Hilton Worldwide Holdings Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. All dollar amounts are U.S. dollars; financial figures are in millions unless noted.
Business context and reporting period
Hilton operates a predominantly asset-light hospitality business through management and franchise services, alongside a smaller hotel ownership and leasing segment. At year-end, its system comprised 6,110 properties and 971,780 rooms in 119 countries and territories; 5,342 properties were franchised and 703 managed. Hilton opened nearly 470 hotels in 2019, adding over 58,000 net rooms. Its pipeline exceeded 2,570 hotels and 387,000 rooms.
Financial and operating performance
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $9,452 | $8,906 | +6.1% |
| Operating income | $1,657 | $1,432 | +15.7% |
| Net income | $886 | $769 | +15.2% |
| Diluted EPS | $3.04 | $2.50 | +21.6% |
| Adjusted EBITDA | $2,308 | $2,101 | +9.9% |
| Cash from operations | $1,384 | $1,255 | +10.3% |
Reported operating margin was approximately 17.5%, versus 16.1% in 2018; net margin was approximately 9.4%, versus 8.6%. Total revenue includes $5,686 million of managed- and franchised-property reimbursements, which are largely offset by related expenses and have little or no net effect on operating income.
System-wide comparable RevPAR rose 0.8%: occupancy increased 0.5 percentage points to 75.7%, while ADR increased 0.1% to $144.79. RevPAR varied by region, rising 3.0% in Europe and declining 3.0% in the Middle East and Africa and 0.9% in Asia Pacific.
Fourth quarter: Revenue was $2,369 million, operating income $348 million, net income $176 million, and diluted EPS $0.61. Compared with fourth-quarter 2018, revenue increased about 3.5%, operating income decreased about 3.9%, net income decreased about 21.8%, and diluted EPS decreased about 18.7%.
Cash, debt and liquidity
Cash and cash equivalents were $538 million at year-end, plus $92 million of restricted cash. Net cash used in investing activities was $123 million; net cash used in financing activities was $1,113 million. Hilton returned over $1.7 billion to shareholders during 2019 through $1.5 billion of share repurchases and $172 million of dividends, principally funded by borrowings and available cash. Approximately $515 million remained under its $3.5 billion repurchase authorization.
Debt, excluding unamortized financing costs and discounts, was approximately $8.1 billion, compared with $7.4 billion in 2018. The company had $195 million outstanding on its revolving facility and reported $1.50 billion of available borrowing capacity. Long-term debt contractual obligations, including estimated interest, totaled $10.1 billion; operating lease liabilities were $1.17 billion. The credit agreement requires a secured net leverage ratio no greater than 5.0 to 1.0. Stockholders’ equity was a deficit of $482 million, following substantial repurchases and the adoption of lease accounting.
Material changes, outlook and key risks
- Management and franchise fees grew with system additions; franchise and licensing fees rose 9.9%. Incentive management fees declined 2.1%. Owned and leased hotel revenue fell 4.2%, affected by foreign exchange and portfolio changes.
- Hilton recorded an $81 million pretax gain on the September 2019 sale of Hilton Odawara Resort & Spa for approximately $122 million, then entered a 30-year management contract for the hotel.
- Interest expense increased 11.6% to $414 million, reflecting debt issuance, partly offset by term-loan repayments and a lower term-loan rate. A $1.0 billion 4.875% note due 2030 was issued in 2019.
- No quantified 2020 earnings or operating guidance is provided in the supplied filing text. Management said available cash and, from time to time, the revolving facility should meet anticipated requirements for the foreseeable future. Hilton expects first-quarter revenue generally to be lower than in later quarters because of seasonality.
- The filing identifies economic and travel-demand cycles, competition, labor costs and disputes, third-party owner financing and property standards, cyber and privacy incidents, foreign exchange, natural disasters, and substantial indebtedness as risks. The coronavirus outbreak was emerging at the filing date; its effects were described as uncertain. Brexit’s ultimate effects were also uncertain.
- The IRS proposed adjustments relating to intercompany loans and Hilton Honors 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 $58 million of unrecognized tax benefits related to these issues. Total unrecognized tax benefits were $395 million.
- Ordinary-course lawsuits were not expected by management to have a material adverse effect, though an unfavorable resolution could affect a particular period. Possible cash outlays under four hotel performance guarantees totaled approximately $20 million; Hilton also guaranteed two loans totaling $30 million.
Most important facts for investors to verify
- Reconcile growth in operating income and Adjusted EBITDA with the $81 million asset-sale gain and review the company’s non-GAAP adjustments.
- Assess debt service, variable-rate exposure, refinancing needs, covenant headroom and the effect of share repurchases funded partly by borrowing.
- Track the IRS dispute, including the potential $817 million assessment and the recorded reserve, as well as other tax uncertainties.
- Evaluate whether pipeline approvals convert into openings and whether regional RevPAR trends, particularly in Asia Pacific and the Middle East and Africa, persist.
- Review Hilton Honors liability estimates and point-redemption assumptions; the year-end program liability was $1,859 million and related deferred revenue was $396 million.