MARRIOTT VACATIONS WORLDWIDE Corp 10-Q

Item 1. Financial Statements MARRIOTT VACATIONS WORLDWIDE CORPORATION INTERIM CONSOLIDATED STATEMENTS OF INCOME (In millions, except per share amounts) (Unaudited) Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 REVENUES Sale of vacation ownership products $ 53 $ 341 $ 311 $ 634 Management and exchange 145 231 372 470 Rental 18 150 153 297 Financing 70 69 142 137 Cost reimbursements 194 252 512 539 TOTAL REVENUES 480 1,043 1,490 2,077 EXPENSES Cost of vacation ownership products 23 91 83 169 Marketing and sales 57 189 240 375 Management and exchange 77 123 215 256 Rental 73 97 171 177 Financing 23 21 61 43 General and administrative 19 64 89 131 Depreciation and amortization 31 36 63 73 Litigation charges — 1 2 2 Royalty fee 23 26 49 52 Impairment 1 — 96 26 Cost reimbursements 194 252 512 539 TOTAL EXPENSES 521 900 1,581 1,843 Gains (losses) and other income (expense), net 14 2 ( 42 ) 10 Interest expense ( 42 ) ( 35 ) ( 75 ) ( 69 ) ILG acquisition-related costs ( 12 ) ( 36 ) ( 33 ) ( 62 ) Other — — ( 3 ) — (LOSS) INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS ( 81 ) 74 ( 244 ) 113 Benefit (provision) for income taxes 19 ( 25 ) 77 ( 40 ) NET (LOSS) INCOME ( 62 ) 49 ( 167 ) 73 Net income attributable to noncontrolling interests ( 8 ) — ( 9 ) — NET (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ ( 70 ) $ 49 $ ( 176 ) $ 73 (LOSS) EARNINGS PER SHARE ATTRIBUTABLE TO COMMON SHAREHOLDERS Basic $ ( 1.68 ) $ 1.11 $ ( 4.25 ) $ 1.62 Diluted $ ( 1.68 ) $ 1.10 $ ( 4.25 ) $ 1.61 CASH DIVIDENDS DECLARED PER SHARE $ — $ 0.45 $ 0.54 $ 0.90 See Notes to Interim Consolidated Financial Statements 1 Table of Contents MARRIOTT VACATIONS WORLDWIDE CORPORATION INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In millions) (Unaudited) Three Months Ended Six Months Ended June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 NET (LOSS) INCOME $ ( 62 ) $ 49 $ ( 167 ) $ 73 Foreign currency translation adjustments 3 ( 2 ) ( 14 ) ( 1 ) Derivative instrument adjustment, net of tax ( 1 ) ( 13 ) ( 25 ) ( 16 ) OTHER COMPREHENSIVE GAIN (LOSS), NET OF TAX 2 ( 15 ) ( 39 ) ( 17 ) Net income attributable to noncontrolling interests ( 8 ) — ( 9 ) — Other comprehensive income attributable to noncontrolling interests — — — — COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS ( 8 ) — ( 9 ) — COMPREHENSIVE (LOSS) INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ ( 68 ) $ 34 $ ( 215 ) $ 56 See Notes to the Interim Consolidated Financial Statements 2 Table of Contents MARRIOTT VACATIONS WORLDWIDE CORPORATION INTERIM CONSOLIDATED BALANCE SHEETS (In millions, except share and per share data) Unaudited June 30, 2020 December 31, 2019 ASSETS Cash and cash equivalents $ 566 $ 287 Restricted cash (including $ 73 and $ 64 from VIEs, respectively) 341 414 Accounts receivable, net (including $ 14 and $ 13 from VIEs, respectively) 287 323 Vacation ownership notes receivable, net (including $ 1,797 and $ 1,750 from VIEs, respectively) 2,014 2,233 Inventory 771 859 Property and equipment, net 835 718 Goodwill 2,817 2,892 Intangibles, net 977 1,027 Other (including $ 42 and $ 39 from VIEs, respectively) 509 461 TOTAL ASSETS $ 9,117 $ 9,214 LIABILITIES AND EQUITY Accounts payable $ 151 $ 286 Advance deposits 153 187 Accrued liabilities (including $ 2 and $ 2 from VIEs, respectively) 317 397 Deferred revenue 470 433 Payroll and benefits liability 153 186 Deferred compensation liability 112 110 Securitized debt, net (including $ 1,886 and $ 1,871 from VIEs, respectively) 1,887 1,871 Debt, net 2,680 2,216 Other 185 197 Deferred taxes 289 300 TOTAL LIABILITIES 6,397 6,183 Contingencies and Commitments (Note 11) 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; 75,249,855 and 75,020,272 shares issued, respectively 1 1 Treasury stock — at cost; 34,192,119 and 33,438,176 shares, respectively ( 1,334 ) ( 1,253 ) Additional paid-in capital 3,736 3,738 Accumulated other comprehensive loss ( 75 ) ( 36 ) Retained earnings 371 569 TOTAL MVW SHAREHOLDERS' EQUITY 2,699 3,019 Noncontrolling interests 21 12 TOTAL EQUITY 2,720 3,031 TOTAL LIABILITIES AND EQUITY $ 9,117 $ 9,214 The abbreviation VIEs above means Variable Interest Entities. See Notes to Interim Consolidated Financial Statements 3 Table of Contents MARRIOTT VACATIONS WORLDWIDE CORPORATION INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (In millions) (Unaudited) Six Months Ended June 30, 2020 June 30, 2019 OPERATING ACTIVITIES Net (loss) income $ ( 167 ) $ 73 Adjustments to reconcile net income to net cash, cash equivalents and restricted cash provided by operating activities: Depreciation and amortization of intangibles 63 73 Amortization of debt discount and issuance costs 10 9 Vacation ownership notes receivable reserve 81 51 Share-based compensation 12 17 Impairment charges 96 26 Deferred income taxes ( 13 ) 20 Net change in assets and liabilities, net of the effects of acquisition: Accounts receivable 28 ( 18 ) Vacation ownership notes receivable originations ( 197 ) ( 423 ) Vacation ownership notes receivable collections 334 309 Inventory ( 5 ) 76 Purchase of vacation ownership units for future transfer to inventory ( 61 ) — Other assets ( 5 ) ( 32 ) Accounts payable, advance deposits and accrued liabilities ( 239 ) ( 129 ) Deferred revenue 39 37 Payroll and benefit liabilities ( 32 ) ( 39 ) Deferred compensation liability 3 9 Other liabilities ( 11 ) — Other, net ( 9 ) ( 3 ) Net cash, cash equivalents and restricted cash (used in) provided by operating activities ( 73 ) 56 INVESTING ACTIVITIES Capital expenditures for property and equipment (excluding inventory) ( 34 ) ( 19 ) Proceeds from collection of notes receivable — 38 Purchase of company owned life insurance ( 4 ) ( 4 ) Net cash, cash equivalents and restricted cash (used in) provided by investing activities ( 38 ) 15 Continued See Notes to Interim Consolidated Financial Statements 4 Table of Contents MARRIOTT VACATIONS WORLDWIDE CORPORATION INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (In millions) (Unaudited) Six Months Ended June 30, 2020 June 30, 2019 FINANCING ACTIVITIES Borrowings from securitization transactions 315 574 Repayment of debt related to securitization transactions ( 302 ) ( 496 ) Proceeds from debt 1,166 310 Repayments of debt ( 701 ) ( 266 ) Finance lease payment ( 8 ) — Debt issuance costs ( 9 ) ( 6 ) Repurchase of common stock ( 82 ) ( 215 ) Payment of dividends ( 45 ) ( 61 ) Payment of withholding taxes on vesting of restricted stock units ( 14 ) ( 10 ) Other, net — — Net cash, cash equivalents and restricted cash provided by (used in) financing activities 320 ( 170 ) Effect of changes in exchange rates on cash, cash equivalents and restricted cash ( 3 ) 1 Change in cash, cash equivalents and restricted cash 206 ( 98 ) Cash, cash equivalents and restricted cash, beginning of period 701 614 Cash, cash equivalents and restricted cash, end of period $ 907 $ 516 SUPPLEMENTAL DISCLOSURES Non-cash transfer from property and equipment to inventory $ — $ 64 Non-cash transfer from inventory to property and equipment 87 — Non-cash issuance of treasury stock for employee stock purchase plan 1 1 Interest paid, net of amounts capitalized 84 81 Income taxes paid, net of refunds 12 60 See Notes to Interim Consolidated Financial Statements 5 MARRIOTT VACATIONS WORLDWIDE CORPORATION INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (In millions) (Unaudited) Common Stock Issued Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Loss Retained Earnings Total MVW Shareholders' Equity Noncontrolling Interests Total Equity 75.0 BALANCE AT DECEMBER 31, 2019 $ 1 $ ( 1,253 ) $ 3,738 $ ( 36 ) $ 569 $ 3,019 $ 12 $ 3,031 — Net (loss) income — — — — ( 106 ) ( 106 ) 1 ( 105 ) — Foreign currency translation adjustments — — — ( 17 ) — ( 17 ) — ( 17 ) — Derivative instrument adjustment — — — ( 24 ) — ( 24 ) — ( 24 ) 0.2 Share-based compensation plans — — ( 9 ) — — ( 9 ) — ( 9 ) — Repurchase of common stock — ( 82 ) — — — ( 82 ) — ( 82 ) — Dividends — — — — ( 22 ) ( 22 ) — ( 22 ) 75.2 BALANCE AT MARCH 31, 2020 1 ( 1,335 ) 3,729 ( 77 ) 441 2,759 13 2,772 — Net (loss) income — — — — ( 70 ) ( 70 ) 8 ( 62 ) — Foreign currency translation adjustments — — — 3 — 3 — 3 — Derivative instrument adjustment — — — ( 1 ) — ( 1 ) — ( 1 ) — Share-based compensation plans — — 7 — — 7 — 7 — Employee stock plan issuance — 1 — — — 1 — 1 75.2 BALANCE AT JUNE 30, 2020 $ 1 $ ( 1,334 ) $ 3,736 $ ( 75 ) $ 371 $ 2,699 $ 21 $ 2,720 Continued See Notes to Interim Consolidated Financial Statements 6 MARRIOTT VACATIONS WORLDWIDE CORPORATION INTERIM CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (CONTINUED) (In millions) (Unaudited) Common Stock Issued Common Stock Treasury Stock Additional Paid-In Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total MVW Shareholders' Equity Noncontrolling Interests Total Equity 57.6 BALANCE AT DECEMBER 31, 2018 $ 1 $ ( 790 ) $ 3,721 $ 6 $ 523 $ 3,461 $ 5 $ 3,466 — Impact of adoption of ASU 2016-02 — — — — ( 8 ) ( 8 ) — ( 8 ) 57.6 OPENING BALANCE 2019 1 ( 790 ) 3,721 6 515 3,453 5 3,458 — Net income — — — — 24 24 — 24 — Foreign currency translation adjustments — — — 1 — 1 — 1 — Derivative instrument adjustment — — — ( 3 ) — ( 3 ) — ( 3 ) 0.2 Share-based compensation plans — — ( 4 ) — — ( 4 ) — ( 4 ) — Repurchase of common stock — ( 106 ) — — — ( 106 ) — ( 106 ) — Dividends — — — — ( 20 ) ( 20 ) — ( 20 ) — Employee stock plan issuance — 1 — — — 1 — 1 57.8 BALANCE AT MARCH 31, 2019 1 ( 895 ) 3,717 4 519 3,346 5 3,351 — Net income — — — — 49 49 — 49 — ILG Acquisition purchase accounting adjustment — — — — — — 1 1 — Foreign currency translation adjustments — — — ( 2 ) — ( 2 ) — ( 2 ) — Derivative instrument adjustment — — — ( 13 ) — ( 13 ) — ( 13 ) — Share-based compensation plans — — 13 — — 13 — 13 — Repurchase of common stock — ( 109 ) — — — ( 109 ) — ( 109 ) — Dividends — — — — ( 20 ) ( 20 ) — ( 20 ) 0.1 Employee stock plan issuance — — — — — — — — 57.9 BALANCE AT JUNE 30, 2019 $ 1 $ ( 1,004 ) $ 3,730 $ ( 11 ) $ 548 $ 3,264 $ 6 $ 3,270 See Notes to Interim Consolidated Financial Statements 7 Table of Contents MARRIOTT VACATIONS WORLDWIDE CORPORATION NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The Interim Consolidated Financial Statements present the results of operations, financial position and cash flows of Marriott Vacations Worldwide Corporation (referred to in this report as (i) “we,” “us,” “Marriott Vacations Worldwide,” “MVW” or “the Company,” which includes our consolidated subsidiaries except where the context of the reference is to a single corporate entity, or (ii) “MVWC,” which shall refer only to Marriott Vacations Worldwide Corporation, without its consolidated subsidiaries). In order to make this report easier to read, we refer throughout to (i) our Interim Consolidated Financial Statements as our “Financial Statements,” (ii) our Interim Consolidated Statements of Income as our “Income Statements,” (iii) our Interim Consolidated Balance Sheets as our “Balance Sheets,” and (iv) our Interim Consolidated Statements of Cash Flows as our “Cash Flows.” In addition, references throughout to numbered “Footnotes” refer to the numbered Notes in these Notes to Interim Consolidated Financial Statements, unless otherwise noted. Capitalized terms used and not specifically defined herein have the same meaning given those terms in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 (the “2019 Annual Report”). We use certain other terms that are defined within these Financial Statements. The Financial Statements presented herein and discussed below include 100 percent of the assets, liabilities, revenues, expenses and cash flows of Marriott Vacations Worldwide, all entities in which Marriott Vacations Worldwide has a controlling voting interest (“subsidiaries”), and those variable interest entities (“VIEs”) for which Marriott Vacations Worldwide is the primary beneficiary in accordance with consolidation accounting guidance. References in these Financial Statements to net (loss) income attributable to common shareholders and MVW shareholders’ equity do not include noncontrolling interests, which represent the outside ownership of our consolidated non-wholly owned entities and are reported separately. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. These Financial Statements reflect our financial position, results of operations and cash flows as prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, revenue recognition, allocations of the purchase price paid in business combinations, cost of vacation ownership products, inventory valuation, goodwill and intangibles valuation, property and equipment valuation, accounting for acquired vacation ownership notes receivable, vacation ownership notes receivable reserves, income taxes and loss contingencies. The uncertainty created by the COVID-19 pandemic (defined below), and efforts to mitigate it, has made it more challenging to make these estimates. Accordingly, ultimate results could differ materially from our estimates. In our opinion, our Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position, the results of our operations and cash flows for the periods presented. Interim results may not be indicative of fiscal year performance because of, among other reasons, the impact of the COVID-19 pandemic (defined below) and seasonal and short-term variations. These Financial Statements have not been audited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP. Although we believe our footnote disclosures are adequate to make the information presented not misleading, the Financial Statements in this report should be read in conjunction with the consolidated financial statements and notes thereto in our 2019 Annual Report. The accompanying Financial Statements also reflect our adoption of new accounting standards. See Footnote 2 “Significant Accounting Policies and Recent Accounting Standards” for additional information. COVID-19 Pandemic Update In March 2020, the World Health Organization declared the coronavirus (COVID-19) a global pandemic (the “COVID-19 pandemic”). National, federal, state, and local governments have since implemented various travel restrictions, border closings, restrictions on public gatherings, mandatory quarantines, shelter-in-place mandates and limitations on business operations. The speed with which the effects of the COVID-19 pandemic have changed the global economic landscape, outlook and, in particular, the travel and hospitality industries, has been swift and unexpected. The results of operations during the first half of 2020 include impacts related to the COVID-19 pandemic, which have been significantly adverse for our business, and the overall hospitality industry in general. We began to see an adverse impact on occupancy in our Vacation Ownership business in mid-March 2020, which quickly accelerated later that month and continued into May 2020. While many of our resorts remained open for owner occupancy throughout April and May, most owners chose to postpone their arrival until a later date, which resulted in low-single-digit overall resort occupancy for the second quarter of 2020. In addition, in response to quickly evolving travel restrictions and restrictions on business operations, 8 Table of Contents we closed all of our sales centers, and beginning March 25, 2020, we closed our resorts for rental guests with stays at our branded North America vacation ownership resorts. Further, due to low occupancy rates and based on various governmental mandates and advisories, we closed several of our resorts, and reduced operations and amenities at our resorts that remained open. Based on these events and the uncertainty they created, we immediately began to focus on our liquidity, including quickly and substantially enhancing our cash holdings. In late-March, we drew down the remainder of our $ 600 million Revolving Corporate Credit Facility (as defined in Footnote 13 “Debt”). We issued senior secured debt in May, which we used to repay amounts outstanding on our Revolving Corporate Credit Facility. As of June 30, 2020, we had $ 566 million in cash and cash equivalents on hand, and $ 597 million of availability on our Revolving Corporate Credit Facility. In addition to accessing the capital markets, we believe we have made significant progress in bolstering our liquidity through cost reduction. These efforts include reducing capital expenditures; suspending hiring, salary increases and our 2019 401(k) match; reducing executive and other associate salaries; implementing furloughs and reduced work weeks for most of our associates; and modifying vendor and supplier payment terms where possible. In late-May, as many government restrictions were beginning to be relaxed, owner occupancy at our resorts began to grow and we began reopening resorts to rental guests. We reopened certain sales centers in June and continued to open additional sales centers in July. However, based on the resurgence of the virus in many of the locations in which our resorts and sales centers are located, extended or further closures of our sales centers may be required. In our Exchange & Third-Party Management business, the closures of certain affiliated resorts and managed properties had a significant adverse impact on our business in the second quarter of 2020, with a large number of resorts closed or not taking reservations at the beginning of the quarter, but by the end of June, over half of those resorts had reopened. However, based on the resurgence of the virus in many of the locations in which these resorts and managed properties are located, further closures may be required. The COVID-19 pandemic has depressed the demand for vacation rentals due to “stay-at-home” recommendations or requirements, quarantines, and the reluctance of consumers to travel. During the second quarter of 2020, we continued the temporary adjustments implemented in the first quarter of 2020 to cancellation policies for near-term travel for customers who were unable or unwilling to travel due to the COVID-19 pandemic. We continue to monitor this unprecedented and rapidly evolving situation, and are unable to predict its duration or severity. Reclassifications We have reclassified certain prior year amounts to conform to our current year presentation. 2. SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING STANDARDS New Accounting Standards Accounting Standards Update 2016-13 – “ Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ” (“ASU 2016-13”) In the first quarter of 2020, we adopted ASU 2016-13, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. The current expected credit loss model provides that an initial estimate of expected credit losses over the contractual life of the financial instrument is reflected in the allowance for credit losses and any changes to that estimate are recognized as adjustments to the allowance. ASU 2016-13 did not have a material impact on our financial statements or disclosures upon adoption. Vacation Ownership Notes Receivable Our originated vacation ownership notes receivable are recorded net of a reserve that is calculated in accordance with ASC 606, so there was no material impact upon adoption of ASU 2016-13. Our acquired vacation ownership notes receivable have historically been accounted for using the expected cash flow method of recognizing discount accretion based on the expected cash flows of those instruments. Upon adoption of ASU 2016-13, we established a reserve for credit losses and a corresponding increase in the book value of the acquired vacation ownership notes receivable, resulting in no impact to the recorded balance. In addition, we recorded a noncredit discount of $ 2 million, which represents the difference between the amortized cost basis and the par value of our acquired vacation ownership notes receivable. The noncredit discount will be amortized to interest expense over the contractual life of the acquired vacation ownership notes receivable and is recorded as 9 Table of Contents Financing expenses on our Income Statements. For additional information on our vacation ownership notes receivable, including information on the related reserves, see Footnote 6 “Vacation Ownership Notes Receivable.” Accounts Receivable Our Accounts receivable include amounts due from customers, principally credit card receivables, and amounts due from resort developers, members and managed properties. These amounts are typically due within one year and are presented net of an allowance for credit losses. Subsequent to our adoption of ASU 2016-13, we estimate expected credit losses for our accounts receivable by considering a number of factors, including previous loss history and the condition of the general economy, as well as any other significant events that may impact the collectibility of the specific accounts receivable. Accounts receivable also includes interest receivable on vacation ownership notes receivable. Write-offs of interest receivable are recorded as a reversal of previously recorded interest income. There was no material impact to our financial statements or disclosures as a result of our adoption of ASU 2016-13 for accounts receivable, and no material change in our allowance for credit losses during the first half of 2020. Securities and Exchange Commission (“SEC”) Final Rule Release No. 33-10762, Financial Disclosures About Guarantors and Issuers of Guaranteed Securities and Affiliates Whose Securities Collateralize a Registrant’s Securities (“SEC Final Rule”) In March 2020, the SEC issued the SEC Final Rule which simplifies the disclosure requirements related to registered securities under Rule 3-10 of Regulation S-X. The SEC Final Rule replaces the requirement for a parent entity to provide detailed disclosures regarding guarantors of registered debt offerings within the footnotes to the consolidated financial statements. Under the SEC Final Rule, a parent entity is required to present summarized financial information of the issuers’ and guarantors’ balance sheets and statements of operations on a consolidated basis. It also requires qualitative disclosures with respect to information about guarantors and the terms and conditions of guarantees. These disclosures may be provided outside the footnotes to a company’s consolidated financial statements. We early adopted the reporting requirements of the SEC Final Rule in the first quarter of 2020 and elected to provide these disclosures within Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations . Future Adoption of Accounting Standards Accounting Standards Update 2019-12 – “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes” (“ASU 2019-12”) In December 2019, the FASB issued ASU 2019-12, which amends and simplifies existing guidance in an effort to reduce the complexity of accounting for income taxes while maintaining or enhancing the helpfulness of information provided to financial statement users. This update is effective for fiscal years beginning after December 15, 2020, including interim periods therein, with early adoption permitted. We expect to adopt ASU 2019-12 commencing in fiscal year 2021 and continue to evaluate the impact that adoption of this update will have on our financial statements and disclosures. Accounting Standards Update 2020-04 – “ Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting ” (“ASU 2020-04”) In March 2020, the FASB issued ASU 2020-04, as amended, which provides optional expedients and exceptions to existing guidance on contract modifications and hedge accounting in an effort to ease the financial reporting burdens related to the expected market transition from the LIBOR and other interbank offered rates to alternative reference rates. This update can be adopted no later than December 1, 2022, with early adoption permitted. We expect to adopt ASU 2020-04 in fiscal year 2022 and continue to evaluate the impact that adoption of this update will have on our financial statements and disclosures. 3. ACQUISITIONS AND DISPOSITIONS New York, New York During the first quarter of 2020, we acquired 57 completed vacation ownership units, as well as office and ancillary space, located at our Marriott Vacation Club Pulse, New York City property for $ 89 million, of which $ 22 million was a prepayment for future tranches of completed vacation ownership units and $ 20 million was paid in December 2019. We accounted for the transaction as an asset acquisition with the purchase price allocated to Other assets ($ 22 million) and Property and equipment ($ 67 million). See Footnote 11 “Contingencies and Commitments” for information on our remaining commitment to purchase future inventory and Footnote 16 “Variable Interest Entities” for additional information on this transaction and our activities relating to the VIE involved in this transaction. 10 Table of Contents San Francisco, California During the first quarter of 2020, we acquired 34 completed vacation ownership units located at our Marriott Vacation Club Pulse, San Francisco property for $ 26 million, of which $ 5 million was a prepayment for future tranches of completed vacation ownership units. We accounted for the transaction as an asset acquisition with the purchase price allocated to Inventory ($ 18 million), Other assets ($ 5 million), and Property and equipment ($ 3 million). See Footnote 11 “Contingencies and Commitments” for information on our remaining commitment to purchase future inventory and Footnote 16 “Variable Interest Entities” for additional information on this transaction and our activities relating to the VIE involved in this transaction. 4. REVENUE AND RECEIVABLES Sources of Revenue by Segment The following tables detail the sources of revenue by segment for the time periods presented. Three Months Ended June 30, 2020 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Sale of vacation ownership products $ 53 $ — $ — $ 53 Ancillary revenues 6 — — 6 Management fee revenues 38 — ( 5 ) 33 Exchange and other services revenues 29 39 38 106 Management and exchange 73 39 33 145 Rental 12 6 — 18 Cost reimbursements 198 12 ( 16 ) 194 Revenue from contracts with customers 336 57 17 410 Financing 69 1 — 70 Total Revenues $ 405 $ 58 $ 17 $ 480 Three Months Ended June 30, 2019 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Sale of vacation ownership products $ 341 $ — $ — $ 341 Ancillary revenues 57 1 — 58 Management fee revenues 37 10 ( 3 ) 44 Exchange and other services revenues 30 65 34 129 Management and exchange 124 76 31 231 Rental 133 17 — 150 Cost reimbursements 258 22 ( 28 ) 252 Revenue from contracts with customers 856 115 3 974 Financing 68 1 — 69 Total Revenues $ 924 $ 116 $ 3 $ 1,043 11 Table of Contents Six Months Ended June 30, 2020 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Sale of vacation ownership products $ 311 $ — $ — $ 311 Ancillary revenues 52 1 — 53 Management fee revenues 76 10 ( 9 ) 77 Exchange and other services revenues 57 100 85 242 Management and exchange 185 111 76 372 Rental 134 19 — 153 Cost reimbursements 543 33 ( 64 ) 512 Revenue from contracts with customers 1,173 163 12 1,348 Financing 140 2 — 142 Total Revenues $ 1,313 $ 165 $ 12 $ 1,490 Six Months Ended June 30, 2019 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Sale of vacation ownership products $ 634 $ — $ — $ 634 Ancillary revenues 114 2 — 116 Management fee revenues 73 25 ( 7 ) 91 Exchange and other services revenues 62 131 70 263 Management and exchange 249 158 63 470 Rental 262 34 1 297 Cost reimbursements 549 46 ( 56 ) 539 Revenue from contracts with customers 1,694 238 8 1,940 Financing 135 2 — 137 Total Revenues $ 1,829 $ 240 $ 8 $ 2,077 Timing of Revenue from Contracts with Customers by Segment The following tables detail the timing of revenue from contracts with customers by segment for the time periods presented. Three Months Ended June 30, 2020 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Services transferred over time $ 275 $ 30 $ 17 $ 322 Goods or services transferred at a point in time 61 27 — 88 Revenue from contracts with customers $ 336 $ 57 $ 17 $ 410 12 Table of Contents Three Months Ended June 30, 2019 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Services transferred over time $ 455 $ 52 $ 3 $ 510 Goods or services transferred at a point in time 401 63 — 464 Revenue from contracts with customers $ 856 $ 115 $ 3 $ 974 Six Months Ended June 30, 2020 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Services transferred over time $ 805 $ 84 $ 12 $ 901 Goods or services transferred at a point in time 368 79 — 447 Revenue from contracts with customers $ 1,173 $ 163 $ 12 $ 1,348 Six Months Ended June 30, 2019 ($ in millions) Vacation Ownership Exchange & Third-Party Management Corporate and Other Total Services transferred over time $ 937 $ 110 $ 8 $ 1,055 Goods or services transferred at a point in time 757 128 — 885 Revenue from contracts with customers $ 1,694 $ 238 $ 8 $ 1,940 Sale of Vacation Ownership Products Revenues were reduced during the second quarter and first half of 2020 by $ 9 million and $ 55 million, respectively, due to changes in our estimates of variable consideration for performance obligations that were satisfied in prior periods. See Footnote 6 “Vacation Ownership Notes Receivable” for information on increases to our vacation ownership notes receivable reserve attributable to the COVID-19 pandemic. Receivables from Contracts with Customers, Contract Assets & Contract Liabilities The following table shows the composition of our receivables from contracts with customers and contract liabilities. We had no contract assets at either June 30, 2020 or December 31, 2019. ($ in millions) At June 30, 2020 At December 31, 2019 Receivables from Contracts with Customers Accounts receivable $ 131 $ 166 Vacation ownership notes receivable, net 2,014 2,233 $ 2,145 $ 2,399 Contract Liabilities Advance deposits $ 153 $ 187 Deferred revenue 470 433 $ 623 $ 620 Revenue recognized during the second quarter and first half of 2020 that was included in our contract liabilities balance at December 31, 2019 was $ 45 million and $ 162 million, respectively. Remaining Performance Obligations Our remaining performance obligations represent the expected transaction price allocated to our contracts that we expect to recognize as revenue in future periods when we perform under the contracts. At June 30, 2020, approximately 80 percent of this amount is expected to be recognized as revenue over the next two years . 13 Table of Contents Accounts Receivable Accounts receivable is comprised of amounts due from customers, primarily property owners’ associations, resort developers and members, credit card receivables, interest receivables, amounts due from taxing authorities, indemnification assets and other miscellaneous receivables. The following table shows the composition of our accounts receivable balances: ($ in millions) At June 30, 2020 At December 31, 2019 Receivables from contracts with customers $ 131 $ 166 Interest receivable 15 16 Tax receivable 104 82 Indemnification asset 17 38 Other 20 21 $ 287 $ 323 5. INCOME TAXES Our provision for income taxes is calculated using an estimated annual effective tax rate, based upon expected annual income, less losses in certain jurisdictions, permanent items, statutory rates and planned tax strategies in the various jurisdictions in which we operate. However, discrete items related to prior year tax items are treated separately. Our interim effective tax rate was 23.3 percent and 33.0 percent for the three months ended June 30, 2020 and June 30, 2019, respectively. The change in the effective tax rate is predominately attributable to a pre-tax loss, and a change in our projected mix of earnings in international jurisdictions with differing tax rates and jurisdictions where valuation allowances are recorded. Our interim effective tax rate was 31.4 percent and 35.6 percent for the six months ended June 30, 2020 and June 30, 2019, respectively. The change in the effective tax rate is predominately attributable to a pre-tax loss and a release in uncertain tax benefits for the six months ended June 30, 2020, and a change in our projected mix of earnings in international jurisdictions with differing tax rates and jurisdictions where valuation allowances are recorded. We have considered the income tax accounting and disclosure implications of the relief provided by the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) enacted on March 27, 2020. As of June 30, 2020, we evaluated the income tax provisions of the CARES Act and have determined there to be no effect on either the June 30, 2020 tax rate or the computation of the estimated effective tax rate for the year ended December 31, 2020. We will continue to evaluate the income tax provisions of the CARES Act and monitor the developments in the jurisdictions where we have significant operations for tax law changes that could have income tax accounting and disclosure implications. Unrecognized Tax Benefits The following table summarizes the activity related to our unrecognized tax benefits (excluding interest and penalties) during the six months ended June 30, 2020. ($ in millions) Unrecognized Tax Benefits Balance at December 31, 2019 $ 21 Increases related to tax positions taken during the current period 1 Decreases related to settlements with taxing authorities ( 14 ) Decreases related to tax positions taken during a prior period ( 1 ) Balance at June 30, 2020 $ 7 The total unrecognized tax benefits related to uncertain income tax positions, which would affect the effective tax rate if recognized, was $ 7 million at June 30, 2020 and $ 21 million at December 31, 2019. The total amount of gross interest and penalties accrued was $ 16 million at June 30, 2020 and $ 41 million at December 31, 2019. The decrease in our unrecognized tax benefits, including interest and penalties, is offset by a $ 30 million expense to (Losses) gains and other (expense) income, net for amounts previously recorded as indemnified pursuant to a Tax Matters Agreement dated May 11, 2016 (the “Tax Matters Agreement”) by and among Starwood Hotels & Resorts Worldwide, Inc., Vistana Signature Experiences, Inc., and Interval Leisure Group, Inc. 14 Table of Contents We anticipate $ 4 million of unrecognized tax benefits, including interest and penalties, to be indemnified pursuant to the Tax Matters Agreement and consequently have recorded a corresponding indemnification asset. The unrecognized tax benefits, including accrued interest and penalties, are included in other liabilities on our Balance Sheet. Our income tax returns are subject to examination by relevant tax authorities. Certain of our returns are being audited in various jurisdictions for tax years 2013 through 2018. The amount of the unrecognized tax benefit may increase or decrease within the next twelve months as a result of audits or audit settlements. 6. VACATION OWNERSHIP NOTES RECEIVABLE The following table shows the composition of our vacation ownership notes receivable balances, net of reserves. June 30, 2020 December 31, 2019 ($ in millions) Originated Acquired Total Originated Acquired Total Securitized $ 1,463 $ 334 $ 1,797 $ 1,378 $ 372 $ 1,750 Non-securitized Eligible for securitization (1) 34 1 35 155 10 165 Not eligible for securitization (1) 154 28 182 261 57 318 Subtotal 188 29 217 416 67 483 $ 1,651 $ 363 $ 2,014 $ 1,794 $ 439 $ 2,233 _________________________ (1) Refer to Footnote 7 “Financial Instruments” for a discussion of eligibility of our vacation ownership notes receivable for securitization. We reflect interest income associated with vacation ownership notes receivable in our Income Statements in the Financing revenues caption. The following table summarizes interest income associated with vacation ownership notes receivable. Three Months Ended Six Months Ended ($ in millions) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Interest income associated with vacation ownership notes receivable — securitized $ 64 $ 59 $ 127 $ 118 Interest income associated with vacation ownership notes receivable — non-securitized 3 8 9 14 Total interest income associated with vacation ownership notes receivable $ 67 $ 67 $ 136 $ 132 COVID-19 Impact on Vacation Ownership Notes Receivable Reserves We evaluated our vacation ownership notes receivable reserves in light of the COVID-19 pandemic, using the performance of our vacation ownership notes receivable in response to the 2008/2009 financial crisis as a reference point. Using this information, we increased our estimated default rates by approximately 50 percent for a 15 -month period to align with the period over which we experienced increased defaults during the previous recessionary period. As a result, we increased our vacation ownership notes receivable reserves by $ 52 million in the first quarter of 2020. This was reflected as a $ 42 million reduction to Sale of vacation ownership products, a $ 10 million increase in Financing expenses, and a $ 15 million reduction in Cost of vacation ownership products on our Income Statement for the first half of 2020. Acquired Vacation Ownership Notes Receivable As part of the ILG Acquisition, we acquired existing portfolios of vacation ownership notes receivable. At acquisition, we recorded these vacation ownership notes receivable at fair value. Upon adoption of ASU 2016-13 on January 1, 2020, we established a reserve for credit losses and a corresponding increase in the book value of the acquired vacation ownership notes receivable, resulting in no impact to the recorded balance. In addition, we established a noncredit discount of $ 2 million, which represents the difference between the amortized cost basis and the par value of our acquired vacation ownership notes receivable. The noncredit discount will be amortized to interest expense over the contractual life of the acquired vacation ownership notes receivable and is recorded as Financing expenses on our Income Statements. 15 Table of Contents The following table summarizes the activity related to our acquired vacation ownership notes receivable reserve. Acquired Vacation Ownership Notes Receivable Reserve ($ in millions) Non-Securitized Securitized Total Balance at December 31, 2019, as reported $ — $ — $ — Impact of adoption of ASU 2016-13 29 26 55 Opening Balance at January 1, 2020 29 26 55 Securitizations ( 1 ) 1 — Write-offs ( 16 ) — ( 16 ) Recoveries 8 — 8 Increase in vacation ownership notes receivable reserve (1) 8 6 14 Balance at June 30, 2020 $ 28 $ 33 $ 61 _________________________ (1) Increase in vacation ownership notes receivable reserve includes $ 10 million ($ 2 million non-securitized and $ 8 million securitized) attributable to the increased reserve as a result of the COVID-19 pandemic. The following table shows future contractual principal payments, as well as interest rates, for our non-securitized and securitized acquired vacation ownership notes receivable at June 30, 2020. Acquired Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total 2020, remaining $ 2 $ 22 $ 24 2021 3 44 47 2022 3 44 47 2023 3 44 47 2024 4 41 45 Thereafter 14 139 153 Balance at June 30, 2020 $ 29 $ 334 $ 363 Weighted average stated interest rate 13.4 % 13.5 % 13.4 % Range of stated interest rates 3.0 % to 17.9 % 6.0 % to 15.9 % 3.0 % to 17.9 % Originated Vacation Ownership Notes Receivable Originated vacation ownership notes receivable represent vacation ownership notes receivable originated by Legacy-ILG subsequent to the Acquisition Date and all Legacy-MVW vacation ownership notes receivable. The following table shows future principal payments, net of reserves, as well as interest rates, for our originated non-securitized and securitized originated vacation ownership notes receivable at June 30, 2020. Originated Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total 2020, remaining $ 17 $ 69 $ 86 2021 26 141 167 2022 22 145 167 2023 18 148 166 2024 16 150 166 Thereafter 89 810 899 Balance at June 30, 2020 $ 188 $ 1,463 $ 1,651 Weighted average stated interest rate 12.1 % 12.7 % 12.6 % Range of stated interest rates 0.0 % to 18.0 % 0.0 % to 17.5 % 0.0 % to 18.0 % For originated vacation ownership notes receivable, we record the difference between the vacation ownership note receivable and the variable consideration included in the transaction price for the sale of the related vacation ownership product as a reserve on our vacation ownership notes receivable. 16 Table of Contents The following table summarizes the activity related to our originated vacation ownership notes receivable reserve. Originated Vacation Ownership Notes Receivable Reserve ($ in millions) Non-Securitized Securitized Total Balance at December 31, 2019 $ 90 $ 114 $ 204 Increase in vacation ownership notes receivable reserve (1) 41 40 81 Securitizations ( 33 ) 33 — Write-offs ( 25 ) — ( 25 ) Defaulted vacation ownership notes receivable repurchase activity (2) 37 ( 37 ) — Balance at June 30, 2020 $ 110 $ 150 $ 260 _________________________ (1) Increase in vacation ownership notes receivable reserve includes $ 42 million ($ 16 million non-securitized and $ 26 million securitized) attributable to the increased reserve as a result of the COVID-19 pandemic. (2) Decrease in securitized vacation ownership notes receivable reserve and increase in non-securitized vacation ownership notes receivable reserve were attributable to the transfer of the reserve when we voluntarily repurchased defaulted securitized vacation ownership notes receivable. Credit Quality of Vacation Ownership Notes Receivable Legacy-MVW Vacation Ownership Notes Receivable For both Legacy-MVW non-securitized and securitized vacation ownership notes receivable, we estimated average remaining default rates of 8.22 percent as of June 30, 2020 (includes 1.51 percent attributed to the additional expected defaults as a result of the COVID-19 pandemic), and 7.04 percent as of December 31, 2019. A 0.5 percentage point increase in the estimated default rate would have resulted in an increase in the related vacation ownership notes receivable reserve of $ 7 million as of June 30, 2020, and $ 8 million as of December 31, 2019. The following table shows our recorded investment in non-accrual Legacy-MVW vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due. Legacy-MVW Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total Investment in vacation ownership notes receivable on non-accrual status at June 30, 2020 $ 62 $ 19 $ 81 Investment in vacation ownership notes receivable on non-accrual status at December 31, 2019 $ 43 $ 11 $ 54 The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-MVW vacation ownership notes receivable as of June 30, 2020. Legacy-MVW Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total 31 – 90 days past due $ 7 $ 34 $ 41 91 – 150 days past due 6 19 25 Greater than 150 days past due 56 — 56 Total past due 69 53 122 Current 137 1,222 1,359 Total vacation ownership notes receivable $ 206 $ 1,275 $ 1,481 17 Table of Contents The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-MVW vacation ownership notes receivable as of December 31, 2019. Legacy-MVW Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total 31 – 90 days past due $ 7 $ 33 $ 40 91 – 150 days past due 4 11 15 Greater than 150 days past due 39 — 39 Total past due 50 44 94 Current 222 1,254 1,476 Total vacation ownership notes receivable $ 272 $ 1,298 $ 1,570 The following table details the origination year of our Legacy-MVW vacation ownership notes receivable as of June 30, 2020 . Legacy-MVW Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total Year of Origination 2020 $ 53 $ 79 $ 132 2019 63 456 519 2018 37 317 354 2017 16 186 202 2016 9 87 96 2015 and Prior 28 150 178 $ 206 $ 1,275 $ 1,481 Legacy-ILG Vacation Ownership Notes Receivable At June 30, 2020 and December 31, 2019, the weighted average FICO score within our consolidated Legacy-ILG vacation ownership notes receivable pools was 709 and 712 , respectively, based upon the outstanding vacation ownership notes receivable balance at time of origination. The average estimated rate for all future defaults for our Legacy-ILG consolidated outstanding pool of vacation ownership notes receivable was 17.07 percent as of June 30, 2020 (includes 2.89 percent attributed to additional expected defaults as a result of the COVID-19 pandemic) and 12.65 percent as of December 31, 2019. A 0.5 percentage point increase in the estimated default rate on the Legacy-ILG originated vacation ownership notes receivable would have resulted in an increase in the related vacation ownership notes receivable reserve of $ 3 million as of June 30, 2020, and $ 2 million as of December 31, 2019. The following table shows our recorded investment in non-accrual Legacy-ILG vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due. Legacy-ILG Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total Investment in vacation ownership notes receivable on non-accrual status at June 30, 2020 $ 68 $ 17 $ 85 Investment in vacation ownership notes receivable on non-accrual status at December 31, 2019 $ 40 $ 9 $ 49 18 Table of Contents The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-ILG vacation ownership notes receivable as of June 30, 2020. Legacy-ILG Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total 31 – 90 days past due $ 8 $ 25 $ 33 91 – 120 days past due 4 9 13 Greater than 120 days past due 64 8 72 Total past due 76 42 118 Current 73 663 736 Total vacation ownership notes receivable $ 149 $ 705 $ 854 The following table shows the aging of the recorded investment in principal, before reserves, in Legacy-ILG vacation ownership notes receivable as of December 31, 2019. Legacy-ILG Vacation Ownership Notes Receivable ($ in millions) Non-Securitized Securitized Total 31 – 90 days past due $ 11 $ 18 $ 29 91 – 120 days past due 3 6 9 Greater than 120 days past due 37 3 40 Total past due 51 27 78 Current 250 539 789 Total vacation ownership notes receivable $ 301 $ 566 $ 867 The following tables show the Legacy-ILG acquired vacation ownership notes receivable by brand and FICO score, before reserves. Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers. Acquired Vacation Ownership Notes Receivable as of June 30, 2020 ($ in millions) 700 + 600 - 699 < 600 No Score Total Westin $ 98 $ 55 $ 4 $ 13 $ 170 Sheraton 92 82 15 35 224 Hyatt 14 10 1 — 25 Other 3 1 — 2 6 $ 207 $ 148 $ 20 $ 50 $ 425 Acquired Vacation Ownership Notes Receivable as of December 31, 2019 ($ in millions) 700 + 600 - 699 < 600 No Score Total Westin $ 103 $ 57 $ 4 $ 13 $ 177 Sheraton 95 83 15 37 230 Hyatt 15 10 1 — 26 Other 3 1 — 2 6 $ 216 $ 151 $ 20 $ 52 $ 439 19 Table of Contents The following table details the origination year of our Legacy-ILG acquired vacation ownership notes receivable by brand and FICO score as of June 30, 2020 . Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers. Acquired Vacation Ownership Notes Receivable - Westin ($ in millions) 2020 2019 2018 2017 2016 2015 & Prior Total 700 + $ — $ — $ 27 $ 26 $ 16 $ 29 $ 98 600 - 699 — — 12 14 11 18 55 < 600 — — 3 1 — — 4 No Score — — 3 3 2 5 13 $ — $ — $ 45 $ 44 $ 29 $ 52 $ 170 Acquired Vacation Ownership Notes Receivable - Sheraton ($ in millions) 2020 2019 2018 2017 2016 2015 & Prior Total 700 + $ — $ — $ 26 $ 25 $ 16 $ 25 $ 92 600 - 699 — — 21 21 14 26 82 < 600 — — 9 3 1 2 15 No Score — — 9 10 6 10 35 $ — $ — $ 65 $ 59 $ 37 $ 63 $ 224 Acquired Vacation Ownership Notes Receivable - Hyatt and Other ($ in millions) 2020 2019 2018 2017 2016 2015 & Prior Total 700 + $ — $ — $ 3 $ 4 $ 3 $ 7 $ 17 600 - 699 — — 2 2 2 5 11 < 600 — — 1 — — — 1 No Score — — — — — 2 2 $ — $ — $ 6 $ 6 $ 5 $ 14 $ 31 The following tables show the Legacy-ILG originated vacation ownership notes receivable by brand and FICO score, before reserves. Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers. Originated Vacation Ownership Notes Receivable as of June 30, 2020 ($ in millions) 700 + 600 - 699 < 600 No Score Total Westin $ 110 $ 50 $ 6 $ 20 $ 186 Sheraton 97 67 14 43 221 Hyatt 15 7 — — 22 $ 222 $ 124 $ 20 $ 63 $ 429 Originated Vacation Ownership Notes Receivable as of December 31, 2019 ($ in millions) 700 + 600 - 699 < 600 No Score Total Westin $ 122 $ 46 $ 5 $ 25 $ 198 Sheraton 97 61 13 37 208 Hyatt 16 6 — — 22 $ 235 $ 113 $ 18 $ 62 $ 428 20 Table of Contents The following tables detail the origination year of our Legacy-ILG originated vacation ownership notes receivable by brand and FICO score as of June 30, 2020. Vacation ownership notes receivable with no FICO score primarily relate to non-U.S. resident borrowers. Originated Vacation Ownership Notes Receivable - Westin ($ in millions) 2020 2019 2018 2017 2016 2015 & Prior Total 700 + $ 22 $ 72 $ 16 $ — $ — $ — $ 110 600 - 699 7 35 8 — — — 50 < 600 1 4 1 — — — 6 No Score 6 12 2 — — — 20 $ 36 $ 123 $ 27 $ — $ — $ — $ 186 Originated Vacation Ownership Notes Receivable - Sheraton ($ in millions) 2020 2019 2018 2017 2016 2015 & Prior Total 700 + $ 12 $ 67 $ 18 $ — $ — $ — $ 97 600 - 699 8 46 13 — — — 67 < 600 2 10 2 — — — 14 No Score 9 28 6 — — — 43 $ 31 $ 151 $ 39 $ — $ — $ — $ 221 Originated Vacation Ownership Notes Receivable - Hyatt ($ in millions) 2020 2019 2018 2017 2016 2015 & Prior Total 700 + $ 3 $ 10 $ 2 $ — $ — $ — $ 15 600 - 699 1 4 2 — — — 7 < 600 — — — — — — — No Score — — — — — — — $ 4 $ 14 $ 4 $ — $ — $ — $ 22 21 Table of Contents 7. 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 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 June 30, 2020 At December 31, 2019 ($ in millions) Carrying Amount Fair Value Carrying Amount Fair Value Vacation ownership notes receivable $ 2,014 $ 2,066 $ 2,233 $ 2,264 Other assets 48 48 45 45 Total financial assets $ 2,062 $ 2,114 $ 2,278 $ 2,309 Securitized debt, net $ ( 1,887 ) $ ( 1,893 ) $ ( 1,871 ) $ ( 1,924 ) 2025 Notes, net ( 493 ) ( 512 ) — — 2026 Notes, net ( 743 ) ( 760 ) ( 742 ) ( 824 ) 2028 Notes, net ( 345 ) ( 320 ) ( 345 ) ( 358 ) Term Loan, net ( 878 ) ( 832 ) ( 881 ) ( 899 ) Revolving Corporate Credit Facility, net — — ( 27 ) ( 27 ) Convertible Notes, net ( 211 ) ( 212 ) ( 207 ) ( 247 ) Total financial liabilities $ ( 4,557 ) $ ( 4,529 ) $ ( 4,073 ) $ ( 4,279 ) Vacation Ownership Notes Receivable At June 30, 2020 At December 31, 2019 ($ in millions) Carrying Amount Fair Value Carrying Amount Fair Value Vacation ownership notes receivable Securitized $ 1,797 $ 1,841 $ 1,750 $ 1,771 Eligible for securitization 35 43 165 175 Not eligible for securitization 182 182 318 318 Non-securitized 217 225 483 493 $ 2,014 $ 2,066 $ 2,233 $ 2,264 We estimate the fair value of our vacation ownership notes receivable that have been securitized 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 to determine the fair value of the underlying vacation ownership notes receivable. We concluded that this fair value measurement should be categorized within Level 3. Due to factors that impact the general marketability of our vacation ownership notes receivable that have not been securitized, as well as current market conditions, we bifurcate our non-securitized 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 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. 22 Table of Contents The table above shows the bifurcation of our vacation ownership notes receivable that have not been securitized into those eligible and not eligible for securitization based upon the aforementioned eligibility criteria. We estimate the fair value of the portion of our vacation ownership notes receivable that have not been securitized that we believe will ultimately be securitized in the same manner as vacation ownership notes receivable that have been securitized. We value the remaining vacation ownership notes receivable that have not been securitized 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, or otherwise imputed, 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. We concluded that this fair value measurement should be categorized within Level 3. Other Assets Other assets include $ 42 million of company owned insurance policies (the “COLI policies”), acquired on the lives of certain participants in the Marriott Vacations Worldwide Deferred Compensation Plan, that are held in a rabbi trust. The carrying value of the COLI policies is equal to their cash surrender value (Level 2 inputs). In addition, we have investments in marketable securities of $ 6 million that are marked to market as trading securities using quoted market prices (Level 1 inputs). Securitized Debt 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. We concluded that this fair value measurement should be categorized within Level 3. 2025 Notes, 2026 Notes and 2028 Notes We estimate the fair value of our 2025 Notes, 2026 Notes and 2028 Notes (each as defined in Footnote 13 “Debt”) using quoted market prices as of the last trading day for the quarter; however these notes have only a limited trading history and volume, and as such this fair value estimate is not necessarily indicative of the value at which these notes could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 2. Term Loan We estimate the fair value of our Term Loan (as defined in Footnote 13 “Debt”) using quotes from securities dealers as of the last trading day for the quarter; however these notes have only a limited trading history and volume, and as such this fair value estimate is not necessarily indicative of the value at which the Term Loan could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 3. Revolving Corporate Credit Facility We estimate that the fair value of our Revolving Corporate Credit Facility (as defined in Footnote 13 “Debt”) approximates its gross carrying value as the contractual interest rate is variable plus an applicable margin. We concluded that this fair value measurement should be categorized within Level 3. Convertible Notes We estimate the fair value of our Convertible Notes (as defined in Footnote 13 “Debt”) using quoted market prices as of the last trading day for the quarter; however these notes have only a limited trading history and volume and as such this fair value estimate is not necessarily indicative of the value at which the Convertible Notes could be retired or transferred. We concluded that this fair value measurement should be categorized within Level 2. The difference between the carrying value and the fair value is primarily attributed to the underlying conversion feature and the spread between the conversion price and the market value of the shares underlying the Convertible Notes. 23 Table of Contents 8. EARNINGS PER SHARE Basic (loss) earnings per common share attributable to common shareholders is calculated by dividing net (loss) 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 attributable to common shareholders is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period, except in periods when there is a loss because the inclusion of the potential common shares would have an anti-dilutive effect. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted earnings per common share applicable to common shareholders by application of the treasury stock method using average market prices during the period. Our calculation of diluted earnings per share attributable to common shareholders reflects our intent to settle conversions of the Convertible Notes 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 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 June 30, 2020 or June 30, 2019, there was no dilutive impact from the Convertible Notes for either the second quarter or first half of 2020 or 2019. The shares issuable on exercise of the Warrants (as defined in Footnote 13 “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. 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 13 “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 attributable to common shareholders. The table below illustrates the reconciliation of the earnings and number of shares used in our calculation of basic and diluted (loss) earnings per share attributable to common shareholders. Three Months Ended Six Months Ended (in millions, except per share amounts) June 30, 2020 June 30, 2019 (1) June 30, 2020 June 30, 2019 (1) Computation of Basic (Loss) Earnings Per Share Attributable to Common Shareholders Net (loss) income attributable to common shareholders $ ( 70 ) $ 49 $ ( 176 ) $ 73 Shares for basic (loss) earnings per share 41.2 44.7 41.4 45.1 Basic (loss) earnings per share $ ( 1.68 ) $ 1.11 $ ( 4.25 ) $ 1.62 Computation of Diluted (loss) Earnings Per Share Attributable to Common Shareholders Net (loss) income attributable to common shareholders $ ( 70 ) $ 49 $ ( 176 ) $ 73 Shares for basic (loss) earnings per share 41.2 44.7 41.4 45.1 Effect of dilutive shares outstanding Employee stock options and SARs — 0.3 — 0.3 Restricted stock units — 0.2 — 0.2 Shares for diluted (loss) earnings per share 41.2 45.2 41.4 45.6 Diluted (loss) earnings per share $ ( 1.68 ) $ 1.10 $ ( 4.25 ) $ 1.61 _______________________________ (1) The computations of diluted earnings per share attributable to common shareholders exclude approximately 452,000 shares of common stock, the maximum number of shares issuable as of June 30, 2019, 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 second quarter of 2019, we excluded from our calculation of diluted earnings per share 167,760 shares underlying stock appreciation rights (“SARs”) that may settle in shares of common stock because the exercise prices of such SARs, which ranged from $ 100.52 to $ 143.38 , were greater than the average market price for the applicable period. 24 Table of Contents In accordance with the applicable accounting guidance for calculating earnings per share, for the first half of 2019, we excluded from our calculation of diluted earnings per share 249,737 shares underlying SARs that may settle in shares of common stock because the exercise prices of such SARs, which ranged from $ 97.53 to $ 143.38 , were greater than the average market price for the applicable period. 9. INVENTORY The following table shows the composition of our inventory balances: ($ in millions) At June 30, 2020 At December 31, 2019 Finished goods (1) $ 750 $ 782 Work-in-progress 10 69 Real estate inventory 760 851 Other 11 8 $ 771 $ 859 _________________________ (1) Represents completed inventory that is registered for sale as vacation ownership interests and inventory expected to be acquired pursuant to estimated future foreclosures. We value vacation ownership 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. Product cost true-up activity relating to vacation ownership products increased carrying values of inventory by $ 3 million during the first half of 2020 and increased by $ 4 million during the first half of 2019. Additionally, during the first half of 2020, we recorded a $ 5 million impairment to Inventory. In addition to the above, at June 30, 2020, we had $ 174 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. We also have $ 42 million and $ 38 million of deposits on future purchases of inventory at June 30, 2020 and December 31, 2019, respectively, which are included in the Other assets line on our Balance Sheets. 10. GOODWILL AND INTANGIBLES Goodwill The following table details the carrying amount of our goodwill at June 30, 2020 and December 31, 2019, and reflects goodwill attributed to the ILG Acquisition. ($ in millions) Vacation Ownership Segment Exchange & Third-Party Management Segment Total Consolidated Balance at December 31, 2019 $ 2,445 $ 447 $ 2,892 Impairment — ( 73 ) ( 73 ) Foreign exchange adjustments — ( 2 ) ( 2 ) Balance at March 31, 2020 2,445 372 2,817 Impairment — — — Foreign exchange adjustments — — — Balance at June 30, 2020 $ 2,445 $ 372 $ 2,817 Q1 2020 In connection with the preparation of our Financial Statements for the first quarter of 2020, we initially concluded that it was more likely than not that the fair value of both of our reporting units was below their respective carrying amounts. The factors that led to this conclusion were related to the COVID-19 pandemic and included: (i) the substantial decline in our stock price and market capitalization; (ii) the closure of substantially all of our Vacation Ownership reporting unit sales centers; (iii) the government stay-at-home orders in place in many of the jurisdictions in which we operate; (iv) our planned furloughs and reduced work schedule arrangements; (v) the impact of travel restrictions on the hospitality industry; and (vi) the macroeconomic fallout from the COVID-19 pandemic. 25 Table of Contents We utilized a combination of the income and market approaches to estimate the fair value of our reporting units (Level 3). We concluded that there was no impairment of the Vacation Ownership reporting unit as declines in expected future operating results were not substantial enough to cause the fair value of the reporting unit to be below its carrying amount. We recognized a non-cash impairment charge of $ 73 million in the Impairment line on our Income Statement during the first quarter of 2020 related to the Exchange & Third-Party Management reporting unit, which was primarily driven by the change in expected future operating results as a result of the impact of the COVID-19 pandemic. Q2 2020 In connection with the preparation of our Financial Statements for the second quarter of 2020, we concluded that an interim quantitative impairment test was required for our Exchange & Third-Party Management reporting unit because of the impairment charge we recognized for this reporting unit in the first quarter of 2020. We utilized a combination of the income and market approaches to estimate the fair value of this reporting unit (Level 3) consistent with the methodology used in the first quarter of 2020. We concluded that there was no further impairment of the Exchange & Third-Party Management reporting unit from the first quarter of 2020, as future expected operating results had improved slightly in comparison to the projections used in the first quarter, resulting in a fair value of the reporting unit in excess of its carrying amount. We performed a qualitative analysis of the impact of recent events, including business and industry specific considerations, on the fair value of our Vacation Ownership reporting unit and determined that an interim quantitative impairment test was not required. While the goodwill of our reporting units are not impaired as of the second quarter of 2020, we cannot assure you that goodwill will not be impaired in future periods. We will continue to monitor the operating results, cash flow forecasts and impact from changes in market conditions, as well as impacts of COVID-19 for these reporting units. Indefinite-Lived Intangibles The following table summarizes the activity related to our intangible assets, all of which are related to the Exchange & Third-Party Management segment. ($ in millions) Trade Names and Trademarks Balance at December 31, 2019 $ 82 Impairment ( 18 ) Balance at March 31, 2020 64 Impairment — Balance at June 30, 2020 $ 64 In connection with the preparation of the Financial Statements for the first quarter of 2020, we concluded that it was more likely than not that the fair value of our indefinite lived intangibles was below their carrying amounts. The factors that led to this conclusion were related to the COVID-19 pandemic and included: (i) the government stay-at-home orders in place in many of the jurisdictions in which we operate ; (ii) the impact of travel restrictions on the hospitality industry; and (iii) the macroeconomic fallout from the COVID-19 pandemic. We used the relief of royalty method in calculating the fair value of the trade names and trademarks (Level 3). We recognized a non-cash impairment charge of $ 18 million in the Impairment line on our Income Statement during the first quarter of 2020, which was primarily attributed to the decline in estimated near-term revenues and related recovery of long-term revenues attributed to the impact of the COVID-19 pandemic. 11. CONTINGENCIES AND COMMITMENTS Commitments and Letters of Credit As of June 30, 2020, 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 $ 65 million, of which we expect $ 17 million, $ 22 million, $ 15 million, $ 9 million and $ 2 million will be paid in the remainder of 2020, 2021, 2022, 2023 and 2024, respectively. 26 Table of Contents • We have a remaining commitment to purchase an operating property that we manage, located in New York, New York for $ 97 million. We expect to acquire the remaining units in the property, in their current form, in two transactions during 2021. See Footnote 3 “Acquisitions and Dispositions” for information on the purchase that occurred during the first quarter of 2020 and Footnote 16 “Variable Interest Entities” for additional information on this transaction and our activities relating to the VIE involved in this transaction. • We have a remaining commitment to purchase 88 vacation ownership units located in Bali, Indonesia for use in our Vacation Ownership segment, contingent upon completion of construction to agreed-upon standards. We expect to complete the acquisition in 2021 and to make the remaining payments with respect to these units when specific construction milestones are completed, as follows: $ 1 million in 2020, $ 21 million in 2021, and $ 2 million in 2022. • We have a remaining commitment to purchase an operating property that we manage, located in San Francisco, California for $ 88 million. We expect to acquire the operating property over time and are committed to make payments for the operating property as follows: $ 32 million in 2021, $ 24 million in 2022, and $ 32 million in 2023. See Footnote 16 “Variable Interest Entities” for additional information on this transaction and our activities relating to the VIE involved in this transaction and Footnote 3 “Acquisitions and Dispositions” for information on the purchase that occurred during the first quarter of 2020. • During the first quarter of 2020, we assigned a commitment to purchase a property located in Waikiki, Hawaii to a third party. If we are unable to negotiate a capital efficient inventory arrangement, we are committed to purchase the property, in its then current form, for $ 98 million in 2021, unless it has been sold to another party. See Footnote 16 “Variable Interest Entities” for additional information on this transaction and our activities relating to the VIE involved in this transaction. Surety bonds issued as of June 30, 2020 totaled $ 72 million, the majority of which were requested by federal, state, or local governments in connection with our operations. As of June 30, 2020, we had $ 3 million of letters of credit outstanding under our Revolving Corporate Credit Facility (as defined in Footnote 13 “Debt”). In addition, as of June 30, 2020, we had $ 5 million in letters of credit outstanding related to and in lieu of reserves required for several vacation ownership notes receivable securitization transactions outstanding. These letters of credit are not issued pursuant to, nor do they impact our borrowing capacity under, the Revolving Corporate Credit Facility. We estimate the cash outflow associated with completing the phases of our existing portfolio of vacation ownership projects currently under development will be approximately $ 6 million, of which $ 4 million is included within liabilities on our Balance Sheet at June 30, 2020. This estimate is based on our current development plans, which remain subject to change, and we expect the phases currently under development will be completed by the end of 2021. Guarantees Certain of our rental management agreements in our Exchange & Third-Party Management segment provide for owners of properties we manage to receive specified percentages or guaranteed amounts of the rental revenue generated under our management. In these cases, the operating expenses for the rental operations are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages or guaranteed amounts, and our vacation rental business either retains the balance (if any) as its fee or makes up the deficit. At June 30, 2020, our maximum exposure under fixed dollar guarantees was $ 27 million, of which $ 7 million, $ 10 million, $ 4 million, $ 2 million, $ 1 million and $ 3 million relate to the remainder of 2020, 2021, 2022, 2023, 2024 and thereafter, respectively. Based on the impact of the COVID-19 pandemic on our rental operations, we declared the occurrence of a force majeure event under many of these agreements, generally effective as of April 1, 2020. As a result, owner distributions made under such agreements will be paid on a net operating income basis, rather than as guaranteed amounts, until such time as force majeure event conditions abate. Loss Contingencies In March 2017, RCHFU, L.L.C. and other owners at The Ritz-Carlton Club, Aspen Highlands (“RCC Aspen Highlands”) filed a complaint in an action pending in the U.S. District Court for the District of Colorado against us and certain third parties, alleging that their fractional interests were devalued by the affiliation of the RCC Aspen Highlands and other Ritz-Carlton Clubs with our points-based Marriott Vacation Club Destinations (“MVCD”) program. The plaintiffs are seeking compensatory damages, disgorgement, punitive damages, fees and costs. A trial is scheduled to begin in January 2021. 27 Table of Contents In May 2016, a purported class-action lawsuit was filed in the U.S. District Court for the Middle District of Florida by Anthony and Beth Lennen against us and certain third parties. The complaint challenged the characterization of the beneficial interests in the MVCD trust that are sold to customers as real estate interests under Florida law, the structure of the trust, and associated operational aspects of the trust. The plaintiffs sought declaratory relief, an unwinding of the MVCD product, and punitive damages. In August 2019, the District Court granted our motion for judgment on the pleadings and dismissed the case. The plaintiffs have appealed the ruling. In December 2016, Flora and Bruce Gillespie and other owners and former owners of fractional interests at the Fifth and Fifty-Fifth Residence Club located within The St. Regis, New York (the “St. Regis NY Club”) filed an action in the U.S. District Court for the Southern District of New York against ILG, certain of its subsidiaries, and certain third parties alleging that the sale of less than all interests offered in the fractional offering plan, the amendment of the plan to include additional units, and the rental of unsold fractional interests by the plan’s sponsor breached the relevant agreements and harmed the value of plaintiffs’ fractional interests. The plaintiffs sought compensatory damages, rescission, disgorgement, fees and costs. In May 2020, the court granted our motion for summary judgment and dismissed the case. The plaintiffs have appealed the ruling. In February 2019, the owners’ association for the St. Regis NY Club filed a lawsuit in the Supreme Court for the State of New York, New York County, Commercial Division against ILG and several of its subsidiaries and certain third parties. The operative complaint alleges that the defendants breached their fiduciary duties related to sale and rental practices, aided and abetted certain breaches of fiduciary duty, engaged in self-dealing as the sponsor and manager of the club, tortiously interfered with the management agreement, was unjustly enriched, and engaged in anticompetitive conduct. The plaintiff is seeking unspecified damages, punitive damages and disgorgement of payments under the management and purchase agreements. In April 2019, a purported class-action lawsuit was filed by Alan and Marjorie Helman and others against us in the Superior Court of the Virgin Islands, Division of St. Thomas alleging that their fractional interests were devalued by the affiliation of The Ritz-Carlton Club, St. Thomas and other Ritz-Carlton Clubs with our MVCD program. The lawsuit was subsequently removed to the U.S. District Court for the District of the Virgin Islands. The plaintiffs are seeking unspecified damages, disgorgement of profits, fees and costs. In May 2019, the G.A. Resort Condominium Association Inc., the owners’ association for the fractional owners at the Hyatt Residence Club Grand Aspen resort (“HRC Grand Aspen”) filed a lawsuit against us in the District Court for the County of Pitkin, Colorado relating to the transfer of ownership of developer-owned fractional interests at HRC Grand Aspen to the HPC Trust Club for sale and use as a part of the Hyatt Residence Club Portfolio Program. The lawsuit was subsequently removed to the U.S. District Court for the District of Colorado. The plaintiff is seeking termination of the management agreement with the owners’ association, the annulment of certain amendments to governing documents at HRC Grand Aspen, the removal of fractional interests at HRC Grand Aspen from the HPC Trust Club, unspecified damages, disgorgement of profits, fees and costs. In July 2020, the District Court granted our motion to dismiss claims against ILG and MVWC. Certain claims remain pending against other defendants, including certain of our subsidiaries. We believe we have meritorious defenses to the claims in each of the above matters and intend to vigorously defend each matter. In the ordinary course of our business, various claims and lawsuits have been filed or are pending against us. A number of these lawsuits and claims may exist at any given time. Additionally, the COVID-19 pandemic may give rise to various claims and lawsuits from owners, members and other parties. We record and accrue for legal contingencies when we determine that it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. In making such determinations, we evaluate, among other things, the degree of probability of an unfavorable outcome and, when it is probable that a liability has been incurred, our ability to make a reasonable estimate of loss. We review these accruals each reporting period and make revisions based on changes in facts and circumstances. We have not accrued for any of the pending matters described above and we cannot estimate a range of the potential liability associated with these pending matters, if any, at this time. We have accrued for other claims and lawsuits, but the amount accrued is not material in the aggregate. For matters not requiring accrual, we do not believe that the ultimate outcome of such matters, individually and in the aggregate, will materially harm our financial position, cash flows, or overall trends in results of operations based on information currently available. However, legal proceedings are inherently uncertain, and while we believe that our accruals are adequate and/or we have valid defenses to the claims asserted, unfavorable rulings could occur that could, individually or in the aggregate, have a material adverse effect on our business, financial condition, or operating results. 28 Table of Contents Leases That Have Not Yet Commenced During the first quarter of 2020, we entered into a finance lease arrangement for our new global headquarters in Orlando, Florida. The new office building is expected to be completed in 2022, at which time the lease term will commence and a right-of-use asset and corresponding liability will be recorded on our balance sheet. The initial lease term is approximately 16 years with total lease payments of $ 129 million for the aforementioned period. During the second quarter of 2020, in response to the COVID-19 pandemic and our ongoing evaluation of future space needs, we entered into a standstill arrangement with the developer/lessor. The agreement provides for a standstill on certain project spending for several months, extends certain deliverable dates pertaining to the development and lease, and grants MVW a limited termination option in exchange for reimbursement of certain developer soft costs. 12. SECURITIZED DEBT The following table provides detail on our securitized debt, net of unamortized debt discount and issuance costs. ($ in millions) At June 30, 2020 At December 31, 2019 Vacation ownership notes receivable securitizations, gross (1) $ 1,578 $ 1,850 Unamortized debt discount and issuance costs ( 15 ) ( 18 ) 1,563 1,832 Warehouse Credit Facility, gross (2) 308 21 Unamortized debt issuance costs ( 2 ) ( 2 ) 306 19 Other 18 20 $ 1,887 $ 1,871 _________________________ (1) Interest rates as of June 30, 2020 range from 2.2 % to 4.4 %, with a weighted average interest rate of 2.9 % (2) Effective interest rate as of June 30, 2020 was 2.1 % All of our securitized debt is non-recourse to us. See Footnote 16 “Variable Interest Entities” for a discussion of the collateral for the non-recourse debt associated with our securitized debt. The following table shows scheduled future principal payments for our securitized debt as of June 30, 2020. Vacation Ownership Notes Receivable Securitizations Warehouse Credit Facility Other Total ($ in millions) Payments Year 2020, remaining $ 87 $ 9 $ 1 $ 97 2021 173 18 2 193 2022 175 20 2 197 2023 179 261 2 442 2024 176 — 2 178 Thereafter 788 — 9 797 $ 1,578 $ 308 $ 18 $ 1,904 29 Table of Contents Vacation Ownership Notes Receivable Securitizations Each of the securitized vacation ownership notes receivable transactions 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 second quarter and first half of 2020, and as of June 30, 2020, no securitized vacation ownership notes receivable pools were out of compliance with their respective established parameters. As of June 30, 2020, we had 12 securitized vacation ownership notes receivable pools outstanding. 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. Subsequent to the end of the second quarter of 2020, we completed the securitization of a pool of $ 383 million of vacation ownership notes receivable. Approximately $ 368 million of the vacation ownership notes receivable were purchased on July 22, 2020 by MVW 2020-1 LLC (the “2020-1 LLC”), and all or a portion of the remaining loans may be purchased by the 2020-1 LLC prior to October 1, 2020. In connection with the securitization, investors purchased $ 375 million in vacation ownership loan backed notes from the 2020-1 LLC in a private placement. Four classes of vacation ownership loan backed notes were issued by the 2020-1 LLC: $ 238 million of Class A Notes, $ 72 million of Class B Notes, $ 44 million of Class C Notes, and $ 21 million of Class D Notes. The Class A Notes have an interest rate of 1.74 percent, the Class B Notes have an interest rate of 2.73 percent, the Class C Notes have an interest rate of 4.21 percent, and the Class D Notes have an interest rate of 7.14 percent, for an overall weighted average interest rate of 2.53 percent. Of the $ 375 million in proceeds from the transaction, $ 15 million will be held by the 2020-1 LLC until it purchases all or a portion of the remaining loans or, if not used for that purpose, returned to the investors. In addition, $ 300 million was used to repay all outstanding amounts previously drawn under the Warehouse Credit Facility, as defined below, $ 7 million was used to pay transaction expenses and fund required reserves, and the remaining $ 53 million will be used for general corporate purposes. Warehouse Credit Facility Our warehouse credit facility (the “Warehouse Credit Facility”) allows for the securitization of vacation ownership notes receivable on a revolving non-recourse basis through December 20, 2021. During the first quarter of 2020, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $ 240 million. The average advance rate was 84 percent, which resulted in gross proceeds of $ 202 million. Net proceeds were $ 201 million due to the funding of reserve accounts of $ 1 million. During the second quarter of 2020, we amended our Warehouse Credit Facility to increase the borrowing capacity by $ 181 million, to $ 531 million. The revolving period for the existing $ 350 million remains the same and will terminate in December 2021, if not renewed or terminated earlier. The revolving period for the additional $ 181 million portion will terminate in March 2021, if not renewed. As part of this amendment, the interest rate increased from primarily LIBOR plus 1.1 % to primarily LIBOR plus 1.4 %. During the second quarter of 2020, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $ 132 million. The average advance rate was 86 percent, which resulted in gross proceeds of $ 113 million. Net proceeds were $ 113 million due to the funding of reserve accounts of less than $ 1 million. 30 Table of Contents 13. DEBT The following table provides detail on our debt balances, net of unamortized debt discount and issuance costs. ($ in millions) At June 30, 2020 At December 31, 2019 Senior Secured Notes 2025 Notes $ 500 $ — Unamortized debt discount and issuance costs ( 7 ) — 493 — Senior Unsecured Notes 2026 Notes 750 750 Unamortized debt discount and issuance costs ( 7 ) ( 8 ) 743 742 2028 Notes 350 350 Unamortized debt discount and issuance costs ( 5 ) ( 5 ) 345 345 Corporate Credit Facility Term Loan 889 893 Unamortized debt discount and issuance costs ( 11 ) ( 12 ) 878 881 Revolving Corporate Credit Facility — 30 Unamortized debt issuance costs — ( 3 ) — 27 Convertible Notes 230 230 Unamortized debt discount and issuance costs ( 19 ) ( 23 ) 211 207 Finance leases 10 14 $ 2,680 $ 2,216 The following table shows scheduled future principal payments for our debt, excluding finance leases, as of June 30, 2020. ($ in millions) 2025 Notes 2026 Notes 2028 Notes Term Loan Convertible Notes Total Payments Year 2020, remaining $ — $ — $ — $ 4 $ — $ 4 2021 — — — 9 — 9 2022 — — — 9 230 239 2023 — — — 9 — 9 2024 — — — 9 — 9 Thereafter 500 750 350 849 — 2,449 $ 500 $ 750 $ 350 $ 889 $ 230 $ 2,719 31 Table of Contents Senior Secured Notes In the second quarter of 2020, we issued $ 500 million aggregate principal amount of 6.125 % Senior Secured Notes due September 15, 2025 (the “2025 Notes”). The 2025 Notes are pari passu with and secured by the same collateral as our Corporate Credit Facility. We pay interest on the 2025 Notes on May 15 and November 15 of each year, commencing on November 15, 2020. We received net proceeds of approximately $ 493 million from the offering of the 2025 Notes, after deducting offering expenses and the underwriting discount, which were used to repay all amounts outstanding at that time on the Revolving Corporate Credit Facility. Senior Unsecured Notes Our Senior Unsecured Notes include the following: • $ 750 million aggregate principal amount of 6.500 % Senior Unsecured Notes due 2026 issued in the third quarter of 2018 with a maturity date of September 15, 2026 (the “2026 Notes”); and • $ 350 million aggregate principal amount of 4.750 % Senior Unsecured Notes due 2028 issued in the fourth quarter of 2019 with a maturity date of January 15, 2028 (the “2028 Notes”). Corporate Credit Facility Our corporate credit facility (“Corporate Credit Facility”), which provides support for our business, including ongoing liquidity and letters of credit, includes a $ 900 million term loan facility (the “Term Loan”), which matures on August 31, 2025, and a revolving credit facility with a borrowing capacity of $ 600 million (the “Revolving Corporate Credit Facility”), including a letter of credit sub-facility of $ 75 million, that terminates on August 31, 2023. The Term Loan bears interest at LIBOR plus 1.75 percent. Borrowings under the Revolving Corporate Credit 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 to 40 basis points per annum, also depending on our credit rating. As of June 30, 2020, we were in compliance with the applicable financial and operating covenants under the Corporate Credit Facility. In May 2020, we entered into a waiver (the “Waiver”) to the agreement that governs the Corporate Credit Facility. The Waiver, among other things, suspends the requirement to comply with the leverage covenant in the Revolving Corporate Credit Facility for up to four quarters, commencing with the fiscal quarter ending June 30, 2020. We are required to maintain monthly minimum liquidity of at least $ 300 million until the later of March 31, 2021 or the end of the suspension period. In addition, for the duration of the period during which the waiver of the leverage covenant remains in effect, we are prohibited from making certain restricted payments, including share repurchases and dividends. If we are not in compliance with the leverage covenant at the end of the suspension period, we will seek to negotiate with our lenders to amend such covenant, as needed. Prior to 2020, we entered into $ 250 million of interest rate swaps under which we pay a fixed rate of 2.9625 percent and receive a floating interest rate through September 2023 and $ 200 million of interest rate swaps under which we pay a fixed rate of 2.2480 percent and receive a floating interest rate through April 2024, in each case to hedge a portion of our interest rate risk on the Term Loan. We also entered into a $ 100 million interest rate collar with a cap strike rate of 2.5000 percent and a floor strike rate of 1.8810 percent through April 2024 to further hedge our interest rate risk on the Term Loan. Both the interest rate swaps and the interest rate collar have been designated and qualify as cash flow hedges of interest rate risk and recorded in Other liabilities on our Balance Sheet as of June 30, 2020 and December 31, 2019. We characterize payments we make in connection with these derivative instruments as interest expense and a reclassification of accumulated other comprehensive income for presentation purposes. 32 Table of Contents The following table reflects the activity in accumulated other comprehensive loss related to our derivative instruments: ($ in millions) 2020 2019 Derivative instrument adjustment balance, January 1 $ ( 21 ) $ ( 6 ) Other comprehensive loss before reclassifications ( 24 ) ( 3 ) Reclassification to Income Statement — — Net other comprehensive loss ( 24 ) ( 3 ) Derivative instrument adjustment balance, March 31 ( 45 ) ( 9 ) Other comprehensive loss before reclassifications ( 1 ) ( 13 ) Reclassification to Income Statement — — Net other comprehensive loss ( 1 ) ( 13 ) Derivative instrument adjustment balance, June 30 $ ( 46 ) $ ( 22 ) Convertible Notes During 2017, we issued $ 230 million of aggregate principal amount of convertible senior notes (the “Convertible Notes”) that bear interest at a rate of 1.50 percent, payable in cash semi-annually. The conversion rate is subject to adjustment for certain events as described in the indenture governing the notes. Upon conversion, 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. As of June 30, 2020, the effective interest rate was 4.7 % and the remaining discount amortization period was 2.2 years. The following table shows the net carrying value of the Convertible Notes. ($ in millions) At June 30, 2020 At December 31, 2019 Liability component Principal amount $ 230 $ 230 Unamortized debt discount ( 16 ) ( 20 ) Unamortized debt issuance costs ( 3 ) ( 3 ) Net carrying amount of the liability component $ 211 $ 207 Carrying amount of equity component, net of issuance costs $ 33 $ 33 The following table shows interest expense information related to the Convertible Notes. Three Months Ended Six Months Ended ($ in millions) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Contractual interest expense $ 1 $ — $ 2 $ 1 Amortization of debt discount 2 1 4 3 Amortization of debt issuance costs — 1 — 1 $ 3 $ 2 $ 6 $ 5 Convertible Note Hedges and Warrants In connection with the offering of the Convertible Notes, we concurrently entered into the following privately-negotiated separate transactions: convertible note hedge transactions with respect to our common stock (“Convertible Note Hedges”), initially covering a total of approximately 1.55 million shares of our common stock, and warrant transactions (“Warrants”), whereby we sold to the counterparties to the Convertible Note Hedges warrants to acquire approximately 1.55 million shares of our common stock at an initial strike price of $ 176.68 per share. As of June 30, 2020, no Convertible Note Hedges or Warrants have been exercised. 33 Table of Contents Security and Guarantees Amounts borrowed under the Corporate Credit Facility and the 2025 Notes, as well as obligations with respect to letters of credit issued pursuant to the Corporate Credit Facility, are secured by a perfected first priority security interest in substantially all of the assets of the borrowers under, and guarantors of, that facility (which include MVWC and certain 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. In addition, the Corporate Credit Facility, the 2025 Notes, the 2026 Notes and the 2028 Notes are guaranteed by MVWC and certain of our direct and indirect, existing and future, domestic subsidiaries, excluding bankruptcy remote special purpose subsidiaries. 14. SHAREHOLDERS’ EQUITY Marriott Vacations Worldwide has 100,000,000 authorized shares of common stock, par value of $ 0.01 per share. At June 30, 2020, there were 75,249,855 shares of Marriott Vacations Worldwide common stock issued, of which 41,057,736 shares were outstanding and 34,192,119 shares were held as treasury stock. At December 31, 2019, there were 75,020,272 shares of Marriott Vacations Worldwide common stock issued, of which 41,582,096 shares were outstanding and 33,438,176 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 June 30, 2020 or December 31, 2019. Share Repurchase Program The following table summarizes share repurchase activity under our current share repurchase program: ($ in millions, except per share amounts) Number of Shares Repurchased Cost of Shares Repurchased Average Price Paid per Share As of December 31, 2019 16,418,950 $ 1,258 $ 76.60 For the first half of 2020 769,935 82 106.60 As of June 30, 2020 17,188,885 $ 1,340 $ 77.95 On July 30, 2019, our Board of Directors authorized the extension of the duration of our existing share repurchase program to December 31, 2020, as well as the repurchase of up to 4.5 million additional shares of our common stock. As of June 30, 2020, our Board of Directors had authorized the repurchase of an aggregate of up to 19.4 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 June 30, 2020, 1.9 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. Due to the impact of the COVID-19 pandemic, we temporarily suspended repurchasing shares of our common stock. Any future share repurchases will be subject to the restrictions imposed under the Waiver. Dividends We declared cash dividends to holders of common stock during the first half of 2020 as follows: Declaration Date Shareholder Record Date Distribution Date Dividend per Share February 14, 2020 February 27, 2020 March 12, 2020 $ 0.54 Due to the impact of the COVID-19 pandemic, we temporarily suspended cash dividends. Any future dividend payments will be subject to both the restrictions imposed under the Waiver and Board approval, and there can be no assurance that we will pay dividends in the future. Noncontrolling Interests Property Owners’ Associations We consolidate certain property owners’ associations under the voting interest model. Noncontrolling interests represents the portion of the property owners’ associations related to individual or third-party vacation ownership interest owners. Noncontrolling interests of $ 21 million and $ 12 million, as of June 30, 2020 and December 31, 2019, respectively, are included on our Balance Sheets as a component of equity. 34 Table of Contents 15. SHARE-BASED COMPENSATION During the second quarter of 2020, our shareholders approved the Marriott Vacations Worldwide Corporation 2020 Equity Incentive Plan (the “MVW Equity Plan”), which supersedes both the Marriott Vacations Worldwide Corporation Stock and Cash Incentive Plan and the Interval Leisure Group, Inc. 2013 Stock and Incentive Plan (collectively, the “Prior Plans”). No new awards will be granted under the Prior Plans and all awards that were granted under the Prior Plans will remain outstanding and continue to be governed by the Prior Plans. The MVW Equity Plan is maintained for the benefit of our officers, directors, and employees. Under the MVW Equity Plan, we are authorized to award: (1) restricted stock units (“RSUs”) of our common stock, (2) SARs relating to our common stock, and (3) stock options to purchase our common stock. A total of 1.8 million shares are authorized for issuance pursuant to grants under the MVW Equity Plan. As of June 30, 2020, approximately 1.8 million shares were available for grants under the MVW Equity Plan. The following table details our share-based compensation expense related to award grants to our officers, directors, and employees: Three Months Ended Six Months Ended ($ in millions) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Service-based RSUs $ 7 $ 6 $ 11 $ 9 Performance-based RSUs 1 2 ( 1 ) 3 ILG Acquisition Converted RSUs — 2 1 6 8 10 11 18 SARs 1 1 2 2 Stock options — — — — $ 9 $ 11 $ 13 $ 20 The following table details our deferred compensation costs related to unvested awards: ($ in millions) At June 30, 2020 At December 31, 2019 Service-based RSUs $ 30 $ 17 Performance-based RSUs 4 10 ILG Acquisition Converted RSUs 1 3 35 30 SARs 3 1 Stock options — — $ 38 $ 31 Restricted Stock Units We granted 268,192 service-based RSUs, which are subject to time-based vesting conditions, with a weighted average grant-date fair value of $ 90.12 , to our employees and non-employee directors during the first half of 2020. During the first half of 2020, we also granted performance-based RSUs, which are subject to performance-based vesting conditions, to members of management. A maximum of 177,208 RSUs may be earned under the performance-based RSU awards granted during the first half of 2020. Stock Appreciation Rights We granted 116,434 SARs, with a weighted average grant-date fair value of $ 29.63 and a weighted average exercise price of $ 96.82 , to members of management during the first half of 2020. We use the Black-Scholes model to estimate the fair value of the SARs granted. The expected stock price volatility was calculated based on the average of the historical and implied volatility of our stock price. The average expected life was calculated using the simplified method, as we have insufficient historical information to provide a basis for estimating average expected life. 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. 35 Table of Contents The following table outlines the assumptions used to estimate the fair value of grants during the first half of 2020: Expected volatility 38.81 % Dividend yield 2.13 % Risk-free rate 0.96 % Expected term (in years) 6.25 16. 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 VIEs. 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. There is no noncontrolling interest balance related to these entities and the creditors of these entities do not have general recourse to us. As part of the ILG Acquisition, we acquired the variable interests in the entities associated with ILG’s outstanding vacation ownership notes receivable securitization transactions. As these vacation ownership notes receivable securitizations are similar in nature to the Legacy-MVW vacation ownership notes receivable securitizations, they have been aggregated for disclosure purposes. The following table shows consolidated assets, which are collateral for the obligations of these VIEs, and consolidated liabilities included on our Balance Sheet at June 30, 2020: ($ in millions) Vacation Ownership Notes Receivable Securitizations Warehouse Credit Facility Total Consolidated Assets Vacation ownership notes receivable, net of reserves $ 1,472 $ 325 $ 1,797 Interest receivable 11 3 14 Restricted cash 60 13 73 Total $ 1,543 $ 341 $ 1,884 Consolidated Liabilities Interest payable $ 2 $ — $ 2 Securitized Debt 1,578 308 1,886 Total $ 1,580 $ 308 $ 1,888 The following table shows the interest income and expense recognized as a result of our involvement with these VIEs during the second quarter of 2020: ($ in millions) Vacation Ownership Notes Receivable Securitizations Warehouse Credit Facility Total Interest income $ 52 $ 12 $ 64 Interest expense to investors $ 12 $ 2 $ 14 Debt issuance cost amortization $ 2 $ — $ 2 36 Table of Contents The following table shows the interest income and expense recognized as a result of our involvement with these VIEs during the first half of 2020: ($ in millions) Vacation Ownership Notes Receivable Securitizations Warehouse Credit Facility Total Interest income $ 109 $ 18 $ 127 Interest expense to investors $ 26 $ 3 $ 29 Debt issuance cost amortization $ 3 $ 1 $ 4 Administrative expenses $ 1 $ — $ 1 The following table shows cash flows between us and the vacation ownership notes receivable securitization VIEs: Six Months Ended ($ in millions) June 30, 2020 June 30, 2019 Cash Inflows Net proceeds from vacation ownership notes receivable securitizations $ — $ 445 Principal receipts 232 237 Interest receipts 107 101 Reserve release — 99 Total 339 882 Cash Outflows Principal to investors ( 238 ) ( 233 ) Voluntary repurchases of defaulted vacation ownership notes receivable ( 35 ) ( 23 ) Interest to investors ( 25 ) ( 22 ) Funding of restricted cash — ( 93 ) Total ( 298 ) ( 371 ) Net Cash Flows $ 41 $ 511 Under the terms of our vacation ownership notes receivable securitizations, we have the right to substitute loans for, or repurchase, defaulted loans at our option, subject to certain limitations. Our maximum exposure to potential 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 of the outstanding vacation ownership notes receivable), plus cash reserves and any residual interest in future cash flows from collateral. The following table shows cash flows between us and the Warehouse Credit Facility VIE: Six Months Ended ($ in millions) June 30, 2020 June 30, 2019 Cash Inflows Proceeds from vacation ownership notes receivable securitizations $ 315 $ 124 Principal receipts 32 12 Interest receipts 14 12 Reserve release — 2 Total 361 150 Cash Outflows Principal to investors ( 27 ) ( 12 ) Voluntary repurchases of defaulted vacation ownership notes receivable ( 2 ) — Repayment of Warehouse Credit Facility — ( 228 ) Interest to investors ( 3 ) ( 4 ) Funding of restricted cash ( 1 ) ( 1 ) Total ( 33 ) ( 245 ) Net Cash Flows $ 328 $ ( 95 ) 37 Table of Contents Other Variable Interest Entities We have a commitment to purchase an operating property located in San Francisco, California, that we currently manage as Marriott Vacation Club Pulse, San Francisco. Refer to Footnote 11 “Contingencies and Commitments” for additional information on the commitment. We are required to purchase the property from the third-party developer unless the developer has sold the property to another party. The property is held by a VIE for which we are not the primary beneficiary as we cannot prevent the VIE from selling the property at a higher price. Accordingly, we have not consolidated the VIE. As of June 30, 2020, our Balance Sheet reflected $ 2 million in Accounts Receivable, including a note receivable of less than $ 1 million, and $ 5 million in Other assets for a deposit related to the acquisition of a portion of this property. We believe that our maximum exposure to loss as a result of our involvement with this VIE is approximately $ 7 million as of June 30, 2020. 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 11 “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 VIE for which we are not the primary beneficiary as we cannot prevent the VIE from selling the property at a higher price. Accordingly, we have not consolidated the VIE. As of June 30, 2020, our Balance Sheet reflected $ 22 million in Other assets for a deposit related to the acquisition of a portion of this property, and a note receivable of less than $ 1 million that is included in the Accounts receivable line. We believe that our maximum exposure to loss as a result of our involvement with this VIE is approximately $ 23 million as of June 30, 2020. We have a commitment to purchase a property located in Waikiki, Hawaii. Refer to Footnote 11 “Contingencies and Commitments” for additional information on the commitment. If we are unable to negotiate a capital efficient inventory arrangement, we are committed to purchase the property, in its then current form, unless it has been sold to another party. The property is held by a VIE for which we are not the primary beneficiary as we do not control the operations of the VIE. Accordingly, we have not consolidated the VIE. As of June 30, 2020, our Balance Sheet reflected $ 1 million in Accounts Receivable, including a note receivable of less than $ 1 million. We believe that our maximum exposure to loss as a result of our involvement with this VIE is less than $ 1 million as of June 30, 2020. Deferred Compensation Plan We consolidate the liabilities of the Marriott Vacations Worldwide Deferred Compensation Plan and the related assets, which consist of the COLI policies held in the rabbi trust. The rabbi trust is considered a 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 June 30, 2020, the value of the assets held in the rabbi trust was $ 42 million, which is included in the Other line within assets on our Balance Sheets. 17. BUSINESS SEGMENTS We define our reportable segments based on the way in which the chief operating decision maker (“CODM”), currently our chief executive officer, manages the operations of the Company for purposes of allocating resources and assessing performance. We operate in two operating and reportable business segments: • Vacation Ownership includes a diverse portfolio of resorts that includes seven vacation ownership brands licensed under exclusive, long-term relationships with Marriott International and Hyatt Hotels Corporation. We are the exclusive worldwide developer, marketer, seller and manager of vacation ownership and related products under the Marriott Vacation Club, Grand Residences by Marriott, Sheraton Vacation Club, Westin Vacation Club and Hyatt Residence Club brands, as well as under 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, we have the non-exclusive right to develop, market and sell whole ownership residential products under The Ritz-Carlton Residences brand and we have a license to use the St. Regis brand for specified fractional ownership resorts. Our Vacation Ownership segment generates most of its revenues from four primary sources: selling vacation ownership products; managing vacation ownership resorts, clubs and owners’ associations; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory. • Exchange & Third-Party Management includes exchange networks and membership programs, as well as management of resorts and lodging properties. We provide these services through a variety of brands including Interval International, Trading Places International, Vacation Resorts International, and Aqua-Aston. Exchange & Third-Party Management revenue generally is fee-based and derived from membership, exchange and rental transactions, property and association management, and other related products and services. 38 Table of Contents Our CODM evaluates 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 or indirect general and administrative expenses to our segments. We include interest income specific to segment activities within the appropriate segment. We allocate depreciation, other gains and losses, equity in earnings or losses from our joint ventures and noncontrolling interest to each of our segments as appropriate. Corporate and other represents that portion of our results that are not allocable to our segments, including those relating to property owners’ associations consolidated under the voting interest model, as our CODM does not use this information to make operating segment resource allocations. Prior year segment information has been reclassified to conform to the current reportable segment presentation. Our CODM uses Adjusted EBITDA to evaluate the profitability of our operating segments, and the components of net income attributable to common shareholders excluded from Adjusted EBITDA are not separately evaluated. Adjusted EBITDA is defined as net income attributable to common shareholders, before interest expense (excluding consumer financing interest expense associated with term loan securitization transactions), income taxes, depreciation and amortization, excluding share-based compensation expense and adjusted for certain items that affect the comparability of our operating performance. Our reconciliation of the aggregate amount of Adjusted EBITDA for our reportable segments to consolidated net (loss) income attributable to common shareholders is presented below. Revenues Three Months Ended Six Months Ended ($ in millions) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Vacation Ownership $ 405 $ 924 $ 1,313 $ 1,829 Exchange & Third-Party Management 58 116 165 240 Total segment revenues 463 1,040 1,478 2,069 Corporate and other 17 3 12 8 $ 480 $ 1,043 $ 1,490 $ 2,077 Adjusted EBITDA and Reconciliation to Net (Loss) Income Attributable to Common Shareholders Three Months Ended Six Months Ended ($ in millions) June 30, 2020 June 30, 2019 June 30, 2020 June 30, 2019 Adjusted EBITDA Vacation Ownership $ ( 19 ) $ 203 $ 128 $ 375 Adjusted EBITDA Exchange & Third-Party Management 19 46 60 100 Reconciling items: Corporate and other ( 10 ) ( 54 ) ( 60 ) ( 114 ) Interest expense ( 42 ) ( 35 ) ( 75 ) ( 69 ) Tax benefit (provision) 19 ( 25 ) 77 ( 40 ) Depreciation and amortization ( 31 ) ( 36 ) ( 63 ) ( 73 ) Share-based compensation expense ( 9 ) ( 11 ) ( 13 ) ( 20 ) Certain items 3 ( 39 ) ( 230 ) ( 86 ) Net (loss) income attributable to common shareholders $ ( 70 ) $ 49 $ ( 176 ) $ 73 Assets ($ in millions) At June 30, 2020 At December 31, 2019 Vacation Ownership $ 7,149 $ 7,345 Exchange & Third-Party Management 1,022 1,162 Total segment assets 8,171 8,507 Corporate and other 946 707 $ 9,117 $ 9,214 We conduct business globally, and our operations outside the United States represented approximately 7 percent and 11 percent of our revenues, excluding cost reimbursements, for the three months ended June 30, 2020 and June 30, 2019, respectively, and 11 percent of our revenues, excluding cost reimbursements, for both the six months ended June 30, 2020 and June 30, 2019. 39 Table of Contents