 246 |
|
| (74) |
|
| 172 |
Technology |
|
| 25 |
|
| (25) |
|
| — |
Other |
|
| 23 |
|
| (22) |
|
| 1 |
Total intangible assets with definite lives |
| $ | 657 |
| $ | (342) |
| $ | 315 |
At December 31, 2017, intangible assets with definite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
| Cost |
| Accumulated Amortization |
| Net | |||
Customer relationships |
| $ | 287 |
| $ | (141) |
| $ | 146 |
Purchase agreements |
|
| 76 |
|
| (76) |
|
| — |
Resort management contracts |
|
| 246 |
|
| (68) |
|
| 178 |
Technology |
|
| 25 |
|
| (25) |
|
| — |
Other |
|
| 23 |
|
| (22) |
|
| 1 |
|
| $ | 657 |
| $ | (332) |
| $ | 325 |
At December 31, 2016, intangible assets with definite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
| ||
|
| Cost |
| Amortization |
| Net |
| Cost |
| Accumulated Amortization |
| Net | ||||||
Customer relationships |
| $ | 287 |
| $ | (137) |
| $ | 150 |
| $ | 287 |
| $ | (143) |
| $ | 144 |
Purchase agreements |
|
| 76 |
|
| (76) |
|
| — |
|
| 76 |
|
| (76) |
|
| — |
Resort management contracts |
|
| 245 |
|
| (58) |
|
| 187 |
|
| 246 |
|
| (71) |
|
| 175 |
Technology |
|
| 25 |
|
| (25) |
|
| — |
|
| 25 |
|
| (25) |
|
| — |
Other |
|
| 23 |
|
| (21) |
|
| 2 |
|
| 23 |
|
| (22) |
|
| 1 |
Total |
| $ | 656 |
| $ | (317) |
| $ | 339 | |||||||||
Total intangible assets with definite lives |
| $ | 657 |
| $ | (337) |
| $ | 320 |
In accordance with our policy on the recoverability of long‑lived assets, we review the carrying value of all long‑lived assets, primarily property and equipment and definite‑lived intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying value of a long‑lived asset (asset group) may be impaired. For the ninethree months ended September 30, 2017 and the year ended DecemberMarch 31, 2016,2018, we did not identify any events or
24
changes in circumstances indicating that the carrying value of a long-lived asset (or asset group) may be impaired; accordingly, a recoverability test was not warranted.
Amortization of intangible assets with definite lives is primarily computed on a straight‑line basis. Total amortization expense for intangible assets with definite lives was $5 million and $6 million for the three months ended September 30, 2017March 31, 2018 and 2016, respectively, and $15 million and $14 million for the nine months ended September 30, 2017 and 2016, respectively.2017. Based on the September 30, 2017March 31, 2018 balances, amortization expense for the next five years and thereafter is estimated to be as follows (in millions):
|
|
|
|
|
|
|
Twelve month period ending September 30, |
|
|
| |||
2018 |
| $ | 20 | |||
Twelve month period ending March 31, |
|
|
| |||
2019 |
|
| 20 |
| $ | 20 |
2020 |
|
| 19 |
|
| 19 |
2021 |
|
| 18 |
|
| 19 |
2022 |
|
| 15 |
|
| 16 |
2023 and thereafter |
|
| 233 | |||
2023 |
|
| 14 | |||
2024 and thereafter |
|
| 227 | |||
|
| $ | 325 |
| $ | 315 |
NOTE 10—CONSOLIDATED VARIABLE INTEREST ENTITIES
We have variable interests in the entities associated with Vistana’s fourthree outstanding securitization transactions. As these securitizations consist of similar, homogenous loans, they have been aggregated for disclosure purposes. We applied the variable interest model and determined we are the primary beneficiary of these VIEs and, accordingly, these VIEs are consolidated in our results. In making that determination, we evaluated the activities that significantly impact the economics of the VIEs, including the management of the securitized vacation ownership mortgages receivable and any related non-performing loans. We are the servicer of the securitized vacation ownership mortgages receivable. We
28
also have the option, subject to certain limitations, to repurchase or replace vacation ownership mortgages receivable that are in default at their outstanding principal amounts. Historically, Vistana has been able to resell the vacation ownership products underlying the vacation ownership mortgages repurchased or replaced under these provisions without incurring significant losses. We also hold the risk of potential loss (or gain), as we are the last to be paid out by proceeds of the VIEs under the terms of the agreements. As such, we hold both the power to direct the activities of the VIEs and obligation to absorb the losses (or benefits) from the VIEs.
The securitization agreements are without recourse to us, except for breaches of representations and warranties with material adverse effect to the holders. We have the right to substitute loans for, or repurchase, defaulted loans at our option, subject to certain limitations. Based on industry practice and our past practices, we currently expect that we will exercise this option.
25
The following table shows assets which are collateral for the related obligations of the variable interest entities, included in our condensed consolidated balance sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vacation Ownership Notes Receivable Securitization (1) |
| Vacation Ownership Notes Receivable Securitization (1) | ||||||||
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
| $ | 92 |
| $ | 34 |
| $ | 19 |
| $ | 20 |
Interest receivable |
|
| 4 |
|
| 3 |
|
| 3 |
|
| 4 |
Vacation ownership mortgages receivable, net |
|
| 567 |
|
| 429 |
|
| 518 |
|
| 559 |
Total |
| $ | 663 |
| $ | 466 |
| $ | 540 |
| $ | 583 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Interest payable |
| $ | 1 |
| $ | 1 |
| $ | 1 |
| $ | 1 |
Securitized debt |
|
| 653 |
|
| 430 |
|
| 530 |
|
| 575 |
Total |
| $ | 654 |
| $ | 431 |
| $ | 531 |
| $ | 576 |
(1) | The creditors of these entities do not have general recourse to us. |
Upon transfer of vacation ownership mortgages receivable, net to the VIEs, the receivables and certain cash flows derived from them become restricted for use in meeting obligations to the VIE creditors. The VIEs utilize trusts which have ownership of cash balances that also have restrictions, the amounts of which are reported in our restricted cash. Our interests in trust assets are subordinate to the interests of third-party investors and, as such, may not be realized by us if needed to absorb deficiencies in cash flows that are allocated to the investors in the trusts' debt. Unless we exceed certain triggers related to default levels and collateralization of the securitized pool, we are contractually entitled to receive the excess cash flows (spread between the collections on the mortgages and payment of third party obligations and debt service on the trusts’ debt defined in the securitization agreements) from the VIEs. Such activity totaled $33$15 million from December 31, 20162017 through September 30, 2017.March 31, 2018.
The net cash flows generated by the VO mortgages receivable in the VIEs are used to repay our securitized debt from VIEs and, excluding any restricted cash balances, are reflected in the operating activities section of our condensed consolidated statements of cash flows. Proceeds and repayments pertaining to our securitized debt from VIEs is reflected in the financing activities section of our combined statements of cash flows. Refer to Note 13 of these condensed consolidated financial statements for additional discussion on our securitized debt from VIEs.
29
NOTE 11—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the general components of accrued expenses and other current liabilities (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
General accrued expenses |
| $ | 73 |
| $ | 62 |
| $ | 100 |
| $ | 82 |
Accrued other taxes |
|
| 17 |
|
| 13 |
|
| 21 |
|
| 19 |
Customer deposits |
|
| 74 |
|
| 71 |
|
| 85 |
|
| 76 |
Accrued membership-related costs |
|
| 24 |
|
| 18 |
|
| 19 |
|
| 17 |
Accrued construction costs |
|
| 25 |
|
| 16 |
|
| 18 |
|
| 15 |
Member deposits |
|
| 7 |
|
| 7 |
|
| 6 |
|
| 6 |
Accrued expenses and other current liabilities |
| $ | 220 |
| $ | 187 | ||||||
Total accrued expenses and other current liabilities |
| $ | 249 |
| $ | 215 |
26
NOTE 12—DEFERRED REVENUE
The following table summarized the general components of deferred revenue (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Deferred membership-related revenue |
| $ | 167 |
| $ | 157 |
| $ | 201 |
| $ | 152 |
HOAs |
|
| 94 |
|
| 76 | ||||||
Other |
|
| 11 |
|
| 9 |
|
| 13 |
|
| 10 |
Total |
| $ | 178 |
| $ | 166 | ||||||
Total deferred revenue |
| $ | 308 |
| $ | 238 |
Deferred membership-related revenue primarily relates to membership fees from our Exchange and Rental segment, which are deferred and recognized over the terms of the applicable memberships, typically ranging from one to five years, on a straight-line basis. The increase inHOAs deferred membership-related revenue as of September 30, 2017 from December 31, 2016predominantly pertains to maintenance fees collected from their respective owners which are earned over the timing of annual membership renewals. applicable maintenance period.
Other deferred revenue pertains primarily to incentives given in connection with a VOI sale, annual maintenance fees collected thatin our European VO management business which are not yet earned, and other items.earned.
NOTE 13—SECURITIZED VACATION OWNERSHIP DEBT
As discussed in Note 10, the VIEs associated with the securitization of our VOI mortgages receivable are consolidated in our financial statements. Securitized vacation ownership debt consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
| ||
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
2011 securitization, interest rates ranging from 3.67% to 4.82%, maturing 2026 |
| $ | 33 |
| $ | 44 | ||||||
2012 securitization, interest rates ranging from 2.00% to 2.76%, maturing 2023 |
| 36 |
|
| 46 |
| $ | 30 |
| $ | 33 | |
2016 securitization, interest rates ranging from 2.54% to 2.74%, maturing 2026 |
| 266 |
|
| 345 |
| 224 |
|
| 244 | ||
2017 securitization, interest rates ranging from 2.33% to 2.93%, maturing 2029 |
| 325 |
|
| — |
| 282 |
|
| 305 | ||
Unamortized debt issuance costs (2016 & 2017 securitization) |
|
| (7) |
|
| (5) |
|
| (6) |
|
| (7) |
Total securitized vacation ownership debt, net of debt issuance costs |
| $ | 653 |
| $ | 430 |
| $ | 530 |
| $ | 575 |
On September 22, 2017, we completed a term securitization transaction involving the issuance of $325 million of asset-backed notes. An indirect wholly-owned subsidiary of Vistana issued $240 million of Class A notes, $59 million of Class B notes and $26 million of Class C notes. The notes are backed by vacation ownership loans and have coupons of 2.33%, 2.63% and 2.93%, respectively, for an overall weighted average coupon of 2.43%. The advance rate for this transaction was approximately 97%.
Of the $325 million in proceeds from the transaction, approximately $65 million was held in escrow (restricted cash) to purchase additional vacation ownership loans, including the redemption of the outstanding balance on Vistana’s 2011 securitization or, if not used for said purpose, returned to investors. The remainder of the proceeds were used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our $600 million revolving credit facility and for general purposes.
On September 20, 2016, we completed a term securitization transaction involving the issuance of $375 million of asset-backed notes. An indirect wholly-owned subsidiary of Vistana issued $346 million of Class A notes and $29 million of Class B notes. The notes are backed by vacation ownership loans and have coupons of 2.54% and 2.74%, respectively, for an overall weighted average coupon of 2.56%. The advance rate for this transaction was approximately 96.5%.
Of the $375 million in proceeds from the transaction, approximately $33 million was used to repay the outstanding balance on Vistana’s 2010 securitization and the remainder was used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our $600 million revolving credit facility and
2730
for general corporate purposes. In the first quarter of 2017, the VIE purchased approximately $19 million of loans, allowing for the release of the proceeds held in escrow as of December 31, 2016.
During the three and nine months ended September 30,March 31, 2018 and 2017, interest expense associated with securitized vacation ownership debt totaled $2$4 million and $7$3 million, respectively, and is reflected within consumer financing expenses in our condensed consolidated statements of income. The securitized debt is non-recourse with no contractual minimum repayment amounts throughout its term. The amount of each principal payment is contingent on the cash flows from the underlying vacation ownership notes in a given period. Refer to Note 5—Vacation Ownership Mortgages Receivable5 for the stated maturities of our securitized vacation ownership notes receivable, which provide an indication of the potential repayment pattern before the impact of any prepayments or defaults.
As of the September 30,March 31, 2018 and December 31, 2017, total unamortized debt issuance costs pertaining to the 2016 and 2017 securitizations were $6 million and $7 million, respectively, which is presented as a reduction of securitized debt from VIEs in the accompanying condensed consolidated balance sheet.sheets. Unamortized debt issuance costs pertaining to our securitized debt are amortized to interest expense using the effective interest method through the estimated life of the respective debt instruments.
NOTE 14—LONG-TERM DEBT
Long‑term debt is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Revolving credit facility (interest rate of 2.99% at September 30, 2017 and interest rate of 2.27% at December 31, 2016) |
| $ | 171 |
| $ | 240 | ||||||
Revolving credit facility (interest rate of 3.46% at March 31, 2018 and of 3.10% at December 31, 2017) |
| $ | 220 |
| $ | 220 | ||||||
5.625% senior notes |
|
| 350 |
|
| 350 |
|
| 350 |
|
| 350 |
Unamortized debt issuance costs (revolving credit facility) |
|
| (3) |
|
| (4) |
|
| (2) |
|
| (3) |
Unamortized debt issuance costs (senior notes) |
|
| (5) |
|
| (6) |
|
| (5) |
|
| (5) |
Total long-term debt, net of debt issuance costs |
| $ | 513 |
| $ | 580 |
| $ | 563 |
| $ | 562 |
Credit Facility
On May 17, 2016, we entered into a fifth amendment to the amended credit agreement which extended the maturity of the credit facility through May 17, 2021, and modified requirements with respect to assignments by lenders in connection with the acquisition of Vistana in May of 2016. There were no other material changes under this amendment.
As of September 30, 2017,March 31, 2018, there was $171$220 million outstanding with $415$366 million available to be drawn, net of any letters of credit. Any principal amounts outstanding under the revolving credit facility are due at maturity.maturity in May 2021. The interest rate on the amended credit agreement is based on (at our election) either LIBOR plus a predetermined margin that ranges from 1.25% to 2.5%, or the Base Rate as defined in the amended credit agreement plus a predetermined margin that ranges from 0.25% to 1.5%, in each case based on our consolidated total leverage ratio. At September 30, 2017,March 31, 2018, the applicable margin was 1.75% per annum for LIBOR revolving loans and 0.75% per annum for Base Rate loans. The amended credit agreement has a commitment fee on undrawn amounts that ranges from 0.25% to 0.40% per annum based on our leverage ratio and the commitment fee was 0.275% at quarter end.
Pursuant to the amended credit agreement, all obligations under the revolving credit facility are unconditionally guaranteed by ILG and certain of its subsidiaries. Borrowings are further secured by (1) 100% of the voting equity securities of ILG’s U.S. subsidiaries and 65% of the equity in our first‑tier foreign subsidiaries and (2) substantially all of our domestic tangible and intangible property.
Senior Notes
In April 2015, we completed a private offering of $350 million in aggregate principal amount of our 5.625% senior notes due in 2023. As of September 30, 2017,March 31, 2018, total unamortized debt issuance costs relating to theseour $350 million of 5.625% senior notes
28
due in 2023 were $5 million, which are presented as a direct deduction from the principal amount. Interest on the senior notes is paid semi-annually in arrears on April 15 and October 15 of each year. The senior notes are unsecured and fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries that are required to guarantee the amended credit facility. Additionally, the voting stock of the issuer and the subsidiary guarantors is 100% owned by ILG. The senior notes are redeemable from April 15, 2018 at a redemption price starting at 104.219% which declines over time.
31
Restrictions and Covenants
The senior notes and amended credit agreement have various financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness, incur additional liens, issue redeemable stock and preferred stock, pay dividends or distributions or redeem or repurchase capital stock, prepay, redeem or repurchase debt, make loans and investments, enter into agreements that restrict distributions from our subsidiaries, sell assets and capital stock of our subsidiaries, enter into certain transactions with affiliates and consolidate or merge with or into or sell substantially all of our assets to another person.
The indenture governing the senior notes restricts our ability to issue additional debt in the event we are not in compliance with the minimum fixed charge coverage ratio of 2.0 to 1.0 and limits restricted payments and investments unless we are in compliance with the minimum fixed charge coverage ratio and the amount is within a bucket that grows with our consolidated net income. We met the minimum fixed charge coverage ratio as of September 30, 2017.March 31, 2018. In addition, the amended credit agreement requires us to meet certain financial covenants regarding the maintenance of a maximum consolidated secured leverage ratio of consolidated secured debt, over consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as defined. We are also required to maintain a minimum consolidated interest coverage ratio of consolidated EBITDA over consolidated interest expense. As of September 30, 2017,March 31, 2018, the maximum consolidated secured leverage ratio was 3.25x and the minimum consolidated interest coverage ratio was 3.0x. ILG was in compliance in all material respects with the requirements of all applicable financial and operating covenants, and our consolidated secured leverage ratio and consolidated interest coverage ratio under the amended credit agreement were 0.500.68 and 16.41,13.36, respectively.
Interest Expense and Debt Issuance Costs
Interest expense for the three months ended September 30,March 31, 2018 and 2017 and 2016 was $7 million and $6 million, respectively, and for the nine months ended September 30, 2017 and 2016 was $20 million and $18$5 million, respectively. Interest expense is net of $1 milliona negligible amount of capitalized interest and $2 million of capitalized interest for the three months ended September 30,March 31, 2018 and 2017, and 2016, respectively and for the nine months ended September 30, 2017 and 2016 was $4 million and $2 million, respectively.
As of September 30, 2017,March 31, 2018, total unamortized debt issuance costs were $8$7 million, net of $7$8 million of accumulated amortization, incurred in connection with the issuance and various amendments to our amended credit agreement, the issuance of our senior notes in April 2015 and the exchange for registered notes in June 2016. As of December 31, 2016,2017, total unamortized debt issuance costs were $10$8 million, net of $5$7 million of accumulated amortization. Unamortized debt issuance costs are presented as a reduction of long-term debt in the accompanying condensed consolidated balance sheets, pursuant to ASU 2015-03. These costs are amortized to interest expense through the maturity date of our respective debt instruments using the effective interest method for those costs related to our senior notes, and on a straight-line basis for costs related to our amended credit agreement.
2932
NOTE 15—FAIR VALUE MEASUREMENTS
Fair Value of Financial Instruments
The estimated fair value of financial instruments below has been determined using available market information and appropriate valuation methodologies, as applicable. There have been no changes in the methods and significant assumptions used to estimate the fair value of financial instruments during the ninethree months ended September 30, 2017.March 31, 2018. Our financial instruments are detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, 2017 |
| December 31, 2016 |
| March 31, 2018 |
| December 31, 2017 | ||||||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| Carrying |
| Fair |
| Carrying |
| Fair | ||||||||
|
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value |
| Amount |
| Value | ||||||||
|
| (In millions) |
| (In millions) | ||||||||||||||||||||
Cash and cash equivalents |
| $ | 211 |
| $ | 211 |
| $ | 126 |
| $ | 126 |
| $ | 158 |
| $ | 158 |
| $ | 122 |
| $ | 122 |
Restricted cash and cash equivalents |
|
| 139 |
|
| 139 |
|
| 118 |
|
| 118 |
|
| 256 |
|
| 256 |
|
| 230 |
|
| 230 |
Financing receivables |
|
| 36 |
|
| 36 |
|
| 19 |
|
| 19 |
|
| 37 |
|
| 37 |
|
| 36 |
|
| 36 |
Vacation ownership mortgages receivable |
|
| 713 |
|
| 758 |
|
| 719 |
|
| 737 |
|
| 733 |
|
| 781 |
|
| 737 |
|
| 770 |
Investments in marketable securities |
|
| 14 |
|
| 14 |
|
| 14 |
|
| 14 |
|
| 13 |
|
| 13 |
|
| 13 |
|
| 13 |
Securitized debt |
|
| 653 |
|
| 657 |
|
| 430 |
|
| 425 |
|
| 530 |
|
| 524 |
|
| 575 |
|
| 563 |
Revolving credit facility(1) |
|
| (168) |
|
| (171) |
|
| (236) |
|
| (240) |
|
| (218) |
|
| (220) |
|
| (217) |
|
| (220) |
Senior notes(1) |
|
| (345) |
|
| (364) |
|
| (344) |
|
| (361) |
|
| (345) |
|
| (359) |
|
| (345) |
|
| (364) |
(1) | The carrying value of our revolving credit facility and senior notes as of |
The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reflected in the accompanying condensed consolidated balance sheets approximate fair value as they are redeemable at par upon notice or maintained with various high‑quality financial institutions and have original maturities of three months or less. Under the fair value hierarchy established in ASC 820, cash and cash equivalents and restricted cash and cash equivalents are stated at fair value based on quoted prices in active markets for identical assets (Level 1).
The financing receivables as of September 30, 2017March 31, 2018 are presented in our condensed consolidated balance sheet within other non‑current assets and principally pertain to financing receivables issued to individual purchasers by our consolidated Great Destinations joint-venture as part of their VOI reselling activities, as well as a convertible secured loan to CLC that matures October of 2019 with interest payable monthly. The outstanding CLC loan is to be repaid in full at maturity either in cash or by means of a share option exercisable by ILG, at its sole discretion. The carrying value of thisthese financing receivable approximatesreceivables approximate fair value through inputs inherent to the originating value of this loan,these loans, such as interest rates and ongoing credit risk accounted for through non‑recurring adjustments for estimated credit losses as necessary (Level 2). The stated interest raterates on this loan isthese financing receivables are comparable to market. Interesttheir respective market rates. In our condensed consolidated income statement, interest on the CLC loan is recognized within our “Interest income” line item, inwhile interest from our condensed consolidated statements of income for the nine months ended September 30, 2017 and 2016.Great Destinations financing receivables is recognized as revenue within our “Consumer financing” line item.
We estimate the fair value of vacation ownership mortgages receivable using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model incorporates default rates, prepayment rates, coupon rates and loan terms respective to the portfolio based on current market assumptions for similar types of arrangements. Based upon the availability of market data, we have classified inputs used in the valuation of our vacation ownership mortgages receivable as Level 3. The primary sensitivity in these assumptions relates to forecasted defaults and projected prepayments which could cause the estimated fair value to vary. These loans are secured by the underlying VOI.
Investments in marketable securities consist of marketable securities (mutual funds) related to deferred compensation plans which are funded in a Rabbi trust as of September 30, 2017March 31, 2018 and December 31, 20162017 and classified as
33
other noncurrent assets in the accompanying condensed consolidated balance sheets. Participants in the deferred compensation plan unilaterally determine how their compensation deferrals are invested within the confines of the Rabbi trust which holds the marketable securities. Consequently, management has designated these marketable securities as trading investments, as allowed by applicable accounting guidance, even though there is no intent by ILG to actively buy
30
or sell securities with the objective of generating profits on short‑term differences in market prices. These marketable securities are recorded at a fair value of $14$13 million at each of September 30, 2017March 31, 2018 and December 31, 20162017 based on quoted market prices in active markets for identical assets (Level 1). We recognized approximately $1 millionnegligible amount of unrealized trading gainloss for the three months ended September 30, 2017 and $2 million for the nine months ended September 30, 2017.March 31, 2018. These unrealized trading gainslosses have an accompanying offsetting adjustment to employee compensation expense and are each included within general and administrative expenses in the accompanying condensed consolidated statement of income. See Note 17 for further discussion in regardsregard to this deferred compensation plan.
Our non-public, securitized debt fair value is determined based upon discounted cash flows for the debt using Level 3 inputs such as rates deemed reasonable for the type of debt, prevailing market conditions and the length of maturity for the debt.
Borrowings under our senior notes (issued April 2015) and revolving credit facility are carried at historical cost and adjusted for principal payments. The fair value of our senior notes was estimated at September 30, 2017March 31, 2018 and December 31, 20162017 using an input of quoted prices from an inactive market due to the infrequency at which trades occur on our senior notes (Level 2). The carrying value of the outstanding balance under our revolving credit facility, exclusive of debt issuance costs, approximates fair value as of September 30, 2017March 31, 2018 and December 31, 20162017 through inputs inherent to the debt such as variable interest rates and credit risk (Level 2).
NOTE 16—EQUITY
ILG has 300 million authorized shares of common stock, par value of $0.01 per share. At September 30, 2017,March 31, 2018, there were 134.0134.3 million shares of ILG common stock issued, of which 124.0124.3 million are outstanding with 10.0 million shares held as treasury stock. At December 31, 2016,2017, there were 133.5134.1 million shares of ILG common stock issued, of which 124.7124.1 million were outstanding with 8.910.0 million shares held as treasury stock.
ILG has 25 million authorized shares of preferred stock, par value of $0.01 per share, none of which are issued or outstanding as of September 30, 2017March 31, 2018 and December 31, 2016.2017. The Board of Directors has the authority to issue the preferred stock in one or more series and to establish the rights, preferences and dividends.
In connection with the acquisition of Vistana in May 2016, we issued 72.4 million shares of ILG common stock, valued at $1 billion as of the acquisition date, to the holders who received Vistana common stock in the spin-off from its former parent.
Dividend Declared
In February May and August 2017,2018, our Board of Directors declared a quarterly dividend payment of $0.15$0.175 per share paid in March June and September 2017, amounting to $19 million each. 2018 of $22 million.
In November 2017,May 2018, our Board of Directors declared a $0.15$0.175 per share dividend payable December 19, 2017June 12, 2018 to shareholders of record on December 5, 2017.June 1, 2018.
Stockholder Rights Plan
In June 2009, ILG’sOur ability to continue to pay dividends in the future may be restricted by covenants in our credit agreement or if we do not have sufficient surplus under Delaware law. Additionally, our Board of Directors approvedmay determine not to declare dividends if they deem this action to be in ILG’s best interests.
During the creation of a Series A Junior Participating Preferred Stock, adopted a stockholders rights plan and declared a dividend of one rightyear ended December 31, 2017, we repurchased 1.1 million shares for each outstanding share of common stock held by our stockholders of record$28 million, including commissions, with $21 million available for future repurchases as of the closeDecember 31, 2017. There were no repurchases of business on June 22, 2009. The rights attach to any additional shares of common stock issued after June 22, 2009. These rights, which trade with the shares of our common stock, currently are not exercisable. Under the rights plan, these rights will be exercisable if a person or group acquires or commences a tender or exchange offer for 15% or more of our common stock. The rights plan provides certain exceptions for acquisitions by Liberty Interactive Corporation in accordance with an agreement entered into with ILG in connection with its spin‑off from IAC/InterActiveCorp (IAC). If the rights become exercisable, each right will permit its holder, other than the “acquiring person,” to purchase from us shares of common stock at a 50% discount to the then prevailing market price. As a result, the rights will cause substantial dilution to a person or group that becomes an “acquiring person” on terms not approved by our Board of Directors.
3134
Share Repurchase Program
In November 2016, the Board authorized repurchases of up to $50 million of ILG common stock with $49 million available for repurchases as of December 31, 2016. Duringduring the ninethree months ended September 30, 2017, we repurchased 1.1 million shares of common stock for approximately $28 million, including commissions. The remaining availability for future repurchases of our common stock was $21 million as of September 30, 2017.March 31, 2018. Acquired shares of our common stock are held as treasury shares carried at cost on our condensed consolidated balance sheets.
Common stock repurchases may be conducted in the open market or in privately negotiated transactions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements, restrictions under our Tax Matters Agreement with Starwood, and other factors. This program may be modified, suspended or terminated by us at any time without notice.
Accumulated Other Comprehensive Loss
Entities are required to disclose additional information about reclassification adjustments within accumulated other comprehensive income/loss, referred to as AOCL including (1) changes in AOCL balances by component and (2) significant items reclassified out of AOCL in the period. For the ninethree months ended September 30, 2017,March 31, 2018, there were no significant items reclassified out of AOCL, and the change in AOCL pertains to current period foreign currency translation adjustments, as disclosed in our accompanying condensed consolidated statements of comprehensive income.
Noncontrolling Interests
Noncontrolling Interest—VRI Europe
In connection with the VRI Europe transaction on November 4, 2013, CLC was issued a noncontrolling interest in VRI Europe representing 24.5% of the business, which was determined based on the purchase price paid by ILG for its 75.5% ownership interest as of the acquisition date. As of September 30, 2017March 31, 2018 and December 31, 2016,2017, this noncontrolling interest amounts to $28$29 million and $26 million, respectively,at the end of each respective period and is presented on our condensed consolidated balance sheets as a component of equity. The change from December 31, 2016 to September 30, 2017 relates to the recognition of the noncontrolling interest holder’s proportional share of VRI Europe’s earnings, as well as the translation effect on the foreign currency based amount.
The parties have agreed not to transfer their interests in VRI Europe or CLC’s related development business for a period of five years from the acquisition. In addition, they have agreed to certain rights of first refusal, and customary drag along and tag along rights, including a right by CLC to drag along ILG’s VRI Europe shares in connection with a sale of the entire CLC resort business subject to achieving minimum returns and a preemptive right by ILG. As of September 30, 2017,March 31, 2018, there have been no changes in ILG’s ownership interest in VRI Europe.
Additionally, in connection with this arrangement, ILG and CLC entered into a loan agreement whereby ILG made available to CLC a convertible secured loan facility of $15 million that matures in October of 2019 with interest payable monthly. The outstanding loan is to be repaid in full at maturity either in cash or by means of a share option exercisable by ILG, at its sole discretion, which would allow for settlement of the loan in CLC’s shares of VRI Europe for contractually determined equivalent value. ILG has the right to exercise this share option at any time prior to maturity of the loan; however, the equivalent value for these shares would be measured at a 20% premium to its acquisition date value. We have determined the value of this embedded derivative is not material to warrant bifurcating from the host instrument (loan) at this time.
Noncontrolling Interest – HOAs
A component of ILG’s noncontrolling interest balance pertains to our consolidated HOAs and represents the portion related to individual or third-party VOI owners. As of March 31, 2018 and December 31, 2017, this noncontrolling interest amounted to $11 million and $8 million, respectively, and is presented on our condensed consolidated balance sheets as a component of equity.
NOTE 17—BENEFIT PLANS
Under retirement savings plans sponsored by ILG, qualified under Section 401(k) of the Internal Revenue Code, participating employees may contribute up to 50.0% of their pre‑tax earnings, but not more than statutory limits. ILG provides a discretionary match of fifty cents for each dollar a participant contributes into a plan with a maximum contribution of 3% of a participant’s eligible earnings. Forearnings, with employees participating in the safe harbor plan, ILG providesalso
35
receiving a 100% match for the first 1% of the participant’s eligible earnings, and 50% over 1%, up to 6% of eligible
32
compensation. In addition, ILG makes a discretionary matching contribution of 50% over 6%, up to 7% of compensation. These plans are subject to Internal Revenue Service (“IRS”) restrictions. Net matching contributions for the ILG plans werewas $3 million and $2 million for the three months ended September 30, 2017March 31, 2018 and 2016, respectively, and $7 million and $4 million for the nine months ended September 30, 2017 and 2016, respectively.2017. Matching contributions were invested in the same manner as each participant’s voluntary contributions in the investment options provided under the plans.
Effective August 20, 2008, a deferred compensation plan (the “Director Plan”) was established to provide non‑employee directors of ILG an option to defer director fees on a tax‑deferred basis. Participants in the Director Plan are allowed to defer a portion or all of their compensation and are 100% vested in their respective deferrals and earnings. With respect to director fees earned for services performed after the date of such election, participants may choose from receiving cash or stock at the end of the deferral period. ILG has reserved 100,000 shares of common stock for issuance pursuant to this plan, of which 67,79771,667 share units were outstanding at September 30, 2017.March 31, 2018. ILG does not provide matching or discretionary contributions to participants in the Director Plan. Any deferred compensation elected to be received in stock is included in diluted earnings per share.
Effective October 1, 2014, a non-qualified deferred compensation plan (the “DCP”) was established to allow eligible employees of ILG an option to defer compensation on a tax-deferred basis. Participants in the DCP currently include only certain HVO and Vistana employees that participated in similar plans prior to the respective acquisitions. Participants are fully vested in all amounts held in their individual accounts. Participants have only an unsecured claim against ILG for the future payment of the deferred amounts, although payment is indirectly secured through a fully funded Rabbi trust. The Rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the Rabbi trust are not available for general corporate purposes. Amounts in the Rabbi trust are invested in mutual funds, as selected by participants, which are designated as trading securities and carried at fair value. As of September 30, 2017,March 31, 2018, the fair value of the investments in the Rabbi trust was $14$13 million, which is recorded in other non-current assets with the corresponding deferred compensation liability recorded in other long-term liabilities in the condensed consolidated balance sheets. Unrealized gains or losses are offset by a corresponding adjustment to compensation expense, all within general and administrative expense in our condensed consolidated income statements.
NOTE 18—STOCK‑BASED COMPENSATION
On May 21, 2013, ILG adopted the Interval Leisure Group, Inc. 2013 Stock and Incentive Plan which provides for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock‑based awards. RSUs are awards in the form of phantom shares or units, denominated in a hypothetical equivalent number of shares of ILG common stock and with the value of each award equal to the fair value of ILG common stock at the date of grant.grant, except for RSUs subject to relative total shareholder return performance criteria, for which the fair value is based on a Monte Carlo simulation analysis. Each RSU and share of restricted stock is subject to service‑based vesting, where a specific period of continued employment must pass before an award vests. We grant awards subject to graded vesting (i.e., portions of the award vest at different times during the vesting period) or to cliff vesting (i.e., all awards vest at the end of the vesting period). In addition, certain RSUs are subject to attaining specific performance criteria. As of September 30, 2017, 3.1March 31, 2018, 2.8 million shares were available for future issuance under the 2013 Stock and Incentive Compensation Plan.
TheDuring the first quarter of 2018 and 2017, the Compensation Committee granted, during the first nine months of 2017, 927,000569,000 and 870,000 RSUs, respectively, generally vesting over three years, and during the first nine months of 2016, 1.5 million RSUs generally vesting over three to four years, to certain officers, board of directors and employees of ILG and its subsidiaries. Of these RSUs granted in 2018 and 2017, approximately 160,000 and 2016, approximately 229,000, and 518,000, respectively, cliff vest in three years and approximately 213,000147,000 and 348,000,213,000, respectively, are subject to performance criteria that could result between 0% and up to 200% of these awards being earned either based on defined adjusted EBITDA, revenue, or relative total shareholder return targets over the respective performance period, as specified in the award document. Additionally, on May 11, 2016, in connection with the acquisition of Vistana, we issued a total of 713,000 shares of restricted stock and 11,000 RSUs upon conversion of unvested equity grants held by Vistana’s employees to grants under the ILG 2013 Stock and Incentive Plan with a fair value of $10 million, of which $2 million and $8 million were attributed to pre-acquisition and post-acquisition services,
33
respectively. The converted awards generally have the same terms and conditions as the original Starwood awards and vest through the first quarter of 2019.
For the 20172018 and 20162017 RSUs subject to relative total shareholder return performance criteria, the number of RSUs that may ultimately be awarded depends on whether the market condition is achieved. We used a Monte Carlo simulation analysis to estimate a per unit grant date fair value of $50.37 for 2018 and $28.23 for 2017, and $13.13 for 2016, for these performance based RSUs. This analysis estimates the total shareholder return ranking of ILG as of the grant date relative to two peer groups approved by the Compensation Committee, over the remaining performance period. The expected
36
volatility of ILG’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk‑free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.
Non‑cash compensation expense related to RSUs and restricted stock for the three months ended September 30,March 31, 2018 and 2017 and 2016 was $6 million for each $5 million, and for the nine months ended September 30, 2017 and 2016 was $18million and $13 million, respectively.period. At September 30, 2017,March 31, 2018, there was approximately $28$37 million of unrecognized compensation cost related to RSUs and restricted stock, which is currently expected to be recognized over a weighted average period of approximately 1.92.25 years.
The amount of stock‑basedStock-based compensation expense recognized in the condensed consolidated statements of incomeis not reduced for periods prior to January 1, 2017 is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate was estimated at the grant date based on historical experience. With the adoption of ASU 2016-09 on January 1, 2017, we no longer reduce stock-based compensation by estimated forfeitures. Instead weWe account for forfeitures when they occur. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is equal to the portion of the grant‑date value of the award tranche that is actually vested at that date.
Non‑cash stock‑based compensation expense related to equity awards is included in the following line items in the accompanying condensed consolidated statements of income for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (in millions):
|
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|
|
|
|
|
|
|
| ||||||
|
| Three Months |
| Nine Months |
|
|
|
|
|
| ||||||||
|
| Ended |
| Ended | Three Months Ended |
| ||||||||||||
|
| September 30, |
| September 30, | March 31, |
| ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2018 |
| 2017 |
| ||||||
Cost of sales |
| $ | — |
| $ | 1 |
| $ | 1 |
| $ | 1 | $ | — |
| $ | 1 |
|
Selling and marketing expense |
|
| 1 |
|
| — |
|
| 2 |
|
| 1 |
| 1 |
|
| 1 |
|
General and administrative expense |
|
| 4 |
|
| 4 |
|
| 15 |
|
| 11 |
| 5 |
|
| 4 |
|
Non-cash compensation expense |
| $ | 5 |
| $ | 5 |
| $ | 18 |
| $ | 13 | $ | 6 |
| $ | 6 |
|
The following table summarizes RSU activity during the ninethree months ended September 30, 2017:March 31, 2018:
|
|
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|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
|
|
| Weighted-Average | ||
|
|
|
| Grant Date |
|
|
| Grant Date | ||
|
| Shares |
| Fair Value |
| Shares |
| Fair Value | ||
|
| (In millions) |
|
|
|
| (In millions) |
|
|
|
Non-vested RSUs at January 1, 2017 |
| 3 |
| $ | 16.71 | |||||
Non-vested RSUs at January 1, 2018 |
| 3 |
| $ | 17.53 | |||||
Granted |
| 1 |
|
| 20.43 |
| 1 |
|
| 33.42 |
Vested |
| (1) |
|
| 17.54 |
| (1) |
|
| 19.61 |
Forfeited |
| — |
|
| 20.36 |
| — |
|
| 16.40 |
Non-vested RSUs at September 30, 2017 |
| 3 |
| $ | 17.44 | |||||
Non-vested RSUs at March 31, 2018 |
| 3 |
| $ | 20.60 |
34
NOTE 19—INCOME TAXES
ILG calculates its interim income tax provision in accordance with ASC 740, “Income Taxes.” At the end of each interim period, ILG makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year‑to‑date earnings or loss. The income tax provision or benefit related to significant, unusual, or extraordinary items, if applicable, that will be separately reported or reported net of their related tax effects are individually computed and recognized in the interim period in which those items occur. In addition, the effect of changes in enacted tax laws or rates, tax status, judgment on the realizability of a beginning-of-the-year deferred tax asset in future years or the liabilities for uncertain tax positions is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected pre-tax income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of the realization of deferred tax assets generated in the current year. The accounting estimates used to compute the provision or benefit for income taxes may change as new events occur, more experience is acquired, additional
37
information is obtained or ILG’s tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in income tax expense in the quarter in which the change occurs.
A valuation allowance for deferred tax assets is provided when it is more likely than not that certain deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the history of taxable income in recent years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies to make this assessment.
For the three and nine months ended September 30,March 31, 2018 and 2017, ILG recorded income tax provisions for continuing operations of $17$20 million and $55$25 million, respectively, which represent effective tax rates of 35.7%31.1% and 35.1%35.9% for the respective periods. TheseOn December 22, 2017, the President of the United States signed into law the Tax Reform Act, which among other things, lowered the statutory corporate tax rates arerate from 35% to 21% effective in 2018. The tax rate for the three months ended March 31, 2018 is higher than the federal statutory rate of 21% due principally to state, local, and foreign income taxes, net discrete items related to non-cash compensation, and other tax items. The other tax items increasing the rate include the projected impact of certain provisions enacted in the Tax Reform Act effective in 2018 such as the global intangible low-taxed income provisions. The tax rate for the three months ended March 31, 2017 is higher than the federal statutory rate of 35% due principally to state and local income taxes and other tax items partially offset by foreign income taxed at lower rates and the discrete impact of excess tax benefits associated with stock-based awards recorded in the income statement.
For the three and nine months ended September 30, 2016, ILG recorded an income tax benefit and provision for continuing operations of $2 million and $46 million, respectively, which represent effective tax rates of (7.4)% and 16.3% for the respective periods. The negative effective tax rate for the quarter was a result of recognizing an income tax benefit in an interim period with pre-tax income. This income tax benefit is a result of a decrease in the estimated annual effective tax rate and the effect of this change on prior quarters. The decrease in the estimated annual effective tax rate from the prior quarter was primarily due to both a change in the projected proportion of income earned and taxed in various jurisdictions and the projected utilization of certain income tax credits that were previously not expected to be realized. For the nine months ended September 30, 2016, the tax rate was lower than the federal statutory rate of 35% due principally to the nontaxable gain on bargain purchase recorded during the period in connection with the acquisition of Vistana and included in the computation of the annual expected effective tax rate as a non-discrete permanent item. This gain on bargain purchase is not subject to income taxation.rates.
As of September 30, 2017,March 31, 2018, there were no material changes to ILG’s unrecognized tax benefits and related interest. In connection with the acquisition of Vistana, Starwood and ILG entered into a Tax Matters Agreement. Under the Tax Matters Agreement, Starwood indemnifies ILG for all consolidated tax liabilities and related interest and penalties for the pre-close period. Accordingly, any unrecognized tax benefits for Vistana related to the pre-close period that are the obligation of its former parent have not been recorded. ILG recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense.
ILG files income tax returns in the U.S. federal jurisdiction and various state, local, and foreign jurisdictions. As of September 30, 2017,March 31, 2018, no open tax years are currently under examination by the IRS. The U.S. federal statute of limitations for years prior to and including 2013 has closed. ILG’s consolidated state tax return for the tax years, 2013
35
through 2015, was under examination by the State of Florida. During the current period the State of Florida completed its audit and issued a Notice of Proposed Assessment with no changes. The audit is now closed. No otheropen tax years are currently under examination in any material state and local jurisdictions. Vistana, by virtue of previously filed consolidated tax returns with Starwood, is under audit by the IRS for several pre-close periods. Vistana is also under audit in Mexico for the tax year ended December 31,years 2012, 2013 and December 31, 2013.2015. Under the Tax Matters Agreement, Starwood indemnifies ILG for all income tax liabilities and related interest and penalties for the pre-close period.
The Tax Reform Act significantly changed U.S. tax law by, among other things, lowering the statutory corporate tax rate, as discussed above, eliminating certain deductions, requiring a one-time transition tax on certain unrepatriated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which was codified in ASU 2018-05 during the current period, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. During 2017, we reasonably estimated the effects of the Tax Reform Act and recorded a provisional tax benefit for the impact of the Tax Reform Act of approximately $51 million in our financial statements as of December 31, 2017. This amount is primarily comprised of the remeasurement of federal net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate from 35% to 21%, partially offset by the mandatory one-time tax on the accumulated earnings of our foreign subsidiaries. We have not completed our determination of the accounting implications of the Tax Reform Act on our tax accruals and have not made any material changes during the three months ended March 31, 2018 to the provisional amounts recorded.
38
The ultimate impact of the Tax Reform Act may differ, possibly materially, from these provisional amounts due to among other things, additional analysis, changes in interpretations and assumptions ILG has made, additional regulatory guidance that may be issued, and actions ILG may take as a result of the Tax Reform Act. Any such revisions will be treated in accordance with the measurement period guidance outlined in SAB 118. As such, we expect to complete our analysis no later than December 22, 2018.
NOTE 20—SEGMENT INFORMATION
Pursuant to FASB guidance as codified in ASC 280, an operating segment is a component of a public entity (1) that engages in business activities that may earn revenues and incur expenses; (2) for which operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segments and assess its performance; and (3) for which discrete financial information is available. We also considered how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered. ILG is comprised of two operating and reportable segments: Vacation Ownership and Exchange and Rental.
Our Vacation Ownership segment engages in the management, sales, marketing, financing, rental and ancillary services, and development of VOIs as well as related services to owners and associations. Our Exchange and Rental segment offers access to vacation accommodations and other travel‑related transactions and services to members of our programs and other leisure travelers, by providing vacation exchange services and vacation rental, working with resort developers, HOAs and operating vacation rental properties.
ILG provides certain corporate functions that benefit the organization as a whole. Such corporate functions include corporate services relating to oversight, corporate development, finance and accounting, legal, treasury, tax, internal audit, human resources, and certain IT functions. Costs relating to such corporate functions that are not directly cross‑charged to individual businesses are being allocated to our two operating and reportable segments based on a pre‑determined measure of profitability relative to total ILG. All such allocations relate only to general and administrative expenses. The condensed consolidated statements of income are not impacted by this cross‑segment allocation.
3639
Information on reportable segments and reconciliation to consolidated operating income is as follows (in millions):
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|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended |
| ||||||||||||
|
| September 30, |
| September 30, |
| March 31, |
| ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 |
| ||||||
Vacation Ownership: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
| $ | 52 |
| $ | 53 |
| $ | 162 |
| $ | 86 |
| $ | 63 |
| $ | 58 |
|
Management fee and other revenue |
|
| 35 |
|
| 32 |
|
| 99 |
|
| 81 |
|
| 57 |
|
| 30 |
|
Sales of vacation ownership products, net |
|
| 118 |
|
| 96 |
|
| 351 |
|
| 154 |
|
| 123 |
|
| 105 |
|
Consumer financing revenue |
|
| 23 |
|
| 23 |
|
| 66 |
|
| 37 |
|
| 24 |
|
| 21 |
|
Cost reimbursement revenue |
|
| 67 |
|
| 63 |
|
| 192 |
|
| 118 |
|
| 44 |
|
| 58 |
|
Total revenue |
|
| 295 |
|
| 267 |
|
| 870 |
|
| 476 |
|
| 311 |
|
| 272 |
|
Cost of service and membership related |
|
| 14 |
|
| 11 |
|
| 40 |
|
| 31 |
|
| 45 |
|
| 13 |
|
Cost of sales of vacation ownership products |
|
| 17 |
|
| 31 |
|
| 73 |
|
| 56 |
|
| 39 |
|
| 25 |
|
Cost of sales of rental and ancillary services |
|
| 54 |
|
| 47 |
|
| 164 |
|
| 72 |
|
| 43 |
|
| 51 |
|
Cost of consumer financing |
|
| 7 |
|
| 4 |
|
| 20 |
|
| 7 |
|
| 8 |
|
| 6 |
|
Cost reimbursements |
|
| 67 |
|
| 63 |
|
| 192 |
|
| 118 |
|
| 44 |
|
| 58 |
|
Total cost of sales |
|
| 159 |
|
| 156 |
|
| 489 |
|
| 284 |
|
| 179 |
|
| 153 |
|
Royalty fee expense |
|
| 11 |
|
| 9 |
|
| 31 |
|
| 15 |
|
| 11 |
|
| 10 |
|
Selling and marketing expense |
|
| 65 |
|
| 53 |
|
| 190 |
|
| 83 |
|
| 66 |
|
| 57 |
|
General and administrative expense |
|
| 26 |
|
| 26 |
|
| 77 |
|
| 61 |
|
| 26 |
|
| 24 |
|
Amortization expense of intangibles |
|
| 2 |
|
| 3 |
|
| 6 |
|
| 6 |
|
| 2 |
|
| 2 |
|
Depreciation expense |
|
| 10 |
|
| 9 |
|
| 29 |
|
| 14 |
|
| 10 |
|
| 10 |
|
Segment operating income |
| $ | 22 |
| $ | 11 |
| $ | 48 |
| $ | 13 |
| $ | 17 |
| $ | 16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | Three Months Ended |
| ||||||||||||
|
| September 30, |
| September 30, | March 31, |
| ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 | 2018 |
| 2017 |
| ||||||
Exchange and Rental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
| $ | 47 |
| $ | 47 |
| $ | 155 |
| $ | 155 | $ | 59 |
| $ | 59 |
|
Membership fee revenue |
|
| 36 |
|
| 35 |
|
| 105 |
|
| 99 |
| 36 |
|
| 36 |
|
Ancillary member revenue |
|
| 2 |
|
| 1 |
|
| 5 |
|
| 4 |
| 2 |
|
| 2 |
|
Total member revenue |
|
| 85 |
|
| 83 |
|
| 265 |
|
| 258 |
| 97 |
|
| 97 |
|
Club rental revenue |
|
| 26 |
|
| 24 |
|
| 83 |
|
| 42 |
| 34 |
|
| 30 |
|
Other revenue |
|
| 4 |
|
| 6 |
|
| 18 |
|
| 18 |
| 5 |
|
| 5 |
|
Rental management revenue |
|
| 12 |
|
| 13 |
|
| 37 |
|
| 36 |
| 14 |
|
| 14 |
|
Cost reimbursement revenue |
|
| 24 |
|
| 25 |
|
| 75 |
|
| 71 |
| 21 |
|
| 26 |
|
Total Exchange and Rental revenue |
|
| 151 |
|
| 151 |
|
| 478 |
|
| 425 | ||||||
Cost of service and membership related sales |
|
| 19 |
|
| 19 |
|
| 57 |
|
| 51 | ||||||
Total revenue |
| 171 |
|
| 172 |
| ||||||||||||
Cost of service and membership related |
| 19 |
|
| 22 |
| ||||||||||||
Cost of sales of rental and ancillary services |
|
| 24 |
|
| 20 |
|
| 71 |
|
| 51 |
| 29 |
|
| 26 |
|
Cost reimbursements |
|
| 24 |
|
| 25 |
|
| 75 |
|
| 71 |
| 21 |
|
| 26 |
|
Total cost of sales |
|
| 67 |
|
| 64 |
|
| 203 |
|
| 173 |
| 69 |
|
| 74 |
|
Royalty fee expense |
|
| — |
|
| — |
|
| 1 |
|
| 1 | ||||||
Selling and marketing expense |
|
| 12 |
|
| 13 |
|
| 40 |
|
| 42 |
| 12 |
|
| 13 |
|
General and administrative expense |
|
| 32 |
|
| 30 |
|
| 93 |
|
| 87 |
| 33 |
|
| 30 |
|
Amortization expense of intangibles |
|
| 3 |
|
| 3 |
|
| 9 |
|
| 8 |
| 3 |
|
| 3 |
|
Depreciation expense |
|
| 5 |
|
| 5 |
|
| 15 |
|
| 14 |
| 5 |
|
| 5 |
|
Segment operating income |
| $ | 32 |
| $ | 36 |
| $ | 117 |
| $ | 100 | $ | 49 |
| $ | 47 |
|
3740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 446 |
| $ | 418 |
| $ | 1,348 |
| $ | 901 |
| $ | 482 |
| $ | 444 |
Cost of sales |
|
| 226 |
|
| 220 |
|
| 692 |
|
| 457 |
|
| 248 |
|
| 227 |
Operating expenses |
|
| 166 |
|
| 151 |
|
| 491 |
|
| 331 |
|
| 168 |
|
| 154 |
Operating income |
| $ | 54 |
| $ | 47 |
| $ | 165 |
| $ | 113 |
| $ | 66 |
| $ | 63 |
Selected financial information by reporting segment is presented below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Total Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
Vacation Ownership |
| $ | 2,499 |
| $ | 2,220 |
| $ | 2,660 |
| $ | 2,603 |
Exchange and Rental |
|
| 1,080 |
|
| 1,084 |
|
| 1,110 |
|
| 1,084 |
Total |
| $ | 3,579 |
| $ | 3,304 |
| $ | 3,770 |
| $ | 3,687 |
Geographic Information
We conduct operations through offices in the U.S. and 14 other countries. For the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, revenue is sourced from over 100 countries worldwide. Other than the United States, and Europe,no revenue sourced from any individual country or geographic region did not exceedexceeded 10% of consolidated revenue for the three and nine months ended September 30, 2017March 31, 2018 and 2016.2017.
Geographic information on revenue, based on sourcing, and long‑lived assets, based on physical location, is presented in the table below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 376 |
| $ | 354 |
| $ | 1,131 |
| $ | 760 |
| $ | 424 |
| $ | 374 |
Europe |
|
| 16 |
|
| 16 |
|
| 48 |
|
| 50 | ||||||
All other countries(1) |
|
| 54 |
|
| 48 |
|
| 169 |
|
| 91 |
|
| 58 |
|
| 70 |
Total |
| $ | 446 |
| $ | 418 |
| $ | 1,348 |
| $ | 901 |
| $ | 482 |
| $ | 444 |
(1) | Includes countries within the following continents: Africa, Asia, Australia, Europe, North America and South America. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| September 30, |
| December 31, |
| March 31, |
| December 31, | ||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
| ||||||
Long-lived assets, net (excluding goodwill and intangible assets): |
|
|
|
|
|
| ||||||
United States |
| $ | 466 |
| $ | 469 |
| $ | 483 |
| $ | 486 |
Mexico |
|
| 129 |
|
| 107 |
|
| 134 |
|
| 126 |
Europe |
|
| 4 |
|
| 4 |
|
| 4 |
|
| 4 |
Total |
| $ | 599 |
| $ | 580 |
| $ | 621 |
| $ | 616 |
NOTE 21—COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, ILG is a party to various legal proceedings. ILG establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. ILG does not establish reserves for identified legal matters when ILG believes that the likelihood of an unfavorable outcome is not probable. Although management currently believes that an unfavorable resolution of
38
claims against ILG, including claims where an unfavorable outcome is reasonably possible, will not have a material
41
impact on the liquidity, results of operations, or financial condition of ILG, these matters are subject to inherent uncertainties and management’s view of these matters may change in the future. ILG also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 19 for a discussion of income tax contingencies.
Purchase Obligations and Other Commitments
Other items, such as certain purchase commitments and guarantees are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. These funding commitments could potentially require our performance in the event of demands by third parties or contingent events. The following table summarizes these items, on an undiscounted basis, at September 30, 2017 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments Due by Period | |||||||||||||
|
|
|
|
| Up to |
|
|
|
|
|
|
| More than | ||
Contractual Obligations |
| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years | |||||
|
| (Dollars in millions) | |||||||||||||
Debt principal(a) |
| $ | 521 |
| $ | — |
| $ | — |
| $ | 171 |
| $ | 350 |
Debt interest(a) |
|
| 134 |
|
| 27 |
|
| 53 |
|
| 44 |
|
| 10 |
Purchase obligations and other commitments(b) |
|
| 75 |
|
| 36 |
|
| 28 |
|
| 11 |
|
| — |
Vacation ownership development commitments(c) |
|
| 2 |
|
| 2 |
|
| — |
|
| — |
|
| — |
Operating leases |
|
| 153 |
|
| 20 |
|
| 33 |
|
| 21 |
|
| 79 |
Total contractual obligations |
| $ | 885 |
| $ | 85 |
| $ | 114 |
| $ | 247 |
| $ | 439 |
(a)Debt principal and projected debt interest represent principal and interest to be paid on our senior notes and revolving credit facility based on the balance outstanding as of September 30, 2017, exclusive of debt issuance costs. In addition, also included are certain fees associated with our revolving credit facility based on the unused borrowing capacity and outstanding letters of credit balances, if any, as of September 30, 2017. Interest on the revolving credit facility is calculated using the prevailing rates as of September 30, 2017.
(b)Purchase obligations and other commitments primarily relate to future guaranteed purchases of rental inventory, operational support services, marketing related benefits, membership fulfillment benefits and other commitments.
(c)Vacation ownership development commitments represents our estimate of remaining costs associated with completing the phases of our vacation ownership projects currently in presales and accounted for under the percentage of completion method.
At September 30, 2017, guarantees, surety bonds and letters of credit totaled $100 million, with the highest annual amount of $65 million occurring in year one. The total also includes maximum exposure under guarantees of $52million which primarily relates to our Exchange and Rental segment’s rental management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the segment’s management activities that are entered into on behalf of the property owners for which either party generally may terminate such leases upon 60 to 90 days prior written notice to the other party.
In addition, certain of our rental management agreements provide that owners receive specified percentages or guaranteed amounts of the rental revenue generated under its management. In these cases, the operating expenses for the rental operations are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages or guaranteed amounts, and our vacation rental business either retain the balance (if any) as its fee or makes up the deficit. Although such deficits are reasonably possible in a few of these agreements, as of September 30, 2017 future amounts are not expected to be material either individually or in the aggregate.
Our operating and purchase obligations primarily relate to future guaranteed purchases of rental inventory, operational support services, marketing related benefits and membership fulfillment benefits. Certain of our vacation
39
rental businesses also enter into agreements, as principal, for services purchased on behalf of property owners for which we are subsequently reimbursed. As such, we are the primary obligor and may be liable for unreimbursed costs. As of September 30, 2017, amounts pending reimbursements are not material.
Vacation Ownership Development Commitments
With respect to vacation ownership projects under development, we estimate the cost associated with completing the phases of our vacation ownership projects currently in presales and accounted for under the percentage of completion method is approximately $2 million at September 30, 2017. This estimate is based on our current development plans, which remain subject to change, and we expect the phases currently under development will be completed in 2017. Only certain of our vacation ownership projects under development are currently in presales.
Letters of Credit
Additionally, as of September 30, 2017, our letters of credit totaled $14 million and were principally related to our Vacation Ownership sales and financing activities. More specifically, these letters of credit provide alternate assurance on amounts required to be held in escrow which enable our developer entities to access purchaser deposits prior to closings, as well as provide a guarantee of maintenance fees owed by our developer entities during subsidy periods at a particular vacation ownership resort, among other items.
Litigation
On December 5, 2016, individuals and entities who own or owned 107 fractional interests of a total of 372 interests created in the Fifth and Fifty-Fifth Residence Club located within The St. Regis, New York (the “Club”) filed suit against ILG, certain of our subsidiaries, Marriott International Inc. (“Marriott”) and certain of its subsidiaries including Starwood Hotels & Resorts Worldwide LLC (“Starwood”).Starwood. The case is filed as a mass action in federal court in the Southern District of New York, not as a class action. In response to our request to file a motion to dismiss, the plaintiffs filed an amended complaint on March 6, 2017. Plaintiffs principally challenge the sale of less than all interests offered in the fractional offering plan, the amendment of the plan to include additional units, and the rental of unsold fractional interests by the plan’s sponsor, claiming that alleged acts by us and the other defendants breached the relevant agreements and harmed the value of plaintiffs’ fractional interests. The relief sought includes, among other things, compensatory damages, rescission, disgorgement, attorneys’ fees, and pre- and post-judgment interest. We filed a motion to dismiss the amended complaint on April 21, 2017. The court has not yet rendered any decision on the motion.motion and fact discovery is proceeding. We dispute the material allegations in the amended complaint and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
On February 28, 2017, the ownersowners’ association for the Club filed a separate suit against us and certain of our subsidiaries in federal court in the Southern District of New York. On March 13, 2017, before it had served the initial complaint, Plaintiff filed an amended complaint that added Marriott and Starwood as defendants and added additional claims. Plaintiff then filed a second amended complaint on July 14, 2017. The complaint, as amended, asserts claims against the sponsor of the Club, St. Regis Residence Club, New York, Inc., the Club manager, St. Regis New York Management, Inc., and certain affiliated entities, as well as against Marriott and Starwood, for alleged breach of fiduciary duties principally related to sale and rental practices, tortious interference with the management agreement, alleged unjust enrichment, seeks certain declaratory relief in connection with the Starpoints conversion program and the exchange program at the Club, and asserts claims based on alleged anticompetitive conduct by the defendants in connection with Plaintiff’s renewal of the Club management agreement. In addition to the declaratory relief sought, Plaintiff seeks unspecified actual damages, punitive damages, and disgorgement of payments under the management and purchase agreements, as well as related agreements. We filed a motion to dismiss the second amended complaint on September 8, 2017. The court has not yet rendered any decision on the motion. We dispute the material allegations in the second amended complaint and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
4042
Purchase Obligations and Other Commitments
Other items, such as certain purchase commitments and guarantees are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. These funding commitments could potentially require our performance in the event of demands by third parties or contingent events. The following table summarizes these items, on an undiscounted basis, at March 31, 2018 and the future periods in which such obligations are expected to be settled in cash. In addition, the table reflects the timing of principal and interest payments on outstanding borrowings.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Payments Due by Period | |||||||||||||
|
|
|
|
| Up to |
|
|
|
|
|
|
| More than | ||
Contractual Obligations |
| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years | |||||
|
| (Dollars in millions) | |||||||||||||
Debt principal(a) |
| $ | 570 |
| $ | — |
| $ | — |
| $ | 220 |
| $ | 350 |
Debt interest(a) |
|
| 129 |
|
| 29 |
|
| 58 |
|
| 41 |
|
| 1 |
Purchase obligations and other commitments(b) |
|
| 68 |
|
| 37 |
|
| 25 |
|
| 6 |
|
| — |
Operating leases |
|
| 144 |
|
| 20 |
|
| 32 |
|
| 19 |
|
| 73 |
Total contractual obligations |
| $ | 911 |
| $ | 86 |
| $ | 115 |
| $ | 286 |
| $ | 424 |
(a)Debt principal and projected debt interest represent principal and interest to be paid on our senior notes and revolving credit facility based on the balance outstanding as of March 31, 2018, exclusive of debt issuance costs. In addition, also included are certain fees associated with our revolving credit facility based on the unused borrowing capacity and outstanding letters of credit balances, if any, as of March 31, 2018. Interest on the revolving credit facility is calculated using the prevailing rates as of March 31, 2018.
(b)Purchase obligations and other commitments primarily relate to future guaranteed purchases of rental inventory, operational support services, marketing related benefits, membership fulfillment benefits and other commitments.
At March 31, 2018, guarantees, surety bonds and letters of credit totaled $101 million, with the highest annual amount of $54 million occurring in year one. The total also includes maximum exposure under guarantees of $48million which primarily relates to our Exchange and Rental segment’s rental management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the segment’s management activities that are entered into on behalf of the property owners for which either party generally may terminate such leases upon 60 to 90 days prior written notice to the other party.
In addition, certain of our rental management agreements provide that owners receive specified percentages or guaranteed amounts of the rental revenue generated under its management. In these cases, the operating expenses for the rental operations are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages or guaranteed amounts, and our vacation rental business either retain the balance (if any) as its fee or makes up the deficit. Although such deficits are reasonably possible in a few of these agreements, as of March 31, 2018 future amounts are not expected to be material either individually or in the aggregate.
Our operating and purchase obligations primarily relate to future guaranteed purchases of rental inventory, operational support services, marketing related benefits and membership fulfillment benefits. Certain of our vacation rental businesses also enter into agreements, as principal, for services purchased on behalf of property owners for which we are subsequently reimbursed. As such, we are the primary obligor and may be liable for unreimbursed costs. As of March 31, 2018, amounts pending reimbursements are not material.
Letters of Credit
Additionally, as of March 31, 2018, our letters of credit totaled $14 million and were principally related to our Vacation Ownership sales and financing activities. More specifically, these letters of credit provide alternate assurance on amounts required to be held in escrow which enable our developer entities to access purchaser deposits prior to
43
closings, as well as provide a guarantee of maintenance fees owed by our developer entities during subsidy periods at a particular vacation ownership resort, among other items.
Insurance recoveries
As discussed in Notes 6 and 8, during September 2017 we sustained damages at our Westin St. John Resort Villas property as a result of Hurricane Irma. The resort has remained closed while rebuilding activities are in process. The reopening of the resort is currently targeted for January 2019. As of March 31, 2018, we are carrying an $8 million insurance liability as a result of receiving approximately $45 million of insurance proceeds during the quarter. This liability is presented within accrued expenses and other current liabilities within on our condensed consolidated balance sheet. We do not anticipate remaining in a net liability position in future periods as this is not a final claim figure and does not include any claims pertaining to business interruption at this time.
NOTE 22— SUPPLEMENTAL GUARANTOR INFORMATION
The senior notes are guaranteed by ILG and certain other subsidiaries for which 100% of the voting securities are owned directly or indirectly by ILG (collectively, the “Guarantor Subsidiaries”). These guarantees are full and unconditional and joint and several. The guarantees of the Guarantor Subsidiaries are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The indenture governing the senior notes contains covenants that, among other things, limit the ability of Interval Acquisition Corp. (the “Issuer”) and the Guarantor Subsidiaries to pay dividends to us or make distributions, loans or advances to us.
The following tables present consolidating financial information as of September 30, 2017March 31, 2018 and December 31, 20162017 and for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 for ILG on a stand‑alone basis, the Issuer on a stand‑alone basis, the combined Guarantor Subsidiaries of ILG (collectively, the “Guarantor Subsidiaries”), the combined non-guarantor subsidiaries of ILG (collectively, the “Non-Guarantor Subsidiaries”) and ILG on a consolidated basis (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of September 30, 2017 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Balance Sheet as of March 31, 2018 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Current assets |
| $ | 1 |
| $ | 2 |
| $ | 692 |
| $ | 371 |
| $ | - |
| $ | 1,066 |
| $ | 3 |
| $ | 7 |
| $ | 829 |
| $ | 452 |
| $ | — |
| $ | 1,291 |
Property and equipment, net |
|
| 1 |
|
| - |
|
| 452 |
|
| 146 |
|
| - |
|
| 599 |
|
| 1 |
|
| — |
|
| 456 |
|
| 164 |
|
| — |
|
| 621 |
Goodwill and intangible assets, net |
|
| - |
|
| 267 |
|
| 632 |
|
| 109 |
|
| - |
|
| 1,008 |
|
| — |
|
| 267 |
|
| 623 |
|
| 113 |
|
| — |
|
| 1,003 |
Investments in subsidiaries |
|
| 741 |
|
| 1,436 |
|
| 1,073 |
|
| - |
|
| (3,250) |
|
| - |
|
| 870 |
|
| 1,583 |
|
| 1,038 |
|
| — |
|
| (3,491) |
|
| — |
Other assets |
|
| - |
|
| - |
|
| 324 |
|
| 582 |
|
| - |
|
| 906 |
|
| — |
|
| — |
|
| 342 |
|
| 513 |
|
| — |
|
| 855 |
Total assets |
| $ | 743 |
| $ | 1,705 |
| $ | 3,173 |
| $ | 1,208 |
| $ | (3,250) |
| $ | 3,579 |
| $ | 874 |
| $ | 1,857 |
| $ | 3,288 |
| $ | 1,242 |
| $ | (3,491) |
| $ | 3,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 2 |
| $ | 9 |
| $ | 371 |
| $ | 228 |
| $ | - |
| $ | 610 |
| $ | 4 |
| $ | 10 |
| $ | 409 |
| $ | 305 |
| $ | — |
| $ | 728 |
Other long-term liabilities |
|
| - |
|
| - |
|
| 276 |
|
| 539 |
|
| - |
|
| 815 |
|
| — |
|
| — |
|
| 234 |
|
| 111 |
|
| — |
|
| 345 |
Long term debt |
|
| - |
|
| 513 |
|
| - |
|
| - |
|
| - |
|
| 513 | ||||||||||||||||||
Long term debt and securitized debt from VIEs (noncurrent portion) |
|
| — |
|
| 563 |
|
| — |
|
| 395 |
|
| — |
|
| 958 | ||||||||||||||||||
Intercompany liabilities (receivables) / equity |
|
| (871) |
|
| 442 |
|
| 1,089 |
|
| (660) |
|
| - |
|
| - |
|
| (828) |
|
| 414 |
|
| 1,062 |
|
| (648) |
|
| — |
|
| — |
Redeemable noncontrolling interest |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
|
| — |
|
|
|
|
| 1 |
|
|
|
|
| — |
|
| 1 |
ILG stockholders' equity |
|
| 1,612 |
|
| 741 |
|
| 1,436 |
|
| 1,073 |
|
| (3,250) |
|
| 1,612 |
|
| 1,698 |
|
| 870 |
|
| 1,583 |
|
| 1,038 |
|
| (3,491) |
|
| 1,698 |
Noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| 28 |
|
| - |
|
| 28 |
|
| — |
|
|
|
|
| (1) |
|
| 41 |
|
| — |
|
| 40 |
Total liabilities and equity |
| $ | 743 |
| $ | 1,705 |
| $ | 3,173 |
| $ | 1,208 |
| $ | (3,250) |
| $ | 3,579 |
| $ | 874 |
| $ | 1,857 |
| $ | 3,288 |
| $ | 1,242 |
| $ | (3,491) |
| $ | 3,770 |
4144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of December 31, 2016 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Balance Sheet as of December 31, 2017 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Current assets |
| $ | 1 |
| $ | 2 |
| $ | 491 |
| $ | 252 |
| $ | - |
| $ | 746 |
| $ | 1 |
| $ | 3 |
| $ | 790 |
| $ | 406 |
| $ | — |
| $ | 1,200 |
Property and equipment, net |
|
| 1 |
|
| - |
|
| 420 |
|
| 159 |
|
| - |
|
| 580 |
|
| 1 |
|
| — |
|
| 464 |
|
| 151 |
|
| — |
|
| 616 |
Goodwill and intangible assets, net |
|
| - |
|
| 267 |
|
| 647 |
|
| 97 |
|
| - |
|
| 1,011 |
|
| — |
|
| 266 |
|
| 628 |
|
| 110 |
|
| — |
|
| 1,004 |
Investments in subsidiaries |
|
| 619 |
|
| 1,289 |
|
| 390 |
|
| - |
|
| (2,298) |
|
| - |
|
| 824 |
|
| 1,521 |
|
| 1,022 |
|
| — |
|
| (3,367) |
|
| — |
Other assets |
|
| - |
|
| - |
|
| 462 |
|
| 505 |
|
| - |
|
| 967 |
|
| — |
|
| — |
|
| 285 |
|
| 582 |
|
| — |
|
| 867 |
Total assets |
| $ | 621 |
| $ | 1,558 |
| $ | 2,410 |
| $ | 1,013 |
| $ | (2,298) |
| $ | 3,304 |
| $ | 826 |
| $ | 1,790 |
| $ | 3,189 |
| $ | 1,249 |
| $ | (3,367) |
| $ | 3,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 1 |
| $ | 5 |
| $ | 344 |
| $ | 169 |
| $ | - |
| $ | 519 |
| $ | 3 |
| $ | 5 |
| $ | 339 |
| $ | 294 |
| $ | — |
| $ | 641 |
Other long-term liabilities |
|
| - |
|
| - |
|
| 266 |
|
| 26 |
|
| - |
|
| 292 |
|
| — |
|
| — |
|
| 236 |
|
| 102 |
|
| — |
|
| 338 |
Long term debt |
|
| - |
|
| 581 |
|
| (12) |
|
| 330 |
|
| - |
|
| 899 | ||||||||||||||||||
Long term debt and securitized debt from VIEs (noncurrent portion) |
|
| — |
|
| 562 |
|
| — |
|
| 429 |
|
| — |
|
| 991 | ||||||||||||||||||
Intercompany liabilities (receivables) / equity |
|
| (947) |
|
| 353 |
|
| 522 |
|
| 72 |
|
| - |
|
| - |
|
| (856) |
|
| 399 |
|
| 1,093 |
|
| (636) |
|
| — |
|
| — |
Redeemable noncontrolling interest |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
ILG stockholders' equity |
|
| 1,567 |
|
| 619 |
|
| 1,289 |
|
| 390 |
|
| (2,298) |
|
| 1,567 |
|
| 1,679 |
|
| 824 |
|
| 1,521 |
|
| 1,022 |
|
| (3,367) |
|
| 1,679 |
Noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| 26 |
|
| - |
|
| 26 |
|
| — |
|
| — |
|
| (1) |
|
| 38 |
|
| — |
|
| 37 |
Total liabilities and equity |
| $ | 621 |
| $ | 1,558 |
| $ | 2,410 |
| $ | 1,013 |
| $ | (2,298) |
| $ | 3,304 |
| $ | 826 |
| $ | 1,790 |
| $ | 3,189 |
| $ | 1,249 |
| $ | (3,367) |
| $ | 3,687 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Three Months Ended September 30, 2017 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Statement of Income for the Three Months Ended March 31, 2018 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Revenue |
| $ | - |
| $ | - |
| $ | 371 |
| $ | 75 |
| $ | - |
| $ | 446 |
| $ | — |
| $ | — |
| $ | 414 |
| $ | 68 |
| $ | — |
| $ | 482 |
Operating expenses |
|
| (2) |
|
| - |
|
| (332) |
|
| (58) |
|
| - |
|
| (392) |
|
| (2) |
|
| — |
|
| (368) |
|
| (46) |
|
| — |
|
| (416) |
Interest income (expense), net |
|
| - |
|
| (7) |
|
| 1 |
|
| (1) |
|
| - |
|
| (7) |
|
| — |
|
| (7) |
|
| 1 |
|
| (1) |
|
| — |
|
| (7) |
Other income (expense), net |
|
| 30 |
|
| 32 |
|
| 23 |
|
| (31) |
|
| (55) |
|
| (1) |
|
| 44 |
|
| 49 |
|
| 15 |
|
| 8 |
|
| (111) |
|
| 5 |
Income tax benefit (provision) |
|
| 1 |
|
| 2 |
|
| (27) |
|
| 7 |
|
| - |
|
| (17) |
|
| 1 |
|
| 2 |
|
| (14) |
|
| (9) |
|
| — |
|
| (20) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
Net income |
|
| 29 |
|
| 27 |
|
| 37 |
|
| (8) |
|
| (55) |
|
| 30 | ||||||||||||||||||
Net loss (income) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| (1) |
|
| - |
|
|
|
|
| (1) | ||||||||||||||||||
Net income attributable to common stockholders |
| $ | 29 |
| $ | 27 |
| $ | 36 |
| $ | (8) |
| $ | (55) |
| $ | 29 | ||||||||||||||||||
Net income (loss) |
|
| 43 |
|
| 44 |
|
| 49 |
|
| 20 |
|
| (111) |
|
| 45 | ||||||||||||||||||
Net income (loss) attributable to noncontrolling interests |
|
| — |
|
| — |
|
| — |
|
| (2) |
|
| — |
|
| (2) | ||||||||||||||||||
Net income (loss) attributable to common stockholders |
| $ | 43 |
| $ | 44 |
| $ | 49 |
| $ | 18 |
| $ | (111) |
| $ | 43 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Three Months Ended September 30, 2016 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Statement of Income for the Three Months Ended March 31, 2017 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||||||||||||||||||||
Revenue |
| $ | - |
| $ | - |
| $ | 350 |
| $ | 68 |
| $ | - |
| $ | 418 |
| $ | — |
| $ | — |
| $ | 373 |
| $ | 71 |
| $ | — |
| $ | 444 |
Operating expenses |
|
| (2) |
|
| - |
|
| (310) |
|
| (59) |
|
| - |
|
| (371) |
|
| (2) |
|
| — |
|
| (327) |
|
| (52) |
|
| — |
|
| (381) |
Interest income (expense), net |
|
| - |
|
| (7) |
|
| 2 |
|
| (1) |
|
| - |
|
| (6) |
|
| — |
|
| (6) |
|
| 2 |
|
| (1) |
|
| — |
|
| (5) |
Other income (expense), net |
|
| 26 |
|
| 42 |
|
| 4 |
|
| (4) |
|
| (81) |
|
| (13) |
|
| 45 |
|
| 49 |
|
| 16 |
|
| 10 |
|
| (110) |
|
| 10 |
Income tax benefit (provision) |
|
| 8 |
|
| - |
|
| (6) |
|
| - |
|
| - |
|
| 2 |
|
| 1 |
|
| 2 |
|
| (17) |
|
| (11) |
|
| — |
|
| (25) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 2 |
|
| - |
|
| - |
|
| 2 |
|
| — |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
| 2 |
Net income |
|
| 32 |
|
| 35 |
|
| 42 |
|
| 4 |
|
| (81) |
|
| 32 | ||||||||||||||||||
Net loss (income) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - | ||||||||||||||||||
Net income attributable to common stockholders |
| $ | 32 |
| $ | 35 |
| $ | 42 |
| $ | 4 |
| $ | (81) |
| $ | 32 | ||||||||||||||||||
Net income (loss) |
|
| 44 |
|
| 45 |
|
| 49 |
|
| 17 |
|
| (110) |
|
| 45 | ||||||||||||||||||
Net loss attributable to noncontrolling interests |
|
| — |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| (1) | ||||||||||||||||||
Net income (loss) attributable to common stockholders |
| $ | 44 |
| $ | 45 |
| $ | 49 |
| $ | 16 |
| $ | (110) |
| $ | 44 |
4245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Nine Months Ended September 30, 2017 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||
Revenue |
| $ | - |
| $ | - |
| $ | 1,123 |
| $ | 225 |
| $ | - |
| $ | 1,348 |
Operating expenses |
|
| (5) |
|
| (1) |
|
| (1,022) |
|
| (155) |
|
| - |
|
| (1,183) |
Interest income (expense), net |
|
| - |
|
| (20) |
|
| 6 |
|
| (5) |
|
| - |
|
| (19) |
Other income (expense), net (1) |
|
| 105 |
|
| 116 |
|
| 51 |
|
| (16) |
|
| (248) |
|
| 8 |
Income tax benefit (provision) |
|
| 1 |
|
| 8 |
|
| (46) |
|
| (18) |
|
| - |
|
| (55) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 4 |
|
| - |
|
| - |
|
| 4 |
Net income |
|
| 101 |
|
| 103 |
|
| 116 |
|
| 31 |
|
| (248) |
|
| 103 |
Net loss (income) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| (2) |
|
| - |
|
| (2) |
Net income attributable to common stockholders |
| $ | 101 |
| $ | 103 |
| $ | 116 |
| $ | 29 |
| $ | (248) |
| $ | 101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Three Months Ended March 31, 2018 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| ILG Consolidated | |||||
Cash flows provided by operating activities |
| $ | — |
| $ | 1 |
| $ | 64 |
| $ | 87 |
| $ | 152 |
Cash flows used in investing activities |
|
| — |
|
| — |
|
| (13) |
|
| (3) |
|
| (16) |
Cash flows provided by (used in) financing activities |
|
| 2 |
|
| 4 |
|
| (17) |
|
| (64) |
|
| (75) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| — |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
Cash, cash equivalents and restricted cash at beginning of period |
|
| — |
|
| 2 |
|
| 82 |
|
| 268 |
|
| 352 |
Cash, cash equivalents and restricted cash at end of period |
| $ | 2 |
| $ | 7 |
| $ | 116 |
| $ | 289 |
| $ | 414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Nine Months Ended September 30, 2016 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| Total Eliminations |
| ILG Consolidated | ||||||
Revenue |
| $ | - |
| $ | - |
| $ | 762 |
| $ | 139 |
| $ | - |
| $ | 901 |
Operating expenses |
|
| (4) |
|
| - |
|
| (669) |
|
| (115) |
|
| - |
|
| (788) |
Interest income (expense), net |
|
| - |
|
| (20) |
|
| 4 |
|
| (1) |
|
| - |
|
| (17) |
Other income, net (1) |
|
| 271 |
|
| 100 |
|
| 15 |
|
| (2) |
|
| (198) |
|
| 186 |
Income tax benefit (provision) |
|
| (29) |
|
| 3 |
|
| (17) |
|
| (3) |
|
| - |
|
| (46) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 4 |
|
| - |
|
| - |
|
| 4 |
Net income |
|
| 238 |
|
| 83 |
|
| 99 |
|
| 18 |
|
| (198) |
|
| 240 |
Net loss (income) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| 1 |
|
| (3) |
|
| - |
|
| (2) |
Net income attributable to common stockholders |
| $ | 238 |
| $ | 83 |
| $ | 100 |
| $ | 15 |
| $ | (198) |
| $ | 238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Three Months Ended March 31, 2017 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| ILG Consolidated | |||||
Cash flows provided by (used in) operating activities |
| $ | — |
| $ | 1 |
| $ | (8) |
| $ | 65 |
| $ | 58 |
Cash flows used in investing activities |
|
| — |
|
| — |
|
| (17) |
|
| (5) |
|
| (22) |
Cash flows provided by (used in) financing activities |
|
| — |
|
| (1) |
|
| 25 |
|
| (62) |
|
| (38) |
Effect of exchange rate changes on cash, cash equivalents and restricted cash |
|
| — |
|
| — |
|
| — | �� |
| (1) |
|
| (1) |
Cash, cash equivalents and restricted cash at beginning of period |
|
| — |
|
| 1 |
|
| 99 |
|
| 144 |
|
| 244 |
Cash, cash equivalents and restricted cash at end of period |
| $ | — |
| $ | 1 |
| $ | 99 |
| $ | 141 |
| $ | 241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Nine Months Ended September 30, 2017 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| ILG Consolidated | |||||
Cash flows provided by (used in) operating activities |
| $ | (1) |
| $ | (6) |
| $ | 169 |
| $ | (4) |
| $ | 158 |
Cash flows used in investing activities |
|
| - |
|
| - |
|
| (62) |
|
| (17) |
|
| (79) |
Cash flows provided by (used in) financing activities |
|
| 1 |
|
| 6 |
|
| (86) |
|
| 81 |
|
| 2 |
Effect of exchange rate changes on cash and cash equivalents |
|
| - |
|
| - |
|
| - |
|
| 4 |
|
| 4 |
Cash and cash equivalents at beginning of period |
|
| - |
|
| - |
|
| 38 |
|
| 88 |
|
| 126 |
Cash and cash equivalents at end of period |
| $ | - |
| $ | - |
| $ | 59 |
| $ | 152 |
| $ | 211 |
NOTE 23— SUBSEQUENT EVENTS
On April 30, 2018, we entered into an Agreement and Plan of Merger (“Merger Agreement”), with Marriott Vacations Worldwide Corporation (“Marriott Vacations”), Ignite Holdco, Inc. and Ignite Holdco Subsidiary, Inc. (two of our wholly owned subsidiaries), and Volt Merger Sub, Inc. and Volt Merger Sub, LLC (two wholly owned subsidiaries of Marriott Vacations), pursuant to which Marriott Vacations will acquire ILG in a series of transactions (the “Combination Transactions”) and ILG stockholders will receive $14.75 in cash (without interest) and 0.165 shares of common stock of Marriott Vacations for each share of ILG common stock held by such stockholder. This will result in ILG stockholders owning approximately 43% of Marriott Vacations following the merger transactions.
Consummation of the Combination Transactions is subject to customary conditions, including customary conditions relating to:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Nine Months Ended September 30, 2016 |
| ILG |
| Interval Acquisition Corp. |
| Guarantor Subsidiaries |
| Non-Guarantor Subsidiaries |
| ILG Consolidated | |||||
Cash flows provided by (used in) operating activities |
| $ | (33) |
| $ | (11) |
| $ | 470 |
| $ | (352) |
| $ | 74 |
Cash flows used in investing activities |
|
| 1,221 |
|
| - |
|
| (1,350) |
|
| 1 |
|
| (128) |
Cash flows provided by (used in) financing activities |
|
| (1,188) |
|
| 11 |
|
| 920 |
|
| 378 |
|
| 121 |
Effect of exchange rate changes on cash and cash equivalents |
|
| - |
|
| - |
|
| - |
|
| (2) |
|
| (2) |
Cash and cash equivalents at beginning of period |
|
| - |
|
| - |
|
| 14 |
|
| 79 |
|
| 93 |
Cash and cash equivalents at end of period |
| $ | - |
| $ | - |
| $ | 54 |
| $ | 104 |
| $ | 158 |
· | the approval of the merger by holders of a majority of the outstanding shares of ILG common stock entitled to vote thereon at a duly convened meeting, |
· | the approval of the issuance of the stock consideration by Marriott Vacations by a majority of the votes cast at a duly convened meeting of the stockholders of Marriott Vacations, and |
· | the expiration or early termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and receipt of other required regulatory approvals. |
(1)Includes equityThe obligation of each party to consummate the merger is also conditioned upon the other party’s representations and warranties being true and correct (subject to certain materiality exceptions) and the other party having performed in net incomeall material respects its obligations under the Merger Agreement.
The Merger Agreement contains customary representations and warranties of wholly-owned subsidiariesILG and gain on bargain purchase.Marriott Vacations. Additionally, the Merger Agreement contains customary pre-closing covenants, including covenants requiring each party (1) to use reasonable best efforts to cause the consummation of the transactions contemplated by the Merger Agreement, (2) to conduct its business in the ordinary course and (3) to refrain from taking certain actions prior to the consummation of the transactions without the other party’s consent. The Merger Agreement also contains “no shop” provisions that
4346
restrict ILG’s and Marriott Vacations’ ability to solicit or initiate discussions or negotiations with third parties regarding other proposals to acquire ILG or Marriott Vacations, as applicable, and ILG and Marriott Vacations have each agreed to certain terms relating to their ability to respond to such proposals. In addition, the Merger Agreement requires that, subject to certain exceptions, the board of directors of ILG recommend that ILG’s stockholders approve the mergers and that the board of directors of Marriott Vacations recommend that Marriott Vacations’ stockholders approve the issuance of the stock consideration.
Prior to obtaining ILG’s stockholder approval, our board of directors may, among other things, (1) withhold, withdraw, modify or qualify its recommendation of the Combination Transactions or approve, endorse or recommend any Ignite Alternative Transaction (as defined in the Merger Agreement) or (2) terminate the Merger Agreement to enter into an agreement providing for an Ignite Superior Proposal (as defined in the Merger Agreement), subject to complying with notice and other specified conditions, including giving Marriott Vacations the opportunity to propose revisions to the terms of the transactions contemplated by the Merger Agreement during a period following notice, and the payment of the Termination Fee (as defined below). Marriott Vacations has reciprocal rights and obligations under the Merger Agreement.
The Merger Agreement contains specified termination rights for the parties and provides that, in connection with the termination of the Merger Agreement under specified circumstances, including termination of the Merger Agreement by the Company or Marriott Vacations to enter into a definitive agreement for an acquisition proposal that constitutes an Ignite Qualifying Transaction or a Volt Qualifying Transaction, as applicable (each as defined in the Merger Agreement), the Company or Marriott Vacations, as applicable, will be required to pay a termination fee equal to $146 million (such amount, the “Termination Fee”).
The foregoing summary description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement.
In connection with the transactions contemplated by the Merger Agreement, Qurate Retail, Inc. (formerly Liberty Interactive Corp.) and one of its wholly owned subsidiaries entered into a voting and support with ILG and Marriott Vacations. Subject to certain exceptions set forth therein, Qurate has agreed to vote all of its shares of ILG common stock in favor of the adoption of the Merger Agreement and the transactions contemplated thereby and has also agreed to vote its shares of ILG common stock against any Competing Proposal (as defined in the Voting and Support Agreement) and any actions that are intended to prevent or delay the consummation of the Combination Transactions.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward‑Looking Information
This quarterly report on Form 10‑Q contains “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” among others, generally identify forward‑looking statements. These forward‑looking statements include, among others, statements relating to: our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward‑looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Actual results could differ materially from those contained in the forward‑looking statements included in this report for a variety of reasons, including, among (1) adverse trends in economic conditions generally or in the vacation ownership, vacation rental and travel industries, or adverse events or trends in key vacation destinations, (2) lack of available financing for, or insolvency or consolidation of developers, including availability of receivables financing for our business, (3) adverse changes to, or interruptions in, relationships with third parties, (4) our ability to compete effectively and successfully and to add new products and services, (5) our ability to market VOIs successfully and efficiently, (6) our ability to source sufficient inventory to support VOI sales and risks related to development of inventory in accordance with applicable brand standards, (7) the occurrence of a termination event under the master license agreement with Starwood or Hyatt, (8) actions of Starwood, Hyatt or any successor that affect the reputation of the licensed marks, the offerings of or access to these brands and programs, (9) decreased demand from prospective purchasers of vacation interests, (10) travel related health concerns, (11) significant increase in defaults on our vacation ownership mortgage receivables; (12) the restrictive covenants in our revolving credit facility and indenture and our ability to refinance our debt on acceptable terms; (13) our ability to successfully manage and integrate acquisitions, including Vistana, (14) impairment of ILG’s assets or other adverse changes to estimates and assumptions underlying our financial results, (15) our ability to expand successfully in international markets and manage risks specific to international operations (16) fluctuations in currency exchange rates, (17) the ability of managed homeowners associations to collect sufficient maintenance fees, (18) business interruptions in connection with technology systems, (19) regulatory changes and (20) timing and collection of insurance proceeds related to hurricane losses. Certain of these and other risks and uncertainties are discussed in our filings with the SEC, including in Item 1A “Risk Factors” of this report. In light of these risks and uncertainties, the forward looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward looking statements, which only reflect the views of our management as of the date of this report. Except as required by applicable law, we do not undertake to update these forward‑looking statements.
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GENERAL
The following Management Discussion and Analysis provides a narrative of the results of operations and financial condition of ILG for the three and nine months ended September 30, 2017.March 31, 2018. This section should be read in conjunction with the condensed consolidated financial statements and accompanying notes included in this report, as well as our 20162017 Annual Report on Form 10‑K, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). This discussion includes the following sections:
· | Management Overview |
· | Results of Operations |
· | Financial Position, Liquidity and Capital Resources |
· | Critical Accounting Policies and Estimates |
· | ILG’s Principles of Financial Reporting |
· | Reconciliations of Non‑GAAP Measures |
MANAGEMENT OVERVIEW
General Description of our Business
ILG is a leading provider of professionally delivered vacation experiences and the exclusive global licensee for the Hyatt®, Sheraton® and Westin® brands in vacation ownership. We operate in two segments: Vacation Ownership (VO) and Exchange and Rental. The Vacation Ownership operating segment consists of the VOI sales and financing business of Vistana and HVO as well as the management related business of Vistana, HVO, VRI, TPI, and VRI Europe. The Exchange and Rental operating segment consists of Interval, the Vistana Signature Network, the Hyatt Residence Club, the TPI exchange business, and Aqua-Aston Holdings, Inc.
Vacation Ownership engages in the sales, marketing, financing, and development of vacation ownership interests; the management of vacation ownership resorts; and related services to owners and associations. Exchange and Rental offers access to vacation accommodations and other travel‑related transactions and services to members of our programs and other leisure travelers, by providing vacation exchange services and vacation rentals, working with resort developers, HOAs and operating vacation rental properties.
Vacation Ownership Services
Revenue from the Vacation Ownership segment is derived principally from sales of VOIs by Vistana and HVO, interest income earned for financing these sales, fees for vacation ownership resort and homeowners’ association management services and rental and ancillary revenues, including from hotels owned by Vistana and HVO.
Vistana and HVO sell, market, finance, develop and, in the case of HVO, license, the brand for vacation ownership products. Purchasers are generally automatically enrolled in either the Vistana Signature Network or the Hyatt Residence Club as well as the Interval Network. In addition, HVO receives fees for sales and marketing, brand licensing and other services provided to properties where the developer is not controlled by us.
Sales of VOIs may be made for cash or we may provide financing to qualified customers. These loans generally bear interest at a fixed rate, have a term of up to 15 years and require a minimum 10% down payment. The typical financing agreement provides for monthly payments of principal and interest, with the principal balance of the loan fully amortizing over the term of the related vacation ownership note receivable. Our financing propensity for the three months and nine months ended September 30, 2017March 31, 2018 was approximately 72% and 70%, respectively.65%. The weighted average FICO score of loans originated over the last twelve months as of September 30, 2017March 31, 2018 was 738.737. Historical default rates, which represent the trailing twelve months of
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rates, which represent the trailing twelve months of defaults as a percentage of each period’s beginning gross vacation ownership notes receivable balance, were 5.0%4.7% as of September 30, 2017March 31, 2018 and 4.4%4.5% as of December 31, 2016.2017.
We have exclusive global master license agreements with Starwood Hotels & Resorts Worldwide, LLC (Starwood) for use of the Sheraton® and Westin® brands in vacation ownership and with Hyatt Hotels Corporation for the use of the Hyatt® brand in vacation ownership.
We provide management services to over 200 vacation ownership properties and/or their associations through Vistana, HVO, TPI, VRI and VRI Europe. Vistana and HVO provide management services for their respective branded luxury and upper upscale resorts. TPI and VRI provide property management, homeowners’ association management and related services to timeshare resorts in the United States, Canada and Mexico. VRI Europe manages vacation ownership resorts in Spain and the Canary Islands, the United Kingdom, France and Portugal. Our management services are provided pursuant to agreements with terms generally ranging from one to ten years (several indefinite-lived contracts in Europe), many of which are automatically renewable. Management fees are negotiated amounts for management and other specified services, and at times are based on a cost-plus arrangement.
Exchange & Rental Services
Our Exchange and Rental segment offers owners, members and guests access to world-class destinations and an array of benefits and services. These are provided through vacation exchange within the Interval International network (the “Interval Network”), the Vistana Signature Network, the Hyatt Residence Club and TPI, as well as vacation rentals through these businesses and Aqua-Aston.
The Exchange and Rental segment earns most of its revenue from (i) fees paid for membership in the Interval Network, the Vistana Signature Network and the Hyatt Residence Club and (ii) Interval Network, Vistana Signature Network and Hyatt Residence Club transactional and service fees paid primarily for exchanges, Getaway rentals, reservation servicing, and related transactions collectively referred to as “transaction revenue.” Revenue is also derived from club rentals, rental management and other related activities.
Interval, which operates the Interval Network, has been a leader in the vacation exchange services industry since its founding in 1976. As of September 30, 2017,March 31, 2018, this quality global vacation ownership membership exchange network included Vistana Signature Network and Hyatt Residence Club resorts and owners among its large and diversified base of participating resorts consisting of more than 3,000 resorts located in over 80 countries and approximately 1.8 million members.
Interval typically enters into exclusive multi-year contracts with developers of vacation ownership resorts, pursuant to which the resort developers agree to enroll all purchasers of vacation interests at the applicable resort as members of the Interval exchange program. Members may also enroll directly, for instance, when they purchase a VOI through resale or HOA affiliation at a resort that participates in the Interval Network. In return, Interval provides enrolled purchasers with the ability to exchange their VOI occupancy rights (whether denominated in weeks or points) for comparable, alternative accommodations at another resort and/or occupancy period, or for another vacation experience.
Both the Vistana Signature Network and the Hyatt Residence Club provide enhanced flexibility for owners to utilize their VOIs within the applicable network. In exchange for these services, we earn club and transaction fees. The Vistana Signature Network currently encompasses owners at 21 resorts, while the Hyatt Residence Club has 16 resorts. We also operate additional exchange programs including TPI’s exchange business.
All of these businesses earn revenue from rentals of inventory not being used for exchange and, in the case of Interval, additional third party accommodations utilized for Getaways. Vistana Signature Network and Hyatt Residence
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Club rentals are transacted mainly to monetize inventory to provide exchanges through hotel loyalty programs. In addition, Interval offers sales, marketing and operational support, consulting and back-office services, including reservation servicing, to certain resort developers participating in the Interval Network, upon their request and for additional consideration.
This segment also provides vacation rental through Aqua‑Aston as part of a comprehensive package of rental, marketing and management services offered to vacation property owners, primarily of Hawaiian properties. Revenue from our vacation rental business is derived principally from fees for rental services and related management of hotels, condominium resorts and homeowners’ associations. Agreements with owners at many of the vacation rental managed hotel and condominium resorts provide that owners receive either specified percentages of the revenue generated under our management or, in limited instances, guaranteed dollar amounts. In these cases, the operating expenses for the rental operation are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages or guaranteed amounts, and our vacation rental business either retains the balance (if any) as its fee or makes up the deficit. In other instances, fees for rental services generally consist of commissions earned on rentals. Management fees consist of a base management fee and, in some instances, an incentive management fee which is generally a percentage of operating profits or improvement in operating profits. Service fee revenue is based on the services provided to owners including reservations, sales and marketing, property accounting and information technology services either internally or through third party providers.
International Revenue
International revenue increaseddecreased by 9%17% to $70$58 million in the three months ended September 30, 2017 and by 54% to $217 million in the nine months ended September 30, 2017March 31, 2018 compared to the same period in 2016,2017, principally due to including Vistana and its Mexican and Caribbean operations fordriven by the year-to-date period andclosure of The Westin St. John Resort Villas in the launchU.S. Virgin Islands as a result of our Westin Aventuras club productHurricane Irma in June ofSeptember 2017. As a percentage of our total revenue, international revenue remained consistent atwas 12% for the three months ended March 31, 2018 and 16% for the three months ended September 30, 2017 when compared to the same period in 2016, and remained consistent in the nine months ended September 30, 2017, at 16%, when compared to the same period in 2016.March 31, 2017.
Other Factors Affecting Results
On May 11, 2016, we acquired the vacation ownership business of Starwood Hotels & Resorts Worldwide, or Starwood, known as Vistana. The results of operations of this business are included in our consolidated results following the acquisition date within both our Vacation Ownership and Exchange and Rental segments. Consequently, this acquisition will affect the year-over-year comparability of our results of operations for the year ended December 31, 2017 with respect to comparisons against prior year results which include pre-acquisition time periods. In September 2016, Starwood was acquired by Marriott International, Inc.
In September 2017, Hurricanes Irma and Maria affected several Vistana and HVO resorts and sales centers, as well as nearly 300 properties within the Interval Network or managed by VRI or Aqua-Aston Hospitality. In particular, resorts in Florida, the U.S. Virgin Islands, St. Maarten, and Puerto Rico were in the path of these storms. Many of the resorts were only affected for a short period; however, The Westin St. John Resort Villas in the U.S. Virgin Islands and Hyatt Residence Club Dorado, Hacienda del Mar, in Puerto Rico remain closed, as do many Interval Network properties on the hardest-hit islands. Three Hyatt Residence Club resorts andOther 2017 storms also impacted our HVO sales center located in Key West were closed for several weeks but have since re-opened in October. With that said, overalloperations to a lesser extent, such as Tropical Storm Lidia which affected Los Cabos.
Overall these storms did not have a material impact on our financial condition given the recoverability of property damage from expected insurance proceeds.
See Note 21 accompanying our condensed consolidated financial statements for additional information pertaining to expected and received insurance proceeds.
We estimate the impact of these storms in the third quarter had the following adverse effects on our results (using a 36% effective tax rate):first quarter 2018 results:
· | Consolidated revenue - |
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· | Consolidated timeshare contract sales - |
· | Net income attributable to common stockholders - |
· | Income tax effect of $2 million using the applicable projected annual effective tax rate |
· | Adjusted EBITDA - |
· | Adjusted net income - |
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Vacation Ownership
The Vistana acquisition has increased our focus on salesSales and financing of VOIs which drivesdrive a number of recurring fee-for-service revenues such as management fees and the club revenues discussed further below. Effective leadrevenues. Lead generation is a key driver of both contract sales and volume per guest. Costs for new purchasers are generally higher than those for upgrading or selling additional VOIs to existing owners, however, sales to new owners are important for future revenue streams.
In addition, changes to prevailing interest rates may affect our financing results to the extent we adjust the interest rate we charge or pay a higher rate for receivables financing transactions or other debt. The rentals in this segment are sourced from developer-owned inventory, as well as revenue from the hotels included in the Vistana and HVO businesses. These operations are sensitive to the same factors as the club rentals described further below.
For the United States based businesses, our management fees are paid by the HOAs and funded from the annual maintenance fees paid by the individual owners to the association. Most of VRI Europe revenue is based on a different model. Typically, VRI Europe charges vacation owners directly an annual fee intended to cover property management, all resort operating expenses and a management profit. Consequently, VRI Europe’s business model normally operates at a lower gross margin than the other management businesses, when excluding cost reimbursement revenue.
Vistana, HVO, TPI and VRI also offer vacation rental services to HOAs and, in some cases, to individual timeshare owners. Vistana and HVO provide management services to HOAs and resorts that participate in their systems. VRI Europe manages resorts developed by CLC World Resorts, our joint venture partner in VRI Europe, as well as independent homeowners’ associations.
Exchange & Rental
The vacation exchange business has evolved with the growth of developer proprietary exchange networks, such as the Marriott Destination Club, THE Club by Diamond Resorts, the Hilton Grand Vacation Club, the Vistana Signature Network and the Hyatt Residence Club. The external exchange networks, such as the Interval Network, still provide a larger array of choices for members of the proprietary networks. However, with the consolidation among developers over the last several years, external exchange networks have been challenged to grow as a smaller number of developers has focused a higher percentage of their sales than historically, on existing owners instead of new buyers.buyers than they have historically. During this period, ILG has broadened its exchange platform to include both external exchange networks and proprietary developer networks. Additionally, ILG has put a greater focus on relationships with and increased marketing to HOAs and resellers in order to augment developer enrollments.
Our 20172018 results continue to be negatively affected by a shift in the percentage mix of the Interval Network membership base from traditional and direct renewal members to corporate members. Our corporate developer accounts enroll and renew their entire active owner base which positively impacts our retention rate; however, these members tend to have a lower propensity to transact with us as corporate developers often operate their own proprietary exchange programs. MembershipAs of March 31, 2018, the membership mix as of September 30, 2017 included 54%was 56% traditional and 46%44% corporate members, compared to 57%55% and 43%45%, respectively, as of September 30, 2016.March 31, 2017.
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An increasingly important part of the value proposition we provide to our members consists of rentals. In the Interval Network, Getaways provide additional discounted vacation opportunities for members without the need to exchange their VOIs, while our proprietary clubs rent inventory in order to provide exchange opportunities to branded hotels through the SPG® and World of Hyatt® program, as applicable. These rentals and our Aqua-Aston business are sensitive to general economic conditions, inventory supply and pricing in the applicable markets.
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On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "Tax Reform Act"). For further discussion related to the impact of the Tax Reform Act please see Note 19 accompanying our condensed consolidated financial statements.
Outlook
We expect additional consolidation within the vacation ownership industry leading to increased competition in our businesses. This leads to challenges for our external exchange business that relies on new buyers for additional members. Through the growth of our proprietary clubs and our engagement with HOAs, we plan to increase customer engagement and generate new members.
Our vacation ownership sales and financing businesses are positioned to grow through development of additional phases at existing resorts, converting properties to vacation ownership, adding resorts in attractive markets and expanding our sales distribution capabilities. In April 2017,During the first quarter of 2018, we opened Thephases at the (i) Westin Los Cabos Resort Villas &and Spa, and The Westin Nanea Ocean Villas, while in September 2017 we opened an additional building at TheCancun, (ii) Westin Desert Willow.Willow Villas, Palm Desert, and (iii) Hyatt Residence Club San Antonio, Wild Oak Ranch. For the remainder of 2017 and into early 2018, we expect to open additional phases at the following resorts:
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our Hyatt Residence Club Bonita Springs, Coconut Plantation resort.
Additionally, we opened sales centers in the second quarter of 2017 in Maui, Los Cabos, Key West and Bonita Springs. AsWe expect the volume at these sales centers to continue to ramp up throughout 2018. With that said, as we expand our sales distribution, we have faced competition for talent.
Hurricane related impactsimpact
As discussed in the Other Factors Affecting Results section above, certain of our properties were impacted by Hurricanes Irma and Maria in September 2017, in particular TheOur Westin St. John in the U.S. Virgin Islands. We expect this resort and sales center togallery in St. John and our Hyatt Residence Club resort in Puerto Rico will remain closed forthroughout 2018. Additionally, approximately 50 Interval affiliated resorts were still closed as of March 31, 2018, most of which are located in the foreseeable future as repairsheavily damaged islands of St. Maarten and reconstruction work continue.
Aside from thePuerto Rico. Therefore, we expect a continuing impact to our St. John resort, we expect additional impacts resultingresults in 2018.
On December 22, 2017, the President of the United States signed into law the Tax Reform Act, which lowered the federal corporate tax rate from these weather events35% to carry into the fourth quarter of 2017. Our exchange business has been adversely affected from the impact suffered by affiliated resorts21% effective in the path of these storms. This has resulted in a loss of inventory, for an extended period of time in some cases, which would otherwise be available for exchanges2018 and Getaways. There may also be an unfavorable impact to new member flow as developers at certain affected locations work towards re-opening resorts or re-establishing normal operations, in addition to a possible impact on membership renewals as members in affected locations recover.
With regards tomade numerous other impacts totax law changes. For further discussion please see Note 19 accompanying our vacation ownership business, apart from The Westin St. John, our HVO resorts in Key West and the associated sales center remained closed for most of October. Some softness in that market is expected as tourism begins to return to the Florida Keys. A relatively similar impact from a tour flow perspective is expected at our Hyatt Coconut Plantation resort in Bonita Springs, Florida as the operations there normalize.
We expect our business interruption insurance will ultimately offset some of these adverse impacts; however, the collection and recognition of these insurance proceeds is unlikely to occur in the current year.condensed consolidated financial statements.
4953
RESULTS OF OPERATIONS
Operating Statistics
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, | ||||||||||
Including Vistana only since the May 11, 2016 acquisition: |
| 2017 |
| % Change |
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| 2016 |
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| 2017 |
| % Change |
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| 2016 |
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Vacation Ownership |
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Total timeshare contract sales (in millions)(1) | $ | 130 |
| 6% |
| $ | 123 |
| $ | 404 |
| 81% |
| $ | 223 |
Consolidated timeshare contract sales (in millions)(2) | $ | 117 |
| 9% |
| $ | 107 |
| $ | 356 |
| 105% |
| $ | 174 |
Average transaction price(3) | $ | 16,132 |
| 3% |
| $ | 15,736 |
| $ | 17,008 |
| 7% |
| $ | 15,914 |
Volume per guest(4) | $ | 2,788 |
| (1)% |
| $ | 2,804 |
| $ | 2,960 |
| 9% |
| $ | 2,722 |
Tour flow(5) |
| 41,831 |
| 9% |
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| 38,253 |
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| 120,296 |
| 89% |
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| 63,781 |
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Exchange and Rental |
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Total active members at end of period (000's) (6) |
| 1,814 |
| (1)% |
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| 1,828 |
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| 1,814 |
| (1)% |
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| 1,828 |
Average revenue per member (7) | $ | 46.47 |
| 0% |
| $ | 46.35 |
| $ | 145.73 |
| 2% |
| $ | 142.51 |
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Including Vistana as if acquired January 1, 2016: |
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Vacation Ownership |
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Total timeshare contract sales (in millions)(1) | $ | 130 |
| 6% |
| $ | 123 |
| $ | 404 |
| 8% |
| $ | 374 |
Consolidated timeshare contract sales (in millions)(2) | $ | 117 |
| 9% |
| $ | 107 |
| $ | 356 |
| 11% |
| $ | 321 |
Average transaction price(3) | $ | 16,132 |
| 3% |
| $ | 15,736 |
| $ | 17,008 |
| 2% |
| $ | 16,682 |
Volume per guest(4) | $ | 2,788 |
| (1)% |
| $ | 2,804 |
| $ | 2,960 |
| 0% |
| $ | 2,970 |
Tour flow(5) |
| 41,831 |
| 9% |
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| 38,253 |
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| 120,296 |
| 11% |
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| 108,183 |
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Exchange and Rental |
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Average revenue per member (7) | $ | 46.47 |
| 0% |
| $ | 46.35 |
| $ | 145.73 |
| (2)% |
| $ | 148.22 |
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| 2018 |
| % Change |
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Vacation Ownership |
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Consolidated timeshare contract sales (in millions) (1) | $ | 133 |
| 9% |
| $ | 122 |
Volume per guest (2) | $ | 3,230 |
| (1)% |
| $ | 3,267 |
Tour flow (3) |
| 40,760 |
| 11% |
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| 36,776 |
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Exchange and Rental |
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Total active members at end of period (000's) (4) |
| 1,822 |
| (0)% |
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| 1,829 |
Average revenue per member (5) | $ | 53.17 |
| 2% |
| $ | 52.12 |
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(1) | Represents total timeshare interests sold at consolidated |
(2) |
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| Represents consolidated timeshare contract sales divided by tour flow during the period. |
| Represents the number of sales presentations given at sales centers |
| Represents active members of the Interval Network as of the end of the period. Active members are members in good standing that have paid membership fees and any other applicable charges in full as of the end of the period or are within the allowed grace period. All Hyatt Residence Club members and Vistana Signature Network members are also members of the Interval Network. |
| Represents membership fee revenue, transaction revenue and ancillary member revenue for the Interval Network, Hyatt Residence Club and Vistana Signature Network for the applicable period divided by the monthly weighted average number of active members during the applicable |
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For the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016.March 31, 2017.
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| Three Months Ended September 30, |
| Three Months Ended March 31, | ||||||||||||
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| 2017 |
| % Change |
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| 2018 |
| % Change |
| 2017 | ||||
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Vacation Ownership |
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Resort operations revenue |
| $ | 52 |
| (2)% |
| $ | 53 |
| $ | 63 |
| 9% |
| $ | 58 |
Management fee and other revenue |
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| 35 |
| 9% |
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| 32 |
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| 57 |
| 90% |
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| 30 |
Sales of vacation ownership products, net |
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| 118 |
| 23% |
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| 96 |
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| 123 |
| 17% |
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| 105 |
Consumer financing revenue |
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| 23 |
| - |
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| 23 |
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| 24 |
| 14% |
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| 21 |
Cost reimbursement revenue |
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| 67 |
| 6% |
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| 63 |
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| 44 |
| (24)% |
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| 58 |
Total Vacation Ownership revenue |
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| 295 |
| 10% |
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| 267 |
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| 311 |
| 14% |
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| 272 |
Exchange and Rental |
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Transaction revenue |
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| 47 |
| - |
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| 47 |
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| 59 |
| — |
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| 59 |
Membership fee revenue |
|
| 36 |
| 3% |
|
| 35 |
|
| 36 |
| — |
|
| 36 |
Ancillary member revenue |
|
| 2 |
| 100% |
|
| 1 |
|
| 2 |
| — |
|
| 2 |
Total member revenue |
|
| 85 |
| 2% |
|
| 83 |
|
| 97 |
| — |
|
| 97 |
Club rental revenue |
|
| 26 |
| 8% |
|
| 24 |
|
| 34 |
| 13% |
|
| 30 |
Other revenue |
|
| 4 |
| (33)% |
|
| 6 |
|
| 5 |
| — |
|
| 5 |
Rental management revenue |
|
| 12 |
| (8)% |
|
| 13 |
|
| 14 |
| — |
|
| 14 |
Cost reimbursement revenue |
|
| 24 |
| (4)% |
|
| 25 |
|
| 21 |
| (19)% |
|
| 26 |
Total Exchange and Rental revenue |
|
| 151 |
| - |
|
| 151 |
|
| 171 |
| (1)% |
|
| 172 |
Total ILG revenue |
| $ | 446 |
| 7% |
| $ | 418 |
|
| 482 |
| 9% |
|
| 444 |
Adverse impact from 2017 storms (lost business) |
|
| 19 |
| NM |
|
| — | ||||||||
Total ILG revenue excluding adverse impact above |
| $ | 501 |
| 13% |
| $ | 444 |
Revenue for the first quarter of 2017 has been restated as part of adopting the new revenue recognition accounting standard (ASC 606) as of January 1, 2018. Refer to Note 3 accompanying our condensed consolidated financial statements for additional information regarding this accounting standard adoption and related disclosures.
Revenue for the three months ended September 30, 2017March 31, 2018 of $446$482 million increased $28$38 million, or 7%9%, compared to revenue of $418$444 million in 20162017 quarter. Vacation Ownership segment revenue of $295$311 million increased $28$39 million, or 10%14%, in the quarter, while Exchange and Rental segment revenue of $151$171 million was relatively consistent with last year.
Excluding the estimated impact of the hurricanes discussed below, consolidated revenue would have been $451 million, or 8% higher than last year, and consolidated timeshare contract sales would have been $1212017 storms:
· | Consolidated revenue would have been $501 million, or 13% higher than last year. |
· | Vacation ownership segment revenue would have been $328 million, or 21% higher than last year. |
· | Exchange and Rental segment revenue would have been $173 million, or relatively in-line with last year. |
· | Consolidated timeshare contract sales would have been $143 million, or 17% over last year. |
Vacation Ownership
Vacation Ownership segment revenue, excluding cost reimbursements, increased $24$53 million, or 12%25%, in the thirdfirst quarter of 20172018 compared to 2016.2017. The increase was driven primarily by $22$27 million of higher management fee and other revenue, $18 million of higher sales of vacation ownership products, net, whichand an $5 million increase in resort operations revenue. The increase in sales of vacation ownership products, net, was primarily attributable to the following:
55
· | higher consolidated timeshare contract sales largely attributable to a |
|
|
· | a |
· | partly offset by an unfavorable change of approximately $2 million in the quarter in our allowance for losses on originated loans when compared to prior year. |
Additionally, The increase of $27 million in management fee and other revenue increased by $3 millionis predominantly attributable to revenue from HOAs consolidated starting in the fourth quarter over last year primarily due toof 2017, which is largely offset by a corresponding decrease in cost reimbursements revenue, as well as the consolidation of our Great Destinations joint-venture and the resulting inclusion of their financials in our results as ofjoint venture commencing April 1, 2017,2017. The increase of $5 million in resort operations revenue was primarily driven by higher available and occupied room nights, as discussed in Note 3 to our condensed consolidated financial statements.
51
well as average daily rate.
Exchange and Rental
Exchange and Rental segment revenue, excluding cost reimbursements, was relatively consistenthigher by $4 million, or 3%, in the quarter compared to 2016.
For2017. The increase is attributable to stronger club rental revenue as a result of higher available and occupied room nights, as well as average daily rate. Additionally, the nine months ended September 30,impact from the 2017 comparedstorms on affiliated resorts continues to impact our exchange business through loss of inventory available for transactions in the nine months ended September 30, 2016.
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||||
|
| 2017 |
| % Change |
| 2016 | ||
|
| (Dollars in millions) | ||||||
Vacation Ownership |
|
|
|
|
|
|
|
|
Resort operations revenue |
| $ | 162 |
| 88% |
| $ | 86 |
Management fee and other revenue |
|
| 99 |
| 22% |
|
| 81 |
Sales of vacation ownership products, net |
|
| 351 |
| 128% |
|
| 154 |
Consumer financing revenue |
|
| 66 |
| 78% |
|
| 37 |
Cost reimbursement revenue |
|
| 192 |
| 63% |
|
| 118 |
Total Vacation Ownership revenue |
|
| 870 |
| 83% |
|
| 476 |
Exchange and Rental |
|
|
|
|
|
|
|
|
Transaction revenue |
|
| 155 |
| - |
|
| 155 |
Membership fee revenue |
|
| 105 |
| 6% |
|
| 99 |
Ancillary member revenue |
|
| 5 |
| 25% |
|
| 4 |
Total member revenue |
|
| 265 |
| 3% |
|
| 258 |
Club rental revenue |
|
| 83 |
| 98% |
|
| 42 |
Other revenue |
|
| 18 |
| - |
|
| 18 |
Rental management revenue |
|
| 37 |
| 3% |
|
| 36 |
Cost reimbursement revenue |
|
| 75 |
| 6% |
|
| 71 |
Total Exchange and Rental revenue |
|
| 478 |
| 12% |
|
| 425 |
Total ILG revenue |
| $ | 1,348 |
| 50% |
| $ | 901 |
Revenue for the nine months ended September 30, 2017 of $1.3 billion increased $447 million, or 50%, compared toInterval Network. We estimate this adversely affected revenue of $901by $2 million in the 2016 period. Vacation Ownership segment revenue of $870 million increased $394 million, or 83%, while Exchange and Rental segment revenue of $478 million increased $53 million, or 12%, in the period compared to prior year.quarter.
Vacation Ownership
Vacation Ownership segment revenue, excluding cost reimbursements, increased $320 million, or 89%, in the period compared to 2016. This increase over the prior period resulted predominantly from the Vistana acquisition. Excluding Vistana and cost reimbursements, segment revenue increased by $7 million, or 6%, largely driven by the consolidation of Great Destinations as previously discussed.
Exchange and Rental
Exchange and Rental segment revenue, excluding cost reimbursements, increased $49 million, or 14%, in the period compared to 2016. This increase is due to the inclusion of Vistana in our results subsequent to the acquisition. Excluding Vistana and cost reimbursements, segment revenue in the period was lower by $5 million when compared to the prior year. The period’s activity was unfavorably impacted, largely in the first half of the year, by the continued shift in the percentage mix of our membership base from traditional to corporate members. This was offset in part by a combined increase of $2 million in rental management and club rental revenue.
5256
Cost of Sales and Royalty Fee Expense
For the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| % Change |
| 2016 |
| 2018 |
| % Change |
| 2017 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service and membership related |
| $ | 14 |
| 27% |
| $ | 11 |
| $ | 45 |
| 246% |
| $ | 13 |
Cost of sales of vacation ownership products |
|
| 17 |
| (45)% |
|
| 31 |
|
| 39 |
| 56% |
|
| 25 |
Cost of rental and ancillary services |
|
| 54 |
| 15% |
|
| 47 |
|
| 43 |
| (16)% |
|
| 51 |
Cost of consumer financing |
|
| 7 |
| 75% |
|
| 4 |
|
| 8 |
| 33% |
|
| 6 |
Cost reimbursements |
|
| 67 |
| 6% |
|
| 63 |
|
| 44 |
| (24)% |
|
| 58 |
Total Vacation Ownership cost of sales |
|
| 159 |
| 2% |
|
| 156 |
|
| 179 |
| 17% |
|
| 153 |
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service and membership related sales |
|
| 19 |
| - |
|
| 19 |
|
| 19 |
| (14)% |
|
| 22 |
Cost of sales of rental and ancillary services |
|
| 24 |
| 20% |
|
| 20 |
|
| 29 |
| 12% |
|
| 26 |
Cost reimbursements |
|
| 24 |
| (4)% |
|
| 25 |
|
| 21 |
| (19)% |
|
| 26 |
Total Exchange and Rental cost of sales |
|
| 67 |
| 5% |
|
| 64 |
|
| 69 |
| (7)% |
|
| 74 |
Total ILG cost of sales |
| $ | 226 |
| 3% |
| $ | 220 |
| $ | 248 |
| 9% |
| $ | 227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty fee expense |
| $ | 11 |
| 22% |
| $ | 9 |
| $ | 11 |
| 10% |
| $ | 10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margin metrics: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ILG: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
| 49% |
| 4% |
|
| 47% |
|
| 49% |
| (0)% |
|
| 49% |
Gross margin without cost reimbursement revenue/expenses |
|
| 62% |
| 3% |
|
| 60% |
|
| 56% |
| (7)% |
|
| 60% |
Vacation Ownership: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
| 46% |
| 10% |
|
| 42% |
|
| 42% |
| (5)% |
|
| 44% |
Gross margin without cost reimbursement revenue/expenses |
|
| 60% |
| 11% |
|
| 54% |
|
| 49% |
| (13)% |
|
| 56% |
Exchange and Rental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin |
|
| 56% |
| (3)% |
|
| 58% |
|
| 60% |
| 5% |
|
| 57% |
Gross margin without cost reimbursement revenue/expenses |
|
| 66% |
| (4)% |
|
| 69% |
|
| 68% |
| 1% |
|
| 67% |
Cost of sales is organized on our condensed consolidated income statement by the respective revenue line items and consists primarily of the following:following general expense types:
· | Compensation and other employee‑related costs (including stock‑based compensation) for personnel engaged in providing services to members, property owners and/or guests of our respective segment |
|
|
· | Costs |
· | Consumer financing expenses representing costs incurred in support of the financing, servicing and securitization processes, as well as interest expense on securitized |
53
· | Other expenses such as costs necessary to operate certain of our |
57
Cost of sales for the three months ended September 30, 2017March 31, 2018 increased $6$21 million from 2016.2017. This increasechange consists of $3a $26 million increase from our Vacation Ownership segment, and $3partly offset by a $5 million decrease from our Exchange and Rental segment. Overall gross margin in the quarter of 49% was 49%, higher by 196 basis points overconsistent with the prior year.
Vacation Ownership
Overall cost of sales for this segment in the quarter, excluding cost reimbursements, in the quarter was relatively consistent withup $40 million from the prior year. However, theThe quarter’s results reflectincrease reflects the following activity:
· |
|
· | An increase of $14 million in cost of sales of vacation ownership products was driven largely by an unfavorable $9 million product cost true-up related principally to our Sheraton Flex product upon transferring recently converted Sheraton Steamboat Resort Villas inventory into the structure, in addition to higher sales volume overall. |
· | A net increase in cost of rental and ancillary services |
· | An increase in cost of consumer financing was primarily driven by a full quarter of interest expense in |
Gross margin for this segment, excluding cost reimbursements, increased 524decreased 617 basis points to 60%49% in the quarter compared to 54% last year. The drop in year-over-year margin is largely attributable to the inclusion of consolidated HOAs in our results starting in the fourth quarter of 2017.
Exchange and Rental
Gross margin for the Exchange and Rental segment in the period, excluding cost reimbursements, decreased 291increased 88 basis points to 66%68% when compared to the prior year, driven by an increase of $4 million inwhile overall cost of sales of rental and ancillary services largely attributable to incremental costs associated with club rental activity for the newly opened Westin Nanea Ocean Villas and Westin Los Cabos Resort and Spa.remained relatively flat year-over-year.
54
Royalty Fee Expense
Royalty fee expense for the quarter pertains to costs incurred pursuant to our exclusive global licenses for the Hyatt®, Sheraton®Hyatt, Sheraton and Westin®Westin brands in vacation ownership. The increase of $2$1 million in royalty fee expense in the period compared to the prior year was due to higher vacation ownership product sales.
For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, | ||||||
|
| 2017 |
| % Change |
| 2016 | ||
|
| (Dollars in millions) | ||||||
Vacation Ownership |
|
|
|
|
|
|
|
|
Cost of service and membership related |
| $ | 40 |
| 29% |
| $ | 31 |
Cost of sales of vacation ownership products |
|
| 73 |
| 30% |
|
| 56 |
Cost of rental and ancillary services |
|
| 164 |
| 128% |
|
| 72 |
Cost of consumer financing |
|
| 20 |
| 186% |
|
| 7 |
Cost reimbursements |
|
| 192 |
| 63% |
|
| 118 |
Total Vacation Ownership cost of sales |
|
| 489 |
| 72% |
|
| 284 |
Exchange and Rental |
|
|
|
|
|
|
|
|
Cost of service and membership related |
|
| 57 |
| 12% |
|
| 51 |
Cost of rental and ancillary services |
|
| 71 |
| 39% |
|
| 51 |
Cost reimbursements |
|
| 75 |
| 6% |
|
| 71 |
Total Exchange and Rental cost of sales |
|
| 203 |
| 17% |
|
| 173 |
Total ILG cost of sales |
| $ | 692 |
| 51% |
| $ | 457 |
|
|
|
|
|
|
|
|
|
Royalty fee expense |
| $ | 32 |
| 100% |
| $ | 16 |
|
|
|
|
|
|
|
|
|
Margin metrics: |
|
|
|
|
|
|
|
|
ILG: |
|
|
|
|
|
|
|
|
Gross margin |
|
| 49% |
| - |
|
| 49% |
Gross margin without cost reimbursement revenue/expenses |
|
| 61% |
| (2)% |
|
| 62% |
Vacation Ownership: |
|
|
|
|
|
|
|
|
Gross margin |
|
| 44% |
| 10% |
|
| 40% |
Gross margin without cost reimbursement revenue/expenses |
|
| 56% |
| 4% |
|
| 54% |
Exchange and Rental: |
|
|
|
|
|
|
|
|
Gross margin |
|
| 58% |
| (2)% |
|
| 59% |
Gross margin without cost reimbursement revenue/expenses |
|
| 68% |
| (4)% |
|
| 71% |
Cost of sales for the nine months ended September 30, 2017 increased $235 million from 2016 due to the inclusion of Vistana’s results subsequent to the acquisition. This increase consists of $205 million from our Vacation Ownership segment and $30 million from our Exchange and Rental segment. Overall gross margin was 49% in the period.
Vacation Ownership
The increase of $131 million in cost of sales, excluding cost reimbursements, from the Vacation Ownership segment was attributable to the inclusion of Vistana in our results. Excluding cost reimbursements and Vistana, cost of sales in this segment were higher by $4 million compared to the prior year. Gross margin for this segment of 55%, when excluding Vistana and cost reimbursements, was in-line with last year.
5558
Exchange and Rental
Gross margin for the Exchange and Rental segment in the period, excluding cost reimbursements, decreased 295 basis points to 68% when compared to the prior year. Excluding cost reimbursements and Vistana, cost of sales were lower by $3 million, or 4%, and gross margin improved by 59 basis points in period compared with the prior year. The decrease reflects lower costs of rental and ancillary services.
Royalty Fee Expense
The increase of $16 million in royalty fee expense in the period compared to prior year pertains to the inclusion of Vistana in our results for the full period.
Selling and Marketing Expense
For the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| % Change |
| 2016 |
| 2018 |
| % Change |
| 2017 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Vacation Ownership |
| $ | 65 |
| 23% |
| $ | 53 |
| $ | 66 |
| 16% |
| $ | 57 |
Exchange and Rental |
|
| 12 |
| (8)% |
|
| 13 |
|
| 12 |
| (8)% |
|
| 13 |
Total ILG selling and marketing expense |
| $ | 77 |
| 17% |
| $ | 66 |
| $ | 78 |
| 11% |
| $ | 70 |
As a percentage of total revenue |
|
| 17% |
| 6% |
|
| 16% |
|
| 16% |
| — |
|
| 16% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 22% |
| 10% |
|
| 20% |
|
| 19% |
| — |
|
| 19% |
Selling and marketing expense for our Vacation Ownership segment primarily relates to sales employee compensation and a range of marketing efforts aimed at generating prospects for our vacation ownership sales activities. These marketing efforts can include activities related to targeted promotional mailings, multi‑night vacation marketing packages and programs, premiums such as gift certificates and tickets to local attractions or events, costs to provide alternative usage options as purchase incentives, and other costs related to encouraging potential purchasers to attend sales presentations and closing transactions. Selling and marketing expenses for our Exchange and Rental segment primarily include printing costs of directories and magazines, promotions, tradeshows, agency fees, marketing fees and related commissions.
Additionally, these expenses for both segments include compensation and other employee‑related costs, including stock‑based compensation and benefits for certain of our operating businesses, pertaining to personnel engaged in sales and sales support functions.
Selling and marketing expense in the thirdfirst quarter of 20172018 increased $11$8 million compared to last year, principally driven by an increase inincremental selling and marketing related expenses tied to higher contract sales and tour flow in additionour VO segment, particularly with regards to incremental previously-deferred expenses recognizedour new sales centers in Maui and Los Cabos. This increase was partly offset by the quarter relatedcontinued closure of our St. John sales center due to the application of percentage of completion accounting compared to last year.2017 hurricanes. As a percentage of total revenue excluding cost reimbursements, selling and marketing expense during the quarter was higherlower by 16974 basis points from last year.
56
For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended | ||||||
|
| September 30, | ||||||
|
| 2017 |
| % Change |
| 2016 | ||
|
| (Dollars in millions) | ||||||
Vacation Ownership |
| $ | 190 |
| 129% |
| $ | 83 |
Exchange and Rental |
|
| 40 |
| (5)% |
|
| 42 |
Total ILG selling and marketing expense |
| $ | 230 |
| 84% |
| $ | 125 |
As a percentage of total revenue |
|
| 17% |
| 21% |
|
| 14% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 21% |
| 17% |
|
| 18% |
Selling and marketing expense in the first nine months of 2017 increased $105 million compared to last year, principally due to the inclusion of Vistana’s results for the full period. As a percentage of total revenue excluding cost reimbursements, sales and marketing expense during the period was higher by 169 basis points from last year when excluding Vistana due to continued investments in our VOI sales and marketing platform.
General and Administrative Expense
For the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016March 31, 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| % Change |
| 2016 |
| 2018 |
| % Change |
| 2017 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
General and administrative expense |
| $ | 58 |
| 4% |
| $ | 56 |
| $ | 59 |
| 9% |
| $ | 54 |
As a percentage of total revenue |
|
| 13% |
| - |
|
| 13% |
|
| 12% |
| — |
|
| 12% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 16% |
| (6)% |
|
| 17% |
|
| 14% |
| (7)% |
|
| 15% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition-related and restructuring costs |
|
| 16% |
| - |
|
| 16% |
|
| 14% |
| — |
|
| 14% |
59
General and administrative expense consists primarily of compensation and other employee‑related costs (including stock‑based compensation) for personnel engaged in oversight, corporate development, finance and accounting, legal, treasury, tax, internal audit, human resources, and certain IT functions, as well as certain facilities costs, fees for professional services, benefits and other items.
General and administrative expense in the thirdfirst quarter of 20172018 was higher by $2$5 million when compared against the prior year. The quarter’s activity includedincrease over prior year reflects higher professional fees expense largely due to costs associated with our board of directors’ strategic review as disclosed in our fourth quarter 2017 earnings call. In addition, we recorded a net $3$1 million of natural disaster related expenses comprised of $4 million of the total $9 million inventory impairment charge recorded in the quarter relatingrelated to Hurricane Irma’s impact on The Westin St. John which will not be offset byrecognizing the final component of the insurance proceeds, partly offset by a $1 million gain on insurance settlement recorded in the third quarter of 2017 pertainingdeductible related to Hurricane NewtonTropical Storm Lidia which impacted our Westin Los Cabos resort last year. Additionally, with regards to natural disaster related events, approximately $12 millionin August of property and equipment write-offs related to The Westin St. John were recorded in the quarter, which were offset by expected insurance proceeds deemed probable of collection.2017.
As a percentage of revenue excluding (i) cost reimbursements, (ii) acquisition-related and restructuring expenses, (iii) strategic review related costs, and (iii)(iv) natural disaster related net charges, general and administrative expense would be lower by 10798 basis points compared to prior year.
Amortization Expense of Intangibles
For the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| March 31, | ||||||
|
| 2018 |
| % Change |
| 2017 | ||
|
| (Dollars in millions) | ||||||
Amortization expense of intangibles |
| $ | 5 |
| — |
| $ | 5 |
As a percentage of total revenue |
|
| 1% |
| — |
|
| 1% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 1% |
| — |
|
| 1% |
Amortization expense of intangibles for the three months ended March 31, 2018 was consistent with the prior year.
Depreciation Expense
For the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| March 31, | ||||||
|
| 2018 |
| % Change |
| 2017 | ||
|
| (Dollars in millions) | ||||||
Depreciation expense |
| $ | 15 |
| — |
| $ | 15 |
As a percentage of total revenue |
|
| 3% |
| — |
|
| 3% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 4% |
| — |
|
| 4% |
Depreciation expense for the three months ended March 31, 2018 was consistent with the prior year.
5760
For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
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| September 30, | ||||||
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| 2017 |
| % Change |
| 2016 | ||
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| (Dollars in millions) | ||||||
General and administrative expense |
| $ | 170 |
| 15% |
| $ | 148 |
As a percentage of total revenue |
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| 13% |
| (19)% |
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| 16% |
As a percentage of total revenue excluding cost reimbursement revenue |
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| 16% |
| (24)% |
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| 21% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition-related and restructuring costs |
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| 15% |
| (17)% |
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| 18% |
The increase in general and administrative expense in the first nine months of 2017 is primarily attributable to the inclusion of Vistana. Excluding Vistana as well as restructuring and acquisition-related costs attributable to the transaction, general and administrative expense in the first nine months was less by $3 million versus last year. As a percentage of revenue excluding cost reimbursements, acquisition-related and restructuring expenses and Vistana, general and administrative expense was largely consistent with the prior year.
Amortization Expense of Intangibles
For the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016
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| Nine Months Ended | ||||||||||||
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| September 30, |
| September 30, | ||||||||||||
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| 2017 |
| % Change |
| 2016 |
| 2017 |
| % Change |
| 2016 | ||||
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| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Amortization expense of intangibles |
| $ | 5 |
| (17)% |
| $ | 6 |
| $ | 15 |
| 7% |
| $ | 14 |
As a percentage of total revenue |
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| 1% |
| - |
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| 1% |
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| 1% |
| (50)% |
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| 2% |
As a percentage of total revenue excluding cost reimbursement revenue |
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| 1% |
| (50)% |
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| 2% |
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| 1% |
| (50)% |
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| 2% |
Amortization expense of intangibles for the three months ended September 30, 2017 was lower by $1 million due to certain intangible assets reaching full amortization in the second quarter of 2017, while the year-to-date period increased by $1 million over 2016 due to incremental amortization expense pertaining to the Vistana acquisition in May 2016.
Depreciation Expense
For the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016
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| September 30, | ||||||||||||
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| 2017 |
| % Change |
| 2016 |
| 2017 |
| % Change |
| 2016 | ||||
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| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Depreciation expense |
| $ | 15 |
| 7% |
| $ | 14 |
| $ | 44 |
| 57% |
| $ | 28 |
As a percentage of total revenue |
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| 3% |
| - |
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| 3% |
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| 3% |
| - |
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| 3% |
As a percentage of total revenue excluding cost reimbursement revenue |
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| 4% |
| - |
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| 4% |
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| 4% |
| - |
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| 4% |
58
Depreciation expense for the three ended September 30, 2017 increased $1 million over the prior year due to depreciable assets being placed in service subsequent to September 30, 2016. Depreciation expense for the nine months ended September 30, 2017 increased $16 million over 2016 largely due to incremental depreciation expense related to fixed assets acquired as part of the Vistana acquisition.
Operating Income
For the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016March 31, 2017.
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| March 31, | ||||||||||||
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| 2017 |
| % Change |
| 2016 |
| 2018 |
| % Change |
| 2017 | ||||
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| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Vacation Ownership |
| $ | 22 |
| 100% |
| $ | 11 |
| $ | 17 |
| 6% |
| $ | 16 |
Exchange and Rental |
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| 32 |
| (11)% |
|
| 36 |
|
| 49 |
| 4% |
|
| 47 |
Total ILG operating income |
| $ | 54 |
| 15% |
| $ | 47 |
| $ | 66 |
| 5% |
| $ | 63 |
As a percentage of total revenue |
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| 12% |
| 9% |
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| 11% |
|
| 14% |
| — |
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| 14% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 15% |
| 7% |
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| 14% |
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| 16% |
| (11)% |
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| 18% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition-related and restructuring costs |
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| 16% |
| 7% |
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| 15% |
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| 16% |
| (11)% |
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| 18% |
Operating income in the thirdfirst quarter of 20172018 increased $7$3 million from 2016,2017, consisting of an $11$1 million increase from Vacation Ownership and a $4$2 million decreaseincrease from Exchange and Rental.
Operating income for our Vacation Ownership segment was higher by $11$1 million compared to prior year drivendue to the HOAs we commenced consolidating starting in the fourth quarter of 2017. Excluding the impact of these HOAs, operating income for this segment would have been lower by $1 million compared to last year. This decrease in operating income is mainly attributable to the adverse effect in the quarter due to the 2017 storms, in particular the continued closure of our Westin St. John resort, and higher professional fees largely due to costs associated with our Board of Directors’ strategic review; partly offset by an increase in sales of vacation ownership products together with lower associated costdriven in large part by our recently opened Maui and Los Cabos sales centers. Excluding these higher professional fees and the impact of sales largely as a result ofconsolidating HOAs, operating income for this segment would have been comparable to the product cost true-up of The Westin Nanea Ocean Villas in the quarter. These favorable items were partly offset by a net $3 million of natural disaster related charges and expenses as discussed in the general and administrative expenses section above.prior year.
Operating income for our Exchange and Rental segment of $32$49 million was lowerhigher by $4$2 million compared to the prior year, reflecting higher costs of rental and ancillary services, largely attributable to incremental costs associated withprimarily driven by stronger club rental activity foras discussed in the newly opened Westin Nanea Ocean Villas and Westin Los Cabos Resort and Spa, and restructuring related expensesrevenue section above, partly offset by the adverse impact in the quarter compared to last year.
Forof the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016storms on affected Interval Network affiliated resorts.
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| Nine Months Ended September 30, | ||||||
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| 2017 |
| % Change |
| 2016 | ||
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| (Dollars in millions) | ||||||
Vacation Ownership |
| $ | 48 |
| NM |
| $ | 13 |
Exchange and Rental |
|
| 117 |
| 17% |
|
| 100 |
Total operating income |
| $ | 165 |
| 46% |
| $ | 113 |
As a percentage of total revenue |
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| 12% |
| (8)% |
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| 13% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 15% |
| (6)% |
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| 16% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition-related and restructuring costs |
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| 16% |
| (11)% |
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| 18% |
5961
Operating income in the first nine months of 2017 increased $52 million from 2016, consisting of a $35 million increase from Vacation Ownership and a $17 million increase from Exchange and Rental.
Operating income for our Vacation Ownership segment of $48 million was higher by $35 million compared to prior year, reflecting the inclusion of Vistana in our results. Excluding Vistana and acquisition-related and restructuring expenses, this segment’s operating income would have been lower by $2 million from last year in part due to continued investments in our VOI sales and marketing platform.
Operating income for our Exchange and Rental segment of $117 million was higher by $17 million compared to the prior year, reflecting the favorable inclusion of Vistana in our results compared to prior year. Excluding Vistana and acquisition-related and restructuring expenses, this segment’s operating income would have been lower by $2 million compared to prior year.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
Adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) is a non‑GAAP measure and is defined in “ILG’s Principles of Financial Reporting.”
For the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016March 31, 2017.
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| Three Months Ended | ||||||||||||
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| September 30, |
| March 31, | ||||||||||||
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| 2017 |
| % Change |
| 2016 |
| 2018 |
| % Change |
| 2017 | ||||
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| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Vacation Ownership |
| $ | 43 |
| 30% |
| $ | 33 |
| $ | 36 |
| 9% |
| $ | 33 |
Exchange and Rental |
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| 44 |
| (6)% |
|
| 47 |
|
| 62 |
| 5% |
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| 59 |
Total ILG adjusted EBITDA |
| $ | 87 |
| 9% |
| $ | 80 |
|
| 98 |
| 7% |
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| 92 |
As a percentage of total revenue |
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| 20% |
| 5% |
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| 19% | ||||||||
As a percentage of total revenue excluding cost reimbursement revenue |
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| 25% |
| 4% |
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| 24% | ||||||||
Unadjusted adverse impact from 2017 storms (lost business) |
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| 6 |
| NM |
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| — | ||||||||
Total ILG adjusted EBITDA excluding adverse impact above |
| $ | 104 |
| 13% |
| $ | 92 | ||||||||
As a percentage of total revenue excluding 2017 storms impact |
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| 21% |
| — |
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| 21% | ||||||||
As a percentage of total revenue excluding cost reimbursement revenue and 2017 storms impact |
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| 24% |
| (8)% |
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| 26% |
Adjusted EBITDA for the three months ended September 30, 2017March 31, 2018 increased by $7$6 million, or 9%7%, from 2016,2017, consisting of an increase of $10 million from our Vacation Ownership segment and a decrease of $3 million from each of our Exchange and Rental segment.two segments. Additionally, as discussed in our Other Factors Affecting Results section, our thirdfirst quarter 2017of 2018 performance was adversely affected by the closure of resorts and sales centers impacted by Hurricanes Irma and Maria in September of 2017.the 2017 storms. Excluding the estimated impact of the hurricanes,storms, ILG adjusted EBITDA would have been $90$104 million, or 12%13% higher than last year.
Adjusted EBITDA of $43$36 million from our Vacation Ownership segment rose by $10$3 million, or 30%9%, driven primarily from higher sales of VOIs and lower product coststronger resort operations rental activity, as previously discussed. These increases were partly offset by an estimated $5 million adverse effect in the quarter comparedpertaining to last year, as previously discussed.the 2017 storms, in particular the continued closure of our Westin resort in St. John.
Adjusted EBITDA of $44$62 million from our Exchange and Rental segment decreasedincreased by $3 million, or 6%5%, compared to the prior year due in large part to higher cost of rental and ancillary services largely attributable to incremental costs associated withprimarily driven by stronger club rental activity foras discussed in the newly opened Westin Nanea Ocean Villas and Westin Los Cabos Resort and Spa.
60
For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
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| Nine Months Ended | ||||||
|
| September 30, | ||||||
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| 2017 |
| % Change |
| 2016 | ||
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| (Dollars in millions) | ||||||
Vacation Ownership |
| $ | 109 |
| 85% |
| $ | 59 |
Exchange and Rental |
|
| 152 |
| 11% |
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| 137 |
Total ILG adjusted EBITDA |
| $ | 261 |
| 33% |
| $ | 196 |
As a percentage of total revenue |
|
| 19% |
| (14)% |
|
| 22% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 24% |
| (14)% |
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| 28% |
Adjusted EBITDA for the nine months ended September 30, 2017 increased by $65 million, or 33%, from 2016, consisting of increases of $50 million from our Vacation Ownership segment and $15 million from our Exchange and Rental segment.
Adjusted EBITDA of $109 million from our Vacation Ownership segment rose by $50 million, or 85%, from the prior year due to the Vistana acquisition.storms on affected Interval Network affiliated resorts. Excluding Vistana,this adverse impact, adjusted EBITDA in this segment would have been relatively in-line with the prior year.
Adjusted EBITDA of $152up 7%, or $4 million from our Exchange and Rental segment rose by $15 million, or 11%, compared to the prior year due to the Vistana acquisition. Excluding Vistana, segment adjusted EBITDA was relatively consistent when compared to theover prior year.
Other Income (Expense), net
For the three months ended September 30, 2017March 31, 2018 compared to the three months ended September 30, 2016March 31, 2017.
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| Three Months Ended | ||||||||||||
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| September 30, |
| March 31, | ||||||||||||
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| 2017 |
| % Change |
| 2016 |
| 2018 |
| % Change |
| 2017 | ||||
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| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Interest expense |
| $ | (7) |
| 17% |
| $ | (6) |
| $ | (7) |
| 40% |
| $ | (5) |
Equity in earnings from unconsolidated entities |
| $ | 1 |
| (50)% |
| $ | 2 |
| $ | 1 |
| (50)% |
| $ | 2 |
Gain on bargain purchase |
| $ | — |
| (100)% |
|
| (9) | ||||||||
Other income (expense), net |
| $ | (1) |
| (75)% |
| $ | (4) | ||||||||
Other income, net |
| $ | 5 |
| (50)% |
| $ | 10 |
Interest expense in the quarter was higher by $1 million compared to last year and relates to interest and amortization of debt issuance costs on our amended and restated revolving credit facility and our $350 million senior notes. TheInterest expense in 2018 was higher interest expense resultedby $2 million compared
62
to the prior year resulting in part from a higher average outstanding balanceinterest rate in the quarter relativecompared to prior year.year and less capitalized interest expense.
Equity in earnings from unconsolidated entities relates to noncontrolling investments that are recorded under the equity method of accounting; principally, our joint venture in Hawaii which developed a vacation ownership resort for the purpose of selling VOIs. Income and losses from this joint venture are allocated based on ownership interests. See Note 7 to6 accompanying our condensed consolidated financial statements for relatedfurther discussion.
Gain on bargain purchase was recorded in connection with the Vistana acquisition and represents the excess of the fair value of the net tangible and intangible assets acquired over the purchase price. The measurement period for this acquisition closed on May 11, 2017. See Note 3 of our condensed consolidated financial statements for additional discussion.
61
Other income, (expense), net primarily relates to net gains and losses on foreign currency exchange related to certain foreign intercompany loans and excessnon-operating cash positions held by foreign subsidiaries in currencies other than their functional currency. Non‑operating foreign exchange net loss was $1 million for the third quarter of 2017, compared to a $4 million net loss in the prior year quarter. The unfavorable fluctuations in the third quarter of 2017 and 2016 were primarily driven by U.S. dollar denominated intercompany loan positions held as of the respective quarter-end which were affected by the stronger dollar compared to the Mexican peso.
For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
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| Nine Months Ended | ||||||
|
| September 30, | ||||||
|
| 2017 |
| % Change |
| 2016 | ||
|
| (Dollars in millions) | ||||||
Interest income |
| $ | 1 |
| - |
| $ | 1 |
Interest expense |
| $ | (20) |
| 11% |
| $ | (18) |
Equity in earnings from unconsolidated entities |
| $ | 4 |
| - |
| $ | 4 |
Gain on bargain purchase |
| $ | 2 |
| (99)% |
| $ | 188 |
Other income (expense), net |
| $ | 6 |
| NM |
| $ | (2) |
Interest expense in the first nine months of 2017 was higher by $2 million compared to last year and relates to interest and amortization of debt issuance costs on our amended and restated revolving credit facility and our $350 million senior notes. The higher interest expense resulted from a higher average outstanding balance in the period relative to prior year.
Equity in earnings from unconsolidated entities relates to noncontrolling investments that are recorded under the equity method of accounting; principally, our joint venture in Hawaii.
The gain on bargain purchase of $2 million for the nine months ended September 30, 2017 pertains to additional tax-related adjustments to our purchase price allocation for Vistana in the second quarter of 2017 prior to the measurement period closing on May 11, 2017.
Other income (expense), net primarily relates to net gains and losses on foreign currency exchange related to certain foreign intercompany loans and excess cash held by foreign subsidiaries in currencies other than their functional currency. Non‑operating foreign exchange net gains were $6$5 million and net losses were $2$10 million infor the first nine monthsquarter of 20172018 and 2016,2017, respectively. The favorable fluctuations in the period2018 and 2017 quarters were primarily driven by U.S. dollar denominated intercompany loan positions held at September 30,March 31, 2018 and 2017, respectively, which were affected by the weaker dollar compared to the Mexican peso, partly offset by the remeasurement of U.S. dollar denominated excessnon-operating cash positions held by our Mexican subsidiary at year-end. The unfavorable fluctuations during the 2016 period were primarily driven by U.S. dollar denominated intercompany loan positions held at September 30, 2016 which were affected by the stronger dollar compared to the Mexican peso, partly offset by favorable fluctuations stemming from the stronger dollar againstthe British pound.respective quarter-end.
Income Tax Provision
For the three months ended March 31, 2018 compared to the three months ended March 31, 2017.
For the three months ended September 30,March 31, 2018 and 2017, compared to the three months ended September 30, 2016
For the three months ended September 30, 2017 and 2016, ILG recorded an income tax provision and benefitprovisions for continuing operations of $17$20 million and $2$25 million, respectively, which represent effective tax rates of 35.7%31.1% and (7.4)%35.9% for the respective periods. The effective tax rate for the three months ended September 30, 2017March 31, 2018 is greaterlower than the prior year period primarily due to enacted tax legislation commonly referred to as the nontaxable gainTax Cuts and Jobs Act (the "Tax Reform Act") which, effective 2018, reduced the statutory corporate tax rate from 35% to 21%.
Additional Information
The Tax Reform Act significantly changed U.S. tax law by, among other things, lowering the statutory corporate tax rate, as discussed above, eliminating certain deductions, requiring a one-time transition tax on bargain purchase recordedcertain unrepatriated earnings of foreign subsidiaries, introducing new tax regimes, and changing how foreign earnings are subject to U.S. tax. The SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which was codified in ASU 2018-05 during the priorcurrent period, to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. SAB 118 allows registrants to record provisional amounts during a one year “measurement period” similar to that used when accounting for business combinations. We estimated the effects of the Tax Reform Act and recorded a net provisional tax benefit for the impact of the Tax Reform Act in our financial statements as of December 31, 2017. We have not completed our determination of the accounting implications of the Tax Reform Act on our tax accruals.
The ultimate impact of the Tax Reform Act may differ, possibly materially, from these provisional amounts due to among other things, additional analysis, changes in interpretations and assumptions ILG has made, additional regulatory guidance that may be issued, and actions ILG may take as a result of the Tax Reform Act. Any such revisions will be treated in accordance with the measurement period guidance outlined in SAB 118. As such, we expect to complete our analysis no later than December 22, 2018.
A valuation allowance is provided on deferred tax assets if it is determined that it is more likely than not that the deferred tax asset will not be realized. In making this determination, we make estimates and assumptions regarding this realization, which is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the history of taxable income in recent years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies to make this assessment. A change in these assumptions may increase or decrease our valuation allowance
6263
connection with the acquisition of Vistana. The prior year period’s negativeresulting in an increase or decrease in our effective tax rate, was also the result of recognizing an income tax benefit in an interim period with pre-tax income. This income tax benefit was a result of a decrease in the estimated annual effective tax rate and the effect of this change on prior quarters.
For the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016
For the nine months ended September 30, 2017 and 2016, ILG recorded income tax provisions for continuing operations of $55 million and $46 million, respectively, which represent effective tax rates of 35.1% and 16.3% for the respective periods. The effective tax rate for the nine months ended September 30, 2017 is greater than the prior year period primarily due to the nontaxable gain on bargain purchase recorded during the prior year period in connection with the acquisition of Vistana.
Additional Information
The current U.S. administration and key members of Congress have called for substantial change to fiscal and tax policies, including comprehensive tax reform. During the current period, the administration released the “Unified Framework for Fixing Our Broken Tax Code” which outlines the principles and goals of the proposed tax reform. On November 2, 2017, the U.S. House Ways and Means Committee released its proposed tax reform bill called the “Tax Cuts and Jobs Act.” We cannot predict what changes will be enacted or the impact, if any, of these changes tocould materially affect our business. It is possible that some policies adopted by the administration will benefit us and others will negatively affect us. Until we know what changes are enacted, we will not know whether in total we benefit from, or are negatively affected by, the changes.consolidated financial statements.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2017,March 31, 2018, we had $211$158 million of cash and cash equivalents, including $154$95 million of U.S. dollar equivalent or denominated cash deposits held by foreign subsidiaries which are subject to changes in foreign exchange rates. Of this amount, $90$72 million is held in foreign jurisdictions, principally the United Kingdom, Mexico and the U.S Virgin Islands. EarningsUnder the Tax Reform Act, all accumulated foreign earnings as of foreign subsidiaries, except Venezuela, are permanently reinvested. Additional tax provisions would be required should such earningsDecember 31, 2017 were mandatorily deemed to be repatriated and taxed, which was also referred to as the Transition Tax. The Transition Tax was assessed regardless of whether ILG actually repatriated its undistributed foreign earnings. Historically, it has been ILG’s practice and intention to reinvest the earnings of certain of its foreign subsidiaries. In light of the significant changes made by the Tax Reform Act, ILG will no longer be permanently reinvested with regard to the U.S. earnings of its foreign subsidiaries. ILG will continue to be permanently reinvested with respect to the remaining excess of the amount for financial reporting over the tax basis of investments in our foreign subsidiaries.
Additionally, we are also exposed to risks associated with the repatriation of cash from certain of our foreign operations to the United States where currency restrictions exist, such as Venezuela and Argentina, which limit our ability to immediately access cash through repatriations. These currency restrictions had no impact on our overall liquidity during the ninethree months ended September 30, 2017March 31, 2018 and, as of that date, the respective cash balances were immaterial to our overall cash on hand.
Cash generated by operations has been our primary source of liquidity. We believe that our cash on hand along with our anticipated operating future cash flows and availability under our $600 million revolving credit facility, which may be increased to up to $700 million subject to certain conditions, as well as future securitizations of our vacation ownership mortgages receivable, are sufficient to fund our operating needs, quarterly cash dividend, capital expenditures, development and expansion of our operations, debt service, investments and other commitments and contingencies for at least the next twelve months. However, our operating cash flow and access to the securitization market may be impacted by macroeconomic and other factors outside of our control.
Cash Flows Discussion
Operating Activities
Net cash and restricted cash provided by operating activities increased to $158$152 million in the ninethree months ended September 30, 2017March 31, 2018 from $74$58 million in the same period of 2016.2017. The increase of $84$94 million from 20162017 was principally due to higher net cash receipts largelypartly attributable to the inclusionproperty insurance proceeds of Vistana for a full nine months in 2017, partly offset by inventory
63
spend of $179$42 million in the current period in large part related to on-goingthe 2017 hurricanes, largely associated with rebuilding activities at The Westin St. John Resort Villas which commenced in the fourth quarter of 2017. In addition, inventory spend was lower by $36 million due to development activities at The Westin Nanea Ocean Villas Sheraton Steamboat Resort Villas and Westin Desert Willow, to lower income taxes paid of $35 million, and to a $10 million royalty pre-payment to Hyatt in the prior year triggeredperiod. Also, restricted cash increased by $27 million primarily due to the Vistana acquisition.collection of maintenance fees in the current quarter by our consolidated HOAs which were not consolidated in the comparable prior year period. These increases were partly offset by $6$3 million of higher interest paid (net amounts capitalized). and $2 million of higher income taxes paid.
Investing Activities
Net cash and restricted cash used in investing activities of $79$16 million and $22 million in the ninethree months ended September 30,March 31, 2018 and 2017, respectively, pertains to capital expenditures, primarily related to investments in assets used mainly to support marketing and sales locations, resort operations (including sales centers), as well as IT initiatives. Net cash usedCapital expenditures in investing activities of $128 million in the nine months ended September 30, 2016 primarily pertained to the Vistana acquisition, net of cash acquired, of $77 million, capital expenditures of $42 million primarily related to IT initiatives, and investments on assets primarily used to support marketing and sales locations and resort operations. In addition, we made an investment in an unconsolidated entity for $5 million.
Financing Activities
Net cash provided by financing activities of $2 million in the nine months ended September 30, 2017 relates to proceeds of $325 million from a vacation ownership mortgages receivable securitization transaction in September 2017 involving the issuance of $3252018 include $3 million of asset-backed notes, which were primarily used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our revolver, andinsurance proceeds for general purposes. This increase was offset by payments of $100 million on securitized debt; by net payments of $69 million on our revolving credit facility; net increase of $58 million in financing-related restricted cash largely attributable to the 2017 term securitization (see Notes 5 and 13 of the condensed consolidated financial statements); cash dividend payments of $56 million to ILG stockholders, as well as a cash dividend payment of $3 million to a noncontrolling interest holder; repurchases of our common stock at market prices totaling $28 million, including commissions, which settled during the nine months; and withholding taxes on the vesting of restricted stock units and restricted stock of $6 million.
Net cash provided by financing activities of $121 million in the nine months ended September 30, 2016 related to proceeds of $375 million from a vacation ownership mortgage receivable securitization transaction in September 2016 involving the issuance of $375 million of asset-backed notes, which were primarily used to repay the outstanding balance on an existing securitization, fund required reserves and pay down a portion of the borrowings under our revolver. These increases were partly offset by repurchases of our common stock at market prices totaling $100 million, including commissions, which settled during the nine months; payment of $24 million to Vistana’s former owner related to a financing obligation; cash dividend payments to ILG stockholders of $37 million as well as cash dividend payments of $2 million to a noncontrolling interest holder; an increase of $26 million in financing-related restricted cash largely attributable to the 2016 term securitizations; repayments of $56 million on securitized debt; payments of debt issuance costs totaling $7 million related to the securitization, amendments to the Amended Credit Agreement and the exchange offer of the senior notes; and withholding taxes on the vesting of restricted stock units of $2 million.
Revolving Credit Facility
On May 17, 2016, we entered into a fifth amendment to the amended credit agreement which extended the maturity of the credit facility through May 17, 2021, and modified requirements with respect to assignments by lenders in connection with the acquisition of Vistana in May of 2016. There were no other material changes under this amendment.
As of September 30, 2017, borrowings outstanding under the revolving credit facility amounted to $171 million, with $415 million available to be drawn, net of outstanding letters of credit.
hurricane property damage.
64
Senior NotesFinancing Activities
On April 10, 2015, we completed a private offeringNet cash and restricted cash used in financing activities of $350$75 million in aggregate principal amountthe three months ended March 31, 2018 relates to payments of $45 million on securitized debt, cash dividend payments of $22 million to ILG stockholders, and withholding taxes on the vesting of restricted stock units and restricted stock of $8 million. Net cash and restricted cash used in financing activities of $38 million in the three months ended March 31, 2017 related to repayments of $32 million on securitized debt, cash dividend payments to ILG stockholders of $19 million, withholding taxes on the vesting of restricted stock units and restricted stock of $4 million, and repurchases of our 5.625% senior notes due in 2023. Thecommon stock at market prices totaling $3 million, including commissions, which settled during the three months ended March 31, 2017. These uses of cash were partially offset by net proceeds from the offering, after deducting offering related expenses, were $343 million. We used the proceeds to repay indebtedness outstandingborrowings of $20 million on our revolving credit facility.
Revolving Credit Facility
As of September 30, 2017,March 31, 2018, borrowings outstanding under the revolving credit facility that matures in May 2021 amounted to $220 million, with $366 million available to be drawn, net of outstanding letters of credit.
Senior Notes
As of March 31, 2018, total unamortized debt issuance costs pertaining to our $350 million of 5.625% senior notes due in 2023 were $5 million.
Interest on the senior notes is paid semi‑annually in arrears on April 15 and October 15 of each year and the senior notes are fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries that are required to guarantee the amended credit facility. Additionally, the voting stock of the issuer and the subsidiary guarantors is 100% owned by ILG. The senior notes are redeemable from April 15, 2018 at a redemption price starting at 104.219% which declines over time.
Restrictions and Covenants
The senior notes and amended credit agreement have various financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness, incur additional liens, issue redeemable stock and preferred stock, pay dividends or distributions or redeem or repurchase capital stock, prepay, redeem or repurchase debt, make loans and investments, enter into agreements that restrict distributions from our subsidiaries, sell assets and capital stock of our subsidiaries, enter into certain transactions with affiliates and consolidate or merge with or into or sell substantially all of our assets to another person.
The indenture governing the senior notes restricts our ability to issue additional debt in the event we are not in compliance with the minimum fixed charge coverage ratio of 2.0 to 1.0 and limits restricted payments and investments unless we are in compliance with the minimum fixed charge coverage ratio and the amount is within a bucket that grows with our consolidated net income. We met the minimum fixed charge coverage ratio as of September 30, 2017.March 31, 2018. In addition, the amended credit agreement requires us to meet certain financial covenants regarding the maintenance of a maximum consolidated secured leverage ratio of consolidated secured debt, over consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as defined. We are also required to maintain a minimum consolidated interest coverage ratio of consolidated EBITDA over consolidated interest expense. As of September 30, 2017,March 31, 2018, the maximum consolidated secured leverage ratio was 3.25x and the minimum consolidated interest coverage ratio was 3.0x. ILG was in compliance in all material respects with the requirements of all applicable financial and operating covenants, and our consolidated secured leverage ratio and consolidated interest coverage ratio under the amended credit agreement were 0.500.68 and 16.41,13.36, respectively.
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VOI Term Securitization
On September 22, 2017, we completed a term securitization transaction involving the issuance of $325 million of asset-backed notes. An indirect wholly-owned subsidiary of Vistana issued $240 million of Class A notes, $59 million of Class B notes and $26 million of Class C notes. The notes are backed by vacation ownership loans and have coupons of 2.33%, 2.63% and 2.93%, respectively, for an overall weighted average coupon of 2.43%. The advance rate for this transaction was approximately 97%.
Of the $325 million in proceeds from the transaction, approximately $65 million was held in escrow to purchase additional vacation ownership loans, including the redemption of the outstanding balance on Vistana’s 2011 securitization or, if not used for said purpose, returned to investors. The remainder of the proceeds will be used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our $600 million revolving credit facility and for general purposes.
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On September 20, 2016, we completed a term securitization transaction involving the issuance of $375 million of asset-backed notes. An indirect wholly-owned subsidiary of Vistana issued $346 million of Class A notes and $29 million of Class B notes. The notes were backed by vacation ownership loans and had coupons of 2.54% and 2.74%, respectively, for an overall weighted average coupon of 2.56%. The advance rate for this transaction was 96.5%.
Of the $375 million in proceeds from the transaction, approximately $33 million was used to repay the outstanding balance on Vistana’s 2010 securitization and the remainder was used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our $600 million revolving credit facility and for general corporate purposes. In the first quarter of 2017, the VIE purchased approximately $19 million of loans, allowing for the release of the proceeds held in escrow as of December 31, 2016.
Free Cash Flow
Free cash flow is a non‑GAAP measure and is defined in “ILG’s Principles of Financial Reporting.” For the ninethree months ended September 30,March 31, 2018 and 2017, and 2016, free cash flow was $249$66 million and $345$54 million, respectively. The change is primarily a result of higher repayments on securitized vacation ownership mortgages receivable given the inclusion of Vistana for the full 2017 periodincrease in net cash and restricted cash provided by operating activities as well as todiscussed above, and lower net proceeds from the 2017 securitization, and to higher capital expenditures, partly offset by higher net cash provided by operating activities.securitization activities, including higher repayments on securitizations.
Dividends and Share Repurchases
In February May and August 2017,2018, our Board of Directors declared a quarterly dividend payment of $0.15$0.175 per share paid in March June, and September2018 of 2017, amounting to $19 million each.$22 million. In November 2017,May 2018, our Board of Directors declared a $0.15$0.175 per share dividend payable December 19, 2017June 12, 2018 to shareholders of record on December 5, 2017.June 1, 2018. Based on the number of shares of common stock outstanding as of September 30, 2017,March 31, 2018, at a dividend of $0.15$0.175 per share, the anticipated cash outflow would be $19$22 million in the fourthsecond quarter of 2017.2018. We currently expect to declare and pay quarterly dividends of similar amounts per share.
In November 2016, the Board authorized repurchases of up to $50 million of ILG common stock, $49$21 million of which was remaining for future repurchases as of December 31, 2016. During2017. There were no repurchases of common stock during the ninethree months ended September 30, 2017, we repurchased 1.1 million shares for approximately $28 million, including commissions, with $21 million available for future repurchases as of quarter-end.
March 31, 2018. Acquired shares of our common stock are held as treasury shares carried at cost on our condensed consolidated financial statements.
Common stock repurchases may be conducted in the open market or in privately negotiated transactions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors. This program may be modified, suspended or terminated by us at any time without notice.
Contractual Obligations and Commercial Commitments
We have funding commitments that could potentially require our performance in the event of demands by third parties or contingent events. At September 30, 2017,March 31, 2018, guarantees, surety bonds and letters of credit totaled $100$101 million. This total includes maximum exposure under guarantees of $52$48 million primarily relating to our vacation rental business’s hotel and resort management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the rental management activities entered into on behalf of the property owners for which either party generally may terminate such leases upon 60 to 90 days prior written notice to the other.
66
In addition, certain of the vacation rental business’s hotel and resort management agreements provide that owners receive specified percentages of the revenue generated under management. In these cases, the operating expenses
66
for the rental operations are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages, and we either retain the balance (if any) as our management fee or make up the deficit. Although such deficits are reasonably possible in a few of these agreements, as of September 30, 2017,March 31, 2018, future amounts are not expected to be significant, individually or in the aggregate. Certain of our vacation rental businesses also enter into agreements, as principal, for services purchased on behalf of property owners for which they are subsequently reimbursed. As such, we are the primary obligor and may be liable for unreimbursed costs. As of September 30, 2017,March 31, 2018, amounts pending reimbursements are not significant.
As of September 30, 2017,March 31, 2018, our letters of credit totaled $14 million and were principally related to our Vacation Ownership sales and financing activities. More specifically, these letters of credit provide alternate assurance on amounts held in escrow which enable our developer entities to access purchaser deposits prior to closings, as well as provide a guarantee of maintenance fees owed by our developer entities during subsidy periods at a particular vacation ownership resort, among other items.
Contractual obligations and commercial commitments at September 30, 2017March 31, 2018 are as follows:
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Contractual Obligations |
| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years |
| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years | ||||||||||
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| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||||||||||||||||
Debt principal(a) |
| $ | 521 |
| $ | — |
| $ | — |
| $ | 171 |
| $ | 350 |
| $ | 570 |
| $ | — |
| $ | — |
| $ | 220 |
| $ | 350 |
Debt interest(a) |
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| 134 |
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| 27 |
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| 53 |
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| 44 |
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| 10 |
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| 129 |
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| 29 |
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| 58 |
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| 41 |
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| 1 |
Purchase obligations and other commitments(b) |
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| 75 |
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| 36 |
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| 28 |
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| 11 |
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| — |
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| 68 |
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| 37 |
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| 25 |
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| 6 |
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| — |
Vacation ownership development commitments(c) |
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| 2 |
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| 2 |
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| — |
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| — |
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| — | |||||||||||||||
Operating leases |
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| 153 |
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| 20 |
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| 33 |
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| 21 |
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| 79 |
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| 144 |
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| 20 |
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| 32 |
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| 19 |
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| 73 |
Total contractual obligations |
| $ | 885 |
| $ | 85 |
| $ | 114 |
| $ | 247 |
| $ | 439 |
| $ | 911 |
| $ | 86 |
| $ | 115 |
| $ | 286 |
| $ | 424 |
(a)Debt principal and projected debt interest represent principal and interest to be paid on our senior notes and revolving credit facility based on the balance outstanding as of September 30, 2017,March 31, 2018, exclusive of debt issuance costs. In addition, also included are certain fees associated with our revolving credit facility based on the unused borrowing capacity and outstanding letters of credit balances, if any, as of September 30, 2017.March 31, 2018. Interest on the revolving credit facility is calculated using the prevailing rates as of September 30, 2017.March 31, 2018.
(b)Purchase obligations and other commitments primarily relate to future guaranteed purchases of rental inventory, operational support services, marketing related benefits, membership fulfillment benefits and other commitments.
(c)Vacation ownership development commitments represents our estimate of remaining costs associated with completing the phases of our vacation ownership projects currently in presales and accounted for under the percentage of completion method.
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Other Commercial Commitments |
| Committed |
| 1 Year |
| 1 ‑ 3 Years |
| 3 ‑ 5 Years |
| 5 Years |
| Committed |
| 1 Year |
| 1 ‑ 3 Years |
| 3 ‑ 5 Years |
| 5 Years | ||||||||||
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Guarantees, surety bonds and letters of credit |
| $ | 100 |
| $ | 65 |
| $ | 25 |
| $ | 10 |
| $ | — |
| $ | 101 |
| $ | 54 |
| $ | 40 |
| $ | 7 |
| $ | — |
(d)(c)Commercial commitments include minimum revenue guarantees related to hotel and resort management agreements, accommodation leases entered into on behalf of the property owners, and funding commitments that could potentially require performance in the event of demands by third parties or contingent events, such as under a letter of credit extended or under guarantees.
67
Off‑Balance Sheet Arrangements
Except as disclosed above in our Contractual Obligations and Commercial Commitments (excluding “Debt principal”), as of September 30, 2017,March 31, 2018, we did not have any significant off‑balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S‑K.
67
Recent Accounting Pronouncements
Refer to Note 2 accompanying our condensed consolidated financial statements for a description of recent accounting pronouncements.
Seasonality
Refer to Note 1 accompanying our condensed consolidated financial statements for a discussion on the impact of seasonality.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in our condensed consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other judgments and assumptions that we believe are reasonable under the circumstances. Actual outcomes could differ from those estimates. We have discussed those estimates that we believe are critical and required the use of significant judgment and use of estimates that could have a significant impact on our financial statements in our 20162017 Annual Report on Form 10‑K and in Note 2 of theaccompanying our condensed consolidated financial statements herein. There have been no material changes to our critical accounting policies in the interim period other than the updates to our significant accounting policies described in Note 2 of theaccompanying our condensed consolidated financial statements herein.
ILG’S PRINCIPLES OF FINANCIAL REPORTING
Definition of ILG’s Non‑GAAP Measures
Earnings before interest, taxes, depreciation and amortization (EBITDA) is defined as net income attributable to common stockholders excluding, if applicable: (1) non‑operating interest income and interest expense, (2) income taxes, (3) depreciation expense, and (4) amortization expense of intangibles.
Adjusted EBITDA is defined as EBITDA excluding, if applicable: (1) non‑cash compensation expense, (2) goodwill and asset impairments, (3) acquisition-related and restructuring costs, (4) other non‑operating income and expense, (5) the impact of the application of purchase accounting, and (6) other special items.
Adjusted net income is defined as net income attributable to common stockholders excluding the impact of (1) acquisition related and restructuring costs, (2) other non‑operating foreign currency remeasurements, (3) the impact of the application of purchase accounting, (4) goodwill and asset impairments, and (5) other special items.
Adjusted earnings per share (EPS) is defined as adjusted net income divided by the weighted average number of shares of common stock outstanding during the period for basic EPS and, additionally, inclusive of dilutive securities for diluted EPS.
Free cash flow is defined as cash and restricted cash provided by operating activities less capital expenditures, plus net changes in financing-related restricted cash and net borrowing and repayment activity relatedpertaining to securitizations, and excluding changes in operating-related restricted cash and certain payments unrelated to our ongoing core business, such as acquisition-related and restructuring costs.
Consolidated timeshare contract sales represent total timeshare interests sold at consolidated projects pursuant to purchase agreements, gross of incentives and net of actual cancellations and rescissions, where we have met a
68
Contract sales represents total VOIs sold at consolidated and unconsolidated projects pursuant to purchase agreements, net of actual cancellations and rescissions, where we have met a minimum threshold amounting to a 10% down payment of the contract purchase price during the period. For upgrade sales, we include only the incremental value purchased.
Our presentation of above‑mentioned non‑GAAP measures may not be comparable to similarly‑titled measures used by other companies. We believe the performance measures (such as EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted EPS) are useful to investors because they represent the consolidated operating results from our segments, excluding the effects of any non‑core expenses or gains. We also believe these measures improve the transparency of our disclosures, provide a meaningful presentation of our results from our business operations, excluding the impact of certain items not related to our core business operations and improve the period‑to‑period comparability of results from business operations. These non‑GAAP performance measures have certain limitations in that they do not take into account the impact of certain expenses to our statement of operations; such as non‑cash compensation and acquisition related and restructuring costs as it relates to adjusted EBITDA.
We believe free cash flow is a useful liquidity measure for both management and investors to evaluate our ability to generate cash for uses other than capital expenditures, changes in financing-related restricted cash, net borrowings and repayments on securitizations and non-core payments such as acquisition and restructuring related payments. These uses may include strategic opportunities, debt repayments, and returning cash to shareholders through dividends and share repurchases. Additionally, we believe this measure assists in understanding the year-over-year comparability of cash flows generated by the Company’s core business activities. Free cash flow has limitations due to the fact that it does not represent the residual cash flow available for discretionary expenditures as detailed in the condensed consolidated statement of cash flows.
We endeavor to compensate for the limitations of the non‑GAAP measures presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non‑GAAP measure.
We report these non‑GAAP measures as supplemental measures to results reported pursuant to GAAP. These measures are among the primary metrics by which we evaluate the performance of our businesses, on which our internal budgets are based and by which management is compensated. We believe that investors should have access to the same set of metrics that we use in analyzing our results. These non‑GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non‑GAAP measures which are discussed below.
Items That Are Excluded From ILG’s Non‑GAAP Measures (as applicable)
Amortization expense of intangibles is a non‑cash expense relating primarily to acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as customer relationships, purchase agreements and resort management agreements are valued and amortized over their estimated lives. We believe that since intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of transaction costs.
Depreciation expense is a non‑cash expense relating to our property and equipment and is recorded on a straight‑line basis to allocate the cost of depreciable assets to operations over their estimated service lives.
Non‑cash compensation expense consists principally of expense associated with the grants of restricted stock units. These expenses are not paid in cash, and we will include the related shares in our future calculations of diluted shares of stock outstanding. Upon vesting of restricted stock units, the awards will be settled, at our discretion, on a net basis, with us remitting the required tax withholding amount from our current funds.
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Goodwill and asset impairments are non‑cash expenses relating to adjustments to goodwill and long‑lived assets whereby the carrying value exceeds the fair value of the related assets, and are infrequent in nature.
Acquisition-related and restructuring costs are transaction fees, costs incurred in connection with performing due diligence, subsequent adjustments to our initial estimate of contingent consideration obligations associated with business acquisitions, and other direct costs related to acquisition activities. Additionally, this item includes certain restructuring charges primarily related to workforce reductions, costs associated with integrating acquired businesses and estimated costs of exiting contractual commitments.
Other non‑operating income and expense consists principally of foreign currency translations of cash held in certain countries in currencies, principally U.S. dollars, other than their functional currency, in addition to any gains or losses on extinguishment of debt.
Impact of the application of purchase accounting represents the difference between amounts derived from the fair value remeasurement of assets and liabilities acquired in a business combination versus the historical basis. We believe generally this is most meaningful in the first year subsequent to an acquisition.
Other special items consists of other items that we believe are not related to our core business operations. For the three and nine months ended September 30,March 31, 2018 and 2017, and 2016, such items include (as applicable to the respective period): (i) the gain on bargain purchase recognized as part of the Vistana acquisition, (ii) costs related to the litigation matters described in Note 21 and (iii)accompanying our condensed consolidated financial statements, (ii) impact to our financial statements related to natural disasters, including Hurricane Irma and other named storms. storms, and (iii) costs related to our board of directors’ strategic review.
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RECONCILIATIONS OF NON‑GAAP MEASURES
The following tables reconcile EBITDA and adjusted EBITDA to operating income for our operating segments and to net income attributable to common stockholders in total to operating income, and to EBITDA and adjusted EBITDA for our operating segments for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (in millions). The noncontrolling interest relates primarily to the Vacation Ownership segment.
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| Three Months Ended September 30, 2017 |
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| Ownership |
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| Consolidated |
| Ownership |
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| Consolidated | ||||||
Net income attributable to common stockholders |
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| $ | 43 | |||||||||
Net income attributable to noncontrolling interest |
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| 2 | |||||||||
Net income |
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| 45 | |||||||||
Income tax provision |
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| 20 | |||||||||
Equity in earnings from unconsolidated entities |
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Interest expense |
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| 7 | |||||||||
Operating income |
| $ | 17 |
| $ | 49 |
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| 66 | |||||||||
Other non-operating income (expense), net |
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| 7 |
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| (2) |
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| 5 | |||||||||
Equity in earnings from unconsolidated entities |
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| 1 |
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| — |
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| 1 | |||||||||
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| (2) |
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| — |
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| (2) | |||||||||
Depreciation expense |
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| 10 |
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| 5 |
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| 15 | |||||||||
Amortization expense of intangibles |
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| 2 |
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| 3 |
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| 5 | |||||||||
EBITDA |
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| 35 |
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| 55 |
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| 90 | |||||||||
Other special items |
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| 3 |
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| 1 |
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| 4 | |||||||||
Asset impairments |
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| 2 |
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| — |
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| 2 | |||||||||
Acquisition related and restructuring costs |
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| 1 |
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| — |
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| 1 | |||||||||
Less: Other non-operating (income) expense, net |
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| (7) |
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| 2 |
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| (5) | |||||||||
Non-cash compensation expense |
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| 2 |
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| 4 |
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| 6 | |||||||||
Adjusted EBITDA |
| $ | 43 |
| $ | 44 |
| $ | 87 |
| $ | 36 |
| $ | 62 |
| $ | 98 |
Non-cash compensation expense |
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| (3) |
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| (2) |
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| (5) | |||||||||
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| (1) |
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| — |
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Asset impairments |
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Other special items |
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| — |
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EBITDA |
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| 33 |
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| 40 |
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| 73 | |||||||||
Amortization expense of intangibles |
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| (1) |
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| — |
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Less: Net income attributable to noncontrolling interest |
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| 1 |
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| — |
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| 1 | |||||||||
Less: Other non-operating expense, net |
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| 1 |
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| — |
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| 1 | |||||||||
Operating income |
| $ | 22 |
| $ | 32 |
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| 54 | |||||||||
Interest income |
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| — | |||||||||
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|
|
|
| 30 | |||||||||
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (1) | |||||||||
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 29 |
71
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended September 30, 2016 | |||||||
|
| Vacation |
| Exchange |
|
|
| ||
|
| Ownership |
| and Rental |
| Consolidated | |||
Adjusted EBITDA | $ |
| 33 |
| $ | 47 |
| $ | 80 |
Non-cash compensation expense |
|
| (2) |
|
| (3) |
|
| (5) |
Other non-operating income (expense), net |
|
| (5) |
|
| 1 |
|
| (4) |
Acquisition-related and restructuring costs |
|
| (3) |
|
| — |
|
| (3) |
Other special items |
|
| — |
|
| (9) |
|
| (9) |
Impact of purchase accounting |
|
| (3) |
|
| — |
|
| (3) |
EBITDA |
|
| 20 |
|
| 36 |
|
| 56 |
Amortization expense of intangibles |
|
| (3) |
|
| (3) |
|
| (6) |
Depreciation expense |
|
| (9) |
|
| (5) |
|
| (14) |
Equity in earnings from unconsolidated entities |
|
| (2) |
|
| — |
|
| (2) |
Less: Other special items (gain on bargain purchase) |
|
| — |
|
| 9 |
|
| 9 |
Less: Other non-operating income (expense), net |
|
| 5 |
|
| (1) |
|
| 4 |
Operating income | $ |
| 11 |
| $ | 36 |
|
| 47 |
Interest income |
|
|
|
|
|
|
|
| — |
Interest expense |
|
|
|
|
|
|
|
| (6) |
Other non-operating income, net |
|
|
|
|
|
|
|
| (4) |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 2 |
Other special items |
|
|
|
|
|
|
|
| (9) |
Income tax benefit |
|
|
|
|
|
|
|
| 2 |
Net income |
|
|
|
|
|
|
|
| 32 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| — |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 32 |
72
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2017 | |||||||
|
| Vacation |
| Exchange |
|
|
| ||
|
| Ownership |
| and Rental |
| Consolidated | |||
Adjusted EBITDA |
| $ | 109 |
| $ | 152 |
| $ | 261 |
Non-cash compensation expense |
|
| (10) |
|
| (8) |
|
| (18) |
Other non-operating income (expense), net |
|
| 9 |
|
| (3) |
|
| 6 |
Acquisition-related and restructuring costs |
|
| (8) |
|
| (2) |
|
| (10) |
Asset impairments |
|
| (9) |
|
| — |
|
| (9) |
Other special items |
|
| (1) |
|
| 1 |
|
| — |
Impact of purchase accounting |
|
| 4 |
|
| — |
|
| 4 |
EBITDA |
|
| 94 |
|
| 140 |
|
| 234 |
Amortization expense of intangibles |
|
| (6) |
|
| (9) |
|
| (15) |
Depreciation expense |
|
| (29) |
|
| (15) |
|
| (44) |
Equity in earnings from unconsolidated entities |
|
| (4) |
|
| — |
|
| (4) |
Less: Net income attributable to noncontrolling interest |
|
| 2 |
|
| — |
|
| 2 |
Less: Other special items (gain on bargain purchase) |
|
| — |
|
| (2) |
|
| (2) |
Less: Other non-operating income (expense), net |
|
| (9) |
|
| 3 |
|
| (6) |
Operating income |
| $ | 48 |
| $ | 117 |
|
| 165 |
Interest income |
|
|
|
|
|
|
|
| 1 |
Interest expense |
|
|
|
|
|
|
|
| (20) |
Other non-operating income, net |
|
|
|
|
|
|
|
| 6 |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 4 |
Gain on bargain purchase |
|
|
|
|
|
|
|
| 2 |
Income tax provision |
|
|
|
|
|
|
|
| (55) |
Net income |
|
|
|
|
|
|
|
| 103 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (2) |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 101 |
73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2016 |
| Three Months Ended March 31, 2017 | ||||||||||||||
|
| Vacation |
| Exchange |
|
|
|
| Vacation |
| Exchange |
|
|
| ||||
|
| Ownership |
| and Rental |
| Consolidated |
| Ownership |
| and Rental |
| Consolidated | ||||||
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 44 | |||||||||
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| 1 | |||||||||
Net income |
|
|
|
|
|
|
|
| 45 | |||||||||
Income tax provision |
|
|
|
|
|
|
|
| 25 | |||||||||
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| (2) | |||||||||
Other non-operating expense, net |
|
|
|
|
|
|
|
| (10) | |||||||||
Interest expense |
|
|
|
|
|
|
|
| 5 | |||||||||
Operating income |
| $ | 16 |
| $ | 47 |
|
| 63 | |||||||||
Other non-operating income (expense), net |
|
| 11 |
|
| (1) |
|
| 10 | |||||||||
Equity in earnings from unconsolidated entities |
|
| 2 |
|
| — |
|
| 2 | |||||||||
Net income attributable to noncontrolling interest |
|
| (1) |
|
| — |
|
| (1) | |||||||||
Depreciation expense |
|
| 10 |
|
| 5 |
|
| 15 | |||||||||
Amortization expense of intangibles |
|
| 2 |
|
| 3 |
|
| 5 | |||||||||
EBITDA |
|
| 40 |
|
| 54 |
|
| 94 | |||||||||
Impact of purchase accounting |
|
| (3) |
|
| — |
|
| (3) | |||||||||
Asset impairments |
|
| 2 |
|
| — |
|
| 2 | |||||||||
Acquisition related and restructuring costs |
|
| 3 |
|
| — |
|
| 3 | |||||||||
Less: Other non-operating (income) expense, net |
|
| (11) |
|
| 1 |
|
| (10) | |||||||||
Non-cash compensation expense |
|
| 2 |
|
| 4 |
|
| 6 | |||||||||
Adjusted EBITDA |
| $ | 59 |
| $ | 137 |
| $ | 196 |
| $ | 33 |
| $ | 59 |
| $ | 92 |
Non-cash compensation expense |
|
| (5) |
|
| (8) |
|
| (13) | |||||||||
Other non-operating income (expense), net |
|
| (5) |
|
| 3 |
|
| (2) | |||||||||
Acquisition-related and restructuring costs |
|
| (12) |
|
| (7) |
|
| (19) | |||||||||
Other special items |
|
| — |
|
| 188 |
|
| 188 | |||||||||
Impact of purchase accounting |
|
| (7) |
|
| — |
|
| (7) | |||||||||
EBITDA |
|
| 30 |
|
| 313 |
|
| 343 | |||||||||
Amortization expense of intangibles |
|
| (6) |
|
| (8) |
|
| (14) | |||||||||
Depreciation expense |
|
| (14) |
|
| (14) |
|
| (28) | |||||||||
Equity in earnings from unconsolidated entities |
|
| (4) |
|
| — |
|
| (4) | |||||||||
Less: Net income attributable to noncontrolling interest |
|
| 2 |
|
| — |
|
| 2 | |||||||||
Less: Other special items (gain on bargain purchase) |
|
| — |
|
| (188) |
|
| (188) | |||||||||
Less: Other non-operating income (expense), net |
|
| 5 |
|
| (3) |
|
| 2 | |||||||||
Operating income |
| $ | 13 |
| $ | 100 |
|
| 113 | |||||||||
Interest income |
|
|
|
|
|
|
|
| 1 | |||||||||
Interest expense |
|
|
|
|
|
|
|
| (18) | |||||||||
Other non-operating income, net |
|
|
|
|
|
|
|
| (2) | |||||||||
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 4 | |||||||||
Other special items |
|
|
|
|
|
|
|
| 188 | |||||||||
Income tax provision |
|
|
|
|
|
|
|
| (46) | |||||||||
Net income |
|
|
|
|
|
|
|
| 240 | |||||||||
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (2) | |||||||||
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 238 |
The following tables present the inputs used to compute operating income and adjusted EBITDA margin for our operating segments for the three and nine months ended September 30,March 31, 2018 and 2017 and 2016 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vacation Ownership |
| Vacation Ownership |
| Vacation Ownership | ||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
Revenue |
| $ | 295 |
| $ | 267 |
| $ | 870 |
| $ | 476 |
| $ | 311 |
| $ | 272 |
Revenue excluding cost reimbursement revenue |
|
| 228 |
|
| 204 |
|
| 678 |
|
| 358 |
|
| 267 |
|
| 214 |
Operating income |
|
| 22 |
|
| 11 |
|
| 48 |
|
| 13 |
|
| 17 |
|
| 16 |
Adjusted EBITDA |
|
| 43 |
|
| 33 |
|
| 109 |
|
| 59 |
|
| 36 |
|
| 33 |
Margin computations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
| 7% |
|
| 4% |
|
| 6% |
|
| 3% |
|
| 5% |
|
| 6% |
Operating income margin excluding cost reimbursement revenue |
|
| 10% |
|
| 5% |
|
| 7% |
|
| 4% |
|
| 6% |
|
| 7% |
Adjusted EBITDA margin |
|
| 15% |
|
| 12% |
|
| 13% |
|
| 12% |
|
| 12% |
|
| 12% |
Adjusted EBITDA margin excluding cost reimbursement revenue |
|
| 19% |
|
| 16% |
|
| 16% |
|
| 16% |
|
| 13% |
|
| 15% |
7472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exchange and Rental |
| Exchange and Rental |
| Exchange and Rental | ||||||||||||
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
Revenue |
| $ | 151 |
| $ | 151 |
| $ | 478 |
| $ | 425 |
| $ | 171 |
| $ | 172 |
Revenue excluding cost reimbursement revenue |
|
| 127 |
|
| 126 |
|
| 403 |
|
| 354 |
|
| 150 |
|
| 146 |
Operating income |
|
| 32 |
|
| 36 |
|
| 117 |
|
| 100 |
|
| 49 |
|
| 47 |
Adjusted EBITDA |
|
| 44 |
|
| 47 |
|
| 152 |
|
| 137 |
|
| 62 |
|
| 59 |
Margin computations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
| 21% |
|
| 24% |
|
| 24% |
|
| 24% |
|
| 29% |
|
| 27% |
Operating income margin excluding cost reimbursement revenue |
|
| 25% |
|
| 29% |
|
| 29% |
|
| 28% |
|
| 33% |
|
| 32% |
Adjusted EBITDA margin |
|
| 29% |
|
| 31% |
|
| 32% |
|
| 32% |
|
| 36% |
|
| 34% |
Adjusted EBITDA margin excluding cost reimbursement revenue |
|
| 35% |
|
| 37% |
|
| 38% |
|
| 39% |
|
| 41% |
|
| 40% |
The following table reconciles cash provided by operating activities to free cash flow for the ninethree months ended September 30,March 31, 2018 and 2017 and 2016 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended |
| Three Months Ended | ||||||||
|
| September 30, |
| March 31, | ||||||||
|
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||
Operating activities before inventory spend |
| $ | 337 |
| $ | 177 |
| $ | 146 |
| $ | 145 |
Inventory spend |
|
| (179) |
|
| (103) |
|
| (21) |
|
| (57) |
Net cash provided by operating activities |
|
| 158 |
|
| 74 | ||||||
Net changes in operating-related restricted cash |
|
| 27 |
|
| (30) | ||||||
Net cash and restricted cash provided by operating activities |
|
| 152 |
|
| 58 | ||||||
Repayments on securitizations |
|
| (100) |
|
| (56) |
|
| (45) |
|
| (32) |
Proceeds from securitizations, net of debt issuance costs |
|
| 322 |
|
| 370 | ||||||
Net changes in financing-related restricted cash |
|
| (58) |
|
| (26) |
|
| 1 |
|
| 18 |
Net securitization activities |
|
| 164 |
|
| 288 |
|
| (44) |
|
| (14) |
Net changes in operating-related restricted cash |
|
| (27) |
|
| 30 | ||||||
Capital expenditures |
|
| (80) |
|
| (42) |
|
| (16) |
|
| (22) |
Acquisition-related and restructuring payments |
|
| 7 |
|
| 25 |
|
| 1 |
|
| 2 |
Free cash flow |
| $ | 249 |
| $ | 345 |
| $ | 66 |
| $ | 54 |
7573
The following tables reconciletable reconciles net income attributable to common stockholders to adjusted net income, and to adjusted earnings per share for the three and nine months ended September 30,March 31, 2018 and 2017 (in millions except share and 2016 (in millions)per share data).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | |||||||||||||
|
| September 30, |
| September 30, |
| March 31, | |||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | |||||||
Net income attributable to common stockholders |
| $ | 29 |
| $ | 32 |
| $ | 101 |
| $ | 238 |
| $ | 43 |
| $ | 44 | |
Acquisition-related and restructuring costs |
|
| 3 |
|
| 4 |
|
| 10 |
|
| 19 |
|
| 1 |
|
| 3 | |
Other non-operating foreign currency remeasurements |
|
| 1 |
|
| 4 |
|
| (6) |
|
| 2 |
|
| (5) |
|
| (10) | |
Impact of purchase accounting |
|
| — |
|
| 3 |
|
| (2) |
|
| 7 |
|
| — |
|
| 2 | |
Other special items |
|
| 1 |
|
| 9 |
|
| — |
|
| (188) |
|
| 7 |
|
| — | |
Asset impairments |
|
| 4 |
|
| — |
|
| 9 |
|
| — |
|
| 2 |
|
| 2 | |
Income tax impact on adjusting items(1) |
|
| (3) |
|
| (3) |
|
| (4) |
|
| 26 |
|
| (2) |
|
| 1 | |
Adjusted net income |
| $ | 35 |
| $ | 49 |
| $ | 108 |
| $ | 104 |
| $ | 46 |
| $ | 42 | |
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
| $ | 0.24 |
| $ | 0.26 |
| $ | 0.81 |
| $ | 2.55 |
| $ | 0.35 |
| $ | 0.35 | |
Diluted |
| $ | 0.23 |
| $ | 0.25 |
| $ | 0.80 |
| $ | 2.53 |
| $ | 0.34 |
| $ | 0.35 | |
Adjusted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
| $ | 0.28 |
| $ | 0.39 |
| $ | 0.87 |
| $ | 1.11 |
| $ | 0.37 |
| $ | 0.33 | |
Diluted |
| $ | 0.28 |
| $ | 0.39 |
| $ | 0.85 |
| $ | 1.10 |
| $ | 0.36 |
| $ | 0.33 | |
Weighted average number of common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Weighted average number of shares of common stock outstanding (in thousands): |
|
|
|
|
|
| |||||||||||||
Basic |
|
| 124,122 |
|
| 124,762 |
|
| 124,168 |
|
| 93,157 |
|
| 123,826 |
|
| 123,998 | |
Diluted |
|
| 126,002 |
|
| 125,763 |
|
| 125,908 |
|
| 93,858 |
|
| 125,751 |
|
| 125,582 |
(1) | All adjusting items were tax effected using the applicable projected annual effective tax rate since none of the adjustments were discrete to the periods. |
The following table reconcilereconciles consolidated timeshare contract sales to sales of vacation ownership products, net, for the three months ended September 30,March 31, 2018 and 2017 and 2016 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended |
| Three Months Ended | ||||||||||||
|
| September 30, |
| September 30, |
| March 31, | ||||||||||||
|
| 2017 |
| 2016 |
| 2017 |
| 2016 |
| 2018 |
| 2017 | ||||||
Total timeshare contract sales |
| $ | 130 |
| $ | 123 |
| $ | 404 |
| $ | 223 | ||||||
Provision for loan losses |
|
| (11) |
|
| (8) |
|
| (26) |
|
| (12) | ||||||
Contract sales of unconsolidated projects |
|
| (14) |
|
| (16) |
|
| (48) |
|
| (49) | ||||||
Percentage of completion |
|
| 3 |
|
| (5) |
|
| 3 |
|
| (7) | ||||||
Other items and adjustments(1) |
|
| 10 |
|
| 2 |
|
| 18 |
|
| (1) | ||||||
Sales of vacation ownership products, net |
| $ | 118 |
| $ | 96 |
| $ | 351 |
| $ | 154 |
| $ | 123 |
| $ | 105 |
Provision for loan losses |
|
| 11 |
|
| 8 |
|
| 26 |
|
| 12 |
|
| 5 |
|
| 7 |
Percentage of completion |
|
| (3) |
|
| 5 |
|
| (3) |
|
| 7 | ||||||
Other items and adjustments(1) |
|
| (9) |
|
| (2) |
|
| (18) |
|
| 1 |
|
| 5 |
|
| 10 |
Consolidated timeshare contract sales |
| $ | 117 |
| $ | 107 |
| $ | 356 |
| $ | 174 |
| $ | 133 |
| $ | 122 |
(1) | Includes adjustments for incentives, |
76
The following tables represent reconciliations of our revenues between our condensed consolidated income statement format and our segment presentation format for the three and nine months ended September 30, 2017 and 2016 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended September 30, 2017 |
|
|
|
|
|
| For the Three Months Ended September 30, 2016 |
|
|
| ||||||||||||||||||||||||
|
|
| Service and membership related |
|
| Sales of vacation ownership products |
|
| Rental and ancillary services |
|
| Consumer financing |
|
| Cost reimbursements |
|
| Total |
|
|
| Service and membership related |
|
| Sales of vacation ownership products |
|
| Rental and ancillary services |
|
| Consumer financing |
|
| Cost reimbursements |
|
| Total |
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
| $ | - |
| $ | - |
| $ | 52 |
| $ | - |
| $ | - |
| $ | 52 |
|
| $ | - |
| $ | - |
| $ | 53 |
| $ | - |
| $ | - |
| $ | 53 |
Management fee and other revenue |
|
| 35 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 35 |
|
|
| 32 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 32 |
Sales of vacation ownership products, net |
|
| - |
|
| 118 |
|
| - |
|
| - |
|
| - |
|
| 118 |
|
|
| - |
|
| 96 |
|
| - |
|
| - |
|
| - |
|
| 96 |
Consumer financing revenue |
|
| - |
|
| - |
|
| - |
|
| 23 |
|
| - |
|
| 23 |
|
|
| - |
|
| - |
|
| - |
|
| 23 |
|
| - |
|
| 23 |
Cost reimbursement revenue |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 67 |
| �� | 67 |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
| 63 |
|
| 63 |
Total Vacation Ownership revenue |
|
| 35 |
|
| 118 |
|
| 52 |
|
| 23 |
|
| 67 |
|
| 295 |
|
|
| 32 |
|
| 96 |
|
| 53 |
|
| 23 |
|
| 63 |
|
| 267 |
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
|
| 32 |
|
| - |
|
| 15 |
|
| - |
|
| - |
|
| 47 |
|
|
| 34 |
|
| - |
|
| 13 |
|
| - |
|
| - |
|
| 47 |
Membership fee revenue |
|
| 36 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 36 |
|
|
| 35 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 35 |
Ancillary member revenue |
|
| 2 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 2 |
|
|
| 1 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 1 |
Total member revenue |
|
| 70 |
|
| - |
|
| 15 |
|
| - |
|
| - |
|
| 85 |
|
|
| 70 |
|
| - |
|
| 13 |
|
| - |
|
| - |
|
| 83 |
Club rental revenue |
|
| - |
|
| - |
|
| 26 |
|
| - |
|
| - |
|
| 26 |
|
|
| - |
|
| - |
|
| 24 |
|
| - |
|
| - |
|
| 24 |
Other revenue |
|
| 3 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 4 |
|
|
| 5 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 6 |
Rental management revenue |
|
| 11 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 12 |
|
|
| 12 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 13 |
Cost reimbursement revenue |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 24 |
|
| 24 |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
| 25 |
|
| 25 |
Total Exchange and Rental revenue |
|
| 84 |
|
| - |
|
| 43 |
|
| - |
|
| 24 |
|
| 151 |
|
|
| 87 |
|
| - |
|
| 39 |
|
| - |
|
| 25 |
|
| 151 |
Total ILG revenue |
| $ | 119 |
| $ | 118 |
| $ | 95 |
| $ | 23 |
| $ | 91 |
| $ | 446 |
|
| $ | 119 |
| $ | 96 |
| $ | 92 |
| $ | 23 |
| $ | 88 |
| $ | 418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, 2017 |
|
|
|
|
|
| For the Nine Months Ended September 30, 2016 |
|
|
| ||||||||||||||||||||||||
|
|
| Service and membership related |
|
| Sales of vacation ownership products |
|
| Rental and ancillary services |
|
| Consumer financing |
|
| Cost reimbursements |
|
| Total |
|
|
| Service and membership related |
|
| Sales of vacation ownership products |
|
| Rental and ancillary services |
|
| Consumer financing |
|
| Cost reimbursements |
|
| Total |
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
| $ | - |
| $ | - |
| $ | 162 |
| $ | - |
| $ | - |
| $ | 162 |
|
| $ | - |
| $ | - |
| $ | 86 |
| $ | - |
| $ | - |
| $ | 86 |
Management fee and other revenue |
|
| 99 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 99 |
|
|
| 81 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 81 |
Sales of vacation ownership products, net |
|
| - |
|
| 351 |
|
| - |
|
| - |
|
| - |
|
| 351 |
|
|
| - |
|
| 154 |
|
| - |
|
| - |
|
| - |
|
| 154 |
Consumer financing revenue |
|
| - |
|
| - |
|
| - |
|
| 66 |
|
| - |
|
| 66 |
|
|
| - |
|
| - |
|
| - |
|
| 37 |
|
| - |
|
| 37 |
Cost reimbursement revenue |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 192 |
|
| 192 |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
| 118 |
|
| 118 |
Total Vacation Ownership revenue |
|
| 99 |
|
| 351 |
|
| 162 |
|
| 66 |
|
| 192 |
|
| 870 |
|
|
| 81 |
|
| 154 |
|
| 86 |
|
| 37 |
|
| 118 |
|
| 476 |
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
|
| 109 |
|
| - |
|
| 46 |
|
| - |
|
| - |
|
| 155 |
|
|
| 106 |
|
| - |
|
| 49 |
|
| - |
|
| - |
|
| 155 |
Membership fee revenue |
|
| 105 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 105 |
|
|
| 99 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 99 |
Ancillary member revenue |
|
| 5 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 5 |
|
|
| 4 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 4 |
Total member revenue |
|
| 219 |
|
| - |
|
| 46 |
|
| - |
|
| - |
|
| 265 |
|
|
| 209 |
|
| - |
|
| 49 |
|
| - |
|
| - |
|
| 258 |
Club rental revenue |
|
| - |
|
| - |
|
| 83 |
|
| - |
|
| - |
|
| 83 |
|
|
| - |
|
| - |
|
| 42 |
|
| - |
|
| - |
|
| 42 |
Other revenue |
|
| 14 |
|
| - |
|
| 4 |
|
| - |
|
| - |
|
| 18 |
|
|
| 17 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 18 |
Rental management revenue |
|
| 34 |
|
| - |
|
| 3 |
|
| - |
|
| - |
|
| 37 |
|
|
| 33 |
|
| - |
|
| 3 |
|
| - |
|
| - |
|
| 36 |
Cost reimbursement revenue |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 75 |
|
| 75 |
|
|
| - |
|
| - |
|
| - |
|
| - |
|
| 71 |
|
| 71 |
Total Exchange and Rental revenue |
|
| 267 |
|
| - |
|
| 136 |
|
| - |
|
| 75 |
|
| 478 |
|
|
| 259 |
|
| - |
|
| 95 |
|
| - |
|
| 71 |
|
| 425 |
Total ILG revenue |
| $ | 366 |
| $ | 351 |
| $ | 298 |
| $ | 66 |
| $ | 267 |
| $ | 1,348 |
|
| $ | 340 |
| $ | 154 |
| $ | 181 |
| $ | 37 |
| $ | 189 |
| $ | 901 |
Definition of ILG’s Revenue Line Items
Club rental revenue – Represents rentals generated by the Vistana Signature Network and Hyatt Residence Club mainly to monetize inventory to provide exchanges through hotel loyalty programs.
Consumer financing revenue – Includes interest income on vacation ownership mortgages receivable, as well as loan servicing fees from unconsolidated entities.
77
Cost reimbursement revenue - Represents the compensation and other employee-related costs directly associated with managing properties that are included in both revenue and cost of sales and that are passed on to the property owners or homeowner associations without mark-up. Cost reimbursement revenue of the Vacation Ownership segment also includes reimbursement, without mark-up, of certain sales and marketing expenses and, in some cases, certain other expenses, pursuant to contractual arrangements.
Management fee and other revenue - Represents vacation ownership property management revenue earned by our Vacation Ownership segment, exclusive of cost reimbursements, as well as other fee revenue.
Membership fee revenue - Represents fees paid for membership in the Interval Network, Vistana Signature Network and Hyatt Residence Club.
Other revenue - Includes revenue related primarily to exchange and rental transaction activity and membership programs outside of the Interval Network, Vistana Signature Network and Hyatt Residence Club, sales of marketing materials primarily for point-of-sale developer use, and certain financial services-related fee income.
Rental and ancillary – Includes our rental activities such as Getaways, club rentals and owned hotel revenues, as well as associated resort ancillary revenues.
Rental management revenue – Represents rental management revenue earned by our vacation rental businesses within our Exchange and Rental segment, exclusive of cost reimbursement revenue.
Resort operations revenue - Pertains to our revenue generating activities from rentals of owned vacation ownership inventory (exclusive of lead-generation) along with ancillary resort services, in addition to rental and ancillary revenue generated by owned hotels.
Sales of vacation ownership products, net – Includes sales of vacation ownership products, net, for HVO and Vistana.
Service and membership revenue– Revenue associated with providing services including membership-related activities and exchange transactions, as well as vacation ownership and vacation rental management businesses.
Transaction revenue – Interval Network, Vistana Signature Network and Hyatt Residence Club transactional and service fees paid primarily for exchanges, Getaways, reservation servicing and related transactions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We conduct business in certain foreign markets, primarily in the United Kingdom, Mexico and European Union markets. Our foreign currency risk primarily relates to our investments in foreign subsidiaries that transact business in a functional currency other than the U.S. dollar. This exposure is mitigated as we have generally reinvested profits in our international operations. As currency exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year‑over‑year comparability of operating results.
74
In addition, we are exposed to foreign currency risk related to transactions and/or assets and liabilities denominated in a currency other than the functional currency. Historically, we have not hedged currency risks.
Furthermore, in an effort to mitigate economic risk, we hold U.S. dollars in certain subsidiaries that have a functional currency other than the U.S. dollar.
78
Operating foreign currency exchange resulted in a net lossgains of $1$0.3 million and $0.5 million for the three months ended September 30,March 31, 2018 and 2017, and 2016 and resulted in a minimal net gain compared to a $1 million net loss for the nine months ended September 30, 2017 and 2016, respectively. This activity is attributable to foreign currency remeasurements of operating assets and liabilities denominated in a currency other than their functional currency.
Non‑operatingNon-operating foreign exchange net loss was $1gains were $5 million and $10 million for the thirdfirst quarter of 2018 and 2017, compared to a $4 million net loss in the prior year quarter. The unfavorable fluctuations in the third quarter of 2017 and 2016 were primarily driven by U.S. dollar denominated intercompany loan positions held as of the respective quarter-end which were affected by the stronger dollar compared to the Mexican peso.
Non‑operating foreign exchange net gain was $6 million for the nine months ended September 30, 2017 compared to a net loss of $2 million for the nine months ended September 30, 2016.respectively. The favorable fluctuations in in the period2018 and 2017 quarters were primarily driven by U.S. dollar denominated intercompany loan positions held at September 30,March 31, 2018 and 2017, respectively, which were affected by the weaker dollar compared to the Mexican peso, partly offset by the remeasurement of U.S. dollar denominated excessnon-operating cash positions held by our Mexican subsidiary at year-end. The unfavorable fluctuations during the 2016 period were primarily driven by U.S. dollar denominated intercompany loan positions held at September 30, 2016 which were affected by the stronger dollar compared to the Mexican peso, partly offset by favorable fluctuations stemming from the stronger dollar against the British pound.respective quarter-end.
Our operations in international markets are exposed to potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on us is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing, operating and hedging strategies. A hypothetical 10% weakening/strengthening in foreign exchange rates to the U.S. dollar for the three and nine months ended September 30, 2017March 31, 2018 would result in an approximate change to revenue of $4 million and $12 million, respectively.$5 million. There have been no material quantitative changes in market risk exposures since December 31, 2016.2017.
Interest Rate Risk
We are exposed to interest rate risk through borrowings under our amended credit agreement which bears interest at variable rates. The interest rate on the amended credit agreement is based on (at our election) either LIBOR plus a predetermined margin that ranges from 1.25% to 2.50%, or the Base Rate as defined in the amended credit agreement plus a predetermined margin that ranges from 0.25% to 1.50%, in each case based on ILG’s leverage ratio. As of September 30, 2017,March 31, 2018, the applicable margin was 1.75% per annum for LIBOR revolving loans and 0.75% per annum for Base Rate loans. As of September 30, 2017,March 31, 2018, we had $171$220 million outstanding under our revolving credit facility; a hypothetical 100 basis point change in interest rates would result in an approximate change to interest expense of $2$1 million for the ninethree months ended September 30, 2017.March 31, 2018. While we currently do not hedge our interest rate exposure, this risk is mitigated by the issuance of $350 million senior notes in April 2015 at a fixed rate of 5.625% as well as variable interest rates earned on our cash balances, as well as current and future securitizations which are or are expected to be at fixed rates of interest.
Additionally, our consumer financing business generates income from the spread between the revenue generated on loans originated less its costs to fund and service those loans, including interest costs related to associated securitizations. Adverse changes in prevailing market rates for securitizations could negatively impact income from our consumer financing business in the future.
Item 4. Controls and Procedures
We monitor and evaluate on an ongoing basis our disclosure controls and internal control over financial reporting in order to improve our overall effectiveness. In the course of this evaluation, we modify and refine our internal processes as conditions warrant.
79
As required by Rule 13a‑15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined by Rule 13a‑15(e) and 15d‑15(e) under
75
the Exchange Act). Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in our filings with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a‑15(d) of the Exchange Act, we, under the supervision and with the participation of our management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, also evaluated whether any changes occurred to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. In connection with the May 2016 acquisition of Vistana, we have been reviewing and working to strengthen standards, systems, procedures and controls at Vistana. We are continuing to integrate Vistana into our overall control over financial reporting, as a result, there have been changes to internal controls over financial reporting during our most recent completed quarter that have materially affected or are reasonably likely to materially affect our internal controls over financial reporting.
OTHER INFORMATION
See description of legal proceedings under litigation in Note 21 to theaccompanying our condensed consolidated financial statements.
See Part I, Item IA., “Risk Factors,” of ILG’s 20162017 Annual Report on Form 10-K, for a detailed discussion
of the risk factors affecting ILG. There have been no material changes from the risk factors described in the Annual Reports.
Report, with the following clarifications.
Under the Tax Matters Agreement, we are restricted from taking certain actions that may adversely affect the intended U.S. federal income tax treatment of the contribution, the distribution, the merger and certain related internal reorganization transactions consummated in connection with the acquisition of Vistana, and such restrictions may significantly impair our ability to implement strategic initiatives that otherwise would be beneficial.
The Tax Matters Agreement generally restricts us from taking certain actions after the merger of Vistana (the “Merger”) that may adversely affect the intended U.S. federal income tax treatment of the Merger and certain related transactions consummated in connection with Starwood’s internal reorganization. Failure to adhere to these restrictions, including in certain circumstances that may be outside of our control, could result in tax being imposed on Starwood or on Starwood shareholders for which we could bear responsibility and for which we could be obligated to indemnify Starwood. In addition, even if we are not responsible for tax liabilities of Starwood under the Tax Matters Agreement, Vistana nonetheless could be liable under applicable tax law for such liabilities if Starwood were to fail to pay such taxes. Because of these provisions in the Tax Matters Agreement, unless certain conditions are satisfied we are restricted from taking certain actions, particularly for the two years following the Merger, including (among other things) the ability to freely issue stock, to make acquisitions and to raise additional equity capital. These restrictions could have a
80
material adverse effect on our liquidity and financial condition, and otherwise could impair our ability to implement strategic initiatives. Also, our indemnity obligation to Starwood might discourage, delay or prevent a change of control that our stockholders may consider favorable.
Even if the contribution and distribution, taken together, otherwise qualify as a reorganization under Sections 368(a) and 355 of the Code, the distribution will nonetheless be taxable to Starwood (but not to Starwood stockholders) pursuant to Section 355(e) of the Code if 50% or more of the stock of either Starwood or Vistana (including ILG’s stock after the Merger, as the parent of Vistana) is acquired, directly or indirectly (taking into account our stock acquired by Starwood stockholders in the Merger), as part of a plan or series of related transactions that includes the Distribution. In that regard, because Starwood stockholders owned more than 50% of our stock following the Merger, the Merger standing alone will not cause the Distribution to be taxable under Section 355(e) of the Code, and the Distribution Tax Opinion so provided. However, if the IRS were to determine that other acquisitions of Starwood stock or our stock are part of a plan or series of related transactions that includes the Distribution, such determination could result in the recognition of gain by Starwood (but not by Starwood stockholders) for U.S. federal income tax purposes.
Spanish Court rulings invalidating timeshare contracts may adversely affect our management business and exchange membership in Spain.
Courts in Spain have issued a series of rulings regarding sales of timeshare in that country between January 1999 and July 2012 that renders the consumer contracts null and void if the underlying structure did not meet the requirements of the structures prescribed by the Spanish timeshare laws enacted in 1998, even if the structure was lawful prior to 1998. These cases have led to an increase in claims seeking to invalidate timeshare agreements in Spain. While the industry disagrees with the rulings and seeks to introduce new legislation that will have a more balanced approach, the increased ability for owners of Spanish timeshares to void their contracts is negatively impacting developers with resorts there. The decrease in owners may adversely affect the business, financial condition and results of operations of our timeshare management business in Spain. It may also lead to a significant decrease in the number of resorts located in Spain in the Interval Network and the loss of members that own at those resorts.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sale of Securities. None
(b) Use of Proceeds. Not applicable
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers: The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended September 30, 2017March 31, 2018 by or on behalf of ILG or any “affiliated purchaser,” as defined by Rule 10b‑18(a)(3) of the Exchange Act. All purchases were made in accordance with Rule 10b‑18 of the Exchange Act.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Number of |
| Approximate Dollar | |
|
| Total |
|
|
|
| Shares Purchased |
| Value of Shares that | |
|
| Number of |
| Average |
| as Part of Publicly |
| May Yet Be Purchased | ||
|
| Shares |
| Price Paid |
| Announced Plans |
| Under the Plans | ||
Period |
| Purchased |
| per Share |
| or Programs |
| or Programs(1) | ||
July 2017 |
| — |
| $ | — |
| — |
| $ | 45,928,910 |
August 2017 |
| 950,000 |
| $ | 26.19 |
| 950,000 |
| $ | 21,050,422 |
September 2017 |
| — |
| $ | — |
| — |
| $ | 21,050,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Total Number of |
| Approximate Dollar | |
|
| Total |
|
|
|
| Shares Purchased |
| Value of Shares that | |
|
| Number of |
| Average |
| as Part of Publicly |
| May Yet Be Purchased | ||
|
| Shares |
| Price Paid |
| Announced Plans |
| Under the Plans | ||
Period |
| Purchased |
| per Share |
| or Programs |
| or Programs(1) | ||
January 2018 |
| — |
| $ | — |
| — |
| $ | 21,050,422 |
February 2018 |
| — |
| $ | — |
| — |
| $ | 21,050,422 |
March 2018 |
| — |
| $ | — |
| — |
| $ | 21,050,422 |
(1) | In November 2016, the Board of Directors authorized the repurchase of up to $50 million of ILG common stock. There is no time restriction on this authorization and repurchases may be made in the open‑market or through privately negotiated transactions. |
8176
|
|
|
|
|
Exhibit |
| Description |
| Location |
3.1 |
| Amended and Restated Certificate of Incorporation of Interval Leisure Group, Inc. |
| Exhibit 3.1 to ILG’s Current Report on Form 8‑K, filed on August 25, 2008 |
3.2 |
| Certificate of Designations, Preferences and Rights to Series A Junior Participating Preferred Stock |
| Exhibit 3.2 to ILG’s Quarterly Report on Form 10‑Q, filed on August 11, 2009 |
3.3 |
| Fifth Amended and Restated By‑Laws of Interval Leisure Group, Inc. |
| Exhibit 3.2 to ILG’s Current Report on Form 8‑K, filed on October 17, 2016 |
3.4 |
| Certificate of Amendment of Amended and Restated Certificate of Incorporation of ILG, Inc. |
| Exhibit 3.1 to ILG’s Current Report on Form 8‑K, filed on October 17, 2016 |
10.1† | ||||
10.2† | ||||
31.1† |
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31.2† |
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31.3† |
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32.1†† |
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32.2†† |
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32.3†† |
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101.INS† |
| XBRL Instance Document |
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101.SCH† |
| XBRL Taxonomy Extension Schema Document |
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101.CAL† |
| XBRL Taxonomy Calculation Linkbase Document |
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101.LAB† |
| XBRL Taxonomy Label Linkbase Document |
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101.PRE† |
| XBRL Taxonomy Presentation Linkbase Document |
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101.DEF† |
| XBRL Taxonomy Extension Definition Linkbase Document |
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* Reflects management contracts and management and director compensatory plans.
† Filed herewith.
†† Furnished herewith.
8277
Pursuant to the requirements 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.
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Date: | ILG, INC. | |
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| By: | /s/ William L. Harvey |
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| William L. Harvey |
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| Chief Financial Officer |
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| By: | /s/ John A. Galea |
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| John A. Galea |
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| Chief Accounting Officer |
8378