Hilton Worldwide Holdings Inc. — 2020 Third-Quarter Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; comparisons are with the corresponding 2019 periods. Hilton operates management and franchise, and ownership, hotel businesses. At quarter-end it had 6,333 hotels and resorts, 998,282 rooms, and operations in 118 countries and territories. The COVID-19 pandemic materially impaired results.
Financial and operating performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $933 million | $2,395 million | $3,417 million | $7,083 million |
| Operating income (loss) | $11 million | $519 million | $(223) million | $1,309 million |
| Net income (loss) attributable to Hilton | $(79) million | $288 million | $(491) million | $706 million |
| Diluted EPS | $(0.28) | $1.00 | $(1.76) | $2.42 |
| Adjusted EBITDA (non-GAAP) | $224 million | $605 million | $638 million | $1,722 million |
Total revenue includes substantial reimbursements of expenses from managed and franchised properties. Core segment revenue was $375 million in Q3, down from $957 million. System-wide comparable RevPAR fell 59.9% in Q3 and 55.9% for the nine-month period; occupancy was 42.5% in Q3, down 36.0 percentage points. Q3 RevPAR declines ranged from 46.4% in Asia Pacific to 75.3% in the Americas excluding the U.S.
Nine-month operating cash flow was $846 million, down from $1.182 billion. Investing cash outflow was $89 million. Cash and cash equivalents were $3.405 billion at September 30, versus $538 million at year-end 2019; including restricted cash, the balance was $3.468 billion. The cash position benefited materially from the $1.0 billion Hilton Honors points pre-sale.
Total debt, including finance leases and before unamortized financing costs and discount, was approximately $10.6 billion, compared with $8.1 billion at year-end 2019. Long-term debt on the balance sheet was $10.439 billion, with $51 million of current maturities. Total liabilities were $18.448 billion and total deficit was $1.319 billion. Hilton drew its $1.75 billion revolving facility in March and issued $1.0 billion of senior notes in April.
Hilton declared no dividend in Q3; nine-month dividends declared were $0.15 per share, down from $0.45. It suspended dividends and share repurchases in March. The company reported no material debt maturities before June 2024.
Material changes and unusual items
- Q3 revenue declined 61% year over year; nine-month revenue declined 52%. Franchise and licensing fees fell 46% in Q3, while owned and leased hotel revenue fell 74%.
- Q3 operating income included no comparable prior-year asset-sale gain; Q3 2019 included an $81 million gain on the sale of Hilton Odawara.
- Nine-month results included $136 million in impairment losses and $38 million in reorganization costs, largely related to the pandemic and cost reductions. Credit-loss provisions were $45 million for the nine-month period.
- The Honors points pre-sale generated $1.0 billion cash and increased deferred revenue and guest-loyalty liabilities. It supported liquidity but represents obligations to recognize revenue as points are awarded or redeemed.
- Operating cash flow was also supported by changes in deferred revenue and guest-loyalty liabilities; management said operating cash generation was primarily a result of the points pre-sale.
Outlook, commentary and risks
Management said the pandemic would continue to have a material adverse impact for an indeterminate period and could not estimate its full future effects. As of November 2, 97% of hotels were open, but approximately 190 remained temporarily closed and reopened properties generally had significantly lower occupancy. Occupancy had improved from April to September in several regions, but late-October restrictions were reintroduced in some areas.
Hilton said its cash position should meet anticipated requirements for the foreseeable future based on current conditions. It reduced payroll and other costs, limited non-essential spending and capital expenditures, and expects annual spending to remain materially below the prior year. The development pipeline contained approximately 2,640 hotels and more than 408,000 rooms, though openings and development may be delayed.
Key risks include prolonged weak travel demand, renewed restrictions, owner liquidity or insolvency and related contract losses, lower fees and delayed collections, leased-hotel fixed costs and further impairments, and potentially more costly or restricted access to financing. Other disclosed exposures include possible cash outlays of approximately $18 million under four hotel performance guarantees, a $10 million loan guarantee, and up to approximately $10 million of possible hotel capital-expenditure support.
Hilton disclosed unsettled IRS proposed adjustments of approximately $817 million, excluding interest, penalties and possible state taxes; the company disputes the assertions. It had recorded $76 million of unrecognized tax benefits related to the appealed issues. Total unrecognized tax benefits were $432 million, with approximately $64 million accrued for related interest and penalties. The filing also reports ordinary-course litigation and a recent settlement with the SEC concerning historical perquisites disclosures.
Important facts for investors to verify
- Whether RevPAR, occupancy and fee revenue recover, or new restrictions cause further deterioration.
- How much cash generation is recurring from operations versus timing effects and the one-time Honors points pre-sale, and how the associated liabilities are fulfilled.
- Debt service capacity, refinancing conditions, credit ratings and liquidity if the downturn persists; review debt covenants and maturity terms.
- Assumptions supporting leased-hotel and intangible-asset valuations, further impairment risk, and the financial condition of third-party hotel owners.
- Potential outcomes and timing of the IRS tax dispute, hotel guarantees and other contingencies.
- Non-GAAP Adjusted EBITDA adjustments and comparability; Hilton notes that this measure is not a substitute for GAAP earnings or cash flow.