UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from_________ to ________

Commission file number 001-37794

Hilton Grand Vacations Inc.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	81-2545345
(State or Other Jurisdiction of	(I.R.S. Employer
Incorporation or Organization)	Identification No.)

6355 MetroWest Boulevard, Suite 180,
Orlando, Florida	32835
(Address of Principal Executive Offices)	(Zip Code)

Registrant’s Telephone Number, Including Area Code (407) 613-3100

(Former Name, Former Address, and Former Fiscal Year, if Changed Since Last Report)

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 requirement for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☒	Accelerated Filer	☐
Non-Accelerated Filer	☐	Smaller Reporting Company	☐
Emerging Growth Company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, $0.01 par value per share	HGV	New York Stock Exchange

The number of shares outstanding of the registrant’s common stock, par value $0.01 per share, as of April 26, 2019 was 90,772,372.

HILTON GRAND VACATIONS INC.

FORM 10-Q TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements	2
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.		Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.		Controls and Procedures	40
PART II - OTHER INFORMATION
Item 1.	Legal Proceedings		41
Item 1A.	Risk Factors		41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		41
Item 3.	Defaults Upon Senior Securities		41
Item 4.	Mine Safety Disclosures		41
Item 5.	Other Information		41
Item 6.	Exhibits		42
	Signatures		43

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PART I FINANCIAL INFORMATION

Item 1. Financial Statements

HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in millions, except share data)

	March 31,		December 31,
	2019		2018
	(unaudited)
ASSETS
Cash and cash equivalents	$	158	$	108
Restricted cash		64		72
Accounts receivable, net of allowance for doubtful accounts of $12 and $14		146		153
Timeshare financing receivables, net		1,111		1,120
Inventory		529		527
Property and equipment, net		644		559
Operating lease right of use assets, net		66		—
Investments in unconsolidated affiliates		40		38
Intangible assets, net		80		81
Other assets		123		95
TOTAL ASSETS (variable interest entities - $608 and $647)	$	2,961	$	2,753
LIABILITIES AND EQUITY
Liabilities:
Accounts payable, accrued expenses and other	$	286	$	324
Advanced deposits		106		101
Debt, net		800		604
Non-recourse debt, net		720		759
Operating lease liabilities		78		—
Deferred revenues		135		95
Deferred income tax liabilities		261		254
Total liabilities (variable interest entities - $601 and $640)		2,386		2,137
Commitments and contingencies - see Note 19
Equity:
Preferred stock, $0.01 par value; 300,000,000 authorized shares, none    issued or outstanding as of March 31, 2019 and December 31, 2018		—		—
Common stock, $0.01 par value; 3,000,000,000 authorized shares,    91,886,756 issued and outstanding as of March 31, 2019 and    94,558,086 issued and outstanding as of December 31, 2018		1		1
Additional paid-in capital		170		174
Accumulated retained earnings		404		441
Total equity		575		616
TOTAL LIABILITIES AND EQUITY	$	2,961	$	2,753

See notes to unaudited condensed consolidated financial statements.

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HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

(in millions, except per share amounts)

	Three Months Ended March 31,
	2019			2018
Revenues
Sales of VOIs, net	$	125		$	78
Sales, marketing, brand and other fees		141			125
Financing		41			38
Resort and club management		42			39
Rental and ancillary services		59			51
Cost reimbursements		42			36
Total revenues		450			367
Expenses
Cost of VOI sales		36			19
Sales and marketing		170			161
Financing		13			11
Resort and club management		11			11
Rental and ancillary services		35			28
General and administrative		25			23
Depreciation and amortization		10			8
License fee expense		23			23
Cost reimbursements		42			36
Total operating expenses		365			320
Interest expense		(10	)		(7	)
Equity in earnings from unconsolidated affiliates		1			1
Other loss, net		(1	)		(1	)
Income before income taxes		75			40
Income tax expense		(20	)		(10	)
Net income	$	55		$	30
Earnings per share:
Basic	$	0.59		$	0.31
Diluted	$	0.58		$	0.30

See notes to unaudited condensed consolidated financial statements.

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HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in millions)

	Three Months Ended March 31,
	2019			2018
Operating Activities
Net income	$	55		$	30
Adjustments to reconcile net income to net cash provided by    operating activities:
Depreciation and amortization		10			8
Amortization of deferred financing costs and other		2			1
Provision for financing receivables losses		14			12
Other loss, net		1			1
Share-based compensation		5			3
Deferred income tax expense (benefit)		5			(8	)
Equity in earnings from unconsolidated affiliates		(1	)		(1	)
Distributions received from unconsolidated affiliates		—			1
Net changes in assets and liabilities:
Accounts receivable, net		7			(5	)
Timeshare financing receivables, net		(5	)		(15	)
Inventory		(3	)		(19	)
Purchases and development of real estate for future conversion to     inventory		(63	)		—
Other assets		(29	)		(51	)
Accounts payable, accrued expenses and other		(31	)		(42	)
Advanced deposits		5			5
Deferred revenues		41			105
Other		1			—
Net cash provided by operating activities		14			25
Investing Activities
Capital expenditures for property and equipment		(6	)		(14	)
Software capitalization costs		(4	)		(4	)
Return of investment from unconsolidated affiliates		—			9
Investments in unconsolidated affiliates		—			(5	)
Net cash used in investing activities		(10	)		(14	)
Financing Activities
Issuance of debt		195			—
Repayment of debt		(23	)		(3	)
Repayment of non-recourse debt		(40	)		(39	)
Debt issuance costs		—			(2	)
Repurchase and retirement of common stock		(92	)		(112	)
Payment of withholding taxes on vesting of restricted stock units		(2	)		(1	)
Capital contribution		—			3
Net cash provided by (used in) financing activities		38			(154	)
Net increase (decrease) in cash, cash equivalents and restricted cash		42			(143	)
Cash, cash equivalents and restricted cash, beginning of period		180			297
Cash, cash equivalents and restricted cash, end of period	$	222		$	154
Supplemental disclosure of non-cash operating activities:
Cumulative effect of adoption of new accounting standard	$	—		$	38
Supplemental disclosure of non-cash financing activities:
Issuance of other debt	$	23		$	—

See notes to unaudited condensed consolidated financial statements.

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HILTON GRAND VACATIONS INC.

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY (UNAUDITED)

(in millions)

						Additional			Accumulated
	Common Stock					Paid-in			Retained			Total
	Shares			Amount		Capital			Earnings			Equity
Balance as of December 31, 2018		94		$	1	$	174		$	441		$	616
Net income		—			—		—			55			55
Activity related to share-based compensation		—			—		1			—			1
Repurchase and retirement of common stock		(3	)		—		(5	)		(92	)		(97	)
Balance as of March 31, 2019		91		$	1	$	170		$	404		$	575
Balance as of December 31, 2017		99		$	1	$	162		$	355		$	518
Net income		—			—		—			30			30
Activity related to share-based compensation		—			—		(1	)		—			(1	)
Repurchase and retirement of common stock		(2	)		—		(3	)		(109	)		(112	)
Revenue recognition cumulative-effect adjustment		—			—		—			(38	)		(38	)
Capital contribution		—			—		3			—			3
Balance as of March 31, 2018		97		$	1	$	161		$	238		$	400

See notes to unaudited condensed consolidated financial statements.

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HILTON GRAND VACATIONS INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization

Our Business

Hilton Grand Vacations Inc. (“Hilton Grand Vacations,” “we,” “us,” “our,” “HGV” or the “Company”) is a global timeshare company engaged in developing, marketing, selling and managing timeshare resorts primarily under the Hilton Grand Vacations brand. Our operations primarily consist of: selling vacation ownership intervals (“VOIs”) for us and third parties; operating resorts; financing and servicing loans provided to consumers for their timeshare purchases; and managing our points-based Hilton Grand Vacations Club exchange program (the “Club”). As of March 31, 2019, we had 56 properties, comprised of 8,966 units, located in the United States (“U.S.”), Japan and Europe.

In connection with the completion of the spin-off in January 2017, we entered into agreements with Hilton Worldwide (“Hilton”) (who at the time was a related party) and other third parties, including licenses to use the Hilton Grand Vacations brand. The unaudited condensed consolidated financial statements reflect the effect of these agreements. For the three months ended March 31, 2019 and 2018, we incurred $56 million and $59 million, respectively, in costs relating to the agreements entered with Hilton. See Key Agreements Related to the Spin-Off section in Part I - Item 1. Business of our Annual Report on Form 10-K for the year ended December 31, 2018 for further information.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The unaudited condensed consolidated financial statements presented herein include 100 percent of our assets, liabilities, revenues, expenses and cash flows as well as all entities in which we have a controlling financial interest.  In our opinion, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods.  All material intercompany transactions and balances have been eliminated in consolidation.

The unaudited condensed consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Certain information and footnote disclosures normally included in financial statements presented in accordance with U.S. GAAP have been omitted in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”). Although we believe the disclosures made are adequate to prevent information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto as of and for the year ended December 31, 2018, included in our Annual Report on Form 10-K filed with the SEC on February 28, 2019.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

Summary of Significant Accounting Policies

Leases

We lease sales centers, office space and equipment under operating leases. We determine if an arrangement is a lease at inception. Amounts related to operating leases are included in Operating lease right-of-use (“ROU”) assets, net and Operating lease liabilities in our condensed consolidated balance sheets. Operating lease ROU assets exclude lease incentives received.

ROU assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Because most of our leases do not provide an explicit on implicit rate of return, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis. Our incremental borrowing rate for a lease is the rate of interest we would have to pay on a collateralized basis to borrow an amount equal to the lease payments for the asset under similar terms.

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We have lease agreements with lease and non-lease components. Our operating leases may require minimum rent payments, contingent rent payments based on a percentage of revenue or income or rental payments adjusted periodically for inflation, or rent payments equal to the greater of a minimum rent or contingent rent. Our leases do not contain any residual value guarantees or material restrictive covenants. Leases with a lease term of 12 months or less are not recorded on the balance sheet and lease expense is recognized on a straight-line basis over the lease term. We currently have no finance leases.

We monitor events or changes in circumstances that change the timing or amount of future lease payments which results in the remeasurement of a lease liability, with a corresponding adjustment to the ROU asset. ROU assets for operating leases are periodically reviewed for impairment losses under ASC 360-10, Property, Plant, and Equipment, to determine whether an ROU asset is impaired, and if so, the amount of the impairment loss to recognize.

Recently Issued Accounting Pronouncements

Adopted Accounting Standards

On January 1, 2018, we adopted Accounting Standards Update (ASU) No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) as amended, using the modified retrospective approach permitted under ASU No. 2018-11, Targeted Improvements, collectively Accounting Standards Codification Topic 842 (“ASC 842”). Accordingly, previously reported financial information has not been restated to reflect the application of the new standard to the comparative periods presented. As permitted under the transition guidance in ASC 842, we have made an accounting policy election to adopt the following package of practical expedients:  

i. to not reassess whether expired or existing contracts are or contain leases;

ii. to not reassess lease classification for expired or existing leases;

iii. to not reassess any initial direct costs for any existing leases;  

iv. to not reassess the existence of a lease for existing or expired land easements that were not previously accounted for as leases;

v. to record short-term lease payments (less than 12 months) in profit and loss on a straight-line basis over the lease term and variable lease payments in the period in which the obligation for those payments is incurred; and

vi. to not prospectively, and upon adoption, separate lease and non-lease components.

ROU assets represent our right to use an underlying asset for the lease term and operating lease liabilities represent our obligation to make lease payments arising from the lease. ASC 842 had no impact on our condensed consolidated statements of operations or on our condensed consolidated statements of cash flows. Upon adoption, we recognized ROU assets of $68 million and operating lease liabilities of $80 million for our real estate and equipment operating leases on the condensed consolidated balance sheets.

Accounting Standards Not Yet Adopted

In June 2016, the FASB issued ASU No. 2016-13, (“ASU 2016-13”), Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The update is effective for annual periods beginning after December 15, 2019. We are currently evaluating the effect that this ASU will have on our unaudited condensed consolidated financial statements.

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Note 3: Revenue from Contracts with Customers

Disaggregation of Revenue

The following tables show our disaggregated revenues by segment from contracts with customers. We operate our business in the following two segments: (i) Real estate sales and financing and (ii) Resort operations and club management. Please refer to Note 18: Business Segments below for more details related to our segments.

	Three Months Ended March 31,
($ in millions)	2019		2018
Real Estate and Financing Segment
Sales of VOIs, net	$	125	$	78
Sales, marketing, brand and other fees		141		125
Interest income		36		34
Other financing revenue		5		4
Real estate and financing segment revenues	$	307	$	241

	Three Months Ended March 31,
($ in millions)	2019		2018
Resort Operations and Club Management Segment
Club management	$	26	$	23
Resort management		16		16
Rental (1)		52		53
Ancillary services		7		6
Resort operations and club management segment revenues	$	101	$	98

⁽¹⁾ Includes intersegment eliminations. See Note 18:  Business Segments for additional information.

Contract Balances

The following table provides information on our accounts receivable and contract asset from contracts with customers which are included in Accounts receivable, net on our condensed consolidated balance sheets:

($ in millions)	March 31, 2019		December 31, 2018
Receivables	$	122	$	122
Contract asset		2		—

The following table presents the composition of our contract liabilities.

($ in millions)	March 31, 2019		December 31, 2018
Contract liabilities:
Advanced deposits	$	106	$	101
Deferred revenues(1)		116		72
Club Bonus Point incentive liability(2)		57		56

⁽¹⁾ The deferred revenues balance is primarily comprised of (i) Club activation fees that are paid at the closing of a VOI purchase, which grants access to our points-based Club and (ii) annual dues for Club membership renewals.

⁽²⁾ Amounts related to the Club Bonus Point incentive liability are included in Accounts payable, accrued expenses and other on our condensed consolidated balance sheets. This liability is comprised of revenue for incentives from VOI sales and sales and marketing expenses in conjunction with our fee-for-service arrangements.

Revenue earned during the three months ended March 31, 2019 that was included in the contract liabilities balance at December 31, 2018 was approximately $39 million.

Accounts receivable for the three months ended March 31, 2019 include amounts associated with our contractual right to consideration for completed performance obligations related primarily to our fee-for-service arrangements and are settled when the related cash is received. Accounts receivable are recorded when the right to consideration becomes

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unconditional and is only contingent on the passage of time. For the three months ended March 31, 2019, there were no associated impairment losses. Refer to Note 5: Timeshare Financing Receivables for information on balances and changes in balances during the period related to our timeshare financing receivables.

Contract asset relates to incentive fees that can be earned for meeting certain target on sales of VOIs at properties under our fee-for-service arrangements; however, our right to consideration is conditional upon completing the requirements of the incentive fee period.  

Contract liabilities include payments received or due in advance of satisfying our performance obligations. Such contract liabilities include advance deposits received on prepaid vacation packages for future stays at our resorts, deferred revenues and the liability for Club Bonus Points awarded to our customers for purchase of VOIs at our properties or properties under our fee-for-service arrangements that may be redeemed in the future.

Transaction Price Allocated to Remaining Performance Obligations

Transaction price allocated to remaining performance obligations represents contract revenue that has not yet been recognized. Our contracts with remaining performance obligations primarily include (i) sales of VOIs under construction, (ii) Club activation fees paid at closing of a VOI purchase, (iii) customers’ advanced deposits on prepaid vacation packages and (iv) Club Bonus Points that may be redeemed in the future. As of March 31, 2019 and December 31, 2018, we had no remaining performance obligations on sales of VOIs under construction.

The following table includes the remaining transaction price related to Advanced deposits, Club activation fees and Club Bonus Points as of March 31, 2019:

($ in millions)	Remaining Transaction Price		Recognition Period	Recognition Method
Advanced deposits	$	106	18 months	Upon customer stays
Club activation fees		64	7 years	Straight-line basis over average inventory holding     period
Club Bonus Points		57	24 months	Upon redemption

Note 4: Restricted Cash

Restricted cash was as follows:

	March 31,		December 31,
($ in millions)	2019		2018
Escrow deposits on VOI sales	$	38	$	45
Reserves related to non-recourse debt(1)		26		27
	$	64	$	72

⁽¹⁾ See Note 11: Debt & Non-recourse Debt for further discussion.

Note 5: Timeshare Financing Receivables

Timeshare financing receivables were as follows:

	March 31, 2019
($ in millions)	Securitized and Pledged			Unsecuritized(1)			Total
Timeshare financing receivables	$	618		$	662		$	1,280
Less: allowance for financing receivables losses		(39	)		(130	)		(169	)
	$	579		$	532		$	1,111

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	December 31, 2018
($ in millions)	Securitized and Pledged			Unsecuritized(1)			Total
Timeshare financing receivables	$	660		$	632		$	1,292
Less: allowance for financing receivables losses		(43	)		(129	)		(172	)
	$	617		$	503		$	1,120

⁽¹⁾ Includes amounts used as collateral to secure a non-recourse revolving timeshare receivable credit facility ("Timeshare Facility") as well as amounts held as future collateral for upcoming securitization activities.

As of March 31, 2019 and December 31, 2018, we had $