Business Context and Reporting Period
Company: Wyndham Worldwide Corporation (formerly a subsidiary of Cendant Corporation)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2006
Overview: Wyndham is a global hospitality company operating in three primary segments: Lodging (franchising and property management), Vacation Exchange and Rentals (RCI), and Vacation Ownership (Wyndham Vacation Resorts and WorldMark by Wyndham). The company became an independent, publicly traded entity on July 31, 2006, following its separation from Cendant Corporation. As of December 31, 2006, the company operated approximately 6,473 franchised hotels with over 543,000 rooms globally.
Key Financial Metrics
| Metric ($ millions) | 2006 | 2005 |
|---|---|---|
| Net Revenues | 3,842 | 3,471 |
| Operating Income | 577 | 620 |
| Net Income | 287 | 431 |
| Diluted EPS | $1.44 | $2.15 |
| EBITDA | 725 | 751 |
| Total Assets | 9,520 | 9,167 |
| Total Debt (Securitized + Long-term) | 2,900 | 2,042 |
| Cash and Cash Equivalents | 269 | 99 |
Note: 2006 Net Income includes a $65 million after-tax charge for the cumulative effect of an accounting change (SFAS No. 152).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 11% to $3.84 billion, driven by a 25% increase in gross vacation ownership interest sales, acquisitions (Wyndham Hotels & Resorts, Baymont), and growth in consumer financing revenues.
- Profitability Decline: Net income decreased 33% to $287 million. This decline was primarily due to:
- Accounting Change: A $65 million non-cash charge related to the adoption of SFAS No. 152 (Accounting for Real Estate Time-Sharing Transactions).
- Separation Costs: $99 million in costs associated with the separation from Cendant.
- Increased Expenses: Higher operating expenses ($414 million increase) due to volume-related costs, marketing initiatives, and interest expense.
- Debt Structure: Total debt increased significantly following the separation. The company issued $800 million in 6.00% senior unsecured notes and entered into a $300 million term loan and a $900 million revolving credit facility.
- Segment Performance:
- Lodging: Revenues up 24%; RevPAR increased 13% to $34.95.
- Vacation Ownership: Revenues up 10%; Gross sales up 25%.
- Vacation Exchange & Rentals: Revenues up 5%; EBITDA down 7% due to increased expenses and a $21 million tax charge.
Guidance, Outlook, and Risks
Management Commentary & Outlook:
- Strategic Focus: Management intends to accelerate growth through organic expansion in the economy lodging segment, room growth in middle/upscale segments, and international expansion of brands like Wyndham, Ramada, and Days Inn.
- Rebranding: The company is transitioning Fairfield Resorts and Trendwest brands to Wyndham Vacation Resorts and WorldMark by Wyndham, respectively, to leverage the Wyndham brand equity.
- Capital Allocation: The company completed a $400 million stock repurchase program in early 2007 and authorized a new $400 million program. Capital expenditures for 2006 were $191 million (excluding vacation ownership development).
Risks and Contingencies:
- Cendant Liabilities: Wyndham assumed 37.5% of certain contingent and corporate liabilities of Cendant (approx. $434 million recorded), including litigation and tax matters. If other parties default, Wyndham may be liable for a larger share.
- Accounting Standards: The adoption of SFAS No. 152 significantly altered revenue recognition for vacation ownership sales, reducing reported revenues by reclassifying loan loss provisions as a reduction of revenue.
- Market Risks: Exposure to interest rate fluctuations (variable rate debt) and foreign currency exchange rates (significant international operations).
- Legal Proceedings: Ongoing litigation includes class actions regarding vacation ownership reservation policies and patent infringement claims regarding the TripRewards program.
Investor Verification Checklist
- Accounting Impact: Verify the long-term impact of SFAS No. 152 on revenue recognition and the comparability of 2006 results to prior years.
- Cendant Liability Exposure: Assess the potential financial impact of the 37.5% share of Cendant's contingent liabilities, particularly regarding the Cendant securities litigation and tax audits.
- Debt Covenants: Review compliance with financial covenants (minimum interest coverage ratio of 3.0x and maximum leverage ratio of 3.5x) under the new credit facilities.
- Loan Portfolio Quality: Monitor the performance of the vacation ownership contract receivables portfolio, specifically the cumulative default rate (approx. 16.5% expected) and the adequacy of the allowance for loan losses.
- Rebranding Costs: Track the execution and cost implications of the Fairfield/Trendwest to Wyndham brand transition.