Hilton Worldwide Holdings Inc. — Q3 2014 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2014; comparisons are with the three and nine months ended September 30, 2013. Hilton operates owned and leased hotels, manages and franchises hotels, and conducts timeshare activities. At quarter-end, its system included 4,221 hotels and resorts with 698,402 rooms in 93 countries and territories, plus 44 timeshare properties.
Financial performance and liquidity
- Revenue: Q3 total revenue was $2.644 billion, up 8.0%; nine-month revenue was $7.674 billion, up 8.2%. These totals include managed- and franchised-property revenue and matching expenses.
- Profit: Q3 operating income was $445 million, up from $357 million; net income attributable to Hilton stockholders was $183 million versus $200 million, and diluted EPS was $0.19 versus $0.22. For nine months, operating income was $1.218 billion versus $1.013 billion, stockholder net income was $515 million versus $389 million, and diluted EPS was $0.52 versus $0.42.
- Margins: Calculated GAAP operating margin was approximately 16.8% in Q3 versus 14.6% a year earlier, using reported total revenue. The comparable net margin attributable to Hilton stockholders was approximately 6.9% versus 8.2%; reported revenue includes pass-through amounts.
- Hotel trends: Comparable system-wide Q3 occupancy was 79.0%, up 3.1 percentage points; ADR rose 4.2% to $142.51 and RevPAR rose 8.4% to $112.59. Nine-month RevPAR increased 7.3%.
- Adjusted EBITDA: Q3 was $645 million, up 13.2%; nine-month total was $1.840 billion, up 14.5%. This is a non-GAAP measure and Hilton cautions it is not a substitute for cash flow or net income.
- Cash flow: Nine-month operating cash flow was $899 million, down from $1.024 billion. Investing cash use was $200 million and financing cash use was $743 million. Cash and cash equivalents ended at $543 million, down from $594 million at year-end 2013; restricted cash was $288 million.
- Debt and liquidity: Total indebtedness was approximately $12.1 billion, including $937 million of non-recourse debt. Long-term debt was $11.124 billion. Hilton prepaid $700 million on its term loans during the first nine months. It had $953 million of available borrowing capacity on its $1.0 billion revolving facility. Current assets exceeded current liabilities by $274 million; the current ratio was 1.13.
Material changes versus the prior comparable period
- Growth was led by management and franchise fees, up 18.6% in Q3 and 18.7% for nine months, reflecting stronger comparable RevPAR and additions to the system. Net additions since September 2013 included 36 managed hotels and 158 franchised hotels.
- Owned and leased hotel revenue increased 8.1% in Q3; comparable RevPAR rose 7.7%. Timeshare revenue declined 2.3% in Q3 but increased 5.1% for nine months.
- Q3 stockholder net income fell despite higher operating income, as interest expense rose to $156 million from $127 million, income tax expense rose to $127 million from $70 million, and foreign-currency transactions shifted to a $5 million loss from a $39 million gain. Nine-month interest expense rose to $467 million from $401 million.
- Operating cash flow decreased primarily because cash taxes paid increased by $200 million year over year, partly offset by lower cash interest paid.
Outlook, commentary, risks, and unusual items
- Management reported RevPAR increases across all segments and regions, mainly from higher occupancy and rates where demand exceeded supply. No quantified earnings or revenue guidance is provided in the filing.
- Hilton had 1,269 hotels and approximately 215,000 rooms in its development pipeline across 74 countries and territories; approximately 109,000 rooms were under construction. The company expects international rooms to grow as pipeline hotels open and emphasizes the relatively low capital needs of managed and franchised growth.
- In October 2014, Hilton agreed to sell the Waldorf Astoria New York for $1.95 billion, subject to customary closing conditions, and expects to continue managing it under a 100-year agreement. Closing was scheduled for December 31, 2014, with specified extension rights. The approximately $525 million mortgage is expected to be repaid at closing from other sources of liquidity. Hilton also prepaid another $100 million of term loans in October.
- Unusual gains included a $24 million pre-tax remeasurement gain from exchanging hotel equity interests and $13 million of pre-tax gains from hotel and land sales during the first nine months. A cash-based incentive plan termination reduced compensation expense by approximately $25 million in the period.
- Key exposures include approximately $140 million of possible cash outlays under six hotel performance guarantees, $120 million of capital expenditure commitments, and a remaining potential $35 million exposure under a guarantee related to a prior settlement; Hilton had not accrued for the latter, citing remote likelihood of material funding. The filing says ordinary-course litigation is not expected to have a material overall effect, while acknowledging unfavorable outcomes could affect a particular period.
- Unrecognized tax benefits were $378 million at September 30, 2014; $342 million related to positions that could benefit the effective tax rate if resolved favorably. Hilton noted ongoing tax examinations and uncertainty over their timing and outcomes.
Important facts for investors to verify
- Whether and when the Waldorf Astoria sale closes, the final proceeds and adjustments, the mortgage repayment, and resulting liquidity and management-fee economics.
- How much of revenue and Adjusted EBITDA growth is sustained by comparable hotel performance and recurring management/franchise fees versus acquisitions, asset sales, foreign exchange, and other adjustments.
- The trajectory of interest expense, cash taxes, operating cash flow, debt repayment, and available revolver capacity.
- Timeshare sales and financing-receivable performance, including collections, delinquencies, allowance adequacy, and dependence on securitization funding.
- Potential cash requirements from performance guarantees, capital commitments, tax examinations, and other contingencies.