As filed with the Securities and Exchange Commission on August 8, 2013
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One) | ||
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2013 |
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or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File No. 1-34062
INTERVAL LEISURE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
26-2590997 (I.R.S. Employer Identification No.) |
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6262 Sunset Drive, Miami, FL (Address of Registrant's principal executive offices) |
33143 (Zip Code) |
(305) 666-1861
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ý | Accelerated filer o | Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
As of August 2, 2013, 57,352,630 shares of the registrant's common stock were outstanding.
Item 1. Consolidated Financial Statements
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
Three Months Ended June 30, |
Six Months Ended June 30, |
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---|---|---|---|---|---|---|---|---|---|---|---|---|---|
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2013 | 2012 | 2013 | 2012 | |||||||||
Revenue |
$ | 124,983 | $ | 118,668 | $ | 259,864 | $ | 245,407 | |||||
Cost of sales (exclusive of depreciation and amortization shown separately below) |
43,421 | 43,261 | 89,797 | 86,052 | |||||||||
Gross profit |
81,562 | 75,407 | 170,067 | 159,355 | |||||||||
Selling and marketing expense |
14,272 | 14,268 | 28,007 | 28,041 | |||||||||
General and administrative expense |
28,227 | 26,980 | 54,532 | 52,406 | |||||||||
Amortization expense of intangibles |
1,896 | 7,289 | 3,908 | 14,332 | |||||||||
Depreciation expense |
3,696 | 3,222 | 7,360 | 6,528 | |||||||||
Operating income |
33,471 | 23,648 | 76,260 | 58,048 | |||||||||
Other income (expense): |
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Interest income |
72 | 577 | 223 | 1,003 | |||||||||
Interest expense |
(1,611 | ) | (8,825 | ) | (3,264 | ) | (17,389 | ) | |||||
Other income (expense), net |
1,479 | 980 | 959 | (1,493 | ) | ||||||||
Loss on extinguishment of debt |
| (602 | ) | | (602 | ) | |||||||
Total other expense, net |
(60 | ) | (7,870 | ) | (2,082 | ) | (18,481 | ) | |||||
Earnings before income taxes and noncontrolling interest |
33,411 | 15,778 | 74,178 | 39,567 | |||||||||
Income tax provision |
(12,841 | ) | (5,727 | ) | (28,598 | ) | (14,287 | ) | |||||
Net income |
20,570 | 10,051 | 45,580 | 25,280 | |||||||||
Net loss (income) attributable to noncontrolling interest |
| 1 | (6 | ) | (3 | ) | |||||||
Net income attributable to common stockholders |
$ | 20,570 | $ | 10,052 | $ | 45,574 | $ | 25,277 | |||||
Earnings per share attributable to common stockholders: |
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Basic |
$ | 0.36 | $ | 0.18 | $ | 0.80 | $ | 0.45 | |||||
Diluted |
$ | 0.36 | $ | 0.18 | $ | 0.79 | $ | 0.44 | |||||
Weighted average number of shares of common stock outstanding: |
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Basic |
57,315 | 56,540 | 57,121 | 56,315 | |||||||||
Diluted |
57,795 | 57,321 | 57,615 | 56,998 | |||||||||
Dividends declared per common share |
$ | 0.11 | $ | 0.10 | $ | 0.11 | $ | 0.20 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
2
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
Three Months Ended June 30, |
Six Months Ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||
Net income attributable to common stockholders |
$ | 20,570 | $ | 10,052 | $ | 45,574 | $ | 25,277 | |||||
Other comprehensive income (loss), net of tax: |
|||||||||||||
Foreign currency translation adjustments |
(1,417 | ) | (1,858 | ) | (3,190 | ) | 1,109 | ||||||
Total other comprehensive income (loss), net of tax |
(1,417 | ) | (1,858 | ) | (3,190 | ) | 1,109 | ||||||
Comprehensive income |
$ | 19,153 | $ | 8,194 | $ | 42,384 | $ | 26,386 | |||||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
3
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
|
June 30, 2013 |
December 31, 2012 |
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(Unaudited) |
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ASSETS |
|||||||
Cash and cash equivalents |
$ | 108,999 | $ | 101,162 | |||
Restricted cash and cash equivalents |
9,450 | 7,348 | |||||
Accounts receivable, net of allowance of $377 and $409, respectively |
44,621 | 31,964 | |||||
Deferred income taxes |
16,706 | 16,107 | |||||
Deferred membership costs |
10,019 | 12,349 | |||||
Prepaid income taxes |
11,175 | 12,973 | |||||
Prepaid expenses and other current assets |
22,227 | 27,592 | |||||
Total current assets |
223,197 | 209,495 | |||||
Property and equipment, net |
52,304 | 53,348 | |||||
Goodwill |
505,774 | 505,774 | |||||
Intangible assets, net |
94,770 | 98,678 | |||||
Deferred membership costs |
11,673 | 11,058 | |||||
Deferred income taxes |
4,317 | 4,571 | |||||
Other non-current assets |
12,564 | 23,996 | |||||
TOTAL ASSETS |
$ | 904,599 | $ | 906,920 | |||
LIABILITIES AND EQUITY |
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LIABILITIES: |
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Accounts payable, trade |
$ | 12,828 | $ | 11,086 | |||
Deferred revenue |
101,399 | 93,367 | |||||
Interest payable |
247 | 386 | |||||
Accrued compensation and benefits |
18,523 | 16,526 | |||||
Member deposits |
10,014 | 9,463 | |||||
Accrued expenses and other current liabilities |
42,389 | 44,575 | |||||
Total current liabilities |
185,400 | 175,403 | |||||
Long-term debt |
215,000 | 260,000 | |||||
Other long-term liabilities |
1,109 | 1,493 | |||||
Deferred revenue |
105,440 | 111,273 | |||||
Deferred income taxes |
85,450 | 86,259 | |||||
Total liabilities |
592,399 | 634,428 | |||||
Redeemable noncontrolling interest |
431 | 426 | |||||
Commitments and contingencies |
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STOCKHOLDERS' EQUITY: |
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Preferred stockauthorized 25,000,000 shares, of which 100,000 shares are designated Series A Junior Participating Preferred Stock; $0.01 par value; none issued and outstanding |
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Common stockauthorized 300,000,000 shares; $.01 par value; issued 59,049,990 and 58,553,265 shares, respectively |
590 | 586 | |||||
Treasury stock1,697,360 shares at cost |
(20,913 | ) | (20,913 | ) | |||
Additional paid-in capital |
185,922 | 182,131 | |||||
Retained earnings |
160,258 | 121,160 | |||||
Accumulated other comprehensive loss |
(14,088 | ) | (10,898 | ) | |||
Total stockholders' equity |
311,769 | 272,066 | |||||
TOTAL LIABILITIES AND EQUITY |
$ | 904,599 | $ | 906,920 | |||
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
4
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
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Common Stock | Treasury Stock | |
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Accumulated Other Comprehensive Loss |
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Total Stockholders' Equity |
Additional Paid-in Capital |
Retained Earnings |
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Amount | Shares | Amount | Shares | |||||||||||||||||||||
Balance as of December 31, 2012 |
$ | 272,066 | $ | 586 | 58,553,265 | $ | (20,913 | ) | 1,697,360 | $ | 182,131 | $ | 121,160 | $ | (10,898 | ) | |||||||||
Net income attributable to common stockholders |
45,574 | | | | | | 45,574 | | |||||||||||||||||
Other comprehensive loss |
(3,190 | ) | | | | | | | (3,190 | ) | |||||||||||||||
Non-cash compensation expense |
5,144 | | | | | 5,144 | | | |||||||||||||||||
Issuance of common stock upon exercise of stock options |
377 | | 27,249 | | | 377 | | | |||||||||||||||||
Issuance of common stock upon vesting of restricted stock units, net of withholding taxes |
(4,472 | ) | 4 | 469,476 | | | (4,476 | ) | | | |||||||||||||||
Change in excess tax benefits from stock-based awards |
2,594 | | | | | 2,594 | | | |||||||||||||||||
Deferred stock compensation expense |
(20 | ) | | | | | (20 | ) | | | |||||||||||||||
Dividends declared on common stock |
(6,304 | ) | | | | | 172 | (6,476 | ) | | |||||||||||||||
Balance as of June 30, 2013 |
$ | 311,769 | $ | 590 | 59,049,990 | $ | (20,913 | ) | 1,697,360 | $ | 185,922 | $ | 160,258 | $ | (14,088 | ) | |||||||||
The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.
5
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
Six Months Ended June 30, |
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2013 | 2012 | |||||
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(In thousands) |
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Cash flows from operating activities: |
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Net income |
$ | 45,580 | $ | 25,280 | |||
Adjustments to reconcile net income to net cash provided by operating activities: |
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Amortization expense of intangibles |
3,908 | 14,332 | |||||
Amortization of debt issuance costs |
391 | 816 | |||||
Depreciation expense |
7,360 | 6,528 | |||||
Accretion of original issue discount |
| 1,355 | |||||
Non-cash compensation expense |
5,144 | 6,169 | |||||
Non-cash interest expense |
170 | 221 | |||||
Non-cash interest income |
| (362 | ) | ||||
Deferred income taxes |
(1,427 | ) | (716 | ) | |||
Excess tax benefits from stock-based awards |
(2,598 | ) | (2,233 | ) | |||
Loss (gain) on disposal of property and equipment |
163 | (256 | ) | ||||
Loss on extinguishment of debt |
| 602 | |||||
Change in fair value of contingent consideration |
337 | | |||||
Changes in operating assets and liabilities: |
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Accounts receivable |
(13,225 | ) | (11,975 | ) | |||
Prepaid expenses and other current assets |
5,256 | 2,419 | |||||
Prepaid income taxes and income taxes payable |
4,153 | (6,759 | ) | ||||
Accounts payable and other current liabilities |
(226 | ) | 1,221 | ||||
Deferred revenue |
5,146 | 12,221 | |||||
Other, net |
1,127 | 1,335 | |||||
Net cash provided by operating activities |
61,259 | 50,198 | |||||
Cash flows from investing activities: |
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Acquisition, net of cash acquired |
| (39,963 | ) | ||||
Capital expenditures |
(6,592 | ) | (7,318 | ) | |||
Investment in financing receivables |
| (9,480 | ) | ||||
Payments received on financing receivables |
9,876 | 2,873 | |||||
Proceeds from disposal of property and equipment |
7 | 230 | |||||
Net cash provided by (used in) investing activities |
3,291 | (53,658 | ) | ||||
Cash flows from financing activities: |
|||||||
Principal payments on term loan |
| (56,000 | ) | ||||
Payments on revolving credit facility |
(45,000 | ) | | ||||
Payments of debt issuance costs |
| (3,785 | ) | ||||
Dividend payments |
(6,304 | ) | (11,309 | ) | |||
Withholding taxes on vesting of restricted stock units |
(4,466 | ) | (3,615 | ) | |||
Proceeds from the exercise of stock options |
377 | 386 | |||||
Excess tax benefits from stock-based awards |
2,598 | 2,233 | |||||
Net cash used in financing activities |
(52,795 | ) | (72,090 | ) | |||
Effect of exchange rate changes on cash and cash equivalents |
(3,918 | ) | 1,168 | ||||
Net increase (decrease) in cash and cash equivalents |
7,837 | (74,382 | ) | ||||
Cash and cash equivalents at beginning of period |
101,162 | 195,517 | |||||
Cash and cash equivalents at end of period |
$ | 108,999 | $ | 121,135 | |||
Supplemental disclosures of cash flow information: |
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Cash paid during the period for: |
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Interest, net of amounts capitalized |
$ | 2,819 | $ | 14,994 | |||
Income taxes, net of refunds |
$ | 25,872 | $ | 21,762 |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
6
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2013
(Unaudited)
NOTE 1ORGANIZATION AND BASIS OF PRESENTATION
Company Overview
Interval Leisure Group, Inc., or ILG, is a leading global provider of membership and leisure services to the vacation industry. ILG consists of two operating segments. Membership and Exchange offers leisure and travel-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 provides hotel, condominium resort, timeshare resort and homeowners association management, and rental services to both vacation property owners and vacationers.
On February 28, 2012, we acquired all of the equity of Vacation Resorts International, or VRI, a non-developer provider of resort and homeowners association management services to the shared ownership industry. VRI was consolidated into our financial statements as of the acquisition date with its assets and results of operations primarily included in our Management and Rental operating segment.
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 Trading Places International, or 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
The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of ILG's management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not indicative of the results that may be expected for a full year.
The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2012 Annual Report on Form 10-K.
Seasonality
Revenue at ILG is influenced by the seasonal nature of travel. The Membership and Exchange businesses recognize exchange and Getaway revenue based on confirmation of the vacation, with the first quarter generally experiencing higher revenue and the fourth quarter generally experiencing lower revenue. The Management and Rental businesses recognize rental revenue based on occupancy, with the first and third quarters generally generating higher revenue and the second and fourth quarters generally generating lower revenue. The timeshare and homeowners' association management part of this business does not experience significant seasonality.
7
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES
Our significant accounting policies were described in Note 2 to our audited consolidated financial statements included in our 2012 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the six months ended June 30, 2013.
Accounting Estimates
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 long-lived assets as well as goodwill and other intangible assets; purchase price allocations of business combinations; 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.
Earnings per Share
Basic earnings per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of restricted stock units ("RSUs") using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. The computations of diluted earnings per share available to common stockholders do not include approximately 0.9 million and 0.8 million stock options and RSUs for the three and six months ended June 30, 2013, respectively, and 0.9 million and 1.1 million stock options and RSUs for the three and six months ended June 30, 2012, respectively, as the effect of their inclusion would have been antidilutive to earnings per share.
In connection with the spin-off, stock options to purchase ILG common stock were granted to non-ILG employees for which there is no future compensation expense to be recognized by ILG. As of June 30, 2013 and 2012, 0.9 million of stock options remained outstanding.
8
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES (Continued)
The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows (in thousands):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
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2013 | 2012 | 2013 | 2012 | |||||||||
Basic weighted average shares of common stock outstanding |
57,315 | 56,540 | 57,121 | 56,315 | |||||||||
Net effect of common stock equivalents assumed to be vested related to RSUs |
475 | 765 | 486 | 668 | |||||||||
Net effect of common stock equivalents assumed to be exercised related to stock options held by non-employees |
5 | 16 | 8 | 15 | |||||||||
Diluted weighted average shares of common stock outstanding |
57,795 | 57,321 | 57,615 | 56,998 | |||||||||
Recent Accounting Pronouncements
With the exception of those discussed below, there are no recent accounting pronouncements or changes in accounting pronouncements since the recent accounting pronouncements described in our 2012 Annual Report on Form 10-K that are of significance, or potential significance, to ILG based on our current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement.
In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-10, "Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate, ("OIS")) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2013-10)"). ASU 2013-10 ratified the Task Force's consensus to allow the Fed Funds effective swap rate to serve as a benchmark interest rate in the United States, which was previously defined in ASC 815 as either (1) a rate on direct obligations of the U.S. Department of the Treasury (UST) or (2) the LIBOR swap rate. ASU 2013-10 does not add to the disclosure requirements in ASC 815-10-50; however, in order to comply with the required disclosures related to fair value in ASC 820 a separate process for determining the fair value hierarchy of derivatives when the OIS rate is an input may be required. The ASU is required to be applied prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013. We do not currently anticipate the adoption of this guidance, as of the effective date, will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements.
In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment ("CTA") upon Derecognition of Certain
9
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES (Continued)
Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2013-05"). ASU 2013-05 applies to the release of the CTA into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The ASU is effective for fiscal years beginning after December 15, 2013 (and interim periods within those fiscal years) and shall be applied prospectively, with early adoption permitted. We do not currently anticipate the adoption of this guidance will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements.
In February 2013, the FASB issued ASU 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date" ("ASU 2013-04"). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The ASU requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. The ASU is effective for fiscal years beginning after December 15, 2013 (and interim periods within those years), and shall be applied retrospectively, with early adoption permitted. We do not currently anticipate the adoption of this guidance will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements.
Adopted Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 adds new disclosure requirements for items reclassified out of accumulated other comprehensive income/loss ("AOCI"), including (1) disaggregating and separately presenting changes in AOCI balances by component and (2) presenting significant items reclassified out of AOCI either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. It does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2012 (and interim periods within those years), and shall be applied prospectively. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.
10
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 2SIGNIFICANT ACCOUNTING POLICIES (Continued)
In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities" ("ASU 2013-01"). ASU 2013-01 clarifies the offsetting disclosure requirements in ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"). Under ASU 2013-01, the disclosure requirements would apply to derivative instruments accounted for in accordance with ASC 815, "Derivatives and Hedging," including bifurcated embedded derivatives. The ASU is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. Retrospective application is required for all comparative periods presented. The adoption of ASU 2013-01 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.
In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements" ("ASU 2012-04"). ASU 2012-04 makes certain technical corrections, clarifications and conforming fair value amendments to the FASB Accounting Standard Codification (the "Codification") that affects various Codification topics. The amendments in this ASU are effective upon issuance, except for amendments that are subject to transition guidance, which will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.
In December 2011, the FASB issued ASU 2011-11 that creates new disclosure requirements about the nature of an entity's rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The ASU is designed to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards ("IFRS"). The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The adoption of ASU 2011-11 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.
Correction of an Immaterial Prior Period Item
During the current quarter, we identified an immaterial net understatement of membership revenue, related membership expenses, and income for the period commencing January 1, 2011 through March 31, 2013. In accordance with ASC 250, "Accounting Changes and Error Corrections," we assessed the materiality of the net understatement, both quantitatively and qualitatively, and concluded it is not material to any of our previously issued or current year financial statements. The out of period correction of this item resulted in the recognition of $4.1 million of membership revenue and $0.6 million of certain membership expenses in the three and six month periods ended June 30, 2013. Consequently, operating income and net income for the three and six months ended June 30, 2013 were increased by $3.5 million and $2.1 million, respectively, or $0.04 of diluted earnings per share.
NOTE 3GOODWILL AND OTHER INTANGIBLE ASSETS
Pursuant to FASB guidance as codified within ASC 350, "IntangiblesGoodwill and Other," goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date. ILG determined our Membership and Exchange and
11
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 3GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Management and Rental operating segments are individual reporting units which are also individual reportable segments of ILG pursuant to ASC 280, Segment Reporting ("ASC 280"). ILG tests goodwill and other indefinite-lived intangible assets for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Goodwill is tested for impairment based on either a qualitative assessment or a two-step impairment test, as more fully described in Note 2 of our 2012 Annual Report on Form 10-K. When performing the two-step impairment test, if the carrying amount of a reporting unit's goodwill exceeds its implied fair value, an impairment loss equal to the excess is recorded.
As of October 1, 2012, we reviewed the carrying value 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 that 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 exceeded its carrying value and, therefore, a two-step impairment test was not necessary. As of June 30, 2013, we did not identify any triggering events which required an interim impairment test subsequent to our annual impairment test on October 1, 2012.
The balance of goodwill and other intangible assets, net is as follows (in thousands):
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Goodwill |
$ | 505,774 | $ | 505,774 | |||
Intangible assets with indefinite lives |
40,916 | 40,916 | |||||
Intangible assets with definite lives, net |
53,854 | 57,762 | |||||
Total goodwill and other intangible assets, net |
$ | 600,544 | $ | 604,452 | |||
There were no changes in the carrying amount of goodwill for the six months ended June 30, 2013. Goodwill related to the Membership and Exchange and Management and Rental reportable segments (each a reporting unit) was $483.5 million and $22.3 million, respectively, as of June 30, 2013 and December 31, 2012.
12
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 3GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)
Other Intangible Assets
Intangible assets with indefinite lives relate principally to trade names and trademarks. At June 30, 2013, intangible assets with definite lives relate to the following (in thousands):
|
Cost | Accumulated Amortization |
Net | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Customer relationships |
$ | 129,500 | $ | (129,500 | ) | $ | | |||
Purchase agreements |
75,879 | (74,729 | ) | 1,150 | ||||||
Resort management contracts |
72,666 | (24,188 | ) | 48,478 | ||||||
Technology |
25,076 | (25,063 | ) | 13 | ||||||
Other |
17,826 | (13,613 | ) | 4,213 | ||||||
Total |
$ | 320,947 | $ | (267,093 | ) | $ | 53,854 | |||
At December 31, 2012, intangible assets with definite lives relate to the following (in thousands):
|
Cost | Accumulated Amortization |
Net | |||||||
---|---|---|---|---|---|---|---|---|---|---|
Customer relationships |
$ | 129,500 | $ | (129,500 | ) | $ | | |||
Purchase agreements |
75,879 | (74,491 | ) | 1,388 | ||||||
Resort management contracts |
72,666 | (21,225 | ) | 51,441 | ||||||
Technology |
25,076 | (24,988 | ) | 88 | ||||||
Other |
17,826 | (12,981 | ) | 4,845 | ||||||
Total |
$ | 320,947 | $ | (263,185 | ) | $ | 57,762 | |||
Amortization of intangible assets with definite lives is primarily computed on a straight-line basis. Total amortization expense for intangible assets with definite lives was $1.9 million and $7.3 million for the three months ended June 30, 2013 and 2012, respectively, and $3.9 million and $14.3 million for the six months ended June 30, 2013 and 2012, respectively. Based on June 30, 2013 balances, amortization expense for the next five years and thereafter is estimated to be as follows (in thousands):
Twelve month period ending June 30,
|
|
|||
---|---|---|---|---|
2014 |
$ | 7,630 | ||
2015 |
7,467 | |||
2016 |
6,767 | |||
2017 |
6,232 | |||
2018 |
5,644 | |||
2019 and thereafter |
20,114 | |||
|
$ | 53,854 | ||
13
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 4PROPERTY AND EQUIPMENT
Property and equipment, net is as follows (in thousands):
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Computer equipment |
$ | 19,524 | $ | 18,269 | |||
Capitalized software |
82,261 | 78,036 | |||||
Land, buildings and leasehold improvements |
23,948 | 23,781 | |||||
Furniture and other equipment |
13,294 | 12,419 | |||||
Projects in progress |
5,589 | 6,372 | |||||
|
144,616 | 138,877 | |||||
Less: accumulated depreciation and amortization |
(92,312 | ) | (85,529 | ) | |||
Total property and equipment, net |
$ | 52,304 | $ | 53,348 | |||
NOTE 5LONG-TERM DEBT
Long-term debt is as follows (in thousands):
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Revolving credit facility (interest rate of 1.95% at June 30, 2013 and 1.97% at December 31, 2012) |
$ | 215,000 | $ | 260,000 | |||
Total long-term debt |
$ | 215,000 | $ | 260,000 | |||
Credit Facility
On June 21, 2012, we entered into an amended and restated credit agreement (the "Amended Credit Agreement") which, among other things (1) provides for a $500 million revolving credit facility, (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 our consolidated leverage ratio, and (4) may be increased to up to $700 million, subject to certain conditions. As of June 30, 2013, there was $215.0 million outstanding on the revolving credit facility. 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 our consolidated leverage ratio. As of June 30, 2013, 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% per annum based on our consolidated leverage ratio and as of June 30, 2013, the commitment fee was 0.275%.
Pursuant to the Amended Credit Agreement, all obligations under the revolving credit facility are unconditionally guaranteed by ILG and certain of its subsidiaries. Borrowings are further secured by
14
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 5LONG-TERM DEBT (Continued)
(1) 100% of the voting equity securities of ILG's U.S. subsidiaries and 65% of the equity in our first-tier foreign subsidiaries and (2) substantially all of our domestic tangible and intangible property.
Restrictions and Covenants
The Amended Credit Agreement has various financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness, 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 Amended Credit Agreement 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 June 30, 2013, 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 1.16 and 17.27, respectively.
Debt Issuance Costs
In connection with entering into the Amended Credit Agreement, we incurred $3.9 million of lender and third-party debt issuance costs. As of June 30, 2013 and December 31, 2012, total unamortized debt issuance costs on outstanding debt were $3.1 million, net of $0.8 million of accumulated amortization, and $3.5 million, net of $0.4 million of accumulated amortization, respectively, which were included in "Other non-current assets" in our consolidated balance sheets. Debt issuance costs are amortized to "Interest expense" on a straight-line basis for our Amended Credit Agreement.
NOTE 6FAIR VALUE MEASUREMENTS
In accordance with ASC Topic 820, "Fair Value Measurement," ("ASC 820") the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between unrelated knowledgeable and willing parties. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the
15
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 6FAIR VALUE MEASUREMENTS (Continued)
liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:
Level 1Observable inputs that reflect quoted prices in active markets |
Level 2Inputs other than quoted prices in active markets that are either directly or indirectly observable |
Level 3Unobservable inputs in which little or no market data exists, therefore requiring the company to develop its own assumptions |
As part of the acquisition of TPI in November 2010, we are obligated to pay contingent consideration in an amount ranging from zero up to a total of $5.0 million to TPI's former owners during the three year period subsequent to the acquisition should TPI meet certain earnings targets. In our determination of the fair value of this contingent consideration, we utilize a probability-weighted income approach, which includes certain significant inputs not observable in the market, such as a discount rate of 18.5% as well as actual and estimated probability-weighted cash flows pertaining to the periods subject to the contingent consideration. We believe these inputs represent Level 3 measurements within the fair value hierarchy.
As of June 30, 2013, the fair value of the remaining contingent consideration was $1.7 million, an increase of $0.5 million from December 31, 2012, of which $0.3 million is due to revisions to the estimated earnings used in our calculation of the fair value of the contingent consideration and $0.2 million is due to the accretion of interest. The revision to estimated earnings and the accretion of interest have been reflected in "General and administrative expense" and "Interest expense", respectively, in our consolidated statements of income. The total contingent consideration of $1.7 million is included in "Accrued expenses and other current liabilities" in our consolidated balance sheet as of June 30, 2013.
As a measure of sensitivity, a change of 10% to all of the aforementioned Level 3 inputs would have resulted in a change to the estimated contingent consideration liability pertaining to this acquisition of between $0.9 million (favorable) or $0.1 million (unfavorable) as of June 30, 2013. There have been no transfers of inputs used in measuring fair value between the three tiers within the fair value hierarchy since December 31, 2012.
Fair Value of Financial Instruments
The estimated fair value of financial instruments below has been determined using available market information and appropriate valuation methodologies, as applicable. There have been no changes in the methods and significant assumptions used to estimate the fair value of financial
16
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 6FAIR VALUE MEASUREMENTS (Continued)
instruments during the three and six months ended June 30, 2013. Our financial instruments include guarantees, letters of credit and surety bonds.
|
June 30, 2013 | December 31, 2012 | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
Carrying Amount |
Fair Value | Carrying Amount |
Fair Value | |||||||||
|
(In thousands) |
||||||||||||
Cash and cash equivalents |
$ | 108,999 | $ | 108,999 | $ | 101,162 | $ | 101,162 | |||||
Restricted cash and cash equivalents |
$ | 9,450 | $ | 9,450 | $ | 7,348 | $ | 7,348 | |||||
Financing receivable |
| | $ | 9,876 | $ | 9,876 | |||||||
Total debt |
$ | (215,000 | ) | $ | (215,000 | ) | $ | (260,000 | ) | $ | (260,000 | ) | |
Guarantees, surety bonds and letters of credit |
N/A | $ | (32,461 | ) | N/A | $ | (36,747 | ) |
The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reflected in the accompanying consolidated balance sheets approximate fair value as they are redeemable at par upon notice or maintained with various high-quality financial institutions and have original maturities of three months or less. Under the fair value hierarchy established in ASC 820, cash and cash equivalents and restricted cash and cash equivalents are stated at fair value based on quoted prices in active markets for identical assets (Level 1). As of December 31, 2012, the financing receivable was presented in our consolidated balance sheets within "Other non-current assets" and pertained to a secured real estate related loan issued to a third party in 2012 with an original maturity in 2015. During the first quarter 2013, the loan was repaid in full at 100% of the original principal amount plus accrued interest. The carrying value at December 31, 2012 of this financing receivable approximated fair value through inputs inherent to the originating value of the loan, such as interest rates and ongoing credit risk accounted for through non-recurring adjustments for estimated credit losses as necessary (Level 2). The stated interest rate on this loan was comparable to market rate. Interest was recognized within our "Interest income" line item in our consolidated statements of income for the six months ended June 30, 2013 and 2012.
The carrying value of the outstanding balance under our $500 million revolving credit facility approximates fair value as of June 30, 2013 through inputs inherent to the debt such as variable interest rates and credit risk (Level 2).
The guarantees, surety bonds, and letters of credit represent liabilities that are carried on our balance sheet only when a future related contingent event becomes probable and reasonably estimable. These commitments are in place to facilitate our commercial operations. The related fair value of these liabilities is estimated at the minimum expected cash flows contractually required to satisfy the related liabilities in the future upon occurrence of the applicable contingent events (Level 2).
NOTE 7STOCKHOLDERS' EQUITY
ILG has 300 million authorized shares of common stock, par value of $.01 per share. At June 30, 2013, there were 59.0 million shares of ILG common stock issued, of which 57.4 million are outstanding with 1.7 million shares held as treasury stock. At December 31, 2012, there were
17
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 7STOCKHOLDERS' EQUITY (Continued)
58.6 million shares of ILG common stock issued, of which 56.9 million were outstanding with 1.7 million shares held as treasury stock.
ILG has 25 million authorized shares of preferred stock, par value $.01 per share, none of which are issued or outstanding as of June 30, 2013 and December 31, 2012. The Board of Directors has the authority to issue the preferred stock in one or more series and to establish the rights, preferences, and dividends.
Dividend Declared
In May 2013, our Board of Directors declared a quarterly dividend payment of $0.11 per share to shareholders of record on June 4, 2013. On June 18, 2013, a cash dividend of $6.3 million was paid.
In August 2013, our Board of Directors declared a $0.11 per share dividend payable September 18, 2013 to shareholders of record on September 4, 2013.
Stockholder Rights Plan
In June 2009, ILG's Board of Directors approved the creation of a Series A Junior Participating Preferred Stock, adopted a stockholders rights plan and declared a dividend of one right for each outstanding share of common stock held by our stockholders of record as of the close of business on June 22, 2009. The rights attach to any additional shares of common stock issued after June 22, 2009. These rights, which trade with the shares of our common stock, currently are not exercisable. Under the rights plan, these rights will be exercisable if a person or group acquires or commences a tender or exchange offer for 15% or more of our common stock. The rights plan provides certain exceptions for acquisitions by Liberty Interactive Corporation (formerly known as Liberty Media Corporation) in accordance with an agreement entered into with ILG in connection with its spin-off from IAC/InterActiveCorp (IAC). If the rights become exercisable, each right will permit its holder, other than the "acquiring person," to purchase from us shares of common stock at a 50% discount to the then prevailing market price. As a result, the rights will cause substantial dilution to a person or group that becomes an "acquiring person" on terms not approved by our Board of Directors.
Share Repurchase Program
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. Acquired shares of our common stock are held as treasury shares carried at cost on our consolidated financial statements. Common stock repurchases may be conducted in the open market or in privately negotiated transactions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors. This program may be modified, suspended or terminated by us at any time without notice.
There were no repurchases of common stock during the year ended December 31, 2012 and the six months ended June 30, 2013. As of June 30, 2013, the remaining availability for future repurchases of our common stock was $4.1 million.
18
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 7STOCKHOLDERS' EQUITY (Continued)
Accumulated Other Comprehensive Loss
Pursuant to final guidance issued by the FASB in February of 2013, entities are required to disclose additional information about reclassification adjustments within accumulated other comprehensive income/loss, referred to as AOCL for ILG, including (1) changes in AOCL balances by component and (2) significant items reclassified out of AOCL in the period. For the six months ended June 30, 2013, there were no significant items reclassified out of AOCL, and the change in AOCL pertains to current period foreign currency translation adjustments as disclosed in our accompanying consolidated statements of comprehensive income.
NOTE 8BENEFIT PLANS
Under a retirement savings plan sponsored by ILG, qualified under Section 401(k) of the Internal Revenue Code, participating employees may contribute up to 50.0% of their pre-tax earnings, but not more than statutory limits. ILG provides a discretionary match under the ILG plan of fifty cents for each dollar a participant contributed into the plan with a maximum contribution of 3% of a participant's eligible earnings, subject to Internal Revenue Service ("IRS") restrictions. Matching contributions for the ILG plan were approximately $0.4 million and $0.8 million for the three and six months ended June 30, 2013, respectively, and approximately $0.4 million and $0.7 million for the three and six months ended June 30, 2012, respectively. Matching contributions were invested in the same manner as each participant's voluntary contributions in the investment options provided under the plan.
Effective August 20, 2008, a deferred compensation plan (the "Director Plan") was established to provide non-employee directors of ILG an option to defer director fees on a tax-deferred basis. Participants in the Director Plan are allowed to defer a portion or all of their compensation and are 100% vested in their respective deferrals and earnings. With respect to director fees earned for services performed after the date of such election, participants may choose from receiving cash or stock at the end of the deferral period. ILG has reserved 100,000 shares of common stock for issuance pursuant to this plan, of which 39,525 share units were outstanding at June 30, 2013. ILG does not provide matching or discretionary contributions to participants in the Director Plan. Any deferred compensation elected to be received in stock is included in diluted earnings per share.
NOTE 9STOCK-BASED COMPENSATION
On May 21, 2013, ILG adopted the Interval Leisure Group, Inc. 2013 Stock and Incentive Plan to replace the ILG 2008 Stock and Annual Incentive Plan. Both plans provide for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards. RSUs are awards in the form of phantom shares or units, denominated in a hypothetical equivalent number of shares of ILG common stock and with the value of each award equal to the fair value of ILG common stock at the date of grant. Each RSU is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. 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). In addition, certain RSUs are subject to attaining specific performance criteria.
19
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 9STOCK-BASED COMPENSATION (Continued)
ILG recognizes non-cash compensation expense for all RSUs held by ILG's employees. For RSUs to be settled in stock, the accounting charge is measured at the grant date as the fair value of ILG common stock and expensed as non-cash compensation over the vesting term using the straight-line basis for service awards and the accelerated basis for performance-based awards with graded vesting. Certain cliff vesting awards contain performance criteria which are tied to anticipated future results of operations in determining the fair value of the award, while other cliff vesting awards with performance criteria are tied to the achievement of certain market conditions. This value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line recognition method. 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.
RSUs are not issued or outstanding until vested. In relation to our quarterly dividend, unvested RSUs are credited with dividend equivalents, in the form of additional RSUs, when dividends are paid on our shares of common stock. Such additional RSUs are forfeitable and will have the same vesting dates and will vest under the same terms as the RSUs in respect of which such additional RSUs are credited. Given such dividend equivalents are forfeitable, we do not consider them to be participating securities and, consequently, they are not subject to the two-class method of determining earnings per share.
Under the ILG 2013 Stock and Incentive Compensation Plan, the maximum aggregate number of shares of common stock reserved for issuance as of adoption is 4.1 million shares, less one share for every share granted under any prior plan after December 31, 2012. As of June 30, 2013, ILG has 3.4 million shares available for future issuance under the 2013 Stock and Incentive Compensation Plan.
During the first quarter of 2013 and 2012, the Compensation Committee granted approximately 657,000 and 586,000 RSUs, respectively, vesting over three to four years, to certain officers and employees of ILG and its subsidiaries. Of these RSUs granted in 2013 and 2012, approximately 300,000 and 130,000 cliff vest in three years and approximately 58,000 and 73,000 of these RSUs, respectively, are subject to performance criteria that could result between 0% and 200% of these awards being earned either based on defined EBITDA or relative total shareholder return targets over the respective performance period, as specified in the award document.
For the 2013 and 2012 RSUs subject to relative total shareholder return performance criteria, the number of RSUs that may ultimately be awarded depends on whether the market condition is achieved. We used a Monte Carlo simulation analysis to estimate a $29.61 for 2013 and $17.34 for 2012 per unit grant date fair value for these performance based RSUs. This analysis estimates the total shareholder return ranking of ILG as of the grant date relative to two peer groups, approved by the Compensation Committee, over the remaining performance period. The expected volatility of ILG's common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.
20
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 9STOCK-BASED COMPENSATION (Continued)
Non-cash compensation expense related to RSUs for the three months ended June 30, 2013 and 2012 was $2.6 million and $3.1 million, respectively. For the six months ended June 30, 2013 and 2012, non-cash compensation expense related to RSUs was $5.1 million and $6.2 million, respectively. At June 30, 2013, there was approximately $19.8 million of unrecognized compensation cost, net of estimated forfeitures, related to RSUs, which is currently expected to be recognized over a weighted average period of approximately 2.1 years.
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 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 at least equal to the portion of the grant-date value of the award tranche that is actually vested at that date.
Non-cash stock-based compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of income for the three and six months ended June 30, 2013 and 2012 (in thousands):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Cost of sales |
$ | 164 | $ | 151 | $ | 358 | $ | 316 | |||||
Selling and marketing expense |
292 | 252 | 614 | 529 | |||||||||
General and administrative expense |
2,131 | 2,689 | 4,172 | 5,324 | |||||||||
Non-cash compensation expense |
$ | 2,587 | $ | 3,092 | $ | 5,144 | $ | 6,169 | |||||
The following table summarizes RSU activity during the six months ended June 30, 2013:
|
Shares | Weighted-Average Grant Date Fair Value |
|||||
---|---|---|---|---|---|---|---|
|
(In thousands) |
|
|||||
Non-vested RSUs at January 1 |
1,569 | $ | 13.29 | ||||
Granted |
700 | 20.73 | |||||
Vested |
(687 | ) | 11.63 | ||||
Forfeited |
(13 | ) | 18.10 | ||||
Non-vested RSUs at June 30 |
1,569 | $ | 17.29 | ||||
In connection with the acquisition of Aston by ILG in 2007, a member of Aston's management purchased a noncontrolling interest in Aston and, additionally, was granted non-voting restricted common equity. This award was granted on May 31, 2007 and was initially measured at fair value, which was amortized over the vesting period. This award vests ratably over four and a half years, or earlier based upon the occurrence of certain prescribed events. These shares are subject to a put right
21
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 9STOCK-BASED COMPENSATION (Continued)
by the holder and a call right by ILG, which became exercisable for the first time in the first quarter of 2013 for a period of 60 days subsequent to the filing of our 2012 Annual Report on Form 10-K and is exercisable annually thereafter.
The value of these shares upon exercise of the put or call is equal to their fair market value, determined by negotiation or arbitration, reduced by the accreted value of the preferred interest that was taken by ILG upon the purchase of Aston. The initial value of the preferred interest was equal to the acquisition price of Aston. The preferred interest accretes at a 10% annual rate. Upon exercise of the put or call, the consideration payable can be denominated in ILG shares, cash or a combination thereof at ILG's option. An additional put right by the holder and call right by ILG would require, upon exercise, the purchase of these non-voting common shares by ILG immediately prior to a registered public offering by Aston, at the public offering price. As of June 30, 2013, the estimated redemption value of this redeemable interest is lower than the current carrying value on our consolidated balance sheet. Consequently, pursuant to the applicable accounting guidance, no adjustment to the balance of this noncontrolling interest was recorded for the six months ended June 30, 2013.
NOTE 10INCOME TAXES
ILG calculates its interim income tax provision in accordance with ASC 740, "Income Taxes." At the end of each interim period, ILG makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of a change in enacted tax laws or rates, tax status, or judgment on the realizability of a beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.
The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or ILG's tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.
A valuation allowance for deferred tax assets is provided when it is more likely than not that certain deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the history of taxable income in recent years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies to make this assessment.
22
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 10INCOME TAXES (Continued)
For the three and six months ended June 30, 2013, ILG recorded an income tax provision for continuing operations of $12.8 million and $28.6 million, respectively, which represents effective tax rates of 38.4% and 38.6% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. During the three and six months ended June 30, 2013, the effective tax rate increased due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions, partially offset by the U.S. tax consequences of foreign operations and the decrease during the first quarter of 2013 in unrecognized tax benefits associated with the expiration of the statute of limitations related to foreign taxes.
For the three and six months ended June 30, 2012, ILG recorded an income tax provision for continuing operations of $5.7 million and $14.3 million, respectively, which represents effective tax rates of 36.3% and 36.1% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. During the three and six months ended June 30, 2012, the effective tax rate decreased due to other income tax items, the most significant of which related to the tax impact of ILG's ability and intention to redeem the senior notes and the decrease during the first quarter of 2012 in unrecognized tax benefits associated with the expiration of the statute of limitations related to foreign taxes.
As of June 30, 2013 and December 31, 2012, ILG had unrecognized tax benefits of $1.6 million and $0.7 million, respectively, which if recognized, would favorably affect the effective tax rate. There were no material increases or decreases in unrecognized tax benefits for the three months ended June 30, 2013. During the six months ended June 30, 2013, the unrecognized tax benefits increased by a net amount of approximately $0.9 million during the first quarter of 2013 as a result of an increase of approximately $1.1 million related to state income tax items offset by approximately $0.2 million related to the decrease in unrecognized tax benefits as a result of the expiration of the statute of limitations related to foreign taxes. The increase of $1.1 million for state income tax items did not have an overall impact on the effective tax rate as it is entirely offset by a related state refund claim filed during the first quarter of 2013.
ILG recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for the three and six months ended June 30, 2013. During the six months ended June 30, 2013, interest and penalties decreased by approximately $0.2 million during the first quarter of 2013 as a result of the expiration of the statute of limitations related to foreign taxes. As of June 30, 2013, ILG had accrued $0.4 million for interest and penalties.
ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $1.3 million within twelve months of the current reporting date due primarily to binding technical advice expected to be issued by state taxing authorities on state income tax items and 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
23
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 10INCOME TAXES (Continued)
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.
The IRS has substantially completed its review of IAC's consolidated tax returns for the years ended December 31, 2001 through 2009, which includes our operations from September 24, 2002, our date of acquisition by IAC, until the spin-off in August 2008. The settlement has been submitted to the Joint Committee of Taxation for approval. The statute of limitations for the years 2001 through 2009 has been extended to June 30, 2014. Various IAC consolidated tax returns that include our operations, filed with state and local jurisdictions, are currently under examination, the most significant of which are California, New York and New York City for various tax years beginning with 2006. No other open tax years are currently under examination by the IRS or any state and local jurisdictions.
During 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%, 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. The change in the corporate tax rate initially negatively impacted 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.
NOTE 11SEGMENT INFORMATION
Segment Information
Pursuant to FASB guidance as codified in ASC 280, an operating segment is a component of a public entity (1) that engages in business activities that may earn revenues and incur expenses; (2) for which operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segments and assess its performance; and (3) for which discrete financial information is available. We also considered how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered. ILG consists of two operating segments which are also reportable segments. Membership and Exchange offers leisure and travel-related products and services to owners of vacation interests and others mostly through various membership programs, as well as related services to resort developer clients. Management and Rental provides hotel, condominium resort, timeshare resort and homeowners association management, and vacation rental services to both vacation property owners and vacationers.
24
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 11SEGMENT INFORMATION (Continued)
Information on reportable segments and reconciliation to consolidated operating income is as follows (in thousands):
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Membership and Exchange |
|||||||||||||
Revenue |
$ | 95,517 | $ | 89,726 | $ | 197,612 | $ | 190,633 | |||||
Cost of sales |
22,780 | 22,720 | 48,237 | 47,846 | |||||||||
Gross profit |
72,737 | 67,006 | 149,375 | 142,787 | |||||||||
Selling and marketing expense |
13,229 | 13,275 | 26,054 | 26,127 | |||||||||
General and administrative expense |
22,208 | 21,915 | 42,693 | 44,141 | |||||||||
Amortization expense of intangibles |
337 | 5,420 | 674 | 10,840 | |||||||||
Depreciation expense |
3,367 | 2,951 | 6,686 | 6,014 | |||||||||
Segment operating income |
$ | 33,596 | $ | 23,445 | $ | 73,268 | $ | 55,665 | |||||
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Management and Rental |
|||||||||||||
Management fee revenue |
$ | 14,172 | $ | 13,615 | $ | 31,617 | $ | 26,048 | |||||
Pass-through revenue |
15,294 | 15,327 | 30,635 | 28,726 | |||||||||
Total revenue |
29,466 | 28,942 | 62,252 | 54,774 | |||||||||
Cost of sales |
20,641 | 20,541 | 41,560 | 38,206 | |||||||||
Gross profit |
8,825 | 8,401 | 20,692 | 16,568 | |||||||||
Selling and marketing expense |
1,043 | 993 | 1,953 | 1,914 | |||||||||
General and administrative expense |
6,019 | 5,065 | 11,839 | 8,265 | |||||||||
Amortization expense of intangibles |
1,559 | 1,869 | 3,234 | 3,492 | |||||||||
Depreciation expense |
329 | 271 | 674 | 514 | |||||||||
Segment operating income (loss) |
$ | (125 | ) | $ | 203 | $ | 2,992 | $ | 2,383 | ||||
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Consolidated |
|||||||||||||
Revenue |
$ | 124,983 | $ | 118,668 | $ | 259,864 | $ | 245,407 | |||||
Cost of sales |
43,421 | 43,261 | 89,797 | 86,052 | |||||||||
Gross profit |
81,562 | 75,407 | 170,067 | 159,355 | |||||||||
Direct segment operating expenses |
48,091 | 51,759 | 93,807 | 101,307 | |||||||||
Operating income |
$ | 33,471 | $ | 23,648 | $ | 76,260 | $ | 58,048 | |||||
25
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 11SEGMENT INFORMATION (Continued)
Selected financial information by reporting segment is presented below (in thousands):
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Total Assets: |
|||||||
Membership and Exchange |
$ | 788,267 | $ | 789,451 | |||
Management and Rental |
116,332 | 117,469 | |||||
Total |
$ | 904,599 | $ | 906,920 | |||
Geographic Information
We conduct operations through offices in the U.S. and 16 other countries. For the six months ended June 30, 2013, revenue is sourced from over 100 countries worldwide. Other than the United States, revenue sourced from any individual country or geographic region did not exceed 10% of consolidated revenue for the three and six months ended June 30, 2013 and 2012.
Geographic information on revenue, based on sourcing, and long-lived assets, based on physical location, is presented in the table below (in thousands). Amounts in the proceeding table representing revenue sourced from the United States versus all other countries for the three and six months ended June 30, 2012 have been reclassified to conform to current period presentation.
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Revenue: |
|||||||||||||
United States |
$ | 103,127 | $ | 96,160 | $ | 212,470 | $ | 197,698 | |||||
All other countries(a) |
21,856 | 22,508 | 47,394 | 47,709 | |||||||||
Total |
$ | 124,983 | $ | 118,668 | $ | 259,864 | $ | 245,407 | |||||
|
June 30, 2013 |
December 31, 2012 |
|||||
---|---|---|---|---|---|---|---|
Long-lived assets (excluding goodwill and other intangible assets): |
|||||||
United States |
$ | 50,133 | $ | 51,059 | |||
All other countries |
2,171 | 2,289 | |||||
Total |
$ | 52,304 | $ | 53,348 | |||
26
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 12COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, ILG is a party to various legal proceedings. ILG establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. ILG does not establish reserves for identified legal matters when ILG believes that the likelihood of an unfavorable outcome is not probable. Although management currently believes that an unfavorable resolution of claims against ILG, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of ILG, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. ILG also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 10 for a discussion of income tax contingencies.
Other items, such as certain purchase commitments and guarantees are not recognized as liabilities in our consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. These funding commitments could potentially require our performance in the event of demands by third parties or contingent events. At June 30, 2013, guarantees, surety bonds and letters of credit totaled $32.5 million, with the highest annual amount of $13.8 million occurring in year one. The total includes maximum exposure under guarantees of $29.3 million, which primarily relates 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 management activities of Aston, 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 party. 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 its 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 June 30, 2013, future amounts are not expected to be significant, individually or in the aggregate.
The purchase obligations primarily relate to future guaranteed purchases of rental inventory, operational support services and membership fulfillment benefits. 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 June 30, 2013, amounts pending reimbursements are not significant.
European Union Value Added Tax Matter
In 2009, the European Court of Justice issued a judgment related to Value Added Tax ("VAT") in Europe against an unrelated party. The judgment affects companies who transact within the European Union ("EU"), specifically providers of vacation interest exchange services, and altered the manner in which the Membership and Exchange segment accounts for VAT on its revenues as well as to which EU country VAT is owed. As of June 30, 2013 and December 31, 2012, ILG had an accrual of $2.8 million and $4.5 million, respectively, representing the net exposure of any VAT reclaim refund receivable and accrued VAT liabilities related to this matter. The net change in the accrual from
27
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
JUNE 30, 2013
(Unaudited)
NOTE 12COMMITMENTS AND CONTINGENCIES (Continued)
December 31, 2012 primarily relates to a $1.1 million decrease due to the change in estimate primarily to update the periods for which the accrued VAT liabilities are due and to refine the VAT accrual calculation for certain other countries, $0.5 million in payments, as well as the effect of foreign currency remeasurements. The change in estimate resulted in favorable adjustments to our consolidated statements of income for the three and six months ended June 30, 2013. Because of the uncertainty surrounding the ultimate outcome and settlement of these VAT liabilities, it is reasonably possible that future costs to settle these VAT liabilities may range from $2.8 million up to approximately $4.1 million based on quarter-end exchange rates. ILG believes that the $2.8 million accrual at June 30, 2013 is our best estimate of probable future obligations for the settlement of these VAT liabilities. The difference between the probable and reasonably possible amounts is primarily attributable to the assessment of certain potential penalties.
NOTE 13SUBSEQUENT EVENT
In August 2013, Interval Leisure Group and its subsidiary, VRI Europe Limited, entered into a definitive agreement with CLC World Resorts and Hotels (CLC). VRI Europe Limited will purchase the European shared ownership management business of CLC, for approximately £56 million (or approximately $85.6 million) in cash (subject to adjustment for working capital, actual 2013 results and other specified items) and issuance to CLC of shares totaling 24.5% of VRI Europe Limited. The closing is expected to take place on or prior to November 1, 2013 subject to satisfaction of the following conditions and regulatory requirements: (1) the transfer of certain licenses in Europe, (2) the warranties and covenants of the sellers have not been breached or other occurrence, in each case that could have a material adverse effect on the business and (3) other customary closing conditions. In connection with this arrangement, ILG will issue a convertible secured loan for approximately $14.4 million to CLC which matures in five years with interest payable monthly.
28
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement Regarding Forward-Looking Information
This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "intends," "plans" and "believes," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.
Actual results could differ materially from those contained in the forward-looking statements included in this quarterly report for a variety of reasons, including, among others: adverse trends in economic conditions generally or in the vacation ownership, vacation rental and travel industries; adverse changes to, or interruptions in, relationships with third parties; lack of available financing for, or insolvency 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 our 2012 Annual Report on Form 10-K and in Part II of this report. In light of these risks and uncertainties, the forward looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward looking statements, which only reflect the views of our management as of the date of this report. Except as required by applicable law, we do not undertake to update these forward-looking statements.
The following Management Discussion and Analysis provides a narrative of the results of operations and financial condition of ILG for the three and six months ended June 30, 2013. This section should be read in conjunction with the consolidated financial statements and accompanying notes included in this report as well as our 2012 Annual Report on Form 10-K, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). This discussion includes the following sections:
29
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. Membership and Exchange offers leisure and travel-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 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 June 30, 2013, Interval's primary operation is the Interval Network, a quality global vacation ownership membership exchange network with:
Interval typically enters into multi-year contracts with developers of vacation ownership resorts, pursuant to which the resort developers agree to enroll all purchasers of vacation interests at the applicable resort as members of an Interval exchange program. In return, Interval provides enrolled purchasers with the ability to exchange the use and occupancy of their vacation interest at the home resort (generally for a period of one week) for the right to occupy accommodations at a different resort participating in an Interval exchange network. Through Interval's Getaways, members may rent resort accommodations for a fee without relinquishing the use of their vacation interest. In addition, Interval offers sales, marketing and operational support, consulting and back-office services, including reservation servicing, to certain resort developers participating in the Interval Network, upon their request and for additional consideration.
The Membership and Exchange segment earns most of its revenue from (i) fees paid for membership in the Interval Network and (ii) Interval Network transactional and service fees paid primarily for exchanges, Getaways, reservation servicing, and related transactions collectively referred to as "transaction revenue."
Management and Rental Services
We also provide management and rental services to hotels as well as condominium and timeshare resorts and their homeowners associations through Aston, Vacation Resorts International, or VRI, and Trading Places International, or 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, a non-developer provider of resort and homeowners association management services to the shared ownership industry.
30
As of June 30, 2013, 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 decreased in the three and six months ended June 30, 2013 by 2.9% and 0.7%, respectively, compared to the same periods in 2012. As a percentage of our total revenue, international revenue decreased in the three and six months ended June 30, 2013 to 17.5% and 18.2%, respectively, from 19.0% and 19.4% compared to the same periods in 2012. The decrease in international revenue as a percentage of total revenue is largely attributable to the February 2012 acquisition of VRI which operates entirely in the United States.
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 2013 results to-date continue to be negatively affected by a shift in the percentage mix of our membership base from traditional, direct renewal members to corporate members who are renewed directly by the respective developer and tend to have a lower propensity to transact with us. Membership mix as of June 30, 2013 included 60.7% traditional and 39.3% corporate members, compared to 62.9% and 37.1%, respectively, as of June 30, 2012. 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 4.1% and 5.6% for the three and six months ended June 30, 2013, respectively, compared to the same periods in the prior year. The increase in visitors correlates with an overall increase of 9.5% and 12.0% in revenue per available room ("RevPAR") in Hawaii for the three and six months ended June 30, 2013 compared to the same periods in 2012. The increases in RevPAR in Hawaii were driven by higher average daily rates.
31
As of the latest forecast (May 2013), the Hawaii Department of Business, Economic Development and Tourism forecasts increases of 4.3% in visitors to Hawaii and 5.6% in visitor expenditures in 2013 over 2012.
Business Acquisition
On February 28, 2012, we acquired VRI, a non-developer provider of resort and homeowners association management services to the shared ownership industry. 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 for the six month period ending June 30, 2013 was affected as further discussed in our Results of Operations section.
Correction of an Immaterial Prior Period Item
During the current quarter, we identified an immaterial net understatement of membership revenue, related membership expenses, and income for the period commencing January 1, 2011 through March 31, 2013. In accordance with ASC 250, "Accounting Changes and Error Corrections," we assessed the materiality of the net understatement, both quantitatively and qualitatively, and concluded it is not material to any of our previously issued or current year financial statements. The out of period correction of this item resulted in the recognition of $4.1 million of membership revenue and $0.6 million of certain membership expenses in the three and six month periods ended June 30, 2013. Consequently, operating income and net income for the three and six months ended June 30, 2013 was increased by $3.5 million and $2.1 million, respectively, or $0.04 of diluted earnings per share.
Outlook
The vacation ownership industry remains 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. Additionally, we anticipate continued margin compression and increased competition in our membership and exchange business.
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 the cost of a Hawaiian vacation may negatively impact visitor arrivals and temper growth.
In August 2013, Interval Leisure Group and its subsidiary, VRI Europe Limited, entered into a definitive agreement with CLC World Resorts and Hotels (CLC). VRI Europe Limited will purchase the European shared ownership management business of CLC, for approximately £56 million (or approximately $85.6 million) in cash (subject to adjustment for working capital, actual 2013 results and other specified items) and issuance to CLC of shares totaling 24.5% of VRI Europe Limited. The closing is expected to take place on or prior to November 1, 2013 subject to satisfaction of the following conditions and regulatory requirements: (1) the transfer of certain licenses in Europe, (2) the warranties and covenants of the sellers have not been breached or other occurrence, in each case that could have a material adverse effect on the business and (3) other customary closing conditions. In connection with this arrangement, ILG will issue a convertible secured loan for approximately $14.4 million to CLC which matures in five years with interest payable monthly. Subsequent to the closing of this transaction, we expect the year-over-year comparability of the results of our operations to be affected.
32
RESULTS OF OPERATIONS
Revenue
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
|
Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
||||||||||
Transaction revenue |
$ | 50,174 | 2.2 | % | $ | 49,082 | ||||
Membership fee revenue |
36,819 | 13.2 | % | 32,535 | ||||||
Ancillary member revenue |
1,811 | 3.8 | % | 1,744 | ||||||
Total member revenue |
88,804 | 6.5 | % | 83,361 | ||||||
Other revenue |
6,713 | 5.5 | % | 6,365 | ||||||
Total Membership and Exchange revenue |
95,517 | 6.5 | % | 89,726 | ||||||
Management and Rental |
||||||||||
Management fee and rental revenue |
14,172 | 4.1 | % | 13,615 | ||||||
Pass-through revenue |
15,294 | (0.2 | )% | 15,327 | ||||||
Total Management and Rental revenue |
29,466 | 1.8 | % | 28,942 | ||||||
Total revenue |
$ | 124,983 | 5.3 | % | $ | 118,668 | ||||
Revenue for the three months ended June 30, 2013 increased $6.3 million, or 5.3%, from the comparable period in 2012. Membership and Exchange segment revenue increased $5.8 million, or 6.5%, and Management and Rental segment revenue increased $0.5 million, or 1.8%, in the quarter compared to 2012.
Membership and Exchange
The $5.8 million increase in Membership and Exchange segment revenue during the second quarter of 2013 includes a correction of an immaterial prior period net understatement amounting to $4.1 million (the "prior period item") as discussed in Note 2 of the accompanying notes to our consolidated financial statements.
Excluding the impact of the prior period item, Membership and Exchange revenue increased $1.7 million, or 1.9%, in the second quarter of 2013 compared to 2012. This increase is primarily driven by an increase in transaction revenue of $1.1 million, as well as an increase in other revenue of $0.3 million. The rise in transaction revenue is mainly related to higher revenue from exchanges and Getaways of $0.7 million and increases in other transaction related fees and reservation servicing revenue of $0.3 million and $0.1 million, respectively. Higher transaction revenue from exchanges and Getaways was due to a 1.7% increase in average fee per transaction, partially offset by slight decreases in exchange and Getaway transaction volumes. Lower transaction volume is related to the continued shift in percentage mix of the membership base from traditional to corporate, which reduced transaction propensity. Other revenue consists primarily of revenue generated from non-Interval Network activities and other membership programs.
Total active members in the Interval Network at June 30, 2013 decreased 2.1% to approximately 1.82 million members as compared to approximately 1.86 million members at June 30, 2012. Despite the decrease in total active members, greater adoption of Platinum and Club Interval products bolstered year-over-year membership fee revenue during the period. Overall Interval Network average revenue per member was $48.59 for the second quarter of 2013 which was 7.7% higher over the prior
33
year. Excluding the impact of the prior period item, average revenue per member in the current quarter increased 2.8% over the prior year.
Management and Rental
The increase of $0.6 million, or 4.1%, in management fee and rental revenue was primarily driven by higher fee income earned from managed hotel and condominium resort properties at Aston of $0.4 million, or 6.5%, in the second quarter of 2013 due to a 9.9% increase in RevPAR to $129.17 driven by an 11.2% higher average daily rate, partly offset by a 1.2% drop in occupancy rates during the quarter compared to prior year.
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. Pass-through revenue for the second quarter of 2013 was consistent with the prior year.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
|
Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
||||||||||
Transaction revenue |
$ | 111,322 | 1.0 | % | $ | 110,233 | ||||
Membership fee revenue |
70,183 | 7.8 | % | 65,134 | ||||||
Ancillary member revenue |
3,736 | NM | 3,735 | |||||||
Total member revenue |
185,241 | 3.4 | % | 179,102 | ||||||
Other revenue |
12,371 | 7.3 | % | 11,531 | ||||||
Total Membership and Exchange revenue |
197,612 | 3.7 | % | 190,633 | ||||||
Management and Rental |
||||||||||
Management fee and rental revenue |
31,617 | 21.4 | % | 26,048 | ||||||
Pass-through revenue |
30,635 | 6.6 | % | 28,726 | ||||||
Total Management and Rental revenue |
62,252 | 13.7 | % | 54,774 | ||||||
Total revenue |
$ | 259,864 | 5.9 | % | $ | 245,407 | ||||
Revenue for the six months ended June 30, 2013 increased $14.5 million, or 5.9%, from the comparable period in 2012. Membership and Exchange segment revenue increased $7.0 million, or 3.7%, in the period compared to the prior year and Management and Rental segment revenue increased $7.5 million, or 13.7%, from 2012.
Membership and Exchange
Membership and Exchange revenue increased $7.0 million, or 3.7%, in first six months of 2013 compared to 2012 which includes $4.1 million relating to the prior period item. Excluding the impact of the prior period item, Membership and Exchange revenue increased $2.9 million, or 1.5%, in the 2013 period compared to 2012. This increase is primarily driven by increases in transaction revenue of $1.1 million and membership fee revenue of $1.0 million, coupled with a rise in other revenue of $0.8 million. The rise in transaction revenue is mainly related to higher revenue from exchanges and Getaways of $0.6 million and increases in other transaction related fees and reservation servicing revenue of $0.3 million and $0.1 million, respectively. Higher transaction revenue from exchanges and Getaways was due to a 1.3% increase in average fee per transaction, partially offset by a 0.7% decrease in exchange and Getaway transaction volume. Lower transaction volume is related to the continued
34
shift in percentage mix of the membership base from traditional to corporate, which reduced transaction propensity. Other revenue consists primarily of revenue generated from non-Interval Network activities and other membership programs. Excluding the prior period item, the increase of $1.0 million in membership fee revenue in 2013 compared to 2012 is mainly a result of greater adoption of Platinum and Club Interval products which has bolstered year-over-year membership fee revenue.
The increase in other revenue for the current period is primarily attributable to an increase in non-member vacation rentals coupled with stronger sales from our other membership programs outside of the Interval Network and higher sales of marketing materials. Overall Interval Network average revenue per member was $101.39 in 2013, which was higher by 4.1% over the prior year period. Excluding the impact of the prior period item, average revenue per member in 2013 increased 1.8% over 2012.
Management and Rental
The increase of $5.6 million, or 21.4%, in management fee and rental revenue includes $4.3 million of incremental VRI management fee revenue subsequent to our February 2012 acquisition. Fee income earned from managed hotel and condominium resort properties at Aston increased $1.1 million, or 8.1%, in the first half of 2013 due to a 12.9% increase in RevPAR to $147.39 driven by a 13.0% higher average daily rate during the six month period compared to prior year.
The increase in pass-through revenue of $1.9 million, or 6.6%, in the first half of 2013 is principally related to our acquisition of VRI.
Cost of Sales
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
|
Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
$ | 22,780 | 0.3 | % | $ | 22,720 | ||||
Management and Rental |
||||||||||
Management fee and rental expenses |
5,347 | 2.6 | % | 5,214 | ||||||
Pass-through expenses |
15,294 | (0.2 | )% | 15,327 | ||||||
Total Management and Rental cost of sales |
20,641 | 0.5 | % | 20,541 | ||||||
Total cost of sales |
$ | 43,421 | 0.4 | % | $ | 43,261 | ||||
As a percentage of total revenue |
34.7 | % | (4.7 | )% | 36.5 | % | ||||
As a percentage of total revenue excluding prior period item |
35.8 | % | (1.7 | )% | 36.5 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
39.6 | % | (5.4 | )% | 41.9 | % | ||||
Gross margin |
65.3 | % | 2.7 | % | 63.5 | % | ||||
Gross margin excluding prior period item |
64.2 | % | 1.0 | % | 63.5 | % | ||||
Gross margin without pass-through revenue/expenses |
74.4 | % | 1.9 | % | 73.0 | % |
Cost of sales consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in servicing members of the Membership and Exchange segment and providing services to property owners and/or guests of the Management and Rental segment's managed vacation properties, as well as cost of rental inventory used primarily for Getaways included within the Membership and Exchange segment.
Cost of sales in the second quarter of 2013 increased $0.2 million from 2012, consisting of an increase of $0.1 million each from our Membership and Exchange and Management and Rental segments. Overall gross margin, adjusted to exclude the impact of the prior period item, increased by 62 basis points to 64.2% this quarter compared to 2012.
35
Gross margin for the Membership and Exchange segment in the second quarter of 2013, adjusted to exclude the impact of the prior period item, was relatively consistent when compared to the prior year. Cost of sales for this segment was relatively in-line with the prior periods, increasing $0.1 million, or 0.3%.
Cost of sales for our Management and Rental segment was relatively consistent with the prior period. Gross margin for this segment increased by 92 basis points to 29.9% in the second quarter of 2013 compared to 2012. 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 57 basis points to 62.3% during the quarter compared to the prior year.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
|
Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
$ | 48,237 | 0.8 | % | $ | 47,846 | ||||
Management and Rental |
||||||||||
Management fee and rental expenses |
10,925 | 15.2 | % | 9,480 | ||||||
Pass-through expenses |
30,635 | 6.6 | % | 28,726 | ||||||
Total Management and Rental cost of sales |
41,560 | 8.8 | % | 38,206 | ||||||
Total cost of sales |
$ | 89,797 | 4.4 | % | $ | 86,052 | ||||
As a percentage of total revenue |
34.6 | % | (1.5 | )% | 35.1 | % | ||||
As a percentage of total revenue excluding prior period item |
35.1 | % | NM | 35.1 | % | |||||
As a percentage of total revenue excluding pass-through revenue |
39.2 | % | (1.4 | )% | 39.7 | % | ||||
Gross margin |
65.4 | % | 0.8 | % | 64.9 | % | ||||
Gross margin excluding prior period item |
64.9 | % | NM | 64.9 | % | |||||
Gross margin without pass-through revenue/expenses |
74.2 | % | 0.9 | % | 73.5 | % |
Cost of sales increased $3.7 million, or 4.4%, in the first half of 2013 compared to 2012, consisting of an increase of $0.4 million from our Membership and Exchange segment and $3.4 million from our Management and Rental segment. Excluding the impact of the prior period item, overall gross margin of 64.9% remained consistent year-over-year.
Gross margin for the Membership and Exchange segment in the first half of 2013 was relatively consistent when compared to the prior year. Cost of sales for this segment increased $0.4 million, or 0.8%, primarily due to an increase of $0.8 million in purchased inventory expense, partly offset by certain cost savings pertaining to our call center and membership fulfillment activities. The increase in purchased inventory expense was due to a higher proportion of purchased inventory utilized during 2013, coupled with an increase in the average cost per unit of this purchased inventory.
The increase of $3.4 million in cost of sales from the Management and Rental segment was primarily attributable to an increase of $1.9 million in segment pass-through revenue and of $1.0 million in other incremental expenses related to VRI. Gross margin for this segment increased by 299 basis points to 33.2% in the first half of 2013 compared to 2012. Excluding the effect of pass-through revenue, gross margin for this segment increased by 184 basis points to 65.4% during 2013 compared to the prior year.
36
Selling and marketing expense
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
|
Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Selling and marketing expense |
$ | 14,272 | NM | $ | 14,268 | |||||
As a percentage of total revenue |
11.4 | % | (5.0 | )% | 12.0 | % | ||||
As a percentage of total revenue excluding prior period item |
11.5 | % | (4.6 | )% | 12.0 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
13.0 | % | (5.8 | )% | 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.
Selling and marketing expense in the second quarter of 2013 remained relatively in-line with 2012. Excluding the impact of the prior period item, as a percentage of total revenue and total revenue excluding pass-through revenue, sales and marketing expense decreased 55 and 67 basis points, respectively, during the second quarter of 2013 compared to the prior year.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
|
Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Selling and marketing expense |
$ | 28,007 | NM | $ | 28,041 | |||||
As a percentage of total revenue |
10.8 | % | (5.7 | )% | 11.4 | % | ||||
As a percentage of total revenue excluding prior period item |
10.8 | % | (5.5 | )% | 11.4 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
12.2 | % | (5.6 | )% | 12.9 | % |
Selling and marketing expense for the first half of 2013 remained relatively in-line with 2012. Excluding the impact of the prior period item, as a percentage of total revenue and total revenue excluding pass-through revenue, sales and marketing expense decreased 63 and 68 basis points, respectively, during 2013 compared to the prior year.
General and administrative expense
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
|
Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
General and administrative expense |
$ | 28,227 | 4.6 | % | $ | 26,980 | ||||
As a percentage of total revenue |
22.6 | % | (0.7 | )% | 22.7 | % | ||||
As a percentage of total revenue excluding prior period item |
23.3 | % | 2.4 | % | 22.7 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
25.7 | % | (1.4 | )% | 26.1 | % |
37
General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, human resources, information technology and executive management functions, as well as facilities costs, fees for professional services and other company-wide benefits.
General and administrative expense in the second quarter of 2013 increased $1.2 million from 2012 primarily due to higher professional fees of $1.3 million. The increase in professional fees primarily related to IT initiatives and to accounting and legal services provided largely in connection with the anticipated purchase of 75.5% of the European shared ownership management business of CLC. Additionally, during the quarter we experienced lower non-cash compensation expense of $0.6 million which was largely offset by an increase in other compensation and employee-related costs.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
|
Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
General and administrative expense |
$ | 54,532 | 4.1 | % | $ | 52,406 | ||||
As a percentage of total revenue |
21.0 | % | (1.7 | )% | 21.4 | % | ||||
As a percentage of total revenue excluding prior period item |
21.3 | % | (0.3 | )% | 21.4 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
23.8 | % | (1.6 | )% | 24.2 | % |
General and administrative expense in the first half of 2013 increased $2.1 million from 2012, primarily due to incremental expenses of $1.8 million from the addition of VRI, higher professional fees of $1.4 million, unfavorable net changes of $0.4 million related to the retirement/disposal of certain assets and of $0.3 million related to the estimated fair value of contingent consideration for an acquisition. These cost increases were partly offset by lower overall compensation and other employee related costs of $1.6 million, excluding VRI.
The $1.4 million increase in professional fees primarily related to IT initiatives and to accounting and legal services provided largely in connection with the anticipated purchase of 75.5% of the European shared ownership management business of CLC.
The $1.6 million decrease in overall compensation and other employee-related costs, excluding VRI, was primarily due to a decrease of $1.2 million in non-cash compensation expense mainly due to certain awards vesting fully during the third quarter of 2012 through the first quarter of 2013 which was partially offset by the incremental expense related to new awards granted in the first quarter of 2013, higher capitalized internal labor costs of $1.0 million pertaining to internally developed software, and $0.4 million of lower health and welfare insurance expense primarily resulting from a drop in self-insured claim activity during 2013 compared to prior year. These decreases were partly offset by higher salary and incentive related compensation.
Excluding the impact of the prior period item, as a percentage of total revenue and total revenue excluding pass-through revenue, general and administrative expense during the first half of 2013 was in-line with the prior year.
38
Amortization Expense of Intangibles
For the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012
|
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | 2013 | % Change | 2012 | |||||||||||||
|
(Dollars in thousands) |
(Dollars in thousands) |
|||||||||||||||||
Amortization expense of intangibles |
$ | 1,896 | (74.0 | )% | $ | 7,289 | $ | 3,908 | (72.7 | )% | $ | 14,332 | |||||||
As a percentage of total revenue |
1.5 | % | (75.3 | )% | 6.1 | % | 1.5 | % | (74.2 | )% | 5.8 | % | |||||||
As a percentage of total revenue excluding prior period item |
1.6 | % | (74.5 | )% | 6.1 | % | 1.5 | % | (73.8 | )% | 5.8 | % | |||||||
As a percentage of total revenue excluding pass-through revenue |
1.7 | % | (75.5 | )% | 7.1 | % | 1.7 | % | (74.2 | )% | 6.6 | % |
Amortization expense of intangibles for the three and six months ended June 30, 2013 decreased $5.4 million and $10.4 million, respectively, from the comparable period in 2012 primarily due to certain intangible assets related to our acquisition by IAC in 2002 being fully amortized by the end of the third quarter of 2012, partly offset by the incremental amortization expense in the six month period of 2013 pertaining to intangible assets resulting from the acquisition of VRI in February 2012.
Depreciation Expense
For the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012
|
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | 2013 | % Change | 2012 | |||||||||||||
|
(Dollars in thousands) |
(Dollars in thousands) |
|||||||||||||||||
Depreciation expense |
$ | 3,696 | 14.7 | % | $ | 3,222 | $ | 7,360 | 12.7 | % | $ | 6,528 | |||||||
As a percentage of total revenue |
3.0 | % | 8.9 | % | 2.7 | % | 2.8 | % | 6.5 | % | 2.7 | % | |||||||
As a percentage of total revenue excluding prior period item |
3.1 | % | 12.6 | % | 2.7 | % | 2.9 | % | 8.2 | % | 2.7 | % | |||||||
As a percentage of total revenue excluding pass-through revenue |
3.4 | % | 8.1 | % | 3.1 | % | 3.2 | % | 6.6 | % | 3.0 | % |
Depreciation expense for the three and six months ended June 30, 2013 increased $0.5 million and $0.8 million, respectively, over the comparable 2012 period largely due to additional depreciable assets being placed in service subsequent to March 31, 2012. These depreciable assets pertain primarily to software and related IT hardware, as well as certain website development costs.
Operating Income
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
|
Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
$ | 33,596 | 43.3 | % | $ | 23,445 | ||||
Management and Rental |
(125 | ) | (161.6 | )% | 203 | |||||
Total operating income |
$ | 33,471 | 41.5 | % | $ | 23,648 | ||||
As a percentage of total revenue |
26.8 | % | 34.4 | % | 19.9 | % | ||||
As a percentage of total revenue excluding prior period item |
24.8 | % | 24.4 | % | 19.9 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
30.5 | % | 33.3 | % | 22.9 | % |
39
Operating income in the second quarter of 2013 increased $9.8 million from the comparable period in 2012, consisting of an increase of $10.2 million from our Membership and Exchange segment and a decrease of $0.3 million from our Management and Rental segment.
Operating income for our Membership and Exchange segment increased $10.2 million to $33.6 million in the second quarter compared to prior year. Excluding the $3.5 million impact related to the prior period item, operating income for this segment increased $6.7 million. This increase was primarily driven by $5.1 million of lower amortization expense of intangibles and by an increase in revenue that resulted in higher gross profit of $1.8 million.
The $0.3 million decrease in operating income at our Management and Rental segment is a result of higher general and administrative expense of $1.0 million in the quarter primarily due to an increase in professional fees largely related to the anticipated purchase of 75.5% of the European shared ownership management business of CLC, partly offset by stronger gross profit contribution on a quarter-over-quarter basis.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
|
Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
$ | 73,268 | 31.6 | % | $ | 55,665 | ||||
Management and Rental |
2,992 | 25.6 | % | 2,383 | ||||||
Total operating income |
$ | 76,260 | 31.4 | % | $ | 58,048 | ||||
As a percentage of total revenue |
29.3 | % | 24.1 | % | 23.7 | % | ||||
As a percentage of total revenue excluding prior period item |
28.4 | % | 20.3 | % | 23.7 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
33.3 | % | 24.2 | % | 26.8 | % |
Operating income in the first half of 2013 increased $18.2 million from the comparable period in 2012, consisting of increases of $17.6 million from our Membership and Exchange segment and $0.6 million from our Management and Rental segment.
Operating income for our Membership and Exchange segment increased $17.6 million to $73.3 million in the six month period compared to prior year. Excluding the $3.5 million impact related to the prior period item, operating income for this segment increased $14.1 million. This increase was primarily driven by $10.2 million of lower amortization expense of intangibles, by a $1.5 million decrease in general and administrative expense primarily resulting from lower non-cash compensation expense, and an increase in revenue that resulted in higher gross profit of $2.6 million.
The rise in operating income of $0.6 million at our Management and Rental segment is primarily due to the incremental contribution from VRI and improved operating results at Aston during the current six month period. These increases were partly offset by higher professional fees largely related to the anticipated purchase of 75.5% of the European shared ownership management business of CLC.
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."
40
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
|
Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
$ | 36,133 | 4.3 | % | $ | 34,651 | ||||
Management and Rental |
2,021 | (22.3 | )% | 2,600 | ||||||
Total adjusted EBITDA |
$ | 38,154 | 2.4 | % | $ | 37,251 | ||||
As a percentage of total revenue |
31.6 | % | 0.5 | % | 31.4 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
36.1 | % | 0.2 | % | 36.0 | % |
Adjusted EBITDA in the second quarter of 2013 increased by $0.9 million, or 2.4%, from 2012, consisting of an increase of $1.5 million from our Membership and Exchange segment and a decrease of $0.6 million from our Management and Rental segment.
Adjusted EBITDA of $36.1 million from our Membership and Exchange segment grew by $1.5 million, or 4.3%, compared to the prior year. The improvement in adjusted EBITDA is primarily driven by stronger revenue during the quarter, mainly due to an increase in transaction revenue and the positive contributions from our Platinum and Club Interval products, partly offset by an increase in general and administrative expense largely as a result of higher professional fees related to various IT initiatives incurred during the quarter compared to prior year.
Adjusted EBITDA from our Management and Rental segment decreased $0.6 million to $2.0 million in the second quarter of 2013 from $2.6 million in 2012. The drop in adjusted EBITDA in this segment is mainly attributable to higher professional fees incurred for accounting and legal services largely related to the anticipated purchase of 75.5% of the European shared ownership management business of CLC, and for services provided in connection with the property management infrastructure at Aston. These cost increases were partly offset by stronger gross profit contribution on a year-over-year basis.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
|
Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Membership and Exchange |
$ | 81,740 | 4.6 | % | $ | 78,162 | ||||
Management and Rental |
7,436 | 7.5 | % | 6,915 | ||||||
Total adjusted EBITDA |
$ | 89,176 | 4.8 | % | $ | 85,077 | ||||
As a percentage of total revenue |
34.9 | % | 0.6 | % | 34.7 | % | ||||
As a percentage of total revenue excluding pass-through revenue |
39.6 | % | 0.9 | % | 39.3 | % |
Adjusted EBITDA in the first half of 2013 increased by $4.1 million, or 4.8%, from 2012, consisting of increases of $3.6 million from our Membership and Exchange segment and $0.5 million from our Management and Rental segment.
Adjusted EBITDA of $81.7 million from our Membership and Exchange segment grew by $3.6 million, or 4.6%, compared to the prior year. The improvement in adjusted EBITDA is primarily driven by stronger revenue during the first six months of 2013, largely due to the positive contributions from our Platinum and Club Interval products, stronger transaction revenue, and to lower compensation and employee-related costs within general and administrative expense in the segment.
41
Adjusted EBITDA from our Management and Rental segment rose by $0.5 million to $7.4 million in the first half of 2013 from $6.9 million in 2012. The growth in adjusted EBITDA in this segment is primarily driven by the inclusion of VRI in our results of operations and improvement in Aston's RevPAR during the year, partly offset by higher professional fees incurred for accounting and legal services largely related to the anticipated purchase of 75.5% of the European shared ownership management business of CLC.
Other income (expense), net
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
|
Three Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Interest income |
$ | 72 | (87.5 | )% | $ | 577 | ||||
Interest expense |
(1,611 | ) | (81.7 | )% | (8,825 | ) | ||||
Other income, net |
1,479 | 50.9 | % | 980 | ||||||
Loss on extinguishment of debt |
| NM | (602 | ) |
Interest income decreased $0.5 million in the second quarter of 2013 compared to 2012 primarily as a result of the repayment of certain loans receivable subsequent to March 31, 2012.
Interest expense in the second quarter of 2012 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. Interest expense in the second quarter of 2013 relates to interest and amortization of debt costs on our amended and restated revolving credit facility entered into on June 21, 2012. Lower interest expense in the second quarter of 2013 is primarily due the lower average balance outstanding and interest rate under the revolving credit facility compared to the term loan and senior notes.
Other 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 for the three months ended June 30, 2013 and 2012 resulted in a net gain of $1.5 million and $1.0 million, respectively. The favorable fluctuations during the current quarter were principally driven by U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Mexican and Colombian peso. The favorable fluctuations for the three months ended June 30, 2012 were principally driven by U.S. dollar positions held at June 30, 2012 affected by the stronger dollar compared to the Mexican peso.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
|
Six Months Ended June 30, | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
2013 | % Change | 2012 | |||||||
|
(Dollars in thousands) |
|||||||||
Interest income |
$ | 223 | (77.8 | )% | $ | 1,003 | ||||
Interest expense |
(3,264 | ) | (81.2 | )% | (17,389 | ) | ||||
Other income (expense), net |
959 | (164.2 | )% | (1,493 | ) | |||||
Loss on extinguishment of debt |
| NM | (602 | ) |
Interest income decreased $0.8 million in the first half of 2013 compared to 2012 primarily as a result of the repayment of certain loans receivable subsequent to March 31, 2012.
Interest expense in the first six months of 2012 primarily relates to interest and amortization of debt costs on the term loan and senior notes, which were extinguished on June 21, 2012 and
42
September 4, 2012, respectively. Interest expense in the first six months of 2013 relates to interest and amortization of debt costs on our amended and restated revolving credit facility entered into on June 21, 2012. Lower interest expense in 2013 is primarily due the lower average balance outstanding and interest rate under the revolving credit facility compared to the term loan and senior notes.
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 for the six months ended June 30, 2013 and 2012 resulted in a net gain of $1.3 million and a net loss of $1.2 million, respectively. The favorable fluctuations during the 2013 period were principally driven by U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Colombian peso and the Egyptian pound. The unfavorable fluctuations for the six months ended June 30, 2012 were principally driven by U.S. dollar positions held at June 30, 2012 affected by the weaker dollar compared to the Colombian and Mexican pesos.
Income Tax Provision
For the three months ended June 30, 2013 compared to the three months ended June 30, 2012
For the three months ended June 30, 2013 and 2012, ILG recorded income tax provisions for continuing operations of $12.8 million and $5.7 million, respectively, which represent effective tax rates of 38.4% and 36.3%, 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. The effective tax rate in the second quarter of 2013 is higher than the prior year period due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions, partially offset by the U.S. tax consequences of foreign operations. Additionally, the 2012 period benefitted from the one-time permanent difference attributable to ILG's ability to redeem the senior notes.
For the six months ended June 30, 2013 compared to the six months ended June 30, 2012
For the six months ended June 30, 2013 and 2012, ILG recorded income tax provisions for continuing operations of $28.6 million and $14.3 million, respectively, which represent effective tax rates of 38.6% and 36.1%, 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. For the six months ended June 30, 2013, the effective tax rate is higher than the prior year period due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions, partially offset by the U.S. tax consequences of foreign operations. Additionally, the 2012 period benefitted from the one-time permanent difference attributable to ILG's ability to redeem the senior notes.
As of June 30, 2013 and December 31, 2012, ILG had unrecognized tax benefits of $1.6 million and $0.7 million, respectively, which if recognized, would favorably affect the effective tax rate. There were no material increases or decreases in unrecognized tax benefits for the three months ended June 30, 2013. During the six months ended June 30, 2013, the unrecognized tax benefits increased by a net amount of approximately $0.9 million during the first quarter of 2013 as a result of an increase of approximately $1.1 million related to state income tax items offset by approximately $0.2 million related to the decrease in unrecognized tax benefits as a result of the expiration of the statute of limitations related to foreign taxes. The increase of $1.1 million for state income tax items did not have an overall impact on the effective tax rate as it is entirely offset by a related state refund claim filed during the first quarter of 2013.
ILG recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for the three and six months ended June 30, 2013. During the six months ended June 30, 2013, interest and penalties decreased by approximately
43
$0.2 million during the first quarter of 2013 as a result of the expiration of the statute of limitations related to foreign taxes. As of June 30, 2013, ILG had accrued $0.4 million for interest and penalties.
ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $1.3 million within twelve months of the current reporting date due primarily to binding technical advice expected to be issued by state taxing authorities on state income tax items and 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 a Tax Sharing Agreement, IAC indemnifies ILG for all consolidated tax liabilities and related interest and penalties for the pre-spin period.
During 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%, 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. The change in the corporate tax rate initially negatively impacted 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.
During the first quarter of 2013, the U.K. government released its 2013 Budget, where it also indicated that it intends to enact a further U.K. rate decrease to 20% effective April 1, 2015. This rate decrease is in addition to the previously announced rate reduction of 21% effective April 1, 2014. On July 17, 2013, the U.K. Finance Act of 2013 was enacted which passed into law the rate reductions to 21% and 20%. The impact of these further rate reductions will be reflected during the third quarter of 2013, the reporting period when the law was enacted, and are expected to have a similar impact on our financial statements as in 2012, outlined above. However, the actual impact will be dependent on our deferred tax position at that time.
44
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2013, we had $109.0 million of cash and cash equivalents, including $92.4 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, $60.5 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 the six months ended June 30, 2013 and, as of June 30, 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 increased to $61.3 million in the six months ended June 30, 2013 from $50.2 million in the same period of 2012. The increase of $11.1 million from 2012 was principally due to lower interest paid as well as higher cash receipts in 2013 compared to 2012, partly offset by an increase in income taxes paid primarily related to higher actual pre-tax book income in 2013.
Net cash provided by investing activities of $3.3 million in the six months ended June 30, 2013 primarily related to the early repayment of an existing loan receivable totaling $9.9 million, partly offset by capital expenditures of $6.6 million primarily related to IT initiatives. Net cash used in investing activities of $53.7 million in the six months ended June 30, 2012 primarily related to the VRI acquisition, net of cash acquired, of $40.0 million, disbursements totaling $9.5 million for additional investments in loans receivable and capital expenditures of $7.3 million principally pertaining to IT initiatives, all offset by payments totaling $2.9 million received on an existing loan.
Free cash flow is a non-GAAP measure and is defined in "ILG's Principles of Financial Reporting." For the six months ended June 30, 2013 and 2012, free cash flow was $54.7 million and $42.9 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 $52.8 million in the six months ended June 30, 2013 primarily related to principal payments of $45.0 million on our revolving credit facility, $6.3 million of dividends paid, and withholding taxes on the vesting of restricted stock units. These uses of cash were partially offset by excess tax benefits from stock-based awards and the proceeds from the exercise of stock options. In the six months ended June 30, 2012, net cash used in financing activities of $72.1 million was primarily due to 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 $11.3 million, payments of debt issuance costs of $3.8 million in connection with entering into our amended and restated credit agreement in June 2012 and vesting of restricted stock units, net of withholding taxes. These uses of cash were partially offset by proceeds from excess tax benefits from stock-based awards and the exercise of stock options.
45
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, (2) extends the maturity of the credit facility to June 21, 2017, (3) provides for an interest rate on borrowings, commitment fees and letter of credit fees based on ILG and its subsidiaries' consolidated leverage ratio, and (4) may be increased to up to $700 million, subject to certain conditions. As of June 30, 2013, $215.0 million of borrowings were outstanding under the revolving credit facility, with $285.0 million available to be drawn.
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 our consolidated leverage ratio. As of June 30, 2013, 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% per annum based on our consolidated leverage ratio and as of June 30, 2013, 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 June 30, 2013, 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 1.16 and 17.27, respectively.
Dividends
In May 2013, our Board of Directors declared a quarterly dividend payment of $0.11 per share to shareholders of record on June 4, 2013. On June 18, 2013, a cash dividend of $6.3 million was paid. We currently expect to declare and pay quarterly dividends of similar amounts.
In August 2013, our Board of Directors declared a $0.11 per share dividend payable September 18, 2013 to shareholders of record on September 4, 2013. Based on the number of shares of common stock outstanding as of June 30, 2013, at a dividend of $0.11 per share, the anticipated cash outflow would be $6.3 million in the third quarter of 2013.
Anticipated Business Acquisition
In connection with the anticipated purchase of 75.5% of the European shared ownership management business of CLC, the cash outflow is expected to be approximately £56 million (or approximately $85.6 million). Additionally, ILG will issue a convertible secured loan for approximately $14.4 million to CLC which will mature in five years with interest payable monthly. The closing is expected to take place on or prior to November 1, 2013 subject to satisfaction of certain conditions and regulatory requirements.
46
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 June 30, 2013, guarantees, surety bonds and letters of credit totaled $32.5 million. The total includes maximum exposure under guarantees of $29.3 million, which primarily relates to the Management and Rental segment's hotel and resort management agreements of Aston, including those with guaranteed dollar amounts, and accommodation leases supporting the Aston management activities, entered into on behalf of the property owners for which either party may terminate such leases upon 60 days prior written notice to the other. In addition, certain of the Management and Rental segment's hotel and resort management agreements of Aston provide that owners receive specified percentages of the revenue generated under Aston management. In these cases, the operating expenses for the rental operations are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages, and the Management and Rental segment either retains the balance (if any) as its management fee or makes up the deficit. Although such deficits are reasonably possible in a few of these agreements, as of June 30, 2013 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 June 30, 2013, amounts pending reimbursements are not significant.
Contractual obligations and commercial commitments at June 30, 2013 are as follows:
|
Payments Due by Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Contractual Obligations
|
Total | Up to 1 year |
1 - 3 years | 3 - 5 years | More than 5 years |
|||||||||||
|
(Dollars in thousands) |
|||||||||||||||
Debt principal(a) |
$ | 215,000 | $ | | $ | | $ | 215,000 | $ | | ||||||
Debt interest(a) |
20,046 | 5,018 | 10,106 | 4,922 | | |||||||||||
Purchase obligations(b) |
31,392 | 10,001 | 15,871 | 4,970 | 550 | |||||||||||
Operating leases |
51,899 | 11,719 | 17,016 | 11,374 | 11,790 | |||||||||||
Total contractual obligations |
$ | 318,337 | $ | 26,738 | $ | 42,993 | $ | 236,266 | $ | 12,340 | ||||||
|
Amount of Commitment Expiration Per Period | |||||||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Other Commercial Commitments(c)
|
Total Amounts Committed |
Less than 1 Year |
1 - 3 Years | 3 - 5 Years | More than 5 Years |
|||||||||||
|
(In thousands) |
|||||||||||||||
Guarantees, surety bonds and letters of credit |
$ | 32,461 | $ | 13,780 | $ | 13,619 | $ | 3,815 | $ | 1,247 | ||||||
47
Included in other liabilities, both current and long-term, as presented in our consolidated balance sheet as of June 30, 2013, are certain unconditional recorded contractual obligations. These obligations and the future periods in which such obligations are expected to settle in cash are as follows (in thousands):
Twelve Month Period Ending June 30,
|
|
|||
---|---|---|---|---|
2013 |
$ | 3,857 | ||
2014 |
| |||
2015 |
| |||
2016 |
| |||
2017 |
| |||
Thereafter |
| |||
Total |
$ | 3,857 | ||
Off-Balance Sheet Arrangements
Except for the off-balance sheet items disclosed above in our Contractual Obligations and Commercial Commitments (which excludes "Debt principal"), as of June 30, 2013 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.
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. We have discussed those estimates that we believe are critical and required the use of significant judgment and use of estimates that could have a significant impact on our financial statements in our 2012 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies in the interim period.
ILG'S PRINCIPLES OF FINANCIAL REPORTING
Definition 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, (3) other non-operating income and expense, and (4) the impact of correcting prior period items.
48
Non-GAAP net income is defined as net income attributable to common stockholders, excluding the impact of correcting an immaterial prior period net understatement in the current period financials.
Non-GAAP earnings per share (EPS) is defined as non-GAAP net income divided by the weighted average number of shares of common stock outstanding during the period for basic EPS and, additionally, inclusive of dilutive securities for diluted EPS.
Free cash flow is defined as 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 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 the 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 metrics 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 of restricted stock units. 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 units, the awards will be settled, at our discretion, on a net basis, with us remitting the required tax withholding amount from our current funds.
49
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.
RECONCILIATIONS OF NON-GAAP MEASURES
The following tables reconcile adjusted EBITDA and EBITDA to operating income for our operating segments, and to net income attributable to common stockholders in total for the three and six months ended June 30, 2013 and 2012 (in thousands). The noncontrolling interest relates to the Management and Rental segment.
|
For the Three Months Ended June 30, 2013 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Membership and Exchange |
Management and Rental |
Consolidated | |||||||
Adjusted EBITDA |
$ | 36,133 | $ | 2,021 | $ | 38,154 | ||||
Non-cash compensation expense |
(2,329 | ) | (258 | ) | (2,587 | ) | ||||
Other non-operating income (expense), net |
1,481 | (2 | ) | 1,479 | ||||||
Prior period item |
3,496 | | 3,496 | |||||||
EBITDA |
38,781 | 1,761 | 40,542 | |||||||
Amortization expense of intangibles |
(337 | ) | (1,559 | ) | (1,896 | ) | ||||
Depreciation expense |
(3,367 | ) | (329 | ) | (3,696 | ) | ||||
Less: Other non-operating income (expense), net |
(1,481 | ) | 2 | (1,479 | ) | |||||
Operating income (loss) |
$ | 33,596 | $ | (125 | ) | 33,471 | ||||
Interest income |
72 | |||||||||
Interest expense |
(1,611 | ) | ||||||||
Other non-operating income, net |
1,479 | |||||||||
Income tax provision |
(12,841 | ) | ||||||||
Net income |
20,570 | |||||||||
Net income attributable to noncontrolling interest |
| |||||||||
Net income attributable to common stockholders |
$ | 20,570 | ||||||||
50
|
For the Three Months Ended June 30, 2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Membership and Exchange |
Management and Rental |
Consolidated | |||||||
Adjusted EBITDA |
$ | 34,651 | $ | 2,600 | $ | 37,251 | ||||
Non-cash compensation expense |
(2,835 | ) | (257 | ) | (3,092 | ) | ||||
Other non-operating income, net |
980 | | 980 | |||||||
Loss on extinguishment of debt |
(602 | ) | | (602 | ) | |||||
EBITDA |
32,194 | 2,343 | 34,537 | |||||||
Amortization expense of intangibles |
(5,420 | ) | (1,869 | ) | (7,289 | ) | ||||
Depreciation expense |
(2,951 | ) | (271 | ) | (3,222 | ) | ||||
Less: Other non-operating income, net |
(980 | ) | | (980 | ) | |||||
Less: Loss on extinguishment of debt |
602 | | 602 | |||||||
Operating income |
$ | 23,445 | $ | 203 | 23,648 | |||||
Interest income |
577 | |||||||||
Interest expense |
(8,825 | ) | ||||||||
Other non-operating income, net |
980 | |||||||||
Loss on extinguishment of debt |
(602 | ) | ||||||||
Income tax provision |
(5,727 | ) | ||||||||
Net income |
10,051 | |||||||||
Net loss attributable to noncontrolling interest |
1 | |||||||||
Net income attributable to common stockholders |
$ | 10,052 | ||||||||
|
For the Six Months Ended June 30, 2013 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Membership and Exchange |
Management and Rental |
Consolidated | |||||||
Adjusted EBITDA |
$ | 81,740 | $ | 7,436 | $ | 89,176 | ||||
Non-cash compensation expense |
(4,608 | ) | (536 | ) | (5,144 | ) | ||||
Other non-operating income (expense), net |
1,132 | (173 | ) | 959 | ||||||
Prior period item |
3,496 | | 3,496 | |||||||
EBITDA |
81,760 | 6,727 | 88,487 | |||||||
Amortization expense of intangibles |
(674 | ) | (3,234 | ) | (3,908 | ) | ||||
Depreciation expense |
(6,686 | ) | (674 | ) | (7,360 | ) | ||||
Less: Other non-operating income (expense), net |
(1,132 | ) | 173 | (959 | ) | |||||
Operating income |
$ | 73,268 | $ | 2,992 | 76,260 | |||||
Interest income |
223 | |||||||||
Interest expense |
(3,264 | ) | ||||||||
Other non-operating income, net |
959 | |||||||||
Income tax provision |
(28,598 | ) | ||||||||
Net income |
45,580 | |||||||||
Net income attributable to noncontrolling interest |
(6 | ) | ||||||||
Net income attributable to common stockholders |
$ | 45,574 | ||||||||
51
|
For the Six Months Ended June 30, 2012 | |||||||||
---|---|---|---|---|---|---|---|---|---|---|
|
Membership and Exchange |
Management and Rental |
Consolidated | |||||||
Adjusted EBITDA |
$ | 78,162 | $ | 6,915 | $ | 85,077 | ||||
Non-cash compensation expense |
(5,643 | ) | (526 | ) | (6,169 | ) | ||||
Other non-operating expense, net |
(1,344 | ) | (149 | ) | (1,493 | ) | ||||
Loss on extinguishment of debt |
(602 | ) | | (602 | ) | |||||
EBITDA |
70,573 | 6,240 | 76,813 | |||||||
Amortization expense of intangibles |
(10,840 | ) | (3,492 | ) | (14,332 | ) | ||||
Depreciation expense |
(6,014 | ) | (514 | ) | (6,528 | ) | ||||
Less: Other non-operating expense, net |
1,344 | 149 | 1,493 | |||||||
Less: Loss on extinguishment of debt |
602 | | 602 | |||||||
Operating income |
$ | 55,665 | $ | 2,383 | 58,048 | |||||
Interest income |
1,003 | |||||||||
Interest expense |
(17,389 | ) | ||||||||
Other non-operating expense, net |
(1,493 | ) | ||||||||
Loss on extinguishment of debt |
(602 | ) | ||||||||
Income tax provision |
(14,287 | ) | ||||||||
Net income |
25,280 | |||||||||
Net income attributable to noncontrolling interest |
(3 | ) | ||||||||
Net income attributable to common stockholders |
$ | 25,277 | ||||||||
The following table reconciles cash provided by operating activities to free cash flow for the six months ended June 30, 2013 and 2012 (in thousands).
|
For the Six Months Ended June 30, |
||||||
---|---|---|---|---|---|---|---|
|
2013 | 2012 | |||||
Net cash provided by operating activities |
$ | 61,259 | $ | 50,198 | |||
Less: Capital expenditures |
(6,592 | ) | (7,318 | ) | |||
Free cash flow |
$ | 54,667 | $ | 42,880 | |||
The following table reconciles net income attributable to common stockholders to non-GAAP net income, and to non-GAAP earnings per share for the three and six months ended June 30, 2013 and 2012 (in thousands).
|
Three Months Ended June 30, |
Six Months Ended June 30, |
|||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
|
2013 | 2012 | 2013 | 2012 | |||||||||
Net income attributable to common stockholders |
$ | 20,570 | $ | 10,052 | $ | 45,574 | $ | 25,277 | |||||
Prior period item |
(3,496 | ) | | (3,496 | ) | | |||||||
Income tax provision on prior period item |
1,387 | | 1,387 | | |||||||||
Non-GAAP net income |
$ | 18,461 | $ | 10,052 | $ | 43,465 | $ | 25,277 | |||||
Non-GAAP earnings per share |
|||||||||||||
Basic |
$ | 0.32 | $ | 0.18 | $ | 0.76 | $ | 0.45 | |||||
Diluted |
$ | 0.32 | $ | 0.18 | $ | 0.75 | $ | 0.44 |
52
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Foreign Currency Exchange Risk
We conduct business in certain foreign markets, primarily in the United Kingdom and other European Union markets. Our foreign currency risk primarily relates to our investments in foreign subsidiaries that transact business in a functional currency other than the U.S. dollar. This exposure is mitigated as we have generally reinvested profits in our international operations. As currency exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year-over-year comparability of operating results.
In addition, we are exposed to foreign currency risk related to transactions and/or assets and liabilities denominated in a currency other than the functional currency. Historically, we have not hedged currency risks. However, our foreign currency exposure related to EU VAT liabilities denominated in euros is offset by euro denominated cash balances.
Furthermore, in an effort to mitigate economic risk, we hold U.S. dollars in certain subsidiaries that have a functional currency other than the U.S. dollar.
Operating foreign currency exchange for the three months ended June 30, 2013 and 2012 resulted net losses of $0.3 million and $6,000, respectively, attributable to foreign currency remeasurements of operating assets and liabilities denominated in a currency other than their functional currency. Operating foreign currency exchange for the six months ended June 30, 2013 and 2012 resulted in a net loss of $0.2 million and $0.1 million, respectively
Non-operating foreign exchange for the three months ended June 30, 2013 and 2012 resulted in a net gain of $1.5 million and $1.0 million, respectively, attributable to cash held in certain countries in currencies other than their functional currency. Non-operating foreign exchange for the six months ended June 30, 2013 and 2012 resulted in a net gain of $1.3 million and a net loss of $1.2 million, respectively.
The favorable fluctuations in the second quarter of 2013 and 2012 were principally driven by U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Mexican and Columbia peso, and at June 20, 2012 affected by the stronger dollar compared to the Mexican peso. The favorable fluctuations in the six months ended June 30, 2013 were principally driven by U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Columbian peso and the Egyptian pound. The unfavorable fluctuations in the six months ended June 30, 2012 were principally driven by U.S. dollar positions held at June 30, 2012 affected by the weaker dollar compared to the Columbian and Mexican peso.
The Venezuelan Bolivar cash held impacted our foreign exchange net loss in 2010 given our change to the U.S. dollar as the functional currency for that entity due to highly inflationary accounting, effective that year, partially offset by a gain realized in June 2010 due to our change from the parallel market rate to the SITME rate for remeasurement purposes. In April 2010, we transferred the majority of the cash from our Venezuelan entity's Bolivar denominated bank account in Venezuela to our Venezuelan entity's U.S. dollar denominated bank account in the U.S. and consequently reduced the exposure going forward. Effective in February 2013, the Venezuelan government eliminated the SITME market and concurrently devalued their currency. We do not anticipate this currency devaluation to have more than a negligible impact on our consolidated financial statements.
Our operations in international markets are exposed to potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on us is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing, operating and hedging strategies. A hypothetical 10% weakening/strengthening in foreign exchange rates to the U.S. dollar for the three
53
and six months ended June 30, 2013 would result in an approximate change to revenue of $0.7 million and $1.5 million, respectively. There have been no material quantitative changes in market risk exposures since December 31, 2012.
Interest Rate Risk
We are exposed to interest rate risk through borrowings under our June 21, 2012 amended credit agreement which bears interest at variable rates. 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 ILG's leverage ratio. As of June 30, 2013, the applicable margin was 1.75% per annum for LIBOR revolving loans and 0.75% per annum for Base Rate loans. During the second quarter of 2013, we had at least $215.0 million outstanding under our revolving credit facility; a 100 basis point change in interest rates would result in an approximate change to interest expense of $0.6 million for the current quarter. While we currently do not hedge our interest rate exposure, this risk is somewhat mitigated by variable interest rates earned on our cash balances.
Item 4. Controls and Procedures
We monitor and evaluate on an ongoing basis our disclosure controls and internal control over financial reporting in order to improve our overall effectiveness. In the course of this evaluation, we modify and refine our internal processes as conditions warrant.
As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined by Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in our filings with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
As required by Rule 13a-15(d) of the Exchange Act, we, under the supervision and with the participation of our management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, also evaluated whether any changes occurred to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, there have been no material changes to internal controls over financial reporting.
54
Not applicable
See Part I, Item IA., "Risk Factors," of ILG's 2012 Annual Report on Form 10-K, for a detailed discussion of the risk factors affecting ILG. There have been no material changes from the risk factors described in the Annual Report.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Period
|
Total Number of Shares Purchased |
Average Price Paid per Share |
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
Approximate Dollar Value of Shares that May Yet Be Purchase Under the Plans or Programs(1) |
|||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|
April 2013 |
| | 1,697,360 | $ | 4,120,479 | ||||||||
May 2013 |
| | 1,697,360 | $ | 4,120,479 | ||||||||
June 2013 |
| | 1,697,360 | $ | 4,120,479 |
55
Exhibit Number |
Description | Location | |||
---|---|---|---|---|---|
3.1 | Amended and Restated Certificate of Incorporation of Interval Leisure Group, Inc. | Exhibit 3.1 to ILG's Current Report on Form 8-K, filed on August 25, 2008. | |||
3.2 | Certificate of Designations, Preferences and Rights to Series A Junior Participating Preferred Stock | Exhibit 3.2 to ILG's Quarterly Report on Form 10-Q, filed on August 11, 2009. | |||
3.3 | Third Amended and Restated By-Laws of Interval Leisure Group, Inc. | Exhibit 3.2 to ILG's Current Report on Form 8-K, filed on December 14, 2011. | |||
10.1 | | Form of Terms and Conditions of Director Restricted Stock Unit Awards (2013 Plan)* | |||
31.1 | | Certification of the Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act | |||
31.2 | | Certification of the Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act | |||
31.3 | | Certification of the Chief Accounting Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934 as adopted pursuant to Section 302 of the Sarbanes-Oxley Act | |||
32.1 | | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act | |||
32.2 | | Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act | |||
32.3 | | Certification of the Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act | |||
101.INS | XBRL Instance Document | ||||
101.SCH | XBRL Taxonomy Extension Schema Document | ||||
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Exhibit Number |
Description | Location | |||
---|---|---|---|---|---|
101.CAL | XBRL Taxonomy Calculation Linkbase Document | ||||
101.LAB | XBRL Taxonomy Label Linkbase Document | ||||
101.PRE | XBRL Taxonomy Presentation Linkbase Document | ||||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: August 7, 2013
INTERVAL LEISURE GROUP, INC. | ||||
By: |
/s/ WILLIAM L. HARVEY William L. Harvey Chief Financial Officer |
|||
By: |
/s/ JOHN A. GALEA John A. Galea Chief Accounting Officer |
58
Exhibit 10.1
Terms and Conditions for Annual Restricted Stock Unit Awards
Directors
Overview
These Terms and Conditions apply to the grant awarded to you by Interval Leisure Group, Inc. (ILG or the Company) pursuant to Section 12 of the Interval Leisure Group 2013 Stock and Incentive Plan (the Plan) of restricted stock units (the Award). You were notified of your Award by way of an award notice (the Award Notice).
ALL CAPITALIZED TERMS USED HEREIN, TO THE EXTENT NOT DEFINED, SHALL HAVE THE MEANINGS SET FORTH IN THE PLAN.
Continuous Service
In order for your Award to vest, you must be continuously serving as a director of ILG during the Restriction Period (as defined below). Nothing in your Award Notice, these Terms and Conditions, or the Plan shall confer upon you any right to continue in the service of ILG or any of its Affiliates.
Vesting
Subject to the Award Notice, these Terms and Conditions and the provisions of the Plan, the Restricted Stock Units (RSUs) in respect to your Award, shall vest and no longer be subject to any restriction (such period during which restrictions apply is the Restriction Period):
|
|
Percentage of Total |
|
Vesting Date |
|
Award Vesting |
|
|
|
|
|
On the first year anniversary of the Award Date |
|
50 |
% |
|
|
|
|
On the second year anniversary of the Award Date |
|
50 |
% |
Termination of Service
In the event of termination from membership on the Board of Directors of the Company due to your death or Disability (as defined in the Plan), the Restricted Stock Units shall automatically vest. Except as otherwise stated herein, any RSUs still subject to restriction shall be forfeited and canceled in their entirety effective immediately upon the termination of your service with ILG during the Restriction Period.
Settlement
As soon as practicable after any RSUs in respect of your Award have vested and are no longer subject to the Restriction Period, such RSUs shall be settled. In no event shall settlement occur later than two and one half months after the end of the fiscal year in which the RSUs vest. For each RSU settled (and subject to withholding as described below), ILG shall issue one share of Common Stock for each RSU vesting. Notwithstanding the foregoing, ILG shall be entitled to hold the shares issuable to you upon settlement of all RSUs that have vested until ILG or the agent selected by ILG to administer the Plan (the Agent) has received from you (i) a duly executed Form W-9 or W-8 and (ii) payment for any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such RSUs.
Taxes and Withholding
No later than the date as of which an amount in respect of any RSUs first becomes includible in your gross income for federal, state, local or foreign income or employment or other tax purposes, ILG shall, unless prohibited by law, have the right to deduct any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount due to you, including deducting such amount from the delivery of shares issued upon settlement of the RSUs that gives rise to the withholding requirement. In the event shares are deducted to cover tax withholdings, the number of shares withheld shall generally have a Fair Market Value equal to the aggregate amount of ILGs withholding obligation. In the event that any such deduction and/or withholding is prohibited by law, you shall, prior to or contemporaneously with the vesting of your RSUs, pay to ILG, or make arrangements satisfactory to ILG regarding the payment of, any federal, state, local or foreign taxes of any kind required by law to be withheld with respect to such amount.
Adjustment in the Event of Change in Stock; Change in Control
Adjustment in the Event of Change in Stock. In the event of (i) a stock dividend, stock split, reverse stock split, share combination, or recapitalization or similar event affecting the capital structure of ILG (each, a Share Change), or (ii) a merger, consolidation, acquisition of property or shares, separation, spin-off, reorganization, significant non-recurring cash dividend, stock rights offering, liquidation, Disaffiliation, or similar event affecting ILG or any of its Subsidiaries (each, a Corporate Transaction), the Compensation and Human Resources Committee (the Committee) or the Board shall make such substitutions or adjustments as it, in its good faith and sole discretion, deems appropriate and equitable to the number of RSUs and the number and kind of shares of Common Stock underlying the RSUs. The determination of the Committee regarding any such adjustment will be final and conclusive and need not be the same for all RSU award recipients.
Change in Control. In the event of a Change in Control, the Restricted Stock Units shall automatically vest.
Non-Transferability of the RSUs
Until such time as your RSUs are ultimately settled, they shall not be transferable by you by means of sale, assignment, exchange, encumbrance, pledge, hedge or otherwise.
No Rights as a Stockholder
Except as otherwise specifically provided in the Plan, unless and until your RSUs are settled, you shall not be entitled to any rights of a stockholder with respect to the RSUs (including the right to vote the underlying shares). Notwithstanding the foregoing, if ILG declares and pays dividends on the Common Stock during the Restriction Period for particular RSUs in respect of your Award, you will be credited with additional amounts for each RSU underlying such Award equal to the dividend that would have been paid with respect to such RSU as if it had been an actual share of Common Stock, which amount shall remain subject to restrictions (and as determined by the Committee may be reinvested in RSUs or may be held in kind as restricted property) and shall vest concurrently with the vesting of the RSUs upon which such dividend equivalent amounts were paid. Notwithstanding the foregoing, dividends and distributions other than regular quarterly cash dividends, if any, may result in an adjustment pursuant to the Adjustment in the Event of Change in Stock; Change in Control section above.
Other Restrictions
The RSUs shall be subject to the requirement that, if at any time the Committee shall determine that (i) the listing, registration or qualification of the shares of Common Stock subject or related thereto upon any securities exchange or under any state or federal law, or (ii) the consent or approval of any government regulatory body is necessary or desirable as a condition of, or in connection with, the delivery of shares, then in any such event, the award of RSUs shall not be effective unless such listing, registration, qualification, consent or approval shall have been effected or obtained free of any conditions not acceptable to the Committee.
By accepting the award, you acknowledge that you are subject to ILGs policies regarding compliance with securities laws, including but not limited to its Policy on Securities Trading (as in effect from time to time and any successor policies), and, pursuant to these policies, you shall be required to obtain pre-clearance from ILGs counsels office prior to purchasing or selling any of ILGs securities, including any shares issued upon vesting of the Restricted Stock Units, and may be prohibited from selling such shares other than during an open trading window. You further acknowledge that, in its discretion, ILG may prohibit you from selling such shares even during an open trading window if ILG has concerns over the potential for insider trading.
Conflicts and Interpretation
In the event of any conflict between these Terms and Conditions and the Plan, the Plan shall control; provided, that an action or provision that is permissive under the terms of the Plan, and required under these Terms and Conditions, shall not be deemed a conflict and these Terms and Conditions shall control. In the event of any ambiguity in these Terms and Conditions, or any matters as to which these Terms and Conditions are silent, the Plan shall govern. In the event of any conflict between the Award Notice (or any other information posted on ILGs extranet or given to you directly or indirectly through the Agent (including information posted on www.benefitaccess.com)) and ILGs books and records, or (ii) ambiguity in the Award Notice (or any other information posted on ILGs extranet or given to you directly or indirectly through the Agent (including information posted on www.benefitaccess.com)), ILGs books and records shall control.
Amendment
ILG may modify, amend or waive the terms of your RSUs, prospectively or retroactively, but no such modification, amendment or waiver shall materially impair your rights without your consent, except as required by applicable law, NASDAQ or stock exchange rules, tax rules or accounting rules.
Data Protection
The acceptance of your RSUs constitutes your authorization of the release from time to time to ILG or any of its Subsidiaries and to the Agent (together, the Relevant Companies) of any and all personal or professional data that is necessary or desirable for the administration of your RSUs and/or the Plan (the Relevant Information). Without limiting the above, this authorization permits your employing company to collect, process, register and transfer to the Relevant Companies all Relevant Information (including any professional and personal data that may be useful or necessary for the purposes of the administration of your RSUs and/or the Plan and/or to implement or structure any further grants of equity awards (if any)). The acceptance of your RSUs also constitutes your authorization of the transfer of the Relevant Information to any jurisdiction in which ILG, your employing company or the Agent considers appropriate. You shall have access to, and the right to change, the Relevant Information, which will only be used in accordance with applicable law.
Section 409A of the Code
Your Award is not intended to constitute nonqualified deferred compensation within the meaning of Section 409A of the Internal Revenue Code of 1986, as amended, and the rules and regulations issued there under (Section 409A). In no event shall ILG be required to pay you any gross-up or other payment with respect to any taxes or penalties imposed under Section 409A with respect to any amounts or benefits paid to you in respect of your Award.
Notification of Changes
Any changes to these Terms and Conditions shall either be posted on ILGs intranet and www.benefitaccess.com or communicated (either directly by ILG or indirectly through the Agent) to you electronically via e-mail (or otherwise in writing) promptly after such change becomes effective.
I, Craig M. Nash, certify that:
Dated: August 7, 2013 | /s/ CRAIG M. NASH Craig M. Nash Chairman, President and Chief Executive Officer |
I, William L. Harvey, certify that:
Dated: August 7, 2013 | /s/ WILLIAM L. HARVEY William L. Harvey Chief Financial Officer |
I, John A. Galea, certify that:
Dated: August 7, 2013 | /s/ JOHN A. GALEA John A. Galea Chief Accounting Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Craig M. Nash, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge:
Dated: August 7, 2013 | /s/ CRAIG M. NASH Craig M. Nash Chairman, President and Chief Executive Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, William L. Harvey, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge:
Dated: August 7, 2013 | /s/ WILLIAM L. HARVEY William L. Harvey Chief Financial Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, John A. Galea, certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350, that, to my knowledge:
Dated: August 7, 2013 | /s/ JOHN A. GALEA John A. Galea Chief Accounting Officer |
INCOME TAXES
|
6 Months Ended |
---|---|
Jun. 30, 2013
|
|
INCOME TAXES | |
INCOME TAXES | NOTE 10—INCOME TAXES ILG calculates its interim income tax provision in accordance with ASC 740, "Income Taxes." At the end of each interim period, ILG makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of a change in enacted tax laws or rates, tax status, or judgment on the realizability of a beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs. The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or ILG's tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter. A valuation allowance for deferred tax assets is provided when it is more likely than not that certain deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the history of taxable income in recent years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies to make this assessment. For the three and six months ended June 30, 2013, ILG recorded an income tax provision for continuing operations of $12.8 million and $28.6 million, respectively, which represents effective tax rates of 38.4% and 38.6% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. During the three and six months ended June 30, 2013, the effective tax rate increased due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions, partially offset by the U.S. tax consequences of foreign operations and the decrease during the first quarter of 2013 in unrecognized tax benefits associated with the expiration of the statute of limitations related to foreign taxes. For the three and six months ended June 30, 2012, ILG recorded an income tax provision for continuing operations of $5.7 million and $14.3 million, respectively, which represents effective tax rates of 36.3% and 36.1% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. During the three and six months ended June 30, 2012, the effective tax rate decreased due to other income tax items, the most significant of which related to the tax impact of ILG's ability and intention to redeem the senior notes and the decrease during the first quarter of 2012 in unrecognized tax benefits associated with the expiration of the statute of limitations related to foreign taxes. As of June 30, 2013 and December 31, 2012, ILG had unrecognized tax benefits of $1.6 million and $0.7 million, respectively, which if recognized, would favorably affect the effective tax rate. There were no material increases or decreases in unrecognized tax benefits for the three months ended June 30, 2013. During the six months ended June 30, 2013, the unrecognized tax benefits increased by a net amount of approximately $0.9 million during the first quarter of 2013 as a result of an increase of approximately $1.1 million related to state income tax items offset by approximately $0.2 million related to the decrease in unrecognized tax benefits as a result of the expiration of the statute of limitations related to foreign taxes. The increase of $1.1 million for state income tax items did not have an overall impact on the effective tax rate as it is entirely offset by a related state refund claim filed during the first quarter of 2013. ILG recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for the three and six months ended June 30, 2013. During the six months ended June 30, 2013, interest and penalties decreased by approximately $0.2 million during the first quarter of 2013 as a result of the expiration of the statute of limitations related to foreign taxes. As of June 30, 2013, ILG had accrued $0.4 million for interest and penalties. ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $1.3 million within twelve months of the current reporting date due primarily to binding technical advice expected to be issued by state taxing authorities on state income tax items and 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. The IRS has substantially completed its review of IAC's consolidated tax returns for the years ended December 31, 2001 through 2009, which includes our operations from September 24, 2002, our date of acquisition by IAC, until the spin-off in August 2008. The settlement has been submitted to the Joint Committee of Taxation for approval. The statute of limitations for the years 2001 through 2009 has been extended to June 30, 2014. Various IAC consolidated tax returns that include our operations, filed with state and local jurisdictions, are currently under examination, the most significant of which are California, New York and New York City for various tax years beginning with 2006. No other open tax years are currently under examination by the IRS or any state and local jurisdictions. During 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%, 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. The change in the corporate tax rate initially negatively impacted 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. |
GOODWILL AND OTHER INTANGIBLE ASSETS
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GOODWILL AND OTHER INTANGIBLE ASSETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
GOODWILL AND OTHER INTANGIBLE ASSETS | NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS Pursuant to FASB guidance as codified within ASC 350, "Intangibles—Goodwill and Other," goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date. ILG determined our Membership and Exchange and Management and Rental operating segments are individual reporting units which are also individual reportable segments of ILG pursuant to ASC 280, Segment Reporting ("ASC 280"). ILG tests goodwill and other indefinite-lived intangible assets for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Goodwill is tested for impairment based on either a qualitative assessment or a two-step impairment test, as more fully described in Note 2 of our 2012 Annual Report on Form 10-K. When performing the two-step impairment test, if the carrying amount of a reporting unit's goodwill exceeds its implied fair value, an impairment loss equal to the excess is recorded. As of October 1, 2012, we reviewed the carrying value 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 that 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 exceeded its carrying value and, therefore, a two-step impairment test was not necessary. As of June 30, 2013, we did not identify any triggering events which required an interim impairment test subsequent to our annual impairment test on October 1, 2012. The balance of goodwill and other intangible assets, net is as follows (in thousands):
There were no changes in the carrying amount of goodwill for the six months ended June 30, 2013. Goodwill related to the Membership and Exchange and Management and Rental reportable segments (each a reporting unit) was $483.5 million and $22.3 million, respectively, as of June 30, 2013 and December 31, 2012. Other Intangible Assets Intangible assets with indefinite lives relate principally to trade names and trademarks. At June 30, 2013, intangible assets with definite lives relate to the following (in thousands):
At December 31, 2012, intangible assets with definite lives relate to the following (in thousands):
Amortization of intangible assets with definite lives is primarily computed on a straight-line basis. Total amortization expense for intangible assets with definite lives was $1.9 million and $7.3 million for the three months ended June 30, 2013 and 2012, respectively, and $3.9 million and $14.3 million for the six months ended June 30, 2013 and 2012, respectively. Based on June 30, 2013 balances, amortization expense for the next five years and thereafter is estimated to be as follows (in thousands):
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PROPERTY AND EQUIPMENT (Tables)
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Schedule of Property and equipment, net | Property and equipment, net is as follows (in thousands):
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SEGMENT INFORMATION
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SEGMENT INFORMATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SEGMENT INFORMATION | NOTE 11—SEGMENT INFORMATION Segment Information Pursuant to FASB guidance as codified in ASC 280, an operating segment is a component of a public entity (1) that engages in business activities that may earn revenues and incur expenses; (2) for which operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segments and assess its performance; and (3) for which discrete financial information is available. We also considered how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered. ILG consists of two operating segments which are also reportable segments. Membership and Exchange offers leisure and travel-related products and services to owners of vacation interests and others mostly through various membership programs, as well as related services to resort developer clients. Management and Rental provides hotel, condominium resort, timeshare resort and homeowners association management, and vacation rental services to both vacation property owners and vacationers. Information on reportable segments and reconciliation to consolidated operating income is as follows (in thousands):
Selected financial information by reporting segment is presented below (in thousands):
Geographic Information We conduct operations through offices in the U.S. and 16 other countries. For the six months ended June 30, 2013, revenue is sourced from over 100 countries worldwide. Other than the United States, revenue sourced from any individual country or geographic region did not exceed 10% of consolidated revenue for the three and six months ended June 30, 2013 and 2012. Geographic information on revenue, based on sourcing, and long-lived assets, based on physical location, is presented in the table below (in thousands). Amounts in the proceeding table representing revenue sourced from the United States versus all other countries for the three and six months ended June 30, 2012 have been reclassified to conform to current period presentation.
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COMMITMENTS AND CONTINGENCIES (Details) (USD $)
In Millions, unless otherwise specified |
6 Months Ended |
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Jun. 30, 2013
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Guarantees, surety bonds and letters of credit
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Commitments and guarantees | |
Guarantees and commitments amount | $ 32.5 |
Amount of guarantees and commitments, year one | 13.8 |
Guarantees
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Commitments and guarantees | |
Guarantees and commitments amount | $ 29.3 |
Notice period for termination of lease | 60 days |
STOCK-BASED COMPENSATION (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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STOCK-BASED COMPENSATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of allocation of recognized compensation cost | Non-cash stock-based compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of income for the three and six months ended June 30, 2013 and 2012 (in thousands):
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Schedule of RSU award activity |
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FAIR VALUE MEASUREMENTS (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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FAIR VALUE MEASUREMENTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of estimated fair value of financial instruments |
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INCOME TAXES (Details 2) (U.K. Finance Act of 2012)
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1 Months Ended | |
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Apr. 30, 2013
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Apr. 30, 2012
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U.K. Finance Act of 2012
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Income Taxes | ||
U.K. corporate income tax rate (as a percent) | 23.00% | 24.00% |
GOODWILL AND OTHER INTANGIBLE ASSETS (Details 2) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | |||
---|---|---|---|---|---|
Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
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Dec. 31, 2012
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Other intangible assets | |||||
Cost | $ 320,947 | $ 320,947 | $ 320,947 | ||
Accumulated Amortization | (267,093) | (267,093) | (263,185) | ||
Net | 53,854 | 53,854 | 57,762 | ||
Amortization expense for intangible assets | 1,896 | 7,289 | 3,908 | 14,332 | |
Amortization of intangible assets | |||||
2014 | 7,630 | 7,630 | |||
2015 | 7,467 | 7,467 | |||
2016 | 6,767 | 6,767 | |||
2017 | 6,232 | 6,232 | |||
2018 | 5,644 | 5,644 | |||
2019 and thereafter | 20,114 | 20,114 | |||
Net | 53,854 | 53,854 | 57,762 | ||
Customer relationships
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Other intangible assets | |||||
Cost | 129,500 | 129,500 | 129,500 | ||
Accumulated Amortization | (129,500) | (129,500) | (129,500) | ||
Purchase agreements
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Other intangible assets | |||||
Cost | 75,879 | 75,879 | 75,879 | ||
Accumulated Amortization | (74,729) | (74,729) | (74,491) | ||
Net | 1,150 | 1,150 | 1,388 | ||
Amortization of intangible assets | |||||
Net | 1,150 | 1,150 | 1,388 | ||
Resort management contracts
|
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Other intangible assets | |||||
Cost | 72,666 | 72,666 | 72,666 | ||
Accumulated Amortization | (24,188) | (24,188) | (21,225) | ||
Net | 48,478 | 48,478 | 51,441 | ||
Amortization of intangible assets | |||||
Net | 48,478 | 48,478 | 51,441 | ||
Technology
|
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Other intangible assets | |||||
Cost | 25,076 | 25,076 | 25,076 | ||
Accumulated Amortization | (25,063) | (25,063) | (24,988) | ||
Net | 13 | 13 | 88 | ||
Amortization of intangible assets | |||||
Net | 13 | 13 | 88 | ||
Other
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Other intangible assets | |||||
Cost | 17,826 | 17,826 | 17,826 | ||
Accumulated Amortization | (13,613) | (13,613) | (12,981) | ||
Net | 4,213 | 4,213 | 4,845 | ||
Amortization of intangible assets | |||||
Net | $ 4,213 | $ 4,213 | $ 4,845 |
COMMITMENTS AND CONTINGENCIES (Details 2) (European Union Value Added Tax Matter, USD $)
In Millions, unless otherwise specified |
6 Months Ended | |
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Jun. 30, 2013
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Dec. 31, 2012
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European Union Value Added Tax Matter
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COMMITMENTS AND CONTINGENCIES | ||
Accrual of VAT liability | $ 2.8 | $ 4.5 |
Change in estimate of VAT liability | 1.1 | |
Payment of VAT | 0.5 | |
Possible future costs to settle VAT liabilities, lower range | 2.8 | |
Possible future costs to settle VAT liabilities, higher range | $ 4.1 |
SIGNIFICANT ACCOUNTING POLICIES (Details 2)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2013
|
Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
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Weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share | ||||
Basic weighted average shares of common stock outstanding | 57,315 | 56,540 | 57,121 | 56,315 |
Diluted weighted average shares of common stock outstanding | 57,795 | 57,321 | 57,615 | 56,998 |
RSUs
|
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Weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share | ||||
Net effect of common stock equivalents (in shares) | 475 | 765 | 486 | 668 |
Stock options
|
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Weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share | ||||
Net effect of common stock equivalents (in shares) | 5 | 16 | 8 | 15 |
STOCK-BASED COMPENSATION (Details 2) (USD $)
In Thousands, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Jun. 30, 2013
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Jun. 30, 2012
|
Jun. 30, 2013
|
Jun. 30, 2012
|
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Non-cash stock-based compensation expense | ||||
Non-cash compensation expense | $ 2,587 | $ 3,092 | $ 5,144 | $ 6,169 |
Cost of sales
|
||||
Non-cash stock-based compensation expense | ||||
Non-cash compensation expense | 164 | 151 | 358 | 316 |
Selling and marketing expense
|
||||
Non-cash stock-based compensation expense | ||||
Non-cash compensation expense | 292 | 252 | 614 | 529 |
General and administrative expenses
|
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Non-cash stock-based compensation expense | ||||
Non-cash compensation expense | $ 2,131 | $ 2,689 | $ 4,172 | $ 5,324 |
LONG-TERM DEBT (Tables)
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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LONG-TERM DEBT | |||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Long-term debt | Long-term debt is as follows (in thousands):
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ORGANIZATION AND BASIS OF PRESENTATION
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6 Months Ended |
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Jun. 30, 2013
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ORGANIZATION AND BASIS OF PRESENTATION | |
ORGANIZATION AND BASIS OF PRESENTATION | NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION Company Overview Interval Leisure Group, Inc., or ILG, is a leading global provider of membership and leisure services to the vacation industry. ILG consists of two operating segments. Membership and Exchange offers leisure and travel-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 provides hotel, condominium resort, timeshare resort and homeowners association management, and rental services to both vacation property owners and vacationers. On February 28, 2012, we acquired all of the equity of Vacation Resorts International, or VRI, a non-developer provider of resort and homeowners association management services to the shared ownership industry. VRI was consolidated into our financial statements as of the acquisition date with its assets and results of operations primarily included in our Management and Rental operating segment. 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 Trading Places International, or 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 The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of ILG's management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not indicative of the results that may be expected for a full year. The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2012 Annual Report on Form 10-K. Seasonality Revenue at ILG is influenced by the seasonal nature of travel. The Membership and Exchange businesses recognize exchange and Getaway revenue based on confirmation of the vacation, with the first quarter generally experiencing higher revenue and the fourth quarter generally experiencing lower revenue. The Management and Rental businesses recognize rental revenue based on occupancy, with the first and third quarters generally generating higher revenue and the second and fourth quarters generally generating lower revenue. The timeshare and homeowners' association management part of this business does not experience significant seasonality. |
PROPERTY AND EQUIPMENT
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Jun. 30, 2013
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PROPERTY AND EQUIPMENT | NOTE 4—PROPERTY AND EQUIPMENT Property and equipment, net is as follows (in thousands):
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SIGNIFICANT ACCOUNTING POLICIES
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6 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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SIGNIFICANT ACCOUNTING POLICIES | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
SIGNIFICANT ACCOUNTING POLICIES | NOTE 2—SIGNIFICANT ACCOUNTING POLICIES Our significant accounting policies were described in Note 2 to our audited consolidated financial statements included in our 2012 Annual Report on Form 10-K. There have been no significant changes in our significant accounting policies for the six months ended June 30, 2013. Accounting Estimates 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 long-lived assets as well as goodwill and other intangible assets; purchase price allocations of business combinations; 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. Earnings per Share Basic earnings per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed exercise of common stock options and the vesting of restricted stock units ("RSUs") using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. The computations of diluted earnings per share available to common stockholders do not include approximately 0.9 million and 0.8 million stock options and RSUs for the three and six months ended June 30, 2013, respectively, and 0.9 million and 1.1 million stock options and RSUs for the three and six months ended June 30, 2012, respectively, as the effect of their inclusion would have been antidilutive to earnings per share. In connection with the spin-off, stock options to purchase ILG common stock were granted to non-ILG employees for which there is no future compensation expense to be recognized by ILG. As of June 30, 2013 and 2012, 0.9 million of stock options remained outstanding. The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows (in thousands):
Recent Accounting Pronouncements With the exception of those discussed below, there are no recent accounting pronouncements or changes in accounting pronouncements since the recent accounting pronouncements described in our 2012 Annual Report on Form 10-K that are of significance, or potential significance, to ILG based on our current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement. In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-10, "Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate, ("OIS")) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2013-10)"). ASU 2013-10 ratified the Task Force's consensus to allow the Fed Funds effective swap rate to serve as a benchmark interest rate in the United States, which was previously defined in ASC 815 as either (1) a rate on direct obligations of the U.S. Department of the Treasury (UST) or (2) the LIBOR swap rate. ASU 2013-10 does not add to the disclosure requirements in ASC 815-10-50; however, in order to comply with the required disclosures related to fair value in ASC 820 a separate process for determining the fair value hierarchy of derivatives when the OIS rate is an input may be required. The ASU is required to be applied prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013. We do not currently anticipate the adoption of this guidance, as of the effective date, will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements. In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment ("CTA") upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2013-05"). ASU 2013-05 applies to the release of the CTA into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The ASU is effective for fiscal years beginning after December 15, 2013 (and interim periods within those fiscal years) and shall be applied prospectively, with early adoption permitted. We do not currently anticipate the adoption of this guidance will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements. In February 2013, the FASB issued ASU 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date" ("ASU 2013-04"). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The ASU requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. The ASU is effective for fiscal years beginning after December 15, 2013 (and interim periods within those years), and shall be applied retrospectively, with early adoption permitted. We do not currently anticipate the adoption of this guidance will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements. Adopted Accounting Pronouncements In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 adds new disclosure requirements for items reclassified out of accumulated other comprehensive income/loss ("AOCI"), including (1) disaggregating and separately presenting changes in AOCI balances by component and (2) presenting significant items reclassified out of AOCI either on the face of the statement where net income is presented or as a separate disclosure in the notes to the financial statements. It does not amend any existing requirements for reporting net income or other comprehensive income in the financial statements. The ASU is effective for fiscal years beginning after December 15, 2012 (and interim periods within those years), and shall be applied prospectively. The adoption of ASU 2013-02 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures. In January 2013, the FASB issued ASU 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities" ("ASU 2013-01"). ASU 2013-01 clarifies the offsetting disclosure requirements in ASU 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities" ("ASU 2011-11"). Under ASU 2013-01, the disclosure requirements would apply to derivative instruments accounted for in accordance with ASC 815, "Derivatives and Hedging," including bifurcated embedded derivatives. The ASU is effective for fiscal years beginning on or after January 1, 2013, and interim periods within those years. Retrospective application is required for all comparative periods presented. The adoption of ASU 2013-01 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures. In October 2012, the FASB issued ASU 2012-04, "Technical Corrections and Improvements" ("ASU 2012-04"). ASU 2012-04 makes certain technical corrections, clarifications and conforming fair value amendments to the FASB Accounting Standard Codification (the "Codification") that affects various Codification topics. The amendments in this ASU are effective upon issuance, except for amendments that are subject to transition guidance, which will be effective for fiscal periods beginning after December 15, 2012. The adoption of ASU 2012-04 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures. In December 2011, the FASB issued ASU 2011-11 that creates new disclosure requirements about the nature of an entity's rights of setoff and related arrangements associated with its financial instruments and derivative instruments. The ASU is designed to make financial statements that are prepared under GAAP more comparable to those prepared under International Financial Reporting Standards ("IFRS"). The ASU is effective for annual reporting periods beginning on or after January 1, 2013, and interim periods therein, with retrospective application required. The adoption of ASU 2011-11 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures. Correction of an Immaterial Prior Period Item During the current quarter, we identified an immaterial net understatement of membership revenue, related membership expenses, and income for the period commencing January 1, 2011 through March 31, 2013. In accordance with ASC 250, "Accounting Changes and Error Corrections," we assessed the materiality of the net understatement, both quantitatively and qualitatively, and concluded it is not material to any of our previously issued or current year financial statements. The out of period correction of this item resulted in the recognition of $4.1 million of membership revenue and $0.6 million of certain membership expenses in the three and six month periods ended June 30, 2013. Consequently, operating income and net income for the three and six months ended June 30, 2013 were increased by $3.5 million and $2.1 million, respectively, or $0.04 of diluted earnings per share. |
BENEFIT PLANS (Details) (USD $)
In Millions, except Share data, unless otherwise specified |
3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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Retirement savings plan qualified under Section 401(k) of the Internal Revenue Code and other various benefit plans | ||||
Employee contribution as maximum percentage of pre-tax earnings | 50.00% | |||
Employer contribution against each dollar contributed by employee (as a percent) | 50.00% | |||
Matching contributions | $ 0.4 | $ 0.4 | $ 0.8 | $ 0.7 |
Director Plan | ||||
Vesting percentage under deferred compensation plan | 100.00% | |||
Shares of common stock reserved for issuance pursuant to deferred compensation plan | 100,000 | 100,000 | ||
Shares outstanding under the deferred compensation plan | 39,525 | 39,525 | ||
Maximum
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Retirement savings plan qualified under Section 401(k) of the Internal Revenue Code and other various benefit plans | ||||
Employer's maximum contribution of participant's eligible earnings (as a percent) | 3.00% |
SEGMENT INFORMATION (Tables)
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Schedule of information on reportable segments and reconciliation to consolidated operating income | Information on reportable segments and reconciliation to consolidated operating income is as follows (in thousands):
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Schedule of financial information by reporting segment | Selected financial information by reporting segment is presented below (in thousands):
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Schedule of geographic information on revenue, based on sourcing, and long-lived assets, based on physical location |
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SIGNIFICANT ACCOUNTING POLICIES (Details 3) (USD $)
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3 Months Ended | 6 Months Ended | ||
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Jun. 30, 2013
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Jun. 30, 2012
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Jun. 30, 2013
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Jun. 30, 2012
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SIGNIFICANT ACCOUNTING POLICIES | ||||
Operating income | $ 33,471,000 | $ 23,648,000 | $ 76,260,000 | $ 58,048,000 |
Net income | 20,570,000 | 10,051,000 | 45,580,000 | 25,280,000 |
Diluted earnings per share (in dollars per share) | $ 0.36 | $ 0.18 | $ 0.79 | $ 0.44 |
Correction Adjustment | Understatement of membership revenue and expense
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SIGNIFICANT ACCOUNTING POLICIES | ||||
Membership revenue | 4,100,000 | 4,100,000 | ||
Membership expenses | 600,000 | 600,000 | ||
Operating income | 3,500,000 | 3,500,000 | ||
Net income | $ 2,100,000 | $ 2,100,000 | ||
Diluted earnings per share (in dollars per share) | $ 0.04 | $ 0.04 |