Hilton Grand Vacations (HGV) - 2020 Q2 - Quarterly Report

PART I Item 1. Financial Statements Unaudited Q2 2020 financial statements reflect a $48 million net loss and increased liquidity due to severe COVID-19 impact Condensed Consolidated Balance Sheets The balance sheet highlights a significant increase in cash and debt, reflecting proactive liquidity measures taken by the company Condensed Consolidated Balance Sheet Highlights (in millions) | Account | June 30, 2020 (unaudited) | December 31, 2019 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $733 | $67 | | Timeshare financing receivables, net | $1,053 | $1,156 | | Inventory | $907 | $558 | | Total Assets | $3,635 | $3,079 | | Liabilities & Equity | | | | Debt, net | $1,263 | $828 | | Non-recourse debt, net | $926 | $747 | | Total Liabilities | $3,112 | $2,509 | | Total Equity | $523 | $570 | - The company significantly increased its cash position to $733 million from $67 million, primarily by drawing on its debt facilities to bolster liquidity amidst the COVID-19 pandemic[7] Condensed Consolidated Statements of Operations The statements of operations show a substantial decline in revenues and a net loss for Q2 2020 due to pandemic-related operational curtailments Condensed Consolidated Statements of Operations Highlights (in millions, except per share amounts) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | :--- | :--- | | Total revenues | $123 | $454 | $474 | $904 | | Total operating expenses | $165 | $390 | $502 | $755 | | Net income (loss) | $(48) | $39 | $(40) | $94 | | Diluted EPS | $(0.56) | $0.43 | $(0.47) | $1.01 | - Total revenues for Q2 2020 plummeted to $123 million from $454 million in Q2 2019, a decrease of approximately 73%, driven by the widespread closure of resorts and sales centers due to COVID-19[9] Condensed Consolidated Statements of Cash Flows Cash flow statements indicate a significant increase in cash from financing activities, primarily debt issuance, to bolster liquidity Condensed Consolidated Statements of Cash Flows Highlights (in millions) | Cash Flow Activity | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $88 | $71 | | Net cash used in investing activities | $(15) | $(29) | | Net cash provided by (used in) financing activities | $598 | $(35) | | Net increase in cash | $671 | $7 | - Financing activities provided $598 million in cash during the first six months of 2020, primarily from the issuance of debt ($495 million) and non-recourse debt ($495 million), which was a significant shift from the $35 million used in financing activities in the prior-year period. This was a direct response to the need for liquidity during the pandemic[10] Notes to Unaudited Condensed Consolidated Financial Statements Notes detail the pandemic's impact, including resort closures, employee furloughs, liquidity measures, and segment-specific revenue declines - In response to COVID-19, the company took significant actions including furloughing approximately 67% of its employees, implementing salary reductions, and reducing planned new inventory investment by about $200 million[18] - As of June 30, 2020, approximately two-thirds of the company's resorts and sales centers had reopened in a phased manner with significant capacity constraints and enhanced safety measures[21] - Due to the negative impact of the COVID-19 pandemic, the company determined that performance conditions for 2018, 2019, and 2020 Performance RSU awards were improbable of achievement, resulting in a reversal of $8 million of previously recognized share-based compensation expense[100] - As of June 30, 2020, the company had commitments to purchase approximately $464 million of inventory and land over an 11-year period[115] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the severe COVID-19 impact, detailing property closures, liquidity actions, and ongoing uncertainties despite phased reopenings Recent Events Related to the COVID-19 Pandemic The company details its response to the COVID-19 pandemic, including property closures, employee furloughs, and aggressive liquidity preservation measures - Commencing in March 2020, the company temporarily closed substantially all properties and suspended U.S. sales operations in response to the COVID-19 pandemic[149] - To preserve liquidity, the company took several actions: furloughed over 6,100 employees (more than two-thirds of its workforce), implemented salary reductions, drew down its revolver facility by $445 million, amended its Credit Agreement for covenant flexibility, and completed a $300 million securitization in June 2020[149][150] - A phased reopening of resorts and sales centers began in May 2020 under new 'HGV Enhanced Care Guidelines', but many properties are operating with significant capacity constraints[154] Results of Operations Operational results show significant revenue declines across segments and negative Adjusted EBITDA due to pandemic-induced disruptions Adjusted EBITDA Reconciliation (in millions) | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Variance $ | Variance % | | :--- | :--- | :--- | :--- | :--- | | Net income (loss) | $(48) | $39 | $(87) | NM | | EBITDA | $(33) | $78 | $(111) | NM | | Adjusted EBITDA | $(19) | $90 | $(109) | NM | Real Estate Sales Metrics | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Variance | Variance % | | :--- | :--- | :--- | :--- | :--- | | Contract sales | $35M | $363M | $(328)M | (90.4)% | | Tour flow | 5,810 | 101,712 | (95,902) | (94.3)% | | VPG | $4,786 | $3,393 | $1,393 | 41.1% | - The Real Estate Sales and Financing segment revenue decreased by 81.8% in Q2 2020 compared to Q2 2019, while the Resort Operations and Club Management segment revenue decreased by 61.4%[158] - Rental and ancillary services revenue saw a dramatic 91.7% decline in Q2 2020 versus Q2 2019, falling from $60 million to $5 million due to resort closures[179] Liquidity and Capital Resources The company significantly enhanced liquidity through debt issuance and reduced capital expenditures to navigate the pandemic's financial impact - The company's primary liquidity sources are cash from operations, its senior secured credit facility, and securitizations of timeshare financing receivables[185] - As of June 30, 2020, the company had total cash and cash equivalents of $823 million, including $90 million of restricted cash. This was significantly bolstered by drawing down its revolver facility and a June 2020 securitization[187] - The company suspended its share repurchase program and reduced planned new inventory investment by approximately $200 million to preserve capital[186] Total Contractual Obligations as of June 30, 2020 (in millions) | Obligation Type | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $1,269 | $12 | $22 | $1,212 | $23 | | Non-recourse debt | $937 | $261 | $367 | $188 | $121 | | Inventory purchase commitments | $464 | $108 | $244 | $98 | $14 | | Total | $3,014 | $475 | $777 | $1,572 | $190 | Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risk exposure remains primarily from interest rate fluctuations on variable-rate debt and foreign currency changes, managed with swaps - The company is exposed to interest rate risk on its variable-rate debt, including its term loans, revolver, and Timeshare Facility. It uses interest rate swaps to manage this risk[210] - Foreign currency exchange risk is primarily from timeshare financing receivables denominated in Japanese yen, though the potential impact of a 10% rate change is considered minimal (less than $1 million)[215] Item 4. Controls and Procedures Disclosure controls and procedures were deemed effective as of June 30, 2020, with no material changes to internal controls over financial reporting - Based on an evaluation as of June 30, 2020, the CEO and CFO concluded that the company's disclosure controls and procedures were effective[217] - No changes occurred during the three months ended June 30, 2020, that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting[218] PART II Item 1. Legal Proceedings The company is involved in litigation arising from the normal course of business. Management has evaluated these matters and does not expect the ultimate resolution of pending claims to have a material effect on its financial statements - While involved in litigation from the normal course of business, the company does not expect the resolution of pending claims as of June 30, 2020, to materially affect its unaudited condensed consolidated financial statements[220] Item 1A. Risk Factors The COVID-19 pandemic is identified as the most significant and material risk, posing ongoing uncertainties for operations and financial performance - The COVID-19 pandemic is identified as having a continuing material adverse effect on the business, financial condition, and results of operations for the foreseeable future[223] - Key uncertainties and risks include: resurgences of the virus (especially in key markets like Florida, Hawaii, and New York), potential 'second waves', new travel bans or quarantine requirements, and changing consumer behavior regarding travel[227] - The company acknowledges risks associated with implementing new safety measures, including significant costs, potential guest dissatisfaction, and the possibility of infection transmission despite these efforts[227] - There is a risk of being unable to repay increased indebtedness if the pandemic worsens or continues for a significant duration, despite recent efforts to enhance liquidity[228] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None[231] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the period - None[232] Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable[233] Item 5. Other Information There was no other information to report for the period - None[234] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including amendments to credit agreements, certifications by the CEO and CFO, and XBRL data files