Hilton Worldwide Holdings Inc. — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are U.S. dollars. Hilton operated or franchised 5,560 hotels with 894,158 rooms in 109 countries and territories.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $2.253bn | $2.091bn | $6.618bn | $6.063bn |
| Operating income | $385m | $332m | $1.070bn | $873m |
| Net income attributable to Hilton | $162m | $158m | $540m | $355m |
| Diluted EPS | $0.54 | $0.49 | $1.76 | $1.08 |
| Adjusted EBITDA | $557m | $511m | $1.557bn | $1.425bn |
Q3 operating margin was approximately 17.1% of reported revenue, versus 15.9% a year earlier; net margin was approximately 7.3%, versus 7.6%. Reported revenue includes reimbursed managed-property costs, which largely have offsetting expenses and no net operating-income effect. Adjusted EBITDA is a non-GAAP measure and excludes specified items.
- For the first nine months, operating cash flow was $914m, up from $595m. Investing cash outflow was $80m; financing cash outflow was $790m. Cash, cash equivalents and restricted cash totaled $700m at period end, including $79m restricted; balance-sheet cash and cash equivalents were $621m.
- Total debt was approximately $7.7bn before unamortized financing costs and discounts ($7.559bn net long-term debt on the balance sheet, including $15m current maturities). Interest expense was $99m in Q3 and $277m year to date. Revolver capacity was $936m after $64m of letters of credit.
- Current liabilities were $2.413bn and total liabilities $13.563bn; total equity was $580m. The current guest-loyalty liability was $723m, with a further $906m long-term.
Changes and operating trends
- Q3 total revenue rose 7.7%; nine-month revenue rose 9.2%. Management and franchise segment revenue increased 9.8% in Q3 and 11.3% year to date, supported by system additions, comparable-hotel performance and higher licensing and other fees. Ownership segment revenue fell 2.6% in Q3 but increased 4.5% year to date, with foreign exchange affecting both periods.
- System-wide comparable RevPAR increased 2.0% in Q3 and 3.3% year to date, primarily on higher average daily rates. Q3 RevPAR rose 6.9% in Europe and 5.0% in Asia Pacific; U.S. RevPAR increased 1.0%, affected by calendar shifts and natural disasters. Nine-month U.S. RevPAR increased 2.5%.
- Hilton repurchased 21.3m shares for $1.561bn during the nine months, funded with borrowings and cash; 16.5m shares were bought from a former stockholder outside the public program. Shares outstanding fell, contributing to higher EPS. Approximately $719m remained under the $2bn repurchase authorization at September 30.
- Cash from operations increased $319m, primarily from improved management and franchise results and lower cash taxes and interest paid, partly offset by higher contract acquisition costs. Debt rose following issuance of $1.5bn of 5.125% notes due 2026; proceeds, revolver borrowings and cash also funded a share repurchase and $500m term-loan repayment. The remaining term-loan rate was reduced by 25 basis points.
Outlook, risks and unusual items
- The filing provides no specific full-year financial guidance. Management said operating cash and expected operating cash generation should meet anticipated needs for the foreseeable future, while noting dependence on future performance and hospitality-industry conditions. The development pipeline included 2,418 hotels and more than 371,000 rooms; over half the rooms were under construction. Hilton launched the Motto by Hilton brand in October 2018, with its first opening expected in 2019.
- Q3 and nine-month results include a $29m deferred tax expense related to a September restructuring that brought foreign subsidiaries into U.S. tax filings. Hilton also continued refining its accounting for the 2017 Tax Cuts and Jobs Act. The effective tax rate was affected by these items.
- The IRS proposed adjustments for 2006–2013 that, after a taxpayer-favorable ruling resolved one issue, could result in approximately $817m of additional U.S. federal tax, excluding interest, penalties and potential state taxes. Hilton disputes the remaining issues and intends to contest them; it recorded $50m of unrecognized tax benefits related to the appeals. The filing says the Hilton Honors-related portion would reduce future tax liability when points are redeemed.
- Four hotel performance guarantees had possible cash outlays of approximately $44m, dependent on hotel performance. Hilton reported ordinary-course litigation and said it did not expect pending matters to materially adversely affect consolidated results, while acknowledging an unfavorable resolution could affect a particular period.
- Revenue recognition under ASC 606 was adopted retrospectively, with a cumulative $212m adjustment to accumulated deficit as of January 1, 2016; prior-year figures were adjusted. The company expects the new lease standard, planned for adoption January 1, 2019, to have a material balance-sheet effect. Management identified risks including hospitality and macroeconomic conditions, competition, third-party owner relationships, technology and reservation channels, international operations and indebtedness.
Important facts for investors to verify
- Track the IRS tax appeals, potential exposure and reserve adequacy, including the timing and possible cash impact of any resolution.
- Assess debt service capacity, refinancing and interest-rate exposure alongside ongoing share repurchases, dividends and the company’s cash-flow generation.
- Monitor RevPAR, hotel openings and pipeline conversion, particularly regional trends and owned-hotel expense growth.
- Review Hilton Honors liability and deferred-revenue estimates: changes in redemption, breakage or reward-cost assumptions could materially affect balances and revenue recognition.
- Evaluate the effect of lease-standard adoption and distinguish GAAP results from Adjusted EBITDA, which Hilton notes is not a substitute for cash flow or GAAP performance measures.