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MARRIOTT VACATIONS WORLDWIDE CORP

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MARRIOTT VACATIONS WORLDWIDE : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/06/2019 | 07:40am EDT
Forward-Looking Statements
We make forward-looking statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations and elsewhere in this Quarterly
Report on Form 10-Q based on our management's beliefs and assumptions and on
information currently available to our management. Forward-looking statements
include, among other things, the information concerning our possible or assumed
future results of operations, business strategies, financing plans, competitive
position, potential growth opportunities, potential operating performance
improvements, and the effects of competition. Forward-looking statements include
all statements that are not historical facts and can be identified by the use of
forward-looking terminology such as the words "believe," "expect," "plan,"
"intend," "anticipate," "estimate," "predict," "potential," "continue," "may,"
"might," "should," "could" or the negative of these terms or similar
expressions.
Forward-looking statements involve risks, uncertainties and assumptions. Actual
results may differ materially from those expressed in these forward-looking
statements. You should not put undue reliance on any forward-looking statements
in this Quarterly Report. We do not have any intention or obligation to update
forward-looking statements after the date of this Quarterly Report on Form 10-Q,
except as required by law.
The risk factors discussed in "Risk Factors" in our most recent Annual Report on
Form 10-K, and which may be discussed in subsequent Quarterly Reports on Form
10-Q or other filings with the Securities and Exchange Commission ("SEC"), could
cause our results to differ materially from those expressed in forward-looking
statements. There may be other risks and uncertainties that we cannot predict at
this time or that we currently do not expect will have a material adverse effect
on our financial position, results of operations or cash flows. Any such risks
could cause our results to differ materially from those we express in
forward-looking statements.
Our Financial Statements (as defined below), which we discuss below, reflect our
historical financial condition, results of operations and cash flows. The
financial information discussed below and included in this Quarterly Report on
Form 10-Q may not necessarily reflect what our financial condition, results of
operations or cash flows may be in the future. In order to make this report
easier to read, we refer to (i) our Interim Consolidated Financial Statements as
our "Financial Statements," (ii) our Interim Consolidated Statements of Income
as our "Income Statements," (iii) our Interim Consolidated Balance Sheets as our
"Balance Sheets" and (iv) our Interim Consolidated Statements of Cash Flows as
our "Cash Flows." In addition, references throughout to numbered "Footnotes"
refer to the numbered Notes to our Financial Statements that we include in the
Financial Statements of this Quarterly Report on Form 10-Q.
Business Overview
We are a leading global vacation company that offers vacation ownership,
exchange, rental, and resort and property management, along with related
businesses, products and services. Our business operates in two reportable
segments: Vacation Ownership and Exchange & Third-Party Management.
On September 1, 2018, we completed the ILG Acquisition for approximately $4.2
billion in aggregate consideration. In connection with the ILG Acquisition, we
entered into multiple financing arrangements, which include the issuance of
senior notes and the replacement of our previously existing corporate credit
facility with a new senior secured corporate credit agreement, our Corporate
Credit Facility, that provides for a term loan and revolving loans.
We refer to our business associated with the brands that existed prior to the
ILG Acquisition as "Legacy-MVW" and to ILG's business and brands that we
acquired as "Legacy-ILG."
Our Vacation Ownership segment includes seven vacation ownership brands licensed
under exclusive, long-term relationships with Marriott International and Hyatt
Hotels Corporation. We are the exclusive worldwide developer, marketer, seller
and manager of vacation ownership and related products under the Marriott
Vacation Club, Grand Residences by Marriott, Sheraton Vacation Club, Westin
Vacation Club, and Hyatt Residence Club brands, as well as under Marriott
Vacation Club Pulse, an extension to the Marriott Vacation Club brand. We are
also the exclusive worldwide developer, marketer and seller of vacation
ownership and related products under The Ritz-Carlton Destination Club brand, we
have the non-exclusive right to develop, market and sell whole ownership
residential products under The Ritz-Carlton Residences brand and have a license
to use the St. Regis brand for specified fractional ownership resorts.
Our Vacation Ownership segment generates most of its revenues from four primary
sources: selling vacation ownership products; managing vacation ownership
resorts, clubs and owners' associations; financing consumer purchases of
vacation ownership products; and renting vacation ownership inventory.

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Our Exchange & Third-Party Management segment includes exchange networks and
membership programs, as well as management of resorts and lodging properties. We
provide these services through a variety of brands including Interval
International, Trading Places International, Vacation Resorts International,
Aqua-Aston and Great Destinations. Exchange & Third-Party Management revenue
generally is fee-based and derived from membership, exchange and rental
transactions, property and association management, and other related products
and services.
Corporate and other represents that portion of our results that are not
allocable to our segments, including those relating to property owners'
associations consolidated under the voting interest model ("Consolidated
Property Owners' Associations").
Hurricane Activity
During the third quarter of 2017, over 20 Legacy-MVW properties and two
Legacy-ILG properties were negatively impacted by one or both of Hurricane Irma
and Hurricane Maria (collectively, the "2017 Hurricanes"). All of the Legacy-MVW
properties reopened prior to the end of 2018. The Legacy-ILG property in St.
John partially reopened in the first quarter of 2019 and the Legacy-ILG resort
in Puerto Rico is expected to open in 2020.
We received $29 million and $9 million of net insurance proceeds in 2018 and
2019, respectively, related to the settlement of Legacy-MVW business
interruption insurance claims arising from the 2017 Hurricanes. We have
submitted most of the insurance claims for our Legacy-ILG business interruption
losses as well as Legacy-MVW and Legacy-ILG property damage experienced by both
us and associated property owners' associations from these 2017 Hurricanes. We
received an initial $25 million advance of insurance proceeds related to the
business interruption losses at the Legacy-ILG St. John property in 2018, we
received $7 million of insurance proceeds related to the business interruption
losses at the other Legacy-ILG properties in 2019 and we received advances of
$108 million of insurance proceeds related to the Legacy-ILG property damage
experienced by the related property owners' associations as of the second
quarter of 2019. Repairs are underway at the Legacy-ILG resort in Puerto Rico
and the related insurance claim is expected to be submitted in 2020 upon the
completion of construction. However, we cannot quantify the extent of any
additional payments under such claims at this time.
During the third quarter of 2018, our Legacy-MVW properties in South Carolina
and Florida were negatively impacted by Hurricane Florence and Hurricane
Michael, respectively (collectively, the "2018 Hurricanes"). We expect to submit
insurance claims for our business interruption losses as well as property damage
experienced by both us and associated property owners' associations from these
2018 Hurricanes. However, we cannot quantify the extent of any payments under
such claims at this time.
Significant Accounting Policies Used in Describing Results of Operations
Sale of Vacation Ownership Products
We recognize revenues from the sale of vacation ownership products ("VOIs") when
control of the vacation ownership product is transferred to the customer and the
transaction price is deemed collectible. Based upon the different terms of the
contracts with the customer and business practices, control of the vacation
ownership product is transferred to the customer at closing for Legacy-MVW
transactions and upon expiration of the statutory rescission period for
Legacy-ILG transactions. Sales of vacation ownership products may be made for
cash or we may provide financing. In addition, we recognize settlement fees
associated with the transfer of vacation ownership products and commission
revenues from sales of vacation ownership products on behalf of third parties,
which we refer to as "resales revenue."
We also provide sales incentives to certain purchasers. These sales incentives
typically include Marriott Bonvoy points, World of Hyatt points or an
alternative sales incentive that we refer to as "plus points." These plus points
are redeemable for stays at our resorts or for use in other third-party
offerings, generally up to two years from the date of issuance. Typically, sales
incentives are only awarded if the sale is closed.
As a result of the revenue recognition requirements included in Accounting
Standards Codification ("ASC") Topic 606, "Revenue from Contracts with
Customers" ("ASC 606"), there may be timing differences between the date of the
contract with the customer and when revenue is recognized. When comparing
results year-over-year, this timing difference may generate significant
variances, which we refer to as the impact of revenue reportability.
Finally, as more fully described in "Financing" below, we record the difference
between the vacation ownership note receivable and the consideration to which we
expect to be entitled (also known as a vacation ownership notes receivable
reserve or a sales reserve) as a reduction of revenues from the sale of vacation
ownership products at the time we recognize revenues from a sale.
We report, on a supplemental basis, contract sales for our Vacation Ownership
segment. Contract sales consist of the total amount of vacation ownership
product sales under contract signed during the period where we have received a
down payment of at least ten percent of the contract price, reduced by actual
rescissions during the period, inclusive of contracts

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associated with sales of vacation ownership products on behalf of third-parties,
which we refer to as "resales contract sales." In circumstances where a customer
applies any or all of their existing ownership interests as part of the purchase
price for additional interests, we include only the incremental value purchased
as contract sales. Contract sales differ from revenues from the sale of vacation
ownership products that we report on our income statements due to the
requirements for revenue recognition described above. We consider contract sales
to be an important operating measure because it reflects the pace of sales in
our business.
Cost of vacation ownership products includes costs to develop and construct our
projects (also known as real estate inventory costs), other non-capitalizable
costs associated with the overall project development process and settlement
expenses associated with the closing process. For each project, we expense real
estate inventory costs in the same proportion as the revenue recognized.
Consistent with the applicable accounting guidance, to the extent there is a
change in the estimated sales revenues or inventory costs for the project in a
period, a non-cash adjustment is recorded on our income statements to true-up
costs in that period to those that would have been recorded historically if the
revised estimates had been used. These true-ups, which we refer to as product
cost true-up activity, can have a positive or negative impact on our income
statements.
We refer to revenues from the sale of vacation ownership products less the cost
of vacation ownership products and marketing and sales costs as development
margin. Development margin percentage is calculated by dividing development
margin by revenues from the sale of vacation ownership products.
Management and Exchange
Our management and exchange revenues include revenues generated from fees we
earn for managing each of our vacation ownership resorts, providing property
management, property owners' association management and related services to
third-party vacation ownership resorts and fees we earn for providing rental
services and related hotel, condominium resort, and property owners' association
management services to vacation property owners.
In addition, we earn revenue from ancillary offerings, including food and
beverage outlets, golf courses and other retail and service outlets located at
our Vacation Ownership resorts. We also receive annual membership fees, club
dues and certain transaction-based fees from members, owners and other third
parties.
Management and exchange expenses include costs to operate the food and beverage
outlets and other ancillary operations and to provide overall customer support
services, including reservations, and certain transaction-based expenses
relating to external exchange service providers.
In our Vacation Ownership segment and Consolidated Property Owners'
Associations, we refer to these activities as "Resort Management and Other
Services."
Financing
We offer financing to qualified customers for the purchase of most types of our
vacation ownership products. The average FICO score of customers who were U.S.
citizens or residents who financed a vacation ownership purchase was as follows:
                         Six Months Ended
                   June 30, 2019   June 30, 2018
Average FICO score      739             739


The typical financing agreement provides for monthly payments of principal and
interest with the principal balance of the loan fully amortizing over the term
of the related vacation ownership note receivable, which is generally ten years.
Included within our vacation ownership notes receivable are originated vacation
ownership notes receivable and vacation ownership notes receivable acquired in
connection with the ILG Acquisition.
Acquired vacation ownership notes receivable are accounted for using the
expected cash flow method of recognizing discount accretion based on the
expected cash flows. At acquisition, we recorded these vacation ownership notes
receivable at a preliminary estimate of fair value, including a credit discount
which is accreted as an adjustment to yield over the estimated life of the
vacation ownership notes receivable. Our acquired vacation ownership notes
receivable are remeasured at each reporting date based on expected future cash
flows which takes into consideration an estimated measure of anticipated
defaults and early repayments. See Footnote 6 "Vacation Ownership Notes
Receivable" for further information regarding the accounting for acquired
vacation ownership notes receivable.
The interest income earned from the originated vacation ownership financing
arrangements is earned on an accrual basis on the principal balance outstanding
over the contractual life of the arrangement and is recorded as Financing
revenues on our Income Statements. Financing revenues also include fees earned
from servicing the existing vacation ownership notes

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receivable portfolio. Financing expenses include costs in support of the financing, servicing and securitization processes. The amount of interest income earned in a period depends on the amount of outstanding vacation ownership notes receivable, which, for originated vacation ownership notes receivable, is impacted positively by the origination of new vacation ownership notes receivable and negatively by principal collections. We calculate financing propensity as contract sales volume of finance contracts originated in the period divided by contract sales volume of all contracts originated in the period. We do not include resales contract sales in the financing propensity calculation. Financing propensity was 63 percent in the second quarter of 2018 and 62 percent in the second quarter of 2019. We expect to continue to offer financing incentive programs and that interest income will continue to increase as new originations of vacation ownership notes receivable outpace the decline in principal of existing vacation ownership notes receivable. In the event of a default, we generally have the right to foreclose on or revoke the underlying VOI. We return VOIs that we reacquire through foreclosure or revocation back to inventory. As discussed above, for originated vacation ownership notes receivable, we record a reserve at the time of sale and classify the reserve as a reduction to revenues from the sale of vacation ownership products on our Income Statements. Historical default rates, which represent defaults as a percentage of each year's beginning gross vacation ownership notes receivable balance, were as follows:

                               Six Months Ended
                         June 30, 2019   June 30, 2018
Historical default rates     2.1%            1.7%


Financing expenses include consumer financing interest expense, which represents
interest expense associated with the securitization of our vacation ownership
notes receivable. We distinguish consumer financing interest expense from all
other interest expense because the debt associated with the consumer financing
interest expense is secured by vacation ownership notes receivable that have
been sold to bankruptcy remote special purpose entities and is generally
non-recourse to us.
Rental
In our Vacation Ownership segment, we operate a rental business to provide owner
flexibility and to help mitigate carrying costs associated with our inventory.
We generate revenue from rentals of inventory that we hold for sale as interests
in our vacation ownership programs, inventory that we control because our owners
have elected alternative usage options permitted under our vacation ownership
programs and rentals of owned-hotel properties. We also recognize rental revenue
from the utilization of plus points under the MVCD program when the points are
redeemed for rental stays at one of our resorts or in other third-party
offerings. We obtain rental inventory from unsold inventory and inventory we
control because owners have elected alternative usage options offered through
our vacation ownership programs. For rental revenues associated with vacation
ownership products which we own and which are registered and held for sale, to
the extent that the revenues from rental are less than costs, revenues are
reported net in accordance with ASC Topic 978, "Real Estate - Time-Sharing
Activities" ("ASC 978"). The rental activity associated with discounted vacation
packages requiring a tour ("preview stays") is not included in transient rental
metrics, and because the majority of these preview stays are sourced directly or
indirectly from unsold inventory, the associated revenues and expenses are
reported net in Marketing and sales expense.
In our Exchange & Third-Party Management segment, we offer vacation rental
opportunities to members of the Interval International Network and certain other
membership programs. The offering of Getaways allows us to monetize excess
availability of resort accommodations within the applicable exchange network.
Resort accommodations available as Getaways typically result from seasonal
oversupply or underutilized space, as well as resort accommodations we source
specifically for Getaways.
Rental expenses include:
• Maintenance fees on unsold inventory;


•         Costs to provide alternative usage options, including Marriott Bonvoy
          points and offerings available as part of third-party offerings, for
          owners who elect to exchange their inventory;


•         Marketing costs and direct operating and related expenses in connection
          with the rental business (such as housekeeping, credit card expenses
          and reservation services); and

• Costs to secure resort accommodations for use in Getaways.

Rental metrics, including the average daily transient rate or the number of transient keys rented, may not be comparable between periods given fluctuation in available occupancy by location, unit size (such as two bedroom, one bedroom or studio unit), owner use and exchange behavior. In addition, rental metrics may not correlate with rental revenues due to the requirement to report certain rental revenues net of rental expenses in accordance with ASC 978 (as discussed


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above). Further, as our ability to rent certain luxury and other inventory is
often limited on a site-by-site basis, rental operations may not generate
adequate rental revenues to cover associated costs. Our Vacation Ownership
segment units are either "full villas" or "lock-off" villas. Lock-off villas are
units that can be separated into a master unit and a guest room. Full villas are
"non-lock-off" villas because they cannot be separated. A "key" is the lowest
increment for reporting occupancy statistics based upon the mix of non-lock-off
and lock-off villas. Lock-off villas represent two keys and non-lock-off villas
represent one key. The "transient keys" metric represents the blended mix of
inventory available for rent and includes all of the combined inventory
configurations available in our resort system.
Cost Reimbursements
Cost reimbursements include direct and indirect costs that are reimbursed to us
by customers under management contracts. All costs, with the exception of taxes
assessed by a governmental authority, reimbursed to us by customers are reported
on a gross basis. We recognize cost reimbursements when we incur the related
reimbursable costs. Cost reimbursements consist of actual expenses with no added
margin.
Interest Expense
Interest expense consists of all interest expense other than consumer financing
interest expense, which is included with Financing expense.
Other Items
We measure operating performance using the following key metrics:
• Contract sales from the sale of vacation ownership products;


•                  Total contract sales include contract sales from the sale of
                   vacation ownership products including joint ventures


•                  Consolidated contract sales exclude contract sales from the
                   sale of vacation ownership products for non-consolidated joint
                   ventures

• Development margin percentage;


•            Volume per guest ("VPG"), which we calculate by dividing
             consolidated vacation ownership contract sales, excluding fractional
             sales, telesales, resales, joint venture sales and other sales that
             are not attributed to a tour at a sales location, by the number of
             tours at sales locations in a given period (which we refer to as
             "tour flow"). We believe that this operating metric is valuable in
             evaluating the effectiveness of the sales process as it combines the
             impact of average contract price with the number of touring guests
             who make a purchase;


•            Average revenue per member, which we calculate by dividing
             membership fee revenue, transaction revenue and other member revenue
             for the Interval International network by the monthly weighted
             average number of Interval International network active members
             during the applicable period; and


•            Total active members, which is the number of Interval International
             network active members at the end of the applicable period.



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© Edgar Online, source Glimpses

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Financials (USD)
Sales 2019 4 424 M
EBIT 2019 580 M
Net income 2019 223 M
Debt 2019 1 908 M
Yield 2019 2,34%
P/E ratio 2019 16,9x
P/E ratio 2020 9,95x
EV / Sales2019 1,28x
EV / Sales2020 1,15x
Capitalization 3 769 M
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Consensus
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Mean consensus BUY
Number of Analysts 9
Average target price 129,06  $
Last Close Price 86,60  $
Spread / Highest target 79,0%
Spread / Average Target 49,0%
Spread / Lowest Target 13,2%
EPS Revisions
Managers
NameTitle
Stephen P. Weisz President, Chief Executive Officer & Director
William Joseph Shaw Chairman
Ralph Lee Cunningham Chief Operating Officer & Executive Vice President
John E. Geller CFO, Chief Administrative Officer & Executive VP
Dwight D. Smith Chief Information Officer & Executive VP
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