Hilton Worldwide Holdings Inc. — Q2 2016 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2016. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted. Comparisons are with 2015.
Business context
Hilton operated or franchised 4,680 hotels and resorts with 768,221 rooms in 104 countries and territories, plus 47 timeshare properties. Its three reportable segments are ownership, management and franchise, and timeshare. In June 2016, Hilton Grand Vacations Inc. and Park Hotels & Resorts Inc. filed registration statements related to planned spin-offs of the timeshare business and a substantial portion of the ownership business. Completion remained subject to SEC effectiveness and board approval.
Financial performance and liquidity
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Total revenue | $3,051 | $2,922 | $5,801 | $5,521 |
| Operating income | $553 | $427 | $962 | $917 |
| Net income attributable to Hilton stockholders | $239 | $161 | $548 | $311 |
| Diluted EPS | $0.24 | $0.16 | $0.55 | $0.31 |
| Adjusted EBITDA | $806 | $777 | $1,459 | $1,376 |
| Operating cash flow | $655 | $648 |
Q2 revenue rose 4.4%; operating margin was approximately 18.1%, versus 14.6%. Six-month operating margin was approximately 16.6% in both years. Revenue includes pass-through charges and matching expenses from managed and franchised properties: $1,166 million in Q2 2016 and $1,061 million in Q2 2015.
- Q2 system-wide comparable RevPAR increased 2.9%; ADR rose 2.7% and occupancy increased 0.1 percentage point. Managed and franchised hotel RevPAR rose 3.2%; owned and leased hotel RevPAR rose 0.7%.
- Management and franchise segment Adjusted EBITDA rose 8.5% in Q2 and 6.7% for the half year. Ownership Adjusted EBITDA declined 6.0% in Q2 and 0.4% for the half year; timeshare Adjusted EBITDA rose 14.0% and 20.6%, respectively.
- Cash and cash equivalents were $810 million; restricted cash was $271 million. Current assets were $2,930 million and current liabilities $2,663 million, a 1.10 current ratio. The $1.0 billion revolving facility had $955 million available after letters of credit.
- Total indebtedness was approximately $10.4 billion, including $445 million of timeshare debt. The balance sheet reported $9.9 billion of long-term debt, plus current maturities. Cash dividends paid in the first half totaled $138 million; declared dividends were $0.07 per share quarterly.
- Six-month investing cash outflow was $222 million, including $169 million of property and equipment capital expenditures and $35 million of capitalized software costs. Cash increased $201 million to $810 million.
Material changes versus prior period
- Six-month net income rose to $554 million from $317 million, while income tax expense fell to $110 million from $308 million. Hilton released $218 million of reserves related to unrecognized tax benefits during the first half; this materially affected the tax comparison.
- Q2 management and franchise revenue increased 9.1%, with franchise fees up 11.1%. The system added 403 managed and franchised properties net from January 2015 to June 2016.
- Owned and leased revenue declined 2.6% in Q2, principally reflecting international property disposals and currency effects, partly offset by U.S. acquisitions. The prior-year half included a $144 million gain on the sale of the Waldorf Astoria New York; the 2016 first half included a $15 million impairment charge.
- General and administrative expense fell substantially, partly because 2015 included accelerated IPO-related share-based compensation and Waldorf sale-related severance costs. Hilton incurred $18 million of spin-off costs in Q2 and $27 million in the first half of 2016.
Outlook, commentary, risks and contingencies
- The filing provides no numerical full-year guidance. Management said system-wide RevPAR grew in the first half, citing ADR growth across segments and demand growth in Asia Pacific. It also noted political and terrorism-related pressures in parts of Europe and the Middle East and Africa.
- Hilton cited a development pipeline of 1,822 hotels and approximately 288,000 rooms in 91 countries and territories; more than 99% of pipeline rooms were in management and franchise. The filing does not quantify expected pipeline openings or their future financial contribution.
- The IRS proposed adjustments that could result in approximately $874 million of additional U.S. federal tax, excluding interest, penalties and potential state taxes. Hilton disputes the proposed adjustments and intends to contest them; it recognized a $46 million unrecognized tax benefit related to issues under appeal. The filing says timing and outcomes of tax audits are uncertain.
- Commitments included approximately $89 million of possible cash outlays under hotel performance guarantees, $84 million of capital expenditure commitments, and approximately $195 million of timeshare inventory purchase commitments over four years. Hilton also disclosed a $60 million junior mezzanine loan commitment, of which $17 million had been funded by June 30.
- Debt maturities include approximately $3.45 billion in 2018 and $4.26 billion in 2020, based on assumed extensions available at Hilton’s option. Hilton cited operating performance and industry conditions as factors affecting its ability to service debt. Market risks include interest-rate and foreign-exchange exposure.
- Other risks include execution and approval of the proposed spin-offs, hotel and timeshare industry conditions, competition, third-party owner relationships, international operations, and litigation. Management said pending litigation was not expected to materially affect consolidated results, financial position or cash flows, but outcomes cannot be predicted with certainty.
Important facts for investors to verify
- Progress, final terms, approvals and financing or separation effects of the two proposed spin-offs.
- Whether earnings growth persists excluding the substantial tax-reserve release, and how tax examinations and appeals resolve, particularly the IRS’s proposed adjustments.
- Comparable RevPAR, occupancy and ADR trends by segment and region, including continued weakness in some international markets and the impact of currency movements.
- Debt maturities, available revolver capacity, refinancing options and cash needs for dividends, capital spending and contractual commitments.
- Whether timeshare sales, inventory commitments, loan-loss allowances and performance guarantees develop as expected.