Hilton Grand Vacations (HGV) - 2021 Q3 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements, reflecting the significant impact of the Diamond Resorts acquisition on assets, liabilities, revenues, and expenses Condensed Consolidated Balance Sheets The balance sheet reflects a significant increase in total assets to $8.1 billion and liabilities to $6.2 billion due to the Diamond acquisition Condensed Consolidated Balance Sheet Highlights (in millions) | Account | Sep 30, 2021 (unaudited) | Dec 31, 2020 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $334 | $428 | | Timeshare financing receivables, net | $1,767 | $974 | | Inventory | $1,461 | $702 | | Goodwill | $820 | $0 | | Intangible assets, net | $1,953 | $81 | | Total Assets | $8,097 | $3,134 | | Liabilities & Equity | | | | Debt, net | $2,929 | $1,159 | | Non-recourse debt, net | $1,290 | $766 | | Total Liabilities | $6,203 | $2,760 | | Total Equity | $1,894 | $374 | Condensed Consolidated Statements of Operations Total revenues surged to $928 million in Q3 2021, resulting in a $99 million net income, driven by the Diamond acquisition and COVID-19 recovery Condensed Consolidated Statements of Operations Highlights (in millions, except per share data) | Metric | Q3 2021 | Q3 2020 | YTD 2021 | YTD 2020 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $928 | $208 | $1,497 | $682 | | Acquisition and integration-related expense | $54 | $0 | $83 | $0 | | Net Income (Loss) | $99 | $(7) | $101 | $(47) | | Diluted EPS | $0.90 | $(0.08) | $1.07 | $(0.55) | Condensed Consolidated Statements of Cash Flows Operating cash flow decreased to $36 million, while investing activities used $1.61 billion and financing provided $1.61 billion, primarily for the Diamond acquisition Condensed Consolidated Statements of Cash Flows Highlights (Nine Months Ended Sep 30, in millions) | Activity | 2021 | 2020 | | :--- | :--- | :--- | | Net cash provided by operating activities | $36 | $86 | | Net cash used in investing activities | $(1,610) | $(24) | | Net cash provided by financing activities | $1,612 | $503 | | Net increase in cash, cash equivalents and restricted cash | $38 | $565 | - The acquisition of Diamond was a non-cash transaction in part, with $1.381 billion in stock issued[11][12] - The cash portion of investing activities reflects the net cash paid for the acquisition[11][12] Notes to Unaudited Condensed Consolidated Financial Statements Notes detail accounting policies and financial results, including the Diamond acquisition's impact on financial structure, goodwill, and segment reporting - The acquisition of Diamond Holdings, Inc. was completed on August 2, 2021[17] - HGV shareholders own approximately 72% of the combined company, with former Diamond owners holding 28%[17] - As of September 30, 2021, the company had 154 properties, of which 92 were from the Legacy-Diamond portfolio[16][20] - The financial statements include Diamond's results of operations beginning on August 2, 2021[20] Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the financial condition and results of operations, highlighting the transformative impact of the Diamond acquisition and the company's return to profitability Overview The company, a global timeshare operator, significantly expanded its scale and resort network through the Diamond acquisition on August 2, 2021 - On August 2, 2021, HGV completed the acquisition of Diamond, with pre-existing HGV shareholders owning approximately 72% and former Diamond owners owning approximately 28% of the combined company[202][203] - The acquisition added 92 Legacy-Diamond properties to HGV's portfolio, bringing the total to 154 properties as of September 30, 2021[207] - New financing arrangements to fund the acquisition included a $1.3 billion Term Loan B, $850 million in 2029 Senior Notes, and $500 million in 2031 Senior Notes, with proceeds used to repay existing debt of both HGV and Diamond[205] Results of Operations Q3 and YTD 2021 results show dramatic improvement, with total revenues reaching $928 million and Adjusted EBITDA $340 million, driven by the Diamond acquisition and pandemic recovery Segment Revenue and Adjusted EBITDA (Q3 2021 vs Q3 2020, in millions) | Metric | Q3 2021 | Q3 2020 | Change | Change due to Legacy-Diamond | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $928 | $208 | $720 | $245 | | Real estate sales and financing | $659 | $116 | $543 | $127 | | Resort operations and club management | $216 | $61 | $155 | $102 | | Adjusted EBITDA | $340 | $19 | $321 | $89 | - Contract sales for Q3 2021 were $433 million, an increase of $316 million from Q3 2020, with Legacy-Diamond contributing $143 million[249][251] - Net recognition of revenue from VOIs under construction was $241 million in Q3 2021, compared to a net deferral of $13 million in Q3 2020, significantly boosting reported Sales of VOIs[242] Liquidity and Capital Resources The Diamond acquisition significantly reshaped liquidity, with $564 million in cash and $2.65 billion in new debt, ensuring adequate funding for operations - As of September 30, 2021, the company had total cash and cash equivalents of $564 million, including $230 million of restricted cash[274] - The company has $499 million of remaining borrowing capacity under its revolver facility and $629 million under its timeshare and conduit facilities[274] Contractual Obligations as of September 30, 2021 (in millions) | Obligation | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $2,984 | $22 | $14 | $314 | $2,634 | | Non-recourse debt | $1,297 | $270 | $320 | $119 | $588 | | Inventory purchase commitments | $331 | $80 | $199 | $43 | $9 | | Total | $6,205 | $575 | $756 | $668 | $4,206 | Critical Accounting Policies and Estimates New critical accounting policies, including Business Combinations, Goodwill impairment, and Purchased Credit Deteriorated assets, are highlighted post-Diamond acquisition - The company accounts for business combinations using the acquisition method, allocating the purchase price to tangible and intangible assets and liabilities at estimated fair values[301] - Goodwill is not amortized but is evaluated for impairment at least annually or when triggering events occur[302] - Acquired financial assets with more-than-insignificant credit deterioration since origination are classified as Purchased Credit Deteriorated (PCD) assets and are recorded at fair value, then grossed-up by an initial allowance for credit losses[303][304] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate and foreign currency fluctuations, primarily affecting variable-rate debt and timeshare receivables - The company is exposed to interest rate risk on its variable-rate debt, including term loans and the Revolver, and uses interest rate swaps to mitigate this risk[308] - Foreign currency exposure primarily comes from timeshare financing receivables denominated in Japanese yen and Canadian dollars, where a 10% change in the JPY/USD exchange rate would impact gross receivables by approximately $2 million[313] Financial Instruments Materially Affected by Interest Rate Risk (as of Sep 30, 2021, in millions) | Instrument Type | Weighted Avg. Rate | Total Principal | Fair Value | | :--- | :--- | :--- | :--- | | Fixed-rate securitized timeshare receivables | 13.780% | $1,234 | $1,191 | | Fixed-rate unsecuritized timeshare receivables | 14.740% | $1,171 | $991 | | Fixed-rate debt | 4.098% | $3,871 | $3,937 | | Variable-rate debt | 3.226% | $410 | $405 | Controls and Procedures Management concluded disclosure controls were effective, with ongoing assessment and integration of Diamond's internal controls over financial reporting - Management concluded that disclosure controls and procedures were effective as of the end of the reporting period[315] - The company is currently in the process of assessing and integrating the internal controls over financial reporting of the newly acquired Diamond business[316] PART II - OTHER INFORMATION Legal Proceedings The company has accrued $25 million for legal contingencies, primarily from pre-acquisition Diamond matters, with no material impact expected - The company has accrued approximately $25 million for legal contingencies as of September 30, 2021[183] - A substantial portion of the accrued legal liabilities relates to matters that existed at Diamond as of the acquisition date[183] - Management does not expect the ultimate resolution of pending claims to have a material effect on the company's financial condition or results of operations[318] Risk Factors This section details significant new and magnified risks post-Diamond acquisition, including integration challenges, increased indebtedness, and operational complexities Integration and Synergy Risks Significant risks exist in integrating the Diamond business, including potential delays, loss of employees, and failure to realize anticipated synergies and cost savings - Successful integration of Diamond is subject to significant challenges, including potential delays, difficulties, loss of employees, and disruption of business processes[321] - Anticipated cost savings, synergies, and other benefits from the acquisition may not be realized, which could adversely affect financial results[326] - The company may incur substantial and unexpected costs and liabilities related to the integration and Diamond's legacy business[327] Financial and Operational Risks Increased indebtedness from the acquisition heightens financial risk and reduces flexibility, while magnifying operational complexities, especially in international markets - The company significantly increased its indebtedness to finance the acquisition, which could adversely affect business flexibility and the ability to meet payment obligations[328] - The acquisition magnifies general operational risks due to the substantial size and complexity of the combined business[332] - The acquired Diamond business operates in several non-US jurisdictions, exposing the company to new risks related to international operations, including compliance with local laws and currency fluctuations[340][342] Brand, Licensing, and Owner-Related Risks Brand reputation, compliance with the Hilton license agreement, and managing owner satisfaction and the Diamond Collections trust system pose significant risks - The business depends on the reputation of its brands, and the A&R Hilton License Agreement is critical, with its termination materially harming the business[333][349] - The company must obtain Hilton's consent to convert Diamond properties to Hilton brands and comply with "Separate Operations" provisions, which may be costly and limit synergies[350][352] - The company faces risks from potential owner dissatisfaction, increased third-party exit company activity targeting the larger owner base, and complexities of the Diamond Collections trust system[345][346][348] Unregistered Sales of Equity Securities and Use of Proceeds No unregistered sales of equity securities or use of proceeds were reported during the period - None[354] Defaults Upon Senior Securities No defaults upon senior securities were reported during the period - None[355] Mine Safety Disclosures This item is not applicable to the company - Not applicable[356] Other Information No other information was reported for the period - None[357] Exhibits This section lists exhibits filed with Form 10-Q, including Diamond acquisition agreements, credit facilities, and required certifications - Exhibits include the Stockholders Agreement with Apollo, the new Credit Agreement, and certifications pursuant to the Sarbanes-Oxley Act[359]