Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended June 30, 2006, for Wyndham Worldwide Corporation (Wyndham). The financial statements represent a combined reporting entity comprising the assets and liabilities of Cendant Corporation's Hospitality Services businesses (Lodging, Vacation Exchange and Rental, and Vacation Ownership). On July 31, 2006, Cendant distributed Wyndham to its stockholders, separating it into an independent, publicly traded company. The historical results presented do not reflect the costs or capital structure of a stand-alone entity.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2006 | Six Months Ended June 30, 2006 |
|---|---|---|
| Net Revenues | $955 million | $1,825 million |
| Operating Income | $130 million | $278 million |
| Net Income | $75 million | $103 million |
| Pro Forma EPS (Basic) | $0.37 | $0.51 |
| EBITDA | $166 million | $348 million |
| Cash and Cash Equivalents | $148 million | $148 million |
| Total Debt (Long-term + Current) | $2,189 million | $2,189 million |
| Operating Cash Flow (6 months) | N/A | $201 million |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 10% to $955 million for the quarter and 10% to $1,825 million for the six months compared to the prior year periods. Growth was driven by higher vacation ownership sales (increased tour flow and volume per guest) and the acquisition of the Wyndham Hotels and Resorts brand.
- Net Income Decline: Despite revenue growth, net income decreased 16% to $75 million for the quarter and 53% to $103 million for the six months. The six-month decline was significantly impacted by a $65 million after-tax charge recorded in Q1 2006 due to the cumulative effect of adopting SFAS No. 152 (Accounting for Real Estate Time-Sharing Transactions).
- Accounting Changes: The adoption of SFAS No. 152 reclassified the provision for loan losses from an operating expense to a reduction of net revenue. This resulted in a $56 million reduction in reported revenue for the quarter and $117 million for the six months, though it had a neutral impact on operating income.
- Acquisitions: The acquisition of the Baymont Inn & Suites brand (April 2006) and the inclusion of Wyndham Hotels and Resorts (acquired Oct 2005) contributed incremental revenue and expenses.
Guidance, Outlook, and Risks
- Separation and Debt: In connection with the separation from Cendant, Wyndham established $2 billion in new borrowing facilities. On July 27, 2006, the company drew $1,360 million, transferring the proceeds to Cendant to repay corporate debt. Wyndham expects to receive approximately $760 million from Cendant upon the closing of the Travelport sale, which would reduce Wyndham's indebtedness to approximately $600 million.
- Contingent Liabilities: Wyndham assumed 37.5% (or 30% if Travelport is not sold) of Cendant's contingent and other corporate liabilities, including unresolved litigation and tax matters. The estimated liability assumed at separation was approximately $589 million.
- Capital Expenditures: The company anticipates spending approximately $180 million on capital expenditures and $635 million on vacation ownership development projects in 2006.
- Key Risks:
- Failure of Cendant to complete the sale of Travelport, which would prevent debt reduction.
- Seasonality of the travel industry and economic downturns.
- Competition and the ability to maintain franchisee relationships.
- Regulatory compliance, particularly regarding vacation ownership sales and privacy laws.
- Credit risk associated with consumer financing of vacation ownership interests (average expected cumulative gross default rate of 16.3%).
Investor Verification Checklist
- Travelport Sale Status: Verify the completion of the Travelport sale to Blackstone Group, as this triggers the $760 million cash contribution to Wyndham and subsequent debt reduction.
- Debt Covenants: Review the new credit facility covenants (minimum interest coverage ratio of 3.0x and maximum leverage ratio of 3.5x) to ensure compliance post-separation.
- Contingent Liability Exposure: Assess the potential financial impact of the assumed Cendant litigation and tax liabilities, specifically the unresolved securities actions and IRS audits.
- Accounting Policy Impact: Monitor the ongoing effects of SFAS No. 152 on revenue recognition and loan loss provisions for the vacation ownership segment.
- Stock Repurchase Program: Track the execution of the authorized $400 million stock repurchase program, which is contingent on receiving proceeds from the Travelport sale.