MARRIOTT VACATIONS WORLDWIDE Corp annual report, FY2011

Marriott Vacations Worldwide Corporation — Fiscal 2011 Form 10-K

Business context and reporting period

The filing covers the 52-week fiscal year ended December 30, 2011. Marriott Vacations Worldwide (“MVW”) became an independent public company on November 21, 2011, following its spin-off from Marriott International. MVW develops, markets, sells and manages vacation ownership and related residential products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. It operated 64 properties under 71 management contracts in the United States and eight other countries and territories, serving approximately 420,000 owners.

The filing also reports fourth-quarter results; the fourth quarter comprised 16 weeks. Historical pre-spin-off results were derived from Marriott International and may not represent the costs or financial profile of MVW as a stand-alone public company.

Key financial metrics

Metric	2011	2010	Change
Total revenue	$1.613 billion	$1.584 billion	Up 2%
Vacation ownership sales, net	$634 million	$635 million	Down $1 million
Resort management and other services	$238 million	$227 million	Up 5%
Financing revenue	$169 million	$188 million	Down 10%
Rental revenue	$212 million	$187 million	Up 13%
Net loss attributable to MVW	$(178) million	$67 million income	Decline of $245 million
Basic and diluted loss per share	$(5.29)	$2.00	Declined
Adjusted EBITDA	$139 million	$155 million	Down $16 million
Cash flow from operating activities	$321 million	$379 million	Down $58 million
Capital expenditures	$15 million	$24 million	Down $9 million

Fourth-quarter 2011 revenue was $484 million versus $479 million in the prior-year fourth quarter. Fourth-quarter net income attributable to MVW was $8 million versus $18 million in the prior-year quarter. Third-quarter 2011 included the principal impairment charge and reported a $221 million net loss.

Contract sales totaled $680 million in 2011, compared with $685 million in 2010. Company-owned contract sales were $659 million, while joint-venture contract sales were $21 million. Resort occupancy was 90% for the full year, and North America occupancy was 91%.

Balance sheet, debt and liquidity

Cash and cash equivalents were $110 million at year-end 2011, compared with $26 million at year-end 2010.
Total assets were $2.846 billion, down from $3.642 billion, primarily reflecting inventory impairments and lower deferred tax assets.
Total debt was $850 million, down from $1.022 billion. Approximately $847 million was non-recourse debt related to securitized notes receivable and the warehouse facility.
MVW had no borrowings outstanding under its $200 million revolving corporate credit facility at year-end.
The company established a $300 million non-recourse warehouse credit facility and drew $125 million gross, or $122 million net, against $154 million of securitized notes receivable during October 2011.
Mandatorily redeemable preferred stock of a consolidated subsidiary totaled $40 million and carried a 12% annual dividend rate for the first five years.
Real estate inventory was $959 million at year-end, including $448 million of finished goods, $215 million of work-in-process and $290 million of land and infrastructure.
Contractual obligations totaled $1.484 billion, including $988 million of debt obligations, $88 million of preferred-stock obligations and $247 million related to the Marriott Rewards loyalty program.

Material changes versus the prior comparable period

Revenue growth came primarily from rental revenue, including $27 million of revenue recognized from MVCD “plus points,” and higher resort management fees and cost reimbursements.
Financing revenue declined because collections on existing notes receivable exceeded new originations; the average notes receivable balance fell to $1.391 billion from $1.555 billion.
North America contract sales declined 3% to $514 million. Sales were weaker in the first half as MVCD enrollment focused on existing owners purchasing at lower average prices, while second-half volume per guest improved.
Revenue from vacation ownership sales remained broadly flat despite lower contract sales because of more favorable revenue reportability and lower notes-receivable reserve activity.
Rental profitability remained negative, with rental revenue less expenses at a loss of $8 million versus a loss of $7 million. Higher revenue was offset by costs associated with the MVCD banking and borrowing feature and increased variable operating costs.
Adjusted EBITDA declined to $139 million from $155 million, although reported EBITDA was $(134) million because of the large impairment charge.
Inventory fell by $453 million, primarily due to the write-down of excess land and luxury inventory and reduced development activity.
Cash flow from operations declined despite lower inventory spending, reflecting lower earnings, reduced notes-receivable collections and working-capital changes.

Guidance, outlook, risks and unusual items

For 2012 executive incentive purposes, management set an Adjusted EBITDA target of $125 million and a Development Margin target of 12.0%. These are compensation-plan targets, not formal investor guidance.

Management planned to increase marketing to new owners after emphasizing existing-owner MVCD enrollment in 2010 and 2011.
MVW intended to align inventory development more closely with sales pace, dispose of excess land and luxury inventory, and pursue asset-light development and management opportunities.
No new luxury development was planned, and the company was focusing Europe on selling existing products and managing existing resorts. Asia Pacific remained a targeted growth opportunity.
MVW recorded a $324 million pre-tax, non-cash impairment charge, or $234 million after tax, primarily for excess undeveloped land and built luxury inventory. The charge included $251 million for inventory and $73 million for property and equipment.
MVW’s license agreements require ongoing use of Marriott and Ritz-Carlton standards and provide for royalty payments, including a fixed fee of $50 million annually plus percentage-based fees. The filing recorded $4 million of royalty expense in 2011 after the spin-off.
Key risks include weak consumer demand, secondary-market pricing pressure, consumer loan defaults, dependence on securitization markets, inventory depletion under points-based programs, extensive regulation, travel disruption, real estate valuation declines and potential termination of brand license agreements.
Three securitized loan pools breached performance triggers during 2011; two were cured by year-end. Approximately $3 million of cash flows were redirected to investors during the year.
The filing restated prior-year cash-flow classifications for 2010 and 2009; management considered the errors immaterial to the prior-period financial statements.
Management concluded disclosure controls were effective. The filing did not include management’s internal-control assessment or an auditor attestation because of the SEC transition period for newly public companies.

Most important facts to verify

Whether the $139 million Adjusted EBITDA adequately reflects recurring operations after excluding impairments and consumer-financing interest.
The sustainability of operating cash flow as notes receivable continue to run off and securitization funding remains important.
Actual losses and recovery values associated with the $959 million inventory balance, particularly excess land and luxury inventory.
Performance of securitized loan pools, default trends and the renewal or refinancing of the warehouse facility after its revolving period.
The effect of the $50 million annual brand-license fee and percentage royalties on future margins and cash flow.
Whether post-spin-off corporate, technology, public-company and transition-service costs will exceed historical allocated expenses.
Potential obligations under the $40 million preferred stock, tax-sharing and indemnification agreements, guarantees, joint-venture commitments and other contractual obligations.
Whether the company’s historical financial statements are comparable to future stand-alone results, given the November 2011 spin-off and prior Marriott cost allocations.