Business Context and Reporting Period
This Form 8-K, dated August 9, 2006, reports the second-quarter 2006 pro forma financial results for Wyndham Worldwide Corporation (formerly a subsidiary of Cendant Corporation). Wyndham was separated from Cendant via a tax-free distribution on July 31, 2006. The results presented are pro forma, treating Wyndham as an independent company without incremental stand-alone costs. The company operates three primary segments: Lodging, Vacation Exchange and Rental, and Vacation Ownership.
Key Financial Metrics (Q2 2006)
- Revenue: $955 million (up 10% from $867 million in Q2 2005).
- Net Income: $75 million, or $0.37 per pro forma share (down from $89 million or $0.44 per share in Q2 2005).
- EBITDA: $166 million (down from $182 million in Q2 2005).
- Effective Tax Rate: 37% (down from 40% in Q2 2005).
- Segment Performance:
- Lodging: Revenue $176 million (+36%); EBITDA $53 million (+13%).
- Vacation Exchange and Rental: Revenue $261 million (-1%); EBITDA $32 million (-45%).
- Vacation Ownership: Revenue $518 million (+10%); EBITDA $84 million (+11%).
- Operating Statistics: RevPAR increased 15.9% to $36.97; Vacation Ownership gross sales increased 21% to $390 million.
Material Changes vs. Prior Period
While revenue grew 10% year-over-year, net income and EBITDA declined due to specific one-time and non-recurring items:
- Foreign Tax Accrual: Approximately $32 million in pretax expenses (including $11 million in interest) related to an accrual for local foreign taxes at European vacation rental operations. This reduced earnings per share by approximately $0.12.
- Separation Costs: Approximately $5 million in pretax expenses associated with the spin-off from Cendant.
- Accounting Standard Change: Adoption of SFAS No. 152 in January 2006 reduced Vacation Ownership revenue by $46 million and EBITDA by $2 million.
- Acquisitions: Lodging revenue growth was driven by the inclusion of Wyndham Hotels and Resorts and Baymont acquisitions. Excluding these, RevPAR grew 9.6%.
- Market Conditions: Vacation Exchange and Rental EBITDA dropped 45% due to the tax accrual and weakness in the French destination market, despite strong membership growth.
Guidance, Outlook, and Risks
2006 Full-Year Guidance (assuming Travelport sale):
- Revenue: $3,670 million – $3,770 million.
- EBITDA: $750 million – $780 million (includes tax accrual, excludes separation costs).
- Q3 2006 Outlook: Net income $104–$113 million; EPS $0.51–$0.56.
- Q4 2006 Outlook: Net income $80–$90 million; EPS $0.39–$0.44.
Management Commentary & Risks:
- Separation costs are expected to be larger in the second half of 2006.
- The Q2 tax accrual is not expected to materially impact subsequent quarters.
- Guidance assumes the successful sale of Travelport by Cendant, which is subject to conditions precedent.
- Key risks include the failure to complete the Travelport sale, inability to access capital markets, foreign currency fluctuations, regulatory changes, and the costs of complying with Sarbanes-Oxley Act Section 404 as a standalone entity.
Investor Verification Checklist
- Verify the final status and terms of the proposed Travelport sale, as full-year guidance depends on this transaction.
- Confirm the resolution of the European foreign tax accrual and any potential additional liabilities.
- Monitor the magnitude of separation costs in the third and fourth quarters of 2006.
- Assess the impact of SFAS No. 152 on future Vacation Ownership revenue recognition.
- Review the company's ability to maintain RevPAR growth excluding the impact of recent acquisitions.