Marriott Vacations Worldwide Corporation — FY2017 Form 10-K Summary
Business context and reporting period
The filing is an annual report for the fiscal year ended December 31, 2017, not a standalone quarterly filing. Beginning in 2017, the Company changed to a calendar-year reporting cycle; FY2017 contained 366 days versus 364 days in FY2016. Marriott Vacations Worldwide develops, markets, sells, finances, manages and rents vacation ownership products under Marriott Vacation Club, Grand Residences by Marriott and Ritz-Carlton brands. Operations are reported across North America, Asia Pacific and Europe.
At year-end, the Company had more than 65 properties, 13,654 vacation ownership villas, approximately 400,000 owners and approximately 11,000 employees. The fourth quarter of 2017 generated revenue of $481.2 million and net income of $108.0 million.
Financial performance and key metrics
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue | $1,951.9 million | $1,808.5 million | 8.0% |
| Net income | $226.8 million | $137.3 million | 65.1% |
| Basic EPS | $8.38 | $4.93 | 69.9% |
| Diluted EPS | $8.18 | $4.83 | 69.4% |
| Operating cash flow | $142.2 million | $141.4 million | 0.6% |
| Adjusted EBITDA | $280.0 million | $261.4 million | 7.1% |
| Contract sales | $802.9 million | $723.6 million | 10.9% |
Reported net income benefited materially from a $65.2 million deferred-tax benefit related to the Tax Cuts and Jobs Act, a $6.1 million benefit from excess tax benefits on share-based compensation and a $8.7 million net insurance recovery related to Hurricane Matthew. The reported net margin was approximately 11.6%; Adjusted EBITDA margin was approximately 14.4%.
| Revenue source | FY2017 | Year-over-year change |
|---|---|---|
| Sale of vacation ownership products | $727.9 million | 14.2% |
| Resort management and other services | $306.2 million | 1.8% |
| Financing | $134.9 million | 7.0% |
| Rental | $322.9 million | 3.5% |
| Cost reimbursements | $460.0 million | 6.5% |
Development margin increased to $141.4 million from $129.1 million, but the development margin percentage declined to 19.4% from 20.3%, primarily because of higher marketing and sales costs, unfavorable product-cost true-up activity and expenses associated with newer sales locations. Resort management margin increased to $134.1 million from $126.5 million, while rental margin declined to $41.6 million from $51.3 million as rental expenses and unsold maintenance fees grew faster than rental revenue.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $409.1 million at December 31, 2017; cash, cash equivalents and restricted cash totaled $490.6 million.
- Total debt, net, was $1.095 billion, up from $737.2 million. Gross debt included $845.1 million of non-recourse securitization debt, $230.0 million of 1.50% convertible senior notes due 2022 and a $63.6 million non-interest-bearing note payable related to Hawaii inventory.
- The Company issued $230.0 million of convertible notes and received approximately $210.8 million of net proceeds after debt costs, note hedges and warrants. The notes had a $148.13 conversion price at year-end; associated warrants had an initial $176.68 strike price.
- The $250.0 million corporate revolver had no cash borrowings outstanding at year-end, although $4.6 million of letters of credit were outstanding. The $250.0 million warehouse facility also had no borrowings outstanding at year-end and terminates March 7, 2019 unless renewed.
- Operating cash flow was $142.2 million. Investing cash flow was negative $38.4 million, including $26.3 million of capital expenditures and $12.1 million for company-owned life insurance. Financing activities provided $170.7 million.
- The Company repurchased 767,876 shares for $88.3 million during 2017 and declared $1.45 per share of dividends for the year. Approximately 1.5 million shares remained available under the repurchase authorization at year-end.
- Real estate inventory was $711.5 million, with an additional $48.3 million of completed units classified within property and equipment. Contractual obligations totaled $1.818 billion, including $452.2 million of purchase obligations.
Material changes versus the prior comparable period
- Total contract sales increased 11%, led by North America contract sales growth of 13%. Excluding the estimated impact of 2017 hurricanes, total contract sales would have increased approximately 14%.
- North America tours increased 12% and volume per guest increased 3% to $3,565. Asia Pacific contract sales rose 4%, while Europe contract sales fell 19%, primarily because several large multi-week purchases in 2016 did not recur.
- Financing propensity increased to 64.0% from 60.1%, increasing loan originations and future interest income but also increasing exposure to consumer credit performance.
- Resort occupancy declined modestly to 88.7% from 89.1%, while transient keys rented increased 6%.
- More than 20 North America properties were affected by Hurricanes Irma and Maria. Two St. Thomas resorts and a sales center remained closed at year-end; one resort and a modified sales gallery reopened in February 2018, with the remaining resort expected to reopen in the second half of 2018.
- Asia Pacific reported a segment loss of $1.0 million versus segment income of $1.3 million in 2016, while Europe segment results improved to $14.7 million from $12.1 million.
- The Company acquired vacation ownership units and related assets in Bali, Marco Island and Hawaii, including 112 Hawaii units financed partly with a $63.6 million non-interest-bearing note.
- Revenue recognition changed materially beginning January 1, 2018 upon adoption of ASC 606 on a retrospective basis. The filing provides adjusted 2017 revenue of $2.183 billion and adjusted net income of $235.3 million under the new presentation, compared with reported 2017 revenue of $1.952 billion and net income of $226.8 million.
Guidance, outlook, commentary and risks
The filing does not provide formal numerical earnings or revenue guidance. Management expects continued growth in interest income as new loan originations exceed principal collections and expects to continue financing incentive programs in 2018. Strategic priorities include profitable contract-sales growth, expansion of points-based products, improved owner and guest engagement, capital-efficient inventory sourcing, cash-flow maximization and selective acquisitions or management affiliations.
In February 2018, Marriott International and the Company amended their license and loyalty-program agreements. Benefits include a $3.0 million annual royalty reduction, expected co-marketing and loyalty-point benefits, expanded access to hotel and digital marketing channels and an extension of certain call-transfer rights. The Company also terminated its noncompetition agreement with Marriott International. The filing cautions that anticipated benefits may not be realized as expected.
- Hurricane-related business interruption, property damage and resort closures may continue to affect sales, rentals and operating costs. Insurance claims for 2017 hurricane losses had not been quantified.
- Consumer defaults, loan-loss reserves and securitization performance are significant risks. The portfolio’s estimated average remaining default rate was 7.16% at year-end, and a 0.5 percentage-point increase in the estimated default rate would have increased reserves by approximately $5.9 million.
- The Company depends heavily on access to ABS markets, the warehouse facility and other financing sources. The warehouse facility’s 2019 termination date creates a refinancing and liquidity consideration.
- Brand-license termination, non-renewal of resort management agreements or deterioration in Marriott and Ritz-Carlton brand reputation could materially reduce sales, management fees and rental activity.
- The business is heavily regulated, including under consumer-protection, lending, marketing, privacy, real-estate and anti-corruption laws. GDPR became effective in May 2018 and may impose substantial penalties for noncompliance.
- Competition, secondary-market pricing pressure, inventory-delivery delays, construction costs, economic downturns, currency movements, natural disasters, cybersecurity incidents and litigation could adversely affect results.
- Several Hawaii and California litigation matters remain unresolved, and the filing states that potential losses cannot currently be estimated.
Most important facts for investors to verify
- Reconcile reported FY2017 results with the retrospective ASC 606 presentation and assess the impact on future revenue mix, margins and comparability.
- Separate recurring earnings from the $65.2 million tax benefit, $8.7 million Hurricane Matthew insurance recovery and other unusual items.
- Monitor 2018 recovery of St. Thomas operations and insurance proceeds related to Hurricanes Irma and Maria.
- Review consumer-loan delinquency, default, reserve and securitization-trigger trends as financing propensity and receivables expand.
- Assess refinancing plans for the warehouse facility before its March 2019 termination and the Company’s ability to fund substantial inventory purchase commitments.
- Evaluate the financial and competitive effects of the February 2018 Marriott agreement amendments and the termination of the noncompetition agreement.
- Review outstanding litigation, including the Kapalua Bay, Ritz-Carlton San Francisco, Aspen Highlands and MVCD class-action matters, for potential exposure.