Hilton Worldwide Holdings Inc. quarterly report, Q1 FY2019

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Hilton Worldwide Holdings Inc. — Q1 2019 Form 10-Q

Reporting period: Three months ended March 31, 2019; compared with the three months ended March 31, 2018, unless otherwise noted. Hilton operated or franchised 5,757 hotels and resorts with 923,110 rooms in 113 countries and territories.

Financial performance

  • Revenue: $2.204 billion, up 6.3%. This includes $1.349 billion of revenues from managed and franchised properties, largely reimbursed expenses. Franchise and licensing fees rose 15.4% to $382 million; management fees were $135 million, up 2.3%. Owned and leased hotel revenue declined 6.6% to $312 million, mainly reflecting foreign exchange.
  • Profit: Operating income was $312 million, up 11.8%; net income was $159 million, down 2.5%; net income attributable to Hilton stockholders was $158 million, down 1.9%. Diluted EPS increased to $0.54 from $0.51, supported by fewer weighted-average shares.
  • Margins and operating indicators: GAAP operating income was approximately 14.2% of reported total revenue; this ratio includes substantial pass-through property revenues and expenses. Adjusted EBITDA, a non-GAAP measure, was $499 million versus $445 million. System-wide comparable RevPAR increased 1.8%, with occupancy up 0.5 percentage points and ADR up 1.1%.
  • Cash flow: Operating cash flow was $364 million, versus $243 million. Investing used $44 million, including $23 million of property and equipment capital expenditures and $19 million of capitalized software costs. Financing used $343 million, including $296 million of share repurchases and $44 million of dividends. Cash, cash equivalents and restricted cash ended at $461 million, including $79 million restricted.
  • Debt and liquidity: Long-term debt was $7.330 billion net of financing costs and current maturities; gross debt including finance leases was approximately $7.4 billion. Hilton had $50 million drawn on its $1.0 billion revolving facility and $891 million of availability after letters of credit at March 31. It subsequently drew an additional net $125 million. Operating and finance lease liabilities totaled approximately $1.36 billion on the balance sheet; management cited approximately $1.5 billion of lease liabilities using its broader measure.
  • Balance sheet: Total assets were $14.853 billion and total liabilities $14.745 billion at quarter-end. Hilton stockholders’ equity was $100 million.

Changes versus the prior comparable period

  • Growth in managed and franchised properties, comparable RevPAR and licensing fees supported an 11.3% increase in management and franchise segment revenue to $532 million and segment operating income to $532 million.
  • Comparable RevPAR increased across the system, but results varied by region: MEA RevPAR fell 5.7%, while Americas excluding the U.S. rose 4.4% and Europe rose 3.2%.
  • Interest expense increased to $98 million from $83 million, primarily reflecting the 2026 Senior Notes issued in April 2018. The prior-year period included an $11 million foreign-currency gain; none was recorded in Q1 2019.
  • Operating cash flow increased by $121 million, primarily from improved operating results and working-capital changes. Financing outflows rose with higher shareholder returns.
  • Hilton adopted the new lease accounting standard on January 1, 2019, recording operating lease right-of-use assets and liabilities. Adoption included a $256 million cumulative reduction to accumulated deficit; prior periods were not restated.

Outlook, commentary and risks

  • The filing provides no specific numerical full-year earnings or RevPAR guidance. Management stated that existing cash and, as needed, the revolving facility should meet anticipated requirements for the foreseeable future.
  • Hilton reported nearly 2,480 hotels and more than 371,000 rooms in its development pipeline, with over half of pipeline rooms under construction. It added 473 managed and franchised properties net from January 2018 through March 2019.
  • Management attributed system-wide RevPAR growth mainly to ADR. It cited strong group performance in the U.S. and Japan, growth in southern Europe, and softer domestic travel in China. Supply growth in Saudi Arabia and the UAE weighed on MEA results.
  • Risks include hospitality-sector and macroeconomic conditions, competition, third-party hotel-owner performance, international operations and foreign exchange, information technology, reservation channels, and substantial indebtedness. Hilton said Brexit had not materially affected Q1 results but could cause market disruption and tax or currency volatility.
  • Tax contingency: Two disputed IRS issues could result in approximately $817 million of additional U.S. federal tax, excluding interest, penalties and potential state taxes. Hilton disputes the positions and intends to contest them; it had recorded $54 million of unrecognized tax benefits related to these issues. Total unrecognized tax benefits were $320 million.
  • Other contingencies: Five hotel performance guarantees had possible cash outlays totaling approximately $36 million; $12 million was accrued for one guarantee. Hilton also guaranteed $20 million of debt for a franchised hotel. It reported ordinary-course litigation and did not expect pending matters to have a material adverse effect, while noting outcomes are uncertain.
  • Capital returns: Hilton repurchased 3.9 million shares for $296 million and paid $44 million in dividends. The board authorized an additional $1.5 billion for repurchases in February 2019.

Important facts for investors to verify

  • Track the IRS appeals and potential tax exposure, including how the Hilton Honors issue may affect future tax liabilities.
  • Monitor debt, interest expense, revolving-credit draws and cash available after shareholder returns and lease commitments.
  • Assess the durability of fee growth and RevPAR by region, particularly continued weakness in MEA and moderation in China.
  • Separate pass-through managed-property revenues and expenses from fee-based revenue when evaluating reported revenue and margins; review the company’s non-GAAP Adjusted EBITDA reconciliation.
  • Consider the effect of lease-standard adoption and the $256 million opening-equity adjustment when comparing balance sheets and equity across periods.