Marriott Vacations Worldwide Corporation — 2017 Third-Quarter Form 10-Q
Business context and reporting period
Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. Its reportable segments are North America, Asia Pacific and Europe, with more than 65 properties in the United States and nine other countries and territories.
The filing covers the 92 days ended September 30, 2017, compared with the 84 days ended September 9, 2016, and the first 274 days of 2017 compared with 252 days in 2016. The company changed to a calendar year-end and month-end quarterly reporting cycle in 2017; historical results were not restated.
Key financial metrics
| Metric | Q3 2017 | Q3 2016 | First three quarters 2017 | First three quarters 2016 |
|---|---|---|---|---|
| Total revenue | $487.0 million | $401.6 million | $1.471 billion | $1.244 billion |
| Income before taxes | $63.1 million | $40.8 million | $180.9 million | $142.2 million |
| Net income | $40.8 million | $26.8 million | $118.7 million | $87.5 million |
| Diluted EPS | $1.47 | $0.97 | $4.26 | $3.05 |
| Adjusted EBITDA | $74.0 million | $50.6 million | $213.9 million | $166.4 million |
| Operating cash flow | Not separately provided | Not separately provided | $70.8 million | $90.9 million |
Q3 net margin was approximately 8.4%, compared with approximately 6.7% in the prior-year quarter. First-three-quarter net margin was approximately 8.1%, compared with approximately 7.0% in the prior-year period.
- Vacation ownership product revenue increased 38% in Q3 to $180.5 million and 31% year to date to $543.7 million.
- Contract sales increased 17% in Q3 to $198.5 million and 23% year to date to $602.2 million. North America generated $179.2 million of Q3 contract sales and $547.5 million year to date.
- Development margin increased to $37.2 million in Q3 from $17.2 million; development margin percentage rose to 20.6% from 13.1%. Year-to-date margin percentage was 19.7%, versus 18.1%.
- Resort management and other services margin was $32.2 million in Q3 and $98.7 million year to date. The Q3 margin percentage declined to 41.9% from 43.3%, while the year-to-date percentage improved to 43.1% from 40.5%.
- Financing margin increased 21% in Q3 to $23.1 million and 16% year to date to $68.7 million. Financing propensity was 65.8% in Q3 and 64.9% year to date.
- Rental margin declined 21% in Q3 to $10.1 million, with margin percentage falling to 12.5% from 17.4%. Year-to-date rental margin increased 4% to $39.0 million, but margin percentage declined to 15.6% from 16.4%.
- Cash, cash equivalents and restricted cash totaled $501.8 million at September 30, 2017, including $440.1 million of cash and cash equivalents.
- Total debt, net of discounts and issuance costs, was $1.153 billion, compared with $737.2 million at December 30, 2016. Gross debt principal was approximately $1.208 billion, including $906.7 million of non-recourse securitization debt, $230.0 million of convertible notes and a $63.6 million non-interest-bearing note payable.
- The company had no cash borrowings under its $250.0 million revolving credit facility and no cash borrowings under its $250.0 million warehouse credit facility at quarter-end.
Material changes versus the prior comparable period
- Growth was led by North America, where Q3 segment revenue increased 22% to $437.8 million and segment financial results increased 26% to $103.9 million. Asia Pacific revenue increased 15%, but the segment recorded a $0.5 million loss versus $1.2 million of income. Europe revenue increased 15% and segment results increased 49% to $6.8 million.
- The 2017 period contained eight additional days in Q3 and 22 additional days year to date. Management estimated that 2016 comparable contract sales would have been approximately $17 million higher for Q3 and $43 million higher year to date on an equivalent-day basis.
- Hurricanes Irma and Maria affected more than 20 properties. Management estimated a $12 million adverse effect on Q3 and year-to-date contract sales, with additional fourth-quarter effects possible.
- Rental profitability weakened despite higher rented keys because of lower average transient rates, lower occupancy and higher expenses related to owner alternative-usage options and unsold inventory.
- General and administrative expense increased $4.5 million in Q3 and $10.9 million year to date, partly from the longer reporting periods and higher personnel-related costs.
- The company issued $230.0 million of 1.50% convertible senior notes due 2022, entered into $33.2 million of convertible note hedges and received $20.3 million from related warrant transactions. It used $40.1 million of note proceeds to repurchase 351,900 shares.
- The company completed a $350.0 million vacation ownership receivables securitization during Q3 at a weighted average interest rate of 2.51%.
Outlook, risks, contingencies and unusual items
- Management expected 2017 financing propensity to approximate 65% and expected interest income to continue increasing as new loan originations exceeded principal collections on existing receivables.
- Management expected inventory spending to be in line with inventory costs for the remainder of 2017. The company continued to pursue selective, capital-efficient inventory acquisitions, particularly in North America and Asia Pacific.
- Insurance proceeds of $8.7 million related to Hurricane Matthew were recorded in Q3. The company also recorded $1.7 million for estimated property-damage deductibles and impairment related primarily to Hurricane Irma and Hurricane Maria. Management did not expect Hurricane-related insurance proceeds in 2017 and could not quantify future mitigation.
- The company recorded $2.0 million of Q3 litigation settlement expense and $2.2 million year to date. Several Hawaii, California, Colorado and Florida lawsuits remained outstanding; management could not estimate potential liability for the disclosed matters.
- Contractual obligations totaled $1.765 billion, including $1.333 billion of debt obligations and $336.4 million of purchase obligations. Material commitments included $158.5 million for a New York property, $108.2 million for remaining Marco Island units and $305.8 million of commitments to acquire completed vacation ownership units.
- Vacation ownership notes receivable totaled $1.076 billion net of reserves, with an allowance of $114.0 million and an estimated average remaining default rate of 7.18%. A 0.5 percentage-point increase in the estimated default rate would have increased the allowance by approximately $5.6 million.
- The company planned to adopt the new revenue recognition standard in fiscal 2018 on a retrospective basis. It expected material gross presentation increases in cost reimbursements and changes in timing and classification for certain vacation ownership sales, but had not completed quantification of the full impact.
- Management identified leverage, refinancing, liquidity, convertible-note cash settlement requirements, potential dilution from warrants, hurricane disruption, litigation and consumer-credit performance as significant risks.
Most important facts for investors to verify
- Assess reported growth against equivalent-day comparisons because 2017 periods were longer than the 2016 comparables.
- Verify the sustainability of North American contract-sales growth, development margins and financing propensity after hurricane-related disruptions and the ramp-up of six newer sales distributions.
- Monitor cash generation relative to $1.2 billion of gross debt, significant inventory-acquisition commitments and the $230 million convertible notes due 2022.
- Review vacation ownership receivable delinquencies, defaults, reserves and securitization triggers, including the company’s non-recourse exposure and potential repurchase obligations.
- Evaluate the effect of Hurricane Irma and Maria on fourth-quarter sales, resort availability, rental operations and insurance recoveries.
- Quantify the eventual financial-statement effects of the 2018 revenue recognition adoption.
- Track the outcome and potential exposure of the disclosed litigation and the company’s remaining property purchase commitments.