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INTERVAL LEISURE GROUP, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) Cautionary Statement Regarding Forward-Looking Information
This quarterly report on Form 10-Q contains "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995. The
use of words such as "anticipates," "estimates," "expects," "intends," "plans"
and "believes," and similar expressions or future or conditional verbs such as
"will," "should," "would," "may" and "could" among others, generally identify
forward-looking statements. These forward-looking statements include, among
others, statements relating to: our future financial performance, our business
prospects and strategy, anticipated financial position, liquidity and capital
needs and other similar matters. These forward-looking statements are based on
management's current expectations and assumptions about future events, which are
inherently subject to uncertainties, risks and changes in circumstances that are
difficult to predict.
Actual results could differ materially from those contained in the
forward-looking statements included in this quarterly report for a variety of
reasons, including, among others: adverse trends in economic conditions
generally or in the vacation ownership, vacation rental and travel industries;
adverse changes to, or interruptions in, relationships with third parties; lack
of available financing for, or insolvency or consolidation of developers;
decreased demand from prospective purchasers of vacation interests; travel
related health concerns; changes in our senior management; regulatory changes;
our ability to compete effectively and successfully add new products and
services; the effects of our significant indebtedness and our compliance with
the terms thereof; adverse events or trends in key vacation destinations;
business interruptions in connection with our technology systems; ability of
managed homeowners associations to collect sufficient maintenance fees; third
parties not repaying advances or extensions of credit; loss of the management
contract for one of Aston's largest managed properties; and our ability to
expand successfully in international markets and manage risks specific to
international operations. Certain of these and other risks and uncertainties are
discussed in our filings with the SEC, including in Item 1A "Risk Factors" of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and
in Part II of this report. In light of these risks and uncertainties, the
forward looking statements discussed in this report may not prove to be
accurate. Accordingly, you should not place undue reliance on these forward
looking statements, which only reflect the views of our management as of the
date of this report. Except as required by applicable law, we do not undertake
to update these forward-looking statements.
GENERAL
The following Management Discussion and Analysis provides a narrative of the
results of operations and financial condition of ILG for the three and nine
months ended September 30, 2012. This section should be read in conjunction with
the consolidated financial statements and accompanying notes included in this
report as well as our 2011 Annual Report on Form 10-K, which have been prepared
in accordance with accounting principles generally accepted in the United States
of America ("GAAP"). This discussion includes the following sections:
º •
º Management Overview
º •
º Results of Operations
º •
º Financial Position, Liquidity and Capital Resources
º •
º Critical Accounting Policies and Estimates
º •
º ILG's Principles of Financial Reporting
º •
º Reconciliation of EBITDA and Adjusted EBITDA
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MANAGEMENT OVERVIEWGeneral Description of our Business
ILG is a leading global provider of membership and leisure services to the
vacation industry. We operate in two operating segments: Membership and Exchange
and Management and Rental. Our principal operating segment, Membership and
Exchange, offers travel and leisure related products and services to owners of
vacation interests and others primarily through various membership programs, as
well as related services to resort developer clients. Management and Rental, our
other business segment, provides hotel, condominium resort, timeshare resort and
homeowners association management, and rental services to both vacation property
owners and vacationers.
Membership and Exchange Services
Interval, the principal business comprising our Membership and Exchange
segment, has been a leader in the membership and exchange services industry
since its founding in 1976. As of September 30, 2012, Interval's primary
operation is the Interval Network, a quality global vacation ownership
membership exchange network with:
º •
º a large and diversified base of participating resorts consisting of
approximately 2,700 resorts located in over 75 countries, including
both leading independent resort developers and branded hospitality
companies; and
º •
º approximately 1.9 million vacation ownership interest owners enrolled
as members of the Interval Network.
Interval typically enters into multi-year contracts with developers of
vacation ownership resorts, pursuant to which the resort developers agree to
enroll all purchasers of vacation interests at the applicable resort as members
of an Interval exchange program. In return, Interval provides enrolled
purchasers with the ability to exchange the use and occupancy of their vacation
interest at the home resort (generally for a period of one week) for the right
to occupy accommodations at a different resort participating in an Interval
exchange network. Through Interval's Getaways, members may rent resort
accommodations for a fee without relinquishing the use of their vacation
interest. In addition, Interval offers sales, marketing and operational support,
consulting and back-office services, including reservation servicing, to certain
resort developers participating in the Interval Network, upon their request and
for additional consideration.
The Membership and Exchange segment earns most of its revenue from (i) fees
paid for membership in the Interval Network and (ii) Interval Network
transactional and service fees paid primarily for exchanges, Getaways,
reservation servicing, and related transactions collectively referred to as
"transaction revenue."
Management and Rental Services
We also provide management and rental services to hotels as well as
condominium and timeshare resorts and their homeowners associations through
Aston, Vacation Resorts International ("VRI") and Trading Places International
("TPI"). Such vacation properties and hotels are not owned by us. Aston is based
in Hawaii and concentrates largely on hotel and condominium resort management
primarily in Hawaii, as well as vacation property rental and related services
(including common area and owner association management services for condominium
projects). TPI provides timeshare resort and homeowners association management
services as well as vacation rentals. On February 28, 2012, we acquired VRI, the
largest independent provider of resort and homeowners association management
services to the shared ownership industry.
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As of September 30, 2012, the businesses that comprise our Management and
Rental segment provided management and rental services at over 200 vacation
properties, resorts and club locations in North America as well as more limited
management services to certain additional properties.
Revenue from the Management and Rental segment is derived principally from
fees for hotel, condominium resort, timeshare resort and homeowners association
management and rental services. Management fees consist of a base management fee
and, in some instances for hotels or condominium resorts, an incentive
management fee which is generally a percentage of operating profits or
improvement in operating profits. Service fee revenue is based on the services
provided to owners including reservations, sales and marketing, property
accounting and information technology services either internally or through
third party providers. A majority of Aston's hotel and condominium resort
management agreements provide that owners receive either specified percentages
of the revenue generated under our management or guaranteed dollar amounts. In
these cases, the operating expenses for the rental operation are paid from the
revenue generated by the rentals, the owners are then paid their contractual
percentages or amounts, and the Management and Rental segment either retains the
balance (if any) as its management fee or makes up the deficit.
International Operations
International revenue remained relatively flat in the three months ended
September 30, 2012 and increased approximately 2.1% in the nine months ended
September 30, 2012 compared to the same periods in 2011. As a percentage of our
total revenue, international revenue decreased to 13.7% and 14.5% in the three
and nine months ended September 30, 2012, respectively, from 15.0% and 15.6% for
the three and nine months ended September 30, 2011, respectively. The decreases
as a percentage of total revenue are attributable to higher U.S. revenue mainly
due to our newly acquired VRI business.
Other Factors Affecting Results
Membership and Exchange
The consolidation of resort developers driven by bankruptcies and the lack
of receivables financing has resulted in a decrease in the flow of new members
from point of sale to our exchange networks. While access to receivables
financing has improved, financing standards for consumers remain higher than
those required several years ago. Developers are continuing to modify their
business models whereby a high proportion of sales are to their existing owners,
which does not result in new members to the Interval Network.
In addition, our 2012 results continue to be negatively affected by a shift
in the percentage mix of our membership base from traditional, direct renewal
members to corporate members who are renewed directly by the respective
developer and tend to have a lower propensity to transact with us. Consequently,
we work to structure our corporate membership arrangements such that there is a
reservation servicing component which partly offsets the anticipated lower
transaction propensity.
Management and Rental
Our Management and Rental segment results are susceptible to variations in
economic conditions, particularly in its primary market, Hawaii. According to
the Hawaii Tourism Authority, visitor arrivals by air in Hawaii have increased
8.4% and 9.2% for the three and nine months ended September 30, 2012,
respectively, compared to the same periods in the prior year. This is consistent
with Aston's managed properties in Hawaii experiencing increases in occupancy,
leading to overall increases of 18.0% and 16.7% in revenue per available room
("RevPAR") in Hawaii for the three and nine months ended September 30, 2012
compared to the same periods in 2011, respectively. These increases in RevPAR in
Hawaii were driven by both higher average daily rates and occupancy.
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As of the latest forecast (August 2012), the Hawaii Department for Business,
Economic Development and Tourism forecasts increases of 8.6% in visitors to
Hawaii and 15.2% in visitor expenditures in 2012 over 2011. Additionally, our
third quarter and year-to-date 2012 results include the results of operations
from VRI for the months subsequent to our February 28, 2012 acquisition.
Liquidity
On June 21, 2012, we entered into an amended and restated credit agreement
which provides, among other things, a $500 million revolving credit facility, as
further discussed in Note 5 of the interim consolidated financial statements
included in this report. The interest rate on the amended credit agreement is
based on (at our election) either LIBOR plus a predetermined margin that ranges
from 1.25% to 2.25%, or the Base Rate, as defined, plus a predetermined margin
that ranges from 0.25% to 1.25%, in each case based on ILG's leverage ratio. On
September 4, 2012, we redeemed all of our 9.5% senior notes at 100% of the
principal amount plus accrued and unpaid interest to the redemption date, at
which time the senior notes were no longer deemed to be outstanding and our
obligations under the indenture, as previously supplemented, terminated.
Additionally, the extinguishment of our senior notes resulted in a non-cash,
pre-tax loss on extinguishment of debt of $17.9 million during the third quarter
of 2012 principally pertaining to the acceleration of the original issue
discount and the write-off of the related unamortized deferred debt issuance
costs. This non-cash charge is presented as a separate line item within other
income (expense) in our consolidated statements of income for the three and nine
months ended September 30, 2012.
Outlook
Throughout 2012, the vacation ownership industry remained in a period of
transition that resulted in the bankruptcy, restructuring and consolidation of
developers as well as continued modifications to their business models. We
expect additional consolidation and reorganizations within the industry into
2013. Additionally, we anticipate margin compression and increased competition
in our membership and exchange business resulting from developers' proprietary
clubs.
For the Management and Rental segment, we expect Aston's RevPAR to continue
to show year-over-year improvement as its primary market, Hawaii, continues its
tourism recovery; however, increases in airfare may negatively impact visitor
arrivals from the mainland and temper growth. Additionally, our comparative
results for the remainder of 2012 will be favorably impacted by the inclusion of
the results of operations from VRI subsequent to our acquisition.
Lastly, during the second quarter of 2012, the ownership and debt structure
of one of Aston's largest managed properties was restructured. This caused
Aston's management agreement for the property to be modified, Aston's
compensation to be reduced and the remaining term to be shortened, with
short-term renewals at the option of the new property owner. Consequently,
during the second and third quarter we assessed the impact of these
modifications on our Management and Rental operating segment to determine
whether an interim impairment test of long-lived assets and goodwill and other
indefinite-lived intangible assets is warranted as of September 30, 2012. The
result of these assessments did not indicate that assets might be impaired and,
therefore, an interim impairment test was not warranted at this time.
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RESULTS OF OPERATIONSRevenue
For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Three Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange
Transaction revenue $ 46,588 (0.5 )% $ 46,836
Membership fee revenue 32,518 1.0 % 32,196
Ancillary member revenue 1,808 (14.7 )% 2,119
Total member revenue 80,914 (0.3 )% 81,151
Other revenue 5,178 2.1 % 5,071
Total Membership and Exchange revenue 86,092 (0.2 )%
86,222
Management and Rental
Management fee and rental revenue 15,117 78.2 % 8,484
Pass-through revenue 15,986 33.1 % 12,007
Total Management and Rental revenue 31,103 51.8 % 20,491
Total revenue $ 117,195 9.8 % $ 106,713
Revenue for the three months ended September 30, 2012 increased
$10.5 million, or 9.8%, from the comparable period in 2011. Management and
Rental segment revenue increased $10.6 million, or 51.8%, in the quarter
compared to the prior year. Membership and Exchange segment revenue was
relatively in-line with the prior year, decreasing $0.1 million.
Membership and Exchange
Total active members in the Interval Network at September 30, 2012 increased
to approximately 1.86 million members as compared to approximately 1.79 million
members at September 30, 2011, an increase of 3.6%. This led to an increase of
$0.3 million, or 1.0%, in membership fee revenue during the period, partly
offset by lower average membership fee revenue per member. On the other hand,
transaction revenue was lower by $0.2 million primarily due to a $1.0 million
decrease in revenue from exchanges and Getaways, resulting from a 3.9% decrease
in exchange and Getaway transaction volume during the quarter compared to 2011
which was partly offset by a 1.6% increase in average fee per transaction.
However, this decrease in transaction revenue also was partly offset by higher
reservation servicing and other transaction related fees of $0.4 million and
$0.3 million, respectively. Lower transaction volume and higher reservation
servicing revenue are related to a shift in the percentage mix of our membership
base from traditional to corporate members. Overall Interval Network average
revenue per member was $43.54 in the third quarter of 2012, a decrease of 3.6%
from $45.15 in the prior year.
Management and Rental
The increase of $6.6 million, or 78.2%, in management fee and rental revenue
includes $5.5 million of incremental VRI management fee revenue and an increase
of $0.5 million contribution from TPI primarily related to the addition of new
property management contracts subsequent to the start of the third quarter of
2011. Fee income earned from managed hotel and condominium resort properties at
Aston increased $0.6 million, or 8.3%, during the quarter compared to the prior
year
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quarter due to an 18.9% increase in RevPAR to $134.45 driven by an 11.3% higher
average daily rate and a 6.8% improvement in occupancy rates in the third
quarter.
Additionally, this segment reported an increase of $4.0 million, or 33.1%,
in reimbursed compensation and other employee-related costs directly associated
with managing properties that are included in both revenue and expenses and that
are passed on to the property owners or homeowners association without mark-up
("pass-through revenue"). The increase in pass-through revenue is mostly related
to our acquisition of VRI and, to a lesser extent, increases at Aston and TPI
related to higher occupied room nights and new property management contracts,
respectively.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Nine Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange
Transaction revenue $ 156,822 3.9 % $ 150,865
Membership fee revenue 97,652 0.4 % 97,307
Ancillary member revenue 5,542 (6.1 )% 5,900
Total member revenue 260,016 2.3 % 254,072
Other revenue 16,709 4.9 % 15,929
Total Membership and Exchange revenue 276,725 2.5 % 270,001
Management and Rental
Management fee and rental revenue 41,165 69.9 % 24,229
Pass-through revenue 44,712 27.7 % 35,020
Total Management and Rental revenue 85,877 44.9 % 59,249
Total revenue $ 362,602 10.1 % $ 329,250
Revenue for the nine months ended September 30, 2012 increased
$33.4 million, or 10.1%, from the comparable period in 2011. Membership and
Exchange segment revenue increased $6.7 million, or 2.5%, in the period compared
to the prior year and Management and Rental segment revenue increased
$26.6 million, or 44.9%, from 2011.
Membership and Exchange
The increase of $6.7 million in Membership and Exchange segment revenue in
2012 is primarily due to increases in transaction revenue and other revenue of
$6.0 million and $0.8 million, respectively. The rise in transaction revenue for
the nine month period is the result of a strong first-half of 2012 which
returned higher revenue from exchanges and Getaways by $2.4 million and
increases in reservation servicing and other transaction related fees of
$1.6 million and $2.0 million, respectively. Higher transaction revenue from
exchanges and Getaways was due to a 5.7% increase in average fee per
transaction, partially offset by a 3.7% decrease in exchange and Getaway
transaction volume. Lower transaction volume is related to a shift in the
percentage mix of our membership base from traditional to corporate members.
Membership fee revenue during the first nine months of 2012 was relatively
consistent with 2011. The increase in other revenue in the nine month period is
primarily attributable to the membership and exchange related activities of TPI
and the inclusion of VRI subsequent to our acquisition in February 2012. Overall
Interval Network average revenue per member of $141.00 for 2012 is in-line with
$140.61 of the prior year.
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Management and Rental
The increase of $16.9 million, or 69.9%, in management fee and rental
revenue includes $12.9 million of incremental VRI management fee revenue and a
$1.9 million contribution from TPI largely related to the addition of new
property management contracts. Fee income earned from managed hotel and
condominium resort properties at Aston increased $2.1 million, or 11.2% in 2012
due to an 18.5% increase in RevPAR to $131.84 driven by a 10.0% higher average
daily rate and a 7.7% improvement in occupancy rates during the nine months
ended September 30, 2012.
The increase of $9.7 million, or 27.7%, in pass-through revenue is mostly
related to our acquisition of VRI and, to a lesser extent, increases at Aston
and TPI attributable to higher occupied room nights and new property management
contracts, respectively.
Cost of Sales
For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Three Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange $ 20,538 5.0 % $ 19,565
Management and Rental
Management fee and rental expenses 5,217 66.4 % 3,136
Pass-through expenses 15,986 33.1 % 12,007
Total Management and Rental cost of sales 21,203 40.0 % 15,143
Total cost of sales $ 41,741 20.3 % $ 34,708
As a percentage of total revenue 35.6 % 9.5 % 32.5 %
As a percentage of total revenue excluding
pass-through revenue 41.2 % 12.5 % 36.6 %
Gross margin 64.4 % (4.6 )% 67.5 %
Gross margin without pass-through
revenue/expenses 74.6 % (1.9 )% 76.0 %
Cost of sales consists primarily of compensation and other employee-related
costs (including stock-based compensation) for personnel engaged in servicing
members of the Membership and Exchange segment and providing services to
property owners and/or guests of the Management and Rental segment's managed
vacation properties, as well as cost of rental inventory used primarily for
Getaways included within the Membership and Exchange segment.
Cost of sales in the third quarter of 2012 increased $7.0 million from 2011,
consisting of an increase of $1.0 million from our Membership and Exchange
segment and $6.1 million from our Management and Rental segment. Overall gross
margin decreased 4.6% to 64.4% this quarter compared to 2011, primarily due to
increased gross profit contribution from our lower-margin Management and Rental
segment relative to total ILG gross profit.
Gross margin for the Membership and Exchange segment decreased by 1.5% as
compared to the prior year. Cost of sales for this segment increased
$1.0 million primarily due to an increase of $0.8 million in compensation and
other employee related costs. This increase mainly pertained to our call center
and related member servicing activities which, coupled with increases of
$0.2 million in membership fulfillment related expenses and $0.3 million in
telecommunications costs related to member servicing , were in part attributable
to an increase in the number of active members in our Interval Network resulting
from the affiliation of two corporate accounts during the first half of 2012.
These increases were partly offset by a $0.2 million decrease in cost of
purchased inventory during the
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quarter. The lower cost of purchased inventory was attributable mainly to a
decrease in the average cost per unit of this purchased inventory, partly offset
by a higher proportion of purchased inventory utilized during the quarter.
The increase of $6.1 million in cost of sales from the Management and Rental
segment was primarily attributable to an increase of $4.0 million in segment
pass-through revenue coupled with an increase of $1.8 million in other
incremental expenses related to VRI. Gross margin for this segment increased
22.0% to 31.8% in the third quarter of 2012 compared to 2011. The Management and
Rental segment has lower gross margins than our Membership and Exchange segment
largely due to the pass-through revenue. Excluding the effect of pass-through
revenue, gross margin for this segment increased 3.9% to 65.5% during the third
quarter compared to prior year.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Nine Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange $ 68,384 8.5 % $ 63,027
Management and Rental
Management fee and rental expenses 14,697 54.4 % 9,517
Pass-through expenses 44,712 27.7 % 35,020
Total Management and Rental cost of sales $ 59,409 33.4 % $ 44,537
Total cost of sales $ 127,793 18.8 % $ 107,564
As a percentage of total revenue 35.2 % 7.9 % 32.7 %
As a percentage of total revenue excluding
pass-through revenue 40.2 % 10.0 % 36.6 %
Gross margin 64.8 % (3.8 )% 67.3 %
Gross margin without pass-through
revenue/expenses 73.9 % (2.0 )% 75.3 %
Cost of sales increased $20.2 million from 2011, consisting of an increase
of $5.4 million from our Membership and Exchange segment and $14.9 million from
our Management and Rental segment. Overall gross margin decreased 3.8% to 64.8%
in the first nine months of 2012 compared to 2011, primarily due to increased
gross profit contribution from our lower-margin Management and Rental segment
relative to total ILG gross profit.
Gross margin for the Membership and Exchange segment decreased by 1.8%
during first nine months of 2012 compared to the prior year. Cost of sales for
this segment increased $5.4 million primarily due to an increase of $3.0 million
in compensation and other employee related costs and $0.8 million in the cost of
purchased inventory. The increase in compensation and other employee related
costs mainly pertained to our call center and related member servicing
activities which, coupled with an increase of $1.5 million in membership
fulfillment related expenses, were in part attributable to an increase in the
number of active members in our Interval Network resulting from the affiliation
of two corporate accounts during the first half of 2012. The increase in the
cost of purchased inventory was due to a higher proportion of purchased
inventory utilized during 2012, partly offset by a decrease in the average cost
per unit of this purchased inventory.
The increase of $14.9 million in cost of sales from the Management and
Rental segment was primarily attributable to an increase of $9.7 million in
segment pass-through revenue coupled with an increase of $4.4 million in other
incremental expenses related to VRI and an increase of $0.5 million in
compensation and other employee related costs at TPI. Gross margin for this
segment increased 24.1% to 30.8% in the first nine months of 2012 compared to
2011. Excluding the effect of pass-through
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revenue, gross margin for this segment increased 5.9% to 64.3% during 2012
compared to the prior year.
Selling and marketing expense
For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Three Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Selling and marketing expense $ 13,282 (0.4 )% $ 13,341
As a percentage of total revenue 11.3 % (9.3 )% 12.5 %
As a percentage of total revenue excluding
pass-through revenue 13.1 % (6.8 )% 14.1 %
Selling and marketing expense consists primarily of advertising and
promotional expenditures and compensation and other employee-related costs
(including stock-based compensation) for personnel engaged in sales and sales
support functions. Advertising and promotional expenditures primarily include
printing costs of directories and magazines, promotions, tradeshows, agency
fees, marketing fees and related commissions.
Selling and marketing expense in the third quarter 2012 remained relatively
flat compared to 2011, decreasing $0.1 million, or 0.4%. As a percentage of
total revenue and total revenue excluding pass-through revenue, sales and
marketing expense decreased 9.3% and 6.8%, respectively, during the third
quarter of 2012 compared to the prior year.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Nine Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Selling and marketing expense $ 41,323 0.3 % $ 41,215
As a percentage of total revenue 11.4 % (9.0 )% 12.5 %
As a percentage of total revenue excluding
pass-through revenue 13.0 % (7.2 )% 14.0 %
Selling and marketing expense in 2012 remained relatively flat compared to
2011, increasing $0.1 million, or 0.3%. As a percentage of total revenue and
total revenue excluding pass-through revenue, sales and marketing expense
decreased 9.0% and 7.2%, respectively, during the first nine months of 2012
compared to the prior year.
General and administrative expense
For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Three Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
General and administrative expense $ 26,626 14.5 % $ 23,256
As a percentage of total revenue 22.7 % 4.3 % 21.8 %
As a percentage of total revenue excluding
pass-through revenue 26.3 % 7.1 % 24.6 %
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General and administrative expense consists primarily of compensation and
other employee-related costs (including stock-based compensation) for personnel
engaged in finance, legal, tax, human resources, information technology and
executive management functions, as well as facilities costs, fees for
professional services and other company-wide benefits.
General and administrative expense in the third quarter 2012 increased
$3.4 million from 2011, primarily due to an increase of $2.6 million in overall
compensation and other employee-related costs as well as other incremental
expenses of $0.9 million from VRI, an unfavorable variance of $1.1 million in
our estimated accrual for European Union ("EU") Value Added Tax ("VAT"),
primarily due to the $1.1 million change in estimate recorded in the third
quarter of 2011, and an unfavorable variance of $0.3 million in operating
currency impact resulting from foreign currency remeasurements of operating
assets and liabilities denominated in a currency other than the functional
currency. These changes were partly offset by a favorable net change of
$1.8 million in the estimated fair value of contingent consideration related to
an acquisition, primarily due to the $1.2 million unfavorable change in estimate
recorded in the third quarter of 2011 compared to a $0.7 million favorable
change in estimate recorded in the current quarter.
The $2.6 million increase in overall compensation and other employee-related
costs was primarily due to $1.6 million of incremental compensation and other
employee-related expenses from VRI, an increase in health and welfare insurance
expense of $1.0 million due to higher self-insured claim activity in the
quarter, as well as increases in other employee-related costs. These higher
employee-related costs were partly offset by a decrease of $0.5 million in
non-cash compensation expense mainly due to awards granted at spin-off, vesting
fully during the third quarter of 2012.
As a percentage of total revenue and total revenue excluding pass-through
revenue, general and administrative expense increased 4.3% and 7.1%,
respectively, during the third quarter of 2012 compared to the prior year.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Nine Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
General and administrative expense $ 79,032 10.2 % $ 71,731
As a percentage of total revenue 21.8 % NM 21.8 %
As a percentage of total revenue excluding
pass-through revenue 24.9 % 2.0 % 24.4 %
General and administrative expense increased $7.3 million from 2011,
primarily due to an increase of $6.7 million in overall compensation and other
employee-related costs, other incremental expenses of $2.1 million from VRI and
certain other miscellaneous increases primarily at Aston, partly offset by a
favorable net change of $1.8 million in the estimated fair value of contingent
consideration related to an acquisition.
The $6.7 million increase in overall compensation and other employee-related
costs was primarily due to $3.8 million of incremental compensation and other
employee-related expenses from VRI, an increase of $1.2 million in health and
welfare insurance expense due to higher self-insured claim activity in 2012, and
various other increases in compensation and employee-related costs. These higher
employee-related costs were partly offset by a decrease of $0.3 million in
non-cash compensation expense mainly due to awards granted at spin-off, vesting
fully during the third quarter of 2012.
As a percentage of total revenue, general and administrative expense was
in-line with the prior year and was higher by 2.0% as a percentage of total
revenue excluding pass-through revenue.
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Amortization Expense of Intangibles
For the three and nine months ended September 30, 2012 compared to the three and
nine months ended September 30, 2011
Three Months Ended Nine Months Ended
September 30, September 30,
2012 % Change 2011 2012 % Change 2011
(Dollars in thousands) (Dollars in thousands)
Amortization $ 6,669 (2.4 )% $ 6,830 $ 21,001 2.7 % $ 20,448
As a percentage of total
revenue 5.7 % (11.1 )% 6.4 % 5.8 % (6.7 )% 6.2 %
As a percentage of total
revenue excluding
pass-through revenue 6.6 % (8.6 )% 7.2 % 6.6 % (4.9 )% 6.9 %
Amortization expense of intangibles for the third quarter of 2012 decreased
$0.2 million from the comparable period in 2011 primarily due certain intangible
assets amortizing fully during and prior to the third quarter of 2012, partly
offset by the incremental amortization expense pertaining to intangible assets
resulting from the acquisition of VRI.
Amortization expense of intangibles for the nine months ended September 30,
2012 increased $0.6 million from 2011 primarily due to the incremental
amortization expense pertaining to intangible assets resulting from the
acquisition of VRI, partly offset by certain intangible assets amortizing fully
during and prior to the third quarter of 2012.
Depreciation Expense
For the three and nine months ended September 30, 2012 compared to the three and
nine months ended September 30, 2011
Three Months Ended Nine Months Ended
September 30, September 30,
2012 % Change 2011 2012 % Change 2011
(Dollars in thousands) (Dollars in thousands)
Depreciation $ 3,311 (0.2 )% $ 3,319 $ 9,839 (1.7 )% $ 10,006
As a percentage of total
revenue 2.8 % (9.2 )% 3.1 % 2.7 % (10.7 )% 3.0 %
As a percentage of total
revenue excluding
pass-through revenue 3.3 % (6.7 )% 3.5 % 3.1 % (9.0 )% 3.4 %
Depreciation expense for the three and nine months ended September 30, 2012
was relatively consistent with the comparable periods in 2011, decreasing
slightly by 0.2% and 1.7%, respectively.
Operating Income
For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Three Months Ended
September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange $ 23,411 (6.6 )% $ 25,052
Management and Rental 2,155 941.1 % 207
Total operating income $ 25,566 1.2 % $ 25,259
As a percentage of total revenue 21.8 % (7.8 )% 23.7 %
As a percentage of total revenue excluding
pass-through revenue 25.3 % (5.3 )% 26.7 %
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Operating income in the third quarter was relatively consistent with the
prior year, increasing slightly by $0.3 million or 1.2%, and was comprised of a
decrease of $1.6 million from our Membership and Exchange segment and an
increase of $1.9 million from our Management and Rental segment.
Operating income for our Membership and Exchange segment decreased
$1.6 million to $23.4 million in the third quarter 2012 from 2011 due to lower
segment operating results, partly offset by the positive contributions from
VRI's membership and exchange activities and a favorable net change of
$0.9 million in the estimated fair value of contingent consideration related to
an acquisition.
The increase in operating income of $1.9 million at our Management and
Rental segment is primarily due to improved operating results at Aston during
the quarter, incremental contributions from VRI and a favorable net change of
$0.9 million in the estimated fair value of contingent consideration related to
an acquisition.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Nine Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange $ 79,076 1.0 % $ 78,304
Management and Rental 4,538 NM (18 )
Total operating income $ 83,614 6.8 % $ 78,286
As a percentage of total revenue 23.1 % (3.0 )% 23.8 %
As a percentage of total revenue excluding
pass-through revenue 26.3 % (1.1 )% 26.6 %
Operating income for the first nine months of 2012 increased $5.3 million
from the comparable period in 2011, consisting of increases of $0.8 million from
our Membership and Exchange segment and $4.6 million from our Management and
Rental segment.
Operating income for our Membership and Exchange segment increased
$0.8 million to $79.1 million in 2012 from 2011 due to the positive
contributions from the membership and exchange activities of TPI and VRI and a
favorable net change of $0.9 million in the estimated fair value of contingent
consideration related to an acquisition, largely offset by lower segment
operating results.
The increase in operating income of $4.6 million at our Management and
Rental segment is primarily due to improved operating results at Aston and TPI
during the first nine months of 2012, coupled with the incremental contribution
from VRI and a favorable net change of $0.9 million in the estimated fair value
of contingent consideration related to an acquisition.
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization
("Adjusted EBITDA") is a non-GAAP measure and is defined in "ILG's Principles of
Financial Reporting."
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For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Three Months Ended
September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange $ 33,701 (7.1 )% $ 36,262
Management and Rental 4,409 112.0 % 2,080
Total Adjusted EBITDA $ 38,110 (0.6 )% $ 38,342
As a percentage of total revenue 32.5 % (9.5 )% 35.9 %
As a percentage of total revenue excluding
pass-through revenue 37.7 % (7.0 )% 40.5 %
Adjusted EBITDA in the third quarter 2012 was relatively in-line with the
prior year, decreasing slightly by $0.2 million, or 0.6%, consisting of a
decrease of $2.6 million from our Membership and Exchange segment and an
increase of $2.3 million from our Management and Rental segment.
Adjusted EBITDA from our Membership and Exchange segment decreased
$2.6 million to $33.7 million in 2012 from $36.3 million in 2011. The decline in
this segment's Adjusted EBITDA is primarily due to a continuing contraction in
gross margin in part driven by a shift in percentage mix of the membership base
from traditional to corporate members, who have a lower propensity to transact
with us and a reduced membership fee. Additionally, the segment's results were
negatively affected by increased health and welfare insurance expense resulting
from higher self-insured claim activity in the quarter and an unfavorable
variance of $1.1 million in our estimated accrual for EU VAT. Such was partly
offset by incremental contributions from VRI and a favorable net change of
$0.9 million in the estimated fair value of contingent consideration related to
an acquisition.
Adjusted EBITDA from our Management and Rental segment increased
$2.3 million to $4.4 million in 2012 from $2.1 million in 2011. The improvement
in Adjusted EBITDA in this segment is primarily due to higher gross profit of
$4.6 million delivered mainly as a result of the inclusion of VRI in our results
of operations, improvement in Aston's RevPAR during the quarter, new property
management contracts gained at TPI subsequent to the start of the third quarter
of 2011, as well as the favorable net change of $0.9 million in the estimated
fair value of contingent consideration related to an acquisition. This was
partly offset by an increase of $2.5 million in general and administrative
expense due to the inclusion of VRI's general and administrative expenses and,
to a lesser extent, various other increases within Aston's general and
administrative expenses.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Nine Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Membership and Exchange $ 111,863 (0.1 )% $ 111,935
Management and Rental 11,324 100.6 % 5,645
Total Adjusted EBITDA $ 123,187 4.8 % $ 117,580
As a percentage of total revenue 34.0 % (4.9 )% 35.7 %
As a percentage of total revenue excluding
pass-through revenue 38.8 % (3.0 )% 40.0 %
Adjusted EBITDA for the first nine months of 2012 increased $5.6 million
from 2011, or 4.8%, driven by an increase of $5.7 million from our Management
and Rental segment, while our Membership and Exchange segment was in-line with
prior year, decreasing slightly by $0.1 million.
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Adjusted EBITDA from our Membership and Exchange segment of $111.9 million
was relatively in-line with prior year. Adjusted EBITDA for this segment
reflects a strong first half of 2012 that was subsequently impacted by margin
compression in the third quarter, as previously discussed, due to a shift in
percentage mix of the membership base which has negatively affected transaction
propensity and average membership fee per member. Additionally, the segment
experienced higher overall compensation and employee-related costs, particularly
driven by rising health and welfare insurance expense due to higher self-insured
claim activity in the period. Such was partly offset by the inclusion of VRI's
results, the favorable contribution from the membership and exchange activities
of TPI, as well as a favorable net change of $0.9 million in the estimated fair
value of contingent consideration related to an acquisition.
Adjusted EBITDA from our Management and Rental segment increased
$5.7 million to $11.3 million in 2012 from $5.6 million in 2011. The improvement
in Adjusted EBITDA in this segment is primarily driven by higher gross profit of
$11.8 million delivered mainly from the inclusion of VRI in our results of
operations, improvement in Aston's RevPAR during the year, new property
management contracts gained at TPI subsequent to the start of the third quarter
2011, in addition to a favorable net change, between the third quarter of 2011
and 2012, of $0.9 million in the estimated fair value of contingent
consideration related to an acquisition. This was partly offset by higher
general and administrative expenses of $5.9 million due to the inclusion of
VRI's general and administrative expenses in our results and, to a lesser
extent, various other increases within Aston and TPI's general and
administrative expenses.
Other income (expense), net
For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
Three Months Ended
September 30,
2012 % Change 2011
(Dollars in thousands)
Interest income $ 535 23.6 % $ 433
Interest expense (6,485 ) (26.0 )% (8,762 )
Other income (expense), net (915 ) (136.8 )% 2,488
Loss on extinguishment of debt (17,925 ) NM -
Interest income increased $0.1 million in the third quarter 2012 compared to
2011 primarily as a result of interest earned on loans issued in periods
subsequent to the third quarter 2011.
Interest expense primarily relates to interest and amortization of debt
costs related to our senior notes, which were extinguished on September 4, 2012,
and our amended and restated revolving credit facility entered into on June 21,
2012. The senior notes were initially recorded with an original issue discount
of $23.5 million, of which $0.5 million and $0.6 million were amortized in the
third quarter of 2012 and 2011, respectively. Lower interest expense during the
quarter is primarily due to (1) the extinguishment of our term loan on June 21,
2012, compared to the then outstanding principal balance on our term loan during
the third quarter of 2011, (2) our senior notes being outstanding only through
September 4, 2012 and (3) the prevailing interest rates on our revolving credit
facility compare favorably against the extinguished indebtedness.
Other income (expense), net primarily relates to net gains and losses on
foreign currency exchange related to cash held in certain countries in
currencies other than their local currency. Non-operating foreign exchange net
loss was $0.9 million for the third quarter 2012 compared to a net gain of
$2.5 million in 2011. The unfavorable fluctuations during the third quarter of
2012 were principally driven by U.S. dollar positions held at September 30, 2012
affected by the weaker dollar compared to the Mexican peso. The favorable
fluctuations during the third quarter of 2011 were principally driven by U.S.
dollar positions held at September 30, 2011 affected by the stronger dollar
compared to the Mexican and Colombian pesos.
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Additionally, in connection with the redemption of our senior notes on
September 4, 2012, we recognized a loss of $17.9 million in the third quarter
2012 on the early extinguishment of this debt resulting from the acceleration of
related unamortized debt issuance costs and remaining original issue discount.
This loss is presented as a separate line item within other income (expense) in
our consolidated statements of income for the three months ended September 30,
2012.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
Nine Months Ended September 30,
2012 % Change 2011
(Dollars in thousands)
Interest income $ 1,538 87.6 % $ 820
Interest expense (23,874 ) (11.1 )% (26,868 ) Other income (expense), net (2,408 ) NM 758
Loss on extinguishment of debt (18,527 ) NM -
Interest income increased $0.7 million in the first nine months of 2012
compared to 2011 primarily as a result of interest earned on loans issued in
periods subsequent to the third quarter 2011.
Interest expense primarily relates to interest and amortization of debt
costs on the term loan and senior notes, which were extinguished on June 21,
2012 and September 4, 2012, respectively, and our amended and restated revolving
credit facility entered into on June 21, 2012. The senior notes were initially
recorded with an original issue discount of $23.5 million of which $1.8 million
and $1.9 million were amortized in the first nine months of 2012 and 2011,
respectively. Lower interest expense during the 2012 is primarily due to (1) the
extinguishment of our term loan on June 21, 2012, compared to the then
outstanding principal balance on our term loan during third quarter 2011,
(2) our senior notes being outstanding only through September 4, 2012, and
(3) the prevailing interest rates on our revolving credit facility compare
favorably against the extinguished indebtedness.
Other income (expense), net primarily relates to net gains and losses on
foreign currency exchange related to cash held in certain countries in
currencies other than their local currency. Non-operating foreign exchange net
loss was $2.1 million for the third quarter 2012 compared to a net gain of
$1.0 million in 2011. The unfavorable fluctuations during 2012 were principally
driven by U.S. dollar positions held at September 30, 2012 affected by the
weaker dollar compared to the Mexican and Colombian peso. The favorable
fluctuations during 2011 were principally driven by U.S. dollar positions held
at September 30, 2011 affected by the stronger dollar compared to the Mexican
peso, partly offset by a weaker dollar compared to the Colombian peso.
Additionally, in connection with the repayment of our term loan on June 21,
2012 and the redemption of our senior notes on September 4, 2012, we recognized
a loss of $18.5 million for the nine months ended September 30, 2012 on the
early extinguishment of this indebtedness resulting from the acceleration of
related unamortized debt issuance costs and the remaining original issue
discount on the senior notes. This loss is presented as a separate line item
within other income (expense) in our consolidated statements of income for the
nine months ended September 30, 2012.
Income Tax Provision
For the three months ended September 30, 2012 compared to the three months ended
September 30, 2011
For the three months ended September 30, 2012 and 2011, ILG recorded income
tax provisions for continuing operations of $0.6 million and $8.0 million,
respectively, which represent effective tax rates of 80.5% and 41.1%,
respectively. The higher effective tax rate for the three months ended
September 30, 2012 was primarily attributable to a reduced income before income
taxes, driven by the loss on the extinguishment of debt related to the
redemption of the senior notes, which magnified the
43
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impact of other income tax items, the most significant of which related to the
effect of changes in tax laws in the U.K., as discussed further below, that were
enacted during the third quarter of 2012. For the three months ended
September 30, 2011, the tax rate is higher than the federal statutory rate of
35% due principally to state and local income taxes partially offset by foreign
income taxed at lower rates. During the three months ended September 30, 2011,
the effective tax rate increased due to other income tax items, the most
significant related to the effect of changes in tax laws in the U.K., that were
enacted during the third quarter of 2011.
For the nine months ended September 30, 2012 compared to the nine months ended
September 30, 2011
For the nine months ended September 30, 2012 and 2011, ILG recorded income
tax provisions for continuing operations of $14.9 million and $20.9 million,
respectively, which represent effective tax rates of 37.0% and 39.4%,
respectively. These tax rates are higher than the federal statutory rate of 35%
due principally to state and local income taxes partially offset by foreign
income taxed at lower rates. During the nine months ended September 30, 2012,
the effective tax rate decreased due to other income tax items, the most
significant of which related to the tax impact of ILG's redemption of the senior
notes offset by the effect of changes in tax laws in the U.K., as discussed
further below, that were enacted during the third quarter of 2012. During the
nine months ended September 30, 2011, the effective tax rate increased due to
other income items, the most significant related to the effect of changes in tax
laws in the U.K. that were enacted during the third quarter of 2011.
As of September 30, 2012 and December 31, 2011, ILG had unrecognized tax
benefits of $0.8 million and $0.9 million, respectively. During the three months
ended September 30, 2012, the unrecognized tax benefits increased by
approximately $0.1 million as a result of other income tax items, primarily
related to certain tax credits. During the nine months ended September 30, 2012,
the unrecognized tax benefits decreased by a net amount of approximately
$0.1 million as a result of the expiration of the statute of limitations related
to foreign taxes during the first quarter of 2012, partly offset by other income
tax items in the third quarter of 2012. Additionally, during the first quarter
of 2012, ILG acquired VRI, a domestic S corporation for income tax purposes.
During the tax due diligence review of the S corporation status of VRI, a number
of potential issues emerged that required a private letter ruling for assurance
of VRI's S corporation status for the period prior to the acquisition. The
ruling requested inadvertent termination relief if any of the identified issues
inadvertently terminated VRI's S corporation election. VRI submitted the ruling
request to the Internal Revenue Service ("IRS") on February 29, 2012. During the
third quarter of 2012, the private letter ruling was received from the IRS
granting VRI inadvertent termination relief. Accordingly, no adjustment was
required to be made to the financial statements.
ILG recognizes interest and, if applicable, penalties related to
unrecognized tax benefits in income tax expense. There were no material accruals
for interest for the three and nine months ended September 30, 2012. During the
nine months ended September 30, 2012, interest and penalties decreased by
approximately $0.2 million during the first quarter of 2012 as a result of the
expiration of the statute of limitations related to foreign taxes. As of
September 30, 2012, ILG had accrued $0.6 million for interest and penalties.
ILG believes that it is reasonably possible that its unrecognized tax
benefits could decrease by approximately $0.3 million within twelve months of
the current reporting date due primarily to the expiration of the statute of
limitations related to foreign taxes and settlements with taxing authorities on
other income tax items. An estimate of other changes in unrecognized tax
benefits cannot be made, but is not expected to be significant.
By virtue of previously filed separate company and consolidated tax returns
with IAC, ILG is routinely under audit by federal, state, local and foreign
taxing authorities. These audits include questioning the timing and the amount
of deductions and the allocation of income among various tax
44
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jurisdictions. Income taxes payable include amounts considered sufficient to pay
assessments that may result from examination of prior year returns; however, the
amount paid upon resolution of issues raised may differ from the amount
provided. Differences between the reserves for tax contingencies and the amounts
owed by ILG are recorded in the period they become known. Under a Tax Sharing
Agreement, IAC indemnifies ILG for all consolidated tax liabilities and related
interest and penalties for the pre-spin period. The IRS is also currently
examining ILG's federal consolidated tax return for the short period following
the spin-off and ended December 31, 2008. The statute of limitations for the
short period following the spin-off and ended December 31, 2008 has been
extended to June 30, 2013. This examination is expected to be completed prior to
the expiration of the extended statute of limitations in 2013. Additionally
during the third quarter of 2012, the State of Florida completed its examination
of ILG's consolidated state tax return for the short period following the
spin-off and ended December 31, 2008 as well as for the tax year ended
December 31, 2009.
During 2011, the U.K. Finance Act of 2011 was enacted, which further reduced
the U.K. corporate income tax rate to 26%, effective April 1, 2011 and 25%,
effective April 1, 2012. The impact of the U.K. rate reduction to 26% and 25%,
which reduced our U.K. net deferred tax asset and increased income tax expense,
was reflected in the reporting period when the law was enacted. During the third
quarter of 2012, the U.K. Finance Act of 2012 was enacted which further reduced
the U.K. corporate income tax rate to 24%, effective April 1, 2012 and 23%,
effective April 1, 2013. The impact of the U.K. rate reduction to 24% and 23%
has been reflected in the current reporting period. It reduced our U.K. net
deferred tax asset and increased income tax expense by approximately
$0.4 million. The change in the corporate tax rate initially negatively impacts
income tax expense as the future benefit expected to be realized from our U.K.
net deferred tax assets decreases; however, going forward, the lower corporate
tax rate will decrease income tax expense and favorably impact our effective tax
rate.
A further U.K. rate reduction to 22% is expected to be included in a future
U.K. Finance Bill. The future corporate income tax rate reduction is expected to
have a similar impact on our financial statements, as outlined above, however
the actual impact will be dependent on our deferred tax position at that time.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2012, we had $137.7 million of cash and cash equivalents
and restricted cash and cash equivalents, including $90.5 million of U.S. dollar
equivalent or denominated cash deposits held by foreign subsidiaries which are
subject to changes in foreign exchange rates. Of this amount, $61.6 million is
held in foreign jurisdictions, principally the U.K. Earnings of foreign
subsidiaries, except Venezuela, are permanently reinvested. Additional tax
provisions would be required should such earnings be repatriated to the U.S.
Cash generated by operations is used as our primary source of liquidity. We
believe that our cash on hand along with our anticipated operating future cash
flows and availability under our $500 million revolving credit facility, which
may be increased to up to $700 million subject to certain conditions, are
sufficient to fund our operating needs, quarterly cash dividend, capital
expenditures, development and expansion of our operations, debt service,
investments and other commitments and contingencies for at least the next twelve
months. However, our operating cash flow may be impacted by macroeconomic
factors outside of our control.
Cash Flows Discussion
Net cash provided by operating activities decreased to $64.1 million in the
nine months ended September 30, 2012 from $76.9 million in the same period of
2011. The decrease of $12.7 million from 2011 was principally due to higher
income taxes paid related to the timing of certain income tax payments.
45
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Net cash used in investing activities of $42.6 million in the nine months
ended September 30, 2012 primarily related to the VRI acquisition, net of cash
acquired, of $40.0 million, disbursements totaling $9.5 million for additional
investments in loans receivable, and capital expenditures of $10.4 million
primarily related to IT initiatives, all partly offset by the early repayments
of existing loans receivable totaling $17.0 million. Interest on the loans
receivable are due monthly or quarterly and in some instances may be paid in
kind. As of September 30, 2012, an additional $2.8 million is available to be
drawn in connection with our financing receivables. In the nine months ended
September 30, 2011, net cash used in investing activities was $31.7 million
resulting from disbursements totaling $16.2 million for loans to third parties,
capital expenditures of $9.9 million, primarily related to IT initiatives, and
the acquisition of certain management agreements by our Management and Rental
segment for $5.6 million.
On June 21, 2012, we entered into an amended and restated credit agreement
which, among other things (1) provides for a $500 million revolving credit
facility in place of the existing senior secured credit facility which consisted
of a $50 million revolving facility and a term loan facility with an original
principal amount of $150 million, (2) extends the maturity of the credit
facility to June 21, 2017, (3) provides for an interest rate on borrowings,
commitment fees and letter of credit fees based on ILG and its subsidiaries'
consolidated leverage ratio, and (4) may be increased to up to $700 million,
subject to certain conditions. As of September 30, 2012, $290.0 million of
borrowings were outstanding under the revolving credit facility, with
$210.0 million available to be drawn.
On September 4, 2012, we redeemed all of our $300 million senior notes,
issued on August 19, 2008, at a redemption price equal to 100% of the principal
amount plus accrued and unpaid interest, amounting to $314.5 million. We funded
the redemption through the use of $290.0 million, drawn on our $500 million
revolving credit facility, and cash on hand.
Net cash used in financing activities of $89.4 million in the nine months
ended September 30, 2012 was primarily due to the redemption of our senior
notes, principal payments of $56.0 million on the term loan, of which we paid
$51.0 million from cash on-hand in June 2012 to fully extinguish the term loan,
cash dividends totaling $17.0 million, payments of debt issuance costs of
$3.9 million in connection with entering into our amended and restated credit
agreement in June 2012, and vesting of restricted stock units, net of
withholding taxes. These uses of cash were partially offset by proceeds of the
$290.0 million drawn on our revolving credit facility to fund the redemption,
proceeds from excess tax benefits from stock-based awards and the exercise of
stock options. In the nine months ended September 30, 2011, net cash used in
financing activities of $34.3 million was principally due to repurchases of our
common stock at market prices totaling $17.6 million, including commissions,
which settled during the quarter, as well as voluntary principal prepayments on
the term loan totaling $15.0 million, and vesting of restricted stock units, net
of withholding taxes, all partially offset by excess tax benefits from
stock-based awards and proceeds from the exercise of stock options.
Any principal amounts outstanding under the revolving credit facility are
due at maturity. The interest rate on the amended credit agreement is based on
(at our election) either LIBOR plus a predetermined margin that ranges from
1.25% to 2.25%, or the Base Rate as defined in the amended credit agreement plus
a predetermined margin that ranges from 0.25% to 1.25%, in each case based on
the Borrower's leverage ratio. As of September 30, 2012, the applicable margin
was 1.75% per annum for LIBOR revolving loans and 0.75% per annum for Base Rate
loans. The revolving credit facility has a commitment fee on undrawn amounts
that ranges from 0.25% to 0.375% based on the Borrower's leverage ratio and as
of September 30, 2012 the commitment fee was 0.275%.
The revolving credit facility has various financial and operating covenants
that place significant restrictions on us, including our ability to incur
additional indebtedness, to incur additional liens, issue redeemable stock and
preferred stock, pay dividends or distributions or redeem or repurchase capital
stock, prepay, redeem or repurchase debt, make loans and investments, enter into
agreements that
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restrict distributions from our subsidiaries, sell assets and capital stock of
our subsidiaries, enter into certain transactions with affiliates and
consolidate or merge with or into or sell substantially all of our assets to
another person. The revolving credit facility requires us to meet certain
financial covenants requiring the maintenance of a maximum consolidated leverage
ratio of consolidated debt, less credit given for foreign cash, over
consolidated Earnings Before Interest, Taxes, Depreciation and Amortization
("EBITDA"), as defined in the Amended Credit Agreement, of 3.50 through
December 31, 2013 and 3.25 thereafter. Additionally, we are required to maintain
a minimum consolidated interest coverage ratio of consolidated EBITDA over
consolidated interest expense, as defined in the Amended Credit Agreement, of
3.0. As of September 30, 2012, ILG was in compliance in all material respects
with the requirements of all applicable financial and operating covenants and
our consolidated leverage ratio and consolidated interest coverage ratio under
the Amended Credit Agreement were 1.70 and 5.41, respectively.
In March 2012, May 2012 and August 2012, our Board of Directors declared a
quarterly dividend of $0.10 per share for shareholders of record on April 2,
2012, June 12, 2012 and September 6, 2012, respectively. On each of April 18,
2012, June 26, 2012 and September 20, 2012, a cash dividend of $5.7 million was
paid. We currently expect to declare and pay quarterly dividends of similar
amounts.
We have funding commitments that could potentially require our performance
in the event of demands by third parties or contingent events. At September 30,
2012, guarantees, surety bonds and letters of credit totaled $35.2 million.
Guarantees represent $32.6 million of this total and primarily relate to the
Management and Rental segment's hotel and resort management agreements of Aston,
including those with guaranteed dollar amounts, and accommodation leases
supporting the Aston management activities, entered into on behalf of the
property owners for which either party may terminate such leases upon 60 days
prior written notice to the other. In addition, certain of the Management and
Rental segment's hotel and resort management agreements of Aston provide that
owners receive specified percentages of the revenue generated under Aston
management. In these cases, the operating expenses for the rental operations are
paid from the revenue generated by the rentals, the owners are then paid their
contractual percentages, and the Management and Rental segment either retains
the balance (if any) as its management fee or makes up the deficit. Although
such deficits are reasonably possible in a few of these agreements, as of
September 30, 2012 amounts are not expected to be significant, individually or
in the aggregate. Aston also enters into agreements, as principal, for services
purchased on behalf of property owners for which it is subsequently reimbursed.
As such, Aston is the primary obligor and may be liable for unreimbursed costs.
As of September 30, 2012, amounts pending reimbursements are not significant.
Subsequent Event
In November 2012, our Board of Directors declared a $0.10 per share dividend
payable December 18, 2012 to shareholders of record on December 4, 2012. Based
on the number of shares of common stock outstanding as of September 30, 2012, at
a dividend of $0.10 per share, the anticipated cash outflow would be
$5.7 million in the fourth quarter of 2012.
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Contractual Obligations and Commercial Commitments
Contractual obligations and commercial commitments at September 30, 2012 are
as follows:
Payments Due by Period
More
Up to than
Contractual Obligations Total 1 year 1 - 3 years 3 - 5 years 5 years
(Dollars in thousands)
Debt principal(a) $ 290,000 $ - $ - $ 290,000 $ -
Debt interest(a) 30,351 6,384 12,856 11,111 -
Purchase obligations(b) 30,107 8,234 11,715 7,758 2,400
Unused commitment on loans
receivable and other
advances 2,868 2,868 - - -
Operating leases 58,116 11,740 18,228 12,432 15,716
Total contractual
obligations $ 411,442 $ 29,226 $ 42,799 $ 321,301 $ 18,116
--------------------------------------------------------------------------------
º (a)
º Debt principal and debt interest represent principal and interest to be
paid on our revolving credit facility based on the balance outstanding as
of September 30, 2012. In addition, also included are certain fees associated with our revolving credit facility based on the unused borrowing
capacity and outstanding letters of credit balances, if any, as of
September 30, 2012. Interest on the revolving credit facility is calculated
using the prevailing rates as of September 30, 2012.
º (b)
º The purchase obligations primarily relate to future guaranteed purchases of
rental inventory, operational support services, marketing related benefits
and membership fulfillment benefits.
Amount of Commitment Expiration Per Period
More
Total Amounts Less than thanOther Commercial Commitments(c) Committed 1 Year 1 - 3 Years 3 - 5 Years 5 Years
(In thousands)
Guarantees, surety bonds and
letters of credit $ 35,220 $ 12,191 $ 15,082 $ 5,835 $ 2,112
--------------------------------------------------------------------------------
º (c)
º Commercial commitments include minimum revenue guarantees related to
Aston's hotel and resort management agreements, Aston's accommodation
leases entered into on behalf of the property owners, and funding
commitments that could potentially require performance in the event of demands by third parties or contingent events, such as under a letter of
credit extended or under guarantees.
Included in other liabilities, both current and long-term, as presented in
our consolidated balance sheet as of September 30, 2012, are certain
unconditional recorded contractual obligations. These obligations and the future
periods in which such obligations are expected to settle in cash are as follows
(in thousands):
Twelve Month Period Ending September 30,
2013 $ 2,982
2014 3,857
2015 -
2016 -
2017 -
Thereafter -
Total $ 6,839
48
--------------------------------------------------------------------------------
Recent Accounting Pronouncements
Refer to Note 2 in the consolidated financial statements for a description
of recent accounting pronouncements.
Seasonality
Refer to Note 1 in the consolidated financial statements for a discussion on
the impact of seasonality.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of financial statements in conformity with GAAP requires
management to make estimates, judgments and assumptions that affect the amounts
reported in our consolidated financial statements and accompanying notes. On an
ongoing basis, we evaluate our estimates which are based on historical
experience and various other judgments and assumptions that we believe are
reasonable under the circumstances. Actual outcomes could differ from those
estimates. We have discussed those estimates that we believe are critical and
required the use of significant judgment and use of estimates that could have a
significant impact on our financial statements in our 2011 Annual Report on
Form 10-K. There have been no material changes to our critical accounting
policies in the interim period.
ILG'S PRINCIPLES OF FINANCIAL REPORTINGDefinition of ILG's Non-GAAP Measure
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is
defined as net income attributable to common stockholders excluding, if
applicable: (1) interest income and interest expense, (2) income taxes,
(3) depreciation expense, and (4) amortization expense of intangibles.
Adjusted EBITDA is defined as EBITDA excluding, if applicable: (1) non-cash
compensation expense, (2) goodwill and asset impairments and (3) other
non-operating income and expense.
Our presentation of Adjusted EBITDA and EBITDA may not be comparable to
similarly-titled measures used by other companies. We believe these measures are
useful to investors because they represent the consolidated operating results
from our segments, excluding the effects of any non-cash expenses. We also
believe these non-GAAP financial measures improve the transparency of our
disclosures, provide a meaningful presentation of our results from our business
operations, excluding the impact of certain items not related to our core
business operations and improve the period-to-period comparability of results
from business operations. Adjusted EBITDA and EBITDA have certain limitations in
that they do not take into account the impact of certain expenses to our
statement of operations; including for Adjusted EBITDA, non-cash compensation.
We endeavor to compensate for the limitations of these non-GAAP measures
presented by also providing the comparable GAAP measure with equal or greater
prominence and descriptions of the reconciling items, including quantifying such
items, to derive the non-GAAP measure.
We report Adjusted EBITDA and EBITDA as supplemental measures to results
reported pursuant to GAAP. These measures are among the primary metrics by which
we evaluate the performance of our businesses, on which our internal budgets are
based and by which management is compensated. We believe that investors should
have access to the same set of tools that we use in analyzing our results. These
non-GAAP measures should be considered in addition to results prepared in
accordance with GAAP, but should not be considered a substitute for or superior
to GAAP results. We provide and encourage investors to examine the reconciling
adjustments between the GAAP and non-GAAP measures which are discussed below.
49--------------------------------------------------------------------------------
Pro Forma Results
We will only present Adjusted EBITDA and/or EBITDA on a pro forma basis if
we view a particular transaction as significant in size or transformational in
nature. For the periods presented in this report, there are no transactions that
we have included on a pro forma basis.
Non-Cash Expenses That Are Excluded From ILG's Non-GAAP Measure (as applicable)
Amortization expense of intangibles is a non-cash expense relating primarily
to acquisitions. At the time of an acquisition, the intangible assets of the
acquired company, such as customer relationships, purchase agreements and resort
management agreements are valued and amortized over their estimated lives. We
believe that since intangibles represent costs incurred by the acquired company
to build value prior to acquisition, they were part of transaction costs.
Depreciation expense is a non-cash expense relating to our property and
equipment and is recorded on a straight-line basis to allocate the cost of
depreciable assets to operations over their estimated service lives.
Non-cash compensation expense consists principally of expense associated
with the grants, including unvested grants assumed in acquisitions, of
restricted stock, restricted stock units and stock options. These expenses are
not paid in cash, and we will include the related shares in our future
calculations of diluted shares of stock outstanding. Upon vesting of restricted
stock and restricted stock units and the exercise of certain stock options, the
awards will be settled, at our discretion, on a net basis, with us remitting the
required tax withholding amount from our current funds.
Goodwill and asset impairments are non-cash expenses relating to adjustments
to goodwill and long-lived assets whereby the carrying value exceeds the fair
value of the related assets, and are infrequent in nature.
Other non-operating income and expense consists principally of foreign
currency translations of cash held in certain countries in currencies other than
their functional currency, in addition to any gains or losses on extinguishment
of debt.
RECONCILIATION OF EBITDA AND ADJUSTED EBITDA
The following tables reconcile EBITDA and Adjusted EBITDA to operating
income for our operating segments, and to net income attributable to common
stockholders in total, for the three and
50--------------------------------------------------------------------------------
nine months ended September 30, 2012 and 2011 (in thousands). The noncontrolling
interest relates to the Management and Rental segment.
For the Three Months Ended
September 30, 2012
Membership Management
and and
Exchange Rental Consolidated
Adjusted EBITDA $ 33,701 $ 4,409 $ 38,110
Non-cash compensation expense (2,311 ) (253 ) (2,564 )
Other non-operating expense, net (915 ) - (915 )
Loss on extinguishment of debt (17,925 ) - (17,925 )
EBITDA 12,550 4,156 16,706
Amortization expense of intangibles (4,968 ) (1,701 ) (6,669 )
Depreciation expense (3,011 ) (300 ) (3,311 )
Less: Other non-operating expense, net 915 - 915
Less: Loss on extinguishment of debt 17,925 - 17,925
Operating income $ 23,411 $ 2,155 25,566
Interest income 535
Interest expense (6,485 )
Other non-operating expense, net (915 )
Loss on extinguishment of debt (17,925 )
Income tax provision (624 )
Net income 152
Net income attributable to
noncontrolling interest (3 )
Net income attributable to common
stockholders $ 149
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