TNL

Wyndham Worldwide Corporation: Q3 2007 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report on Form 10-Q for Wyndham Worldwide Corporation (formerly a subsidiary of Cendant Corporation) for the period ended September 30, 2007. The Company operates in three primary segments: Lodging (franchising and property management), Vacation Exchange and Rentals (RCI), and Vacation Ownership (sales, financing, and management of timeshare interests). The Company has been operating as a standalone public entity since its separation from Cendant on July 31, 2006.

Key Financial Metrics

Note: 9M 2006 Net Income includes a $65 million cumulative effect of accounting change charge related to SFAS No. 152 adoption.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 16% in Q3 2007 and 16% in the first nine months of 2007. Growth was driven by a 15% increase in Vacation Ownership sales (higher tour flow and volume per guest), a 16% increase in rental transaction revenues, and 6% RevPAR growth in the Lodging segment.
• Profitability: Operating income rose 42% in Q3 and 25% in the 9M period. This was aided by a significant reduction in separation-related costs ($65 million decrease in Q3 compared to prior year) and strong segment performance.
• Segment Performance:
  • Vacation Ownership: Net revenues up 22% (Q3) and 22% (9M); EBITDA up 32% (Q3) and 18% (9M).
  • Vacation Exchange & Rentals: Net revenues up 8% (Q3) and 10% (9M); EBITDA up 6% (Q3) and 15% (9M). Foreign currency translation provided a favorable impact of $14 million in Q3 and $35 million in 9M.
  • Lodging: Net revenues up 12% (Q3) and 8% (9M); EBITDA up 4% (Q3) and 7% (9M).
• Debt Structure: Total debt increased to $3.47 billion as of September 30, 2007, primarily due to new securitized vacation ownership debt facilities ($600 million term notes in May 2007 and $155 million facility in Feb 2007) to fund receivables growth.

Guidance, Outlook, and Risks

• Capital Expenditures: Management anticipates spending approximately $185–$230 million on capital expenditures and $650–$750 million on vacation ownership development projects for the full year 2007.
• Stock Repurchases: The Board authorized a $200 million stock repurchase program in August 2007. As of September 30, approximately $179 million remained available.
• Dividends: A quarterly dividend of $0.04 per share was declared in October 2007, payable in December 2007.
• Contingent Liabilities: The Company assumed 37.5% of certain Cendant contingent liabilities (litigation, tax, and corporate) totaling approximately $391 million. In Q3 2007, the Company increased its litigation accrual by $27 million due to an adverse order in a Cendant-related matter.
• Rating Outlook: Standard & Poor's assigned a "negative outlook" to the Company's senior unsecured debt (rated BBB) in August 2007.
• Seasonality: The Company notes that revenues are typically higher in Q2 and Q3 due to leisure travel patterns.

Key Facts for Investor Verification

• Loan Loss Provisions: Verify the adequacy of the $222 million provision for loan losses recorded in the first nine months of 2007, which is recorded as a reduction of net revenues under SFAS No. 152.
• Cendant Liability Exposure: Monitor the $391 million in assumed Cendant liabilities, specifically the $43 million litigation accrual and $236 million tax liability, as outcomes of these matters could materially impact future earnings.
• Securitization Capacity: Confirm the renewal status and capacity of the $1.2 billion bank conduit facility (renewed October 2007) and the ability to securitize future vacation ownership receivables.
• Foreign Currency Impact: Assess the sensitivity of the Vacation Exchange and Rentals segment to foreign exchange rates, which provided a $35 million favorable impact in the first nine months of 2007.
• Stock Repurchase Execution: Track the execution of the $200 million share repurchase program and its impact on diluted share count and EPS.