Company Results

Diamond Resorts International Total Revenue 2013 Increased 39.4%

Hospitality and Management Services revenue grew by $22.1 million, or 14.4%, for 2013 compared to 2012.

Diamond Resorts

Diamond Resorts International, Inc. (NYSE:DRII) , announced results for the fourth quarter and full year ended December 31, 2013.

David F. Palmer, President and Chief Executive Officer, stated, “Our business performed strongly this period, as we delivered a record fourth quarter, concluding a record year. Our results clearly reinforce the advantages of our differentiated business model, which combined with solid execution by our team, led to growth across nearly all the key metrics that define our business. As we look to 2014, we expect to continue to benefit from the recurring and predictable contractual cash flows and revenue growth associated with our hospitality and management services business and that we will capitalize on the flexibility of our vacation interest business to continue the positive momentum we have seen to date. We believe we have a unique business model in a highly fragmented and under-penetrated industry and are confident in our ability to continue to deliver strong results in the quarters and years ahead.”

Full Year 2013 Highlights

  • Total revenue increased $206.1 million, or 39.4%, to $729.8 million for 2013 from $523.7 million for 2012.
  • Hospitality and Management Services revenue grew by $22.1 million, or 14.4%, for 2013 compared to 2012. This growth was driven by the full year ownership of Pacific Monarch Resorts (acquired in May 2012), the inclusion of the PMR Services Companies and Island One (both acquired in July 2013), increases in operating costs at the resort level which generated higher same-store management fee revenue, and increases in revenue from our club operations.
  • Vacation Interest sales, net grew by $171.5 million, or 58.5%, for 2013 compared to 2012. This growth was driven by a:
    • 14.4% increase in tours to 207,075 from 180,981
    • 12.0% increase in transactions to 29,955 from 26,734 (reflecting closing percentages of 14.5% for 2013 and 14.8% for 2012)
    • 34.1% increase in average transaction price to $16,771 from $12,510
  • Advertising, sales and marketing expense for 2013 included a non-cash charge of $2.1 million related to stock based compensation. Excluding this charge, advertising, sales and marketing as a percentage of Vacation Interest sales revenue decreased 5.7 percentage points to 50.3%, from 56.0% in 2012. Including this non-cash charge, advertising, sales and marketing as a percentage of Vacation Interest sales revenue was 50.7%. This improvement was primarily due to improved leverage of fixed costs through increased sales efficiencies.
  • Pre-tax income for 2013 and 2012 included non-cash and one-time charges and adjustments of $63.8 million and $12.3 million, respectively. The non-cash items were charges related to stock-based compensation of $40.5 million in 2013 and $3.3 million in 2012, a one-time charge of $5.5 million related to the final settlement of the FLRX Alter Ego suit (“FLRX litigation”) in 2013 (representing the carrying value of our interest in certain Mexican land transferred to the plaintiff), a charge of $6.6 million related to the early extinguishment of debt which was repaid with proceeds from our IPO in July 2013, and a gain on bargain purchase from business combinations of $2.9 million in 2013 and $20.6 million in 2012. In addition, 2013 included a cash charge of $9.0 million related to the early extinguishment of debt and a one-time cash charge of $5.0 million related to the final settlement of the FLRX litigation. In 2012, there was a one-time cash charge of $5.0 million related to the termination of consultants who had been executives of an acquired company (“Executive Termination”). Excluding these items, pre-tax income in 2013 would have been $67.0 million, an increase of $80.0 million from a pre-tax loss of $13.0 million in 2012. Including these items, pre-tax income in 2013 was $3.2 million and the pre-tax loss in 2012 was $0.7 million.
  • Net cash used by operations in 2013 was $5.4 million. This includes a $128.8 million net working capital use from the buildup of receivables, net of repayments. Our receivables are generally monetized through a securitization transaction, or by pledging them under one of our funding facilities. This monetization is shown under “financing activities” on our statement of cash flows. During 2013 we generated $125.2 million of net cash related to the monetization of our receivables portfolio which included $38.5 million as of December 31, 2013 in receivables activity related to the DROT 2013-2 securitization.
  • Adjusted EBITDA for the Company and its Restricted Subsidiaries was $219.0 million for 2013. Adjusted EBITDA for the Company on a consolidated basis was $220.2 million for 2013. Adjusted EBITDA for 2013 included a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation. Adjusted EBITDA for the Company and its Restricted Subsidiaries was $123.3 million for 2012. On a consolidated basis, Adjusted EBITDA was $113.2 million for 2012. Adjusted EBITDA for 2012 included a $5.0 million charge related to the Executive Termination.
  • In 2013 we completed three securitization transactions issuing notes with an aggregate face value of $349.6 million.

Fourth Quarter 2013 Highlights

  • Total revenue increased $60.3 million, or 40.0%, to $210.9 million for 2013 from $150.6 million for 2012.
  • Hospitality and Management Services revenue grew by $6.8 million, or 17.6%, for 2013 compared to 2012. This growth was driven mainly by increased management fees as a result of the inclusion of the managed properties from the Island One and PMR Service Companies acquisitions (completed in July 2013) and increased revenues from our club operations.
  • Vacation Interest sales, net grew by $48.5 million, or 53.6%, in 2013 compared to the same period in 2012. This growth was driven primarily by a 40.8% increase in average transaction price to $18,313 from $13,007.
  • Advertising, sales and marketing as a percentage of Vacation Interest sales revenue decreased 4.0 percentage points to 49.9%, from 53.9% in 2012. This improvement was primarily due to improved leverage of fixed costs through increased sales efficiencies.
  • Pre-tax income for 2013 and 2012 included non-cash and one-time charges of $14.6 million and $5.3 million, respectively. The non-cash items were charges related to stock-based compensation of $2.0 million in 2013 and $3.3 million in 2012, a one-time charge of $5.5 million related to the final settlement of the FLRX litigation in 2013, a charge of $2.2 million related to the early extinguishment of debt, a gain on bargain purchase from business combinations of $0.2 million in 2013 and an adjustment to bargain purchase from business combinations of $2.0 million in 2012. In addition, 2013 included a one-time cash charge of $5.0 million related to the final settlement of the FLRX litigation. Excluding these items, pre-tax income in 2013 would have been $30.7 million, an increase of $38.1 million from pre-tax loss of $7.4 million in 2012. Including these items, pre-tax income in 2013 was $16.1 million and the pre-tax loss in 2012 was $12.7 million.
  • Net cash used in 2013 was $0.4 million. This includes a $44.4 million net working capital use from the buildup of receivables, net of repayments while we generated $60.9 million in cash related to the monetization of our receivables portfolio.
  • Adjusted EBITDA for the Company and its Restricted Subsidiaries was $53.5 million for 2013. Adjusted EBITDA for the Company on a consolidated basis was $55.5 million for 2013. Adjusted EBITDA for 2013 included a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation. Adjusted EBITDA for the Company and its Restricted Subsidiaries was $35.6 million for 2012. On a consolidated basis, Adjusted EBITDA was $35.8 million for 2012.
  • On November 20, 2013, we completed a securitization transaction and issued DROT 2013-2 Class A and B Notes with a face value of $225.0 million.

Full Year Earnings Summary

Hospitality and Management Services

Total management and member services revenue in our Hospitality and Management Services segment increased $16.3 million, or 14.2%, to $131.2 million for the twelve months ended December 31, 2013 from $114.9 million for the twelve months ended December 31, 2012. Management fees increased as a result of full year ownership of Pacific Monarch Resorts, the inclusion of the managed properties from our acquisitions of Island One and the PMR Service Companies (both completed in July 2013) in 2013. We also experienced higher revenue from our club operations due to increased membership dues, higher collection rate and higher club member count in 2013 compared to 2012. We had a total of approximately 200,000 and 170,000 club members as of December 31, 2013 and 2012, respectively. These increases were partially offset by the reduction in commissions earned on fee-for-service management agreements with Island One which were terminated in conjunction with the Island One acquisition on July 24, 2013.

Management and member services expense increased $2.6 million, or 7.3%, to $37.9 million for the twelve months ended December 31, 2013 from $35.3 million for the twelve months ended December 31, 2012. The increase was primarily attributable to higher operating expense associated with higher club member count and higher operating costs at the resorts for which we act as the HOA. The above increases were partially offset by a reduction in the costs incurred under the fee-for-service agreements with Island One that terminated in conjunction with the Island One acquisition and an increase in the absorption of certain expenses by the HOAs that we manage. Management and member services expense as a percentage of management and member services revenue decreased to 28.9% in 2013 from 30.7% in 2012.

Vacation Interest Sales and Financing

Vacation Interest sales, net, increased $171.5 million, or 58.5%, to $464.6 million for the twelve months ended December 31, 2013 from $293.1 million for the twelve months ended December 31, 2012. The increase in Vacation Interest sales, net, was attributable to a $190.7 million increase in Vacation Interest sales revenue, partially offset by a $19.2 million increase in our provision for uncollectible Vacation Interest sales revenue. The $190.7 million increase in Vacation Interest sales revenue in 2013 compared to 2012 was generated by an increase in the number of transactions and a higher average sales price per transaction. During the third and fourth quarter, the Company closed three low performing off-site sales centers, which will enable us to increase sales efficiencies. Our total number of tours increased to 207,075 in 2013 from 180,981 in 2012, primarily due to an increase in the number of tours resulting from the expansion of our lead-generation and marketing programs. We closed a total of 29,955 Vacation Interest sales transactions in 2013, compared to 26,734 transactions in 2012. Our closing percentage (which represents the percentage of Vacation Interest sales transactions closed relative to the total number of tours at our sales centers during the period presented) decreased slightly to 14.5% in 2013 from 14.8% in 2012 as a result of an increase in focus on sales to new customers. Vacation Interest sales price per transaction increased to $16,771 in 2013 from $12,510 in 2012 due principally to a change in our selling strategy which focused on selling larger point packages and the success of the sales and marketing initiatives implemented in furtherance of this strategy.

Sales incentives increased $1.8 million, or 18.8% to $11.1 million for the twelve months ended December 31, 2013 from $9.4 million for the twelve months ended December 31, 2012. The amount we record as sales incentives is reduced by an estimated breakage amount and, accordingly, the estimated amount of such breakage increases our Vacation Interest sales revenue, net. In 2013, we adjusted sales incentives by $3.2 million relating to the expiration, and expected future expiration, of sales incentives we provided to customers prior to June 30, 2013 as we had more historical data to compute the estimated breakage. Excluding the $3.2 million reduction, sales incentives as a percentage of gross Vacation Interest sales revenue were 2.8% in 2013 compared to 2.9% in 2012.

Provision for uncollectible Vacation Interest sales revenue increased $19.2 million, or 75.5%, to $44.7 million for the twelve months ended December 31, 2013 from $25.5 million for the twelve months ended December 31, 2012, primarily due to the increase in Vacation Interest sales revenue and an increase in the percentage of financed Vacation Interest sales in 2013 as compared to 2012.

Advertising, sales and marketing costs as a percentage of Vacation Interest sales revenue were 50.7% for the twelve months ended December 31, 2013, compared to 56.0% for the twelve months ended December 31, 2012, primarily due to the increase in Vacation Interest sales. Advertising, sales and marketing expense in 2013 included a charge of $2.1 million for stock-based compensation. Without this non-cash charge, advertising, sales and marketing as a percentage of gross Vacation Interest sales revenue would have been 50.3%, a decrease of 5.7 percentage points from the prior year period. The decrease of such costs as a percentage of Vacation Interest sales revenue was primarily due to improved absorption of fixed costs through increased sales efficiencies.

Vacation Interest cost of sales increased $24.5 million, or 76.3%, to $56.7 million for the twelve months ended December 31, 2013 from $32.2 million for the twelve months ended December 31, 2012. Of this increase, $18.7 million was due to an increase in Vacation Interest Sales in 2013 as compared to 2012. The remaining increase was a combination of the impact of the inclusion of the inventory purchased in the Pacific Monarch Resorts acquisition in 2012 and the impact of a smaller pool of low-cost inventory becoming eligible for recovery and capitalization pursuant to our inventory recovery agreements in 2013 as compared to 2012. The inventory purchased in the Pacific Monarch Resorts acquisition reduced the cost of sales in 2012 as the inventory had a lower cost basis than the average cost basis of our then existing inventory. The increase to cost of sales was compounded as a smaller pool of inventory became available for recovery and capitalization pursuant to our inventory recovery agreements in 2013.

General and Administrative Expense

General and administrative expense for the twelve months ended December 31, 2013 and December 31, 2012 included non-cash charges related to stock based compensation of $37.0 million and $3.3 million, respectively. In 2013, there was a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation. In 2012, there was a one-time charge of $5.0 million related to the Executive Termination. Excluding these charges, general and administrative expense would have been $98.4 million in 2013, an increase of $7.7 million, or 8.5%, from $90.7 million in 2012. This increase is primarily due to additional costs incurred in connection with the operation of the Pacific Monarch Resorts for a full year, and the PMR Service Companies and Island One acquisitions. Giving effect to these charges, general and administrative expense as reported was $145.9 million in 2013 and $99.0 million in 2012.

Pre-tax Income/Loss and Net Income / Loss

Pre-tax income for twelve months ended December 31, 2013 and the twelve months ended December 31, 2012 included non-cash and one-time charges and adjustments of $63.8 million and $12.3 million, respectively. The non-cash items were charges related to stock-based compensation of $40.5 million in 2013 and $3.3 million in 2012, a one-time charge of $5.5 million related to the final settlement of the FLRX litigation in 2013 (representing the carrying value of our interest in certain Mexican land transferred to the plaintiff), a charge of $6.6 million related to the early extinguishment of debt which was repaid with proceeds from our IPO in July 2013, and a gain on bargain purchase from business combinations of $2.9 million in 2013 and $20.6 million in 2012. In addition, 2013 included a cash charge of $9.0 million related to the early extinguishment of debt and a one-time cash charge of $5.0 million related to the final settlement of the FLRX litigation. In 2012, there was a one-time cash charge of $5.0 million related to the Executive Termination. Excluding these items, pre-tax income in 2013 would have been $67.0 million, an increase of $80.0 million from a pre-tax loss of $13.0 million in 2012. Including these items, pre-tax income in 2013 was $3.2 million and the pre-tax loss in 2012 was $0.7 million.

Net income for the twelve months ended December 31, 2013 and the twelve months ended December 31, 2012 included the pre-tax charges discussed above. 2013 had a net loss of $2.5 million, which is a decrease of $16.1 million from a net income of $13.6 million in 2012.

Fourth Quarter Earnings Summary

Hospitality and Management Services

Total management and member services revenue in our Hospitality and Management Services segment increased $5.5 million, or 19.0%, to $34.9 million for the three months ended December 31, 2013 from $29.4 million for the three months ended December 31, 2012. Management fees increased as a result of the inclusion of the managed properties from our acquisitions of Island One and the PMR Service Companies (both completed in July 2013) during the period in 2013. We also experienced higher revenue from the clubs due to increased membership dues, higher collection rate and higher club member count during the period in 2013 compared to the period in 2012. These increases were partially offset by the reduction in commissions earned on fee-for-service agreements with Island One which were terminated in conjunction with the Island One acquisition on July 24, 2013.

Management and member services expense increased $0.2 million, or 2.3%, to $9.9 million for the three months ended December 31, 2013 from $9.7 million for the three months ended December 31, 2012. The increase was primarily attributable to higher operating expense associated with higher club member count and higher operating costs at the resorts for which we act as the HOA. The above increases were partially offset by a reduction in the costs incurred under the fee-for-service agreements with Island One that terminated in conjunction with the Island One acquisition and an increase in the absorption of certain resort management expenses to the HOAs that we manage. Management and member services expense as a percentage of management and member services revenue decreased to 28.5% during the period in 2013 from 33.1% during the period in 2012.

Vacation Interest Sales and Financing

Vacation Interest sales, net, increased $48.5 million, or 53.6%, to $138.8 million for the three months ended December 31, 2013 from $90.3 million for the three months ended December 31, 2012. The increase in Vacation Interest sales, net, was attributable to a $54.0 million increase in Vacation Interest sales revenue, partially offset by a $5.6 million increase in our provision for uncollectible Vacation Interest sales revenue. The $54.0 million increase in Vacation Interest sales revenue during the period in 2013 compared to the period in 2012 was generated due to an increase in the number of transactions and a higher average sales price per transaction. During the quarter, the Company closed one low performing off-site sales center, which will enable us to increase sales efficiencies. Our total number of tours increased to 50,104 during the period in 2013 from 50,098 during the period in 2012. We closed a total of 7,926 Vacation Interest sales transactions during the period in 2013, compared to 8,024 transactions during the period in 2012. Our closing percentage (which represents the percentage of Vacation Interest sales transactions closed relative to the total number of sales presentations at our sales centers during the period presented) decreased slightly to 15.8% during the period in 2013 from 16.0% during the period in 2012. Vacation Interest sales price per transaction increased to $18,313 during the period in 2013 from $13,007 during the period in 2012 due principally to a change in our selling strategy to focus on selling larger point packages and the success of the sales and marketing initiatives implemented in furtherance of this strategy.

Sales incentives increased $1.2 million, or 28.9% to $5.2 million for the three months ended December 31, 2013 from $4.0 million for the three months ended December 31, 2012. Sales incentives as a percentage of gross Vacation Interest sales revenue were 3.4% for the period in 2013 compared to 4.0% for the period in 2012.

Provision for uncollectible Vacation Interest sales revenue increased $5.6 million, or 59.5%, to $14.9 million during the period in 2013 from $9.4 million during the period in 2012, primarily due to the increase in Vacation Interest sales revenue and an increase in the percentage of financed Vacation Interest sales during the period in 2013 as compared to the period in 2012.

Advertising, sales and marketing costs as a percentage of Vacation Interest sales revenue were 49.9% for the three months ended December 31, 2013, compared to 53.9% for the three months ended December 31, 2012. The decrease of such costs as a percentage of Vacation Interest sales revenue was primarily due to improved absorption of fixed costs through increased sales efficiencies.

Vacation Interest cost of sales decreased $3.7 million, to $11.2 million for the three months ended December 31, 2013 from $15.0 million for the three months ended December 31, 2012. Of this change, $3.6 million was an increase related to the increase in Vacation Interest Sales during the period in 2013 as compared to the period in 2012. The $3.6 million increase was offset by a $7.3 million decrease due to a larger pool of low-cost inventory becoming eligible for recovery and capitalization pursuant to our inventory recovery agreements during the period in 2013 as compared to the period in 2012.

General and Administrative Expense

General and administrative expense for the three months ended December 31, 2013 and the three months ended December 31, 2012 included a non-cash charge related to stock based compensation of $1.7 million and $3.3 million, respectively. During the period for 2013, there was a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation. Excluding these charges, general and administrative expense would have increased $3.4 million, or 13.7%, to $28.2 million during the period in 2013 from $24.8 million during the period in 2012. This increase is primarily due to additional costs incurred in connection with the PMR Service Companies and Island One acquisitions completed in the third quarter of 2013. Giving effect to these charges, general and administrative expense as reported was $40.3 million during the period in 2013 and $28.1 million during the period in 2012.

Pre-tax Income/Loss and Net Income / Loss

The pre-tax income for the three months ended December 31, 2013 and the three months ended December 31, 2012 included non-cash and one-time charges of $14.6 million and $5.3 million, respectively. The non-cash items were charges related to stock-based compensation of $2.0 million in 2013 and $3.3 million in 2012, a one-time charge of $5.5 million related to the final settlement of the FLRX litigation in 2013, a charge of $2.2 million related to the early extinguishment of debt, a gain on bargain purchase from business combinations of $0.2 million in 2013 and an adjustment to bargain purchase from business combinations of $2.0 million in 2012. In addition, 2013 included a one-time cash charge of $5.0 million related to the final settlement of the FLRX litigation. Excluding these items, pre-tax income in 2013 would have been $30.7 million, an increase of $38.1 million from pre-tax loss of $7.4 million in 2012. Including these items, pre-tax income in 2013 was $16.1 million and the pre-tax loss in 2012 was $12.7 million.

Net income for the three months ended December 31, 2013 and the three months ended December 31, 2012 included the pre-tax charges discussed above. Net income increased $15.3 million to $3.6 million during the period for 2013 from a net loss of $11.7 million during the period in 2012.

Capital Resources and Liquidity

As of December 31, 2013, we had cash and cash equivalents of $35.9 million, corporate indebtedness of $377.7 million and non-recourse debt of $411.3 million. Our cash used in operating activities was $5.4 million, reflecting $128.8 million net working capital use from the buildup of receivables, net of repayments. Our receivables are generally monetized through a securitization transaction, or by pledging them under one of our funding facilities. This monetization is shown under “financing activities” on our statement of cash flows. During 2013 we generated $125.2 million of net cash related to the monetization of our receivables portfolio which included $38.5 million as of December 31, 2013 in receivables activity related to the DROT 2013-2 securitization. Capital expenditures for the year ended December 31, 2013 were $15.2 million, an increase of $0.9 million from $14.3 million for the year ended December 31, 2012. Cash expenditures for the July 2013 acquisition of the PMR Service Companies were $47.4 million.

The indenture governing our 12% senior secured notes due 2018 includes covenants which are determined by reference to the Adjusted EBITDA of Diamond and its “restricted subsidiaries.” Adjusted EBITDA, as defined in the indenture, was $220.2 million for the year ended December 31, 2013. This includes a one-time charge of $10.5 million ($5.0 million of which was cash) related to the final settlement of the FLRX litigation.

Outlook

For the full year ending December 31, 2014, the Company is providing the following guidance for its expected operating results:

      Year Ending December 31, 2014
($ in thousands) Low  

High

Pre-tax income $ 65,000 $ 92,500
Corporate interest expense $ 56,500 $ 54,500
Vacation interest cost of sales(a) $ 79,500 $ 69,500
Depreciation and amortization $ 32,000 $ 30,000
Other non-cash items(b) $ 22,000 $ 18,500
 

For the year ending December 31, 2014, the Company anticipates cash expenditures for the acquisition of inventory, excluding inventory from acquisitions, to be between $30.0 million and $35.0 million. In addition, the company anticipates capital expenditures(c) to be between $18.0 million and $20.0 million.

(a)

    In accordance with ASC 978, the Company records Vacation Interest Cost of Sales using the relative sales value method (See Note 2 - Summary of Significant Accounting Policies in the Annual Report on Form 10-K for the year ended December 31, 2012 of Diamond Resorts Corporation). This method requires the Company to make a number of projections and estimates, which are subject to significant uncertainty and retroactive adjustment in the future periods. These "true-up" adjustments may result, and for the Company have resulted in prior periods, in major swings (both positive and negative) in the Company's pre-tax income computed in accordance with US GAAP that do not have a direct correlation to the operating performance for the periods in which the "true-ups" are made. It is difficult to predict with any degree of precision what the projections and estimates used in connection with the relative sales value method will be and what impact those projections and estimates will have on the amount recorded in future periods as Vacation Interest Cost of Sales. As a result, guidance for Vacation Interest Cost of Sales (and as a result, pre-tax income) covers a wide range of outcomes.
(b) Other non-cash items include: stock based compensation, amortization of loan origination costs, and amortization of net portfolio discounts and premiums.

(c)

Principally for IT infrastructure and sales center expansion/refurbishment. This does not include expenditures for the acquisition of inventory, or resort-level capital improvements which are paid by the homeowners associations.

 

About Diamond Resorts International®

Diamond Resorts International®, with its network of 306 vacation destinations located in 33 countries throughout the continental United States, Hawaii, Canada, Mexico, the Caribbean, South America, Central America, Europe, Asia, Australia and Africa provides guests with choices and flexibility as they design their dream vacation, whether they're traveling an hour away or around the world. Our hassle-free, relaxing vacations give guests a truly memorable experience every time, for a lifetime.

Diamond Resorts International® owns, operates and manages vacation ownership resorts and, through resort and partner affiliation agreements, provides members and owners with access to 92 managed resorts, 162 affiliated resorts, 48 affiliated hotels and four cruise itineraries through THE Club® at Diamond Resorts International®.

Basis of Presentation

On July 24, 2013, Diamond closed the initial public offering (“IPO”) of its common stock. Prior to the consummation of the initial public offering, Diamond was a newly-formed Delaware corporation that had not conducted any activities other than those incident to its formation and other actions in connection with the IPO. Diamond was formed for the purpose of changing the organizational structure of Diamond Resorts Parent, LLC (“DRP”) from a limited liability company to a corporation. Immediately prior to the consummation of the IPO, DRP was the sole stockholder of Diamond. In connection with, and immediately prior to the completion of the IPO, various reorganization transactions were effected ultimately with DRP merging with and into Diamond. See “Organizational Structure-Reorganization Transactions” in the Registration Statement on Form S-1 filed by Diamond with the Securities and Exchange Commission for additional information concerning these reorganization transactions. References in this press release to “Diamond,” “the Company,” ”DRII,” “we,” “us” and “our,” refer to Diamond Resorts International, Inc. and its subsidiaries, after giving effect to those reorganization transactions, and our consolidated financial statements and other historical financial data included in this press release for periods prior to July 24, 2013 are those of DRP and its subsidiaries after giving effect to the reorganization transactions.

Reconciliation of GAAP to Non-GAAP Measures

We believe supplementing our consolidated financial statements presented in accordance with U.S. GAAP with non-U.S. GAAP measures provides investors with useful information regarding our liquidity and short-term and long-term trends.

We define Adjusted EBITDA as our net income (loss), plus: (i) corporate interest expense; (ii) provision (benefit) for income taxes; (iii) depreciation and amortization; (iv) Vacation Interest cost of sales; (v) loss on extinguishment of debt; (vi) impairments and other non-cash write-offs; (vii) loss on the disposal of assets; (viii) amortization of loan origination costs; (ix) amortization of net portfolio premiums; and (x) stock-based compensation; less (a) gain on the disposal of assets; (b) gain on bargain purchase from business combination; and (c) amortization of net portfolio discounts. Adjusted EBITDA is a non-U.S. GAAP financial measure and should not be considered in isolation, or as an alternative to net cash provided by operating activities or any other measure of liquidity, or as an alternative to net income (loss), operating income (loss) or any other measure of financial performance, in each case calculated and presented in accordance with U.S. GAAP. Additional information regarding our calculation of Adjusted EBITDA is provided below.

We present Adjusted EBITDA primarily because, as indicated above, the indenture governing our 12% senior secured notes due 2018 includes covenants which are determined by reference to the Adjusted EBITDA of the Company and its “restricted subsidiaries,” and other of our debt-related agreements include covenants that are determined by reference to Adjusted EBITDA. As a result, we believe that supplementing our consolidated financial statements presented in accordance with US GAAP with this non-GAAP measure provides investors with useful information with respect to our liquidity.

In addition to its application under the Indenture for our senior secured notes, our management uses Adjusted EBITDA: (i) for planning purposes, including the preparation of our annual operating budget; (ii) to allocate resources to enhance the financial performance of our business; (iii) to evaluate the effectiveness of our business strategies and (iv) as a factor for determining compensation for personnel employed by the Company.

We understand that, although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluation of companies, it has limitations as an analytical tool, including:

  • Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures or Vacation Interest inventory;
  • Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
  • Adjusted EBITDA does not reflect cash requirements for income taxes;
  • Adjusted EBITDA does not reflect interest expense for our corporate indebtedness;
  • although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced, and Adjusted EBITDA does not reflect any cash requirements for these replacements;
  • we make expenditures to replenish Vacation Interests inventory (principally pursuant to our inventory recovery agreements and in connection with our strategic acquisitions), and Adjusted EBITDA does not reflect our cash requirements for these expenditures or certain costs of carrying such inventory (which are capitalized); and
  • other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.

The following tables present Adjusted EBITDA for us and our restricted subsidiaries, as calculated in accordance with, and for purposes of covenants contained in, the Notes Indenture, reconciled to each of (i) our net cash provided by (used in) operating activities and (ii) our net income (loss) for the periods presented.

         
Quarter Ended December 31, Year Ended December 31,
2013   2012 2013   2012
($ in thousands) ($ in thousands)
Net cash provided by (used in) operating activities $ 367 $ (739 ) $ (5,410 ) $ 24,600
Provision (benefit) for income taxes 12,554 (957 ) 5,777 (14,310 )
Provision for uncollectible Vacation Interest sales revenue(a) (14,939 ) (9,364 ) (44,670 ) (25,457 )

Amortization of capitalized financing costs and original issue discounts(a)

(1,472 ) (1,551 ) (7,079 ) (6,293 )
Deferred income taxes(b) (11,304 ) (602 ) (3,264 ) 13,010
Loss on foreign currency (c) (30 ) (211 ) (245 ) (113 )
Gain on mortgage purchase(a) 40 1 111 27
Unrealized gain on derivative instruments(d) 657

Unrealized loss on post-retirement benefit plan(e)

(113 ) (887 )
Corporate interest expense(f) 14,105 21,704 72,215 77,422

Change in operating assets and liabilities excluding acquisitions(g)

44,392 12,539 146,922 12,183
Vacation interest cost of sales(h) 11,244   14,975   56,695   32,150  
Adjusted EBITDA - Consolidated 55,501 35,795 220,165 113,219
Less: Adjusted EBITDA - Unrestricted Subsidiaries(i) 9,308 5,624 30,238 8,957
Plus: Intercompany elimination(j) 7,339   5,472   29,095   19,058  
Adjusted EBITDA - Diamond Resorts International, Inc. and Restricted Subsidiaries $ 53,532   $ 35,643   $ 219,022   $ 123,320  
 
(a)     Represents non-cash charge or gain.
(b) Represents the deferred income tax liability arising from the difference between the treatment for financial reporting purposes as compared to income tax return purposes, primarily related to the Island One Acquisition and the PMR Service Companies Acquisition in 2013 and the PMR Acquisition in 2012.
(c) Represents net realized losses on foreign exchange transactions settled at unfavorable exchange rates and unrealized net losses resulting from the devaluation of foreign currency-denominated assets and liabilities.
(d) Represents the effects of the changes in mark-to-market valuations of derivative liabilities.
(e) Represents unrealized losses on our post-retirement benefit plan related to a collective labor agreement entered into with the employees of our two resorts in St. Maarten.
(f) Represents corporate interest expense; does not include interest expense related to non-recourse indebtedness incurred by our special-purpose subsidiaries that is secured by our VOI consumer loans.
(g) Represents the net change in operating assets and liabilities excluding acquisitions, as computed directly from the statements of cash flows. Vacation Interest cost of sales is included in the net changes in unsold Vacation Interests, net, as presented in the statements of cash flows.
(h) We record Vacation Interest cost of sales using the relative sales value method in accordance with ASC 978, "Real-estate Time-Sharing Activities," which requires us to make significant estimates which are subject to significant uncertainty. In determining the appropriate amount of costs using the relative sales value method, we rely on complex, multi-year financial models that incorporate a variety of estimated inputs. These models are reviewed on a regular basis, and the relevant estimates used in the models are revised based upon historical results and management's new estimates.
(i) Represents the Adjusted EBITDA of unrestricted subsidiaries as defined in, and calculated in accordance with, the Notes Indenture.
(j) Represents the elimination of revenues and expenses related to agreements entered into between our restricted and unrestricted subsidiaries. The agreements include service agreements for sales and marketing management (terminated on July 24, 2013), resort management, reservation services and portfolio management, whereby certain restricted subsidiaries operate these functions on behalf of the unrestricted subsidiaries for a fee. In addition to these service agreements, we have also entered into intercompany sales agreements, whereby certain restricted subsidiaries purchase unsold Vacation Interests from unrestricted subsidiaries.
 
         
Quarter Ended December 31, Year Ended December 31,
2013   2012 2013   2012
($ in thousands) ($ in thousands)
Net income (loss) $ 3,573 $ (11,748 ) $ (2,525 ) $ 13,643
Plus: Corporate interest expense(a) 14,105 21,704 72,215 77,422
Provision (benefit) for income taxes 12,554 (957 ) 5,777 (14,310 )
Depreciation and amortization(b) 8,273 5,478 28,185 18,857
Vacation Interest cost of sales(c) 11,244 14,975 56,695 32,150
Loss on extinguishment of debt(c) 2,221 15,604
Impairments and other non-cash write-offs(b) 308 619 1,587 1,009
Gain on the disposal of assets(b) (309 ) (387 ) (982 ) (605 )
(Gain) adjustment on bargain purchase from business combinations(d) (153 ) 2,024 (2,879 ) (20,610 )
Amortization of loan origination costs(b) 1,543 904 5,419 3,295
Amortization of net portfolio premium (discounts)(b) 104 (138 ) 536 (953 )
Stock-based compensation(e) 2,038   3,321   40,533   3,321  
Adjusted EBITDA - Consolidated 55,501 35,795 220,165 113,219
Less: Adjusted EBITDA - Unrestricted Subsidiaries(f) 9,308 5,624 30,238 8,957
Plus: Adjusted EBITDA - Intercompany elimination(g) 7,339   5,472   29,095   19,058  
Adjusted EBITDA - Diamond Resorts International, Inc. and Restricted Subsidiaries $ 53,532   $ 35,643   $ 219,022   $ 123,320  
 
(a)     Corporate interest expense does not include interest expense related to non-recourse indebtedness incurred by our special-purpose vehicles that is secured by our VOI consumer loans.
(b) These items represent non-cash charges/gains.
(c) We record Vacation Interest cost of sales using the relative sales value method in accordance with ASC 978, which requires us to make significant estimates which are subject to significant uncertainty. In determining the appropriate amount of costs using the relative sales value method, we rely on complex, multi-year financial models that incorporate a variety of estimated inputs. These models are reviewed on a regular basis, and the relevant estimates used in the models are revised based upon historical results and management's new estimates.
(d) Represents the amount by which the fair value of the assets acquired net of the liabilities assumed in the PMR Service Companies Acquisition and the PMR Acquisition exceeded the respective purchase prices in 2013 and 2012, respectively.
(e) Represents the non-cash charge related to stock-based compensation due to stock options exercisable for approximately 6.6 million shares of common stock we issued in connection with the IPO.
(f) Represents the Adjusted EBITDA of unrestricted subsidiaries as defined in, and calculated in accordance with, the Notes Indenture.
(g)

Represents the elimination of revenues and expenses related to agreements entered into between our restricted and unrestricted subsidiaries. The significant agreements include service agreements for sales and marketing management, resort management, reservation services and portfolio management, whereby certain restricted subsidiaries operate these functions on behalf of the unrestricted subsidiaries for a fee. In addition to these service agreements, we have also entered into intercompany sales agreements, whereby certain restricted subsidiaries purchase unsold Vacation Interests from unrestricted subsidiaries.

 

The following tables present a reconciliation of (i) advertising, sales and marketing expense as reported to advertising, sales and marketing expense after excluding certain non-cash items; (ii) general and administrative expense as reported to general and administrative expense after excluding certain non-cash and one-time items; and (iii) income (loss) before provision (benefit) for income taxes to income (loss) before provision (benefit) for income taxes after excluding certain non-cash items for the periods presented below. We exclude these non-cash items because management excludes them from its forecasts and evaluation of our operational performance and because we believe that the GAAP measures including these items are not indicative of our core operating results.

         
Quarter Ended December 31, Year Ended December 31,
2013   2012 2013   2012
($ in thousands) ($ in thousands)
Advertising, sales and marketing expense $ 76,783 $ 53,774 $ 258,451   $ 178,365
Stock-based compensation (155 )   (2,104 )

Advertising, sales and marketing expense excluding stock-based compensation

$ 76,628   $ 53,774   $ 256,347   $ 178,365
 
         
Quarter Ended December 31, Year Ended December 31,
2013   2012 2013   2012
($ in thousands) ($ in thousands)
General and administrative expense $ 40,313 $ 28,078 $ 145,925   $ 99,015
Stock-based compensation (1,655 ) (3,321 ) (37,044 ) (3,321 )
Final settlement for the FLRX litigation (10,500 ) (10,500 )
 
Executive Termination       (5,000 )
General and administrative expense after excluding certain non-cash items $ 28,158   $ 24,757   $ 98,381   $ 90,694  
 



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