Marriott Vacations Worldwide Corporation — 2016 Q2 Form 10-Q
Business context and reporting period
Unaudited quarterly report for the twelve and twenty-four weeks ended June 17, 2016, compared with June 19, 2015. The company develops, markets, sells and manages vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands, with reportable segments in North America, Europe and Asia Pacific. The portfolio included more than 60 properties in the United States and eight other countries and territories.
Key financial metrics
| Metric | 12 weeks ended June 17, 2016 | Prior comparable period | 24 weeks ended June 17, 2016 | Prior comparable period |
|---|---|---|---|---|
| Total revenue | $429.9 million | $422.8 million | $855.0 million | $877.7 million |
| Net income | $36.3 million | $34.0 million | $60.7 million | $68.1 million |
| Diluted EPS | $1.26 | $1.05 | $2.08 | $2.08 |
| EBITDA | $68.3 million | $64.9 million | $115.6 million | $129.3 million |
| Adjusted EBITDA | $64.2 million | $61.7 million | $115.8 million | $121.8 million |
| Operating cash flow | Not separately provided for the quarter | Not separately provided | $21.1 million | $78.7 million |
- Second-quarter revenue increased 2% and net income increased 7%; year-to-date revenue declined 3% and net income declined 11%.
- Approximate net margin was 8.4% for the quarter and 7.1% year to date, compared with 8.1% and 7.8%, respectively, in the prior comparable periods.
- Development margin was $33.8 million, or 23.1%, in the quarter, compared with $33.1 million, or 21.3%. Year-to-date development margin was $58.1 million, or 20.4%, compared with $72.1 million, or 21.2%.
- Resort management and other services margin increased to $31.6 million, or 39.1%, in the quarter and $55.5 million, or 36.8%, year to date.
- Rental margin declined to $9.0 million, or 12.0%, in the quarter, and $24.7 million, or 15.9%, year to date.
- Cash and cash equivalents were $97.4 million at June 17, 2016, compared with $177.1 million at January 1, 2016. Restricted cash was $68.3 million.
- Gross debt was $746.3 million, including $602.8 million of securitization debt, $89.0 million under the Warehouse Credit Facility and $45.0 million under the Revolving Corporate Credit Facility. Net debt reported on the balance sheet was $733.8 million.
- Total assets were $2.25 billion and total equity was $846.7 million at June 17, 2016. Real estate inventory was $697.9 million.
- The company declared dividends of $0.30 per share in each of the first two quarters and repurchased 2.8 million shares for $163.4 million during the first half.
Material changes versus the prior comparable period
- Vacation ownership product revenue decreased 6% in the quarter and 16% year to date, despite second-quarter contract sales being essentially flat at $166.0 million. Year-to-date contract sales declined 12% to $319.5 million, primarily because the prior year included $28.4 million of Macau residential sales.
- North America contract sales declined 3% in the quarter and 7% year to date, reflecting fewer existing-owner sales, lower off-site sales and weaker fractional sales. Europe contract sales increased 35% in the quarter and 14% year to date. Asia Pacific vacation ownership contract sales increased 31% in the quarter and 19% year to date, but total Asia Pacific contract sales fell 56% year to date because no comparable Macau residential sales occurred in 2016.
- Resort management and other services revenue rose 9% in both the quarter and first half, supported by higher management fees, club dues and ancillary revenue.
- Financing revenue increased 1% in both periods. Financing propensity rose to 54.4% in the quarter and 56.2% year to date, versus 41.9% and 42.7%, respectively. Management expects higher originations to support future interest income, but the higher financing activity also increased sales reserves.
- Rental revenue increased 3% in the quarter and 4% year to date, but rental margin declined because of lower transient rates, higher expenses and losses from the Australian operating property.
- Operating cash flow fell by $57.6 million year to date, primarily due to higher financing propensity and related note originations, lower collections, working-capital timing and distributions to property owners’ associations.
- Gains and other income included a $10.5 million gain on San Francisco residential units, a $1.7 million reversal of a Kauai disposition accrual and a $1.5 million loss on the sale of the non-converted portion of the Australian property.
Guidance, outlook, risks and unusual items
- Management stated that available liquidity, operating cash flow, securitization capacity and credit facilities are expected to meet short- and long-term liquidity needs, debt service and growth plans. No formal earnings guidance was provided.
- Management is targeting higher financing propensity for fiscal 2016 and expects interest income to grow as new originations outpace portfolio run-off.
- The company expects to redeem the $40.0 million mandatorily redeemable preferred stock at par in October 2016, although redemption is not required until October 2021.
- Subsequent to quarter-end, the company securitized $41.8 million of notes receivable for $35.1 million of net proceeds and repaid $45.0 million of its Revolving Corporate Credit Facility.
- Significant future commitments include $158.5 million for a New York property, $137.1 million for Marco Island vacation ownership units, $91.1 million for Big Island of Hawaii units, and contingent Bali commitments with specified milestone payments.
- Litigation includes claims involving Kapalua Bay, Ritz-Carlton San Francisco, Ritz-Carlton Aspen Highlands and a putative class action challenging the MVCD trust structure. The company disputes the allegations and cannot estimate potential liability for the unresolved matters.
- Credit risk remains material: vacation ownership notes receivable totaled $903.7 million net of reserves, with a $106.8 million allowance for loan losses and an estimated average remaining default rate of 6.97%.
- The filing identifies seasonal operating variability, foreign exchange exposure, consumer defaults, securitization performance triggers, inventory carrying costs, regulatory and litigation risks, and dependence on continued access to securitization and credit markets.
Important facts for investors to verify
- Whether higher financing propensity improves recurring financing income without causing materially higher defaults, sales reserves or cash requirements.
- The sustainability of North America sales trends and whether Asia Pacific growth offsets the absence of prior-year Macau residential sales.
- The effect of the Australian property disposition on future rental and ancillary revenue and margins.
- Liquidity after share repurchases, property and inventory commitments, preferred-stock redemption and debt repayments.
- Actual cash generation relative to reported EBITDA, particularly given note originations, inventory investment and working-capital movements.
- Progress and final settlement of outstanding litigation and the company’s exposure under guarantees, variable-interest entities and purchase commitments.