Hilton Worldwide Holdings Inc. — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; unaudited, with comparisons to Q1 2013 unless otherwise noted. Financial amounts are in millions of dollars except per-share data. Hilton operated 4,112 hotels and resorts with 680,117 rooms in 92 countries and territories, plus 43 timeshare properties, at quarter-end.
Financial performance and liquidity
| Metric | Q1 2014 | Q1 2013 / prior date | Change |
|---|---|---|---|
| Total revenue | $2,363 | $2,263 | +4.4% |
| Operating income | $338 | $252 | +34.1% |
| Net income attributable to Hilton stockholders | $123 | $34 | +$89 |
| Diluted EPS | $0.12 | $0.03 | +$0.09 |
| Adjusted EBITDA (non-GAAP) | $544 | $447 | +21.7% |
| Cash from operating activities | $147 | $172 | -$25 |
| Cash used in investing activities | $73 | $64 | Use increased $9 |
| Cash used in financing activities | $232 | $77 | Use increased $155 |
| Cash and cash equivalents at quarter-end | $435 | $594 at Dec. 31, 2013 | -$159 |
| Total assets / total liabilities | $26,393 / $21,946 | $26,562 / $22,286 at Dec. 31, 2013 | — |
- Revenue excluding $827 of pass-through revenue from managed and franchised properties was $1,536, up 8.0%. These pass-through revenues are offset by corresponding expenses; total expenses were $2,025.
- Operating margin was approximately 14.3% of reported revenue versus 11.1% a year earlier; reported net margin attributable to Hilton stockholders was approximately 5.2% versus 1.5%. These ratios are affected by pass-through revenues.
- At March 31, cash and cash equivalents were $435 and restricted cash was $287, or $722 combined. Working capital surplus was $309 and the current ratio was 1.16. Hilton reported $954 of unused borrowing capacity under its $1.0 billion revolving credit facility, after $46 of letters of credit.
- Total indebtedness was approximately $12.5 billion, including $959 of non-recourse debt. Hilton made $200 of voluntary prepayments on its senior secured term loans during the quarter; long-term debt on the balance sheet was $11,551, excluding current maturities. Interest expense was $153, up from $143.
- Property and equipment capital expenditures were $43, compared with $57 in Q1 2013; software capitalization was $15 versus $11.
Operating trends and changes from the prior period
- Comparable system-wide RevPAR increased 6.6%, with occupancy up 1.9 percentage points to 69.8% and ADR up 3.6% to $139.13. RevPAR rose 8.7% in Asia Pacific, 6.7% in the Americas and 6.5% in Europe; MEA was relatively unchanged.
- Management and franchise fees and other revenue rose 19.1% to $312, reflecting stronger comparable-property RevPAR and additions to the system. Hilton added 40 managed properties and 122 franchised properties net over the year.
- Timeshare revenue rose 13.4% to $279, including approximately $18 of increased real estate sales, primarily from recognition of previously deferred revenue after a property opened, and higher resort rental revenue.
- Segment Adjusted EBITDA increased to $331 from $282 for management and franchise, $85 from $59 for timeshare, and $179 from $174 for ownership. Corporate and other improved to a loss of $51 from a loss of $68.
- The $89 increase in Hilton-attributable net income included a $57 swing in foreign-currency transaction results, from a $43 loss to a $14 gain. Income tax expense increased to $83 from $38, primarily due to higher taxable income. Adjusted EBITDA is a company-defined non-GAAP measure and is not a substitute for GAAP earnings or cash flow.
Outlook, commentary, risks and unusual items
- Management reported occupancy growth across all segments and rate increases in markets where demand outpaced supply. Hilton had 1,165 hotels and approximately 200,000 rooms in its development pipeline across 76 countries and territories; more than 101,000 rooms were under construction. More than 99% of pipeline rooms were in management and franchise.
- No specific earnings, revenue or RevPAR guidance for future periods is provided in the supplied filing text. Management said it expected operating cash and existing cash to meet anticipated operating needs and purchase commitments for the foreseeable future, while noting debt-service capacity depends on future operating performance and industry conditions.
- Unusual compensation items included a $25 reduction in compensation expense from terminating a cash-based long-term incentive plan and $7 of incremental expense from modifying vesting terms for certain Promote plan awards. The filing also reports higher share-based compensation expense, including $13 of Promote plan expense.
- Other notable items: a $3 gain on sale of an affiliate investment; Q1 2013 included a $48 reduction in non-recourse debt and $44 reduction in property and equipment from a Japanese VIE lease restructuring. In April 2014, Hilton received approximately $37 from selling land and easement rights for a timeshare project to Blackstone and entered related service agreements; in May it prepaid another $100 of term loans.
- Key exposures include approximately $150 of possible cash outlays under six hotel performance guarantees, $133 of cancellable capital-expenditure commitments, and $27 of guarantees of third-party debt and other obligations. Hilton also disclosed ordinary-course litigation; it did not expect pending matters to materially affect consolidated results, financial position or cash flows, but noted an unfavorable resolution could affect a particular period.
- Unrecognized tax benefits were $442 at quarter-end, with $47 accrued for related interest and penalties. Hilton said it was subject to federal, state and foreign tax examinations. The filing reported no material change in previously disclosed risk factors or market-risk exposure.
Important facts for investors to verify
- Whether RevPAR growth, new hotel additions and the large development pipeline convert into sustained fee growth and cash generation.
- How much of the improvement in GAAP earnings reflects recurring operations versus the foreign-currency swing and compensation-plan changes.
- Debt-service requirements, refinancing and maturity exposure, including the substantial 2018 maturities shown in the filing, and the effect of further voluntary repayments on liquidity.
- Realized cash requirements from hotel performance guarantees, capital commitments, tax audits and litigation, and the availability of unrestricted cash versus restricted balances.
- Performance of timeshare sales and receivables, including the effect of deferred-revenue recognition and credit losses; also assess Adjusted EBITDA alongside GAAP results and cash flows.