Marriott Vacations Worldwide Corporation — Fiscal 2015 Form 10-K
Business context and reporting period
The filing covers the 52-week fiscal year ended January 1, 2016. The fourth quarter contained 16 weeks; the comparable fourth quarter of 2014 also contained 16 weeks. Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. Operations are reported in North America, Europe and Asia Pacific.
At year-end, the Company had approximately 410,000 owners, 61 properties, 12,807 vacation ownership villas and nearly 10,000 employees. Revenue sources were vacation ownership sales, resort management and other services, consumer financing, rental operations and cost reimbursements.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Total revenue | $1.830 billion | $1.736 billion | 6% |
| Income before taxes | $206.5 million | $150.6 million | 37% |
| Net income | $122.8 million | $80.8 million | 52% |
| Diluted EPS | $3.82 | $2.33 | 64% |
| EBITDA, non-GAAP | $241.5 million | $181.0 million | 33% |
| Net margin | 6.7% | 4.7% | Up 2.0 pts |
| Contract sales | $728.3 million | $713.3 million | 2% |
Revenue increased primarily through higher vacation ownership sales revenue, resort management and other services, and rental revenue. Financing revenue declined 4% to $124.0 million because collections on the existing notes receivable portfolio exceeded new originations. Rental revenue rose 18% to $313.0 million, and rental margin more than doubled to $53.3 million, or 17.0% of rental revenue, from 10.0%.
Development margin increased 4% to $140.4 million, while the development margin percentage was broadly stable at 20.8% versus 20.9%. Resort management and other services margin increased 13% to $112.3 million, with margin rising to 36.0% from 33.2%. The effective tax rate declined to 40.53% from 46.37%.
Cash flow, liquidity and capital structure
| Metric | 2015 | 2014 |
|---|---|---|
| Cash flow from operations | $109.0 million | $291.4 million |
| Cash flow from investing | $(25.1) million | $43.1 million |
| Cash flow from financing | $(249.7) million | $(185.7) million |
| Year-end cash and equivalents | $177.1 million | $346.5 million |
| Debt, net | $678.8 million | $703.0 million |
| Gross debt | $688.1 million | Not clearly provided in the filing excerpt |
The decline in operating cash flow reflected a $66.0 million early payment related to the Marriott Rewards customer loyalty program, acquisitions of hotels and units intended for future vacation ownership conversion, lower notes receivable collections and higher financing propensity. Approximately $684.6 million of gross debt was non-recourse debt related to vacation ownership notes receivable securitizations. The Company had no borrowings outstanding under its $200 million revolving corporate credit facility or its $250 million warehouse credit facility at year-end, although $3.3 million of letters of credit were outstanding.
During 2015, the Company completed a $255 million securitization of a $264.2 million notes receivable pool at a 2.56% weighted-average interest rate. It repurchased 2.86 million shares for $201.4 million and paid $23.8 million of dividends. Year-end real estate inventory was $663.9 million, including $332.9 million of finished goods and $331.0 million of land and infrastructure.
Material changes versus the prior comparable period
- North America remained the dominant segment, with revenue of $1.622 billion, up from $1.550 billion; segment financial results increased to $409.4 million from $350.6 million.
- Europe revenue declined 13% to $114.6 million, and contract sales declined 24% to $34.4 million, reflecting the absence of large 2014 Middle East purchases, fewer tours, higher cancellations and foreign-exchange effects.
- Asia Pacific revenue increased 72% to $94.0 million, primarily due to $28.4 million of residential contract sales from the disposition of Macau units and the acquisition of the Surfers Paradise hotel.
- Rental performance improved materially because of a 6% increase in transient keys rented and a 4% increase in the average transient key rate; company-wide resort occupancy was 89.0% versus 89.4%.
- Marketing and sales expense increased 5% to $330.6 million, reflecting investment in programs intended to increase future tour volumes.
- Litigation settlement expense was a $0.2 million benefit in 2015, compared with $19.5 million of expense in 2014, which included a $23.8 million non-cash loss on the sale of The Abaco Club and other settlements.
- 2015 included $9.6 million of gains from land and golf-course dispositions and $8.4 million of other expense, including transaction costs related to acquisitions and potential acquisitions.
- Share repurchases reduced the weighted-average basic share count to 31.5 million from 33.7 million, contributing to EPS growth.
Guidance, outlook, commentary and risks
- Management targeted 50% to 55% financing propensity in 2016, compared with approximately 50% in 2015, expecting new loan originations eventually to exceed principal collections.
- The Company intends to emphasize points-based products, profitable contract sales growth, capital-efficient inventory arrangements, owner engagement and expansion in North America and Asia Pacific.
- Management stated that liquidity from cash, operating cash flow, asset dispositions, securitizations and committed credit facilities should be adequate for expected requirements, but no formal revenue or earnings guidance was provided.
- Subsequent events included a $158.5 million conditional commitment for a New York hotel, commitments for Bali vacation ownership units, a $23.5 million Miami Beach hotel acquisition and a $51.1 million gross draw on the warehouse facility on February 24, 2016.
- Key risks include economic weakness and reduced consumer credit, purchaser defaults and securitization performance triggers, dependence on ABS market access, inventory depletion or construction delays, foreign-exchange and international operating risks, extensive consumer-protection and lending regulation, cyber and data-security risks, competition and potential loss or impairment of Marriott and Ritz-Carlton licensing relationships.
- Pending or potential litigation includes Hawaii owner and association disputes, claims alleging that the points-based MVCD program reduced the value of legacy interests, and other resort-related matters. For several cases, management could not estimate potential liability.
- The Company had $1.036 billion of total contractual obligations, including $771.9 million of debt obligations, $64.6 million of preferred-stock obligations, $123.7 million of purchase obligations and $67.8 million of operating leases.
Important facts for investors to verify
- Reconcile reported contract sales with recognized vacation ownership revenue, including reportability adjustments, sales reserves and sales incentives.
- Assess whether higher financing propensity reverses the decline in financing revenue without causing deterioration in default rates or loan-loss reserves.
- Review cash conversion, particularly the effect of hotel acquisitions, inventory commitments, the New York and Bali commitments, and shareholder returns.
- Confirm the amount, maturity profile and non-recourse status of securitized debt, as well as compliance with securitization performance triggers and credit-facility covenants.
- Evaluate Europe’s declining sales trend and Asia Pacific’s dependence on unusual residential sales and newly acquired hotel assets.
- Review pending litigation, tax-sharing and indemnification arrangements with Marriott International, license-agreement terms, and the $40 million mandatorily redeemable preferred stock.
- Monitor the planned adoption of the new revenue-recognition standard beginning in fiscal 2018 and its potential effect on reported revenue, margins and timing.