Hilton Grand Vacations Inc. — Q1 2018 Form 10-Q
Business context and period. The filing covers the three months ended March 31, 2018. Hilton Grand Vacations develops, markets, sells and manages timeshare resorts and provides consumer financing and club services. At quarter-end, it operated 48 properties with 8,102 units and had approximately 292,000 Club members.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $367 million | $399 million | Down 8.0% |
| Net income | $30 million | $50 million | Down 40.0% |
| Diluted EPS | $0.30 | $0.51 | Down $0.21 |
| Adjusted EBITDA (non-GAAP) | $62 million | $94 million | Down 34.0% |
| Operating cash flow | $25 million | $135 million | Down $110 million |
- Revenue mix: Real estate sales and financing revenue was $241 million, down 14.8%; resort operations and club management revenue was $98 million, up 11.4%. Cost reimbursements contributed $36 million.
- Sales indicators: Contract sales, a non-GAAP operating measure, increased 14.6% to $329 million. Tour flow rose 7.3% to 77,700 and volume per guest increased 7.0% to $3,997. Real estate margin fell to $31 million from $71 million, and margin percentage declined to 17.6% from 32.9%.
- Other margins: Financing margin was $27 million (71.1%); resort and club management margin was $28 million (71.8%); rental and ancillary services margin was $23 million (45.1%).
- Cash and liquidity: Cash and cash equivalents were $85 million and restricted cash was $69 million at March 31, versus $246 million and $51 million, respectively, at year-end. Cash, cash equivalents and restricted cash totaled $154 million, down $143 million during the quarter. Investing cash outflow was $14 million and financing cash outflow was $154 million.
- Debt: Balance-sheet debt was $479 million and non-recourse debt was $544 million, net of financing costs. Contractual principal balances were $487 million and $549 million, respectively. The company reported compliance with financial covenants. In April, it borrowed $100 million under its revolving credit facility at one-month LIBOR plus 2.25%.
- Assets and receivables: Total assets were $2.365 billion. Net timeshare financing receivables were $1.074 billion, supported by a $144 million loan-loss allowance; $57 million of principal was on non-accrual status. Inventory was $564 million, up from $509 million at year-end.
Material changes and comparability
- The company adopted ASC 606 on January 1, 2018 using the modified retrospective method. Under the new standard, revenue and related costs for VOIs under construction are deferred until construction is complete; the prior method recognized revenue using percentage of completion. ASC 606 reduced reported Q1 2018 revenue by $63 million and net income by $24 million versus the previous accounting guidance. On that previous-guidance basis, Q1 2018 revenue would have been $430 million and net income $54 million. The adoption did not change total cash flows.
- Accordingly, reported year-over-year revenue and earnings comparisons are affected by differing accounting standards. The filing’s retrospective ASC 606-adjusted Q1 2017 figures were revenue of $387 million and net income of $47 million.
- Reported real estate sales and financing Adjusted EBITDA declined to $44 million from $83 million, largely reflecting ASC 606 timing effects. Resort operations and club management Adjusted EBITDA increased to $59 million from $51 million, supported by more Club members, new properties and higher rentals.
- Operating cash flow fell substantially, principally due to a $63 million federal tax payment deferred from 2017, increased inventory spending and the absence of a license-fee payment made in Q1 2017. Financing cash use included the $112 million repurchase and retirement of 2.5 million shares from HNA.
- HNA sold 22.25 million shares in a secondary offering and ceased to be a related party; HGV received no proceeds. The company separately repurchased 2.5 million shares for approximately $112 million.
Outlook, risks and contingencies
- The filing provides no specific full-year revenue, earnings or cash-flow guidance. Management stated that available cash, operating cash generation and timeshare-receivable securitizations were expected to meet anticipated needs for the foreseeable future.
- Management cited consumer demand and economic conditions, competition, fee-for-service agreement terminations, inventory availability and development, international and foreign-exchange exposure, cyber and data-security events, litigation, taxes, and debt and interest-rate risks among factors that could affect results.
- Purchase commitments for vacation ownership inventory and land totaled approximately $419 million over seven years, including $41 million scheduled for the remainder of 2018. Timing and amounts may change under the agreements, which may permit cancellation in certain circumstances.
- The company reported ordinary-course litigation, including claims for substantial sums, but did not expect pending or threatened matters to materially affect the financial statements. It also reported no material change in previously disclosed risk factors.
- Revenue recognition for VOIs under construction, estimates of loan collectability and the timing of committed inventory purchases are important items to monitor. The company was evaluating the effect of the new lease accounting standard, effective for it in 2019.
Important facts for investors to verify
- How much of the reported sales and earnings decline reflects ASC 606 timing rather than underlying demand; compare contract sales and the filing’s prior-guidance and adjusted-comparative figures.
- Whether stronger contract sales, tour flow and volume per guest translate into recognized revenue and improved real estate margins as projects are completed.
- Whether the lower operating cash flow and reduced unrestricted cash are temporary, and how the April $100 million revolver borrowing affects liquidity, interest expense and covenant headroom.
- Timeshare loan performance: delinquency trends, non-accrual balances and adequacy of the allowance for loan losses.
- The pace and funding of the $419 million inventory and land commitments, and the company’s ability to meet scheduled debt maturities while funding operations and investment.
- Adjusted EBITDA and contract sales are non-GAAP measures; assess them alongside GAAP earnings, cash flows and the stated limitations of those measures.