MARRIOTT VACATIONS WORLDWIDE Corp annual report, FY2014

Marriott Vacations Worldwide Corporation: FY2014 Form 10-K Summary

Business context and reporting period

The filing covers the 52-week fiscal year ended January 2, 2015. Fiscal 2013 included 53 weeks, which affects year-over-year comparisons. Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership and related residential products under Marriott Vacation Club, Grand Residences by Marriott, The Ritz-Carlton Destination Club and The Ritz-Carlton Residences brands. Operations are reported in North America, Europe and Asia Pacific.

At year-end, the company operated 58 properties in the United States and seven other countries and territories, serving approximately 415,000 owners with 12,866 built vacation ownership units and 2,325 additional planned units.

Key financial metrics

Metric	FY2014	FY2013	Change
Total revenue	$1.736 billion	$1.750 billion	(1%)
Net income	$81 million	$80 million	1%
Diluted EPS	$2.33	$2.18	7%
EBITDA	$182 million	$167 million	9%
Net margin	4.7%	4.6%	Up modestly
Contract sales	$713 million	$694 million	3%
Operating cash flow	$291 million	$162 million	80%
Cash and cash equivalents	$347 million	$200 million	74%
Total debt	$711 million	$678 million	5%
Real estate inventory	$768 million	$864 million	(11%)

Revenue comprised vacation ownership sales of $648 million, resort management and other services of $298 million, financing revenue of $129 million, rental revenue of $264 million and cost reimbursements of $397 million. Cost reimbursements are recorded gross and carry no added margin.

Development margin was $136 million, or 20.9%, compared with $142 million, or 21.2%, in 2013. Resort management and other services margin increased to $99 million, or 33.2%, from $84 million, or 29.0%. Rental margin increased to $26 million, or 10.0%, from $11 million, or 4.1%. Financing margin declined to $79 million from $85 million as the consumer loan portfolio continued to contract.

The fourth quarter of 2014 comprised 16 weeks and generated revenue of $511 million, expenses of $492 million, net income of $1 million, basic EPS of $0.02 and diluted EPS of $0.01. The comparable fourth quarter of 2013 comprised 17 weeks and generated revenue of $527 million and net income of $6 million.

Material changes versus the prior comparable period

Contract sales increased 3% to $713 million, or approximately 4% excluding the impact of the extra week in 2013. Vacation ownership contract sales increased 3% to $699 million.
Reported vacation ownership sales revenue decreased 4% to $648 million because 2013 benefited from higher revenue reportability, including $21 million related to extended European rescission periods.
North America contract sales increased 2% to $634 million. On-site sales benefited from a 6% increase in value per guest to $3,386, offset by a 3% decline in tours.
Europe contract sales increased 34% to $45 million, but reported vacation ownership revenue fell 36% to $35 million due primarily to the prior-year revenue-recognition benefit.
Asia Pacific contract sales declined 8% to $34 million, reflecting a 9% decline in tours related to Singapore regulatory changes and political turmoil in Thailand.
Rental margin improved substantially because of a 3% increase in average transient rates, a 1% increase in transient keys rented and lower unsold maintenance fees.
Financing revenue declined 9% to $129 million as collections exceeded new loan originations and the average gross notes receivable balance fell by $85 million. Financing propensity increased to 44% from 42%.
Operating cash flow increased by $129 million, primarily due to favorable timing of real estate inventory spending, lower loyalty-program payments, higher cash receipts on sales not yet reportable and the absence of significant 2013 litigation-settlement cash payments.
Real estate inventory declined to $768 million from $864 million. Inventory spending was $99 million versus $165 million in 2013, while dispositions generated $82 million of cash proceeds.
Share repurchases increased materially: the company repurchased 3.49 million shares for $203 million, compared with $26 million in 2013. The company also declared its first quarterly common dividend, $0.25 per share.

Debt, liquidity and capital resources

Total debt was $711 million, of which $708 million was non-recourse debt related to vacation ownership receivable securitizations and $3 million was other debt.
The company held $347 million of cash and $110 million of restricted cash at year-end.
No borrowings were outstanding under the $200 million Revolving Corporate Credit Facility; $3 million of letters of credit were outstanding. The facility matures in September 2019 and includes financial covenants.
No borrowings were outstanding under the $250 million Warehouse Credit Facility. Its revolving period was extended to September 2016.
The company completed two 2014 securitizations, including $23 million of notes at 6.25% and $240 million of notes with a weighted-average interest rate of 2.29%.
Mandatorily redeemable preferred stock of a consolidated subsidiary totaled $40 million and carries a 12% annual dividend rate through the first five years. It is mandatorily redeemable in 2021, subject to earlier optional redemption beginning in October 2016.
Management stated that operating cash flow, asset dispositions, the credit facilities and continued access to the asset-backed securities market should be adequate to meet liquidity needs and fund growth.

Guidance, outlook, commentary and unusual items

The filing does not provide formal numerical earnings or revenue guidance. Management expects 2015 tour flow to benefit from programs targeting existing owners and first-time buyers. The company intends to pursue profitable contract-sales growth, maximize cash flow, use asset-light inventory structures, expand selectively in North America and Asia Pacific, dispose of remaining excess assets and complete its separation-related activities.

Management expected an additional $5 million to $7 million of separation-related spending by the end of 2015, with approximately $15 million of annualized savings once the initiatives are complete.
The company recorded a $24 million non-cash loss on the sale of The Abaco Club, included in litigation settlement expense, partly offset by an $8 million settlement gain involving a service provider and a $3 million settlement charge related to the RCC San Francisco litigation.
The company recorded $5 million of gains on other asset dispositions and a $1 million impairment charge.
In the first quarter of 2015, the company entered into an asset-light transaction, sold Marco Island inventory subject to continuing involvement and completed the approximately $55 million acquisition of a San Diego hotel intended for conversion to vacation ownership inventory.
Management reported no securitized loan pools out of compliance with performance parameters at year-end and stated that the company was in compliance with its revolving-credit financial and operating covenants.

Principal risks and contingencies

Demand is sensitive to economic conditions, consumer confidence, travel trends and the availability of consumer credit.
Loan defaults, lower financing propensity or deterioration in securitized loan-pool performance could reduce revenue, cash flow and access to ABS financing.
The business depends heavily on the Marriott and Ritz-Carlton brands, license agreements and the Marriott Rewards relationship. Termination or loss of these arrangements would materially impair sales, rental revenue and competitiveness.
Points-based programs concentrate inventory in trusts and increase the risk of temporary inventory depletion if construction, registration or third-party delivery is delayed.
Asset-light arrangements expose the company to counterparty and construction-completion risk.
The company faces extensive timeshare, real estate, lending, marketing, privacy, anti-corruption and resort-management regulation, including rescission and telemarketing requirements.
Several owner and association disputes remained unresolved, including litigation or arbitration concerning RCC San Francisco, Kapalua Bay and alleged effects of the MVCD program. For certain matters, the company could not estimate potential exposure.
Contractual obligations totaled $1.312 billion, including $805 million of debt-related payments, $253 million of purchase obligations, $93 million related to Marriott Rewards and $78 million of operating leases.
Future inventory commitments included $76 million for Miami units and $39 million for Big Island of Hawaii units, plus an estimated $45 million to $55 million of renovation funding for the Hawaii units.

Important facts for investors to verify

Reconcile contract-sales growth with reported vacation ownership revenue, particularly the effects of revenue reportability, rescission periods, sales reserves and product-cost true-ups.
Assess whether the strong 2014 operating cash flow is sustainable after considering inventory spending, securitization activity, asset dispositions and working-capital timing.
Monitor tour volumes, value per guest, financing propensity and loan default trends, especially in North America.
Review the maturity, renewal and covenant terms of the Warehouse Credit Facility, Revolving Corporate Credit Facility and ABS securitizations.
Evaluate the effect of the $203 million share-repurchase program and continuing dividends on liquidity and future growth investment.
Track the unresolved litigation, contingent guarantees, inventory purchase commitments and the first-quarter 2015 San Diego hotel acquisition.
Review the future adoption impact of ASC 606 revenue recognition, which the company expected to adopt in the first quarter of 2017; the filing states that the impact was still under assessment.