Marriott Vacations Worldwide Corporation — Q2 2019 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2019, compared with the same periods in 2018. The company operates Vacation Ownership and Exchange & Third-Party Management segments. Comparability is significantly affected by the September 1, 2018 acquisition of ILG, whose businesses are included in 2019 but not in the comparable 2018 reported periods.
Key financial metrics
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $1.068 billion | $595 million | $2.128 billion | $1.166 billion |
| Net income attributable to common shareholders | $49 million | $11 million | $73 million | $47 million |
| Diluted EPS | $1.10 | $0.39 | $1.61 | $1.71 |
| Adjusted EBITDA | $195 million | $76 million | $361 million | $139 million |
| Operating cash flow | Not separately provided | Not separately provided | $56 million | $58 million |
- Q2 revenue increased 80%, while six-month revenue increased 82%; management attributes most of the increase to ILG, with revenue excluding ILG increasing 3% in Q2 and 4% for the first half.
- Q2 net margin was approximately 4.6%, compared with 1.8% in the prior-year quarter. Six-month net margin was approximately 3.4%, compared with 4.0% in 2018.
- Q2 development margin was $78 million, or 22.2%, versus $42 million, or 19.9%, in 2018. Six-month development margin was $122 million, or 18.7%, versus $66 million, or 17.2%.
- Q2 rental margin was $42 million, or 29.0%, versus $12 million, or 16.7%. Six-month rental margin was $87 million, or 29.9%, versus $32 million, or 21.0%.
- Contract sales were $398 million in Q2 and $763 million for the first half, up 6% and 8%, respectively. Legacy-MVW North America consolidated contract sales increased 4% in Q2 and 5% for the first half, with VPG of $3,700 and $3,736, respectively.
- At June 30, 2019, cash and cash equivalents were $179 million and restricted cash was $337 million. Total assets were $9.023 billion and total liabilities were $5.753 billion.
- Gross debt was approximately $4.0 billion, including $1.8 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 and $23 million of finance leases.
- The $600 million revolving corporate credit facility had $80 million outstanding and $4 million of letters of credit at quarter-end. The company reported compliance with applicable debt covenants.
- Cash flow from financing activities was negative $170 million, driven principally by $215 million of share repurchases, $61 million of dividends and debt repayments, partially offset by borrowings. Cash, cash equivalents and restricted cash declined by $98 million during the first half.
Material changes versus the prior comparable period
- The ILG acquisition added $455 million of Q2 revenue and $913 million of first-half revenue, and $34 million and $66 million of net income attributable to common shareholders, respectively.
- Exchange & Third-Party Management contributed $115 million of Q2 revenue and $239 million of first-half revenue, with Adjusted EBITDA of $58 million and $124 million, respectively.
- Interest expense increased to $35 million in Q2 and $69 million for the first half, compared with $5 million and $9 million, primarily because of acquisition-related debt.
- ILG acquisition-related costs were $36 million in Q2 and $62 million for the first half, compared with $19 million and $20 million, respectively.
- The company recorded a $26 million non-cash impairment in the first half related to Orlando land and land improvements subject to a $10 million sale contract.
- Litigation charges declined to $1 million in Q2 and $2 million for the first half, compared with $16 million in each 2018 period.
- The company repurchased 2.36 million shares for $215 million during the first half. It declared $0.45 per share quarterly dividends in March and June. After quarter-end, the board extended the repurchase program through December 31, 2020 and authorized up to 4.5 million additional shares.
- The company adopted the new lease standard on January 1, 2019, recognizing a $165 million lease obligation, a $155 million right-of-use asset and an $8 million reduction to opening retained earnings.
Guidance, outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided in the filing. Management states that cash on hand, operating cash flow, securitization capacity and available credit are expected to support liquidity, debt service, growth plans and shareholder returns.
- Management expects 2019 inventory spending to be lower than inventory costs, including remaining purchase commitments, supported by completed inventory and capital-efficient development structures.
- Major commitments include $182 million for a New York operating property, $158 million for a San Francisco operating property, Bali inventory commitments, and $62 million of information-technology commitments. Total contractual obligations were $5.702 billion, including $4.971 billion of debt obligations including interest.
- Legal proceedings include disputes involving Ritz-Carlton, Marriott Vacation Club, St. Regis and Hyatt fractional interests. No accrual was recorded for the described matters, and the company cannot estimate potential losses.
- Approximately $950 million of gross debt and $550 million of derivatives were indexed to LIBOR. The filing warns that the transition away from LIBOR could affect financing availability and costs.
- Hurricane-related properties and insurance claims remain relevant. The Legacy-ILG Puerto Rico resort was expected to reopen in 2020, and a $10 million insurance claim receivable remained outstanding at June 30, 2019.
- The first half included $9 million of insurance-related gains, a $3 million recovery related to a prior electronic-payment fraud, and the $26 million impairment. These items affect period comparability.
Important facts for investors to verify
- Separate underlying Legacy-MVW performance from ILG acquisition-related revenue, earnings and synergies.
- Assess leverage, refinancing requirements and sensitivity to LIBOR and interest-rate changes.
- Monitor vacation ownership notes receivable quality, default assumptions, reserves and securitization capacity.
- Evaluate whether acquisition-related costs, integration expenses and the Orlando impairment are nonrecurring or indicative of continuing costs.
- Review pending litigation, hurricane-related claims, property purchase commitments and other contractual obligations.
- Confirm the sustainability of share repurchases and dividends given negative financing cash flow and the company’s debt burden.