Marriott Vacations Worldwide Corporation — 2013 First-Quarter Form 10-Q
Business Context and Reporting Period
The filing covers the unaudited twelve weeks ended March 22, 2013, compared with the twelve weeks ended March 23, 2012. Marriott Vacations Worldwide develops, markets, sells and manages vacation ownership and related products under the Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It operated 63 properties across North America, Europe and Asia Pacific.
The company reports three segments: North America, Europe and Asia Pacific. Beginning December 29, 2012, the former Luxury segment was combined with North America, and prior-period segment information was recast. The company also restated prior-period cost reimbursements presentation, increasing both 2012 revenue and expense by $4 million without affecting net income.
Financial Performance and Key Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Total revenue | $389 million | $376 million | 3% |
| Income before taxes | $29 million | $17 million | 71% |
| Net income | $18 million | $9 million | 100% |
| Diluted EPS | $0.50 | $0.24 | 108% |
| EBITDA | $46 million | $37 million | 24% |
| Adjusted EBITDA | $38 million | $27 million | 41% |
| Net margin | 4.6% | 2.4% | Improved |
| Operating cash flow | $(11) million | $25 million | Declined $36 million |
- Vacation ownership product revenue increased to $140 million from $134 million. Contract sales increased 2% to $156 million, led by a 7% increase in North America contract sales to $143 million.
- Development margin increased to $22 million from $12 million, and development margin percentage rose to 15.8% from 9.2%. Favorable product-cost true-ups contributed $6 million in the current period versus $2 million in the prior period.
- Resort management and other services revenue increased to $56 million from $54 million, while margin increased to $14 million from $10 million.
- Financing revenue declined to $33 million from $36 million as collections on existing notes receivable exceeded new originations. Financing propensity declined to 40% from 41%.
- Rental revenue increased 13% to $63 million, but rental margin declined to $7 million from $8 million and margin percentage fell to 11.1% from 14.5%, primarily because of lower plus-points revenue and higher costs.
- North America generated $353 million of revenue and $78 million of segment financial results, compared with $337 million and $70 million, respectively. Europe generated $21 million of revenue and approximately breakeven results. Asia Pacific revenue declined to $15 million from $18 million, while segment results improved to $3 million from $1 million.
- North America volume per guest increased 11% to $3,266, and North America development margin percentage increased to 17.3% from 11.7%.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | March 22, 2013 | December 28, 2012 |
|---|---|---|
| Cash and cash equivalents | $119 million | $103 million |
| Restricted cash | $46 million | $68 million |
| Vacation ownership notes receivable, net | $1.016 billion | $1.056 billion |
| Real estate inventory | $866 million | $874 million |
| Total assets | $2.569 billion | $2.604 billion |
| Total debt | $686 million | $678 million |
| Total equity | $1.168 billion | $1.151 billion |
- Approximately $682 million of total debt was non-recourse debt associated with securitized vacation ownership notes receivable. The balance included $572 million of securitization debt and $110 million under the Warehouse Credit Facility.
- The company reported no cash borrowings under its $200 million Revolving Corporate Credit Facility at period-end, although $6 million of letters of credit were outstanding.
- The company stated that cash on hand, operating cash flow, securitizations, the Warehouse Credit Facility and the corporate credit facility should provide adequate liquidity for expected requirements. However, operating activities used $11 million of cash during the quarter.
- Future debt principal payments total $686 million, including $73 million in 2013, $98 million in 2014 and $178 million in 2015. Debt maturities may occur earlier because of prepayments by vacation ownership borrowers.
Material Changes, Outlook and Unusual Items
- Management expects organizational and separation efforts from Marriott International to continue through 2014. Future spending is estimated at $20 million to $25 million, with expected annualized savings of $15 million to $20 million once completed. Approximately $1 million of incremental savings was reflected in first-quarter 2013 results.
- The company expects real estate inventory spending to remain in line with or below cost of sales in the near term. It had $866 million of real estate inventory and estimated approximately $137 million of remaining cash outflows to complete existing projects under development, of which $15 million was already included in liabilities.
- The company closed off-site sales locations in Hong Kong and Japan in late 2012 and is focusing Asia Pacific activity on more efficient on-site sales channels. Europe is focused on selling existing projects and managing existing resorts, with no current plans for new development.
- No formal financial guidance is provided in the filing. Management cautions that interim results may not be indicative of full-year performance because of seasonality and short-term variations.
- First-quarter results benefited from favorable product-cost true-ups, improved revenue reportability, sales execution and lower interest expense. These benefits may not recur at the same level.
- In March 2013, the company reversed $1 million of previously recognized litigation expense following a settlement. It had recorded a $41 million charge in 2012 related to earlier Ritz-Carlton San Francisco litigation.
- Several lawsuits and arbitration matters remain pending, including claims involving disclosures at Ritz-Carlton San Francisco, Ritz-Carlton fractional interests, Ritz-Carlton Club program changes and Kapalua Bay. The company disputes the allegations and states that potential losses cannot currently be estimated for these matters.
- Financing and credit risk remain significant. Vacation ownership notes receivable totaled $1.016 billion net of reserves, with a $144 million allowance. The estimated average remaining default rate was 7.27%; a 0.5 percentage-point increase would have increased the allowance by approximately $5 million.
- The filing presents an inconsistency in the financing cash-flow discussion: the consolidated cash-flow statement reports $5 million of cash provided by financing activities, while the MD&A table labels financing cash flow as $(5) million. Investors should verify the intended presentation against the filed financial statements.
Important Facts for Investors to Verify
- Whether the improvement in development margin is sustainable after excluding favorable product-cost true-ups and revenue-reportability effects.
- The pace of new vacation ownership note originations versus collections, financing propensity and the resulting decline in financing revenue.
- Credit performance, allowance adequacy and default trends for the $1.016 billion notes receivable portfolio.
- Availability and renewal terms of the Warehouse Credit Facility, along with access to future asset-backed securitizations.
- Cash requirements for project completion, inventory repurchases, development spending and separation activities.
- Potential exposure from pending litigation, arbitration, guarantees and the $10 million accrual related to a Hawaii joint venture.
- The correct financing cash-flow amount because of the inconsistency between the cash-flow statement and MD&A.