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EX-32.2 - EXHIBIT 32.2 - MARRIOTT VACATIONS WORLDWIDE Corpq32017exhibit322-cfo404cer.htm
EX-32.1 - EXHIBIT 32.1 - MARRIOTT VACATIONS WORLDWIDE Corpq32017exhibit321-ceo404cer.htm
EX-31.2 - EXHIBIT 31.2 - MARRIOTT VACATIONS WORLDWIDE Corpq32017exhibit312-cfocertif.htm
EX-31.1 - EXHIBIT 31.1 - MARRIOTT VACATIONS WORLDWIDE Corpq32017exhibit311-ceocertif.htm
EX-10.2 - EXHIBIT 10.2 - MARRIOTT VACATIONS WORLDWIDE Corpq3201710-qexhibit102xformo.htm
EX-10.1 - EXHIBIT 10.1 - MARRIOTT VACATIONS WORLDWIDE Corpq3201710-qexhibit101xformo.htm
EX-4.1 - EXHIBIT 4.1 - MARRIOTT VACATIONS WORLDWIDE Corpq3201710-qexhibit41xindent.htm

 
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, 2017
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 001-35219
_________________________
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 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  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.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
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  x
The number of shares outstanding of the issuer’s common stock, par value $0.01 per share, as of October 27, 2017 was 26,494,634.
 



MARRIOTT VACATIONS WORLDWIDE CORPORATION
FORM 10-Q TABLE OF CONTENTS

Throughout this report, we refer to brands that we own, as well as those brands that we license from Marriott International, Inc. (“Marriott International”) or its affiliates, as our brands. Brand names, trademarks, service marks and trade names that we own or license from Marriott International include Marriott Vacation Club®, Marriott Vacation Club DestinationsTM, Marriott Vacation Club PulseSM, 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. We may also refer to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.




PART I. FINANCIAL INFORMATION
 
Item 1.    Financial Statements
MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
 
September 30, 2017
 
September 9, 2016
 
(92 days)
 
(84 days)
 
(274 days)
 
(252 days)
REVENUES
 
 
 
 
 
 
 
Sale of vacation ownership products
$
180,522

 
$
131,012

 
$
543,687

 
$
415,831

Resort management and other services
76,882

 
70,185

 
229,004

 
208,049

Financing
34,685

 
29,066

 
99,326

 
86,944

Rental
81,177

 
73,776

 
250,621

 
229,133

Cost reimbursements
113,724

 
97,598

 
348,091

 
303,973

TOTAL REVENUES
486,990

 
401,637

 
1,470,729

 
1,243,930

EXPENSES
 
 
 
 
 
 
 
Cost of vacation ownership products
42,826

 
34,779

 
131,589

 
104,149

Marketing and sales
100,527

 
79,017

 
305,217

 
236,348

Resort management and other services
44,696

 
39,825

 
130,349

 
123,695

Financing
5,062

 
4,581

 
12,528

 
11,782

Rental
71,048

 
60,970

 
211,643

 
191,658

General and administrative
26,666

 
22,151

 
83,739

 
72,871

Litigation settlement
2,033

 

 
2,216

 
(303
)
Consumer financing interest
6,498

 
5,361

 
18,090

 
15,840

Royalty fee
15,220

 
14,624

 
47,597

 
42,007

Cost reimbursements
113,724

 
97,598

 
348,091

 
303,973

TOTAL EXPENSES
428,300

 
358,906

 
1,291,059

 
1,102,020

Gains and other income, net
6,977

 
454

 
6,752

 
11,129

Interest expense
(2,642
)
 
(2,262
)
 
(5,180
)
 
(6,331
)
Other
104

 
(75
)
 
(365
)
 
(4,528
)
INCOME BEFORE INCOME TAXES
63,129

 
40,848

 
180,877

 
142,180

Provision for income taxes
(22,367
)
 
(14,041
)
 
(62,139
)
 
(54,656
)
NET INCOME
$
40,762

 
$
26,807

 
$
118,738

 
$
87,524

 
 
 
 
 
 
 
 
EARNINGS PER SHARE
 
 
 
 
 
 
 
Earnings per share - Basic
$
1.50

 
$
0.99

 
$
4.36

 
$
3.10

Earnings per share - Diluted
$
1.47

 
$
0.97

 
$
4.26

 
$
3.05

 
 
 
 
 
 
 
 
CASH DIVIDENDS DECLARED PER SHARE
$
0.35

 
$
0.30

 
$
1.05

 
$
0.90



See Notes to Interim Consolidated Financial Statements

1



MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
 
September 30, 2017
 
September 9, 2016
 
(92 days)
 
(84 days)
 
(274 days)
 
(252 days)
Net income
$
40,762

 
$
26,807

 
$
118,738

 
$
87,524

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
4,945

 
(664
)
 
11,626

 
1,089

Derivative instrument adjustment, net of tax
22

 
33

 
70

 
(366
)
Total other comprehensive income (loss), net of tax
4,967

 
(631
)
 
11,696

 
723

COMPREHENSIVE INCOME
$
45,729

 
$
26,176

 
$
130,434

 
$
88,247



See Notes to the Interim Consolidated Financial Statements


2



MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
(Unaudited)
September 30, 2017
 
December 30, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
440,074

 
$
147,102

Restricted cash (including $34,413 and $27,525 from VIEs, respectively)
61,701

 
66,000

Accounts and contracts receivable, net (including $5,702 and $4,865 from VIEs, respectively)
136,107

 
161,733

Vacation ownership notes receivable, net (including $875,237 and $717,543 from VIEs, respectively)
1,076,402

 
972,311

Inventory
735,072

 
712,536

Property and equipment
253,738

 
202,802

Other (including $13,153 and $0 from VIEs, respectively)
119,942

 
128,935

TOTAL ASSETS
$
2,823,036

 
$
2,391,419

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
76,766

 
$
124,439

Advance deposits
60,247

 
55,542

Accrued liabilities (including $739 and $584 from VIEs, respectively)
128,236

 
147,469

Deferred revenue
103,376

 
95,495

Payroll and benefits liability
97,080

 
95,516

Deferred compensation liability
72,803

 
62,874

Debt, net (including $906,701 and $738,362 from VIEs, respectively)
1,153,222

 
737,224

Other
12,789

 
15,873

Deferred taxes
169,295

 
149,168

TOTAL LIABILITIES
1,873,814

 
1,483,600

Contingencies and Commitments (Note 8)

 

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; 36,857,186 and 36,633,868 shares issued, respectively
369

 
366

Treasury stock — at cost; 10,363,139 and 9,643,562 shares, respectively
(689,134
)
 
(606,631
)
Additional paid-in capital
1,184,635

 
1,162,283

Accumulated other comprehensive income
17,156

 
5,460

Retained earnings
436,196

 
346,341

TOTAL EQUITY
949,222

 
907,819

TOTAL LIABILITIES AND EQUITY
$
2,823,036

 
$
2,391,419

The abbreviation VIEs above means Variable Interest Entities.


See Notes to Interim Consolidated Financial Statements

3


MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)


    
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
 
(274 days)
 
(252 days)
OPERATING ACTIVITIES
 
 
 
Net income
$
118,738

 
$
87,524

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
15,802

 
14,856

Amortization of debt discount and issuance costs
5,783

 
3,784

Provision for loan losses
38,577

 
31,817

Share-based compensation
12,349

 
9,995

Loss (gain) on disposal of property and equipment, net
1,683

 
(11,129
)
Deferred income taxes
20,769

 
21,823

Net change in assets and liabilities:
 
 
 
Accounts and contracts receivable
25,094

 
(2,824
)
Notes receivable originations
(345,663
)
 
(218,190
)
Notes receivable collections
203,840

 
177,451

Inventory
27,112

 
(6,118
)
Purchase of vacation ownership units for future transfer to inventory
(33,594
)
 

Other assets
23,110

 
38,103

Accounts payable, advance deposits and accrued liabilities
(64,994
)
 
(73,935
)
Deferred revenue
7,121

 
26,832

Payroll and benefit liabilities
1,241

 
(20,898
)
Deferred compensation liability
9,928

 
8,846

Other liabilities
(638
)
 
1,190

Other, net
4,529

 
1,758

Net cash provided by operating activities
70,787

 
90,885

INVESTING ACTIVITIES
 
 
 
Capital expenditures for property and equipment (excluding inventory)
(21,167
)
 
(22,445
)
Purchase of company owned life insurance
(12,100
)
 

Dispositions, net
17

 
68,525

Net cash (used in) provided by investing activities
(33,250
)
 
46,080

Continued



See Notes to Interim Consolidated Financial Statements


4


MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(In thousands)
(Unaudited)


 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
 
(274 days)
 
(252 days)
FINANCING ACTIVITIES
 
 
 
Borrowings from securitization transactions
400,260

 
376,622

Repayment of debt related to securitization transactions
(231,921
)
 
(254,510
)
Borrowings from Revolving Corporate Credit Facility
87,500

 
85,000

Repayment of Revolving Corporate Credit Facility
(87,500
)
 
(85,000
)
Proceeds from issuance of Convertible Notes
230,000

 

Purchase of Convertible Note Hedges
(33,235
)
 

Proceeds from issuance of Warrants
20,332

 

Debt issuance costs
(14,459
)
 
(4,065
)
Repurchase of common stock
(83,067
)
 
(163,359
)
Accelerated stock repurchase forward contract

 
(14,470
)
Payment of dividends
(28,590
)
 
(26,067
)
Payment of withholding taxes on vesting of restricted stock units
(10,713
)
 
(3,972
)
Other, net
(502
)
 
194

Net cash provided by (used in) financing activities
248,105

 
(89,627
)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash
3,031

 
(3,247
)
Increase in cash, cash equivalents, and restricted cash
288,673

 
44,091

Cash, cash equivalents and restricted cash, beginning of period
213,102

 
248,512

Cash, cash equivalents and restricted cash, end of period
$
501,775

 
$
292,603

 
 
 
 
SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Property acquired via capital lease
$

 
$
7,221

Non-cash issuance of treasury stock for employee stock purchase plan
942

 
673

Disposition accruals not yet paid

 
2,931

Non-cash transfer from Inventory to Property and equipment

 
9,741

Non-cash issuance of debt in connection with acquisition of vacation ownership units
63,558

 

Non-cash debt issuance costs
1,000

 

Dividends payable
9,394

 
8,127





See Notes to Interim Consolidated Financial Statements


5


MARRIOTT VACATIONS WORLDWIDE CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our Business
Marriott Vacations Worldwide Corporation (“we,” “us,” “Marriott Vacations Worldwide” or the “Company,” which includes our consolidated subsidiaries except where the context of the reference is to a single corporate entity) is the exclusive worldwide developer, marketer, seller and manager of vacation ownership and related products under the Marriott Vacation Club and Grand Residences by Marriott brands. In 2016, we introduced Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand. We are also the exclusive worldwide developer, marketer and seller of vacation ownership and related products under The Ritz-Carlton Destination Club brand, and we have the non-exclusive right to develop, market and sell whole ownership residential products under The Ritz-Carlton Residences brand. The Ritz-Carlton Hotel Company, L.L.C., a subsidiary of Marriott International, provides on-site management for Ritz-Carlton branded properties.
Our business is grouped into three reportable segments: North America, Asia Pacific and Europe. As of September 30, 2017, our portfolio consisted of over 65 properties in the United States and nine other countries and territories. We generate most of our revenues from four primary sources: selling vacation ownership products; managing our resorts; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory.
Principles of Consolidation and Basis of Presentation
The interim consolidated 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. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. The interim consolidated 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 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 “Statements of Income,” (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.
Beginning with our 2017 fiscal year, we changed our financial reporting cycle to a calendar year-end and end-of-month quarterly reporting cycle. Accordingly, our 2017 fiscal year began on December 31, 2016 (the day after the end of the 2016 fiscal year) and will end on December 31, 2017, and our 2017 quarters include the three month periods ended March 31, June 30, September 30, and December 31, except that the period ended March 31, 2017 also includes December 31, 2016. Our future fiscal years will begin on January 1 and end on December 31. Historically, our fiscal year was a 52 or 53 week fiscal year that ended on the Friday nearest to December 31, and our quarterly reporting cycle included twelve week periods for the first, second, and third quarters and a sixteen week period (or in some cases a seventeen week period) for the fourth quarter. We have not restated, and do not plan to restate, historical results.
The table below shows the reporting periods as we refer to them in this report, their date ranges, and the number of days in each:
Reporting Period
 
Date Range
 
Number of Days
2017 third quarter
 
July 1, 2017 — September 30, 2017
 
92
2016 third quarter
 
June 18, 2016 — September 9, 2016
 
84
2017 first three quarters
 
December 31, 2016 — September 30, 2017
 
274
2016 first three quarters
 
January 2, 2016 — September 9, 2016
 
252
2017 fiscal year
 
December 31, 2016 — December 31, 2017
 
366
2016 fiscal year
 
January 2, 2016 — December 30, 2016
 
364
As a result of the change in our financial reporting cycle, our 2017 third quarter had eight more days of activity than our 2016 third quarter, and our 2017 first three quarters had 22 more days of activity than our 2016 first three quarters. While our 2017 full fiscal year will have two additional days of activity as compared to our 2016 full fiscal year, our 2017 fourth quarter will have 20 fewer days of activity than the corresponding periods in our 2016 fiscal year.

6


In our opinion, our Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position and 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, seasonal and short-term variations.
These Financial Statements have not been audited. Amounts as of December 30, 2016 included in these Financial Statements have been derived from the audited consolidated financial statements as of that date. 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, you should read these Financial Statements in conjunction with the consolidated financial statements and notes to those consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016.
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, cost of vacation ownership products, inventory valuation, property and equipment valuation, loan loss reserves, loss contingencies and income taxes. Accordingly, actual amounts may differ from these estimated amounts.
We have reclassified certain prior year amounts to conform to our current period presentation. Our Financial Statements include adjustments for the 2016 third quarter and 2016 first three quarters to correct immaterial presentation errors, consistent with those reported in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016, within the following line items on our Statements of Income: Resort management and other services revenues, Resort management and other services expenses and General and administrative expenses. Correction of these immaterial errors had no impact on our consolidated Net income.
The impact of these adjustments on the Financial Statements is as follows:
 
 
Quarter Ended
 
Year to Date Ended
 
 
September 9, 2016
 
September 9, 2016
 
 
(84 days)
 
(252 days)
($ in thousands)
 
As Revised
 
Previous Filing
 
As Revised
 
Previous Filing
Resort management and other services
 
$
70,185

 
$
75,539

 
$
208,049

 
$
226,098

TOTAL REVENUES
 
$
401,637

 
$
406,991

 
$
1,243,930

 
$
1,261,979

Resort management and other services
 
$
39,825

 
$
45,437

 
$
123,695

 
$
140,545

General and administrative
 
$
22,151

 
$
21,619

 
$
72,871

 
$
71,504

TOTAL EXPENSES
 
$
358,906

 
$
364,260

 
$
1,102,020

 
$
1,120,069

Deferred Compensation Plan
Beginning in our 2017 fiscal year, participants in the Marriott Vacations Worldwide Deferred Compensation Plan (the “Deferred Compensation Plan”) may select a rate of return based on various market-based investment alternatives for a portion of their contributions, as well as any future Company contributions, to the Deferred Compensation Plan, and may also select such a rate for a portion of their existing account balances. To support our ability to meet a portion of our obligations under the Deferred Compensation Plan, we acquired company owned insurance policies (the “COLI policies”) on the lives of certain participants in the Deferred Compensation Plan, the proceeds of which are intended to be aligned with the investment alternatives elected by plan participants and are payable to a rabbi trust with the Company as grantor. A portion of a participant’s contributions to the Deferred Compensation Plan must be subject to a fixed rate of return, which for our 2017 fiscal year was reduced to 3.5 percent.
We consolidate the liabilities of the Deferred Compensation Plan and the related assets, which consist of the COLI policies held in the rabbi trust. The rabbi trust is considered a variable interest entity (“VIE”). We are considered the primary beneficiary of the rabbi trust because we direct the activities of the trust and are the beneficiary of the trust. At September 30, 2017, the value of the assets held in the rabbi trust was $13.2 million, which is included in the Other line within assets on our Balance Sheets.

7


New Accounting Standards
Accounting Standards Update No. 2017-09 – “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting” (“ASU 2017-09”)
In May 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, which clarifies when changes to the terms or conditions of a share-based payment award must be accounted for as modifications for the purpose of applying the modification guidance in Accounting Standards Codification Topic 718. This update is effective for all entities for annual periods beginning after December 15, 2017, and for interim periods within those annual periods, with early adoption permitted. Our early adoption of ASU 2017-09 in the 2017 second quarter did not have an impact on our financial statements or disclosures.
Accounting Standards Update No. 2016-18 – “Restricted Cash” (“ASU 2016-18”)
In November 2016, the FASB issued ASU 2016-18, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, we no longer present changes in restricted cash as a component of investing activities. This update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted ASU 2016-18 on a retrospective basis commencing in the 2017 first quarter.
Accounting Standards Update No. 2016-09 – “Compensation – Stock Compensation (Topic 718)” (“ASU 2016-09”)
In March 2016, the FASB issued ASU 2016-09, which changes how entities account for certain aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance requires all income tax effects of awards, including excess tax benefits, to be recorded as income tax expense (or benefit) in the income statement, which resulted in benefits to our provision for income taxes of $0.9 million in the 2017 third quarter and $6.1 million in the 2017 first three quarters. The new guidance requires excess tax benefits to be presented as an operating inflow rather than as a financing inflow in the statement of cash flows. Prior to the adoption of ASU 2016-09, excess tax benefits were recorded in additional paid-in-capital on the balance sheet. This update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We adopted ASU 2016-09 in the 2017 first quarter. The adoption of ASU 2016-09 decreased our provision for income taxes, the amount of which depends on the vesting activity of our share-based compensation awards in any given period, and eliminated the presentation of excess tax benefits as a financing inflow on our statement of cash flows. Further, we made an accounting policy election to recognize forfeitures of share-based compensation awards as they occur, the cumulative effect of which resulted in an adjustment of $0.4 million to opening retained earnings. The adoption of ASU 2016-09 did not have any other material impacts on our financial statements or disclosures.
Future Adoption of Accounting Standards
Accounting Standards Update No. 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 are evaluating the impact that ASU 2017-12, including the timing of implementation, will have on our financial statements and disclosures.
Accounting Standards Update No. 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. We are evaluating the impact that adoption of ASU 2016-16 in the first quarter of fiscal year 2018 will have on our financial statements and disclosures.

8


Accounting Standards Update No. 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 are evaluating the impact that ASU 2016-13, including the timing of implementation, will have on our financial statements and disclosures.
Accounting Standards Update No. 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 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. This update is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption permitted. Although we expect to adopt ASU 2016-02 in fiscal year 2019 and have commenced our implementation efforts, we continue to evaluate the impact that adoption of this accounting standards update will have on our financial statements and disclosures.
Accounting Standards Update No. 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. We do not expect the adoption of ASU 2016-01 to have a material impact on our financial statements.
Accounting Standards Update No. 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, supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as 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, will be 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 will adopt ASU 2014-09, as amended, commencing in fiscal year 2018, on a retrospective basis. Our analysis of the impact that adoption of this accounting standards update will have on our financial statements and disclosures is substantially complete, with the exception of accounting for the sale of vacation ownership products in our Asia Pacific and Europe segments.
We expect adoption of ASU 2014-09 will result in the following with respect to the recognition of revenues from the sale of vacation ownership products within our North America segment:
alignment of our assessment of collectibility of the transaction price with our credit granting policies;
deferral of revenue recognition deemed collectible from expiration of the statutory rescission period to closing, when control of the vacation ownership product is transferred to the customer;
reclassification of revenues and incidental expenses from rental revenues and expenses to marketing and sales expenses;
no impact on sales reserve accounting; and
net presentation of certain sales incentives (e.g., Marriott Rewards Points).
In addition, we expect to elect the practical expedient available in ASU 2014-09 to expense all marketing and sales costs as they are incurred.

9


We expect no material changes to our consolidated financial reporting for resort management and other services revenues, financing revenues or rental revenues, other than as outlined above pertaining to reclassification of activity to different lines in our statements of income. We expect a material increase in our consolidated cost reimbursements revenues and cost reimbursements expenses, as all costs reimbursed to us by property owners’ associations will be reported on a gross basis upon adoption of ASU 2014-09.
We are in the process of quantifying the impact of the adoption of ASU 2014-09 and will disclose additional detail on the impact of adoption of this accounting standards update in our 2017 Form 10-K.
2. INCOME TAXES
We file income tax returns with U.S. federal and state and non-U.S. jurisdictions and are subject to audits in these jurisdictions. Although we do not anticipate that a significant impact to our unrecognized tax benefit balance will occur during the next fiscal year, the amount of our liability for unrecognized tax benefits could change as a result of audits in these jurisdictions. Our total unrecognized tax benefit balance that, if recognized, would impact our effective tax rate, was $1.5 million at both September 30, 2017 and December 30, 2016.
3. VACATION OWNERSHIP NOTES RECEIVABLE
The following table shows the composition of our vacation ownership notes receivable balances, net of reserves:
($ in thousands)
At September 30, 2017
 
At December 30, 2016
Vacation ownership notes receivable — securitized
$
875,237

 
$
717,543

Vacation ownership notes receivable — non-securitized
 
 
 
Eligible for securitization(1)
44,907

 
98,508

Not eligible for securitization(1)
156,258

 
156,260

Subtotal
201,165

 
254,768

Total vacation ownership notes receivable
$
1,076,402

 
$
972,311

_________________________
(1) 
Refer to Footnote No. 4, “Financial Instruments,” for discussion of eligibility of our vacation ownership notes receivable for securitization.
The following tables show future principal payments, net of reserves, as well as interest rates for our non-securitized and securitized vacation ownership notes receivable at September 30, 2017:
($ in thousands)
Non-Securitized
Vacation Ownership
Notes Receivable
 
Securitized
Vacation Ownership
Notes Receivable
 
Total
2017, remaining
$
11,833

 
$
25,594

 
$
37,427

2018
37,988

 
97,634

 
135,622

2019
26,664

 
94,676

 
121,340

2020
21,575

 
96,259

 
117,834

2021
16,952

 
97,628

 
114,580

Thereafter
86,153

 
463,446

 
549,599

Balance at September 30, 2017
$
201,165

 
$
875,237

 
$
1,076,402

Weighted average stated interest rate at September 30, 2017
11.2%
 
12.6%
 
12.3%
Range of stated interest rates at September 30, 2017
0.0% to 18.0%
 
4.9% to 18.0%
 
0.0% to 18.0%

10


We reflect interest income associated with vacation ownership notes receivable in our Statements of Income in the Financing revenues caption. The following table summarizes interest income associated with vacation ownership notes receivable:
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(92 days)
 
(84 days)
 
(274 days)
 
(252 days)
Interest income associated with vacation ownership notes receivable — securitized
$
26,538

 
$
22,908

 
$
72,832

 
$
65,300

Interest income associated with vacation ownership notes receivable — non-securitized
6,407

 
4,795

 
21,272

 
17,430

Total interest income associated with vacation ownership notes receivable
$
32,945

 
$
27,703

 
$
94,104

 
$
82,730

We record an estimate of expected uncollectibility on all notes receivable from vacation ownership purchasers as a reduction of revenues from the sale of vacation ownership products at the time we recognize profit on a vacation ownership product sale. We fully reserve for all defaulted vacation ownership notes receivable in addition to recording a reserve on the estimated uncollectible portion of the remaining vacation ownership notes receivable. For those vacation ownership notes receivable that are not in default, we assess collectibility based on pools of vacation ownership notes receivable because we hold large numbers of homogeneous vacation ownership notes receivable. We use the same criteria to estimate uncollectibility for non-securitized vacation ownership notes receivable and securitized vacation ownership notes receivable because they perform similarly. We estimate uncollectibility for each pool based on historical activity for similar vacation ownership notes receivable.
The following table summarizes the activity related to our vacation ownership notes receivable reserve for the 2017 first three quarters:
($ in thousands)
Non-Securitized
Vacation Ownership
Notes Receivable
 
Securitized
Vacation Ownership
Notes Receivable
 
Total
Balance at December 30, 2016
$
56,628

 
$
53,735

 
$
110,363

Provision for loan losses
31,711

 
7,206

 
38,917

Securitizations
(29,071
)
 
29,071

 

Clean-up of Warehouse Credit Facility(1)
3,995

 
(3,995
)
 

Write-offs
(35,264
)
 

 
(35,264
)
Defaulted vacation ownership notes receivable repurchase activity(2)
22,356

 
(22,356
)
 

Balance at September 30, 2017
$
50,355

 
$
63,661

 
$
114,016

_________________________
(1) 
Refers to our voluntary repurchase of previously securitized non-defaulted vacation ownership notes receivable from our non-recourse warehouse credit facility (the “Warehouse Credit Facility”).
(2) 
Decrease in securitized vacation ownership notes receivable reserve and increase in non-securitized vacation ownership notes receivable reserve was attributable to the transfer of the reserve when we voluntarily repurchased defaulted securitized vacation ownership notes receivable.
Although we consider loans to owners to be past due if we do not receive payment within 30 days of the due date, we suspend accrual of interest only on those loans that are over 90 days past due. We consider loans over 150 days past due to be in default. We apply payments we receive for vacation ownership notes receivable on non-accrual status first to interest, then to principal and any remainder to fees. We resume accruing interest when vacation ownership notes receivable are less than 90 days past due. We do not accept payments for vacation ownership notes receivable during the foreclosure process unless the amount is sufficient to pay all past due principal, interest, fees and penalties owed and fully reinstate the note. We write off uncollectible vacation ownership notes receivable against the reserve once we receive title to the vacation ownership products through the foreclosure or deed-in-lieu process or, in Asia Pacific or Europe, when revocation is complete. For both non-securitized and securitized vacation ownership notes receivable, we estimated average remaining default rates of 7.18 percent and 7.09 percent as of September 30, 2017 and December 30, 2016, respectively. A 0.5 percentage point increase in the estimated default rate would have resulted in an increase in our allowance for loan losses of $5.6 million and $5.0 million as of September 30, 2017 and December 30, 2016, respectively.

11


The following table shows our recorded investment in non-accrual vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due:
($ in thousands)
Non-Securitized
Vacation Ownership
Notes Receivable
 
Securitized
Vacation Ownership
Notes Receivable
 
Total
Investment in vacation ownership notes receivable on non-accrual status at September 30, 2017
$
40,368

 
$
5,618

 
$
45,986

Investment in vacation ownership notes receivable on non-accrual status at December 30, 2016
$
43,792

 
$
6,687

 
$
50,479

Average investment in vacation ownership notes receivable on non-accrual status during the 2017 third quarter
$
39,423

 
$
6,304

 
$
45,727

Average investment in vacation ownership notes receivable on non-accrual status during the 2016 third quarter
$
47,038

 
$
8,278

 
$
55,316

Average investment in vacation ownership notes receivable on non-accrual status during the 2017 first three quarters
$
42,080

 
$
6,153

 
$
48,233

Average investment in vacation ownership notes receivable on non-accrual status during the 2016 first three quarters
$
45,926

 
$
7,296

 
$
53,222

The following table shows the aging of the recorded investment in principal, before reserves, in vacation ownership notes receivable as of September 30, 2017:
($ in thousands)
Non-Securitized
Vacation Ownership
Notes Receivable
 
Securitized
Vacation Ownership
Notes Receivable
 
Total
31 – 90 days past due
$
5,751

 
$
15,354

 
$
21,105

91 – 150 days past due
4,297

 
5,618

 
9,915

Greater than 150 days past due
36,071

 

 
36,071

Total past due
46,119

 
20,972

 
67,091

Current
205,401

 
917,926

 
1,123,327

Total vacation ownership notes receivable
$
251,520

 
$
938,898

 
$
1,190,418

The following table shows the aging of the recorded investment in principal, before reserves, in vacation ownership notes receivable as of December 30, 2016:
($ in thousands)
Non-Securitized
Vacation Ownership
Notes Receivable
 
Securitized
Vacation Ownership
Notes Receivable
 
Total
31 – 90 days past due
$
7,780

 
$
16,468

 
$
24,248

91 – 150 days past due
3,981

 
6,687

 
10,668

Greater than 150 days past due
39,811

 

 
39,811

Total past due
51,572

 
23,155

 
74,727

Current
259,824

 
748,123

 
1,007,947

Total vacation ownership notes receivable
$
311,396

 
$
771,278

 
$
1,082,674


12


4. FINANCIAL INSTRUMENTS
The following table shows the carrying values and the estimated fair values of financial assets and liabilities that qualify as financial instruments, determined in accordance with the authoritative guidance for disclosures regarding the fair value of financial instruments. Considerable judgment is required in interpreting market data to develop estimates of fair value. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. The table excludes Cash and cash equivalents, Restricted cash, Accounts and contracts receivable, Accounts payable, Advance deposits and Accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
 
At September 30, 2017
 
At December 30, 2016
($ in thousands)
Carrying
Amount
 
Fair
Value(1)
 
Carrying
Amount
 
Fair
Value(1)
Vacation ownership notes receivable — securitized
$
875,237

 
$
1,028,374

 
$
717,543

 
$
834,009

Vacation ownership notes receivable — non-securitized
201,165

 
207,592

 
254,768

 
269,161

Other assets
13,153

 
13,153

 

 

Total financial assets
$
1,089,555

 
$
1,249,119

 
$
972,311

 
$
1,103,170

Non-recourse debt associated with vacation ownership notes receivable securitizations, net
$
(895,405
)
 
$
(902,213
)
 
$
(729,188
)
 
$
(725,963
)
Convertible notes, net
(190,739
)
 
(241,562
)
 

 

Non-interest bearing note payable, net
(59,677
)
 
(59,677
)
 

 

Total financial liabilities
$
(1,145,821
)
 
$
(1,203,452
)
 
$
(729,188
)
 
$
(725,963
)
_________________________
(1) 
Fair value of financial instruments, with the exception of other assets and convertible notes, has been determined using Level 3 inputs. Fair value of other assets and convertible notes that are financial instruments has been determined using Level 2 inputs.
Vacation Ownership Notes Receivable
We estimate the fair value of our securitized vacation ownership notes receivable using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model uses default rates, prepayment rates, coupon rates and loan terms for our securitized vacation ownership notes receivable portfolio as key drivers of risk and relative value that, when applied in combination with pricing parameters, determine the fair value of the underlying vacation ownership notes receivable.
Due to factors that impact the general marketability of our non-securitized vacation ownership notes receivable, as well as current market conditions, we bifurcate our vacation ownership notes receivable at each balance sheet date into those eligible and not eligible for securitization using criteria applicable to current securitization transactions in the asset-backed securities (“ABS”) market. Generally, vacation ownership notes receivable are considered not eligible for securitization if any of the following attributes are present: (1) payments are greater than 30 days past due; (2) the first payment has not been received; or (3) the collateral is located in Asia or Europe. In some cases, eligibility may also be determined based on the credit score of the borrower, the remaining term of the loans and other similar factors that may reflect investor demand in a securitization transaction or the cost to effectively securitize the vacation ownership notes receivable.
The following table shows the bifurcation of our non-securitized vacation ownership notes receivable into those eligible and not eligible for securitization based upon the aforementioned eligibility criteria:
 
At September 30, 2017
 
At December 30, 2016
($ in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Vacation ownership notes receivable
 
 
 
 
 
 
 
Eligible for securitization
$
44,907

 
$
51,334

 
$
98,508

 
$
112,901

Not eligible for securitization
156,258

 
156,258

 
156,260

 
156,260

Total non-securitized
$
201,165

 
$
207,592

 
$
254,768

 
$
269,161


13


We estimate the fair value of the portion of our non-securitized vacation ownership notes receivable that we believe will ultimately be securitized in the same manner as securitized vacation ownership notes receivable. We value the remaining non-securitized vacation ownership notes receivable at their carrying value, rather than using our pricing model. We believe that the carrying value of these particular vacation ownership notes receivable approximates fair value because the stated interest rates of these loans are consistent with current market rates and the reserve for these vacation ownership notes receivable appropriately accounts for risks in default rates, prepayment rates, discount rates and loan terms.
Other Assets
We estimate the fair value of our other assets that are financial instruments using Level 2 inputs. These assets consist of COLI policies held in a rabbi trust. The carrying value of the COLI policies is equal to their cash surrender value.
Non-Recourse Debt Associated with Securitized Vacation Ownership Notes Receivable
We generate cash flow estimates by modeling all bond tranches for our active vacation ownership notes receivable securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in our analysis include default rates, prepayment rates, bond interest rates and other structural factors, which we use to estimate the projected cash flows. In order to estimate market credit spreads by rating, we obtain indicative credit spreads from investment banks that actively issue and facilitate the market for vacation ownership securities and determine an average credit spread by rating level of the different tranches. We then apply those estimated market spreads to swap rates in order to estimate an underlying discount rate for calculating the fair value of the active bonds payable.
Convertible Notes
We estimate the fair value of our Convertible Notes (as defined in Footnote No. 9, “Debt,”) based on quoted market prices as of the last trading day for the 2017 third quarter; however these notes have only a limited trading volume and as such this fair value estimate is not necessarily the value at which they could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 2.
Non-Interest Bearing Note Payable
The carrying value of our non-interest bearing note payable issued in connection with the acquisition of vacation ownership units located on the Big Island of Hawaii approximates fair value, because the imputed interest rate used to discount this note payable is consistent with current market rates. See Footnote No. 5, “Acquisitions and Dispositions,” and Footnote No. 9, “Debt,” for additional information on this transaction.
5. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Bali, Indonesia
During the 2017 third quarter, we acquired 51 completed vacation ownership units, as well as a sales gallery and related amenities and infrastructure, located in Bali, Indonesia for $23.8 million. The transaction was accounted for as an asset acquisition with the purchase price allocated to Inventory ($21.7 million) and Property and equipment ($2.1 million).
Marco Island, Florida
During the 2017 second quarter, we acquired 36 completed vacation ownership units located at our resort in Marco Island, Florida for $33.6 million. The transaction was accounted for as an asset acquisition with all of the purchase price allocated to Property and equipment. To ensure consistency with the expected related future cash flow presentation, the cash purchase price was included as an operating activity in the Purchase of vacation ownership units for future transfer to inventory line on our Cash Flows. See Footnote No. 8, “Contingencies and Commitments,” for information on our remaining commitment related to this property.
Big Island of Hawaii
During the 2017 second quarter, we acquired 112 completed vacation ownership units located on the Big Island of Hawaii. The transaction was accounted for as an asset acquisition with all of the purchase price allocated to Inventory. As consideration for the acquisition, we paid $27.3 million in cash, settled a $0.5 million note receivable from the seller on a non-cash basis, and issued a non-interest bearing note payable for $63.6 million. See Footnote No. 9, “Debt,” for information on the non-interest bearing note payable.

14


Miami Beach, Florida
During the 2016 first quarter, we completed the acquisition of an operating property located in the South Beach area of Miami Beach, Florida for $23.5 million. The acquisition was treated as a business combination, accounted for using the acquisition method of accounting and included within Operating activities on our Cash Flows. As consideration for the acquisition, we paid $23.5 million in cash; the value of the acquired property was allocated to Inventory. We rebranded this property as Marriott Vacation Club Pulse, South Beach and converted it, in its entirety, into vacation ownership inventory.
Dispositions
San Francisco, California
During the 2016 second quarter, we disposed of 19 residential units located at The Ritz-Carlton Club and Residences, San Francisco (the “RCC San Francisco”) for gross cash proceeds of $19.5 million. We accounted for the sale under the full accrual method in accordance with the authoritative guidance on accounting for sales of real estate and recorded a gain of $10.5 million in the Gains and other income line on our Statements of Income for the 2016 first three quarters.
Surfers Paradise, Australia
During 2015, we completed the acquisition of an operating property located in Surfers Paradise, Australia. During the 2016 second quarter, we disposed of the portion of this operating property that we did not intend to convert into vacation ownership inventory for gross cash proceeds of AUD $70.5 million ($50.9 million). We accounted for the sale under the full accrual method in accordance with the authoritative guidance on accounting for sales of real estate. As part of the disposition, we guaranteed the net operating income of this portion of the operating property through 2021 up to a specified maximum of AUD $2.9 million ($2.3 million), which was recorded as a deferred gain in the Other line within liabilities on our balance sheet. We recognized a loss, inclusive of the deferred gain, of AUD $1.4 million ($1.0 million) in connection with the sale, which was recorded in the Gains and other income line on the Statement of Income for the 2016 first three quarters.
6. EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted average number of shares of common stock outstanding during the reporting period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period.
Our calculation of diluted earnings per share reflects our intent to settle conversions of the Convertible Notes (as defined in Footnote No. 9, “Debt”) through a combination settlement, which contemplates repayment in cash of the principal amount and repayment in shares of our common stock of any excess of the conversion value over the principal amount (the “conversion premium”). Therefore, we will include only the shares that may be issued with respect to any conversion premium in total dilutive weighted average shares outstanding, which we calculate using the treasury stock method. As no conversion premium existed as of September 30, 2017, there was no dilutive impact from the Convertible Notes for the 2017 third quarter or the 2017 first three quarters.
The shares issuable on exercise of the Warrants (as defined in Footnote No. 9, “Debt”) sold in connection with the issuance of the Convertible Notes will not impact the total dilutive weighted average shares outstanding unless and until the price of our common stock exceeds the strike price of $176.68, as described in Footnote No. 9, “Debt.” If and when the price of our common stock exceeds the strike price of the Warrants, we will include the dilutive effect of the additional shares that may be issued upon exercise of the Warrants in total dilutive weighted average shares outstanding, which we calculate using the treasury stock method. The Convertible Note Hedges (as defined in Footnote No. 9, “Debt”) purchased in connection with the issuance of the Convertible Notes are considered to be anti-dilutive and will not impact our calculation of diluted earnings per share.

15


The table below illustrates the reconciliation of the earnings and number of shares used in our calculation of basic and diluted earnings per share.
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2017(1)
 
September 9, 2016(2)
 
September 30, 2017(1)
 
September 9, 2016(2)
(in thousands, except per share amounts)
(92 days)
 
(84 days)
 
(274 days)
 
(252 days)
Computation of Basic Earnings Per Share
 
 
 
 
 
 
 
Net income
$
40,762

 
$
26,807

 
$
118,738

 
$
87,524

Shares for basic earnings per share
27,090

 
27,152

 
27,219

 
28,207

Basic earnings per share
$
1.50

 
$
0.99

 
$
4.36

 
$
3.10

Computation of Diluted Earnings Per Share
 
 
 
 
 
 
 
Net income
$
40,762

 
$
26,807

 
$
118,738

 
$
87,524

Shares for basic earnings per share
27,090

 
27,152

 
27,219

 
28,207

Effect of dilutive shares outstanding
 
 
 
 
 
 
 
Employee stock options and SARs
403

 
356

 
440

 
366

Restricted stock units
220

 
172

 
199

 
145

Shares for diluted earnings per share
27,713

 
27,680

 
27,858

 
28,718

Diluted earnings per share
$
1.47

 
$
0.97

 
$
4.26

 
$
3.05

_________________________
(1) 
The computations of diluted earnings per share exclude approximately 289,000 shares of common stock, the maximum number of shares issuable as of September 30, 2017 upon the vesting of certain performance-based awards, because the performance conditions required to be met for the shares subject to such awards to vest were not achieved by the end of the reporting period.
(2) 
The computations of diluted earnings per share exclude approximately 254,000 shares of common stock, the maximum number of shares issuable as of September 9, 2016 upon the vesting of certain performance-based awards, because the performance conditions required to be met for the shares subject to such awards to vest were not achieved by the end of the reporting period.
In accordance with the applicable accounting guidance for calculating earnings per share, for the 2017 third quarter and the 2017 first three quarters, our calculation of diluted earnings per share included shares underlying stock appreciation rights (“SARs”) that may be settled in shares of common stock, because the exercise prices of such SARs were less than or equal to the average market prices for the applicable period.
For the 2016 third quarter and the 2016 first three quarters, we excluded from our calculation of diluted earnings per share 62,018 shares underlying SARs that may be settled in shares of common stock because the exercise price of $77.42 of such SARs was greater than the average market price for the applicable period.
7. INVENTORY
The following table shows the composition of our inventory balances:
($ in thousands)
At September 30, 2017
 
At December 30, 2016
Finished goods(1)
$
390,383

 
$
337,949

Work-in-progress
1,964

 
39,486

Land and infrastructure(2)
338,149

 
330,728

Real estate inventory
730,496

 
708,163

Operating supplies and retail inventory
4,576

 
4,373

 
$
735,072

 
$
712,536

_________________________
(1) 
Represents completed inventory that is either registered for sale as vacation ownership interests, or unregistered and available for sale in its current form.
(2) 
Includes $66.0 million of inventory related to estimated future foreclosures at September 30, 2017.

16


We value vacation ownership and residential products at the lower of cost or fair market value less costs to sell, in accordance with applicable accounting guidance, and we record operating supplies at the lower of cost (using the first-in, first-out method) or net realizable value. During the 2017 and 2016 first three quarters, product cost true-up activity relating to vacation ownership products increased carrying values of inventory by $1.0 million and $12.2 million, respectively.
In addition to the above, at September 30, 2017, we had $49.1 million of completed vacation ownership units which have been classified as a component of Property and equipment until the time at which they are legally registered for sale as vacation ownership products. Furthermore, at September 30, 2017, we also had $305.8 million of commitments to acquire completed vacation ownership units as discussed below in Footnote No. 8, “Contingencies and Commitments.”
8. CONTINGENCIES AND COMMITMENTS
Commitments and Letters of Credit
As of September 30, 2017, we had the following commitments outstanding:
We have various contracts for the use of information technology hardware and software that we use in the normal course of business. Our aggregate commitments under these contracts were $26.6 million, of which we expect $4.9 million, $12.9 million, $5.3 million, $1.3 million, $0.8 million and $1.4 million will be paid in 2017, 2018, 2019, 2020, 2021 and thereafter, respectively.
We have a commitment to purchase an operating property located in New York, New York for $158.5 million, of which $7.2 million is attributed to a related capital lease arrangement and recorded in Debt. We expect to acquire the units in the property in their current form, over time. We currently manage this property, which we have rebranded as Marriott Vacation Club Pulse, New York City. See Footnote No. 12, “Variable Interest Entities,” for additional information on this transaction. As of the end of the 2017 third quarter, we had expected to make payments for these units of $96.8 million and $61.7 million in 2018 and 2019, respectively. Subsequent to the 2017 third quarter, we amended the terms of this commitment and, as a result, we expect to make payments of $108.5 million and $61.7 million in 2019 and 2020, respectively, for these units.
We have a commitment to purchase 88 vacation ownership units located in Bali, Indonesia for use in our Asia Pacific segment, contingent upon completion of construction to agreed-upon standards within specified timeframes. We expect to complete the acquisition in 2019 and to make payments with respect to these units when specific construction milestones are completed, as follows: $7.8 million in 2017, $5.9 million in 2018 and $25.4 million in 2019.
We have a remaining commitment to purchase vacation ownership units located at our resort in Marco Island, Florida for $108.2 million, which we expect will be paid as follows: $23.7 million in 2018 and $84.5 million in 2019. See Footnote No. 5, “Acquisitions and Dispositions,” and Footnote No. 12, “Variable Interest Entities,” for additional information on this transaction.
In addition to those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016, we have operating lease commitments that expire in 2029. Our aggregate minimum lease payments under these contracts are $17.5 million, of which we expect $0.1 million, $0.4 million, $1.7 million, $1.7 million, $1.9 million and $11.7 million will be paid in 2017, 2018, 2019, 2020, 2021 and thereafter, respectively.
Surety bonds issued as of September 30, 2017 totaled $37.7 million, the majority of which were requested by federal, state or local governments in connection with our operations.
Additionally, as of September 30, 2017, we had $4.6 million of letters of credit outstanding under our $250.0 million revolving credit facility (the “Revolving Corporate Credit Facility”).
Loss Contingencies         
In April 2013, Krishna and Sherrie Narayan and other owners of 12 residential units (owners of two of which subsequently agreed to release their claims) at the resort formerly known as The Ritz-Carlton Club & Residences, Kapalua Bay (“Kapalua Bay”) filed an amended complaint in Circuit Court for Maui County, Hawaii against us, certain of our subsidiaries, Marriott International, certain of its subsidiaries, and the joint venture in which we have an equity investment that developed and marketed vacation ownership and residential products at Kapalua Bay (the “Joint Venture”). In the original complaint, the plaintiffs alleged that defendants mismanaged funds of the residential owners association (the “Kapalua Bay Association”), created a conflict of interest by permitting their employees to serve on the Kapalua Bay Association’s board, and failed to disclose documents to which the plaintiffs were allegedly entitled. The amended complaint alleges breach of fiduciary duty, violations of the Hawaii Unfair and Deceptive Trade Practices Act and the Hawaii condominium statute, intentional misrepresentation and concealment, unjust enrichment and civil conspiracy. The relief sought in the amended complaint

17


includes injunctive relief, repayment of all sums paid to us and our subsidiaries and Marriott International and its subsidiaries, compensatory and punitive damages, and treble damages under the Hawaii Unfair and Deceptive Trade Practices Act. We filed a motion in the Circuit Court to compel arbitration of plaintiffs’ claims. That motion was denied, but on appeal the Hawaii Intermediate Court of Appeals reversed. The Hawaii Supreme Court reversed the decision of the Intermediate Court of Appeals and reinstated the action in Circuit Court, which set the case for trial. We filed a petition with the United States Supreme Court seeking review of the Hawaii Supreme Court’s decision. In January 2016, the U.S. Supreme Court issued an order vacating the Hawaii Supreme Court’s decision and remanding the case with instructions to reconsider its ruling in light of a recent U.S. Supreme Court decision reiterating the obligation of courts to enforce arbitration agreements. On July 14, 2017, the Hawaii Supreme Court issued a decision reaffirming its prior ruling and remanding the case to the Circuit Court for trial. Our motion for reconsideration of that decision was denied on August 9, 2017. We dispute the material allegations in the amended complaint and continue to defend against the action vigorously. Given the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
In June 2013, Earl C. and Patricia A. Charles, owners of a fractional interest at Kapalua Bay, together with owners of 38 other fractional interests (owners of two of which subsequently agreed to release their claims) at Kapalua Bay, filed an amended complaint in the Circuit Court of the Second Circuit for the State of Hawaii against us, certain of our subsidiaries, Marriott International, certain of its subsidiaries, the Joint Venture, and other entities that have equity investments in the Joint Venture. The plaintiffs allege that the defendants failed to disclose the financial condition of the Joint Venture and the commitment of the defendants to the Joint Venture, and that defendants’ actions constituted fraud and violated the Hawaii Unfair and Deceptive Trade Practices Act, the Hawaii Condominium Property Act and the Hawaii Time Sharing Plans statute. The relief sought includes compensatory and punitive damages, attorneys’ fees, pre-judgment interest, declaratory relief, rescission and treble damages under the Hawaii Unfair and Deceptive Trade Practices Act. The complaint was subsequently further amended to add owners of two additional fractional interests as plaintiffs. The Circuit Court granted our motion to compel arbitration of the claims asserted by the plaintiffs. Plaintiffs appealed that decision to the Hawaii Intermediate Court of Appeals and also initiated arbitration. In July 2015, the Intermediate Court of Appeals reversed the decision of the Circuit Court and directed that the action be reinstated in the Circuit Court, based on the Hawaii Supreme Court’s decision in the Narayan case discussed above. On October 10, 2017, following the most recent action of the Hawaii Supreme Court in the Narayan case, the Circuit Court set the Charles case for trial beginning in January 2019. We dispute the material allegations in the amended complaint and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
In May 2015, we and certain of our subsidiaries were named as defendants in an action filed in the Superior Court of San Francisco County, California, by William and Sharon Petrick and certain other present and former owners of 69 fractional interests at the RCC San Francisco. The plaintiffs allege that the affiliation of the RCC San Francisco with our points-based Marriott Vacation Club Destinations (“MVCD”) program, certain alleged sales practices, and other acts we and the other defendants allegedly took caused an actionable decrease in the value of their fractional interests. The relief sought includes, among other things, compensatory and punitive damages, rescission, and pre- and post-judgment interest. Plaintiffs filed an amended complaint in April 2016. We filed a motion to dismiss, which the Court granted in part and denied in part on September 13, 2017. The Court also granted leave to plaintiffs to file a second amended complaint, which plaintiffs filed on October 17, 2017. We dispute the plaintiffs’ material allegations and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
In March 2017, RCHFU, L.L.C. and other owners of 232 fractional interests at The Ritz-Carlton Club, Aspen Highlands (“RCC Aspen Highlands”) served an amended complaint in an action pending in the court against us, certain of our subsidiaries, and other third party defendants. The U.S. District Court for the District of Colorado has ordered that no further amendments will be permitted. The amended complaint alleges that the plaintiffs’ fractional interests were devalued by the affiliation of RCC Aspen Highlands and other Ritz-Carlton Clubs with our points-based MVCD program. The relief sought includes, among other things, unspecified damages, pre- and post-judgment interest, and attorneys’ fees. We filed a motion to dismiss the amended complaint, which remains pending. We dispute the plaintiffs’ material allegations and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
In May 2016, we, certain of our subsidiaries, and other third parties were named as defendants in an action filed in the U.S. District Court for the Middle District of Florida by Anthony and Beth Lennen. The case is filed as a putative class action; the plaintiffs seek to represent a class consisting of themselves and all other purchasers of MVCD points, from inception of the MVCD program in June 2010 to the present, as well as all individuals who own or have owned weeks in any resorts for which weeks have been added to the MVCD program. Plaintiffs challenge the characterization of the beneficial interests in the MVCD trust that are sold to customers as real estate interests under Florida law. They also challenge the structure of the trust and associated operational aspects of the trust product. The relief sought includes, among other things, declaratory relief, an unwinding of the MVCD product, and punitive damages. On September 15, 2016, we filed a motion to dismiss the complaint

18


and a motion to stay the case pending referral of certain questions to Florida state regulators. On September 27, 2017, the Court granted the motion to dismiss and denied the motion to stay. The Court granted leave to plaintiffs to file an amended complaint, which plaintiffs filed on October 25, 2017. We dispute the plaintiffs’ material allegations and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
Other
In September 2017, over 20 of our properties were impacted by Hurricane Irma and Hurricane Maria and, as a result, we have accrued $1.7 million of expense for the estimated property damage insurance deductibles, which was recorded in the Gains and other income, net line on the Statement of Income.
During 2016, our properties in Hilton Head and Myrtle Beach, South Carolina were temporarily closed as a result of damage from Hurricane Matthew. In the 2017 third quarter, we received $8.7 million in net insurance proceeds related to the settlement of business interruption insurance claims arising from Hurricane Matthew, which were recorded in the Gains and other income line on the Statement of Income.
9. DEBT
The following table provides detail on our debt balances, net of unamortized debt discount and issuance costs:
($ in thousands)
At September 30, 2017
 
At December 30, 2016
Vacation ownership notes receivable securitizations, gross(1)
$
906,701

 
$
738,362

Unamortized debt issuance costs
(11,296
)
 
(9,174
)
 
895,405

 
729,188

 
 
 
 
Convertible notes, gross(2)
230,000

 

Unamortized debt discount and issuance costs
(39,261
)
 

 
190,739

 

 
 
 
 
Non-interest bearing note payable
63,558

 

Unamortized debt discount(3)
(3,881
)
 

 
59,677

 

 
 
 
 
Other debt, gross
196

 
834

Unamortized debt issuance costs
(16
)
 
(19
)
 
180

 
815

 
 
 
 
Capital leases
7,221

 
7,221

 
$
1,153,222

 
$
737,224

_________________________
(1) 
Interest rates as of September 30, 2017 range from 2.2% to 6.3% with a weighted average interest rate of 2.5%.
(2) 
The effective interest rate as of September 30, 2017 was 4.7%.
(3) 
Debt discount based on imputed interest rate of 6.0%.
See Footnote No. 12, “Variable Interest Entities,” for a discussion of the collateral for the non-recourse debt associated with the securitized vacation ownership notes receivable and our Warehouse Credit Facility.

19


The following table shows scheduled future principal payments for our debt as of September 30, 2017:
($ in thousands)
Vacation Ownership
Notes Receivable
Securitizations(1)
 
Convertible Notes
 
Non-Interest Bearing Note Payable
 
Other
Debt
 
Capital
Leases
 
Total
Debt Principal Payments Year
 
 
 
 
 
 
 
 
 
 
 
2017, remaining
$
26,213

 
$

 
$

 
$
4

 
$

 
$
26,217

2018
98,949

 

 
32,680

 
4

 
7,221

 
138,854

2019
96,249

 

 
30,878

 
4

 

 
127,131

2020
98,215

 

 

 
5

 

 
98,220

2021
99,010

 

 

 
5

 

 
99,015

Thereafter
488,065

 
230,000

 

 
174

 

 
718,239

 
$
906,701

 
$
230,000

 
$
63,558

 
$
196

 
$
7,221

 
$
1,207,676

_________________________
(1) 
The debt associated with our vacation ownership notes receivable securitizations is non-recourse to us.
As the contractual terms of the underlying securitized vacation ownership notes receivable determine the maturities of the non-recourse debt associated with them, actual maturities may occur earlier than shown above due to prepayments by the vacation ownership notes receivable obligors.
We paid cash for interest, net of amounts capitalized, of $15.6 million and $14.6 million in the 2017 first three quarters and the 2016 first three quarters, respectively.
Debt Associated with Vacation Ownership Notes Receivable Securitizations
During the 2017 third quarter, we completed the securitization of a pool of $360.8 million of vacation ownership notes receivable. In connection with the securitization, investors purchased in a private placement $350.0 million in vacation ownership loan backed notes from the MVW Owner Trust 2017-1 (the “2017-1 Trust”). Three classes of vacation ownership loan backed notes were issued by the 2017-1 Trust: $276.0 million of Class A Notes, $46.9 million of Class B Notes and $27.1 million of Class C Notes. The Class A Notes have an interest rate of 2.42 percent, the Class B Notes have an interest rate of 2.75 percent and the Class C Notes have an interest rate of 2.99 percent, for an overall weighted average interest rate of 2.51 percent.
Each of the transactions in which we have securitized vacation ownership notes receivable contains various triggers relating to the performance of the underlying vacation ownership notes receivable. If a pool of securitized vacation ownership notes receivable fails to perform within the pool’s established parameters (default or delinquency thresholds vary by transaction), transaction provisions effectively redirect the monthly excess spread we would otherwise receive from that pool (attributable to the interests we retained) to accelerate the principal payments to investors (taking into account the subordination of the different tranches to the extent there are multiple tranches) until the performance trigger is cured. During the 2017 first three quarters, and as of September 30, 2017, no securitized vacation ownership notes receivable pools were out of compliance with their respective established parameters. As of September 30, 2017, we had 8 securitized vacation ownership notes receivable pools outstanding.
Convertible Notes
During the 2017 third quarter, we issued $230.0 million aggregate principal amount of our 1.50% Convertible Senior Notes due 2022 (the “Convertible Notes”), which included the exercise in full of the over-allotment option we granted to the initial purchasers of the Convertible Notes to purchase up to an additional $30.0 million aggregate principal amount of Convertible Notes. The Convertible Notes are governed by an indenture dated September 25, 2017 (the “Indenture”) between us and The Bank of New York Mellon Trust Company, N.A., as trustee (the “Trustee”). We received net proceeds from the offering of approximately $223.7 million after adjusting for debt issuance costs, including the discount to the initial purchasers.
The Convertible Notes bear interest at a rate of 1.50 percent, payable in cash semi-annually on March 15 and September 15 of each year beginning on March 15, 2018. The Convertible Notes mature on September 15, 2022, unless repurchased or converted in accordance with their terms prior to that date. On or after June 15, 2022, and until the close of business on the second scheduled trading day immediately preceding the maturity date, holders may convert their Convertible Notes at their option. The Convertible Notes are convertible at an initial rate of 6.7482 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $148.19 per share of our common stock). The conversion rate is subject to adjustment for certain events as described in the Indenture. Upon conversion,

20


we will pay or deliver, as the case may be, cash, shares of our common stock or a combination of cash and shares of our common stock, at our election. It is our intent to settle conversions of the Convertible Notes through combination settlement, which contemplates repayment in cash of the principal amount and repayment in shares of our common stock of any excess of the conversion value over the principal amount.
Holders may convert their Convertible Notes prior to June 15, 2022 only under the following circumstances:
during any calendar quarter commencing after the calendar quarter ending on December 31, 2017 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ending on the last trading day of the immediately preceding calendar quarter is greater than or equal to 130 percent of the conversion price on each applicable trading day;
during the five business day period after any five consecutive trading day period in which the trading price per $1,000 principal amount of the Convertible Notes for each trading day of that five consecutive trading day period was less than 98 percent of the product of the last reported sale price of our common stock and the conversion rate on each such trading day; or
upon the occurrence of specified corporate events as described in the Indenture.
We may not redeem the Convertible Notes prior to their maturity date, and no sinking fund is provided for them. If we undergo a fundamental change, as described in the Indenture, subject to certain conditions, holders may require us to repurchase for cash all or any portion of their Convertible Notes. The repurchase price as a result of a fundamental change is equal to 100 percent of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the repurchase date. If certain fundamental changes referred to in the Indenture as make-whole fundamental changes occur, the conversion rate applicable to the Convertible Notes may increase.
The Convertible Notes are our general senior unsecured obligations, ranking senior in right of payment to any future debt that is expressly subordinated in right of payment to the Convertible Notes and equally in right of payment with all of our existing and future liabilities that are not so subordinated. The Convertible Notes are effectively subordinated to all of our existing and future secured debt to the extent of the value of the assets securing such debt. The Convertible Notes are structurally subordinated to all of the existing and future liabilities and obligations of our subsidiaries. The Convertible Notes are not guaranteed by any of our subsidiaries.
There are no financial or operating covenants related to the Convertible Notes. The Indenture contains customary events of default with respect to the Convertible Notes and provides that upon the occurrence and continuation of certain events of default, the Trustee or the holders of at least 25 percent in aggregate principal amount of the Convertible Notes then outstanding, may declare all principal of, and accrued and any unpaid interest on, the Convertible Notes then outstanding to be immediately due and payable. In case of certain events of bankruptcy or insolvency involving the Company or certain of its subsidiaries, all of the principal of and accrued and unpaid interest on the Convertible Notes will automatically become immediately due and payable.
In accounting for the issuance of the Convertible Notes, we separated the Convertible Notes into liability and equity components. We allocated $196.8 million of the Convertible Notes to the liability component, and $33.2 million to the equity component. The excess of the principal amount of the liability component over its carrying amount is amortized to interest expense over the term of the Convertible Notes using the effective interest method. The equity component will not be remeasured as long as it continues to meet the conditions for equity classification.
We incurred issuance costs of $7.3 million related to the Convertible Notes. Issuance costs were allocated to the liability and equity components based on their relative values. Issuance costs attributable to the liability component are being amortized to interest expense over the term of the Convertible Notes, and issuance costs attributable to the equity component are included along with the equity component in stockholders' equity.
The following table shows the net carrying value of the Convertible Notes at September 30, 2017:
($ in thousands)
 
Liability component
 
Principal amount
$
230,000

Unamortized debt discount
(33,076
)
Unamortized debt issuance costs
(6,185
)
 
$
190,739

 
 
Equity component, net of issuance costs
$
32,573


21


The following table shows the total interest expense related to the Convertible Notes for the 2017 third quarter and the 2017 first three quarters:
($ in thousands)
 
Contractual interest expense
$
58

Amortization of debt discount
148

Amortization of debt issuance costs
26

 
$
232

Convertible Note Hedges and Warrants
In connection with the offering of the Convertible Notes, we entered into privately-negotiated convertible note hedge transactions with respect to our common stock with two counterparties on each of September 20, 2017 and September 21, 2017 (“Convertible Note Hedges”), covering a total of approximately 1.55 million shares of our common stock at a cost of $33.2 million. The Convertible Note Hedges are subject to anti-dilution provisions substantially similar to those of the Convertible Notes, have a strike price that initially corresponds to the initial conversion price of the Convertible Notes, are exercisable by us upon any conversion under the Convertible Notes, and expire when the Convertible Notes mature. The cost of the Convertible Note Hedges is expected to be tax deductible as an original issue discount over the life of the Convertible Notes, as the Convertible Notes and the Convertible Note Hedges represent an integrated debt instrument for tax purposes. The cost of the Convertible Note Hedges was recorded as a reduction of Additional paid-in capital on our Balance Sheet as of September 30, 2017.
Concurrently with the entry into the Convertible Note Hedges, we separately entered into privately-negotiated warrant transactions (the “Warrants”), whereby we sold to the counterparties to the Convertible Note Hedges warrants to acquire, collectively, subject to anti-dilution adjustments, approximately 1.55 million shares of our common stock at an initial strike price of $176.68 per share. We received aggregate proceeds of approximately $20.3 million from the sale of the Warrants to the counterparties. Taken together, the Convertible Note Hedges and the Warrants are generally expected to reduce the potential dilution to our common stock (or, in the event the conversion of the Convertible Notes is settled in cash, to reduce our cash payment obligation) in the event that at the time of conversion our stock price exceeds the conversion price under the Convertible Notes and to effectively increase the overall conversion price from $148.19 (or a conversion premium of 30 percent) to $176.68 per share (or a conversion premium of 55 percent). The Warrants will expire in ratable portions on a series of expiration dates commencing on December 15, 2022. The proceeds from the issuance of the Warrants were recorded as an increase to Additional paid-in capital on our Balance Sheet as of September 30, 2017.
The Convertible Notes, the Convertible Note Hedges and the Warrants are transactions that are separate from each other. Holders of any such instrument have no rights with respect to the other instruments. As of September 30, 2017, no Convertible Note Hedges or Warrants have been exercised.
Revolving Corporate Credit Facility
During the 2017 third quarter, we terminated our $200.0 million revolving credit facility (the “Previous Revolving Corporate Credit Facility”) and entered into a new Revolving Corporate Credit Facility with a borrowing capacity of $250.0 million, including a letter of credit sub-facility of $30.0 million, that terminates on August 16, 2022. All outstanding cash borrowings under our Previous Revolving Corporate Credit Facility were repaid in full prior to termination. The Revolving Corporate Credit Facility will provide support for our business, including ongoing liquidity and letters of credit. Borrowings under this facility generally bear interest at a floating rate plus an applicable margin that varies from 0.50 percent to 2.75 percent depending on the type of loan and our credit rating. In addition, we pay a commitment fee on the unused availability under the Revolving Corporate Credit Facility at a rate that varies from 20 basis points per annum to 40 basis points per annum, also depending on our credit rating.
No cash borrowings were outstanding as of September 30, 2017 under our Revolving Corporate Credit Facility. Any amounts borrowed under that facility, as well as obligations with respect to letters of credit issued pursuant to that facility, are secured by a perfected first priority security interest in substantially all of the assets of the borrower under, and guarantors of, that facility (which include Marriott Vacations Worldwide and each of our direct and indirect, existing and future, domestic subsidiaries, excluding certain bankruptcy remote special purpose subsidiaries), in each case including inventory, subject to certain exceptions. As of September 30, 2017, we were in compliance with the applicable financial and operating covenants under the Revolving Credit Facility.

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Warehouse Credit Facility
The Warehouse Credit Facility, which has a borrowing capacity of $250.0 million, allows for the securitization of vacation ownership notes receivable on a non-recourse basis. During the 2017 third quarter, we amended certain agreements associated with this facility (the “Warehouse Amendment”). The Warehouse Amendment requires us to comply with the financial covenants in the Revolving Corporate Credit Facility and eliminates the requirement to comply with the covenants contained in the Previous Revolving Corporate Credit Facility. The Warehouse Amendment did not modify the borrowing capacity or the term of the Warehouse Credit Facility. The Warehouse Credit Facility terminates on March 7, 2019 and if not renewed, any amounts outstanding thereunder would become due and payable 13 months after termination, at which time all principal and interest collected with respect to the vacation ownership notes receivable held in the Warehouse Credit Facility would be redirected to the lenders to pay down the outstanding debt under the facility. The advance rate for vacation ownership notes receivable securitized using the Warehouse Credit Facility varies based on the characteristics of the securitized vacation ownership notes receivable. We also pay unused facility and other fees under the Warehouse Credit Facility.
During the 2017 second quarter, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $59.1 million. The advance rate was 85 percent, which resulted in gross proceeds of $50.3 million. Net proceeds were $50.0 million due to the funding of reserve accounts in the amount of $0.3 million.
As of September 30, 2017, there were no cash borrowings outstanding under our Warehouse Credit Facility. We generally expect to securitize our vacation ownership notes receivable, including any vacation ownership notes receivable held in the Warehouse Credit Facility, in the ABS market once per year.
Non-Interest Bearing Note Payable
During the 2017 second quarter, we issued a non-interest bearing note payable in connection with the acquisition of vacation ownership units located on the Big Island of Hawaii. See Footnote No. 5, “Acquisitions and Dispositions,” for additional information regarding this transaction.
10. SHAREHOLDERS’ EQUITY
Marriott Vacations Worldwide has 100,000,000 authorized shares of common stock, par value of $0.01 per share. At September 30, 2017, there were 36,857,186 shares of Marriott Vacations Worldwide common stock issued, of which 26,494,047 shares were outstanding and 10,363,139 shares were held as treasury stock. At December 30, 2016, there were 36,633,868 shares of Marriott Vacations Worldwide common stock issued, of which 26,990,306 shares were outstanding and 9,643,562 shares were held as treasury stock. Marriott Vacations Worldwide has 2,000,000 authorized shares of preferred stock, par value of $0.01 per share, none of which were issued or outstanding as of September 30, 2017 or December 30, 2016.
The following table details changes in shareholders’ equity during three quarters ended September 30, 2017:
($ in thousands)
Common Stock
 
Treasury
Stock
 
Additional
Paid-In
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Equity
Balance at December 30, 2016
$
366

 
$
(606,631
)
 
$
1,162,283

 
$
5,460

 
$
346,341

 
$
907,819

Impact of adoption of ASU 2016-09

 

 
371

 

 
(371
)
 

Opening balance 2017
366

 
(606,631
)
 
1,162,654

 
5,460

 
345,970

 
907,819

Net income

 

 

 

 
118,738

 
118,738

Foreign currency translation adjustments

 

 

 
11,626

 

 
11,626

Derivative instrument adjustment

 

 

 
70

 

 
70

Amounts related to share-based compensation
3

 

 
1,933

 

 

 
1,936

Repurchase of common stock

 
(83,067
)
 

 

 

 
(83,067
)
Dividends

 

 

 

 
(28,512
)
 
(28,512
)
Equity component of convertible notes, net of issuance costs

 

 
32,573

 

 

 
32,573

Purchase of convertible note hedges

 

 
(33,235
)
 

 

 
(33,235
)
Issuance of warrants

 

 
20,332

 

 

 
20,332

Employee stock plan issuance

 
564

 
378

 

 

 
942

Balance at September 30, 2017
$
369

 
$
(689,134
)
 
$
1,184,635

 
$
17,156

 
$
436,196

 
$
949,222


23


Share Repurchase Program
The following table summarizes share repurchase activity under our current share repurchase program:
($ in thousands, except per share amounts)
Number of Shares Repurchased
 
Cost of Shares Repurchased
 
Average Price Paid per Share
As of December 30, 2016
9,672,629

 
$
608,439

 
$
62.90

For the 2017 first three quarters
728,385

 
83,067

 
114.04

As of September 30, 2017
10,401,014

 
$
691,506

 
$
66.48

On August 1, 2017, our Board of Directors authorized the repurchase of up to 1.0 million additional shares of our common stock under our existing share repurchase program and extended the duration of the program through May 31, 2018. As of September 30, 2017, our Board of Directors had authorized the repurchase of an aggregate of up to 11.9 million shares of our common stock under the share repurchase program since the initiation of the program in October 2013. Share repurchases may be made through open market purchases, privately negotiated transactions, block transactions, tender offers, accelerated share repurchase agreements or otherwise. The specific timing, amount and other terms of the repurchases will depend on market conditions, corporate and regulatory requirements and other factors. Acquired shares of our common stock are held as treasury shares carried at cost in our Financial Statements. In connection with the repurchase program, we are authorized to adopt one or more trading plans pursuant to the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
As of September 30, 2017, 1.5 million shares remained available for repurchase under the authorization approved by our Board of Directors. The authorization for the share repurchase program may be suspended, terminated, increased or decreased by our Board of Directors at any time without prior notice.
Dividends
We declared cash dividends to holders of common stock during the 2017 first three quarters as follows:
Declaration Date
 
Shareholder Record Date
 
Distribution Date
 
Dividend per Share
February 9, 2017
 
February 23, 2017
 
March 9, 2017
 
$0.35
May 11, 2017
 
May 25, 2017
 
June 8, 2017
 
$0.35
September 7, 2017
 
September 21, 2017
 
October 5, 2017
 
$0.35
Any future dividend payments will be subject to Board approval, and there can be no assurance that we will pay dividends in the future.
11. SHARE-BASED COMPENSATION
We maintain the Marriott Vacations Worldwide Corporation Stock and Cash Incentive Plan (the “Stock Plan”) for the benefit of our officers, directors and employees. Under the Stock Plan, we award: (1) restricted stock units (“RSUs”) of our common stock, (2) SARs and (3) stock options to purchase our common stock. A total of 6 million shares are authorized for issuance pursuant to grants under the Stock Plan. As of September 30, 2017, 1.4 million shares were available for grants under the Stock Plan.
The following table details our share-based compensation expense related to award grants to our officers, directors and employees for the following periods:
 
 
Quarter Ended
 
Year to Date Ended
 
 
September 30, 2017
 
September 9, 2016
 
September 30, 2017
 
September 9, 2016
($ in thousands)
 
(92 days)
 
(84 days)
 
(274 days)
 
(252 days)
Service based RSUs
 
$
2,367

 
$
2,065

 
$
7,814

 
$
6,618

Performance based RSUs
 
904

 
560

 
2,775

 
2,003

 
 
3,271

 
2,625

 
10,589

 
8,621

SARs
 
627

 
514

 
1,760

 
1,374

Stock options
 

 

 

 

 
 
$
3,898

 
$
3,139

 
$
12,349

 
$
9,995


24


The following table details our deferred compensation costs related to unvested awards:
($ in thousands)
 
At September 30, 2017
 
At December 30, 2016
Service based RSUs
 
$
10,931

 
$
9,000

Performance based RSUs
 
5,754

 
3,307

 
 
16,685

 
12,307

SARs
 
1,626

 
1,146

Stock options
 

 

 
 
$
18,311

 
$
13,453

Restricted Stock Units
We granted 111,992 service based RSUs, which are subject to time-based vesting conditions, with a weighted average grant-date fair value of $95.57, to our employees and non-employee directors during the 2017 first three quarters. During the 2017 first three quarters, we also granted performance based RSUs, which are subject to performance based vesting conditions, to members of management. A maximum of 94,436 RSUs may be earned under the performance based RSUs granted during the 2017 first three quarters.
Stock Appreciation Rights
We granted 81,977 SARs, with a weighted average grant-date fair value of $27.63 and a weighted average exercise price of $97.53, to members of management during the 2017 first three quarters. We use the Black-Scholes model to estimate the fair value of the SARs granted. The average expected life was calculated using the simplified method. The risk-free interest rate was calculated based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The dividend yield assumption listed below is based on the expectation of future payouts.
The following table outlines the assumptions used to estimate the fair value of grants during the 2017 first three quarters:
Expected volatility
30.41%
Dividend yield
1.44%
Risk-free rate
2.06%
Expected term (in years)
6.25
12. VARIABLE INTEREST ENTITIES
Variable Interest Entities Related to Our Vacation Ownership Notes Receivable Securitizations
We periodically securitize, without recourse, through bankruptcy remote special purpose entities, notes receivable originated in connection with the sale of vacation ownership products. These vacation ownership notes receivable securitizations provide funding for us and transfer the economic risks and substantially all the benefits of the consumer loans we originate to third parties. In a vacation ownership notes receivable securitization, various classes of debt securities issued by a special purpose entity are generally collateralized by a single tranche of transferred assets, which consist of vacation ownership notes receivable. With each vacation ownership notes receivable securitization, we may retain a portion of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized vacation ownership notes receivable or, in some cases, overcollateralization and cash reserve accounts.
We created these bankruptcy remote special purpose entities to serve as a mechanism for holding assets and related liabilities, and the entities have no equity investment at risk, making them variable interest entities. We continue to service the vacation ownership notes receivable, transfer all proceeds collected to these special purpose entities, and retain rights to receive benefits that are potentially significant to the entities. Accordingly, we concluded that we are the entities’ primary beneficiary and, therefore, consolidate them.

25


The following table shows consolidated assets, which are collateral for the obligations of these variable interest entities, and consolidated liabilities included on our Balance Sheet at September 30, 2017:
($ in thousands)
Vacation Ownership
Notes Receivable
Securitizations
 
Warehouse
Credit Facility
 
Total
Consolidated Assets:
 
 
 
 
 
Vacation ownership notes receivable, net of reserves
$
875,237

 
$

 
$
875,237

Interest receivable
5,702

 

 
5,702

Restricted cash
34,413

 

 
34,413

Total
$
915,352

 
$

 
$
915,352

Consolidated Liabilities:
 
 
 
 
 
Interest payable
$
697

 
$
42

 
$
739

Debt
906,701

 

 
906,701

Total
$
907,398

 
$
42

 
$
907,440

The noncontrolling interest balance was zero. The creditors of these entities do not have general recourse to us.
The following table shows the interest income and expense recognized as a result of our involvement with these variable interest entities during the 2017 third quarter:
($ in thousands)
Vacation Ownership
Notes Receivable
Securitizations
 
Warehouse
Credit Facility
 
Total
Interest income
$
25,900

 
$
638

 
$
26,538

Interest expense to investors
$
4,837

 
$
474

 
$
5,311

Debt issuance cost amortization
$
947

 
$
240

 
$
1,187

Administrative expenses
$
92

 
$
37

 
$
129

The following table shows the interest income and expense recognized as a result of our involvement with these variable interest entities during the 2017 first three quarters:
($ in thousands)
Vacation Ownership
Notes Receivable
Securitizations
 
Warehouse
Credit Facility
 
Total
Interest income
$
70,501

 
$
2,331

 
$
72,832

Interest expense to investors
$
13,389

 
$
1,325

 
$
14,714

Debt issuance cost amortization
$
2,677

 
$
699

 
$
3,376

Administrative expenses
$
301

 
$
116

 
$
417


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The following table shows cash flows between us and the vacation ownership notes receivable securitization variable interest entities during the 2017 first three quarters and the 2016 first three quarters:
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(274 days)
 
(252 days)
Cash inflows:
 
 
 
Net proceeds from vacation ownership notes receivable securitizations
$
346,469

 
$
247,453

Principal receipts
170,920

 
118,015

Interest receipts
71,464

 
60,863

Reserve release
32

 
405

Total
588,885

 
426,736

Cash outflows:
 
 
 
Principal to investors
(159,305
)
 
(105,863
)
Voluntary repurchases of defaulted vacation ownership notes receivable
(22,356
)
 
(22,025
)
Interest to investors
(13,121
)
 
(10,823
)
Funding of restricted cash(1)
(1,804
)
 
(51,770
)
Total
(196,586
)
 
(190,481
)
Net Cash Flows
$
392,299

 
$
236,255

_________________________
(1) 
Includes $50.0 million of the proceeds from the securitization transaction completed during the 2016 third quarter, which were released when the remaining vacation ownership notes receivable were purchased by the MVW Owner Trust 2016-1 subsequent to the end of the 2016 third quarter.
The following table shows cash flows between us and the Warehouse Credit Facility variable interest entity during the 2017 first three quarters and the 2016 first three quarters:
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(274 days)
 
(252 days)
Cash inflows:
 
 
 
Proceeds from vacation ownership notes receivable securitizations
$
50,260

 
$
126,622

Principal receipts
1,403

 
5,227

Interest receipts
2,093

 
5,048

Reserve release
296

 
909

Total
54,052

 
137,806

Cash outflows:
 
 
 
Principal to investors
(1,160
)
 
(3,771
)
Voluntary repurchases of defaulted vacation ownership notes receivable

 
(661
)
Repayment of Warehouse Credit Facility
(49,100
)
 
(122,190
)
Interest to investors
(1,324
)
 
(1,338
)
Funding of restricted cash
(296
)
 
(447
)
Total
(51,880
)
 
(128,407
)
Net Cash Flows
$
2,172

 
$
9,399

Under the terms of our vacation ownership notes receivable securitizations, we have the right at our option to repurchase defaulted vacation ownership notes receivable at the outstanding principal balance. The transaction documents typically limit such repurchases to 15 to 20 percent of the transaction’s initial vacation ownership notes receivable principal balance. Our maximum exposure to loss relating to the special purpose entities that purchase, sell and own these vacation ownership notes receivable is the overcollateralization amount (the difference between the loan collateral balance and the balance on the outstanding vacation ownership notes receivable), plus cash reserves and any residual interest in future cash flows from collateral. In addition, we could be required to fund up to an aggregate of $5.0 million upon presentation of demand notes related to certain vacation ownership notes receivable securitization transactions outstanding at September 30, 2017.

27


Other Variable Interest Entities
We have a commitment to purchase an operating property located in New York, New York, that we currently manage as Marriott Vacation Club Pulse, New York City. Refer to Footnote No. 8, “Contingencies and Commitments” for additional information on the commitment. We are required to purchase the completed property from the third party developer unless the developer has sold the property to another party. The property is held by a variable interest entity for which we are not the primary beneficiary as we cannot prevent the variable interest entity from selling the property at a higher price. Accordingly, we have not consolidated the variable interest entity. As of September 30, 2017, our Balance Sheet reflected $8.4 million in Property and equipment related to a capital lease and leasehold improvements and $7.2 million in Debt related to the capital lease liability for ancillary and operations space we lease from the variable interest entity. In addition, a note receivable of $0.5 million is included in the Accounts and contracts receivable line on the Balance Sheet as of September 30, 2017. We believe that our maximum exposure to loss as a result of our involvement with this variable interest entity is $2.2 million as of September 30, 2017.
Pursuant to a commitment to repurchase an operating property located in Marco Island, Florida that was previously sold to a third-party developer, we acquired 36 completed vacation ownership units during the 2017 second quarter. Refer to Footnote No. 5, “Acquisitions and Dispositions” for additional information on this transaction. We remain obligated to repurchase the remaining portion of the operating property. Refer to Footnote No. 8, “Contingencies and Commitments” for additional information on our remaining commitment. The developer is a variable interest entity for which we are not the primary beneficiary as we do not control the variable interest entity’s development activities and cannot prevent the variable interest entity from selling the property at a higher price. Accordingly, we have not consolidated the variable interest entity. We are obligated to repurchase the remaining portion of the property from the developer contingent upon the property meeting our brand standards upon completion, provided that the third-party developer has not sold the property to another party. As of September 30, 2017, our Balance Sheet reflected $3.5 million of Inventory, $2.4 million of Other assets that relate to prepaid and other deposits, and $7.5 million of Other liabilities that relate to the deferral of gain recognition on the previous sale transaction and the deferral of revenue for development management services for the remaining purchase commitment, both of which will reduce our basis in the asset if we repurchase the property. In addition, a note receivable of $0.5 million is included in the Accounts and contracts receivable line on the Balance Sheet as of September 30, 2017. We believe that our maximum exposure to loss as a result of our involvement with this variable interest entity is less than $1 million as of September 30, 2017.
13. BUSINESS SEGMENTS
We define our reportable segments based on the way in which the chief operating decision maker, currently our chief executive officer, manages the operations of the company for purposes of allocating resources and assessing performance. We operate in three reportable business segments:
In our North America segment, we develop, market, sell and manage vacation ownership and related products under the Marriott Vacation Club and Grand Residences by Marriott brands. In 2016, we introduced Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand. We also develop, market and sell vacation ownership and related products under The Ritz-Carlton Destination Club brand, as well as whole ownership residential products under The Ritz-Carlton Residences brand.
In our Asia Pacific segment, we develop, market, sell and manage two points-based programs that we specifically designed to appeal to the vacation preferences of the market, Marriott Vacation Club, Asia Pacific and Marriott Vacation Club Destinations, Australia, as well as a weeks-based right-to-use product.
In our Europe segment, we are focusing on selling our existing projects and managing existing resorts. We do not have any current plans for new development in this segment.
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses or income taxes. We do not allocate corporate interest expense, consumer financing interest expense, other financing expenses or general and administrative expenses to our segments. We include interest income specific to segment activities within the appropriate segment. We allocate other gains and losses and equity in earnings or losses from our joint ventures to each of our segments as appropriate. Corporate and other represents that portion of our revenues and other gains or losses that are not allocable to our segments.

28


Revenues
 
Quarter Ended
 
Year to Date Ended
 
September 30, 2017
 
  September 9, 2016 (1)
 
September 30, 2017
 
  September 9, 2016 (1)
($ in thousands)
(92 days)
 
(84 days)
 
(274 days)
 
(252 days)
North America
$
437,801

 
$
358,799

 
$
1,341,430

 
$
1,117,419

Asia Pacific
16,952

 
14,760

 
50,482

 
53,168

Europe
32,237

 
28,078

 
78,817

 
73,343

Total segment revenues
486,990