MARRIOTT VACATIONS WORLDWIDE Corp quarterly report, Q2 FY2020

Marriott Vacations Worldwide Corporation — 2020 Q2 Form 10-Q

Business context and reporting period

Unaudited quarterly report for the three and six months ended June 30, 2020, compared with the corresponding 2019 periods. MVW operates Vacation Ownership and Exchange & Third-Party Management segments, including vacation ownership sales, resort management, exchange services, rentals and consumer financing. Results were materially affected by the COVID-19 pandemic, including resort and sales-center closures, travel restrictions and reduced occupancy.

Key financial metrics

Metric	Q2 2020	Q2 2019	Six months 2020	Six months 2019
Total revenue	$480 million	$1,043 million	$1,490 million	$2,077 million
Net income attributable to common shareholders	$(70) million	$49 million	$(176) million	$73 million
Basic EPS	$(1.68)	$1.11	$(4.25)	$1.62
Adjusted EBITDA	$(10) million	$195 million	$128 million	$361 million
Operating cash flow	Not separately provided for the quarter	Not separately provided for the quarter	$(73) million	$56 million
Cash, cash equivalents and restricted cash	At June 30, 2020: $907 million	At December 31, 2019: $701 million

Q2 revenue declined 54%, while first-half revenue declined 28%. Q2 Adjusted EBITDA margin was approximately negative 2.1%, compared with approximately 18.7% in Q2 2019. First-half Adjusted EBITDA margin was approximately 8.6%, compared with approximately 17.4% in the prior-year period.

Vacation Ownership revenue was $405 million in Q2, down 56%, and $1.313 billion for the first half, down 28%. Vacation Ownership segment Adjusted EBITDA was $(19) million in Q2 and $128 million for the first half.
Exchange & Third-Party Management revenue was $58 million in Q2, down 50%, and $165 million for the first half, down 31%. Segment Adjusted EBITDA was $19 million in Q2 and $60 million for the first half.
Vacation ownership contract sales were $30 million in Q2, down 93%, and $345 million for the first half, down 55%. Only eight sales centers were open during Q2.
Rental revenue was $18 million in Q2, down 88%, and $153 million for the first half, down 48%. Q2 resort occupancy was 24.5%, compared with 88.6% in the prior-year quarter.
Financing revenue increased to $70 million in Q2 and $142 million for the first half, but financing margin declined to $46 million and $80 million, respectively, due largely to higher credit-loss reserves and financing costs.
Six-month general and administrative expense declined to $89 million from $131 million, reflecting furloughs, reduced work weeks, lower compensation and deferred spending.

Material changes versus the prior comparable period

COVID-19 drove sharp reductions in sales, rentals, exchange activity, resort occupancy and contract sales. Sales centers were closed beginning in March, and rental guests were restricted from staying at branded North America resorts beginning March 25.
The Company recorded a $96 million impairment charge in the first half, including $73 million for Exchange & Third-Party Management goodwill, $18 million for trademarks and $5 million related to Asia Pacific inventory. No additional goodwill impairment was recorded in Q2.
Vacation ownership notes receivable reserves increased by $81 million in the first half. The Company increased projected default rates based on performance during the 2008/2009 financial crisis; $52 million of the reserve increase related to COVID-19 assumptions.
Legacy-MVW estimated average remaining default rates increased to 8.22% from 7.04% at December 31, 2019. Legacy-ILG estimated future default rates increased to 17.07% from 12.65%.
Operating cash flow shifted to an outflow of $73 million from an inflow of $56 million. Financing activities provided $320 million, primarily reflecting debt issuance and borrowing activity.
Total assets were $9.117 billion at June 30, 2020, compared with $9.214 billion at year-end 2019. Debt, net increased to $2.680 billion from $2.216 billion, while securitized debt was $1.887 billion.

Liquidity, debt and capital actions

Cash and cash equivalents were $566 million, and the Company reported $597 million of availability under its $600 million Revolving Corporate Credit Facility at June 30, 2020.
MVW issued $500 million of 6.125% senior secured notes due 2025 and used approximately $493 million of net proceeds to repay amounts outstanding under the revolving facility.
Gross debt was approximately $4.6 billion, including $1.9 billion of non-recourse securitized debt, $1.1 billion of senior unsecured notes, $0.9 billion under the Corporate Credit Facility, $500 million of senior secured notes, $230 million of convertible notes and $10 million of finance leases.
A credit agreement waiver suspended the leverage covenant for up to four quarters beginning with Q2 2020. MVW must maintain at least $300 million of monthly minimum liquidity until the later of March 31, 2021 or the end of the suspension period. The waiver restricts dividends, share repurchases and other restricted payments.
The Warehouse Credit Facility capacity was increased by $181 million to approximately $531 million; $308 million was outstanding at June 30, 2020.
Dividends and share repurchases were suspended. The Company paid $45 million of dividends and repurchased $82 million of stock during the first half before the suspension.

Guidance, outlook, risks and unusual items

Management did not provide formal quantitative earnings guidance in the filing. Management expected revenue in the third quarter to improve from Q2 as sales centers and resorts reopened, but cautioned that renewed virus resurgences could require further closures. The Company stated that it believed liquidity was adequate to fund operations and debt service through at least 2021, even if sales centers and resort rentals were again limited.

As of the end of July, approximately 40% of associates remained furloughed and 16% of remaining associates had reduced work weeks or pay. Cost-reduction measures were expected to save up to $300 million of cash in 2020.
Planned inventory spending and property-and-equipment expenditures were expected to be significantly reduced for the remainder of 2020.
COVID-19 increased payment delinquencies and could result in additional defaults, higher reserves, foreclosures and reduced access to asset-backed financing.
Securitized loan pools remained in compliance with their performance triggers at June 30, 2020, but deterioration could redirect excess cash flow to accelerated debt repayment.
Material commitments included $97 million for remaining New York property purchases, $88 million for the San Francisco property, potential $98 million for a Waikiki property, and $65 million of information-technology commitments.
Pending legal matters were not accrued because the Company could not estimate potential losses; management stated that unfavorable rulings could nevertheless materially affect results.
Subsequent to quarter-end, MVW completed a $375 million securitization of vacation ownership loan-backed notes, using $300 million to repay Warehouse Credit Facility borrowings and retaining approximately $53 million for general corporate purposes.

Most important facts for investors to verify

Whether resort occupancy, sales-center openings and vacation ownership contract sales recover without renewed COVID-19-related closures.
Actual default, delinquency and collection trends in Legacy-MVW and Legacy-ILG vacation ownership notes receivable, compared with reserve assumptions.
Compliance with the $300 million minimum-liquidity requirement and the timing and terms of any leverage-covenant reset after the waiver period.
Availability and pricing of future securitizations and Warehouse Credit Facility refinancing, including the effect of loan-pool performance triggers.
Whether additional goodwill, intangible-asset or inventory impairments are required if travel demand and operating forecasts weaken.
The Company’s ability to meet debt maturities, property-purchase commitments and other contractual obligations while dividends and repurchases remain suspended.