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TABLE OF CONTENTS

Table 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)


ý



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


For the quarterly period ended June 30, 20152016


or


o



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

(State or other jurisdiction of

incorporation or organization)

26-259099726‑2590997

(I.R.S. Employer

Identification No.)


6262 Sunset Drive, Miami, FL

(Address of Registrant's
Registrant’s

principal executive offices)



33143

(Zip Code)

(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 filerý

Accelerated filero

Non-acceleratedNon‑accelerated filero

(Do not check if a

smaller reporting company)

Smaller reporting companyo

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.

 



TABLE OF CONTENTS



Page

PART

PART  I

Item 1.

Financial Statements

3

Item 1.

Financial Statements

Condensed Consolidated Statements of Income

3
4 

Condensed Consolidated Statements of Comprehensive Income

4
5 

Condensed Consolidated Balance Sheets

5
6 

Condensed Consolidated Statement of Equity

6
7 

Condensed Consolidated Statements of Cash Flows

7
8 

Notes to Condensed Consolidated Financial Statements

8
9 

Item 2.

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

37
42 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

67
68 

Item 4.

Controls and Procedures

68
69 


PART II





Item 1.

Legal Proceedings

69
71 

Item 1A.

Risk Factors

69
71 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

70
71 

Item 3.

Defaults Upon Senior Securities

71
 

Item 4.

Mine Safety Disclosures

71
 

Item 5.

Other Information

71
 

Item 6.

Exhibits

Exhibits

71
73 


3


Table of Contents

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)

 

 

 

 

 

 

 

 

 

 

 

 

 


 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 

    

2016

    

2015

    

2016

    

2015

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service and membership related

 

$

110

 

$

104

 

$

222

 

$

219

 

Sales of vacation ownership products, net

 

 

49

 

 

10

 

 

58

 

 

16

 

Rental and ancillary services

 

 

63

 

 

22

 

 

89

 

 

44

 

Consumer financing

 

 

11

 

 

1

 

 

13

 

 

3

 

Cost reimbursements

 

 

64

 

 

37

 

 

101

 

 

76

 

Total revenues

 

 

297

 

 

174

 

 

483

 

 

358

 

Operating costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of service and membership related sales

 

 

27

 

 

25

 

 

52

 

 

51

 

Cost of vacation ownership product sales

 

 

19

 

 

7

 

 

25

 

 

12

 

Cost sales of rental and ancillary services

 

 

42

 

 

11

 

 

56

 

 

22

 

Cost of consumer financing

 

 

3

 

 

 —

 

 

3

 

 

 —

 

Cost reimbursements

 

 

64

 

 

37

 

 

101

 

 

76

 

Royalty fee expense

 

 

5

 

 

1

 

 

7

 

 

2

 

Selling and marketing expense

 18,578 13,808 36,786 28,378 

 

 

42

 

 

19

 

 

59

 

 

37

 

General and administrative expense

 35,541 31,251 71,436 62,688 

 

 

54

 

 

36

 

 

92

 

 

71

 

Amortization expense of intangibles

 3,514 2,895 7,015 5,861 

 

 

5

 

 

3

 

 

8

 

 

7

 

Depreciation expense

 4,328 3,876 8,597 7,669 

 

 

9

 

 

4

 

 

14

 

 

8

 

Total operating costs and expenses

 

 

270

 

 

143

 

 

417

 

 

286

 

Operating income

 31,361 31,937 71,683 72,362 

 

 

27

 

 

31

 

 

66

 

 

72

 

Other income (expense):

         

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 276 55 543 99 

 

 

 —

 

 

 —

 

 

1

 

 

1

 

Interest expense

 (5,974) (1,628) (8,727) (2,952)

 

 

(6)

 

 

(6)

 

 

(12)

 

 

(9)

 

Other income (expense), net

 195 (280) 1,116 (416)

Gain on bargain purchase

 

 

197

 

 

 —

 

 

197

 

 

 —

 

Other income, net

 

 

1

 

 

1

 

 

2

 

 

1

 

Equity in earnings from unconsolidated entities

 925  2,449  

 

 

1

 

 

1

 

 

2

 

 

2

 

Total other expense, net

 (4,578) (1,853) (4,619) (3,269)

Total other income (expense), net

 

 

193

 

 

(4)

 

 

190

 

 

(5)

 

Earnings before income taxes and noncontrolling interests

 26,783 30,084 67,064 69,093 

 

 

220

 

 

27

 

 

256

 

 

67

 

Income tax provision

 (9,656) (10,690) (24,148) (25,005)

 

 

(36)

 

 

(10)

 

 

(49)

 

 

(24)

 

Net income

 17,127 19,394 42,916 44,088 

 

 

184

 

 

17

 

 

207

 

 

43

 

Net income attributable to noncontrolling interests

 (486) (1,034) (1,013) (2,013)

 

 

(1)

 

 

 —

 

 

(1)

 

 

(1)

 

Net income attributable to common stockholders

 $16,641 $18,360 $41,903 $42,075 

 

$

183

 

$

17

 

$

206

 

$

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

 

Weighted average number of shares 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

 

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.


4


Table of Contents


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)

Comprehensive income attributable to common stockholders

 $22,673 $18,981 $42,195 $43,100 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Net income

 

$

184

 

$

17

 

$

207

 

$

43

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

 

(10)

 

 

7

 

 

(14)

 

 

 —

 

Total comprehensive income, net of tax

 

 

174

 

 

24

 

 

193

 

 

43

 

Less: Net income attributable to noncontrolling interests, net of tax

 

 

(1)

 

 

 —

 

 

(1)

 

 

(1)

 

Less: Other comprehensive loss (income) attributable to noncontrolling interests

 

 

(2)

 

 

(1)

 

 

(3)

 

 

 —

 

Total comprehensive loss (income) attributable to noncontrolling interests

 

 

(3)

 

 

(1)

 

 

(4)

 

 

(1)

 

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.


5


Table of Contents


INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands,millions, except share and per share data)

 

 

 

 

 

 

 

    

June 30,

    

December 31,

 

 

2016

 

2015

 


 June 30,
2015
 December 31,
2014
 

 

 

 

 

 

 

 

ASSETS

     

 

 

 

 

 

 

 

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
(including $5 and $0 from variable interest entities, "VIEs," respectively)

 

 

71

 

 

17

 

Accounts receivable, net of allowance for doubtful accounts of $0.4 and $0.2, respectively

 

 

91

 

 

48

 

Vacation ownership mortgages receivable, net of allowance of $0 and $0, respectively (including $34 and $0 from VIEs)

 

 

90

 

 

6

 

Vacation ownership inventory

 50,614 54,061 

 

 

301

 

 

47

 

Deferred income taxes

 17,103 16,441 

Deferred membership costs

 8,740 8,716 

 

 

8

 

 

8

 

Prepaid income taxes

 17,432 22,029 

 

 

 —

 

 

13

 

Prepaid expenses and other current assets

 23,995 30,230 

Prepaid expenses and other current assets (including $1 and $0 of interest receivables from VIEs, respectively)

 

 

75

 

 

26

 

Total current assets

 296,249 284,973 

 

 

763

 

 

258

 

Vacation ownership mortgages receivable, net

 26,966 29,333 

Restricted cash and cash equivalents
(including $2 and $0 from variable interest entities, "VIEs," respectively)

 

 

3

 

 

 —

 

Vacation ownership mortgages receivable, net of allowance of $6 and $2, respectively (including $129 and $0 from VIEs)

 

 

643

 

 

26

 

Investments in unconsolidated entities

 35,891 33,486 

 

 

58

 

 

38

 

Property and equipment, net

 86,111 86,601 

 

 

561

 

 

91

 

Goodwill

 562,469 562,250 

 

 

560

 

 

561

 

Intangible assets, net

 263,039 268,875 

 

 

474

 

 

250

 

Deferred membership costs

 10,498 10,948 

 

 

9

 

 

10

 

Deferred income taxes

 99 112 

 

 

5

 

 

 —

 

Other non-current assets

 44,987 47,424 

 

 

57

 

 

45

 

TOTAL ASSETS

 $1,326,309 $1,324,002 

 

$

3,133

 

$

1,279

 

LIABILITIES AND EQUITY

     

 

 

 

 

 

 

 

LIABILITIES:

     

 

 

 

 

 

 

 

Accounts payable, trade

 $25,473 $39,082 

 

$

40

 

$

36

 

Current portion of securitized debt from VIEs

 

 

42

 

 

 —

 

Deferred revenue

 102,513 89,850 

 

 

149

 

 

86

 

Income taxes payable

 

 

11

 

 

 —

 

Accrued compensation and benefits

 30,231 28,891 

 

 

61

 

 

26

 

Member deposits

 8,461 8,222 

 

 

7

 

 

8

 

Accrued expenses and other current liabilities

 64,579 47,923 

 

 

193

 

 

56

 

Total current liabilities

 231,257 213,968 

 

 

503

 

 

212

 

Long-term debt

 434,838 484,383 

 

 

624

 

 

416

 

Securitized debt from VIEs

 

 

103

 

 

 —

 

Income taxes payable, non-current

 

 

5

 

 

 —

 

Other long-term liabilities

 18,648 18,247 

 

 

60

 

 

19

 

Deferred revenue

 93,346 93,730 

 

 

85

 

 

87

 

Deferred income taxes

 93,870 92,869 

 

 

142

 

 

79

 

Total liabilities

 871,959 903,197 

 

 

1,522

 

 

813

 

Redeemable noncontrolling interest

 699 457 

 

 

1

 

 

1

 

Commitments and contingencies

     

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

     

 

 

 

 

 

 

 

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

   

 

 

 —

 

 

 —

 

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

 

 

1

 

Treasury stock— 6,580,124 and 2,363,324 shares at cost, respectively

 

 

(96)

 

 

(35)

 

Additional paid-in capital

 206,756 201,834 

 

 

1,251

 

 

214

 

Retained earnings

 263,433 235,945 

 

 

463

 

 

281

 

Accumulated other comprehensive loss

 (19,005) (19,297)

 

 

(40)

 

 

(29)

 

Total ILG stockholders' equity

 416,748 384,043 

Total ILG stockholders’ equity

 

 

1,579

 

 

432

 

Noncontrolling interests

 36,903 36,305 

 

 

31

 

 

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.


6


Table of Contents


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)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.


7


Table of Contents


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.


8


Table of Contents


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


Table of Contents


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


Tableand shares of Contents


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


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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


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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

OPERATING SEGMENTS
Exchange and RentalVacation Ownership
Exchange reporting unitVO management reporting unit
Rental reporting unitVO sales and financing reporting unit

 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 

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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


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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.


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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.


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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 $32.0 million and the net carrying amount of $27.8 million as of June 30, 2015 is related to the application of ASC 310-30.

(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.


Table of Contents


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.

    Past-due

    ·

    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.

Non-performing—Vacation ownership mortgages receivable are considered non-performing if interest or principal is more thanin default upon reaching 120 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.

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


Table of Contents


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-TERM11ACCRUED 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 12DEFERRED 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 13SECURITIZED 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.

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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


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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


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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)
The carrying value of our revolving credit facility and senior notes include $3.5 million and $6.7 million, respectively, as of June 30, 2015, and our revolving credit facility includes $3.6 million as of December 31, 2014, of debt issuance costs which are presented as a direct reduction of the corresponding liability.

(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.

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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.

 

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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.


Table

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.


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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


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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


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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.


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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.


Table of Contents


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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months

 

Six months

 

 

Ended

 

Ended

 


 Three Months
Ended June 30,
 Six Months
Ended June 30,
 

 

June 30,

 

June 30,

 


 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

 

 

6

 

Non-cash compensation expense

 $3,412 $2,633 $6,934 $5,480 

 

$

5

 

$

3

 

$

8

 

$

7

 

 

The following table summarizes RSU activity during the six months ended June 30, 2015:2016:

 

 

 

 

 

 

 

 

    

 

    

Weighted-Average

 

 

 

 

 

Grant Date

 

 

 

Shares

 

Fair Value

 

 

 

(In millions)

 

 

 

 

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 

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.


Table of Contents


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


Table of Contents


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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30,

 

June 30,

 

 

    

2016

    

2015

    

2016

    

2015

 

Exchange and Rental:

 

 

 

 

 

 

 

 

 

 

 

 

 

Transaction revenue

 

$

50

 

$

48

 

$

108

 

$

104

 

Membership fee revenue

 

 

34

 

 

31

 

 

64

 

 

63

 

Ancillary member revenue

 

 

1

 

 

1

 

 

3

 

 

3

 

Total member revenue

 

 

85

 

 

80

 

 

175

 

 

170

 

Club rental revenue

 

 

15

 

 

3

 

 

18

 

 

5

 

Other revenue

 

 

6

 

 

6

 

 

12

 

 

13

 

Rental management revenue

 

 

10

 

 

12

 

 

23

 

 

25

 

Cost reimbursement revenue

 

 

24

 

 

24

 

 

46

 

 

47

 

Total revenues

 

 

140

 

 

125

 

 

274

 

 

260

 

Cost of service and membership related sales

 

 

16

 

 

17

 

 

32

 

 

35

 

Cost of sales of rental and ancillary services

 

 

19

 

 

9

 

 

31

 

 

18

 

Cost reimbursements

 

 

24

 

 

24

 

 

46

 

 

47

 

Total cost of sales

 

 

59

 

 

50

 

 

109

 

 

100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

81

 

 

75

 

 

165

 

 

160

 

Royalty fee expense

 

 

 —

 

 

 —

 

 

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 


Table of Contents


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 

Table of Contents


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.

(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.


Table of Contents


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


Table of Contents


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

39


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Table of Contents40


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.


GENERAL

 

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

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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:

members.

 

Interval typically enters into exclusive multi-year contracts with developers of vacation ownership resorts, pursuant to which the resort developers agree to enroll all purchasers of vacation interests at the applicable resort as members of 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


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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.


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 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.


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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.


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        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.


RESULTS OF OPERATIONS

Operating Statistics

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

2016

 

% Change

 

 

2015

 

 

2016

 

% Change

 

 

2015

Exchange and Rental

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Vacation Ownership

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 


 Three Months Ended June 30, 

 

Three Months Ended June 30,


 2015 % Change 2014 

 

2016

 

% Change

 

2015


 (Dollars in thousands)
 

 

(Dollars in millions)

Exchange and Rental

       

    

 

    

    

    

 

 

    

Transaction revenue

 $47,139 (0.4)%$47,315 

 

$

50

 

4%

 

$

48

Membership fee revenue

 31,579 (0.1)% 31,602 

 

 

34

 

10%

 

 

31

Ancillary member revenue

 1,402 (18.0)% 1,709 

 

 

1

 

0%

 

 

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

       

 

 

 

 

 

 

 

 

Resort operations revenue

 

 

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

 

 

49

 

NM

 

 

10

Consumer financing revenue

 

 

11

 

NM

 

 

1

Cost reimbursement revenue

 

 

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

 

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:


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last year.

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.


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For the six months ended June 30, 20152016 compared to the six months ended June 30, 20142015

 

 

 

 

 

 

 

 


 Six Months Ended June 30, 

 

Six Months Ended June 30,


 2015 % Change 2014 

 

2016

 

% Change

 

2015


 (Dollars in thousands)
 

 

(Dollars in millions)

Exchange and Rental

       

    

 

    

    

    

 

 

    

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

       

 

 

 

 

 

 

 

 

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:


Table of Contents48


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.

Higher transactionlower rental management revenue of $0.8$2 million, or 8% primarily relatedattributable to an increasea reduction in revenue from exchangesavailable room nights due to a net reduction in units under management at certain Aqua-Aston resorts and Getaways, as well as incremental HRC transactions. Higher transaction revenue from exchanges and Getaways was driven by an increase of 1.4% in average fee per Interval Network transaction, partly offset by a decline in transaction volume of 2.1%. Lower transaction volume is related to the shift in percentage mix of the membership base from traditional to corporate, which reduced transaction propensity.

Lower membership fee revenue of $0.3$1 million, in the period reflectsor 2%, attributed to the continued shift in the percentage mix of our membership base from traditional to corporate members as well asand the impact of less favorable terms related to the multi-yearmulti‑year renewal of certain large developer clients in thea prior year taking effect in the current period. This was

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.

Overall Interval Network averageGetaways, together with higher club rental revenue per member was $94.04 in the first half of 2015, which was relatively consistent with average revenue per member of $93.68 in the$1 million over prior year period.
year.

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.


Table of Contents49


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%

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

June 30,

 

 

2016

 

% Change

 

2015

 

 

(Dollars in millions)

Exchange and Rental

    

 

    

    

    

 

 

    

Cost of service and membership related sales

 

$

16

 

(6)%

 

$

17

Cost of sales of rental and ancillary services

 

 

19

 

111%

 

 

9

Cost reimbursements

 

 

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

 

 

 

 

 

 

 

 

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%

 

 

 

 

 

 

 

 

 

Royalty fee expense

 

$

5

 

NM

 

$

1

 

 

 

 

 

 

 

 

 

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


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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.


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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%

Table of Contents2015

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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%

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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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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%

 

 

 

 

 

 

 

 

 

 

 

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


Table of Contents

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.


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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 $ 

Table of Contents2015

 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


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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.


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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.


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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


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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


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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.


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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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Payments by Period

 


 Payments Due by Period 

 

 

 

 

Up to

 

 

 

 

 

 

 

More than

 

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

 


 (Dollars in thousands)
 

 

(Dollars in millions)

 

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

 

Debt interest(a)

 

 

177

 

 

28

 

 

57

 

 

56

 

 

36

 

Purchase obligations and other commitments(b)

 

 

106

 

 

33

 

 

50

 

 

19

 

 

4

 

Vacation ownership development commitments(c)

 

 

58

 

 

58

 

 

 —

 

 

 —

 

 

 —

 

Operating leases

 56,757 14,272 21,561 14,252 6,672 

 

 

170

 

 

20

 

 

34

 

 

26

 

 

90

 

Total contractual obligations

 $755,525 $53,915 $103,096 $169,881 $428,633 

 

$

512

 

$

139

 

$

141

 

$

101

 

$

131

 


(a)

Debt principal and projected debt interest represent principal and interest to be paid on our senior notes and revolving credit facility based on the balance outstanding as of June 30, 2015,2016, exclusive of debt issuance costs. In addition, also included are certain fees associated with our revolving credit facility based on the unused borrowing capacity and outstanding letters of credit balances, if any, as of June 30, 2015.2016. Interest on the revolving credit facility is calculated using the prevailing rates as of June 30, 2015.

2016.

(b)

Purchase obligations and other commitments primarily relate to future guaranteed purchases of rental inventory, operational support services, marketing related benefits, membership fulfillment benefits and other commitments.

(c)Vacation ownership development commitments represents our estimate of remaining costs associated with completing the phases of our vacation ownership projects currently in presales and accounted for under the percentage of completion method.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of Commitment Expiration Per Period

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts

 

Less than

 

 

 

 

 

 

 

More than

 

Other Commercial Commitments(d)

 

Committed

 

1 Year

 

1 ‑ 3 Years

 

3 ‑ 5 Years

 

5 Years

 

 

 

(In millions)

 

Guarantees, surety bonds and letters of credit

    

$

98

    

$

78

    

$

15

    

$

5

    

$

 —

 

 
 Amount of Commitment Expiration Per Period 
Other Commercial Commitments(c)
 Total
Amounts
Committed
 Less than
1 Year
 1 - 3 Years 3 - 5 Years More than
5 Years
 
 
 (In thousands)
 

Guarantees, surety bonds and letters of credit

 $83,356 $58,803 $15,445 $9,045 $63 
(c)

(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.

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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.


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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

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


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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.


part of the Vistana acquisition.



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.

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2016

 

 

Exchange

 

Vacation

 

 

 

 

 

and Rental

 

Ownership

 

Consolidated

Adjusted EBITDA

    

$

43

    

$

19

    

$

62

Non-cash compensation expense

 

 

(3)

 

 

(2)

 

 

(5)

Other special items

 

 

197

 

 

 —

 

 

197

Other non-operating income (expense), net

 

 

1

 

 

 —

 

 

1

Acquisition related and restructuring costs

 

 

(6)

 

 

(6)

 

 

(12)

Impact of purchase accounting

 

 

 —

 

 

(4)

 

 

(4)

EBITDA

 

 

232

 

 

7

 

 

239

Amortization expense of intangibles

 

 

(3)

 

 

(2)

 

 

(5)

Depreciation expense

 

 

(4)

 

 

(5)

 

 

(9)

Less: Net income attributable to noncontrolling interest

 

 

 —

 

 

1

 

 

1

Equity in earnings from unconsolidated entities

 

 

 —

 

 

(1)

 

 

(1)

Less: Other special items

 

 

(197)

 

 

 —

 

 

(197)

Less: Other non-operating expense, net

 

 

(1)

 

 

 —

 

 

(1)

Operating income

 

$

27

 

$

 —

 

 

27

Interest income

 

 

 

 

 

 

 

 

 —

Interest expense

 

 

 

 

 

 

 

 

(6)

Other non-operating income, net

 

 

 

 

 

 

 

 

1

Equity in earnings from unconsolidated entities

 

 

 

 

 

 

 

 

1

Other special items

 

 

 

 

 

 

 

 

197

Income tax provision

 

 

 

 

 

 

 

 

(36)

Net income

 

 

 

 

 

 

 

 

184

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

(1)

Net income attributable to common stockholders

 

 

 

 

 

 

 

$

183

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2015

 

 

Exchange

 

Vacation

 

 

 

 

 

and Rental

 

Ownership

 

Consolidated

Adjusted EBITDA

    

$

35

 

$

7

 

$

42

Non-cash compensation expense

 

 

(2)

 

 

(1)

 

 

(3)

Other non‑operating income (expense), net

 

 

1

 

 

 —

 

 

1

EBITDA

 

 

34

 

 

6

 

 

40

Amortization expense of intangibles

 

 

(2)

 

 

(1)

 

 

(3)

Depreciation expense

 

 

(4)

 

 

 —

 

 

(4)

Less: Net income attributable to noncontrolling interest

 

 

 —

 

 

 —

 

 

 —

Equity in earnings from unconsolidated entities

 

 

 —

 

 

(1)

 

 

(1)

Less: Other non-operating income (expense), net

 

 

(1)

 

 

 —

 

 

(1)

Operating income

 

$

27

 

$

4

 

 

31

Interest income

 

 

 

 

 

 

 

 

 —

Interest expense

 

 

 

 

 

 

 

 

(6)

Other non-operating income, net

 

 

 

 

 

 

 

 

1

Equity in earnings from unconsolidated entities

 

 

 

 

 

 

 

 

1

Income tax provision

 

 

 

 

 

 

 

 

(10)

Net income

 

 

 

 

 

 

 

 

17

Net income attributable to noncontrolling interest

 

 

 

 

 

 

 

 

 —

Net income attributable to common stockholders

 

 

 

 

 

 

 

$

17

65

 
 Three Months Ended June 30, 2015 
 
 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)

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 


Table of Contents


 

 

 

 

 

 

 

 

 

 

 

 

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 

Table of Contents


 
 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%

Table of Contents


 

 

 

 

 

 

 

 

 

 

 

 

 

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)

(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


Table of Contents

(1)

Includes adjustments for incentives, cancelled sales and closing cost revenue.

Item 3.  Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

 

We conduct business in certain foreign markets, primarily in the United Kingdom 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


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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

69


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.


70


Table of Contents

PART II

OTHER INFORMATION

Item 1.  Legal Proceedings

 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

Item 1A.  Risk Factors

 

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:


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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


Table of Contents

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)

In February 2015, we announced that our Board of Directors had authorized the repurchase of up to $25 million of our common stock. In May 2016, we announced that our Board of Directors had increased the authorization for the repurchase of up to $100 million of our common stock. There is no time restriction on this authorization and repurchases may be made in the open-marketopen‑market or through privately negotiated transactions.

Items 3‑4. Not applicable

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:

71


Proposal 1 – Election of Directors:  

 

 

 

 

 

 

 

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.

72


Item 6.  Exhibits

Exhibit

Number

Description

Location

3.1 
3.1

Amended and Restated Certificate of Incorporation of Interval Leisure Group, Inc.

Exhibit 3.1 to ILG'sILG’s Current Report on Form 8-K,8‑K, filed on August 25, 2008.2008

3.2 

3.2

Certificate of Designations, Preferences and Rights to Series A Junior Participating Preferred Stock

Exhibit 3.2 to ILG'sILG’s Quarterly Report on Form 10-Q,10‑Q, filed on August 11, 2009.2009

3.3 

3.3

Fourth Amended and Restated By-LawsBy‑Laws of Interval Leisure Group, Inc.

Exhibit 3.2 to ILG'sILG’s Current Report on Form 8-K,8‑K, filed on December 12, 2014.2014

31.1†

10.1Interval Leisure Group, Inc. Non-Employee Director Stock Compensation Plan*
31.1

Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)13a‑14(a) or Rule 15d-14(a)15d‑14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-OxleySarbanes‑Oxley Act

31.2†

31.2

Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)13a‑14(a) or Rule 15d-14(a)15d‑14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-OxleySarbanes‑Oxley Act

31.3†

31.3

Certification of the Chief Accounting Officer pursuant to Rule 13a-14(a)13a‑14(a) or Rule 15d-14(a)15d‑14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-OxleySarbanes‑Oxley Act

32.1††



Table of Contents

Exhibit
Number
DescriptionLocation
32.1††Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes‑Oxley Act

32.2††

32.2††

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

32.3††

32.3††

Certification of the Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-OxleySarbanes‑Oxley Act

101.INS†

99.1Stipulation and Order of Dismissal, dated July 28, 2015
101.INS

XBRL Instance Document

101.SCH†

101.SCH

XBRL Taxonomy Extension Schema Document

101.CAL†

101.CAL

XBRL Taxonomy Calculation Linkbase Document

101.LAB†

101.LAB

XBRL Taxonomy Label Linkbase Document

101.PRE†

101.PRE

XBRL Taxonomy Presentation Linkbase Document

101.DEF†

101.DEF

XBRL Taxonomy Extension Definition Linkbase Document


Filed herewith.

††

Furnished herewith.

*

Reflects management contracts and management and director compensatory plans.


SIGNATURES
SIGNATURES

 

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:


By:


/s/ WILLIAM L. HARVEY


William L. Harvey

William L. Harvey

Chief Financial Officer




By:


By:


/s/ JOHN A. GALEA


John A. Galea

John A. Galea

Chief Accounting Officer



74