Edgar Filing: MARRIOTT VACATIONS WORLDWIDE Corp

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________

FORM 10-Q

___________________________________________

(Mark One)



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

For the quarterly period ended September 30, 2018



¨	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 001-35219

_________________________

Marriott Vacations Worldwide Corporation

(Exact name of registrant as specified in its charter)

_________________________



Delaware		45-2598330
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
6649 Westwood Blvd. Orlando, FL		32821
(Address of principal executive offices)		(Zip Code)

(407) 206-6000

(Registrant’s telephone number, including area code)

(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 requirements for the past 90 days. Yes x 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 x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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.

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 x

The number of shares outstanding of the issuer’s common stock, par value $0.01 per share, as of November 2, 2018 was 47,037,330.

MARRIOTT VACATIONS WORLDWIDE CORPORATION

FORM 10-Q TABLE OF CONTENTS



		Page
Part I.	FINANCIAL INFORMATION (UNAUDITED)	1
Item 1.	Financial Statements	1
	Interim Consolidated Statements of Income	1
	Interim Consolidated Statements of Comprehensive Income	2
	Interim Consolidated Balance Sheets	3
	Interim Consolidated Statements of Cash Flows	4
	Interim Consolidated Statements of Shareholders’ Equity	6
	Notes to Interim Consolidated Financial Statements	7
	1. Summary of Significant Accounting Policies	7
	2. Acquisitions and Dispositions	11
	3. Revenue	15
	4. Income Taxes	21
	5. Vacation Ownership Notes Receivable	22
	6. Financial Instruments	27
	7. Earnings Per Share	29
	8. Inventory	30
	9. Contingencies and Commitments	31
	10. Securitized Debt	34
	11. Debt	36
	12. Shareholders’ Equity	39
	13. Share-Based Compensation	40
	14. Variable Interest Entities	42
	15. Business Segments	45
	16. Adoption Impact of New Revenue Standard	47
	17. Supplemental Guarantor Information	52
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	54
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	86
Item 4.	Controls and Procedures	87
Part II.	OTHER INFORMATION	88
Item 1.	Legal Proceedings	88
Item 1A.	Risk Factors	88
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	107
Item 3.	Defaults Upon Senior Securities	107
Item 4.	Mine Safety Disclosures	107
Item 5.	Other Information	107
Item 6.	Exhibits	107
	SIGNATURES	110

Throughout this report, we refer to brands that we own, as well as those brands that we license as our brands. All brand trademarks, service marks or trade names cited in this report are the property of their respective owners, including those of other companies and organizations. Solely for convenience, trademarks, trade names and service marks referred to in this report may appear without the ^®or ^TMsymbols, however such references are not intended to indicate in any way that MVW or the owner, as applicable, will not assert, to the fullest extent under applicable law, all rights to such trademarks, trade names and service marks.

“Hyatt Vacation Ownership” business refers to the group of businesses using the Hyatt^® brand in the shared ownership business pursuant to an exclusive, global master license agreement with a subsidiary of Hyatt Hotels Corporation (“Hyatt”). Our subsidiary, Vistana Signature Experiences, Inc. (“Vistana”), uses the Westin^® and Sheraton^® brands (and to a limited extent the St. Regis^® and The Luxury Collection^® brands) in vacation ownership pursuant to an exclusive global license agreement with Starwood Hotels and Resort Worldwide, LLC (“Starwood”). Brand names, trademarks, service marks and trade names that we own or license from Marriott International, Inc. (“Marriott International”) or its affiliates include Marriott Vacation Club^®, Marriott Vacation Club Destinations^TM, Marriott Vacation Club Pulse^SM, Marriott Grand Residence Club^®, Grand Residences by Marriott^®, and The Ritz-Carlton Club^®. We also refer to Marriott International’s Marriott Rewards^® customer loyalty program.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARRIOTT VACATIONS WORLDWIDE CORPORATION

INTERIM CONSOLIDATED STATEMENTS OF INCOME

(In millions, except per share amounts)

(Unaudited)



	Three Months Ended						Nine Months Ended
	September 30, 2018			September 30, 2017			September 30, 2018			September 30, 2017
REVENUES
Sale of vacation ownership products	$	252		$	183		$	632		$	549
Management and exchange	126			70			274			209
Rental	90			66			239			203
Financing	48			34			119			99
Cost reimbursements	234			177			652			561
TOTAL REVENUES	750			530			1,916			1,621
EXPENSES
Cost of vacation ownership products	64			46			167			141
Marketing and sales	135			94			346			287
Management and exchange	65			38			140			111
Rental	74			57			191			168
Financing	19			11			40			30
General and administrative	53			26			114			81
Depreciation and amortization	18			6			29			16
Litigation settlement	17			2			33			2
Royalty fee	19			15			50			47
Cost reimbursements	234			177			652			561
TOTAL EXPENSES	698			472			1,762			1,444
Gains (losses) and other income (expense), net	2			7			(4		)	7
Interest expense	(14		)	(2		)	(23		)	(5		)
ILG acquisition-related costs	(108		)	—			(128		)	(1		)
Other	—			—			(3		)	—
(LOSS) INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS	(68		)	63			(4		)	178
Benefit (provision) for income taxes	10			(23		)	(7		)	(62		)
NET (LOSS) INCOME	(58		)	40			(11		)	116
Net income attributable to noncontrolling interests	—			—			—			—
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(58	)	$	40		$	(11	)	$	116

(LOSSES) EARNINGS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
Basic	$	(1.75	)	$	1.49		$	(0.37	)	$	4.27
Diluted	$	(1.75	)	$	1.45		$	(0.37	)	$	4.18

CASH DIVIDENDS DECLARED PER SHARE	$	0.40		$	0.35		$	1.20		$	1.05

See Notes to Interim Consolidated Financial Statements

MARRIOTT VACATIONS WORLDWIDE CORPORATION

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In millions)

(Unaudited)



	Three Months Ended					Nine Months Ended
	September 30, 2018			September 30, 2017		September 30, 2018			September 30, 2017
Net (loss) income	$	(58	)	$	40	$	(11	)	$	116
Other comprehensive income (loss):
Foreign currency translation adjustments	—			5		—			12
Derivative instrument adjustment, net of tax	—			—		(1		)	—
Total other comprehensive income (loss), net of tax	—			5		(1		)	12
TOTAL COMPREHENSIVE (LOSS) INCOME, NET OF TAX	(58		)	45		(12		)	128
Less: Net income attributable to noncontrolling interests	—			—		—			—
Less: Other comprehensive income attributable to noncontrolling interests	—			—		—			—
Total comprehensive income attributable to noncontrolling interests	—			—		—			—
COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS	$	(58	)	$	45	$	(12	)	$	128

See Notes to the Interim Consolidated Financial Statements

MARRIOTT VACATIONS WORLDWIDE CORPORATION

INTERIM CONSOLIDATED BALANCE SHEETS

(In millions, except share and per share data)

(Unaudited)



	September 30, 2018			December 31, 2017
ASSETS
Cash and cash equivalents	$	441		$	409
Restricted cash (including $130 and $32 from VIEs, respectively)	365			82
Accounts receivable, net (including $10 and $6 from VIEs, respectively)	236			92
Vacation ownership notes receivable, net (including $1,557 and $814 from VIEs, respectively)	1,959			1,115
Inventory	829			398
Property and equipment	952			583
Goodwill	2,747			—
Intangibles, net	1,216			—
Other (including $28 and $14 from VIEs, respectively)	268			166
TOTAL ASSETS	$	9,013		$	2,845

LIABILITIES AND EQUITY
Accounts payable	$	181		$	145
Advance deposits	124			84
Accrued liabilities (including $2 and $1 from VIEs, respectively)	370			120
Deferred revenue	325			69
Payroll and benefits liability	194			112
Deferred compensation liability	94			75
Securitized debt, net (including $1,701 and $845 from VIEs, respectively)	1,688			835
Debt, net	2,235			260
Other	15			14
Deferred taxes	266			90
TOTAL LIABILITIES	5,492			1,804
Contingencies and Commitments (Note 9)
Preferred stock — $0.01 par value; 2,000,000 shares authorized; none issued or outstanding	—			—
Common stock — $0.01 par value; 100,000,000 shares authorized; 57,611,046 and 36,861,843 shares issued, respectively	1			—
Treasury stock — at cost; 10,405,594 and 10,400,547 shares, respectively	(696		)	(694		)
Additional paid-in capital	3,697			1,189
Accumulated other comprehensive income	16			17
Retained earnings	478			529
TOTAL MVW SHAREHOLDERS' EQUITY	3,496			1,041
Noncontrolling interests	25			—
TOTAL EQUITY	3,521			1,041
TOTAL LIABILITIES AND EQUITY	$	9,013		$	2,845

The abbreviation VIEs above means Variable Interest Entities.

See Notes to Interim Consolidated Financial Statements

MARRIOTT VACATIONS WORLDWIDE CORPORATION

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)

(Unaudited)



	Nine Months Ended
	September 30, 2018			September 30, 2017
OPERATING ACTIVITIES
Net (loss) income	$	(11	)	$	116
Adjustments to reconcile net (loss) income to net cash and restricted cash provided by operating activities:
Depreciation and amortization of intangibles	29			16
Amortization of debt discount and issuance costs	12			6
Accretion of acquired vacation ownership notes receivable	(1		)	—
Vacation ownership notes receivable reserve	42			40
Share-based compensation	19			12
Deferred income taxes	2			23
Net change in assets and liabilities, net of the effects of acquisition:
Accounts receivable	(9		)	23
Vacation ownership notes receivable originations	(395		)	(345		)
Vacation ownership notes receivable collections	244			204
Inventory	68			26
Purchase of vacation ownership units for future transfer to inventory	—			(34		)
Other assets	53			34
Accounts payable, advance deposits and accrued liabilities	(13		)	(78		)
Deferred revenue	38			10
Payroll and benefit liabilities	(29		)	1
Deferred compensation liability	11			10
Other liabilities	1			—
Other, net	6			7
Net cash and restricted cash provided by operating activities	67			71
INVESTING ACTIVITIES
Acquisition of a business, net of cash and restricted cash acquired	(1,393		)	—
Capital expenditures for property and equipment (excluding inventory)	(17		)	(21		)
Purchase of company owned life insurance	(13		)	(12		)
Net cash and restricted cash used in investing activities	(1,423		)	(33		)

Continued

See Notes to Interim Consolidated Financial Statements

MARRIOTT VACATIONS WORLDWIDE CORPORATION

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(In millions)

(Unaudited)



	Nine Months Ended
	September 30, 2018			September 30, 2017
FINANCING ACTIVITIES
Borrowings from securitization transactions	423			400
Repayment of debt related to securitization transactions	(264		)	(232		)
Proceeds from debt	1,650			318
Repayments of debt	(53		)	(88		)
Purchase of Convertible Note Hedges	—			(33		)
Proceeds from issuance of Warrants	—			20
Debt issuance costs	(34		)	(14		)
Repurchase of common stock	(2		)	(83		)
Payment of dividends	(32		)	(29		)
Payment of withholding taxes on vesting of restricted stock units	(17		)	(11		)
Net cash and restricted cash provided by financing activities	1,671			248
Effect of changes in exchange rates on cash, cash equivalents and restricted cash	—			3
Increase in cash, cash equivalents and restricted cash	315			289
Cash, cash equivalents and restricted cash, beginning of period	491			213
Cash, cash equivalents and restricted cash, end of period	$	806		$	502

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Non-cash issuance of debt in connection with acquisition of vacation ownership units	$	—		$	64
Non-cash issuance of stock in connection with ILG Acquisition	2,505			—
Dividends payable	19			9

SUPPLEMENTAL DISCLOSURES
Interest paid, net of amounts capitalized	28			16
Income taxes paid, net of refunds	18			38

See Notes to Interim Consolidated Financial Statements

MARRIOTT VACATIONS WORLDWIDE CORPORATION

INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In millions)

(Unaudited)



Common Stock Issued		Common Stock		Treasury Stock			Additional Paid-In Capital		Accumulated Other Comprehensive Income			Retained Earnings			Total MVW Shareholders' Equity			Noncontrolling Interests		Total Equity


36.9	Balance at December 31, 2017	$	—	$	(694	)	$	1,189	$	17		$	529		$	1,041		$	—	$	1,041
—	Net loss	—		—			—		—			(11		)	(11		)	—		(11		)
20.5	ILG Acquisition	1		—			2,440		—			—			2,441			25		2,466
—	Derivative instrument adjustment	—		—			—		(1		)	—			(1		)	—		(1		)
0.2	Amounts related to share-based compensation	—		—			68		—			—			68			—		68
—	Repurchase of common stock	—		(2		)	—		—			—			(2		)	—		(2		)
—	Dividends	—		—			—		—			(40		)	(40		)	—		(40		)
57.6	Balance at September 30, 2018	$	1	$	(696	)	$	3,697	$	16		$	478		$	3,496		$	25	$	3,521

See Notes to Interim Consolidated Financial Statements

MARRIOTT VACATIONS WORLDWIDE CORPORATION

NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Interim Consolidated Financial Statements present the results of operations, financial position and cash flows of Marriott Vacations Worldwide Corporation (“we,” “us,” “Marriott Vacations Worldwide,” “MVW” or the “Company,” which includes our consolidated subsidiaries except where the context of the reference is to a single corporate entity). In order to make this report easier to read, we refer throughout to (i) our Interim Consolidated Financial Statements as our “Financial Statements,” (ii) our Interim Consolidated Statements of Income as our “Income Statements,” (iii) our Interim Consolidated Balance Sheets as our “Balance Sheets” and (iv) our Interim Consolidated Statements of Cash Flows as our “Cash Flows.” In addition, references throughout to numbered “Footnotes” refer to the numbered Notes in these Notes to Interim Consolidated Financial Statements, unless otherwise noted. We use certain other terms that are defined within these Financial Statements.

The Financial Statements presented herein and discussed below include 100 percent of the assets, liabilities, revenues, expenses and cash flows of Marriott Vacations Worldwide, all entities in which Marriott Vacations Worldwide has a controlling voting interest (“subsidiaries”), and those variable interest entities for which Marriott Vacations Worldwide is the primary beneficiary in accordance with consolidation accounting guidance. References in these Financial Statements to net income attributable to common shareholders and MVW shareholders’ equity do not include noncontrolling interests, which represent the outside ownership of our consolidated non-wholly owned entities and are reported separately. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. These Financial Statements reflect our financial position, results of operations and cash flows as prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”).

In our opinion, our Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position, the results of our operations and cash flows for the periods presented. Interim results may not be indicative of fiscal year performance because of, among other reasons, the ILG Acquisition (defined below), seasonal and short-term variations. These Financial Statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP. Although we believe our footnote disclosures are adequate to make the information presented not misleading, the Financial Statements in this report should be read in conjunction with the consolidated financial statements and notes thereto recast for the adoption of Accounting Standards Update (“ASU”) 2014-09 “Revenue from Contracts with Customers (Topic 606),” as amended (“ASU 2014-09”) included in our Current Report on Form 8-K, filed with the U.S. Securities and Exchange Commission on June 5, 2018.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, revenue recognition, allocations of the purchase price paid in business combinations, cost of vacation ownership products, inventory valuation, goodwill and intangibles valuation, property and equipment valuation, accounting for acquired vacation ownership mortgages receivable, vacation ownership notes receivable reserves, income taxes and loss contingencies. Accordingly, actual amounts may differ from these estimated amounts.

Acquisition of ILG

On September 1, 2018, we completed the previously announced acquisition of ILG, LLC, formerly known as ILG, Inc. (“ILG”) through a series of transactions, after which ILG became our indirect wholly-owned subsidiary (the “ILG Acquisition”). The Financial Statements in this report include ILG’s results of operations for the 30 days ended September 30, 2018 and reflect the financial position of our combined company at September 30, 2018. We refer to our business associated with brands that existed prior to the ILG Acquisition as “Legacy-MVW” and to ILG’s business and brands that we acquired as “Legacy-ILG.” See Footnote 2 “Acquisitions and Dispositions” for more information on the ILG Acquisition.

Business Combinations

We allocate the purchase price of an acquisition to the tangible and intangible assets acquired and liabilities assumed based on their estimated fair values at the acquisition date. We recognize as goodwill the amount by which the purchase price of an acquired entity exceeds the net of the fair values assigned to the assets acquired and liabilities assumed. In determining the fair values of assets acquired and liabilities assumed, we use various recognized valuation methods including the income, cost and market approaches. Further, we make assumptions within certain valuation techniques, including discount rates, royalty rates, and the amount and timing of future cash flows. We record the net assets and results of operations of an acquired entity in our Financial Statements from the acquisition date. We initially perform these valuations based upon preliminary estimates and assumptions by management or independent valuation specialists under our supervision, where appropriate, and make revisions as estimates and assumptions are finalized. We expense acquisition-related costs as we incur them. See Footnote 2 “Acquisitions and Dispositions” for additional information.

Goodwill

We test goodwill for potential impairment at least annually, or more frequently if an event or other circumstance indicates that we may not be able to recover the carrying amount of the net assets of the reporting unit. In evaluating goodwill for impairment, we may assess qualitative factors to determine whether it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. If we bypass the qualitative assessment, or if we conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying value, then we perform a quantitative impairment test by comparing the fair value of a reporting unit with its carrying amount.

Intangibles and Long-Lived Assets

We assess indefinite-lived intangible assets for potential impairment and continued indefinite use annually, or more frequently if an event or other circumstance indicates that we may not be able to recover the carrying amount of the asset. We may first assess qualitative factors to determine whether it is more likely than not that the fair value of the indefinite-lived intangible is less than its carrying amount. If the carrying value of the asset exceeds the fair value, we recognize an impairment loss in the amount of that excess.We test definite-lived intangibles and long-lived asset groups for recoverability when changes in circumstances indicate that we may not be able to recover the carrying value; for example, when there are material adverse changes in projected revenues or expenses, significant underperformance relative to historical or projected operating results, or significant negative industry or economic trends. We also test recoverability when management has committed to a plan to sell or otherwise dispose of an asset group and we expect to complete the plan within a year. We evaluate recoverability of an asset group by comparing its carrying value to the future net undiscounted cash flows that we expect the asset group will generate. If the comparison indicates that we will not be able to recover the carrying value of an asset group, we recognize an impairment loss for the amount by which the carrying value exceeds the estimated fair value. When we recognize an impairment loss for assets to be held and used, we depreciate the adjusted carrying amount of those assets over their remaining useful life.We calculate the estimated fair value of an intangible asset or asset group using the income approach. For the income approach, we use internally developed discounted cash flow models that include the following assumptions, among others: projections of revenues, expenses, and related cash flows based on assumed long-term growth rates and demand trends; expected future investments to grow; and estimated discount rates.

Restricted Cash

Restricted cash primarily consists of cash restricted for use by consolidated property owners’ associations which is designated for resort operations and other specific uses, such as reserves, cash held in a reserve account related to vacation ownership notes receivable securitizations, cash collected for maintenance fees to be remitted to property owners’ associations, and deposits received and held in escrow, primarily associated with the sale of vacation ownership products.

Reclassifications

We have reclassified the following prior year amounts to conform to the current year presentation:


•	Reclassified Resort management and other services revenue to Management and exchange revenue;


•	Reclassified Resort management and other services expense to Management and exchange expense;


•	Consolidated Consumer financing interest expense into Financing expense;


•	Reclassified depreciation expense from Marketing and sales expense, Management and exchange expense, Rental expense, and General and administrative expense to Depreciation and amortization expense;


•	Reclassified costs related to the ILG Acquisition from Other expense to ILG acquisition-related costs;


•	Reclassified $330 million of land and infrastructure from Inventory to Property and equipment at December 31, 2017; and


•	Reclassified $835 million of debt associated with vacation ownership notes receivable securitization, net of unamortized debt issuance costs from Debt, net to Securitized debt, net at December 31, 2017.

New Accounting Standards

Accounting Standards Update 2018-05 – “Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118” (“ASU 2018-05”)

In March 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-05, which updates the income tax accounting in GAAP to reflect the interpretive guidance in Staff Accounting Bulletin (“SAB”) 118 (“SAB 118”), that was issued by the staff of the Securities and Exchange Commission in December 2017 in order to address the application of GAAP in situations where a registrant does not have all the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Cuts and Jobs Act (“the “Tax Act”). SAB 118 provides for a provisional one year measurement period for registrants to finalize their accounting for certain income tax effects related to the Tax Act. ASU 2018-05 was effective upon issuance. We expect to finalize our provisional amounts related to the Tax Act by the fourth quarter of 2018. See Footnote 4 “Income Taxes” for additional information.

Accounting Standards Update 2016-01 – “Financial Instruments – Overall (Subtopic 825-10)” (“ASU 2016-01”)

In January 2016, the FASB issued ASU 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public business entities, the amendments in ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 in the first quarter of 2018 did not have a material impact on our financial statements or disclosures.

Accounting Standards Update 2016-16 – “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory” (“ASU 2016-16”)

In October 2016, the FASB issued ASU 2016-16, which changes the timing of when certain intercompany transactions are recognized within the provision for income taxes. This update is effective for public companies for annual periods beginning after December 15, 2017, and for annual periods and interim periods thereafter, with early adoption permitted. The adoption of ASU 2016-16 in the first quarter of 2018 did not have a material impact on our financial statements or disclosures.

Accounting Standards Update 2014-09 – “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), as Amended

In May 2014, the FASB issued ASU 2014-09, which, as amended, created Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts with Customers” (“ASC 606”), and supersedes the revenue recognition requirements in ASC Topic 605, “Revenue Recognition,” including most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principle-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchange for the promised goods or services, the provider should apply the following five steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09, as amended, is effective for annual reporting periods, and interim periods within those reporting periods, beginning after December 15, 2017. The new standard may be applied retrospectively or on a modified retrospective basis with the cumulative effect recognized on the date of adoption. We adopted ASU 2014-09, as amended (the new “Revenue Standard”), effective January 1, 2018, the first day of our 2018 fiscal year, on a retrospective basis and restated our previously reported historical results. See Footnote 16 “Adoption Impact of New Revenue Standard” for further discussion of adoption and the impact on our previously reported historical results. See Footnote 3 “Revenue” for additional information on how we recognize revenue.

Future Adoption of Accounting Standards

Accounting Standards Update 2017-12 – “Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities” (“ASU 2017-12”)

In August 2017, the FASB issued ASU 2017-12, which amends and simplifies existing guidance in order to allow companies to better portray the economic effects of risk management activities in the financial statements and enhance the transparency and understandability of the results of hedging activities. ASU 2017-12 eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. The guidance also eases certain documentation and assessment requirements. This update is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. We expect to adopt ASU 2017-12 commencing in fiscal year 2019 and are continuing to evaluate the impact that adoption of this update will have on our financial statements and disclosures.

Accounting Standards Update 2016-13 – “Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”)

In June 2016, the FASB issued ASU 2016-13, which replaces the incurred loss impairment methodology in current GAAP 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. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted for fiscal years beginning after December 15, 2018. We expect to adopt ASU 2016-13 commencing in fiscal year 2019 and are continuing to evaluate the impact that adoption of this update will have on our financial statements and disclosures.

Accounting Standards Update 2016-02 – “Leases (Topic 842)” (“ASU 2016-02”)

In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability of information regarding an entity’s leasing activities by providing additional information to users of financial statements. ASU 2016-02 requires lessees to recognize most leases on their balance sheet by recording a liability for its lease obligation and an asset for its right to use the underlying asset as of the lease commencement date and recognizing expenses on the income statement in a similar manner to the current guidance in Accounting Standards Codification 840, Leases (“ASC 840”). Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the updated revenue recognition guidance.

Upon adoption of ASU 2016-02, as amended, leases will be classified as either finance or operating, with classification affecting the geography of expense recognition in the income statement. Additionally, enhanced quantitative and qualitative disclosures regarding leases are required. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted.

As permitted by the amended guidance, we intend to elect to retain the original lease classification and historical accounting for existing or expired contracts of lessees and lessors so that we will not be required to reassess whether such contracts contain leases, the lease classification, or the initial direct costs. Additionally, with respect to our real estate leases, we intend to elect an accounting policy by class of underlying asset to combine lease and non-lease components. We do not intend to utilize the practical expedient which allows the use of hindsight by lessees and lessors in determining the lease term and in assessing impairment of its right-of-use assets.

We plan to adopt ASU 2016-02, as amended, using the transition method which allows the application of the standard at the adoption date, January 1, 2019, and will recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

We are continuing our implementation efforts and evaluating the impact that adoption of ASU 2016-02, as amended, will have on our financial statements and disclosures, including for example, any potential changes to and investments in policies, processes, systems and internal controls over financial reporting that may be required to comply with the new guidance related to identifying and measuring right-of-use assets and lease liabilities.

We expect the adoption of ASU 2016-02 will have a material effect on our balance sheets as a result of recognizing a lease obligation and right-of-use asset for our operating leases, primarily those related to leases of real estate and other assets. We do not expect the adoption of ASU 2016-02 to have a material effect on our statements of income or cash flows.

2. ACQUISITIONS AND DISPOSITIONS

Acquisitions

ILG Acquisition

On September 1, 2018, (the “Acquisition Date”), we completed the ILG Acquisition. ILG is a leading provider of professionally delivered vacation experiences and the exclusive global licensee for the Hyatt, Sheraton and Westin brands in vacation ownership. The combination of our brands creates a leading global provider of upper-upscale vacation ownership, exchange networks and management services with access to world-class loyalty programs and an expanded portfolio of highly demanded vacation destinations.

Shareholders of ILG received 0.165 shares of our common stock and $14.75 in cash for each share of ILG common stock. The following table presents the fair value of each class of consideration transferred at the Acquisition Date.



(in millions, except per share amounts)
Equivalent shares of Marriott Vacations Worldwide common stock issued in exchange for ILG outstanding shares	20.5
Marriott Vacations Worldwide common stock price as of Acquisition Date	$	119.00
Fair value of Marriott Vacations Worldwide common stock issued in exchange for ILG outstanding shares	2,441
Cash consideration to ILG shareholders, net of cash acquired of $154 million	1,680
Fair value of ILG equity-based awards attributed to pre-combination service	64
Total consideration transferred, net of cash acquired	4,185
Noncontrolling interests	25
	$	4,210

Preliminary Fair Values of Assets Acquired and Liabilities Assumed

We accounted for the ILG Acquisition as a business combination, which requires us to record the assets acquired and liabilities assumed at fair value as of the Acquisition Date. We commenced the appraisals necessary to assess the fair values of the tangible and intangible assets acquired and liabilities assumed and the amount of goodwill to be recognized as of the Acquisition Date. The amounts recorded for certain assets and liabilities are preliminary in nature and are subject to adjustment as additional information is obtained about the facts and circumstances that existed as of the Acquisition Date. The final determination of the fair values of certain assets and liabilities will be completed within the measurement period of up to one year from the Acquisition Date, as permitted under GAAP. The size and breadth of the ILG Acquisition could necessitate the need to use the full one year measurement period to adequately analyze and assess a number of the factors used in establishing the asset and liability fair values as of the Acquisition Date. The final values may also result in changes to amortization expense related to intangible assets and depreciation expense related to property and equipment. Any potential adjustments made could be material in relation to the values presented in the table below. The following table presents our preliminary estimates of the fair values of the assets that we acquired and the liabilities that we assumed in connection with the business combination.



($ in millions)
Vacation ownership notes receivable	$	736
Inventory	494
Property and equipment	384
Intangible assets	1,223
Other assets	581
Deferred revenue	(217		)
Deferred taxes	(174		)
Debt	(392		)
Securitized debt from VIEs	(696		)
Other liabilities	(476		)
Net assets acquired	1,463
Goodwill⁽¹⁾	2,747