Hilton Grand Vacations (US:HGV)2023-11-05 16:00PART I - FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for Q3 2023, including balance sheets, income, cash flows, and notes, with details on the Bluegreen acquisition Condensed Consolidated Balance Sheet Highlights (Unaudited) | ($ in millions) | Sep 30, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Assets | | | | Cash and cash equivalents | $227 | $223 | | Timeshare financing receivables, net | $1,821 | $1,767 | | Inventory | $1,308 | $1,159 | | Goodwill | $1,416 | $1,416 | | Total Assets | $8,009 | $8,004 | | Liabilities & Equity | | | | Debt, net | $2,730 | $2,651 | | Non-recourse debt, net | $1,038 | $1,102 | | Total Liabilities | $5,861 | $5,853 | | Total Stockholders' Equity | $2,148 | $2,151 | | Total Liabilities & Equity | $8,009 | $8,004 | Condensed Consolidated Statements of Operations Highlights (Unaudited) | ($ in millions, except EPS) | Q3 2023 | Q3 2022 | 9 Months 2023 | 9 Months 2022 | | :--- | :--- | :--- | :--- | :--- | | Total Revenues | $1,018 | $1,116 | $2,959 | $2,843 | | Net Income | $92 | $150 | $245 | $274 | | Diluted EPS | $0.83 | $1.24 | $2.18 | $2.23 | Condensed Consolidated Statements of Cash Flows Highlights (Unaudited) | ($ in millions) | 9 Months Ended Sep 30, 2023 | 9 Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $312 | $763 | | Net cash used in investing activities | ($47) | ($51) | | Net cash used in financing activities | ($270) | ($644) | - On November 5, 2023, the company entered into a merger agreement to acquire Bluegreen Vacations Holding Corporation for approximately $1.5 billion in an all-cash transaction, expected to close in the first half of 2024106 - As of September 30, 2023, the company accrued liabilities of approximately $121 million for legal matters, including $101 million for a judgment against Diamond, for which an $83 million insurance claim receivable was recorded103 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 and YTD 2023 financial results, covering segment performance, liquidity, and risks related to the Bluegreen acquisition Results of Operations Q3 2023 total revenues decreased 8.8% to $1,018 million and net income fell 38.7% to $92 million, primarily due to real estate sales decline offset by resort operations growth Segment Revenue Performance | ($ in millions) | Q3 2023 | Q3 2022 | % Change | 9 Months 2023 | 9 Months 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Real estate sales and financing | $612 | $745 | (17.9)% | $1,766 | $1,783 | (1.0)% | | Resort operations and club management | $322 | $299 | 7.7% | $944 | $870 | 8.5% | | Total segment revenues | $934 | $1,044 | (10.5)% | $2,710 | $2,653 | 2.1% | Reconciliation of Net Income to Adjusted EBITDA | ($ in millions) | Q3 2023 | Q3 2022 | % Change | 9 Months 2023 | 9 Months 2022 | % Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Net Income | $92 | $150 | (38.7)% | $245 | $274 | (10.6)% | | EBITDA | $234 | $300 | (22.0)% | $631 | $677 | (6.8)% | | Adjusted EBITDA | $269 | $338 | (20.4)% | $735 | $813 | (9.6)% | Real Estate Sales and Financing Segment Q3 2023 Adjusted EBITDA for this segment fell 30.5% to $205 million, driven by lower VPG, Maui wildfires, and a $98 million negative variance in revenue recognition Real Estate Operating Metrics | Metric | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Contract Sales ($M) | $603 | $621 | (2.9)% | | Tour Flow | 163,699 | 142,647 | 14.8% | | VPG | $3,656 | $4,229 | (13.5)% | Real Estate Profitability | ($ in millions) | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Sales Revenue | $474 | $625 | (24.2)% | | Real Estate Expense | $314 | $372 | (15.6)% | | Real Estate Profit | $160 | $253 | (36.8)% | | Real Estate Profit Margin | 33.8% | 40.5% | -6.7 p.p. | Resort Operations and Club Management Segment This segment showed solid growth in Q3 2023, with revenues up 7.7% and Adjusted EBITDA up 12.5% to $126 million, driven by higher rental and club management revenues Resort and Club Management Profitability | ($ in millions) | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Resort & Club Management Revenues | $138 | $130 | 6.2% | | Resort & Club Management Profit | $95 | $85 | 11.8% | | Profit Margin | 68.8% | 65.4% | +3.4 p.p. | Rental and Ancillary Services Profitability | ($ in millions) | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Rental & Ancillary Services Revenues | $171 | $159 | 7.5% | | Rental & Ancillary Services Profit | $17 | $15 | 13.3% | | Profit Margin | 9.9% | 9.4% | +0.5 p.p. | Liquidity and Capital Resources As of September 30, 2023, the company maintained liquidity with $227 million in cash and available credit, despite a significant decrease in operating cash flow to $312 million for the nine months Key Liquidity Metrics (as of Sep 30, 2023) | Metric | Amount ($ in millions) | | :--- | :--- | | Cash and cash equivalents | $227 | | Restricted cash | $308 | | Revolver facility capacity remaining | $866 | | Timeshare Facility capacity remaining | $750 | - Net cash provided by operating activities decreased by $451 million to $312 million for the nine months ended Sep 30, 2023, primarily due to a $136 million inventory purchase, increased working capital usage, and lower net income182184 - The company repurchased 6 million shares for $269 million during the nine months ended September 30, 2023, with $432 million remaining available under the 2023 Repurchase Plan as of October 30, 202393 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's exposure to market risks, including interest rates and currency exchange rates, has not materially changed since the 2022 annual report - Exposure to market risk from changes in interest rates and currency exchange rates has not materially changed since the 2022 year-end report200 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of September 30, 2023, due to a material weakness in internal controls related to the acquired Diamond business, with remediation ongoing - The CEO and CFO concluded that disclosure controls and procedures were not effective as of September 30, 2023202 - The ineffectiveness is due to a material weakness in internal controls over financial reporting identified in 2022 at the legacy Diamond business, which was acquired in August 2021 and was not previously an SEC reporting company203 - Remediation efforts are ongoing, including enhancing control design, implementing new controls, and improving IT systems, with full remediation expected by the end of 2023205206 PART II - OTHER INFORMATION Item 1. Legal Proceedings As of September 30, 2023, the company accrued $121 million for legal matters, including a $101 million judgment against Diamond with an $83 million insurance claim receivable - As of September 30, 2023, the company accrued liabilities of approximately $121 million for all legal matters, of which $101 million relates to a judgment against Diamond from a 2015 case103 - The company has recorded an insurance claim receivable of $83 million related to the Diamond judgment, which is included in Accounts receivable, net103 Item 1A. Risk Factors This section updates risk factors, focusing on new risks from the pending Bluegreen Vacations merger, including business disruptions, integration challenges, increased debt, and Hilton license compliance Risks Relating to the Merger Significant risks related to the Bluegreen acquisition include potential business disruptions, integration challenges, increased indebtedness, substantial transaction costs, and critical compliance with the Hilton license agreement - The merger is subject to various uncertainties that could disrupt relationships with employees, owners, and suppliers, and make it difficult to retain key personnel212213214 - The company will incur significant additional indebtedness to finance the merger, which could reduce business flexibility and increase vulnerability to adverse economic conditions225 - Integrating Bluegreen successfully is a major risk, with challenges in combining corporate cultures, systems, and realizing expected synergies, and compliance with the Hilton license agreement is critical for successful integration221223 - Substantial non-recurring transaction costs are expected, and if the merger is not completed, these expenses will be recognized without realizing any benefits228229 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's Q3 2023 stock repurchase activity, including 1,456,853 shares bought at an average of $43.78, with $432 million remaining for future repurchases Issuer Purchases of Equity Securities (Q3 2023) | Period | Total Shares Purchased | Average Price Paid Per Share | | :--- | :--- | :--- | | July 2023 | — | $— | | August 2023 | 1,093,967 | $44.26 | | September 2023 | 362,886 | $42.31 | | Total | 1,456,853 | $43.78 | - As of October 30, 2023, the company had $432 million of remaining availability under its 2023 Share Repurchase Plan232 Item 3. Defaults Upon Senior Securities The company reported no defaults upon senior securities during the period - None233 Item 4. Mine Safety Disclosures This item is not applicable to the company - Not applicable233 Item 5. Other Information The company reports no information for this item - None233 Item 6. Exhibits This section lists exhibits filed with the Form 10-Q, including amendments to credit agreements, guarantor subsidiaries, Sarbanes-Oxley certifications, and Inline XBRL data files - The report includes several exhibits, such as amendments to credit agreements, Sarbanes-Oxley certifications (302 and 906), and Inline XBRL documents234