Marriott Vacations Worldwide Corporation — Q1 2020 Form 10-Q Summary
Reporting period: Three months ended March 31, 2020; unaudited interim results. MVW operates Vacation Ownership and Exchange & Third-Party Management businesses, including vacation ownership sales, resort management, exchange, rental and consumer financing activities. Results were materially affected by the COVID-19 pandemic, particularly during the second half of March.
Financial results and key metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $1,010 million | $1,034 million | Down 2% |
| Net income attributable to common shareholders | $(106) million | $24 million | Down $130 million |
| Basic and diluted EPS | $(2.56) | $0.52 basic; $0.51 diluted | Declined |
| Adjusted EBITDA | $138 million | $166 million | Down $28 million |
| Operating cash flow | $(122) million | $28 million | Down $150 million |
| Cash, cash equivalents and restricted cash at period end | $1,020 million | $578 million | Up $442 million |
Revenue mix: Vacation ownership revenue was $908 million, up from $905 million. Exchange & Third-Party Management revenue was $107 million, down 14%. Sale of vacation ownership products declined 12% to $258 million; management and exchange revenue declined 5% to $227 million; rental revenue declined 8% to $135 million; financing revenue increased 6% to $72 million; and cost reimbursements increased 11% to $318 million.
Profitability: Development margin declined to $28 million from $43 million, with the development margin percentage falling to 10.7% from 14.8%. Vacation Ownership Adjusted EBITDA was $147 million versus $172 million, while Exchange & Third-Party Management Adjusted EBITDA was $41 million versus $54 million. Rental margin declined to $15 million from $44 million, and the rental margin percentage fell to 12.4% from 34.1%. Financing margin declined to $34 million from $45 million.
Cash flow and balance sheet: Cash used in operating activities was $122 million, reflecting the net loss, higher inventory spending and working-capital timing. Investing cash outflow was $21 million, including $17 million of property and equipment expenditures. Financing activities provided $468 million, primarily from corporate borrowings and securitization proceeds. Total assets were $9.4 billion and total equity was $2.8 billion at March 31, 2020.
Debt and liquidity: Gross debt was approximately $4.7 billion, including $1.9 billion of non-recourse securitized debt, $1.1 billion of senior unsecured notes, approximately $1.5 billion under the Corporate Credit Facility, $230 million of convertible notes and $9 million of finance lease obligations. The Company borrowed $596 million under its revolving facility at quarter-end as a precautionary liquidity measure. Management stated that cash resources were expected to support operations and debt service through 2021 even if closures and limited rentals persisted.
Material changes versus the prior comparable period
- COVID-19 caused closure of all sales centers, closure of North American resorts to rental guests beginning March 25, reduced resort amenities and operations, and significant disruption to exchange, rental and management activity.
- Total vacation ownership contract sales declined 14% to $315 million; consolidated contract sales declined 13% to $306 million. Contract sales and volume per guest were above the prior year through March 13 but declined sharply after sales-center closures began.
- The Company increased vacation ownership notes receivable reserves by $52 million based on an estimated default-rate increase modeled on the 2008–2009 financial crisis. The adjustment reduced vacation ownership product sales by $42 million, increased financing expense by $10 million and reduced product costs by $15 million.
- Impairment charges increased to $95 million from $26 million, including $73 million of Exchange & Third-Party Management goodwill impairment and $18 million of trademark impairment. Vacation Ownership also recorded a $4 million inventory impairment.
- Other significant items included $56 million of losses and other expense, $21 million of ILG acquisition-related costs and $32 million associated with a Marriott International tax indemnification receivable true-up. The tax benefit was $58 million versus a $15 million provision in the prior year.
- Operating cost actions included furloughing approximately 65% of associates, reducing remaining work weeks by roughly 25% on average, reducing executive salaries, deferring certain investments and temporarily suspending share repurchases and dividends.
Outlook, contingencies and unusual items
- Management did not provide conventional earnings or revenue guidance. The filing states that the duration, severity and recovery path of COVID-19 were uncertain and that interim results may not indicate full-year performance.
- Subsequent to quarter-end, MVW issued $500 million of 6.125% senior secured notes due 2025, amended its Warehouse Credit Facility to increase capacity by approximately $181 million to $531 million, entered into a waiver suspending the revolving-facility leverage covenant for up to four quarters, and repaid the $596 million revolving-facility balance outstanding at March 31.
- During the waiver period, the Company must maintain minimum monthly liquidity of $300 million and is restricted from certain payments, including share repurchases and dividends. Future dividends and repurchases are therefore uncertain.
- Material commitments included $97 million for the remaining New York property purchase, $88 million for the San Francisco property, a potential $98 million Waikiki property purchase, $25 million of remaining Bali commitments and $66 million of information-technology commitments.
- Pending legal matters include claims involving Ritz-Carlton, St. Regis, Hyatt Residence Club and other fractional ownership or management arrangements. No accrual was recorded for the described matters, and the potential loss range was not estimable.
- COVID-19 increased delinquencies and could cause additional defaults in vacation ownership notes receivable, impair securitization capacity, trigger securitization performance provisions or reduce future cash flows.
Most important facts for investors to verify
- Actual post-quarter reopening dates, occupancy, contract sales, exchange activity and rental demand.
- Subsequent default and delinquency trends in the vacation ownership notes receivable portfolio and the adequacy of the $52 million reserve increase.
- Compliance with the amended Corporate Credit Facility, including the $300 million minimum-liquidity requirement and restrictions on dividends and repurchases.
- Available liquidity after the May repayment of the revolving facility, the $500 million secured-notes issuance and ongoing operating cash burn.
- Potential further goodwill, trademark, inventory or notes-receivable impairments if the travel recovery is slower than assumed.
- Status and financial exposure of the New York, San Francisco, Waikiki and Bali property commitments and pending litigation.