This paper discusses the financial state of the Hyatt Hotel Corporation. A brief company history is introduced in the first chapter. In Chapter 2, Hyatt's financial performance is interpreted by ratio analysis according to its financial reports from the last three years. After that, a financial forecast for the next two periods will be provided in the third chapter.
Chapter One Brief Company History of Hyatt
Hyatt was founded by Jay Pritzker in 1957. The first hotel was a small motor hotel near the Los Angeles International Airport, called the Hyatt House. By working together with other Pritzker family business interests, Hyatt's portfolio grew quickly in the next 10 years and became a public company in 1962. In 1967, Hyatt launched its first major designed hotel in Georgia, named Hyatt Regency Atlanta. Its innovative design and revolutionary architecture impressed the industry significantly and promoted the Hyatt brand as a global hospitality leader. In 1968, Hyatt International was established. In the next year, 13 hotels were opened around the US and a branch company was set up in Hong Kong. The Hyatt International Corporation was formed. Over the following decade, Hyatt branched out and diversified quickly. In 1980, the Grand Hyatt and Park Hyatt were set up. The launching of Hyatt Regency Maui Resort & Spa in Hawaii also reinforced the Hyatt brand and introduced it into the luxury hospitality market. On December 31, 2004, the Hyatt Corporation and the Hyatt International Corporation were consolidated as the Hyatt Hotel Corporation (HHC), which was entirely owned by Pritzker family business interests (Hyatt, 2010).
Today, Hyatt has six different successful brands: Andaz, Hyatt Regency, Park Hyatt, Grand Hyatt, Hyatt Place and Hyatt Summerfield Suites, all of which distinguish HHC as very competitive in the hospitality market. These six properties are designed to cater for customers by providing them with different experiences of lifestyles, attitudes, values and aspirations (Hyatt, 2010).
"Andaz brand is sophistication made simple delivered with a genuine warmth; Hyatt Regency enables productivity and revitalization within a responsive, convenient and contemporary environment; Park Hyatt, a discreet and refined collection located in fashionable cities around the world, epitomizes modern luxury; Grand Hyatt properties are some of the most architecturally dramatic hotels in the world, offering stunning design and a myriad of innovative food and beverage concepts; Hyatt Place is designed for the 24/7 lifestyle of today's multi-tasking business travelers; and Hyatt Summerfield Suites, a reinvention of the all-suites, extended-stay hotel, features timely amenities and inviting, residential design." (Hyatt, 2010)
To consolidate its industry leading brand, Hyatt pursues its goals and values in every segment of its business. By March 31, 2010, Hyatt Hotels Corporation had expanded its business to over 45 countries with 434 properties. As a global-recognized company, Hyatt will carry its innovation tradition forward and accomplish its mission to guests, employees, associates and owners by providing outstanding services, upscale amenities, exceptional catering programs and an innovative, well-designed environment (Hyatt, 2010).
Chapter Two The Evaluation of Hyatt's Financial performance
This chapter will explain the ratio analysis of the Hyatt Hotel Corporation (HHC)'s financial performance from 2007 to 2009. Based on the data in Hyatt's balance sheets and income statements, a ratio table for the last three years is generated here:
2009
2008
2007
Liquidity Ratios
Current ratio
1,989/495
4.02
1,057/653
1.62
1,065/697
1.53
Acid ratio
1,327+226/495
3.14
428+281/653
1.08
409+318/697
1.04
Asset Man Ratio
Inventory turnover
2753/133
20.70
2934/170
17.26
2847/150
18.98
Capital turnover
3332/2139-495+5016
0.5
3837/2555-653+3564
0.7
3738/2814-697+3434
0.67
Profitability Ratio
Operating income to sales
48/3332
0.014
364/3837
0.095
385/3738
0.103
return on assets
(43)/7155
(0.006)
168/6119
0.027
270/6248
0.04
Leverage Ratio
Debt to equity
2139/5016
0.43
2555/3564
0.72
2814/3434
0.82
Debt ratio
2139/7155
0.3
2555/6119
0.42
2814/6248
0.45
Times interest earned
(55)/56
(0.98)
204/75
2.75
474/43
11.02
Return on Equity
profit margin
(43)/3332
(0.013)
168/3837
0.044
270/3738
0.072
Asset turnover
3332/7155
0.46
3837/6119
0.63
3738/6248
0.6
financial leverage
7155/5016
1.43
6119/3564
1.72
6248/3434
1.82
Liquidity ratios analyze whether the company has the ability to carry out its short-term obligations (Rio-Morales, 2010). As is shown in the ratio table, the current ratios of the Hyatt Hotels Corporation were 1.53 and 1.62 in 2007 and 2008 respectively. This means that Hyatt had 1.53 times more current assets than its current liabilities in 2007 and it rose to 1.62 times more in 2008, which were both acceptable. However, in 2009, as Hyatt raised its liquid cash from $428 in 2008 to $1,327, its current ratio soared to 4.02, which was too high because it indicated that the management was not investing the company's assets productively to grow the revenue in 2009. On the other hand, the acid ratios of Hyatt in 2007 and 2008 were also normal, which were 1.04 and 1.08 respectively, while in 2009, its quick ratio grew to 3.14 dramatically. This also means that the company had too many idle assets not being invested.
Assets management Ratios scale a company's ability to generate revenue from its assets (Rio-Morales, 2010). The inventory turnover rate of Hyatt climbed up gradually from 18.98 in 2007 to 20.7 in 2009. This growth was appreciated by the shareholders because it implies that Hyatt became more capable of efficiently turning its inventory into sales in these three years. Capital turnover is another kind of asset management ratio, which aims to measure if the company can turn its capital into sales effectively (Rio-Morales, 2010). Hyatt had experienced a regression in generate revenue from its debt and equity. In 2007, for each dollar of capital invested, there was a mere growth of $0.67 in sales, while in 2009, this went down even further ($0.5).
"Profitability ratios are used to assess a business' ability to generate earnings as compared to expenses over a specified time period (Lopes, 2010)." Hyatt's earnings before interest and taxes (EBIT) dropped quickly in the last three years (from $385 to $48), which finally resulted in a big decline of profit margin in 2009.
Return on assets measures how much profit a company can squeeze out of its assets (Rio-Morales, 2010). Obviously, a higher return is preferred. The situation of Hyatt is still far from satisfactory. Its return on assets ratio has dropped year by year in the last three years. In 2007, Hyatt made $0.04 net income from each dollar of assets, but by the end of 2009, it failed to make any positive net revenue from its assets.
Unlike liquidity ratio which is based on short-term assets and liabilities, leverage ratios provide an indication of a company's long-term solvency (NetMBA, 2010.) Debt to Equity compares the company's debts from creditors to the shareholders equity (Rio-Morales, 2010). From 2007 to 2008, Hyatt Hotels Cooperation's debt to equity decreased slightly from 0.82 to 0.72, then it quickly dropped to 0.43 in 2009. This means that compared to Hyatt's equity, only 43% of its funds were debts. This change shows that Hyatt controlled the risk while still making revenue efficiently, because the higher the ratio, the more debts the company possess. The more debts the company has, the higher the risk is. Therefore, Hyatt had balanced its management of debt and equity successfully.
Debt ratio measures how much debt a company has in its total assets. A lower debt ratio can be interpreted as the company being capable of carrying its liabilities since there are enough assets (Rio-Morales, 2010). Hyatt's debt ratio went down to 0.3 in 2009, which means that only 30% of Hyatt's asset sources were from creditors. This would definitely be appreciated by the managers, creditors and investors.
Times interest earned refers to the number of times a company's earnings covers its interest expenses (Rio-Morales, 2010). It measures a company's ability to meet its debt obligations on a pretax basis (Investopedia, 2010). Hyatt's times interest earned ratios show that the corporation's ability to cover its interest expenses had decreased from 2007 to 2009. In 2007, Hyatt covered its interest expenses 11.02 times with operation income, while in 2008, the number of times dropped significantly to 2.75. Eventually, in 2009, the company failed to cover its debt obligations.
Return on equity ratios are used to interpret a company's ability to generate earnings from its investments. For instance, profit margin reflects how much profit a company generates from its sales (Rio-Morales, 2010). In 2007, Hyatt made $0.072 of return on each dollar of its sales. In 2008 and 2009, the profit margin dropped to 0.004 and -0.013 (because the corporation's net income had become negative) respectively.
Asset turnover reflects how much sales the company is able to grow from its assets (Rio-Morales, 2010). Hyatt experienced a slight growth in its asset turnover rate from 0.6 in 2007 to 0.63 in 2008. However, in 2009, although Hyatt gained $1036 million more in its total assets, the sales dropped to $3332 million. This caused a significant decrease in its asset turnover: for every $1 of assets, Hyatt was only able to generate $0.43 of sales by the end of 2009.
Financial leverage measures how much a company is able to increase its total assets from the investment of creditors and shareholders (Rio-Morales, 2010). Usually, most managers will prefer a lower financial leverage because a higher ratio implies a higher risk of bankruptcy if the company does not have enough money to pay its debts. Hyatt's financial leverage ratio has experienced a gradually decline in the last three years, which reflects a lower financial risk for the company.
To sum up, there was a significant decline in Hyatt's financial statement in 2009. Compared to 2008, its revenue and net income dropped sharply, while its total assets grew by $1036 million dollars. The equity of Hyatt Hotel Cooperation also increased by $1448 million, while there was a $412 million decline of the total liability. Why had HHC such a contradictory, unusual financial performance in 2009? The investors and managers should see what happened to the company in 2009 and have a look at Hyatt's cash flow statement.
In 2009, Hyatt's net income was $71 million and $132 million less than 2008 and 2007 respectively. This decline was due to the decrease of income from cost methods investments, foreign currency losses and the cost of debt settlement. As is listed below, Hyatt's income from cost methods investment dropped to $22 million in 2009.
(Hyatt, 2009, p.F-9)
Companies use foreign currency forward contracts to minimize the risks and effects of foreign currency exposures (Hyatt, 2009). The value of these forward contracts will be recorded in the income statement as other income (loss), net (Hyatt, 2009). Hyatt's foreign currency gains were quite weak in 2009, which was $12 million less than $17 million in 2007.
The debt settlement cost of Hyatt rose sharply in 2009. On May 13 and May 18, 2009, the corporation repurchased and cancelled $600 million of 5.84% senior subordinated due 2013 (see Hyatt's debt table below) and plus $ 88 million in make whole interest and early settlement premium (Hyatt, 2009). That is the main reason why its total long-term debt had decreased by $369 million between 2008 and 2009. In addition, the early settlement of a stock purchase forward agreement and the provision on hotel loans also cut down the net income of the Hyatt Hotel Cooperation (HHC) in 2009 (Hyatt, 2009).
(Hyatt, 2009, p.F-26)
As is shown in the cash flow statement (appendix 3) of HHC, the net cash provided by financing activities of continuing operations surged in 2009, which ended up with $1056 million by the end of the year, while for 2008 and 2007, the net cash from financing activities was -$20 and - $374 respectively. This significant growth is due to the proceeds from issuance of long-term debt, from revolver and the issuance of common stock. On August 14, 2009, Hyatt received the proceeds of $498 million from issuance of long-term debt and of $675 from revolver (Hyatt, 2009). On May 14, 2009, the corporation sold its common stock at $26 per share, got $775 million in cash and netted $4million in related costs. The total cash flow from the issuance of common stock was $1482 million in 2009.This significantly contributed to the net cash of provided by being used in financing activities, which was $1056 million, while Hyatt failed to gain any cash from financing activities of continuing operations in both 2008 (-$20 million) and 2007 (-$374 million) (Hyatt, 2009). The net increase in cash and cash equivalents surged to $899 million which made the cash and cash equivalents continuing operations become about 3 times more than they were in 2008 and 2007. Also as is shown in the balance sheet of HHC, the cash and cash equivalents were $1327 million, $428 million and $409 million in 2009, 2008 and 2007 respectively. These 1327 million dollars had mainly contributed to the substantial growth of the corporation's total current assets ($1989 million) in 2009 and will provide Hyatt with more adequate liquidity and resources for future growth (Hyatt, 2009).
According to the previous analysis of Hyatt Hotel Corporation's financial performance from 2007 to 2009, it is clear that Hyatt experienced a sharp decline of its revenue and net income in 2009. Five of the main reasons are that 1) the occupancy rate and room rate also declined so significantly (Simpson, 2009); 2) Hyatt repurchased its 2013 Notes for $600 million; 3) the decline of income from cost method investment; 4) the loss of foreign currency gains; 5) the proceeds were used to pay the hotel loans. However, the corporation's total assets and shareholders' equity increased a lot because the cash flow from financing activities was substantially strong in 2009, which generated about three times more cash than before. The growth of liquid assets eventually increased its total assets. In 2009, HHC sold 29,195,199 shares of its common stock, which contributed to the growth of cash and also the total shareholders' equity.
Chapter Three The financial forecast of Hyatt
Forecasting has been described as an attempt to foresee the future by examining historical data and patterns and applying judgment to projections created from those patterns (Rio-Morales, 2010). It has always been one component of running an enterprise and plays a very important role in the success or failure of a company. In recent years, business forecasting has developed into a much more scientific endeavor, with a host of theories, methods, and techniques designed for forecasting certain types of data.
Time series forecasting models is the most common method used. It normally uses historical records that are readily available within the firm or industry to predict future financial statements. Applications of time series models, which use quantitative methods, for forecasting time series usually rely on four basic models:the Moving average model, the Weighted moving average model,the Exponential smoothing model and the Linear regression model (Hyatt Hotels, 2010).
The Moving Average model is in the class of "naive" models, because it takes a data set with variation and creates another data set with less variation, or a smoothed data set. It takes the average of several periods of data; the result is a dampened or smoothed data set.This model is used when demand is stable and there is no evidence of a trend or seasonal pattern (Abilla, 2007). Compared to the Moving Average model, the weighted moving average model indicates the subjective importance we wish to place on past or recent data. The higher the weight, then the higher the importance we place on more recent data; similarly, for lower weights (Abilla, 2007).
The Exponential smoothing model uses a smoothing constant, alpha, as an adjustment in determining the forecast. A smoothing constant is a value assigned by the forecaster to adjust the forecast based on the forecaster's assumption of the relationship between sales in one time period and sales in the next time period (Rio-Morales, 2010).
In this case, forecasting for the next two periods is required, but these three methods only can be used to forecast one period of future financial statement exactly. So it seems that it is preferable to use the Linear regression model (Hyatt Hotels, 2010).
Linear regression is a functional relationship between two or more correlated variables that is often empirical to predict values of one variable when given values of the others (Rio-Morales, 2010). It is applied here to forecast the trend of sales, cost and profits in the future. (See the following graphs)
In order to get more information, detailed data is listed below.
Revenue, Cost and Profit forecast in 3rd and 4th quarter in 2010
Year
Quarter
Forecasting Revenue
Forecasting Cost
Forecasting Profit
2008
1
967
858
97
2
1042
901
76
3
942
842
137
4
886
872
(142)
2009
1
789
769
14
2
848
824
(50)
3
806
812
5
4
889
879
(12)
2010
1
841
820
5
2
889
830
25
3
781
800
(112)
4
793
847
71
Looking at these pictures, it shows, that in recent years, Hyatt has not had a good performance. Its revenue is declining constantly. Although it has reduced their cost in these years, they can't prevent the loss of profit. According to the graph, company finance in 2010 will continue to fall. The revenue in the 3rd and 4th quarters will be $781 million and $793 million, 3.10% and 10.8% less than the same period last year respectively. And the company will lose $112 million in the 3rd and gain $71 million in the 4th quarter. It seems that the situation will improve in the future.
Mark S.Hoplamazian, president and chief executive officer of Hyatt Hotels Corporation, said that this loss is just a current cyclical downturn. "We believe that this is an opportune time to commit capital to renovations in our owned hotels and we will continue to do so in 2010 as we invest for the long term (Hyatt Hotels, 2010)."
Conclusion
This project produced a financial report for Hyatt Hotels Corporation. The analyses are basically generated according to the corporation's annual and quarterly financial reports. Besides the income statement and balance sheet, the evaluation also uses the cash flow statement to see the details of Hyatt's financial performance from 2007 to 2009. The forecast for the next two periods' sales, profits and costs have been produced by using the last 10 periods' data. If possible, our group would like to include more information about the corporation's stock, notes, investment and international franchising to write a fuller report.
