Item 1. Financial Statements
Item 1. Financial Statements
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
September 30, December 31,
2022 2021
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents
$ 1,282 $ 1,427
Restricted cash and cash equivalents
80 85
Accounts receivable, net of allowance for credit losses of $ 124 and $ 126
1,278 1,068
Prepaid expenses 139 89
Other
197 202
Total current assets (variable interest entities – $ 28 and $ 30 )
2,976 2,871
Intangibles and Other Assets:
Goodwill
4,990 5,071
Brands
4,814 4,883
Management and franchise contracts, net 874 758
Other intangible assets, net 158 194
Operating lease right-of-use assets
624 694
Property and equipment, net
254 305
Deferred income tax assets
213 213
Other
605 452
Total intangibles and other assets (variable interest entities – $ 141 and $ 184 )
12,532 12,570
TOTAL ASSETS $ 15,508 $ 15,441
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, accrued expenses and other
$ 1,728 $ 1,568
Current maturities of long-term debt
39 54
Current portion of deferred revenues
266 350
Current portion of liability for guest loyalty program 1,332 1,047
Total current liabilities (variable interest entities – $ 39 and $ 50 )
3,365 3,019
Long-term debt 8,692 8,712
Operating lease liabilities 786 870
Deferred revenues
845 896
Deferred income tax liabilities 794 700
Liability for guest loyalty program 1,251 1,317
Other 689 746
Total liabilities (variable interest entities – $ 174 and $ 212 )
16,422 16,260
Commitments and contingencies – see Note 12
Equity (Deficit):
Preferred stock, $ 0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of September 30, 2022 and December 31, 2021
— —
Common stock, $ 0.01 par value; 10,000,000,000 authorized shares, 332,944,066 issued and 271,541,523 outstanding as of September 30, 2022 and 332,011,359 issued and 279,091,009 outstanding as of December 31, 2021
3 3
Treasury stock, at cost; 61,402,543 shares as of September 30, 2022 and 52,920,350 shares as of December 31, 2021
( 5,545 ) ( 4,443 )
Additional paid-in capital
10,791 10,720
Accumulated deficit ( 5,477 ) ( 6,322 )
Accumulated other comprehensive loss
( 685 ) ( 779 )
Total Hilton stockholders' deficit
( 913 ) ( 821 )
Noncontrolling interests
( 1 ) 2
Total deficit ( 914 ) ( 819 )
TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 15,508 $ 15,441
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Revenues
Franchise and licensing fees $ 573 $ 451 $ 1,531 $ 1,062
Base and other management fees 76 49 206 116
Incentive management fees 52 26 132 60
Owned and leased hotels 295 199 727 376
Other revenues 28 18 71 56
1,024 743 2,667 1,670
Other revenues from managed and franchised properties
1,344 1,006 3,662 2,282
Total revenues 2,368 1,749 6,329 3,952
Expenses
Owned and leased hotels
263 200 705 452
Depreciation and amortization 39 46 123 143
General and administrative 93 107 287 302
Other expenses 13 12 35 31
408 365 1,150 928
Other expenses from managed and franchised properties
1,337 944 3,589 2,339
Total expenses 1,745 1,309 4,739 3,267
Loss on sale of assets, net — ( 8 ) — ( 8 )
Operating income 623 432 1,590 677
Interest expense ( 106 ) ( 98 ) ( 295 ) ( 302 )
Gain on foreign currency transactions
— — 4 1
Loss on debt extinguishment — — — ( 69 )
Other non-operating income, net
10 6 32 16
Income before income taxes 527 340 1,331 323
Income tax expense
( 181 ) ( 100 ) ( 407 ) ( 64 )
Net income 346 240 924 259
Net loss attributable to noncontrolling interests
1 1 3 4
Net income attributable to Hilton stockholders $ 347 $ 241 $ 927 $ 263
Earnings per share:
Basic $ 1.27 $ 0.86 $ 3.35 $ 0.94
Diluted $ 1.26 $ 0.86 $ 3.32 $ 0.94
Cash dividends declared per share $ 0.15 $ — $ 0.30 $ —
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
Net income $ 346 $ 240 $ 924 $ 259
Other comprehensive income (loss), net of tax benefit (expense):
Currency translation adjustment, net of tax of $ 12 , $( 2 ), $ 18 and $( 4 )
( 22 ) ( 5 ) ( 47 ) ( 26 )
Pension liability adjustment, net of tax of $ — (1) , $( 1 ), $( 1 ) and $( 2 )
1 2 4 6
Cash flow hedge adjustment, net of tax of $( 17 ), $ — , $( 46 ) and $( 4 )
50 — 137 11
Total other comprehensive income (loss) 29 ( 3 ) 94 ( 9 )
Comprehensive income 375 237 1,018 250
Comprehensive loss attributable to noncontrolling interests
1 1 3 4
Comprehensive income attributable to Hilton stockholders
$ 376 $ 238 $ 1,021 $ 254
____________
(1) Amount was less than $1 million.
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended
September 30,
2022 2021
Operating Activities:
Net income $ 924 $ 259
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of contract acquisition costs 28 23
Depreciation and amortization expenses 123 143
Gain on foreign currency transactions ( 4 ) ( 1 )
Share-based compensation expense 126 144
Deferred income taxes 54 6
Contract acquisition costs, net of refunds ( 61 ) ( 160 )
Working capital changes and other 9 ( 436 )
Net cash provided by (used in) operating activities 1,199 ( 22 )
Investing Activities:
Capital expenditures for property and equipment
( 19 ) ( 17 )
Issuance of other financing receivables ( 46 ) ( 3 )
Undesignated derivative financial instruments 65 ( 13 )
Capitalized software costs ( 43 ) ( 28 )
Investments in unconsolidated affiliates ( 53 ) —
Other ( 2 ) 27
Net cash used in investing activities ( 98 ) ( 34 )
Financing Activities:
Borrowings 23 1,505
Repayment of debt ( 35 ) ( 3,221 )
Debt issuance costs and redemption premium — ( 76 )
Dividends paid ( 82 ) —
Repurchases of common stock ( 1,092 ) —
Share-based compensation tax withholdings ( 56 ) ( 48 )
Proceeds from share-based compensation 16 26
Settlements of interest rate swap with financing component ( 4 ) —
Net cash used in financing activities ( 1,230 ) ( 1,814 )
Effect of exchange rate changes on cash, restricted cash and cash equivalents ( 21 ) ( 6 )
Net decrease in cash, restricted cash and cash equivalents ( 150 ) ( 1,876 )
Cash, restricted cash and cash equivalents, beginning of period 1,512 3,263
Cash, restricted cash and cash equivalents, end of period $ 1,362 $ 1,387
Supplemental Disclosures:
Cash paid during the period:
Interest $ 264 $ 254
Income taxes, net of refunds 253 79
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Organization and Basis of Presentation
Organization
Hilton Worldwide Holdings Inc. (the "Parent," or together with its subsidiaries, "Hilton," "we," "us," "our" or the "Company"), a Delaware corporation, is one of the largest hospitality companies in the world and is engaged in managing, franchising, owning and leasing hotels and resorts, and licensing its intellectual property ("IP"), including brand names, trademarks and service marks. As of September 30, 2022 , we managed, franchised, owned or leased 7,061 hotels and resorts, including timeshare properties, totaling 1,111,147 rooms in 123 countries and territories.
Basis of Presentation
The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 2022 and 2021 have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") and are unaudited. We have condensed or omitted certain disclosures normally included in annual financial statements presented in accordance with GAAP but that are not required for interim reporting purposes. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Additionally, interim results are not necessarily indicative of full year performance. In particular, the coronavirus ("COVID-19") pandemic (the "pandemic") had an adverse impact on certain of our results for the three and nine months ended September 30, 2022 and 2021; however, our results experienced significant recovery during the three and nine months ended September 30, 2022 when compared to prior year periods. As such, these interim periods, as well as upcoming periods, may not 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. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions have been eliminated in consolidation.
Note 2: Revenues from Contracts with Customers
Contract Liabilities
The following table summarizes the activity of our contract liabilities, which are classified as components of current and long-term deferred revenues, during the nine months ended September 30, 2022:
(in millions)
Balance as of December 31, 2021
$ 1,166
Cash received in advance and not recognized as revenue
329
Revenue recognized (1)(2)
( 380 )
Other (3)
( 64 )
Balance as of September 30, 2022
$ 1,051
____________
(1) Primarily related to Hilton Honors, our guest loyalty program, including co-branded credit card arrangements.
(2) Revenue recognized during the three months ended September 30, 2022 was $ 139 million. Revenue recognized during the three and nine months ended September 30, 2022 included a net increase in revenue of $ 7 million and $ 4 million, respectively, for Hilton Honors points redeemed in prior periods, as a result of a change to the estimated breakage of Hilton Honors points for which point expirations have been temporarily suspended.
(3) Primarily represents changes in estimated transaction prices for our performance obligations related to the issuance of Hilton Honors points, which had no effect on revenues.
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Performance Obligations
As of September 30, 2022 , we had deferred revenues for unsatisfied performance obligations consisting of: (i) $ 352 million related to Hilton Honors that will be recognized as revenue over approximately the next two years ; (ii) $ 669 million related to application, initiation and other fees; and (iii) $ 30 million related to other obligations. These performance obligations are recognized as revenue as discussed in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.
Note 3: Consolidated Variable Interest Entities
As of September 30, 2022 and December 31, 2021, we consolidated two variable interest entities ("VIEs") that each lease one hotel property. We consolidated these VIEs since we are the primary beneficiary, having the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb losses and the right to receive benefits that could be significant to each of the VIEs individually. The assets of our consolidated VIEs are only available to settle the obligations of the respective entities, and the liabilities of the consolidated VIEs are non-recourse to us.
Our condensed consolidated balance sheets include the assets and liabilities of these entities, which primarily comprised the following:
September 30, December 31,
2022 2021
(in millions)
Cash and cash equivalents $ 20 $ 18
Property and equipment, net 42 60
Deferred income tax assets 49 62
Other non-current assets 49 62
Accounts payable, accrued expenses and other 15 15
Long-term debt (1)
145 179
Other long-term liabilities 14 16
____________
(1) Includes finance lease liabilities of $ 109 million and $ 153 million as of September 30, 2022 and December 31, 2021, respectively.
During the nine months ended September 30, 2022, our consolidated VIEs borrowed a net 2.7 billion JPY (equivalent to $ 19 million as of September 30, 2022), with a weighted average interest rate of 1.22 percent as of September 30, 2022 and maturity dates ranging from May 2023 to February 2029; these borrowings are included in current maturities of long-term debt and long-term debt in our condensed consolidated balance sheet as of September 30, 2022.
As of December 31, 2021, one of our consolidated VIEs had drawn 500 million JPY (equivalent to $ 4 million as of December 31, 2021) under a revolving credit facility, which was fully repaid by July 2022.
Note 4: Finite-Lived Intangible Assets
Our finite-lived intangible assets consist of management and franchise contracts and other intangible assets. Management and franchise contracts, net were as follows:
September 30, 2022
Gross Carrying Value Accumulated Amortization Net
Carrying Value
(in millions)
Management contracts recorded at Merger (1)
$ 283 $ ( 265 ) $ 18
Contract acquisition costs
936 ( 195 ) 741
Development commissions and other
145 ( 30 ) 115
$ 1,364 $ ( 490 ) $ 874
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December 31, 2021
Gross Carrying Value Accumulated Amortization Net
Carrying Value
(in millions)
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
____________
(1) Represents intangible assets that were initially recorded at fair value as part of the 2007 transaction whereby we became a wholly owned subsidiary of affiliates of Blackstone Inc. (the "Merger").
Amortization of our finite-lived intangible assets was as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in millions)
Recognized in depreciation and amortization expenses (1)
$ 27 $ 32 $ 88 $ 103
Recognized as a reduction of franchise and licensing fees and base and other management fees
10 9 28 23
____________
(1) Includes amortization expense associated with assets that were initially recorded at fair value at the time of the Merger of $ 11 million for both the three months ended September 30, 2022 and 2021 and $ 34 million and $ 35 million for the nine months ended September 30, 2022 and 2021, respectively.
Note 5: Debt
Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of September 30, 2022, were as follows:
September 30, December 31,
2022 2021
(in millions)
Senior secured term loan facility with a rate of 4.83 %, due 2026
$ 2,619 $ 2,619
Senior notes with a rate of 5.375 %, due 2025 (1)
500 500
Senior notes with a rate of 4.875 %, due 2027 (1)
600 600
Senior notes with a rate of 5.750 %, due 2028 (1)
500 500
Senior notes with a rate of 3.750 %, due 2029 (1)
800 800
Senior notes with a rate of 4.875 %, due 2030 (1)
1,000 1,000
Senior notes with a rate of 4.000 %, due 2031 (1)
1,100 1,100
Senior notes with a rate of 3.625 %, due 2032 (1)
1,500 1,500
Finance lease liabilities with a weighted average rate of 5.85 %, due 2022 to 2030
153 208
Other debt of consolidated VIEs with a weighted average rate of 1.21 %, due 2023 to 2029 (2)
36 26
8,808 8,853
Less: unamortized deferred financing costs and discount ( 77 ) ( 87 )
Less: current maturities of long-term debt (3)
( 39 ) ( 54 )
$ 8,692 $ 8,712
____________
(1) These 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., an indirect wholly owned subsidiary of the Parent and the issuer of all of the series of Senior Notes.
(2) Refer to Note 3: "Consolidated Variable Interest Entities" for additional information on the debt of our consolidated VIEs .
(3) Represents current maturities of finance lease liabilities and borrowings of a consolidated VIE.
Our senior secured credit facilities consist of a $ 1.75 billion senior secured revolving credit facility (the "Revolving Credit Facility") and a senior secured term loan facility (the "Term Loan"). The obligations of our senior secured credit facilities are unconditionally and irrevocably guaranteed by the Parent and substantially all of its direct and indirect wholly owned domestic
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restricted subsidiaries. As of September 30, 2022, we had $ 60 million of letters of credit outstanding under the Revolving Credit Facility, resulting in an available borrowing capacity of $ 1,690 million.
Note 6: Fair Value Measurements
The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below:
September 30, 2022
Hierarchy Level
Carrying Value Level 1 Level 2 Level 3
(in millions)
Assets:
Cash equivalents $ 499 $ — $ 499 $ —
Interest rate swap (1)
116 — 116 —
Liabilities:
Long-term debt (2)
8,542 5,086 — 2,551
December 31, 2021
Hierarchy Level
Carrying Value Level 1 Level 2 Level 3
(in millions)
Assets:
Cash equivalents $ 622 $ — $ 622 $ —
Liabilities:
Long-term debt (2)
8,532 6,180 — 2,599
Interest rate swaps (1)
41 — 41 —
____________
(1) Interest rate swaps are included in other non-current assets or other long-term liabilities in our condensed consolidated balance sheets depending on their value to us as of the balance sheet date. During the nine months ended September 30, 2022, one of the interest rate swaps that was outstanding as of December 31, 2021 matured. The remaining interest rate swap outstanding as of September 30, 2022 will mature in March 2026.
(2) The carrying values include the deduction for unamortized deferred financing costs and any applicable discounts. The carrying values and fair values exclude finance lease liabilities and other debt of consolidated VIEs.
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.
The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of September 30, 2022 and December 31, 2021.
Note 7: Income Taxes
At the end of each quarter, we estimate the effective income tax rate expected to be applied for the full year. The effective income tax rate is determined by the level and composition of income (loss) before income taxes, which is subject to federal, state, local and foreign income taxes.
In August 2022, the Inflation Reduction Act of 2022 (the "IRA") was signed into law in the U.S. We do not expect the IRA to have a material impact on our consolidated financial statements, including our annual estimated effective tax rate.
Note 8: Share-Based Compensation
We recognized share-based compensation expense of $ 42 million and $ 52 million during the three months ended September 30, 2022 and 2021, respectively, and $ 126 million and $ 144 million during the nine months ended September 30, 2022 and 2021, respectively, which included amounts reimbursed by hotel owners.
Our share-based compensation primarily consists of awards that we grant to eligible employees under the Hilton 2017 Omnibus Incentive Plan (the "2017 Plan") and includes time-vesting restricted stock units ("RSUs"), nonqualified stock options
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("options") and performance-vesting RSUs ("performance shares"). As of September 30, 2022, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 141 million, which are expected to be recognized over a weighted-average period of 1.7 years on a straight-line basis.
RSUs
During the nine months ended September 30, 2022, we granted 507,000 RSUs with a weighted average grant date fair value per share of $ 150.58 , which vest in equal annual installments over two or three years from the date of grant.
Options
During the nine months ended September 30, 2022, we granted 318,000 options with an exercise price per share of $ 150.67 , which vest in equal annual installments over three years from the date of grant and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.
The grant date fair value per share of the options granted during the nine months ended September 30, 2022 was $ 51.15 , which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility (1)
33.28 %
Dividend yield (2)
0.41 %
Risk-free rate (3)
1.93 %
Expected term (in years) (4)
6.0
____________
(1) Estimated using a blended approach of historical and implied volatility. Historical volatility is based on the historical movement of Hilton's stock price for a look back period that corresponds to the expected term of the option.
(2) Estimated based on the expectation, at the date of grant, of the resumption of a quarterly $ 0.15 per share dividend, as well as our three-month average stock price.
(3) Based on the yields of U.S. Department of Treasury instruments with similar expected terms at the date of grant.
(4) Estimated using the midpoint of the vesting period and the contractual term of the options.
Performance Shares
During the nine months ended September 30, 2022, we granted 216,000 performance shares with a grant date fair value per share of $ 150.67 . We recognize compensation expense based on the total number of performance shares that are expected to vest as determined by the projected achievement of each of the performance measures, which are estimated each reporting period and range from zero percent to 200 percent, with 100 percent being the target. As of September 30, 2022, we determined that all of the performance measures for the outstanding performance shares were probable of achievement, with the average of the achievement factors estimated to be between the target and maximum achievement percentages for the performance shares granted in 2020 and 2021 and at target for the performance shares granted in 2022.
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Note 9: Earnings Per Share
The following table presents the calculation of basic and diluted earnings per share ("EPS"):
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in millions, except per share amounts)
Basic EPS:
Numerator:
Net income attributable to Hilton stockholders
$ 347 $ 241 $ 927 $ 263
Denominator:
Weighted average shares outstanding 273 279 277 278
Basic EPS $ 1.27 $ 0.86 $ 3.35 $ 0.94
Diluted EPS:
Numerator:
Net income attributable to Hilton stockholders
$ 347 $ 241 $ 927 $ 263
Denominator:
Weighted average shares outstanding (1)
275 281 279 281
Diluted EPS $ 1.26 $ 0.86 $ 3.32 $ 0.94
____________
(1) Certain shares related to share-based compensation were excluded from the calculations of diluted EPS because their effect would have been anti-dilutive under the treasury stock method, including 1 million shares for both the three and nine months ended September 30, 2022, and less than 1 million shares for both the three and nine months ended September 30, 2021.
Note 10: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss
The following tables present the changes in the components of stockholders' equity (deficit):
Three Months Ended September 30, 2022
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of June 30, 2022 275.5 $ 3 $ ( 5,048 ) $ 10,753 $ ( 5,783 ) $ ( 714 ) $ — $ ( 789 )
Net income (loss) — — — — 347 — ( 1 ) 346
Other comprehensive income
— — — — — 29 — 29
Dividends (1)
— — — — ( 41 ) — — ( 41 )
Repurchases of common stock (2)
( 4.0 ) — ( 497 ) — — — — ( 497 )
Share-based compensation
— — — 38 — — — 38
Balance as of September 30, 2022 271.5 $ 3 $ ( 5,545 ) $ 10,791 $ ( 5,477 ) $ ( 685 ) $ ( 1 ) $ ( 914 )
Three Months Ended September 30, 2021
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of June 30, 2021 278.7 $ 3 $ ( 4,447 ) $ 10,603 $ ( 6,710 ) $ ( 866 ) $ 1 $ ( 1,416 )
Net income (loss) — — — — 241 — ( 1 ) 240
Other comprehensive loss
— — — — — ( 3 ) — ( 3 )
Share-based compensation
— — — 51 — — — 51
Balance as of September 30, 2021 278.7 $ 3 $ ( 4,447 ) $ 10,654 $ ( 6,469 ) $ ( 869 ) $ — $ ( 1,128 )
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Nine Months Ended September 30, 2022
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of December 31, 2021 279.1 $ 3 $ ( 4,443 ) $ 10,720 $ ( 6,322 ) $ ( 779 ) $ 2 $ ( 819 )
Net income (loss) — — — — 927 — ( 3 ) 924
Other comprehensive income
— — — — — 94 — 94
Dividends (1)
— — — — ( 82 ) — — ( 82 )
Repurchases of common stock (2)
( 8.5 ) — ( 1,107 ) — — — — ( 1,107 )
Share-based compensation
0.9 — 5 71 — — — 76
Balance as of September 30, 2022 271.5 $ 3 $ ( 5,545 ) $ 10,791 $ ( 5,477 ) $ ( 685 ) $ ( 1 ) $ ( 914 )
Nine Months Ended September 30, 2021
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of December 31, 2020 277.6 $ 3 $ ( 4,453 ) $ 10,552 $ ( 6,732 ) $ ( 860 ) $ 4 $ ( 1,486 )
Net income (loss) — — — — 263 — ( 4 ) 259
Other comprehensive loss
— — — — — ( 9 ) — ( 9 )
Share-based compensation
1.1 — 6 102 — — — 108
Balance as of September 30, 2021 278.7 $ 3 $ ( 4,447 ) $ 10,654 $ ( 6,469 ) $ ( 869 ) $ — $ ( 1,128 )
____________
(1) During the three months ended June 30, 2022, we resumed payment of regular quarterly cash dividends.
(2) During the three months ended March 31, 2022, we resumed share repurchases under our previously authorized stock repurchase program.
The changes in the components of accumulated other comprehensive loss, net of taxes, were as follows:
Currency Translation Adjustment (1)
Pension Liability Adjustment (2)
Cash Flow Hedge Adjustment (3)
Total
(in millions)
Balance as of December 31, 2021 $ ( 540 ) $ ( 210 ) $ ( 29 ) $ ( 779 )
Other comprehensive income (loss) before reclassifications
( 48 ) ( 2 ) 121 71
Amounts reclassified from accumulated other comprehensive loss
1 6 16 23
Net current period other comprehensive income (loss)
( 47 ) 4 137 94
Balance as of September 30, 2022 $ ( 587 ) $ ( 206 ) $ 108 $ ( 685 )
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Currency Translation Adjustment (1)
Pension Liability Adjustment (2)
Cash Flow Hedge Adjustment (3)
Total
(in millions)
Balance as of December 31, 2020 $ ( 511 ) $ ( 289 ) $ ( 60 ) $ ( 860 )
Other comprehensive loss before reclassifications
( 32 ) ( 2 ) ( 4 ) ( 38 )
Amounts reclassified from accumulated other comprehensive loss
6 8 15 29
Net current period other comprehensive income (loss)
( 26 ) 6 11 ( 9 )
Balance as of September 30, 2021 $ ( 537 ) $ ( 283 ) $ ( 49 ) $ ( 869 )
____________
(1) Includes net investment hedge gains and intra-entity foreign currency transactions that are of a long-term investment nature. Amounts reclassified during the nine months ended September 30, 2022 and 2021 relate to the liquidation of investments in foreign entities and were recognized in gain on foreign currency transactions and loss on sale of assets, net, respectively, in our condensed consolidated statements of operations.
(2) Amounts reclassified relate to the amortization of prior service cost and amortization of net loss and were recognized in other non-operating income, net in our condensed 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, with related amounts recognized in interest expense in our condensed consolidated statements of operations and (b) forward contracts that hedge our foreign currency denominated fees, with related amounts recognized in various revenue line items, as applicable, in our condensed consolidated statements of operations .
Note 11: Business Segments
We are a hospitality company with operations organized in two distinct operating segments: (i) management and franchise and (ii) ownership, each of which is reported as a segment based on: (a) delivering a similar set of products and services and
(b) 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 Hilton Grand Vacations Inc. ("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 September 30, 2022, this segment included 759 managed hotels and 6,175 franchised hotels consisting of 1,080,454 total rooms.
As of September 30, 2022, 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. As a result of the pandemic, the operations of approximately 15 hotels in our ownership segment were suspended for some period of time during the nine months ended September 30, 2021, while no hotels in our ownership segment suspended operations as a result of the pandemic during the nine months ended September 30, 2022.
The performance of our operating segments is evaluated primarily on operating income (loss), without allocating amortization of contract acquisition costs, other revenues and other expenses, other revenues and other expenses from managed and franchised properties, depreciation and amortization expenses or general and administrative expenses.
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The following table presents revenues for our reportable segments, reconciled to consolidated amounts:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in millions)
Franchise and licensing fees $ 578 $ 455 $ 1,544 $ 1,072
Base and other management fees (1)
88 57 235 135
Incentive management fees 52 26 132 60
Management and franchise 718 538 1,911 1,267
Ownership 295 199 727 376
Segment revenues 1,013 737 2,638 1,643
Amortization of contract acquisition costs ( 10 ) ( 9 ) ( 28 ) ( 23 )
Other revenues 28 18 71 56
Direct reimbursements from managed and franchised properties (2)
643 446 1,764 998
Indirect reimbursements from managed and franchised properties (2)
701 560 1,898 1,284
Intersegment fees elimination (1)
( 7 ) ( 3 ) ( 14 ) ( 6 )
Total revenues $ 2,368 $ 1,749 $ 6,329 $ 3,952
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(1) Includes management, royalty and IP fees charged to consolidated hotels in our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
(2) Included in other revenues from managed and franchised properties in our condensed consolidated statements of operations.
The following table presents operating income (loss) for each of our reportable segments, reconciled to consolidated income before income taxes:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in millions)
Management and franchise (1)
$ 718 $ 538 $ 1,911 $ 1,267
Ownership (1)
25 ( 4 ) 8 ( 82 )
Segment operating income 743 534 1,919 1,185
Amortization of contract acquisition costs ( 10 ) ( 9 ) ( 28 ) ( 23 )
Other revenues, less other expenses 15 6 36 25
Net other revenues (expenses) from managed and franchised properties
7 62 73 ( 57 )
Depreciation and amortization expenses ( 39 ) ( 46 ) ( 123 ) ( 143 )
General and administrative expenses ( 93 ) ( 107 ) ( 287 ) ( 302 )
Loss on sale of assets, net — ( 8 ) — ( 8 )
Operating income 623 432 1,590 677
Interest expense ( 106 ) ( 98 ) ( 295 ) ( 302 )
Gain on foreign currency transactions — — 4 1
Loss on debt extinguishment — — — ( 69 )
Other non-operating income, net 10 6 32 16
Income before income taxes $ 527 $ 340 $ 1,331 $ 323
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(1) Includes management, royalty and IP fees charged to consolidated hotels in our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
Note 12: Commitments and Contingencies
We provide performance guarantees to certain owners of hotels that we operate under management contracts. Most of these guarantees do not require us to fund shortfalls, but allow for termination of the contract, if specified operating performance levels are not achieved. However, in limited cases, we are obligated to fund performance shortfalls, creating variable interests in the ownership entities of the hotels, of which we are not the primary beneficiary. As of September 30, 2022, we had
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performance guarantees with expirations ranging from 2025 to 2043 and potential cash outlays totaling $ 8 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 for that particular hotel.
As of September 30, 2022, we had extended debt guarantees and letters of credit with expirations ranging from 2023 to 2031 and potential cash outlays totaling $ 124 million to owners of certain hotels that we will in the future or do currently manage or franchise.
We receive fees from managed and franchised properties that we are contractually required to use to operate our marketing, sales and brands programs on behalf of our hotel owners. If we collect amounts in excess of amounts expended, we have a commitment to spend these amounts on the related programs. As of September 30, 2022, amounts collected on behalf of these programs exceeded the amounts expended, and, as of December 31, 2021, amounts expended 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 September 30, 2022 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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