Hyatt Hotels Corporation — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017. Hyatt operates, manages, franchises and licenses hotels and related hospitality properties. At quarter-end, its worldwide hotel portfolio comprised 686 hotels and 175,626 rooms. Reported revenue includes reimbursements for costs incurred on behalf of managed properties, with corresponding expenses.
Financial performance
| Metric ($ millions, except per-share data) | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenue | 1,195 | 1,165 | 2,382 | 2,254 |
| Income before taxes | 132 | 88 | 243 | 138 |
| Net income attributable to Hyatt | 87 | 67 | 157 | 101 |
| Diluted EPS | $0.68 | $0.49 | $1.22 | $0.74 |
| Adjusted EBITDA (non-GAAP) | 229 | 227 | 457 | 421 |
| Operating cash flow | — | — | 319 | 239 |
Q2 revenue increased 2.6% year over year; six-month revenue rose 5.7%. Net income margin, calculated from reported net income and revenue, was approximately 7.3% in Q2 versus 5.8% a year earlier, and 6.6% for the six months versus 4.5%. These margins include significant gains and investment-related items. Q2 Adjusted EBITDA increased only 0.6%; six-month Adjusted EBITDA grew 8.5%.
- Management and franchise fees rose 12.0% in Q2 and 13.1% for the six months, supported by fee growth in the Americas and ASPAC.
- Systemwide comparable RevPAR increased 2.4% in Q2, or 2.9% in constant currency. Owned and leased comparable RevPAR declined 1.7% reported, while the Americas, ASPAC and EAME/SW Asia systemwide groups recorded increases.
- Q2 owned and leased segment Adjusted EBITDA fell $13 million to $136 million, partly offset by higher Americas and ASPAC management and franchising EBITDA.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $400 million, restricted cash $340 million and short-term investments $51 million. Cash plus short-term investments totaled $451 million. Current assets were $1.363 billion against current liabilities of $1.073 billion.
- Total debt was approximately $1.687 billion; net debt, as defined by Hyatt, was $1.236 billion. Net debt to total capital was 22.4%, up from 18.8% at year-end 2016. Debt excludes Hyatt’s share of unconsolidated venture debt.
- Hyatt had $230 million outstanding under its revolving credit facility and approximately $1.3 billion of available capacity. It reported compliance with applicable debt covenants.
- Six-month operating cash flow was $319 million. Investing used $182 million and financing used $221 million; cash and cash equivalents decreased $82 million to $400 million. Investing and financing included the Miraval acquisition, hotel dispositions, capital spending and $288 million of share repurchases.
- Capital expenditures were $133 million for the six months, versus $85 million a year earlier.
Material changes and unusual items
- Hyatt acquired Miraval for approximately $237 million, including wellness properties and the Miraval brand.
- Hyatt sold Hyatt Regency Grand Cypress for $202 million net and entered a long-term management agreement; the $26 million pretax gain is deferred over the agreement term. It sold Hyatt Regency Louisville for $65 million net, recognized a $35 million pretax gain, and entered a long-term franchise agreement.
- Six-month other income, net, included $94 million of interest income and $40 million of realized losses associated with the redemption of Playa preferred shares. The redemption, alongside the Louisville gain, contributed to higher reported earnings; these items should be distinguished from recurring operating performance.
- Hyatt repurchased 5.48 million shares during the first half for $288 million. A $300 million accelerated share repurchase was partly unsettled at quarter-end; 500,000 additional shares were delivered after quarter-end. Approximately $509 million remained under the authorization.
Outlook, risks and contingencies
- The filing provides no specific quantitative earnings or revenue guidance. Management stated that cash, short-term investments, operating cash flow, revolver capacity and capital-market access should meet funding requirements and capital deployment objectives for the foreseeable future.
- Management cited softer U.S. group demand in Q2, partly reflecting the timing of Easter; group revenue booked for 2017 stays was lower than a year earlier, while bookings for future years were higher. Regional performance varied, including strong transient demand in China and softer demand in Switzerland.
- Maximum remaining exposure under performance guarantees was $378 million, including $335 million related to four managed hotels in France. Net recorded performance-guarantee liabilities were $69 million. Separate debt repayment guarantees had maximum potential payments of $598 million and maximum exposure net of stated third-party recoveries of $278 million.
- The IRS issued a notice of deficiency concerning the treatment of loyalty-program contributions for tax years 2009–2011. Hyatt petitioned the U.S. Tax Court and believes its reserves are adequate. The asserted liability was $119 million, including estimated interest; Hyatt said it would be primarily offset by a deferred tax asset, with related interest affecting the effective tax rate if recognized.
- Hyatt flagged possible goodwill impairment of up to $17 million if assumptions and estimates changed by 4%. It also identified risks from economic and travel conditions, operating costs, foreign exchange, labor, hotel-owner and franchisee finances, guarantees, acquisitions and dispositions, cybersecurity, and legal and regulatory matters. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- How much of earnings growth reflects recurring hotel and fee operations versus the Louisville gain and Playa redemption-related income and losses.
- Whether RevPAR and group-booking trends, particularly in U.S. full-service hotels, improve or persist into subsequent quarters.
- The actual cash available for general use, given $340 million of restricted cash, and the timing and conditions for release of sale proceeds held for potential like-kind exchanges.
- Potential cash exposure from performance and debt guarantees, especially the French hotel guarantees and the IRS tax dispute.
- Capital allocation after substantial share repurchases, including remaining ASR settlement, debt levels and planned capital expenditures.