MARRIOTT VACATIONS WORLDWIDE Corp quarterly report, Q3 FY2012

Business Context and Reporting Period

Marriott Vacations Worldwide Corporation filed an unaudited Form 10-Q for the twelve and thirty-six weeks ended September 7, 2012, compared with September 9, 2011. The company develops, markets, sells and manages vacation ownership products under the Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands, and operates 64 properties across North America, Luxury, Europe and Asia Pacific. The company completed its spin-off from Marriott International on November 21, 2011; therefore, historical pre-spin-off results may not reflect the costs or operations of a standalone public company.

Financial Performance and Key Metrics

Metric	12 Weeks Ended Sept. 7, 2012	12 Weeks Ended Sept. 9, 2011	36 Weeks Ended Sept. 7, 2012	36 Weeks Ended Sept. 9, 2011
Total revenue	$383 million	$378 million	$1.138 billion	$1.129 billion
Income (loss) before taxes	$18 million	$(302) million	$47 million	$(241) million
Net income (loss)	$6 million	$(221) million	$23 million	$(186) million
Diluted EPS	$0.17	$(6.57)	$0.65	$(5.52)
Adjusted EBITDA	$30 million	$26 million	$78 million	$104 million
Cash flow from operations	Not provided for the quarter	Not provided for the quarter	$158 million	$248 million

Revenue composition for the thirty-six weeks included vacation ownership product sales of $425 million, resort management and other services of $176 million, financing revenue of $106 million, rental revenue of $167 million and cost reimbursements of $243 million.
Development margin increased to 16.6% from 3.5% in the third quarter and to 12.3% from 6.8% for the thirty-six-week period. The improvement was substantially aided by favorable product-cost true-ups, improved marketing efficiency and lower prior-year charges.
North America remained the primary earnings driver, producing $213 million of segment financial results for the thirty-six weeks, compared with $188 million in the prior year. Luxury remained loss-making at $(11) million, although this improved from $(127) million because of the absence of the prior-year impairment charge.
Third-quarter North America contract sales increased 13% to $143 million, and volume per guest increased 19% to $3,051. Total company contract sales declined to $171 million from $179 million because prior-year joint-venture sales were not repeated.
Rental revenue increased 13% to $167 million for the thirty-six weeks, with rental margin improving to $9 million from a $1 million loss. Financing revenue declined 11% to $106 million as collections exceeded new loan originations and the notes receivable portfolio contracted.
At September 7, 2012, cash and cash equivalents were $212 million, restricted cash was $72 million, total assets were $2.746 billion and total equity was $1.152 billion.
Total debt was $793 million, down from $850 million at year-end 2011. Approximately $790 million was non-recourse debt associated with securitized vacation ownership notes receivable; no borrowings were outstanding under the $200 million revolving corporate credit facility or the warehouse credit facility at period-end.
Real estate inventory was $891 million, including $440 million of finished goods, $164 million of work-in-process and $287 million of land and infrastructure.

Material Changes Versus the Prior Comparable Period

Net income improved from a $221 million loss to $6 million of income in the quarter and from a $186 million loss to $23 million of income for the thirty-six weeks.
The major comparative distortion was the $324 million pre-tax impairment charge recorded in the third quarter and first thirty-six weeks of 2011; no impairment charge was recorded in 2012.
Vacation ownership product revenue decreased 4% to $425 million for the thirty-six weeks despite higher company-owned contract sales, primarily because of $36 million of lower revenue reportability from financed sales that did not meet down-payment requirements by period-end.
Resort management and other services revenue increased 6% to $176 million for the thirty-six weeks, supported by higher club dues, management fees, ancillary revenue and resale activity.
General and administrative expense increased to $69 million from $56 million for the thirty-six weeks, reflecting $8 million of separation costs, $3 million of incremental standalone public-company costs and $2 million of claims related to a Luxury project.
Interest expense increased to $42 million from $32 million, and royalty expense was $41 million in 2012 versus none in the prior-year comparable period, reflecting post-spin-off license arrangements.
Operating cash flow declined to $158 million from $248 million, partly because of a $20 million payment to Marriott International for final spin-off expense settlement and a $20 million payment to property owners’ associations.
The company restated the prior-year cash flow presentation for classification errors; management stated that the errors were immaterial to the individual prior-period financial statements.

Guidance, Outlook, Risks and Unusual Items

Management expects approximately $30 million to $35 million of additional organizational and separation costs through 2014, including approximately $8 million in the fourth quarter of 2012 and $15 million to $20 million in 2013. Estimated annual savings are $15 million to $20 million, with the full annualized benefit expected in 2014; actual savings are not guaranteed.
The company expects financing revenue to continue declining for the next several years unless new loan originations exceed collections on the existing portfolio.
Management expects real estate inventory spending to remain below or in line with cost of sales in the near term and plans to sell excess Luxury inventory and undeveloped land to generate cash and reduce carrying costs.
The Luxury segment has materially reduced development activity, is placing inventory into the MVCD points program and plans to pursue a bulk sale of the Abaco Club asset after removing the Ritz-Carlton brand.
The company planned to close off-site sales locations in Hong Kong and Japan in the fourth quarter of 2012, with expected costs of approximately $4 million to $5 million.
On September 11, 2012, the warehouse credit facility was amended: capacity declined from $300 million to $250 million, the revolving period was extended to September 10, 2014, and pricing became based on LIBOR and bank conduit commercial paper rates plus 1.5%.
The company expected a net cash outflow of approximately $38 million to repurchase approximately $42 million of previously securitized notes and retire related debt.
Legal exposure includes a California lawsuit involving Ritz-Carlton owners seeking rescission and punitive damages. Potential damages were not estimable; approximately $7 million had been accrued for related matters.
Additional contingencies include $23 million of maximum potential funding under vacation ownership financing guarantees, $93 million of surety bonds, approximately $137 million of estimated remaining development costs for projects under construction, and a $10 million accrual related to a distressed Hawaii joint venture.
Management stated that all securitized notes receivable pools were in compliance at quarter-end, although one pool temporarily triggered performance provisions during the quarter and $1 million of excess spread was redirected to investors during the thirty-six weeks.
Forward-looking statements are subject to risks including economic conditions, consumer defaults, revenue-recognition timing, inventory valuation, financing availability, litigation, execution of the spin-off transition and the ability to realize projected cost savings.

Most Important Facts for Investors to Verify

Whether North America’s higher contract sales and VPG can offset continuing declines in financing revenue and weaker Luxury, Europe and Asia Pacific sales.
The sustainability of the 2012 development margin improvement, particularly the extent to which it reflects nonrecurring favorable product-cost true-ups and revenue-reportability timing.
Actual cash generation after inventory spending, debt repayments, note repurchases, separation costs and potential legal or joint-venture funding.
Performance of the vacation ownership notes receivable portfolio, including default rates, reserves, non-accrual balances and securitization triggers.
Progress toward the projected $15 million to $20 million of annual separation-related savings and the remaining $30 million to $35 million of transition costs.
Resolution and ultimate exposure from the California litigation, the Hawaii joint venture, financing guarantees and other contingencies.
The impact of royalty fees, Marriott Rewards obligations, preferred-stock dividends and other post-spin-off costs on normalized earnings.