TNL

Business Context and Reporting Period

Company: Wyndham Worldwide Corporation (formerly Travel & Leisure Co.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2009
Business Overview: A global provider of hospitality products and services operating in three segments: Lodging (franchising and management), Vacation Exchange and Rentals (RCI), and Vacation Ownership (development, sales, and financing of timeshare interests).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 17% ($210 million) for the quarter and 16% ($533 million) for the nine months compared to 2008. The primary driver was a 35% drop in gross Vacation Ownership Interest (VOI) sales due to a strategic reduction in tour flow and a 17% decline in Lodging RevPAR.
• Profitability: Net income decreased 27% ($38 million) for the quarter and 22% ($62 million) for the nine months. Despite revenue declines, operating expenses decreased significantly (18% for the quarter) due to cost-cutting measures and reduced marketing spend.
• Segment Performance:
  • Lodging: Revenues down 14% (quarter) due to global RevPAR weakness.
  • Vacation Exchange & Rentals: Revenues down 8% (quarter), impacted by foreign exchange headwinds ($24 million unfavorable) and lower rental prices.
  • Vacation Ownership: Revenues down 23% (quarter) driven by fewer tours, partially offset by higher Volume Per Guest (VPG) and recognition of previously deferred revenue.
• Debt Activity: The company issued $250 million in 9.875% senior unsecured notes and $230 million in 3.50% convertible notes in May 2009. Interest expense increased $13 million for the quarter due to these issuances.

Guidance, Outlook, and Risks

• Restructuring: The company recorded $46 million in restructuring costs for the nine months ended September 30, 2009, related to closing over 85 sales offices and reducing staff by approximately 370 employees. Management anticipates annual net savings of $160 million to $180 million from these initiatives.
• Capital Expenditures: Anticipated total capital expenditures for 2009 are $145 million to $155 million, including routine maintenance and facility consolidation.
• Interest Expense Outlook: Management anticipates an increase in interest expense of $25 million to $35 million in full-year 2010 compared to 2009 due to new debt issuances and lower capitalized interest.
• Liquidity and Credit Markets: The company faces risks related to the asset-backed securities market. While it successfully accessed term securitization markets in 2009, it has reduced its reliance on these markets. The 2008 bank conduit facility was renewed in October 2009 with capacity reduced to $600 million.
• Contingent Liabilities: The company has a significant contingent tax liability of $273 million related to an IRS audit of its former parent, Cendant, for tax years 2003-2006. The company is responsible for 37.5% of these liabilities.
• Goodwill Impairment Risk: The company continues to monitor goodwill balances ($1.386 billion) for impairment indicators, noting that significant deterioration in economic conditions could trigger further charges.

Investor Verification Checklist

• VOI Sales Pace: Verify the sustainability of the reduced tour flow strategy and its long-term impact on revenue recognition.
• Loan Loss Provisions: Review the $346 million provision for loan losses recorded in the first nine months of 2009 and the adequacy of the allowance for loan losses ($372 million) given the economic downturn.
• Debt Covenants: Confirm continued compliance with financial covenants (Interest Coverage Ratio of 23.8x and Leverage Ratio of 2.4x as of Sep 30, 2009).
• Cendant Tax Liability: Monitor the status of the IRS audit regarding Cendant tax years 2003-2006, which represents a $273 million accrual.
• Foreign Exchange Impact: Assess the ongoing impact of a stronger U.S. dollar on the Vacation Exchange and Rentals segment, which saw $24 million in unfavorable currency translation in Q3 2009.