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INTERVAL LEISURE GROUP, INC. - 10-K - 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 annual report on Form 10-K 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 annual 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 of developers; 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; our ability to successfully manage and integrate acquisitions;
impairment of assets; the restrictive covenants in our revolving credit
facility; 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; 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 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 years ended
December 31, 2012 and 2011, respectively. This section should be read in
conjunction with the consolidated financial statements and accompanying notes
included in this Form 10-K for the year ended December 31, 2012, which have been
prepared in accordance with U.S. generally accepted accounting principles
("GAAP"). This discussion includes the following sections:
º •
º Management Overview
º •
º Critical Accounting Policies and Estimates
º •
º Results of Operations
º •
º Financial Position, Liquidity and Capital Resources
º •
º ILG's Principles of Financial Reporting
º •
º Reconciliations of Non-GAAP Measures
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MANAGEMENT OVERVIEW
History
ILG was incorporated as a Delaware corporation in May 2008 in connection
with a plan by IAC/InterActiveCorp, or IAC, to separate into five publicly
traded companies, referred to as the "spin-off." ILG was formed to hold the
membership and exchange and management and rental businesses, and commenced
trading on The NASDAQ Stock Market in August 2008 under the symbol "IILG."
The Membership and Exchange operating segment consists of Interval
International Inc.'s businesses, referred to as Interval, and the membership and
exchange related line of business of TPI and VRI. The Management and Rental
operating segment consists of Aston Hotels & Resorts, LLC and Maui Condo and
Home, LLC, referred to as Aston, and the management and rental related line of
business of VRI and TPI.
Basis of Presentation and Accounting Estimates
The accompanying consolidated financial statements have been prepared in
accordance with GAAP and reflect the financial position and operating results of
ILG. ILG's management is required to make certain estimates and assumptions
during the preparation of its consolidated financial statements in accordance
with GAAP. These estimates and assumptions impact the reported amounts of assets
and liabilities and disclosures of contingent assets and liabilities as of the
date of the consolidated financial statements. They also impact the reported
amount of net earnings during any period. Actual results could differ from those
estimates.
Significant estimates underlying the accompanying consolidated financial
statements include: the recovery of goodwill and long-lived and other intangible
assets; purchase price allocations; the determination of deferred income taxes
including related valuation allowances; the determination of deferred revenue
and membership costs; and the determination of stock-based compensation. In the
opinion of ILG's management, the assumptions underlying the historical
consolidated financial statements of ILG and its subsidiaries are reasonable.
General 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 December 31, 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
nearly 2,800 resorts located in over 75 countries, including both
leading independent resort developers and branded hospitality
companies; and
º •
º approximately 1.8 million vacation ownership interest owners enrolled
as members of the Interval Network.
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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, VRI and 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 property management, vacation
rental and homeowners association management services to timeshare resorts in
the United States, Canada and Mexico. On February 28, 2012, we acquired VRI, the
largest non-developer provider of resort and homeowners association management
services to the shared ownership industry, determined by number of properties.
As of December 31, 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 increased 3.8% in 2012 compared to 2011 and increased
2.5% in 2011 compared to 2010. As a percentage of our total revenue,
international revenue decreased to 14.2% in 2012, from 15.1% in 2011, and from
15.4% in 2010. The decrease in international revenue as a percentage of total
revenue is impacted by the recent acquisitions of VRI and TPI which operate
predominantly in the United States.
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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 recovered, financing standards for consumers remain higher than
those required several years ago. Additionally, a high proportion of sales by
developers are to their existing owners, which does not result in new members to
the Interval Network.
Our 2012 results were 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. Membership mix as of December 31, 2012
included 62% traditional and 38% corporate members, compared to 68% and 32%,
respectively, as of December 31, 2011. Consequently, where possible, we
structure our corporate membership arrangements to include reservation servicing
and/or other revenue streams to mitigate the anticipated lower transaction
propensity.
Management and Rental
Our Management and Rental segment results are susceptible to variations in
economic conditions, particularly in its largest market, Hawaii. According to
the Hawaii Tourism Authority, visitor arrivals by air in Hawaii increased 9.2%
in 2012 compared to 2011. The increase in visitors is consistent with Aston's
managed properties in Hawaii experiencing increases in occupancy, leading to an
overall increase of 15.1% in revenue per available room ("RevPAR") in Hawaii in
2012 compared to 2011. The increase in RevPAR in Hawaii was predominantly driven
by higher average daily rates and, to a lesser extent, higher occupancy.
As of the latest forecast (February 2013), the Hawaii Department for
Business, Economic Development and Tourism, forecasts increases of 5.4% in
visitors to Hawaii and 7.1% in visitor expenditures in 2013 when compared to
2012.
Business Acquisition
On February 28, 2012, we acquired VRI, the largest non-developer provider of
resort and homeowners association management services to the shared ownership
industry, determined by number of properties. VRI was consolidated into our
financial statements as of the acquisition date and the financial effect of this
acquisition was not material to our consolidated financial statements; however,
the year-over-year comparability was affected as further discussed in our
Results of Operations section.
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 consolidated financial statements included in
this report. The interest rate on the amended and restated 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
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charge is presented as a separate line item within other income (expense) in our
consolidated statement of income for the year ended December 31, 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 largest market, Hawaii, continues its
tourism recovery and benefits from increases in airlift into the island chain;
however, increases in airfare may negatively impact visitor arrivals from the
mainland and temper growth.
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 was warranted. The result of these
assessments did not indicate that assets might be impaired and, therefore, an
interim impairment test was not warranted at that time. Additionally, as of
October 1, 2012, we performed our annual impairment test on our goodwill and
other intangible assets, as discussed in Note 3 of these consolidated financial
statements, and concluded that the likelihood of impairment was below the
"more-likely-than-not" threshold established in the applicable accounting
guidance and, therefore, no further steps were warranted.
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 on various other judgments and assumptions that we believe are
reasonable under the circumstances. Actual outcomes could differ from those
estimates.
Our significant accounting policies are discussed in Note 2 accompanying our
consolidated financial statements and should be reviewed in connection with the
following discussion. Set forth below are the policies and estimates that we
have identified as critical to our business operations and an understanding of
our results of operations, based on the high degree of judgment or complexity in
their application.
Revenue Recognition
Revenue, net of sales incentives, from membership fees from our Membership
and Exchange segment is deferred and recognized over the terms of the applicable
memberships, typically ranging from one to five years, on a straight-line basis.
When multiple member benefits and services are provided over the term of the
membership, revenue is recognized for each separable deliverable ratably over
the membership period, as applicable. Generally, memberships are cancelable and
refundable on a pro-rata basis, with the exception of our Platinum tier, which
is non-refundable. Direct costs of acquiring members (primarily commissions) and
certain fulfillment costs related to deferred membership revenue are also
deferred and amortized on a straight-line basis over the terms of the applicable
memberships or benefit period, whichever is shorter. The recognition of
previously deferred
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revenue and expense is based on estimates derived from an aggregation of
member-level data. Revenue from exchange and Getaway transactions is recognized
when confirmation of the transaction is provided as the earnings process is
complete. Reservation servicing revenue is recognized when service is performed
or on a straight-line basis over the applicable service period depending on the
specific contractual terms. All taxable revenue transactions are presented on a
net-of-tax basis.
The Management and Rental segment's revenue is derived principally from fees
for hotel, condominium resort, timeshare resort and homeowners association
management and rental services. Management fees consist of base management fees,
which are either fixed amounts or range from 1% to 5% of adjusted gross lodging
revenue, various revenue sharing arrangements with condominium owners based on
stated formulas or a percentage of adjusted gross lodging revenue, and incentive
management fees for certain hotels and condominium resorts which are 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. Service fee revenue is
recognized when the service is provided. In certain instances we arrange
services which are provided directly to property owners. Transactions for these
services do not impact our consolidated financial statements as they are not
included in our results of operations. Additionally, in most cases, we employ
on-site personnel to provide services such as housekeeping, maintenance and
administration to property owners and homeowner associations under our
management agreements. For such services, we recognize revenue in an amount
equal to the expenses incurred.
Additionally, when we enter into multiple-element arrangements, we are
required to determine whether the deliverables in these arrangements should be
treated as separate units of accounting for revenue recognition purposes and, if
so, how the contract price should be allocated to each element. We analyze our
contracts upon execution to determine the appropriate revenue recognition
accounting treatment. Our determination of whether to recognize revenue for
separate deliverables will depend on the terms and specifics of our products and
arrangements as well as the nature of changes to our existing products and
services, if any. The allocation of contract revenue to the various elements
does not change the total revenue recognized from a transaction or arrangement,
but may impact the timing of revenue recognition.
Accounting for Business Combinations
In accordance with ASC Topic 805, "Business Combinations," when accounting
for business combinations we are required to recognize the assets acquired,
liabilities assumed, contractual contingencies, and contingent consideration at
their fair value as of the acquisition date. The purchase price allocation
process requires management to make significant estimates and assumptions with
respect to intangible assets, estimated contingent consideration payments and/or
pre-acquisition contingencies, all of which ultimately affect the fair value of
goodwill established as of the acquisition date. Goodwill acquired in business
combinations is assigned to the reporting unit(s) expected to benefit from the
combination as of the acquisition date and is then subsequently tested for
impairment at least annually.
Although we believe the assumptions and estimates we have made have been
reasonable and appropriate, they are based in part on historical experience and
information obtained from the management of the acquired entity and are
inherently uncertain. Examples of critical estimates in accounting for
acquisitions include but are not limited to:
º •
º the estimated fair value of the acquisition-related contingent
consideration, which is performed using a probability-weighted income approach based upon the forecasted achievement of post-acquisition
pre-determined targets;
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º •
º the future expected cash flows from sales of products and services and
related contracts and agreements; and
º •
º discount and long-term growth rates.
Unanticipated events and circumstances may occur which could affect the
accuracy or validity of our assumptions, estimates or actual results.
Additionally, any change in the fair value of the acquisition-related contingent
consideration subsequent to the acquisition date, including changes resulting
from events that occur after the acquisition date, such as changes in our
estimated fair value of the targets that are expected to be achieved, will be
recognized in earnings in the period of the change in estimated fair value.
Recoverability of Goodwill and Other Intangible Assets
Our Policy
Goodwill and other intangible assets are significant components of our
consolidated balance sheets. Our policies regarding the valuation of intangible
assets affect the amount of future amortization and possible impairment charges
we may incur. Assumptions and estimates about future values and remaining useful
lives of our intangible and other long-lived assets are complex and subjective.
They can be affected by a variety of factors, including external factors such as
consumer spending habits and general economic trends, and internal factors such
as changes in our business strategy and our internal forecasts.
In accordance with ASC Topic 350, "Intangibles-Goodwill and Other," we
review the carrying value of goodwill and other intangible assets of each of our
reporting units on an annual basis as of October 1, or more frequently upon the
occurrence of certain events or substantive changes in circumstances. Goodwill
is tested for impairment based on either a qualitative assessment or a two-step
impairment test. We consider our Membership and Exchange and Management and
Rental segments to be individual reporting units which are also individual
operating segments of ILG. Goodwill acquired in business combinations is
assigned to the reporting unit(s) expected to benefit from the combination as of
the acquisition date.
During the year, we monitor the actual performance of our reporting units
relative to the fair value assumptions used in our annual impairment test,
including potential events and changes in circumstance affecting our key
estimates and assumptions.
Qualitative Assessment
The qualitative assessment may be elected in any given year pursuant to ASU
2011-08, "Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for
Impairment" ("ASU 2011-08"). ASU 2011-08 amended the testing of goodwill for
impairment. Under the revised guidance, entities testing goodwill for impairment
have the option of performing a qualitative assessment before calculating the
fair value of a reporting unit. If entities determine, on the basis of
qualitative factors, that it is more-likely-than-not (i.e., a likelihood of more
than 50 percent) that the fair value of the reporting unit is below the carrying
amount, the two-step impairment test would be required. The guidance also
provides the option to skip the qualitative assessment in any given year and
proceed directly with the two-step impairment test at our discretion.
Our qualitative assessment is performed for the purpose of assessing whether
events or circumstances have occurred in the intervening period between the date
of our last two-step impairment test (the "Baseline Valuation") and the date of
our current annual impairment test which could adversely affect the comparison
of our reporting units' fair value with its carrying amount. Examples of events
and circumstances that might indicate that a reporting unit's fair value is less
than its carrying amount include macro-economic conditions such as deterioration
in the entity's operating
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environment, industry or overall market conditions; reporting unit specific
events such as increasing costs, declining financial performance, or loss of key
personnel or contracts; or other events such as pending litigation, access to
capital in the credit markets or a sustained decrease in ILG's stock price on
either an absolute basis or relative to peers. If it is determined, as a result
of the qualitative assessment, that it is more-likely-than-not that the fair
value of a reporting unit is less than its carrying amount, we are then required
to perform a two-step impairment test on goodwill.
Two-step Impairment Test
The first step of the impairment test compares the fair value of each
reporting unit with its carrying amount including goodwill. The fair value of
each reporting unit is calculated using the average of an income approach and a
market comparison approach which utilizes similar companies as the basis for the
valuation. If the carrying amount exceeds fair value, then the second step of
the impairment test is performed to measure the amount of any impairment loss.
The impairment loss is determined by comparing the implied fair value of
goodwill to the carrying value of goodwill. The implied fair value of goodwill
represents the excess of the fair value of the reporting unit over amounts
assigned to its net assets.
The determination of fair value utilizes an evaluation of historical and
forecasted operating results and other estimates. Fair value measurements are
generally determined through the use of valuation techniques that may include a
discounted cash flow approach, which reflects our own assumptions of what market
participants would use in pricing the asset or liability.
Indefinite-Lived Intangible Assets
Our intangible assets with indefinite lives relate principally to trade
names and trademarks. Pursuant to ASC 350, if an intangible asset is determined
to have an indefinite useful life, it shall not be amortized until its useful
life is determined to no longer be indefinite. Accordingly, we evaluate the
remaining useful life of an intangible asset that is not being amortized each
reporting period to determine whether events or circumstances continue to
support an indefinite useful life. As of December 31, 2012, there have been no
changes to the indefinite life determination pertaining to these intangible
assets.
In addition, an intangible asset that is not subject to amortization shall
be tested for impairment annually, or more frequently if events or changes in
circumstances indicate that the asset might be impaired. The impairment test
consists of a comparison of the fair value of an intangible asset with its
carrying amount. If the carrying amount of an indefinite-lived intangible asset
exceeds its estimated fair value, an impairment loss equal to the excess is
recorded. However, subsequent to the issuance of ASU 2012-02 in July 2012,
entities testing an indefinite-lived intangible asset for impairment have the
option of performing a qualitative assessment before calculating the fair value
of the asset. If entities determine, on the basis of qualitative factors, that
the likelihood of the indefinite-lived intangible asset being impaired is below
a "more-likely-than-not" threshold (i.e., a likelihood of more than 50 percent),
the entity would not need to calculate the fair value of the asset.
2012 Annual Impairment Test
As of October 1, 2012, we reviewed the carrying amount of goodwill and other
intangible assets of each of our two reporting units. Goodwill assigned to the
Membership and Exchange and Management and Rental reporting units as of this
date was $483.5 million and $22.3 million, respectively. We performed a
qualitative assessment on both our reporting units and concluded that it was
more-likely-than-not that the fair value of each reporting unit exceeded its
carrying amount and, therefore, a two-step impairment test was not necessary. As
of December 31, 2012, we did not identify
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any triggering events which required an interim impairment test subsequent to
our annual impairment test on October 1, 2012.
Key Estimates and Assumptions
The determination of fair value utilizes an evaluation of historical and
forecasted operating results and other key assumptions made by management,
including discount rates, utilized in the valuation of certain identifiable
assets. Deterioration in macroeconomic conditions or in our results of
operations or unforeseen negative events could adversely affect either of our
reporting units and lead to a revision of the estimates used to calculate fair
value. These key estimates and forecasted operating results may or may not occur
or may be revised by management which may require us to recognize impairment
losses in the future.
The October 1, 2012 qualitative assessment we performed on our Membership
and Exchange reporting unit considered the substantial passing margin of 77%
realized in our October 1, 2011 Baseline Valuation and the following measures of
sensitivity, calculated by holding other variables constant, when comparing our
Baseline Valuation against the events and circumstances specific to the
intervening period ending October 1, 2012:
º •
º The EBITDA multiple required to fail step-one of the Baseline
Valuation would require a multiple less than half of what was used in
the Baseline Valuation.
º •
º The discount rate required to fail step-one of the Baseline Valuation
would require using a discount rate more than double the rate used in
the Baseline Valuation.
º •
º Our long-term (residual) growth rates needed for the Baseline Valuation to fail step-one would require a significant and prolonged
period of negative growth given the substantial passing margin.
Our 2012 qualitative assessment did not lead us to believe any of the above
hypothetical sensitivity measures were more-likely-than-not to have occurred in
the period between our Baseline Valuation and our October 1, 2012 testing date.
With respect to the Baseline Valuation for our Membership and Exchange
reporting unit, the primary examples of key estimates include our discount rate
and forecasted sales growth rates. As previously noted, we used the average of
an income approach and a market comparison approach to calculate the fair value
of our reporting units in the Baseline Valuation. As a measure of sensitivity on
the income approach, as of the date of our Baseline Valuation, a hypothetical
10% change in both our discount and long-term growth rates would result in a
change of $400 million in the income approach fair value of the reporting unit,
or approximately 29% of the excess of the fair value of the reporting unit over
its carrying value. In regards to the market comparison approach, a change in
our selected EBITDA multiple by 10% would result in a change of approximately
$100 million in the Membership and Exchange reporting unit's market comparison
approach fair value, or approximately 7% of the excess of the reporting unit's
fair value over its carrying value.
The October 1, 2012 qualitative assessment we performed on our Management
and Rental reporting unit considered the following measures of sensitivity,
calculated by holding other variables constant, when comparing our Baseline
Valuation against the events and circumstances specific to the intervening
period ending October 1, 2012:
º •
º The discount rate required to fail step-one of the Baseline Valuation
would require using a discount rate that would be 14% higher than the
rate used in the Baseline Valuation.
º • º An unfavorable change by 200% to our projected long-term (residual)
growth rates would be needed for the Baseline Valuation to fail
step-one.
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º •
º A sustained contraction in our projected EBITDA multiple, when compared against the EBITDA multiple selected as part of the Baseline
Valuation, would be required to fail step-one.
Our 2012 qualitative assessment did not lead us to believe any of the above
hypothetical sensitivity measures were more-likely-than-not to have occurred in
the period between our Baseline Valuation and our October 1, 2012 testing date.
With respect to the Baseline Valuation for our Management and Rental
reporting unit, the primary examples of key estimates include forecasted
available and occupied room nights, average daily rates and long-term growth
rates. As a measure of sensitivity on the income approach, as of the date of our
Baseline Valuation, a hypothetical 10% change to all four forecasted key
estimates would result in a change of approximately $11 million in our
Management and Rental's income approach fair value, or approximately 40% of the
excess of the fair value of the reporting unit over its carrying value. In
regards to the market comparison approach, a change in our selected EBITDA
multiple by 10% would result in a change of approximately $10 million in the
reporting unit's market comparison approach fair value, or approximately 38% of
the excess of the reporting unit's fair value over its carrying value.
The preceding sensitivities for our Membership and Exchange and Management
and Rental reporting units exclude the impact of our February 28, 2012
acquisition of VRI, which we qualitatively assessed separately and concluded the
likelihood of VRI's fair value failing to exceed its carrying amount was not
above the more-likely-than-not threshold.
Key estimates and assumptions for both our reporting units can be impacted
by certain potential events and changes in circumstances, as follows:
Events and trends in the vacation ownership, vacation rental and travel
industries that could adversely affect consumers travel to and vacation in
certain destinations and regions in which vacation rental and managed properties
are located, including events such as:
º •
º Declines in discretionary spending levels during general economic
downturns.
º •
º Inclement weather and/or natural disasters.
º •
º Travel health concerns.
º •
º Concerns related to terrorism, enhanced travel security measures
and/or geographical conflicts.
Additionally, key estimates and assumptions for both our reporting units can
be impacted by certain potential events and changes in circumstances specific to
each reporting unit, such as:
Membership and Exchange
º •
º A downturn or a weakening of the economy may cause decreased demand
for purchases of vacation ownership interests, may increase default
rates among current owners and may increase refund requests from our
members.
º •
º Lack of available financing for vacation property developers and consumers or the potential insolvency or consolidation of developers
could adversely affect our ability to maintain and grow our exchange
network membership which could adversely affect our business,
financial condition and results of operations.
º •
º Our ability to maintain and renew contractual relationships with
vacation ownership developers that provide new members and supply of
resort accommodations for use in exchanges or Getaways.
º • º Our ability to motivate members to renew their existing memberships
and/or otherwise engage in transactions.
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Management and Rental
º •
º A downturn or a weakening of the economy may cause decreased demand
for vacation rentals.
º •
º The failure to maintain existing hotel, condominium resort and
timeshare resort management and/or rental services arrangements with vacation property owners/homeowners associations, and/or insolvency of
several properties managed by or marketed by the Management and Rental
segment, particularly managed hotels.
º •
º A significant decrease in the supply of available vacation rental
accommodations due to ongoing property renovations.
º •
º Inability of our managed homeowners associations to levy and collect
sufficient maintenance fees to cover the costs to operate and maintain
the resort properties; such properties may be forced to close or file
bankruptcy and may terminate our management.
Recoverability of Long-Lived Assets
Our Policy
We review the carrying value of all long-lived assets, primarily property
and equipment and definite-lived intangible assets, for impairment whenever
events or changes in circumstances indicate that the carrying value of a
long-lived asset (asset group) may be impaired. In accordance with guidance
included within ASC Topic 360, "Property, Plant and Equipment," recoverability
of assets to be held and used is measured by a comparison of the carrying amount
of an asset (asset group) to future undiscounted cash flows expected to be
generated by the asset (asset group). An asset group is the lowest level of
assets and liabilities for which identifiable cash flows are largely independent
of the cash flows of other assets and liabilities. When estimating future cash
flows, we consider:
º •
º only the future cash flows that were directly associated with and that
are expected to arise as a direct result of the use and eventual
disposition of the asset group;
º • º our own assumptions about our use of the asset group and all available
evidence when estimating future cash flows;
º •
º potential events and changes in circumstance affecting our key
estimates and assumptions;
º •
º the existing service potential of the asset (asset group) at the date
tested.
If an asset (asset group) is considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the asset
(asset group) exceeds its fair value. When determining the fair value of the
asset (asset group), we consider the highest and best use of the assets from a
market-participant perspective. The fair value measurement is generally
determined through the use of independent third party appraisals or an expected
present value technique, both of which may include a discounted cash flow
approach, which reflects our own assumptions of what market participants would
utilize to price the asset (asset group).
Assets to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell. Assets to be abandoned, or from which no further
benefit is expected, are written down to zero at the time that the determination
is made and the assets are removed entirely from service.
Recoverability Test
The last recoverability test performed was as of March 31, 2010 on an asset
group within our Management and Rental reporting unit as a consequence of that
reporting unit failing step-one of the two-step process for testing goodwill for
impairment. The resulting recoverability test concluded the asset group was not
considered to be impaired. From that date through December 31, 2012, we have
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not identified events or changes in circumstances indicating that the carrying
value of a long lived asset (or asset group) may be impaired; accordingly, a
recoverability test has not been warranted.
Stock-Based Compensation
Stock-based compensation is accounted for under ASC Topic 718,
"Compensation-Stock Compensation" ("ASC 718"). Compensation cost for stock
awards is measured at fair value on date of grant and recognized over the
service period for awards expected to vest. The fair value of restricted stock
and restricted stock units ("RSUs") is determined based on the number of shares
granted and the quoted price of our common stock on that date, except for RSUs
subject to relative total shareholder return performance criteria, which the
fair value is based on a Monte Carlo simulation analysis as further discussed in
Note 9 accompanying our consolidated financial statements. We grant awards
subject to graded vesting (i.e. portions of the award vest at different times
during the vesting period) or to cliff vesting (i.e. all awards vest at the end
of the vesting period). Certain RSUs, in addition, are subject to attaining
specific performance criteria. For RSUs to be settled in stock, the accounting
charge is measured at the grant date fair value and expensed as non-cash
compensation over the vesting term using the straight-line basis for
service-only awards and the accelerated basis for performance-based awards with
graded vesting. For certain cliff vesting awards with performance criteria, we
also use anticipated future results in determining the fair value of the award.
Such value is recognized as expense over the service period, net of estimated
forfeitures, using the straight-line recognition method. The amount of
stock-based compensation expense recognized in the consolidated statements of
income is reduced by estimated forfeitures, as the amount recorded is based on
awards ultimately expected to vest. The expense associated with RSU awards to be
settled in cash is initially measured at fair value at the grant date and
expensed ratably over the vesting term, recording a liability subject to
mark-to-market adjustments for changes in the price of the respective common
stock as compensation expense.
Stock-based compensation is recorded within the same line item in our
consolidated statements of income as the employee-related compensation of the
award recipient, as disclosed in tabular format in Note 9 accompanying our
consolidated financial statements.
Management must make certain estimates and assumptions regarding stock
awards that will ultimately vest, and to the extent actual results or updated
estimates differ from our current estimates, such amounts will be recorded as a
cumulative adjustment in the period estimates are revised. We consider many
factors when estimating expected forfeitures, including types of awards,
employee class, and historical experience. The forfeiture rate is estimated at
the grant date based on historical experience and revised, if necessary, in
subsequent periods for any changes to the estimated forfeiture rate from that
previously estimated. For any vesting tranche of an award, the cumulative amount
of compensation cost recognized is equal to the portion of the grant-date value
of the award tranche that is actually vested at that date. Actual results and
future estimates may differ substantially from our current estimates.
As of December 31, 2012, ILG had approximately $10.9 million of unrecognized
compensation cost, net of estimated forfeitures, related to all equity-based
awards, which is currently expected to be recognized over a weighted average
period of approximately 1.6 years. Of the $10.9 million of unrecognized
compensation cost, 46.7% relates to an employee class group comprised of certain
key employees for which we do not expect RSUs to be forfeited. For awards in
which we expect forfeitures to occur, a 10% change to our estimated forfeiture
rate would have an impact of less than $100,000 to our unrecognized compensation
cost as of December 31, 2012.
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Income Taxes
Accounting for our income taxes requires significant judgment in the
evaluation of our uncertain tax positions and in the calculation of our
provision for income taxes. Pursuant to ASC Topic 740 "Income Taxes" ("ASC
740"), we adopted a two-step approach to recognizing and measuring uncertain tax
positions. The first step is to evaluate available evidence to determine if it
appears more likely than not that an uncertain tax position will be sustained on
an audit by a taxing authority, based solely on the technical merits of the tax
position. The second step is to measure the tax benefit as the largest amount
that is more than 50% likely of being realized upon settling the uncertain tax
position.
Although we believe we have adequately reserved for our uncertain tax
positions, the ultimate outcome of these tax matters may differ from our
expectations. We adjust our reserves in light of changing facts and
circumstances, such as the completion of a tax audit, expiration of the
applicable statute of limitations, the refinement of an estimate, and interest
accruals associated with uncertain tax positions until they are resolved. To the
extent that the final tax outcome of these matters is different than the amounts
recorded, such differences will impact the provision for income taxes in the
period in which such determination is made. See Note 10 accompanying our
consolidated financial statement.
Our future effective tax rates could be affected by changes in our deferred
tax assets or liabilities, the valuation of our uncertain tax positions, or by
changes in tax laws, regulations, accounting principles, or interpretations
thereof.
RESULTS OF OPERATIONS
Revenue
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Membership and Exchange
Transaction revenue $ 198,434 3.2 % $ 192,297 0.7 % $ 190,954
Membership fee revenue 130,784 1.0 % 129,477 (0.3 )% 129,818
Ancillary member revenue 6,976 (5.4 )% 7,371 (15.4 )% 8,709
Total member revenue 336,194 2.1 % 329,145 (0.1 )% 329,481
Other revenue 21,538 6.2 % 20,282 28.8 % 15,747
Total Membership and Exchange
revenue 357,732 2.4 % 349,427 1.2 % 345,228
Management and Rental
Management fee and rental
revenue 54,946 69.4 % 32,441 42.9 % 22,694
Pass-through revenue 60,661 29.3 % 46,926 13.0 % 41,518
Total Management and Rental
revenue 115,607 45.7 % 79,367 23.6 % 64,212
Total revenue $ 473,339 10.4 % $ 428,794 4.7 % $ 409,440
2012 Compared to 2011
Revenue in 2012 increased $44.5 million, or 10.4%, from 2011. Membership and
Exchange segment revenue increased $8.3 million, or 2.4%, in 2012 compared to
the prior year period and Management and Rental segment revenue increased
$36.2 million, or 45.7% from 2011.
Membership and Exchange
The increase of $8.3 million in Membership and Exchange revenue in 2012 is
primarily driven by increases in transaction revenue and membership fee revenue
of $6.1 million and $1.3 million,
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respectively, coupled with a rise in other revenue of $1.3 million. The rise in
transaction revenue is mainly related to higher revenue from exchanges and
Getaways of $1.9 million and increases in reservation servicing and other
transaction related fees of $1.9 million and $2.3 million, respectively. Higher
transaction revenue from exchanges and Getaways was due to a 4.7% increase in
average fee per transaction, partially offset by a 3.5% 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.
Total active members in the Interval Network at December 31, 2012 increased
to approximately 1.82 million members as compared to approximately 1.78 million
members at December 31, 2011, an increase of 2.4%. Membership fee revenue during
2012 rose $1.3 million, or 1.0%, compared to the prior year. This increase is
largely due to greater penetration of Platinum memberships. The increase in
other revenue for the year 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 $182.39 for 2012 is consistent with the prior year.
Management and Rental
The increase of $22.5 million, or 69.4%, in management fee and rental
revenue includes $18.2 million of incremental VRI management fee revenue and a
$2.0 million contribution from TPI largely related to property management
contracts secured in August of 2011. Fee income earned from managed hotel and
condominium resort properties at Aston increased $2.3 million, or 9.2%, in 2012
due to a 16.9% increase in RevPAR to $130.28 driven by a 9.8% higher average
daily rate and a 6.5% improvement in occupancy rates during 2012 compared to
2011.
Pass-through revenue represents 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. The increase of $13.7 million,
or 29.3%, in pass-through revenue in 2012 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.
2011 Compared to 2010
Revenue in 2011 increased $19.4 million, or 4.7%, from 2010. Membership and
Exchange segment revenue increased $4.2 million, or 1.2%, in 2011 compared to
the prior year period and Management and Rental segment revenue increased
$15.2 million, or 23.6% from 2010.
Membership and Exchange
The increase of $4.2 million in Membership and Exchange segment revenue is
due to an increase in other revenue of $4.5 million, or 28.8%, in 2011 compared
to 2010 primarily related to the incremental TPI membership and exchange revenue
due to our November 2010 acquisition of TPI.
Total active members in the Interval Network at December 31, 2011 decreased
to approximately 1.78 million members as compared to approximately 1.80 million
members at the end of the prior year, a decrease of 1.3%. Total member revenue,
which primarily consists of Interval Network membership fees and transactional
and service fees, decreased $0.3 million, or 0.1%. This decrease was primarily
due to lower ancillary member revenue of $1.3 million, which primarily consists
of travel agency related activities, and lower membership fee revenue of
$0.3 million resulting from a decrease of 0.8% in average active members, partly
offset by an increase in transaction revenue of $1.3 million. The increase in
transaction revenue is a result of higher transaction related fees of
$1.4 million and an increase of $0.6 million in transaction revenue from
exchanges and Getaways, partly offset by a decrease of $0.7 million in
reservation servicing fees. Higher transaction revenue from exchanges and
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Getaways was due to a 3.7% increase in average fee per transaction, partially
offset by a decrease of 3.2% in exchange and Getaway transaction activity, which
reflects the effect of a shift in the mix and availability of exchange and
Getaway inventory and changes in travel patterns experienced to a greater extent
in the first half of 2011.
Overall Interval Network average revenue per member remained relatively
flat, increasing 0.7% to $182.71 in 2011 from $181.36 in 2010.
Management and Rental
The increase of $9.7 million, or 42.9%, in management fee and rental revenue
includes $7.1 million of incremental TPI management fee revenue due to a full
year of TPI results. Fee income earned from managed hotel and condominium resort
properties at Aston increased $2.7 million, or 12.1% in 2011 due to a 16.3%
increase in RevPAR to $111.43 driven by an 11.1% higher average daily rate and a
4.7% improvement in occupancy rates during 2011 compared to 2010. The increase
of $5.4 million, or 13.0%, in pass-through revenue is related to our acquisition
of TPI.
Cost of Sales
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Membership and Exchange $ 87,868 7.4 % $ 81,812 5.2 % $ 77,741
Management and Rental
Management fee and rental
expenses 19,730 55.6 % 12,682 40.2 % 9,045
Pass-through expenses 60,661 29.3 % 46,926 13.0 % 41,518
Total Management and Rental
cost of sales 80,391 34.9 % 59,608 17.9 % 50,563
Total cost of sales $ 168,259 19.0 % $ 141,420 10.2 % $ 128,304
As a percentage of total
revenue 35.5 % 7.8 % 33.0 % 5.2 % 31.3 %
As a percentage of total
revenue excluding
pass-through revenue 40.8 % 10.1 % 37.0 % 6.2 % 34.9 %
Gross margin 64.5 % (3.8 )% 67.0 % (2.4 )% 68.7 %
Gross margin without
pass-through revenue/expenses 73.9 % (1.8 )% 75.3 % (1.5 )% 76.4 %
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.
2012 Compared to 2011
Cost of sales in 2012 increased $26.8 million from 2011, consisting of an
increase of $6.1 million from our Membership and Exchange segment and
$20.8 million from our Management and Rental segment. Overall gross margin
decreased by 257 basis points to 64.5% in 2012 compared to 67.0% in 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 115 basis
points during 2012 compared to the prior year. Cost of sales for this segment
increased $6.1 million primarily due to an increase of $3.1 million in
compensation and other employee related costs and $1.2 million in the
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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 $0.7 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 $20.8 million in cost of sales from the Management and
Rental segment was primarily attributable to an increase of $13.7 million in
segment pass-through revenue coupled with an increase of $6.1 million in other
incremental expenses related to VRI and an increase of $0.6 million in
compensation and other employee related costs at TPI. Gross margin for this
segment increased by 557 basis points to 30.5% in 2012 compared to 2011. Our
Management and Rental segment has lower gross margins than our Membership and
Exchange segment largely due to the effect of pass-through revenue. Excluding
the effect of pass-through revenue, gross margin for this segment increased by
318 basis points to 64.1% during 2012 compared to the prior year.
2011 Compared to 2010
Cost of sales in 2011 increased $13.1 million from 2010, consisting of an
increase of $4.1 million from our Membership and Exchange segment and
$9.0 million from our Management and Rental segment. Overall gross margin
decreased by 164 basis points to 67.0% in 2011 compared to 68.7% in 2010,
primarily due to increased gross profit contribution from our lower-margin
Management and Rental segment.
Gross margin for the Membership and Exchange segment decreased by 89 basis
points as compared to the prior year. Cost of sales for this segment increased
$4.1 million primarily due to increases of $2.8 million in the cost of purchased
rental inventory and $1.2 million of incremental TPI expenses following the
acquisition. The increase in the cost of purchased inventory and a slightly
higher proportion of purchased inventory utilized contributed to our decrease in
gross margin in 2011.
The increase of $9.0 million in cost of sales from the Management and Rental
segment was primarily attributable to an increase of $5.4 million in
pass-through revenue coupled with an increase of $3.2 million in other
incremental expenses both related to TPI. Gross margin for this segment
increased by 364 basis points to 24.9% in 2011 compared to 2010. Excluding the
effect of pass-through revenue, gross margin for this segment increased by 76
basis points to 60.9% during 2011 compared to the prior year.
Selling and Marketing Expense
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Selling and marketing expense $ 53,559 0.1 % $ 53,504 5.4 % $ 50,755
As a percentage of total revenue 11.3 % (9.3 )% 12.5 % 0.7 % 12.4 %
As a percentage of total revenue
excluding pass-through revenue 13.0 % (7.4 )% 14.0 % 1.6 % 13.8 %
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.
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2012 Compared to 2011
Selling and marketing expense in 2012 remained relatively flat compared to
2011, increasing less than $0.1 million. As a percentage of total revenue and
total revenue excluding pass-through revenue, sales and marketing expense
decreased 9.3% and 7.4%, respectively, during 2012 compared to the prior year.
2011 Compared to 2010
Selling and marketing expense in 2011 increased $2.7 million from 2010 and
remained consistent as a percentage of total revenue. The increase is primarily
due to an incremental $1.1 million in overall compensation and other
employee-related costs and increases in certain advertising and promotional
expenditures, coupled with various other less significant cost increases.
General and Administrative Expense
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)General and administrative expense $ 105,270 11.4 % $ 94,508
6.2 % $ 88,980
As a percentage of total revenue 22.2 % 0.9 % 22.0 % 1.4 % 21.7 %
As a percentage of total revenue
excluding pass-through revenue 25.5 % 3.1 % 24.7 % 2.3 % 24.2 %
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.
2012 Compared to 2011
General and administrative expense in 2012 increased $10.8 million from
2011, primarily due to an increase of $8.5 million in overall compensation and
other employee-related costs, other incremental expenses of $2.9 million from
VRI and higher IT maintenance and support services of $1.2 million, partly
offset by a favorable net change of $1.7 million in the estimated fair value of
contingent consideration related to an acquisition.
The $8.5 million increase in overall compensation and other employee-related
costs was primarily due to $5.4 million of incremental compensation and other
employee-related expenses from VRI, an increase of $1.6 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 $1.0 million in
non-cash compensation expense mainly due to awards granted at spin-off, vesting
fully during the third quarter of 2012, and $1.4 million of higher capitalized
internal labor costs pertaining to internally developed software.
2011 Compared to 2010
General and administrative expense in 2011 increased $5.5 million from 2010,
primarily due to an increase of $2.6 million in overall compensation and other
employee-related costs, an increase of $1.1 million in professional fees, an
increase of $1.2 million due to a change in the estimated fair value of
contingent consideration related to an acquisition, and higher expenses of
$0.9 million relating to IT and maintenance and support services. In addition,
we experienced $0.2 million of higher net currency losses related to foreign
currency remeasurements of operating assets and liabilities denominated in a
currency other than the functional currency, and other increases of $1.2 million
due to the inclusion of
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TPI in our results of operations. These increases were partly offset by a
favorable $1.4 million dollar change in our estimated accrual for the European
Union Value Added Tax ("VAT") matter discussed in Note 12 accompanying our
consolidated financial statements.
The increase of $1.1 million in professional fees primarily relates to lower
capitalized external labor costs pertaining to internally developed software
subsequent to the launch of iServices, our proprietary membership platform, in
November 2010, and to $0.4 million of legal fees associated with an Aston legal
proceeding.
The increase of $2.6 million in overall compensation and other
employee-related costs was primarily due to $2.4 million of incremental salary
and related expenses pertaining to TPI employees, $1.4 million of lower
capitalized internal labor costs pertaining to internally developed software
subsequent to the launch of iServices, and a $1.2 million increase in non-cash
compensation expense primarily related to annual awards granted in March 2010
through March 2011. These increases were partially offset by a decrease of
$2.2 million in employee-related health and welfare insurance expense.
Amortization Expense of Intangibles
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Amortization expense of
intangibles $ 23,041 (15.6 )% $ 27,301 3.5 % $ 26,387
As a percentage of total revenue 4.9 % (23.5 )% 6.4 % (1.2 )% 6.4 %
As a percentage of total revenue
excluding pass-through revenue 5.6 % (21.9 )% 7.1 % (0.3 )% 7.2 %
2012 Compared to 2011
Amortization expense of intangibles for 2012 decreased $4.3 million from
2011 primarily due to certain intangible assets fully amortized by the end of
the third quarter of 2012, partly offset by the incremental amortization expense
pertaining to intangible assets resulting from the acquisition of VRI.
2011 Compared to 2010
Amortization expense of intangibles in 2011 was consistent with the 2010
period other than incremental amortization expense pertaining to recognized
intangible assets related to the acquisition of TPI.
Depreciation Expense
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Depreciation expense $ 13,429 1.1 % $ 13,277 26.0 % $ 10,537
As a percentage of total revenue 2.8 % (8.4 )% 3.1 % 20.3 % 2.6 %
As a percentage of total revenue
excluding pass-through revenue 3.3 % (6.4 )% 3.5 % 21.4 % 2.9 %
2012 Compared to 2011
Depreciation expense for 2012 was relatively consistent compared with 2011,
increasing by $0.2 million or 1.1%.
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2011 Compared to 2010
Depreciation expense for 2011 as compared to 2010 increased $2.7 million
primarily related to our iServices membership platform that was placed in
service in the fourth quarter 2010 and, consequently, reflects a full year of
depreciation in 2011.
Operating Income
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Membership and Exchange $ 104,245 5.8 % $ 98,562 (6.7 )% $ 105,634
Management and Rental 5,536 NM 222 119.2 % (1,157 )
Total operating income $ 109,781 11.1 % $ 98,784 (5.4 )% $ 104,477
As a percentage of total
revenue 23.2 % 0.7 % 23.0 % (9.7 )% 25.5 %
As a percentage of total
revenue excluding pass-through
revenue 26.6 % 2.8 % 25.9 % (8.9 )% 28.4 %
2012 Compared to 2011
Operating income in 2012 increased $11.0 million from the comparable period
in 2011, consisting of an increase of $5.7 million from our Membership and
Exchange segment and an increase of $5.3 million from our Management and Rental
segment.
Operating income for our Membership and Exchange segment increased
$5.7 million to $104.2 million in 2012 from 2011 due to $5.5 million of lower
amortization expense of intangibles as a result of certain intangible assets
becoming fully amortized by the end of third quarter of 2012, 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. This was partly offset by higher
general and administrative expense primarily due to employee related costs,
including health and welfare benefits.
The increase in operating income of $5.3 million at our Management and
Rental segment is primarily due to improved operating results at Aston and TPI
during the year, 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.
2011 Compared to 2010
Operating income in 2011 decreased $5.7 million from the comparable period
in 2010, consisting of a decrease of $7.1 million from our Membership and
Exchange segment, partly offset by an increase of $1.4 million from our
Management and Rental segment.
Operating income for our Membership and Exchange segment decreased
$7.1 million to $98.6 million in 2011 from $105.6 million in 2010 largely due to
a contraction in gross profit at Interval during the first half of 2011 and
increases in other operating expenses, including depreciation expense, as
further discussed in preceding sections.
The increase in operating income of $1.4 million at our Management and
Rental segment is primarily due to higher gross profit of $6.1 million, partly
offset by the charge of $0.6 million to this segment resulting from the change
in the estimated fair value of contingent consideration related to an
acquisition, allocated to each segment, as well as an increase of $3.8 million
in general and administrative expense largely attributable to the inclusion of
TPI's general and administrative expenses, which includes $0.4 million of legal
fees at Aston associated with a legal proceeding.
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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."
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Membership and Exchange $ 142,590 (0.4 )% $ 143,220 (1.7 )% $ 145,753
Management and Rental 14,592 87.6 % 7,778 35.0 % 5,763
Total adjusted EBITDA $ 157,182 4.1 % $ 150,998 (0.3 )% $ 151,516
As a percentage of total
revenue 33.2 % (5.7 )% 35.2 % (4.8 )% 37.0 %
As a percentage of total
revenue excluding
pass-through revenue 38.1 % (3.7 )% 39.5 % (4.0 )% 41.2 %
2012 Compared to 2011
Adjusted EBITDA in 2012 increased $6.2 million from 2011, or 4.1%,
consisting of an increase of $6.8 million from our Management and Rental
segment, partly offset by a decrease of $0.6 million from our Membership and
Exchange segment.
Adjusted EBITDA of $142.6 million from our Membership and Exchange segment
was relatively in-line with the prior year. Adjusted EBITDA for this segment
reflects 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 and higher call
center costs and related member servicing activities mainly resulting from the
affiliation of two corporate accounts during the first half of 2012. This 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
$6.8 million to $14.6 million in 2012 from $7.8 million in 2011. The improvement
in adjusted EBITDA in this segment is primarily driven by higher gross profit of
$15.5 million delivered mainly from the inclusion of VRI in our results of
operations, improvement in Aston's RevPAR during the year, and new property
management contracts secured at TPI in the third quarter 2011, in addition to a
favorable net change 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 $8.5 million due to the inclusion of
VRI's general and administrative expenses in our results.
2011 Compared to 2010
Adjusted EBITDA in 2011 decreased $0.5 million from 2010, or 0.3%,
consisting of a decrease of $2.5 million from our Membership and Exchange
segment, partly offset by an increase of $2.0 million from our Management and
Rental segment.
Adjusted EBITDA from our Membership and Exchange segment decreased to
$143.2 million in 2011 from $145.8 million in 2010. The decrease in this segment
is due primarily to a contraction in Interval gross margin, primarily in the
first half of 2011, and increases in general and administrative and selling and
marketing expenses.
The contraction in Interval gross margin can be mainly attributed to a
decrease in exchange and Getaway transaction activity partially related to a
shift in the mix and availability of exchange and
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Getaway inventory, changes in travel patterns, and increased costs of purchased
inventory. This was partially offset by the inclusion of TPI in our results of
operations. The increase in other operating expenses is partly attributable to
the inclusion of TPI's general and administrative expenses in our results of
operations as well as increases in certain costs at Interval such as lower
capitalized internal and external labor costs pertaining to internally developed
software subsequent to the launch of iServices, higher costs pertaining to IT
maintenance and support services and increases in advertising and promotional
related expenses.
Adjusted EBITDA from our Management and Rental segment increased to
$7.8 million in 2011 from $5.8 million in 2010. The increase in this segment is
due primarily to higher gross profit of $6.1 million delivered as a result of
the inclusion of TPI in our results of operations and an increase in Aston's
RevPAR in 2011 compared to 2010, partly offset by a charge of $0.6 million to
this segment due to a change in the estimated fair value of contingent
consideration related to an acquisition, as well as an increase of $3.8 million
in general and administrative expense largely due to the inclusion of TPI's
general and administrative expenses, and $0.4 million in legal fees associated
with an Aston legal proceeding.
Other Income (Expense)
Year Ended December 31,
2012 % Change 2011 % Change 2010
(Dollars in thousands)
Interest income $ 1,792 41.9 % $ 1,263 181.9 % $ 448
Interest expense (25,629 ) (28.0 )% (35,575 ) (0.6 )% (35,782 )
Other income (expense), net (2,456 ) (255.4 )% 1,580 683.0 % (271 )
Loss on extinguishment of debt (18,527 ) NM - - -
2012 Compared to 2011
Interest income increased $0.5 million in 2012 compared to 2011 primarily as
a result of interest earned on loans issued in 2012.
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 $2.5 million were amortized in 2012 and 2011, respectively. Lower interest
expense during 2012 is primarily due to the extinguishment of our term loan on
June 21, 2012, redemption of our senior notes on September 4, 2012, and lower
prevailing interest rates compared to 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 $2.2 million in 2012 compared to a net gain of $1.8 million in 2011.
The unfavorable fluctuations during 2012 were principally driven by U.S. dollar
positions held at December 31, 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 December 31, 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 in 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
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as a separate line item within other income (expense) in our consolidated
statement of income for the year ended December 31, 2012.
2011 Compared to 2010
Interest income increased $0.8 million in 2011 compared to 2010 primarily as
a result of interest earned on loans issued during the second quarter of 2011
and discussed in Note 6 of our consolidated financial statements.
Interest expense for these periods primarily relates to interest and
amortization of debt costs on the indebtedness incurred in connection with the
spin-off. The senior notes were initially recorded with an original issue
discount of $23.5 million based on the prevailing interest rate at the time of
pricing, estimated at 11.0%, of which $2.5 million and $2.3 million was
amortized in 2011 and 2010, respectively. Lower interest expense in 2011 is due
to the lower outstanding principal balance on our term loan and slightly lower
interest rates, partly offset by a decrease in capitalized interest expense
subsequent to the launch of iServices in the fourth quarter of 2010.
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
gain in 2011 was $1.8 million while 2010 experienced a net loss of $0.3 million.
The favorable fluctuations in 2011 were principally driven by U.S. dollar
positions held at December 31, 2011 affected by the stronger dollar compared to
the Mexican peso, partly offset by the strengthening of the Colombian peso
against the U.S. dollar. The unfavorable fluctuations in 2010 were principally
driven by U.S. dollar positions held at December 31, 2010 affected by the weaker
dollar compared to the Colombian peso and the Mexican peso, partly offset by the
stronger dollar compared to the British pound.
Income Tax Provision
2012 Compared to 2011
For the years ended December 31, 2012 and 2011, ILG recorded income tax
provisions for continuing operations of $24.3 million and $24.9 million,
respectively, which represent effective tax rates of 37.3% and 37.7%,
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. In addition, as it relates to 2012, ILG recorded
income tax benefits of $0.9 million associated with the U.S. tax consequences of
certain of ILG's foreign operations and other income tax items, the most
significant of which related to the tax impact of ILG's redemption of the senior
notes. As it relates to 2011, ILG recorded income taxes of $0.4 million
associated with non-deductible non-cash compensation and other income tax items.
As of December 31, 2012 and 2011, ILG had unrecognized tax benefits of
$0.7 million and $0.9 million, respectively, which if recognized, would
favorably affect the effective tax rate. Also included in the balance of
unrecognized tax benefits as of December 31, 2012 and 2011 are $0.4 million and
$0.6 million, respectively, of unrecognized tax benefits related to the
acquisition of TPI. In connection with our acquisition of TPI, the former
shareholders have agreed to indemnify us for all tax liabilities and related
interest and penalties for the pre-acquisition period. The net decrease of $0.2
million in 2012 in unrecognized tax benefits is due principally to both a
decrease in foreign taxes as a result of the expiration of the statute of
limitations and settlements with taxing authorities related primarily to certain
tax credits, partly offset by other income tax items. The net decrease of
$0.1 million in 2011 in unrecognized tax benefits is due principally to the
decrease in foreign taxes as a result of the expiration of the statute of
limitations.
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ILG recognizes interest and, if applicable, penalties related to
unrecognized tax benefits in income tax expense. There were no material accruals
for interest during 2012. During 2012, interest and penalties decreased by
approximately $0.2 million as a result of the expiration of the statute of
limitations related to foreign taxes. There were no material accruals for
interest during 2011. During 2011, interest and penalties decreased by
approximately $0.1 million as a result of the expiration of the statute of
limitations related to foreign taxes. At December 31, 2012 and 2011, ILG has
accrued $0.6 million and $0.8 million, respectively, for the payment of interest
and, if applicable, penalties.
ILG believes that it is reasonably possible that its unrecognized tax
benefits could decrease by approximately $0.2 million within twelve months of
the current reporting date due primarily to the expiration of the statute of
limitations related to foreign taxes. An estimate of other changes in
unrecognized tax benefits cannot be made, but is not expected to be significant.
ILG has routinely been 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 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 the Tax Sharing
Agreement, IAC indemnifies ILG for all consolidated tax liabilities and related
interest and penalties for the pre-spin period. During the fourth quarter of
2012, the IRS also completed its examination of ILG's Federal consolidated tax
return for the short period following the spin-off and ended December 31, 2008.
Additionally during 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 21% 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.
2011 Compared to 2010
For the years ended December 31, 2011 and 2010, ILG recorded income tax
provisions for continuing operations of $24.9 million and $26.5 million,
respectively, which represent effective tax rates of 37.7% and 38.4%,
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. In addition, as it relates to 2011, ILG recorded
income taxes of $0.4 million associated with non-deductible non-cash
compensation and other income tax items. As it relates to 2010, ILG recorded
income taxes associated with non-deductible non-cash compensation of
$0.5 million, partially offset by
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$0.1 million of U.S. tax consequences of certain of ILG's foreign operations and
other income tax items.
As of December 31, 2011 and 2010, ILG had unrecognized tax benefits of
$0.9 million and $1.0 million, respectively, which if recognized, would
favorably affect the effective tax rate. Also included in the balance of
unrecognized tax benefits as of December 31, 2011 and 2010 are $0.6 million and
$0.7 million, respectively, of unrecognized tax benefits related to the
acquisition of TPI. In connection with our acquisition of TPI, the former
shareholders have agreed to indemnify us for all tax liabilities and related
interest and penalties for the pre-acquisition period. The net decrease of
$0.1 million in 2011 in unrecognized tax benefits is due principally to the
decrease in foreign taxes as a result of the expiration of the statute of
limitations. The net increase of $0.9 million in 2010 in unrecognized tax
benefits is due principally to the increase of $0.7 million in foreign taxes as
a result of ILG's acquisition of TPI and an increase of $0.2 million related to
other income tax items.
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 2012, we had $108.5 million of cash and cash equivalents
and restricted cash and cash equivalents, including $91.6 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, $61.8 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.
Additionally, we are also exposed to risks associated with the repatriation of
cash from certain of our foreign operations to the United States where currency
restrictions exist, such as Venezuela and Argentina, which limit our ability to
immediately access cash through repatriations. These currency restrictions had
no impact on our overall liquidity during 2012 and, as of December 31, 2012, the
respective cash balances were immaterial to our overall cash on hand.
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 and
other factors outside of our control.
Cash Flows Discussion
Net cash provided by operating activities decreased to $80.4 million in 2012
from $95.9 million in 2011 and from $91.4 million in 2010. The decrease of
$15.5 million in 2012 from 2011 was principally due to higher income taxes paid
of $8.6 million, net higher payments of $3.9 million made in connection with
long-term agreements, higher interest payments of $0.8 million and higher net
cash expenses. The higher interest payments are primarily related to the shift
in the timing of interest payments under our new credit facility. Due to the
semi-annual scheduled timing of interest payments on our redeemed senior notes,
we paid twelve months of interest in both 2012 and 2011.
The increase of $4.5 million in 2011 from 2010 was principally due to lower
income taxes paid of $4.9 million, lower interest paid, excluding capitalized
interest, of $0.9 million, higher interest income of $0.7 million and lower net
payments of $0.4 million made in connection with long-term agreements, partly
offset by higher net cash expenses, including $0.6 million of the total
$1.5 million contingent consideration payment related to an acquisition. Lower
interest payments in 2011 are due to the lower principal balance outstanding,
and slightly lower interest rates. The increase in interest income is due to
interest earned and received on the loans receivable issued to third parties in
2011.
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Net cash used in investing activities of $47.3 million in 2012 primarily
related to the VRI acquisition, net of cash acquired, of $40.0 million,
disbursements totaling $9.5 million for investments in loans receivable, and
capital expenditures of $15.0 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 December 31, 2012, an additional
$2.6 million is available to be drawn in connection with our financing
receivables.
In 2011, net cash used in investing activities of $35.2 million related to
disbursements totaling $16.5 million for loans to third parties, capital
expenditures of $13.0 million, primarily related to IT initiatives, and the
acquisition of certain management agreements by our Management and Rental
segment for $5.6 million.
In 2010, net cash used in investing activities of $28.4 million resulted
from capital expenditures of $16.4 million and an acquisition, net of cash
acquired, of $12.9 million, slightly offset by a $1.0 million decrease in
restricted cash, related to a collateral agreement for merchant transactions in
the United Kingdom that was no longer required.
Free cash flow is a non-GAAP measure and is defined in "ILG's Principles of
Financial Reporting." For the years ended December 31, 2012, 2011 and 2010, free
cash flow was $65.4 million, $82.9 million and $75.0 million, respectively. The
change is mainly a result of the variance in net cash provided by operating
activities as discussed above.
Net cash used in financing activities of $131.8 million in 2012 was
principally 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
$28.4 million, payments of debt issuance costs of $3.9 million in connection
with entering into our amended and restated credit agreement in June 2012,
withholding taxes paid on the vesting of restricted stock units of $6.2 million
and $1.1 million of the total $1.5 million contingent consideration payment
related to an acquisition. 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 2011, net cash used in financing activities of $43.6 million was
principally due to repurchases of our common stock at market prices totaling
$20.9 million, including commissions, which settled during the year as well as
voluntary principal prepayments on the term loan totaling $20.0 million,
withholding taxes paid on the vesting of restricted stock units of $3.5 million
and $0.9 million of the total $1.5 million contingent consideration payment
related to an acquisition, all partially offset by excess tax benefits from
stock-based awards and proceeds from the exercise of stock options. Effective,
August 3, 2011, ILG's Board of Directors authorized a share repurchase program
for up to $25.0 million, excluding commissions, of our outstanding common stock.
As of December 31, 2012, the remaining availability for future repurchases of
our common stock was $4.1 million.
In 2010, net cash used in financing activities of $41.2 million was
principally due to principal payments of $40.0 million on the term loan and
withholding taxes paid on the vesting of restricted stock units of $2.9 million,
net of excess tax benefits from stock-based awards and proceeds from the
exercise of warrants and stock options.
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
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to certain conditions. As of December 31, 2012, $260.0 million of borrowings
were outstanding under the revolving credit facility, with $240.0 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.
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 December 31, 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 December 31, 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 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 regarding the maintenance of a maximum consolidated
leverage ratio of consolidated debt, less credit given for a portion of 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 December 31, 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 1.51 and 6.97, respectively.
Dividends
In March 2012, May 2012, August 2012 and November 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, September 6, 2012 and December 4, 2012,
respectively. On each of April 18, 2012, June 26, 2012 September 20, 2012 and
December 18, 2012, a cash dividend of $5.7 million was paid. We currently expect
to declare and pay quarterly dividends of similar amounts.
In December 2012, our Board of Directors declared a $0.10 per share dividend
for shareholders of record on December 17, 2012, accelerating the first quarter
of 2013 expected dividend. On December 27, 2012, a cash dividend of $5.7 million
was paid. For the year ended December 31, 2012, we paid $28.4 million in cash
dividends.
Contractual Obligations and Commercial Commitments
We have funding commitments that could potentially require our performance
in the event of demands by third parties or contingent events. At December 31,
2012, guarantees, surety bonds and letters of credit totaled $36.7 million.
Guarantees represent $33.4 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
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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 December 31, 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 December 31, 2012,
amounts pending reimbursements are not significant.
Contractual obligations and commercial commitments at December 31, 2012 are
as follows:
Payments Due by Period
Up to More than
Contractual Obligations Total 1 year 1-3 years 3-5 years 5 years
(Dollars in thousands)
Debt principal(a) $ 260,000 $ - $ - $ 260,000 $ -
Debt interest(a) 26,182 5,798 11,742 8,642 -
Purchase obligations(b) 32,318 13,281 14,093 4,394 550
Unused commitment on loans
receivable and other advances 2,624 2,624 - - -
Operating leases 55,966 11,928 17,545 11,988 14,505
Total contractual obligations $ 377,090 $ 33,631 $ 43,380 $ 285,024 $ 15,055
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º (a)
º Debt principal and projected debt interest represent principal and interest
to be paid on our revolving credit facility based on the balance
outstanding as of December 31, 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 December 31, 2012. Interest on the revolving credit facility is
calculated using the prevailing rates as of December 31, 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
Total
Amounts Less than More thanOther Commercial Commitments(c) Committed 1 year 1-3 years
3-5 years 5 years
(Dollars in thousands)
Guarantees, surety bonds and
letters of credit $ 36,747 $ 14,654 $ 15,143 $ 5,125 $ 1,825
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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 December 31, 2012, are certain
unconditional recorded contractual obligations. These
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obligations and the future periods in which such obligations are expected to
settle in cash are as follows (in thousands):
Twelve Month Period Ending December 31,
2013 $ 3,857
2014 -
2015 -
2016 -
2017 -
Thereafter -
Total $ 3,857
Off-Balance Sheet Arrangements
Except as disclosed above in our Contractual Obligations and Commercial
Commitments (except for our Debt Principal) as of December 31, 2012, we did not
have any significant off-balance sheet arrangements, as defined in Item 303(a)
(4) (ii) of SEC Regulation S-K.
Recent Accounting Pronouncements
Refer to Note 2 accompanying our consolidated financial statements for a
description of recent accounting pronouncements.
Seasonality
Refer to Note 1 accompanying our consolidated financial statements for a
discussion on the impact of seasonality.
ILG'S PRINCIPLES OF FINANCIAL REPORTINGDefinition of ILG's Non-GAAP Measures
Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") is
defined as net income 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.
Adjusted net income-Net income attributable to common stockholders excluding
the non-cash loss on extinguishment of our indebtedness, net of tax.
Adjusted diluted EPS-Adjusted net income divided by the weighted average
number of shares of common stock and dilutive securities outstanding during the
period.
Free cash flow-Cash provided by operating activities less capital
expenditures.
Our presentation of above-mentioned non-GAAP measures 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. These non-GAAP measures have
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certain limitations in that they do not take into account the impact of certain
expenses to our statement of operations; including non-cash compensation for
adjusted EBITDA. 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 these non-GAAP measures 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.
Pro Forma Results
We will only present EBITDA and/or adjusted 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 Measures (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,
principally U.S. dollars, other than their functional currency, in addition to
any gains or losses on extinguishment of debt.
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RECONCILIATIONS OF NON-GAAP MEASURES
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 years ended December 31, 2012, 2011 and 2010 (in
thousands). The noncontrolling interest relates to the Management and Rental
segment.
Year Ended December 31, 2012
Membership Management
and and
Exchange Rental Consolidated
Adjusted EBITDA $ 142,590 $ 14,592 $ 157,182
Non-cash compensation expense (9,904 ) (1,027 ) (10,931 )
Other non-operating expense, net (2,303 ) (153 ) (2,456 )
Loss on extinguishment of debt (18,527 ) - (18,527 )
EBITDA 111,856 13,412 125,268
Amortization expense of intangibles (16,147 ) (6,894 ) (23,041 )
Depreciation expense (12,294 ) (1,135 ) (13,429 )
Less: Other non-operating expense, net 2,303 153 2,456
Less: Loss on extinguishment of debt 18,527 - 18,527
Operating income $ 104,245 $ 5,536 109,781
Interest income 1,792
Interest expense (25,629 )
Other non-operating expense, net (2,456 )
Loss on extinguishment of debt (18,527 )
Income tax provision (24,252 )
Net income 40,709
Net income attributable to
noncontrolling interest (7 )
Net income attributable to common
stockholders $ 40,702
60
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Year Ended December 31, 2011
Membership Management
and and
Exchange Rental Consolidated
Adjusted EBITDA $ 143,220 $ 7,778 $ 150,998
Non-cash compensation expense (10,638 ) (998 ) (11,636 )
Other non-operating income (expense),
net 1,705 (125 ) 1,580
EBITDA 134,287 6,655 140,942
Amortization expense of intangibles (21,689 ) (5,612 ) (27,301 )
Depreciation expense (12,331 ) (946 ) (13,277 )
Less: Other non-operating income
(expense), net (1,705 ) 125 (1,580 )
Operating income $ 98,562 $ 222 98,784
Interest income 1,263
Interest expense (35,575 )
Other non-operating income, net 1,580
Income tax provision (24,926 )
Net income 41,126
Net loss attributable to noncontrolling
interest -
Net income attributable to common
stockholders $ 41,126
Year Ended December 31, 2010
Membership Management
and and
Exchange Rental Consolidated
Adjusted EBITDA $ 145,753 $ 5,763 $ 151,516
Non-cash compensation expense (9,346 ) (769 ) (10,115 )
Other non-operating expense, net (271 ) - (271 )
EBITDA 136,136 4,994 141,130
Amortization expense of intangibles (21,083 ) (5,304 ) (26,387 )
Depreciation expense (9,690 ) (847 ) (10,537 )
Less: Other non-operating expense, net 271 - 271
Operating income (loss) $ 105,634 $ (1,157 ) 104,477
Interest income 448
Interest expense (35,782 )
Other non-operating expense, net (271 )
Income tax provision (26,457 )
Net income 42,415
Net loss attributable to noncontrolling
interest 3
Net income attributable to common
stockholders $ 42,418
61
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The following tables reconcile net income attributable to common
stockholders to adjusted net income and cash provided by operating activities to
free cash flow for the years ended December 31, 2012, 2011 and 2010 (in
thousands).
Year Ended December 31,
2012 2011 2010
Net income attributable to common stockholders $ 40,702 $ 41,126 $ 42,418
Loss on extinguishment of debt 18,527 - -
Income tax benefit of adjusting items(1) (7,270 ) - -
Adjusted net income $ 51,959 $ 41,126 $ 42,418
Earnings per share attributable to common stockholders:
Basic $ 0.72 $ 0.72 $ 0.75
Diluted $ 0.71 $ 0.71 $ 0.73
Adjusted earnings per share:
Basic $ 0.92 $ 0.72 $ 0.75
Diluted $ 0.91 $ 0.71 $ 0.73
Weighted average number of common stock outstanding:
Basic 56,549 56,981 56,898
Diluted 57,248 57,775 57,756
Year Ended December 31,
2012 2011 2010
Basic Diluted Basic Diluted Basic Diluted
Earnings per share $ 0.72 $ 0.71 $ 0.72 $ 0.71 $ 0.75 $ 0.73
Loss on extinguishment of debt 0.33 0.33 - - - -
Income tax benefit of adjusting
items(1) (0.13 ) (0.13 ) - - - -
Adjusted earnings per share $ 0.92 $ 0.91 $ 0.72 $ 0.71 $ 0.75 $ 0.73
--------------------------------------------------------------------------------
º (1)
º Tax rate utilized is the applicable effective tax rate respective to the
period to the extent amounts are deductible.
Year Ended December 31,
2012 2011 2010
Net cash provided by operating activities $ 80,438 $ 95,907 $ 91,403
Less: Capital expenditures (15,040 ) (13,038 ) (16,443 )
Free cash flow $ 65,398 $ 82,869 $ 74,960
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