As filed with the Securities and Exchange Commission on August 5,November 9, 2016
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10‑Q
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(Mark One) |
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended | |
or | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File No. 1‑34062
INTERVAL LEISURE GROUP, INC.ILG, Inc.
(Exact name of registrant as specified in its charter)
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Delaware | 26‑2590997 |
6262 Sunset Drive, Miami, FL | 33143 |
(305) 666‑1861
(Registrant’s telephone number, including area code)
Interval Leisure Group, Inc.
(Former name or former address, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer or a smaller reporting company. See definition of “accelerated filer,” “large accelerated filer” and “smaller reporting company” in Rule 12b‑2 of the Exchange Act. (Check one):
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Large accelerated filer ☒ | Accelerated filer ☐ | Non‑accelerated filer ☐ | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act). Yes ☐ No ☒
As of August 2,November 4, 2016, 125,130,750133,522,270 shares of the registrant’s common stock were outstanding.
TABLE OF CONTENTS
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| Page |
PART I |
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4 | ||
| 4 | |
| 5 | |
| 6 | |
| 7 | |
| 8 | |
| 9 | |
Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||
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3
Item 1. Consolidated Financial Statements
INTERVAL LEISURE GROUP,ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions, except per share data)
(Unaudited)
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| Three Months Ended |
| Six Months Ended |
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| Three Months Ended |
| Nine Months Ended |
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| June 30, |
| June 30, |
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| September 30, |
| September 30, |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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Revenues: |
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Service and membership related |
| $ | 110 |
| $ | 104 |
| $ | 222 |
| $ | 219 |
|
| $ | 119 |
| $ | 108 |
| $ | 340 |
| $ | 327 |
|
Sales of vacation ownership products, net |
|
| 49 |
|
| 10 |
|
| 58 |
|
| 16 |
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|
| 96 |
|
| 7 |
|
| 154 |
|
| 21 |
|
Rental and ancillary services |
|
| 63 |
|
| 22 |
|
| 89 |
|
| 44 |
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|
| 92 |
|
| 20 |
|
| 181 |
|
| 66 |
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Consumer financing |
|
| 11 |
|
| 1 |
|
| 13 |
|
| 3 |
|
|
| 23 |
|
| 1 |
|
| 37 |
|
| 4 |
|
Cost reimbursements |
|
| 64 |
|
| 37 |
|
| 101 |
|
| 76 |
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|
| 88 |
|
| 38 |
|
| 189 |
|
| 114 |
|
Total revenues |
|
| 297 |
|
| 174 |
|
| 483 |
|
| 358 |
|
|
| 418 |
|
| 174 |
|
| 901 |
|
| 532 |
|
Operating costs and expenses: |
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Cost of service and membership related sales |
|
| 27 |
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| 25 |
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| 52 |
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| 51 |
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| 30 |
|
| 26 |
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| 82 |
|
| 77 |
|
Cost of vacation ownership product sales |
|
| 19 |
|
| 7 |
|
| 25 |
|
| 12 |
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|
| 31 |
|
| 1 |
|
| 56 |
|
| 13 |
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Cost sales of rental and ancillary services |
|
| 42 |
|
| 11 |
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| 56 |
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| 22 |
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Cost of sales of rental and ancillary services |
|
| 67 |
|
| 9 |
|
| 123 |
|
| 31 |
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Cost of consumer financing |
|
| 3 |
|
| — |
|
| 3 |
|
| — |
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|
| 4 |
|
| — |
|
| 7 |
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| — |
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Cost reimbursements |
|
| 64 |
|
| 37 |
|
| 101 |
|
| 76 |
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|
| 88 |
|
| 38 |
|
| 189 |
|
| 114 |
|
Royalty fee expense |
|
| 5 |
|
| 1 |
|
| 7 |
|
| 2 |
|
|
| 9 |
|
| 1 |
|
| 16 |
|
| 3 |
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Selling and marketing expense |
|
| 42 |
|
| 19 |
|
| 59 |
|
| 37 |
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|
| 66 |
|
| 18 |
|
| 125 |
|
| 55 |
|
General and administrative expense |
|
| 54 |
|
| 36 |
|
| 92 |
|
| 71 |
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|
| 56 |
|
| 40 |
|
| 148 |
|
| 111 |
|
Amortization expense of intangibles |
|
| 5 |
|
| 3 |
|
| 8 |
|
| 7 |
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|
| 6 |
|
| 4 |
|
| 14 |
|
| 10 |
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Depreciation expense |
|
| 9 |
|
| 4 |
|
| 14 |
|
| 8 |
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|
| 14 |
|
| 4 |
|
| 28 |
|
| 13 |
|
Total operating costs and expenses |
|
| 270 |
|
| 143 |
|
| 417 |
|
| 286 |
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|
| 371 |
|
| 141 |
|
| 788 |
|
| 427 |
|
Operating income |
|
| 27 |
|
| 31 |
|
| 66 |
|
| 72 |
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|
| 47 |
|
| 33 |
|
| 113 |
|
| 105 |
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Other income (expense): |
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Interest income |
|
| — |
|
| — |
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| 1 |
|
| 1 |
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|
| — |
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| — |
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| 1 |
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| 1 |
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Interest expense |
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| (6) |
|
| (6) |
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| (12) |
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| (9) |
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| (6) |
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| (6) |
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| (18) |
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| (15) |
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Gain on bargain purchase |
|
| 197 |
|
| — |
|
| 197 |
|
| — |
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| (9) |
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| — |
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| 188 |
|
| — |
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Other income, net |
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| 1 |
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| 1 |
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| 2 |
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| 1 |
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Other income (loss), net |
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| (4) |
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| 3 |
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| (2) |
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| 3 |
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Equity in earnings from unconsolidated entities |
|
| 1 |
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| 1 |
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| 2 |
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| 2 |
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| 2 |
|
| 1 |
|
| 4 |
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| 4 |
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Total other income (expense), net |
|
| 193 |
|
| (4) |
|
| 190 |
|
| (5) |
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| (17) |
|
| (2) |
|
| 173 |
|
| (7) |
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Earnings before income taxes and noncontrolling interests |
|
| 220 |
|
| 27 |
|
| 256 |
|
| 67 |
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|
| 30 |
|
| 31 |
|
| 286 |
|
| 98 |
|
Income tax provision |
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| (36) |
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| (10) |
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| (49) |
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| (24) |
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Income tax (provision) benefit |
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| 2 |
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| (11) |
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| (46) |
|
| (35) |
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Net income |
|
| 184 |
|
| 17 |
|
| 207 |
|
| 43 |
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|
| 32 |
|
| 20 |
|
| 240 |
|
| 63 |
|
Net income attributable to noncontrolling interests |
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| (1) |
|
| — |
|
| (1) |
|
| (1) |
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|
| — |
|
| (1) |
|
| (2) |
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| (2) |
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Net income attributable to common stockholders |
| $ | 183 |
| $ | 17 |
| $ | 206 |
| $ | 42 |
|
| $ | 32 |
| $ | 19 |
| $ | 238 |
| $ | 61 |
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Earnings per share attributable to common stockholders: |
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Basic |
| $ | 1.89 |
| $ | 0.29 |
| $ | 2.66 |
| $ | 0.73 |
|
| $ | 0.26 |
| $ | 0.33 |
| $ | 2.55 |
| $ | 1.06 |
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Diluted |
| $ | 1.87 |
| $ | 0.29 |
| $ | 2.64 |
| $ | 0.72 |
|
| $ | 0.25 |
| $ | 0.33 |
| $ | 2.53 |
| $ | 1.05 |
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Weighted average number of shares of common stock outstanding: |
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Weighted average number of shares of common stock outstanding (in 000's): |
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Basic |
|
| 97,091 |
|
| 57,453 |
|
| 77,355 |
|
| 57,316 |
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|
| 124,762 |
|
| 57,477 |
|
| 93,157 |
|
| 57,369 |
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Diluted |
|
| 97,857 |
|
| 58,041 |
|
| 77,905 |
|
| 57,894 |
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|
| 125,763 |
|
| 58,055 |
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| 93,858 |
|
| 57,948 |
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Dividends declared per share of common stock |
| $ | 0.12 |
| $ | 0.12 |
| $ | 0.24 |
| $ | 0.24 |
|
| $ | 0.12 |
| $ | 0.12 |
| $ | 0.36 |
| $ | 0.36 |
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The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
4
INTERVAL LEISURE GROUP,
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
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| ||||||||
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| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| Nine Months Ended |
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|
| June 30, |
| June 30, |
|
| September 30, |
| September 30, |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Net income |
| $ | 184 |
| $ | 17 |
| $ | 207 |
| $ | 43 |
|
| $ | 32 |
| $ | 20 |
| $ | 240 |
| $ | 63 |
|
Other comprehensive loss, net of tax: |
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Foreign currency translation adjustments |
|
| (10) |
|
| 7 |
|
| (14) |
|
| — |
|
|
| (6) |
|
| (7) |
|
| (20) |
|
| (7) |
|
Total comprehensive income, net of tax |
|
| 174 |
|
| 24 |
|
| 193 |
|
| 43 |
|
|
| 26 |
|
| 13 |
|
| 220 |
|
| 56 |
|
Less: Net income attributable to noncontrolling interests, net of tax |
|
| (1) |
|
| — |
|
| (1) |
|
| (1) |
|
|
| — |
|
| (1) |
|
| (2) |
|
| (2) |
|
Less: Other comprehensive loss (income) attributable to noncontrolling interests |
|
| (2) |
|
| (1) |
|
| (3) |
|
| — |
| |||||||||||||
Less: Other comprehensive loss attributable to noncontrolling interests |
|
| 1 |
|
| 1 |
|
| 4 |
|
| 1 |
| |||||||||||||
Total comprehensive loss (income) attributable to noncontrolling interests |
|
| (3) |
|
| (1) |
|
| (4) |
|
| (1) |
|
|
| 1 |
|
| — |
|
| 2 |
|
| (1) |
|
Comprehensive income attributable to common stockholders |
| $ | 171 |
| $ | 23 |
| $ | 189 |
| $ | 42 |
|
| $ | 27 |
| $ | 13 |
| $ | 222 |
| $ | 55 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
5
INTERVAL LEISURE GROUP,
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share and per share data)
(Unaudited)
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|
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| June 30, |
| December 31, |
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| September 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
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| 2016 |
| 2015 |
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ASSETS |
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Cash and cash equivalents |
| $ | 127 |
| $ | 93 |
|
| $ | 158 |
| $ | 93 |
|
Restricted cash and cash equivalents |
|
| 71 |
|
| 17 |
| |||||||
Restricted cash and cash equivalents |
|
| 102 |
|
| 17 |
| |||||||
Accounts receivable, net of allowance for doubtful accounts of $0.4 and $0.2, respectively |
|
| 91 |
|
| 48 |
|
|
| 92 |
|
| 48 |
|
Vacation ownership mortgages receivable, net of allowance of $0 and $0, respectively (including $34 and $0 from VIEs) |
|
| 90 |
|
| 6 |
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Vacation ownership mortgages receivable, net of allowance of $1 and $0, respectively (including a net $59 and $0 in VIEs, respectively) |
|
| 86 |
|
| 6 |
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Vacation ownership inventory |
|
| 301 |
|
| 47 |
|
|
| 342 |
|
| 47 |
|
Deferred membership costs |
|
| 8 |
|
| 8 |
|
|
| 8 |
|
| 8 |
|
Prepaid income taxes |
|
| — |
|
| 13 |
|
|
| — |
|
| 13 |
|
Prepaid expenses and other current assets (including $1 and $0 of interest receivables from VIEs, respectively) |
|
| 75 |
|
| 26 |
| |||||||
Prepaid expenses and other current assets (including $3 and $0 of interest receivables in VIEs, respectively) |
|
| 66 |
|
| 26 |
| |||||||
Total current assets |
|
| 763 |
|
| 258 |
|
|
| 854 |
|
| 258 |
|
Restricted cash and cash equivalents |
|
| 3 |
|
| — |
| |||||||
Vacation ownership mortgages receivable, net of allowance of $6 and $2, respectively (including $129 and $0 from VIEs) |
|
| 643 |
|
| 26 |
| |||||||
Restricted cash and cash equivalents |
|
| 4 |
|
| — |
| |||||||
Vacation ownership mortgages receivable, net of allowance of $14 and $2, respectively (including a net $408 and $0 in VIEs, respectively) |
|
| 650 |
|
| 26 |
| |||||||
Investments in unconsolidated entities |
|
| 58 |
|
| 38 |
|
|
| 59 |
|
| 38 |
|
Property and equipment, net |
|
| 561 |
|
| 91 |
|
|
| 568 |
|
| 91 |
|
Goodwill |
|
| 560 |
|
| 561 |
|
|
| 559 |
|
| 561 |
|
Intangible assets, net |
|
| 474 |
|
| 250 |
|
|
| 466 |
|
| 250 |
|
Deferred membership costs |
|
| 9 |
|
| 10 |
|
|
| 9 |
|
| 10 |
|
Deferred income taxes |
|
| 5 |
|
| — |
|
|
| 5 |
|
| — |
|
Other non-current assets |
|
| 57 |
|
| 45 |
|
|
| 58 |
|
| 45 |
|
TOTAL ASSETS |
| $ | 3,133 |
| $ | 1,279 |
|
| $ | 3,232 |
| $ | 1,279 |
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LIABILITIES AND EQUITY |
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LIABILITIES: |
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Accounts payable, trade |
| $ | 40 |
| $ | 36 |
|
| $ | 60 |
| $ | 36 |
|
Current portion of securitized debt from VIEs |
|
| 42 |
|
| — |
|
|
| 123 |
|
| — |
|
Deferred revenue |
|
| 149 |
|
| 86 |
|
|
| 142 |
|
| 86 |
|
Income taxes payable |
|
| 11 |
|
| — |
|
|
| 3 |
|
| — |
|
Accrued compensation and benefits |
|
| 61 |
|
| 26 |
|
|
| 72 |
|
| 26 |
|
Member deposits |
|
| 7 |
|
| 8 |
|
|
| 7 |
|
| 8 |
|
Accrued expenses and other current liabilities |
|
| 193 |
|
| 56 |
| |||||||
Accrued expenses and other current liabilities (including a net $1 and $0 of interest payables in VIEs, respectively) |
|
| 216 |
|
| 56 |
| |||||||
Total current liabilities |
|
| 503 |
|
| 212 |
|
|
| 623 |
|
| 212 |
|
Long-term debt |
|
| 624 |
|
| 416 |
|
|
| 415 |
|
| 416 |
|
Securitized debt from VIEs |
|
| 103 |
|
| — |
|
|
| 344 |
|
| — |
|
Income taxes payable, non-current |
|
| 5 |
|
| — |
|
|
| 5 |
|
| — |
|
Other long-term liabilities |
|
| 60 |
|
| 19 |
|
|
| 50 |
|
| 19 |
|
Deferred revenue |
|
| 85 |
|
| 87 |
|
|
| 83 |
|
| 87 |
|
Deferred income taxes |
|
| 142 |
|
| 79 |
|
|
| 124 |
|
| 79 |
|
Total liabilities |
|
| 1,522 |
|
| 813 |
|
|
| 1,644 |
|
| 813 |
|
Redeemable noncontrolling interest |
|
| 1 |
|
| 1 |
|
|
| 1 |
|
| 1 |
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY: |
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Preferred stock—authorized 25,000,000 shares, of which 100,000 shares are designated Series A Junior Participating Preferred Stock; $0.01 par value; none issued and outstanding |
|
| — |
|
| — |
|
|
| — |
|
| — |
|
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) |
| |||||||
Common stock—authorized 300,000,000 shares; $0.01 par value; issued 133,522,339 and 59,853,933 shares, respectively |
|
| 1 |
|
| 1 |
| |||||||
Treasury stock— 8,810,081 and 2,363,324 shares at cost, respectively |
|
| (135) |
|
| (35) |
| |||||||
Additional paid-in capital |
|
| 1,251 |
|
| 214 |
|
|
| 1,257 |
|
| 214 |
|
Retained earnings |
|
| 463 |
|
| 281 |
|
|
| 480 |
|
| 281 |
|
Accumulated other comprehensive loss |
|
| (40) |
|
| (29) |
|
|
| (45) |
|
| (29) |
|
Total ILG stockholders’ equity |
|
| 1,579 |
|
| 432 |
|
|
| 1,558 |
|
| 432 |
|
Noncontrolling interests |
|
| 31 |
|
| 33 |
|
|
| 29 |
|
| 33 |
|
Total equity |
|
| 1,610 |
|
| 465 |
|
|
| 1,587 |
|
| 465 |
|
TOTAL LIABILITIES AND EQUITY |
| $ | 3,133 |
| $ | 1,279 |
|
| $ | 3,232 |
| $ | 1,279 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
6
INTERVAL LEISURE GROUP,
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(In millions, except share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
| ||
|
|
|
|
|
|
| Total ILG |
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
|
|
|
|
|
|
| Total ILG |
|
|
|
|
|
|
|
|
|
|
| Additional |
|
|
|
| Other |
| ||||||||
|
| Total |
| Noncontrolling |
| Stockholders’ |
| Common Stock |
| Treasury Stock |
| Paid-in |
| Retained |
| Comprehensive |
|
| Total |
| Noncontrolling |
| Stockholders’ |
| Common Stock |
| Treasury Stock |
| Paid-in |
| Retained |
| Comprehensive |
| ||||||||||||||||||||||||
|
| Equity |
| Interests |
| Equity |
| Amount |
| Shares |
| Amount |
| Shares |
| Capital |
| Earnings |
| Loss |
|
| 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) |
|
| $ | 465 |
| $ | 33 |
| $ | 432 |
| $ | 1 |
| 59,853,933 |
| $ | (35) |
| 2,363,324 |
| $ | 214 |
| $ | 281 |
| $ | (29) |
|
Net income |
|
| 207 |
|
| 1 |
|
| 206 |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 206 |
|
|
|
|
|
| 240 |
|
| 2 |
|
| 238 |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| 238 |
|
|
|
|
Other comprehensive loss, net of tax |
|
| (14) |
|
| (3) |
|
| (11) |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (11) |
|
|
| (20) |
|
| (4) |
|
| (16) |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (16) |
|
Non-cash compensation expense |
|
| 8 |
|
| — |
|
| 8 |
|
| — |
| — |
|
| — |
| — |
|
| 8 |
|
| — |
|
| — |
|
|
| 14 |
|
| — |
|
| 14 |
|
| — |
| — |
|
| — |
| — |
|
| 14 |
|
| — |
|
| — |
|
Dividends paid to noncontrolling interest |
|
| (2) |
|
| (2) |
|
| — |
|
| — |
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
| |||||||||||||||||||||||||||||
Issuance of common stock upon vesting of RSUs, net of withholding taxes |
|
| (1) |
|
| — |
|
| (1) |
|
| — |
| 609,972 |
|
| — |
| — |
|
| (1) |
|
| — |
|
| — |
|
|
| (1) |
|
| — |
|
| (1) |
|
| — |
| 622,268 |
|
| — |
| — |
|
| (1) |
|
| — |
|
| — |
|
Issuance of restricted stock for converted shares in connection with the acquisition of Vistana |
|
| — |
|
| — |
|
| — |
|
| — |
| 705,794 |
|
| — |
| — |
|
| — |
|
| ��— |
|
| — |
|
|
| — |
|
| — |
|
| — |
|
| — |
| 674,169 |
|
| — |
| — |
|
| — |
|
| — |
|
| — |
|
Fair value of restricted stock awards attributable to precombination services converted in connection with the Vistana acquisition |
|
| 2 |
|
| — |
|
| 2 |
|
| — |
| — |
|
| — |
| — |
|
| 2 |
|
| — |
|
| — |
|
|
| 2 |
|
| — |
|
| 2 |
|
| — |
| — |
|
| — |
| — |
|
| 2 |
|
| — |
|
| — |
|
Issuance of common stock in connection with the Vistana acquisition |
|
| 1,029 |
|
| — |
|
| 1,029 |
|
| — |
| 72,371,969 |
|
| — |
| — |
|
| 1,029 |
|
| — |
|
| — |
|
|
| 1,029 |
|
| — |
|
| 1,029 |
|
| — |
| 72,371,969 |
|
| — |
| — |
|
| 1,029 |
|
| — |
|
| — |
|
Change in excess tax benefits from stock-based awards |
|
| (2) |
|
| — |
|
| (2) |
|
| — |
| — |
|
| — |
| — |
|
| (2) |
|
| — |
|
| — |
|
|
| (2) |
|
| — |
|
| (2) |
|
| — |
| — |
|
| — |
| — |
|
| (2) |
|
| — |
|
| — |
|
Dividends declared on common stock |
|
| (23) |
|
| — |
|
| (23) |
|
| — |
| — |
|
| — |
| — |
|
| 1 |
|
| (24) |
|
| — |
|
|
| (38) |
|
| — |
|
| (38) |
|
| — |
| — |
|
| — |
| — |
|
| 1 |
|
| (39) |
|
| — |
|
Treasury stock purchases |
|
| (61) |
|
| — |
|
| (61) |
|
| — |
| — |
|
| (61) |
| 4,216,800 |
|
| — |
|
| — |
|
| — |
|
|
| (100) |
|
| — |
|
| (100) |
|
| — |
| — |
|
| (100) |
| 6,446,757 |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||
Balance as of June 30, 2016 |
| $ | 1,610 |
| $ | 31 |
| $ | 1,579 |
| $ | 1 |
| 133,541,668 |
| $ | (96) |
| 6,580,124 |
| $ | 1,251 |
| $ | 463 |
| $ | (40) |
| |||||||||||||||||||||||||||||
Balance as of September 30, 2016 |
| $ | 1,587 |
| $ | 29 |
| $ | 1,558 |
| $ | 1 |
| 133,522,339 |
| $ | (135) |
| 8,810,081 |
| $ | 1,257 |
| $ | 480 |
| $ | (45) |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of this statement.
7
INTERVAL LEISURE GROUP,
ILG, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
|
| Nine Months Ended |
| ||||||||
|
| June 30, |
|
| September 30, |
| ||||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||
| (In millions) |
|
|
| ||||||||||
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 207 |
| $ | 43 |
|
| $ | 240 |
| $ | 63 |
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization expense of intangibles |
|
| 8 |
|
| 7 |
|
|
| 14 |
|
| 10 |
|
Amortization of debt issuance costs |
|
| 1 |
|
| 1 |
| |||||||
Depreciation expense |
|
| 14 |
|
| 8 |
|
|
| 28 |
|
| 13 |
|
Provision for loan losses |
|
| 4 |
|
| 1 |
|
|
| 12 |
|
| 2 |
|
Accretion of mortgages receivable |
|
| 2 |
|
| — |
| |||||||
Non-cash compensation expense |
|
| 8 |
|
| 7 |
|
|
| 13 |
|
| 10 |
|
Deferred income taxes |
|
| (3) |
|
| — |
|
|
| (26) |
|
| 1 |
|
Equity in earnings from unconsolidated entities |
|
| (2) |
|
| (2) |
|
|
| (4) |
|
| (4) |
|
Excess tax benefits from stock-based awards |
|
| — |
|
| (2) |
| |||||||
Gain on bargain purchase of Vistana acquisition |
|
| (197) |
|
| — |
|
|
| (188) |
|
| — |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash |
|
| 2 |
|
| 4 |
|
|
| (2) |
|
| 4 |
|
Accounts receivable |
|
| (4) |
|
| (18) |
|
|
| (6) |
|
| (8) |
|
Vacation ownership mortgages receivable |
|
| 2 |
|
| 2 |
|
|
| (12) |
|
| 2 |
|
Vacation ownership inventory |
|
| (24) |
|
| 3 |
|
|
| (63) |
|
| 5 |
|
Prepaid expenses and other current assets |
|
| (4) |
|
| 6 |
|
|
| 4 |
|
| 8 |
|
Prepaid income taxes and income taxes payable |
|
| 21 |
|
| 6 |
|
|
| 13 |
|
| 15 |
|
Accounts payable and other current liabilities |
|
| 14 |
|
| 3 |
|
|
| 50 |
|
| 5 |
|
Deferred income |
|
| 5 |
|
| 13 |
|
|
| (3) |
|
| 4 |
|
Other, net |
|
| (1) |
|
| 4 |
|
|
| 4 |
|
| 5 |
|
Net cash provided by operating activities |
|
| 53 |
|
| 86 |
|
|
| 74 |
|
| 135 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisitions, net of cash acquired |
|
| (77) |
|
| — |
|
|
| (77) |
|
| — |
|
Investment in unconsoliated entity |
|
| (5) |
|
|
|
| |||||||
Investment in unconsolidated entity |
|
| (5) |
|
| — |
| |||||||
Capital expenditures |
|
| (25) |
|
| (7) |
|
|
| (42) |
|
| (13) |
|
Purchases of trading investments |
|
| (2) |
|
| — |
|
|
| (2) |
|
| — |
|
Investment in financing receivables |
|
| (2) |
|
| — |
|
|
| (2) |
|
| (1) |
|
Net cash used in investing activities |
|
| (111) |
|
| (7) |
|
|
| (128) |
|
| (14) |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of senior notes |
|
| — |
|
| 350 |
|
|
| — |
|
| 350 |
|
Borrowings on revolving credit facility, net |
|
| 210 |
|
| (393) |
| |||||||
Payments on revolving credit facility, net |
|
| — |
|
| (413) |
| |||||||
Payments of debt issuance costs |
|
| (2) |
|
| (7) |
|
|
| (7) |
|
| (7) |
|
Proceeds from securitized debt |
|
| 375 |
|
| — |
| |||||||
Payments on securitized debt |
|
| (9) |
|
| — |
|
|
| (56) |
|
| — |
|
Decrease in restricted cash |
|
| 3 |
|
| — |
| |||||||
Increase in restricted cash |
|
| (26) |
|
| — |
| |||||||
Payment to former Vistana owner for subsidiary financing obligation |
|
| (24) |
|
| — |
|
|
| (24) |
|
| — |
|
Purchases of treasury stock |
|
| (56) |
|
| — |
|
|
| (100) |
|
| — |
|
Dividend payments to stockholders |
|
| (23) |
|
| (14) |
|
|
| (37) |
|
| (21) |
|
Dividend payments to noncontrolling interest |
|
| (2) |
|
| (3) |
| |||||||
Withholding taxes on vesting of restricted stock units |
|
| (1) |
|
| (4) |
|
|
| (2) |
|
| (4) |
|
Excess tax benefits from stock-based awards |
|
| — |
|
| 2 |
|
|
| — |
|
| 2 |
|
Net cash provided by (used in) financing activities |
|
| 98 |
|
| (66) |
|
|
| 121 |
|
| (96) |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| (6) |
|
| (2) |
|
|
| (2) |
|
| (5) |
|
Net increase in cash and cash equivalents |
|
| 34 |
|
| 11 |
|
|
| 65 |
|
| 20 |
|
Cash and cash equivalents at beginning of period |
|
| 93 |
|
| 81 |
|
|
| 93 |
|
| 81 |
|
Cash and cash equivalents at end of period |
| $ | 127 |
| $ | 92 |
|
| $ | 158 |
| $ | 101 |
|
Supplemental disclosures of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of stock in connection with Vistana acquisition |
| $ | 1,031 |
| $ | — |
|
| $ | 1,031 |
| $ | — |
|
Interest, net of amounts capitalized |
| $ | 12 |
| $ | 3 |
| |||||||
Income taxes, net of refunds |
| $ | 31 |
| $ | 18 |
| |||||||
Interest paid, net of amounts capitalized |
| $ | 14 |
| $ | 5 |
| |||||||
Income taxes paid, net of refunds |
| $ | 60 |
| $ | 19 |
|
The accompanying Notes to Condensed Consolidated Financial Statements are an integral part of these statements.
8
INTERVAL LEISURE GROUP,ILG, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNESEPTEMBER 30, 2016
(Unaudited)
NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION
Organization
ILG, Inc., (formerly known as Interval Leisure Group, Inc.), or ILG, is a leading provider of professionally delivered vacation experiences and the exclusive global licensee for the Hyatt®, Westin® and Sheraton® brands in vacation ownership. We operate in the following two segments: Exchange and Rental, and Vacation 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 rentals, working with resort developers and operating vacation rental properties. The Exchange and Rental operating segment consists of Interval International (referred to as Interval), the Vistana Signature Network, the Hyatt Residence Club, the Trading Places International (known as TPI) operated exchange business, and Aqua-Aston Holdings, Inc. (referred to as Aqua-Aston).
Vacation Ownership engages in sales, marketing, and financing of vacation ownership interests (VOIs); the management of vacation ownership resorts; and related services to owners and associations. The Vacation Ownership operating segment consists of the VOI sales and financing business of Vistana Signature Experiences (Vistana) and Hyatt Vacation Ownership (HVO) as well as the management related lines of business of Vistana, HVO, Vacation Resorts International (or VRI), TPI, and 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.""IILG" and now trades under “ILG.”
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”) for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of ILG’s management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not indicative of the results that may be expected for a full year.
The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2015 Annual Report on Form 10‑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 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. 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 2015 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the sixnine months ended JuneSeptember 30, 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
If 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 JuneSeptember 30, 2016, and associated direct selling costs are deferred as prepaid expenses within prepaid expenses and other current assets.
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 to sell, 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, while upgraded loans are 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; |
· | 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 |
· | the determination of deferred revenue and membership costs; |
· | and the determination of stock‑based compensation. |
In the opinion of ILG’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”) 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 0.5less than 0.1 million RSUs and shares of restricted stock, and 0.10.4 million RSUs for the three months ended JuneSeptember 30, 2016 and 2015, respectively, and 0.60.4 million RSUs and shares of restricted stock, and 0.5 million RSUs and stock options for the sixnine months ended JuneSeptember 30, 2016 and 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 JuneSeptember 30, 2016 and 2015, there were no stock options outstanding, and as of June 30, 2015, the balance was de minimis.outstanding.
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):
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| Three Months Ended |
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| Six Months Ended |
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| Three Months Ended |
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| Nine Months Ended |
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| June 30, |
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| June 30, |
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| September 30, |
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| September 30, |
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| 2016 |
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| 2015 |
|
| 2016 |
|
| 2015 |
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| 2016 |
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| 2015 |
|
| 2016 |
|
| 2015 |
|
Basic weighted average shares of common stock outstanding |
| 97,091 |
|
| 57,453 |
|
| 77,355 |
|
| 57,316 |
|
| 124,762 |
|
| 57,477 |
|
| 93,157 |
|
| 57,369 |
|
Net effect of common stock equivalents assumed to be vested related to RSUs and restricted stock |
| 766 |
|
| 587 |
|
| 550 |
|
| 576 |
|
| 1,001 |
|
| 578 |
|
| 701 |
|
| 578 |
|
Net effect of common stock equivalents assumed to be exercised related to stock options held by non-employees |
| — |
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| 1 |
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| — |
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| 2 |
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| — |
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| — |
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| — |
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| 1 |
|
Diluted weighted average shares of common stock outstanding |
| 97,857 |
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| 58,041 |
|
| 77,905 |
|
| 57,894 |
|
| 125,763 |
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| 58,055 |
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| 93,858 |
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| 57,948 |
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Earnings per share for the three and sixnine months ended JuneSeptember 30, 2016 and 2015 are as follows (in thousands, except per share data):
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| Three Months Ended |
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| Six Months Ended |
| Three Months Ended |
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| Nine Months Ended | ||||||||||||
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| June 30, |
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| June 30, |
| September 30, |
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| September 30, | ||||||||||||
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| 2016 |
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| 2015 |
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| 2016 |
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| 2015 |
| 2016 |
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| 2015 |
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| 2016 |
|
| 2015 |
Net income attributable to common stockholders | $ | 183,375 |
| $ | 16,641 |
| $ | 205,554 |
| $ | 41,903 | $ | 31,913 |
| $ | 19,100 |
| $ | 237,500 |
| $ | 61,003 |
Weighted average number of shares of common stock outstanding: |
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Basic |
| 97,091 |
|
| 57,453 |
|
| 77,355 |
|
| 57,316 |
| 124,762 |
|
| 57,477 |
|
| 93,157 |
|
| 57,369 |
Diluted |
| 97,857 |
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| 58,041 |
|
| 77,905 |
|
| 57,894 |
| 125,763 |
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| 58,055 |
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| 93,858 |
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| 57,948 |
Earnings per share attributable to common stockholders: |
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Basic | $ | 1.89 |
| $ | 0.29 |
| $ | 2.66 |
| $ | 0.73 | $ | 0.26 |
| $ | 0.33 |
| $ | 2.55 |
| $ | 1.06 |
Diluted | $ | 1.87 |
| $ | 0.29 |
| $ | 2.64 |
| $ | 0.72 | $ | 0.25 |
| $ | 0.33 |
| $ | 2.53 |
| $ | 1.05 |
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 2015 Annual Report on Form 10‑K that are of significance, or potential significance, to ILG based on our current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement.
In October 2016, the FASB issued ASU 2016-17, “Consolidation (Topic 810),” to amend the existing guidance issued with ASU 2015-02. This ASU is being issued to amend the consolidation guidance on how a reporting entity, that is the single decision maker of a VIE, should treat indirect interests in the entity held through related parties that are under common control with the reporting entity, when determining whether it is the primary beneficiary of that VIE. The update is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Entities that already have adopted the amendments in ASU 2015-02 are required to apply the amendments in this ASU,
12
retrospectively beginning with the fiscal year in which the amendments in ASU 2015-02 initially were applied. We are currently assessing the future impact of this accounting standard update on our consolidated financial statements.
In October 2016, the FASB issued ASU 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”) as part of the Board’s initiative to reduce complexity in accounting standards. This ASU eliminates an exception in ASC 740, which prohibits the immediate recognition of income tax consequences of intra-entity asset transfers other than inventory. Under ASU 2016-16, entities will be required to recognize the immediate current and deferred income tax effects of intra-entity asset transfers, which often involve a subsidiary of a company transferring intellectual property to another subsidiary. For public entities, the new guidance will be effective for annual periods beginning after December 15, 2017, and interim periods within those annual periods. This ASU’s amendments should be applied on a modified retrospective basis, recognizing the effects in retained earnings as of the beginning of the year of adoption. We are currently assessing the future impact of this accounting standard update on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230).” This ASU addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows under existing guidance. The update is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. We are currently assessing the future impact of this accounting standard update on our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses (Topic 326).” This ASU amends the Board’s guidance on the impairment of financial instruments. The ASU adds to GAAP an impairment model (known as the current expected credit losses model) that is based on an expected losses model rather than an incurred losses model. Under the new guidance, an entity recognizes as an allowance its estimate of expected credit losses. The ASU is also intended to reduce the complexity of GAAP by decreasing the number of impairment models that entities
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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 ASU 2016-12 is to address certain issues identified to improve Topic 606 by enhancing guidance on assessing collectability, presentation of sales taxes and other similar taxes collected from customers, noncash consideration and completed contracts and contract modifications at transition. The amendments in this Update 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 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 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 to our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-10, “Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing” (“ASU 2016-10”). The purpose of ASU 2016-10 is to clarify two aspects of Topic 606: identifying performance obligations and the licensing implementation guidance (while retaining the related principles for those areas). 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 services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in these two ASUs 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 that reporting period. Given the complexities of this new
13
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 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 to our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-03”), to simplify the current accounting for Stock Compensation. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. 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 ASU require, among other items, that an equity method investor add the cost of acquiring an additional interest in the investee to the current basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for equity method accounting, as well as eliminates certain other existing requirements. ASU 2016-07 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. 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. We are currently assessing the future impact of this accounting 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 did not have a material impact on our consolidated financial statements.statements other than the impact of an adjustment in the third quarter of 2016 to the gain on bargain purchase associated with the Vistana acquisition in the second quarter of 2016. This impact is summarized as follows:
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| As Reported |
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| Recasted for Subsequent Quarter Gain on Bargain Purchase Adjustment | ||||||
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| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
| Six Months Ended | ||||
(In thousands, except per share data) |
| June 30, 2016 |
| June 30, 2016 |
| June 30, 2016 |
| June 30, 2016 | ||||
Net income attributable to common stockholders |
| $ | 183,375 |
| $ | 205,554 |
| $ | 175,985 |
| $ | 198,164 |
EPS - Basic |
| $ | 1.89 |
| $ | 2.66 |
| $ | 1.81 |
| $ | 2.56 |
EPS - Diluted |
| $ | 1.87 |
| $ | 2.64 |
| $ | 1.80 |
| $ | 2.54 |
In April 2015, the FASB issued ASU 2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement” (“ASU 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. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis” (“ASU 2015-02”). The amendments in this topic are intended to improve and simplify targeted
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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”) 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). The adoption of this guidance did not have a material impact on our consolidated financial statements.
In January 2015, the FASB issued ASU 2015‑01, “Income Statement—Extraordinary and Unusual Items (Subtopic 225‑20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015‑01”). ASU 2015‑01 eliminates from generally accepted accounting principles (GAAP) the concept of extraordinary items as part of the FASB’s initiative to reduce complexity in accounting standards (the Simplification Initiative). Existing guidance requires a reporting entity to separately classify, present and disclose extraordinary events and transactions if the event 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 ASC Master Glossary and replaced with definitions for infrequency of occurrence and unusual nature. The presentation and existing disclosure guidance for items that are unusual in nature or occur infrequently are retained and expanded to include items that are both unusual in nature and occur infrequently. The ASU is effective for fiscal years beginning after December 15, 2015 (and interim periods within those fiscal years). A reporting entity may apply the amendments in the ASU prospectively and also may apply the amendments retrospectively to all prior periods presented in the financial statements. The adoption of this guidance did not have a material impact on our consolidated financial statements.
In June 2014, the FASB issued ASU 2014‑12, “Compensation—Stock Compensation (Topic 718): Accounting for Share‑Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period” (“ASU 2014‑12”). ASU 2014‑12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share‑based payment award as performance conditions that affect vesting. No new disclosures are required under ASU 2014‑12. The ASU is effective for fiscal years beginning after December 15, 2015 (and interim periods within that period). In addition, all entities will have the option of applying the guidance either prospectively or retrospectively. The adoption of this guidance, on a prospective basis, did not have a material impact on our consolidated financial 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 related to this business are included in our condensed consolidated statements of income beginning on May 12, 2016 and within our Exchange and Rental and Vacation Ownership segments for segment reporting purposes on the basis of its respective business activities.
1415
Purchase Price Allocation
The following table presents the preliminary allocation of total purchase price consideration to the assets acquired and liabilities assumed, based on their estimated fair values as of their respective acquisition dates (in millions):
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(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 of $188 million is presented within Other income (expense), net, in our condensed consolidated statement of income for the |
(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. |
(3) | Represents adjustments to the preliminary purchase price allocation first presented in our June 30, 2016 Form 10-Q resulting from our ongoing activities, including our reassessment of assets acquired and liabilities assumed, with respect to finalizing our purchase price allocation for this acquisition. |
The purchase price allocated to the fair value of identifiable intangible assets associated with the Vistana acquisition is as follows (in millions):
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| Fair Value |
| Useful Life (years) |
Resort management contracts |
| $ | 150 |
| 26 |
Customer relationships |
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| 90 |
| 22 |
Other |
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| 1 |
| < 1 |
Total |
| $ | 241 |
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In connection with the Vistana acquisition we recorded identifiable intangible assets of $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 customer relationships) and their resort management contracts. The amortization period, as of the respective acquisition date, for the definite-lived resort management contracts and customer relationships intangible assets noted in the table above is 26 and 22 years, respectively.
The valuation of the assets acquired and liabilities assumed in connection with this acquisition was based on fair values at the acquisition date. The assets purchased and liabilities assumed for the Vistana acquisition have been reflected in the accompanying condensed consolidated balance sheet as of JuneSeptember 30, 2016. 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
16
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$239 million and $7$12 million respectively, for the three and six months ended JuneSeptember 30, 2016 and $361 million and $22 million for nine months ended September 30, 2016. Transaction costs, consisting primarily of professional fees, directly related to this acquisition and expensed as incurred totaled $12$3 million and $15$18 million for the three and sixnine months ended JuneSeptember 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, 2015three and the sixnine months ended JuneSeptember 30, 2016 and 2015 are based on the historical financial statements of ILG and Vistana, adjusted to reflect the purchase method of accounting, with ILG as accounting acquirer. The pro forma information is not necessarily indicative of the 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$188 million pertaining to the gain on bargain purchase discussed above and a $14$11 million and $4 million reduction in revenue for the three and nine months ended September 30, 2015, respectively, related to the remeasurement of deferred revenue balances as part of purchase accounting. Additionally, net income for the three and nine months ended September 30, 2015 were adjusted for other non-recurring items such as the remeasurement of deferred expenses. Pro forma adjustments are tax-effected at ILG's estimated statutory tax rate of 37.2% for the 2015 periods and 35% for the 2016 periods, with the exception of the $197$188 million gain which is not subject to income taxation.
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| Three Months Ended September 30, |
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| Nine Months Ended September 30, | |||||||||
(In millions, except per share data) |
| Year Ended December 31, 2015 |
| Six Months Ended June 30, 2016 |
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| 2015 |
| 2016 |
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| 2015 |
| 2016 | |||||
Revenue |
| $ | 1,593 |
| $ | 839 |
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| $ | 395 |
| $ | 427 |
| $ | 1,224 |
| $ | 1,272 |
Net income attributable to common stockholders |
| $ | 345 |
| $ | 53 |
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| $ | 15 |
| $ | 30 |
| $ | 266 |
| $ | 86 |
Earnings per share: |
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Basic |
| $ | 2.66 |
| $ | 0.41 |
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| $ | 0.12 |
| $ | 0.24 |
| $ | 2.05 |
| $ | 0.67 |
Diluted |
| $ | 2.64 |
| $ | 0.40 |
|
| $ | 0.11 |
| $ | 0.24 |
| $ | 2.04 |
| $ | 0.67 |
NOTE 4—RESTRICTED CASH
Restricted cash consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
| ||
|
| June 30, |
| December 31, |
| September 30, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Escrow deposits on vacation ownership products |
| $ | 57 |
| $ | 2 |
| $ | 57 |
| $ | 2 |
Securitization VIEs |
|
| 7 |
| — |
|
| 35 |
| — | ||
Other |
|
| 10 |
|
| 15 |
|
| 14 |
|
| 15 |
Total restricted cash |
| $ | 74 |
| $ | 17 |
| $ | 106 |
| $ | 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
17
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. As of September 30, 2016, this balance also includes $19 million of cash collateral pending transfer of additional vacation ownership mortgages receivable into the September 2016 securitized pool, as described in Note 13.
16
NOTE 5—VACATION OWNERSHIP MORTGAGES RECEIVABLE
Vacation ownership mortgages receivable is comprised of various mortgage loans related to our financing of vacation ownership interval sales. As part of our acquisitions of HVO and Vistana, we acquired existing portfolios of vacation ownership mortgages receivable. These loans are accounted for using the expected cash flows method of recognizing discount accretion based on the acquired loans’ expected cash flows pursuant to ASC 310-30, “Loans acquired with deteriorated credit quality.” At acquisition, we recorded these acquired loans at fair value, including a credit discount or premium, as applicable, which is accreted as an adjustment to yield over the loan pools’loans’ estimate life. Originated loans as of JuneSeptember 30, 2016 and December 31, 2015 represent vacation ownership mortgages receivable originated by ILG, or more specifically our Vacation Ownership segment, subsequent to the acquisitions of HVO and Vistana on October 1, 2014 and May 11, 2016, respectively.
Vacation ownership mortgages receivable carrying amounts as of JuneSeptember 30, 2016 and December 31, 2015 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| June 30, |
| December 31, |
| September 30, |
| December 31, | ||||||||||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||||||||||||||||||||||||||
|
|
| Securitized |
|
| Unsecuritized(2) |
|
| Total |
|
| Securitized |
|
| Unsecuritized(2) |
|
| Total |
|
| Securitized |
|
| Unsecuritized(2) |
|
| Total |
|
| Securitized |
|
| Unsecuritized(2) |
|
| Total |
Acquired vacation ownership mortgages receivable(1) |
| $ | 163 |
| $ | 524 |
| $ | 687 |
| $ | — |
| $ | 23 |
| $ | 23 |
| $ | 458 |
| $ | 154 |
| $ | 612 |
| $ | — |
| $ | 23 |
| $ | 23 |
Originated vacation ownership mortgages receivable(1) |
|
| — |
| 52 |
| 52 |
|
| — |
|
| 11 |
|
| 11 |
|
| 11 |
|
| 128 |
|
| 139 |
|
| — |
|
| 11 |
|
| 11 | ||
Less allowance for loan losses on originated loans |
|
| — |
|
| (6) |
|
| (6) |
|
| — |
|
| (2) |
|
| (2) |
|
| (1) |
|
| (14) |
|
| (15) |
|
| — |
|
| (2) |
|
| (2) |
Net vacation ownership mortgages receivable |
| $ | 163 |
| $ | 570 |
| $ | 733 |
| $ | — |
| $ | 32 |
| $ | 32 |
| $ | 468 |
| $ | 268 |
| $ | 736 |
| $ | — |
| $ | 32 |
| $ | 32 |
(1) | At various interest rates with varying payment terms through |
(2) | As of |
The fair value of our acquired loans as of the respective acquisition dates 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 becomes the historical cost basis for that existing portfolio going forward. As of JuneSeptember 30, 2016 and December 31, 2015, the contractual outstanding balance of the acquired loans, which represents contractually-owed future principal amounts, was $603$529 million and $26 million, respectively. The change as of JuneSeptember 30, 2016 from year-end reflects the acquired loans pertaining to the Vistana acquisition.
18
The table below (in millions) presents a rollforward from December 31, 2015 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 |
|
| |
Balance, beginning of period |
| $ | 12 |
Vistana acquired accretable yield |
|
| |
Accretion |
|
| |
Reclassification between nonaccretable difference |
|
|
|
Balance, end of period |
| $ | |
|
|
|
|
Nonaccretable difference, end of period balance |
| $ |
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.
Vacation ownership mortgages receivable as of JuneSeptember 30, 2016 are scheduled to mature as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Vacation Ownership Mortgages Receivable |
|
| Vacation Ownership Mortgages Receivable |
| |||||||||||||||||||||||
|
| Acquired |
|
|
|
|
|
|
|
| Acquired |
| Originated |
|
|
|
| ||||||||||||
Twelve month period ending June 30, |
| Securitized Loans |
| Unsecuritized Loans |
| Unsecuritized Loans |
| Total |
| ||||||||||||||||||||
Twelve month period ending September 30, |
| Securitized Loans |
| Unsecuritized Loans |
| Securitized Loans |
| Unsecuritized Loans |
| Total |
| ||||||||||||||||||
2017 |
| $ | 30 |
| $ | 45 |
| $ | 5 |
| $ | 80 |
|
| $ | 50 |
| $ | 16 |
| $ | — |
| $ | 10 |
| $ | 76 |
|
2018 |
| 27 |
| 44 |
| 3 |
| 74 |
|
|
| 49 |
|
| 14 |
|
| 1 |
|
| 8 |
|
| 72 |
| ||||
2019 |
| 24 |
| 44 |
| 4 |
| 72 |
|
|
| 48 |
|
| 13 |
|
| 1 |
|
| 8 |
|
| 70 |
| ||||
2020 |
| 22 |
| 45 |
| 4 |
| 71 |
|
|
| 47 |
|
| 14 |
|
| 1 |
|
| 9 |
|
| 71 |
| ||||
2021 |
| 18 |
| 47 |
| 4 |
| 69 |
|
|
| 45 |
|
| 14 |
|
| 1 |
|
| 11 |
|
| 71 |
| ||||
2022 and thereafter |
|
| 23 |
|
| 234 |
|
| 32 |
|
| 289 |
|
|
| 150 |
|
| 69 |
|
| 7 |
|
| 82 |
|
| 308 |
|
Total |
|
| 144 |
| 459 |
| 52 |
| 655 |
|
|
| 389 |
|
| 140 |
|
| 11 |
|
| 128 |
|
| 668 |
| |||
Plus: net premium on acquired loans(1) |
|
| 19 |
| 65 |
| — |
| 84 |
|
|
| 69 |
|
| 14 |
|
| — |
|
| — |
|
| 83 |
| |||
Less: allowance for losses |
|
| — |
|
| — |
|
| (6) |
|
| (6) |
|
|
| — |
|
| — |
|
| (1) |
|
| (14) |
|
| (15) |
|
Net vacation ownership mortgages receivable |
| $ | 163 |
| $ | 524 |
| $ | 46 |
| $ | 733 |
|
| $ | 458 |
| $ | 154 |
| $ | 10 |
| $ | 114 |
| $ | 736 |
|
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% |
|
|
| |||||||||||||||||||||
Weighted average stated interest rate as of September 30, 2016 |
|
| 13.3% |
|
| 13.3% |
|
| 13.3% |
|
| 13.3% |
|
|
|
| |||||||||||||
Range of stated interest rates as of September 30, 2016 |
|
| 7.75% to 15.9% |
|
| 10.9% to 16.9% |
|
|
|
|
(1) | The difference between the contractual principal amount of acquired loans of |
Collectability
We assess our vacation ownership mortgages receivable portfolio of loans for collectability on an aggregate basis. Estimates of uncollectability pertaining to our originated loans are recorded as provisions in the vacation ownership mortgages receivable allowance for 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
19
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 JuneSeptember 30, 2016, allowance for losses of
18
$6$15 million for uncollectability was recorded to the vacation ownership mortgages receivable allowance for losses related solely to our originated loans.
Our acquired loans are remeasured at period end based on expected future cash flows which uses an estimated measure of anticipated defaults. We consider the 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 JuneSeptember 30, 2016, the weighted average FICO score within our consolidated loan pools was 713711 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 JuneSeptember 30, 2016 was 9.8%10.0%.
Balances of our vacation ownership mortagesmortgages receivable by brand and by FICO score (at time of loan origination) were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| As of June 30, 2016 |
|
| As of September 30, 2016 | ||||||||||||||||||||
|
| 700+ |
| 600-699 |
| <600 |
| No Score |
| Total |
|
| 700+ |
|
| 600-699 |
|
| <600 |
|
| No Score(1) |
|
| Total |
Westin |
| 183 |
| 90 |
| 5 |
| 30 |
| 308 |
| $ | 185 |
| $ | 91 |
| $ | 4 |
| $ | 28 |
| $ | 308 |
Sheraton |
| 161 |
| 148 |
| 13 |
| 62 |
| 384 |
|
| 168 |
|
| 150 |
|
| 13 |
|
| 64 |
|
| 395 |
Hyatt |
| 19 |
| 13 |
| 2 |
| 1 |
| 35 |
|
| 20 |
|
| 14 |
|
| 2 |
|
| 1 |
|
| 37 |
Other |
| 7 |
| 1 |
| - |
| 4 |
| 12 |
|
| 6 |
|
| 1 |
|
| - |
|
| 4 |
|
| 11 |
Vacation ownership mortgages receivable, gross |
| 370 |
| 252 |
| 20 |
| 97 |
| 739 |
| $ | 379 |
| $ | 256 |
| $ | 19 |
| $ | 97 |
| $ | 751 |
(1) | Mortgages receivable with no FICO score primarily relate to non-U.S. resident borrowers. |
On an ongoing basis, we monitor credit quality of our vacation ownership mortgages receivable portfolio based on payment activity as follows:
· | Current—The consumer’s note is in good standing as payments and reporting are current per the terms contractually stipulated in the agreement. |
· | Delinquent—We consider a vacation ownership mortgage receivable to be delinquent based on the contractual terms of each individual financing agreement. |
· | Non‑performing—Our vacation ownership mortgages receivable are generally considered non‑performing if interest or principal is more than 30 days past due. All non‑performing loans are placed on non‑accrual status and we do not resume interest accrual until the receivable becomes contractually current. We apply payments we receive for vacation ownership notes receivable on non‑performing status first to interest, then to principal, and any remainder to fees. |
1920
In the event of a default, we generally have the right to recover the mortgaged VOIs and consider loans to be in default upon reaching 120 days outstanding. Our aged analysis of delinquent vacation ownership mortgages receivable and the gross balance of vacation ownership mortgages receivable greater than 120 days past‑due as of JuneSeptember 30, 2016 and December 31, 2015 for our originated loans is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
| Delinquent |
|
| Defaulted(1) |
|
|
|
|
|
|
|
| Delinquent |
|
| Defaulted(1) |
|
| ||||||||||||||||||||
|
| Receivables |
|
| Current |
| 30-59 Days |
| 60-89 Days |
| 90-119 Days |
| ≥120 |
|
| Total Delinquent & Defaulted |
| Receivables |
|
| Current |
| 30-59 Days |
| 60-89 Days |
| 90-119 Days |
| ≥120 |
|
| Total Delinquent & Defaulted | ||||||||||||
Originated Loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
June 30, 2016 |
| $ | 52 |
|
| $ | 52 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — | ||||||||||||||||||||||
September 30, 2016 |
| $ | 139 |
|
| $ | 138 |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1 | ||||||||||||||||||||||
December 31, 2015 |
| $ | 11 |
|
| $ | 11 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 11 |
|
| $ | 11 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
(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 JuneSeptember 30, 2016 and December 31, 2015, vacation ownership inventory is comprised of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||
Completed unsold vacation ownership interests |
| $ | 137 |
| $ | 46 |
|
| $ | 124 |
| $ | 46 |
|
Vacation ownership products construction in process |
|
| 164 |
|
| — |
|
|
| 218 |
|
| — |
|
Other |
|
| — |
|
| 1 |
|
|
| — |
|
| 1 |
|
Total inventory |
| $ | 301 |
| $ | 47 |
|
| $ | 342 |
| $ | 47 |
|
The change in inventory balances as of JuneSeptember 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—Equity Method and Joint Ventures,” primarily consists 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 and Vistana’s Harborside at Atlantis joint venture.venture, which performs sales, marketing and management services for a vacation ownership resort in the Bahamas. These joint ventures were acquired in connection with our acquisitions of HVO and Vistana and were recorded at fair value on the respective acquisition dates. Our equity income from investments in unconsolidated entities, recorded in equity in earnings from unconsolidated entities in the accompanying condensed consolidated statement of income, was $2 and $1 million each period for the three months ended JuneSeptember 30, 2016 and 2015, respectively and $2$4 million each period, for the sixnine months ended JuneSeptember 30, 2016 and 2015.2015, respectively.
2021
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%25% to 50.0%50%. The carrying value of our investments in unconsolidated entities as of JuneSeptember 30, 2016 and December 31, 2015 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
|
| December 31, |
| September 30, |
|
| December 31, | ||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
Maui Timeshare Venture, LLC | $ | 40 |
| $ | 37 |
| $ | 41 |
| $ | 37 |
|
Harborside at Atlantis joint venture |
| 13 |
|
| — |
|
| 13 |
|
| — |
|
Other |
| 5 |
|
| 1 |
|
| 5 |
|
| 1 |
|
Total | $ | 58 |
| $ | 38 |
| $ | 59 |
| $ | 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 8—PROPERTY AND EQUIPMENT
Property and equipment, net is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||
Computer equipment |
| $ | 35 |
| $ | 23 |
|
| $ | 35 |
| $ | 23 |
|
Capitalized software (including internally developed software) |
|
| 134 |
|
| 108 |
|
|
| 136 |
|
| 108 |
|
Land, buildings and leasehold improvements |
|
| 362 |
|
| 51 |
|
|
| 357 |
|
| 51 |
|
Land held for development |
|
| 54 |
|
| — |
|
|
| 56 |
|
| — |
|
Furniture, fixtures and other equipment |
|
| 44 |
|
| 17 |
|
|
| 44 |
|
| 17 |
|
Construction projects in progress |
|
| 36 |
|
| — |
|
|
| 48 |
|
| — |
|
Other projects in progress |
|
| 38 |
|
| 19 |
|
|
| 46 |
|
| 19 |
|
Less: accumulated depreciation and amortization |
|
| (142) |
|
| (127) |
|
|
| (154) |
|
| (127) |
|
Total property and equipment, net |
| $ | 561 |
| $ | 91 |
|
| $ | 568 |
| $ | 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 |
|
2122
The following tables present the balance of goodwill by reporting unit, including the changes in carrying amount of goodwill as of JuneSeptember 30, 2016 and December 31, 2015 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
| ||||||||||||
|
| Balance as of |
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of |
|
| Balance as of |
|
|
|
|
|
| Currency |
| Goodwill |
| Balance as of |
| ||||||||||
|
| January 1, 2016 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| June 30, 2016 |
|
| January 1, 2016 |
| Additions |
| Deductions |
| Translation |
| Impairment |
| September 30, 2016 |
| ||||||||||||
Exchange |
| $ | 496 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 496 |
|
| $ | 496 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 496 |
|
Rental |
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
|
|
| 20 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 20 |
|
VO management |
|
| 38 |
|
| — |
|
| — |
|
| (1) |
|
| — |
|
| 37 |
|
|
| 38 |
|
| — |
|
| — |
|
| (2) |
|
| — |
|
| 36 |
|
VO sales and financing |
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
|
| 7 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 7 |
|
Total |
| $ | 561 |
| $ | — |
| $ | — |
| $ | (1) |
| $ | — |
| $ | 560 |
|
| $ | 561 |
| $ | — |
| $ | — |
| $ | (2) |
| $ | — |
| $ | 559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 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 JuneSeptember 30, 2016 and December 31, 2015 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||
Intangible assets with indefinite lives |
| $ | 119 |
| $ | 127 |
|
| $ | 117 |
| $ | 127 |
|
Intangible assets with definite lives, net |
|
| 355 |
|
| 123 |
|
|
| 349 |
|
| 123 |
|
Total intangible assets, net |
| $ | 474 |
| $ | 250 |
|
| $ | 466 |
| $ | 250 |
|
The $8$10 million change in our indefinite-lived intangible assets during the sixnine months ended JuneSeptember 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 JuneSeptember 30, 2016 and December 31, 2015, intangible assets with indefinite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
|
| December 31, |
|
|
| September 30, |
|
| December 31, |
|
|
|
| 2016 |
|
| 2015 |
|
|
| 2016 |
|
| 2015 |
|
Resort management contracts |
| $ | 75 |
| $ | 83 |
|
| $ | 73 |
| $ | 83 |
|
Trade names and trademarks |
|
| 44 |
|
| 44 |
|
|
| 44 |
|
| 44 |
|
Total |
| $ | 119 |
| $ | 127 |
|
| $ | 117 |
| $ | 127 |
|
At JuneSeptember 30, 2016, intangible assets with definite lives relate to the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Cost |
| Accumulated Amortization |
| Net |
|
| Cost |
| Accumulated Amortization |
| Net |
| ||||||
Customer relationships |
| $ | 258 |
| $ | (133) |
| $ | 125 |
|
| $ | 258 |
| $ | (134) |
| $ | 124 |
|
Purchase agreements |
|
| 76 |
|
| (76) |
|
| — |
|
|
| 76 |
|
| (76) |
|
| — |
|
Resort management contracts |
|
| 278 |
|
| (52) |
|
| 226 |
|
|
| 277 |
|
| (55) |
|
| 222 |
|
Technology |
|
| 25 |
|
| (25) |
|
| — |
|
|
| 25 |
|
| (25) |
|
| — |
|
Other |
|
| 23 |
|
| (19) |
|
| 4 |
|
|
| 23 |
|
| (20) |
|
| 3 |
|
Total |
| $ | 660 |
| $ | (305) |
| $ | 355 |
|
| $ | 659 |
| $ | (310) |
| $ | 349 |
|
2223
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 sixnine months ended JuneSeptember 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$6 million and $3$4 million for the three months ended JuneSeptember 30, 2016 and 2015, respectively, and $8$14 million and $7$10 million for the sixnine months ended JuneSeptember 30, 2016 and 2015, respectively. Based on JuneSeptember 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, |
|
|
|
| ||||
Twelve month period ending September 30, |
|
|
|
| ||||
2017 |
| $ | 12 |
|
| $ | 22 |
|
2018 |
|
| 21 |
|
|
| 20 |
|
2019 |
|
| 20 |
|
|
| 20 |
|
2020 |
|
| 20 |
|
|
| 20 |
|
2021 |
|
| 20 |
|
|
| 19 |
|
2022 and thereafter |
|
| 262 |
|
|
| 248 |
|
|
| $ | 355 |
|
| $ | 349 |
|
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.
2324
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 | |
|
|
|
| |
|
|
| 2016 | |
Assets |
|
|
|
|
Restricted cash |
|
| $ | |
Interest receivable |
|
|
| |
Vacation ownership mortgages receivable, net |
|
|
| |
Total |
|
| $ | |
|
|
|
|
|
Liabilities |
|
|
|
|
Interest payable |
|
| $ |
|
Securitized debt |
|
|
| |
Total |
|
| $ |
(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$8 million since our May 11, 2016 acquisition of Vistana through JuneSeptember 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. Refer to Note 13 of these condensed consolidated financial statements for additional discussion on our securitized debt from VIEs.
NOTE 11—ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table summarizes the general components of accrued expenses and other current liabilities (in millions):
|
|
|
|
|
|
|
|
| ||||
|
| June 30, |
| December 31, |
| September 30, |
| December 31, | ||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
General accrued expenses |
| $ | 66 |
| $ | 18 |
| $ | 70 |
| $ | 18 |
Accrued other taxes |
|
| 15 |
|
| 5 |
|
| 15 |
|
| 5 |
Customer deposits |
|
| 67 |
|
| 13 |
|
| 68 |
|
| 13 |
Accrued membership related |
|
| 26 |
|
| 20 |
|
| 26 |
|
| 20 |
Accrued construction costs |
|
| 19 |
|
| — |
|
| 37 |
|
| — |
Accrued expenses and other current liabilities |
| $ | 193 |
| $ | 56 |
| $ | 216 |
| $ | 56 |
2425
NOTE 12—DEFERRED REVENUE
The following table summarized the general components of deferred revenue (in millions):
|
|
|
|
|
|
|
|
| ||
|
| June 30, |
|
| December 31, |
| September 30, |
|
| December 31, |
|
| 2016 |
|
| 2015 |
| 2016 |
|
| 2015 |
|
| (in millions) |
| (in millions) | ||||||
Deferred membership-related revenue | $ | 187 |
| $ | 169 | $ | 174 |
| $ | 169 |
Deferred sales of vacation ownership products |
| 41 |
| — |
| 45 |
| — | ||
Other |
| 6 |
|
| 4 |
| 6 |
|
| 4 |
Total | $ | 234 |
| $ | 173 | $ | 225 |
| $ | 173 |
Deferred membership-related revenue primarily relates to membership fees from our Exchange and Rental segment, which are deferred and recognized over the terms of the applicable memberships, typically ranging from one to five years, on a straight-line basis.
Deferred sales of vacation ownership products primarily relate to sales associated with incomplete phases or buildings that are being recognized under the percentage-of-completion method. The increase in deferred sales of vacation ownership products relates to deferred revenue acquired in connection with our Vistana acquisition or generated thereafter, which primarily pertains to a property in Hawaii that is currently under construction. The related sales are deferred under the percentage of completion method.
Other deferred revenue pertains to annual maintenance fees collected that are not yet earned.
NOTE 13—SECURITIZED VACATION OWNERSHIP DEBT
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):
|
|
|
|
|
|
|
|
| |
|
| 2016 | ||
|
|
| ||
2011 securitization, interest rates ranging from 3.67% to 4.82%, maturing 2025 |
| $ |
| |
2012 securitization, interest rates ranging from 2.00% to 2.76%, maturing 2023 |
|
| ||
2016 securitization, interest rates ranging from 2.54% to 2.74%, maturing 2024 | 375 | |||
Unamortized debt issuance costs (2016 securitization) | (5) |
| ||
Total securitized vacation ownership debt, net of debt issuance costs |
| $ |
|
On September 20, 2016, we completed a term securitization transaction involving the issuance of $375 million of asset-backed notes. An indirect wholly-owned subsidiary of Vistana issued $346 million of Class A notes and $29 million of Class B notes. The notes are backed by vacation ownership loans and have coupons of 2.54% and 2.74%, respectively, for an overall weighted average coupon of 2.56%. The advance rate for this transaction was 96.5%.
Of the $375 million in proceeds from the transaction, $19 million is being held in escrow until the associated VIE purchases up to $19 million of additional loans by March 15, 2017 with any unused cash returned to the investors. Approximately $33 million was used to repay the outstanding balance on Vistana’s 2010 securitization and the remainder was used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our $600 million revolving credit facility and for general corporate purposes.
During the three and sixnine months ended JuneSeptember 30, 2016, interest expense associated with securitized vacation ownership debt totaled $1 million in both periods, 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
26
maturities of our securitized vacation ownership notes receivable, which provide an indication of the potential repayment pattern before the impact of any prepayments or defaults.
As of September 30, 2016, total unamortized debt issuance costs pertaining to the 2016 securitization were $5 million, which is presented as a reduction of securitized debt from VIEs in the accompanying condensed consolidated balance sheet. Unamortized debt issuance costs pertaining to our securitized debt are amortized to interest expense using the effective interest method through the estimated life of the respective debt instruments.
25
NOTE 14—LONG-TERM DEBT
Long‑term debt is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||
Revolving credit facility (interest rate of 2.47% at June 30, 2016 and 2.68% at December 31, 2015) |
| $ | 285 |
| $ | 75 |
| |||||||
Revolving credit facility (interest rate of 2.28% at September 30, 2016 and 2.68% at December 31, 2015) |
| $ | 75 |
| $ | 75 |
| |||||||
5.625% senior notes |
|
| 350 |
|
| 350 |
|
|
| 350 |
|
| 350 |
|
Unamortized debt issuance costs (revolving credit facility) |
|
| (5) |
|
| (3) |
|
|
| (4) |
|
| (3) |
|
Unamortized debt issuance costs (senior notes) |
|
| (6) |
|
| (6) |
|
|
| (6) |
|
| (6) |
|
Total long-term debt, net of debt issuance costs |
| $ | 624 |
| $ | 416 |
|
| $ | 415 |
| $ | 416 |
|
Credit Facility
In April 2014, we entered into the first amendment to the June 21, 2012 amended and restated credit agreement (the “Amended Credit 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 3.25 to 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.
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 JuneSeptember 30, 2016, there was $285$75 million outstanding. Any principal amounts outstanding under the revolving credit facility are due at maturity. As of JuneSeptember 30, 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 JuneSeptember 30, 2016, the applicable margin was 2.00% per annum for LIBOR revolving loans and 1.00% per annum for Base Rate loans. As of JuneSeptember 30, 2016, the
27
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 JuneSeptember 30, 2016 the commitment fee was 0.350%0.275%.
Pursuant to the Amended Credit Agreement, all obligations under the revolving credit facility are unconditionally guaranteed by ILG and certain of its subsidiaries. Borrowings are further secured by (1) 100% of the voting equity securities of ILG’s U.S. subsidiaries and 65% of the equity in our first‑tier foreign subsidiaries and (2) substantially all of our domestic tangible and intangible property.
26
Senior Notes
On April 10, 2015, we completed a private offering of $350 million in aggregate principal amount of our 5.625% senior notes due in 2023. The net proceeds from the offering, after deducting offering related expenses, were $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 JuneSeptember 30, 2016, total unamortized debt issuance costs relating to these senior notes were $6 million, which are presented as a direct deduction from the principal amount. Interest on the senior notes is paid semi-annually in arrears on April 15 and October 15 of each year 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 JuneSeptember 30, 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”), as defined. We are also required to maintain a minimum consolidated interest coverage ratio of consolidated EBITDA over consolidated interest expense. As of JuneSeptember 30, 2016, the maximum consolidated secured leverage ratio was 3.25x and the minimum consolidated interest coverage ratio was 3.0x. As of JuneSeptember 30, 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 0.870.24 and 13.24,13.15, respectively.
Interest Expense and Debt Issuance Costs
Interest expense for the three months ended JuneSeptember 30, 2016 and 2015 was $6 million each year,and $6 million respectively, and for the sixnine months ended JuneSeptember 30, 2016 and 2015 was $12$18 million and $9$15 million, respectively. Interest expense for these periods is net of negligible capitalized interest relating to internally-developed software.
As of JuneSeptember 30, 2016, total unamortized debt issuance costs were $4$10 million, net of $3$5 million of accumulated amortization, incurred in connection with the issuance and various amendments to our Amended Credit Agreement, the issuance of our senior notes in April 2015 and the exchange for registered notes in June 2016. As of December 31, 2015, total unamortized debt issuance costs were $4$9 million, net of $2$4 million of accumulated amortization. Unamortized debt issuance costs are presented as a reduction of long-term debt in the accompanying condensed consolidated balance sheets, pursuant to ASC 2015-03. Unamortized debt issuance costs are amortized to
28
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 15—FAIR VALUE MEASUREMENTS
In accordance with ASC Topic 820, “Fair Value Measurement,” (“ASC 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’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‑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 sixnine months ended JuneSeptember 30, 2016. Our financial instruments are detailed in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, 2016 |
| December 31, 2015 |
|
| September 30, 2016 |
| December 31, 2015 |
| ||||||||||||||||
|
| Carrying |
| Fair |
| Carrying |
| Fair |
|
| Carrying |
| Fair |
| Carrying |
| Fair |
| ||||||||
|
| Amount |
| Value |
| Amount |
| Value |
|
| Amount |
| Value |
| Amount |
| Value |
| ||||||||
|
| (In millions) |
|
| (In millions) |
| ||||||||||||||||||||
Cash and cash equivalents |
| $ | 127 |
| $ | 127 |
| $ | 93 |
| $ | 93 |
|
| $ | 158 |
| $ | 158 |
| $ | 93 |
| $ | 93 |
|
Restricted cash and cash equivalents |
|
| 71 |
|
| 71 |
|
| 17 |
|
| 17 |
|
|
| 106 |
|
| 106 |
|
| 17 |
|
| 17 |
|
Financing receivables |
|
| 19 |
|
| 19 |
|
| 16 |
|
| 16 |
|
|
| 19 |
|
| 19 |
|
| 16 |
|
| 16 |
|
Vacation ownership mortgages receivable |
|
| 733 |
|
| 742 |
|
| 32 |
|
| 34 |
|
|
| 736 |
|
| 749 |
|
| 32 |
|
| 34 |
|
Investments in marketable securities |
|
| 13 |
|
| 13 |
|
| 11 |
|
| 11 |
|
|
| 14 |
|
| 14 |
|
| 11 |
|
| 11 |
|
Securitized debt |
|
| 145 |
|
| 145 |
|
| — |
|
| — |
|
|
| 467 |
|
| 473 |
|
| — |
|
| — |
|
Revolving credit facility(1) |
|
| (280) |
|
| (285) |
|
| (72) |
|
| (75) |
|
|
| (71) |
|
| (75) |
|
| (72) |
|
| (75) |
|
Senior notes(1) |
|
| (344) |
|
| (353) |
|
| (344) |
|
| (348) |
|
|
| (344) |
|
| (363) |
|
| (344) |
|
| (348) |
|
(1) | As of |
The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reflected in the accompanying condensed consolidated balance sheets approximate fair value as they are redeemable at par upon notice or maintained with various high‑quality financial institutions and have original maturities of three months or less. Under the fair value hierarchy established in ASC 820, cash and cash equivalents and restricted cash and cash equivalents are stated at fair value based on quoted prices in active markets for identical assets (Level 1).
The financing receivables as of JuneSeptember 30, 2016 are presented in our consolidated balance sheet within other non‑current assets and principally pertains to a convertible secured loan to CLC that matures October of 2019 with interest payable monthly. The outstanding loan is to be repaid in full at maturity either in cash or by means of a share option exercisable by ILG, at its sole discretion. 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‑recurring adjustments for estimated credit losses as necessary (Level 2). The stated interest rate on this loan is comparable to market. Interest is recognized within our “Interest income” line item in our condensed consolidated statement of income for the three and sixnine months ended JuneSeptember 30, 2016.
29
We estimate the fair value of vacation ownership mortgages receivable using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model incorporates default rates, prepayment rates, coupon rates and loan terms respective to the portfolio based on current market assumptions for similar types of arrangements. Based upon the availability of market data, we have classified inputs used in the valuation of our vacation ownership mortgages receivable as Level 3. The primary sensitivity in these assumptions relates to forecasted defaults and projected prepayments which could cause the estimated fair value to vary.
28
Investments in marketable securities consist of marketable securities (mutual funds) related to deferred compensation plans which are funded in a Rabbi trust as of JuneSeptember 30, 2016 and classified as other noncurrent assets in the accompanying condensed consolidated balance sheets. This deferred compensation plan was created in connection with the HVO 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‑term differences in market prices. These marketable securities are recorded at a fair value of $13$14 million as of JuneSeptember 30, 2016 based on quoted market prices in active markets for identical assets (Level 1). Minimal unrealized trading gains for the three months and sixnine months ended JuneSeptember 30, 2016 were 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 17 for further discussion in regards to this deferred compensation plan.
Our non-public, securitized debt fair value is determined based upon discounted cash flows for the debt using Level 3 inputs such as rates deemed reasonable for the type of 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 JuneSeptember 30, 2016 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 JuneSeptember 30, 2016 and December 31, 2015 through inputs inherent to the debt such as variable interest rates and credit risk (Level 2).
NOTE 16—EQUITY
ILG has 300 million authorized shares of common stock, par value of $0.01 per share. At JuneSeptember 30, 2016, there were 132.8133.5 million shares of ILG common stock issued, of which 126.8124.7 million are outstanding with 6.18.8 million shares held as treasury stock. At December 31, 2015, there were 59.9 million shares of ILG common stock issued, of which 57.5 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 JuneSeptember 30, 2016 and December 31, 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, May and MayAugust of 2016, our Board of Directors declared a quarterly dividend payment of $0.12 per share paid in March, June and JuneSeptember of 2016, respectively, amounting to $7 million, $16 million, and $16$15 million, respectively.
In AugustNovember 2016, our Board of Directors declared a $0.12 per share dividend payable September 21,December 20, 2016 to shareholders of record on September 7,December 6, 2016.
30
Stockholder Rights Plan
In June 2009, ILG’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‑off from IAC/InterActiveCorp (IAC). If the rights become exercisable, each right will permit its holder, other than the “acquiring person,” to purchase from us shares of common stock at a 50% discount to the then prevailing market price. As a result, the rights will cause substantial dilution to a person or group that becomes an “acquiring person” on terms not approved by our Board of Directors.
Share Repurchase Program
In May 2016, ILG’sour Board of Directors increased the then remaining share repurchase authorization to a total of $100 million. During the nine months ended September 30, 2016, we repurchased 6.4 million shares of common stock for $100 million, including commissions. As of September 30, 2016, there was no remaining availability for future repurchases of our common stock under this authorization. Acquired shares of our common stock are held as treasury shares carried at cost on our condensed consolidated financial statements.
In November 2016, the Board authorized repurchases of up to $50 million of ILG common stock. 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 six months ended June 30, 2016, we repurchased 4.2 million shares of common stock for $61 million. As of June 30, 2016, the remaining availability for future repurchases of our common stock was $39 million. There were no repurchases of common stock during the year ended December 31, 2015.
Accumulated Other Comprehensive Loss
Entities are required to disclose additional information about reclassification adjustments within accumulated other comprehensive income/loss, referred to as AOCL including (1) changes in AOCL balances by component and (2) significant items reclassified out of AOCL in the period. For the three months and sixnine months ended JuneSeptember 30, 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 JuneSeptember 30, 2016 and December 31, 2015, this noncontrolling interest amounts to $30$27 million and $33$31 million, respectively, and is presented on our condensed consolidated balance sheets as a component of equity. The change from December 31, 2015 to JuneSeptember 30, 2016 relates to the recognition of the noncontrolling interest holder’s proportional share of VRI Europe’s earnings, as well as the translation effect on the foreign currency based amount.
The parties have agreed not to transfer their interests in VRI Europe or CLC’s related development business for a period of five years from the acquisition. In addition, they have agreed to certain rights of first refusal, and customary drag along and tag along rights, including a right by CLC to drag along ILG’s VRI Europe shares in connection with a sale of the entire CLC resort business subject to achieving minimum returns and a preemptive right by ILG. As of JuneSeptember 30, 2016, there have been no changes in ILG’s ownership interest in VRI Europe.
31
Additionally, in connection with this arrangement, ILG and CLC entered into a loan agreement whereby ILG made available to CLC a convertible secured loan facility of $15 million that matures in October of 2019 with interest payable monthly. The outstanding loan is to be repaid in full at maturity either in cash or by means of a share option exercisable by ILG, at its sole discretion, which would allow for settlement of the loan in CLC’s shares of VRI Europe for contractually determined equivalent value. ILG has the right to exercise this share option at any time prior to maturity of the loan; however, the equivalent value for these shares would be measured at a 20% premium to its acquisition date
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 VOIs. The fair value of the noncontrolling interest at acquisition was determined based on the noncontrolling party’s ownership interest applied against the fair value allocated to the respective joint venture entity. As of JuneSeptember 30, 2016 and December 31, 2015, this noncontrolling interest amounted to $1 million and $2 million, respectively, and is presented on our condensed consolidated balance sheets as a component of equity.
NOTE 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‑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’s eligible earnings, with Vistana employees also receiving a 100% match for the first 1% of the participant’s eligible earnings, subject to Internal Revenue Service (“IRS”) restrictions. MatchingNet matching contributions for the ILG plan were $1$2 million and $1 million for the three months ended JuneSeptember 30, 2016 and 2015, respectively and $2$4 million and $1$2 million for the sixnine months ended JuneSeptember 30, 2016 and 2015, respectively. Matching contributions were invested in the same manner as each participant’s voluntary contributions in the investment options provided under the plan.
Effective August 20, 2008, a deferred compensation plan (the “Director Plan”) was established to provide non‑employee directors of ILG an option to defer director fees on a tax‑deferred basis. Participants in the Director Plan are allowed to defer a portion or all of their compensation and are 100% vested in their respective deferrals and earnings. With respect to director fees earned for services performed after the date of such election, participants may choose from receiving cash or stock at the end of the deferral period. ILG has reserved 100,000 shares of common stock for issuance pursuant to this plan, of which 57,21859,124 share units were outstanding at JuneSeptember 30, 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”) was established to allow 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 compensation liabilities in connection with the acquisition of 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 currently include only certain HVO 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 beginning in the next calendar year, 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. Participants have only an unsecured claim against ILG for the future payment of the deferred amounts, although payment is indirectly secured through a fully funded Rabbi trust. The Rabbi trust is subject to creditor claims in the event of insolvency, but the assets held in the Rabbi trust are not available for general corporate purposes. Amounts in the Rabbi trust are invested in mutual funds, as selected by participants, which are designated as trading securities and carried at fair value. Subsequent to the acquisitions of HVO and Vistana, there were net transfers of $11 million and $2 million, respectively, into the Rabbi trust, related to participants that became ILG employees in connection with the respective acquisitions. As
32
of JuneSeptember 30, 2016, the fair value of the investments in the Rabbi trust was $13$14 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 $1 million, for each of the three and nine month periods ended September 30, 2016, 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. Such amounts were de minimis in the three and six months ended June 30, 2016 in the condensed consolidated statements of income.
31
NOTE 18—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”). Both plans provide for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock‑based awards. RSUs are awards in the form of phantom shares or units, denominated in a hypothetical equivalent number of shares of ILG common stock and with the value of each award equal to the fair value of ILG common stock at the date of grant. Each RSU is subject to service‑based vesting, where a specific period of continued employment must pass before an award vests. We grant awards subject to graded vesting (i.e., portions of the award vest at different times during the vesting period) or to cliff vesting (i.e., all awards vest at the end of the vesting period). In addition, certain RSUs are subject to attaining specific performance criteria.
ILG recognizes non‑cash compensation expense for all RSUs held by ILG’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‑cash compensation over the vesting term using the straight‑line basis for service awards and the accelerated basis for performance‑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‑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‑market adjustments for changes in the price of the respective common stock, as compensation expense.
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‑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. In August 2016, the 2013 Stock and Incentive Compensation Plan was amended to increase the plan balance by 4.0 million shares. As of JuneSeptember 30, 2016, a de minimis amount of4.0 million shares were available for future issuance under the 2013 Stock and Incentive Compensation Plan.
During the first halfnine months of 2016 and 2015, the Compensation Committee granted 855,000862,000 and 423,000 RSUs, respectively, vesting over one to four years, to certain officers, board of directors and employees of ILG and its subsidiaries. Of these RSUs granted in 2016 and 2015, approximately 140,000142,000 and 105,000, respectively, cliff vest in three years and approximately 105,000 and 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 2016 and 2015 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 for these performance based RSUs. This analysis estimates the total shareholder return ranking of ILG as of the grant date relative
33
to two peer groups approved by the Compensation Committee, over the remaining performance period. The expected volatility of ILG’s common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk‑free interest rate assumption was based on observed interest rates consistent with the approximate three – year performance measurement period.
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$10 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 JuneSeptember 30, 2016 and 2015 was $5 million and $3 million, respectively and $8$13 million and $6$10 million for the sixnine months ended JuneSeptember 30, 2016 and 2015, respectively. At JuneSeptember 30, 2016, there was approximately $36$30 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 years.
The amount of stock‑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‑date value of the award tranche that is actually vested at that date.
Non‑cash stock‑based compensation expense related to equity awards is included in the following line items in the accompanying condensed consolidated statements of income for the three months ended JuneSeptember 30, 2016 and 2015 (in millions):
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| Six months |
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| Ended |
| Ended |
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| Ended |
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| June 30, |
| June 30, |
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| September 30, |
| September 30, |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
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| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Cost of sales |
| $ | — |
| $ | — |
| $ | 1 |
| $ | — |
|
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | 1 |
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Selling and marketing expense |
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| 1 |
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| — |
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| 1 |
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| 1 |
|
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| — |
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| — |
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| 1 |
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| 1 |
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General and administrative expense |
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| 4 |
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| 3 |
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| 6 |
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| 6 |
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| 4 |
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| 3 |
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| 11 |
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| 8 |
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Non-cash compensation expense |
| $ | 5 |
| $ | 3 |
| $ | 8 |
| $ | 7 |
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| $ | 5 |
| $ | 3 |
| $ | 13 |
| $ | 10 |
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The following table summarizes RSU activity during the sixnine months ended JuneSeptember 30, 2016:
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Non-vested RSUs at January 1, 2016 |
| 2 |
| $ | 22.98 |
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| 2 |
| $ | 22.98 |
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Granted |
| 2 |
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| 13.29 |
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| 2 |
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| 13.34 |
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Vested |
| (1) |
|
| 20.73 |
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| (1) |
|
| 20.58 |
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Non-vested RSUs at June 30, 2016 |
| 3 |
| $ | 16.75 |
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Non-vested RSUs at September 30, 2016 |
| 3 |
| $ | 16.76 |
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NOTE 19—INCOME TAXES
ILG calculates its interim income tax provision in accordance with ASC 740, “Income Taxes.” At the end of each interim period, ILG makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year‑to‑date earnings or loss. The income tax provision or benefit related to significant, unusual, or extraordinary items, if applicable, that will be separately reported or reported net of their related tax effecteffects are individually computed and recognized in the interim period in which those items occur. In addition, the effect of a changechanges 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 or the liabilities for uncertain tax positions is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operatingpre-tax income (or loss) for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of recoveringthe realization of deferred tax assets generated in the current year. The accounting estimates used to compute the provision or benefit for income taxes may change as new events occur, more experience is acquired, additional information is obtained or ILG’s tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in income tax expense forin the current quarter.quarter in which the change occurs.
A valuation allowance for deferred tax assets is provided when it is more likely than not that certain deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the history of taxable income in recent years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies to make this assessment.
For the three and sixnine months ended JuneSeptember 30, 2016, ILG recorded an income tax provisionsbenefit and provision for continuing operations of $36$2 million and $49$46 million, respectively, which represent effective tax rates of 16.4%(7.4)% and 19.1%16.3% for the respective periods. TheseThe negative effective tax rates arerate for the quarter was a result of recognizing an income tax benefit in an interim period with pre-tax income. This income tax benefit is a result of a decrease in the estimated annual effective tax rate and the effect of this change on prior quarters. The decrease in the estimated annual effective tax rate from the prior quarter was primarily due to a change in the projected proportion of income earned and taxed in various jurisdictions and the projected utilization of certain income tax credits that were previously not expected to be realized. For the nine months ended September 30, 2016, the tax rate was lower than the federal statutory rate of 35% due principally to the nontaxable gain on bargain purchase recorded during the 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.taxation.
For the three and sixnine months ended JuneSeptember 30, 2015, ILG recorded income tax provisions for continuing operations of $10$11 million and $24$35 million, respectively, which represent effective tax rates of 36.1%35.3% and 36.0%35.8% 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 JuneSeptember 30, 2016, there were no material changes to ILG’s unrecognized tax benefits and related interest. In connection with the acquisition of Vistana, Starwood and ILG entered into a Tax Matters Agreement,
35
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. As of JuneSeptember 30, 2016, no open tax years are currently under examination by the IRS. During the second quarter, ILG was notified by the State of Florida that the consolidated state tax return for all open tax years will be examined. As of the end of the current quarter, in Florida our tax years ended December 31, 20122013 through 2014 will be examined.December 31, 2015 are open. 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.
On September 15, 2016, the U.K. Finance Act 2016 was enacted, which among other changes, further reduced the U.K. corporate income tax rate to 17% effective April 1, 2020. The impact of this further rate reduction was recorded in the current reporting period and was not significant. This reduced our U.K. net deferred tax liability and decreased income tax expense, favorably impacting our effective tax rate. Going forward, the lower U.K. corporate tax rate will continue to decrease income tax expense and favorably impact our effective tax rate.
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 20—SEGMENT INFORMATION
Pursuant to FASB guidance as codified in ASC 280, an operating segment is a component of a public entity (1) that engages in business activities that may earn revenues and incur expenses; (2) for which operating results are regularly reviewed by the entity’s chief operating decision maker to make decisions about resources to be allocated to the segments and assess its performance; and (3) for which discrete financial information is available. We also considered how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered. ILG is comprised of two operating and reportable segments: Exchange and Rental, and Vacation Ownership.
Our Exchange and Rental segment offers access to vacation accommodations and other travel‑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 Ownership segment engages in the management, sales, marketing, financing, rental and ancillary services, and development of VOIs as well as related services to owners and associations.
ILG provides certain corporate functions that benefit the organization as a whole. Such corporate functions include corporate services relating to oversight, corporate development, finance and accounting, legal, treasury, tax, internal audit, human resources, and certain IT functions. Costs relating to such corporate functions that are not directly cross‑charged to individual businesses are being allocated to our two operating and reportable segments based on a pre‑determined measure of profitability relative to total ILG. All such allocations relate only to general and
36
administrative expenses. The condensed consolidated statements of income are not impacted by this cross‑segment allocation.
35
Information on reportable segments and reconciliation to consolidated operating income is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
|
| September 30, |
| September 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Exchange and Rental: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
| $ | 50 |
| $ | 48 |
| $ | 108 |
| $ | 104 |
|
| $ | 47 |
| $ | 47 |
| $ | 155 |
| $ | 151 |
|
Membership fee revenue |
|
| 34 |
|
| 31 |
|
| 64 |
|
| 63 |
|
|
| 35 |
|
| 31 |
|
| 99 |
|
| 94 |
|
Ancillary member revenue |
|
| 1 |
|
| 1 |
|
| 3 |
|
| 3 |
|
|
| 1 |
|
| 2 |
|
| 4 |
|
| 5 |
|
Total member revenue |
|
| 85 |
|
| 80 |
|
| 175 |
|
| 170 |
|
|
| 83 |
|
| 80 |
|
| 258 |
|
| 250 |
|
Club rental revenue |
|
| 15 |
|
| 3 |
|
| 18 |
|
| 5 |
|
|
| 24 |
|
| 2 |
|
| 42 |
|
| 7 |
|
Other revenue |
|
| 6 |
|
| 6 |
|
| 12 |
|
| 13 |
|
|
| 6 |
|
| 5 |
|
| 18 |
|
| 18 |
|
Rental management revenue |
|
| 10 |
|
| 12 |
|
| 23 |
|
| 25 |
|
|
| 13 |
|
| 14 |
|
| 36 |
|
| 39 |
|
Cost reimbursement revenue |
|
| 24 |
|
| 24 |
|
| 46 |
|
| 47 |
|
|
| 25 |
|
| 24 |
|
| 71 |
|
| 71 |
|
Total revenues |
|
| 140 |
|
| 125 |
|
| 274 |
|
| 260 |
| |||||||||||||
Total revenue |
|
| 151 |
|
| 125 |
|
| 425 |
|
| 385 |
| |||||||||||||
Cost of service and membership related sales |
|
| 16 |
|
| 17 |
|
| 32 |
|
| 35 |
|
|
| 19 |
|
| 16 |
|
| 51 |
|
| 51 |
|
Cost of sales of rental and ancillary services |
|
| 19 |
|
| 9 |
|
| 31 |
|
| 18 |
|
|
| 20 |
|
| 7 |
|
| 51 |
|
| 25 |
|
Cost reimbursements |
|
| 24 |
|
| 24 |
|
| 46 |
|
| 47 |
|
|
| 25 |
|
| 24 |
|
| 71 |
|
| 71 |
|
Total cost of sales |
|
| 59 |
|
| 50 |
|
| 109 |
|
| 100 |
|
|
| 64 |
|
| 47 |
|
| 173 |
|
| 147 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Gross profit |
|
| 81 |
|
| 75 |
|
| 165 |
|
| 160 |
| |||||||||||||
Royalty fee expense |
|
| — |
|
| — |
|
| 1 |
|
| 1 |
|
|
| — |
|
| 1 |
|
| 1 |
|
| 1 |
|
Selling and marketing expense |
|
| 15 |
|
| 16 |
|
| 29 |
|
| 31 |
|
|
| 13 |
|
| 14 |
|
| 42 |
|
| 45 |
|
General and administrative expense |
|
| 32 |
|
| 26 |
|
| 56 |
|
| 52 |
|
|
| 30 |
|
| 27 |
|
| 87 |
|
| 79 |
|
Amortization expense of intangibles |
|
| 3 |
|
| 2 |
|
| 5 |
|
| 4 |
|
|
| 3 |
|
| 2 |
|
| 8 |
|
| 6 |
|
Depreciation expense |
|
| 4 |
|
| 4 |
|
| 9 |
|
| 7 |
|
|
| 5 |
|
| 4 |
|
| 14 |
|
| 12 |
|
Segment operating income |
| $ | 27 |
| $ | 27 |
| $ | 65 |
| $ | 65 |
|
| $ | 36 |
| $ | 30 |
| $ | 100 |
| $ | 95 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
|
| September 30, |
| September 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Vacation Ownership: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
| $ | 30 |
| $ | 4 |
| $ | 35 |
| $ | 7 |
|
| $ | 53 |
| $ | 5 |
| $ | 86 |
| $ | 12 |
|
Management fee revenue |
|
| 27 |
|
| 21 |
|
| 48 |
|
| 43 |
|
|
| 32 |
|
| 22 |
|
| 81 |
|
| 67 |
|
Sales of vacation ownership products, net |
|
| 49 |
|
| 10 |
|
| 58 |
|
| 16 |
|
|
| 96 |
|
| 7 |
|
| 154 |
|
| 21 |
|
Consumer financing revenue |
|
| 11 |
|
| 1 |
|
| 13 |
|
| 3 |
|
|
| 23 |
|
| 1 |
|
| 37 |
|
| 4 |
|
Cost reimbursement revenue |
|
| 40 |
|
| 13 |
|
| 55 |
|
| 29 |
|
|
| 63 |
|
| 14 |
|
| 118 |
|
| 43 |
|
Total revenue |
|
| 157 |
|
| 49 |
|
| 209 |
|
| 98 |
|
|
| 267 |
|
| 49 |
|
| 476 |
|
| 147 |
|
Cost of service and membership related |
|
| 11 |
|
| 8 |
|
| 20 |
|
| 16 |
|
|
| 11 |
|
| 10 |
|
| 31 |
|
| 26 |
|
Cost of sales of vacation ownership products |
|
| 19 |
|
| 7 |
|
| 25 |
|
| 12 |
|
|
| 31 |
|
| 1 |
|
| 56 |
|
| 13 |
|
Cost of rental and ancillary services |
|
| 23 |
|
| 2 |
|
| 25 |
|
| 4 |
|
|
| 47 |
|
| 2 |
|
| 72 |
|
| 6 |
|
Cost of consumer financing |
|
| 3 |
|
| — |
|
| 3 |
|
| — |
|
|
| 4 |
|
| — |
|
| 7 |
|
| — |
|
Cost reimbursements |
|
| 40 |
|
| 13 |
|
| 55 |
|
| 29 |
|
|
| 63 |
|
| 14 |
|
| 118 |
|
| 43 |
|
Total cost of sales |
|
| 96 |
|
| 30 |
|
| 128 |
|
| 61 |
|
|
| 156 |
|
| 27 |
|
| 284 |
|
| 88 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
Gross profit |
|
| 61 |
|
| 19 |
|
| 81 |
|
| 37 |
| |||||||||||||
Royalty fee expense |
|
| 5 |
|
| 1 |
|
| 6 |
|
| 1 |
|
|
| 9 |
|
| — |
|
| 15 |
|
| 2 |
|
Selling and marketing expense |
|
| 27 |
|
| 3 |
|
| 30 |
|
| 6 |
|
|
| 53 |
|
| 4 |
|
| 83 |
|
| 10 |
|
General and administrative expense |
|
| 22 |
|
| 10 |
|
| 36 |
|
| 19 |
|
|
| 26 |
|
| 13 |
|
| 61 |
|
| 32 |
|
Amortization expense of intangibles |
|
| 2 |
|
| 1 |
|
| 3 |
|
| 3 |
|
|
| 3 |
|
| 2 |
|
| 6 |
|
| 4 |
|
Depreciation expense |
|
| 5 |
|
| — |
|
| 5 |
|
| 1 |
|
|
| 9 |
|
| — |
|
| 14 |
|
| 1 |
|
Segment operating income |
| $ | — |
| $ | 4 |
| $ | 1 |
| $ | 7 |
|
| $ | 11 |
| $ | 3 |
| $ | 13 |
| $ | 10 |
|
3637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
|
| September 30, |
| September 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Consolidated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
| $ | 297 |
| $ | 174 |
| $ | 483 |
| $ | 358 |
|
| $ | 418 |
| $ | 174 |
| $ | 901 |
| $ | 532 |
|
Cost of sales |
|
| 155 |
|
| 80 |
|
| 237 |
|
| 161 |
|
|
| 220 |
|
| 74 |
|
| 457 |
|
| 235 |
|
Gross profit |
|
| 142 |
|
| 94 |
|
| 246 |
|
| 197 |
| |||||||||||||
Direct segment operating expenses |
|
| 115 |
|
| 63 |
|
| 180 |
|
| 125 |
| |||||||||||||
Operating expenses |
|
| 151 |
|
| 67 |
|
| 331 |
|
| 192 |
| |||||||||||||
Operating income |
| $ | 27 |
| $ | 31 |
| $ | 66 |
| $ | 72 |
|
| $ | 47 |
| $ | 33 |
| $ | 113 |
| $ | 105 |
|
Selected financial information by reporting segment is presented below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||
Total Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exchange and Rental |
| $ | 1,001 |
| $ | 905 |
|
| $ | 1,004 |
| $ | 905 |
|
Vacation Ownership |
|
| 2,132 |
|
| 374 |
|
|
| 2,228 |
|
| 374 |
|
Total |
| $ | 3,133 |
| $ | 1,279 |
|
| $ | 3,232 |
| $ | 1,279 |
|
Geographic Information
We conduct operations through offices in the U.S. and 14 other countries. For the sixnine months ended JuneSeptember 30, 2016 and 2015 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 sixnine months ended JuneSeptember 30, 2016 and 2015.
Geographic information on revenue, based on sourcing, and long‑lived assets, based on physical location, is presented in the table below (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
|
| Three Months Ended |
| Nine Months Ended |
| ||||||||||||||||
|
| June 30, |
| June 30, |
|
| September 30, |
| September 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 250 |
| $ | 144 |
| $ | 406 |
| $ | 298 |
|
| $ | 354 |
| $ | 145 |
| $ | 760 |
| $ | 441 |
|
Europe |
|
| 17 |
|
| 17 |
|
| 34 |
|
| 34 |
|
|
| 16 |
|
| 16 |
|
| 50 |
|
| 51 |
|
All other countries(1) |
|
| 30 |
|
| 13 |
|
| 43 |
|
| 26 |
|
|
| 48 |
|
| 13 |
|
| 91 |
|
| 40 |
|
Total |
| $ | 297 |
| $ | 174 |
| $ | 483 |
| $ | 358 |
|
| $ | 418 |
| $ | 174 |
| $ | 901 |
| $ | 532 |
|
(1) | Includes countries within the following continents: Africa, Asia, Australia, North America and South America. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| June 30, |
| December 31, |
|
| September 30, |
| December 31, |
| ||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||
Long-lived assets (excluding goodwill and intangible assets): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 451 |
| $ | 87 |
|
| $ | 460 |
| $ | 87 |
|
Mexico |
|
| 106 |
|
| — |
|
|
| 104 |
|
| — |
|
Europe |
|
| 4 |
|
| 4 |
|
|
| 4 |
|
| 4 |
|
Total |
| $ | 561 |
| $ | 91 |
|
| $ | 568 |
| $ | 91 |
|
NOTE 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
38
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’s view of these matters may change in the future. ILG also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 19 for a discussion of income tax contingencies.
Purchase Obligations and Other Commitments
Other items, such as certain purchase commitments and guarantees are not recognized as liabilities in our condensed consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. These funding commitments could potentially require our performance in the event of demands by third parties or contingent events. At JuneSeptember 30, 2016, guarantees, surety bonds and letters of credit totaled $98$101 million, with the highest annual amount of $78$71 million occurring in year one. The total includes a guarantee by us of up to $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 $8$6 million as of JuneSeptember 30, 2016. Additionally, the total also includes maximum exposure under guarantees of $92$35 million primarily relating to our vacation rental business’s hotel and resort management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the rental management activities 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.management or in limited instances, guaranteed dollar amounts. 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 JuneSeptember 30, 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 JuneSeptember 30, 2016, amounts pending reimbursements are not significant.
Letters of Credit
Additionally, as of JuneSeptember 30, 2016, our letters of credit totaled $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 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.
Vacation Ownership Development Commitments
With respect to vacation ownership projects under development, we estimate the cost associated with completing the phases of our vacation ownership projects currently in presales and accounted for under the percentage of completion method is approximately $58$39 million at JuneSeptember 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.
3839
NOTE 22— SUPPLEMENTAL GUARANTOR INFORMATION
The senior notes are guaranteed by ILG and certain other subsidiaries thatfor which 100% of the voting securities 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 of JuneSeptember 30, 2016 and December 31, 2015 and for the three and/or sixnine months ended JuneSeptember 30, 2016 and 2015 for ILG on a stand‑alone basis, the Issuer on a stand‑alone basis, the combined Guarantor Subsidiaries of ILG (collectively, the “Guarantor Subsidiaries”), the combined non-guarantor subsidiaries of ILG (collectively, the “Non-Guarantor Subsidiaries”) and ILG on a consolidated basis (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet as of June 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Balance Sheet as of September 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Current assets |
| $ | - |
| $ | - |
| $ | 558 |
| $ | 205 |
| $ | - |
| $ | 763 |
| $ | 2 |
| $ | 1 |
| $ | 560 |
| $ | 291 |
| $ | - |
| $ | 854 |
Property and equipment, net |
|
| - |
|
| - |
|
| 398 |
|
| 163 |
|
| - |
|
| 561 |
|
| - |
|
| - |
|
| 409 |
|
| 159 |
|
| - |
|
| 568 |
Goodwill and intangible assets, net |
|
| - |
|
| 267 |
|
| 661 |
|
| 106 |
|
| - |
|
| 1,034 |
|
| - |
|
| 267 |
|
| 656 |
|
| 102 |
|
| - |
|
| 1,025 |
Investments in subsidiaries |
|
| 574 |
|
| 1,259 |
|
| 393 |
|
| - |
|
| (2,226) |
|
| - |
|
| 604 |
|
| 1,295 |
|
| 388 |
|
| - |
|
| (2,287) |
|
| - |
Other assets |
|
| - |
|
| - |
|
| 541 |
|
| 234 |
|
| - |
|
| 775 |
|
| - |
|
| - |
|
| 307 |
|
| 478 |
|
| - |
|
| 785 |
Total assets |
| $ | 574 |
| $ | 1,526 |
| $ | 2,551 |
| $ | 708 |
| $ | (2,226) |
| $ | 3,133 |
| $ | 606 |
| $ | 1,563 |
| $ | 2,320 |
| $ | 1,030 |
| $ | (2,287) |
| $ | 3,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities |
| $ | 7 |
| $ | 5 |
| $ | 390 |
| $ | 101 |
| $ | - |
| $ | 503 |
| $ | 2 |
| $ | 9 |
| $ | 426 |
| $ | 186 |
| $ | - |
| $ | 623 |
Other long-term liabilities |
|
| - |
|
| - |
|
| 262 |
|
| 30 |
|
| - |
|
| 292 |
|
| - |
|
| - |
|
| 233 |
|
| 29 |
|
| - |
|
| 262 |
Long term debt |
|
| - |
|
| 624 |
|
| (12) |
|
| 115 |
|
| - |
|
| 727 |
|
| - |
|
| 415 |
|
| (12) |
|
| 356 |
|
| - |
|
| 759 |
Intercompany liabilities (receivables) / equity |
|
| (1,012) |
|
| 323 |
|
| 649 |
|
| 40 |
|
| - |
|
| - |
|
| (954) |
|
| 535 |
|
| 375 |
|
| 44 |
|
| - |
|
| - |
Redeemable noncontrolling interest |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
ILG stockholders' equity |
|
| 1,579 |
|
| 574 |
|
| 1,259 |
|
| 393 |
|
| (2,226) |
|
| 1,579 |
|
| 1,558 |
|
| 604 |
|
| 1,295 |
|
| 388 |
|
| (2,287) |
|
| 1,558 |
Noncontrolling interests |
|
| - |
|
| - |
|
| 2 |
|
| 29 |
|
| - |
|
| 31 |
|
| - |
|
| - |
|
| 2 |
|
| 27 |
|
| - |
|
| 29 |
Total liabilities and equity |
| $ | 574 |
| $ | 1,526 |
| $ | 2,551 |
| $ | 708 |
| $ | (2,226) |
| $ | 3,133 |
| $ | 606 |
| $ | 1,563 |
| $ | 2,320 |
| $ | 1,030 |
| $ | (2,287) |
| $ | 3,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
3940
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Three Months Ended June 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Statement of Income for the Three Months Ended September 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Revenue |
| $ | - |
| $ | - |
| $ | 253 |
| $ | 44 |
| $ | - |
| $ | 297 |
| $ | - |
| $ | - |
| $ | 350 |
| $ | 68 |
| $ | - |
| $ | 418 |
Operating expenses |
|
| (1) |
|
| - |
|
| (234) |
|
| (35) |
|
| - |
|
| (270) |
|
| (2) |
|
| - |
|
| (310) |
|
| (59) |
|
| - |
|
| (371) |
Interest (expense) income, net |
|
| - |
|
| (7) |
|
| 1 |
|
| - |
|
| - |
|
| (6) |
|
| - |
|
| (7) |
|
| 2 |
|
| (1) |
|
| - |
|
| (6) |
Other income (expense), net |
|
| 221 |
|
| 32 |
|
| 8 |
|
| 1 |
|
| (64) |
|
| 198 |
|
| 26 |
|
| 42 |
|
| 4 |
|
| (4) |
|
| (81) |
|
| (13) |
Income tax benefit (provision) |
|
| (37) |
|
| - |
|
| 2 |
|
| (1) |
|
| - |
|
| (36) | ||||||||||||||||||
Income tax (provision) benefit |
|
| 8 |
|
| - |
|
| (6) |
|
| - |
|
| - |
|
| 2 | ||||||||||||||||||
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 2 |
|
| - |
|
| - |
|
| 2 |
Net income |
|
| 183 |
|
| 25 |
|
| 31 |
|
| 9 |
|
| (64) |
|
| 184 |
|
| 32 |
|
| 35 |
|
| 42 |
|
| 4 |
|
| (81) |
|
| 32 |
Net income (loss) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| (1) |
|
| - |
|
| (1) | ||||||||||||||||||
Net loss (income) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - | ||||||||||||||||||
Net income attributable to common stockholders |
| $ | 183 |
| $ | 25 |
| $ | 31 |
| $ | 8 |
| $ | (64) |
| $ | 183 |
| $ | 32 |
| $ | 35 |
| $ | 42 |
| $ | 4 |
| $ | (81) |
| $ | 32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Three Months Ended September 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated |
Revenue |
| $ | - |
| $ | - |
| $ | 148 |
| $ | 26 |
| $ |
|
| $ | 174 |
Operating expenses |
|
| (1) |
|
| - |
|
| (117) |
|
| (23) |
|
|
|
|
| (141) |
Interest (expense) income, net |
|
| - |
|
| (6) |
|
| - |
|
| - |
|
|
|
|
| (6) |
Other income, net (1) |
|
| 20 |
|
| 23 |
|
| 3 |
|
| 4 |
|
| (47) |
|
| 3 |
Income tax (provision) benefit |
|
| - |
|
| 3 |
|
| (11) |
|
| (3) |
|
|
|
|
| (11) |
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
|
|
|
| 1 |
Net income |
|
| 19 |
|
| 20 |
|
| 24 |
|
| 4 |
|
| (47) |
|
| 20 |
Net loss (income) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| (1) |
|
| - |
|
| (1) |
Net income attributable to common stockholders |
| $ | 19 |
| $ | 20 |
| $ | 24 |
| $ | 3 |
| $ | (47) |
| $ | 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Income for the Three Months Ended June 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Statement of Income for the Nine Months Ended September 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Revenue |
| $ | - |
| $ | - |
| $ | 147 |
| $ | 27 |
| $ | - |
| $ | 174 |
| $ | - |
| $ | - |
| $ | 762 |
| $ | 139 |
| $ | - |
| $ | 901 |
Operating expenses |
|
| (1) |
|
| - |
|
| (120) |
|
| (22) |
|
| - |
|
| (143) |
|
| (4) |
|
| - |
|
| (669) |
|
| (115) |
|
| - |
|
| (788) |
Interest (expense) income, net |
|
| - |
|
| (6) |
|
| - |
|
| - |
|
| - |
|
| (6) |
|
| - |
|
| (20) |
|
| 4 |
|
| (1) |
|
| - |
|
| (17) |
Other income, net (1) |
|
| 18 |
|
| 21 |
|
| 3 |
|
| - |
|
| (41) |
|
| 1 |
|
| 271 |
|
| 100 |
|
| 15 |
|
| (2) |
|
| (198) |
|
| 186 |
Income tax benefit (provision) |
|
| - |
|
| 2 |
|
| (10) |
|
| (2) |
|
| - |
|
| (10) | ||||||||||||||||||
Income tax (provision) benefit |
|
| (29) |
|
| 3 |
|
| (17) |
|
| (3) |
|
| - |
|
| (46) | ||||||||||||||||||
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 4 |
|
| - |
|
| - |
|
| 4 |
Net income |
|
| 17 |
|
| 17 |
|
| 21 |
|
| 3 |
|
| (41) |
|
| 17 |
|
| 238 |
|
| 83 |
|
| 99 |
|
| 18 |
|
| (198) |
|
| 240 |
Net income (loss) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - |
|
| - | ||||||||||||||||||
Net loss (income) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| 1 |
|
| (3) |
|
| - |
|
| (2) | ||||||||||||||||||
Net income attributable to common stockholders |
| $ | 17 |
| $ | 17 |
| $ | 21 |
| $ | 3 |
| $ | (41) |
| $ | 17 |
| $ | 238 |
| $ | 83 |
| $ | 100 |
| $ | 15 |
| $ | (198) |
| $ | 238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
4041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Statement of Income for the Six Months Ended June 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Statement of Income for the Nine Months Ended September 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| Total Eliminations |
|
| ILG Consolidated | ||||||||||||||||||
Revenue |
| $ | - |
| $ | - |
| $ | 305 |
| $ | 53 |
| $ | - |
| $ | 358 |
| $ | - |
| $ | - |
| $ | 452 |
| $ | 80 |
| $ | - |
| $ | 532 |
Operating expenses |
|
| (2) |
|
| - |
|
| (241) |
|
| (43) |
|
| - |
|
| (286) |
|
| (3) |
| - |
|
| (359) |
|
| (65) |
|
| - |
|
| (427) | |
Interest (expense) income, net |
|
| - |
|
| (9) |
|
| 1 |
|
| - |
|
| - |
|
| (8) |
|
| - |
| (15) |
|
| 1 |
|
| - |
|
| - |
|
| (14) | |
Other income, net (1) |
|
| 43 |
|
| 49 |
|
| 5 |
|
| 1 |
|
| (97) |
|
| 1 |
|
| 63 |
| 72 |
|
| 10 |
|
| 3 |
|
| (145) |
|
| 3 | |
Income tax benefit (provision) |
|
| 1 |
|
| 4 |
|
| (24) |
|
| (5) |
|
| - |
|
| (24) | ||||||||||||||||||
Income tax (provision) benefit |
|
| 1 |
| 6 |
|
| (35) |
|
| (7) |
|
| - |
|
| (35) | |||||||||||||||||||
Equity in earnings from unconsolidated entities |
|
| - |
|
| - |
|
| 2 |
|
| - |
|
| - |
|
| 2 |
|
| - |
|
| - |
|
| 4 |
|
| - |
|
| - |
|
| 4 |
Net income |
|
| 42 |
|
| 44 |
|
| 48 |
|
| 6 |
|
| (97) |
|
| 43 |
|
| 61 |
| 63 |
|
| 73 |
|
| 11 |
|
| (145) |
|
| 63 | |
Net income (loss) attributable to noncontrolling interests |
|
| - |
|
| - |
|
| - |
|
| (1) |
|
|
|
|
| (1) |
|
| - |
|
| - |
|
| - |
|
| (2) |
|
| - |
|
| (2) |
Net income attributable to common stockholders |
| $ | 42 |
| $ | 44 |
| $ | 48 |
| $ | 5 |
| $ | (97) |
| $ | 42 |
| $ | 61 |
| $ | 63 |
| $ | 73 |
| $ | 9 |
| $ | (145) |
| $ | 61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes equity in net income of wholly-owned subsidiaries. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Nine Months Ended September 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| ILG Consolidated |
|
Cash flows provided by (used in) operating activities |
| $ | (33) |
| $ | (11) |
| $ | 470 |
| $ | (352) |
| $ | 74 |
|
Cash flows used in investing activities |
|
| 1,221 |
|
| - |
|
| (1,350) |
|
| 1 |
|
| (128) |
|
Cash flows provided by (used in) financing activities |
|
| (1,188) |
|
| 11 |
|
| 920 |
|
| 378 |
|
| 121 |
|
Effect of exchange rate changes on cash and cash equivalents |
|
| - |
|
| - |
|
| - |
|
| (2) |
|
| (2) |
|
Cash and cash equivalents at beginning of period |
|
| - |
|
| - |
|
| 14 |
|
| 79 |
|
| 93 |
|
Cash and cash equivalents at end of period |
| $ | - |
| $ | - |
| $ | 54 |
| $ | 104 |
| $ | 158 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement of Cash Flows for the Six Months Ended June 30, 2016 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| ILG Consolidated |
| ||||||||||||||||
Statement of Cash Flows for the Nine Months Ended September 30, 2015 |
|
| ILG |
|
| Interval Acquisition Corp. |
|
| Guarantor Subsidiaries |
|
| Non-Guarantor Subsidiaries |
|
| ILG Consolidated |
| ||||||||||||||||
Cash flows provided by (used in) operating activities |
| $ | (38) |
| $ | (10) |
| $ | 104 |
| $ | (3) |
| $ | 53 |
|
| $ | (2) |
| $ | 1 |
| $ | 115 |
| $ | 21 |
| $ | 135 |
|
Cash flows used in investing activities |
|
| 1,230 |
|
| - |
|
| (1,305) |
|
| (36) |
|
| (111) |
|
|
| - |
|
| - |
|
| (13) |
|
| (1) |
|
| (14) |
|
Cash flows provided by (used in) financing activities |
|
| (1,192) |
|
| 10 |
|
| 1,233 |
|
| 47 |
|
| 98 |
|
|
| 2 |
|
| (1) |
|
| (95) |
|
| (2) |
|
| (96) |
|
Effect of exchange rates changes on cash and cash equivalents |
|
| - |
|
| - |
|
| - |
|
| (6) |
|
| (6) |
| ||||||||||||||||
Cash and cash equivalents at beginning of the period |
|
| - |
|
| - |
|
| 14 |
|
| 79 |
|
| 93 |
| ||||||||||||||||
Effect of exchange rate changes on cash and cash equivalents |
|
| - |
|
| - |
|
| - |
|
| (5) |
|
| (5) |
| ||||||||||||||||
Cash and cash equivalents at beginning of period |
|
| - |
|
| - |
|
| 17 |
|
| 64 |
|
| 81 |
| ||||||||||||||||
Cash and cash equivalents at end of period |
| $ | - |
| $ | - |
| $ | 46 |
| $ | 81 |
| $ | 127 |
|
| $ | - |
| $ | - |
| $ | 24 |
| $ | 77 |
| $ | 101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
4142
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward‑Looking Information
This quarterly report on Form 10‑Q contains “forward‑looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as “anticipates,” “estimates,” “expects,” “intends,” “plans” and “believes,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “may” and “could” among others, generally identify forward‑looking statements. These forward‑looking statements include, among others, statements relating to: our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward‑looking statements are based on management’s current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Actual results could differ materially from those contained in the forward‑looking statements included in this report for a variety of reasons, including, among others: (1) adverse trends in economic conditions generally or in the vacation ownership, vacation rental and travel industries, or adverse events or trends in key vacation destinations, (2) adverse changes to, or interruptions in, relationships with third parties, (3) lack of available financing for, or insolvency or consolidation of developers, (4) decreased demand from prospective purchasers of vacation interests, (5) travel related health concerns, (6) regulatory changes, (7) our ability to compete effectively and successfully and to add new products and services, (8) our ability to successfully manage and integrate acquisitions, including Vistana, (9) the occurrence of a termination event under the master license agreement with Starwood or Hyatt, (10) our ability to market VOIs successfully and efficiently, (11) impairment of ILG’s assets, (12) the restrictive covenants in our revolving credit facility and indenture; (13) business interruptions in connection with technology systems, (14) the ability of managed homeowners associations to collect sufficient maintenance fees, (15) third parties not repaying advances or extensions of credit, (16) fluctuations in currency exchange 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 this report. In light of these risks and uncertainties, the forward looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward looking statements, which only reflect the views of our management as of the date of this report. Except as required by applicable law, we do not undertake to update these forward‑looking statements.
GENERAL
The following Management Discussion and Analysis provides a narrative of the results of operations and financial condition of ILG for the three and sixnine months ended JuneSeptember 30, 2016. This section should be read in conjunction with the consolidated financial statements and accompanying notes included in this report as well as our 2015 Annual Report on Form 10‑K, which have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). This discussion includes the following sections:
· | Management Overview |
· | Results of Operations |
· | Financial Position, Liquidity and Capital Resources |
· | Critical Accounting Policies and Estimates |
· | ILG’s Principles of Financial Reporting |
· | Reconciliations of Non‑GAAP Measures |
4243
MANAGEMENT OVERVIEW
Organization
We operate in two segments: Exchange and Rental, and Vacation Ownership (VO). The Exchange and Rental operating segment consists of Interval, Vistana Signature Network, Hyatt Residence Club, Vistana Signature Network, the TPI operated exchange business, and Aqua-Aston. The Vacation Ownership operating segment consists of the VOI sales and financing businesses of Vistana and HVO as well as the management related business lines of Vistana, HVO, VRI, TPI and VRI Europe.
General Description of our Business
ILG is a leading provider of professionally delivered vacation experiences and the 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 sales, marketing, and financing of vacation ownership interests (VOIs); the management of vacation ownership resorts; and related services to owners and associations.
Exchange & Rental Services
Our Exchange and Rental segment offers owners, members and guests access to world-class destinations and an array of benefits and services. These are provided through vacation exchange within the Interval International network (the “Interval Network”), the Vistana Signature Network, and the Hyatt Residence Club and TPI 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 JuneSeptember 30, 2016, this quality global vacation ownership membership exchange network included Vistana Signature Network and Hyatt Residence Club resorts and owners among its large and diversified base of participating resorts consisting of approximately 3,000 resorts located in over 80 countries and approximately 1.8 million members.
Interval typically enters into exclusive multi-year contracts with developers of vacation ownership resorts, pursuant to which the resort developers agree to enroll all purchasers of vacation interests at the applicable resort as members of the Interval exchange program. 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 the 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 for 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 Getaways. Vistana Signature Network and Hyatt Residence Club rentals are transacted mainly to monetize inventory to provide exchanges through hotel loyalty programs. In addition, Interval offers sales, marketing and operational support, consulting and back-office services, including reservation servicing, to certain resort developers participating in the Interval Network, upon their request and for additional consideration.
This segment also provides vacation rental through Aqua‑Aston as part of a comprehensive package of rental, marketing and management services offered to vacation property owners, primarily of Hawaiian properties. Revenue
44
from our vacation rental business is derived principally from fees for rental services and related management of hotels, condominium resorts and homeowners’ associations. Agreements with owners at many of vacation rental’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 Hyatt Residence Club and (ii) Interval Network, Vistana Signature Network and Hyatt Residence Club transactional and service fees paid primarily for exchanges, Getaway rentals, reservation servicing, and related transactions collectively referred to as “transaction revenue.” Revenue is also derived from club rentals, rental management and other related activities.
Vacation Ownership Services
Revenue from the Vacation Ownership segment is derived principally from sales of VOIs by Vistana and HVO, interest income earned for financing these sales, and licensing, sales and marketing, and other fees charged to non-controlled developers of HRC affiliated 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. Our financing propensity for the three and nine months ended September 30, 2016 was approximately 75%. 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 June4.0% as of September 30, 2016 and 3.5% for the year-endedas of 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 the management services of 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 over 200 vacation ownership properties and/or their associations through Vistana, HVO, TPI, VRI and VRI Europe. Vistana and HVO provide management services for their respective branded luxury and upper upscale resorts. TPI and VRI provide property management, homeowners’ association management and related services to timeshare resorts in the United States, Canada and Mexico. VRI Europe manages vacation
45
ownership resorts in Spain and the Canary Islands, the United Kingdom, France and Portugal. Our management services are provided pursuant to agreements with terms generally ranging from one to ten years 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.
International Revenue
International revenue increased in the three and sixnine months ended JuneSeptember 30, 2016 by 58%118% and 27%55%, respectively, compared to the same periods in 2015 principally due to including Vistana and its Mexican operations. As a percentage of our total revenue, international revenue for bothdecreased in the three and sixnine months ended JuneSeptember 30, 2016 decreased to 16%, each period, respectively, from 17% in each of the previous periods.same periods in 2015.
Other Factors Affecting Results
On May 11, 2016, we acquired the vacation ownership business of Starwood Hotels & Resorts Worldwide, Inc., or Starwood, known as Vistana. The results of operations of this business are included in our consolidated results following the acquisition date within both our Exchange and Rental, and Vacation Ownership segments. Consequently, this acquisition will affect the year-over-year comparability of our results of operations for the year ended December 31, 2016, including respective interim periods. In September 2016, Starwood was acquired by Marriott International, Inc.
Exchange & Rental
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 Hilton Grand Vacation Club, the Vistana Signature Network and the Hyatt Residence Club. The external exchange networks, such as the Interval Network, still provide a larger array of choices for members of the proprietary networks. However, with the consolidation among developers over the last several years, external exchange networks have been challenged to grow as a smaller number of developers has focused a higher percentage of their sales than historically, on existing owners instead of new buyers. During this period, ILG has broadened its exchange platform to include both external exchange networks and proprietary developer networks.
Our 2016 results continue to be negatively affected by a shift in the percentage mix of the Interval Network membership base from traditional and direct renewal members to corporate members. Our corporate developer accounts enroll and renew their entire active owner base which positively impacts our retention rate; however, these members tend to have a lower propensity to transact with us as corporate developers often operate their own proprietary exchange programs. Membership mix as of JuneSeptember 30, 2016 included 57% traditional and 43% corporate members, compared to 58% and 42%, respectively, as of JuneSeptember 30, 2015.
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 Hyatt Gold Passport® programs, as applicable. These rentals and our Aqua-Aston business are sensitive to general economic conditions, inventory supply and pricing in the 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 extent we adjust the interest rate we charge or pay a higher rate for receivables financing transactions or other debt. The rentals in this
46
segment include developerare sourced from developer-owned inventory used for lead generation as well as revenue from the hotels included in the Vistana and HVO businesses. These operations are sensitive to the same factors as the club rentals described above.
45
Outlook
We expect additional consolidation within the vacation ownership industry leading to increased competition in our businesses. This leads to challenges for our external exchange business that relies on new buyers for additional members. Through the growth of our proprietary clubs, we plan to increase wallet-share and generate new members.
Our vacation ownership sales and financing businesses are positioned to grow through development of additional phases at existing resorts, converting properties to vacation ownership, adding resorts in attractive markets and expanding our sales distribution capabilities. The four new sales galleries that opened in the fourth quarter of 2015 are still in the process of ramping up to a full sales volume. Three additional sales centers are scheduled to open in 2017. As we expand our sales distribution, we have faced competition for talent.
47
Operating Statistics
|
|
|
|
|
|
|
|
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|
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|
|
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|
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|
| Three Months Ended June 30, |
|
| Six Months Ended June 30, |
| Three Months Ended September 30, |
|
| Nine Months Ended September 30, | ||||||||||||||||||||
Including Vistana only since the May 11, 2016 acquisition: |
| 2016 |
| % Change |
|
| 2015 |
|
| 2016 |
| % Change |
|
| 2015 | |||||||||||||||
|
| 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 |
| 1,828 |
| 0% |
|
| 1,823 |
|
| 1,828 |
| 0% |
|
| 1,823 |
Average revenue per member (2) | $ | 46.76 |
| 6% |
| $ | 44.17 |
| $ | 96.19 |
| 2% |
| $ | 94.04 | $ | 46.35 |
| 6% |
| $ | 43.83 |
| $ | 142.51 |
| 3% |
| $ | 137.89 |
|
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|
|
Vacation Ownership |
|
|
|
|
|
|
|
|
|
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|
|
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|
|
|
|
|
|
|
Contract sales (in millions)(3) | $ | 75 |
| 226% |
| $ | 23 |
| $ | 101 |
| 98% |
| $ | 51 | |||||||||||||||
Average transaction price(4) | $ | 18,179 |
| (43)% |
| $ | 31,745 |
| $ | 20,773 |
| (43)% |
| $ | 36,224 | |||||||||||||||
Volume per guest(5) | $ | 2,855 |
| (8)% |
| $ | 3,117 |
| $ | 3,096 |
| (16)% |
| $ | 3,692 | |||||||||||||||
�� Total timeshare contract sales (in millions)(3) | $ | 123 |
| 392% |
| $ | 25 |
| $ | 223 |
| 197% |
| $ | 75 | |||||||||||||||
Consolidated timeshare contract sales (in millions)(4) | $ | 107 |
| NM |
| $ | 7 |
| $ | 174 |
| NM |
| $ | 20 | |||||||||||||||
Average transaction price(5) | $ | 15,736 |
| (9)% |
| $ | 17,314 |
| $ | 15,914 |
| (12)% |
| $ | 18,135 | |||||||||||||||
Volume per guest(6) | $ | 2,804 |
| 50% |
| $ | 1,866 |
| $ | 2,722 |
| 39% |
| $ | 1,965 | |||||||||||||||
Tour flow(7) |
| 38,253 |
| NM |
|
| 3,460 |
|
| 63,781 |
| NM |
|
| 10,150 | |||||||||||||||
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|
Including Vistana since acquisition and Q3-2015 for comparison: |
|
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| |||||||||||||||
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| |||||||||||||||
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
Total timeshare contract sales (in millions)(3) | $ | 123 |
| 8% |
| $ | 114 |
|
|
|
|
|
|
|
| |||||||||||||||
Consolidated timeshare contract sales (in millions)(4) | $ | 107 |
| 14% |
| $ | 94 |
|
|
|
|
|
|
|
| |||||||||||||||
Average transaction price(5) | $ | 15,736 |
| 7% |
| $ | 14,755 |
|
|
|
|
|
|
|
| |||||||||||||||
Volume per guest(6) | $ | 2,804 |
| 7% |
| $ | 2,622 |
|
|
|
|
|
|
|
| |||||||||||||||
Tour flow(7) |
| 38,253 |
| 6% |
|
| 35,981 |
|
|
|
|
|
|
|
|
46
(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 |
(4) | Represents total timeshare interests sold at consolidated 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. |
(5) | Represents consolidated timeshare 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. |
| Represents |
(7) | Represents the |
48
Revenue
For the three months ended JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended June 30, |
| Three Months Ended September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
| $ | 50 |
| 4% |
| $ | 48 |
| $ | 47 |
| 0% |
| $ | 47 |
Membership fee revenue |
|
| 34 |
| 10% |
|
| 31 |
|
| 35 |
| 13% |
|
| 31 |
Ancillary member revenue |
|
| 1 |
| 0% |
|
| 1 |
|
| 1 |
| (50)% |
|
| 2 |
Total member revenue |
|
| 85 |
| 6% |
|
| 80 |
|
| 83 |
| 4% |
|
| 80 |
Club rental revenue |
|
| 15 |
| NM |
|
| 3 |
|
| 24 |
| NM |
|
| 2 |
Other revenue |
|
| 6 |
| 0% |
|
| 6 |
|
| 6 |
| 20% |
|
| 5 |
Rental management revenue |
|
| 10 |
| (17)% |
|
| 12 |
|
| 13 |
| (7)% |
|
| 14 |
Cost reimbursement revenue |
|
| 24 |
| (0)% |
|
| 24 |
|
| 25 |
| 4% |
|
| 24 |
Total Exchange and Rental revenue |
|
| 140 |
| 12% |
|
| 125 |
|
| 151 |
| 21% |
|
| 125 |
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
|
| 30 |
| NM |
|
| 4 |
|
| 53 |
| NM |
|
| 5 |
Management fee revenue |
|
| 27 |
| 29% |
|
| 21 |
|
| 32 |
| 45% |
|
| 22 |
Sales of vacation ownership products, net |
|
| 49 |
| NM |
|
| 10 |
|
| 96 |
| NM |
|
| 7 |
Consumer financing revenue |
|
| 11 |
| NM |
|
| 1 |
|
| 23 |
| NM |
|
| 1 |
Cost reimbursement revenue |
|
| 40 |
| 208% |
|
| 13 |
|
| 63 |
| 350% |
|
| 14 |
Total Vacation Ownership revenue |
|
| 157 |
| 220% |
|
| 49 |
|
| 267 |
| 445% |
|
| 49 |
Total ILG revenue |
| $ | 297 |
| 71% |
| $ | 174 |
| $ | 418 |
| 140% |
| $ | 174 |
Revenue for the three months ended JuneSeptember 30, 2016 of $297$418 million increased $123$244 million, or 71%140%, compared to revenue of $174 million in 2015. Vacation Ownership segment revenue of $157$267 million increased $108$218 million, or 220%445%, while Exchange and Rental segment revenue of $140$151 million increased $15$26 million, or 12%21%, in the quarter compared to the prior year.
Exchange and Rental
Exchange and Rental segment revenue, excluding cost reimbursements, increased $15$25 million, or 15%25%, in the secondthird quarter of 2016 compared to 2015. This increase is due to the inclusion of Vistana in our results subsequent to the
47
May 11, 2016 acquisition. Excluding Vistana and cost reimbursements, segment revenue decreased by $2$3 million, or 2%3%, in the quarter compared to prior year. This decrease resulted from lower rental management revenue of $2 million, or 17%, attributable to a reduction in available room nights due to a net reduction in units under management at certain Aqua-Aston resorts, and a decline in membership fee revenue of $1 million, or 3%, attributed to the continued shift in the percentage mix of our membership base from traditional to corporate members and the impact of less favorable terms related to the multi‑year renewal of certain large developer clients in a prior year taking effect in the current period. Transaction revenueyear. Additionally, we experienced lower transaction volume in the quarter, remained fairly consistent with last year.which was partly offset by a higher average fee per transaction.
Vacation Ownership
The increase of $108$218 million in segment revenue over the prior year principally resultingresulted from the Vistana acquisition. Excluding Vistana and cost reimbursements, segment revenue increased by $2$3 million, or 5%10%, primarily driven by an increase of $2 million attributable to higher resort operations revenue management fee revenue and a $1 million increase in sales of vacation ownership products in the quarter over prior year. Resort operations revenue pertains to our revenue generating activities from rentals of owned vacation ownership inventory (exclusive of lead-generation) along with ancillary resort services, in addition to rental and ancillary revenue generated by hotels owned by Vistana and HVO.
Sales of vacation ownership products, net, and consumerhotels. Consumer financing revenue excluding Vistana, were largely consistent in the quarter, excluding Vistana, was largely consistent with the prior year.
49
For the sixnine months ended JuneSeptember 30, 2016 compared to the sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Nine Months Ended September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
| $ | 108 |
| 4% |
| $ | 104 |
| $ | 155 |
| 3% |
| $ | 151 |
Membership fee revenue |
|
| 64 |
| 2% |
|
| 63 |
|
| 99 |
| 5% |
|
| 94 |
Ancillary member revenue |
|
| 3 |
| 0% |
|
| 3 |
|
| 4 |
| (20)% |
|
| 5 |
Total member revenue |
|
| 175 |
| 3% |
|
| 170 |
|
| 258 |
| 3% |
|
| 250 |
Club rental revenue |
|
| 18 |
| NM |
|
| 5 |
|
| 42 |
| NM |
|
| 7 |
Other revenue |
|
| 12 |
| (8)% |
|
| 13 |
|
| 18 |
| 0% |
|
| 18 |
Rental management revenue |
|
| 23 |
| (8)% |
|
| 25 |
|
| 36 |
| (8)% |
|
| 39 |
Cost reimbursement revenue |
|
| 46 |
| (2)% |
|
| 47 |
|
| 71 |
| 0% |
|
| 71 |
Total Exchange and Rental revenue |
|
| 274 |
| 5% |
|
| 260 |
|
| 425 |
| 10% |
|
| 385 |
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
|
| 35 |
| NM |
|
| 7 |
|
| 86 |
| NM |
|
| 12 |
Management fee revenue |
|
| 48 |
| 12% |
|
| 43 |
|
| 81 |
| 21% |
|
| 67 |
Sales of vacation ownership products, net |
|
| 58 |
| NM |
|
| 16 |
|
| 154 |
| NM |
|
| 21 |
Consumer financing revenue |
|
| 13 |
| NM |
|
| 3 |
|
| 37 |
| NM |
|
| 4 |
Cost reimbursement revenue |
|
| 55 |
| 90% |
|
| 29 |
|
| 118 |
| 174% |
|
| 43 |
Total Vacation Ownership revenue |
|
| 209 |
| 113% |
|
| 98 |
|
| 476 |
| 224% |
|
| 147 |
Total ILG revenue |
| $ | 483 |
| 35% |
| $ | 358 |
| $ | 901 |
| 69% |
| $ | 532 |
Revenue for the sixnine months ended JuneSeptember 30, 2016 of $483$901 million increased $125$369 million, or 35%69%, compared to revenue of $358$532 million in 2015. Vacation Ownership segment revenue of $209$476 million increased $111$329 million, or 113%224%, while Exchange and Rental segment revenue of $274$425 million increased $14$40 million, or 5%10%, in the period compared to prior year.
Exchange and Rental
Exchange and Rental segment revenue, excluding cost reimbursements, increased $15$40 million, or 7%13%, in the first sixnine months of 2016 compared to 2015. This increase is due to the inclusion of Vistana in our results subsequent to the acquisition. Excluding Vistana and cost reimbursements, segment revenue decreased by $4$7 million, or 2%, in the
48
period compared to the prior year. This decrease resulted from lower rental management revenue of $2$3 million, or 8% primarily attributable to a reduction inless available room nights due to a net reduction in units under management at certain Aqua-Aston resorts and a decline in membership fee revenuethe first nine months of $1 million, or 2%, attributed tothe year. Additionally, the continued shift in the percentage mix of our membership base from traditional to corporate members and the impact of less favorable terms related to the multi‑year renewal of certain large developer clients in a prior year taking effecton multi-year corporate renewals discussed in the currentthree month revenue section unfavorably impacted the period.
These declines were partly offset by an approximate $1 million increase in transaction revenue in the period due to an increase of 3% inhigher average transaction fees for exchanges and Getaways, together with higheran increase club rental revenue of $1 million over prior year.
Vacation Ownership
The increase of $85$254 million in segment revenue, excluding cost reimbursement, over the prior year principally resultingresulted from the Vistana acquisition. Excluding Vistana and cost reimbursements, segment revenue increased by $5$8 million, or 7%8%, primarily driven by stronger sales of consolidated vacation ownership products which rose by $2$4 million, or 15%16%, higher resort operations revenue of $2$4 million, or 24%29%, and an increase of $1 million in management fee revenue in the period over prior year. The increase in sales of vacation ownership productsresort operations revenue is largelyprimarily attributable to higher recognized sales ofreported rental revenue from owned VOIs in the current period compared to last year, as well as the inclusion of incremental rental revenue from owned VOIs.
year.
4950
Cost of Sales and Royalty Fee Expense
For the three months ended JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service and membership related sales |
| $ | 16 |
| (6)% |
| $ | 17 |
| $ | 19 |
| 19% |
| $ | 16 |
Cost of sales of rental and ancillary services |
|
| 19 |
| 111% |
|
| 9 |
|
| 20 |
| 186% |
|
| 7 |
Cost reimbursements |
|
| 24 |
| 0% |
|
| 24 |
|
| 25 |
| 4% |
|
| 24 |
Total Exchange and Rental cost of sales |
|
| 59 |
| 18% |
|
| 50 |
|
| 64 |
| 36% |
|
| 47 |
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 |
|
| 11 |
| 10% |
|
| 10 |
Cost of sales of vacation ownership products |
|
| 19 |
| 171% |
|
| 7 |
|
| 31 |
| NM |
|
| 1 |
Cost of rental and ancillary services |
|
| 23 |
| NM |
|
| 2 |
|
| 47 |
| NM |
|
| 2 |
Cost of consumer financing |
|
| 3 |
| 100% |
|
| — |
|
| 4 |
| NM |
|
| — |
Cost reimbursements |
|
| 40 |
| 208% |
|
| 13 |
|
| 63 |
| 350% |
|
| 14 |
Total Vacation Ownership cost of sales |
|
| 96 |
| 220% |
|
| 30 |
|
| 156 |
| 478% |
|
| 27 |
Total ILG cost of sales |
| $ | 155 |
| 94% |
| $ | 80 |
| $ | 220 |
| 197% |
| $ | 74 |
Gross margin |
|
| 39% |
| (0)% |
|
| 39% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 52% |
| (1)% |
|
| 53% | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty fee expense |
| $ | 5 |
| NM |
| $ | 1 |
| $ | 9 |
| 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% | ||||||||
Margin metrics: |
|
|
|
|
|
|
|
| ||||||||
ILG: |
|
|
|
|
|
|
|
| ||||||||
Gross margin |
|
| 47% |
| (18)% |
|
| 57% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 60% |
| (19)% |
|
| 74% | ||||||||
Exchange and Rental: |
|
|
|
|
|
|
|
| ||||||||
Gross margin |
|
| 58% |
| (6)% |
|
| 62% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 69% |
| (10)% |
|
| 77% | ||||||||
Vacation Ownership: |
|
|
|
|
|
|
|
| ||||||||
Gross margin |
|
| 42% |
| (7)% |
|
| 45% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 54% |
| (14)% |
|
| 63% |
Cost of sales is organized on our consolidated income statement by the respective revenue line items and
consists primarily of the 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 JuneSeptember 30, 2016 increased $75$146 million from 2015 principally due to the inclusion of Vistana’s results subsequent to our acquisition. This increase consists of $66$129 million from our Vacation Ownership segment and $9$17 million from our Exchange and Rental segment. Overall gross margin was 48%47% in the quarter.
5051
Exchange and Rental
Gross margin for the Exchange and Rental segment in the quarter, excluding cost reimbursements, decreased 443 basis points to 70% when compared tofrom 77% in the prior year.year to 69% in the current quarter. Excluding cost reimbursements and Vistana, cost of sales and gross margin were relatively in-line with the prior year. The quarter’s activity reflects lower call centermember fulfillment related expenses (included within costs of service and membership related), partly offset by higher third-party purchased accomodationsaccommodations (included within cost of rental and ancillary services).
Vacation Ownership
The increase of $39$80 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 64845 basis points to 52%54% when compared to the prior year. Excluding Vistana and cost reimbursements, cost of sales and gross margin for this segment was relatively consistent with lastdecreased from 63% to 54% in the quarter in part due to a decrease in certain reported expenses in the prior year.
Royalty Fee Expense
Royalty fee 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$8 million in royalty fee expense in the quarter compared to prior year pertains to the inclusion of Vistana in our results.
52
For the sixnine months ended JuneSeptember 30, 2016 compared to the sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Nine Months Ended September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of service and membership related |
| $ | 32 |
| (9)% |
| $ | 35 |
| $ | 51 |
| 0% |
| $ | 51 |
Cost of rental and ancillary services |
|
| 31 |
| 72% |
|
| 18 |
|
| 51 |
| 104% |
|
| 25 |
Cost reimbursements |
|
| 46 |
| (2)% |
|
| 47 |
|
| 71 |
| 0% |
|
| 71 |
Total Exchange and Rental cost of sales |
|
| 109 |
| 9% |
|
| 100 |
|
| 173 |
| 18% |
|
| 147 |
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 |
|
| 31 |
| 19% |
|
| 26 |
Cost of sales of vacation ownership products |
|
| 25 |
| 108% |
|
| 12 |
|
| 56 |
| 331% |
|
| 13 |
Cost of rental and ancillary services |
|
| 25 |
| NM |
|
| 4 |
|
| 72 |
| NM |
|
| 6 |
Cost of consumer financing |
|
| 3 |
| 100% |
|
| - |
|
| 7 |
| NM |
|
| - |
Cost reimbursements |
|
| 55 |
| 90% |
|
| 29 |
|
| 118 |
| 174% |
|
| 43 |
Total Vacation Ownership cost of sales |
| $ | 128 |
| 110% |
| $ | 61 |
|
| 284 |
| 223% |
|
| 88 |
Total ILG cost of sales |
| $ | 237 |
| 47% |
| $ | 161 |
| $ | 457 |
| 94% |
| $ | 235 |
Gross margin |
|
| 39% |
| 3% |
|
| 38% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 53% |
| (1)% |
|
| 54% | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty fee expense |
|
| 7 |
| 250% |
|
| 2 |
| $ | 16 |
| 433% |
| $ | 3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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% | ||||||||
Margin metrics: |
|
|
|
|
|
|
|
| ||||||||
ILG: |
|
|
|
|
|
|
|
| ||||||||
Gross margin |
|
| 49% |
| (13)% |
|
| 56% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 62% |
| (13)% |
|
| 71% | ||||||||
Exchange and Rental: |
|
|
|
|
|
|
|
| ||||||||
Gross margin |
|
| 59% |
| (5)% |
|
| 62% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 71% |
| (7)% |
|
| 76% | ||||||||
Vacation Ownership: |
|
|
|
|
|
|
|
| ||||||||
Gross margin |
|
| 40% |
| 0% |
|
| 40% | ||||||||
Gross margin without cost reimbursement revenue/expenses |
|
| 54% |
| (5)% |
|
| 57% |
Cost of sales for the sixnine months ended JuneSeptember 30, 2016 increased $76$222 million from 2015 principally due to the inclusion of Vistana’s results subsequent to our acquisition. This increase consists of $67$196 million from our Vacation
51
Ownership segment and $9$26 million from our Exchange and Rental segment. Overall gross margin was 51%49% in the quarter.period.
Exchange and Rental
Gross margin for the Exchange and Rental segment in the quarter,period, excluding cost reimbursements, decreased 275461 basis points to 72%71% when compared to the prior year. Excluding cost reimbursements and Vistana, cost of sales and gross margin were relatively in-line with the prior year. The period’s activity reflects lower call center related expenses and member fulfillment costs (included within costs of service and membership related), partly offset by higher third-party purchased accomodationsaccommodations (included within cost of rental and ancillary services).
Vacation Ownership
The increase of $41$121 million in cost of sales, excluding cost resimbursements,reimbursements, 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$5 million, or 2%12%, primarily as a result of higher sales of vacation ownership products.products and other reported developer costs in the current period compared to last year. Gross margin for this segment increased 203excluding Vistana and cost reimbursements decreased 144 basis points to 56%55% in the period compared to 54%57% last year.
53
Royalty Fee Expense
The increase of $5$13 million in royalty fee expense in the period is primarily due to the inclusion of Vistana in our results.
Selling and Marketing Expense
For the three months ended JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
| $ | 15 |
| (6)% |
| $ | 16 |
| $ | 13 |
| (7)% |
| $ | 14 |
Vacation Ownership |
|
| 27 |
| NM |
|
| 3 |
|
| 53 |
| NM |
|
| 4 |
Total ILG selling and marketing expense |
| $ | 42 |
| 121% |
| $ | 19 |
| $ | 66 |
| 267% |
| $ | 18 |
As a percentage of total revenue |
|
| 14% |
| 27% |
|
| 11% |
|
| 16% |
| 60% |
|
| 10% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 18% |
| 29% |
|
| 14% |
|
| 20% |
| 54% |
|
| 13% |
Selling and marketing expense consists primarily of advertising and promotional expenditures andas well as compensation and other employee‑related costs, 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 expense for our Vacation Ownership segment primarily relates to a range of marketing efforts aimed at generating prospects for our vacation ownership sales activities. These marketing efforts can include activities related to targeted promotional mailings, multi‑night mini‑vacation marketing packages telemarketing activities,and programs, premiums such as gift certificates and tickets to local attractions or events, the cost of renting accomodations at off‑property locations, and other costs related to encouraging potential purchasers to attend sales presentations.
Selling and marketing expense in the secondthird quarter of 2016 increased $23$48 million, or 121%267%, compared to 2015 principally due to the inclusion of Vistana’s results subsequent to our acquisition. Excluding Vistana, sales and marketing expense remained relatively consistent with prior year.results. As a percentage of total revenue and total revenue excluding cost reimbursements, sales and marketing expense during the quarter was comparable to the prior year when excluding Vistana.
52
For the sixnine months ended JuneSeptember 30, 2016 compared to the sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Six Months Ended |
| Nine Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
| $ | 29 |
| (6)% |
| $ | 31 |
| $ | 42 |
| (7)% |
| $ | 45 |
Vacation Ownership |
|
| 30 |
| NM |
|
| 6 |
|
| 83 |
| NM |
|
| 10 |
Total ILG selling and marketing expense |
| $ | 59 |
| 59% |
| $ | 37 |
| $ | 125 |
| 127% |
| $ | 55 |
As a percentage of total revenue |
|
| 12% |
| 20% |
| 10% |
|
| 14% |
| 40% |
| 10% | ||
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 15% |
| 15% |
| 13% |
|
| 18% |
| 38% |
| 13% |
Selling and marketing expense in the first halfnine months of 2016 increased $22$70 million, or 59%127%, compared to 2015 due to the inclusion of Vistana’s results subsequent to our acquisition.results. Excluding Vistana, sales and marketing expense remained relatively consistent with prior year. As a percentage of total revenue and total revenue excluding cost reimbursements, sales and marketing expense during the period was comparable to the prior year when excluding Vistana.
54
General and Administrative Expense
For the three months ended JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
General and administrative expense |
| $ | 54 |
| 50% |
| $ | 36 |
| $ | 56 |
| 40% |
| $ | 40 |
As a percentage of total revenue |
|
| 18% |
| (14)% |
|
| 21% |
|
| 13% |
| (43)% |
|
| 23% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 23% |
| (12)% |
|
| 26% |
|
| 17% |
| (41)% |
|
| 29% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 18% |
| (31)% |
|
| 26% |
|
| 16% |
| (43)% |
|
| 28% |
General and administrative expense consists primarily of compensation and other employee‑related costs (including stock‑based compensation) for personnel engaged in oversight, corporate development, finance and accounting, legal, treasury, tax, internal audit, human resources, and certain IT functions, as well as certain facilities costs, fees for professional services and other benefits.
Excluding Vistana and the approximate $12 millionThe increase in professional fees pertaining to the Vistana transaction, general and administrative expense in the secondquarter is attributable to the inclusion of Vistana. Excluding Vistana, general and administrative expense in the third quarter of 2016 was relatively unchanged from 2015.decreased by $2 million. General and administrative expense as a percentage of revenue when excluding cost reimbursements, acquisition related expenses and Vistana, was also in-line withlower by 147 basis points compared to last year.
For the sixnine months ended JuneSeptember 30, 2016 compared to the sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Nine Months Ended September 30, | ||||||||||||
|
|
| 2016 |
| % Change |
|
| 2015 |
|
| 2016 |
| % Change |
|
| 2015 |
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
General and administrative expense |
| $ | 92 |
| 30% |
| $ | 71 |
| $ | 148 |
| 33% |
| $ | 111 |
As a percentage of total revenue |
|
| 19% |
| (5)% |
|
| 20% |
|
| 16% |
| (24)% |
|
| 21% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 24% |
| (4)% |
|
| 25% |
|
| 21% |
| (22)% |
|
| 27% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 20% |
| (20)% |
|
| 25% |
|
| 18% |
| (31)% |
|
| 26% |
FOR THIS IS
53
The increase in general and administrative expense in the quarter is attributable to the inclusion of Vistana. 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 2016 period decreased by $1$3 million from 2015, despite an unfavorable $1 million comparison with the prior year related to our estimated accrual for the European Union value added tax matter. As a percentage of revenue excluding cost reimbursements, acquisition related expenses and Vistana, general and administrative expense was lower by 4579 basis points compared to last year.
Amortization Expense of Intangibles
For the three and sixnine months ended JuneSeptember 30, 2016 compared to the three and sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Nine Months Ended | ||||||||||||
|
| September 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Amortization expense of intangibles |
| $ | 6 |
| 50% |
| $ | 4 |
| $ | 14 |
| 40% |
| $ | 10 |
As a percentage of total revenue |
|
| 1% |
| (50)% |
|
| 2% |
|
| 2% |
| 0% |
|
| 2% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 2% |
| (33)% |
|
| 3% |
|
| 2% |
| 0% |
|
| 2% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended | ||||||||||||
|
| June 30, |
| June 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Amortization expense of intangibles |
| $ | 5 |
| 67% |
| $ | 3 |
| $ | 8 |
| 14% |
| $ | 7 |
As a percentage of total revenue |
|
| 2% |
| (0)% |
|
| 2% |
|
| 2% |
| (0)% |
|
| 2% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 2% |
| (0)% |
|
| 2% |
|
| 2% |
| (0)% |
|
| 2% |
55
Amortization expense of intangibles for the three and sixnine months ended JuneSeptember 30, 2016 increased $2 million and $1$4 million, respectively, over the comparable 2015 periods, due to incremental amortization expense pertaining to the Vistana acquisition in May 2016.
Depreciation Expense
For the three and sixnine months ended JuneSeptember 30, 2016 compared to the three and sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
| ||
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||||||||||
|
| June 30, |
| June 30, |
| September 30, |
| September 30, | ||||||||||||||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||||||
|
| (Dollars in millions) |
| (Dollars in millions) |
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||||||||||||||
Depreciation expense |
| $ | 9 |
| 125% |
| $ | 4 |
| $ | 14 |
| 75% |
| $ | 8 |
| $ | 14 |
| 250% |
| $ | 4 |
| $ | 28 |
| 115% |
| $ | 13 |
As a percentage of total revenue |
|
| 3% |
| 50% |
|
| 2% |
|
| 3% |
| 50% |
|
| 2% |
|
| 3% |
| 50% |
|
| 2% |
|
| 3% |
| 50% |
|
| 2% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 4% |
| 33% |
|
| 3% |
|
| 4% |
| 33% |
|
| 3% |
|
| 4% |
| 33% |
|
| 3% |
|
| 4% |
| 33% |
|
| 3% |
Depreciation expense for the three and sixnine months ended JuneSeptember 30, 2016 increased $5$10 million and $6$15 million, respectively, over the comparable 2015 periodperiods, largely due to incremental depreciation expense related to fixed assets acquired as part of the Vistana acquisition, in addition to other depreciable assets being placed in service subsequent to JuneSeptember 30, 2015. These depreciable assets pertain primarily to software and related IT hardware.
54
Operating Income
For the three months ended JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
| $ | 27 |
| (0)% |
| $ | 27 |
| $ | 36 |
| 20% |
| $ | 30 |
Vacation Ownership |
|
| — |
| (100)% |
|
| 4 |
|
| 11 |
| 267% |
|
| 3 |
Total ILG operating income |
| $ | 27 |
| (13)% |
| $ | 31 |
| $ | 47 |
| 42% |
| $ | 33 |
As a percentage of total revenue |
|
| 9% |
| (50)% |
|
| 18% |
|
| 11% |
| (42)% |
|
| 19% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 12% |
| (48)% |
|
| 23% |
|
| 14% |
| (42)% |
|
| 24% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 17% |
| (26)% |
|
| 23% |
|
| 15% |
| (42)% |
|
| 26% |
Operating income in the secondthird quarter of 2016 decreased $4increased $14 million from 2015, consisting of a $4increases of $6 million decreaseincrease from Exchange and Rental and $8 million from Vacation Ownership.
Operating income for our Vacation Ownership segment.Exchange and Rental segment of $36 million was higher by $6 million over the prior year. The increase in operating income in the quarter was driven by the inclusion of Vistana in our results. Excluding Vistana and acquisition related costs of $1 million and $0.2 million for the three months ended September 30, 2016 and 2015, respectively, operating income for this segment would have been lower by $1 million largely due to lower membership fee revenue.
The decreaseincrease in operating income of $4$8 million in our Vacation Ownership segment is due to $6 millionthe inclusion of higher professional fees and other costs incurred in connection with closing the Vistana acquisition in May.Vistana. Excluding Vistana and acquisition related expenses of $1 million for the third quarter of 2016 and 2015, respectively, this segment’s operating income would have been lower by $1 million over prior year due in part to increased investments in our VOI sales and marketing.marketing platform.
Operating income for our Exchange and Rental segment of $27 million was in-line with the prior year. Operating 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.
56
Excluding Vistana and acquisition related costs of $12$4 million and $1$2 million for the three months ended JuneSeptember 30, 2016 and 2015, respectively, operating income as a percentage of total revenue excluding cost reimbursements decreased 85was lower by 133 basis points in the quarter.when compared with last year.
For the sixnine months ended JuneSeptember 30, 2016 compared to the sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, |
| Nine Months Ended September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
| $ | 65 |
| (0)% |
| $ | 65 |
| $ | 100 |
| 5% |
| $ | 95 |
Vacation Ownership |
|
| 1 |
| (86)% |
|
| 7 |
|
| 13 |
| 30% |
|
| 10 |
Total ILG operating income |
| $ | 66 |
| (8)% |
| $ | 72 |
| $ | 113 |
| 8% |
| $ | 105 |
As a percentage of total revenue |
|
| 14% |
| (30)% |
|
| 20% |
|
| 13% |
| (35)% |
|
| 20% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 17% |
| (35)% |
|
| 26% |
|
| 16% |
| (36)% |
|
| 25% |
As a percentage of total revenue excluding cost reimbursement revenue and acquisition related costs |
|
| 21% |
| (19)% |
|
| 26% |
|
| 18% |
| (31)% |
|
| 26% |
Operating income in the first half of 2016 decreased $6period increased $8 million from 2015, driven by ourconsisting of a $5 million increase from Exchange and Rental and $3 million from Vacation Ownership segment. The decrease in operating income in our Vacation Ownership segment is due to $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, this segment’s operating income would have been in-line with the prior year.Ownership.
Operating income for our Exchange and Rental segment of $65$100 million remained consistentwas higher by $5 million when compared to the prior year. Operating income in the period reflects the favorable inclusion of Vistana in our results, offset by $6$7 million of higher professional fees and other costs incurred principally in connection with closing the Vistana acquisition in May.acquisition. Excluding Vistana and acquisition related expenses, this segment’s operating income would have been relatively consistent with last year.
Operating income for our Vacation Ownership segment in the period was unfavorably impacted by $12 million of higher acquisition related costs in connection with the Vistana acquisition in May, which largely offset the inclusion of Vistana in our results. Excluding Vistana and acquisition related expenses, this segment’s operating income would have been lower by $1 million when compared to the prior year.year due in part to increased investments in our VOI sales and marketing platform.
55
Excluding Vistana and acquisition related costs of $15$19 million and $0.5$2 million for the sixnine months ended JuneSeptember 30, 2016 and 2015, respectively, ILG operating income as a percentage of total 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‑GAAP measure and is defined in “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 JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
| $ | 43 |
| 23% |
| $ | 35 |
| $ | 47 |
| 24% |
| $ | 38 |
Vacation Ownership |
|
| 19 |
| 171% |
|
| 7 |
|
| 33 |
| 313% |
|
| 8 |
Total ILG adjusted EBITDA |
| $ | 62 |
| 48% |
| $ | 42 |
| $ | 80 |
| 74% |
| $ | 46 |
As a percentage of total revenue |
|
| 21% |
| (13)% |
|
| 24% |
|
| 19% |
| (27)% |
|
| 26% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 27% |
| (13)% |
|
| 31% |
|
| 24% |
| (29)% |
|
| 34% |
57
Adjusted EBITDA in the secondthird quarter of 2016 increased by $20$34 million, or 48%74%, from 2015, consisting of increases of $8$9 million from our Exchange and Rental segment and $12$25 million from our Vacation Ownership segment.
Adjusted EBITDA of $43$47 million from our Exchange and Rental segment rose by $8$9 million, or 23%24%, compared to the prior year due to the Vistana acquisition. Excluding Vistana, segment adjusted EBITDA for the quarter was relatively in-line with last year.
Adjusted EBITDA from our Vacation Ownership segment of $19$33 million was up $12$25 million, or 171%313%, from the prior year primarily due to the Vistana acquisition. Excluding Vistana, adjusted EBITDA in this segment decreased $1 million, primarilyin part reflecting increased investments in our VOI sales and marketing platform in the current quarter.
For the sixnine months ended JuneSeptember 30, 2016 compared to the sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| Nine Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Exchange and Rental |
| $ | 90 |
| 11% |
| $ | 81 |
| $ | 137 |
| 13% |
| $ | 121 |
Vacation Ownership |
|
| 26 |
| 73% |
|
| 15 |
|
| 59 |
| 181% |
|
| 21 |
Total ILG adjusted EBITDA |
| $ | 116 |
| 21% |
| $ | 96 |
| $ | 196 |
| 38% |
| $ | 142 |
As a percentage of total revenue |
|
| 24% |
| (11)% |
|
| 27% |
|
| 22% |
| (19)% |
|
| 27% |
As a percentage of total revenue excluding cost reimbursement revenue |
|
| 30% |
| (12)% |
|
| 34% |
|
| 28% |
| (18)% |
|
| 34% |
Adjusted EBITDA in the first halfnine months of 2016 increased by $20$54 million, or 21%38%, from 2015, consisting of increases of $9$16 million from our Exchange and Rental segment and $11$38 million from our Vacation Ownership segment.
Adjusted EBITDA of $90$137 million from our Exchange and Rental segment rose by $9$16 million, or 11%13%, compared to the prior year due largely to the Vistana acquisition. Excluding Vistana, segment adjusted EBITDA rose by $1 million from last year in large part due to cost savings in our exchange business.
56
Adjusted EBITDA from our Vacation Ownership segment of $26$59 million was up $11$38 million, or 73%181%, from the prior year due to the Vistana acquisition. Excluding Vistana, adjusted EBITDA in this segment decreased $1$2 million, primarily reflecting increased investments in our consolidatedVOI sales and marketing platform in the period.
Other Income (Expense), net
For the three months ended JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Three Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Interest expense |
| $ | (6) |
| 0% |
| $ | (6) |
| $ | (6) |
| 0% |
| $ | (6) |
Equity in earnings from unconsolidated entities |
| $ | 1 |
| 0% |
| $ | 1 |
| $ | 2 |
| 100% |
| $ | 1 |
Gain on bargain purchase |
| $ | 197 |
| NM |
| $ | — |
| $ | (9) |
| NM |
| $ | — |
Other income, net |
| $ | 1 |
| NM |
| $ | 1 | ||||||||
Other income (expense), net |
| $ | (4) |
| (233)% |
| $ | 3 |
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. Interest expense for the full quarter remainedwas relatively consistentin-line with the prior year despitereflecting a higher average outstanding balance on our revolving credit facility in connection with closing the Vistana acquisition on May 11, 2016.2016, offset by higher interest expense capitalized in connection with vacation ownership development activities.
Equity in earnings from unconsolidated entities relates to noncontrolling investments that are recorded under the equity method of accounting; principally, our joint venture in Hawaii which developed a vacation ownership resort for the purpose of selling VOIs.resort. Income
58
and losses from this joint venture are allocated based on ownership interests. See Note 7 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. The change in the quarter to the gain on bargain purchase is the result of additional adjustments to our purchase price allocation for Vistana. 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 certain foreign intercompany loans and excess cash held by foreign subsidiaries in currencies other than their functional currency. Non‑operating foreign exchange net gainslosses were $1$4 million in the secondthird quarter of 2016.2016 compared to net gains of $2 million in prior year. The favorableunfavorable fluctuations during the current quarter were primarily driven by U.S. dollar denominated intercompany loan positions held at JuneSeptember 30, 2016 affected primarily by the stronger dollar compared to the British poundMexican peso. The favorable fluctuations during the 2015 third quarter was primarily driven by U.S. dollar excess cash positions held at September 30, 2015 affected by the stronger dollar compared to the Colombian and the Mexican peso.pesos.
For the sixnine months ended JuneSeptember 30, 2016 compared to the sixnine months ended JuneSeptember 30, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| Nine Months Ended | ||||||||||||
|
| June 30, |
| September 30, | ||||||||||||
|
| 2016 |
| % Change |
| 2015 |
| 2016 |
| % Change |
| 2015 | ||||
|
| (Dollars in millions) |
| (Dollars in millions) | ||||||||||||
Interest income |
| $ | 1 |
| 0% |
| $ | 1 |
| $ | 1 |
| 0% |
| $ | 1 |
Interest expense |
| $ | (12) |
| 33% |
| $ | (9) |
| $ | (18) |
| 20% |
| $ | (15) |
Equity in earnings from unconsolidated entities |
| $ | 2 |
| 0% |
| $ | 2 |
| $ | 4 |
| 0% |
| $ | 4 |
Gain on bargain purchase |
| $ | 197 |
| NM |
| $ | — |
| $ | 188 |
| NM |
| $ | — |
Other income, net |
| $ | 2 |
| 100% |
| $ | 1 | ||||||||
Other income (expense), net |
| $ | (2) |
| (167)% |
| $ | 3 |
Interest income of $1 million in the 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 first halfnine months of 2016 is primarily due to our
57
senior notes, which carry a higher interest rate than our revolving credit facility, andas well as a higher average outstanding balance on our revolving credit facility in connection with the closing of the Vistana acquisition on May 11, 2016.2016, partly offset by higher interest expense capitalized in connection with vacation ownership development activities.
Equity in earnings from unconsolidated entities relates to noncontrolling investments that are recorded under the equity method of accounting; principally, our joint venture in Hawaii which developed a vacation ownership resort for the purpose of selling VOIs. Income and losses from this joint venture are allocated based on ownership interests. See Note 6 to our condensed consolidated financial statements for further discussion.
The gain on bargain purchase of $197$188 million for the nine months ended September 30, 2016 is described in the three month discussion above.
Other income, net primarily relates to net gains and losses on foreign currency exchange related to certain foreign intercompany loans and excess cash held by foreign subsidiaries in currencies other than their functional currency. Non‑operating foreign exchange net gainslosses were $2 million and $1net gains of $4 million in the first halfnine months of 2016 and 2015, respectively. The favorableunfavorable fluctuations in 2016 were primarily driven by U.S. dollar denominated intercompany loan positions held at JuneSeptember 30, 2016 which were affected primarily by the stronger dollar compared to the Mexican peso, andpartly offset by favorable fluctuations stemming from the stronger dollar against the British pound. The favorable fluctuations in 2015 were primarily driven by U.S. dollar excess cash positions held at JuneSeptember 30, 2015 affected by the stronger dollar compared to the Mexican and Colombian pesos as well as the Egyptian pound.pesos.
59
Income Tax Provision
For the three months ended JuneSeptember 30, 2016 compared to the three months ended JuneSeptember 30, 2015
For the three months ended JuneSeptember 30, 2016 and 2015, ILG recorded an income tax benefit and provision for continuing operations of $2 million and $11 million, respectively, which represent effective tax rates of (7.4)% and 35.3% for the respective periods. The negative effective tax rate for the quarter was a result of recognizing an income tax benefit in an interim period with pre-tax income. This income tax benefit is a result of a decrease in the estimated annual effective tax rate and the effect of this change on prior quarters. The decrease in the estimated annual effective tax rate from the prior quarter was primarily due to a change in the projected proportion of income earned and taxed in various jurisdictions and the projected utilization of certain income tax credits that were previously not expected to be realized.
For the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015
For the nine months ended September 30, 2016 and 2015, ILG recorded income tax provisions for continuing operations of $36$46 million and $10$35 million, respectively, which represent effective tax rates of 16.4%16.3% and 36.1%35.8% for the respective periods. The effective tax rate for the threenine months ended JuneSeptember 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 taxationtaxation.
We do not expect the low annual effective tax rates to continue into next year. Going forward we expect our annual effective tax rate to be approximately 38%, absent the impact of discrete items or other items that may cause volatility in the rate.
Additional information
On September 15, 2016, the U.K. Finance Act 2016 was enacted, which among other changes, further reduced the U.K. corporate income tax rate to 17% effective April 1, 2020. The impact of this further rate reduction was recorded in the current reporting period and was not significant. This reduced our U.K. net deferred tax liability and decreased income tax expense, favorably impacting our effective tax rate. Going forward, the lower corporate tax 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 comparedwill continue to the six months ended June 30, 2015
For the six months ended June 30, 2016 and 2015, ILG recordeddecrease income tax provisions for continuing operations of $49 millionexpense 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 reducedfavorably impact our effective tax rate in absolute terms by approximately 18 percentage points for the six months ended June 30, 2016.rate.
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 JuneSeptember 30, 2016, we had $127$158 million of cash and cash equivalents, including $77$91 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, $62$75 million is held in foreign jurisdictions, principally the United Kingdom.Kingdom and Mexico. 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
60
restrictions had no impact on our overall liquidity during the three months ended JuneSeptember 30, 2016 and, as of JuneSeptember 30, 2016, the respective cash balances were immaterial to our overall cash on hand.
Cash generated by operations has been our primary source of liquidity. We believe that our cash on hand along with our anticipated operating future cash flows and availability under our $600 million revolving credit facility, which may be increased to up to $700 million subject to certain conditions, as well as future securitizations of our vacation ownership mortgages receivable, are sufficient to fund our operating needs, quarterly cash dividend, capital expenditures, development and expansion of our operations, debt service, investments and other commitments and contingencies for at least the next twelve months. However, our operating cash flow and access to the securizationsecuritization market may be impacted by macroeconomic and other factors outside of our control.
Cash Flows Discussion
Operating Activities
Net cash provided by operating activities decreased to $53$74 million in the sixnine months ended JuneSeptember 30, 2016 from $86$135 million in the same period of 2015. The decrease of $33$61 million from 2015 was principally due to inventory spend of $41$103 million at Vistana since the acquisition mostly related to on-going development activities, higher income taxes paid of $13$41 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 outlflowsoutflows 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$128 million in the sixnine months ended JuneSeptember 30, 2016 primarily pertain to the Vistana acquisition, net of cash acquired, of $77 million, capital expenditures of $25$42 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, and purchased trading investments of $2 million. Net cash used in investing activities of $7$14 million in the sixnine months ended JuneSeptember 30, 2015 primarily pertains to capital expenditures, primarilymostly related to IT initiatives.
Financing Activities
Net cash provided by financing activities of $98$121 million in the sixnine months ended JuneSeptember 30, 2016 relatedrelates to net borrowingproceeds of $210$375 million from a vacation ownership mortgages receivable securitization transaction in September 2016 involving the issuance of $375 million of asset-backed notes, which were primarily used to repay the outstanding balance on an existing securitization, fund required reserves and pay down a portion of the borrowings under our revolving credit facility and an decrease of $3 million in financing -related restricted cash.revolver. These increases were partly offset by repurchases of our common stock at market prices totaling $56$100 million, including commissions, which settled during the sixnine months; repayments of $56 million on securitized debt; cash dividend payments to ILG stockholders of $37 million as well as cash dividend payments of $2 million to a noncontrolling interest holder; an increase of $26 million in financing-related restricted cash largely attributable to the 2016 term securitization; payment of $24 million to Vistana’s former owner related to a financing obligation; cash dividend payments of $23 million; repayments of $9 million on securitized debt; payments of debt issuance costs totaling $2$7 million related to the securitization, amendments to the Amended Credit Agreement and the exchange offer of the senior notes; and withholding taxes on the vesting of restricted stock units of $1$2 million.
Net cash used in financing activities of $66$96 million in the sixnine months ended JuneSeptember 30, 2015 related to net principal payments of $393$413 million on our revolving credit facility, cash dividend payments of $14$21 million, as well as cash dividend payments of $3 million to a noncontrolling interest, payments of debt issuance costs of $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 million. These uses of cash were partially offset by
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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.
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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‑based financial covenant from a maximum consolidated total leverage to EBITDA ratio of 3.5 to 1.0 to a maximum consolidated secured leverage to EBITDA ratio of 3.25 to 1.0. In addition, the amendment adds an incurrence test requiring a maximum consolidated total leverage to EBITDA ratio of 4.5 to 1.0 on a pro forma basis in certain circumstances in which we make acquisitions or investments, incur additional indebtedness or make restricted payments. Also, the amendment added a new pricing level to the pricing grid for when the consolidated 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.
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 JuneSeptember 30, 2016, borrowings outstanding under the revolving credit facility amounted to $285$75 million, with $304$514 million available to be drawn, net of outstanding letters of credit. The increaseddecrease in borrowings outstanding as ofat September 30, 2016 compared to June 30, 2016 from December 31, 2015 primarily reflectis attributable to utilizing funds drawn forfrom our September 2016 securitization (discussed below) to pay down a portion of the Vistana acquisition in May 2016 and repurchases of our common stock.revolving credit facility.
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 million. We used the proceeds to repay indebtedness outstanding on our revolving credit facility. As of JuneSeptember 30, 2016, total unamortized debt issuance costs pertaining to our senior notes were $6 million.
Interest on the senior notes is paid semi‑annually in arrears on April 15 and October 15 of each year and the senior notes are fully and unconditionally guaranteed on a joint and several basis by our domestic subsidiaries that are required to guarantee the Amended Credit Facility. Additionally, the voting stock of the issuer and the subsidiary guarantors is 100% owned by ILG. The senior notes are redeemable from April 15, 2018 at a redemption price starting at 104.219% which declines over time.
Restrictions and Covenants
The senior notes and 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.
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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 JuneSeptember 30, 2016. Additionally, the revolving credit facility requires us to meet certain financial covenants regarding the maintenance of a maximum consolidated leverage ratio of consolidated secured debt over consolidated Earnings Before Interest, Taxes, Depreciation and Amortization (“EBITDA”), as defined in the amended credit agreement. As of JuneSeptember 30, 2016, the maximum consolidated secured leverage to EBITDA ratio is 3.25x and the minimum consolidated interest coverage ratio is 3.0x. As of JuneSeptember 30, 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 0.870.24 and 13.24,13.15, respectively.
VOI Term Securitization
On September 20, 2016, we completed a term securitization transaction involving the issuance of $375 million of asset-backed notes. An indirect wholly-owned subsidiary of Vistana issued $346 million of Class A notes and $29 million of Class B notes. The notes were backed by vacation ownership loans and had coupons of 2.54% and 2.74%, respectively, for an overall weighted average coupon of 2.56%. The advance rate for this transaction was 96.5%.
Of the $375 million in proceeds from the transaction, $19 million is being held in escrow until the associated VIE purchases up to $19 million of additional loans by March 15, 2017 with any unused cash returned to the investors. Approximately $33 million was used to repay the outstanding balance on Vistana’s 2010 securitization and the remainder was used to pay transaction expenses, fund required reserves, pay down a portion of the borrowings outstanding under our $600 million revolving credit facility and for general corporate purposes.
Free Cash Flow
Free cash flow is a non‑GAAP measure and is defined in “ILG’s Principles of Financial Reporting.” For the sixnine months ended JuneSeptember 30, 2016 and 2015, free cash flow was $45$345 million and $79$123 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, May and MayAugust 2016, our Board of Directors declared a quarterly dividend payment of $0.12 per share paid in March, June and JuneSeptember 2016, respectively, amounting to $7 million, $16 million and $16$15 million, respectively. In AugustNovember 2016, our Board of Directors declared a $0.12 per share dividend payable September 21,December 20, 2016 to shareholders on record on September 7,December 6, 2016. Based on the number of shares of common stock outstanding as of JuneSeptember 30, 2016, at a dividend of $0.12 per share, the anticipated cash outflow would be $15 million in the thirdfourth quarter of 2016. We currently expect to declare and pay quarterly dividends of similar amounts per share.
In May 2016, our Board of Directors increased the remaining share repurchase authorization to a total of $100 million. During the nine months ended September 30, 2016, we repurchased 6.4 million shares of common stock for $100 million, including commissions. As of September 30, 2016, there was no remaining availability for future repurchases of our common stock under this authorization. Acquired shares of our common stock are held as treasury shares carried at cost on our condensed consolidated financial statements.
In November 2016, the Board authorized repurchases of up to $50 million of ILG common stock. 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 six months ended June 30, 2016, we repurchased 4.2 million shares of our common stock for $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.
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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 JuneSeptember 30, 2016, guarantees, surety bonds and letters of credit totaled $98$101 million. The total includes a guarantee by us of up to $37 million of the construction loan for the Maui project. This amount represents the maximum exposure under the 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 $8$6 million as of JuneSeptember 30, 2016. Additionally, the total also includes maximum exposure under guarantees of $92$35 million primarily relating to our vacation rental business’s hotel and resort management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the rental management activities entered into on behalf of the property owners for which either party generally may terminate such leases upon 60 to 90 days prior written notice to the other.
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In addition, certain of the vacation rental business’s hotel and resort management agreements provide that owners receive specified percentages of the revenue generated under management. In these cases, the operating expenses 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 JuneSeptember 30, 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 JuneSeptember 30, 2016, amounts pending reimbursements are not significant.
As of JuneSeptember 30, 2016, our letters of credit totaled $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 JuneSeptember 30, 2016 are as follows:
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Contractual Obligations |
| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years |
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| Total |
| 1 year |
| 1 ‑ 3 years |
| 3 ‑ 5 years |
| 5 years |
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| (Dollars in millions) |
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| (Dollars in millions) |
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Debt principal(a) |
| $ | 1 |
| $ | — |
| $ | — |
| $ | — |
| $ | 1 |
|
| $ | 425 |
| $ | — |
| $ | — |
| $ | 75 |
| $ | 350 |
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Debt interest(a) |
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| 177 |
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| 28 |
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| 57 |
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| 56 |
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| 36 |
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| 141 |
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| 22 |
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| 44 |
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| 44 |
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| 31 |
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Purchase obligations and other commitments(b) |
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| 106 |
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| 33 |
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| 50 |
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| 19 |
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| 4 |
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| 95 |
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| 22 |
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| 46 |
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| 18 |
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| 9 |
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Vacation ownership development commitments(c) |
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| 58 |
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| 58 |
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| — |
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| — |
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| — |
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| 39 |
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| 39 |
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| — |
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| — |
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| — |
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Operating leases |
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| 170 |
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| 20 |
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| 34 |
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| 26 |
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| 90 |
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| 169 |
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| 22 |
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| 34 |
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| 25 |
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| 88 |
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Total contractual obligations |
| $ | 512 |
| $ | 139 |
| $ | 141 |
| $ | 101 |
| $ | 131 |
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| $ | 869 |
| $ | 105 |
| $ | 124 |
| $ | 162 |
| $ | 478 |
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(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 JuneSeptember 30, 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 JuneSeptember 30, 2016. Interest on the revolving credit facility is calculated using the prevailing rates as of JuneSeptember 30, 2016.
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(b)Purchase obligations and other commitments primarily relate to future guaranteed purchases of rental inventory, operational support services, marketing related benefits, membership fulfillment benefits and other commitments.
(c)Vacation ownership development commitments represents our estimate of remaining costs associated with completing the phases of our vacation ownership projects currently in presales and accounted for under the percentage of completion method.
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| Committed |
| 1 Year |
| 1 ‑ 3 Years |
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Guarantees, surety bonds and letters of credit |
| $ | 98 |
| $ | 78 |
| $ | 15 |
| $ | 5 |
| $ | — |
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| $ | 101 |
| $ | 71 |
| $ | 24 |
| $ | 6 |
| $ | — |
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(d)Commercial commitments include minimum revenue guarantees related to hotel and resort management agreements, accommodation leases entered into on behalf of the property owners, and funding commitments that could potentially require performance in the event of demands by third parties or contingent events, such as under a letter of credit extended or under guarantees.
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Off‑Balance Sheet Arrangements
Except as disclosed above in our Contractual Obligations and Commercial Commitments (excluding “Debt principal”), as of JuneSeptember 30, 2016, we did not have any significant off‑balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S‑K.
Recent Accounting Pronouncements
Refer to Note 2 accompanying our condensed consolidated financial statements for a description of recent accounting pronouncements.
Seasonality
Refer to Note 1 accompanying our condensed consolidated financial statements for a discussion on the impact of seasonality.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other judgments and assumptions that we believe are reasonable under the circumstances. Actual outcomes could differ from those estimates. We have discussed those estimates that we believe are critical and required the use of significant judgment and use of estimates that could have a significant impact on our financial statements in our 2015 Annual Report on Form 10‑K.K and in Note 2 of the condensed consolidated financial statements herein. There have been no material changes to our critical accounting policies in the interim period.period other than the updates to our significant accounting policies described in Note 2 of the condensed consolidated financial statements herein.
ILG’S PRINCIPLES OF FINANCIAL REPORTING
Definition of ILG’s Non‑GAAP Measures
Earnings before interest, taxes, depreciation and amortization (EBITDA) is defined as net income attributable to common stockholders excluding, if applicable: (1) non‑operating interest income and interest expense, (2) income taxes, (3) depreciation expense, and (4) amortization expense of intangibles.
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Adjusted EBITDA is defined as EBITDA excluding, if applicable: (1) non‑cash compensation expense, (2) goodwill and asset impairments, (3) acquisition related and restructuring costs, (4) other non‑operating income and expense, (5) the impact of the application of purchase accounting, and (6) other special items.
Adjusted net income is defined as net income attributable to common stockholders excluding the impact of (1) acquisition related and restructuring costs, (2) other non‑operating foreign currency remeasurements, (3) the impact of the application of purchase accounting, and (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, 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.
Contract sales represents total VOIs sold at consolidated and unconsolidated projects pursuant to purchase agreements, net of actual cancellations and rescissions, where we have met a minimum threshold amounting to a 10% down payment of the contract purchase price during the period.
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Our presentation of above‑mentioned non‑GAAP measures may not be comparable to similarly‑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 or gains. We also believe these non‑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‑period comparability of results from business operations. These non‑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‑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 measures presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non‑GAAP measure.
We report these non‑GAAP measures as supplemental measures to results reported pursuant to GAAP. These measures are among the primary metrics by which we evaluate the performance of our businesses, on which our internal budgets are based and by which management is compensated. We believe that investors should have access to the same set of metrics that we use in analyzing our results. These non‑GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non‑GAAP measures which are discussed below.
Items That Are Excluded From ILG’s Non‑GAAP Measures (as applicable)
Amortization expense of intangibles is a non‑cash expense relating primarily to acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as customer relationships, purchase agreements and resort management agreements are valued and amortized over their estimated lives. We believe that since intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of transaction costs.
Depreciation expense is a non‑cash expense relating to our property and equipment and is recorded on a straight‑line basis to allocate the cost of depreciable assets to operations over their estimated service lives.
Non‑cash compensation expense consists principally of expense associated with the grants of restricted stock units. These expenses are not paid in cash, and we will include the related shares in our future calculations of diluted shares of stock outstanding. Upon vesting of restricted stock units, the awards will be settled, at our discretion, on a net basis, with us remitting the required tax withholding amount from our current funds.
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Goodwill and asset impairments are non‑cash expenses relating to adjustments to goodwill and long‑lived assets whereby the carrying value exceeds the fair value of the related assets, and are infrequent in nature.
Acquisition related and restructuring costs are transaction fees, costs incurred in connection with performing due diligence, subsequent adjustments to our initial estimate of contingent consideration obligations associated with business acquisitions, and other direct costs related to acquisition activities. Additionally, this item includes certain restructuring charges primarily related to workforce reductions, costs associated with integrating acquired businesses and estimated costs of exiting contractual commitments.
Other non‑operating income and expense consists principally of foreign currency translations of cash held in certain countries in currencies, principally U.S. dollars, other than their functional currency, in addition to any gains or losses on extinguishment of debt.
Impact of the application of purchase accounting represents the difference between amounts derived from the fair value remeasurement of assets and liabilities acquired in a business combination versus the historical basis.
Other special items consists of other items that we believe are not related to our core business operations. For the three and sixnine months ended JuneSeptember 30, 2016, includes the gain on bargain purchase recognized as part of the Vistana acquisition.
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RECONCILIATIONS OF NON‑GAAP MEASURES
The following tables reconcile EBITDA and adjusted EBITDA to operating income for our operating segments and to net income attributable to common stockholders in total for the three and sixnine months ended JuneSeptember 30, 2016 and 2015 (in millions). The noncontrolling interest relates to the Vacation Ownership segment.
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| Three Months Ended June 30, 2016 |
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| and Rental |
| Ownership |
| Consolidated |
| and Rental |
| Ownership |
| Consolidated | ||||||
Adjusted EBITDA |
| $ | 43 |
| $ | 19 |
| $ | 62 |
| $ | 47 |
| $ | 33 |
| $ | 80 |
Non-cash compensation expense |
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| (3) |
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| (2) |
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| (5) |
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| (3) |
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| (2) |
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| (5) |
Other special items |
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| 197 |
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| — |
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| 197 |
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| (9) |
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| — |
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| (9) |
Other non-operating income (expense), net |
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| 1 |
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| — |
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| 1 |
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| 1 |
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| (5) |
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| (4) |
Acquisition related and restructuring costs |
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| (6) |
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| (6) |
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| (12) |
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| — |
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| (3) |
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| (3) |
Impact of purchase accounting |
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| — |
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| (4) |
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| (4) |
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| — |
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| (3) |
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| (3) |
EBITDA |
|
| 232 |
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| 7 |
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| 239 |
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| 36 |
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| 20 |
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| 56 |
Amortization expense of intangibles |
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| (3) |
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| (2) |
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| (5) |
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| (3) |
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| (3) |
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| (6) |
Depreciation expense |
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| (4) |
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| (5) |
|
| (9) |
|
| (5) |
|
| (9) |
|
| (14) |
Less: Net income attributable to noncontrolling interest |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
|
| — |
|
| — |
Equity in earnings from unconsolidated entities |
|
| — |
|
| (1) |
|
| (1) |
|
| — |
|
| (2) |
|
| (2) |
Less: Other special items |
|
| (197) |
|
| — |
|
| (197) |
|
| 9 |
|
| — |
|
| 9 |
Less: Other non-operating expense, net |
|
| (1) |
|
| — |
|
| (1) |
|
| (1) |
|
| 5 |
|
| 4 |
Operating income |
| $ | 27 |
| $ | — |
|
| 27 |
| $ | 36 |
| $ | 11 |
|
| 47 |
Interest income |
|
|
|
|
|
|
|
| — |
|
|
|
|
|
|
|
| — |
Interest expense |
|
|
|
|
|
|
|
| (6) |
|
|
|
|
|
|
|
| (6) |
Other non-operating income, net |
|
|
|
|
|
|
|
| 1 |
|
|
|
|
|
|
|
| (4) |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 1 |
|
|
|
|
|
|
|
| 2 |
Other special items |
|
|
|
|
|
|
|
| 197 |
|
|
|
|
|
|
|
| (9) |
Income tax provision |
|
|
|
|
|
|
|
| (36) | |||||||||
Income tax benefit |
|
|
|
|
|
|
|
| 2 | |||||||||
Net income |
|
|
|
|
|
|
|
| 184 |
|
|
|
|
|
|
|
| 32 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (1) |
|
|
|
|
|
|
|
| — |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 183 |
|
|
|
|
|
|
| $ | 32 |
|
|
|
|
|
|
|
|
|
|
|
| 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 |
6567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2016 |
| Three Months Ended September 30, 2015 | ||||||||||||||
|
| Exchange |
| Vacation |
|
|
|
| Exchange |
| Vacation |
|
|
| ||||
|
| and Rental |
| Ownership |
| Consolidated |
| and Rental |
| Ownership |
| Consolidated | ||||||
Adjusted EBITDA |
| $ | 90 |
|
| 26 |
| $ | 116 |
| $ | 38 |
| $ | 8 |
| $ | 46 |
Non-cash compensation expense |
|
| (5) |
|
| (3) |
|
| (8) |
|
| (2) |
|
| (1) |
|
| (3) |
Other special items |
|
| 197 |
|
| — |
|
| 197 | |||||||||
Other non-operating income (expense), net |
|
| 2 |
|
| — |
|
| 2 | |||||||||
Other non‑operating income (expense), net |
|
| 3 |
|
| — |
|
| 3 | |||||||||
Acquisition related and restructuring costs |
|
| (6) |
|
| (9) |
|
| (15) |
|
| — |
|
| (2) |
|
| (2) |
Impact of purchase accounting |
|
| — |
|
| (4) |
|
| (4) | |||||||||
EBITDA |
|
| 278 |
|
| 10 |
|
| 288 |
|
| 39 |
|
| 5 |
|
| 44 |
Amortization expense of intangibles |
|
| (5) |
|
| (3) |
|
| (8) |
|
| (2) |
|
| (2) |
|
| (4) |
Depreciation expense |
|
| (9) |
|
| (5) |
|
| (14) |
|
| (4) |
|
| — |
|
| (4) |
Less: Net income attributable to noncontrolling interest |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
|
| 1 |
|
| 1 |
Equity in earnings from unconsolidated entities |
|
| — |
|
| (2) |
|
| (2) |
|
| — |
|
| (1) |
|
| (1) |
Less: Other special items |
|
| (197) |
|
| — |
|
| (197) | |||||||||
Less: Other non-operating income (expense), net |
|
| (2) |
|
| — |
|
| (2) |
|
| (3) |
|
| — |
|
| (3) |
Operating income |
| $ | 65 |
| $ | 1 |
|
| 66 |
| $ | 30 |
| $ | 3 |
|
| 33 |
Interest income |
|
|
|
|
|
|
|
| 1 |
|
|
|
|
|
|
|
| — |
Interest expense |
|
|
|
|
|
|
|
| (12) |
|
|
|
|
|
|
|
| (6) |
Other non-operating income, net |
|
|
|
|
|
|
|
| 2 |
|
|
|
|
|
|
|
| 3 |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 2 |
|
|
|
|
|
|
|
| 1 |
Other special items |
|
|
|
|
|
|
|
| 197 | |||||||||
Income tax provision |
|
|
|
|
|
|
|
| (49) |
|
|
|
|
|
|
|
| (11) |
Net income |
|
|
|
|
|
|
|
| 207 |
|
|
|
|
|
|
|
| 20 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (1) |
|
|
|
|
|
|
|
| (1) |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 206 |
|
|
|
|
|
|
| $ | 19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended June 30, 2015 |
| Nine Months Ended September 30, 2016 | ||||||||||||||
|
| Exchange |
| Vacation |
|
|
|
| Exchange |
| Vacation |
|
|
| ||||
|
| and Rental |
| Ownership |
| Consolidated |
| and Rental |
| Ownership |
| Consolidated | ||||||
Adjusted EBITDA |
| $ | 81 |
| $ | 15 |
| $ | 96 |
| $ | 137 |
| $ | 59 |
| $ | 196 |
Non-cash compensation expense |
|
| (5) |
|
| (2) |
|
| (7) |
|
| (8) |
|
| (5) |
|
| (13) |
Other special items |
|
| 188 |
|
| — |
|
| 188 | |||||||||
Other non-operating income (expense), net |
|
| 1 |
|
| — |
|
| 1 |
|
| 3 |
|
| (5) |
|
| (2) |
Acquisition related and restructuring costs |
|
| (7) |
|
| (12) |
|
| (19) | |||||||||
Impact of purchase accounting |
|
| — |
|
| (1) |
|
| (1) |
|
| — |
|
| (7) |
|
| (7) |
EBITDA |
|
| 77 |
|
| 12 |
|
| 89 |
|
| 313 |
|
| 30 |
|
| 343 |
Amortization expense of intangibles |
|
| (4) |
|
| (3) |
|
| (7) |
|
| (8) |
|
| (6) |
|
| (14) |
Depreciation expense |
|
| (7) |
|
| (1) |
|
| (8) |
|
| (14) |
|
| (14) |
|
| (28) |
Less: Net income attributable to noncontrolling interest |
|
| — |
|
| 1 |
|
| 1 |
|
| — |
|
| 2 |
|
| 2 |
Equity in earnings from unconsolidated entities |
|
| — |
|
| (4) |
|
| (4) | |||||||||
Less: Other special items |
|
| (188) |
|
| — |
|
| (188) | |||||||||
Less: Other non-operating income (expense), net |
|
| (1) |
|
| — |
|
| (1) |
|
| (3) |
|
| 5 |
|
| 2 |
Equity in earnings from unconsolidated entities |
|
| — |
|
| (2) |
|
| (2) | |||||||||
Operating income |
| $ | 65 |
| $ | 7 |
|
| 72 |
| $ | 100 |
| $ | 13 |
|
| 113 |
Interest income |
|
|
|
|
|
|
|
| 1 |
|
|
|
|
|
|
|
| 1 |
Interest expense |
|
|
|
|
|
|
|
| (9) |
|
|
|
|
|
|
|
| (18) |
Other non-operating income, net |
|
|
|
|
|
|
|
| 1 |
|
|
|
|
|
|
|
| (2) |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 2 |
|
|
|
|
|
|
|
| 4 |
Other special items |
|
|
|
|
|
|
|
| 188 | |||||||||
Income tax provision |
|
|
|
|
|
|
|
| (24) |
|
|
|
|
|
|
|
| (46) |
Net income |
|
|
|
|
|
|
|
| 43 |
|
|
|
|
|
|
|
| 240 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (1) |
|
|
|
|
|
|
|
| (2) |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 42 |
|
|
|
|
|
|
| $ | 238 |
6668
|
|
|
|
|
|
|
|
|
|
|
| Nine Months Ended September 30, 2015 | |||||||
|
| Exchange |
| Vacation |
|
|
| ||
|
| and Rental |
| Ownership |
| Consolidated | |||
Adjusted EBITDA |
| $ | 121 |
| $ | 21 |
| $ | 142 |
Non-cash compensation expense |
|
| (8) |
|
| (2) |
|
| (10) |
Other non-operating income (expense), net |
|
| 3 |
|
| - |
|
| 3 |
Acquisition related and restructuring costs |
|
| - |
|
| (2) |
|
| (2) |
Impact of purchase accounting |
|
| - |
|
| - |
|
| - |
EBITDA |
|
| $ 116 |
|
| $ 17 |
|
| $ 133 |
Amortization expense of intangibles |
|
| (6) |
|
| (4) |
|
| (10) |
Depreciation expense |
|
| (12) |
|
| (1) |
|
| (13) |
Less: Net income attributable to noncontrolling interest |
|
| — |
|
| 2 |
|
| 2 |
Less: Other non-operating income (expense), net |
|
| (3) |
|
| — |
|
| (3) |
Equity in earnings from unconsolidated entities |
|
| — |
|
| (4) |
|
| (4) |
Operating income |
| $ | 95 |
| $ | 10 |
|
| 105 |
Interest income |
|
|
|
|
|
|
|
| 1 |
Interest expense |
|
|
|
|
|
|
|
| (15) |
Other non-operating income, net |
|
|
|
|
|
|
|
| 3 |
Equity in earnings from unconsolidated entities |
|
|
|
|
|
|
|
| 4 |
Income tax provision |
|
|
|
|
|
|
|
| (35) |
Net income |
|
|
|
|
|
|
|
| 63 |
Net income attributable to noncontrolling interest |
|
|
|
|
|
|
|
| (2) |
Net income attributable to common stockholders |
|
|
|
|
|
|
| $ | 61 |
The following tables present the inputs used to compute operating income and adjusted EBITDA margin for our operating segments for the three and sixnine months ended JuneSeptember 30, 2016 and 2015 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Exchange and Rental |
| Exchange and Rental |
| Exchange and Rental |
| Exchange and Rental | ||||||||||||||||
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
|
| June 30, |
| June 30, |
| September 30, |
| September 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||||||
Revenue |
| $ | 140 |
| $ | 125 |
| $ | 274 |
| $ | 260 |
| $ | 151 |
| $ | 125 |
| $ | 425 |
| $ | 385 |
Revenue excluding cost reimbursement revenue |
|
| 116 |
|
| 101 |
|
| 228 |
|
| 213 |
|
| 126 |
|
| 101 |
|
| 354 |
|
| 314 |
Operating income |
|
| 27 |
|
| 27 |
|
| 65 |
|
| 65 |
|
| 36 |
|
| 30 |
|
| 100 |
|
| 95 |
Adjusted EBITDA |
|
| 43 |
|
| 35 |
|
| 90 |
|
| 81 |
|
| 47 |
|
| 38 |
|
| 137 |
|
| 121 |
Margin computations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
| 19% |
|
| 22% |
|
| 24% |
|
| 25% |
|
| 24% |
|
| 24% |
|
| 24% |
|
| 25% |
Operating income margin excluding cost reimbursement revenue |
|
| 23% |
|
| 27% |
|
| 29% |
|
| 31% |
|
| 29% |
|
| 30% |
|
| 28% |
|
| 30% |
Adjusted EBITDA margin |
|
| 31% |
|
| 28% |
|
| 33% |
|
| 31% |
|
| 31% |
|
| 30% |
|
| 32% |
|
| 31% |
Adjusted EBITDA margin excluding cost reimbursement revenue |
|
| 37% |
|
| 35% |
|
| 39% |
|
| 38% |
|
| 37% |
|
| 38% |
|
| 39% |
|
| 39% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Vacation Ownership |
| Vacation Ownership |
| Vacation Ownership |
| Vacation Ownership | ||||||||||||||||
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
|
| June 30, |
| June 30, |
| September 30, |
| September 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||||||
Revenue |
| $ | 157 |
| $ | 49 |
| $ | 209 |
| $ | 98 |
| $ | 267 |
| $ | 49 |
| $ | 476 |
| $ | 147 |
Revenue excluding cost reimbursement revenue |
|
| 117 |
|
| 36 |
|
| 153 |
|
| 69 |
|
| 204 |
|
| 35 |
|
| 358 |
|
| 104 |
Operating income |
|
| — |
|
| 4 |
|
| 1 |
|
| 7 |
|
| 11 |
|
| 3 |
|
| 13 |
|
| 10 |
Adjusted EBITDA |
|
| 19 |
|
| 7 |
|
| 26 |
|
| 15 |
|
| 33 |
|
| 8 |
|
| 59 |
|
| 21 |
Margin computations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income margin |
|
| 0% |
|
| 8% |
|
| 0% |
|
| 7% |
|
| 4% |
|
| 6% |
|
| 3% |
|
| 7% |
Operating income margin excluding cost reimbursement revenue |
|
| 0% |
|
| 11% |
|
| 1% |
|
| 10% |
|
| 5% |
|
| 9% |
|
| 4% |
|
| 10% |
Adjusted EBITDA margin |
|
| 12% |
|
| 14% |
|
| 12% |
|
| 15% |
|
| 12% |
|
| 16% |
|
| 12% |
|
| 14% |
Adjusted EBITDA margin excluding cost reimbursement revenue |
|
| 16% |
|
| 19% |
|
| 17% |
|
| 22% |
|
| 16% |
|
| 23% |
|
| 16% |
|
| 20% |
69
The following table reconciles cash provided by operating activities to free cash flow for the sixnine months ended JuneSeptember 30, 2016 and 2015 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Six Months Ended |
| Nine Months Ended | ||||||||
|
| June 30, |
| September 30, | ||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||
Net cash provided by operating activities |
| $ | 53 |
| $ | 86 |
| $ | 74 |
| $ | 135 |
Less: Capital expenditures |
|
| (25) |
|
| (7) |
|
| (42) |
|
| (13) |
Net changes in financing-related restricted cash |
|
| 3 |
|
| - | ||||||
Repayment activitiy related to securitizations |
|
| (9) |
|
| - | ||||||
Less: Repayments on securitizations |
|
| (56) |
|
| - | ||||||
Plus: Proceeds from securitizations, net of debt issuance costs |
|
| 370 |
|
| - | ||||||
Plus: Net changes in financing-related restricted cash |
|
| (26) |
|
| - | ||||||
Plus: Acquisition-related and restructuring payments |
|
| 23 |
|
| - |
|
| 25 |
|
| 1 |
Free cash flow |
| $ | 45 |
| $ | 79 |
| $ | 345 |
| $ | 123 |
67
The following tables reconcile net income attributable to common stockholders to adjusted net income, and to adjusted earnings per share for the three and sixnine months ended JuneSeptember 30, 2016 and 2015 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
|
| June 30, |
| June 30, |
| September 30, |
| September 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||||||
Net income attributable to common stockholders |
| $ | 183 |
| $ | 17 |
| $ | 206 |
| $ | 42 |
| $ | 32 |
| $ | 19 |
| $ | 238 |
| $ | 61 |
Acquisition related and restructuring costs |
|
| 12 |
|
| — |
|
| 15 |
|
| — |
|
| 4 |
|
| 2 |
|
| 19 |
|
| 2 |
Other non-operating foreign currency remeasurements |
|
| (1) |
|
| — |
|
| (2) |
|
| (1) |
|
| 4 |
|
| (2) |
|
| 2 |
|
| (4) |
Impact of purchase accounting |
|
| 4 |
|
| — |
|
| 4 |
|
| 1 |
|
| 3 |
|
| — |
|
| 7 |
|
| — |
Other special items |
|
| (197) |
|
| — |
|
| (197) |
|
| — |
|
| 9 |
|
| — |
|
| (188) |
|
| — |
Income tax impact on adjusting items(1) |
|
| 34 |
|
| — |
|
| 34 |
|
| 0 |
|
| (3) |
|
| — |
|
| 26 |
|
| 1 |
Adjusted net income |
| $ | 35 |
| $ | 17 |
| $ | 60 |
| $ | 42 |
| $ | 49 |
| $ | 19 |
| $ | 104 |
| $ | 60 |
Earnings per share attributable to common stockholders: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 1.89 |
| $ | 0.29 |
| $ | 2.66 |
| $ | 0.73 |
| $ | 0.26 |
| $ | 0.33 |
| $ | 2.55 |
| $ | 1.06 |
Diluted |
| $ | 1.87 |
| $ | 0.29 |
| $ | 2.64 |
| $ | 0.72 |
| $ | 0.25 |
| $ | 0.33 |
| $ | 2.53 |
| $ | 1.05 |
Adjusted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.36 |
| $ | 0.30 |
| $ | 0.77 |
| $ | 0.73 |
| $ | 0.39 |
| $ | 0.33 |
| $ | 1.11 |
| $ | 1.05 |
Diluted |
| $ | 0.36 |
| $ | 0.29 |
| $ | 0.76 |
| $ | 0.72 |
| $ | 0.39 |
| $ | 0.32 |
| $ | 1.10 |
| $ | 1.04 |
Weighted average number of common stock outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
| 97,091 |
|
| 57,453 |
|
| 77,355 |
|
| 57,316 |
|
| 124,762 |
|
| 57,477 |
|
| 93,157 |
|
| 57,369 |
Diluted |
|
| 97,857 |
|
| 58,041 |
|
| 77,905 |
|
| 57,894 |
|
| 125,763 |
|
| 58,055 |
|
| 93,858 |
|
| 57,948 |
(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 three and sixnine months ended JuneSeptember 30, 2016 and 2015 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended |
| Six Months Ended |
| Three Months Ended |
| Nine Months Ended | ||||||||||||||||
|
| June 30, |
| June 30, |
| September 30, |
| September 30, | ||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 | ||||||||
Contract Sales |
| $ | 75 |
| $ | 23 |
| $ | 101 |
| $ | 51 | ||||||||||||
Revenue recognition adjustments: |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Total timeshare contract sales |
| $ | 123 |
| $ | 25 |
| $ | 223 |
| $ | 75 | ||||||||||||
Provision for loan losses |
|
| (3) |
|
| — |
|
| (4) |
|
| (1) |
|
| (8) |
|
| (1) |
|
| (12) |
|
| (2) |
Contract sales of unconsolidated projects |
|
| (16) |
|
| (15) |
|
| (34) |
|
| (37) |
|
| (16) |
|
| (18) |
|
| (49) |
|
| (55) |
Percentage of completion deferral |
|
| (2) |
|
| — |
|
| (2) |
|
| — | ||||||||||||
Percentage of completion |
|
| (5) |
|
| — |
|
| (7) |
|
| — | ||||||||||||
Other items and adjustments(1) |
|
| (5) |
|
| 2 |
|
| (3) |
|
| 3 |
|
| 2 |
|
| 1 |
|
| (1) |
|
| 3 |
Sales of vacation ownership products, net |
| $ | 49 |
| $ | 10 |
| $ | 58 |
| $ | 16 |
| $ | 96 |
| $ | 7 |
| $ | 154 |
| $ | 21 |
Provision for loan losses |
|
| 8 |
|
| 1 |
|
| 12 |
|
| 2 | ||||||||||||
Percentage of completion |
|
| 5 |
|
| — |
|
| 7 |
|
| — | ||||||||||||
Other items and adjustments(1) |
|
| (2) |
|
| (1) |
|
| 1 |
|
| (3) | ||||||||||||
Consolidated timeshare contract sales |
| $ | 107 |
| $ | 7 |
| $ | 174 |
| $ | 20 |
(1) | Includes adjustments for incentives, other GAAP deferrals, cancelled sales, fractional sales and |
70
The following tables represent reconciliations of our revenues between our consolidated income statement format and our segment presentation format for the three and nine months ended September 30, 2016 and 2015 (in millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended September 30, 2016 |
|
|
|
|
| For the Three Months Ended September 30, 2015 |
|
|
| ||||||||||||||||||||||||
|
|
| Service and Membership Related |
|
| Sales of Vacation Ownership Products |
|
| Rental and Ancillary Services |
|
| Consumer Financing |
|
| Cost Reimbursements |
|
| Total |
|
| Service and Membership Related |
|
| Sales of Vacation Ownership Products |
|
| Rental and Ancillary Services |
|
| Consumer Financing |
|
| Cost Reimbursements |
|
| Total |
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
| $ | 34 |
| $ | - |
| $ | 13 |
| $ | - |
| $ | - |
| $ | 47 |
| $ | 35 |
| $ | - |
| $ | 12 |
| $ | - |
| $ | - |
| $ | 47 |
Membership fee revenue |
|
| 35 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 35 |
|
| 31 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 31 |
Ancillary member revenue |
|
| 1 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 1 |
|
| 2 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 2 |
Total member revenue |
|
| 70 |
|
| - |
|
| 13 |
|
| - |
|
| - |
|
| 83 |
|
| 68 |
|
| - |
|
| 12 |
|
| - |
|
| - |
|
| 80 |
Club rental revenue |
|
| - |
|
| - |
|
| 24 |
|
| - |
|
| - |
|
| 24 |
|
| - |
|
| - |
|
| 2 |
|
| - |
|
| - |
|
| 2 |
Other revenue |
|
| 5 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 6 |
|
| 5 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 5 |
Rental management revenue |
|
| 12 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 13 |
|
| 13 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 14 |
Cost reimbursement revenue |
|
|
|
|
| - |
|
|
|
|
| - |
|
| 25 |
|
| 25 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 24 |
|
| 24 |
Total Exchange and Rental revenue |
|
| 87 |
|
| - |
|
| 39 |
|
| - |
|
| 25 |
|
| 151 |
|
| 86 |
|
| - |
|
| 15 |
|
| - |
|
| 24 |
|
| 125 |
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
|
| - |
|
| - |
|
| 53 |
|
| - |
|
| - |
|
| 53 |
|
| - |
|
| 1 |
|
| 4 |
|
| - |
|
| - |
|
| 5 |
Management fee revenue |
|
| 32 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 32 |
|
| 22 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 22 |
Sales of vacation ownership products, net |
|
| - |
|
| 96 |
|
| - |
|
| - |
|
| - |
|
| 96 |
|
| - |
|
| 7 |
|
| - |
|
| - |
|
| - |
|
| 7 |
Consumer financing revenue |
|
| - |
|
| - |
|
| - |
|
| 23 |
|
| - |
|
| 23 |
|
| - |
|
| - |
|
| - |
|
| 1 |
|
| - |
|
| 1 |
Cost reimbursement revenue |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 63 |
|
| 63 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 14 |
|
| 14 |
Total Vacation Ownership revenue |
|
| 32 |
|
| 96 |
|
| 53 |
|
| 23 |
|
| 63 |
|
| 267 |
|
| 22 |
|
| 8 |
|
| 4 |
|
| 1 |
|
| 14 |
|
| 49 |
Total ILG revenue |
| $ | 119 |
| $ | 96 |
| $ | 92 |
| $ | 23 |
| $ | 88 |
| $ | 418 |
| $ | 108 |
| $ | 8 |
| $ | 19 |
| $ | 1 |
| $ | 38 |
| $ | 174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the Nine Months Ended September 30, 2016 |
|
|
|
|
| For the Nine Months Ended September 30, 2015 |
|
|
| ||||||||||||||||||||||||
|
|
| Service and Membership Related |
|
| Sales of Vacation Ownership Products |
|
| Rental and Ancillary Services |
|
| Consumer Financing |
|
| Cost Reimbursements |
|
| Total |
|
| Service and Membership Related |
|
| Sales of Vacation Ownership Products |
|
| Rental and Ancillary Services |
|
| Consumer Financing |
|
| Cost Reimbursements |
|
| Total |
Exchange and Rental |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction revenue |
| $ | 106 |
| $ | - |
| $ | 49 |
| $ | - |
| $ | - |
| $ | 155 |
| $ | 107 |
| $ | - |
| $ | 44 |
| $ | - |
| $ | - |
| $ | 151 |
Membership fee revenue |
|
| 99 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 99 |
|
| 94 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 94 |
Ancillary member revenue |
|
| 4 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 4 |
|
| 5 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 5 |
Total member revenue |
|
| 209 |
|
| - |
|
| 49 |
|
| - |
|
| - |
|
| 258 |
|
| 206 |
|
| - |
|
| 44 |
|
| - |
|
| - |
|
| 250 |
Club rental revenue |
|
| - |
|
| - |
|
| 42 |
|
| - |
|
| - |
|
| 42 |
|
| - |
|
| - |
|
| 7 |
|
| - |
|
| - |
|
| 7 |
Other revenue |
|
| 17 |
|
| - |
|
| 1 |
|
| - |
|
| - |
|
| 18 |
|
| 18 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 18 |
Rental management revenue |
|
| 33 |
|
| - |
|
| 3 |
|
| - |
|
|
|
|
| 36 |
|
| 36 |
|
| - |
|
| 3 |
|
| - |
|
| - |
|
| 39 |
Cost reimbursement revenue |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 71 |
|
| 71 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 71 |
|
| 71 |
Total Exchange and Rental revenue |
|
| 259 |
|
| - |
|
| 95 |
|
| - |
|
| 71 |
|
| 425 |
|
| 260 |
|
| - |
|
| 54 |
|
| - |
|
| 71 |
|
| 385 |
Vacation Ownership |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Resort operations revenue |
|
| - |
|
| - |
|
| 86 |
|
| - |
|
| - |
|
| 86 |
|
| - |
|
| 3 |
|
| 9 |
|
| - |
|
| - |
|
| 12 |
Management fee revenue |
|
| 81 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 81 |
|
| 67 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 67 |
Sales of vacation ownership products, net |
|
| - |
|
| 154 |
|
| - |
|
| - |
|
| - |
|
| 154 |
|
| - |
|
| 21 |
|
| - |
|
| - |
|
| - |
|
| 21 |
Consumer financing revenue |
|
| - |
|
| - |
|
| - |
|
| 37 |
|
| - |
|
| 37 |
|
| - |
|
| - |
|
| - |
|
| 4 |
|
| - |
|
| 4 |
Cost reimbursement revenue |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 118 |
|
| 118 |
|
| - |
|
| - |
|
| - |
|
| - |
|
| 43 |
|
| 43 |
Total Vacation Ownership revenue |
|
| 81 |
|
| 154 |
|
| 86 |
|
| 37 |
|
| 118 |
|
| 476 |
|
| 67 |
|
| 24 |
|
| 9 |
|
| 4 |
|
| 43 |
|
| 147 |
Total ILG revenue |
| $ | 340 |
| $ | 154 |
| $ | 181 |
| $ | 37 |
| $ | 189 |
| $ | 901 |
| $ | 327 |
| $ | 24 |
| $ | 63 |
| $ | 4 |
| $ | 114 |
| $ | 532 |
Definition of ILG’s Revenue Line Items
Club rental revenue – Represents rentals generated by the Vistana Signature Network and Hyatt Residence Club mainly to monetize inventory to provide exchanges through hotel loyalty programs.
Consumer financing revenue – Includes interest income on vacation ownership mortgages receivable, as well as fees from servicing the existing securitized portion of Vistana’s receivables portfolio.
Cost reimbursement revenue - Represents the compensation and other employee-related costs directly associated with managing properties that are included in both revenue and cost of sales and that are passed on to the property owners or homeowner associations without mark-up. Cost reimbursement revenue of the Vacation Ownership segment also includes reimbursement of sales and marketing expenses, without mark-up, pursuant to contractual arrangements.
71
Management fee revenue - Represents vacation ownership property management revenue earned by our Vacation Ownership segment exclusive of cost reimbursements.
Membership fee revenue - Represents fees paid for membership in the Interval Network, Vistana Signature Network and Hyatt Residence Club.
Other revenue - Includes revenue related primarily to exchange and rental transaction activity and membership programs outside of the Interval Network, Vistana Signature Network and Hyatt Residence Club, sales of marketing materials primarily for point-of-sale developer use, and certain financial services-related fee income.
Rental and ancillary – Includes our rental activities such as Getaways, club rentals and owned hotel revenues, as well as associated resort ancillary revenues.
Rental management revenue– Represents rental management revenue earned by our vacation rental businesses within our Exchange and Rental segment, exclusive of cost reimbursement revenue.
Resort operations revenue - Pertains to our revenue generating activities from rentals of owned vacation ownership inventory (exclusive of lead-generation) along with ancillary resort services, in addition to rental and ancillary revenue generated by owned hotels.
Sales of vacation ownership products, net – Includes sales of vacation ownership products, net, for HVO and Vistana.
Service and membership revenue– Revenue associated with providing services including membership-related activities and exchange transactions, as well as vacation ownership and vacation rental management businesses.
Transaction revenue – Interval Network, Vistana Signature Network and Hyatt Residence Club transactional and service fees paid primarily for exchanges, Getaways, reservation servicing and related transactions.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We conduct business in certain foreign markets, primarily in the United Kingdom, Mexico and 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‑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 sixnine months ended JuneSeptember 30, 2016 resulted in a minimal net gain,loss of $1 million, each period, and for the three and six months ended June 30, 2015 resulted in a minimal net loss.loss for the three and nine months ended September 30, 2015. 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 gainloss was $1$4 million for the secondthird quarter of 2016 compared to a minimal net gain of $2 million in 2015. The favorableunfavorable fluctuations during the current quarter were primarily driven by U.S. dollar denominated intercompany loan positions held at JuneSeptember 30, 2016 affected primarily by the stronger dollar compared to the British pound
72
Mexican peso. The favorable fluctuations during the 2015 third quarter was primarily driven by U.S. dollar excess cash positions held at September 30, 2015 affected by the stronger dollar compared to the Colombian and the Mexican peso.pesos.
Non-operating foreign exchange net gainloss was $2 million for the first half ofnine months ended September 30, 2016 compared to a net gain of $1$4 million in 2015.for the nine months ended September 30, 2016. The favorableunfavorable fluctuations in 2016 were primarily driven by U.S. dollar denominated intercompany loan positions held at JuneSeptember 30, 2016 which were affected primarily by the stronger dollar compared to the Mexican peso, partly offset by favorable fluctuations stemming from the stronger dollar against the British pound and the Mexican peso.pound. The favorable fluctuations in 2015 were primarily driven by U.S. dollar excess cash positions held at JuneSeptember 30, 2015 affected by the stronger dollar compared to the Mexican and Colombian pesos as well as 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 sixnine months ended JuneSeptember 30, 2016 would result in an approximate change to revenue of $2 million and $3 millions,$5 million, respectively. There have been no material quantitative changes in market risk exposures since December 31, 2015.
Interest Rate Risk
We are exposed to interest rate risk through borrowings under our amended credit agreement which bears interest at variable rates. The interest rate on the amended credit agreement as of April 2015 is based on (at our election) either LIBOR plus a predetermined margin that ranges from 1.25% to 2.50%, or the Base Rate as defined in the amended credit agreement plus a predetermined margin that ranges from 0.25% to 1.50%, in each case based on ILG’s leverage ratio. As of JuneSeptember 30, 2016, the applicable margin was 2.00% per annum for LIBOR revolving loans and 1.00% per annum for Base Rate loans. As of JuneSeptember 30, 2016, we had $285$75 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 $1 million for the sixnine months ended JuneSeptember 30, 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, as well as future securitizationsecuritizations 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.
Additionally, our consumer financing business generates income from the spread between the revenue generated on loans originated less its costs to fund and service those loans, including interest costs related to associated securitizations. Adverse changes in prevailing market rates for securitizations could negatively impact income from our consumer financing business in the future.
Item 4. Controls and Procedures
We monitor and evaluate on an ongoing basis our disclosure controls and internal control over financial reporting in order to improve our overall effectiveness. In the course of this evaluation, we modify and refine our internal processes as conditions warrant.
As required by Rule 13a‑15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined by Rule 13a‑15(e) and 15d‑15(e) under
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the Exchange Act). Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in our filings with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’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
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accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a‑15(d) of the Exchange Act, we, under the supervision and with the participation of our management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, also evaluated whether any changes occurred to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. 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.
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OTHER INFORMATION
Not applicable
See Part I, Item IA., “Risk Factors,” of ILG’s 2015 Annual Report on Form 10‑K, for a detailed discussion of the risk factors affecting ILG. There have been no material changes from the risk factors described in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sale of Securities. None
(b) Use of Proceeds. Not applicable
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers: The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended JuneSeptember 30, 2016 by or on behalf of ILG or any “affiliated purchaser,” as defined by Rule 10b‑18(a)(3) of the Exchange Act. All purchases were made in accordance with Rule 10b‑18 of the Exchange Act.
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Period |
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| Total Number of |
| Approximate Dollar |
| |
|
| Total |
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|
| 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 |
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June 2016 |
| 2,776,800 |
| $ 14.95 |
| 4,216,800 |
| $ | 38,702,454 |
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Period |
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| Total Number of |
| Approximate Dollar |
| |
|
| Total |
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|
| Shares Purchased |
| Value of Shares that |
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| 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) |
| |
July 2016 |
| 1,450,000 | $ | 17.22 |
| 1,450,000 |
| $ | 13,734,312 |
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August 2016 |
| 779,957 | $ | 17.61 |
| 779,957 |
| $ | — |
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September 2016 |
| — | $ | — |
| — |
| $ | — |
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(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‑market or through privately negotiated transactions. In November 2016, the Board authorized repurchases of up to $50 million of ILG common stock.
Items 3‑4.5. Not applicableapplicable
Item 5. Other information
On August 3, 2016, ILG held its annual meeting of stockholders. The matters on which the stockholders voted, in person or by proxy, were (i) to elect thirteen directors to serve until ILG’s next annual meeting of stockholders or until their successors are duly elected and qualified, (ii) to approve amendments to the Interval Leisure Group, Inc. 2013 Stock and Incentive Compensation Plan including the performance goals contained therein, and (iii) to ratify the appointment of Ernst & Young LLP as ILG’s independent registered certified public accounting firm for the fiscal year ended December 31, 2016. The results of the voting are as follows:
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Proposal 1 – Election of Directors:
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Name of Nominee |
| Votes For |
| Votes Withheld |
| Broker Non-votes |
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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 –Approve amendments to the Interval Leisure Group, Inc. 2013 Stock and Incentive Compensation Plan including the performance goals contained therein
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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
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Votes For |
| Votes Against |
| Abstentions |
| Broker Non-votes |
117,806,050 |
| 1,369,825 |
| 31,790 |
| 0 |
The stockholders ratified Proposal 3.
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Exhibit |
| Description |
| Location |
3.1 |
| Amended and Restated Certificate of Incorporation of Interval Leisure Group, Inc. |
| Exhibit 3.1 to ILG’s Current Report on Form 8‑K, filed on August 25, 2008 |
3.2 |
| Certificate of Designations, Preferences and Rights to Series A Junior Participating Preferred Stock |
| Exhibit 3.2 to ILG’s Quarterly Report on Form 10‑Q, filed on August 11, 2009 |
3.3 |
| Fourth Amended and Restated By‑Laws of Interval Leisure Group, Inc. |
| Exhibit 3.2 to ILG’s Current Report on Form 8‑K, filed on December 12, 2014 |
31.1† |
| Certification of the Chief Executive Officer pursuant to Rule 13a‑14(a) or Rule 15d‑14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act |
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31.2† |
| Certification of the Chief Financial Officer pursuant to Rule 13a‑14(a) or Rule 15d‑14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act |
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31.3† |
| Certification of the Chief Accounting Officer pursuant to Rule 13a‑14(a) or Rule 15d‑14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes‑Oxley Act |
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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‑Oxley Act |
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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‑Oxley Act |
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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‑Oxley Act |
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101.INS† |
| XBRL Instance Document |
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101.SCH† |
| XBRL Taxonomy Extension Schema Document |
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101.CAL† |
| XBRL Taxonomy Calculation Linkbase Document |
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101.LAB† |
| XBRL Taxonomy Label Linkbase Document |
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101.PRE† |
| XBRL Taxonomy Presentation Linkbase Document |
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101.DEF† |
| XBRL Taxonomy Extension Definition Linkbase Document |
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† Filed herewith.
†† Furnished herewith.
* Reflects management contracts and management and director compensatory plans.
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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,November 8, 2016
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| By: | /s/ William L. Harvey |
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| William L. Harvey |
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| Chief Financial Officer |
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| By: | /s/ John A. Galea |
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| John A. Galea |
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| Chief Accounting Officer |
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