Wyndham Worldwide Corporation 2008 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: Wyndham Worldwide Corporation (formerly a subsidiary of Cendant Corporation, separated July 2006).
Reporting Period: Fiscal year ended December 31, 2008.
Business Segments: The company operates three primary segments:
- Lodging: Franchises hotels (upscale, midscale, economy) and provides management services. Brands include Wyndham, Ramada, Days Inn, and Super 8.
- Vacation Exchange and Rentals (Group RCI): Provides vacation exchange services (RCI) and markets vacation rental properties globally.
- Vacation Ownership: Develops, markets, and sells vacation ownership interests (timeshares) and provides consumer financing.
Key Financial Metrics (2008)
| Metric | 2008 Value | 2007 Value |
|---|---|---|
| Net Revenues | $4,281 million | $4,360 million |
| Operating Income/(Loss) | $(830) million | $710 million |
| Net Income/(Loss) | $(1,074) million | $403 million |
| Diluted EPS | $(6.05) | $2.20 |
| Total Assets | $9,573 million | $10,459 million |
| Total Debt (Long-term + Current) | $3,794 million | $3,606 million |
| Cash and Cash Equivalents | $136 million | $210 million |
| Operating Cash Flow | $109 million | $10 million |
Material Changes vs. Prior Period
The company reported a significant deterioration in financial performance in 2008 compared to 2007, driven primarily by the global economic downturn and strategic realignment.
- Net Loss: The company swung from a net income of $403 million in 2007 to a net loss of $1,074 million in 2008. This was primarily due to a non-cash goodwill impairment charge of $1,342 million in the Vacation Ownership segment.
- Revenue Decline: Net revenues decreased by 2% ($79 million). This was driven by a $150 million increase in the provision for loan losses and a $48 million increase in deferred revenue due to the percentage-of-completion method, partially offset by growth in consumer financing revenues ($68 million) and rental transactions ($42 million).
- Segment Performance:
- Lodging: Revenues increased 4% to $753 million, but EBITDA decreased 2% due to higher expenses and a $16 million impairment related to the Howard Johnson brand.
- Vacation Exchange and Rentals: Revenues increased 3% to $1,259 million, but EBITDA fell 15% due to currency conversion losses ($24 million) and asset impairments.
- Vacation Ownership: Revenues decreased 6% to $2,278 million. EBITDA collapsed from $378 million to a loss of $1,074 million, largely due to the goodwill impairment and increased loan loss provisions.
- Restructuring: The company recorded $79 million in restructuring costs to reduce costs and enhance efficiency, including the termination of approximately 4,500 employees.
Guidance, Outlook, and Risks
Strategic Realignment: In response to the credit crisis, management announced a plan to reduce the pace of Vacation Ownership Interest (VOI) sales by approximately 40% in 2009 (projected gross sales of ~$1.2 billion) to reduce reliance on the asset-backed securities market.
Liquidity and Capital Resources:
- The company maintains a $900 million revolving credit facility with $291 million available as of year-end 2008.
- Securitized vacation ownership debt facilities faced tighter terms; the 2008 bank conduit facility had a lower advance rate (50% vs. 80% previously) and higher spreads.
- Management anticipates cash flow to be neutral to positive in 2009, with estimated net income between $271 million and $304 million.
Key Risks:
- Credit Market Disruption: Continued inability to access asset-backed securities markets could force further reductions in sales or financing.
- Loan Portfolio Quality: Rising default rates on consumer financing for vacation ownership interests could increase loan loss provisions.
- Goodwill Impairment: Further impairments may be required if economic conditions deteriorate or if strategic plans change.
- Legacy Liabilities: The company retains 37.5% responsibility for certain contingent liabilities from its former parent, Cendant, including tax and litigation matters.
Investor Verification Checklist
- Goodwill Impairment: Verify the assumptions used in the discounted cash flow model that led to the $1.34 billion impairment charge in the Vacation Ownership segment.
- Loan Loss Provisions: Review the static pool analysis and default rate assumptions for the vacation ownership loan portfolio, given the 24% provision rate projected for 2009.
- Securitization Capacity: Confirm the status of renewals for the 2008 bank conduit facility (expires Nov 2009) and the foreign credit facility (expires June 2009).
- Restructuring Savings: Monitor the realization of the projected $160–$180 million in annual net savings from restructuring initiatives.
- Cendant Legacy Liabilities: Track the status of the IRS audit of Cendant's 2003–2006 tax years and the potential impact on Wyndham's 37.5% share of liabilities.