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As filed with the Securities and Exchange Commission on August 6, 2014

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

Commission File No. 1-34062

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INTERVAL LEISURE GROUP, INC.
(Exact name of registrant as specified in its charter)

(305) 666-1861
(Registrant's telephone number, including area code)

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        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý    No o

        Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "accelerated filer," "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):

        Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No ý

        As of August 1, 2014, 57,094,866 shares of the registrant's common stock were outstanding.

   

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PART 1—FINANCIAL STATEMENTS

Item 1.    Consolidated Financial Statements

INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(In thousands, except per share data)

(Unaudited)

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF EQUITY

(In thousands, except share data)

(Unaudited)

   

The accompanying Notes to Consolidated Financial Statements are an integral part of this statement.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

   

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(Unaudited)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION

Company Overview

        Interval Leisure Group, Inc., or ILG, is a leading global provider of membership and leisure services to the vacation industry. ILG consists of two operating segments. Membership and Exchange offers leisure and travel-related products and services to owners of vacation interests and others primarily through various membership programs, as well as related services to resort developer clients. Management and Rental provides hotel, condominium resort, timeshare resort and homeowners' association management, and rental services to both vacation property owners and vacationers.

        On November 4, 2013, VRI Europe Limited, a subsidiary of ILG, purchased the European shared ownership resort management business of CLC World Resorts and Hotels (CLC). As part of this transaction, ILG issued to CLC shares totaling 24.5% of VRI Europe Limited. Additionally, on December 12, 2013, we acquired all of the equity of Aqua Hospitality LLC and Aqua Hotels and Resorts, Inc., referred to as Aqua, a Hawaii-based hotel and resort management company representing 29 properties in Hawaii and Guam.

        In May 2014, we entered into an Equity Interest Purchase Agreement with Hyatt Corporation to acquire the Hyatt Residential Group business, including its capital contribution associated with its interest in a joint venture related to a 131-unit vacation ownership property in Maui. In connection with this transaction we will enter into an exclusive master license agreement and become Hyatt's exclusive licensee in vacation ownership. The closing of this transaction is subject to obtaining specified consents, in addition to other customary closing conditions, and the Equity Interest Purchase Agreement may be terminated in certain circumstances, including, among others, if the transaction does not close by December 31, 2014.

        The Membership and Exchange operating segment consists of Interval International Inc.'s businesses, referred to as Interval, and the membership and exchange related line of business of Trading Places International, or TPI, and VRI. The Management and Rental operating segment consists of Aston Hotels & Resorts (referred to as Aston), Aqua, VRI Europe and the management and rental related line of business of VRI and TPI.

Basis of Presentation

        The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP") for interim financial information and with the rules and regulations of the Securities and Exchange Commission. Accordingly, these financial statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of ILG's management, all adjustments (including normal recurring accruals) considered necessary for a fair presentation have been included. Interim results are not indicative of the results that may be expected for a full year.

        The accompanying unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2013 Annual Report on Form 10-K.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 1—ORGANIZATION AND BASIS OF PRESENTATION (Continued)

Seasonality

        Revenue at ILG is influenced by the seasonal nature of travel. The Membership and Exchange businesses recognize exchange and Getaway revenue based on confirmation of the vacation, with the first quarter generally experiencing higher revenue and the fourth quarter generally experiencing lower revenue. The Management and Rental businesses recognize rental revenue based on occupancy, with the first and third quarters generally generating higher revenue and the second and fourth quarters generally generating lower revenue. The timeshare and homeowners' association management part of this business does not experience significant seasonality.

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

        Our significant accounting policies were described in Note 2 to our audited consolidated financial statements included in our 2013 Annual Report on Form 10-K. Below we have included expanded descriptions of two of our significant accounting policies: our policy for accounting for business combinations to incorporate our process for determining the useful lives of identifiable intangible assets recognized separately from goodwill and a discussion which adds additional specificity to our policy on determining our allowance for doubtful accounts. Apart from these updates, there have been no significant changes in our significant accounting policies for the six months ended June 30, 2014.

Accounting for Business Combinations

        In accordance with ASC Topic 805, "Business Combinations," when accounting for business combinations we are required to recognize the assets acquired, liabilities assumed, contractual contingencies, noncontrolling interests and contingent consideration at their fair value as of the acquisition date. These items are recorded on our consolidated balance sheets as of the respective acquisition dates based upon their estimated fair values at such dates. The results of operations of acquired businesses are included in the consolidated statements of income since their respective acquisition dates.

        The purchase price allocation process requires management to make significant estimates and assumptions with respect to intangible assets, estimated contingent consideration payments and/or pre-acquisition contingencies, all of which ultimately affect the fair value of goodwill established as of the acquisition date. Goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date and is then subsequently tested for impairment at least annually.

        Additionally, as part of our accounting for business combinations we are required to determine the useful lives of identifiable intangible assets recognized separately from goodwill. The useful life of an intangible asset is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the acquired business. An intangible asset with a finite useful life shall be amortized; an intangible asset with an indefinite useful life shall not be amortized. We base the

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

estimate of the useful life of an intangible asset on an analysis of all pertinent factors, in particular, all of the following factors with no one factor being more presumptive than the other:

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The expected use of the asset.



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The expected useful life of another asset or a group of assets to which the useful life of the intangible asset may relate.



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Any legal, regulatory, or contractual provisions that may limit the useful life.



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Our own historical experience in renewing or extending similar arrangements, consistent with our intended use of the asset, regardless of whether those arrangements have explicit renewal or extension provisions.



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The effects of obsolescence, demand, competition, and other economic factors.



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The level of maintenance expenditures required to obtain the expected future cash flows from the asset.

        If no legal, regulatory, contractual, competitive, economic, or other factors limit the useful life of an intangible asset to the reporting entity, the useful life of the asset shall be considered to be indefinite. The term indefinite does not mean the same as infinite or indeterminate. The useful life of an intangible asset is indefinite if that life extends beyond the foreseeable horizon—that is, there is no foreseeable limit on the period of time over which it is expected to contribute to the cash flows of the acquired business.

        Although we believe the assumptions and estimates we have made have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired entity and are inherently uncertain. Examples of critical estimates in accounting for acquisitions include but are not limited to:

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the estimated fair value of the acquisition-related contingent consideration, which is performed using a probability-weighted income approach based upon the forecasted achievement of post-acquisition pre-determined targets;



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the future expected cash flows from sales of products and services and related contracts and agreements; and



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discount and long-term growth rates.

        Unanticipated events and circumstances may occur which could affect the accuracy or validity of our assumptions, estimates or actual results. Additionally, any change in the fair value of the acquisition-related contingent consideration subsequent to the acquisition date, including changes resulting from events that occur after the acquisition date, such as changes in our estimated fair value of the targets that are expected to be achieved, will be recognized in earnings in the period of the change in estimated fair value.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounts Receivable

        Accounts receivable are stated at amounts due from customers, principally resort developers, members and managed properties, net of an allowance for doubtful accounts. Accounts receivable outstanding longer than the contractual payment terms are considered past due. ILG determines its allowance by considering a number of factors, including the length of time accounts receivable are past due, ILG's previous loss history, our judgment as to the specific customer's current ability to pay its obligation to ILG and the condition of the general economy. More specifically, ILG's policy for determining its allowance for doubtful accounts consists of both general and specific reserves. The general reserve methodology is distinct for each ILG business based on its historical collection experience and past practice. Predominantly, receivables greater than 120 days past due are applied a general reserve factor, while receivables 180 days or more past due are fully reserved. The determination of when to apply a specific reserve requires judgment and is directly related to the particular customer collection issue identified, such as known liquidity constraints, insolvency concerns or litigation.

        The allowance for bad debt is included within general and administrative expense within our consolidated statements of income. ILG writes off accounts receivable when they become uncollectible once we have exhausted all reasonable means of collection.

Accounting Estimates

        ILG's management is required to make certain estimates and assumptions during the preparation of its consolidated financial statements in accordance with GAAP. These estimates and assumptions impact the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as of the date of the consolidated financial statements. They also impact the reported amount of net earnings during any period. Actual results could differ from those estimates.

        Significant estimates underlying the accompanying consolidated financial statements include: the recovery of long-lived assets as well as goodwill and other intangible assets; purchase price allocations of business combinations; the determination of deferred income taxes including related valuation allowances; the determination of deferred revenue and membership costs; and the determination of stock-based compensation. In the opinion of ILG's management, the assumptions underlying the historical consolidated financial statements of ILG and its subsidiaries are reasonable.

Earnings per Share

        Basic earnings per share attributable to common stockholders is computed by dividing the net income attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per share attributable to common stockholders is computed based on the weighted average number of shares of common stock and dilutive securities outstanding during the period. Dilutive securities are common stock equivalents that are freely exercisable into common stock at less than market prices or otherwise dilute earnings if converted. The net effect of common stock equivalents is based on the incremental common stock that would be issued

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

upon the assumed exercise of common stock options and the vesting of restricted stock units ("RSUs") using the treasury stock method. Common stock equivalents are not included in diluted earnings per share when their inclusion is antidilutive. The computations of diluted earnings per share available to common stockholders do not include approximately 0.8 million stock options for the three and six months ended June 30, 2014, respectively, and 0.9 million and 0.8 million stock options and RSUs for the three and six months ended June 30, 2013, respectively, as the effect of their inclusion would have been antidilutive to earnings per share.

        In connection with the spin-off, stock options to purchase ILG common stock were granted to non-ILG employees for which there is no future compensation expense to be recognized by ILG. As of June 30, 2014 and 2013, 0.8 million and 0.9 million, respectively, of stock options remained outstanding.

        The computation of weighted average common and common equivalent shares used in the calculation of basic and diluted earnings per share is as follows (in thousands):

Recent Accounting Pronouncements

        With the exception of those discussed below, there are no recent accounting pronouncements or changes in accounting pronouncements since the recent accounting pronouncements described in our 2013 Annual Report on Form 10-K that are of significance, or potential significance, to ILG based on our current operations. The following summary of recent accounting pronouncements is not intended to be an exhaustive description of the respective pronouncement.

        In June 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-12, "Compensation—Stock Compensation (Topic 718): Accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period ("ASU 2014-12"). ASU 2014-12 clarifies that entities should treat performance targets that can be met after the requisite service period of a share-based payment award as performance conditions that affect vesting. Therefore, an entity would not record compensation expense (measured as of the grant date without taking into account the effect of the performance target) related to an award for which transfer to the employee is contingent on the entity's satisfaction of a performance target until it becomes probable that the performance target will be met. No new disclosures are required under ASU 2014-12. The ASU is effective for fiscal years beginning after December 15, 2015 (and interim periods within that period), with early adoption permitted. In addition,

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

all entities will have the option of applying the guidance either prospectively (i.e. only to awards granted or modified on or after the effective date of the issue) or retrospectively. Retrospective application would only apply to awards with performance targets outstanding at or after the beginning of the first annual period presented (i.e., the earliest presented comparative period). We do not currently anticipate the adoption of this guidance will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements.

        In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"). The FASB and the International Accounting Standards Board ("IASB") initiated a joint project to clarify the principles for recognizing revenue and to develop a common revenue standard for U.S. GAAP and IFRS that would: (i) remove inconsistencies and weaknesses in revenue requirements; (ii) provide a more robust framework for addressing revenue issues; (iii) improve comparability of revenue recognition practices across entities, industries, jurisdictions, and capital markets; (iv) provide more useful information to users of financial statements through improved disclosure requirements; and (v) simplify the preparation of financial statements by reducing the number of requirements to which an entity must refer. To meet those objectives, the FASB amended the FASB Accounting Standards Codification ("Codification") and created a new Topic 606, Revenue from Contracts with Customers. The core principle of the guidance in ASU 2014-09 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance in this ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry specific guidance throughout the Industry Topics of the Codification. Additionally, ASU 2014-09 supersedes some cost guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. The ASU is effective for fiscal years beginning after December 15, 2016 (and interim periods within that period); early adoption is not permitted. Given the complexities of this new standard, we are unable to determine, at this time, whether adoption of this standard will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.

        In April 2014, the FASB ASU No. 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360)" ("ASU 2014-08"). The amendments in ASU 2014-08 change the requirements for reporting and disclosing discontinued operations. Among other items, this new guidance defines a discontinued operation as a disposal of a component or group of components that is disposed of or is classified as held for sale and "represents a strategic shift that has (or will have) a major effect on an entity's operations and financial results." The standard states that a strategic shift could include a disposal of (i) a major geographical area of operations, (ii) a major line of business, (iii) a major equity method investment, or (iv) other major parts of an entity. The ASU is effective for fiscal years beginning after December 15, 2014 (and interim periods within those fiscal years), with early adoption permitted. We do not currently anticipate the adoption of this guidance will have a material impact on our consolidated financial position, results of operations, cash flows or

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements.

        In January 2014, the FASB issued ASU No. 2014-04, "Receivables—Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure" ("ASU 2014-04"). Current US GAAP requires a loan to be reclassified to Other Real Estate Owned ("OREO") upon a troubled debt restructuring that is "in substance a repossession or foreclosure," where the creditor receives "physical possession" of the debtor's assets regardless of whether formal foreclosure proceedings take place. The amendments in ASU 2014-04 clarify when an "in substance a repossession or foreclosure" and "physical possession" has occurred as these terms are not defined in US GAAP, in addition to requiring certain supplementary interim and annual disclosures. The ASU is effective for fiscal years beginning after December 15, 2014 (and interim periods within those fiscal years) and shall be applied prospectively, with early adoption permitted. We do not currently anticipate the adoption of this guidance will have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures; however, we will continue to assess through the effective date the future impact, if any, of this new accounting update to our consolidated financial statements.

Adopted Accounting Pronouncements

        In July 2013, the FASB issued ASU 2013-10, "Derivatives and Hedging (Topic 815): Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate, ("OIS")) as a Benchmark Interest Rate for Hedge Accounting Purposes (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2013-10"). ASU 2013-10 ratified the Task Force's consensus to allow the Fed Funds effective swap rate to serve as a benchmark interest rate in the United States, which was previously defined in ASC 815 as either (1) a rate on direct obligations of the U.S. Department of the Treasury (UST) or (2) the LIBOR swap rate. ASU 2013-10 does not add to the disclosure requirements in ASC 815-10-50; however, in order to comply with the required disclosures related to fair value in ASC 820 a separate process for determining the fair value hierarchy of derivatives when the OIS rate is an input may be required. The ASU is required to be applied prospectively for qualifying new or re-designated hedging relationships entered into on or after July 17, 2013. The adoption of ASU 2013-10 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.

        In March 2013, the FASB issued ASU 2013-05, "Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment ("CTA") upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force)" ("ASU 2013-05"). ASU 2013-05 applies to the release of the CTA into net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. The ASU does not change the requirement to release a pro rata portion of the CTA of the foreign entity into earnings for a partial sale of an equity method investment in a foreign entity. The ASU is effective for fiscal years beginning after December 15, 2013 (and interim periods

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

within those fiscal years) and shall be applied prospectively. The adoption of ASU 2013-05 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.

        In February 2013, the FASB issued ASU 2013-04, "Liabilities (Topic 405): Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed at the Reporting Date" ("ASU 2013-04"). ASU 2013-04 provides guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of this ASU is fixed at the reporting date. The ASU requires an entity to measure those obligations as the sum of the amount the reporting entity agreed to pay on the basis of its arrangements among its co-obligors as well as any additional amount the reporting entity expects to pay on behalf of its co-obligors. ASU 2013-04 also requires an entity to disclose the nature and amount of those obligations. The ASU is effective for fiscal years beginning after December 15, 2013 (and interim periods within those years), and shall be applied retrospectively. The adoption of ASU 2013-04 did not have a material impact on our consolidated financial position, results of operations, cash flows or related disclosures.

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS

        Pursuant to FASB guidance as codified within ASC 350, "Intangibles—Goodwill and Other," goodwill acquired in business combinations is assigned to the reporting unit(s) expected to benefit from the combination as of the acquisition date. ILG determined our Membership and Exchange and Management and Rental operating segments are individual reporting units which are also individual reportable segments of ILG pursuant to ASC 280, Segment Reporting ("ASC 280"). ILG tests goodwill and other indefinite-lived intangible assets for impairment annually as of October 1, or more frequently if events or changes in circumstances indicate that the assets might be impaired. Goodwill is tested for impairment based on either a qualitative assessment or a two-step impairment test, as more fully described in Note 2 of our 2013 Annual Report on Form 10-K. When performing the two-step impairment test, if the carrying amount of a reporting unit's goodwill exceeds its implied fair value, an impairment loss equal to the excess is recorded.

        As of October 1, 2013, we reviewed the carrying value of goodwill and other intangible assets of each of our two reporting units. Goodwill assigned to the Membership and Exchange and Management and Rental reporting units as of that date was $483.5 million and $22.3 million, respectively. We elected to bypass the qualitative assessment for the 2013 annual test and performed the first step of the impairment test on both our reporting units. Following the impairment test, we concluded that each reporting unit's fair value exceeded its carrying value and, therefore, the second step of the impairment test was not necessary. As of June 30, 2014, we did not identify any triggering events which required an interim impairment test subsequent to our annual impairment test on October 1, 2013.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

        The following tables present the balance of goodwill by reporting unit, including the changes in carrying amount of goodwill as of June 30, 2014 and December 31, 2013 (in thousands):

 

Other Intangible Assets

        The balance of other intangible assets, net as of June 30, 2014 and December 31, 2013 is as follows (in thousands):

        The $1.3 million change in our indefinite-lived intangible assets during the six months ended June 30, 2014 reflects the associated foreign currency translation of intangible assets carried on the books of an ILG entity whose functional currency is not the US dollar.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 3—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

        At June 30, 2014 and December 31, 2013, intangible assets with indefinite lives relate to the following (in thousands):

        At June 30, 2014, intangible assets with definite lives relate to the following (in thousands):

        At December 31, 2013, intangible assets with definite lives relate to the following (in thousands):

        Amortization of intangible assets with definite lives is primarily computed on a straight-line basis. Total amortization expense for intangible assets with definite lives was $2.9 million and $1.9 million for the three months ended June 30, 2014 and 2013, respectively, and $5.9 million and $3.9 million for the six months ended June 30, 2014 and 2013, respectively. Based on June 30, 2014 balances, amortization expense for the next five years and thereafter is estimated to be as follows (in thousands):

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 4—PROPERTY AND EQUIPMENT

        Property and equipment, net is as follows (in thousands):

NOTE 5—LONG-TERM DEBT

        Long-term debt is as follows (in thousands):

Credit Facility

        In April 2014, we entered into the first amendment to the June 21, 2012 amended and restated credit agreement (collectively, the "Amended Credit Agreement") which increases the revolving credit facility from $500 million to $600 million, extends the maturity of the credit facility to April 8, 2019 and provides for certain other amendments to covenants. The terms related to interest rates and commitment fees remain unchanged. As of June 30, 2014, there was $268 million outstanding on the revolving credit facility. Any principal amounts outstanding under the revolving credit facility are due at maturity. The interest rate on the Amended Credit Agreement is based on (at our election) either LIBOR plus a predetermined margin that ranges from 1.25% to 2.25%, or the Base Rate as defined in the Amended Credit Agreement plus a predetermined margin that ranges from 0.25% to 1.25%, in each case based on our leverage ratio. As of June 30, 2014, the applicable margin was 1.50% per annum for LIBOR revolving loans and 0.50% per annum for Base Rate loans. The Amended Credit Agreement has a commitment fee on undrawn amounts that ranges from 0.25% to 0.375% per annum based on our leverage ratio and as of June 30, 2014 the commitment fee was 0.275%. Interest expense for each of the three months ended June 30, 2014 and 2013 was $1.6 million, respectively, and for the six months ended June 30, 2014 and 2013 was $3.0 million and $3.3 million, respectively.

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 5—LONG-TERM DEBT (Continued)

        Pursuant to the Amended Credit Agreement, all obligations under the revolving credit facility are unconditionally guaranteed by ILG and certain of its subsidiaries. Borrowings are further secured by (1) 100% of the voting equity securities of ILG's U.S. subsidiaries and 65% of the equity in our first-tier foreign subsidiaries and (2) substantially all of our domestic tangible and intangible property.

Restrictions and Covenants

        The Amended Credit Agreement has various financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness, incur additional liens, issue redeemable stock and preferred stock, pay dividends or distributions or redeem or repurchase capital stock, prepay, redeem or repurchase debt, make loans and investments, enter into agreements that restrict distributions from our subsidiaries, sell assets and capital stock of our subsidiaries, enter into certain transactions with affiliates and consolidate or merge with or into or sell substantially all of our assets to another person.

        The Amended Credit Agreement requires us to meet certain financial covenants regarding the maintenance of a maximum consolidated leverage ratio of consolidated debt, less credit given for a portion of foreign cash, over consolidated Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), as defined in the Amended Credit Agreement. Additionally, we are required to maintain a minimum consolidated interest coverage ratio of consolidated EBITDA over consolidated interest expense, as defined in the Amended Credit Agreement. Currently, the maximum consolidated leverage ratio is 3.5x and the minimum consolidated interest coverage ratio is 3.0x. As of June 30, 2014, ILG was in compliance in all material respects with the requirements of all applicable financial and operating covenants, and our consolidated leverage ratio and consolidated interest coverage ratio under the Amended Credit Agreement were 1.43 and 33.08, respectively.

Debt Issuance Costs

        In connection with entering into the Amended Credit Agreement in June 2012, we incurred $3.9 million of lender and third-party debt issuance costs and wrote-off the remaining unamortized balance of $0.6 million relating to the original revolving credit and term loan facilities. In connection with entering into the first amendment in April 2014, we carried over $2.5 million of unamortized debt issuance costs pertaining to our June 2012 Amended Credit Agreement and incurred and deferred an additional $1.7 million of debt issuance costs. As of June 30, 2014, total unamortized debt issuance costs were $4.1 million, net of $1.6 million of accumulated amortization. As of December 31, 2013, total debt issuance costs on outstanding debt were $2.7 million, net of $1.2 million of accumulated amortization. Unamortized debt issuance costs are included in "Other non-current assets" in our consolidated balance sheets and are amortized to "Interest expense" on a straight-line basis through the maturity date of the Amended Credit Agreement.

NOTE 6—FAIR VALUE MEASUREMENTS

        In accordance with ASC Topic 820, "Fair Value Measurement," ("ASC 820") the fair value of an asset is considered to be the price at which the asset could be sold in an orderly transaction between

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NOTE 6—FAIR VALUE MEASUREMENTS (Continued)

unrelated knowledgeable and willing parties. A liability's fair value is defined as the amount that would be paid to transfer the liability to a new obligor, not the amount that would be paid to settle the liability with the creditor. Assets and liabilities recorded at fair value are measured using a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:

Fair Value of Financial Instruments

        The estimated fair value of financial instruments below has been determined using available market information and appropriate valuation methodologies, as applicable. There have been no changes in the methods and significant assumptions used to estimate the fair value of financial instruments during the three and six months ended June 30, 2014. Our financial instruments include guarantees, letters of credit and surety bonds.

        The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents reflected in the accompanying consolidated balance sheets approximate fair value as they are redeemable at par upon notice or maintained with various high-quality financial institutions and have original maturities of three months or less. Under the fair value hierarchy established in ASC 820, cash and cash equivalents and restricted cash and cash equivalents are stated at fair value based on quoted prices in active markets for identical assets (Level 1).

        The carrying value of the outstanding balance under our revolving credit facility approximates fair value as of June 30, 2014 and December 31, 2013 through inputs inherent to the debt such as variable interest rates and credit risk (Level 2).

        The guarantees, surety bonds, and letters of credit represent liabilities that are carried on our balance sheet only when a future related contingent event becomes probable and reasonably estimable. These commitments are in place to facilitate our commercial operations. The related fair value of these liabilities is estimated at the minimum expected cash flows contractually required to satisfy the related liabilities in the future upon occurrence of the applicable contingent events (Level 2).

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NOTE 6—FAIR VALUE MEASUREMENTS (Continued)

Fair Value of Contingent Consideration

        In connection with the VRI Europe transaction, we have an obligation to transfer additional consideration in the form of cash, resulting in incremental noncontrolling interest value in VRI Europe, based on final results of the acquired business for the twelve months ended December 31, 2013. During the second quarter of 2014, the parties reached final agreement resulting in a downward adjustment to the amount of contingent consideration by approximately $1.3 million, net of noncontrolling interest, which was recognized in earnings during the quarter. The final agreed upon liability of $6.5 million was settled in full during the quarter.

        Additionally, in connection with our fourth quarter 2013 acquisitions, certain amounts related to the purchase consideration paid at closing were deposited into escrow to be held subject to specified future events which could occur over a period ranging from the respective acquisition dates up to 36 months thereafter, as applicable. Pursuant to ASC 805, we consider these escrowed funds to be contingent consideration whereby their release from escrow is subject to future performance. During the second quarter of 2014, the performance related to these escrowed funds was completed and consequently, the escrowed funds were released to the respective third parties and our contingent consideration liability (and corresponding asset representing the prepayment into escrow) were relieved on our consolidated balance sheet as of June 30, 2014.

NOTE 7—EQUITY

        ILG has 300 million authorized shares of common stock, par value of $.01 per share. At June 30, 2014, there were 59.5 million shares of ILG common stock issued, of which 57.2 million are outstanding with 2.3 million shares held as treasury stock. At December 31, 2013, there were 59.1 million shares of ILG common stock issued, of which 57.4 million were outstanding with 1.7 million shares held as treasury stock.

        ILG has 25 million authorized shares of preferred stock, par value $.01 per share, none of which are issued or outstanding as of June 30, 2014 and December 31, 2013. The Board of Directors has the authority to issue the preferred stock in one or more series and to establish the rights, preferences, and dividends.

Dividends Declared

        In February and May 2014, our Board of Directors declared quarterly dividend payments of $0.11 per share to shareholders of record on March 13, 2014 and June 4, 2014, respectively. In each of March and June 2014, a cash dividend of $6.3 million was paid.

        In August 2014, our Board of Directors declared a $0.11 per share dividend payable September 17, 2014 to shareholders of record on September 3, 2014.

Stockholder Rights Plan

        In June 2009, ILG's Board of Directors approved the creation of a Series A Junior Participating Preferred Stock, adopted a stockholders rights plan and declared a dividend of one right for each

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NOTE 7—EQUITY (Continued)

outstanding share of common stock held by our stockholders of record as of the close of business on June 22, 2009. The rights attach to any additional shares of common stock issued after June 22, 2009. These rights, which trade with the shares of our common stock, currently are not exercisable. Under the rights plan, these rights will be exercisable if a person or group acquires or commences a tender or exchange offer for 15% or more of our common stock. The rights plan provides certain exceptions for acquisitions by Liberty Interactive Corporation (formerly known as Liberty Media Corporation) in accordance with an agreement entered into with ILG in connection with its spin-off from IAC/InterActiveCorp (IAC). If the rights become exercisable, each right will permit its holder, other than the "acquiring person," to purchase from us shares of common stock at a 50% discount to the then prevailing market price. As a result, the rights will cause substantial dilution to a person or group that becomes an "acquiring person" on terms not approved by our Board of Directors.

Share Repurchase Program

        Effective August 3, 2011 and June 4, 2014, ILG's Board of Directors authorized a share repurchase program for up to $25.0 million and $20.0 million, respectively, excluding commissions, of our outstanding common stock. Acquired shares of our common stock are held as treasury shares carried at cost on our consolidated financial statements. Common stock repurchases may be conducted in the open market or in privately negotiated transactions. The amount and timing of all repurchase transactions are contingent upon market conditions, applicable legal requirements and other factors. This program may be modified, suspended or terminated by us at any time without notice.

        During the six months ended June 30, 2014, we repurchased 0.2 million shares of common stock for $4.1 million, including commissions, under the August 2011 repurchase program, and 0.4 million shares of common stock for $9.5 million, including commissions, under the June 2014 repurchase program. As of June 30, 2014, the remaining availability for future repurchases of our common stock was $10.5 million.

Accumulated Other Comprehensive Loss

        Pursuant to final guidance issued by the FASB in February of 2013, entities are required to disclose additional information about reclassification adjustments within accumulated other comprehensive income/loss, referred to as AOCL for ILG, including (1) changes in AOCL balances by component and (2) significant items reclassified out of AOCL in the period. For the six months ended June 30, 2014, there were no significant items reclassified out of AOCL, and the change in AOCL pertains to current period foreign currency translation adjustments as disclosed in our accompanying consolidated statements of comprehensive income.

Noncontrolling Interest and Redeemable Noncontrolling Interest

Noncontrolling Interest

        In connection with the VRI Europe transaction on November 4, 2013, CLC was issued a noncontrolling interest in VRI Europe valued at 24.5% of the business, which was determined based on the purchase price paid by ILG for its 75.5% ownership interest as of the acquisition date. As of

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NOTE 7—EQUITY (Continued)

June 30, 2014 and December 31, 2013, this noncontrolling interest amounts to $34.7 million and $32.7 million, respectively, and is presented on our consolidated balance sheets as a component of equity. The change from December 31, 2013 to June 30, 2014 relates to the recognition of the noncontrolling interest holder's proportional share of VRI Europe's earnings, the translation effect on the foreign currency based amount, and a $0.4 million adjustment related to contingent consideration as discussed in Note 6 to the consolidated financial statements.

        The parties have agreed not to transfer their interests in VRI Europe or CLC's related development business for a period of five years from the acquisition. In addition, they have agreed to certain rights of first refusal, and customary drag along and tag along rights, including a right by CLC to drag along ILG's VRI Europe shares in connection with a sale of the entire CLC resort business subject to minimum returns and a preemptive right by ILG. As of June 30, 2014, there have been no changes in ILG's ownership interest percentage in VRI Europe.

        Additionally, in connection with this arrangement, ILG and CLC entered into a loan agreement whereby ILG has made available to CLC a convertible secured loan facility of $15.1 million that matures five years subsequent to the funding date with interest payable monthly. The outstanding loan is to be repaid in full at maturity either in cash or by means of a share option exercisable by ILG, at its sole discretion, which would allow for settlement of the loan in CLC's shares of VRI Europe for contractually determined equivalent value. The funding of this loan is subject to certain conditions precedent that have not been met as of June 30, 2014.

Redeemable Noncontrolling Interest

        The redeemable noncontrolling interest presented on our consolidated balance sheet as temporary equity represents a noncontrolling ownership in the parent company of our Aston and Aqua businesses. In connection with the acquisition of Aston by ILG in May 2007, a member of senior management of this business purchased an ownership interest at the same per share price as ILG, a portion of which accrues preferred dividends at a rate of 10% per annum, and was granted an additional interest vesting over four and a half years. ILG is party to a fair value put and call arrangement with respect to this individual's holdings whereby this member of management could require ILG to purchase their interest or ILG could acquire such interest at fair value. The fair value of these shares upon exercise of the put or call is equal to their fair market value, determined by negotiation or arbitration, reduced by the accreted value of the preferred interest that was taken by ILG upon the purchase of Aston. The initial value of the preferred interest was equal to the acquisition price of Aston. An additional put right by the holder and call right by ILG would require, upon exercise, the purchase of these non-voting common shares by ILG immediately prior to a registered public offering by Aston, at the public offering price.

        This put arrangement is exercisable by the counter-party outside the control of ILG and is accounted for in accordance with the ASC Topic 480, "Distinguishing Liabilities from Equity" ("ASC 480"). Pursuant to this guidance, we are required to adjust the carrying value of this noncontrolling interest, once redeemable, to its maximum redemption amount at each balance sheet date with a corresponding adjustment to retained earnings. Furthermore, if the noncontrolling interest

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(Unaudited)

NOTE 7—EQUITY (Continued)

is not currently redeemable yet probable of becoming redeemable, we are required to either (1) accrete changes in the redemption value over the period from the date of issuance (or from the date that it becomes probable that the security will become redeemable, if later) to the earliest redemption date of the instrument using an appropriate methodology, usually the interest method, or (2) recognize changes in the redemption value (for example, fair value) immediately as they occur and adjust the carrying value of the security to equal the redemption value at the end of each reporting period. In applicable periods, we elect to use the second approach.

        This put and call arrangement became redeemable in the first quarter of 2014 upon filing our 2013 Annual Report on Form 10-K, and is exercisable for a period of 60 days and annually thereafter. Upon exercise of the put or call, the consideration payable can be denominated in ILG shares, cash or a combination thereof at ILG's option.

        As of June 30, 2014, the estimated redemption value of this redeemable interest is lower than the current carrying value on our consolidated balance sheet. Consequently, pursuant to the applicable accounting guidance, no adjustment to the balance of this noncontrolling interest was recorded for the six months ended June 30, 2014.

        The balance of redeemable noncontrolling interest as of June 30, 2014 and 2013 was $0.4 million. Changes during the periods then ended are as follows (in thousands):

NOTE 8—BENEFIT PLANS

        Under a retirement savings plan sponsored by ILG, qualified under Section 401(k) of the Internal Revenue Code, participating employees may contribute up to 50.0% of their pre-tax earnings, but not more than statutory limits. ILG provides a discretionary match under the ILG plan of fifty cents for each dollar a participant contributed into the plan with a maximum contribution of 3% of a participant's eligible earnings, subject to Internal Revenue Service ("IRS") restrictions. Matching contributions for the ILG plan were approximately $0.5 million and $1.0 million for the three and six months ended June 30, 2014, respectively. For the three and six months ended June 30, 2013, matching contributions for the ILG plan were approximately $0.4 million and $0.8 million, respectively. Matching contributions were invested in the same manner as each participant's voluntary contributions in the investment options provided under the plan.

        During the three and six months ended June 30, 2014 and 2013, we also had or participated in various benefit plans, principally defined contribution plans, for non-U.S. employees. Our contributions for these plans were approximately $0.1 million in each of the three and six months ended June 30, 2014 and 2013.

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JUNE 30, 2014

(Unaudited)

NOTE 8—BENEFIT PLANS (Continued)

        Effective August 20, 2008, a deferred compensation plan (the "Director Plan") was established to provide non-employee directors of ILG an option to defer director fees on a tax-deferred basis. Participants in the Director Plan are allowed to defer a portion or all of their compensation and are 100% vested in their respective deferrals and earnings. With respect to director fees earned for services performed after the date of such election, participants may choose from receiving cash or stock at the end of the deferral period. ILG has reserved 100,000 shares of common stock for issuance pursuant to this plan, of which 44,233 share units were outstanding at June 30, 2014. ILG does not provide matching or discretionary contributions to participants in the Director Plan. Any deferred compensation elected to be received in stock is included in diluted earnings per share.

NOTE 9—STOCK-BASED COMPENSATION

        On May 21, 2013, ILG adopted the Interval Leisure Group, Inc. 2013 Stock and Incentive Plan and stopped granting awards under the ILG 2008 Stock and Annual Incentive Plan. Both plans provide for the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, and other stock-based awards. RSUs are awards in the form of phantom shares or units, denominated in a hypothetical equivalent number of shares of ILG common stock and with the value of each award equal to the fair value of ILG common stock at the date of grant. Each RSU is subject to service-based vesting, where a specific period of continued employment must pass before an award vests. We grant awards subject to graded vesting (i.e., portions of the award vest at different times during the vesting period) or to cliff vesting (i.e., all awards vest at the end of the vesting period). In addition, certain RSUs are subject to attaining specific performance criteria.

        ILG recognizes non-cash compensation expense for all RSUs held by ILG's employees. For RSUs to be settled in stock, the accounting charge is measured at the grant date as the fair value of ILG common stock and expensed as non-cash compensation over the vesting term using the straight-line basis for service awards and the accelerated basis for performance-based awards with graded vesting. Certain cliff vesting awards contain performance criteria which are tied to anticipated future results of operations in determining the fair value of the award, while other cliff vesting awards with performance criteria are tied to the achievement of certain market conditions. This value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line recognition method. The expense associated with RSU awards to be settled in cash is initially measured at fair value at the grant date and expensed ratably over the vesting term, recording a liability subject to mark-to-market adjustments for changes in the price of the respective common stock, as compensation expense.

        Shares underlying RSUs are not issued or outstanding until vested. In relation to our quarterly dividend, unvested RSUs are credited with dividend equivalents, in the form of additional RSUs, when dividends are paid on our shares of common stock. Such additional RSUs are forfeitable and will have the same vesting dates and will vest under the same terms as the RSUs in respect of which such additional RSUs are credited. Given such dividend equivalents are forfeitable, we do not consider them to be participating securities and, consequently, they are not subject to the two-class method of determining earnings per share.

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JUNE 30, 2014

(Unaudited)

NOTE 9—STOCK-BASED COMPENSATION (Continued)

        Under the ILG 2013 Stock and Incentive Compensation Plan, the maximum aggregate number of shares of common stock reserved for issuance as of adoption is 4.1 million shares, less one share for every share granted under any prior plan after December 31, 2012. As of June 30, 2014, ILG has 3.0 million shares available for future issuance under the 2013 Stock and Incentive Compensation Plan.

        During the first quarter of 2014 and 2013, the Compensation Committee granted approximately 390,000 and 657,000 RSUs, respectively, vesting over three to five years, to certain officers and employees of ILG and its subsidiaries. Of these RSUs granted in 2014 and 2013, approximately 116,000 and 300,000 cliff vest in three to five years and approximately 84,000 and 58,000 of these RSUs, respectively, are subject to performance criteria that could result between 0% and 200% of these awards being earned either based on defined adjusted EBITDA or relative total shareholder return targets over the respective performance period, as specified in the award document.

        For the 2014 and 2013 RSUs subject to relative total shareholder return performance criteria, the number of RSUs that may ultimately be awarded depends on whether the market condition is achieved. We used a Monte Carlo simulation analysis to estimate a per unit grant date fair value of $36.90 for 2014 and $29.61 for 2013 for these performance based RSUs. This analysis estimates the total shareholder return ranking of ILG as of the grant date relative to two peer groups approved by the Compensation Committee, over the remaining performance period. The expected volatility of ILG's common stock at the date of grant was estimated based on a historical average volatility rate for the approximate three-year performance period. The dividend yield assumption was based on historical and anticipated dividend payouts. The risk-free interest rate assumption was based on observed interest rates consistent with the approximate three-year performance measurement period.

        Non-cash compensation expense related to RSUs for each of the three months ended June 30, 2014 and 2013 was $2.6 million. For the six months ended June 30, 2014 and 2013, non-cash compensation expense related to RSUs was $5.5 million and $5.1 million, respectively. At June 30, 2014, there was approximately $20.2 million of unrecognized compensation cost, net of estimated forfeitures, related to RSUs, which is currently expected to be recognized over a weighted average period of approximately 2.0 years.

        The amount of stock-based compensation expense recognized in the consolidated statements of income is reduced by estimated forfeitures, as the amount recorded is based on awards ultimately expected to vest. The forfeiture rate is estimated at the grant date based on historical experience and revised, if necessary, in subsequent periods for any changes to the estimated forfeiture rate from that previously estimated. For any vesting tranche of an award, the cumulative amount of compensation cost recognized is at least equal to the portion of the grant-date value of the award tranche that is actually vested at that date.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 9—STOCK-BASED COMPENSATION (Continued)

        Non-cash stock-based compensation expense related to equity awards is included in the following line items in the accompanying consolidated statements of income for the three and six months ended June 30, 2014 and 2013 (in thousands):

        The following table summarizes RSU activity during the six months ended June 30, 2014:

NOTE 10—INCOME TAXES

        ILG calculates its interim income tax provision in accordance with ASC 740, "Income Taxes." At the end of each interim period, ILG makes its best estimate of the annual expected effective tax rate and applies that rate to its ordinary year-to-date earnings or loss. The income tax or benefit related to significant, unusual, or extraordinary items that will be separately reported or reported net of their related tax effect are individually computed and recognized in the interim period in which those items occur. In addition, the effect of a change in enacted tax laws or rates, tax status, or judgment on the realizability of a beginning-of-the-year deferred tax asset in future years is recognized in the interim period in which the change occurs.

        The computation of the annual expected effective tax rate at each interim period requires certain estimates and assumptions including, but not limited to, the expected operating income for the year, projections of the proportion of income (or loss) earned and taxed in foreign jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is acquired, additional information is obtained or ILG's tax environment changes. To the extent that the estimated annual effective tax rate changes during a quarter, the effect of the change on prior quarters is included in tax expense for the current quarter.

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JUNE 30, 2014

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NOTE 10—INCOME TAXES (Continued)

        A valuation allowance for deferred tax assets is provided when it is more likely than not that certain deferred tax assets will not be realized. Realization is dependent upon the generation of future taxable income or the reversal of deferred tax liabilities during the periods in which those temporary differences become deductible. We consider the history of taxable income in recent years, the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies to make this assessment.

        For the three and six months ended June 30, 2014, ILG recorded an income tax provision for continuing operations of $10.7 million and $25.0 million, respectively, which represents effective tax rates of 35.5% and 36.2% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. During the three and six months ended June 30, 2014, the effective tax rate decreased due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions and the decrease during the first quarter of 2014 in unrecognized tax benefits associated with the expiration of the statute of limitations related to foreign taxes, partially offset by the net increase during the first quarter of 2014 in income taxes associated with the effect of changes in tax laws in certain states and other income tax items.

        For the three and six months ended June 30, 2013, ILG recorded an income tax provision for continuing operations of $12.8 million and $28.6 million, respectively, which represents effective tax rates of 38.4% and 38.6% for the respective periods. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. During the three and six months ended June 30, 2013, the effective tax rate increased due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions, partially offset by the U.S. tax consequences of foreign operations and the decrease during the first quarter of 2013 in unrecognized tax benefits associated with the expiration of the statute of limitations related to foreign taxes.

        As of June 30, 2014 and December 31, 2013, ILG had unrecognized tax benefits of $0.4 million and $0.5 million, respectively, which if recognized, would favorably affect the effective tax rate. There were no material increases or decreases in unrecognized tax benefits for the three months ended June 30, 2014. During the six months ended June 30, 2014, the unrecognized tax benefits decreased by approximately $0.1 million related to the decrease in unrecognized tax benefits as a result of the expiration of the statute of limitations related to foreign taxes.

        ILG recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for the three and six months ended June 30, 2014. During the six months ended June 30, 2014, interest and penalties decreased by approximately $0.1 million during the first quarter of 2014 as a result of the expiration of the statute of limitations related to foreign taxes. As of June 30, 2014, ILG had accrued $0.3 million for interest and penalties.

        ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $0.2 million within twelve months of the current reporting date due primarily to the expiration of the statute of limitations related to foreign taxes and other tax credits. An estimate of other changes in unrecognized tax benefits cannot be made, but is not expected to be significant.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 10—INCOME TAXES (Continued)

        ILG has routinely been under audit by federal, state, local and foreign taxing authorities. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by ILG are recorded in the period they become known. Under a tax sharing agreement, IAC indemnifies ILG for all consolidated tax liabilities and related interest and penalties for the pre-spin period.

        The IRS has completed its review of IAC's consolidated tax returns for the years ended December 31, 2001 through 2009, which includes our operations from September 24, 2002, our date of acquisition by IAC, until the spin-off in August 2008. On August 28, 2013, the Joint Committee of Taxation completed its review and approved the audit settlement. The statute of limitations for the years 2001 through 2009 expired on July 1, 2014. Various IAC consolidated tax returns that include our operations, filed with state and local jurisdictions, are currently under examination, the most significant of which are California, New York and New York City for various tax years beginning with 2006. As of June 30, 2014, no other open tax years are under examination by the IRS or any material state and local jurisdictions; however, during the third quarter of 2014, ILG was notified by the IRS that the federal consolidated tax return for the year ended December 31, 2012 will be examined.

        During 2013, the U.K. Finance Act of 2013 was enacted, which further reduced the U.K. corporate income tax rate to 21%, effective April 1, 2014 and 20%, effective April 1, 2015. The impact of the U.K. rate reduction to 21% and 20%, which reduced our U.K. net deferred tax asset and increased income tax expense, was reflected in the reporting period when the law was enacted. The change in the corporate tax rate initially negatively impacted income tax expense as the future benefit expected to be realized from our U.K. net deferred tax assets decreased; however, going forward, the lower corporate tax rate will decrease income tax expense and favorably impact our effective tax rate.

NOTE 11—SEGMENT INFORMATION

        Pursuant to FASB guidance as codified in ASC 280, an operating segment is a component of a public entity (1) that engages in business activities that may earn revenues and incur expenses; (2) for which operating results are regularly reviewed by the entity's chief operating decision maker to make decisions about resources to be allocated to the segments and assess its performance; and (3) for which discrete financial information is available. We also considered how the businesses are organized as to segment management, and the focus of the businesses with regards to the types of products or services offered. ILG consists of two operating segments which are also reportable segments. Membership and Exchange offers leisure and travel-related products and services to owners of vacation interests and others mostly through various membership programs, as well as related services to resort developer clients. Management and Rental provides hotel, condominium resort, timeshare resort and homeowners' association management, and vacation rental services to both vacation property owners and vacationers.

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JUNE 30, 2014

(Unaudited)

NOTE 11—SEGMENT INFORMATION (Continued)

        Information on reportable segments and reconciliation to consolidated operating income is as follows (in thousands):

 

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JUNE 30, 2014

(Unaudited)

NOTE 11—SEGMENT INFORMATION (Continued)

        Selected financial information by reporting segment is presented below (in thousands):

Geographic Information

        We conduct operations through offices in the U.S. and 16 other countries. For the six months ended June 30, 2014 and 2013 revenue is sourced from over 100 countries worldwide. Other than the United States and Europe, revenue sourced from any individual country or geographic region did not exceed 10% of consolidated revenue for the three and six months ended June 30, 2013 and 2012.

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JUNE 30, 2014

(Unaudited)

NOTE 11—SEGMENT INFORMATION (Continued)

        Geographic information on revenue, based on sourcing, and long-lived assets, based on physical location, is presented in the table below (in thousands):

NOTE 12—COMMITMENTS AND CONTINGENCIES

        In the ordinary course of business, ILG is a party to various legal proceedings. ILG establishes reserves for specific legal matters when it determines that the likelihood of an unfavorable outcome is probable and the loss is reasonably estimable. ILG does not establish reserves for identified legal matters when ILG believes that the likelihood of an unfavorable outcome is not probable. Although management currently believes that an unfavorable resolution of claims against ILG, including claims where an unfavorable outcome is reasonably possible, will not have a material impact on the liquidity, results of operations, or financial condition of ILG, these matters are subject to inherent uncertainties and management's view of these matters may change in the future. ILG also evaluates other contingent matters, including tax contingencies, to assess the probability and estimated extent of potential loss. See Note 10 for a discussion of income tax contingencies.

        Other items, such as certain purchase commitments and guarantees are not recognized as liabilities in our consolidated financial statements but are required to be disclosed in the footnotes to the financial statements. These funding commitments could potentially require our performance in the event of demands by third parties or contingent events. At June 30, 2014, guarantees, surety bonds and letters of credit totaled $23.0 million, with the highest annual amount of $13.1 million occurring in year

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INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

JUNE 30, 2014

(Unaudited)

NOTE 12—COMMITMENTS AND CONTINGENCIES (Continued)

one. The total includes maximum exposure under guarantees of $20.4 million, which primarily relates to the Management and Rental segment's hotel and resort management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the segment's management activities, entered into on behalf of the property owners for which either party generally may terminate such leases upon 60 to 90 days prior written notice to the other.

        In addition, certain of the Management and Rental segment's hotel and resort management agreements provide that owners receive specified percentages of the revenue generated under 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, and we either retain the balance (if any) as our management fee or make up the deficit. Although such deficits are reasonably possible in a few of these agreements, as of June 30, 2014, future amounts are not expected to be significant, individually or in the aggregate. Certain of our Management and Rental businesses also enter into agreements, as principal, for services purchased on behalf of property owners for which they are subsequently reimbursed. As such, we are the primary obligor and may be liable for unreimbursed costs. As of June 30, 2014, amounts pending reimbursements are not significant.

European Union Value Added Tax Matter

        In 2009, the European Court of Justice issued a judgment related to Value Added Tax ("VAT") in Europe against an unrelated party. The judgment affects companies who transact within the European Union ("EU"), specifically providers of vacation interest exchange services, and altered the manner in which the Membership and Exchange segment accounts for VAT on its revenues as well as to which EU country VAT is owed.

        As of June 30, 2014 and December 31, 2013, ILG had an accrual of $2.4 million and $2.9 million, respectively, representing the net exposure of any VAT reclaim refund receivable and accrued VAT liabilities related to this matter. The net change in the accrual primarily relates to a decrease in the change in estimate primarily to update the periods for which the accrued VAT liabilities are due, as well as the effect of foreign currency remeasurements. The change in estimate resulted in favorable adjustments to our consolidated statements of income for the three and six months ended June 30, 2014.

        Because of the uncertainty surrounding the ultimate outcome and settlement of these VAT liabilities, it is reasonably possible that future costs to settle these VAT liabilities may range from $2.4 million up to approximately $3.3 million based on quarter-end exchange rates. ILG believes that the $2.4 million accrual at June 30, 2014 is our best estimate of probable future obligations for the settlement of these VAT liabilities. The difference between the probable and reasonably possible amounts is primarily attributable to the assessment of certain potential penalties.

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Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statement Regarding Forward-Looking Information

        This quarterly report on Form 10-Q contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The use of words such as "anticipates," "estimates," "expects," "intends," "plans" and "believes," and similar expressions or future or conditional verbs such as "will," "should," "would," "may" and "could" among others, generally identify forward-looking statements. These forward-looking statements include, among others, statements relating to: our future financial performance, our business prospects and strategy, anticipated financial position, liquidity and capital needs and other similar matters. These forward-looking statements are based on management's current expectations and assumptions about future events, which are inherently subject to uncertainties, risks and changes in circumstances that are difficult to predict.

        Actual results could differ materially from those contained in the forward-looking statements included in this quarterly report for a variety of reasons, including, among others: adverse trends in economic conditions generally or in the vacation ownership, vacation rental and travel industries; adverse changes to, or interruptions in, relationships with third parties; lack of available financing for, or insolvency of developers; consolidation of developers; decreased demand from prospective purchasers of vacation interests; travel related health concerns; changes in our senior management; regulatory changes; our ability to compete effectively and successfully add new products and services; our ability to successfully manage and integrate acquisitions; impairment of assets; the restrictive covenants in our revolving credit facility; adverse events or trends in key vacation destinations; business interruptions in connection with our technology systems; ability of managed homeowners' associations to collect sufficient maintenance fees; third parties not repaying advances or extensions of credit; failure to consummate a previously announced transaction; and our ability to expand successfully in international markets and manage risks specific to international operations. Certain of these and other risks and uncertainties are discussed in our filings with the SEC, including in Item 1A "Risk Factors" of our 2013 Annual Report on Form 10-K and in Part II of this report. In light of these risks and uncertainties, the forward looking statements discussed in this report may not prove to be accurate. Accordingly, you should not place undue reliance on these forward looking statements, which only reflect the views of our management as of the date of this report. Except as required by applicable law, we do not undertake to update these forward-looking statements.

GENERAL

        The following Management Discussion and Analysis provides a narrative of the results of operations and financial condition of ILG for the three and six months ended June 30, 2014. This section should be read in conjunction with the consolidated financial statements and accompanying notes included in this report as well as our 2013 Annual Report on Form 10-K, which have been prepared in accordance with U.S. generally accepted accounting principles ("GAAP"). This discussion includes the following sections:

•

Management Overview



•

Results of Operations



•

Financial Position, Liquidity and Capital Resources



•

Critical Accounting Policies and Estimates



•

ILG's Principles of Financial Reporting



•

Reconciliations of Non-GAAP Measures

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MANAGEMENT OVERVIEW

General Description of our Business

        ILG is a leading global provider of membership and leisure services to the vacation industry. We operate in two segments: Membership and Exchange and Management and Rental. Membership and Exchange, offers leisure and travel-related products and services to owners of vacation interests and others primarily through various membership programs, as well as related services to resort developer clients. Management and Rental provides hotel, condominium resort, timeshare resort and homeowners' association management, and rental services to both vacation property owners and vacationers.

Membership and Exchange Services

        Interval, the principal business comprising our Membership and Exchange segment, has been a leader in the membership and exchange services industry since its founding in 1976. As of June 30, 2014, Interval's primary operation is the Interval Network, a quality global vacation ownership membership exchange network with:

•

a large and diversified base of participating resorts consisting of approximately 2,900 resorts located in over 80 countries, including both leading independent resort developers and branded hospitality companies; and



•

approximately 1.8 million vacation ownership interest owners enrolled as members of the Interval Network.

        Interval typically enters into multi-year contracts with developers of vacation ownership resorts, pursuant to which the resort developers agree to enroll all purchasers of vacation interests at the applicable resort as members of an Interval exchange program. In return, Interval provides enrolled purchasers with the ability to exchange the use and occupancy of their vacation interest at the home resort (generally for a period of one week) for the right to occupy accommodations at a different resort participating in an Interval exchange network. Through Interval's Getaways, members may rent resort accommodations for a fee without relinquishing the use of their vacation interest. In addition, Interval offers sales, marketing and operational support, consulting and back-office services, including reservation servicing, to certain resort developers participating in the Interval Network, upon their request and for additional consideration.

        The Membership and Exchange segment earns most of its revenue from (i) fees paid for membership in the Interval Network and (ii) Interval Network transactional and service fees paid primarily for exchanges, Getaways, reservation servicing, and related transactions collectively referred to as "transaction revenue."

Management and Rental Services

        We also provide management and rental services to hotels, condominium resorts, timeshare resorts, vacation clubs and homeowners' associations through Aston, Aqua, VRI Europe, Vacation Resorts International (VRI), and Trading Places International (TPI). Such vacation properties and hotels are not owned by us. Aston and Aqua are based in Hawaii and concentrate largely on hotel and condominium resort management primarily in Hawaii, as well as vacation property rental and related services (including common area and owner association management services for condominium projects). VRI Europe manages vacation ownership resorts in Spain, the United Kingdom, France and Portugal. TPI and VRI provide property management, vacation rental and homeowners' association management services to timeshare resorts in the United States, Canada and Mexico.

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        As of June 30, 2014, the businesses that comprise our Management and Rental segment provided various management and rental services to travelers and owners at more than 225 vacation properties, resorts and club locations.

        Revenue from the Management and Rental segment is derived principally from fees for hotel, condominium resort, timeshare resort, vacation clubs and homeowners' association management and rental services. Management fees consist of a base management fee, incentive management fee, service fees, and annual maintenance fees, as applicable. Incentive management fees are generally a percentage of operating profits or improvement in operating profits. Service fee revenue is based on the services provided to owners including reservations, sales and marketing, property accounting and information technology services either internally or through third party providers. Annual maintenance fees are amounts paid by timeshare owners for maintaining and operating the respective properties, including management services.

        At Aston and Aqua, the majority of hotel and condominium resort management agreements provide that owners receive either specified percentages of the revenue generated under our management or, in limited instances, guaranteed dollar amounts. In these cases, the operating expenses for the rental operation are paid from the revenue generated by the rentals, the owners are then paid their contractual percentages or amounts, and the Management and Rental segment either retains the balance (if any) as its management fee or makes up the deficit. In other instances, fees for rental services generally consist of commissions earned on rentals.

International Revenue

        International revenue increased in the three and six months ended June 30, 2014 by 31.5% and 24.7%, respectively, compared to the same periods in 2013. As a percentage of our total revenue, international revenue increased in the three and six months ended June 30, 2014 to 23.0% and 22.7%, respectively, from 17.5% and 18.2% compared to the same periods in 2013. The increase in international revenue as a percentage of total revenue in 2014 is attributable to revenue from our VRI Europe joint venture established in November 2013.

Other Factors Affecting Results

Membership and Exchange

        The consolidation of resort developers driven by bankruptcies and the lack of receivables financing previously resulted in a decrease in the flow of new members from point of sale to our exchange networks. Access to financing has returned to the industry following the recession and slow recovery. While very few new projects have been constructed in the last several years, developers and homeowners' associations have been taking back vacation ownership interests which are again available to be sold. This allows developers to continue to generate sales revenues without significant capital expenditure for development and causes homeowners' associations at resorts that are no longer linked to a developer to look for efficient distribution channels to resell the inventory to preserve the maintenance fee paying owner base. Additionally, a high proportion of sales by developers are to their existing owners, which does not result in new members to the Interval Network.

        Our 2014 results to-date continue to be negatively affected by a shift in the percentage mix of our membership base from traditional, direct renewal members to corporate members, a tightening in the availability of exchange and Getaway inventory and, to a lesser extent, during the first quarter of 2014, severe weather throughout much of the United States which limited demand to certain destinations with availability. In addition, we secured multi-year renewals with several large developer clients that account for approximately two-thirds of the Interval Network corporate members; however, the terms associated with these renewals have resulted in reduced profitability. Our corporate developer accounts enroll and renew their entire active owner base which positively impacts our retention rate; however,

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these members tend to have a lower propensity to transact with us. Membership mix as of June 30, 2014 included 59.3% traditional and 40.7% corporate members, compared to 60.5% and 39.5%, respectively, as of June 30, 2013. Consequently, where possible, we structure our corporate membership arrangements to include reservation servicing and/or other revenue streams to mitigate the anticipated lower transaction propensity.

Management and Rental

        Our Management and Rental segment results are susceptible to variations in economic conditions, particularly in its largest market, Hawaii. According to the Hawaii Tourism Authority, visitor arrivals by air in Hawaii increased 1.2% and 0.5% for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. Aston's occupancy in Hawaii for the three and six months ended June 30, 2014 declined from last year, which led to lower revenue per available room for the quarter but was offset by higher average daily rate in the year-to-date-period when compared to 2013. For comparative purposes, Aqua has been excluded from this analysis

        As of the latest forecast (May 2014), the Hawaii Department of Business, Economic Development and Tourism forecasts increases of 0.7% in visitors to Hawaii and 2.3% in visitor expenditures in 2014 over 2013.

        During the second quarter of 2014, we advanced with our restructuring plan of consolidating TPI and VRI's corporate office into one building. As part of this initiative, we incurred approximately $1.0 million in restructuring expense during the quarter, which is included in general and administrative expense within our consolidated statements of income, mainly resulting from estimated costs of exiting contractual commitments. As of June 30, 2014, approximately $0.9 million is accrued within accrued expenses and other current liabilities on our consolidated balance sheet pertaining to these restructuring costs.

Business Acquisitions

        During the fourth quarter of 2013, we purchased the European shared ownership resort management business of CLC and all of the equity of Aqua, a Hawaii-based hotel and resort management company. These acquisitions were not individually significant; however, the year-over-year comparability for the three and six months ended June 30, 2014 was affected as further discussed in our Results of Operations section.

Outlook

        The vacation ownership industry remains in a period of transition that resulted in the bankruptcy, restructuring and consolidation of developers as well as continued modifications to their business models. We expect additional consolidation and reorganizations within the industry leading to increased competition in our membership and exchange business and reduced availability of exchange and Getaway inventory. Also, we anticipate reduced profitability related to the several large corporate renewals discussed above to unfavorably impact year-over-year comparability for the remainder of 2014.

        For the Management and Rental segment, we expect year-over-year RevPAR to hold steady as the tourism recovery of its largest market, Hawaii, moderates. Additionally, airlift into the island chain remains a positive factor bolstering the Hawaiian tourism economy; however, increases in the cost of a Hawaiian vacation may continue to negatively impact visitor arrivals and temper growth.

Business Acquisitions

        The completion of the VRI Europe and Aqua transactions during the fourth quarter of 2013 will affect the year-over-year comparability of our results of operations for the year ended December 31,

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2014 and respective interim periods. The VRI Europe transaction will continue to affect international revenue as a percentage of total revenue.

        In May 2014, we entered into an Equity Interest Purchase Agreement with Hyatt Corporation to acquire the Hyatt Residential Group business for approximately $190 million in cash at closing, subject to customary post-closing adjustments. Additionally, we will reimburse Hyatt for its capital contribution associated with its interest in a joint venture related to a 131-unit vacation ownership property in Maui (currently estimated to be $35 million based on an assumed early fourth quarter closing). In connection with this transaction we will enter into an exclusive master license agreement and become Hyatt's exclusive licensee in vacation ownership. The closing of this transaction is subject to obtaining specified consents, in addition to other customary closing conditions, and the Equity Interest Purchase Agreement may be terminated in certain circumstances, including, among others, if the transaction does not close by December 31, 2014.

RESULTS OF OPERATIONS

Revenue

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

        Revenue for the three months ended June 30, 2014 increased $18.5 million, or 14.8%, from the comparable period in 2013. Management and Rental segment revenue increased $27.1 million, or 92.0%, in the quarter compared to 2013, while Membership and Exchange segment revenue decreased $8.6 million, or 9.0%, year-over-year.

Membership and Exchange

        Membership and Exchange revenue decreased $8.6 million, or 9.0%, in the second quarter of 2014 compared to 2013. Of this decrease, $4.1 million represents the correction of an immaterial prior period net understatement recorded in the second quarter of 2013. Excluding the impact of this prior period item, Membership and Exchange revenue decreased $4.5 million, or 4.9%, in the quarter compared to prior year.

        This decrease of $4.5 million in segment revenue primarily resulted from lower transaction revenue and membership fee revenue of $2.9 million and $1.2 million, respectively. The decrease in transaction revenue is mainly related to a drop in revenue from exchanges and Getaways of $3.8 million, partly

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offset by an increase of $0.7 million related to our E-Plus product launched in the latter half of last year. Lower transaction revenue from exchanges and Getaways was caused by a decline in transaction volume of 12.8%, partly offset by an increase of 4.8% in average fee for exchanges and Getaways. Lower transaction volume is related to the shift in percentage mix of the membership base from traditional to corporate, which reduced transaction propensity.

        Total active members in the Interval Network at June 30, 2014 remained relatively consistent with the prior year at approximately 1.82 million members. The decrease of $1.2 million in membership fee revenue in the quarter largely reflects the impact of less favorable membership fees associated with the multi-year renewals of several large corporate developer clients in the first quarter of 2014 when compared to prior arrangements. Additionally, the period was negatively affected by the shift in percentage mix of our membership base from traditional to corporate members as well as a decline in average active Interval Network members. The unfavorable impact of these items was partly mitigated by continued improvement in the member base penetration of our Platinum and Club Interval Gold products. Overall Interval Network average revenue per member was $44.36 in the quarter, lower by 8.7% from $48.59 in the prior year period. Excluding the impact of the prior period item recorded in the second quarter of 2013, average revenue per member decreased 4.3% from $46.37 in the prior year to $44.38 this quarter.

Management and Rental

        The increase of $18.2 million, or 128.4%, in management fee and rental revenue includes $18.1 million of incremental revenue from our VRI Europe and Aqua acquisitions. Aston and Aqua combined revenue per available room ("RevPAR") was $110.39, a decrease of 14.5% over the prior year. Excluding Aqua, Aston RevPAR in the quarter decreased to $125.41 compared to $129.17 in the prior year. The drop in RevPAR, when excluding Aqua, can be mainly attributed to a 2.3% decline in occupancy rate compared to 2013 and the inclusion of available room nights from Orlando, a lower ADR market.

        Pass-through revenue represents reimbursed compensation and other employee-related costs directly associated with managing properties that are included in both revenue and expenses and that are passed on to the property owners or homeowners association without mark-up. The increase in pass-through revenue of $8.9 million, or 58.4%, in the quarter is predominately related to our acquisition of Aqua.

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For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        Revenue for the six months ended June 30, 2014 increased $40.7 million, or 15.7%, from the comparable period in 2013. Management and Rental segment revenue increased $56.0 million, or 90.0%, in the quarter compared to 2013, while Membership and Exchange segment revenue decreased $15.3 million, or 7.8%, year-over-year.

Membership and Exchange

        Membership and Exchange revenue decreased $15.3 million, or 7.8%, in the first half of 2014 compared to 2013. Excluding the impact of the prior period item recorded in the second quarter of 2013, Membership and Exchange revenue decreased $11.3 million, or 5.8%, in the quarter compared to prior year.

        This decrease of $11.3 million in segment revenue primarily resulted from lower transaction revenue and membership fee revenue of $7.9 million and $2.7 million, respectively. The decrease in transaction revenue is mainly related to a drop in revenue from exchanges and Getaways of $8.4 million, partly offset by a rise of $0.5 million in other transaction related fees. Lower transaction revenue from exchanges and Getaways was caused by a decline in transaction volume of 12.8%, partly offset by an increase of 3.7% in average fee per transaction. Lower transaction volume is related to the shift in percentage mix of the membership base from traditional to corporate, which reduced transaction propensity, coupled with a tightening in the availability of exchange and Getaway inventory primarily in the first quarter of 2014.

        The decrease of $2.7 million in membership fee revenue in the six months largely reflects the impact of less favorable membership fees associated with the multi-year renewals of several large corporate developer clients in the first quarter of 2014 when compared to prior arrangements. Additionally, the period was negatively affected by the shift in the percentage mix of our membership base from traditional to corporate members as well as a decline in average active Interval Network members. This impact has been partly mitigated by continued improvement in the member base penetration of our Platinum and Club Interval Gold products. Overall Interval Network average revenue per member was $93.68 in 2014, lower by 7.6% from $101.39 in the prior year period. Excluding the impact of the prior period item recorded in the second quarter of 2013, average revenue per member decreased 5.5% from $99.17 in the prior year to $93.68 this period.

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Management and Rental

        The increase of $37.3 million, or 118.1%, in management fee and rental revenue includes $37.6 million of incremental revenue from our VRI Europe and Aqua acquisitions. Aston and Aqua combined RevPAR was $125.85, a decrease of 14.6% over the prior year. Excluding Aqua, Aston RevPAR in for the first six months of 2014 decreased slightly to $146.28 compared to $147.39 in the prior year. The decrease in RevPAR, when excluding Aqua, can be mainly attributed to a 1.2% decline in occupancy rate compared to 2013 and the inclusion of available room nights from Orlando, a lower ADR market, partly offset by an improvement in ADR in Hawaii. The increase in pass-through revenue of $18.7 million, or 61.0%, in 2014 is predominately related to our acquisition of Aqua.

Cost of Sales

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

        Cost of sales consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in servicing members of the Membership and Exchange segment and providing services to property owners and/or guests of the Management and Rental segment's managed vacation properties, as well as cost of rental inventory used primarily for Getaways included within the Membership and Exchange segment.

        Cost of sales in the second quarter of 2014 increased $16.3 million from 2013, consisting of an increase of $18.1 million from our Management and Rental segment, partly offset by a decrease of $1.8 million from our Membership and Exchange segment. Overall gross margin, adjusted to exclude the impact of the prior period item, decreased by 580 basis points to 58.4% this quarter compared to 2013. The decrease in overall gross margin is largely due to the incremental gross profit contribution from our lower-margin Management and Rental segment relative to total ILG gross profit.

        Gross margin for the Membership and Exchange segment in the second quarter of 2014 was largely consistent when compared to the prior year. Cost of sales for this segment decreased $1.8 million, or 7.8%, from 2013. The year-over-year decrease in cost of sales is a result of lower purchased inventory expense of $0.5 million, together with a decrease in call center costs and related member servicing activities. The decline in purchased inventory expense was principally due to lower purchased inventory volumes, partly offset by an increase in the average cost per unit of this purchased inventory.

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        The increase of $18.1 million in cost of sales from the Management and Rental segment was primarily attributable to the inclusion of our fourth quarter 2013 acquisitions, which includes $9.5 million of incremental expenses and $8.7 million pass-through revenue related to Aqua. Gross margin for this segment increased by 156 basis points to 31.5% in the quarter compared to 2013. Excluding the effect of pass-through revenue, gross margin for this segment decreased by 717 basis points to 55.1% in the current quarter when compared to the prior year quarter, largely resulting from the incremental gross profit contribution from VRI Europe relative to total segment gross profit. VRI Europe's business model generally differs from our other management businesses with respect to the fee structure. Our other management businesses charge the association or property owner a management fee that is separate from the association/owner payments to maintain the property, while also recording pass-through revenues relating to certain reimbursed compensation and other employee-related costs directly associated with managing properties. Typically, VRI Europe fees are charged directly to the vacation owners and include amounts to cover property management and all resort operating expenses. Consequently, VRI Europe's business model normally operates at a lower gross margin than our other management businesses, when excluding pass-through revenue/expenses.

For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        Cost of sales in the first half of 2014 increased $33.8 million from 2013, consisting of an increase of $37.1 million from our Management and Rental segment, partly offset by a decrease of $3.3 million from our Membership and Exchange segment. Overall gross margin, adjusted to exclude the impact of the prior period item, decreased by 606 basis points to 58.9% this year compared to 2013. The decrease in overall gross margin is largely due to the incremental gross profit contribution from our lower-margin Management and Rental segment relative to total ILG gross profit.

        Gross margin for the Membership and Exchange segment in the first six months of 2014 was largely consistent when compared to the prior year. Cost of sales for this segment decreased $3.3 million, or 6.8%, from 2013. The year-over-year decrease in cost of sales is a result of lower purchased inventory expense of $1.3 million, together with a decrease in call center costs and related member servicing activities. The decline in purchased inventory expense was principally due to lower purchased inventory volumes, partly offset by an increase in the average cost per unit of this purchased inventory.

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        The increase of $37.1 million in cost of sales from the Management and Rental segment was primarily attributable to the inclusion of our fourth quarter 2013 acquisitions, which includes $19.1 million of incremental and an increase of $18.1 million in pass-through revenue related to Aqua. Gross margin of 33.5% for this segment was largely consistent when compared to the prior year. Excluding the effect of pass-through revenue, gross margin for this segment decreased by 795 basis points to 57.5% in the current year when compared to the prior year largely resulting from the incremental gross profit contribution from VRI Europe relative to total segment gross profit. VRI Europe's business model generally differs from our other management businesses with respect to the fee structure. Our other management businesses charge the association or property owner a management fee that is separate from the association/owner payments to maintain the property, while also recording pass-through revenues relating to certain reimbursed compensation and other employee-related costs directly associated with managing properties. Typically, VRI Europe fees are charged directly to the vacation owners and include amounts to cover property management and all resort operating expenses. Consequently, VRI Europe's business model normally operates at a lower gross margin than our other management businesses, when excluding pass-through revenue/expenses.

Selling and Marketing Expense

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

        Selling and marketing expense consists primarily of advertising and promotional expenditures and compensation and other employee-related costs (including stock-based compensation) for personnel engaged in sales and sales support functions. Advertising and promotional expenditures primarily include printing costs of directories and magazines, promotions, tradeshows, agency fees, marketing fees and related commissions.

        Selling and marketing expense in the second quarter of 2014 decreased $0.5 million, or 3.3%, compared to 2013. The decrease in sales and marketing spend is largely attributable to lower printing and postage costs associated with a revision to the distribution timing and format of Interval Network member publications, partly offset by increased marketing fees related to developer contract renewals during the year. As a percentage of total revenue (excluding the impact of the prior period item) and total revenue excluding pass-through revenue, sales and marketing expense decreased 186 and 144 basis points, respectively, during the second quarter of 2014 compared to the prior year.

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For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        Selling and marketing expense in the first six months of 2014 increased $0.4 million, or 1.3%, compared to 2013. Higher sales and marketing spend is attributable to increased marketing fees related to developer contract renewals during the year, partly offset by lower printing and postage costs associated with a revision to the distribution timing and format of Interval Network member publications, as well as lower sales commissions as compared to the prior year. As a percentage of total revenue (excluding the impact of the prior period item) and total revenue excluding pass-through revenue, sales and marketing expense decreased 135 and 92 basis points, respectively, during the first half of 2014 compared to the prior year.

General and Administrative Expense

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

        General and administrative expense consists primarily of compensation and other employee-related costs (including stock-based compensation) for personnel engaged in finance, legal, tax, human resources, information technology and executive management functions, as well as facilities costs, fees for professional services and other company-wide benefits.

        General and administrative expense in the second quarter of 2014 increased $3.0 million from 2013, primarily due to incremental expenses of $2.2 million from the inclusion of our acquired businesses in our results of operations and an increase of $1.1 million in restructuring expenses consisting mainly of estimated costs of exiting contractual commitments and costs associated with workforce reorganizations. Additionally, we incurred higher professional fees of $0.5 million (excluding such incremental expenses from acquired businesses), an unfavorable year-over-year change of $0.6 million in our estimated accrual for European Union Value Added Tax ("VAT"), as further discussed in Note 12 accompanying our consolidated financial statements, and certain other miscellaneous cost increases. These increases were partly offset by a favorable year-over-year change of $1.5 million related to the estimated fair value of contingent consideration for acquisitions.

        As a percentage of total revenue (excluding the impact of the prior period item) and total revenue excluding pass-through revenue, general and administrative expense decreased 150 basis points and increased 46 basis points, respectively, during the second quarter of 2014 compared to the prior year.

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For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        General and administrative expense in the first half of 2014 increased $8.2 million from 2013 primarily due to incremental expenses of $4.4 million from the inclusion of our acquired businesses in our results of operations and higher professional fees of $2.2 million (excluding such incremental expenses from acquired businesses). Additionally, in the first half of 2014, we incurred an increase of $1.1 million in restructuring expenses consisting mainly of estimated costs of exiting contractual commitments and costs associated with workforce reorganizations, an increase of $1.4 million in overall compensation and other employee related costs (excluding incremental expenses from acquired businesses) which were driven predominately by a higher health and welfare insurance expense, as well as certain other miscellaneous cost increases. These increases were partly offset by a favorable year-over-year change of $2.0 million related to the estimated fair value of contingent consideration for acquisitions.

        The $2.2 million increase in professional fees primarily related to accounting and legal services provided largely in connection with potential acquisition activities, together with additional costs related to certain IT initiatives.

        As a percentage of total revenue (excluding the impact of the prior period item) and total revenue excluding pass-through revenue, general and administrative expense decreased 43 basis points and increased 116 basis points, respectively, during the first six months of 2014 compared to the prior year.

Amortization Expense of Intangibles

For the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013

        Amortization expense of intangibles for the three and six months ended June 30, 2014 increased $1.0 million and $2.0 million, respectively, over the comparable 2013 period due to incremental amortization expense pertaining to intangible assets of our recently acquired businesses.

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Depreciation Expense

For the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013

        Depreciation expense for the three and six months ended June 30, 2014 increased $0.2 million and $0.3 million, respectively, over the comparable 2013 period largely due to additional depreciable assets being placed in service subsequent to June 30, 2013. These depreciable assets pertain primarily to software and related IT hardware.

Operating Income

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

        Operating income in the second quarter of 2014 decreased $1.5 million from 2013, consisting of a $7.6 million decrease from our Membership and Exchange segment, offset in part by a $6.0 million increase from our Management and Rental segment.

        Operating income for our Membership and Exchange segment decreased $7.6 million to $26.0 million in the quarter compared to the prior year. Excluding the $3.5 million impact related to the prior period item recorded in the second quarter of 2013, operating income for this segment decreased $4.1 million over the comparable 2013 period. The decrease in operating income was driven primarily by gross profit contraction in the period, coupled with higher marketing fees largely resulting from developer contract renewals in the first quarter of 2014, partly offset by lower printing and postage costs associated with a revision to the distribution timing and format of Interval Network member publications, and to an unfavorable year-over-year change in our estimated accrual for VAT.

        The increase in operating income of $6.0 million in our Management and Rental segment is primarily due to the incremental contributions from our recently acquired businesses, partly offset by expenses related to restructuring activities.

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For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        Operating income in the first half of 2014 decreased $3.9 million from 2013, consisting of a $15.3 million decrease from our Membership and Exchange segment, offset in part by an $11.4 million increase from our Management and Rental segment.

        Operating income for our Membership and Exchange segment decreased $15.3 million to $58.0 million in the first half of 2013 compared to the prior year. Excluding the $3.5 million impact related to the prior period item recorded in the second quarter of 2013, operating income for this segment decreased $11.8 million over the comparable 2013 period. The decrease in operating income was driven primarily by gross profit contraction in the period, coupled with higher marketing fees, higher professional fees incurred in connection with potential acquisition activities, and the unfavorable year-over-year change in our estimated accrual for VAT.

        The increase in operating income of $11.4 million in our Management and Rental segment is primarily due to the incremental contributions from our recently acquired businesses, partly offset by higher professional fees largely related to potential acquisition activities and expenses related to restructuring activities.

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization

        Adjusted earnings before interest, taxes, depreciation and amortization (adjusted EBITDA) is a non-GAAP measure and is defined in "ILG's Principles of Financial Reporting." Prior period amounts have been recast to conform to the current period definition of Adjusted EBITDA.

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

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        Adjusted EBITDA in the second quarter of 2014 increased by $2.7 million, or 7.0%, from 2013, consisting of a $5.9 million increase from our Management and Rental segment, offset in part by a $3.2 million decrease from our Membership and Exchange segment.

        Adjusted EBITDA of $32.9 million from our Membership and Exchange segment declined by $3.2 million, or 8.9%, compared to the prior year. The drop in adjusted EBITDA is mainly correlated with a weakening in transaction revenue in the quarter, as well as lower membership fee revenue and reduced profitability resulting from securing multi-year renewals from several of our largest corporate developer clients during the first quarter of 2014. These items were partially offset by the positive contributions from our Platinum and Club Interval Gold products. Transaction revenue was adversely affected in the period by the shift in percentage mix of the membership base from traditional to corporate, which reduced transaction propensity. These items were partly mitigated in the quarter by lower printing and postage costs associated with a revision to the distribution timing and format of Interval Network member publications.

        Adjusted EBITDA from our Management and Rental segment rose by $5.9 million, or 222.6%, to $8.6 million in the quarter from $2.7 million in 2013. The growth in adjusted EBITDA in this segment is driven primarily by the incremental contribution from our recently acquired businesses coupled with positive contributions from our other vacation ownership management businesses.

For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        Adjusted EBITDA in the first half of 2014 increased by $1.2 million, or 1.4%, from 2013, consisting of an $11.7 million increase from our Management and Rental segment, offset in part by a $10.5 million decrease from our Membership and Exchange segment.

        Adjusted EBITDA of $71.4 million from our Membership and Exchange segment declined by $10.5 million, or 12.8%, compared to the prior year. The drop in adjusted EBITDA is mainly correlated with a deterioration in transaction revenue in the period, as well as lower membership fee revenue and reduced profitability resulting from securing multi-year renewals from several of our largest corporate developer clients. These items were partially offset by the positive contributions from our Platinum and Club Interval Gold products. Transaction revenue was adversely affected in the period by the shift in percentage mix of the membership base from traditional to corporate, which reduced transaction propensity, coupled with a tightening in the availability of exchange and Getaway inventory during the first quarter of 2014. Additionally, adjusted EBITDA in the period was unfavorably impacted by an increase in overall compensation and other employee-related costs partly attributable to an increase health and welfare insurance costs resulting from higher self-insured claim activity when compared to last year.

        Adjusted EBITDA from our Management and Rental segment rose by $11.7 million, or 136.3%, to $20.4 million in the first half of 2014 from $8.6 million in the prior year. The growth in adjusted

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EBITDA in this segment is driven by the incremental contribution from our recently acquired businesses.

Other Income (Expense), net

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

        Interest income of $0.1 million in the second quarter of 2014 was relatively consistent with the prior year. Interest expense in the second quarter of 2014 and 2013 relates to interest and amortization of debt costs on our amended and restated revolving credit facility. The relatively flat interest expense for the second quarter of 2014 compared to prior year is a function of a lower average interest rate applicable to the period being applied against a higher average balance outstanding on our revolver.

        Other expense, net primarily relates to net gains and losses on foreign currency exchange related to cash held in certain countries in currencies other than their local currency. Non-operating foreign exchange net loss was $0.3 million in the second quarter of 2014 compared to a net gain of $1.5 million in 2013. The unfavorable fluctuations during the current quarter were principally driven by U.S. dollar positions held at June 30, 2014 affected by the weaker dollar compared to the Colombian peso and British pound. The favorable fluctuations during the prior year quarter were U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Mexican and Colombian peso.

For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        Interest income decreased $0.1 million in the first half of 2014 compared to 2013 due to certain loans receivable being outstanding and accruing interest for a portion of the first quarter of 2013 prior to settlement during that quarter.

        Interest expense in the first half of 2014 relates to interest and amortization of debt costs on our amended and restated revolving credit facility. Lower interest expense in the quarter is primarily a function of a lower average interest rate applicable to the period compared to prior year, partly offset by higher average balance outstanding on our revolver.

        Other expense, net primarily relates to net gains and losses on foreign currency exchange related to cash held in certain countries in currencies other than their local currency. Non-operating foreign exchange net loss was $0.1 million in the first half of 2014 compared to a net gain of $1.3 million in 2013. The unfavorable fluctuations during the year were principally driven by U.S. dollar positions held at June 30, 2014 affected by the weaker dollar compared to the Colombian peso and British pound, partly offset by the stronger dollar compared to the Egyptian pound. The favorable fluctuations during the 2013 period were principally driven by U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Colombian peso and the Egyptian pound.

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Income Tax Provision

For the three months ended June 30, 2014 compared to the three months ended June 30, 2013

        For the three months ended June 30, 2014 and 2013, ILG recorded income tax provisions for continuing operations of $10.7 million and $12.8 million, respectively, which represent effective tax rates of 35.5% and 38.4%, respectively. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. The effective tax rate in the second quarter of 2014 is lower than the prior year period primarily due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions.

For the six months ended June 30, 2014 compared to the six months ended June 30, 2013

        For the six months ended June 30, 2014 and 2013, ILG recorded income tax provisions for continuing operations of $25.0 million and $28.6 million, respectively, which represent effective tax rates of 36.2% and 38.6%, respectively. These tax rates are higher than the federal statutory rate of 35% due principally to state and local income taxes partially offset by foreign income taxed at lower rates. For the six months ended June 30, 2014, the effective tax rate is lower than the prior year period due to the shift in the projections of the proportion of income earned and taxed between the various jurisdictions.

        As of June 30, 2014 and December 31, 2013, ILG had unrecognized tax benefits of $0.4 million and $0.5 million, respectively, which if recognized, would favorably affect the effective tax rate. There were no material increases or decreases in unrecognized tax benefits for the three months ended June 30, 2014. During the six months ended June 30, 2014, the unrecognized tax benefits decreased by approximately $0.1 million related to the decrease in unrecognized tax benefits as a result of the expiration of the statute of limitations related to foreign taxes.

        ILG recognizes interest and, if applicable, penalties related to unrecognized tax benefits in income tax expense. There were no material accruals for interest for the three and six months ended June 30, 2014. During the six months ended June 30, 2014, interest and penalties decreased by approximately $0.1 million during the first quarter of 2014 as a result of the expiration of the statute of limitations related to foreign taxes. As of June 30, 2014, ILG had accrued $0.3 million for interest and penalties.

        ILG believes that it is reasonably possible that its unrecognized tax benefits could decrease by approximately $0.2 million within twelve months of the current reporting date due primarily to the expiration of the statute of limitations related to foreign taxes and other tax credits. An estimate of other changes in unrecognized tax benefits cannot be made, but is not expected to be significant.

        ILG has routinely been under audit by federal, state, local and foreign taxing authorities. These audits include questioning the timing and the amount of deductions and the allocation of income among various tax jurisdictions. Income taxes payable include amounts considered sufficient to pay assessments that may result from examination of prior year returns; however, the amount paid upon resolution of issues raised may differ from the amount provided. Differences between the reserves for tax contingencies and the amounts owed by ILG are recorded in the period they become known. Under a tax sharing agreement, IAC indemnifies ILG for all consolidated tax liabilities and related interest and penalties for the pre-spin period.

        During 2013, the U.K. Finance Act of 2013 was enacted, which further reduced the U.K. corporate income tax rate to 21%, effective April 1, 2014 and 20%, effective April 1, 2015. The impact of the U.K. rate reduction to 21% and 20%, which reduced our U.K. net deferred tax asset and increased income tax expense, was reflected in the reporting period when the law was enacted. The change in the corporate tax rate initially negatively impacted income tax expense as the future benefit expected to be realized from our U.K. net deferred tax assets decreased; however, going forward, the lower corporate tax rate will decrease income tax expense and favorably impact our effective tax rate.

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FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES

        As of June 30, 2014, we had $74.6 million of cash and cash equivalents, including $57.2 million of U.S. dollar equivalent or denominated cash deposits held by foreign subsidiaries which are subject to changes in foreign exchange rates. Of this amount, $41.2 million is held in foreign jurisdictions, principally the U.K. Earnings of foreign subsidiaries, except Venezuela, are permanently reinvested. Additional tax provisions would be required should such earnings be repatriated to the U.S. Cash generated by operations is used as our primary source of liquidity. Additionally, we are also exposed to risks associated with the repatriation of cash from certain of our foreign operations to the United States where currency restrictions exist, such as Venezuela and Argentina, which limit our ability to immediately access cash through repatriations. These currency restrictions had no impact on our overall liquidity during the six months ended June 30, 2014 and, as of June 30, 2014, the respective cash balances were immaterial to our overall cash on hand.

        We believe that our cash on hand along with our anticipated operating future cash flows and availability under our $600 million revolving credit facility, which may be increased to up to $700 million subject to certain conditions, are sufficient to fund our operating needs, quarterly cash dividend, capital expenditures, development and expansion of our operations, debt service, investments and other commitments and contingencies for at least the next twelve months. However, our operating cash flow may be impacted by macroeconomic and other factors outside of our control.

Cash Flows Discussion

Operating Activities

        Net cash provided by operating activities decreased to $55.7 million in the six months ended June 30, 2014 from $61.3 million in the same period of 2013. The decrease of $5.5 million from 2013 was principally due to payments made in connection with long-term agreements in the first quarter of 2014, as well as higher cash disbursements, including a $1.2 million contingent consideration payment, partly offset by higher cash receipts.

Investing Activities

        Net cash used in investing activities of $9.9 million in the six months ended June 30, 2014 pertain to capital expenditures of $9.1 million primarily related to IT initiatives, and to an investment in loan receivable of $0.8 million. Net cash provided by investing activities of $3.3 million in the six months ended June 30, 2013 primarily related to the early repayment of an existing loan receivable totaling $9.9 million, partly offset by capital expenditures of $6.6 million primarily related to IT initiatives.

Financing Activities

        Net cash used in financing activities of $19.5 million in the six months ended June 30, 2014 primarily related to cash dividend payments of $12.7 million, repurchases of our common stock which settled during the year at market prices totaling $11.0 million (including commissions), withholding taxes on the vesting of restricted stock units of $4.0 million, payment of $1.8 million of debt issuance costs related to the amendment of our credit facility in April 2014, and $7.3 million of contingent consideration payments relating to acquisitions. These uses of cash were partially offset by $15.0 million of net borrowings on our revolving credit facility, excess tax benefits from stock-based awards, and the proceeds from the exercise of stock options. Net cash used in financing activities of $52.8 million in the six months ended June 30, 2013 primarily related to principal payments of $45.0 million on our revolving credit facility, $6.3 million of dividends paid, and withholding taxes on the vesting of restricted stock units. These uses of cash were partially offset by excess tax benefits from stock-based awards and the proceeds from the exercise of stock options.

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        On April 8, 2014, we entered into the first amendment to our amended and restated credit agreement which increases the revolving line of credit from $500 million to $600 million, extends the maturity of the credit facility to April 8, 2019 and provides for certain other amendments to covenants. The terms related to interest rates and commitment fees remain unchanged. As of June 30, 2014, borrowings outstanding under the revolving credit facility amounted to $268 million.

        Any principal amounts outstanding under the revolving credit facility are due at maturity. The interest rate on the amended credit agreement is based on (at our election) either LIBOR plus a predetermined margin that ranges from 1.25% to 2.25%, or the Base Rate as defined in the amended credit agreement plus a predetermined margin that ranges from 0.25% to 1.25%, in each case based on our leverage ratio. As of June 30, 2014, the applicable margin was 1.50% per annum for LIBOR revolving loans and 0.50% per annum for Base Rate loans. The revolving credit facility has a commitment fee on undrawn amounts that ranges from 0.25% to 0.375% per annum based on our leverage ratio and as of June 30, 2014, the commitment fee was 0.275%.

        The revolving credit facility has various financial and operating covenants that place significant restrictions on us, including our ability to incur additional indebtedness, to incur additional liens, issue redeemable stock and preferred stock, pay dividends or distributions or redeem or repurchase capital stock, prepay, redeem or repurchase debt, make loans and investments, enter into agreements that restrict distributions from our subsidiaries, sell assets and capital stock of our subsidiaries, enter into certain transactions with affiliates and consolidate or merge with or into or sell substantially all of our assets to another person. The revolving credit facility requires us to meet certain financial covenants regarding the maintenance of a maximum consolidated leverage ratio of consolidated debt, less credit given for a portion of foreign cash, over consolidated Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA"), as defined in the amended credit agreement. Additionally, we were required to maintain a minimum consolidated interest coverage ratio of consolidated EBITDA over consolidated interest expense, as defined in the Amended Credit Agreement. Currently, the maximum consolidated leverage ratio is 3.5x and the minimum consolidated interest coverage ratio is 3.0x. As of June 30, 2014, ILG was in compliance in all material respects with the requirements of all applicable financial and operating covenants and our consolidated leverage ratio and consolidated interest coverage ratio under the amended credit agreement were 1.43 and 33.08, respectively.

Free Cash Flow

        Free cash flow is a non-GAAP measure and is defined in "ILG's Principles of Financial Reporting." For the six months ended June 30, 2014 and 2013, free cash flow was $46.5 million and $54.7 million, respectively. The change is mainly a result of the variances in net cash provided by operating activities and capital expenditures as discussed above.

Dividends and Share Repurchases

        In February 2014 and May 2014, our Board of Directors declared a quarterly dividend of $0.11 per share for shareholders of record on March 13, 2014 and June 4, 2014, respectively. On each of March 27, 2014 and June 18, 2014, a cash dividend of $6.3 million was paid. Based on the number of shares of common stock outstanding as of March 31, 2014, at a dividend of $0.11 per share, the anticipated cash outflow would be $6.3 million in the third quarter of 2014. In August 2014, our Board of Directors declared a $0.11 per share dividend payable September 17, 2014 to shareholders of record on September 3, 2014.

        Additionally, effective August 3, 2011 and June 4, 2014, ILG's Board of Directors authorized a share repurchase program for up to $25.0 million and $20.0 million, respectively, excluding commissions, of our outstanding common stock. During the six months ended June 30, 2014, we repurchased 0.2 million shares of common stock for $4.1 million, including commissions, under the

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August 2011 repurchase program, and 0.4 million shares of common stock for $9.5 million, including commissions, under the June 2014 repurchase program. As of June 30, 2014, the remaining availability for future repurchases of our common stock was $10.5 million.

Contractual Obligations and Commercial Commitments

        We have funding commitments that could potentially require our performance in the event of demands by third parties or contingent events. At June 30, 2014, guarantees, surety bonds and letters of credit totaled $23.0 million. The total includes maximum exposure under guarantees of $20.4 million, which primarily relates to the Management and Rental segment's hotel and resort management agreements, including those with guaranteed dollar amounts, and accommodation leases supporting the segment's management activities, entered into on behalf of the property owners for which either party generally may terminate such leases upon 60 to 90 days prior written notice to the other.

        In addition, certain of the Management and Rental segment's hotel and resort management agreements provide that owners receive specified percentages of the revenue generated under 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, and we either retain the balance (if any) as our management fee or make up the deficit. Although such deficits are reasonably possible in a few of these agreements, as of June 30, 2014, future amounts are not expected to be significant, individually or in the aggregate. Certain of our Management and Rental businesses also enter into agreements, as principal, for services purchased on behalf of property owners for which they are subsequently reimbursed. As such, we are the primary obligor and may be liable for unreimbursed costs. As of June 30, 2014, amounts pending reimbursements are not significant.

        Contractual obligations and commercial commitments at June 30, 2014 are as follows:

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Off-Balance Sheet Arrangements

        Except as disclosed above in our Contractual Obligations and Commercial Commitments (excluding "Debt principal"), as of June 30, 2014, we did not have any significant off-balance sheet arrangements, as defined in Item 303(a) (4) (ii) of SEC Regulation S-K.

Recent Accounting Pronouncements

        Refer to Note 2 accompanying our consolidated financial statements for a description of recent accounting pronouncements.

Seasonality

        Refer to Note 1 accompanying our consolidated financial statements for a discussion on the impact of seasonality.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

        The preparation of financial statements in conformity with GAAP requires management to make estimates, judgments and assumptions that affect the amounts reported in our consolidated financial statements and accompanying notes. On an ongoing basis, we evaluate our estimates which are based on historical experience and on various other judgments and assumptions that we believe are reasonable under the circumstances. Actual outcomes could differ from those estimates. We have discussed those estimates that we believe are critical and required the use of significant judgment and use of estimates that could have a significant impact on our financial statements in our 2013 Annual Report on Form 10-K. There have been no material changes to our critical accounting policies in the interim period.

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ILG'S PRINCIPLES OF FINANCIAL REPORTING

Definition of ILG's Non-GAAP Measures

        Earnings before interest, taxes, depreciation and amortization (EBITDA) is defined as net income attributable to common stockholders excluding, if applicable: (1) interest income and interest expense, (2) income taxes, (3) depreciation expense, and (4) amortization expense of intangibles.

        Adjusted EBITDA is defined as EBITDA excluding, if applicable: (1) non-cash compensation expense, (2) goodwill and asset impairments, (3) acquisition related and restructuring costs, (4) other non-operating income and expense and (5) the impact of correcting prior period items.

        Adjusted net income is defined as net income attributable to common stockholders, excluding the impact of (1) acquisition related and restructuring costs, (2) other non-operating foreign currency remeasurements, (3) correcting an immaterial prior period net understatement in the prior period financials, and (4) other special items, as applicable.

        Adjusted earnings per share (EPS) is defined as adjusted net income divided by the weighted average number of shares of common stock outstanding during the period for basic EPS and, additionally, inclusive of dilutive securities for diluted EPS.

        Free cash flow is defined as cash provided by operating activities less capital expenditures.

        Our presentation of above-mentioned non-GAAP measures may not be comparable to similarly-titled measures used by other companies. We believe these measures are useful to investors because they represent the consolidated operating results from our segments, excluding the effects of any non-cash expenses. We also believe these non-GAAP financial measures improve the transparency of our disclosures, provide a meaningful presentation of our results from our business operations, excluding the impact of certain items not related to our core business operations and improve the period-to-period comparability of results from business operations. These non-GAAP measures have certain limitations in that they do not take into account the impact of certain expenses to our statement of operations; including non-cash compensation for adjusted EBITDA. We endeavor to compensate for the limitations of the non-GAAP measures presented by also providing the comparable GAAP measure with equal or greater prominence and descriptions of the reconciling items, including quantifying such items, to derive the non-GAAP measure.

        We report these non-GAAP measures as supplemental measures to results reported pursuant to GAAP. These measures are among the primary metrics by which we evaluate the performance of our businesses, on which our internal budgets are based and by which management is compensated. We believe that investors should have access to the same set of metrics that we use in analyzing our results. These non-GAAP measures should be considered in addition to results prepared in accordance with GAAP, but should not be considered a substitute for or superior to GAAP results. We provide and encourage investors to examine the reconciling adjustments between the GAAP and non-GAAP measures which are discussed below.

Items That Are Excluded From ILG's Non-GAAP Measures (as applicable)

        Amortization expense of intangibles is a non-cash expense relating primarily to acquisitions. At the time of an acquisition, the intangible assets of the acquired company, such as customer relationships, purchase agreements and resort management agreements are valued and amortized over their estimated lives. We believe that since intangibles represent costs incurred by the acquired company to build value prior to acquisition, they were part of transaction costs.

        Depreciation expense is a non-cash expense relating to our property and equipment and is recorded on a straight-line basis to allocate the cost of depreciable assets to operations over their estimated service lives.

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        Non-cash compensation expense consists principally of expense associated with the grants of restricted stock units. These expenses are not paid in cash, and we will include the related shares in our future calculations of diluted shares of stock outstanding. Upon vesting of restricted stock units, the awards will be settled, at our discretion, on a net basis, with us remitting the required tax withholding amount from our current funds.

        Goodwill and asset impairments are non-cash expenses relating to adjustments to goodwill and long-lived assets whereby the carrying value exceeds the fair value of the related assets, and are infrequent in nature.

        Acquisition related and restructuring costs are transaction fees, costs incurred in connection with performing due diligence, subsequent adjustments to our initial estimate of contingent consideration obligations associated with business acquisitions, and other direct costs related to acquisition activities. Additionally, this item includes certain restructuring charges primarily related to workforce reductions and estimated costs of exiting contractual commitments.

        Other non-operating income and expense consists principally of foreign currency translations of cash held in certain countries in currencies, principally U.S. dollars, other than their functional currency, in addition to any gains or losses on extinguishment of debt.

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RECONCILIATIONS OF NON-GAAP MEASURES

        The following tables reconcile EBITDA and adjusted EBITDA to operating income for our operating segments and to net income attributable to common stockholders in total for the three and six months ended June 30, 2014 and 2013 (in thousands). The noncontrolling interest relates to the Management and Rental segment.

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        The following tables present the inputs used to compute operating income and adjusted EBITDA margin for our operating segments for the three and six months ended June 30, 2014 and 2013 (in thousands).

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        The following table reconciles cash provided by operating activities to free cash flow for the six months ended June 30, 2014 and 2013 (in thousands).

        The following table reconciles net income attributable to common stockholders to adjusted net income, and to adjusted earnings per share for the three and six months ended June 30, 2014 and 2013 (in thousands).

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

Foreign Currency Exchange Risk

        We conduct business in certain foreign markets, primarily in the United Kingdom and other European Union markets. Our foreign currency risk primarily relates to our investments in foreign subsidiaries that transact business in a functional currency other than the U.S. dollar. This exposure is mitigated as we have generally reinvested profits in our international operations. As currency exchange rates change, translation of the income statements of our international businesses into U.S. dollars affects year-over-year comparability of operating results.

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        In addition, we are exposed to foreign currency risk related to transactions and/or assets and liabilities denominated in a currency other than the functional currency. Historically, we have not hedged currency risks. However, our foreign currency exposure related to EU VAT liabilities denominated in euros is offset by euro denominated cash balances.

        Furthermore, in an effort to mitigate economic risk, we hold U.S. dollars in certain subsidiaries that have a functional currency other than the U.S. dollar.

        Operating foreign currency exchange for the three months ended June 30, 2014 and 2013 resulted in net losses of $0.1 million and $0.3 million, respectively, attributable to foreign currency remeasurements of operating assets and liabilities denominated in a currency other than their functional currency. Operating foreign currency exchange for the six months ended June 30, 2014 and 2013 resulted in a net gain of $0.1 million and a net loss of $0.2 million, respectively

        Non-operating foreign exchange for the three months ended June 30, 2014 and 2013 resulted in a net loss of $0.3 million and a net gain of $1.5 million, respectively, attributable to cash held in certain countries in currencies other than their functional currency. Non-operating foreign exchange for the six months ended June 30, 2014 and 2013 resulted in a net loss of $0.1 million and a net gain of $1.3 million, respectively.

        The unfavorable fluctuations during the second quarter of 2014 were principally driven by U.S. dollar positions held at June 30, 2014 affected by the weaker dollar compared to the Colombian peso and British pound. The favorable fluctuations during the 2013 period were principally driven by U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Mexican and Colombian pesos. The unfavorable fluctuations during the year were principally driven by U.S. dollar positions held at June 30, 2014 affected by the weaker dollar compared to the Colombian peso and British pound, partly offset by the stronger dollar compared to the Egyptian pound. The favorable fluctuations in the six months ended June 30, 2013 were principally driven by U.S. dollar positions held at June 30, 2013 affected by the stronger dollar compared to the Columbian peso and the Egyptian pound.

        Our operations in international markets are exposed to potentially volatile movements in currency exchange rates. The economic impact of currency exchange rate movements on us is often linked to variability in real growth, inflation, interest rates, governmental actions and other factors. These changes, if material, could cause us to adjust our financing, operating and hedging strategies. A hypothetical 10% weakening/strengthening in foreign exchange rates to the U.S. dollar for the three and six months ended June 30, 2014 would result in an approximate change to revenue of $0.7 million and $1.9 million, respectively. There have been no material quantitative changes in market risk exposures since December 31, 2013.

Interest Rate Risk

        We are exposed to interest rate risk through borrowings under our June 21, 2012 amended credit agreement, as amended, which bears interest at variable rates. The interest rate on the amended credit agreement is based on (at our election) either LIBOR plus a predetermined margin that ranges from 1.25% to 2.25%, or the Base Rate as defined in the amended credit agreement plus a predetermined margin that ranges from 0.25% to 1.25%, in each case based on ILG's leverage ratio. As of June 30, 2014, the applicable margin was 1.50% per annum for LIBOR revolving loans and 0.50% per annum for Base Rate loans. During the second quarter of 2014, we had at least $268 million outstanding under our revolving credit facility; a 100 basis point change in interest rates would result in an approximate change to interest expense of $0.6 million for the current quarter. While we currently do not hedge our interest rate exposure, this risk is somewhat mitigated by variable interest rates earned on our cash balances.

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Item 4.    Controls and Procedures

        We monitor and evaluate on an ongoing basis our disclosure controls and internal control over financial reporting in order to improve our overall effectiveness. In the course of this evaluation, we modify and refine our internal processes as conditions warrant.

        As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), our management, including our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined by Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer concluded that as of the end of the period covered by this report, our disclosure controls and procedures were effective in providing reasonable assurance that information we are required to disclose in our filings with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms, and include controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

        As required by Rule 13a-15(d) of the Exchange Act, we, under the supervision and with the participation of our management, including the Chief Executive Officer, Chief Financial Officer and Chief Accounting Officer, also evaluated whether any changes occurred to our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, such control. Based on that evaluation, there have been no material changes to internal controls over financial reporting.

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PART II

OTHER INFORMATION

Item 1.    Legal Proceedings

        Not applicable

Item 1A.    Risk Factors

        See Part I, Item IA., "Risk Factors," of ILG's 2013 Annual Report on Form 10-K, for a detailed discussion of the risk factors affecting ILG. There have been no material changes from the risk factors described in the Annual Report except as follows.

Our previously announced transaction may not be consummated

        We previously announced that we entered into an agreement to purchase the Hyatt Residential Group business. This agreement is subject to customary closing conditions and may be terminated in certain circumstances. The occurrence of any event, change, or circumstance that could give rise to the termination of the purchase agreement (including the failure to satisfy conditions to completion) could cause the transaction not to close. This could adversely affect our stock price and future results.

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Unregistered Sale of Securities.    None



(b)

Use of Proceeds.    Not applicable



(c)

Purchases of Equity Securities by the Issuer and Affiliated Purchasers:    The following table sets forth information with respect to purchases of shares of our common stock made during the quarter ended June 30, 2014 by or on behalf of ILG or any "affiliated purchaser," as defined by Rule 10b-18(a)(3) of the Exchange Act. All purchases were made in accordance with Rule 10b-18 of the Exchange Act.

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Items 3-5.    Not applicable.

Item 6.    Exhibits

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SIGNATURES

        Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Date: August 5, 2014

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QuickLinks

PART 1—FINANCIAL STATEMENTS

Item 1. Consolidated Financial Statements

INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) (Unaudited)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands) (Unaudited)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share and per share data)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EQUITY (In thousands, except share data) (Unaudited)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
INTERVAL LEISURE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2014 (Unaudited)

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

GENERAL
MANAGEMENT OVERVIEW
RESULTS OF OPERATIONS
FINANCIAL POSITION, LIQUIDITY AND CAPITAL RESOURCES
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
ILG'S PRINCIPLES OF FINANCIAL REPORTING
RECONCILIATIONS OF NON-GAAP MEASURES

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Item 4. Controls and Procedures

PART II OTHER INFORMATION

Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Items 3-5. Not applicable.
Item 6. Exhibits

SIGNATURES