Business Context and Reporting Period
Marriott Vacations Worldwide Corporation is a vacation ownership company operating under the Marriott Vacation Club, Grand Residences by Marriott, and Ritz-Carlton brands. It develops, markets, sells, finances, manages, and rents vacation ownership products. As of June 19, 2015, it operated 59 properties across North America, Europe, and Asia Pacific.
This unaudited Form 10-Q covers the 12 and 24 weeks ended June 19, 2015, compared with the comparable periods ended June 20, 2014. The company uses a 52-week fiscal year, so the fiscal quarter does not correspond exactly to a calendar quarter.
Financial Performance and Key Metrics
| Metric | 12 weeks ended June 19, 2015 | 12 weeks ended June 20, 2014 | 24 weeks ended June 19, 2015 | 24 weeks ended June 20, 2014 |
|---|---|---|---|---|
| Total revenues | $422.8 million | $409.9 million | $877.7 million | $811.8 million |
| Income before taxes | $57.4 million | $57.6 million | $114.8 million | $89.7 million |
| Net income | $34.0 million | $35.3 million | $68.1 million | $54.6 million |
| Diluted EPS | $1.05 | $1.00 | $2.08 | $1.54 |
| EBITDA | $64.9 million | $64.5 million | $129.3 million | $103.4 million |
- Second-quarter revenue increased 3% year over year, while year-to-date revenue increased 8%.
- Second-quarter net income declined 4%, primarily because the prior-year period included a $7.6 million litigation settlement gain. Year-to-date net income increased 25%.
- Second-quarter diluted EPS increased to $1.05 from $1.00, supported by share repurchases despite slightly lower net income. Year-to-date diluted EPS increased 35% to $2.08.
- Revenue mix for the 24-week period included vacation ownership product sales of $339.3 million, resort management and other services of $138.5 million, financing revenue of $57.3 million, rental revenue of $148.8 million, and cost reimbursements of $193.8 million.
- Development margin was $33.1 million, or 21.3%, for the second quarter, compared with 24.2% in the prior-year period. For the first 24 weeks, development margin was $72.1 million, or 21.2%, compared with 21.4%.
- Rental revenue increased 17% in the quarter and 19% year to date. Rental margin increased to 14.9% from 11.1% in the quarter and to 18.0% from 10.8% year to date.
- Financing revenue declined 5% in both comparable periods because collections continued to exceed new vacation ownership note originations. Financing propensity increased to 42% in the quarter and 43% year to date, from 40% and 41%, respectively.
- Contract sales increased 1% in the quarter and 12% year to date. Year-to-date contract sales benefited from $28.4 million of residential sales related to 18 Macau units.
Cash Flow, Debt, Liquidity, and Balance Sheet
| Metric | June 19, 2015 | January 2, 2015 |
|---|---|---|
| Cash and cash equivalents | $250.9 million | $346.5 million |
| Total assets | $2.323 billion | $2.531 billion |
| Vacation ownership notes receivable, net | $878.9 million | $917.2 million |
| Inventory | $704.7 million | $772.8 million |
| Debt, net | $561.1 million | $703.0 million |
| Total equity | $1.061 billion | $1.080 billion |
- For the first 24 weeks, operating cash flow was $78.7 million, down from $98.2 million; investing cash flow was $48.4 million, down from $74.1 million; and financing cash flow was negative $221.5 million, compared with negative $202.0 million.
- Cash declined by $95.6 million during the first 24 weeks, compared with a $29.7 million decline in the prior-year period.
- Financing outflows included $143.4 million of securitization debt repayments, $66.2 million of common-stock repurchases, $8.1 million of dividends, and $9.4 million of withholding-tax payments on equity awards.
- Gross debt was $568.1 million, of which $564.7 million was non-recourse debt associated with vacation ownership note securitizations. The company had no cash borrowings under its Warehouse Credit Facility or Revolving Corporate Credit Facility at June 19, 2015.
- The company held $699.1 million of real estate inventory and stated that cash on hand, operating cash flow, securitization capacity, and available credit facilities should be adequate for expected liquidity needs.
Material Changes Versus the Prior Comparable Period
- North America remained the primary growth driver: 24-week segment revenue rose to $776.4 million from $729.3 million, and segment financial results increased to $202.3 million from $181.3 million.
- Europe weakened materially: 24-week revenue declined to $48.2 million from $59.2 million, contract sales fell 37%, and segment financial results declined to $3.0 million from $6.6 million. Second-quarter development margin was negative $0.5 million.
- Asia Pacific segment revenue increased to $53.1 million from $23.4 million year to date, primarily because of the $28.4 million Macau residential disposition; segment financial results increased to $9.4 million from $3.0 million.
- Marketing and sales expense increased 10% year to date, contributing to lower development-margin percentages, particularly in North America and Europe.
- Resort management margins improved because of lower ancillary operating costs following prior asset dispositions, closures, and outsourcing, while management fees and club dues increased.
- Debt declined substantially because of securitization repayments. The company also repurchased 817,726 shares for $66.2 million during the first 24 weeks and declared quarterly dividends of $0.25 per share.
- The company acquired a San Diego operating hotel for $55.0 million in the first quarter, intending to convert it into vacation ownership inventory. It also completed the sale of remaining undeveloped Kauai land, recording an $8.7 million gain.
Outlook, Commentary, Risks, and Unusual Items
- The filing does not provide a specific quantitative earnings or revenue forecast. Management stated that it expects available liquidity sources to satisfy near- and long-term requirements, subject to operating performance and capital-market access.
- Management plans to pursue asset-light growth opportunities, particularly in North America and Asia Pacific, and to focus Asia Pacific inventory acquisitions on destinations with strong on-site sales locations.
- The company committed AUD $84.5 million, or approximately $65.8 million, to acquire an operating hotel in Surfers Paradise, Australia, with the remaining payment of approximately $59.3 million expected in the third quarter of 2015. Additional transaction costs of $3.0 million to $4.0 million were expected.
- Other significant commitments included $75.5 million for Miami inventory, $38.5 million for Big Island of Hawaii inventory plus $45 million to $55 million of planned renovation costs, and $137.1 million for Marco Island inventory.
- Vacation ownership note performance remains a key risk. The estimated average remaining default rate was 7.03%, and a 0.5 percentage-point increase would have increased the loan-loss allowance by approximately $4.5 million.
- Material litigation included the Kapalua Bay Narayan and Charles matters, the Abramson class-related action, and a newly filed Petrick action. The company could not estimate potential liability for these matters. A $2.9 million accrual existed for the settled Benner action.
- The company had maximum potential future funding obligations of $9.6 million under financing guarantees, $77.9 million of surety bonds, and $3.3 million of letters of credit outstanding.
- The filing identifies foreign exchange, regulatory changes, litigation, consumer defaults, reliance on securitization markets, seasonal results, inventory carrying costs, and execution of planned acquisitions as important risks.
- The company early adopted certain consolidation and debt issuance-cost accounting standards without material reported impact. It was evaluating the future impact of the new revenue-recognition standard.
Investor Verification Checklist
- Verify whether year-to-date earnings growth remains after excluding the $8.7 million Kauai gain and the prior-year $7.6 million litigation settlement gain.
- Assess the sustainability of higher rental margins and the effect of increased marketing and sales spending on development margins.
- Monitor Europe contract sales, development margins, foreign exchange exposure, and the pace of inventory liquidation.
- Review vacation ownership note delinquencies, default assumptions, allowance adequacy, and securitization triggers.
- Confirm funding requirements and returns associated with the Surfers Paradise, Miami, Hawaii, and Marco Island commitments.
- Evaluate liquidity after share repurchases, dividends, debt repayments, planned acquisitions, and required inventory investments.
- Track the outcome and potential exposure from outstanding litigation and the company’s financing guarantees and other contingencies.