SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -------------------
Commission file number 1-3427
HILTON HOTELS CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 36-2058176
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
9336 CIVIC CENTER DRIVE, BEVERLY HILLS, CALIFORNIA 90210
(Address of principal executive offices) (Zip code)
(310) 278-4321
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of July 31, 2000 --- Common Stock, $2.50 par value ---
368,509,236 shares.
PART I FINANCIAL INFORMATION
Company or group of companies for which report is filed:
HILTON HOTELS CORPORATION AND SUBSIDIARIES
ITEM 1. FINANCIAL STATEMENTS
Three months ended Six months ended
CONSOLIDATED STATEMENTS OF INCOME June 30, June 30,
(in millions, except per share amounts) 1999 2000 1999 2000
- --------------------------------------------------------------------------------------------------------------- -------------------
Revenue Owned hotels $ 467 644 868 1,198
Leased hotels - 105 - 197
Management and franchise fees 26 93 51 175
Other fees and income 46 74 95 139
--------------------------------------------------------------------------- -------------------
539 916 1,014 1,709
Expenses Owned hotels 290 396 560 767
Leased hotels - 94 - 180
Depreciation and amortization 43 96 81 188
Other operating expenses 39 62 78 117
Corporate expense, net 13 18 25 34
--------------------------------------------------------------------------- -------------------
385 666 744 1,286
--------------------------------------------------------------------------- -------------------
Operating Income 154 250 270 423
Interest and dividend income 13 22 26 41
Interest expense (54) (113) (106) (225)
Interest expense, net, from unconsolidated affiliates - (4) (1) (7)
Net gain on asset dispositions - - - 29
--------------------------------------------------------------------------- -------------------
Income Before Income Taxes
and Minority Interest 113 155 189 261
Provision for income taxes (45) (65) (76) (110)
Minority interest, net (2) (2) (5) (5)
--------------------------------------------------------------------------- -------------------
Income Before Cumulative
Effect of Accounting Change 66 88 108 146
Cumulative effect of accounting change,
net of tax benefit of $1 - - (2) -
--------------------------------------------------------------------------- -------------------
Net Income $ 66 88 106 146
============================================================================================================ ===================
Basic Earnings Per Share Income before cumulative effect
of accounting change $ .26 .24 .42 .40
Cumulative effect of accounting change - - (.01) -
--------------------------------------------------------------------------- -------------------
Net Income Per Share $ .26 .24 .41 .40
============================================================================================================ ===================
Diluted Earnings Per Share Income before cumulative effect
of accounting change $ .25 .23 .41 .39
Cumulative effect of accounting change - - (.01) -
--------------------------------------------------------------------------- -------------------
Net Income Per Share $ .25 .23 .40 .39
============================================================================================================ ===================
1
see notes to consolidated financial statements
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS December 31, June 30,
(in millions) 1999 2000
- ----------------------------------------------------------------------------------------------------------------
Assets Cash and equivalents $ 104 108
Accounts receivable, net 396 434
Inventories 90 115
Deferred income taxes 15 15
Current portion of notes receivable 78 99
Other current assets 80 79
------------------------------------------------------------------------------------
Total current assets 763 850
Investments and notes receivable 676 599
Long-term receivable 625 625
Property and equipment, net 3,892 3,926
Management and franchise contracts, net 647 622
Leases, net 216 211
Brands, net 1,048 1,035
Goodwill, net 1,277 1,269
Other assets 109 107
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Total investments, property and other assets 8,490 8,394
------------------------------------------------------------------------------------
Total Assets $ 9,253 9,244
================================================================================================================
Liabilities and Accounts payable and accrued expenses $ 615 523
Stockholders' Equity Current maturities of long-term debt 9 5
Income taxes payable 5 44
------------------------------------------------------------------------------------
Total current liabilities 629 572
Long-term debt 6,085 6,026
Deferred income taxes and other liabilities 1,124 1,110
Stockholders' equity 1,415 1,536
------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 9,253 9,244
================================================================================================================
2
see notes to consolidated financial statements
HILTON HOTELS CORPORATION AND SUBSIDIARIES Six months ended
CONSOLIDATED STATEMENTS OF CASH FLOW June 30,
(in millions) 1999 2000
- --------------------------------------------------------------------------------------------------------------
Operating Activities Net income $ 106 146
Adjustments to reconcile net income to net cash provided
by operating activities:
Cumulative effect of accounting change 2 -
Depreciation and amortization 81 188
Amortization of loan costs 1 4
Gain on asset dispositions - (29)
Change in working capital components:
Receivables, inventories and other current assets 14 (66)
Accounts payable and accrued expenses (63) (94)
Income taxes payable 1 39
Change in deferred income taxes 3 (19)
Change in other liabilities (5) 5
Unconsolidated affiliates' distributions (less than)
in excess of earnings (5) 33
Other 8 (9)
----------------------------------------------------------------------------------------
Net cash provided by operating activities 143 198
- --------------------------------------------------------------------------------------------------------------
Investing Activities Capital expenditures (63) (178)
Additional investments (49) (61)
Proceeds from asset dispositions - 71
Payments on notes and other 36 51
Acquisitions, net of cash acquired (237) -
----------------------------------------------------------------------------------------
Net cash used in investing activities (313) (117)
- --------------------------------------------------------------------------------------------------------------
Financing Activities Change in commercial paper borrowings and revolving loans 287 (59)
Reduction of long-term debt (1) (4)
Issuance of common stock 2 -
Purchase of common stock (90) -
Cash dividends (10) (14)
----------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 188 (77)
- --------------------------------------------------------------------------------------------------------------
Increase in Cash and Equivalents 18 4
Cash and Equivalents at Beginning of Year 47 104
- --------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 65 108
==============================================================================================================
3
see notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
The consolidated financial statements presented herein have been prepared by
Hilton Hotels Corporation (Hilton or the Company) in accordance with the
accounting policies described in its 1999 Annual Report to Stockholders and
should be read in conjunction with the Notes to Consolidated Financial
Statements which appear in that report.
The statements for the three and six months ended June 30, 1999 and 2000 are
unaudited; however, in the opinion of management, all adjustments (which include
only normal recurring accruals) have been made which are considered necessary to
present fairly the operating results and financial position for the unaudited
periods.
The consolidated financial statements for prior periods reflect certain
reclassifications to conform with classifications adopted in the current period.
These reclassifications have no effect on net income.
NOTE 2: EARNINGS PER SHARE
Basic EPS is computed by dividing net income available to common stockholders
by the weighted average number of common shares outstanding for the period.
The weighted average number of common shares outstanding totaled 368 million
for both the three and six months ended June 30, 2000, and 257 million and
259 million for the three months and six months ended June 30, 1999,
respectively. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted. The dilutive effect of the assumed exercise of stock options and
convertible securities increased the weighted average number of common shares
by 23 million for both the three and six months ended June 30, 2000 and 24
million for both the three and six months ended June 30, 1999. In addition,
the increase to net income resulting from interest on convertible securities
assumed to have not been paid was $3.7 million for each of the three month
periods ended June 30, 1999 and 2000 and $7.3 million for each of the six
month periods ended June 30, 1999 and 2000.
NOTE 3: SUPPLEMENTAL CASH FLOW INFORMATION
Six months ended
June 30,
1999 2000
---- ----
(in millions)
Cash paid during the period for the following:
Interest, net of amounts capitalized $ 87 190
Income taxes 52 67
NOTE 4: COMPREHENSIVE INCOME
Three months ended Six months ended
June 30, June 30,
1999 2000 1999 2000
---- ---- ---- ----
(in millions) (in millions)
Net income $ 66 88 106 146
Change in unrealized gains and losses, net of tax 13 2 14 (13)
-------- -------- -------- -------
Comprehensive income $ 79 90 120 133
======== ======== ======== =======
4
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The Company is primarily engaged in the ownership, management and franchising
of hotels. At June 30, 2000, the Company's hotel system contained 1,827
properties totaling approximately 310,000 rooms worldwide. The Company's
brands include Hilton, Hilton Garden Inn, Doubletree, Embassy Suites, Hampton
Inn, Homewood Suites by Hilton, Red Lion, Conrad and Harrison Conference
Centers. The Company's hotel system also includes certain properties that are
not Company-branded. In addition, the Company develops and operates vacation
ownership resorts through Hilton Grand Vacations Company and its related
entities, which are wholly owned by the Company. The Company is also engaged
in various other activities incidental or related to the operation of hotels.
DEVELOPMENT
OVERVIEW
Hilton intends to grow its brands primarily through franchising and the addition
of management contracts. In addition, the Company will continue to review its
hotel portfolio in light of the November 30, 1999 acquisition of Promus Hotel
Corporation ("Promus") for potential repositioning or re-branding opportunities
and may seek to sell certain owned assets. The Company did not purchase any
hotel properties in the first six months of 2000 and acquisition spending is not
expected to be significant in the remainder of the year.
During the first half of 2000, the Company added a total of 94 hotels and
over 13,500 rooms to its portfolio, including an increase of 87 franchise
properties. A total of 19 properties and approximately 4,000 rooms were
removed from the Company's system, primarily former Promus brand franchise
hotels which did not meet the Company's quality standards. The Company
expects the number of removals from the system to decrease from the level
experienced in the first half of 2000. The Company's development pipeline for
2000 and 2001 totals more than 400 hotels and 60,000 rooms either open, under
construction or in design, with Hampton Inn, Hilton Garden Inn and Homewood
Suites by Hilton accounting for most of the new development. The Company
continued to develop its strong pipeline in the first half of 2000 by
approving 115 new hotels, primarily franchises, representing approximately
15,000 rooms. Our ability to grow the number of franchised and managed hotels
is affected by, among other things, national and regional economic
conditions, capital markets, credit availability, relationships with
franchisees and owners as well as competition from other hotel franchisors
and managers.
5
Properties by brand at June 30, 2000 are as follows:
HOTELS ROOMS
------ -------
Hilton 227 84,522
Hilton Garden Inn 79 11,205
Doubletree 158 43,088
Embassy Suites 155 37,831
Homewood Suites by Hilton 91 9,976
Hampton 1,026 106,603
Other 91 16,556
Total ------- ---------
1,827 309,781
======= =========
STRATEGIC ALLIANCES AND JOINT VENTURES
In 1997, the Company entered into agreements with Hilton Group plc, whose wholly
owned subsidiary Hilton International Co. ("HI") owns the rights to the Hilton
name outside the United States. The agreements provide for the reunification of
the Hilton brand worldwide through a strategic alliance between the companies,
including cooperation on sales and marketing, loyalty programs and other
operational matters. Pursuant to these agreements, the Company and HI launched
the Hilton HHonors Worldwide loyalty program ("HHonors"). On April 3, 2000,
HHonors was expanded to include the Hampton Inn, Doubletree, Embassy Suites and
Homewood Suites by Hilton brands. During the second quarter, HHonors related
stays accounted for 15 percent of total stays at these four brands. HHonors is
now featured in more than 2,000 hotels worldwide and has total membership of
approximately 9 million travelers. The Company anticipates HHonors membership
will increase to nearly 11 million by year end, with approximately 10 percent of
the new members enrolling through the Hilton.com website. The Company expects
the expansion of HHonors to continue to have a positive impact on all the brands
that participate in the program.
As of June 30, 2000, the Company leased 51 properties from RFS Hotel Investors,
Inc. ("RFS"). In January 2000, the Company entered into an agreement which gives
RFS the option to terminate these leases. As consideration for terminating the
leases, RFS will pay the Company approximately $60 million. As part of the
agreement, the Company has the option of requiring RFS to repurchase convertible
preferred stock of RFS currently owned by Hilton for approximately $13 million.
If RFS elects not to terminate the leases, the Company will have the right to
require RFS to redeem the convertible preferred stock for $13.75 million. RFS
may elect to pay all or part of the purchase price for the preferred shares in
the form of RFS common stock. It is anticipated that the lease termination and
repurchase of the convertible preferred stock will be accomplished
simultaneously in the first quarter of 2001.
6
ACQUISITIONS AND CAPITAL SPENDING
On November 30, 1999, Hilton completed the acquisition of Promus. As a result of
the Promus acquisition, the Company expanded its hotel count by over 1,450
properties representing more than 200,000 rooms. The Promus acquisition has
created a more diversified and balanced income stream by increasing the
percentage of revenue the Company derives from management and franchise fees
which require little or no ongoing capital investment by the Company. The
integration of Promus was substantially completed during the first quarter of
2000. The Company believes the Promus acquisition has and will continue to yield
significant synergies, economies of scale and revenue enhancements by providing
greater opportunity for expansion with multiple brands and market segments;
spreading overhead over a wider base of properties; and including the Promus
brands in Hilton's HHonors program, its central reservation system and its sales
and marketing initiatives. Based on the success of the integration efforts to
date, the Company believes it will exceed its synergy targets for the year.
Capital expenditures at owned properties during the first half of 2000 totaled
$178 million, representing maintenance capital expenditures and several
significant renovation and construction projects. These projects include the
453-room Kalia Tower at the Hilton Hawaiian Village, which will feature a world
class health club and wellness spa, exciting retail shops and an interactive
Hawaiian cultural center. Construction on the project is scheduled to be
completed in Spring 2001. Renovation and construction projects are also underway
at the Hilton Seattle Airport and the Hilton Portland. The Seattle project
includes renovating existing rooms and constructing a 222-room addition, while
the Portland project involves construction of a 319-room tower addition. The
Company is also currently constructing four new Homewood Suites by Hilton
properties. New investments during the first half of 2000 totaled $61 million,
consisting primarily of loans related to financing of Hilton Grand Vacation
timeshare unit sales.
Construction continued on a 275-unit vacation ownership resort at the Hilton
Hawaiian Village. Interval sales commenced during the first quarter of 2000
and are well ahead of forecast. The project is expected to open in Spring 2001.
Construction costs associated with timeshare intervals are reflected as
inventory until the intervals are sold.
During 2000, the company anticipates spending approximately $300 million on
renovation and construction projects, as well as approximately $300 million on
normal capital replacements, upgrades and technology. Expenditures required to
complete capital spending programs in 2000 will be financed through available
cash flows and general corporate borrowings.
7
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities totaled $143 million and $198
million for the six months ended June 30, 1999 and 2000, respectively. The
increase was primarily attributable to continued strength at many of the
Company's owned full-service hotels and the benefit of cash flow from the
hotel properties acquired in the Promus acquisition. Net cash used in
investing activities was $313 million in 1999 compared to $117 million in
2000. The net decrease of $196 million was due primarily to proceeds received
from the sale of securities in the first quarter of 2000 and the impact of
hotel acquisition spending in the 1999 first half. Net cash provided by
financing activities totaled $188 million in the 1999 first half and net cash
used in financing activities totaled $77 million in the 2000 first half. The
decrease in cash provided is primarily attributable to the change in
commercial paper borrowings and revolving loans in the first half of 2000 in
comparison to the 1999 first half.
Cash and equivalents totaled $108 million at June 30, 2000, an increase of $4
million from December 31, 1999. Hilton believes that its operating cash flow,
available borrowings under its revolving credit facilities, and the Company's
ability to obtain additional financing through various financial markets are
sufficient to meet its liquidity needs.
FINANCING
The Company has two revolving credit facilities: a $1.75 billion revolving
credit facility which expires in 2001 and a $1.85 billion revolving credit
facility, consisting of a $1.4 billion five-year revolver which expires in
2004 and a $450 million 364-day revolver which expires in 2000. As of June
30, 2000, $1.67 billion of borrowings were outstanding under the $1.75
billion facility, $1.26 billion of borrowings were outstanding under the $1.4
billion revolver, $86 million of the $1.4 billion revolver supported the
issuance of commercial paper and the $450 million 364-day revolver was
undrawn. The total revolving debt capacity available to the Company as of
June 30, 2000 is approximately $550 million. The Company anticipates
extending the term and reducing the commitment under the $1.75 billion
facility in the second half of 2000.
In October 1997, the Company filed a shelf registration statement ("Shelf") with
the Securities and Exchange Commission registering up to $2.5 billion in debt or
equity securities. At June 30, 2000, available financing under the Shelf totaled
$2.1 billion. The terms of any additional securities offered pursuant to the
Shelf will be determined by market conditions at the time of issuance.
8
On December 31, 1998, the Company completed a spin-off of the Company's
gaming business to a new corporation named Park Place Entertainment
Corporation ("Park Place"). The 1999 and 2000 debt balances include $625
million of long-term debt which, although allocated to Park Place under a
debt assumption agreement, remains the legal obligation of Hilton. At the
time of the spin-off, Park Place assumed and agreed to pay 100% of the amount
of each payment required to be made by Hilton under the terms of the
indentures governing Hilton's $300 million 7.375% Senior Notes due 2002 and
its $325 million 7% Senior Notes due 2004. These notes remain in Hilton's
long-term debt balance and a long-term receivable from Park Place in an equal
amount is included in the Company's 1999 and 2000 consolidated balance
sheets. In the event of an increase in the interest rate on these notes as a
result of certain actions taken by Hilton or in certain other limited
circumstances, Hilton will be required to reimburse Park Place for any such
increase. Hilton is obligated to make any payment Park Place fails to make,
and in such event Park Place would be obligated to pay to Hilton the amount
of such payment together with interest, at the rate per annum borne by the
applicable notes plus two percent, to the date of reimbursement.
As of June 30, 2000, approximately 67% of the Company's long-term debt
(excluding the Park Place allocated debt) bears interest at floating rates.
The Company is currently seeking to balance its exposure to changes in
short-term interest rates by refinancing a portion of its floating rate debt
in the form of a long-term secured borrowing. The Company expects to finalize
a secured debt refinancing by October 31, 2000.
STOCKHOLDERS' EQUITY
Dividends paid on common shares were $.02 per share for the three month periods
ended June 30, 1999 and 2000, and $.04 for the six month periods ended June 30,
1999 and 2000.
9
RESULTS OF OPERATIONS
The following discussion presents an analysis of the Company's results of
operations for the three and six months ended June 30, 1999 and 2000. EBITDA
(earnings before interest, taxes, depreciation, amortization, pre-opening
expense and non-cash items) is presented supplementally in the tables below
and in the discussion of operating results because management believes it
allows for a more complete analysis of results of operations. Non-cash items,
such as asset write-downs and impairment losses, are excluded from EBITDA as
these items do not impact operating results on a recurring basis. EBITDA can
be computed by adding depreciation, amortization, pre-opening expense,
interest and dividend income from investments related to operating activities
and non-cash items to operating income. This information should not be
considered as an alternative to any measure of performance as promulgated
under generally accepted accounting principles (such as operating income or
net income), nor should it be considered as an indicator of the overall
financial performance of the Company. The Company's calculation of EBITDA may
be different from the calculation used by other companies and therefore
comparability may be limited.
The Company operates in one business segment, hospitality and leisure. The
Company's results are significantly affected by growth in the number of
available rooms through acquisition and development, occupancy and room rates
achieved by hotels, the Company's ability to manage costs and the relative mix
of owned, leased, managed and franchised hotels.
Although the supply-demand balance in the Company's major markets generally
remains favorable, future operating results could be adversely impacted by
increased capacity and weak demand. These conditions could limit the Company's
ability to pass through inflationary increases in operating costs in the form of
higher room rates. Increases in transportation and fuel costs or sustained
recessionary periods in the U.S. (affecting domestic travel) and internationally
(affecting inbound travel from abroad) could also unfavorably impact future
results. However, the Company believes that its financial strength and diverse
market presence will enable it to remain competitive.
10
COMPARISON OF FISCAL QUARTERS ENDED JUNE 30, 1999 AND 2000
OVERVIEW
A summary of the Company's consolidated results for the three months ended
June 30, 1999 and 2000 is as follows:
(in millions, except per share amounts) 1999 2000 % CHANGE
---- ---- ---------
Revenue $539 916 70%
Operating income 154 250 62
Net Income 66 88 33
Basic EPS .26 .24 (8)
Diluted EPS .25 .23 (8)
OTHER OPERATING DATA
Reconciliation of Net Income to EBITDA:
Net Income $ 66 88 33%
Minority interest, net 2 2
Provision for income taxes 45 65
Interest expense, net, from unconsolidated affiliates - 4
Interest expense 54 113
Interest and dividend income (13) (22)
------- ------- 62%
Operating Income 154 250
Operating interest and dividend income - 9
Depreciation and amortization(1) 44 101
Pre-opening expense - 1
Total EBITDA ------- ------- 82%
$198 361
======= =======
(1) Includes proportionate share of unconsolidated affiliates.
Total revenue for the second quarter of 2000 was $916 million, an increase of
$377 million over 1999. Total EBITDA was $361 million, an increase of $163
million compared to a year ago. The Company's consolidated EBITDA margin
increased 2.7 points to 39.4 percent in the second quarter of 2000 from 36.7
percent in the 1999 quarter. Total operating income increased $96 million to
$250 million. The 2000 results benefited from the Promus acquisition, which was
completed on November 30, 1999, and from other 1999 acquisition and development
activity. Results were also positively impacted by significant increases
in revenue per available room ("RevPAR") at most of the Company's major market
owned hotels and increases in management and franchise fee revenue due to unit
growth and system-wide RevPAR gains across all brands. Overall operating results
also reflect the benefit of the April 2000 introduction of the HHonors loyalty
program to the former Promus brands as well as the Company's cross-selling and
other marketing initiatives.
The Company's domestic owned hotels contributed $248 million of EBITDA in the
2000 second quarter, compared to $176 million in the prior year. The 2000 second
quarter benefited from the Promus acquisition, the 1999 acquisition of the
Pointe
11
Hilton Squaw Peak Resort and the Hilton Minneapolis, and the September
1999 opening of the Hilton Boston Logan Airport. In total, acquisition and
development activity provided $51 million of incremental domestic owned EBITDA
in the 2000 second quarter.
Results in the quarter benefited from strong performances and RevPAR gains at
many of the Company's Hilton brand owned properties. Particularly strong results
were seen in Hawaii, which continued to rebound from a market-wide slump during
the past two years, and in New York and Chicago, both of which generated
increased RevPAR from strong group business. The Company also benefited from
EBITDA gains in San Francisco, driven by strong increases in individual business
traveler ("IBT") occupancy and rate. RevPAR for comparable owned Hilton
properties improved 12.2 percent in the 2000 second quarter, with occupancy up
4.3 points to 82.6 percent and average daily rate ("ADR") up 6.3 percent to
$176.91.
EBITDA from owned hotels acquired in the Promus acquisition totaled $39 million
in the 2000 second quarter. Although not included in the Company's 1999 reported
results, EBITDA from these hotels increased eight percent on a comparable basis
over pro forma 1999 second quarter results. This increase was due primarily to
strong results at owned Doubletree properties which benefited from expansion of
the HHonors program and aggressive cross-selling efforts.
In addition to the incremental EBITDA from domestic owned properties, the Promus
acquisition provided incremental EBITDA of $14 million from unconsolidated
affiliates which own interests in hotels pursuant to joint venture agreements
and $11 million from properties operated by the Company under operating lease
agreements. The Company did not operate properties under operating lease
agreements prior to the Promus acquisition.
In addition, the acquisition generated incremental EBITDA of $63 million from
management and franchise fees. This incremental fee income includes the
impact of unit growth and system-wide RevPAR gains across the former Promus
brands. Including this $63 million of incremental fee income, management and
franchise fee revenue increased $67 million in the second quarter of 2000 to
$93 million. Fee revenue across all brands benefited from revenue increases
resulting from the expansion of the HHonors program and the Company's
cross-selling and other marketing initiatives. Fee revenue is based primarily
on operating revenue at managed properties and rooms revenue at franchised
properties.
12
Depreciation and amortization, including the Company's proportionate share of
depreciation and amortization from its unconsolidated affiliates, increased $57
million in the second quarter of 2000 to $101 million due primarily to the
depreciation of fixed assets and the amortization of identifiable intangible
assets and goodwill associated with the Promus acquisition.
CORPORATE ACTIVITY
Corporate expense increased $5 million in the second quarter of 2000 to $18
million, primarily from incremental costs as a result of the Promus acquisition.
Interest and dividend income increased $9 million compared with the prior year,
primarily due to an increase in notes receivable as the result of balances
acquired in the Promus acquisition. Interest expense, net of amounts
capitalized, increased $59 million reflecting higher debt levels due to the
Promus acquisition and higher interest rates on the Company's floating rate
debt.
The effective income tax rate for the second quarter of 2000 increased to 41.9%
from 39.8% in the second quarter of 1999. The Company's effective income tax
rate is determined by the level and composition of pretax income and the mix of
income subject to varying foreign, state and local taxes.
HOTEL STATISTICS
RevPAR for U.S. owned-or-operated hotels and system-wide for the three months
ended June 30, 1999 and 2000 is as follows:
U.S. OWNED-OR-OPERATED HOTELS(1)
Three months ended June 30,
1999 2000 % CHANGE
---- ---- ---------
Hilton $119.21 133.64 12.1%
Doubletree 78.12 83.94 7.5
Embassy Suites 96.36 104.62 8.6
Other 65.94 69.26 5.0
Total 93.88 102.72 9.4
(1) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable U.S.
hotels, and include only hotels in the system as of June 30, 2000 and owned
or managed by Hilton since January 1, 1999.
13
SYSTEM-WIDE(2)
Three months ended June 30,
1999 2000 % CHANGE
---- ---- ---------
Hilton $ 94.73 104.33 10.1%
Hilton Garden Inn 63.50 71.70 12.9
Doubletree 74.20 80.17 8.0
Embassy Suites 92.33 98.93 7.1
Homewood Suites by Hilton 72.40 75.97 4.9
Hampton 52.39 54.45 3.9
Other 72.66 78.64 8.2
(2) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable hotels, and
include only hotels in the system as of June 30, 2000 and owned, managed or
franchised by Hilton since January 1, 1999.
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 2000
OVERVIEW
A summary of the Company's consolidated results for the six months ended
June 30, 1999 and 2000 is as follows:
(in millions, except per share amounts) 1999 2000 % CHANGE
---- ----- ---------
Revenue $ 1,014 1,709 69%
Operating income 270 423 57
Income before cumulative effect of accounting change 108 146 35
Basic EPS before cumulative effect of accounting change .42 .40 (5)
Diluted EPS before cumulative effect of accounting change .41 .39 (5)
OTHER OPERATING DATA
Reconciliation of Net Income to EBITDA:
Net Income $ 106 146 38%
Cumulative effect of accounting change 2 -
Minority interest, net 5 5
Provision for income taxes 76 110
Net gain on asset dispositions - (29)
Interest expense, net, from unconsolidated affiliates 1 7
Interest expense 106 225
Interest and dividend income (26) (41)
--------- -------- 57%
Operating Income 270 423
Operating interest and dividend income - 17
Depreciation and amortization(1) 84 199
Pre-opening expense - 2
Total EBITDA --------- -------- 81%
$ 354 641
========= ========
(1) Includes proportionate share of unconsolidated affiliates.
Total revenue in the first half of 2000 was $1.7 billion, an increase of $695
million over 1999. Total EBITDA was $641 million, an increase of $287 million
compared to a year ago. The Company's consolidated EBITDA margin increased 2.6
points to 37.5 percent in 2000 from 34.9 percent in the 1999 six month period.
Total operating income increased $153 million to
14
$423 million. The 2000 results benefited from the Promus acquisition and from
other 1999 acquisition and development activity. Results were also positively
impacted by significant increases in RevPAR at many of the Company's major
market hotels and increases in management and franchise fee revenue due to
unit growth and system-wide RevPAR gains across all brands. Overall operating
results also reflect the benefit of the Company's cross-selling and other
marketing initiatives as well as the second quarter 2000 introduction of the
HHonors program to the former Promus brands.
The Company's domestic owned hotels contributed $431 million of EBITDA in the
first half of 2000, compared to $308 million in the prior year. The 2000 six
month period benefited from the Promus acquisition, the 1999 acquisition of
the Hilton Boston Back Bay, the Pointe Hilton Squaw Peak Resort and the
Hilton Minneapolis, and the September 1999 opening of the Hilton Boston Logan
Airport. In total, acquisition and development activity provided $90 million
of incremental domestic owned EBITDA in the first half of 2000.
Six month results benefited from strong performances and RevPAR gains at many of
the Company's Hilton brand owned properties. Year to date results were strong in
Hawaii, which has rebounded from a market-wide slump. Six month results were
also strong in New York, which benefited from strong group business, and San
Francisco, which benefited from strong occupancy and rate increases in the IBT
segment. RevPAR for comparable owned Hilton properties improved 8.9 percent in
the 2000 first half, with occupancy up two points to 77.8 percent and ADR up 6.1
percent to $173.30.
EBITDA from owned hotels acquired in the Promus acquisition totaled $70
million in the first six months of 2000. Although not included in the
Company's 1999 reported results, EBITDA from these hotels increased two
percent on a comparable basis over pro forma 1999 six month results. This
increase was driven by an eight percent comparable basis EBITDA increase in
the 2000 second quarter as the former Promus brands, particularly Doubletree,
began to show the benefits of the Company's cross-selling efforts, marketing
initiatives and the second quarter expansion of the HHonors program.
In addition to the $70 million of incremental EBITDA from domestic owned
properties, the Promus acquisition provided incremental EBITDA of $25 million
from unconsolidated affiliates which own interests in hotels pursuant to
joint venture agreements and $17 million from properties operated by the
Company under operating lease agreements.
15
The acquisition also added incremental EBITDA of $113 million from management
and franchise fees. This incremental fee income includes the impact of unit
growth and system-wide RevPAR gains across the former Promus brands. Including
this $113 million of incremental fee income, management and franchise fee
revenue increased $124 million in the first half of 2000 to $175 million. Fee
revenue across all brands benefited from revenue increases resulting from the
expansion of the HHonors program and the Company's cross-selling and marketing
initiatives, particularly in the second quarter of 2000.
Depreciation and amortization, including the Company's proportionate share of
depreciation and amortization from its unconsolidated affiliates, increased $115
million in the first half of 2000 to $199 million due primarily to the
depreciation of fixed assets and the amortization of identifiable intangible
assets and goodwill associated with the Promus acquisition.
CORPORATE ACTIVITY
In the 2000 first half, the Company realized a pre-tax gain on asset
dispositions of $29 million from the sale of certain marketable securities.
Corporate expense increased $9 million in the first half of 2000 to $34 million,
primarily from incremental costs as a result of the Promus acquisition.
Interest and dividend income increased $15 million compared with the prior year,
primarily due to an increase in notes receivable as the result of balances
acquired in the Promus acquisition. Interest expense, net of amounts
capitalized, increased $119 million reflecting higher debt levels due to the
Promus acquisition and higher interest rates on the Company's floating rate
debt.
The effective income tax rate for the first half of 2000 increased to 42.1%
from 40.2% in the first half of 1999.
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HOTEL STATISTICS
RevPAR for U.S. owned-or-operated hotels and system-wide for the six months
ended June 30, 1999 and 2000 is as follows:
U.S. OWNED-OR-OPERATED HOTELS(1)
Six months ended June 30,
1999 2000 % CHANGE
---- ---- --------
Hilton $ 117.97 128.18 8.7%
Doubletree 75.89 79.19 4.3
Embassy Suites 95.87 101.68 6.1
Other 61.89 64.19 3.7
Total 92.03 98.12 6.6
(1) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable U.S.
hotels, and include only hotels in the system as of June 30, 2000 and
owned or managed by Hilton since January 1, 1999.
SYSTEM-WIDE(2)
Six months ended June 30,
1999 2000 % CHANGE
---- ---- --------
Hilton $ 92.76 99.60 7.4%
Hilton Garden Inn 59.09 66.88 13.2
Doubletree 71.72 75.34 5.0
Embassy Suites 90.88 95.10 4.6
Homewood Suites by Hilton 69.86 73.31 4.9
Hampton 48.53 49.70 2.4
Other 66.93 71.47 6.8
(2) Statistics for 1999 include the properties acquired in the Promus
acquisition on a pro forma basis. Statistics are for comparable
hotels, and include only hotels in the system as of June 30, 2000 and
owned, managed or franchised by Hilton since January 1, 1999.
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OTHER MATTERS
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation, those
set forth under the captions "Development," "Liquidity and Capital Resources,"
and "Results of Operations," and statements relating to the Company's plans,
strategies, objectives, expectations, intentions and adequacy of resources, are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995.
The words "believes," "anticipates," "expects" and similar expressions are
intended to identify forward-looking statements. These forward-looking
statements reflect the Company's current views with respect to future events and
financial performance, and are subject to certain risks and uncertainties,
including those identified above under "Results of Operations" and those in the
Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1999
under the captions "Additional Information -- Business Risks," and
"Competition," the effect of economic conditions, and customer demand, which
could cause actual results to differ materially from historical results or those
anticipated. Although the Company believes the expectations reflected in such
forward-looking statements are based upon reasonable assumptions, it can give no
assurance that its expectations will be attained.
PART II OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27. Financial data schedule for the six month period ended June 30, 2000.
(b) REPORTS ON FORM 8-K
None
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
HILTON HOTELS CORPORATION
(Registrant)
Date: August 11, 2000 /s/ MATTHEW J. HART
------------------------
Matthew J. Hart
Executive Vice President and
Chief Financial Officer
Date: August 11, 2000 /s/ THOMAS E. GALLAGHER
----------------------------
Thomas E. Gallagher
Executive Vice President,
Chief Administrative Officer
and General Counsel
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