Marriott Vacations Worldwide Corporation — Form 10-Q Summary
Business context and reporting period
Unaudited interim combined financial statements cover the twelve and thirty-six weeks ended September 9, 2011, compared with September 10, 2010. The company develops, markets, sells and manages vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands, operating 64 properties under 71 management contracts across four segments: North America, Luxury, Europe and Asia Pacific.
The statements are presented as if the spin-off from Marriott International had occurred before the periods shown, but they reflect historical allocations and do not necessarily represent results as an independent public company. The spin-off was completed on November 21, 2011, and the company began trading on the NYSE under “VAC” on November 22, 2011.
Key financial metrics
| Metric ($ millions, except percentages) | Q3 2011 | Q3 2010 | First 36 weeks 2011 | First 36 weeks 2010 |
|---|---|---|---|---|
| Total revenue | 378 | 360 | 1,129 | 1,105 |
| Net income (loss) | (221) | 19 | (186) | 49 |
| Net margin | (58.5%) | 5.3% | (16.5%) | 4.4% |
| Operating cash flow | Not provided for quarter | Not provided for quarter | 249 | 340 |
| Adjusted EBITDA | 26 | 39 | 104 | 144 |
| Adjusted EBITDA margin | 6.9% | 10.8% | 9.2% | 13.0% |
- Q3 revenue increased 5% to $378 million; first-36-week revenue increased 2% to $1.129 billion.
- Vacation ownership product sales, net, increased 7% in Q3 to $147 million and 1% year to date to $442 million. Resort management and other services increased 10% in Q3 and 7% year to date. Rental revenue increased 8% in Q3 and 7% year to date.
- Financing revenue declined 9% in Q3 to $39 million and 11% year to date to $119 million, driven by lower notes receivable balances.
- Total contract sales were $179 million in Q3 versus $164 million and $488 million for the first 36 weeks versus $489 million. North America VPG was $2,560 in Q3 versus $2,337.
- Debt declined to $833 million at September 9, 2011 from $1.022 billion at December 31, 2010, primarily due to a $186 million reduction in non-recourse securitization debt. Cash and cash equivalents were $25 million, with restricted cash of $65 million.
- Total assets declined to $3.165 billion from $3.642 billion, largely reflecting inventory impairment and debt-related reductions. Inventory declined to $1.014 billion from $1.412 billion.
Material changes versus the prior comparable period
- The company recorded a $324 million pre-tax, non-cash impairment charge in Q3, including $256 million against inventory and $68 million against property and equipment. The charge reduced after-tax earnings by approximately $234 million and was primarily related to excess undeveloped land and built Luxury inventory.
- The impairment caused Q3 net loss of $221 million compared with net income of $19 million, and year-to-date net loss of $186 million compared with net income of $49 million.
- Excluding specified adjustments, Q3 Adjusted EBITDA declined to $26 million from $39 million, while year-to-date Adjusted EBITDA declined to $104 million from $144 million.
- Operating cash flow declined 27% to $249 million, primarily reflecting lower net income, lower notes receivable collections in excess of new mortgages and reduced cash benefit from financially reportable sales.
- North America remained the primary operating contributor, with first-36-week revenue of $899 million and segment financial results of $193 million. Luxury reported a $132 million segment loss, including $113 million of impairment charges.
- Owners continued to enroll in the Marriott Vacation Club Destinations points program; more than 83,000 weeks-based owners had enrolled by quarter-end, representing more than 153,000 weeks. Substantial point banking deferred usage from 2011 into 2012, increasing related costs.
Guidance, outlook, risks and unusual items
- Management expected to generate net cash for full-year 2011 and believed operating cash flow, available credit facilities and future securitizations would provide adequate liquidity.
- The company planned to monetize excess undeveloped land over 18 to 24 months and accelerate sales of excess built Luxury inventory over three years. Management identified 16% of combined inventory and property and equipment held at September 9, 2011 as excess.
- New post-spin-off financing included a $300 million warehouse credit facility and a $200 million revolving corporate credit facility. The corporate facility includes leverage, minimum EBITDA-to-interest and tangible-net-worth covenants.
- Subsequent to quarter-end, the company drew $125 million gross, or $122 million net, under the warehouse facility against $154 million of securitized notes receivable. It also issued $40 million of mandatorily redeemable preferred stock bearing a 12% initial dividend rate.
- Post-spin-off license agreements require a fixed annual fee of $50 million plus percentage-based fees on specified initial developer and resale transactions using Marriott or Ritz-Carlton marks.
- Liquidity and operating risks include only $25 million of unrestricted cash at quarter-end, reliance on securitization markets, mortgage delinquencies, inventory carrying costs, luxury real estate weakness, seasonal cash flows and compliance with new credit facility covenants.
- Notes receivable totaled $1.178 billion net of reserves, with $149 million past due and $115 million on non-accrual status. The combined estimated average remaining default rate was 7.61%.
- Guarantees included maximum potential future fundings of $27 million, a $13 million remaining funding liability related to an equity investment, $90 million of Marriott-guaranteed surety bonds and $32 million of letters of credit.
- Existing projects under construction were expected to require approximately $187 million of additional cash outflows through completion, with completion anticipated by 2016.
Investor verification checklist
- Verify the impact of the $324 million impairment charge and whether additional write-downs arise from land sales, Luxury inventory pricing or changes in market assumptions.
- Assess the company’s post-spin-off standalone cost structure, including the $50 million annual brand license fee, transition services, employee costs and other Marriott-related obligations.
- Review available borrowing capacity, covenant headroom and the terms and collateral of the $200 million revolving facility and $300 million warehouse facility.
- Monitor cash flow conversion, inventory monetization, securitization capacity and the pace of mortgage collections relative to new originations.
- Evaluate delinquency, default and repurchase trends in the notes receivable portfolio, including the $185 million reserve balance and $149 million of past-due receivables.
- Reconcile reported contract sales with recognized revenue because rescission periods, financing requirements, reserves and revenue-reportability rules can create significant timing differences.