Marriott Vacations Worldwide Corporation — 2014 Second-Quarter Form 10-Q
Reporting period: Unaudited results for the twelve and twenty-four weeks ended June 20, 2014, compared with the corresponding periods ended June 14, 2013. The company develops, markets, sells and manages vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It operated 62 properties across North America, Europe and Asia Pacific.
Key Financial Metrics
| Metric | 12 weeks ended June 20, 2014 | 12 weeks ended June 14, 2013 | 24 weeks ended June 20, 2014 | 24 weeks ended June 14, 2013 |
|---|---|---|---|---|
| Total revenue | $410 million | $421 million | $812 million | $811 million |
| Income before taxes | $58 million | $44 million | $90 million | $74 million |
| Net income | $36 million | $30 million | $55 million | $49 million |
| Diluted EPS | $1.00 | $0.85 | $1.54 | $1.35 |
| EBITDA | $66 million | $53 million | $104 million | $92 million |
| Operating cash flow | Not separately provided | Not separately provided | $98 million | $34 million |
Net income margins were approximately 8.8% for the second quarter and 6.8% year to date, compared with approximately 7.1% and 6.0%, respectively, in the prior-year periods. EBITDA margins were approximately 16.1% and 12.8%, compared with 12.6% and 11.3%.
- Revenue mix: Vacation ownership product sales were $152 million in the quarter and $297 million year to date, down 10% and 4%, respectively. Resort management and other services increased 8% and 6% to $70 million and $130 million. Financing revenue declined 7% and 8% to $29 million and $60 million. Rental revenue declined 4% and 2% to $62 million and $126 million.
- Contract sales: Total contract sales increased 5% to $164 million in the quarter and 4% to $326 million year to date. North America VPG increased 5% in the quarter and 6% year to date, although tour volume declined 1% and 3%, respectively.
- Margins: Consolidated development margin percentage increased to 24.2% from 23.1% in the quarter and to 21.4% from 19.8% year to date. Resort management margin percentage increased to 34.6% from 27.9% in the quarter and to 32.7% from 27.6% year to date. Rental margin percentage declined to 11.1% from 13.3% in the quarter and to 10.8% from 12.2% year to date.
- Cash and liquidity: Cash and cash equivalents were $170 million at June 20, 2014, compared with $200 million at January 3, 2014. Restricted cash was $42 million. The company reported $98 million of operating cash flow, $74 million of investing cash flow and $202 million of financing cash outflow year to date.
- Debt: Total debt was $570 million, down from $678 million at year-end; $566 million was non-recourse debt associated with vacation ownership receivable securitizations. No borrowings were outstanding under the Warehouse Credit Facility or Revolving Corporate Credit Facility, although $3 million of letters of credit were outstanding under the revolving facility.
- Balance sheet: Total assets were $2.41 billion, including $920 million of net vacation ownership notes receivable and $826 million of inventory. The company also had $40 million of mandatorily redeemable preferred stock of a consolidated subsidiary.
Material Changes Versus the Prior Comparable Period
- Net income increased 20% in the quarter and 12% year to date despite essentially flat total revenue.
- Profitability benefited from a favorable mix of lower-cost real estate inventory, improved marketing and sales efficiency, lower loan-loss activity and lower consumer financing interest expense.
- Vacation ownership revenue was pressured by approximately $25 million of lower revenue reportability in the quarter and $27 million year to date, largely because the prior-year periods included higher recognition following expiration of rescission periods, particularly in Europe.
- Resort management results improved as management fees, exchange fees, resale commissions, club dues and ancillary revenue increased while expenses were broadly stable.
- Rental results weakened because revenue from Marriott Vacation Club Destinations points declined as enrollment by existing owners matured, partially offset by higher transient keys rented and higher average rates.
- Financing revenue declined as collections on existing notes receivable exceeded new originations; financing propensity nevertheless increased to 40% in the quarter and 41% year to date, compared with 38% and 39%.
- The company repurchased 1.67 million shares for $89 million during the first 24 weeks, leaving approximately 1.3 million shares available under the authorization.
- Debt declined primarily through repayment of securitization-related obligations. The company completed a $23 million securitization of a $24 million pool of seasoned notes receivable, accounted for as a secured borrowing.
Outlook, Commentary, Risks and Unusual Items
- Outlook: The filing does not provide formal earnings or revenue guidance. Management expected organizational and separation efforts to be substantially completed in 2014, with an additional $4 million to $6 million of related costs and expected annualized savings of $15 million to $20 million once completed.
- Management implemented programs intended to increase existing-owner and first-time-buyer tour flow over the next six to nine months, addressing declining tours associated with shorter stays and greater use of the points-based program.
- The company expects to dispose of excess undeveloped or partially developed land and other assets. A $60 million Kauai transaction remained subject to closing conditions, and management could not assure completion.
- Second-quarter unusual items included an $8 million gain from settlement of a service-provider dispute, a $2 million reversal of a previously recorded joint-venture accrual, approximately $2 million of gains from asset dispositions year to date, and a $1 million impairment charge.
- Potentially material litigation includes claims relating to Ritz-Carlton San Francisco disclosures, Ritz-Carlton Destination Club program changes, Kapalua Bay, The Abaco Club and the Marriott Vacation Club Destinations points program. Management could not estimate potential liability for several matters.
- The company could incur a non-cash loss of up to $25 million if the contemplated sale of The Abaco Club assets is completed under the terms described.
- Loan performance remains an important risk. Net vacation ownership notes receivable were $920 million, with a $129 million reserve; a 0.5 percentage-point increase in the estimated default rate would have increased the allowance by approximately $5 million.
- Other exposures include $14 million of maximum potential funding under financing guarantees, $76 million of surety bonds, $41 million of technology-related commitments and approximately $24 million of remaining development spending for projects under construction.
- Asia Pacific contract sales declined 9% in the quarter and 16% year to date, with management citing political turmoil in Thailand as a factor.
Investor Verification Checklist
- Verify whether improved development margins are sustainable after the favorable inventory mix, product-cost true-ups and prior-year revenue-reportability effects normalize.
- Monitor tour volume, VPG, financing propensity and new owner enrollment in the points-based program, particularly in North America.
- Assess trends in vacation ownership note defaults, reserves, securitization capacity and the ability to refinance or repay scheduled non-recourse debt.
- Review the outcome and potential exposure from the pending litigation, including the possible Abaco Club non-cash loss of up to $25 million.
- Confirm completion and cash proceeds from planned asset dispositions, including the proposed Kauai transaction and remaining San Francisco residential units.
- Evaluate the cash impact of the $89 million share repurchase, ongoing development commitments and the company’s stated liquidity resources.