Marriott Vacations Worldwide Corporation: 2013 Third-Quarter Form 10-Q
Business context and reporting period
Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership and related residential products under the Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It operated 63 properties across the United States and nine other countries and territories through three reportable segments: North America, Europe and Asia Pacific.
The unaudited filing covers the 12 weeks and 36 weeks ended September 6, 2013, compared with the corresponding periods ended September 7, 2012. Fiscal quarters are 12-week periods rather than calendar quarters. Results may be affected by seasonality and the timing of rescission periods, down-payment requirements and revenue recognition.
Financial performance and key metrics
| Metric | 12 weeks ended Sept. 6, 2013 | 12 weeks ended Sept. 7, 2012 | 36 weeks ended Sept. 6, 2013 | 36 weeks ended Sept. 7, 2012 |
|---|---|---|---|---|
| Total revenues | $412 million | $383 million | $1,223 million | $1,140 million |
| Income before income taxes | $40 million | $16 million | $114 million | $41 million |
| Net income | $25 million | $5 million | $74 million | $18 million |
| Diluted EPS | $0.67 | $0.12 | $2.03 | $0.50 |
| EBITDA | $47 million | $28 million | $139 million | $74 million |
- Revenue increased 8% for the quarter and 7% year to date. Net income increased $20 million for the quarter and $56 million year to date. Net margins were approximately 6.1% and 6.0%, respectively, compared with approximately 1.3% and 1.6% in the prior comparable periods.
- Vacation ownership product revenue was $162 million for the quarter and $472 million year to date, up 13% in each period. Development margin was $34 million, or 21.1%, for the quarter, versus $22 million, or 15.6%, in 2012; year-to-date development margin was $95 million, or 20.3%, versus $46 million, or 11.2%.
- Resort management and other services margin increased to $17 million, or 28.1%, for the quarter, and $47 million, or 26.4%, year to date, compared with $13 million and $36 million, respectively, in 2012.
- Financing revenue declined 9% to $32 million for the quarter and 8% to $97 million year to date, primarily because collections of existing notes receivable exceeded new originations. Financing margin was $27 million for the quarter and $81 million year to date.
- Rental revenue increased 17% to $65 million for the quarter and 16% to $193 million year to date. Rental margin improved to $8 million and $24 million, respectively, from a $1 million loss and $9 million of margin in the prior periods.
- Contract sales decreased 2% to $168 million for the quarter and 2% to $481 million year to date. North American vacation ownership contract sales increased 2% in both periods, while Europe and Asia Pacific declined. North American VPG increased 6.6% to $3,252 for the quarter and nearly 9% to $3,243 year to date.
Cash flow, liquidity and debt
- Cash provided by operating activities was $123 million for the 36 weeks ended September 6, 2013, compared with $158 million in 2012. Cash used in investing activities was $4 million, while financing activities provided $66 million.
- Cash and cash equivalents increased to $288 million from $103 million at year-end 2012. Restricted cash was $65 million.
- Total debt was $751 million, up from $678 million at year-end 2012. Approximately $747 million was non-recourse debt associated with securitized vacation ownership notes receivable; other debt was $4 million. The company also had $40 million of mandatorily redeemable preferred stock of a consolidated subsidiary.
- During the third quarter, the company securitized a $263 million pool of notes receivable and issued $250 million of notes with a 2.21% weighted average interest rate. The transaction was accounted for as a secured borrowing.
- The Warehouse Credit Facility revolving period was extended to September 5, 2015. No amount was outstanding under that facility at September 6, 2013; $17 million of gross notes receivable was eligible for securitization.
- Real estate inventory was $853 million, including $390 million of finished goods, $193 million of work-in-progress and $270 million of land and infrastructure. Estimated cash outflows to complete existing projects under development were approximately $97 million, of which $15 million was included in liabilities.
Material changes versus the prior comparable period
- Profitability improved substantially, driven by higher recognized vacation ownership revenue, improved marketing and sales efficiency, stronger rental performance, lower consumer financing interest expense and lower general interest expense.
- Revenue reportability was materially higher, including the effect of extended European rescission periods. Management stated that this factor is expected to have a positive material effect on 2013 year-over-year earnings comparability.
- Financing revenue continued to decline as the notes receivable portfolio contracted, although lower financing interest costs partly offset the impact.
- General and administrative expense increased $7 million year to date, primarily from higher legal and audit, personnel and standalone public-company costs.
- The company closed off-site sales locations in Hong Kong and Japan, reducing Asia Pacific contract sales, while emphasizing more efficient on-site channels. Europe continued selling existing inventory with no current plans for new development.
Guidance, outlook, risks and unusual items
- Management expects organizational and separation-related spending of an additional $10 million to $15 million through 2014 and expects approximately $15 million to $20 million of annualized savings once the program is complete. Approximately $3 million of incremental savings had been reflected in year-to-date results.
- Management expects real estate inventory spending to remain at or below cost of sales in the near term and plans to sell excess Ritz-Carlton inventory and undeveloped land. Ten San Francisco units acquired in connection with a legal settlement were expected to generate approximately $17 million of net cash proceeds over the six to nine months beginning in the fourth quarter of 2013.
- Prior-period financial statements were restated for European sales documentation and rescission-period errors, deferred tax timing corrections and certain cost-reimbursement presentation adjustments. The cumulative effect reduced income before taxes through December 28, 2012 by $12 million and reduced retained earnings. The filing states that cash flows were not affected in total, although individual cash-flow line items will be restated in the 2013 Form 10-K.
- As of September 6, 2013, the company had a $16 million accrual for potential future funding related to a Hawaii joint venture, in addition to unresolved litigation exposure. Several lawsuits and arbitration matters involve claims for damages, rescission, restitution or disgorgement; potential losses generally could not be estimated.
- Financing risks include consumer defaults, securitization performance triggers, access to the asset-backed securities market and the decline in the notes receivable portfolio. The company reported no securitization pools out of compliance with performance triggers.
- Guarantees to third-party lenders had a maximum potential funding amount of $16 million, consisting of $13 million in Asia Pacific and $3 million in North America, with no recorded liability for expected future fundings. Surety bonds totaled $89 million and letters of credit under the revolving facility totaled $4 million.
- On October 8, 2013, the board authorized repurchases of up to 3.5 million common shares through March 28, 2015, subject to market and other conditions.
Important facts for investors to verify
- Reconcile the 2013 results with the restated prior-period financial statements and assess how European rescission-period timing affected reported earnings.
- Evaluate whether improved development and rental margins are sustainable after excluding revenue-reportability effects, product-cost true-ups and other unusual items.
- Monitor the pace of notes receivable collections versus new originations, financing propensity, default rates and the $137 million notes receivable reserve balance.
- Review securitization maturities, non-recourse debt service, Warehouse Credit Facility availability and continued access to the ABS market.
- Assess unresolved litigation and Hawaii joint-venture exposure, including the $16 million accrual and claims for which potential losses remain unestimable.
- Confirm execution and timing of the planned inventory dispositions, expected $17 million San Francisco proceeds and the authorized share repurchase program.