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Additional Information (Details)
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(Details)
60: R50 Diamond Acquisition - Schedule of Fair Value of HTML 43K
Consideration Transferred (Details)
61: R51 Diamond Acquisition - Schedule of Preliminary Fair HTML 85K
Values of Assets Acquired and Liabilities Assumed
(Details)
62: R52 Diamond Acquisition - Schedule of Financing HTML 41K
Receivables (Details)
63: R53 Diamond Acquisition - Schedule of Preliminary HTML 48K
Estimates Of The Fair Value of Intangible Assets
and Estimated Remaining Use (Details)
64: R54 Diamond Acquisition - Schedule of Goodwill HTML 42K
(Details)
65: R55 Diamond Acquisition - Schedule of Acquisition Pro HTML 54K
Forma Information (Details)
66: R56 Revenue from Contracts with Customers - Additional HTML 51K
Information (Details)
67: R57 Revenue from Contracts with Customers - Schedule HTML 66K
of Disaggregated Revenues by Segment from
Contracts with Customers (Details)
68: R58 Revenue from Contracts with Customers - Schedule HTML 36K
of Accounts Receivable from Contracts with
Customers (Details)
69: R59 Revenue from Contracts with Customers - HTML 42K
Composition of Contract Liabilities (Details)
70: R60 Revenue from Contracts with Customers - Schedule HTML 41K
of Deferred Revenue, Cost of VOI Sales and Direct
Selling Costs from Sales of VOIs Related to
Project Under Construction (Details)
71: R61 Revenue from Contracts with Customers - Remaining HTML 45K
Transaction Price (Details)
72: R62 Restricted Cash - Schedule of Restricted Cash HTML 42K
(Details)
73: R63 Accounts Receivable - Summary of Accounts HTML 47K
Receivable, Net of Allowance for Credit Losses
(Details)
74: R64 Accounts Receivable - Changes in Allowance for HTML 42K
Fee-for-Service Commissions (Details)
75: R65 Timeshare Financing Receivables - Schedule of HTML 60K
Timeshare Financing Receivables (Details)
76: R66 Timeshare Financing Receivables - Additional HTML 96K
Information (Details)
77: R67 Timeshare Financing Receivables - Maturities of HTML 66K
Financing Receivables (Details)
78: R68 Timeshare Financing Receivables - Schedule of HTML 51K
Change in Allowance For Financing Receivables
Losses (Details)
79: R69 Timeshare Financing Receivables - Financing HTML 62K
Receivable by Average FICO Score (Details)
80: R70 Timeshare Financing Receivables - Past Due HTML 81K
Financing Receivables (Details)
81: R71 Timeshare Financing Receivables - Details of HTML 107K
Financing Receivables by Origination Year and
Average FICO Score (Details)
82: R72 Inventory - Schedule of Inventory, Noncurrent HTML 39K
(Details)
83: R73 Inventory - Schedule of Costs of Sales True-ups HTML 40K
Relating to VOI Products and Impacts on the
Carrying Value of Inventory (Details)
84: R74 Property and Equipment - Schedule of Property and HTML 56K
Equipment (Details)
85: R75 Consolidated Variable Interest Entities - HTML 38K
Additional Information (Details)
86: R76 Consolidated Variable Interest Entities - Schedule HTML 57K
of Consolidated Variable Interest Entities
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87: R77 Investments in Unconsolidated Affiliates - HTML 49K
Additional Information (Details)
88: R78 Intangible Assets - Schedule of Intangible Assets HTML 50K
And Related Amortization Expense (Details)
89: R79 Intangible Assets (Additional Information) HTML 39K
(Details)
90: R80 Debt & Non-recourse Debt - Schedule of Outstanding HTML 112K
Borrowings (Details)
91: R81 Debt & Non-recourse Debt - Schedule of Derivative HTML 43K
Instruments (Details)
92: R82 Debt & Non-recourse Debt - Additional Information HTML 101K
(Details)
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Maturities of Debt (Details)
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Estimated Fair Value Amounts (Details)
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Information Related to Operating Leases (Details)
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Information Related to Operating Leases (Details)
98: R88 Leases - Future Minimum Lease Payments Under HTML 51K
Non-Cancelable Operating Leases (Details)
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100: R90 Share-Based Compensation - Additional Information HTML 82K
(Details)
101: R91 Share-Based Compensation - Options Assumptions HTML 42K
(Details)
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Share, Basic and Diluted (Details)
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(Details)
104: R94 Related Party Transactions - Additional HTML 43K
Information (Details)
105: R95 Related Party Transactions - Summary of Amounts HTML 43K
Included in Condensed Consolidated Statements of
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106: R96 Business Segments - Additional Information HTML 34K
(Details)
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Performance Reconciled to Consolidated Amounts
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Reconciled to Net Income (Details)
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Information (Details)
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Remaining Purchase Obligations (Details)
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(Exact Name of Registrant as Specified in Its Charter)
____________________________________________
iDelaware
i81-2545345
(State
or Other Jurisdiction of Incorporation or Organization)
(I.R.S. Employer Identification No.)
i6355 MetroWest Boulevard, iSuite
180,
iOrlando, iFlorida
i32835
(Address
of Principal Executive Offices)
(Zip Code)
Registrant’s Telephone Number, Including Area Code (i407) i613-3100
(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)
____________________________________________
Securities
registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iCommon
Stock, $0.01 par value per share
iHGV
iNew York Stock Exchange
Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirement for the past 90 days. iYesx No o
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). iYesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,
a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,”“accelerated filer,”“smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
iLarge Accelerated Filer
x
Accelerated
Filer
o
Non-Accelerated Filer
o
Smaller Reporting Company
io
Emerging Growth Company
io
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes ix
No
The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of November 4, 2022 was i115,057,769.
Accounts
receivable, net of allowance for doubtful accounts of $i40 and $i39
i398
i302
Timeshare
financing receivables, net
i1,743
i1,747
Inventory
i1,145
i1,240
Property
and equipment, net
i776
i756
Operating
lease right-of-use assets, net
i56
i70
Investments
in unconsolidated affiliates
i69
i59
Goodwill
i1,416
i1,377
Intangible
assets, net
i1,318
i1,441
Land
and infrastructure held for sale
i—
i41
Other
assets
i381
i280
TOTAL ASSETS (variable interest entities - $i974
and $i1,100)
$
i8,046
$
i8,008
LIABILITIES
AND EQUITY
Accounts payable, accrued expenses and other
$
i978
$
i673
Advanced
deposits
i138
i112
Debt,
net
i2,612
i2,913
Non-recourse
debt, net
i1,161
i1,328
Operating
lease liabilities
i74
i87
Deferred
revenues
i223
i237
Deferred income tax liabilities
i703
i670
Total
liabilities (variable interest entities - $i1,171 and $i1,199)
i5,889
i6,020
Commitments
and contingencies - see Note 21
i
i
Equity:
Preferred
stock, $ii0.01/ par value; ii300,000,000/
authorized shares, iiiinone///
issued or outstanding as of September 30, 2022 and December 31, 2021
i—
i—
Common
stock, $ii0.01/ par value; ii3,000,000,000/
authorized shares, ii116,387,235/ shares issued and outstanding
as of September 30, 2022 and ii119,904,001/
shares issued and outstanding as of December 31, 2021
i1
i1
Additional
paid-in capital
i1,607
i1,630
Accumulated
retained earnings
i517
i357
Accumulated
other comprehensive income
i32
i—
Total
equity
i2,157
i1,988
TOTAL
LIABILITIES AND EQUITY
$
i8,046
$
i8,008
See
notes to unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1: iOrganization
and Basis of Presentation
Our Business
Hilton Grand Vacations Inc. (“Hilton Grand Vacations,”“we,”“us,”“our,”“HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts, primarily under the Hilton Grand Vacations brand. During 2021, we acquired Dakota Holdings, Inc., the parent of Diamond Resorts International (“Diamond”)(the “Diamond Acquisition”), and are in the process of rebranding Diamond properties and sales centers to brands that meet Hilton standards. Our operations primarily consist of selling vacation ownership intervals and vacation ownership interests (collectively, “VOIs” or “VOI”) for ourselves and third parties; financing and servicing loans provided to consumers for their VOI purchases; operating resorts and multi-resort
trusts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (collectively the “Legacy-HGV Club”) in addition to our Diamond points-based clubs (the Legacy-HGV Club and Diamond Clubs (as defined below) are collectively referred to as “Clubs”).
As of September 30, 2022, we had i154 properties located in the United States (“U.S.”), Europe, Mexico, the Caribbean, Canada and Japan. A significant number of our properties and VOIs are concentrated in Florida, Nevada,
Hawaii, Europe, California, Virginia and Arizona.
Diamond Acquisition
On August 2, 2021, we completed the Diamond Acquisition by exchanging i100 percent of the outstanding equity interests of Diamond for shares of HGV common stock. Pre-existing HGV shareholders owned approximately i72
percent of the combined company immediately after giving effect of the Diamond Acquisition, with certain funds controlled by Apollo Global Management Inc. (the “Apollo Funds” or, “Apollo”) and other minority shareholders, who previously owned i100 percent of Diamond, holding the remaining, approximately i28
percent at the time the Diamond Acquisition was completed.
Diamond also operates in the hospitality and VOI industry, with a worldwide resort network of global vacation destinations. Diamond’s portfolio consists of resort properties that we manage, are included in one of Diamond’s single- and multi-use trusts (collectively, the “Diamond Collections” or “Collections”), or are Diamond branded resorts in which we own inventory, as well as affiliated resorts and hotels, which we do not manage, and which do not carry the Diamond brand but are a part of Diamond’s network and, through THE Club® and other Club offerings (the “Diamond Clubs”), are available for its members to use as vacation destinations.
The unaudited condensed consolidated financial statements in this report include Diamond’s results of operations beginning on August 2,
2021. We refer to Diamond’s business and operations that we acquired as “Legacy-Diamond”, and our business and operations that existed both prior to and following the Diamond Acquisition as “Legacy-HGV.” See Note 3: Diamond Acquisition for more information.
i
Basis of Presentation
The unaudited condensed consolidated financial statements presented herein include i100
percent of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest. Our accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions and balances have been eliminated in consolidation.
The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures
made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2021, included in our Annual Report on Form 10-K filed with the SEC on March 1, 2022.
The preparation
of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.
The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of rights held by other interests. If the entity is considered to be a variable interest entity (“VIE”), we determine whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. We consolidate entities when we own more than i50
percent of the voting shares of a company or otherwise have a controlling financial interest. The consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. GAAP.
Note 2: iSummary of Significant Accounting Policies
iReclassifications
Certain
prior period amounts in the unaudited condensed consolidated financial statements have been reclassified to conform to the current period presentation with no effect on previously reported total assets and total liabilities, net income or stockholders’ equity.
i
Recently Issued Accounting Pronouncements
Accounting Standards Not Yet Adopted
In March 2022, the FASB issued Accounting Standards Update 2022-02 (“ASU
2022-02”), Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. ASU 2022-02 provides, under Issue 2 - Vintage Disclosures, that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. For financing receivables, the vintage disclosure is to present the amortized cost basis by credit quality indicator and class of financing receivable for the year of origination. The guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and is to be applied prospectively. We are currently evaluating the effects of this ASU to our disclosures.
Note
3: iDiamond Acquisition
On August 2, 2021, (the “Acquisition Date”), we completed the Diamond Acquisition by exchanging i100
percent of the outstanding equity interests of Diamond to HGV common shares. Following the closing of the Diamond Acquisition, pre-existing HGV shareholders owned approximately i72 percent of the combined company after giving effect to the Diamond Acquisition, with Apollo Funds and other minority shareholders holding the remaining approximately i28
percent at the time the Diamond Acquisition was completed. Diamond is a leader in the vacation ownership industry focused on the infusion of hospitality and experiences through the full life cycle of an owner or members’ life cycle relationship with Diamond. This strategic combination creates a more expansive industry offering, leveraging HGV’s strong brand and net owner growth along with Diamond’s diverse network of locations and strength in experiential offerings. The acquisition also diversifies our product offerings and allows us to expand our customer demographic.
On the Acquisition Date, shareholders of Diamond received i0.32
shares of our common stock for each share of Diamond common stock, totaling approximately i28 percent of our total common shares outstanding. Additionally, in connection with the Diamond Acquisition, HGV repaid certain existing indebtedness of Diamond.
The following table presents the fair value of each class of consideration transferred in relation to the Diamond Acquisition at the Acquisition Date:
($ in millions, except stock price amounts)
HGV
common stock shares issued for outstanding Diamond shares
i33.93
HGV common stock price as of Acquisition Date(1)
i40.71
Stock
purchase price
$
i1,381
Repayment of Legacy-Diamond debt
$
i2,029
Total
consideration transferred
$
i3,410
(1) Represents the average of the opening and closing price of HGV stock on August 2, 2021.
/
Fair
Values of Assets Acquired and Liabilities Assumed
We accounted for the Diamond Acquisition as a business combination, which required us to record the assets acquired and liabilities assumed at fair value as of the Acquisition Date. The following table presents the fair values of the assets that we acquired and the liabilities that we assumed on the Acquisition Date in connection with the business combination as finalized at iSeptember 30,
2022.
($ in millions)
Amounts Recognized as of the Acquisition Date
Assets acquired
Cash and cash equivalents
$
i310
Restricted
cash
i127
Accounts receivable, net of allowance for doubtful accounts
i90
Timeshare
financing receivables, net
i825
Inventory
i488
Property
and equipment, net
i273
Operating lease right-of-use assets, net
i33
Intangible
assets, net
i1,429
Other assets
i261
Total
assets acquired
$
i3,836
Liabilities assumed
Accounts payable, accrued expenses and other
$
i520
Non-recourse
debt, net
i660
Operating lease liabilities
i33
Advanced
deposits
i4
Deferred revenues
i140
Deferred
income tax liabilities
i485
Total liabilities assumed
$
i1,842
Net
assets acquired
$
i1,994
Total consideration transferred
$
i3,410
Goodwill(1)
$
i1,416
(1)Goodwill
is calculated as total consideration transferred less net assets acquired and it primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined Company post-acquisition. The majority of goodwill is not deductible for tax purposes.
The measurement period adjustments recorded during the quarter ended September 30, 2022 resulted from changes to our estimates of the fair value of the acquired assets and assumed liabilities based on finalizing the valuations of acquired property and equipment and accounts receivable. In addition, we have established an initial reserve in connection
with certain pre-acquisition expenses which we have determined are not deductible for tax purposes. These resulted in a net increase to goodwill for the period of $i59 million, net of tax impacts of adjustments.
The measurement period adjustments recorded during the quarter ended June
30, 2022 resulted from changes to our estimates of the fair value of the acquired assets and assumed liabilities based on finalizing the valuations of operating lease right-of-use asset and related lease liabilities valuation and capitalized software. These resulted in a net adjustment to goodwill for the period of $i6 million, net of tax impacts of adjustments.
The measurement period adjustments recorded during the quarter ended March
31, 2022 resulted from changes to our estimates of the fair value of the acquired assets and assumed liabilities based on a revision to our valuation of insurance receivables given the ultimate determination of proceeds related to preacquisition business interruption insurance claims. The measurement period adjustments recognized include an adjustment to increase accounts receivable, net of allowance for doubtful accounts, for pre-acquisition contingencies, and the related tax impacts increasing deferred income tax liabilities. These resulted in a net adjustment to goodwill for the period of $i26 million.
The prior period net income effect associated with the measurement period adjustments recorded during the nine months ended September 30, 2022 is immaterial.
Timeshare Financing Receivables
We acquired timeshare financing receivables which consist of loans to customers who purchased vacation ownership products and chose to finance their purchases. These timeshare financing receivables are collateralized by the underlying VOIs and generally have i10-year
amortizing repayment terms. We estimated the fair value of the timeshare financing receivables using a discounted cash flow model, which calculated a present value of expected future risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. For purposes of our allocation, we have considered all acquired receivables to be purchase credit deteriorated assets. See Note 7: Timeshare Financing Receivables for additional information.
i
Acquired timeshare financing
receivables with credit deterioration as of the Acquisition Date were as follows:
We acquired inventory which primarily consists of completed unsold VOIs
and undeveloped land. We valued acquired inventory using a discounted cash flows method, which included an estimate of cash flows expected to be generated from the sale of VOIs. Significant estimates and assumptions impacting the fair value of the acquired inventory that are subjective and/or require complex judgments include our estimates of operating costs and margins, and the discount rate. Certain other estimates and assumptions impacting the fair value of the acquired inventory involving less subjective and/or less complex judgments include: short-term and long-term revenue growth rates, capital expenditures, tax rates and other factors impacting the discounted cash flows.
Property and Equipment
We acquired property and equipment, which includes land, building and leasehold improvements, furniture and fixtures and construction in progress. We valued the majority of acquired
property and equipment using a mix of cost, market and discounted cash flow approaches, which included estimates of future income growth, capitalization rates, discount rates, and capital expenditure needs of the resorts.
The
following table presents our estimates of the fair values of the acquired Diamond’s identified intangible assets and their related estimated remaining useful lives:
We valued the acquired trade name intangible using the relief-from-royalty method, which applies
an estimated royalty rate to forecasted future cash flows, discounted to present value. We valued the acquired management contracts intangible and member relationships intangible using the multi-period excess earnings method, which is a variation of the income approach. This method estimates an intangible asset’s value based on the present value of the incremental after-tax cash flows attributable to the intangible asset. Significant estimates and assumptions impacting the fair value of the acquired management contracts intangible that are subjective and/or require complex judgments include our estimates of operating costs and margins, and the discount rate. Certain other estimates and assumptions impacting the fair value of the acquired management contracts
intangible involving less subjective and/or less complex judgments include: short-term and long-term revenue growth rates, attrition rates, capital expenditures, tax rates and other factors impacting the discounted cash flows.
Deferred Revenue
Deferred revenue primarily relates to deferred sales incentives revenues, primarily related to Bonus Points, which are deferred and recognized upon redemption; and Club membership fees, which are deferred and recognized over the terms of the applicable contract term or membership on a straight-line basis. Additionally, deferred revenue includes maintenance fees collected from owners, in certain cases, which are earned by the relevant property owners’ association over the applicable period. We valued deferred revenue at its carrying value.
Deferred
Income Taxes
Deferred income taxes primarily relate to the fair value of assets and liabilities acquired from Diamond, including timeshare financing receivables, inventory, property and equipment, intangible assets, and debt. We calculated deferred income taxes based on statutory rates in the jurisdictions of the legal entities where the acquired assets and liabilities are recorded.
Debt
As part of the acquisition and consideration transferred, we paid off $i2,029
million of Diamond’s existing corporate debt, accrued interest and early termination penalties.
Non-Recourse Debt
We valued the securitized debt from VIEs and warehouse loan facilities, using a discounted cash flow model under the income approach. The significant assumptions in our analysis include default rates, prepayment rates, bond interest rates and other structural factors.
Operating Lease Right-of-Use-Assets and Lease Liabilities
We have recorded liabilities for those operating leases assumed in connection with the Diamond Acquisition with a remaining term in excess of a year. We valued lease liabilities at the present value of the remaining contractual lease payments based on the guidance in ASC 842 and using a discount rate determined as of the Acquisition Date. The right-of-
use assets for such leases were measured at an amount equal to the lease liabilities, adjusted for favorable or unfavorable terms of the lease when compared with market terms.
Goodwill
i
We have allocated the acquired goodwill to our segments, Real Estate Sales and Financing and Resort Operations and Club Management, as indicated in the table below.
Real
Estate Sales and Financing Segment
Resort Operations and Club Management Segment
Total Consolidated
Goodwill
$
i1,048
$
i368
$
i1,416
/
Pro
Forma Results of Operations
i
The following unaudited pro forma information presents the combined results of operations of HGV and Diamond as if we had completed the Diamond Acquisition on January 1, 2021, the first day of our prior fiscal year, but using our fair values of assets and liabilities as of the Acquisition Date. These unaudited pro forma results do not reflect any synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not
necessarily indicative of what the actual results of operations of the combined company would have been if the Diamond Acquisition had occurred at the beginning of the period presented, nor are they indicative of future results of operations.
The following tables show our disaggregated revenues by product and segment from contracts with customers. We operate our business in the following itwo
segments: (i) Real estate sales and financing and (ii) Resort operations and club management. Please refer to Note 20: Business Segments below for more details related to our segments.
($ in millions)
Three Months Ended September
30,
Nine Months Ended September 30,
Real Estate Sales and Financing Segment
2022
2021
2022
2021
Sales of VOIs, net
$
i500
$
i488
$
i1,130
$
i597
Sales,
marketing, brand and other fees
i177
i118
i457
i252
Interest
income
i61
i46
i170
i108
Other
financing revenue
i7
i7
i26
i19
Real
estate sales and financing segment revenues
$
i745
$
i659
$
i1,783
$
i976
($
in millions)
Three Months Ended September 30,
Nine Months Ended September 30,
Resort Operations and Club Management Segment
2022
2021
2022
2021
Club management
$
i48
$
i42
$
i150
$
i98
Resort
management
i82
i57
i229
i94
Rental(1)
i157
i104
i436
i184
Ancillary
services
i2
i8
i30
i14
Resort
operations and club management segment revenues
$
i289
$
i211
$
i845
$
i390
(1)Excludes
intersegment eliminations. See Note 20: Business Segments for additional information.
The
following table provides information on our accounts receivable from contracts with customers which are included in Accounts receivable, net on our unaudited condensed consolidated balance sheets:
Deferred
sales of VOIs of projects under construction
i1
i34
Club
dues and Legacy-HGV Club activation fees
i105
i91
Bonus
Point incentive liability(1)
i58
i44
(1)Amounts
related to the Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our unaudited condensed consolidated balance sheets. This liability is comprised of unrecognized revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.
/
Revenue earned for the three and nine months ended September 30, 2022, that was included in the contract liabilities balance at December 31, 2021 was approximately $i63
million and $i161 million, respectively.
Our accounts receivable that relate to our contracts with customers includes amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and homeowners’ associations management agreements and are settled when the related cash is received. Accounts receivable
are recorded when the right to consideration becomes unconditional and is only contingent on the passage of time. Refer to Note 7: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our timeshare financing receivables.
Contract assets relate to incentive fees that can be earned for meeting certain targets on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the annual incentive fee period. There were $i5
million contract assets as of September 30, 2022 and inocontract assets as of December 31, 2021.
Contract liabilities include payments received or due in advance
of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues related to sales of VOIs of projects under construction, Club activation fees and annual dues and the liability for Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the future.
In addition to the contract liabilities included herein, we also have deferred revenue of $i118
million and $i112 million as of September 30, 2022 and December 31, 2021, respectively. This additional deferred revenue balance includes $i50
million and $i51 million for bonus points and vacation package deferred revenue, $i22 million and $i10
million in deferred property insurance, $i17 million and $i14 million in deferred maintenance fees and $i28
million and $i37 million in other deferred revenue as of September 30, 2022 and December 31, 2021, respectively.
Transaction Price Allocated to Remaining Performance Obligations
Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts
with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Legacy-HGV Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Bonus Points that may be redeemed in the future.
The
following table represents the deferred revenue, cost of VOI sales and direct selling costs from sales of VOIs related to projects under construction as of September 30, 2022 and December 31, 2021:
(1)Includes
anticipated Cost of VOI sales related to inventory associated with Sales of VOIs under construction.
We recognized the revenue, costs of VOI sales and direct selling costs related to the project under construction upon completion during the third quarter of 2022.
i
The following table includes the remaining transaction price related to Advanced deposits, and Legacy-HGV Club
activation fees and Bonus Points as of September 30, 2022:
($ in millions)
Remaining Transaction Price
Recognition Period
Recognition Method
Advanced deposits
$
i138
i18
months
Upon customer stays
Legacy-HGV Club activation fees
i65
i7
years
Straight-line basis over average inventory holding period
(1)See
Note 13: Debt & Non-recourse Debt for further discussion.
(2)Other restricted cash primarily includes cash collected on behalf of HOAs, deposits related to servicer arrangements and other deposits.
/
Note 6: iAccounts
Receivable
Accounts receivable within the scope of ASC 326 are measured at amortized cost. iThe following table represents our accounts receivable, net of allowance for credit losses:
Our accounts receivable are generally due within one year of origination. We use delinquency status and economic factors such as credit quality indicators to monitor our receivables within the scope of ASC 326 and use these as a basis for how we develop our expected loss estimates.
We sell VOIs on behalf of third-party developers using
the Hilton Grand Vacations brand in exchange for sales, marketing and brand fees. We use historical losses and economic factors as a basis to develop our allowance for credit losses. Under these fee-for-service arrangements, we earn commission fees based on a percentage of total interval sales. Additionally, the terms of these arrangements include provisions requiring the reduction of fees earned for defaults and cancellations.
i
The changes in our allowance for fee-for-service commissions were as follows during the period from December 31,
2021 to September 30, 2022:
In addition to the fee-for-service commission allowance, we have various allowances for our accounts receivable to account for expected losses related to club dues, maintenance fees,
trade accounts receivable, sales of VOIs, and marketing packages.
Note 7: iTimeshare Financing Receivables
We define our timeshare financing receivables portfolio segments as (i) originated and (ii) acquired. iThe
following table presents the components of each portfolio segment by class of timeshare financing receivables:
(1)Includes
amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility (“Timeshare Facility”) as well as amounts held as future collateral for securitization activities.
(2)Acquired timeshare financing receivables include all timeshare financing receivables of Legacy-Diamond as of the Acquisition Date. Originated timeshare financing receivables include all Legacy-HGV timeshare financing receivables and Legacy-Diamond timeshare financing receivables originated after the Acquisition Date.
(3)Non-credit premium of $i97
million was recognized at the Acquisition Date, of which $i47 million remains unamortized as of September 30, 2022.
In August 2022, we completed a securitization of $i269 million
of gross timeshare financing receivables and issued approximately $i153 million of i4.30 percent notes, $i73 million
of i4.74 percent notes, $i26 million of i5.57
percent notes, and $i17 million of i8.73 percent notes due January 2037. The securitization transaction did not qualify as a sale and, accordingly, no gain or
loss was recognized. The transaction is considered a secured borrowing, and the proceeds from the transaction are presented as non-recourse debt. The proceeds were primarily used to pay down the remaining borrowings of our Timeshare Facility and general corporate operating expenses. See Note 13: Debt and Non-recourse Debt for additional information.
In April 2022, we completed a securitization of $i246 million of gross timeshare financing receivables and issued approximately $i107
million of i3.61 percent notes, $i84 million of i4.10
percent notes, $i22 million of i4.69 percent notes, and $i33
million of i6.79 percent notes due June 2034. The securitization transaction did not qualify as a sale and, accordingly,
no gain
or loss was recognized. The transaction is considered a secured borrowing, and the proceeds from the transaction are presented as non-recourse debt. The proceeds were primarily used to pay down the remaining borrowings of one of our conduit facilities and general corporate operating expenses. See Note 13: Debt and Non-recourse Debt for additional information.
As of September 30, 2022 and December 31, 2021, we had timeshare financing receivables with a carrying value of $i9
million and $i131 million, respectively, securing the Timeshare Facility. We record an estimate of variable consideration for estimated defaults as a reduction of revenue from VOI sales at the time revenue is recognized on a VOI sale. We record the difference between the timeshare financing receivable and the variable consideration included in the transaction price for the sale of the related VOI as an allowance for financing receivables and record the receivable net of the allowance. For the nine months ended September 30, 2022, we recorded
an adjustment to our estimate of variable consideration of $i101 million.
We recognize interest income on our timeshare financing receivables as earned. As of September 30, 2022 and December 31, 2021, we hadinterest receivable outstanding of $i12 million
and $i9 million, respectively, on our originated timeshare financing receivables, which represent all Legacy-HGV timeshare financing receivables and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date. As of September 30, 2022 and December 31, 2021, we had interest receivable outstanding of $i4 million
and $i7 million on our acquired timeshare financing receivables, which represents all timeshare financing receivables of Legacy-Diamond as of the Acquisition Date. Interest receivable is included in Other Assets within our consolidated balance sheets. The interest rate charged on the notes correlates to the risk profile of the customer at the time of purchase and the percentage of the purchase that is financed, among other factors. As of September 30, 2022, our originated timeshare financing receivables
had interest rates ranging from i1.5 percent to i25.8
percent, a weighted-average interest rate of i14.2 percent, a weighted-average remaining term of i8.2 and maturities through
2037. Our acquired timeshare financing receivables had interest rates ranging from i2.0 percent to i25.0
percent, a weighted-average interest rate of i15.7 percent, a weighted-average remaining term of i7.6 years and maturities
through 2032.
Acquired Timeshare Financing Receivables with Credit Deterioration
As part of the Diamond Acquisition, we acquired existing portfolios of timeshare financing receivables. Acquired timeshare financing receivables include all timeshare financing receivables of Legacy-Diamond as of the Acquisition Date and were deemed to be purchase credit deteriorated financial assets. These notes receivable were initially recognized at their purchase price, represented by the acquisition date fair value, and subsequently “grossed-up” by our acquisition date assessment of the allowance for credit losses. The difference over which par value of the acquired purchased credit deteriorated assets exceeds the purchase price plus the initial allowance for credit losses is reflected as a non-credit premium and is amortized as a reduction to interest income under the effective interest
method.
The fair value of our acquired timeshare financing receivables as of the Acquisition Date was determined using a discounted cash flow method, which calculated a present value of expected future risk-adjusted cash flows over the remaining term of the respective timeshare financing receivables. which calculated a present value of expected future cash flows based on scheduled principal and interest payments over the term of the respective timeshare financing receivables. Consequently, the fair value of the acquired timeshare financing receivables recorded on our consolidated balance sheet as of the Acquisition Date included an estimate of expected credit losses which became the historical cost basis for that portfolio going forward.
The allowance for credit losses for our acquired timeshare financing receivables is remeasured at each period end and takes into consideration an
estimated measure of anticipated defaults and early repayments. We consider historical Legacy-Diamond timeshare financing receivables performance and the current economic environment in the re-measurement of the allowance for credit losses for our acquired timeshare financing receivables. Subsequent changes to the allowance for credit losses are recorded as additions to or reversals of credit losses in our consolidated statements of operations through provision for credit losses.
Our
acquired timeshare financing receivables as of September 30, 2022 mature as follows:
Acquired Timeshare Financing Receivables
($ in millions)
Securitized
Unsecuritized
Total
Year
2022
(remaining)
$
i10
$
i8
$
i18
2023
i41
i34
i75
2024
i45
i38
i83
2025
i48
i42
i90
2026
i51
i47
i98
Thereafter
i168
i271
i439
$
i363
$
i440
$
i803
/
Originated
Timeshare Financing Receivables
Originated timeshare financing receivables represent all Legacy-HGV timeshare financing receivables and timeshare financing receivables originated by Legacy-Diamond subsequent to the Acquisition Date. Our originated timeshare financing receivables as of September 30, 2022 mature as follows:
Originated Timeshare Financing
Receivables
($ in millions)
Securitized
Unsecuritized
Total
Year
2022 (remaining)
$
i24
$
i19
$
i43
2023
i100
i52
i152
2024
i104
i59
i163
2025
i105
i66
i171
2026
i105
i73
i178
Thereafter
i418
i530
i948
$
i856
$
i799
$
i1,655
Allowance
for Financing Receivables Losses
i
The changes in our allowance for financing receivables losses were as follows:
(1)Includes
incremental provision for financing receivables losses, net of activity related to the repurchase of defaulted and upgraded securitized timeshare financing receivables.
(2)Represents the initial change in allowance resulting from upgrades of Acquired loans. Upgraded Acquired loans and their related allowance are included in the Originated portfolio segment.
Credit
Quality of Timeshare Financing Receivables
Legacy-HGV Timeshare Financing Receivables
We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the collectability of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for estimating expected defaults and determining our allowance for financing receivables losses on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. The adequacy of the related allowance is determined
by management through analysis of several factors, such as current economic conditions and industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.
i
Our gross balances by average FICO score of our Legacy-HGV timeshare financing receivables were as follows:
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
/i
The following table details our Legacy-HGV timeshare financing receivables by the origination year and average FICO score as of September 30, 2022:
($
in millions)
2022
2021
2020
2019
2018
Prior
Total
FICO score
700+
$
i258
$
i157
$
i55
$
i98
$
i68
$
i98
$
i734
600-699
i87
i58
i20
i35
i25
i39
i264
<600
i11
i8
i3
i5
i3
i6
i36
No
score(1)
i41
i30
i19
i29
i19
i29
i167
$
i397
$
i253
$
i97
$
i167
$
i115
$
i172
$
i1,201
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
/
We apply payments we receive for loans, including those in non-accrual status, to amounts due in the following order: servicing fees; interest; principal; and late charges. Once a loan is 91 days past due, we cease accruing interest and reverse the accrued interest recognized up to that point. We resume interest accrual for loans for which we had previously ceased accruing interest once the loan is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the loan is 121 days past due and, subsequently, we write off the uncollectible note against the reserve once the foreclosure process is complete
and we receive the deed for the foreclosed unit.
As of September 30, 2022 and December 31,
2021, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $i71 million and $i83
million, respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:
We evaluate this portfolio collectively for purposes of estimating variable consideration, since we hold a large group of homogeneous timeshare financing receivables which are individually immaterial. We monitor the collectability of our receivables on an ongoing basis. There are no significant concentrations of credit risk with any individual counterparty or groups of counterparties. We use a technique referred to as static pool analysis as the basis for estimating expected defaults and determining our allowance for financing receivables losses on our timeshare financing receivables. For static pool analysis, we use certain key dimensions to stratify our portfolio, including FICO scores, equity percentage at the time of sale and certain other factors. The adequacy of the related allowance is determined by management through analysis of several factors, such as current economic conditions and
industry trends, as well as the specific risk characteristics of the portfolio including assumed default rates, aging and historical write-offs of these receivables. The allowance is maintained at a level deemed adequate by management based on a periodic analysis of the mortgage portfolio.
Our gross balances by average FICO score of our Legacy-Diamond acquired and originated timeshare financing receivables were as follows:
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
The following tables detail our Legacy-Diamond acquired and originated timeshare financing receivables by the origination year and average FICO score as of September 30, 2022:
(1)Timeshare
financing receivables without a FICO score are primarily related to foreign borrowers.
The accrued interest on our Legacy-Diamond timeshare financing receivables is accrued based on the contractual provisions of the loan documents, which is suspended at the earlier of (i) the customer’s account becoming over 90 days delinquent, or (ii) the completion of cancellation or foreclosure proceedings. Once suspended, we reverse all prior recognized interest income as well. We resume interest accrual for receivables for which we had previously ceased accruing interest once the receivable is less than 91 days past due. We fully reserve for a timeshare financing receivable in the month following the date that the receivable is 121 days past due and, subsequently, we write off the uncollectible balance against the reserve once the foreclosure process is complete and we become owner of the deed for the foreclosed unit.
As of September 30, 2022 and December 31, 2021, we had ceased accruing interest on Legacy-Diamond timeshare financing receivables with an aggregate principal balance of $i400 million and $i369 million,
respectively. The following tables detail an aged analysis of our gross timeshare receivables balance:
The
table below presents costs of sales true-ups relating to VOI products and the related impacts to the carrying value of inventory.
Nine Months Ended September 30,
($ in millions)
2022
2021
Cost of sales true-up(1)
$
i17
$
(i1)
(1)For
the nine months ended September 30, 2022, the costs of sales true-up decreased costs of VOI sales and increased inventory. For the nine months ended September 30, 2021, the costs of sales true-up increased costs of VOI sales and decreased inventory.
Shown below are expenses incurred, recorded in Cost of VOI sales, related to granting credit to customers for their existing ownership when upgrading into fee-for service projects:
Three
Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2022
2021
2022
2021
Cost of VOI sales related to fee-for-service upgrades
Land
increased by $ii48/
million during the second quarter of 2022 from December 31, 2021. We concluded that certain parcels of land and infrastructure which were previously classified as held for sale, no longer met the held for sale criteria. Thus, these assets were reclassified to property and equipment as a non-cash transfer. The assets were measured at fair value as of June 30, 2022 as assets held for sale prior to reclassification, principally utilizing market approaches for the land parcels and the cost approach for infrastructure. During the second quarter of 2022, we recorded a reversal of impairment expense of $i7 million
corresponding with this reclassification.
Note 10: iConsolidated Variable Interest Entities
As of September 30, 2022 and December 31, 2021, we consolidated i9
variable interest entities (“VIEs”) and i11 VIEs, respectively. The activities of these entities are limited primarily to purchasing qualifying non-recourse timeshare financing receivables from us and issuing debt securities and/or borrowing under a debt facility to facilitate such purchases. The timeshare financing receivables held by these entities are not available to our creditors and are not our legal assets, nor is the debt that is securitized through these entities a legal liability to us.
We have determined that we are the primary beneficiaries of all VIEs as we have
the power to direct the activities that most significantly affect their economic performance. We are also the servicer of these timeshare financing receivables and we often replace or repurchase timeshare financing receivables that are in default at their outstanding principal amounts. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. Only the assets of our VIEs are available to settle the obligations of the respective entities.
As part of the Diamond Acquisition, we acquired the variable interests in the entities associated with Diamond’s outstanding timeshare financing receivables securitization transactions and conduit facilities. They have been aggregated for disclosure purposes as they are similar in nature to our previously established VIEs. As of September 30, 2022 and December 31,
2021, conduit facilities had outstanding balances of izero and $i133 million, respectively. As of September 30,
2022, all conduit facilities were paid off and terminated.
i
Our unaudited condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily consisted of the following:
During the three and nine months ended September 30, 2022 and 2021, we did iiiinot///
provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.
As of September 30, 2022, we have i25 percent and i50
percent ownership interests in BRE Ace LLC and 1776 Holding LLC, respectively, which are VIEs. We do not consolidate BRE Ace LLC and 1776 Holding LLC because we are not the primary beneficiary. Our investment interests in and equity earned from both VIEs are included in our consolidated balance sheets as Investments in unconsolidated affiliates and in our consolidated statements of operations as Equity in earnings from unconsolidated affiliates, respectively.
Our itwo
unconsolidated affiliates have aggregated debt balances of $i398 million and $i463 million as of September 30, 2022 and December 31, 2021, respectively.
The debt is secured by their assets and is without recourse to us. Our maximum exposure to loss as a result of our investment interests in the two unconsolidated affiliates is primarily limited to (i) the carrying amount of the investments, which totaled $i69 million and $i59
million as of September 30, 2022 and December 31, 2021, respectively, and (ii) receivables for commission and other fees earned under fee-for-service arrangements. See Note 19: Related Party Transactions for additional information.
Note 12: iIntangible Assets
i
Intangible
assets and related accumulated amortization were as follows:
We
acquired definite-lived intangible assets as part of the Diamond Acquisition, which have been valued in the amount of $i1,429 million as of the Acquisition Date. Refer to Note 3: Diamond Acquisition for further details. Amortization expense on intangible assets was $i50
million and $i38 million for the three months ended September 30, 2022 and 2021, respectively, and $i147
million and $i48 million for the nine months ended September 30, 2022 and 2021, respectively.
(2)Amount includes unamortized deferred financing costs related to our term loan and senior notes of $i27 million and $i20
million, respectively, as of September 30, 2022 and $i33 million and $i22 million, respectively, as of December 31,
2021. This amount also includes unamortized original issuance discounts of $i7 million and $i6 million as of September 30,
2022 and December 31, 2021, respectively.
(3)Amount does not include unamortized deferred financing costs of $i4 million and $i5
million as of September 30, 2022 and December 31, 2021, respectively, related to our revolving facility which are included in Other assets in our unaudited condensed consolidated balance sheets.
/
Senior secured credit facilities
During the nine months ended September 30, 2022, we repaid $i310
million under the senior secured credit facilities. As of September 30, 2022, we had $i1 million of letters of credit outstanding under the revolving credit facility and $i2
million outstanding backed by cash collateral. We were in compliance with all applicable maintenance and financial covenants and ratios as of September 30, 2022.
We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt. These interest rate swaps are associated with the remaining available LIBOR based senior secured credit facility. Therefore as of September 30, 2022, these interest rate swaps convert the LIBOR based variable rate on our Term Loan to average fixed rates of i1.32
percent per annum with maturities between 2023 and 2028, for the balance on this borrowing up to the notional values of our interest rate swaps. As of September 30, 2022, the notional values of the interest rate swaps under our Term Loan was $i710 million. Our interest rate swaps have been designated and qualify as cash flow hedges of interest rate risk and recorded at their estimated fair value as an asset in Other assets in our unaudited condensed consolidated
balance sheets. As of September 30, 2022 and December 31, 2021, the estimated fair value of our cash flow hedges are $i67 million and $i2
million, respectively. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income for presentation purposes. iThe following table reflects the activity in accumulated other comprehensive income related to our derivative instruments during the nine months ended September 30, 2022.
(2)Amount relates to securitized debt only and does not include unamortized deferred financing costs of $i4 million and $i2
million as of September 30, 2022 and December 31, 2021, respectively, relating to our Timeshare Facility included in Other Assets in our unaudited condensed consolidated balance sheets.
(3)In connection with the amended and restated Timeshare Facility executed in May 2022, the revolving commitment period of the Timeshare Facility terminates in August 2024, however the repayment maturity date extends 12 months beyond the commitment termination date to August 2025.
During the nine months ended September 30, 2022, we terminated our conduit facility due in 2023 and 2024.
In August 2022, we completed a securitization of
$i269 million of gross timeshare financing receivables and issued approximately $i153 million of i4.30
percent notes, $i73 million of i4.74 percent notes, $i26 million
of i5.57 percent notes, and $i17 million of i8.73
percent notes due January 2037. The securitized debt is backed by pledged assets, consisting primarily of a pool of timeshare financing receivables secured by first mortgages or deeds of trust on timeshare interest. The proceeds were primarily used to pay down the remaining borrowings of our Timeshare Facility and general corporate operating expenses. In connection with the securitization, we incurred $i5 million in debt issuance costs.
In April 2022, we completed a securitization of $i246
million of gross timeshare financing receivables and issued approximately $i107 million of i3.61 percent notes, $i84
million of i4.10 percent notes, $i22 million of i4.69
percent notes, and $i33 million of i6.79 percent notes due June 2034. The securitized debt is backed by pledged assets, consisting primarily
of a pool of timeshare financing receivables secured by first mortgages or deeds of trust on timeshare interest and temporarily by a $i34 million cash deposit. The securitized debt is a non-recourse obligation and is payable solely from the pool of timeshare financing receivables pledged as collateral to the debt. The proceeds were primarily used to pay down the remaining borrowings on one of our conduit facility and general corporate operating expenses. In connection with the securitization, we incurred $i4
million in debt issuance costs.
The Timeshare Facility is a non-recourse obligation payable solely from the pool of timeshare financing receivables pledged as collateral and related assets. In May 2022, we Amended and Restated our Timeshare Facility agreement under new terms, which include increasing the borrowing capacity from $i450 million to $i750
million, allowing
us to borrow up to the maximum amount until May 2024 and requiring all amounts borrowed to be repaid in 2025. In connection with the amendment, we incurred $i3
million in debt issuance costs.
We are required to deposit payments received from customers on the timeshare financing receivables securing the Timeshare Facility and Securitized Debt into depository accounts maintained by third parties. On a monthly basis, the depository accounts are utilized to make required principal, interest and other payments due under the respective loan agreements. The balances in the depository accounts were $i59 million and $i67
million as of September 30, 2022 and December 31, 2021, respectively, and were included in Restricted cash in our unaudited condensed consolidated balance sheets.
Debt Maturities
i
The contractual maturities of our debt and non-recourse debt as of September 30, 2022 were as follows:
($
in millions)
Debt
Non-recourse Debt
Total
Year
2022 (remaining)
$
i4
$
i188
$
i192
2023
i15
i433
i448
2024
i15
i164
i179
2025
i14
i214
i228
2026
i13
i65
i78
Thereafter
i2,605
i109
i2,714
$
i2,666
$
i1,173
$
i3,839
/
Note
14: iFair Value Measurements
i
The carrying amounts and
estimated fair values of our financial assets and liabilities were as follows:
(1)Carrying
amount net of allowance for financing receivables losses.
/
(2)Carrying amount net of unamortized deferred financing costs and discount.
Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values. The table
above
excludes cash and cash equivalents, restricted cash, accounts receivable, accounts payable, advance deposits and accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments. Our estimated fair value of derivative financial instruments is considered a level 2 measurement and is included inNote 13: Debt and Non-recourse Debt above. Our valuation methodology is categorized based on each asset or liability’s respective measurement inputs and their correlation to information available in active markets as follows:
•Level 1 - Measurements based on unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access.
•Level
2 - Measurements based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active or market data other than quoted prices that are observable.
•Level 3 - Measurements based on unobservable data that are supported by little or no market activity and are significant to the valuation methodology.
The estimated fair values of our originated and acquired timeshare financing receivables were determined using a discounted cash flow model. Our model incorporates default rates, coupon rates, credit quality and loan terms respective to the portfolio based on current market assumptions for similar types of arrangements.
The estimated fair value of our level 2 derivative financial instruments was determined
utilizing projected future cash flows discounted based on an expectation of future interest rates derived from observable market interest rate curves and market volatility.
The estimated fair value of our level 3 debt was determined utilizing indicative quotes obtained for similar issuances and projected future cash flows discounted at risk-adjusted rates.
The estimated fair value of our level 3 non-recourse debt was determined utilizing projected future cash flows discounted at risk-adjusted rates.
Note 15: iLeases
We
lease sales centers, office space and equipment under operating leases, some of which we acquired as part of the Diamond Acquisition. Our leases expire at various dates from 2022 through 2030, with varying renewal and termination options. Our lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise that option.
As part of our integration of business operations from the Diamond Acquisition, we ceased utilizing one leased office space in the first quarter of 2022 and one additional office space in the second quarter of 2022 , both of which the Company considered to be a triggering event for impairment analysis. We recognized ino
impairment expenses on the related right-of-use assets during the three months ended September 30, 2022 and $i6 million in the nine months ended September 30, 2022 respectively.
We recognize rent expense on leases with both contingent and non-contingent lease payment terms. Rent associated with non-contingent lease payments are recognized on a straight-line basis over the lease term. Rent expense for all operating leases
for the three months ended September 30, 2022 and 2021, was $i14 million and $i6 million,
and $i29 million and $i15 million, for the nine months ended September 30, 2022 and 2021,
respectively. For the three months ended September 30, 2022 and 2021, these amounts included less than $ii1/
million of short-term and variable lease costs, and for the nine months ended September 30, 2022 and 2021, $i2 million and $i1
million, respectively.
Weighted-average remaining lease term of operating leases (in years)
i4
i4
Weighted-average
discount rate of operating leases
i4.46
%
i4.35
%
/i
The
future minimum lease payments under non-cancelable operating leases, due in each of the next five years and thereafter as of September 30, 2022, are as follows:
($ in millions)
Operating Leases
Year
2022 (remaining)
$
i7
2023
i26
2024
i18
2025
i15
2026
i9
Thereafter
i6
Total
future minimum lease payments
$
i81
Less: imputed interest
(i7)
Present
value of lease liabilities
$
i74
/
Note 16: iIncome
Taxes
The effective tax rate for the nine months ended September 30, 2022 and 2021 was approximately i30 percent and i31
percent, respectively. The effective tax rate decrease year over year is primarily due to the change in earnings mix of our worldwide income and the impact of non-deductible costs related to the Diamond acquisition in the third quarter of 2021. The difference between our effective tax rate as compared to the U.S. statutory federal tax rate of 21 percent is primarily due to the impact of state and foreign income taxes, as well as discrete items including share-based compensation.
Note 17: iShare-Based
Compensation
Stock Plan
We issue service-based restricted stock units (“Service RSUs”), service and performance-based restricted stock units (“Performance RSUs”) and nonqualified stock options (“Options”) to certain employees and directors. We recognized share-based compensation expense of $i14 million for the three months ended September 30, 2022 and 2021,
and $i40 million and $i32 million for the nine months ended September 30,
2022 and 2021, respectively.
As of September 30, 2022, unrecognized compensation costs for unvested awards was approximately $i43 million, which is expected to be recognized over a weighted average period of i1.9
years. As of September 30, 2022, there were i2,657,102 shares of common stock available for future issuance under this plan.
During the nine months ended September 30, 2022, we issued i795,963 Service RSUs with a grant date fair value of $i44.17,
which generally vest in equal annual installments over ithree years from the date of grant.
Options
During the nine months ended September 30, 2022, we issued i389,536
Options with an exercise price of $i44.09, which generally vest over ithree
years from the date of the grant.
i
The weighted-average grant date fair value of these options was $i20.08,
which was determined using the Black-Scholes-Merton option-pricing model with the assumptions included in the table below. Expected volatility is calculated using our historical and implied volatility of our share price. Dividend yield is calculated based on our expected future payout at the time of issuance. Risk-free rate is based on the yields of U.S. Department of Treasury instruments with similar maturities. Expected term is estimated using the vesting period and contractual term of the Options.
Expected volatility
i45.8
%
Dividend
yield
i—
%
Risk-free rate
i1.7
%
Expected
term (in years)
i6.0
/
As of September 30, 2022, we had i1,539,384
Options outstanding that were exercisable.
Performance RSUs
During the nine months ended months ended September 30, 2022, we issued i93,064 Performance RSUs with a grant date fair value of $i44.09.
The Performance RSUs are settled at the end of a itwo-year performance period, with i50
percent of the Performance RSUs subject to achievement based on the Company’s adjusted earnings before interest expense, taxes and depreciation and amortization further adjusted for net deferral and recognition of revenues and related direct expenses related to sales of VOIs of projects under construction. The remaining i50 percent of the Performance
RSUs are subject to the achievement of certain contract sales targets.
We determined that the performance conditions for our Performance RSUs are probable of achievement and, for the three and nine months ended September 30, 2022, we recognized compensation expense based on the number of Performance RSUs we expect to vest.
Employee Stock Purchase Plan
In March 2017, the Board of Directors adopted the Hilton Grand Vacations Inc. Employee Stock Purchase Plan (the “ESPP”), which became effective during 2017. In connection with the ESPP, we issued i2.5
million shares of common stock which may be purchased under the ESPP. The ESPP allows eligible employees to purchase shares of our common stock at a price per share not less than i95 percent of the fair market value per share of common stock on the purchase date, up to a maximum threshold established by the plan administrator for the offering period. During the three and nine months ended September 30,
2022 and 2021, we recognized less than $iiii1/// million
of compensation expense related to this plan.
The following tables present the calculation of our basic and diluted earnings per share (“EPS”) and the corresponding weighted average shares outstanding referenced in these calculations for the three and nine months ended September 30, 2022 and 2021.
Three
Months Ended September 30,
Nine Months Ended September 30,
($ and shares outstanding in millions, except per share amounts)
2022
2021
2022
2021
Basic EPS:
Numerator:
Net
income(1)
$
i150
$
i99
$
i274
$
i101
Denominator:
Weighted
average shares outstanding
i120
i108
i121
i93
Basic
EPS
$
i1.25
$
i0.92
$
i2.26
$
i1.08
Diluted
EPS:
Numerator:
Net income(1)
$
i150
$
i99
$
i274
$
i101
Denominator:
Weighted
average shares outstanding
i121
i109
i123
i94
Diluted
EPS
$
i1.24
$
i0.90
$
i2.23
$
i1.07
(1)Net
income for the three months ended September 30, 2022 and 2021 was $i149,767,212 and $i98,704,709, respectively, and $i273,567,561
and $i100,634,069 for the nine months ended September 30, 2022 and 2021, respectively.
The
dilutive effect of outstanding share-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period. For the three and nine months ended September 30, 2022, we excluded i846,369 and i736,581,
respectively, and i512,371 and i631,738
for the three and nine months ended September 30, 2021, respectively, of share-based compensation awards, because their effect would have been anti-dilutive under the treasury stock method.
Note 19: iRelated Party Transactions
BRE Ace LLC and 1776 Holding, LLC
We
hold a i25 percent ownership interest in BRE Ace LLC, a VIE, which owns a timeshare resort property and related operations, commonly known as “Elara, by Hilton Grand Vacations.”
We hold a i50
percent ownership interest in 1776 Holding, LLC, a VIE, which owns a timeshare resort property and related operations, known as “Liberty Place Charleston, by Hilton Club.”
We record Equity in earnings from our unconsolidated affiliates in our unaudited condensed consolidated statements of operations. See Note 11: Investments in Unconsolidated Affiliates for additional information. Additionally, we earn commissions and other fees related to fee-for-service agreements with the investees to sell VOIs at Elara, by Hilton Grand Vacations and Liberty Place Charleston, by Hilton Club. iThese
amounts are summarized in the following table and are included in Sales, marketing, brand, and other fees on our unaudited condensed consolidated statements of operations as of the date they became related parties.
We also had $i14
million and $i20 million of outstanding receivables related to the fee-for-service agreements included in Accounts receivable, net on our unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021, respectively.
Three
Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2022
2021
2022
2021
Equity in earnings from unconsolidated affiliates
$
i2
$
i1
$
i9
$
i7
Commissions
and other fees
i52
i33
i133
i70
Note
20: iBusiness Segments
We operate our business through the following itwo segments:
•Real
estate sales and financing – We market and sell VOIs that we own. We also source VOIs through fee-for-service agreements with third-party developers. Related to the sales of the VOIs that we own, we provide consumer financing, which includes interest income generated from the origination of consumer loans to customers to finance their purchase of VOIs and revenue from servicing the loans. We also generate fee revenue from servicing the loans provided by third-party developers to purchasers of their VOIs.
•Resort operations and club management – We manage the Club and Diamond Clubs and earn activation fees, annual dues and transaction fees from member exchanges for other vacation products. We also earn fees for managing the timeshare properties. We generate rental revenue from unit rentals of unsold inventory and inventory made available due to ownership
exchanges under our Club and Diamond Clubs programs. We also earn revenue from food and beverage, retail and spa outlets at our timeshare properties.
The performance of our operating segments is evaluated primarily based on adjusted earnings before interest expense (excluding non-recourse debt), taxes, depreciation and amortization (“EBITDA”). We define Adjusted EBITDA as EBITDA, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) other gains, including asset dispositions and foreign currency transactions; (ii) debt restructurings/retirements; (iii) non-cash impairment losses; (iv) share-based and other compensation expenses; and (v) other items, including but not limited to costs associated with acquisitions, restructuring, amortization of premiums resulting from purchase accounting, and other non-cash and one-time charges.
We
do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance.
Below is the presentation of our reportable segment results which include the acquired Diamond operations within both segments since the Acquisition Date. iThe following table presents revenues for our reportable segments reconciled to consolidated amounts:
Three
Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2022
2021
2022
2021
Revenues:
Real estate sales and financing
$
i745
$
i659
$
i1,783
$
i976
Resort
operations and club management(1)
i299
i216
i870
i403
Total
segment revenues
i1,044
i875
i2,653
i1,379
Cost
reimbursements
i82
i58
i215
i131
Intersegment
eliminations(1)(2)
(i10)
(i5)
(i25)
(i13)
Total
revenues
$
i1,116
$
i928
$
i2,843
$
i1,497
(1)Includes
charges to the real estate sales and financing segment from the resort operations and club management segment for fulfillment of discounted marking package stays at resorts. These charges totaled $i10 million and $i5
million for the three months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022 and 2021, these charges totaled $i25 million and $i13
million, respectively.
(2)Includes charges to the real estate sales and financing segment from the resort operations and club management segment for the rental of model units toshow prospective buyers. These charges totaled $i1
million and $i2 million and less than $ii1/
million for the three and nine months ended September 30, 2022 and 2021, respectively.
i
The following table presents Adjusted EBITDA for our reportable segments reconciled to net income:
Three
Months Ended September 30,
Nine Months Ended September 30,
($ in millions)
2022
2021
2022
2021
Adjusted EBITDA:
Real estate sales and financing(1)
$
i295
$
i280
$
i666
$
i352
Resort
operations and club management(1)
i112
i109
i332
i212
Segment
Adjusted EBITDA
i407
i389
i998
i564
Acquisition
and integration-related expense
(i19)
(i54)
(i49)
(i83)
General
and administrative
(i50)
(i41)
(i158)
(i92)
Depreciation
and amortization
(i57)
(i48)
(i181)
(i71)
License
fee expense
(i33)
(i24)
(i90)
(i57)
Other
loss, net
i2
(i20)
i1
(i22)
Interest
expense
(i37)
(i42)
(i105)
(i74)
Income
tax expense
(i54)
(i49)
(i115)
(i46)
Equity
in earnings from unconsolidated affiliates
i2
i1
i9
i7
Impairment
expense
i—
(i1)
i—
(i2)
Other
adjustment items(2)
(i11)
(i12)
(i36)
(i23)
Net
income
$
i150
$
i99
$
i274
$
i101
(1)Includes
intersegment transactions. Refer to our table presenting revenues by reportable segment above for additional discussion.
(2)For the three and nine months ended September 30, 2022 and 2021, this amount includes costs associated with restructuring, one-time charges and othernon-cash items included within our reportable segments.
/
Note 21: iCommitments
and Contingencies
Commitments
We have entered into certain arrangements with developers whereby we have committed to purchase vacation ownership units or other real estate at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of September 30, 2022, we were committed to purchase approximately $i270 million of inventory and land over a period of i8
years and $i12 million of other commitments in the normal course of business. Additionally, we have committed to develop additional vacation ownership units at an existing resort in Japan. We are also committed to an agreement to exchange parcels of land in Hawaii, subject to the successful completion of zoning, land use requirements and other applicable regulatory requirements. The actual amount and timing of the acquisitions are subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain
circumstances. During the nine months ended September 30, 2022, we fulfilled $i50 million of purchases required under our inventory commitments. During the nine months ended September 30, 2021, we completed $i132
million of purchases required under our inventory-related purchase commitments. iAs of September 30, 2022, our remaining obligations pursuant to these arrangements were expected to be incurred as follows:
($
in millions)
2022
(remaining)
2023
2024
2025
2026
Thereafter
Total
Inventory purchase obligations
$
i56
$
i141
$
i59
$
i3
$
i3
$
i8
$
i270
Other
commitments(1)
i2
i8
i2
i—
i—
i—
i12
Total
$
i58
$
i149
$
i61
$
i3
$
i3
$
i8
$
i282
(1)Primarily
relates to commitments related to information technology and sponsorships.
As part of the Diamond Acquisition and per our licensing agreement with Hilton, we are committed to rebranding Diamond properties to brands that meet Hilton standards. We are currently rebranding our resorts and sales centers and expect rebranding to occur over a period of several years.
Litigation Contingencies
We are involved in litigation
arising from the normal course of business, some of which include claims for substantial sums. We evaluate these legal proceedings and claims at each balance sheet date to determine the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, our ability to reasonably estimate the amount of loss. We record a contingent litigation liability when it is determined that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
As of September 30, 2022, we accrued liabilities of approximately $i121
million for all legal matters that were contingencies. Approximately $i95 million of these accrued liabilities relate to a judgment entered against Diamond in March 2022 in connection with a case filed in 2015 that was not deemed probable and estimable as of the Acquisition Date. This matter is subject to insurance coverage and as a result as of September 30, 2022, we recorded an insurance claim receivable of $i80
million within Accounts receivable, net in our unaudited condensed consolidated balance sheet, During the three and nine months ended September 30, 2022, we recognized a charge of $i1 million and $i15 million,
respectively, to our unaudited condensed consolidated statement of operations that represents the amount of the settlement liability not deemed probable of recovery from the insurance carriers.
While we currently believe that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material effect on the Company’s financial condition, cash flows, or materially adversely affect overall trends in our results of operations, legal proceedings are inherently uncertain and unfavorable rulings could, individually or in aggregate, have a material adverse effect on the Company’s business, financial condition or results of operations.
Note
22: iSubsequent Events
Management has evaluated all subsequent events through November 9, 2022, the date the unaudited condensed consolidated financial statements were available to be issued. The results of management’s analysis indicated no significant subsequent events have occurred that required consideration or adjustments to our disclosures in the unaudited financial statements.
Item
2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the year ended December 31, 2021.
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements
convey management’s expectations as to the future of HGV, and are based on management’s beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time HGV makes such statements. Forward-looking statements include all statements that are not historical facts and may be identified by terminology such as the words “outlook,”“believe,”“expect,”“potential,”“goal,”“continues,”“may,”“will,”“should,”“could,”“would,”“seeks,”“approximately,”“projects,”“predicts,”“intends,”“plans,”“estimates,”“anticipates,”“future,”“guidance,”“target,” or the negative version of these words or other comparable words, although not all forward-looking statements may contain such words. The forward-looking statements contained in this Quarterly Report on Form
10-Q include statements related to HGV’s revenues, earnings, taxes, cash flow and related financial and operating measures, and expectations with respect to future operating, financial and business performance, and other anticipated future events and expectations that are not historical facts.
HGV cautions you that our forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that are beyond HGV’s control, which may cause the actual results, performance or achievements to be materially different from the future results. Any one or more of these risks or uncertainties could adversely impact
HGV’s
operations, revenue, operating profits and margins, key business operational metrics discussed under “— Operational Metrics” below, financial condition or credit rating.
For additional information regarding factors that could cause HGV’s actual results to differ materially from those expressed or implied in the forward-looking statements in this Quarterly Report on Form 10-Q, please see the risk factors discussed in “Part I—Item 1A. Risk Factors” and the Summary of Risk Factors in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as supplemented and updated by the risk factors discussed in “Part II-Item 1A. Risk Factors” of this Report and those described from time to time in other periodic reports that we file with the SEC. There may be other risks and uncertainties that we are unable to predict at this time or that we currently
do not expect to have a material adverse effect on our business. Except for HGV’s ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments, changes in management’s expectations, or otherwise.
Terms Used in this Quarterly Report on Form 10-Q
Except where the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Hilton Grand Vacations,”“HGV,”“the Company,”“we,”“us” and “our” refer to Hilton Grand Vacations Inc., together with its consolidated subsidiaries. “Legacy-HGV”
refers to our business and operations that existed both prior to and following the Diamond Acquisition (as defined below), excluding Legacy-Diamond. “Legacy-Diamond” refers to the business and operations that we acquired in the Diamond Acquisition. Except where the context requires otherwise, references to our “properties” or “resorts” refer to the timeshare properties that we manage or own. Of these resorts and units, a portion is directly owned by us or joint ventures in which we have an interest; the remaining resorts and units are owned by our third-party owners.
“Developed” refers to VOI inventory that is sourced from projects developed by HGV.
“Fee for service” refers to VOI inventory that we sell and manage on behalf of third-party developers.
“Just-in-time” refers to VOI inventory that
is primarily sourced in transactions that are designed to closely correlate the timing of the acquisition by us with our sale of that inventory to purchasers.
“Points-based” refers to VOI sales that are backed by physical real estate that is contributed to a trust.
“VOI” refers to vacation ownership intervals and interests.
Non-GAAP Financial Measures
This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms under U.S. Generally Accepted Accounting Principles (“U.S. GAAP”), and financial measures that are not calculated in accordance with U.S. GAAP, including earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization (“EBITDA”) and Adjusted EBITDA.
Operational
Metrics
This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate profit, tour flow, and volume per guest (“VPG”).
See “Key Business and Financial Metrics and Terms Used by Management” and “Results of Operations” for a discussion of the meanings of these terms, the Company’s reasons for providing non-GAAP financial measures, and reconciliations of non-GAAP financial measures to measures calculated in accordance with U.S. GAAP.
Overview
Our
Business
We are a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our Company also owns and operates Diamond Resorts International (“Diamond”) and is in the process of rebranding Diamond properties and sales centers to brands that meet Hilton standards. Our operations primarily consist of: selling vacation ownership intervals and vacation ownership interests (collectively,
“VOIs”,
“VOI”) for us and third parties; financing and servicing loans provided to consumers for their timeshare purchases; operating resorts and multi-resort trusts; and managing our points-based Hilton Grand Vacations Club and Hilton Club exchange program (collectively the “Legacy-HGV Club”) and Diamond points-based clubs.
As of September 30, 2022, we have 154 properties located in the United States (“U.S.”), Europe, Mexico, the Caribbean, Canada, and Japan. A significant number of our properties and VOIs are concentrated in Florida, Nevada, Hawaii, Europe, California, Virginia and Arizona. and feature spacious, condominium-style accommodations with superior amenities and quality service. As of September 30, 2022, we have approximately 344,000 Hilton Grand Vacations Club and Hilton Club members. Legacy-HGV Club
members have the flexibility to exchange their VOIs for stays at any Hilton Grand Vacations resort or any property in the Hilton system of 18 industry-leading brands across approximately 7,000 properties, as well as numerous experiential vacation options, such as cruises and guided tours. We also have 171,000 Diamond Club members who are able to utilize their points across the Diamond resorts, affiliated properties and alternative experiential options.
Diamond Acquisition
On August 2, 2021, we completed the acquisition of Dakota Holdings, Inc., the parent of Diamond (the “Diamond Acquisition”). We completed the acquisition by exchanging 100 percent of the outstanding equity interests of Diamond into shares of HGV common stock. Pre-existing HGV shareholders own approximately 72 percent of the combined company after giving effect
of the Diamond Acquisition, with certain funds controlled by Apollo Global Management Inc. (the “Apollo Funds” or, “Apollo”) and other minority shareholders, who previously owned 100 percent of Diamond, holding the remaining approximately 28 percent at the time the Diamond Acquisition was completed.
Diamond also operates in the hospitality and VOI industry, with a worldwide resort network of global vacation destinations. Diamond’s portfolio consists of resort properties that we manage, are included in one of Diamond’s single- and multi-use trusts (collectively, the “Diamond Collections” or “Collections”), or are Diamond branded resorts in which we own inventory. In addition there are affiliated resorts and hotels, which we do not manage, and which do not carry the Diamond brand but are a part of Diamond’s network and, through THE Club® and other Club offerings (the “Diamond Clubs”), are available
for its members to use as vacation destinations.
The financial results within this report include Diamond’s results of operations beginning on August 2, 2021. We refer to Diamond’s business and operations that we acquired as “Legacy-Diamond”, and our business and operations that existed both prior to and following the Diamond Acquisition as “Legacy-HGV.” See Note 3: Diamond Acquisition for more information. Acquisition and integration-related expenses represent direct costs associated with the Diamond Acquisition including integration costs, legal fees, financial and other professional services. These expenses also include severance, retention and other employee-related benefits.
Our Segments
We operate our business across two
segments: (1) real estate sales and financing; and (2) resort operations and club management.
Real Estate Sales and Financing
Our primary Legacy-HGV product is the marketing and selling of fee-simple VOIs deeded in perpetuity and right to use real estate interests, developed either by us or by third parties. This ownership interest is an interest in real estate generally equivalent to one week on an annual basis, at the timeshare resort where the VOI was purchased. Traditionally, timeshare operators have funded 100 percent of the investment necessary to acquire land and construct timeshare properties. In addition to developing our own properties, we source VOIs through fee-for-service and just-in-time agreements with third-party developers and have focused our inventory strategy on developing an optimal inventory mix focused on developed properties as well as fee-for-service and
just-in-time agreements. The fee-for-service agreements enable us to generate fees from the sales and marketing of the VOIs and Legacy-HGV Club memberships and from the management of the timeshare properties without requiring us to fund acquisition and construction costs. The just-in-time agreements enable us to source VOI inventory in a manner that allows us to correlate the timing of acquisition of the inventory with the sale to purchasers. Sales of owned, including just-in-time inventory, generally result in greater Adjusted EBITDA contributions, while fee-for-service sales require less initial investment and allow us to accelerate our sales growth. Both sales of owned inventory and fee-for-service sales generate long-term, predictable fee streams, by adding to the Club membership base and properties under management, that generate strong returns on invested capital.
We also source VOIs through our Collections product which are represented by an annual or biennial allotment of points that can be utilized for vacations at any of the resorts in our network for varying lengths of stay. Purchasers of points generally do not acquire a direct ownership interest in the resort properties in our network. For each Collection, one or more trustees hold legal title to the deeded fee simple real estate interests or the functional equivalent, or, in some cases, leasehold real estate interests for the benefit of the respective Collection’s association members in accordance with the applicable agreements.
For the nine months ended September 30, 2022, sales from fee-for-service, just-in-time, developed
inventory and points-based sources were 28 percent, 14 percent, 21 percent and 36 percent, respectively, of contract sales. See “Key Business and Financial Metrics and Terms Used by Management — Real Estate Sales Operating Metrics” for additional discussion of contract sales. The estimated contract sales value related to our inventory that is currently available for sale at open or soon-to-be open projects and inventory at new or existing projects that will become available for sale in the future upon registration, delivery or construction is approximately $12 billion at current pricing.
Capital efficient arrangements, comprised of our fee-for-service
and just-in-time inventory, represented approximately 40 percent of that supply. We believe that the visibility into our long-term supply allows us to efficiently manage inventory to meet predicted sales, reduce capital investments, minimize our exposure to the cyclicality of the real estate market and mitigate the risks of entering into new markets.
We sell our vacation ownership products primarily through our distribution network of both-in-market and off-site sales centers. Our products are currently marketed for sale throughout the United States, Mexico, Canada, Europe, and Japan. We operate sales distribution centers in major markets and popular leisure destinations with year-round demand and a history of being a friendly environment for vacation ownership. We have approximately 60 sales distribution centers in various domestic and international locations. A phased rebranding of sales centers that were acquired as part
of the Diamond Acquisition began in late 2021. Our marketing and sales activities are based on targeted direct marketing and a highly personalized sales approach. We use targeted direct marketing to reach potential members who are identified as having the financial ability to pay for our products and have an affinity with Hilton (Legacy-HGV only) and are frequent leisure travelers. Tour flow quality impacts key metrics such as close rate and VPG, defined in “Key Business and Financial Metrics and Terms Used by Management—Real Estate Sales Operating Metrics.” Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the nine months ended September 30, 2022, 71 percent of our contract sales were to our existing
owners.
We provide financing for members purchasing our developed and acquired inventory and generate interest income. Our timeshare financing receivables are collateralized by the underlying VOIs and are generally structured as 10-year, fully-amortizing loans that bear a fixed interest rate typically ranging from 2.5 percent to 25 percent per annum. Financing propensity was 63 percent and 66 percent for the nine months ended September 30, 2022 and 2021. We calculate financing propensity as contract sales volume of financed contracts originated in the period divided by contract
sales volume of all contracts originated in the period.
The interest rate on our loans is determined by, among other factors, the amount of the down payment, the borrower’s credit profile and the loan term. The weighted-average FICO score for loans to U.S. and Canadian borrowers at the time of origination were as follows:
Prepayment is permitted without penalty. When a member defaults, we ultimately return their VOI to inventory for resale and that member no longer participates in our Clubs.
Some of our timeshare financing receivables have been pledged as collateral in our securitization transactions and our Timeshare Facility, which have in the past and may in the future provide funding for our business activities. In these securitization transactions, special purpose entities are established to issue various classes of debt securities which are generally collateralized by a single pool of assets, consisting of timeshare financing receivables that we service and related cash deposits.
For additional information see Note 7: Timeshare Financing Receivables in our unaudited condensed consolidated financial statements.
In addition, we earn fees from servicing the loans provided by third-party developers of our fee-for-service projects to purchasers of their VOIs and from our securitized timeshare financing receivables.
Resort Operations and Club Management
We enter into management agreements with the HOAs of the timeshare
resorts developed by us or a third party. Each of the HOAs is governed by a board of directors comprised of owner and developer representatives that are charged with ensuring the resorts are well-maintained and financially stable. Our management services include day-to-day operations of the resorts, maintenance of the resorts, preparation of reports, budgets and projections and employee training and oversight. Our HOA management agreements provide for a cost-plus management fee, which means we generally earn a fee equal to 10 percent to 15 percent of the costs to operate the applicable resort. The fees we earn are highly predictable due to the relatively fixed nature of resort operating expenses and our management fees are unaffected by changes in rental rate or occupancy. We are reimbursed for the costs incurred to perform our services, principally related to personnel providing on-site services. The initial term of our management agreements typically ranges from
three to five years and the agreements are subject to periodic renewal for one to three-year periods. Many of these agreements renew automatically unless either party provides advance notice of termination before the expiration of the term.
We also manage and operate the Clubs, including the points-based Hilton Grand Vacations Club and Hilton Club exchange programs, which provide exclusive exchange, leisure travel and reservation services to our Legacy-HGV Club members, as well as the Diamond Clubs. When owners purchase a VOI, they are generally enrolled in a Club which allows the member to exchange their points for a number of vacation options. In addition to an annual membership fee, Club members pay incremental fees depending on exchanges they choose within the Club system.
We rent unsold VOI inventory, third-party inventory and inventory made available due to ownership exchanges
through our club programs. We earn a fee from rentals of third-party inventory. Additionally, we provide ancillary offerings including food and beverage, retail and spa offerings at these timeshare properties.
Key Business and Financial Metrics and Terms Used by Management
Real Estate Sales Operating Metrics
We measure our performance using the following key operating metrics:
•Contract sales represents the total amount of VOI products (fee-for-service, just-in-time, developed, and points-based) under purchase agreements signed during the
period where we have received a down payment of at least 10 percent of the contract price. Contract sales differ from revenues from the Sales of VOIs, net that we report in our unaudited condensed consolidated statements of operations due to the requirements for revenue recognition, as well as adjustments for incentives. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business and is used to manage the performance of the sales organization. While we do not record the purchase price of sales of VOI products developed by fee-for-service partners as revenue in our unaudited condensed consolidated
financial statements, rather recording the commission earned as revenue in accordance with U.S. GAAP, we believe contract sales to be an important operational metric, reflective of the overall volume and pace of sales in our business and believe it provides meaningful comparability of our results to the results of our competitors which may source their VOI products differently.
•We believe that the presentation of contract sales on a combined basis (fee-for-service, developed and points-based) is most appropriate for the purpose of the operating metric; additional information regarding the split of contract sales, is included in
“—Real Estate” below.
•Sales revenue represents Sales of VOIs, net, commissions and brand fees earned from the sale of fee-for-service intervals.
•Real estate profit represents sales revenue less the cost of VOI sales, sales and marketing costs, net of marketing revenue. Real estate margin percentage is calculated by dividing real estate margin by sales revenue. We consider this to be an important operating measure because it measures the efficiency of our sales and marketing spending and management of inventory costs.
•Tour flow represents the number of sales presentations given at our sales centers during the period.
•Volume
per guest (“VPG”) represents the sales attributable to tours at our sales locations and is calculated by dividing contract sales, excluding telesales, by tour flow. We consider VPG to be an
important operating measure because it measures the effectiveness of our sales process, combining the average transaction price with the closing rate.
For further information see Item 8. Financial Statements and Supplementary
Data - Note 2: Basis of Presentation and Summary of Significant Accounting Policies in our Annual Report on Form 10-K for the year ended December 31, 2021.
EBITDA and Adjusted EBITDA
EBITDA, presented herein, is a financial measure that is not recognized under U.S. GAAP that reflects net income, before interest expense (excluding non-recourse debt), a provision for income taxes and depreciation and amortization.
Adjusted EBITDA, presented herein, is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) other gains, including asset dispositions and foreign currency transactions; (ii) debt restructurings/retirements; (iii) non-cash
impairment losses; (iv) share-based and other compensation expenses; and (v) other items, including but not limited to costs associated with acquisitions, restructuring, amortization of premiums resulting from purchase accounting, and other non-cash and one-time charges.
EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our
operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry.
EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income, cash flow or other methods of analyzing our results as reported under U.S. GAAP. Some of these limitations are:
•EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA and Adjusted EBITDA do not reflect our interest expense (excluding interest expense on non-recourse debt), or the cash requirements
necessary to service interest or principal payments on our indebtedness;
•EBITDA and Adjusted EBITDA do not reflect our tax expense or the cash requirements to pay our taxes;
•EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
•EBITDA and Adjusted EBITDA do not reflect any cash requirements for future replacements of assets that are being depreciated and amortized; and
•EBITDA
and Adjusted EBITDA may be calculated differently from other companies in our industry limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.
We evaluate our business segment operating performance using segment Adjusted EBITDA, as described in Note 20: Business Segments in our unaudited condensed consolidated financial statements. We do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment operating performance. For a discussion of our definition of EBITDA and Adjusted EBITDA, how management uses them to manage our business and material limitations on their usefulness, refer to “—Key Business and Financial Metrics and Terms Used by Management—EBITDA
and Adjusted EBITDA.” The following tables set forth revenues and Adjusted EBITDA by segment:
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Revenues:
Real
estate sales and financing
$
745
$
659
$
86
13.1
$
1,783
$
976
$
807
82.7
Resort
operations and club management
299
216
83
38.4
870
403
467
NM
Total segment revenues
1,044
875
169
19.3
2,653
1,379
1,274
92.4
Cost
reimbursements
82
58
24
41.4
215
131
84
64.1
Intersegment eliminations(2)
(10)
(5)
(5)
100.0
(25)
(13)
(12)
92.3
Total
revenues
$
1,116
$
928
$
188
20.3
$
2,843
$
1,497
$
1,346
89.9
(1)NM
- fluctuation in terms of percentage change is not meaningful.
(2)Refer to Note 20: Business Segments in our unaudited condensed consolidated financial statements for details on the intersegment eliminations.
The following table reconciles net income, our most comparable U.S. GAAP financial measure, to EBITDA and Adjusted EBITDA:
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Net
income
$
150
$
99
$
51
51.5
$
274
$
101
$
173
NM
Interest
expense
37
42
(5)
(11.9)
105
74
31
41.9
Income tax expense
54
49
5
10.2
115
46
69
NM
Depreciation
and amortization
57
48
9
18.8
181
71
110
NM
Interest expense, depreciation and amortization included in equity in earnings from unconsolidated
affiliates
2
—
2
100.0
2
1
1
100.0
EBITDA
300
238
62
26.1
677
293
384
NM
Other
loss, net
(2)
20
(22)
(110.0)
(1)
22
(23)
NM
Share-based compensation expense
14
14
—
—
40
32
8
25.0
Impairment
expense
—
1
(1)
(100.0)
—
2
(2)
(100.0)
Acquisition and integration-related expense
19
54
(35)
(64.8)
49
83
(34)
(41.0)
Other
adjustment items(2)
7
13
(6)
(46.2)
48
20
28
NM
Adjusted EBITDA
$
338
$
340
$
(2)
(0.6)
$
813
$
452
$
361
79.9
(1)NM
- fluctuation in terms of percentage change is not meaningful.
(2)For the three and nine months ended September 30, 2022 and 2021 this amount includes costs associated with restructuring, one-time charges and other non-cash items. This amount also includes the amortization of premiums resulting from purchase accounting.
The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Adjusted
EBITDA:
Real estate sales and financing(2)
$
295
$
280
$
15
5.4
$
666
$
352
$
314
89.2
Resort
operations and club management(2)
112
109
3
2.8
332
212
120
56.6
Adjustments:
Adjusted
EBITDA from unconsolidated affiliates
5
1
4
NM
12
8
4
50.0
License fee expense
(33)
(24)
(9)
37.5
(90)
(57)
(33)
57.9
General
and administrative(3)
(41)
(26)
(15)
57.7
(107)
(63)
(44)
69.8
Adjusted EBITDA
$
338
$
340
$
(2)
(0.6)
$
813
$
452
$
361
79.9
(1)NM
- fluctuation in terms of percentage change is not meaningful.
(2)Includes intersegment transactions, share-based compensation, depreciation and other adjustments attributable to the segments.
(3)Excludes segment related share-based compensation, depreciation and other adjustment items.
Real Estate Sales and Financing
In accordance with Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), revenue and the related costs to fulfill and acquire the contract
(“direct costs”) from sales of VOIs under construction are deferred until the point in time when construction activities are deemed to be completed. The real estate sales and financing segment is impacted by construction related deferral and recognition activity. In periods where Sales of VOIs and related direct costs of projects under construction are deferred, margin percentages will generally contract as the indirect marketing and selling costs associated with these sales are recognized as incurred in the current period. In periods where previously deferred Sales of VOIs and related direct costs are recognized upon construction completion, margin percentages will generally expand as the indirect marketing and selling costs associated with these sales were recognized in prior periods.
The following table represents deferrals
and recognitions of Sales of VOI revenue and direct costs for properties under construction:
Three Months Ended September 30,
Variance
Nine
Months Ended September 30,
Variance
($ in millions)
2022
2021
$
2022
2021
$
Sales of VOIs (deferrals)
$
10
$
—
$
10
$
(53)
$
—
$
(53)
Sales
of VOIs recognitions
76
241
(165)
87
167
(80)
Net Sales of VOIs (deferrals) recognitions
86
241
(155)
34
167
(133)
Cost
of VOI sales (deferrals)(1)
3
—
3
(18)
—
(18)
Cost of VOI sales recognitions
27
73
(46)
30
50
(20)
Net
Cost of VOI sales (deferrals) recognitions(1)
30
73
(43)
12
50
(38)
Sales and marketing expense (deferrals)
2
—
2
(8)
—
(8)
Sales
and marketing expense recognitions
11
35
(24)
13
24
(11)
Net Sales and marketing expense (deferrals) recognitions
13
35
(22)
5
24
(19)
Net
construction (deferrals) recognitions
$
43
$
133
$
(90)
$
17
$
93
$
(76)
(1)Includes anticipated Costs of
VOI sales of VOIs under construction that will be acquired under a just-in-time arrangement once construction is complete for the three and nine months ended September 30, 2022 and 2021.
Real estate sales and financing segment revenues increased by $86 million and $807 million for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, sales revenue primarily increased in these periods due to an increase in travel demand and a
corresponding
increase in tour flow and sales transactions; partially offset by a net decrease in the recognition of deferred sales of VOIs related to projects previously under construction during the same periods in 2021. Sales revenue for the nine months ended September 30, 2022 also increased as a result of the launch of new properties in the second half of 2021.
Real estate sales and financing Adjusted EBITDA increased by $15 million and by $314 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to the revenue increases discussed above.
Refer to “—Real Estate” and “—Financing” for further discussion on the revenues and expenses of the real estate sales and financing segment.
Resort
Operations and Club Management
Resort operations and club management segment revenues increased by $83 million and $467 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, the increase in resort operations and club management revenues was driven by greater resort management revenue from the launch of new properties in the second half of 2021 as well as an increase in Club members. Resort operations and club management segment adjusted EBITDA increased by $3 million and by $120 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021, primarily due to the increase in resort and club management and rental revenues described above, partially offset by a by an increase in resort and club
management expenses due to personnel-related costs incurred to service increased arrivals and transaction activity along with the launch of new club features and programs.
Refer to “— Resort and Club Management” and “—Rental and Ancillary Services” for further discussion on the revenues and expenses of the resort operations and club management segment.
Net recognition of sales of VOIs under construction(3)
86
241
(155)
(64.3)
34
167
(133)
(79.6)
Fee-for-service
sale upgrades, net
5
3
2
66.7
14
8
6
75.0
Other(4)
(5)
(15)
10
(66.7)
(74)
(42)
(32)
76.2
Sales
of VOIs, net
$
500
$
488
$
12
2.5
$
1,130
$
597
$
533
89.3
Tour
flow
142,647
97,628
45,019
375,507
181,921
193,586
VPG
$
4,229
$
4,255
$
(26)
$
4,463
$
4,356
$
107
(1)NM
- fluctuation in terms of percentage change is not meaningful.
(2)Represents contract sales from fee-for-service properties on which we earn commissions and brand fees.
(3)Represents the net recognition of revenues related to the Sales of VOIs under construction that are recognized when construction is complete.
(4)Includes adjustments for revenue recognition, including amounts in rescission and sales incentives.
Contract sales increased by $188 million and by $916 million for the three and nine months ended September
30, 2022, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, the increase in these
periods was primarily due to an increase in tour flow corresponding with increases in travel demand related to new inventory available for sale at resorts that were opened in the second half of 2021.
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Sales,
marketing, brand and other fees
$
177
$
118
$
59
50.0
$
457
$
252
$
205
81.3
Less:
Marketing
revenue and other fees
52
45
7
15.6
164
90
74
82.2
Commissions and brand fees
125
73
52
71.2
293
162
131
80.9
Sales
of VOIs, net
500
488
12
2.5
1,130
597
533
89.3
Sales revenue
625
561
64
11.4
1,423
759
664
87.5
Less:
Cost
of VOI sales
102
130
(28)
(21.5)
207
154
53
34.4
Sales and marketing expense, net(2)
246
174
72
41.4
644
316
328
NM
Real
estate profit
$
277
$
257
$
20
7.8
$
572
$
289
$
283
97.9
Real
estate profit margin
44.3
%
45.8
%
40.2
%
38.1
%
(1)NM - fluctuation in terms of percentage change is not meaningful.
(2)Includes
revenue recognized through our marketing programs for existing owners and prospective first-time buyers and revenue associated with sales incentives, title service and document compliance.
Real estate profit increased by $20 million and by $283 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, these increases were driven by greater travel demand; partially offset by a net decrease in the recognition of deferred sales of VOIs related to projects previously under construction. The increase in real estate profit was also attributed to a higher mix of sales of VOIs at new properties and greater commissions earned on sales of fee-for-service properties compared to the same periods in 2021. For the three and nine months ended September
30, 2022, cost of VOI sales decreased primarily due to a net decrease in the recognition of deferred cost of VOI sales related to projects previously under construction during the same periods in 2021; partially offset with an increase consistent with the increase in sales revenue. For the same periods, marketing revenue and other fees increased as a result of increased sales of vacation packages.
Financing
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Interest
income(2)
$
61
$
46
$
15
32.6
$
170
$
108
$
62
57.4
Other
financing revenue
7
7
—
—
26
19
7
36.8
Financing revenue
68
53
15
28.3
196
127
69
54.3
Consumer
financing interest expense(3)
11
8
3
37.5
26
22
4
18.2
Other financing expense
14
11
3
27.3
40
21
19
90.5
Financing
expense
25
19
6
31.6
66
43
23
53.5
Financing profit
$
43
$
34
$
9
26.5
$
130
$
84
$
46
54.8
Financing
profit margin
63.2
%
64.2
%
66.3
%
66.1
%
(1)NM - fluctuation in terms of percentage change is not meaningful.
(2)For
the three and nine months ended September 30, 2022, this amount includes $7 million and $27 million, respectively, of amortization of the premium related to the acquired timeshare financing receivables resulting from the Diamond Acquisition.
(3)For the three and nine months ended September 30, 2022, this amount includes $2 million and $8 million, respectively, of amortization of the premium related to the acquired non-recourse debt resulting from the Diamond Acquisition.
Financing profit increased by $9 million and $46 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, financing revenue
increased due to an increase in the weighted average interest rate and an increase in the carrying balance of the timeshare financing receivables portfolio. Financing expense also increased due to increased costs associated with loan servicing in addition to an increase in consumer financing interest expense resulting from an increase in the weighted-average interest rate compared to the same periods in 2021.
Resort Operations and Club Management Segment
Resort and Club Management
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Club
management revenue
$
48
$
42
$
6
14.3
$
150
$
98
$
52
53.1
Resort
management revenue
82
57
25
43.9
229
94
135
NM
Resort and club management revenues
130
99
31
31.3
379
192
187
97.4
Club
management expense
11
8
3
37.5
31
18
13
72.2
Resort management expense
34
18
16
88.9
87
27
60
NM
Resort
and club management expenses
45
26
19
73.1
118
45
73
NM
Resort and club management profit
$
85
$
73
$
12
16.4
$
261
$
147
$
114
77.6
Resort
and club management profit margin
65.4
%
73.7
%
68.9
%
76.6
%
(1)NM - fluctuation in terms of percentage change is not meaningful.
Resort
and club management profit increased by $12 million and $114 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, the increases in resort operations and club management revenues were driven by greater resort management revenue from the launch of new properties in the second half of 2021 as well as an increase in Club members and number of transactions; partially offset by an increase in resort and club management expenses due to personnel related costs incurred to service increased transactions and the launch of new club features and programs.
Rental and Ancillary Services
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Rental
revenues
$
157
$
104
$
53
51.0
$
436
$
184
$
252
NM
Ancillary
services revenues
2
8
(6)
(75.0)
30
14
16
NM
Rental and ancillary services revenues
159
112
47
42.0
466
198
268
NM
Rental
expenses
141
77
64
83.1
401
138
263
NM
Ancillary services expense
3
7
(4)
(57.1)
25
13
12
92.3
Rental
and ancillary services expenses
144
84
60
71.4
426
151
275
NM
Rental and ancillary services profit
$
15
$
28
$
(13)
(46.4)
$
40
$
47
$
(7)
(14.9)
Rental
and ancillary services profit margin
9.4
%
25.0
%
8.6
%
23.7
%
(1)NM - fluctuation in terms of percentage change is not meaningful.
Rental
and ancillary services profit decreased by $13 million and $7 million for the three and nine months ended September 30, 2022, compared to the same periods in 2021. Excluding the impact of the Diamond Acquisition, rental and ancillary services revenue increased in both of these periods due to an increase in average nightly rates charged in addition
to an increase in rooms available for rent corresponding with the launch of new properties during the second half of 2021. Rental and ancillary services expense increased
consistent with the aforementioned launch of new properties.
Other Operating Expenses
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
General
and administrative
$
50
$
41
$
9
22.0
$
158
$
92
$
66
71.7
Depreciation
and amortization
57
48
9
18.8
181
71
110
NM
License fee expense
33
24
9
37.5
90
57
33
57.9
Impairment
(reversal) expense
—
1
(1)
(100.0)
—
2
(2)
(100.0)
(1)NM - fluctuation in terms of percentage change
is not meaningful.
The change in other operating expenses for the three and nine months ended September 30, 2022, compared to the same periods in 2021 was driven by increased costs subsequent to the Diamond Acquisition and increases in expenses related to share-based compensation. General and administrative expenses increased by $9 million and $66 million compared to the same periods in 2021, primarily due to increased salaries and wages expenses corresponding with an increase in team members associated with the Diamond Acquisition. General and administrative expenses also increased due to expenses incurred associated with Performance RSUs during the three and nine months ended September 30, 2022, that were not incurred in the same periods in 2021 due to certain performance targets that were not expected to be achieved during
that period. Depreciation and amortization increased due to additional amortization expense recognized related to management contracts, club member relationships and trade names acquired as a part of the Diamond Acquisition. License fee expense increased during the three and nine months ended September 30, 2022, compared to the same periods in 2021 due to improved results related to increased travel demand.
Acquisition and Integration-Related Expense
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Acquisition
and integration-related expense
$
19
$
54
$
(35)
(64.8)
$
49
$
83
$
(34)
(41.0)
(1)NM
- fluctuation in terms of percentage change is not meaningful.
Acquisition and integration-related costs include direct expenses related to the Diamond Acquisition including integration costs, legal and other professional fees. Integration costs include technology-related costs, fees paid to management consultants and employee-related costs such as severance and retention. For the three and nine months ended September 30, 2022, acquisition and integration-related costs decreased by $35 million and $34 million, respectively, due to decreased legal and professional fees incurred compared to the same periods in 2021.
Non-Operating Expenses
Three
Months Ended September 30,
Variance (1)
Nine Months Ended September 30,
Variance (1)
($ in millions)
2022
2021
$
%
2022
2021
$
%
Interest
expense
$
37
$
42
$
(5)
(11.9)
$
105
$
74
$
31
41.9
Equity
in earnings from unconsolidated affiliates
(2)
(1)
(1)
100.0
(9)
(7)
(2)
28.6
Other (gain) loss, net
(2)
20
(22)
(110.0)
(1)
22
(23)
(104.5)
Income
tax expense
54
49
5
10.2
115
46
69
NM
(1)NM- fluctuation in terms of percentage change is not meaningful.
The change in non-operating expenses for the three and nine months ended September 30, 2022, compared to the same periods in 2021 was primarily due to a year over year increase in interest expense as a result of the issuance of our senior secured credit facility in the third quarter of 2021, in addition to an increase in Other (gain) loss, net resulting from a loss on debt extinguishment of certain corporate indebtedness in the third quarter of 2021. Income tax expense also increased consistent with the increase in income before income taxes in the same periods.
Liquidity and Capital Resources
Overview
Our cash management objectives are to maintain the availability of liquidity, minimize operational costs, make debt payments and fund future acquisitions and development projects. Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating expenses and other expenditures, including payroll and related benefits, legal costs, operating costs associated with the operation of our resorts and sales centers, interest and scheduled principal payments on our outstanding indebtedness, inventory-related purchase commitments, and capital expenditures for renovations and maintenance at our offices and sales centers. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, inventory-related purchase commitments and costs associated with acquisitions and development projects, including rebranding.
We
finance our short- and long-term liquidity needs primarily through cash and cash equivalents, cash generated from our operations, draws on our senior secured credit facility and our non-recourse revolving timeshare credit facility (“Timeshare Facility”), and through periodic securitizations of our timeshare financing receivables.
•In April 2022, we completed a securitization of $246 million of gross timeshare financing receivables. The proceeds were primarily used to pay down one of our conduit facilities in full and for general corporate purposes. See Note 13: Debt and Non-Recourse Debt for additional information.
•In May 2022, we amended and restated our Timeshare Facility agreement under new terms, which includes increasing the borrowing capacity from $450 million to $750 million
allowing us to borrow up to the maximum amount until May 2024 and requiring all amounts borrowed to be repaid in 2025. The Timeshare Facility is secured by certain timeshare financing receivables in our loan portfolio. See Note 13: Debt and Non-Recourse Debt and Note 7: Timeshare Financing Receivables for additional information.
•In August 2022, we completed a securitization of $269 million of gross timeshare financing receivables. The proceeds were primarily used to pay down the remaining borrowings of our Timeshare Facility and general corporate operating expenses. See Note 13: Debt and Non-recourse Debt for additional information.
•As of September 30,
2022, we had total cash and cash equivalents of $425 million, including $319 million of restricted cash.
•As of September 30, 2022, we had $999 million remaining borrowing capacity under the revolver facility.
•As of September 30, 2022, we had an aggregate of $750 million remaining borrowing capacity in total under our Timeshare Facility due in 2025. Of this amount, we have $178 million of mortgage notes that are available to be securitized and another $324 million of mortgage notes that we expect will become eligible as soon as they meet typical milestones including receipt of first payment, deeding, or recording.
We believe that our capital allocation strategy provides adequate funding
for our operations, is flexible enough to fund our development pipeline, securitizes the optimal level of receivables, and provides the ability to be strategically opportunistic in the marketplace. We have made commitments with developers to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand. As of September 30, 2022, our inventory-related purchase commitments totaled $270 million over 8 years.
The
following table summarizes our net cash flows and key metrics related to our liquidity:
Nine Months Ended September 30,
Variance
($ in millions)
2022
2021
$
Net cash provided by (used in):
Operating activities
$
763
$
36
$
727
Investing activities
(51)
(1,610)
1,559
Financing
activities
(644)
1,612
(2,256)
Operating Activities
Cash flow provided by operating activities is primarily generated from (1) sales and financing of VOIs and (2) net cash generated from managing our resorts, Club and Diamond Club operations and providing related rental and ancillary services. Cash flows used in operating activities primarily include spending for the purchase and development of real estate for future conversion to inventory and funding our working capital needs. Our cash flows from operations generally vary due to the following factors related to the sale of our VOIs; the
degree to which our owners finance their purchase and our owners’ repayment of timeshare financing receivables; the timing of management and sales and marketing services provided; and cash outlays for VOI inventory acquisition and development. Additionally, cash flow from operations will also vary depending upon our sales mix of VOIs; over time, we generally receive more cash from the sale of an owned VOI as compared to that from a fee-for-service sale.
The change in net cash flows provided by operating activities for the nine months ended September 30, 2022, compared to the same period in 2021 was primarily driven by increased sales and operating performance compared to the prior year, as discussed above, in addition to an increase in net working capital from operations.
The following table summarizes our VOI inventory spending:
Nine
Months Ended September 30,
($ in millions)
2022
2021
VOI spending - owned properties(1)
$
96
$
159
VOI spending - fee-for-service upgrades(2)
9
5
Purchases
and development of real estate for future conversion to inventory
4
25
Total VOI inventory spending
$
109
$
189
(1)For the nine months ended September 30, 2022 and 2021, our VOI inventory spending on owned properties relates to deeded properties that are classified as Inventory on our unaudited condensed consolidated
balance sheets.
(2)Includes expense related to granting credit to customers for their existing ownership when upgrading into fee-for-service projects from developed projects of $6 million and $4 million recorded in Costs of VOI sales for the nine months ended September 30, 2022 and 2021, respectively.
Investing Activities
The following table summarizes our net cash used in investing activities:
Nine
Months Ended September 30,
Variance
($ in millions)
2022
2021
$
Acquisition of Diamond, net of cash and restricted cash acquired
$
—
$
(1,585)
$
1,585
Capital
expenditures for property and equipment
(25)
(11)
(14)
Software capitalization costs
(26)
(14)
(12)
Net cash used in investing activities
$
(51)
$
(1,610)
$
1,559
Our
capital expenditures include spending related to technology and buildings and leasehold improvements used to support sales and marketing locations, resort operations and corporate activities in addition to capitalized costs
associated with rebranding Legacy-Diamond properties as a result of the Diamond Acquisition. We believe the renovations of our existing assets are necessary to stay competitive in the markets in which we operate.
The change in net cash used in investing activities for nine months ended September
30, 2022, compared to the same period in 2021, was primarily due to costs associated with acquisition of Diamond in the third quarter of 2021.
Financing Activities
The following table summarizes our net cash (used in) provided by financing activities:
Nine Months Ended September 30,
Variance
($
in millions)
2022
2021
$
Issuance of debt
$
—
$
2,650
$
(2,650)
Issuance of non-recourse debt
671
96
575
Repayment
of debt
(310)
(843)
533
Repayment of non-recourse debt
(824)
(234)
(590)
Debt issuance costs and discounts
(12)
(61)
49
Repurchase
and retirement of common stock
(162)
—
(162)
Payment of withholding taxes on vesting of restricted stock units
(8)
(5)
(3)
Proceeds from employee stock plan purchases
2
1
1
Proceeds
from stock option exercises
1
10
(9)
Other financing activity
(2)
(2)
—
Net cash (used in) provided by financing activities
$
(644)
$
1,612
$
(2,256)
Thechange in net cash provided by financing activities for nine months ended September 30, 2022, compared to the same period in 2021, was primarily driven by corporate debt drawn in connection with the Diamond Acquisition in the third quarter of 2021, in addition to the launch of our share repurchase program in the first half of 2022.
Contractual Obligations
Our commitments primarily relate to agreements with developers to purchase or construct vacation ownership units, operating leases, and obligations associated with our debt, non-recourse debt and the related interest. As of September 30, 2022, we were committed to approximately $5,054 million in contractual obligations over 9 years, $312 million of which will be fulfilled in the remainder
of 2022. The ultimate amount and timing of certain commitments is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 21: Commitments and Contingencies, Note 13: Debt and Non-recourse Debt and Note 15: Leases in our unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q for additional information. We also intend to rebrand Diamond properties to brands that meet Hilton standards in accordance with the Amended and Restated License Agreement with Hilton.
We utilize surety bonds related to the sales of VOIs in order to meet regulatory requirements of certain states. The availability, terms and conditions and pricing of such bonding capacity
are dependent on, among other things, continued financial strength and stability of the insurance company affiliates providing the bonding capacity, general availability of such capacity and our corporate credit rating. We have commitments from surety providers in the amount of $303 million as of September 30, 2022 which primarily consist of escrow and construction related bonds.
Guarantor Financial Information
Certain subsidiaries, which are listed on Exhibit 22 of this Quarterly Report on Form 10-Q, have guaranteed our obligations related to our senior unsecured 2029 Notes and 2031 Notes (together, “the Notes”). The 2029 Notes were issued in June 2021 with an aggregate principal balance of $850 million,
an interest rate of 5 percent, and maturity in June 2029. The 2031 Notes were issued in June 2021 with an aggregate principal balance of $500 million, an interest rate of 4.875 percent, and maturity in July 2031.
The Notes were co-issued by Hilton Grand Vacations Borrower LLC and Hilton Grand Vacations Borrower Inc. (the “Issuers”) and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by Hilton Grand Vacations Inc. (the “Parent”), Hilton Grand
Vacations Parent LLC, the Issuers, and each of the Issuer’s existing and future wholly owned domestic restricted subsidiaries (all entities that guarantee the Notes, collectively, the “Obligor group”).
The Notes rank equally in right of payment with all of the Issuers’ and each guarantor’s existing and future senior indebtedness, are subordinated to all of the Issuers’ and guarantors’ existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness, including the Senior Secured Credit Facilities, rank senior in right of payment to all of the Issuers’ and guarantors’ future subordinated indebtedness and other obligations that expressly provide for their subordination to the notes and the related guarantees, and are structurally subordinated to all existing and future indebtedness
claims of holders of preferred stock and other liabilities of the Issuer’s subsidiaries that do not guarantee the Notes.
The guarantee of each guarantor subsidiary is limited to a maximum amount, subject to applicable U.S. and non-U.S. laws. The guarantees can also be released upon the sale or transfer of a guarantor subsidiary’s capital stock or substantially all of its assets, becoming designated as an unrestricted subsidiary, or upon its consolidation into a co-Issuer or another subsidiary Guarantor.
The
following tables provide summarized financial information of the Obligor group on a combined basis after elimination of (i) intercompany transactions and balances between the Parent and the subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries and unconsolidated affiliates:
Total revenues - transactions with non-guarantor subsidiaries
$
9
Total
revenues - other
2,478
Operating income
338
Net income
155
Subsequent Events
Management has evaluated all subsequent events through November 9, 2022 the date the unaudited consolidated financial statements were available to be issued. The results of management’s analysis indicated no significant subsequent events have occurred that required consideration or adjustments to our disclosures in the unaudited financial statements.
The preparation of our unaudited condensed consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the year ended December 31, 2021.
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
We
are exposed to market risk from changes in interest rates and currency exchange rates. We manage our exposure to these risks by monitoring available financing alternatives and through pricing policies that may take into account currency exchange rates. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2021.
Interest Rate Risk
We are exposed to interest rate risk on our variable-rate debt, comprised of the Term Loan, Revolver and our Timeshare Facility, of which the Timeshare Facility, is without recourse to us. The interest rates are primarily based on one-month LIBOR and we are most vulnerable to changes in this rate. The interest rate for our Timeshare Facility is based on one-month term SOFR, for which we are also vulnerable
to fluctuations in this rate. We primarily use interest rate swaps as part of our interest rate risk management strategy for our variable-rate debt.
Our interest rate swaps have been designated and qualify as cash flow hedges of interest rate risk and recorded as an asset in Other Assets in our unaudited condensed consolidated balance sheets as of September 30, 2022 and December 31, 2021. For further information regarding these swaps, see Note 13: Debt and Non-recourse Debt and Note 14: Fair Value Measurements.
Foreign Currency Exchange Rate Risk
Though the majority of our operations are conducted
in United States dollar (“U.S. dollar”), we are exposed to earnings and cash flow volatility associated with changes in foreign currency exchange rates. Our principal exposure results from our sales of VOIs in Japanese Yen and timeshare financing receivables denominated in Japanese yen and Canadian dollars, the value of which could change materially in reference to our reporting currency, the U.S. dollar.
ITEM 4. Controls and Procedures
Disclosure Controls and Procedures
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act) or our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act) will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of the controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error and mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of effectiveness of controls and procedures to future periods are subject to the risk that the controls and procedures may become inadequate because of changes in conditions, or that the degree of compliance with the controls and procedures may have deteriorated.
In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this quarterly report, an evaluation was carried out under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures, as of the end of the period covered by this quarterly report, were effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting, other than changes in control over financial reporting to integrate the business we acquired in the Diamond Acquisition. In the third quarter of 2022, we integrated Diamond into our general ledger system.
PART II OTHER INFORMATION
Item
1. Legal Proceedings
We are involved in litigation arising from the normal course of business, some of which includes claims for substantial sums as detailed above in Note 21: Commitments and Contingencies. Management has evaluated these legal matters and we believe certain unfavorable outcomes are reasonably probable and estimable. We have accrued liabilities for these matters which are included in the September 30, 2022 unaudited condensed consolidated financial statements. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of September 30, 2022 will not have a material effect on our unaudited condensed consolidated financial statements.
Item
1A. Risk Factors
The following represents important updates to the risk factors previously disclosed in Item 1A. of Part I of our Annual Report on Form 10-K for the year ended December 31, 2021 (our “2021 Form 10-K”). The risk factors included in our 2021 Form 10-K are important to understanding our business, operation, results of operations, financial condition, prospects, and our statements generally in this Form 10-Q. Therefore, they should be read in conjunction with the unaudited condensed consolidated financial statements and related notes in Part I, Item 1, “Financial Statements” and Part I, Item 2. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of this Form 10-Q.
In addition, the following risks and those risks described in our 2021 Form 10-K contain forward-looking
statements, and they may not be the only risks facing the Company. The future business, results of operations and financial condition of the Company can be affected by the risk factors described in such reports and by other factors currently unknown, that management presently believes not to be material, that management has made certain forward-looking projections, estimates or assumptions on, or that may rapidly evolve, develop or change. Any one or more of such factors could, directly or indirectly, cause our actual financial condition and results of operations to vary materially and adversely from past, or from anticipated future financial condition and results of operations. Any of these factors, in whole or in part, could materially and adversely
affect our business, results of operations and financial condition and the trading price of our common stock. Because of these factors affecting our financial condition, key business operational metrics, and operating results, past financial performance should not be considered to be a reliable indicator of future performance, and investors should not use historical trends to anticipate results or trends in future periods.
We cannot guarantee that we will repurchase our common stock pursuant to our share repurchase program or that our share repurchase program will enhance long-term shareholder value. Share repurchases could also increase the volatility of the price of our common stock and diminish our cash reserves.
On May 4, 2022, our Board of Directors authorized a share repurchase program (the “Repurchase Program”), pursuant
to which we may repurchase up to $500 million of our common stock over a two year period. The timing and amount of repurchases of shares of our common stock, if any, will depend upon several factors, such as the market price of our common stock, general market and economic conditions, our working capital requirements and corporate strategy, the terms of our financing arrangements and applicable legal requirements. We are not obligated to repurchase any specific number or amount of shares of common stock pursuant to the Repurchase Program, and we may modify, suspend or terminate the Repurchase Program at any time without prior notice. Repurchases of our common stock pursuant to the Repurchase Program could impact our stock price and increase its volatility. The existence of the Repurchase Program could cause our stock price to be higher than it would be in the absence of such a program. Additionally, the Repurchase Program could diminish our cash reserves, which may impact
our ability to finance future growth and to pursue possible
future strategic opportunities. There can be no assurance that any share repurchases will enhance long-term stockholder value, and the market price of our common stock may decline below the levels at which we repurchased shares of stock.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c)
Issuer Purchases of Equity Securities
On May 4, 2022, our Board of Directors approved a share repurchase program authorizing the Company to repurchase up to an aggregate of $500 million of its outstanding shares of common stock over a two-year period. The timing and actual number of shares repurchased will depend on a variety of factors, including the stock price, corporate and regulatory requirements and other market and economic conditions. The stock repurchase program may be suspended or discontinued at any time and will automatically expire at the end of the two-year term. During the three months ended September 30, 2022, we repurchased the following shares:
Period
Total
Number of Shares Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under Plan
Inline XBRL Instance Document - the instance
document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on this 9th day of November 2022.