Business Context and Reporting Period
Marriott Vacations Worldwide Corporation filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2019. The company operates Vacation Ownership and Exchange & Third-Party Management businesses. Comparisons are materially affected by the September 1, 2018 acquisition of ILG, which contributed only one month to the 2018 third-quarter and nine-month comparisons but a full period in 2019.
Key Financial Metrics
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $1.082 billion | $750 million | $3.210 billion | $1.916 billion |
| Net income attributable to common shareholders | $(9) million | $(36) million | $64 million | $11 million |
| Diluted EPS | $(0.21) | $(1.08) | $1.43 | $0.38 |
| Adjusted EBITDA | $190 million | $100 million | $551 million | $239 million |
| Operating cash flow | Not separately provided | Not separately provided | $180 million | $67 million |
- Q3 revenue increased 44%; nine-month revenue increased 68%. Excluding Legacy-ILG, management reported revenue growth of approximately 1% in Q3 and 3% for the first nine months.
- Q3 net loss attributable to common shareholders improved by $27 million year over year, while nine-month earnings increased by $53 million.
- Q3 development margin was $83 million, or 23.6%, versus $57 million, or 22.5%, in the prior-year quarter. Nine-month development margin was $205 million, or 20.4%, versus $123 million, or 19.3%.
- Q3 rental margin was $28 million, or 21.2%, versus $12 million, or 14.1%. Nine-month rental margin was $115 million, or 27.1%, versus $44 million, or 18.7%.
- Vacation Ownership Adjusted EBITDA was $195 million in Q3 and $574 million for nine months. Exchange & Third-Party Management Adjusted EBITDA was $56 million and $180 million, respectively.
- Cash, cash equivalents and restricted cash totaled $505 million at September 30, 2019, including $183 million of unrestricted cash and $322 million of restricted cash.
- Vacation ownership notes receivable, net, totaled $2.168 billion, up from $2.039 billion at December 31, 2018. Inventory was $910 million, compared with $863 million at year-end.
- Total gross debt was approximately $4.0 billion, including $1.7 billion of non-recourse securitized debt. Reported net debt balances were $1.686 billion of securitized debt and $2.294 billion of other debt.
- The company generated $180 million of operating cash flow, used $290 million in financing activities, repurchased $342 million of common stock, and paid $61 million of dividends during the first nine months.
Material Changes Versus the Prior Comparable Period
- The ILG acquisition substantially expanded revenue, EBITDA, debt, goodwill and intangible assets. Legacy-ILG generated $458 million of Q3 revenue and $1.371 billion of nine-month revenue in 2019.
- Total contract sales were $401 million in Q3, up from $283 million, and $1.164 billion for nine months, up from $719 million. Excluding Legacy-ILG, total contract sales increased approximately 1% in Q3 and 5% for nine months.
- Exchange & Third-Party Management revenue increased to $112 million in Q3 and $351 million for nine months, compared with $40 million for the comparable 2018 periods, primarily because the acquired businesses were included for a full period.
- Interest expense increased to $31 million in Q3 and $100 million for nine months, versus $14 million and $23 million, respectively, primarily because of acquisition-related debt.
- General and administrative expense increased to $68 million in Q3 and $225 million for nine months, compared with $53 million and $114 million.
- Litigation charges declined to $2 million in Q3 and $4 million for nine months, compared with $17 million and $33 million.
- The company recorded $73 million of Q3 impairment charges and $99 million for nine months, compared with none in the prior-year periods.
- Shareholders’ equity declined to $3.122 billion from $3.466 billion at December 31, 2018, primarily reflecting $342 million of share repurchases, dividends and accumulated other comprehensive losses.
Guidance, Outlook, Commentary, Risks and Unusual Items
- Management stated that available cash, operating cash flow, securitization capacity, the Warehouse Credit Facility and the Revolving Corporate Credit Facility are expected to support liquidity needs, debt service, growth plans and shareholder returns.
- Management expected 2019 inventory spending to remain below inventory costs, including payments under existing inventory purchase commitments.
- The company completed a strategic review of land and hotel holdings and identified assets expected to generate $160 million to $220 million of proceeds over several years. The review resulted in $72 million of Q3 non-cash impairment charges, including $61 million related to land at existing resorts and $9 million related to land held for development.
- Hurricane Dorian reduced estimated Q3 contract sales by approximately $7 million. Physical damage to company-operated resorts and sales centers was described as minimal. Certain hurricane-related insurance claims remained unresolved, including claims related to Legacy-ILG properties.
- On October 1, 2019, after quarter-end, the company issued $350 million of 4.750% senior notes due 2028. Proceeds were intended to redeem the IAC Notes and Exchange Notes, repay part of the revolving facility, pay transaction costs and fund general corporate purposes.
- The company adopted the new lease standard on January 1, 2019, recognizing a $165 million lease obligation, a $155 million right-of-use asset and an $8 million reduction to opening retained earnings.
- Pending litigation includes matters involving fractional ownership interests, resort management agreements and vacation ownership programs. The company had not accrued for the described matters and could not estimate potential losses; it stated that unfavorable rulings could materially affect results.
- Other exposures include $408 million of purchase obligations, a $182 million New York property purchase commitment, a $101 million San Francisco property commitment, a $28 million Bali inventory commitment, lease obligations and rental guarantees with maximum exposure of $33 million.
- The company’s estimated default rate for Legacy-ILG vacation ownership notes receivable increased to 12.47% from 12.37% at year-end; Legacy-MVW historical default rates were 3.2% versus 2.8% in the prior-year period.
Important Facts for Investors to Verify
- Reconcile reported growth with the timing and full-period contribution of the ILG acquisition, particularly for revenue, Adjusted EBITDA and contract sales.
- Review the sustainability of earnings after excluding $202 million of nine-month “certain items,” including impairment charges and ILG acquisition-related costs.
- Assess leverage, interest-rate exposure and refinancing needs, including the post-quarter-end 2028 notes issuance and redemption transactions.
- Evaluate cash conversion, securitization capacity, the growth of vacation ownership notes receivable and changes in default and reserve assumptions.
- Monitor identified asset dispositions, impairment assumptions and expected proceeds of $160 million to $220 million.
- Review pending litigation, hurricane-related insurance recoveries, purchase commitments and rental guarantees for potential cash or earnings impacts.
- Confirm future dividend and share-repurchase capacity against debt covenants, liquidity requirements and the company’s stated capital priorities.