Wyndham Worldwide Corporation: Q1 2007 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 2007, for Wyndham Worldwide Corporation (formerly a subsidiary of Cendant Corporation). The Company operates as an independent entity following its separation from Cendant on July 31, 2006. Its business is organized into three segments: Lodging (hotel franchising and management), Vacation Exchange and Rentals (vacation exchange services and rental marketing), and Vacation Ownership (sales of vacation ownership interests and consumer financing).
Key Financial Metrics
| Metric | Q1 2007 | Q1 2006 |
|---|---|---|
| Net Revenues | $1,012 million | $870 million |
| Operating Income | $154 million | $148 million |
| Net Income | $86 million | $28 million |
| Diluted EPS | $0.45 | $0.14 |
| EBITDA | $192 million | $182 million |
| Cash and Equivalents | $174 million | $115 million |
| Total Debt (Securitized + Long-term) | $3,132 million | $2,900 million (approx.) |
| Operating Cash Flow | ($15) million | $66 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 16% ($142 million) driven by a 20% increase in gross vacation ownership interest sales, higher rental transaction volumes, and growth in the lodging segment (including the Baymont Inn & Suites acquisition).
- Profitability: Net income increased significantly ($58 million) primarily due to the absence of a $65 million after-tax cumulative effect of accounting change charge recorded in Q1 2006 related to the adoption of SFAS No. 152.
- Expense Increases: Total expenses rose 19% ($136 million), reflecting higher costs of sales, increased marketing and reservation expenses, and higher interest costs associated with the Company's new capital structure post-separation.
- Cash Flow: Operating cash flow turned negative ($15 million outflow) compared to a $66 million inflow in the prior year, largely due to increased investments in inventory and vacation ownership contract receivables.
Guidance, Outlook, and Risks
- Capital Expenditures: Management anticipates spending approximately $185 to $230 million on capital expenditures and $600 to $700 million on vacation ownership development projects in 2007.
- Dividend Plan: On May 1, 2007, the Board approved a dividend plan with an anticipated initial quarterly cash dividend of $0.04 per share, beginning in Q3 2007.
- Stock Repurchases: The Company completed a $400 million repurchase program in January 2007 and authorized a new $400 million program in February 2007. As of March 31, 2007, $129 million remained available.
- Contingent Liabilities: The Company assumed 37.5% of certain Cendant contingent liabilities (litigation, tax, and corporate) totaling approximately $404 million. The maximum exposure for some guarantees cannot be quantified.
- Debt Covenants: The Company is in compliance with financial covenants, including a minimum interest coverage ratio of 3.0x and a maximum leverage ratio of 3.5x.
Investor Verification Checklist
- Accounting Changes: Verify the impact of the SFAS No. 152 adoption in 2006 and the FIN 48 adoption in 2007 on revenue recognition and tax liabilities.
- Receivables Quality: Review the $2,490 million in vacation ownership contract receivables and the $281 million allowance for loan losses.
- Debt Structure: Confirm the terms and maturity profile of the $1.7 billion in securitized vacation ownership debt and the $1.4 billion in long-term debt.
- Contingent Liabilities: Assess the potential financial impact of the $404 million in assumed Cendant liabilities and ongoing litigation.
- Seasonality: Note that vacation ownership sales and rental revenues are highly seasonal, with Q1 typically being a planning period for exchanges but lower for ownership sales compared to Q3/Q4.