Hilton Worldwide Holdings Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the corresponding 2017 periods. Amounts are in U.S. dollars. Hilton operated or franchised 5,456 hotels with 879,349 rooms in 106 countries and territories at quarter-end.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $2.291 billion | $2.076 billion | $4.365 billion | $3.972 billion |
| Operating income | $406 million | $324 million | $685 million | $541 million |
| Net income attributable to Hilton stockholders | $217 million | $150 million | $378 million | $197 million |
| Diluted EPS | $0.71 | $0.46 | $1.21 | $0.60 |
| Adjusted EBITDA | $555 million | $504 million | $1.000 billion | $914 million |
| Operating cash flow | Not separately stated | Not separately stated | $532 million | $344 million |
Q2 revenue increased 10.4%, operating income 25.3%, and net income attributable to Hilton stockholders 44.7% year over year. Reported operating margin was approximately 17.7%, versus 15.6% in Q2 2017; total revenue includes reimbursed managed- and franchised-property costs, which generally have little or no net effect on operating income. For the six months, operating margin was approximately 15.7%, versus 13.6%.
System-wide comparable RevPAR rose 4.0% in Q2 and 3.9% for the first half. Q2 occupancy was 79.5% (up 1.3 percentage points) and ADR was $150.76 (up 2.3%).
At June 30, cash and cash equivalents were $423 million, with $82 million of restricted cash; cash plus restricted cash totaled $505 million. Hilton had $7.665 billion of gross long-term debt, or $7.564 billion after unamortized financing costs and current maturities, and $936 million of available revolving-credit borrowing capacity. Stockholders’ equity was $555 million, down from $1.688 billion at year-end 2017.
For the first half, investing cash outflow was $75 million and financing cash outflow was $616 million. Hilton repurchased $1.439 billion of shares and paid $92 million of dividends. Operating cash flow increased $188 million year over year, which management attributed primarily to improved management-and-franchise results and lower cash taxes and interest paid.
Material changes versus the prior period
- Management and franchise revenue was $565 million in Q2, up 11.2%; ownership-segment revenue was $392 million, up 5.1%. Ownership operating income fell 19.4% to $29 million in Q2, as higher hotel operating expenses more than offset revenue growth.
- Hilton issued $1.5 billion of 5.125% senior notes due 2026 and repaid $500 million of term loans in April. Long-term debt increased from $6.556 billion at December 31, 2017 to $7.564 billion at June 30, 2018, net of financing costs and current maturities.
- HNA sold its entire Hilton stake in April. Hilton repurchased 16.5 million shares from HNA for $1.171 billion; first-half repurchases totaled 19.8 million shares for $1.439 billion.
- Comparable RevPAR improved across most regions; Q2 MEA RevPAR was essentially flat, with softer demand in some local markets. Hilton cited strength in U.S. group travel, recovery in Turkey, and higher China occupancy as regional drivers.
- Reported prior-period figures reflect retrospective adoption of the new revenue-recognition standard. Hilton recorded a $212 million cumulative adjustment to accumulated deficit as of January 1, 2016; the standard changed presentation and timing for certain fees, reimbursements, and Hilton Honors revenue.
Outlook, commentary, risks, and unusual items
- The filing provides no specific full-year financial guidance. Management described continued expansion of the fee-based business as a priority and reported a development pipeline of 2,373 hotels and approximately 362,000 rooms.
- Management said existing cash and operating cash generation should be adequate for anticipated requirements for the foreseeable future, while noting that debt service depends on future operating performance. It cautioned that insufficient cash flow could require lower capital spending, additional equity issuance, or revolver borrowings.
- The IRS has proposed approximately $874 million of additional U.S. federal tax for 2006 through 2010, excluding interest, penalties, and potential state taxes. Hilton disputes the proposed adjustments and intends to contest them; it recorded $47 million of unrecognized tax benefits related to the appealed issues. Total unrecognized tax benefits were $285 million, with approximately $36 million accrued for interest and penalties.
- Four hotel management contracts had performance guarantees with possible cash outlays totaling approximately $45 million. Hilton said ordinary-course litigation was not expected to have a material adverse effect, while acknowledging an unfavorable resolution could affect results in a particular period.
- Hilton had not completed its accounting for certain effects of the 2017 Tax Cuts and Jobs Act and was still evaluating GILTI tax accounting. The company expects adoption of the lease-accounting standard in 2019 to have a material effect on its balance sheet.
- Other notable items: Q2 foreign-currency transaction loss was $12 million; first-half results included an $8 million additional tax benefit from refining provisional tax-law estimates. The prior-year first half included a $60 million debt-extinguishment loss, making year-over-year comparisons partly affected by that unusual charge.
Important facts for investors to verify
- How much of revenue growth and margin improvement reflects underlying fee growth versus reimbursed-property amounts and accounting presentation changes.
- Debt and liquidity after the HNA repurchase, including refinancing costs, interest-rate exposure, and the company’s ongoing large share repurchases.
- The resolution, timing, and potential cash impact of the IRS dispute, including interest, penalties, and possible state-tax exposure.
- The assumptions underlying Hilton Honors redemption liabilities and deferred revenue; changes in breakage and redemption estimates could materially affect reported balances.
- Whether hotel pipeline openings, regional RevPAR trends, and ownership-hotel cost pressures support continued operating performance; the filing gives no specific financial forecast.
- The eventual balance-sheet impact of the new lease standard and any updates to tax-law estimates.