Use these links to rapidly review the documentTABLE OF CONTENTS
As filed with the Securities and Exchange Commission on August 6, 20155, 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q10‑Q
(Mark One) | ||
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, | ||
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. 1-340621‑34062
INTERVAL LEISURE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware |
| |
6262 Sunset Drive, Miami, FL | 33143 |
(305) 666-1861
666‑1861
(Registrant'sRegistrant’s telephone number, including area code)
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 ý☒ No o☐
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-TS‑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 ý☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-acceleratednon‑accelerated filer or a smaller reporting company. See definition of "accelerated“accelerated filer," "large” “large accelerated filer"filer” and "smaller“smaller reporting company"company” in Rule 12b-212b‑2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer |
| Smaller reporting company |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-212b‑2 of the Exchange Act). Yes o☐ No ý☒
As of August 3, 2015, 57,475,6552, 2016, 125,130,750 shares of the registrant'sregistrant’s common stock were outstanding.
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4 | |||||||||
Condensed Consolidated Statements of Income | 4 | ||||||||
Condensed Consolidated Statements of Comprehensive Income | 5 | ||||||||
Condensed Consolidated Balance Sheets | 6 | ||||||||
Condensed Consolidated Statement of Equity | 7 | ||||||||
Condensed Consolidated Statements of Cash Flows | 8 | ||||||||
Notes to Condensed Consolidated Financial Statements | 9 | ||||||||
Item 2. |
| 42 | |||||||
Item 3. | Quantitative and Qualitative Disclosures about Market Risk | 68 | |||||||
Item 4. | Controls and Procedures | 69 | |||||||
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Item 1. | Legal Proceedings | 71 | |||||||
Item 1A. | Risk Factors | 71 | |||||||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 71 | |||||||
Item 3. | Defaults Upon Senior Securities | 71 | |||||||
Item 4. | Mine Safety Disclosures | 71 | |||||||
Item 5. | Other Information | 71 | |||||||
Item 6. |
| 73 |
PART PART I—FINANCIAL STATEMENTSSTATEMENTS
Item 1. Consolidated Financial Statements
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands,millions, except per share data)
(Unaudited)
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| Three Months Ended June 30, | Six Months Ended June 30, |
| Three Months Ended |
| Six Months Ended |
| |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 |
| June 30, |
| June 30, |
| |||||||||||||||||
Revenue | $ | 173,745 | $ | 143,528 | $ | 358,297 | $ | 300,569 | ||||||||||||||||||
Cost of sales (exclusive of depreciation and amortization shown separately below) | 80,423 | 59,761 | 162,780 | 123,611 | ||||||||||||||||||||||
| | | | | | | | | | | | | ||||||||||||||
Gross profit | 93,322 | 83,767 | 195,517 | 176,958 | ||||||||||||||||||||||
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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Revenues: |
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Service and membership related |
| $ | 110 |
| $ | 104 |
| $ | 222 |
| $ | 219 |
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Sales of vacation ownership products, net |
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| 49 |
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| 10 |
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| 58 |
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| 16 |
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Rental and ancillary services |
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| 63 |
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| 22 |
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| 89 |
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| 44 |
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Consumer financing |
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| 11 |
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| 1 |
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| 13 |
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| 3 |
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Cost reimbursements |
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| 64 |
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| 37 |
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| 101 |
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| 76 |
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Total revenues |
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| 297 |
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| 174 |
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| 483 |
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| 358 |
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Operating costs and expenses: |
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Cost of service and membership related sales |
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| 27 |
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| 25 |
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| 52 |
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| 51 |
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Cost of vacation ownership product sales |
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| 19 |
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| 7 |
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| 25 |
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| 12 |
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Cost sales of rental and ancillary services |
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| 42 |
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| 11 |
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| 56 |
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| 22 |
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Cost of consumer financing |
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| 3 |
|
| — |
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| 3 |
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| — |
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Cost reimbursements |
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| 64 |
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| 37 |
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| 101 |
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| 76 |
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Royalty fee expense |
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| 5 |
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| 1 |
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| 7 |
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| 2 |
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Selling and marketing expense | 18,578 | 13,808 | 36,786 | 28,378 |
|
| 42 |
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| 19 |
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| 59 |
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| 37 |
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General and administrative expense | 35,541 | 31,251 | 71,436 | 62,688 |
|
| 54 |
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| 36 |
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| 92 |
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| 71 |
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Amortization expense of intangibles | 3,514 | 2,895 | 7,015 | 5,861 |
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| 5 |
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| 3 |
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| 8 |
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| 7 |
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Depreciation expense | 4,328 | 3,876 | 8,597 | 7,669 |
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| 9 |
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| 4 |
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| 14 |
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| 8 |
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Total operating costs and expenses |
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| 270 |
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| 143 |
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| 417 |
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| 286 |
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Operating income | 31,361 | 31,937 | 71,683 | 72,362 |
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| 27 |
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| 31 |
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| 66 |
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| 72 |
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Other income (expense): |
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Interest income | 276 | 55 | 543 | 99 |
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| — |
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| — |
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| 1 |
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| 1 |
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Interest expense | (5,974 | ) | (1,628 | ) | (8,727 | ) | (2,952 | ) |
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| (6) |
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| (6) |
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| (12) |
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| (9) |
| |||||
Other income (expense), net | 195 | (280 | ) | 1,116 | (416 | ) | ||||||||||||||||||||
Gain on bargain purchase |
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| 197 |
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| — |
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| 197 |
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| — |
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Other income, net |
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| 1 |
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| 1 |
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| 2 |
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| 1 |
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Equity in earnings from unconsolidated entities | 925 | — | 2,449 | — |
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| 1 |
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| 1 |
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| 2 |
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| 2 |
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Total other expense, net | (4,578 | ) | (1,853 | ) | (4,619 | ) | (3,269 | ) | ||||||||||||||||||
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Total other income (expense), net |
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| 193 |
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| (4) |
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| 190 |
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| (5) |
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Earnings before income taxes and noncontrolling interests | 26,783 | 30,084 | 67,064 | 69,093 |
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| 220 |
|
| 27 |
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| 256 |
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| 67 |
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Income tax provision | (9,656 | ) | (10,690 | ) | (24,148 | ) | (25,005 | ) |
|
| (36) |
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| (10) |
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| (49) |
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| (24) |
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Net income | 17,127 | 19,394 | 42,916 | 44,088 |
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| 184 |
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| 17 |
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| 207 |
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| 43 |
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Net income attributable to noncontrolling interests | (486 | ) | (1,034 | ) | (1,013 | ) | (2,013 | ) |
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| (1) |
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| — |
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| (1) |
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| (1) |
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Net income attributable to common stockholders | $ | 16,641 | $ | 18,360 | $ | 41,903 | $ | 42,075 |
| $ | 183 |
| $ | 17 |
| $ | 206 |
| $ | 42 |
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Earnings per share attributable to common stockholders: |
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Basic | $ | 0.29 | $ | 0.32 | $ | 0.73 | $ | 0.73 |
| $ | 1.89 |
| $ | 0.29 |
| $ | 2.66 |
| $ | 0.73 |
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Diluted | $ | 0.29 | $ | 0.32 | $ | 0.72 | $ | 0.72 |
| $ | 1.87 |
| $ | 0.29 |
| $ | 2.64 |
| $ | 0.72 |
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Weighted average number of shares of common stock outstanding: |
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Basic | 57,453 | 57,669 | 57,316 | 57,587 |
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| 97,091 |
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| 57,453 |
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| 77,355 |
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| 57,316 |
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Diluted | 58,041 | 58,169 | 57,894 | 58,123 |
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| 97,857 |
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| 58,041 |
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| 77,905 |
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| 57,894 |
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Dividends declared per share of common stock | $ | 0.12 | $ | 0.11 | $ | 0.24 | $ | 0.22 |
| $ | 0.12 |
| $ | 0.12 |
| $ | 0.24 |
| $ | 0.24 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)millions)
(Unaudited)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |||||||||
Net income | $ | 17,127 | $ | 19,394 | $ | 42,916 | $ | 44,088 | |||||
Other comprehensive income (loss), net of tax: | |||||||||||||
Foreign currency translation adjustments | 7,310 | 778 | (111 | ) | 1,445 | ||||||||
| | | | | | | | | | | | | |
Total comprehensive income, net of tax | 24,437 | 20,172 | 42,805 | 45,533 | |||||||||
| | | | | | | | | | | | | |
Less: Net income attributable to noncontrolling interests, net of tax | (486 | ) | (1,034 | ) | (1,013 | ) | (2,013 | ) | |||||
Less: Other comprehensive income attributable to noncontrolling interests | (1,278 | ) | (157 | ) | 403 | (420 | ) | ||||||
| | | | | | | | | | | | | |
Total comprehensive income attributable to noncontrolling interests | (1,764 | ) | (1,191 | ) | (610 | ) | (2,433 | ) | |||||
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Comprehensive income attributable to common stockholders | $ | 22,673 | $ | 18,981 | $ | 42,195 | $ | 43,100 | |||||
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| Three Months Ended |
| Six Months Ended |
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| June 30, |
| June 30, |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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Net income |
| $ | 184 |
| $ | 17 |
| $ | 207 |
| $ | 43 |
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Other comprehensive loss, net of tax: |
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Foreign currency translation adjustments |
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| (10) |
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| 7 |
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| (14) |
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| — |
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Total comprehensive income, net of tax |
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| 174 |
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| 24 |
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| 193 |
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| 43 |
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Less: Net income attributable to noncontrolling interests, net of tax |
|
| (1) |
|
| — |
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| (1) |
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| (1) |
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Less: Other comprehensive loss (income) attributable to noncontrolling interests |
|
| (2) |
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| (1) |
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| (3) |
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| — |
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Total comprehensive loss (income) attributable to noncontrolling interests |
|
| (3) |
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| (1) |
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| (4) |
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| (1) |
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Comprehensive income attributable to common stockholders |
| $ | 171 |
| $ | 23 |
| $ | 189 |
| $ | 42 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands,millions, except share and per share data)
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| June 30, |
| December 31, |
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| 2016 |
| 2015 |
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| June 30, 2015 | December 31, 2014 |
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ASSETS |
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Cash and cash equivalents | $ | 92,241 | $ | 80,493 |
| $ | 127 |
| $ | 93 |
| |||
Restricted cash and cash equivalents | 16,030 | 19,984 | ||||||||||||
Accounts receivable, net of allowance of $230 and $193, respectively | 63,750 | 45,850 | ||||||||||||
Vacation ownership mortgages receivable, net | 6,344 | 7,169 | ||||||||||||
Restricted cash and cash equivalents |
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| 71 |
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| 17 |
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Accounts receivable, net of allowance for doubtful accounts of $0.4 and $0.2, respectively |
|
| 91 |
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| 48 |
| |||||||
Vacation ownership mortgages receivable, net of allowance of $0 and $0, respectively (including $34 and $0 from VIEs) |
|
| 90 |
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| 6 |
| |||||||
Vacation ownership inventory | 50,614 | 54,061 |
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| 301 |
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| 47 |
| |||||
Deferred income taxes | 17,103 | 16,441 | ||||||||||||
Deferred membership costs | 8,740 | 8,716 |
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| 8 |
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| 8 |
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Prepaid income taxes | 17,432 | 22,029 |
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| — |
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| 13 |
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Prepaid expenses and other current assets | 23,995 | 30,230 | ||||||||||||
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Prepaid expenses and other current assets (including $1 and $0 of interest receivables from VIEs, respectively) |
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| 75 |
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| 26 |
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Total current assets | 296,249 | 284,973 |
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| 763 |
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| 258 |
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Vacation ownership mortgages receivable, net | 26,966 | 29,333 | ||||||||||||
Restricted cash and cash equivalents |
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| 3 |
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| — |
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Vacation ownership mortgages receivable, net of allowance of $6 and $2, respectively (including $129 and $0 from VIEs) |
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| 643 |
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| 26 |
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Investments in unconsolidated entities | 35,891 | 33,486 |
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| 58 |
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| 38 |
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Property and equipment, net | 86,111 | 86,601 |
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| 561 |
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| 91 |
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Goodwill | 562,469 | 562,250 |
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| 560 |
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| 561 |
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Intangible assets, net | 263,039 | 268,875 |
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| 474 |
|
| 250 |
| |||||
Deferred membership costs | 10,498 | 10,948 |
|
| 9 |
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| 10 |
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Deferred income taxes | 99 | 112 |
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| 5 |
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| — |
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Other non-current assets | 44,987 | 47,424 |
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| 57 |
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| 45 |
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TOTAL ASSETS | $ | 1,326,309 | $ | 1,324,002 |
| $ | 3,133 |
| $ | 1,279 |
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LIABILITIES AND EQUITY |
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LIABILITIES: |
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Accounts payable, trade | $ | 25,473 | $ | 39,082 |
| $ | 40 |
| $ | 36 |
| |||
Current portion of securitized debt from VIEs |
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| 42 |
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| — |
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Deferred revenue | 102,513 | 89,850 |
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| 149 |
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| 86 |
| |||||
Income taxes payable |
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| 11 |
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| — |
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Accrued compensation and benefits | 30,231 | 28,891 |
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| 61 |
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| 26 |
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Member deposits | 8,461 | 8,222 |
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| 7 |
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| 8 |
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Accrued expenses and other current liabilities | 64,579 | 47,923 |
|
| 193 |
|
| 56 |
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| | | | | | | ||||||||
Total current liabilities | 231,257 | 213,968 |
|
| 503 |
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| 212 |
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Long-term debt | 434,838 | 484,383 |
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| 624 |
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| 416 |
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Securitized debt from VIEs |
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| 103 |
|
| — |
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Income taxes payable, non-current |
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| 5 |
|
| — |
| |||||||
Other long-term liabilities | 18,648 | 18,247 |
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| 60 |
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| 19 |
| |||||
Deferred revenue | 93,346 | 93,730 |
|
| 85 |
|
| 87 |
| |||||
Deferred income taxes | 93,870 | 92,869 |
|
| 142 |
|
| 79 |
| |||||
| | | | | | | ||||||||
Total liabilities | 871,959 | 903,197 |
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| 1,522 |
|
| 813 |
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| | | | | | | ||||||||
Redeemable noncontrolling interest | 699 | 457 |
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| 1 |
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| 1 |
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Commitments and contingencies |
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STOCKHOLDERS' 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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| — |
| |||||
Common stock—authorized 300,000,000 shares; $0.01 par value; issued 59,837,175 and 59,463,200 shares, respectively | 598 | 595 | ||||||||||||
Treasury stock—2,363,324 shares at cost | (35,034 | ) | (35,034 | ) | ||||||||||
Common stock—authorized 300,000,000 shares; $0.01 par value; issued 133,541,668 and 59,853,933 shares, respectively |
|
| 1 |
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| 1 |
| |||||||
Treasury stock— 6,580,124 and 2,363,324 shares at cost, respectively |
|
| (96) |
|
| (35) |
| |||||||
Additional paid-in capital | 206,756 | 201,834 |
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| 1,251 |
|
| 214 |
| |||||
Retained earnings | 263,433 | 235,945 |
|
| 463 |
|
| 281 |
| |||||
Accumulated other comprehensive loss | (19,005 | ) | (19,297 | ) |
|
| (40) |
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| (29) |
| |||
| | | | | | | ||||||||
Total ILG stockholders' equity | 416,748 | 384,043 | ||||||||||||
| | | | | | | ||||||||
Total ILG stockholders’ equity |
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| 1,579 |
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| 432 |
| |||||||
Noncontrolling interests | 36,903 | 36,305 |
|
| 31 |
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| 33 |
| |||||
| | | | | | | ||||||||
Total equity | 453,651 | 420,348 |
|
| 1,610 |
|
| 465 |
| |||||
| | | | | | | ||||||||
TOTAL LIABILITIES AND EQUITY | $ | 1,326,309 | $ | 1,324,002 |
| $ | 3,133 |
| $ | 1,279 |
| |||
| | | | | | | ||||||||
| | | | | ||||||||||
| | | | | | |
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In thousands,millions, except share data)
(Unaudited)
| | | | Common Stock | Treasury Stock | | | Accumulated Other Comprehensive Income (Loss) | |||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Total Equity | Noncontrolling Interest | Total ILG Stockholders' Equity | Additional Paid-in Capital | Retained Earnings | ||||||||||||||||||||||||||
| Amount | Shares | Amount | Shares | |||||||||||||||||||||||||||
Balance as of December 31, 2014 | $ | 420,348 | $ | 36,305 | $ | 384,043 | $ | 595 | 59,463,200 | $ | (35,034 | ) | 2,363,324 | $ | 201,834 | $ | 235,945 | $ | (19,297 | ) | |||||||||||
Net income | 42,904 | 1,001 | 41,903 | — | — | — | — | — | 41,903 | — | |||||||||||||||||||||
Other comprehensive income (loss), net of tax | (111 | ) | (403 | ) | 292 | — | — | — | — | — | — | 292 | |||||||||||||||||||
Non-cash compensation expense | 6,934 | — | 6,934 | — | — | — | — | 6,934 | — | — | |||||||||||||||||||||
Issuance of common stock upon exercise of stock options | 182 | — | 182 | — | 9,280 | — | — | 182 | — | — | |||||||||||||||||||||
Issuance of common stock upon vesting of restricted stock units, net of withholding taxes | (4,333 | ) | — | (4,333 | ) | 3 | 364,695 | — | — | (4,336 | ) | — | — | ||||||||||||||||||
Change in excess tax benefits from stock-based awards | 1,846 | — | 1,846 | — | — | — | — | 1,846 | — | — | |||||||||||||||||||||
Deferred stock compensation expense | (99 | ) | — | (99 | ) | — | — | — | — | (99 | ) | — | — | ||||||||||||||||||
Dividends declared on common stock | (13,789 | ) | — | (13,789 | ) | — | — | — | — | 395 | (14,184 | ) | — | ||||||||||||||||||
Increase in redemption value of redeemable noncontrolling interest | (231 | ) | — | (231 | ) | — | — | — | — | — | (231 | ) | — | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance as of June 30, 2015 | $ | 453,651 | $ | 36,903 | $ | 416,748 | $ | 598 | 59,837,175 | $ | (35,034 | ) | 2,363,324 | $ | 206,756 | $ | 263,433 | $ | (19,005 | ) | |||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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|
|
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|
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|
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|
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|
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|
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|
|
|
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|
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|
|
| 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, 2015 |
| $ | 465 |
| $ | 33 |
| $ | 432 |
| $ | 1 |
| 59,853,933 |
| $ | (35) |
| 2,363,324 |
| $ | 214 |
| $ | 281 |
| $ | (29) |
|
Net income |
|
| 207 |
|
| 1 |
|
| 206 |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 206 |
|
|
|
|
Other comprehensive loss, net of tax |
|
| (14) |
|
| (3) |
|
| (11) |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (11) |
|
Non-cash compensation expense |
|
| 8 |
|
| — |
|
| 8 |
|
| — |
| — |
|
| — |
| — |
|
| 8 |
|
| — |
|
| — |
|
Issuance of common stock upon vesting of RSUs, net of withholding taxes |
|
| (1) |
|
| — |
|
| (1) |
|
| — |
| 609,972 |
|
| — |
| — |
|
| (1) |
|
| — |
|
| — |
|
Issuance of restricted stock for converted shares in connection with the acquisition of Vistana |
|
| — |
|
| — |
|
| — |
|
| — |
| 705,794 |
|
| — |
| — |
|
| — |
|
| ��— |
|
| — |
|
Fair value of restricted stock awards attributable to precombination services converted in connection with the Vistana acquisition |
|
| 2 |
|
| — |
|
| 2 |
|
| — |
| — |
|
| — |
| — |
|
| 2 |
|
| — |
|
| — |
|
Issuance of common stock in connection with the Vistana acquisition |
|
| 1,029 |
|
| — |
|
| 1,029 |
|
| — |
| 72,371,969 |
|
| — |
| — |
|
| 1,029 |
|
| — |
|
| — |
|
Change in excess tax benefits from stock-based awards |
|
| (2) |
|
| — |
|
| (2) |
|
| — |
| — |
|
| — |
| — |
|
| (2) |
|
| — |
|
| — |
|
Dividends declared on common stock |
|
| (23) |
|
| — |
|
| (23) |
|
| — |
| — |
|
| — |
| — |
|
| 1 |
|
| (24) |
|
| — |
|
Treasury stock purchases |
|
| (61) |
|
| — |
|
| (61) |
|
| — |
| — |
|
| (61) |
| 4,216,800 |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of June 30, 2016 |
| $ | 1,610 |
| $ | 31 |
| $ | 1,579 |
| $ | 1 |
| 133,541,668 |
| $ | (96) |
| 6,580,124 |
| $ | 1,251 |
| $ | 463 |
| $ | (40) |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
| |||||||
| Six Months Ended |
| ||||||||||||
| Six Months Ended June 30, |
| June 30, |
| ||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 |
| 2016 |
| 2015 |
| |||||||
| (In thousands) | (In millions) |
| |||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
| |||||||
Net income | $ | 42,916 | $ | 44,088 |
| $ | 207 |
| $ | 43 |
| |||
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
| |||||||
Amortization expense of intangibles | 7,015 | 5,861 |
|
| 8 |
|
| 7 |
| |||||
Amortization of debt issuance costs | 642 | 407 |
|
| 1 |
|
| 1 |
| |||||
Depreciation expense | 8,597 | 7,669 |
|
| 14 |
|
| 8 |
| |||||
Provision for loan losses | 880 | — |
|
| 4 |
|
| 1 |
| |||||
Accretion of mortgages receivable |
|
| 2 |
|
| — |
| |||||||
Non-cash compensation expense | 6,934 | 5,480 |
|
| 8 |
|
| 7 |
| |||||
Deferred income taxes | 289 | 310 |
|
| (3) |
|
| — |
| |||||
Equity in earnings from unconsolidated entities | (2,449 | ) | — |
|
| (2) |
|
| (2) |
| ||||
Excess tax benefits from stock-based awards | (1,890 | ) | (1,908 | ) |
|
| — |
|
| (2) |
| |||
Loss on disposal of property and equipment | 217 | 10 | ||||||||||||
Change in fair value of contingent consideration | — | (1,606 | ) | |||||||||||
Gain on bargain purchase of Vistana acquisition |
|
| (197) |
|
| — |
| |||||||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
| |||||||
Restricted cash |
|
| 2 |
|
| 4 |
| |||||||
Accounts receivable | (18,286 | ) | (6,416 | ) |
|
| (4) |
|
| (18) |
| |||
Vacation ownership mortgages receivable | 2,312 | — |
|
| 2 |
|
| 2 |
| |||||
Vacation ownership inventory | 3,447 | — |
|
| (24) |
|
| 3 |
| |||||
Prepaid expenses and other current assets | 6,339 | (418 | ) |
|
| (4) |
|
| 6 |
| ||||
Prepaid income taxes and income taxes payable | 5,848 | (1,586 | ) |
|
| 21 |
|
| 6 |
| ||||
Accounts payable and other current liabilities | 7,606 | 5,725 |
|
| 14 |
|
| 3 |
| |||||
Payment of contingent consideration | — | (1,184 | ) | |||||||||||
Deferred revenue | 12,545 | 9,133 | ||||||||||||
Deferred income |
|
| 5 |
|
| 13 |
| |||||||
Other, net | 3,476 | (9,909 | ) |
|
| (1) |
|
| 4 |
| ||||
| | | | | | | ||||||||
Net cash provided by operating activities | 86,438 | 55,656 |
|
| 53 |
|
| 86 |
| |||||
| | | | | | | ||||||||
Cash flows from investing activities: |
|
|
|
|
|
|
| |||||||
Acquisitions, net of cash acquired |
|
| (77) |
|
| — |
| |||||||
Investment in unconsoliated entity |
|
| (5) |
|
|
|
| |||||||
Capital expenditures | (6,694 | ) | (9,146 | ) |
|
| (25) |
|
| (7) |
| |||
Purchases of trading investments |
|
| (2) |
|
| — |
| |||||||
Investment in financing receivables | (250 | ) | (750 | ) |
|
| (2) |
|
| — |
| |||
Other | (24 | ) | (7 | ) | ||||||||||
| | | | | | | ||||||||
Net cash used in investing activities | (6,968 | ) | (9,903 | ) |
|
| (111) |
|
| (7) |
| |||
| | | | | | | ||||||||
Cash flows from financing activities: |
|
|
|
|
|
|
| |||||||
Proceeds from issuance of senior notes | 350,000 | — |
|
| — |
|
| 350 |
| |||||
Borrowings (payments) on revolving credit facility, net | (393,000 | ) | 15,000 | |||||||||||
Borrowings on revolving credit facility, net |
|
| 210 |
|
| (393) |
| |||||||
Payments of debt issuance costs | (6,677 | ) | (1,711 | ) |
|
| (2) |
|
| (7) |
| |||
Dividend payments | (13,789 | ) | (12,681 | ) | ||||||||||
Payments of contingent consideration | — | (7,272 | ) | |||||||||||
Repurchases of common stock | — | (10,999 | ) | |||||||||||
Payments on securitized debt |
|
| (9) |
|
| — |
| |||||||
Decrease in restricted cash |
|
| 3 |
|
| — |
| |||||||
Payment to former Vistana owner for subsidiary financing obligation |
|
| (24) |
|
| — |
| |||||||
Purchases of treasury stock |
|
| (56) |
|
| — |
| |||||||
Dividend payments to stockholders |
|
| (23) |
|
| (14) |
| |||||||
Withholding taxes on vesting of restricted stock units | (4,333 | ) | (3,972 | ) |
|
| (1) |
|
| (4) |
| |||
Proceeds from the exercise of stock options | 182 | 310 | ||||||||||||
Excess tax benefits from stock-based awards | 1,890 | 1,908 |
|
| — |
|
| 2 |
| |||||
| | | | | | | ||||||||
Net cash used in financing activities | (65,727 | ) | (19,417 | ) | ||||||||||
| | | | | | | ||||||||
Net cash provided by (used in) financing activities |
|
| 98 |
|
| (66) |
| |||||||
Effect of exchange rate changes on cash and cash equivalents | (1,995 | ) | (188 | ) |
|
| (6) |
|
| (2) |
| |||
| | | | | | | ||||||||
Net increase in cash and cash equivalents | 11,748 | 26,148 |
|
| 34 |
|
| 11 |
| |||||
Cash and cash equivalents at beginning of period | 80,493 | 48,462 |
|
| 93 |
|
| 81 |
| |||||
| | | | | | | ||||||||
Cash and cash equivalents at end of period | $ | 92,241 | $ | 74,610 |
| $ | 127 |
| $ | 92 |
| |||
| | | | | | | ||||||||
| | | | | ||||||||||
| | | | | | | ||||||||
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
| |||||||
Cash paid during the period for: | ||||||||||||||
Issuance of stock in connection with Vistana acquisition |
| $ | 1,031 |
| $ | — |
| |||||||
Interest, net of amounts capitalized | $ | 3,495 | $ | 2,386 |
| $ | 12 |
| $ | 3 |
| |||
Income taxes, net of refunds | $ | 18,011 | $ | 26,281 |
| $ | 31 |
| $ | 18 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 20152016
(Unaudited)
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
Organization
Company Overview
Interval Leisure Group, Inc., or ILG, is a leading global provider of non-traditional lodging, encompassing a portfolio of leisure businesses from exchangeprofessionally delivered vacation experiences and vacation rental tothe exclusive global licensee for the Hyatt®, Westin® and Sheraton® brands in vacation ownership. At the end of 2014, we re-aligned our operating segments to encompass the vacation ownership sales and marketing capabilities with the acquisition of the Hyatt Vacation Ownership business, or HVO, in October 2014. We operate in the following two segments: Exchange and Rental, and Vacation Ownership. Ownership (VO).
Exchange and Rental offers access to vacation accommodations and other travel-related transactions and services to leisure travelers, by providing vacation exchange services and vacation rental,rentals, working with resort developers and operating vacation rental properties. Vacation Ownership engages in the management of vacation ownership resorts; sales, marketing, and financing of vacation ownership interests; and related services to owners and associations.
The Exchange and Rental operating segment consists of Interval International (referred to as Interval), the Vistana Signature Network, the Hyatt Residence Club, (referred to as HRC), the Trading Places International (known as TPI) operated exchange business, and Aqua-Aston Holdings, Inc., which owns Aston Hotels & Resorts LLC, Aqua Hospitality LLC (referred to as Aqua-Aston).
Vacation Ownership engages in sales, marketing, and Aqua Hotelsfinancing of vacation ownership interests (VOIs); the management of vacation ownership resorts; and Resorts, Inc.related services to owners and associations. The Vacation Ownership operating segment consists of VRI Europe, HVO's management and vacation ownership interests (VOI)the VOI sales and financing businesses,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 (known as(or VRI), TPI, and TPI.VRI Europe.
ILG was incorporated as a Delaware corporation in May 2008 in connection with a plan by IAC/InterActiveCorp, or IAC, to separate into five publicly traded companies, referred to as the "spin-off." ILG commenced trading on The NASDAQ Stock Market in August 2008 under the symbol "IILG."
On May 11, 2016, we acquired the vacation ownership business of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, known as Vistana. At closing, Starwood spun-off Vistana to its stockholders immediately prior to the merger of Vistana with and into a wholly owned subsidiary of ILG. In the merger, ILG issued approximately 72.4 million shares of ILG common stock to the holders who received Vistana common stock in the spin-off. Additionally, ILG directly purchased certain Mexican entities and a note receivable for total consideration of $123 million, which is subject to post-closing adjustment. In connection with the acquisition, Vistana entered into an exclusive, 80 - year global license agreement with Starwood for the use of the Westin® and Sheraton® brands in vacation ownership. 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"(“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'sILG’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.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 20142015 Annual Report on Form 10-K.
Seasonality10‑K.
9
Seasonality
Revenue at ILG is influenced by the seasonal nature of travel. Within our Exchange and Rental segment, our vacation exchange businesses recognize exchange and Getaway revenue based on confirmation of the vacation, with the first quarter generally experiencing higher revenue and the
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION (Continued)
fourth quarter generally experiencing lower revenue. Our vacation rental businesses recognize rental revenue based on occupancy, with the first and third quarters generally generating 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 generating lower revenue.
Within our Vacation Ownership segment, our sales and financing business experiences a modest impact from seasonality, with higher sales volumes during the traditional vacation periods, largely the third quarter (summer months).periods. Our vacation ownership management businesses by and large do not experience significant seasonality.
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies were described in Note 2 to our audited consolidated financial statements included in our 20142015 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the six months ended June 30, 2015.2016 other than the following additional policies adopted as part of our acquisition of Vistana in the second quarter of 2016:
Revenue recognition
Vacation Ownership
Accounting EstimatesIf construction of the vacation ownership product is not complete, we determine the portion of revenues to recognize based upon the percentage of completion method, which includes judgments and estimates, including total project costs to complete. Revenue deferred under the percentage of completion calculations is included in deferred revenues on the condensed consolidated balance sheet as of June 30, 2016, and associated direct selling costs are deferred as prepaid expenses within prepaid expenses and other current assets.
ILG's
Vacation Ownership Inventory and Cost of Sales
Our inventory consists of completed vacation ownership products and vacation ownership products under construction. We carry our inventory at the lower of cost or fair value, less expected direct selling costs, which can result in impairment charges and/or recoveries of previous impairments.
We capitalize costs clearly associated with the acquisition, development and construction of a real estate project when it is probable that the project will move forward. We capitalize salary and related costs only to the extent they directly relate to the project. We capitalize interest expense, taxes and insurance costs when activities that are necessary to get the property ready for its intended use are underway. We cease capitalization of costs during prolonged gaps in development when substantially all activities are suspended or when projects are considered substantially complete.
We account for our vacation ownership inventory and cost of vacation ownership products in accordance with the authoritative guidance for accounting for real estate time-sharing transactions contained in ASC Topic 978, Real Estate—Time Sharing Activities, which defines a specific application of the relative sales value method for reducing vacation ownership inventory and recording cost of sales. Also, pursuant to the guidance for accounting for real estate time-sharing transactions, we do not reduce inventory for the cost of vacation ownership products related to anticipated credit losses (accordingly, no adjustment is made when inventory is reacquired upon default of originated receivables). These standards provide for changes in estimates within the relative sales value calculations to be accounted for as real estate inventory true-ups, which we refer to as cost of sales true-ups, and are recorded in cost of vacation ownership product sales to retrospectively adjust the margin previously recorded subject to those estimates. These cost of sales true-ups could result in material adjustments to cost of vacation ownership product sales in a given period.
10
Costs Incurred to Sell Vacation Ownership Products
We capitalize and defer direct costs attributable to the sale of vacation ownership products until the sales are recognized, in accordance with the guidelines of ASC Topic 978, Real Estate—Time Sharing Activities. All such capitalized costs are included in prepaid expenses and other current assets in the accompanying condensed consolidated balance sheets, and are subsequently reflected in sales and marketing expense when recognized. If a contract is cancelled, we charge the unrecoverable direct selling costs to expense. In accordance with ASC 978, indirect sales and marketing costs are expensed as incurred.
Vacation Ownership Mortgages Receivable and Allowance for Loan Losses
The collection activity associated with our securitized vacation ownership notes receivable determines the amount of our monthly repayments against our securitized debt. Collection activity includes contractual payments due and prepayments. In addition, defaulted and upgraded loans are generally removed from the securitized pool and are substituted or repurchased for debt repayment purposes. The securitized debt is non-recourse without a specific repayment schedule. As the amount of each principal payment is contingent on the cash flows from underlying vacation ownership mortgages receivable in a given period, we have not disclosed future contractual debt repayments. Additionally, our vacation ownership mortgages receivable securitization agreements allow us to receive the net excess cash flows (spread between the collections on the notes and payments for third party obligations as defined in the securitization agreements) from the VIEs provided we do not meet certain triggers related to default levels and collateralization of the securitized pool, as discussed in Note 10.
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.
Significant estimates underlying the accompanying condensed consolidated financial statements primarily include: the recovery of long-lived assets as well as goodwill and other intangible assets; purchase price allocations of business combinations; the determination of deferred income taxes including related valuation allowances; the determination of deferred revenue and membership costs; and the determination of stock-based compensation.
· | the recovery of long‑lived assets as well as goodwill and other intangible assets; |
· | purchase price allocations of business combinations; |
· | loan loss reserves for vacation ownership mortgages receivable; |
· | accounting for acquired vacation ownership mortgages receivable; |
· | revenue recognition pertaining to sales of vacation ownership products pursuant to the percentage of completion method; |
· | cost of vacation ownership product sales; |
· | the determination of deferred income taxes including related valuation allowances; |
· | the determination of deferred revenue and membership costs; |
· | and the determination of stock‑based compensation. |
In the opinion of ILG'sILG’s management, the assumptions underlying the historical 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
11
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 restricted stock units ("RSUs"(“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 do not include approximately 0.10.5 million RSUs for the three months ended
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)
June 30, 2015restricted stock, and 1.20.1 million stock options and RSUs for the three months ended June 30, 2014,2016 and 2015, respectively, and 0.6 million RSUs and shares of restricted stock, and 0.5 million RSUs and 1.0 million stock options and RSUs for the six months ended June 30, 20152016 and 2014,2015, respectively, as the effect of their inclusion would have been antidilutive to earnings per share.
In connection with the 2008 spin-off of ILG from IAC, stock options to purchase ILG common stock were granted to non-ILG employees for which there is no future compensation expense to be recognized by ILG. As of June 30, 2015, the balance of2016, there were no stock options outstanding, was de minimis, and as of June 30, 2014 less than 0.8 million remained outstanding.2015, the balance was de minimis.
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 |
|
| Six Months Ended |
| ||||||
|
| June 30, |
|
| June 30, |
| ||||||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
Basic weighted average shares of common stock outstanding |
| 97,091 |
|
| 57,453 |
|
| 77,355 |
|
| 57,316 |
|
Net effect of common stock equivalents assumed to be vested related to RSUs and restricted stock |
| 766 |
|
| 587 |
|
| 550 |
|
| 576 |
|
Net effect of common stock equivalents assumed to be exercised related to stock options held by non-employees |
| — |
|
| 1 |
|
| — |
|
| 2 |
|
Diluted weighted average shares of common stock outstanding |
| 97,857 |
|
| 58,041 |
|
| 77,905 |
|
| 57,894 |
|
Earnings per share for the three and six months ended June 30, 2016 and 2015 are as follows (in thousands, except per share data):
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |||||||||
Basic weighted average shares of common stock outstanding | 57,453 | 57,669 | 57,316 | 57,587 | |||||||||
Net effect of common stock equivalents assumed to be vested related to RSUs | 587 | 497 | 576 | 530 | |||||||||
Net effect of common stock equivalents assumed to be exercised related to stock options held by non-employees | 1 | 3 | 2 | 6 | |||||||||
| | | | | | | | | | | | | |
Diluted weighted average shares of common stock outstanding | 58,041 | 58,169 | 57,894 | 58,123 | |||||||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
|
| Six Months Ended | ||||||
|
| June 30, |
|
| June 30, | ||||||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
Net income attributable to common stockholders | $ | 183,375 |
| $ | 16,641 |
| $ | 205,554 |
| $ | 41,903 |
Weighted average number of shares of common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
Basic |
| 97,091 |
|
| 57,453 |
|
| 77,355 |
|
| 57,316 |
Diluted |
| 97,857 |
|
| 58,041 |
|
| 77,905 |
|
| 57,894 |
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
Basic | $ | 1.89 |
| $ | 0.29 |
| $ | 2.66 |
| $ | 0.73 |
Diluted | $ | 1.87 |
| $ | 0.29 |
| $ | 2.64 |
| $ | 0.72 |
Recent Accounting Pronouncements
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 20142015 Annual Report on Form 10-K10‑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.
In July 2015,June 2016, the FASB issued ASU 2015-11, "Inventory2016-13, “Financial Instruments – Credit Losses (Topic 330): Simplifying326).” This ASU amends the MeasurementBoard’s guidance on the impairment of Inventory" ("financial instruments. The ASU 2015-11"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
12
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 May 2016, the FASB issued ASU 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”). The purpose of this ASU 2016-12 is to more closely align the measurementaddress certain issues identified to improve Topic 606 by enhancing guidance on assessing collectability, presentation of inventory in GAAP with the measurement of inventory in International Financial Reporting Standards. This ASU requires entities to measure most inventory "at the lower of costsales taxes and net realizable value." Additionally, some of the amendments are designed to more clearly articulate the requirements for the measurementother similar taxes collected from customers, noncash consideration and disclosure of inventory.completed contracts and contract modifications at transition. The amendments in this updateUpdate affect the guidance in ASU 2014-09, which is not yet effective. The amendments are effective for fiscal years beginning after December 15, 2017 (and interim periods within that period). Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within those fiscal years. The amendments in this Update should be applied prospectively and early adoption is permitted, including adoption in an interimthat reporting period. Given the recent issuancecomplexities of this ASU,new revenue recognition standard (Topic 606), we are unable to determine, at this time, whether adoption of this standard and its associated ASUs will have not yet assesseda material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact if any, of this new accounting update onto our consolidated financial statements.
In June 2015,March 2016, the FASB issued ASU 2015-10, "Technical Corrections2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Improvements" ("Licensing” (“ASU 2015-10"2016-10”). The purpose of this ASU 2016-10 is to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance correct unintended application(while retaining the related principles for those areas). Also, 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. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer to promised goods or make minor improvementsservices to guidancecustomers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in these two ASUs are not expectedeffective for fiscal years beginning after December 15, 2017 (and interim periods within that period). Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Given the complexities of this new revenue recognition standard (Topic 606), we are unable to determine, at this time, whether adoption of this standard and its associated ASUs will have a significant effect
Tablematerial impact on our consolidated financial position, results of Contentsoperations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact to our consolidated financial statements.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)
onIn March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-03”), to simplify the current accounting practice or create a significant administrative cost to most entities. Additionally, somefor Stock Compensation. The areas for simplification in this update involve several aspects of the amendments are intended to simplify guidance by making it easier to understandaccounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and easier to apply by eliminating inconsistencies, providing needed clarifications, and improving the presentation of guidance in the Codification. Transition guidance varies basedclassification on the amendments in this update.statement of cash flows. The new guidance will be effective for public entities for annual periods beginning after December 15, 2016 and interim periods therein. Early adoption of ASU 2016‑09 as of its issuance is permitted. We are currently assessing the future impact of adopting the new stock compensation standard on our 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 updateASU require, among other items, that require transition guidance arean 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. ASU 2016-07 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early2016. The amendments should be applied prospectively upon their effective date to increases in the level of ownership interest or degree of influence that would result in adoption of the equity method and earlier application is permitted, including adoption in an interim period. All other amendments will be effective uponpermitted. We are currently assessing the issuancefuture impact of this update. We do not currently anticipateaccounting standard update on our consolidated financial statements.
Adopted Accounting Pronouncements
In September 2015, the FASB issued ASU 2015-16, “Business Combinations (Topic 805).” The purpose of the ASU is to simplify the accounting for measurement-period adjustments related to business combinations. ASU 2015-16
13
requires an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period, in the reporting period in which the adjustment amounts are determined. The amendments in this update are effective for fiscal years beginning after December 31, 2015, including interim periods within the fiscal year and should be applied prospectively. The adoption of this guidance willdid not have a material impact on our consolidated financial statements.
In April 2015, the FASB issued ASU 2015-05, "Intangibles—“Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer'sCustomer’s Accounting for Fees Paid in a Cloud Computing Arrangement" ("Arrangement” (“ASU 2015-05"2015-05”). The FASB amended its guidance on internal use software to clarify how customers in cloud computing arrangements should determine whether the arrangement includes a software license. The guidance also eliminates the existing requirement for customers to account for software licenses they acquire by analogizing to the guidance on leases. Instead, entities will account for these arrangements as licenses of intangible assets. The ASU is effective for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. Early adoption is permitted. We do not currently anticipate theThe adoption of this guidance willdid not have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, "Consolidation“Consolidation (Topic 810): Amendments to the Consolidation Analysis" ("Analysis” (“ASU 2015-02"2015-02”). The amendments in this topic are intended to improve and simplify targeted areas of the consolidation guidance. ASU 2015-02 modifies the method for determining whether limited partnerships and similar legal entities are variable interest entities ("VIEs"(“VIEs”) or voting interest entities. Further, it eliminates the presumption that a general partner should consolidate a limited partnership and impacts the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The ASU is effective for fiscal years beginning after December 15, 2015 (and interim periods within those fiscal years). EarlyThe adoption is permitted. We are currently assessing the futureof this guidance did not have a material impact if any, this new accounting update may have on our consolidated financial statements.
Adopted Accounting Pronouncements
In AprilJanuary 2015, the FASB issued ASU 2015-03, "Interest—Imputation of Interest2015‑01, “Income Statement—Extraordinary and Unusual Items (Subtopic 835-30)225‑20): Simplifying Income Statement Presentation by Eliminating the PresentationConcept of Debt Issuance Costs" ("Extraordinary Items” (“ASU 2015-03"2015‑01”). ASU 2015-03 simplifies presentation2015‑01 eliminates from generally accepted accounting principles (GAAP) the concept of debt issuance costs, requiring debt issuance costs relatedextraordinary items as part of the FASB’s initiative to reduce complexity in accounting standards (the Simplification Initiative). Existing guidance requires a recognized debt liability be presented inreporting entity to separately classify, present and disclose extraordinary events and transactions if the balance sheet as a direct deductionevent or transaction meets both of the following criteria for extraordinary item classification: unusual nature and infrequency of occurrence. Under ASU 2015‑01, the concept of extraordinary item is eliminated from the carrying amountASC Master Glossary and replaced with definitions for infrequency of occurrence and unusual nature. The presentation and existing disclosure guidance for items that debt liability, consistent with debt discounts. The guidanceare unusual in the standard is limitednature or occur infrequently are retained and expanded to the presentation of debt issuance costsinclude items that are both unusual in nature and does not affect the recognition and measurement of debt issuance costs. The amortization of such costs are to continue being calculated using the interest method and be reported as interest expense.occur infrequently. The ASU is effective for fiscal years beginning after December 15, 2015 (and interim periods within those fiscal years). Early adoption is permitted for financial statements that have not been previously issued and will be applied on a retrospective basis. We adoptedA reporting entity may apply the provisions of
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)
amendments in the ASU asprospectively and also may apply the amendments retrospectively to all prior periods presented in the financial statements. The adoption of June 30, 2015 restrospectively and the adoptionthis guidance did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures. Other non-current assets and long-term debt on our consolidated balance sheet as of December 31, 2014 has been retrospectively adjusted by $3.6 million to effectuate the adoption of this ASU as described above.statements.
In AprilJune 2014, the FASB issued ASU No. 2014-08, "Presentation2014‑12, “Compensation—Stock Compensation (Topic 718): Accounting for Share‑Based Payments When the Terms of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)" ("an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014-08"2014‑12”). The amendments in ASU 2014-08 change2014‑12 clarifies that entities should treat performance targets that can be met after the requirements for reporting and disclosing discontinued operations. Among other items, this new guidance defines a discontinued operation as a disposalrequisite service period of a component or group of componentsshare‑based payment award as performance conditions that is disposed of or is classified as held for sale and "represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results." The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity.affect vesting. No new disclosures are required under ASU 2014‑12. The ASU is effective for fiscal years beginning after December 15, 20142015 (and interim periods within those fiscal years), with early adoption permitted.that period). In addition, all entities will have the option of applying the guidance either prospectively or retrospectively. The adoption of ASU 2014-08this guidance, on a prospective basis, did not have a material impact on our consolidated financial position,statements.
NOTE 3—BUSINESS COMBINATION
On May 11, 2016, we completed the acquisition of Vistana, from wholly‑owned subsidiaries of Starwood Hotels & Resorts Worldwide, Inc. as discussed in Note 1 to these condensed consolidated financial statements.
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 cash flows or related disclosures.
In January 2014, the FASB issued ASU No. 2014-04, "Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassificationto this business are included in our condensed consolidated statements of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure" ("ASU 2014-04"). Current US GAAP requires a loan to be reclassified to Other Real Estate Owned ("OREO") upon a troubled debt restructuring that is "in substance a repossession or foreclosure," where the creditor receives "physical possession" of the debtor's assets regardless of whether formal foreclosure proceedings take place. The amendments in ASU 2014-04 clarify when an "in substance a repossession or foreclosure"income beginning on May 12, 2016 and "physical possession" has occurred as these terms are not defined in US GAAP, in addition to requiring certain supplementary interim and annual disclosures. The ASU is effective for fiscal years beginning after December 15, 2014 (and interim periods within those fiscal years) and shall be applied prospectively, with early adoption permitted. The adoption of ASU 2014-04 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.
NOTE 3—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.
As discussed in Note 14, "Segment Information," ILG reorganized its management reporting structure in the fourth quarter of 2014 resulting in the following two operating and reportable segments: Exchange and Rental, and Vacation Ownership. As a result of the change in operating
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
segments, ILG's reporting units were also reorganized. The Exchange and Rental and Vacation Ownership segments now each contain twofor segment reporting units as follows:purposes on the basis of its respective business activities.
14
In accordance with ASC 350, we reassigned our existing goodwill
Purchase Price Allocation
The following table presents the preliminary allocation of total purchase price consideration to these new reporting units utilizing a relative fair value allocation approach as of December 31, 2014. With the assistance of a third party specialist, we allocated goodwillassets acquired and liabilities assumed, based on their relativeestimated fair values as of December 31, 2014their respective acquisition dates (in millions):
Vistana Acquisition | |||
Cash | $ | 45 | |
Vacation ownership inventory | 221 | ||
Vacation ownership mortgages receivable | 712 | ||
Other current assets | 143 | ||
Intangibles | 241 | ||
Property plant and equipment | 465 | ||
Other non-current assets | 24 | ||
Deferred revenue | (60) | ||
Securitized debt | (154) | ||
Other current liabilities(2) | (187) | ||
Other non-current liabilities | (98) | ||
Gain on bargain purchase(1) | (197) | ||
Net assets acquired | $ | 1,155 |
(1) | Gain on bargain purchase represents the excess of the fair value of the net tangible and intangible assets acquired over the purchase price. This gain is presented within Other income (expense), net, in our condensed consolidated statement of income for the period ended June 30, 2016. The existence of a gain on bargain purchase pertaining to this transaction is principally related to the decrease in our stock price leading up to the acquisition date. |
(2) | Includes a $24 million accrual pertaining to a dividend declared by a subsidiary of Vistana to Starwood prior to our acquisition date which was settled subsequent to the acquisition closing. |
The purchase price allocated to each new reporting unitthe fair value of identifiable intangible assets associated with the Vistana acquisition is as follows (in thousands)millions):
| Balance as of December 31, 2014 | |||
---|---|---|---|---|
Exchange and Rental segment | ||||
Exchange reporting unit | $ | 495,748 | ||
Rental reporting unit | 20,396 | |||
Vacation Ownership segment | ||||
VO management reporting unit | 39,160 | |||
VO sales and financing reporting unit | 6,946 | |||
| | | | |
Total goodwill | $ | 562,250 | ||
| | | | |
| | | | |
| | | | |
|
|
|
|
|
|
|
|
| Fair Value |
| Useful Life (years) |
Resort management contracts |
| $ | 150 |
| 26 |
Customer relationships |
|
| 90 |
| 22 |
Other |
|
| 1 |
| < 1 |
Total |
| $ | 241 |
|
|
As
In connection with the Vistana acquisition we recorded identifiable intangible assets of December 31, 2014,$241 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 a resultcustomer relationships) and their resort management contracts. The amortization period, as of the reorganization of ourrespective acquisition date, for the definite-lived resort management reporting structurecontracts and reporting units (see Note 14), we assessedcustomer relationships intangible assets noted in the carrying value of goodwill pursuant to the two-step impairment approach. table above is 26 and 22 years, respectively.
The first stepvaluation of the impairment test concludedassets acquired and liabilities assumed in connection with this acquisition was based on fair values at the carrying value of each reporting unit did not exceed its fair value; consequently,acquisition date. The assets purchased and liabilities assumed for the second step ofVistana acquisition have been reflected in the impairment test was not necessary and goodwill was not determined to be impaired. As of June 30, 2015, we did not identify any triggering events which required an interim impairment test subsequent to our most recent impairment test on December 31, 2014.
The following tables present theaccompanying condensed consolidated balance of goodwill by reporting unit, including the changes in carrying amount of goodwillsheet as of June 30, 20152016. However, given the circumstances of this acquisition which closed in the middle of the second quarter, as well as the size and complexity of the transaction, the entire purchase price allocation disclosed herein (as well as the related gain on bargain purchase) is considered provisional at this time and subject to adjustment to reflect new information obtained about factors and circumstances that existed as of the acquisition date that if known would have affected the measurement of the amounts recognized as of that date, while the measurement period remains open.
15
Results of operations
Revenue and earnings before income taxes and noncontrolling interests related to the Vistana acquisition was recognized in our condensed consolidated statements of income totaling $122 million and $7 million, respectively, for the three and six months ended June 30, 2016. Transaction costs, consisting primarily of professional fees, directly related to this acquisition and expensed as incurred totaled $12 million and $15 million for the three and six months ended June 30, 2016, respectively, and are classified within the general and administrative expense line item in our condensed consolidated statements of income included herein.
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 pro forma results presented below for the year ended December 31, 2014 (in thousands):
| Balance as of January 1, 2015 | Additions | Deductions | Foreign Currency Translation | Goodwill Impairment | Balance as of June 30, 2015 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exchange | $ | 495,748 | $ | — | $ | — | $ | — | $ | — | $ | 495,748 | |||||||
Rental | 20,396 | — | — | — | — | 20,396 | |||||||||||||
VO management | 39,160 | — | — | 219 | — | 39,379 | |||||||||||||
VO sales and financing | 6,946 | — | — | — | — | 6,946 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total | $ | 562,250 | $ | — | $ | — | $ | 219 | $ | — | $ | 562,469 | |||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
| Balance as of January 1, 2014 | Additions | Deductions | Foreign Currency Translation | Goodwill Impairment | Balance as of December 31, 2014 | |||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Exchange | $ | 483,462 | $ | 12,286 | $ | — | $ | — | $ | — | $ | 495,748 | |||||||
Rental | 20,396 | — | — | — | — | 20,396 | |||||||||||||
VO management | 36,981 | 3,307 | — | (1,128 | ) | — | 39,160 | ||||||||||||
VO sales and financing | — | 6,946 | — | — | — | 6,946 | |||||||||||||
| | | | | | | | | | | | | | | | | | | |
Total | $ | 540,839 | $ | 22,539 | $ | — | $ | (1,128 | ) | $ | — | $ | 562,250 | ||||||
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
Other Intangible Assets
The balance of other intangible assets, net as of June 30, 2015 and December 31, 2014 is as follows (in thousands):
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Intangible assets with indefinite lives | $ | 132,380 | $ | 131,336 | |||
Intangible assets with definite lives, net | 130,659 | 137,539 | |||||
| | | | | | | |
Total intangible assets, net | $ | 263,039 | $ | 268,875 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The $1.0 million change in our indefinite-lived intangible assets during the six months ended June 30, 2015 reflects the associated foreign currency translation of intangible assets carried2016 are based on the bookshistorical financial statements of an ILG entity whose functional currencyand Vistana, adjusted to reflect the purchase method of accounting, with ILG as accounting acquirer. The pro forma information is not necessarily indicative of the US dollar.
At June 30,consolidated results of operations that might have been achieved 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 periods presented. Pro forma adjustments reflect non-recurring adjustments in 2015 of $197 million pertaining to the gain on bargain purchase discussed above and a $14 million reduction in revenue related to the remeasurement of deferred revenue balances as part of purchase accounting. Pro forma adjustments are tax-effected at ILG's estimated statutory tax rate of 37.2% for the 2015 and December 31, 2014, intangible assets2016 periods, with indefinite lives relatethe exception of the $197 million gain which is not subject to the following (in thousands):
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Resort management contracts | $ | 88,464 | $ | 87,420 | |||
Trade names and trademarks | 43,916 | 43,916 | |||||
| | | | | | | |
Total | $ | 132,380 | $ | 131,336 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
income taxation.Table of Contents
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
At June 30, 2015, intangible assets with definite lives relate to the following (in thousands):
| Cost | Accumulated Amortization | Net | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Customer relationships | $ | 168,400 | $ | (130,826 | ) | $ | 37,574 | |||
Purchase agreements | 75,879 | (75,680 | ) | 199 | ||||||
Resort management contracts | 130,046 | (41,819 | ) | 88,227 | ||||||
Technology | 25,076 | (25,076 | ) | 0 | ||||||
Other | 21,819 | (17,160 | ) | 4,659 | ||||||
| | | | | | | | | | |
Total | $ | 421,220 | $ | (290,561 | ) | $ | 130,659 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
|
|
|
|
|
|
|
(In millions, except per share data) |
| Year Ended December 31, 2015 |
| Six Months Ended June 30, 2016 |
| ||
Revenue |
| $ | 1,593 |
| $ | 839 |
|
Net income attributable to common stockholders |
| $ | 345 |
| $ | 53 |
|
Earnings per share: |
|
|
|
|
|
|
|
Basic |
| $ | 2.66 |
| $ | 0.41 |
|
Diluted |
| $ | 2.64 |
| $ | 0.40 |
|
At December 31, 2014, intangible assets with definite lives relate to the following (in thousands):
| Cost | Accumulated Amortization | Net | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Customer relationships | $ | 168,400 | $ | (129,942 | ) | $ | 38,458 | |||
Purchase agreements | 75,879 | (75,443 | ) | 436 | ||||||
Resort management contracts | 129,864 | (36,790 | ) | 93,074 | ||||||
Technology | 25,076 | (25,076 | ) | — | ||||||
Other | 21,815 | (16,244 | ) | 5,571 | ||||||
| | | | | | | | | | |
Total | $ | 421,034 | $ | (283,495 | ) | $ | 137,539 | |||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
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 six months ended June 30, 2015 and the year ended December 31, 2014, we did not identify any events or 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 $3.5 million and $2.9 million for the three months ended June 30, 2015 and 2014, respectively, and $7.0 million and $5.9 million for the
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
six months ended June 30, 2015 and 2014, respectively. Based on June 30, 2015 balances, amortization expense for the next five years and thereafter is estimated to be as follows (in thousands):
Twelve month period ending June 30, | | |||
---|---|---|---|---|
2016 | $ | 13,448 | ||
2017 | 12,037 | |||
2018 | 11,067 | |||
2019 | 10,433 | |||
2020 | 10,085 | |||
2021 and thereafter | 73,589 | |||
| | | | |
$ | 130,659 | |||
| | | | |
| | | | |
| | | | |
NOTE 4—VACATION OWNERSHIP INVENTORYRESTRICTED CASH
As part of our acquisition of HVO on October 1, 2014, we acquired vacation ownership inventory which primarily
Restricted cash consists of unsold vacation ownership intervals that are available for sale in their current form. As of June 30, 2015 and December 31, 2014, vacation ownership inventory is comprised of the following (in thousands)millions):
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2016 |
| 2015 | ||
Escrow deposits on vacation ownership products |
| $ | 57 |
| $ | 2 |
Securitization VIEs |
|
| 7 |
|
| — |
Other |
|
| 10 |
|
| 15 |
Total restricted cash |
| $ | 74 |
| $ | 17 |
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.
16
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Completed unsold vacation ownership interests | $ | 49,987 | $ | 53,434 | |||
Land held for development | 627 | 627 | |||||
| | | | | | | |
Total inventory | $ | 50,614 | $ | 54,061 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
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 acquisitionacquisitions of HVO on October 1, 2014,and Vistana, we acquired an existing portfolioportfolios 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'loans’ expected cash flows pursuant to ASC 310-30, "Loans“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 loan pools'pools’ estimate life. Originated loans as of June 30, 20152016 and December 31, 20142015 represent vacation ownership mortgages receivable originated by ILG, or more specifically our Vacation Ownership segment, subsequent to the acquisitionacquisitions of HVO and Vistana on October 1, 2014.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 5—VACATION OWNERSHIP MORTGAGES RECEIVABLE (Continued)2014 and May 11, 2016, respectively.
Vacation ownership mortgages receivable carrying amounts as of June 30, 20152016 and December 31, 20142015 were as follows (in thousands)millions):
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Acquired vacation ownership mortgages receivable at various stated interest rates with varying payment through 2024 (see below) | $ | 27,767 | $ | 33,953 | |||
Originated vacation ownership mortgages receivable at various stated interest rates with varying payment through 2025 (see below) | 6,659 | 2,896 | |||||
Less allowance for loan losses on originated loans | (1,116 | ) | (347 | ) | |||
| | | | | | | |
Net vacation ownership mortgages receivable | $ | 33,310 | $ | 36,502 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||||||||||||||
|
| 2016 |
| 2015 | ||||||||||||||
|
|
| Securitized |
|
| Unsecuritized(2) |
|
| Total |
|
| Securitized |
|
| Unsecuritized(2) |
|
| Total |
Acquired vacation ownership mortgages receivable(1) |
| $ | 163 |
| $ | 524 |
| $ | 687 |
| $ | — |
| $ | 23 |
| $ | 23 |
Originated vacation ownership mortgages receivable(1) |
|
| — |
|
| 52 |
|
| 52 |
|
| — |
|
| 11 |
|
| 11 |
Less allowance for loan losses on originated loans |
|
| — |
|
| (6) |
|
| (6) |
|
| — |
|
| (2) |
|
| (2) |
Net vacation ownership mortgages receivable |
| $ | 163 |
| $ | 570 |
| $ | 733 |
| $ | — |
| $ | 32 |
| $ | 32 |
(1) | At various interest rates with varying payment terms through 2031 for acquired receivables and through 2031 for originated receivables |
(2) | As of June 30, 2016, $16 million of unsecuritized vacation ownership receivables were not eligible for securitization. |
The fair value of our acquired loans of $37.5 million as of the respective acquisition date wasdates were 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 consolidated balance sheet as of the acquisition date includes an estimate for future loan losses which is reflected inbecomes the historical cost basis for that portfolio.existing portfolio going forward. As of June 30, 20152016 and December 31, 2014,2015, the contractual outstanding balance of the acquired loans, which represents contractually-owed future principal amounts, and accrued interest, was $32.0$603 million and $38.0$26 million, respectively. The change as of June 30, 2016 from year-end reflects the acquired loans pertaining to the Vistana acquisition.
The table below (in millions) presents a roll-forwardrollforward from December 31, 20142015 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 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.
17
Accretable Yield | Six Months Ended June 30, 2015 | |||
---|---|---|---|---|
Balance, beginning of period | $ | 15,406 | ||
Accretion | (2,286 | ) | ||
Reclassification between nonaccretable difference | (555 | ) | ||
| | | | |
Balance, end of period | $ | 12,565 | ||
| | | | |
| | | | |
| | | | |
Nonaccretable difference, end of period balance | $ | 7,904 | ||
| | | | |
| | | | |
| | | | |
Six Months Ended | |||
Accretable Yield | June 30, 2016 | ||
Balance, beginning of period | $ | 12 | |
Vistana acquired accretable yield | 245 | ||
Accretion | (12) | ||
Reclassification between nonaccretable difference | — | ||
Balance, end of period | $ | 245 | |
Nonaccretable difference, end of period balance | $ | 61 |
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 collected, and changes in expected future principal and interest cash collections which impacts the nonaccretable difference.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 5—VACATION OWNERSHIP MORTGAGES RECEIVABLE (Continued)
Vacation ownership mortgages receivable as of June 30, 20152016 are scheduled to mature as follows (in thousands)millions):
| Vacation Ownership Mortgages Receivable | |||||||
---|---|---|---|---|---|---|---|---|
Twelve month period ending June 30, | Acquired loans | Originated loans | Total | |||||
2016 | $5,740 | $371 | $ | 6,111 | ||||
2017 | 5,224 | 428 | 5,652 | |||||
2018 | 4,345 | 477 | 4,822 | |||||
2019 | 3,476 | 520 | 3,996 | |||||
2020 | 3,362 | 578 | 3,940 | |||||
2021 and thereafter | 9,896 | 4,285 | 14,181 | |||||
| | | | | | | | |
Total | $32,043 | $6,659 | $ | 38,702 | ||||
Less: discount on acquired loans(1) | (4,276) | — | (4,276 | ) | ||||
Less: allowance for losses | — | (1,116) | (1,116 | ) | ||||
| | | | | | | | |
Net vacation ownership mortgages receivable | $27,767 | $5,543 | $ | 33,310 | ||||
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Weighted average stated interest rate during six months ended June 30, 2015 | 14.0% | 14.0% | ||||||
Range of stated interest rates during six months ended June 30, 2015 | 12.5% to 17.9% | 12.9% to 14.9% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vacation Ownership Mortgages Receivable |
| ||||||||||
|
| Acquired |
|
|
|
|
|
|
| ||||
Twelve month period ending June 30, |
| Securitized Loans |
| Unsecuritized Loans |
| Unsecuritized Loans |
| Total |
| ||||
2017 |
| $ | 30 |
| $ | 45 |
| $ | 5 |
| $ | 80 |
|
2018 |
|
| 27 |
|
| 44 |
|
| 3 |
|
| 74 |
|
2019 |
|
| 24 |
|
| 44 |
|
| 4 |
|
| 72 |
|
2020 |
|
| 22 |
|
| 45 |
|
| 4 |
|
| 71 |
|
2021 |
|
| 18 |
|
| 47 |
|
| 4 |
|
| 69 |
|
2022 and thereafter |
|
| 23 |
|
| 234 |
|
| 32 |
|
| 289 |
|
Total |
|
| 144 |
|
| 459 |
|
| 52 |
|
| 655 |
|
Plus: net premium on acquired loans(1) |
|
| 19 |
|
| 65 |
|
| — |
|
| 84 |
|
Less: allowance for losses |
|
| — |
|
| — |
|
| (6) |
|
| (6) |
|
Net vacation ownership mortgages receivable |
| $ | 163 |
| $ | 524 |
| $ | 46 |
| $ | 733 |
|
Weighted average stated interest rate as of June 30, 2016 |
|
| 13.2% |
|
| 13.3% |
|
| 13.3% |
|
|
|
|
Range of stated interest rates as of June 30, 2016 |
|
| 8.0% to 15.9% |
|
| 11.9% to 14.9% |
|
|
|
|
(1) | The difference between the contractual principal amount of acquired loans of $603 million and the net carrying amount of $687 million as of June 30, 2016 is related to the application of ASC 310-30. |
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 losses. For originated loans, we record an estimate of uncollectability as a reduction of sales of vacation ownership intervals in the accompanying condensed consolidated statements of income at the time revenue is recognized on a vacation ownership interval sale. We evaluate our originated loan portfolio collectively as they are largely 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 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 June 30, 2015, a provision2016, allowance for losses of $1.1
18
$6 million for uncollectability was recorded to the vacation ownership mortgages receivable allowance for losses related solely to our originated loans.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 5—VACATION OWNERSHIP MORTGAGES RECEIVABLE (Continued)
Our acquired loans are remeasured at period end based on expected future cash flows which uses an estimated measure of anticipated defaults at period end.defaults. We consider the loan loss provision on our originated loans and estimates of 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 (Westin, Sheraton, Hyatt and other) and the FICO scores of the buyers as the primary credit quality indicators to calculate the loan loss reserve 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 loan loss reserve 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 June 30, 2015,2016, the weighted average FICO score within our acquired and originatedconsolidated loan pools was 703 and 717, respectively,713 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 June 30, 20152016 was 11.4%9.8%.
Balances of our vacation ownership mortages receivable by brand and by FICO score (at time of loan origination) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
| As of June 30, 2016 | ||||||||
|
| 700+ |
| 600-699 |
| <600 |
| No Score |
| Total |
Westin |
| 183 |
| 90 |
| 5 |
| 30 |
| 308 |
Sheraton |
| 161 |
| 148 |
| 13 |
| 62 |
| 384 |
Hyatt |
| 19 |
| 13 |
| 2 |
| 1 |
| 35 |
Other |
| 7 |
| 1 |
| - |
| 4 |
| 12 |
Vacation ownership mortgages receivable, gross |
| 370 |
| 252 |
| 20 |
| 97 |
| 739 |
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. |
19
In the event of a default, we generally have the right to recover the mortgaged VOIs and consider loans to be past-due based on the contractual terms of each individual financing agreement.
outstanding. Our aged analysis of past-duedelinquent vacation ownership mortgages receivable and the gross balance of vacation ownership mortgages receivable greater than 90120 days past-due, and the gross balance of vacation ownership mortgage receivables on non-performing statuspast‑due as of June 30, 2016 and December 31, 2015 for our originated loans is as follows (in thousands)millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Delinquent |
|
| Defaulted(1) |
|
|
| |||||||
|
| Receivables |
|
| Current |
| 30-59 Days |
| 60-89 Days |
| 90-119 Days |
| ≥120 |
|
| Total Delinquent & Defaulted | ||||||
Originated Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016 |
| $ | 52 |
|
| $ | 52 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
December 31, 2015 |
| $ | 11 |
|
| $ | 11 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| Vacation Ownership Mortgages Receivable | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Acquired loans | Originated loans | Total | |||||||
Receivables past due | $ | 619 | $ | 15 | $ | 634 | ||||
Receivables greater than 90 days past due | $ | 120 | $ | — | $ | 120 |
(1) | Mortgages receivable equal to or greater than 120 days are considered defaulted and have been fully reserved in our loan loss reserve for originated loans. |
NOTE 6—VACATION OWNERSHIP INVENTORY
Vacation ownership inventory primarily consists of unsold vacation ownership intervals that are available for sale in their current form and vacation ownership projects under construction. In connection with the acquisition of Vistana on May 11, 2016 we acquired $221 million in unsold vacation ownership inventory stated at fair value. As of June 30, 2016 and December 31, 2015, vacation ownership inventory is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Completed unsold vacation ownership interests |
| $ | 137 |
| $ | 46 |
|
Vacation ownership products construction in process |
|
| 164 |
|
| — |
|
Other |
|
| — |
|
| 1 |
|
Total inventory |
| $ | 301 |
| $ | 47 |
|
The change in inventory balances as of June 30, 2016 compared to December 31, 2016 principally pertains to the acquisition of Vistana on May 11, 2016.
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—“Investments—Equity Method and Joint Ventures,"” primarily consistconsists of an ownership interest in Maui Timeshare Venture, LLC, a joint venture to develop and operate a vacation ownership resort in the state of Hawaii. ThisHawaii and Vistana’s Harborside at Atlantis joint venture wasventure. These joint ventures were acquired in connection with our acquisitionacquisitions of HVO and our investment wasVistana and were recorded at fair value on the respective acquisition date.dates. Our equity income from investments in unconsolidated entities, recorded in equity in
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 6—INVESTMENTS IN UNCONSOLIDATED ENTITIES (Continued)
earnings from unconsolidated entities in the accompanying condensed consolidated statement of income, was $0.9$1 million and $2.4 millioneach period for the three months ended June 30, 2016 and 2015, respectively and $2 million each period for the six months ended June 30, 2015, respectively.2016 and 2015.
20
The ownership percentages of the Maui Timeshare Venture and Harborside investments are 33% and 50%, respectively, and ownership percentages of the other investments range from 25.0% to 50.0%. The carrying value of our investments in unconsolidated entities as of June 30, 2016 and December 31, 2015 were as follows:follows (in millions):
| Ownership Interest | Carrying Value | ||||
---|---|---|---|---|---|---|
| | (in thousands) | ||||
Maui Timeshare Venture, LLC | 33.0% | $ | 35,337 | |||
Other | 25.0% - 43.3% | 554 | ||||
| | | | | | |
Total | $ | 35,891 | ||||
| | | | | | |
| | | | | | |
| | | | | | |
|
|
|
|
|
|
|
|
| June 30, |
|
| December 31, | |
|
| 2016 |
|
| 2015 |
|
Maui Timeshare Venture, LLC | $ | 40 |
| $ | 37 |
|
Harborside at Atlantis joint venture |
| 13 |
|
| — |
|
Other |
| 5 |
|
| 1 |
|
Total | $ | 58 |
| $ | 38 |
|
The change from December 31, 2015 principally represents the equity interest acquired in Harborside at Atlantis in connection with the Vistana acquisition in the second quarter and, within Other, an investment made in the first quarter in a fee-for-service, real-estate brokerage firm that specializes in reselling resort timeshare properties on behalf of independent homeowners’ associations.
NOTE 7—8—PROPERTY AND EQUIPMENT
Property and equipment, net is as follows (in thousands)millions):
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Computer equipment |
| $ | 35 |
| $ | 23 |
|
Capitalized software (including internally developed software) |
|
| 134 |
|
| 108 |
|
Land, buildings and leasehold improvements |
|
| 362 |
|
| 51 |
|
Land held for development |
|
| 54 |
|
| — |
|
Furniture, fixtures and other equipment |
|
| 44 |
|
| 17 |
|
Construction projects in progress |
|
| 36 |
|
| — |
|
Other projects in progress |
|
| 38 |
|
| 19 |
|
Less: accumulated depreciation and amortization |
|
| (142) |
|
| (127) |
|
Total property and equipment, net |
| $ | 561 |
| $ | 91 |
|
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: Exchange and Rental, and Vacation Ownership, each of which contain two reporting units as follows:
OPERATING SEGMENTS | |||
Exchange and Rental | Vacation Ownership | ||
Exchange reporting unit | VO management reporting unit | ||
Rental reporting unit | VO sales and financing reporting unit |
21
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Computer equipment | $ | 22,020 | $ | 21,389 | |||
Capitalized software (including internally developed software) | 103,418 | 97,561 | |||||
Land, buildings and leasehold improvements | 50,776 | 50,685 | |||||
Furniture and other equipment | 15,568 | 16,638 | |||||
Projects in progress | 13,036 | 10,581 | |||||
| | | | | | | |
204,818 | 196,854 | ||||||
Less: accumulated depreciation and amortization | (118,707 | ) | (110,253 | ) | |||
| | | | | | | |
Total property and equipment, net | $ | 86,111 | $ | 86,601 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following tables present the balance of goodwill by reporting unit, including the changes in carrying amount of goodwill as of June 30, 2016 and December 31, 2015 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
| ||||||
|
| Balance as of |
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of |
| |||||
|
| January 1, 2016 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| June 30, 2016 |
| ||||||
Exchange |
| $ | 496 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 496 |
|
Rental |
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
|
VO management |
|
| 38 |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| 37 |
|
VO sales and financing |
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
Total |
| $ | 561 |
| $ | — |
| $ | — |
| $ | (1) |
| $ | — |
| $ | 560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
|
| |
|
| Balance as of |
|
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of |
| ||||
|
| January 1, 2015 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| December 31, 2015 |
| ||||||
Exchange |
| $ | 496 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 496 |
|
Rental |
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
|
VO management |
|
| 39 |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| 38 |
|
VO sales and financing |
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
Total |
| $ | 562 |
| $ | — |
| $ | — |
| $ | (1) |
| $ | — |
| $ | 561 |
|
Other Intangible Assets
The balance of other intangible assets, net as of June 30, 2016 and December 31, 2015 is as follows (in millions):
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Intangible assets with indefinite lives |
| $ | 119 |
| $ | 127 |
|
Intangible assets with definite lives, net |
|
| 355 |
|
| 123 |
|
Total intangible assets, net |
| $ | 474 |
| $ | 250 |
|
The $8 million change in our indefinite-lived intangible assets during the six months ended June 30, 2016 reflects the associated foreign currency translation of intangible assets carried on the books of an ILG entity whose functional currency is not the US dollar.
At June 30, 2016 and December 31, 2015, intangible assets with indefinite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
| June 30, |
|
| December 31, |
|
|
|
| 2016 |
|
| 2015 |
|
Resort management contracts |
| $ | 75 |
| $ | 83 |
|
Trade names and trademarks |
|
| 44 |
|
| 44 |
|
Total |
| $ | 119 |
| $ | 127 |
|
At June 30, 2016, intangible assets with definite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
| Cost |
| Accumulated Amortization |
| Net |
| |||
Customer relationships |
| $ | 258 |
| $ | (133) |
| $ | 125 |
|
Purchase agreements |
|
| 76 |
|
| (76) |
|
| — |
|
Resort management contracts |
|
| 278 |
|
| (52) |
|
| 226 |
|
Technology |
|
| 25 |
|
| (25) |
|
| — |
|
Other |
|
| 23 |
|
| (19) |
|
| 4 |
|
Total |
| $ | 660 |
| $ | (305) |
| $ | 355 |
|
22
At December 31, 2015, intangible assets with definite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
| Cost |
| Accumulated Amortization |
| Net | |||
Customer relationships |
| $ | 168 |
| $ | (132) |
| $ | 36 |
Purchase agreements |
|
| 76 |
|
| (76) |
|
| — |
Resort management contracts |
|
| 129 |
|
| (46) |
|
| 83 |
Technology |
|
| 25 |
|
| (25) |
|
| — |
Other |
|
| 22 |
|
| (18) |
|
| 4 |
Total |
| $ | 420 |
| $ | (297) |
| $ | 123 |
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 six months ended June 30, 2016 and the year ended December 31, 2015, we did not identify any events or 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 $3 million for the three months ended June 30, 2016 and 2015, respectively, and $8 million and $7 million for the six months ended June 30, 2016 and 2015, respectively. Based on June 30, 2016 balances, amortization expense for the next five years and thereafter is estimated to be as follows (in millions):
|
|
|
|
|
Twelve month period ending June 30, |
|
|
|
|
2017 |
| $ | 12 |
|
2018 |
|
| 21 |
|
2019 |
|
| 20 |
|
2020 |
|
| 20 |
|
2021 |
|
| 20 |
|
2022 and thereafter |
|
| 262 |
|
|
| $ | 355 |
|
NOTE 10—CONSOLIDATED VARIABLE INTEREST ENTITIES
We have variable interests in the entities associated with Vistana’s three 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 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 Vistana’s past practices, we currently expect that we will exercise this option.
23
The following table shows assets which are collateral for the related obligations of the variable interest entities, included in our consolidated balance sheets (in millions):
Vacation Ownership Mortgages Receivable Securitization(1) | ||||
June 30, | ||||
2016 | ||||
Assets | ||||
Restricted cash | $ | 7 | ||
Interest receivable | 1 | |||
Vacation ownership mortgages receivable, net | 163 | |||
Total | $ | 171 | ||
Liabilities | ||||
Interest payable | — | |||
Securitized debt | 145 | |||
Total | $ | 145 |
(1) | The creditors of these entities do not have general recourse to us. |
Upon transfer of vacation ownership mortgage 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 $3 million since our May 11, 2016 acquisition of Vistana through June 30, 2016. The net cash flows generated by 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 combined statements of cash flows. The repayment of our securitized debt from VIEs is reflected in the financing activities section of our combined statements of cash flows.
NOTE 8—LONG-TERM11—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the general components of accrued expenses and other current liabilities (in millions):
|
|
|
|
|
|
|
|
| June 30, |
| December 31, | ||
|
| 2016 |
| 2015 | ||
General accrued expenses |
| $ | 66 |
| $ | 18 |
Accrued other taxes |
|
| 15 |
|
| 5 |
Customer deposits |
|
| 67 |
|
| 13 |
Accrued membership related |
|
| 26 |
|
| 20 |
Accrued construction costs |
|
| 19 |
|
| — |
Accrued expenses and other current liabilities |
| $ | 193 |
| $ | 56 |
24
NOTE 12—DEFERRED REVENUE
The following table summarized the general components of deferred revenue (in millions):
|
|
|
|
|
|
|
| June 30, |
|
| December 31, |
|
| 2016 |
|
| 2015 |
|
| (in millions) | |||
Deferred membership-related revenue | $ | 187 |
| $ | 169 |
Deferred sales of vacation ownership products |
| 41 |
|
| — |
Other |
| 6 |
|
| 4 |
Total | $ | 234 |
| $ | 173 |
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.
Deferred sales of vacation ownership products primarily relate to sales associated with incomplete phases or buildings that are being recognized under the percentage-of-completion method. The increase in deferred sales of vacation ownership products relates to deferred revenue acquired in connection with our Vistana acquisition or generated thereafter, which primarily pertains to a property in Hawaii that is currently under construction. The related sales are deferred under the percentage of completion method.
Other deferred revenue pertains to annual maintenance fees collected that are not yet earned.
NOTE 13—SECURITIZED VACATION OWNERSHIP DEBT
Long-term
As discussed in Note 10, the VIEs associated with the securitization of our VOI mortgages receivable acquired in connection with the Vistana acquisition are consolidated in our financial statements. Securitized vacation ownership debt consisted of the following (in millions):
June 30, | ||||
2016 | ||||
2010 securitization, interest rates ranging from 3.65% to 4.75%, maturing 2021 | $ | 38 | ||
2011 securitization, interest rates ranging from 3.67% to 4.82%, maturing 2025 | 53 | |||
2012 securitization, interest rates ranging from 2.00% to 2.76%, maturing 2023 | 54 | |||
Total securitized vacation ownership debt | $ | 145 |
During the three and six months ended June 30, 2016, interest expense associated with securitized vacation ownership debt totaled $1 million and is reflected within consumer financing expenses in our 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 Receivable 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.
25
NOTE 14—LONG-TERM DEBT
Long‑term debt is as follows (in thousands)millions):
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Revolving credit facility (interest rate of 2.47% at June 30, 2016 and 2.68% at December 31, 2015) |
| $ | 285 |
| $ | 75 |
|
5.625% senior notes |
|
| 350 |
|
| 350 |
|
Unamortized debt issuance costs (revolving credit facility) |
|
| (5) |
|
| (3) |
|
Unamortized debt issuance costs (senior notes) |
|
| (6) |
|
| (6) |
|
Total long-term debt, net of debt issuance costs |
| $ | 624 |
| $ | 416 |
|
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Revolving credit facility (interest rate of 2.44% at June 30, 2015 and 1.92% at December 31, 2014) | $ | 95,000 | $ | 488,000 | |||
5.625% senior notes | 350,000 | — | |||||
Unamortized debt issuance costs (recolving credit facility) | (3,478 | ) | (3,617 | ) | |||
Unamortized debt issuance costs (senior notes) | (6,684 | ) | — | ||||
| | | | | | | |
Total long-term debt, net of debt issuance costs | $ | 434,838 | $ | 484,383 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
Table of ContentsCredit Facility
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 8—LONG-TERM DEBT (Continued)
Credit Facility
In April 2014, we entered into the first amendment to the June 21, 2012 amended and restated credit agreement (the "Amended“Amended Credit Agreement"Agreement”) which increased the revolving credit facility from $500 million to $600 million, extended the maturity of the credit facility to April 8, 2019 and provided for certain other amendments to covenants. The terms related to interest rates and commitment fees remained unchanged. In November 2014, we entered into a second amendment which primarily provides for a second letter of credit issuer and certain other amendments to covenants. Under this amendment, the financial covenants, interest rates, commitment fees and other significant terms remain unchanged. On April 10, 2015, we entered into a third amendment which changed the leverage-based financial covenant from a maximum consolidated total leverage to EBITDA ratio of 3.5 to 1.0 to a maximum consolidated secured leverage to EBITDA ratio of 3.25to 1.0. In addition, the amendment adds an incurrence test allowing a maximum consolidated total leverage to EBITDA ratio of 4.5 to 1.0 on a pro forma basis in certain circumstances in which we make acquisitions or investments, incur additional indebtedness or make restricted payments. Also, the amendment added a new pricing level to the pricing grid applicable when the consolidated total leverage to EBITDA ratio equals or exceeds 3.5 to 1.0. This pricing level is either LIBOR plus 2.5% or the base rate plus 1.5% and requires a commitment fee on undrawn amounts of 0.4% per annum. There were no other material changes under this amendment.
Additionally, on
On May 5, 2015, we entered into a fourth amendment to the Amended Credit Agreement which changed the definition of change of control to remove the provision that certain changes in the composition of the board of directors would constitute a change of control and therefore be a default under the credit agreement. The amendment also included clarifying language regarding provisions that relate to our 5.625% senior notes due in 2023. There were no other material changes under this amendment.
Additionally, 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 June 30, 2015,2016, there was $95$285 million outstanding. Any principal amounts outstanding under the revolving credit facility are due at maturity. As of June 30, 2015,2016, the interest rate on the Amended Credit Agreement is based on (at our election) either LIBOR plus a predetermined margin that ranged from 1.25% to 2.5%, or the Base Rate as defined in the Amended Credit Agreement plus a predetermined margin that ranged from 0.25% to 1.5%, in each case based on our consolidated total leverage ratio. As of June 30, 2015,2016, the applicable margin was 2.25%2.00% per annum for LIBOR revolving loans and 1.25%1.00% per annum for Base Rate loans. As of June 30, 2015,2016, the Amended Credit Agreement has a commitment fee on undrawn amounts that ranged from 0.25% to 0.40% per annum based on our leverage ratio and as of June 30, 20152016 the commitment fee was 0.375%0.350%.
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'sILG’s U.S. subsidiaries and 65% of the equity in our first-tierfirst‑tier foreign subsidiaries and (2) substantially all of our domestic tangible and intangible property.
26
Senior Notes
On April 10, 2015, we completed a private offering of $350 million in aggregate principal amount of our 5.625% senior notes due in 2023. The net proceeds from the offering, after deducting offering
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 8—LONG-TERM DEBT (Continued)
related expenses, were $343.1$343 million. We used the proceeds to repay indebtedness outstanding on our revolving credit facility. In June 2016, we completed an exchange offer to exchange these unregistered notes with registered notes that otherwise have the same terms. As of June 30, 2015,2016, total unamortized debt issuance costs relating to these senior notes were $6.7$6 million, which are presented as a direct deduction from the carrying amount of the debt liability.principal amount. 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 are in compliance with this covenant as of June 30, 2015.2016. 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"(“EBITDA”), as defined. We are also required to maintain a minimum consolidated interest coverage ratio of consolidated EBITDA over consolidated interest expense. As of June 30, 2015,2016, the maximum consolidated secured leverage ratio was 3.25x and the minimum consolidated interest coverage ratio was 3.0x. As of June 30, 2015,2016, 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 0.680.87 and 14.26,13.24, respectively.
Interest Expense and Debt Issuance Costs
Interest expense for the three months ended June 30, 2016 and 2015 and 2014 was $6.0$6 million and $1.6 million,each year, respectively, and for the six months ended June 30, 2016 and 2015 and 2014 was $8.7$12 million and $3.0$9 million, respectively. Interest expense for these periods is net of negligible capitalized interest relating to internally-developed software.
As of June 30, 2015,2016, total unamortized debt issuance costs were $10.1 $4million, net of $2.7$3 million of accumulated amortization, incurred in connection with the issuance and various ammendmentsamendments to our Amended Credit Agreement, as well as the issuance of our senior notes in April 2015.2015 and the exchange for registered notes in June 2016. As of December 31, 2014,2015, total unamortized debt issuance costs were $3.6$4 million, net of $2.0$2 million of accumulated amortization. Unamortized debt issuance costs are presented as a reduction of long-term
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 8—LONG-TERM DEBT (Continued)
debt in the accompanying condensed consolidated balance sheets, pursuant to ASC 2015-03 as discussed in Note 2.2015-03. Unamortized debt issuance 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.
NOTE 9—15—FAIR VALUE MEASUREMENTS
In accordance with ASC Topic 820, "Fair“Fair Value Measurement," ("” (“ASC 820"820”) the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability'sliability’s fair value is defined as the amount that would be paid to transfer the liability to a new
27
obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities that are either recorded or disclosed at fair value are measured using a three-tierthree‑tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1—Observable inputs that reflect quoted prices in active markets
Level 2—Inputs other than quoted prices in active markets that are either directly or indirectly observable
Level 3—Unobservable inputs in which little or no market data exists, therefore requiring the company to
develop its own assumptions
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 six months ended June 30, 2015.2016. Our financial instruments are detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2016 |
| December 31, 2015 |
| ||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||
|
| Amount |
| Value |
| Amount |
| Value |
| ||||
|
| (In millions) |
| ||||||||||
Cash and cash equivalents |
| $ | 127 |
| $ | 127 |
| $ | 93 |
| $ | 93 |
|
Restricted cash and cash equivalents |
|
| 71 |
|
| 71 |
|
| 17 |
|
| 17 |
|
Financing receivables |
|
| 19 |
|
| 19 |
|
| 16 |
|
| 16 |
|
Vacation ownership mortgages receivable |
|
| 733 |
|
| 742 |
|
| 32 |
|
| 34 |
|
Investments in marketable securities |
|
| 13 |
|
| 13 |
|
| 11 |
|
| 11 |
|
Securitized debt |
|
| 145 |
|
| 145 |
|
| — |
|
| — |
|
Revolving credit facility(1) |
|
| (280) |
|
| (285) |
|
| (72) |
|
| (75) |
|
Senior notes(1) |
|
| (344) |
|
| (353) |
|
| (344) |
|
| (348) |
|
| June 30, 2015 | December 31, 2014 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Carrying Amount | Fair Value | Carrying Amount | Fair Value | |||||||||
| (In thousands) | ||||||||||||
Cash and cash equivalents | $ | 92,241 | $ | 92,241 | $ | 80,493 | $ | 80,493 | |||||
Restricted cash and cash equivalents | 16,030 | 16,030 | 19,984 | 19,984 | |||||||||
Financing receivables | 16,138 | 16,138 | 15,896 | 15,896 | |||||||||
Vacation ownership mortgages receivable | 33,310 | 33,560 | 36,502 | 37,624 | |||||||||
Investments in marketable securities | 11,757 | 11,757 | 11,368 | 11,368 | |||||||||
Revolving credit facility(1) | (91,522 | ) | (95,000 | ) | (484,383 | ) | (488,000 | ) | |||||
Senior notes(1) | (343,316 | ) | (358,750 | ) | — | — |
(1) | As of June 30, 2016, the carrying value of our revolving credit facility and senior notes include $4 million and $6 million of debt issuance costs, respectively, which are presented as a direct reduction of the corresponding liability. |
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 9—FAIR VALUE MEASUREMENTS (Continued)
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-qualityhigh‑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 June 30, 20152016 are presented in our consolidated balance sheet within other non-currentnon‑current assets and principally pertains to a convertible secured loan to CLC that matures five years subsequent to the funding dateOctober of 2019 with interest payable monthly. The loan was funded in October of 2014. 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. The carrying value of this financing receivable approximates fair value through inputs inherent to the originating value of this loan, such as interest rates and ongoing credit risk accounted for through non-recurringnon‑recurring adjustments for estimated credit losses as necessary (Level 2). The stated interest rate on this loan is comparable to market rate.market. Interest is recognized within our "Interest income"“Interest income” line item in our condensed consolidated statement of income for the three and six months ended June 30, 2015.2016.
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.
28
Investments in marketable securities consist of marketable securities (mutual funds) related to a deferred compensation plan that isplans which are funded in a Rabbi trust as of June 30, 20152016 and classified as other noncurrent assets in the accompanying condensed consolidated balance sheets. This deferred compensation plan was created and funded in connection with the HVO acquisition.acquisition and funded following both the HVO and Vistana acquisitions. 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 or sell securities with the objective of generating profits on short-termshort‑term differences in market prices. These marketable securities are recorded at a fair value of $11.8$13 million as of June 30, 20152016 based on quoted market prices in active markets for identical assets (Level 1). UnrealizedMinimal unrealized trading gains for the three months and six months ended June 30, 20152016 were less than $0.1 million and $0.3 million, respectively,recorded, with 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 1117 for further discussion in regards 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 Contents
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 9—FAIR VALUE MEASUREMENTS (Continued)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 June 30, 20152016 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 June 30, 20152016 and December 31, 20142015 through inputs inherent to the debt such as variable interest rates and credit risk (Level 2).
NOTE 10—16—EQUITY
ILG has 300 million authorized shares of common stock, par value of $0.01 per share. At June 30, 2015,2016, there were 59.8132.8 million shares of ILG common stock issued, of which 57.5126.8 million are outstanding with 2.46.1 million shares held as treasury stock. At December 31, 2014,2015, there were 59.559.9 million shares of ILG common stock issued, of which 57.157.5 million were outstanding with 2.4 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 June 30, 20152016 and December 31, 2014.2015. 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 to the holders who received Vistana common stock in the spin-off from its former parent.
Dividend Declared
In February and May of 2015,2016, our Board of Directors declared a quarterly dividend payment of $0.12 per share paid in March and June of 2015,2016, respectively, amounting to $6.9$7 million each.and $16 million, respectively.
In August 2015,2016, our Board of Directors declared a $0.12 per share dividend payable September 15, 201521, 2016 to shareholders of record on September 1, 2015.7, 2016.
Stockholder Rights Plan
In June 2009, ILG'sILG’s Board of Directors approved the creation of a Series A Junior Participating Preferred Stock, adopted a stockholders rights plan and declared a dividend of one right for each outstanding share of common stock held by our stockholders of record as of the close 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
29
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 (formerly known as Liberty Media Corporation) in accordance with an agreement entered into with ILG in connection with its spin-offspin‑off from IAC/InterActiveCorp (IAC). If the rights become exercisable, each right will permit its holder, other than the "acquiring“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"“acquiring person” on terms not approved by our Board of Directors.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 10—EQUITY (Continued)
Share Repurchase Program
In February 2015, ILG'sMay 2016, ILG’s Board of Directors increased the remaining share repurchase authorization to a total of $25$100 million. 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.
During the yearsix months ended December 31, 2014,June 30, 2016, we repurchased 0.74.2 million shares of common stock for $14.1 million, including commissions.$61 million. As of June 30, 2015,2016, the remaining availability for future repurchases of our common stock was $25.0$39 million. There were no repurchases of common stock during the six monthsyear ended June 30,December 31, 2015.
Accumulated Other Comprehensive Loss
Pursuant to final guidance issued by the FASB in February of 2013, entities
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 three months and six months ended June 30, 2015,2016, 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 June 30, 20152016 and December 31, 2014,2015, this noncontrolling interest amounts to $34.3$30 million and $33.3$33 million, respectively, and is presented on our condensed consolidated balance sheets as a component of equity. The change from December 31, 20142015 to June 30, 20152016 relates to the recognition of the noncontrolling interest holder'sholder’s proportional share of VRI Europe'sEurope’s earnings, andas 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'sCLC’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'sILG’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 June 30, 2015,2016, there have been no changes in ILG'sILG’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 $15.1$15 million that matures
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 10—EQUITY (Continued)
five years subsequent to the funding date2019 with interest payable monthly. This loan was funded during the fourth quarter of 2014. 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'sCLC’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
30
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—Hyatt Vacation Ownership
In connection with the HVO acquisition on October 1, 2014, ILG assumed a noncontrolling interest in a joint venture entity, which we fully consolidate, formed for the purpose of developing and selling vacation ownership interests.VOIs. The fair value of the noncontrolling interest at acquisition was determined based on the noncontrolling party'sparty’s ownership interest applied against the fair value allocated to the respective joint venture entity. As of June 30, 20152016 and December 31, 2014,2015, this noncontrolling interest amounted to $2.5$1 million and $3.1$2 million, respectively, and is presented on our condensed consolidated balance sheets as a component of equity.
NOTE 11—17—BENEFIT PLANS
Under a retirement savings plan sponsored by ILG, qualified under Section 401(k) of the Internal Revenue Code, participating employees may contribute up to 50.0% of their pre-taxpre‑tax earnings, but not more than statutory limits. ILG provides a discretionary match under the ILG plan of fifty cents for each dollar a participant contributed into the plan with a maximum contribution of 3% of a participant'sparticipant’s eligible earnings, subject to Internal Revenue Service ("IRS"(“IRS”) restrictions. Matching contributions for the ILG plan were approximately $0.7$1 million and $0.5$1 million for the three months ended June 30, 20152016 and 2014,2015, respectively and $1.2$2 million and $1.0$1 million for the six months ended June 30, 20152016 and 2014,2015, respectively. Matching contributions were invested in the same manner as each participant'sparticipant’s voluntary contributions in the investment options provided under the plan.
Effective August 20, 2008, a deferred compensation plan (the "Director Plan"“Director Plan”) was established to provide non-employeenon‑employee directors of ILG an option to defer director fees on a tax-deferredtax‑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 49,26057,218 share units were outstanding at June 30, 2015.2016. 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"“DCP”) was established to allow certain eligible employees of ILG an option to defer compensation on a tax-deferred basis. The initial establishment of the DCP was intended to receive a transfer of deferred
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 11—BENEFIT PLANS (Continued)
compensation liabilities in connection with the acquisition of HVO.HVO and, the DCP was amended in 2016 in connection with the receipt of a transfer of deferred compensation plan liabilities and assets in connection with the acquisition of Vistana. Participants in the DCP are currently limited toinclude only certain HVO employees.and Vistana employees that participated in similar plans prior to the acquisitions by ILG of HVO and Vistana, respectively. These participants make an election prior to the first of each year to defer an amount of compensation payable for services to be rendered begin ningbeginning in the next calendar year, or to receive distributions.and also select when such deferred amounts will be distributed in the future. Participants are fully vested in all amounts held in their individual accounts. The DCPParticipants have only an unsecured claim against ILG for the future payment of the deferred amounts, although payment is indirectly secured through a fully funded in a 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. Subsequent to the acquisitionacquisitions of HVO and Vistana, there was awere net transfertransfers of $10.6$11 million and $2 million, respectively, into the Rabbi trust, related to participants acquiredthat became ILG employees in connection with the acquisition.respective acquisitions. As of June 30, 2015,2016, the fair value of the investments in the Rabbi trust was $11.8$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 sheet. We recorded unrealized gains of less than $0.1 million and $0.3 million for the three and six months ended June 30, 2015, respectively, to general and administrative expense related to the investment gains, and a charge to compensation expense also within general and administrative expense related to the increase in deferred compensation liabilities to reflect the DCP liability,liability. Such amounts were de minimis in the three and six months ended June 30, 2016 in the condensed consolidated statementstatements of income.
31
NOTE 12—STOCK-BASED18—STOCK‑BASED COMPENSATION
On May 21, 2013, ILG adopted the Interval Leisure Group, Inc. 2013 Stock and Incentive Plan and stopped granting awards under the ILG 2008 Stock and Annual Incentive Plan ("(“2008 Incentive Plan"Plan”). Both plans provide for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-basedstock‑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. Each RSU is subject to service-basedservice‑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.
ILG recognizes non-cashnon‑cash compensation expense for all RSUs held by ILG'sILG’s employees. For RSUs to be settled in stock, the accounting charge is measured at the grant date as the fair value of ILG common stock and expensed as non-cashnon‑cash compensation over the vesting term using the straight-linestraight‑line basis for service awards and the accelerated basis for performance-basedperformance‑based awards with graded vesting. Certain cliff vesting awards contain performance criteria which are tied to anticipated future results of operations in determining the fair value of the award, while other cliff vesting awards with performance criteria are tied to the achievement of certain market conditions. This value is recognized as expense over the service period, net of estimated forfeitures, using the straight-linestraight‑line recognition method. The expense associated with RSU awards to be settled in cash is initially measured at fair value at the grant date and expensed ratably over the vesting term, recording a liability subject to mark-to-marketmark‑to‑market adjustments for changes in the price of the respective common stock, as compensation expense.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 12—STOCK-BASED COMPENSATION (Continued)
Shares underlying RSUs are not issued or outstanding until vested. In relation to our quarterly dividend, unvested RSUs are credited with dividend equivalents, in the form of additional RSUs, when dividends are paid on our shares of common stock. Such additional RSUs are forfeitable and will have the same vesting dates and will vest under the same terms as the RSUs in respect of which such additional RSUs are credited. Given such dividend equivalents are forfeitable, we do not consider them to be participating securities and, consequently, they are not subject to the two-classtwo‑class method of determining earnings per share.
Under the ILG 2013 Stock and Incentive Compensation Plan, the maximum aggregate number of shares of common stock reserved for issuance as of adoption is 4.1 million shares, less one share for every share granted under any prior plan after December 31, 2012. As of June 30, 2015, ILG has 2.4 million2016, a de minimis amount of shares were available for future issuance under the 2013 Stock and Incentive Compensation Plan.
During the first half of 20152016 and 2014,2015, the Compensation Committee granted approximately855,000 and 423,000 and 390,000 RSUs, respectively, vesting over threeone to fivefour years, to certain officers, board of directors and employees of ILG and its subsidiaries. Of these RSUs granted in 2016 and 2015, approximately 140,000 and 2014, approximately 105,000, and 116,000respectively, cliff vest in three to five years and approximately 54,000105,000 and 84,000 of these RSUs,54,000, respectively, are subject to performance criteria that could result between 0% and 200% of these awards being earned either based on defined adjusted EBITDA or relative total shareholder return targets over the respective performance period, as specified in the award document.
For the 20152016 and 20142015 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 $13.13 for 2016 and $40.71 for 2015 and $36.90 for 2014 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 volatility of ILG'sILG’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-freerisk‑free interest rate assumption was based on observed interest rates consistent with the approximate three-yearthree – year performance measurement period.
Non-cash
Additionally, on May 11, 2016, in connection with the acquisition of Vistana, all of the unvested equity grants held by Vistana’s employees under Starwood plans were converted to grants under the ILG 2013 Stock and Incentive
32
Plan based on a conversion factor using relative stock prices at closing. A total of 713,000 shares of restricted stock and 11,000 RSUs were issued in this conversion with a fair value of $10.3 million, of which $2 million and $8 million were attributed to pre-acquisition and post-acquisition services, respectively. The converted awards generally have the same terms and conditions as the original Starwood awards and vest through the first quarter of 2019.
In connection with the acquisition effective May 12, 2016, certain ILG and Vistana executive officers were awarded a total of 595,000 RSUs, with 375,000 cliff vesting in three years, and 220,000 vesting over three years as follows, 30%, 30% and 40%. All of these RSUs granted are subject to performance criteria of which 168,000 could result between 0% and 200% of these awards being earned based on defined adjusted EBITDA targets and 75,000 could result between 0% and 140% of these awards being earned based on revenue targets, over the respective performance period, as specified in the award documents. Of the aggregate estimated value of the awards, $5 million is being amortized to expense on a straight-line basis, and $3 million is being amortized to expense on an accelerated basis, over the applicable vesting period of the awards.
Non‑cash compensation expense related to RSUs and restricted stock for the three months ended June 30, 2016 and 2015 and 2014 was $3.4$5 million and $2.6$3 million, respectively and $6.9$8 million and $5.5$6 million for the six months ended June 30, 20152016 and 2014,2015, respectively. At June 30, 2015,2016, there was approximately $24.2$36 million of unrecognized compensation cost, net of estimated forfeitures, related to RSUs and restricted stock, which is currently expected to be recognized over a weighted average period of approximately 2.02 years.
The amount of stock-basedstock‑based compensation expense recognized in the condensed consolidated statements of income is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods for any changes to the estimated forfeiture rate from that previously estimated. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is at least equal to the portion of the grant-dategrant‑date value of the award tranche that is actually vested at that date.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 12—STOCK-BASED COMPENSATION (Continued)
Non-cash stock-basedNon‑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 six months ended June 30, 2016 and 2015 and 2014 (in thousands)millions):
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| Three Months |
| Six months |
| |||||||||||||||||||||
| Ended |
| Ended |
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| Three Months Ended June 30, | Six Months Ended June 30, |
| June 30, |
| June 30, |
| |||||||||||||||||||
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| 2015 | 2014 | 2015 | 2014 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| |||||||||||||
Cost of sales | $ | 203 | $ | 173 | $ | 433 | $ | 383 |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
| |||||
Selling and marketing expense | 408 | 334 | 881 | 697 |
|
| 1 |
|
| — |
|
| 1 |
|
| 1 |
| |||||||||
General and administrative expense | 2,801 | 2,126 | 5,620 | 4,400 |
|
| 4 |
|
| 3 |
|
| 6 |
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| 6 |
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| | | | | | | | | | | | | ||||||||||||||
Non-cash compensation expense | $ | 3,412 | $ | 2,633 | $ | 6,934 | $ | 5,480 |
| $ | 5 |
| $ | 3 |
| $ | 8 |
| $ | 7 |
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The following table summarizes RSU activity during the six months ended June 30, 2015:2016:
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| Weighted-Average |
| |
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| Grant Date |
| |
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| Shares |
| Fair Value |
| |
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| (In millions) |
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Non-vested RSUs at January 1, 2016 |
| 2 |
| $ | 22.98 |
|
Granted |
| 2 |
|
| 13.29 |
|
Vested |
| (1) |
|
| 20.73 |
|
Non-vested RSUs at June 30, 2016 |
| 3 |
| $ | 16.75 |
|
33
| Shares | Weighted-Average Grant Date Fair Value | |||||
---|---|---|---|---|---|---|---|
| (In thousands) | | |||||
Non-vested RSUs at January 1, 2015 | 1,694 | $ | 20.23 | ||||
Granted | 520 | 26.08 | |||||
Vested | (532 | ) | 17.25 | ||||
Forfeited | (5 | ) | 20.57 | ||||
| | | | | | | |
Non-vested RSUs at June 30, 2015 | 1,677 | $ | 23.00 | ||||
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NOTE 13—19—INCOME TAXES
ILG calculates its interim income tax provision in accordance with ASC 740, "Income Taxes".“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-dateyear‑to‑date earnings or loss. The income tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of a change in enacted tax laws or rates, tax status, or judgment on the realizability of a beginning-of-the-yearbeginning‑of‑the‑year deferred tax asset in future years 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 operating income 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 recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or ILG'sILG’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 tax expense for the current quarter.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 13—INCOME TAXES (Continued)
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 six months ended June 30, 2016, ILG recorded income tax provisions for continuing operations of $36 million and $49 million, respectively, which represent effective tax rates of 16.4% and 19.1% for the respective periods. These tax rates are lower than the federal statutory rate of 35% due principally to the nontaxable gain on bargain purchase recorded during the current 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 and reduced our effective tax rate in absolute terms by approximately 21 and 18 percentage points for the three and six months ended June 30, 2016, respectively.
For the three and six months ended June 30, 2015, ILG recorded income tax provisions for continuing operations of $9.7$10 million and $24.1$24 million, respectively, which represent effective tax rates of 36.1% and 36.0% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates.
For the three and six months ended June 30, 2014, ILG recorded income tax provisions for continuing operations of $10.7 million and $25.0 million, respectively, which represent effective tax rates of 35.5% and 36.2% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates.
As of June 30, 2015,2016, there were no material changes to ILG'sILG’s unrecognized tax benefits and related interest. In connection with the acquisition of Vistana, Starwood and ILG entered into a Tax Matters Agreement, discussed further below. 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. ILG's federal consolidated tax return for the period ended December 31, 2012 was under examination by the IRS. During the second quarter of 2015, this examination was closed. As of June 30, 2015,2016, no open tax years are currently under examination by the IRS orIRS. During the quarter, ILG was notified by the State of Florida that the consolidated state tax return for the tax years ended December 31, 2012 through 2014 will be examined. No other 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, 2012. Under the Tax Matters Agreement, Starwood indemnifies ILG for all income tax liabilities and related interest and penalties for the pre-close period.
In connection with the Vistana transaction, Starwood and ILG entered into a Tax Matters Agreement that generally governs the parties' respective rights, responsibilities, and obligations with respect to taxes, including both
34
taxes arising in the ordinary course of business as well as taxes, if any, incurred as a result of any failure of the Vistana reorganization, spin-off, Merger and certain related transactions consummated in connection with Starwood's internal restructuring to qualify for their intended U.S. federal income tax treatment. In addition to allocating responsibility for these taxes between the parties, the Tax Matters Agreement sets forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters. The Tax Matters Agreement also generally prohibits ILG, Vistana and any subsidiary of Vistana from taking certain actions that could cause the failure of the Vistana reorganization, spin-off, Merger and certain related transactions consummated in connection with Starwood's internal restructuring from qualifying for their intended tax treatment. Additional details can be found in the Tax Matters Agreement which was included as an exhibit to Form 8-K filed on May 12, 2016.
NOTE 14—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'sentity’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. In the fourth quarterILG is comprised of 2014, as a result of the acquisition of HVO, ILG reorganized its management reporting structure resulting in the followingtwo operating and reportable segments: Exchange and Rental and Vacation Ownership.
Our Exchange and Rental segment offers access to vacation accommodations and other travel-relatedtravel‑related transactions and services to leisure travelers, by providing vacation exchange services and vacation rental, working with resort developers and managing vacation properties. Our Vacation
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 14—SEGMENT INFORMATION (Continued)
Ownership segment engages in the management, sales, marketing, financing, rental and ancillary services, and development of vacation ownership interests andVOIs as well as related services to owners and associations.
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. Historically most of these costs have been borne by the Interval business. Beginning in the fourth quarter of 2014, costsCosts relating to such corporate functions that are not directly cross-chargedcross‑charged to individual businesses are being allocated to our two operating and reportable segments based on a pre-determinedpre‑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-segmentcross‑segment allocation. Consequently, for comparative purposes, we have recast our segment results for 2014 to include such corporate allocations.
35
Information on reportable segments and reconciliation to consolidated operating income is as follows (in thousands)millions):
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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Exchange and Rental: |
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Transaction revenue |
| $ | 50 |
| $ | 48 |
| $ | 108 |
| $ | 104 |
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Membership fee revenue |
|
| 34 |
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| 31 |
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| 64 |
|
| 63 |
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Ancillary member revenue |
|
| 1 |
|
| 1 |
|
| 3 |
|
| 3 |
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Total member revenue |
|
| 85 |
|
| 80 |
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| 175 |
|
| 170 |
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Club rental revenue |
|
| 15 |
|
| 3 |
|
| 18 |
|
| 5 |
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Other revenue |
|
| 6 |
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| 6 |
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| 12 |
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| 13 |
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Rental management revenue |
|
| 10 |
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| 12 |
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| 23 |
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| 25 |
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Cost reimbursement revenue |
|
| 24 |
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| 24 |
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| 46 |
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| 47 |
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Total revenues |
|
| 140 |
|
| 125 |
|
| 274 |
|
| 260 |
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Cost of service and membership related sales |
|
| 16 |
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| 17 |
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| 32 |
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| 35 |
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Cost of sales of rental and ancillary services |
|
| 19 |
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| 9 |
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| 31 |
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| 18 |
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Cost reimbursements |
|
| 24 |
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| 24 |
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| 46 |
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| 47 |
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Total cost of sales |
|
| 59 |
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| 50 |
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| 109 |
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| 100 |
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Gross profit |
|
| 81 |
|
| 75 |
|
| 165 |
|
| 160 |
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Royalty fee expense |
|
| — |
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| — |
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| 1 |
|
| 1 |
|
Selling and marketing expense |
|
| 15 |
|
| 16 |
|
| 29 |
|
| 31 |
|
General and administrative expense |
|
| 32 |
|
| 26 |
|
| 56 |
|
| 52 |
|
Amortization expense of intangibles |
|
| 3 |
|
| 2 |
|
| 5 |
|
| 4 |
|
Depreciation expense |
|
| 4 |
|
| 4 |
|
| 9 |
|
| 7 |
|
Segment operating income |
| $ | 27 |
| $ | 27 |
| $ | 65 |
| $ | 65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
Vacation Ownership: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
| $ | 30 |
| $ | 4 |
| $ | 35 |
| $ | 7 |
|
Management fee revenue |
|
| 27 |
|
| 21 |
|
| 48 |
|
| 43 |
|
Sales of vacation ownership products, net |
|
| 49 |
|
| 10 |
|
| 58 |
|
| 16 |
|
Consumer financing revenue |
|
| 11 |
|
| 1 |
|
| 13 |
|
| 3 |
|
Cost reimbursement revenue |
|
| 40 |
|
| 13 |
|
| 55 |
|
| 29 |
|
Total revenue |
|
| 157 |
|
| 49 |
|
| 209 |
|
| 98 |
|
Cost of service and membership related |
|
| 11 |
|
| 8 |
|
| 20 |
|
| 16 |
|
Cost of sales of vacation ownership products |
|
| 19 |
|
| 7 |
|
| 25 |
|
| 12 |
|
Cost of rental and ancillary services |
|
| 23 |
|
| 2 |
|
| 25 |
|
| 4 |
|
Cost of consumer financing |
|
| 3 |
|
| — |
|
| 3 |
|
| — |
|
Cost reimbursements |
|
| 40 |
|
| 13 |
|
| 55 |
|
| 29 |
|
Total cost of sales |
|
| 96 |
|
| 30 |
|
| 128 |
|
| 61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
| 61 |
|
| 19 |
|
| 81 |
|
| 37 |
|
Royalty fee expense |
|
| 5 |
|
| 1 |
|
| 6 |
|
| 1 |
|
Selling and marketing expense |
|
| 27 |
|
| 3 |
|
| 30 |
|
| 6 |
|
General and administrative expense |
|
| 22 |
|
| 10 |
|
| 36 |
|
| 19 |
|
Amortization expense of intangibles |
|
| 2 |
|
| 1 |
|
| 3 |
|
| 3 |
|
Depreciation expense |
|
| 5 |
|
| — |
|
| 5 |
|
| 1 |
|
Segment operating income |
| $ | — |
| $ | 4 |
| $ | 1 |
| $ | 7 |
|
36
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |||||||||
Exchange and Rental: | |||||||||||||
Transaction revenue | $ | 47,139 | $ | 47,315 | $ | 104,203 | $ | 103,426 | |||||
Membership fee revenue | 31,579 | 31,602 | 63,127 | 63,420 | |||||||||
Ancillary member revenue | 1,402 | 1,709 | 2,801 | 3,332 | |||||||||
| | | | | | | | | | | | | |
Total member revenue | 80,120 | 80,626 | 170,131 | 170,178 | |||||||||
Other revenue | 8,866 | 6,314 | 17,571 | 12,107 | |||||||||
Rental management revenue | 11,411 | 10,035 | 25,611 | 23,960 | |||||||||
Pass-through revenue | 24,200 | 19,827 | 46,921 | 40,645 | |||||||||
| | | | | | | | | | | | | |
Total revenues | 124,597 | 116,802 | 260,234 | 246,890 | |||||||||
Cost of sales | 49,518 | 44,782 | 100,742 | 93,807 | |||||||||
| | | | | | | | | | | | | |
Gross profit | 75,079 | 72,020 | 159,492 | 153,083 | |||||||||
Selling and marketing expense | 15,528 | 13,824 | 30,849 | 28,256 | |||||||||
General and administrative expense | 25,931 | 25,540 | 52,006 | 50,259 | |||||||||
Amortization expense of intangibles | 2,155 | 1,751 | 4,310 | 3,580 | |||||||||
Depreciation expense | 3,896 | 3,694 | 7,722 | 7,305 | |||||||||
| | | | | | | | | | | | | |
Segment operating income | $ | 27,569 | $ | 27,211 | $ | 64,605 | $ | 63,683 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 14—SEGMENT INFORMATION (Continued)
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |||||||||
Vacation Ownership: | |||||||||||||
Management fee revenue | $ | 24,855 | $ | 22,308 | $ | 49,913 | $ | 44,995 | |||||
Vacation ownership sales and financing revenue | 10,875 | — | 19,471 | — | |||||||||
Pass-through revenue | 13,418 | 4,418 | 28,679 | 8,684 | |||||||||
| | | | | | | | | | | | | |
Total revenue | 49,148 | 26,726 | 98,063 | 53,679 | |||||||||
Cost of sales | 30,905 | 14,979 | 62,038 | 29,804 | |||||||||
| | | | | | | | | | | | | |
Gross profit | 18,243 | 11,747 | 36,025 | 23,875 | |||||||||
Selling and marketing expense | 3,050 | (16 | ) | 5,937 | 122 | ||||||||
General and administrative expense | 9,610 | 5,711 | 19,430 | 12,429 | |||||||||
Amortization expense of intangibles | 1,359 | 1,144 | 2,705 | 2,281 | |||||||||
Depreciation expense | 432 | 182 | 875 | 364 | |||||||||
| | | | | | | | | | | | | |
Segment operating income | $ | 3,792 | $ | 4,726 | $ | 7,078 | $ | 8,679 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 297 |
| $ | 174 |
| $ | 483 |
| $ | 358 |
|
Cost of sales |
|
| 155 |
|
| 80 |
|
| 237 |
|
| 161 |
|
Gross profit |
|
| 142 |
|
| 94 |
|
| 246 |
|
| 197 |
|
Direct segment operating expenses |
|
| 115 |
|
| 63 |
|
| 180 |
|
| 125 |
|
Operating income |
| $ | 27 |
| $ | 31 |
| $ | 66 |
| $ | 72 |
|
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |||||||||
Consolidated: | |||||||||||||
Revenue | $ | 173,745 | $ | 143,528 | $ | 358,297 | $ | 300,569 | |||||
Cost of sales | 80,423 | 59,761 | 162,780 | 123,611 | |||||||||
| | | | | | | | | | | | | |
Gross profit | 93,322 | 83,767 | 195,517 | 176,958 | |||||||||
Direct segment operating expenses | 61,961 | 51,830 | 123,834 | 104,596 | |||||||||
| | | | | | | | | | | | | |
Operating income | $ | 31,361 | $ | 31,937 | $ | 71,683 | $ | 72,362 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Selected financial information by reporting segment is presented below (in thousands)millions). Total assets for our Exchange and Rental segment as of December 31, 2014 have been recast pursuant to ASU 2015-03 with regards to the presentation of debt issuance costs as a contra long-term debt item. See Note 8 for additional discussion.
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Total Assets: |
|
|
|
|
|
|
|
Exchange and Rental |
| $ | 1,001 |
| $ | 905 |
|
Vacation Ownership |
|
| 2,132 |
|
| 374 |
|
Total |
| $ | 3,133 |
| $ | 1,279 |
|
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Total Assets: | |||||||
Exchange and Rental | $ | 939,022 | $ | 928,081 | |||
Vacation Ownership | 387,287 | 395,921 | |||||
| | | | | | | |
Total | $ | 1,326,309 | $ | 1,324,002 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 14—SEGMENT INFORMATION (Continued)
Geographic Information
We conduct operations through offices in the U.S. and 1514 other countries. For the six months ended June 30, 20152016 and 20142015 revenue is sourced from over 100 countries worldwide. Other than the United States and Europe, revenue sourced from any individual country or geographic region did not exceed 10% of consolidated revenue for the three and six months ended June 30, 20152016 and 2014.2015.
Geographic information on revenue, based on sourcing, and long-livedlong‑lived assets, based on physical location, is presented in the table below (in thousands)millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| ||||||||
|
| June 30, |
| June 30, |
| ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 250 |
| $ | 144 |
| $ | 406 |
| $ | 298 |
|
Europe |
|
| 17 |
|
| 17 |
|
| 34 |
|
| 34 |
|
All other countries(1) |
|
| 30 |
|
| 13 |
|
| 43 |
|
| 26 |
|
Total |
| $ | 297 |
| $ | 174 |
| $ | 483 |
| $ | 358 |
|
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |||||||||
Revenue: | |||||||||||||
United States | $ | 144,388 | $ | 110,528 | $ | 298,079 | $ | 232,228 | |||||
Europe | 16,618 | 17,465 | 34,468 | 36,708 | |||||||||
All other countries(1) | 12,739 | 15,535 | 25,750 | 31,633 | |||||||||
| | | | | | | | | | | | | |
Total | $ | 173,745 | $ | 143,528 | $ | 358,297 | $ | 300,569 | |||||
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
(1) | Includes countries within the following continents: Africa, Asia, Australia, North America and South America. |
| June 30, 2015 | December 31, 2014 | |||||
---|---|---|---|---|---|---|---|
Long-lived assets (excluding goodwill and intangible assets): | |||||||
United States | $ | 80,970 | $ | 81,291 | |||
Europe | 4,722 | 4,884 | |||||
All other countries | 419 | 426 | |||||
| | | | | | | |
Total | $ | 86,111 | $ | 86,601 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
| ||
|
| 2016 |
| 2015 |
| ||
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
|
|
United States |
| $ | 451 |
| $ | 87 |
|
Mexico |
|
| 106 |
|
| — |
|
Europe |
|
| 4 |
|
| 4 |
|
Total |
| $ | 561 |
| $ | 91 |
|
NOTE 15—21—COMMITMENTS AND CONTINGENCIES
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
37
of an unfavorable outcome is not probable. Although management currently believes that an unfavorable resolution of claims against ILG, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of ILG, these matters are subject to inherent uncertainties and management'smanagement’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 1319 for a discussion of income tax contingencies.
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 15—COMMITMENTS AND CONTINGENCIES (Continued)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. At June 30, 2015,2016, guarantees, surety bonds and letters of credit totaled $83.4$98 million, with the highest annual amount of $58.8$78 million occurring in year one. The total includes a guarantee by us of up to $36.7$37 million of the construction loan for the Maui project. This amount represents the maximum exposure under guarantee related to this construction loan from a legal perspective; however, our reasonable expectation of our exposure under this guarantee based on the agreements among guarantors is proportionally reduced by our ownership percentage in the Maui project to $20.7$8 million as of June 30, 2015.2016. Additionally, the total also includes maximum exposure under guarantees of $34.1$92 million primarily relating to our vacation rental business'sbusiness’s hotel and resort management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the rental 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 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 retains 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 June 30, 2015,2016, future amounts are not expected to be significant 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 June 30, 2016, amounts pending reimbursements are not significant.
Letters of Credit
Additionally, as of June 30, 2015,2016, our letters of credit totaled $8.3$11 million and were principally related to our Vacation Ownership sales and financing activities. More specifically, these letterletters of creditscredit 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.
Our operating and purchase obligations primarily relate
Vacation Ownership Development Commitments
With respect to future guaranteed purchases of rental inventory, operational support services, marketing related benefits and membership fulfillment benefits. Certainvacation ownership projects under development, we estimate the cost associated with completing the phases of our vacation rental businesses also enter into agreements,ownership projects currently in presales and accounted for under the percentage of completion method is approximately $58 million at June 30, 2016. 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 2016 and 2017.
38
NOTE 22— SUPPLEMENTAL GUARANTOR INFORMATION
The senior notes are guaranteed by ILG and certain other subsidiaries that are 100% 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 condensed consolidating financial information as principal, for services purchased on behalf of property owners for which it is subsequently reimbursed. As such, we are the primary obligor and may be liable for unreimbursed costs. As of June 30, 2015, amounts pending reimbursements are not significant.
European Union Value Added Tax Matter
In 2009, the European Court of Justice issued a judgment related to Value Added Tax ("VAT") in Europe against an unrelated party. The judgment affects companies who transact within the European Union ("EU"), specifically providers of vacation interest exchange services, and altered the manner in
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2015
(Unaudited)
NOTE 15—COMMITMENTS AND CONTINGENCIES (Continued)
which our Exchange and Rental segment accounts for VAT on its revenues as well as to which EU country VAT is owed.
As of June 30, 20152016 and December 31, 2014, ILG had an accrual of $1.4 million2015 and $2.3 million, respectively, representing the net exposure of any VAT reclaim refund receivable and accrued VAT liabilities related to this matter. The net change in the accrual primarily relates to the resolution with the respective taxing authority of a specific methodology that is to be utilized, and to a decrease in the change in estimate primarily to update the periods for which the accrued VAT liabilities are due, as well as the effect of foreign currency remeasurements. The change in estimate resulted in favorable adjustments of $0.2 million and $1.2 million for the three andand/ or six months ended June 30, 2016 and 2015 respectively,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 $0.1 million and $0.6 million for the three and six months ended June 30, 2014, respectively, to ourILG on a consolidated statements of income.basis (in millions).
Because of the uncertainty surrounding the ultimate outcome and settlement of these VAT liabilities, it is reasonably possible that future costs to settle these VAT liabilities as of June 30, 2015 may range from $1.4 million up to approximately $2.6 million based on quarter-end exchange rates. ILG believes that the $1.4 million accrual at June 30, 2015 is our best estimate of probable future obligations for the settlement of these VAT liabilities. The difference between the probable and reasonably possible amounts is primarily attributable to the assessment of certain potential penalties.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of June 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated |
Current assets |
| $ | - |
| $ | - |
| $ | 558 |
| $ | 205 |
| $ | - |
| $ | 763 |
Property and equipment, net |
|
| - |
|
| - |
|
| 398 |
|
| 163 |
|
| - |
|
| 561 |
Goodwill and intangible assets, net |
|
| - |
|
| 267 |
|
| 661 |
|
| 106 |
|
| - |
|
| 1,034 |
Investments in subsidiaries |
|
| 574 |
|
| 1,259 |
|
| 393 |
|
| - |
|
| (2,226) |
|
| - |
Other assets |
|
| - |
|
| - |
|
| 541 |
|
| 234 |
|
| - |
|
| 775 |
Total assets |
| $ | 574 |
| $ | 1,526 |
| $ | 2,551 |
| $ | 708 |
| $ | (2,226) |
| $ | 3,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 7 |
| $ | 5 |
| $ | 390 |
| $ | 101 |
| $ | - |
| $ | 503 |
Other long-term liabilities |
|
| - |
|
| - |
|
| 262 |
|
| 30 |
|
| - |
|
| 292 |
Long term debt |
|
| - |
|
| 624 |
|
| (12) |
|
| 115 |
|
| - |
|
| 727 |
Intercompany liabilities (receivables) / equity |
|
| (1,012) |
|
| 323 |
|
| 649 |
|
| 40 |
|
| - |
|
| - |
Redeemable noncontrolling interest |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
ILG stockholders' equity |
|
| 1,579 |
|
| 574 |
|
| 1,259 |
|
| 393 |
|
| (2,226) |
|
| 1,579 |
Noncontrolling interests |
|
| - |
|
| - |
|
| 2 |
|
| 29 |
|
| - |
|
| 31 |
Total liabilities and equity |
| $ | 574 |
| $ | 1,526 |
| $ | 2,551 |
| $ | 708 |
| $ | (2,226) |
| $ | 3,133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of December 31, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated |
Current assets |
| $ | 1 |
| $ | - |
| $ | 148 |
| $ | 109 |
| $ | - |
| $ | 258 |
Property and equipment, net |
|
| - |
|
| - |
|
| 65 |
|
| 26 |
|
| - |
|
| 91 |
Goodwill and intangible assets, net |
|
| - |
|
| 268 |
|
| 427 |
|
| 116 |
|
| - |
|
| 811 |
Investments in subsidiaries |
|
| 539 |
|
| 1,321 |
|
| 136 |
|
| - |
|
| (1,996) |
|
| - |
Other assets |
|
| - |
|
| - |
|
| 103 |
|
| 16 |
|
| - |
|
| 119 |
Total assets |
| $ | 540 |
| $ | 1,589 |
| $ | 879 |
| $ | 267 |
| $ | (1,996) |
| $ | 1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 1 |
| $ | 5 |
| $ | 175 |
| $ | 31 |
| $ | - |
| $ | 212 |
Other long-term liabilities |
|
| - |
|
| - |
|
| 163 |
|
| 22 |
|
| - |
|
| 185 |
Long term debt |
|
| - |
|
| 416 |
|
| (8) |
|
| 8 |
|
| - |
|
| 416 |
Intercompany liabilities (receivables) / equity |
|
| 107 |
|
| 629 |
|
| (775) |
|
| 39 |
|
| - |
|
| - |
Redeemable noncontrolling interest |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
ILG stockholders' equity |
|
| 432 |
|
| 539 |
|
| 1,321 |
|
| 136 |
|
| (1,996) |
|
| 432 |
Noncontrolling interests |
|
| - |
|
| - |
|
| 2 |
|
| 31 |
|
| - |
|
| 33 |
Total liabilities and equity |
| $ | 540 |
| $ | 1,589 |
| $ | 879 |
| $ | 267 |
| $ | (1,996) |
| $ | 1,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Three Months Ended June 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated |
Revenue |
| $ | - |
| $ | - |
| $ | 253 |
| $ | 44 |
| $ | - |
| $ | 297 |
Operating expenses |
|
| (1) |
|
| - |
|
| (234) |
|
| (35) |
|
| - |
|
| (270) |
Interest (expense) income, net |
|
| - |
|
| (7) |
|
| 1 |
|
| - |
|
| - |
|
| (6) |
Other income (expense), net |
|
| 221 |
|
| 32 |
|
| 8 |
|
| 1 |
|
| (64) |
|
| 198 |
Income tax benefit (provision) |
|
| (37) |
|
| - |
|
| 2 |
|
| (1) |
|
| - |
|
| (36) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
Net income |
|
| 183 |
|
| 25 |
|
| 31 |
|
| 9 |
|
| (64) |
|
| 184 |
Net income (loss) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| (1) |
|
| - |
|
| (1) |
Net income attributable to common stockholders |
| $ | 183 |
| $ | 25 |
| $ | 31 |
| $ | 8 |
| $ | (64) |
| $ | 183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Three Months Ended June 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated |
Revenue |
| $ | - |
| $ | - |
| $ | 147 |
| $ | 27 |
| $ | - |
| $ | 174 |
Operating expenses |
|
| (1) |
|
| - |
|
| (120) |
|
| (22) |
|
| - |
|
| (143) |
Interest (expense) income, net |
|
| - |
|
| (6) |
|
| - |
|
| - |
|
| - |
|
| (6) |
Other income, net (1) |
|
| 18 |
|
| 21 |
|
| 3 |
|
| - |
|
| (41) |
|
| 1 |
Income tax benefit (provision) |
|
| - |
|
| 2 |
|
| (10) |
|
| (2) |
|
| - |
|
| (10) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
Net income |
|
| 17 |
|
| 17 |
|
| 21 |
|
| 3 |
|
| (41) |
|
| 17 |
Net income (loss) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
Net income attributable to common stockholders |
| $ | 17 |
| $ | 17 |
| $ | 21 |
| $ | 3 |
| $ | (41) |
| $ | 17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Six Months Ended June 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated |
Revenue |
| $ | - |
| $ | - |
| $ | 413 |
| $ | 70 |
| $ | - |
| $ | 483 |
Operating expenses |
|
| (2) |
|
| - |
|
| (359) |
|
| (56) |
|
| - |
|
| (417) |
Interest (expense) income, net |
|
| - |
|
| (13) |
|
| 2 |
|
| - |
|
| - |
|
| (11) |
Other income, net (1) |
|
| 245 |
|
| 58 |
|
| 11 |
|
| 2 |
|
| (117) |
|
| 199 |
Income tax benefit (provision) |
|
| (37) |
|
| 3 |
|
| (12) |
|
| (3) |
|
| - |
|
| (49) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 2 |
|
| - |
|
| - |
|
| 2 |
Net income |
|
| 206 |
|
| 48 |
|
| 57 |
|
| 13 |
|
| (117) |
|
| 207 |
Net income (loss) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| 1 |
|
| (2) |
|
| - |
|
| (1) |
Net income attributable to common stockholders |
| $ | 206 |
| $ | 48 |
| $ | 58 |
| $ | 11 |
| $ | (117) |
| $ | 206 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Six Months Ended June 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated |
Revenue |
| $ | - |
| $ | - |
| $ | 305 |
| $ | 53 |
| $ | - |
| $ | 358 |
Operating expenses |
|
| (2) |
|
| - |
|
| (241) |
|
| (43) |
|
| - |
|
| (286) |
Interest (expense) income, net |
|
| - |
|
| (9) |
|
| 1 |
|
| - |
|
| - |
|
| (8) |
Other income, net (1) |
|
| 43 |
|
| 49 |
|
| 5 |
|
| 1 |
|
| (97) |
|
| 1 |
Income tax benefit (provision) |
|
| 1 |
|
| 4 |
|
| (24) |
|
| (5) |
|
| - |
|
| (24) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 2 |
|
| - |
|
| - |
|
| 2 |
Net income |
|
| 42 |
|
| 44 |
|
| 48 |
|
| 6 |
|
| (97) |
|
| 43 |
Net income (loss) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| (1) |
|
|
|
|
| (1) |
Net income attributable to common stockholders |
| $ | 42 |
| $ | 44 |
| $ | 48 |
| $ | 5 |
| $ | (97) |
| $ | 42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes equity in net income of wholly-owned subsidiaries. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Six Months Ended June 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| ILG Consolidated |
|
Cash flows provided by (used in) operating activities |
| $ | (38) |
| $ | (10) |
| $ | 104 |
| $ | (3) |
| $ | 53 |
|
Cash flows used in investing activities |
|
| 1,230 |
|
| - |
|
| (1,305) |
|
| (36) |
|
| (111) |
|
Cash flows provided by (used in) financing activities |
|
| (1,192) |
|
| 10 |
|
| 1,233 |
|
| 47 |
|
| 98 |
|
Effect of exchange rates changes on cash and cash equivalents |
|
| - |
|
| - |
|
| - |
|
| (6) |
|
| (6) |
|
Cash and cash equivalents at beginning of the period |
|
| - |
|
| - |
|
| 14 |
|
| 79 |
|
| 93 |
|
Cash and cash equivalents at end of period |
| $ | - |
| $ | - |
| $ | 46 |
| $ | 81 |
| $ | 127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Six Months Ended June 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| ILG Consolidated |
|
Cash flows provided by (used in) operating activities |
| $ | (2) |
| $ | - |
| $ | 75 |
| $ | 13 |
| $ | 86 |
|
Cash flows used in investing activities |
|
| - |
|
| - |
|
| (6) |
|
| (1) |
|
| (7) |
|
Cash flows provided by (used in) financing activities |
|
| 2 |
|
| - |
|
| (64) |
|
| (4) |
|
| (66) |
|
Effect of exchange rates changes on cash and cash equivalents |
|
| - |
|
| - |
|
| - |
|
| (2) |
|
| (2) |
|
Cash and cash equivalents at beginning of the period |
|
| - |
|
| - |
|
| 17 |
|
| 64 |
|
| 81 |
|
Cash and cash equivalents at end of period |
| $ | - |
| $ | - |
| $ | 22 |
| $ | 70 |
| $ | 92 |
|
41
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-LookingForward‑Looking Information
This quarterly report on Form 10-Q10‑Q contains "forward-looking statements"“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"“anticipates,” “estimates,” “expects,” “intends,” “plans” and "believes,"“believes,” and similar expressions or future or conditional verbs such as "will," "should," "would," "may"“will,” “should,” “would,” “may” and "could"“could” among others, generally identify forward-lookingforward‑looking statements. These forward-lookingforward‑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-lookingforward‑looking statements are based on management'smanagement’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-lookingforward‑looking statements included in this quarterly report for a variety of reasons, including, among others: (1) adverse trends in economic conditions generally or in the vacation ownership, vacation rental and travel industries;industries, or adverse events or trends in key vacation destinations, (2) adverse changes to, or interruptions in, relationships with third parties;parties, (3) lack of available financing for, or insolvency of developers;or consolidation of developers;developers, (4) decreased demand from prospective purchasers of vacation interests;interests, (5) travel related health concerns;concerns, (6) regulatory changes, in our senior management; regulatory changes;(7) our ability to compete effectively and successfully and to add new products and services;services, (8) our ability to successfully manage and integrate acquisitions;acquisitions, including Vistana, (9) the occurrence of a change in controltermination event under the master license agreement with Hyatt; our failure to comply with designated Hyatt® brand standards with respect to the operation of theStarwood or Hyatt, Vacation Ownership business;(10) our ability to market vacation ownership interestsVOIs successfully and efficiently;efficiently, (11) impairment of assets;ILG’s assets, (12) the restrictive covenants in our revolving credit facility and senior notes; adverse events or trends in key vacation destinations;indenture; (13) business interruptions in connection with our technology systems;systems, (14) the ability of managed homeowners'homeowners associations to collect sufficient maintenance fees;fees, (15) third parties not repaying advances or extensions of credit;credit, (16) fluctuations in currency exchange rates;rates, (17) actions of Starwood or any successor of Starwood that affect the reputation of the licensed marks, the offerings of or access to Starwood's brands and programs, and (18) our ability to expand successfully in international markets and manage risks specific to international operations. Certain of these and other risks and uncertainties are discussed in our filings with the SEC, including in Item 1A "Risk Factors" of our 2014 Annual Report on Form 10-K and in Part II“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-lookingforward‑looking statements.
The following Management Discussion and Analysis provides a narrative of the results of operations and financial condition of ILG for the three and six months ended June 30, 2015.2016. This section should be read in conjunction with the consolidated financial statements and accompanying notes included in this report as well as our 20142015 Annual Report on Form 10-K,10‑K, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"(“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
Organization
In the fourth quarter of 2014, as a result of the acquisition of HVO and its added sales and marketing capabilities, ILG reorganized its management structure. This realignment resulted
Organization
We operate in a change to our operating and reportable segments which are nowtwo segments: Exchange and Rental, and Vacation Ownership.Ownership (VO). The Exchange and Rental operating segment consists of Interval, HRC,Hyatt Residence Club, Vistana Signature Network, the TPI operated exchange business, Aston and Aqua.Aqua-Aston. The Vacation Ownership operating segment consists of VRI Europe, HVO's management andthe VOI sales and financing businesses of Vistana and HVO as well as the management related business lines of business ofVistana, HVO, VRI, TPI and TPI.VRI Europe.
General Description of our Business
ILG is a leading global provider of non-traditional lodging, encompassing a portfolio of leisure businesses from exchangeprofessionally delivered vacation experiences and vacation rental tothe exclusive global licensee for the Hyatt®, Westin® and Sheraton® brands in vacation ownership.
Exchange and Rental offers access to vacation accommodations and other travel-related transactions and services to leisure travelers, by providing vacation exchange services and vacation rentals, working with resort developers and operating vacation rental properties. Vacation Ownership engages in the management of vacation ownership resorts; sales, marketing, and financing of vacation ownership interests;interests (VOIs); the management of vacation ownership resorts; and related services to owners and associations.
Exchange & Rental Services
Interval, the principal business in our
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, and the Hyatt Residence Club as well as vacation rentals through these businesses and Aqua-Aston.
Interval, which operates the Interval Network, has been a leader in the vacation exchange services industry since its founding in 1976. As of June 30, 2015, Interval's primary operation is the Interval Network, a2016, this quality global vacation ownership membership exchange network with:
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 anthe Interval exchange program. In return, Interval provides enrolled purchasers with the ability to exchange the use and occupancy of their vacation interest at the home resort/club system for the right to occupy accommodations at a different resort participating in anthe Interval Network.
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 network. Through Interval's Getaways, members may rent resortfor these services, we earn club and transaction fees. The Vistana Signature Network currently encompasses owners at 22 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 a fee without relinquishing the use of their vacation interest.Getaways. 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. We also operate additional exchange programs including the HRC, which currently encompasses 16 resorts, and TPI's operated exchange business.
This segment also provides vacation rental through its Aqua‑Aston and Aqua businesses as part of a comprehensive package of rental, marketing and management services offered to vacation property owners, primarily of Hawaiian properties, as well as through the Interval Network.properties. Revenue from our vacation rental business is derived principally from fees for rental services and related management of
hotels, condominium resorts and homeowners'homeowners’ associations. Agreements with owners at many of vacation rental'srental’s managed
43
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.
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 HRCHyatt Residence Club and (ii) Interval Network, Vistana Signature Network and HRCHyatt Residence Club transactional and service fees paid primarily for exchanges, Getaways,Getaway rentals, reservation servicing, and related transactions collectively referred to as "transaction“transaction revenue."” Revenue is also derived from fees for ancillary products and services provided to members, fees from other exchange andclub rentals, rental programsmanagement and other products and services sold to developers.related activities.
Vacation Ownership Services
Revenue from the Vacation Ownership segment is derived principally from fees for vacation ownership resort and homeowners' association management services, sales of Hyatt® branded vacation ownership interests,VOIs by Vistana and HVO, interest income earned for financing these sales, and licensing, sales and marketing, and other fees charged to non-controlled developers of HRC affiliated resorts.resorts as well as 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. Each purchaser is automatically enrolled in either the Vistana Signature Network or the Hyatt Residence Club as well as the Interval Network. Sales of VOIs may be made in exchange 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, which is generally ten years. Historical default rates, which represent the trailing twelve months of defaults as a percentage of each period’s beginning gross vacation ownership notes receivable balance was 3.9% for the six months ended June 30, 2016 and 3.5% for the year-ended December 31, 2015. The 3.5% historical default rate for the year-ended December 31, 2015 pertains solely to HVO loans.
We capitalize direct costs attributable to the sale of VOIs until the sales are recognized. All such capitalized costs are included in prepaid expenses and other current assets in the consolidated balance sheets. If a contract is cancelled, we charge the unrecoverable direct selling costs to expense. Indirect sales and marketing costs are expensed as incurred.
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. We have exclusive global master license agreements with Starwood Hotels & Resorts Worldwide, Inc, for use of the Westin® and Sheraton®brands in vacation ownership and with Hyatt Hotels Corporation for the use of the Hyatt® brand in vacation ownership. Marketing efforts for TPI, VRI and VRI Europe are focused on homeowners’ associations of vacation ownership resorts. VRI Europe has an agreement with CLC World Resorts to source additional management opportunities, while Vistana and HVO focus their management services on their respective branded resorts and associations.
We provide management services to nearlyover 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'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. HVO provides management services for luxury and upper upscale resorts throughout the United States participating in the HRC. Our management services are provided pursuant to agreements with terms generally ranging from one to ten years or more, many of which are
44
automatically renewable. Management fees are negotiated amounts for management and other specified services, and at times are based on a cost-plus arrangement.
HVO sells, markets, finances, develops and/or licenses the brand for 16 vacation ownership resorts that participate in the HRC. HVO sells traditional vacation ownership interests of weekly intervals and, at certain properties, fractional interests, as deeded real estate. These interests provide annual usage rights for a one-week or longer interval at a specific resort. Each purchaser is automatically enrolled in the HRC. In connection with the sales of vacation ownership interests, we provide financing to eligible purchasers collateralized by the deeded interest. These loans generally bear interest at a fixed rate, have a term of up to 10 years and require a minimum 10% down payment. In addition, we receive fees for sales and marketing, brand licensing and other services provided to properties where the developer is not controlled by us. We have a global master license agreement with a subsidiary of Hyatt Hotels Corporation which provides us with an exclusive license for the use of Hyatt® brand with respect to shared ownership. The HRC resorts are able to use the Hyatt brand through agreements with us. Marketing efforts for TPI, VRI and VRI Europe are focused on homeowners' associations of vacation ownership resorts. VRI Europe has an agreement with CLC World Resorts to source additional management opportunities, while HVO focuses its management services on HRC resorts and associations.
Table of ContentsInternational Revenue
In December 2014, the newest HRC resort, Hyatt Ka'anapali Beach opened on Maui. This resort was developed through an unconsolidated joint venture with Host Hotels & Resorts and HVO is providing sales, marketing and management services and the license for the brand.
International Revenue
International revenue decreasedincreased in the three and six months ended June 30, 20152016 by 11.0%58% and 11.9%27%, respectively, compared to the same periods in 2014.2015 principally due to Vistana and its Mexican operations. As a percentage of our total revenue, international revenue decreased infor both the three and six months ended June 30, 20152016 decreased to 16.9% and 16.8%16%, respectively, from 23.0% and 22.7% compared to the same periods in 2014. In constant currency, international revenue decreased 1.1% and 2.6%17% in the quarter and year-to-date 2015 period compared to last year, whileprevious periods.
Other Factors Affecting Results
On May 11, 2016, we acquired the vacation ownership business of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, known as a percentage of our total revenue it decreased to 18.4% and 18.3%, respectively.Vistana. The decrease in international revenue in constant currency as a percentage of total revenue in 2015 is attributable to revenue from our HVO acquisition consummated in October 2014 which is entirely U.S. revenue.
Constant currency represents current period results of operations determined by translatingof this business are included in our functional currencyconsolidated results to U.S. dollars (our reporting currency) usingfollowing the actual prior period blended rate of translation fromacquisition date within both our Exchange and Rental, and Vacation Ownership segments. Consequently, this acquisition will affect the comparable prior period. We believe that the presentationyear-over-year comparability of our results of operations excludingfor the effect of foreign currency translations serves to enhance the understanding of our performance, improves transparency of our disclosures, provides meaningful presentations of our results from our business operations by excluding this effect not related to our core business operations and improves the period to period comparability of results from business operations.
Other Factors Affecting Resultsyear ended December 31, 2016, including respective interim periods.
Exchange & Rental
While fewer new projects have been constructed in
Since the 2008 recession, 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 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, we are beginning to see more activity that generates new members. In addition, developers and homeowners' associationsexternal exchange networks have been taking back vacation ownership interests which are availablechallenged to be sold again. This allowsgrow as a smaller number of developers to continue to generatehas focused a higher percentage of their sales revenues without significant capital expenditure for development. However, a high proportion of sales by developers continues to be to theirthan historically, on existing owners which does not result ininstead of new membersbuyers. During this period, ILG has broadened its exchange platform to the Interval Network.include both external exchange networks and proprietary developer networks.
Our 20152016 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.us as corporate developers often operate their own proprietary exchange programs. Membership mix as of June 30, 20152016 included 58%57% traditional and 42%43% corporate members, compared to 59%58% and 41%42%, respectively, as of June 30, 2014.2015.
Our Exchange
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 Rental segment resultsHyatt Gold Passport® programs, as applicable. These rentals and our Aqua-Aston business are susceptiblesensitive to variations ingeneral economic conditions, particularlyinventory supply and pricing in its largest vacation rental market, Hawaii. Accordingthe applicable markets.
Vacation Ownership
The Vistana acquisition has increased our focus on sales and financing of VOIs, which drives a number of recurring fee-for-service revenues such as management fees and the club exchange revenues discussed above. Effective 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 buyers, however, an appropriate proportion of new owners are needed to increase recurring revenues and the potential customers for future upgrades.
In addition, changes to prevailing interest rates may affect our financing results to the Hawaii Tourism Authority, visitor arrivals by airextent we adjust the interest rate we charge or pay a higher rate for receivables financing transactions or other debt. The rentals in Hawaii increased 4.5%this segment include developer inventory used for lead generation as well as revenue from the six months ended June 30, 2015 (latest available data) compared to the comparable periodhotels included in the prior year. Applying the change to the calculation of revenue per available room ("RevPAR") discussed in the revenue section of our Results of Operations below to the prior year period, average daily rate ("ADR") at AstonVistana and Aqua in Hawaii for the three and six months ended June 30, 2015 rose 8.3% and 5.7% from last year, respectively, which led to an increase of 11.7% and 8.1% in RevPAR, respectively, when comparedHVO businesses. These operations are sensitive to the same period in 2014.factors as the club rentals described above.
Outlook
As of the latest forecast (May 2015), the Hawaii Department of Business, Economic Development and Tourism forecasts increases of 2.5% in visitors to Hawaii and 2.0% in visitor expenditures in 2015 over 2014.
Vacation Ownership
For the United States based businesses, our management fees are paid by the homeowners' association 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 pass-through revenue.
HVO, TPI and VRI also offer vacation rental services to individual timeshare owners and homeowners' associations. HVO provides management services to homeowners' associations and resorts that participate in the HRC. VRI Europe manages resorts developed by CLC World Resorts, our joint venture partner in VRI Europe, as well as independent homeowners' associations. The loss of several of our largest management agreements could materially impact our Vacation Ownership business.
On October 1, 2014, in connection with the closing of the acquisition of HVO, our subsidiary entered into a Master License Agreement with a subsidiary of Hyatt Hotels Corporation. The Master License Agreement provides an exclusive license for the use of the Hyatt® brand in connection with the shared ownership business. Pursuant to the terms of the Master License Agreement, our subsidiary may continue to develop, market, sell and operate existing shared ownership projects as well as new shared ownership projects agreed to by us and Hyatt. HVO must comply with designated Hyatt® brand standards with respect to the operation of the licensed business. The initial term of the Master License Agreement expires on December 31, 2093, with three 20-year extensions subject to meeting sales performance tests. In consideration for the exclusive license and for access to Hyatt's various marketing channels, including the existing hotel loyalty program, we have agreed to pay Hyatt certain recurring royalty fees based on revenues generated from vacation ownership sales, management, rental and club dues collected by us related to the branded business. Hyatt may terminate the Master License Agreement upon the occurrence of certain uncured, material defaults by us. Such defaults include, but are not limited to, a substantial payment default, bankruptcy, a transfer in breach of the specified transfer restrictions or a material failure to comply with Hyatt® brand standards on a systemic level.
Business Acquisition
The financial effect of the acquisition of HVO impacts the year-over-year comparability as further discussed in our Results of Operations section.
Outlook
We expect additional consolidation within the vacation ownership industry leading to increased competition in our Exchangebusinesses. This leads to challenges for our external exchange business that relies on new buyers for additional members. Through the growth of our proprietary clubs, we plan to increase wallet-share and Rental business and reduced availability of exchange and Getaway inventory. Additionally, we anticipate continued margin compression and increased competition in our Exchange and Rental business.generate new members.
For the vacation rental business, we expect year-over-year RevPAR to remain relatively consistent as the tourism activity of its largest market, Hawaii, flattens. Additionally, airlift into the island chain remains a positive factor bolstering the Hawaiian tourism economy; however, limited airlift between islands and increases in the cost of a Hawaiian vacation, particularly for Japanese travelers who have lost purchasing power due to the strengthening U.S. dollar, may continue to negatively impact visitor arrivals and temper growth.
In theOur vacation ownership management business, we expect independent homeowners' associationssales and financing businesses are positioned to be increasingly dependent on secondarygrow through development of additional phases at existing resorts, converting properties to vacation ownership, adding resorts in attractive markets and expanding our sales of inventory to replace lost maintenance fees from an aging owner base. Changes in currency exchange rates will negatively affect the results of our VRI Europe business.
Additionally, our completion of the HVO acquisitiondistribution capabilities. The four new sales galleries opened in the fourth quarter of 2014 will affect2015 are still in the year-over-year comparabilityprocess of ramping up to a full sales volume. Three additional sales centers are scheduled to open in 2017. As we expand our results of operationssales distribution, we have faced competition for the year ended December 31, 2015.talent.
Operating Statistics
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| Three Months Ended June 30, |
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| Six Months Ended June 30, | ||||||||||
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| 2016 |
| % Change |
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| 2015 |
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| 2016 |
| % Change |
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| 2015 |
Exchange and Rental |
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Total active members at end of period (000's) (1) |
| 1,809 |
| (1)% |
|
| 1,820 |
|
| 1,809 |
| (1)% |
|
| 1,820 |
Average revenue per member (2) | $ | 46.76 |
| 6% |
| $ | 44.17 |
| $ | 96.19 |
| 2% |
| $ | 94.04 |
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Vacation Ownership |
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Contract sales (in millions)(3) | $ | 75 |
| 226% |
| $ | 23 |
| $ | 101 |
| 98% |
| $ | 51 |
Average transaction price(4) | $ | 18,179 |
| (43)% |
| $ | 31,745 |
| $ | 20,773 |
| (43)% |
| $ | 36,224 |
Volume per guest(5) | $ | 2,855 |
| (8)% |
| $ | 3,117 |
| $ | 3,096 |
| (16)% |
| $ | 3,692 |
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Revenue46
(1) | 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. |
(2) | 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 period. |
(3) | 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. Contract Sales included herein pertaining to Vistana are after the May 11, 2016 acquisition date. If Vistana were to be included for a full quarter, Contract Sales for the second quarter of 2016 would have been $118 million. |
(4) | Represents Contract Sales divided by the net number of transactions during the period, and only includes transactions for Vistana after the May 11, 2016 acquisition date. If Vistana were to be included for a full quarter, Average Transaction price for the second quarter of 2016 would have been $17,575. |
(5) | Represents Contract Sales divided by the total number of tours during the period, and only includes tours for Vistana after the May 11, 2016 acquisition date. If Vistana were to be included for a full quarter, VPG for the second quarter of 2016 would have been $2,937. |
Revenue
For the three months ended June 30, 20152016 compared to the three months ended June 30, 20142015
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| Three Months Ended June 30, |
| Three Months Ended June 30, | |||||||||||||||
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| 2015 | % Change | 2014 |
| 2016 |
| % Change |
| 2015 | |||||||||
| (Dollars in thousands) |
| (Dollars in millions) | |||||||||||||||
Exchange and Rental |
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Transaction revenue | $ | 47,139 | (0.4 | )% | $ | 47,315 |
| $ | 50 |
| 4% |
| $ | 48 | ||||
Membership fee revenue | 31,579 | (0.1 | )% | 31,602 |
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| 34 |
| 10% |
|
| 31 | ||||||
Ancillary member revenue | 1,402 | (18.0 | )% | 1,709 |
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| 1 |
| 0% |
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| 1 | ||||||
| | | | | | | | | | |||||||||
Total member revenue | 80,120 | (0.6 | )% | 80,626 |
|
| 85 |
| 6% |
|
| 80 | ||||||
Club rental revenue |
|
| 15 |
| NM |
|
| 3 | ||||||||||
Other revenue | 8,866 | 40.4 | % | 6,314 |
|
| 6 |
| 0% |
|
| 6 | ||||||
Rental management revenue | 11,411 | 13.7 | % | 10,035 |
|
| 10 |
| (17)% |
|
| 12 | ||||||
Pass-through revenue | 24,200 | 22.1 | % | 19,827 | ||||||||||||||
| | | | | | | | | | |||||||||
Cost reimbursement revenue |
|
| 24 |
| (0)% |
|
| 24 | ||||||||||
Total Exchange and Rental revenue | 124,597 | 6.7 | % | 116,802 |
|
| 140 |
| 12% |
|
| 125 | ||||||
| | | | | | | | | | |||||||||
Vacation Ownership |
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Resort operations revenue |
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| 30 |
| NM |
|
| 4 | ||||||||||
Management fee revenue | $ | 24,855 | 11.4 | % | $ | 22,308 |
|
| 27 |
| 29% |
|
| 21 | ||||
Sales and financing revenue | 10,875 | N/M | — | |||||||||||||||
Pass-through revenue | 13,418 | 203.7 | % | 4,418 | ||||||||||||||
| | | | | | | | | | |||||||||
Sales of vacation ownership products, net |
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| 49 |
| NM |
|
| 10 | ||||||||||
Consumer financing revenue |
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| 11 |
| NM |
|
| 1 | ||||||||||
Cost reimbursement revenue |
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| 40 |
| 208% |
|
| 13 | ||||||||||
Total Vacation Ownership revenue | 49,148 | 83.9 | % | 26,726 |
|
| 157 |
| 220% |
|
| 49 | ||||||
| | | | | | | | | | |||||||||
Total ILG revenue | $ | 173,745 | 21.1 | % | $ | 143,528 |
| $ | 297 |
| 71% |
| $ | 174 | ||||
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| | | | | | | | | |
Revenue for the three months ended June 30, 20152016 of $173.7$297 million increased $30.2$123 million, or 21.1%71%, compared to revenue of $143.5$174 million in 2014.2015. Vacation Ownership segment revenue of $157 million increased $108 million, or 220%, while Exchange and Rental segment revenue of $124.6$140 million increased $7.8$15 million, or 6.7%, and Vacation Ownership segment revenue of $49.1 million increased $22.4 million, or 83.9%12%, in the quarter compared to the prior year quarter. On a constant currency basis, ILG revenue for the current quarter would have been $177.0 million, an increase of 23.3% over the prior year quarter.year.
Exchange and Rental
Exchange and Rental segment revenue, excluding cost reimbursements, increased $7.8$15 million, or 6.7%15%, in the second quarter of 20152016 compared to 2014.2015. This increase is primarily due to incrementalthe inclusion of Vistana in our results subsequent to the
47
May 11, 2016 acquisition. Excluding Vistana and cost reimbursements, segment revenue attributable to our HRC business (acquired in October 2014) which drove an increase of $2.6 million in other revenue. In addition, rental management revenue was higherdecreased by $1.4$2 million, or 13.7%, over the prior year and pass-through revenue increased by $4.4 million to $24.2 million for the quarter. Membership fee and transaction revenue in the quarter were relatively consistent with the prior year. Further details on the components of this quarter's net increase in revenue are as follows:
both revenue and expenses and that are passed on to the property owners$2 million, or homeowners associations without mark-up. The increase in pass-through revenue in the quarter is largely17%, attributable to new propertya reduction in available room nights due to a net reduction in units under management contracts secured subsequent to the second quarter of 2014.
Vacation Ownership
The increase of $22.4$108 million or 83.9%, in segment revenue for the second quarter of 2015 reflects increases over the prior year principally resulting from the Vistana acquisition. Excluding Vistana and cost reimbursements, segment revenue increased by $2 million, or 5%, primarily driven by an increase of $10.9$2 million of incremental vacation ownership sales and financingattributable to higher resort operations revenue, and $9.0 million in pass-through revenue, entirely related to the HVO acquisition, as well as $2.5 million in management fee revenue. The increase in management fee revenue is a resultand sales of incremental revenue from our HVO acquisition in October 2014, partly offset by the foreign currency negative impact of translating the results of our European vacation ownership management businesses into U.S. dollars as part of consolidating our results. This unfavorably impacted revenue by approximately $2.8 millionproducts in the quarter drivenover prior year. Resort operations revenue pertains to our revenue generating activities from rentals of owned vacation ownership inventory along with ancillary resort services, in addition to rental and ancillary revenue generated by the weakeninghotels owned by Vistana and HVO.
Sales of foreign currencies compared to the U.S. dollar. On a constant currency basis, total revenuevacation ownership products, net, and consumer financing revenue, excluding pass-through for this segment would have been $51.9 million and $38.5 million, respectively, an increase of 94.2% and 72.5% overVistana, were largely consistent in the quarter with the prior year quarter.
Table of Contentsyear.
For the six months ended June 30, 20152016 compared to the six months ended June 30, 20142015
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| Six Months Ended June 30, |
| Six Months Ended June 30, | |||||||||||||||
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| 2015 | % Change | 2014 |
| 2016 |
| % Change |
| 2015 | |||||||||
| (Dollars in thousands) |
| (Dollars in millions) | |||||||||||||||
Exchange and Rental |
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Transaction revenue | $ | 104,203 | 0.8 | % | $ | 103,426 |
| $ | 108 |
| 4% |
| $ | 104 | ||||
Membership fee revenue | 63,127 | (0.5 | )% | 63,420 |
|
| 64 |
| 2% |
|
| 63 | ||||||
Ancillary member revenue | 2,801 | (15.9 | )% | 3,332 |
|
| 3 |
| 0% |
|
| 3 | ||||||
| | | | | | | | | | |||||||||
Total member revenue | 170,131 | (0.0 | )% | 170,178 |
|
| 175 |
| 3% |
|
| 170 | ||||||
Club rental revenue |
|
| 18 |
| NM |
|
| 5 | ||||||||||
Other revenue | 17,571 | 45.1 | % | 12,107 |
|
| 12 |
| (8)% |
|
| 13 | ||||||
Rental management revenue | 25,611 | 6.9 | % | 23,960 |
|
| 23 |
| (8)% |
|
| 25 | ||||||
Pass-through revenue | 46,921 | 15.4 | % | 40,645 | ||||||||||||||
| | | | | | | | | | |||||||||
Cost reimbursement revenue |
|
| 46 |
| (2)% |
|
| 47 | ||||||||||
Total Exchange and Rental revenue | 260,234 | 5.4 | % | 246,890 |
|
| 274 |
| 5% |
|
| 260 | ||||||
| | | | �� | | | | | | |||||||||
Vacation Ownership |
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Resort operations revenue |
|
| 35 |
| NM |
|
| 7 | ||||||||||
Management fee revenue | $ | 49,913 | 10.9 | % | $ | 44,995 |
|
| 48 |
| 12% |
|
| 43 | ||||
Sales and financing revenue | 19,471 | N/M | — | |||||||||||||||
Pass-through revenue | 28,679 | 230.3 | % | 8,684 | ||||||||||||||
| | | | | | | | | | |||||||||
Sales of vacation ownership products, net |
|
| 58 |
| NM |
|
| 16 | ||||||||||
Consumer financing revenue |
|
| 13 |
| NM |
|
| 3 | ||||||||||
Cost reimbursement revenue |
|
| 55 |
| 90% |
|
| 29 | ||||||||||
Total Vacation Ownership revenue | 98,063 | 82.7 | % | 53,679 |
|
| 209 |
| 113% |
|
| 98 | ||||||
| | | | | | | | | | |||||||||
Total ILG revenue | $ | 358,297 | 19.2 | % | $ | 300,569 |
| $ | 483 |
| 35% |
| $ | 358 | ||||
| | | | | | | | | | |||||||||
| | | | | | | ||||||||||||
| | | | | | | | | |
Revenue for the six months ended June 30, 20152016 of $358.3$483 million increased $57.7$125 million, or 19.2%35%, compared to revenue of $300.6$358 million in 2014.2015. Vacation Ownership segment revenue of $209 million increased $111 million, or 113%, while Exchange and Rental segment revenue of $260.2$274 million increased $13.3$14 million, or 5.4%, and Vacation Ownership segment revenue of $98.1 million increased $44.4 million, or 82.7%5%, in the period compared to prior year. On a constant currency basis, ILG revenue for the first half of 2015 would have been $364.6 million, an increase of 21.3% over the prior year.
Exchange and Rental
Exchange and Rental segment revenue, excluding cost reimbursements, increased $13.3$15 million, or 5.4%7%, in 2015the first six months of 2016 compared to 2014.2015. This increase is primarily due to incremental revenue attributable to our HRC business (acquired in October 2014) which drove an increase of $5.5 million in other revenue and $0.8 million in transaction revenue. Additionally, our rental businesses drove rental management revenue higher by $1.7 million, or 6.9%, over the prior year and pass-through revenue of $46.9 million in the period was higher by $6.3 million. These increases were partly offset by $0.3 million of lower membership fee revenue. Further details on the components of this period's net increase in revenue are as follows:
at a lower RevPAR yet contributed favorably to the overall increase in rental management revenue, offset by stronger RevPAR in Hawaii. On a Hawaii-only basis, RevPAR increased 8.1% to $130.73 in the period compared to $120.96 in the prior year. The increase in Hawaii-only RevPAR was driven by 5.7% higher average daily rate and a 2.3% increase in occupancy in the
period compared to prior year. With regards to the prior year RevPAR figures, effective January 1, 2015, a change in industry reporting standards now precludes certain resort feesThis decrease resulted from being included within gross lodging revenue. Consequently, this reporting change impacts the year-over-year comparability of RevPAR and, therefore, we have recast prior year RevPAR figures for purposes of this comparison. Additionally, certain revisions resulting from a refinement in our calculation of RevPAR pursuant to industry reporting standards are included in the recast prior year RevPAR figures.
These declines were partly offset by the inclusion of the HRC business subsequent to its acquisition and the continued improvementan approximate $1 million increase in transaction revenue in the member base penetrationperiod due to an increase of our Platinum3% in average transaction fees for exchanges and Club Interval products.
Vacation Ownership
The increase of $44.4$85 million or 82.7%, in segment revenue, for 2015 reflects increasesexcluding cost reimbursement, over the prior year principally resulting from the Vistana acquisition. Excluding Vistana and cost reimbursements, segment revenue increased by $5 million, or 7%, primarily driven by stronger sales of $19.5 million of incrementalconsolidated vacation ownership salesproducts which rose by $2 million, or 15%, higher resort operations revenue of $2 million, or 24%, and financing revenue and $20.0 million in pass-through revenue, entirely related to the HVO acquisition, as well as $4.9increase of $1 million in management fee revenue.revenue in the period over prior year. The increase in management fee revenuesales of vacation ownership products is a resultlargely attributable to higher recognized sales of VOIs in the period compared to last year, as well as the inclusion of incremental rental revenue from our HVO acquisition in October 2014, partly offset by the foreign currency negative impact of translating the results of our European vacation ownership management businesses into U.S. dollars as part of consolidating our results. This unfavorably impacted revenue by approximately $6.3 million in the current year, driven by the weakening of foreign currencies compared to the U.S. dollar. On a constant currency basis, total revenue and revenue excluding pass-through for this segment would have been $103.3 million and $74.6 million, respectively, an increase of 92.4% and 65.8% over the prior year period.owned VOIs.
Cost of Sales and Royalty Fee Expense
For the three months ended June 30, 20152016 compared to the three months ended June 30, 20142015
| Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | ||||||||||
Exchange and rental expenses | $ | 25,318 | 1.5 | % | $ | 24,955 | ||||
Pass-through expenses | 24,200 | 22.1 | % | 19,827 | ||||||
| | | | | | | | | | |
Total Exchange and Rental cost of sales | 49,518 | 10.6 | % | 44,782 | ||||||
| | | | | | | | | | |
Gross margin | 60.3 | % | (2.3 | )% | 61.7 | % | ||||
Gross margin without pass-through revenue/expenses | 74.8 | % | 0.7 | % | 74.3 | % | ||||
Vacation Ownership | ||||||||||
Management, sales and financing expenses | 17,487 | 65.6 | % | 10,561 | ||||||
Pass-through expenses | 13,418 | 203.7 | % | 4,418 | ||||||
| | | | | | | | | | |
Total Vacation Ownership cost of sales | 30,905 | 106.3 | % | 14,979 | ||||||
| | | | | | | | | | |
Gross margin | 37.1 | % | (15.6 | )% | 44.0 | % | ||||
Gross margin without pass-through revenue/expenses | 51.1 | % | (3.0 | )% | 52.7 | % | ||||
| | | | | | | | | | |
Total ILG cost of sales | $ | 80,423 | 34.6 | % | $ | 59,761 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 46.3 | % | 11.2 | % | 41.6 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 59.1 | % | 17.9 | % | 50.1 | % | ||||
Gross margin | 53.7 | % | (8.0 | )% | 58.4 | % | ||||
Gross margin without pass-through revenue/expenses | 68.6 | % | (2.4 | )% | 70.2 | % |
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| Three Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
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| (Dollars in millions) | ||||||
Exchange and Rental |
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Cost of service and membership related sales |
| $ | 16 |
| (6)% |
| $ | 17 |
Cost of sales of rental and ancillary services |
|
| 19 |
| 111% |
|
| 9 |
Cost reimbursements |
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| 24 |
| 0% |
|
| 24 |
Total Exchange and Rental cost of sales |
|
| 59 |
| 18% |
|
| 50 |
Gross margin |
|
| 58% |
| (4)% |
|
| 60% |
Gross margin without cost reimbursement revenue/expenses |
|
| 70% |
| (6)% |
|
| 74% |
Vacation Ownership |
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Cost of service and membership related |
|
| 11 |
| 38% |
|
| 8 |
Cost of sales of vacation ownership products |
|
| 19 |
| 171% |
|
| 7 |
Cost of rental and ancillary services |
|
| 23 |
| NM |
|
| 2 |
Cost of consumer financing |
|
| 3 |
| 100% |
|
| — |
Cost reimbursements |
|
| 40 |
| 208% |
|
| 13 |
Total Vacation Ownership cost of sales |
|
| 96 |
| 220% |
|
| 30 |
Total ILG cost of sales |
| $ | 155 |
| 94% |
| $ | 80 |
Gross margin |
|
| 39% |
| (0)% |
|
| 39% |
Gross margin without cost reimbursement revenue/expenses |
|
| 52% |
| (1)% |
|
| 53% |
|
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|
Royalty fee expense |
| $ | 5 |
| NM |
| $ | 1 |
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|
|
|
As a percentage of total revenue |
|
| 52% |
| 13% |
|
| 46% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 67% |
| 16% |
|
| 58% |
Total ILG gross margin |
|
| 48% |
| (11)% |
|
| 54% |
Total ILG Gross margin without cost reimbursement revenue/expenses |
|
| 61% |
| (12)% |
|
| 69% |
Cost of sales is organized on our consolidated income statement by the respective revenue line items and
consists primarily of 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 businesses. Additionally, cost of sales includes other items such as costs necessary to operate certain of our managed properties, costs of rental inventory used primarily for Getaways included within the Exchange and Rental segment, costs associated with vacation ownership sales and related incentives, as well as recurring royalty fees related to our Hyatt-branded vacation ownership business.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 businesses. |
· | Costs associated with vacation ownership sales, including maintenance fees on unsold inventory; costs to provide alternative usage options; subsidy payments to HOAs; and related sale incentives. |
· | Consumer financing expenses representing costs incurred in support of the financing, servicing and securitization processes, as well as interest expense on securitized debt. |
· | Other expenses such as costs necessary to operate certain of our managed properties and costs of rental inventory used primarily for Getaways included within the Exchange and Rental segment. |
Cost of sales for the three months ended June 30, 20152016 increased $20.7$75 million from 2014, consisting2015 principally due to the inclusion of increasesVistana’s results subsequent to our acquisition. This increase consists of $4.7$66 million from our Vacation Ownership segment and $9 million from our Exchange and Rental segment and $15.9 million from our Vacation Ownership segment. Overall gross margin decreased by 465 basis points to 53.7%was 48% in the quarter compared to last year. The decrease in overall gross margin is due to the incremental gross profit contribution from our lower-margin Vacation Ownership segment relative to total ILG gross profit.quarter.
50
Exchange and Rental
Gross margin for the Exchange and Rental segment in the quarter, excluding cost reimbursements, decreased 140443 basis points to 60.3% when compared to the prior year. However, excluding the effect of pass-through revenue, gross margin of 74.8% in the quarter was higher by 52 basis points when compared to the prior year. Cost of sales for this segment rose $4.7 million, or 10.6%, from 2014 primarily resulting from $4.4 million of higher pass-through expenses at our rental management businesses as a result of new resort management contracts and the inclusion of the HRC business subsequent to its October 1, 2014 acquisition. This change was partly offset by a decrease in call center costs and $0.4 million of lower
purchased rental inventory expense. The decline in purchased rental inventory expense was principally due to lower average cost per unit of inventory purchased.
Vacation Ownership
The increase of $15.9 million in cost of sales from the Vacation Ownership segment was attributable to the incremental costs of $18.0 million resulting from our HVO acquisition. Of this amount, $9.7 million represented incremental HVO pass-through expenses. This increase was partly offset by lower cost of sales at our other vacation ownership management businesses in the quarter largely attributable to the foreign currency impact of translating the results of our European vacation ownership management businesses into U.S. dollars as part of consolidating our results. This decreased cost of sales by approximately $1.5 million in the quarter on a constant currency basis.
Gross margin of 37.1% for this segment decreased by 683 basis points70% when compared to the prior year. Excluding cost reimbursements and Vistana, cost of sales and gross margin were relatively in-line with the effectprior year. The quarter’s activity reflects lower call center related expenses (included within costs of pass-through revenue,service and membership related), partly offset by higher third-party purchased accomodations (included within cost of rental and ancillary services).
Vacation Ownership
The increase of $39 million in cost of sales, excluding cost reimbursements, from the Vacation Ownership segment was principally attributable to the inclusion of Vistana in our results. Gross margin in the quarter, excluding cost reimbursements, decreased 64 basis points to 52% when compared to the prior year. Excluding Vistana and cost reimbursements, cost of sales and gross margin for this segment was 51.1%relatively consistent with last year.
Royalty Expense
Royalty expense for the period pertains to costs incurred pursuant to our exclusive global licenses for the Hyatt®, Westin® and Sheraton® brands in vacation ownership. The increase of $4 million in royalty expense in the quarter compared to 52.7% lastprior year largely resulting frompertains to the incremental gross profit contribution from HVO relative to total segment gross profit, specificallyinclusion of Vistana in our vacation ownership sales and financing business which operates at a lower gross margin.results.
For the six months ended June 30, 20152016 compared to the six months ended June 30, 20142015
| Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | ||||||||||
Exchange and rental expenses | $ | 53,821 | 1.2 | % | $ | 53,162 | ||||
Pass-through expenses | 46,921 | 15.4 | % | 40,645 | ||||||
| | | | | | | | | | |
Total Exchange and Rental cost of sales | 100,742 | 7.4 | % | 93,807 | ||||||
| | | | | | | | | | |
Gross margin | 61.3 | % | (1.2 | )% | 62.0 | % | ||||
Gross margin without pass-through revenue/expenses | 74.8 | % | 0.7 | % | 74.2 | % | ||||
Vacation Ownership | ||||||||||
Management, sales and financing expenses | 33,359 | 57.9 | % | 21,120 | ||||||
Pass-through expenses | 28,679 | 230.3 | % | 8,684 | ||||||
| | | | | | | | | | |
Total Vacation Ownership cost of sales | 62,038 | 108.2 | % | 29,804 | ||||||
| | | | | | | | | | |
Gross margin | 36.7 | % | (17.4 | )% | 44.5 | % | ||||
Gross margin without pass-through revenue/expenses | 51.9 | % | (2.1 | )% | 53.1 | % | ||||
| | | | | | | | | | |
Total ILG cost of sales | $ | 162,780 | 31.7 | % | $ | 123,611 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 45.4 | % | 10.5 | % | 41.1 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 57.6 | % | 17.0 | % | 49.2 | % | ||||
Gross margin | 54.6 | % | (7.3 | )% | 58.9 | % | ||||
Gross margin without pass-through revenue/expenses | 69.2 | % | (1.8 | )% | 70.4 | % |
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Exchange and Rental |
|
|
|
|
|
|
|
|
Cost of service and membership related |
| $ | 32 |
| (9)% |
| $ | 35 |
Cost of rental and ancillary services |
|
| 31 |
| 72% |
|
| 18 |
Cost reimbursements |
|
| 46 |
| (2)% |
|
| 47 |
Total Exchange and Rental cost of sales |
|
| 109 |
| 9% |
|
| 100 |
Gross margin |
|
| 60% |
| (2)% |
|
| 62% |
Gross margin without cost reimbursement revenue/expenses |
|
| 72% |
| (4)% |
|
| 75% |
Vacation Ownership |
|
|
|
|
|
|
|
|
Cost of service and membership related |
|
| 20 |
| 25% |
|
| 16 |
Cost of sales of vacation ownership products |
|
| 25 |
| 108% |
|
| 12 |
Cost of rental and ancillary services |
|
| 25 |
| NM |
|
| 4 |
Cost of consumer financing |
|
| 3 |
| 100% |
|
| - |
Cost reimbursements |
|
| 55 |
| 90% |
|
| 29 |
Total Vacation Ownership cost of sales |
| $ | 128 |
| 110% |
| $ | 61 |
Total ILG cost of sales |
| $ | 237 |
| 47% |
| $ | 161 |
Gross margin |
|
| 39% |
| 3% |
|
| 38% |
Gross margin without cost reimbursement revenue/expenses |
|
| 53% |
| (1)% |
|
| 54% |
|
|
|
|
|
|
|
|
|
Royalty fee expense |
|
| 7 |
| 250% |
|
| 2 |
|
|
|
|
|
|
|
|
|
As a percentage of total revenue |
|
| 49% |
| 9% |
|
| 45% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 62% |
| 9% |
|
| 57% |
Total ILG gross margin |
|
| 51% |
| (7)% |
|
| 55% |
Total ILG gross margin without cost reimbursement revenue/expenses |
|
| 65% |
| (7)% |
|
| 70% |
Cost of sales for the six months ended June 30, 20152016 increased $39.2$76 million from 2014, consisting2015 principally due to the inclusion of increasesVistana’s results subsequent to our acquisition. This increase consists of $6.9$67 million from our Vacation
51
Ownership segment and $9 million from our Exchange and Rental segment and $32.2 million from our Vacation Ownership segment. Overall gross margin decreased by 431 basis points to 54.6%was 51% in the period compared to last year. The decrease in overall gross margin is due to the incremental gross
Table of Contentsquarter.
profit contribution from our lower-margin Vacation Ownership segment relative to total ILG gross profit.
Exchange and Rental
Gross margin for the Exchange and Rental segment in the first half of 2015quarter, excluding cost reimbursements, decreased 72275 basis points to 61.3% when compared to the prior year. However, excluding the effect of pass-through revenue, gross margin of 74.8% in the period was higher by 55 basis points when compared to the prior year. Cost of sales for this segment rose $6.9 million, or 7.4%, from 2014 primarily resulting from $6.3 million of higher pass-through expenses at our rental management businesses as a result of new resort management contracts and the inclusion of the HRC business subsequent to its October 1, 2014 acquisition. This change was partly offset by a decrease in call center costs and $0.7 million of lower purchased rental inventory expense. The decline in purchased rental inventory expense was principally due to lower average cost per unit of inventory purchased.
Vacation Ownership
The increase of $32.2 million in cost of sales from the Vacation Ownership segment was attributable to the incremental costs of $36.5 million resulting from our HVO acquisition. Of this amount, $21.3 million represented incremental HVO pass-through expenses. This increase was partly offset by lower cost of sales at our other vacation ownership management businesses in the period largely attributable to the foreign currency impact of translating the results of our European vacation ownership management businesses into U.S. dollars as part of consolidating our results. This decreased cost of sales by approximately $2.8 million in the period on a constant currency basis.
Gross margin of 36.7% for this segment decreased by 774 basis points72% when compared to the prior year. Excluding cost reimbursements and Vistana, cost of sales and gross margin were relatively in-line with the effectprior year. The period’s activity reflects lower call center related expenses (included within costs of pass-through revenue, grossservice and membership related), partly offset by higher third-party purchased accomodations (included within cost of rental and ancillary services).
Vacation Ownership
The increase of $41 million in cost of sales, excluding cost resimbursements, from the Vacation Ownership segment was principally attributable to the inclusion of Vistana in our results. Excluding cost reimbursements and Vistana, cost of sales in this segment increased $1 million, or 2%, primarily as a result of higher sales of vacation ownership products. Gross margin for this segment was 51.9%increased 203 basis points to 56% in the period compared to 53.1%54% last year largely resulting fromyear.
Royalty Expense
The increase of $5 million in royalty expense in the incremental gross profit contribution from HVO relativeperiod is primarily due to total segment gross profit, specificallythe inclusion of Vistana in our vacation ownership sales and financing business which operates at a lower gross margin.results.
Selling and Marketing Expense
For the three months ended June 30, 20152016 compared to the three months ended June 30, 20142015
| Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | $ | 15,528 | 12.3 | % | $ | 13,824 | ||||
Vacation Ownership | 3,050 | NM | (16 | ) | ||||||
| | | | | | | | | | |
Total ILG selling and marketing expense | $ | 18,578 | 34.5 | % | $ | 13,808 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 10.7 | % | 11.1 | % | 9.6 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 13.6 | % | 17.9 | % | 11.6 | % |
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Exchange and Rental |
| $ | 15 |
| (6)% |
| $ | 16 |
Vacation Ownership |
|
| 27 |
| NM |
|
| 3 |
Total ILG selling and marketing expense |
| $ | 42 |
| 121% |
| $ | 19 |
As a percentage of total revenue |
|
| 14% |
| 27% |
|
| 11% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 18% |
| 29% |
|
| 14% |
Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-relatedemployee‑related costs, (including stock-based compensation)including stock‑based compensation and benefits for certain of our operating businesses, for personnel engaged in sales and sales support functions. Selling and marketing expenditures for our Exchange and Rental segment primarily include printing costs of directories and magazines, promotions, tradeshows, agency fees, marketing fees and related commissions.
Selling and marketing expendituresexpense for our Vacation Ownership segment primarily relates to a range of marketing efforts aimed at generating prospects for our vacation ownership sales activities.
These marketing efforts can include targeted promotional mailings, multi-night mini-vacationmulti‑night mini‑vacation packages, telemarketing activities, premiums such as gift certificates and tickets to local attractions or events, the cost of renting spaceaccomodations at off-propertyoff‑property locations, and other costs related to encouraging potential ownerspurchasers to attend sales presentations.
Selling and marketing expense in the second quarter of 20152016 increased $4.8$23 million, or 34.5%121%, compared to 2014. Higher2015 principally due to the inclusion of Vistana’s results subsequent to our acquisition. Excluding Vistana, sales and marketing spend of $1.7 million in our Exchange and Rental segment is primarily attributable to a shift in the timing for mailing an Interval Network magazine into the second quarter compared to theexpense remained relatively consistent with prior year's distribution schedule. The increase of $3.1 million in our Vacation Ownership segment principally pertains to incremental costs associated with our vacation ownership selling and marketing efforts subsequent to the acquisition of HVO in October 2014.
year. As a percentage of total revenue and total revenue excluding pass-through revenue,cost reimbursements, sales and marketing expense increased 107 and 207 basis points, respectively, during the quarter comparedwas comparable to the prior year.year when excluding Vistana.
52
For the six months ended June 30, 20152016 compared to the six months ended June 30, 20142015
| Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | $ | 30,849 | 9.2 | % | $ | 28,256 | ||||
Vacation Ownership | 5,937 | NM | 122 | |||||||
| | | | | | | | | | |
Total ILG selling and marketing expense | $ | 36,786 | 29.6 | % | $ | 28,378 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 10.3 | % | 8.7 | % | 9.4 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 13.0 | % | 15.2 | % | 11.3 | % |
|
|
|
|
|
|
|
|
|
|
| Six Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Exchange and Rental |
| $ | 29 |
| (6)% |
| $ | 31 |
Vacation Ownership |
|
| 30 |
| NM |
|
| 6 |
Total ILG selling and marketing expense |
| $ | 59 |
| 59% |
| $ | 37 |
As a percentage of total revenue |
|
| 12% |
| 20% |
|
| 10% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 15% |
| 15% |
|
| 13% |
Selling and marketing expense in the first half of 20152016 increased $8.4$22 million, or 29.6%59%, compared to 2014. Higher2015 due to the inclusion of Vistana’s results subsequent to our acquisition. Excluding Vistana, sales and marketing spend of $2.6 million in our Exchange and Rental segment is attributable to a shift in the timing for mailing an Interval Network magazine into the second quarter compared to theexpense remained relatively consistent with prior year's distribution schedule, as well as increased marketing fees related to developer contract renewals executed in 2014. The increase of $5.8 million in our Vacation Ownership segment principally pertains to incremental costs associated with our vacation ownership selling and marketing efforts subsequent to the acquisition of HVO in October 2014.
year. As a percentage of total revenue and total revenue excluding pass-through revenue,cost reimbursements, sales and marketing expense increased 83 and 172 basis points, respectively, during the period comparedwas comparable to the prior year.year when excluding Vistana.
General and Administrative Expense
For the three months ended June 30, 20152016 compared to the three months ended June 30, 2014
| Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
General and administrative expense | $ | 35,541 | 13.7 | % | $ | 31,251 | ||||
As a percentage of total revenue | 20.5 | % | (6.1 | )% | 21.8 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 26.1 | % | (0.3 | )% | 26.2 | % |
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
General and administrative expense |
| $ | 54 |
| 50% |
| $ | 36 |
As a percentage of total revenue |
|
| 18% |
| (14)% |
|
| 21% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 23% |
| (12)% |
|
| 26% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 18% |
| (31)% |
|
| 26% |
General and administrative expense consists primarily of compensation and other employee-relatedemployee‑related costs (including stock-basedstock‑based compensation) for personnel engaged in oversight, corporate development, finance and accounting, legal, treasury, tax, internal audit, human resources, information technology and executive managementcertain IT functions, as well as certain facilities costs, fees for professional services and other company-wide benefits.
General
Excluding Vistana and the approximate $12 million increase in professional fees pertaining to the Vistana transaction, general and administrative expense in the second quarter of 2015 increased $4.3 million2016 was relatively unchanged from 2014 predominately due to incremental expenses of $4.5 million from the inclusion of HVO in our results of operations. Additionally, excluding HVO, compensation2015. General and other employee-related costs rose by $1.1 million in the period in part attributable to a rise in health and welfare costs resulting from higher self-insured claim activity, partly offset by lower professional fees (primarily associated with acquisition related activities) of $1.2 million compared to prior year.
Asadministrative expense as a percentage of total revenue when excluding cost reimbursements, acquisition expenses and total revenue excluding pass-through revenue, general and administrative expense decreased 132 and 9 basis points, respectively, during the quarter compared to the priorVistana, was also in-line with last year.
For the six months ended June 30, 20152016 compared to the six months ended June 30, 20142015
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | ||||||
|
|
| 2016 |
| % Change |
|
| 2015 |
|
| (Dollars in millions) | ||||||
General and administrative expense |
| $ | 92 |
| 30% |
| $ | 71 |
As a percentage of total revenue |
|
| 19% |
| (5)% |
|
| 20% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 24% |
| (4)% |
|
| 25% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 20% |
| (20)% |
|
| 25% |
FOR THIS IS
53
| Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
General and administrative expense | $ | 71,436 | 14.0 | % | $ | 62,688 | ||||
As a percentage of total revenue | 19.9 | % | (4.4 | )% | 20.9 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 25.3 | % | 1.3 | % | 25.0 | % |
General
Excluding Vistana and the approximate $14 million increase in professional fees pertaining to the Vistana transaction, general and administrative expense in the first half of 2015 increased $8.72016 decreased by $1 million from 2014 predominately due to incremental expenses of $8.92015, despite an unfavorable $1 million from the inclusion of HVO in our results of operations. Additionally, excluding HVO, compensation and other employee-related costs rose by $3.4 million in the period, partly offset by lower professional fees (primarily associatedcomparison with acquisition related activities) of $2.3 million and $1.2 million of lower restructuring expenses incurred in the prior year which consisted mainly ofrelated to our estimated costs of exiting contractual commitments and costs associated with workforce reorganizations.
The $3.4 million increase in overall compensation and other employee-related costs (excluding HVO) was primarily due to an increase of $0.8 million in non-cash compensation expense, a rise in health and welfare insurance expense of $0.5 million resulting from higher self-insured claim activity duringaccrual for the period and higher salary and other employee-related costs.
European Union value added tax matter. As a percentage of total revenue and total revenue excluding pass-through revenue,cost reimbursements, acquisition expenses and Vistana, general and administrative expense decreased 92was lower by 45 basis points and increased 32 basis points, respectively, during the period compared to the priorlast year.
Amortization Expense of Intangibles
For the three and six months ended June 30, 20152016 compared to the three and six months ended June 30, 20142015
|
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| ||||||||||||||||||||
| Three Months Ended |
| Six Months Ended | ||||||||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, |
| June 30, |
| June 30, | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | 2015 | % Change | 2014 |
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | |||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) |
| (Dollars in millions) |
| (Dollars in millions) | |||||||||||||||||||||||||||||
Amortization expense of intangibles | $ | 3,514 | 21.4 | % | $ | 2,895 | $ | 7,015 | 19.7 | % | $ | 5,861 |
| $ | 5 |
| 67% |
| $ | 3 |
| $ | 8 |
| 14% |
| $ | 7 | |||||||
As a percentage of total revenue | 2.0 | % | 0.3 | % | 2.0 | % | 2.0 | % | 0.4 | % | 1.9 | % |
|
| 2% |
| (0)% |
|
| 2% |
|
| 2% |
| (0)% |
|
| 2% | |||||||
As a percentage of total revenue excluding pass-through revenue | 2.6 | % | 6.4 | % | 2.4 | % | 2.5 | % | 6.4 | % | 2.3 | % | |||||||||||||||||||||||
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 2% |
| (0)% |
|
| 2% |
|
| 2% |
| (0)% |
|
| 2% |
Amortization expense of intangibles for the three and six months ended June 30, 20152016 increased $0.6$2 million and $1.2$1 million, respectively, over 2014 predominately 2015, due to incremental amortization expense pertaining to the HVOVistana acquisition in October 2014.May 2016.
Depreciation Expense
For the three and six months ended June 30, 20152016 compared to the three and six months ended June 30, 20142015
|
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| ||||||||||||||||||||
| Three Months Ended |
| Six Months Ended | ||||||||||||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, |
| June 30, |
| June 30, | |||||||||||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | 2015 | % Change | 2014 |
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | |||||||||||||||||
| (Dollars in thousands) | (Dollars in thousands) |
| (Dollars in millions) |
| (Dollars in millions) | |||||||||||||||||||||||||||||
Depreciation expense | $ | 4,328 | 11.7 | % | $ | 3,876 | $ | 8,597 | 12.1 | % | $ | 7,669 |
| $ | 9 |
| 125% |
| $ | 4 |
| $ | 14 |
| 75% |
| $ | 8 | |||||||
As a percentage of total revenue | 2.5 | % | (7.8 | )% | 2.7 | % | 2.4 | % | (6.0 | )% | 2.6 | % |
|
| 3% |
| 50% |
|
| 2% |
|
| 3% |
| 50% |
|
| 2% | |||||||
As a percentage of total revenue excluding pass-through revenue | 3.2 | % | (2.2 | )% | 3.2 | % | 3.0 | % | (0.4 | )% | 3.1 | % | |||||||||||||||||||||||
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 4% |
| 33% |
|
| 3% |
|
| 4% |
| 33% |
|
| 3% |
Depreciation expense for the three and six months ended June 30, 20152016 increased $0.5$5 million and $0.9$6 million, respectively, over the comparable 20142015 period largely due to incremental depreciation expense related to fixed assets acquired as part of the HVOVistana acquisition, in addition to other depreciable assets being placed in service subsequent to June 30, 2014.2015. These depreciable assets pertain primarily to software and related IT hardware.
54
Operating Income
For the three months ended June 30, 20152016 compared to the three months ended June 30, 20142015
| Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | $ | 27,569 | 1.3 | % | $ | 27,211 | ||||
Vacation Ownership | 3,792 | (19.8 | )% | 4,726 | ||||||
| | | | | | | | | | |
Total ILG operating income | $ | 31,361 | (1.8 | )% | $ | 31,937 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 18.1 | % | (18.9 | )% | 22.3 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 23.0 | % | (14.0 | )% | 26.8 | % |
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|
|
| Three Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Exchange and Rental |
| $ | 27 |
| (0)% |
| $ | 27 |
Vacation Ownership |
|
| — |
| (100)% |
|
| 4 |
Total ILG operating income |
| $ | 27 |
| (13)% |
| $ | 31 |
As a percentage of total revenue |
|
| 9% |
| (50)% |
|
| 18% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 12% |
| (48)% |
|
| 23% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 17% |
| (26)% |
|
| 23% |
Operating income in the second quarter of 20152016 decreased $0.6$4 million from 2014,2015, consisting of a $0.9$4 million decrease from our Vacation Ownership segment, offset in part by a $0.4 million increase from our Exchange and Rental segment. On a constant currency basis, operating income would have been $32.4 million, an increase of 1.4% over the prior year quarter.
Operating income for our Exchange and Rental segment increased $0.4 million to $27.6 million in the quarter compared to the prior year. The change in operating income was driven by the incremental contributions from our HRC business post-acquisition, together with stronger results from our rental businesses. These positive contributions were largely offset by higher operating expense items such as higher health and welfare insurance costs, an increase in sales and marketing expense and other employee related costs.
The decrease in operating income of $0.9 million in our Vacation Ownership segment is largely due to $1.0 million of unfavorable foreign currency impact in the period from translating the results of our European vacation ownership management businesses into U.S. dollars. On a constant currency basis, operating income for this segment would have been $4.8 million, relatively consistent with prior
year quarter. This change is largely attributable to a favorable adjustment recorded in the prior year related to a change in the estimated fair value of contingent consideration for acquisitions, partly offset by lower acquisition related expenses in the current quarter compared to last year.
Operating income in the quarter for our Vacation Ownership segment also reflects incremental depreciation and amortization expense of intangibles of $0.5 million related to our HVO acquisition, as well as the unfavorable impact of a purchase accounting treatment applicable to our acquisition of HVO whereby pre-acquisition deferred revenue and any related expenses have been re-measured as of the acquisition date. As it relates to our HVO transaction, this re-measurement resulted in less income being recognized during the quarter than would have otherwise been recognized on a historical basis. Consequently, we did not recognize a net contribution of approximately $0.3 million in operating income due to this purchase accounting treatment.
For the six months ended June 30, 2015 compared to the six months ended June 30, 2014
| Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | $ | 64,605 | 1.4 | % | $ | 63,683 | ||||
Vacation Ownership | 7,078 | (18.4 | )% | 8,679 | ||||||
| | | | | | | | | | |
Total ILG operating income | $ | 71,683 | (0.9 | )% | $ | 72,362 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 20.0 | % | (16.9 | )% | 24.1 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 25.4 | % | (12.0 | )% | 28.8 | % |
Operating income in the first half of 2015 decreased $0.7 million from 2014, consisting of a $1.6 million decrease from our Vacation Ownership segment, offset in part by a $0.9 million increase from our Exchange and Rental segment. On a constant currency basis, operating income would have been $73.9 million, higher by 2.1% compared to last year.
Operating income for our Exchange and Rental segment increased $0.9 million to $64.6 million in the period compared to the prior year. The change in operating income was driven by the incremental contributions from our HRC business post-acquisition, together with stronger results from our rental businesses. These positive contributions were partly offset by higher operating expense items such as higher health and welfare insurance costs, an increase in sales and marketing expense and other employee related costs.
The decrease in operating income of $1.6$4 million in our Vacation Ownership segment is due to $1.9$6 million of unfavorable foreign currency impacthigher professional fees and other costs incurred in connection with closing the period from translating the results of our European vacation ownership management businesses into U.S. dollars. On a constant currency basis,Vistana acquisition in May. Excluding Vistana and acquisition related expenses, this segment’s operating income for this segment would have been $8.9lower by $1 million an increaseover prior year due to increased investments in sales and marketing.
Operating income for our Exchange and Rental segment of $0.3$27 million or 2.9%, overwas in-line with the prior year. This increaseOperating income in the quarter reflects $6 million higher professional fees and other costs incurred in connection with closing the Vistana acquisition in May, partly offset by the favorable inclusion of Vistana in our results.
Excluding Vistana and acquisition related costs of $12 million and $1 million for the three months ended June 30, 2016 and 2015, respectively, operating income as a percentage of total revenue excluding cost reimbursements decreased 85 basis points in the quarter.
For the six months ended June 30, 2016 compared to the six months ended June 30, 2015
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Exchange and Rental |
| $ | 65 |
| (0)% |
| $ | 65 |
Vacation Ownership |
|
| 1 |
| (86)% |
|
| 7 |
Total ILG operating income |
| $ | 66 |
| (8)% |
| $ | 72 |
As a percentage of total revenue |
|
| 14% |
| (30)% |
|
| 20% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 17% |
| (35)% |
|
| 26% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 21% |
| (19)% |
|
| 26% |
Operating income in the first half of 2016 decreased $6 million from 2015 driven by our Vacation Ownership segment. The decrease in operating income in our Vacation Ownership segment is largely attributabledue to lower$9 million of higher professional fees and other costs incurred in connection with closing the Vistana acquisition in May. Excluding Vistana and acquisition related expenses, inthis segment’s operating income would have been in-line with the current periodprior year.
Operating income for our Exchange and Rental segment of $65 million remained consistent when compared to last year, largely offset by a favorable adjustment recorded in the prior year related to a change in the estimated fair value of contingent consideration for acquisitions.
year. Operating income in the period forreflects the favorable inclusion of Vistana in our Vacation Ownership segment also reflects incremental depreciationresults, offset by $6 million of higher professional fees and amortization expense of intangibles of $1.1 million related to our HVOother costs incurred in connection with closing the Vistana acquisition as well as the unfavorable impact of a purchase accounting treatment applicable to ourin May. Excluding Vistana and acquisition of HVO whereby pre-acquisition deferred revenue and any related expenses, this segment’s operating income would have been re-measured ashigher by $1 million when compared to the prior year.
55
Excluding Vistana and acquisition related costs of $15 million and $0.5 million for the acquisition date. As it relates to our HVO transaction, this re-measurement resulted in less income being recognized during the quarter than would have otherwise been recognized on a historical basis. Consequently, we did not recognize a net contribution of approximately $0.7 million insix months ended June 30, 2016 and 2015, respectively, operating income due to this purchase accounting treatment.
Tableas a percentage of Contentstotal revenue excluding cost reimbursements was relatively consistent with last year.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
Adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) is a non-GAAPnon‑GAAP measure and is defined in "ILG's“ILG’s Principles of Financial Reporting."” Prior period amounts have been recast to conform to the current period definition of Adjusted EBITDA.
For the three months ended June 30, 20152016 compared to the three months ended June 30, 20142015
| Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | $ | 36,499 | 1.7 | % | $ | 35,904 | ||||
Vacation Ownership | 7,002 | 25.7 | % | 5,570 | ||||||
| | | | | | | | | | |
Total ILG adjusted EBITDA | $ | 43,501 | 4.9 | % | $ | 41,474 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 25.0 | % | (13.4 | )% | 28.9 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 32.0 | % | (8.1 | )% | 34.8 | % |
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Exchange and Rental |
| $ | 43 |
| 23% |
| $ | 35 |
Vacation Ownership |
|
| 19 |
| 171% |
|
| 7 |
Total ILG adjusted EBITDA |
| $ | 62 |
| 48% |
| $ | 42 |
As a percentage of total revenue |
|
| 21% |
| (13)% |
|
| 24% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 27% |
| (13)% |
|
| 31% |
Adjusted EBITDA in the second quarter of 20152016 increased by $2.0$20 million, or 4.9%48%, from 2014,2015, consisting of increases of $1.4 million from our Vacation Ownership segment and $0.6$8 million from our Exchange and Rental segment. On a constant currency basis, adjusted EBITDA would have been $44.6segment and $12 million an increase of 7.4% over the prior year quarter.from our Vacation Ownership segment.
Adjusted EBITDA of $36.5$43 million from our Exchange and Rental segment rose by $0.6$8 million, or 1.7%23%, compared to the prior year. The increase inyear due to the Vistana acquisition. Excluding Vistana, segment adjusted EBITDA is a result offor the incremental contributions from our recently acquired HRC business, togetherquarter was in-line with stronger results from our rental businesses and lower call center related costs. This was partly offset, among other items, by an increase in sales and marketing expense attributable to a shift in the timing for mailing an Interval Network magazine into the second quarter compared to the prior year's distribution schedule, membership fee revenue compression, and higher overall compensation and other employee-related costs partly attributable to a rise in health and welfare costs resulting from higher self-insured claim activity.last year.
Adjusted EBITDA from our Vacation Ownership segment rose by $1.4of $19 million was up $12 million, or 25.7%171%, to $7.0 million in the quarter from $5.6 million in the prior year. The growth inyear primarily due to the Vistana acquisition. Excluding Vistana, adjusted EBITDA in this segment is driven by the incremental management anddecreased $1 million, primarily reflecting increased investments in our sales and financing activities from our recently acquired HVO business, which was somewhat moderated by the unfavorable purchase accounting impact described within the operating income discussion above. Of this incremental contribution, we recognized $0.9 million in equity in earnings from unconsolidated entities, principally HVO's joint venture in Maui. The adjusted EBITDA increase was partly offset by the unfavorable foreign currency impactmarketing platform in the period of translating the results of our European vacation ownership management businesses into U.S. dollars. This unfavorably impacted adjusted EBITDA by approximately $1.0 million in the quarter, driven by the weakening of foreign currencies compared to the U.S. dollar. On a constant currency basis, adjusted EBITDA for this segment would have been $8.0 million, an increase of 43.2% over the prior yearcurrent quarter.
For the six months ended June 30, 20152016 compared to the six months ended June 30, 20142015
| Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Exchange and Rental | $ | 82,372 | 2.2 | % | $ | 80,628 | ||||
Vacation Ownership | 13,946 | 25.2 | % | 11,136 | ||||||
| | | | | | | | | | |
Total ILG adjusted EBITDA | $ | 96,318 | 5.0 | % | $ | 91,764 | ||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
As a percentage of total revenue | 26.9 | % | (11.9 | )% | 30.5 | % | ||||
As a percentage of total revenue excluding pass-through revenue | 34.1 | % | (6.7 | )% | 36.5 | % |
|
|
|
|
|
|
|
|
|
|
| Six Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Exchange and Rental |
| $ | 90 |
| 11% |
| $ | 81 |
Vacation Ownership |
|
| 26 |
| 73% |
|
| 15 |
Total ILG adjusted EBITDA |
| $ | 116 |
| 21% |
| $ | 96 |
As a percentage of total revenue |
|
| 24% |
| (11)% |
|
| 27% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 30% |
| (12)% |
|
| 34% |
Adjusted EBITDA in the first half of 20152016 increased by $4.6$20 million, or 5.0%21%, from 2014,2015, consisting of increases of $2.8 million from our Vacation Ownership segment and $1.7$9 million from our Exchange and Rental segment. On a constant currency basis, adjusted EBITDA would have been $98.5segment and $11 million an increase of 7.4% over the prior year.from our Vacation Ownership segment.
Adjusted EBITDA of $82.4$90 million from our Exchange and Rental segment rose by $1.7$9 million, or 2.2%11%, compared to the prior year. The increase inyear due largely to the Vistana acquisition. Excluding Vistana, segment adjusted EBITDA is a result of the incremental contributionsrose by $1 million from last year in large part due to cost savings in our recently acquired HRC business, together with lower call center related costs. This was partly offset, among other items, by an increase in sales and marketing expense attributable to a shift in the timing for mailing an Interval Network magazine into the second quarter compared to the prior year's distribution schedule, membership fee revenue compression, and higher overall compensation and other employee-related costs partly attributable to a rise in health and welfare costs resulting from higher self-insured claim activity.exchange business.
56
Adjusted EBITDA from our Vacation Ownership segment rose by $2.8of $26 million was up $11 million, or 25.2%73%, from the prior year due to $13.9 million in the period from $11.1 million last year. The growth inVistana acquisition. Excluding Vistana, adjusted EBITDA in this segment reflects the incremental management anddecreased $1 million, primarily reflecting increased investments in our consolidated sales and financing activities from our recently acquired HVO business, which was somewhat moderated by the unfavorable purchase accounting impact described within the operating income discussion above, as well as outperformance at our European vacation ownership management businesses. Of the incremental HVO contribution, we recognized $2.4 million in equity in earnings from unconsolidated entities, principally HVO's joint venture in Maui. The adjusted EBITDA increase was partly offset by the unfavorable foreign currency impactmarketing platform in the period of translating the results of our European vacation ownership management businesses into U.S. dollars. This unfavorably impacted adjusted EBITDA by approximately $1.9 million in the period, driven by the weakening of foreign currencies compared to the U.S. dollar. On a constant currency basis, adjusted EBITDA for this segment would have been $15.8 million, an increase of 41.9% over the prior year.period.
Other Income (Expense), net
For the three months ended June 30, 20152016 compared to the three months ended June 30, 2014
| Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 | |||||||
| (Dollars in thousands) | |||||||||
Interest income | $ | 276 | 401.8 | % | $ | 55 | ||||
Interest expense | $ | (5,974 | ) | 267.0 | % | $ | (1,628 | ) | ||
Other income (expense), net | $ | 195 | 169.6 | % | $ | (280 | ) | |||
Equity in earnings from unconsolidated entities | $ | 925 | NM | $ | — |
Interest income increased $0.2 million in the second quarter of 2015 compared to 2014 due to a loan receivable issued in the fourth quarter of 2014, as described in Note 9 to our consolidated financial statements.
|
|
|
|
|
|
|
|
|
|
| Three Months Ended | ||||||
|
| June 30, | ||||||
|
| 2016 |
| % Change |
| 2015 | ||
|
| (Dollars in millions) | ||||||
Interest expense |
| $ | (6) |
| 0% |
| $ | (6) |
Equity in earnings from unconsolidated entities |
| $ | 1 |
| 0% |
| $ | 1 |
Gain on bargain purchase |
| $ | 197 |
| NM |
| $ | — |
Other income, net |
| $ | 1 |
| NM |
| $ | 1 |
Interest expense in the quarter relates to interest and amortization of debt costs on our amended and restated revolving credit facility and our $350 million senior notes issued in April of 2015. Higher interestInterest expense infor the full quarter is primarily a function of our newly issued senior notes, which carryremained relatively consistent with the prior year, despite a higher interest rate than our revolving credit facility. Our senior notes were used to paydownoutstanding balance on our revolving credit facility in April 2015. Overall, we carried a higher average outstanding balance when compared toconnection with closing the prior year period primarily due to the funding of the HVOVistana acquisition in the fourth quarter of 2014.on May 11, 2016.
Other income (expense), net primarily relates to net gains and losses on foreign currency exchange related to cash held by foreign subsidiaries in currencies other than their functional currency. Non-operating foreign exchange net gain was $0.3 million in the second quarter of 2015 compared to a net loss of $0.3 million in 2014. The favorable fluctuations during the quarter were primarily driven by U.S. dollar positions held at June 30, 2015 affected by the stronger dollar compared to the Mexican peso. The unfavorable fluctuations during the prior year quarter were principally driven by U.S. dollar positions held at June 30, 2014 affected by the weaker dollar compared to the Colombian peso and British pound.
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 vacation ownership interests.VOIs. Income and losses from this joint venture are allocated based on ownership interests. See Note 67 to our condensed consolidated financial statements for further 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. As disclosed in Note 3 of the consolidated financial statements included herein, our purchase price allocation for the Vistana acquisition is currently provisional and therefore subject to change while the measurement period remains open. Consequently, this gain on bargain purchase could change by a material amount.
Other income, net primarily relates to net gains and losses on foreign currency exchange related to cash held by foreign subsidiaries in currencies other than their functional currency. Non‑operating foreign exchange net gains were $1 million in the second quarter of 2016. The favorable fluctuations during the current quarter were primarily driven by U.S. dollar positions held at June 30, 2016 affected primarily by the stronger dollar compared to the British pound and the Mexican peso.
For the six months ended June 30, 20152016 compared to the six months ended June 30, 20142015
|
|
|
|
|
|
|
|
| ||||||||||
| Six Months Ended | |||||||||||||||||
| Six Months Ended June 30, |
| June 30, | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | % Change | 2014 |
| 2016 |
| % Change |
| 2015 | |||||||||
| (Dollars in thousands) |
| (Dollars in millions) | |||||||||||||||
Interest income | $ | 543 | 448.5 | % | $ | 99 |
| $ | 1 |
| 0% |
| $ | 1 | ||||
Interest expense | $ | (8,727 | ) | 195.6 | % | $ | (2,952 | ) |
| $ | (12) |
| 33% |
| $ | (9) | ||
Other income (expense), net | $ | 1,116 | 368.3 | % | $ | (416 | ) | |||||||||||
Equity in earnings from unconsolidated entities | $ | 2,449 | NM | $ | — |
| $ | 2 |
| 0% |
| $ | 2 | |||||
Gain on bargain purchase |
| $ | 197 |
| NM |
| $ | — | ||||||||||
Other income, net |
| $ | 2 |
| 100% |
| $ | 1 |
Interest income increased $0.4of $1 million in the first hald of 2015 compared to 2014 due to a loan receivable issued in the fourth quarter of 2014, as described in Note 9 to our consolidated financial statements.
period remained relatively consistent with 2015. Interest expense in the period relates to interest and amortization of debt costs on our amended and restated revolving credit facility and our $350 million senior notes issued in April of 2015. Higher interest expense in the quarterfirst half of 2016 is primarily a function ofdue to our newly issued
57
senior notes, which carry a higher interest rate than our revolving credit facility. Our senior notes were used to paydownfacility, and a higher outstanding balance on our revolving credit facility in April 2015. Overall, we carried a higher average outstanding balance when compared toconnection with the prior year period primarily due to the fundingclosing of the HVOVistana acquisition in the fourth quarter of 2014.on May 11, 2016.
Other income (expense), net primarily relates to net gains and losses on foreign currency exchange related to cash held by foreign subsidiaries in currencies other than their functional currency. Non-operating foreign exchange net gain was $1.3 million in 2015 compared to a net loss of $0.1 million in 2014. The favorable fluctuations during the period were primarily driven by U.S. dollar positions held at June 30, 2015 affected by the stronger dollar compared to the Mexican and
Colombian pesos as well as the Egyptian pound. The unfavorable fluctuations during the prior year were principally driven by U.S. dollar positions held at June 30, 2014 affected by the weaker dollar compared to the Colombian peso and British pound, partly offset by the stronger dollar compared to the Egyptian pound.
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 vacation ownership interests.VOIs. Income and losses from this joint venture are allocated based on ownership interests. See Note 6 to our condensed consolidated financial statements for further discussion.
The gain on bargain purchase of $197 million is described in the three month discussion above.
Other income, net primarily relates to net gains and losses on foreign currency exchange related to cash held by foreign subsidiaries in currencies other than their functional currency. Non‑operating foreign exchange net gains were $2 million and $1 million in the first half of 2016 and 2015, respectively. The favorable fluctuations in 2016 were primarily driven by U.S. dollar positions held at June 30, 2016 affected primarily by the stronger dollar compared to the Mexican peso and the British pound. The favorable fluctuations in 2015 were primarily driven by U.S. dollar positions held at June 30, 2015 affected by the stronger dollar compared to the Mexican and Colombian pesos as well as the Egyptian pound.
Income Tax Provision
For the three months ended June 30, 20152016 compared to the three months ended June 30, 20142015
For the three months ended June 30, 20152016 and 2014,2015, ILG recorded income tax provisions for continuing operations of $9.7$36 million and $10.7$10 million, respectively, which represent effective tax rates of 36.1%16.4% and 35.5%36.1% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. The effective tax rate for the three months ended June 30, 2015 is higher than the prior year period due to the shift in the projection of the proportion of income earned and taxed between the various jurisdictions.
For the six months ended June 30, 2015 compared to the six months ended June 30, 2014
For the six months ended June 30, 2015 and 2014, ILG recorded income tax provisions for continuing operations of $24.1 million and $25.0 million, respectively, which represent effective tax rates of 36.0% and 36.2% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. For the six months ended June 30, 2015, the effective tax rate2016 is lower than the prior year period primarily due to the increasenontaxable gain on bargain purchase recorded during the current period in income taxesconnection with the acquisition of Vistana and included in the first quartercomputation of 2014 associated with discrete items attributable to the effect of changes in tax laws in certain states.
On July 8, 2015, the U.K. government released its 2015 Summer Budget, where it indicated that it intends to enact further decreases in the U.K. corporate incomeannual expected effective tax rate as a non-discrete permanent item. This gain on bargain purchase is not subject to 19%income taxation and 18% effective April 1, 2017 and April 1, 2020, respectively. The impact of these further rate reductions will be reflected in the reporting period when the law is enacted and will be dependent on our deferred tax position at that time. However, going forward, the lower corporate tax rate will decrease income tax expense and favorably impactreduced our effective tax rate.rate in absolute terms by approximately 21 percentage points for the three months ended June 30, 2016.
For the six months ended June 30, 2016 compared to the six months ended June 30, 2015
For the six months ended June 30, 2016 and 2015, ILG recorded income tax provisions for continuing operations of $49 million and $24 million, respectively, which represent effective tax rates of 19.1% and 36.0% for the respective periods. The effective tax rate for the six months ended June 30, 2016 is lower than the prior year period primarily due to the nontaxable gain on bargain purchase recorded during the current 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 and reduced our effective tax rate in absolute terms by approximately 18 percentage points for the six months ended June 30, 2016.
In connection with the Vistana transaction, Starwood and ILG entered into a Tax Matters Agreement that generally governs the parties' respective rights, responsibilities, and obligations with respect to taxes, including both taxes arising in the ordinary course of business as well as taxes, if any, incurred as a result of any failure of the Vistana reorganization, spin-off, Merger and certain related transactions consummated in connection with Starwood's internal restructuring to qualify for their intended U.S. federal income tax treatment. In addition to allocating responsibility for these taxes between the parties, the Tax Matters Agreement sets forth the respective obligations of the parties with respect to the filing of tax returns, the administration of tax contests and assistance and cooperation on tax matters. The Tax Matters Agreement also generally prohibits ILG, Vistana and any subsidiary of Vistana from taking certain actions that could cause the failure of the Vistana reorganization, spin-off, Merger and certain related transactions consummated in connection with Starwood's internal restructuring from qualifying for their intended tax treatment. Additional details can be found in the Tax Matters Agreement which was included as an exhibit to Form 8-K filed on May 12, 2016.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2015,2016, we had $92.2$127 million of cash and cash equivalents, including $66.6$77 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, $46.0$62 million is held in foreign jurisdictions, principally the U.K.United Kingdom. Earnings of foreign subsidiaries, except Venezuela, are permanently reinvested. Additional tax provisions would be required should such earnings be repatriated to the U.S. 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 three months ended June 30, 20152016 and, as of June 30, 2015,2016, the respective cash balances were immaterial to our overall cash on hand.
Cash generated by operations is used ashas 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 securization market may be impacted by macroeconomic and other factors outside of our control.
Cash Flows Discussion
Operating Activities
Net cash provided by operating activities increaseddecreased to $86.4$53 million in the six months ended June 30, 2016 from $86 million in the same period of 2015. The decrease of $33 million from 2015 was principally due to inventory spend of $41 million at Vistana since the acquisition mostly related to on-going development activities, higher income taxes paid of $13 million, a $10 million royalty pre-payment to Hyatt triggered by the Vistana acquisition, $9 million of higher interest paid (net of amounts capitalized), and the timing of certain cash disbursements. These cash outlflows were partly offset by higher net cash receipts largely attributable to the inclusion of Vistana.
Investing Activities
Net cash used in investing activities of $111 million in the six months ended June 30, 2016 primarily pertain to the Vistana acquisition, net of cash acquired, of $77 million, capital expenditures of $25 million primarily related to IT initiatives and investments by Vistana 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 and issued financing receivables of $2 million. Net cash used in investing activities of $7 million in the six months ended June 30, 2015 from $55.7 million in the same period of 2014. The increase of $30.8 million from 2014 was principally duepertains to higher net cash receipts due in partcapital expenditures, primarily related to the addition of HVO subsequent to its acquisition, lower payments of $13.0 million made in connection with long-term agreements, and lower income taxes paid of $8.3 million. These increases were partly offset by higher interest payments of $1.1 million.IT initiatives.
Financing Activities
Investing Activities
Net cash used in investingprovided by financing activities of $7.0$98 million in the six months ended June 30, 2015 pertain to capital expenditures, primarily2016 related to IT initiativesnet borrowing of $210 million on our revolving credit facility and to additional fundingan decrease of $0.3$3 million in financing -related restricted cash. These increases were partly offset by repurchases of our common stock at market prices totaling $56 million, including commissions, which settled during the six months; payment of $24 million to an existing investment in financing receivables. Net cash used in investing activities of $9.9 million in the six months ended June 30, 2014 pertain to capital expenditures of $9.1 million primarilyVistana’s former owner related to IT initiativesa financing obligation; cash dividend payments of $23 million; repayments of $9 million on securitized debt; payments of debt issuance costs totaling $2 million related to amendments to the Amended Credit Agreement and to an investment in loan receivablethe exchange offer of $0.8the senior notes; and withholding taxes on the vesting of restricted stock units of $1 million.
Financing Activities
Net cash used in financing activities of $65.7$66 million in the six months ended June 30, 2015 related to net principal payments of $393.0$393 million on our revolving credit facility, cash dividend payments of $13.8$14 million, payments of debt issuance costs of $6.7$7 million related primarily to our issuance of senior notes and also to amendments to our Amended Credit Agreement, and withholding taxes on the vesting of restricted stock units of $4.3$4 million. These uses of cash were partially offset by
59
the proceeds of the issuance of senior notes of $350 million, of which net proceeds were used to repay indebtedness outstanding on our revolving credit facility, and excess tax benefits from stock-based awards and the proceeds from the exercise of stock options. Net cash used in financing activities of $19.4 million in the six months ended June 30, 2014 related to cash dividend payments of $12.7 million, repurchases of our common stock which settled during the year at market prices totaling $11.0 million (including commissions), $7.3 million contingent consideration payment related to acquisitions, withholding taxes on the vesting of restricted stock units of $4.0 million, and payment of $1.7 million of debt issuance costs related to the amendment of our credit facility in April 2014. These uses of cash were partially offset by $15.0 million of net borrowings on our revolving credit facility, excess tax benefits from stock-based awards and the proceeds from the exercise of stock options.stock‑based awards.
Revolving Credit Facility
In 2014, we entered into amendments to our amended and restated credit agreement which increased the revolving line of credit from $500 million to $600 million, extended the maturity of the credit facility to April 2019 and provided for certain other amendments to covenants. The terms related to interest rates and commitment fees remain unchanged.
On April 10, 2015, we entered into a third amendment to the Amended Credit Agreement which changes the leverage-basedleverage‑based financial covenant from a maximum consolidated total leverage to EBITDA
ratio of 3.5 to 1.0 to a maximum consolidated secured leverage to EBITDA ratio of 3.25 to 1.0. In addition, the amendment adds an incurrence test requiring a maximum consolidated total leverage to EBITDA ratio of 4.5 to 1.0 on a pro forma basis in certain circumstances in which we make acquisitions or investments, incur additional indebtedness or make restricted payments. Also, the amendment added a new pricing level to the pricing grid for when the consolidated total leverage to EBITDA ratio equals or exceeds 3.5 to 1.0. This pricing level is either LIBOR plus 2.5% or the base rate plus 1.5% and requires a commitment fee on undrawn amounts of 0.4% per annum. There were no other material changes under this amendment.
Additionally, on
On May 5, 2015, we entered into a fourth amendment which changes the definition of change of control to remove the provision that certain changes in the composition of the board of directors would constitute a change of control and therefore be a default under the credit agreement. The amendment also includes additional clarifying language regarding provisions that relate to our 5.625% senior notes due in 2023. There were no other material changes under this amendment.
Additionally, 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 June 30, 2015,2016, borrowings outstanding under the revolving credit facility amounted to $95$285 million, with $496.7$304 million available to be drawn, net of anyoutstanding letters of credit. BorrowingsThe increased borrowings outstanding as of June 30, 2016 from December 31, 2015 primarily reflect funds drawn for the paydownVistana acquisition in May 2016 and repurchases of our revolving credit facility with proceeds from our senior notes issued in April 2015.common stock.
Senior Notes
On April 10, 2015, we completed a private offering of $350 million in aggregate principal amount of our 5.625% senior notes due in 2023. The net proceeds from the offering, after deducting offering related expenses, were $343.1$343 million. We used the proceeds to repay indebtedness outstanding on our revolving credit facility. As of June 30, 2015,2016, total unamortized debt issuance costs pertaining to our senior notes were $6.7$6 million.
Interest on the senior notes is paid semi-annuallysemi‑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 revolving credit facility have various financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness, to 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
60
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 incompliance 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 are in compliance with this covenant as of June 30, 2015.2016. Additionally, the revolving credit facility 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"(“EBITDA”), as defined in the amended credit agreement. As of June 30, 2015,2016, the maximum consolidated secured leverage to EBITDA ratio is 3.25x and the minimum consolidated interest coverage ratio is 3.0x. As of June 30, 2015,2016, 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 0.680.87 and 14.26,13.24, respectively.
Free Cash Flow
Free cash flow is a non-GAAPnon‑GAAP measure and is defined in "ILG's“ILG’s Principles of Financial Reporting."” For the six months ended June 30, 20152016 and 2014,2015, free cash flow was $79.7$45 million and $46.5$79 million, respectively. The change is mainly a result of the variance in net cash provided by operating activities and capital expenditures as discussed above.
Dividends and Share Repurchases
In February and May of 2015,2016, our Board of Directors declared a quarterly dividend payment of $0.12 per share paid in March and June of 2015,2016, respectively amounting to $6.9$7 million each.and $16 million, respectively. In August 2015,2016, our Board of Directors declared a $0.12 per share dividend payable September 15, 201521, 2016 to shareholders ofon record on September 1, 2015.7, 2016. Based on the number of shares of common stock outstanding as of June 30, 2015,2016, at a dividend of $0.12 per share, the anticipated cash outflow would be $6.9$15 million in the third quarter of 2015.2016. We currently expect to declare and pay quarterly dividends of similar amounts.amounts per share.
In February 2015,May 2016, our Board of Directors increased the remaining share repurchase authorization to a total of $25$100 million. 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.
During the yearsix months ended December 31, 2014,June 30, 2016, we repurchased 0.74.2 million shares of common stock for $14.1 million, including commissions. As of June 30, 2015, the remaining availability for future repurchases of our common stock was $25.0for $61 million. There were no repurchases of common stock during the six months ended June 30, 2015. As of June 30, 2016, the remaining availability under the authorization to repurchase our common stock was $39 million.
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 June 30, 2015,2016, guarantees, surety bonds and letters of credit totaled $83.4$98 million. The total includes a guarantee by us of up to $36.7$37 million of the construction loan for the Maui project. This amount represents the maximum exposure under guarantee related to this construction loan from a legal perspective; however, our reasonable expectation of our exposure under this guarantee based on the agreements among guarantors is proportionally reduced by our ownership percentage in the Maui project to $20.7$8 million as of June 30, 2015.2016. Additionally, the total also includes maximum exposure under guarantees of $34.1$92 million primarily relating to our vacation rental business'sbusiness’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.
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In addition, certain of the vacation rental business'sbusiness’s hotel and resort management agreements provide that owners receive specified percentages of the revenue generated under 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, 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 June 30, 2015,2016, 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 June 30, 2015,2016, amounts pending reimbursements are not significant.
As of June 30, 2015,2016, our letters of credit totaled $8.3$11 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 June 30, 20152016 are as follows:
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Contractual Obligations | Total | Up to 1 year | 1 - 3 years | 3 - 5 years | More than 5 years |
| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years |
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| (Dollars in thousands) |
| (Dollars in millions) |
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Debt principal(a) | $ | 445,000 | $ | — | $ | — | $ | 95,000 | $ | 350,000 | ||||||||||||||||||||||
Debt interest(a) | 170,144 | 24,135 | 48,246 | 42,802 | 54,961 | |||||||||||||||||||||||||||
Purchase obligations and other commitments(b) | 83,624 | 15,508 | 33,289 | 17,827 | 17,000 | |||||||||||||||||||||||||||
Debt principal(a) |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1 |
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Debt interest(a) |
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| 177 |
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| 28 |
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| 57 |
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| 56 |
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| 36 |
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Purchase obligations and other commitments(b) |
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| 106 |
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| 33 |
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| 50 |
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| 19 |
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| 4 |
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Vacation ownership development commitments(c) |
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| 58 |
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| 58 |
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Operating leases | 56,757 | 14,272 | 21,561 | 14,252 | 6,672 |
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| 170 |
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| 20 |
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| 34 |
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| 26 |
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| 90 |
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Total contractual obligations | $ | 755,525 | $ | 53,915 | $ | 103,096 | $ | 169,881 | $ | 428,633 |
| $ | 512 |
| $ | 139 |
| $ | 141 |
| $ | 101 |
| $ | 131 |
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(a)
(b)
(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(d) |
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Guarantees, surety bonds and letters of credit |
| $ | 98 |
| $ | 78 |
| $ | 15 |
| $ | 5 |
| $ | — |
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Guarantees, surety bonds and letters of credit | $ | 83,356 | $ | 58,803 | $ | 15,445 | $ | 9,045 | $ | 63 | ||||||
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(d)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.
Off-Balance62
Off‑Balance Sheet Arrangements
Except as disclosed above in our Contractual Obligations and Commercial Commitments (excluding "Debt principal"“Debt principal”), as of June 30, 2015,2016, we did not have any significant off-balanceoff‑balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S-K.S‑K.
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 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 20142015 Annual Report on Form 10-K.10‑K. There have been no material changes to our critical accounting policies in the interim period.
ILG’S PRINCIPLES OF FINANCIAL REPORTING
Definition of ILG's Non-GAAPILG’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-operatingnon‑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-cashnon‑cash compensation expense, (2) goodwill and asset impairments, (3) acquisition related and restructuring costs, (4) other non-operatingnon‑operating income and expense, (5) the impact of the application of purchase accounting, and (5)(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-operatingnon‑operating foreign currency remeasurements, (3) the impact of the application of purchase accounting, and (3)(4) 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 provided by operating activities less capital expenditures.expenditures, plus net changes in financing-related restricted cash and net borrowing and repayment activity related to securitizations, and excluding certain payments unrelated to our ongoing core business, such as acquisition-related and restructuring costs.
Constant currencyContract sales represents current period resultstotal VOIs sold at consolidated and unconsolidated projects pursuant to purchase agreements, net of operations determined by translating our functional currency resultsactual cancellations and rescissions, where we have met a minimum threshold amounting to U.S. dollars (our reporting currency) usinga 10% down payment of the actual prior year blended rate of translation fromcontract purchase price during the comparable prior period. We believe that this measure improves the period to period comparability of results from business operations as it eliminates the effect of foreign currency translation.
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Our presentation of above-mentioned non-GAAPabove‑mentioned non‑GAAP measures may not be comparable to similarly-titledsimilarly‑titled measures used by other companies. We believe these measures are useful to investors because they represent the consolidated operating results from our segments, excluding the effects of any non-core expenses.non‑core expenses or gains. We also believe these non-GAAPnon‑GAAP financial 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-periodperiod‑to‑period comparability of results from business operations. These non-GAAPnon‑GAAP 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-cashnon‑cash compensation and acquisition related and restructuring costs as it relates to adjusted EBITDA. We endeavor to compensate for the limitations of the non-GAAP
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-GAAPnon‑GAAP measure.
We report these non-GAAPnon‑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-GAAPnon‑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-GAAPnon‑GAAP measures which are discussed below.
Items That Are Excluded From ILG's Non-GAAPILG’s Non‑GAAP Measures (as applicable)
Amortization expense of intangibles is a non-cashnon‑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-cashnon‑cash expense relating to our property and equipment and is recorded on a straight-linestraight‑line basis to allocate the cost of depreciable assets to operations over their estimated service lives.
Non-cashNon‑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.
Goodwill and asset impairments are non-cashnon‑cash expenses relating to adjustments to goodwill and long-livedlong‑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-operatingnon‑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.
Other special items consistconsists of other items that we believe are not related to our core business operations. For the three and six months ended June 30, 2015, such item relates to legal proceedings2016, includes the gain on bargain purchase recognized as described in Part II, Item 1.
RECONCILIATIONS OF NON-GAAPNON‑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 for the three and six months ended June 30, 2016 and 2015 and 2014 (in thousands)millions). The noncontrolling interest relates to the Vacation Ownership segment.
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| Ownership |
| Consolidated | |||
Adjusted EBITDA |
| $ | 43 |
| $ | 19 |
| $ | 62 |
Non-cash compensation expense |
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| (3) |
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| (2) |
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| (5) |
Other special items |
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| 197 |
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| — |
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| 197 |
Other non-operating income (expense), net |
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| 1 |
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| — |
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| 1 |
Acquisition related and restructuring costs |
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| (6) |
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| (6) |
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| (12) |
Impact of purchase accounting |
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| — |
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| (4) |
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| (4) |
EBITDA |
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| 232 |
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| 7 |
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| 239 |
Amortization expense of intangibles |
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| (3) |
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| (2) |
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| (5) |
Depreciation expense |
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| (4) |
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| (5) |
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| (9) |
Less: Net income attributable to noncontrolling interest |
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| — |
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| 1 |
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| 1 |
Equity in earnings from unconsolidated entities |
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| — |
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| (1) |
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| (1) |
Less: Other special items |
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| (197) |
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| — |
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| (197) |
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| (1) |
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| — |
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Operating income |
| $ | 27 |
| $ | — |
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| 27 |
Interest income |
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Interest expense |
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Other non-operating income, net |
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Equity in earnings from unconsolidated entities |
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| 1 |
Other special items |
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| 197 |
Income tax provision |
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Net income |
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| 184 |
Net income attributable to noncontrolling interest |
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Net income attributable to common stockholders |
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| $ | 183 |
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Adjusted EBITDA |
| $ | 35 |
| $ | 7 |
| $ | 42 |
Non-cash compensation expense |
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| (2) |
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| (1) |
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| (3) |
Other non‑operating income (expense), net |
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| 1 |
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| — |
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| 1 |
EBITDA |
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| 34 |
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| 6 |
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| 40 |
Amortization expense of intangibles |
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| (2) |
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| (1) |
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| (3) |
Depreciation expense |
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| (4) |
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| — |
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Less: Net income attributable to noncontrolling interest |
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Equity in earnings from unconsolidated entities |
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Less: Other non-operating income (expense), net |
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Operating income |
| $ | 27 |
| $ | 4 |
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| 31 |
Interest income |
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Interest expense |
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Other non-operating income, net |
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| 1 |
Equity in earnings from unconsolidated entities |
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| 1 |
Income tax provision |
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Net income |
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| 17 |
Net income attributable to noncontrolling interest |
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| — |
Net income attributable to common stockholders |
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| $ | 17 |
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| Three Months Ended June 30, 2015 | |||||||||
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| Exchange and Rental | Vacation Ownership | Consolidated | |||||||
Adjusted EBITDA | $ | 36,499 | $ | 7,002 | $ | 43,501 | ||||
Non-cash compensation expense | (2,654 | ) | (758 | ) | (3,412 | ) | ||||
Other non-operating income (expense), net | 282 | (87 | ) | 195 | ||||||
Acquisition related and restructuring costs | (67 | ) | (209 | ) | (276 | ) | ||||
Other special items | (144 | ) | (27 | ) | (171 | ) | ||||
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EBITDA | 33,916 | 5,921 | 39,837 | |||||||
Amortization expense of intangibles | (2,155 | ) | (1,359 | ) | (3,514 | ) | ||||
Depreciation expense | (3,896 | ) | (432 | ) | (4,328 | ) | ||||
Less: Net income attributable to noncontrolling interest | 2 | 484 | 486 | |||||||
Equity in earnings from unconsolidated entities | (16 | ) | (909 | ) | (925 | ) | ||||
Less: Other non-operating income (expense), net | (282 | ) | 87 | (195 | ) | |||||
| | | | | | | | | | |
Operating income | $ | 27,569 | $ | 3,792 | 31,361 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest income | 276 | |||||||||
Interest expense | (5,974 | ) | ||||||||
Other non-operating income, net | 195 | |||||||||
Equity in earnings from unconsolidated entities | 925 | |||||||||
Income tax provision | (9,656 | ) | ||||||||
| | | | | | | | | | |
Net income | 17,127 | |||||||||
Net income attributable to noncontrolling interest | (486 | ) | ||||||||
| | | | | | | | | | |
Net income attributable to common stockholders | $ | 16,641 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2016 | |||||||
|
| Exchange |
| Vacation |
|
|
| ||
|
| and Rental |
| Ownership |
| Consolidated | |||
Adjusted EBITDA |
| $ | 90 |
|
| 26 |
| $ | 116 |
Non-cash compensation expense |
|
| (5) |
|
| (3) |
|
| (8) |
Other special items |
|
| 197 |
|
| — |
|
| 197 |
Other non-operating income (expense), net |
|
| 2 |
|
| — |
|
| 2 |
Acquisition related and restructuring costs |
|
| (6) |
|
| (9) |
|
| (15) |
Impact of purchase accounting |
|
| — |
|
| (4) |
|
| (4) |
EBITDA |
|
| 278 |
|
| 10 |
|
| 288 |
Amortization expense of intangibles |
|
| (5) |
|
| (3) |
|
| (8) |
Depreciation expense |
|
| (9) |
|
| (5) |
|
| (14) |
Less: Net income attributable to noncontrolling interest |
|
| — |
|
| 1 |
|
| 1 |
Equity in earnings from unconsolidated entities |
|
| — |
|
| (2) |
|
| (2) |
Less: Other special items |
|
| (197) |
|
| — |
|
| (197) |
Less: Other non-operating income (expense), net |
|
| (2) |
|
| — |
|
| (2) |
Operating income |
| $ | 65 |
| $ | 1 |
|
| 66 |
Interest income |
|
|
|
|
|
|
|
| 1 |
Interest expense |
|
|
|
|
|
|
|
| (12) |
Other non-operating income, net |
|
|
|
|
|
|
|
| 2 |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 2 |
Other special items |
|
|
|
|
|
|
|
| 197 |
Income tax provision |
|
|
|
|
|
|
|
| (49) |
Net income |
|
|
|
|
|
|
|
| 207 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (1) |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 206 |
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2015 | |||||||
|
| Exchange |
| Vacation |
|
|
| ||
|
| and Rental |
| Ownership |
| Consolidated | |||
Adjusted EBITDA |
| $ | 81 |
| $ | 15 |
| $ | 96 |
Non-cash compensation expense |
|
| (5) |
|
| (2) |
|
| (7) |
Other non-operating income (expense), net |
|
| 1 |
|
| — |
|
| 1 |
Impact of purchase accounting |
|
| — |
|
| (1) |
|
| (1) |
EBITDA |
|
| 77 |
|
| 12 |
|
| 89 |
Amortization expense of intangibles |
|
| (4) |
|
| (3) |
|
| (7) |
Depreciation expense |
|
| (7) |
|
| (1) |
|
| (8) |
Less: Net income attributable to noncontrolling interest |
|
| — |
|
| 1 |
|
| 1 |
Less: Other non-operating income (expense), net |
|
| (1) |
|
| — |
|
| (1) |
Equity in earnings from unconsolidated entities |
|
| — |
|
| (2) |
|
| (2) |
Operating income |
| $ | 65 |
| $ | 7 |
|
| 72 |
Interest income |
|
|
|
|
|
|
|
| 1 |
Interest expense |
|
|
|
|
|
|
|
| (9) |
Other non-operating income, net |
|
|
|
|
|
|
|
| 1 |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 2 |
Income tax provision |
|
|
|
|
|
|
|
| (24) |
Net income |
|
|
|
|
|
|
|
| 43 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (1) |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 42 |
66
| Three Months Ended June 30, 2014 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Exchange and Rental | Vacation Ownership | Consolidated | |||||||
Adjusted EBITDA | $ | 35,904 | $ | 5,570 | $ | 41,474 | ||||
Non-cash compensation expense | (2,261 | ) | (372 | ) | (2,633 | ) | ||||
Other non-operating expense, net | (279 | ) | (1 | ) | (280 | ) | ||||
Acquisition related and restructuring costs | (987 | ) | (180 | ) | (1,167 | ) | ||||
| | | | | | | | | | |
EBITDA | 32,377 | 5,017 | 37,394 | |||||||
Amortization expense of intangibles | (1,751 | ) | (1,144 | ) | (2,895 | ) | ||||
Depreciation expense | (3,694 | ) | (182 | ) | (3,876 | ) | ||||
Less: Net income attributable to noncontrolling interest | — | 1,034 | 1,034 | |||||||
Less: Other non-operating expense, net | 279 | 1 | 280 | |||||||
| | | | | | | | | | |
Operating income | $ | 27,211 | $ | 4,726 | 31,937 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest income | 55 | |||||||||
Interest expense | (1,628 | ) | ||||||||
Other non-operating expense, net | (280 | ) | ||||||||
Income tax provision | (10,690 | ) | ||||||||
| | | | | | | | | | |
Net income | 19,394 | |||||||||
Net income attributable to noncontrolling interest | (1,034 | ) | ||||||||
| | | | | | | | | | |
Net income attributable to common stockholders | $ | 18,360 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Six Months Ended June 30, 2015 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Exchange and Rental | Vacation Ownership | Consolidated | |||||||
Adjusted EBITDA | $ | 82,372 | $ | 13,946 | $ | 96,318 | ||||
Non-cash compensation expense | (5,402 | ) | (1,532 | ) | (6,934 | ) | ||||
Other non-operating income (expense), net | 1,208 | (92 | ) | 1,116 | ||||||
Acquisition related and restructuring costs | (169 | ) | (313 | ) | (482 | ) | ||||
Other special items | (144 | ) | (27 | ) | (171 | ) | ||||
| | | | | | | | | | |
EBITDA | 77,865 | 11,982 | 89,847 | |||||||
Amortization expense of intangibles | (4,310 | ) | (2,705 | ) | (7,015 | ) | ||||
Depreciation expense | (7,722 | ) | (875 | ) | (8,597 | ) | ||||
Less: Net income attributable to noncontrolling interest | 11 | 1,002 | 1,013 | |||||||
Equity in earnings from unconsolidated entities | (31 | ) | (2,418 | ) | (2,449 | ) | ||||
Less: Other non-operating income (expense), net | (1,208 | ) | 92 | (1,116 | ) | |||||
| | | | | | | | | | |
Operating income | $ | 64,605 | $ | 7,078 | 71,683 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest income | 543 | |||||||||
Interest expense | (8,727 | ) | ||||||||
Other non-operating income, net | 1,116 | |||||||||
Equity in earnings from unconsolidated entities | 2,449 | |||||||||
Income tax provision | (24,148 | ) | ||||||||
| | | | | | | | | | |
Net income | 42,916 | |||||||||
Net income attributable to noncontrolling interest | (1,013 | ) | ||||||||
| | | | | | | | | | |
Net income attributable to common stockholders | $ | 41,903 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| Six Months Ended June 30, 2014 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
| Exchange and Rental | Vacation Ownership | Consolidated | |||||||
Adjusted EBITDA | $ | 80,628 | $ | 11,136 | $ | 91,764 | ||||
Non-cash compensation expense | (4,741 | ) | (739 | ) | (5,480 | ) | ||||
Other non-operating expense, net | (262 | ) | (154 | ) | (416 | ) | ||||
Acquisition related and restructuring costs | (1,337 | ) | (1,068 | ) | (2,405 | ) | ||||
��� | | | | | | | | | | |
EBITDA | 74,288 | 9,175 | 83,463 | |||||||
Amortization expense of intangibles | (3,580 | ) | (2,281 | ) | (5,861 | ) | ||||
Depreciation expense | (7,305 | ) | (364 | ) | (7,669 | ) | ||||
Less: Net income attributable to noncontrolling interest | 18 | 1,995 | 2,013 | |||||||
Less: Other non-operating expense, net | 262 | 154 | 416 | |||||||
| | | | | | | | | | |
Operating income | $ | 63,683 | $ | 8,679 | 72,362 | |||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
Interest income | 99 | |||||||||
Interest expense | (2,952 | ) | ||||||||
Other non-operating expense, net | (416 | ) | ||||||||
Income tax provision | (25,005 | ) | ||||||||
| | | | | | | | | | |
Net income | 44,088 | |||||||||
Net income attributable to noncontrolling interest | (2,013 | ) | ||||||||
| | | | | | | | | | |
Net income attributable to common stockholders | $ | 42,075 | ||||||||
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
The following tables present the inputs used to compute operating income and adjusted EBITDA margin for our operating segments for the three and six months ended June 30, 2016 and 2015 and 2014 (in thousands)millions).
| Exchange and Rental | ||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2015 | 2014 | 2015 | 2014 | |||||||||
Revenue | $ | 124,597 | $ | 116,802 | $ | 260,234 | $ | 246,890 | |||||
Revenue excluding pass-through revenue | 100,397 | 96,975 | 213,313 | 206,245 | |||||||||
Operating income | 27,569 | 27,211 | 64,605 | 63,683 | |||||||||
Adjusted EBITDA | 36,499 | 35,904 | 82,372 | 80,628 | |||||||||
Margin computations | |||||||||||||
Operating income margin | 22.1 | % | 23.3 | % | 24.8 | % | 25.8 | % | |||||
Operating income margin excluding pass-through revenue | 27.5 | % | 28.1 | % | 30.3 | % | 30.9 | % | |||||
Adjusted EBITDA margin | 29.3 | % | 30.7 | % | 31.7 | % | 32.7 | % | |||||
Adjusted EBITDA margin excluding pass-through revenue | 36.4 | % | 37.0 | % | 38.6 | % | 39.1 | % |
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Exchange and Rental |
| Exchange and Rental | ||||||||||||||||||||||
| Vacation Ownership |
| Three Months Ended |
| Six Months Ended | ||||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Three Months Ended June 30, | Six Months Ended June 30, |
| June 30, |
| June 30, | |||||||||||||||||||
| 2015 | 2014 | 2015 | 2014 |
| 2016 |
| 2015 |
| 2016 |
| 2015 | |||||||||||||
Revenue | $ | 49,148 | $ | 26,726 | $ | 98,063 | $ | 53,679 |
| $ | 140 |
| $ | 125 |
| $ | 274 |
| $ | 260 | |||||
Revenue excluding pass-through revenue | 35,730 | 22,308 | 69,384 | 44,995 | |||||||||||||||||||||
Revenue excluding cost reimbursement revenue |
|
| 116 |
|
| 101 |
|
| 228 |
|
| 213 | |||||||||||||
Operating income | 3,792 | 4,726 | 7,078 | 8,679 |
|
| 27 |
|
| 27 |
|
| 65 |
|
| 65 | |||||||||
Adjusted EBITDA | 7,002 | 5,570 | 13,946 | 11,136 |
|
| 43 |
|
| 35 |
|
| 90 |
|
| 81 | |||||||||
Margin computations |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Operating income margin | 7.7 | % | 17.7 | % | 7.2 | % | 16.2 | % |
|
| 19% |
|
| 22% |
|
| 24% |
|
| 25% | |||||
Operating income margin excluding pass-through revenue | 10.6 | % | 21.2 | % | 10.2 | % | 19.3 | % | |||||||||||||||||
Operating income margin excluding cost reimbursement revenue |
|
| 23% |
|
| 27% |
|
| 29% |
|
| 31% | |||||||||||||
Adjusted EBITDA margin | 14.2 | % | 20.8 | % | 14.2 | % | 20.7 | % |
|
| 31% |
|
| 28% |
|
| 33% |
|
| 31% | |||||
Adjusted EBITDA margin excluding pass-through revenue | 19.6 | % | 25.0 | % | 20.1 | % | 24.7 | % | |||||||||||||||||
Adjusted EBITDA margin excluding cost reimbursement revenue |
|
| 37% |
|
| 35% |
|
| 39% |
|
| 38% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vacation Ownership |
| Vacation Ownership | ||||||||
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Revenue |
| $ | 157 |
| $ | 49 |
| $ | 209 |
| $ | 98 |
Revenue excluding cost reimbursement revenue |
|
| 117 |
|
| 36 |
|
| 153 |
|
| 69 |
Operating income |
|
| — |
|
| 4 |
|
| 1 |
|
| 7 |
Adjusted EBITDA |
|
| 19 |
|
| 7 |
|
| 26 |
|
| 15 |
Margin computations |
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
| 0% |
|
| 8% |
|
| 0% |
|
| 7% |
Operating income margin excluding cost reimbursement revenue |
|
| 0% |
|
| 11% |
|
| 1% |
|
| 10% |
Adjusted EBITDA margin |
|
| 12% |
|
| 14% |
|
| 12% |
|
| 15% |
Adjusted EBITDA margin excluding cost reimbursement revenue |
|
| 16% |
|
| 19% |
|
| 17% |
|
| 22% |
The following table reconciles cash provided by operating activities to free cash flow for the six months ended June 30, 2016 and 2015 and 2014 (in thousands)millions).
|
|
|
|
|
|
|
|
| Six Months Ended | ||||
|
| June 30, | ||||
|
| 2016 |
| 2015 | ||
Net cash provided by operating activities |
| $ | 53 |
| $ | 86 |
Less: Capital expenditures |
|
| (25) |
|
| (7) |
Net changes in financing-related restricted cash |
|
| 3 |
|
| - |
Repayment activitiy related to securitizations |
|
| (9) |
|
| - |
Plus: Acquisition-related and restructuring payments |
|
| 23 |
|
| - |
Free cash flow |
| $ | 45 |
| $ | 79 |
67
| Six Months Ended June 30, | ||||||
---|---|---|---|---|---|---|---|
| 2015 | 2014 | |||||
Net cash provided by operating activities | $ | 86,438 | $ | 55,656 | |||
Less: Capital expenditures | (6,694 | ) | (9,146 | ) | |||
| | | | | | | |
Free cash flow | $ | 79,744 | $ | 46,510 | |||
| | | | | | | |
| | | | | | | |
| | | | | | | |
The following tables reconcile net income attributable to common stockholders to adjusted net income, and to adjusted earnings per share for the three and six months ended June 30, 2016 and 2015 and 2014 (in thousands)millions).
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
| Three Months Ended |
| Six Months Ended | ||||||||||||||||||||||
| Three Months Ended June 30, | Six Months Ended June 30, |
| June 30, |
| June 30, | |||||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 |
| 2016 |
| 2015 |
| 2016 |
| 2015 | |||||||||||||
Net income attributable to common stockholders | $ | 16,641 | $ | 18,360 | $ | 41,903 | $ | 42,075 |
| $ | 183 |
| $ | 17 |
| $ | 206 |
| $ | 42 | |||||
Acquisition related and restructuring costs | 276 | 1,167 | 482 | 2,406 |
|
| 12 |
|
| — |
|
| 15 |
|
| — | |||||||||
Other non-operating foreign currency remeasurements | (250 | ) | 305 | (1,326 | ) | 135 |
|
| (1) |
|
| — |
|
| (2) |
|
| (1) | |||||||
Impact of purchase accounting |
|
| 4 |
|
| — |
|
| 4 |
|
| 1 | |||||||||||||
Other special items | 171 | — | 171 | — |
|
| (197) |
|
| — |
|
| (197) |
|
| — | |||||||||
Income tax impact on adjusting items(1) | (77 | ) | (523 | ) | 264 | (920 | ) |
|
| 34 |
|
| — |
|
| 34 |
|
| 0 | ||||||
| | | | | | | | | | | | | |||||||||||||
Adjusted net income | $ | 16,761 | $ | 19,309 | $ | 41,494 | $ | 43,696 |
| $ | 35 |
| $ | 17 |
| $ | 60 |
| $ | 42 | |||||
| | | | | | | | | | | | | |||||||||||||
| | | | | | | | | |||||||||||||||||
| | | | | | | | | | | | | |||||||||||||
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Basic | $ | 0.29 | $ | 0.32 | $ | 0.73 | $ | 0.73 |
| $ | 1.89 |
| $ | 0.29 |
| $ | 2.66 |
| $ | 0.73 | |||||
Diluted | $ | 0.29 | $ | 0.32 | $ | 0.72 | $ | 0.72 |
| $ | 1.87 |
| $ | 0.29 |
| $ | 2.64 |
| $ | 0.72 | |||||
Adjusted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Basic | $ | 0.29 | $ | 0.33 | $ | 0.72 | $ | 0.76 |
| $ | 0.36 |
| $ | 0.30 |
| $ | 0.77 |
| $ | 0.73 | |||||
Diluted | $ | 0.29 | $ | 0.33 | $ | 0.72 | $ | 0.75 |
| $ | 0.36 |
| $ | 0.29 |
| $ | 0.76 |
| $ | 0.72 | |||||
Weighted average number of common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Basic | 57,453 | 57,669 | 57,316 | 57,587 |
|
| 97,091 |
|
| 57,453 |
|
| 77,355 |
|
| 57,316 | |||||||||
Diluted | 58,041 | 58,169 | 57,894 | 58,123 |
|
| 97,857 |
|
| 58,041 |
|
| 77,905 |
|
| 57,894 |
(1) | Tax rate utilized is the applicable effective tax rate respective to the period. |
The following table reconcile contract sales to sales of vacation ownership products, net, for the applicable effective tax rate respective to the period to the extent amounts are deductible.three and six months ended June 30, 2016 and 2015 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||
|
| June 30, |
| June 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Contract Sales |
| $ | 75 |
| $ | 23 |
| $ | 101 |
| $ | 51 |
Revenue recognition adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
Provision for loan losses |
|
| (3) |
|
| — |
|
| (4) |
|
| (1) |
Contract sales of unconsolidated projects |
|
| (16) |
|
| (15) |
|
| (34) |
|
| (37) |
Percentage of completion deferral |
|
| (2) |
|
| — |
|
| (2) |
|
| — |
Other items and adjustments(1) |
|
| (5) |
|
| 2 |
|
| (3) |
|
| 3 |
Sales of vacation ownership products, net |
| $ | 49 |
| $ | 10 |
| $ | 58 |
| $ | 16 |
(1) Includes adjustments for incentives, cancelled sales and closing cost revenue. Item 3. Quantitative and Qualitative Disclosures about Market Risk Foreign Currency Exchange RiskTable of Contents
We conduct business in certain foreign markets, primarily in the United Kingdom and other 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-yearyear‑over‑year comparability of operating results.
68
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. However, our foreign currency exposure related to EU VAT liabilities denominated in euros is offset by euro denominated cash balances.
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.
Operating foreign currency exchange for the three and six months ended June 30, 2015 and 20142016 resulted in a minimal net losses of $0.2 million and $0.1 million, respectively,gain, and for the three and six months ended June 30, 2015 and 2014 resulted in a minimal net loss of $0.2 million and a net gain of $0.1 million, respectively.loss. This activity is attributable to foreign currency remeasurements of operating assets and liabilities denominated in a currency other than their functional currency.
Non-operating foreign exchange net gain was $0.3$1 million infor the second quarter of 20152016 compared to a minimal net loss of $0.3 milliongain in 2014.2015. The favorable fluctuations during the current quarter were primarily driven by U.S. dollar positions held at June 30, 20152016 affected primarily by the stronger dollar compared to the British pound and the Mexican peso.
Non-operating foreign exchange net gain was $2 million for the first half of 2016 compared to a net gain of $1 million in 2015. The unfavorablefavorable fluctuations during the prior year quarterin 2016 were principallyprimarily driven by U.S. dollar positions held at June 30, 20142016 affected primarily by the weakerstronger dollar compared to the Colombian pesoBritish pound and British pound.
Non-operating foreign exchange net gain was $1.3 million in for the first half of 2015 compared to a net loss of $0.1 million in 2014.Mexican peso. The favorable fluctuations during the periodin 2015 were primarily driven by U.S. dollar positions held at June 30, 2015 affected by the stronger dollar compared to the Mexican and Colombian pesos as well as the Egyptian pound. The unfavorable fluctuations during the prior year were principally driven by U.S. dollar positions held at June 30, 2014 affected by the weaker dollar compared to the Colombian peso and British pound, partly offset by the stronger dollar compared to the Egyptian pound.
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 six months ended June 30, 20152016 would result in an approximate change to revenue of $1.7$2 million and $3.5 million,$3 millions, respectively. There have been no material quantitative changes in market risk exposures since December 31, 2014.2015.
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 as of April 2015 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'sILG’s leverage ratio. As of June 30, 2015,2016, the applicable margin was 2.25%2.00% per annum for LIBOR revolving loans and 1.25%1.00% per annum for Base Rate loans. During the second quarterAs of 2015,June 30, 2016, we had at least $90$285 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 $0.3 million and $1.5$1 million for the three and six months ended June 30, 2015, respectively.2016. 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.balances, as well as future securitization are expected to be at fixed rates of interest. The proceeds of the senior notes were used to pay down the revolving credit facility in April 2015.
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.
As required by Rule 13a-15(b)13a‑15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"“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)13a‑15(e) and 15d-15(e)15d‑15(e) under
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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'sCommission’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)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. We acquired Vistana on May 11, 2016 and are currently in the process of integrating Vistana into our internal controls over financial reporting. Based on that evaluation, and except for any changes in internal controls related to the integration of Vistana and its subsidiaries, there have been no material changes to internal controls over financial reporting during our most recently completed quarter that materially affected or are reasonably likely to materially affect internal control over financial reporting.
OTHER INFORMATION
On April 21, 2015, David Shaev Profit Sharing Account ("Plaintiff") brought suit in the Court of Chancery of the State of Delaware (Case No. 10923) against ILG, members of ILG's Board of Directors, and Wells Fargo & Company, in its capacity as Administrative Agent under ILG's Amended Credit Agreement. Plaintiff alleges that ILG's directors breached their fiduciary duties by agreeing to the Amended Credit Agreement containing what Plaintiff calls a "dead hand proxy put" change of control provision, which would provide for the acceleration of amounts outstanding under the Amended Credit Agreement in the event that a majority of the board of directors is replaced in a proxy contest. The Plaintiff alleged that this provision, (which has been present in ILG's credit facilities since the spin-off in 2008) had a coercive effect on stockholder voting for change on the board of directors and entrenched ILG's incumbent directors. The complaint further asserted that Wells Fargo aided and abetted the defendant directors in their alleged breach of fiduciary duties. In May 2015, ILG and Wells Fargo executed an amendment to ILG's Amended Credit Agreement to remove the provision at issue in the lawsuit. Since the amendment rendered the claims moot, the parties reached an agreement regarding the dismissal of the Plaintiff's claims and an award of $130,000 for Plaintiff's attorneys' fees. On July 28, 2015, the court entered a Stipulation and Order providing for dismissal of the suit, a copy of which is filed as an exhibit to this report.
Not applicable
See Part I, Item IA., "Risk“Risk Factors,"” of ILG's 2014ILG’s 2015 Annual Report on Form 10-K,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 Report except as follows:Report.
Following the issuance of the senior notes, we continue to have substantial debt and interest payment obligations that may restrict our future operations and impair our ability to meet our obligations.
We and our consolidated subsidiaries have substantial indebtedness and, as a result, significant debt service obligations. As of June 30, 2015, we had $445.0 million of total indebtedness outstanding and $496.7 million (net of any outstanding letters of credit) available for future borrowings as secured indebtedness under the credit facility. Our level of debt and these significant demands on our cash resources could have material consequences to our business, including, but not limited to:
We may not be able to generate sufficient cash to service all of our indebtedness, including the senior notes.
Our ability to make payments on and to refinance our indebtedness, including the senior notes, depends on our ability to generate cash in the future, which will be affected by general economic, financial, competitive, business and other factors beyond our control. We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us under the credit facility in amounts sufficient to enable us to service our debt obligations, pay our indebtedness, including the notes at maturity or otherwise, or to fund our other liquidity needs. If we are unable to meet our debt obligations or to fund our other liquidity needs, we may need to restructure or refinance our indebtedness, including the notes. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial condition at such time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants, which could further restrict our business operations. As a result, it may be difficult for us to obtain financing on terms that are acceptable to us, or at all. Without this financing, we could be forced to reduce or delay investments and capital expenditures, or to sell assets, seek additional capital or restructure or refinance our indebtedness, including the notes. The terms of the credit facility and the indenture governing the senior notes limit our ability to sell assets and also restrict the use of proceeds from such a sale. Moreover, substantially all of our domestic assets have been pledged to secure repayment of our indebtedness under the credit facility. In addition, we may not be able to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations, including our obligations on the notes.
Despite our substantial indebtedness, we may still be able or obligated to incur more debt, which could intensify the risks described above.
Although the terms of the credit facility and the indenture governing the senior notes contain, restrictions on the incurrence of additional indebtedness, these restrictions are subject to a number of important exceptions, and indebtedness incurred in compliance with these exceptions could be substantial. As of June 30, 2015, we had approximately $496.7 million available for additional revolving credit borrowings under the Credit Facility, including the sub-facility for letters of credit. To the extent we incur additional indebtedness, the risks discussed above will increase.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a)
(b)
(c)
by Rule 10b-18(a)10b‑18(a)(3) of the Exchange Act. All purchases were made in accordance with Rule 10b-1810b‑18 of the Exchange Act.
Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Approximate Dollar Value of Shares that May Yet Be Purchase Under the Plans or Programs(1) | |||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
April 2015 | — | — | — | $ | 25,000,000 | ||||||||
May 2015 | — | — | — | $ | 25,000,000 | ||||||||
June 2015 | — | — | — | $ | 25,000,000 |
|
|
|
|
|
|
|
|
|
|
|
Period |
|
|
|
|
| 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 |
| |
|
| Purchased |
| per Share |
| or Programs |
| or Programs(1) |
| |
April 2016 |
| — |
| — |
| — |
| $ | 25,000,000 |
|
May 2016 |
| 1,440,000 |
| $ 13.74 |
| 1,440,000 |
| $ | 80,215,543 |
|
June 2016 |
| 2,776,800 |
| $ 14.95 |
| 4,216,800 |
| $ | 38,702,454 |
|
(1)
Item 5. Other information
On August 3, 2016, ILG held its annual meeting of stockholders. The matters on which the stockholders voted, in person or by proxy, were (i) to elect thirteen directors to serve until ILG’s next annual meeting of stockholders or until their successors are duly elected and qualified, (ii) to approve amendments to the Interval Leisure Group, Inc. 2013 Stock and Incentive Compensation Plan including the performance goals contained therein, and (iii) to ratify the appointment of Ernst & Young LLP as ILG’s independent registered certified public accounting firm for the fiscal year ended December 31, 2016. The results of the voting are as follows:
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Proposal 1 – Election of Directors:
|
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|
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|
Name of Nominee |
| Votes For |
| Votes Withheld |
| Broker Non-votes |
|
|
|
|
|
|
|
Craig M. Nash |
| 106,265,956 |
| 4,952,623 |
| 7,988,874 |
David Flowers |
| 108,242,613 |
| 2,975,966 |
| 7,988,874 |
Victoria L. Freed |
| 100,319,444 |
| 10,899,135 |
| 7,988,874 |
Lizanne Galbreath |
| 110,854,482 |
| 364,097 |
| 7,988,874 |
Chad Hollingsworth |
| 110,439,992 |
| 778,587 |
| 7,988,874 |
Lewis J. Korman |
| 108,225,686 |
| 2,992,893 |
| 7,988,874 |
Thomas J. Kuhn |
| 107,795,090 |
| 3,423,489 |
| 7,988,874 |
Thomas J. McInerney |
| 105,887,274 |
| 5,331,305 |
| 7,988,874 |
Thomas P. Murphy, Jr. |
| 107,141,720 |
| 4,076,859 |
| 7,988,874 |
Stephen R. Quazzo |
| 110,798,370 |
| 420,209 |
| 7,988,874 |
Sergio D. Rivera |
| 110,849,641 |
| 368,938 |
| 7,988,874 |
Thomas O. Ryder |
| 98,139,827 |
| 13,078,752 |
| 7,988,874 |
Avy H. Stein |
| 107,130,294 |
| 4,088,285 |
| 7,988,874 |
Each of ILG’s directors was re-elected.
Proposal 2 –Items 3-5. Not applicable.
Approve amendments to the Interval Leisure Group, Inc. 2013 Stock and Incentive Compensation Plan including the performance goals contained therein
|
|
|
|
|
|
|
Votes For |
| Votes Against |
| Abstentions |
| Broker Non-votes |
105,658,884 |
| 5,486,184 |
| 73,723 |
| 7,988,874 |
The stockholders ratified Proposal 2.
Proposal 3 –Ratify the appointment of Ernst & Young LLP as ILG’s independent registered certified public accounting firm for the fiscal year ended December 31, 2015
|
|
|
|
|
|
|
Votes For |
| Votes Against |
| Abstentions |
| Broker Non-votes |
117,806,050 |
| 1,369,825 |
| 31,790 |
| 0 |
The stockholders ratified Proposal 3.
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Exhibit | Description | Location | ||||||||
3.1 | Amended and Restated Certificate of Incorporation of Interval Leisure Group, Inc. | Exhibit 3.1 to | ||||||||
3.2 | ||||||||||
Certificate of Designations, Preferences and Rights to Series A Junior Participating Preferred Stock | Exhibit 3.2 to | |||||||||
3.3 | ||||||||||
Fourth Amended and Restated | Exhibit 3.2 to | |||||||||
31.1† | ||||||||||
Certification of the Chief Executive Officer pursuant to Rule | ||||||||||
31.2† | ||||||||||
Certification of the Chief Financial Officer pursuant to Rule | ||||||||||
31.3† | ||||||||||
Certification of the Chief Accounting Officer pursuant to Rule | ||||||||||
32.1†† |
Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the | |||||
32.2†† | |||||
Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the | |||||
32.3†† | |||||
Certification of the Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the | |||||
101.INS† | |||||
XBRL Instance Document | |||||
101.SCH† | |||||
XBRL Taxonomy Extension Schema Document | |||||
101.CAL† | |||||
XBRL Taxonomy Calculation Linkbase Document | |||||
101.LAB† | |||||
XBRL Taxonomy Label Linkbase Document | |||||
101.PRE† | |||||
XBRL Taxonomy Presentation Linkbase Document | |||||
101.DEF† | |||||
XBRL Taxonomy Extension Definition Linkbase Document |
†
††
*
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.
Date: August 5, 2015
2016
INTERVAL LEISURE GROUP, INC. | |||||
By: | /s/ William L. Harvey | ||||
William L. Harvey | |||||
Chief Financial Officer | |||||
By: | /s/ John A. Galea | ||||
John A. Galea | |||||
Chief Accounting Officer |
74