Hilton Worldwide Holdings Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017. Unless noted, amounts are in millions of dollars. Hilton operates hotel management and franchising businesses and owned and leased hotels; at quarter-end its system comprised 5,168 hotels and resorts, 837,692 rooms, across 103 countries and territories.
Business context and comparability
Hilton completed the spin-offs of Park Hotels & Resorts and Hilton Grand Vacations on January 3, 2017. Their historical results are presented as discontinued operations, so year-over-year comparisons—particularly revenue, profit and cash flow—are affected by the changed business perimeter. Hilton reported two continuing segments: management and franchise, and ownership. It also completed a 1-for-3 reverse stock split; prior-period per-share data were retrospectively adjusted.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $2,354 | $1,867 | $6,861 | $5,543 |
| Operating income | $382 | $265 | $1,024 | $708 |
| Continuing operations income, net of tax | $181 | $89 | $423 | $380 |
| Net income attributable to Hilton stockholders | $179 | $187 | $419 | $735 |
| Diluted EPS from continuing operations | $0.55 | $0.27 | $1.28 | $1.14 |
| Adjusted EBITDA | $524 | $415 | $1,467 | $1,142 |
Total revenue rose 26% in Q3 and 24% for the nine-month period. Growth included higher pass-through revenue from managed and franchised properties, which is matched by corresponding expenses; total revenue therefore is not a straightforward measure of fee-business growth. Management and franchise segment revenue increased 25% in Q3 and 25% year to date, driven by system additions, comparable hotel performance and HGV licensing fees. Owned and leased hotel revenue rose 4% in Q3 but declined 2% year to date, including foreign-exchange effects.
Q3 operating income increased to $382 from $265, and continuing-operations diluted EPS rose to $0.55 from $0.27. Hilton-attributable net income was lower than the prior-year quarter, which included $100 of discontinued-operations income attributable to Hilton stockholders. Nine-month Hilton-attributable net income also declined versus 2016, which included $360 of such discontinued-operations income. Adjusted EBITDA, a non-GAAP measure, increased 26% in Q3 and 28% year to date.
System-wide comparable RevPAR increased 1.3% in Q3 and 2.1% for the first nine months. Q3 occupancy was 79.3%, up 0.5 percentage points, and ADR was $145.80, up 0.6%. Results varied by region: Europe and Asia Pacific posted strong RevPAR growth; U.S. Q3 RevPAR declined 0.1%, while MEA RevPAR was nearly flat amid lower ADR.
Cash flow, debt and liquidity
- Cash flow: Nine-month operating cash flow was $646, versus $969 in 2016; investing cash outflow was $146 versus $346; financing cash outflow was $1,396 versus $355. Comparisons reflect the spin-offs, including the prior-year inclusion of Park and HGV cash flows. 2017 financing uses included $501 of cash transferred in the spin-offs, $625 of share repurchases and $147 of dividends.
- Cash and liquidity: September 30 cash and cash equivalents were $670, with restricted cash of $126, for total cash and restricted cash of $796. Working capital was negative $128 and the current ratio was 0.94. The $1.0 billion revolving facility had $982 of borrowing capacity available after letters of credit.
- Debt: Long-term debt, including current maturities, was approximately $6.7 billion before unamortized financing costs and discounts. In March, Hilton issued $900 of 4.625% notes due 2025 and $600 of 4.875% notes due 2027, using proceeds and cash to redeem $1.5 billion of 5.625% notes due 2021. The redemption generated a $60 debt-extinguishment loss. Hilton also repriced and extended term loans; the term-loan rate was LIBOR plus 200 basis points.
- Returns and capital spending: Hilton repurchased $625 of shares during the nine months under a $1.0 billion authorization; $375 remained at quarter-end. Dividends paid were $147. Property and equipment capital expenditures were $36; contract acquisition and capitalized software costs were $51 and $45, respectively.
Outlook, risks and unusual items
Hilton provided no specific full-year financial guidance in the supplied filing text. Management described continued global system expansion as a strategic priority: the development pipeline included 2,191 hotels and more than 335,000 rooms across 104 countries and territories, with more than half of pipeline rooms outside the U.S. and more than half under construction. Management expects fee growth from new managed and franchised hotels as properties stabilize. It stated that available cash and operating cash flows should meet anticipated requirements for the foreseeable future, while noting that debt service depends on future operating performance.
- Tax exposure: The IRS proposed approximately $874 of additional federal tax for 2006–2010, excluding interest, penalties and potential state taxes. Hilton disputes the proposed adjustments and intends to contest them. It reported $165 of unrecognized tax benefits and approximately $33 accrued for interest and penalties; $48 of unrecognized tax benefits related to specified appealed issues.
- Guarantees and litigation: Five hotel-management contracts contained performance guarantees with possible cash outlays totaling approximately $68, subject to hotel performance and contract terms. Hilton said pending litigation was not expected to have a material overall effect, while acknowledging an unfavorable resolution could materially affect a particular period.
- Industry and market risks: The filing identifies hospitality-industry and macroeconomic conditions, competition, third-party owner relationships, technology and reservation-channel risks, international operations, indebtedness, interest rates and foreign exchange as relevant risks. MEA faced travel sanctions and geopolitical pressures; weather events affected some markets during the quarter.
- Accounting changes: Hilton expected the new revenue-recognition standard, effective for periods beginning after December 15, 2017, to materially affect its financial statements and anticipated retrospective adoption. It expected the new lease standard to materially affect the balance sheet.
- Subsequent event: On October 4, 2017, Hilton repurchased 986,175 shares from Blackstone for $68 in connection with Blackstone’s secondary offering. Blackstone’s beneficial ownership fell to 5.4%.
Important facts for investors to verify
- Assess year-over-year trends on a continuing-operations basis and account for the Park and HGV spin-offs and pass-through revenues.
- Review the drivers and sustainability of management and franchise fee growth, comparable RevPAR, the development pipeline and hotel openings.
- Monitor operating cash generation, negative working capital, debt maturities, interest costs and remaining repurchase commitments.
- Track the IRS appeals and potential tax exposure, performance guarantees and the implementation effects of revenue and lease accounting standards.
- Reconcile non-GAAP Adjusted EBITDA with GAAP results and cash available for debt service, capital investment and shareholder returns.