MARRIOTT VACATIONS WORLDWIDE Corp - FORM 8-K/A - EX-99.1 - EXHIBIT 99.1 - November 13, 2018

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8-K/A - 8-K/A - MARRIOTT VACATIONS WORLDWIDE Corpa20188-kaupdatedproforma.htm
Exhibit 99.1

UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
On September 1, 2018 (the “Acquisition Date”), Marriott Vacations Worldwide Corporation (“MVW”) completed the previously announced acquisition of ILG, LLC, formerly known as ILG, Inc. (“ILG”) through a series of transactions, after which ILG became an indirect wholly-owned subsidiary (the “Combination Transactions”).
The following unaudited pro forma combined statements of income present the combination of the historical statements of income of MVW and ILG, adjusted to give effect to the Combination Transactions. Presentation of a pro forma combined balance sheet is not required because the Combination Transactions are already reflected in the historical MVW consolidated balance sheet as of September 30, 2018.
These unaudited pro forma combined statements of income give effect to the Combination Transactions. Specifically, MVW presents the pro forma combined statements of income for the nine months ended September 30, 2018 and the fiscal year ended December 31, 2017 as if the Combination Transactions had occurred on December 31, 2016, the beginning of the earliest period presented. The historical financial results of ILG are presented separately prior to the Acquisition Date and are included in the results of MVW beginning on the Acquisition Date and thereafter.
The unaudited pro forma combined statements of income were prepared using purchase accounting with MVW considered the acquirer of ILG. Under purchase accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair values, with any excess purchase price allocated to goodwill. The preliminary purchase price allocation was based on a preliminary estimate of the fair values of the tangible and intangible assets and liabilities of ILG for purposes of inclusion on the opening balance sheet and have been included in the MVW consolidated balance sheet as of September 30, 2018. During the measurement period, MVW expects to complete the purchase price allocation after considering the fair value of ILG’s assets and liabilities at the level of detail necessary to finalize the required purchase price allocation. Accordingly, the purchase price allocations are preliminary and subject to further adjustments as additional information becomes available and as additional analyses are performed. The final purchase price allocation may be different than that reflected in the preliminary purchase price allocation presented herein, and this difference may be material.
In order to make these unaudited pro forma combined statements of income easier to read, MVW refers to unaudited pro forma combined statements of income, associated adjustments and related information as the “pro forma statements of income” throughout this document. All such statements and information are unaudited and combined, except where such information by its presentation or context applies only to MVW or ILG.
The pro forma statements of income do not reflect the realization of any expected cost savings or other synergies from the acquisition of ILG as a result of integration activities and other cost savings initiatives. MVW currently estimates that synergies and planned integration activities will result in annual combined cost savings of at least $100 million following the consummation of the Combination Transactions, which are not reflected in the pro forma statements of income, except to the extent realized prior to September 30, 2018. Although MVW believes such cost savings and other synergies will be realized following the business combination, there can be no assurance that these cost savings or any other synergies will be achieved in full or at all. In addition, the pro forma statements of income do not reflect the planned integration and other charges associated with these cost savings, which are expected to be expensed in MVW’s statement of income.
The unaudited pro forma adjustments are based upon currently available information, estimates and assumptions that MVW’s management believes are reasonable as of the date hereof. The pro forma adjustments and related assumptions are described in the accompanying notes presented on the following pages, which should be read together with the pro forma statements of income.
The pro forma statements of income are for informational purposes only and are not intended to represent or to be indicative of the actual results of operations that the combined MVW and ILG business would have reported had the Combination Transactions been completed as of the dates set forth in the pro forma statements of income and should not be taken as being indicative of future combined results of operations. The actual results may differ significantly from those reflected in the pro forma statements of income for a number of reasons, including, but not limited to, differences between the assumptions used to prepare the pro forma statements of income and actual amounts. As a result, the pro forma statements of income do not purport to be indicative of what the results of operations would have been had the Combination Transactions been completed on the applicable dates of the unaudited pro forma statements of income. They also may not be useful in predicting the future results of operations of the Combined Company.

1

The pro forma statements of income are based on, and should be read together with, the separate historical consolidated financial statements and accompanying notes of MVW and ILG for the applicable periods:
•
MVW consolidated financial statements as of and for (1) the year ended December 31, 2017 in its Current Report on Form 8-K filed with the SEC on June 5, 2018 and (2) the nine months ended September 30, 2018 in its Quarterly Report on Form 10-Q filed with the SEC on November 8, 2018; and
•
ILG consolidated financial statements as of and for (1) the year ended December 31, 2017 in its Current Report on Form 8-K filed with the SEC on June 5, 2018 and (2) the six months ended June 30, 2018 in its Quarterly Report on Form 10-Q filed with the SEC on August 3, 2018.
Rounding
Calculated values were determined using whole numbers.

2
MARRIOTT VACATIONS WORLDWIDE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 2018
(In millions, except per share amounts)


 
Historical
 
Pro Forma Adjustments
 
Pro Forma Combined
 
MVW
 
ILG (a)
 
 
REVENUES
 
 
 
 
 
 
 
 
Sale of vacation ownership products
$
632

 
$
332

 
$
 
 
$
964

Management and exchange
274

 
473

 
(15
)
(b)
 
728

 
 
 
 
 
(4
)
(c)
 
 
Rental
239

 
224

 
 
 
 
463

Financing
119

 
63

 
11

(d)
 
193

Cost reimbursements
652

 
172

 
 
 
 
824

TOTAL REVENUES
1,916

 
1,264

 
(8
)
 
 
3,172

EXPENSES
 
 
 
 
 
 
 
 
Cost of vacation ownership products
167

 
82

 
10

(e)
 
259

Marketing and sales
346

 
219

 
(8
)
(b)
 
561

 
 
 
 
 
4

(f)
 
 
Management and exchange
140

 
213

 
(8
)
(b)
 
344

 
 
 
 
 
(1
)
(f)
 
 
Rental
191

 
144

 
 
 
 
335

Financing
40

 
21

 
 
 
 
61

General and administrative
114

 
154

 
—

(f)
 
268

Depreciation and amortization
29

 
55

 
(1
)
(h)
 
125

 
 
 
 
 
42

(i)
 
 
Litigation settlement
33

 
—

 
 
 
 
33

Royalty fee
50

 
30

 
 
 
 
80

Cost reimbursements
652

 
172

 
 
 
 
824

TOTAL EXPENSES
1,762

 
1,090

 
38

 
 
2,890

Gains (losses) and other income (expense), net
(4
)
 
2

 
 
 
 
(2
)
Interest expense
(23
)
 
(19
)
 
—

(c)
 
(98
)
 
 
 
 
 
(56
)
(j)
 
 
ILG acquisition-related costs
(128
)
 
(9
)
 
137

(g)
 
—

Other
(3
)
 
(11
)
 
 
 
 
(14
)
(LOSS) INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS
(4
)
 
137

 
35

 
 
168

Provision for income taxes
(7
)
 
(41
)
 
(8
)
(k)
 
(56
)
NET (LOSS) INCOME
(11
)
 
96

 
27

 
 
112

Net income attributable to noncontrolling interests
—

 
(2
)
 
 
 
 
(2
)
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
(11
)
 
$
94

 
$
27

 
 
$
110

 
 
 
 
 
 
 
 
 
(LOSSES) EARNINGS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
 
 
 
 
 
 
 
 
Basic
$
(0.37
)
 
 
 
 
(l)
 
$
2.23

Diluted
$
(0.37
)
 
 
 
 
(l)
 
$
2.18

Weighted average shares outstanding - basic
28.8

 
 
 
 
(l)
 
49.3

Weighted average shares outstanding - diluted
28.8

 
 
 
 
(l)
 
50.3

See Note 3 to Unaudited Pro Forma Combined Statements of Income.

3
MARRIOTT VACATIONS WORLDWIDE CORPORATION
UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
YEAR ENDED DECEMBER 31, 2017
(In millions, except per share amounts)


 
Historical
 
Pro Forma Adjustments
 
Pro Forma Combined
 
MVW
 
ILG (a)
 
 
REVENUES
 
 
 
 
 
 
 
 
Sale of vacation ownership products
$
757

 
$
461

 
$
 
 
$
1,218

Management and exchange
279

 
614

 
(22
)
(b)
 
862

 
 
 
 
 
(9
)
(c)
 
 
Rental
262

 
281

 
 
 
 
543

Financing
135

 
89

 
16

(d)
 
240

Cost reimbursements
750

 
326

 
 
 
 
1,076

TOTAL REVENUES
2,183

 
1,771

 
(15
)
 
 
3,939

EXPENSES
 
 
 
 
 
 
 
 
Cost of vacation ownership products
194

 
92

 
14

(e)
 
300

Marketing and sales
388

 
299

 
(12
)
(b)
 
674

 
 
 
 
 
(1
)
(f)
 
 
Management and exchange
147

 
249

 
(10
)
(b)
 
386

 
 
 
 
 
—

(f)
 
 
Rental
221

 
191

 
 
 
 
412

Financing
43

 
29

 
 
 
 
72

General and administrative
106

 
213

 
—

(f)
 
319

Depreciation and amortization
21

 
80

 
(1
)
(h)
 
164

 
 
 
 
 
64

(i)
 
 
Litigation settlement
4

 
—

 
 
 
 
4

Royalty fee
63

 
44

 
 
 
 
107

Cost reimbursements
750

 
326

 
 
 
 
1,076

TOTAL EXPENSES
1,937

 
1,523

 
54

 
 
3,514

Gains (losses) and other income (expense), net
6

 
(5
)
 
 
 
 
1

Interest expense
(10
)
 
(22
)
 
—

(c)
 
(117
)
 
 
 
 
 
(85
)
(j)
 
 
ILG acquisition-related costs
(1
)
 
(1
)
 
2

(g)
 
—

Other
(1
)
 
(17
)
 
 
 
 
(18
)
INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS
240

 
203

 
(152
)
 
 
291

(Provision) benefit for income taxes
(5
)
 
(26
)
 
57

(k)
 
26

NET INCOME
235

 
177

 
(95
)
 
 
317

Net income attributable to noncontrolling interests
—

 
(3
)
 
 
 
 
(3
)
NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS
$
235

 
$
174

 
$
(95
)
 
 
$
314

 
 
 
 
 
 
 
 
 
EARNINGS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS
 
 
 
 
 
 
 
 
Basic
$
8.70

 
 
 
 
(l)
 
$
6.60

Diluted
$
8.49

 
 
 
 
(l)
 
$
6.45

Weighted average shares outstanding - basic
27.1

 
 
 
 
(l)
 
47.6

Weighted average shares outstanding - diluted
27.7

 
 
 
 
(l)
 
48.6

See Note 3 to Unaudited Pro Forma Combined Statements of Income.

4
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
GIVING EFFECT TO THE COMBINATION TRANSACTIONS

Note 1. Consideration Transferred
On the Acquisition Date, shareholders of ILG received 0.165 shares of MVW common stock and $14.75 in cash for each share of ILG common stock. The following table presents the fair value of each class of consideration transferred at the Acquisition Date.
(in millions, except per share amounts)
 
 
Equivalent shares of Marriott Vacations Worldwide common stock issued in exchange for ILG outstanding shares
 
20.5

Marriott Vacations Worldwide common stock price per share as of Acquisition Date
 
$
119.00

Fair value of Marriott Vacations Worldwide common stock issued in exchange for ILG outstanding shares
 
2,441

Cash consideration to ILG shareholders, net of cash acquired of $154 million
 
1,680

Fair value of ILG equity-based awards attributed to pre-combination service
 
64

Total consideration transferred, net of cash acquired
 
4,185

Noncontrolling interests
 
25

 
 
$
4,210

Note 2. Preliminary Fair Values of Assets Acquired and Liabilities Assumed
The following table presents our preliminary estimates of fair values of the assets that we acquired and the liabilities that we assumed. Our preliminary estimates are based on the information that was available as of the Acquisition Date. We are continuing to evaluate the underlying inputs and assumptions used in our valuations. Accordingly, these preliminary estimates are subject to change during the measurement period, which is up to one year from the Acquisition Date.
($ in millions)
 
 
Vacation ownership notes receivable
 
$
736

Inventory
 
494

Property and equipment
 
384

Intangible assets
 
1,223

Other assets
 
581

Deferred revenue
 
(217
)
Deferred taxes
 
(174
)
Debt
 
(392
)
Securitized debt from variable interest entities
 
(696
)
Other liabilities
 
(476
)
Net assets acquired
 
1,463

Goodwill(1)
 
2,747

 
 
$
4,210

_________________________
(1) 
Goodwill is calculated as total consideration transferred, net of cash acquired, less identified net assets acquired and it primarily represents the value that we expect to obtain from synergies and growth opportunities from our combined operations.
Note 3. Pro Forma Adjustments
(a)
Certain presentation changes have been made to the historical presentation of ILG financial information in order to conform to the actual combined MVW presentation in effect following the Combination Transactions. These presentation changes were identified through a review of the historical presentation of ILG financial information, with the effects reflected in the historical ILG figures accordingly.
(b)
To reflect the elimination of intercompany revenue and expenses between MVW and ILG.
(c)
To record decreases in amortized deferred revenue related to the decreases in fair value of ILG’s deferred revenue based on the purchase price allocation. MVW provisionally estimated the value of ILG’s deferred revenue based on a review of existing deferred revenue balances against ILG’s legal performance obligations.

5
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
GIVING EFFECT TO THE COMBINATION TRANSACTIONS

(d)
To reflect an adjustment to financing revenue to convert interest income recognition from acquired vacation ownership notes receivable to approximate the level-yield method pursuant to Financial Accounting Standards Board Accounting Standards Codification ("ASC") 310-30, Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. The level-yield method requires MVW to recognize as interest income the excess of the cash flows expected to be collected on the acquired vacation ownership notes receivable portfolio over the fair value of the portfolio.
(e)
To reflect the impact to cost of sales attributable to the purchase price adjustment remeasuring vacation ownership inventory to fair value, which has a recurring impact post-close of the Combination Transactions.
(f)
In its adoption of ASC 606, Revenue from Contracts with Customers, MVW elected to apply the practical expedient permitted under the standard to expense costs rather than capitalize costs to obtain a contract as incurred and ILG elected to capitalize these costs. As MVW has an accounting policy to expense these costs as incurred, this pro forma adjustment reflects the elimination of the amortization associated with these capitalized costs during the respective periods and recognizes an estimate of costs during the respective periods that would have been expensed in order to conform ILG’s accounting policy to that of MVW.
(g)
To reflect the elimination of non-recurring transaction-related expenses incurred by MVW or ILG directly associated with the Combination Transactions.
(h)
To reflect a preliminary pro forma adjustment to recognize changes to straight-line depreciation expense resulting from the fair value adjustments to acquired property and equipment. The pro forma adjustments for depreciation expense are based on the preliminary purchase price allocation which is subject to further adjustments as additional information becomes available and as additional analyses are performed.
(i)
To reflect a preliminary pro forma adjustment to recognize incremental straight-line amortization expense resulting from the allocation of purchase consideration to definite-lived intangible assets subject to amortization. The pro forma adjustments for amortization expense are as follows:
($ in millions)
 
Estimated
Fair Value
 
Eight Months Ended August 31, 2018
 
Year Ended December 31, 2017
 
Estimated Useful Life
(in years)
Member relationships
 
$
754

 
$
43

 
$
65

 
10 to 15
Management contracts
 
354

 
12

 
19

 
15 to 25
 
 
 
 
55

 
84

 
 
Previously recorded amortization expense of intangibles
 
 
 
(13
)
 
(20
)
 
 
 
 
 
 
$
42

 
$
64

 
 
(j)
During the third quarter of 2018, in connection with the Combination Transactions, MVW issued $750 million aggregate principal amount of 6.500% senior unsecured notes due 2026 and entered into a new credit facility. The new credit facility includes a $900 million term loan facility (“Term Loan”) which matures on August 31, 2025 and a Revolving Corporate Credit Facility with a borrowing capacity of $600 million that terminates on August 31, 2023. The Term Loan bears interest at a floating rate plus an applicable margin that varies from 1.25% to 2.25%, and borrowings under the Revolving Corporate Credit Facility generally bear interest at a floating rate plus an applicable margin that varies from 0.50% to 2.75%.
Pro forma interest expense includes the impact of the new senior unsecured notes and new credit facility, including the impact of changes to amortization of debt issuance costs, discounts and purchase accounting adjustments. The pro forma interest expense associated with newly issued debt is based on a weighted average interest rate of 5.4%.
($ in millions)
 
Eight Months Ended August 31, 2018
 
Year Ended December 31, 2017
Interest expense on new debt
 
$
61

 
$
91

Amortization of debt issuance costs
 
3

 
4

Less: historical interest expense on ILG credit facility
 
(6
)
 
(9
)
Less: historical amortization of debt issuance costs
 
(3
)
 
(3
)
Amortization of change in fair value of acquired debt
 
1

 
2

 
 
$
56

 
$
85


6
NOTES TO THE UNAUDITED PRO FORMA COMBINED STATEMENTS OF INCOME
GIVING EFFECT TO THE COMBINATION TRANSACTIONS

(k)
To reflect the pro forma tax effect of the adjustments herein at an estimated statutory blended rate of 24.0% for the nine months ended September 30, 2018 and 37.5% for the year ended December 31, 2017. The 2017 historical income statement includes the estimated impacts of the Tax Cuts and Jobs Act, which have not been reflected in the pro forma statements of income. For the purposes of these pro forma statements of income, MVW has not made adjustments related to the remeasurement of the deferred tax assets and liabilities due to the reduction of the corporate tax rate from 35% to 21%, and the transition tax on un-repatriated earnings of foreign subsidiaries with respect to the Combined Company since these are non-recurring items and not directly attributable to the Combination Transactions.
(l)
The following table shows our calculation of pro forma combined basic and diluted earnings per share for the nine months ended September 30, 2018 and fiscal year ended December 31, 2017:
(in millions, except per share amounts)
 
Nine Months Ended September 30, 2018
 
Year Ended December 31, 2017
Pro forma net income attributable to common shareholders
 
$
110

 
$
314

Basic weighted average MVW shares outstanding
 
28.8

 
27.1

ILG shares converted to MVW shares(1)
 
20.5

 
20.5

Pro forma basic weighted average shares outstanding
 
49.3

 
47.6

Dilutive effect of securities:
 
 
 
 
Employee stock options and SARs
 
0.4

 
0.4

Restricted stock units
 
0.2

 
0.2

MVW equity-based awards
 
0.6

 
0.6

ILG equity-based awards converted to MVW equity awards(1)
 
0.4

 
0.4

Proforma diluted weighted average shares outstanding
 
50.3

 
48.6

Pro forma basic earnings per share
 
$
2.23

 
$
6.60

Pro forma diluted earnings per share
 
$
2.18

 
$
6.45

_________________________
(1) 
Represents the number of shares of MVW common stock issued to ILG shareholders based on the number of shares of ILG common stock outstanding on the Acquisition Date and after giving effect to the exchange ratio as determined in the merger agreement. Awards consist of the right to receive shares and an award of cash.


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