Hilton Worldwide Holdings Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparisons are with Q1 2015 unless stated otherwise. Amounts are in millions of dollars except per-share data and operating statistics. Hilton operates owned and leased hotels, manages and franchises hotels, and runs a timeshare business. At quarter-end, its system included 4,615 hotels and resorts and 46 timeshare properties across 102 countries and territories.
Financial performance and liquidity
| Metric | Q1 2016 | Q1 2015 | Change / note |
|---|---|---|---|
| Total revenue | $2,750 | $2,599 | Up 5.8%; includes $1,071 of managed- and franchised-property revenues, matched by corresponding expenses. |
| Operating income | $409 | $490 | Prior period included a $145 net gain on asset sales, primarily the Waldorf Astoria New York sale. |
| Net income attributable to Hilton stockholders | $309 | $150 | EPS was $0.31 versus $0.15; 2016 included a $46 income tax benefit. |
| Adjusted EBITDA | $653 | $599 | Up 9.0%; non-GAAP measure, as defined by Hilton. |
| Cash from operating activities | $312 | $286 | Up $26, mainly from improved operating results, partly offset by higher cash taxes. |
| Cash used in investing activities | $96 | Cash provided: $465 | 2016 primarily reflected capital spending; 2015 included tax-deferred exchange proceeds. |
| Cash used in financing activities | $137 | $761 | 2016 included $69 of dividends; 2015 included larger debt repayments. |
| Cash and cash equivalents | $692 | $609 at Dec. 31, 2015 | Additional restricted cash was $281; total cash including restricted cash was $973. |
| Debt | $10.4 billion | — | Total indebtedness including $473 of timeshare debt; excludes Hilton’s share of affiliate debt. |
Current assets were $2,738 and current liabilities $2,545 at March 31, 2016, a current ratio of 1.08 and working-capital surplus of $193. Hilton reported $9,878 of long-term debt and $97 of current maturities of long-term debt. Its $1.0 billion revolving facility had $955 of borrowing capacity available after letters of credit.
Operating trends and changes versus prior period
- Comparable system-wide RevPAR increased 2.1%, with ADR up 2.5% and occupancy down 0.3 percentage points to 70.2%. Management attributed some occupancy softness to the shift in Easter timing.
- Regional RevPAR grew fastest in Asia Pacific, up 7.1%; Middle East and Africa declined 4.7%, which Hilton attributed to regional turmoil and travel concerns.
- Management and franchise fees and other revenue rose 4.0% to $386. Hilton added 301 managed and franchised properties net, adding 45,669 rooms over the preceding 12 months.
- Timeshare revenue increased 1.6% to $326, while timeshare Adjusted EBITDA increased to $95 from $74, mainly due to lower expenses.
- Owned and leased hotel revenue was nearly flat at $967. International revenue was affected by foreign currency and property dispositions; U.S. revenue benefited partly from properties acquired in 2015.
- Adjusted EBITDA increased across ownership, management and franchise, and timeshare. GAAP operating income declined from the prior-year period, which included the Waldorf Astoria New York sale gain.
Outlook, risks, contingencies and unusual items
- Hilton announced in February 2016 a plan to separate a substantial portion of its ownership business, primarily U.S. owned hotels, and its timeshare business into two additional publicly traded companies. The filing provides no quantified transaction timetable or financial guidance.
- Management said operating cash and cash generated from operations should be adequate for anticipated operating needs and purchase commitments for the foreseeable future. Growth plans include expanding the fee-based management and franchise business; the development pipeline was 1,729 hotels and approximately 281,000 rooms.
- The effective tax rate and reported earnings were materially affected by tax items. Hilton released $218 of reserves for uncertain tax benefits during the quarter. It also recorded a $49 unrecognized tax benefit related to issues under IRS appeal.
- The IRS proposed adjustments for tax years 2006 through 2010 that Hilton estimates could result in approximately $874 of additional federal tax, excluding interest, penalties and possible state taxes. Hilton disputes the proposed positions and intends to contest them; the amount is not a final tax assessment.
- Commitments include approximately $195 to purchase timeshare inventory over four years, $96 of capital expenditure commitments under third-party contracts, and a $60 junior mezzanine loan commitment. Hotel performance guarantees had possible cash outlays of approximately $86.
- Hilton cited exposure to hospitality-industry and macroeconomic conditions, competition, third-party hotel owners, international operations, indebtedness, interest rates, foreign exchange, and the proposed separations. It reported no material change in previously disclosed risk factors, no material change in internal control, and no litigation expected to materially affect consolidated results, financial position or cash flows.
Important facts for investors to verify
- Progress, terms, timing, costs and financing implications of the announced separations.
- Resolution of IRS examinations and appeals, including the proposed $874 tax adjustment and the recorded uncertain tax benefits.
- Debt maturities, covenant and collateral restrictions, and availability of the revolving credit facility; Hilton’s contractual maturity schedule includes significant 2018 and 2020 maturities.
- Whether RevPAR growth and the development pipeline translate into sustained fee growth, given regional weakness and lower occupancy.
- Cash generation after working-capital needs, capital expenditures, dividends, timeshare inventory commitments and other contractual obligations; Adjusted EBITDA is non-GAAP and is not cash available for debt service or investment.