Quarterly Report


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Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_________________________
FORM  10-Q
___________________________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-35219
_________________________
Marriott Vacations Worldwide Corporation
(Exact name of registrant as specified in its charter)
_________________________
Delaware
 
45-2598330
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
6649 Westwood Blvd.
Orlando, FL
 
32821
(Address of principal executive offices)
 
(Zip Code)
(407) 206-6000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨ (Do not check if a smaller reporting company)
 
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨     No   x
The number of shares outstanding of the issuer’s common stock, par value $0.01 per share, as of April 28, 2017 was 27,148,564 .
 


Table of Contents

MARRIOTT VACATIONS WORLDWIDE CORPORATION
FORM 10-Q TABLE OF CONTENTS
 
 
 
 
 
Page No.
Part I.
Item 1.
 
 
 
 
 
Item 2.
Item 3.
Item 4.
Part II.
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 

Throughout this report, we refer to brands that we own, as well as those brands that we license from Marriott International, Inc. (“Marriott International”) or its affiliates, as our brands. Brand names, trademarks, service marks and trade names that we own or license from Marriott International include Marriott Vacation Club ® , Marriott Vacation Club Destinations TM , Marriott Vacation Club Pulse SM , Marriott Grand Residence Club ® , Grand Residences by Marriott ® , and The Ritz-Carlton Club ® . We also refer to Marriott International’s Marriott Rewards ® customer loyalty program. We may also refer to brand names, trademarks, service marks and trade names of other companies and organizations, and these brand names, trademarks, service marks and trade names are the property of their respective owners.



Table of Contents

PART I. FINANCIAL INFORMATION
 
Item 1.    Financial Statements
MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
 
(91 days)
 
(84 days)
REVENUES
 
 
 
Sale of vacation ownership products
$
172,155

 
$
138,369

Resort management and other services
74,339

 
63,757

Financing
32,111

 
29,224

Rental
85,256

 
80,288

Cost reimbursements
123,633

 
107,533

TOTAL REVENUES
487,494

 
419,171

EXPENSES
 
 
 
Cost of vacation ownership products
42,620

 
35,617

Marketing and sales
100,661

 
78,412

Resort management and other services
41,831

 
39,863

Financing
5,206

 
4,629

Rental
70,432

 
64,660

General and administrative
27,539

 
25,359

Litigation settlement

 
(303
)
Consumer financing interest
5,938

 
5,362

Royalty fee
16,070

 
13,357

Cost reimbursements
123,633

 
107,533

TOTAL EXPENSES
433,930

 
374,489

(Losses) gains and other (expense) income
(59
)
 
7

Interest expense
(781
)
 
(1,982
)
Other
(369
)
 
(2,542
)
INCOME BEFORE INCOME TAXES
52,355

 
40,165

Provision for income taxes
(18,655
)
 
(15,757
)
NET INCOME
$
33,700

 
$
24,408

 
 
 
 
EARNINGS PER SHARE
 
 
 
Earnings per share - basic
$
1.24

 
$
0.84

Earnings per share - diluted
$
1.21

 
$
0.82

 
 
 
 
CASH DIVIDENDS DECLARED PER SHARE
$
0.35

 
$
0.30

See Notes to Interim Consolidated Financial Statements

1


MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
 
(91 days)
 
(84 days)
Net income
$
33,700

 
$
24,408

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
4,548

 
1,147

Derivative instrument adjustment, net of tax
(307
)
 
409

Total other comprehensive income, net of tax
4,241

 
1,556

COMPREHENSIVE INCOME
$
37,941

 
$
25,964

See Notes to the Interim Consolidated Financial Statements


2


MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
 
(Unaudited)
March 31, 2017
 
December 30, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
101,841

 
$
147,102

Restricted cash (including $32,762 and $27,525 from VIEs, respectively)
64,033

 
66,000

Accounts and contracts receivable, net (including $4,522 and $4,865 from VIEs, respectively)
127,347

 
161,733

Vacation ownership notes receivable, net (including $659,191 and $717,543 from VIEs, respectively)
997,419

 
972,311

Inventory
692,757

 
712,536

Property and equipment
202,380

 
202,802

Other (including $8,427 and $0 from VIEs, respectively)
160,397

 
128,935

TOTAL ASSETS
$
2,346,174

 
$
2,391,419

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
72,277

 
$
124,439

Advance deposits
61,685

 
55,542

Accrued liabilities (including $564 and $584 from VIEs, respectively)
154,056

 
147,469

Deferred revenue
127,607

 
95,495

Payroll and benefits liability
81,175

 
95,516

Deferred compensation liability
67,022

 
62,874

Debt, net (including $684,023 and $738,362 from VIEs, respectively)
683,767

 
737,224

Other
15,762

 
15,873

Deferred taxes
149,574

 
149,168

TOTAL LIABILITIES
1,412,925

 
1,483,600

Contingencies and Commitments (Note 8)

 

Preferred stock — $0.01 par value; 2,000,000 shares authorized; none issued or outstanding

 

Common stock — $0.01 par value; 100,000,000 shares authorized; 36,787,613 and 36,633,868 shares issued, respectively
368

 
366

Treasury stock — at cost; 9,640,067 and 9,643,562 shares, respectively
(606,411
)
 
(606,631
)
Additional paid-in capital
1,159,454

 
1,162,283

Accumulated other comprehensive income
9,701

 
5,460

Retained earnings
370,137

 
346,341

TOTAL EQUITY
933,249

 
907,819

TOTAL LIABILITIES AND EQUITY
$
2,346,174

 
$
2,391,419

The abbreviation VIEs above means Variable Interest Entities.
See Notes to Interim Consolidated Financial Statements


3


MARRIOTT VACATIONS WORLDWIDE CORPORATION
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
 
(91 days)
 
(84 days)
OPERATING ACTIVITIES
 
 
 
Net income
$
33,700

 
$
24,408

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
5,191

 
5,125

Amortization of debt issuance costs
1,386

 
1,300

Provision for loan losses
12,042

 
8,287

Share-based compensation
3,276

 
2,524

Deferred income taxes
5,472

 
5,549

Net change in assets and liabilities:
 
 
 
Accounts and contracts receivable
34,586

 
21

Notes receivable originations
(112,832
)
 
(57,524
)
Notes receivable collections
76,068

 
60,532

Inventory
21,944

 
(14,970
)
Other assets
(27,119
)
 
(5,285
)
Accounts payable, advance deposits and accrued liabilities
(30,179
)
 
(32,204
)
Deferred revenue
31,861

 
30,317

Payroll and benefit liabilities
(14,500
)
 
(28,586
)
Deferred compensation liability
4,147

 
4,406

Other liabilities
(242
)
 
6,665

Other, net
903

 
(687
)
Net cash provided by operating activities
45,704

 
9,878

INVESTING ACTIVITIES
 
 
 
Capital expenditures for property and equipment (excluding inventory)
(5,055
)
 
(6,331
)
Purchase of company owned life insurance
(8,200
)
 

Dispositions, net
1

 
9

Net cash used in investing activities
(13,254
)
 
(6,322
)
FINANCING ACTIVITIES
 
 
 
Borrowings from securitization transactions

 
51,130

Repayment of debt related to securitization transactions
(54,340
)
 
(47,711
)
Debt issuance costs
(1,219
)
 

Repurchase of common stock

 
(73,228
)
Payment of dividends
(19,010
)
 
(17,585
)
Payment of withholding taxes on vesting of restricted stock units
(6,644
)
 
(3,864
)
Other, net
(16
)
 
591

Net cash used in financing activities
(81,229
)
 
(90,667
)
Effect of changes in exchange rates on cash, cash equivalents and restricted cash
1,551

 
464

DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
(47,228
)
 
(86,647
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
213,102

 
248,512

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
$
165,874

 
$
161,865

SUPPLEMENTAL DISCLOSURES OF NON-CASH INVESTING AND FINANCING ACTIVITIES
 
 
 
Property acquired via capital lease
$

 
$
7,221

Non-cash transfer from Property and equipment to assets held for sale, within Other assets

 
45,201

Non-cash issuance of treasury stock for employee stock purchase plan
331

 

See Notes to Interim Consolidated Financial Statements

4


MARRIOTT VACATIONS WORLDWIDE CORPORATION
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Our Business
Marriott Vacations Worldwide Corporation (“we,” “us,” “Marriott Vacations Worldwide” or the “Company,” which includes our consolidated subsidiaries except where the context of the reference is to a single corporate entity) is the exclusive worldwide developer, marketer, seller and manager of vacation ownership and related products under the Marriott Vacation Club and Grand Residences by Marriott brands. In 2016, we introduced 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, and we have the non-exclusive right to develop, market and sell whole ownership residential products under The Ritz-Carlton Residences brand. The Ritz-Carlton Hotel Company, L.L.C., a subsidiary of Marriott International, provides on-site management for Ritz-Carlton branded properties.
Our business is grouped into three reportable segments: North America, Asia Pacific and Europe. As of March 31, 2017 , our portfolio consisted of over 60 properties in the United States and eight other countries and territories. We generate most of our revenues from four primary sources: selling vacation ownership products; managing our resorts; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory.
Principles of Consolidation and Basis of Presentation
The interim consolidated financial statements presented herein and discussed below include 100 percent of the assets, liabilities, revenues, expenses and cash flows of Marriott Vacations Worldwide, all entities in which Marriott Vacations Worldwide has a controlling voting interest (“subsidiaries”), and those variable interest entities for which Marriott Vacations Worldwide is the primary beneficiary in accordance with consolidation accounting guidance. Intercompany accounts and transactions between consolidated companies have been eliminated in consolidation. The interim consolidated financial statements reflect our financial position, results of operations and cash flows as prepared in conformity with United States Generally Accepted Accounting Principles (“GAAP”).
In order to make this report easier to read, we refer throughout to (i) our Interim Consolidated Financial Statements as our “Financial Statements,” (ii) our Interim Consolidated Statements of Income as our “Statements of Income,” (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 in these Notes to Interim Consolidated Financial Statements, unless otherwise noted.
Beginning with our 2017 fiscal year, we changed our financial reporting cycle to a calendar year-end and end-of-month quarterly reporting cycle. Accordingly, our 2017 fiscal year began on December 31, 2016 (the day after the end of the 2016 fiscal year) and will end on December 31, 2017, and our 2017 quarters include the three month periods ended March 31, June 30, September 30, and December 31, except that the period ended March 31, 2017 also includes December 31, 2016. Our future fiscal years will begin on January 1 and end on December 31. Historically, our fiscal year was a 52 or 53 week fiscal year that ended on the Friday nearest to December 31, and our quarterly reporting cycle included twelve week periods for the first, second, and third quarters and a sixteen week period (or in some cases a seventeen week period) for the fourth quarter. We have not restated, and do not plan to restate, historical results.
The table below shows the reporting periods as we refer to them in this report, their date ranges, and the number of days in each:
Reporting Period
 
Date Range
 
Number of Days
2017 first quarter
 
December 31, 2016 — March 31, 2017
 
91
2016 first quarter
 
January 2, 2016 — March 25, 2016
 
84
2017 fiscal year
 
December 31, 2016 — December 31, 2017
 
366
2016 fiscal year
 
January 2, 2016 — December 30, 2016
 
364

As a result of the change in our financial reporting cycle, our 2017 first quarter had seven more days of activity than our 2016 first quarter. While our 2017 full fiscal year will have only two additional days of activity as compared to our 2016 full fiscal year, our 2017 second quarter will have seven additional days of activity, our 2017 third quarter will have eight additional days of activity, and our 2017 fourth quarter will have 20 fewer days of activity than the corresponding periods in our 2016 fiscal year.

5


In our opinion, our Financial Statements reflect all normal and recurring adjustments necessary to present fairly our financial position and the results of our operations and cash flows for the periods presented. Interim results may not be indicative of fiscal year performance because of, among other reasons, seasonal and short-term variations.
These Financial Statements have not been audited. Amounts as of December 30, 2016 included in these Financial Statements have been derived from the audited consolidated financial statements as of that date. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP. Although we believe our footnote disclosures are adequate to make the information presented not misleading, you should read these Financial Statements in conjunction with the consolidated financial statements and notes to those consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016 .
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates include, but are not limited to, revenue recognition, cost of vacation ownership products, inventory valuation, property and equipment valuation, loan loss reserves, loss contingencies and income taxes. Accordingly, actual amounts may differ from these estimated amounts.
We have reclassified certain prior year amounts to conform to our current period presentation. Our Financial Statements include adjustments for the 2016 first quarter to correct immaterial presentation errors, consistent with those reported in our Annual Report on Form 10-K for the fiscal year ended December 30, 2016, within the following line items on our Statements of Income: Resort management and other services revenues, Resort management and other services expenses and General and administrative expenses. Correction of these immaterial errors had no impact on our consolidated Net income.
The impact of these adjustments on the Financial Statements is as follows:
 
 
Quarter Ended
 
 
March 25, 2016
 
 
(84 days)
($ in thousands)
 
As Revised
 
Previous Filing
Resort management and other services
 
$
63,757

 
$
69,629

TOTAL REVENUES
 
$
419,171

 
$
425,043

Resort management and other services
 
$
39,863

 
$
45,797

General and administrative
 
$
25,359

 
$
25,297

TOTAL EXPENSES
 
$
374,489

 
$
380,361


Deferred Compensation Plan
Beginning in our 2017 fiscal year, participants in the Marriott Vacations Worldwide Deferred Compensation Plan (the “Deferred Compensation Plan”), may select a rate of return based on various market-based investment alternatives for a portion of their contributions, as well as any future Company contributions, to the Deferred Compensation Plan, and may also select such a rate for a portion of their existing account balances. To support our ability to meet a portion of our obligations under the Deferred Compensation Plan, we acquired company owned insurance policies (the “COLI policies”) on the lives of certain participants in the Deferred Compensation Plan, the proceeds of which are intended to be aligned with the investment alternatives elected by plan participants and are payable to a rabbi trust with the Company as grantor. A portion of a participant’s contributions to the Deferred Compensation Plan must be subject to a fixed rate of return, which for our 2017 fiscal year was reduced to 3.5 percent.
We consolidate the liabilities of the Deferred Compensation Plan and the related assets, which consist of the COLI policies held in the rabbi trust. The rabbi trust is considered a variable interest entity (“VIE”). We are considered the primary beneficiary of the rabbi trust because we direct the activities of the trust and are the beneficiary of the trust. At March 31, 2017, the value of the assets held in the rabbi trust was $8.4 million , which is included in the Other line within assets on our Balance Sheets.

6


New Accounting Standards
Accounting Standards Update No. 2016-18 – “Restricted Cash” (“ASU 2016-18”)
In November 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-18, which requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, we will no longer present changes in restricted cash as a component of investing activities. The update is effective for public companies for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We adopted ASU 2016-18 on a retrospective basis commencing in the 2017 first quarter.
Accounting Standards Update No. 2016-09 – “ Compensation – Stock Compensation (Topic 718) ” (“ASU 2016-09”)
In March 2016, the FASB issued ASU 2016-09, which changes how entities account for certain aspects of share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The new guidance requires all income tax effects of awards, including excess tax benefits, to be recorded as income tax expense (or benefit) in the income statement, which resulted in a $2.4 million benefit to our provision for income taxes in the 2017 first quarter. The new guidance requires excess tax benefits to be presented as an operating inflow rather than as a financing inflow in the statement of cash flows. Prior to the adoption of ASU 2016-09, excess tax benefits were recorded in additional paid-in-capital on the balance sheet. The update is effective for annual periods beginning after December 15, 2016 and interim periods within those annual periods. We adopted ASU 2016-09 in the 2017 first quarter. The adoption of ASU 2016-09 decreased our provision for income taxes, the amount of which depends on the vesting activity of our share-based compensation awards in any given period, and eliminated the presentation of excess tax benefits as a financing inflow on our statement of cash flows. Further, we made an accounting policy election to recognize forfeitures of share-based compensation awards as they occur, the cumulative effect of which resulted in an adjustment of $0.4 million to opening retained earnings. The adoption of ASU 2016-09 did not have any other material impacts on our financial statements and disclosures.
Future Adoption of Accounting Standards
Accounting Standards Update No. 2016-16 – “ Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory ” (“ASU 2016-16”)
In October 2016, the FASB issued ASU 2016-16, which changes the timing of when certain intercompany transactions are recognized within the provision for income taxes. The update is effective for public companies for annual periods beginning after December 15, 2017, and for annual periods and interim periods thereafter, with early adoption permitted. We are evaluating the impact that ASU 2016-16, including the timing of implementation, will have on our financial statements and disclosures.
Accounting Standards Update No. 2016-13 – “ Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments ” (“ASU 2016-13”)
In June 2016, the FASB issued ASU 2016-13, which replaces the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses. The update is intended to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This update is effective for annual periods beginning after December 15, 2019, with early adoption permitted for annual periods beginning after December 15, 2018. We are evaluating the impact that ASU 2016-13, including the timing of implementation, will have on our financial statements and disclosures.
Accounting Standards Update No. 2016-02 – “ Leases (Topic 842) ” (“ASU 2016-02”)
In February 2016, the FASB issued ASU 2016-02 to increase transparency and comparability of information regarding an entity’s leasing activities by providing additional information to users of financial statements. ASU 2016-02 amends the existing accounting standards for lease accounting, including requiring lessees to recognize most leases on their balance sheets and making targeted changes to lessor accounting. The new standard requires a modified retrospective transition approach for all leases existing at, or entered into after, the date of initial application, with an option to use certain transition relief. This update is effective for annual periods beginning after December 15, 2018, with early adoption permitted. Although we expect to adopt ASU 2016-02 commencing in fiscal year 2019, we continue to evaluate the impact that adoption of this accounting standards update will have on our financial statements and disclosures.

7


Accounting Standards Update No. 2016-01 – “ Financial Instruments – Overall (Subtopic 825-10) (“ASU 2016-01”)
In January 2016, the FASB issued ASU 2016-01, which updates certain aspects of recognition, measurement, presentation and disclosure of financial instruments. For public business entities, the amendments in ASU 2016-01 will be effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. We do not expect the adoption of ASU 2016-01 to have a material impact on our financial statements.
Accounting Standards Update No. 2014-09 – “ Revenue from Contracts with Customers (Topic 606) ” (“ASU 2014-09”), as Amended     
In May 2014, the FASB issued ASU 2014-09, which, as amended, supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principle-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the consideration that it expects to receive in exchange for the promised goods or services, the provider should apply the following five steps: (1) identify the contract with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU 2014-09, as amended, will be effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The new standard may be applied retrospectively or on a modified retrospective basis with the cumulative effect recognized on the date of adoption. We will adopt ASU 2014-09, as amended, commencing in fiscal year 2018, on a retrospective basis. While we continue to evaluate the impact that adoption of this accounting standards update will have on our financial statements and disclosures, we expect the amount and timing of revenue recognition related to our accounting for management fee revenues, ancillary revenues and rental revenues will remain materially consistent with our current accounting. We anticipate disclosing additional detail on the impact of adoption of this accounting standards update later in 2017.
2. INCOME TAXES
We file income tax returns with U.S. federal and state and non-U.S. jurisdictions and are subject to audits in these jurisdictions. Although we do not anticipate that a significant impact to our unrecognized tax benefit balance will occur during the next fiscal year, the amount of our liability for unrecognized tax benefits could change as a result of audits in these jurisdictions. Our total unrecognized tax benefit balance that, if recognized, would impact our effective tax rate, was $1.5 million at both March 31, 2017 and December 30, 2016 .
3. VACATION OWNERSHIP NOTES RECEIVABLE
The following table shows the composition of our vacation ownership notes receivable balances, net of reserves:
($ in thousands)
At March 31, 2017
 
At December 30, 2016
Vacation ownership notes receivable — securitized
$
659,191

 
$
717,543

Vacation ownership notes receivable — non-securitized
 
 
 
Eligible for securitization (1)
189,567

 
98,508

Not eligible for securitization (1)
148,661

 
156,260

Subtotal
338,228

 
254,768

Total vacation ownership notes receivable
$
997,419

 
$
972,311

_________________________
(1)  
Refer to Footnote No. 4, “Financial Instruments,” for discussion of eligibility of our vacation ownership notes receivable for securitization.

8


The following tables show future principal payments, net of reserves, as well as interest rates for our non-securitized and securitized vacation ownership notes receivable at March 31, 2017 :
($ in thousands)
Non-Securitized Vacation Ownership Notes Receivable
 
Securitized
Vacation Ownership Notes Receivable
 
Total
2017, remaining
$
39,788

 
$
69,096

 
$
108,884

2018
39,799

 
85,657

 
125,456

2019
33,288

 
79,940

 
113,228

2020
29,740

 
79,272

 
109,012

2021
27,302

 
77,744

 
105,046

Thereafter
168,311

 
267,482

 
435,793

Balance at March 31, 2017
$
338,228

 
$
659,191

 
$
997,419

Weighted average stated interest rate at March 31, 2017
11.7%
 
12.7%
 
12.4%
Range of stated interest rates at March 31, 2017
0.0% to 19.5%
 
4.9% to 19.5%
 
0.0% to 19.5%

We reflect interest income associated with vacation ownership notes receivable in our Statements of Income in the Financing revenues caption. The following table summarizes interest income associated with vacation ownership notes receivable:
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
($ in thousands)
(91 days)
 
(84 days)
Interest income associated with vacation ownership notes receivable — securitized
$
23,346

 
$
21,191

Interest income associated with vacation ownership notes receivable — non-securitized
7,010

 
6,583

Total interest income associated with vacation ownership notes receivable
$
30,356

 
$
27,774


We record an estimate of expected uncollectibility on all notes receivable from vacation ownership purchasers as a reduction of revenues from the sale of vacation ownership products at the time we recognize profit on a vacation ownership product sale. We fully reserve for all defaulted vacation ownership notes receivable in addition to recording a reserve on the estimated uncollectible portion of the remaining vacation ownership notes receivable. For those vacation ownership notes receivable that are not in default, we assess collectibility based on pools of vacation ownership notes receivable because we hold large numbers of homogeneous vacation ownership notes receivable. We use the same criteria to estimate uncollectibility for non-securitized vacation ownership notes receivable and securitized vacation ownership notes receivable because they perform similarly. We estimate uncollectibility for each pool based on historical activity for similar vacation ownership notes receivable.
The following table summarizes the activity related to our vacation ownership notes receivable reserve for the 2017 first quarter:
($ in thousands)
Non-Securitized Vacation Ownership Notes Receivable
 
Securitized
Vacation Ownership Notes Receivable
 
Total
Balance at December 30, 2016
$
56,628

 
$
53,735

 
$
110,363

Provision for loan losses
10,366

 
1,780

 
12,146

Write-offs
(16,270
)
 

 
(16,270
)
Defaulted vacation ownership notes receivable repurchase activity (1)
6,325

 
(6,325
)
 

Balance at March 31, 2017
$
57,049

 
$
49,190

 
$
106,239

_________________________
(1)  
Decrease in securitized vacation ownership notes receivable reserve and increase in non-securitized vacation ownership notes receivable reserve was attributable to the transfer of the reserve when we voluntarily repurchased defaulted securitized vacation ownership notes receivable.

9


Although we consider loans to owners to be past due if we do not receive payment within 30 days of the due date, we suspend accrual of interest only on those loans that are over 90 days past due. We consider loans over 150 days past due to be in default. We apply payments we receive for vacation ownership notes receivable on non-accrual status first to interest, then to principal and any remainder to fees. We resume accruing interest when vacation ownership notes receivable are less than 90 days past due. We do not accept payments for vacation ownership notes receivable during the foreclosure process unless the amount is sufficient to pay all past due principal, interest, fees and penalties owed and fully reinstate the note. We write off uncollectible vacation ownership notes receivable against the reserve once we receive title to the vacation ownership products through the foreclosure or deed-in-lieu process or, in Asia Pacific or Europe, when revocation is complete. For both non-securitized and securitized vacation ownership notes receivable, we estimated average remaining default rates of 7.14 percent and 7.09 percent as of March 31, 2017 and December 30, 2016 , respectively. A 0.5 percentage point increase in the estimated default rate would have resulted in an increase in our allowance for loan losses of $5.2 million and $5.0 million as of March 31, 2017 and December 30, 2016 , respectively.
The following table shows our recorded investment in non-accrual vacation ownership notes receivable, which are vacation ownership notes receivable that are 90 days or more past due:
($ in thousands)
Non-Securitized Vacation Ownership Notes Receivable
 
Securitized
Vacation Ownership Notes Receivable
 
Total
Investment in vacation ownership notes receivable on non-accrual status at March 31, 2017
$
37,880

 
$
7,978

 
$
45,858

Investment in vacation ownership notes receivable on non-accrual status at December 30, 2016
$
43,792

 
$
6,687

 
$
50,479

Average investment in vacation ownership notes receivable on non-accrual status during the 2017 first quarter
$
40,836

 
$
7,333

 
$
48,169

Average investment in vacation ownership notes receivable on non-accrual status during the 2016 first quarter
$
46,359

 
$
9,425

 
$
55,784


The following table shows the aging of the recorded investment in principal, before reserves, in vacation ownership notes receivable as of March 31, 2017 :
($ in thousands)
Non-Securitized Vacation Ownership Notes Receivable
 
Securitized
Vacation Ownership Notes Receivable
 
Total
31 – 90 days past due
$
7,384

 
$
16,069

 
$
23,453

91 – 150 days past due
4,218

 
7,978

 
12,196

Greater than 150 days past due
33,662

 

 
33,662

Total past due
45,264

 
24,047

 
69,311

Current
350,013

 
684,334

 
1,034,347

Total vacation ownership notes receivable
$
395,277

 
$
708,381

 
$
1,103,658

The following table shows the aging of the recorded investment in principal, before reserves, in vacation ownership notes receivable as of December 30, 2016 :
($ in thousands)
Non-Securitized Vacation Ownership Notes Receivable
 
Securitized
Vacation Ownership Notes Receivable
 
Total
31 – 90 days past due
$
7,780

 
$
16,468

 
$
24,248

91 – 150 days past due
3,981

 
6,687

 
10,668

Greater than 150 days past due
39,811

 

 
39,811

Total past due
51,572

 
23,155

 
74,727

Current
259,824

 
748,123

 
1,007,947

Total vacation ownership notes receivable
$
311,396

 
$
771,278

 
$
1,082,674



10


4. FINANCIAL INSTRUMENTS
The following table shows the carrying values and the estimated fair values of financial assets and liabilities that qualify as financial instruments, determined in accordance with the authoritative guidance for disclosures regarding the fair value of financial instruments. Considerable judgment is required in interpreting market data to develop estimates of fair value. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts. The table excludes Cash and cash equivalents, Restricted cash, Accounts and contracts receivable, Accounts payable, Advance deposits and Accrued liabilities, all of which had fair values approximating their carrying amounts due to the short maturities and liquidity of these instruments.
 
At March 31, 2017
 
At December 30, 2016
($ in thousands)
Carrying
Amount
 
Fair
Value (1)
 
Carrying
Amount
 
Fair
Value (1)
Vacation ownership notes receivable — securitized
$
659,191

 
$
766,301

 
$
717,543

 
$
834,009

Vacation ownership notes receivable — non-securitized
338,228

 
365,877

 
254,768

 
269,161

Other assets
8,427

 
8,427

 

 

Total financial assets
$
1,005,846

 
$
1,140,605

 
$
972,311

 
$
1,103,170

Non-recourse debt associated with vacation ownership notes receivable securitizations, net
$
(675,746
)
 
$
(673,620
)
 
$
(729,188
)
 
$
(725,963
)
Other debt, net
(800
)
 
(800
)
 
(815
)
 
(815
)
Other liabilities
(141
)
 
(141
)
 
(2,285
)
 
(2,285
)
Total financial liabilities
$
(676,687
)
 
$
(674,561
)
 
$
(732,288
)
 
$
(729,063
)
_________________________
(1)  
Fair value of financial instruments, with the exception of other assets, has been determined using Level 3 inputs. Fair value of other assets that are financial instruments has been determined using Level 2 inputs.
Vacation Ownership Notes Receivable
We estimate the fair value of our securitized vacation ownership notes receivable using a discounted cash flow model. We believe this is comparable to the model that an independent third party would use in the current market. Our model uses default rates, prepayment rates, coupon rates and loan terms for our securitized vacation ownership notes receivable portfolio as key drivers of risk and relative value that, when applied in combination with pricing parameters, determine the fair value of the underlying vacation ownership notes receivable.
Due to factors that impact the general marketability of our non-securitized vacation ownership notes receivable, as well as current market conditions, we bifurcate our vacation ownership notes receivable at each balance sheet date into those eligible and not eligible for securitization using criteria applicable to current securitization transactions in the asset-backed securities (“ABS”) market. Generally, vacation ownership notes receivable are considered not eligible for securitization if any of the following attributes are present: (1) payments are greater than 30 days past due; (2) the first payment has not been received; or (3) the collateral is located in Asia or Europe. In some cases, eligibility may also be determined based on the credit score of the borrower, the remaining term of the loans and other similar factors that may reflect investor demand in a securitization transaction or the cost to effectively securitize the vacation ownership notes receivable.
The following table shows the bifurcation of our non-securitized vacation ownership notes receivable into those eligible and not eligible for securitization based upon the aforementioned eligibility criteria:
 
At March 31, 2017
 
At December 30, 2016
($ in thousands)
Carrying
Amount
 
Fair
Value
 
Carrying
Amount
 
Fair
Value
Vacation ownership notes receivable
 
 
 
 
 
 
 
Eligible for securitization
$
189,567

 
$
217,216

 
$
98,508

 
$
112,901

Not eligible for securitization
148,661

 
148,661

 
156,260

 
156,260

Total non-securitized
$
338,228

 
$
365,877

 
$
254,768

 
$
269,161



11


We estimate the fair value of the portion of our non-securitized vacation ownership notes receivable that we believe will ultimately be securitized in the same manner as securitized vacation ownership notes receivable. We value the remaining non-securitized vacation ownership notes receivable at their carrying value, rather than using our pricing model. We believe that the carrying value of these particular vacation ownership notes receivable approximates fair value because the stated interest rates of these loans are consistent with current market rates and the reserve for these vacation ownership notes receivable appropriately accounts for risks in default rates, prepayment rates, discount rates and loan terms.
Other Assets
We estimate the fair value of our other assets that are financial instruments using Level 2 inputs. These assets consist of COLI policies held in a rabbi trust. The carrying value of the COLI policies is equal to their cash surrender value.
Non-Recourse Debt Associated with Securitized Vacation Ownership Notes Receivable, Net
We generate cash flow estimates by modeling all bond tranches for our active vacation ownership notes receivable securitization transactions, with consideration for the collateral specific to each tranche. The key drivers in our analysis include default rates, prepayment rates, bond interest rates and other structural factors, which we use to estimate the projected cash flows. In order to estimate market credit spreads by rating, we obtain indicative credit spreads from investment banks that actively issue and facilitate the market for vacation ownership securities and determine an average credit spread by rating level of the different tranches. We then apply those estimated market spreads to swap rates in order to estimate an underlying discount rate for calculating the fair value of the active bonds payable.
5. ACQUISITIONS AND DISPOSITIONS
Miami Beach, Florida
During the 2016 first quarter, we completed the acquisition of an operating property located in the South Beach area of Miami Beach, Florida, for $23.5 million . The acquisition was treated as a business combination, accounted for using the acquisition method of accounting and included within Operating activities on our Cash Flows and presented as Inventory. As consideration for the acquisition, we paid $23.5 million in cash; the value of the acquired property was allocated to inventory. We rebranded this property as Marriott Vacation Club Pulse, South Beach and intend to convert this property, in its entirety, into vacation ownership interests for future use in our Marriott Vacation Club Destinations (“MVCD”) program.

12


6. EARNINGS PER SHARE
Basic earnings per common share is calculated by dividing net income attributable to common shareholders by the weighted average number of shares of common stock outstanding during the reporting period. Treasury stock is excluded from the weighted average number of shares of common stock outstanding. Diluted earnings per common share is calculated to give effect to all potentially dilutive common shares that were outstanding during the reporting period. The dilutive effect of outstanding equity-based compensation awards is reflected in diluted earnings per common share by application of the treasury stock method using average market prices during the period.
The table below illustrates the reconciliation of the earnings and number of shares used in our calculation of basic and diluted earnings per share.
 
Quarters Ended
 
March 31, 2017 (1)
 
March 25, 2016 (2)
(in thousands, except per share amounts)
(91 days)
 
(84 days)
Computation of Basic Earnings Per Share
 
 
 
Net income
$
33,700

 
$
24,408

Shares for basic earnings per share
27,251

 
29,123

Basic earnings per share
$
1.24

 
$
0.84

Computation of Diluted Earnings Per Share
 
 
 
Net income
$
33,700

 
$
24,408

Shares for basic earnings per share
27,251

 
29,123

Effect of dilutive shares outstanding
 
 
 
Employee stock options and SARs
458

 
375

Restricted stock units
191

 
142

Shares for diluted earnings per share
27,900

 
29,640

Diluted earnings per share
$
1.21

 
$
0.82

_________________________
(1)  
The computations of diluted earnings per share exclude approximately 312,000 shares of common stock, the maximum number of shares issuable as of March 31, 2017 upon the vesting of certain performance-based awards, because the performance conditions required for the shares subject to such awards to vest were not achieved by the end of the reporting period.
(2)  
The computations of diluted earnings per share exclude approximately 278,000 shares of common stock, the maximum number of shares issuable as of March 25, 2016 upon the vesting of certain performance-based awards, because the performance conditions required for the shares subject to such awards to vest were not achieved by the end of the reporting period.
In accordance with the applicable accounting guidance for calculating earnings per share, for the 2017 first quarter, we excluded from our calculation of diluted earnings per share 81,977 shares underlying stock appreciation rights (“SARs”) that may be settled in shares of common stock, with an exercise price of $97.53 , because this exercise price was greater than the average market price for the applicable period. For the 2016 first quarter, we excluded from our calculation of diluted earnings per share 194,615 shares underlying SARs that may be settled in shares of common stock, with exercise prices ranging from $61.71 to $77.42 , because these exercise prices were greater than the average market price for the applicable period.

13


7. INVENTORY
The following table shows the composition of our inventory balances:
($ in thousands)
At March 31, 2017
 
At December 30, 2016
Finished goods (1)
$
324,431

 
$
337,949

Work-in-progress
28,677

 
39,486

Land and infrastructure (2)
335,155

 
330,728

Real estate inventory
688,263

 
708,163

Operating supplies and retail inventory
4,494

 
4,373

 
$
692,757

 
$
712,536

_________________________
(1)  
Represents completed inventory that is either registered for sale as vacation ownership interests, or unregistered and available for sale in its current form.
(2)  
Includes $69.2 million of inventory related to estimated future foreclosures at March 31, 2017 .
We value vacation ownership and residential products at the lower of cost or fair market value less costs to sell, in accordance with applicable accounting guidance, and we record operating supplies at the lower of cost (using the first-in, first-out method) or net realizable value. Product cost true-up activity relating to vacation ownership products decreased carrying values of inventory by $0.9 million during the 2017 first quarter and increased carrying values of inventory by $3.2 million during the 2016 first quarter.
During the 2016 first quarter, $27.3 million was transferred from Property and equipment to Inventory when we commenced the conversion of portions of the operating properties in Surfers Paradise, Australia and San Diego, California to vacation ownership inventory. The acquisition of these operating properties was previously included within Operating Activities on our Cash Flows and presented as Purchase of operating properties for future conversion to inventory within Operating Activities.
8. CONTINGENCIES AND COMMITMENTS
Commitments and Letters of Credit
As of March 31, 2017 , we had the following commitments outstanding:
We have various contracts for the use of information technology hardware and software that we use in the normal course of business. Our aggregate commitments under these contracts were $24.8 million , of which we expect $9.0 million , $8.6 million , $3.4 million , $1.6 million , $0.8 million and $1.4 million will be paid in 2017, 2018, 2019, 2020, 2021 and thereafter, respectively.
We have a commitment to purchase an operating property located in New York, New York, for $ 158.5 million , of which $7.2 million is attributed to a related capital lease arrangement and recorded in Debt. We expect to acquire the units in the property, in their current form, over time, and we expect to make payments for these units of $ 96.8 million and $ 61.7 million in 2018 and 2019, respectively. We currently manage this property, which we have rebranded as Marriott Vacation Club Pulse, New York City. See Footnote No. 12, “Variable Interest Entities,” for additional information on this transaction.
We have commitments to purchase vacation ownership units located in two resorts in Bali, Indonesia in two separate transactions, contingent upon completion of construction to agreed upon standards within specified timeframes, for use in our Asia Pacific segment. We expect to complete the acquisition of 51 vacation ownership units in 2017 pursuant to one of the commitments, and to make remaining payments of $15.4 million in 2017 with respect to these units, when specific construction milestones are completed. We expect to complete the acquisition of 88 vacation ownership units in 2019 pursuant to the other commitment, and to make payments with respect to these units, when specific construction milestones are completed, as follows: $7.8 million in 2017, $5.9 million in 2018 and $25.4 million in 2019.
We have a commitment of $137.1 million to purchase vacation ownership units located at our resort in Marco Island, Florida, of which we expect $ 33.3 million , $ 50.0 million and $ 53.8 million will be paid in 2017, 2018 and 2019, respectively. See Footnote No. 12, “Variable Interest Entities,” and Footnote No. 14, “Subsequent Events,” for additional information on this transaction.

14


We have a commitment of $91.1 million to purchase vacation ownership units located on the Big Island of Hawaii, contingent upon the completion of renovations to the vacation ownership units. We expect to acquire the completed vacation ownership units in 2017 and to pay the purchase price as follows: $27.5 million in 2017, $32.7 million in 2018 and $30.9 million in 2019.
We have a new operating lease commitment that expires in 2029 . Our aggregate minimum lease payment under this contract is $15.5 million , of which we expect $1.3 million , $1.3 million , $1.4 million and $11.5 million will be paid in 2019, 2020, 2021 and thereafter, respectively.
Surety bonds issued as of March 31, 2017 totaled $43.3 million , the majority of which were requested by federal, state or local governments in connection with our operations.
Additionally, as of March 31, 2017 , we had $1.1 million of letters of credit outstanding under our $200 million revolving credit facility (as amended, the “Revolving Corporate Credit Facility”).
Loss Contingencies         
In April 2013, Krishna and Sherrie Narayan and other owners of 12 residential units (owners of two of which subsequently agreed to release their claims) at the resort formerly known as The Ritz-Carlton Residences, Kapalua Bay (“Kapalua Bay”) filed an amended complaint in Circuit Court for Maui County, Hawaii against us, certain of our subsidiaries, Marriott International, certain of its subsidiaries, and the joint venture in which we have an equity investment that developed and marketed vacation ownership and residential products at Kapalua Bay (the “Joint Venture”). In the original complaint, the plaintiffs alleged that defendants mismanaged funds of the residential owners association (the “Kapalua Bay Association”), created a conflict of interest by permitting their employees to serve on the Kapalua Bay Association’s board, and failed to disclose documents to which the plaintiffs were allegedly entitled. The amended complaint alleges breach of fiduciary duty, violations of the Hawaii Unfair and Deceptive Trade Practices Act and the Hawaii condominium statute, intentional misrepresentation and concealment, unjust enrichment and civil conspiracy. The relief sought in the amended complaint includes injunctive relief, repayment of all sums paid to us and our subsidiaries and Marriott International and its subsidiaries, compensatory and punitive damages, and treble damages under the Hawaii Unfair and Deceptive Trade Practices Act. We dispute the material allegations in the amended complaint and continue to defend against the action vigorously. We filed a motion in the Circuit Court to compel arbitration of plaintiffs’ claims. That motion was denied, but on appeal the Hawaii Intermediate Court of Appeals reversed. The Hawaii Supreme Court reversed the decision of the Intermediate Court of Appeals and reinstated the action in Circuit Court, which set the case for trial. We filed a petition with the United States Supreme Court seeking review of the Hawaii Supreme Court’s decision. On January 11, 2016, the U.S. Supreme Court issued an order vacating the Hawaii Supreme Court’s decision and remanding the case with instructions to reconsider its ruling in light of a recent U.S. Supreme Court decision reiterating the obligation of courts to enforce arbitration agreements. The Circuit Court has stayed proceedings pending action by the Hawaii Supreme Court. Given the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
In June 2013, Earl C. and Patricia A. Charles, owners of a fractional interest at Kapalua Bay, together with owners of  38 other fractional interests (owners of two of which subsequently agreed to release their claims) at Kapalua Bay, filed an amended complaint in the Circuit Court of the Second Circuit for the State of Hawaii against us, certain of our subsidiaries, Marriott International, certain of its subsidiaries, the Joint Venture, and other entities that have equity investments in the Joint Venture. The plaintiffs allege that the defendants failed to disclose the financial condition of the Joint Venture and the commitment of the defendants to the Joint Venture, and that defendants’ actions constituted fraud and violated the Hawaii Unfair and Deceptive Trade Practices Act, the Hawaii Condominium Property Act and the Hawaii Time Sharing Plans statute. The relief sought includes compensatory and punitive damages, attorneys’ fees, pre-judgment interest, declaratory relief, rescission and treble damages under the Hawaii Unfair and Deceptive Trade Practices Act. The complaint was subsequently further amended to add owners of two additional fractional interests as plaintiffs. The Circuit Court granted our motion to compel arbitration of the claims asserted by the plaintiffs. Plaintiffs appealed that decision to the Hawaii Intermediate Court of Appeals and also initiated arbitration. On July 24, 2015, the Intermediate Court of Appeals reversed the decision of the Circuit Court and directed that the action be reinstated in the Circuit Court, based on the Hawaii Supreme Court’s decision in the Narayan case discussed above, which has since been vacated by the U.S. Supreme Court. We dispute the material allegations in the amended complaint and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.

15


On May 26, 2015, we and certain of our subsidiaries were named as defendants in an action filed in the Superior Court of San Francisco County, California, by William and Sharon Petrick and certain other present and former owners of 69 fractional interests at the RCC San Francisco. The plaintiffs allege that the affiliation of the RCC San Francisco with our points-based MVCD program, certain alleged sales practices, and other acts we and the other defendants allegedly took caused an actionable decrease in the value of their fractional interests. The relief sought includes, among other things, compensatory and punitive damages, rescission, and pre- and post-judgment interest. Plaintiffs filed an amended complaint on April 25, 2016. We filed a motion to dismiss. The Court held a hearing and the parties are awaiting a decision. We dispute the material allegations in the amended complaint and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
On March 31, 2017, following an order of the U.S. District Court for the District of Colorado that no further amendments would be permitted, RCHFU, L.L.C. and other owners of 232 fractional interests at The Ritz-Carlton Club, Aspen Highlands (“RCC Aspen Highlands”) served an amended complaint in an action pending in the court against us, certain of our subsidiaries, and other third party defendants. The amended complaint alleges that the plaintiffs’ fractional interests were devalued by the affiliation of RCC Aspen Highlands and other Ritz-Carlton Clubs with our points-based MVCD program. The relief sought includes, among other things, unspecified damages, pre- and post-judgment interest, and attorneys’ fees. We filed a motion to dismiss the amended complaint, which remains pending. We dispute the plaintiffs’ material allegations and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
On May 20, 2016, we, certain of our subsidiaries, and other third parties were named as defendants in an action filed in the U.S. District Court for the Middle District of Florida by Anthony and Beth Lennen. The case is filed as a putative class action; the plaintiffs seek to represent a class consisting of themselves and all other purchasers of MVCD points, from inception of the MVCD program in June 2010 to the present, as well as all individuals who own or have owned weeks in any resorts for which weeks have been added to the MVCD program. Plaintiffs challenge the characterization of the beneficial interests in the MVCD trust that are sold to customers as real estate interests under Florida law. They also challenge the structure of the trust and associated operational aspects of the trust product. The relief sought includes, among other things, declaratory relief, an unwinding of the MVCD product, and punitive damages. On September 15, 2016, we filed a motion to dismiss the complaint and a motion to stay the case pending referral of certain questions to Florida state regulators, which motions remain pending. We dispute the material allegations in the complaint and intend to defend against the action vigorously. Given the early stages of the action and the inherent uncertainties of litigation, we cannot estimate a range of the potential liability, if any, at this time.
9. DEBT
The following table provides detail on our debt balances, net of unamortized debt issuance costs:
($ in thousands)
At March 31, 2017
 
At December 30, 2016
Vacation ownership notes receivable securitizations, gross (1)
$
684,023

 
$
738,362

Unamortized debt issuance costs
(8,277
)
 
(9,174
)
 
675,746

 
729,188

Other debt, gross
818

 
834

Unamortized debt issuance costs
(18
)
 
(19
)
 
800

 
815

Capital leases
7,221

 
7,221

 
$
683,767

 
$
737,224

_________________________
(1)  
Interest rates as of March 31, 2017 range from 2.2% to 6.3% with a weighted average interest rate of 2.5% .
See Footnote No. 12, “Variable Interest Entities,” for a discussion of the collateral for the non-recourse debt associated with the securitized vacation ownership notes receivable and the Warehouse Credit Facility. All of our other debt was, and to the extent currently outstanding is, recourse to us but unsecured.

16


The following table shows scheduled future principal payments, net of debt issuance costs, for our debt as of March 31, 2017 :
($ in thousands)
Vacation Ownership Notes Receivable Securitizations (1)
 
Other Debt
 
Capital Leases
 
Total
Debt Principal Payments Year
 
 
 
 
 
 
 
2017, remaining
$
71,501

 
$
604

 
$

 
$
72,105

2018
87,053

 
4

 
7,221

 
94,278

2019
80,578

 
4

 

 
80,582

2020
79,520

 
4

 

 
79,524

2021
78,321

 
5

 

 
78,326

Thereafter
287,050

 
197

 

 
287,247

Balance at March 31, 2017
$
684,023

 
$
818

 
$
7,221

 
$
692,062

_________________________
(1)  
The debt associated with our vacation ownership notes receivable securitizations is non-recourse to us.
As the contractual terms of the underlying securitized vacation ownership notes receivable determine the maturities of the non-recourse debt associated with them, actual maturities may occur earlier than shown above due to prepayments by the vacation ownership notes receivable obligors.
We paid cash for interest, net of amounts capitalized, of $4.8 million and $4.6 million in the 2017 first quarter and the 2016 first quarter, respectively.
Debt Associated with Vacation Ownership Notes Receivable Securitizations
Each of the transactions in which we have securitized vacation ownership notes receivable contains various triggers relating to the performance of the underlying vacation ownership notes receivable. If a pool of securitized vacation ownership notes receivable fails to perform within the pool’s established parameters (default or delinquency thresholds vary by transaction), transaction provisions effectively redirect the monthly excess spread we would otherwise receive from that pool (attributable to the interests we retained) to accelerate the principal payments to investors (taking into account the subordination of the different tranches to the extent there are multiple tranches) until the performance trigger is cured. During the 2017 first quarter, and as of March 31, 2017 , no securitized vacation ownership notes receivable pools were out of compliance with their respective established parameters. As of March 31, 2017 , we had 7 securitized vacation ownership notes receivable pools outstanding.
Revolving Corporate Credit Facility
The Revolving Corporate Credit Facility, which terminates on September 10, 2019, has a borrowing capacity of $200 million , including a letter of credit sub-facility of $100 million , and provides support for our business, including ongoing liquidity and letters of credit. Borrowings under the Revolving Corporate Credit Facility generally bear interest at a floating rate at the Eurodollar rate plus an applicable margin that varies from 1.625 percent to 3.125 percent depending on our credit rating. In addition, we pay a commitment fee on the unused availability under the Revolving Corporate Credit Agreement at a rate that varies from 20 basis points per annum to 50 basis points per annum depending on our credit rating.
No cash borrowings were outstanding as of March 31, 2017 under our Revolving Corporate Credit Facility. Any amounts that are borrowed under that facility, as well as obligations with respect to letters of credit issued pursuant to that facility, are secured by a perfected first priority security interest in substantially all of the assets of the borrower under, and guarantors of, that facility (which include Marriott Vacations Worldwide and each of our direct and indirect, existing and future, domestic subsidiaries, excluding certain bankruptcy remote special purpose subsidiaries), in each case including inventory, subject to certain exceptions. As of March 31, 2017, we were in compliance with the requirements of applicable financial and operating covenants under the facility.
Warehouse Credit Facility
The Warehouse Credit Facility, which has a borrowing capacity of $250 million , allows for the securitization of vacation ownership notes receivable on a non-recourse basis. The Warehouse Credit Facility terminates on March 7, 2019 and if not renewed, any amounts outstanding thereunder would become due and payable 13 months after termination, at which time all principal and interest collected with respect to the vacation ownership notes receivable held in the Warehouse Credit Facility would be redirected to the lenders to pay down the outstanding debt under the facility. The advance rate for vacation ownership

17


notes receivable securitized using the Warehouse Credit Facility varies based on the characteristics of the securitized vacation ownership notes receivable. We also pay unused facility and other fees under the Warehouse Credit Facility.
As of March 31, 2017 , there were no cash borrowings outstanding under our Warehouse Credit Facility. We generally expect to securitize our vacation ownership notes receivable, including any vacation ownership notes receivable held in the Warehouse Credit Facility, in the ABS market once per year.
10. SHAREHOLDERS’ EQUITY
Marriott Vacations Worldwide has 100,000,000 authorized shares of common stock, par value of $ 0.01 per share. At March 31, 2017 , there were 36,787,613 shares of Marriott Vacations Worldwide common stock issued, of which 27,147,546 shares were outstanding and 9,640,067 shares were held as treasury stock. At December 30, 2016 , there were 36,633,868 shares of Marriott Vacations Worldwide common stock issued, of which 26,990,306 shares were outstanding and 9,643,562 shares were held as treasury stock. Marriott Vacations Worldwide has 2,000,000 authorized shares of preferred stock, par value of $ 0.01 per share, none of which were issued or outstanding as of March 31, 2017 or December 30, 2016 .
The following table details changes in shareholders’ equity during the quarter ended March 31, 2017 :
($ in thousands)
Common Stock
 
Treasury Stock
 
Additional Paid-In Capital
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Total Equity
Balance at December 30, 2016
$
366

 
$
(606,631
)
 
$
1,162,283

 
$
5,460

 
$
346,341

 
$
907,819

Impact of adoption of ASU 2016-09

 

 
371

 

 
(371
)
 

Opening balance 2017
366

 
(606,631
)
 
1,162,654

 
5,460

 
345,970

 
907,819

Net income

 

 

 

 
33,700

 
33,700

Foreign currency translation adjustments

 

 

 
4,548

 

 
4,548

Derivative instrument adjustment

 

 

 
(307
)
 

 
(307
)
Amounts related to share-based compensation
2

 

 
(3,311
)
 

 

 
(3,309
)
Dividends

 

 

 

 
(9,533
)
 
(9,533
)
Employee stock plan issuance

 
220

 
111

 

 

 
331

Balance at March 31, 2017
$
368

 
$
(606,411
)
 
$
1,159,454

 
$
9,701

 
$
370,137

 
$
933,249


Share Repurchase Program
The following table summarizes share repurchase activity under our current share repurchase program:
($ in thousands, except per share amounts)
Number of Shares Repurchased
 
Cost of Shares Repurchased
 
Average Price Paid per Share
As of December 30, 2016
9,672,629

 
$
608,439

 
$
62.90

For the quarter ended March 31, 2017

 

 

As of March 31, 2017
9,672,629

 
$
608,439

 
$
62.90


On February 9, 2017, our Board of Directors extended the duration of our existing share repurchase program to September 30, 2017. As of March 31, 2017, our Board of Directors had authorized the repurchase of an aggregate of up to 10,900,000 shares of our common stock under the share repurchase program since the initiation of the program in October 2013. Share repurchases may be made through open market purchases, privately negotiated transactions, block transactions, tender offers, accelerated share repurchase agreements or otherwise. The specific timing, amount and other terms of the repurchases will depend on market conditions, corporate and regulatory requirements and other factors. Acquired shares of our common stock are held as treasury shares carried at cost in our Financial Statements. In connection with the repurchase program, we are authorized to adopt one or more trading plans pursuant to the provisions of Rule 10b5-1 under the Securities Exchange Act of 1934, as amended.
As of March 31, 2017 , 1.2 million shares remained available for repurchase under the authorization approved by our Board of Directors. The authorization for the share repurchase program may be suspended, terminated, increased or decreased by our Board of Directors at any time without prior notice.

18


Dividends
We declared cash dividends to holders of common stock during the quarter ended March 31, 2017 as follows:
Declaration Date
 
Shareholder Record Date
 
Distribution Date
 
Dividend per Share
February 9, 2017
 
February 23, 2017
 
March 9, 2017
 
$0.35

Any future dividend payments will be subject to Board approval, and there can be no assurance that we will pay dividends in the future.
11. SHARE-BASED COMPENSATION
We maintain the Marriott Vacations Worldwide Corporation Stock and Cash Incentive Plan (the “Stock Plan”) for the benefit of our officers, directors and employees. Under the Stock Plan, we award: (1) restricted stock units (“RSUs”) of our common stock, (2) SARs and (3) stock options to purchase our common stock. A total of 6 million shares are authorized for issuance pursuant to grants under the Stock Plan. As of March 31, 2017 , 1.3 million shares were available for grants under the Stock Plan.
The following table details our share-based compensation expense related to award grants to our officers, directors and employees for the 2017 first quarter and the 2016 first quarter:
 
 
Quarters Ended
 
 
March 31, 2017
 
March 25, 2016
($ in thousands)
 
(91 days)
 
(84 days)
Service based RSUs
 
$
1,966

 
$
1,567

Performance based RSUs
 
851

 
610

 
 
2,817

 
2,177

SARs
 
459

 
347

Stock options
 

 

 
 
$
3,276

 
$
2,524


The following table details our deferred compensation costs related to unvested awards:
($ in thousands)
 
At March 31, 2017
 
At December 30, 2016
Service based RSUs
 
$
16,337

 
$
9,000

Performance based RSUs
 
7,452

 
3,307

 
 
23,789

 
12,307

SARs
 
2,927

 
1,146

Stock options
 

 

 
 
$
26,716

 
$
13,453


Restricted Stock Units
We granted 103,001 service based RSUs, with a weighted average grant-date fair value of $94.10 , to our employees and non-employee directors during the 2017 first quarter. During the 2017 first quarter, we also granted performance based RSUs to members of management. A maximum of 94,436 RSUs may be earned under the performance based RSUs granted during the 2017 first quarter.
Stock Appreciation Rights
We granted 81,977 SARs, with a weighted average grant-date fair value of $27.63 and a weighted average exercise price of $97.53 , to members of management during the 2017 first quarter. We use the Black-Scholes model to estimate the fair value of the SARs granted. The average expected life was calculated using the simplified method. The risk-free interest rate was calculated based on U.S. Treasury zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant. The dividend yield assumption listed below is based on the expectation of future payouts.
The following table outlines the assumptions used to estimate the fair value of grants during the 2017 first quarter:
Expected volatility
30.41%
Dividend yield
1.44%
Risk-free rate
2.06%
Expected term (in years)
6.25

12. VARIABLE INTEREST ENTITIES
Variable Interest Entities Related to Our Vacation Ownership Notes Receivable Securitizations
We periodically securitize, without recourse, through bankruptcy remote special purpose entities, notes receivable originated in connection with the sale of vacation ownership products. These vacation ownership notes receivable securitizations provide funding for us and transfer the economic risks and substantially all the benefits of the consumer loans we originate to third parties. In a vacation ownership notes receivable securitization, various classes of debt securities issued by a special purpose entity are generally collateralized by a single tranche of transferred assets, which consist of vacation ownership notes receivable. With each vacation ownership notes receivable securitization, we may retain a portion of the securities, subordinated tranches, interest-only strips, subordinated interests in accrued interest and fees on the securitized vacation ownership notes receivable or, in some cases, overcollateralization and cash reserve accounts.
We created these bankruptcy remote special purpose entities to serve as a mechanism for holding assets and related liabilities, and the entities have no equity investment at risk, making them variable interest entities. We continue to service the vacation ownership notes receivable, transfer all proceeds collected to these special purpose entities, and retain rights to receive benefits that are potentially significant to the entities. Accordingly, we concluded that we are the entities’ primary beneficiary and, therefore, consolidate them.
The following table shows consolidated assets, which are collateral for the obligations of these variable interest entities, and consolidated liabilities included on our Balance Sheet at March 31, 2017 :
($ in thousands)
Vacation Ownership Notes Receivable Securitizations
 
Warehouse
Credit Facility
 
Total
Consolidated Assets:
 
 
 
 
 
Vacation ownership notes receivable, net of reserves
$
659,191

 
$

 
$
659,191

Interest receivable
4,522

 

 
4,522

Restricted cash
32,762

 

 
32,762

Total
$
696,475

 
$

 
$
696,475

Consolidated Liabilities:
 
 
 
 
 
Interest payable
$
518

 
$
46

 
$
564

Debt
684,023

 

 
684,023

Total
$
684,541

 
$
46

 
$
684,587

The noncontrolling interest balance was zero . The creditors of these entities do not have general recourse to us.
The following table shows the interest income and expense recognized as a result of our involvement with these variable interest entities during the 2017 first quarter:
($ in thousands)
Vacation Ownership Notes Receivable Securitizations
 
Warehouse
Credit Facility
 
Total
Interest income
$
23,346

 
$

 
$
23,346

Interest expense to investors
$
4,473

 
$
347

 
$
4,820

Debt issuance cost amortization
$
898

 
$
220

 
$
1,118

Administrative expenses
$
121

 
$
43

 
$
164


19


The following table shows cash flows between us and the vacation ownership notes receivable securitization variable interest entities during the 2017 first quarter and the 2016 first quarter:
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
($ in thousands)
(91 days)
 
(84 days)
Cash inflows:
 
 
 
Principal receipts
$
55,854

 
$
40,224

Interest receipts
23,659

 
20,906

Reserve release
187

 
161

Total
79,700

 
61,291

Cash outflows:
 
 
 
Principal to investors
(48,015
)
 
(39,939
)
Voluntary repurchases of defaulted vacation ownership notes receivable
(6,325
)
 
(7,371
)
Interest to investors
(4,472
)
 
(4,323
)
Total
(58,812
)
 
(51,633
)
Net Cash Flows
$
20,888

 
$
9,658

The following table shows cash flows between us and the Warehouse Credit Facility variable interest entity during the 2017 first quarter and the 2016 first quarter:
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
($ in thousands)
(91 days)
 
(84 days)
Cash inflows:
 
 
 
Proceeds from vacation ownership notes receivable securitizations
$

 
$
51,130

Principal receipts

 
932

Interest receipts

 
647

Reserve release

 
6

Total

 
52,715

Cash outflows:
 
 
 
Principal to investors

 
(259
)
Voluntary repurchases of defaulted vacation ownership notes receivable

 
(142
)
Interest to investors
(344
)
 
(387
)
Funding of restricted cash

 
(386
)
Total
(344
)
 
(1,174
)
Net Cash Flows
$
(344
)
 
$
51,541


Under the terms of our vacation ownership notes receivable securitizations, we have the right at our option to repurchase defaulted vacation ownership notes receivable at the outstanding principal balance. The transaction documents typically limit such repurchases to 15 to 20 percent of the transaction’s initial vacation ownership notes receivable principal balance. Our maximum exposure to loss relating to the special purpose entities that purchase, sell and own these vacation ownership notes receivable is the overcollateralization amount (the difference between the loan collateral balance and the balance on the outstanding vacation ownership notes receivable), plus cash reserves and any residual interest in future cash flows from collateral. In addition, we could be required to fund up to an aggregate of $5.0 million upon presentation of demand notes related to certain vacation ownership notes receivable securitization transactions outstanding at March 31, 2017 .

20


Other Variable Interest Entities
We have a commitment to purchase an operating property located in New York, New York, that we currently manage as Marriott Vacation Club Pulse, New York City. Refer to Footnote No. 8, “Contingencies and Commitments” for additional information on the commitment. We are required to purchase the completed property from the third party developer unless the developer has sold the property to another party. The property is held by a variable interest entity for which we are not the primary beneficiary as we cannot prevent the variable interest entity from selling the property at a higher price. Accordingly, we have not consolidated the variable interest entity. As of March 31, 2017 , our Balance Sheet reflected a $6.9 million capital lease asset and a $7.2 million capital lease liability for ancillary and operations space we lease from the variable interest entity. In addition, our Balance Sheet reflected a note receivable of $0.5 million from this variable interest entity, which we believe is our maximum exposure to loss as a result of our involvement with this variable interest entity as of March 31, 2017 .
We have a commitment to repurchase an operating property located in Marco Island, Florida, that was previously sold to a third-party developer. Refer to Footnote No. 8, “Contingencies and Commitments” for additional information on the commitment. The developer is a variable interest entity for which we are not the primary beneficiary as we do not control the variable interest entity’s development activities and cannot prevent the variable interest entity from selling the property at a higher price. Accordingly, we have not consolidated the variable interest entity. We are obligated to repurchase the completed property from the developer contingent upon the property meeting our brand standards, provided that the third-party developer has not sold the property to another party. As of March 31, 2017 , our Balance Sheet reflected $10.0 million of Other liabilities that relate to the deferral of gain recognition on the previous sale transaction and the deferral of revenue for development management services, both of which will reduce our basis in the asset if we repurchase the property. In addition, the note receivable of $0.5 million is included in the Accounts and contracts receivable line on the Balance Sheet as of March 31, 2017 . We believe that our maximum exposure to loss as a result of our involvement with this variable interest entity is our interest in the note receivable discussed above as of March 31, 2017 .
13. BUSINESS SEGMENTS
We define our reportable segments based on the way in which the chief operating decision maker, currently our chief executive officer, manages the operations of the company for purposes of allocating resources and assessing performance. We operate in three reportable business segments:
In our North America segment, we develop, market, sell and manage vacation ownership and related products under the Marriott Vacation Club and Grand Residences by Marriott brands. In 2016, we introduced Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand. We also develop, market and sell vacation ownership and related products under The Ritz-Carlton Destination Club brand, as well as whole ownership residential products under The Ritz-Carlton Residences brand.
In our Asia Pacific segment, we develop, market, sell and manage two points-based programs that we specifically designed to appeal to the vacation preferences of the market, Marriott Vacation Club, Asia Pacific and Marriott Vacation Club Destinations, Australia, as well as a weeks-based right-to-use product.
In our Europe segment, we are focusing on selling our existing projects and managing existing resorts. We do not have any current plans for new development in this segment.
We evaluate the performance of our segments based primarily on the results of the segment without allocating corporate expenses or income taxes. We do not allocate corporate interest expense, consumer financing interest expense, other financing expenses or general and administrative expenses to our segments. We include interest income specific to segment activities within the appropriate segment. We allocate other gains and losses and equity in earnings or losses from our joint ventures to each of our segments as appropriate. Corporate and other represents that portion of our revenues and other gains or losses that are not allocable to our segments.

21


Revenues
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
($ in thousands)
(91 days)
 
(84 days)
North America
$
449,809

 
$
380,164

Asia Pacific
18,027

 
19,446

Europe
19,658

 
19,561

Total segment revenues
487,494

 
419,171

Corporate and other

 

 
$
487,494

 
$
419,171


Net Income
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
($ in thousands)
(91 days)
 
(84 days)
North America
$
105,726

 
$
89,586

Asia Pacific
1,104

 
1,010

Europe
747

 
386

Total segment financial results
107,577

 
90,982

Corporate and other
(55,222
)
 
(50,817
)
Provision for income taxes
(18,655
)
 
(15,757
)
 
$
33,700

 
$
24,408


Assets
($ in thousands)
At March 31, 2017
 
At December 30, 2016
North America
$
2,002,039

 
$
1,968,021

Asia Pacific
106,365

 
102,348

Europe
65,311

 
62,245

Total segment assets
2,173,715

 
2,132,614

Corporate and other
172,459

 
258,805

 
$
2,346,174

 
$
2,391,419


14. SUBSEQUENT EVENTS
Revolving Corporate Credit Facility Borrowing
Subsequent to the end of the 2017 first quarter, we borrowed $30.0 million under our Revolving Corporate Credit Facility to facilitate the funding of our short-term working capital needs.
Warehouse Credit Facility Borrowing
Subsequent to the end of the 2017 first quarter, we securitized vacation ownership notes receivable under our Warehouse Credit Facility. The carrying amount of the vacation ownership notes receivable securitized was $59.1 million . The advance rate was 85 percent, which resulted in gross proceeds of $50.3 million . Net proceeds were $50.0 million due to the funding of reserve accounts in the amount of $0.3 million .
Acquisitions
Subsequent to the end of the 2017 first quarter, we paid $33.3 million , related to a commitment outstanding at March 31, 2017, to purchase 36 vacation ownership units, a parking garage and other amenities located at our resort in Marco Island, Florida. See to Footnote No. 8, “Contingencies and Commitments,” for additional information on this commitment.

22


Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 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 “Statements of Income,” (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 section of this Quarterly Report on Form 10-Q.
Business Overview
We are one of the world’s largest companies whose business is focused almost entirely on vacation ownership, based on number of owners, number of resorts and revenues. We are the exclusive worldwide developer, marketer, seller and manager of vacation ownership and related products under the Marriott Vacation Club and Grand Residences by Marriott brands. We are also the exclusive worldwide developer, marketer and seller of vacation ownership and related products under The Ritz-Carlton Destination Club brand, and we have the non-exclusive right to develop, market and sell whole ownership residential products under The Ritz-Carlton Residences brand.
In 2016, we introduced Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand, which features unique properties that embrace the spirit and culture of their urban locations, creating an authentic sense of place while delivering easy access to local interests, attractions and transportation.
Our business is grouped into three reportable segments: North America, Asia Pacific and Europe. As of March 31, 2017 , our portfolio consisted of over 60 properties in the United States and eight other countries and territories. We generate most of our revenues from four primary sources: selling vacation ownership products; managing our resorts; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory.
As further detailed in Footnote No. 1, “Summary of Significant Accounting Policies,” to our Financial Statements, beginning with our 2017 fiscal year, we changed our financial reporting cycle to a calendar year-end and end-of-month quarterly reporting cycle. Accordingly, our 2017 fiscal year began on December 31, 2016 (the day after the end of the 2016 fiscal year) and will end on December 31, 2017, and our 2017 first quarter is the period from December 31, 2016 through March 31, 2017 (91 days), while our 2016 first quarter is the period from January 2, 2016 through March 26, 2016 (84 days). As a result, we had seven more days in the 2017 first quarter than we had in the 2016 first quarter. We estimate that 2016 first quarter contract sales would have been approximately $14 million higher on a comparable basis. Prior year results have not been restated for the impact of the change in the company’s financial reporting calendar.

23


Below is a summary of significant accounting policies used in our business that will be used in describing our results of operations.
Sale of Vacation Ownership Products
We recognize revenues from the sale of vacation ownership products when all of the following conditions exist: a binding sales contract has been executed; the statutory rescission period has expired; the receivable is deemed collectible; and the remainder of our obligations are substantially completed.
Sales of vacation ownership products may be made for cash or we may provide financing. For sales where we provide financing, we defer revenue recognition until we receive a minimum down payment equal to ten percent of the purchase price plus the fair value of certain sales incentives provided to the purchaser. These sales incentives typically include Marriott Rewards 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 the Explorer Collection, generally up to two years from the date of issuance. Sales incentives are only awarded if the sale is closed.
As a result of the down payment requirement with respect to financed sales and the requirement that the statutory rescission period has expired, we often defer revenues associated with the sale of vacation ownership products from the date of the purchase agreement to a future period. When comparing results year-over-year, this deferral frequently generates significant variances, which we refer to as the impact of revenue reportability.
Finally, as more fully described in the “Financing” section below, we record an estimate of expected uncollectibility on all vacation ownership notes receivable (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 each of our three segments. Contract sales consist of the total amount of vacation ownership product sales under purchase agreements 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. 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 Statements of Income 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) as well as other non-capitalizable costs associated with the overall project development 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 real estate inventory costs for the project in a period, a non-cash adjustment is recorded on our Statements of Income 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, will have a positive or negative impact on our Statements of Income.
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.
Resort Management and Other Services
Our resort management and other services revenues include revenues generated from fees we earn for managing each of our resorts. In addition, we earn revenue for providing ancillary offerings, including food and beverage, retail, and golf and spa offerings at our resorts. We also receive annual fees, club dues, settlement fees from the sale of vacation ownership products and certain transaction-based fees from owners and other third parties, including external exchange service providers with which we are associated.
We provide day-to-day management services, including housekeeping services, operation of reservation systems, maintenance, and certain accounting and administrative services for property owners’ associations. We receive compensation for these management services; this compensation is typically based on either a percentage of the budgeted costs to operate the resorts or a fixed fee arrangement. We earn these fees regardless of usage or occupancy.
Resort management and other services expenses include costs to operate the food and beverage and other ancillary operations and overall customer support services, including reservations, certain transaction-based expenses relating to external exchange service providers and settlement expenses from the sale of vacation ownership products.

24


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:
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
 
(91 days)
 
(84 days)
Average FICO score
740
 
744
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. The interest income earned from the financing arrangements is earned on an accrual basis on the principal balance outstanding over the life of the arrangement and is recorded as Financing revenues on our Statements of Income.
Financing revenues include interest income earned on vacation ownership notes receivable as well as fees earned from servicing the existing vacation ownership notes 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 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 financed contracts closed in the period divided by contract sales volume of all contracts closed in the period. Financing propensity was 60.1 percent in the 2016 fiscal year and 66.1 percent in the 2017 first quarter, reflecting successful incentive programs that have been helping to increase financing propensity. We expect financing propensity in 2017 to continue at similar levels to 2016 as we intend to continue to offer the 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 vacation ownership interest. We return vacation ownership interests that we reacquire through foreclosure or revocation back to real estate inventory. As discussed above, we record a vacation ownership notes receivable reserve at the time of sale and classify the reserve as a reduction to revenues from the sale of vacation ownership products on our Statements of Income. Historical default rates, which represent defaults as a percentage of each year’s beginning gross vacation ownership notes receivable balance, were as follows:
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
 
(91 days)
 
(84 days)
Historical default rates
0.9%
 
0.9%
Rental
We operate a rental business to provide owner flexibility and to help mitigate carrying costs associated with our inventory. We obtain rental inventory from unsold inventory and inventory we control because owners have elected alternative usage options offered through our vacation ownership programs.
Rental revenues are primarily the revenues we earn from renting this inventory. We also recognize rental revenue from the utilization of plus points under the Marriott Vacation Club Destinations (“MVCD”) program when the points are redeemed for rental stays at one of our resorts or in the Explorer Collection, or upon expiration of the points.
Rental expenses include:
Maintenance fees on unsold inventory;
Costs to provide alternative usage options, including Marriott Rewards Points and offerings available as part of the Explorer Collection, 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 associated with the banking and borrowing usage option that is available under our points-based programs.

25


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), and owner use and exchange behavior. Further, as our ability to rent certain luxury inventory and inventory in our Asia Pacific segment is often limited on a site-by-site basis, rental operations may not generate adequate rental revenues to cover associated costs. Our vacation 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 property owners’ associations reimburse to us. In accordance with the accounting guidance for “gross versus net” presentation, we record these revenues and expenses on a gross basis. We recognize cost reimbursements when we incur the related reimbursable costs. These costs primarily consist of payroll and payroll related expenses for management of the property owners’ associations and other services we provide where we are the employer. Cost reimbursements consist of actual expenses with no added margin.
Consumer Financing Interest Expense
Consumer financing interest expense represents interest expense associated with the debt from our non-recourse warehouse credit facility (the “Warehouse Credit Facility”) and from 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.
Interest Expense
Interest expense consists of all interest expense other than consumer financing interest expense.
Other Items
We measure operating performance using the following key metrics:
Contract sales from the sale of vacation ownership products;
Development margin percentage; and
Volume per guest (“VPG”), which we calculate by dividing contract sales, excluding fractional and residential sales, telesales 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. 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.

26


Consolidated Results
The following discussion presents an analysis of our results of operations for the 2017 first quarter compared to the 2016 first quarter.
 
Quarters Ended
 
March 31, 2017
 
March 25, 2016
($ in thousands)
(91 days)
 
(84 days)
REVENUES
 
 
 
Sale of vacation ownership products
$
172,155

 
$
138,369

Resort management and other services
74,339

 
63,757

Financing
32,111

 
29,224

Rental
85,256

 
80,288

Cost reimbursements
123,633

 
107,533

TOTAL REVENUES
487,494

 
419,171

EXPENSES
 
 
 
Cost of vacation ownership products
42,620

 
35,617

Marketing and sales
100,661

 
78,412

Resort management and other services
41,831

 
39,863

Financing
5,206

 
4,629

Rental
70,432

 
64,660

General and administrative
27,539

 
25,359

Litigation settlement

 
(303
)
Consumer financing interest
5,938

 
5,362

Royalty fee
16,070

 
13,357

Cost reimbursements
123,633

 
107,533

TOTAL EXPENSES
433,930

 
374,489

(Losses) gains and other (expense) income
(59
)
 
7

Interest expense
(781
)
 
(1,982
)
Other
(369
)
 
(2,542
)
INCOME BEFORE INCOME TAXES
52,355

 
40,165

Provision for income taxes
(18,655
)
 
(15,757
)
NET INCOME
$
33,700

 
$
24,408

Contract Sales
2017 First Quarter
 
Quarters Ended
 
Change
 
% Change
 
March 31, 2017
 
March 25, 2016
 
 
($ in thousands)
(91 days)
 
(84 days)
 
Contract sales
 
 
 
 
 
 
 
Vacation ownership
 
 
 
 
 
 
 
North America
$
177,436

 
$
139,650

 
$
37,786

 
27%
Asia Pacific
11,948

 
9,426

 
2,522

 
27%
Europe
4,450

 
4,418

 
32

 
1%
Total contract sales
$
193,834

 
$
153,494

 
$
40,340

 
26%
The changes in contract sales are described within the discussions of our segment results below. Our 2017 first quarter had seven more days than our 2016 first quarter due to the change to an end-of-month quarterly reporting cycle in 2017. We estimate that 2016 first quarter contract sales would have been approximately $14 million higher on a comparable basis.

27


Sale of Vacation Ownership Products
2017 First Quarter
 
Quarters Ended
 
Change
 
% Change
 
March 31, 2017
 
March 25, 2016
 
 
($ in thousands)
(91 days)
 
(84 days)
 
Contract sales
$
193,834

 
$
153,494

 
$
40,340

 
26%
Revenue recognition adjustments:
 
 
 
 
 
 
 
Reportability
(4,030
)
 
786

 
(4,816
)
 
 
Sales reserve
(12,221
)
 
(8,223
)
 
(3,998
)
 
 
Other (1)
(5,428
)
 
(7,688
)
 
2,260

 
 
Sale of vacation ownership products
$
172,155

 
$
138,369

 
$
33,786

 
24%
_________________________
(1)  
Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue.
Revenue reportability had a $4.0 million negative impact in the 2017 first quarter due to an increase in the amount of sales that remained in the rescission period as of the end of the quarter, partially offset by an increase in the amount of sales that met the down payment requirement for revenue reportability during the quarter, compared to a $0.8 million positive revenue reportability impact in the 2016 first quarter.
The higher sales reserve reflected the higher vacation ownership contract sales volume ($2.4 million of the increase), an increase in the North America sales reserve due to the increase in financing propensity ($1.1 million of the increase) and changes in the Asia Pacific and Europe sales reserve rates due mainly to an unfavorable sales reserve adjustment to correct an immaterial error in 2016 with respect to historical static pool data ($0.5 million of the increase).
The decrease in other adjustments for sales incentives was driven by a decrease in the utilization of plus points as a sales incentive in our North America segment in the 2017 first quarter.
Development Margin
2017 First Quarter
 
Quarters Ended
 
Change
 
% Change
 
March 31, 2017
 
March 25, 2016
 
 
($ in thousands)
(91 days)
 
(84 days)
 
Sale of vacation ownership products
$
172,155

 
$
138,369

 
$
33,786

 
24%
Cost of vacation ownership products
(42,620
)
 
(35,617
)
 
(7,003
)
 
(20%)
Marketing and sales
(100,661
)
 
(78,412
)
 
(22,249
)
 
(28%)
Development margin
$
28,874

 
$
24,340

 
$
4,534

 
19%
Development margin percentage
16.8%
 
17.6%
 
(0.8 pts)
 
 
The increase in development margin reflected $17.1 million from higher vacation ownership contract sales volume net of direct variable expenses (i.e., cost of vacation ownership products and marketing and sales), including $8.3 million from higher vacation ownership contract sales, $7.2 million from a favorable mix of lower cost real estate inventory being sold and $1.6 million from lower usage of plus points as a sales incentive in our North America segment, which resulted in less revenue being deferred that will be recognized as rental revenue when the points are redeemed or expire.
  These increase s in development margin were partially offset by the following:
$4.1 million of unfavorable changes in product cost true-up activity ($0.9 million of unfavorable true-up activity in the 2017 first quarter compared to $3.2 million of favorable true-up activity in the 2016 first quarter);
$3.3 million of unfavorable revenue reportability compared to the 2016 first quarter;
$3.0 million of higher marketing and sales costs due to ramping up the company’s six new sales distributions;

28


$1.4 million from higher sales reserve activity due to the increase in financing propensity in our North America segment and an increase in the sales reserve rates in our Asia Pacific and Europe segments due mainly to an unfavorable sales reserve adjustment to correct an immaterial error in 2016 with respect to historical static pool data; and
$0.8 million from higher other development and inventory expenses.
The 0.8 percentage point decline in the development margin percentage reflected a 2.4 percentage point decrease due to the unfavorable changes in product cost true-up activity year-over-year, a 1.8 percentage point decline due to the higher ramp-up expenses associated with the new sales locations, a 1.5 percentage point decrease due to the unfavorable revenue reportability year-over-year, a 0.7 percentage point decline from the higher sales reserve rate and a 0.4 percentage point decrease from higher other development and inventory expenses. These declines were partially offset by a 4.2 percentage point increase due to a favorable mix of lower cost vacation ownership real estate inventory being sold in the 2017 first quarter, a 1.0 percentage point increase due to the leveraging of fixed costs on higher vacation ownership contract sales and a 0.8 percentage point increase from the lower usage of plus points as a sales incentive.
Resort Management and Other Services Revenues, Expenses and Margin
2017 First Quarter
 
Quarters Ended
 
Change
 
% Change
 
March 31, 2017
 
March 25, 2016
 
 
($ in thousands)
(91 days)
 
(84 days)
 
Management fee revenues
$
21,759

 
$
18,440

 
$
3,319

 
18%
Ancillary revenues
27,269

 
27,299

 
(30
)
 
—%
Other services revenues
25,311

 
18,018

 
7,293

 
40%
Resort management and other services revenues
74,339

 
63,757

 
10,582

 
17%
Resort management and other services expenses
(41,831
)
 
(39,863
)
 
(1,968
)
 
(5%)
Resort management and other services margin
$
32,508

 
$
23,894

 
$
8,614

 
36%
Resort management and other services margin percentage
43.7%
 
37.5%
 
6.2 pts
 
 
The increase in resort management and other services revenues reflected $3.3 million of higher management fees, $2.2 million of higher refurbishment revenue due to an increase in the number of projects being refurbished in the 2017 first quarter, $2.1 million of higher settlement and lien fees due to the timing of lien fees and an increase in the number of closed contracts in the 2017 first quarter, $1.8 million of additional annual club dues and other revenues earned in connection with the MVCD program due to the cumulative increase in owners enrolled in the program, and $1.2 million of higher resales commissions, brand fees and other revenues. The slight decline in ancillary revenues included $2.7 million of lower ancillary revenues from the operating property in Surfers Paradise, Australia (a portion of which was disposed of in the 2016 second quarter) and $0.7 million of lower revenue due to outsourcing the operation of one restaurant in our North America segment, offset by $3.4 million of higher revenues from food and beverage and golf offerings at our resorts.
The improvement in the resort management and other services margin reflected the increases in revenue, partially offset by $2.0 million of higher expenses including $2.3 million of higher ancillary expenses from food and beverage and golf offerings at our resorts, $1.3 million of higher refurbishment expenses due to an increase in the number of projects being refurbished in the 2017 first quarter, $1.3 million of higher expenses associated with the MVCD program and $0.2 million of higher other expenses, partially offset by $2.4 million of lower ancillary expenses from the operating property in Surfers Paradise, Australia and $0.7 million of lower ancillary expenses due to outsourcing the operation of a restaurant in our North America segment.
The ancillary revenue producing portions of the operating property in Surfers Paradise, Australia were included in the sale of the portion of the operating property completed in the second quarter of 2016. Therefore, we do not anticipate future ancillary revenues or expenses at this property.

29


Financing Revenues, Expenses and Margin
2017 First Quarter
 
Quarters Ended
 
Change
 
% Change