Hilton Grand Vacations (HGV) - 2021 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements, management's discussion, market risk, and controls for Q1 2021 Item 1. Financial Statements This section presents Hilton Grand Vacations Inc.'s unaudited condensed consolidated financial statements for Q1 2021, covering balance sheets, operations, cash flows, equity, and detailed notes on accounting policies and COVID-19 impact Condensed Consolidated Balance Sheets The condensed consolidated balance sheets show a slight decrease in total assets and liabilities from December 31, 2020, to March 31, 2021, with cash and cash equivalents decreasing and deferred revenues increasing significantly | Metric | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $400 | $428 | $(28) | -6.54% | | Restricted cash | $105 | $98 | $7 | 7.14% | | Timeshare financing receivables, net | $940 | $974 | $(34) | -3.49% | | Inventory | $720 | $702 | $18 | 2.56% | | Total Assets | $3,114 | $3,134 | $(20) | -0.64% | | Debt, net | $1,156 | $1,159 | $(3) | -0.26% | | Non-recourse debt, net | $698 | $766 | $(68) | -8.88% | | Deferred revenues | $336 | $262 | $74 | 28.24% | | Total Liabilities | $2,745 | $2,760 | $(15) | -0.54% | | Total Equity | $369 | $374 | $(5) | -1.34% | Condensed Consolidated Statements of Operations The company reported a net loss of $7 million for Q1 2021, a significant decline from $8 million net income in the prior-year period, driven by substantial revenue decreases due to COVID-19 | Metric | Three Months Ended March 31, 2021 (in millions) | Three Months Ended March 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $235 | $351 | $(116) | -33.05% | | Total Operating Expenses | $234 | $337 | $(103) | -30.56% | | Interest Expense | $(15) | $(10) | $(5) | 50.00% | | Net (Loss) Income | $(7) | $8 | $(15) | -187.50% | | Basic EPS | $(0.08) | $0.09 | $(0.17) | -188.89% | | Diluted EPS | $(0.08) | $0.09 | $(0.17) | -188.89% | Condensed Consolidated Statements of Cash Flows Net cash provided by operating activities increased to $62 million in Q1 2021 from $53 million in Q1 2020, while net cash used in financing activities significantly increased to $78 million due to reduced debt issuances | Metric | Three Months Ended March 31, 2021 (in millions) | Three Months Ended March 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Net (Loss) Income | $(7) | $8 | $(15) | -187.50% | | Net cash provided by operating activities | $62 | $53 | $9 | 16.98% | | Net cash used in investing activities | $(5) | $(8) | $3 | -37.50% | | Net cash (used in) provided by financing activities | $(78) | $562 | $(640) | -113.88% | | Net (decrease) increase in cash, cash equivalents and restricted cash | $(21) | $607 | $(628) | -103.46% | | Cash, cash equivalents and restricted cash, end of period | $505 | $759 | $(254) | -33.46% | Condensed Consolidated Statements of Stockholders' Equity Total equity decreased from $374 million at December 31, 2020, to $369 million at March 31, 2021, primarily due to a $7 million net loss, partially offset by share-based compensation activity | Metric | December 31, 2020 (in millions) | March 31, 2021 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Total Equity | $374 | $369 | $(5) | -1.34% | | Net Loss | — | $(7) | $(7) | NM | | Activity related to share-based compensation | — | $2 | $2 | NM | Notes to Unaudited Condensed Consolidated Financial Statements These notes detail the unaudited condensed consolidated financial statements, covering business, accounting policies, revenue, debt, equity, and COVID-19 impact Note 1: Organization Hilton Grand Vacations Inc. operates as a global timeshare company, managing 62 properties with 499,616 vacation ownership intervals as of March 31, 2021 - Hilton Grand Vacations operates as a global timeshare company, focusing on developing, marketing, selling, and managing timeshare resorts under its brand[15] - As of March 31, 2021, the company had 62 properties, comprising 499,616 VOIs, located in the U.S., Japan, UK, Italy, Barbados, and Mexico, with significant concentration in Florida, Hawaii, Nevada, New York, and South Carolina[15] Note 2: Basis of Presentation and Summary of Significant Accounting Policies The unaudited financial statements conform to U.S. GAAP, reflecting significant COVID-19 impacts on operations, including phased resort reopenings and workforce adjustments, with no material impact from ASU 2019-12 adoption - The unaudited condensed consolidated financial statements are prepared in conformity with U.S. GAAP and include all entities with a controlling financial interest[16][17] - The COVID-19 pandemic significantly impacted the hospitality industry, leading to temporary closures of resorts and sales centers in early 2020. By March 31, 2021, approximately 80% of resorts and nearly all sales centers had reopened, though many operate with capacity constraints and safety measures[19] - In response to COVID-19, the company amended financial covenant ratios, furloughed team members, and implemented a workforce reduction plan impacting approximately 1,500 team members in 2020, with 1,100 still furloughed as of March 31, 2021[20] - The adoption of Accounting Standards Update 2019-12, Income Taxes (Topic 740), on January 1, 2021, did not have a material impact on the condensed consolidated financial statements[23] Note 3: Revenue from Contracts with Customers Revenue is disaggregated into Real Estate and Financing and Resort Operations and Club Management segments, with total revenues decreasing significantly year-over-year, primarily in the Real Estate and Financing segment, while contract liabilities increased | Segment | Three Months Ended March 31, 2021 (in millions) | Three Months Ended March 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Real Estate and Financing Segment Revenues | $123 | $206 | $(83) | -40.29% | | Resort Operations and Club Management Segment Revenues | $77 | $96 | $(19) | -19.79% | | Contract Liability | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Advanced deposits | $114 | $117 | $(3) | -2.56% | | Deferred sales of VOIs of projects under construction | $201 | $169 | $32 | 18.93% | | Club activation fees, annual dues and other | $120 | $77 | $43 | 55.84% | | Club Bonus Point incentive liability | $41 | $48 | $(7) | -14.58% | - Revenue earned for the three months ended March 31, 2021, that was included in the contract liabilities balance at December 31, 2020, was approximately $35 million[28] | Remaining Transaction Price (as of March 31, 2021) | Amount (in millions) | Recognition Period | Recognition Method | | :--- | :--- | :--- | :--- | | Advanced deposits | $114 | 18 months | Upon customer stays | | Club activation fees | $62 | 7 years | Straight-line basis over average inventory holding period | | Club Bonus Points | $41 | 24 months | Upon redemption | Note 4: Restricted Cash Restricted cash increased to $105 million as of March 31, 2021, from $98 million at December 31, 2020, primarily due to increased escrow deposits on VOI sales | Category | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Escrow deposits on VOI sales | $76 | $69 | $7 | 10.14% | | Reserves related to non-recourse debt | $29 | $29 | $0 | 0.00% | | Total Restricted Cash | $105 | $98 | $7 | 7.14% | Note 5: Accounts Receivable Accounts receivable, net, decreased to $111 million as of March 31, 2021, from $119 million at December 31, 2020, with the allowance for fee-for-service commissions decreasing due to write-offs | Category | March 31, 2021 (in millions) | | :--- | :--- | | Fee-for-service commissions | $22 | | Real estate and financing | $12 | | Resort and club operations | $27 | | Tax receivables | $41 | | Other receivables | $9 | | Total Accounts Receivable, net | $111 | | Allowance for Fee-for-Service Commissions | Amount (in millions) | | :--- | :--- | | Balance as of December 31, 2020 | $18 | | Current period provision for expected credit losses | $1 | | Write-offs charged against the allowance | $(5) | | Balance as of March 31, 2021 | $14 | Note 6: Timeshare Financing Receivables Timeshare financing receivables, net, decreased to $940 million as of March 31, 2021, from $974 million at December 31, 2020, with a 12.6% weighted-average interest rate and a $16 million adjustment for expected defaults | Metric | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Timeshare financing receivables, net | $940 | $974 | $(34) | -3.49% | | Gross Timeshare financing receivables | $1,147 | $1,185 | $(38) | -3.21% | | Allowance for financing receivables losses | $(207) | $(211) | $4 | -1.89% | - For the three months ended March 31, 2021, an adjustment of $16 million was recorded to the estimate of variable consideration for expected defaults, following an incremental $23 million revenue reduction in March 2020 due to COVID-19 impacts[41] - As of March 31, 2021, timeshare financing receivables had interest rates ranging from 1.5% to 19.5%, a weighted-average interest rate of 12.6%, and a weighted-average remaining term of 7.4 years, with maturities through 2036[44] | FICO Score | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | 700+ | $685 | $711 | $(26) | -3.66% | | 600-699 | $256 | $266 | $(10) | -3.76% | | <600 | $35 | $36 | $(1) | -2.78% | | No score | $171 | $172 | $(1) | -0.58% | | Total Gross Timeshare Financing Receivables | $1,147 | $1,185 | $(38) | -3.21% | | Allowance for Financing Receivables Losses | March 31, 2021 (in millions) | March 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Balance as of December 31, 2020/2019 | $211 | $184 | $27 | 14.67% | | Provision for financing receivables losses | $16 | $37 | $(21) | -56.76% | | Write-offs | $(20) | $(9) | $(11) | 122.22% | | Balance as of March 31, 2021/2020 | $207 | $212 | $(5) | -2.36% | Note 7: Inventory Inventory increased to $720 million as of March 31, 2021, from $702 million at December 31, 2020, mainly due to an increase in completed unsold VOIs and construction in process | Category | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Completed unsold VOIs | $526 | $515 | $11 | 2.14% | | Construction in process | $193 | $186 | $7 | 3.76% | | Land, infrastructure and other | $1 | $1 | $0 | 0.00% | | Total Inventory | $720 | $702 | $18 | 2.56% | | Cost of Sales Adjustments | Three Months Ended March 31, 2021 (in millions) | Three Months Ended March 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Cost of sales true-up | $6 | $4 | $2 | 50.00% | | Cost of VOI sales related to fee-for-service upgrades | $1 | $5 | $(4) | -80.00% | Note 8: Property and Equipment Property and equipment, net, remained stable at $501 million as of March 31, 2021, with an increase in construction in progress offset by accumulated depreciation | Category | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Land | $108 | $109 | $(1) | -0.92% | | Building and leasehold improvements | $250 | $250 | $0 | 0.00% | | Furniture and equipment | $62 | $65 | $(3) | -4.62% | | Construction in progress | $216 | $208 | $8 | 3.85% | | Accumulated depreciation | $(135) | $(131) | $(4) | 3.05% | | Total Property and Equipment, net | $501 | $501 | $0 | 0.00% | Note 9: Consolidated Variable Interest Entities The company consolidated four VIEs as of March 31, 2021, which issued non-recourse debt backed by timeshare financing receivables, with their assets and liabilities decreasing slightly from December 31, 2020 - Hilton Grand Vacations consolidated 4 VIEs as of March 31, 2021, for which it is the primary beneficiary, having the power to direct activities and absorb losses[54] | VIE Financials | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Restricted cash | $29 | $28 | $1 | 3.57% | | Timeshare financing receivables, net | $676 | $742 | $(66) | -8.90% | | Non-recourse debt | $698 | $766 | $(68) | -8.88% | Note 10: Investments in Unconsolidated Affiliates The company holds 25% and 50% ownership interests in two unconsolidated VIEs, with maximum loss exposure limited to their $53 million carrying amount as of March 31, 2021, and related receivables - Hilton Grand Vacations holds 25% and 50% ownership interests in BRE Ace LLC and 1776 Holding LLC, respectively, which are unconsolidated VIEs[57] - The maximum exposure to loss from these unconsolidated affiliates is primarily limited to the carrying amount of investments ($53 million as of March 31, 2021) and receivables for commission and other fees[58] | Metric | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Investments in unconsolidated affiliates | $53 | $51 | $2 | 3.92% | | Aggregated debt balances of unconsolidated affiliates | $442 | $454 | $(12) | -2.64% | Note 11: Debt & Non-recourse Debt Total debt, including non-recourse debt, decreased slightly to $1,868 million as of March 31, 2021, with the company amending its Credit Agreement for the Diamond acquisition and hedging $175 million of the Term Loan with interest rate swaps | Debt Category | March 31, 2021 (in millions) | December 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Debt, net | $1,156 | $1,159 | $(3) | -0.26% | | Non-recourse debt, net | $698 | $766 | $(68) | -8.88% | | Total Debt (gross) | $1,868 | $1,939 | $(71) | -3.66% | - In March 2021, the Credit Agreement was amended to permit the proposed acquisition of Dakota Holdings, Inc. ('Diamond'), incurring $1 million in debt issuance costs. A revolving credit facility commitment for the Merger also incurred $2 million in debt issuance costs[61] - Approximately $175 million of the Term Loan is subject to interest rate swaps, converting LIBOR-based variable rates to an average fixed annual rate of 0.53% through November 2023[63] - As of March 31, 2021, the company had $450 million remaining borrowing capacity under its non-recourse Timeshare Facility[68] | Debt Maturity (in millions) | 2021 (remaining) | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $10 | $11 | $818 | $300 | $0 | $23 | $1,162 | | Non-recourse Debt | $104 | $174 | $138 | $115 | $56 | $119 | $706 | | Total | $114 | $185 | $956 | $415 | $56 | $142 | $1,868 | Note 12: Fair Value Measurements Fair values of timeshare financing receivables, net, and debt, net, decreased from December 31, 2020, to March 31, 2021, estimated using discounted cash flow models and risk-adjusted rates | Financial Instrument | March 31, 2021 (Carrying Amount, in millions) | March 31, 2021 (Fair Value, in millions) | December 31, 2020 (Carrying Amount, in millions) | December 31, 2020 (Fair Value, in millions) | | :--- | :--- | :--- | :--- | :--- | | Timeshare financing receivables, net | $940 | $1,209 | $974 | $1,248 | | Debt, net | $1,156 | $1,186 | $1,159 | $1,186 | | Non-recourse debt, net | $698 | $657 | $766 | $732 | - Fair values of timeshare financing receivables are determined using a discounted cash flow model incorporating default rates, coupon rates, credit quality, and loan terms[77] - Fair values of Level 1 debt are based on active debt market prices, while Level 3 debt and non-recourse debt are based on projected future cash flows discounted at risk-adjusted rates[77] | Non-recurring Fair Value Measurements (as of March 31, 2021, in millions) | Level 2 | Level 3 | | :--- | :--- | :--- | | Land held for sale | $47 | — | | Infrastructure held for sale | — | $5 | Note 13: Leases The company leases sales centers, office space, and equipment under operating leases, with rent expense decreasing to $4 million in Q1 2021 and a weighted-average remaining lease term of 5.3 years | Metric | Three Months Ended March 31, 2021 (in millions) | Three Months Ended March 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Rent expense for all operating leases | $4 | $5 | $(1) | -20.00% | | Operating cash outflows from operating leases | $5 | $5 | $0 | 0.00% | | Lease Metric | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Weighted-average remaining lease term of operating leases (in years) | 5.3 | 5.4 | | Weighted-average discount rate of operating leases | 4.98% | 4.95% | | Future Minimum Lease Payments (Operating Leases, in millions) | 2021 (remaining) | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Total future minimum lease payments | $12 | $13 | $13 | $11 | $11 | $11 | $71 | | Less: imputed interest | $(8) | | | | | | $(8) | | Present value of lease liabilities | $63 | | | | | | $63 | Note 14: Income Taxes The effective tax rate for Q1 2021 was approximately 46%, significantly higher than 11% in the prior-year period, primarily due to changes in earnings mix and a non-recurring discrete item, with no material impact from the American Rescue Plan Act | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | | :--- | :--- | :--- | | Effective tax rate | 46% | 11% | - The higher effective tax rate in Q1 2021 is primarily due to a change in the earnings mix of worldwide income and the impact of a non-recurring discrete item[85] - The American Rescue Plan Act of 2021, enacted March 11, 2021, had no material effect on the March 31, 2021 tax rate or the estimated effective tax rate for the year[86] Note 15: Share-Based Compensation Share-based compensation expense was $4 million for Q1 2021, compared to a $2 million credit in the prior-year period, with $49 million in unrecognized compensation costs expected over 1.6 years | Metric | Three Months Ended March 31, 2021 (in millions) | Three Months Ended March 31, 2020 (in millions) | Change | | :--- | :--- | :--- | :--- | | Share-based compensation expense | $4 | $(2) | $6 | - Unrecognized compensation costs for unvested awards totaled approximately $49 million as of March 31, 2021, expected to be recognized over a weighted average period of 1.6 years[87] - During Q1 2021, the company issued 560,604 Service RSUs (grant date fair value $38.22), 542,793 Options (exercise price $38.22, weighted-average fair value $13.30), and 124,711 Performance RSUs (grant date fair value $38.22)[89][90][91] Note 16: (Loss) Earnings Per Share Basic and diluted EPS were $(0.08) for Q1 2021, reflecting a $7 million net loss, a significant decrease from $0.09 EPS and $8 million net income in the prior-year period | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Net (loss) income (in millions) | $(7) | $8 | $(15) | | Weighted average shares outstanding (in millions) | 85 | 86 | $(1) | | Basic EPS | $(0.08) | $0.09 | $(0.17) | | Diluted EPS | $(0.08) | $0.09 | $(0.17) | - Potentially dilutive shares of 943,373 were excluded from diluted EPS calculation for Q1 2021 due to the net loss position[96] Note 17: Related Party Transactions The company reported $2 million in equity in earnings from unconsolidated affiliates and $13 million in commissions from related parties for Q1 2021, both decreasing from the prior year | Metric | Three Months Ended March 31, 2021 (in millions) | Three Months Ended March 31, 2020 (in millions) | Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Equity in earnings from unconsolidated affiliates | $2 | $3 | $(1) | -33.33% | | Commissions and other fees | $13 | $23 | $(10) | -43.48% | - Outstanding receivables related to fee-for-service agreements with related parties decreased from $7 million at December 31, 2020, to $5 million at March 31, 2021[99] Note 18: Business Segments Total segment revenues decreased by 34.5% year-over-year, primarily in Real Estate Sales and Financing, while total Adjusted EBITDA increased by 27.3% to $42 million for Q1 2021 | Segment Revenues (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Real estate sales and financing | $123 | $206 | $(83) | -40.3% | | Resort operations and club management | $80 | $104 | $(24) | -23.1% | | Total segment revenues | $203 | $310 | $(107) | -34.5% | | Total revenues | $235 | $351 | $(116) | -33.0% | | Adjusted EBITDA (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Real estate sales and financing | $27 | $15 | $12 | 80.0% | | Resort operations and club management | $42 | $55 | $(13) | -23.6% | | Segment Adjusted EBITDA | $69 | $70 | $(1) | -1.4% | | Total Adjusted EBITDA | $42 | $33 | $9 | 27.3% | - Adjusted EBITDA is a key performance metric, excluding items like acquisition costs, restructuring, and non-cash charges. For Q1 2021, it included $15 million in acquisition costs for Diamond, $4 million for restructuring, and $3 million for other one-time charges[100][105] Note 19: Commitments and Contingencies As of March 31, 2021, inventory purchase commitments totaled $453 million over 10 years, with $226 million due in the remainder of 2021, and management believes litigation will not materially affect financial statements | Commitments (in millions) | 2021 (remaining) | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Inventory purchase obligations | $226 | $114 | $58 | $40 | $3 | $12 | $453 | | Other commitments | $9 | $2 | $0 | $0 | $0 | $0 | $11 | | Total | $235 | $116 | $58 | $40 | $3 | $12 | $464 | - Management believes that possible losses from unfavorable outcomes in legal matters are not reasonably estimable but are not expected to materially affect the unaudited condensed consolidated financial statements[107] Note 20: Planned Acquisition Hilton Grand Vacations agreed to acquire Dakota Holdings, Inc. ('Diamond') for approximately $1.4 billion in a stock transaction, expected to close in summer 2021, with existing HGV shareholders owning 72% of the combined company - Hilton Grand Vacations Inc. agreed to acquire Dakota Holdings, Inc. ('Diamond') in a stock transaction with an equity fair value of approximately $1.4 billion as of March 10, 2021[109] - Upon closing, existing HGV shareholders are expected to own approximately 72% of the combined company, and Apollo (controlling Diamond) is expected to own approximately 28%[109] - The transaction is subject to customary conditions, including shareholder and regulatory approvals, and is anticipated to close during the summer of 2021[109][110] - The acquisition will be financed through a combination of cash on hand, assumption of debt, and incremental debt financing[110] Note 21: Subsequent Events No significant subsequent events occurred between March 31, 2021, and April 29, 2021, requiring adjustment or disclosure in the unaudited financial statements - No significant subsequent events occurred between March 31, 2021, and April 29, 2021, that required adjustment or disclosure in the unaudited financial statements[110] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial condition and results for Q1 2021, highlighting COVID-19 impact, the Diamond acquisition, and liquidity strategies Cautionary Note Regarding Forward-Looking Statements The report contains forward-looking statements subject to known and unknown risks, including COVID-19 impacts, the proposed Diamond Merger, and inherent business risks, which could cause actual results to differ materially - Forward-looking statements in the report are based on management's expectations and involve known and unknown risks and uncertainties[113][114] - Factors that could cause actual results to differ materially include the impact of the COVID-19 pandemic, risks related to the proposed Merger with Diamond (e.g., termination, integration difficulties, increased indebtedness), and inherent business risks in the timeshare and hospitality industries[114] Terms Used in this Quarterly Report on Form 10-Q This section defines key operational metrics like 'Contract Sales' and 'VPG,' and non-GAAP financial measures such as 'EBITDA' and 'Adjusted EBITDA,' used for performance evaluation - Key terms defined include 'Developed' (VOI inventory from HGV projects), 'Fee for service' (VOI inventory sold and managed for third parties), and 'Just-in-time' (VOI inventory acquired to correlate with sales)[118][119] - Non-GAAP financial measures like EBITDA and Adjusted EBITDA are used to evaluate operating performance, with specific adjustments for items such as acquisition costs and share-based compensation[121][141] - Operational metrics include 'contract sales' (total VOI products under purchase agreements), 'sales revenue' (VOI sales, commissions, brand fees), 'real estate profit' (sales revenue less costs), 'tour flow' (sales presentations), and 'VPG' (sales per tour)[138][139] Overview Hilton Grand Vacations operates 62 properties with 328,000 Club members, with its business significantly and adversely impacted by the COVID-19 pandemic - Hilton Grand Vacations operates 62 properties with 499,616 VOIs and serves approximately 328,000 Club members as of March 31, 2021[124] - The business has been and continues to be adversely impacted by the COVID-19 pandemic, affecting the global economy and leading to government-mandated business closures[124] Real Estate Sales and Financing This segment markets and sells VOIs from developed, fee-for-service, and just-in-time inventory, with fee-for-service accounting for 40% of Q1 2021 contract sales and a 65% financing propensity for new loans - The company's inventory strategy focuses on an optimal mix of developed properties, fee-for-service, and just-in-time agreements to manage capital investments and market risks[126] | Inventory Source | Percentage of Contract Sales (Q1 2021) | | :--- | :--- | | Fee-for-service | 40% | | Just-in-time | 28% | | Developed | 32% | - The estimated contract sales value for currently available and future inventory is approximately $10 billion at current pricing, with capital-efficient arrangements (fee-for-service and just-in-time) representing about 52% of this supply[128][129] - For Q1 2021, 66% of contract sales were to existing owners, and the financing propensity was 65% (up from 63% in Q1 2020). The weighted-average FICO score for new U.S. and Canadian loans was 735[130][131][132] Resort Operations and Club Management This segment manages timeshare resorts for HOAs, operates points-based vacation clubs, and generates rental and ancillary revenues, earning cost-plus management fees typically 10-15% of operating costs - The company manages timeshare resorts for HOAs, earning cost-plus management fees, typically 10% to 15% of resort operating costs[135] - The segment manages the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, generating annual membership fees and incremental fees for exchanges[136] - Additional revenue streams include rentals of unsold and exchanged VOI inventory, and ancillary services such as food and beverage, retail, and spa offerings at timeshare properties[137] Key Business and Financial Metrics and Terms Used by Management This section defines key operational metrics like Contract Sales, Real Estate Profit, and VPG, alongside non-GAAP measures such as EBITDA and Adjusted EBITDA, used for performance evaluation despite their analytical limitations - Contract sales, a key operating measure, represents total VOI products under purchase agreements with at least a 10% down payment, reflecting sales pace and used to manage sales organization performance[138] - Real estate profit measures the efficiency of sales and marketing spending and inventory costs, calculated as sales revenue less cost of VOI sales and net sales and marketing costs[139] - VPG (Volume per Guest) measures sales attributable to tours, calculated by dividing contract sales (excluding telesales) by tour flow, indicating sales process effectiveness[139] - EBITDA and Adjusted EBITDA are non-GAAP measures used by management and investors to evaluate operating performance and compare results across the industry, but they have limitations as analytical tools and should not be considered substitutes for GAAP measures[140][141][143][144] Recent Events Related to the COVID-19 Pandemic and Impact on Our Results of Operations, Financial Condition, and Business During the Three Months Ended March 31, 2021. The COVID-19 pandemic continued to materially impact revenues and net loss in Q1 2021 due to reduced travel demand and capacity constraints, with 80% of resorts and nearly all sales centers reopened under safety measures - The COVID-19 pandemic continued to have a materially adverse impact on revenues, net (loss) income, and other operating results during Q1 2021, primarily due to reduced travel demand[147] - As of March 31, 2021, approximately 80% of resorts and nearly all sales centers are open, but many operate with capacity constraints and safety measures, impacting consumer demand[149] - The company implemented HGV Enhanced Care Guidelines for cleaning and safety protocols in response to the pandemic[149] - Significant uncertainty remains regarding the continuing degree of impact and duration of the pandemic on the company's financial and operational results[150] Planned Acquisition of Diamond Hilton Grand Vacations agreed to acquire Dakota Holdings, Inc. ('Diamond') for approximately $1.4 billion in a stock transaction, expected to close in summer 2021, with existing HGV shareholders owning 72% of the combined company - Hilton Grand Vacations Inc. entered into an agreement on March 10, 2021, to acquire Dakota Holdings, Inc. ('Diamond') for approximately $1.4 billion in a stock transaction[151] - Upon closing, existing HGV shareholders are projected to own 72% of the combined company, and Apollo Global Management Inc. (Diamond's controller) will own 28%[151] - The transaction is subject to shareholder and regulatory approvals and is anticipated to close during the summer of 2021, financed by cash on hand, assumed debt, and incremental debt financing[151][152] Results of Operations Total revenues decreased by 33.0% to $235 million in Q1 2021 due to COVID-19, yet Adjusted EBITDA increased by 27.3% to $42 million, driven by Real Estate Sales and Financing segment performance | Metric (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Total Revenues | $235 | $351 | $(116) | -33.0% | | Net (loss) income | $(7) | $8 | $(15) | NM | | Adjusted EBITDA | $42 | $33 | $9 | 27.3% | | Segment Adjusted EBITDA (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Real estate sales and financing | $27 | $15 | $12 | NM | | Resort operations and club management | $42 | $55 | $(13) | -23.6% | Segment Results Segment revenues decreased by 34.5% year-over-year, with Real Estate Sales and Financing revenues down 40.3% and Resort Operations down 23.1%, while total Adjusted EBITDA increased by 27.3% to $42 million | Segment Revenues (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Real estate sales and financing | $123 | $206 | $(83) | -40.3% | | Resort operations and club management | $80 | $104 | $(24) | -23.1% | | Total segment revenues | $203 | $310 | $(107) | -34.5% | | Adjusted EBITDA (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Real estate sales and financing | $27 | $15 | $12 | NM | | Resort operations and club management | $42 | $55 | $(13) | -23.6% | | Total Adjusted EBITDA | $42 | $33 | $9 | 27.3% | - Adjusted EBITDA for Q1 2021 included $15 million of acquisition costs for Diamond, $4 million for restructuring, and $3 million for other one-time charges and non-cash items[157] Real Estate Sales and Financing Segment This segment's revenues decreased by $83 million (40.3%) in Q1 2021 due to COVID-19, but Adjusted EBITDA increased by $12 million as expense reductions outpaced revenue decline, aided by government assistance - Real estate sales and financing segment revenues decreased by $83 million (40.3%) for Q1 2021, primarily due to decreases in sales revenue and marketing revenue from the COVID-19 pandemic[163] - Real estate sales and financing Adjusted EBITDA increased by $12 million for Q1 2021, driven by a greater decrease in cost of VOI sales and real estate operating expenses compared to the revenue decrease, and aided by $3 million in government assistance[164] Real Estate Contract sales decreased by $105 million (43.0%) in Q1 2021 due to reduced tour flow from the COVID-19 pandemic. Despite this, Real Estate Profit turned positive to $3 million from a $(2) million loss, as expense decreases exceeded revenue declines | Metric | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Contract sales (in millions) | $139 | $244 | $(105) | -43.0% | | Sales of VOIs, net (in millions) | $33 | $56 | $(23) | -41.1% | | Tour flow | 27,948 | 66,965 | (39,017) | -58.3% | | VPG | $4,647 | $3,506 | $1,141 | 32.5% | - Contract sales decreased primarily due to a decrease in tour flow related to the ongoing impact of the COVID-19 pandemic on travel demand[170] | Real Estate Financials (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Sales revenue | $65 | $137 | $(72) | -52.6% | | Cost of VOI sales | $3 | $14 | $(11) | -78.6% | | Sales and marketing expense, net | $59 | $125 | $(66) | -52.8% | | Real estate profit (loss) | $3 | $(2) | $5 | NM | | Real estate profit margin | 4.6% | -1.5% | | | - Real estate profit increased because the decrease in expenses was greater than the decrease in revenue[174] Financing Financing revenue decreased by $7 million (15.9%) in Q1 2021, primarily due to a decrease in the timeshare financing receivables portfolio balance, resulting in a $7 million (22.6%) decrease in financing profit | Financing Metric (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Interest income | $31 | $38 | $(7) | -18.4% | | Other financing revenue | $6 | $6 | $0 | 0.0% | | Financing revenue | $37 | $44 | $(7) | -15.9% | | Financing profit | $24 | $31 | $(7) | -22.6% | | Financing profit margin | 64.9% | 70.5% | | | - Financing revenue decreased primarily due to a decrease in the timeshare financing receivables portfolio balance, partially offset by an increase in the related weighted average interest rate from 12.52% to 12.59%[175] Resort Operations and Club Management Segment This segment's revenues decreased by $24 million (23.1%) in Q1 2021, mainly due to reduced rental and ancillary revenues from COVID-19, leading to a $13 million decrease in Adjusted EBITDA - Resort operations and club management segment revenues decreased $24 million (23.1%) for Q1 2021, primarily due to decreases in rental and ancillary revenues from the COVID-19 pandemic[166] - Resort operations and club management segment Adjusted EBITDA decreased $13 million for Q1 2021, primarily due to decreases in segment margin[167] Resort and Club Management Resort and club management revenues increased by $1 million (2.3%) in Q1 2021, primarily due to higher club management revenue per member, with profit increasing by $5 million (15.6%) due to expense reductions | Metric (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Club management revenue | $27 | $25 | $2 | 8.0% | | Resort management revenue | $18 | $19 | $(1) | -5.3% | | Resort and club management revenues | $45 | $44 | $1 | 2.3% | | Resort and club management profit | $37 | $32 | $5 | 15.6% | | Resort and club management profit margin | 82.2% | 72.7% | | | - Resort and club management profit increased primarily due to a reduction in resort and club management expenses, driven by the ongoing impact of the COVID-19 pandemic and phased reopening of resort operations[178] Rental and Ancillary Services Rental and ancillary services revenues decreased by $20 million (38.5%) in Q1 2021, with profit decreasing by $14 million (93.3%), primarily due to COVID-19's impact on travel demand and operational constraints | Metric (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Rental revenues | $30 | $47 | $(17) | -36.2% | | Ancillary services revenues | $2 | $5 | $(3) | -60.0% | | Rental and ancillary services revenues | $32 | $52 | $(20) | -38.5% | | Rental and ancillary services profit | $1 | $15 | $(14) | -93.3% | | Rental and ancillary services profit margin | 3.1% | 28.8% | | | - The decrease in revenues, expenses, and profit percentage was due to the ongoing impact of the COVID-19 pandemic on travel demand, with approximately 20% of properties still suspended and others operating under capacity constraints[179] Other Operating Expenses General and administrative expenses increased by $15 million (71.4%) in Q1 2021 due to Diamond acquisition costs and Performance RSU expense, while license fee expense decreased by $8 million (36.4%) | Expense (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | General and administrative | $36 | $21 | $15 | 71.4% | | Depreciation and amortization | $11 | $12 | $(1) | -8.3% | | License fee expense | $14 | $22 | $(8) | -36.4% | - The increase in general and administrative expenses is primarily due to consulting and legal expenses related to the Diamond acquisition, partially offset by decreased salaries and wages, and an increase in Performance RSU expense[181] Non-Operating Expenses Non-operating expenses increased in Q1 2021, with interest expense rising by $5 million (50.0%) due to increased debt, and income tax expense shifting to a $6 million benefit from a $1 million expense | Expense (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | Percentage Change | | :--- | :--- | :--- | :--- | | Interest expense | $15 | $10 | $5 | 50.0% | | Equity in (earnings) losses from unconsolidated affiliates | $(2) | $(3) | $1 | -33.3% | | Other loss (gain), net | $1 | $(2) | $3 | NM | | Income tax (benefit) expense | $(6) | $1 | $(7) | NM | - The increase in interest expense is a result of an increase in related debt, while the decrease in income tax expense is due to a decrease in income before taxes combined with an increase in the effective tax rate[182] Liquidity and Capital Resources The company manages liquidity to cover operating expenses, debt, and acquisitions, sourcing from cash, operations, and credit facilities, with $505 million in cash and equivalents as of March 31, 2021 - Cash management objectives include maintaining liquidity, minimizing operational costs, making debt payments, and funding future acquisitions and development projects[183] - Liquidity is primarily financed through cash and cash equivalents, cash from operations, draws on senior secured credit facilities, non-recourse revolving timeshare credit facility, and periodic securitizations[184] - As of March 31, 2021, the company had $505 million in cash and cash equivalents (including $105 million restricted cash), $139 million remaining borrowing capacity under the revolver, and $450 million under the Timeshare Facility[185][191] - The planned acquisition of Diamond will be financed through cash on hand, assumption of debt, and incremental debt financing[191] Overview The company's liquidity strategy maintains financial flexibility amid COVID-19, with 80% of resorts open under constraints, and $453 million in inventory-related purchase commitments over 10 years - The company amended certain financial covenant ratios through Q3 2021 to provide financial flexibility due to the ongoing impact of the COVID-19 pandemic[186] - As of March 31, 2021, approximately 80% of resorts and nearly all sales centers are open, but operate with capacity constraints and safety measures, impacting consumer demand[187] - Inventory-related purchase commitments totaled $453 million over 10 years as of March 31, 2021[188] Sources and Uses of Our Cash Net cash provided by operating activities increased by $9 million to $62 million in Q1 2021, while net cash used in investing activities decreased by $3 million to $5 million, and net cash used in financing activities significantly increased to $78 million | Cash Flow Activity (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $62 | $53 | $9 | | Net cash used in investing activities | $(5) | $(8) | $3 | | Net cash (used in) provided by financing activities | $(78) | $562 | $(640) | Operating Activities Cash flow from operating activities increased by $9 million in Q1 2021, primarily from timeshare financing receivables, while total VOI inventory spending decreased to $23 million from $30 million - The $9 million increase in net cash provided by operating activities for Q1 2021 was primarily due to an increase in proceeds from timeshare financing receivables, partially offset by decreased sources of cash from working capital[191] | VOI Inventory Spending (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :--- | :--- | :--- | :--- | | VOI spending - owned properties | $15 | $17 | $(2) | | VOI spending - fee-for-service upgrades | $2 | $8 | $(6) | | Purchases and development of real estate for future conversion to inventory | $6 | $5 | $1 | | Total VOI inventory spending | $23 | $30 | $(7) | Investing Activities Net cash used in investing activities decreased by $3 million to $5 million in Q1 2021, primarily due to reduced capital expenditures for property and equipment and software capitalization costs | Investing Activity (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Capital expenditures for property and equipment | $(1) | $(3) | $2 | | Software capitalization costs | $(4) | $(5) | $1 | | Net cash used in investing activities | $(5) | $(8) | $3 | - The decrease in net cash used in investing activities was primarily due to a reduction of property and equipment spending[194] Financing Activities Net cash used in financing activities was $78 million in Q1 2021, a significant shift from $562 million provided in Q1 2020, primarily due to the absence of large debt issuances | Financing Activity (in millions) | Three Months Ended March 31, 2021 | Three Months Ended March 31, 2020 | Change | | :--- | :--- | :--- | :--- | | Issuance of debt | $0 | $495 | $(495) | | Issuance of non-recourse debt | $0 | $195 | $(195) | | Repayment of debt | $(2) | $(57) | $55 | | Repayment of non-recourse debt | $(69) | $(58) | $(11) | | Debt issuance costs | $(3) | $0 | $(3) | | Net cash (used in) provided by financing activities | $(78) | $562 | $(640) | - The significant change in net cash from financing activities was primarily due to the absence of debt borrowings (both general and non-recourse) in Q1 2021 compared to Q1 2020, partially offset by fewer repayments[195] Contractual Obligations As of March 31, 2021, total contractual obligations amounted to $2,638 million, with $479 million due within one year, including debt, interest, operating leases, and inventory purchase commitments | Contractual Obligation (in millions) | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $1,162 | $12 | $827 | $300 | $23 | | Non-recourse debt | $706 | $145 | $328 | $151 | $82 | | Interest on debt | $235 | $74 | $119 | $29 | $13 | | Operating leases | $71 | $12 | $26 | $22 | $11 | | Inventory purchase commitments | $453 | $227 | $172 | $43 | $11 | | Other commitments | $11 | $9 | $2 | $0 | $0 | | Total contractual obligations | $2,638 | $479 | $1,474 | $545 | $140 | - Inventory-related purchase commitments totaled $453 million over 10 years, with $227 million expected to be purchased within the next twelve months[197] - The company has commitments from surety providers totaling $367 million as of March 31, 2021, primarily for escrow and construction-related bonds[198] Off -Balance Sheet Arrangements Off-balance sheet arrangements as of March 31, 2021, consisted of $453 million in inventory purchase commitments and $11 million in other commitments, with timing and amounts subject to change - Off-balance sheet arrangements as of March 31, 2021, consisted of $453 million in inventory purchase commitments and $11 million in other commitments[199] Guarantor Financial Information The Obligor group, guaranteeing senior unsecured notes, reported total assets of $2,160 million and total liabilities of $2,037 million as of March 31, 2021, with a net loss of $21 million for Q1 2021 - The company's senior unsecured notes are fully and unconditionally guaranteed, jointly and severally, by Hilton Grand Vacations Inc. and its wholly-owned domestic restricted subsidiaries (the 'Obligor group')[201] - The Notes rank equally with other senior unsecured obligations but are subordinate to secured indebtedness, including senior secured credit facilities and securitized non-recourse debt[202] | Obligor Group Financials (in millions) | March 31, 2021 | December 31, 2020 | | :--- | :--- | :--- | | Total assets | $2,160 | $2,120 | | Total liabilities | $2,037 | $1,992 | | Net loss (Q1 2021) | $(21) | | Subsequent Events No significant subsequent events were identified between March 31, 2021, and April 29, 2021, that required adjustment or disclosure - No significant subsequent events were identified between March 31, 2021, and April 29, 2021, that required adjustment or disclosure[205] Critical Accounting Policies and Estimates The preparation of financial statements requires management to make estimates and assumptions, with critical accounting policies previously disclosed in the 2020 Annual Report on Form 10-K - The preparation of financial statements requires management to make estimates and assumptions that affect reported amounts and disclosures[206] - Critical accounting policies and estimates, involving complex judgment, were previously disclosed in the Annual Report on Form 10-K for the year ended December 31, 2020[206] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate and currency exchange rate changes, managed through financing alternatives and interest rate swaps, with no material change from prior disclosures - The company is exposed to market risk from changes in interest rates and currency exchange rates, with no material change from prior disclosures[207] Interest Rate Risk The company's primary interest rate risk is on variable-rate debt, managed by interest rate swaps converting $175 million of the Term Loan to a fixed 0.53% rate through November 2023 - The company's primary interest rate risk exposure is on its variable-rate debt (term loans, Revolver, Timeshare Facility), which is based on one-month LIBOR[208] - Interest rate swaps are used to manage variable-rate debt risk, converting approximately $175 million of the Term Loan to a fixed annual rate of 0.53% through November 2023[208][210] | Financial Instrument (as of March 31, 2021, in millions) | Weighted Average Interest Rate | 2021 | 2022 | 2023 | 2024 | 2025 | Thereafter | Total | Fair Value | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Fixed-rate securitized timeshare financing receivables | 12.271% | $70 | $95 | $98 | $100 | $98 | $269 | $730 | $770 | | Fixed-rate unsecuritized timeshare financing receivables | 13.131% | $28 | $37 | $40 | $42 | $44 | $226 | $417 | $439 | | Fixed-rate debt | 4.133% | $106 | $175 | $139 | $415 | $56 | $142 | $1,033 | $1,005 | | Variable-rate debt | 3.750% | $8 | $10 | $817 | $0 | $0 | $0 | $835 | $838 | Foreign Currency Exchange Rate Risk Principal foreign currency exposure arises from Japanese yen and Mexican peso denominated receivables, with a 10% change in JPY/USD impacting gross timeshare financing receivables by less than $1.5 million - Principal foreign currency exposure results from timeshare financing receivables denominated in Japanese yen and VAT receivables in Mexican pesos[213] - A 10% increase in the Japanese yen to U.S. dollar exchange rate would change gross timeshare financing receivables by less than $1.5 million[213] - A 10% change in the Mexican peso to U.S. dollar exchange rate would change VAT receivables by approximately $1 million[213] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2021, with no material changes in internal control over financial reporting, despite ongoing assessment due to remote work - Management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of March 31, 2021, providing reasonable assurance for timely and accurate financial reporting[215] - No material changes in internal control over financial reporting occurred during the three months ended March 31, 2021[216] - The company continues to assess the adequacy of disclosure controls and internal controls over financial reporting, particularly in light of remote working conditions due to the COVID-19 pandemic[215][216] PART II - OTHER INFORMATION This part covers legal proceedings, updated risk factors, and other required disclosures for the period Item 1. Legal Proceedings The company is involved in various litigation, but management believes the ultimate resolution of all pending or threatened claims as of March 31, 2021, will not materially affect the financial statements - The company is involved in litigation, including claims for substantial sums, arising from the normal course of business[218] - Management believes that the ultimate resolution of all pending or threatened claims as of March 31, 2021, will not materially affect the unaudited condensed consolidated financial statements[218] Item 1A. Risk Factors This section updates risk factors, focusing on new risks from the planned Diamond acquisition, including merger uncertainties, integration challenges, increased debt, and brand reputation impacts - The risk factors update and supplement those previously disclosed in the 2020 Form 10-K, focusing on the current environment and the COVID-19 pandemic's indirect and direct effects[219][220] - New risks are primarily related to the planned acquisition of Diamond, including uncertainties during the pending merger, integration challenges, increased indebtedness, and potential impacts on brand reputation[224][236][239][242] Risks Relating to the Merger Risks related to the pending Diamond Merger include unadjusted exchange ratios, potential disruptions to relationships, diversion of management's attention, and adverse impacts from failure to complete or closing conditions - The exchange ratio for the Merger is pre-determined and will not be adjusted for changes in HGV's stock price, leading to uncertainty in the value Diamond stockholders will receive[221][222] - Uncertainty during the pending Merger may disrupt relationships with employees, suppliers, vendors, and customers, and divert management's attention from day-to-day operations[224][226] - Failure to complete the Merger could adversely affect HGV's business, financial results, and stock price, potentially incurring termination fees and costs[229][230] - The Merger is subject to various closing conditions, including shareholder and regulatory approvals, which may impose adverse conditions or cause delays, reducing anticipated benefits[231][232] Risks if the Merger is Completed If the Merger is completed, risks include unsuccessful integration, loss of employees, increased indebtedness, dependence on brand reputation, and potential harm from increased maintenance fees - Successful integration of HGV and Diamond is uncertain and could take longer than anticipated, potentially leading to loss of valuable employees, disruption of businesses, and failure to achieve anticipated operating efficiencies[236][237] - The Merger will significantly increase HGV's indebtedness, requiring a larger portion of cash flow for debt service, reducing funds for strategic initiatives, and limiting financial flexibility[239][240] - The combined company's business will depend on the quality and reputation of the Hilton Vacation Club brand (rebranded Diamond properties), and any deterioration could adversely affect market share and financial results[242] - Increased maintenance fees at HGV or Diamond resorts could make products less desirable, negatively impacting sales and potentially increasing defaults on vacation ownership notes receivable[244] - Substantial non-recurring transaction costs will be incurred, and there is no assurance that expected cost savings and efficiencies will offset these costs in the near term or at all[246] - HGV stockholders will have a reduced ownership and voting interest (approximately 72%) in the combined company, exercising less influence over management[247] Risks Related to Diamond's Business Diamond's business is significantly impacted by COVID-19, exposing it to debt covenant breaches, international operation risks, regulatory compliance issues for its trust-based system, and disruptions from third-party exit companies - The COVID-19 pandemic has significantly impacted Diamond's business, leading to temporary closures, reduced capacity, and potential breaches of debt covenants if adverse impacts persist[252][253][254] - Diamond's international operations (Mexico, Canada, UK, EU) expose it to additional risks, including compliance with local regulations, anti-corruption laws, economic conditions, and foreign currency fluctuations[255] - Diamond's trust-based timeshare system (Diamond Collections) is subject to regulatory requirements, and non-compliance could materially adversely affect the developer, trustee, and member association[259][260] - Increased activity by third-party exit companies targeting Diamond owners could disrupt Diamond's business, affect cash flow from loan collections, and adversely impact HGV's integration plans[261] Risks Related to Our Relationship with Hilton The company's future depends on its license agreement with Hilton, with risks includ