Hilton Worldwide Holdings Inc. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, compared with the three months ended March 31, 2017. Hilton operates management and franchise and ownership segments. At quarter-end, its system comprised 5,339 hotels and resorts, 863,241 rooms and 74 million Hilton Honors members. Its development pipeline included 2,343 hotels and approximately 355,000 rooms.
Financial and operating results
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $2.074 billion | $1.896 billion |
| Operating income | $279 million | $217 million |
| Net income attributable to Hilton stockholders | $161 million | $47 million |
| Diluted EPS | $0.51 | $0.14 |
| Adjusted EBITDA | $445 million | $410 million |
| Operating cash flow | $243 million | $50 million |
- Total revenue increased 9.4%; reported revenue includes reimbursed costs from managed and franchised properties, which generally have no net effect on operating income over time.
- Management and franchise segment revenue was $478 million, up 13.3%; segment operating income was also $478 million, versus $422 million. Ownership segment revenue rose to $334 million from $296 million, while segment operating income fell to $6 million from $21 million.
- System-wide comparable RevPAR rose 3.9%, with occupancy up 1.8 percentage points and ADR up 1.2%. RevPAR increased across all regions.
- Net cash used in investing activities was $26 million and net cash used in financing activities was $211 million. Cash and cash equivalents were $610 million; restricted cash was $73 million, for total cash and restricted cash of $683 million.
- Debt was approximately $6.7 billion gross ($6.558 billion long-term debt on the balance sheet); $936 million of revolving-credit capacity was available after letters of credit.
- Current assets were $2.008 billion and current liabilities $2.488 billion. The guest loyalty program liability totaled $1.533 billion, including $692 million current.
Changes versus prior comparable period
- Net income and EPS increased substantially; the 2017 quarter included a $60 million debt-extinguishment loss, associated with redeeming 2021 notes. Operating income also improved, while interest expense declined to $83 million from $89 million.
- Adjusted EBITDA increased 8.5%. Management cited new managed and franchised properties, higher comparable-hotel RevPAR and increased licensing fees.
- Operating cash flow increased by $193 million, primarily reflecting improved management and franchise operating results.
- Owned and leased hotel expenses rose to $320 million from $268 million, reflecting currency effects and higher variable costs associated with occupancy. Ownership segment operating income consequently declined.
- Hilton adopted the revenue-recognition standard retrospectively. The adjusted 2017 comparison reflects the new standard; its adoption reduced accumulated deficit by $212 million as of January 1, 2016 and changed revenue presentation. It also reduced reported 2017 Q1 net income from $74 million as previously reported to $47 million as adjusted.
Outlook, commentary, risks and unusual items
- No quantified full-year earnings or RevPAR guidance is provided in the supplied filing. Hilton said it expected existing cash and operating cash generation to meet anticipated requirements for the foreseeable future.
- Management highlighted system expansion and fee-based growth, supported by a pipeline of approximately 355,000 rooms; over half were outside the U.S. and approximately 184,000 were under construction.
- In April 2018, Hilton issued $1.5 billion of 5.125% senior notes due 2026. It used proceeds, revolving-credit borrowings and cash to repurchase 16.5 million shares from HNA for $1.171 billion and to repay approximately $500 million of term loans. HNA also sold its remaining Hilton shares and no longer held beneficial ownership.
- Hilton reported $284 million of unrecognized tax benefits and approximately $35 million accrued for tax-related interest and penalties. An IRS dispute covering tax years 2006–2010 involves proposed additional federal tax of approximately $874 million, excluding interest, penalties and potential state taxes; Hilton disputes the proposed adjustments. The filing says the Hilton Honors-related portion would reduce future tax liability when points are redeemed.
- Four hotel-management performance guarantees could require cash outlays totaling approximately $47 million, depending on hotel performance. Hilton said pending litigation was not expected to have a material adverse effect, while noting unfavorable outcomes could affect results in a particular period.
- Key risks include hospitality-industry and macroeconomic conditions, competition, third-party hotel-owner relationships, international operations, technology and reservation-channel risks, and indebtedness. Hilton noted that lease-accounting adoption expected in 2019 was likely to materially affect its balance sheet.
Important facts for investors to verify
- How the April 2018 share repurchase and financing affect post-quarter debt, interest costs and liquidity.
- Underlying fee growth and comparable-hotel trends, distinguishing fee revenue from reimbursed property costs and currency effects.
- Assumptions behind Hilton Honors redemption, breakage and cost estimates, given the $1.533 billion program liability and $535 million of deferred revenue related to outstanding points.
- Developments in the IRS dispute, including potential resolution timing, exposure and the relationship between proposed adjustments and recorded tax reserves.
- Progress and conversion of the development pipeline, and performance-guarantee exposure as hotel performance evolves.