| ADOPTION IMPACT OF NEW REVENUE STANDARD | REVENUE We account for revenue in accordance with ASC 606, “ Revenue from Contracts with Customers ,” which we adopted on January 1, 2018, using the retrospective method. See Footnote 1 “Summary of Significant Accounting Policies” for additional information and Footnote 15 “Adoption of New Revenue Standard” for further discussion of the adoption and the impact on our previously reported historical results. We generate most of our revenues from four primary sources: selling vacation ownership products; managing our resorts; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory. The following series of tables present our revenue disaggregated by several categories. Sources of Revenue by Segment Three Months Ended June 30, 2018 ($ in thousands) North America Asia Pacific Europe Total Sale of vacation ownership products $ 188,624 $ 11,654 $ 4,890 $ 205,168 Ancillary revenues 29,716 96 5,600 35,412 Management fee revenues 22,760 742 1,814 25,316 Other services revenues 15,953 499 462 16,914 Resort management and other services 68,429 1,337 7,876 77,642 Rental 67,083 2,059 5,419 74,561 Cost reimbursements 186,734 1,931 12,805 201,470 Revenue from contracts with customers $ 510,870 $ 16,981 $ 30,990 $ 558,841 Financing 33,912 1,238 701 35,851 Total Revenues $ 544,782 $ 18,219 $ 31,691 $ 594,692 Three Months Ended June 30, 2017 ($ in thousands) North America Asia Pacific Europe Total Sale of vacation ownership products $ 184,880 $ 10,282 $ 6,694 $ 201,856 Ancillary revenues 27,910 — 5,130 33,040 Management fee revenues 19,711 694 1,623 22,028 Other services revenues 16,295 287 290 16,872 Resort management and other services 63,916 981 7,043 71,940 Rental 62,021 2,046 5,223 69,290 Cost reimbursements 176,236 1,607 8,977 186,820 Revenue from contracts with customers $ 487,053 $ 14,916 $ 27,937 $ 529,906 Financing 30,719 1,105 706 32,530 Total Revenues $ 517,772 $ 16,021 $ 28,643 $ 562,436 Six Months Ended June 30, 2018 ($ in thousands) North America Asia Pacific Europe Total Sale of vacation ownership products $ 349,320 $ 22,900 $ 7,737 $ 379,957 Ancillary revenues 55,113 141 8,657 63,911 Management fee revenues 44,323 1,514 3,653 49,490 Other services revenues 32,524 995 902 34,421 Resort management and other services 131,960 2,650 13,212 147,822 Rental 135,158 5,384 8,229 148,771 Cost reimbursements 389,360 3,697 24,601 417,658 Revenue from contracts with customers $ 1,005,798 $ 34,631 $ 53,779 $ 1,094,208 Financing 67,441 2,452 1,440 71,333 Total Revenues $ 1,073,239 $ 37,083 $ 55,219 $ 1,165,541 Six Months Ended June 30, 2017 ($ in thousands) North America Asia Pacific Europe Total Sale of vacation ownership products $ 336,589 $ 19,437 $ 9,707 $ 365,733 Ancillary revenues 52,598 — 7,711 60,309 Management fee revenues 39,627 1,386 3,130 44,143 Other services revenues 33,764 537 606 34,907 Resort management and other services 125,989 1,923 11,447 139,359 Rental 124,506 4,950 7,513 136,969 Cost reimbursements 357,802 2,717 23,515 384,034 Revenue from contracts with customers $ 944,886 $ 29,027 $ 52,182 $ 1,026,095 Financing 60,958 2,228 1,455 64,641 Total Revenues $ 1,005,844 $ 31,255 $ 53,637 $ 1,090,736 Timing of Revenue from Contracts with Customers by Segment Three Months Ended June 30, 2018 ($ in thousands) North America Asia Pacific Europe Total Services transferred over time $ 289,368 $ 5,015 $ 20,420 $ 314,803 Goods or services transferred at a point in time 221,502 11,966 10,570 244,038 Revenue from contracts with customers $ 510,870 $ 16,981 $ 30,990 $ 558,841 Three Months Ended June 30, 2017 ($ in thousands) North America Asia Pacific Europe Total Services transferred over time $ 269,806 $ 4,410 $ 16,080 $ 290,296 Goods or services transferred at a point in time 217,247 10,506 11,857 239,610 Revenue from contracts with customers $ 487,053 $ 14,916 $ 27,937 $ 529,906 Six Months Ended June 30, 2018 ($ in thousands) North America Asia Pacific Europe Total Services transferred over time $ 594,157 $ 11,139 $ 37,214 $ 642,510 Goods or services transferred at a point in time 411,641 23,492 16,565 451,698 Revenue from contracts with customers $ 1,005,798 $ 34,631 $ 53,779 $ 1,094,208 Six Months Ended June 30, 2017 ($ in thousands) North America Asia Pacific Europe Total Services transferred over time $ 545,371 $ 9,164 $ 34,640 $ 589,175 Goods or services transferred at a point in time 399,515 19,863 17,542 436,920 Revenue from contracts with customers $ 944,886 $ 29,027 $ 52,182 $ 1,026,095 Sale of Vacation Ownership Products We market and sell vacation ownership products in our three reportable segments. Vacation ownership products include deeded vacation ownership products, deeded beneficial interests, rights to use real estate, and other interests in trusts that solely hold real estate and deeded whole ownership units in residential buildings (collectively “vacation ownership products”). Vacation ownership products may be sold for cash or we may provide financing. In connection with the sale of vacation ownership products, we provide sales incentives to certain purchasers. Non-cash incentives typically include Marriott Rewards points or an alternative sales incentive that we refer to as “plus points.” Plus points are redeemable for stays at our resorts or for use in an exclusive selection of travel packages provided by affiliate tour operators (the “Explorer Collection”), generally up to two years from the date of issuance. Typically, sales incentives are only awarded if the sale is closed. Upon execution of a legal sales agreement, we typically receive an upfront deposit from our customer with the remainder of the purchase price for the vacation ownership product to either be collected at closing (“cash contract”) or financed by the customer through our financing programs (“financed contract”). Refer to “ Financing Revenues ” below for further information regarding financing terms. Customer deposits received for contracts are recorded as Advance deposits on our Balance Sheets until the point in time at which control of the vacation ownership product has transferred to the customer. Our assessment of collectibility of the transaction price for sales of vacation ownership products is aligned with our credit granting policies for financed contracts. We compared the lending terms against the terms of similar notes in the market and concluded that certain contracts within our Asia Pacific and Europe segments contain below market interest rates and as such have adjusted the transaction price for these contracts to reflect a market rate of interest. The lending terms of financed contracts within our North America segment reflect market terms. In determining the consideration to which we expect to be entitled for financed contracts, we include estimated variable consideration in the transaction price to the extent it is probable that a significant reversal of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is resolved. Our estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on the customer class and the results of our static pool analysis, which relies on historical payment data by customer class. Variable consideration which has not been included within the transaction price is presented as a reserve on vacation ownership notes receivable. Revisions to estimates of variable consideration from the sale of vacation ownership products impact the reserve on vacation ownership notes receivable and can increase or decrease revenue. Revenues were reduced during the second quarter and first half of 2018 by $3.7 million and $2.0 million , respectively, due to changes in our estimate of variable consideration for performance obligations that were satisfied in prior periods. In addition, we account for cash incentives provided to customers as a reduction of the transaction price. Refer to “ Arrangements with Multiple Performance Obligations ” below for a description of our methods of allocating transaction price to each performance obligation. We recognize revenue on the sale of vacation ownership products at closing, when control is transferred to the customer. We evaluated our business practices, and the underlying risks and rewards associated with vacation ownership products, and the respective timing that such risk and rewards are transferred to the customer in determining the point in time at which control of the vacation ownership product is transferred to the customer. Revenue for non-cash incentives, such as plus points, is recorded as Deferred revenue on our Balance Sheets at closing and is recognized as rental revenue upon transfer of control to the customer, which typically occurs upon delivery of the incentive, or at the point in time when the incentive is redeemed. For non-cash incentives provided by third parties (i.e. Marriott Rewards points or third-party Explorer Collection offerings), we evaluated whether we control the underlying good or service prior to delivery to the customer. We concluded that we are an agent for those non-cash incentives which we do not control prior to delivery and as such record the related revenue net of the related cost upon recognition. Resort Management and Other Services Revenues and Cost Reimbursements Revenues Ancillary Revenues Ancillary revenues consist of goods and services that are sold or provided by us at food and beverage outlets, golf courses and other retail and service outlets located at our resorts. Payments for such goods and services are generally received at the point of sale in the form of cash or credit card charges. For goods and services sold, we evaluated whether we control the underlying goods or services prior to delivery to the customer. For transactions where we do not control the goods or services prior to delivery, the related revenue is recorded net of the related cost upon recognition. We recognize ancillary revenue at the point in time when goods have been provided and/or services have been rendered. Management Fee Revenues and Cost Reimbursements Revenues We provide day-to-day-management services, including housekeeping services, operation of reservation systems, maintenance and certain accounting and administrative services for property owners’ associations. We generate revenue from fees we earn for managing each of our resorts. These fees are earned regardless of usage or occupancy and are typically based on either a percentage of the budgeted costs to operate the resorts or a fixed fee arrangement (“Management fee revenues”) and reimbursement of costs incurred on behalf of the property owners’ associations (“Cost reimbursements revenues”). Cost reimbursements revenues exclude amounts that we have paid to the property owners’ associations related to maintenance fees for unsold vacation ownership products, as we have concluded that such payments are consideration payable to a customer. Cost reimbursements consist of actual expenses with no added margin. Management fees are typically collected over time or upfront depending upon the specific management contract. Cost reimbursements are received over time and considered variable consideration. We have determined that a significant financing component does not exist as a substantial amount of the consideration promised by the customer is variable. We evaluated the nature of the services provided to property owners’ associations and concluded that the management services constitute a series of distinct services to be accounted for as a single performance obligation transferred over time. We use an input method, the number of days that management services are provided, to recognize management fee revenues, which is consistent with the pattern of transfer to the property owners’ associations who receive and consume the benefits as services are provided each day. Any consideration we receive in advance of services being rendered is recorded as Deferred revenue on our Balance Sheets and is recognized ratably across the service period to which it relates. We recognize variable consideration for Cost reimbursements revenues when the reimbursable costs are incurred. Other Services Revenues Other services revenues include additional fees for services we provide to owners and property owners’ associations. We receive club dues for exchange services as well as certain transaction-based fees from owners and other third parties, including external exchange service providers with which we are associated. Club dues are received in advance of providing access to the exchange services, are recorded as Deferred revenue on our Balance Sheets and are earned regardless of whether exchange services are provided. Transaction-based fees from owners are typically received at the time of the transaction and transaction-based fees from other third parties are typically received at a point in time. We have determined that exchange services constitute a stand-ready obligation for us to provide unlimited access to exchange services over a defined period of time, when and if a customer (or customer of a customer) requests. We have determined that customers benefit from the stand-ready obligation evenly throughout the period in which the customer has access to exchange services and as such, recognize club dues on a straight-line basis over the related period of time. Transaction-based fees are recognized as revenue at the point in time at which the relevant goods or services are transferred to the customer. For transaction-based fees, we evaluated whether we control the underlying goods or services prior to delivery to the customer. For transactions where we do not control the goods or services prior to delivery, the related revenue is recorded net of the related cost upon recognition. Financing Revenues We offer consumer financing as an option to qualifying customers purchasing vacation ownership products, which is collateralized by the underlying vacation ownership products. We recognize interest income on an accrual basis. The contractual terms of the financing agreements require that the contractual level of annual principal payments be sufficient to amortize the loan over a customary period for the vacation ownership product being financed, which is generally ten years. Generally, payments commence under the financing contracts 30 to 60 days after closing. We record the difference between the vacation ownership note receivable and the variable consideration included in the transaction price for the sale of the related vacation ownership product as a reserve on our vacation ownership notes receivable. We earn interest income from the financing arrangements on the principal balance outstanding over the life of the arrangement and record that interest income in Financing revenues on our Income Statements. Financing revenues include transaction-based fees we charge to owners and other third parties for services. We recognize fee revenues when services have been rendered. Rental Revenues We generate revenue from rentals of inventory that we hold for sale as interests in our vacation ownership programs or inventory that we control because our owners have elected alternative usage options permitted under our vacation ownership programs. We receive payments for rentals primarily through credit card charges. We recognize rental revenues when occupancy has occurred, which is consistent with the period in which the customer benefits from such service. We recognize rental revenue from the utilization of plus points issued in connection with the sale of vacation ownership products as described in “ Sale of Vacation Ownership Products ” above. We also generate revenues from vacation packages sold to our customers. The packages have an expiration period of six to twenty-four months, and payments for such packages are non-refundable and generally paid by the customer in advance. Payments received in advance are recorded as Advance deposits on our Balance Sheets, until the revenue is recognized, when occupancy has occurred. For rental revenues associated with vacation ownership products which we own and which are registered and held for sale, to the extent that the proceeds are less than costs, revenues are reported net in accordance with ASC Topic 978, “ Real Estate – Time-Sharing Activities .” Arrangements with Multiple Performance Obligations Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. In cases where the standalone selling price is not readily available, we generally determine the standalone selling prices utilizing the adjusted market approach, using prices from similar contracts, our historical pricing on similar contracts, our internal marketing and selling data and other internal and external inputs we deem to be appropriate. Significant judgment is required in determining the standalone selling price under the adjusted market approach. Receivables, Contract Assets & Contract Liabilities As discussed above, the payment terms and conditions in our customer contracts vary. In some cases, customers prepay for their goods and services; in other cases, after appropriate credit evaluations, payment is due in arrears. When the timing of our delivery of goods and services is different from the timing of the payments made by customers, we recognize either a contract asset (performance precedes contractual due date) or a contract liability (customer payment precedes performance or when we have a right to consideration that is unconditional before the transfer of goods or services to a customer). Receivables are recorded when the right to consideration becomes unconditional. Contract liabilities are recognized as revenue as (or when) we perform under the contract. The following table shows the composition of our receivables and contract liabilities. We had no contract assets at either June 30, 2018 or December 31, 2017 . ($ in thousands) At June 30, 2018 At December 31, 2017 Receivables Accounts receivable $ 42,369 $ 72,905 Vacation ownership notes receivable, net 1,167,779 1,114,552 $ 1,210,148 $ 1,187,457 Contract Liabilities Advance deposits $ 95,816 $ 84,087 Deferred revenue 98,500 69,058 $ 194,316 $ 153,145 Revenue recognized in the second quarter and first half of 2018 that was included in our contract liabilities balance at December 31, 2017 was $47.3 million and $94.4 million , respectively. Remaining Performance Obligations Our remaining performance obligations represent the expected transaction price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the contracts. At June 30, 2018 , over 90 percent of this amount is expected to be recognized as revenue over the next two As discussed in Footnote 1 “Summary of Significant Accounting Policies,” the FASB issued ASU 2014-09 in 2014, which, as amended, created ASC 606. The core principle of ASC 606 is that an entity shall recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard also contains significant new disclosure requirements regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. We adopted ASC 606 effective January 1, 2018, on a retrospective basis and restated our previously reported historical results as shown in the tables below. The cumulative impact of the adoption of the new Revenue Standard on our opening retained earnings as of January 2, 2016, the first day of our 2016 fiscal year, was $2.7 million . Upon adoption of the new Revenue Standard, recognition of revenue from the sale of vacation ownership products that is deemed collectible is now deferred from the point in time at which the statutory rescission period expires to closing, when control of the vacation ownership product is transferred to the customer. In addition, we aligned our assessment of collectibility of the transaction price for sales of vacation ownership products with our credit granting policies. We elected the practical expedient to expense all marketing and sales costs as they are incurred. Our consolidated cost reimbursements revenues and cost reimbursements expenses increased significantly, as all costs reimbursed to us by property owners’ associations are now reported on a gross basis upon adoption of the new Revenue Standard. In conjunction with the adoption of the new Revenue Standard we reclassified certain revenues and expenses. As part of the adoption of the new Revenue Standard, we elected the following practical expedients and accounting policies: • We expense all marketing and sales costs that we incur to sell vacation ownership products when incurred. • In determining the transaction price for contracts from customers, we exclude all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific revenue-product transaction and collected by the entity from a customer (e.g., sales tax). • We do not disclose the amount of the transaction price allocated to the remaining performance obligations as of December 31, 2017 or provide an explanation of when we expect to recognize that amount as revenue. The following tables present the impact of the adoption of the new Revenue Standard on our previously reported historical results for the periods presented: Income Statement Impact - Second Quarter of 2017 Three Months Ended June 30, 2017 ($ in thousands, except per share amounts) As Reported Adjustments As Adjusted REVENUES Sale of vacation ownership products $ 191,010 $ 10,846 $ 201,856 Resort management and other services 79,158 (7,218 ) 71,940 Financing 32,530 — 32,530 Rental 84,188 (14,898 ) 69,290 Cost reimbursements 110,734 76,086 186,820 TOTAL REVENUES 497,620 64,816 562,436 EXPENSES Cost of vacation ownership products 46,143 4,882 51,025 Marketing and sales 104,029 (4,861 ) 99,168 Resort management and other services 44,008 (4,595 ) 39,413 Financing 3,449 — 3,449 Rental 70,163 (12,407 ) 57,756 General and administrative 29,534 — 29,534 Litigation settlement 183 — 183 Consumer financing interest 5,654 — 5,654 Royalty fee 16,307 — 16,307 Cost reimbursements 110,734 76,086 186,820 TOTAL EXPENSES 430,204 59,105 489,309 Losses and other expense, net (166 ) — (166 ) Interest expense (1,757 ) — (1,757 ) Other (100 ) — (100 ) INCOME BEFORE INCOME TAXES 65,393 5,711 71,104 Provision for income taxes (21,117 ) (1,801 ) (22,918 ) NET INCOME $ 44,276 $ 3,910 $ 48,186 Earnings per share - Basic $ 1.62 $ 0.14 $ 1.76 Earnings per share - Diluted $ 1.58 $ 0.14 $ 1.72 Income Statement Impact - First Half of 2017 Six Months Ended June 30, 2017 ($ in thousands, except per share amounts) As Reported Adjustments As Adjusted REVENUES Sale of vacation ownership products $ 363,165 $ 2,568 $ 365,733 Resort management and other services 152,122 (12,763 ) 139,359 Financing 64,641 — 64,641 Rental 169,444 (32,475 ) 136,969 Cost reimbursements 234,367 149,667 384,034 TOTAL REVENUES 983,739 106,997 1,090,736 EXPENSES Cost of vacation ownership products 88,763 6,033 94,796 Marketing and sales 204,690 (8,024 ) 196,666 Resort management and other services 85,653 (8,769 ) 76,884 Financing 7,466 — 7,466 Rental 140,595 (29,131 ) 111,464 General and administrative 57,073 — 57,073 Litigation settlement 183 — 183 Consumer financing interest 11,592 — 11,592 Royalty fee 32,377 — 32,377 Cost reimbursements 234,367 149,667 384,034 TOTAL EXPENSES 862,759 109,776 972,535 Losses and other expense, net (225 ) — (225 ) Interest expense (2,538 ) — (2,538 ) Other (469 ) — (469 ) INCOME BEFORE INCOME TAXES 117,748 (2,779 ) 114,969 Provision for income taxes (39,772 ) 879 (38,893 ) NET INCOME $ 77,976 $ (1,900 ) $ 76,076 Earnings per share - Basic $ 2.86 $ (0.07 ) $ 2.79 Earnings per share - Diluted $ 2.79 $ (0.07 ) $ 2.72 Balance Sheet Impact As of December 31, 2017 ($ in thousands) As Reported Adjustments As Adjusted ASSETS Cash and cash equivalents $ 409,059 $ — $ 409,059 Restricted cash 81,553 — 81,553 Accounts receivable, net 154,174 (62,515 ) 91,659 Vacation ownership notes receivable, net 1,119,631 (5,079 ) 1,114,552 Inventory 716,533 11,846 728,379 Property and equipment 252,727 — 252,727 Other 172,516 (5,863 ) 166,653 TOTAL ASSETS $ 2,906,193 $ (61,611 ) $ 2,844,582 LIABILITIES AND EQUITY Accounts payable $ 145,405 $ — $ 145,405 Advance deposits 63,062 21,025 84,087 Accrued liabilities 168,591 (48,781 ) 119,810 Deferred revenue 98,286 (29,228 ) 69,058 Payroll and benefits liability 111,885 — 111,885 Deferred compensation liability 74,851 — 74,851 Debt, net 1,095,213 — 1,095,213 Other 13,155 316 13,471 Deferred taxes 90,725 (738 ) 89,987 TOTAL LIABILITIES 1,861,173 (57,406 ) 1,803,767 Preferred stock — — — Common stock 369 — 369 Treasury stock (694,233 ) — (694,233 ) Additional paid-in capital 1,188,538 — 1,188,538 Accumulated other comprehensive income 16,745 — 16,745 Retained earnings 533,601 (4,205 ) 529,396 TOTAL EQUITY 1,045,020 (4,205 ) 1,040,815 TOTAL LIABILITIES AND EQUITY $ 2,906,193 $ (61,611 ) $ 2,844,582 Cash Flow Impact - Operating Activities Six Months Ended June 30, 2017 ($ in thousands) As Reported Adjustments As Adjusted OPERATING ACTIVITIES Net income $ 77,976 $ (1,900 ) $ 76,076 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation 10,192 — 10,192 Amortization of debt discount and issuance costs 2,726 — 2,726 Vacation ownership notes receivable reserve 26,821 230 27,051 Share-based compensation 8,451 — 8,451 Deferred income taxes 11,778 1,032 12,810 Net change in assets and liabilities: Accounts receivable 30,079 (6,109 ) 23,970 Vacation ownership notes receivable originations (227,643 ) (405 ) (228,048 ) Vacation ownership notes receivable collections 136,731 — 136,731 Inventory 16,007 (1,001 ) 15,006 Purchase of vacation ownership units for future transfer to inventory (33,594 ) — (33,594 ) Other assets 4,406 69 4,475 Accounts payable, advance deposits and accrued liabilities (70,470 ) 2,242 (68,228 ) Deferred revenue 19,654 5,509 25,163 Payroll and benefit liabilities (8,698 ) — (8,698 ) Deferred compensation liability 7,053 — 7,053 Other liabilities (585 ) 293 (292 ) Other, net 3,246 40 3,286 Net cash provided by operating activities $ 14,130 $ — $ 14,130 |
