Business context and reporting period
Hilton Worldwide Holdings Inc.’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2017. Hilton operated 5,079 hotels and resorts with 825,747 rooms in 103 countries and territories. Its continuing operations comprise management and franchise, and hotel ownership and leasing.
The January 3, 2017 spin-offs of Park Hotels & Resorts and Hilton Grand Vacations materially changed the business perimeter. Their 2016 results are presented as discontinued operations; comparisons with 2017 continuing operations therefore require care. Hilton also completed a 1-for-3 reverse stock split on that date.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Total revenues | $2.346bn | $1.950bn | $4.507bn | $3.676bn |
| Operating income | $365m | $273m | $642m | $443m |
| Continuing-operations income, net of tax | $167m | $100m | $242m | $291m |
| Net income attributable to Hilton stockholders | $166m | $239m | $240m | $548m |
| Diluted EPS from continuing operations | $0.51 | $0.29 | $0.73 | $0.87 |
| Adjusted EBITDA | $519m | $412m | $943m | $727m |
Reported total revenue includes reimbursed revenues and matching expenses from managed and franchised properties ($1.436bn in Q2 2017); these pass-through amounts materially increase reported revenue without a corresponding operating-income contribution. Management and franchise segment revenue rose 25.7% in Q2 and 24.1% year to date, while owned and leased hotel revenue fell 5.3% and 5.6%, respectively.
System-wide comparable RevPAR increased 1.8% in Q2 and 2.4% for the six months. Q2 RevPAR growth was strongest in MEA, Europe, and Asia Pacific; U.S. Q2 RevPAR rose 0.5%, with occupancy down 0.5 percentage points.
Six-month operating cash flow was $376m, versus $674m in 2016; the filing attributes the decline primarily to the spin-offs and lower contribution from owned hotels and timeshare sales in the prior-year period. Investing cash use was $97m, including $18m of property-and-equipment capital expenditures. Financing cash use was $1.061bn, including $501m of cash transferred in the spin-offs and $352m of share repurchases.
At June 30, cash and cash equivalents were $784m and restricted cash was $125m. Current assets were $1.999bn and current liabilities $1.989bn; working capital surplus was $10m and the current ratio was 1.01. Long-term debt was $6.572bn, plus $48m current maturities; total debt before financing-cost deductions was approximately $6.7bn. Hilton had $977m available under its $1bn revolving credit facility, net of letters of credit.
Material changes versus the prior comparable period
- Management and franchise revenue growth reflected system expansion, higher comparable hotel activity, and fees from properties transferred to Park and HGV. The pipeline contained 2,153 hotels and approximately 332,000 rooms.
- Q2 continuing-operations income increased year over year, while six-month continuing income declined. The prior-year six-month tax result included a $58m tax benefit; 2017 included a $60m debt-extinguishment loss related to refinancing.
- Hilton issued $900m of 4.625% notes due 2025 and $600m of 4.875% notes due 2027, using proceeds and cash to redeem $1.5bn of 5.625% notes due 2021. It also extended $750m of term loans due 2020 to 2023 and repriced the term loans to LIBOR plus 200 basis points.
- The board authorized up to $1bn in share repurchases. Hilton repurchased $352m during the first half; $648m remained authorized at quarter-end. Cash dividends declared were $0.15 per share for Q2 and $0.30 for the first half.
Outlook, risks, contingencies, and unusual items
The filing provides no specific earnings or revenue guidance. Management said available cash and operating cash generation were expected to meet anticipated requirements for the foreseeable future. It noted that debt service depends on future performance and hospitality-market conditions; insufficient operating cash flow could require lower capital spending, additional equity, or revolver borrowings.
Hilton identified industry and macroeconomic conditions, competition, third-party hotel-owner relationships, international operations, technology and alternative reservation channels, and indebtedness as risks. Management reported no material change to previously disclosed risk factors. Comparable hotel performance and results may also be affected by foreign exchange; owned and leased hotel revenue was reduced by currency effects of $26m in Q2 and $49m in the first half.
A significant tax contingency remains: the IRS proposed approximately $874m of additional federal tax for 2006–2010, excluding interest, penalties, and possible state taxes. Hilton disputes the proposed adjustments and intends to contest them; it recorded $47m of unrecognized tax benefits related to the issues. Total unrecognized tax benefits were $173m, with approximately $35m accrued for interest and penalties. Hilton also disclosed six hotel performance guarantees with possible cash outlays totaling approximately $72m, dependent on future hotel performance. Management did not expect pending litigation to materially affect consolidated results, though an unfavorable resolution could affect a particular period.
Other notable items include a $20m recovery from settlement of a defined-benefit-plan-related claim, $15m of spin-off costs in the first half, and higher share-based compensation expense. Hilton expects the new lease accounting standard to materially affect its balance sheet and anticipates a material financial-statement effect from the new revenue standard, with implementation expected retrospectively.
Important facts for investors to verify
- Assess growth using continuing-operations figures and distinguish fee revenue from reimbursed managed-property pass-through revenue; the spin-offs make year-over-year comparisons less directly comparable.
- Review the reconciliation and sustainability of Adjusted EBITDA, including excluded share-based compensation, transaction costs, currency effects, and debt-extinguishment charges.
- Monitor the IRS tax dispute, unrecognized tax benefits, and potential exposure beyond amounts accrued.
- Track debt service, refinancing terms, available revolver capacity, cash generation, and the pace of repurchases and dividends.
- Check whether pipeline additions convert to operating hotels and whether comparable RevPAR and fee growth continue across regions.