Marriott Vacations Worldwide Corporation: 2013 Second-Quarter Form 10-Q
Business context and reporting period
Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership products under the Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It operates 63 properties across North America, Europe and Asia Pacific. The filing covers the twelve weeks and twenty-four weeks ended June 14, 2013; comparable periods ended June 15, 2012. The interim financial statements are unaudited.
Financial performance and position
| Metric | 12 weeks ended June 14, 2013 | 12 weeks ended June 15, 2012 | 24 weeks ended June 14, 2013 | 24 weeks ended June 15, 2012 |
|---|---|---|---|---|
| Total revenue | $421 million | $383 million | $811 million | $757 million |
| Income before taxes | $44 million | $9 million | $74 million | $25 million |
| Net income | $30 million | $5 million | $49 million | $13 million |
| Diluted EPS | $0.85 | $0.15 | $1.35 | $0.37 |
| EBITDA | $60 million | $30 million | $107 million | $66 million |
| Adjusted EBITDA | $54 million | $18 million | $93 million | $44 million |
- Revenue increased 10% for both the quarter and year-to-date period. Net margin was approximately 7.1% versus 1.3% in the comparable quarter and 6.0% versus 1.7% year to date.
- Vacation ownership sales revenue increased to $169 million from $141 million for the quarter and to $310 million from $273 million year to date. Development margin was $38 million, or 23.1%, versus $13 million, or 9.3%, for the quarter; year-to-date development margin was $61 million, or 19.8%, versus $24 million, or 9.0%.
- Rental revenue increased 18% for the quarter and 15% year to date. Rental margin increased to $9 million from $2 million for the quarter and to $16 million from $10 million year to date.
- Financing revenue declined 8% for both periods, primarily because collections on existing notes receivable exceeded new originations. Financing propensity was 38% for the quarter and 39% year to date, compared with 40% in the prior-year year-to-date period.
- Adjusted EBITDA increased 200% for the quarter and 111% year to date. This non-GAAP measure excludes certain items and deducts consumer-financing interest expense; it should not be viewed as a substitute for GAAP results.
- Cash and cash equivalents were $104 million at June 14, 2013, compared with $103 million at December 28, 2012. Restricted cash was $64 million.
- Net cash provided by operating activities was $34 million, down from $106 million. Investing activities used no net cash, while financing activities used $33 million.
- Total debt was $647 million, down from $678 million at year-end 2012. Approximately $643 million was non-recourse debt associated with securitized vacation ownership notes receivable, including $104 million under the Warehouse Credit Facility. The company had no borrowings outstanding under its revolving corporate credit facility, although $4 million of letters of credit were outstanding.
- Vacation ownership notes receivable totaled $988 million net of reserves, down from $1.056 billion. The reserve balance was $142 million, and the estimated average remaining default rate was 7.20%.
Material changes versus the prior comparable period
- Total contract sales declined 7% for the quarter and 3% year to date, despite North America contract sales increasing 3% year to date. Asia Pacific sales declined following the closure of off-site Hong Kong and Japan sales locations, while Europe was affected by inventory sell-through and higher rescission activity.
- North America benefited from higher volume per guest, which increased 8% for the quarter and 10% year to date, but tours declined 6% and 5%, respectively, as owners used the points program for shorter stays and alternative usage options.
- Revenue reportability materially increased reported vacation ownership revenue. The company stated that extended European rescission periods contributed approximately $17 million of higher reportability in the quarter and $18 million year to date.
- Resort management and other services margin improved to 26.1% from 21.3% for the quarter and to 25.5% from 20.1% year to date, primarily due to higher club dues and lower operating costs.
- Interest expense declined to $11 million from $14 million for the quarter and to $22 million from $27 million year to date, reflecting lower securitized debt balances and lower average interest rates.
- General and administrative expense increased to $22 million from $20 million for the quarter and to $43 million from $39 million year to date. Organizational and separation-related charges declined to $2 million from $4 million for the quarter and to $3 million from $6 million year to date.
Guidance, outlook, risks and unusual items
- Management expects to incur an additional $16 million to $21 million through 2014 for separation and organizational activities. It expects these efforts to produce approximately $15 million to $20 million of annualized savings when completed; approximately $2 million of incremental savings were reflected in year-to-date results.
- The company believes cash on hand, operating cash flow, securitizations and available credit facilities will meet liquidity requirements. It expects real estate inventory spending to remain at or below cost of sales in the near term and expects to sell excess Ritz-Carlton inventory and undeveloped land.
- The Warehouse Credit Facility terminates on September 10, 2014. If not renewed, outstanding amounts become payable 13 months after termination, subject to the facility’s contractual cash-flow provisions.
- The company corrected and restated prior-period financial information after identifying noncompliant European sales documentation that extended purchaser rescission periods. Approximately $9 million of the cumulative correction increased pretax income in the quarter and approximately $10 million increased pretax income year to date; approximately $1 million was expected in the third quarter.
- The filing also describes deferred-tax and cost-reimbursement corrections. The company said the corrections did not affect previously reported net cash flow from operations and did not materially affect the balance sheet, but cumulative prior-period effects required restatement.
- The company recorded a $7 million expense in the quarter related to expected remaining costs associated with a Hawaii joint venture. Its total accrual for potential future funding related to that involvement was $16 million.
- Existing litigation includes lawsuits concerning disclosures at Ritz-Carlton Club and Residences, San Francisco, and claims involving Kapalua Bay and other Ritz-Carlton projects. Several matters are at early stages and potential liabilities cannot currently be estimated.
- Existing project development commitments were approximately $121 million, including $16 million already included in balance-sheet liabilities. Financing guarantees had a maximum potential funding amount of $18 million, with no recorded liability for expected future fundings.
- Key operating risks include sales-tour declines, credit losses, rescission and revenue-recognition timing, reliance on securitization markets, inventory carrying costs, litigation, regulatory compliance and separation from Marriott International.
Facts investors should verify
- Reconcile the restated prior-period results and assess how the European rescission-documentation issue affected reported revenue, earnings and future quarters.
- Review the sustainability of earnings growth excluding the approximately $9 million quarterly and $10 million year-to-date reportability benefit.
- Monitor contract sales, tours, volume per guest and financing propensity, particularly in North America and after the Asia Pacific sales-location closures.
- Evaluate cash conversion, including the decline in operating cash flow to $34 million and the timing of notes receivable collections, inventory spending and maintenance-fee payments.
- Assess securitization capacity, Warehouse Credit Facility renewal risk, debt maturities and performance triggers for securitized receivable pools.
- Track vacation ownership defaults, reserves and non-accrual notes, as well as the sensitivity to changes in estimated default rates.
- Review litigation developments, the $16 million Hawaii joint-venture accrual and the company’s $121 million remaining development commitments.