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, 1999
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, 1999 --- Common Stock, $2.50 par value ---
254,975,911 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 1998 1999 1998
- ------------------------------------------------------------------------------------------------------- ----------------
Revenue Rooms $ 293 245 543 428
Food and beverage 134 111 249 194
Management and franchise fees 26 28 51 55
Other revenue 86 73 171 146
------------------------------------------------------------------ --------------
539 457 1,014 823
Expenses Rooms 71 57 137 105
Food and beverage 95 79 182 145
Other expenses 205 163 399 310
Corporate expense, net 14 16 26 27
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385 315 744 587
------------------------------------------------------------------ --------------
Operating Income 154 142 270 236
Interest income 13 2 26 4
Interest expense (54) (33) (106) (60)
Interest expense, net, from unconsolidated affiliates - - (1) (3)
------------------------------------------------------------------ --------------
Income Before Income Taxes
and Minority Interest 113 111 189 177
Provision for income taxes 45 45 76 71
Minority interest, net 2 1 5 3
------------------------------------------------------------------ --------------
Income from Continuing Operations 66 65 108 103
Income from discontinued gaming operations,
net of tax provisions of $35 and $70 - 41 - 80
Cumulative effect of accounting change,
net of tax benefit of $1 - - (2) -
------------------------------------------------------------------ ---------------
Net Income $ 66 106 106 183
======================================================================================================= ===============
Basic Earnings Per Share
Income from Continuing Operations $ .26 .25 .42 .39
Discontinued Operations - .16 - .32
Cumulative Effect of Accounting Change - - (.01) -
------------------------------------------------------------------ --------------
Net Income Per Share $ .26 .41 .41 .71
======================================================================================================= ==============
Diluted Earnings Per Share
Income from Continuing Operations $ .25 .25 .41 .39
Discontinued Operations - .14 - .29
Cumulative Effect of Accounting Change - - (.01) -
------------------------------------------------------------------ --------------
Net Income Per Share $ .25 .39 .40 .68
======================================================================================================= ==============
see notes to consolidated financial statements
1
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in millions)
June 30, December 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------------------------
Assets Cash and equivalents $ 65 47
Accounts receivable, net 239 204
Receivable from discontinued gaming operations - 73
Inventories 68 54
Deferred income taxes 49 48
Other current assets 53 43
----------------------------------------------------------------------------------------
Total current assets 474 469
Investments 301 262
Long-term receivable 625 625
Property and equipment, net 2,703 2,483
Other assets 100 105
----------------------------------------------------------------------------------------
Total investments, property and other assets 3,729 3,475
----------------------------------------------------------------------------------------
Total Assets $ 4,203 3,944
============================================================================================================================
Liabilities and Accounts payable and accrued expenses $ 347 410
Stockholders' Equity Current maturities of long-term debt 62 62
Income taxes payable 35 34
----------------------------------------------------------------------------------------
Total current liabilities 444 506
Long-term debt 3,324 3,037
Deferred income taxes and other liabilities 222 214
Stockholders' equity 213 187
----------------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity $ 4,203 3,944
============================================================================================================================
see notes to consolidated financial statements
2
HILTON HOTELS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(in millions)
Six months ended
June 30,
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Operating Activities Net income $ 106 183
Adjustments to reconcile net income to net
cash provided by operating activities:
Income from discontinued gaming operations - (80)
Cumulative effect of accounting change 2 -
Depreciation and amortization 81 55
Amortization of loan costs 1 1
Change in working capital components:
Receivables, inventories and other current assets 14 (47)
Accounts payable and accrued expenses (63) 27
Income taxes payable 1 31
Change in deferred income taxes 3 9
Change in other liabilities (5) 15
Distributions from unconsolidated affiliates less than earnings (5) (12)
Other 8 (34)
---------------------------------------------------------------------------------------------
Net cash provided by operating activities 143 148
- ------------------------------------------------------------------------------------------------------------------------
Investing Activities Capital expenditures (63) (42)
Additional investments (49) (332)
Payments on notes and other 36 54
Acquisitions, net of cash acquired (237) (340)
---------------------------------------------------------------------------------------------
Net cash used in investing activities (313) (660)
- ------------------------------------------------------------------------------------------------------------------------
Financing Activities Change in commercial paper borrowings
and revolving loans 287 1,060
Reduction of long-term debt (1) (187)
Issuance of common stock 2 11
Purchase of common stock (90) (81)
Cash dividends (10) (46)
---------------------------------------------------------------------------------------------
Net cash provided by financing activities 188 757
- ------------------------------------------------------------------------------------------------------------------------
Net Transfers To Discontinued Gaming Operations - (147)
Increase in Cash and Equivalents 18 98
Cash and Equivalents at Beginning of Year 47 5
- ------------------------------------------------------------------------------------------------------------------------
Cash and Equivalents at End of Period $ 65 103
========================================================================================================================
see notes to consolidated financial statements
3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1: GENERAL
On December 31, 1998, Hilton Hotels Corporation (Hilton or the Company)
completed a spin-off that split the Company's operations into two independent
public corporations, one for conducting its hotel business and one for
conducting its gaming business. Hilton retained ownership of the hotel
business. Hilton transferred the gaming business to a new corporation named
Park Place Entertainment Corporation (Park Place) and distributed the stock
of Park Place tax-free to Hilton stockholders on a one-for-one basis. As a
result of the spin-off, Hilton's financial statements reflect the gaming
business as discontinued operations.
The consolidated financial statements presented herein have been prepared by
Hilton in accordance with the accounting policies described in its 1998
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 1998 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
(net income less preferred dividends of $3 million and $7 million for the
three and six months ended June 30, 1998, respectively) by the weighted
average number of common shares outstanding for the period. The weighted
average number of common shares outstanding totaled 257 million and 259
million for the three and six months ended June 30, 1999, respectively and
247 million for the three and six months ended June 30, 1998. 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 24 million for the
three and six months ended June 30, 1999 and 32 million for the three and six
months ended June 30, 1998. In addition, the increase to net income resulting
from interest on convertible securities assumed to have not been paid was $4
million for each of the three month periods ended June 30, 1999 and 1998 and
$7 million for each of the six month periods ended June 30, 1999 and 1998.
NOTE 3: SUPPLEMENTAL CASH FLOW INFORMATION
Six months ended
June 30,
1999 1998
---- ----
(in millions)
Cash paid during the period for the following:
Interest, net of amounts capitalized $ 87 46
Income taxes (1) 52 98
(1) Includes amounts paid by the Company on behalf of the discontinued gaming
operations.
4
NOTE 4: COMPREHENSIVE INCOME
Comprehensive income for the three and six months ended June 30, 1999 and 1998
is as follows:
Three months ended Six months ended
June 30, June 30,
1999 1998 1999 1998
------ ------ ------ ------
(in millions) (in millions)
Net Income $ 66 106 106 183
Change in unrealized gains
and losses, net of tax 13 1 14 (4)
------ ------ ------ ------
Comprehensive Income $ 79 107 120 179
====== ====== ====== ======
NOTE 5: CHANGE IN ACCOUNTING PRINCIPLE
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." This SOP requires that all
nongovernmental entities expense costs of start-up activities (pre-opening,
pre-operating and organizational costs) as those costs are incurred and
requires the write-off of any unamortized balances upon implementation. SOP
98-5 is effective for financial statements issued for periods beginning after
December 15, 1998. The Company's adoption of SOP 98-5 resulted in a
cumulative effect of accounting change of $2 million, net of a tax benefit of
$1 million, in the 1999 first quarter.
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
On December 31, 1998, the Company completed a spin-off of its gaming
operations. As a result, the Company's historical financial statements have
been restated to reflect the gaming business as discontinued operations. The
following discussion and analysis of financial condition and results of
operations is that of Hilton's continuing operations.
FINANCIAL CONDITION
LIQUIDITY
For the six months ended June 30, net cash provided by operating activities
was $143 million and $148 million in 1999 and 1998, respectively. Cash and
equivalents totaled $65 million at June 30, 1999, an increase of $18 million
from December 31, 1998.
ACQUISITIONS AND CAPITAL SPENDING
Net cash used in investing activities was $313 million in the 1999 six month
period compared to $660 million last year. The decrease was primarily due to
higher acquisition spending in the 1998 period which included the acquisition
of four full-service hotels, versus three in the 1999 period, and an
additional investment related to the restructuring of the Hilton Hawaiian
Village joint venture. Expenditures required to complete acquisitions and
capital spending programs in 1999 will be financed through available cash
flows and general corporate borrowings.
Growth continues through selective acquisition of large full-service hotels
in major market locations. In February 1999, the Company acquired the
495-room Radisson Plaza Hotel at Mark Center in Alexandria, Virginia
(re-named the Hilton Alexandria Mark Center) for approximately $52 million.
In April 1999, the Company purchased the 563-room Pointe Hilton Squaw Peak
Resort in Phoenix, Arizona for approximately $94 million. Also in April 1999,
the Company acquired the 385-room Hilton Boston Back Bay for approximately
$70 million. The Company plans to spend approximately $12 million to renovate
6
guest rooms, meeting rooms, the lobby and the health club at this property.
The Company expects to make further acquisitions in 1999.
The Company is currently renovating the Hilton New York & Towers. This
project, which includes new restaurants, a state-of-the-art
business/conference center, a world-class fitness facility and an exclusive
Towers Lounge overlooking Manhattan, is expected to be completed in late
1999. 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 nearing completion on construction of a new 600-room hotel at
the center of Boston's Logan Airport and a 232-unit vacation ownership resort
adjacent to the Las Vegas Hilton, which are expected to open in the 1999
third quarter and the 1999 fourth quarter, respectively.
In June 1999, the Company announced plans to develop a 245-unit vacation
ownership resort adjacent to the Hilton Hawaiian Village. Interval sales will
commence in the first quarter of 2000 with the project expected to open in
the first quarter of 2001. In addition, in August 1999 the Company announced
that construction will begin on a 453-room tower addition at the Hilton
Hawaiian Village. Construction of the Kalia Tower is scheduled to be
complete in Spring 2001.
In addition to an estimated $260 million in 1999 development related
expenditures including those related to the aforementioned renovation and
construction projects, the Company intends to spend approximately $150
million in 1999 on normal capital replacements, upgrades and compliance
projects.
OTHER DEVELOPMENTS
The Company continues to improve its franchise business primarily through the
expansion of the Hilton Garden Inn product. As of June 30, 1999, a total of
42 Garden Inn properties were open and 70 are expected to be open by
year-end. The Company expects to have 140 Garden Inn properties open with
another 60 under construction by year-end 2000.
FINANCING
Long-term debt at June 30, 1999 totaled $3.3 billion, compared with $3.0
billion at December 31, 1998. For the six months ended June 30, 1999, cash
provided by financing activities totaled $188 million compared to $757
million in the 1998 period. Commercial paper borrowings in the 1998 period
reflect a higher level of acquisition activity and the restructuring of the
Hilton Hawaiian Village joint venture. By
7
virtue of an agreement with The Prudential Insurance Company of America
(Prudential) to restructure the joint venture ownership of the Hilton
Hawaiian Village, effective June 1, 1998 the Company was deemed to control
the joint venture, thus requiring consolidation of this previously
unconsolidated entity. The agreement also called for the refinancing of the
joint venture's existing debt under a new joint venture revolving credit
facility. In accordance with the terms of the agreement, this new facility
was used to borrow an additional $294 million which was loaned to a
Prudential affiliate and subsequently redeemed to increase the Company's
investment in the joint venture from 50% to 98%. The consolidation of the
joint venture, which includes the total borrowings under the new facility,
resulted in an increase in consolidated debt of $480 million in the 1998
period.
The debt balance at June 30, 1999 and December 31, 1998 includes $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 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
shall 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
such reimbursement.
At June 30, 1999, approximately $446 million of the aggregate commitment of
the Company's $1.75 billion revolving credit facility supported the issuance
of commercial paper, leaving approximately $1.3 billion of the revolving bank
debt facility available to the Company at such date.
8
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, 1999, 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.
Pursuant to the Company's stock repurchase program, during the first six
months of 1999 the Company repurchased 6.4 million shares of common stock for
an aggregate purchase price of $90 million. The Company may, at any time,
repurchase up to 9.3 million remaining shares authorized for repurchase
pursuant to such program. The timing of stock repurchases are made at the
discretion of the Company's management, subject to certain business and
market conditions.
In accordance with the terms of the indenture governing the Company's $500
million 5% Convertible Subordinated Notes due 2006, effective January 4,
1999, the conversion price was adjusted to $22.17 to reflect the gaming
spin-off.
STOCKHOLDERS' EQUITY
Dividends paid on common shares were $.02 and $.08 for the three months ended
June 30, 1999 and 1998, respectively and $.04 and $.16 for the six months
ended June 30, 1999 and 1998, respectively. In October 1998, 14.8 million
shares of the Company's Preferred Redeemable Increased Dividend Equity
Securities, 8% PRIDES, Convertible Preferred Stock were converted into 13.6
million shares of common stock.
RESULTS OF OPERATIONS
The following discussion presents an analysis of the Company's results of
operations for the three and six month periods ended June 30, 1999 and 1998.
EBITDA (earnings before interest, taxes, depreciation, amortization 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
9
EBITDA as these items do not impact operating results on a recurring basis.
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.
COMPARISON OF FISCAL QUARTERS ENDED JUNE 30, 1999 AND 1998
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the three
months ended June 30, 1999 and 1998 is as follows:
(in millions, except per share amounts) 1999 1998 % Change
------ ----- --------
Revenue $ 539 457 18 %
Operating income 154 142 8 %
Income from continuing operations 66 65 2 %
Basic EPS from continuing operations .26 .25 4 %
Diluted EPS from continuing operations .25 .25 - %
OTHER OPERATING DATA
Reconciliation of EBITDA to income from continuing operations:
EBITDA
Operations $ 211 188 12 %
Corporate expense, net (13) (15) (13)%
------ ------
Total EBITDA 198 173 14 %
Depreciation and amortization (1) (44) (31) 42 %
------ ------
Operating income 154 142 8 %
Interest income 13 2 - %
Interest expense (54) (33) 64 %
Provision for income taxes (45) (45) - %
Minority interest, net (2) (1) - %
------ ------
Income from continuing operations $ 66 65 2 %
====== ======
(1) Includes proportionate share of unconsolidated affiliates.
Consolidated revenue for the 1999 second quarter was $539 million, an
increase of 18 percent over 1998. Total EBITDA was $198 million for the 1999
second quarter, a 14 percent increase compared to $173 million a year ago,
while operating income increased eight percent to $154 million from $142
million last year.
10
The Company's domestic owned and equity hotels contributed $178 million of
EBITDA in the 1999 second quarter, compared to $159 million in the prior
year. The 1999 results were significantly impacted by earnings contributions
from hotels acquired in 1998 and 1999. The Company also benefited from strong
EBITDA growth at its properties in San Francisco, Washington D.C. and New
Orleans. Results were negatively impacted by continuing weak conditions in
Hawaii, along with softness in the New York and Chicago markets. Comparable
EBITDA at the Company's domestic owned and equity properties decreased two
percent from the 1998 second quarter. Occupancy for comparable domestic owned
and equity hotels was 78.1 percent compared to 78.2 percent in the 1998
quarter. The average room rate increased .6 percent to $168.62 in the 1999
second quarter and RevPAR increased .5 percent.
EBITDA at the Hilton San Francisco & Towers increased $3 million or 22
percent on strong city-wide group demand in the 1999 quarter. A 19 percent
increase in revenue per available room (RevPAR) resulted from increases in
occupancy and average rates in the convention segment along with a shift in
the market mix from leisure to the higher rated individual business traveler
(IBT) segment. Combined EBITDA from the Hilton Washington & Towers and
Capital Hilton increased $2 million, or 16 percent, from the prior year
quarter on a combined ten percent RevPAR increase. EBITDA from the Hilton New
Orleans Riverside increased $1 million due to a six percent increase in
RevPAR driven by strong increases in convention volume and rate. Combined
EBITDA from the Hilton Chicago & Towers, the Hilton Chicago O'Hare Airport
and the Palmer House Hilton decreased $2 million or five percent from the
prior year quarter on a combined RevPAR decrease of three percent. Soft group
demand drove the RevPAR decline, which also limited the properties' ability
to increase transient rates. Comparatively lower convention attendance also
negatively effected food and beverage and concession revenues. Results at the
Hilton New York & Towers were affected by a soft city-wide group market,
decreased transient demand and the impact of the renovation project currently
underway, which has reduced foot traffic and resulted in the temporary
closure of three food and beverage outlets. These factors contributed to a
seven percent decline in EBITDA at that property in the 1999 second quarter.
Based on advance bookings, the Company anticipates increased demand in the
group business segments in the Chicago and New York markets beginning after
Labor Day.
11
On a comparable basis, EBITDA from the Hilton Hawaiian Village in Honolulu
and the Hilton Waikoloa Village on the Big Island of Hawaii declined 15
percent and 41 percent, respectively, from the prior year quarter. The
Company anticipates continued weakness in Hawaii for the remainder of 1999
due to the impact of the Asian economic situation, with the Hilton Hawaiian
Village expected to show declining results for the full year. The Company,
however, anticipates improved market conditions and commensurate improvement
at these properties in 2000. Factors leading to this outlook include an
increase in advance bookings at the Hilton Hawaiian Village; new business to
the state generated as a result of the newly opened Hawaii Convention Center;
increased business and leisure travel coinciding with Year 2000 events and
activities, and enhanced marketing efforts in Asia and the U.S. mainland by
the State of Hawaii to attract additional visitors. Excluding the Company's
two properties in Hawaii, comparable EBITDA at the Company's domestic owned
and equity hotels was flat in the 1999 second quarter. Occupancy for
comparable domestic owned and equity hotels (excluding Hawaii) was 79.8
percent versus 79.9 percent in the 1998 quarter. The average room rate
increased 1.7 percent to $168.93 in the 1999 second quarter and RevPAR
improved 1.6 percent between periods.
Acquisition activity, including increased ownership of properties which were
previously partially owned and new property acquisitions, contributed
approximately $19 million of EBITDA to the second quarter of 1999. Management
and franchise fees decreased $2 million in 1999 to $26 million primarily
attributable to the acquisition of several previously managed properties
during 1998 and 1999. Depreciation and amortization, including the Company's
proportionate share of unconsolidated affiliates, increased $13 million over
the prior year to $44 million due to new acquisitions.
Future operating results could be adversely impacted by increased capacity or
weak demand. These conditions could limit the Company's ability to pass
through inflationary increases in operating costs in the form of higher
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
12
unfavorably impact future results. However, the Company believes that its
financial strength, market presence and diverse product line will enable it
to remain extremely competitive.
CORPORATE ACTIVITY
Interest income increased $11 million in the 1999 period to $13 million due
to the interest on the $625 million of Hilton public debt assumed by Park
Place at the time of the spin-off of Hilton's gaming operations. As Hilton
remains the legal obligor of the debt, an equal amount of interest is
included in interest expense. Consolidated interest expense increased $21
million to $54 million primarily due to the $625 million of debt assumed by
Park Place and higher average debt levels resulting from acquisition spending.
The effective income tax rate for the 1999 period decreased to 39.8 percent
compared to 40.5 percent for 1998. The Company's effective income tax rate is
determined by the level and composition of pretax income subject to varying
foreign, state and local taxes.
13
COMPARISON OF SIX MONTHS ENDED JUNE 30, 1999 AND 1998
OVERVIEW
A summary of the Company's consolidated revenue and earnings for the six months
ended June 30, 1999 and 1998 is as follows:
(in millions, except per share amounts) 1999 1998 % Change
---- ---- --------
Revenue $1,014 823 23 %
Operating income 270 236 14 %
Income from continuing operations 108 103 5 %
Basic EPS from continuing operations .42 .39 8 %
Diluted EPS from continuing operations .41 .39 5 %
OTHER OPERATING DATA
Reconciliation of EBITDA to income from continuing operations:
EBITDA
Operations $ 379 321 18 %
Corporate expense, net (25) (26) (4)%
------ ------
Total EBITDA 354 295 20 %
Depreciation and amortization (1) (84) (59) 42 %
------ ------
Operating income 270 236 14 %
Interest income 26 4 - %
Interest expense (106) (60) 77 %
Interest expense, net, from unconsolidated affiliates (1) (3) (67)%
Provision for income taxes (76) (71) 7 %
Minority interest, net (5) (3) 67 %
------ ------
Income from continuing operations $ 108 103 5 %
====== ======
(1) Includes proportionate share of unconsolidated affiliates.
Consolidated revenue for the 1999 six month period was $1.0 billion, an
increase of 23 percent over 1998. Total EBITDA was $354 million for the first
six months of 1999, a 20 percent increase compared to $295 million a year
ago, while operating income increased 14 percent to $270 million from $236
million last year.
The Company's domestic owned and equity hotels contributed $313 million of
EBITDA in the 1999 six month period, compared to $262 million in the prior
year. Growth was primarily the result of EBITDA contributions from hotels
acquired in 1999 and 1998. Comparable EBITDA at the Company's owned and
equity hotels was flat with the prior year six month period. Occupancy for
comparable domestic owned
14
and equity hotels was 75.8 percent compared to 74.8 percent in the 1998
period. The average room rate was flat at $166.41 and RevPAR increased 1.2
percent.
Combined EBITDA from the Hilton Chicago & Towers, the Hilton Chicago O'Hare
Airport and the Palmer House Hilton increased $3 million or seven percent
over the prior year six month period on a combined RevPAR increase of five
percent. A strong city-wide convention market in the first quarter of 1999
offset the softer group market and lower convention attendance experienced in
the 1999 second quarter. EBITDA at the Hilton San Francisco & Towers
increased $4 million due to significant increases in occupancy and average
rate in the convention segment and volume increases in the IBT segment
resulting in a total RevPAR increase of 15 percent. EBITDA from the Hilton
New Orleans Riverside increased $3 million on an eight percent increase in
RevPAR driven by both occupancy and average rate increases in the convention
segment. Renovations at the Hilton New York & Towers and a soft city-wide
group market in the second quarter contributed to a $2 million or six percent
decline in EBITDA in the 1999 six month period. The Company benefited from
improved results at the recently acquired Hilton Boston Back Bay, Hilton East
Brunswick & Towers, Hilton Charlotte & Towers, Hilton La Jolla Torrey Pines
and the Hilton Short Hills. These five properties posted a combined $4
million, or 18 percent, EBITDA increase compared to pro forma 1998 results.
On a comparable basis, EBITDA from the Hilton Hawaiian Village and the Hilton
Waikoloa Village declined 20 percent and 25 percent, respectively, from the
prior year period. Excluding the Company's two properties in Hawaii,
comparable EBITDA at the Company's domestic owned and equity hotels increased
four percent from the 1998 six month period. Occupancy for comparable
domestic owned and equity hotels (excluding Hawaii) was 76.5 percent versus
75.1 percent in the 1998 period. The average room rate increased 1.6 percent
to $165.25 in the 1999 period and RevPAR improved 3.6 percent between periods.
Acquisition activity contributed approximately $48 million of EBITDA to the
first six months of 1999. Management and franchise fees decreased $4 million
in 1999 to $51 million. This decrease is primarily
15
attributable to the acquisition of several previously managed properties
during 1998 and 1999. Depreciation and amortization, including the Company's
proportionate share of unconsolidated affiliates, increased $25 million over
the prior year to $84 million primarily due to new acquisitions.
CORPORATE ACTIVITY
Interest income increased $22 million in the 1999 period to $26 million due
to the interest on the $625 million of Hilton public debt assumed by Park
Place at the time of the spin-off of Hilton's gaming operations. Consolidated
interest expense increased $46 million to $106 million primarily due to the
$625 million of debt assumed by Park Place and higher average debt levels
resulting from acquisition spending.
The effective income tax rate for the 1999 period increased to 40.2 percent
compared to 40.1 percent for 1998.
OTHER MATTERS
YEAR 2000
The Company continues to work to resolve the potential impact of the Year
2000 on the processing of date-sensitive information by its computerized
information systems. The Year 2000 problem is the result of computer programs
being written using two digits (rather than four) to define the applicable
year. Any of the Company's programs that have time-sensitive software may
recognize a date using "00" as the year 1900 rather than the Year 2000, which
could result in miscalculations or system failures.
The Company has a Year 2000 program, the objective of which is to determine
and assess the risks of the Year 2000 issue, and plan and institute
mitigating actions to minimize those risks. The Company's standard for
compliance requires that for a computer system or business process to be Year
2000 compliant, it must be designed to operate without error in date and
date-related data prior to, on and after January 1, 2000. The Company expects
to be fully Year 2000 compliant with respect to all significant business
systems prior to December 31, 1999.
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The Company's various project teams are focusing their attention in the
following major areas:
INFORMATION TECHNOLOGY (IT) SYSTEMS
Information technology systems account for much of the Year 2000 work and
include all computer systems and technology managed by the Company. The
Company has assessed these core systems, has plans in place, and is
undertaking to test and implement changes where required. The Company has not
yet identified any significant remediation. The Company has contacted
appropriate vendors and suppliers as to their Year 2000 compliance and their
deliverables have been factored into the Company's plans.
NON-IT SYSTEMS
The Company has completed an inventory of all property level non-IT systems
(including elevators, electronic door locks, etc.). The Company has assessed
the majority of these non-IT systems, has plans in place, and is undertaking
to test and implement changes where required. The Company has contacted
appropriate vendors and suppliers as to their Year 2000 compliance and their
deliverables have been factored into the Company's plans.
SUPPLIERS
The Company is communicating with its significant suppliers to understand
their Year 2000 issues and how they might prepare themselves to manage those
issues as they relate to the Company. To date, no significant supplier has
informed the Company that a material Year 2000 issue exists which will have a
material effect on the Company.
During 1999, the Company will continually review its progress against its
Year 2000 plans and determine what contingency plans are appropriate to
reduce its exposure to Year 2000 related issues.
Based on the Company's current assessment, the costs of addressing potential
problems are expected to be less than $3 million. However, if the Company is
unable to resolve its Year 2000 issues, contingency plans to update existing
systems are in place for which the Company expects the cost, if any, to be an
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additional $3 million. If the Company's customers or vendors identify
significant Year 2000 issues in the future and are unable to resolve such
issues in a timely manner, it could result in a material financial risk.
Accordingly, the Company plans to devote the necessary resources to resolve
all significant Year 2000 issues in a timely manner.
RECENT ACCOUNTING PRONOUNCEMENTS
In April 1998, the AICPA issued Statement of Position (SOP) 98-5, "Reporting
on the Costs of Start-Up Activities." This SOP requires that all
nongovernmental entities expense costs of start-up activities (pre-opening,
pre-operating and organizational costs) as those costs are incurred and
requires the write-off of any unamortized balances upon implementation. SOP
98-5 is effective for financial statements issued for periods beginning after
December 15, 1998. The Company's adoption of SOP 98-5 resulted in a
cumulative effect of accounting change of $2 million, net of a tax benefit of
$1 million, in the 1999 first quarter.
FORWARD-LOOKING STATEMENTS
Forward-looking statements in this report, including without limitation,
those set forth under the captions "Financial Condition," "Results of
Operations" and "Other Matters," 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, 1998 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
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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, 1999.
99.01 Amendment 1999-1 to the Hilton Hotels Corporation Retirement Plan.
99.02 Amendment 1999-1 to the Hilton Hotels Corporation Thrift Savings Plan.
99.03 Hilton Hotels Corporation Executive Deferred Compensation Plan, as
amended and restated effective January 1, 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 9, 1999 /s/ MATTHEW J. HART
-----------------------------------
Matthew J. Hart
Executive Vice President,
Chief Financial Officer and Treasurer
Date: August 9, 1999 /s/ THOMAS E. GALLAGHER
-----------------------------------
Thomas E. Gallagher
Executive Vice President, Chief Administrative
Officer, General Counsel and Secretary
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