Item 1. Financial Statements
Item 1. Financial Statements
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
March 31, December 31,
2021 2020
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents
$ 2,402 $ 3,218
Restricted cash and cash equivalents
45 45
Accounts receivable, net of allowance for credit losses of $ 138 and $ 132
797 771
Prepaid expenses 104 70
Other
120 98
Total current assets (variable interest entities – $ 38 and $ 53 )
3,468 4,202
Intangibles and Other Assets:
Goodwill
5,084 5,095
Brands
4,895 4,904
Management and franchise contracts, net 691 653
Other intangible assets, net 241 266
Operating lease right-of-use assets
763 772
Property and equipment, net
327 346
Deferred income tax assets
194 194
Other
311 323
Total intangibles and other assets (variable interest entities – $ 186 and $ 199 )
12,506 12,553
TOTAL ASSETS $ 15,974 $ 16,755
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, accrued expenses and other
$ 1,271 $ 1,302
Current maturities of long-term debt
48 56
Current portion of deferred revenues
364 370
Current portion of liability for guest loyalty program 793 703
Total current liabilities (variable interest entities – $ 50 and $ 57 )
2,476 2,431
Long-term debt 9,908 10,431
Operating lease liabilities 970 971
Deferred revenues
930 1,004
Deferred income tax liabilities 616 649
Liability for guest loyalty program 1,733 1,766
Other 961 989
Total liabilities (variable interest entities – $ 225 and $ 248 )
17,594 18,241
Commitments and contingencies – see Note 13
Equity (Deficit):
Preferred stock, $ 0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of March 31, 2021 and December 31, 2020
— —
Common stock, $ 0.01 par value; 10,000,000,000 authorized shares, 331,448,235 issued and 278,527,885 outstanding as of March 31, 2021 and 330,511,254 issued and 277,590,904 outstanding as of December 31, 2020
3 3
Treasury stock, at cost; 52,920,350 shares as of March 31, 2021 and December 31, 2020
( 4,453 ) ( 4,453 )
Additional paid-in capital
10,547 10,552
Accumulated deficit ( 6,840 ) ( 6,732 )
Accumulated other comprehensive loss
( 880 ) ( 860 )
Total Hilton stockholders' deficit
( 1,623 ) ( 1,490 )
Noncontrolling interests
3 4
Total deficit ( 1,620 ) ( 1,486 )
TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 15,974 $ 16,755
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended
March 31,
2021 2020
Revenues
Franchise and licensing fees $ 242 $ 339
Base and other management fees 25 60
Incentive management fees 13 23
Owned and leased hotels 56 210
Other revenues 17 23
353 655
Other revenues from managed and franchised properties
521 1,265
Total revenues 874 1,920
Expenses
Owned and leased hotels
110 239
Depreciation and amortization 51 91
General and administrative 97 60
Impairment losses — 112
Other expenses 10 14
268 516
Other expenses from managed and franchised properties
585 1,336
Total expenses 853 1,852
Operating income 21 68
Interest expense ( 103 ) ( 94 )
Gain on foreign currency transactions
2 9
Loss on debt extinguishment ( 69 ) —
Other non-operating income, net
5 —
Loss before income taxes ( 144 ) ( 17 )
Income tax benefit
35 35
Net income (loss) ( 109 ) 18
Net loss attributable to noncontrolling interests
1 —
Net income (loss) attributable to Hilton stockholders $ ( 108 ) $ 18
Earnings (loss) per share:
Basic $ ( 0.39 ) $ 0.06
Diluted $ ( 0.39 ) $ 0.06
Cash dividends declared per share $ — $ 0.15
See notes to condensed consolidated financial statements.
3
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
Three Months Ended
March 31,
2021 2020
Net income (loss) $ ( 109 ) $ 18
Other comprehensive income (loss), net of tax benefit (expense):
Currency translation adjustment, net of tax of $( 3 ) and $ 8
( 29 ) ( 24 )
Pension liability adjustment, net of tax (1)
2 1
Cash flow hedge adjustment, net of tax of $( 2 ) and $ 13
7 ( 36 )
Total other comprehensive loss ( 20 ) ( 59 )
Comprehensive loss ( 129 ) ( 41 )
Comprehensive loss attributable to noncontrolling interests
1 —
Comprehensive loss attributable to Hilton stockholders
$ ( 128 ) $ ( 41 )
____________
(1) Amounts were less than $1 million for both periods.
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Three Months Ended
March 31,
2021 2020
Operating Activities:
Net income (loss) $ ( 109 ) $ 18
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Amortization of contract acquisition costs 7 8
Depreciation and amortization 51 91
Impairment losses — 112
Gain on foreign currency transactions ( 2 ) ( 9 )
Share-based compensation expense (benefit) 39 ( 12 )
Deferred income taxes ( 39 ) ( 37 )
Contract acquisition costs ( 43 ) ( 11 )
Change in deferred revenues ( 80 ) 12
Change in liability for guest loyalty program 57 55
Working capital changes and other ( 52 ) ( 98 )
Net cash provided by (used in) operating activities ( 171 ) 129
Investing Activities:
Capital expenditures for property and equipment
( 3 ) ( 12 )
Capitalized software costs ( 8 ) ( 17 )
Other ( 5 ) ( 18 )
Net cash used in investing activities ( 16 ) ( 47 )
Financing Activities:
Borrowings 1,500 1,690
Repayment of debt ( 2,016 ) ( 205 )
Debt issuance costs and redemption premium ( 74 ) —
Dividends paid — ( 42 )
Repurchases of common stock — ( 296 )
Share-based compensation tax withholdings and other ( 34 ) ( 47 )
Net cash provided by (used in) financing activities ( 624 ) 1,100
Effect of exchange rate changes on cash, restricted cash and cash equivalents ( 5 ) ( 7 )
Net increase (decrease) in cash, restricted cash and cash equivalents ( 816 ) 1,175
Cash, restricted cash and cash equivalents, beginning of period 3,263 630
Cash, restricted cash and cash equivalents, end of period $ 2,447 $ 1,805
Supplemental Disclosures:
Cash paid during the year:
Interest $ 72 $ 94
Income taxes, net of refunds 25 50
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Organization and Basis of Presentation
Organization
Hilton Worldwide Holdings Inc. (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 March 31, 2021, we managed, franchised, owned or leased 6,567 hotels and resorts, including timeshare properties, totaling 1,032,412 rooms in 119 countries and territories.
Basis of Presentation
The accompanying condensed consolidated financial statements for the three months ended March 31, 2021 and 2020 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. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. 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 months ended March 31, 2021 and 2020 when compared to periods prior to the onset of the pandemic in early 2020. As such, this interim period, as well as upcoming periods, are unlikely to be comparable to periods prior to the onset of the pandemic or to other periods affected by the pandemic, and are not indicative of future performance. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions have been eliminated in consolidation.
Note 2: 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 three months ended March 31, 2021:
(in millions)
Balance as of December 31, 2020
$ 1,312
Cash received in advance and not recognized as revenue
23
Revenue recognized (1)
( 60 )
Other (2)
( 31 )
Balance as of March 31, 2021
$ 1,244
____________
(1) Revenue recognized during the three months ended March 31, 2021 included $ 46 million related to Hilton Honors, our guest loyalty program. Revenue recognized during the three months ended March 31, 2020 was $ 54 million, which included $ 40 million related to Hilton Honors.
(2) Primarily represents changes in estimated transaction prices for our performance obligations related to points issued under Hilton Honors, which had no effect on revenues.
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Hilton Honors Points Pre-Sale
In April 2020, we pre-sold Hilton Honors points to American Express for $ 1.0 billion in cash (the "Honors Points Pre-Sale"). 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. Upon receipt of the cash, we recognized $ 636 million in deferred revenues and the remainder in liability for guest loyalty program; see below for additional information on the revenue recognition of the related deferred revenues.
Performance Obligations
As of March 31, 2021, we had deferred revenues for unsatisfied performance obligations consisting of: (i) $ 241 million related to Hilton Honors that will be recognized as revenue when the points are redeemed, which we estimate will occur over approximately the next two years ; (ii) $ 407 million related to co-branded credit card arrangements, primarily consisting of deferred revenues for the Honors Points Pre-Sale of which a portion will be recognized as revenue when points are awarded, with the remaining portion recognized as revenue when the points are redeemed; and (iii) $ 596 million related to application, initiation and other fees that is expected to be recognized as revenue over the terms of the related contracts.
Note 3: Consolidated Variable Interest Entities
As of March 31, 2021 and December 31, 2020, we consolidated two variable interest entities ("VIEs") that each lease a hotel property. We consolidated these VIEs since we are the primary beneficiary, having the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our consolidated VIEs are only available to settle the obligations of the respective entities.
Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily comprised the following:
March 31, December 31,
2021 2020
(in millions)
Cash and cash equivalents $ 26 $ 40
Property and equipment, net 69 76
Deferred income tax assets 56 57
Other non-current assets 61 66
Accounts payable, accrued expenses and other 26 27
Long-term debt (1)
181 203
Other long-term liabilities 17 17
____________
(1) Includes finance lease liabilities of $ 164 million and $ 184 million as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and December 31, 2020, there were no amounts drawn under the VIEs' revolving credit facilities that had borrowing capacities totaling 4.75 billion Japanese yen (equivalent to $ 43 million as of March 31, 2021).
We did not provide any financial or other support to any consolidated VIEs that we were not previously contractually required to provide during the three months ended March 31, 2021 and 2020.
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Note 4: Finite-Lived Intangible Assets
Finite-lived intangible assets were as follows:
March 31, 2021
Gross Carrying Value Accumulated Amortization Net Carrying Value
(in millions)
Management and franchise contracts:
Management contracts recorded at Merger (1)
$ 314 $ ( 264 ) $ 50
Contract acquisition costs
681 ( 149 ) 532
Development commissions and other
133 ( 24 ) 109
$ 1,128 $ ( 437 ) $ 691
Other intangible assets:
Leases (1)
$ 141 $ ( 81 ) $ 60
Capitalized software costs
529 ( 403 ) 126
Hilton Honors (1)
341 ( 286 ) 55
$ 1,011 $ ( 770 ) $ 241
December 31, 2020
Gross Carrying Value Accumulated Amortization Net Carrying Value
(in millions)
Management and franchise contracts:
Management contracts recorded at Merger (1)
$ 317 $ ( 261 ) $ 56
Contract acquisition costs
632 ( 144 ) 488
Development commissions and other
132 ( 23 ) 109
$ 1,081 $ ( 428 ) $ 653
Other intangible assets:
Leases (1)(2)
$ 157 $ ( 95 ) $ 62
Capitalized software costs
522 ( 378 ) 144
Hilton Honors (1)
342 ( 282 ) 60
$ 1,021 $ ( 755 ) $ 266
____________
(1) Represents intangible assets that were initially recorded at their fair value as part of the October 2007 transaction whereby we became a wholly owned subsidiary of affiliates of The Blackstone Group Inc. (the "Merger").
(2) During the three months ended March 31, 2020, we recognized $ 46 million of impairment losses included in our condensed consolidated statement of operations.
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Amortization of our finite-lived intangible assets was as follows:
Three Months Ended
March 31,
2021 2020
(in millions)
Recognized in depreciation and amortization expense (1)
$ 38 $ 77
Recognized as a reduction of franchise and licensing fees and base and other management fees
7 8
____________
(1) Includes amortization expense of $ 12 million and $ 49 million for the three months ended March 31, 2021 and 2020, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger, some of which became fully amortized during 2020.
We estimate future amortization of our finite-lived intangible assets as of March 31, 2021 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
Year (in millions)
2021 (remaining) $ 94 $ 23
2022 98 30
2023 62 29
2024 14 29
2025 8 28
Thereafter 124 393
$ 400 $ 532
Note 5: Debt
Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of March 31, 2021, were as follows:
March 31, December 31,
2021 2020
(in millions)
Senior secured revolving credit facility with a rate of 1.11 %, due 2024
$ 1,190 $ 1,690
Senior secured term loan facility with a rate of 1.86 %, due 2026
2,619 2,619
Senior notes with a rate of 5.375 %, due 2025
500 500
Senior notes with a rate of 5.125 %, due 2026
— 1,500
Senior notes with a rate of 4.875 %, due 2027
600 600
Senior notes with a rate of 5.750 %, due 2028
500 500
Senior notes with a rate of 3.750 %, due 2029
800 800
Senior notes with a rate of 4.875 %, due 2030
1,000 1,000
Senior notes with a rate of 4.000 %, due 2031
1,100 1,100
Senior notes with a rate of 3.625 %, due 2032
1,500 —
Finance lease liabilities with a weighted average rate of 5.85 %, due 2021 to 2030
227 252
Other debt with a rate of 3.08 %, due 2026
17 19
10,053 10,580
Less: unamortized deferred financing costs and discount ( 97 ) ( 93 )
Less: current maturities of long-term debt (1)
( 48 ) ( 56 )
$ 9,908 $ 10,431
____________
(1) Represents current maturities of finance lease liabilities.
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Our senior secured credit facilities consist of a $ 1.75 billion senior secured revolving credit facility (the "Revolving Credit Facility") and a senior secured term loan facility (the "Term Loan"). 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. During the three months ended March 31, 2021, we repaid $ 500 million of the outstanding debt balance on the Revolving Credit Facility. As of March 31, 2021, in addition to the outstanding debt balance, we had $ 60 million of letters of credit outstanding on our Revolving Credit Facility, resulting in an available borrowing capacity of $ 500 million.
In February 2021, we issued $ 1.5 billion aggregate principal amount of 3.625 % Senior Notes due 2032 (the "2032 Senior Notes") and incurred $ 21 million of debt issuance costs. Interest on the 2032 Senior Notes is payable semi-annually in arrears on February 15 and August 15 of each year, beginning August 15, 2021. We used the net proceeds from the issuance, together with available cash, to redeem all $ 1.5 billion in aggregate principal amount of our outstanding 5.125 % Senior Notes due 2026 (the "2026 Senior Notes"), plus accrued and unpaid interest. In connection with the redemption, we paid a redemption premium of $ 55 million and accelerated the recognition of the unamortized deferred financing costs on the 2026 Senior Notes of $ 14 million, which were both included in loss on debt extinguishment in our condensed consolidated statement of operations for the three months ended March 31, 2021.
The 5.375 % Senior Notes due 2025 (the "2025 Senior Notes"), the 4.875 % Senior Notes due 2027, the 5.750 % Senior Notes due 2028 (the "2028 Senior Notes"), the 3.750 % Senior Notes due 2029, the 4.875 % Senior Notes due 2030, the 4.000 % Senior Notes due 2031 and the 2032 Senior Notes 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"), an indirect wholly owned subsidiary of the Parent and the issuer of all of the series of Senior Notes.
The contractual maturities of our long-term debt as of March 31, 2021 were as follows:
Year (in millions)
2021 (remaining) $ 40
2022 29
2023 22
2024 1,212
2025 523
Thereafter 8,227
$ 10,053
Note 6: Fair Value Measurements
Estimates of the fair values of our financial instruments and nonfinancial assets were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values.
The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below:
March 31, 2021
Hierarchy Level
Carrying Value Level 1 Level 2 Level 3
(in millions)
Assets:
Cash equivalents $ 1,415 $ — $ 1,415 $ —
Restricted cash equivalents 9 — 9 —
Liabilities:
Long-term debt (1)
9,712 6,114 — 3,788
Interest rate swaps 73 — 73 —
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December 31, 2020
Hierarchy Level
Carrying Value Level 1 Level 2 Level 3
(in millions)
Assets:
Cash equivalents $ 2,270 $ — $ 2,270 $ —
Restricted cash equivalents 9 — 9 —
Liabilities:
Long-term debt (1)
10,216 6,366 — 4,293
Interest rate swaps 82 — 82 —
____________
(1) The carrying values include unamortized deferred financing costs and discount. The carrying values and fair values exclude finance lease liabilities and other debt.
We measure our interest rate swaps at fair value, which was determined using a discounted cash flow analysis that reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs of similar instruments, including interest rate curves, as applicable. Our interest rate swaps are included in other long-term liabilities in our condensed consolidated balance sheets.
The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of March 31, 2021 and December 31, 2020.
Note 7: Leases
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 March 31, 2021, we leased 48 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 months ended March 31, 2020, we recognized impairment losses in our condensed consolidated statement of operations related to certain hotel properties in our ownership segment under operating and finance leases, including $ 45 million of operating lease right-of-use ("ROU") assets and $ 21 million of property and equipment, net, of which $ 2 million related to finance lease ROU assets.
Supplemental cash flow information related to leases was as follows:
Three Months Ended
March 31,
2021 2020
(in millions)
ROU assets obtained in exchange for lease liabilities in non-cash transactions:
Operating leases $ 28 $ 6
Finance leases 3 11
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Our future minimum lease payments as of March 31, 2021 were as follows:
Operating
Leases Finance
Leases
Year (in millions)
2021 (remaining) $ 158 $ 49
2022 158 40
2023 144 32
2024 122 30
2025 120 30
Thereafter 746 104
Total minimum lease payments 1,448 285
Less: imputed interest ( 321 ) ( 58 )
Total lease liabilities $ 1,127 $ 227
Note 8: Income Taxes
The Company's income tax provision for interim reporting periods has historically been calculated by applying an estimate of the annual effective income tax rate for the full year to "ordinary" income (loss) for the interim reporting period, which is calculated as pre-tax income (loss) excluding unusual and infrequently occurring discrete items. For the three months ended March 31, 2021, we calculated the income tax provision using a discrete effective income tax rate method as if the interim year to date period was an annual period. We determined that since normal changes in estimated "ordinary" income (loss) would result in disproportionate changes in the estimated annual effective income tax rate, the Company's historic method of calculating its income tax provision for interim reporting periods would not provide a reliable estimate for the three months ended March 31, 2021.
We file income tax returns, including returns for our subsidiaries, with federal, state, local and foreign tax jurisdictions. We are under regular and recurring audit by the Internal Revenue Service ("IRS") and other taxing authorities on open tax positions. The timing of the resolution of tax audits is highly uncertain, as are the amounts, if any, that may ultimately be paid upon such resolution. Changes may result from the conclusion of ongoing audits, appeals or litigation in federal, state, local and foreign tax jurisdictions or from the resolution of various proceedings between the U.S. and foreign tax authorities. As of March 31, 2021, 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 2020.
Our total unrecognized tax benefits as of March 31, 2021 and December 31, 2020 were $ 444 million and $ 451 million, respectively. As of March 31, 2021 and December 31, 2020, we had accrued approximately $ 67 million and $ 65 million, respectively, for interest and penalties related to these unrecognized tax benefits. Included in the balances of unrecognized tax benefits as of March 31, 2021 and December 31, 2020 were $ 399 million and $ 400 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. We disagreed with several of the proposed adjustments in the RARs and filed formal appeals protests with the IRS. The unsettled proposed adjustments sought by the IRS for the tax years with open audits would result in additional U.S. federal taxes owed of approximately $ 817 million, excluding interest and penalties and potential state income taxes. We disagree with the IRS's position on each of their assertions and intend to vigorously contest them. 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 March 31, 2021, we had recorded $ 93 million of unrecognized tax benefits related to these issues.
Note 9: Share-Based Compensation
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. We recognized an expense of $ 39 million and a benefit of $ 12 million related to share-based compensation during the three months ended March 31, 2021 and 2020, respectively, which included amounts reimbursed by hotel owners. The benefit recognized during the three months ended March 31, 2020 was primarily due to the reversal of expense recognized in prior periods, as a result of the determination that the performance conditions of certain of the then-outstanding performance shares were no longer probable of achievement.
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As of March 31, 2021, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 229 million, which are expected to be recognized over a weighted-average period of 1.9 years on a straight-line basis. As of March 31, 2021, there were 12.1 million 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, canceled, forfeited or withheld for taxes.
RSUs
During the three months ended March 31, 2021, we granted 573,000 RSUs with a weighted average grant date fair value per share of $ 123.02 , which vest in equal annual installments over two or three years from the date of grant.
Options
During the three months ended March 31, 2021, we granted 361,000 options with an exercise price per share of $ 123.13 , which vest in equal annual installments over three years from the date of grant and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.
The grant date fair value per share of the options granted during the three months ended March 31, 2021 was $ 41.15 , which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility (1)
33.13 %
Dividend yield (2)
— %
Risk-free rate (3)
0.92 %
Expected term (in years) (4)
6.0
____________
(1) Estimated using a blended approach of historical and implied volatility. Historical volatility is based on the historical movement of Hilton's stock price for a period that corresponds to the expected life of the option.
(2) We have historically paid regular quarterly cash dividends. However, in March 2020, we suspended the declaration and payment of dividends as part of certain proactive measures we took to secure our liquidity position in response to the COVID-19 pandemic, and, at the time of the grant, we could not estimate when the payment of dividends would resume.
(3) Based on the yields of U.S. Department of Treasury instruments with similar expected lives.
(4) Estimated using the average of the vesting periods and the contractual term of the options.
Performance Shares
In December 2020, we modified our then-outstanding performance shares in response to the COVID-19 pandemic and its negative impact on the hospitality industry and, ultimately, the Company's performance. The modifications were structured to reward for results achieved prior to the COVID-19 pandemic, retain senior business leaders and incentivize for the recovery efforts by utilizing metrics most meaningful in assessing our performance during our recovery from the negative impact of the pandemic. Under the terms of the modified awards, a portion of the outstanding performance shares granted in 2019 were modified to vest based on performance prior to the pandemic and continued service, and the remaining portion of those performance shares and the performance shares granted in 2020 were converted to performance shares that will vest based on different performance measures from those under the original agreements. The modified terms did not change the vesting schedules of the original awards.
During the three months ended March 31, 2021, we granted 241,000 performance shares with a grant date fair value per share of $ 123.13 . We recognize compensation expense based on the total number of performance shares that are expected to vest as determined by the related performance measure's achievement factor, which is estimated each reporting period and ranges from zero percent to 200 percent, with 100 percent being the target. As of March 31, 2021, we determined that the performance measures for all of the outstanding performance shares were probable of achievement, with the estimated applicable achievement factors at approximately target.
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Note 10: Earnings (Loss) Per Share
The following table presents the calculation of basic and diluted earnings (loss) per share ("EPS"):
Three Months Ended
March 31,
2021 2020
(in millions, except per share amounts)
Basic EPS:
Numerator:
Net income (loss) attributable to Hilton stockholders
$ ( 108 ) $ 18
Denominator:
Weighted average shares outstanding 278 277
Basic EPS $ ( 0.39 ) $ 0.06
Diluted EPS:
Numerator:
Net income (loss) attributable to Hilton stockholders
$ ( 108 ) $ 18
Denominator:
Weighted average shares outstanding (1)
278 280
Diluted EPS $ ( 0.39 ) $ 0.06
____________
(1) Approximately 3 million and 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three months ended March 31, 2021 and 2020, respectively, because their effect would have been anti-dilutive under the treasury stock method.
Note 11: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss
The following tables present the changes in the components of stockholders' equity (deficit):
Three Months Ended March 31, 2021
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of December 31, 2020 278 $ 3 $ ( 4,453 ) $ 10,552 $ ( 6,732 ) $ ( 860 ) $ 4 $ ( 1,486 )
Net loss — — — — ( 108 ) — ( 1 ) ( 109 )
Other comprehensive loss
— — — — — ( 20 ) — ( 20 )
Share-based compensation
1 — — ( 5 ) — — — ( 5 )
Balance as of March 31, 2021 279 $ 3 $ ( 4,453 ) $ 10,547 $ ( 6,840 ) $ ( 880 ) $ 3 $ ( 1,620 )
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Three Months Ended March 31, 2020
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of December 31, 2019 279 $ 3 $ ( 4,169 ) $ 10,489 $ ( 5,965 ) $ ( 840 ) $ 10 $ ( 472 )
Net income — — — — 18 — — 18
Other comprehensive loss
— — — — — ( 59 ) — ( 59 )
Dividends (1)
— — — — ( 42 ) — — ( 42 )
Repurchases of common stock (1)
( 3 ) — ( 279 ) — — — — ( 279 )
Share-based compensation
1 — ( 14 ) ( 46 ) — — — ( 60 )
Cumulative effect of the adoption of ASU 2016-13 (2)
— — — — ( 10 ) — — ( 10 )
Balance as of March 31, 2020 277 $ 3 $ ( 4,462 ) $ 10,443 $ ( 5,999 ) $ ( 899 ) $ 10 $ ( 904 )
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(1) In March 2020, we suspended share repurchases and the declaration of dividends.
(2) Relates to Accounting Standards Update No. 2016-13 ("ASU 2016-13"), Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments , that was adopted on January 1, 2020.
The changes in the components of accumulated other comprehensive loss, net of taxes, were as follows:
Currency Translation Adjustment (1)
Pension Liability Adjustment (2)
Cash Flow Hedge Adjustment (3)
Total
(in millions)
Balance as of December 31, 2020 $ ( 511 ) $ ( 289 ) $ ( 60 ) $ ( 860 )
Other comprehensive income (loss) before reclassifications
( 29 ) ( 1 ) 2 ( 28 )
Amounts reclassified from accumulated other comprehensive loss
— 3 5 8
Net current period other comprehensive income (loss)
( 29 ) 2 7 ( 20 )
Balance as of March 31, 2021 $ ( 540 ) $ ( 287 ) $ ( 53 ) $ ( 880 )
Currency Translation Adjustment (1)
Pension Liability Adjustment (2)
Cash Flow Hedge Adjustment (3)
Total
(in millions)
Balance as of December 31, 2019 $ ( 549 ) $ ( 269 ) $ ( 22 ) $ ( 840 )
Other comprehensive loss before reclassifications
( 25 ) ( 1 ) ( 34 ) ( 60 )
Amounts reclassified from accumulated other comprehensive loss
1 2 ( 2 ) 1
Net current period other comprehensive income (loss)
( 24 ) 1 ( 36 ) ( 59 )
Balance as of March 31, 2020 $ ( 573 ) $ ( 268 ) $ ( 58 ) $ ( 899 )
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(1) Includes net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature. The amount reclassified during the three months ended March 31, 2020 related to the liquidation of an investment in a foreign entity and was recognized in gain on foreign currency transactions in our condensed consolidated statement of operations.
(2) Amounts reclassified related to the amortization of prior service cost (credit) and amortization of net loss and were recognized in other non-operating income, net in our condensed consolidated statements of operations.
(3) Amounts reclassified related to interest rate swaps, including interest rate swaps that were dedesignated and subsequently settled, and forward contracts that hedge our foreign currency denominated fees and were recognized 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.
Note 12: Business Segments
We are a hospitality company with operations organized in two distinct operating segments: (i) management and franchise and (ii) ownership. These segments are managed and reported separately because of their distinct economic characteristics.
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The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels that license our brands and where we provide other prescribed services, but where the day-to-day services of the hotels are operated or managed by someone other than us. This segment also earns licensing fees from Hilton Grand Vacations Inc. ("HGV") and strategic partnerships, including co-branded credit card arrangements, for the right to use certain Hilton marks and IP, as well as fees for managing properties in our ownership segment. As of March 31, 2021, this segment included 717 managed hotels and 5,733 franchised hotels consisting of 1,003,961 total rooms. As a result of the COVID-19 pandemic, during the three months ended March 31, 2021 and 2020, the operations of certain hotels in our management and franchise segment were suspended for some period of time. As of March 31, 2021, all but approximately 200 of these hotels were open.
As of March 31, 2021, our ownership segment included 61 properties totaling 19,400 rooms. The segment comprised 53 hotels that we wholly owned or leased, one hotel owned by a consolidated non-wholly owned entity, two hotels that were each leased by a consolidated VIE and five hotels owned or leased by unconsolidated affiliates. As a result of the COVID-19 pandemic, the operations of approximately 15 hotels in our ownership segment were suspended for some period of time during the three months ended March 31, 2021 and approximately five remained suspended as of March 31, 2021. Although the operations of certain hotels in our ownership segment were suspended for some period of time during the three months ended March 31, 2020, the suspensions began in late March 2020.
The performance of our operating segments is evaluated primarily on operating income (loss), without allocating other revenues and expenses or general and administrative expenses.
The following table presents revenues for our reportable segments, reconciled to consolidated amounts:
Three Months Ended
March 31,
2021 2020
(in millions)
Franchise and licensing fees $ 245 $ 342
Base and other management fees (1)
30 66
Incentive management fees 13 23
Management and franchise 288 431
Ownership 56 210
Segment revenues 344 641
Amortization of contract acquisition costs ( 7 ) ( 8 )
Other revenues 17 23
Direct reimbursements from managed and franchised properties (2)
223 745
Indirect reimbursements from managed and franchised properties (2)
298 520
Intersegment fees elimination (1)
( 1 ) ( 1 )
Total revenues $ 874 $ 1,920
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(1) Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
(2) Included in other revenues from managed and franchised properties in our condensed consolidated statements of operations.
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The following table presents operating income (loss) for our reportable segments, reconciled to consolidated loss before income taxes:
Three Months Ended
March 31,
2021 2020
(in millions)
Management and franchise (1)
$ 288 $ 431
Ownership (1)
( 55 ) ( 30 )
Segment operating income 233 401
Amortization of contract acquisition costs ( 7 ) ( 8 )
Other revenues, less other expenses 7 9
Net other expenses from managed and franchised properties
( 64 ) ( 71 )
Depreciation and amortization expenses ( 51 ) ( 91 )
General and administrative expenses ( 97 ) ( 60 )
Impairment losses — ( 112 )
Operating income 21 68
Interest expense ( 103 ) ( 94 )
Gain on foreign currency transactions 2 9
Loss on debt extinguishment ( 69 ) —
Other non-operating income, net 5 —
Loss before income taxes $ ( 144 ) $ ( 17 )
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(1) Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
The following table presents total assets of our reportable segments, reconciled to consolidated amounts:
March 31, December 31,
2021 2020
(in millions)
Management and franchise $ 11,097 $ 11,065
Ownership 1,189 1,242
Corporate and other 3,688 4,448
$ 15,974 $ 16,755
Note 13: Commitments and Contingencies
We provide performance guarantees to certain owners of hotels that we operate under management contracts. Most of these guarantees do not require us to fund shortfalls, but allow for termination of the contract, if specified operating performance levels are not achieved. 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 March 31, 2021, we had five performance guarantees, with expirations ranging from 2023 to 2039 , and possible cash outlays totaling approximately $ 20 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 March 31, 2021 and December 31, 2020, we accrued current liabilities of $ 5 million and $ 7 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.
As of March 31, 2021, we guaranteed a $ 10 million loan, which matures in 2023, for two hotels that we will franchise. Additionally, we have an agreement with the owner of a hotel that we manage to finance capital expenditures at the hotel. As of March 31, 2021, 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, which are based on the underlying hotel's sales or usage. As a result of the adverse impact of the COVID-19 pandemic on our hotels' sales and, ultimately, the program fees we earn, our costs to operate these programs have outpaced the
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fees received, which, as of March 31, 2021, resulted in $ 52 million of amounts expended on behalf of these programs exceeding the amounts collected. As of December 31, 2020, we had collected an aggregate of $ 5 million in excess of amounts expended, 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 March 31, 2021 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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