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 and manages vacation ownership products, provides resort management and related services, finances customer purchases, and rents vacation inventory. The company operated 62 properties across the United States and nine other countries and territories at September 12, 2014.
This unaudited Form 10-Q covers the fiscal third quarter ended September 12, 2014, consisting of 12 weeks, and the year-to-date period consisting of 36 weeks. Comparable periods ended September 6, 2013. Results may be affected by seasonal and short-term variations.
Financial Performance and Position
| Metric | 12 weeks ended September 12, 2014 | Prior comparable period | 36 weeks ended September 12, 2014 | Prior comparable period |
|---|---|---|---|---|
| Total revenues | $413 million | $412 million | $1,225 million | $1,223 million |
| Income before taxes | $43 million | $40 million | $133 million | $114 million |
| Net income | $25 million | $25 million | $80 million | $74 million |
| Diluted EPS | $0.75 | $0.67 | $2.28 | $2.03 |
| EBITDA | $50 million | $47 million | $154 million | $139 million |
| Operating cash flow | Not separately provided | Not separately provided | $206 million | $123 million |
Approximate consolidated net margins were 6.1% for the quarter and 6.5% year to date, compared with approximately 6.1% and 6.1%, respectively, in the prior periods. EBITDA margins were approximately 12.1% for the quarter and 12.6% year to date.
- Vacation ownership product revenue was $156 million for the quarter and $453 million year to date, down 4% in both comparisons. Contract sales increased 2% to $172 million for the quarter and 3% to $498 million year to date.
- Resort management and other services revenue increased 4% to $67 million for the quarter and 5% to $197 million year to date. The related margin percentage improved to 33.0% from 29.9% for the quarter and to 32.8% from 28.4% year to date.
- Financing revenue declined 6% to $30 million for the quarter and 7% to $90 million year to date, primarily because collections continued to exceed new loan originations. Financing margin was $19 million for the quarter and $56 million year to date.
- Rental revenue was $65 million for the quarter and $191 million year to date. Rental margin improved to $11 million from $8 million for the quarter and to $25 million from $24 million year to date.
- Development margin percentage increased to 21.5% from 21.1% for the quarter and to 21.4% from 20.3% year to date, primarily reflecting a favorable mix of lower-cost real estate inventory.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $146 million at September 12, 2014, compared with $200 million at January 3, 2014. Restricted cash was $65 million.
- Year-to-date operating cash flow was $206 million, compared with $123 million in the prior year. Investing activities provided $46 million, compared with $4 million used in the prior year, including $33 million of net proceeds from dispositions. Financing activities used $305 million, principally reflecting $163 million of securitization debt repayments and $160 million of common-stock repurchases.
- Total debt was $538 million, down from $678 million at year-end; $534 million was non-recourse debt associated with vacation ownership note securitizations. Debt carried weighted-average securitization interest of approximately 3.5%.
- The company had no borrowings under its $200 million revolving corporate credit facility and had $3 million of letters of credit outstanding. The facility was amended to extend lender commitments to September 10, 2019. The company reported compliance with applicable covenants.
- Vacation ownership notes receivable, net, were $912 million, including $580 million securitized and $332 million non-securitized. The allowance for loan losses was $124 million; estimated average remaining default rates were 6.94%.
- Real estate inventory was $794 million, including $446 million of finished goods and $348 million of land and infrastructure. Future cash outflows to complete existing projects were estimated at approximately $19 million, of which $9 million was accrued.
Material Changes Versus the Prior Comparable Period
- Revenue was essentially flat, but pretax income increased 8% for the quarter and 17% year to date; year-to-date net income rose 8% and diluted EPS rose 12%.
- Improved profitability reflected lower vacation ownership product costs, stronger resort management margins, lower consumer financing interest expense, lower organizational and separation costs, and favorable inventory mix. These benefits were partly offset by lower revenue reportability and higher income taxes.
- Revenue reportability was materially lower year over year, particularly in Europe, because of timing related to rescission periods and down-payment requirements. Management identified a $36 million year-to-date unfavorable revenue-reportability comparison.
- North America remained the primary contributor, with year-to-date segment revenue of $1.093 billion and segment financial results of $267 million, compared with $249 million. Europe revenue declined to $97 million from $107 million and segment results declined to $13 million from $19 million. Asia Pacific revenue declined to $35 million from $39 million and segment results declined to $4 million from $5 million.
- North America on-site VPG increased 7% for the quarter and 6% year to date, but tours declined 4% in both comparisons. Management attributed lower tour flow to owners using the points program for shorter stays and alternative usage options.
- The company repurchased 2.46 million shares for $135 million during the 36-week period and had 2.96 million shares held in treasury at September 12, 2014.
Outlook, Commentary, Risks and Unusual Items
- No formal consolidated earnings or revenue guidance is provided in the filing. Management expects new programs targeting existing owners and first-time buyers to increase tour flow in 2015.
- Management expects organizational and separation activities to be substantially completed in 2015, with an additional $7 million to $9 million of costs through the end of 2015 and anticipated annualized savings exceeding $15 million once completed.
- Management expects real estate inventory spending to remain below or in line with vacation ownership product costs in the near term and plans to dispose of excess land and Ritz-Carlton inventory.
- Subsequent to quarter-end, the warehouse credit facility was extended to September 15, 2016. On October 9, 2014, the company completed a $240 million securitization backed by a $250 million pool of vacation ownership notes, with a weighted-average interest rate of 2.29%.
- Subsequent to quarter-end, the board authorized up to an additional 3.4 million share repurchases, extended the program to March 26, 2016, and declared a quarterly dividend of $0.25 per share.
- A $3 million litigation charge was recorded for an agreement in principle to settle the Benner action relating to Ritz-Carlton Club and Residences, San Francisco. The company received an $8 million one-time service-provider settlement gain during the year-to-date period.
- The proposed sale of The Abaco Club remains subject to closing conditions. If completed as contemplated, the company could incur a non-cash loss of up to $25 million and related litigation claims would be dismissed.
- Other litigation and arbitration matters, including claims involving Kapalua Bay, Ritz-Carlton fractional interests and the Marriott Vacation Club points program, remain unresolved; potential liability cannot currently be estimated for several matters.
- Key operating risks include vacation ownership demand and tour flow, customer defaults, reliance on securitization markets, rescission and revenue-recognition timing, litigation outcomes, foreign currency and political conditions in Asia Pacific, and the ability to sell excess inventory.
Important Facts for Investors to Verify
- Reconcile cash generation with the $160 million share repurchase program, debt repayments and the decline in cash balances.
- Assess the sustainability of improved margins given reliance on favorable inventory mix, revenue-reportability timing and lower separation costs.
- Monitor financing revenue, loan originations, delinquency trends, default-rate assumptions and the $124 million loan-loss reserve.
- Review the terms, collateral, triggers and non-recourse treatment of securitization debt, including the October 2014 transaction.
- Track tour volumes, VPG, financing propensity and the expected effect of new marketing programs on 2015 demand.
- Evaluate the status and potential financial impact of the Abaco Club disposition and outstanding litigation and arbitration matters.
- Confirm subsequent share repurchases, dividend payments and compliance with revolving-credit-facility covenants.