Hilton Worldwide Holdings Inc. 10-Q

Item 1. Financial Statements HILTON WORLDWIDE HOLDINGS INC. CONDENSED CONSOLIDATED BALANCE SHEETS (in millions, except share data) September 30, December 31, 2021 2020 (unaudited) ASSETS Current Assets: Cash and cash equivalents $ 1,288 $ 3,218 Restricted cash and cash equivalents 99 45 Accounts receivable, net of allowance for credit losses of $ 130 and $ 132 1,012 771 Prepaid expenses 124 70 Other 171 98 Total current assets (variable interest entities – $ 31 and $ 53 ) 2,694 4,202 Intangibles and Other Assets: Goodwill 5,078 5,095 Brands 4,890 4,904 Management and franchise contracts, net 730 653 Other intangible assets, net 208 266 Operating lease right-of-use assets 719 772 Property and equipment, net 303 346 Deferred income tax assets 244 194 Other 448 323 Total intangibles and other assets (variable interest entities – $ 181 and $ 199 ) 12,620 12,553 TOTAL ASSETS $ 15,314 $ 16,755 LIABILITIES AND EQUITY (DEFICIT) Current Liabilities: Accounts payable, accrued expenses and other $ 1,433 $ 1,302 Current maturities of long-term debt 54 56 Current portion of deferred revenues 298 370 Current portion of liability for guest loyalty program 837 703 Total current liabilities (variable interest entities – $ 52 and $ 57 ) 2,622 2,431 Long-term debt 8,713 10,431 Operating lease liabilities 899 971 Deferred revenues 790 1,004 Deferred income tax liabilities 718 649 Liability for guest loyalty program 1,739 1,766 Other 961 989 Total liabilities (variable interest entities – $ 217 and $ 248 ) 16,442 18,241 Commitments and contingencies – see Note 12 Equity (Deficit): Preferred stock, $ 0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of September 30, 2021 and December 31, 2020 — — Common stock, $ 0.01 par value; 10,000,000,000 authorized shares, 331,639,032 issued and 278,718,682 outstanding as of September 30, 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 September 30, 2021 and December 31, 2020 ( 4,447 ) ( 4,453 ) Additional paid-in capital 10,654 10,552 Accumulated deficit ( 6,469 ) ( 6,732 ) Accumulated other comprehensive loss ( 869 ) ( 860 ) Total Hilton stockholders' deficit ( 1,128 ) ( 1,490 ) Noncontrolling interests — 4 Total deficit ( 1,128 ) ( 1,486 ) TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 15,314 $ 16,755 See notes to condensed consolidated financial statements. 2 HILTON WORLDWIDE HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Revenues Franchise and licensing fees $ 451 $ 241 $ 1,062 $ 712 Base and other management fees 49 24 116 92 Incentive management fees 26 7 60 25 Owned and leased hotels 199 94 376 335 Other revenues 18 19 56 52 743 385 1,670 1,216 Other revenues from managed and franchised properties 1,006 548 2,282 2,201 Total revenues 1,749 933 3,952 3,417 Expenses Owned and leased hotels 200 144 452 478 Depreciation and amortization 46 90 143 269 General and administrative 107 66 302 189 Reorganization costs — — — 38 Impairment losses — 9 — 136 Other expenses 12 21 31 48 365 330 928 1,158 Other expenses from managed and franchised properties 944 592 2,339 2,482 Total expenses 1,309 922 3,267 3,640 Loss on sale of assets, net ( 8 ) — ( 8 ) — Operating income (loss) 432 11 677 ( 223 ) Interest expense ( 98 ) ( 116 ) ( 302 ) ( 316 ) Gain (loss) on foreign currency transactions — ( 12 ) 1 ( 16 ) Loss on debt extinguishment — — ( 69 ) — Other non-operating income (loss), net 6 3 16 ( 20 ) Income (loss) before income taxes 340 ( 114 ) 323 ( 575 ) Income tax benefit (expense) ( 100 ) 33 ( 64 ) 80 Net income (loss) 240 ( 81 ) 259 ( 495 ) Net loss attributable to noncontrolling interests 1 2 4 4 Net income (loss) attributable to Hilton stockholders $ 241 $ ( 79 ) $ 263 $ ( 491 ) Earnings (loss) per share: Basic $ 0.86 $ ( 0.29 ) $ 0.94 $ ( 1.77 ) Diluted $ 0.86 $ ( 0.29 ) $ 0.94 $ ( 1.77 ) 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 Nine Months Ended September 30, September 30, 2021 2020 2021 2020 Net income (loss) $ 240 $ ( 81 ) $ 259 $ ( 495 ) Other comprehensive income (loss), net of tax benefit (expense): Currency translation adjustment, net of tax of $( 2 ), $( 11 ), $( 4 ) and $( 2 ) ( 5 ) 25 ( 26 ) 21 Pension liability adjustment, net of tax of $( 1 ), $( 1 ), $( 2 ) and $( 2 ) 2 2 6 5 Cash flow hedge adjustment, net of tax of $ — , $( 1 ), $( 4 ) and $ 13 — 1 11 ( 39 ) Total other comprehensive income (loss) ( 3 ) 28 ( 9 ) ( 13 ) Comprehensive income (loss) 237 ( 53 ) 250 ( 508 ) Comprehensive loss attributable to noncontrolling interests 1 2 4 4 Comprehensive income (loss) attributable to Hilton stockholders $ 238 $ ( 51 ) $ 254 $ ( 504 ) See notes to condensed consolidated financial statements. 4 HILTON WORLDWIDE HOLDINGS INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) (unaudited) Nine Months Ended September 30, 2021 2020 Operating Activities: Net income (loss) $ 259 $ ( 495 ) Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Amortization of contract acquisition costs 23 22 Depreciation and amortization 143 269 Impairment losses — 136 Loss (gain) on foreign currency transactions ( 1 ) 16 Share-based compensation expense 144 37 Deferred income taxes 6 ( 142 ) Contract acquisition costs ( 160 ) ( 37 ) Change in deferred revenues ( 286 ) 496 Change in liability for guest loyalty program 107 413 Working capital changes and other ( 257 ) 131 Net cash provided by (used in) operating activities ( 22 ) 846 Investing Activities: Capital expenditures for property and equipment ( 17 ) ( 38 ) Capitalized software costs ( 28 ) ( 38 ) Other 11 ( 13 ) Net cash used in investing activities ( 34 ) ( 89 ) Financing Activities: Borrowings 1,505 2,690 Repayment of debt ( 3,221 ) ( 214 ) Debt issuance costs and redemption premium ( 76 ) ( 14 ) Dividends paid — ( 42 ) Repurchases of common stock — ( 296 ) Share-based compensation tax withholdings and other ( 22 ) ( 36 ) Other — ( 1 ) Net cash provided by (used in) financing activities ( 1,814 ) 2,087 Effect of exchange rate changes on cash, restricted cash and cash equivalents ( 6 ) ( 6 ) Net increase (decrease) in cash, restricted cash and cash equivalents ( 1,876 ) 2,838 Cash, restricted cash and cash equivalents, beginning of period 3,263 630 Cash, restricted cash and cash equivalents, end of period $ 1,387 $ 3,468 Supplemental Disclosures: Cash paid during the period: Interest $ 254 $ 276 Income taxes, net of refunds 79 67 See notes to condensed consolidated financial statements. 5 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 September 30, 2021, we managed, franchised, owned or leased 6,758 hotels and resorts, including timeshare properties, totaling 1,061,686 rooms in 122 countries and territories. Basis of Presentation The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 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 disclosures normally included in annual financial statements presented in accordance with GAAP but that are not required for interim reporting purposes. 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 and nine months ended September 30, 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 components of current and long-term deferred revenues, during the nine months ended September 30, 2021: (in millions) Balance as of December 31, 2020 $ 1,312 Cash received in advance and not recognized as revenue 99 Revenue recognized (1) ( 284 ) Other (2) ( 81 ) Balance as of September 30, 2021 $ 1,046 ____________ (1) Includes $ 245 million related to Hilton Honors, our guest loyalty program. Revenue recognized during the three months ended September 30, 2021 was $ 170 million, including $ 34 million for performance obligations that were satisfied in prior periods as a result of a change to the estimated breakage of Hilton Honors points for which point expirations have been temporarily suspended. During the three and nine months ended September 30, 2020, revenue recognized was $ 54 million and $ 164 million, respectively. (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. 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 6 cards and for promotions, rewards and incentive programs or certain other activities that 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 September 30, 2021, we had deferred revenues for unsatisfied performance obligations consisting of: (i) $ 188 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) $ 236 million related to co-branded credit card arrangements, primarily from 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) $ 622 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 September 30, 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 losses and the right to receive benefits that could be significant to each of the VIEs individually. The assets of our consolidated VIEs are only available to settle the obligations of the respective entities, and the liabilities of the consolidated VIEs are non-recourse to us. Our condensed consolidated balance sheets include the assets and liabilities of these entities, which primarily comprised the following: September 30, December 31, 2021 2020 (in millions) Cash and cash equivalents $ 17 $ 40 Property and equipment, net 63 76 Deferred income tax assets 57 57 Other non-current assets 61 66 Accounts payable, accrued expenses and other 18 27 Long-term debt (1) 181 203 Other long-term liabilities 17 17 ____________ (1) Includes finance lease liabilities of $ 159 million and $ 184 million as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, the VIEs had revolving credit facilities with borrowing capacities totaling 4.5 billion Japanese yen (equivalent to $ 40 million), with 500 million Japanese yen (equivalent to $ 5 million) drawn under these facilities, resulting in an available borrowing capacity totaling 4.0 billion Japanese yen (equivalent to $ 35 million). There were no amounts drawn under these facilities as of December 31, 2020 . See Note 5: "Debt" for additional information. Note 4: Finite-Lived Intangible Assets Our finite-lived intangible assets consist of management and franchise contracts and other intangible assets. Management and franchise contracts, net were as follows: September 30, 2021 Gross Carrying Value Accumulated Amortization Net Carrying Value (in millions) Management contracts recorded at Merger (1) $ 311 $ ( 271 ) $ 40 Contract acquisition costs 741 ( 163 ) 578 Development commissions and other 138 ( 26 ) 112 $ 1,190 $ ( 460 ) $ 730 7 December 31, 2020 Gross Carrying Value Accumulated Amortization Net Carrying Value (in millions) Management contracts recorded at Merger (1) $ 317 $ ( 261 ) $ 56 Contract acquisition costs (2) 632 ( 144 ) 488 Development commissions and other 132 ( 23 ) 109 $ 1,081 $ ( 428 ) $ 653 ____________ (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 Blackstone Inc. (the "Merger"). (2) During the three and nine months ended September 30, 2020, we recognized $ 6 million and $ 15 million, respectively, of impairment losses related to our contract acquisition costs included in our condensed consolidated statements of operations. Amortization of our finite-lived intangible assets was as follows: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in millions) Recognized in depreciation and amortization expense (1) $ 32 $ 76 $ 103 $ 227 Recognized as a reduction of franchise and licensing fees and base and other management fees 9 7 23 22 ____________ (1) Includes amortization expense of $ 11 million and $ 47 million for the three months ended September 30, 2021 and 2020, respectively, and $ 35 million and $ 143 million for the nine months ended September 30, 2021 and 2020, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger, some of which fully amortized during 2020. Note 5: Debt Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of September 30, 2021, were as follows: September 30, December 31, 2021 2020 (in millions) Senior secured revolving credit facility, due 2024 $ — $ 1,690 Senior secured term loan facility with a rate of 1.84 %, 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 5.89 %, due 2021 to 2030 216 252 Other debt of consolidated VIEs with a weighted average rate of 2.69 %, due 2022 and 2026 22 19 8,857 10,580 Less: unamortized deferred financing costs and discount ( 90 ) ( 93 ) Less: current maturities of long-term debt (1) ( 54 ) ( 56 ) $ 8,713 $ 10,431 ____________ (1) Represents current maturities of finance lease liabilities and, as of September 30, 2021, the outstanding borrowings under the revolving credit facility of a consolidated VIE. 8 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 restricted subsidiaries. During the nine months ended September 30, 2021, we fully repaid the $ 1,690 million outstanding debt balance on the Revolving Credit Facility. As of September 30, 2021, we had $ 60 million of letters of credit outstanding on the Revolving Credit Facility, resulting in an available borrowing capacity of $ 1,690 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 related to 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 nine months ended September 30, 2021. In August 2021, one of our consolidated VIEs borrowed 500 million Japanese yen (equivalent to $ 5 million as of September 30, 2021) on its revolving credit facility, which has a maturity date of June 2022. See Note 3: "Consolidated Variable Interest Entities" for additional information. 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 restricted 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. Note 6: Fair Value Measurements The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below: September 30, 2021 Hierarchy Level Carrying Value Level 1 Level 2 Level 3 (in millions) Assets: Cash equivalents $ 624 $ — $ 624 $ — Liabilities: Long-term debt (1) 8,529 6,171 — 2,601 Interest rate swaps 66 — 66 — December 31, 2020 Hierarchy Level Carrying Value Level 1 Level 2 Level 3 (in millions) Assets: Cash equivalents $ 2,270 $ — $ 2,270 $ — 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 of consolidated VIEs. 9 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 September 30, 2021 and December 31, 2020. Note 7: 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 nine months ended September 30, 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 historical method of calculating its income tax provision for interim reporting periods would not provide a reliable estimate for the nine months ended September 30, 2021. In June 2021, the United Kingdom's ("U.K.") Finance Act 2021 (the "U.K. Finance Act") was enacted, which included, among other items, an increase to the U.K. corporate income tax rate from 19 percent to 25 percent. We remeasured our U.K. deferred tax assets and other tax liabilities to the new rate, resulting in a $ 30 million tax benefit recognized during the nine months ended September 30, 2021. Due to this remeasurement, our effective income tax rate on consolidated pre-tax income is lower than the combined U.S. statutory rate for the nine months ended September 30, 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 September 30, 2021, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2020 and foreign examinations of our income tax returns for tax years from 1996 through 2020. Our total unrecognized tax benefits as of September 30, 2021 and December 31, 2020 were $ 438 million and $ 451 million, respectively. As of September 30, 2021 and December 31, 2020, we had accrued approximately $ 71 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 September 30, 2021 and December 31, 2020 were $ 401 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 for those respective years and filed formal appeals protests with the IRS. The unsettled proposed adjustments sought by the IRS for these open audit periods 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 are vigorously contesting 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 September 30, 2021, we had recorded $ 86 million of unrecognized tax benefits related to these issues. Note 8: Share-Based Compensation Under the Hilton 2017 Omnibus Incentive Plan (the "2017 Plan"), we award time-vesting restricted stock units ("RSUs"), nonqualified stock options ("options") and performance-vesting RSUs ("performance shares") to our eligible employees. We recognized share-based compensation expense of $ 52 million and $ 25 million during the three months ended September 30, 2021 and 2020, respectively, and $ 144 million and $ 37 million during the nine months ended September 30, 2021 and 2020, respectively, which included amounts reimbursed by hotel owners. 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 the performance shares that were originally awarded in 2018, 2019 and 2020 were no longer probable of achievement. Refer to "Performance Shares" below for additional information. 10 As of September 30, 2021, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 157 million, which are expected to be recognized over a weighted-average period of 1.7 years on a straight-line basis. RSUs During the nine months ended September 30, 2021, we granted 587,000 RSUs with a weighted average grant date fair value per share of $ 123.09 , which vest in equal annual installments over two or three years from the date of grant. Options During the nine months ended September 30, 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 nine months ended September 30, 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 performance shares that were originally awarded in 2018, 2019 and 2020 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 adverse 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, as well as the shares granted in 2020, were converted to performance shares that will vest based on different performance measures from those under the original award agreements. The modified terms did not change the vesting schedules of the original awards, and, as such, the performance shares that were originally awarded in 2018 vested in December 2020. During the nine months ended September 30, 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 performance measures' achievement factors, which are estimated each reporting period and range from zero percent to 200 percent, with 100 percent being the target. As of September 30, 2021, we determined that the performance measures for all of the outstanding performance shares were probable of achievement, with the applicable achievement factors estimated to be between the target and maximum achievement percentages. 11 Note 9: Earnings (Loss) Per Share The following table presents the calculation of basic and diluted earnings (loss) per share ("EPS"): Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in millions, except per share amounts) Basic EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ 241 $ ( 79 ) $ 263 $ ( 491 ) Denominator: Weighted average shares outstanding 279 277 278 277 Basic EPS $ 0.86 $ ( 0.29 ) $ 0.94 $ ( 1.77 ) Diluted EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ 241 $ ( 79 ) $ 263 $ ( 491 ) Denominator: Weighted average shares outstanding (1) 281 277 281 277 Diluted EPS (1) $ 0.86 $ ( 0.29 ) $ 0.94 $ ( 1.77 ) ____________ (1) Certain shares related to share-based compensation were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive under the treasury stock method, including less than 1 million shares for both the three and nine months ended September 30, 2021, and, as revised, 3 million shares for both the three and nine months ended September 30, 2020. The dilutive shares related to share-based compensation included in the previously reported weighted average shares outstanding of 279 million for both the three and nine months ended September 30, 2020 were revised in the current period presentation, as the previously reported dilutive shares were determined to be anti-dilutive as a result of the net loss attributable to Hilton stockholders reported during those periods. The result of the revision is an immaterial decrease in the previously reported diluted EPS for the three and nine months ended September 30, 2020 of $ 0.01 . Note 10: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss The following tables present the changes in the components of stockholders' equity (deficit): Three Months Ended September 30, 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 June 30, 2021 279 $ 3 $ ( 4,447 ) $ 10,603 $ ( 6,710 ) $ ( 866 ) $ 1 $ ( 1,416 ) Net income (loss) — — — — 241 — ( 1 ) 240 Other comprehensive loss — — — — — ( 3 ) — ( 3 ) Share-based compensation — — — 51 — — — 51 Balance as of September 30, 2021 279 $ 3 $ ( 4,447 ) $ 10,654 $ ( 6,469 ) $ ( 869 ) $ — $ ( 1,128 ) 12 Three Months Ended September 30, 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 June 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,465 $ ( 6,429 ) $ ( 881 ) $ 8 $ ( 1,291 ) Net loss — — — — ( 79 ) — ( 2 ) ( 81 ) Other comprehensive income — — — — — 28 — 28 Share-based compensation — — — 26 — — — 26 Distributions — — — — — — ( 1 ) ( 1 ) Balance as of September 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,491 $ ( 6,508 ) $ ( 853 ) $ 5 $ ( 1,319 ) Nine Months Ended September 30, 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 income (loss) — — — — 263 — ( 4 ) 259 Other comprehensive loss — — — — — ( 9 ) — ( 9 ) Share-based compensation 1 — 6 102 — — — 108 Balance as of September 30, 2021 279 $ 3 $ ( 4,447 ) $ 10,654 $ ( 6,469 ) $ ( 869 ) $ — $ ( 1,128 ) Nine Months Ended September 30, 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 loss — — — — ( 491 ) — ( 4 ) ( 495 ) Other comprehensive loss — — — — — ( 13 ) — ( 13 ) Dividends (1) — — — — ( 42 ) — — ( 42 ) Repurchases of common stock (1) ( 3 ) — ( 279 ) — — — — ( 279 ) Share-based compensation 1 — ( 9 ) 2 — — — ( 7 ) Distributions — — — — — — ( 1 ) ( 1 ) Cumulative effect of the adoption of ASU 2016-13 (2) — — — — ( 10 ) — — ( 10 ) Balance as of September 30, 2020 277 $ 3 $ ( 4,457 ) $ 10,491 $ ( 6,508 ) $ ( 853 ) $ 5 $ ( 1,319 ) ____________ (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. 13 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 loss before reclassifications ( 32 ) ( 2 ) ( 4 ) ( 38 ) Amounts reclassified from accumulated other comprehensive loss 6 8 15 29 Net current period other comprehensive income (loss) ( 26 ) 6 11 ( 9 ) Balance as of September 30, 2021 $ ( 537 ) $ ( 283 ) $ ( 49 ) $ ( 869 ) 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 income (loss) before reclassifications 16 ( 3 ) ( 35 ) ( 22 ) Amounts reclassified from accumulated other comprehensive loss 5 8 ( 4 ) 9 Net current period other comprehensive income (loss) 21 5 ( 39 ) ( 13 ) Balance as of September 30, 2020 $ ( 528 ) $ ( 264 ) $ ( 61 ) $ ( 853 ) ____________ (1) Includes net investment hedge gains and intra-entity foreign currency transactions that are of a long-term investment nature. Amounts reclassified during the nine months ended September 30, 2021 and 2020 relate to the liquidation of investments in foreign entities and were recognized in loss on sale of assets, net and loss on foreign currency transactions, respectively, in our condensed consolidated statements 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 (loss), net in our condensed consolidated statements of operations. (3) Amounts reclassified are the result of hedging instruments, including: (a) interest rate swaps, inclusive of interest rate swaps that were dedesignated and subsequently settled, with related amounts recognized in interest expense in our condensed consolidated statements of operations and (b) forward contracts that hedge our foreign currency denominated fees, with related amounts recognized in franchise and licensing fees, base and other management fees and other revenues from managed and franchised properties in our condensed consolidated statements of operations. Note 11: 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. 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 September 30, 2021, this segment included 735 managed hotels and 5,905 franchised hotels consisting of 1,033,282 total rooms. As a result of the COVID-19 pandemic, during the nine months ended September 30, 2021 and 2020, the operations of certain hotels in our management and franchise segment were suspended for some period of time. As of September 30, 2021, all but 87 of these hotels were open. As of September 30, 2021, our ownership segment included 59 properties totaling 19,056 rooms. The segment comprised 51 hotels that we 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. In March 2020, as a result of the COVID-19 pandemic, certain hotels in our ownership segment began suspending operations; however, as of September 30, 2021, with the exception of one hotel owned by an unconsolidated affiliate, which reopened in October 2021, all of the hotels in our ownership segment were open. During 2020, we recognized impairment losses in our condensed consolidated statements of operations related to certain hotel properties in our ownership segment under operating and finance leases, which included $ 51 million of operating lease 14 right-of-use ("ROU") assets and $ 46 million of other intangible assets, net during the nine months ended September 30, 2020 and, during the three and nine months ended September 30, 2020, $ 3 million and $ 24 million of property and equipment, net, respectively, of which $ 2 million and $ 4 million related to finance lease ROU assets, respectively. The performance of our operating segments is evaluated primarily on operating income (loss), without allocating amortization of contract acquisition costs, other revenues and other expenses from managed and franchised properties, other revenues, other expenses or general and administrative expenses. The following table presents revenues for our reportable segments, reconciled to consolidated amounts: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in millions) Franchise and licensing fees $ 455 $ 244 $ 1,072 $ 720 Base and other management fees (1) 57 30 135 108 Incentive management fees 26 7 60 25 Management and franchise 538 281 1,267 853 Ownership 199 94 376 335 Segment revenues 737 375 1,643 1,188 Amortization of contract acquisition costs ( 9 ) ( 7 ) ( 23 ) ( 22 ) Other revenues 18 19 56 52 Direct reimbursements from managed and franchised properties (2) 446 244 998 1,185 Indirect reimbursements from managed and franchised properties (2) 560 304 1,284 1,016 Intersegment fees elimination (1) ( 3 ) ( 2 ) ( 6 ) ( 2 ) Total revenues $ 1,749 $ 933 $ 3,952 $ 3,417 ____________ (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. 15 The following table presents operating income (loss) for our reportable segments, reconciled to consolidated income (loss) before income taxes: Three Months Ended Nine Months Ended September 30, September 30, 2021 2020 2021 2020 (in millions) Management and franchise (1) $ 538 $ 281 $ 1,267 $ 853 Ownership (1) ( 4 ) ( 52 ) ( 82 ) ( 145 ) Segment operating income 534 229 1,185 708 Amortization of contract acquisition costs ( 9 ) ( 7 ) ( 23 ) ( 22 ) Other revenues, less other expenses 6 ( 2 ) 25 4 Net other revenues (expenses) from managed and franchised properties 62 ( 44 ) ( 57 ) ( 281 ) Depreciation and amortization expenses ( 46 ) ( 90 ) ( 143 ) ( 269 ) General and administrative expenses ( 107 ) ( 66 ) ( 302 ) ( 189 ) Reorganization costs — — — ( 38 ) Impairment losses — ( 9 ) — ( 136 ) Loss on sale of assets, net ( 8 ) — ( 8 ) — Operating income (loss) 432 11 677 ( 223 ) Interest expense ( 98 ) ( 116 ) ( 302 ) ( 316 ) Gain (loss) on foreign currency transactions — ( 12 ) 1 ( 16 ) Loss on debt extinguishment — — ( 69 ) — Other non-operating income (loss), net 6 3 16 ( 20 ) Income (loss) before income taxes $ 340 $ ( 114 ) $ 323 $ ( 575 ) ____________ (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. Note 12: 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 September 30, 2021, we had six performance guarantees, with expirations ranging from 2023 to 2043, 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 September 30, 2021 and December 31, 2020, we accrued current liabilities of $ 2 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 September 30, 2021, we guaranteed a $ 10 million loan, which matures in 2023, for two hotels that we franchise. Additionally, we have an agreement with the owner of a hotel that we manage to finance capital expenditures at the hotel, contingent on certain criteria imposed on the owner. As of September 30, 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, since we will not be obligated to fund such capital expenditures if certain terms of the agreement are not met. In June 2021, Hilton provided two letters of credit totaling $ 26 million to the owner of a hotel that we will manage to satisfy debt service reserve requirements for their debt with a third party. Each letter of credit will expire at the earlier of the date at which it is fully drawn or 2031. 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 fees received, which, as of September 30, 2021, resulted in $ 13 million of amounts expended and recognized on behalf of these 16 programs exceeding the amounts collected. As of December 31, 2020, we had collected and recognized 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 September 30, 2021 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. 17