MARRIOTT VACATIONS WORLDWIDE Corp annual report, FY2013

Business Context and Reporting Period

Marriott Vacations Worldwide Corporation filed its Form 10-K for the fiscal year ended January 3, 2014. Fiscal 2013 included 53 weeks, compared with 52 weeks in fiscal 2012; the fourth quarter included 17 weeks versus 16 weeks in the prior-year quarter. The company develops, sells, finances, manages and rents vacation-ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands.

At year-end, the company operated 62 properties under 85 management contracts, with 12,829 vacation-ownership villas and approximately 420,000 owners. Reportable segments were North America, Europe and Asia Pacific.

Financial Performance and Key Metrics

Metric	2013	2012	Change
Total revenue	$1.750 billion	$1.639 billion	+$111 million
Income before taxes	$131 million	$31 million	+$100 million
Net income	$80 million	$7 million	+$73 million
Basic EPS	$2.25	$0.19	+$2.06
Diluted EPS	$2.18	$0.18	+$2.00
EBITDA	$167 million	$78 million	+$89 million
Operating cash flow	$162 million	$163 million	-$1 million
Cash and equivalents	$200 million	$103 million	+$97 million
Total debt	$678 million	$678 million	Flat

Net income margin was approximately 4.6% of revenue, compared with approximately 0.4% in 2012. Development margin increased to $142 million, or 21.2% of vacation-ownership sales revenue, from $86 million, or 14.0%.

Vacation-ownership sales revenue increased to $672 million from $618 million.
Resort management and other services revenue increased to $260 million from $253 million; margin increased to $70 million from $54 million.
Financing revenue declined to $141 million from $151 million as the average vacation-ownership notes receivable balance decreased; financing propensity declined to 42% from 43%.
Rental revenue increased 16% to $262 million. Rental margin improved to $11 million from approximately break-even, supported by higher transient keys rented, rates and occupancy.
Total contract sales increased 1% to $694 million. North America contract sales increased 7% to $623 million, while Europe declined 29% to $34 million and Asia Pacific declined 36% to $37 million.
North America volume per guest increased 8% to $3,200, despite a 3% decline in tours.
Resort occupancy was 90.0%, compared with 89.8% in 2012.

Liquidity, Debt and Capital Resources

Year-end cash was $200 million, supplemented by operating cash flow, asset sales, securitizations and undrawn credit facilities.
Of total debt, $674 million was non-recourse debt associated with vacation-ownership receivable securitizations; other debt was $4 million.
No borrowings were outstanding under the $200 million revolving corporate credit facility; $1 million of letters of credit was outstanding.
No amounts were outstanding under the Warehouse Credit Facility at year-end. Its revolving period was extended to September 5, 2015.
The company securitized $263 million of vacation-ownership notes receivable, generating approximately $250 million of gross proceeds and approximately $246 million after transaction expenses and required reserves.
Mandatorily redeemable preferred stock of a consolidated subsidiary totaled $40 million and carries a 12% annual cash dividend rate during the first five years.
Real estate inventory totaled $864 million, including $369 million of finished goods, $151 million of work-in-process and $344 million of land and infrastructure.
The company repurchased 505,023 common shares for $26 million during 2013 at an average price of $50.76.

Material Changes Versus the Prior Comparable Period

Profitability improved substantially, driven by higher revenue reportability, improved marketing and sales efficiency, favorable inventory mix, stronger North American performance and the absence of the $41 million litigation charge recorded in 2012.
Development margin benefited from approximately $45 million of higher revenue reportability, including $21 million related to extended European rescission periods.
Financing revenue continued to decline because collections on existing receivables exceeded new loan originations.
Rental operations improved as transient keys rented rose 14% and the average transient key rate increased 9%.
General and administrative expense increased $13 million to $99 million, primarily due to higher personnel, legal, public-company and audit costs.
Consumer-financing interest expense declined $10 million to $31 million, reflecting lower securitized debt balances and lower average interest rates.
The company restated prior-period financial statements for errors involving European sales documentation, deferred taxes and certain cost reimbursements. The 2012 restated net income was $7 million, $9 million below the previously reported amount.
Most transition services from Marriott International had ceased by year-end, although the company expects an additional $5 million to $8 million of separation-related costs through 2014 and expects eventual annualized savings of approximately $15 million to $20 million.

Guidance, Outlook, Commentary and Risks

Management did not provide a specific numerical revenue or earnings forecast in the filing. Management expects near-term real estate inventory spending to remain at or below cost of vacation-ownership products and intends to pursue asset-light growth, particularly in North America and Asia. The company plans to sell excess Ritz-Carlton inventory and dispose of certain undeveloped land and other excess assets.

Management intends to increase first-time-buyer tours and move toward a more balanced mix of new and existing buyers.
Europe is focused on selling existing projects and managing existing resorts, with no current plans for new development.
Asia Pacific is being repositioned around more efficient on-site sales channels following the closure of off-site sales locations in Hong Kong and Japan.
Key risks include economic weakness, consumer credit availability, secondary-market pricing pressure, purchaser defaults, inventory depletion under points-based programs and access to securitization markets.
The company depends materially on the Marriott and Ritz-Carlton license agreements, brand reputation and Marriott Rewards affiliation. Termination or nonrenewal could materially impair sales, rental revenue and management fees.
The business is highly regulated, including vacation-ownership sales, real estate, lending, telemarketing, privacy, anti-corruption and resort-management requirements.
Outstanding contractual obligations totaled approximately $1.129 billion, including $770 million of debt-related payments, $129 million for the Marriott Rewards program, $97 million of operating leases and $46 million of purchase obligations.
Guarantees to third-party lenders had a maximum potential exposure of $16 million, with no material liability recorded for expected future fundings.
Several lawsuits and arbitration matters remain outstanding, including claims related to Ritz-Carlton properties and Kapalua Bay; the filing states that potential liabilities cannot currently be estimated for several matters.
Subsequent to year-end, the company sold a golf course and adjacent land for $24 million of cash proceeds and expects to recognize an approximately $2 million gain over the period it continues operating the golf course through mid-2015.

Most Important Facts for Investors to Verify

Reconcile the significant 2013 earnings improvement to recurring operating performance versus the 53rd week, revenue-reportability effects, favorable product-cost true-ups and other unusual items.
Review the restated 2012 and 2011 financial statements and the effect of the European sales-documentation issue on revenue timing, rescissions and deferred taxes.
Assess the sustainability of North American sales growth, including the decline in tours and reliance on higher volume per guest.
Monitor financing-revenue declines, loan-loss assumptions, default rates and the $970 million net vacation-ownership notes receivable portfolio.
Evaluate refinancing and securitization access before the Warehouse Credit Facility revolving period ends in September 2015.
Review the $40 million preferred stock obligation, its 12% dividend rate and its October 2021 mandatory redemption date.
Track the disposal of excess land and luxury inventory, related carrying costs and potential impairment charges.
Review pending litigation, tax indemnification obligations to Marriott International and the continued enforceability of the Marriott and Ritz-Carlton license agreements.