Marriott Vacations Worldwide Corporation — 2017 Q2 Form 10-Q Summary
Business context and reporting period
Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It operates through North America, Asia Pacific and Europe segments and had more than 65 properties in the United States and eight other countries and territories at June 30, 2017.
The quarter ended June 30, 2017 covered 91 days, compared with 84 days for the quarter ended June 17, 2016. The first half covered 182 days versus 168 days in the prior-year period because the company changed to a calendar-year, end-of-month reporting cycle. Prior-year results were not restated.
Key financial metrics
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Total revenue | $497.6 million | $423.2 million | $983.7 million | $842.3 million |
| Income before taxes | $65.4 million | $61.2 million | $117.7 million | $101.3 million |
| Net income | $44.3 million | $36.3 million | $78.0 million | $60.7 million |
| Diluted EPS | $1.58 | $1.26 | $2.79 | $2.08 |
| Adjusted EBITDA | $77.9 million | $64.2 million | $139.9 million | $115.8 million |
| Net margin | 8.9% | 8.6% | 7.9% | 7.2% |
Revenue from vacation ownership products increased 30% to $191.0 million in the quarter and 28% to $363.2 million in the first half. Contract sales increased 26% in both periods, to $209.9 million in the quarter and $403.7 million in the first half. North America generated $455.1 million of second-quarter revenue and $903.6 million year to date, representing the substantial majority of consolidated revenue.
Development margin increased to $40.8 million in the quarter and $69.7 million year to date, but development margin percentage declined to 21.4% from 23.1% in the prior-year quarter and to 19.2% from 20.4% year to date. The decline primarily reflected unfavorable product-cost true-ups and higher marketing and sales costs related to six new sales distributions.
Other operating trends were favorable. Second-quarter resort management margin increased to $35.2 million, or 44.4%, from $30.1 million, or 40.7%. Rental margin increased to $14.0 million, or 16.7%, from $9.0 million, or 12.0%. First-half financing margin increased 13% to $45.6 million, while financing propensity rose to 64.4% from 56.2%.
Liquidity, cash flow and debt
- Cash and cash equivalents were $85.2 million at June 30, 2017, compared with $147.1 million at December 30, 2016. Cash, cash equivalents and restricted cash totaled $143.9 million at quarter-end.
- First-half operating cash flow was $14.1 million, down from $21.1 million. Cash use reflected higher vacation ownership loan originations, inventory spending and working-capital timing.
- First-half investing cash flow was an outflow of $21.4 million, including $11.3 million of capital expenditures and $10.1 million for company-owned life insurance.
- First-half financing cash flow was an outflow of $63.9 million, including $28.6 million of dividends, $3.9 million of share repurchases and net debt-related cash outflows.
- Gross debt was $789.7 million at June 30, 2017, compared with $737.2 million at December 30, 2016. Debt included $621.6 million of non-recourse securitization debt, $49.6 million under the non-recourse Warehouse Credit Facility, $47.5 million under the corporate revolver and a $63.6 million non-interest-bearing note issued for Hawaii inventory.
- The $200 million corporate revolver terminated September 10, 2019. The company was in compliance with applicable covenants at quarter-end and subsequently borrowed an additional $27.5 million for short-term working capital needs.
- Vacation ownership notes receivable, net, totaled $1.04 billion, with a weighted-average stated interest rate of 12.3%. The allowance for loan losses was $110.5 million, and loans on non-accrual status totaled $45.5 million.
Material changes, outlook and unusual items
- Management expects 2017 financing propensity to remain approximately 60% to 65% and expects interest income to increase as new loan originations outpace collections of existing principal.
- North America contract sales rose 31% in the quarter and 29% year to date, supported by more tours, new sales locations and higher volume per guest. Asia Pacific contract sales rose 11% in the quarter and 19% year to date, while Europe declined 26% and 17%, respectively.
- Asia Pacific remained marginally unprofitable, with a first-half segment loss of $0.1 million, while Europe segment results improved to $4.2 million from $2.5 million.
- The company acquired 36 completed vacation ownership units in Marco Island, Florida for $33.6 million and 112 units on Hawaii’s Big Island using $27.3 million of cash, a $0.5 million note settlement and a $63.6 million non-interest-bearing note.
- The prior-year comparison benefited from a $10.5 million gain on the sale of excess inventory at Ritz-Carlton Club and Residences, San Francisco. No comparable gain was recorded in 2017; 2017 included approximately $0.2 million of acquisition, litigation-settlement and other losses in the quarter.
- Adoption of ASU 2016-09 reduced the tax provision by $2.8 million in the quarter and $5.2 million in the first half. The company expects to adopt the new revenue standard in fiscal 2018 on a retrospective basis, with expected changes primarily involving vacation ownership sales timing, collectibility, sales incentives and marketing-cost presentation.
- Material commitments included $158.5 million for the New York property, $102.2 million of remaining Marco Island purchases, and contingent Bali property commitments. The company also had $37.7 million of surety bonds and $4.6 million of letters of credit outstanding.
- Several lawsuits involving Kapalua Bay, Ritz-Carlton fractional interests and the Marriott Vacation Club Destinations program remained unresolved. The company could not estimate potential liability for these matters.
- On August 1, 2017, the board authorized 1.0 million additional shares for repurchase and extended the repurchase program through May 31, 2018. Approximately 2.0 million shares were then available.
Important facts for investors to verify
- Separate the reported growth from the effect of seven additional days in the quarter and 14 additional days in the first half; management estimated comparable prior-year contract sales would have been approximately $12 million and $26 million higher, respectively.
- Assess the sustainability of North America sales growth against declining development margins, higher marketing costs and increased financing propensity.
- Monitor loan performance, allowance adequacy, non-accrual balances and the sensitivity of reserves to estimated default rates.
- Review liquidity after the subsequent $27.5 million revolver borrowing, planned inventory commitments and debt maturities.
- Evaluate exposure from the New York, Marco Island and Bali commitments, as well as the Hawaii note payable and other variable-interest-entity arrangements.
- Consider the impact of the 2018 revenue-recognition adoption and the absence of the prior-year disposal gain when comparing future results.
- Confirm the status and potential financial exposure of the disclosed litigation, for which the filing provides no clear liability estimate.