MARRIOTT VACATIONS WORLDWIDE Corp 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Forward-Looking Statements We make forward-looking statements in this 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; financial condition and leverage; dividend payments; business strategies, such as our plans to continue to increase our focus on sales of vacation ownership products to first-time buyers and our expectations that we will continue to offer financing incentives; financing plans; competitive position; potential growth opportunities; potential operating performance improvements, including the expectations that contract sales, resort management, resort occupancies, and tour flow will continue to remain strong in 2023; our expectation that interest income will increase in 2023; our expectations regarding availability of inventory for Getaways and exchange transactions; indemnification; taxes; dilution related to convertible notes; inventory spending; the effects of competition; and any effects of the COVID-19 pandemic. 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. We caution you that these statements are not guarantees of future performance and are subject to numerous and evolving risks and uncertainties that we may not be able to predict or assess, such as: the effects of the COVID-19 pandemic or future health crises, including their short and longer-term impact on consumer confidence and demand for travel, and the pace of recovery following a future health crisis; variations in demand for vacation ownership and exchange products and services; worker absenteeism; price and wage inflation; global supply chain disruptions; volatility in the international and national economy and credit markets; impact of the current or a future banking crisis; the ongoing war between Russia and Ukraine and related sanctions and other measures; our ability to attract and retain our global workforce; competitive conditions; the availability of capital to finance growth; the impact of rising interest rates; political or social strife; difficulties associated with implementing new or maintaining existing technology; changes in privacy laws and other matters referred to under the heading “Risk Factors” contained herein and also in our most recent Annual Report on Form 10-K, and which may be updated in our future periodic filings with the U.S. Securities and Exchange Commission (the “SEC”). All forward-looking statements in this Quarterly Report on Form 10-Q apply only as of the date of this Quarterly Report on Form 10-Q or as of the date they were made or as otherwise specified herein. We do not undertake any obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, or otherwise, except as required by law. 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. However, the financial information discussed below and included in this Quarterly Report on Form 10-Q may not necessarily reflect what our financial condition, results of operations or cash flows may be in the future. In order to make this report easier to read, we refer to (i) our Interim Consolidated Financial Statements as our “Financial Statements,” (ii) our Interim Consolidated Statements of Income as our “Income Statements,” (iii) our Interim Consolidated Balance Sheets as our “Balance Sheets” and (iv) our Interim Consolidated Statements of Cash Flows as our “Cash Flows.” In addition, references throughout to numbered “Footnotes” refer to the numbered Notes in the Interim Condensed Notes to Consolidated Financial Statements that we include in the Financial Statements of this Quarterly Report on Form 10-Q. 31 Table of Contents Business Overview We are a leading global vacation company that offers vacation ownership, exchange, rental and resort and property management, along with related businesses, products and services. Our business operates in two reportable segments: Vacation Ownership and Exchange & Third-Party Management. Our Vacation Ownership segment includes a diverse portfolio of resorts that includes some of the world’s most iconic brands licensed under exclusive long-term relationships. We are the exclusive worldwide developer, marketer, seller and manager of vacation ownership and related products under the Marriott Vacation Club, Grand Residences by Marriott, Sheraton Vacation Club, Westin Vacation Club and Hyatt Residence Club brands, as well as under Marriott Vacation Club Pulse, an extension to the Marriott Vacation Club brand. We are also the exclusive worldwide developer, marketer and seller of vacation ownership and related products under The Ritz-Carlton Club brand, we have the non-exclusive right to develop, market and sell whole ownership residential products under The Ritz-Carlton Residences brand and we have a license to use the St. Regis brand for specified fractional ownership resorts. Our Vacation Ownership segment generates most of its revenues from four primary sources: selling vacation ownership products; managing vacation ownership resorts, clubs and owners’ associations; financing consumer purchases of vacation ownership products; and renting vacation ownership inventory. Our Exchange & Third-Party Management segment includes an exchange network and membership programs, as well as the provision of management services to other resorts and lodging properties. Exchange & Third-Party Management revenue generally is fee-based and derived from membership, exchange and rental transactions, property and owners’ association management, and other related products and services. Since May 2022, we provide these services through our Interval International and Aqua-Aston businesses. In April 2022, we disposed of VRI Americas after determining that the business was not a core component of our future growth strategy and operating model. This business was a component of our Exchange and Third-Party Management segment through the date of the sale. Corporate and other represents that portion of our results that are not allocable to our segments, including those relating to consolidated property owners’ associations (“Consolidated Property Owners’ Associations”). Integration of Marriott-, Sheraton- and Westin- Branded Vacation Ownership Products In 2016, Marriott International purchased Starwood Hotels and Resorts Worldwide, Inc., which at the time exclusively licensed the Sheraton and Westin vacation ownership brands to Legacy-ILG. Part of the rationale for our acquisition of ILG in 2018 was to achieve operating efficiencies and business growth by leveraging the brands then licensed by Marriott International and its subsidiaries to us and to ILG. In August 2022, we launched Abound by Marriott Vacations, a new owner benefit and exchange program which affiliates the Marriott, Sheraton and Westin vacation ownership brands to offer similar benefits to owners of our products under these brands. Under this program, owners of Marriott-, Sheraton- and Westin-branded VOIs can access over 90 resorts under the Marriott Vacation Club, Sheraton Vacation Club and Westin Vacation Club brands using a common currency. The program also harmonizes fee structures and owner benefit levels and has allowed us to transition most of our Legacy-ILG sales galleries to sell our Marriott Vacation Club Destinations product. Further, in late 2022, we added certain Sheraton- and Westin- branded VOIs to the Marriott Vacation Club Destinations product. We recognize revenues from the sale of vacation ownership products (also referred to as VOIs) when control of the vacation ownership product is transferred to the customer and the transaction price is deemed collectible. Based upon the different terms of our contracts with the customer and business practices, control of the vacation ownership product has historically transferred to the customer at different points in time for each brand of VOIs. In the third quarter of 2022, we aligned our business practices and contract terms, resulting in the prospective change in the timing of the transfer of control to the customer for Marriott-branded VOIs. Prior to these changes, control transfer occurred at closing for Marriott-branded vacation ownership products. Subsequent to this alignment, transfer of control of Marriott-branded vacation ownership products occurs at expiration of the statutory rescission period, consistent with the historical timing of Sheraton-, Westin- and Hyatt- branded transactions. Marriott-branded VOI sales contracts executed prior to these modifications have been accounted for with transfer of control of the VOI occurring at closing. Control transfer for Legacy-Welk VOIs continues to occur at closing. As a result of the unification of our Marriott-, Sheraton- and Westin- branded vacation ownership products under the Abound by Marriott Vacations program and stabilization of default rates following the initial impact of the COVID-19 pandemic, in the third quarter of 2022, we combined and aligned our reserve methodology for vacation ownership notes receivable for our Marriott, Sheraton and Westin brands. 32 Table of Contents Performance Measures We measure operating performance using the key metrics described below: • Contract sales from the sale of vacation ownership products, which consists of the total amount of vacation ownership product sales under contracts signed during the period where we have generally received a down payment of at least ten percent of the contract price, reduced by actual rescissions during the period, inclusive of contracts associated with sales of vacation ownership products on behalf of third-parties, which we refer to as “resales contract sales.” In circumstances where a customer applies any or all of their existing ownership interests as part of the purchase price for additional interests, we include only the incremental value purchased as contract sales. Contract sales differ from revenues from the sale of vacation ownership products that we report on our income statements due to the requirements for revenue recognition described above. We consider contract sales to be an important operating measure because it reflects the pace of sales in our business. • Total contract sales include contract sales from the sale of vacation ownership products including non-consolidated joint ventures. • Consolidated contract sales exclude contracts sales from the sale of vacation ownership products for non-consolidated joint ventures. • Volume per guest (“VPG”) is calculated by dividing consolidated vacation ownership contract sales, excluding fractional sales, telesales, resales, 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. • Development profit margin is calculated by dividing Development profit by revenues from the sale of vacation ownership products. 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 profit. We believe that Development profit margin is an important measure of the profitability of our development and marketing and sales of VOIs. • Total active members is the number of Interval International network active members at the end of the applicable period. We consider active members to be an important metric because it represents the population of owners eligible to book transactions using the Interval International network. • Average revenue per member is calculated by dividing membership fee revenue, transaction revenue, rental revenue, and other member revenue for the Interval International network by the monthly weighted average number of Interval International network active members during the applicable period. We believe this metric is valuable in measuring the overall engagement of our Interval International network active members. • Segment financial results attributable to common shareholders represents revenues less expenses directly attributable to each applicable reportable business segment (Vacation Ownership and Exchange & Third-Party Management). We consider this measure to be important in evaluating the performance of our reportable business segments. See Footnote 16 “Business Segments” to our Financial Statements for further information on our reportable business segments. NM = Not meaningful. 33 Table of Contents Consolidated Results Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 REVENUES Sale of vacation ownership products $ 375 $ 310 Management and exchange 200 222 Rental 151 133 Financing 78 71 Cost reimbursements 365 316 TOTAL REVENUES 1,169 1,052 EXPENSES Cost of vacation ownership products 58 60 Marketing and sales 210 182 Management and exchange 107 127 Rental 113 81 Financing 26 21 General and administrative 68 61 Depreciation and amortization 32 33 Litigation charges 3 3 Royalty fee 29 27 Impairment 4 — Cost reimbursements 365 316 TOTAL EXPENSES 1,015 911 Gains and other income, net 21 4 Interest expense, net (34) (27) Transaction and integration costs (13) (28) INCOME BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS 128 90 Provision for income taxes (41) (32) NET INCOME 87 58 Net income attributable to noncontrolling interests — — NET INCOME ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 87 $ 58 Operating Statistics 2023 First Quarter Three Months Ended (Contract sales $ in millions) March 31, 2023 March 31, 2022 Change % Change Vacation Ownership Total contract sales $ 444 $ 403 $ 41 10% Consolidated contract sales $ 434 $ 394 $ 40 10% Joint venture contract sales $ 10 $ 9 $ 1 7% VPG $ 4,358 $ 4,706 $ (348) (7%) Exchange & Third-Party Management Total active members at end of period (000's) 1,568 1,606 (38) (2%) Average revenue per member $ 42.07 $ 44.33 $ (2.26) (5%) 34 Table of Contents Revenues 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Vacation Ownership $ 1,097 $ 956 $ 141 15% Exchange & Third-Party Management 71 84 (13) (16%) Total Segment Revenues 1,168 1,040 128 12% Consolidated Property Owners’ Associations 1 12 (11) (89%) Total Revenues $ 1,169 $ 1,052 $ 117 11% Earnings Before Interest Expense, Taxes, Depreciation and Amortization (“EBITDA”) and Adjusted EBITDA EBITDA, a financial measure that is not prescribed by GAAP, is defined as earnings, or net income or loss attributable to common shareholders, before interest expense, net (excluding consumer financing interest expense associated with term securitization transactions), income taxes, depreciation and amortization. Adjusted EBITDA reflects additional adjustments for certain items, and excludes share-based compensation expense to address considerable variability among companies in recording compensation expense because companies use share-based payment awards differently, both in the type and quantity of awards granted. For purposes of our EBITDA and Adjusted EBITDA calculations, we do not adjust for consumer financing interest expense associated with term securitization transactions because we consider it to be an operating expense of our business. We consider Adjusted EBITDA to be an indicator of operating performance, which we use to measure our ability to service debt, fund capital expenditures, expand our business, and return cash to shareholders. We also use Adjusted EBITDA, as do analysts, lenders, investors, and others, because this measure excludes certain items that can vary widely across different industries or among companies within the same industry. For example, interest expense can be dependent on a company’s capital structure, debt levels and credit ratings. Accordingly, the impact of interest expense on earnings can vary significantly among companies. The tax positions of companies can also vary because of their differing abilities to take advantage of tax benefits and because of the tax policies of the jurisdictions in which they operate. As a result, effective tax rates and provisions for income taxes can vary considerably among companies. EBITDA and Adjusted EBITDA also exclude depreciation and amortization because companies utilize productive assets of different ages and use different methods of both acquiring and depreciating productive assets. These differences can result in considerable variability in the relative costs of productive assets and the depreciation and amortization expense among companies. We believe Adjusted EBITDA is useful as an indicator of operating performance because it allows for period-over-period comparisons of our on-going core operations before the impact of the excluded items. Adjusted EBITDA also facilitates comparison by us, analysts, investors, and others of results from our on-going core operations before the impact of these items with results from other companies. EBITDA and Adjusted EBITDA have limitations and should not be considered in isolation or as a substitute for performance measures calculated in accordance with GAAP. In addition, other companies in our industry may calculate EBITDA and Adjusted EBITDA differently than we do or may not calculate them at all, limiting their usefulness as comparative measures. The table below shows our EBITDA and Adjusted EBITDA calculation and reconciles these measures with Net income attributable to common shareholders, which is the most directly comparable GAAP financial measure. 2023 First Quarter Three Months Ended Change ($ in millions) March 31, 2023 March 31, 2022 % Change Net income attributable to common shareholders $ 87 $ 58 $ 29 50% Interest expense, net 34 27 7 27% Provision for income taxes 41 32 9 30% Depreciation and amortization 32 33 (1) (2%) EBITDA 194 150 44 30% Share-based compensation expense 7 8 (1) (10%) Certain items 2 30 (28) (97%) Adjusted EBITDA $ 203 $ 188 $ 15 8% Adjusted EBITDA Margin 25% 25% — pts 35 Table of Contents The table below details the components of Certain items. Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 ILG integration $ 9 $ 25 Welk acquisition and integration 4 3 Transaction and integration costs 13 28 Purchase accounting adjustments 2 3 Litigation charges 3 3 Impairment 4 — Early redemption of senior secured notes 10 — Foreign currency translation (2) (1) Insurance proceeds (2) (3) Change in indemnification asset (23) — Other (4) — Gains and other income, net (21) (4) Other 1 — Total Certain items $ 2 $ 30 Segment Adjusted EBITDA 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Vacation Ownership $ 229 $ 199 $ 30 15% Exchange & Third-Party Management 37 43 (6) (13%) Segment adjusted EBITDA 266 242 24 10% General and administrative (63) (54) (9) (15%) Adjusted EBITDA $ 203 $ 188 $ 15 8% The following tables present segment financial results attributable to common shareholders reconciled to segment Adjusted EBITDA. Vacation Ownership 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Segment financial results $ 205 $ 173 $ 32 19% Depreciation and amortization 23 22 1 2% Share-based compensation expense 1 1 — 30% Certain items — 3 (3) NM Segment adjusted EBITDA $ 229 $ 199 $ 30 15% The table below details the components of Certain items. Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Purchase accounting adjustments $ 2 $ 3 Litigation charges 3 3 Impairment 4 — Insurance proceeds (2) (3) Change in indemnification asset (3) — Other (4) — Gains and other income, net (9) (3) Total Certain items $ — $ 3 36 Table of Contents Exchange & Third-Party Management 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Segment financial results $ 28 $ 33 $ (5) (16%) Depreciation and amortization 8 9 (1) (2%) Share-based compensation expense 1 1 — (25%) Segment adjusted EBITDA $ 37 $ 43 $ (6) (13%) Business Segments Our business is grouped into two reportable business segments: Vacation Ownership and Exchange & Third-Party Management. See Footnote 16 “Business Segments” to our Financial Statements for further information on our segments. Vacation Ownership Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 REVENUES Sale of vacation ownership products $ 375 $ 310 Resort management and other services 135 126 Rental 141 122 Financing 78 71 Cost reimbursements 368 327 TOTAL REVENUES 1,097 956 EXPENSES Cost of vacation ownership products 58 60 Marketing and sales 210 182 Resort management and other services 64 54 Rental 116 90 Financing 26 21 Depreciation and amortization 23 22 Litigation charges 3 3 Royalty fee 29 27 Impairment 4 — Cost reimbursements 368 327 TOTAL EXPENSES 901 786 Gains and other income, net 9 3 SEGMENT FINANCIAL RESULTS BEFORE NONCONTROLLING INTERESTS 205 173 Net income attributable to noncontrolling interests — — SEGMENT FINANCIAL RESULTS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 205 $ 173 37 Table of Contents Sale of Vacation Ownership Products 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 % of Consolidated Contract Sales, Net of Resales March 31, 2022 % of Consolidated Contract Sales, Net of Resales Change % Change Total consolidated contract sales $ 434 $ 394 $ 40 10% Joint venture contract sales 10 9 1 7% Total contract sales 444 403 41 10% Less: resales contract sales (11) (9) (2) Less: joint venture contract sales (10) (9) (1) Consolidated contract sales, net of resales 423 385 38 Plus: Settlement revenue 8 2% 7 2% 1 Resales revenue 6 1% 4 1% 2 Revenue recognition adjustments: Reportability — —% (33) (9%) 33 Sales reserve (38) (9%) (29) (7%) (9) Other (1) (24) (6%) (24) (6%) — Sale of vacation ownership products $ 375 88% $ 310 80% $ 65 21% (1) Adjustment for sales incentives that will not be recognized as Sale of vacation ownership products revenue and other adjustments to Sale of vacation ownership products revenue. The higher contract sales performance reflects tour growth of 18% compared to the 2022 first quarter, resulting from strong package and in-house sales channel results as well as the rebound of leisure travel in Asia Pacific, partially offset by a decline in VPG of 7% attributed to the strong first quarter 2022 performance. We expect contract sales for the remainder of 2023 to exceed 2022 results. Financing propensity was 54% in the first quarter of 2023 and 50% in the first quarter of 2022. We expect to continue offering financing incentive programs in 2023. The average FICO score of customers who were U.S. citizens or residents who financed a vacation ownership purchase was 738 and 736 for the three months ended March 31, 2023 and March 31, 2022, respectively. The increase in the sales reserve as a percentage of Consolidated contract sales, net of resales is attributed to the increase in reportability (65 basis points) and financing propensity (65 basis points), and a higher reserve rate (25 basis points). Historical default rates as a percentage of each year’s beginning gross vacation ownership notes receivable balance increased to 1.5% in the 2023 first quarter from 1.1% in the 2022 first quarter. Excluding the impact of defaults on loans financing the purchase of Legacy-Welk vacation ownership products, historical default rates as a percentage of each year’s beginning gross vacation ownership notes receivable increased 20bps. 38 Table of Contents Development Profit 2023 First Quarter Three Months Ended Change % Change ($ in millions) March 31, 2023 % of Revenue March 31, 2022 % of Revenue Sale of vacation ownership products $ 375 $ 310 $ 65 21% Cost of vacation ownership products (58) (16%) (60) (19%) 2 3% Marketing and sales (210) (56%) (182) (59%) (28) (15%) Development profit $ 107 $ 68 $ 39 58% Development profit margin 28.5% 21.8% 6.7 pts The increase in Development profit reflects $24 million from favorable revenue reportability, $5 million benefit of higher contract sales volumes and $11 million of favorable product cost, due mainly to the sale of lower cost inventory and, to a lesser extent, a $4 million favorable product cost true-up, partially offset by $5 million related to higher sales reserves. We expect development profit margins for the remainder of 2023 to be above the 2023 first quarter results. Resort Management and Other Services Revenues, Expenses and Profit 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Management fee revenues $ 45 $ 42 $ 3 7% Ancillary revenues 61 54 7 13% Other management and exchange revenues 29 30 (1) (2%) Resort management and other services revenues 135 126 9 7% Resort management and other services expenses (64) (54) (10) (20%) Resort management and other services profit $ 71 $ 72 $ (1) (2%) Resort management and other services profit margin 52.7% 57.5% (4.8 pts) (8%) Resort occupancy (1) 88.9% 87.6% 1.3 pts (1) Resort occupancy represents all transient, previews, and owner keys divided by total keys available, net of keys out of service. Resort management and other services revenues reflect higher ancillary revenues, including revenues from food and beverage and golf offerings, as a result of a 13% increase in revenue per occupied key, and a 1% increase in occupied keys at resorts with ancillary businesses, as well as higher management fees, partially offset by $1 million of lower refurbishment project revenues. The $1 million decrease in resort management and other services profit reflects a $1 million decrease in ancillary profit, timing of club dues, higher customer services and exchange company expenses due to wage increases and improvements in service levels, partially offset by higher management fee revenues. 39 Table of Contents Rental Revenues, Expenses and Profit 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Rental revenues $ 141 $ 122 $ 19 16% Rental expenses (116) (90) (26) (28%) Rental profit $ 25 $ 32 $ (7) (19%) Rental profit margin 17.9% 25.8% (7.9 pts) Three Months Ended March 31, 2023 March 31, 2022 Change % Change Transient keys rented (1) 547,540 539,559 7,981 1% Average transient rate $ 286.82 $ 275.49 $ 11.33 4% Rental occupancy 70.4% 67.0% 3.4 pts (1) Transient keys rented exclude those occupied through the use of plus points and preview stays. (2) Rental occupancy represents transient and preview keys divided by keys available to rent, which is total available keys excluding owner usage. Rental profit for transient keys, including plus points and excluding keys from owned hotels, declined by $5 million due to a $13 million increase in unsold maintenance fees associated with developer owned inventory and $6 million of increased costs associated with higher owner utilization of third-party vacation and other offerings. These decreases were partially offset by $6 million of higher profit from the increase in keys rented and 4% higher average transient rate, net of tidy and variable costs, $3 million of higher plus points revenue, a $3 million reduction of rental costs recorded as marketing and sales expense for marketing purposes costs and $2 million of lower hotel loyalty and other costs. Rental profit for our owned hotels decreased by $2 million (43%) due to the disposition of our Puerto Vallarta hotel in 2022. Financing Revenues, Expenses and Profit 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Financing revenues $ 78 $ 71 $ 7 10% Financing expenses (10) (9) (1) (13%) Consumer financing interest expense (16) (12) (4) (37%) Financing profit $ 52 $ 50 $ 2 2% Financing profit margin 65.7% 70.3% (4.6 pts) Financing propensity 54.2% 50.3% Financing revenues reflect $8 million of higher interest income as a result of a higher average notes receivable balance partially offset by $1 million of lower plus point financing incentive costs. The higher average notes receivable balance was the result of new loan originations in excess of the amount of the continued pay-down of the existing vacation ownership notes receivable portfolio. We expect the average notes receivable balance, and resulting interest income, to continue to increase during the remainder of 2023 as a result of the expected growth in contract sales and loan originations. Financing expenses increased $1 million due to timing of certain expenses. The increase in consumer financing interest expense is attributable to the higher average securitized debt at a higher average interest rate for the more recent term securitization transactions. We expect consumer financing interest expense to continue to remain elevated over our average outstanding interest rates on existing securitization transactions as a result of rising interest rates. We do not adjust interest rates on consumer financing offerings at the same pace as, or in lock-step with, broader market interest rates; thus we expect our financing profit margin to continue to decrease in 2023, as we repay existing securitization transactions with historically low interest rates and enter into new securitization transactions with higher interest rates. 40 Table of Contents Royalty Fee 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Royalty fee $ 29 $ 27 $ 2 7% The increase in royalty fee expense in the first quarter of 2023 included $1 million from an increase in the dollar volume of closings and $1 million relating to variable royalty fees paid to Hyatt, which commenced in the fourth quarter of 2022. Gains and Other Income 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Gains and other income, net $ 9 $ 3 $ 6 NM During the first quarter of 2023, we recorded a $4 million gain associated with the earn out of additional proceeds from the 2019 disposition of a land parcel in Cancun, Mexico, $3 million of non-income tax adjustments, and $2 million related to receipt of business interruption insurance proceeds. Exchange & Third-Party Management Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 REVENUES Management and exchange $ 56 $ 64 Rental 10 11 Cost reimbursements 5 9 TOTAL REVENUES 71 84 EXPENSES Management and exchange 30 33 Depreciation and amortization 8 9 Cost reimbursements 5 9 TOTAL EXPENSES 43 51 SEGMENT FINANCIAL RESULTS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ 28 $ 33 Management and Exchange Profit 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Management and exchange revenue $ 56 $ 64 $ (8) (12%) Management and exchange expense (30) (33) 3 9% Management and exchange profit $ 26 $ 31 $ (5) (14%) Management and exchange profit margin 47.1% 48.6% (1.5 pts) The decrease in management and exchange revenue reflects $8 million of lower revenue due to the disposition of our VRI Americas business during the second quarter of 2022. Management and exchange profit and profit margin, excluding the impact of the disposition of VRI Americas, would have decreased by $3 million or 9% in the first quarter of 2023, due to higher wage and benefits costs. 41 Table of Contents Rental Revenues 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Rental revenues $ 10 $ 11 $ (1) (10%) Results reflect a $1 million decrease in gross Getaway revenues, which resulted from a 10% decrease in transactions driven by lower inventory availability, partially offset by a 2% increase in the average Getaway fee. Rental inventory procurement costs, which are recorded net within Rental revenues, were in line with the prior year. Corporate and Other Corporate and Other consists of results that are not allocable to our segments, including company-wide general and administrative costs, corporate interest expense, transaction and integration costs, and income taxes. In addition, Corporate and Other includes the revenues and expenses from Consolidated Property Owners’ Associations. Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 REVENUES Resort management and other services $ 9 $ 32 Cost reimbursements (8) (20) TOTAL REVENUES 1 12 EXPENSES Resort management and other services 13 40 Rental (3) (9) General and administrative 68 61 Depreciation and amortization 1 2 Cost reimbursements (8) (20) TOTAL EXPENSES 71 74 Gains and other income, net 12 1 Interest expense, net (34) (27) Transaction and integration costs (13) (28) FINANCIAL RESULTS BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS (105) (116) Provision for income taxes (41) (32) Net income attributable to noncontrolling interests — — FINANCIAL RESULTS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (146) $ (148) 42 Table of Contents Consolidated Property Owners’ Associations The following table illustrates the impact of certain Consolidated Property Owners’ Associations under the relevant accounting guidance and the changes attributed to the deconsolidation of individual Consolidated Property Owners’ Associations. Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 REVENUES Resort management and other services $ 9 $ 32 Cost reimbursements (8) (20) TOTAL REVENUES 1 12 EXPENSES Resort management and other services 13 40 Rental (3) (9) Cost reimbursements (8) (20) TOTAL EXPENSES 2 11 Losses and other expense, net — (1) FINANCIAL RESULTS BEFORE INCOME TAXES AND NONCONTROLLING INTERESTS (1) — Provision for income taxes — (1) Net income attributable to noncontrolling interests — — FINANCIAL RESULTS ATTRIBUTABLE TO COMMON SHAREHOLDERS $ (1) $ (1) General and Administrative 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change General and administrative $ 68 $ 61 $ 7 12% General and administrative expenses increased $5 million for costs related to the implementation of technology associated with the integration of Legacy-ILG, $5 million of incremental costs primarily related to compliance activities and new product development initiatives, and a $1 million increase in insurance expense, partially offset by a $4 million decrease in compensation related costs due to lower bonus expense partially offset by an increase in wages. We expect General and administrative expenses for the remainder of 2023 to increase due the continued impact of increased wages and additional investment in upgrading and implementing technology. Gains and Other Income 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Gains and other income, net $ 12 $ 1 $ 11 NM In the first quarter of 2023, we recorded a $20 million increase in our receivable from Marriott International for indemnified tax matters (the true-up to the offsetting accrual is included in the Provision for income taxes line) and $2 million of foreign currency translation gains, partially offset by $10 million attributed to the redemption premium and write-off of unamortized debt issuance costs attributed to the early redemption of our senior secured notes. In the first quarter of 2022, we recorded $1 million of foreign currency translation gains. 43 Table of Contents Interest Expense 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Interest expense, net $ (34) $ (27) $ (7) (27%) The increase in Interest expense, net is attributed to $5 million associated with higher borrowings on the Warehouse Credit Facility and Revolving Corporate Credit Facility, including the impact of the increase in the variable interest rate on the Revolving Corporate Credit Facility, $3 million of higher variable interest expense on the Term Loan, $4 million of higher interest expense associated with our convertible notes, and $1 million of interest expense related to leased assets. This was partially offset by $4 million of lower interest expense associated with the early redemption of our senior secured notes, $1 million of lower interest on non-income tax related items and $1 million of interest income. Income Tax 2023 First Quarter Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Change % Change Provision for income taxes $ (41) $ (32) $ (9) (30%) Our interim effective tax rate was 32.3% and 35.6% for the three months ended March 31, 2023 and March 31, 2022, respectively. The decrease in the effective tax rate is predominately attributable to an increase in Income Before Income Taxes and Noncontrolling Interests and a net increase in discrete items, including a net increase in the reserve for uncertain tax benefits of $16 million, partially offset by an increase in our share-based compensation benefit of $5 million and a $4 million increase in favorable foreign income tax adjustments. See Footnote 5 “Income Taxes” to our Financial Statements for further information on our uncertain tax benefits and corresponding indemnification. Liquidity and Capital Resources Typically, our capital needs are supported by cash on hand, cash generated from operations, our ability to raise capital through securitizations in the ABS market, our ability to issue new debt and refinance existing debt, and, to the extent necessary, our ability to access funds under the Warehouse Credit Facility and the Revolving Corporate Credit Facility. We believe these sources of capital will be adequate to meet our short-term and long-term liquidity requirements, finance our long-term growth plans, satisfy debt service requirements, fulfill other cash requirements, and return capital to shareholders. We continuously monitor the capital markets to evaluate the effect that changes in market conditions may have on our ability to fund our liquidity needs. Our corporate debt, net of cash and equivalents, to Adjusted EBITDA ratio was 3.1 at March 31, 2023, roughly in-line with our targeted leverage range of 2.5x to 3.0x, and we expect to be within the range by the end of 2023. We have no material maturities of corporate debt until 2025. At the end of the first quarter of 2023, the interest rate applicable to approximately 85% of our total corporate debt, excluding finance leases and including the impact of interest rate hedges, was effectively fixed. The weighted average interest rate of our total corporate debt, excluding finance leases and including the impact of interest rate hedges, was 3.7% as of March 31, 2023. Sources of Liquidity Cash from Operations Our primary sources of funds from operations are (1) cash sales and down payments on financed sales, (2) cash from our financing operations, including principal and interest payments received on outstanding vacation ownership notes receivable, (3) cash from fee-based membership, exchange and rental transactions, and (4) net cash generated from our rental and resort management and other services operations. Vacation Ownership Notes Receivable Securitizations We periodically securitize, without recourse, through bankruptcy remote special purpose entities, the majority of the notes receivable originated in connection with the sale of vacation ownership products to institutional investors in the ABS term securitization market. These vacation ownership notes receivable securitizations provide liquidity for general corporate purposes. In a vacation ownership notes receivable term securitization, several classes of debt securities issued 44 Table of Contents by a special purpose entity are generally collateralized by a single tranche of transferred assets, which consist of vacation ownership notes receivable. In connection with each vacation ownership notes receivable securitization, we may retain all or a portion of the securities that are issued. Typically, we receive cash at inception of the term securitization transaction for the amount of notes issued less fees and monies held in reserve and we receive cash during the life of the transaction in amounts reflecting the excess spread of interest received on the related vacation ownership notes receivable less the interest payable on the ABS securities, less administrative fees and amounts from related vacation ownership notes receivable that default. Each of the securitized vacation ownership notes receivable transactions 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 parameters (default or delinquency thresholds vary by transaction), transaction provisions effectively redirect the monthly excess spread of interest accruing on the related vacation ownership notes receivable less the interest accruing on the ABS securities and fees 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 first quarter of 2023, and as of March 31, 2023, we had 14 term securitization transactions outstanding, all of which were in compliance with their respective required parameters. Since 2000, we have issued approximately $8.1 billion of debt securities in securitization transactions in the term ABS market, excluding amounts securitized through warehouse credit facilities or private bank transactions. See Footnote 11 “Securitized Debt” to our Financial Statements for further information related to our recent securitization transaction, completed subsequent to the end of the first quarter of 2023. On an ongoing basis, we have the ability to use our Warehouse Credit Facility to securitize, on a revolving non-recourse basis, eligible consumer loans derived from certain vacation ownership sales. Those loans may later be transferred to term securitization transactions in the ABS market, which typically occur at least once per year. Our Warehouse Credit Facility provides for up to $425 million of aggregate borrowings through July 28, 2024, and at March 31, 2023, we had $296 million of borrowings outstanding. As of March 31, 2023, $120 million of gross vacation ownership notes receivable were eligible for securitization. Revolving Corporate Credit Facility Our Revolving Corporate Credit Facility, which expires on March 31, 2027, provides for up to $750 million of aggregate borrowings for general corporate needs, including working capital, capital expenditures, letters of credit, and acquisitions. At March 31, 2023, $200 million of borrowings were outstanding on our Revolving Corporate Credit Facility, and $1 million of le tters of credit were outstanding. Redemption of Senior Secured Notes During the first quarter of 2023, we redeemed, prior to maturity, the remaining $250 million of the 2025 Notes outstanding pursuant to a redemption notice issued in the fourth quarter of 2022 and the terms of the indenture governing the 2025 Notes. In connection with this redemption, we incurred charges of $10 million, including a redemption premium and the write-off of unamortized debt issuance costs, which were recorded in Gains and other income, net on our Income Statement for the three months ended March 31, 2023. Uses of Cash We minimize our working capital needs through cash management, strict credit-granting policies, and disciplined collection efforts. Our working capital needs fluctuate throughout the year given the timing of annual maintenance fees on unsold inventory we pay to owners’ associations and certain annual compensation-related outflows. In addition, our cash from operations varies due to the timing of repayment by owners of vacation ownership notes receivable, the closing or recording of sales contracts for vacation ownership products, financing propensity, and cash outlays for inventory acquisitions and development. Cash and cash equivalents on hand at March 31, 2023 totaled $306 million, a decrease of $218 million from December 31, 2022, primarily reflecting the redemption of senior notes of $250 million, the repurchase of common stock of $80 million, payment of dividends of $54 million, capital expenditures for property and equipment (excluding inventory) of $37 million, $9 million for payment of withholding taxes on vesting of restricted stock units, and repayments of securitized debt in excess of new borrowings of $3 million, partially offset by other debt borrowings in excess of repayments of $194 million, $12 million associated with net cash and cash equivalents provided by operating activities, $8 million of finance lease incentives in excess of payments, and $1 million due to the effect of changes in exchange rates. 45 Table of Contents Seasonality Our cash flow from operations fluctuates during the year due to the timing of certain receipts and contractual and compensation-related payments. Significant changes in cash flow can result from the timing of our collection of maintenance fees, club dues, and other customer payments, which typically occur in either the fourth quarter or the first quarter of each year. Generally, cash outflows related to our payment of maintenance fees associated with unsold inventory occurs in the fourth quarter for our points products, and in the first quarter for our weeks-based products. In addition, significant compensation-related cash outflows occur in the first quarter of each year associated with payment of annual bonuses and the payment of two quarterly dividends (December and February dividend declarations). Operations In addition to net income or loss and adjustments for non-cash items, the following are key drivers of our cash flow from operating activities: Inventory Spending Less Than Cost of Sales Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Inventory spending $ (30) $ (22) Purchase of vacation ownership units for future transfer to inventory — (12) Inventory costs 46 50 Inventory spending less than cost of sales $ 16 $ 16 Although we have significant excess inventory on hand, we intend to continue selectively pursuing growth opportunities by targeting high-quality inventory that allows us to add desirable new destinations to our systems with new on-site sales locations. Where possible, we will structure transactions that limit our up-front capital investment and allow us to purchase finished inventory closer to the time it is needed for sale. These capital efficient vacation ownership transaction structures may consist of the development of new inventory, or the conversion of previously built units, by third parties. In addition, we may develop inventory in key markets where opportunities generate acceptable risk adjusted returns. Through our existing VOI repurchase program, we proactively acquire previously sold VOIs from owners’ associations and individual owners at lower costs than would be required to develop new inventory. Among other reasons, by repurchasing inventory, we expect to be able to help stabilize the future cost of our vacation ownership products. Our spending for real estate inventory in the first quarter of 2023 was lower than cost of sales and was primarily related to our VOI repurchase programs. We expect inventory spending to be less than cost of sales for 2023. Vacation Ownership Notes Receivable Collections Less Than Originations Three Months Ended ($ in millions) March 31, 2023 March 31, 2022 Vacation ownership notes receivable collections — non-securitized $ 48 $ 67 Vacation ownership notes receivable collections — securitized 113 121 Vacation ownership notes receivable originations (225) (205) Vacation ownership notes receivable collections less than originations $ (64) $ (17) Vacation ownership notes receivable collections were less than originations due to the growth of sales of VOIs in the 2023 first quarter and 2022. Repurchase of Common Stock The following table summarizes share repurchase activity under our current share repurchase program: ($ in millions, except per share amounts) Number of Shares Repurchased Cost Basis of Shares Repurchased Average Price Paid per Share As of December 31, 2022 22,773,218 $ 2,119 $ 93.06 For the first quarter of 2023 522,422 80 153.71 As of March 31, 2023 23,295,640 $ 2,199 $ 94.42 See Footnote 13 “Shareholders' Equity” to our Financial Statements for further information related to our current share repurchase program. 46 Table of Contents Payment of Dividends to Common Shareholders We distributed cash dividends to holders of common stock during the first quarter of 2023 as follows: Declaration Date Shareholder Record Date Distribution Date Dividend per Share December 1, 2022 December 22, 2022 January 5, 2023 $0.72 February 16, 2023 March 2, 2023 March 16, 2023 $0.72 We currently expect to pay quarterly dividends in the future, but any future dividend payments will be subject to Board of Directors approval, which will depend on our financial condition, results of operations and capital requirements, as well as applicable law, regulatory constraints, industry practice, and other business considerations that our Board of Directors considers relevant. In addition, our Corporate Credit Facility and the indentures governing our senior notes contain restrictions on our ability to pay dividends, and the terms of agreements governing debt that we may incur in the future may also limit or prohibit the payment of dividends. The payment of certain cash dividends may also result in an adjustment to the conversion rate of our convertible notes in a manner adverse to us. Accordingly, there can be no assurance that we will pay dividends in the future at any particular rate or at all. Material Cash Requirements The following table summarizes our future material cash requirements from known contractual or other obligations as of March 31, 2023: Payments Due by Period ($ in millions) Total Remainder of 2023 2024 2025 2026 2027 Thereafter Contractual Obligations Debt (1) $ 3,431 $ 83 $ 116 $ 880 $ 635 $ 833 $ 884 Securitized debt (1)(2) 2,269 176 235 487 214 206 951 Purchase obligations (3) 342 57 136 96 48 1 4 Operating lease obligations (4) 122 18 22 20 19 12 31 Finance lease obligations (4)(5) 528 7 15 12 12 12 470 Other long-term obligations (6) 18 10 3 2 1 1 1 $ 6,710 $ 351 $ 527 $ 1,497 $ 929 $ 1,065 $ 2,341 (1) Includes principal as well as interest payments and excludes unamortized debt discount and issuance costs. (2) Payments based on estimated timing of cash flow associated with securitized notes receivable. (3) Arrangements are considered purchase obligations if a contract specifies all significant terms, including fixed or minimum quantities to be purchased, a pricing structure, and approximate timing of the transaction. Amounts reflected herein represent expected funding under such contracts. Amounts reflected on the consolidated balance sheet as accounts payable and accrued liabilities are excluded from the table above. (4) Includes interest. (5) The lease term of the finance lease arrangement for our new global headquarters office building located in Orlando, Florida commenced for accounting purposes during the first quarter of 2023, upon substantial completion of construction. See Footnote 12 “Debt” to our Financial Statements for additional information on this lease. (6) Primarily relates to future guaranteed purchases of rental inventory of $6 million and our commitment to an owners’ association that we manage to pay for any shortfall between the actual expenses incurred by the owners’ association and the income received by the owners’ association, in lieu of maintenance fees, of $7 million. In the normal course of our resort management business, we enter into purchase commitments on behalf of owners’ associations to manage the daily operating needs of our resorts. Since we are reimbursed for these commitments from the cash flows of the resorts, these obligations have minimal impact on our net income and cash flow. These purchase commitments are excluded from the table above. 47 Table of Contents Supplemental Guarantor Information The 2028 Notes are guaranteed by MVWC, Marriott Ownership Resorts, Inc. (“MORI”), and certain other subsidiaries whose voting securities are wholly owned directly or indirectly by MORI (such subsidiaries collectively, the “Senior Notes Guarantors”). These guarantees are full and unconditional and joint and several. The guarantees of the Senior Notes Guarantors are subject to release in limited circumstances only upon the occurrence of certain customary conditions. The following tables present consolidating financial information as of March 31, 2023 and December 31, 2022, and for the three months ended March 31, 2023 for MVWC and MORI on a stand-alone basis (collectively, the “Issuers”), the Senior Notes Guarantors, the combined non-guarantor subsidiaries of MVWC, and MVW on a consolidated basis. Condensed Consolidating Balance Sheet As of March 31, 2023 Issuers Senior Notes Guarantors Non-Guarantor Subsidiaries Total Eliminations MVW Consolidated ($ in millions) MVWC MORI Cash and cash equivalents $ — $ 79 $ 98 $ 129 $ — $ 306 Restricted cash — 29 83 156 — 268 Accounts and contracts receivable, net 9 121 92 74 (7) 289 Vacation ownership notes receivable, net — 148 186 1,886 — 2,220 Inventory — 178 376 118 — 672 Property and equipment, net — 224 741 250 — 1,215 Goodwill — — 3,117 — — 3,117 Intangibles, net — — 866 32 — 898 Investments in subsidiaries 3,517 4,112 — — (7,629) — Other 111 124 326 176 (120) 617 Total assets $ 3,637 $ 5,015 $ 5,885 $ 2,821 $ (7,756) $ 9,602 Accounts payable $ 26 $ 35 $ 87 $ 74 $ — $ 222 Advance deposits — 72 89 17 — 178 Accrued liabilities 6 73 148 111 (4) 334 Deferred revenue — 9 228 234 (23) 448 Payroll and benefits liability — 108 75 23 — 206 Deferred compensation liability — 114 31 2 — 147 Securitized debt, net — — — 1,957 (21) 1,936 Debt, net 1,127 1,823 174 5 — 3,129 Other — 1 163 19 — 183 Deferred taxes — 109 309 — (79) 339 MVW shareholders' equity 2,478 2,671 4,581 377 (7,629) 2,478 Noncontrolling interests — — — 2 — 2 Total liabilities and equity $ 3,637 $ 5,015 $ 5,885 $ 2,821 $ (7,756) $ 9,602 48 Table of Contents As of December 31, 2022 Issuers Senior Notes Guarantors Non-Guarantor Subsidiaries Total Eliminations MVW Consolidated ($ in millions) MVWC MORI Cash and cash equivalents $ 150 $ 119 $ 89 $ 166 $ — $ 524 Restricted cash — 25 145 160 — 330 Accounts and contracts receivable, net 10 120 116 73 (27) 292 Vacation ownership notes receivable, net — 132 195 1,871 — 2,198 Inventory — 204 375 81 — 660 Property and equipment, net — 202 659 278 — 1,139 Goodwill — — 3,117 — — 3,117 Intangibles, net — — 880 31 — 911 Investments in subsidiaries 3,417 4,076 — — (7,493) — Other 106 129 228 78 (73) 468 Total assets $ 3,683 $ 5,007 $ 5,804 $ 2,738 $ (7,593) $ 9,639 Accounts payable $ 60 $ 45 $ 166 $ 85 $ — $ 356 Advance deposits — 63 79 16 — 158 Accrued liabilities 2 75 193 121 (22) 369 Deferred revenue — 9 169 172 (6) 344 Payroll and benefits liability — 139 86 26 — 251 Deferred compensation liability — 110 27 2 — 139 Securitized debt, net — — — 1,961 (23) 1,938 Debt, net 1,125 1,876 76 11 — 3,088 Other — 1 148 18 — 167 Deferred taxes — 89 291 — (49) 331 MVW shareholders' equity 2,496 2,600 4,569 324 (7,493) 2,496 Noncontrolling interests — — — 2 — 2 Total liabilities and equity $ 3,683 $ 5,007 $ 5,804 $ 2,738 $ (7,593) $ 9,639 Condensed Consolidating Statement of Income Three Months Ended March 31, 2023 Issuers Senior Notes Guarantors Non-Guarantor Subsidiaries Total Eliminations MVW Consolidated ($ in millions) MVWC MORI Revenues $ — $ 237 $ 684 $ 258 $ (10) $ 1,169 Expenses (9) (283) (576) (183) 10 (1,041) Provision for income taxes 7 2 (41) (9) — (41) Equity in net income (loss) of subsidiaries 89 139 — — (228) — Net income (loss) 87 95 67 66 (228) 87 Net income attributable to noncontrolling interests — — — — — — Net income (loss) attributable to common shareholders $ 87 $ 95 $ 67 $ 66 $ (228) $ 87 49 Table of Contents Recent Accounting Pronouncements See Footnote 2 “Significant Accounting Policies and Recent Accounting Standards” to our Financial Statements for a discussion of recently issued accounting pronouncements, including information on new accounting standards and the future adoption of such standards. Critical Accounting Policies and Estimates Our preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed those policies and estimates that we believe are critical and require the use of complex judgment in their application in our most recent Annual Report on Form 10-K. Since the date of our most recent Annual Report on Form 10-K, there have been no material changes to our critical accounting policies or the methodologies or assumptions we apply under them.