MARRIOTT VACATIONS WORLDWIDE Corp annual report, FY2019

Marriott Vacations Worldwide Corporation — FY2019 Form 10-K Summary

Business context and reporting period

The filing covers the fiscal year ended December 31, 2019. Marriott Vacations Worldwide (“MVW”) operates vacation ownership, exchange, rental, resort management and related businesses through two reportable segments: Vacation Ownership and Exchange & Third-Party Management.

The 2019 results include a full year of the ILG businesses acquired on September 1, 2018. The 2018 comparable period includes Legacy-ILG results only from the acquisition date through year-end, limiting direct year-over-year comparability.

Vacation Ownership: more than 100 resorts, over 660,000 owners and members, and 89% of 2019 segment revenue.
Exchange & Third-Party Management: nearly 3,200 affiliated resorts, nearly two million members and management services for over 170 resorts and lodging properties.

Financial performance and key metrics

Metric	2019	2018	Change
Total revenue	$4,355 million	$2,968 million	+$1,387 million
Income before taxes	$225 million	$103 million	+$122 million
Net income attributable to common shareholders	$138 million	$55 million	+$83 million
Diluted EPS	$3.09	$1.61	+$1.48
Adjusted EBITDA	$758 million	$419 million	+$339 million
Operating cash flow	$382 million	$97 million	+$285 million

Net income attributable to common shareholders represented approximately 3.2% of revenue, compared with approximately 1.9% in 2018. Adjusted EBITDA was approximately 17.4% of revenue, but it is a non-GAAP measure and includes $227 million of excluded “certain items.”

Vacation Ownership revenue was $3,869 million; segment Adjusted EBITDA was $800 million.
Exchange & Third-Party Management revenue was $454 million; segment Adjusted EBITDA was $230 million.
Total contract sales were $1,569 million, including $1,524 million of consolidated contract sales. Excluding the ILG acquisition, contract sales increased 6%.
Vacation Ownership development margin was $316 million, with a 22.7% margin versus 21.9% in 2018.
Rental revenue was $628 million and rental margin was $144 million, or 25.5%, versus 21.5% in 2018.
Financing revenue was $275 million and financing propensity increased to 63% from 62%.
Historical default rates increased to 4.5% from 3.8%; the filing attributes the higher sales reserve partly to increased delinquency and default activity.

Cash flow, liquidity and capital structure

Cash and cash equivalents were $287 million at December 31, 2019; restricted cash was $414 million.
Gross debt was approximately $4.2 billion, including $1.9 billion of securitized debt, $1.1 billion of senior unsecured notes, approximately $0.9 billion under the Term Loan and $230 million of Convertible Notes.
Corporate indebtedness was approximately $2.267 billion, excluding securitized debt. The Revolving Corporate Credit Facility had $567 million of remaining availability, net of $3 million of letters of credit.
Inventory was $859 million, including $846 million of real estate inventory. Vacation ownership notes receivable, net, were $2.233 billion.
2019 financing cash outflows were $331 million, including $465 million of share repurchases and $81 million of dividends.
The Company completed three vacation ownership receivable securitizations in 2019 and issued $350 million of 4.750% Senior Notes due 2028. It also redeemed the outstanding IAC Notes and Exchange Notes.

Material changes versus the prior comparable period

The full-year inclusion of Legacy-ILG materially increased reported revenue, earnings, assets, debt and segment scale. Excluding the acquisition, Legacy-MVW contract sales increased 6%, and development margin increased 13%.
Exchange & Third-Party Management contributed a full-year $454 million of revenue and $230 million of Adjusted EBITDA, compared with only four months of contribution in 2018.
Interest expense increased to $132 million from $54 million, primarily due to debt raised to finance the ILG acquisition.
General and administrative expense increased to $300 million from $198 million, while depreciation and amortization increased to $141 million from $62 million, reflecting the expanded company and acquired intangible assets.
Litigation charges declined to $7 million from $46 million.
The Company recorded $99 million of impairment charges in 2019, primarily related to land and development assets identified for disposition after a strategic review.
Operating cash flow improved substantially, although 2019 included higher vacation ownership receivable originations of $817 million and inventory spending of $228 million.
Fourth-quarter 2019 revenue was $1,145 million, net income attributable to common shareholders was $74 million and diluted EPS was $1.71. Third-quarter net income was a $9 million loss, reflecting seasonal and unusual items.

Guidance, outlook, commentary, risks and unusual items

The filing does not provide a clear numerical earnings or revenue forecast. Management emphasizes profitable growth in vacation ownership, recurring fee-based revenue, capital-efficient inventory structures, digital marketing, owner satisfaction, integration of ILG and selective acquisitions or management affiliations.

Management expects liquidity needs to be met through cash, operating cash flow, the $600 million revolving facility, the $350 million Warehouse Credit Facility and continued access to the asset-backed securitization market.
The Warehouse Credit Facility terminates on December 20, 2021; renewal or refinancing is important because outstanding amounts could become due after termination if the facility is not renewed.
Major risks include economic contraction, reduced discretionary travel, purchaser defaults, limited ABS market access, higher interest rates, inventory delivery or development delays, integration execution, regulatory changes, litigation and competition.
Travel disruptions, natural disasters and health concerns could reduce resort visits, sales tours, rentals and exchange activity. The filing specifically identifies the potential effect of coronavirus-related travel concerns, although it does not quantify an impact.
Other material exposures include Spanish timeshare litigation, pending fractional-ownership and resort-management lawsuits, data-security incidents, cyber risk, LIBOR transition and potential liabilities under tax indemnification agreements associated with the Vistana spin-off.
2019 unusual items included $99 million of impairment charges, $118 million of ILG acquisition-related costs, $17 million of unfavorable purchase-price adjustments, $7 million of litigation charges, $28 million of gains and other income, and $9 million of insurance proceeds related to prior hurricanes.
The Company reported effective internal control over financial reporting, and Ernst & Young issued unqualified opinions on the financial statements and internal controls.

Most important facts for an investor to verify

Whether reported growth remains strong after separating the full-year ILG contribution from Legacy-MVW performance.
Trends in vacation ownership loan defaults, delinquency, reserve requirements and the $2.233 billion notes-receivable portfolio.
Debt maturities, leverage covenant compliance, interest-rate exposure and the availability or renewal terms of the Warehouse Credit Facility.
Progress on ILG integration, expected cost synergies and the durability of Exchange & Third-Party Management membership and affiliation revenues.
Whether impairment charges, litigation matters, Spanish claims and tax indemnification exposures require additional reserves or cash payments.
The effect of travel disruptions, economic weakness, regulatory changes and cybersecurity incidents on sales tours, resort occupancy, rental revenue and exchange activity.
Future capital allocation among debt reduction, inventory investment, dividends and share repurchases.