Business Context and Reporting Period
Marriott Vacations Worldwide Corporation filed its Form 10-K for the 52-week fiscal year ended December 28, 2012. The company develops, markets, sells and manages vacation ownership and related residential products under the Marriott Vacation Club, Grand Residences by Marriott, Ritz-Carlton Destination Club and Ritz-Carlton Residences brands. It operated 64 properties in the United States and nine other countries and territories, serving approximately 421,000 owners.
The filing includes fourth-quarter information; fiscal 2012 fourth quarter comprised 16 weeks, compared with 16 weeks in fiscal 2011. Financial statements for periods before the November 2011 spin-off from Marriott International include allocated corporate costs and may not represent stand-alone costs.
Financial Performance and Key Metrics
| Metric | 2012 | 2011 | Change |
|---|---|---|---|
| Total revenue | $1.648 billion | $1.613 billion | +2% |
| Net income (loss) | $16 million | $(178) million | Improved |
| Diluted EPS | $0.44 | $(5.29) | Improved |
| Income before taxes | $37 million | $(214) million | Improved |
| EBITDA | $125 million | $(134) million | Improved |
| Adjusted EBITDA | $82 million | $139 million | $(57) million |
| Operating cash flow | $163 million | $321 million | $(158) million |
- Revenue sources included vacation ownership sales of $627 million, resort management and other services of $253 million, financing of $151 million, rental revenue of $225 million and cost reimbursements of $362 million.
- Contract sales increased to $688 million from $680 million. North America contract sales rose 12% to $578 million, while volume per guest increased 18% to $2,963.
- Development margin increased to $92 million from $50 million, and development margin percentage improved to 14.8% from 8.0%, driven partly by favorable product-cost true-ups and more efficient marketing and sales spending.
- Resort management and other services margin increased to $54 million from $40 million, with margin percentage rising to 21.4% from 17.1%.
- Financing revenue declined 10% to $151 million as the average vacation ownership notes receivable balance fell. Financing margin declined to $125 million from $141 million.
- Rental revenue increased 6% to $225 million, and rental margin improved to approximately break-even from an $8 million loss. Company-wide resort occupancy was 89.8%.
- At year-end, cash and cash equivalents were $103 million, total assets were $2.604 billion, total debt was $678 million and total equity was $1.151 billion.
- Approximately $674 million of debt was non-recourse debt associated with securitized vacation ownership notes receivable. The company also had $40 million of mandatorily redeemable preferred stock at its consolidated subsidiary.
Material Changes Versus the Prior Comparable Period
- Net income benefited from the absence of the $324 million pre-tax non-cash impairment charge recorded in 2011. No impairment charges were recorded in 2012.
- Results were reduced by a $41 million litigation settlement charge, including $39 million recorded in the fourth quarter, related primarily to disclosure claims involving Ritz-Carlton Club and Residences, San Francisco.
- Royalty expense increased to $61 million from $4 million following the spin-off and operation under the Marriott and Ritz-Carlton license agreements.
- General and administrative expense increased to $86 million from $81 million, primarily due to incremental stand-alone public-company and personnel costs.
- Organizational and separation-related expenses were $16 million in 2012. Management expects total future spending of approximately $22 million to $27 million through 2014, with expected annualized savings of approximately $15 million to $20 million after completion.
- Luxury revenue declined to $81 million from $114 million and the segment remained unprofitable, although its loss improved to $48 million from $130 million. The company scaled back Luxury development and shifted inventory into the MVCD points program.
- Europe revenue declined to $121 million from $135 million, and segment financial results declined to $7 million from $12 million. Asia Pacific revenue declined to $83 million from $92 million after the closure of off-site sales locations in Hong Kong and Japan.
- Debt declined by $172 million from year-end 2011, primarily reflecting repayment of securitization-related and warehouse borrowings.
Liquidity, Outlook, Risks and Unusual Items
Management stated that cash on hand, operating cash flow, asset dispositions, securitizations, the Warehouse Credit Facility and the Revolving Corporate Credit Facility should be adequate to meet liquidity needs, debt service and planned growth. The company had no outstanding borrowings under its $250 million Warehouse Credit Facility at year-end and had access to a $200 million revolving corporate facility, which matures in November 2016.
In 2012, the company completed a $250 million vacation ownership receivables securitization, generating approximately $238 million of gross proceeds and $132 million of net cash proceeds after costs, reserves and warehouse-facility repayment. The Warehouse Credit Facility has a $250 million capacity and a revolving period ending September 10, 2014.
- Management plans to emphasize profitable North America sales, points-based products, recurring management and club-fee revenue, cost control, asset-light development and disposition of excess land and Luxury inventory.
- Real estate inventory was $874 million, including $484 million of finished goods, $120 million of work-in-process and $270 million of land and infrastructure. Management expects inventory spending to remain at or below cost of sales in the near term.
- Contractual obligations totaled approximately $1.2 billion, including $787 million of debt obligations, $84 million related to mandatorily redeemable preferred stock, $178 million for the Marriott Rewards liability and $104 million of operating leases.
- Credit performance improved overall, but four securitized receivables pools reached performance triggers during 2012; approximately $1 million of cash flows were redirected. None remained subject to triggers at year-end.
- Key risks include economic weakness and consumer demand, access to securitization and other capital markets, purchaser defaults, inventory depletion under the points-based model, regulatory compliance, litigation, international operations, brand-license termination and the cost of operating as an independent company.
- The company remains exposed to additional litigation related to Ritz-Carlton properties, including a pending San Francisco matter and other class-action claims for which potential liability could not yet be estimated.
- The company’s Marriott and Ritz-Carlton license agreements generally have initial terms extending to 2090, but termination or loss of brand rights could materially impair sales, rental revenue and profitability.
Most Important Facts for Investors to Verify
- Reconcile reported revenue and earnings with contract sales, revenue-reportability timing, loan-loss reserves and product-cost true-ups.
- Assess the sustainability of the $82 million Adjusted EBITDA figure excluding securitization interest, impairment-related items and other adjustments.
- Review cash-flow conversion, including the decline in operating cash flow to $163 million and the effect of cash taxes, royalty payments, Marriott Rewards payments and separation costs.
- Evaluate the maturity and performance of the $674 million non-recourse securitization debt and the availability of future ABS funding after the Warehouse Credit Facility’s 2014 revolving-period expiration.
- Monitor the $159 million pre-2012 Marriott Rewards liability, the $47 million liability for post-2011 points and sensitivity to redemption and breakage assumptions.
- Follow the remaining San Francisco and other Ritz-Carlton litigation, including possible charges beyond the $41 million accrued in 2012.
- Verify the assumptions supporting $874 million of real estate inventory, planned excess-asset dispositions and the absence of 2012 impairment charges.
- Consider the comparability limitations caused by the 2011 spin-off and historical allocations from Marriott International.