Hilton Worldwide Holdings Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. Unless stated otherwise, financial figures are in millions of dollars. Hilton operates management, franchising, ownership and leasing businesses; at quarter-end it reported 5,980 hotels and resorts, 954,855 rooms, across 117 countries and territories.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $2,395 | $2,253 | $7,083 | $6,618 |
| Operating income | $519 | $385 | $1,309 | $1,070 |
| Net income attributable to Hilton stockholders | $288 | $162 | $706 | $540 |
| Diluted EPS | $1.00 | $0.54 | $2.42 | $1.76 |
| Adjusted EBITDA (company-defined, non-GAAP) | $605 | $557 | $1,722 | $1,557 |
| Operating cash flow | Not separately presented for the quarter | $1,182 | $914 |
Q3 total revenue rose 6.3%; nine-month revenue rose 7.0%. Revenue includes substantial managed- and franchised-property reimbursements ($1,434 in Q3; $4,263 year to date), which are largely offset by corresponding expenses. Management and franchise segment revenue increased 6.2% in Q3 and 8.3% year to date; ownership revenue declined 3.2% and 3.5%, respectively. Reported operating income included an $81 pre-tax gain on the sale of Hilton Odawara. Interest expense increased to $105 in Q3 and $304 year to date.
System-wide comparable RevPAR increased 0.4% in Q3 and 1.2% for the first nine months. Occupancy rose 0.4 and 0.6 percentage points, respectively; ADR was nearly flat in Q3 and up 0.5% year to date. Company-defined Adjusted EBITDA increased 8.6% in Q3 and 10.6% year to date.
Balance sheet, debt and liquidity
- At September 30, cash and cash equivalents were $719; restricted cash was $90. Cash, including restricted cash, was $809.
- Total debt, before unamortized financing costs and discounts, was approximately $7.9 billion, versus $7.4 billion at December 31, 2018. Long-term debt on the balance sheet was $7,767, plus $38 of current maturities.
- The revolving credit facility had $1.69 billion available after $59 of letters of credit. Hilton stated that cash, operating cash generation and, as needed, the revolver should meet anticipated requirements for the foreseeable future.
- Operating lease liabilities were $1,132 and finance lease liabilities were $255. Hilton adopted the new lease standard on January 1, 2019; adoption reduced opening accumulated deficit by $256, net of tax.
- Stockholders’ equity moved from $551 at year-end 2018 to a deficit of $208 at September 30, 2019; total equity was a deficit of $199. The filing attributes $256 of the change to lease-standard adoption and reports substantial share repurchases.
Cash returns, capital allocation and material changes
For the first nine months, operating cash flow was $1,182; investing activities used $47 and financing activities used $808. Investing cash flow included $120 of proceeds from the Hilton Odawara sale, alongside $66 of property and equipment spending and $79 of capitalized software costs. Financing included $1,795 of borrowings, $1,327 of debt repayments, $130 of dividends and $1,086 of share repurchases in the cash flow statement. Separately, management reported repurchasing 13 million shares for $1,101 during the period; $959 remained under the repurchase authorization at quarter-end. The declared dividend was $0.15 per share for Q3, unchanged from the prior-year quarter.
Hilton issued $1.0 billion of 4.875% senior notes due 2030 in June and used part of the proceeds to repay $500 million of term loans and $225 million drawn on the revolver. It also extended the term-loan maturity to 2026 and the revolver maturity to 2024, and increased revolving capacity to $1.75 billion.
Outlook, management commentary and risks
- The filing provides no clear numerical full-year earnings or operating guidance. Management described RevPAR growth as modest and highlighted continued strength in Europe, while citing weaker performance in China, Hong Kong, the United Arab Emirates and some other markets.
- Hilton reported a development pipeline of more than 2,530 hotels, nearly 379,000 rooms, in 111 countries and territories. Management described expansion of the fee-based management and franchise business as a strategic objective.
- IRS disputes remain a significant contingency. After one issue was resolved favorably, the IRS’s two remaining proposed adjustments could result in approximately $817 million of additional U.S. federal tax, excluding interest, penalties and potential state taxes. Hilton disagreed and said it intended to contest the positions; it had recorded $56 million of unrecognized tax benefits related to these issues.
- Six hotel performance guarantees had possible cash outlays totaling approximately $38 million. Hilton also guaranteed two loans totaling $30 million and had approximately $25 million of possible funding for hotel-owner capital expenditures. Management said material payments under the loan guarantees were considered unlikely.
- Other stated risks include hospitality-sector and macroeconomic conditions, competition, third-party owner relationships, technology and reservation-channel risks, international operations, foreign exchange and indebtedness. Brexit’s eventual effects remained uncertain; Hilton said results to date were not materially affected. The company reported no material change to its previously disclosed risk factors.
- Hilton said ordinary-course litigation was not expected to have a material adverse effect overall, while noting an unfavorable resolution could materially affect results in a particular period. Disclosure controls were assessed as effective; no material change in internal control was reported.
Most important facts for investors to verify
- Underlying operating performance excluding the $81 million Odawara sale gain and distinguishing fee revenue from reimbursed property revenue.
- RevPAR trends by region, particularly the continuing pressures in China and Hong Kong and the extent of strength in Europe.
- Debt and interest burden, refinancing terms, liquidity availability and cash generation relative to repurchases and dividends.
- Progress and potential exposure in the IRS appeals, including the scale and timing of any possible tax, interest or penalty payments.
- Lease obligations and the effect of lease accounting adoption on reported liabilities and stockholders’ deficit.