Hilton Worldwide Holdings Inc. — Q2 2015 Form 10-Q
Business context and period. This unaudited report covers the three and six months ended June 30, 2015, compared with the same periods in 2014. Hilton operates owned and leased hotels, manages and franchises hotels, and runs a timeshare business. At quarter-end, it reported 4,396 hotels and resorts with 724,943 rooms in 95 countries and territories, plus 44 timeshare properties. Its development pipeline included 1,510 hotels and more than 250,000 rooms.
Financial performance and liquidity
- Q2 revenue: $2.922 billion, up 9.6%. Management and franchise revenue rose 17.0%, timeshare revenue rose 15.6%, and owned and leased hotel revenue rose 1.6%.
- Q2 earnings: Operating income was $427 million versus $435 million; operating margin was approximately 14.6% versus 16.3%. Net income attributable to Hilton stockholders was $161 million versus $209 million; diluted EPS was $0.16 versus $0.21. The quarter included sharply higher general and administrative expense, including Promote Plan compensation and severance.
- First-half results: Revenue was $5.521 billion, up 9.8%; operating income was $917 million versus $773 million. Net income attributable to Hilton stockholders was $311 million versus $332 million; diluted EPS was $0.31 versus $0.34. The 2015 period included a $144 million gain on the Waldorf Astoria New York sale.
- Adjusted EBITDA: Q2 was $777 million, up 15.3%; first-half was $1.376 billion, up 16.4%. This non-GAAP measure excludes specified items and is not a substitute for cash flow or GAAP earnings.
- Hotel trading: Comparable system-wide RevPAR increased 5.2% in Q2 and 5.8% in the first half. Q2 occupancy was 79.2%, up 1.3 percentage points, and ADR was $142.48, up 3.4%. RevPAR increased across regions, although ADR declined in MEA and Asia Pacific.
- Cash flow: First-half operating cash flow was $648 million, up from $512 million. Investing cash flow was positive $258 million, reflecting $1.869 billion of asset-sale proceeds partly offset by $1.410 billion of acquisitions. Financing cash use was $952 million. Cash and cash equivalents ended at $511 million, down $55 million; restricted cash was a further $248 million.
- Debt and liquidity: Long-term debt was $10.4 billion and non-recourse debt $644 million; total indebtedness was approximately $11.2 billion including current maturities. Hilton made $325 million of voluntary term-loan prepayments during the first half. It had $955 million of available revolving-credit capacity and a current ratio of 1.03.
- Balance sheet: Total assets were $26.051 billion and total equity $5.069 billion at June 30, 2015. Capital expenditures were $159 million in the first half, compared with $110 million.
Material changes and notable transactions
- Hilton sold the Waldorf Astoria New York in February for $1.95 billion, recorded a $144 million net gain, and repaid its approximately $525 million mortgage. Proceeds funded a tax-deferred exchange involving several hotel acquisitions for stated purchase prices of $1.76 billion and $112 million; the acquisitions included $450 million of assumed debt.
- Hilton Sydney was sold in July 2015 for AUD 442 million. Hilton used net proceeds to prepay $350 million of term loans and entered into a 50-year management agreement for the hotel.
- In May, the remaining Promote Plan restricted shares vested when Blackstone ceased to own at least 50% of Hilton. Hilton recognized $64 million of related compensation expense. Blackstone held approximately 45.9% of Hilton at June 30.
- Hilton initiated a quarterly dividend program in July and declared a $0.07-per-share dividend, payable by September 25, 2015.
Outlook, risks, and contingencies
- The filing gives no specific numerical full-year revenue, earnings, or RevPAR guidance. Management said it believed cash and operating cash generation would be adequate for anticipated operating requirements and purchase commitments for the foreseeable future.
- Management cited risks including hotel and timeshare industry conditions, competition, third-party hotel-owner relationships, international operations and currency exposure, information technology, and substantial indebtedness. The filing reported no material change to previously disclosed risk factors.
- Hilton disclosed an IRS dispute concerning 2006 and October 2007 tax years. Proposed adjustments could result in approximately $696 million of additional U.S. federal tax, excluding interest, penalties, and possible state taxes. Hilton disputes the claims and recorded no accrual. The filing says some proposed adjustments concerning the loyalty program could reduce future tax when points are redeemed.
- Other exposures included approximately $101 million of possible cash outlays under six hotel performance guarantees, $101 million of capital-expenditure commitments, a $60 million junior mezzanine loan commitment, and a remaining potential $27 million exposure under a legacy guarantee. Hilton said it did not expect ordinary-course litigation to have a material overall effect, while noting outcomes are uncertain.
- Interest-rate and foreign-exchange risks remain; Hilton uses swaps, caps, and forward contracts for hedging, not speculation. The filing states market-risk exposure had not materially changed from its 2014 annual report.
Most important facts for investors to verify
- Reconcile the strong revenue, RevPAR, and Adjusted EBITDA growth with lower Q2 and first-half net income and EPS, including the effects of compensation, severance, taxes, and the prior-period comparison.
- Assess the IRS dispute and potential tax exposure, which is large relative to reported earnings and is unaccrued.
- Confirm post-quarter sale proceeds, the $350 million term-loan prepayment, and the effect of the new dividend on liquidity and debt reduction.
- Review debt maturities and refinancing exposure, including the reported 2018 maturity concentration and variable-rate borrowings.
- Track currency impacts, timeshare sales and financing-receivable performance, hotel pipeline openings, and the cash demands of owned-property investment and guarantees.