Hilton Grand Vacations (HGV) - 2019 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION This part presents the unaudited condensed consolidated financial statements and management's discussion and analysis for Hilton Grand Vacations Inc. Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Hilton Grand Vacations Inc., including balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed notes explaining the company's organization, accounting policies, revenue recognition, financial instruments, debt, and segment information for the periods ended September 30, 2019 and 2018 Condensed Consolidated Balance Sheets This section provides a detailed overview of the company's assets, liabilities, and equity as of September 30, 2019, and December 31, 2018 Condensed Consolidated Balance Sheets (in millions) | Asset/Liability Category | Sep 30, 2019 (unaudited) | Dec 31, 2018 | | :----------------------- | :----------------------- | :----------- | | Cash and cash equivalents | $113 | $108 | | Restricted cash | $98 | $72 | | Accounts receivable, net | $137 | $153 | | Timeshare financing receivables, net | $1,139 | $1,120 | | Inventory | $518 | $527 | | Property and equipment, net | $765 | $559 | | Operating lease right-of-use assets, net | $62 | — | | Investments in unconsolidated affiliates | $44 | $38 | | Intangible assets, net | $87 | $81 | | Other assets | $75 | $95 | | TOTAL ASSETS | $3,038 | $2,753 | | Accounts payable, accrued expenses and other | $343 | $324 | | Advanced deposits | $112 | $101 | | Debt, net | $815 | $604 | | Non-recourse debt, net | $795 | $759 | | Operating lease liabilities | $78 | — | | Deferred revenues | $165 | $95 | | Deferred income tax liabilities | $236 | $254 | | Total liabilities | $2,544 | $2,137 | | Total equity | $494 | $616 | | TOTAL LIABILITIES AND EQUITY | $3,038 | $2,753 | Condensed Consolidated Statements of Operations (Unaudited) This section details the company's revenues, operating expenses, net income, and earnings per share for the three and nine months ended September 30, 2019 and 2018 Condensed Consolidated Statements of Operations (in millions, except per share amounts) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :-------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Total revenues | $466 | $427 | $1,370 | $1,357 | | Total operating expenses | $384 | $364 | $1,139 | $1,092 | | Income before income taxes | $70 | $56 | $199 | $242 | | Income tax expense | $(20) | $(15) | $(55) | $(64) | | Net income | $50 | $41 | $144 | $178 | | Basic EPS | $0.59 | $0.42 | $1.61 | $1.82 | | Diluted EPS | $0.59 | $0.42 | $1.60 | $1.81 | Condensed Consolidated Statements of Cash Flows (Unaudited) This section outlines the company's cash flows from operating, investing, and financing activities for the nine months ended September 30, 2019 and 2018 Condensed Consolidated Statements of Cash Flows (in millions) | Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net cash provided by (used in) operating activities | $148 | $(205) | | Net cash used in investing activities | $(46) | $(35) | | Net cash (used in) provided by financing activities | $(71) | $155 | | Net increase (decrease) in cash, cash equivalents and restricted cash | $31 | $(85) | | Cash, cash equivalents and restricted cash, end of period | $211 | $212 | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) This section presents the changes in the company's stockholders' equity, including net income, share-based compensation, and stock repurchases, for the nine months ended September 30, 2019 Changes in Stockholders' Equity (in millions) | Metric | Balance as of Dec 31, 2018 | Net Income (9M 2019) | Share-based Compensation (9M 2019) | Repurchase of Common Stock (9M 2019) | Balance as of Sep 30, 2019 | | :-------------------------------- | :------------------------- | :------------------- | :--------------------------------- | :----------------------------------- | :------------------------- | | Common Stock (Shares) | 94 | — | — | (9) | 85 | | Common Stock (Amount) | $1 | — | — | — | $1 | | Additional Paid-in Capital | $174 | — | $17 | $(17) | $174 | | Accumulated Retained Earnings | $441 | $144 | — | $(266) | $319 | | Total Equity | $616 | $144 | $17 | $(283) | $494 | - The company repurchased and retired 9 million shares of common stock during the nine months ended September 30, 2019, significantly impacting accumulated retained earnings and total equity[14] Note 1: Organization This note describes Hilton Grand Vacations Inc.'s business, operational scope, and significant agreements with Hilton - Hilton Grand Vacations Inc. is a global timeshare company focused on developing, marketing, selling, and managing timeshare resorts primarily under the Hilton Grand Vacations brand[15] - As of September 30, 2019, the company operated 57 properties with 9,177 units across the U.S., Japan, UK, Italy, and Barbados[15] - The company incurred $36 million and $128 million in costs related to agreements with Hilton for the three and nine months ended September 30, 2019, respectively[16] Note 2: Basis of Presentation and Summary of Significant Accounting Policies This note details the financial statement preparation basis, significant accounting policies, and the impact of new accounting standards - The financial statements are prepared in conformity with U.S. GAAP and include all controlled entities, with intercompany transactions eliminated[17][18] - The company adopted ASU No. 2016-02, Leases (Topic 842), on January 1, 2019, using a modified retrospective approach, resulting in the recognition of $68 million in ROU assets and $80 million in operating lease liabilities, with no impact on the statements of operations or cash flows[24][25] - The company is evaluating ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326), effective after December 15, 2019, but does not expect a material impact on its financial statements[26] Note 3: Revenue from Contracts with Customers This note disaggregates revenue by segment and details contract balances, including deferred revenue and receivables Disaggregated Revenues by Segment (in millions) | Revenue Category | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Real Estate and Financing Segment | | | | | | Sales of VOIs, net | $138 | $99 | $383 | $427 | | Sales, marketing, brand and other fees | $143 | $152 | $429 | $423 | | Interest income | $37 | $35 | $109 | $103 | | Other financing revenue | $6 | $5 | $18 | $14 | | Total Real Estate and Financing | $324 | $291 | $939 | $967 | | Resort Operations and Club Management Segment | | | | | | Club management | $28 | $25 | $80 | $71 | | Resort management | $17 | $15 | $50 | $45 | | Rental | $48 | $53 | $153 | $144 | | Ancillary services | $6 | $7 | $20 | $20 | | Total Resort Operations and Club Management | $99 | $100 | $303 | $280 | Contract Balances (in millions) | Balance Type | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Receivables | $112 | $122 | | Contract assets | $4 | — | | Advanced deposits | $112 | $101 | | Deferred Sales of VOIs of projects under construction | $49 | — | | Club activation fees, annual dues and other | $99 | $72 | | Club Bonus Point incentive liability | $65 | $56 | - Revenue earned from contract liabilities at December 31, 2018, recognized during the nine months ended September 30, 2019, was approximately $94 million[32] - As of September 30, 2019, the company deferred $49 million of revenue and $7 million of direct selling costs from sales of VOIs under construction, expected to be recognized in Q2 2020[36] Note 4: Restricted Cash This note provides a breakdown of restricted cash, including escrow deposits and reserves related to non-recourse debt Restricted Cash (in millions) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Escrow deposits on VOI sales | $48 | $45 | | Reserves related to non-recourse debt | $50 | $27 | | Total Restricted Cash | $98 | $72 | Note 5: Timeshare Financing Receivables This note details the company's timeshare financing receivables, including securitized and unsecuritized portions, and the allowance for losses Timeshare Financing Receivables, Net (in millions) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Securitized and Pledged | $795 | $660 | | Unsecuritized | $523 | $632 | | Gross Timeshare Financing Receivables | $1,318 | $1,292 | | Less: allowance for financing receivables losses | $(179) | $(172) | | Timeshare financing receivables, net | $1,139 | $1,120 | - In August 2019, the company completed a $300 million securitization of timeshare financing receivables, issuing approximately $300 million in notes with maturities in July 2033[41][67] - Proceeds were used to pay down existing debt and for general corporate expenses[41][67] - The weighted-average interest rate on timeshare financing receivables was 12.43% as of September 30, 2019, with rates ranging from 3.9% to 20.5% and a weighted-average remaining term of 7.8 years[44] Allowance for Financing Receivables Losses (in millions) | Metric | Securitized and Pledged (Sep 30, 2019) | Unsecuritized (Sep 30, 2019) | Total (Sep 30, 2019) | Total (Dec 31, 2018) | | :--------------------------------------- | :------------------------------------- | :--------------------------- | :------------------- | :------------------- | | Balance as of Dec 31, 2018 | $43 | $129 | $172 | $172 | | Write-offs | — | $(53) | $(53) | — | | Securitizations | $29 | $(29) | — | — | | Provision for financing receivables losses | $(12) | $72 | $60 | — | | Balance as of Sep 30, 2019 | $60 | $119 | $179 | — | Note 6: Inventory This note provides a breakdown of inventory, including completed unsold VOIs, construction in process, and land Inventory (in millions) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Completed unsold VOIs | $249 | $243 | | Construction in process | $11 | $9 | | Land, infrastructure and other | $258 | $275 | | Total Inventory | $518 | $527 | - For the nine months ended September 30, 2019, the company recorded non-cash transfers of $2 million from Other assets to Inventory[50] - The company recognized $14 million in costs of sales true-ups for VOI products, increasing inventory carrying value and decreasing Cost of VOI sales for the nine months ended September 30, 2019[52] Note 7: Property and Equipment This note details the company's property and equipment, including land, buildings, and construction in progress, net of accumulated depreciation Property and Equipment, Net (in millions) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Land | $313 | $268 | | Building and leasehold improvements | $300 | $295 | | Furniture and equipment | $66 | $54 | | Construction in progress | $190 | $25 | | Accumulated depreciation | $(104) | $(83) | | Total Property and Equipment, net | $765 | $559 | - During Q3 2019, the company purchased 87 hotel units in Los Cabos, Mexico for $37 million for future conversion to timeshare units[54] - Non-cash transfers of $40 million from Other assets to Property and equipment were recorded for the nine months ended September 30, 2019, related to deposits on properties for future development[54] Note 8: Consolidated Variable Interest Entities This note discusses the company's consolidated variable interest entities and their associated assets and liabilities - As of September 30, 2019, the company consolidated 5 variable interest entities (VIEs), up from 4 at December 31, 2018, primarily related to non-recourse debt backed by timeshare financing receivables[56] Assets and Liabilities of Consolidated VIEs (in millions) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Restricted cash | $49 | $23 | | Timeshare financing receivables, net | $735 | $617 | | Non-recourse debt | $795 | $639 | Note 9: Investments in Unconsolidated Affiliates This note outlines the company's investments in unconsolidated affiliates and the maximum exposure to loss from these entities - The company holds 25% and 50% ownership interests in BRE Ace LLC and 1776 Holdings LLC, respectively, which are deemed VIEs but not consolidated as the company is not the primary beneficiary[59] - Maximum exposure to loss from these unconsolidated affiliates is primarily limited to the carrying amount of investments ($44 million as of September 30, 2019) and receivables for commissions[60] Note 10: Other Assets This note provides a breakdown of other assets, including inventory deposits and prepaid expenses Other Assets (in millions) | Category | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Inventory deposits | $7 | $46 | | Prepaid expenses | $23 | $18 | | Other | $45 | $31 | | Total Other Assets | $75 | $95 | - Non-cash operating activity transfers from Other assets to Inventory and Property and equipment occurred during the nine months ended September 30, 2019[61] Note 11: Debt & Non-recourse Debt This note details the company's outstanding debt and non-recourse debt, including terms, rates, and contractual maturities Outstanding Debt Balance (in millions) | Debt Type | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Term loan (avg rate 3.766%, due 2023) | $190 | $197 | | Revolver (avg rate 3.766%, due 2023) | $305 | $115 | | Senior notes (rate 6.125%, due 2024) | $300 | $300 | | Other debt | $27 | — | | Less: unamortized deferred financing costs and discount | $(7) | $(8) | | Total Debt, net | $815 | $604 | Non-recourse Debt (in millions) | Debt Type | Sep 30, 2019 | Dec 31, 2018 | | :--------------------------------------- | :----------- | :----------- | | Timeshare Facility (avg rate 3.164%, due 2021) | — | $120 | | Securitized Debt (rate 2.280%, due 2026) | — | $33 | | Securitized Debt (avg rate 1.810%, due 2026) | $52 | $74 | | Securitized Debt (avg rate 2.711%, due 2028) | $162 | $206 | | Securitized Debt (avg rate 3.602%, due 2032) | $293 | $333 | | Securitized Debt (avg rate 2.431%, due 2033) | $297 | — | | Less: unamortized deferred financing costs | $(9) | $(7) | | Total Non-recourse Debt, net | $795 | $759 | - During the nine months ended September 30, 2019, the company borrowed $455 million and repaid $272 million under senior secured credit facilities[64] - In August 2019, a $300 million securitization of timeshare financing receivables was completed, issuing new notes due July 2033[67] - Proceeds were used to pay down the Timeshare Facility and other Securitized Debt[67] - The Timeshare Facility was amended in April and September 2019, extending the commitment period to April 2021 and temporarily changing certain covenant requirements[69] Contractual Maturities of Debt and Non-recourse Debt (in millions) as of Sep 30, 2019 | Year | Debt | Non-recourse Debt | Total | | :--------------------------------------- | :--- | :---------------- | :---- | | 2019 (remaining) | $3 | $51 | $54 | | 2020 | $12 | $247 | $259 | | 2021 | $11 | $155 | $166 | | 2022 | $10 | $110 | $120 | | 2023 | $463 | $108 | $571 | | Thereafter | $323 | $133 | $456 | | Total | $822 | $804 | $1,626 | Note 12: Fair Value Measurements This note presents the carrying amounts and estimated fair values of the company's financial assets and liabilities Carrying Amounts and Estimated Fair Values of Financial Assets and Liabilities (in millions) | Category | Sep 30, 2019 Carrying Amount | Sep 30, 2019 Fair Value | Dec 31, 2018 Carrying Amount | Dec 31, 2018 Fair Value | | :--------------------------------------- | :----------------------------- | :---------------------- | :----------------------------- | :---------------------- | | Timeshare financing receivables, net | $1,139 | $1,424 | $1,120 | $1,339 | | Debt, net | $815 | $847 | $604 | $631 | | Non-recourse debt, net | $795 | $797 | $759 | $753 | - Fair values for timeshare financing receivables are determined using a discounted cash flow model incorporating default rates, coupon rates, credit quality, and borrowing terms[77] - Fair values for Level 1 debt are based on active market prices, while Level 3 debt and non-recourse debt are based on discounted projected future cash flows[77] Note 13: Leases This note outlines the company's operating lease arrangements, including expenses and future minimum lease payments - The company leases sales centers, office space, and equipment under operating leases expiring from 2019 through 2030[78] Operating Lease Expenses (in millions) | Period | Rent Expense | | :--------------------------------------- | :----------- | | Three months ended Sep 30, 2019 | $6 | | Nine months ended Sep 30, 2019 | $16 | | Year ended Dec 31, 2018 | $24 | Future Minimum Lease Payments (in millions) as of Sep 30, 2019 | Year | Operating Leases | | :--------------------------------------- | :--------------- | | 2019 (remaining) | $4 | | 2020 | $17 | | 2021 | $16 | | 2022 | $11 | | 2023 | $11 | | Thereafter | $33 | | Total future minimum lease payments | $92 | | Less: imputed interest | $(14) | | Present value of lease liabilities | $78 | Note 14: Income Taxes This note details the company's effective tax rate and factors influencing its changes Effective Tax Rate | Period | Effective Tax Rate | | :--------------------------------------- | :----------------- | | Nine months ended Sep 30, 2019 | 28% | | Nine months ended Sep 30, 2018 | 27% | - The effective tax rate increased primarily due to a reduction in the tax benefit related to share-based compensation awards exercised or vested during the nine months ended September 30, 2019[82] Note 15: Share-Based Compensation This note provides details on share-based compensation expense, unrecognized costs, and awards issued Share-Based Compensation Expense (in millions) | Period | Expense | | :--------------------------------------- | :------ | | Three months ended Sep 30, 2019 | $6 | | Three months ended Sep 30, 2018 | $5 | | Nine months ended Sep 30, 2019 | $18 | | Nine months ended Sep 30, 2018 | $13 | - As of September 30, 2019, unrecognized compensation costs for unvested awards totaled approximately $23 million, expected to be recognized over a weighted average period of 1.9 years[83] - During the nine months ended September 30, 2019, the company issued 500,925 Service RSUs (weighted-average grant date fair value of $33.07) and 544,209 Options (weighted-average exercise price of $33.32)[84][85] Note 16: Earnings Per Share This note presents the calculation of basic and diluted earnings per share, including weighted average shares outstanding Earnings Per Share (in millions, except per share amounts) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net Income | $50 | $41 | $144 | $178 | | Weighted average shares outstanding (Basic) | 86 | 97 | 90 | 97 | | Basic EPS | $0.59 | $0.42 | $1.61 | $1.82 | | Weighted average shares outstanding (Diluted) | 86 | 97 | 90 | 98 | | Diluted EPS | $0.59 | $0.42 | $1.60 | $1.81 | - The company excluded 979,779 share-based compensation awards from diluted EPS for the nine months ended September 30, 2019, as their effect would have been anti-dilutive[90] Note 17: Related Party Transactions This note details transactions with related parties, including equity in earnings and commissions - The company has ownership interests in BRE Ace LLC (25%) and 1776 Holding, LLC (50%), earning commissions and other fees from fee-for-service agreements with these affiliates[91][92][93] Related Party Transactions (in millions) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Equity in earnings from unconsolidated affiliates | $1 | $1 | $4 | — | | Commissions and other fees | $31 | $32 | $99 | $96 | - HNA Tourism Group Co., Ltd ceased to be a related party after selling 22,250,000 shares of the company's common stock in March 2018, of which the company repurchased 2,500,000 shares[95] Note 18: Business Segments This note disaggregates the company's revenues and Adjusted EBITDA by its two reportable business segments - The company operates in two segments: Real estate sales and financing, and Resort operations and club management[100] - Segment performance is primarily evaluated based on Adjusted EBITDA, which excludes equity in earnings (losses) from unconsolidated affiliates[96][97] Revenues by Reportable Segment (in millions) | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Real estate sales and financing | $324 | $291 | $939 | $967 | | Resort operations and club management | $108 | $108 | $332 | $304 | | Total segment revenues | $432 | $399 | $1,271 | $1,271 | | Cost reimbursements | $43 | $36 | $128 | $110 | | Intersegment eliminations | $(9) | $(8) | $(29) | $(24) | | Total revenues | $466 | $427 | $1,370 | $1,357 | Segment Adjusted EBITDA (in millions) | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Real estate sales and financing | $94 | $67 | $243 | $274 | | Resort operations and club management | $62 | $62 | $193 | $179 | | Segment Adjusted EBITDA | $156 | $129 | $436 | $453 | Note 19: Commitments and Contingencies This note outlines the company's inventory purchase obligations, other commitments, and pending litigation - As of September 30, 2019, the company was committed to purchase approximately $480 million of inventory and land over 11 years, and $32 million in other commitments[102] Inventory Purchase Obligations and Other Commitments (in millions) as of Sep 30, 2019 | Commitment Type | 2019 (remaining) | 2020 | 2021 | 2022 | 2023 | Thereafter | Total | | :--------------------------------------- | :--------------- | :--- | :--- | :--- | :--- | :--------- | :---- | | Inventory purchase obligations | — | $220 | $92 | $56 | $58 | $54 | $480 | | Other commitments | $4 | $19 | $8 | $1 | — | — | $32 | | Total | $4 | $239 | $100 | $57 | $58 | $54 | $512 | - Management believes that the resolution of all pending or threatened claims and litigation as of September 30, 2019, will not materially affect the unaudited condensed consolidated financial statements[103] Note 20: Condensed Consolidating Guarantor Financial Information This note provides condensed consolidating financial information for the Parent, Subsidiary Issuers, Guarantors, and Non-Guarantors - This note provides unaudited condensed consolidating financial information for the Parent, Subsidiary Issuers, Guarantors, and Non-Guarantors, detailing their respective assets, liabilities, revenues, expenses, and cash flows[105] - The consolidating statements show intercompany eliminations to arrive at the total consolidated figures, providing transparency into the financial structure of the guarantor and non-guarantor entities[106][107][108][109][110][111][112][113][114] Note 21: Subsequent Events This note confirms that management evaluated subsequent events through October 31, 2019, with no material findings - Management evaluated all subsequent events through October 31, 2019, and found no significant events requiring adjustments or disclosures in the unaudited consolidated financial statements[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides a detailed discussion and analysis of Hilton Grand Vacations Inc.'s financial condition and results of operations for the three and nine months ended September 30, 2019, compared to the same periods in 2018. It covers segment performance, key business metrics, liquidity, capital resources, and contractual obligations Cautionary Note Regarding Forward-Looking Statements This note advises caution regarding forward-looking statements, which are subject to risks and uncertainties - The report contains forward-looking statements based on management's expectations, beliefs, and assumptions, which involve known and unknown risks and uncertainties that could cause actual results to differ materially[117][118] - Readers are cautioned not to place undue reliance on forward-looking statements, and the company undertakes no obligation to publicly update or review them[118][119] Terms Used in this Quarterly Report on Form 10-Q This section defines key business, financial, and operational terms used throughout the quarterly report - Key terms defined include 'Developed' (VOI inventory from HGV projects), 'Fee for service' (VOI inventory sold/managed for third parties), 'Just-in-time' (VOI inventory acquired to match sales), and 'VOI' (vacation ownership intervals)[121][122][123] - Non-GAAP financial measures like EBITDA and Adjusted EBITDA, and operational metrics such as contract sales, sales revenue, real estate margin, tour flow, volume per guest (VPG), and transient rate are also defined[124][125] Overview This section provides a high-level description of Hilton Grand Vacations' business model, operational scale, and strategic focus - Hilton Grand Vacations is a growing timeshare company that markets and sells VOIs, manages resorts, and operates a points-based vacation club[127] - As of September 30, 2019, the company had 57 properties (9,177 units) and approximately 322,000 Club members[127] - The business operates in two segments: Real Estate Sales and Financing, and Resort Operations and Club Management[128] - The company has transitioned to a capital-efficient model, with fee-for-service and just-in-time agreements representing approximately 55% of its seven-year future inventory supply[130][131] - For the nine months ended September 30, 2019, 52% of contract sales were to existing owners, and financing propensity was 66.6%[132][133] Key Business and Financial Metrics and Terms Used by Management This section defines the primary metrics used by management to evaluate the company's operational and financial performance - Contract sales measure total VOI products under purchase agreements with at least a 10% down payment, reflecting sales pace[140] - Volume per guest (VPG) measures sales attributable to tours, calculated by dividing contract sales (excluding telesales) by tour flow, indicating sales process effectiveness[140] - EBITDA and Adjusted EBITDA are non-GAAP measures used by management and investors to evaluate operating performance, excluding certain non-recurring or non-cash items[142][143][145] Results of Operations This section analyzes the company's financial performance, including revenues, expenses, and profitability, for the reported periods Segment Results This section presents a comparative analysis of revenues and Adjusted EBITDA for the company's two reportable business segments Segment Revenues (in millions) | Segment | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | Real estate sales and financing | $324 | $291 | $33 | 11.3% | $939 | $967 | $(28) | (2.9)% | | Resort operations and club management | $108 | $108 | — | — | $332 | $304 | $28 | 9.2% | | Total segment revenues | $432 | $399 | $33 | 8.3% | $1,271 | $1,271 | — | — | | Total revenues | $466 | $427 | $39 | 9.1% | $1,370 | $1,357 | $13 | 1.0% | Adjusted EBITDA (in millions) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | Net Income | $50 | $41 | $9 | 22.0% | $144 | $178 | $(34) | (19.1)% | | EBITDA | $96 | $73 | $23 | 31.5% | $271 | $292 | $(21) | (7.2)% | | Adjusted EBITDA | $111 | $80 | $31 | 38.8% | $303 | $317 | $(14) | (4.4)% | | Real estate sales and financing Adjusted EBITDA | $94 | $67 | $27 | 40.3% | $243 | $274 | $(31) | (11.3)% | | Resort operations and club management Adjusted EBITDA | $62 | $62 | — | — | $193 | $179 | $14 | 7.8% | | Segment Adjusted EBITDA | $156 | $129 | $27 | 20.9% | $436 | $453 | $(17) | (3.8)% | Real Estate Sales and Financing Segment This section details the financial performance and key operational metrics for the real estate sales and financing segment - Real estate sales and financing segment revenues increased by $33 million (11.3%) for the three months ended September 30, 2019, primarily due to lower deferrals of revenue from VOI sales for properties under construction[155] - For the nine months ended September 30, 2019, segment revenues decreased by $28 million (2.9%) due to higher deferrals of revenue from VOI sales for properties under construction and a $10 million increase in the provision for financing receivable losses[156][167] Real Estate Sales Metrics (in millions, except Tour flow and VPG) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | Sales of VOIs, net | $138 | $99 | $39 | 39.4% | $383 | $427 | $(44) | (10.3)% | | Contract sales | $360 | $364 | $(4) | (1.1)% | $1,045 | $1,050 | $(5) | (0.5)% | | Tour flow | 102,911 | 94,816 | 8,095 | 8.5% | 287,267 | 266,785 | 20,482 | 7.7% | | VPG | $3,363 | $3,648 | $(285) | (7.8)% | $3,464 | $3,732 | $(268) | (7.2)% | | Real estate margin | $78 | $56 | $22 | 39.3% | $203 | $237 | $(34) | (14.3)% | | Real estate margin percentage | 31.6% | 25.5% | | | 28.6% | 31.2% | | | - Contract sales decreased slightly for both the three and nine months ended September 30, 2019, primarily due to lower VPG (down 7.8% and 7.2% respectively) from declines in close rate and average transaction price, despite growth in tour flow[164] Financing Performance (in millions) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | Financing revenue | $43 | $40 | $3 | 7.5% | $127 | $117 | $10 | 8.5% | | Financing expense | $14 | $12 | $2 | 16.7% | $39 | $35 | $4 | 11.4% | | Financing margin | $29 | $28 | $1 | 3.6% | $88 | $82 | $6 | 7.3% | | Financing margin percentage | 67.4% | 70.0% | | | 69.3% | 70.1% | | | - Financing revenue increased due to higher interest income from an increased weighted average interest rate on timeshare financing receivables and growth in loan servicing revenues[168] Resort Operations and Club Management Segment This section analyzes the financial performance of the resort operations and club management segment, including revenues and margins Resort and Club Management Performance (in millions) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | Resort and club management revenues | $45 | $40 | $5 | 12.5% | $130 | $116 | $14 | 12.1% | | Resort and club management expenses | $11 | $11 | — | — | $34 | $33 | $1 | 3.0% | | Resort and club management margin | $34 | $29 | $5 | 17.2% | $96 | $83 | $13 | 15.7% | | Resort and club management margin percentage | 75.6% | 72.5% | | | 73.8% | 71.6% | | | - Resort and club management revenues increased due to approximately 17,000 new Club members, higher annual dues and transaction fees, and revenue from new properties launched after Q3 2018[170] Rental and Ancillary Services Performance (in millions) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | Rental and ancillary services revenues | $54 | $60 | $(6) | (10.0)% | $173 | $164 | $9 | 5.5% | | Rental and ancillary services expenses | $36 | $37 | $(1) | (2.7)% | $108 | $95 | $13 | 13.7% | | Rental and ancillary services margin | $18 | $23 | $(5) | (21.7)% | $65 | $69 | $(4) | (5.8)% | | Rental and ancillary services margin percentage | 33.3% | 38.3% | | | 37.6% | 42.1% | | | - Rental and ancillary services revenues decreased for the three months ended September 30, 2019, due to lower transient guests from an operating hotel undergoing timeshare conversion and lower club inventory rentals[171] Other Operating Expenses This section reviews changes in general and administrative, depreciation, amortization, and license fee expenses Other Operating Expenses (in millions) | Expense Category | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | General and administrative | $28 | $31 | $(3) | (9.7)% | $82 | $84 | $(2) | (2.4)% | | Depreciation and amortization | $14 | $9 | $5 | 55.6% | $37 | $25 | $12 | 48.0% | | License fee expense | $26 | $25 | $1 | 4.0% | $75 | $73 | $2 | 2.7% | - Depreciation and amortization expense increased significantly due to additional software placed into service (Oracle cloud-based system) and depreciation of unregistered operating assets and renovated sales centers[172] Non-Operating Expenses This section examines interest expense, equity in earnings from unconsolidated affiliates, and income tax expense Non-Operating Expenses (in millions) | Expense Category | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | Variance (%) | | :--------------------------------------- | :------------------------------ | :------------------------------ | :----------- | :----------- | :----------------------------- | :----------------------------- | :----------- | :----------- | | Interest expense | $12 | $7 | $5 | 71.4% | $33 | $22 | $11 | 50.0% | | Equity in earnings from unconsolidated affiliates | $(1) | $(1) | — | — | $(4) | — | $(4) | NM | | Other loss, net | $1 | $1 | — | — | $3 | $1 | $2 | NM | | Income tax expense | $20 | $15 | $5 | 33.3% | $55 | $64 | $(9) | (14.1)% | - Interest expense increased due to a higher average outstanding balance on senior secured credit facilities[173] Liquidity and Capital Resources This section discusses the company's cash management objectives, funding sources, and capital commitments - The company's cash management objectives include maintaining liquidity, minimizing operational costs, making debt payments, and funding future acquisitions and development projects[174] - Short-term liquidity needs include operating expenses, legal costs, interest/principal payments, inventory commitments, and capital expenditures[174] - Primary funding sources are cash and cash equivalents, cash from operations, draws on senior secured credit facilities and non-recourse revolving timeshare credit facility, and periodic securitizations of timeshare financing receivables[175] - As of September 30, 2019, the company had $211 million in cash and cash equivalents (including $98 million restricted cash) and $494 million remaining borrowing capacity under the revolver facility[178] - The company had $480 million in inventory-related purchase commitments over eleven years as of September 30, 2019[178] Sources and Uses of Our Cash This section analyzes the net cash flows from operating, investing, and financing activities Net Cash Flows (in millions) | Activity | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | Variance ($) | | :--------------------------------------- | :----------------------------- | :----------------------------- | :----------- | | Operating activities | $148 | $(205) | $353 | | Investing activities | $(46) | $(35) | $(11) | | Financing activities | $(71) | $155 | $(226) | - The increase in net cash from operating activities was primarily due to a reduction in real estate purchases/development for inventory, reduced inventory deposits, and a deferred federal tax payment in 2018[181] - Net cash used in investing activities increased due to an $11 million return of investment from an unconsolidated affiliate in 2018 and a $7 million increase in software capitalization costs, partially offset by lower property and equipment spending[184] - Net cash used in financing activities was primarily driven by additional repurchases and retirements of common stock compared to the prior year, partially offset by incremental net debt and non-recourse debt activity[187] Contractual Obligations This section details the company's significant contractual obligations, including debt, leases, and purchase commitments Significant Contractual Obligations (in millions) as of Sep 30, 2019 | Obligation Type | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--------------------------------------- | :---- | :--------------- | :-------- | :-------- | :---------------- | | Debt | $822 | $12 | $22 | $465 | $323 | | Non-recourse debt | $804 | $246 | $293 | $169 | $96 | | Interest on debt | $251 | $59 | $100 | $72 | $20 | | Operating leases | $92 | $17 | $29 | $22 | $24 | | Inventory purchase commitments | $480 | $90 | $277 | $98 | $15 | | Other commitments | $32 | $18 | $14 | — | — | | Total contractual obligations | $2,481 | $442 | $735 | $826 | $478 | Off-Balance Sheet Arrangements This section describes the company's off-balance sheet arrangements, primarily related to inventory purchase commitments - Off-balance sheet arrangements as of September 30, 2019, included $480 million in commitments to purchase vacation ownership units from developers and $32 million in other commitments[191] Subsequent Events This section confirms that management evaluated subsequent events through October 31, 2019, with no material findings - Management evaluated all subsequent events through October 31, 2019, and found no significant events requiring adjustments or disclosures[192] Critical Accounting Policies and Estimates This section refers to the critical accounting policies and estimates detailed in the company's Annual Report on Form 10-K - The company's critical accounting policies and estimates, which require complex judgment, are discussed in detail in its Annual Report on Form 10-K for the year ended December 31, 2018[193] ITEM 3. Quantitative and Qualitative Disclosures about Market Risk This section discusses the company's exposure to market risks, primarily from changes in interest rates and foreign currency exchange rates, and how these risks are managed Interest Rate Risk This section details the company's exposure to interest rate risk on its variable-rate debt and strategies for managing it - The company is exposed to interest rate risk on its variable-rate debt, including term loans, revolver, and the non-recourse Timeshare Facility, with interest rates based on one-month LIBOR[196] - The company intends to secure fixed-rate funding through securitization of timeshare financing receivables to match its fixed-rate receivables[197] Financial Instruments Affected by Interest Rate Risk (in millions) as of Sep 30, 2019 | Instrument | Weighted Average Interest Rate | Total (Maturities) | Fair Value | | :--------------------------------------- | :----------------------------- | :----------------- | :--------- | | Fixed-rate securitized timeshare financing receivables | 12.078% | $795 | $867 | | Fixed-rate unsecuritized timeshare financing receivables | 12.964% | $523 | $557 | | Fixed-rate debt | 3.840% | $1,131 | $1,144 | | Variable-rate debt | 3.766% | $495 | $500 | Foreign Currency Exchange Rate Risk This section describes the company's exposure to foreign currency exchange rate risk, primarily from Japanese yen-denominated receivables - The company is exposed to foreign currency exchange rate risk, primarily from timeshare financing receivables denominated in Japanese yen[201] - A 10% increase in the Japanese yen to U.S. dollar exchange rate would increase gro