Hilton Worldwide Holdings Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page No. Management’s Report on Internal Control Over Financial Reporting 68 Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting 69 Report of Independent Registered Public Accounting Firm – Financial Statements 70 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2021 and 2020 73 Consolidated Statements of Operations for the years ended December 31, 2021, 2020 and 2019 74 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2021, 2020 and 2019 75 Consolidated Statements of Cash Flows for the years ended December 31, 2021, 2020 and 2019 76 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2021, 2020 and 2019 77 Notes to Consolidated Financial Statements 78 67 Management's Report on Internal Control Over Financial Reporting Management of Hilton Worldwide Holdings Inc. (the "Company") is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. The Company’s internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with United States generally accepted accounting principles ("GAAP"). The Company's internal control over financial reporting includes those policies and procedures that: (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company’s management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of assets of the Company that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. In making this assessment, management used the criteria established in the Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework). Based on this assessment, management determined that the Company maintained effective internal control over financial reporting as of December 31, 2021. Ernst & Young LLP (PCAOB ID: 42 ), the independent registered public accounting firm that has audited the consolidated financial statements included in this Annual Report on Form 10-K, has issued an attestation report on the Company’s internal control over financial reporting as of December 31, 2021. The report is included herein. 68 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Hilton Worldwide Holdings Inc. Opinion on Internal Control Over Financial Reporting We have audited Hilton Worldwide Holdings Inc.'s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Hilton Worldwide Holdings Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders' equity (deficit), for each of the three years in the period ended December 31, 2021 and the related notes, and our report dated February 16, 2022 expressed an unqualified opinion thereon. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definition and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/ Ernst & Young LLP Tysons, Virginia February 16, 2022 69 Report of Independent Registered Public Accounting Firm To the Stockholders and the Board of Directors of Hilton Worldwide Holdings Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Hilton Worldwide Holdings Inc. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income (loss), cash flows and stockholders’ equity (deficit), for each of the three years in the period ended December 31, 2021, and the related notes (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated February 16, 2022 expressed an unqualified opinion thereon. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 70 Accounting for the Loyalty Program Description of the Matter The Company recognized $346 million of revenues during the year ended December 31, 2021 and had deferred revenues of $535 million and a liability for guest loyalty program of $2,364 million as of December 31, 2021 associated with the Hilton Honors guest loyalty and marketing program (the “Loyalty Program”). As discussed in Note 4 to the consolidated financial statements, the Company has a performance obligation to provide or arrange for the provision of goods or services, for free or at a discount, to Hilton Honors members in exchange for the redemption of points earned through participation in the Loyalty Program. The consideration for the Loyalty Program is received from hotel properties or other program partners at the time points are earned by Hilton Honors members. Such amounts are recognized as revenue when the related point obligation is satisfied based upon the estimated standalone selling price per point in excess of the related cost per point. Auditing Loyalty Program results is complex due to: (1) the complexity of models and high volume of data used to monitor and account for the Loyalty Program results, and (2) the complexity of estimating the standalone selling price per Loyalty Program point, including the estimated breakage rate of Loyalty Program points. Such estimates are complex given the significant estimation associated with expected future redemption activity. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for the Loyalty Program during the year. For example, we tested controls over management’s review of the assumptions and data inputs utilized by third-party actuaries to assist the Company in determining the fair value of the future award redemption obligation and breakage rate of Loyalty Program points and management’s review of activity and data inputs to their accounting model. To test the recognition of revenues and costs associated with the Loyalty Program, we involved specialists on our team and performed audit procedures that included, among others, testing the clerical accuracy and consistency with U.S. GAAP of the accounting model developed by the Company to recognize revenue and costs associated with the Loyalty Program. We tested significant inputs into the accounting model, including the estimated standalone selling price and recognition of points earned and redeemed during the period. We involved our actuarial professionals to assist in our testing procedures with respect to the estimate of the breakage of Loyalty Program points and the ultimate estimated redemption cost. We evaluated management’s methodology for estimating the breakage of Loyalty Program points, as well as tested underlying data and assumptions used in estimating the breakage rate. Accounting for Income Taxes Description of the Matter The Company recognized income tax expense of $153 million during the year ended December 31, 2021, and unrecognized tax benefits of $375 million as of December 31, 2021. As discussed in Note 13 to the consolidated financial statements, changes to the Company’s unrecognized tax benefits relate to, among others, uncertainty regarding prior year tax returns in jurisdictions where the Company operates, changes in reserves related to Hilton Honors, and reductions and settlements related to the conclusion of certain audits. Auditing the accounting for income taxes is complex as a result of: (1) operations in multiple foreign tax jurisdictions and international restructuring transactions, (2) the judgment and estimation associated with both the identification and measurement of the Company's unrecognized tax benefits, including its evaluation of the technical merits related to matters for which no reserves or partial reserves have been recorded, and (3) the significant estimation associated with the measurement of unrecognized tax benefits outstanding as of the balance sheet date. 71 How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for income taxes, including unrecognized tax benefits, during the year. For example, we tested management’s controls over the review of tax positions taken by the Company to determine whether they met the threshold for recognition within the consolidated financial statements. To test the recognition of the Company’s unrecognized tax benefits and measurement of unrecognized tax benefits, we involved tax professionals with specialized skills and knowledge to assess the technical merits of the Company’s tax positions and performed audit procedures that included, among others, evaluation of communications with relevant taxing authorities, evaluation of whether management appropriately considered new information that could significantly change the recognition, measurement or disclosure of the unrecognized tax benefits, and testing the assumptions used by management in estimating the valuation of any associated liability. Accounting for Other Expenses from Managed and Franchised Properties and General and Administrative Expenses Description of the Matter The Company recognized Other expenses from managed and franchised properties of $3,454 million and General and administrative expenses of $405 million during the year ended December 31, 2021. As discussed in Note 2 to the consolidated financial statements, the Company incurs certain direct and indirect expenses that are for the benefit of, and contractually reimbursable from, hotel owners. Such amounts (“Cost Reimbursements”) are recorded in the period in which the expense is incurred as Other expenses from managed and franchised properties and the accounting for indirect cost reimbursements includes judgment with respect to the allocation of certain costs between reimbursable and non-reimbursable. Auditing the classification of indirect reimbursements recognized within Other expenses from managed and franchised properties and General and administrative expenses is complex as a result of: (1) judgment associated with testing management’s conclusions regarding the allocation of costs between reimbursable and non-reimbursable expenses, presented as Other expenses from managed and franchised properties and General and administrative expenses, respectively, (2) the complexity associated with allocating indirect expenses due to the high volume of data utilized by management in establishing and maintaining allocations for indirect expenses, and (3) incentives for management to limit the growth in General and administrative expenses due to the impact on publicly disclosed earnings metrics. How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s process of accounting for Cost Reimbursements, General and administrative expenses, and the process for allocating indirect reimbursement expenses during the year. For example, we tested management’s controls over the review of the allocation of certain indirect costs to determine if they were appropriately classified. To test the recognition of Cost Reimbursements for appropriate classification, we performed audit procedures that included, among others: testing a sample of transactions that were classified within Other expenses from managed and franchised properties in order to evaluate the appropriate accounting treatment and reasonableness of classification; comparing budgeted amounts and initial allocations to actual activity and evaluating the reasonableness of any resulting material changes to allocations of indirect expenses; performing analytic procedures over Other expenses from managed and franchised properties and General and administrative expenses in order to identify indicators of material errors in the classification of expenses based on established trends and expectations; and testing material manual journal entries made to Other expenses from managed and franchised properties and General and administrative expenses. /s/ Ernst & Young LLP We have served as the Company's auditor since 2002. Tysons, Virginia February 16, 2022 72 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED BALANCE SHEETS (in millions, except share data) December 31, 2021 2020 ASSETS Current Assets: Cash and cash equivalents $ 1,427 $ 3,218 Restricted cash and cash equivalents 85 45 Accounts receivable, net of allowance for credit losses of $ 126 and $ 132 1,068 771 Prepaid expenses 89 70 Other 202 98 Total current assets (variable interest entities – $ 30 and $ 53 ) 2,871 4,202 Intangibles and Other Assets: Goodwill 5,071 5,095 Brands 4,883 4,904 Management and franchise contracts, net 758 653 Other intangible assets, net 194 266 Operating lease right-of-use assets 694 772 Property and equipment, net 305 346 Deferred income tax assets 213 194 Other 452 323 Total intangibles and other assets (variable interest entities – $ 184 and $ 199 ) 12,570 12,553 TOTAL ASSETS $ 15,441 $ 16,755 LIABILITIES AND EQUITY (DEFICIT) Current Liabilities: Accounts payable, accrued expenses and other $ 1,568 $ 1,302 Current maturities of long-term debt 54 56 Current portion of deferred revenues 350 370 Current portion of liability for guest loyalty program 1,047 703 Total current liabilities (variable interest entities – $ 50 and $ 57 ) 3,019 2,431 Long-term debt 8,712 10,431 Operating lease liabilities 870 971 Deferred revenues 896 1,004 Deferred income tax liabilities 700 649 Liability for guest loyalty program 1,317 1,766 Other 746 989 Total liabilities (variable interest entities – $ 212 and $ 248 ) 16,260 18,241 Commitments and contingencies – see Note 19 Equity (Deficit): Preferred stock, $ 0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of December 31, 2021 and 2020 — — Common stock, $ 0.01 par value; 10,000,000,000 authorized shares, 332,011,359 issued and 279,091,009 outstanding as of December 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 December 31, 2021 and December 31, 2020 ( 4,443 ) ( 4,453 ) Additional paid-in capital 10,720 10,552 Accumulated deficit ( 6,322 ) ( 6,732 ) Accumulated other comprehensive loss ( 779 ) ( 860 ) Total Hilton stockholders' deficit ( 821 ) ( 1,490 ) Noncontrolling interests 2 4 Total deficit ( 819 ) ( 1,486 ) TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 15,441 $ 16,755 See notes to consolidated financial statements. 73 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) Year Ended December 31, 2021 2020 2019 Revenues Franchise and licensing fees $ 1,493 $ 945 $ 1,681 Base and other management fees 176 123 332 Incentive management fees 98 38 230 Owned and leased hotels 598 421 1,422 Other revenues 79 73 101 2,444 1,600 3,766 Other revenues from managed and franchised properties 3,344 2,707 5,686 Total revenues 5,788 4,307 9,452 Expenses Owned and leased hotels 679 620 1,254 Depreciation and amortization 188 331 346 General and administrative 405 311 441 Reorganization costs — 41 — Impairment losses — 258 — Other expenses 45 60 72 1,317 1,621 2,113 Other expenses from managed and franchised properties 3,454 3,104 5,763 Total expenses 4,771 4,725 7,876 Gain (loss) on sales of assets, net ( 7 ) — 81 Operating income (loss) 1,010 ( 418 ) 1,657 Interest expense ( 397 ) ( 429 ) ( 414 ) Loss on foreign currency transactions ( 7 ) ( 27 ) ( 2 ) Loss on debt extinguishments ( 69 ) ( 48 ) — Other non-operating income (loss), net 23 ( 2 ) 3 Income (loss) before income taxes 560 ( 924 ) 1,244 Income tax benefit (expense) ( 153 ) 204 ( 358 ) Net income (loss) 407 ( 720 ) 886 Net loss (income) attributable to noncontrolling interests 3 5 ( 5 ) Net income (loss) attributable to Hilton stockholders $ 410 $ ( 715 ) $ 881 Earnings (loss) per share: Basic $ 1.47 $ ( 2.58 ) $ 3.07 Diluted $ 1.46 $ ( 2.58 ) $ 3.04 Cash dividends declared per share $ — $ 0.15 $ 0.60 See notes to consolidated financial statements. 74 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) Year Ended December 31, 2021 2020 2019 Net income (loss) $ 407 $ ( 720 ) $ 886 Other comprehensive income (loss), net of tax benefit (expense): Currency translation adjustment, net of tax of $ 6 , $( 24 ) and $( 8 ) ( 29 ) 38 ( 4 ) Pension liability adjustment, net of tax of $( 27 ), $ 7 and $ 3 80 ( 20 ) ( 9 ) Cash flow hedge adjustment, net of tax of $( 10 ), $ 13 and $ 15 31 ( 38 ) ( 45 ) Total other comprehensive income (loss) 82 ( 20 ) ( 58 ) Comprehensive income (loss) 489 ( 740 ) 828 Comprehensive loss (income) attributable to noncontrolling interests 2 5 ( 5 ) Comprehensive income (loss) attributable to Hilton stockholders $ 491 $ ( 735 ) $ 823 See notes to consolidated financial statements. 75 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2021 2020 2019 Operating Activities: Net income (loss) $ 407 $ ( 720 ) $ 886 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of contract acquisition costs 32 29 29 Depreciation and amortization expenses 188 331 346 Impairment losses — 258 — Loss (gain) on sales of assets, net 7 — ( 81 ) Loss on foreign currency transactions 7 27 2 Loss on debt extinguishments 69 48 — Share-based compensation expense 193 97 154 Amortization of deferred financing costs and discount 16 17 16 Deferred income taxes ( 4 ) ( 235 ) ( 20 ) Contract acquisition costs ( 200 ) ( 50 ) ( 90 ) Changes in operating assets and liabilities: Accounts receivable, net ( 301 ) 488 ( 105 ) Prepaid expenses ( 22 ) 60 6 Other current assets ( 107 ) ( 26 ) 15 Accounts payable, accrued expenses and other 273 ( 414 ) 99 Change in operating lease right-of-use assets 96 94 43 Change in operating lease liabilities ( 123 ) ( 142 ) ( 80 ) Change in deferred revenues ( 128 ) 215 ( 17 ) Change in liability for guest loyalty program ( 105 ) 610 191 Change in other liabilities ( 111 ) 8 ( 14 ) Other ( 78 ) 13 4 Net cash provided by operating activities 109 708 1,384 Investing Activities: Capital expenditures for property and equipment ( 35 ) ( 46 ) ( 81 ) Proceeds from asset dispositions 6 — 120 Capitalized software costs ( 44 ) ( 46 ) ( 124 ) Other 16 ( 15 ) ( 38 ) Net cash used in investing activities ( 57 ) ( 107 ) ( 123 ) Financing Activities: Borrowings 1,510 4,590 2,200 Repayment of debt ( 3,230 ) ( 2,121 ) ( 1,547 ) Debt issuance costs and redemption premiums ( 76 ) ( 71 ) ( 29 ) Dividends paid — ( 42 ) ( 172 ) Repurchases of common stock — ( 296 ) ( 1,538 ) Share-based compensation tax withholdings ( 49 ) ( 58 ) ( 44 ) Proceeds from share-based compensation 52 31 17 Other — ( 1 ) — Net cash provided by (used in) financing activities ( 1,793 ) 2,032 ( 1,113 ) Effect of exchange rate changes on cash, restricted cash and cash equivalents ( 10 ) — ( 2 ) Net increase (decrease) in cash, restricted cash and cash equivalents ( 1,751 ) 2,633 146 Cash, restricted cash and cash equivalents, beginning of period 3,263 630 484 Cash, restricted cash and cash equivalents, end of period $ 1,512 $ 3,263 $ 630 Supplemental Disclosures: Cash paid during the period: Interest $ 359 $ 433 $ 360 Income taxes, net of refunds 181 79 363 See notes to consolidated financial statements. 76 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (in millions) Equity (Deficit) Attributable to Hilton Stockholders Additional Paid-in Capital Accumulated Other Comprehensive Loss Common Stock Treasury Stock Accumulated Deficit Noncontrolling Interests Total Shares Amount Balance as of December 31, 2018 295 $ 3 $ ( 2,625 ) $ 10,372 $ ( 6,417 ) $ ( 782 ) $ 7 $ 558 Net income — — — — 881 — 5 886 Other comprehensive loss, net of taxes: Currency translation adjustment — — — — — ( 4 ) — ( 4 ) Pension liability adjustment — — — — — ( 9 ) — ( 9 ) Cash flow hedge adjustment — — — — — ( 45 ) — ( 45 ) Other comprehensive loss — — — — — ( 58 ) — ( 58 ) Dividends — — — — ( 173 ) — — ( 173 ) Repurchases of common stock ( 17 ) — ( 1,544 ) — — — — ( 1,544 ) Share-based compensation 1 — — 117 — — — 117 Cumulative effect of the adoption of ASU 2016-02 (1) — — — — ( 256 ) — — ( 256 ) Deconsolidation of a variable interest entity — — — — — — ( 2 ) ( 2 ) Balance as of December 31, 2019 279 3 ( 4,169 ) 10,489 ( 5,965 ) ( 840 ) 10 ( 472 ) Net loss — — — — ( 715 ) — ( 5 ) ( 720 ) Other comprehensive income (loss), net of taxes: Currency translation adjustment — — — — — 38 — 38 Pension liability adjustment — — — — — ( 20 ) — ( 20 ) Cash flow hedge adjustment — — — — — ( 38 ) — ( 38 ) Other comprehensive loss — — — — — ( 20 ) — ( 20 ) Dividends — — — — ( 42 ) — — ( 42 ) Repurchases of common stock ( 3 ) — ( 279 ) — — — — ( 279 ) Share-based compensation 2 — ( 5 ) 63 — — — 58 Distributions — — — — — — ( 1 ) ( 1 ) Cumulative effect of the adoption of ASU 2016-13 (2) — — — — ( 10 ) — — ( 10 ) Balance as of December 31, 2020 278 3 ( 4,453 ) 10,552 ( 6,732 ) ( 860 ) 4 ( 1,486 ) Net income (loss) — — — — 410 — ( 3 ) 407 Other comprehensive income (loss), net of taxes: Currency translation adjustment — — — — — ( 29 ) — ( 29 ) Pension liability adjustment — — — — — 79 1 80 Cash flow hedge adjustment — — — — — 31 — 31 Other comprehensive income — — — — — 81 1 82 Share-based compensation 1 — 10 168 — — — 178 Balance as of December 31, 2021 279 $ 3 $ ( 4,443 ) $ 10,720 $ ( 6,322 ) $ ( 779 ) $ 2 $ ( 819 ) ____________ (1) Relates to Accounting Standards Update ("ASU") No. 2016-02 ("ASU 2016-02"), Leases (Topic 842) , that was adopted on January 1, 2019. (2) Relates to ASU 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. See notes to consolidated financial statements. 77 HILTON WORLDWIDE HOLDINGS INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1: 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 intellectual property, including brand names, trademarks and service marks ("IP"). As of December 31, 2021, we managed, franchised, owned or leased 6,837 hotels and resorts, including timeshare properties, totaling 1,074,791 rooms in 122 countries and territories. Note 2: Basis of Presentation and Summary of Significant Accounting Policies Basis of Presentation These consolidated financial statements present the consolidated financial position of Hilton as of December 31, 2021 and 2020 and the results of operations for the years ended December 31, 2021, 2020 and 2019. Principles of Consolidation Our consolidated financial statements include the accounts of our wholly owned subsidiaries and other non-wholly owned entities in which we have a controlling financial interest, including variable interest entities ("VIEs") for which we are the primary beneficiary. Non-wholly owned entities in which we have a controlling financial interest generally comprise majority owned entities that own or lease real estate. The determination of a controlling financial interest is based upon the terms of the governing agreements of the respective entities, including the evaluation of rights held by third-party ownership interests. If the entity is considered to be a VIE, we evaluate whether we are the primary beneficiary, and then consolidate those VIEs for which we have determined we are the primary beneficiary. If the entity in which we hold an interest does not meet the definition of a VIE, we evaluate whether we have a controlling financial interest through our voting interests in the entity. We consolidate entities other than VIEs when we own more than 50 percent of the voting shares of a company or otherwise have a controlling financial interest. We hold interests in VIEs, for which we are not the primary beneficiary, that may provide us with the option to acquire an additional interest in such an entity at a predetermined amount, if certain contingent events occur. In a circumstance that we exercise or have the ability to exercise our option to acquire an additional interest in a VIE, we would 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. All material intercompany transactions and balances have been eliminated in consolidation. References in these financial statements to net income (loss) attributable to Hilton stockholders and Hilton stockholders' equity (deficit) do not include noncontrolling interests, which represent the third-party ownership interests of our consolidated, non-wholly owned entities and are reported separately. Use of Estimates The preparation of financial statements in conformity with United States ("U.S.") generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. In particular, the coronavirus ("COVID-19") pandemic had a material adverse impact on our results for the years ended December 31, 2021 and 2020 when compared to periods prior to the onset of the pandemic, which was in early 2020, and it may continue to have an adverse impact in future periods. As such, the years ended December 31, 2021 and 2020, 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. Management has made estimates and judgments in light of these circumstances. Reorganization During the year ended December 31, 2020, we recognized expenses 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 78 the COVID-19 pandemic. Included in these expenses were $ 41 million of reorganization costs for our corporate operations and $ 177 million related to amounts to be reimbursed by our third-party hotel owners, including those related to our managed hotels, which were included in other expenses from managed and franchised properties in our consolidated statement of operations. Summary of Significant Accounting Policies Revenue Recognition Revenues are primarily derived from: (i) management and franchise contracts with third-party hotel and resort owners; (ii) our owned and leased hotels; and (iii) license agreements with Hilton Grand Vacations Inc. ("HGV") and strategic partners, including co-branded credit card providers. The majority of our performance obligations are a series of distinct goods or services, for which we receive variable consideration through our management and franchise fees or fixed consideration through our owned and leased hotels. We allocate the variable fees to the distinct services to which they relate applying the prescribed variable consideration allocation guidance, and we allocate fixed consideration to the related performance obligations based on their estimated standalone selling prices. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good or service to a customer and when the customer pays for that good or service will be twelve months or less. Additionally, we do not typically include extended payment terms in our contracts with customers. However, in response to cash flow deficiencies experienced by certain property owners, such as those resulting from the COVID-19 pandemic, we may amend certain contracts with customers to provide short-term payment relief, expecting that we will collect most amounts outstanding in twelve months or less. Management and franchise revenues We identified the following performance obligations in connection with our management and franchise contracts: • IP licenses grant the right to access our hotel system IP, including brand IP, reservations systems and property management systems. • Hotel management services include providing day-to-day management services in the operation of the hotels for the hotel owners. • Development services include providing consultative services (e.g., design assistance and contractor selection) to the property owner to assist with the construction of the hotel prior to the hotel opening. • Pre-opening services include providing services (e.g., advertising, budgeting, e-commerce strategies and food and beverage testing) to the property owner to assist in preparing for the hotel opening. • Hilton Honors rewards provide substantive rights for free or discounted goods or services to Hilton Honors members. Each of the identified performance obligations is considered to be a series of distinct services transferred over time, except for the performance obligation related to Hilton Honors rewards, which is satisfied at the point in time when the loyalty program point is redeemed by the loyalty program member. While the underlying activities may vary from day to day, the nature of the commitments are the same each day, and the property owner can independently benefit from each day's services. Management and franchise fees are typically based on the sales or usage of the underlying hotel, with the exception of fixed upfront fees, which usually represent an insignificant portion of the transaction price. Franchise and licensing fees represent fees earned in connection with the licensing of one of our brands, usually under long-term contracts with the property owner, and may also include fees from licensing agreements for the use of our IP, and include the following: • Royalty fees are generally based on a percentage of the hotel's monthly gross room revenue and, in some cases, may also include a percentage of gross food and beverage revenues and other revenues, as applicable. These fees are typically billed and collected monthly, and revenue is generally recognized as services are provided. 79 • Application, initiation and other fees are charged when: (i) new hotels enter our system; (ii) there is a change of ownership of a hotel; or (iii) contracts with properties already in our system are extended. These fees are typically fixed and collected upfront and are recognized as revenue over the term of the franchise contract. We do not consider this advance consideration to include a significant financing component, since it is used to protect us from the property owner failing to adequately complete some or all of its obligations under the contract, including establishing and maintaining the hotel in accordance with our standards. • Licensing fees are earned from: (i) a license agreement with HGV to use our IP in its timeshare business, which are typically billed monthly, and revenue is generally recognized at the same time the fees are billed and (ii) strategic partners, including from co-branded credit card providers, which are recognized as revenue when points for our guest loyalty program, Hilton Honors, are issued, generally as spend with the strategic partner or co-branded credit card occurs; see further discussion below under "Hilton Honors." Management fees represent fees earned from hotels that we manage, usually under long-term contracts with the hotel owner, and include the following: • Base management fees are generally based on a percentage of the hotel's monthly gross revenue. Base fees are typically billed and collected monthly, and revenue is generally recognized as services are provided. • Incentive management fees are generally based on a percentage of the hotel's operating profits, normally over a one-calendar year period (the "incentive period"), and, in some cases, may be subject to a stated return threshold to the hotel owner. Incentive fee revenue is recognized on a monthly basis, but only to the extent the cumulative fee earned does not exceed the probable fee for the incentive period. Incentive fee payment terms vary, but they are generally billed and collected monthly or annually upon completion of the incentive period. Consideration paid or anticipated to be paid to incentivize hotel owners to enter into management and franchise contracts with us is amortized over the life of the applicable contract as a reduction to base and other management fees and franchise and licensing fees, respectively. We do not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our: (i) royalty fees, since they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our IP over the terms of the franchise contracts and (ii) other licensing fees and base management fees and incentive management fees since they are allocated entirely to the wholly unsatisfied promise to transfer IP or provide management services, respectively, which form part of a single performance obligation in a series, over the term of the individual contract. Other revenues from managed and franchised properties represent amounts that are contractually reimbursed to us by property owners, either directly as costs are incurred or indirectly through program fees billed and collected in advance related to certain costs and expenses supporting the operations of the related properties, and include the following: • Direct reimbursements include payroll and related costs and certain other operating costs of the managed and franchised properties' operations, which are contractually reimbursed to us by the property owners as expenses are incurred. Revenue is recognized based on the amount of expenses incurred by Hilton, which are presented as other expenses from managed and franchised properties in our consolidated statements of operations, that are then reimbursed to us by the property owner typically on a monthly basis, which results in no net effect on operating income (loss) or net income (loss). • Indirect reimbursements include marketing expenses and other expenses associated with our brand programs and shared services, which are paid from program fees collected by Hilton from the managed and franchised properties. Indirect reimbursements are typically billed and collected monthly, based on the underlying hotel's sales or usage (such as gross room revenue or number of reservations processed), and revenue is generally recognized as services are provided. System implementation fees charged to property owners are deferred and recognized as revenue over the term of the management or franchise contract. The expenses incurred by Hilton to operate the marketing and brand programs and shared services are recognized as incurred and presented as other expenses from managed and franchised properties in our consolidated statements of operations and are expected to equal the revenues earned from indirect reimbursements over time. The management and franchise fees and reimbursements from third-party hotel owners are allocated to the performance obligations and the distinct services to which they relate using their estimated standalone selling prices. The terms of the fees 80 earned under the contract relate to a specific outcome of providing the services (e.g., hotel room sales) or to Hilton's efforts (e.g., costs) to satisfy the performance obligations. Using time as the measure of progress, we recognize fee revenue and indirect reimbursements in the period earned per the terms of the contract and revenue related to direct reimbursements in the period in which the cost is incurred. Owned and leased hotel revenues We identified the following performance obligations in connection with our owned and leased hotel revenues, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services: • Cancellable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs. • Noncancellable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time and satisfied as each distinct good or service is provided, which is reflected by the duration of the reservation. • Substantive rights for free or discounted goods or services are satisfied at the earlier of when: (i) the substantive right expires or (ii) the underlying free or discounted good or service is provided to the hotel guest. • Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest. • Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above. Owned and leased hotel revenues primarily consist of hotel room sales, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and sales of other ancillary goods and services (e.g., parking) related to consolidated owned and leased hotels. Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. Owned and leased hotel revenues are reduced upon issuance of Hilton Honors points for Hilton Honors members' paid stay transactions and are recognized when Hilton Honors points are redeemed for a free or discounted stay at an owned or leased hotel (see the "Hilton Honors" section below for additional information). Although the transaction prices of hotel room sales, goods and other services are generally fixed and based on the respective room reservation or other agreement, an estimate to reduce the transaction price is required if a discount is expected to be provided to the customer. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component. On occasion, the hotel may also provide the customer with a substantive right to a free or discounted good or service in conjunction with a room reservation or banquet contract (e.g., free breakfast or free room night for every four room nights reserved). This substantive right is considered a separate performance obligation to which a portion of the transaction price is allocated based on the estimated standalone selling price of the good or service, adjusted for the likelihood the hotel guest will exercise such right, and it is recognized as revenue when the good or service is redeemed. Other revenues Other revenues include revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels, including purchasing operations, and other operating income. Purchasing revenues include any amounts received for vendor rebate arrangements that we participate in on behalf of the hotels in our system. Taxes and fees collected on behalf of governmental agencies We are required to collect certain taxes and fees from customers on behalf of governmental agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in our measurement of transaction prices. We have elected to 81 present revenue net of sales taxes and other similar taxes. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency. Cash and Cash Equivalents Cash and cash equivalents include all highly liquid investments with original maturities, when purchased, of three months or less. Restricted Cash and Cash Equivalents Restricted cash and cash equivalents include cash balances established as collateral for certain guarantees and insurance, including self-insurance, furniture, fixtures and equipment replacement ("FF&E") reserves required under certain lease agreements and advanced deposits collected on behalf of managed and franchised hotels. Allowance for Credit Losses An allowance for credit losses is provided on our financial instruments, primarily accounts receivable. Our expected credit losses are based on historical collection activity, the nature of the financial instrument, geographic considerations and current and forecasted business conditions. Goodwill Goodwill represents the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized. In connection with the 2007 transaction whereby we became a wholly owned subsidiary of affiliates of Blackstone Inc. (the "Merger"), we recorded goodwill representing the excess purchase price over the fair value of the other identified assets and liabilities. We do not amortize goodwill, but rather evaluate goodwill for potential impairment on an annual basis or at other times during the year if indicators of impairment exist. We evaluate goodwill for potential impairment by comparing the carrying values of our reporting units to their fair values. Our reporting units are the same as our operating segments as described in Note 18: "Business Segments." At any time we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we determine qualitatively that the fair value is more likely than not less than its carrying value, or if we decide to bypass the qualitative assessment, we perform a quantitative analysis. The quantitative analysis is used to identify both the existence of impairment and the amount of the impairment loss by comparing the estimated fair value of a reporting unit to its carrying value, including goodwill. The estimated fair value is based on internal projections of expected future cash flows and operating plans, as well as market conditions relative to the operations of our reporting units. If the carrying value of the reporting unit exceeds its estimated fair value, an impairment loss would be recognized in our consolidated statement of operations in an amount equal to the excess of the carrying value over the fair value, limited to the total amount of goodwill allocated to that reporting unit. Brands We manage, franchise, own and lease hotels under our portfolio of brands. There are no legal, regulatory, contractual, competitive, economic or other factors that limit the useful lives of these brands and, accordingly, the useful lives of these brands are considered to be indefinite. At the time of the Merger, our portfolio consisted of Waldorf Astoria Hotels & Resorts, Conrad Hotels & Resorts, Hilton Hotels & Resorts, DoubleTree by Hilton, Embassy Suites by Hilton, Hilton Garden Inn, Hampton by Hilton, Homewood Suites by Hilton and our timeshare brand, Hilton Grand Vacations. As a result of the Merger, these brands were assigned a fair value using the relief-from-royalty valuation approach or the excess earnings method, depending on the contract type. All brands that were launched subsequent to the Merger, which include LXR Hotels & Resorts, Canopy by Hilton, Signia by Hilton, Curio Collection by Hilton, Tapestry Collection by Hilton, Tempo by Hilton, Motto by Hilton, Tru by Hilton, and Home2 Suites by Hilton, were not assigned fair values, and we do not have any intangible assets for these brands recorded in our consolidated balance sheets. We evaluate our indefinite-lived brands intangible assets for impairment on an annual basis or at other times during the year if indicators of impairment exist. At any time we may elect to perform a qualitative assessment to determine whether it is more likely than not that the fair value of a brand intangible asset is less than its carrying value. If we determine qualitatively that the fair value is more likely than not less than its carrying value, or if we decide to bypass the qualitative assessment, we perform a quantitative analysis. The estimated fair value of the brand is based on internal projections of expected future cash flows. If a brand intangible asset’s estimated fair value is less than its 82 respective carrying value, the excess of the carrying value over the estimated fair value is recognized in our consolidated statement of operations as an impairment loss. Intangible Assets with Finite Useful Lives Certain finite-lived intangible assets were initially recorded at their fair value at the time of the Merger. These intangible assets consisted of management contracts, franchise contracts, leases, certain proprietary technologies and our Hilton Honors guest loyalty program. The intangible assets related to the franchise contracts, U.S. management contracts and certain proprietary technologies were fully amortized as of December 31, 2020. Additionally, we capitalize consideration paid to incentivize hotel owners to enter into management and franchise contracts with us as contract acquisition costs and the incremental costs to obtain the contracts as development commissions and other, both of which are generally fixed. We also capitalize costs incurred to develop internal-use computer software and costs to acquire software licenses, as well as internal and external costs incurred in connection with the development of upgrades or enhancements that result in additional information technology functionality. Intangible assets with finite useful lives are amortized using the straight-line method over their respective estimated useful lives, which for contract acquisition costs and development commissions and other is the contract term, generally including any extension periods that are at our sole option. These estimated useful lives are generally as follows: international management contracts recorded at the Merger ( 16 years); management contract acquisition costs and development commissions and other ( 20 to 30 years); franchise contract acquisition costs and development commissions and other ( 10 to 20 years); leases ( 16 to 35 years); Hilton Honors ( 16 years); and capitalized software costs ( 3 years). In our consolidated statements of operations, the amortization of these intangible assets, excluding contract acquisition costs, is included in depreciation and amortization expense, and the amortization of contract acquisition costs is recognized as a reduction to franchise and licensing fees or base and other management fees, depending on the contract type. Costs incurred prior to the acquisition of a contract, such as external legal costs, are expensed as incurred and included in general and administrative expenses in our consolidated statements of operations. Cash flows for contract acquisition costs and development commissions and other are included as operating activities in our consolidated statements of cash flows, and cash flows for capitalized software costs are included as investing activities. We evaluate the carrying value of all finite-lived intangible assets for indicators of impairment, and, if such indicators exist, we perform an analysis to determine the recoverability of the asset group carrying value by comparing the expected undiscounted future cash flows to the net carrying value of the asset group. If the carrying value of the asset group is not recoverable and exceeds the estimated fair value of the asset group, we recognize an impairment loss in our consolidated statement of operations for the amount by which the carrying value exceeds the estimated fair value. We allocate the impairment loss related to the asset group among the various assets within the asset group pro rata based on the relative carrying values of the respective assets. Property and Equipment Property and equipment are recorded at cost. Costs of improvements that extend the economic life or improve service potential are also capitalized. Capitalized costs are depreciated over their estimated useful lives. Costs for normal repairs and maintenance are expensed as incurred. Right-of-use ("ROU") assets of finance leases are included in property and equipment, net in our consolidated balance sheets; refer to "Leases" below for additional information. Depreciation is recorded using the straight-line method over the assets’ estimated useful lives, which are generally as follows: buildings and improvements ( 8 to 40 years); furniture and equipment ( 3 to 8 years); and computer equipment ( 3 to 5 years). Leasehold improvements are depreciated over the shorter of the estimated useful life, based on the estimates above, or the remaining lease term. We evaluate the carrying value of our property and equipment for indicators of impairment and, if such indicators exist, we review the recoverability of the asset group by comparing the estimated undiscounted future cash flows to the net carrying value of the asset group. If the net carrying value of the asset group is determined to be more than its estimated undiscounted future cash flows and, therefore, is not considered to be recoverable and is in excess of the estimated fair value, we recognize an impairment loss in our consolidated statement of operations for the amount by which the carrying value exceeds the estimated fair value. We allocate the impairment loss related to the asset group among the various assets within the asset group pro rata based on the relative carrying values of the respective assets. 83 If sufficient information exists to reasonably estimate the fair value of a conditional asset retirement obligation, including environmental remediation liabilities, we recognize the fair value of the obligation when the obligation is incurred, which is generally upon acquisition, construction or development or through the normal operation of the asset. Leases We determine if a contract is or contains a lease at the inception of the contract, and we classify that lease as a finance lease if it meets certain criteria or as an operating lease when it does not. We reassess if a contract is or contains a lease upon modification of the contract. We have elected to account for the components in contracts in which we are the lessee, that contain fixed payments for both lease and non-lease components, as a single lease component. At the commencement date of a lease, we recognize a lease liability for future fixed lease payments and a ROU asset representing our right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term. The lease term includes lessee options to extend the lease and periods occurring after a lessee early termination option, only to the extent it is reasonably certain that we will exercise such extension options and not exercise such early termination options, respectively. The future fixed lease payments are discounted using the rate implicit in the lease, if available, or our incremental borrowing rate. Current and long-term portions of operating lease liabilities are classified as accounts payable, accrued expenses and other and operating lease liabilities, respectively, and current and long-term portions of finance lease liabilities are classified as current maturities of long-term debt and long-term debt, respectively, in our consolidated balance sheets. The ROU asset is measured as the amount of the lease liability with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred by us, deferred rent and lease incentives. ROU assets of operating leases are included in operating lease right-of-use assets, and ROU assets of finance leases are included in property and equipment, net in our consolidated balance sheets. We evaluate ROU assets for indicators of impairment and, if such indicators exist, we review the recoverability of the related asset group by comparing the estimated undiscounted future cash flows to the net carrying value of the asset group. If the net carrying value of the asset group is determined to be more than its estimated undiscounted future cash flows and, therefore, is not considered to be recoverable and is in excess of the estimated fair value, we record an impairment loss in our consolidated statement of operations for the amount the carrying value exceeds the estimated fair value. We allocate the impairment loss related to an asset group among the various assets within the asset group pro rata based on the relative carrying values of the respective assets. Depending on the individual agreement, our operating leases may require: (i) fixed lease payments, or minimum payments, as contractually stated in the lease agreement; (ii) variable lease payments, which, for our hotels, are generally based on a percentage of the underlying asset's revenues or profits, or are dependent on changes in an index; and/or (iii) lease payments equal to the greater of the fixed or variable lease payments. In addition, during the term of our hotel leases, we may be required to pay some, or all, of the capital costs for FF&E and leasehold improvements in the hotel property. For operating leases, lease expense relating to fixed payments is recognized on a straight-line basis over the lease term, and lease expense related to variable payments is expensed as incurred, with amounts recognized in owned and leased hotel expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statements of operations. For operating leases for which the ROU asset has been impaired, the lease expense is determined as the sum of the amortization of the ROU asset remaining after impairment, if any, on a straight-line basis over the remaining term of the lease and the accretion of the lease liability based on the discount rate applied to the lease liability. For finance leases, the amortization of the asset is recognized over the shorter of the lease term or useful life of the underlying asset within depreciation and amortization expenses and other expenses from managed and franchised properties in our consolidated statements of operations. The interest expense related to finance leases, including any variable lease payments, is recognized in interest expense in our consolidated statements of operations. Contract Liabilities Contract liabilities relate to: (i) advance consideration received from hotel owners at contract inception for services considered to be part of the contract's performance obligations, such as application, initiation and other fees; (ii) advance consideration received for certain indirect reimbursements, such as system implementation fees; (iii) amounts received when points are issued under Hilton Honors, but for which revenue is not yet recognized, since the related points are not yet redeemed; and (iv) a portion of the consideration received for the pre-sale of Hilton Honors points. Contract liabilities related to advance consideration received for fees and certain indirect reimbursements are recognized ratably as revenue over the term of the related contract. Contract liabilities related to amounts received for Hilton Honors, excluding the pre-sale of Hilton Honors points, are recognized as revenue when the points are redeemed for a free or discounted good or service by the Hilton Honors 84 member. For the contract liabilities related to the pre-sale of Hilton Honors points, a portion is recognized as revenue from licensing fees when the related points are awarded to customers, and the remainder is recognized when customers redeem the Hilton Honors points. Contract liabilities are included in current and long-term deferred revenues in our consolidated balance sheets, with the current portion based on our estimates of the amounts that will be recognized in the next twelve months. Hilton Honors Hilton Honors is our guest loyalty program provided to our hotel and resort properties. All of our managed, franchised, owned and leased properties participate in the Hilton Honors program. Hilton Honors members earn points based on their spend at our participating properties and through participation in affiliated strategic partner programs. When points are earned by Hilton Honors members, they are provided with a substantive right to free or discounted goods or services in the future upon accumulation of the required level of Hilton Honors points. Points may be redeemed for the right to stay at participating properties, as well as for other goods and services from third parties, including, but not limited to, airlines, car rentals, cruises, vacation packages, shopping and dining. As points are issued to a Hilton Honors member, the property or strategic partner pays Hilton Honors based on an estimated cost per point equal to the cost of operating the program, which includes marketing, promotion, communication and administrative expenses, as well as the estimated cost of reward redemptions. When the payments that are related to the issuance of points are received, we record amounts equal to the estimated cost per point of the future redemption obligation within liability for guest loyalty program and any amounts received in excess of the estimated cost per point within deferred revenues in our consolidated balance sheets. For the Hilton Honors fees that are charged to the participating properties, we allocate such fees to the substantive right created by the Hilton Honors points that are issued using the variable consideration allocation guidance, since the fees are directly related to the issuance of Hilton Honors points to the Hilton Honors member and Hilton's efforts to satisfy the future redemption of those Hilton Honors points. We engage third-party actuaries annually to assist in determining the fair value of the future reward redemption obligation using statistical formulas that project future point redemptions based on factors that include historical experience, an estimate of points that will eventually be redeemed, which includes an estimate of breakage (i.e., points that will never be redeemed), and the cost of reimbursing properties and other third parties with respect to other redemption opportunities available to Hilton Honors members. When points are issued as a result of a stay by a Hilton Honors member at an owned or leased hotel, we recognize a reduction in owned and leased hotel revenues, since we are also the program sponsor. The transaction prices for the Hilton Honors points issued are reduced by the expected payments to the properties and other third parties that will provide the free or discounted good or service using the actuarial projection of the cost per point. The remaining transaction price is then further allocated to the points that are expected to be redeemed, adjusting the points that are issued for estimated breakage, and recognized when those points are redeemed. While the points are outstanding, both the estimate of the expected payments to third parties (i.e., cost per point redeemed) and the estimated breakage are reevaluated. The combined estimate that yields the amount of revenue recognized when our point obligation is satisfied is adjusted so that the final amount allocated to the substantive right of the Hilton Honors member to redeem their points for free or discounted goods and services is reflective of the amount retained by Hilton after the cost of providing the free or discounted goods and services. As a result of the COVID-19 pandemic, we temporarily suspended the expiration of Hilton Honors points, and, as a result, our estimates of breakage for both the determination of our liability for guest loyalty program and the amount of revenue recognized when our point obligation is satisfied include the anticipated point expirations that will occur at the end of the suspension. We also earn licensing fees from strategic partnerships, including co-branded credit card arrangements (see "Management and franchise revenues" within the "Revenue Recognition" section above). The consideration received is allocated between two performance obligations based on their estimated standalone selling prices: (i) an IP license using the relief-from-royalty valuation method and (ii) substantive rights for free or discounted goods or services to the Hilton Honors members using a cost plus method based on an evaluation of other third-party administrators. We satisfy our performance obligation related to points issued under Hilton Honors when points are redeemed for a free or discounted good or service by the Hilton Honors member, and we satisfy our performance obligation related to the IP license over time as the strategic partner simultaneously receives and consumes the benefits of the goods or services provided. Hilton reimburses participating properties and applicable third parties when points are redeemed by Hilton Honors members for stays at the participating properties or for other goods or services from the third-party providers, at which time the redemption obligation is reduced and the related deferred revenue is recognized in other revenues from managed and franchised properties in our consolidated statements of operations. Additionally, when Hilton Honors members redeem points for a free or discounted stay at our owned and leased hotels, we recognize room revenue, included in owned and leased hotel revenues in our 85 consolidated statements of operations. We recognized revenue of $ 346 million related to Hilton Honors point redemptions and license fees during the year ended December 31, 2021. Fair Value Measurements – Valuation Hierarchy Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (i.e., an exit price). We use the three-level valuation hierarchy for classification of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. Inputs refer broadly to the assumptions that market participants would use in pricing an asset or liability. Inputs may be observable or unobservable. Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources. Unobservable inputs are inputs that reflect our own assumptions about the data market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. The three-tier hierarchy of inputs is summarized below: • Level 1 – Valuation is based upon quoted prices (unadjusted) for identical assets or liabilities in active markets. • Level 2 – Valuation is based upon quoted prices for similar assets and liabilities in active markets, or other inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument. • Level 3 – Valuation is based upon other unobservable inputs that are significant to the fair value measurement. The classification of assets and liabilities within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement in its entirety. Proper classification of fair value measurements within the valuation hierarchy is considered each reporting period. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts. Estimates of the fair values of our financial instruments and nonfinancial assets are determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values and the classification within the valuation hierarchy. We have not elected the fair value measurement option for any of our financial assets or liabilities. Derivative Instruments We use derivative instruments as part of our overall strategy to manage our exposure to market risks associated with fluctuations in interest rates and foreign currency exchange rates. We regularly monitor the financial stability and credit standing of the counterparties to our derivative instruments. We do not enter into derivative financial instruments for speculative purposes. We record all derivatives at fair value. On the date the derivative contract is entered into, we may designate the derivative as a hedging instrument and, if so, we formally document all relationships between hedging activities, including the risk management objective and strategy for undertaking various hedge transactions. We generally enter into cash flow hedges (i.e., a hedge of a specific forecasted transaction or the variability of cash flows to be paid), and, in the past, we entered into net investment hedges (i.e., a hedge of an investment in a foreign operation). Changes in the fair value of a derivative that is qualified and designated as a cash flow hedge or net investment hedge are recorded in other comprehensive income (loss) in our consolidated statements of comprehensive income (loss) until they are reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. If we do not specifically designate the derivative as a cash flow hedge or another type of hedging instrument, changes in the fair value of the undesignated derivative instrument are reported in current period earnings. Cash flows from designated derivative financial instruments are classified within the same category as the item being hedged in the consolidated statements of cash flows, while cash flows from undesignated derivative financial instruments are included as an investing activity. We perform an initial prospective assessment of hedge effectiveness on a quantitative basis between the inception date and the earlier of the first quarterly hedge effectiveness date or the issuance of the financial statements that include the hedged transaction. On a quarterly basis, we assess the effectiveness of our designated hedges in offsetting the variability in the cash flows using the Hypothetical Derivative Method. This method compares the cumulative change in fair value of each hedging instrument to the cumulative change in fair value of a hypothetical hedging instrument, which has terms that identically match the critical terms of the respective hedged transactions. Thus, the hypothetical hedging instrument is presumed to perfectly 86 offset the hedged cash flows. Ineffectiveness results when the cumulative change in the fair value of the hedging instrument exceeds the cumulative change in the fair value of the hypothetical hedging instrument. We discontinue hedge accounting prospectively when the derivative is no longer highly effective as a hedge, the underlying hedged transaction is no longer probable or the hedging instrument expires, is sold, terminated or exercised. Currency Translation The U.S. dollar ("USD") is our reporting currency and is the functional currency of our entities operating in the U.S. The functional currency for our entities operating outside of the U.S. is the currency of the primary economic environment in which the respective entity operates. Assets and liabilities measured in foreign currencies are translated into USD at the prevailing foreign currency exchange rates in effect as of the financial statement date and the related gains and losses, net of applicable deferred income taxes, are reflected in accumulated other comprehensive income (loss) in our consolidated balance sheets. Income and expense accounts are translated at the average foreign currency exchange rate for the period. Gains and losses from foreign currency exchange rate changes related to transactions denominated in a currency other than an entity's functional currency or intercompany receivables and payables denominated in a currency other than an entity’s functional currency that are not of a long-term investment nature are recognized within gain (loss) on foreign currency transactions in our consolidated statements of operations. Where certain specific evidence indicates intercompany receivables and payables will not be settled in the foreseeable future and are of a long-term nature, gains and losses from foreign currency exchange rate changes are recognized as currency translation adjustment within other comprehensive income (loss) in our consolidated statements of comprehensive income (loss). Insurance We are self-insured for losses up to our third-party insurance deductibles for domestic general liability, auto liability, workers' compensation, employment practices liability and crime insurance at our owned, leased and managed hotels that participate in our insurance programs, in addition to other corporate related coverages. We are also self-insured for health coverage for the employees of our U.S. corporate operations and some managed hotels. In addition, through our captive insurance subsidiary, we participate in reinsurance arrangements that provide coverage and/or act as a financial intermediary for claim payments on our self-insurance program. These obligations and reinsurance arrangements can cause timing differences in the recognition of assets, liabilities, gains and losses between reporting periods, although we expect these amounts to ultimately offset when the related claims are settled. Our insurance reserves are accrued based on our deductibles related to the estimated ultimate cost of claims that occurred during the covered period, which includes claims incurred but not reported, for which we will be responsible. These estimates are prepared with the assistance of third-party actuaries and consultants. The ultimate cost of claims for a covered period are reviewed at least annually and are adjusted based on the latest information available to us, which may differ from our original estimates. 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: • RSUs vest in equal annual installments over two or three years from the date of grant. Vested RSUs generally will be settled for the Company's common stock, with the exception of certain awards that will be settled in cash. The grant date fair value per share is equal to the closing stock price on the date of grant. • Options 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 exercise price is equal to the closing stock price on the date of grant. The grant date fair value per share is estimated using the Black-Scholes-Merton option-pricing model. • Performance shares vest three years from the date of grant based on a set of specified performance measures over a defined performance period. The grant date fair value is equal to the closing stock price on the date of grant. The total number of performance shares that vest related to each performance measure is based on an achievement factor that ranges from zero percent to 200 percent, with 100 percent being the target. We recognize these share-based payment transactions when services from the employees are rendered and recognize either a corresponding increase in additional paid-in capital or accounts payable, accrued expenses and other in our consolidated balance sheets, depending on whether the instruments granted satisfy the equity or liability classification criteria, respectively. 87 The measurement objective for these equity awards is the estimated fair value at the date of grant of the equity instruments that we are obligated to issue when employees have rendered the requisite service and satisfied any other conditions necessary to earn the right to benefit from the instruments. The compensation expense for an award classified as an equity instrument is recognized ratably over the requisite service period, which is the period during which an employee is required to provide service in exchange for an award. Liability awards are measured based on the award’s fair value, and the fair value is remeasured at each reporting date until the date of settlement. Compensation expense for each period until settlement is based on the change (or a portion of the change, depending on the percentage of the requisite service that has been rendered as of the reporting date) in the fair value of the instrument for each reporting period for such liability awards. Compensation expense for awards with performance conditions is recognized over the requisite service period if it is probable that the performance condition will be satisfied. If such performance conditions are not or are no longer considered probable, no compensation expense for these awards is recognized, and any previously recognized expense related to awards that are determined to be improbable of achievement is reversed. Additionally, we have a retirement provision whereby we recognize total compensation expense of the awards for eligible participants through the date their awards are fully vested. We recognize forfeitures of share-based compensation awards as they occur. Share-based compensation expense is recognized in owned and leased hotel expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statements of operations. Income Taxes We account for income taxes using the asset and liability method. The objectives of accounting for income taxes are to recognize the amount of taxes payable or refundable for the current year and to recognize the deferred tax assets and liabilities that relate to tax consequences in future years, which result from differences between the respective tax basis of assets and liabilities and their financial reporting amounts and tax attribute carryforwards. Deferred tax assets and liabilities are measured using the enacted tax rates in effect for the year in which the respective temporary differences or operating loss or tax credit carryforwards are expected to be recovered or settled. The realization of deferred tax assets and tax loss and tax credit carryforwards is contingent upon the generation of future taxable income and other restrictions that may exist under the tax laws of the jurisdiction in which a deferred tax asset exists. Valuation allowances are provided to reduce such deferred tax assets to amounts more likely than not to be ultimately realized. We are taxed on global intangible low-tax income ("GILTI") earned by certain foreign subsidiaries, and our foreign derived intangible income ("FDII") is taxed at a lower effective rate than the statutory rate by allowing a tax deduction against the income. We recognize the current tax on GILTI as an expense in the period the tax is incurred. We include the current tax impact of both GILTI and the FDII deduction in our effective tax rate. We use a prescribed recognition threshold for the financial statement recognition and measurement of a tax position taken in a tax return. For all income tax positions, we first determine whether it is more likely than not that a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. If it is determined that a position meets the more-likely-than-not recognition threshold, the benefit recognized in the financial statements is measured as the largest amount of benefit that is greater than 50 percent likely of being realized upon settlement. Loss Contingencies We are involved in various claims and lawsuits arising in the ordinary course of business, the outcomes of which are subject to significant uncertainty. We also provide various types of guarantees and other assistance in the form of letters of credit and financing to certain owners of hotels that we currently or plan to manage or franchise, with varying degrees of certainty with respect to the ultimate timing and amount of cash flows that might be expended under such agreements. An estimated loss from a loss contingency will be accrued as a charge to income if it is probable a loss has been incurred and the amount of the loss can be reasonably estimated. We evaluate, among other factors, the degree of probability of an unfavorable outcome and the ability to make a reasonable estimate of the amount of loss in determining whether an accrual of an estimated loss is appropriate. Recently Issued Accounting Pronouncements In November 2021, the Financial Accounting Standards Board issued ASU No. 2021-10 ("ASU 2021-10"), Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance , which requires entities to provide annual disclosures about the nature of material existing government assistance agreements and the impact of such agreements on the entity's financial statements. The provisions of ASU 2021-10 are effective for fiscal years beginning after December 15, 88 2021; early adoption is permitted. We do not expect the adoption of this ASU or its application in future periods to have a material effect on our consolidated financial statements. Note 3 : Disposal In 2019, we completed the sale of the Hilton Odawara Resort & Spa 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 consolidated statement of operations for the year ended December 31, 2019. Note 4: Revenues from Contracts with Customers Contract Liabilities The following table summarizes the activity of our contract liabilities during the year ended December 31, 2021: (in millions) Balance as of December 31, 2020 $ 1,312 Cash received in advance and not recognized as revenue 138 Revenue recognized (1)(2) ( 455 ) Other (3) 171 Balance as of December 31, 2021 $ 1,166 ____________ (1) Primarily related to Hilton Honors, including co-branded credit card arrangements. (2) Revenue recognized during the year ended December 31, 2021 included $ 25 million for performance obligations that were satisfied in a prior period as a result of a change to the estimated breakage of Hilton Honors points for which point expirations have been temporarily suspended. (3) 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 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, which is recognized as revenue as discussed in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" and for which the remaining deferred revenue as of December 31, 2021 is included in our co-branded credit card arrangement performance obligation below. Performance Obligations As of December 31, 2021, we had deferred revenues for unsatisfied performance obligations consisting of: (i) $ 384 million related to Hilton Honors that will be recognized as revenue over approximately the next two years ; (ii) $ 151 million related to co-branded credit card arrangements, primarily from the Honors Points Pre-Sale; and (iii) $ 631 million related to application, initiation and other fees . Note 5: Consolidated Variable Interest Entities As of December 31, 2021 and 2020, we consolidated two 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. 89 Our consolidated balance sheets include the assets and liabilities of these entities, which primarily comprised the following: December 31, 2021 2020 (in millions) Cash and cash equivalents $ 18 $ 40 Property and equipment, net 60 76 Deferred income tax assets 62 57 Other non-current assets 62 66 Accounts payable, accrued expenses and other 15 27 Long-term debt (1) 179 203 Other long-term liabilities 16 17 ____________ (1) Includes finance lease liabilities of $ 153 million and $ 184 million as of December 31, 2021 and 2020, respectively. As of December 31, 2021, the VIEs had revolving credit facilities with borrowing capacities totaling 4.5 billion Japanese yen ("JPY") (equivalent to $ 39 million), with 500 million JPY (equivalent to $ 4 million) included in long-term debt in our consolidated balance sheet, resulting in available borrowing capacities totaling 4.0 billion JPY (equivalent to $ 35 million). There were no amounts drawn under these facilities as of December 31, 2020. In December 2021, our consolidated VIEs borrowed an aggregate of 600 million JPY (equivalent to $ 5 million), which was also included in long-term debt in our consolidated balance sheet as of December 31, 2021. See Note 9: Debt for additional information. Note 6: Goodwill and Intangible Assets Goodwill During the year ended December 31, 2020, we fully impaired the goodwill attributable to our ownership reporting unit, recognizing impairment losses of $ 104 million in our consolidated statement of operations; see Note 11: "Fair Value Measurements" for additional information. As such, as of December 31, 2021 and 2020, our goodwill balance was only attributable to our management and franchise reporting unit, which had no accumulated impairment losses as of either date, and the change during the year ended December 31, 2021 was due to foreign currency translation. Intangible Assets Changes to our brands intangible assets during the year ended December 31, 2021 were due to foreign currency translation. Finite-lived intangible assets were as follows: December 31, 2021 Gross Carrying Value Accumulated Amortization Net Carrying Value (in millions) Management and franchise contracts: Management contracts recorded at Merger (1) $ 310 $ ( 275 ) $ 35 Contract acquisition costs 780 ( 170 ) 610 Development commissions and other 140 ( 27 ) 113 $ 1,230 $ ( 472 ) $ 758 Other intangible assets: Capitalized software costs $ 561 $ ( 460 ) $ 101 Leases (1) 138 ( 83 ) 55 Hilton Honors (1) 339 ( 301 ) 38 $ 1,038 $ ( 844 ) $ 194 90 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 (2) 632 ( 144 ) 488 Development commissions and other 132 ( 23 ) 109 $ 1,081 $ ( 428 ) $ 653 Other intangible assets: Capitalized software costs $ 522 $ ( 378 ) $ 144 Leases (1)(3) 157 ( 95 ) 62 Hilton Honors (1) 342 ( 282 ) 60 $ 1,021 $ ( 755 ) $ 266 ____________ (1) Represents intangible assets that were initially recorded at fair value at the time of the Merger. (2) During the year ended December 31, 2020, we recognized impairment losses of $ 15 million included in our consolidated statement of operations. (3) During the year ended December 31, 2020, we recognized impairment losses of $ 46 million included in our consolidated statement of operations. See Note 11: "Fair Value Measurements" for additional information. Amortization of our finite-lived intangible assets was as follows: Year Ended December 31, 2021 2020 2019 (in millions) Recognized in depreciation and amortization expenses (1) $ 135 $ 274 $ 286 Recognized as a reduction of franchise and licensing fees and base and other management fees 32 29 29 ____________ (1) Includes amortization expense of $ 47 million, $ 164 million and $ 202 million for the years ended December 31, 2021, 2020 and 2019, 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. We estimate future amortization expense of our finite-lived intangible assets that will be recognized in depreciation and amortization expenses as of December 31, 2021 to be as follows: Year (in millions) 2022 $ 110 2023 74 2024 24 2025 10 2026 9 Thereafter 115 $ 342 91 Note 7: Property and Equipment Property and equipment were as follows: December 31, 2021 2020 (in millions) Land $ 9 $ 11 Buildings and leasehold improvements 365 381 Furniture and equipment 339 346 Construction-in-progress 14 7 Finance lease ROU assets 83 87 810 832 Accumulated depreciation and amortization (1) ( 505 ) ( 486 ) $ 305 $ 346 ____________ (1) During the years ended December 31, 2021, 2020 and 2019, depreciation and amortization expenses on property and equipment was $ 53 million,$ 57 million and $ 60 million, respectively. During the year ended December 31, 2020, we recognized $ 28 million of impairment losses in our consolidated statement of operations related to property and equipment, net, of which $ 4 million related to finance lease ROU assets. See Note 11: "Fair Value Measurements" for additional information. Note 8: Accounts Payable, Accrued Expenses and Other Accounts payable, accrued expenses and other were as follows: December 31, 2021 2020 (in millions) Accrued employee compensation and benefits $ 514 $ 404 Accounts payable 274 224 Operating lease liabilities, current 140 170 Insurance reserves, current 84 68 Other current liabilities and accrued expenses (1) 556 436 $ 1,568 $ 1,302 ____________ (1) Includes deposit liabilities related to hotel operations and application fees, promotional liabilities and income taxes payable, as well as accrued expenses related to taxes, interest and other. 92 Note 9: Debt Long-term Debt Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of December 31, 2021, were as follows: December 31, 2021 2020 (in millions) Senior secured revolving credit facility, due 2024 $ — $ 1,690 Senior secured term loan facility with a rate of 1.85 %, 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 5.88 %, due 2022 to 2030 208 252 Other debt of consolidated VIEs with a weighted average rate of 2.15 %, due 2022 to 2028 26 19 8,853 10,580 Less: unamortized deferred financing costs and discount ( 87 ) ( 93 ) Less: current maturities of long-term debt (1) ( 54 ) ( 56 ) $ 8,712 $ 10,431 ____________ (1) Represents current maturities of finance lease liabilities and, as of December 31, 2021, the outstanding borrowings under the revolving credit facility of a consolidated VIE. Senior Notes As part of our response to the COVID-19 pandemic, we completed senior note financing transactions during 2020 and early 2021 in an effort to extend the maturities and reduce the interest rates of our outstanding debt, as well as to bolster liquidity and add to our available cash at that point in time. 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, 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 redeemed notes of $ 14 million, which were both included in loss on debt extinguishment in our consolidated statement of operations for the year ended December 31, 2021. In December 2020, we issued $ 800 million aggregate principal amount of 3.750 % Senior Notes due 2029 (the "2029 Senior Notes") and $ 1.1 billion aggregate principal amount of 4.000 % Senior Notes due 2031 (the "2031 Senior Notes") and incurred $ 27 million of debt issuance costs. Interest on the 2029 Senior Notes and the 2031 Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning May 1, 2021. We used the net proceeds from the issuances, together with available cash, to redeem all $ 1.0 billion in aggregate principal amount of our outstanding 4.250 % Senior Notes due 2024 and all $ 900 million in aggregate principal amount of our outstanding 4.625 % Senior Notes due 2025, plus accrued and unpaid interest. In connection with these redemptions, we paid redemption premiums totaling $ 31 million and accelerated the recognition of unamortized deferred financing costs related to the redeemed notes of $ 17 million, which were both included in loss on debt extinguishments in our consolidated statement of operations for the year ended December 31, 2020. In April 2020, we issued $ 500 million aggregate principal amount of 5.375 % Senior Notes due 2025 (the "2025 Senior Notes") and $ 500 million aggregate principal amount of 5.750 % Senior Notes due 2028 (the "2028 Senior Notes") and incurred 93 $ 14 million of debt issuance costs. Interest on the 2025 Senior Notes and the 2028 Senior Notes is payable semi-annually in arrears on May 1 and November 1 of each year, beginning November 1, 2020. In June 2019, we issued $ 1.0 billion aggregate principal amount of 4.875 % Senior Notes due 2030 (the "2030 Senior Notes"). We used a portion of the net proceeds from the issuance to repay $ 500 million outstanding on our senior secured term loan facility (the "Term Loan") and to repay $ 225 million outstanding on the senior secured revolving credit facility (the "Revolving Credit Facility"). As a result of the repayment and simultaneous amendment of the Term Loan, we accelerated the recognition of $ 10 million of unamortized deferred financing costs and discount and fees, which were included in other non-operating income, net in our consolidated statement of operations during the year ended December 31, 2019. The 2025 Senior Notes, the 4.875 % Senior Notes due 2027, the 2028 Senior Notes, the 2029 Senior Notes, the 2030 Senior Notes, the 2031 Senior Notes 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. Senior Secured Credit Facilities Our senior secured credit facilities consist of the $ 1.75 billion Revolving Credit Facility, of which $ 250 million is available in the form of letters of credit, and 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 year ended December 31, 2021, we fully repaid the $ 1,690 million outstanding debt balance on the Revolving Credit Facility, which we borrowed in 2020 in response to the COVID-19 pandemic. As of December 31, 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. Other Debt of Consolidated VIEs In August 2021, one of our consolidated VIEs borrowed 500 million JPY (equivalent to $ 4 million as of December 31, 2021) on its revolving credit facility, which has a maturity date of June 2022; refer to Note 5: "Consolidated Variable Interest Entities" for additional information on the revolving credit facilities of our consolidated VIEs. In December 2021, our two consolidated VIEs each borrowed 300 million JPY (totaling to an equivalent of $ 5 million as of December 31, 2021) with zero percent interest rates and maturity dates in November 2024 and November 2028. Debt Maturities The contractual maturities of our long-term debt as of December 31, 2021 were as follows: Year (in millions) 2022 $ 54 2023 26 2024 26 2025 523 2026 2,660 Thereafter 5,564 $ 8,853 94 Note 10: Other Liabilities Other long-term liabilities were as follows: December 31, 2021 2020 (in millions) Other long-term tax liabilities $ 385 $ 400 Insurance reserves 151 189 Deferred employee compensation and benefits 111 116 Pension obligations 25 143 Other 74 141 $ 746 $ 989 Note 11: Fair Value Measurements The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below: December 31, 2021 Hierarchy Level Carrying Value Level 1 Level 2 Level 3 (in millions) Assets: Cash equivalents $ 622 $ — $ 622 $ — Liabilities: Long-term debt (1) 8,532 6,180 — 2,599 Interest rate swaps 41 — 41 — 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. The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of December 31, 2021 and 2020. 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 consolidated balance sheets. Our nonfinancial assets that were measured at fair value on a non-recurring basis during the year ended December 31, 2020, and for which we recorded impairment losses as a result of the COVID-19 pandemic, were primarily related to certain hotel properties under operating and finance leases and goodwill, all of which were part of our ownership reporting unit. See Note 6: "Goodwill and Intangible Assets", Note 7: "Property and Equipment" and Note 12: "Leases" for additional information on these impairment losses. 95 For the quantitative analysis of goodwill that was performed during the year ended December 31, 2020, we estimated the fair value of the ownership reporting unit using discounted cash flow analyses and significant level 3 unobservable inputs, which included an estimate of the impact of the COVID-19 pandemic on the reporting unit's expected future cash flows, a stabilized growth rate after recovery and the present value of the reporting unit's terminal value. The expected future cash flows were discounted using a discount rate that reflected the market rate of return. As a result of the non-recurring fair value measurement, we fully impaired the goodwill attributable to our ownership reporting unit, recognizing impairment losses of $ 104 million in our consolidated statement of operations for the year ended December 31, 2020. During the year ended December 31, 2020, we estimated the fair value of assets related to certain hotel properties under operating and finance leases, including related lease intangible assets, operating and finance lease ROU assets and property and equipment, using discounted cash flow analyses and significant level 3 unobservable inputs, which included an estimate of the impact of the COVID-19 pandemic on each leased property based on the expected recovery term, stabilized growth rates after recovery and discount rates reflecting the risk profile of the underlying cash flows and the individual markets where the assets are located. As a result of these non-recurring fair value measurements, we recognized impairment losses on these assets of $ 139 million in our consolidated statement of operations during the year ended December 31, 2020. Note 12: 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 December 31, 2021, we leased 43 hotels under operating leases and five hotels under finance leases, two of which were the liabilities of consolidated VIEs, which are non-recourse to us. Our hotel leases expire at various dates, with varying renewal and termination options. During the year ended December 31, 2020, we recognized $ 65 million and $ 4 million of impairment losses related to certain operating lease and finance lease ROU assets, respectively; see Note 11: "Fair Value Measurements" for additional information. Supplemental balance sheet information related to leases was as follows: December 31, 2021 2020 (dollars in millions) Operating leases: Operating lease right-of-use assets $ 694 $ 772 Accounts payable, accrued expenses and other 140 170 Operating lease liabilities 870 971 Finance leases: Property and equipment, net $ 33 $ 40 Current maturities of long-term debt 50 56 Long-term debt 158 196 Weighted average remaining lease term: Operating leases 11.0 years 12.3 years Finance leases 7.0 years 7.8 years Weighted average discount rate: Operating leases 3.87 % 3.82 % Finance leases 5.88 % 5.85 % 96 The components of lease expense were as follows: Year Ended December 31, 2021 2020 2019 (in millions) Operating lease expense for fixed payments $ 125 $ 129 $ 144 Finance lease expense: Amortization of ROU assets 23 26 30 Fixed interest on lease liabilities 13 14 14 Variable lease expense (1) 35 17 168 ____________ (1) Includes amounts related to variable rent expense for operating leases and variable interest expense for finance leases. Supplemental cash flow information related to leases was as follows: Year Ended December 31, 2021 2020 2019 (in millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 187 $ 149 $ 187 Financing cash flows from finance leases 40 26 42 ROU assets obtained in exchange for lease liabilities in non-cash transactions: Operating leases 45 33 48 Finance leases 17 20 61 Our future minimum lease payments as of December 31, 2021 were as follows: Operating Leases Finance Leases Year (in millions) 2022 $ 177 $ 61 2023 146 35 2024 122 31 2025 119 28 2026 107 28 Thereafter 587 72 Total minimum lease payments 1,258 255 Less: imputed interest ( 248 ) ( 47 ) Total lease liabilities $ 1,010 $ 208 Note 13: Income Taxes Income Tax Provision (Benefit) Our income tax provision (benefit) includes federal, state and foreign income taxes payable. The domestic and foreign components of income (loss) before income taxes were as follows: Year Ended December 31, 2021 2020 2019 (in millions) U.S. income (loss) before income taxes $ 631 $ ( 267 ) $ 867 Foreign income (loss) before income taxes ( 71 ) ( 657 ) 377 Income (loss) before income taxes $ 560 $ ( 924 ) $ 1,244 97 The components of our provision (benefit) for income taxes were as follows: Year Ended December 31, 2021 2020 2019 (in millions) Current: Federal $ 89 $ ( 6 ) $ 190 State 45 ( 32 ) 60 Foreign 23 69 128 Total current 157 31 378 Deferred: Federal 51 ( 102 ) ( 61 ) State ( 14 ) ( 34 ) ( 5 ) Foreign ( 41 ) ( 99 ) 46 Total deferred ( 4 ) ( 235 ) ( 20 ) Total provision (benefit) for income taxes $ 153 $ ( 204 ) $ 358 Reconciliations of the provision (benefit) for income taxes at the U.S. statutory rate to the provision (benefit) for income taxes were as follows: Year Ended December 31, 2021 2020 2019 (in millions) Statutory U.S. federal income tax provision (benefit) $ 118 $ ( 194 ) $ 261 State income taxes, net of U.S. federal income tax benefit 22 ( 24 ) 47 Impact of foreign operations 8 ( 106 ) 31 Goodwill impairment losses — 22 — Tax rate differential on U.S. federal net operating loss carryback — ( 14 ) — Changes in deferred tax asset valuation allowances 34 116 13 Income tax rate changes (1) ( 45 ) — — Provision for uncertain tax positions 15 7 16 Nondeductible compensation 15 — — Excess tax benefits related to share-based compensation ( 10 ) — — Other, net ( 4 ) ( 11 ) ( 10 ) Provision (benefit) for income taxes $ 153 $ ( 204 ) $ 358 ____________ (1) Income tax rate changes resulted in the remeasurement of our deferred tax assets and liabilities and other tax liabilities to the new tax rates, resulting in a $ 49 million deferred tax benefit and a $ 4 million current tax expense, respectively, which were recognized during the year ended December 31, 2021. 98 Deferred Income Taxes Deferred income taxes represent the tax effect of the differences between the book and tax bases of assets and liabilities plus carryforward items. The tax effects of the temporary differences and carryforwards that give rise to our net deferred taxes were as follows: December 31, 2021 2020 (in millions) Deferred tax assets: Net tax loss carryforwards and carrybacks $ 649 $ 593 Compensation 101 135 Reserves 76 71 Operating and finance lease liabilities 341 382 Deferred income 278 271 Foreign tax credit carryforwards 48 48 Other 144 153 Total gross deferred tax assets 1,637 1,653 Less: valuation allowance ( 669 ) ( 654 ) Deferred tax assets 968 999 Deferred tax liabilities: Brands ( 1,152 ) ( 1,147 ) Finite-lived intangible assets ( 61 ) ( 74 ) Investment in foreign subsidiaries ( 24 ) ( 26 ) Operating and finance lease ROU assets ( 218 ) ( 207 ) Deferred tax liabilities ( 1,455 ) ( 1,454 ) Net deferred taxes $ ( 487 ) $ ( 455 ) As of December 31, 2021, we had: (i) state net operating loss carryforwards of $ 69 million, which resulted in deferred tax assets of $ 4 million; (ii) separate return limitation year loss carryforwards of $ 221 million, which resulted in federal deferred tax assets of $ 44 million and state deferred tax assets of $ 11 million; and (iii) foreign net operating loss carryforwards of $ 2.2 billion and other foreign tax loss carryforwards of $ 129 million, resulting in deferred tax assets of $ 556 million and $ 34 million, respectively. Approximately $ 44 million of our deferred tax assets as of December 31, 2021 related to net operating loss carryforwards that will expire between 2022 and 2041 with less than $1 million of that amount expiring in 2022. Approximately $ 516 million of our deferred tax assets as of December 31, 2021 resulted from net operating loss carryforwards that are not subject to expiration. Approximately $ 90 million of our deferred tax assets as of December 31, 2021 resulted from other tax loss carryforwards that are not subject to expiration. We believe that it is more likely than not that the benefit from certain federal, state and foreign tax loss carryforwards will not be realized. In recognition of this assessment, we provided a valuation allowance of $ 488 million as of December 31, 2021 on the deferred tax assets relating to these tax loss carryforwards. As of December 31, 2021, we also had deferred tax assets for foreign tax credit carryforwards of $ 48 million that will expire within eight years, for which we have provided full valuation allowances. During the year ended December 31, 2021, we generated net operating losses in various jurisdictions and recorded a deferred tax benefit of $ 49 million for net operating losses, reduced by valuation allowances of $ 7 million, which resulted in a net deferred tax benefit of $ 42 million. We have also provided valuation allowances of $ 27 million on other deferred tax assets generated during the year. Management determined whether we were more likely than not to realize the benefit of these assets by considering all available positive and negative evidence to determine whether sufficient future taxable income will be generated to permit the use of the deferred tax assets. Additionally, revaluations of certain existing deferred tax assets and their associated valuation allowances due to tax rate changes, foreign currency exchange rate changes and other changes resulted in no net income tax expense or benefit in the current year, but decreased total valuation allowances by $ 19 million. Overall, our total valuation allowance increased by $ 15 million during the year ended December 31, 2021. Tax Uncertainties 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 99 tax jurisdictions or from the resolution of various proceedings between the U.S. and foreign tax authorities. As of December 31, 2021, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2021 and foreign examinations of our income tax returns for tax years from 1996 through 2021. Reconciliations of the beginning and ending amounts of unrecognized tax benefits were as follows: Year Ended December 31, 2021 2020 2019 (in millions) Balance at beginning of year $ 451 $ 395 $ 318 Additions for tax positions related to prior years 33 45 67 Additions for tax positions related to the current year 2 56 13 Reductions for tax positions related to prior years ( 39 ) ( 13 ) ( 3 ) Settlements ( 66 ) ( 37 ) 1 Lapse of statute of limitations ( 2 ) ( 1 ) ( 2 ) Currency translation adjustment ( 4 ) 6 1 Balance at end of year $ 375 $ 451 $ 395 In prior periods, we received assessments for the tax years from 2006 through 2013 seeking proposed adjustments related to assertions by the IRS that: (i) certain foreign currency denominated intercompany loans from our foreign subsidiaries to certain U.S. subsidiaries should be recharacterized as equity for U.S. federal income tax purposes and constitute deemed dividends from such foreign subsidiaries to our U.S. subsidiaries and (ii) in calculating the amount of U.S. taxable income resulting from Hilton Honors, we should not reduce gross income by the estimated costs of future redemptions, but rather such costs would be deductible at the time the points are redeemed. As of December 31, 2021, we had entered into a tentative agreement to pay $ 48 million to settle both matters through the 2010 tax year, for which we had previously recorded reserves of $ 39 million. The settlement is subject to approval by the Joint Committee on Taxation. We continue to be subject to audit by the IRS on the two matters described above for the tax years subsequent to those subject to the settlement and may be assessed tax in the future on these same matters, and the amounts of such future assessments may be material. We have evaluated the amount of benefit more likely than not to be realized for these two matters and, as of December 31, 2021, we had recorded $ 49 million of unrecognized tax benefits related to these issues for the tax years 2011 through 2021. Subsequent to the aforementioned settlement, $ 36 million remains unsettled related to the two matters described above for the tax years from 2011 through 2013 and could result in additional U.S. federal income taxes. The decrease to our unrecognized tax benefits during the year ended December 31, 2021 primarily related to a tentative settlement agreement reached with the IRS for the tax years from 2006 through 2010. Additionally, reserves decreased due to the current year decrease in the liability for Hilton Honors. The increase to our unrecognized tax benefits during the year ended December 31, 2020 primarily related to uncertainty regarding prior year income tax returns in certain foreign jurisdictions where we operate, as well as the addition of reserves related to Hilton Honors. These increases were partially offset by reductions and settlements, primarily relating to the conclusion of certain state audits. The increase to our unrecognized tax benefits during the year ended December 31, 2019 primarily related to uncertainty regarding affirmative refund claims submitted to the IRS during 2019, as well as the addition of reserves related to Hilton Honors. We recognize interest and penalties accrued related to uncertain tax positions in income tax benefit (expense) in our consolidated statements of operations. During the years ended December 31, 2021, 2020 and 2019, we recognized income tax expense related to interest and penalties of $ 16 million, $ 13 million and $ 12 million, respectively, in our consolidated statements of operations. As of both December 31, 2021 and 2020, we had accrued approximately $ 65 million for interest and penalties related to our unrecognized tax benefits in our consolidated balance sheets. Included in the balances of unrecognized tax benefits as of December 31, 2021 and 2020 were $ 343 million and $ 400 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective income tax rate. As a result of the expected resolution of examination issues with foreign tax authorities, we believe it is reasonably possible that during the next 12 months, the amount of unrecognized tax benefits will decrease by up to $ 35 million. Note 14: Employee Benefit Plans We sponsor multiple domestic and international employee benefit plans (the "pension plans"), and the benefits are based upon years of service and compensation. The employee benefit plan in the U.S. (the "Domestic Plan") covers certain employees not earning union benefits. This plan was frozen for participant benefit accruals in 1996; therefore, the projected benefit obligation is equal to the accumulated 100 benefit obligation. The plan assets will be used to pay benefits due to employees for service through December 31, 1996. Since employees have not accrued additional benefits from that time, we do not utilize salary or pension inflation assumptions in calculating our benefit obligation for the Domestic Plan. The employee benefit plans covering many of our international employees include: (i) a plan that covers employees in the U.K. (the "U.K. Plan"), which was frozen to further service accruals in 2013 and (ii) a number of smaller plans that cover employees in various countries around the world (the "International Plans"). The annual measurement date for all of our plans is December 31. We are required to recognize the funded status of our pension plans, which is the difference between the fair value of plan assets and the projected benefit obligations, in our consolidated balance sheets and make corresponding adjustments for changes in the difference between the fair value of plan assets and the projected benefit obligations through accumulated other comprehensive income (loss), net of taxes. The following table presents the projected benefit obligation, fair value of plan assets, funded status and accumulated benefit obligation for the Domestic Plan, the U.K. Plan and the International Plans: Domestic Plan U.K. Plan International Plans 2021 2020 2021 2020 2021 2020 (in millions) Change in projected benefit obligation Benefit obligation at beginning of year $ 399 $ 382 $ 541 $ 445 $ 90 $ 87 Service cost — — 2 3 1 1 Interest cost 6 10 5 8 2 2 Actuarial loss (gain) ( 11 ) 31 ( 32 ) 78 ( 3 ) 2 Settlements — ( 1 ) — — ( 1 ) — Effect of foreign currency exchange rates — — ( 4 ) 22 ( 4 ) 3 Benefits paid ( 24 ) ( 23 ) ( 22 ) ( 15 ) ( 4 ) ( 5 ) Benefit obligation at end of year $ 370 $ 399 $ 490 $ 541 $ 81 $ 90 Change in plan assets Fair value of plan assets at beginning of year $ 343 $ 318 $ 485 $ 404 $ 70 $ 68 Actual return on plan assets, net of expenses 44 41 36 66 7 3 Employer contributions 11 8 11 10 2 2 Settlements — ( 1 ) — — ( 1 ) — Effect of foreign currency exchange rates — — ( 5 ) 20 ( 3 ) 2 Benefits paid ( 24 ) ( 23 ) ( 22 ) ( 15 ) ( 4 ) ( 5 ) Fair value of plan assets at end of year 374 343 505 485 71 70 Funded status at end of year (underfunded) 4 ( 56 ) 15 ( 56 ) ( 10 ) ( 20 ) Accumulated benefit obligation $ 370 $ 399 $ 490 $ 541 $ 81 $ 90 Amounts recognized in our consolidated balance sheets consisted of the following: Domestic Plan U.K. Plan International Plans 2021 2020 2021 2020 2021 2020 (in millions) Other non-current assets $ 4 $ — $ 15 $ — $ 15 $ 11 Other liabilities — ( 56 ) — ( 56 ) ( 25 ) ( 31 ) Net amount recognized $ 4 $ ( 56 ) $ 15 $ ( 56 ) $ ( 10 ) $ ( 20 ) 101 Amounts recognized in accumulated other comprehensive loss consisted of the following: Domestic Plan U.K. Plan International Plans 2021 2020 2019 2021 2020 2019 2021 2020 2019 (in millions) Net actuarial loss (gain) $ ( 38 ) $ 4 $ ( 3 ) $ ( 48 ) $ 41 $ 29 $ ( 7 ) $ 3 $ 3 Prior service cost ( 4 ) ( 4 ) ( 4 ) — — ( 3 ) — — — Amortization of net loss ( 5 ) ( 4 ) ( 3 ) ( 5 ) ( 4 ) ( 3 ) ( 1 ) ( 1 ) ( 1 ) Net amount recognized $ ( 47 ) $ ( 4 ) $ ( 10 ) $ ( 53 ) $ 37 $ 23 $ ( 8 ) $ 2 $ 2 The net periodic pension cost (credit) was as follows: Domestic Plan U.K. Plan International Plans 2021 2020 2019 2021 2020 2019 2021 2020 2019 (in millions) Service cost (1) $ 3 $ 3 $ 6 $ 2 $ 3 $ 2 $ 1 $ 1 $ 2 Interest cost (2) 6 10 14 5 8 10 2 2 2 Expected return on plan assets (2) ( 19 ) ( 17 ) ( 19 ) ( 21 ) ( 20 ) ( 19 ) ( 3 ) ( 3 ) ( 3 ) Amortization of prior service cost (2) 4 4 4 — — — — — — Amortization of net loss (2) 5 4 3 5 4 3 1 1 1 Net periodic pension cost (credit) $ ( 1 ) $ 4 $ 8 $ ( 9 ) $ ( 5 ) $ ( 4 ) $ 1 $ 1 $ 2 ____________ (1) Recognized in owned and leased hotel expenses and general and administrative expenses, as applicable, in our consolidated statements of operations. (2) Recognized in other non-operating income (loss), net in our consolidated statements of operations. The weighted average assumptions used to determine benefit obligations were as follows: Domestic Plan U.K. Plan International Plans 2021 2020 2021 2020 2021 2020 Discount rate 2.8 % 2.4 % 1.9 % 1.3 % 2.3 % 1.8 % Salary inflation N/A N/A 2.6 2.1 2.3 2.2 Pension inflation N/A N/A 3.1 2.7 1.9 1.8 The weighted average assumptions used to determine net periodic pension cost (credit) were as follows: Domestic Plan U.K. Plan International Plans 2021 2020 2019 2021 2020 2019 2021 2020 2019 Discount rate 2.6 % 3.2 % 4.3 % 1.3 % 2.1 % 3.1 % 1.7 % 2.0 % 3.1 % Expected return on plan assets 6.3 6.3 7.0 4.5 5.0 5.5 2.4 2.7 4.3 Salary inflation N/A N/A N/A 2.1 1.6 1.8 2.2 2.2 2.2 Pension inflation N/A N/A N/A 2.7 2.8 3.0 1.8 1.9 1.8 The investment objectives for the various plans are preservation of capital, current income and long-term growth of capital. All plan assets are managed by third-party investment managers and do not include investments in Hilton stock. Asset allocations are reviewed periodically by the investment managers. Expected long-term returns on plan assets are determined using historical performance for debt and equity securities held by our plans, actual performance of plan assets and current and expected market conditions. Expected returns are formulated based on the target asset allocation. As of December 31, 2021 and 2020, the target asset allocation, as a percentage of total plan assets, for the Domestic Plan was 75 percent and 80 percent, respectively, in funds that invest in equity securities and 25 percent and 20 percent, respectively, in funds that invest in debt securities. As of December 31, 2021 and 2020, the target asset allocation, as a percentage of total plan assets, for the U.K. Plan and International Plans was 75 percent in funds that invest in equity and debt securities and 25 percent in bond funds. 102 The following tables present the fair value hierarchy of total plan assets measured at fair value by asset category: December 31, 2021 Domestic Plan U.K. Plan International Plans (in millions) Level 1 Cash $ — $ 12 $ 12 Equity funds — — 3 Bond funds 3 42 — Level 2 Equity funds — — 4 Bond funds — 34 6 Net asset value (1) Cash equivalents — 34 — Equity funds — 86 Bond funds — 69 — Common collective trusts 371 — 46 Alternative investments — 168 — Other — 60 — $ 374 $ 505 $ 71 December 31, 2020 Domestic Plan U.K. Plan International Plans (in millions) Level 1 Cash and cash equivalents $ — $ 45 $ 12 Equity funds — 75 3 Bond funds 2 43 — Alternative investments — 105 — Level 2 Equity funds — — 4 Bond funds — — 6 Net asset value (1) Bond funds — 74 — Common collective trusts 341 — 45 Alternative investments — 87 — Other — 56 — $ 343 $ 485 $ 70 ____________ (1) Certain investments are measured at net asset value per share as a practical expedient and, therefore, have not been classified in the fair value hierarchy. 103 As of December 31, 2021, the benefits expected to be paid in the next five years and in the aggregate for the five years thereafter were as follows: Domestic Plan U.K. Plan International Plans Year (in millions) 2022 $ 33 $ 21 $ 12 2023 27 22 5 2024 26 22 5 2025 26 23 4 2026 25 23 4 2027-2031 114 125 22 $ 251 $ 236 $ 52 In 2007, the Domestic Plan and plans maintained for certain domestic hotels currently or formerly managed by us were merged into a multiple employer plan. As of December 31, 2021 and 2020, the multiple employer plan had combined plan assets of $ 405 million and $ 372 million, respectively, and a projected benefit obligation of $ 395 million and $ 426 million, respectively. Note 15: Share-Based Compensation We recognized share-based compensation expense of $ 193 million, $ 97 million and $ 154 million during the years ended December 31, 2021, 2020 and 2019, respective ly, which included amounts reimbursed by hotel owners. The total tax benefit recognized related to share-based compensation expense was $ 54 million , $ 35 million and $ 41 million for the years ended December 31, 2021, 2020 and 2019, respectively . Share-based compensation expense recognized during the year ended December 31, 2020 included the reversal of expense recognized in prior years as a result of the determination that the performance conditions of our then-outstanding performance shares were no longer probable of achievement, partially offset by expense recorded in December 2020 as a result of the modification of our then-outstanding performance shares. As of December 31, 2021, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 132 million, which are expected to be recognized over a weighted average period of 1.6 years on a straight-line basis. As of December 31, 2021, there were 12.2 million shares of common stock available for future issuance under the 2017 Plan, including any shares subject to awards outstanding under the 2013 Omnibus Incentive Plan that will become available for issuance under the 2017 Plan if such outstanding awards expire or are terminated or are canceled or forfeited. RSUs The following table provides information about our RSU grants: Year Ended December 31, 2021 2020 2019 Number of shares granted (in thousands) 589 942 963 Weighted average grant date fair value per share $ 123.13 $ 93.48 $ 83.47 Aggregate intrinsic value of shares vested (in millions) $ 94 $ 97 $ 92 The following table summarizes the activity of our RSUs during the year ended December 31, 2021: Number of Shares Weighted Average Grant Date Fair Value per Share (in thousands) Outstanding as of December 31, 2020 1,493 $ 88.55 Granted 589 123.13 Vested ( 760 ) 86.66 Forfeited ( 76 ) 100.94 Outstanding as of December 31, 2021 1,246 105.28 104 Options The following table provides information about our option grants: Year Ended December 31, 2021 2020 2019 Number of options granted (in thousands) 361 755 758 Weighted average exercise price per share $ 123.13 $ 93.33 $ 83.11 Weighted average grant date fair value per share $ 41.15 $ 21.47 $ 21.08 The weighted average grant date fair value per share of the option grants for each year was determined using the Black-Scholes-Merton option-pricing model with the following assumptions: Year Ended December 31, 2021 2020 2019 Expected volatility (1) 33.13 % 23.69 % 23.51 % Dividend yield (2) — % 0.55 % 0.81 % Risk-free rate (3) 0.92 % 0.96 % 2.47 % Expected term (in years) (4) 6.0 6.0 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) For options granted during the years ended December 31, 2020 and 2019, dividend yield was estimated based on our historical quarterly dividends and the three-month average stock price at the date of grant. However, after the 2020 options were granted, we suspended the declaration and payment of dividends and, at the time of grant for the 2021 options, 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 terms of the options. The following table summarizes the activity of our options during the year ended December 31, 2021: Number of Shares Weighted Average Exercise Price per Share (in thousands) Outstanding as of December 31, 2020 3,027 $ 71.88 Granted 361 123.13 Exercised ( 566 ) 64.25 Forfeited ( 19 ) 100.84 Outstanding as of December 31, 2021 (1) 2,803 80.03 Exercisable as of December 31, 2021 (2) 1,799 67.85 ____________ (1) The aggregate intrinsic value was $ 210 million and the weighted average remaining contractual term was 6.5 years. (2) The aggregate intrinsic value was $ 157 million and the weighted average remaining contractual term was 5.5 years. 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 via 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 and 2019 vested in December 2020 and December 2021, respectively. 105 As a result of the performance share modifications, we recognized incremental share-based compensation expense of $ 70 million and $ 44 million during the years ended December 31, 2021 and 2020, respectively, and we expect to recognize the remaining incremental expense of $ 23 million during 2022. As of December 31, 2021, we determined that all of the performance measures for the outstanding performance shares were probable of achievement, with the applicable achievement factors estimated to be between the target and maximum achievement percentages. The following table provides information about our performance share grants for the last three years: Year Ended December 31, 2021 2020 (1) 2019 (1) Number of shares granted (in thousands) 241 348 384 Weighted average grant date fair value per share $ 123.13 $ 93.33 $ 83.11 Aggregate intrinsic value of shares vested (in millions) $ 36 $ 58 $ — ____________ (1) In December 2020, 288,000 and 340,000 performance shares from the 2020 grant and 2019 grant, respectively, were modified, as discussed above, with a modification date fair value per share of $ 102.95 . The following table summarizes the activity of our performance shares for all of our performance measures during the year ended December 31, 2021: Number of Shares Weighted Average Grant Date Fair Value per Share (in thousands) Outstanding as of December 31, 2020 1,020 $ 84.57 Granted 241 123.13 Vested ( 391 ) 79.42 Forfeited ( 22 ) 94.55 Outstanding as of December 31, 2021 848 97.63 Note 16: Earnings (Loss) Per Share The following table presents the calculation of basic and diluted earnings (loss) per share ("EPS"): Year Ended December 31, 2021 2020 2019 (in millions, except per share amounts) Basic EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ 410 $ ( 715 ) $ 881 Denominator: Weighted average shares outstanding 279 277 287 Basic EPS $ 1.47 $ ( 2.58 ) $ 3.07 Diluted EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ 410 $ ( 715 ) $ 881 Denominator: Weighted average shares outstanding (1) 281 277 290 Diluted EPS (1) $ 1.46 $ ( 2.58 ) $ 3.04 ____________ (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, 4 million shares, as revised, and 1 million shares for the years ended December 31, 2021, 2020 and 2019, respectively. The dilutive shares related to share-based compensation included in the previously reported weighted average shares outstanding of 279 million for the year ended December 31, 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 the period. The result of the revision is an immaterial decrease in the previously reported diluted EPS for the year ended December 31, 2020 of $ 0.02 . 106 Note 17: Accumulated Other Comprehensive Loss 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, 2018 $ ( 545 ) $ ( 260 ) $ 23 $ ( 782 ) Other comprehensive loss before reclassifications ( 5 ) ( 17 ) ( 35 ) ( 57 ) Amounts reclassified from accumulated other comprehensive loss 1 8 ( 10 ) ( 1 ) Net current period other comprehensive loss ( 4 ) ( 9 ) ( 45 ) ( 58 ) Balance as of December 31, 2019 ( 549 ) ( 269 ) ( 22 ) ( 840 ) Other comprehensive income (loss) before reclassifications 33 ( 30 ) ( 46 ) ( 43 ) Amounts reclassified from accumulated other comprehensive loss 5 10 8 23 Net current period other comprehensive income (loss) 38 ( 20 ) ( 38 ) ( 20 ) Balance as of December 31, 2020 ( 511 ) ( 289 ) ( 60 ) ( 860 ) Other comprehensive income (loss) before reclassifications ( 36 ) 68 11 43 Amounts reclassified from accumulated other comprehensive loss 7 11 20 38 Net current period other comprehensive income (loss) ( 29 ) 79 31 81 Balance as of December 31, 2021 $ ( 540 ) $ ( 210 ) $ ( 29 ) $ ( 779 ) ____________ (1) Includes net investment hedge gains 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 which were recognized in our consolidated statements of operations in loss on sales of assets, net during the year ended December 31, 2021 and in loss on foreign currency transactions during the years ended December 31, 2020 and 2019. (2) Amounts reclassified related to the amortization of prior service cost and amortization of net loss and were recognized in other non-operating income (loss), net in our consolidated statements of operations. (3) Amounts reclassified were 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 consolidated statements of operations and (b) forward contracts that hedge our foreign currency denominated fees, with related amounts recognized in various revenue line items, as applicable, in our consolidated statements of operations. Note 18: Business Segments We are a hospitality company with operations organized in two distinct operating segments: (i) management and franchise and (ii) ownership, each of which is reported as a segment based on (i) delivering a similar set of products and services and (ii) being managed separately given its 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 IP, and where we provide other contracted services to third-party owners, but the day-to-day services of the hotels are operated or managed by someone other than us. This segment generates its revenue from: (i) management and franchise fees charged to third-party owners; (ii) licensing fees from HGV and strategic partnerships, including co-branded credit card arrangements, for the right to use our IP; and (iii) fees for managing hotels in our ownership segment. As of December 31, 2021, this segment included 745 managed hotels and 5,978 franchised hotels consisting of 1,047,262 total rooms. As a result of the COVID-19 pandemic, during the years ended December 31, 2021 and 2020, the operations of certain hotels in our management and franchise segment were suspended for some period of time. As of December 31, 2021, nearly all of these hotels had reopened. As of December 31, 2021, our ownership segment included 54 properties totaling 18,151 rooms. The segment comprised 46 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. On December 31, 2021, five of our leased hotels exited our system or transferred to our management and franchise segment and, therefore, they are not included in the number of leased hotels as of December 31, 2021. Further, as a result of the COVID-19 pandemic, during the years ended December 31, 2021 and 2020, the operations of certain hotels in our ownership segment were suspended for some period of time; however, all of the hotels in our ownership segment that had suspended operations at some point as a result of the pandemic were open as of December 31, 2021. The performance of our operating segments is evaluated primarily on operating income (loss), without allocating amortization of contract acquisition costs, other revenues, other revenues and other expenses from managed and franchised properties, other expenses or general and administrative expenses. 107 The following table presents revenues for our reportable segments, reconciled to consolidated amounts: Year Ended December 31, 2021 2020 2019 (in millions) Franchise and licensing fees $ 1,508 $ 956 $ 1,691 Base and other management fees (1) 203 144 394 Incentive management fees 98 38 230 Management and franchise 1,809 1,138 2,315 Ownership 598 421 1,422 Segment revenues 2,407 1,559 3,737 Amortization of contract acquisition costs ( 32 ) ( 29 ) ( 29 ) Other revenues 79 73 101 Direct reimbursements from managed and franchised properties (2) 1,503 1,375 3,110 Indirect reimbursements from managed and franchised properties (2) 1,841 1,332 2,576 Intersegment fees elimination (1) ( 10 ) ( 3 ) ( 43 ) Total revenues $ 5,788 $ 4,307 $ 9,452 ____________ (1) Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our consolidated statements of operations. (2) Included in other revenues from managed and franchised properties in our consolidated statements of operations. The following table presents operating income (loss) for our reportable segments, reconciled to consolidated income (loss) before income taxes: Year Ended December 31, 2021 2020 2019 (in millions) Management and franchise (1) $ 1,809 $ 1,138 $ 2,315 Ownership (1) ( 91 ) ( 202 ) 125 Segment operating income 1,718 936 2,440 Amortization of contract acquisition costs ( 32 ) ( 29 ) ( 29 ) Other revenues, less other expenses 34 13 29 Net other expenses from managed and franchised properties ( 110 ) ( 397 ) ( 77 ) Depreciation and amortization expenses ( 188 ) ( 331 ) ( 346 ) General and administrative expenses ( 405 ) ( 311 ) ( 441 ) Reorganization costs — ( 41 ) — Impairment losses — ( 258 ) — Gain (loss) on sales of assets, net ( 7 ) — 81 Operating income (loss) 1,010 ( 418 ) 1,657 Interest expense ( 397 ) ( 429 ) ( 414 ) Loss on foreign currency transactions ( 7 ) ( 27 ) ( 2 ) Loss on debt extinguishments ( 69 ) ( 48 ) — Other non-operating income (loss), net 23 ( 2 ) 3 Income (loss) before income taxes $ 560 $ ( 924 ) $ 1,244 ____________ (1) Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our consolidated statements of operations. 108 The following table presents total assets of our reportable segments, reconciled to consolidated amounts: December 31, 2021 2020 (in millions) Management and franchise $ 11,404 $ 11,065 Ownership 1,061 1,242 Corporate and other 2,976 4,448 $ 15,441 $ 16,755 Total revenues by country were as follows: Year Ended December 31, 2021 2020 2019 (in millions) U.S. $ 4,765 $ 3,593 $ 7,423 All other (1) 1,023 714 2,029 $ 5,788 $ 4,307 $ 9,452 ____________ (1) There are no countries included in these amounts that individually represented more than 10 percent of total revenues for the years ended December 31, 2021, 2020 and 2019. Property and equipment, net by country was as follows: December 31, 2021 2020 (in millions) U.S. $ 112 $ 128 U.K. 77 79 Japan 60 77 All other (1) 56 62 $ 305 $ 346 ____________ (1) There are no countries included in these amounts that individually represented more than 10 percent of total property and equipment, net as of December 31, 2021 and 2020. Note 19: 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 December 31, 2021, we had performance guarantees with expirations ranging from 2025 to 2043 and possible cash outlays totaling approximately $ 10 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 December 31, 2021 and 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 December 31, 2021, we had debt guarantees for hotels that we will or currently manage or franchise totaling $ 35 million with expirations ranging from 2023 to 2026 . Additionally, Hilton had extended 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 that we are contractually required to use to operate our marketing, sales and brand programs on behalf of hotel owners. As of December 31, 2020, we had collected amounts in excess of amounts 109 expended, representing an obligation to spend these amounts on the programs. However, as of December 31, 2021, amounts expended and recognized on behalf of these programs exceeded the amounts collected. 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 December 31, 2021 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. 110 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.