Hilton Worldwide Holdings Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. Hilton manages, franchises, owns and leases hotels and resorts. At quarter-end, its system comprised 6,215 properties, 983,465 rooms and 108 million Hilton Honors members.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $564 million | $2.484 billion | $2.484 billion | $4.688 billion |
| Operating income (loss) | $(302) million | $478 million | $(234) million | $790 million |
| Net income (loss) attributable to Hilton | $(430) million | $260 million | $(412) million | $418 million |
| Diluted EPS | $(1.55) | $0.89 | $(1.48) | $1.42 |
| Adjusted EBITDA | $51 million | $618 million | $414 million | $1.117 billion |
Reported revenue includes reimbursements from managed and franchised properties, which are largely offset by corresponding expenses. System-wide comparable RevPAR fell 81.0% in Q2 and 53.9% in the first half year over year. Q2 system-wide occupancy was 22.3%, down 56.1 percentage points, and ADR declined 33.2%.
Six-month operating cash flow was $946 million, compared with $650 million a year earlier. The increase was primarily driven by the $1.0 billion Hilton Honors points pre-sale to American Express, rather than stronger hotel operations; cash inflows from hotel operations declined. Investing cash outflow was $76 million and financing cash inflow was $2.082 billion.
At June 30, cash and cash equivalents were $3.503 billion, with $72 million of restricted cash. Total indebtedness, excluding financing costs and discounts, was approximately $10.6 billion, up from $8.1 billion at year-end 2019. Hilton had fully drawn its $1.75 billion revolving facility and issued $1.0 billion of senior notes during the period. Total liabilities were $18.417 billion and stockholders’ deficit was $1.291 billion.
Material changes and unusual items
- COVID-19 drove sharp declines across regions and business lines. Approximately 1,205 hotels had suspended operations at some point in the first half; more than half of temporarily suspended managed and franchised hotels had reopened by June 30. As of July 31, 96% of properties were open, while 260 remained temporarily suspended.
- Q2 franchise and licensing fees fell 70.3%; base and other management fees fell 91.0%; owned and leased hotel revenue fell 92.0%. Incentive management fees were negative $5 million in Q2, including reversals of previously recognized fees as hotel-owner return thresholds were no longer expected to be met.
- Hilton recorded $127 million of impairment losses in the first half, including $15 million in Q2, primarily related to leased hotels and certain contract-related intangible assets. It also recorded $38 million of reorganization costs tied mainly to workforce reductions.
- The $1.0 billion Honors points pre-sale provided liquidity but created deferred revenue and guest loyalty obligations. The balance sheet showed $1.634 billion of contract liabilities at June 30.
- Hilton suspended dividends and share repurchases in March. No repurchases occurred after March 5; the board-authorized program remained in place. Q2 dividends declared were zero.
Outlook, risks and contingencies
Management said the pandemic was expected to continue materially adversely affecting results for an indeterminate period and did not provide a quantified earnings or revenue outlook. Hilton stated that its cash position was expected to cover anticipated requirements for at least 24 months, even at very low occupancy levels. That assessment depends on uncertain operating conditions and available liquidity.
Key risks include prolonged weak travel demand or renewed closures; delayed or missed payments by hotel owners; owner bankruptcies, foreclosures or contract terminations; higher financing costs or reduced access to capital; and further impairment charges. Cost reductions, furloughs and workforce changes may also affect staffing, service and brand reputation. Hilton noted that some credit ratings had been downgraded or placed on credit watch.
Contingencies include approximately $19 million of possible cash outlays under four hotel performance guarantees, a $20 million accrued liability for one loan guarantee, and approximately $10 million of possible hotel capital-expenditure funding. The IRS has proposed adjustments that could result in about $817 million of additional federal taxes, excluding interest, penalties and possible state taxes; Hilton disputes the positions and reported $78 million of unrecognized tax benefits related to these issues. Total unrecognized tax benefits were $428 million, plus approximately $59 million accrued for related interest and penalties. Hilton said pending litigation was not expected to have a material adverse effect, while noting outcomes are uncertain.
Most important facts for investors to verify
- Whether hotel occupancy, RevPAR and fee revenue recover sustainably, and whether reopened properties remain open.
- Whether cash generation can improve beyond proceeds and timing effects from the Honors points pre-sale, and how the related loyalty obligations are fulfilled.
- Debt service capacity, borrowing costs and covenant or rating implications, given approximately $10.6 billion of indebtedness and continued pandemic exposure.
- Potential additional impairments, owner-credit losses, guarantee payments and tax-audit outcomes.
- Whether management’s stated liquidity runway remains adequate if low occupancy persists or the pandemic worsens.