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 65 Report of Independent Registered Public Accounting Firm – Internal Control Over Financial Reporting 66 Report of Independent Registered Public Accounting Firm – Financial Statements 67 Consolidated Financial Statements: Consolidated Balance Sheets as of December 31, 2022 and 2021 70 Consolidated Statements of Operations for the years ended December 31, 2022, 2021 and 2020 71 Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2022, 2021 and 2020 72 Consolidated Statements of Cash Flows for the years ended December 31, 2022, 2021 and 2020 73 Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2022, 2021 and 2020 74 Notes to Consolidated Financial Statements 75 64 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, 2022. 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, 2022. 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, 2022. The report is included herein. 65 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, 2022, 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, 2022, 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, 2022 and 2021, 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, 2022 and the related notes, and our report dated February 9, 2023 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 9, 2023 66 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, 2022 and 2021, 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, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2022, 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, 2022, 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 9, 2023 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. 67 Accounting for the Loyalty Program Description of the Matter The Company recognized $457 million of revenues during the year ended December 31, 2022 and had deferred revenues of $631 million and a liability for guest loyalty program of $2,395 million as of December 31, 2022 associated with the Hilton Honors guest loyalty and marketing program (the “Loyalty Program”). As discussed in Note 2 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. generally accepted accounting principles 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 $477 million during the year ended December 31, 2022, and unrecognized tax benefits of $337 million as of December 31, 2022. As discussed in Note 2 to the consolidated financial statements, for all tax positions taken in a tax return, the Company will first determine whether it is more likely than not that a tax position will be sustained upon examination. If the Company determines 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. 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. 68 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 $5,076 million and General and administrative expenses of $382 million during the year ended December 31, 2022. 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 peri od 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, and (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. 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 analytical 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 9, 2023 69 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED BALANCE SHEETS (in millions, except share data) December 31, 2022 2021 ASSETS Current Assets: Cash and cash equivalents $ 1,209 $ 1,427 Restricted cash and cash equivalents 77 85 Accounts receivable, net of allowance for credit losses of $ 117 and $ 126 1,327 1,068 Prepaid expenses 105 89 Other 152 202 Total current assets (variable interest entities – $ 43 and $ 30 ) 2,870 2,871 Intangibles and Other Assets: Goodwill 5,032 5,071 Brands 4,840 4,883 Management and franchise contracts, net 887 758 Other intangible assets, net 161 194 Operating lease right-of-use assets 662 694 Property and equipment, net 280 305 Deferred income tax assets 204 213 Other 576 452 Total intangibles and other assets (variable interest entities – $ 152 and $ 184 ) 12,642 12,570 TOTAL ASSETS $ 15,512 $ 15,441 LIABILITIES AND EQUITY (DEFICIT) Current Liabilities: Accounts payable, accrued expenses and other $ 1,790 $ 1,568 Current maturities of long-term debt 39 54 Current portion of deferred revenues 433 350 Current portion of liability for guest loyalty program 1,110 1,047 Total current liabilities (variable interest entities – $ 45 and $ 50 ) 3,372 3,019 Long-term debt 8,708 8,712 Operating lease liabilities 832 870 Deferred revenues 986 896 Deferred income tax liabilities 735 700 Liability for guest loyalty program 1,285 1,317 Other 692 746 Total liabilities (variable interest entities – $ 188 and $ 212 ) 16,610 16,260 Commitments and contingencies – see Note 18 Equity (Deficit): Common stock, $ 0.01 par value; 10,000,000,000 authorized shares, 267,860,301 outstanding as of December 31, 2022 and 279,091,009 outstanding as of December 31, 2021 3 3 Treasury stock, at cost; 65,217,085 shares as of December 31, 2022 and 52,920,350 shares as of December 31, 2021 ( 6,040 ) ( 4,443 ) Additional paid-in capital 10,831 10,720 Accumulated deficit ( 5,190 ) ( 6,322 ) Accumulated other comprehensive loss ( 706 ) ( 779 ) Total Hilton stockholders' deficit ( 1,102 ) ( 821 ) Noncontrolling interests 4 2 Total deficit ( 1,098 ) ( 819 ) TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 15,512 $ 15,441 See notes to consolidated financial statements. 70 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF OPERATIONS (in millions, except per share data) Year Ended December 31, 2022 2021 2020 Revenues Franchise and licensing fees $ 2,068 $ 1,493 $ 945 Base and other management fees 294 176 123 Incentive management fees 196 98 38 Owned and leased hotels 1,076 598 421 Other revenues 102 79 73 3,736 2,444 1,600 Other revenues from managed and franchised properties 5,037 3,344 2,707 Total revenues 8,773 5,788 4,307 Expenses Owned and leased hotels 999 679 620 Depreciation and amortization 162 188 331 General and administrative 382 405 311 Reorganization costs — — 41 Impairment losses — — 258 Other expenses 60 45 60 1,603 1,317 1,621 Other expenses from managed and franchised properties 5,076 3,454 3,104 Total expenses 6,679 4,771 4,725 Loss on sales of assets, net — ( 7 ) — Operating income (loss) 2,094 1,010 ( 418 ) Interest expense ( 415 ) ( 397 ) ( 429 ) Gain (loss) on foreign currency transactions 5 ( 7 ) ( 27 ) Loss on debt extinguishments — ( 69 ) ( 48 ) Other non-operating income (loss), net 50 23 ( 2 ) Income (loss) before income taxes 1,734 560 ( 924 ) Income tax benefit (expense) ( 477 ) ( 153 ) 204 Net income (loss) 1,257 407 ( 720 ) Net loss (income) attributable to noncontrolling interests ( 2 ) 3 5 Net income (loss) attributable to Hilton stockholders $ 1,255 $ 410 $ ( 715 ) Earnings (loss) per share: Basic $ 4.56 $ 1.47 $ ( 2.58 ) Diluted $ 4.53 $ 1.46 $ ( 2.58 ) Cash dividends declared per share $ 0.45 $ — $ 0.15 See notes to consolidated financial statements. 71 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (in millions) Year Ended December 31, 2022 2021 2020 Net income (loss) $ 1,257 $ 407 $ ( 720 ) Other comprehensive income (loss), net of tax benefit (expense): Currency translation adjustment, net of tax of $ 22 , $ 6 and $( 24 ) ( 8 ) ( 29 ) 38 Pension liability adjustment, net of tax of $ 18 , $( 27 ) and $ 7 ( 49 ) 80 ( 20 ) Cash flow hedge adjustment, net of tax of $( 44 ), $( 10 ) and $ 13 130 31 ( 38 ) Total other comprehensive income (loss) 73 82 ( 20 ) Comprehensive income (loss) 1,330 489 ( 740 ) Comprehensive loss (income) attributable to noncontrolling interests ( 2 ) 2 5 Comprehensive income (loss) attributable to Hilton stockholders $ 1,328 $ 491 $ ( 735 ) See notes to consolidated financial statements. 72 HILTON WORLDWIDE HOLDINGS INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (in millions) Year Ended December 31, 2022 2021 2020 Operating Activities: Net income (loss) $ 1,257 $ 407 $ ( 720 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Amortization of contract acquisition costs 38 32 29 Depreciation and amortization expenses 162 188 331 Impairment losses — — 258 Loss on sales of assets, net — 7 — Loss (gain) on foreign currency transactions ( 5 ) 7 27 Loss on debt extinguishments — 69 48 Share-based compensation expense 162 193 97 Amortization of deferred financing costs and discount 16 16 17 Deferred income taxes 34 ( 4 ) ( 235 ) Contract acquisition costs, net of refunds ( 81 ) ( 200 ) ( 50 ) Changes in operating assets and liabilities: Accounts receivable, net ( 270 ) ( 301 ) 488 Prepaid expenses ( 21 ) ( 22 ) 60 Other current assets 78 ( 107 ) ( 26 ) Accounts payable, accrued expenses and other 198 273 ( 414 ) Change in operating lease right-of-use assets 105 96 94 Change in operating lease liabilities ( 113 ) ( 123 ) ( 142 ) Change in deferred revenues 174 ( 128 ) 215 Change in liability for guest loyalty program 31 ( 105 ) 610 Change in other liabilities ( 11 ) ( 111 ) 8 Other ( 73 ) ( 78 ) 13 Net cash provided by operating activities 1,681 109 708 Investing Activities: Capital expenditures for property and equipment ( 39 ) ( 35 ) ( 46 ) Issuance of financing receivables ( 46 ) ( 3 ) ( 3 ) Undesignated derivative financial instruments 79 ( 5 ) ( 3 ) Proceeds from asset dispositions — 6 — Capitalized software costs ( 63 ) ( 44 ) ( 46 ) Investments in unconsolidated affiliates ( 53 ) — — Other ( 1 ) 24 ( 9 ) Net cash used in investing activities ( 123 ) ( 57 ) ( 107 ) Financing Activities: Borrowings 23 1,510 4,590 Repayment of debt ( 48 ) ( 3,230 ) ( 2,121 ) Debt issuance costs and redemption premiums — ( 76 ) ( 71 ) Dividends paid ( 123 ) — ( 42 ) Repurchases of common stock ( 1,590 ) — ( 296 ) Share-based compensation tax withholdings ( 58 ) ( 49 ) ( 58 ) Proceeds from share-based compensation 29 52 31 Settlements of interest rate swap with financing component 2 — — Other — — ( 1 ) Net cash provided by (used in) financing activities ( 1,765 ) ( 1,793 ) 2,032 Effect of exchange rate changes on cash, restricted cash and cash equivalents ( 19 ) ( 10 ) — Net increase (decrease) in cash, restricted cash and cash equivalents ( 226 ) ( 1,751 ) 2,633 Cash, restricted cash and cash equivalents, beginning of period 1,512 3,263 630 Cash, restricted cash and cash equivalents, end of period $ 1,286 $ 1,512 $ 3,263 Supplemental Disclosures: Cash paid during the period: Interest $ 383 $ 359 $ 433 Income taxes, net of refunds 389 181 79 See notes to consolidated financial statements. 73 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, 2019 279.0 $ 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 ( 2.6 ) — ( 279 ) — — — — ( 279 ) Share-based compensation 1.2 — ( 5 ) 63 — — — 58 Distributions — — — — — — ( 1 ) ( 1 ) Cumulative effect of the adoption of ASU 2016-13 (1) — — — — ( 10 ) — — ( 10 ) Balance as of December 31, 2020 277.6 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 1.5 — 10 168 — — — 178 Balance as of December 31, 2021 279.1 3 ( 4,443 ) 10,720 ( 6,322 ) ( 779 ) 2 ( 819 ) Net income — — — — 1,255 — 2 1,257 Other comprehensive income (loss), net of taxes: Currency translation adjustment — — — — — ( 8 ) — ( 8 ) Pension liability adjustment — — — — — ( 49 ) — ( 49 ) Cash flow hedge adjustment — — — — — 130 — 130 Other comprehensive income — — — — — 73 — 73 Dividends — — — — ( 123 ) — — ( 123 ) Repurchases of common stock ( 12.3 ) — ( 1,608 ) — — — — ( 1,608 ) Share-based compensation 1.1 — 11 111 — — — 122 Balance as of December 31, 2022 (2) 267.9 $ 3 $ ( 6,040 ) $ 10,831 $ ( 5,190 ) $ ( 706 ) $ 4 $ ( 1,098 ) ____________ (1) Relates to Accounting Standards Update ("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. (2) As of December 31, 2022, 3.0 billion shares of preferred stock with a par value of $ 0.01 were authorized with no such shares issued. See notes to consolidated financial statements. 74 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 ("IP"), including brand names, trademarks and service marks. As of December 31, 2022, we managed, franchised or leased 7,165 hotels and resorts, including timeshare properties, totaling 1,127,430 rooms in 123 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, 2022 and 2021 and the results of operations for the years ended December 31, 2022, 2021 and 2020. 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 shares in the entity, and, if we do, we consolidate the entity. 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 on the date that we became the primary beneficiary. If such consolidation is required, the amounts may be material. 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 (the "COVID-19 pandemic" or the "pandemic") had an adverse impact on certain of our results for the years ended December 31, 2022, 2021 and 2020; however, our results experienced significant recovery during the years ended December 31, 2022 and 2021 when compared to the year ended December 31, 2020, the period most impacted by the pandemic. The years ended December 31, 2022, 2021 and 2020, as well as upcoming periods, may not be comparable to periods prior to the onset of the COVID-19 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. 75 Summary of Significant Accounting Policies Revenue Recognition Revenues are primarily derived from: (i) fees earned from management and franchise contracts with third-party hotel owners; (ii) fees earned from license agreements with strategic partners, including co-branded credit card providers, and Hilton Grand Vacations Inc. ("HGV"); and (iii) our owned and leased hotels. The majority of our performance obligations are promises to provide 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 hotel 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 third-party hotel 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 third-party hotel owner to assist in preparing for the hotel opening. • Rewards from Hilton Honors, our guest loyalty program, 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 Hilton Honors point is redeemed by the Hilton Honors 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 hotel 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. • 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 hotels 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 hotel owner 76 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) strategic partnerships, including from co-branded credit card arrangements, which are recognized as revenue when points for Hilton Honors are issued, generally as spend with the strategic partner or co-branded credit card provider occurs (see further discussion below under "Hilton Honors") and (ii) 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. 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, generally including any extension periods that are at our sole option, 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 monthly program fees 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 statement 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 our 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 statement 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 property 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 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. 77 Owned and leased hotels revenues We identified the following performance obligations in connection with our owned and leased hotels revenues, with such revenues 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 when 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 hotels 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 hotels 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 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. 78 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 and furniture, fixtures and equipment replacement ("FF&E") reserves required under certain lease agreements. 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. Our reporting units are the same as our operating segments as described in Note 17: "Business Segments." We evaluate goodwill for potential impairment by comparing the carrying value of the reporting unit to its fair value. When we evaluate goodwill for potential impairment, generally, we first 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 it is more likely than not that the fair value of a reporting unit is 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 Certain brand intangible assets were initially recorded at their fair value at the time of the Merger, using the relief-from-royalty valuation approach or the excess earnings method, depending on the contract type. At the time of the Merger, our portfolio of brands, and those for which we recorded intangible assets, 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. 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. A portion of our brands intangible assets are denominated in foreign currencies and, as such, a period over period change in these assets is attributable to fluctuations in foreign currency exchange rates. All brands that were launched subsequent to the Merger, which, as of December 31, 2022, included 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. When we evaluate our brands intangible assets for potential impairment, generally, we first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the asset is less than its carrying value. If we determine qualitatively that the fair value of an asset is more likely than not less than its carrying value, 79 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 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 statement of operations, the amortization of these intangible assets, excluding contract acquisition costs, is included in depreciation and amortization expenses, 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 statement of operations. Cash flows for contract acquisition costs and development commissions and other are included as operating activities in our consolidated statement 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 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 it 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: (i) 8 to 40 years for buildings and improvements; (ii) 3 to 8 years for furniture and equipment; and (iii) 3 to 5 years for computer equipment. 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 perform an analysis to determine 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 carrying value of the asset group is not recoverable and it 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. 80 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 lessor options to renew the lease within the lessor's control and 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. In our consolidated balance sheets, 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. We evaluate the carrying value of our ROU assets for indicators of impairment, and, if such indicators exist, we perform an analysis to determine 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 carrying value of the asset group is not recoverable and it 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 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 result from changes in inflationary indices; 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 hotels expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statement 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 statement of operations. The interest expense related to finance leases, including any variable lease payments, is recognized in interest expense in our consolidated statement 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) as of December 31, 2021, 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 81 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 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, including co-branded credit card arrangements. 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 a discount rate and 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), an expectation of when such points are expected to 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 hotels revenues, since we are also the program sponsor. We estimate the current portions of our liability for guest loyalty program and Hilton Honors deferred revenues based on the total point redemptions and breakage expected to occur within the next 12 months; these amounts are presented as current portion of liability for guest loyalty program and current portion of deferred revenues in our consolidated balance sheets. 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 included the anticipated point expirations that occurred at the end of the suspension, which was December 31, 2022. 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 82 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 statement 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 hotels revenues in our consolidated statement of operations. During the year ended December 31, 2022, we recognized an aggregate of $ 457 million of revenue related to Hilton Honors, including amounts related to point redemptions, which were recognized in other revenues from managed and franchised properties, and amounts related to licensing fees, which were recognized in franchise and licensing fees. 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 statement 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 statement of cash flows, while cash flows from undesignated derivative financial instruments are included as an investing activity. 83 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 a statistical 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 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, unless it is considered a highly inflationary economy in which case the functional currency of that entity is USD. 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 statement 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 statement 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 leased and managed hotels that participate in our insurance programs, in addition to other corporate related coverages. We are also self-insured for health coverages for some of our U.S. and Puerto Rico employees, which include those working at our corporate operations and managed hotels, with purchased insurance protection for costs over specified thresholds. 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, or more frequently as circumstances dictate, 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. 84 • 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. 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 a performance condition is dependent on the expected achievement percentage of such awards, which is reassessed each reporting period from the date of grant through the vesting of such performance awards, and 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 hotels expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statement 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 each evaluated tax position and the amounts we would ultimately accept in a negotiated settlement with tax authorities. 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. 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 during interim periods. 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 85 credit and financing to owners of certain hotels that we currently or in the future will 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. 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, 2021 and the amendments should be applied either: (i) prospectively to all in scope transactions that are reflected in the financial statements at the date of initial application and new transactions that are entered into after that date; or (ii) retrospectively to those transactions. Hilton adopted this ASU on January 1, 2022 on a prospective basis and it had no material impact on our consolidated financial statements as of and for the year ended December 31, 2022. If, at any point in time, such amounts are deemed to be material, we will present the required disclosures as applicable . Note 3: Revenues from Contracts with Customers Contract Liabilities The following table summarizes the activity of our contract liabilities during the year ended December 31, 2022: (in millions) Balance as of December 31, 2021 $ 1,166 Cash received in advance and not recognized as revenue 444 Revenue recognized (1)(2) ( 534 ) Other (3) 255 Balance as of December 31, 2022 $ 1,331 ____________ (1) Primarily related to Hilton Honors, including co-branded credit card arrangements. (2) Revenue recognized during the year ended December 31, 2022 included a net increase in revenue of $ 11 million 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 were temporarily suspended through December 31, 2022. (3) Represents changes in estimated transaction prices for our performance obligations related to the issuance of Hilton Honors points, which had no effect on revenues during the period, and was primarily due to the expiration of Hilton Honors points on December 31, 2022 following the program's temporary suspension of such points. Performance Obligations As of December 31, 2022, we had deferred revenues for unsatisfied performance obligations consisting of: (i) $ 631 million related to Hilton Honors that will be recognized as revenue over approximately the next two years ; (ii) $ 674 million related to advance consideration received from hotel owners for application, initiation and other fees and certain indirect reimbursements; and (iii) $ 26 million related to other obligations. Note 4: Consolidated Variable Interest Entities As of December 31, 2022 and 2021, we consolidated two VIEs that each lease one hotel property, both of which are located in Japan. 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. 86 Our consolidated balance sheets include the assets and liabilities of these entities, including the effect of foreign currency translation, which primarily comprised the following: December 31, 2022 2021 (in millions) Cash and cash equivalents $ 29 $ 18 Property and equipment, net 45 60 Deferred income tax assets 52 62 Other non-current assets 55 62 Accounts payable, accrued expenses and other 21 15 Long-term debt (1) 152 179 Other long-term liabilities 14 16 ____________ (1) Includes finance lease liabilities of $ 115 million and $ 153 million as of December 31, 2022 and 2021, respectively. During the year ended December 31, 2022, our consolidated VIEs borrowed an aggregate of 2.7 billion Japanese yen ("JPY"), of which 0.3 billion JPY was repaid during the year ended December 31, 2022, resulting in 2.4 billion JPY (equivalent to $ 18 million) of those borrowings remaining outstanding as of December 31, 2022. As of December 31, 2022, these remaining borrowings were included in long-term debt in our consolidated balance sheet and had a weighted average interest rate of 1.04 percent and maturity dates ranging from August 2025 to February 2029. As of December 31, 2021, one of our consolidated VIEs had drawn 500 million JPY (equivalent to $ 4 million) under a revolving credit facility, which was fully repaid by July 2022; these borrowings were included in long-term debt in our consolidated balance sheet as of December 31, 2021. Note 5: 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 10: "Fair Value Measurements" for additional information. As such, as of December 31, 2022 and 2021, our goodwill balance was only attributable to our management and franchise reporting unit, which had no accumulated impairment losses as of either date. The changes in our goodwill balances during the years ended December 31, 2022 and 2021 were due to foreign currency translation. Intangible Assets Finite-lived intangible assets were as follows: December 31, 2022 Gross Carrying Value Accumulated Amortization Net Carrying Value (in millions) Management and franchise contracts: International management contracts recorded at Merger (1) $ 293 $ ( 278 ) $ 15 Contract acquisition costs 961 ( 206 ) 755 Development commissions and other 149 ( 32 ) 117 $ 1,403 $ ( 516 ) $ 887 Other intangible assets: Capitalized software costs $ 615 $ ( 515 ) $ 100 Leases (1) 124 ( 80 ) 44 Hilton Honors (1) 335 ( 318 ) 17 $ 1,074 $ ( 913 ) $ 161 87 December 31, 2021 Gross Carrying Value Accumulated Amortization Net Carrying Value (in millions) Management and franchise contracts: International 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 ____________ (1) Represents intangible assets that were initially recorded at fair value at the time of the Merger. During the year ended December 31, 2020 we recognized $ 15 million and $ 46 million of impairment losses related to contract acquisition costs and our leases intangible assets, respectively, in our consolidated statement of operations; see Note 10 : " Fair Value Measurements " for additional information. Amortization of our finite-lived intangible assets was as follows: Year Ended December 31, 2022 2021 2020 (in millions) Recognized in depreciation and amortization expenses (1) $ 116 $ 135 $ 274 Recognized as a reduction of franchise and licensing fees and base and other management fees 38 32 29 ____________ (1) Includes amortization expense of $ 45 million, $ 47 million and $ 164 million for the years ended December 31, 2022, 2021 and 2020, respectively, associated with assets that were initially recorded at fair value at the time of the Merger, some of which fully amortized during 2020. As of December 31, 2022, w e estimate future amortization expense of our finite-lived intangible assets that will be recognized in depreciation and amortization expenses to be as follows: Year (in millions) 2023 $ 96 2024 46 2025 25 2026 11 2027 9 Thereafter 106 $ 293 88 Note 6: Property and Equipment Property and equipment were as follows: December 31, 2022 2021 (in millions) Land $ 9 $ 9 Buildings and leasehold improvements 355 365 Furniture and equipment 299 339 Construction-in-progress 24 14 Finance lease ROU assets 82 83 769 810 Accumulated depreciation and amortization (1) ( 489 ) ( 505 ) $ 280 $ 305 ____________ (1) During the years ended December 31, 2022, 2021 and 2020, depreciation and amortization expenses on property and equipment was $ 46 million , $ 53 million and $ 57 million, respectively. Property and equipment, net attributed to U.S. operations was $ 111 million and $ 112 million as of December 31, 2022 and 2021, respectively, and to operations outside the U.S. was $ 169 million and $ 193 million, respectively, most significantly in the United Kingdom ("U.K.") and Japan. 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 10: "Fair Value Measurements" for additional information. Note 7: Accounts Payable, Accrued Expenses and Other Accounts payable, accrued expenses and other were as follows: December 31, 2022 2021 (in millions) Accrued employee compensation and benefits $ 555 $ 514 Accounts payable 368 274 Operating lease liabilities, current 112 140 Insurance reserves, current 86 84 Other current liabilities and accrued expenses (1) 669 556 $ 1,790 $ 1,568 ____________ (1) Includes deposit liabilities related to hotel operations and application fees, promotional liabilities, contract acquisition costs payable and income taxes payable, as well as accrued expenses related to taxes, interest, advertising, rent and other. 89 Note 8: Debt Long-term Debt Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of December 31, 2022, were as follows: December 31, 2022 2021 (in millions) Senior secured term loan facility with a rate of 6.17 %, 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 5.90 %, due 2023 to 2030 (2) 164 208 Other debt of consolidated VIEs with a weighted average rate of 1.12 %, due 2024 to 2029 (2) 37 26 8,820 8,853 Less: unamortized deferred financing costs and discount ( 73 ) ( 87 ) Less: current maturities of long-term debt (3) ( 39 ) ( 54 ) $ 8,708 $ 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, except for 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. (2) Long-term debt of our consolidated variable interest entities is included in finance lease liabilities and other debt of consolidated VIEs as applicable; refer to Note 4: "Consolidated Variable Interest Entities" for additional information. (3) Represents current maturities of finance lease liabilities and borrowings of one consolidated VIE. Senior Secured Credit Facilities Our senior secured credit facilities consist of a senior secured revolving credit facility (the "Revolving Credit Facility") and a senior secured term loan facility. 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, except for HOC, the named borrower on the senior secured credit facilities. In December 2022, we amended the credit agreement that governs our senior secured credit facilities to reference the Secured Overnight Financing Rate as the primary benchmark rate for our variable-rate indebtedness under this agreement in lieu of the London Interbank Offered Rate. We applied the practical expedient as prescribed in ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting that allowed us to consider this amendment as though the modification was not substantial. As of December 31, 2022, our Revolving Credit Facility had a total borrowing capacity of $ 1.75 billion and, of the $ 250 million available in the form of letters of credit, $ 60 million letters of credit were outstanding, resulting in an available borrowing capacity of $ 1,690 million. No borrowings were outstanding under the Revolving Credit Facility as of December 31, 2022 and 2021. In January 2023, we amended the credit agreement governing our Revolving Credit Facility to increase the borrowing capacity to $ 2.0 billion, $ 250 million of which is available in the form of letters of credit, and, based on the terms of the agreement, we expect the extended maturity date to be January 2028. In connection with this amendment, we incurred approximately $ 9 million of debt issuance costs. As of February 3, 2023, after considering $ 60 million letters of credit outstanding and no borrowings outstanding, we had an available borrowing capacity on the Revolving Credit Facility of $ 1,940 million . Senior Notes During 2021 and 2020, we completed financing transactions, whereby we issued senior unsecured notes and used the net proceeds from those issuances, together with available cash, to redeem outstanding senior unsecured notes. In connection with 90 the redemptions, we paid redemption premiums of $ 55 million and $ 31 million during the years ended December 31, 2021 and 2020, respectively, and accelerated the recognition of the unamortized deferred financing costs on the redeemed notes of $ 14 million and $ 17 million, respectively. These amounts were included in loss on debt extinguishments in our consolidated statements of operations for the years ended December 31, 2021 and 2020. During 2020, we also issued in aggregate $ 1.0 billion of senior unsecured notes. Debt Maturities The contractual maturities of our long-term debt as of December 31, 2022 were as follows: Year (in millions) 2023 $ 39 2024 33 2025 526 2026 2,658 2027 617 Thereafter 4,947 $ 8,820 Note 9: Other Liabilities Other long-term liabilities were as follows: December 31, 2022 2021 (in millions) Other long-term tax liabilities $ 349 $ 385 Insurance reserves 146 151 Deferred employee compensation and benefits 91 111 Pension obligations 40 25 Other 66 74 $ 692 $ 746 Note 10: 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, 2022 Hierarchy Level Carrying Value (1) Level 1 Level 2 Level 3 (in millions) Assets: Cash equivalents $ 338 $ — $ 338 $ — Interest rate swap (2) 108 — 108 — Liabilities: Long-term debt (3) 8,619 5,292 — 2,616 91 December 31, 2021 Hierarchy Level Carrying Value (1) Level 1 Level 2 Level 3 (in millions) Assets: Cash equivalents $ 622 $ — $ 622 $ — Liabilities: Long-term debt (3) 8,619 6,180 — 2,599 Interest rate swaps (2) 41 — 41 — ____________ (1) The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values. (2) Interest rate swaps are included in other non-current assets or other long-term liabilities in our consolidated balance sheet depending on their value to us as of the balance sheet date. During the year ended December 31, 2022, one of the interest rate swaps that was outstanding as of December 31, 2021 matured. The remaining interest rate swap outstanding as of December 31, 2022 will mature in March 2026. (3) The carrying value and fair values exclude the deduction for unamortized deferred financing costs and any applicable discounts, as well as all finance lease liabilities and other debt of consolidated VIEs; refer to Note 8: Debt for additional information. 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 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 5: "Goodwill and Intangible Assets," Note 6: "Property and Equipment" and Note 11: "Leases" for additional information on these impairment losses. 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 11: 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, 2022, we leased 42 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 10: "Fair Value Measurements" for additional information. 92 Supplemental balance sheet information related to leases was as follows: December 31, 2022 2021 (dollars in millions) Operating leases: Operating lease right-of-use assets (1) $ 662 $ 694 Accounts payable, accrued expenses and other 112 140 Operating lease liabilities 832 870 Finance leases: Property and equipment, net $ 33 $ 33 Current maturities of long-term debt 38 50 Long-term debt 126 158 Weighted average remaining lease term: Operating leases 11.3 years 11.0 years Finance leases 6.1 years 7.0 years Weighted average discount rate: Operating leases 4.22 % 3.87 % Finance leases 5.90 % 5.88 % ____________ (1) Operating lease ROU assets attributed to U.S. operations was $ 78 million and $ 37 million as of December 31, 2022 and 2021, respectively, and to operations outside the U.S. was $ 584 million and $ 657 million, respectively, most significantly in the U.K. and Germany. The components of lease expense were as follows: Year Ended December 31, 2022 2021 2020 (in millions) Operating lease expense for fixed payments $ 113 $ 125 $ 129 Finance lease expense: Amortization of ROU assets 21 23 26 Fixed interest on lease liabilities 10 13 14 Variable lease expense (1) 139 35 17 ____________ (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, 2022 2021 2020 (in millions) Cash paid for amounts included in the measurement of lease liabilities: Operating cash flows from operating leases $ 157 $ 187 $ 149 Financing cash flows from finance leases 42 40 26 ROU assets obtained in exchange for lease liabilities in non-cash transactions: Operating leases 135 45 33 Finance leases 21 17 20 93 Our future minimum lease payments as of December 31, 2022 were as follows: Operating Leases Finance Leases Year (in millions) 2023 $ 147 $ 47 2024 127 34 2025 121 27 2026 112 25 2027 104 17 Thereafter 604 47 Total minimum lease payments 1,215 197 Less: imputed interest ( 271 ) ( 33 ) Total lease liabilities $ 944 $ 164 Note 12: Income Taxes Income Tax Provision (Benefit) The domestic and foreign components of income (loss) before income taxes were as follows: Year Ended December 31, 2022 2021 2020 (in millions) U.S. income (loss) before income taxes $ 1,320 $ 631 $ ( 267 ) Foreign income (loss) before income taxes 414 ( 71 ) ( 657 ) Income (loss) before income taxes $ 1,734 $ 560 $ ( 924 ) The components of our provision (benefit) for income taxes were as follows: Year Ended December 31, 2022 2021 2020 (in millions) Current: Federal $ 306 $ 89 $ ( 6 ) State 81 45 ( 32 ) Foreign 56 23 69 Total current 443 157 31 Deferred: Federal 16 51 ( 102 ) State 6 ( 14 ) ( 34 ) Foreign 12 ( 41 ) ( 99 ) Total deferred 34 ( 4 ) ( 235 ) Total provision (benefit) for income taxes $ 477 $ 153 $ ( 204 ) 94 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, 2022 2021 2020 (in millions) Statutory U.S. federal income tax provision (benefit) $ 364 $ 118 $ ( 194 ) State income taxes, net of U.S. federal income tax benefit 65 22 ( 24 ) Impact of foreign operations 35 8 ( 106 ) Goodwill impairment losses — — 22 Tax rate differential on U.S. federal net operating loss carryback — — ( 14 ) Changes in deferred tax asset valuation allowances ( 5 ) 34 116 Income tax rate changes (1) — ( 45 ) — Provision for uncertain tax positions 14 15 7 Other, net 4 1 ( 11 ) Provision (benefit) for income taxes $ 477 $ 153 $ ( 204 ) ____________ (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. 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, 2022 2021 (in millions) Deferred tax assets: Net tax loss carryforwards and carrybacks $ 641 $ 649 Compensation 117 101 Reserves 66 76 Operating and finance lease liabilities 301 341 Deferred income 271 278 Foreign tax credit carryforwards 49 48 Other 102 144 Total gross deferred tax assets 1,547 1,637 Less: valuation allowance ( 649 ) ( 669 ) Deferred tax assets 898 968 Deferred tax liabilities: Brands ( 1,151 ) ( 1,152 ) Finite-lived intangible assets ( 40 ) ( 61 ) Investment in foreign subsidiaries ( 22 ) ( 24 ) Operating and finance lease ROU assets ( 206 ) ( 218 ) Other ( 10 ) — Deferred tax liabilities ( 1,429 ) ( 1,455 ) Net deferred taxes $ ( 531 ) $ ( 487 ) As of December 31, 2022, we had gross U.S. separate return limitation year loss carryforwards and foreign operating loss carryforwards of $ 2.6 billion, resulting in deferred tax assets of $ 641 million. Approximately $ 41 million of our deferred tax assets as of December 31, 2022 related to loss carryforwards that will expire between 2023 and 2042 with less than $ 1 million of that amount expiring in 2023. Approximately $ 600 million of our deferred tax assets as of December 31, 2022 resulted from loss carryforwards that are not subject to expiration. We believe that it is more likely than not that the benefit from certain U.S. and foreign loss carryforwards will not be realized. In recognition of this assessment, we provided valuation allowances totaling $ 494 million as of December 31, 2022 on the deferred tax assets relating to these loss carryforwards. As of December 31, 2022, we also had deferred tax assets for U.S. tax credit carryforwards of $ 49 million that will expire between 2029 and 2032, for which we have provided valuation allowances. 95 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 tax jurisdictions or from the resolution of various proceedings between the U.S. and foreign tax authorities. As of December 31, 2022, the Company's federal income tax returns remain subject to examination by the IRS for tax years from 2005 through 2022. Various income tax returns filed with state, local and foreign jurisdictions remain subject to examination by the applicable taxing authorities. Reconciliations of the beginning and ending amounts of unrecognized tax benefits were as follows: Year Ended December 31, 2022 2021 2020 (in millions) Balance at beginning of year $ 375 $ 451 $ 395 Additions for tax positions related to prior years 1 33 45 Additions for tax positions related to the current year 3 2 56 Reductions for tax positions related to prior years ( 32 ) ( 39 ) ( 13 ) Settlements — ( 66 ) ( 37 ) Lapse of statute of limitations ( 5 ) ( 2 ) ( 1 ) Currency translation adjustment ( 5 ) ( 4 ) 6 Balance at end of year $ 337 $ 375 $ 451 As of December 31, 2021, we had entered into a tentative agreement with the IRS, subject to approval by the Joint Committee on Taxation, to settle our federal examination through the 2010 tax year, and the settlement was approved by the Joint Committee on Taxation during the year ended December 31, 2022. As a result, the extended federal statute of limitations for tax years from 2005 through 2010 is set to expire in 2023. The assets and liabilities relating to the settlement were previously recognized as of December 31, 2021, and no adjustments were necessary as a result of the settlement approval. 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, 2022, 2021 and 2020, we recognized income tax expense related to interest and penalties of $ 17 million, $ 16 million and $ 13 million, respectively, in our consolidated statements of operations. As of December 31, 2022 and 2021, we had accrued approximately $ 79 million and $ 65 million, respectively, 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, 2022 and 2021 were $ 337 million and $ 343 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 $ 32 million. Note 13: 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 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 certain 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 96 consolidated balance sheets and make corresponding adjustment s 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 2022 2021 2022 2021 2022 2021 (in millions) Change in projected benefit obligation Benefit obligation at beginning of year $ 370 $ 399 $ 490 $ 541 $ 81 $ 90 Service cost — — 2 2 2 1 Interest cost 8 6 8 5 2 2 Actuarial gain (1) ( 71 ) ( 11 ) ( 152 ) ( 32 ) ( 10 ) ( 3 ) Settlements — — — — — ( 1 ) Effect of foreign currency exchange rates — — ( 49 ) ( 4 ) ( 4 ) ( 4 ) Benefits paid ( 23 ) ( 24 ) ( 13 ) ( 22 ) ( 7 ) ( 4 ) Benefit obligation at end of year $ 284 $ 370 $ 286 $ 490 $ 64 $ 81 Change in plan assets Fair value of plan assets at beginning of year $ 374 $ 343 $ 505 $ 485 $ 71 $ 70 Actual return on plan assets, net of expenses ( 80 ) 44 ( 186 ) 36 ( 3 ) 7 Employer contributions — 11 21 11 2 2 Settlements — — — — — ( 1 ) Effect of foreign currency exchange rates — — ( 50 ) ( 5 ) ( 3 ) ( 3 ) Benefits paid ( 23 ) ( 24 ) ( 13 ) ( 22 ) ( 7 ) ( 4 ) Fair value of plan assets at end of year 271 374 277 505 60 71 Funded status at end of year (underfunded) ( 13 ) 4 ( 9 ) 15 ( 4 ) ( 10 ) Accumulated benefit obligation $ 284 $ 370 $ 286 $ 490 $ 64 $ 81 ____________ (1) The actuarial gains during the year ended December 31, 2022 were primarily related to increases in the discount rate assumptions. Amounts recognized in our consolidated balance sheets consisted of the following: Domestic Plan U.K. Plan International Plans 2022 2021 2022 2021 2022 2021 (in millions) Other non-current assets $ — $ 4 $ — $ 15 $ 14 $ 15 Other liabilities ( 13 ) — ( 9 ) — ( 18 ) ( 25 ) Net amount recognized $ ( 13 ) $ 4 $ ( 9 ) $ 15 $ ( 4 ) $ ( 10 ) Amounts recognized in accumulated other comprehensive loss consisted of the following: Domestic Plan U.K. Plan International Plans 2022 2021 2020 2022 2021 2020 2022 2021 2020 (in millions) Net actuarial loss (gain) $ 25 $ ( 38 ) $ 4 $ 39 $ ( 48 ) $ 41 $ ( 4 ) $ ( 7 ) $ 3 Amortization of prior service cost ( 4 ) ( 4 ) ( 4 ) — — — — — — Amortization of net loss ( 3 ) ( 5 ) ( 4 ) ( 3 ) ( 5 ) ( 4 ) ( 1 ) ( 1 ) ( 1 ) Net amount recognized $ 18 $ ( 47 ) $ ( 4 ) $ 36 $ ( 53 ) $ 37 $ ( 5 ) $ ( 8 ) $ 2 97 The net periodic pension cost (credit) was as follows: Domestic Plan U.K. Plan International Plans 2022 2021 2020 2022 2021 2020 2022 2021 2020 (in millions) Service cost (1) $ 3 $ 3 $ 3 $ 2 $ 2 $ 3 $ 2 $ 1 $ 1 Interest cost (2) 8 6 10 8 5 8 2 2 2 Expected return on plan assets (2) ( 20 ) ( 19 ) ( 17 ) ( 23 ) ( 21 ) ( 20 ) ( 3 ) ( 3 ) ( 3 ) Amortization of prior service cost (2) 4 4 4 — — — — — — Amortization of net loss (2) 3 5 4 3 5 4 1 1 1 Net periodic pension cost (credit) $ ( 2 ) $ ( 1 ) $ 4 $ ( 10 ) $ ( 9 ) $ ( 5 ) $ 2 $ 1 $ 1 ____________ (1) Recognized in owned and leased hotels 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 2022 2021 2022 2021 2022 2021 Discount rate 5.6 % 2.8 % 4.8 % 1.9 % 4.4 % 2.3 % Salary inflation N/A N/A 2.6 2.6 2.4 2.3 Pension inflation N/A N/A 3.1 3.1 2.1 1.9 The weighted average assumptions used to determine net periodic pension cost (credit) were as follows: Domestic Plan U.K. Plan International Plans 2022 2021 2020 2022 2021 2020 2022 2021 2020 Discount rate 2.9 % 2.6 % 3.2 % 1.9 % 1.3 % 2.1 % 2.2 % 1.7 % 2.0 % Expected return on plan assets 6.3 6.3 6.3 5.0 4.5 5.0 2.7 2.4 2.7 Salary inflation N/A N/A N/A 2.6 2.1 1.6 2.3 2.2 2.2 Pension inflation N/A N/A N/A 3.1 2.7 2.8 1.9 1.8 1.9 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, 2022 and 2021, the target asset allocation, as a percentage of total plan assets, for the Domestic Plan was 70 percent and 75 percent, respectively, in funds that invest in equity securities and 30 percent and 25 percent, respectively, in funds that invest in debt securities. As of December 31, 2022 and 2021, 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. 98 The following tables present the fair value hierarchy of total plan assets measured at fair value by asset category: December 31, 2022 Domestic Plan U.K. Plan International Plans (in millions) Level 1 Cash $ — $ 13 $ 12 Equity funds — — 3 Bond funds 6 — — Level 2 Equity funds — — 4 Bond funds — 35 6 Net asset value (1) Cash equivalents — 24 — Bond funds — 44 — Common collective trusts 265 — 35 Alternative investments — 111 — Other — 50 — $ 271 $ 277 $ 60 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 ____________ (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. 99 As of December 31, 2022, 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) 2023 $ 33 $ 13 $ 9 2024 26 13 4 2025 26 13 3 2026 25 14 3 2027 25 14 3 2028-2032 110 77 15 $ 245 $ 144 $ 37 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, 2022 and 2021, the multiple employer plan had combined plan assets of $ 294 million and $ 405 million, respectively, and a projected benefit obligation of $ 303 million and $ 395 million, respectively. Note 14: Share-Based Compensation We recognized share-based compensation expense of $ 162 million, $ 193 million and $ 97 million during the years ended December 31, 2022, 2021 and 2020, respective ly, which included amounts reimbursed by hotel owners, and the related tax benefit recognized was $ 48 million, $ 54 million and $ 35 million, 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. Further, in December 2020, we modified our then-outstanding performance shares in response to the COVID-19 pandemic to reward for results achieved prior to the pandemic and incentivize our recovery efforts, with a portion of the awards modified to vest based on continued service and the remaining portion of the awards to vest based on new performance measures. As a result of this modification, our share-based compensation expense for the years ended December 31, 2022, 2021 and 2020 includes incremental share-based compensation of $ 25 million, $ 70 million and $ 44 million, respectively. As of December 31, 2022, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 119 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, 2022, there were 11.4 million remaining shares authorized for awards 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, 2022 2021 2020 Number of shares granted (in thousands) 507 589 942 Weighted average grant date fair value per share $ 150.58 $ 123.13 $ 93.48 Aggregate intrinsic value of shares vested (in millions) $ 97 $ 94 $ 97 100 The following table summarizes the activity of our RSUs during the year ended December 31, 2022: Number of Shares Weighted Average Grant Date Fair Value per Share (in thousands) Outstanding as of December 31, 2021 1,246 $ 105.28 Granted 507 150.58 Vested ( 682 ) 99.63 Forfeited ( 58 ) 124.25 Outstanding as of December 31, 2022 1,013 130.68 Options The following table provides information about our option grants: Year Ended December 31, 2022 2021 2020 Number of options granted (in thousands) 318 361 755 Weighted average exercise price per share $ 150.67 $ 123.13 $ 93.33 Weighted average grant date fair value per share $ 51.15 $ 41.15 $ 21.47 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, 2022 2021 2020 Expected volatility (1) 33.28 % 33.13 % 23.69 % Dividend yield (2) 0.41 % — % 0.55 % Risk-free rate (3) 1.93 % 0.92 % 0.96 % 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 look back period that corresponds to the expected term of the option. (2) For options granted during the year ended December 31, 2020, dividend yield was estimated based on our historical quarterly dividends. 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. For the options granted during the year ended December 31, 2022, dividend yield was estimated based on the expectation, at the date of grant, of the resumption of a quarterly $ 0.15 per share dividend, which occurred in the second quarter of 2022. For option grants made during the years ended December 31, 2022 and 2020, the three month average stock price at the date of grant was also utilized in the dividend yield calculation. (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. The following table summarizes the activity of our options during the year ended December 31, 2022: Number of Shares Weighted Average Exercise Price per Share (in thousands) Outstanding as of December 31, 2021 2,803 $ 80.03 Granted 318 150.67 Exercised ( 100 ) 69.88 Outstanding as of December 31, 2022 (1) 3,021 87.61 Exercisable as of December 31, 2022 (2) 2,246 74.39 ____________ (1) The aggregate intrinsic value was $ 125 million and the weighted average remaining contractual term was 5.9 years. (2) The aggregate intrinsic value was $ 117 million and the weighted average remaining contractual term was 5.1 years. 101 Performance Shares As of December 31, 2022, we determined that all of the performance measures for the outstanding performance shares were probable of achievement, with the average of 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, 2022 2021 2020 (1) Number of shares granted (in thousands) 216 241 348 Weighted average grant date fair value per share $ 150.67 $ 123.13 $ 93.33 Aggregate intrinsic value of shares vested (in millions) $ 42 $ 36 $ 58 ____________ (1) In December 2020, 288,000 performance shares from the 2020 grant were modified with a modification date fair value per share of $ 102.95 . The following table summarizes the activity of our performance shares in aggregate for all of our performance measures during the year ended December 31, 2022, with the performance shares reflected at the target achievement percentage until completion of the performance period: Number of Shares Weighted Average Grant Date Fair Value per Share (in thousands) Outstanding as of December 31, 2021 848 $ 97.63 Granted 216 150.67 Performance achievement share adjustments (1) 163 83.11 Vested ( 496 ) 83.11 Forfeited ( 1 ) 127.69 Outstanding as of December 31, 2022 730 119.87 ____________ (1) Reflects the number of shares achieved above target, based on actual performance as determined at the completion of the respective three-year performance period. 102 Note 15: Earnings (Loss) Per Share The following table presents the calculation of basic and diluted earnings (loss) per share ("EPS"): Year Ended December 31, 2022 2021 2020 (in millions, except per share amounts) Basic EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ 1,255 $ 410 $ ( 715 ) Denominator: Weighted average shares outstanding 275 279 277 Basic EPS $ 4.56 $ 1.47 $ ( 2.58 ) Diluted EPS: Numerator: Net income (loss) attributable to Hilton stockholders $ 1,255 $ 410 $ ( 715 ) Denominator: Weighted average shares outstanding (1) 277 281 277 Diluted EPS (1) $ 4.53 $ 1.46 $ ( 2.58 ) ____________ (1) Certain shares related to share-based compensation were excluded from the calculation of diluted EPS because their effect would have been anti-dilutive under the treasury stock method, including less than 1 million shares for the years ended December 31, 2022 and 2021 and 4 million shares for the year ended December 31, 2020. Note 16: 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, 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 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 other comprehensive income (loss) ( 29 ) 79 31 81 Balance as of December 31, 2021 ( 540 ) ( 210 ) ( 29 ) ( 779 ) Other comprehensive income (loss) before reclassifications ( 9 ) ( 57 ) 114 48 Amounts reclassified from accumulated other comprehensive loss 1 8 16 25 Net other comprehensive income (loss) ( 8 ) ( 49 ) 130 73 Balance as of December 31, 2022 $ ( 548 ) $ ( 259 ) $ 101 $ ( 706 ) ____________ (1) Includes net investment hedge gains and intra-entity foreign currency transactions that are of a long-term investment nature. Amounts reclassified relate to the liquidation of investments in foreign entities which were recognized in our consolidated statements of operations in gain (loss) on foreign currency transactions during the years ended December 31, 2022 and 2020 and in loss on sales of assets, net during the year ended December 31, 2021. (2) Amounts reclassified relate 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, 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. 103 Note 17: 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. Revenues from this segment include: (i) management and franchise fees charged to third-party hotel owners; (ii) licensing fees from our strategic partners, including co-branded credit card providers, and HGV for the right to use our IP; and (iii) fees for managing hotels in our ownership segment. As of December 31, 2022, this segment included 778 managed hotels and 6,255 franchised hotels consisting of 1,096,115 total rooms. As of December 31, 2022, our ownership segment included 52 properties totaling 17,612 rooms. The segment comprised 45 hotels that we leased, two hotels that were each leased by a consolidated VIE and five hotels owned or leased by unconsolidated affiliates. In December 2022, one non-wholly owned consolidated hotel and one of our leased hotels exited our system, and, therefore, they are not included in the number of owned and leased hotels as of December 31, 2022, although the results of operations of the hotels are consolidated in our financial statements for the year ended December 31, 2022 for the period prior to their exit. As a result of the COVID-19 pandemic, the operations of certain of our hotels were suspended for some period of time. However, substantially all of the hotels in our management and franchise segment had re-opened by the end of 2021 and have remained open and operating since then. All of the hotels in our ownership segment that had suspended operations at some point in time 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 and other expenses, other revenues and other expenses from managed and franchised properties, depreciation and amortization expenses or general and administrative expenses, and does not include equity in earnings (losses) from unconsolidated affiliates. Our chief operating decision maker does not use assets by operating segment when assessing performance or making operating segment resource allocations. The following table presents revenues for our reportable segments, reconciled to consolidated amounts: Year Ended December 31, 2022 2021 2020 (in millions) Franchise and licensing fees $ 2,085 $ 1,508 $ 956 Base and other management fees (1) 338 203 144 Incentive management fees 196 98 38 Management and franchise 2,619 1,809 1,138 Ownership 1,076 598 421 Segment revenues 3,695 2,407 1,559 Amortization of contract acquisition costs ( 38 ) ( 32 ) ( 29 ) Other revenues 102 79 73 Direct reimbursements from managed and franchised properties (2) 2,441 1,503 1,375 Indirect reimbursements from managed and franchised properties (2) 2,596 1,841 1,332 Intersegment fees elimination (1) ( 23 ) ( 10 ) ( 3 ) Total revenues $ 8,773 $ 5,788 $ 4,307 ____________ (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 consolidated statements of operations. (2) Included in other revenues from managed and franchised properties in our consolidated statements of operations. 104 The following table presents operating income (loss) for each of our reportable segments, reconciled to consolidated income (loss) before income taxes: Year Ended December 31, 2022 2021 2020 (in millions) Management and franchise (1) $ 2,619 $ 1,809 $ 1,138 Ownership (1) 54 ( 91 ) ( 202 ) Segment operating income 2,673 1,718 936 Amortization of contract acquisition costs ( 38 ) ( 32 ) ( 29 ) Other revenues, less other expenses 42 34 13 Net other expenses from managed and franchised properties ( 39 ) ( 110 ) ( 397 ) Depreciation and amortization expenses ( 162 ) ( 188 ) ( 331 ) General and administrative expenses ( 382 ) ( 405 ) ( 311 ) Reorganization costs — — ( 41 ) Impairment losses — — ( 258 ) Loss on sales of assets, net — ( 7 ) — Operating income (loss) 2,094 1,010 ( 418 ) Interest expense ( 415 ) ( 397 ) ( 429 ) Gain (loss) on foreign currency transactions 5 ( 7 ) ( 27 ) Loss on debt extinguishments — ( 69 ) ( 48 ) Other non-operating income (loss), net 50 23 ( 2 ) Income (loss) before income taxes $ 1,734 $ 560 $ ( 924 ) ____________ (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 consolidated statements of operations. Total revenues by country were as follows: Year Ended December 31, 2022 2021 2020 (in millions) U.S. $ 6,947 $ 4,765 $ 3,593 All other (1) 1,826 1,023 714 $ 8,773 $ 5,788 $ 4,307 ____________ (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, 2022, 2021 and 2020. Note 18: 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, 2022, we had performance guarantees with expirations ranging from 2025 to 2043 and possible cash outlays totaling approximately $ 7 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 December 31, 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 currently or in the future will manage or franchise. 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. If we collect amounts in excess of amounts expended, we have a commitment to spend these amounts on the related programs. As of December 31, 2022 and 2021, amounts expended on behalf of these programs exceeded the amounts collected. 105 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, 2022 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows. 106 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.