Huazhu Group Limited (the “Company”) completed the acquisition of all shares of Steigenberger Hotels Aktiengesellschaft (“Deutsche Hospitality”) on January 2, 2020. The financial statements of Deutsche Hospitality for the year ended December 31, 2019 were prepared in accordance with the International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board. The unaudited pro forma condensed combined financial information included in Exhibit 99.2 to this report on Form6-K has been prepared using the acquisition method of accounting under existing U.S. generally accepted accounting principles, or U.S. GAAP. The unaudited pro forma condensed combined financial information is based on certain assumptions and pro forma adjustments, which are preliminary and subject to further revisions as additional information becomes available and additional analyses are performed, including the final assessment of the determination of differences between IFRS and U.S. GAAP, and of the application of purchase price adjustments, and which have been made solely for the purpose of providing unaudited pro forma condensed combined financial information. The table below sets forth the reconciliation of EBITDA to unaudited net loss extracted from the unaudited pro forma condensed combined financial information, which is the most directly comparable U.S. GAAP measure, for the year ended December 31, 2019 of Deutsche Hospitality:
| | | | |
| | | Year Ended
December 31, | |
| | | 2019 | |
| | | (EUR in millions) | |
Unaudited net loss attributable to Deutsche Hospitality (U.S. GAAP) | | | (2 | ) |
Interest income | | | (0 | ) |
Interest expense | | | 13 | |
Income tax expense | | | 3 | |
Depreciation and amortization | | | 28 | |
| | | | |
EBITDA(Non-GAAP) | | | 42 | |
| | | | |
Note:
The Company uses earnings before interest income, interest expense, income tax expense (benefit) and depreciation and amortization, or EBITDA, anon-GAAP financial measure, to assess Deutsche Hospitality’s results of operations before the impact of investing and financing transactions and income taxes. Given the significant investments that Deutsche Hospitality has made in leasehold improvements, depreciation and amortization expense comprises a significant portion of Deutsche Hospitality’s cost structure. The Company believes that EBITDA is widely used by other companies in the lodging industry and may be used by investors as a measure of Deutsche Hospitality’s financial performance.
The presentation of EBITDA should not be construed as an indication that future results of Deutsche Hospitality will be unaffected by other charges and gains that Company considers to be outside the ordinary course of Deutsche Hospitality’s business. The use of EBITDA has certain limitations. Depreciation and amortization expense, income tax, interest income and interest expense have been and will be incurred and are not reflected in the presentation of EBITDA. Each of these items should also be considered in the overall evaluation of the results of Deutsche Hospitality. Additionally, EBITDA does not consider capital expenditures or other investing activities and should not be considered as a measure of Deutsche Hospitality’s liquidity.
The term EBITDA is not defined under U.S. GAAP or IFRS, and EBITDA is not a measure of net income, operating income, operating performance or liquidity presented in accordance with U.S. GAAP or IFRS. When assessing the operating and financial performance of Deutsche Hospitality, you should not consider these data in isolation or as a substitute for its net income, operating income or any other operating performance measure that is calculated in accordance with U.S. GAAP. In addition, EBITDA of Deutsche Hospitality may not be comparable to EBITDA or similarly titled measures utilized by other companies since such other companies may not calculate EBITDA in the same manner as the Company does for Deutsche Hospitality.
