MARRIOTT VACATIONS WORLDWIDE Corp quarterly report, Q1 FY2012

Marriott Vacations Worldwide Corporation — Q1 2012 Form 10-Q Summary

Business context and reporting period

The filing covers the unaudited twelve weeks ended March 23, 2012, compared with the twelve weeks ended March 25, 2011. Marriott Vacations Worldwide develops, markets, sells, finances, manages, and rents vacation ownership products under the Marriott Vacation Club, Grand Residences by Marriott, and Ritz-Carlton brands. The company operates 64 properties across North America, Luxury, Europe, and Asia Pacific.

The company became independent from Marriott International on November 21, 2011. Historical pre-spin-off results were prepared on a stand-alone basis using allocations from Marriott International and may not reflect the costs of operating as an independent public company.

Financial performance and key metrics

Metric	Q1 2012	Q1 2011	Change
Total revenue	$372 million	$371 million	Up $1 million
Income before taxes	$17 million	$33 million	Down $16 million
Net income	$9 million	$19 million	Down $10 million
Basic EPS	$0.25	$0.58	Down $0.33
Diluted EPS	$0.24	$0.58	Down $0.34
Adjusted EBITDA	$27 million	$41 million	Down $14 million
Cash flow from operations	$25 million	$49 million	Down $24 million

Net margin was approximately 2.4% in Q1 2012 versus 5.1% in Q1 2011. Pretax margin was approximately 4.6% versus 8.9%. EBITDA was $37 million versus $53 million.

Vacation ownership product sales revenue declined to $134 million from $143 million, despite total contract sales increasing 6% to $154 million. Revenue was affected by unfavorable timing of statutory rescission periods and higher notes receivable reserves.
Resort management and other services revenue increased to $54 million from $51 million.
Financing revenue declined to $36 million from $41 million as the notes receivable portfolio continued to contract.
Rental revenue increased to $56 million from $49 million, including $6 million of plus-points revenue and higher transient keys rented.
Cost reimbursements increased to $86 million from $81 million, with corresponding expenses recorded on a gross basis and no added margin.
North America contract sales increased 18% to $130 million, and North America volume per guest increased 18% to $2,942 from $2,493.
Resort occupancy improved to 88% from 87%; transient keys rented increased 4%, while transient rates declined 2%, partly because of below-average ski conditions.

Balance sheet, debt, liquidity, and cash flow

Cash and cash equivalents were $77 million at March 23, 2012, down from $110 million at December 30, 2011. Restricted cash was $59 million.
Total assets were $2.721 billion, including $1.110 billion of net vacation ownership notes receivable and $932 million of inventory, of which $926 million was real estate inventory.
Total debt was $774 million, down from $850 million at year-end 2011. Debt consisted primarily of $662 million of non-recourse securitization debt, $109 million under the warehouse credit facility, and $3 million of other debt. No amounts were drawn under the $200 million revolving corporate credit facility, although $5 million of letters of credit were outstanding.
Approximately $771 million of debt was non-recourse and expected to be paid from collections on securitized notes receivable. Scheduled debt principal payments total $774 million, including $97 million in 2012 and $206 million in 2013.
Operating cash flow was $25 million. Investing activities provided $19 million, primarily from a $22 million decrease in restricted cash, while financing activities used $77 million, mainly for $76 million of securitization-related debt repayments.
Management stated that cash on hand, operating cash flow, securitizations, and available credit facilities are expected to support liquidity needs, debt service, capital expenditures, and growth plans.

Material changes versus the prior comparable period

Revenue was broadly flat, but profitability declined materially because of the newly applicable $13 million royalty fee, lower financing revenue, unfavorable revenue reportability, higher general and administrative costs, and higher interest expense.
The royalty fee began after the spin-off under license agreements with Marriott International and The Ritz-Carlton Hotel Company.
General and administrative expense increased to $21 million from $19 million, including $2 million of organizational and separation-related costs and higher public-company costs.
Interest expense increased to $13 million from $12 million, partly because of Marriott Rewards liability expense and dividends on the mandatorily redeemable preferred stock of a subsidiary.
Cash flow from operations declined partly because Q1 2012 included a $20 million final settlement payment to Marriott International and a $20 million payment to property owners’ associations for previously collected maintenance fees.
Debt declined by $76 million from year-end 2011, while cash declined by $33 million.
The company restated prior-year cash flow classifications for the twelve weeks ended March 25, 2011. Management determined the misstatements were immaterial to the individual prior-period financial statements.

Guidance, outlook, commentary, risks, and unusual items

No quantitative earnings or revenue guidance was provided in the filing.
Management expects real estate inventory spending to remain below cost of sales in the near term because of substantial completed inventory and the company’s points-based programs. It expects this trend to continue in the near term, subject to changes in demand and market conditions.
The company has no current plans for new development in the Luxury or Europe segments and expects to sell existing inventory, evaluate bulk sales, and dispose of undeveloped land where appropriate.
Management identified seasonality and timing of sales closings, rescission periods, owner repayments, inventory development, and annual maintenance-fee payments as important sources of cash-flow variability.
Vacation ownership notes receivable totaled $1.110 billion net of reserves. The estimated average remaining default rate was 7.75%; a 0.5 percentage-point increase in the estimated default rate would increase the allowance for credit losses by approximately $6 million.
At quarter-end, $140 million of gross notes receivable was past due, including $86 million more than 150 days past due. Non-accrual notes receivable totaled $104 million.
Two securitized notes receivable pools reached performance triggers during the quarter, while one pool that had previously triggered returned to compliance. One pool remained outside performance thresholds at quarter-end, causing $1 million of excess spread to be redirected to accelerated debt repayment.
Guarantees to third-party lenders had a maximum potential funding amount of $25 million, with a $1 million recorded liability. The company also had a $13 million accrued exposure related to a nonconsolidated Hawaii joint venture whose lenders had issued a notice of default.
Remaining commitments included an $18 million Asia Pacific purchase commitment, $2 million of other purchase commitments, $3 million of information technology commitments, $6 million of property-owner association subsidies, and approximately $133 million of estimated future development spending for projects under construction.
Below-average ski conditions reduced transient rates. Legal proceedings remain subject to inherent uncertainty, although management did not expect current matters to materially harm financial condition, cash flows, or operating trends.

Important facts for investors to verify

Whether improved contract sales and North America VPG translate into recognized revenue and sustained profitability after rescission-period timing and notes receivable reserves.
The ongoing effect of royalty fees, stand-alone public-company costs, Marriott-related agreements, and the 12% initial dividend rate on the subsidiary’s mandatorily redeemable preferred stock.
Trends in financing revenue, notes receivable balances, delinquencies, default rates, loan-loss reserves, and securitization performance triggers.
Liquidity after scheduled debt repayments, including $97 million due in 2012 and $206 million in 2013, and the company’s ability to access securitization and credit facilities.
Progress in reducing real estate inventory and completing approximately $133 million of remaining development commitments.
Potential cash exposure from lender guarantees, the Hawaii joint venture, tax-sharing arrangements, and other contingencies.
Comparability of future results with historical periods given the November 2011 spin-off and the use of historical allocations from Marriott International.