Business Context and Reporting Period
Marriott Vacations Worldwide Corporation is a vacation ownership company operating more than 60 properties across North America, Asia Pacific and Europe under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It generates revenue primarily from vacation ownership sales, resort management, financing and rentals.
The filing covers the unaudited 91-day first quarter ended March 31, 2017. The comparable 2016 first quarter covered 84 days ended March 25, 2016, following the Company’s transition to a calendar year-end and end-of-month quarterly reporting cycle. Management estimated that 2016 first-quarter contract sales would have been approximately $14 million higher on a comparable 91-day basis.
Key Financial Metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $487.5 million | $419.2 million | 16.3% increase |
| Income before taxes | $52.4 million | $40.2 million | 30.4% increase |
| Net income | $33.7 million | $24.4 million | 38.1% increase |
| Diluted EPS | $1.21 | $0.82 | 47.6% increase |
| Adjusted EBITDA | $62.1 million | $51.6 million | 20.3% increase |
| Operating cash flow | $45.7 million | $9.9 million | Increase of $35.8 million |
| Development margin | $28.9 million | $24.3 million | 18.6% increase |
| Development margin percentage | 16.8% | 17.6% | 0.8-point decrease |
| Resort management margin percentage | 43.7% | 37.5% | 6.2-point increase |
| Rental margin percentage | 17.4% | 19.5% | 2.1-point decrease |
| Cash, cash equivalents and restricted cash | $165.9 million | $161.9 million | Comparable period-end balance |
Net income margin was approximately 6.9%, compared with 5.8% in the prior-year quarter. Total revenue included $123.6 million of cost reimbursements, which are recorded gross with an equal expense and have no margin contribution.
Contract sales increased 26% to $193.8 million. North America contributed $177.4 million, Asia Pacific $11.9 million and Europe $4.5 million. North America represented approximately 92% of total contract sales.
Balance Sheet, Debt and Liquidity
- Total assets were $2.35 billion at March 31, 2017, compared with $2.39 billion at December 30, 2016.
- Vacation ownership notes receivable, net, increased to $997.4 million from $972.3 million. The allowance for loan losses was $106.2 million, and the estimated average remaining default rate was 7.14%.
- Inventory was $692.8 million, including $324.4 million of finished goods, $28.7 million of work-in-progress and $335.2 million of land and infrastructure.
- Debt, net, was $683.8 million, down from $737.2 million. Approximately $675.7 million represented non-recourse debt associated with vacation ownership receivable securitizations.
- The Company had no cash borrowings under its $200 million revolving corporate credit facility or its $250 million warehouse credit facility at quarter-end. It had $1.1 million of letters of credit outstanding and was in compliance with applicable covenants.
- Financing activities used $81.2 million of cash, primarily due to $54.3 million of securitization debt repayments, $19.0 million of dividend payments and $6.6 million of withholding taxes on restricted stock vesting.
- The Company declared a quarterly dividend of $0.35 per share. No shares were repurchased during the quarter, and approximately 1.2 million shares remained available under the repurchase authorization.
Material Changes Versus the Prior Comparable Period
- Vacation ownership product revenue rose 24% to $172.2 million, while contract sales increased 26%. Revenue was reduced by a $4.0 million unfavorable reportability adjustment and a $12.2 million sales reserve.
- Resort management and other services revenue increased 17% to $74.3 million, with margin rising 36% to $32.5 million. Higher management fees, refurbishment revenue, settlement and lien fees, club dues and other services drove the improvement.
- Financing revenue increased 10% to $32.1 million, and financing margin increased 9% to $21.0 million. Financing propensity rose to 66.1% from 58.5%.
- Rental revenue increased 6% to $85.3 million, but rental margin declined 5% to $14.8 million. Transient keys rented increased 12%, while occupancy declined to 87.6% from 88.9% and the average transient rate was slightly lower.
- General and administrative expense increased $2.2 million, partly due to the additional seven reporting days and higher personnel costs. Royalty expense increased $2.7 million.
- Interest expense declined $1.2 million, primarily because the prior-year period included expense related to mandatorily redeemable preferred stock that was redeemed in 2016.
- Operating cash flow improved substantially, reflecting higher net income, lower real estate inventory spending, higher collections and higher sales closings. This was partly offset by increased notes receivable originations associated with higher sales and financing propensity.
- North America segment revenue increased to $449.8 million from $380.2 million, and segment financial results increased to $105.7 million from $89.6 million. Asia Pacific results increased modestly to $1.1 million, while Europe increased to $0.7 million.
Guidance, Outlook, Risks and Unusual Items
- Management expected full-year 2017 financing propensity to approximate 60% and expected interest income to continue increasing as new loan originations outpaced principal collections on existing notes.
- Management expected real estate inventory spending to increase during the remainder of 2017 as the Company met commitments to purchase vacation ownership units in North America and Asia Pacific.
- Subsequent to quarter-end, the Company borrowed $30.0 million under its revolving credit facility and securitized $59.1 million of vacation ownership notes receivable, generating $50.0 million of net proceeds. It also paid $33.3 million for Marco Island vacation ownership units and related assets.
- Material purchase commitments included $158.5 million for a New York operating property, $137.1 million for Marco Island inventory, $91.1 million for Big Island of Hawaii inventory and additional commitments for Bali units.
- The Company disclosed several unresolved lawsuits involving Kapalua Bay, Ritz-Carlton fractional interests and the MVCD points-based program. Management disputes the allegations, but stated that potential liability cannot currently be estimated for these matters.
- Credit performance remains important: vacation ownership notes receivable past due totaled $69.3 million before reserves, and a 0.5 percentage-point increase in the estimated default rate would have increased the allowance by approximately $5.2 million.
- The Company adopted accounting guidance that produced a $2.4 million income-tax benefit from excess tax benefits related to share-based compensation and a $0.4 million reduction to opening retained earnings for forfeiture accounting.
- Results include potentially significant timing effects from the seven-day difference in reporting periods, revenue reportability, inventory cost true-ups, sales reserves, seasonal rental activity and the disposition or conversion of properties in Australia and San Diego.
Investor Verification Priorities
- Verify comparable-period performance after adjusting for the seven additional reporting days in Q1 2017.
- Assess sustainability of the 26% contract-sales growth and whether new sales distributions can mature without further pressure on development margins.
- Monitor loan-loss reserves, delinquency trends, default rates and the ability to securitize eligible vacation ownership notes receivable.
- Reconcile reported liquidity after the quarter-end $30.0 million revolver borrowing, $50.0 million securitization proceeds and $33.3 million Marco Island payment.
- Evaluate the funding requirements and timing of the disclosed property and inventory purchase commitments.
- Follow the pending litigation, particularly claims involving the MVCD program and Ritz-Carlton fractional interests, because potential exposure is not estimable.
- Distinguish GAAP net income and cash flow from non-GAAP Adjusted EBITDA and review the effects of revenue deferrals, sales reserves and product cost true-ups.