Marriott Vacations Worldwide Corporation — 2016 First-Quarter Form 10-Q
Reporting period: Twelve weeks ended March 25, 2016, compared with twelve weeks ended March 27, 2015. The interim financial statements are unaudited and prepared under U.S. GAAP. The company develops, markets, sells, finances, manages and rents vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. Its portfolio included more than 60 properties in the United States and eight other countries and territories.
Key Financial Metrics
| Metric | 2016 Q1 | 2015 Q1 | Change |
|---|---|---|---|
| Total revenue | $425.0 million | $454.9 million | Down 6.6% |
| Income before taxes | $40.2 million | $57.3 million | Down 30.0% |
| Net income | $24.4 million | $34.1 million | Down 28.4% |
| Diluted EPS | $0.82 | $1.03 | Down $0.21 |
| Adjusted EBITDA | $51.6 million | $60.2 million | Down 14.2% |
| Operating cash flow | $9.9 million | $32.1 million | Down $22.2 million |
| Development margin | $24.3 million; 17.6% | $38.9 million; 21.2% | Margin down 3.6 points |
| Rental margin | $15.6 million; 19.5% | $16.0 million; 21.1% | Margin down 1.6 points |
Revenue from vacation ownership product sales declined 25% to $138.4 million. Resort management and other services revenue increased 8% to $69.6 million, financing revenue increased 1% to $29.2 million, rental revenue increased 5% to $80.3 million, and cost reimbursements increased 6% to $107.5 million. The approximate net margin was 5.7%, compared with 7.5% in the prior-year period.
Liquidity, Cash Flow and Capital Structure
- Cash and cash equivalents were $106.6 million at March 25, 2016, compared with $177.1 million at January 1, 2016. Restricted cash was $55.3 million.
- Net cash used in financing activities was $90.7 million, including $73.2 million of share repurchases and $17.6 million of dividend payments.
- Gross debt was approximately $699.3 million, or $689.2 million net of issuance costs. Approximately $688.0 million was non-recourse debt associated with vacation ownership notes receivable securitizations and the warehouse credit facility.
- The company drew $51.1 million gross, or $50.7 million net, under its warehouse credit facility in February 2016. No cash borrowings were outstanding under the $200 million revolving corporate credit facility, although $3.3 million of letters of credit were outstanding.
- Vacation ownership notes receivable, net, totaled $908.6 million. The allowance for loan losses was $104.7 million, and notes on non-accrual status totaled $56.8 million.
- Real estate inventory increased to $709.9 million from $663.9 million at year-end, including $317.9 million of finished goods, $30.0 million of work-in-progress and $362.1 million of land and infrastructure.
- The company repurchased 1.33 million shares at an average price of $55.18 and declared a quarterly dividend of $0.30 per share. Approximately 2.7 million shares remained available for repurchase under the program at quarter-end.
Material Changes Versus the Prior Comparable Period
- Total contract sales decreased 23% to $153.5 million. Vacation ownership contract sales declined 10% to $153.5 million, while the prior-year period included $28.4 million of Asia Pacific residential product sales that did not recur.
- North America contract sales declined 10%, primarily because of fewer tours and lower volume from elevated owner-recognition activity in the prior-year period. North America VPG decreased 3.9% to $3,496, and tours declined 4.0%.
- Asia Pacific vacation ownership contract sales increased 9% to $9.4 million, but total Asia Pacific contract sales fell 75% because the prior-year period included the Macau residential sale.
- Development margin declined because of lower sales volume, higher marketing investment, increased use of plus points, the absence of prior-year residential sales and pre-opening costs for new sales locations. Favorable product-cost true-ups and improved revenue reportability partially offset the decline.
- Financing propensity increased to 58.5% from approximately 43.8%, reflecting new financing programs. Financing margin increased 6% to $19.2 million, while consumer financing interest expense declined 11%.
- Rental revenue increased, but rental margin declined 3% because of higher direct operating costs and lower transient keys rented. Resort occupancy increased to 88.9% from 87.7%.
- General and administrative expense increased $2.5 million to $25.3 million, primarily due to information technology project costs and inflation. Other expense included $2.3 million of acquisition-related costs and $0.2 million of transaction costs.
- The company acquired an operating property in South Beach, Miami, for $23.5 million and intends to convert it for future use in its Marriott Vacation Club Destinations program.
Outlook, Risks, Contingencies and Unusual Items
- Management stated that cash on hand, operating cash flow, securitization capacity and available credit facilities should be adequate for expected liquidity requirements, debt service, growth plans and other cash needs.
- Management expects financing propensity and related interest income to remain higher than historical levels and is targeting higher financing propensity for fiscal 2016.
- The company expected to exercise its option to redeem $40.0 million of mandatorily redeemable preferred stock at par in October 2016, although mandatory redemption was not required until October 2021. The preferred stock carried a 12% annual dividend rate through October 2016.
- Material purchase commitments included $158.5 million for a New York property, $137.1 million for Marco Island units, commitments for Bali units, and a Hawaii commitment subsequently amended to make acquisition contingent on renovation. The filing text does not provide a consolidated total for all purchase commitments.
- Financing guarantees had a maximum potential exposure of $7.7 million, with a recorded liability of $0.2 million. Surety bonds totaled $57.8 million, and letters of credit totaled $3.3 million.
- Several Hawaii and other resort-related lawsuits remain pending, including claims involving Kapalua Bay, the MVCD points program and Ritz-Carlton properties. Management disputed the allegations, but stated that potential liability could not be estimated because of litigation uncertainty.
- The company had an estimated $2.0 million accrual for potential future funding obligations related to a Hawaii joint venture and could be required to fund up to $5.0 million under demand notes connected with certain securitizations.
- Subsequent to quarter-end, the revolving credit facility was amended to provide more favorable tangible-net-worth and borrowing-base covenant requirements.
- Interim results may not be indicative of full-year performance because of seasonality and short-term variations. The company identified no material changes to previously disclosed risk factors, market risk exposures or internal controls.
Facts Investors Should Verify
- Whether lower contract sales and development margins persist after accounting for the prior-year Macau residential sale and unusual owner-recognition activity.
- Whether higher financing propensity improves recurring financing revenue without causing increased defaults, loan-loss reserves or liquidity pressure.
- The cash requirements and funding sources for the New York, Marco Island, Bali and Hawaii inventory commitments, as well as the planned preferred-stock redemption.
- Future securitization capacity, warehouse-facility availability, covenant compliance and the maturity profile of non-recourse debt.
- Performance of newly acquired or converted properties, particularly South Beach, Australia and New York, including their effect on rental and resort-management margins.
- Developments in the pending resort-related litigation and any resulting settlement, reserve or cash exposure.
- The impact of adopting new accounting standards for revenue recognition, leases and share-based compensation.