Marriott Vacations Worldwide Corporation — Q1 2018 Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company develops, markets, sells and manages vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott, Marriott Vacation Club Pulse and Ritz-Carlton brands. Operations are reported in North America, Asia Pacific and Europe across more than 65 properties in the United States and nine other countries and territories.
The company adopted ASC 606 on January 1, 2018 using retrospective application and restated prior-period results. The standard changed the timing of vacation ownership revenue recognition and caused reimbursed costs to be presented gross.
Financial performance and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $570.8 million | $528.3 million | +8% |
| Income before taxes | $46.7 million | $43.9 million | +6% |
| Net income | $36.0 million | $27.9 million | +29% |
| Diluted EPS | $1.32 | $1.00 | +32% |
| Adjusted EBITDA | $62.8 million | $53.6 million | +17% |
| Operating cash flow | $23.3 million | $45.7 million | -49% |
Revenue growth was led by vacation ownership product sales of $174.8 million, resort management and other services of $70.2 million, financing revenue of $35.5 million, rental revenue of $74.2 million and cost reimbursements of $216.2 million. Contract sales increased 2% to $203.7 million; management estimated a $6 million adverse hurricane impact and two fewer selling days versus the prior-year quarter.
Net margin improved to approximately 6.3% from 5.3%. Development margin was $22.5 million, with margin percentage declining to 12.9% from 13.8%, primarily because of higher marketing and sales costs and an unfavorable inventory mix. Rental margin increased to $18.3 million from $14.0 million, and resort management and other services margin increased to $32.4 million from $29.9 million.
The effective tax rate declined to 22.94% from 36.37%, primarily reflecting the Tax Cuts and Jobs Act reduction in the U.S. corporate tax rate. The company expects an approximately 24.85% effective tax rate for fiscal 2018, but its Tax Act accounting remains provisional.
Cash, cash equivalents and restricted cash totaled $385.1 million at March 31, 2018, including $323.8 million of unrestricted cash. Total debt, net, was $1.012 billion, including $749.5 million of non-recourse securitization debt, $194.1 million of convertible notes net of discount and issuance costs, and $61.4 million of a non-interest-bearing note payable. No cash borrowings were outstanding under the $250 million revolving corporate credit facility or the $250 million warehouse credit facility; $5.9 million of letters of credit were outstanding under the revolving facility.
Operating cash flow declined because of higher inventory spending, employee benefit payments, payments to property owners’ associations and vacation ownership note originations. Financing cash outflows included $86.3 million of securitization debt repayments, $21.3 million of dividends, $8.3 million of share-based compensation withholding taxes and $1.9 million of share repurchases. The quarterly dividend was $0.40 per share.
Material changes versus the prior comparable period
- North America revenue increased to $528.5 million from $488.1 million, and segment financial results increased to $107.9 million from $98.5 million.
- Asia Pacific revenue increased 24% to $18.9 million, but segment losses widened to $1.1 million from $0.2 million, driven partly by Bali pre-opening and tour-generation costs.
- Europe revenue declined 6% to $23.5 million, and segment losses widened to $0.8 million from $0.4 million.
- Financing revenue increased 10%, while financing propensity declined to 61.7% from 66.1%. Management expects fiscal-year financing propensity of approximately 60% to 65%.
- Vacation ownership notes receivable, net, increased to $1.133 billion from $1.115 billion. The reserve was $118.7 million at March 31, 2018, and estimated average remaining default rates were approximately 7.08%.
- Debt, net, decreased $82.8 million from year-end, mainly because of securitization debt repayments.
- ASC 606 reduced previously reported Q1 2017 net income from $33.7 million to $27.9 million and diluted EPS from $1.21 to $1.00 on a restated basis; the adoption reduced opening retained earnings by $2.7 million as of January 2, 2016.
Guidance, outlook, risks and unusual items
- Management expects financing income to continue increasing as new note originations outpace principal collections and expects financing propensity of 60% to 65% for fiscal 2018.
- Hurricane Irma and Hurricane Maria continued to affect St. Thomas and other locations. One St. Thomas resort and a modified sales gallery reopened in February 2018; the remaining resort was expected to reopen in the second half of 2018. Insurance claims for business interruption and property damage were expected, but proceeds could not be estimated.
- The company incurred $3.1 million of other expense, including $2.5 million of costs related to the anticipated San Francisco property acquisition and other acquisition costs. Adjusted EBITDA also excluded acquisition costs and a favorable hurricane-related true-up.
- On April 30, 2018, after quarter-end, the company agreed to acquire ILG, Inc. in a cash-and-stock transaction with an implied equity value of approximately $4.7 billion. ILG shareholders would receive $14.75 in cash and 0.165 shares of Marriott Vacations Worldwide common stock per ILG share. Closing was targeted for the end of Q3 2018 and is subject to shareholder, regulatory and other conditions. The transaction is expected to require cash and substantial additional debt financing.
- Material commitments included $170.2 million for a New York property, $84.5 million for remaining Marco Island units, $163.5 million for a San Francisco property and up to $36.7 million for Bali units. The company also had $34.5 million of surety bonds and $5.9 million of letters of credit outstanding.
- Pending litigation includes several owner-related matters involving Kapalua Bay, RCC San Francisco, RCC Aspen Highlands and the MVCD program. The company could not estimate potential losses; trials in certain matters were scheduled for 2018 and 2019.
- The filing states that disclosure controls were effective and that there were no material changes in internal control other than implementation of controls related to ASC 606.
Important facts for investors to verify
- Reconcile reported revenue growth and margins for the effects of retrospective ASC 606 adoption and gross presentation of cost reimbursements.
- Monitor vacation ownership note delinquencies, defaults, reserve adequacy, securitization performance and the effect of changing financing propensity.
- Assess liquidity after the ILG transaction, including new debt, interest expense, covenant capacity, refinancing needs and potential dilution.
- Track hurricane recovery, insurance claim outcomes and remaining resort closures.
- Review the timing and funding of property and inventory commitments, particularly the New York, San Francisco, Marco Island and Bali obligations.
- Evaluate the status and potential exposure of pending litigation and the provisional accounting for the Tax Cuts and Jobs Act.