David F. Palmer, President and Chief Executive Officer, stated, “This was another exceptional quarter of record results for the Company. We posted all time record revenue and EBITDA and generated more cash than any other quarter in our history -$72 million in cash before applying a portion to share repurchases, debt reduction, and other strategic investments. Our business continued to benefit from compelling marketing programs evidenced by increased average transaction size and an increased close rate. We are reaffirming our previous guidance for the full year ending December 31, 2015 and anticipate that our results will be towards the top end of the range. Further, our Board of Directors has authorized an additional $100 million for the repurchase of the Company’s common stock under the Company’s stock repurchase program.
In addition, earlier today we announced a sales and management opportunity in connection with a new resort to be built by an affiliate of Och Ziff Real Estate in Kona, Hawaii that we intend to become a part of our high-demand Hawaii Collection. This initiative provides us with an opportunity to add inventory sufficient to support in excess of $400 million of sales in an efficient manner, nicely complementing our inventory recapture program. We are also pleased to have completed earlier today a $170 million securitization with very favorable terms, underscoring the strength of our business and the high quality of our loan portfolio.”
Second Quarter 2015 Highlights
- Total revenue increased $22.5 million, or 10.8%, to $231.5 million.
- Net income increased $39.6 million to $36.9 million from the prior year loss of $2.7 million.
- Pre-tax income, excluding non-cash stock based compensation and a charge related to the loss on extinguishment of debt and the contract renegotiation with Interval International during the period in 2014, increased $21.6 million, or 45.9%, to$68.8 million.
- We generated $72.6 million in free cash flow prior to spending $13.0 million on share repurchases, $5.9 million in construction expenditures relating to the expansion of our Cabo Azul resort, $4.1 million on reduction of notes payable and $1.5 million capitalizing our Asian joint venture.
- Cash and Cash Equivalents at June 30, 2015 were $231.2 million which is after repurchasing $90.2 million of our shares through June 30th.
- Adjusted EBITDA for the period in 2014 included a one-time benefit of $1.8 million related to the renegotiation of our agreement with Interval International. Excluding this benefit in 2014, Adjusted EBITDA increased $8.4 million, or 9.7% to$95.2 million.
- Earlier today we completed a $170.0 million securitization of consumer receivables at an advance rate of 96.0% and at a weighted average interest rate of 2.76%.
For the full year ending December 31, 2015, the Company is reaffirming guidance for its expected operating results. We anticipate for the year ending December 31, 2015 our operating results will be towards the high end of the ranges.
|Guidance||Year Ending December 31, 2015|
|($ in thousands)||Low||High|
|Corporate interest expense||$||28,000||$||26,000|
|Vacation interest cost of sales(a)||$||73,000||$||63,000|
|Depreciation and amortization||$||38,000||$||36,000|
|Other non-cash items(b)||$||47,000||$||44,000|
|For the year ending December 31, 2015, we anticipate capital expenditures(c) to be between $25.0 million and $30.0 million. In addition, we anticipate ordinary course cash expenditures for the acquisition of inventory to be between $50.0 million and $55.0 million, and cash tax payments to be between $17.0 million and $23.0 million.|
|Consistent with our capital allocation philosophy, we also anticipate investing approximately $27.0 million of our cash in projects expected to generate superior returns, including the build-out of inventory at our Cabo Azul resort (we have spent $7.8 million through June 30, 2015) and other strategic investments. We continue to pursue other opportunities to provide superior returns to our stockholders.|
|(a)||In accordance with ASC 978, the Company records Vacation Interest Cost of Sales using the relative sales value method (See Note 2 – Summary of Significant Accounting Policies in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014). This method requires the Company to make a number of projections and estimates, which are subject to significant uncertainty and retroactive adjustment in future periods. These “true-up” adjustments may result, and for the Company have resulted in prior periods, in major swings (both positive and negative) in the Company’s pre-tax income computed in accordance with US GAAP that do not have a direct correlation to the operating performance for the periods in which the “true-ups” are made. It is difficult to predict with any degree of precision what the projections and estimates used in connection with the relative sales value method will be and what impact those projections and estimates will have on the amount recorded in future periods as Vacation Interest Cost of Sales. As a result, guidance for Vacation Interest Cost of Sales (and as a result, pre-tax income) covers a wide range of outcomes and does not impact Adjusted EBITDA.|
|(b)||Other non-cash items include: stock based compensation, amortization of loan origination costs, and amortization of net portfolio discounts and premiums.|
|(c)||Principally for IT infrastructure and sales center expansion/refurbishment. This does not include expenditures for the acquisition of inventory, or resort-level capital improvements which are paid by the homeowners associations.|
Second Quarter Earnings Summary
Hospitality and Management Services
Total management and member services revenue in our Hospitality and Management Services segment increased $2.8 million, or 7.2%, to $42.0 million for the second quarter of 2015 from $39.2 million for the second quarter of 2014. Management fees increased as a result of increases in operating costs at the resort level, which generated higher management fee revenue under our cost-plus management agreements. In addition, effective January 1, 2015, the Company deconsolidated the operations of the two managed resorts in St. Maarten; thus removing those resorts’ revenues and expenses from our consolidated resort operations revenue and expense, respectively, while recognizing the management fee revenue earned in this line item.
Management and member services expense in our Hospitality and Management Services segment increased $2.4 million, or 41.4%, to $8.3 million for the second quarter of 2015 from $5.9 million for the second quarter of 2014. For each of the second quarter of 2015 and 2014, management and member services expense included $0.3 million of non-cash stock-based compensation charges. In April 2014, we renegotiated our contract with Interval International, an exchange company, which relieved us from our obligation to repay the unearned portion of a marketing allowance to Interval International under the original contract, and which resulted in the one-time release of this deferred revenue to the statement of operations and comprehensive income (loss) of $1.8 million as a reduction of exchange company costs for the second quarter of 2014. Excluding the non-cash stock-based compensation charges and the non-cash one-time benefit, management and member services expense as a percentage of management and member services revenue increased slightly. Excluding these non-cash items, management and member services expense would have been $7.4 million for the second quarter of 2014, and management and member services expense for the second quarter of 2015 would have increased 7.9% from the 2014 quarter. Including these non-cash items, management and member services expense as a percentage of management and member services revenue increased to 19.8% compared to 15.0%.
Vacation Interest Sales and Financing
Vacation Interest sales, net, increased $20.3 million, or 15.6%, to $150.3 million for the second quarter of 2015 from $130.0 million for the second quarter of 2014. The increase in Vacation Interest sales, net, was attributable to a $28.2 million increase in Vacation Interest sales revenue, partially offset by an $8.0 million increase in our provision for uncollectible Vacation Interest sales revenue. The $28.2 million increase in Vacation Interest sales revenue during the second quarter of 2015 compared to the second quarter of 2014 was generated by sales growth on a same-store basis from 51 sales centers primarily attributable to an increase in our volume per guest (“VPG,” which represents Vacation Interest sales revenue divided by the number of tours). VPG increased by $596, or 23.7%, to $3,112 from $2,516, as a result of a higher average sales price per transaction and a higher closing percentage (which represents the percentage of VOI sales transactions closed relative to the total number of tours at our sales centers during the period presented). The number of tours decreased to 56,911 from 58,267, due principally to the closure of our Cabo Azul resort sales center as a result of the damage suffered in Hurricane Odile as well as the impact of our decision to change our mix of tours to improve efficiency. We expect sales at Cabo Azul to commence during the fourth quarter. Our VOI sales transactions increased to 8,542 compared to 8,276, and VOI average sales price per transaction increased $3,020, or 17.0%, to $20,733 from $17,713. Our closing percentage increased to 15.0% from 14.2%. The increase in average sales price per transaction and the higher closing percentage (and as a result, higher VPG) are due principally to the continued focus on selling larger point packages and the success of the sales and marketing initiatives implemented in association with this strategy.
Provision for uncollectible Vacation Interest Sales revenue increased $8 million to $20.8 million during the second quarter of 2015 from $12.8 million during the second quarter in 2014. This increase is primarily due to: (i) the change in mix of the overall loans written during the quarter (based on consumer FICO score), and increased sales revenue and percentage of sales financed; and (ii) a slight increase in the percentage of loans in our portfolio more than 90 days past due. The allowance for uncollectible mortgages and contracts receivable as a percentage of gross mortgages and contracts receivable was 22.1% as of June 30, 2015, as compared to 21.8% as of June 30, 2014. The weighted average FICO score of loans written during the second quarter of 2015 and 2014 were 752 and 753, respectively.
Advertising, sales and marketing expense for the second quarter of 2015 and 2014 included non-cash charges of $0.5 millionand $0.3 million, respectively, related to stock-based compensation. Excluding these charges, advertising, sales and marketing expense as a percentage of Vacation Interest sales revenue decreased 0.2 percentage points to 49.3% from 49.5%. This improvement was primarily due to improved leverage of fixed costs through increased sales efficiencies and a reduction in cost related to the focus on more efficient tours. Including the non-cash charges, advertising, sales and marketing expense as a percentage of Vacation Interest sales revenue was 49.6% compared to 49.8%.
Vacation Interest cost of sales decreased $8.0 million, or 51.8%, to $7.5 million for the second quarter of 2015 from $15.5 million for the second quarter of 2014. This decrease consisted of a $10.4 million decrease resulting from changes in estimates under the relative sales value method, partially offset by a $2.4 million increase related to the increase in Vacation Interest Sales revenue. The changes under the relative sales value method related to the recovery of a larger pool of low cost inventory, an increase in the average retail sales price and a larger pool of inventory becoming eligible for capitalization in accordance with our inventory recovery agreement. Vacation Interest cost of sales as a percentage of Vacation Interest sales, net decreased to 5.0% from 11.9%.
General and Administrative Expense
General and administrative expense for the second quarter of 2015 of $23.5 million and 2014 of $23.3 million included $3.4 million of non-cash stock-based compensation charges in both periods. Excluding these charges, general and administrative expense as a percentage of total revenue decreased 0.8 percentage point to 8.7% from 9.5%. Including these charges, general and administrative expense as a percentage of total revenue was 10.2% as compared to 11.1%. The reduction of general and administrative expense as a percentage of total revenue reflects the improved leverage of fixed costs over a higher revenue base.
Pre-tax Income and Net Income (Loss)
Pre-tax income for the second quarter of 2015 and 2014 included non-cash charges of $4.4 million and $4.2 million, respectively, related to stock-based compensation. The second quarter in 2014 included a charge of $46.8 million related to the loss on extinguishment of debt and a one-time benefit of $1.8 million related to the contract renegotiation with Interval International. Excluding the amounts discussed above, pre-tax income in 2015 would have been $68.8 million, an increase of$21.6 million from $47.1 million. Including these items, pre-tax income for the second quarter of 2015 was $64.3 millioncompared to a pre-tax loss of $2.1 million in the second quarter of 2014.
Net income for the second quarter in 2015 and 2014 were inclusive of the non-cash and one-time items discussed above. Net income increased $39.6 million to $36.9 million during the period for 2015 from a net loss of $2.7 million during the period in 2014.
Capital Resources and Liquidity
As of June 30, 2015, the Company had cash and cash equivalents of $231.2 million and corporate indebtedness of $429.0 million. During the second quarter of 2015, the Company had a net increase of $48.2 million in cash and cash equivalents.
During the second quarter of 2015 and 2014, we used cash of $18.1 million and $14.8 million, respectively, for acquisitions of VOI inventory pursuant to inventory recovery agreements and in open market and bulk VOI inventory purchases, for capitalized legal, title and trust fees and for the construction of VOI inventory. Of these total cash amounts, $5.9 million and$0.1 million during the three months ended June 30, 2015 and 2014, respectively, were used for the construction of VOI inventory, primarily related to construction of additional units at our Cabo Azul resort.
In addition, we had increases in unsold Vacation Interests, net, that did not have an impact on our working capital during the respective periods. Specifically, we capitalized $18.2 million and $17.5 million during the three months ended June 30, 2015and 2014, respectively, related to inventory recovery agreements in the U.S., offset by an equal increase in due to related parties, net where cash will be used in future periods to settle these amounts. The Company also transferred $2.5 million and$3.0 million during the three months ended June 30, 2015 and 2014, respectively, from due from related parties, net, to unsold Vacation Interests, net, as a result of our recovery of VOI inventory pursuant to inventory recovery arrangements inEurope; cash was used in prior periods when these amounts were recorded to due from related parties, net. Furthermore, we transferred $0.6 million and $0.4 million from mortgages and contracts receivable, net, to unsold Vacation Interests, net, during the three months ended June 30, 2015 and 2014, respectively, as a result of our recovery of underlying VOI inventory due to loan defaults.
Net cash provided by operating activities for the three months ended June 30, 2015 was $45.6 million and was primarily the result of net income of $36.9 million and non-cash revenues and expenses totaling $50.9 million, partially offset by other changes in operating assets and liabilities that resulted in a net credit of $42.2 million which primarily includes increases in mortgages and contracts receivable, unsold vacation interest and deferred revenues, reductions in accrued liabilities, as well as changes in other working capital assets and liabilities. The significant non-cash revenues and expenses included (i) $20.8 million in the provision for uncollectible Vacation Interest sales revenue; (ii) $12.8 million in deferred income taxes; (iii) $8.5 million in depreciation and amortization; (iv) $4.4 million in stock-based compensation expense; (v) $3.1 million in amortization of capitalized loan origination costs and net portfolio discounts; and (vi) $1.4 million in amortization of capitalized financing costs and original issue discounts. Net cash provided by operating activities for the three months endedJune 30, 2014 was $19.2 million and was the result of net loss of $2.7 million and non-cash revenues and expenses totaling$74.9 million, partially offset by other changes in operating assets and liabilities that resulted in a net credit of $52.9 millionwhich primarily includes increases in mortgages and contracts receivable, accrued liabilities and deferred revenues, as well as changes in other working capital assets and liabilities.
Net cash used in investing activities for the three months ended June 30, 2015 was $8.3 million, consisting of (i) $6.8 millionused to purchase property and equipment, primarily associated with information technology related projects and equipment and renovation projects at certain sales centers; and (ii) a $1.5 million investment in the Joint Venture in Asia. Net cash used in investing activities for the three months ended June 30, 2014 was $3.9 million, which was used to purchase property and equipment.
Net cash provided by financing activities for the three months ended June 30, 2015 was $10.2 million, consisting of (i) $90.3 million in proceeds from the issuance of securitization notes and funding facilities offset by (a) $62.8 million of payments on securitization notes and funding facilities; (b) $13.0 million in repurchases of our common stock; and (c) $4.1 million in repayments on notes payable. During the three months ended June 30, 2014, net cash provided by financing activities was$26.4 million, which consisted of (i) $442.8 million in proceeds from the issuance of the senior credit facility; and (ii) $69.2 million in proceeds from the issuance of securitization notes and funding facilities; offset by (a) $404.7 million in repayments of the senior secured note; (b) $49.3 million of payments on securitization notes and funding facilities; (c) $20.8 million in repayments on notes payable; and (d) $10.7 million in payments of debt issuance cost.
Earlier today, the Company completed a securitization involving the issuance of $170.0 million of investment-grade rated securities. The issuance was completed through Diamond Resorts Owner Trust 2015-1 and is comprised of $158.5 million of AA- rated vacation ownership loan backed notes and $11.5 million of A rated vacation ownership loan backed notes. The notes have interest rates of 2.7% and 3.2% respectively, for an overall weighted average interest rate of 2.76%. The advance rate for this transaction was 96.0%.
Business Interruption Insurance Recovery
Earlier this month, the Company received $3.0 million as the first installment from its insurance carrier under its business interruption insurance policy related to lost profits during the period that the Cabo Azul Resort remains closed as a result of the damage suffered in Hurricane Odile in September 2014. This cash receipt will be recorded as other revenue in the Company’s condensed consolidated statement of operations for the quarter ending September 30, 2015. The total claim remains under negotiation with the insurance carrier and any further payments will also be recorded as other revenue in the periods in which they are received.
Stock Repurchase Program
In October 2014, we announced a plan to repurchase up to $100.0 million of our common stock. We are announcing today that the Board of Directors of the Company has authorized the expenditure of up to an additional $100 million for the repurchase of the Company’s common stock under the stock repurchase program. During the second quarter, we used cash of $13.0 million to repurchase shares of our common stock. With the new authorization approximately $109.8 million is available under the plan. Any repurchases under the expanded program will be made from time to time in accordance with applicable securities laws in the open market and/or in privately negotiated transactions, and may include repurchases pursuant to Rule 10b5-1 trading plans.
The expanded repurchase program does not obligate the Company to acquire any additional shares of common stock or impose any particular timetable for repurchases, and the program may be suspended or modified at any time at the Company’s discretion. The timing and amount of any stock repurchases will be determined by the Company’s management based on its evaluation of market conditions, the trading price of the stock, potential alternative uses of cash resources, applicable legal requirements, compliance with the provisions of the Company’s credit agreement, and other factors.
Second Quarter 2015 Earnings Call
The company will be conducting a conference call to discuss the second quarter financial results at 5:00 p.m. Eastern Time onJuly 29, 2015, available via webcast on the Company’s website at http://investors.diamondresorts.com. A webcast replay will become available within 2 hours of the call and will run for approximately one year on the Company’s website. Alternatively, participants may call into (888) 753-4238 from the United States, or (706) 643-3355 from outside the U.S. with conference ID 77782829; please dial in fifteen minutes early to ensure a timely start.
Cautionary Notes Regarding Forward-Looking Statements
This press release contains forward-looking statements, including the guidance for expected operating results presented under “Outlook” above and other statements regarding the Company’s current expectations, prospects and opportunities. These forward-looking statements are covered by the “Safe Harbor for Forward-Looking Statements” provided by the Private Securities Litigation Reform Act of 1995. The Company has tried to identify these forward looking statements by using words such as “expect,” “anticipate,” “estimate,” “plan,” “will,” “would,” “should,” “could,” “forecast,” “believe,” “guidance,” “projection,” “target” or similar expressions, but these words are not the exclusive means for identifying such statements. The Company cautions that a number of risks, uncertainties and other factors could cause the Company’s actual results to differ materially from those expressed in, or implied by, the forward-looking statements, including, without limitation, adverse trends or disruptions in economic conditions generally or in the vacation ownership, vacation rental and travel industries; adverse changes to, or interruptions in, relationships with the Company’s affiliates and other third parties, including termination of the Company’s hospitality management contracts; the Company’s ability to maintain an optimal inventory of vacation ownership interests for sale overall, as well as in specific Collections; the market price of the Company’s stock prevailing from time to time; alternative uses of cash and investment opportunities pursued by the Company from time to time; the Company’s compliance with the financial and other covenants contained in the credit agreement with respect to the Company’s senior secured credit facility; the Company’s ability to sell, securitize or borrow against its consumer loans; decreased demand from prospective purchasers of Vacation Interests; adverse events or trends in vacation destinations and regions where the resorts in our network are located; changes in the Company’s senior management; the Company’s ability to comply with regulations applicable to the vacation ownership industry; the effects of the Company’s indebtedness and its compliance with the terms thereof; the Company’s ability to successfully implement its growth strategy; and the Company’s ability to compete effectively. For a detailed discussion of factors that could affect the Company’s future operating results, please see the Company’s filings with the Securities and Exchange Commission, including the disclosures under “Risk Factors” in those filings. Except as expressly required by the federal securities laws, the Company undertakes no obligation to update or revise any forward-looking statements, whether as a result of new information, changed circumstances or future events or for any other reason.
The securitization transaction discussed above was completed in reliance upon Rule 144A and Regulation S as a placement of securities not registered under the Securities Act of 1933, as amended (the “Securities Act”), or any state securities law. All of such securities having been sold, this announcement of their sale appears as a matter of record only. The notes have not been registered under the Securities Act, or the securities laws of any state or other jurisdiction, and may not be offered or sold in the United States without registration or an applicable exemption from the Securities Act and applicable state securities laws.
Additionally, the statements about the Company’s current expectations with respect to potential future repurchases of its common stock are subject to a variety of factors, including, without limitation, future economic, competitive and market conditions; the market price of the Company’s stock prevailing from time to time; alternative uses of cash and the nature of other investment opportunities that may be available to the Company from time to time; the Company’s compliance with the financial and other covenants contained in the credit agreement with respect to the Company’s senior secured credit facility (under which the currently available basket for restricted payments, including purchases under the Company’s stock repurchase program, is approximately $89.3 million); and future business decisions.
About Diamond Resorts International®
Diamond Resorts International® (NYSE: DRII), with its network of more than 330 vacation destinations located in 34 countries throughout the continental United States, Hawaii, Canada, Mexico, the Caribbean, South America, Central America, Europe,Asia, Australasia and Africa, provides guests with choice and flexibility to let them create their dream vacation, whether they are traveling an hour away or around the world. Our relaxing vacations have the power to give guests an increased sense of happiness and satisfaction in their lives, while feeling healthier and more fulfilled in their relationships, by enjoying memorable and meaningful experiences that let them Stay Vacationed.™
Diamond Resorts International® manages vacation ownership resorts and sells vacation ownership points that provide members and owners with Vacations for Life® at over 330 managed and affiliated properties and cruise itineraries.
Reconciliation of GAAP to Non-GAAP Measures
We believe supplementing our consolidated financial statements presented in accordance with U.S. GAAP with non-U.S. GAAP measures provides investors with useful information regarding our liquidity and short-term and long-term trends.
We define Adjusted EBITDA as our net income, plus: (i) corporate interest expense; (ii) provision (benefit) for income taxes; (iii) depreciation and amortization; (iv) Vacation Interest cost of sales; (v) loss on extinguishment of debt; (vi) impairments and other non-cash write-offs; (vii) loss on the disposal of assets; (viii) amortization of loan origination costs; (ix) amortization of net portfolio premiums; and (x) stock-based compensation; less (a) gain on the disposal of assets; (b) gain on bargain purchase from business combination; and (c) amortization of net portfolio discounts. Adjusted EBITDA is a non-U.S. GAAP financial measure and should not be considered in isolation, or as an alternative to net cash provided by operating activities or any other measure of liquidity, or as an alternative to net income, operating income or any other measure of financial performance, in any such case calculated and presented in accordance with U.S. GAAP. Additional information regarding our calculation of Adjusted EBITDA is provided below.
We present Adjusted EBITDA primarily because the Senior Credit Facility Agreement includes covenants which are determined by reference to the Adjusted EBITDA of the Company and its “restricted subsidiaries,” and other of our debt-related agreements include covenants that are determined by reference to measures calculated in a manner similar to the calculation of Adjusted EBITDA. As a result, we believe that supplementing our consolidated financial statements presented in accordance with U.S. GAAP with this non-U.S. GAAP measure provides investors with useful information with respect to our liquidity. As of June 30, 2015, all of our subsidiaries were designated as restricted subsidiaries, as defined in the Senior Credit Facility Agreement.
In addition to its application under the Senior Credit Facility Agreement, our management uses Adjusted EBITDA: (i) for planning purposes, including the preparation of our annual operating budget; (ii) to allocate resources to enhance the financial performance of our business; (iii) to evaluate the effectiveness of our business strategies; and (iv) as a factor for determining compensation for certain personnel.
We understand that, although measures similar to Adjusted EBITDA are frequently used by investors and securities analysts in their evaluation of companies, it has limitations as an analytical tool, including:
- Adjusted EBITDA does not reflect our cash expenditures or future requirements for capital expenditures;
- Adjusted EBITDA does not reflect changes in, or cash requirements for, our working capital needs;
- Adjusted EBITDA does not reflect cash requirements for income taxes;
- Adjusted EBITDA does not reflect interest expense for our corporate indebtedness;
- although depreciation and amortization are non-cash charges, the assets being depreciated or amortized will often have to be replaced, and Adjusted EBITDA does not reflect any cash requirements for these replacements;
- we make expenditures to replenish Vacation Interests inventory (principally pursuant to our inventory recovery agreements and in connection with our strategic acquisitions), and Adjusted EBITDA does not reflect our cash requirements for these expenditures or certain costs of carrying such inventory (which are capitalized); and
- other companies in our industry may calculate Adjusted EBITDA differently than we do, limiting its usefulness as a comparative measure.
In this release, we present Adjusted EBITDA excluding the one-time cash charge related to the contract termination referenced above; because management excludes this charge from its forecasts and evaluation of our operational performance and because we believe that Adjusted EBITDA including this item is not indicative of our core cash flows or operating results.
The following tables present Adjusted EBITDA, excluding the one-time charge related to the contract termination and the one-time benefit related to the contract renegotiation reconciled to each of (i) our net cash provided by operating activities and (ii) our net income for the periods presented. These tables further reconcile to free cash flow for the periods presented.
We define Free Cash Flow as our Adjusted EBITDA, less: (i) cash interest paid on corporate indebtedness; (ii) impact of receivables financing; (iii) cash spend for acquisitions of VOI inventory pursuant to inventory recovery agreements and in open market and bulk VOI inventory purchases, for capitalized legal and title and trust fees; (iv) cash spend for corporate capital expenditures; and (v) other changes in net working capital. In arriving at free cash flow, we also adjust for certain net changes in working capital.
We believe that free cash flow is an important measure of our operating performance and, more specifically, that our presentation of free cash flow provides useful information regarding our generation of cash from our operations and our ability to execute our business and growth strategies (including potential strategic transactions) from a financial perspective. We also anticipate that free cash flow will be incorporated into the factors used to determine compensation for certain of our employees.