HILTON GRAND VACATIONS INC. 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 endedDecember 31, 2019 .
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q (this "Report") 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 our future, and are based on management's beliefs, expectations, assumptions and such plans, estimates, projections and other information available to management at the time we make such statements. Forward-looking statements include all statements that are not historical facts, including those related to our revenues, earnings, cash flow and operations, and may be identified by terminology such as the words "outlook," "believe," "expect," "potential," "goal," "continues," "may," "will," "should," "could," "seeks," "approximately," "projects," predicts," "intends," "plans," "estimates," "anticipates" "future," "guidance," "target," or the negative version of these words or other comparable words. We caution you that our forward-looking statements involve known and unknown risks, uncertainties and other factors, including those that are beyond our control, that may cause our actual results, performance or achievements to be materially different from the future results. Factors that could cause our actual results to differ materially from those contemplated by our forward-looking statements include: the material impact of the COVID-19 pandemic on our business, operating results, and financial condition; the extent and duration of the impact of the COVID-19 pandemic on global economic conditions; our ability to meet our liquidity needs; risks related to our indebtedness; inherent business risks, market trends and competition within the timeshare and hospitality industries; our ability to successfully source inventory and market, sell and finance VOIs; default rates on our financing receivables; the reputation of and our ability to access Hilton brands and programs, including the risk of a breach or termination of our license agreement withHilton ; compliance with and changes toUnited States and global laws and regulations, including those related to anti-corruption and privacy; risks related to our acquisitions, joint ventures, and other partnerships; our dependence on third-party development activities to secure just-in-time inventory; the performance of our information technology systems and our ability to maintain data security; regulatory proceedings or litigation; adequacy of our workforce to meet our business and operation needs; our ability to attract and retain key executives and employees with skills and capacity to meet our needs; and natural disasters or adverse geo-political conditions. Any one or more of the foregoing factors could adversely impact our operations, revenue, operating margins, financial condition and/or credit rating. For additional information regarding factors that could cause our actual results to differ materially from those expressed or implied in the forward-looking statements in this Report, please see the risk factors discussed in "Part I-Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2019 , as supplemented and updated by the risk factors discussed in "Part II-Item 1A. Risk Factors" of our Quarterly Reports on Forms 10-Q for the quarter endedMarch 31, 2020 ,June 30, 2020 and this Report, as well as those described from time to time other periodic reports that we file with theSEC . Except for our ongoing obligations to disclose material information under the federal securities laws, we undertake no obligation to publicly update or revise 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 toHilton Grand Vacations Inc. , together with its consolidated subsidiaries. Except where the context requires otherwise, references to our "properties" or "resorts" and "units" refer to the timeshare properties that we manage or own. Of these resorts and units, a portion is directly owned by us or our joint ventures in which we have an interest and 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.
"VOI" refers to vacation ownership intervals.
26
--------------------------------------------------------------------------------Non-GAAP Financial Measures This Quarterly Report on Form 10-Q includes discussion of terms that are not recognized terms underU.S. Generally Accepted Accounting Principles ("U.S. GAAP"), and financial measures that are not calculated in accordance withU.S. GAAP, including earnings before interest expense (excluding interest expense relating to our non-recourse debt), taxes and depreciation and amortization ("EBITDA"), Adjusted EBITDA, free cash flow and adjusted free cash flow. Operational Metrics
This Quarterly Report on Form 10-Q includes discussion of key business operational metrics including contract sales, sales revenue, real estate margin, tour flow, and volume per guest.
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 withU.S. GAAP. Overview Our Business We are a timeshare company that markets and sells VOIs, manages resorts in top leisure and urban destinations, and operates a points-based vacation club. As ofSeptember 30, 2020 , we have 60 properties, representing 9,594 units, that are primarily located in vacation destinations such asOrlando ,Las Vegas , the Hawaiian Islands,New York City ,Washington D.C. , andSouth Carolina and feature spacious, condominium-style accommodations with superior amenities and quality service. As ofSeptember 30, 2020 , we have approximately 328,000Hilton Grand Vacations Club andHilton Club (collectively the "Club") members. Club members have the flexibility to exchange their VOIs for stays at anyHilton Grand Vacations resort or any property in theHilton system of 18 industry-leading brands across approximately 6,200 properties, as well as numerous experiential vacation options, such as cruises and guided tours. Our business has been and continues to be adversely impacted by the COVID-19 pandemic and its effects on the global economy, including the various government orders and mandates for closures of non-essential businesses. Please see "Recent Events" and other discussions throughout this Report for additional information regarding such impacts.
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 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. 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 theVOIs and 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. For the nine months endedSeptember 30, 2020 , sales from fee-for-service, just-in-time and developed inventory sources were 55 percent, 22 percent and 23 percent, respectively, of contract sales. See "Key Business and Financial Metrics and Terms Used by Management--Real Estate Sales 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$10 billion at current pricing. 27 -------------------------------------------------------------------------------- Capital efficient arrangements represent approximately 52 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 under the Hilton Grand Vacations brand primarily through our distribution network of both in-market and off-site sales centers. Our products are currently marketed for sale throughoutthe United States and theAsia-Pacific region . 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 sales distribution centers inLas Vegas ,Orlando ,Oahu ,Japan ,New York ,Myrtle Beach ,Waikoloa ,Washington D.C. ,Hilton Head ,Park City ,Chicago ,Korea and Carlsbad. 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 withHilton 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 Metrics." Additionally, the quality of tour flow impacts sales revenue and the collectability of our timeshare financing receivables. For the nine months endedSeptember 30, 2020 , 60 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 9 percent to 18 percent per annum. Financing propensity was 65 percent and 67 percent for the nine months endedSeptember 30, 2020 and 2019, respectively. 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 new loans toU.S. and Canadian borrowers at the time of origination were as follows: Nine Months Ended September 30, 2020 2019 Weighted-average FICO score 734 735 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 Club. Some of our timeshare financing receivables have been pledged as collateral in our securitization transactions, 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 6: 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 VOI owners for 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 points-based
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VOI, they are generally enrolled in the Club and given an annual allotment of
points that allow the member to exchange their annual usage rights in the VOI
that they own for a number of vacation and travel 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
and developed) 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 condensed consolidated statements of operations due to the
requirements for revenue recognition, as well as adjustments forincentives. 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 condensed consolidated financial statements,
rather recording the commission earned as revenue in accordance with
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 and developed) is most appropriate for the purpose of the
operating metric, additional information regarding the split of contract sales,
is included in "-Real Estate" below. See Note 2: Basis of Presentation and
Summary of Significant Accounting Policies in our audited consolidated financial
statements included in Item 8 in our Annual Report on form 10-K for the year
ended December 31, 2019 , for additional information on Sales of VOI, net.
• Sales revenue represents Sales of VOIs, net, commissions and brand fees
earned from the sale of fee-for-service intervals.
• Real estate margin 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 endedDecember 31, 2019 .
EBITDA and Adjusted EBITDA
EBITDA, presented herein, is a financial measure that is not recognized underU.S. GAAP that reflects net income (loss), 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) asset dispositions; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) reorganization costs, including severance and relocation costs; (vi) share-based and certain other compensation expenses; (vii) costs related to the spin-off; and (viii) other items. 29 -------------------------------------------------------------------------------- EBITDA and Adjusted EBITDA are not recognized terms underU.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance withU.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 (loss), cash flow or other methods of analyzing our results as reported underU.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.
Recent Events Related to the COVID-19 Pandemic and Impact on Our Results of
Operations, Financial Condition, and Business During the Three and Nine Months
Ended
InMarch 2020 , a National Public Health Emergency was declared in response to the coronavirus, known as COVID-19. As a result, many local, county and state government officials have issued, and continue to issue, various mandates and orders to close non-essential businesses, impose travel restrictions, and require "stay-at-home" and/or self-quarantine in certain cases, all in an effort to protect the health and safety of individuals and aimed at slowing and ultimately stopping the spread and transmission of the virus. Accordingly, commencing inMarch 2020 , we started to temporarily close substantially all of our properties and suspended ourU.S sales operations and closed such sales offices. We took a number of other actions to reduce our expenses and preserve liquidity, including workforce furlough, implementing salary reductions for the remaining active employees primarily during the second quarter of 2020, implementing hiring freezes, eliminating all discretionary spending, and reducing our planned investment in new inventory by approximately$200 million . Recently, we announced a workforce reduction plan that will impact approximately 1,600 team members, and approximately 2,000 of our team members remain furloughed. 30
-------------------------------------------------------------------------------- Furthermore, we believe the following actions will provide adequate capital to meet our short-and long-term liquidity requirements for anticipated operating expenses and other expenditures, including payroll and related benefits, legal costs, and additional costs related to complying with various regulatory requirements and best practices for opening under the current environment resulting from the pandemic, and to finance our long-term growth plan and capital expenditures for the foreseeable future.
• In
capacity under our revolver facility through net borrowings of
as a precautionary measure to ensure liquidity for a sustained period in
the economic environment resulting from the COVID-19 pandemic. We expect
the proceeds would be used for general corporate and working capital
purposes in the ordinary course of business.
• In
level calculations of underlying timeshare loans that are used as
collateral for borrowings under our Timeshare Facility, and generated added
flexibility to manage any potential increase in the rate of delinquency as
a result of the impact of the COVID-19 pandemic.
• In
the credit facilities ("Senior Secured Credit Facilities") to provide us
with both near-term and long-term flexibility with respect to satisfying
certain negative and financial covenants and ratios as may be needed due to
the ongoing and uncertain future impact of the COVID-19 pandemic on our
business and operations.
• In
timeshare financing receivables and used the proceeds to pay down the
million outstanding balance on our Timeshare Facility and for general
corporate operating expenses. As of
million remaining borrowing capacity under our Timeshare Facility. See Note
11: Debt and Non-Recourse Debt for additional information.
• In
certain provisions relating to advance rate, successor benchmark interest
rate, certain used and unused fees, and thresholds for interest rate
hedging obligations and transactions.
The closure of our resorts and sales centers, and the related suspensions of our operations, expectedly have had a materially adverse impact on our revenues, net income (loss) and other operating results during the third quarter, as well as our business and operations generally, as more fully discussed below. As discussed in further detail below, substantially all of the unfavorable changes in our operating results during the three and nine months endedSeptember 30, 2020 as compared to prior periods were as a result of the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and suspension of our sales and related operations during the first half of 2020. Additionally, as a result of the ongoing COVID-19 pandemic, we are performing a review over certain of our long-lived assets in order to determine our optimal strategic direction with regards to these assets. These assets include undeveloped parcels of land and certain unallocated infrastructure costs related to future phases of existing resorts. The result of this review could have a material impact on the carrying value of certain assets, which could result in non-cash impairments. Outlook The COVID-19 pandemic has created an unprecedented and challenging time. Our current focus is on taking critical actions that are aimed at positioning the Company in a sound position from an operational, liquidity, credit access, and compliance perspective for a strong recovery when the impact of COVID-19 subsides. As discussed above, we have taken several steps to enhance our liquidity, preserve cash, reduce our expenditures and provide financial flexibility. We will continue to assess the evolving COVID-19 pandemic, including the various government mandates and orders that impact the re-opening of our properties and any new recommended or required business practices, and will take additional actions as appropriate. Prior to re-opening our resorts and sales centers, we introduced the HGV Enhanced Care Guidelines, designed to provide owners, guests and team members with the highest level of cleaning protocols and safety standards recommended by theCenter for Disease Control and Prevention and cleaning solutions approved by theEnvironmental Protection Agency in response to the COVID-19 pandemic. Along with providing personal protective equipment to team members, these Enhanced Care Guidelines include low-touch arrivals and departures, frequent and thorough cleaning, reduction of paper items, reduced capacity for our pool decks and fitness centers, and new technologies. While operations were suspended, 31 -------------------------------------------------------------------------------- essential resort personnel worked diligently maintaining the resorts for a safe re-opening. Annual deep cleanings, typically scheduled during slower seasons, were moved up and completed, allowing the resorts to be in top shape when owners and guests arrive. Beginning inMay 2020 , various states and counties started to allow gradual relaxation of restrictions on activities and a resumption of businesses. In response, we began a phased reopening of resorts and resumption of our business activities during the second quarter of 2020, but under new operating guidelines and with safety measures. As ofOctober 2020 , we have over three quarters of our resorts and sales centers open and currently operating however, many of our resorts and sales centers are operating with significant capacity constraints and subject to various safety measures. Although we have started re-opening our sales centers, they have initially been operating at lower levels of utilization than they were prior to the temporary shutdown. This includes lower levels of sales staff, modified operating schedules to stagger tours in compliance with social distancing rules, and running a reduced weekly operating calendar. As we respond to changes in tour flow, we intend to adjust our sales operations accordingly while complying with all applicable social distancing rules and our own safety measures. While we plan to continue to reopen our resorts and resume our business as conditions and applicable rules and regulations permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Further, ongoing strict travel and other restrictions in regions and locations where we have a significant concentration of our properties and units, in particular,Hawaii andNew York , are significantly impacting consumer demand for our resorts in those areas. Accordingly, there remains significant uncertainty as to the degree of impact and duration of the conditions stemming from the ongoing pandemic on our revenues, net income and other operating results, as well as our business and operations generally. Any significantly extended duration or worsening of the conditions associated with the pandemic may adversely impact our liquidity in the longer term, including our ability to finance our day-to-day business and operations, and may adversely affect our ability to comply with our maintenance and financial covenants and ratios under our debt obligations notwithstanding the recent amendments discussed above. However, we believe that prior to triggering an event of default, if any, in connection with the financial covenants under our debt agreements we would be able to reach an agreement with our lenders to amend such covenants in advance of any potential default. Please review carefully the risk factors contained in our Form 10-K for the year endedDecember 31, 2019 and those that are included in our Forms 10-Q for the quarters endedMarch 31, 2020 andJune 30, 2020 and this Report for discussions of various factors and uncertainties related to the pandemic that may materially impact us. Results of Operations
Three and Nine Months Ended
Segment Results
We evaluate our business segment operating performance using segment Adjusted
EBITDA, as described in Note 18: 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:
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Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance($ in millions) 2020 2019 $ % 2020 2019 $ % Revenues: Real estate sales and financing$ 116 $ 324 $ (208 )
(64.2 )%
management 61 108 (47 ) (43.5 ) 209 332 (123 ) (37.0 ) Segment revenues 177 432 (255 ) (59.0 ) 587 1,271 (684 ) (53.8 ) Cost reimbursements 33 43 (10 ) (23.3 ) 105 128 (23 ) (18.0 ) Intersegment eliminations(1) (2 ) (9 ) 7 (77.8 ) (10 ) (29 ) 19 (65.5 ) Total revenues$ 208 $ 466 $ (258 ) (55.4 )$ 682 $ 1,370 $ (688 ) (50.2 )
(1) Refer to Note 18: Business Segments in our unaudited condensed consolidated
financial statements for details on the intersegment eliminations.
The following table reconciles net (loss) income, our most comparable
Nine Months Ended
Three Months Ended September 30, Variance September 30, Variance
($ in millions) 2020 2019 $ % 2020 2019 $ %
Net (loss) income $ (7 ) $ 50 $ (57 ) NM(1) $ (47 ) $ 144 $ (191 ) NM(1)
Interest expense 10 12 (2 ) (16.7 )% 32 33 (1 ) (3.0 )%
Income tax (benefit)
expense (5 ) 20 (25 ) NM(1) (12 ) 55 (67 ) NM(1)
Depreciation and
amortization 11 12 (1 ) (8.3 ) 34 32 2 6.3
Interest expense,
depreciation
and amortization
included in
equity in (losses)
earnings from
unconsolidated
affiliates 1 - 1 NM(1) 2 2 - -
EBITDA 10 94 (84 ) (89.4 ) 9 266 (257 ) (96.6 )
Other (gain) loss, net (1 ) 1 (2 ) NM(1) - 3 (3 ) (100.0 )
Share-based compensation
expense(2) 6 6 - - 10 18 (8 ) (44.4 )
Other adjustment
items(3) 4 10 (6 ) (60.0 ) 14 16 (2 ) (12.5 )
Adjusted EBITDA $ 19 $ 111 $ (92 ) (82.9 ) $ 33 $ 303 $ (270 ) (89.1 )
(1) Fluctuation in terms of percentage change is not meaningful.
33
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(2) As of
2018, 2019, and 2020 Performance RSUs were improbable of achievement
therefore we reversed
recognized in prior years and ceased accruing expenses related to Performance
RSUs granted in 2018, 2019, and 2020, during the three months ended
2020. As of
continue to be improbable of achievement and therefore no expense was
recognized for our Performance RSUs in the current period.
(3) For the three and nine months ended
includes costs associated with restructuring, one-time charges and other
non-cash items.
The following table reconciles our segment Adjusted EBITDA to Adjusted EBITDA:
Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance($ in millions) 2020 2019 $ % 2020 2019 $ % Adjusted EBITDA: Real estate sales and financing(1)$ 15 $ 94 $ (79 ) (84.0 )%$ 16 $ 243 $ (227 ) (93.4 )% Resort operations and club management(1) 30 62 (32 ) (51.6 ) 100 193 (93 ) (48.2 ) Segment Adjusted EBITDA 45 156 (111 ) (71.2 ) 116 436 (320 ) (73.4 ) Adjustments: Adjusted EBITDA from unconsolidated affiliates - 1 (1 ) (100.0 ) 5 6 (1 ) (16.7 ) License fee expense (11 ) (26 ) 15 (57.7 ) (39 ) (75 ) 36 (48.0 ) General and administrative(2) (15 ) (20 ) 5 (25.0 ) (49 ) (64 ) 15 (23.4 ) Adjusted EBITDA$ 19 $ 111 $ (92 ) (82.9 )$ 33 $ 303 $ (270 ) (89.1 )
(1) Includes intersegment transactions, share-based compensation, depreciation
and other adjustments attributable to the segments.
(2) 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 Nine Months Ended
September 30, Variance September 30, Variance
($ in millions) 2020 2019 $ 2020 2019 $
Sales of VOIs (deferrals) $ (13 ) $ (15 ) $ 2 $ (64 ) $ (49 ) $ (15 )
Sales of VOIs recognitions - - - - - -
Net Sales of VOIs (deferrals)
recognitions (13 ) (15 ) 2 (64 ) (49 ) (15 )
Cost of VOI sales (deferrals)(1) (4 ) (5 ) 1 (17 ) (16 ) (1 )
Cost of VOI sales recognitions - - - - - -
Net Cost of VOI sales (deferrals)
recognitions(1) (4 ) (5 ) 1 (17 ) (16 ) (1 )
Sales and marketing expense
(deferrals) (1 ) (2 ) 1 (9 ) (7 ) (2 )
Sales and marketing expense
recognitions - - - - - -
(deferrals) recognitions (1 ) (2 ) 1 (9 ) (7 ) (2 ) Net construction (deferrals) recognitions$ (8 ) $ (8 ) $ -$ (38 ) $ (26 ) $ (12 ) 34
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(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
Real estate sales and financing segment revenues decreased by$208 million for the three months endedSeptember 30, 2020 and$561 million for the nine months endedSeptember 30, 2020 , compared to the same periods in 2019, primarily due to decreases in sales revenue and marketing revenue as a result of the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and suspension of our sales and related operations during the first half of 2020. Real estate sales and financing Adjusted EBITDA decreased by$79 million for the three months endedSeptember 30, 2020 and$227 million for the nine months endedSeptember 30, 2020 , compared to the same periods in 2019, primarily due to the decreases in segment revenues associated with segment performance discussed herein partially offset by a decrease in related expenses. In addition, real estate sales and financing segment Adjusted EBITDA was impacted by$9 million in one-time payroll related expenses, net of an employee retention credit granted primarily under the CARES Act, primarily related to payments made to employees as a result of operational closures caused by the COVID-19 pandemic for the nine months endedSeptember 30, 2020 .
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 decreased$47 million and$123 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in 2019, primarily due to decreases in rental and ancillary revenues as a result of the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and suspension of our sales and related operations during the first half of 2020.
Resort operations and club management segment Adjusted EBITDA decreased
Refer to "- Resort and Club Management" and "-Rental and Ancillary Services" for further discussion on the revenues and expenses of the resort operations and club management segment.
Real Estate Sales and Financing Segment
Real Estate
Three Months Ended
September 30, Variance Nine Months Ended September 30, Variance
($ in millions, except Tour
flow and VPG) 2020 2019 $ % 2020 2019 $ %
Contract sales $ 117 $ 360 $ (243 ) (67.5 ) $ 396
(67 ) (194 ) 127 (65.5 ) (216 ) (569 ) 353 (62.0 )
Provision for financing
receivables losses (12 ) (22 ) 10 (45.5 ) (57 ) (60 ) 3 (5.0 )
Reportability and other:
Net deferral (recognition)
of sales of VOIs under
construction(3) (13 ) (15 ) 2 (13.3 ) (64 ) (49 ) (15 ) 30.6
Fee-for-service sale
upgrades, net 4 15 (11 ) (73.3 ) 13 39 (26 ) (66.7 )
Other(4) (5 ) (6 ) 1 (16.7 ) 8 (23 ) 31 NM(1)
Sales of VOIs, net $ 24 $ 138 $ (114 ) (0.8 ) $ 80 $ 383 $ (303 ) (0.8 )
Tour flow 25,488 102,911 (77,423 ) (75.2 ) 98,263 287,267 (189,004 ) (65.8 )
VPG $ 4,205 $ 3,363 $ 842 25.0 $ 3,763 $ 3,464 $ 299 8.6
(1) Fluctuation in terms of percentage change is not meaningful.
35
--------------------------------------------------------------------------------(2) Represents contract sales from fee-for-service properties on which we earn
commissions and brand fees.
(3) Represents the net impact of deferred 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 decreased$243 million and$649 million for the three and nine months endedSeptember 30, 2020 , respectively, compared to the same periods in 2019, primarily due to a decrease in tour flow related to the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and suspension of our sales and related operations during the first half of 2020. Beginning inMay 2020 , we began a phased reopening of resorts and resumption of our business activities, however many of our resorts and sales centers are operating with significant capacity constraints and are subject to various safety measures. As ofSeptember 30, 2020 , we have over three quarters of our resorts and sales centers open and currently operating. Three Months Ended September 30, Variance Nine Months Ended September 30, Variance ($ in millions) 2020 2019 $ % 2020 2019 $ % Sales, marketing, brand and other fees$ 52 $ 143$ (91 ) (63.6 )%$ 171 $ 429$ (258 ) (60.1 )% Less: Marketing revenue and other fees 11 34 (23 ) (67.6 ) 40 102 (62 ) (60.8 ) Commissions and brand fees 41 109 (68 ) (62.4 ) 131 327 (196 ) (59.9 ) Sales of VOIs, net 24 138 (114 ) (82.6 ) 80 383 (303 ) (79.1 ) Sales revenue 65 247 (182 ) (73.7 ) 211 710 (499 ) (70.3 ) Less: Cost of VOI sales 8 24 (16 ) (66.7 ) 21 92 (71 ) (77.2 ) Sales and marketing expense, net(2) 66 145 (79 ) (54.5 ) 247 415 (168 ) (40.5 ) Real estate margin$ (9 ) $ 78
(13.8 )% 31.6 % (27.0 )% 28.6 %
(1) 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.
Sales revenue decreased for the three and nine months endedSeptember 30, 2020 , compared to the same periods in 2019, due to decreases in sales revenue, commissions and brand fees and related expenses as a result of the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our properties and suspension of our sales and related operations during the first half of 2020. Financing Three Months Ended Nine Months Ended September 30, Variance September 30, Variance ($ in millions) 2020 2019 $ % 2020 2019 $ % Interest income$ 34 $ 37 $ (3 ) (8.1 )$ 108 $ 109 $ (1 ) (0.9 )% Other financing revenue 6 6 - - 19 18 1 5.6 Financing revenue 40 43 (3 ) (7.0 ) 127 127 - - Consumer financing interest expense 9 8 1 12.5 23 22 1 4.5 Other financing expense 4 6 (2 ) (33.3 ) 16 17 (1 ) (5.9 ) Financing expense 13 14 (1 ) (7.1 ) 39 39 - - Financing margin$ 27 $ 29 $ (2 ) (6.9 )$ 88 $ 88 $ - - Financing margin percentage 67.5 % 67.4 % 69.3 % 69.3 % 36
-------------------------------------------------------------------------------- Financing revenue decreased$3 million for the three months endedSeptember 30, 2020 and remained flat for the nine months endedSeptember 30, 2020 , compared to the same periods in 2019 primarily due to a decrease in the timeshare financing receivables portfolio balance. Financing margin decreased for the three months endedSeptember 30, 2020 , compared to the same period in 2019 related to the aforementioned decrease in interest income partially offset primarily by a decrease in other financing expenses. Financing margin percentage remained relatively flat for the three and nine months endedSeptember 30, 2020 compared to the same periods in 2019.
Resort Operations and Club Management Segment
Resort and Club Management
Three Months Ended Nine Months Ended
September 30, Variance September 30, Variance
($ in millions) 2020 2019 $ % 2020 2019 $ %
Club management revenue $ 23 $ 28 $ (5 ) (17.9 )% $ 70 $ 80 $ (10 ) (12.5 )%
Resort management revenue 16 17 (1 ) (5.9 ) 52 50 2 4.0
Resort and club management revenues 39 45 (6 ) (13.3 ) 122 130 (8 ) (6.2 )
Club management expense 6 6 - - 18 20 (2 ) (10.0 )
Resort management expense 3 5 (2 ) (40.0 ) 9 14 (5 ) (35.7 )
Resort and club management expenses 9 11 (2 ) (18.2 ) 27 34 (7 ) (20.6 )
Resort and club management margin
76.9 % 75.6 % 77.9 % 73.8 %
Resort and club management revenues decreased for the three and nine months
ended September 30, 2020 , compared to the same periods in 2019, primarily due to
a decrease in club management revenue related to the refunding and waiving of
club transaction fees to accommodate our guests impacted by the COVID-19
pandemic. For the nine months ended September 30, 2020 , the decrease in revenue
was partially offset by (i) an increase of approximately 6,000 Club members and
(ii) an increase in resort management revenue from the launch of new properties,
compared to the same period in 2019.
Resort and club management margin percentage increased for the three and nine
months ended September 30, 2020 , primarily due to a reduction in resort and club
management expenses driven by the ongoing impact of the COVID-19 pandemic on
travel demand, along with the temporary closure of substantially all of our
resort operations during the first half of 2020.
Rental and Ancillary Services
Three Months Ended September 30, Variance Nine Months Ended September 30, Variance
($ in millions) 2020 2019 $ % 2020 2019 $ %
Rental revenues $ 19 $ 48 $ (29 ) (60.4 )% $ 71 $ 153 $ (82 ) (53.6 )%
Ancillary services revenues 1 6 (5 ) (83.3 ) 6 20 (14 ) (70.0 )
Rental and ancillary services revenues 20 54 (34 ) (63.0 ) 77 173 (96 ) (55.5 )
Rental expenses 23 30 (7 ) (23.3 ) 77 89 (12 ) (13.5 )
Ancillary services expense 1 6 (5 ) (83.3 ) 8 19 (11 ) (57.9 )
Rental and ancillary services
expenses 24 36 (12 ) (33.3 ) 85 108 (23 ) (21.3 )
Rental and ancillary services margin $ (4 ) $ 18 $ (22 ) NM(1) $ (8 ) $ 65 $ (73 ) NM(1)
Rental and ancillary services margin
percentage (20.0 )% 33.3 % (10.4 )% 37.6 %
37
--------------------------------------------------------------------------------
(1) Fluctuation in terms of percentage change is not meaningful.
Rental and ancillary services revenues, expenses, and margin percentage decreased for the three and nine months endedSeptember 30, 2020 , compared to the same periods in 2019, due to the ongoing impact of the COVID-19 pandemic on travel demand, along with the temporary closure of substantially all of our resort operations during the first half of 2020. Beginning inMay 2020 , we began a phased reopening of resorts and resumption of our business activities; however, many of our resorts are operating at significant capacity constraints and are subject to various safety measures. As ofSeptember 30, 2020 , we have over three quarters of our resorts open and currently operating. Other Operating Expenses Three Months Ended September 30, Variance Nine Months Ended September 30, Variance ($ in millions) 2020 2019 $ % 2020 2019 $ % General and administrative $ 22 $ 30$ (8 ) (26.7 )% $ 65 $ 87$ (22 ) (25.3 )% Depreciation and amortization 11 12 (1 ) (8.3 ) 34 32 2 6.3 License fee expense 11 26 (15 ) (57.7 ) 39 75 (36 ) (48.0 ) The change in other operating expenses for the three and nine months endedSeptember 30, 2020 , compared to the same periods in 2019, is driven by a decrease in General and administrative expenses related to (i) decreases in salaries and wages from the furloughs and pay decreases announced during the second quarter of 2020, (ii) the reversal of previously recognized expense related to our 2018 and 2019 Performance RSUs which are not expected to achieve certain performance targets during the first quarter of 2020 and (iii) lower license fee expense related to the corresponding decrease in real estate sales and resort operations revenue. Non-Operating Expenses Three Months Ended September 30, Variance Nine Months Ended September 30, Variance ($ in millions) 2020 2019 $ % 2020 2019 $ % Interest expense $ 10 $ 12$ (2 ) (16.7 )%$ 32 $ 33$ (1 ) (3.0 )% Equity in losses (earnings) from 1 (1 ) 2 NM(1) (3 ) (4 ) 1 (25.0 ) unconsolidated affiliates Other (gain) loss, net (1 ) 1 (2 ) NM(1) - 3 (3 ) (100.0 ) Income tax (benefit) (5 ) 20 (25 ) NM(1) (12 ) 55 (67 ) NM(1) expense
(1) Fluctuation in terms of percentage change is not meaningful.
38
-------------------------------------------------------------------------------- The change in non-operating expenses for the three and nine months endedSeptember 30, 2020 , compared to the same periods in 2019, is primarily due to a decrease in income tax expense due to a decrease in income before taxes combined with a decrease in the effective tax rate. See Note 14: Income Taxes for additional information.
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 potential
acquisitions and development projects.
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
capacity under the revolver facility through net borrowings of
as a precautionary measure to ensure liquidity for a sustained period in
the economic environment resulting from the COVID-19 pandemic. We do not
have a plan for the use of the proceeds other than for general corporate
and working capital purposes in the ordinary course of business. As of
September 30, 2020 , we have $39 million remaining borrowing capacity underthe revolver facility ("Revolver"). See Note 11: Debt and Non-Recourse Debt
for additional information.
• In
level calculations of underlying timeshare loans that are used as
collateral for borrowings under our Timeshare Facility, and generated added
flexibility to manage any potential increase in the rate of delinquency as
a result of the impact of the COVID-19 pandemic.
• In
the credit facilities ("Senior Secured Credit Facilities") to provide us
with both near-term and long-term flexibility with respect to satisfying
certain negative and financial covenants and ratios as may be needed due to
the ongoing and uncertain future impact of the COVID-19 pandemic on our
business and operations.
• In
timeshare financing receivables and used the proceeds to pay down the
million outstanding balance on our Timeshare Facility and for general
corporate operating expenses. As of
million remaining borrowing capacity under our Timeshare Facility. See Note
11: Debt and Non-Recourse Debt for additional information.
• In
certain provisions relating to advance rate, successor benchmark interest
rate, certain used and unused fees, and thresholds for interest rate
hedging obligations and transactions.
• As of
million, including $92 million of restricted cash. The restricted cash
balance relates to escrowed cash from sales of our VOIs and reserves
related to our non-recourse debt.
39
-------------------------------------------------------------------------------- To optimize our liquidity and access to capital in light of the significant adverse impact of the COVID-19 pandemic, particularly as substantially all of our properties were temporarily closed and substantially all of our sales, operations and other activities were suspended during the first and second quarter of 2020, in addition to the steps discussed above, we have undertaken efforts to increase our capital and decrease our expenses. These include workforce furloughs, temporary salary reductions for employees primarily during the second quarter of 2020, eliminating discretionary spending, and reducing our planned investment in new inventory by approximately$200 million . We have also suspended the share repurchase program that was initially authorized by our Board inMarch 2020 . Recently, we announced a workforce reduction plan that will impact approximately 1,600 team members for which we expect to incur between$10 million to$12 million in restructuring and related expenses and charges, primarily related to employee severance, benefits and related costs, primarily during the fourth quarter of 2020. In addition, approximately 2,000 of our workers remain furloughed. We believe that these actions, together with drawing on available borrowings under our Revolver and preserving our capacity under our Timeshare Facility as described above, will provide adequate capital to meet our short- and long-term liquidity requirements for operating expenses and other expenditures, including payroll and related benefits, legal costs, and additional costs related to complying with various regulatory requirements and best practices for opening under the current environment resulting from the pandemic, and to finance our long-term growth plan and capital expenditures for the foreseeable future. In addition, as noted previously, beginning inMay 2020 , in response to various states and counties starting to allow gradual relaxation of restrictions on activities and a resumption of businesses, we began a phased reopening of resorts and resumption of our business activities, including our sales activities. However, we are operating under new guidelines and with safety measures that did not exist prior to the onset of the pandemic. As ofOctober 2020 , we have over three quarters of our resorts and sales centers open and currently operating; however, many of our resorts and sales centers are operating with significant capacity constraints and subject to various safety measures. While we plan to continue to reopen our resorts and resume our business as conditions permit, the pandemic continues to be unprecedented and rapidly changing, and has unknown duration and severity. Accordingly, there remains significant uncertainty as to the degree of impact and duration of the conditions stemming from the ongoing pandemic on our revenues, net income (loss) and other operating results, as well as our business and operations generally and, accordingly, our future cash flows and our liquidity in the longer term. Any sustained material adverse impact on our revenues, net income (loss) and other operating results due to COVID-19 could adversely affect our ability to comply with our maintenance and financial covenants and ratios under our debt obligations. Sources and Uses of Our Cash The following table summarizes our net cash flows and key metrics related to our liquidity: Nine Months Ended September 30, Variance ($ in millions) 2020 2019 $ Net cash provided by (used in): Operating activities $ 86 $ 146$ (60 ) Investing activities (24 ) (44 ) 20 Financing activities 503 (71 ) 574 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 operations and providing related 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. 40 -------------------------------------------------------------------------------- The change in net cash flows provided by operating activities for the nine months endedSeptember 30, 2020 , compared to the same period in 2019 was primarily due to a reduction in the purchase and development of real estate for future conversion to inventory, partially offset by decreased sources of cash from working capital.
The following table exhibits our VOI inventory spending:
Nine Months Ended September 30,
($ in millions) 2020 2019
VOI spending - owned properties $ 70 $ 61
VOI spending - fee-for-service upgrades(1) 11 36
Purchases and development of real estate for future
conversion to inventory 27 107
Total VOI inventory spending $ 108 $ 204
(1) Includes expense related to granting credit to customers for their existing
ownership when upgrading into fee-for-service projects from developed
projects of
nine months ended September 30, 2020 and 2019, respectively.
Investing Activities
The following table summarizes our net cash used in investing activities:
Nine Months Ended September 30, Variance
($ in millions) 2020 2019 $
Capital expenditures for property and equipment $ (6 ) $ (25 ) $ 19
Software capitalization costs (16 ) (17 ) 1
Investments in unconsolidated affiliates (2 ) (2 ) -
Net cash used in investing activities $ (24 ) $ (44 ) $ 20
The change in net cash used in investing activities for the nine months ended
September 30, 2020 , compared to the same period in 2019, was primarily due to a
reduction of property and equipment spending.
Our capital expenditures include spending related to technology, buildings and
leasehold improvements used to support sales and marketing locations, resort
operations and corporate activities. We believe the renovations of our existing
assets are necessary to stay competitive in the markets in which we operate.
Financing Activities
The following table summarizes our net cash provided by financing activities:
Nine Months Ended September 30, Variance
($ in millions) 2020 2019 $
Issuance of debt $ 495 $ 455 $ 40
Issuance of non-recourse debt 495 365 130
Repayment of debt (62 ) (272 ) 210
Repayment of non-recourse debt (403 ) (327 ) (76 )
Debt issuance costs (8 ) (6 ) (2 )
Repurchase and retirement of common stock (10 ) (283 ) 273
Payment of withholding taxes on vesting of (3 ) (3 ) -
restricted stock units
Proceeds from employee stock plan purchases 1 2 (1 )
Other financing activity (2 ) (2 ) -
Net cash provided by (used in) financing $ 503 $ (71 ) $ 574
activities
41
-------------------------------------------------------------------------------- The change in net cash provided by (used in) financing activities for the nine months endedSeptember 30, 2020 , compared to the same period in 2019, was primarily due to (i) the change in debt borrowings and repayments under our Revolver of$40 million and$210 million , respectively, (ii) additional repayments of$66 million of our securitized debt, (iii) the additional net borrowing of$120 million on our Timeshare Facility, and (iv) a reduction in repurchases and retirement of common stock.
Contractual Obligations
The following table summarizes our significant contractual obligations as ofSeptember 30, 2020 : Payments Due by Period Less Than 1 More Than 5 ($ in millions) Total Year 1-3 Years 3-5 Years Years Debt$ 1,268 $ 12$ 23 $ 1,210 $ 23 Non-recourse debt 847 301 304 160 82 Interest on debt(1) 222 63 104 40 15 Operating leases 80 18 26 23 13 Inventory purchase commitments 457 235 168 42 12 Other commitments(2) 16 5 9 1 1
Total contractual obligations
634$ 1,476 $ 146
(1) Includes interest on our debt and non-recourse debt. For our variable-rate
debt, we have assumed a constant 30-day LIBOR rate of 0.15 percent, subject
to a 0.25 percent floor, as of
(2) Primarily relates to commitments related to information technology and brand
licensing under the normal course of business.
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 ofSeptember 30, 2020 , our inventory-related purchase commitments totaled$457 million over 10 years of which we expect to purchase$10 million for the remainder of 2020. 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$571 million as ofSeptember 30, 2020 which primarily consist of escrow and construction related bonds.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as ofSeptember 30, 2020 consisted of$457 million of certain commitments with developers whereby we have committed to purchase vacation ownership units at a future date to be marketed and sold under our Hilton Grand Vacations brand and$16 million of other commitments under the normal course of business. The ultimate amount and timing of the acquisitions is subject to change pursuant to the terms of the respective arrangements, which could also allow for cancellation in certain circumstances. See Note 19: Commitments and Contingencies in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.
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 notes (the "Notes"). The notes were issued inNovember 2016 with an aggregate principal balance of$300 million , an interest rate of 6.125 percent, and maturity inDecember 2024 . Our senior unsecured notes were co-issued byHilton Grand Vacations Borrower LLC andHilton Grand Vacations Borrower Inc. (the "Issuers") and are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis byHilton Grand Vacations Inc. (the "Parent"),Hilton Grand Vacations Parent LLC (the "Intermediate Parent"), the Issuers, and each of the Issuer's existing and future wholly owned domestic restricted subsidiaries (all entities that guarantee the Notes, collectively, the "Obligor group"). The Notes rank equally in right of payment with all of our existing and future senior unsecured obligations, are senior in right of payment to any of our Guarantor's subordinated indebtedness, and are subordinate to all existing and future liabilities of our entities that do not guarantee the Notes and our secured indebtedness, including our senior secured credit facilities and securitized non-recourse debt. 42 -------------------------------------------------------------------------------- The guarantee of each guarantor subsidiary is limited to a maximum amount, subject to applicableU.S. and non-U.S. laws. The guarantees can also be released upon the sale or transfer of a guarantor subsidiary's capital stock or substantially all of its assets, becoming designated as an unrestricted subsidiary, or upon its consolidation into a co-Issuer or another subsidiary Guarantor. The following tables provide summarized financial information of the Obligor group on a combined basis after elimination of (i) intercompany transactions and balances between the Parent Company and the subsidiary Guarantors and (ii) investments in and equity in the earnings of non-Guarantor subsidiaries and unconsolidated affiliates:
Summarized Financial Information
September 30, December 31,
($ in millions) 2020 2019
Assets
Cash and cash equivalents $ 587 $ 35
Restricted cash 62 59
Accounts receivable, net - due from non-guarantor
subsidiaries 19 41
Accounts receivable, net - due from related parties 7 25
Accounts receivable, net - other 85 126
Timeshare financing receivables, net 178 449 Inventory 843 524 Property and equipment, net 477 718 Operating lease right-of-use assets, net 53 58 Intangible assets, net 80 77 Other assets 88 69 Total assets $ 2,479$ 2,181 Liabilities
Accounts payable, accrued expenses and other - due from non-guarantor subsidiaries
$ 19 $ 41
Accounts payable, accrued expenses and other - other 254 288
Advanced deposits 119 115
Debt, net 1,262 828
Operating lease liabilities 69 74
Deferred revenues 261 186
Deferred income tax liabilities 209 259
Total liabilities $ 2,193 $ 1,791
Nine Months Ended
September 30,
($ in millions) 2020Total revenues - transactions with non-guarantor subsidiaries $
5
Total revenues - other 584
Operating loss (83 )
Net loss (103 )
Subsequent Events
On October 15, 2020 , we announced a workforce reduction plan in response to the
continuing adverse impact of the COVID-19 pandemic and related government orders
and mandates restricting travel and operations on our business and the travel
and leisure industry in general. The reduction in force is expected to reduce
our workforce by approximately 1,600 team members and better align the workforce
with the evolving business needs.
The reduction in force is estimated to result in approximately $10 million to
$12 million in restructuring and related expenses and charges, primarily related
to employee severance, benefits and related costs. We expect to incur the
majority
43
--------------------------------------------------------------------------------of these costs during the last quarter of 2020. All of the restructuring and related expenses and charges are expected to result in cash expenditures.
Additionally, in
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance withU.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 endedDecember 31, 2019 . 44
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