Marriott Vacations Worldwide Corporation — Q3 2016 Form 10-Q
Business context and reporting period
The filing covers the twelve and thirty-six weeks ended September 9, 2016, compared with the periods ended September 11, 2015. Marriott Vacations Worldwide develops, markets, sells, finances, manages and rents vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. Its reportable segments are North America, Europe and Asia Pacific, with more than 60 properties across the United States and eight other countries and territories.
Key financial metrics
| Metric | 12 weeks ended September 9, 2016 | 12 weeks ended September 11, 2015 | 36 weeks ended September 9, 2016 | 36 weeks ended September 11, 2015 |
|---|---|---|---|---|
| Total revenue | $407.0 million | $407.1 million | $1,262.0 million | $1,284.8 million |
| Income before taxes | $40.8 million | $36.2 million | $142.2 million | $151.0 million |
| Net income | $26.8 million | $21.6 million | $87.5 million | $89.7 million |
| Net margin | 6.6% | 5.3% | 6.9% | 7.0% |
| Diluted EPS | $0.97 | $0.67 | $3.05 | $2.75 |
| Adjusted EBITDA | $50.6 million | $54.7 million | $166.4 million | $176.6 million |
| Operating cash flow | Not separately provided | Not separately provided | $90.9 million | $100.7 million |
Third-quarter revenue was essentially flat year over year, while net income increased 24% and diluted EPS increased 45%, benefiting from lower interest and tax expense and a lower share count. Year-to-date revenue declined 1.8%, net income declined 2.4%, and Adjusted EBITDA declined 5.8%.
- Vacation ownership product revenue declined 4% in the quarter and 13% year to date to $415.8 million. Contract sales increased 6% in the quarter to $169.8 million but declined 1% year to date to $489.3 million.
- Resort management and other services revenue increased 2% in the quarter and 6% year to date. The related margin improved to 39.8% from 35.8% in the quarter and to 37.8% from 36.3% year to date.
- Financing revenue increased 3% in the quarter and 2% year to date. Financing margin increased 8% in both periods. Financing propensity rose to 63.4% in the quarter and 59.1% year to date, versus 53.3% and 46.4%, respectively.
- Rental revenue declined 3% in the quarter and increased 2% year to date. Rental margin declined 5% in the quarter and 7% year to date; year-to-date rental margin percentage fell to 16.4% from 17.9%.
- Development margin declined to $17.2 million, or 13.1%, in the quarter from $24.4 million, or 17.8%. Year-to-date development margin declined to $75.3 million, or 18.1%, from $96.5 million, or 20.3%.
- North America generated $1,133.4 million of year-to-date revenue and $283.2 million of segment financial results. Europe generated $75.0 million of revenue and $7.1 million of segment results. Asia Pacific generated $53.6 million of revenue and a segment loss of $0.2 million.
Liquidity, cash flow and capital structure
- Cash and cash equivalents were $174.8 million at September 9, 2016, compared with $177.1 million at January 1, 2016. Restricted cash was $117.8 million.
- Total debt, net, was $804.7 million, compared with $678.8 million at January 1, 2016. Gross debt included $806.7 million of non-recourse securitization debt, $1.2 million of other debt and $7.2 million of capital leases.
- The company completed a $250.0 million vacation ownership receivables securitization at a 2.28% weighted average interest rate. It also securitized receivables through its warehouse facility, which had no cash borrowings outstanding at quarter-end.
- Operating cash flow was $90.9 million year to date. Investing activities used $0.6 million, while financing activities used $89.6 million. Financing uses included $163.4 million of share repurchases and $26.1 million of dividends.
- Shareholders’ equity declined to $868.3 million from $976.3 million, primarily due to share repurchases. The company repurchased 2.8 million shares during the first 36 weeks at an average price of $58.32 per share.
- The company stated that cash on hand, operating cash flow, securitization capacity and available credit facilities should be adequate for expected liquidity requirements, debt service and growth plans.
Material changes versus the prior comparable period
- Quarterly profitability improved despite flat revenue, but underlying operating measures weakened: development margin percentage fell 4.7 percentage points and Adjusted EBITDA fell $4.1 million.
- Higher financing propensity increased notes receivable originations and financing revenue but also increased sales reserves and reduced near-term vacation ownership revenue recognition.
- Revenue reportability adjustments and sales reserves were more unfavorable. In the quarter, reportability reduced revenue by $19.0 million versus $11.1 million, while sales reserves reduced revenue by $13.9 million versus $7.6 million.
- Marketing and sales spending, including pre-opening and startup costs for new sales locations, increased and pressured development margins.
- North America quarterly contract sales increased 6%, while Europe declined 24% and Asia Pacific increased 62%. Year-to-date Asia Pacific contract sales increased 32%, but total segment contract sales were affected by the absence of prior-year Macau residential sales.
- Gains and other income included a $10.5 million gain from the sale of excess Ritz-Carlton San Francisco inventory, partially offset by a $1.0 million loss on the Surfers Paradise disposition. The prior-year period included significant gains on other property dispositions.
Guidance, outlook, risks and unusual items
- Management expected financing propensity to remain above the historical 40% to 45% range for the remainder of fiscal 2016 and expected interest income to grow as new originations outpaced portfolio amortization.
- The company is selectively pursuing growth in North America and Asia Pacific, including new sales locations and inventory acquisitions designed to limit upfront capital investment.
- Management plans to redeem $40.0 million of mandatorily redeemable subsidiary preferred stock on October 26, 2016, using cash on hand.
- Material future purchase commitments included $158.5 million for a New York property, $137.1 million for Marco Island inventory, $91.1 million for Big Island of Hawaii units, and Bali purchase commitments with scheduled payments through 2019.
- Financing risks include consumer defaults, securitization performance triggers, interest-rate exposure, reliance on continued access to asset-backed securitization markets and an estimated average remaining default rate of 7.02% at quarter-end. A 0.5 percentage-point increase in the estimated default rate would have increased the allowance by approximately $4.8 million.
- Pending litigation involves Kapalua Bay, Ritz-Carlton San Francisco, Ritz-Carlton Aspen Highlands and a putative class action challenging the structure and legal characterization of the Marriott Vacation Club Destinations product. The company could not estimate potential losses for these matters.
- The filing states that seasonal and short-term variations may make interim results not indicative of full-year performance. Management reported effective disclosure controls and no material changes in internal control over financial reporting.
Most important facts for investors to verify
- Whether increased financing propensity and higher loan defaults produce sustained growth in financing revenue without materially increasing sales reserves or credit losses.
- The sustainability of contract sales, VPG, closing efficiency and development margins after new-location startup costs and revenue-reportability effects normalize.
- Liquidity after the October 2016 preferred-stock redemption, committed property and inventory purchases, dividends and share repurchases.
- Future access to securitization markets, performance of securitized receivable pools and compliance with related triggers and credit-facility covenants.
- The effect of unusual gains, dispositions, property conversions and prior-year Macau residential sales on year-over-year comparability.
- Potential exposure from pending litigation, guarantees, variable-interest entities and other commitments, for which the filing does not provide a clear estimated loss range.