What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-08-06 compared with 2020-05-07 · 183 added, 140 removed, 235 unchanged (58% of the section changed)

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COVID-19 Pandemic

During the three months ended March 31, 2020, the COVID-19 pandemic significantly impacted the global economy and strained the hospitality industry due to travel restrictions and stay-at-home directives resulting in cancellations and significantly reduced travel around the world.

The reduction in travel has resulted in complete and partial suspensions of hotel operations in many of the locations in which our hotels are located for an indeterminate duration, which included approximately 12 percent of our global hotel properties for some portion of the reporting period.

As such, it had a material negative impact on our results for the three months ended March 31, 2020, and we expect it to continue to have a material negative impact on our results in future periods, as described below under "—Results of Operations."

As of May 4, 2020, we were experiencing suspensions of hotel operations at approximately 950 hotels, or approximately 16 percent of our global hotel properties, and have re-opened approximately 210 hotels that had previously suspended operations at some point in time as a result of the COVID-19 pandemic.

During the six months ended June 30, 2020, the COVID-19 pandemic significantly impacted the global economy and strained the hospitality industry due to travel restrictions and stay-at-home directives in place at various times during the period, resulting in cancellations and significantly reduced travel around the world.

The reduction in travel has resulted in complete and partial suspensions of hotel operations in many of the locations in which our hotels are located for an indeterminate duration, which, outside of China, largely began in mid-March, and included approximately 20 percent of our global hotel properties for some portion of the reporting period.

As such, it had a material adverse impact on our results for the three and six months ended June 30, 2020, and we expect it to continue to have a material adverse impact on our results in future periods, as described below under "—Results of Operations."

As of July 31, 2020, 96 percent of our global hotel properties were open, while 260 hotels had temporarily suspended operations.

Hotels that have reopened generally have experienced significantly lower occupancy as compared with periods before the onset of the pandemic.

In response to this global crisis, we have taken actions to prioritize the safety and security of our guests, employees and owners and support our communities, which have included:

(i) finding alternative uses for our hotel properties, such as providing housing for first responders and healthcare workers;

(i) finding alternative uses for our hotel properties, such as providing housing for first responders and healthcare workers, which included our partnership with American Express to donate up to one million hotel room nights across the U.S.

to frontline medical professionals;

(ii) pledging financial assistance to organizations helping those affected by COVID-19 through our Hilton Effect Foundation;

and (iii) providing the option for our Hilton Honors members to donate Hilton Honors points to select foundations aiding those impacted by COVID-19.

Additionally, we took steps to help ensure our business can withstand this uncertain time, as detailed in "—Liquidity."

Hilton is one of the largest hospitality companies in the world, with 6,162 properties comprising 977,939 rooms in 118 countries and territories as of March 31, 2020.

Most recently, as properties around the world are reopening and certain travel restrictions are lifted, we launched a new program, Hilton CleanStay, that will deliver a new standard of cleanliness and disinfection to our properties worldwide, and Hilton EventReady, which focuses on cleanliness and customer service specific to meetings and events.

Additionally, we have taken several steps to help our business withstand this uncertain time, as detailed in "—Liquidity."

Hilton is one of the largest hospitality companies in the world, with 6,215 properties comprising 983,465 rooms in 118 countries and territories as of June 30, 2020.

Our premier brand portfolio includes:

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our focused service hotel brands, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton;

and our timeshare

brand, Hilton Grand Vacations.

As of March 31, 2020, we had over 106 million members in our award-winning guest loyalty program, Hilton Honors, a 19 percent increase from March 31, 2019.

and our timeshare brand, Hilton Grand Vacations.

As of June 30, 2020, we had 108 million members in our award-winning guest loyalty program, Hilton Honors.

Segments and Regions

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Although the U.S.

is included in the Americas, it represented 72 percent of our system-wide hotel rooms as of March 31, 2020;

is included in the Americas, it represented 72 percent of our system-wide hotel rooms as of June 30, 2020;

therefore, the U.S.

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Prior to approving the addition of new properties to our management and franchise development pipeline, we evaluate the economic viability of the property based on its geographic location, the credit quality of the third-party owner and other factors.

By increasing the number of management and franchise contracts with third-party owners, we expect to increase overall return on invested capital and cash available to support our business needs.

While these objectives have not changed as a result of the COVID-19 pandemic, the current economic environment has posed certain challenges to the execution of our strategy, which may in some cases include delays in openings and new development.

By increasing the number of management and franchise contracts with third-party owners, over time we expect to increase revenues, overall return on invested capital and cash available to support our business needs.

While these objectives have not changed as a result of the COVID-19 pandemic, the current economic environment has posed certain challenges to the execution of our strategy, which have and may continue to include delays in openings and new development.

See further discussion on our cash management policy, as detailed in "—Liquidity."

As of March 31, 2020, we had nearly 2,670 hotels in our development pipeline that we expect to add as open hotels in our system, representing more than 405,000 rooms under construction or approved for development throughout 120 countries and territories, including 35 countries and territories where we do not currently have any open hotels.

As of June 30, 2020, we had over 2,700 hotels in our development pipeline that we expect to add as open hotels in our system, representing nearly 414,000 rooms under construction or approved for development throughout 121 countries and territories, including 35 countries and territories where we do not currently have any open hotels.

All of the rooms in the development pipeline are within our management and franchise segment.

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The effects of Brexit will depend on the final terms that will be negotiated during the implementation period, including the terms of any trade agreements that will dictate the U.K.’s access to E.U.

While our results as of and for the three months ended March 31, 2020 were not materially affected by Brexit, the final outcomes are not yet certain.

While our results as of and for the six months ended June 30, 2020 were not materially affected by Brexit, the final outcomes are not yet certain.

Brexit measures could potentially disrupt the markets we serve and cause tax and foreign currency volatility, which could have adverse effects on our business.

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and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results were not available.

Of the 6,107 hotels in our system as of March 31, 2020, 5,036 hotels were classified as comparable hotels.

Our 1,071 non-comparable hotels included 235 hotels, or approximately four percent of the total hotels in our system, that were removed from the comparable group during the last twelve months because they sustained substantial property damage, business interruption, underwent large-scale capital projects or comparable results were not available.

When considering business interruption in the context of our definition of comparable hotels, any hotel that had completely or partially suspended operations on a temporary basis at any point during the three months ended March 31, 2020, as a result of the COVID-19 pandemic, was considered to be part of the definition of comparable hotels.

Despite these temporary suspensions of hotel operations, we believe that including these hotels within occupancy, average daily rate and revenue per available room, reflects the underlying results of our business for the three months ended March 31, 2020.

Of the 6,160 hotels in our system as of June 30, 2020, 5,018 hotels were classified as comparable hotels.

Our 1,142 non-comparable hotels included 192 hotels, or approximately three percent of the total hotels in our system, that were removed from the comparable group during the last twelve months because they sustained substantial property damage, business interruption, underwent large-scale capital projects or comparable results were otherwise not available.

When considering business interruption in the context of our definition of comparable hotels, any hotel that had completely or partially suspended operations on a temporary basis at any point during the six months ended June 30, 2020 as a result of the COVID-19 pandemic was considered to be part of the definition of comparable hotels.

Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period.

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References to RevPAR, ADR and occupancy are presented on a comparable basis, and references to RevPAR and ADR are presented on a currency neutral basis, unless otherwise noted.

As such, comparisons of these hotel operating statistics for the three months ended March 31, 2020 and 2019 use the exchange rates for the three months ended March 31, 2020.

As such, comparisons of these hotel operating statistics for the three and six months ended June 30, 2020 and 2019 use the exchange rates for the three and six months ended June 30, 2020, respectively.

EBITDA and Adjusted EBITDA

EBITDA reflects net income (loss), excluding interest expense, income tax expense (benefit) and depreciation and amortization.

EBITDA reflects net income (loss), excluding interest expense, income tax benefit (expense) and depreciation and amortization.

Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses, revenues and expenses in connection with:

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(iv) furniture, fixtures and equipment ("FF&E") replacement reserves required under certain lease agreements;

(v) reorganization costs;

(vi) share-based compensation expense (benefit);

(vii) non-cash impairment losses;

(viii) severance, relocation and other expenses;

(ix) amortization of contract acquisition costs;

(x) the net effect of reimbursable costs included in other revenues and other expenses from managed and franchised properties;

and (xi) other items.

(v) reorganization, severance, relocation and other related expenses;

(vi) share-based compensation;

(vii) non-cash impairment;

(viii) amortization of contract acquisition costs;

(ix) the net effect of reimbursable costs included in other revenues and other expenses from managed and franchised properties;

and (x) other items.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons:

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The hotel operating statistics by region for our system-wide comparable hotels were as follows:

Three Months Ended Variance

March 31, 2020 2020 vs.

Three Months Ended Variance Six Months Ended Variance

June 30, 2020 2020 vs.

2019 June 30, 2020 2020 vs.

Occupancy 24.4 % (55.9) % pts.

41.5 % (34.5) % pts.

ADR $ 101.17 (33.2) % $ 129.02 (13.2) %

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Occupancy 10.3 % (60.7) % pts.

32.4 % (35.8) % pts.

ADR $ 76.72 (32.7) % $ 109.78 (5.9) %

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Occupancy 7.1 % (72.3) % pts.

30.0 % (43.1) % pts.

ADR $ 84.21 (39.9) % $ 115.43 (12.6) %

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Occupancy 15.4 % (50.2) % pts.

38.6 % (29.8) % pts.

ADR $ 103.91 (28.7) % $ 128.99 (8.8) %

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Occupancy 28.8 % (40.7) % pts.

33.4 % (34.1) % pts.

ADR $ 74.09 (33.3) % $ 96.70 (15.5) %

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Occupancy 22.3 % (56.1) % pts.

39.3 % (35.1) % pts.

ADR $ 97.18 (33.2) % $ 124.94 (12.6) %

RevPAR $ 21.67 (81.0) % $ 49.06 (53.9) %

During the three months ended March 31, 2020, we experienced significant declines in RevPAR in all regions, due primarily to occupancy decreases resulting from the COVID-19 pandemic.

Our Asia Pacific region experienced the effects of the pandemic in January, which continued into February and March, with suspensions of hotel operations beginning in late January.

However, pronounced negative results in the U.S., Americas (excluding the U.S.), Europe and MEA regions only began in March after having occupancy rates that were roughly flat through February, when compared to the prior year, with hotel suspensions beginning in mid-March.

Of the approximately 730 properties that had suspended hotel operations as of March 31, 2020, approximately 49 percent were in the U.S., 9 percent were in the Americas (excluding U.S.), 32 percent were in Europe, 5 percent were in MEA and 5 percent were in Asia Pacific.

However, we have seen early signs of recovery in the Asia Pacific region, particularly in China, with occupancy as of May 4, 2020 of approximately 40 percent, up from approximately 9 percent in early February, and with the reopening of nearly all of the approximately 150 hotels in China that had previously suspended operations.

The table below provides a reconciliation of net income to EBITDA and Adjusted EBITDA:

Three Months Ended

During the three and six months ended June 30, 2020, we experienced significant declines in RevPAR in all regions compared to the same periods in 2019, due to both occupancy and ADR decreases resulting from the COVID-19 pandemic.

Our Asia Pacific region experienced the effects of the pandemic early in 2020, with suspensions of hotel operations beginning in late January.

Pronounced negative results in the Americas and EMEA regions lagged the Asia Pacific region, with hotel suspensions in those regions beginning in mid-March.

Of the approximately 1,205 properties that had suspended hotel operations at some point during the six months ended June 30, 2020, approximately 46 percent were in the U.S., 10 percent were in the Americas (excluding U.S.), 23 percent were in Europe, 5 percent were in MEA and 16 percent were in Asia Pacific.

As of July 31, 2020, the operations at 260 hotels, primarily located in the U.S., were temporarily suspended.

However, properties that have reopened have experienced significantly lower occupancy compared with periods prior to the onset of the pandemic as business and transient demand remains lower and travel restrictions and stay-at-home directives are still in place in many areas.

On a global level, the pervasiveness of the COVID-19 impact began in late March, with its most significant adverse impact on occupancy and RevPAR seen in April.

Since April, all regions, except for MEA, have experienced month over month increases in occupancy and RevPAR.

We experienced the most notable recoveries in the U.S.

and Asia Pacific with occupancy levels up approximately 20 percentage points and 15 percentage points, respectively, from April to June.

The table below provides a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:

Three Months Ended Six Months Ended

June 30, June 30,

2020 2019 2020 2019

(in millions)

Net income $ 18 $ 159

Net income (loss) $ (432) $ 261 $ (414) $ 420

Interest expense 106 101 200 199

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EBITDA (250) 549 (82) 949

Gain on foreign currency transactions (9) —

Loss on foreign currency transactions 13 3 4 3

FF&E replacement reserves 7 15 21 29

Share-based compensation expense (benefit) (12) 34

Share-based compensation expense 24 47 12 81

Reorganization costs 38 — 38 —

Impairment losses 15 — 127 —

Amortization of contract acquisition costs 7 7 15 14

Net other expenses from managed and franchised properties

Net other expenses (revenues) from managed and franchised properties

166 (22) 237 12

Other adjustment items (1)

Adjusted EBITDA $ 51 $ 618 $ 414 $ 1,117

(1) Includes adjustments for severance and other items.

Three Months Ended Percent

March 31, Change

(1) Includes severance not related to the reorganization and other items.

The three and six months ended June 30, 2020 also include losses related to the disposal of an investment and an accrual for a loan guarantee for a franchised hotel.

The three and six months ended June 30, 2019 also include expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities.

Three Months Ended Percent Six Months Ended Percent

June 30, Change June 30, Change

2020 2019 2020 vs.

(in millions)

2019 2020 2019 2020 vs.

(in millions) (in millions)

Franchise and licensing fees $ 132 $ 444 (70.3) $ 471 $ 826 (43.0)

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Incentive management fees

(5) 58 NM (1)

18 113 (84.1)

Total management fees $ 3 $ 147 (98.0) $ 86 $ 282 (69.5)

Our franchise and licensing fees and management fees decreased primarily as a result of occupancy decreases due to the COVID-19 pandemic and the related reduction in global travel and tourism, which required the complete or partial suspensions of hotel operations at many of our managed and franchised properties.

The COVID-19 pandemic had the most significant impact to our franchise and licensing fees and management fees beginning in March 2020.

For the three months ended March 31, 2020, the reduced occupancy of 12.8 percentage points at our comparable franchised properties and 18.8 percentage points at our comparable managed properties led to decreases in RevPAR of 20.8 percent and 26.7 percent, respectively, which resulted in decreased franchise fees and management fees from our comparable properties.

On a non-comparable basis, the decreases were partially offset by the addition of new properties to our management and franchise segment.

Including new development and ownership type transfers, from January 1, 2019 to March 31, 2020, we added 479 managed and franchised properties on a net basis, providing an additional 65,560 rooms to our management and franchise segment.

As new hotels stabilize in our system, we expect the fees received from such hotels to increase as they are part of our system for full periods.

Additionally, licensing and other fees decreased during the period, primarily due to a $10 million decrease in termination fees, attributable to a termination fee that was recognized during the three months ended March 31, 2019 for the redevelopment of a franchised hotel.

Three Months Ended Percent

March 31, Change

(1) Fluctuation in terms of percentage change is not meaningful.

The COVID-19 pandemic and the related reduction in global travel and tourism resulted in the complete or partial suspensions of hotel operations at approximately 1,170 of our managed and franchised properties at some point during the six months ended June 30, 2020.

Of these hotels, more than half had reopened as of June 30, 2020.

On a comparable basis, decreases in occupancy and ADR led to reduced RevPAR, resulting in decreases in franchise fees and management fees from our comparable managed and franchised properties.

For the three months ended June 30, 2020, RevPAR decreased 77.9 percent at our comparable franchised properties and 88.3 percent at our comparable managed properties, resulting from reduced occupancy of 54.6 percentage points and 59.7 percentage points, respectively, and reduced ADR of 29.1 percent and 44.7 percent, respectively.

For the six months ended June 30, 2020, RevPAR decreased 51.6 percent at our comparable franchised properties and 58.7 percent at our comparable managed properties, resulting from reduced occupancy of 33.6 percentage points and 39.3 percentage points, respectively, and reduced ADR of 12.2 percent and 10.7 percent, respectively.

Incentive fees decreased during the periods as they are based on hotels' operating profits, which have declined and are expected to continue to decline as a result of the COVID-19 pandemic.

For the three months ended June 30, 2020, we reversed incentive fees that were recognized in the previous period due to the expectation that stated return thresholds to the hotel owners would no longer be met.

Management and franchise and licensing fees also decreased on a non-comparable basis.

Licensing and other fees decreased $48 million and $53 million during the three and six months ended June 30, 2020, respectively, primarily due to decreased licensing fees from both our strategic partnerships and HGV as a result of the COVID-19 pandemic.

The six months ended June 30, 2020, also included a $12 million decrease in termination fees, attributable to a termination fee that was recognized in 2019 for the redevelopment of a franchised hotel.

Including new development and ownership type transfers, from January 1, 2019 to June 30, 2020, we added 532 managed and franchised properties on a net basis, providing an additional 71,073 rooms to our management and franchise segment.

While we have historically experienced increases to management and franchise fees as new hotels are a part of our system for full periods, the impact of the COVID-19 pandemic has outweighed the impact of these property additions in 2020.

Three Months Ended Percent Six Months Ended Percent

June 30, Change June 30, Change

2020 2019 2020 vs.

(in millions)

2019 2020 2019 2020 vs.

(in millions) (in millions)

Owned and leased hotels

$ 31 $ 387 (92.0) $ 241 $ 699 (65.5)

Owned and leased hotel revenues decreased primarily as a result of occupancy decreases due to the COVID-19 pandemic and the related reduction in global travel and tourism, which required the complete and partial suspensions of hotel operations at approximately 35 of our owned and leased properties at some point in the period.

The pandemic most significantly impacted owned and leased hotel revenues in March 2020, and, for the three months ended March 31, 2020, the 17.6 percentage point reduction in occupancy at our comparable owned and leased hotels led to a decrease in RevPAR of 30.6 percent for the period.

Additionally, owned and leased hotel revenues decreased $16 million related to properties that were transferred to our managed and franchised segment during 2019.

Three Months Ended Percent

March 31, Change

Owned and leased hotel revenues decreased primarily due to the COVID-19 pandemic and the related reduction in global travel and tourism.

As a result of the COVID-19 pandemic, approximately 35 hotels in our ownership segment had temporarily suspended operations at some point in time during the six months ended June 30, 2020, of which nearly 10 hotels had reopened as of June 30, 2020.

On a comparable basis, decreases in occupancy and ADR led to reduced RevPAR, resulting in decreases in revenues from our comparable owned and leased hotels.

For the three and six months ended June 30, 2020, RevPAR decreased 96.0 percent and 67.9 percent, respectively, resulting from reduced occupancy of 73.5 percentage points and 45.1 percentage points, respectively, and reduced ADR of 41.6 percent and 16.1 percent, respectively.

Additionally, owned and leased hotel revenues decreased $12 million and $28 million during the three and six months ended June 30, 2020, respectively, due to properties that were transferred to our managed and franchised segment during 2019.

Three Months Ended Percent Six Months Ended Percent

June 30, Change June 30, Change

2020 2019 2020 vs.

(in millions)

2019 2020 2019 2020 vs.

(in millions) (in millions)

Other revenues $ 10 $ 26 (61.5) $ 33 $ 52 (36.5)

The decrease in other revenues during the three months ended March 31, 2020 was primarily due to a decrease in revenues from our purchasing operations related to delayed hotel improvement projects and lower volume purchasing based on reduced hotel demand primarily beginning in March 2020, as a result of the COVID-19 pandemic.

The decreases in other revenues during the three and six months ended June 30, 2020 were primarily due to decreases in revenues from our purchasing operations related to delayed hotel improvement projects and lower volume purchasing based on reduced hotel demand as a result of the COVID-19 pandemic.

Operating Expenses

Three Months Ended Percent

March 31, Change

Three Months Ended Percent Six Months Ended Percent

June 30, Change June 30, Change

2020 2019 2020 vs.

(in millions)

2019 2020 2019 2020 vs.

(in millions) (in millions)

Owned and leased hotels

Owned and leased hotel expen ses decreased primarily due to decreases in occupancy as a result of the COVID-19 pandemic, which also reduced variable rent expense at certain leased hotels attributable to declining performance .

However, certain fixed costs could not be reduced at the same rate as the hotel revenue decreases during the three months ended March 31, 2020.

Additionally, the effect of properties that we transferred to our managed and franchised segment during 2019 decreased expenses by $15 million during the three months ended March 31, 2020.

Three Months Ended Percent

March 31, Change

$ 95 $ 334 (71.6) $ 334 $ 632 (47.2)

Owned and leased hotel expen ses decreased primarily due to decreases in occupancy resulting from the COVID-19 pandemic and approximately 35 hotels suspending operations at some point during the six months ended June 30, 2020.

Further, as a result of declining performance, variable rent expense was reduced at most leased hotels with a variable rent structure.

However, certain fixed costs of maintaining these hotels, even while temporarily closed or operating with very low occupancy, could not be reduced at the same rate as the hotel revenue decreases during the periods.

Additionally, owned and leased hotel expenses decreased $11 million and $25 million during the six months ended June 30, 2020 related to properties that were transferred to our managed and franchised segment during 2019.

Three Months Ended Percent Six Months Ended Percent

June 30, Change June 30, Change

2020 2019 2020 vs.

(in millions)

2019 2020 2019 2020 vs.

(in millions) (in millions)

Depreciation and amortization $ 88 $ 86 2.3 $ 179 $ 170 5.3

General and administrative 63 113 (44.2) 123 220 (44.1)

Reorganization costs 38 — NM (1)

Impairment losses 15 — NM (1)

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(1) Fluctuation in terms of percentage change is not meaningful.

The increase in depreciation and amortization expense was primarily due to additions to capitalized software costs in the period and during 2019.

General and administrative expenses decreased primarily as a result of a decrease in share-based compensation expense due to the determination that the performance conditions of our 2018 performance shares were no longer probable of achievement resulting in a reversal of previously recognized expense;

The increases in depreciation and amortization expense were primarily due to increases in amortization expense resulting from additions to capitalized software costs during 2020 and 2019, partially offset by reduced amortization expense due to impairment losses on other intangible assets related to our leased properties that were recognized during the six months ended June 30, 2020.

General and administrative expenses decreased primarily as a result of actions taken by the Company during the three and six months ended June 30, 2020 to reduce or eliminate certain corporate costs in response to the COVID-19 pandemic;

refer to "—Liquidity and Capital Resources" for additional information.

These actions are expected to also reduce costs in future periods.

In addition, share-based compensation expense decreased due to the determination that the performance conditions of our outstanding 2018 and 2019 performance shares were no longer probable of achievement, resulting in a reversal of previously recognized expense for the outstanding 2019 performance awards during the three and six months ended June 30, 2020 and for the outstanding 2018 performance awards during the six months ended June 30, 2020;

"Share-Based Compensation" in our unaudited condensed consolidated financial statements for additional information.

In addition, in March 2020, the Company took specific actions to

reduce or eliminate certain corporate costs, which resulted in lower costs in the current period and is expected to reduce costs in future periods.

During the three months ended March 31, 2020, we recognized impairment losses related to certain hotel properties under operating and finance leases, totaling $46 million of other intangible assets, net, $45 million of operating lease right-of-use assets and $21 million of property and equipment, net.

During the three and six months ended June 30, 2020, we recognized reorganization costs related to activities undertaken in response to the COVID-19 pandemic, primarily relating to reductions in our workforce and associated costs.

During the three months ended June 30, 2020, we recognized $6 million and $9 million of impairment losses on hotel operating lease ROU assets and management contract acquisition costs, respectively.

During the six months ended June 30, 2020, we recognized $51 million, $21 million, $9 million and $46 million of impairment losses on hotel operating lease ROU assets, property and equipment related to our leased properties, management contract acquisition costs and other intangible assets related to our leased hotel properties, respectively.

These impairment losses were due to a decline in results and expected future performance at the related hotels as a result of the COVID-19 pandemic.

Other expenses decreased primarily as a result of a decrease in expenses from our purchasing operations, resulting from reduced demand.

Other expenses decreased primarily as a result of decreases in expenses from our purchasing operations, resulting from reduced demand, partially offset by an increase in amounts accrued related to our performance guarantees.

Non-operating Income and Expenses

Three Months Ended Percent

March 31, Change

Three Months Ended Percent Six Months Ended Percent

June 30, Change June 30, Change

2020 2019 2020 vs.

(in millions)

2019 2020 2019 2020 vs.

(in millions) (in millions)

Interest expense $ (106) $ (101) 5.0 $ (200) $ (199) 0.5

Gain on foreign currency transactions

Other non-operating income, net — 4 (100.0)

Income tax benefit (expense) 35 (59) NM (1)

Loss on foreign currency transactions

(13) (3) NM (1)

Other non-operating loss, net

(23) (12) 91.7 (23) (8) NM (1)

Income tax benefit (expense)

12 (101) NM (1)

47 (160) NM (1)

(1) Fluctuation in terms of percentage change is not meaningful.

The decrease in interest expense was primarily due to a principal repayment on our Term Loans of $500 million in June 2019 and decreased variable interest expense of certain hotels under finance leases that resulted from a decline in performance.

The decrease was partially offset by an increase in interest expense due to the issuance of the 2030 Senior Notes in June 2019 and the full draw down on the Revolving Credit Facility in March 2020.

The effect of foreign currency transactions primarily related to changes in foreign currency exchange rates on certain intercompany financing arrangements, including short-term cross-currency intercompany loans.

For the three months ended March 31, 2020 and 2019, the changes were predominantly related to the Australian dollar and, for the three months ended March 31, 2019, also the EUR.

The change in the income tax provision was primarily attributable to a decrease in income before income taxes and the discrete deferred income tax benefit associated with the impairment losses that were recognized during the three months ended March 31, 2020.

The increases in interest expense were primarily due to the issuance of the 4.875% Senior Notes due 2030 in June 2019, the full draw down on the Revolving Credit Facility in March 2020 and the issuances of the 5.375% 2025 Senior Notes and the 2028 Senior Notes in April 2020.

The increases were partially offset by a decrease in interest expense on our Term Loans due to a 2019 principal repayment of $500 million and a lower variable interest rate, as well as decreased variable interest expense of certain finance leases for our hotels that resulted from a decline in operating performance.

The losses on foreign currency transactions included changes in foreign currency exchange rates on certain intercompany financing arrangements, including short-term cross-currency intercompany loans.

The changes were the result of various currencies, but, for the three months ended June 30, 2020, were primarily related to changes in the Australian dollar.

Other non-operating loss, net for the three and six months ended June 30, 2020 primarily included losses related to an accrual for a loan guarantee for a franchised hotel and the disposal of an investment.

Other non-operating loss, net for the three and six months ended June 30, 2019 primarily included a loss on the disposal of an unconsolidated real estate investment and expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities.

The changes in the income tax provisions were primarily attributable to decreases in income before income taxes, offset by reductions in the tax benefits recognized for the expected NOLs generated in 2020 in certain foreign jurisdictions.

For additional information, see Note 9:

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Refer to Note 13:

"Business Segments" in our unaudited condensed consolidated financial statements for reconciliations of revenues for our reportable segments to consolidated amounts and of segment operating income to income (loss) before income taxes.

We evaluate our business segment operating performance using operating income, without allocating other revenues and expenses or general and administrative expenses.

Refer to "—Revenues" for further discussion of the decrease in revenues from our managed and franchised properties, which is correlated to our management and franchise segment revenues and segment operating income.

Refer to "—Revenues" and "—Operating Expenses" for further discussion of the decreases in revenues and operating expenses at our owned and leased hotels, which is correlated with our ownership segment revenues and segment operating income.

We evaluate our business segment operating performance using segment operating income (loss), without allocating other revenues and expenses or general and administrative expenses.

Refer to "—Revenues" for further discussion of the decreases in revenues from our managed and franchised properties, which are correlated to our management and franchise segment revenues and segment operating income.

Refer to "—Revenues" and "—Operating Expenses" for further discussion of the decreases in revenues and operating expenses at our owned and leased hotels, which are correlated with our ownership segment revenues and segment operating income (loss).

Liquidity and Capital Resources

As of March 31, 2020, we had total cash and cash equivalents of $1,805 million, including $71 million of restricted cash and cash equivalents.

As of June 30, 2020, we had total cash and cash equivalents of $3,575 million, including $72 million of restricted cash and cash equivalents.

The majority of our restricted cash and cash equivalents balance related to cash collateral on our self-insurance programs and cash held for FF&E reserves.

We cannot presently estimate the financial impact of the unprecedented COVID-19 pandemic, which is highly dependent on the severity and duration of the pandemic, but we expect it will continue to have a significant adverse impact on our results of operations.

Although we cannot presently estimate the ultimate and total financial impact of the unprecedented COVID-19 pandemic, which is highly dependent on the severity and duration of the pandemic, we expect it will continue to have a significant adverse impact on our results of operations.

As such, due to the uncertainties associated with the COVID-19 pandemic and the indeterminate length of time it will affect the hospitality industry, we have taken certain proactive measures to secure our liquidity position to be able to meet our obligations for the foreseeable future, which have included:

(i) fully drawing down on our $1.75 billion Revolving Credit Facility in March 2020;

(ii) temporarily suspending dividend payments and share repurchases;

(iii) implementing strict cost management measures, such as temporarily halting marketing programs, temporarily eliminating non-essential expenses, including capital expenditures, and reducing payroll and related costs through furloughs and salary reductions;

(iv) consummating the Hilton Honors points pre-sale in April 2020;

and (v) issuing $1.0 billion aggregate principal amount of senior notes in April 2020.

Refer to Note 15:

"Subsequent Events" in our unaudited condensed consolidated financial statements for additional discussion on the Hilton Honors points pre-sale and senior notes issuance.

After giving effect to the Hilton Honors points pre-sale and senior notes issuance, as of March 31, 2020, we would have had approximately $3.8 billion of cash, restricted cash and cash equivalents.

(i) fully drawing down on our $1.75 billion Revolving Credit Facility;

(ii) suspending dividend payments and share repurchases;

(iv) consummating the Honors Points Pre-Sale;

and (v) issuing $1.0 billion aggregate principal amount of senior notes.

Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including costs associated with the management and franchising of hotels, corporate expenses, payroll and compensation costs, taxes and compliance costs, interest payments on our outstanding indebtedness, contract acquisition costs and capital expenditures for renovations and maintenance at the hotels within our ownership segment.

We expect to pay a significant portion of the reorganization costs recognized during the three months ended June 30, 2020 in the three months ending September 30, 2020.

While our accounts receivable balance as of June 30, 2020 is less than prior periods, we are generally experiencing slower payment of certain fees due to us.

As such, we have considered the implications of these delayed payment trends in developing our estimates of expected future credit losses.

Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements to the hotels within our ownership segment, commitments to owners in our management and franchise segment and corporate capital and information technology expenditures.

We have currently suspended dividend payments and share repurchases, but expect these activities will result in uses of liquidity in future periods.

We have currently suspended dividend payments and share repurchases, but expect that these activities will result in uses of liquidity in future periods.

We have a long-term investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments and returning available capital to stockholders through dividends and share repurchases.

However, the COVID-19 pandemic has caused us to temporarily change our cash management strategy, which includes suspending share repurchases and dividend payments.

But, within the framework of our long-term investment policy, we will continue to finance our business activities primarily with existing cash, including from the activities described above, and cash generated from our operations.

After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position, after giving effect to the transactions discussed above, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments for an estimated period of up to 24 months, even if current levels of very low occupancy were to persist.

The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs.

However, the COVID-19 pandemic has caused us to temporarily change our cash management strategy as described above.

Within the framework of our long-term investment policy, we currently intend to continue to finance our business activities primarily with cash on our balance sheet as of June 30, 2020 and cash generated from our operations.

After considering our approach to liquidity and accessing our available sources of cash, we believe that our cash position will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments for an estimated period of at least 24 months, even at very low occupancy levels.

The objectives of our cash management policy are to maintain the availability of liquidity while minimizing operational costs.

We may from time to time issue or incur or increase our capacity to incur new debt and/or purchase our outstanding debt through underwritten offerings, open market transactions, privately negotiated transactions or otherwise.

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The amounts involved may be material.

We formally suspended share repurchases as of March 26, 2020 given the current economic environment and our efforts to preserve cash, and no share repurchases were made after March 5, 2020 through the date of this report.

Prior to that, during the three months ended March 31, 2020, we repurchased 2.6 million shares of our common stock under our stock repurchase program for $279 million, which we funded principally with available cash.

Prior to the suspension of share repurchases, in March 2020, our board of directors authorized an additional $2.0 billion for share repurchases, bringing total authorizations under the program to $5.5 billion.

We formally suspended share repurchases given the current economic environment and our efforts to preserve cash, and no share repurchases were made after March 5, 2020.

The stock repurchase program remains authorized by the board of directors, and we may resume share repurchases in the future at any time, depending on market conditions, our capital needs and other factors.

As of March 31, 2020, approximately $2.2 billion remained available for share repurchases under the program.

Prior to the suspension, during the six months ended June 30, 2020, we repurchased 2.6 million shares of our common stock under our stock repurchase program for $279 million, which we funded principally with available cash.

As of June 30, 2020, approximately $2.2 billion remained available for share repurchases under the program.

Sources and Uses of Our Cash and Cash Equivalents

The following table summarizes our net cash flows:

Three Months Ended Percent

March 31, Change

Six Months Ended Percent

June 30, Change

2020 2019 2020 vs.

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Operating Activities

The $235 million decrease in net cash provided by operating activities was primarily the result of decreases in cash inflows generated from our management and franchise properties, as well as from our owned and leased hotels.

The decreases were largely the result of decreases in system-wide occupancy due to the COVID-19 pandemic, as further discussed in "—Revenues." Additionally, cash paid for taxes increased $37 million during the three months ended March 31, 2020, primarily resulting from taxable income that was earned during 2019.

The increase in net cash provided by operating activities was primarily the result of $1.0 billion of cash received in connection with the Honors Points Pre-Sale, offset by decreases in cash inflows generated from our management and franchise properties and our owned and leased hotels.

The decreases were largely the result of decreases in system-wide RevPAR due to the COVID-19 pandemic, as further discussed in "—Revenues." Additionally, cash paid for taxes decreased $104 million, primarily resulting from decreases in income before income taxes, as well as NOLs that were generated in 2020 in many foreign tax jurisdictions that had taxable income in 2019.

Investing Activities

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Financing Activities

The increase in net cash provided by financing activities during the three months ended March 31, 2020 was primarily attributable to a $1.4 billion increase in net borrowings and repayments under our Revolving Credit Facility, after borrowing the full capacity during the three months ended March 31, 2020.

The change in cash flows related to financing activities was primarily attributable to a $1.5 billion increase in net borrowings and repayments under our Revolving Credit Facility, a $500 million decrease in net borrowings and repayments under our Term Loans and a $400 million decrease in share repurchases and dividend payments.

Debt and Borrowing Capacity

As of March 31, 2020, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $9.6 billion.

For additional information on our total indebtedness, including fully drawing down our Revolving Credit Facility and guarantees on our debt, refer to Note 6:

As of June 30, 2020, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $10.6 billion.

For additional information on our total indebtedness, including fully drawing down our Revolving Credit Facility, our issuance of $1.0 billion aggregate principal amount of senior notes and guarantees on our debt, refer to Note 6:

"Debt" in our unaudited condensed consolidated financial statements.

For information on our issuance of $1.0 billion aggregate principal amount of senior notes in April 2020, refer to Note 15:

"Subsequent Events" in our unaudited condensed consolidated financial statements.

If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to reduce capital expenditures or issue additional equity securities.

Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hospitality industry that may be beyond our control.

While the COVID-19 pandemic has negatively impacted our cash flows from operations during the three months ended March 31, 2020, and will continue to do so for an indeterminate period of time, we have taken precautions to secure our cash position, as discussed above, and expect to be able to meet our current obligations.

Although our operating activities provided cash during the six months ended June 30, 2020 it was primarily a result of the Honors Points Pre-Sale.

The COVID-19 pandemic negatively impacted our cash flows from operations during the period, and will continue to do so for an indeterminate period of time.

We have taken precautions to secure our cash position, as discussed above, and expect to be able to meet our current obligations.

Furthermore, we do not have any material indebtedness outstanding that matures prior to June 2024.

Contractual Obligations

As described above, as of March 31, 2020, we had $1.69 billion of borrowings outstanding under our Revolving Credit Facility, after giving effect to the letters of credit outstanding, which mature in 2024 and are repayable by us at any time.

Further, in April 2020, we issued $1.0 billion aggregate principal amount of senior notes.

During the six months ended June 30, 2020, we fully drew down $1.69 billion under our Revolving Credit Facility, after giving effect to the letters of credit outstanding, which matures in 2024 and is repayable by us at any time.

Further, we issued $500 million aggregate principal amount of senior notes due 2025 and $500 million aggregate principal amount of senior notes due 2028.

Other than these borrowings, there were no material changes to our contractual obligations from what we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

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Summarized Guarantor Financial Information

Our indirect wholly owned subsidiaries, Hilton Worldwide Finance LLC ("HWF") and Hilton Worldwide Finance Corp.

issued the 2025 Senior Notes and the 2027 Senior Notes.

HOC, also our indirect wholly owned subsidiary, assumed the 2024 Senior Notes, originally issued by escrow issuers, and issued the 2026 Senior Notes and the 2030 Senior Notes.

In February 2020, we merged HWF with and into HOC (the "merger"), with HOC as the surviving entity (hereinafter collectively referred to as "HOC"), with HOC being 100 percent owned by Hilton Worldwide Parent LLC ("HWP"), which, in turn, is 100 percent owned by the Parent.

As such, HOC assumed the 2025 Senior Notes and the 2027 Senior Notes.

The Senior Notes are guaranteed jointly and severally on a senior unsecured basis by the Parent, HWP and substantially all of the Parent's direct and indirect wholly owned domestic restricted subsidiaries, except for HOC, after the merger, which is considered to be the issuer of all of the Senior Notes (together, the "Guarantors").

HOC is the issuer of the Senior Notes and is 100 percent owned by Hilton Worldwide Parent LLC ("HWP"), which, in turn, is 100 percent owned by the Parent.

The indentures that govern the Senior Notes provide that any subsidiary of the Company that provides a guarantee of our senior secured credit facilities will guarantee the Senior Notes.

As of March 31, 2020, none of our foreign subsidiaries or domestic subsidiaries owned by foreign subsidiaries or conducting foreign operations or our non-wholly owned subsidiaries guaranteed the Senior Notes.

As of June 30, 2020, none of our foreign subsidiaries or domestic subsidiaries owned by foreign subsidiaries or conducting foreign operations or our non-wholly owned subsidiaries guaranteed the Senior Notes.

The guarantees are full and unconditional, subject to certain customary release provisions.

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however, we are supplementally providing the information set forth below.

The following tables present summarized financial information for the Parent, HOC and Guarantors on a combined basis:

March 31, 2020

The following tables present summarized financial information for HOC, along with the Parent and all other Guarantors, on a combined basis:

June 30, 2020

(in millions)

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TOTAL LIABILITIES AND DEFICIT 9,844

Three Months Ended

March 31, 2020

Six Months Ended June 30, 2020

(in millions)

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Interest expense (193)

Income tax expense (6)

Net income 51

Net income attributable to Hilton stockholders 51

Income tax benefit 47

Net loss (115)

Net loss attributable to Hilton stockholders (115)

Critical Accounting Policies and Estimates

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As a result of the impact of the COVID-19 pandemic on our business, we have had to reevaluate certain estimates and assumptions that affect our reported amounts.

In particular, we extended the expected redemption rate of our Hilton Honors points over the next year, which resulted in reclassifications of the liabilities for guest loyalty program and deferred revenues from current to long-term of $221 million and $50 million, respectively, as of March 31, 2020.

Additionally, we recognized impairment losses of $112 million during the three months ended March 31, 2020, which required the use of significant judgments and estimates.

"Fair Value Measurements" in our unaudited condensed consolidated financial statements for additional information.

In particular, we extended the expected redemption rate of our Hilton Honors points over the next year, which, due to the re-evaluation at March 31, 2020, resulted in reclassifications of the liabilities for guest loyalty program and deferred revenues from current to long-term of $221 million and $50 million, respectively.

We continued to use the revised methodology as of June 30, 2020.

Additionally, we recognized impairment losses of $15 million and $127 million during the three and six months ended June 30, 2020, respectively, which required the use of significant judgments and estimates.

"Fair Value Measurements" and Note 5:

"Finite-Lived Intangible Assets" in our unaudited condensed consolidated financial statements for additional information on the impairment losses.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis