Hilton Worldwide Holdings Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Amounts are in U.S. dollars unless stated otherwise. Hilton operates owned and leased hotels, manages and franchises hotels, and conducts timeshare operations. At quarter-end, its system included 4,318 hotels and resorts with 713,883 rooms across 94 countries and territories, plus 44 timeshare properties.
Financial performance and liquidity
- Revenue: $2.599 billion, up 10.0% from $2.363 billion. Management and franchise fees and other revenue rose 18.9% to $371 million; timeshare revenue rose 15.1% to $321 million; owned and leased hotel revenue rose 1.3% to $957 million. The $950 million of other revenues from managed and franchised properties is accompanied by corresponding expenses.
- Profit: Operating income was $490 million versus $338 million. Net income attributable to Hilton stockholders was $150 million, or $0.15 per diluted share, compared with $123 million, or $0.12 per share. Q1 2015 operating income included a $146 million gain on the Waldorf Astoria New York sale.
- Margins: Operating income was approximately 18.9% of reported revenue, versus 14.3% in Q1 2014; net income attributable to Hilton stockholders was approximately 5.8% versus 5.2%. These ratios use consolidated revenue, including managed-property revenue with matching expenses. Adjusted EBITDA was $599 million, up 17.9% from $508 million.
- Comparable hotel trends: System-wide RevPAR increased 6.6%, with occupancy up 2.1 percentage points and ADR up 3.5%. Managed and franchised RevPAR increased 6.9%; owned and leased RevPAR increased 3.4%. Asia Pacific RevPAR rose 10.1%, although ADR declined 0.1% as Hilton sought to generate demand in certain markets.
- Cash flow: Operating cash flow was $286 million, versus $147 million. Capital expenditures were $88 million, versus $43 million; operating cash flow less these expenditures was $198 million. Investing cash flow was positive $465 million, reflecting $1.869 billion of asset-sale proceeds and $1.298 billion of acquisition payments. Financing cash flow was negative $761 million, including debt repayments. Cash and cash equivalents ended at $547 million, down $19 million from year-end; restricted cash was $269 million.
- Debt and liquidity: Total debt, including non-recourse debt, was approximately $11.5 billion; reported long-term and non-recourse debt balances were $10.572 billion and $711 million, respectively, with $147 million of current maturities. The current ratio was 1.08 and working-capital surplus was $191 million. Hilton had $955 million of available capacity under its $1.0 billion revolving credit facility. It prepaid $150 million of term loans during the quarter.
- Other balance-sheet data: Total assets were $25.905 billion and total equity $4.622 billion at March 31, 2015. Goodwill declined to $5.916 billion, principally reflecting the Waldorf Astoria New York disposal.
Material changes versus Q1 2014
- Growth in comparable RevPAR and additions to the managed and franchised system supported higher fee revenue. Hilton added 202 franchised properties and 10 managed properties on a net basis year over year.
- Management and franchise Adjusted EBITDA increased to $391 million from $331 million; ownership Adjusted EBITDA rose to $190 million from $175 million. Timeshare Adjusted EBITDA fell to $74 million from $82 million, as expense growth exceeded revenue growth.
- Q1 2015 results included the Waldorf Astoria New York sale and the acquisition of five properties—Waldorf Astoria Orlando, Hilton Orlando Bonnet Creek, Casa Marina, The Reach, and Parc 55—as part of a tax-deferred real-property exchange. Hilton reported a $1.95 billion sale price and a $1.76 billion purchase price for the acquired properties.
- Currency movements reduced reported international owned and leased hotel revenue by $51 million; on a currency-neutral basis, it increased $16 million. Foreign-currency transactions produced an $18 million loss versus a $14 million gain in Q1 2014.
- Income tax expense increased to $163 million from $83 million, reflecting higher pretax income and a higher effective rate, including the non-deductible goodwill reduction on the Waldorf sale and foreign losses for which no tax benefit was recognized. A foreign tax-rate change also generated $6 million of tax expense.
- General, administrative and other expense increased to $127 million from $97 million, including higher severance costs and the prior-year benefit from reversing accruals for a discontinued cash-based incentive plan.
Outlook, risks, contingencies and unusual items
- Outlook: The filing provides no specific full-year financial guidance. Hilton said it expected further growth in the share of rooms outside the U.S. as pipeline hotels open. Its development pipeline comprised 1,432 hotels and approximately 240,000 rooms in 81 countries and territories; over half the pipeline rooms were under construction. Management said operating cash and cash generated from operations were expected to meet anticipated needs for the foreseeable future, while noting that actual results may differ and interim results are not necessarily indicative of full-year performance.
- Debt and market exposure: Hilton’s substantial indebtedness creates ongoing interest and repayment obligations. Its ability to service debt depends on future operating performance; management identified reduced capital expenditures, additional equity issuance, or revolver borrowings as possible responses if operating cash flow is insufficient. The company is exposed to interest-rate and foreign-exchange movements and uses derivatives for hedging, not speculation.
- Tax dispute: Hilton reported $401 million of unrecognized tax benefits. The IRS proposed approximately $696 million of additional federal tax, excluding interest, penalties and potential state taxes, relating to disputed issues for 2006 and October 2007. Hilton disputed the positions, intended to contest them, and had not accrued the proposed amount. It said up to $25 million of unrecognized tax benefits could decrease over the next 12 months as examination issues are resolved.
- Commitments and litigation: Possible cash outlays under seven hotel performance guarantees totaled approximately $109 million; Hilton had recorded related liabilities for certain guarantees. Other disclosed commitments included $110 million for property capital expenditures, a $60 million hotel-construction mezzanine loan commitment, and approximately $92 million of timeshare inventory purchases subject to specified conditions. Hilton also disclosed ordinary-course litigation and a remaining potential exposure of approximately $30 million under a legacy guarantee; it considered material payment under that guarantee remote.
- Subsequent events: In April, Hilton agreed to acquire an additional property for $112 million in its tax-deferred exchange, made a $100 million term-loan prepayment, and agreed to sell the Hilton Sydney for A$442 million. The Sydney sale was expected to close in Q2 2015, subject to customary conditions; Hilton planned to use net proceeds primarily to reduce debt and continue operating the hotel under a 50-year management agreement.
- Controls: Management concluded disclosure controls were effective at quarter-end and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much of the quarter’s earnings growth is attributable to the $146 million Waldorf Astoria New York sale gain, and how recurring operating performance compares without that item.
- Whether the Hilton Sydney sale closed on the stated terms and how proceeds affected term-loan balances and interest expense.
- The outcome and potential cash or tax consequences of the IRS dispute, including any interest, penalties, or state-tax exposure.
- Timeshare profitability and financing-receivable credit quality, given the decline in segment Adjusted EBITDA and the reported allowance for uncollectible receivables.
- Debt maturities, restricted cash availability, and performance against hotel guarantee, capital-expenditure, and other contractual commitments.