MARRIOTT VACATIONS WORLDWIDE Corp quarterly report, Q1 FY2014

Business Context and Reporting Period

Marriott Vacations Worldwide Corporation is a vacation ownership company operating under the Marriott Vacation Club, Grand Residences by Marriott, Ritz-Carlton Destination Club and Ritz-Carlton Residences brands. It operated 62 properties across the United States and nine other countries and territories through North America, Europe and Asia Pacific segments.

This unaudited Form 10-Q covers the twelve weeks ended March 28, 2014, compared with the twelve weeks ended March 22, 2013. The company develops, markets, sells and manages vacation ownership products and also generates revenue from resort management, consumer financing, rentals and related services.

Key Financial Metrics

Metric	Q1 2014	Q1 2013	Change
Total revenue	$402 million	$390 million	3%
Income before taxes	$32 million	$30 million	7%
Net income	$19 million	$19 million	Flat
Diluted EPS	$0.54	$0.51	6%
EBITDA	$38 million	$39 million	Down $1 million
Cash flow from operations	$48 million	$(11) million	Improved $59 million
Cash and cash equivalents	$159 million	$119 million at prior-year quarter-end	Comparable prior-year balance

Revenue included $145 million from vacation ownership product sales, $60 million from resort management and other services, $31 million from financing, $64 million from rentals and $100 million of cost reimbursements. Cost reimbursements are recorded on a gross basis with corresponding expenses.

Development margin increased to $27 million from $23 million, and development margin percentage improved to 18.5% from 15.8%. Resort management and other services margin increased to $18 million from $16 million, with margin percentage rising to 30.4% from 27.2%. Rental margin was $7 million, compared with $7 million, while rental margin percentage declined to 10.6% from 11.1%.

Total contract sales were $162 million, up 3% from $156 million, including $156 million of vacation ownership sales and $6 million of residential product sales. North America represented $366 million of revenue and $80 million of segment financial results; Europe generated $23 million of revenue and $1 million of segment financial results; and Asia Pacific generated $13 million of revenue and $1 million of segment financial results.

Balance Sheet, Debt and Liquidity

Total assets were $2.519 billion, down from $2.632 billion at January 3, 2014.
Vacation ownership notes receivable, net, were $936 million, compared with $970 million at January 3, 2014.
Real estate inventory was $850 million, including $379 million of finished goods, $124 million of work-in-progress and $341 million of land and infrastructure.
Total debt was $597 million, down from $678 million. Approximately $593 million was non-recourse debt associated with vacation ownership notes receivable securitizations.
No amounts were outstanding under the Warehouse Credit Facility or the Revolving Corporate Credit Facility at March 28, 2014; $3 million of letters of credit were outstanding under the revolving facility.
The company held $74 million of restricted cash and stated that cash on hand, operating cash flow, securitizations and available credit facilities should meet expected liquidity needs.
The company repurchased 734,141 shares for $37 million at an average price of $50.99. Approximately 2.3 million shares remained available under the repurchase authorization.

Material Changes Versus the Prior Comparable Period

Vacation ownership contract sales were flat overall. North America vacation ownership contract sales declined 2%, while Europe increased 89% and Asia Pacific declined 22%.
North America on-site volume per guest increased 6.5% to $3,477, but tours declined 5%. Management attributed lower tour flow partly to greater existing-owner use of the points-based program and shorter stays.
Development margin benefited from favorable inventory mix, more efficient marketing and sales spending, lower loan-loss reserve activity and residential sales, partly offset by lower favorable product cost true-ups.
Financing revenue declined 8% to $31 million because collections continued to exceed new loan originations, reducing the average notes receivable balance by $96 million.
Rental revenue increased slightly, supported by higher transient keys rented and average transient rates, but lower plus-points revenue limited margin improvement.
Cash flow from operations improved substantially, principally because of the timing of litigation settlement payments, income taxes and maintenance-fee payments.
Financing cash flow was $(122) million, primarily reflecting $81 million of securitization-related debt repayments, the $37 million share repurchase and $4 million of tax withholding payments on equity awards.

Guidance, Outlook, Commentary and Risks

Management expected organizational and separation activities to be substantially completed in 2014, with an additional $5 million to $7 million of costs expected in 2014, including approximately $4 million expected to be capitalized. It projected annualized savings of approximately $15 million to $20 million after completion, in addition to $10 million achieved through 2013.
Management expected financing interest income to continue declining in the near term unless new originations outpace collections of the existing notes receivable portfolio.
New programs intended to increase existing-owner tours and attract first-time buyers were expected to generate additional tour flow in nine to twelve months.
The company intends to focus growth on asset-light opportunities in North America and Asia and to sell excess Ritz-Carlton inventory and certain undeveloped or partially developed land.
A $2 million impairment-related charge was recorded for additional expected costs associated with an equity-method joint venture. The company had a $10 million accrual for remaining potential funding obligations related to that joint venture.
The company sold an Orlando golf course and adjacent undeveloped land for $24 million in cash and expects to recognize approximately $2 million of gain over the operating period through the end of the first quarter of 2015.
Subsequent to quarter-end, the company agreed to sell undeveloped and partially developed land, an operating golf course and related Kauai assets for $60 million, subject to closing conditions.
Material litigation includes matters involving Ritz-Carlton San Francisco, Ritz-Carlton Destination Club, Kapalua Bay, The Abaco Club and a newly filed putative class action concerning the transition to a points-based product. Potential liabilities for several matters could not be estimated.
The proposed sale of The Abaco Club assets could result in a non-cash loss of up to $25 million if completed on contemplated terms, although related claims would be dismissed with prejudice.
Loan performance remains important: the estimated average remaining default rate was 7.01%, and a 0.5 percentage-point increase would have increased the allowance for loan losses by approximately $5 million.

Facts Investors Should Verify

Whether declining financing balances and interest income are offset by sufficient new vacation ownership originations.
Whether lower owner tour flow persists and whether new marketing programs improve tours, VPG and contract sales.
The sustainability of the improved development margin excluding favorable inventory mix and product cost true-ups.
Progress, costs and realized savings from the remaining organizational and separation activities.
The timing and economics of the proposed $60 million Kauai asset sale and other planned inventory dispositions.
Potential cash or non-cash exposure from outstanding litigation, the Abaco Club transaction and the Kapalua Bay joint venture.
Repayment and refinancing requirements for the $593 million of securitization-related debt and the availability of future securitization capacity.
The company’s ability to maintain liquidity after debt repayments and share repurchases while funding approximately $39 million of remaining development commitments.