Hilton Worldwide Holdings Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; unaudited, U.S. GAAP. Figures are in U.S. dollars unless stated otherwise.
Business context
Hilton operates owned and leased hotels, manages and franchises hotels, and operates a timeshare business. At quarter-end, it reported 4,774 hotel and resort properties in 104 countries and territories, plus 46 timeshare properties. The development pipeline included 1,898 hotels and approximately 300,000 rooms. Blackstone affiliates beneficially owned approximately 45.8% of Hilton’s common stock.
Hilton was preparing to spin off a substantial portion of its U.S. hotel ownership business into Park Hotels & Resorts and its timeshare business into Hilton Grand Vacations. Both transactions remained subject to conditions, including SEC effectiveness of registration statements and board approval.
Key financial results
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $2.942bn | $2.895bn | $8.743bn | $8.416bn |
| Operating income | $493m | $663m | $1.455bn | $1.580bn |
| Net income | $192m | $283m | $746m | $600m |
| Net income attributable to Hilton stockholders | $187m | $279m | $735m | $590m |
| Diluted EPS | $0.19 | $0.28 | $0.74 | $0.60 |
| Adjusted EBITDA | $765m | $758m | $2.224bn | $2.134bn |
| Operating cash flow | Not presented for quarter | Not presented for quarter | $936m | $991m |
Q3 revenue rose 1.6%, while Hilton-attributable income fell 33%. Nine-month revenue increased 3.9% and attributable income increased 25%. Prior-year operating income and earnings included material gains on asset sales: $164m in Q3 2015 and $306m for the first nine months of 2015. The filing reports Q3 operating income margin of approximately 16.8%, versus 22.9% in Q3 2015; the comparison is affected by those prior-year gains. Adjusted EBITDA is a non-GAAP measure and should not be treated as cash available for debt service or discretionary spending.
For Q3, management and franchise Adjusted EBITDA grew 7.3% to $470m; ownership Adjusted EBITDA declined 6.0% to $264m; and timeshare Adjusted EBITDA declined 14.1% to $85m. For the nine months, the respective changes were +6.9%, -2.4%, and +7.3%.
Operating trends and changes versus prior period
- Comparable system-wide RevPAR increased 1.3% in Q3 and 2.1% for the nine months, supported by ADR growth; occupancy was down 0.2 percentage points in both periods.
- Management and franchise fees and other revenue grew 7.2% in Q3 and 6.9% year to date, primarily from system additions and higher comparable RevPAR. Hilton added a net 498 managed and franchised properties from January 2015 through September 2016.
- Timeshare revenue rose 7.2% in Q3 and 4.7% year to date. Q3 timeshare sales volume increased 15%, but segment Adjusted EBITDA fell as expenses grew faster than revenue.
- Owned and leased hotel revenue declined 4.5% in Q3 and 2.2% year to date, reflecting international disposals and foreign-exchange effects, partly offset by U.S. hotel additions. Comparable international owned-hotel revenue also weakened in Q3.
- Regional performance was mixed: Q3 RevPAR rose 1.5% in the U.S., 6.0% in the Americas excluding the U.S., and 0.6% in Asia Pacific; it fell 0.7% in Europe and 2.6% in the Middle East and Africa. Management cited geopolitical and terrorism concerns as weighing on Europe and MEA occupancy.
Cash, debt and liquidity
- September 30 cash and cash equivalents were $859m, plus $272m restricted cash; total cash including restricted balances was $1.131bn. Current assets were $3.024bn and current liabilities $2.598bn, a 1.16 current ratio and $426m working-capital surplus.
- Nine-month operating cash flow was $936m, down from $991m, principally because cash taxes increased by $117m and interest paid rose by $12m, partly offset by improved operating results. Capital expenditures for property and equipment were $227m; net investing cash use was $332m.
- Total indebtedness was approximately $10.4bn, including $417m of timeshare debt. Balance-sheet long-term debt was $9.883bn, with $101m current maturities; timeshare debt was $337m, with $80m current maturities. The revolving credit facility had $955m available after $45m of letters of credit.
- Hilton issued $1.0bn of 4.25% senior notes due 2024 in August and amended $3.225bn of term loans, with the new tranche due 2023. It prepaid $991m of its CMBS loan in September. Dividends paid during the first nine months totaled $207m, or $0.21 per share.
- In October, after quarter-end, Hilton reported a further $1.967bn CMBS prepayment and new Park-bound CMBS loans of $725m and $1.275bn. The latter loan was secured by the Hilton Hawaiian Village and carried a fixed 4.1995% rate, with a 10-year term and no scheduled amortization.
Outlook, risks and unusual items
- No specific full-year earnings or RevPAR guidance is provided in the supplied filing text. Management said it believed existing cash and operating cash generation would meet anticipated operating needs and purchase commitments for the foreseeable future; it also identified debt service and capital spending as material liquidity requirements.
- The planned spin-offs were a major near-term transaction and drove additional costs: spin-off-related costs increased general and administrative expense by $27m in Q3 and $54m year to date. Hilton also completed related financing transactions before and after quarter-end.
- Income tax expense fell to $255m for the first nine months from $555m in 2015. Hilton released $220m of uncertain-tax-position reserves during the period; unrecognized tax benefits were $248m at quarter-end, down from $407m at year-end 2015.
- Hilton disputes IRS proposed adjustments for 2006–2010 that could result in approximately $874m of additional U.S. federal tax, excluding interest, penalties and potential state taxes. The company intends to contest the positions; it recognized a $44m unrecognized tax benefit related to certain appealed issues. The timing and outcome remain uncertain.
- Other exposures include eight hotel performance guarantees with possible cash outlays totaling approximately $89m, third-party guarantees of $25m, and approximately $195m of timeshare inventory purchase commitments over four years. Hilton stated that pending litigation was not expected to have a material overall effect, while acknowledging that an unfavorable resolution could affect results in a particular period.
- Risks highlighted include hospitality-industry and macroeconomic conditions, competition, reliance on third-party owners, real-estate exposure, international operations, foreign exchange and interest rates, indebtedness, and execution of the proposed spin-offs. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Important facts for investors to verify
- Progress, final terms, and completion conditions for the Park and Hilton Grand Vacations spin-offs, including which assets and liabilities transfer.
- How much of the $874m IRS proposed adjustment is ultimately sustained, and the related interest, penalties, state-tax exposure, and reserve requirements.
- Post-quarter CMBS refinancing and prepayments, remaining debt balances and maturities, collateral restrictions, and liquidity available to Hilton and the spin-off entities.
- Whether management and franchise growth and RevPAR trends offset continued softness in owned hotels and timeshare operating costs.
- Cash-flow conversion, tax payments, capital spending, and dividend capacity; restricted cash is not generally available for unrestricted corporate use.