Hilton Worldwide Holdings Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Amounts are in millions of dollars except per-share data, percentages and hotel statistics. Hilton operates management/franchise and ownership businesses; at quarter-end it had 5,872 hotels and resorts, 939,297 rooms in 114 countries and territories.
Financial and operating performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Total revenue | $2,484 | $2,291 | $4,688 | $4,365 |
| Operating income | $478 | $406 | $790 | $685 |
| Net income attributable to Hilton stockholders | $260 | $217 | $418 | $378 |
| Diluted EPS | $0.89 | $0.71 | $1.42 | $1.21 |
| Adjusted EBITDA | $618 | $555 | $1,117 | $1,000 |
| Operating cash flow | — | — | $650 | $532 |
- Q2 revenue rose 8.4%, operating income 17.7%, Hilton-attributable net income 19.8%, and diluted EPS 25.4% year over year. Six-month increases were 7.4%, 15.3%, 10.6% and 17.4%, respectively.
- Management and franchise segment revenue increased 7.8% in Q2 and 9.4% for the half; ownership segment revenue declined 1.3% and 3.7%. Segment operating income increased 9.6% in Q2 and 10.3% for the half.
- System-wide comparable RevPAR increased 1.4% in Q2 and 1.6% for the half, led by Europe and the Americas excluding the U.S. Q2 occupancy was 79.4% and ADR was $148.93; RevPAR growth was 5.0% in Europe and 3.3% in the Americas excluding the U.S.
- Total revenue includes substantial managed- and franchised-property reimbursements, with related costs recorded in expenses. Q2 reimbursement revenue was $1,480 and related expense was $1,458; these pass-through amounts affect reported revenue and margins.
Cash, debt and liquidity
- Six-month operating cash flow was $650, versus $532 a year earlier. Investing used $95, including $46 of property and equipment expenditure and $44 of capitalized software costs. Financing used $323; cash, restricted cash and equivalents increased $234 to $718, including $83 restricted.
- At June 30, total debt was approximately $7.9 billion before unamortized financing costs; balance-sheet long-term debt was $7.772 billion, plus $37 current maturities. Cash and cash equivalents excluding restricted cash were $635. Hilton also reported $1.69 billion available under its revolving credit facility.
- In June, Hilton issued $1.0 billion of 4.875% senior notes due 2030, using part of the proceeds to repay $500 million of term loans and $225 million drawn on the revolver. It extended term-loan maturity to 2026 and increased and extended its revolver to $1.75 billion through 2024.
- Operating lease right-of-use assets were $891 and operating lease liabilities were $1.066 billion, with additional current operating lease liabilities. The filing reported approximately $1.5 billion of operating and finance lease liabilities.
- Hilton repurchased 8 million shares for $679 during the first half and paid $87 in dividends. Approximately $1.4 billion remained under its $3.5 billion repurchase authorization. Stockholders’ equity was a deficit of $30, and total equity was a deficit of $23.
Changes, outlook, risks and unusual items
- Compared with the prior year, higher RevPAR, net additions to the managed and franchised system, and licensing fees supported fee-business growth. Currency movements reduced reported owned and leased hotel revenue by $20 in Q2 and $42 in the first half; on a currency-neutral basis, comparable owned and leased hotel revenue increased.
- Hilton reported no quantified full-year guidance in this filing. Management said interim results are not necessarily indicative of full-year performance and cited adequate cash and operating cash generation, with possible revolver use, to meet anticipated requirements.
- The company had nearly 2,490 hotels and approximately 373,000 rooms in its development pipeline; 192,000 rooms were under construction. Hilton Honors membership exceeded 94 million, up 21% year over year.
- The IRS was pursuing proposed adjustments for certain tax years that could result in approximately $817 million of additional U.S. federal tax, excluding interest, penalties and potential state taxes. Hilton disputes the positions and intends to contest them; it had recorded $55 million of unrecognized tax benefits related to these issues. Total unrecognized tax benefits were $323 million.
- Other exposures include six hotel performance guarantees with possible cash outlays totaling approximately $39 million, a $20 million guarantee of franchised-hotel debt, and commitments to fund about $29 million of hotel capital expenditures. Hilton said pending litigation was not expected to have a material adverse effect, while noting outcomes cannot be predicted with certainty.
- Brexit had not materially affected first-half results, but Hilton warned that its eventual terms could create market disruption, tax and currency volatility. The filing identifies hospitality-industry conditions, macroeconomic factors, competition, third-party owner relationships, international operations, technology and indebtedness among relevant risks.
- Hilton adopted the new lease accounting standard on January 1, 2019, recognizing lease assets and liabilities. Adoption included a $256 million cumulative adjustment to accumulated deficit related to impairment of previously existing right-of-use assets. The filing also reported $8 million of fees and unamortized financing costs associated with term-loan repayment in other non-operating loss.
Important facts for investors to verify
- Whether RevPAR, hotel additions and fee growth continue, particularly in regions with weaker or mixed results, and how foreign exchange affects reported performance.
- The company’s debt service capacity and refinancing profile, together with actual use and availability of the revolving credit facility.
- Developments in the IRS appeals and the potential ultimate cash and tax impact of the disputed adjustments.
- Cash requirements and performance outcomes for hotel guarantees, owner commitments, leases, repurchases and dividends.
- How lease adoption and reimbursement pass-throughs affect comparisons of reported revenue, expenses, margins and cash flow.