Marriott Vacations Worldwide Corporation: FY2018 Form 10-K Summary
Business context and reporting period
This Form 10-K covers the fiscal year ended December 31, 2018. The company operates Vacation Ownership and Exchange & Third-Party Management segments, offering timeshare sales, resort management, consumer financing, rentals, exchange services and related travel products.
On September 1, 2018, MVW completed its approximately $4.2 billion acquisition of ILG. Accordingly, 2018 results include ILG only from September 1 through December 31, 2018, while year-end assets and liabilities reflect the combined company. Prior-period results were retrospectively adjusted for adoption of ASC 606 revenue recognition.
Financial performance and key metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $2,968 million | $2,183 million | 36% |
| Revenue excluding cost reimbursements | $2,043 million | $1,433 million | 42% |
| Net income attributable to common shareholders | $55 million | $235 million | (77%) |
| Diluted EPS | $1.61 | $8.49 | (81%) |
| Adjusted EBITDA | $419 million | $294 million | 42% |
| Operating cash flow | $97 million | $142 million | (32%) |
| Total assets | $9,018 million | $2,845 million | Large increase, primarily from ILG |
Net income margin was approximately 1.9% of revenue, compared with approximately 10.8% in 2017. The decline reflected $127 million of ILG acquisition-related costs, $46 million of litigation settlement charges, higher interest expense, higher depreciation and amortization, and a substantially higher tax provision. Adjusted EBITDA margin was approximately 14.1%, compared with 13.5% in 2017, although this non-GAAP measure excludes significant acquisition and other unusual items.
- Vacation Ownership revenue was $2.803 billion, representing approximately 94% of consolidated revenue; segment Adjusted EBITDA was $511 million.
- Exchange & Third-Party Management contributed $161 million of revenue and $77 million of Adjusted EBITDA for the four months included after the ILG acquisition.
- Consolidated contract sales were $1.073 billion, up 30%; excluding ILG, contract sales increased 9%. Total contract sales, including joint ventures, were $1.089 billion.
- Legacy-MVW North America volume per guest increased 3% to $3,666, and tour flow increased 6% to 204,208 tours.
- Development margin was $217 million, with a 21.9% margin versus 23.1% in 2017. Legacy-MVW development margin was 22.2%.
- Rental margin increased to $75 million, or 21.5%, from $41 million, or 15.4%. Resort occupancy was 88.5%.
- Financing revenue was $183 million and financing margin was $118 million. Financing propensity declined to 62% from 64%.
Liquidity, cash flow and debt
Cash and cash equivalents were $231 million at December 31, 2018, with an additional $383 million of restricted cash. Operating cash flow was $97 million, while investing cash flow was negative $1.407 billion, principally reflecting the ILG acquisition. Financing cash flow was positive $1.433 billion, primarily from acquisition-related borrowings and securitizations.
Total gross debt was approximately $3.9 billion, including $1.7 billion of non-recourse securitized debt. Corporate debt was approximately $2.178 billion and included a $900 million term loan, $750 million of 6.5% senior unsecured notes due 2026, $141 million of IAC Notes, $89 million of Exchange Notes, $230 million of convertible notes and other obligations. The company had no cash borrowings outstanding under its $600 million revolving corporate credit facility and had approximately $596 million available, excluding letters of credit. The $250 million non-recourse Warehouse Credit Facility had $116 million outstanding.
Real estate inventory was $852 million, including $843 million of finished inventory. Contractual obligations totaled $5.601 billion, including $4.866 billion of debt principal and interest, $449 million of purchase obligations and $222 million of operating leases.
Material changes versus the prior comparable period
- The ILG acquisition materially expanded the company’s scale, adding Hyatt, Westin, Sheraton, Interval International and third-party management businesses. ILG contributed $568 million of revenue and a $5 million net loss during the post-acquisition period.
- Goodwill of $2.828 billion and net intangible assets of $1.107 billion were recorded, based largely on preliminary acquisition accounting estimates.
- Corporate interest expense increased to $54 million from $10 million, and depreciation and amortization increased to $62 million from $21 million.
- General and administrative expense increased to $198 million from $106 million, including incremental costs associated with the expanded company.
- Income tax expense increased to $51 million from $5 million. The 2017 provision benefited from a $65 million one-time deferred tax benefit related to the Tax Cuts and Jobs Act; the 2018 effective tax rate was 49.8%.
- Shareholders received $51 million of dividends in 2018, and the company repurchased approximately 1.25 million shares for $96 million. The annual dividend increased to $1.65 per share from $1.45.
- The company adopted ASC 606 retrospectively, increasing reported cost reimbursements and related expenses on a gross basis and changing the timing and classification of certain revenues and expenses.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific quantified 2019 revenue or earnings forecast in the provided filing. Its stated priorities are to integrate ILG, realize cost synergies, grow recurring fee-based revenue, expand capital-efficient inventory arrangements, improve digital and analytical capabilities, maximize cash flow and optimize the capital structure.
- Integration of ILG is a multi-year initiative and may be more costly or slower than expected. Management had not included ILG in its internal-control assessment for 2018; ILG represented 69% of year-end assets, 19% of revenue and 1% of pretax income.
- 2018 included $127 million of ILG acquisition-related costs, $46 million of litigation settlements, $29 million of net insurance proceeds related to prior hurricanes, $8 million of losses and other expense, and $6 million of unfavorable purchase accounting adjustments.
- In June 2018, the company identified $10 million of fraudulent electronic payment disbursements caused by unauthorized email access. It recovered $6 million by year-end and expected potential insurance recovery for part of the remainder.
- Hurricanes Irma, Maria, Lane and Florence disrupted resorts, sales centers and rental operations. Certain properties in St. John and Puerto Rico remained closed at year-end; the Puerto Rico property was expected to reopen in 2020.
- Key risks include high leverage, variable-rate debt, refinancing and securitization-market access, consumer loan defaults, reliance on Marriott, Hyatt, Starwood and Ritz-Carlton licenses, competition, regulatory compliance, cybersecurity, severe weather, litigation and the secondary market for vacation ownership interests.
- The company had a $182 million commitment to acquire a New York operating property, a $158 million commitment amended in 2019 for a San Francisco property, and additional commitments for Bali vacation ownership units.
- The company disclosed unresolved litigation involving fractional owners, owners’ associations and vacation ownership products. Certain matters were accrued, while potential exposure for other cases could not be estimated.
Most important facts for investors to verify
- Reconcile reported growth with the four-month contribution from ILG and review pro forma results, which showed 2018 revenue of $4.216 billion and net income attributable to common shareholders of $193 million as if the acquisition had occurred at the start of the period.
- Assess sustainable earnings and cash generation excluding acquisition costs, litigation charges, hurricane insurance proceeds and other adjustments.
- Review debt maturities, covenant requirements, floating-rate exposure and the ability to refinance or securitize vacation ownership receivables.
- Evaluate consumer loan performance, including Legacy-MVW estimated future default rates of 7.01%, Legacy-ILG estimated future default rates of 12.37%, and the adequacy of reserves.
- Monitor ILG integration costs, preliminary purchase accounting valuations, goodwill and intangible-asset impairment risk, and the control environment as ILG is integrated.
- Review the status and potential cost of disclosed litigation, insurance claims, hurricane-related closures and property-purchase commitments.
- Confirm dividend and share-repurchase capacity against leverage, contractual restrictions and future liquidity needs.