Marriott Vacations Worldwide Corporation — 2012 Q2 Form 10-Q Summary
Business context and reporting period
Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership and related residential products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It operated 64 properties across North America, Luxury, Europe and Asia Pacific. The company completed its spin-off from Marriott International on November 21, 2011; post-spin-off results include royalty fees, standalone public-company costs and preferred-stock dividends that were not present in the comparable 2011 periods.
The filing covers the twelve weeks and twenty-four weeks ended June 15, 2012, compared with the twelve weeks and twenty-four weeks ended June 17, 2011. Interim financial statements are unaudited.
Key financial metrics
| Metric | 12 weeks ended June 15, 2012 | 12 weeks ended June 17, 2011 | 24 weeks ended June 15, 2012 | 24 weeks ended June 17, 2011 |
|---|---|---|---|---|
| Total revenue | $383 million | $380 million | $755 million | $751 million |
| Income before taxes | $12 million | $28 million | $29 million | $61 million |
| Net income | $8 million | $16 million | $17 million | $35 million |
| Diluted EPS | $0.24 | $0.47 | $0.48 | $1.05 |
| EBITDA | $33 million | $47 million | $70 million | $100 million |
| Adjusted EBITDA | $21 million | $37 million | $48 million | $78 million |
| Development margin percentage | 11% | 6% | 10% | 8% |
Net margin was approximately 2.1% for the quarter and 2.3% year to date, compared with approximately 4.2% and 4.7%, respectively, in the prior-year periods. The company-owned contract sales metric increased to $168 million for the quarter and $322 million year to date, while North America contract sales rose 10% and 14%, respectively. North America VPG increased to $2,968 for the quarter and $2,955 year to date.
Revenue mix for the quarter included vacation ownership sales of $145 million, resort management and other services of $62 million, financing of $35 million, rental of $54 million, other revenue of $8 million and cost reimbursements of $79 million.
Cash flow, debt and liquidity
- Cash and cash equivalents were $83 million at June 15, 2012, compared with $110 million at December 30, 2011. Restricted cash was $72 million.
- Operating cash flow was $106 million for the first 24 weeks, down from $160 million in the prior-year period. Investing activities provided $5 million, while financing activities used $136 million. Cash decreased by $27 million.
- Total debt was $714 million, down from $850 million at year-end 2011. Approximately $711 million was non-recourse debt associated with securitized notes receivable and the warehouse facility; no borrowings were outstanding under the revolving corporate credit facility at quarter-end.
- Debt consisted principally of $608 million of securitization debt, $103 million under the warehouse credit facility and $3 million of other debt. The company had $5 million of letters of credit outstanding under its $200 million revolving corporate credit facility.
- Vacation ownership notes receivable totaled $1.076 billion net of reserves, including $772 million securitized and $304 million non-securitized. The allowance for loan losses was $164 million, and the estimated average remaining default rate was 7.86%.
- Real estate inventory was $901 million, including $471 million of finished goods, $119 million of work-in-progress and $311 million of land and infrastructure.
Material changes versus the prior comparable period
- Total revenue increased only 1% for both the quarter and year-to-date period because higher rental and resort-management revenue offset lower vacation ownership sales revenue and financing revenue.
- Vacation ownership sales revenue declined $7 million for the quarter and $16 million year to date, despite higher contract sales. Unfavorable revenue reportability, caused principally by financed sales not meeting down-payment requirements before period-end, reduced reported revenue by $7 million for the quarter and $27 million year to date.
- Rental revenue increased $8 million for the quarter and $15 million year to date, supported by higher transient keys rented, greater use of plus points and stronger consumer demand.
- Financing revenue declined $4 million for the quarter and $9 million year to date as collections exceeded new loan originations and the notes receivable portfolio contracted. Financing propensity was 38% versus 41% in the quarter and 40% in both year-to-date comparable periods.
- Development margin percentage improved, aided by favorable product-cost true-ups, lower-cost inventory mix and marketing and sales efficiencies, but reported earnings declined because of new royalty fees, higher general and administrative costs, higher interest expense and lower financing income.
- General and administrative expense increased $7 million for the quarter and $9 million year to date, reflecting separation and organizational costs, standalone public-company costs and claims related to a Luxury project. Royalty fees were $14 million for the quarter and $27 million year to date.
- North America remained the primary earnings contributor, with segment financial results of $71 million for the quarter and $143 million year to date. Luxury remained loss-making, Europe declined to breakeven, and Asia Pacific improved to $1 million for the quarter and $2 million year to date.
Guidance, outlook, risks and unusual items
- The filing does not provide formal quantitative earnings or revenue guidance. Management expects available liquidity, operating cash flow, securitizations and committed credit facilities to support near- and long-term requirements.
- Management expects real estate inventory spending to remain below or in line with cost of sales for the next several years and plans to sell excess Luxury inventory and undeveloped land. No new Luxury or Europe development was planned; most remaining Luxury inventory was expected to be placed into the MVCD points program.
- On June 28, 2012, the company completed a securitization of approximately $250 million of vacation ownership notes receivable and received approximately $233 million of cash after expenses and reserves. Approximately $101 million was used to repay warehouse-facility borrowings; the transaction will be accounted for as secured borrowing with no third-quarter gain or loss.
- A California lawsuit involving 11 Ritz-Carlton owners received a tentative decision favoring plaintiffs, including possible rescission and punitive damages. The ultimate exposure was not estimable; approximately $7 million had been accrued for related matters, including $2 million accrued in the second quarter. Two other similar lawsuits were pending.
- The company estimated approximately $156 million of future cash outflows to complete existing development phases through 2016, of which $14 million was included in liabilities at June 15, 2012.
- Financing guarantees had maximum potential future fundings of $23 million, with a $1 million liability recorded. Additional risks include timeshare-loan defaults, revenue-recognition timing, Luxury inventory carrying costs, foreign currency movements, economic conditions, litigation, tax contingencies and dependence on securitization markets.
- The company recorded a $2 million reversal of a previously recorded impairment related to a Hawaii joint venture investment. It retained a $10 million accrual for potential future funding exposure related to that investment.
- Prior-year cash flow activity was restated for classification errors; management considered the misstatements immaterial to the individual prior periods.
Most important facts for an investor to verify
- Whether higher contract sales and development margins convert into reported revenue and sustainable earnings after revenue-reportability deferrals and loan-loss reserves.
- The sustainability of rental growth and North America sales performance as the financing portfolio continues to decline.
- Liquidity after the June 28 securitization, including warehouse-facility repayment, future securitization access and scheduled debt payments.
- Potential exposure from the California litigation, Hawaii joint venture, financing guarantees and other contingencies.
- The recurring level of post-spin-off royalty fees, standalone corporate costs, loyalty-program charges and preferred-stock dividends.
- The comparability of 2011 results, which were prepared on a standalone historical basis before the spin-off and included Marriott International cost allocations.