Business Context and Reporting Period
Marriott Vacations Worldwide Corporation is a vacation-ownership developer, marketer, seller, financier and resort manager operating under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. The company reported unaudited results for the 12 and 36 weeks ended September 11, 2015, compared with September 12, 2014. Its portfolio included 61 properties across North America, Europe and Asia Pacific.
Financial Performance and Position
| Metric | 12 Weeks 2015 | 12 Weeks 2014 | 36 Weeks 2015 | 36 Weeks 2014 |
|---|---|---|---|---|
| Total revenue | $407.1 million | $413.0 million | $1,284.8 million | $1,224.9 million |
| Net income | $21.6 million | $25.6 million | $89.7 million | $80.3 million |
| Diluted EPS | $0.67 | $0.75 | $2.75 | $2.28 |
| EBITDA | $44.3 million | $50.7 million | $173.6 million | $154.0 million |
| Operating cash flow | Not separately provided | Not separately provided | $100.7 million | $206.5 million |
| Cash and cash equivalents | $321.7 million at September 11, 2015 | $346.5 million at January 2, 2015 | ||
| Debt, net | $769.7 million at September 11, 2015 | $703.0 million at January 2, 2015 |
- Net margin was approximately 5.3% in the third quarter and 7.0% for the 36-week period, versus approximately 6.2% and 6.6%, respectively, in the comparable periods.
- Third-quarter revenue declined 1% primarily because vacation-ownership product revenue fell 12% to $136.8 million. For the 36-week period, revenue increased 5%, supported by higher vacation-ownership, rental and resort-management revenue.
- Rental revenue increased 16% in the quarter and 18% year to date. Rental margin increased to $13.5 million from $11.0 million in the quarter and to $40.3 million from $24.6 million year to date.
- Resort management and other services margin increased 14% in the quarter and 13% year to date, with margin percentages of 35.8% and 36.3%, respectively.
- Development margin declined to 17.8% from 21.5% in the quarter and to 20.3% from 21.4% year to date, primarily because of lower revenue reportability, higher marketing and sales spending and unfavorable inventory mix.
- Operating cash flow declined by $105.8 million year to date, reflecting hotel and inventory acquisitions, lower notes-receivable collections and higher financing propensity.
- Cash declined $24.8 million year to date. Financing cash outflows included $106.1 million of share repurchases and $16.0 million of dividends, partly offset by $255.0 million of securitization borrowings.
Material Changes Versus the Prior Comparable Period
- Third-quarter contract sales fell 7% to $159.8 million, including a 4% decline in vacation-ownership sales. Management attributed the decline to lower North American sales, no comparable residential sale, weaker Europe sales, currency effects and hurricane-related tour cancellations.
- Year-to-date contract sales increased 5% to $524.1 million, driven by North American vacation-ownership sales and $28.4 million of Asia Pacific residential sales related to Macau inventory.
- Financing propensity increased to 53% from 46% in the quarter and to approximately 46% from 43% year to date. Financing revenue nevertheless declined because collections on the existing notes-receivable portfolio exceeded new originations.
- Debt, net increased $66.7 million from year-end, while substantially all gross debt was non-recourse securitization debt. The company completed a $255.0 million securitization at a weighted-average interest rate of 2.56%.
- The company acquired an operating hotel in Surfers Paradise, Australia, for approximately $62.3 million and 71 rooms at The Mayflower Hotel in Washington, D.C., for $32.0 million. It also acquired a San Diego hotel earlier in the year for $55.0 million.
- Third-quarter and year-to-date results included $4.2 million and $5.4 million, respectively, of transaction costs primarily related to the Australian acquisition. Year-to-date other income included an $8.7 million gain on the sale of Kauai land.
- Shares outstanding declined because the company repurchased 1.3 million shares for $106.1 million during the 36-week period. The board subsequently authorized an additional 2.0 million shares for repurchase and extended the program through March 2017.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide specific quantitative earnings or revenue guidance. Management expects financing propensity to remain above its historical 40% to 45% range and expects new originations and higher financing propensity eventually to offset declines in the existing notes-receivable portfolio. The company plans selective growth in North America and Asia Pacific, including capital-efficient inventory arrangements and conversion of acquired hotels into vacation-ownership inventory.
- Key operating risks include seasonality, weather and hurricanes, foreign currency movements, tourism demand, sales conversion and financing propensity.
- Vacation-ownership notes receivable totaled $887.5 million net of reserves, with a $108.2 million allowance. Management estimated an average remaining default rate of 6.83%; a 0.5 percentage-point increase would increase the allowance by approximately $4.5 million.
- Non-accrual notes receivable totaled $58.5 million, and total past-due principal before reserves was $81.4 million at September 11, 2015.
- Material commitments included $137.1 million to purchase Marco Island vacation-ownership units, $75.5 million for Miami units, $38.5 million for Hawaii units and an additional $45 million to $55 million of anticipated Hawaii renovation costs.
- Financing guarantees had maximum potential future fundings of $8.7 million, with a recorded liability of $0.2 million. Surety bonds totaled $78.4 million, and letters of credit totaled $3.3 million.
- Pending litigation includes claims concerning Ritz-Carlton properties and the MVCD program. Several matters have unquantifiable potential exposure; the company recorded a $0.9 million accrual for the RCC San Francisco settlement.
- The company expects approximately $13.1 million of additional cash outflows to complete existing development phases through 2017.
- Subsequent to quarter-end, the securitization trust purchased an additional $31.5 million of notes receivable and released $30.4 million of restricted cash.
Important Facts for Investors to Verify
- Whether the decline in third-quarter contract sales and development margin was temporary or indicates sustained pressure on sales productivity and revenue reportability.
- The sustainability and credit quality impact of the higher financing propensity, including future default rates and allowance adequacy.
- Execution, timing and capital requirements for converting the San Diego and Surfers Paradise hotels and acquiring the committed Miami, Hawaii and Marco Island inventory.
- Available liquidity after restricted cash, securitization requirements, debt service, share repurchases, dividends and contractual commitments.
- Potential cash and earnings exposure from pending litigation, financing guarantees, variable interest entities and other contingencies.
- The effect of currency movements, tourism trends, severe weather and regulatory changes in international markets.