Hilton Worldwide Holdings Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; financial statements are unaudited. Hilton operates owned and leased hotels, manages and franchises hotels, and operates timeshare properties.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Total revenue | $2.667B | $2.380B | $5.030B | $4.643B |
| Operating income | $435M | $404M | $773M | $656M |
| Net income attributable to Hilton | $209M | $155M | $332M | $189M |
| Diluted EPS | $0.21 | $0.17 | $0.34 | $0.20 |
| Adjusted EBITDA (non-GAAP) | $651M | $590M | $1.195B | $1.037B |
Q2 reported operating margin was approximately 16.3%, versus 17.0% a year earlier; total revenue includes matching pass-through revenues and expenses from managed and franchised properties, so this margin is affected by gross presentation. Net margin attributable to Hilton was approximately 7.8%, versus 6.5%.
- Comparable system-wide RevPAR rose 6.7% in Q2 and 6.6% for the first half, supported by higher occupancy and average daily rates. Management and franchise Adjusted EBITDA rose 13.8% in Q2 and 15.5% year to date; timeshare Adjusted EBITDA increased 15.0% and 29.4%, respectively.
- Operating cash flow was $512M for the first half, down from $638M, mainly because cash taxes paid increased by $101M. Investing cash outflow was $121M; financing cash outflow was $441M. Property and equipment capital expenditures were $110M.
- At June 30, cash and cash equivalents were $545M and restricted cash was $284M. The current ratio was 1.14. Hilton reported approximately $12.3B of debt, including $997M of non-recourse debt; $952M was available under its $1.0B revolving facility.
- Long-term debt was $11.314B, down from $11.751B at year-end. Hilton prepaid $450M on its term loans during the first half and made a further $150M voluntary prepayment in July.
Material changes and notable items
- Revenue increased 12.1% in Q2 and 8.3% in the first half. Management and franchise fees benefited from RevPAR growth and net additions of managed and franchised hotels. Timeshare revenue also grew, including deferred revenue recognized after a resort opened.
- Q2 general, administrative and other expense increased 44.6% to $133M, reflecting share-based and Promote plan compensation and $6M of costs related to a secondary offering. First-half expense growth was partly offset by reversal of accruals after Hilton terminated a cash-based incentive plan.
- Interest expense increased to $158M in Q2 and $311M for the first half, partly reflecting debt and interest-rate swaps entered into in 2013 and securitized timeshare debt. Foreign-currency transaction results swung to gains of $32M in Q2 and $46M year to date, from losses in the comparable periods.
- A June timeshare receivables securitization issued approximately $350M of notes; it was accounted for as debt, not a sale. Hilton also recorded $12M of pretax gains from property sales in the first half. A related-party timeshare project transaction generated a $13M capital contribution, not operating income.
- Blackstone-affiliated selling stockholders sold 103.5M shares in a June secondary offering at $22.50 per share; Hilton issued no shares and received no proceeds.
Outlook, risks and contingencies
- The filing gives no quantified earnings or revenue guidance. Management cited continued system expansion: 1,230 hotels and approximately 210,000 rooms in the development pipeline, with more than 106,000 rooms under construction. The pipeline is in management and franchise, generally requiring limited Hilton capital investment.
- Management reported RevPAR declines in the Middle East and Africa, where political unrest reduced occupancy. Hilton also highlighted its exposure to hotel-industry conditions, interest rates, foreign exchange, and its ability to generate cash to service debt.
- Potential cash outlays include approximately $150M under six hotel performance guarantees; $144M of capital-expenditure contract commitments; and up to approximately $92M of timeshare inventory purchases under a Las Vegas agreement, subject to conditions. Other guarantees included $27M for third-party obligations and a remaining potential $37M exposure under a prior settlement guarantee.
- Unrecognized tax benefits were $379M at June 30; tax examinations and their timing and outcomes remain uncertain. Hilton said ordinary-course litigation was not expected to have a material overall effect, while noting unfavorable resolution could affect a particular period.
- After quarter-end, Hilton agreed to exchange interests in 11 hotel investments, potentially resulting in full ownership of five hotels and consolidation; the fair-value impact was not yet estimable.
Important facts for investors to verify
- Reconcile headline revenue and margins with the substantial pass-through revenue and expense presentation for managed and franchised properties.
- Track cash conversion and tax payments: first-half operating cash flow declined despite higher net income.
- Review debt maturities, refinancing and interest costs, and the effect of term-loan prepayments on liquidity.
- Assess whether RevPAR growth and the development pipeline persist, particularly given weakness in the Middle East and Africa.
- Monitor performance guarantees, capital commitments, timeshare financing and receivables quality, tax audits, and the post-quarter hotel investment exchange.
- Consider that Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for net income or cash flow.