Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-Q
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2016
OR
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File No. 001-34521
HYATT HOTELS CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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| | |
Delaware | | 20-1480589 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
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71 South Wacker Drive 12th Floor, Chicago, Illinois | | 60606 |
(Address of Principal Executive Offices) | | (Zip Code) |
(312) 750-1234
(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 12 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 by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One):
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Large accelerated filer | x | | Accelerated filer | ¨ | |
Non-accelerated filer | ¨ | | Smaller reporting company | ¨ | |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of October 28, 2016, there were 23,611,575 shares of the registrant’s Class A common stock, $0.01 par value, outstanding and 107,247,326 shares of the registrant’s Class B common stock, $0.01 par value, outstanding.
HYATT HOTELS CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2016
TABLE OF CONTENTS
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| PART I – FINANCIAL INFORMATION | |
Item 1. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
| | |
| PART II – OTHER INFORMATION | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 3. | | |
Item 4. | | |
Item 5. | | |
Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In millions of dollars, except per share amounts)
(Unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2016 | | September 30, 2015 | | September 30, 2016 | | September 30, 2015 |
REVENUES: | | | | | | | |
Owned and leased hotels | $ | 519 |
| | $ | 500 |
| | $ | 1,594 |
| | $ | 1,549 |
|
Management and franchise fees | 110 |
| | 103 |
| | 332 |
| | 320 |
|
Other revenues | 11 |
| | 10 |
| | 31 |
| | 26 |
|
Other revenues from managed properties | 448 |
| | 440 |
| | 1,385 |
| | 1,324 |
|
Total revenues | 1,088 |
| | 1,053 |
| | 3,342 |
| | 3,219 |
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DIRECT AND SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES: | | | | | | | |
Owned and leased hotels | 402 |
| | 385 |
| | 1,204 |
| | 1,160 |
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Depreciation and amortization | 87 |
| | 78 |
| | 254 |
| | 233 |
|
Other direct costs | 8 |
| | 8 |
| | 23 |
| | 20 |
|
Selling, general, and administrative | 74 |
| | 54 |
| | 237 |
| | 221 |
|
Other costs from managed properties | 448 |
| | 440 |
| | 1,385 |
| | 1,324 |
|
Direct and selling, general, and administrative expenses | 1,019 |
| | 965 |
| | 3,103 |
| | 2,958 |
|
Net gains (losses) and interest income from marketable securities held to fund operating programs | 12 |
| | (15 | ) | | 20 |
| | (6 | ) |
Equity earnings (losses) from unconsolidated hospitality ventures | 25 |
| | (17 | ) | | 46 |
| | (46 | ) |
Interest expense | (20 | ) | | (17 | ) | | (57 | ) | | (51 | ) |
Asset impairments | — |
| | (5 | ) | | — |
| | (5 | ) |
Gains (losses) on sales of real estate | — |
| | — |
| | (21 | ) | | 9 |
|
Other income (loss), net | 4 |
| | 11 |
| | 1 |
| | (3 | ) |
INCOME BEFORE INCOME TAXES | 90 |
| | 45 |
| | 228 |
| | 159 |
|
PROVISION FOR INCOME TAXES | (28 | ) | | (20 | ) | | (65 | ) | | (72 | ) |
NET INCOME | 62 |
| | 25 |
| | 163 |
| | 87 |
|
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | — |
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NET INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION | $ | 62 |
| | $ | 25 |
| | $ | 163 |
| | $ | 87 |
|
EARNINGS PER SHARE—Basic | | | | | | | |
Net income | $ | 0.48 |
| | $ | 0.18 |
| | $ | 1.22 |
| | $ | 0.60 |
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Net income attributable to Hyatt Hotels Corporation | $ | 0.48 |
| | $ | 0.18 |
| | $ | 1.22 |
| | $ | 0.60 |
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EARNINGS PER SHARE—Diluted | | | | | | | |
Net income | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.21 |
| | $ | 0.60 |
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Net income attributable to Hyatt Hotels Corporation | $ | 0.47 |
| | $ | 0.18 |
| | $ | 1.21 |
| | $ | 0.60 |
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See accompanying Notes to condensed consolidated financial statements.
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions of dollars)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Nine Months Ended |
| September 30, 2016 | | September 30, 2015 | | September 30, 2016 | | September 30, 2015 |
Net income | $ | 62 |
| | $ | 25 |
| | $ | 163 |
| | $ | 87 |
|
Other comprehensive income (loss), net of taxes: | | | | | | | |
Foreign currency translation adjustments, net of tax (benefit) expense of $- for the three and nine months ended September 30, 2016 and $- and $(2) for the three and nine months ended September 30, 2015, respectively | (12 | ) | | (35 | ) | | 3 |
| | (82 | ) |
Unrealized gains (losses) on available-for-sale securities, net of tax (benefit) expense of $(5) and $- for the three and nine months ended September 30, 2016, respectively, and $6 and $10 for the three and nine months ended September 30, 2015, respectively | (8 | ) | | 9 |
| | — |
| | 15 |
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Unrealized gains on derivative activity, net of tax expense of $- for the three and nine months ended September 30, 2016 and $- for the three and nine months ended September 30, 2015 | — |
| | 1 |
| | — |
| | 1 |
|
Other comprehensive income (loss) | (20 | ) | | (25 | ) | | 3 |
| | (66 | ) |
COMPREHENSIVE INCOME | 42 |
| | — |
| | 166 |
| | 21 |
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COMPREHENSIVE INCOME ATTRIBUTABLE TO NONCONTROLLING INTERESTS | — |
| | — |
| | — |
| | — |
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COMPREHENSIVE INCOME ATTRIBUTABLE TO HYATT HOTELS CORPORATION | $ | 42 |
| | $ | — |
| | $ | 166 |
| | $ | 21 |
|
See accompanying Notes to condensed consolidated financial statements.
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions of dollars, except share and per share amounts)
(Unaudited)
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| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
ASSETS | | | |
CURRENT ASSETS: | | | |
Cash and cash equivalents | $ | 544 |
| | $ | 457 |
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Restricted cash | 66 |
| | 96 |
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Short-term investments | 46 |
| | 46 |
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Receivables, net of allowances of $17 and $15 at September 30, 2016 and December 31, 2015, respectively | 318 |
| | 298 |
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Inventories | 16 |
| | 12 |
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Prepaids and other assets | 180 |
| | 152 |
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Prepaid income taxes | 49 |
| | 63 |
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Total current assets | 1,219 |
| | 1,124 |
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Investments | 306 |
| | 327 |
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Property and equipment, net | 3,971 |
| | 4,031 |
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Financing receivables, net of allowances | 21 |
| | 20 |
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Goodwill | 127 |
| | 129 |
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Intangibles, net | 591 |
| | 547 |
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Deferred tax assets | 318 |
| | 301 |
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Other assets | 1,094 |
| | 1,112 |
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TOTAL ASSETS | $ | 7,647 |
| | $ | 7,591 |
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LIABILITIES AND EQUITY | | | |
CURRENT LIABILITIES: | | | |
Current maturities of long-term debt | $ | 19 |
| | $ | 328 |
|
Accounts payable | 127 |
| | 141 |
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Accrued expenses and other current liabilities | 565 |
| | 516 |
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Accrued compensation and benefits | 121 |
| | 122 |
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Total current liabilities | 832 |
| | 1,107 |
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Long-term debt | 1,447 |
| | 1,042 |
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Other long-term liabilities | 1,451 |
| | 1,447 |
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Total liabilities | 3,730 |
| | 3,596 |
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Commitments and contingencies (see Note 11) |
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EQUITY: | | | |
Preferred stock, $0.01 par value per share, 10,000,000 shares authorized and none outstanding as of September 30, 2016 and December 31, 2015 | — |
| | — |
|
Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 23,592,340 issued and outstanding at September 30, 2016, and Class B common stock, $0.01 par value per share, 439,741,738 shares authorized, 107,247,326 shares issued and outstanding at September 30, 2016. Class A common stock, $0.01 par value per share, 1,000,000,000 shares authorized, 26,604,687 issued and outstanding at December 31, 2015, and Class B common stock, $0.01 par value per share, 441,623,374 shares authorized, 109,628,962 shares issued and outstanding at December 31, 2015 | 1 |
| | 1 |
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Additional paid-in capital | 1,687 |
| | 1,931 |
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Retained earnings | 2,452 |
| | 2,289 |
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Accumulated other comprehensive loss | (227 | ) | | (230 | ) |
Total stockholders’ equity | 3,913 |
| | 3,991 |
|
Noncontrolling interests in consolidated subsidiaries | 4 |
| | 4 |
|
Total equity | 3,917 |
| | 3,995 |
|
TOTAL LIABILITIES AND EQUITY | $ | 7,647 |
| | $ | 7,591 |
|
See accompanying Notes to condensed consolidated financial statements.
HYATT HOTELS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions of dollars)
(Unaudited)
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| | | | | | | |
| Nine Months Ended |
| September 30, 2016 | | September 30, 2015 |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 163 |
| | $ | 87 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 254 |
| | 233 |
|
Deferred income taxes | (16 | ) | | (43 | ) |
Equity (earnings) losses from unconsolidated hospitality ventures and distributions received | (21 | ) | | 70 |
|
(Gains) losses on sales of real estate | 21 |
| | (9 | ) |
Working capital changes and other | (50 | ) | | 58 |
|
Net cash provided by operating activities | 351 |
| | 396 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | | |
Purchases of marketable securities and short-term investments | (365 | ) | | (450 | ) |
Proceeds from marketable securities and short-term investments | 373 |
| | 422 |
|
Contributions to investments | (31 | ) | | (29 | ) |
Return of investments | 78 |
| | 4 |
|
Acquisitions, net of cash acquired | (331 | ) | | — |
|
Capital expenditures | (140 | ) | | (185 | ) |
Proceeds from sales of real estate, net of cash disposed | 289 |
| | 86 |
|
Sales proceeds transferred from escrow to cash and cash equivalents | 29 |
| | 143 |
|
Proceeds from financing receivables | 1 |
| | 28 |
|
(Increase) decrease in restricted cash | (1 | ) | | 19 |
|
Other investing activities | 4 |
| | (14 | ) |
Net cash (used in) provided by investing activities | (94 | ) | | 24 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: | | | |
Proceeds from long-term debt, net of issuance costs of $4 and $- as of September 30, 2016 and September 30, 2015, respectively | 520 |
| | 12 |
|
Repayments of long-term debt | (435 | ) | | (5 | ) |
Repurchase of common stock | (268 | ) | | (539 | ) |
Other financing activities | (2 | ) | | (2 | ) |
Net cash used in financing activities | (185 | ) | | (534 | ) |
EFFECT OF EXCHANGE RATE CHANGES ON CASH | 15 |
| | (2 | ) |
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | 87 |
| | (116 | ) |
CASH AND CASH EQUIVALENTS—BEGINNING OF YEAR | 457 |
| | 685 |
|
CASH AND CASH EQUIVALENTS—END OF PERIOD | $ | 544 |
| | $ | 569 |
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: | | | |
Cash paid during the period for interest | $ | 73 |
| | $ | 66 |
|
Cash paid during the period for income taxes | $ | 74 |
| | $ | 121 |
|
Non-cash investing and financing activities are as follows: | | | |
Non-cash management and franchise agreement intangibles | $ | 38 |
| | $ | — |
|
Change in accrued capital expenditures | $ | 5 |
| | $ | (1 | ) |
See accompanying Notes to condensed consolidated financial statements.
HYATT HOTELS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(amounts in millions of dollars, unless otherwise indicated)
(Unaudited)
1. ORGANIZATION
Hyatt Hotels Corporation, a Delaware corporation, and its consolidated subsidiaries (collectively "Hyatt Hotels Corporation") provide hospitality services on a worldwide basis through the development, ownership, operation, management, franchising and licensing of hospitality related businesses. We develop, own, operate, manage, franchise, license or provide services to a portfolio of properties consisting of full service hotels, select service hotels, resorts and other properties, including timeshare, fractional and other forms of residential or vacation properties. As of September 30, 2016, (i) we operated or franchised 307 full service hotels, comprising 120,528 rooms throughout the world, (ii) we operated or franchised 332 select service hotels, comprising 46,203 rooms, of which 307 hotels are located in the United States, and (iii) our portfolio of properties included 6 franchised all inclusive Hyatt-branded resorts, comprising 2,401 rooms. As of September 30, 2016, our portfolio of properties operated in 54 countries around the world.
As used in these Notes and throughout this Quarterly Report on Form 10-Q, (i) the terms "Company," "we," "us," or "our" mean Hyatt Hotels Corporation and its consolidated subsidiaries and (ii) the term "portfolio of properties" refers to hotels and other properties or residential ownership units that we develop, own, operate, manage, franchise, license or provide services to, including under our Park Hyatt, Grand Hyatt, Hyatt Regency, Hyatt, Andaz, Hyatt Centric, The Unbound Collection by Hyatt, Hyatt Place, Hyatt House, Hyatt Ziva, Hyatt Zilara and Hyatt Residence Club brands.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information, the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all information or footnotes required by GAAP for complete annual financial statements. As a result, this Quarterly Report on Form 10-Q should be read in conjunction with the Consolidated Financial Statements and accompanying Notes in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (the "2015 Form 10-K").
We have eliminated all intercompany accounts and transactions in our condensed consolidated financial statements. We consolidate entities under our control, including entities where we are deemed to be the primary beneficiary.
Management believes the accompanying condensed consolidated financial statements reflect all adjustments, which are all of a normal recurring nature, considered necessary for a fair presentation of the interim periods.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
Adopted Accounting Standards—In April 2015, the Financial Accounting Standards Board ("FASB") released Accounting Standards Update No. 2015-03 ("ASU 2015-03"), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The provisions of ASU 2015-03 are effective for interim periods and fiscal years beginning after December 15, 2015. We adopted the standard on January 1, 2016, and as a result we reclassified $5 million of debt issuance costs previously included in other assets to long-term debt on our condensed consolidated balance sheets as of December 31, 2015.
Future Adoption of Accounting Standards—In May 2014, the FASB released Accounting Standards Update No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and provides a single, comprehensive revenue recognition model for contracts with customers. In August 2015, the FASB released Accounting Standards Update No. 2015-14 ("ASU 2015-14"), Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU 2015-14 delays the effective date of ASU 2014-09 by one year, making it effective for interim periods and fiscal years beginning after December 15, 2017, with early adoption permitted as of the original effective date under ASU 2014-09. We are currently evaluating the impact of adopting ASU 2014-09.
In January 2016, the FASB released Accounting Standards Update No. 2016-01 ("ASU 2016-01"), Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 revises the accounting for equity investments and financial liabilities under the fair value option and the presentation and disclosure requirements for financial instruments. The provisions of ASU 2016-01 are effective for interim periods and fiscal years beginning after December 15, 2017. We are currently evaluating the impact of adopting ASU 2016-01.
In February 2016, the FASB released Accounting Standards Update No. 2016-02 ("ASU 2016-02"), Leases (Topic 842). ASU 2016-02 requires lessees to record lease contracts on the balance sheet by recognizing a right-of-use asset and lease liability. The provisions of ASU 2016-02 are effective for interim periods and fiscal years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-02.
In June 2016, the FASB released Accounting Standards Update No. 2016-13 ("ASU 2016-13"), Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 replaces the existing impairment model for most financial assets from an incurred loss impairment model to a current expected credit loss model, which requires an entity to recognize an impairment allowance equal to its current estimate of all contractual cash flows the entity does not expect to collect. ASU 2016-13 also requires credit losses relating to available-for-sale ("AFS") debt securities to be recorded through an allowance for credit losses. The provisions of ASU 2016-13 are effective for interim periods and fiscal years beginning after December 15, 2019, with early adoption permitted. We are currently evaluating the impact of adopting ASU 2016-13.
3. EQUITY AND COST METHOD INVESTMENTS
We have investments recorded under both the equity and cost methods. These investments are an integral part of our business and are strategically and operationally important to our overall results. Our equity and cost method investment balances recorded at September 30, 2016 and December 31, 2015 were as follows:
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| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Equity method investments | $ | 299 |
| | $ | 304 |
|
Cost method investments | 7 |
| | 23 |
|
Total investments | $ | 306 |
| | $ | 327 |
|
During the three months ended September 30, 2016, two unconsolidated hospitality ventures in which we hold or held an ownership interest and which are classified as equity method investments within our owned and leased hotels segment, each sold a Hyatt Place hotel, for which we received combined proceeds of $7 million. We recorded gains of $5 million in equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income.
During the three months ended September 30, 2015, we sold an entity which held an interest in one of our foreign currency denominated equity method investments within our owned and leased hotels segment, for which we received proceeds of $3 million. In connection with the sale, we released $21 million of accumulated foreign currency translation losses, which were recorded to equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income.
During the three and nine months ended September 30, 2016, we recorded $0 and $2 million of net losses from our cost method investments, respectively. Gains or losses from cost method investments are recorded within other income (loss), net on our condensed consolidated statements of income.
During the three and nine months ended September 30, 2016, we recorded $2 million and $4 million of impairment charges, respectively, in equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income.
The following table presents summarized financial information for all unconsolidated hospitality ventures in which we hold an investment accounted for under the equity method:
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| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Total revenues | $ | 326 |
| | $ | 280 |
| | $ | 952 |
| | $ | 825 |
|
Gross operating profit | 110 |
| | 88 |
| | 312 |
| | 236 |
|
Income from continuing operations | 40 |
| | 42 |
| | 118 |
| | 26 |
|
Net income | 40 |
| | 42 |
| | 118 |
| | 26 |
|
4. MARKETABLE SECURITIES
We hold marketable securities to fund certain operating programs and for investment purposes. We periodically transfer cash and cash equivalents to time deposits, highly liquid and transparent commercial paper, corporate notes and bonds, and U.S. government obligations and obligations of other government agencies for investment purposes.
Marketable Securities Held to Fund Operating Programs—At September 30, 2016 and December 31, 2015, our total marketable securities held to fund operating programs, which are recorded at fair value and included on the condensed consolidated balance sheets, were as follows: |
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Marketable securities held by Hyatt Gold Passport Fund | $ | 401 |
| | $ | 384 |
|
Marketable securities held to fund deferred compensation plans held in rabbi trusts (Note 9) | 353 |
| | 333 |
|
Marketable securities held to fund our captive insurance companies | 65 |
| | 82 |
|
Total marketable securities held to fund operating programs | 819 |
| | 799 |
|
Less current portion of marketable securities held to fund operating programs included in cash and cash equivalents, short-term investments, and prepaids and other assets | (158 | ) | | (121 | ) |
Marketable securities held to fund operating programs included in other assets | $ | 661 |
| | $ | 678 |
|
Net gains (losses) and interest income from marketable securities held to fund operating programs on the condensed consolidated statements of income included realized and unrealized gains and losses and interest income related to the following:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
2016 | | 2015 | | 2016 | | 2015 |
Hyatt Gold Passport Fund | $ | — |
| | $ | — |
| | $ | 3 |
| | $ | 1 |
|
Deferred compensation plans held in rabbi trusts | 12 |
| | (15 | ) | | 17 |
| | (7 | ) |
Total net gains (losses) and interest income from marketable securities held to fund operating programs | $ | 12 |
| | $ | (15 | ) | | $ | 20 |
| | $ | (6 | ) |
Our captive insurance companies hold marketable securities which are classified as AFS and are invested in U.S. government agencies, time deposits and corporate debt securities. We classify these investments as current or long-term, based on their contractual maturity dates, which range from 2016 through 2021. During the three and nine months ended September 30, 2016, we recorded an insignificant unrealized loss and $1 million of unrealized gains, respectively, related to these AFS securities on the condensed consolidated balance sheets through other comprehensive income (loss).
Marketable Securities Held for Investment Purposes—At September 30, 2016 and December 31, 2015, our total marketable securities held for investment purposes, which are recorded at fair value and included on the condensed consolidated balance sheets, were as follows:
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Interest bearing money market funds | $ | 62 |
| | $ | 5 |
|
Time deposits | 30 |
| | 30 |
|
Preferred shares | 334 |
| | 335 |
|
Total marketable securities held for investment purposes | $ | 426 |
| | $ | 370 |
|
Less current portion of marketable securities held for investment purposes included in cash and cash equivalents and short-term investments | (92 | ) | | (35 | ) |
Marketable securities held for investment purposes included in other assets | $ | 334 |
| | $ | 335 |
|
Fair Value—As of September 30, 2016 and December 31, 2015, we measured the following financial assets at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2016 | | Cash and Cash Equivalents | | Short-term Investments | | Prepaids and Other Assets | | Other Assets |
Level One - Quoted Prices in Active Markets for Identical Assets | | | | | | | | | |
Interest bearing money market funds | $ | 69 |
| | $ | 69 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Mutual funds | 353 |
| | — |
| | — |
| | — |
| | 353 |
|
Level Two - Significant Other Observable Inputs | | | | | | | | | |
Time deposits | 43 |
| | — |
| | 32 |
| | — |
| | 11 |
|
U.S. government obligations | 140 |
| | — |
| | — |
| | 48 |
| | 92 |
|
U.S. government agencies | 61 |
| | — |
| | 13 |
| | 12 |
| | 36 |
|
Corporate debt securities | 185 |
| | — |
| | 1 |
| | 54 |
| | 130 |
|
Mortgage-backed securities | 26 |
| | — |
| | — |
| | 9 |
| | 17 |
|
Asset-backed securities | 31 |
| | — |
| | — |
| | 11 |
| | 20 |
|
Municipal and provincial notes and bonds | 3 |
| | — |
| | — |
| | 1 |
| | 2 |
|
Level Three - Significant Unobservable Inputs | | | | | | | | | |
Preferred shares | 334 |
| | — |
| | — |
| | — |
| | 334 |
|
Total | $ | 1,245 |
| | $ | 69 |
| | $ | 46 |
| | $ | 135 |
| | $ | 995 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2015 | | Cash and Cash Equivalents | | Short-term Investments | | Prepaids and Other Assets | | Other Assets |
Level One - Quoted Prices in Active Markets for Identical Assets | | | | | | | | | |
Interest bearing money market funds | $ | 18 |
| | $ | 18 |
| | $ | — |
| | $ | — |
| | $ | — |
|
Mutual funds | 333 |
| | — |
| | — |
| | — |
| | 333 |
|
Level Two - Significant Other Observable Inputs | | | | | | | | | |
Time deposits | 45 |
| | — |
| | 38 |
| | — |
| | 7 |
|
U.S. government obligations | 131 |
| | — |
| | — |
| | 32 |
| | 99 |
|
U.S. government agencies | 83 |
| | — |
| | 6 |
| | 10 |
| | 67 |
|
Corporate debt securities | 168 |
| | — |
| | 2 |
| | 36 |
| | 130 |
|
Mortgage-backed securities | 26 |
| | — |
| | — |
| | 6 |
| | 20 |
|
Asset-backed securities | 27 |
| | — |
| | — |
| | 7 |
| | 20 |
|
Municipal and provincial notes and bonds | 3 |
| | — |
| | — |
| | 1 |
| | 2 |
|
Level Three - Significant Unobservable Inputs | | | | | | | | | |
Preferred shares | 335 |
| | — |
| | — |
| | — |
| | 335 |
|
Total | $ | 1,169 |
| | $ | 18 |
| | $ | 46 |
| | $ | 92 |
| | $ | 1,013 |
|
During the three and nine months ended September 30, 2016 and September 30, 2015, there were no transfers between levels of the fair value hierarchy. Our policy is to recognize transfers in and transfers out as of the end of each quarterly reporting period. We currently do not have non-financial assets or non-financial liabilities required to be measured at fair value on a recurring basis.
We invest a portion of our cash into short-term interest bearing money market funds that have a maturity of less than ninety days. Consequently, the balances are recorded in cash and cash equivalents. The funds are held with open-ended registered investment companies, and the fair value of the funds is classified as Level One as we are able to obtain market available pricing information on an ongoing basis. The fair value of our mutual funds is classified as Level One as they trade with sufficient frequency and volume to enable us to obtain pricing information on an ongoing basis. Time deposits are recorded at par value, which approximates fair value and are classified as Level Two. The remaining securities, other than our investment in preferred shares, are classified as Level Two due to the use and weighting of multiple market inputs being considered in the final price of the security. Market inputs include quoted market prices from active markets for identical securities, quoted market prices for identical securities in inactive markets, and quoted market prices in active and inactive markets for similar securities.
Preferred shares—During the year ended December 31, 2013, we invested $271 million in Playa Hotels & Resorts B.V. ("Playa") for redeemable, convertible preferred shares. We have the option to convert our preferred shares and any accrued and unpaid paid in kind ("PIK") dividends thereon into shares of common stock at any time through the later of the second anniversary of the closing of our investment or an initial public offering by Playa ("Playa IPO"). The preferred investment is redeemable at our option in August 2021. In the event of a Playa IPO or other equity issuance by Playa, we have the option to request that Playa redeem up to $125 million of preferred shares at par plus any accrued and unpaid PIK dividends thereon. As a result, we have classified the preferred investment as an AFS debt security, which is re-measured quarterly at fair value on the condensed consolidated balance sheets through other comprehensive income (loss). The fair value of the preferred shares was:
|
| | | | | | | |
| 2016 | | 2015 |
Fair value at January 1 | $ | 335 |
| | $ | 280 |
|
Gross unrealized gains | 19 |
| | 10 |
|
Gross unrealized losses | (7 | ) | | — |
|
Fair value at June 30 | $ | 347 |
| | $ | 290 |
|
Gross unrealized gains | — |
| | 15 |
|
Gross unrealized losses | (13 | ) | | — |
|
Fair value at September 30 | $ | 334 |
| | $ | 305 |
|
On September 27, 2016, Playa publicly filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission ("SEC"), in conjunction with its proposed initial public offering ("IPO") of common shares. In connection with the potential Playa IPO, we have committed to convert up to $50 million of our preferred shares at par plus any accrued and unpaid PIK dividends thereon at a conversion price equal to the lower of $8.40 per share or the IPO price. The remaining preferred shares and any accrued and unpaid PIK dividends thereon are expected to be redeemed by Playa with IPO proceeds. The conversion and redemption are expected to close simultaneously with the Playa IPO. There is no assurance that Playa will complete its proposed IPO. In a transaction separate from their IPO, Playa redeemed 3,458,530 of our preferred shares plus accrued and unpaid PIK dividends thereon for $41 million in October 2016.
Due to the lack of availability of market data, the preferred shares are classified as Level Three. Historically, we estimated the fair value of the Playa preferred shares using an option-pricing model. As a result of the potential Playa IPO, we revised our valuation approach at September 30, 2016 and utilized a hybrid of the option-pricing model and the probability-weighted expected return method, to estimate the fair value of our preferred shares. The hybrid model includes various scenarios, such as the successful completion of the Playa IPO and assumptions around conversion and redemption, as well as scenarios where we continue to use the option-pricing model. We assigned a probability to each scenario to arrive at our estimated fair value as of September 30, 2016. Our scenarios include assumptions regarding (i) a potential range of IPO prices and size of the offering, (ii) conversion of up to $50 million of our preferred shares into common shares of Playa and (iii) the redemption of 3,458,530 shares, which closed in October 2016. These option-pricing model scenarios include assumptions regarding the expected term, risk-free interest rate over the expected term, volatility, dividend yield and enterprise value. Financial forecasts were used in the computation of the enterprise value using the income approach, based on assumed revenue growth rates and operating margin levels. The risks associated with achieving these forecasts were assessed in selecting the appropriate weighted-average cost of capital.
The option-pricing scenarios include variations of the expected term, risk-free interest rate, volatility, and dividend yield assumptions as follows:
|
| | | | | |
| September 30, 2016 | | December 31, 2015 |
Expected term | 0.50 to 1.25 years |
| | 0.75 years |
|
Risk-free Interest Rate | 0.45% to 0.64% |
| | 0.57 | % |
Volatility | 47.6% to 47.9% |
| | 46.0 | % |
Dividend Yield | 12.0 | % | | 12.0 | % |
There is inherent uncertainty in our assumptions and fluctuations in these assumptions or the probabilities assigned to each scenario may result in different estimates of fair value. At September 30, 2016, the assumption which most significantly impacted the fair value of the preferred shares is the assignment of probabilities to each
potential scenario. A change to the assigned probabilities may cause the fair value to decrease up to $15 million and increase up to $60 million, representing the difference between the low and high end of the range of fair values based on each scenario.
Held-to-Maturity Debt Securities—At September 30, 2016 and December 31, 2015, we had investments in held-to-maturity ("HTM") debt securities of $25 million, which are investments in third-party entities that own certain of our hotels. The amortized cost of our investments approximates fair value. The securities are mandatorily redeemable between 2020 and 2025.
5. FINANCING RECEIVABLES
Our financing receivables at September 30, 2016 and December 31, 2015 were as follows:
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Unsecured financing to hotel owners | $ | 127 |
| | $ | 120 |
|
Less allowance for losses | (106 | ) | | (98 | ) |
Less current portion included in receivables, net | — |
| | (2 | ) |
Total long-term financing receivables, net | $ | 21 |
| | $ | 20 |
|
During the three months ended September 30, 2015, all of our outstanding secured financing receivables to hotel owners were settled. We received net cash proceeds of $26 million, an unsecured financing receivable of $6 million, and preferred equity investments of $7 million. The settlements of the secured financing receivables resulted in a net recovery of $8 million, which was recognized in other income (loss), net on our condensed consolidated statements of income during the three months ended September 30, 2015.
Allowance for Losses and Impairments—For the three and nine months ended September 30, 2016 and September 30, 2015, the activity in our financing receivables allowance was as follows:
|
| | | | | | | | | | | |
| Secured Financing | | Unsecured Financing | | Total |
Allowance at January 1, 2016 | $ | — |
| | $ | 98 |
| | $ | 98 |
|
Provisions | — |
| | 4 |
| | 4 |
|
Other Adjustments | — |
| | 1 |
| | 1 |
|
Allowance at June 30, 2016 | — |
| | 103 |
| | 103 |
|
Provisions | — |
| | 3 |
| | 3 |
|
Allowance at September 30, 2016 | $ | — |
| | $ | 106 |
| | $ | 106 |
|
|
| | | | | | | | | | | |
| Secured Financing |
| Unsecured Financing |
| Total |
Allowance at January 1, 2015 | $ | 13 |
|
| $ | 87 |
|
| $ | 100 |
|
Provisions | 2 |
|
| 4 |
|
| 6 |
|
Other Adjustments | — |
| | (1 | ) | | (1 | ) |
Allowance at June 30, 2015 | 15 |
| | 90 |
| | 105 |
|
Provisions | 1 |
| | 1 |
| | 2 |
|
Write-offs | (1 | ) | | — |
| | (1 | ) |
Recoveries | (9 | ) | | — |
| | (9 | ) |
Other Adjustments | (6 | ) | | 4 |
| | (2 | ) |
Allowance at September 30, 2015 | $ | — |
| | $ | 95 |
| | $ | 95 |
|
Credit Monitoring—Our unsecured financing receivables were as follows:
|
| | | | | | | | | | | | | | | |
| September 30, 2016 |
| Gross Loan Balance (Principal and Interest) | | Allowance | | Net Financing Receivables | | Gross Receivables on Non-Accrual Status |
Loans | $ | 14 |
| | $ | — |
| | $ | 14 |
| | $ | — |
|
Impaired loans (1) | 63 |
| | (63 | ) | | — |
| | 63 |
|
Total loans | 77 |
| | (63 | ) | | 14 |
| | 63 |
|
Other financing arrangements | 50 |
| | (43 | ) | | 7 |
| | 43 |
|
Total unsecured financing receivables | $ | 127 |
| | $ | (106 | ) | | $ | 21 |
| | $ | 106 |
|
(1) The unpaid principal balance was $45 million and the average recorded loan balance was $61 million at September 30, 2016.
|
| | | | | | | | | | | | | | | |
| December 31, 2015 |
| Gross Loan Balance (Principal and Interest) | | Allowance | | Net Financing Receivables | | Gross Receivables on Non-Accrual Status |
Loans | $ | 15 |
| | $ | — |
| | $ | 15 |
| | $ | — |
|
Impaired loans (2) | 58 |
| | (58 | ) | | — |
| | 58 |
|
Total loans | 73 |
| | (58 | ) | | 15 |
| | 58 |
|
Other financing arrangements | 47 |
| | (40 | ) | | 7 |
| | 40 |
|
Total unsecured financing receivables | $ | 120 |
| | $ | (98 | ) | | $ | 22 |
| | $ | 98 |
|
(2) The unpaid principal balance was $42 million and the average recorded loan balance was $55 million at December 31, 2015.Fair Value—We estimated the fair value of financing receivables which are classified as Level Three in the fair value hierarchy to be approximately $22 million at September 30, 2016 and December 31, 2015. During the three and nine months ended September 30, 2016 and September 30, 2015, there were no transfers between levels of the fair value hierarchy.
6. ACQUISITIONS AND DISPOSITIONS
Acquisitions
Royal Palms Resort and Spa—During the three months ended September 30, 2016, we acquired Royal Palms Resort and Spa from an unrelated third party for a net purchase price of approximately $86 million, net of $2 million of proration adjustments. Due to the iconic nature of the hotel, we retained the Royal Palms Resort and Spa name and added the hotel to The Unbound Collection by Hyatt. Of the $88 million purchase price, assets acquired and recorded in our owned and leased hotels segment consist of $75 million of property and equipment, $9 million of indefinite-lived brand intangibles, and $1 million of advanced bookings intangibles. We also recorded $3 million of management agreement intangibles in our Americas management and franchising segment, which are being amortized over a useful life of 20 years. The purchase of Royal Palms Resort and Spa was structured and identified as a replacement property in a potential reverse like-kind exchange agreement.
The Confidante Miami Beach—During the nine months ended September 30, 2016, we acquired Thompson Miami Beach for a purchase price of approximately $238 million, from a seller indirectly owned by a limited partnership affiliated with the brother of our Executive Chairman. Of the $238 million purchase price, assets acquired consist of $228 million of property and equipment, which was recorded in our owned and leased hotels segment, and $10 million of management agreement intangibles, which were recorded in our Americas management and franchising segment and are being amortized over a useful life of 20 years. We rebranded this hotel as The Confidante Miami Beach, and added the hotel to The Unbound Collection by Hyatt. The purchase of
The Confidante Miami Beach was structured and identified as a replacement property in a potential reverse like-kind exchange agreement.
Dispositions
Hyatt Regency Birmingham (U.K.)—During the three months ended September 30, 2016, we sold the shares of the company that owns Hyatt Regency Birmingham (U.K.) to an unrelated third party for approximately $49 million, net of closing costs and proration adjustments and entered into a long-term management agreement with the owner of the property. The sale resulted in a $17 million pre-tax gain which has been deferred and is being recognized in management and franchise fees over the term of the management agreement, within our EAME/SW Asia management segment. The operating results and financial position of this hotel prior to the sale remain within our owned and leased hotels segment.
Andaz 5th Avenue—During the nine months ended September 30, 2016, we sold Andaz 5th Avenue to an unrelated third party for $240 million, net of $10 million of closing costs and proration adjustments and entered into a long-term management agreement with the owner of the property. The sale resulted in a $21 million pre-tax loss which was recognized in gains (losses) on sales of real estate on our condensed consolidated statements of income during the nine months ended September 30, 2016. The operating results and financial position of this hotel prior to the sale remain within our owned and leased hotels segment.
Hyatt Regency Indianapolis—During the nine months ended September 30, 2015, we sold Hyatt Regency Indianapolis to an unrelated third party for $69 million, net of closing costs and entered into a long-term franchise agreement with the owner of the property. The sale resulted in a pre-tax gain of $8 million, which was recognized in gains (losses) on sales of real estate on our condensed consolidated statements of income during the nine months ended September 30, 2015. The operating results and financial position of this hotel prior to the sale remain within our owned and leased hotels segment.
Land Held for Development—During the nine months ended September 30, 2015, we sold land and construction in progress for $14 million to an unconsolidated hospitality venture in which we have a 40% ownership interest, for which we received $12 million in cash proceeds as of September 30, 2015.
A Hyatt House Hotel— During the nine months ended September 30, 2015, we sold a select service property to an unrelated third party for $5 million, net of closing costs, resulting in a $1 million pre-tax gain which was recognized in gains (losses) on sales of real estate on our condensed consolidated statements of income during the nine months ended September 30, 2015. The operating results and financial position of this hotel prior to the sale remain within our owned and leased hotels segment.
As a result of certain dispositions, we have agreed to provide customary indemnifications to third-party purchasers for certain liabilities incurred prior to sale and for breach of certain representations and warranties made during the sales process, such as representations of valid title, authority, and environmental issues that may not be limited by a contractual monetary amount. These indemnification agreements survive until the applicable statutes of limitation expire, or until the agreed upon contract terms expire.
Like-Kind Exchange Agreements
Periodically, we enter into like-kind exchange agreements upon the disposition of certain hotels. Pursuant to the terms of these agreements, the proceeds from the sales are placed into an escrow account administered by a qualified intermediary. The proceeds are recorded to restricted cash on our condensed consolidated balance sheets and released once they are utilized as part of a like-kind exchange agreement or when a like-kind exchange agreement is not completed within the allowable time period.
In conjunction with the sale of five Hyatt Place properties during the year ended December 31, 2014, we entered into like-kind exchange agreements with a qualified intermediary. Pursuant to the like-kind exchange agreements, the combined net proceeds of $51 million from the sales of these hotels were placed into an escrow account administered by a qualified intermediary. During the nine months ended September 30, 2015, we released the net proceeds because the identified replacement property was not acquired in order to complete the exchange.
In conjunction with the sale of thirty-eight select service properties during the year ended December 31, 2014, we entered into like-kind exchange agreements with a qualified intermediary for twenty-seven of the select service hotels. In the fourth quarter of 2014, we utilized the net proceeds from twenty-one of the twenty-seven hotels as part of the like-kind exchange agreement to acquire Park Hyatt New York. During the nine months ended
September 30, 2015, we released $92 million of net proceeds related to the remaining six hotels from restricted cash, as the intermediary distributed these funds from escrow to complete the reverse like-kind exchange transaction in connection with the acquisition of Hyatt Regency Lost Pines Resort and Spa.
7. INTANGIBLE ASSETS
The following is a summary of intangible assets at September 30, 2016 and December 31, 2015:
|
| | | | | | | | | | |
| September 30, 2016 | | Weighted- Average Useful Lives in Years | | December 31, 2015 |
Management and franchise agreement intangibles | $ | 572 |
| | 25 |
| | $ | 535 |
|
Lease related intangibles | 121 |
| | 112 |
| | 136 |
|
Brand intangibles | 16 |
| | — |
| | 7 |
|
Advanced booking intangibles | 10 |
| | 6 |
| | 12 |
|
Other | 6 |
| | 14 |
| | 8 |
|
| 725 |
| | | | 698 |
|
Accumulated amortization | (134 | ) | | | | (151 | ) |
Intangibles, net | $ | 591 |
| | | | $ | 547 |
|
Amortization expense relating to intangible assets for the three and nine months ended September 30, 2016 and September 30, 2015 was as follows: |
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Amortization expense | $ | 7 |
| | $ | 8 |
| | $ | 20 |
| | $ | 23 |
|
8. DEBT
Long-term debt, net of current maturities, at September 30, 2016 and December 31, 2015, was $1,447 million and $1,042 million, respectively.
Senior Notes—During the nine months ended September 30, 2016, we issued $400 million of 4.850% senior notes due 2026, at an issue price of 99.920% (the "2026 Notes"). We received net proceeds of $396 million from the sale of the 2026 Notes, after deducting discounts and offering expenses of approximately $4 million. We used a portion of the net proceeds to pay for the redemption of the 2016 Notes (as described below), with the remaining proceeds intended to be used for general corporate purposes. Interest on the 2026 Notes is payable semi-annually on March 15 and September 15 of each year, beginning on September 15, 2016.
The 2026 Notes, together with our $250 million of 3.875% senior notes repaid in 2016 (the "2016 Notes"), $196 million of 6.875% senior notes due 2019 (the "2019 Notes"), $250 million of 5.375% senior notes due 2021 (the "2021 Notes"), and $350 million of 3.375% senior notes due 2023 (the "2023 Notes"), are collectively referred to as the "Senior Notes."
Debt Redemption—During the nine months ended September 30, 2016, we redeemed all of our outstanding 2016 Notes, of which an aggregate principal amount of $250 million was outstanding. The redemption price, which was calculated in accordance with the terms of the 2016 Notes and included principal and accrued interest plus a make-whole premium, was $254 million. The make-whole premium was recorded within other income (loss), net on our condensed consolidated statements of income, see Note 17.
Senior Secured Term Loan—During the nine months ended September 30, 2016, we repaid the senior secured term loan related to Hyatt Regency Lost Pines Resort and Spa of $64 million.
Fair Value—We estimated the fair value of debt, excluding capital leases, which consists of our Senior Notes, bonds and other long-term debt. Our Senior Notes and bonds are classified as Level Two due to the use and weighting of multiple market inputs in the final price of the security. Market inputs include quoted market prices from active markets for identical securities, quoted market prices for identical securities in inactive markets, and quoted market prices in active and inactive markets for similar securities. We estimated the fair value of our other long-term
debt instruments using a discounted cash flow analysis based on current market inputs for similar types of arrangements. Based upon the lack of availability of market data, we have classified our other long-term debt as Level Three. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value.
At September 30, 2016 and December 31, 2015, we had the following debt balances, excluding capital lease obligations, as described above:
|
| | | | | | | | | | | | | | | | | | | |
| September 30, 2016 |
| Carrying Value | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level One) | | Significant Other Observable Inputs (Level Two) | | Significant Unobservable Inputs (Level Three) |
Debt, excluding capital lease obligations | $ | (1,451 | ) | | $ | (1,604 | ) | | $ | — |
| | $ | (1,506 | ) | | $ | (98 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2015 |
| Carrying Value | | Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level One) | | Significant Other Observable Inputs (Level Two) | | Significant Unobservable Inputs (Level Three) |
Debt, excluding capital lease obligations | $ | (1,354 | ) | | $ | (1,421 | ) | | $ | — |
| | $ | (1,277 | ) | | $ | (144 | ) |
During the three and nine months ended September 30, 2016 and September 30, 2015, there were no transfers between levels of the fair value hierarchy.
9. LIABILITIES
Other long-term liabilities at September 30, 2016 and December 31, 2015 consisted of the following:
|
| | | | | | | |
| September 30, 2016 | | December 31, 2015 |
Deferred gains on sales of hotel properties | $ | 368 |
| | $ | 367 |
|
Deferred compensation plans | 353 |
| | 333 |
|
Hyatt Gold Passport Fund | 259 |
| | 280 |
|
Guarantee liabilities (see Note 11) | 129 |
| | 120 |
|
Other | 342 |
| | 347 |
|
Total | $ | 1,451 |
| | $ | 1,447 |
|
Accrued expenses and other current liabilities included $176 million and $166 million of liabilities related to the Hyatt Gold Passport Fund at September 30, 2016 and December 31, 2015, respectively.
10. INCOME TAXES
The effective income tax rates for the three months ended September 30, 2016 and September 30, 2015, were 30.2% and 44.6%, respectively. The effective income tax rates for the nine months ended September 30, 2016 and September 30, 2015, were 28.4% and 45.3%, respectively. Our effective tax rates decreased for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015, primarily due to the 2016 tax impact of global transfer pricing changes implemented during the fourth quarter of 2015 and a reversal of uncertain tax positions for certain filing positions in foreign jurisdictions recorded in the third quarter. In addition to the aforementioned items, the 2015 effective tax rates were higher compared to 2016 due to the effect of certain unconsolidated hospitality venture losses that were not fully benefited in 2015.
Unrecognized tax benefits were $100 million and $110 million at September 30, 2016 and December 31, 2015, respectively, of which $13 million and $21 million, respectively, would impact the effective tax rates if recognized.
11. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, we enter into various commitments, guarantees, surety bonds, and letter of credit agreements, which are discussed below:
Commitments—At September 30, 2016, we committed, under certain conditions, to lend or invest up to $366 million, net of any related letters of credit, in various business ventures.
During the three months ended September 30, 2016, we entered into a commitment to fund up to $50 million of preferred equity in a third-party entity which is developing a hotel in Seattle, Washington, for which we also provided a debt repayment guarantee. During the nine months ended September 30, 2016, we also entered into a commitment to purchase land and a to-be-constructed hotel located in Portland, Oregon from the developer upon substantial completion of construction for a purchase price of approximately $160 million.
Performance Guarantees—Certain of our contractual agreements with third-party owners require us to guarantee payments to the owners if specified levels of operating profit are not achieved by their hotels.
Our most significant performance guarantee relates to four managed hotels in France that we began managing in the second quarter of 2013 ("the four managed hotels in France"), which has a term of 7 years, with approximately 3.75 years remaining, and does not have an annual cap. The remaining maximum exposure related to our performance guarantees at September 30, 2016 was $416 million, of which €344 million ($387 million using exchange rates as of September 30, 2016) related to the four managed hotels in France.
We had total net performance guarantee liabilities of $73 million and $97 million at September 30, 2016 and December 31, 2015, which included $59 million and $81 million recorded in other long-term liabilities and $14 million and $16 million in accrued expenses and other current liabilities on our condensed consolidated balance sheets, respectively. Our total performance guarantee liabilities are comprised of the fair value of the guarantee obligation liabilities recorded upon inception, net of amortization and any separate contingent liabilities, net of cash payments. Performance guarantee expense or income and income from amortization of the guarantee obligation liabilities are recorded in other income (loss), net on the condensed consolidated statements of income, see Note 17.
The following table details the total performance guarantee liability:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | The Four Managed Hotels in France | | Other Performance Guarantees | | All Performance Guarantees |
| | 2016 | | 2015 | | 2016 | | 2015 | | 2016 | | 2015 |
Beginning balance, January 1 | | $ | 93 |
| | $ | 106 |
| | $ | 4 |
| | $ | 5 |
| | $ | 97 |
| | $ | 111 |
|
Amortization of initial guarantee obligation liability into income | | (17 | ) | | (5 | ) | | — |
| | — |
| | (17 | ) | | (5 | ) |
Performance guarantee (income) expense, net | | 29 |
| | 15 |
| | (2 | ) | | (1 | ) | | 27 |
| | 14 |
|
Net payments during the period | | (34 | ) | | (22 | ) | | — |
| | — |
| | (34 | ) | | (22 | ) |
Foreign currency exchange, net | | 3 |
| | (9 | ) | | — |
| | — |
| | 3 |
| | (9 | ) |
Ending balance, June 30 | | 74 |
| | 85 |
| | 2 |
| | 4 |
| | 76 |
| | 89 |
|
Amortization of initial guarantee obligation liability into income | | (8 | ) | | (2 | ) | | — |
| | (1 | ) | | (8 | ) | | (3 | ) |
Performance guarantee (income) expense, net | | 13 |
| | (1 | ) | | — |
| | (1 | ) | | 13 |
| | (2 | ) |
Net (payments) receipts during the period | | (10 | ) | | — |
| | 1 |
| | 1 |
| | (9 | ) | | 1 |
|
Foreign currency exchange, net | | 1 |
| | — |
| | — |
| | — |
| | 1 |
| | — |
|
Ending balance, September 30 | | $ | 70 |
| | $ | 82 |
| | $ | 3 |
| | $ | 3 |
| | $ | 73 |
| | $ | 85 |
|
Additionally, we enter into certain management contracts where we have the right, but not an obligation, to make payments to certain hotel owners if their hotels do not achieve specified levels of operating profit. If we choose not to fund the shortfall, the hotel owner has the option to terminate the management contract. At September 30, 2016 and December 31, 2015, there were no amounts recorded on our condensed consolidated balance sheets related to these performance test clauses.
Debt Repayment Guarantees—We enter into various debt repayment guarantees primarily related to our unconsolidated hospitality ventures and certain managed hotels. Typically, we enter into debt repayment guarantees in order to assist hotel owners in obtaining third party financing or to obtain more favorable borrowing terms. Included within debt repayment guarantees are the following:
|
| | | | | | | | | | | | | | | | | | |
Property Description | | Maximum Potential Future Payments | | Maximum Exposure Net of Recoverability from Third Parties | | Other Long-term Liabilities recorded at September 30, 2016 | | Other Long-term Liabilities recorded at December 31, 2015 | | Year of Guarantee Expiration |
Hotel property in Washington (1), (3), (4), (5) | | $ | 215 |
| | $ | — |
| | $ | 38 |
| | $ | — |
| | 2020 |
Hotel properties in India (2), (3) | | 180 |
| | 180 |
| | 23 |
| | 27 |
| | 2020 |
Hotel property in Brazil (1) | | 80 |
| | 40 |
| | 3 |
| | 4 |
| | 2020 |
Hotel property in Minnesota | | 25 |
| | 25 |
| | 2 |
| | 2 |
| | 2021 |
Hotel property in Arizona (1), (4) | | 25 |
| | — |
| | 2 |
| | 3 |
| | 2019 |
Vacation ownership property (1) | | 17 |
| | — |
| | — |
| | — |
| | 2016 |
Hotel property in Hawaii (1) | | 15 |
| | 8 |
| | 2 |
| | 3 |
| | 2017 |
Hotel property in Colorado | | 13 |
| | 13 |
| | — |
| | — |
| | 2016 |
Other (1) | | 17 |
| | 1 |
| | — |
| | — |
| | various, through 2017 |
Total | | $ | 587 |
| | $ | 267 |
| | $ | 70 |
| | $ | 39 |
| | |
(1) We have agreements with either our unconsolidated hospitality venture partner, the respective hotel owners or other third parties to recover certain amounts funded under the debt repayment guarantee; the recoverability mechanism may be in the form of cash, notes receivable, or HTM debt securities.
(2) We have the contractual right to recover amounts funded from the unconsolidated hospitality venture, which is a related party. We expect our maximum exposure to be $90 million, taking into account our partner’s 50% ownership interest in the unconsolidated hospitality venture.
(3) Under certain events or conditions, we have the right to force the sale of the property(ies) in order to recover amounts funded.
(4) If certain funding thresholds are met or if certain events occur, we have the ability to assume control of the property.
(5) We are subject to a completion guarantee whereby the parties agree to substantially complete the construction of the project by a specified date. In the event of default, we are obligated to complete construction using the funds available from the outstanding loan. Any additional funds paid by us are subject to recovery through a HTM debt security.
As of September 30, 2016, the hotel owners are current on their debt service obligations.
Insurance—We obtain commercial insurance for potential losses for general liability, workers' compensation, automobile liability, employment practices, crime, property and other miscellaneous coverages. A portion of the risk is retained on a self-insurance basis primarily through U.S. based and licensed captive insurance companies that are wholly owned subsidiaries of Hyatt and generally insure our deductibles and retentions. Reserve requirements are established based on actuarial projections of ultimate losses. Losses estimated to be paid within twelve months are $40 million and $35 million at September 30, 2016 and December 31, 2015, respectively, and are classified within accrued expenses and other current liabilities on our condensed consolidated balance sheets, while losses expected to be payable in future periods are $55 million and $57 million as of September 30, 2016 and December 31, 2015, respectively, and are included in other long-term liabilities on our condensed consolidated balance sheets. At September 30, 2016, standby letters of credit of $7 million were issued to provide collateral for the estimated claims, which are guaranteed by us. For further discussion, see the "—Letters of Credit" section of this footnote.
Collective Bargaining Agreements—At September 30, 2016, approximately 26% of our U.S. based employees were covered by various collective bargaining agreements, generally providing for basic pay rates, working hours, other conditions of employment and orderly settlement of labor disputes. Generally, labor relations have been maintained in a normal and satisfactory manner, and we believe our employee relations are good.
Surety Bonds—Surety bonds issued on our behalf were $24 million at September 30, 2016 and primarily relate to workers’ compensation, taxes, licenses and utilities related to our lodging operations.
Letters of Credit—Letters of credit outstanding on our behalf as of September 30, 2016 were $238 million, which relate to our ongoing operations and securitization of our performance under our debt repayment guarantee associated with the hotel properties in India, which is only called upon if we default on our guarantee. The letters of credit outstanding do not reduce the available capacity under our revolving credit facility.
Capital Expenditures—As part of our ongoing business operations, significant expenditures are required to complete renovation projects that were approved.
Other—We act as general partner of various partnerships owning hotel properties subject to mortgage indebtedness. These mortgage agreements generally limit the lender’s recourse to security interests in the assets financed and/or other assets of the partnership(s) and/or the general partner(s) thereof.
In conjunction with financing obtained for our unconsolidated hospitality ventures and certain managed hotels, we may provide standard indemnifications to the lender for loss, liability or damage occurring as a result of our actions or actions of the other hospitality venture owners.
We are subject, from time to time, to various claims and contingencies related to lawsuits, taxes and environmental matters, as well as commitments under contractual obligations. Many of these claims are covered under current insurance programs, subject to deductibles. We recognize a liability associated with commitments and contingencies when a loss is probable and reasonably estimable. Although the ultimate liability for these matters cannot be determined at this point, based on information currently available, we do not expect the ultimate resolution of such claims and litigation will have a material effect on our condensed consolidated financial statements.
12. EQUITY
Stockholders’ Equity and Noncontrolling Interests—The following tables detail the equity activity for the nine months ended September 30, 2016 and September 30, 2015, respectively.
|
| | | | | | | | | | | |
| Stockholders’ equity | | Noncontrolling interests in consolidated subsidiaries | | Total equity |
Balance at January 1, 2016 | $ | 3,991 |
| | $ | 4 |
| | $ | 3,995 |
|
Net income | 163 |
| | — |
| | 163 |
|
Other comprehensive income (loss) | 3 |
| | — |
| | 3 |
|
Repurchase of common stock | (268 | ) | | — |
| | (268 | ) |
Directors compensation | 2 |
| | — |
| | 2 |
|
Employee stock plan issuance | 3 |
| | — |
| | 3 |
|
Share-based payment activity | 19 |
| | — |
| | 19 |
|
Balance at September 30, 2016 | $ | 3,913 |
| | $ | 4 |
| | $ | 3,917 |
|
| | | | | |
| Stockholders’ equity | | Noncontrolling interests in consolidated subsidiaries | | Total equity |
Balance at January 1, 2015 | $ | 4,627 |
| | $ | 4 |
| | $ | 4,631 |
|
Net income | 87 |
| | — |
| | 87 |
|
Other comprehensive income (loss) | (66 | ) | | — |
| | (66 | ) |
Repurchase of common stock | (539 | ) | | — |
| | (539 | ) |
Directors compensation | 2 |
| | — |
| | 2 |
|
Employee stock plan issuance | 3 |
| | — |
| | 3 |
|
Share-based payment activity | 16 |
| | — |
| | 16 |
|
Balance at September 30, 2015 | $ | 4,130 |
| | $ | 4 |
| | $ | 4,134 |
|
Accumulated Other Comprehensive Loss—The following tables detail the accumulated other comprehensive loss activity, net of tax, for the three and nine months ended September 30, 2016 and September 30, 2015, respectively. |
| | | | | | | | | | | | | | | |
| Balance at July 1, 2016 | | Current period other comprehensive income (loss) before reclassification | | Amount reclassified from accumulated other comprehensive loss (a) | | Balance at September 30, 2016 |
Foreign currency translation adjustments | $ | (242 | ) | | $ | (15 | ) | | $ | 3 |
| | $ | (254 | ) |
Unrealized gains (losses) on AFS securities | 47 |
| | (8 | ) | | — |
| | 39 |
|
Unrecognized pension cost | (7 | ) | | — |
| | — |
| | (7 | ) |
Unrealized losses on derivative instruments | (5 | ) | | — |
| | — |
| | (5 | ) |
Accumulated Other Comprehensive Income (Loss) | $ | (207 | ) | | $ | (23 | ) | | $ | 3 |
| | $ | (227 | ) |
(a) The amount reclassified from accumulated other comprehensive loss related to the sale of the shares of the company that owns Hyatt Regency Birmingham (U.K.) and was recorded within other long-term liabilities on our condensed consolidated balance sheets. |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| Balance at January 1, 2016 | | Current period other comprehensive income (loss) before reclassification | | Amount reclassified from accumulated other comprehensive loss (a) | | Balance at September 30, 2016 |
Foreign currency translation adjustments | $ | (257 | ) | | $ | — |
| | $ | 3 |
| | $ | (254 | ) |
Unrealized gains on AFS securities | 39 |
| | — |
| | — |
| | 39 |
|
Unrecognized pension cost | (7 | ) | | — |
| | — |
| | (7 | ) |
Unrealized losses on derivative instruments | (5 | ) | | — |
| | — |
| | (5 | ) |
Accumulated Other Comprehensive Income (Loss) | $ | (230 | ) | | $ | — |
| | $ | 3 |
| | $ | (227 | ) |
(a) The amount reclassified from accumulated other comprehensive loss related to the sale of the shares of the company that owns Hyatt Regency Birmingham (U.K.) and was recorded within other long-term liabilities on our condensed consolidated balance sheets. |
| | | | | | | |
| Balance at July 1, 2015 | | Current period other comprehensive income (loss) before reclassification | | Amount reclassified from accumulated other comprehensive loss (b) | | Balance at September 30, 2015 |
Foreign currency translation adjustments | $ | (202 | ) | | $ | (56 | ) | | $ | 21 |
| | $ | (237 | ) |
Unrealized gains on AFS securities | 12 |
| | 9 |
| | — |
| | 21 |
|
Unrecognized pension cost | (5 | ) | | — |
| | — |
| | (5 | ) |
Unrealized gains (losses) on derivative instruments | (6 | ) | | 1 |
| | — |
| | (5 | ) |
Accumulated Other Comprehensive Income (Loss) | $ | (201 | ) | | $ | (46 | ) | | $ | 21 |
| | $ | (226 | ) |
(b) The amount reclassified from accumulated other comprehensive loss was recognized within equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income.
|
| | | | | | | |
| Balance at January 1, 2015 | | Current period other comprehensive income (loss) before reclassification | | Amount reclassified from accumulated other comprehensive loss (b) | | Balance at September 30, 2015 |
Foreign currency translation adjustments | $ | (155 | ) | | $ | (103 | ) | | $ | 21 |
| | $ | (237 | ) |
Unrealized gains on AFS securities | 6 |
| | 15 |
| | — |
| | 21 |
|
Unrecognized pension cost | (5 | ) | | — |
| | — |
| | (5 | ) |
Unrealized gains (losses) on derivative instruments | (6 | ) | | 1 |
| | — |
| | (5 | ) |
Accumulated Other Comprehensive Income (Loss) | $ | (160 | ) | | $ | (87 | ) | | $ | 21 |
| | $ | (226 | ) |
(b) The amount reclassified from accumulated other comprehensive loss was recognized within equity earnings (losses) from unconsolidated hospitality ventures on our condensed consolidated statements of income.
Share Repurchase—During 2016, 2015, and 2014, our board of directors authorized the repurchase of up to $250 million, $400 million and $700 million, respectively, of our common stock. These repurchases may be made from time to time in the open market, in privately negotiated transactions, or otherwise, including pursuant to a Rule 10b5-1 plan, at prices we deem appropriate and subject to market conditions, applicable law and other factors deemed relevant in our sole discretion. The common stock repurchase program applies to our Class A common stock and/or our Class B common stock. The common stock repurchase program does not obligate us to repurchase any dollar amount or number of shares of common stock and the program may be suspended or discontinued at any time.
During the nine months ended September 30, 2016 and September 30, 2015, we repurchased 5,556,424 and 9,614,463 shares of common stock, respectively. These shares of common stock were repurchased at a weighted-average price of $48.25 and $56.05 per share, respectively, for an aggregate purchase price of $268 million and $539 million, respectively, excluding related insignificant expenses in both periods. The shares repurchased during the nine months ended September 30, 2016 represented approximately 4% of our total shares of common stock outstanding as of December 31, 2015. The shares repurchased during the nine months ended September 30, 2015 represented approximately 6% of our total shares of common stock outstanding as of December 31, 2014. The shares of Class A common stock repurchased on the open market were retired and returned to the status of authorized and unissued shares while the shares of Class B common stock repurchased were retired and the total number of authorized Class B shares was reduced by the number of shares repurchased. As of September 30, 2016, we had $111 million remaining under the share repurchase authorization.
Treasury Stock Retirement—During the nine months ended September 30, 2015, we retired 195,423 shares of treasury stock. These shares were retired at a weighted-average price of $43.41 per share resulting in an $8 million reduction in treasury stock. The retired shares of treasury stock were returned to the status of authorized and unissued.
13. STOCK-BASED COMPENSATION
As part of our Long-Term Incentive Plan, we award Stock Appreciation Rights ("SARs"), Restricted Stock Units ("RSUs"), Performance Share Units ("PSUs") and Performance Vesting Restricted Stock ("PSSs") to certain employees. Stock-based compensation expense and unearned compensation presented below exclude amounts related to employees of our managed hotels and other employees whose payroll is reimbursed, as this expense has been and will continue to be reimbursed by our third-party hotel owners and is recorded in other revenues from managed properties and other costs from managed properties on our condensed consolidated statements of income. Stock-based compensation expense included in selling, general, and administrative expense on our condensed consolidated statements of income related to these awards for the three and nine months ended September 30, 2016 and September 30, 2015 were as follows:
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
SARs | $ | 1 |
| | $ | 1 |
| | $ | 9 |
| | $ | 9 |
|
RSUs | 2 |
| | 3 |
| | 13 |
| | 14 |
|
PSUs and PSSs | (2 | ) | | (5 | ) | | (1 | ) | | (3 | ) |
Total stock-based compensation recorded within selling, general, and administrative expenses | $ | 1 |
| | $ | (1 | ) | | $ | 21 |
| | $ | 20 |
|
SARs—Each vested SAR gives the holder the right to the difference between the value of one share of our Class A common stock at the exercise date and the value of one share of our Class A common stock at the grant date. Vested SARs can be exercised over their life in accordance with the plan. All outstanding SARs have a 10-year contractual term, are settled in shares of our Class A common stock and are accounted for as equity instruments.
During the nine months ended September 30, 2016, we granted 924,424 SARs to employees with a weighted-average grant date fair value of $14.52. The fair value of each SAR was estimated on the grant date using the Black-Scholes-Merton option-pricing model.
RSUs—Each vested RSU represents the right to receive a single share of our Class A common stock (or, in the case of an insignificant portion of total RSUs granted, its cash equivalent value). The value of the stock-settled RSUs is based on the fair value of our Class A common stock as of the grant date. We record compensation expense for RSUs over the vesting period of the individual award. Vesting is dependent upon continuous service by the employee, but will accelerate due to death or disability or in the event of a change in control. Compensation expense for retirement eligible grantees is recorded in full once the grantee becomes retirement eligible. In certain limited situations we also grant cash-settled RSUs which are recorded as liability instruments. During the nine months ended September 30, 2016, we granted a total of 444,629 RSUs (an insignificant portion of which are cash-settled RSUs) to employees which, with respect to stock-settled RSUs, had a weighted-average grant date fair value of $47.36.
PSUs and PSSs—We granted both PSUs and PSSs to certain executive officers.
PSUs vest and are paid out in Class A common stock based upon the performance of the Company through the end of the applicable three year performance period relative to the applicable performance target. During the nine months ended September 30, 2016, we granted to our executive officers a total of 111,620 PSUs, with a weighted-average grant date fair value of $47.36. The performance period applicable to such PSUs is a three year period beginning January 1, 2016 and ending December 31, 2018. The PSUs will vest at the end of the performance period only if the performance threshold is met and continued service requirements are satisfied; there is no interim performance metric except in the case of certain change in control transactions.
PSSs vest and restrictions on transfer thereon lapse based upon the performance of the Company through the end of the applicable three year performance period relative to the applicable performance target. The PSSs vest in full if the maximum performance metric is achieved. At the end of the performance period, the PSSs that do not vest will be forfeited. The PSSs will vest at the end of the performance period only if the performance threshold is met and applicable continued service requirements are met; there is no interim performance metric except in the case of certain change in control transactions.
Our total unearned compensation for our stock-based compensation programs as of September 30, 2016 was $7 million for SARs, $15 million for RSUs and $2 million for PSUs and PSSs, which will be recorded to compensation expense over the next three years with respect to SARs and RSUs, with a limited portion of the SAR and RSU awards extending to four years, and over the next two years with respect to PSUs and PSSs.
14. RELATED-PARTY TRANSACTIONS
In addition to those included elsewhere in the Notes to the condensed consolidated financial statements, related-party transactions entered into by us are summarized as follows:
Leases—Our corporate headquarters have been located at the Hyatt Center in Chicago, Illinois, since 2005. A subsidiary of the Company holds a master lease for a portion of the Hyatt Center and has entered into sublease agreements with certain related parties. Future expected sublease income for this space from related parties is $4 million.
Equity Method Investments—We have equity method investments in entities that own properties for which we provide management and/or franchise services and receive fees. We recorded fees of $8 million and $7 million for the three months ended September 30, 2016 and September 30, 2015, respectively. We recorded fees of $22 million and $19 million for the nine months ended September 30, 2016 and September 30, 2015, respectively. As of September 30, 2016 and December 31, 2015, we had receivables due from these properties of $7 million and $6 million, respectively. In addition, in some cases we provide loans (see Note 5) or guarantees (see Note 11) to these entities. During the three and nine months ended September 30, 2016, we recorded fees related to these guarantees of $1 million and $3 million, respectively. Our ownership interest in these unconsolidated hospitality ventures generally varies from 24% to 70%. See Note 3 for further details regarding these investments.
Class B Share Repurchase—During the three and nine months ended September 30, 2016, we repurchased 1,881,636 shares of Class B common stock for a weighted average price of $53.15 per share, for an aggregate purchase price of approximately $100 million. The shares repurchased represented approximately 1% of our total shares of common stock outstanding prior to the repurchase. During the nine months ended September 30, 2015, we repurchased 1,776,501 shares of Class B common stock for a weighted average price of $58.91 per share, for an aggregate purchase price of approximately $105 million. The shares repurchased represented approximately 1% of our total shares of common stock outstanding prior to the repurchase. The shares of Class B common stock were repurchased in privately negotiated transactions from trusts for the benefit of certain Pritzker family members and limited partnerships owned indirectly by trusts for the benefit of certain Pritzker family members and were retired, thereby reducing the total number of shares outstanding and reducing the shares of Class B common stock authorized and outstanding by the repurchased share amount.
Class B Share Conversion—During the three months ended September 30, 2016, 500,000 shares of Class B common stock were converted on a share-for-share basis into shares of our Class A common stock, $0.01 par value per share. The shares of Class B common stock that were converted into shares of Class A common stock have been retired, thereby reducing the shares of Class B common stock authorized and outstanding.
15. SEGMENT INFORMATION
Our reportable segments are components of the business which are managed discretely and for which discrete financial information is reviewed regularly by the chief operating decision maker to assess performance and make decisions regarding the allocation of resources. Our chief operating decision maker is the President and Chief Executive Officer. We define our reportable segments as follows:
| |
• | Owned and leased hotels—This segment derives its earnings from owned and leased hotel properties located predominantly in the United States but also in certain international locations and, for purposes of segment Adjusted Earnings Before Interest Expense, Taxes, Depreciation and Amortization ("Adjusted EBITDA"), includes our pro rata share of the Adjusted EBITDA of our unconsolidated hospitality ventures, based on our ownership percentage of each venture. |
| |
• | Americas management and franchising—This segment derives its earnings primarily from a combination of hotel management and licensing of our portfolio of brands to franchisees located in the United States, Latin America, Canada and the Caribbean. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees with no added margin. These costs relate primarily to payroll costs at managed properties where the Company is the employer. These revenues and costs are recorded within other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees collected from the Company’s owned hotels, which are eliminated in consolidation. |
| |
• | ASPAC management and franchising—This segment derives its earnings primarily from a combination of hotel management and licensing of our portfolio of brands to franchisees located in Southeast Asia, as well as greater China, Australia, South Korea, Japan and Micronesia. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners and franchisees with no added margin. These costs relate primarily to reservations, marketing and IT costs. These revenues and costs are recorded within other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees collected from the Company’s owned hotels, which are eliminated in consolidation. |
| |
• | EAME/SW Asia management—This segment derives its earnings primarily from hotel management of our portfolio of brands located primarily in Europe, Africa, the Middle East, India, Central Asia and Nepal. This segment’s revenues also include the reimbursement of costs incurred on behalf of managed hotel property owners with no added margin. These costs relate primarily to reservations, marketing and IT costs. These revenues and costs are recorded within other revenues from managed properties and other costs from managed properties, respectively. The intersegment revenues relate to management fees collected from the Company’s owned hotels, which are eliminated in consolidation. |
Our chief operating decision maker evaluates performance based on each segment’s revenue and Adjusted EBITDA. Adjusted EBITDA, as we define it, is a non-GAAP measure. We define Adjusted EBITDA as net income attributable to Hyatt Hotels Corporation plus our pro rata share of unconsolidated hospitality ventures Adjusted EBITDA based on our ownership percentage of each venture, adjusted to exclude equity earnings (losses) from unconsolidated hospitality ventures; stock-based compensation expense; asset impairments; gains (losses) on sales of real estate; other income (loss), net; depreciation and amortization; interest expense; and provision for income taxes.
Effective January 1, 2016, our definition of Adjusted EBITDA has been updated to exclude stock-based compensation expense, to facilitate comparison with our competitors. We have applied this change in the definition of Adjusted EBITDA to 2015 historical results to allow for comparability between the periods presented.
The table below shows summarized consolidated financial information by segment. Included within corporate and other are unallocated corporate expenses, license fees related to Hyatt Residence Club, and our co-branded credit card.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Owned and leased hotels | | | | | | | |
Owned and leased hotels revenues | $ | 519 |
| | $ | 500 |
| | $ | 1,594 |
| | $ | 1,549 |
|
Adjusted EBITDA | 120 |
| | 110 |
| | 400 |
| | 374 |
|
Depreciation and amortization | 71 |
| | 69 |
| | 211 |
| | 208 |
|
Americas management and franchising | | | | | | | |
Management and franchise fees revenues | 90 |
| | 85 |
| | 281 |
| | 269 |
|
Other revenues from managed properties | 409 |
| | 409 |
| | 1,266 |
| | 1,225 |
|
Intersegment revenues (a) | 16 |
| | 15 |
| | 57 |
| | 55 |
|
Adjusted EBITDA | 77 |
| | 74 |
| | 242 |
| | 229 |
|
Depreciation and amortization | 5 |
| | 5 |
| | 14 |
| | 14 |
|
ASPAC management and franchising | | | | | | | |
Management and franchise fees revenues | 23 |
| | 21 |
| | 67 |
| | 65 |
|
Other revenues from managed properties | 24 |
| | 19 |
| | 72 |
| | 59 |
|
Intersegment revenues (a) | 1 |
| | — |
| | 1 |
| | 1 |
|
Adjusted EBITDA | 14 |
| | 12 |
| | 38 |
| | 37 |
|
Depreciation and amortization | — |
| | — |
| | 1 |
| | 1 |
|
EAME/SW Asia management | | | | | | | |
Management and franchise fees revenues | 15 |
| | 16 |
| | 47 |
| | 49 |
|
Other revenues from managed properties | 15 |
| | 12 |
| | 47 |
| | 40 |
|
Intersegment revenues (a) | 2 |
| | 4 |
| | 8 |
| | 10 |
|
Adjusted EBITDA | 8 |
| | 7 |
| | 24 |
| | 23 |
|
Depreciation and amortization | 1 |
| | 1 |
| | 4 |
| | 4 |
|
Corporate and other | | | | | | | |
Revenues | 12 |
| | 10 |
| | 34 |
| | 29 |
|
Adjusted EBITDA | (27 | ) | | (32 | ) | | (91 | ) | | (92 | ) |
Depreciation and amortization | 10 |
| | 3 |
| | 24 |
| | 6 |
|
Eliminations (a) | | | | | | | |
Revenues | (19 | ) | | (19 | ) | | (66 | ) | | (66 | ) |
Adjusted EBITDA | — |
| | — |
| | — |
| | — |
|
Depreciation and amortization | — |
| | — |
| | — |
| | — |
|
TOTAL | | | | | | | |
Revenues | $ | 1,088 |
| | $ | 1,053 |
| | $ | 3,342 |
| | $ | 3,219 |
|
Adjusted EBITDA | 192 |
| | 171 |
| | 613 |
| | 571 |
|
Depreciation and amortization | 87 |
| | 78 |
| | 254 |
| | 233 |
|
| |
(a) | Intersegment revenues are included in the management and franchise fees revenues and eliminated in Eliminations. |
The table below provides a reconciliation of our consolidated Adjusted EBITDA to EBITDA and a reconciliation of EBITDA to net income attributable to Hyatt Hotels Corporation for the three and nine months ended September 30, 2016 and September 30, 2015.
|
| | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Adjusted EBITDA | $ | 192 |
| | $ | 171 |
| | $ | 613 |
| | $ | 571 |
|
Equity earnings (losses) from unconsolidated hospitality ventures | 25 |
| | (17 | ) | | 46 |
| | (46 | |