What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-04 compared with 2020-08-06 · 135 added, 126 removed, 524 unchanged (33% of the section changed)

3 unchanged sentences

(in millions, except share data)

June 30, December 31,

September 30, December 31,

Current Assets:

33 unchanged sentences

Preferred stock, $ 0.01 par value;

3,000,000,000 authorized shares, none issued or outstanding as of June 30, 2020 and December 31, 2019

3,000,000,000 authorized shares, none issued or outstanding as of September 30, 2020 and December 31, 2019

Common stock, $ 0.01 par value;

10,000,000,000 authorized shares, 330,229,410 issued and 277,309,060 outstanding as of June 30, 2020 and 333,159,770 issued and 278,985,125 outstanding as of December 31, 2019

10,000,000,000 authorized shares, 330,350,372 issued and 277,430,022 outstanding as of September 30, 2020 and 333,159,770 issued and 278,985,125 outstanding as of December 31, 2019

Treasury stock, at cost;

52,920,350 shares as of June 30, 2020 and 54,174,645 shares as of December 31, 2019

52,920,350 shares as of September 30, 2020 and 54,174,645 shares as of December 31, 2019

( 4,457 ) ( 4,169 )

13 unchanged sentences

(in millions, except per share data)

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

19 unchanged sentences

Total expenses 922 1,957 3,640 5,855

Gain on sale of assets, net

Operating income (loss) 11 519 ( 223 ) 1,309

Interest expense ( 116 ) ( 105 ) ( 316 ) ( 304 )

Loss on foreign currency transactions

Gain (loss) on foreign currency transactions

( 12 ) 7 ( 16 ) 4

Other non-operating loss, net

Other non-operating income (loss), net

3 — ( 20 ) ( 8 )

14 unchanged sentences

(in millions)

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

16 unchanged sentences

(in millions)

Six Months Ended

Nine Months Ended

September 30,

Operating Activities:

4 unchanged sentences

Impairment losses 136 —

Loss on foreign currency transactions 4 3

Gain on sale of assets, net — ( 81 )

Loss (gain) on foreign currency transactions 16 ( 4 )

Share-based compensation 37 123

8 unchanged sentences

( 38 ) ( 66 )

Proceeds from asset disposition — 120

Capitalized software costs ( 38 ) ( 79 )

8 unchanged sentences

Share-based compensation tax withholdings and other ( 36 ) ( 31 )

Other ( 1 ) —

Net cash provided by (used in) financing activities 2,087 ( 808 )

13 unchanged sentences

(the "Parent," or together with its subsidiaries, "Hilton," "we," "us," "our" or the "Company"), a Delaware corporation, is one of the largest hospitality companies in the world and is engaged in managing, franchising, owning and leasing hotels and resorts, and licensing its brands and intellectual property ("IP").

As of June 30, 2020, we managed, franchised, owned or leased 6,215 hotels and resorts, including timeshare properties, totaling 983,465 rooms in 118 countries and territories.

As of September 30, 2020, we managed, franchised, owned or leased 6,333 hotels and resorts, including timeshare properties, totaling 998,282 rooms in 118 countries and territories.

Basis of Presentation

The accompanying condensed consolidated financial statements for the three and six months ended June 30, 2020 and 2019 have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") and are unaudited.

The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2020 and 2019 have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") and are unaudited.

We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP.

2 unchanged sentences

Additionally, interim results are not necessarily indicative of full year performance.

In particular, the novel coronavirus ("COVID-19") pandemic 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 for an indeterminate length of time.

In particular, the novel coronavirus ("COVID-19") pandemic had a material adverse impact on our results for the three and nine months ended September 30, 2020, and we expect it to continue to have a material adverse impact on our results for an indeterminate length of time.

Management is making estimates and judgments in light of these circumstances, and this interim period, as well as upcoming periods, are unlikely to be comparable to past performance or indicative of future performance.

2 unchanged sentences

Reorganization

We recognized $ 38 million of reorganization costs in our condensed consolidated statements of operations during the three and six months ended June 30, 2020 related to organizational changes, including reductions in our workforce and the associated costs, as part of our efforts to reduce future costs for our corporate operations in response to the COVID-19 pandemic.

As of June 30, 2020, $ 35 million of such reorganization costs were included in accounts payable, accrued expenses and other in our condensed consolidated balance sheet.

We recognized $ 38 million of reorganization costs in our condensed consolidated statement of operations during the nine months ended September 30, 2020 related to organizational changes, including reductions in our workforce and the associated costs, as part of our efforts to reduce future costs for our corporate operations in response to the COVID-19 pandemic.

As of September 30, 2020, $ 15 million of such reorganization costs were included in accounts payable, accrued expenses and other in our condensed consolidated balance sheet.

Recently Issued Accounting Pronouncements

5 unchanged sentences

As a result of the adoption, we consider forecasted business conditions, in addition to current business conditions and historical collection activity, in calculating our allowance for credit losses on our financial instruments.

The cumulative adjustment to accumulated deficit that we recognized upon adoption of this ASU did not include the impact of the COVID-19 crisis as a forecasted business condition.

However, during the six months ended June 30, 2020, we revised our expected future credit loss rates from those used at adoption, primarily for our accounts receivable balances, in light of business conditions in the current environment.

In particular, we considered the expected impact on our hotel owners' and customers' ability to ultimately settle receivables that are or will be due to us.

The cumulative adjustment to accumulated deficit that we recognized upon adoption of this ASU did not include the impact of the COVID-19 pandemic as a forecasted business condition.

However, during the nine months ended September 30, 2020, we revised our expected credit loss rates from those used at adoption, primarily for our accounts receivable balances, in light of business conditions in the current environment.

In particular, we considered the expected impact on our hotel owners' and customers'

ability to ultimately settle receivables that are or will be due to us and recorded provisions for credit losses of $ 30 million and $ 45 million during the three and nine months ended September 30, 2020, respectively.

In September 2019, we completed the sale of the Hilton Odawara Resort & Spa ("Hilton Odawara") for a price of 13 billion Japanese yen (equivalent to $ 122 million as of the closing date) and subsequently entered into a 30-year management contract with the purchaser of the hotel.

As a result of the sale, we recognized a pre-tax gain of $ 81 million included in gain on sale of assets, net in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019.

Revenues from Contracts with Customers

Contract Liabilities

The following table summarizes the activity of our contract liabilities, which are classified as a component of current and long-term deferred revenues, during the six months ended June 30, 2020:

The following table summarizes the activity of our contract liabilities, which are classified as a component of current and long-term deferred revenues, during the nine months ended September 30, 2020:

(in millions)

2 unchanged sentences

Revenue recognized (1)(3)

Balance as of June 30, 2020

Balance as of September 30, 2020

(1) Primarily related to Hilton Honors, our guest loyalty program, which included revenue recognized of $ 65 million.

(2) Includes $ 636 million recorded as a result of the Hilton Honors points pre-sale to American Express;

(2) As a result of the Hilton Honors points pre-sale to American Express, we recorded $ 636 million of deferred revenues;

see below for additional information.

(3) During the three months ended June 30, 2020 and 2019, revenue recognized was $ 56 million and $ 78 million, respectively, and during the six months ended June 30, 2019 was $ 135 million.

(3) During the three months ended September 30, 2020 and 2019, revenue recognized was $ 54 million and $ 62 million, respectively, and during the nine months ended September 30, 2019, revenue recognized was $ 197 million.

(4) Represents changes in estimated transaction prices for our performance obligations related to points issued under Hilton Honors, which had no effect on revenues.

In April 2020, we pre-sold Hilton Honors points to American Express for $ 1.0 billion in cash ("Honors Points Pre-Sale"), of which $ 636 million was recorded in deferred revenues and the remainder was recorded in liability for guest loyalty program in our condensed consolidated balance sheet.

In April 2020, we pre-sold Hilton Honors points to American Express for $ 1.0 billion in cash (the "Honors Points Pre-Sale"), of which $ 636 million was recorded in deferred revenues and the remainder was recorded in liability for guest loyalty program in our condensed consolidated balance sheet.

American Express and their respective designees may use the points in connection with Hilton Honors co-branded credit cards and for promotions, rewards and incentive programs or certain other activities as they may establish or engage in from time to time.

1 unchanged sentence

Performance Obligations

As of June 30, 2020, we had deferred revenues for unsatisfied performance obligations consisting of:

As of September 30, 2020, we had deferred revenues for unsatisfied performance obligations consisting of:

(i) $ 444 million related to Hilton Honors that will be recognized as revenues when the points are redeemed, which we estimate will occur over approximately the next two to three years ;

1 unchanged sentence

and (iii) $ 658 million related to application, initiation and licensing fees that is expected to be recognized as revenues over the terms of the related contracts.

Incentive Management Fees

We update our estimates of the expected achievement of incentive management fee targets each reporting period and constrain the recognition of revenue to the extent that we do not expect to achieve the thresholds as specified in our management contracts with incentive fees.

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

Consolidated Variable Interest Entities

As of June 30, 2020 and December 31, 2019, we consolidated two variable interest entities ("VIEs") that lease hotel properties.

As of September 30, 2020 and December 31, 2019, we consolidated two variable interest entities ("VIEs") that lease hotel properties.

We consolidated these VIEs since we are the primary beneficiary, having the power to direct the activities that most significantly affect their economic performance.

2 unchanged sentences

Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily comprised the following:

June 30, December 31,

September 30, December 31,

(in millions)

6 unchanged sentences

Other long-term liabilities 16 17

(1) Includes finance lease liabilities of $ 177 million as of June 30, 2020 and December 31, 2019.

In June 2020, one of our consolidated VIEs entered into a revolving credit facility to provide financial flexibility in response to business disruption during the COVID-19 pandemic.

The revolving credit facility has a borrowing capacity of 2.75 billion Japanese yen (equivalent to $ 26 million as of June 30, 2020) and matures in June 2021.

As of June 30, 2020, no amounts have been drawn under the revolving credit facility.

We did not provide any financial or other support to any consolidated VIEs that we were not previously contractually required to provide during the six months ended June 30, 2020 and 2019, and we are not aware of any future obligations to do so.

(1) Includes finance lease liabilities of $ 181 million and $ 177 million as of September 30, 2020 and December 31, 2019, respectively.

To provide financial flexibility in response to the business disruption caused by the COVID-19 pandemic, each of our consolidated VIEs entered into revolving credit facilities during the nine months ended September 30, 2020.

These revolving credit facilities have borrowing capacities totaling 2.75 billion Japanese yen and 2 billion Japanese yen (equivalent to $ 26 million and $ 19 million, respectively, as of September 30, 2020), and mature in June 2021 and August 2021, respectively.

As of September 30, 2020, no amounts have been drawn under these revolving credit facilities.

We did not provide any financial or other support to any consolidated VIEs that we were not previously contractually required to provide during the nine months ended September 30, 2020 and 2019, and we are not aware of any future obligations to do so.

Finite-Lived Intangible Assets

Finite-lived intangible assets were as follows:

June 30, 2020

September 30, 2020

Gross Carrying Value Accumulated Amortization Net Carrying Value

36 unchanged sentences

(the "Merger").

(2) We recognized impairment losses during the three and six months ended June 30, 2020 that reduced the gross and net carrying values of contract acquisition costs by $ 9 million.

(3) We recognized impairment losses during the six months ended June 30, 2020 that reduced the gross carrying value of our leases intangible asset by $ 138 million, the accumulated amortization by $ 92 million and the net carrying value by $ 46 million.

(2) During the three and nine months ended September 30, 2020, we recognized impairment losses of $ 6 million and $ 15 million, respectively, which in total reduced the gross carrying value and accumulated amortization of contract acquisition co sts by $ 18 million and $ 3 million, respectively.

(3) During the nine months ended September 30, 2020, we recognized impairment losses of $ 46 million, which in total reduced the gross carrying value and accumulated amortization of our leases intangible assets by $ 138 million and $ 92 million , respectively.

"Fair Value Measurements" for additional information.

Amortization of our finite-lived intangible assets was as follows:

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

3 unchanged sentences

Recognized as a reduction of franchise and licensing fees and base and other management fees

(1) Includes amortization expense of $ 47 million and $ 51 million for the three months ended June 30, 2020 and 2019, respectively, and $ 96 million and $ 102 million for the six months ended June 30, 2020 and 2019, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger.

We estimate future amortization of our finite-lived intangible assets as of June 30, 2020 to be as follows:

(1) Includes amortization expense of $ 47 million and $ 50 million for the three months ended September 30, 2020 and 2019, respectively, and $ 143 million and $ 152 million for the nine months ended September 30, 2020 and 2019, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger.

We estimate future amortization of our finite-lived intangible assets as of September 30, 2020 to be as follows:

Recognized in Depreciation and Amortization Expense Recognized as a Reduction of Franchise and Licensing Fees and Base and Other Management Fees

2 unchanged sentences

Thereafter 129 364

Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of June 30, 2020, were as follows:

June 30, December 31,

Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of September 30, 2020, were as follows:

September 30, December 31,

(in millions)

18 unchanged sentences

The obligations of our senior secured credit facilities are unconditionally and irrevocably guaranteed by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries.

In March 2020, as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the COVID-19 pandemic, we fully drew down on our Revolving Credit Facility.

As of June 30, 2020, we also had $ 60 million of letters of credit outstanding under the Revolving Credit Facility.

In March 2020, as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of uncertainty in the global markets resulting from the COVID-19 pandemic, we fully drew down on our Revolving Credit Facility.

As of September 30, 2020, in addition to our outstanding debt balance of $ 1.69 billion under our Revolving Credit Facility, we also had $ 60 million of letters of credit outstanding under the Revolving Credit Facility.

In April 2020, we issued $ 500 million aggregate principal amount of 5.375 % Senior Notes due 2025 (the " 5.375 % 2025 Senior Notes") and $ 500 million aggregate principal amount of 5.750 % Senior Notes due 2028 (the "2028 Senior Notes") and incurred $ 14 million of debt issuance costs.

1 unchanged sentence

The 4.250 % Senior Notes due 2024, the 4.625 % Senior Notes due 2025, the 5.375 % 2025 Senior Notes, the 5.125 % Senior Notes due 2026, the 4.875 % Senior Notes due 2027, the 2028 Senior Notes and the 4.875 % Senior Notes due 2030 are collectively referred to as the Senior Notes and are jointly and severally guaranteed on a senior unsecured basis by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries, other than Hilton Domestic Operating Company Inc.

("HOC"), a wholly owned subsidiary of the Parent, which is the issuer.

The contractual maturities of our long-term debt as of June 30, 2020 were as follows:

("HOC"), a wholly owned subsidiary of the Parent, which is the issuer of each of the series of Senior Notes.

The contractual maturities of our long-term debt as of September 30, 2020 were as follows:

Year (in millions)

5 unchanged sentences

The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below:

June 30, 2020

September 30, 2020

Hierarchy Level

19 unchanged sentences

Our interest rate swaps are included in other long-term liabilities in our condensed consolidated balance sheets.

Our nonfinancial assets that were measured at fair value on a non-recurring basis during the six months ended June 30, 2020, and for which we recorded impairment losses, were related to certain hotel properties under operating and finance leases in our ownership segment.

Our nonfinancial assets that were measured at fair value on a non-recurring basis during the nine months ended September 30, 2020, and for which we recorded impairment losses, were related to certain hotel properties under operating and finance leases in our ownership segment.

"Finite-Lived Intangible Assets" and Note 9:

6 unchanged sentences

(1) Amounts were measured at March 31, 2020, except for $ 10 million of operating lease right-of-use ("ROU") assets, which were remeasured at June 30, 2020.

We recognized impairment losses during the three months ended March 31, 2020 related to certain hotel properties under operating and finance leases.

During the three months ended June 30, 2020, the short-term expected results for certain of these leased hotels declined from estimates used in the assessment of recoverability at March 31, 2020, generally due to extensions of government mandated closures and additional visibility into expected hotel customer engagement at such properties.

As a result, further analysis of the recoverability of the carrying value of the assets related to leased hotel properties was necessary at June 30, 2020.

Additionally, certain of these assets were fully impaired at March 31, 2020, June 30, 2020 and September 30, 2020.

We recognized impairment losses during the six months ended June 30, 2020 related to certain hotel properties under operating and finance leases.

During the three months ended September 30, 2020, the short-term expected results for certain leased hotels declined from estimates used in the assessment of recoverability at June 30, 2020, generally due to extensions of government restrictions and additional visibility into expected hotel customer engagement at such properties.

As a result, further analysis of the recoverability of the carrying value of the assets related to leased hotel properties was necessary at September 30, 2020.

We assessed recoverability of the assets included in the table above using estimates of undiscounted net cash flows, and concluded that the carrying values of the assets were not fully recoverable.

2 unchanged sentences

Estimations of stabilized growth rates after the recovery period ranged from 1.7 percent to 4.8 percent , and discount rates ranged from 7.0 percent to 12.0 percent , with the weighted average, based on relative impairment losses, for both inputs being at the lower end of each of the ranges.

As a result of these non-recurring fair value measurements, we recognized impairment losses of $ 6 million and $ 118 million during the three and six months ended June 30, 2020, respectively.

The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of June 30, 2020 and December 31, 2019.

As a result of these non-recurring fair value measurements, we recognized impairment losses of $ 3 million and $ 121 million during the three and nine months ended September 30, 2020, respectively.

The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of September 30, 2020 and December 31, 2019.

We lease hotel properties, land, corporate office space and equipment used at hotels and corporate offices, with our most significant lease liabilities related to hotel properties.

As of June 30, 2020, we leased 52 hotels under operating leases and six hotels under finance leases, two of which were the liabilities of consolidated VIEs and were non-recourse to us.

As of September 30, 2020, we leased 49 hotels under operating leases and six hotels under finance leases, two of which were the liabilities of consolidated VIEs and were non-recourse to us.

Our hotel leases expire at various dates, with varying renewal and termination options.

During the three and six months ended June 30, 2020, we recognized $ 6 million and $ 51 million of impairment losses related to certain operating lease ROU assets, respectively, and, during the six months ended June 30, 2020, we recognized $ 21 million of impairment losses related to property and equipment, including $ 2 million of finance lease ROU assets.

During the nine months ended September 30, 2020, we recognized $ 51 million of impairment losses related to certain operating lease ROU assets, and during the three and nine months ended September 30, 2020, we recognized $ 3 million and $ 24 million of impairment losses related to property and equipment, respectively, including $ 2 million and $ 4 million of finance lease ROU assets, respectively.

All of these impairment losses were included in impairment losses in our condensed consolidated statements of operations;

"Fair Value Measurements" for additional information.

Our future minimum lease payments as of June 30, 2020 were as follows:

Supplemental cash flow information related to leases was as follows:

Nine Months Ended

September 30,

(in millions)

ROU assets obtained in exchange for lease liabilities in non-cash transactions:

Operating leases $ 32 $ 21

Finance leases 16 59

Our future minimum lease payments as of September 30, 2020 were as follows:

Leases Finance

6 unchanged sentences

At the end of each quarter, we estimate the effective income tax rate expected to be applied for the full year to ordinary income, which excludes discrete items.

Discrete items that were recognized during the six months ended June 30, 2020 included impairment losses and the vesting of certain share-based compensation awards, which provided us with tax benefits.

Discrete items that were recognized during the nine months ended September 30, 2020 included impairment losses and the vesting of certain share-based compensation awards, which provided us with tax benefits.

The effective income tax rate for the full year is determined by the level and composition of income (loss) before income taxes, excluding discrete items as discussed above, which is subject to federal, state, local and foreign income taxes.

1 unchanged sentence

For certain foreign jurisdictions, we expect to have net operating losses ("NOLs"), which we expect to be utilized in future periods.

However, as future utilization of NOLs reduces

foreign taxes paid, we expect U.S.

However, as future utilization of NOLs reduces foreign taxes paid, we expect U.S.

foreign tax credits to be reduced, thereby reducing or eliminating the tax benefit of the NOLs on a global basis.

7 unchanged sentences

and foreign tax authorities.

As of June 30, 2020, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2018 and foreign examinations of our income tax returns for tax years from 1996 through 2019.

Our total unrecognized tax benefits as of June 30, 2020 and December 31, 2019 were $ 428 million and $ 395 million, respectively.

As of June 30, 2020 and December 31, 2019, we had accrued approximately $ 59 million and $ 52 million, respectively, for interest and penalties related to these unrecognized tax benefits.

Included in the balances of unrecognized tax benefits as of June 30, 2020 and December 31, 2019 were $ 388 million and $ 380 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective income tax rate.

As of September 30, 2020, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2019 and foreign examinations of our income tax returns for tax years from 1996 through 2019.

Our total unrecognized tax benefits as of September 30, 2020 and December 31, 2019 were $ 432 million and $ 395 million, respectively.

As of September 30, 2020 and December 31, 2019, we had accrued approximately $ 64 million and $ 52 million, respectively, for interest and penalties related to these unrecognized tax benefits.

Included in the balances of unrecognized tax benefits as of September 30, 2020 and December 31, 2019 were $ 393 million and $ 380 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective income tax rate.

In prior periods, we received 30-day Letters from the IRS and the Revenue Agents Reports ("RARs") for the 2006 through the 2013 tax years.

4 unchanged sentences

However, based on continuing appeals process discussions with the IRS, we believe that it is more likely than not that we will not recognize the full benefit related to certain of the issues being appealed.

Accordingly, as of June 30, 2020, we had recorded $ 78 million of unrecognized tax benefits related to these issues.

Accordingly, as of September 30, 2020, we had recorded $ 76 million of unrecognized tax benefits related to these issues.

Share-Based Compensation

We recognized share-based compensation expense of $ 24 million and $ 47 million during the three months ended June 30, 2020 and 2019, respectively, and $ 12 million and $ 81 million during the six months ended June 30, 2020 and 2019, respectively, which included amounts reimbursed by hotel owners in all periods.

The expenses recognized during the three and six months ended June 30, 2020 were net of the reversal of expenses recognized in prior periods, as a result of the determination that the performance conditions of certain share-based compensation awards were no longer probable of achievement, as described in further detail below.

As part of the Hilton 2017 Omnibus Incentive Plan (the "2017 Plan"), we award time-vesting restricted stock units and restricted stock (collectively, "RSUs"), nonqualified stock options ("options") and performance-vesting RSUs ("performance shares") to our eligible employees.

As of June 30, 2020, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 138 million, which are expected to be recognized over a weighted-average period of 2.0 years on a straight-line basis.

As of June 30, 2020, there were 12,541,000 shares of common stock available for future issuance under the 2017 Plan, plus any shares subject to awards outstanding under the 2013 Omnibus Incentive Plan, which will become available for issuance under the 2017 Plan if such outstanding awards expire or are terminated or are canceled or forfeited.

During the six months ended June 30, 2020, we granted 907,000 RSUs with a weighted average grant date fair value per share of $ 93.43 , which generally vest in equal annual installments over two or three years from the date of grant.

During the six months ended June 30, 2020, we granted 755,000 options with a weighted average exercise price per share of $ 93.33 , which vest over three years from the date of grant in equal annual installments and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.

The weighted average grant date fair value per share of the options granted during the six months ended June 30, 2020 was $ 21.47 , which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:

We recognized share-based compensation expense of $ 25 million and $ 42 million during the three months ended September 30, 2020 and 2019, respectively, and $ 37 million and $ 123 million during the nine months

ended September 30, 2020 and 2019, respectively, which included amounts reimbursed by hotel owners in all periods.

The expenses recognized during the three and nine months ended September 30, 2020 were net of the reversal of expenses recognized in prior periods, as a result of the determination that the performance conditions of certain share-based compensation awards were no longer probable of achievement, as described in further detail below.

As of September 30, 2020, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 87 million, which are expected to be recognized over a weighted-average period of 1.9 years on a straight-line basis.

As of September 30, 2020, there were 12,980,000 shares of common stock available for future issuance under the 2017 Plan, plus any shares subject to awards outstanding under the 2013 Omnibus Incentive Plan, which will become available for issuance under the 2017 Plan if such outstanding awards expire or are terminated or are canceled or forfeited.

During the nine months ended September 30, 2020, we granted 907,000 RSUs with a weighted average grant date fair value per share of $ 93.43 , which generally vest in equal annual installments over two or three years from the date of grant.

During the nine months ended September 30, 2020, we granted 755,000 options with a weighted average exercise price per share of $ 93.33 , which vest over three years from the date of grant in equal annual installments and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.

The weighted average grant date fair value per share of the options granted during the nine months ended September 30, 2020 was $ 21.47 , which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:

Expected volatility (1)

7 unchanged sentences

(4) Estimated using the average of the vesting periods and the contractual term of the options.

As of June 30, 2020, 1,965,000 options were exercisable.

As of September 30, 2020, 1,889,000 options were exercisable.

Performance Shares

During the six months ended June 30, 2020, we granted 347,000 performance shares with a weighted average grant date fair value per share of $ 93.33 .

During the nine months ended September 30, 2020, we granted 347,000 performance shares with a weighted average grant date fair value per share of $ 93.33 .

The performance shares are settled at the end of the three -year performance period with:

1 unchanged sentence

The total number of performance shares that vest related to each performance measure is based on an achievement factor, which is estimated each reporting period, that ranges from a zero percent to 200 percent payout, with 100 percent being the target.

As of June 30, 2020, we determined that the performance conditions for the outstanding 2018 and 2019 performance shares were not probable of achievement and that the performance conditions for the outstanding 2020 performance shares were probable of achievement, for which we recognized compensation expense at the target achievement percentage.

Based on revisions to our estimates of the achievement factor for the outstanding 2018 and 2019 awards, the share-based compensation expense recognized during the three months ended June 30, 2020 is net of the reversal of prior expense recognized related to the outstanding 2019 performance shares, and the expense recognized during the six months ended June 30, 2020 is net of the reversal of prior expense recognized related to the outstanding 2018 and 2019 performance shares.

As of September 30, 2020, we determined that the performance conditions for the outstanding 2018, 2019 and 2020 performance shares were not probable of achievement, which resulted in the reversal of prior expense recognized for the outstanding 2020 performance awards during the three months ended September 30, 2020 and the reversal of prior expense recognized for all outstanding performance awards during the nine months ended September 30, 2020.

Earnings (Loss) Per Share

The following table presents the calculation of basic and diluted earnings (loss) per share ("EPS"):

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

9 unchanged sentences

Diluted EPS $ ( 0.28 ) $ 1.00 $ ( 1.76 ) $ 2.42

(1) Approximately 3 million and 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three and six months ended June 30, 2020, respectively, and 1 million share-based compensation awards were excluded from the computation of EPS for the three and six months ended June 30, 2019 because their effect would have been anti-dilutive under the treasury stock method.

(1) Approximately 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2020 and 2019 because their effect would have been anti-dilutive under the treasury stock method.

Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss

The following tables present the changes in the components of stockholders' equity (deficit):

Three Months Ended June 30, 2020

Three Months Ended September 30, 2020

Equity (Deficit) Attributable to Hilton Stockholders

5 unchanged sentences

(in millions)

Balance as of March 31, 2020 277 $ 3 $ ( 4,462 ) $ 10,443 $ ( 5,999 ) $ ( 899 ) $ 10 $ ( 904 )

Balance as of June 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,465 $ ( 6,429 ) $ ( 881 ) $ 8 $ ( 1,291 )

Net loss — — — — ( 79 ) — ( 2 ) ( 81 )

3 unchanged sentences

— — — 26 — — — 26

Balance as of June 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,465 $ ( 6,429 ) $ ( 881 ) $ 8 $ ( 1,291 )

Three Months Ended June 30, 2019

Distributions — — — — — — ( 1 ) ( 1 )

Balance as of September 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,491 $ ( 6,508 ) $ ( 853 ) $ 5 $ ( 1,319 )

Three Months Ended September 30, 2019

Equity (Deficit) Attributable to Hilton Stockholders

5 unchanged sentences

(in millions)

Balance as of March 31, 2019 292 $ 3 $ ( 2,921 ) $ 10,374 $ ( 6,558 ) $ ( 798 ) $ 8 $ 108

Balance as of June 30, 2019 288 $ 3 $ ( 3,304 ) $ 10,419 $ ( 6,342 ) $ ( 806 ) $ 7 $ ( 23 )

Net income — — — — 288 — 2 290

4 unchanged sentences

Share-based compensation — — — 41 — — — 41

Deconsolidation of a VIE

— — — — — — ( 2 ) ( 2 )

Balance as of June 30, 2019 288 $ 3 $ ( 3,304 ) $ 10,419 $ ( 6,342 ) $ ( 806 ) $ 7 $ ( 23 )

Six Months Ended June 30, 2020

Balance as of September 30, 2019 283 $ 3 $ ( 3,726 ) $ 10,460 $ ( 6,097 ) $ ( 848 ) $ 9 $ ( 199 )

Nine Months Ended September 30, 2020

Equity (Deficit) Attributable to Hilton Stockholders

14 unchanged sentences

1 — ( 9 ) 2 — — — ( 7 )

Distributions — — — — — — ( 1 ) ( 1 )

Cumulative effect of the adoption of ASU 2016-13

— — — — ( 10 ) — — ( 10 )

Balance as of June 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,465 $ ( 6,429 ) $ ( 881 ) $ 8 $ ( 1,291 )

Six Months Ended June 30, 2019

Balance as of September 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,491 $ ( 6,508 ) $ ( 853 ) $ 5 $ ( 1,319 )

Nine Months Ended September 30, 2019

Equity (Deficit) Attributable to Hilton Stockholders

17 unchanged sentences

Deconsolidation of a VIE — — — — — — ( 2 ) ( 2 )

Balance as of June 30, 2019 288 $ 3 $ ( 3,304 ) $ 10,419 $ ( 6,342 ) $ ( 806 ) $ 7 $ ( 23 )

Balance as of September 30, 2019 283 $ 3 $ ( 3,726 ) $ 10,460 $ ( 6,097 ) $ ( 848 ) $ 9 $ ( 199 )

In March 2020, we suspended share repurchases and the payment of dividends.

6 unchanged sentences

Balance as of December 31, 2019 $ ( 549 ) $ ( 269 ) $ ( 22 ) $ ( 840 )

Other comprehensive loss before reclassifications

Other comprehensive income (loss) before reclassifications

16 ( 3 ) ( 35 ) ( 22 )

2 unchanged sentences

21 5 ( 39 ) ( 13 )

Balance as of June 30, 2020 $ ( 553 ) $ ( 266 ) $ ( 62 ) $ ( 881 )

Balance as of September 30, 2020 $ ( 528 ) $ ( 264 ) $ ( 61 ) $ ( 853 )

Currency Translation Adjustment (1)

3 unchanged sentences

Balance as of December 31, 2018 $ ( 545 ) $ ( 260 ) $ 23 $ ( 782 )

Other comprehensive income (loss) before reclassifications

Other comprehensive loss before reclassifications

( 24 ) ( 1 ) ( 40 ) ( 65 )

Amounts reclassified from accumulated other comprehensive loss

1 6 ( 8 ) ( 1 )

Net current period other comprehensive income (loss)

( 23 ) 5 ( 48 ) ( 66 )

Balance as of June 30, 2019 $ ( 533 ) $ ( 256 ) $ ( 17 ) $ ( 806 )

Balance as of September 30, 2019 $ ( 568 ) $ ( 255 ) $ ( 25 ) $ ( 848 )

(1) Includes net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature.

Amounts reclassified related to the liquidation of investments in foreign entities and were recognized net of taxes in loss on foreign currency transactions in our condensed consolidated statements of operations.

(2) Amounts reclassified related to the amortization of prior service cost and amortization of net loss and were recognized net of taxes in other non-operating loss, net in our condensed consolidated statements of operations.

Amounts reclassified related to the liquidation of investments in foreign entities and were recognized net of taxes in gain (loss) on foreign currency transactions in our condensed consolidated statements of operations.

(2) Amounts reclassified related to the amortization of prior service cost and amortization of net loss and were recognized net of taxes in other non-operating income (loss), net in our condensed consolidated statements of operations.

(3) Amounts reclassified related to interest rate swaps and forward contracts that hedge our foreign currency denominated fees and were recognized net of taxes in interest expense and franchise and licensing fees, base and other management fees and other revenues from managed and franchised properties, respectively, in our condensed consolidated statements of operations.

3 unchanged sentences

These segments are managed and reported separately because of their distinct economic characteristics.

The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels operated or managed by someone other than us.

The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels that use our brands, but are operated or managed by someone other than us.

This segment also earns licensing fees from Hilton Grand Vacations Inc.

("HGV") and strategic partnerships for the right to use certain Hilton marks and IP, as well as fees for managing properties in our ownership segment.

As of June 30, 2020, this segment included 690 managed hotels and 5,405 franchised hotels consisting of 953,946 total rooms.

As a result of the COVID-19 pandemic, approximately 1,170 hotels in our management and franchise segment had temporarily suspended operations at some point in time during the six months ended June 30, 2020, largely beginning in mid-March.

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

As of June 30, 2020, the ownership segment included 65 properties totaling 20,562 rooms.

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, largely beginning in mid-March, of which approximately 10 had reopened as of June 30, 2020.

As of September 30, 2020, this segment included 700 managed hotels and 5,516 franchised hotels consisting of 969,546 total rooms.

As a result of the COVID-19 pandemic, approximately 1,235 hotels in our management and franchise segment had temporarily suspended operations at some point in time during the nine months ended September 30, 2020, largely beginning in mid-March.

Of these hotels, all but approximately 200 had reopened as of September 30, 2020.

As of September 30, 2020, our ownership segment included 62 properties totaling 19,780 rooms.

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 nine months ended September 30, 2020, largely beginning in mid-March, of which all had reopened as of September 30, 2020.

The segment comprised 54 hotels that we wholly owned or leased, one hotel owned by a consolidated non-wholly owned entity, two hotels leased by consolidated VIEs and five hotels owned or leased by unconsolidated affiliates.

1 unchanged sentence

The following table presents revenues for our reportable segments, reconciled to consolidated amounts:

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

19 unchanged sentences

The following table presents operating income (loss) for our reportable segments, reconciled to consolidated income (loss) before income taxes:

Three Months Ended Six Months Ended

June 30, June 30,

Three Months Ended Nine Months Ended

September 30, September 30,

2020 2019 2020 2019

7 unchanged sentences

Other revenues, less other expenses ( 2 ) 12 4 29

Net other revenues (expenses) from managed and franchised properties

Net other expenses from managed and franchised properties

( 44 ) ( 9 ) ( 281 ) ( 21 )

3 unchanged sentences

Impairment losses ( 9 ) — ( 136 ) —

Gain on sale of assets, net — 81 — 81

Operating income (loss) 11 519 ( 223 ) 1,309

Interest expense ( 116 ) ( 105 ) ( 316 ) ( 304 )

Loss on foreign currency transactions ( 13 ) ( 3 ) ( 4 ) ( 3 )

Other non-operating loss, net ( 23 ) ( 12 ) ( 23 ) ( 8 )

Gain (loss) on foreign currency transactions ( 12 ) 7 ( 16 ) 4

Other non-operating income (loss), net 3 — ( 20 ) ( 8 )

Income (loss) before income taxes $ ( 114 ) $ 421 $ ( 575 ) $ 1,001

1 unchanged sentence

The following table presents total assets for our reportable segments, reconciled to consolidated amounts:

June 30, December 31,

September 30, December 31,

(in millions)

7 unchanged sentences

However, in limited cases, we are obligated to fund performance shortfalls, creating variable interests in the ownership entities of the hotels, of which we are not the primary beneficiary.

As of June 30, 2020, we had four performance guarantees, with expirations ranging from 2023 to 2039 , and possible cash outlays totaling approximately $ 19 million.

As of September 30, 2020, we had four performance guarantees, with expirations ranging from 2023 to 2039 , and possible cash outlays totaling approximately $ 18 million.

Our obligations under these guarantees in future periods are dependent on the operating performance level of the related hotel over the remaining term of the performance guarantee.

We have included the impact of the COVID-19 pandemic on these hotels in our expectations of their future operating performance and, as of June 30, 2020 and December 31, 2019, we accrued current liabilities of $ 10 million and $ 3 million, respectively, for our performance guarantees.

We do not have any letters of credit pledged as collateral against our performance guarantees.

We have included the impact of the COVID-19 pandemic on these hotels in our expectations of their future operating performance and, as of September 30, 2020 and December 31, 2019, we accrued current liabilities of $ 7 million and $ 3 million, respectively, for our performance guarantees.

We may enter into new contracts containing performance guarantees in the future, which could increase our possible cash outlays.

1 unchanged sentence

Under the terms of our contractual arrangements with certain of these VIEs, we may provide financial support to such entities under specified circumstances, including default of such a VIE under a third-party loan agreement, and may have the option to acquire a controlling financial interest in such an entity at a predetermined amount.

In a circumstance that we provide financial support or exercise our option to acquire an additional interest in a VIE, we may be required to reassess whether we

are the primary beneficiary of the VIE.

In a circumstance that we provide financial support or exercise our option to acquire an additional interest in a VIE, we may be required to reassess whether we are the primary beneficiary of the VIE.

If we determine that we are the primary beneficiary of the VIE, we would be required to consolidate the total assets, liabilities and results of operations of the VIE, which may be material upon consolidation.

As of June 30, 2020, we guaranteed two loans for three hotels that we franchise or will franchise for a total of $ 30 million.

One of the loans has an initial maturity date in 2022 with two one-year extension options, and the other loan will mature in 2023 .

As a result of the COVID-19 pandemic and our assessment of expected losses under these guarantees, we accrued a current liability of $ 20 million as of June 30, 2020 for the guarantee of one of these loans.

We do not have any letters of credit pledged as collateral against these guarantees.

We have entered into an agreement with the owner of a hotel that we manage to finance capital expenditures at the hotel.

As of June 30, 2020, we had remaining possible cash outlays related to this agreement of approximately $ 10 million;

As of September 30, 2020, we guaranteed one loan for two hotels that we will franchise for $ 10 million.

Additionally, we have entered into an agreement with the owner of a hotel that we manage to finance capital expenditures at the hotel.

As of September 30, 2020, we had remaining possible cash outlays related to this agreement of approximately $ 10 million;

however, we cannot currently estimate the timing of the payments or if they will be made at all.

We receive fees from managed and franchised properties to operate our marketing, sales and brand programs on behalf of hotel owners.

As of June 30, 2020 and December 31, 2019, we had collected an aggregate of $ 150 million and $ 350 million in excess of amounts expended, respectively, across all programs.

As of September 30, 2020 and December 31, 2019, we had collected an aggregate of $ 113 million and $ 350 million in excess of amounts expended, respectively, across all programs.

We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums.

While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2020 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of September 30, 2020 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

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 1. Financial Statements