Wyndham Worldwide Corporation: Q2 2009 10-Q Summary
Business Context and Reporting Period
This filing is a Quarterly Report (Form 10-Q) for Wyndham Worldwide Corporation for the period ended June 30, 2009. The company operates in three primary segments: Lodging (franchising and management), Vacation Exchange and Rentals, and Vacation Ownership (development, sales, and financing of timeshare interests). The financial statements are unaudited but have been reviewed by Deloitte & Touche LLP.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2009 | Six Months Ended June 30, 2009 |
|---|---|---|
| Net Revenues | $920 million | $1,821 million |
| Operating Income | $151 million | $238 million |
| Net Income | $71 million | $116 million |
| Diluted EPS | $0.39 | $0.64 |
| Cash and Cash Equivalents | $174 million (as of June 30, 2009) | N/A |
| Total Debt | $3,558 million (Total outstanding) | N/A |
| Operating Cash Flow | N/A | $459 million |
Liquidity: As of June 30, 2009, the company held $174 million in cash and cash equivalents. Available capacity under the revolving credit facility was approximately $841 million, and the 2008 bank conduit facility had $653 million in available capacity.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 19% ($212 million) in Q2 2009 compared to Q2 2008, and 15% ($323 million) for the six-month period. The primary driver was a 39% drop in gross Vacation Ownership Interest (VOI) sales due to a strategic reduction in tour flow and a 17% decline in RevPAR in the Lodging segment.
- Profitability: Net income decreased 28% ($27 million) in Q2 and 17% ($24 million) for the six months ended June 30, 2009. Despite revenue declines, the Vacation Ownership segment saw an EBITDA increase of 26% for the six-month period due to significant cost reductions and the recognition of previously deferred revenue.
- Expense Management: Total expenses decreased 20% in Q2 and 16% for the six months, driven by a 36% reduction in Vacation Ownership expenses (lower commissions, marketing, and cost of sales) and restructuring initiatives.
- Loan Loss Provisions: The provision for loan losses increased by $9 million in Q2 and $34 million for the six months, reflecting a higher estimate of uncollectible receivables as a percentage of VOI sales financed.
Guidance, Outlook, and Risks
- Restructuring: The company recorded $46 million in restructuring costs for the six months ended June 30, 2009, related to the reduction of approximately 390 employees and facility closures. Management anticipates annual net savings of $160 million to $180 million from these initiatives beginning in 2009.
- Debt Issuances: In May 2009, the company issued $250 million of 9.875% senior unsecured notes and $230 million of 3.50% convertible notes. Proceeds were used to reduce borrowings under the revolving credit facility.
- Capital Markets Risk: The filing highlights significant liquidity risks associated with the asset-backed securities market. The company notes that monoline insurers are no longer AAA-rated, increasing the cost and difficulty of securitizing vacation ownership receivables. The 2008 bank conduit facility expires in November 2009, and renewal is critical for liquidity.
- Credit Ratings: Moody's downgraded the company's senior unsecured debt to Ba2 with a stable outlook in April 2009. S&P maintains a BBB- rating with a negative outlook.
- Deferred Revenue: Management expects a net benefit of approximately $170 million to $190 million in 2009 from the recognition of previously deferred revenue as construction on resorts progresses.
Investor Verification Checklist
- Securitization Renewal: Verify the status of the renewal for the 2008 bank conduit facility expiring in November 2009, as failure to renew could force amortization and impact liquidity.
- Loan Loss Reserves: Monitor the trend in the provision for loan losses and the allowance for loan losses ($373 million as of June 30, 2009) given the economic downturn and higher estimated uncollectible rates.
- Convertible Note Hedging: Review the fair value changes of the $69 million derivative liability associated with the bifurcated conversion feature of the May 2009 convertible notes, which is marked to market.
- Cendant Legacy Liabilities: Track the $343 million in contingent liabilities assumed from Cendant (including $271 million in tax liabilities), particularly regarding the ongoing IRS audit of Cendant's 2003-2006 tax years.
- VOI Sales Pace: Confirm if the strategic reduction in tour flow (down 48% in Q2) stabilizes or if further declines in gross VOI sales impact future revenue recognition.