Business context and reporting period
Hilton Worldwide Holdings Inc. filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2015. Hilton operates owned and leased hotels, manages and franchises hotels, and sells and operates timeshare properties. At quarter-end, it reported 4,480 hotels and resorts with 737,922 rooms in 97 countries and territories, plus 45 timeshare properties.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $2.895B | $2.644B | $8.416B | $7.674B |
| Operating income | $663M | $445M | $1.580B | $1.218B |
| Net income attributable to Hilton | $279M | $183M | $590M | $515M |
| Diluted EPS | $0.28 | $0.19 | $0.60 | $0.52 |
| Adjusted EBITDA | $758M | $669M | $2.134B | $1.851B |
Revenue rose 9.5% in Q3 and 9.7% year to date. Operating income included asset-sale gains of $164M in Q3 and $306M year to date, versus none in 2014; reported operating margins were 22.9% and 16.8% in Q3 2015 and 2014, respectively, and are affected by these gains. Adjusted EBITDA increased 13.3% in Q3 and 15.3% year to date. Comparable system-wide RevPAR rose 5.8% in Q3 and 5.9% year to date, with growth in occupancy and ADR.
Nine-month operating cash flow was $991M, compared with $899M. Investing activities provided $515M, primarily reflecting disposition proceeds, against $1.410B of acquisition spending; financing activities used $1.427B, including debt repayments and $69M in dividends. Cash and cash equivalents were $628M at September 30; restricted cash was an additional $276M. Current assets exceeded current liabilities by $88M, and the current ratio was 1.03.
Total indebtedness was approximately $10.8B, including $755M of non-recourse debt. The company had $955M available under its $1.0B revolving credit facility. Long-term debt declined from year-end, reflecting term-loan prepayments and repayment of the Waldorf Astoria New York mortgage. Hilton made a further voluntary $100M term-loan prepayment in October, after quarter-end.
Material changes and unusual items
- Hilton sold the Waldorf Astoria New York for $1.95B and Hilton Sydney for AUD 442M, recognizing respective pre-tax gains of $143M and $163M. Proceeds supported debt repayment and a tax-deferred real-estate exchange.
- Hilton acquired five hotels for a total purchase price of $1.76B and the Juniper Hotel Cupertino for $112M as part of that exchange. The acquisitions included assumption of a $450M mortgage.
- Q3 management and franchise fees increased 14.3%, and timeshare revenue increased 13.2%. Owned and leased hotel revenue was nearly flat, with U.S. growth offset by foreign-exchange effects and portfolio changes internationally.
- General and administrative expense rose 21.8% in Q3 and 41.3% year to date, largely due to severance costs and Promote Plan compensation. Remaining Promote Plan awards vested in May, generating $64M of compensation expense.
- Income-tax expense rose to $247M in Q3 and $555M year to date. Hilton cited asset-sale goodwill reductions and compensation costs without tax benefits as contributors to its higher effective tax rate.
Outlook, risks and contingencies
The filing provides no specific financial guidance. Management reported a development pipeline of 1,555 hotels and approximately 260,000 rooms across 85 countries and territories; more than half of the rooms were under construction. Hilton said it expects its share of rooms outside the U.S. to increase as pipeline hotels open.
Hilton identified hospitality-industry and macroeconomic conditions, competition, third-party owner relationships, owned real estate, international operations, technology and indebtedness as risks to results. It reported no material change to previously disclosed risk factors and said it believed cash and operating cash generation would meet anticipated requirements for the foreseeable future. Interest-rate and foreign-exchange exposure remained; derivatives were used for hedging, not speculation.
The IRS proposed adjustments for 2006 and part of 2007 that Hilton said could result in approximately $696M of additional federal tax, excluding interest, penalties and potential state taxes. Hilton disputes the assertions, intends to contest them, and had recorded no accrual. Unrecognized tax benefits totaled $407M at quarter-end. Other routine litigation was not expected by the company to have a material overall effect, though an unfavorable resolution could affect results in a particular period.
Other commitments include up to approximately $102M of possible cash outlays under hotel performance guarantees, $88M of owned-property capital commitments, and a $60M junior mezzanine loan commitment. Management concluded disclosure controls were effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Separate recurring hotel and fee performance from the $306M of year-to-date asset-sale gains when assessing earnings and margins.
- Review the outcome and potential financial exposure of the IRS tax dispute, along with the company’s broader tax contingencies.
- Assess debt service and refinancing exposure, including the 2018 debt maturities and the variable-rate Bonnet Creek and CMBS borrowings.
- Track whether RevPAR growth, new managed and franchised hotels, and the development pipeline translate into sustained fee and cash-flow growth.
- Evaluate timeshare sales economics, receivable credit quality, and the listed guarantees and contractual commitments.