MARRIOTT VACATIONS WORLDWIDE Corp quarterly report, Q1 FY2019

Marriott Vacations Worldwide Corporation — Q1 2019 Form 10-Q

Business context and reporting period

Unaudited quarterly results for the three months ended March 31, 2019, compared with March 31, 2018. MVW operates Vacation Ownership and Exchange & Third-Party Management businesses. The September 1, 2018 acquisition of ILG materially affects comparability because the 2019 quarter includes Legacy-ILG results while the 2018 reported quarter generally does not.

Key financial metrics

Metric	Q1 2019	Q1 2018	Change
Total revenue	$1,060 million	$571 million	+$489 million
Net income attributable to common shareholders	$24 million	$36 million	-$12 million
Basic/diluted EPS	$0.52/$0.51	$1.35/$1.32	Declined
Adjusted EBITDA	$166 million	$63 million	+$103 million
Operating cash flow	$28 million	$23 million	+$5 million

Revenue increased approximately 86%, while net income declined approximately 33%. Net margin was approximately 2.3%, compared with 6.3% in the prior-year quarter. Adjusted EBITDA margin was approximately 15.7%, compared with 11.0%.

Revenue included vacation ownership product sales of $301 million, management and exchange revenue of $239 million, rental revenue of $165 million, financing revenue of $68 million, and cost reimbursements of $287 million.
Consolidated contract sales were $354 million, up 10% excluding joint ventures; total contract sales, including joint ventures, were $365 million. Legacy-MVW North America contract sales increased 8% to $201 million, with volume per guest of $3,777 and tour flow up 6%.
Vacation Ownership Adjusted EBITDA was $171 million; Exchange & Third-Party Management Adjusted EBITDA was $66 million.
Development margin was $44 million, with a 14.5% development margin percentage versus 13.9% in Q1 2018. Rental margin was $45 million, or 30.7%, versus 25.3%.
Cash and cash equivalents were $222 million; cash, cash equivalents and restricted cash totaled $578 million at March 31, 2019.
Vacation ownership notes receivable, net, totaled $2.055 billion; inventory totaled $910 million.
Total liabilities were $5.761 billion and total equity was $3.351 billion.

Debt, liquidity and capital allocation

Total gross debt was approximately $4.0 billion, including $1.7 billion of non-recourse securitized debt, approximately $1.0 billion of senior notes, approximately $1.0 billion under the Corporate Credit Facility, $230 million of convertible notes, $31 million of a non-interest-bearing note payable, and $23 million of finance lease obligations.
Debt, net, was $2.201 billion and securitized debt, net, was $1.688 billion at March 31, 2019.
The $600 million revolving Corporate Credit Facility had $75 million outstanding at quarter-end, with $4 million of letters of credit. The company was in compliance with applicable covenants.
The $250 million Warehouse Credit Facility had $235 million outstanding and generated $124 million of gross proceeds from securitization activity during the quarter.
Financing cash outflows included $106 million of share repurchases and $41 million of dividends. The quarterly dividend was $0.45 per share; 1.23 million shares were repurchased at an average price of $86.32.
Subsequent to quarter-end, the company borrowed $65 million under the revolving facility and repaid $20 million.

Material changes versus the prior comparable period

The ILG acquisition added $458 million of revenue and $32 million of net income attributable to common shareholders in Q1 2019, including the acquired exchange, rental, management and vacation ownership businesses.
Interest expense increased to $34 million from $4 million, primarily due to acquisition-related debt and higher Warehouse Credit Facility usage.
ILG acquisition-related costs increased to $26 million from $1 million.
Depreciation and amortization increased to $37 million from $6 million, reflecting acquired assets and purchase accounting.
General and administrative expense increased to $78 million from $28 million, primarily due to the acquisition and higher personnel, litigation and other costs.
The company recorded a $26 million non-cash impairment related to Orlando land and land improvements held for a future resort phase, following a contract to sell the assets for $10 million below carrying value.
Gains and other income included $9 million of insurance proceeds related to the settlement of Legacy-MVW business interruption claims from the 2017 hurricanes.
ASC 842 lease adoption on January 1, 2019 resulted in recognition of a $165 million lease obligation, a $155 million right-of-use asset, and an $8 million reduction to opening retained earnings.

Guidance, outlook, commentary and risks

Management expected a fiscal 2019 effective tax rate of approximately 33.04%. The Q1 effective tax rate was 40.43% versus 22.94% in Q1 2018.
Management stated that cash on hand, operating cash flow, securitization capacity, the Warehouse Credit Facility and the revolving facility should be adequate for liquidity needs, debt service, growth plans and shareholder returns.
Management expected full-year 2019 inventory spending to remain below inventory costs, including payments under existing purchase commitments.
Management was reviewing acquired property and equipment and indicated that additional non-cash impairments could result from strategic decisions regarding excess supply and non-core assets.
Remaining contractual obligations totaled $5.587 billion, including $4.877 billion of debt obligations, $430 million of purchase obligations, and $210 million of operating lease obligations.
Material commitments included $182 million for a New York operating property, $158 million for a San Francisco operating property, and approximately $32 million for Bali vacation ownership units.
Maximum exposure under guarantees was $45 million, primarily related to rental management agreements. Surety bonds totaled $74 million.
The company disclosed multiple unresolved legal proceedings, including disputes involving fractional ownership and the Marriott Vacation Club Destinations program. Potential exposure could not be estimated for several matters.
Vacation ownership credit risk remains relevant: the estimated Legacy-MVW average future default rate was 6.91%, and the Legacy-ILG rate was 12.26%. A 0.5 percentage-point increase in certain default assumptions would increase reserves by approximately $7 million for Legacy-MVW and $1 million for Legacy-ILG originated receivables.
The company reported a prior email-system fraud involving $10 million of unauthorized disbursements; $6 million had been recovered during 2018 and a subsequent $3 million insurance recovery was received after quarter-end.

Important facts for investors to verify

Assess pro forma or organic performance separately from the substantial ILG acquisition contribution.
Reconcile Adjusted EBITDA to GAAP earnings and evaluate the impact of $26 million of acquisition costs and $26 million of impairment charges.
Monitor leverage, interest expense, refinancing needs and compliance with Corporate Credit Facility and senior-note covenants.
Review securitization performance triggers, consumer default rates, reserve adequacy and the non-recourse nature of securitized debt.
Evaluate liquidity after share repurchases, dividends, property purchase commitments and post-quarter-end revolver borrowings.
Track potential additional asset impairments, unresolved litigation, hurricane insurance recoveries and tax audit developments.