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Wyndham Worldwide Corporation: Q2 2008 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Wyndham Worldwide Corporation for the period ended June 30, 2008. The company operates in three primary segments: Lodging (franchising and management), Vacation Exchange and Rentals, and Vacation Ownership (sales and financing of timeshare interests). The financial statements are unaudited but have been reviewed by Deloitte & Touche LLP.

Key Financial Metrics

Material Changes vs. Prior Period

• Quarter-over-Quarter (Q2 2008 vs. Q2 2007): Net revenues increased 3% ($32 million) driven by higher rental transaction prices, consumer financing growth, and lodging international royalties. Net income rose slightly by 2% ($2 million) to $98 million.
• Year-to-Date (6mo 2008 vs. 6mo 2007): Net revenues increased 2% ($32 million). However, Net Income decreased 23% ($42 million) to $140 million. This decline was primarily due to a $69 million increase in the provision for loan losses in the Vacation Ownership segment and a $28 million trademark impairment charge.
• Segment Performance:
  • Lodging: Revenues and EBITDA grew 8% and 5% respectively in Q2, driven by international growth and the Wyndham Rewards program.
  • Vacation Exchange and Rentals: Revenues and EBITDA grew 9% and 10% in Q2, aided by foreign exchange translation and higher rental prices.
  • Vacation Ownership: Revenues declined 1% in Q2, but EBITDA grew 12% due to lower cost of sales and higher financing income, despite a $38 million increase in loan loss provisions.

Guidance, Outlook, and Risks

• Loan Loss Provisions: Management expects the trend of higher loan loss provisions to continue for the remainder of 2008 due to negative economic conditions affecting borrowers with lower credit scores.
• Deferred Revenue: The company anticipates an increase in deferred revenue of approximately $70 million to $100 million for the full year 2008 due to sales of vacation resorts under construction.
• Capital Expenditures: Expected to be $210 million to $230 million for lodging and technology, plus $600 million to $700 million for vacation ownership development projects in 2008.
• Liquidity and Credit Ratings: In July 2008, Standard & Poor's downgraded the company's senior unsecured debt rating from BBB (negative outlook) to BBB- (stable outlook). The company remains in compliance with all debt covenants.
• Market Risks: Adverse conditions in the asset-backed securities and commercial paper markets have increased the cost of securitized borrowings. The company successfully closed two term securitizations in May and June 2008 without monoline insurance.
• Subsequent Event: On July 21, 2008, the company acquired U.S. Franchise Systems, Inc. (Microtel and Hawthorn brands) for $131 million.

Investor Verification Checklist

• Loan Loss Trends: Verify the trajectory of the provision for loan losses in the Vacation Ownership segment, which increased significantly ($69 million YTD) and is expected to persist.
• Deferred Revenue Impact: Assess the impact of the $87 million in deferred revenue recognized in the first half of 2008 on future earnings recognition.
• Debt Refinancing: Monitor the renewal of the $1.2 billion bank conduit facility expiring in October 2008 and the cost of capital in the current market environment.
• Legacy Liabilities: Review the $336 million in separation-related liabilities assumed from Cendant, specifically the $236 million in contingent tax liabilities.
• Acquisition Integration: Evaluate the financial impact and integration progress of the U.S. Franchise Systems acquisition completed in July 2008.