UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended March 31,September 30, 2020

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 number 001-37794

 

 

Hilton Grand Vacations Inc.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Delaware

81-2545345

(State or Other Jurisdiction of

(I.R.S. Employer

Incorporation or Organization)

Identification No.)

 

6355 MetroWest Boulevard, Suite 180,

 

Orlando, Florida

32835

(Address of Principal Executive Offices)

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code (407) 613-3100

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, $0.01 par value per share

 

HGV

 

New York Stock Exchange

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

Accelerated Filer

Non-Accelerated Filer

Smaller Reporting Company

Emerging Growth Company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).      Yes      No

 

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of April 24,October 23, 2020 was 84,987,241.85,106,483.

 

 

 


 

HILTON GRAND VACATIONS INC.

FORM 10-Q TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

 

 

 

 

Item 1.

Financial Statements

2

Item 2.

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

3026

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

45

Item 4.

Controls and Procedures

46

 

 

PART II - OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

47

Item 1A.

Risk Factors

47

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

50

Item 3.

Defaults Upon Senior Securities

50

Item 4.

Mine Safety Disclosures

50

Item 5.

Other Information

50

Item 6.

Exhibits

51

 

Signatures

5253

 

 

 


PART I FINANCIAL INFORMATION

Item 1.

Financial Statements

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

(unaudited)

 

 

 

 

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

669

 

 

$

67

 

 

$

625

 

 

$

67

 

Restricted cash

 

 

90

 

 

 

85

 

 

 

92

 

 

 

85

 

Accounts receivable, net of allowance for credit losses of $17 and $21

 

 

158

 

 

 

174

 

Accounts receivable, net of allowance for credit losses of $18 and $21

 

 

109

 

 

 

174

 

Timeshare financing receivables, net

 

 

1,122

 

 

 

1,156

 

 

 

1,012

 

 

 

1,156

 

Inventory

 

 

885

 

 

 

558

 

 

 

933

 

 

 

558

 

Property and equipment, net

 

 

473

 

 

 

778

 

 

 

488

 

 

 

778

 

Operating lease right-of-use assets, net

 

 

62

 

 

 

60

 

 

 

55

 

 

 

60

 

Investments in unconsolidated affiliates

 

 

47

 

 

 

44

 

 

 

49

 

 

 

44

 

Intangible assets, net

 

 

78

 

 

 

77

 

 

 

80

 

 

 

77

 

Other assets

 

 

120

 

 

 

80

 

 

 

101

 

 

 

80

 

TOTAL ASSETS (variable interest entities - $694 and $748)

 

$

3,704

 

 

$

3,079

 

TOTAL ASSETS (variable interest entities - $866 and $748)

 

$

3,544

 

 

$

3,079

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

268

 

 

$

298

 

 

$

264

 

 

$

298

 

Advanced deposits

 

 

117

 

 

 

115

 

 

 

119

 

 

 

115

 

Debt, net

 

 

1,266

 

 

 

828

 

 

 

1,262

 

 

 

828

 

Non-recourse debt, net

 

 

885

 

 

 

747

 

 

 

837

 

 

 

747

 

Operating lease liabilities

 

 

77

 

 

 

76

 

 

 

70

 

 

 

76

 

Deferred revenues

 

 

277

 

 

 

186

 

 

 

261

 

 

 

186

 

Deferred income tax liabilities

 

 

251

 

 

 

259

 

 

 

209

 

 

 

259

 

Total liabilities (variable interest entities - $694 and $750)

 

 

3,141

 

 

 

2,509

 

Total liabilities (variable interest entities - $842 and $750)

 

 

3,022

 

 

 

2,509

 

Commitments and contingencies - see Note 19

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $0.01 par value; 300,000,000 authorized shares, NaN

issued or outstanding as of March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.01 par value; 3,000,000,000 authorized shares,

84,987,241 shares issued and outstanding as of March 31, 2020 and

85,535,501 shares issued and outstanding as of December 31, 2019

 

 

1

 

 

 

1

 

Preferred stock, $0.01 par value; 300,000,000 authorized shares, NaN

issued or outstanding as of September 30, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.01 par value; 3,000,000,000 authorized shares,

85,086,548 shares issued and outstanding as of September 30, 2020 and

85,535,501 shares issued and outstanding as of December 31, 2019

 

 

1

 

 

 

1

 

Additional paid-in capital

 

 

172

 

 

 

179

 

 

 

186

 

 

 

179

 

Accumulated retained earnings

 

 

390

 

 

 

390

 

 

 

335

 

 

 

390

 

Total equity

 

 

563

 

 

 

570

 

 

 

522

 

 

 

570

 

TOTAL LIABILITIES AND EQUITY

 

$

3,704

 

 

$

3,079

 

 

$

3,544

 

 

$

3,079

 

 

See notes to unaudited condensed consolidated financial statements.


HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

 

 

Three Months Ended March 31,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

56

 

 

$

125

 

 

$

24

 

 

$

138

 

 

$

80

 

 

$

383

 

Sales, marketing, brand and other fees

 

 

106

 

 

 

141

 

 

 

52

 

 

 

143

 

 

 

171

 

 

 

429

 

Financing

 

 

44

 

 

 

41

 

 

 

40

 

 

 

43

 

 

 

127

 

 

 

127

 

Resort and club management

 

 

44

 

 

 

42

 

 

 

39

 

 

 

45

 

 

 

122

 

 

 

130

 

Rental and ancillary services

 

 

52

 

 

 

59

 

 

 

20

 

 

 

54

 

 

 

77

 

 

 

173

 

Cost reimbursements

 

 

49

 

 

 

42

 

 

 

33

 

 

 

43

 

 

 

105

 

 

 

128

 

Total revenues

 

 

351

 

 

 

450

 

 

 

208

 

 

 

466

 

 

 

682

 

 

 

1,370

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

14

 

 

 

36

 

 

 

8

 

 

 

24

 

 

 

21

 

 

 

92

 

Sales and marketing

 

 

157

 

 

 

170

 

 

 

79

 

 

 

188

 

 

 

297

 

 

 

544

 

Financing

 

 

13

 

 

 

13

 

 

 

13

 

 

 

14

 

 

 

39

 

 

 

39

 

Resort and club management

 

 

12

 

 

 

11

 

 

 

9

 

 

 

11

 

 

 

27

 

 

 

34

 

Rental and ancillary services

 

 

37

 

 

 

35

 

 

 

24

 

 

 

36

 

 

 

85

 

 

 

108

 

General and administrative

 

 

21

 

 

 

27

 

 

 

22

 

 

 

30

 

 

 

65

 

 

 

87

 

Depreciation and amortization

 

 

12

 

 

 

8

 

 

 

11

 

 

 

12

 

 

 

34

 

 

 

32

 

License fee expense

 

 

22

 

 

 

23

 

 

 

11

 

 

 

26

 

 

 

39

 

 

 

75

 

Cost reimbursements

 

 

49

 

 

 

42

 

 

 

33

 

 

 

43

 

 

 

105

 

 

 

128

 

Total operating expenses

 

 

337

 

 

 

365

 

 

 

210

 

 

 

384

 

 

 

712

 

 

 

1,139

 

Interest expense

 

 

(10

)

 

 

(10

)

 

 

(10

)

 

 

(12

)

 

 

(32

)

 

 

(33

)

Equity in earnings from unconsolidated affiliates

 

 

3

 

 

 

1

 

Equity in (losses) earnings from unconsolidated affiliates

 

 

(1

)

 

 

1

 

 

 

3

 

 

 

4

 

Other gain (loss), net

 

 

2

 

 

 

(1

)

 

 

1

 

 

 

(1

)

 

 

 

 

 

(3

)

Income before income taxes

 

 

9

 

 

 

75

 

Income tax expense

 

 

(1

)

 

 

(20

)

Net income

 

$

8

 

 

$

55

 

Earnings per share:

 

 

 

 

 

 

 

 

(Loss) Income before income taxes

 

 

(12

)

 

 

70

 

 

 

(59

)

 

 

199

 

Income tax benefit (expense)

 

 

5

 

 

 

(20

)

 

 

12

 

 

 

(55

)

Net (loss) income

 

$

(7

)

 

$

50

 

 

$

(47

)

 

$

144

 

(Loss) Earnings per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.09

 

 

$

0.59

 

 

$

(0.08

)

 

$

0.59

 

 

$

(0.55

)

 

$

1.61

 

Diluted

 

$

0.09

 

 

$

0.58

 

 

$

(0.08

)

 

$

0.59

 

 

$

(0.55

)

 

$

1.60

 

 

See notes to unaudited condensed consolidated financial statements.


HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

 

 

Three Months Ended March 31,

 

 

Nine Months Ended September 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8

 

 

$

55

 

Adjustments to reconcile net income to net cash provided by

operating activities:

 

 

 

 

 

 

 

 

Net (loss) income

 

$

(47

)

 

$

144

 

Adjustments to reconcile net (loss) income to net cash provided by

operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

12

 

 

 

8

 

 

 

34

 

 

 

32

 

Amortization of deferred financing costs, contract costs, and other

 

 

4

 

 

 

4

 

 

 

13

 

 

 

12

 

Provision for financing receivables losses

 

 

37

 

 

 

14

 

 

 

57

 

 

 

60

 

Other (gain) loss, net

 

 

(2

)

 

 

1

 

Other loss, net

 

 

 

 

 

3

 

Share-based compensation

 

 

(2

)

 

 

5

 

 

 

10

 

 

 

18

 

Deferred income tax (benefit) expense

 

 

(8

)

 

 

5

 

Deferred income tax benefit

 

 

(50

)

 

 

(21

)

Equity in earnings from unconsolidated affiliates

 

 

(3

)

 

 

(1

)

 

 

(3

)

 

 

(4

)

Net changes in assets and liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

16

 

 

 

7

 

 

 

65

 

 

 

17

 

Timeshare financing receivables, net

 

 

(3

)

 

 

(5

)

 

 

87

 

 

 

(79

)

Inventory

 

 

(10

)

 

 

(3

)

 

 

(59

)

 

 

(6

)

Purchases and development of real estate for future conversion to inventory

 

 

(5

)

 

 

(63

)

 

 

(27

)

 

 

(107

)

Other assets

 

 

(42

)

 

 

(33

)

 

 

(25

)

 

 

(24

)

Accounts payable, accrued expenses and other

 

 

(42

)

 

 

(27

)

 

 

(48

)

 

 

20

 

Advanced deposits

 

 

2

 

 

 

5

 

 

 

4

 

 

 

11

 

Deferred revenues

 

 

91

 

 

 

41

 

 

 

75

 

 

 

70

 

Other

 

 

 

 

 

1

 

Net cash provided by operating activities

 

 

53

 

 

 

14

 

 

 

86

 

 

 

146

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property and equipment

 

 

(3

)

 

 

(6

)

 

 

(6

)

 

 

(25

)

Software capitalization costs

 

 

(5

)

 

 

(4

)

 

 

(16

)

 

 

(17

)

Investments in unconsolidated affiliates

 

 

(2

)

 

 

(2

)

Net cash used in investing activities

 

 

(8

)

 

 

(10

)

 

 

(24

)

 

 

(44

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of debt

 

 

495

 

 

 

195

 

 

 

495

 

 

 

455

 

Issuance of non-recourse debt

 

 

195

 

 

 

 

 

 

495

 

 

 

365

 

Repayment of debt

 

 

(57

)

 

 

(23

)

 

 

(62

)

 

 

(272

)

Repayment of non-recourse debt

 

 

(58

)

 

 

(40

)

 

 

(403

)

 

 

(327

)

Debt issuance costs

 

 

(8

)

 

 

(6

)

Repurchase and retirement of common stock

 

 

(10

)

 

 

(92

)

 

 

(10

)

 

 

(283

)

Payment of withholding taxes on vesting of restricted stock units

 

 

(2

)

 

 

(2

)

 

 

(3

)

 

 

(3

)

Proceeds from employee stock plan purchases

 

 

1

 

 

 

2

 

Other financing activity

 

 

(1

)

 

 

 

 

 

(2

)

 

 

(2

)

Net cash provided by financing activities

 

 

562

 

 

 

38

 

Net cash provided by (used in) financing activities

 

 

503

 

 

 

(71

)

Net increase in cash, cash equivalents and restricted cash

 

 

607

 

 

 

42

 

 

 

565

 

 

 

31

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

152

 

 

 

180

 

 

 

152

 

 

 

180

 

Cash, cash equivalents and restricted cash, end of period

 

$

759

 

 

$

222

 

 

$

717

 

 

$

211

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash transfers from Inventory to Property and Equipment(1)

 

$

301

 

 

$

 

Non-cash transfers from Property and Equipment to Inventory(2)

 

$

301

 

 

$

 

Non-cash transfers from Other Assets to Inventory(1)

 

 

 

 

 

 

2

 

Non-cash transfers from Inventory to Property and Equipment(2)

 

 

 

 

 

 

16

 

Non-cash transfers from Other Assets to Property and Equipment(2)

 

 

 

 

 

 

40

 

Supplemental disclosure of non-cash financing activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of other debt

 

$

 

 

$

23

 

 

$

 

 

$

23

 

 

(1)

See Note 7: Inventory for more information.

(2)

See Note 8: Property and Equipment for more information.

 

See notes to unaudited condensed consolidated financial statements.


HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in millions)

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Total

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Total

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance as of December 31, 2019

 

 

85

 

 

$

1

 

 

$

179

 

 

$

390

 

 

$

570

 

 

 

85

 

 

$

1

 

 

$

179

 

 

$

390

 

 

$

570

 

Net income

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

8

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

8

 

 

 

8

 

Activity related to share-based compensation

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

(5

)

 

 

0

 

 

 

0

 

 

 

(5

)

 

 

0

 

 

 

(5

)

Repurchase and retirement of common stock

 

 

(1

)

 

 

 

 

 

(2

)

 

 

(8

)

 

 

(10

)

 

 

(1

)

 

 

0

 

 

 

(2

)

 

 

(8

)

 

 

(10

)

Balance as of March 31, 2020

 

 

84

 

 

 

1

 

 

$

172

 

 

$

390

 

 

$

563

 

 

 

84

 

 

 

1

 

 

 

172

 

 

 

390

 

 

 

563

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(48

)

 

 

(48

)

Activity related to share-based compensation

 

 

0

 

 

 

0

 

 

 

8

 

 

 

0

 

 

 

8

 

Balance as of June 30, 2020

 

 

84

 

 

 

1

 

 

 

180

 

 

 

342

 

 

 

523

 

Net loss

 

 

0

 

 

 

0

 

 

 

0

 

 

 

(7

)

 

 

(7

)

Activity related to share-based compensation

 

 

0

 

 

 

0

 

 

 

6

 

 

 

0

 

 

 

6

 

Balance as of September 30, 2020

 

 

84

 

 

 

1

 

 

$

186

 

 

$

335

 

 

$

522

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Accumulated

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Total

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Total

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Equity

 

Balance as of December 31, 2018

 

 

94

 

 

$

1

 

 

$

174

 

 

$

441

 

 

$

616

 

 

 

94

 

 

$

1

 

 

$

174

 

 

$

441

 

 

$

616

 

Net income

 

 

 

 

 

 

 

 

 

 

 

55

 

 

 

55

 

 

 

0

 

 

 

0

 

 

 

0

 

 

 

55

 

 

 

55

 

Activity related to share-based compensation

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

1

 

 

 

0

 

 

 

0

 

 

 

1

 

 

 

0

 

 

 

1

 

Repurchase and retirement of common stock

 

 

(3

)

 

 

 

 

 

(5

)

 

 

(92

)

 

 

(97

)

 

 

(3

)

 

 

0

 

 

 

(5

)

 

 

(92

)

 

 

(97

)

Balance as of March 31, 2019

 

 

91

 

 

 

1

 

 

$

170

 

 

$

404

 

 

$

575

 

 

 

91

 

 

 

1

 

 

 

170

 

 

 

404

 

 

 

575

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

39

 

 

 

39

 

Activity related to share-based compensation

 

 

0

 

 

 

0

 

 

 

10

 

 

 

0

 

 

 

10

 

Repurchase and retirement of common stock

 

 

(5

)

 

 

0

 

 

 

(11

)

 

 

(163

)

 

 

(174

)

Balance as of June 30, 2019

 

 

86

 

 

 

1

 

 

 

169

 

 

 

280

 

 

 

450

 

Net income

 

 

0

 

 

 

0

 

 

 

0

 

 

 

50

 

 

 

50

 

Activity related to share-based compensation

 

 

0

 

 

 

0

 

 

 

6

 

 

 

0

 

 

 

6

 

Repurchase and retirement of common stock

 

 

(1

)

 

 

0

 

 

 

(1

)

 

 

(11

)

 

 

(12

)

Balance as of September 30, 2019

 

 

85

 

 

 

1

 

 

$

174

 

 

$

319

 

 

$

494

 

 

See notes to unaudited condensed consolidated financial statements.


HILTON GRAND VACATIONS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization

Our Business

Hilton Grand Vacations Inc. (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our operations primarily consist of: selling vacation ownership intervals (“VOIs”) for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts; and managing our points-based Hilton Grand Vacations Club exchange program (collectively the “Club”). As of March 31,September 30, 2020, we had 5960 properties, comprised of 9,5519,594 units, located in the United States (“U.S.”), Japan, the United Kingdom, Italy and Barbados. A significant number of our properties and units are concentrated in Florida, Hawaii, Nevada, New York, and South Carolina, with particular concentration of our units in Florida, Hawaii and New York.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest.  In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods.  All material intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2019, included in our Annual Report on Form 10-K filed with the SEC on March 2, 2020.

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

 

COVID-19

The novel coronavirus (“COVID-19”) pandemic continues to significantly negatively impact the hospitality, travel and leisure industries due to various mandates and orders to close non-essential businesses, impose travel restrictions, require “stay-at-home” and/or self-quarantine, and require similar actions. Such restrictions and directives have resulted in cancellations and significant reductions in travel around the world, as well as the negative global economic conditions resulting from the impact of the COVID-19 pandemic. As a result of the reduction in travel, during the first quarter of 2020 we closed substantially all of our resorts and sales centers.  

In addition, in response to the impact of COVID-19, we have taken a variety of actions to ensure the continuity of our business and operations, including workforce furlough, implementing temporary salary reductions for the remaining active employees primarily during the second quarter of 2020, eliminating all discretionary spending, and reducing our planned investment in new inventory by approximately $200 million. Further, during the first quarter of 2020, we drew down on the availability under our credit facility as a precautionary measure to ensure liquidity for a sustained period and on May 8, 2020, we amended our Credit Agreement which amended certain terms of the credit facilities (“Senior Secured Credit Facilities”) to provide us with both near-term and long-term flexibility with respect to satisfying certain negative and financial covenant ratios as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business and operations. See Note 11: Debt and Non-recourse debt for additional actions taken with respect to our financial flexibility. Recently, we announced a workforce reduction plan that will affect approximately 1,600 team members in order to better align our workforce with the Company’s needs in light of the current environment.  In addition, approximately 2,000 of our team members remain furloughed.


Prior to re-opening our resorts and sales centers, we introduced the HGV Enhanced Care Guidelines, designed to provide owners, guests and team members with the highest level of cleaning protocols and safety standards recommended by the Center for Disease Control and Prevention and cleaning solutions approved by the Environmental Protection Agency in response to the COVID-19 pandemic. Along with providing personal protective equipment to team members, these Enhanced Care Guidelines include low-touch arrivals and departures, frequent and thorough cleaning, reduction of paper items, reduced capacity for our pool decks and fitness centers, and new technologies. While operations were suspended, essential resort personnel worked diligently maintaining the resorts for a safe re-opening. Annual deep cleanings, typically scheduled during slower seasons, were moved up and completed, allowing the resorts to be in top shape when owners and guests arrive.

Beginning in May 2020, various states and counties started to allow gradual relaxation of restrictions on activities and a resumption of businesses. In response, we began a phased reopening of resorts and resumption of our business activities during the second quarter of 2020, but under new operating guidelines and with safety measures. As of September 30, 2020, we have over three quarters of our resorts and sales centers open and currently operating however, many of our resorts and sales centers are operating with significant capacity constraints and subject to various safety measures. In addition, ongoing strict travel and other restrictions in regions and locations where we have a significant number of resorts and concentration of units, in particular, Hawaii and New York, are significantly impacting consumer demand for our resorts in those areas.

While we plan to continue to reopen our resorts and resume our business as conditions permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Further, various state and local government officials may issue new or revised orders that are different than current ones under which we are operating. Accordingly, there remains significant uncertainty as to the degree of impact and duration of the conditions stemming from the ongoing pandemic on our revenues, net income and other operating results, as well as our business and operations generally. Any significantly extended duration or worsening of the conditions associated with the pandemic may adversely impact our liquidity in the longer term, including our ability to finance our day-to-day business and operations, and may adversely affect our ability to comply with our maintenance and financial covenants and ratios under our debt obligations notwithstanding the recent amendments discussed above. However, we believe that prior to triggering an event of default, if any, in connection with the financial covenants under our debt agreements we would be able to reach an agreement with our lenders to amend such covenants in advance of any potential default.

Additionally, as a result of the ongoing COVID-19 pandemic, we are performing a review over certain of our long-lived assets in order to determine our optimal strategic direction with regards to these assets. These assets include undeveloped parcels of land and certain unallocated infrastructure costs related to future phases of existing resorts. The result of this review could have a material impact on the carrying value of certain assets, which could result in non-cash impairments.

Summary of Significant Accounting Policies

Accounts Receivable and Allowance for Credit Losses

Accounts receivable primarily consists of trade receivables and is reported at the customers’ outstanding balances, less any allowance for credit losses. The expected credit losses are measured using an expected-loss model that reflects the risk of loss and considers the losses expected over the outstanding period of the receivable.

Cloud Computing Arrangements

We capitalize certain costs associated with cloud computing arrangements (“CCAs”). These costs are included in Other assets in our condensed consolidated balance sheets and are expensed in the same line as the hosting arrangement in our condensed consolidated statements of operations using the straight-line method over the assets’ estimated useful lives, which is generally three to five years. We review the CCAs for impairment when circumstances indicate that their carrying amounts may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess of carrying value over the fair value in our condensed consolidated statements of operations.

Derivative Instruments

 

We use derivative instruments as part of our overall strategy to manage our exposure to market risks primarily associated with fluctuations in interest rates and do not use derivatives for trading or speculative purposes. We record the derivative instrument at fair value either as an asset or liability. We assess the effectiveness of our hedging instruments


quarterly and record changes in fair value in accumulated other comprehensive income (“AOCI”) for the effective portion of the hedge and record the ineffectiveness of a hedge immediately in earnings in our condensed consolidated statements of operations. We release the derivative’s gain or loss from AOCI to match the timing of the underlying hedged items’ effect on earnings.


Recently Issued Accounting Pronouncements

Adopted Accounting Standards

On January 1, 2020, we adopted Accounting Standards Update (ASU) No. 2016-13, (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASC 326”), using the modified retrospective approach. The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis are measured using an expected-loss model, replacing the current incurred-loss model, and recorded through an allowance for credit losses. The adoption of ASU 2016-13 did not have a material impact on our condensed consolidated financial statements and related disclosures and no cumulative adjustment was recorded primarily as our timeshare financing receivables are recorded net of an allowance that is calculated in accordance with ASC 606, Revenue from Contracts with Customers.

 

On January 1, 2020, we adopted ASU 2018-15 (“ASU 2018-15”), Customer’s Accounting Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which requires a customer in a cloud computing arrangement that is a service contract to follow the internal-use software guidance in Accounting Standards Codification 350-40 to determine which implementation costs to defer and recognize as an asset. ASU 2018-15 generally aligns the guidance on recognizing implementation costs incurred in a cloud computing arrangement that is a service contract with that for implementation costs incurred to develop or obtain internal-use software, including hosting arrangements that include an internal-use software license. This ASU has been adopted using the retrospective approach. Accordingly, previously reported financial information has been restated to reflect the application of the new standard to the comparative periods presented. The adoption of ASU 2018-15 did not have a material impact on our condensed consolidated financial statements.

In March 2020, the SEC issued a final rule, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities, which simplifies the disclosure requirements related to registered securities under Rule 3-10 of Regulation S-X. Therule replaces the requirement for a parent entity to provide detailed disclosures with regard to guarantors of registered debt offerings within the footnotes to the consolidated financial statements. Under the final rule, a parent entity is required to present summarized financial information ofthe issuers’ and guarantors’ balance sheets and statements of operations on a consolidated basis. It also requires qualitative disclosures with respect to information about guarantors and the terms and conditions of guarantees. These disclosures may be provided outside the footnotes to the Company’s consolidated financial statements. We early adopted the reporting requirements of the rule in the second quarter of 2020 and elected to provide these disclosures in Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Accounting Standards Not Yet Adopted

In December 2019, the FASB issued ASU 2019-12 (“ASU 2019-12”), Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. ASU 2019-12 is intended to simplify various aspects related to accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and which also clarifies and amends existing guidance to improve consistent application. The provisions of this ASU are effective for reporting periods after December 15, 2020. We are currently evaluating the effect that this ASU will have on our condensed consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04 (“ASU 2020-04”), Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective for all entities as of March 12, 2020 through December 31, 2022. We are currently evaluating the effect that this ASU will have on our condensed consolidated financial statements.


Note 3: Revenue from Contracts with Customers

Disaggregation of Revenue

The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following 2 segments: (i) Real estate sales and financing and (ii) Resort operations and club management. Please refer to Note 18: Business Segments below for more details related to our segments.

 

 

Three Months Ended March 31,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Real Estate and Financing Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

56

 

 

$

125

 

 

$

24

 

 

$

138

 

 

$

80

 

 

$

383

 

Sales, marketing, brand and other fees

 

 

106

 

 

 

141

 

 

 

52

 

 

 

143

 

 

 

171

 

 

 

429

 

Interest income

 

 

38

 

 

 

36

 

 

 

34

 

 

 

37

 

 

 

108

 

 

 

109

 

Other financing revenue

 

 

6

 

 

 

5

 

 

 

6

 

 

 

6

 

 

 

19

 

 

 

18

 

Real estate and financing segment revenues

 

$

206

 

 

$

307

 

 

$

116

 

 

$

324

 

 

$

378

 

 

$

939

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Resort Operations and Club Management Segment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Club management

 

$

23

 

 

$

28

 

 

$

70

 

 

$

80

 

Resort management

 

 

16

 

 

 

17

 

 

 

52

 

 

 

50

 

Rental(1)

 

 

19

 

 

 

48

 

 

 

71

 

 

 

153

 

Ancillary services

 

 

1

 

 

 

6

 

 

 

6

 

 

 

20

 

Resort operations and club management segment revenues

 

$

59

 

 

$

99

 

 

$

199

 

 

$

303

 

 

 

 

Three Months Ended March 31,

 

($ in millions)

 

2020

 

 

2019

 

Resort Operations and Club Management Segment

 

 

 

 

 

 

 

 

Club management

 

$

25

 

 

$

26

 

Resort management

 

 

19

 

 

 

16

 

Rental

 

 

47

 

 

 

52

 

Ancillary services

 

 

5

 

 

 

7

 

Resort operations and club management segment revenues

 

$

96

 

 

$

101

 

(1)

Excludes intersegment eliminations. See Note 18: Business Segments for additional information.

 

 

Contract Balances

The following table provides information on our accounts receivable and contract assets from contracts with customers which are included in Accounts receivable, net on our condensed consolidated balance sheets:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Receivables

 

$

115

 

 

$

129

 

 

$

67

 

 

$

129

 

Contract assets

 

 

1

 

 

 

 

 

 

The following table presents the composition of our contract liabilities.

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Contract liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Advanced deposits

 

$

117

 

 

$

115

 

 

$

119

 

 

$

115

 

Deferred Sales of VOIs of projects under construction

 

 

131

 

 

 

84

 

 

 

148

 

 

 

84

 

Club activation fees, annual dues and other

 

 

130

 

 

 

86

 

 

 

96

 

 

 

86

 

Club Bonus Point incentive liability(1)

 

 

61

 

 

 

59

 

 

 

60

 

 

 

59

 

 

(1)

Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our condensed consolidated balance sheets. This liability is comprised of unrecognized revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.

 


Revenue earned for the three and nine months ended March 31,September 30, 2020 that was included in the contract liabilities balance at December 31, 2019 was approximately $36 million.$10 million and $63 million, respectively. 


Our accounts receivables that relate to our contracts with customers includes amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and homeowners’ associations (“HOA”) management agreements and are settled when the related cash is received. Accounts receivable are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. Refer to Note 6: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our timeshare financing receivables.

Contract assets relate to incentive fees that can be earned for meeting certain target on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the annual incentive fee period.  

Contract liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs of projects under construction, club activation fees and annual dues and the liability for Club Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the future.

 

Transaction Price Allocated to Remaining Performance Obligations

 

Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Club Bonus Points that may be redeemed in the future. The following table represents the deferred revenue, cost of VOI sales and direct selling costs from sales of VOIs related to projects under construction as of March 31,September 30, 2020:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Sales of VOIs, net

 

$

131

 

 

$

84

 

 

$

148

 

 

$

84

 

Cost of VOI sales(1)

 

 

40

 

 

 

27

 

 

 

44

 

 

 

27

 

Sales and marketing expense

 

 

19

 

 

 

12

 

 

 

21

 

 

 

12

 

 

(1)

Includes anticipated Cost of VOI sales related to inventory associated with Sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete.

We expect to recognize the revenue, costs of VOI sales and direct selling costs upon completion of the projects in 2021.

 

The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of March 31,September 30, 2020:

 

($ in millions)

 

Remaining

Transaction Price

 

 

Recognition Period

 

Recognition Method

 

Remaining

Transaction Price

 

 

Recognition Period

 

Recognition Method

Advanced deposits

 

$

117

 

 

18 months

 

Upon customer stays

 

$

119

 

 

18 months

 

Upon customer stays

Club activation fees

 

 

71

 

 

7 years

 

Straight-line basis over average inventory holding

   period

 

 

66

 

 

7 years

 

Straight-line basis over average inventory holding

   period

Club Bonus Points

 

 

61

 

 

24 months

 

Upon redemption

 

 

60

 

 

24 months

 

Upon redemption

 


Note 4: Restricted Cash

Restricted cash was as follows:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Escrow deposits on VOI sales

 

$

59

 

 

$

59

 

 

$

61

 

 

$

59

 

Reserves related to non-recourse debt(1)

 

 

31

 

 

 

26

 

 

 

31

 

 

 

26

 

 

$

90

 

 

$

85

 

 

$

92

 

 

$

85

 

(1)

See Note 11: Debt & Non-recourse Debt for further discussion.

 

Note 5: Accounts Receivable

 

The following table represents our accounts receivable, net of allowance for credit losses.  Following the adoption of ASC 326 on January 1, 2020, accounts receivable within the scope of ASC 326 are measured at amortized cost.

 

($ in millions)

March 31, 2020

 

September 30,

2020

 

Fee-for-service commissions(1)

$

63

 

$

23

 

Real estate and financing

15

 

8

 

Resort and club operations

28

 

32

 

Tax receivables

41

 

42

 

Other receivables(2)

11

 

 

4

 

Total

$

158

 

$

109

 

 

(1)

Net of allowance.

(2)

Primarily includes individually insignificant accounts receivable recognized in the ordinary course of business, the allowances for which are individually insignificant.

 

Our accounts receivable are all due within one year of origination. We use delinquency status and economic factors as credit quality indicators to monitor our receivables within the scope of ASC 326 and use these as a basis for how we develop our expected loss estimates.

 

We sell VOIs on behalf of third-party developers using the Hilton Grand Vacations brand in exchange for sales, marketing and brand fees.  We use historical losses and economic factors as a basis to develop our allowance for credit losses. Under these fee-for-service arrangements, we earn commission fees based on a percentage of total interval sales.  Additionally, the terms include provisions requiring the reduction of fees earned for defaults and cancellations.

 

The changes in our allowance for fee-for-service commissions were as follows:

 

($ in millions)

March 31, 2020

 

September 30,

2020

 

Balance as of December 31, 2019

$

19

 

$

19

 

Current period provision for expected credit losses

4

 

5

 

Write-offs charged against the allowance

 

(8

)

 

(8

)

Balance at March 31, 2020

$

15

 

Balance at September 30, 2020

$

16

 

 

 


Note 6: Timeshare Financing Receivables

Timeshare financing receivables were as follows:

 

 

March 31, 2020

 

 

September 30, 2020

 

($ in millions)

 

Securitized and

Pledged

 

 

Unsecuritized(1)

 

 

Total

 

 

Securitized

 

 

Unsecuritized(1)

 

 

Total

 

Timeshare financing receivables

 

$

703

 

 

$

631

 

 

$

1,334

 

 

$

879

 

 

$

350

 

 

$

1,229

 

Less: allowance for financing receivables losses

 

 

(48

)

 

 

(164

)

 

 

(212

)

 

 

(70

)

 

 

(147

)

 

 

(217

)

 

$

655

 

 

$

467

 

 

$

1,122

 

 

$

809

 

 

$

203

 

 

$

1,012

 

 

 

December 31, 2019

 

 

December 31, 2019

 

($ in millions)

 

Securitized and

Pledged

 

 

Unsecuritized(1)

 

 

Total

 

 

Securitized

 

 

Unsecuritized(1)

 

 

Total

 

Timeshare financing receivables

 

$

758

 

 

$

582

 

 

$

1,340

 

 

$

758

 

 

$

582

 

 

$

1,340

 

Less: allowance for financing receivables losses

 

 

(54

)

 

 

(130

)

 

 

(184

)

 

 

(54

)

 

 

(130

)

 

 

(184

)

 

$

704

 

 

$

452

 

 

$

1,156

 

 

$

704

 

 

$

452

 

 

$

1,156

 

 

(1)

Includes amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility ("Timeshare Facility") as well as amounts held as future collateral for securitization activities.

 

As of March 31,September 30, 2020, thewe had timeshare financing receivables with a carrying value of our timeshare financing receivables$19 million securing the outstanding debt balance of our Timeshare Facility was $191 million. in anticipation of future financing activities.As of December 31, 2019, we had 0 timeshare receivables pledged to the Timeshare Facility. We record an estimate of variable consideration for estimated defaults as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale. We record the difference between the timeshare financing receivable and the variable consideration included in the transaction price for the sale of the related VOI as an allowance for financing receivables and record the receivable net of the allowance. During the threenine months ended March 31,September 30, 2020, we recorded an adjustment to our estimate of variable consideration of $37$57 million, which includes a $23 million revenue reduction related to changes in estimates primarily driven by economic factors surrounding the COVID-19 pandemic.

In June 2020, we completed a securitization of $300 million of gross timeshare financing receivables, which included a $15 million cash deposit that was subsequently released during the third quarter of 2020 upon pledging of qualified collateral, and issued approximately $186 million of 2.74 percent notes, $66 million of 4.22 percent notes and $48 million of 6.42 percent notes, which have a stated maturity date of February 25, 2039. The securitization transaction did not qualify as a sale and, accordingly, no gain or loss was recognized. The transaction is considered a secured borrowing; therefore, the proceeds from the transaction are presented as non-recourse debt (collectively, the “Securitized Debt”). The proceeds were primarily used to pay down the remaining borrowings on our Timeshare Facility and general corporate operating expenses. See Note 11: Debt and Non-recourse Debt for additional information.

Our timeshare financing receivables as of March 31,September 30, 2020 mature as follows:

 

($ in millions)

Securitized and Pledged

 

 

Unsecuritized

 

 

Total

 

Securitized

 

 

Unsecuritized

 

 

Total

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020 (remaining)

$

69

 

 

$

43

 

 

$

112

 

$

25

 

 

$

9

 

 

$

34

 

2021

 

92

 

 

 

50

 

 

 

142

 

 

103

 

 

 

32

 

 

 

135

 

2022

 

93

 

 

 

54

 

 

 

147

 

 

107

 

 

 

33

 

 

 

140

 

2023

 

93

 

 

 

59

 

 

 

152

 

 

110

 

 

 

35

 

 

 

145

 

2024

 

92

 

 

 

63

 

 

 

155

 

 

113

 

 

 

36

 

 

 

149

 

Thereafter

 

264

 

 

 

362

 

 

 

626

 

 

421

 

 

 

205

 

 

 

626

 

 

703

 

 

 

631

 

 

 

1,334

 

 

879

 

 

 

350

 

 

 

1,229

 

Less: allowance for financing receivables losses

 

(48

)

 

 

(164

)

 

 

(212

)

 

(70

)

 

 

(147

)

 

 

(217

)

$

655

 

 

$

467

 

 

$

1,122

 

$

809

 

 

$

203

 

 

$

1,012

 

 


We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the credit quality of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for estimating expected defaults and determining our allowance for financing receivables losses on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. 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 assumed default rates, 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.

We recognize interest income on our timeshare financing receivables as earned. As of March 31,2020,September 30, 2020 and December 31, 2019, we hadinterest receivable outstanding of $8 million and $9 million, of interest receivable outstandingrespectively, included in our condensed consolidated balance sheets. The interest rate charged on the notes correlates to the risk profile of the customer at the time of purchase and the percentage of the purchase that is financed, among other factors. As of March 31,September 30, 2020, our timeshare financing receivables had interest rates ranging from 3.90 percent to 20.50 percent, a weighted-average interest rate of 12.5212.60 percent, a weighted-average remaining term of 7.97.6 years and maturities through 2035.

Our gross timeshare financing receivables balances by average FICO score were as follows:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

FICO score

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

700+

 

$

812

 

 

$

818

 

 

$

669

 

 

$

818

 

600-699

 

 

291

 

 

 

292

 

 

 

291

 

 

 

292

 

<600

 

 

39

 

 

 

39

 

 

 

51

 

 

 

39

 

No score(1)

 

 

192

 

 

 

191

 

 

 

218

 

 

 

191

 

 

$

1,334

 

 

$

1,340

 

 

$

1,229

 

 

$

1,340

 

 

(1)

Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.

The following table details the origination year of our gross timeshare financing receivables by average FICO score as of March 31,September 30, 2020:

 

($ in millions)

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Total

 

 

2020

 

 

2019

 

 

2018

 

 

2017

 

 

2016

 

 

Prior

 

 

Total

 

FICO score

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

700+

 

$

78

 

 

$

266

 

 

$

178

 

 

$

115

 

 

$

75

 

 

$

100

 

 

$

812

 

 

$

86

 

 

$

209

 

 

$

142

 

 

$

91

 

 

$

61

 

 

$

80

 

 

$

669

 

600-699

 

 

22

 

 

 

92

 

 

 

64

 

 

 

41

 

 

 

27

 

 

 

45

 

 

 

291

 

 

 

40

 

 

 

91

 

 

 

62

 

 

 

39

 

 

 

23

 

 

 

36

 

 

 

291

 

<600

 

 

3

 

 

 

12

 

 

 

8

 

 

 

5

 

 

 

4

 

 

 

7

 

 

 

39

 

 

 

7

 

 

 

16

 

 

 

11

 

 

 

6

 

 

 

4

 

 

 

7

 

 

 

51

 

No score(1)

 

 

19

 

 

 

62

 

 

 

39

 

 

 

21

 

 

 

15

 

 

 

36

 

 

 

192

 

 

 

34

 

 

 

67

 

 

 

40

 

 

 

27

 

 

 

18

 

 

 

32

 

 

 

218

 

 

$

122

 

 

$

432

 

 

$

289

 

 

$

182

 

 

$

121

 

 

$

188

 

 

$

1,334

 

 

$

167

 

 

$

383

 

 

$

255

 

 

$

163

 

 

$

106

 

 

$

155

 

 

$

1,229

 

 

(1)Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.


(1)

Timeshare financing receivables without a FICO score are primarily related to foreign borrowers.

We apply payments we receive for timeshare financing receivables, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a receivable is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for receivables for which we had previously ceased accruing interest once the receivable is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the receivable is 121 days past due and, subsequently, we write off the uncollectible balance against the reserve once the foreclosure process is complete and we receive the deed for the foreclosed unit.


As of March 31,September 30, 2020 and December 31, 2019, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $84$117 million and $74 million, respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:

 

 

March 31, 2020

 

 

September 30, 2020

 

($ in millions)

 

Securitized and Pledged

 

 

Unsecuritized

 

 

Total

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

Current

 

$

683

 

 

$

540

 

 

$

1,223

 

 

$

858

 

 

$

230

 

 

$

1,088

 

31 - 90 days past due

 

 

13

 

 

 

14

 

 

 

27

 

 

 

12

 

 

 

12

 

 

 

24

 

91 - 120 days past due

 

 

4

 

 

 

4

 

 

 

8

 

 

 

5

 

 

 

3

 

 

 

8

 

121 days and greater past due

 

 

3

 

 

 

73

 

 

 

76

 

 

 

4

 

 

 

105

 

 

 

109

 

 

$

703

 

 

$

631

 

 

$

1,334

 

 

$

879

 

 

$

350

 

 

$

1,229

 

 

 

December 31, 2019

 

 

December 31, 2019

 

($ in millions)

 

Securitized and Pledged

 

 

Unsecuritized

 

 

Total

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

Current

 

$

743

 

 

$

502

 

 

$

1,245

 

 

$

743

 

 

$

502

 

 

$

1,245

 

31 - 90 days past due

 

 

9

 

 

 

12

 

 

 

21

 

 

 

9

 

 

 

12

 

 

 

21

 

91 - 120 days past due

 

 

3

 

 

 

4

 

 

 

7

 

 

 

3

 

 

 

4

 

 

 

7

 

121 days and greater past due

 

 

3

 

 

 

64

 

 

 

67

 

 

 

3

 

 

 

64

 

 

 

67

 

 

$

758

 

 

$

582

 

 

$

1,340

 

 

$

758

 

 

$

582

 

 

$

1,340

 

 

The changes in our allowance for financing receivables losses were as follows:

 

 

March 31, 2020

 

 

September 30, 2020

 

($ in millions)

 

Securitized and Pledged

 

 

Unsecuritized

 

 

Total

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

Balance as of December 31, 2019

 

$

54

 

 

$

130

 

 

$

184

 

 

$

54

 

 

$

130

 

 

$

184

 

Provision for financing receivables losses(1)

 

 

(17

)

 

 

74

 

 

 

57

 

Write-offs

 

 

 

 

 

(9

)

 

 

(9

)

 

 

 

 

 

(24

)

 

 

(24

)

Provision for financing receivables losses(1)

 

 

(6

)

 

 

43

 

 

 

37

 

Balance as of March 31, 2020

 

$

48

 

 

$

164

 

 

$

212

 

Securitization

 

 

33

 

 

 

(33

)

 

 

 

Balance as of September 30, 2020

 

$

70

 

 

$

147

 

 

$

217

 

 

 

March 31, 2019

 

 

September 30, 2019

 

($ in millions)

 

Securitized and Pledged

 

 

Unsecuritized

 

 

Total

 

 

Securitized

 

 

Unsecuritized

 

 

Total

 

Balance as of December 31, 2018

 

$

43

 

 

$

129

 

 

$

172

 

 

$

43

 

 

$

129

 

 

$

172

 

Provision for financing receivables losses(1)

 

 

(12

)

 

 

72

 

 

 

60

 

Write-offs

 

 

 

 

 

(17

)

 

 

(17

)

 

 

 

 

 

(53

)

 

 

(53

)

Provision for financing receivables losses(1)

 

 

(4

)

 

 

18

 

 

 

14

 

Balance as of March 31, 2019

 

$

39

 

 

$

130

 

 

$

169

 

Securitization

 

 

29

 

 

 

(29

)

 

 

 

Balance as of September 30, 2019

 

$

60

 

 

$

119

 

 

$

179

 

 

(1)

Includes incremental provision for financing receivables losses, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables.


Note 7: Inventory

Inventory was as follows:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Completed unsold VOIs

 

$

241

 

 

$

241

 

 

$

402

 

 

$

241

 

Construction in process

 

 

386

 

 

 

59

 

 

 

273

 

 

 

59

 

Land, infrastructure and other

 

 

258

 

 

 

258

 

 

 

258

 

 

 

258

 

 

$

885

 

 

$

558

 

 

$

933

 

 

$

558

 

 


During the threenine months ended March 31,September 30, 2020, we recorded non-cash operating activity transfers from Property and equipment to Inventory. See Note 8: Property and Equipment. 

Shown below are (i) costs of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory and (ii)inventory.

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

Cost of sales true-up(1)

 

$

4

 

 

$

14

 

(1)

Costs of sales true ups reduced costs of VOI sales and increased inventory in the periods presented.

Shown below are expenses incurred, recorded in Cost of VOI sales, related to granting credit to customers for their existing ownership when upgrading into fee-for service projects.

 

 

 

Three Months Ended March 31,

 

($ in millions)

 

2020

 

 

2019

 

Cost of sales true-up(1)

 

$

4

 

 

$

4

 

Cost of VOI sales related to fee-for-service upgrades

 

 

5

 

 

 

9

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cost of VOI sales related to

fee-for-service upgrades

 

$

2

 

 

$

8

 

 

$

7

 

 

$

24

 

(1)

Costs of sales true ups reduced costs of VOI sales and increased inventory in all periods presented.

 

Note 8: Property and Equipment

 

Property and equipment was as follows:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Land

 

$

104

 

 

$

154

 

 

$

104

 

 

$

154

 

Building and leasehold improvements

 

 

245

 

 

 

286

 

 

 

247

 

 

 

286

 

Furniture and equipment

 

 

66

 

 

 

65

 

 

 

68

 

 

 

65

 

Construction in progress

 

 

172

 

 

 

383

 

 

 

198

 

 

 

383

 

 

 

587

 

 

 

888

 

 

 

617

 

 

 

888

 

Accumulated depreciation

 

 

(114

)

 

 

(110

)

 

 

(129

)

 

 

(110

)

 

$

473

 

 

$

778

 

 

$

488

 

 

$

778

 

 

During the threenine months ended March 31,September 30, 2020, we recorded non-cash operating activity transfers of $301 million related to the registrations for timeshare units under construction from Property and equipment to Inventory. Non-cash transfers are reflected in our unaudited condensed consolidated statements of cash flows.

 

Note 9: Consolidated Variable Interest Entities

As of March 31,September 30, 2020 and December 31, 2019, we consolidated 4 variable interest entities (“VIEs”), respectively, that issued non-recourse debt backed by pledged assets consisting primarily of a pool of timeshare financing receivables which is without recourse to us. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we are required to replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only the assets of our VIEs are available to settle the obligations of the respective entities.


Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Restricted cash

 

$

26

 

 

$

26

 

 

$

30

 

 

$

26

 

Timeshare financing receivables, net

 

 

655

 

 

 

704

 

 

 

809

 

 

 

704

 

Non-recourse debt(1)

 

 

690

 

 

 

747

 

 

 

837

 

 

 

747

 

 

(1)

Net of deferred financing costs.

During the threenine months ended March 31,September 30, 2020 and 2019, we did 0t provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

 

Note 10: Investments in Unconsolidated Affiliates

 

As of March 31,September 30, 2020, we have 25 percent and 50 percent ownership interests in BRE Ace LLC and 1776 Holding LLC, respectively, that are deemed as VIEs. We do not consolidate BRE Ace LLC and 1776 Holding LLC because we are not the primary beneficiary. Our investment interests in and equity earned from both VIEs are included in the consolidated balance sheets as Investments in unconsolidated affiliates and in the consolidated statements of operations as Equity in earningsearnings(losses) from unconsolidated affiliates, respectively.

 

We held investments in our 2 unconsolidated affiliates with aggregated debt balances of $477458 million and $479 million as of March 31,September 30, 2020and December 31, 2019, respectively. The debt is secured by their assets and is without recourse to us. Our maximum exposure to loss as a result of our investment interests in the two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investments which totals $47$49 million and $44 million as of March 31,September 30, 2020 and December 31, 2019, respectively and (ii) receivables for commission and other fees earned under fee-for-service arrangements.  See Note 17:  Related Party Transactions for additional information.  

 

 

Note 11: Debt & Non-recourse Debt

Debt

The following table details our outstanding debt balance and its associated interest rates:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Debt(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Senior secured credit facilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Term loan with a rate of 2.709%, due 2023

 

$

185

 

 

$

187

 

Revolver with a weighted average rate of 2.597%, due 2023

 

 

760

 

 

 

320

 

Term loan with a rate of 2.000%, due 2023

 

$

180

 

 

$

187

 

Revolver with a weighted average rate of 2.000%, due 2023

 

 

760

 

 

 

320

 

Senior notes with a rate of 6.125%, due 2024

 

 

300

 

 

 

300

 

 

 

300

 

 

 

300

 

Other debt

 

 

27

 

 

 

27

 

 

 

28

 

 

 

27

 

 

 

1,272

 

 

 

834

 

 

 

1,268

 

 

 

834

 

Less: unamortized deferred financing costs and discount(2)(3)

 

 

(6

)

 

 

(6

)

 

 

(6

)

 

 

(6

)

 

$

1,266

 

 

$

828

 

 

$

1,262

 

 

$

828

 

 

(1)

As of the three months ended March 31,September 30, 2020 and year ended December 31, 2019, weighted-average interest rates were 3.5373.082 percent and 4.571 percent, respectively.

(2)

Amount includes deferred financing costs related to our term loan of $1 million and senior notes of $1 million and $5 million, respectively, as of March 31,September 30, 2020 and December 31, 2019.

(3)

Amount does not include deferred financing costs of $4 million as of September 30, 2020 and $5 million as of March 31, 2020 and December 31, 2019, relating to our revolving facility included in Other Assets in our condensed consolidated balance sheets.


In May 2020, we amended our Credit Agreement which amended certain terms of the Senior Secured Credit Facilities to provide flexibility with respect to satisfying certain negative and financial covenants and ratios as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business and operations. The borrowing capacity under the Credit Agreement remained the same. In connection with the Amendment we incurred $1 million in debt issuance costs.

During the threenine months ended March 31,September 30, 2020, we borrowed $495 million and repaid $57$62 million (including recurring payments) under the senior secured credit facilities with an interest rate based on one month LIBOR plus 1.75 percent.percent, subject to a 0.25 percent floor.

During the first quarterWe primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. As of September 30, 2020, we entered into a pay-fixed/receive-variablehad approximately $180 million of our Term Loan subject to interest rate swap agreementswap. Such interest rate swaps converted the LIBOR-based variable rates on our senior secured credit facility with a notional amount of $62 million.  The one-month LIBOR was effectively modifiedTerm Loan to aan average fixed annual rate of 0.62%0.53 percent per annum through November 2023.  Our interest rate swaps have been designated and qualify as cash flow hedges of interest rate risk and recorded as a liability in Accounts payable, accrued expenses and other in our condensed consolidated balance sheets as of September 30, 2020. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income for presentation purposes. For the threenine months ended March 31,September 30, 2020, we recorded less than $1 million in accumulated other comprehensive incomeloss related to the hedge.

As of March 31,September 30, 2020 and December 31, 2019, we had $1 million of outstanding letters of credit under the revolving credit facility.  We were in compliance with all applicable maintenance and financial covenants and ratios as of March 31,September 30, 2020.

Non-recourse Debt

The following table details our outstanding non-recourse debt balance and its associated interest rates:

 

 

March 31,

 

 

December 31,

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Non-recourse debt(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timeshare Facility with an average rate of 1.861%, due 2022

 

$

195

 

 

$

 

Securitized Debt with an average rate of 1.810%, due 2026

 

 

40

 

 

 

46

 

 

$

 

 

$

46

 

Securitized Debt with an average rate of 2.711%, due 2028

 

 

136

 

 

 

149

 

 

 

116

 

 

 

149

 

Securitized Debt with an average rate of 3.602%, due 2032

 

 

250

 

 

 

275

 

 

 

220

 

 

 

275

 

Securitized Debt with an average rate of 2.431%, due 2033

 

 

271

 

 

 

285

 

 

 

238

 

 

 

285

 

Securitized Debt with an average rate of 3.658%, due 2039

 

 

273

 

 

 

 

 

 

892

 

 

 

755

 

 

 

847

 

 

 

755

 

Less: unamortized deferred financing costs(2)

 

 

(7

)

 

 

(8

)

 

 

(10

)

 

 

(8

)

 

$

885

 

 

$

747

 

 

$

837

 

 

$

747

 

 

(1)

As of three months ended March 31,September 30, 2020 and year ended December 31, 2019, weighted-average interest rates were 2.6503.169 percent and 2.876 percent, respectively.

(2)

Amount relates to securitized debt only and does not include deferred financing costs of $23 million as of March 31,September 30, 2020 and $3 million as of December 31, 2019 relating to our Timeshare Facility which are included in Other Assets in our condensed consolidated balance sheets.

In June 2020, we completed a securitization of $300 million of gross timeshare financing receivables, which included a $15 million cash deposit that was subsequently released during the third quarter of 2020 upon pledging of qualified collateral, and issued approximately $186 million of 2.74 percent notes, $66 million of 4.22 percent notes and $48 million of 6.42 percent notes due February 2039. The Securitized Debt is backed by pledged assets, consisting primarily of a pool of timeshare financing receivables secured by first mortgages or deeds of trust on timeshare interests. The Securitized Debt is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral to the debt. The proceeds were primarily used to pay down the remaining borrowings on our Timeshare Facility and general corporate operating expenses. In connection with the securitization we incurred $5 million in debt issuance costs.


In September 2020, we exercised our call option on the remaining outstanding principal balance on our securitized debt with an average rate of 1.810%, due 2026 (“2014-A Notes”) and prepaid the remaining balance in accordance with the terms of the arrangement.

 

The Timeshare Facility is a non-recourse obligation with a borrowing capacity of $450 million and is payable solely from the pool of timeshare financing receivables pledged as collateral and related assets.In January As of September 30, 2020 and December 31, 2019, we had $450 million remaining borrowing capacity under our Timeshare Facility. During the second quarter of 2020, we amended the Timeshare Facility, temporarily changing certain covenant requirements. All other termsrequirements pricing and borrowing capacity remainedadvance rates to be consistent with the sameamended Credit Agreement. On August 14, 2020, we amended the Timeshare Facility to extend the maturity date from April 2022 to August 2023. Additionally, the amendment reduces the maximum advance rate, replaces LIBOR with a successor benchmark interest rate, increases the excess spread percentage level that will trigger interest hedging obligations, and increases certain used and unused fees. In connection with the Amendment we incurred $2 million in both amendments.debt issuance costs. 

 

We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility and Securitized Debt into depository accounts maintained by third parties. On a monthly basis, the depository accounts are utilized to make required principal, interest and other payments due under the respective loan agreements. The balances in the depository accounts were $31 million and $26 million as of March 31,September 30, 2020 and December 31, 2019, respectively, and were included in Restricted cash in our condensed consolidated balance sheets.


Debt Maturities

The contractual maturities of our debt and non-recourse debt as of March 31,September 30, 2020 were as follows:

 

($ in millions)

 

Debt

 

 

Non-recourse

Debt

 

 

Total

 

 

Debt

 

 

Non-recourse

Debt

 

 

Total

 

Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020 (remaining)

 

$

9

 

 

$

174

 

 

$

183

 

 

$

3

 

 

$

72

 

 

$

75

 

2021

 

 

11

 

 

 

161

 

 

 

172

 

 

 

12

 

 

 

292

 

 

 

304

 

2022

 

 

11

 

 

 

307

 

 

 

318

 

 

 

12

 

 

 

130

 

 

 

142

 

2023

 

 

918

 

 

 

112

 

 

 

1,030

 

 

 

918

 

 

 

131

 

 

 

1,049

 

2024

 

 

300

 

 

 

43

 

 

 

343

 

 

 

300

 

 

 

74

 

 

 

374

 

Thereafter

 

 

23

 

 

 

95

 

 

 

118

 

 

 

23

 

 

 

148

 

 

 

171

 

 

$

1,272

 

 

$

892

 

 

$

2,164

 

 

$

1,268

 

 

$

847

 

 

$

2,115

 

 

 

Note 12: Fair Value Measurements

The carrying amounts and estimated fair values of our financial assets and liabilities were as follows:

 

 

March 31, 2020

 

 

September 30, 2020

 

 

 

 

 

 

Hierarchy Level

 

 

 

 

 

 

Hierarchy Level

 

($ in millions)

 

Carrying

Amount

 

 

Level 1

 

 

Level 3

 

 

Carrying

Amount

 

 

Level 1

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Timeshare financing receivables, net(1)

 

$

1,122

 

 

$

 

 

$

1,377

 

 

$

1,012

 

 

$

 

 

$

1,293

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Debt, net(2)

 

 

1,266

 

 

 

270

 

 

 

962

 

 

 

1,262

 

 

 

311

 

 

 

965

 

Non-recourse debt, net(2)

 

 

885

 

 

 

 

 

 

845

 

 

 

837

 

 

 

 

 

 

835

 

 

(1)

Carrying amount net of allowance for financing receivables losses.

(2)

Carrying amount net of unamortized deferred financing costs and discount.


 

 

 

December 31, 2019

 

 

 

 

 

 

 

Hierarchy Level

 

($ in millions)

 

Carrying

Amount

 

 

Level 1

 

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Timeshare financing receivables, net(1)

 

$

1,156

 

 

$

 

 

$

1,446

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Debt, net(2)

 

 

828

 

 

 

326

 

 

 

544

 

Non-recourse debt, net(2)

 

 

747

 

 

 

 

 

 

749

 

 

(1)

Carrying amount net of allowance for financing receivables losses.

(2)

Carrying amount net of unamortized deferred financing costs and discount.

Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values. The table above excludes cash and cash equivalents, restricted cash, accounts receivable, accounts payable, advance deposits and accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.

The estimated fair values of our timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and borrowing terms respective to the portfolio based on current market assumptions for similar types of arrangements.

The estimated fair values of our Level 1 debt was based on prices in active debt markets. The estimated fair value of our Level 3 debt and non-recourse debt were as follows:

 

Debt - based on indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates.

 

Non-recourse debt - based on projected future cash flows discounted at risk-adjusted rates.


We do 0t have any assets or liabilities measured at fair value on a recurring or non-recurring basis as of March 31,September 30, 2020.

Note 13: Leases

We lease sales centers, office space and equipment under operating leases. Our leases expire at various dates from 20202021 through 2030, with varying renewal and termination options. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.

We recognize rent expense on leases with both contingent and non-contingent lease payment terms. Rent associated with non-contingent lease payments are recognized on a straight-line basis over the lease term. Rent expense for all operating leases for the three months ended March 31,September 30, 2020 and 2019 was $2$5 million and $6 million, respectively, and $15 million and $16 million for the nine months ended September 30, 2020 and 2019, respectively. This amount includes immaterialThese amounts include $1 million of short-term leases and variable lease costs.costs for the three months ended September 30, 2020 and 2019 and $2 million and $4 million for the nine months ended September 30, 2020 and 2019, respectively.  

 

Supplemental cash flow information related to operating leases was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows from operating leases

 

$

5

 

 

$

5

 

Operating cash outflows from operating leases

 

$

14

 

 

$

12

 

Right-of-use assets obtained in exchange for new lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Leases

 

 

5

 

 

 

1

 

 

 

4

 

 

 

9

 

 


Supplemental balance sheet information related to operating leases was as follows:

 

 

March 31,

 

 

December 31,

 

 

September 30

 

 

December 31,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Weighted-average remaining lease term of operating leases (in years)

 

5.9

 

 

6.1

 

 

5.6

 

 

6.1

 

Weighted-average discount rate of operating leases

 

 

5.24

%

 

 

5.34

%

 

 

4.93

%

 

 

5.34

%

 

Future minimum lease payments under noncancelable operating leases, due in each of the next five years and thereafter as of March 31,September 30, 2020, are as follows:

 

($ in millions)

 

Operating

Leases

 

 

Operating

Leases

 

Year

 

 

 

 

 

 

 

 

2020 (remaining)

 

$

14

 

 

$

5

 

2021

 

 

18

 

 

 

17

 

2022

 

 

13

 

 

 

13

 

2023

 

 

12

 

 

 

12

 

2024

 

 

11

 

 

 

11

 

Thereafter

 

 

22

 

 

 

22

 

Total future minimum lease payments

 

$

90

 

 

$

80

 

Less: imputed interest

 

 

(13

)

 

 

(10

)

Present value of lease liabilities

 

$

77

 

 

$

70

 

 

 

Note 14: Income Taxes

At the end of each quarter, we estimate the effective tax rate expected to be applied for the full year. The effective tax rate is determined by the level and composition of pre-tax ordinary income or loss, which is subject to federal, foreign and state and local income taxes. The effective tax rate for the threenine months ended March 31,September 30, 2020 and 2019 was approximately 1120 percent and 2728 percent, respectively. The decrease in the effective tax rate is primarily due to the tax benefit on our worldwide estimated ordinary loss being reduced by the incremental tax expense from the estimated ordinary income in our foreign jurisdictions, the interest due on income deferred related to installment sales, and the impact of estimated permanent differences between financial reporting and taxable income.

We have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic Security (CARES) Act enacted on March 27, 2020. The effect of tax law changes is required to


be recognized either in the interim period in which the legislation is enacted or reflected in the computation of the annual effective tax rate, depending on the nature of the change. As of March 31,September 30, 2020, we evaluated the income tax provisions of the CARES Act and have determined there to be no effect on either the March 31,September 30, 2020 tax rate or the computation of the estimated effective tax rate for the year. We will continue to evaluate the income tax provisions of the CARES Act and monitor the developments in the jurisdictions where we have significant operations for tax law changes that could have income tax accounting and disclosure implications.

We have requested a change in accounting method effective for the taxable year beginning on January 1, 2020 and ending on December 31, 2020 which is pending IRS review as of September 30, 2020.  The impact of the requested method change will be included in the financial statements upon IRS consent.


Note 15: Share-Based Compensation

Stock Plan

We issue service-based restricted stock units (“Service RSUs”), service and performance-based restricted stock units (“Performance RSUs”) and nonqualified stock options (“Options”) to certain employees and directors. For the three months ended March, 31, 2020, we recognized a credit to share-based compensation expense of $2 million due to the reversal of $8 million of expense recognized in prior years related to our Performance RSUs which are not expected to achieve certain performance targets. See Performance Shares below for additional information. For the three months ended March 31, 2019, weWe recognized share-based compensation expense of $5million.$6 million for the three months ended September 30, 2020 and 2019, and $10 million and $18 million for the nine months ended September 30, 2020 and 2019, respectively. As of March 31,September 30, 2020, unrecognized compensation costs for unvested awards were approximately $32$19 million, which is expected to be recognized over a weighted average period of 1.91.8 years. As of March 31,September 30, 2020, there were 5,192,8015,213,524 shares of common stock available for future issuance under this plan.

Service RSUs

During the threenine months ended March 31,September 30, 2020, we issued 609,311652,583 Service RSUs with a grant date fair value of $25.80,$25.24, which generally vest in equal annual installments over three years from the date of grant.

Options

During the threenine months ended March 31,September 30, 2020, we issued 566,401 Options with an exercise price of $25.80, which vest over three years from the date of the grant.

The weighted-average grant date fair value of these options was $9.14, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:

 

Expected volatility

 

 

35.4

%

Dividend yield

 

 

0

%

Risk-free rate

 

 

1.0

%

Expected term (in years)

 

 

6.0

 

 

As of March 31,September 30, 2020, we had 1,122,4151,102,064 Options outstanding that were exercisable.

Performance Shares

During the threenine months ended March 31,September 30, 2020, we issued 172,620 Performance RSUs with a grant date fair value of $25.80. The Performance RSUs are settled at the end of a three-year performance period, with 70 percent of the Performance RSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction. The remaining 30 percent of the Performance RSUs are subject to the achievement of certain contract sales targets. As ofIn March 31, 2020, we determined that the performance conditions for the 2018, 2019, and 2020 Performance RSU awards arewere improbable of achievement due to the significantly negative impact of the COVID-19 pandemic on the global economy, demand for travel and leisure, and our business, including the temporary closures of substantially all of our properties and suspension of substantially all of our sales and other operations, as described in Note 21: COVID-19 and Subsequent Events.business. As a result, we reversed $8 million of previously recognized share-based compensation expense related to our 2018 and 2019 Performance RSUs and ceased accruing expense related to Performance RSUs granted in 2018, 2019, and 2020, during the three months ended March 31, 2020. As of September 30, 2020, we determined the performance conditions continue to be improbable of achievement and therefore no expense was recognized in the current period.


Employee Stock Purchase Plan

In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the Plan, we issued 2.5 million shares of common stock which may be purchased under the ESPP. The ESPP allows eligible employees to purchase shares of our common stock at a price per share not less than 95%95 percent of the fair market value per share of common stock on the purchase date, up to a maximum threshold established by the plan administrator for the offering period. During the three and nine months ended March 31,September 30, 2020 and 2019, we recognized less than $1 million of compensation expense related to this plan.  


Note 16: (Loss) Earnings Per Share

The following table presents the calculation of our basic and diluted (loss) earnings per share (“EPS”).  The weighted- average shares outstanding used to compute basic EPS and diluted EPS for the three months ended March 31,September 30, 2020 was 85,519,151 85,082,124and 86,044,525, respectively,for the nine months ended September 30, 2020 was 85,198,910.The weighted-average shares outstanding used to compute basic EPS and diluted EPS for the three months ended March 31,September 30, 2019 was 94,092,14785,704,321 and 94,597,630,86,272,979, respectively, and for the nine months ended September 30, 2019 was 89,863,807 and 90,348,418, respectively.  

 

 

Three Months Ended March 31,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

($ and shares outstanding in millions, except per share amounts)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income(1)

 

$

8

 

 

$

55

 

Net (loss) income(1)

 

$

(7

)

 

$

50

 

 

$

(47

)

 

$

144

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

86

 

 

 

94

 

 

 

85

 

 

 

86

 

 

 

85

 

 

 

90

 

Basic EPS

 

$

0.09

 

 

$

0.59

 

 

$

(0.08

)

 

$

0.59

 

 

$

(0.55

)

 

$

1.61

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Income(1)

 

$

8

 

 

$

55

 

Net (loss) income(1)

 

$

(7

)

 

$

50

 

 

$

(47

)

 

$

144

 

Denominator:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

86

 

 

 

95

 

 

 

85

 

 

 

86

 

 

 

85

 

 

 

90

 

Diluted EPS

 

$

0.09

 

 

$

0.58

 

 

$

(0.08

)

 

$

0.59

 

 

$

(0.55

)

 

$

1.60

 

 

(1)

Net (loss) income for the three months ended March 31,September 30, 2020 and 2019 was $7,826,746$(6,846,654) and $55,067,801,$50,659,927, respectively, and for the nine months ended September 30, 2020 and 2019 was $(46,771,239) and $144,352,584, respectively.  

The dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period. Potentially dilutive shares of 308,441 and 332,883 for the three and nine months ended September 30, 2020, respectively, were excluded from the calculation of diluted weighted average shares outstanding and diluted earnings per share as a result of our net loss position.

For the three and nine months ended March 31,September 30, 2020, we excluded2,816,707 and 2,506,497, respectively, and for the three and nine months ended September 30, 2019, we excluded1,754,656 887,859 and 948,248979,779 share-based compensation awards, respectively, because their effect would have been anti-dilutive under the treasury stock method.

Note 17: Related Party Transactions

 

BRE Ace LLC and 1776 Holding, LLC

 

We hold a 25 percent ownership interest in BRE Ace LLC, a VIE, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.”

 

We hold a 50 percent ownership interest in 1776 Holding, LLC, a VIE, which will construct a timeshare resort property, known as “Liberty Place Charleston, by Hilton Club.”

We record Equity in earnings (losses) from our unconsolidated affiliates in our condensed consolidated statements of operations. See Note 10: Investments in Unconsolidated Affiliates for additional information. Additionally, we earn commissions and other fees related to fee-for-service agreements with the investees to sell VOIs at Elara, by Hilton Grand Vacations and Liberty Place Charleston, by Hilton Club.  These amounts are summarized in the following table and are included in our condensed consolidated statements of operations as of the date they became related parties.  

 

 

Three Months Ended March 31,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Equity in earnings from unconsolidated affiliates

 

$

3

 

 

$

1

 

Equity in (losses) earnings from unconsolidated affiliates

 

$

(1

)

 

$

1

 

 

$

3

 

 

$

4

 

Commissions and other fees

 

 

23

 

 

 

36

 

 

 

16

 

 

 

31

 

 

 

43

 

 

 

99

 

 


We also have $23$7 million and $25 million of outstanding receivables related to the fee-for-service agreements as of March 31,September 30, 2020 and December 31, 2019, respectively.


Note 18: Business Segments

We operate our business through the following 2 segments:

 

Real estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer receivables to customers to finance their purchase of VOIs and revenue from servicing the timeshare financing receivables. We also generate fee revenue from servicing the timeshare financing receivables provided by third-party developers to purchasers of their VOIs.

 

Resort operations and club management – We manage the Club and earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We also earn fees for managing the timeshare properties. WeIn addition, we generate rental revenue from unit rentals of unsold inventory and inventory made available due to ownership exchanges under our Club program. WeOur timeshare properties also earn revenue from food and beverage, retail and spa outlets at our timeshare properties.outlets.

The performance of our operating segments is evaluated primarily based on adjusted earnings before interest expense (excluding non-recourse debt), taxes, depreciation and amortization (“EBITDA”). We define Adjusted EBITDA as EBITDA which has been further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.

We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance.

The following table present revenues for our reportable segments reconciled to consolidated amounts:

 

 

Three Months Ended March 31,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing

 

$

206

 

 

$

307

 

 

$

116

 

 

$

324

 

 

$

378

 

 

$

939

 

Resort operations and club management(1)(2)

 

 

104

 

 

 

110

 

 

 

61

 

 

 

108

 

 

 

209

 

 

 

332

 

Total segment revenues

 

 

310

 

 

 

417

 

 

 

177

 

 

 

432

 

 

 

587

 

 

 

1,271

 

Cost reimbursements

 

 

49

 

 

 

42

 

 

 

33

 

 

 

43

 

 

 

105

 

 

 

128

 

Intersegment eliminations(1)(2)

 

 

(8

)

 

 

(9

)

 

 

(2

)

 

 

(9

)

 

 

(10

)

 

 

(29

)

Total revenues

 

$

351

 

 

$

450

 

 

$

208

 

 

$

466

 

 

$

682

 

 

$

1,370

 

 

(1)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for fulfillment of discounted marketing package stays at resorts. These charges totaled $8$2 million and $9 million for the three months ended March 31,September 30, 2020 and 2019, and $10 million and $29 million for the nine months ended September 30, 2020 and 2019, respectively.  

(2)

Includes charges to the real estate sales and financing segment from the resort operations and club management segment for the rental of model units to show prospective buyers. These charges totaled less than $1 million for the three and nine months ended March 31,September 30, 2020 and 2019.  

 


The following table presents Segment Adjusted EBITDA for our reportable segments reconciled to net (loss) income:

 

 

Three Months Ended March 31,

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing(1)

 

$

15

 

 

$

80

 

 

$

15

 

 

$

94

 

 

$

16

 

 

$

243

 

Resort operations and club management(1)

 

 

55

 

 

 

65

 

 

 

30

 

 

 

62

 

 

 

100

 

 

 

193

 

Segment Adjusted EBITDA

 

 

70

 

 

 

145

 

 

 

45

 

 

 

156

 

 

 

116

 

 

 

436

 

General and administrative

 

 

(21

)

 

 

(27

)

 

 

(22

)

 

 

(30

)

 

 

(65

)

 

 

(87

)

Depreciation and amortization

 

 

(12

)

 

 

(8

)

 

 

(11

)

 

 

(12

)

 

 

(34

)

 

 

(32

)

License fee expense

 

 

(22

)

 

 

(23

)

 

 

(11

)

 

 

(26

)

 

 

(39

)

 

 

(75

)

Other gain (loss), net

 

 

2

 

 

 

(1

)

 

 

1

 

 

 

(1

)

 

 

 

 

 

(3

)

Interest expense

 

 

(10

)

 

 

(10

)

 

 

(10

)

 

 

(12

)

 

 

(32

)

 

 

(33

)

Income tax expense

 

 

(1

)

 

 

(20

)

Equity in earnings from unconsolidated affiliates

 

 

3

 

 

 

1

 

Income tax benefit (expense)

 

 

5

 

 

 

(20

)

 

 

12

 

 

 

(55

)

Equity in (losses) earnings from unconsolidated affiliates

 

 

(1

)

 

 

1

 

 

 

3

 

 

 

4

 

Other adjustment items(2)

 

 

(1

)

 

 

(2

)

 

 

(3

)

 

 

(6

)

 

 

(8

)

 

 

(11

)

Net income

 

$

8

 

 

$

55

 

Net (loss) income

 

$

(7

)

 

$

50

 

 

$

(47

)

 

$

144

 

 

(1)

Includes intersegment transactions. Refer to our table presenting revenues by reportable segment above for additional discussion.

(2)

For the three and nine months ended March 31,September 30, 2020 and 2019, this amount includes costs associated with restructuring, one-time charges and other non-cash items.

Note 19: Commitments and Contingencies

We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units or other real estate at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of March 31,September 30, 2020, we were committed to purchase approximately $473$457 million of inventory and land over a period of 1110 years and $26$16 million of other commitments under the normal course of business. Additionally, we have committed to develop additional vacation ownership units at an existing resort in Japan. During the second quarter of 2020, we entered into an agreement to exchange parcels of land in Hawaii, subject to the successful completion of zoning, land use requirements and other applicable regulatory requirements. The actual amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. During the threenine months ended March 31,September 30, 2020 we did 0t make any purchases under our commitments. During the three months ended March 31,and 2019, we purchased $9$16 million and $66 million, respectively, as required under our inventory-related purchase commitments. As of March 31,September 30, 2020, our remaining obligation pursuant to these arrangements were expected to be incurred as follows:

 

($ in millions)

 

2020

(remaining)

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

Total

 

 

2020

(remaining)

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

Thereafter

 

 

Total

 

Inventory purchase obligations

 

$

26

 

 

$

225

 

 

$

110

 

 

$

58

 

 

$

40

 

 

$

14

 

 

$

473

 

 

$

10

 

 

$

225

 

 

$

110

 

 

$

58

 

 

$

40

 

 

$

14

 

 

$

457

 

Other commitments(1)

 

 

14

 

 

 

11

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

26

 

 

 

1

 

 

 

10

 

 

 

3

 

 

 

2

 

 

 

 

 

 

 

 

 

16

 

Total

 

$

40

 

 

$

236

 

 

$

111

 

 

$

58

 

 

$

40

 

 

$

14

 

 

$

499

 

 

$

11

 

 

$

235

 

 

$

113

 

 

$

60

 

 

$

40

 

 

$

14

 

 

$

473

 

 

(1)

Primarily relates to commitments related to information technology and brand licensing under the normal course of business.

 

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has evaluated these legal matters and we believe that possible losses derived from an unfavorable outcome that is reasonably possible or remote is not reasonably estimable. While the actual results of claims and litigation cannot be predicted with certainty, we expect that the resolution of all pending or threatened claims and litigation as of March 31,September 30, 2020, will 0t materially affect our unaudited condensed consolidated financial statements.


Note 20: Condensed Consolidating Guarantor Financial Information

The following schedules present the unaudited condensed consolidating financial information as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019 for the Parent, Subsidiary Issuers, Guarantors and Non-Guarantors.

 

 

 

March 31, 2020

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4

 

 

$

 

 

$

617

 

 

$

48

 

 

$

 

 

$

669

 

Restricted cash

 

 

 

 

 

 

 

 

59

 

 

 

31

 

 

 

 

 

 

90

 

Accounts receivable, net

 

 

 

 

 

 

 

 

168

 

 

 

34

 

 

 

(44

)

 

 

158

 

Timeshare financing receivables, net

 

 

 

 

 

 

 

 

276

 

 

 

846

 

 

 

 

 

 

1,122

 

Inventory

 

 

 

 

 

 

 

 

803

 

 

 

82

 

 

 

 

 

 

885

 

Property and equipment, net

 

 

 

 

 

 

 

 

462

 

 

 

11

 

 

 

 

 

 

473

 

Operating lease right-of-use assets, net

 

 

 

 

 

 

 

 

60

 

 

 

2

 

 

 

 

 

 

62

 

Investments in unconsolidated affiliates

 

 

 

 

 

 

 

 

47

 

 

 

 

 

 

 

 

 

47

 

Intangible assets, net

 

 

 

 

 

 

 

 

78

 

 

 

 

 

 

 

 

 

78

 

Other assets

 

 

 

 

 

5

 

 

 

103

 

 

 

12

 

 

 

 

 

 

120

 

Investments in subsidiaries

 

 

559

 

 

 

1,793

 

 

 

146

 

 

 

 

 

 

(2,498

)

 

 

 

TOTAL ASSETS

 

$

563

 

 

$

1,798

 

 

$

2,819

 

 

$

1,066

 

 

$

(2,542

)

 

$

3,704

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued

   expenses and other

 

$

 

 

$

 

 

$

278

 

 

$

34

 

 

$

(44

)

 

$

268

 

Advanced deposits

 

 

 

 

 

 

 

 

117

 

 

 

 

 

 

 

 

 

117

 

Debt, net

 

 

 

 

 

1,239

 

 

 

27

 

 

 

 

 

 

 

 

 

1,266

 

Non-recourse debt, net

 

 

 

 

 

 

 

 

 

 

 

885

 

 

 

 

 

 

885

 

Operating lease liabilities

 

 

 

 

 

 

 

 

76

 

 

 

1

 

 

 

 

 

 

77

 

Deferred revenues

 

 

 

 

 

 

 

 

277

 

 

 

 

 

 

 

 

 

277

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

251

 

 

 

 

 

 

 

 

 

251

 

Total equity

 

 

563

 

 

 

559

 

 

 

1,793

 

 

 

146

 

 

 

(2,498

)

 

 

563

 

TOTAL LIABILITIES AND EQUITY

 

$

563

 

 

$

1,798

 

 

$

2,819

 

 

$

1,066

 

 

$

(2,542

)

 

$

3,704

 


 

 

December 31, 2019

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

2

 

 

$

 

 

$

33

 

 

$

32

 

 

$

 

 

$

67

 

Restricted cash

 

 

 

 

 

 

 

 

59

 

 

 

26

 

 

 

 

 

 

85

 

Accounts receivable, net

 

 

 

 

 

 

 

 

192

 

 

 

52

 

 

 

(70

)

 

 

174

 

Timeshare financing receivables, net

 

 

 

 

 

 

 

 

449

 

 

 

707

 

 

 

 

 

 

1,156

 

Inventory

 

 

 

 

 

 

 

 

524

 

 

 

34

 

 

 

 

 

 

558

 

Property and equipment, net

 

 

 

 

 

 

 

 

718

 

 

 

60

 

 

 

 

 

 

778

 

Operating lease right-of-use assets, net

 

 

 

 

 

 

 

 

58

 

 

 

2

 

 

 

 

 

 

60

 

Investments in unconsolidated affiliate

 

 

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Intangible assets, net

 

 

 

 

 

 

 

 

77

 

 

 

 

 

 

 

 

 

77

 

Other assets

 

 

 

 

 

5

 

 

 

64

 

 

 

11

 

 

 

 

 

 

80

 

Investments in subsidiaries

 

 

568

 

 

 

1,364

 

 

 

136

 

 

 

 

 

 

(2,068

)

 

 

 

TOTAL ASSETS

 

$

570

 

 

$

1,369

 

 

$

2,354

 

 

$

924

 

 

$

(2,138

)

 

$

3,079

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued

   expenses and other

 

$

 

 

$

 

 

$

329

 

 

$

39

 

 

$

(70

)

 

$

298

 

Advanced deposits

 

 

 

 

 

 

 

 

115

 

 

 

 

 

 

 

 

 

115

 

Debt, net

 

 

 

 

 

801

 

 

 

27

 

 

 

 

 

 

 

 

 

828

 

Non-recourse debt, net

 

 

 

 

 

 

 

 

 

 

 

747

 

 

 

 

 

 

747

 

Operating lease liabilities

 

 

 

 

 

 

 

 

74

 

 

 

2

 

 

 

 

 

 

76

 

Deferred revenues

 

 

 

 

 

 

 

 

186

 

 

 

 

 

 

 

 

 

186

 

Deferred income tax liabilities

 

 

 

 

 

 

 

 

259

 

 

 

 

 

 

 

 

 

259

 

Total equity

 

 

570

 

 

 

568

 

 

 

1,364

 

 

 

136

 

 

 

(2,068

)

 

 

570

 

TOTAL LIABILITIES AND EQUITY

 

$

570

 

 

$

1,369

 

 

$

2,354

 

 

$

924

 

 

$

(2,138

)

 

$

3,079

 


 

 

For the Three Months Ended March 31, 2020

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

 

 

$

 

 

$

32

 

 

$

24

 

 

$

 

 

$

56

 

Sales, marketing, brand and other fees

 

 

 

 

 

 

 

 

120

 

 

 

3

 

 

 

(17

)

 

 

106

 

Financing

 

 

 

 

 

 

 

 

20

 

 

 

26

 

 

 

(2

)

 

 

44

 

Resort and club management

 

 

 

 

 

 

 

 

44

 

 

 

 

 

 

 

 

 

44

 

Rental and ancillary services

 

 

 

 

 

 

 

 

51

 

 

 

1

 

 

 

 

 

 

52

 

Cost reimbursements

 

 

 

 

 

 

 

 

48

 

 

 

1

 

 

 

 

 

 

49

 

Total revenues

 

 

 

 

 

 

 

 

315

 

 

 

55

 

 

 

(19

)

 

 

351

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

9

 

 

 

5

 

 

 

 

 

 

14

 

Sales and marketing

 

 

 

 

 

 

 

 

157

 

 

 

17

 

 

 

(17

)

 

 

157

 

Financing

 

 

 

 

 

 

 

 

5

 

 

 

10

 

 

 

(2

)

 

 

13

 

Resort and club management

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

Rental and ancillary services

 

 

 

 

 

 

 

 

35

 

 

 

2

 

 

 

 

 

 

37

 

General and administrative

 

 

 

 

 

 

 

 

21

 

 

 

 

 

 

 

 

 

21

 

Depreciation and amortization

 

 

 

 

 

 

 

 

12

 

 

 

 

 

 

 

 

 

12

 

License fee expense

 

 

 

 

 

 

 

 

22

 

 

 

 

 

 

 

 

 

22

 

Cost reimbursements

 

 

 

 

 

 

 

 

48

 

 

 

1

 

 

 

 

 

 

49

 

Total operating expenses

 

 

 

 

 

 

 

 

321

 

 

 

35

 

 

 

(19

)

 

 

337

 

Interest expense

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

(10

)

Dividends from subsidiary

 

 

12

 

 

 

12

 

 

 

 

 

 

 

 

 

(24

)

 

 

 

Equity in earnings from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

3

 

 

 

 

 

 

 

 

 

3

 

Other gain, net

 

 

 

 

 

 

 

 

2

 

 

 

 

 

 

 

 

 

2

 

Income before income taxes

 

 

12

 

 

 

2

 

 

 

(1

)

 

 

20

 

 

 

(24

)

 

 

9

 

Income tax expense

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Income before equity in earnings

   from subsidiaries

 

 

12

 

 

 

2

 

 

 

(2

)

 

 

20

 

 

 

(24

)

 

 

8

 

Equity in earnings from subsidiaries

 

 

(4

)

 

 

18

 

 

 

20

 

 

 

 

 

 

(34

)

 

 

 

Net income

 

$

8

 

 

$

20

 

 

$

18

 

 

$

20

 

 

$

(58

)

 

$

8

 


 

 

For the Three Months Ended March 31, 2019

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales of VOIs, net

 

$

 

 

$

 

 

$

107

 

 

$

18

 

 

$

 

 

$

125

 

Sales, marketing, brand and other fees

 

 

 

 

 

 

 

 

151

 

 

 

1

 

 

 

(11

)

 

 

141

 

Financing

 

 

 

 

 

 

 

 

18

 

 

 

25

 

 

 

(2

)

 

 

41

 

Resort and club management

 

 

 

 

 

 

 

 

42

 

 

 

 

 

 

 

 

 

42

 

Rental and ancillary services

 

 

 

 

 

 

 

 

58

 

 

 

1

 

 

 

 

 

 

59

 

Cost reimbursements

 

 

 

 

 

 

 

 

41

 

 

 

1

 

 

 

 

 

 

42

 

Total revenues

 

 

 

 

 

 

 

 

417

 

 

 

46

 

 

 

(13

)

 

 

450

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

 

 

 

 

 

 

33

 

 

 

3

 

 

 

 

 

 

36

 

Sales and marketing

 

 

 

 

 

 

 

 

170

 

 

 

11

 

 

 

(11

)

 

 

170

 

Financing

 

 

 

 

 

 

 

 

4

 

 

 

11

 

 

 

(2

)

 

 

13

 

Resort and club management

 

 

 

 

 

 

 

 

11

 

 

 

 

 

 

 

 

 

11

 

Rental and ancillary services

 

 

 

 

 

 

 

 

34

 

 

 

1

 

 

 

 

 

 

35

 

General and administrative

 

 

 

 

 

 

 

 

27

 

 

 

 

 

 

 

 

 

27

 

Depreciation and amortization

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

 

 

8

 

License fee expense

 

 

 

 

 

 

 

 

22

 

 

 

1

 

 

 

 

 

 

23

 

Cost reimbursements

 

 

 

 

 

 

 

 

41

 

 

 

1

 

 

 

 

 

 

42

 

Total operating expenses

 

 

 

 

 

 

 

 

350

 

 

 

28

 

 

 

(13

)

 

 

365

 

Interest expense

 

 

 

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

(10

)

Dividends from subsidiary

 

 

125

 

 

 

125

 

 

 

 

 

 

 

 

 

(250

)

 

 

 

Equity in earnings from unconsolidated

   affiliates

 

 

 

 

 

 

 

 

1

 

 

 

 

 

 

 

 

 

1

 

Other loss, net

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Income (loss) before income taxes

 

 

125

 

 

 

115

 

 

 

67

 

 

 

18

 

 

 

(250

)

 

 

75

 

Income tax expense

 

 

 

 

 

 

 

 

(20

)

 

 

 

 

 

 

 

 

(20

)

Income (loss) before equity in earnings

   (loss) from subsidiaries

 

 

125

 

 

 

115

 

 

 

47

 

 

 

18

 

 

 

(250

)

 

 

55

 

Equity in (loss) earnings from subsidiaries

 

 

(70

)

 

 

65

 

 

 

18

 

 

 

 

 

 

(13

)

 

 

 

Net income

 

$

55

 

 

$

180

 

 

$

65

 

 

$

18

 

 

$

(263

)

 

$

55

 



 

 

For the Three Months Ended March 31, 2020

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating

   activities

 

$

8

 

 

$

20

 

 

$

186

 

 

$

(104

)

 

$

(57

)

 

$

53

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property and

   equipment

 

 

 

 

 

 

 

 

(1

)

 

 

(2

)

 

 

 

 

 

(3

)

Software capitalization costs

 

 

 

 

 

 

 

 

(5

)

 

 

 

 

 

 

 

 

(5

)

Investments in unconsolidated affiliates

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends from subsidiary

 

 

12

 

 

 

12

 

 

 

 

 

 

 

 

 

(24

)

 

 

 

Net cash provided by (used in) investing

   activities

 

 

12

 

 

 

12

 

 

 

(6

)

 

 

(2

)

 

 

(24

)

 

 

(8

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of debt

 

 

 

 

 

495

 

 

 

 

 

 

 

 

 

 

 

 

495

 

Issuance of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

195

 

 

 

 

 

 

195

 

Repayment of debt

 

 

 

 

 

(57

)

 

 

 

 

 

 

 

 

 

 

 

(57

)

Repayment of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

(58

)

 

 

 

 

 

(58

)

Repurchase and retirement of common stock

 

 

(10

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(10

)

Payment of withholding taxes on vesting of

   restricted stock units

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2

)

Other financing activity

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

(1

)

Intercompany transfers

 

 

(6

)

 

 

(470

)

 

 

405

 

 

 

(10

)

 

 

81

 

 

 

 

Net cash (used in) provided by financing

   activities

 

 

(18

)

 

 

(32

)

 

 

404

 

 

 

127

 

 

 

81

 

 

 

562

 

Net increase in cash, cash

   equivalents and restricted cash

 

 

2

 

 

 

 

 

 

584

 

 

 

21

 

 

 

 

 

 

607

 

Cash, cash equivalents and restricted cash,

   beginning of period

 

 

2

 

 

 

 

 

 

92

 

 

 

58

 

 

 

 

 

 

152

 

Cash, cash equivalents and restricted cash,

   end of period

 

$

4

 

 

$

 

 

$

676

 

 

$

79

 

 

$

 

 

$

759

 


 

 

For the Three Months Ended March 31, 2019

 

($ in millions)

 

Parent

 

 

Issuers

 

 

Guarantors

 

 

Non-

Guarantors

 

 

Eliminations

 

 

Total

 

Operating Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by (used in) operating

   activities

 

$

 

 

$

140

 

 

$

(2

)

 

$

66

 

 

$

(190

)

 

$

14

 

Investing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital expenditures for property and

   equipment

 

 

 

 

 

 

 

 

(5

)

 

 

(1

)

 

 

 

 

 

(6

)

Software capitalization costs

 

 

 

 

 

 

 

 

(4

)

 

 

 

 

 

 

 

 

(4

)

Dividends from subsidiary

 

 

100

 

 

 

100

 

 

 

 

 

 

 

 

 

(200

)

 

 

 

Net cash used in investing activities

 

 

100

 

 

 

100

 

 

 

(9

)

 

 

(1

)

 

 

(200

)

 

 

(10

)

Financing Activities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Issuance of debt

 

 

 

 

 

195

 

 

 

 

 

 

 

 

 

 

 

 

195

 

Repayment of debt

 

 

 

 

 

(23

)

 

 

 

 

 

 

 

 

 

 

 

(23

)

Repayment of non-recourse debt

 

 

 

 

 

 

 

 

 

 

 

(40

)

 

 

 

 

 

(40

)

Repurchase and retirement of common stock

 

 

 

 

 

(92

)

 

 

 

 

 

 

 

 

 

 

 

(92

)

Payment of withholding taxes on vesting of

   restricted stock units

 

 

 

 

 

(2

)

 

 

 

 

 

 

 

 

 

 

 

(2

)

Intercompany transfers

 

 

(91

)

 

 

(318

)

 

 

37

 

 

 

(18

)

 

 

390

 

 

 

 

Net cash (used in) provided by financing

   activities

 

 

(91

)

 

 

(240

)

 

 

37

 

 

 

(58

)

 

 

390

 

 

 

38

 

Net increase in cash, cash equivalents and

   restricted cash

 

 

9

 

 

 

 

 

 

26

 

 

 

7

 

 

 

 

 

 

42

 

Cash, cash equivalents and restricted cash,

   beginning of period

 

 

4

 

 

 

 

 

 

134

 

 

 

42

 

 

 

 

 

 

180

 

Cash, cash equivalents and restricted cash,

   end of period

 

$

13

 

 

$

 

 

$

160

 

 

$

49

 

 

$

 

 

$

222

 

Note 21: COVID-19 and20: Subsequent Events

On October 15, 2020, we announced a workforce reduction plan in response to the continuing adverse impact of the COVID-19 pandemic and related government orders and mandates restricting travel and operations on our business and the travel and leisure industry in general.  The reduction in force is expected to reduce our workforce by approximately 1,600 team members and better align the workforce with the evolving business needs.

 

The novel coronavirus (“COVID-19”) pandemic has significantly impactedreduction in force is estimated to result in approximately $10 million to $12 million in restructuring and related expenses and charges, primarily related to employee severance, benefits and related costs. We expect to incur a majority of these costs during the hospitality industry due to travel restrictions and stay-at-home directives that have resulted in cancellations and significantly reduced travel around the world. As a resultlast quarter of 2020.  All of the reductionrestructuring and related expenses and charges are expected to result in travel, we have closed substantially all of our resorts and sales centers for an indeterminate duration.  In response to the impact of COVID-19, we have taken actions to ensure the continuity of our business and operations, including furloughing approximately 67 percent of our employees, implementing salary reductions for the remaining active employees, eliminating all discretionary spending, and reducing our planned investment in new inventory by approximately $200 million. cash expenditures.

 

In addition,Additionally, in October 2020, we drew down on the availabilityrepaid $100 million under our revolving credit facility as a precautionary measure to ensure liquidity for a sustained period.  As we are not able to estimate the dates that the suspensions of resort and sales operations will be lifted, we may need to take additional actions to ensure the continuity of our business. Any sustained material adverse impact on our revenues, net income and other operating results due to COVID-19 could cause our financial covenants under our debt obligations to be adversely affected.  If we are unable to comply with or obtain potential modifications to such covenants prior to any breaches, we may trigger events of defaults under these arrangements.  We are currently in negotiations with our lenders to amend such covenants as needed and believe we will be able to reach an agreement in advance of any such default.facility.

On April 16, we announced that we had adopted a shareholder rights plan.

On April 22, we entered into Amendment No. 14 to our Timeshare Facility, which amended certain key definitions related to delinquency level calculations of underlying timeshare loans that are used as collateral for borrowings under our Timeshare Facility.  Additionally, it provides us with the added flexibility to manage any potential increase in the rate of delinquency that may result from the impact of the COVID-19 pandemic. All other terms and borrowing capacity remained unchanged.

In April 2020, we furloughed approximately 6,100 out of our 9,100 employees.

 


Item 2.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2019.

 

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements convey management’s expectations as to our future, and are based on management’s beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time we make such statements. Forward-looking statements include all statements that are not historical facts, including those related to our revenues, earnings, cash flow and operations, and may be identified by terminology such as the words “outlook,” “believe,” “expect,” “potential,” “goal,” “continues,” “may,” “will,” “should,” “could,” “seeks,” “approximately,” “projects,” predicts,” “intends,” “plans,” “estimates,” “anticipates” “future,” “guidance,” “target,” or the negative version of these words or other comparable words. The forward-looking statements contained in this Report include statements related to our revenues, earnings, taxes, cash flow and related financial and operating measures, and expectations with respect to future operating, financial and business performance, and other anticipated future events and expectations that are not historical facts.

We caution you that our forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that are beyond our control, that may cause our actual results, performance or achievements to be materially different from the future results, business performance or achievements expressed in or implied by such statements. The forward-looking statements in this Report are not guarantees of our future performance, and you should not place undue reliance on such statements.results. Factors that could cause our actualactual results to differ materially from those contemplated by our forward-looking statements include: the material impact of the COVID-19 pandemic on our business, operating results, and financial condition, including, without limitation, our ability to meet certain sales and performance levels, particularly as they relate to our fee-for-service and third party partners, the effectiveness of actions taken by us to manage the impact of the pandemic, and the duration of closure of substantially all of our properties and operations, and uncertainties of when our properties will re-open or the period of time required for ramp-up of operations upon re-opening;condition; the extent and duration of the impact of the COVID-19 pandemic on global economic conditions; the extent and duration of government and other restrictions on travel and commercial activity in response to the COVID-19 pandemic; our ability to meet our liquidity needsneeds; risks related to our indebtedness; inherent business risks, market trends and competition within the timeshare and hospitality industries; our ability to remain compliant withsuccessfully source inventory and market, sell and finance VOIs; default rates on our debt covenants; risks associated withfinancing receivables; the inherent business, financialreputation of and operating risks of the timeshare industry, including limited underwriting standards due to the real-time nature of industry sales practices, and the intense competition associated with the industry; our ability successfully marketto access Hilton brands and sell VOIs; our development and other activities to source inventory for VOI sales; significant increases in defaults on our vacation ownership mortgage receivables;programs, including the abilityrisk of managed homeowner associations to collect sufficient maintenance fees; general volatility in the economy and/or the financial and credit markets; adverse economic or market conditions and trends in the tourism and hospitality industry, which may impact the purchasing and vacationing decisions of consumers; our actions or the occurrence of other events that could cause a breach under or termination of our license agreement with Hilton that could affect or terminate our access to the Hilton brands and programs, or actions of Hilton that affect the reputation of the licensed marks or Hilton’s programs; economic and operational uncertainties related to our expanding global operations, including our ability to manage the outcome and timing of such operations andHilton; compliance with anti-corruption, data privacy and other applicablechanges to United States and global laws and regulations, affecting our international operations; the effects of foreign currency exchange; changes in tax ratesincluding those related to anti-corruption and exposureprivacy; risks related to additional tax liabilities; the impact of future changes in legislation, regulations or accounting pronouncements; our acquisitions, joint ventures, and strategic alliances that that may not result in expected benefits, including the termination of material fee-for-service agreements;other partnerships; our dependence on third-party development activities to secure just-in-time inventory; our usethe performance of social media platforms; cyber-attacks, security vulnerabilities, andour information technology system failures resulting in disclosure of personalsystems and our ability to maintain data company data loss, system outages or disruptions of our online services, which could lead to reduced revenue, increased costs, liability claims, harm to user engagement, and harm to our reputation or competitive position; the impact of claims against us that may result in adverse outcomes, includingsecurity; regulatory proceedings or litigation; adequacy of our credit facilities, indentureworkforce to meet our business and other debt agreements and instruments, including variable interest rates, operating and financial restrictions,operation needs; our ability to make scheduled payments,attract and our ability to refinance our debt on acceptable terms; the continued service and availability ofretain  key executives and employees including our abilitywith skills and capacity to meet human capital needs given our recent furloughs as our businessneeds; and operations normalize after the COVID-19 pandemic eases and the succession planning of our key executives; and catastrophic events or geo-political conditions including war, terrorist activity, political strife, pandemic outbreak (including COVID-19), or natural disasters that may disrupt our operations in key vacation destinations.or adverse geo-political conditions. Any one or more of the foregoing factors could adversely impact our operations, revenue, operating margins, financial condition and/or credit rating.


For additional information regarding factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements in this Report, please see the risk factors discussed in “Part I—Item 1A. Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, as supplemented and updated by the risk factors discussed in “Part II-Item 1A. Risk Factors” of our Quarterly Reports on Forms 10-Q for the quarter ended March 31, 2020, June 30, 2020 and this Report, as well as those described from time to time other periodic reports that we file with the SEC. There may be other risks and uncertainties that we are unable to predict at this time or that we currently do not expect to have a material adverse effect on our business. Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future developments, changes in management’s expectations, or otherwise.

Terms Used in this Quarterly Report on Form 10-Q

 

Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Hilton Grand Vacations,” “HGV,” “the Company,” “we,” “us” and “our” refer to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. Except where the context requires otherwise, references to our “properties” or “resorts” and “units” refer to the timeshare properties that we manage or own. Of these resorts and units, a portion is directly owned by us or orour joint ventures in which we have an interest and the remaining resorts and units are owned by our third-party owners.

 

“Developed” refers to VOI inventory that is sourced from projects developed by HGV.

 

“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.

 

“Just-in-time” refers to VOI inventory that is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.

 

“VOI” refers to vacation ownership intervals.

 


Non-GAAP Financial Measures

 

This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and financial measures that are not calculated in accordance with U.S. GAAP, including earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”), Adjusted EBITDA, free cash flow and adjusted free cash flow.

 

Operational Metrics

 

This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate margin, tour flow, and volume per guest and transient rate.guest.  

 

See “Key Business and Financial Metrics and Terms Used by Management” and “-Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.

Overview

Our Business

We are a timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. As of March 31,September 30, 2020, we have 5960 properties, representing 9,5519,594 units, that are primarily located in vacation destinations such as Orlando, Las Vegas, the Hawaiian Islands, New York City, Washington D.C., and South Carolina and feature spacious, condominium-style accommodations with superior amenities and quality service. As of March 31,September 30, 2020, we have approximately 328,000 Hilton Grand Vacations Club and Hilton Club (collectively the “Club”) members. Club members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 18 industry-leading brands across approximately 6,0006,200 properties, as well as numerous experiential vacation options, such as cruises and guided tours. Our business has been and continues to be adversely impacted by the COVID-19 pandemic and its effects on the global economy, including the various government orders and mandates for closures of non-essential businesses.  Please see “COVID-19 and Subsequent“Recent Events” and other discussions throughout this Report for additional information regarding such impacts.


We operate our business across two segments: (1) real estate sales and financing; and (2) resort operations and club management.

Real Estate Sales and Financing

Our primary product is the marketing and selling of fee-simple VOIs deeded in perpetuity and right to use real estate interests, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week on an annual basis, at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In 2010, we began sourcingWe source VOIs through fee-for-service and just-in-time agreements with third-party developers and have focused our inventory strategy on developing an optimal inventory mix focused on developed properties as well as fee-for-service and just-in-time agreements. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs and Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory with the sale to purchasers. Sales of owned, including just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.

For the threenine months ended March 31,September 30, 2020, sales from fee-for-service, just-in-time and developed inventory sources were 5355 percent, 2522 percent and 2223 percent, respectively, of contract sales. See “Key Business and Financial Metrics and Terms Used by Management——Real Estate Sales Metrics” for additional discussion of contract sales. Based onThe estimated contract sales value related to our trailing twelve months sales pace, we have access to approximately seven years ofinventory that is currently available for sale at open or soon-to-be open projects and inventory at new or existing projects that will become available for sale in the future inventory, with capitalupon registration, delivery or construction is $10 billion at current pricing.


Capital efficient arrangements representingrepresent approximately 52 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets.

We sell our vacation ownership products under the Hilton Grand Vacations brand primarily through our distribution network of both in-market and off-site sales centers.  Our products are currently marketed for sale throughout the United States and the Asia-Pacific region.  We operate sales distribution centers in major markets and popular leisure destinations with year-round demand and a history of being a friendly environment for vacation ownership. We have sales distribution centers in Las Vegas, Orlando, Oahu, Japan, New York, Myrtle Beach, Waikoloa, Washington D.C., Hilton Head, Park City, Chicago, Korea and Carlsbad. Our marketing and sales activities are based on targeted direct marketing and a highly personalized sales approach.  We use targeted direct marketing to reach potential members who are identified as having the financial ability to pay for our products and have an affinity with Hilton and are frequent leisure travelers.  Tour flow quality impacts key metrics such as close rate and VPG, defined in “Key Business and Financial Metrics and Terms Used by Management——Real Estate Sales Metrics.” Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the threenine months ended March 31,September 30, 2020, 5560 percent of our contract sales were to our existing owners.

We provide financing for members purchasing our developed and acquired inventory and generate interest income. Our timeshare financing receivables are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 9 percent to 18 percent per annum. Financing propensity was 6365 percent and 6567 percent for the threenine months ended March 31,September 30, 2020 and 2019, respectively. We calculate financing propensity as contract sales volume of financed contracts originated in the period divided by contract sales volume of all contracts originated in the period.

The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted-average FICO score for new loans to U.S. and Canadian borrowers at the time of origination were as follows:  

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Weighted-average FICO score

 

 

736

 

 

 

738

 

 

 

Nine Months Ended September 30,

 

 

 

2020

 

 

2019

 

Weighted-average FICO score

 

 

734

 

 

 

735

 

 

Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Club.


Some of our timeshare financing receivables have been pledged as collateral in our securitization transactions, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and related cash deposits. For additional information see Note 6: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.

In addition, we earn fees from servicing the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs and from our securitized timeshare financing receivables.

Resort Operations and Club Management

We enter into management agreements with the HOAs of the VOI owners for timeshare resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprised of owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from three to five years and the agreements are subject to periodic renewal for one to three-year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term.

We also manage and operate the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Club members. When owners purchase a


VOI, they are generally enrolled in the Club and given an annual allotment of points that allow the member to exchange their annual usage rights in the VOI that they own for a number of vacation and travel options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.

We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.

Key Business and Financial Metrics and Terms Used by Management

Real Estate Sales Operating Metrics

We measure our performance using the following key operating metrics:

 

Contract sales represents the total amount of VOI products (fee-for-service and developed) under purchase agreements signed during the period where we have received a down payment of at least 10 percent of the contract price. Contract sales differ from revenues from the Sales of VOIs, net that we report in our condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives and other administrative fee revenues.incentives. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business and is used to manage the performance of the sales organization. While we do not record the purchase price of sales of VOI products developed by fee-for-service partners as revenue in our condensed consolidated financial statements, rather recording the commission earned as revenue in accordance with U.S. GAAP, we believe contract sales to be an important operational metric, reflective of the overall volume and pace of sales in our business and believe it provides meaningful comparability of our results to the results of our competitors which may source their VOI products differently.

We believe that the presentation of contract sales on a combined basis (fee-for-service and developed) is most appropriate for the purpose of the operating metric, additional information regarding the split of contract sales, is included in “—Real Estate” below. See Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our audited consolidated financial statements included in Item 8 in our Annual Report on form 10-K for the year ended December 31, 2019, for additional information on Sales of VOI, net.  

 

Sales revenue represents Sales of VOIs, net, commissions and brand fees earned from the sale of fee-for-service intervals.


 

Real estate margin represents sales revenue less the cost of VOI sales, sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs.

 

Tour flow represents the number of sales presentations given at our sales centers during the period.

 

Volume per guest (“VPG”) represents the sales attributable to tours at our sales locations and is calculated by dividing Contract sales, excluding telesales, by tour flow. We consider VPG to be an important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with the closing rate.

Resort and Club Management and Rental Metrics

Transient rate represents the total rental room revenue for transient guests divided by total number of transient room nights sold in a given period and excludes room rentals associated with marketing programs, owner usage and the redemption of Club Bonus Points.

For further information see Item 8. Financial Statements and Supplementary Data - Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2019.

EBITDA and Adjusted EBITDA

EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income (loss), before interest expense (excluding non-recourse debt), a provision for income taxes and depreciation and amortization.

Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to the spin-off; and (viii) other items.


EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:

 

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

 

EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding interest expense on non-recourse debt), or the cash requirements necessary to service interest or principal payments on our indebtedness;

 

EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;

 

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

 

EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;


 

EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and

 

EBITDA and Adjusted EBITDA may be calculated differently from other companies in our industry limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Recent Events Related to the COVID-19 Pandemic and Other MattersImpact on Our Results of Operations, Financial Condition, and Business During the Three and Nine Months Ended September 30, 2020.

In March 2020, a National Public Health Emergency was declared in response to the coronavirus, known as COVID-19. As a result, many local, county and state government officials have issued, and continue to issue, various mandates and orders to close non-essential businesses, impose travel restrictions, and require “stay-at-home” and/or self-quarantine in certain cases, all in an effort to protect the health and safety of individuals and aimed at slowing and ultimately stopping the spread and transmission of the virus.virus.

Accordingly, commencing as ofin March 31, 2020, we hadstarted to temporarily closedclose substantially all of our properties and suspended our U.S sales operations and closed such sales offices. In addition,We took a number of other actions to reduce our expenses and preserve liquidity, including workforce furlough, implementing salary reductions for the remaining active employees primarily during the second quarter of 2020, implementing hiring freezes, eliminating all discretionary spending, and reducing our planned investment in new inventory by approximately $200 million. Recently, we have stopped accepting reservations at our U.S., Europe,announced a workforce reduction plan that will impact approximately 1,600 team members, and Barbados resorts. We also furloughed more than 6,100approximately 2,000 of our approximately 9,100 employees team members remain furloughed.


Furthermore, we believe the following actions will provide adequate capital to meet our short-and long-term liquidity requirements for anticipated operating expenses and implemented hiring freezes. We currently anticipate that these temporary closures. modified operating plans, non-acceptance of reservations,other expenditures, including payroll and related actions will be in place throughbenefits, legal costs, and additional costs related to complying with various regulatory requirements and best practices for opening under the endcurrent environment resulting from the pandemic, and to finance our long-term growth plan and capital expenditures for the foreseeable future.

In March 2020, we drew down the substantial remainder of our borrowing capacity under our revolver facility through net borrowings of $445 million as a precautionary measure to ensure liquidity for a sustained period in the economic environment resulting from the COVID-19 pandemic. We expect the proceeds would be used for general corporate and working capital purposes in the ordinary course of business.

In April 2020, we amended certain key definitions related to delinquency level calculations of underlying timeshare loans that are used as collateral for borrowings under our Timeshare Facility, and generated added flexibility to manage any potential increase in the rate of delinquency as a result of the impact of the COVID-19 pandemic.

In May 2020, we amended our Credit Agreement which amended certain terms of the credit facilities (“Senior Secured Credit Facilities”) to provide us with both near-term and long-term flexibility with respect to satisfying certain negative and financial covenants and ratios as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business and operations.

In June 2020, we completed a securitization of $300 million of gross timeshare financing receivables and used the proceeds to pay down the $195 million outstanding balance on our Timeshare Facility and for general corporate operating expenses. As of September 30, 2020, we have $450 million remaining borrowing capacity under our Timeshare Facility. See Note 11: Debt and Non-Recourse Debt for additional information.

In August 2020, we renewed and extended our Timeshare Facility and amended certain provisions relating to advance rate, successor benchmark interest rate, certain used and unused fees, and thresholds for interest rate hedging obligations and transactions.

The closure of April 2020, after which we will re-evaluate our decisionresorts and sales centers, and the related suspensions of our operations, expectedly have had a materially adverse impact on a case-by-case basis after taking into account various government ordersour revenues, net income (loss) and mandates at such time,other operating results during the third quarter, as well as our business and operations generally, as more fully discussed below. As discussed in further detail below, substantially all of the safetyunfavorable changes in our operating results during the three and nine months ended September 30, 2020 as compared to prior periods were as a result of our owners, guests and employees. Our sales operations in Japan and South Korea remain open on a limited basis.

In April 2020, in response to the ongoing impact of the COVID-19 pandemic we filed a Current Report on Form 8-K disclosing that our executive officers andtravel demand, along with the Boardtemporary closure of Directors had agreed to temporarily reduce officers’ base salaries and forgo non-employee directors’ annual cash retainers. In addition, we disclosed that we had drawn down the substantial remaindersubstantially all of our available borrowings underproperties and suspension of our credit facility through net borrowingssales and related operations during the first half of an additional $445 million. After taking into account2020.  

Additionally, as a result of the other borrowingsongoing COVID-19 pandemic, we are performing a review over certain of our long-lived assets in order to determine our optimal strategic direction with regards to these assets. These assets include undeveloped parcels of land and repayments overcertain unallocated infrastructure costs related to future phases of existing resorts. The result of this review could have a material impact on the coursecarrying value of March 2020, the total amount outstanding under our credit facility immediately thereafter was $761 million at an average interest rate of 2.60%.certain assets, which could result in non-cash impairments.

 

Outlook

The COVID-19 pandemic has created an unprecedented and challenging time. Our current focus is on taking critical actions that are aimed at positioning the Company in a sound position from an operational, liquidity, credit access, and compliance perspective for a strong recovery when the impact of COVID-19 subsides. As discussed above, we have taken several steps to enhance our liquidity, preserve cash, reduce our expenditures and provide financial flexibility, and our management is continuingflexibility. We will continue to assess the evolving situation and will take additional actions as appropriate. We will continue to monitor the COVID-19 pandemic, and its related impact, including the various government mandates and orders that have caused us to close substantially allimpact the re-opening of our properties and any new recommended or required business practice,practices, and startwill take additional actions as appropriate.

Prior to re-openre-opening our resorts and sales centers, we introduced the HGV Enhanced Care Guidelines, designed to provide owners, guests and team members with the highest level of cleaning protocols and safety standards recommended by the Center for Disease Control and Prevention and cleaning solutions approved by the Environmental Protection Agency in response to the COVID-19 pandemic. Along with providing personal protective equipment to team members, these Enhanced Care Guidelines include low-touch arrivals and departures, frequent and thorough cleaning, reduction of paper items, reduced capacity for our pool decks and fitness centers, and new technologies. While operations were suspended,


essential resort personnel worked diligently maintaining the resorts for a safe re-opening. Annual deep cleanings, typically scheduled during slower seasons, were moved up and completed, allowing the resorts to be in top shape when owners and guests arrive.

Beginning in May 2020, various states and counties started to allow gradual relaxation of restrictions on activities and a resumption of businesses. In response, we began a phased reopening of resorts and resumption of our business activities during the second quarter of 2020, but under new operating guidelines and with safety measures. As of October 2020, we have over three quarters of our resorts and sales centers open and currently operating however, many of our resorts and sales centers are operating with significant capacity constraints and subject to various safety measures.

Although we have started re-opening our sales centers, they have initially been operating at lower levels of utilization than they were prior to the temporary shutdown.  This includes lower levels of sales staff, modified operating schedules to stagger tours in compliance with social distancing rules, and running a reduced weekly operating calendar.  As we respond to changes in tour flow, we intend to adjust our sales operations accordingly while complying with all applicable social distancing rules and our own safety measures.

While we plan to continue to reopen our resorts and resume our business as conditions and applicable rules and regulations permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Further, ongoing strict travel and other restrictions in regions and locations where we have a significant concentration of our properties and normalizeunits, in particular, Hawaii and New York, are significantly impacting consumer demand for our operations. Inresorts in those areas.

Accordingly, there remains significant uncertainty as to the meantime, we will continue to work on key initiatives, such as our digital strategydegree of impact and other sales strategy that may not be impacted byduration of the various closures, so that we are as well positioned as possible onceconditions stemming from the impact of COVID-19 has eased.

Any sustained material adverse impactongoing pandemic on our revenues, net income and other operating results, dueas well as our business and operations generally. Any significantly extended duration or worsening of the conditions associated with the pandemic may adversely impact our liquidity in the longer term, including our ability to COVID-19 could causefinance our day-to-day business and operations, and may adversely affect our ability to comply with our maintenance and financial covenants and ratios under our debt obligations notwithstanding the recent amendments discussed above. However, we believe that prior to triggering an event of default, if any, in connection with the financial covenants under our debt obligationsagreements we would be able to be adversely affected.  If we are unable to comply with or obtain potential modifications to such covenants prior to any breaches, we may trigger events of defaults under these arrangements.  We are currently in negotiationsreach an agreement with our lenders to amend such covenants as needed and believe we will be able to reach an agreement in advance of any suchpotential default.

 


Please review carefully the risk factors contained in our Form 10-K for the year ended December 31, 2019 and those that are included in our Forms 10-Q for the quarters ended March 31, 2020 and June 30, 2020 and this Report for discussions of various factors and uncertainties related to the pandemic that may materially impact us.

Results of Operations

Three and Nine Months Ended March 31,September 30, 2020 Compared with the Three and Nine Months Ended March 31,September 30, 2019  

Segment Results

We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 18: Business Segments in our unaudited condensed consolidated financial statements. We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses them to manage our business and material limitations on their usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment:


 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing

 

$

206

 

 

$

307

 

 

$

(101

)

 

 

(32.9

)%

 

$

116

 

 

$

324

 

 

$

(208

)

 

 

(64.2

)%

 

$

378

 

 

$

939

 

 

$

(561

)

 

 

(59.7

)%

Resort operations and club

management

 

 

104

 

 

 

110

 

 

 

(6

)

 

 

(5.5

)

 

 

61

 

 

 

108

 

 

 

(47

)

 

 

(43.5

)

 

 

209

 

 

 

332

 

 

 

(123

)

 

 

(37.0

)

Segment revenues

 

 

310

 

 

 

417

 

 

 

(107

)

 

 

(25.7

)

 

 

177

 

 

 

432

 

 

 

(255

)

 

 

(59.0

)

 

 

587

 

 

 

1,271

 

 

 

(684

)

 

 

(53.8

)

Cost reimbursements

 

 

49

 

 

 

42

 

 

 

7

 

 

 

16.7

 

 

 

33

 

 

 

43

 

 

 

(10

)

 

 

(23.3

)

 

 

105

 

 

 

128

 

 

 

(23

)

 

 

(18.0

)

Intersegment eliminations(1)

 

 

(8

)

 

 

(9

)

 

 

1

 

 

 

(11.1

)

 

 

(2

)

 

 

(9

)

 

 

7

 

 

 

(77.8

)

 

 

(10

)

 

 

(29

)

 

 

19

 

 

 

(65.5

)

Total revenues

 

$

351

 

 

$

450

 

 

$

(99

)

 

 

(22.0

)

 

$

208

 

 

$

466

 

 

$

(258

)

 

 

(55.4

)

 

$

682

 

 

$

1,370

 

 

$

(688

)

 

 

(50.2

)

 

(1)

Refer to Note 18: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations.

The following table reconciles net (loss) income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Net Income

 

$

8

 

 

$

55

 

 

$

(47

)

 

 

(85.5

)%

Net (loss) income

 

$

(7

)

 

$

50

 

 

$

(57

)

 

NM(1)

 

 

$

(47

)

 

$

144

 

 

$

(191

)

 

NM(1)

 

Interest expense

 

 

10

 

 

 

10

 

 

 

 

 

 

 

 

 

10

 

 

 

12

 

 

 

(2

)

 

 

(16.7

)%

 

 

32

 

 

 

33

 

 

 

(1

)

 

 

(3.0

)%

Income tax expense

 

 

1

 

 

 

20

 

 

 

(19

)

 

 

(95.0

)

Income tax (benefit) expense

 

 

(5

)

 

 

20

 

 

 

(25

)

 

NM(1)

 

 

 

(12

)

 

 

55

 

 

 

(67

)

 

NM(1)

 

Depreciation and amortization

 

 

12

 

 

 

8

 

 

 

4

 

 

 

50.0

 

 

 

11

 

 

 

12

 

 

 

(1

)

 

 

(8.3

)

 

 

34

 

 

 

32

 

 

 

2

 

 

 

6.3

 

Interest expense, depreciation

and amortization included in

equity in earnings from

unconsolidated affiliates

 

 

1

 

 

 

1

 

 

 

 

 

 

 

Interest expense, depreciation

and amortization included in

equity in (losses) earnings from

unconsolidated affiliates

 

 

1

 

 

 

 

 

 

1

 

 

NM(1)

 

 

 

2

 

 

 

2

 

 

 

 

 

 

 

EBITDA

 

 

32

 

 

 

94

 

 

 

(62

)

 

 

(66.0

)

 

 

10

 

 

 

94

 

 

 

(84

)

 

 

(89.4

)

 

 

9

 

 

 

266

 

 

 

(257

)

 

 

(96.6

)

Other (gain) loss, net

 

 

(2

)

 

 

1

 

 

 

(3

)

 

NM(1)

 

 

 

(1

)

 

 

1

 

 

 

(2

)

 

NM(1)

 

 

 

 

 

 

3

 

 

 

(3

)

 

 

(100.0

)

Share-based compensation expense(2)

 

 

(2

)

 

 

5

 

 

 

(7

)

 

NM(1)

 

 

 

6

 

 

 

6

 

 

 

 

 

 

 

 

 

10

 

 

 

18

 

 

 

(8

)

 

 

(44.4

)

Other adjustment items(3)

 

 

5

 

 

 

2

 

 

 

3

 

 

NM(1)

 

 

 

4

 

 

 

10

 

 

 

(6

)

 

 

(60.0

)

 

 

14

 

 

 

16

 

 

 

(2

)

 

 

(12.5

)

Adjusted EBITDA

 

$

33

 

 

$

102

 

 

$

(69

)

 

 

(67.6

)

 

$

19

 

 

$

111

 

 

$

(92

)

 

 

(82.9

)

 

$

33

 

 

$

303

 

 

$

(270

)

 

 

(89.1

)

 

(1)

Fluctuation in terms of percentage change is not meaningful.


(2)

As of March 31, 2020, we determined that the performance conditions for our 2018, 2019, and 2020 Performance RSUs arewere improbable of achievement therefore we reversed $8 million of share-based compensation expense recognized in prior years and ceased accruing expenseexpenses related to all Performance RSUs granted in 2018, 2019, and 2020, during the three months ended March 31, 2020.  As of September 30, 2020, we determined the performance conditions continue to be improbable of achievement and therefore no expense was recognized for our Performance RSUs in the current period.

(3)

For the three and nine months ended March 31,September 30, 2020 and 2019, this amount includes costs associated with restructuring, one-time charges and other non-cash items.

 


The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Adjusted EBITDA:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate sales and financing(1)

 

$

15

 

 

$

80

 

 

$

(65

)

 

 

(81.3

)%

 

$

15

 

 

$

94

 

 

$

(79

)

 

 

(84.0

)%

 

$

16

 

 

$

243

 

 

$

(227

)

 

 

(93.4

)%

Resort operations and club management(1)

 

 

55

 

 

 

65

 

 

 

(10

)

 

 

(15.4

)

 

 

30

 

 

 

62

 

 

 

(32

)

 

 

(51.6

)

 

 

100

 

 

 

193

 

 

 

(93

)

 

 

(48.2

)

Segment Adjusted EBITDA

 

 

70

 

 

 

145

 

 

 

(75

)

 

 

(51.7

)

 

 

45

 

 

 

156

 

 

 

(111

)

 

 

(71.2

)

 

 

116

 

 

 

436

 

 

 

(320

)

 

 

(73.4

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Adjusted EBITDA from unconsolidated affiliates

 

 

4

 

 

 

2

 

 

 

2

 

 

 

100.0

 

 

 

 

 

 

1

 

 

 

(1

)

 

 

(100.0

)

 

 

5

 

 

 

6

 

 

 

(1

)

 

 

(16.7

)

License fee expense

 

 

(22

)

 

 

(23

)

 

 

1

 

 

 

(4.3

)

 

 

(11

)

 

 

(26

)

 

 

15

 

 

 

(57.7

)

 

 

(39

)

 

 

(75

)

 

 

36

 

 

 

(48.0

)

General and administrative(2)

 

 

(19

)

 

 

(22

)

 

 

3

 

 

 

(13.6

)

 

 

(15

)

 

 

(20

)

 

 

5

 

 

 

(25.0

)

 

 

(49

)

 

 

(64

)

 

 

15

 

 

 

(23.4

)

Adjusted EBITDA

 

$

33

 

 

$

102

 

 

$

(69

)

 

 

(67.6

)

 

$

19

 

 

$

111

 

 

$

(92

)

 

 

(82.9

)

 

$

33

 

 

$

303

 

 

$

(270

)

 

 

(89.1

)

 

(1)(1)

Includes intersegment transactions, share-based compensation, depreciation and other adjustments attributable to the segments.

(2)(2)

Excludes segment related share-based compensation, depreciation and other adjustment items.  

 

Real Estate Sales and Financing

In accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), revenue and the related costs to fulfill and acquire the contract (“direct costs”) from sales of VOIs under construction are deferred until the point in time when construction activities are deemed to be completed. The Real estate sales and financing segment is impacted by construction related deferral and recognition activity. In periods where Sales of VOIs and related direct costs of projects under construction are deferred, margin percentages will generally contract as the indirect marketing and selling costs associated with these sales are recognized as incurred in the current period.  In periods where previously deferred Sales of VOIs and related direct costs are recognized upon construction completion, margin percentages will generally expand as the indirect marketing and selling costs associated with these sales were recognized in prior periods.  

The following table represents deferrals and recognitions of Sales of VOI revenue and direct costs for properties under construction for the three months ended March 31, 2020.  There were no construction deferrals or recognitions for the three months ended March 31, 2019.construction:

 

 

Three Months Ended March 31,

 

 

Three Months Ended

September 30,

 

 

Variance

 

 

Nine Months Ended

September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2020

 

 

2019

 

 

$

 

 

2020

 

 

2019

 

 

$

 

Sales of VOIs (deferrals)

 

$

(47

)

 

$

(13

)

 

$

(15

)

 

$

2

 

 

$

(64

)

 

$

(49

)

 

$

(15

)

Sales of VOIs recognitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales of VOIs (deferrals) recognitions

 

 

(47

)

 

 

(13

)

 

 

(15

)

 

 

2

 

 

 

(64

)

 

 

(49

)

 

 

(15

)

Cost of VOI sales (deferrals)(1)

 

 

(13

)

 

 

(4

)

 

 

(5

)

 

 

1

 

 

 

(17

)

 

 

(16

)

 

 

(1

)

Cost of VOI sales recognitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Cost of VOI sales (deferrals) recognitions(1)

 

 

(13

)

 

 

(4

)

 

 

(5

)

 

 

1

 

 

 

(17

)

 

 

(16

)

 

 

(1

)

Sales and marketing expense (deferrals)

 

 

(7

)

 

 

(1

)

 

 

(2

)

 

 

1

 

 

 

(9

)

 

 

(7

)

 

 

(2

)

Sales and marketing expense recognitions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales and marketing expense (deferrals) recognitions

 

 

(7

)

 

 

(1

)

 

 

(2

)

 

 

1

 

 

 

(9

)

 

 

(7

)

 

 

(2

)

Net construction (deferrals) recognitions

 

$

(27

)

 

$

(8

)

 

$

(8

)

 

$

 

 

$

(38

)

 

$

(26

)

 

$

(12

)

 


(1)

Includes anticipated Costs of VOI sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete for the three and nine months ended March 31, 2020.September 30, 2020 and 2019.

Real estate sales and financing segment revenues decreased by $101$208 million for the three months ended March 31,September 30, 2020 and $561 million for the nine months ended September 30, 2020, compared to the same periodperiods in 2019, primarily due to a $99 million decreasedecreases in sales revenue a $5 million decrease inand marketing revenue as a result of the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and a $3 million increase in financing revenue.suspension of our sales and related operations during the first half of 2020.


Real estate sales and financing segment Adjusted EBITDA decreased by $65$79 million for the three months ended March 31,September 30, 2020 and $227 million for the nine months ended September 30, 2020, compared to the same periodperiods in 2019, primarily due to the decreases in segment revenues associated with segment performance discussed herein partially offset by decreasesa decrease in related expenses. In addition, real estate sales and financing segment Adjusted EBITDA was impacted by $11$9 million in one-time payroll related expenses, incurrednet of an employee retention credit granted primarily under the CARES Act, primarily related to payments made to employees’employees as a result of operational closures caused by the COVID-19 pandemic.pandemic for the nine months ended September 30, 2020.

Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.

Resort Operations and Club Management

Resort operations and club management segment revenues decreased $6$47 million and $123 million for the three and nine months ended March 31,September 30, 2020, respectively, compared to the same periodperiods in 2019, primarily due to a decreasedecreases in rental and ancillary services revenue, partially offset by an increase in resortrevenues as a result of the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and club management revenue. suspension of our sales and related operations during the first half of 2020.

Resort operations and club management segment Adjusted EBITDA decreased $10$32 million and $93 million for the three and nine months ended March 31,September 30, 2020, respectively, compared to the same periodperiods in 2019, primarily due to the decreases in segment margin associated with segment performance discussed herein.

Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.

Real Estate Sales and Financing Segment

Real Estate

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions, except Tour flow and VPG)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Sales of VOIs, net

 

$

56

 

 

$

125

 

 

$

(69

)

 

 

(55.2

)%

Contract sales

 

$

117

 

 

$

360

 

 

$

(243

)

 

 

(67.5

)

 

$

396

 

 

$

1,045

 

 

$

(649

)

 

 

(62.1

)

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fee-for-service sales(2)

 

 

130

 

 

 

190

 

 

 

(60

)

 

 

(31.6

)

 

 

(67

)

 

 

(194

)

 

 

127

 

 

 

(65.5

)

 

 

(216

)

 

 

(569

)

 

 

353

 

 

 

(62.0

)

Provision for financing receivables losses

 

 

37

 

 

 

14

 

 

 

23

 

 

NM(1)

 

 

 

(12

)

 

 

(22

)

 

 

10

 

 

 

(45.5

)

 

 

(57

)

 

 

(60

)

 

 

3

 

 

 

(5.0

)

Reportability and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net deferral (recognition) of sales of

VOIs under construction(3)

 

 

47

 

 

 

 

 

 

47

 

 

NM(1)

 

 

 

(13

)

 

 

(15

)

 

 

2

 

 

 

(13.3

)

 

 

(64

)

 

 

(49

)

 

 

(15

)

 

 

30.6

 

Fee-for-service sale upgrades, net

 

 

(8

)

 

 

(14

)

 

 

6

 

 

 

(42.9

)

 

 

4

 

 

 

15

 

 

 

(11

)

 

 

(73.3

)

 

 

13

 

 

 

39

 

 

 

(26

)

 

 

(66.7

)

Other(4)

 

 

(18

)

 

 

7

 

 

 

(25

)

 

NM(1)

 

 

 

(5

)

 

 

(6

)

 

 

1

 

 

 

(16.7

)

 

 

8

 

 

 

(23

)

 

 

31

 

 

NM(1)

 

Contract sales

 

$

244

 

 

$

322

 

 

$

(78

)

 

 

(24.2

)

Sales of VOIs, net

 

$

24

 

 

$

138

 

 

$

(114

)

 

 

(0.8

)

 

$

80

 

 

$

383

 

 

$

(303

)

 

 

(0.8

)

Tour flow

 

 

66,965

 

 

 

82,644

 

 

 

(15,679

)

 

 

(19.0

)

 

 

25,488

 

 

 

102,911

 

 

 

(77,423

)

 

 

(75.2

)

 

 

98,263

 

 

 

287,267

 

 

 

(189,004

)

 

 

(65.8

)

VPG

 

$

3,506

 

 

$

3,677

 

 

$

(171

)

 

 

(4.7

)

 

$

4,205

 

 

$

3,363

 

 

$

842

 

 

 

25.0

 

 

$

3,763

 

 

$

3,464

 

 

$

299

 

 

 

8.6

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.


(2)

Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.

(3)

Represents the net impact of deferred revenues related to the Sales of VOIs under construction that are recognized when construction is complete.

(4)

Includes adjustments for revenue recognition, including amounts in rescission and sales incentives.


Contract sales decreased $78$243 million and $649 million for the three and nine months ended March 31,September 30, 2020, respectively, compared to the same periodperiods in 2019, primarily due to a decrease in VPG from both a 29-basis point decline in close rate and a 5 percent average transaction price reduction coupled with a decrease in tour flow primarily related to the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and suspension of our sales and related operations dueduring the first half of 2020.

Beginning in May 2020, we began a phased reopening of resorts and resumption of our business activities, however many of our resorts and sales centers are operating with significant capacity constraints and are subject to the COVID-19 pandemic.various safety measures.  As of September 30, 2020, we have over three quarters of our resorts and sales centers open and currently operating.

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Sales, marketing, brand and other fees

 

$

106

 

 

$

141

 

 

$

(35

)

 

 

(24.8

)%

 

$

52

 

 

$

143

 

 

$

(91

)

 

 

(63.6

)%

 

$

171

 

 

$

429

 

 

$

(258

)

 

 

(60.1

)%

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Marketing revenue and other fees

 

 

25

 

 

 

30

 

 

 

(5

)

 

 

(16.7

)

 

 

11

 

 

 

34

 

 

 

(23

)

 

 

(67.6

)

 

 

40

 

 

 

102

 

 

 

(62

)

 

 

(60.8

)

Commissions and brand fees

 

 

81

 

 

 

111

 

 

 

(30

)

 

 

(27.0

)

 

 

41

 

 

 

109

 

 

 

(68

)

 

 

(62.4

)

 

 

131

 

 

 

327

 

 

 

(196

)

 

 

(59.9

)

Sales of VOIs, net

 

 

56

 

 

 

125

 

 

 

(69

)

 

 

(55.2

)

 

 

24

 

 

 

138

 

 

 

(114

)

 

 

(82.6

)

 

 

80

 

 

 

383

 

 

 

(303

)

 

 

(79.1

)

Sales revenue

 

 

137

 

 

 

236

 

 

 

(99

)

 

 

(41.9

)

 

 

65

 

 

 

247

 

 

 

(182

)

 

 

(73.7

)

 

 

211

 

 

 

710

 

 

 

(499

)

 

 

(70.3

)

Less:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of VOI sales

 

 

14

 

 

 

36

 

 

 

(22

)

 

 

(61.1

)

 

 

8

 

 

 

24

 

 

 

(16

)

 

 

(66.7

)

 

 

21

 

 

 

92

 

 

 

(71

)

 

 

(77.2

)

Sales and marketing expense, net(1)(2)

 

 

125

 

 

 

131

 

 

 

(6

)

 

 

(4.6

)

 

 

66

 

 

 

145

 

 

 

(79

)

 

 

(54.5

)

 

 

247

 

 

 

415

 

 

 

(168

)

 

 

(40.5

)

Real estate margin

 

$

(2

)

 

$

69

 

 

$

(71

)

 

NM(1)

 

 

$

(9

)

 

$

78

 

 

$

(87

)

 

NM(1)

 

 

$

(57

)

 

$

203

 

 

$

(260

)

 

NM(1)

 

Real estate margin percentage

 

 

(1.5

)%

 

 

29.2

%

 

 

 

 

 

 

 

 

 

 

(13.8

)%

 

 

31.6

%

 

 

 

 

 

 

 

 

 

 

(27.0

)%

 

 

28.6

%

 

 

 

 

 

 

 

 

 

(1)

Fluctuation in terms of percentage change is not meaningful.

(12)

Includes revenue recognized through our marketing programs for existing owners and prospective first-time buyers and revenue associated with sales incentives, title service and document compliance.

Sales revenue decreased for the three and nine months ended March 31,September 30, 2020, compared to the same periodperiods in 2019, primarily due to (i) decreases in sales revenue, commissions and brand fees and related expenses as a result of the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and suspension of our sales and related operations as a resultduring the first half of the COVID-19 pandemic, (ii) $472020.

Financing

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Interest income

 

$

34

 

 

$

37

 

 

$

(3

)

 

 

(8.1

)

 

$

108

 

 

$

109

 

 

$

(1

)

 

 

(0.9

)%

Other financing revenue

 

 

6

 

 

 

6

 

 

 

 

 

 

 

 

 

19

 

 

 

18

 

 

 

1

 

 

 

5.6

 

Financing revenue

 

 

40

 

 

 

43

 

 

 

(3

)

 

 

(7.0

)

 

 

127

 

 

 

127

 

 

 

 

 

 

 

Consumer financing interest expense

 

 

9

 

 

 

8

 

 

 

1

 

 

 

12.5

 

 

 

23

 

 

 

22

 

 

 

1

 

 

 

4.5

 

Other financing expense

 

 

4

 

 

 

6

 

 

 

(2

)

 

 

(33.3

)

 

 

16

 

 

 

17

 

 

 

(1

)

 

 

(5.9

)

Financing expense

 

 

13

 

 

 

14

 

 

 

(1

)

 

 

(7.1

)

 

 

39

 

 

 

39

 

 

 

 

 

 

 

Financing margin

 

$

27

 

 

$

29

 

 

$

(2

)

 

 

(6.9

)

 

$

88

 

 

$

88

 

 

$

 

 

 

 

Financing margin percentage

 

 

67.5

%

 

 

67.4

%

 

 

 

 

 

 

 

 

 

 

69.3

%

 

 

69.3

%

 

 

 

 

 

 

 

 


Financing revenue decreased $3 million of deferrals of VOI sales of projects under construction duringfor the three months ended March 31,September 30, 2020 and remained flat for the nine months ended September 30, 2020, compared to the same periods in 2019 primarily due to a decrease in the timeshare financing receivables portfolio balance.

Financing margin decreased for the three months ended September 30, 2020, compared to the same period in 2019 where there were no projects under construction, (iii) a $23 million incremental increaserelated to the provision for financing receivables related to our estimate of the impacts to our portfolio as a result of the COVID-19 pandemic and (iv) a $30 millionaforementioned decrease in commission and brand fees as a result of the COVID-19 pandemic and due to a shift in inventory mix,interest income partially offset primarily by a $5 million decrease in marketing revenue and other fees mainly associated with reduced vacation package sales and lower redemptions of marketing packages as a result of the COVID-19 pandemic.

Financing

 

 

Three Months Ended March 31,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

Interest income

 

$

38

 

 

$

36

 

 

$

2

 

 

 

5.6

%

Other financing revenue

 

 

6

 

 

 

5

 

 

 

1

 

 

 

20.0

 

Financing revenue

 

 

44

 

 

 

41

 

 

 

3

 

 

 

7.3

 

Consumer financing interest expense

 

 

7

 

 

 

7

 

 

 

 

 

 

 

Other financing expense

 

 

6

 

 

 

6

 

 

 

 

 

 

 

Financing expense

 

 

13

 

 

 

13

 

 

 

 

 

 

 

Financing margin

 

$

31

 

 

$

28

 

 

$

3

 

 

 

10.7

 

Financing margin percentage

 

 

70.5

%

 

 

68.3

%

 

 

 

 

 

 

 

 

financing expenses. Financing revenue increased by $3 millionmargin percentage remained relatively flat for the three and nine months ended March 31,September 30, 2020 compared to the same periodperiods in 2019, due to higher interest income resulting from an increase in the weighted average interest rate we receive on our timeshare financing receivables balance and an increase in other financing revenue related to higher loan servicing fees. Financing margin and finance margin percentage increased for the three months ended March 31, 2020, compared to the same period in 2019, due to the increase in interest income and other financing revenue.2019.


Resort Operations and Club Management Segment

Resort and Club Management

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Club management revenue

 

$

25

 

 

$

26

 

 

$

(1

)

 

 

(3.8

)%

 

$

23

 

 

$

28

 

 

$

(5

)

 

 

(17.9

)%

 

$

70

 

 

$

80

 

 

$

(10

)

 

 

(12.5

)%

Resort management revenue

 

 

19

 

 

 

16

 

 

 

3

 

 

 

18.8

 

 

 

16

 

 

 

17

 

 

 

(1

)

 

 

(5.9

)

 

 

52

 

 

 

50

 

 

 

2

 

 

 

4.0

 

Resort and club management revenues

 

 

44

 

 

 

42

 

 

 

2

 

 

 

4.8

 

 

 

39

 

 

 

45

 

 

 

(6

)

 

 

(13.3

)

 

 

122

 

 

 

130

 

 

 

(8

)

 

 

(6.2

)

Club management expense

 

 

7

 

 

 

7

 

 

 

 

 

 

 

 

 

6

 

 

 

6

 

 

 

 

 

 

 

 

 

18

 

 

 

20

 

 

 

(2

)

 

 

(10.0

)

Resort management expense

 

 

5

 

 

 

4

 

 

 

1

 

 

 

25.0

 

 

 

3

 

 

 

5

 

 

 

(2

)

 

 

(40.0

)

 

 

9

 

 

 

14

 

 

 

(5

)

 

 

(35.7

)

Resort and club management expenses

 

 

12

 

 

 

11

 

 

 

1

 

 

 

9.1

 

 

 

9

 

 

 

11

 

 

 

(2

)

 

 

(18.2

)

 

 

27

 

 

 

34

 

 

 

(7

)

 

 

(20.6

)

Resort and club management margin

 

$

32

 

 

$

31

 

 

$

1

 

 

 

3.2

 

 

$

30

 

 

$

34

 

 

$

(4

)

 

 

(11.8

)

 

$

95

 

 

$

96

 

 

$

(1

)

 

 

(1.0

)

Resort and club management margin percentage

 

 

72.7

%

 

 

73.8

%

 

 

 

 

 

 

 

 

 

 

76.9

%

 

 

75.6

%

 

 

 

 

 

 

 

 

 

 

77.9

%

 

 

73.8

%

 

 

 

 

 

 

 

 

 

Resort and club management revenues increased by $2 milliondecreased for the three and nine months ended March 31,September 30, 2020, compared to the same periodperiods in 2019, primarily due to a $3 million in increase in resort management revenue driven by (i) an increase of approximately 17,000 Club members and higher rates pertaining to annual dues and (ii) higher resort management revenue and other fees from the launch of new properties subsequent to the first quarter of 2019, partially offset by a $1 million decrease in club management revenue primarily related to the refunding and waiving of club transaction fees to accommodate our guests impacted by the COVID-19 pandemic.  For the nine months ended September 30, 2020, the decrease in revenue was partially offset by (i) an increase of approximately 6,000 Club members and (ii) an increase in resort management revenue from the launch of new properties, compared to the same period in 2019.

Resort and club management margin percentage decreasedincreased for the three and nine months ended March 31,September 30, 2020, compared to the same period in 2019, primarily due to an increasea reduction in segmentresort and club management expenses relating todriven by the launchongoing impact of new properties subsequent to the first quarter of 2019.

Rental and Ancillary Services

 

 

Three Months Ended March 31,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

Rental revenues

 

$

47

 

 

$

52

 

 

$

(5

)

 

 

(9.6

)%

Ancillary services revenues

 

 

5

 

 

 

7

 

 

 

(2

)

 

 

(28.6

)

Rental and ancillary services revenues

 

 

52

 

 

 

59

 

 

 

(7

)

 

 

(11.9

)

Rental expenses

 

 

32

 

 

 

29

 

 

 

3

 

 

 

10.3

 

Ancillary services expense

 

 

5

 

 

 

6

 

 

 

(1

)

 

 

(16.7

)

Rental and ancillary services expenses

 

 

37

 

 

 

35

 

 

 

2

 

 

 

5.7

 

Rental and ancillary services margin

 

$

15

 

 

$

24

 

 

$

(9

)

 

 

(37.5

)

Rental and ancillary services margin percentage

 

 

28.8

%

 

 

40.7

%

 

 

 

 

 

 

 

 

Rental and ancillary services revenues decreased by $7 million for the three months ended March 31, 2020, compared to the same period in 2019, primarily due toCOVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our propertiesresort operations during the first half of 2020.

Rental and suspensionAncillary Services

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Rental revenues

 

$

19

 

 

$

48

 

 

$

(29

)

 

 

(60.4

)%

 

$

71

 

 

$

153

 

 

$

(82

)

 

 

(53.6

)%

Ancillary services revenues

 

 

1

 

 

 

6

 

 

 

(5

)

 

 

(83.3

)

 

 

6

 

 

 

20

 

 

 

(14

)

 

 

(70.0

)

Rental and ancillary services revenues

 

 

20

 

 

 

54

 

 

 

(34

)

 

 

(63.0

)

 

 

77

 

 

 

173

 

 

 

(96

)

 

 

(55.5

)

Rental expenses

 

 

23

 

 

 

30

 

 

 

(7

)

 

 

(23.3

)

 

 

77

 

 

 

89

 

 

 

(12

)

 

 

(13.5

)

Ancillary services expense

 

 

1

 

 

 

6

 

 

 

(5

)

 

 

(83.3

)

 

 

8

 

 

 

19

 

 

 

(11

)

 

 

(57.9

)

Rental and ancillary services

   expenses

 

 

24

 

 

 

36

 

 

 

(12

)

 

 

(33.3

)

 

 

85

 

 

 

108

 

 

 

(23

)

 

 

(21.3

)

Rental and ancillary services margin

 

$

(4

)

 

$

18

 

 

$

(22

)

 

NM(1)

 

 

$

(8

)

 

$

65

 

 

$

(73

)

 

NM(1)

 

Rental and ancillary services margin

   percentage

 

 

(20.0

)%

 

 

33.3

%

 

 

 

 

 

 

 

 

 

 

(10.4

)%

 

 

37.6

%

 

 

 

 

 

 

 

 


(1)

Fluctuation in terms of percentage change is not meaningful.

Rental and ancillary services revenues, expenses, and margin percentage decreased for the three and nine months ended September 30, 2020, compared to the same periods in 2019, due to the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our resort operations as a result of the COVID-19 pandemic. Rental and ancillary services expenses increased $2 million for the three months ended March 31, 2020, compared to the same period in 2019, primarily due to the launch of new properties subsequent toduring the first quarterhalf of 2019, partially offset by2020.

Beginning in May 2020, we began a decrease in transient expenses driven by lower transient arrivals from the temporary suspensionphased reopening of operations dueresorts and resumption of our business activities; however, many of our resorts are operating at significant capacity constraints and are subject to the COVID-19 pandemic. Rentalvarious safety measures.  As of September 30, 2020, we have over three quarters of our resorts open and ancillary services margin and margin percentage decreased for the three months ended March 31, 2020, compared to the same period in 2019 primarily due to the decreases in revenue and increases in expenses discussed above.currently operating.

Other Operating Expenses

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

General and administrative

 

$

21

 

 

$

27

 

 

$

(6

)

 

 

(22.2

)%

 

$

22

 

 

$

30

 

 

$

(8

)

 

 

(26.7

)%

 

$

65

 

 

$

87

 

 

$

(22

)

 

 

(25.3

)%

Depreciation and amortization

 

 

12

 

 

 

8

 

 

 

4

 

 

 

50.0

 

 

 

11

 

 

 

12

 

 

 

(1

)

 

 

(8.3

)

 

 

34

 

 

 

32

 

 

 

2

 

 

 

6.3

 

License fee expense

 

 

22

 

 

 

23

 

 

 

(1

)

 

 

(4.3

)

 

 

11

 

 

 

26

 

 

 

(15

)

 

 

(57.7

)

 

 

39

 

 

 

75

 

 

 

(36

)

 

 

(48.0

)

 


The change in other operating expenses for the three and nine months ended March 31,September 30, 2020, compared to the same periodperiods in 2019, is primarily duedriven by a decrease in General and administrative expenses related to (i) decreases in salaries and wages from the furloughs and pay decreases announced during the second quarter of 2020, (ii) the reversal of previously recognized expense related to our 2018 and 2019 Performance RSUs which are not expected to achieve certain performance targets and (ii) higher depreciation and amortization expense as a result of additional software placed into service related to systems enhancements and leasehold improvements at newly renovated sales centers subsequent toduring the first quarter of 2019.2020 and (iii) lower license fee expense related to the corresponding decrease in real estate sales and resort operations revenue.

Non-Operating Expenses

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Three Months Ended September 30,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

 

2020

 

 

2019

 

 

$

 

 

%

 

Interest expense

 

$

10

 

 

$

10

 

 

$

 

 

 

 

 

$

10

 

 

$

12

 

 

$

(2

)

 

 

(16.7

)%

 

$

32

 

 

$

33

 

 

$

(1

)

 

 

(3.0

)%

Equity in earnings from unconsolidated affiliates

 

 

(3

)

 

 

(1

)

 

 

(2

)

 

NM(1)

 

Equity in losses (earnings) from unconsolidated affiliates

 

 

1

 

 

 

(1

)

 

 

2

 

 

NM(1)

 

 

 

(3

)

 

 

(4

)

 

 

1

 

 

 

(25.0

)

Other (gain) loss, net

 

 

(2

)

 

 

1

 

 

 

(3

)

 

NM(1)

 

 

 

(1

)

 

 

1

 

 

 

(2

)

 

NM(1)

 

 

 

 

 

 

3

 

 

 

(3

)

 

 

(100.0

)

Income tax expense

 

 

1

 

 

 

20

 

 

 

(19

)

 

 

(95.0

)

Income tax (benefit) expense

 

 

(5

)

 

 

20

 

 

 

(25

)

 

NM(1)

 

 

 

(12

)

 

 

55

 

 

 

(67

)

 

NM(1)

 

 

(1)

Fluctuation in terms of percentage change is not meaningfulmeaningful.

 


The change in non-operating expenses for the three and nine months ended March 31,September 30, 2020, compared to the same periods in 2019, is primarily due to an increase in equity in earnings from unconsolidated affiliates and a decrease in income tax expense due to a decrease in income before income taxes combined with a decrease in the effective tax rate. See Note 14: Income Taxes for additional information.

Liquidity and Capital Resources

Overview

 

Our cash management objectives are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness, inventory-related purchase commitments, and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, inventory-related purchase commitments and costs associated with potential acquisitions and development projects.

We finance our short- and long-term liquidity needs primarily through cash and cash equivalents, cash generated from our operations, draws on our senior secured credit facility and our non-recourse revolving timeshare credit facility (“Timeshare Facility”), and through periodic securitizations of our timeshare financing receivables.  

 

As ofIn March 31, 2020, we had total cash and cash equivalents of $759 million, including $90 million of restricted cash. The restricted cash balance relates to escrowed cash from sales of our VOIs and reserves related to our non-recourse debt.  

During the first quarter of 2020, we substantially drew down the remainingsubstantial remainder of our borrowing capacity under the revolver facility through net borrowings of $445 million as a precautionary measure to ensure liquidity for a sustained period as a result ofin the economic environment resulting from the COVID-19 pandemic. We do not have a plan for the use of the proceeds other than for general corporate and working capital purposes in the ordinary course of business. As of March 31,September 30, 2020, we have $39 million remaining borrowing capacity under the revolver facility (“Revolver”) which includes $29 million of undrawn borrowing capacity available for letters of credit and $10 million available under short-term borrowings.. See Note 11: Debt and Non-Recourse Debt for additional information.

 

During the first quarter ofIn April 2020, we drewamended certain key definitions related to delinquency level calculations of underlying timeshare loans that are used as collateral for borrowings under our Timeshare Facility, and generated added flexibility to manage any potential increase in the rate of delinquency as a result of the impact of the COVID-19 pandemic.

In May 2020, we amended our Credit Agreement which amended certain terms of the credit facilities (“Senior Secured Credit Facilities”) to provide us with both near-term and long-term flexibility with respect to satisfying certain negative and financial covenants and ratios as may be needed due to the ongoing and uncertain future impact of the COVID-19 pandemic on our business and operations.

In June 2020, we completed a securitization of $300 million of gross timeshare financing receivables and used the proceeds to pay down the $195 million outstanding balance on our Timeshare Facility and for general corporate operating expenses. As of September 30, 2020, we have $255$450 million remaining borrowing capacity under our Timeshare Facility. See Note 11: Debt and Non-Recourse Debt for additional information.

In August 2020, we renewed and extended our Timeshare Facility and amended certain provisions relating to advance rate, successor benchmark interest rate, certain used and unused fees, and thresholds for interest rate hedging obligations and transactions.

As of September 30, 2020, we had total cash and cash equivalents of $717 million, including $92 million of restricted cash. The restricted cash balance relates to escrowed cash from sales of our VOIs and reserves related to our non-recourse debt.  


To optimize our liquidity and access to capital in light of the significant adverse impact of the COVID-19 pandemic, particularly as substantially all of our properties havewere temporarily closed and substantially all of our sales, operations and other activities have beenwere suspended during the first and second quarter of 2020, in addition to the steps discussed above, we have undertaken efforts to increase our capital and decrease our expenses. These include the furlough of approximately 67 percent of our employees,workforce furloughs, temporary salary reductions for employees primarily during the remaining employees’,second quarter of 2020, eliminating discretionary spending, and reducing our planned investment in new inventory by approximately $200 million. We have also suspended the share repurchase program that was initially authorized by our Board in March 2020. Recently, we announced a workforce reduction plan that will impact approximately 1,600 team members for which we expect to incur between $10 million to $12 million in restructuring and related expenses and charges, primarily related to employee severance, benefits and related costs, primarily during the fourth quarter of 2020.  In addition, approximately 2,000 of our workers remain furloughed.


We believe that these actions, together with drawing on available borrowings under our Revolver and preserving our capacity under our Timeshare Facility as described above, will provide adequate capital to meet our short- and long-term liquidity requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs, and additional costs related to complying with various regulatory requirements and best practices for opening under the current environment resulting from the pandemic, and to finance our long-term growth plan and capital expenditures for the foreseeable future.

In addition, as noted previously, Asbeginning in May 2020, in response to various states and counties starting to allow gradual relaxation of restrictions on activities and a resumption of businesses, we began a phased reopening of resorts and resumption of our business activities, including our sales activities. However, we are operating under new guidelines and with safety measures that did not ableexist prior to estimate the date thatonset of the suspensionspandemic. As of resortOctober 2020, we have over three quarters of our resorts and sales operations will be lifted, we may need to take additional actions to ensure the continuitycenters open and currently operating; however, many of our business.resorts and sales centers are operating with significant capacity constraints and subject to various safety measures. While we plan to continue to reopen our resorts and resume our business as conditions permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Accordingly, there remains significant uncertainty as to the degree of impact and duration of the conditions stemming from the ongoing pandemic on our revenues, net income (loss) and other operating results, as well as our business and operations generally and, accordingly, our future cash flows and our liquidity in the longer term. Any sustained material adverse impact on our revenues, net income (loss) and other operating results due to COVID-19 could causeadversely affect our ability to comply with our maintenance and financial covenants and ratios under our debt obligations to be adversely affected.  If we are unable to comply with or obtain potential modifications to such covenants prior to any breaches, we may trigger events of defaults under these arrangements.  We are currently in negotiations with our lenders to amend such covenants as needed and believe we will be able to reach an agreement in advance of any such default.

obligations.

 

Sources and Uses of Our Cash

The following table summarizes our net cash flows and key metrics related to our liquidity:

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

2020

 

 

2019

 

 

$

 

Net cash provided by (used in):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$

53

 

 

$

14

 

 

$

39

 

 

$

86

 

 

$

146

 

 

$

(60

)

Investing activities

 

 

(8

)

 

 

(10

)

 

 

2

 

 

 

(24

)

 

 

(44

)

 

 

20

 

Financing activities

 

 

562

 

 

 

38

 

 

 

524

 

 

 

503

 

 

 

(71

)

 

 

574

 

 

Operating Activities

 

Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club operations and providing related ancillary services. Cash flows used in operating activities primarily include spending for the purchase and development of real estate for future conversion to inventory and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs; the degree to which our owners finance their purchase and our owners’ repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale.

 


The change in net cash flows provided by operating activities for the threenine months ended March 31,September 30, 2020, compared to the same period in 2019 was primarily due to a reduction in the purchase and development of real estate for future conversion to inventory, partially offset by decreased sources of cash from working capital.

 

The following table exhibits our VOI inventory spending:

 

 

Three Months Ended March 31,

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

 

2019

 

 

2020

 

 

2019

 

VOI spending - owned properties

 

$

17

 

 

$

26

 

 

$

70

 

 

$

61

 

VOI spending - fee-for-service upgrades(1)

 

 

8

 

 

 

14

 

 

 

11

 

 

 

36

 

Purchases and development of real estate for future conversion to inventory

 

 

5

 

 

 

60

 

 

 

27

 

 

 

107

 

Total VOI inventory spending

 

$

30

 

 

$

100

 

 

$

108

 

 

$

204

 

 

(1)

Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects from developed projects of $5$7 million and $9$24 million recorded in Costs of VOI sales for the threenine months ended March 31,September 30, 2020 and 2019, respectively.

 


Investing Activities

The following table summarizes our net cash used in investing activities:

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

2020

 

 

2019

 

 

$

 

Capital expenditures for property and equipment

 

$

(3

)

 

$

(6

)

 

$

3

 

 

$

(6

)

 

$

(25

)

 

$

19

 

Software capitalization costs

 

 

(5

)

 

 

(4

)

 

 

(1

)

 

 

(16

)

 

 

(17

)

 

 

1

 

Investments in unconsolidated affiliates

 

 

(2

)

 

 

(2

)

 

 

 

Net cash used in investing activities

 

$

(8

)

 

$

(10

)

 

$

2

 

 

$

(24

)

 

$

(44

)

 

$

20

 

 

The change in net cash used in investing activities for the threenine months ended March 31,September 30, 2020, compared to the same period in 2019, was primarily due to a reduction of property and equipment spending.

 

Our capital expenditures include spending related to technology, buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.

Financing Activities

The following table summarizes our net cash provided by financing activities:

 

 

Three Months Ended March 31,

 

 

Variance

 

 

Nine Months Ended September 30,

 

 

Variance

 

($ in millions)

 

2020

 

 

2019

 

 

$

 

 

2020

 

 

2019

 

 

$

 

Issuance of debt

 

$

495

 

 

$

195

 

 

$

300

 

 

$

495

 

 

$

455

 

 

$

40

 

Issuance of non-recourse debt

 

 

195

 

 

 

 

 

 

195

 

 

 

495

 

 

 

365

 

 

 

130

 

Repayment of debt

 

 

(57

)

 

 

(23

)

 

 

(34

)

 

 

(62

)

 

 

(272

)

 

 

210

 

Repayment of non-recourse debt

 

 

(58

)

 

 

(40

)

 

 

(18

)

 

 

(403

)

 

 

(327

)

 

 

(76

)

Debt issuance costs

 

 

(8

)

 

 

(6

)

 

 

(2

)

Repurchase and retirement of common stock

 

 

(10

)

 

 

(92

)

 

 

82

 

 

 

(10

)

 

 

(283

)

 

 

273

 

Payment of withholding taxes on vesting of restricted stock units

 

 

(2

)

 

 

(2

)

 

 

 

 

 

(3

)

 

 

(3

)

 

 

 

Proceeds from employee stock plan purchases

 

 

1

 

 

 

2

 

 

 

(1

)

Other financing activity

 

 

(1

)

 

 

 

 

 

(1

)

 

 

(2

)

 

 

(2

)

 

 

 

Net cash provided by financing activities

 

$

562

 

 

$

38

 

 

$

524

 

Net cash provided by (used in) financing activities

 

$

503

 

 

$

(71

)

 

$

574

 

 


The change in net cash flows provided by (used in) financing activities for the threenine months ended March 31,September 30, 2020, compared to the same period in 2019, was primarily due to (i) higher issuances ofthe change in debt borrowings and non-recourse debt relating torepayments under our Revolver of $40 million and $210 million, respectively, (ii) additional repayments of $66 million of our securitized debt, (iii) the additional net borrowing of $120 million on our Timeshare Facility, and (ii)(iv) a reduction in share repurchases and retirement of common stock, partially offset by higher repayments of debt and non-recourse debt. See Note 11: Debt & Non-recourse Debtstock. in our condensed consolidated financial statements for further discussion.

Contractual Obligations

The following table summarizes our significant contractual obligations as of March 31,September 30, 2020:

 

 

Payments Due by Period

 

 

Payments Due by Period

 

($ in millions)

 

Total

 

 

Less Than 1

Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More Than 5

Years

 

 

Total

 

 

Less Than 1

Year

 

 

1-3 Years

 

 

3-5 Years

 

 

More Than 5

Years

 

Debt

 

$

1,272

 

 

$

12

 

 

$

22

 

 

$

1,215

 

 

$

23

 

 

$

1,268

 

 

$

12

 

 

$

23

 

 

$

1,210

 

 

$

23

 

Non-recourse debt

 

 

892

 

 

 

221

 

 

 

444

 

 

 

141

 

 

 

86

 

 

 

847

 

 

 

301

 

 

 

304

 

 

 

160

 

 

 

82

 

Interest on debt(1)

 

 

258

 

 

 

67

 

 

 

115

 

 

 

61

 

 

 

15

 

 

 

222

 

 

 

63

 

 

 

104

 

 

 

40

 

 

 

15

 

Operating leases

 

 

90

 

 

 

19

 

 

 

29

 

 

 

23

 

 

 

19

 

 

 

80

 

 

 

18

 

 

 

26

 

 

 

23

 

 

 

13

 

Inventory purchase commitments

 

 

473

 

 

 

101

 

 

 

260

 

 

 

98

 

 

 

14

 

 

 

457

 

 

 

235

 

 

 

168

 

 

 

42

 

 

 

12

 

Other commitments(2)

 

 

26

 

 

 

18

 

 

 

8

 

 

 

 

 

 

 

 

 

16

 

 

 

5

 

 

 

9

 

 

 

1

 

 

 

1

 

Total contractual obligations

 

$

3,011

 

 

$

438

 

 

$

878

 

 

$

1,538

 

 

$

157

 

 

$

2,890

 

 

$

634

 

 

$

634

 

 

$

1,476

 

 

$

146

 

 

(1)

Includes interest on our debt and non-recourse debt. For our variable-rate debt, we have assumed a constant 30-day LIBOR rate of 0.990.15 percent, subject to a 0.25 percent floor, as of March 31,September 30, 2020.

(2)

Primarily relates to commitments related to information technology and brand licensing under the normal course of business.


We have made commitments with developers to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand.  As of March 31,September 30, 2020, our inventory-related purchase commitmentcommitments totaled $473$457 million over 1110 years of which we expect to purchase $26$10 million for the remainingremainder of 2020.  

We utilize surety bonds related to the sales of VOIs in order to meet regulatory requirements of certain states. The availability, terms and conditions and pricing of such bonding capacity are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. We have commitments from surety providers in the amount of $569$571 million as of March 31,September 30, 2020 which primarily consist of escrow and construction related bonds.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of March 31,September 30, 2020 consisted of $473$457 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand and $26$16 million of other commitments under the normal course of business. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 19: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.

COVID-19

Guarantor Financial Information

Certain subsidiaries, which are listed on Exhibit 22 of this Quarterly Report on Form 10-Q, have guaranteed our obligations related to our senior unsecured notes (the “Notes”). The notes were issued in November 2016 with an aggregate principal balance of $300 million, an interest rate of 6.125 percent, and Subsequent Eventsmaturity in December 2024.

Our senior unsecured notes were co-issued by Hilton Grand Vacations Borrower LLC and Hilton Grand Vacations Borrower Inc. (the “Issuers”) and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Hilton Grand Vacations Inc. (the “Parent”), Hilton Grand Vacations Parent LLC (the “Intermediate Parent”), the Issuers, and each of the Issuer’s existing and future wholly owned domestic restricted subsidiaries (all entities that guarantee the Notes, collectively, the “Obligor group”).

 

The novel coronavirus (“COVID-19”) pandemic has significantly impactedNotes rank equally in right of payment with all of our existing and future senior unsecured obligations, are senior in right of payment to any of our Guarantor’s subordinated indebtedness, and are subordinate to all existing and future liabilities of our entities that do not guarantee the hospitality industry dueNotes and our secured indebtedness, including our senior secured credit facilities and securitized non-recourse debt.


The guarantee of each guarantor subsidiary is limited to travel restrictionsa maximum amount, subject to applicable U.S. and stay-at-home directives that have resulted in cancellations and significantly reduced travel aroundnon-U.S. laws. The guarantees can also be released upon the world. Assale or transfer of a result of the reduction in travel, we have closedguarantor subsidiary’s capital stock or substantially all of our resortsits assets, becoming designated as an unrestricted subsidiary, or upon its consolidation into a co-Issuer or another subsidiary Guarantor.

The following tables provide summarized financial information of the Obligor group on a combined basis after elimination of (i) intercompany transactions and sales centers for an indeterminate duration.  Inbalances between the Parent Company and the subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries and unconsolidated affiliates:

Summarized Financial Information

 

 

September 30,

 

 

December 31,

 

($ in millions)

 

2020

 

 

2019

 

Assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

587

 

 

$

35

 

Restricted cash

 

 

62

 

 

 

59

 

Accounts receivable, net - due from non-guarantor subsidiaries

 

 

19

 

 

 

41

 

Accounts receivable, net - due from related parties

 

 

7

 

 

 

25

 

Accounts receivable, net - other

 

 

85

 

 

 

126

 

Timeshare financing receivables, net

 

 

178

 

 

 

449

 

Inventory

 

 

843

 

 

 

524

 

Property and equipment, net

 

 

477

 

 

 

718

 

Operating lease right-of-use assets, net

 

 

53

 

 

 

58

 

Intangible assets, net

 

 

80

 

 

 

77

 

Other assets

 

 

88

 

 

 

69

 

Total assets

 

$

2,479

 

 

$

2,181

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other - due from non-guarantor subsidiaries

 

$

19

 

 

$

41

 

Accounts payable, accrued expenses and other - other

 

 

254

 

 

 

288

 

Advanced deposits

 

 

119

 

 

 

115

 

Debt, net

 

 

1,262

 

 

 

828

 

Operating lease liabilities

 

 

69

 

 

 

74

 

Deferred revenues

 

 

261

 

 

 

186

 

Deferred income tax liabilities

 

 

209

 

 

 

259

 

Total liabilities

 

$

2,193

 

 

$

1,791

 

 

 

Nine Months Ended September 30,

 

($ in millions)

 

2020

 

Total revenues - transactions with non-guarantor subsidiaries

 

$

5

 

Total revenues - other

 

 

584

 

Operating loss

 

 

(83

)

Net loss

 

 

(103

)

Subsequent Events

On October 15, 2020, we announced a workforce reduction plan in response to the continuing adverse impact of the COVID-19 we have taken actions to ensure the continuity ofpandemic and related government orders and mandates restricting travel and operations on our business and operations, including furloughing approximately 67 percent ofthe travel and leisure industry in general.  The reduction in force is expected to reduce our employees, implementing salary reductions for the remaining active employees, eliminating all discretionary spending, and reducing our planned investment in new inventoryworkforce by approximately $200 million. 1,600 team members and better align the workforce with the evolving business needs.

 

In addition,The reduction in force is estimated to result in approximately $10 million to $12 million in restructuring and related expenses and charges, primarily related to employee severance, benefits and related costs.  We expect to incur the majority


of these costs during the last quarter of 2020.  All of the restructuring and related expenses and charges are expected to result in cash expenditures.

Additionally, in October 2020, we drew down on the availabilityrepaid $100 million under our revolving credit facility as a precautionary measure to ensure liquidity for a sustained period.  As we are not able to estimate the date that the suspensions of resort and sales operations will be lifted, we may need to take additional actions to ensure the continuity of our business. Any sustained material adverse impact on our revenues, net income and other operating results due to COVID-19 could cause our financial covenants under our debt obligations to be adversely affected.  If we are unable to comply with or obtain potential modifications to such covenants prior to any breaches, we may trigger events of defaults under these arrangements.  We are currently in negotiations with our lenders to amend such covenants as needed and believe we will be able to reach an agreement in advance of any such default.  

On April 16, we announced that we had adopted a shareholder rights plan.

On April 22, we entered into Amendment No. 14 to our Timeshare Facility, which amended certain key definitions related to delinquency level calculations of underlying timeshare loans that are used as collateral for borrowings under our Timeshare Facility.  Additionally, it provides us with the added flexibility to manage any potential increase in the rate of delinquency that may result from the impact of the COVID-19 pandemic. All other terms and borrowing capacity remained unchanged.

In April 2020, we furloughed approximately 6,100 out of our 9,100 employees.

facility.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2019.  

 


ITEM 3.

Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risk from changes in interest rates and currency exchange rates. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. During the course of March 2020, we drew down the substantial remainder of our credit facility through net borrowings of an additional $445 million that was available under our revolver facility, for a total amount of $761 million outstanding at an average interest rate of 2.60%, after taking into account repayments. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Interest Rate Risk

We are exposed to interest rate risk on our variable-rate debt, comprised of the term loans, Revolver and our Timeshare Facility, of which the Timeshare Facility is without recourse to us. The interest rates are based on one-month LIBOR and we are most vulnerable to changes in this rate. We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt.

We intend to securitize timeshare financing receivables in the asset-backed financing market periodically. We expect to secure fixed-rate funding to match our fixed-rate timeshare financing receivables. However, if we have variable-rate debt in the future, we will monitor the interest rate risk and evaluate opportunities to mitigate such risk through the use of derivative instruments.

To the extent we continue to have variable-rate borrowings and continue to utilize variable-rate indebtedness in the future, any increase in interest rates beyond amounts covered under any corresponding derivative financial instruments, particularly if sustained, could have an adverse effect on our net income (loss), cash flows and financial position. While we have entered into certain hedging transactions to address such potential risk, such transactions and any future hedging transactions we may enter into may not adequately mitigate the adverse effects of interest rate increases or that counterparties in those transactions will honor their obligations.

The following table sets forth the contractual maturities, weighted-average interest rates and the total fair values as of March 31,September 30, 2020, for our financial instruments that are materially affected by interest rate risk:

 

 

 

 

 

 

Maturities by Period

 

 

 

 

 

 

Maturities by Period

 

($ in millions)

 

Weighted

Average

Interest

Rate(1)

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

There-

after

 

 

Total(2)

 

 

Fair

Value

 

 

Weighted

Average

Interest

Rate(1)

 

 

2020

 

 

2021

 

 

2022

 

 

2023

 

 

2024

 

 

There-

after

 

 

Total(2)

 

 

Fair

Value

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate securitized timeshare

financing receivables

 

 

12.148

%

 

$

69

 

 

$

92

 

 

$

93

 

 

$

93

 

 

$

92

 

 

$

264

 

 

$

703

 

 

$

729

 

 

 

12.253

%

 

$

25

 

 

$

103

 

 

$

107

 

 

$

110

 

 

$

113

 

 

$

421

 

 

$

879

 

 

$

920

 

Fixed-rate unsecuritized

timeshare financing

receivables

 

 

12.945

%

 

 

43

 

 

 

50

 

 

 

54

 

 

 

59

 

 

 

63

 

 

 

362

 

 

 

631

 

 

 

648

 

 

 

13.421

%

 

 

9

 

 

 

32

 

 

 

33

 

 

 

35

 

 

 

36

 

 

 

205

 

 

 

350

 

 

 

373

 

Liabilities:(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed-rate debt

 

 

3.930

%

 

 

176

 

 

 

162

 

 

 

113

 

 

 

112

 

 

 

343

 

 

 

118

 

 

 

1,024

 

 

 

954

 

 

 

4.011

%

 

 

72

 

 

 

294

 

 

 

132

 

 

 

131

 

 

 

374

 

 

 

171

 

 

 

1,174

 

 

 

1,181

 

Variable-rate debt(4)

 

 

2.489

%

 

 

7

 

 

 

10

 

 

 

205

 

 

 

918

 

 

 

 

 

 

 

 

 

1,140

 

 

 

1,123

 

 

 

2.000

%

 

 

3

 

 

 

10

 

 

 

10

 

 

 

918

 

 

 

 

 

 

 

 

 

941

 

 

 

930

 

 

(1)

Weighted-average interest rate as of March 31,September 30, 2020.

(2)

Amount excludes unamortized deferred financing costs.

(3)

Includes debt and non-recourse debt.

(4)

Variable-rate debt includes principal outstanding debt of $945 million and non-recourse debt of $195$940 million as of March 31,September 30, 2020. See Note 11: Debt & Non-recourse Debt in our unaudited condensed consolidated financial statements for additional information.

Foreign Currency Exchange Rate Risk

Though the majority of our operations are conducted in United States dollar (“U.S. dollar”), we are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from our timeshare financing receivables denominated in Japanese yen, the value of which could change materially in reference to our reporting currency, the U.S. dollar. A 10 percent increase in the foreign exchange rate of Japanese yen to U.S. dollar would change our gross timeshare financing receivables by less than $1 million.A 10 percent change in the foreign exchange rate of Mexican Peso to U.S. dollar would change our gross VAT receivable by less than $1 million.


ITEM 4.

Controls and Procedures

Disclosure Controls and Procedures

Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) or our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated. 

In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.  We will continue to assess the adequacy of our disclosure controls and procedures and make any appropriate changes given the various government mandates and orders of business closures and the resulting remote working conditions as a result of the COVID-19 pandemic.

Changes in Internal Control Over Financial Reporting

 

There were no changes in our internal control over financial reporting that occurred during the three months ended March 31,September 30, 2020, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. We will continue to assess the effectiveness of our internal controls over financial reporting consistent with past practice, particularly in light of the various government mandates and orders of business closures and the resulting remote working conditions as a result of the COVID-19 pandemic.

 


PART II OTHER INFORMATION

Item 1.

We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums. Management has evaluated these legal matters and we believe an unfavorable outcome is either reasonably possible or remote and/or for which are not reasonably estimable. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of March 31,September 30, 2020 will not have a material effect on our unaudited condensed consolidated financial statements.  

Item 1A.

Risk Factors

The following represents materialimportant changes and updates to the risk factors previously disclosed in Item 1A1A. of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019.2019 (our “2019 Form 10-K”) and Item 1A. of Part II of our Quarterly Reports on Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020 (our “Prior Forms 10-Q”). The risk factorfactors discussed below and the risk factors included in our Annual Report on2019 Form 10-K may beand our Prior Forms 10-Q are important to understanding our business, operation, results of operations, financial condition, and prospects, especially during the current environment, and our statements generally in this Form 10-Q and10-Q. Therefore, they should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2,2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.

TheIn addition, the following risks and those risks described in our Annual Report on2019 Form 10-K for the year ended December 31, 2019and our Prior Forms 10-Q contain forward-looking statements, and they may not be the only risks facing the Company. The future business, results of operations and financial condition and operating results of the Company can be affected by the risk factors described in such reports and by other factors currently unknown, that management presently believes not to be material, that management has made certain forward looking projections, estimates or assumptions, or that may rapidly evolve, develop or change, including those that are caused, directly or indirectly, by the COVID-19 pandemic.  Any one or more of such factors could, directly or indirectly, cause the Company’sour actual financial condition and operating results of operations to vary materially from past, or from anticipated future, financial condition and operating results.results of operations. Any of these factors, in whole or in part, could materially and adversely affect the Company’sour business, results of operations and financial condition operating results and the trading price of our common stock.  Because of these factors affecting the Company’sour financial condition and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.

The COVID-19 pandemic has impacted,and related events, including the various measures implemented or adopted to respond to the pandemic, have had, and will likely continue to have, a material adverse impacteffect on our business, financial condition and results of operations for the foreseeable future, and may also impact our ability to meet certain financial covenants under our debt agreements in the future.

The global COVID-19 pandemic has ledand the various measures taken or implemented by governments and other authorities in the United States and around the world, businesses, organizations and individuals have had, and will continue to impose measures intended to control its spread, including restrictionshave, a significant adverse impact on freedom of movement and business operations, such as travel bans, border closings, business closures, quarantines and shelter-in-place orders. As a result, the pandemic has significantly disrupted domestic and international travel, and has adversely impactedconsumer demand for travel, commercial activityactivities across the travel, lodging and hospitality industries, including the timeshare industry.businesses generally, and consequently, on our business and operations. The COVID-19 pandemic also has had, and is expected to or maywill continue to have, significant adverse impacts on global economic, andcapital market, financial, healthcare, societal, and government regulatory conditions.

The effects of In response to the COVID-19growing pandemic on the travel and hospitality industries are unprecedented with demand reaching historic lows. As of March 31, 2020,various governmental orders, we had temporarily closed operations at substantially all of our resorts and closed substantially all of our sales centers. We cannot predict when the effects of the pandemic will subside, and thus we cannot predict when we will be able to reopen our properties and if or when our business will return to normalized levels. There also can be no guarantee that when the restrictions implemented to mitigate the health impact of the pandemic are lifted, the demand for VOIs and consumer confidence in travel generally, will recover as quickly as other industries. The economic downturn resulting from the measures taken to mitigate the health impact of the pandemic may deter consumers from spending on travel and leisurely activities, which would adversely impact our business. The impact of the pandemic on our operations has had and will continue to have a significantly adverse impact on our revenues, results of operations and liquidity.


Although we have takentook certain significant actions to ensure the continuity of our business and operations beginning at the end of the first quarter 2020, including temporarily closing operations at substantially all of our resorts, closing substantially all of our sales centers, implementing salary reductions employeeand workforce furloughs, of over 6,100 of our approximately 9,100 employees, andimplementing hiring freezes, we may need to take additional actions to ensure the continuity of our business. We drewdrawing down on the availabilitysubstantial amounts under our credit facility as a precautionary measure to ensure liquidity forand amending both our credit facility and our warehouse facility to provide near-term flexibility on certain maintenance and financial covenants and ratios. On October 15, 2020, our board of directors approved a sustained period butworkforce reduction plan that is expected to result in the reduction of our workforce by approximately 1,600 members. All of these actions have had, and will likely continue to have, a material adverse effect on our results of operations, financial condition, and business.


Beginning in May 2020, various cities, counties and states in the US started to allow gradual relaxation of restrictions on activities and a resumption of businesses. We began a phased reopening of our resorts and resumption of our sales activities in accordance with applicable orders, and we cannot guarantee we will have sufficient liquidityplan to continue to fundreopen those of our resorts which remain closed as conditions permit. We have implemented a variety of measures that are required, or we believe are advisable, for our business dependingwith the goal of keeping our customers, owners, team members, and the communities we serve as safe as reasonably feasible from the COVID-19 virus. These measures include additional cleaning and sanitation of our resorts and common areas, providing our team members with personal protective equipment, requiring our guests and owners use face masks based on CDC or other federal, state, or local health guidelines, and implementing physical distancing practices.

The conditions caused by the extentpandemic continues to be unprecedented and rapidly changing. Accordingly, there remains significant uncertainties and risks around the duration and severity of the pandemic in the US and around the world, the breadth and duration of business disruptions resulting from COVID-19, the pandemic and resulting economic downturn.  The increase in our level of debt may adversely affect our financial and operating activities or ability to incur additional debt.

In addition, any sustained materially adversepandemic’s impact on our revenues, net incomethe global economy, consumer confidence, various businesses, and, other operating results due to the impact of the COVID-19 pandemic could cause us to breach our operating and financial covenants under our debt obligations, including our credit facility. If we are unable to comply with such covenants, or obtain modifications or waivers to such covenants prior to any such breaches under our credit facility, warehouse facility, term loans or indenture governing our public notes, as applicable, we may trigger events of defaults under such documents and the lenders may have the right to terminate their commitments thereunder and declare the outstanding loans thereunder to be immediately due and payable.

We rely on various commercial agreements and arrangements, including our arrangements with joint venture partners, key developers, and fee-for-service partners, that are critical toconsequently, our business and operations.

Some of those agreements, such as our fee-for-service arrangements, require us to achieve certain salesthese uncertainties and related performance levels before we earn our fees andrisks may include the failure to achieve those targets will not only result in us not earning our fees but may give rise to the other parties’ ability to terminate such arrangements. While we believe we can rely on certain force majeure related exceptions to such termination rights, there can be no assurance that such parties will agree with our view. In addition, these events may result in renegotiating the agreements and there can be no assurance that we will be able to agree to new or revised terms that are favorable to us. Finally, parties to other commercial agreements may themselves assert or attempt to terminate various agreements and arrangements with us on the basis of force majeure provisions that may be contained in such agreements. Any termination of significant commercial agreements may adversely harm our operations.following:

resurgences, new outbreaks, increases in the rate of infection, and/or increasing death rates related to the COVID-19 virus, including in certain regions and locations where we have a significant number of resorts and concentration of units, such as seen earlier in the year in the states of Florida, Hawaii, and New York and the various cities and counties located within such states, which may lead to another series of temporary closures, either out of abundance of caution or as may be required by new regulations;

potentiality of "second waves" of outbreak and spreading of the disease later in 2020 as certain healthcare officials have warned, which may result in further disruptions and additional governmental COVID-19 restrictions, closure orders and/or or “shelter in place” health orders, or similar restrictions;

ongoing issuances of new orders, amendments to existing orders, and conflicting directives by different governmental bodies or changes in federal and local policy, rules or regulations resulting from the outcome of the upcoming elections in the U.S., which could disrupt, change, or otherwise adversely impact our safety protocols and measures that are intended to protect our guests, owners, and team members;

travel bans, quarantine requirements upon entry, and significant restrictions on travel among the states within the U.S., including states where we have a significant number of resorts such as Hawaii and New York, as well as between the U.S. and specific countries, including restrictions placed by foreign governments on citizens of the U.S. entering their countries;

continued closures and/or curtailment of operations at many popular tourist destinations, reducing the demand for leisure travel;

changing behavior of individuals and unwillingness to travel and stay at hotels, resorts, timeshares, and other lodging facilities due to the pandemic which may continue beyond the time global health and safety conditions improve;

various safety measures that—

o

may continue to be challenging to implement due to uncertainties in how to correctly implement such measures, lack of availability of needed supplies or other issues,

o

we have already adopted but may need to change rapidly based on the status of the pandemic, applicable governmental actions, industry practices, and guidance or recommendations from leading healthcare experts,

o

may result in significant costs to us, or

o

may cause guests to not visit our resorts because they do not want to abide by such measures, do not fully understand or agree with such requested measures, and/or are wary of the risk of infection despite such measures,


potential cases of infection and transmission at our resorts despite the implementation of our safety measures efforts, which would be disruptive and may lead to exposure to assertions of liability,

our ability to effectively operate our business in light of significant workforce changes, and our ability to recruit additional talent as needed;

other actions we have taken or may take, or decisions we have made or may make, as a consequence of the COVID-19 pandemic that may result in investigations, legal claims (with or without merit) or litigation against us, and

inability to repay on time or at all the significant increases in our indebtedness and inadequacies of our liquidity, limitations on our ability to incur additional indebtedness or access available debt capital, and recent amendments to our credit facility and warehouse facility, if the pandemic worsens and continues for significant duration.

In addition to the foregoing, the COVID-19 pandemic and the resulting adverse and unpredictable economic conditions are likely to continue to implicate or exacerbate the risk factors that we identified in our Annual Report on2019 Form 10-K forand our Prior Forms 10-Q. We encourage you to review such risk factors and related disclosure in such filings, together with the year ended December 31, 2019, whichforegoing supplemental risk factors.

Any of the foregoing or other risks, factors, and events that are not foreseeable can result in turn could significantly increase the adverse effectssignificant negative impact on our business,results of operations, financial condition, liquiditybusiness and results of operations. Such risks include, but are not limited to, the following:

adverse changes in the supply and demand for our products and services, including, without limitation, those resulting from the various government mandates and orders that have resulted in the closure of most of our properties;

contraction in the global economy and recession;

changes in global and U.S. economic conditions, including low consumer confidence, high unemployment levels and depressed real estate prices, and global or domestic recessions;

sustained steep decline in tourism and travel by consumers, including due to changing perception and behavior of consumers affecting travel, lodging and vacationing;

delays in or cancellations of planned or future development or refurbishment projects, including due to steps we have taken and announced in an effort to proactively preserve our liquidity;

increased delinquency and default rates on our financing or loan receivables, including defaults on payments by borrowers due to loss of jobs, unemployment, or other financial difficulties;

our ability to securitize the receivables that we originate in connection with VOI sales;

the financial condition of third-party developers with whom we do business;

adverse impact on our human capital and its adequacy to operate our business and respond to continuously evolving regulatory, economic, health, business and related challenges, including successor planning for our executive team in the event any of them may be affected by COVID-19;

negative impact on the fair value of our assets, recognition of impairment losses of our assets, or reserves (including increases in estimated amount) against our financing receivables that;

increased exposure to variable rate indebtedness as interest rates fluctuate due to our increase borrowing and uncertain global economic and financial climate;


general compliance with the agreements relating to our outstanding indebtedness in addition to the financial and operating covenants discussed above;

inability to repay our debt as they mature or are due as a result of decreases in our operating cash flows;

inability to obtain the requisite licenses, permits, or other approvals that are critical in connection with our business, including due to COVID-19 related closures of, or delays of approvals by, regulatory agencies;

changes in governmental regulations resulting from COVID-19 that may impose significant restrictions, rules, regulations, and additional resources on our business and operations;

the availability and cost of capital necessary for us, and third-party developers with whom we do business, to fund investments, capital expenditures and service debt obligations;

the economic environment for and trends in the tourism and hospitality industry, which may impact the vacationing and purchasing decisions of consumers;

cyber security exposure and IT infrastructure, particularly with the rapid surge in remote working conditions due to above-described closures of properties and offices;

increases in compensation and general & administrative expenses (including, without limitation, severance and termination costs) due to significant furloughs, layoffs, or other changes to our workforce to date and in the future;

uncertainties related to our ability to re-hire or replace furloughed or terminated employees as we normalize our business and operations, in the future;

the financial and general business condition of the travel industry;

war, political conditions or civil unrest, violence or terrorist activities or threats and additional, heightened travel security measures;

potential increases in litigation and adverse claims against us due to various actions that we have taken and may take in the future in response to the effects of COVID-19 with respect to various aspects of our operations (including, without limitation, labor and employment, commercial arrangements and agreements, and remediation efforts implemented at our properties in response to any COVID-19 related incidents); and

lasting negative public perception of travel, lodging, leisure, socialization, and other travel-related activities due to COVID-19 and other contagious diseases, such as Ebola, avian flu, severe acute respiratory syndrome (SARS), H1N1 (swine flu), and the Zika virus, and their impact on the way we conduct our business, operate our properties, and our employees work.

The COVID-19 pandemic has also resulted in severe disruption and volatility in the financial markets. Depending on the extent and duration of the COVID-19 pandemic, the price of our common stock on the NYSE may continue to experience declines and volatility which may negatively impact our ability to raise capital through the equity markets if necessary to increase our liquidity and will adversely impact your investments in our common stock.reputation.


Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

None.

(b)

Not Applicable.

(c)

Issuer Repurchases. On March 13, 2020, the Company announced that our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to an aggregate of $200 million of its outstanding shares of common stock. The following table presents details regarding our repurchase of securities during the quarter ended March 31,2020. Due to the then-still developing significant adverse impact on the global economy, capital markets, travel industry, and various government mandates regarding closures of businesses, all due to the COVID-19 pandemic and various uncertainties related to it, the Company previously announced on March 31, 2020 that it had suspended the repurchase program.

 

 

Total Number of

Shares Purchased

 

 

Average

Price Paid

Per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs

 

 

Appropriate

Dollar Value of

Shares that

May Yet Be

Purchased

Under Plan

 

January 1 - January 31, 2020

 

 

 

 

$

 

 

 

 

 

$

 

February 1 - February 28, 2020

 

 

 

 

 

 

 

 

 

 

 

 

March 1 - March 31, 2020

 

 

814,128

 

 

 

11.92

 

 

 

814,128

 

 

 

190,314,211

 

Total

 

 

814,128

 

 

$

11.92

 

 

 

814,128

 

 

$

190,314,211

 

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.


Item 6.

Exhibits

 

Exhibit

No.

 

Description

 

 

 

 

  3.1

 

Amended and Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37794) filed on March 17, 2017).

 

 

 

  3.2

 

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (File No. 001-37794) filed on March 17, 2017).

 

 

 

  3.3

Certificate of Designation of Series A Junior Participating Preferred Stock of Hilton Grand Vacations Inc. (incorporated by reference to Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37794) filed on April 16, 2020).

  4.1

Rights Agreement, dated as of April 16, 2020, between Hilton Grand Vacations Inc. and Equiniti Trust Company, as Rights Agent (incorporated by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37794) filed on April 16, 2020).

10.1

 

Omnibus Amendment No. 1316 to Receivables Loan Agreement, Amendment No. 8 to the Sale and Contribution Agreement, and Amendment No. 1 to the Servicing Agreement, effective as of January 17,August 14, 2020, by and among Hilton Grand Vacations Trust I LLC, as borrower, Hilton Resorts Corporation, as seller, Grand Vacations Services LLC, as servicer, the financial institutions signatory thereto as managing agents, the financial institutions signatory thereto as conduit lenders, the financial institutions signatory thereto as committed lenders, Bank of America, N.A., as administrative agent, and Wells Fargo Bank, National Association, as paying agent, securities intermediary and paying agent.backup servicer (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (File No. 001-37794) filed on August 17, 2020. *

 

 

 

10.2

 

FormSeverance Agreement, effective as of Second AmendedSeptember 21, 2020, by and Restated Performance and Service Based Restricted Stock Unit Agreement under thebetween Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (for use for all named executive officers other than Mr. Mark Wang) (2018 Awards).* +and Matthew A. Sparks. *+

 

 

 

  10.322

 

List of Issuer Subsidiaries of Guaranteed Securities and Guarantor Subsidiaries(incorporated by reference to Exhibit 22 to the Registrant’s Quarterly Report on Form of Second Amended and Restated Performance and Service Based Restricted Stock Unit Agreement for Mr. Mark Wang under the Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (2018 Awards)10-Q (File No. 001-37794) filed on July 30, 2020).* +

 

 

 

  10.4

Form of Second Amended and Restated Performance and Service Based Restricted Stock Unit Agreement under the Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (for use for all named executive officers other than Mr. Mark Wang) (2019 Awards).* +

 

  10.5

Form of Second Amended and Restated Performance and Service Based Restricted Stock Unit Agreement for Mr. Mark Wang under the Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (2019 Awards).* +

  10.6

Form of Second Amended and Restated Performance and Service Based Restricted Stock Unit Agreement under the Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (for use for all named executive officers other than Mr. Mark Wang) (2020 Awards).* +

  10.7

Form of Second Amended and Restated Performance and Service Based Restricted Stock Unit Agreement for Mr. Mark Wang under the Hilton Grand Vacations Inc. 2017 Omnibus Incentive Plan (2020 Awards).*+

31.1

 

Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

31.2

 

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.1

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

32.2

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

 

 

 

101.INS

 

Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL

 

Inline XBRL Taxonomy Calculation Linkbase Document.

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB

 

Inline XBRL Taxonomy Label Linkbase Document.


Exhibit

No.

Description

 

 

 

101.PRE

 

Inline XBRL Taxonomy Presentation Linkbase Document.

 

 

 

104

 

Cover Page Interactive Data File (embedded withinThe cover page for the Company’s Quarterly Report on Form 10-Q has been formatted in Inline XBRL document)and contained in Exhibit 101

 

*

Filed herewith.

+

Compensatory arrangement.


SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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, on this 3029th day of AprilOctober 2020.

 

 

HILTON GRAND VACATIONS INC.

 

 

 

 

By:

/s/ Mark D. Wang 

 

Name:

Mark D. Wang

 

Title:

President and Chief Executive Officer

 

 

 

 

By:

/s/ Daniel J. Mathewes

 

Name:

Daniel J. Mathewes

 

Title:

Executive Vice President and Chief Financial Officer

 

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