MARRIOTT VACATIONS WORLDWIDE Corp - FORM 10-Q - November 2, 2017

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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
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EX-10.2 - EXHIBIT 10.2 - MARRIOTT VACATIONS WORLDWIDE Corpq3201710-qexhibit102xformo.htm
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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.

22

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.

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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

 
401,637

 
1,470,729

 
1,243,930

Corporate and other
—

 
—

 
—

 
—

 
$
486,990

 
$
401,637

 
$
1,470,729

 
$
1,243,930

_________________________
(1) 
Includes an immaterial reclassification of activity between the North America and Asia Pacific segments.  
Net Income
 
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
$
103,904

 
$
82,294

 
$
327,210

 
$
282,242

Asia Pacific
(472
)
 
1,191

 
(552
)
 
(423
)
Europe
6,766

 
4,536

 
10,939

 
7,079

Total segment financial results
110,198

 
88,021

 
337,597

 
288,898

Corporate and other
(47,069
)
 
(47,173
)
 
(156,720
)
 
(146,718
)
Provision for income taxes
(22,367
)
 
(14,041
)
 
(62,139
)
 
(54,656
)
 
$
40,762

 
$
26,807

 
$
118,738

 
$
87,524

_________________________
(1) 
Includes an immaterial reclassification of activity between the North America and Asia Pacific segments.
Assets
($ in thousands)
At September 30, 2017
 
At December 30, 2016
North America
$
2,102,691

 
$
1,968,021

Asia Pacific
131,486

 
102,348

Europe
67,433

 
62,245

Total segment assets
2,301,610

 
2,132,614

Corporate and other
521,426

 
258,805

 
$
2,823,036

 
$
2,391,419


29

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
We make forward-looking statements in Management’s Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Quarterly Report on Form 10-Q based on our management’s beliefs and assumptions and on information currently available to our management. Forward-looking statements include, among other things, the information concerning our possible or assumed future results of operations, business strategies, financing plans, competitive position, potential growth opportunities, potential operating performance improvements, and the effects of competition. Forward-looking statements include all statements that are not historical facts and can be identified by the use of forward-looking terminology such as the words “believe,” “expect,” “plan,” “intend,” “anticipate,” “estimate,” “predict,” “potential,” “continue,” “may,” “might,” “should,” “could” or the negative of these terms or similar expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual results may differ materially from those expressed in these forward-looking statements. You should not put undue reliance on any forward-looking statements in this Quarterly Report. We do not have any intention or obligation to update forward-looking statements after the date of this Quarterly Report on Form 10-Q, except as required by law.
The risk factors discussed in “Risk Factors” in our most recent Annual Report on Form 10-K and in this Quarterly Report on Form 10-Q, and which may be discussed in subsequent Quarterly Reports on Form 10-Q, could cause our results to differ materially from those expressed in forward-looking statements. There may be other risks and uncertainties that we cannot predict at this time or that we currently do not expect will have a material adverse effect on our financial position, results of operations or cash flows. Any such risks could cause our results to differ materially from those we express in forward-looking statements.
Our Financial Statements (as defined below), which we discuss below, reflect our historical financial condition, results of operations and cash flows. The financial information discussed below and included in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations or cash flows may be in the future. In order to make this report easier to read, we refer 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 to our Financial Statements that we include in the Financial Statements section of this Quarterly Report on Form 10-Q.
Business Overview
We are one of the world’s largest companies whose business is focused almost entirely on vacation ownership, based on number of owners, number of resorts and revenues. We are 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. 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.
In 2016, we introduced Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand, which features unique properties that embrace the spirit and culture of their urban locations, creating an authentic sense of place while delivering easy access to local interests, attractions and transportation.
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.
As further detailed in Footnote No. 1, “Summary of Significant Accounting Policies,” to our Financial Statements, 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.

30

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 calendar, we had eight more days in the 2017 third quarter than we had in the 2016 third quarter, and 22 more days in the 2017 first three quarters than we had in the 2016 first three quarters. We estimate that 2016 third quarter contract sales would have been approximately $17 million higher and that 2016 first three quarters contract sales would have been approximately $43 million higher on a comparable basis. Prior year results have not been restated for the impact of the change in our financial reporting calendar.
2017 Hurricane Activity
During the third quarter of 2017, over 20 properties within our North America segment were negatively impacted by one or both of Hurricane Irma and Hurricane Maria (the “Hurricanes”). As a result of the mandatory evacuations, shutdowns and cancellations of reservations and scheduled tours resulting from the Hurricanes, the sales operations at several of our locations, primarily those located on St. Thomas (USVI) and on Marco Island and Singer Island in Florida, were adversely impacted along with rental and ancillary operations.
While many of the properties and sales centers impacted by the Hurricanes were fully or partially open by the end of September, two resorts and a sales center on St. Thomas remain closed and we are not currently in a position to predict when they will reopen. Further, while some of the properties were fully or partially open, many of the operations will continue to ramp-up throughout the fourth quarter of 2017, and potentially into 2018. We have estimated the impact these Hurricanes had on our third quarter contract sales and tours and included them in our discussion of the results below. Given the continued ramp-up throughout the fourth quarter of 2017, we expect additional impacts on our fourth quarter contract sales and tours. We expect to submit a claim for our business interruption losses as well as property damage experienced by both us and our owners’ associations from these Hurricanes; however, we cannot quantify the extent of any such mitigation at this time and we do not expect any insurance proceeds to be received in 2017.
Below is a summary of significant accounting policies used in our business that will be used in describing our results of operations.
Sale of Vacation Ownership Products
We recognize revenues from the sale of vacation ownership products when all of the following conditions exist: a binding sales contract has been executed; the statutory rescission period has expired; the receivable is deemed collectible; and the remainder of our obligations are substantially completed.
Sales of vacation ownership products may be made for cash or we may provide financing. For sales where we provide financing, we defer revenue recognition until we receive a minimum down payment equal to ten percent of the purchase price plus the fair value of certain sales incentives provided to the purchaser. These sales incentives typically include Marriott Rewards Points or an alternative sales incentive that we refer to as “plus points.” These plus points are redeemable for stays at our resorts or for use in the Explorer Collection, generally up to two years from the date of issuance. Typically, sales incentives are only awarded if the sale is closed.
As a result of the down payment requirement described above and the requirement that the statutory rescission period has expired, we often defer revenues associated with the sale of vacation ownership products from the date of the purchase agreement to a future period. When comparing results year-over-year, this deferral frequently generates significant variances, which we refer to as the impact of revenue reportability.
Finally, as more fully described in the “Financing” section below, we record an estimate of expected uncollectibility on all vacation ownership notes receivable (also known as a vacation ownership notes receivable reserve or a sales reserve) as a reduction of revenues from the sale of vacation ownership products at the time we recognize revenues from a sale.
We report, on a supplemental basis, contract sales for each of our three segments. Contract sales consist of the total amount of vacation ownership product sales under purchase agreements signed during the period where we have received a

31

down payment of at least ten percent of the contract price, reduced by actual rescissions during the period. In circumstances where a customer applies any or all of their existing ownership interests as part of the purchase price for additional interests, we include only the incremental value purchased as contract sales. Contract sales differ from revenues from the sale of vacation ownership products that we report on our Statements of Income due to the requirements for revenue recognition described above. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business.
Cost of vacation ownership products includes costs to develop and construct our projects (also known as real estate inventory costs) as well as other non-capitalizable costs associated with the overall project development process. For each project, we expense real estate inventory costs in the same proportion as the revenue recognized. Consistent with the applicable accounting guidance, to the extent there is a change in the estimated sales revenues or real estate inventory costs for the project in a period, a non-cash adjustment is recorded on our Statements of Income to true-up costs in that period to those that would have been recorded historically if the revised estimates had been used. These true-ups, which we refer to as product cost true-up activity, will have a positive or negative impact on our Statements of Income.
We refer to revenues from the sale of vacation ownership products less the cost of vacation ownership products and marketing and sales costs as development margin. Development margin percentage is calculated by dividing development margin by revenues from the sale of vacation ownership products.
Resort Management and Other Services
Our resort management and other services revenues include revenues generated from fees we earn for managing each of our resorts. In addition, we earn revenue for providing ancillary offerings, including food and beverage, retail, and golf and spa offerings, at our resorts. We also receive annual fees, club dues, settlement fees from the sale of vacation ownership products and certain transaction-based fees from owners and other third parties, including external exchange service providers with which we are associated.
We provide day-to-day management services, including housekeeping services, operation of reservation systems, maintenance, and certain accounting and administrative services for property owners’ associations. We receive compensation for these management services; this compensation is typically based on either a percentage of the budgeted costs to operate the resorts or a fixed fee arrangement. We earn these fees regardless of usage or occupancy.
Resort management and other services expenses include costs to operate the food and beverage and other ancillary operations and overall customer support services, including reservations, certain transaction-based expenses relating to external exchange service providers and settlement expenses from the sale of vacation ownership products.
Financing
We offer financing to qualified customers for the purchase of most types of our vacation ownership products. The average FICO score of customers who were U.S. citizens or residents who financed a vacation ownership purchase was as follows:
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
 
(274 days)
 
(252 days)
Average FICO score
743
 
742
The typical financing agreement provides for monthly payments of principal and interest with the principal balance of the loan fully amortizing over the term of the related vacation ownership note receivable, which is generally ten years. The interest income earned from the financing arrangements is earned on an accrual basis on the principal balance outstanding over the life of the arrangement and is recorded as Financing revenues on our Statements of Income.
Financing revenues include interest income earned on vacation ownership notes receivable as well as fees earned from servicing the existing vacation ownership notes receivable portfolio. Financing expenses include costs in support of the financing, servicing and securitization processes. The amount of interest income earned in a period depends on the amount of outstanding vacation ownership notes receivable, which is impacted positively by the origination of new vacation ownership notes receivable and negatively by principal collections. We calculate financing propensity as contract sales volume of financed contracts closed in the period divided by contract sales volume of all contracts closed in the period. Financing propensity was 60.1 percent in the 2016 fiscal year and 64.9 percent in the 2017 first three quarters, reflecting successful incentive programs that have been helping to increase financing propensity. We expect financing propensity in 2017 to approximate 65 percent as we intend to continue to offer the financing incentive programs, and that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in principal of existing vacation ownership notes receivable.

32

In the event of a default, we generally have the right to foreclose on or revoke the vacation ownership interest. We return vacation ownership interests that we reacquire through foreclosure or revocation back to real estate inventory. As discussed above, we record a vacation ownership notes receivable reserve at the time of sale and classify the reserve as a reduction to revenues from the sale of vacation ownership products on our Statements of Income. Historical default rates, which represent defaults as a percentage of each year’s beginning gross vacation ownership notes receivable balance, were as follows:
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
 
(274 days)
 
(252 days)
Historical default rates
2.8%
 
3.0%
Rental
We operate a rental business to provide owner flexibility and to help mitigate carrying costs associated with our inventory. We obtain rental inventory from unsold inventory and inventory we control because owners have elected alternative usage options offered through our vacation ownership programs.
Rental revenues are primarily the revenues we earn from renting this inventory. We also recognize rental revenue from the utilization of plus points under the Marriott Vacation Club Destinations (“MVCD”) program when the points are redeemed for rental stays at one of our resorts or in the Explorer Collection, or upon expiration of the points.
Rental expenses include:
•
Maintenance fees on unsold inventory;
•
Costs to provide alternative usage options, including Marriott Rewards Points and offerings available as part of the Explorer Collection, for owners who elect to exchange their inventory;
•
Marketing costs and direct operating and related expenses in connection with the rental business (such as housekeeping, credit card expenses and reservation services); and
•
Costs associated with the banking and borrowing usage option that is available under our points-based programs.
Rental metrics, including the average daily transient rate or the number of transient keys rented, may not be comparable between periods given fluctuation in available occupancy by location, unit size (such as two bedroom, one bedroom or studio unit), and owner use and exchange behavior. Further, as our ability to rent certain luxury inventory and inventory in our Asia Pacific segment is often limited on a site-by-site basis, rental operations may not generate adequate rental revenues to cover associated costs. Our vacation units are either “full villas” or “lock-off” villas. Lock-off villas are units that can be separated into a master unit and a guest room. Full villas are “non-lock-off” villas because they cannot be separated. A “key” is the lowest increment for reporting occupancy statistics based upon the mix of non-lock-off and lock-off villas. Lock-off villas represent two keys and non-lock-off villas represent one key. The “transient keys” metric represents the blended mix of inventory available for rent and includes all of the combined inventory configurations available in our resort system.
Cost Reimbursements
Cost reimbursements include direct and indirect costs that property owners’ associations reimburse to us. In accordance with the accounting guidance for “gross versus net” presentation, we record these revenues and expenses on a gross basis. We recognize cost reimbursements when we incur the related reimbursable costs. These costs primarily consist of payroll and payroll related expenses for management of the property owners’ associations and other services we provide where we are the employer. Cost reimbursements consist of actual expenses with no added margin.
Consumer Financing Interest Expense
Consumer financing interest expense represents interest expense associated with the debt from our non-recourse warehouse credit facility (the “Warehouse Credit Facility”) and from the securitization of our vacation ownership notes receivable. We distinguish consumer financing interest expense from all other interest expense because the debt associated with the consumer financing interest expense is secured by vacation ownership notes receivable that have been sold to bankruptcy remote special purpose entities and is generally non-recourse to us.
Interest Expense
Interest expense consists of all interest expense other than consumer financing interest expense.

33

Other Items
We measure operating performance using the following key metrics:
•
Contract sales from the sale of vacation ownership products;
•
Development margin percentage; and
•
Volume per guest (“VPG”), which we calculate by dividing vacation ownership contract sales, excluding fractional sales, telesales and other sales that are not attributed to a tour at a sales location, by the number of tours at sales locations in a given period. We believe that this operating metric is valuable in evaluating the effectiveness of the sales process as it combines the impact of average contract price with the number of touring guests who make a purchase.
Consolidated Results
The following discussion presents an analysis of our results of operations for the 2017 third quarter compared to the 2016 third quarter, and the 2017 first three quarters compared to the 2016 first three quarters.
 
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)
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


34

Contract Sales
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
 
 
 
 
 
 
 
North America
$
179,227

 
$
150,964

 
$
28,263

 
19%
Asia Pacific
12,569

 
11,169

 
1,400

 
13%
Europe
6,664

 
7,698

 
(1,034
)
 
(13%)
Total contract sales
$
198,460

 
$
169,831

 
$
28,629

 
17%
The changes in contract sales are described within the discussions of our segment results below. Our 2017 third quarter had eight more days than our 2016 third quarter due to the change to an end-of-month quarterly reporting cycle in 2017. We estimate that 2016 third quarter contract sales would have been approximately $17 million higher on a comparable basis. We estimate the Hurricanes negatively impacted contract sales by $12 million in the 2017 third quarter.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
 
 
 
 
 
 
 
North America
$
547,546

 
$
436,214

 
$
111,332

 
26%
Asia Pacific
36,131

 
31,049

 
5,082

 
16%
Europe
18,509

 
22,054

 
(3,545
)
 
(16%)
Total contract sales
$
602,186

 
$
489,317

 
$
112,869

 
23%
The changes in contract sales are described within the discussions of our segment results below. Our 2017 first three quarters had 22 more days than our 2016 first three quarters due to the change to an end-of-month quarterly reporting cycle in 2017. We estimate that 2016 first three quarters contract sales would have been approximately $43 million higher on a comparable basis. We estimate the Hurricanes negatively impacted contract sales by $12 million in the 2017 first three quarters.
Sale of Vacation Ownership Products
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
$
198,460

 
$
169,831

 
$
28,629

 
17%
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
1,135

 
(18,994
)
 
20,129

 
 
Sales reserve
(11,740
)
 
(13,872
)
 
2,132

 
 
Other(1)
(7,333
)
 
(5,953
)
 
(1,380
)
 
 
Sale of vacation ownership products
$
180,522

 
$
131,012

 
$
49,510

 
38%
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
Revenue reportability had a positive impact in the 2017 third quarter due to a decrease in the amount of sales that remained in the rescission period as of the end of the quarter. Revenue reportability had a negative impact in the 2016 third quarter due to a decrease in the amount of sales that met the down payment requirement for revenue reportability during the period and an increase in the amount of sales that remained in the rescission period as of the end of the quarter.

35

The lower sales reserve reflected a lower required reserve in the 2017 third quarter ($2.7 million) due to lower default and delinquency activity, an unfavorable sales reserve adjustment in our North America segment in the 2016 third quarter ($0.9 million), and a favorable sales reserve adjustment in our Asia Pacific segment in the 2017 third quarter ($0.7 million), partially offset by higher vacation ownership contract sales volume ($2.2 million).
The increase in other adjustments for sales incentives was driven by an increase in the utilization of plus points as a sales incentive in our North America segment in the 2017 third quarter due to the higher vacation ownership contract sales.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
$
602,186

 
$
489,317

 
$
112,869

 
23%
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
1,150

 
(17,029
)
 
18,179

 
 
Sales reserve
(38,597
)
 
(33,447
)
 
(5,150
)
 
 
Other(1)
(21,052
)
 
(23,010
)
 
1,958

 
 
Sale of vacation ownership products
$
543,687

 
$
415,831

 
$
127,856

 
31%
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
Revenue reportability had a positive impact in the 2017 first three quarters due to an increase in the amount of sales that met the down payment requirement for revenue reportability during the period, partially offset by an increase in the amount of sales that remained in the rescission period as of the end of the period. Revenue reportability had a negative impact in the 2016 first three quarters due to a decrease in the amount of sales that met the down payment requirement for revenue reportability during the period and an increase in the amount of sales that remained in the rescission period as of the end of the period.
The higher sales reserve reflected the higher vacation ownership contract sales volume ($6.8 million of the increase), partially offset by an unfavorable sales reserve adjustment in our North America segment in the 2016 third quarter ($0.9 million) and a favorable sales reserve adjustment in our Asia Pacific segment in the 2017 third quarter ($0.7 million).
The decrease in other adjustments for sales incentives was driven by a decrease in the utilization of plus points as a sales incentive in our North America segment in the 2017 first three quarters.
Development Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(92 days)
 
(84 days)
 
Sale of vacation ownership products
$
180,522

 
$
131,012

 
$
49,510

 
38%
Cost of vacation ownership products
(42,826
)
 
(34,779
)
 
(8,047
)
 
(23%)
Marketing and sales
(100,527
)
 
(79,017
)
 
(21,510
)
 
(27%)
Development margin
$
37,169

 
$
17,216

 
$
19,953

 
116%
Development margin percentage
20.6%
 
13.1%
 
7.5 pts
 
 
The increase in development margin reflected the following:
•
$13.1 million of favorable revenue reportability compared to the 2016 third quarter;
•
$5.5 million from higher vacation ownership contract sales volume net of the sales reserve and direct variable expenses (i.e., cost of vacation ownership products and marketing and sales);
•
$4.5 million from a favorable mix of lower cost real estate inventory being sold; and
•
$3.4 million from lower sales reserve activity.
These increases in development margin were partially offset by $6.5 million from higher marketing and sales costs (of which $1.1 million was due to the ramp-up of our six newest sales distributions).

36

The 7.5 percentage point increase in the development margin percentage reflected a 6.9 percentage point increase due to the favorable revenue reportability year-over-year, a 2.5 percentage point increase due to a favorable mix of lower cost vacation ownership real estate inventory being sold in the 2017 third quarter, a 1.4 percentage point increase from the lower sales reserve activity, and a 0.3 percentage point increase from the higher North America vacation ownership contract sales (which have a development margin that is higher than the company-wide average). These increases were partially offset by a 3.6 percentage point decline due to higher marketing and sales costs (of which 0.6 percentage points was due to the higher ramp-up expenses associated with our newest sales distributions). We estimate the Hurricanes negatively impacted development margin percentage by 0.5 percentage points in the 2017 third quarter.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(274 days)
 
(252 days)
 
Sale of vacation ownership products
$
543,687

 
$
415,831

 
$
127,856

 
31%
Cost of vacation ownership products
(131,589
)
 
(104,149
)
 
(27,440
)
 
(26%)
Marketing and sales
(305,217
)
 
(236,348
)
 
(68,869
)
 
(29%)
Development margin
$
106,881

 
$
75,334

 
$
31,547

 
42%
Development margin percentage
19.7%
 
18.1%
 
1.6 pts
 
 
The increase in development margin reflected the following:
•
$27.4 million from higher vacation ownership contract sales volume net of the sales reserve and direct variable expenses (i.e., cost of vacation ownership products and marketing and sales);
•
$18.5 million from a favorable mix of lower cost real estate inventory being sold;
•
$11.7 million of favorable revenue reportability compared to the 2016 first three quarters; and
•
$1.6 million from lower sales reserve activity.
  These increases in development margin were partially offset by the following:
•
$14.9 million from higher marketing and sales costs (of which $6.3 million was due to the ramp-up of our six newest sales distributions);
•
$11.2 million of unfavorable changes in product cost true-up activity ($1.0 million of favorable true-up activity in the 2017 first three quarters compared to $12.2 million of favorable true-up activity in the 2016 first three quarters); and
•
$1.6 million from higher other development and inventory expenses.
The 1.6 percentage point increase in the development margin percentage reflected a 3.4 percentage point increase due to a favorable mix of lower cost vacation ownership real estate inventory being sold in the 2017 first three quarters, a 2.0 percentage point increase due to the favorable revenue reportability year-over-year, a 0.9 percentage point increase from the higher North America vacation ownership contract sales (which have a development margin that is higher than the company-wide average) and a 0.3 percentage point increase from the lower sales reserve activity. These increases were partially offset by a 2.0 percentage point decrease due to the unfavorable changes in product cost true-up activity year-over-year, a 2.7 percentage point decline due to higher marketing and sales costs (of which 1.2 percentage points was due to the higher ramp-up expenses associated with our newest sales distributions) and a 0.3 percentage point decrease from higher other development and inventory expenses.

37

Resort Management and Other Services Revenues, Expenses and Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(92 days)
 
(84 days)
 
Management fee revenues
$
22,249

 
$
19,460

 
$
2,789

 
14%
Ancillary revenues
31,095

 
30,471

 
624

 
2%
Other services revenues
23,538

 
20,254

 
3,284

 
16%
Resort management and other services revenues
76,882

 
70,185

 
6,697

 
10%
Resort management and other services expenses
(44,696
)
 
(39,825
)
 
(4,871
)
 
(12%)
Resort management and other services margin
$
32,186

 
$
30,360

 
$
1,826

 
6%
Resort management and other services margin percentage
41.9%
 
43.3%
 
(1.4 pts)
 
 
The increase in resort management and other services revenues reflected $2.8 million of higher management fees resulting from the cumulative increase in the number of vacation ownership products sold and higher operating costs across the system, $2.1 million of additional annual club dues and other revenues earned in connection with the MVCD program due to the cumulative increase in owners enrolled in the program, $1.2 million of higher resales commissions and other revenues and $0.6 million of higher ancillary revenues. The increase in ancillary revenues included $2.3 million of higher revenues from food and beverage and golf offerings at our resorts, partially offset by $1.7 million of lower revenue due to outsourcing multiple operations in our North America segment.
The improvement in the resort management and other services margin reflected the increases in revenue, partially offset by $4.9 million of higher expenses. Compared to the 2016 third quarter, expenses in the 2017 third quarter included $3.2 million of higher ancillary expenses from food and beverage and golf offerings at our resorts, $2.6 million of higher customer service expenses and expenses associated with the MVCD program, and $0.9 million of higher resales and other expenses, partially offset by $1.8 million of lower expenses due to outsourcing multiple operations in our North America segment.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(274 days)
 
(252 days)
 
Management fee revenues
$
65,680

 
$
57,311

 
$
8,369

 
15%
Ancillary revenues
91,404

 
92,142

 
(738
)
 
(1%)
Other services revenues
71,920

 
58,596

 
13,324

 
23%
Resort management and other services revenues
229,004

 
208,049

 
20,955

 
10%
Resort management and other services expenses
(130,349
)
 
(123,695
)
 
(6,654
)
 
(5%)
Resort management and other services margin
$
98,655

 
$
84,354

 
$
14,301

 
17%
Resort management and other services margin percentage
43.1%
 
40.5%
 
2.6 pts
 
 
The increase in resort management and other services revenues reflected $8.4 million of higher management fees resulting from the cumulative increase in the number of vacation ownership products sold and higher operating costs across the system, $5.3 million of additional annual club dues and other revenues earned in connection with the MVCD program due to the cumulative increase in owners enrolled in the program, $2.7 million of higher refurbishment revenue due to an increase in the number of refurbishment projects completed in the 2017 first three quarters, $3.1 million of higher resales commissions, brand fees and other revenues and $2.2 million of higher settlement fees due to an increase in the number of closed contracts in the 2017 first three quarters. These increases were partially offset by $0.7 million of lower ancillary revenues. The decline in ancillary revenues included $6.2 million of lower ancillary revenues from the operating property in Surfers Paradise, Australia (a portion of which was disposed of in the 2016 second quarter) and $5.4 million of lower revenue due to outsourcing multiple operations in our North America segment, partially offset by $10.9 million of higher revenues from food and beverage and golf offerings at our resorts.
The improvement in the resort management and other services margin reflected the increases in revenue, partially offset by $6.7 million of higher expenses. The higher expenses included $8.9 million of higher ancillary expenses from food and beverage and golf offerings at our resorts, $5.4 million of higher customer service expenses and expenses associated with

38

the MVCD program, $2.1 million of higher refurbishment expenses due to an increase in the number of projects being refurbished in the 2017 first three quarters and $0.8 million of higher resales and other expenses, partially offset by $5.5 million of lower ancillary expenses from the operating property in Surfers Paradise, Australia and $5.0 million of lower ancillary expenses due to outsourcing multiple operations in our North America segment.
The ancillary revenue producing portions of the operating property in Surfers Paradise, Australia were included in the portion of the operating property sold in the second quarter of 2016. Therefore, we do not anticipate future ancillary revenues or expenses at this property.
Financing Revenues, Expenses and Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(92 days)
 
(84 days)
 
Interest income
$
32,945

 
$
27,703

 
$
5,242

 
19%
Other financing revenues
1,740

 
1,363

 
377

 
28%
Financing revenues
34,685

 
29,066

 
5,619

 
19%
Financing expenses
(5,062
)
 
(4,581
)
 
(481
)
 
(10%)
Consumer financing interest expense
(6,498
)
 
(5,361
)
 
(1,137
)
 
(21%)
Financing margin
$
23,125

 
$
19,124

 
$
4,001

 
21%
Financing propensity
65.8%
 
63.4%
 
 
 
 
The increase in financing revenues was due to a $147 million increase in the average gross vacation ownership notes receivable balance ($7.4 million) and higher other financing revenues ($0.4 million), partially offset by financing program incentive costs ($1.4 million) and a decrease in the weighted average coupon rate of our vacation ownership notes receivable ($0.8 million).
The increase in financing margin reflected the higher financing revenues, partially offset by higher other expenses and higher consumer financing interest expense. The higher other expenses were due to an increase in variable expenses associated with the increase in the average gross vacation ownership notes receivable balance. The higher consumer financing interest expense was due to a higher average outstanding debt balance and the change to an end-of-month quarterly reporting cycle in 2017 that resulted in eight additional days in the 2017 third quarter.
We expect financing propensity for the 2017 fiscal year to approximate 65 percent as we intend to continue to offer financing incentive programs, and that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in principal of existing vacation ownership notes receivable.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(274 days)
 
(252 days)
 
Interest income
$
94,104

 
$
82,730

 
$
11,374

 
14%
Other financing revenues
5,222

 
4,214

 
1,008

 
24%
Financing revenues
99,326

 
86,944

 
12,382

 
14%
Financing expenses
(12,528
)
 
(11,782
)
 
(746
)
 
(6%)
Consumer financing interest expense
(18,090
)
 
(15,840
)
 
(2,250
)
 
(14%)
Financing margin
$
68,708

 
$
59,322

 
$
9,386

 
16%
Financing propensity
64.9%
 
59.1%
 
 
 
 
The increase in financing revenues was due to a $111 million increase in the average gross vacation ownership notes receivable balance ($18.8 million) and higher other financing revenues ($1.0 million), partially offset by financing program incentive costs ($5.2 million) and a slight decrease in the weighted average coupon rate of our vacation ownership notes receivable ($2.2 million).
The increase in financing margin reflected the higher financing revenues, partially offset by higher consumer financing interest expense and higher other expenses. The higher other expenses were due to an increase in variable expenses

39

associated with the increase in the average gross vacation ownership notes receivable balance. The higher consumer financing interest expense was due to a higher average outstanding debt balance and the change to an end-of-month quarterly reporting cycle in 2017 that resulted in 22 additional days in the 2017 first three quarters.
We expect financing propensity for the 2017 fiscal year to approximate 65 percent as we intend to continue to offer financing incentive programs, and that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in principal of existing vacation ownership notes receivable.
Rental Revenues, Expenses and Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(92 days)
 
(84 days)
 
Rental revenues
$
81,177

 
$
73,776

 
$
7,401

 
10%
Unsold maintenance fees
(19,186
)
 
(18,475
)
 
(711
)
 
(4%)
Other rental expenses
(51,862
)
 
(42,495
)
 
(9,367
)
 
(22%)
Rental margin
$
10,129

 
$
12,806

 
$
(2,677
)
 
(21%)
Rental margin percentage
12.5%
 
17.4%
 
(4.9 pts)
 
 
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
 
(92 days)
 
(84 days)
 
Transient keys rented(1)
323,985

 
287,911

 
36,074
 
13%
Average transient key rate
$
213.20

 
$
218.46

 
$
(5.26
)
 
(2%)
Resort occupancy
89.1%
 
91.7%
 
(2.6 pts)
 
 
_________________________
(1) 
Transient keys rented exclude those obtained through the use of plus points, preview stays and those associated with our operating properties in San Diego, California and Surfers Paradise, Australia prior to their respective conversions to vacation ownership inventory.
The increase in rental revenues was due to a 13 percent increase in transient keys rented ($7.9 million) driven by a 20 percent increase in available keys, $1.1 million of higher plus points revenue (which is recognized when the points are redeemed or expire) and a $0.7 million increase in preview keys rented and other revenue, partially offset by a 2 percent lower average transient rate ($1.7 million) and $0.6 million of revenue in the 2016 third quarter at our operating property in San Diego, California prior to the conversion of the property to vacation ownership inventory.
The decrease in rental margin reflected higher expenses incurred due to owners choosing alternative usage options and higher unsold maintenance fees. These higher expenses more than offset the higher rental revenues net of direct variable expenses (such as housekeeping) and the $1.1 million increase in plus points revenue.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
($ in thousands)
(274 days)
 
(252 days)
 
Rental revenues
$
250,621

 
$
229,133

 
$
21,488

 
9%
Unsold maintenance fees
(57,085
)
 
(48,811
)
 
(8,274
)
 
(17%)
Other rental expenses
(154,558
)
 
(142,847
)
 
(11,711
)
 
(8%)
Rental margin
$
38,978

 
$
37,475

 
$
1,503

 
4%
Rental margin percentage
15.6%
 
16.4%
 
(0.8 pts)
 
 

40

 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
 
(274 days)
 
(252 days)
 
Transient keys rented(1)
984,198

 
864,945

 
119,253

 
14%
Average transient key rate
$
217.89

 
$
220.06

 
$
(2.17
)
 
(1%)
Resort occupancy
88.7%
 
89.3%
 
(0.6 pts)
 
 
_________________________
(1) 
Transient keys rented exclude those obtained through the use of plus points, preview stays and those associated with our operating properties in San Diego, California and Surfers Paradise, Australia prior to their respective conversions to vacation ownership inventory.
The increase in rental revenues was due to a 14 percent increase in transient keys rented ($26.2 million) driven by a 15 percent increase in available keys, a $4.3 million increase in preview keys rented and other revenue and $2.6 million of higher plus points revenue (which is recognized when the points are redeemed or expire), partially offset by $6.1 million of revenue in the 2016 first three quarters from the operating property in Surfers Paradise, Australia prior to the conversion of the property to vacation ownership inventory (a portion of which was disposed of in the second quarter of 2016), $3.4 million of revenue in the 2016 first three quarters at our operating property in San Diego, California prior to the conversion of the property to vacation ownership inventory and a 1 percent lower average transient rate ($2.1 million).
The increase in rental margin reflected the $2.6 million increase in plus points revenue and higher rental revenues net of direct variable expenses (such as housekeeping), partially offset by higher expenses incurred due to owners choosing alternative usage options and higher unsold maintenance fees.
Cost Reimbursements
2017 Third Quarter
Cost reimbursements increased $16.1 million, or 17 percent, over the 2016 third quarter, reflecting an increase of $9.5 million due to the change to an end-of-month quarterly reporting cycle in 2017, $5.3 million due to higher costs, $1.0 million due to additional managed unit weeks in the 2017 third quarter and a $0.3 million impact from foreign exchange rates in our Europe segment.
2017 First Three Quarters
Cost reimbursements increased $44.1 million, or 15 percent, over the 2016 first three quarters, reflecting an increase of $22.4 million due to the change to an end-of-month quarterly reporting cycle in 2017, $17.3 million due to higher costs and $4.7 million due to additional managed unit weeks in the 2017 first three quarters, partially offset by a $0.3 million negative impact from foreign exchange rates in our Europe segment.
General and Administrative
2017 Third Quarter
General and administrative expenses increased $4.5 million due to approximately $2.0 million from the change to an end-of-month quarterly reporting cycle in 2017 and $2.5 million due to higher personnel related and other expenses. The higher personnel related and other expenses included annual merit, bonus and inflationary cost increases.
2017 First Three Quarters
General and administrative expenses increased $10.9 million due to approximately $6.0 million from the change to an end-of-month quarterly reporting cycle in 2017 and $6.4 million due to higher personnel related and other expenses, partially offset by $1.5 million of lower litigation related costs. The higher personnel related and other expenses included annual merit, bonus and inflationary cost increases.

41

Royalty Fee
2017 Third Quarter
Royalty fee expense increased $0.6 million in the 2017 third quarter (from $14.6 million to $15.2 million) due to an increase in the dollar volume of closings ($0.5 million), the change to an end-of-month quarterly reporting cycle in 2017 that resulted in eight additional days in the 2017 third quarter ($1.0 million) and a contractual increase late in 2016 in the fixed portion of the royalty fee owed to Marriott International ($0.5 million), partially offset by $1.4 million of lower costs due to an increase in sales of pre-owned inventory, which carry a lower royalty fee as compared to initial sales of our inventory (one percent versus two percent).
2017 First Three Quarters
Royalty fee expense increased $5.6 million in the 2017 first three quarters (from $42.0 million to $47.6 million) due to an increase in the dollar volume of closings ($3.0 million), the change to an end-of-month quarterly reporting cycle in 2017 that resulted in 22 additional days in the 2017 first three quarters ($2.9 million) and a contractual increase late in 2016 in the fixed portion of the royalty fee owed to Marriott International ($1.7 million), partially offset by $2.0 million of lower costs due to an increase in sales of pre-owned inventory, which carry a lower royalty fee as compared to initial sales of our inventory (one percent versus two percent).
Interest Expense
2017 Third Quarter
Interest expense increased $0.4 million due to $0.9 million of imputed interest on a non-interest bearing note payable associated with the acquisition of vacation ownership units located on the Big Island of Hawaii, $0.4 million of higher other expenses and $0.2 million of interest expense associated with the Convertible Notes that were issued during the 2017 third quarter, partially offset by $1.1 million of expense incurred in the 2016 third quarter associated with the mandatorily redeemable preferred stock of a consolidated subsidiary. Due to the redemption of the mandatorily redeemable preferred stock in 2016, we will not incur further interest expense associated with this liability in the future.
2017 First Three Quarters
Interest expense decreased $1.2 million due to $3.4 million of expense incurred in the 2016 first three quarters associated with the mandatorily redeemable preferred stock of a consolidated subsidiary that we redeemed in 2016, partially offset by $1.4 million of imputed interest on a non-interest bearing note payable associated with the acquisition of vacation ownership units located on the Big Island of Hawaii, $0.6 million of higher other expenses and $0.2 million of interest expense associated with the Convertible Notes that were issued during the 2017 third quarter.
Gains and Other Income, Net
2017 First Three Quarters
In the 2017 third quarter, we recorded $7.0 million of gains and other income, including $8.7 million in net insurance proceeds related to the settlement of business interruption insurance claims arising from Hurricane Matthew, partially offset by a charge of $1.7 million associated with the estimated property damage insurance deductibles and impairment of property and equipment at several of our resorts, primarily in Florida and the Caribbean, that were impacted by Hurricane Irma and Hurricane Maria.
In the 2017 second quarter, we recorded $0.2 million of miscellaneous losses and other expense.
2016 First Three Quarters
In the 2016 third quarter, we recorded a $0.5 million favorable true-up of estimated costs related to the sale of the portion of the operating property in Surfers Paradise, Australia in the 2016 second quarter that we did not intend to convert to vacation ownership inventory.
In the 2016 second quarter, we recorded a $10.5 million gain on the disposition of excess inventory at The Ritz-Carlton Club and Residences, San Francisco (the “RCC San Francisco”), the reversal of the remaining $1.7 million accrual associated with the disposition of a golf course and related assets in Kauai, Hawaii because we no longer expected to incur additional costs in connection with this sale and a $1.5 million loss on the sale of the portion of the operating property in Surfers Paradise, Australia that we did not intend to convert to vacation ownership inventory.

42

Other
2017 First Three Quarters
During the 2017 first three quarters, we incurred $0.6 million of acquisition costs.
2016 First Three Quarters
During the 2016 first quarter, we incurred $2.3 million of acquisition costs associated with an operating property in the South Beach area of Miami Beach and the anticipated future acquisition of the operating property in New York that we currently manage, and $0.2 million of transaction related costs associated with the sale of the portion of the operating property located in Surfers Paradise, Australia that we did not intend to convert to vacation ownership inventory. See Footnote No. 5, “Acquisitions and Dispositions” and Footnote No. 8, “Contingencies and Commitments,” to our Financial Statements for further information related to these transactions.
During the 2016 second quarter, we incurred $1.9 million of costs associated with the anticipated future acquisition of vacation ownership units located on the Big Island of Hawaii and the anticipated future acquisition of the operating property in New York that we currently manage.
During the 2016 third quarter, we incurred $0.1 million of acquisition costs.
Income Tax
2017 Third Quarter
Our provision for income taxes increased $8.4 million (from $14.0 million to $22.4 million) from the 2016 third quarter. The increase was primarily due to an increase in U.S. earnings.
2017 First Three Quarters
Our provision for income taxes increased $7.4 million (from $54.7 million to $62.1 million) from the 2016 first three quarters. The increase was primarily due to increases in U.S. and foreign earnings, partially offset by the favorable impact of the adoption of ASU 2016-09. See Footnote No. 1, “Summary of Significant Accounting Policies,” to our Financial Statements for additional information on ASU 2016-09.
Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA
EBITDA, a financial measure that is not prescribed by GAAP, is defined as earnings, or net income, before interest expense (excluding consumer financing interest expense), provision for income taxes, depreciation and amortization. For purposes of our EBITDA and Adjusted EBITDA calculations, we do not adjust for consumer financing interest expense because the associated debt is secured by vacation ownership notes receivable that have been sold to bankruptcy remote special purpose entities and is generally non-recourse to us. Further, we consider consumer financing interest expense to be an operating expense of our business. We consider EBITDA and Adjusted EBITDA to be indicators of operating performance, which we use to measure our ability to service debt, fund capital expenditures and expand our business. We also use EBITDA and Adjusted EBITDA, as do analysts, lenders, investors and others, because these measures exclude certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company’s capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provision for income taxes can vary considerably among companies. EBITDA and Adjusted EBITDA also exclude depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. Adjusted EBITDA reflects additional adjustments for certain items described below, and excludes non-cash share-based compensation expense to address considerable variability among companies in recording compensation expense because companies use share-based payment awards differently, both in the type and quantity of awards granted. We evaluate Adjusted EBITDA as an indicator of operating performance because it allows for period-over-period comparisons of our on-going core operations before the impact of the excluded items. Together, EBITDA and Adjusted EBITDA facilitate our comparison of results from our on-going core operations before the impact of these items with results from other vacation ownership companies.

43

EBITDA and Adjusted EBITDA have limitations and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do or may not calculate them at all, limiting their usefulness as comparative measures. The table below shows our EBITDA and Adjusted EBITDA calculation and reconciles these measures with Net income, which is the most directly comparable GAAP financial measure.
 
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)
Net income
$
40,762

 
$
26,807

 
$
118,738

 
$
87,524

Interest expense
2,642

 
2,262

 
5,180

 
6,331

Tax provision
22,367

 
14,041

 
62,139

 
54,656

Depreciation and amortization
5,610

 
4,679

 
15,802

 
14,856

EBITDA
71,381

 
47,789

 
201,859

 
163,367

Non-cash share-based compensation
3,898

 
3,139

 
12,349

 
9,995

Certain items
(1,327
)
 
(316
)
 
(308
)
 
(6,994
)
Adjusted EBITDA
$
73,952

 
$
50,612

 
$
213,900

 
$
166,368

2017 Third Quarter
The certain items for the 2017 third quarter consisted of $8.7 million in net insurance proceeds related to the settlement of business interruption insurance claims arising from Hurricane Matthew and a charge of $1.7 million associated with the estimated property damage insurance deductibles at several of our properties, primarily in Florida and the Caribbean, that were impacted by Hurricane Irma and Hurricane Maria (both of which were recorded in gains and other income), $3.7 million of variable compensation expense related to the impact of the Hurricanes, $2.0 million of litigation settlement expenses and a $0.1 million favorable true up of previously recorded acquisition costs. These exclusions decreased EBITDA by $1.3 million.
The certain items for the 2016 third quarter consisted of $0.5 million of gains and other income and $0.1 million of acquisition costs. These exclusions decreased EBITDA by $0.3 million.
2017 First Three Quarters
The certain items for the 2017 first three quarters consisted of $8.7 million in net insurance proceeds related to the settlement of business interruption insurance claims arising from Hurricane Matthew and a charge of $1.7 million associated with the estimated property damage insurance deductibles at several of our properties, primarily in Florida and the Caribbean, that were impacted by Hurricane Irma and Hurricane Maria (both of which were recorded in gains and other income), $3.7 million of variable compensation expense related to the impact of the Hurricanes, $2.2 million of litigation settlement expenses, $0.6 million of acquisition costs and $0.2 million of losses and other expense. These exclusions decreased EBITDA by $0.3 million.
The certain items for the 2016 first three quarters consisted of $11.1 million of gains and other income, $4.7 million of acquisition costs, a $0.3 million reversal of litigation settlement expense, and $0.3 million of profit from the operations of the portion of the property we acquired in Surfers Paradise, Australia in 2015 that we sold in the second quarter of 2016. These exclusions decreased EBITDA by $7.0 million.
Business Segments
Our business is grouped into three reportable business segments: North America, Asia Pacific and Europe. See Footnote No. 13, “Business Segments,” to our Financial Statements for further information on our segments.

44

North America
The following discussion presents an analysis of our results of operations for the North America segment for the 2017 third quarter compared to the 2016 third quarter, and the 2017 first three quarters compared to the 2016 first three quarters.
 
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)
REVENUES
 
 
 
 
 
 
 
Sale of vacation ownership products
$
163,454

 
$
116,184

 
$
495,958

 
$
373,341

Resort management and other services
68,236

 
62,956

 
206,830

 
182,665

Financing
32,854

 
27,438

 
93,812

 
81,699

Rental
69,458

 
63,387

 
224,588

 
201,524

Cost reimbursements
103,799

 
88,834

 
320,242

 
278,190

TOTAL REVENUES
437,801

 
358,799

 
1,341,430

 
1,117,419

EXPENSES
 
 
 
 
 
 
 
Cost of vacation ownership products
37,404

 
30,134

 
116,715

 
89,876

Marketing and sales
87,308

 
67,662

 
266,962

 
202,888

Resort management and other services
37,453

 
33,849

 
111,664

 
101,322

Rental
62,236

 
53,131

 
187,141

 
164,680

Litigation settlement
2,033

 
—

 
2,033

 
(303
)
Royalty fee
1,956

 
2,813

 
7,684

 
6,753

Cost reimbursements
103,799

 
88,834

 
320,242

 
278,190

TOTAL EXPENSES
332,189

 
276,423

 
1,012,441

 
843,406

(Losses) gains and other (expense) income, net
(1,754
)
 
(27
)
 
(1,950
)
 
12,297

Other
46

 
(55
)
 
171

 
(4,068
)
SEGMENT FINANCIAL RESULTS
$
103,904

 
$
82,294

 
$
327,210

 
$
282,242

Contract Sales
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
$
179,227

 
$
150,964

 
$
28,263

 
19%
Total contract sales
$
179,227

 
$
150,964

 
$
28,263

 
19%
The increase in North America vacation ownership contract sales reflected a $30.7 million increase in sales at on-site sales locations, partially offset by a $2.3 million decrease in sales at off-site (non tour-based) sales locations and a $0.1 million decrease in fractional sales as we continue to sell through remaining luxury inventory. Our 2017 third quarter had eight more days than our 2016 third quarter due to the change to an end-of-month quarterly reporting cycle in 2017. We estimate that 2016 third quarter contract sales would have been approximately $15 million higher on a comparable basis, the majority of which would have occurred at on-site sales locations. We estimate the Hurricanes negatively impacted contract sales by $12 million in the 2017 third quarter.
The increase in sales at North America on-site locations reflected an 18 percent increase in the number of tours and a 3 percent increase in VPG to $3,482 in the 2017 third quarter from $3,371 in the 2016 third quarter. The increase in the number of tours was due to increases in both owner tours and first time buyer tours, and was driven by programs that were implemented in 2015 or later to generate additional tours. The 18 percent increase in the number of total tours included an increase of approximately 11 percent due to the change in the financial reporting calendar in 2017 and an increase of 9 percent from new sales locations, partially offset by a decrease of 2 percent from existing sales locations. We estimate the Hurricanes negatively impacted the year over year change in tours by roughly 6.5 percent; the vast majority of this impact was at our exiting sales

45

locations. The increase in VPG resulted from a 0.2 percentage point increase in closing efficiency and higher pricing. The sales at North America off-site locations were negatively impacted by lower sales in Latin America.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
$
547,546

 
$
436,214

 
$
111,332

 
26%
Total contract sales
$
547,546

 
$
436,214

 
$
111,332

 
26%
The increase in North America vacation ownership contract sales reflected a $116.0 million increase in sales at on-site sales locations, partially offset by a $4.3 million decrease in sales at off-site (non tour-based) sales locations and a $0.4 million decrease in fractional sales as we continue to sell through remaining luxury inventory. Our 2017 first three quarters had 22 more days than our 2016 first three quarters due to the change to an end-of-month quarterly reporting cycle in 2017. We estimate that 2016 first three quarters contract sales would have been approximately $38 million higher on a comparable basis, the majority of which would have occurred at on-site sales locations. We estimate the Hurricanes negatively impacted contract sales by $12 million in the 2017 first three quarters.
The increase in sales at North America on-site locations reflected a 23 percent increase in the number of tours and a 5 percent increase in VPG to $3,580 in the 2017 first three quarters from $3,414 in the 2016 first three quarters. The increase in the number of tours was due to increases in both owner tours and first time buyer tours, and was driven by programs that were implemented in 2015 or later to generate additional tours. The 23 percent increase in the number of total tours included an increase of approximately 11 percent due to the change in the financial reporting calendar in 2017, an increase of 9 percent from new sales locations and an increase of 3 percent from existing sales locations. We estimate the Hurricanes negatively impacted the year over year change in tours by nearly 3 percent; the vast majority of this impact was at our exiting sales locations. The increase in VPG resulted from a 0.3 percentage point increase in closing efficiency and higher pricing. The sales at North America off-site locations were negatively impacted by lower sales in Latin America, which were negatively impacted by currency fluctuations.
Sale of Vacation Ownership Products
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
$
179,227

 
$
150,964

 
$
28,263

 
19%
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
1,446

 
(16,853
)
 
18,299

 
 
Sales reserve
(10,277
)
 
(11,923
)
 
1,646

 
 
Other(1)
(6,942
)
 
(6,004
)
 
(938
)
 
 
Sale of vacation ownership products
$
163,454

 
$
116,184

 
$
47,270

 
41%
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
Revenue reportability positively impacted the 2017 third quarter due to a decrease in the amount of sales that remained in the rescission period as of the end of the quarter. Revenue reportability negatively impacted the 2016 third quarter due to a decrease in the amount of sales that met the down payment requirement for revenue reportability during the period and an increase in the amount of sales that remained in the rescission period as of the end of the quarter.
The lower sales reserve reflected a lower required reserve in the 2017 third quarter ($2.9 million) due to lower default and delinquency activity and an unfavorable sales reserve adjustment in the 2016 third quarter ($0.9 million), partially offset by the higher vacation ownership contract sales volume ($2.2 million of the increase).
The increase in other adjustments for sales incentives was driven by an increase in the utilization of plus points as a sales incentive in the 2017 third quarter due to the higher vacation ownership contract sales.

46

2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
$
547,546

 
$
436,214

 
$
111,332

 
26%
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
1,887

 
(12,982
)
 
14,869

 
 
Sales reserve
(33,090
)
 
(26,960
)
 
(6,130
)
 
 
Other(1)
(20,385
)
 
(22,931
)
 
2,546

 
 
Sale of vacation ownership products
$
495,958

 
$
373,341

 
$
122,617

 
33%
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
Revenue reportability positively impacted the 2017 first three quarters due to an increase in the amount of sales that met the down payment requirement for revenue reportability during the period, partially offset by an increase in the amount of sales that remained in the rescission period as of the end of the period. Revenue reportability negatively impacted the 2016 first three quarters due to a decrease in the amount of sales that met the down payment requirement for revenue reportability during the period and an increase in the amount of sales that remained in the rescission period as of the end of the period.
The higher sales reserve reflected the higher vacation ownership contract sales volume, partially offset by an unfavorable sales reserve adjustment in the 2016 first three quarters.
The decrease in other adjustments for sales incentives was driven by a decrease in the utilization of plus points as a sales incentive in the 2017 first three quarters.
Development Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Sale of vacation ownership products
$
163,454

 
$
116,184

 
47,270

 
41%
Cost of vacation ownership products
(37,404
)
 
(30,134
)
 
(7,270
)
 
(24%)
Marketing and sales
(87,308
)
 
(67,662
)
 
(19,646
)
 
(29%)
Development margin
$
38,742

 
$
18,388

 
$
20,354

 
111%
Development margin percentage
23.7%
 
15.8%
 
7.9 pts
 
 
The increase in development margin reflected the following:
•
$11.8 million of favorable revenue reportability compared to the 2016 third quarter;
•
$5.9 million from higher vacation ownership contract sales volume net of the sales reserve and direct variable expenses (i.e., cost of vacation ownership products and marketing and sales);
•
$4.4 million from a favorable mix of lower cost real estate inventory being sold;
•
$2.8 million from lower sales reserve activity in the 2017 third quarter; and
•
$0.5 million of favorable changes in product cost true-up activity ($1.5 million of favorable true-up activity in the 2017 third quarter compared to $1.0 million of favorable true-up activity in the 2016 third quarter).
These increases in development margin were partially offset by $5.1 million from higher marketing and sales costs (of which $1.3 million was due to the ramp-up of our newest sales distributions).
The 7.9 percentage point increase in the development margin percentage reflected a 6.6 percentage point increase due to the favorable revenue reportability year-over-year, a 2.7 percentage point increase due to a favorable mix of lower cost vacation ownership real estate inventory being sold in the 2017 third quarter, a 1.2 percentage point increase from the lower sales reserve activity, and 0.3 percentage point increase due to the favorable changes in product cost true-up activity year-over-year. These increases were partially offset by a 2.9 percentage point decline due to higher marketing and sales costs (of which

47

0.8 percentage points was due to the higher ramp-up expenses associated with our newest sales distributions). We estimate the Hurricanes negatively impacted development margin percentage by 0.3 percentage points in the 2017 third quarter.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Sale of vacation ownership products
$
495,958

 
$
373,341

 
122,617

 
33%
Cost of vacation ownership products
(116,715
)
 
(89,876
)
 
(26,839
)
 
(30%)
Marketing and sales
(266,962
)
 
(202,888
)
 
(64,074
)
 
(32%)
Development margin
$
112,281

 
$
80,577

 
$
31,704

 
39%
Development margin percentage
22.6%
 
21.6%
 
1.0 pts
 
 
The increase in development margin reflected the following:
•
$28.0 million from higher vacation ownership contract sales volume net of the sales reserve and direct variable expenses (i.e., cost of vacation ownership products and marketing and sales);
•
$17.6 million from a favorable mix of lower cost real estate inventory being sold;
•
$9.6 million of favorable revenue reportability compared to the 2016 first three quarters; and
•
$0.4 million from lower sales reserve activity in the 2017 first three quarters.
These increases in development margin were partially offset by the following:
•
$11.8 million from higher marketing and sales costs (of which $7.3 million was due to the ramp-up of our newest sales distributions);
•
$10.7 million of unfavorable changes in product cost true-up activity ($0.7 million of favorable true-up activity in the 2017 first three quarters compared to $11.4 million of favorable true-up activity in the 2016 first three quarters); and
•
$1.4 million from higher other development and inventory expenses.
The 1.0 percentage point increase in the development margin percentage reflected a 3.6 percentage point increase due to a favorable mix of lower cost vacation ownership real estate inventory being sold in the 2017 first three quarters, a 1.5 percentage point increase due to the favorable revenue reportability year-over-year and a 0.1 percentage point increase from the lower sales reserve activity. These increases were partially offset by a 2.2 percentage point decrease due to the unfavorable changes in product cost true-up activity year-over-year and a 1.9 percentage point decline due to higher marketing and sales costs (of which 1.5 percentage points was due to the higher ramp-up expenses associated with our newest sales distributions).
Resort Management and Other Services Revenues, Expenses and Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Management fee revenues
$
19,810

 
$
17,330

 
$
2,480

 
14%
Ancillary revenues
25,924

 
25,992

 
(68
)
 
—%
Other services revenues
22,502

 
19,634

 
2,868

 
15%
Resort management and other services revenues
68,236

 
62,956

 
5,280

 
8%
Resort management and other services expenses
(37,453
)
 
(33,849
)
 
(3,604
)
 
(11%)
Resort management and other services margin
$
30,783

 
$
29,107

 
$
1,676

 
6%
Resort management and other services margin
percentage
45.1%
 
46.2%
 
(1.1 pts)
 
 
The increase in resort management and other services revenues reflected $2.5 million of higher management fees resulting from the cumulative increase in the number of vacation ownership products sold and higher operating costs across the system, $2.0 million of additional annual club dues and other revenues earned in connection with the MVCD program due to

48

the cumulative increase in owners enrolled in the program, and $0.9 million of higher resales commissions and other revenues. These increases were partially offset by $0.1 million of lower ancillary revenues. The decrease in ancillary revenues included $1.7 million of lower revenue due to outsourcing multiple operations, partially offset by $1.6 million of higher revenues from food and beverage and golf offerings at our resorts.
The increase in the resort management and other services margin reflected the increases in revenue, partially offset by $3.6 million of higher expenses. The higher expenses included $2.5 million of higher customer service expenses and expenses associated with the MVCD program, $2.2 million of higher ancillary expenses from food and beverage and golf offerings at our resorts and $0.7 million of higher resales and other expenses, partially offset by $1.8 million of lower expenses due to outsourcing multiple operations.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Management fee revenues
$
58,725

 
$
51,182

 
$
7,543

 
15%
Ancillary revenues
78,522

 
74,633

 
3,889

 
5%
Other services revenues
69,583

 
56,850

 
12,733

 
22%
Resort management and other services revenues
206,830

 
182,665

 
24,165

 
13%
Resort management and other services expenses
(111,664
)
 
(101,322
)
 
(10,342
)
 
(10%)
Resort management and other services margin
$
95,166

 
$
81,343

 
$
13,823

 
17%
Resort management and other services margin
percentage
46.0%
 
44.5%
 
1.5 pts
 
 
The increase in resort management and other services revenues reflected $7.5 million of higher management fees resulting from the cumulative increase in the number of vacation ownership products sold and higher operating costs across the system, $4.9 million of additional annual club dues and other revenues earned in connection with the MVCD program due to the cumulative increase in owners enrolled in the program, $9.3 million of higher ancillary revenues due to higher revenues from food and beverage and golf offerings at our resorts, $3.1 million of higher resales commissions, brand fees and other revenues, $2.7 million of higher refurbishment revenue due to an increase in the number of refurbishment projects completed in the 2017 first three quarters, and $2.1 million of higher settlement fees due to an increase in the number of closed contracts in the 2017 first three quarters, partially offset by $5.4 million of lower revenue due to outsourcing multiple operations.
The increase in the resort management and other services margin reflected the increases in revenue, partially offset by $10.3 million of higher expenses, including $5.1 million of higher customer service expenses and expenses associated with the MVCD program, $7.4 million of higher ancillary expenses from food and beverage and golf offerings at our resorts, $2.1 million of higher refurbishment expenses due to an increase in the number of projects being refurbished in the 2017 first three quarters, and $0.7 million of higher resales and other expenses, partially offset by $5.0 million of lower expenses due to outsourcing multiple operations.
Financing Revenues
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Interest income
$
31,146

 
$
26,107

 
$
5,039

 
19%
Other financing revenues
1,708

 
1,331

 
377

 
28%
Financing revenues
$
32,854

 
$
27,438

 
$
5,416

 
20%
Financing propensity
66.1%
 
62.4%
 
 
 
 
The increase in financing revenues was due to an increase in the average gross vacation ownership notes receivable balance ($7.2 million) and higher other financing revenues ($0.4 million), partially offset by financing program incentive costs ($1.4 million) and a decrease in the weighted average coupon rate of our vacation ownership notes receivable ($0.8 million). We expect financing propensity for the 2017 fiscal year to approximate 65 percent as we intend to continue to offer financing incentive programs, and that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in principal of existing vacation ownership notes receivable.

49

2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Interest income
$
88,698

 
$
77,582

 
$
11,116

 
14%
Other financing revenues
5,114

 
4,117

 
997

 
24%
Financing revenues
$
93,812

 
$
81,699

 
$
12,113

 
15%
Financing propensity
65.0%
 
57.5%
 
 
 
 
The increase in financing revenues was due to an increase in the average gross vacation ownership notes receivable balance ($18.3 million) and higher other financing revenues ($1.0 million), partially offset by financing program incentive costs ($5.2 million) and a decrease in the weighted average coupon rate of our vacation ownership notes receivable ($2.0 million). We expect financing propensity for the 2017 fiscal year to approximate 65 percent as we intend to continue to offer financing incentive programs, and that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in principal of existing vacation ownership notes receivable.
Rental Revenues, Expenses and Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Rental revenues
$
69,458

 
$
63,387

 
$
6,071

 
10%
Unsold maintenance fees
(17,105
)
 
(16,688
)
 
(417
)
 
(2%)
Other rental expenses
(45,131
)
 
(36,443
)
 
(8,688
)
 
(24%)
Rental margin
$
7,222

 
$
10,256

 
$
(3,034
)
 
(30%)
Rental margin percentage
10.4%
 
16.2%
 
(5.8 pts)
 
 
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
(92 days)
 
(84 days)
 
Transient keys rented(1)
296,159

 
262,038

 
34,121

 
13%
Average transient key rate
$
198.05

 
$
204.89

 
$
(6.84
)
 
(3%)
Resort occupancy
89.0%
 
92.3%
 
(3.3 pts)
 
 
_________________________
(1) 
Transient keys rented exclude those obtained through the use of plus points, preview stays and those associated with our operating property in San Diego, California prior to conversion to vacation ownership inventory.
The increase in rental revenues was due to a 13 percent increase in transient keys rented ($7.1 million) driven by a 24 percent increase in available keys, a $0.5 million increase in preview keys rented and other revenue and $1.1 million of higher plus points revenue (which is recognized when the points are redeemed or expire), partially offset by a 3 percent decrease in average transient rate ($2.0 million) and $0.6 million of revenue in the 2016 third quarter at our operating property in San Diego, California prior to the conversion of the property to vacation ownership inventory.
The decrease in rental margin reflected higher expenses incurred due to owners choosing alternative usage options and higher unsold maintenance fees. These higher expenses more than offset the higher rental revenues net of direct variable expenses (such as housekeeping) and the $1.1 million increase in plus points revenue.

50

2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Rental revenues
$
224,588

 
$
201,524

 
$
23,064

 
11%
Unsold maintenance fees
(50,814
)
 
(44,659
)
 
(6,155
)
 
(14%)
Other rental expenses
(136,327
)
 
(120,021
)
 
(16,306
)
 
(14%)
Rental margin
$
37,447

 
$
36,844

 
$
603

 
2%
Rental margin percentage
16.7%
 
18.3%
 
(1.6 pts)
 
 
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
 
(274 days)
 
(252 days)
 
Transient keys rented(1)
907,935

 
797,729

 
110,206

 
14%
Average transient key rate
$
211.32

 
$
214.84

 
$
(3.52
)
 
(2%)
Resort occupancy
89.1%
 
90.2%
 
(1.1 pts)
 
 
_________________________
(1) 
Transient keys rented exclude those obtained through the use of plus points, preview stays and those associated with our operating property in San Diego, California prior to conversion to vacation ownership inventory.
The increase in rental revenues was due to a 14 percent increase in transient keys rented ($23.8 million) driven by a 17 percent increase in available keys, a $3.3 million increase in preview keys rented and other revenue and $2.6 million of higher plus points revenue (which is recognized when the points are redeemed or expire), partially offset by $3.4 million of revenue in the 2017 first three quarters at our operating property in San Diego, California prior to the conversion of the property to vacation ownership inventory and a 2 percent decrease in average transient rate ($3.2 million).
The increase in rental margin reflected the $2.6 million increase in plus points revenue and higher rental revenues net of direct variable expenses (such as housekeeping), partially offset by higher expenses incurred due to owners choosing alternative usage options and higher unsold maintenance fees.

51

Asia Pacific
The following discussion presents an analysis of our results of operations for the Asia Pacific segment for the 2017 third quarter compared to the 2016 third quarter, and the 2017 first three quarters compared to the 2016 first three quarters.
 
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)
REVENUES
 
 
 
 
 
 
 
Sale of vacation ownership products
$
11,362

 
$
10,010

 
$
32,378

 
$
26,645

Resort management and other services
1,022

 
816

 
3,055

 
8,594

Financing
1,122

 
918

 
3,350

 
2,906

Rental
2,733

 
2,324

 
9,115

 
12,773

Cost reimbursements
713

 
692

 
2,584

 
2,250

TOTAL REVENUES
16,952

 
14,760

 
50,482

 
53,168

EXPENSES
 
 
 
 
 
 
 
Cost of vacation ownership products
2,687

 
1,712

 
6,642

 
5,018

Marketing and sales
8,754

 
7,166

 
25,672

 
20,072

Resort management and other services
1,144

 
900

 
3,297

 
8,546

Rental
3,902

 
3,330

 
12,136

 
15,884

Royalty fee
225

 
239

 
674

 
564

Cost reimbursements
713

 
692

 
2,584

 
2,250

TOTAL EXPENSES
17,425

 
14,039

 
51,005

 
52,334

Gains (losses) and other income (expense), net
—

 
490

 
(20
)
 
(1,008
)
Other
1

 
(20
)
 
(9
)
 
(249
)
SEGMENT FINANCIAL RESULTS
$
(472
)
 
$
1,191

 
$
(552
)
 
$
(423
)
Overview
In our Asia Pacific segment, we continue to identify opportunities for development margin growth and improvement. We plan to continue to focus on future inventory acquisitions with strong on-site sales locations. In 2015, we purchased an operating property located in Surfers Paradise, Australia and in 2016, we sold the portion of this operating property that we did not intend to convert to vacation ownership inventory and converted the remaining portion of this operating property to vacation ownership inventory, a portion of which was contributed to our points-based programs within this segment. We began selling from this new location at the end of the 2016 first quarter. During the 2017 third quarter, we completed the purchase of 51 completed vacation ownership units, as well as a sales gallery and related amenities and infrastructure, in Bali, Indonesia. We expect to begin selling from this new location in the coming months.
Contract Sales
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
$
12,569

 
$
11,169

 
$
1,400

 
13%
Total contract sales
$
12,569

 
$
11,169

 
$
1,400

 
13%
The increase in Asia Pacific vacation ownership contract sales was driven by a 37 percent increase in tours, partially offset by an 18 percent decrease in VPG. The increase in tours included an increase of approximately 14 percent due to the change in the financial reporting calendar in 2017, a 15 percent increase from the new sales location in Surfers Paradise, Australia and an 8 percent increase at the existing sales locations. The decrease in VPG was driven by an increase in sales to first time buyers, which generally have a lower VPG than sales to existing owners. Contract sales at the new sales location in Surfers Paradise, Australia are not reported as sale of vacation ownership products until closing.

52

2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
$
36,131

 
$
31,049

 
$
5,082

 
16%
Total contract sales
$
36,131

 
$
31,049

 
$
5,082

 
16%
The increase in Asia Pacific vacation ownership contract sales was driven by a 45 percent increase in tours, partially offset by a 20 percent decrease in VPG. The increase in tours included an increase of approximately 13 percent due to the change in the financial reporting calendar in 2017, a 26 percent increase from the new sales location in Surfers Paradise, Australia and a 6 percent increase at the existing sales locations. The decrease in VPG was driven by an increase in sales to first time buyers, which generally have a lower VPG than sales to existing owners. Contract sales at the new sales location in Surfers Paradise, Australia are not reported as sale of vacation ownership products until closing.
Sale of Vacation Ownership Products
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
$
12,569

 
$
11,169

 
$
1,400

 
13%
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
(264
)
 
24

 
(288
)
 
 
Sales reserve
(572
)
 
(1,112
)
 
540

 
 
Other(1)
(371
)
 
(71
)
 
(300
)
 
 
Sale of vacation ownership products
$
11,362

 
$
10,010

 
$
1,352

 
14%
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
The decrease in the sales reserve was due to a favorable sales reserve adjustment in the 2017 third quarter.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
$
36,131

 
$
31,049

 
$
5,082

 
16%
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
(385
)
 
(539
)
 
154

 
 
Sales reserve
(2,827
)
 
(3,748
)
 
921

 
 
Other(1)
(541
)
 
(117
)
 
(424
)
 
 
Sale of vacation ownership products
$
32,378

 
$
26,645

 
$
5,733

 
22%
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
Revenue reportability had an unfavorable $0.4 million impact in the 2017 first three quarters compared to an unfavorable $0.5 million impact in the 2016 first three quarters. The decrease in the sales reserve was due to an unfavorable sales reserve adjustment made in the 2016 second quarter to correct an immaterial error with respect to historical static pool data and a favorable sales reserve adjustment in the 2017 third quarter, partially offset by the higher vacation ownership contract sales.

53

Development Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Sale of vacation ownership products
$
11,362

 
$
10,010

 
$
1,352

 
14%
Cost of vacation ownership products
(2,687
)
 
(1,712
)
 
(975
)
 
(57%)
Marketing and sales
(8,754
)
 
(7,166
)
 
(1,588
)
 
(22%)
Development margin
$
(79
)
 
$
1,132

 
$
(1,211
)
 
(107%)
Development margin percentage
(0.7%)
 
11.3%
 
(12.0 pts)
 
 
The decrease in development margin reflected higher marketing and sales costs due to the shift to more first time buyer tours and lower favorable product cost true-up activity, partially offset by the higher vacation ownership contract sales volume net of the sales reserve and direct variable expenses (i.e., cost of vacation ownership products and marketing and sales).
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Sale of vacation ownership products
$
32,378

 
$
26,645

 
$
5,733

 
22%
Cost of vacation ownership products
(6,642
)
 
(5,018
)
 
(1,624
)
 
(32%)
Marketing and sales
(25,672
)
 
(20,072
)
 
(5,600
)
 
(28%)
Development margin
$
64

 
$
1,555

 
$
(1,491
)
 
(96%)
Development margin percentage
0.2%
 
5.8%
 
(5.6 pts)
 
 
The decrease in development margin reflected higher marketing and sales costs due to the shift to more first time buyer tours and lower favorable product cost true-up activity, partially offset by the higher vacation ownership contract sales volume net of the sales reserve and direct variable expenses (i.e., cost of vacation ownership products and marketing and sales).
Resort Management and Other Services Revenues, Expenses and Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Management fee revenues
$
674

 
$
582

 
$
92

 
16%
Ancillary revenues
—

 
8

 
(8
)
 
(100%)
Other services revenues
348

 
226

 
122

 
54%
Resort management and other services revenues
1,022

 
816

 
206

 
25%
Resort management and other services expenses
(1,144
)
 
(900
)
 
(244
)
 
(27%)
Resort management and other services margin
$
(122
)
 
$
(84
)
 
$
(38
)
 
(45%)
Resort management and other services margin percentage
(11.9%)
 
(10.3%)
 
(1.6 pts)
 
 
The increase in resort management and other services revenues reflected $0.1 million of higher management fees and $0.1 million of higher other services revenues. The slight decline in the resort management and other services margin reflected the higher customer service expenses, partially offset by the increase in revenues.

54

2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Management fee revenues
$
2,059

 
$
1,657

 
$
402

 
24%
Ancillary revenues
—

 
6,246

 
(6,246
)
 
(100%)
Other services revenues
996

 
691

 
305

 
44%
Resort management and other services revenues
3,055

 
8,594

 
(5,539
)
 
(64%)
Resort management and other services expenses
(3,297
)
 
(8,546
)
 
5,249

 
61%
Resort management and other services margin
$
(242
)
 
$
48

 
$
(290
)
 
(604%)
Resort management and other services margin percentage
(7.9%)
 
0.6%
 
(8.5 pts)
 
 
The decrease in resort management and other services revenues reflected $6.2 million of lower ancillary revenues from the operating property in Surfers Paradise, Australia (a portion of which was disposed of in the second quarter of 2016), partially offset by increases in management fees ($0.4 million) and other services revenues ($0.3 million). The decline in the resort management and other services margin reflected $0.8 million of ancillary profit from the operating property in Surfers Paradise, Australia in the 2016 first three quarters (compared to no ancillary activity in the 2017 first three quarters), partially offset by the higher management fees in the 2017 first three quarters compared to the 2016 first three quarters.
The ancillary revenue producing portions of the operating property in Surfers Paradise, Australia were included in the portion of the operating property sold in the second quarter of 2016. Therefore, we do not anticipate future ancillary revenues or expenses at this property.
Rental Revenues, Expenses and Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Rental revenues
$
2,733

 
$
2,324

 
$
409

 
18%
Rental expenses
(3,902
)
 
(3,330
)
 
(572
)
 
(17%)
Rental margin
$
(1,169
)
 
$
(1,006
)
 
$
(163
)
 
(16%)
Rental margin percentage
(42.8%)
 
(43.3%)
 
0.5 pts
 
 
The increase in rental revenues was due to increases in transient keys rented, preview keys rented and the average transient rate. The higher expenses were due to higher expenses incurred due to owners choosing alternative usage options and higher variable expenses (such as housekeeping) in the 2017 third quarter.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Rental revenues
$
9,115

 
$
12,773

 
$
(3,658
)
 
(29%)
Rental expenses
(12,136
)
 
(15,884
)
 
3,748

 
24%
Rental margin
$
(3,021
)
 
$
(3,111
)
 
$
90

 
3%
Rental margin percentage
(33.1%)
 
(24.4%)
 
(8.7 pts)
 
 
The decline in rental revenues was due to $4.9 million of lower revenue from the operating property in Surfers Paradise, Australia (a portion of which was disposed of in the 2016 second quarter), partially offset by $1.2 million of higher revenues at the other resorts in the region due to increases in transient keys rented, preview keys rented and the average transient rate. The lower expenses were due to $4.8 million of lower expenses from the operating property in Surfers Paradise, Australia (a portion of which was disposed of in the 2016 second quarter), partially offset by $1.1 million of higher other rental expenses in the 2017 first three quarters.

55

Europe
The following discussion presents an analysis of our results of operations for the Europe segment for the 2017 third quarter compared to the 2016 third quarter, and the 2017 first three quarters compared to the 2016 first three quarters.
 
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)
REVENUES
 
 
 
 
 
 
 
Sale of vacation ownership products
$
5,706

 
$
4,818

 
$
15,351

 
$
15,845

Resort management and other services
7,624

 
6,413

 
19,119

 
16,790

Financing
709

 
710

 
2,164

 
2,339

Rental
8,986

 
8,065

 
16,918

 
14,836

Cost reimbursements
9,212

 
8,072

 
25,265

 
23,533

TOTAL REVENUES
32,237

 
28,078

 
78,817

 
73,343

EXPENSES
 
 
 
 
 
 
 
Cost of vacation ownership products
715

 
1,599

 
2,081

 
4,158

Marketing and sales
4,465

 
4,189

 
12,583

 
13,388

Resort management and other services
6,099

 
5,076

 
15,388

 
13,827

Rental
4,910

 
4,509

 
12,366

 
11,094

Royalty fee
70

 
97

 
195

 
264

Cost reimbursements
9,212

 
8,072

 
25,265

 
23,533

TOTAL EXPENSES
25,471

 
23,542

 
67,878

 
66,264

SEGMENT FINANCIAL RESULTS
$
6,766

 
$
4,536

 
$
10,939

 
$
7,079

Overview
In our Europe segment, we are focused on selling our existing projects and managing existing resorts. We do not have any current plans for new development in this segment.
Contract Sales
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
$
6,664

 
$
7,698

 
$
(1,034
)
 
(13%)
Total contract sales
$
6,664

 
$
7,698

 
$
(1,034
)
 
(13%)
The decrease in contract sales was primarily due to lower fractional sales due to limited reacquired inventory available and several large multi-week purchases in the 2016 third quarter.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
$
18,509

 
$
22,054

 
$
(3,545
)
 
(16%)
Total contract sales
$
18,509

 
$
22,054

 
$
(3,545
)
 
(16%)
The decrease in contract sales was primarily due to several large multi-week purchases in the 2016 first three quarters.

56

Sale of Vacation Ownership Products
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Contract sales
$
6,664

 
$
7,698

 
$
(1,034
)
 
(13%)
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
(47
)
 
(2,165
)
 
2,118

 
 
Sales reserve
(891
)
 
(837
)
 
(54
)
 
 
Other(1)
(20
)
 
122

 
(142
)
 
 
Sale of vacation ownership products
$
5,706

 
$
4,818

 
$
888

 
18%
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Contract sales
$
18,509

 
$
22,054

 
$
(3,545
)
 
(16%)
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
(352
)
 
(3,508
)
 
3,156

 
 
Sales reserve
(2,680
)
 
(2,739
)
 
59

 
 
Other(1)
(126
)
 
38

 
(164
)
 
 
Sale of vacation ownership products
$
15,351

 
$
15,845

 
$
(494
)
 
(3%)
_________________________
(1) 
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
Development Margin
2017 Third Quarter
 
Quarter Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(92 days)
 
(84 days)
 
Sale of vacation ownership products
$
5,706

 
$
4,818

 
$
888

 
18%
Cost of vacation ownership products
(715
)
 
(1,599
)
 
884

 
55%
Marketing and sales
(4,465
)
 
(4,189
)
 
(276
)
 
(7%)
Development margin
$
526

 
$
(970
)
 
$
1,496

 
154%
Development margin percentage
9.2%
 
(20.1%)
 
29.3 pts
 
 
2017 First Three Quarters
 
Year to Date Ended
 
Change
 
% Change
 
September 30, 2017
 
September 9, 2016
 
($ in thousands)
(274 days)
 
(252 days)
 
Sale of vacation ownership products
$
15,351

 
$
15,845

 
$
(494
)
 
(3%)
Cost of vacation ownership products
(2,081
)
 
(4,158
)
 
2,077

 
50%
Marketing and sales
(12,583
)
 
(13,388
)
 
805

 
6%
Development margin
$
687

 
$
(1,701
)
 
$
2,388

 
140%
Development margin percentage
4.5%
 
(10.7%)
 
15.2 pts
 
 


57

Corporate and Other
 
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)
EXPENSES
 
 
 
 
 
 
 
Cost of vacation ownership products
$
2,020

 
$
1,334

 
$
6,151

 
$
5,097

Financing
5,062

 
4,581

 
12,528

 
11,782

General and administrative
26,666

 
22,151

 
83,739

 
72,871

Litigation settlement
—

 
—

 
183

 
—

Consumer financing interest
6,498

 
5,361

 
18,090

 
15,840

Royalty fee
12,969

 
11,475

 
39,044

 
34,426

TOTAL EXPENSES
53,215

 
44,902

 
159,735

 
140,016

Gains (losses) and other income (expense), net
8,731

 
(9
)
 
8,722

 
(160
)
Interest expense
(2,642
)
 
(2,262
)
 
(5,180
)
 
(6,331
)
Other
57

 
—

 
(527
)
 
(211
)
TOTAL FINANCIAL RESULTS
$
(47,069
)
 
$
(47,173
)
 
$
(156,720
)
 
$
(146,718
)
Corporate and Other consists of results not specifically attributable to an individual segment, including expenses in support of our financing operations, non-capitalizable development expenses incurred to support overall company development, company-wide general and administrative costs, corporate interest expense, consumer financing interest expense and the fixed royalty fee payable under the license agreements that we entered into with Marriott International in connection with our spin-off from Marriott International.
Total Expenses
2017 Third Quarter
Total expenses increased $8.3 million from the 2016 third quarter. The $8.3 million increase resulted from $4.5 million of higher general and administrative expenses, $1.5 million of higher royalty fees due to the change to an end-of-month quarterly reporting cycle in 2017 that resulted in eight additional days in the 2017 third quarter ($1.0 million) and a contractual increase late in 2016 in the fixed portion of the royalty fee owed to Marriott International ($0.5 million), $1.1 million of higher consumer financing interest expense, $0.7 million of higher cost of vacation ownership products expenses due to higher development expenses, $0.5 million of higher financing expenses due to the change to an end-of-month quarterly reporting cycle in 2017 and the increase in the average gross vacation ownership notes receivable balance.
General and administrative expenses increased $4.5 million due to approximately $2.0 million from the change to an end-of-month quarterly reporting cycle in 2017 and $2.5 million due to higher personnel related and other expenses. The higher personnel related and other expenses included annual merit, bonus and inflationary cost increases.
The $1.1 million increase in consumer financing interest expense was due to a higher average outstanding debt balance and the change to an end-of-month quarterly reporting cycle in 2017.
2017 First Three Quarters
Total expenses increased $19.7 million from the 2016 first three quarters. The $19.7 million increase resulted from $10.9 million of higher general and administrative expenses, $4.6 million of higher royalty fees due to the change to an end-of-month quarterly reporting cycle in 2017 that resulted in 22 additional days in the 2017 first three quarters ($2.9 million) and a contractual increase late in 2016 in the fixed portion of the royalty fee owed to Marriott International ($1.7 million), $2.3 million of higher consumer financing interest expense, $1.1 million of higher cost of vacation ownership products expenses due to higher development expenses, $0.7 million of higher financing expenses due to the change to an end-of-month quarterly reporting cycle in 2017 and the increase in the average gross vacation ownership notes receivable balance and $0.2 million of litigation settlements in the 2017 first three quarters.
General and administrative expenses increased $10.9 million due to approximately $6.0 million from the change to an end-of-month quarterly reporting cycle in 2017 and $6.4 million due to higher personnel related and other expenses, partially offset by $1.5 million of lower litigation related costs. The higher personnel related and other expenses included annual merit, bonus and inflationary cost increases.

58

The $2.3 million increase in consumer financing interest expense was due to a higher average outstanding debt balance and the change to an end-of-month quarterly reporting cycle in 2017.
Recent Accounting Pronouncements
See Footnote No. 1, “Summary of Significant Accounting Policies,” to our Financial Statements for a discussion of recently issued accounting pronouncements, including information on new accounting standards and the future adoption of such standards.
Liquidity and Capital Resources
Our capital needs are supported by cash on hand ($440.1 million at the end of the 2017 third quarter), cash generated from operations, our ability to raise capital through securitizations in the asset-backed securities market and, to the extent necessary, funds available under the Warehouse Credit Facility and our $250.0 million revolving credit facility (the “Revolving Corporate Credit Facility”). We believe these sources of capital will be adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, satisfy debt service requirements, fulfill other cash requirements and return capital to shareholders. At the end of the 2017 third quarter, we had $1.2 billion of total gross debt outstanding, which included $906.7 million of non-recourse debt associated with vacation ownership notes receivable securitizations, $230.0 million of Convertible Notes and a $63.6 million non-interest bearing note payable issued in connection with the acquisition of completed vacation ownership units located on the Big Island of Hawaii.
In September 2017, we completed a private offering of $230.0 million of Convertible Notes. While we do not have an immediate need for the proceeds, we felt that it was an opportune time for us to capitalize on the current interest rate environment and the strength of our stock price to optimize our capital structure. We evaluated several different debt instruments and believe that the one we chose provided the most flexibility for us in terms of covenants and use of proceeds, while enabling us to take advantage of the strength of our stock price and a very low current rate of interest. In connection with the Convertible Notes, we also entered into Convertible Note Hedges at a cost of $33.2 million, and received proceeds of $20.3 million from the issuance of Warrants. Issuance of the Convertible Notes resulted in the receipt of net proceeds, after adjusting for debt issue costs, including underwriting discount, and the net cash used to purchase the Convertible Note Hedges and sell the Warrants, of $210.8 million. See additional discussion in “Cash from Financing Activities” below and in Footnote No. 9, “Debt,” to our Financial Statements.
At the end of the 2017 third quarter, we had $730.5 million of real estate inventory on hand, comprised of $390.4 million of finished goods, $338.1 million of land and infrastructure and $2.0 million of work-in-progress. In addition, we had $49.1 million of completed vacation ownership units that 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.
Our vacation ownership product offerings allow us to utilize our real estate inventory efficiently. The majority of our sales are of points-based products, which permits us to sell vacation ownership products at most of our sales locations, including those where little or no weeks-based inventory remains available for sale. Because we no longer need specific resort-based inventory at each sales location, we need to have only a few resorts under construction at any given time and can leverage successful sales locations at completed resorts. This allows us to maintain long-term sales locations and reduces the need to develop and staff on-site sales locations at smaller projects in the future. We believe our points-based programs enable us to align our real estate inventory acquisitions with the pace of sales of vacation ownership products.
We are selectively pursuing growth opportunities in North America and Asia Pacific by targeting high-quality inventory that allows us to add desirable new destinations to our system with new on-site sales locations through transactions that limit our up-front capital investment and allow us to purchase finished inventory closer to the time it is needed for sale. These capital efficient deal structures may consist of the development of new inventory, or the conversion of previously built units by third parties, just prior to sale.
We intend for our capital allocation strategy to strike a balance between enhancing our operations and using our capital to provide returns to our shareholders through programs such as share repurchase programs and payment of dividends.

59

During the 2017 first three quarters, we had a net increase in cash, cash equivalents and restricted cash of $288.7 million compared to a net increase of $44.1 million during the 2016 first three quarters. The following table summarizes these changes:
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(274 days)
 
(252 days)
Cash, cash equivalents and restricted cash provided by (used in):
 
 
 
Operating activities
$
70,787

 
$
90,885

Investing activities
(33,250
)
 
46,080

Financing activities
248,105

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

 
(3,247
)
Net change in cash, cash equivalents and restricted cash
$
288,673

 
$
44,091

Cash from Operating Activities
Our primary sources of funds from operations are (1) cash sales and down payments on financed sales, (2) cash from our financing operations, including principal and interest payments received on outstanding vacation ownership notes receivable and (3) net cash generated from our rental and resort management and other services operations. Outflows include spending for the development of new phases of existing resorts, the acquisition of additional inventory and funding our working capital needs.
We minimize our working capital needs through cash management, strict credit-granting policies and disciplined collection efforts. Our working capital needs fluctuate throughout the year given the timing of annual maintenance fees on unsold inventory we pay to property owners’ associations and certain annual compensation-related outflows. In addition, our cash from operations varies due to the timing of our owners’ repayment of vacation ownership notes receivable, the closing of sales contracts for vacation ownership products, financing propensity and cash outlays for real estate inventory acquisition and development.
In the 2017 first three quarters, we generated $70.8 million of cash flows from operating activities, compared to $90.9 million in the 2016 first three quarters. Excluding the impact of changes in net income and adjustments for non-cash items, the change in cash flows from operations reflected higher originations driven by higher contract sales and higher financing propensity due to the continued success of the financing incentive programs offered in our North America segment, higher real estate inventory spending and timing of payments related to unsold inventory, partially offset by higher closings on vacation ownership contract sales, higher collections due to an increasing portfolio of outstanding vacation ownership notes receivable and lower payments related to employee benefits programs.
In addition to net income and adjustments for non-cash items, the following operating activities are key drivers of our cash flow from operating activities:
Real Estate Inventory Spending in Excess of Cost of Sales
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(274 days)
 
(252 days)
Real estate inventory spending
$
(94,318
)
 
$
(102,645
)
Purchase of vacation ownership units for future transfer to inventory
(33,594
)
 
—

Real estate inventory costs
121,582

 
95,746

Real estate inventory spending in excess of cost of sales
$
(6,330
)
 
$
(6,899
)
We measure our real estate inventory capital efficiency by comparing the cash outflow for real estate inventory spending (a cash item) to the amount of real estate inventory costs charged to expense on our Statements of Income related to sale of vacation ownership products (a non-cash item).
Our real estate inventory spending exceeded real estate inventory costs in the 2017 first three quarters as we satisfied a portion of our commitments to purchase vacation ownership units in our North America and Asia Pacific segments. However, we expect our inventory spending to be in line with inventory costs throughout the remainder of 2017. Real estate inventory spending included the acquisition of 112 completed vacation ownership units located on the Big Island of Hawaii for $27.3 million, as well as 51 completed vacation ownership units located in Bali, Indonesia for $12.1 million. In connection with the acquisition on the Big Island of Hawaii, we also settled a $0.5 million note receivable from the seller on a non-cash basis, and

60

issued a non-interest bearing note payable for $63.6 million. Purchase of vacation ownership units for future transfer to inventory included the acquisition of 36 completed vacation ownership units located at our resort in Marco Island, Florida, for $33.6 million. We entered into these commitments in prior periods as part of our capital efficiency strategy to limit our up-front capital investment and purchase finished inventory closer to the time it is needed for sale. See Footnote No. 5, “Acquisitions and Dispositions,” and Footnote No. 8, “Contingencies and Commitments,” to our Financial Statements for additional information regarding these transactions.
Our real estate inventory spending exceeded real estate inventory costs in the 2016 first three quarters, as a result of our opportunistic acquisition efforts. Real estate inventory spending included $23.5 million for the acquisition of an operating property located in the South Beach area of Miami Beach, Florida. We rebranded this property as Marriott Vacation Club Pulse, South Beach and converted it, in its entirety, into vacation ownership inventory. See Footnote No. 5, “Acquisitions and Dispositions,” to our Financial Statements for additional information regarding this transaction.
Through our existing vacation ownership interest repurchase program, we proactively buy back previously sold vacation ownership interests at lower costs than would be required to develop new inventory. By repurchasing inventory in desirable locations, we expect to be able to stabilize the future cost of vacation ownership products.
Vacation Ownership Notes Receivable Collections Less Than Originations
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(274 days)
 
(252 days)
Vacation ownership notes receivable collections — non-securitized
$
59,115

 
$
54,209

Vacation ownership notes receivable collections — securitized
144,725

 
123,242

Vacation ownership notes receivable originations
(345,663
)
 
(218,190
)
Vacation ownership notes receivable collections less than originations
$
(141,823
)
 
$
(40,739
)
Vacation ownership notes receivable collections include principal from non-securitized and securitized vacation ownership notes receivable. Vacation ownership notes receivable collections increased during the 2017 first three quarters, as compared to the 2016 first three quarters, due to an increase in the portfolio of outstanding vacation ownership notes receivable. Vacation ownership notes receivable originations in the 2017 first three quarters increased due to higher vacation ownership contract sales, including the impact from the change in the quarterly reporting cycle, and an increase in financing propensity to 64.9 percent for the 2017 first three quarters compared to 59.1 percent for the 2016 first three quarters, due to the continued success of the financing incentive programs that we offer in our North America segment. Given the success of these incentives to date, we expect financing propensity levels during the 2017 fiscal year to approximate 65 percent as we intend to continue to offer financing incentive programs.
Cash from Investing Activities
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(274 days)
 
(252 days)
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

Capital Expenditures for Property and Equipment
Capital expenditures for property and equipment relate to spending for technology development, buildings and equipment used at sales locations and ancillary offerings, such as food and beverage offerings, at locations where such offerings are provided.
In the 2017 first three quarters, capital expenditures for property and equipment of $21.2 million included $19.7 million to support business operations (including $11.4 million for ancillary and other operations assets and $8.3 million for sales locations) and $1.5 million for technology spending.
In the 2016 first three quarters, capital expenditures for property and equipment of $22.4 million included $16.8 million to support business operations (including $13.7 million for sales locations and $3.1 million for ancillary and other operations assets) and $5.6 million for technology spending.

61

Purchase of Company Owned Life Insurance
To support our ability to meet a portion of our obligations under the Marriott Vacations Worldwide Corporation Deferred Compensation Plan (the “Deferred Compensation Plan”), we acquired company owned insurance 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 as discussed in Footnote No. 1, “Summary of Significant Accounting Policies”, to our Financial Statements. During the 2017 first three quarters, we paid $12.1 million for the acquisition of these policies.
Dispositions, net
Dispositions in the 2016 first three quarters related to the sale of the remaining downsized portion of the operating property in Surfers Paradise, Australia for $49.1 million, the sale of excess inventory at the RCC San Francisco for $19.3 million and the sale of undeveloped land in Absecon, New Jersey for $0.1 million.
Cash from Financing Activities
 
Year to Date Ended
 
September 30, 2017
 
September 9, 2016
($ in thousands)
(274 days)
 
(252 days)
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
)
Borrowings from / Repayment of Debt Related to Securitization Transactions
We reflect proceeds from securitizations of vacation ownership notes receivable, including draw downs on the Warehouse Credit Facility, as “Borrowings from securitization transactions.” We reflect repayments of bonds associated with vacation ownership notes receivable securitizations and repayments on the Warehouse Credit Facility (including vacation ownership notes receivable repurchases) as “Repayment of debt related to securitization transactions.”
In the 2017 third quarter, we completed the securitization of a pool of $360.8 million of vacation ownership notes receivable generating gross cash proceeds of $349.9 million. 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.
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. There were no amounts outstanding under this facility as of September 30, 2017.
At September 30, 2017, $47.6 million of gross vacation ownership notes receivable were eligible for securitization. See Footnote No. 9, “Debt,” to our Financial Statements for additional information regarding our Warehouse Credit Facility.
In the 2016 third quarter, we completed the securitization of a pool of $259.1 million of vacation ownership notes receivable generating gross cash proceeds of $250.0 million. In connection with the securitization, investors purchased in a private placement $250.0 million in vacation ownership loan backed notes from the MVW Owner Trust 2016-1 (the “2016-1

62

Trust”). Two classes of vacation ownership loan backed notes were issued by the 2016-1 Trust: $230.6 million of Class A Notes and $19.4 million of Class B Notes. The Class A Notes have an interest rate of 2.25 percent and the Class B Notes have an interest rate of 2.64 percent, for an overall weighted average interest rate of 2.28 percent.
During 2016, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $149.5 million. The advance rate was 85 percent, which resulted in gross proceeds of $126.6 million. Net proceeds were $125.7 million due to the funding of reserve accounts in the amount of $0.9 million.
Borrowings from / Repayment of Revolving Corporate Credit Facility
During the 2017 first three quarters, we borrowed $87.5 million under our Previous Revolving Corporate Credit Facility to facilitate the funding of our short-term working capital needs, all of which was repaid as of September 30, 2017. See Footnote No. 9, “Debt,” to our Financial Statements for additional information regarding our Revolving Corporate Credit Facility.
Proceeds from Issuance of Convertible Notes
During the 2017 third quarter, we issued $230.0 million of Convertible Notes, which included the exercise in full of the $30.0 million over-allotment option we granted to the initial purchasers of the Convertible Notes. 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. We used $40.1 million of the net proceeds to repurchase shares of our common stock from purchasers of the Convertible Notes in privately negotiated repurchase transactions, which is included as a Financing Activity in Repurchase of Common Stock as discussed below, and approximately $12.9 million of the net proceeds to pay the cost of the Convertible Note Hedges, after such cost was partially offset by the proceeds from the issuance of the Warrants, as discussed below. See Footnote No. 9, “Debt,” to our Financial Statements for additional information on our Convertible Notes transaction.
Purchase of Convertible Note Hedges / Proceeds from Issuance of Warrants
In connection with the offering of the Convertible Notes, we entered into Convertible Note Hedges with respect to our common stock, covering approximately 1.55 million shares of our common stock at a cost of $33.2 million. Concurrently, we sold Warrants to acquire approximately 1.55 million shares of our common stock at an initial strike price of $176.68 per share and received aggregate proceeds of $20.3 million. 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 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). See Footnote No. 9, “Debt,” to our Financial Statements for additional information on our Convertible Notes transaction.
Debt Issuance Costs
In the 2017 first three quarters, we paid $14.5 million of debt issuance costs, which included $6.3 million associated with the initial purchaser discounts related to the Convertible Notes, $4.8 million associated with the 2017 vacation ownership notes receivable securitization, $2.2 million related to the new $250.0 million Revolving Corporate Credit Facility and $1.2 million associated with the amendment and extension of the Warehouse Credit Facility.
In the 2016 first three quarters, we incurred $4.1 million of debt issuance costs, which included $3.8 million associated with the 2016 vacation ownership notes receivable securitization and $0.2 million related to the amendment of the Previous Revolving Corporate Credit Facility.
Share Repurchase Program
The following table summarizes share repurchase activity under our current share repurchase program:
($ 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


63

As discussed above, we used $40.1 million of the proceeds from the sale of the Convertible Notes to repurchase 351,900 shares of our common stock under our existing share repurchase program. See Footnote No. 9, “Debt,” to our Financial Statements for additional information on our Convertible Notes transaction and Footnote No. 10, “Shareholders’ Equity,” to our Financial Statements for further information related to our share repurchase program.
Dividends
We distributed 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
December 9, 2016
 
December 22, 2016
 
January 4, 2017
 
$0.35
February 9, 2017
 
February 23, 2017
 
March 9, 2017
 
$0.35
May 11, 2017
 
May 25, 2017
 
June 8, 2017
 
$0.35
We currently expect to pay quarterly cash dividends in the future, but any future dividend payments will be subject to Board approval, which will depend on our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice and other business considerations that our Board of Directors considers relevant. In addition, our Revolving Corporate Credit Facility contains restrictions on our ability to pay dividends, and the terms of agreements governing debt that we may incur in the future may also limit or prohibit dividend payments. Accordingly, there can be no assurance that we will pay dividends in the future at the same rate or at all.
Contractual Obligations and Off-Balance Sheet Arrangements
There have been no significant changes to our “Contractual Obligations and Off-Balance Sheet Arrangements” as presented in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 30, 2016, other than as set forth below.
The following table summarizes our contractual obligations as of September 30, 2017:
 
 
 
 
Payments Due by Period
($ in thousands)
 
Total
 
Remainder
of 2017
 
Years
2018 - 2019
 
Years
2020 - 2021
 
Thereafter
Contractual Obligations
 
 
 
 
 
 
 
 
 
 
Debt(1)
 
$
1,332,995

 
$
32,256

 
$
306,787

 
$
234,069

 
$
759,883

Operating leases
 
87,116

 
4,268

 
26,497

 
20,010

 
36,341

Purchase obligations(2)
 
336,416

 
15,463

 
316,386

 
3,134

 
1,433

Capital lease obligations(3)
 
7,582

 
361

 
7,221

 
—

 
—

Other long-term obligations
 
547

 
547

 
—

 
—

 
—

Total contractual obligations
 
$
1,764,656

 
$
52,895

 
$
656,891

 
$
257,213

 
$
797,657

_________________________
(1) 
Includes principal as well as interest payments and excludes unamortized debt discount and issuance costs.
(2) 
Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Amounts reflected herein represent expected funding under such contracts. Amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above.
(3) 
Includes interest.
Critical Accounting Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. Management considers an accounting estimate to be critical if: (1) it requires assumptions to be made that are uncertain at the time the estimate is made; and (2) changes in the estimate, or different estimates that could have been selected, could have a material effect on our consolidated results of operations or financial condition.
While we believe that our estimates, assumptions, and judgments are reasonable, they are based on information presently available. Actual results may differ significantly. Additionally, changes in our assumptions, estimates or assessments as a result of unforeseen events or otherwise could have a material impact on our consolidated financial position or results of operations. We have discussed those estimates that we believe are critical and require the use of complex judgment in their application in our most recent Annual Report on Form 10-K. Since the date of our most recent Annual Report on Form 10-K,

64

there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.
Item 3.    Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk has not changed materially from that disclosed in Part I, Item 7A of our Annual Report on Form 10-K for the year ended December 30, 2016, other than as set forth below.
In September 2017, we issued $230 million of Convertible Notes. Holders may convert the Convertible Notes prior to maturity upon the occurrence of certain circumstances. Upon conversion, holders of the Convertible Notes will receive cash, shares of our common stock or a combination of cash and shares of our common stock, at our election.
Concurrently with the issuance of the Convertible Notes, we entered into Convertible Note Hedges and Warrants. These separate transactions were intended to reduce the potential economic dilution from the conversion of the Convertible Notes.
The Convertible Notes have fixed annual interest rates at 1.50 percent and, therefore, we do not have economic interest rate exposure on our Convertible Notes. However, the value of the Convertible Notes is exposed to interest rate risk. Generally, the fair market value of the Convertible Notes will increase as interest rates fall and decrease as interest rates rise. In addition, the fair value of the Convertible Notes is affected by our stock price. The net carrying value of the Convertible Notes was $190.7 million as of September 30, 2017. This represents the liability component of the principal balance of the Convertible Notes, net of unamortized debt discount and issuance costs, as of September 30, 2017. The total estimated fair value of the Convertible Notes at September 30, 2017 was $241.6 million, and the fair value was determined based on the quoted market price of the Convertible Notes in an over-the-counter market as of the last day of trading for the quarter ended September 30, 2017. For further information, see Footnote No. 4, “Financial Instruments” and Footnote No. 9, “Debt,” to our Financial Statements.
Item 4.    Controls and Procedures
Disclosure Controls and Procedures
As of the end of the period covered by this Quarterly Report on Form 10-Q, we evaluated, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), and management necessarily applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance about management’s control objectives. Our disclosure controls and procedures have been designed to provide reasonable assurance of achieving the desired control objectives. However, you should note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and we cannot assure you that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote. Based upon the foregoing evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective and operating to provide reasonable assurance that we record, process, summarize and report the information we are required to disclose in the reports that we file or submit under the Exchange Act within the time periods specified in the rules and forms of the SEC, and to provide reasonable assurance that we accumulate and communicate such information to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions about required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Part II. OTHER INFORMATION
Item 1.    Legal Proceedings
Currently, and from time to time, we are subject to claims in legal proceedings arising in the normal course of business, including, among others, the legal actions discussed in Footnote No. 8, “Contingencies and Commitments,” to our Financial Statements. While management presently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not materially harm our financial position, cash flows, or overall trends in results of operations, legal proceedings are inherently uncertain, and unfavorable rulings could, individually or in aggregate, have a material adverse effect on our business, financial condition, or operating results.
Item 1A. Risk Factors
There have been no material changes to the risk factors disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 30, 2016, other than as set forth below.
The degree to which we are leveraged may have a material adverse effect on our financial position, results of operations and cash flows.
We can borrow up to $250 million under the Revolving Corporate Credit Facility and could also incur additional debt to the extent permitted under the Revolving Corporate Credit Facility. Our ability to make dividend payments to holders of our common stock and to make payments on and refinance our indebtedness, including debt under the Revolving Corporate Credit Facility, the Convertible Notes or any future debt that we may incur, will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that we cannot control. If we cannot repay or refinance our debt on commercially reasonable terms as it becomes due, we may be forced to sell assets or take other disadvantageous actions, including (1) reducing or delaying capital expenditures, (2) limiting financing offered to customers, which could result in reduced sales, and (3) dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in the vacation ownership industry could be impaired. If we cannot make scheduled payments on our debt, we will be in default and holders of the Convertible Notes could declare all outstanding principal and interest to be due and payable, the lenders under the Revolving Corporate Credit Facility could terminate their commitments to loan money, lenders under our secured debt (including any borrowings outstanding under the Revolving Corporate Credit Facility) could foreclose against the assets securing their borrowings and we could be forced into bankruptcy or liquidation. If lenders of any of our debt are able to accelerate amounts due to them, a default or acceleration of our other debt could be triggered.
A lowering or withdrawal of the ratings assigned to our company or any of our debt securities by rating agencies may increase our future borrowing costs and reduce our access to capital.
Any rating assigned to our company or our debt, including the Convertible Notes, could be lowered or withdrawn entirely by a rating agency if, in that rating agency’s judgment, future circumstances relating to the basis of the rating, such as adverse changes, so warrant. Any future lowering of our ratings likely would make it more difficult or more expensive for us to obtain additional debt financing.
The fundamental change repurchase feature of the Convertible Notes may delay or prevent an otherwise beneficial attempt to take over our company.
The terms of the Convertible Notes require us to repurchase the Convertible Notes in the event of certain fundamental changes with respect to our company. A takeover of our company would trigger an option of the holders of the Convertible Notes to require us to repurchase the Convertible Notes. This may have the effect of delaying or preventing a takeover of our company that would otherwise be beneficial to holders of our common stock and holders of the Convertible Notes.
The terms of any future preferred equity or debt financing may give holders of any preferred equity or debt securities rights that are senior to rights of our common shareholders or dilute the ownership percentage of existing shareholders or impose more stringent operating restrictions on our company.
Debt or equity financing may not be available to us on acceptable terms. If we incur additional debt or raise equity through the issuance of preferred stock or convertible securities such as the Convertible Notes, the terms of the debt or the preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations. If we raise funds through the issuance of additional equity, the ownership percentage of our existing shareholders would be diluted.

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The conditional conversion feature of the Convertible Notes, if triggered, may adversely affect our financial condition and operating results.
Although holders of the Convertible Notes are generally not permitted to convert the Convertible Notes until June 15, 2022, in the event the conditional conversion feature of the Convertible Notes is triggered due to the trading price of the Convertible Notes or our common stock, holders of the Convertible Notes will be entitled to convert the Convertible Notes at any time during specified periods at their option. See Footnote No. 9, “Debt,” to our Financial Statements for additional information. If one or more holders elect to convert their Convertible Notes, we may elect to settle all or a portion of our conversion obligation through the payment of cash, which could adversely affect our liquidity.
We may not have the ability to raise the funds necessary to settle conversions of the Convertible Notes or to repurchase the Convertible Notes upon a fundamental change.
Upon the occurrence of certain fundamental changes with respect to our company, holders of the Convertible Notes have the right to require us to repurchase their Convertible Notes at a purchase price equal to 100 percent of the principal amount of the Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but not including, the repurchase date. In addition, unless we elect to deliver solely shares of our common stock, we will be required to make cash payments in respect of the Convertible Notes being converted. However, we may not have enough available cash or be able to obtain financing at the time we are required to make purchases of Convertible Notes surrendered therefor or Convertible Notes being converted. In addition, our ability to repurchase the Convertible Notes or to pay cash upon conversions of the Convertible Notes is limited by the agreements governing our existing indebtedness (including the credit agreement governing the Revolving Corporate Credit Facility) and may also be limited by law, by regulatory authority or by agreements that will govern our future indebtedness. Our failure to repurchase Convertible Notes at a time when the repurchase is required by the Indenture or to pay cash payable on future conversions of the Convertible Notes as required by the Indenture would constitute a default under the Indenture. A default under the Indenture or the fundamental change itself could also lead to a default under agreements governing our existing or future indebtedness (including the credit agreement governing the Revolving Corporate Credit Facility). If the repayment of the related indebtedness were to be accelerated after any applicable notice or grace periods, we may not have sufficient funds to repay the indebtedness and repurchase the Convertible Notes or make cash payments upon conversions thereof.
The accounting method for convertible debt securities that may be settled in cash, such as the Convertible Notes, may have a material effect on our reported financial results.
Under Accounting Standards Codification 470-20, Debt with Conversion and Other Options (“ASC 470-20”), an entity must separately account for the liability and equity components of certain convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partially in cash upon conversion in a manner that reflects the issuer’s economic interest cost. The effect of ASC 470-20 on the accounting for the Convertible Notes is that the equity component is required to be included in the additional paid-in capital section of stockholders’ equity on our consolidated balance sheet, and the value of the equity component has been treated as original issue discount for purposes of accounting for the debt component of the Convertible Notes. As a result, we will be required to record a greater amount of non-cash interest expense in current periods presented as a result of the amortization of the discounted carrying value of the Convertible Notes to their face amount over the term of the Convertible Notes. We will report lower net income (or greater net loss) in our financial results because ASC 470-20 requires interest to include both the current period’s amortization of the debt discount and the instrument’s coupon interest, which could adversely affect our reported or future financial results, the market price of our common stock and the trading price of the Convertible Notes.
In addition, under certain circumstances, convertible debt instruments (such as the Convertible Notes) that may be settled entirely or partly in cash are currently accounted for utilizing the treasury stock method if we have the ability and intent to settle in cash, the effect of which is that the shares issuable upon conversion of the Convertible Notes are not included in the calculation of diluted earnings per share except to the extent that the conversion value of the Convertible Notes exceeds their principal amount. Under the treasury stock method, for diluted earnings per share purposes, the transaction is accounted for as if the number of shares of common stock that would be necessary to settle such excess, if we elected to settle such excess in shares, are issued. We cannot be sure that we will be able to continue to demonstrate the ability or intent to settle in cash or that the accounting standards in the future will continue to permit the use of the treasury stock method. If we are unable to use the treasury stock method in accounting for the shares issuable upon conversion of the Convertible Notes, then our diluted earnings per share would be adversely affected.

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The Convertible Note Hedges and Warrants may affect the value of our common stock.
In connection with the Convertible Notes, we entered into privately negotiated Convertible Note Hedges with affiliates of two of the initial purchasers. The Convertible Note Hedges cover, subject to customary anti-dilution adjustments substantially similar to those applicable to the Convertible Notes, the same number of shares of common stock that will initially underlie the Convertible Notes. The Convertible Note Hedges are expected generally to reduce potential dilution to our common stock and/or offset cash payments we are required to make in excess of the principal amount, in each case, upon any conversion of Convertible Notes. Concurrently with our entry into the Convertible Note Hedges, we entered into Warrant transactions with the hedge counterparties relating to the same number of shares of common stock. The Warrants could separately have a dilutive effect on our shares of common stock to the extent that the market price per share exceeds the applicable strike price of the Warrants on one or more of the applicable expiration dates.
In connection with establishing their initial hedges of the convertible note hedge transactions and warrant transactions, the hedge counterparties and/or their respective affiliates advised us that they expected to purchase shares of our common stock in secondary market transactions and/or enter into various derivative transactions with respect to our common stock concurrently with or shortly after the pricing of the Convertible Notes. The hedge counterparties and/or their respective affiliates may modify their hedge positions by entering into or unwinding various derivatives with respect to our common stock and/or purchasing or selling our common stock in secondary market. The effect, if any, of these activities on the market price of our common stock or the Convertible Notes will depend in part on market conditions and cannot be ascertained at this time, but any of these activities could cause or prevent an increase or a decline in the market price of our common stock or the Convertible Notes.
We are subject to counterparty risk with respect to the Convertible Note Hedges.
The counterparties to the Convertible Note Hedges are financial institutions, and we are subject to the risk that one or more of the hedge counterparties may default under the Convertible Note Hedges. Our exposure to the credit risk of the hedge counterparties is not secured by any collateral. If any of the hedge counterparties become subject to insolvency proceedings, we will become an unsecured creditor in those proceedings with a claim equal to our exposure at that time under our transactions with such counterparties. Our exposure will depend on many factors but, generally, the increase in our exposure will be correlated to the increase in the market price and in the volatility of our common stock. In addition, upon a default by a hedge counterparty, we may suffer adverse tax consequences and more dilution than we currently anticipate with respect to our common stock. We can provide no assurances as to the financial stability or viability of the hedge counterparties.
Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
Period
Total Number of Shares Purchased
 
Average
Price per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)
 
Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs(1)
July 1, 2017 – July 31, 2017
147,500

 
$116.00
 
147,500

 
1,047,371
August 1, 2017 – August 31, 2017
196,282

 
$111.84
 
196,282

 
1,851,089
September 1, 2017 – September 30, 2017(2)
352,103

 
$114.00
 
352,103

 
1,498,986
Total
695,885

 
$113.81
 
695,885

 
1,498,986
_________________________
(1) 
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. Prior to that authorization, our Board of Directors had authorized the repurchase of an aggregate of up to 10.9 million shares of our common stock under the share repurchase program since the initiation of the program in October 2013.
(2) 
On September 25, 2017, we used $40.1 million of the proceeds from the sale of the Convertible Notes to repurchase 351,900 shares of our common stock under our existing share repurchase program.
Item 3.    Defaults Upon Senior Securities
None.

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Item 4.    Mine Safety Disclosures
Not applicable.
Item 5.    Other Information
None.
Item 6.    Exhibits
All documents referenced below are being filed as a part of this Quarterly Report on Form 10-Q, unless otherwise noted.
Exhibit Number
 
Description
 
Filed
Herewith
 
Incorporation By Reference From
 
 
 
Form
 
Date Filed
 
Restated Certificate of Incorporation of Marriott Vacations Worldwide Corporation
 
 
 
8-K
 
11/22/2011
 
Restated Bylaws of Marriott Vacations Worldwide Corporation
 
 
 
8-K
 
11/22/2011
 
Indenture between Marriott Vacations Worldwide Corporation and The Bank of New York Mellon Trust Company, N.A., as trustee, dated September 25, 2017
 
X
 
 
 
 
 
Form of 1.50% Convertible Senior Note due 2022 (included in Exhibit 4.1)
 
X
 
 
 
 
 
Form of Call Option Transaction Confirmation
 
X
 
 
 
 
 
Form of Warrant Confirmation
 
X
 
 
 
 
 
Credit Agreement, dated as of August 16, 2017, among Marriott Vacations Worldwide Corporation, Marriott Ownership Resorts, Inc., the several banks and other financial institutions or entities from time to time parties thereto and JPMorgan Chase Bank, N.A., as administrative agent
 
 
 
8-K
 
8/21/2017
 
Guarantee and Collateral Agreement, dated as of August 16, 2017, made by Marriott Vacations Worldwide Corporation, Marriott Ownership Resorts, Inc. and certain other subsidiaries of Marriott Vacations Worldwide Corporation, in favor or JPMorgan Chase Bank, N.A., as Administrative Agent for the banks and other financial institutions or entities from time to time parties to the Credit Agreement
 
 
 
8-K
 
8/21/2017
 
Omnibus Agreement No. 6, dated August 17, 2017, relating to, among other agreements, the Third Amended and Restated Indenture and the Second Amended and Restated Sale Agreement, by and among Marriott Vacations Worldwide Owner Trust 2011-1, Marriott Ownership Resorts, Inc., Wells Fargo Bank, National Association, MORI SPC Series Corp., Marriott Vacations Worldwide Corporation, the Purchasers signatory thereto, Deutsche Bank AG, New York Branch, Wilmington Trust, National Association, and MVCO Series LLC
 
 
 
8-K
 
8/21/2017
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
X
 
 
 
 
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934
 
X
 
 
 
 
 
Certification of Chief Executive Officer pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
 
Furnished
 
Certification of Chief Financial Officer pursuant to Rule 13a-14(b) and Section 906 of the Sarbanes-Oxley Act of 2002
 
Furnished
101.INS
 
XBRL Instance Document - The instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
 
Electronically Submitted
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
Electronically Submitted
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
Electronically Submitted
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
Electronically Submitted
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
Electronically Submitted
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
Electronically Submitted
We have submitted electronically the following documents formatted in XBRL (Extensible Business Reporting Language) as Exhibit 101 to this report: (i) the Interim Consolidated Statements of Income for the 92 days ended September 30, 2017 and the 84 days ended September 9, 2016, as well as the 274 days ended September 30, 2017 and the 252 days ended September 9, 2016; (ii) the Interim Consolidated Statements of Comprehensive Income for the 92 days ended September 30,

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2017 and the 84 days ended September 9, 2016, as well as the 274 days ended September 30, 2017 and the 252 days ended September 9, 2016; (iii) the Interim Consolidated Balance Sheets at September 30, 2017 and December 30, 2016; and (iv) the Interim Consolidated Statements of Cash Flows for the 274 days ended September 30, 2017 and the 252 days ended September 9, 2016.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
MARRIOTT VACATIONS WORLDWIDE CORPORATION
 
 
 
November 2, 2017
 
/s/ Stephen P. Weisz
 
 
Stephen P. Weisz
 
 
President and Chief Executive Officer
 
 
 
 
 
/s/ John E. Geller, Jr.
 
 
John E. Geller, Jr.
 
 
Executive Vice President and Chief Financial Officer

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