Hilton Worldwide Holdings Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Unless noted, amounts are in U.S. dollars. Comparisons reflect continuing operations after the January 3 spin-offs of Park Hotels & Resorts and Hilton Grand Vacations (HGV); 2016 results are presented with those businesses classified as discontinued operations.
Business context
Following the spin-offs, Hilton operated management and franchise and ownership segments. At quarter-end it reported 4,982 properties, 812,341 rooms and operations in 103 countries and territories. Its development pipeline comprised 2,084 hotels and approximately 325,000 rooms; more than half of the rooms were under construction. HNA acquired approximately 25% of Hilton’s common stock from Blackstone in March; Blackstone retained approximately 15.2%.
Financial performance and liquidity
- Revenue: Total revenue was $2.161 billion, up 25.2% from $1.726 billion. This total includes $1.395 billion of revenues from managed and franchised properties, offset by the same amount of related expenses. Management and franchise segment revenue rose 22.1% to $436 million; owned and leased hotel revenue fell 6.0% to $300 million, primarily due to currency movements.
- Profit: Operating income increased to $277 million from $170 million. Continuing-operations income was $75 million versus $191 million, and diluted EPS was $0.22 versus $0.58. The prior-year period included a $121 million income tax benefit; Q1 2017 included a $60 million debt-extinguishment loss. Adjusted EBITDA increased to $424 million from $315 million.
- Margins and operating indicators: System-wide comparable RevPAR rose 3.0%, with occupancy up 1.6 percentage points and ADR up 0.6%. Regional RevPAR increased 8.4% in Europe and 5.5% in Asia Pacific, while declining 2.1% in the Middle East and Africa. Consolidated revenue includes reimbursed property costs, so a margin based on total revenue is not directly comparable as a measure of underlying fee economics.
- Cash flow: Operating cash flow was $63 million, compared with $339 million in Q1 2016; the prior period included Park and HGV. Investing cash outflow was $50 million versus $110 million. Financing cash outflow was $716 million, including $501 million transferred in the spin-offs, debt refinancing, dividends and share repurchases. Quarter-end cash and restricted cash totaled $986 million.
- Debt and liquidity: Long-term debt, including current maturities and before unamortized costs, was approximately $6.7 billion. Hilton issued $1.5 billion of notes due 2025 and 2027 and used proceeds and cash to redeem $1.5 billion of notes due 2021; it also repriced and extended part of its term loans. The $1.0 billion revolving facility had $977 million of borrowing capacity available. Working capital surplus was $102 million and the current ratio was 1.05.
- Capital returns: Hilton repurchased $70 million of shares in the quarter under a $1.0 billion authorization; $930 million remained available. Dividends paid were $49 million.
Material changes and unusual items
- The Park and HGV spin-offs materially changed Hilton’s scale, asset base, cash flows and business mix. Hilton retained management and franchise relationships with Park and a long-term brand license agreement with HGV; the HGV license carries a 5% royalty on defined gross revenues and annual transition fees of $5 million for each of the first five years.
- Q1 2017 other revenue included a $20 million recovery related to a defined-benefit-plan claim. General and administrative expense included $10 million of spin-off costs and a $6 million increase in severance costs. The debt-refinancing charge comprised a $42 million redemption premium and $18 million of accelerated financing-cost recognition.
- A 1-for-3 reverse stock split took effect January 3, 2017; share and per-share figures in the filing are adjusted for it.
Outlook, risks and contingencies
- No quantitative full-year guidance is provided in the supplied filing text. Management said new managed and franchised hotels should contribute higher fees as they stabilize and described continued expansion of its fee-based business.
- Management cited hospitality-industry and macroeconomic risks, competition, third-party owner relationships, international operations, technology and reservation-channel risks, and indebtedness. It attributed weaker MEA RevPAR to geopolitical and terrorism concerns. Management stated that market-risk exposure had not materially changed from its prior annual report.
- Hilton disputes IRS proposed adjustments for 2006–2010 that could result in approximately $874 million of additional U.S. federal tax, excluding interest, penalties and potential state taxes. It intends to contest the positions and recorded $46 million of unrecognized tax benefits related to issues under appeal. Total unrecognized tax benefits were $174 million, with approximately $33 million accrued for interest and penalties.
- Seven hotel performance guarantees could require cash outlays of approximately $70 million, subject to hotel performance and contract terms. Hilton also disclosed ordinary-course litigation, a $5 million third-party debt guarantee and a remaining $1 million commitment to fund a hotel construction loan. Management did not expect pending litigation to have a material overall effect, while noting outcomes are uncertain.
- Hilton expects the new lease accounting standard to have a material balance-sheet effect. It anticipated a material financial-statement effect from the new revenue standard, with implementation details still under assessment.
Important facts for investors to verify
- Assess underlying fee growth and profitability separately from reimbursed managed-property revenue and expenses, and account for the spin-offs when comparing periods.
- Review the sustainability of operating cash generation, the debt burden and refinancing terms, and the remaining revolver capacity.
- Track the IRS appeals and potential tax exposure, including amounts beyond recorded unrecognized tax benefits.
- Monitor RevPAR by region, hotel additions and pipeline conversions, particularly the effects of new hotels stabilizing and continued weakness in MEA.
- Confirm the effects of post-spin-off agreements, guarantees, and adoption of new lease and revenue-recognition standards.