Item 1. Financial Statements
Item 1. Financial Statements
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
March 31, December 31,
2023 2022
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents
$ 901 $ 1,209
Restricted cash and cash equivalents
77 77
Accounts receivable, net of allowance for credit losses of $ 121 and $ 117
1,298 1,327
Prepaid expenses 158 105
Other
127 152
Total current assets (variable interest entities – $ 46 and $ 43 )
2,561 2,870
Intangibles and Other Assets:
Goodwill
5,041 5,032
Brands
4,841 4,840
Management and franchise contracts, net 960 887
Other intangible assets, net 161 161
Operating lease right-of-use assets
661 662
Property and equipment, net
287 280
Deferred income tax assets
204 204
Other
495 576
Total intangibles and other assets (variable interest entities – $ 145 and $ 152 )
12,650 12,642
TOTAL ASSETS $ 15,211 $ 15,512
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, accrued expenses and other
$ 1,704 $ 1,790
Current maturities of long-term debt
35 39
Current portion of deferred revenues
444 433
Current portion of liability for guest loyalty program 1,207 1,110
Total current liabilities (variable interest entities – $ 41 and $ 45 )
3,390 3,372
Long-term debt 8,706 8,708
Operating lease liabilities 831 832
Deferred revenues
992 986
Deferred income tax liabilities 715 735
Liability for guest loyalty program 1,306 1,285
Other 684 692
Total liabilities (variable interest entities – $ 176 and $ 188 )
16,624 16,610
Commitments and contingencies – see Note 12
Equity (Deficit):
Common stock, $ 0.01 par value; 10,000,000,000 authorized shares, 265,439,134 outstanding as of March 31, 2023 and 267,860,301 outstanding as of December 31, 2022
3 3
Treasury stock, at cost; 68,402,352 shares as of March 31, 2023 and 65,217,085 shares as of December 31, 2022
( 6,489 ) ( 6,040 )
Additional paid-in capital
10,815 10,831
Accumulated deficit ( 5,025 ) ( 5,190 )
Accumulated other comprehensive loss
( 724 ) ( 706 )
Total Hilton stockholders' deficit
( 1,420 ) ( 1,102 )
Noncontrolling interests
7 4
Total deficit ( 1,413 ) ( 1,098 )
TOTAL LIABILITIES AND EQUITY (DEFICIT) $ 15,211 $ 15,512
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
Three Months Ended
March 31,
2023 2022
Revenues
Franchise and licensing fees $ 508 $ 413
Base and other management fees 80 55
Incentive management fees 65 34
Owned and leased hotels 248 150
Other revenues 35 18
936 670
Other revenues from managed and franchised properties
1,357 1,051
Total revenues 2,293 1,721
Expenses
Owned and leased hotels
251 185
Depreciation and amortization 37 44
General and administrative 91 91
Other expenses 21 11
400 331
Other expenses from managed and franchised properties
1,395 1,021
Total expenses 1,795 1,352
Operating income 498 369
Interest expense ( 116 ) ( 90 )
Loss on foreign currency transactions
— ( 4 )
Loss on investments in unconsolidated affiliate ( 92 ) —
Other non-operating income, net
12 16
Income before income taxes 302 291
Income tax expense
( 93 ) ( 80 )
Net income 209 211
Net loss (income) attributable to noncontrolling interests
( 3 ) 1
Net income attributable to Hilton stockholders $ 206 $ 212
Earnings per share:
Basic $ 0.77 $ 0.76
Diluted $ 0.77 $ 0.75
Cash dividends declared per share $ 0.15 $ —
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months Ended
March 31,
2023 2022
Net income $ 209 $ 211
Other comprehensive income (loss), net of tax benefit (expense):
Currency translation adjustment, net of tax of $( 3 ) and $ — (1)
( 6 ) ( 2 )
Pension liability adjustment, net of tax of $( 1 ) and $ — (1)
2 1
Cash flow hedge adjustment, net of tax of $ 4 and $( 20 )
( 14 ) 60
Total other comprehensive income (loss) ( 18 ) 59
Comprehensive income 191 270
Comprehensive loss (income) attributable to noncontrolling interests
( 3 ) 1
Comprehensive income attributable to Hilton stockholders
$ 188 $ 271
____________
(1) Amount was less than $1 million.
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Three Months Ended
March 31,
2023 2022
Operating Activities:
Net income $ 209 $ 211
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of contract acquisition costs 10 8
Depreciation and amortization expenses 37 44
Loss on foreign currency transactions — 4
Loss on investments in unconsolidated affiliate 92 —
Share-based compensation expense 33 37
Deferred income taxes ( 20 ) ( 3 )
Contract acquisition costs, net of refunds ( 105 ) ( 15 )
Working capital changes and other 74 ( 91 )
Net cash provided by operating activities 330 195
Investing Activities:
Capital expenditures for property and equipment
( 44 ) ( 4 )
Issuance of financing receivables ( 8 ) —
Undesignated derivative financial instruments ( 12 ) 12
Capitalized software costs ( 19 ) ( 10 )
Investments in unconsolidated affiliates ( 2 ) ( 20 )
Other — ( 4 )
Net cash used in investing activities ( 85 ) ( 26 )
Financing Activities:
Borrowings — 18
Repayment of debt ( 12 ) ( 13 )
Debt issuance costs ( 9 ) —
Dividends paid ( 41 ) —
Repurchases of common stock ( 450 ) ( 121 )
Share-based compensation tax withholdings ( 51 ) ( 55 )
Proceeds from share-based compensation 5 4
Settlements of interest rate swap with financing component 11 —
Net cash used in financing activities ( 547 ) ( 167 )
Effect of exchange rate changes on cash, restricted cash and cash equivalents ( 6 ) ( 4 )
Net decrease in cash, restricted cash and cash equivalents ( 308 ) ( 2 )
Cash, restricted cash and cash equivalents, beginning of period 1,286 1,512
Cash, restricted cash and cash equivalents, end of period $ 978 $ 1,510
Supplemental Disclosures:
Cash paid (received) during the period:
Interest $ 90 $ 78
Income tax refunds, net of payments ( 25 ) ( 44 )
See notes to condensed consolidated financial statements.
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HILTON WORLDWIDE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: Organization and Basis of Presentation
Organization
Hilton Worldwide Holdings Inc. (the "Parent," or together with its subsidiaries, "Hilton," "we," "us," "our" or the "Company"), a Delaware corporation, is one of the largest hospitality companies in the world and is engaged in managing, franchising, owning and leasing hotels and resorts, and licensing its intellectual property ("IP"), including brand names, trademarks and service marks. As of March 31, 2023, we managed, franchised, owned or leased 7,215 hotels and resorts, including timeshare properties, totaling 1,133,277 rooms in 122 countries and territories.
Basis of Presentation
The accompanying condensed consolidated financial statements for the three months ended March 31, 2023 and 2022 have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") and are unaudited. We have condensed or omitted certain disclosures normally included in annual financial statements presented in accordance with GAAP but that are not required for interim reporting purposes. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Additionally, interim results are not necessarily indicative of full year performance. In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions have been eliminated in consolidation.
Note 2: Revenues from Contracts with Customers
Contract Liabilities
The following table summarizes the activity of our contract liabilities, which are classified as components of current and long-term deferred revenues, during the three months ended March 31, 2023:
(in millions)
Balance as of December 31, 2022
$ 1,331
Cash received in advance and not recognized as revenue
148
Revenue recognized (1)
( 40 )
Other (2)
( 88 )
Balance as of March 31, 2023
$ 1,351
____________
(1) Primarily related to Hilton Honors, our guest loyalty program, including co-branded credit card arrangements.
(2) Represents the changes in estimated transaction prices for our performance obligations related to the issuance of Hilton Honors points, which had no effect on revenues .
Performance Obligations
As of March 31, 2023, we had deferred revenues for unsatisfied performance obligations consisting of: (i) $ 644 million related to Hilton Honors that will be recognized as revenue over approximately the next two years ; (ii) $ 684 million related to advance consideration received from hotel owners for application, initiation and other fees and certain indirect reimbursements; and (iii) $ 23 million related to other obligations. These performance obligations are recognized as revenue as discussed in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2022.
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Note 3: Consolidated Variable Interest Entities
As of March 31, 2023 and December 31, 2022, we consolidated two variable interest entities ("VIEs") that each lease one hotel property, both of which are located in Japan. We consolidate these VIEs since we are the primary beneficiary, having the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb losses and the right to receive benefits that could be significant to each of the VIEs individually. The assets of our consolidated VIEs are only available to settle the obligations of the respective entities, and the liabilities of the consolidated VIEs are non-recourse to us.
Our condensed consolidated balance sheets include the assets and liabilities of these entities, including the effect of foreign currency translation, which primarily comprised the following:
March 31, December 31,
2023 2022
(in millions)
Cash and cash equivalents $ 32 $ 29
Property and equipment, net 43 45
Deferred income tax assets 48 52
Other non-current assets 54 55
Accounts payable, accrued expenses and other 22 21
Long-term debt (1)(2)
142 152
____________
(1) Includes finance lease liabilities of $ 106 million and $ 115 million as of March 31, 2023 and December 31, 2022, respectively.
(2) Includes current maturities of $ 18 million and $ 22 million as of March 31, 2023 and December 31, 2022, respectively .
Note 4: Loss on Investments in Unconsolidated Affiliate
We strategically provide equity and debt financing to certain unconsolidated affiliates with an objective of supporting the growth of our network. The assets relating to these investments are classified as other current assets or other non-current assets in our condensed consolidated balance sheets based on the expected maturity of the respective investment.
In the current period, as a result of the continued rise in interest rates, one of our third-party unconsolidated affiliates (the "Fund"), which has underlying investments in hotels that we currently or in the future will manage or franchise, failed to comply with certain requirements of its debt agreements. As a result, as of March 31, 2023, we determined that: (i) our investment in the Fund was fully impaired and (ii) subordinated financing receivables due to us from the Fund within twelve months or less were uncollectible. As such, we recognized an other-than-temporary impairment loss on our investment of $ 44 million and credit losses of $ 48 million to fully reserve the financing receivables, such that their net carrying values were zero as of March 31, 2023. These losses were recognized in loss on investments in unconsolidated affiliate in our condensed consolidated statement of operations for the three months ended March 31, 2023. See Note 6: "Fair Value Measurements" for additional information.
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Note 5: Debt
Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of March 31, 2023, were as follows:
March 31, December 31,
2023 2022
(in millions)
Senior secured term loan facility with a rate of 6.64 %, 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 5.96 %, due 2023 to 2030 (2)
156 164
Other debt of consolidated VIEs with a weighted average rate of 1.12 %, due 2024 to 2029 (2)
36 37
8,811 8,820
Less: unamortized deferred financing costs and discount ( 70 ) ( 73 )
Less: current maturities of long-term debt (3)
( 35 ) ( 39 )
$ 8,706 $ 8,708
____________
(1) These notes are collectively referred to as the Senior Notes and are jointly and severally guaranteed on a senior unsecured basis by the Parent and substantially all of its direct and indirect wholly owned domestic restricted subsidiaries, other than Hilton Domestic Operating Company Inc. ("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 VIEs included in finance lease liabilities and other debt of consolidated VIEs as applicable; refer to Note 3: "Consolidated Variable Interest Entities" for additional information .
(3) Represents current maturities of finance lease liabilities and borrowings of consolidated VIEs.
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 "Term Loan"). The obligations of our senior secured credit facilities are unconditionally and irrevocably guaranteed by the Parent and substantially all of its direct and indirect wholly owned domestic restricted subsidiaries, except for HOC, the named borrower on the senior secured credit facilities. In January 2023, we amended the credit agreement governing our Revolving Credit Facility to increase the borrowing capacity from $ 1.75 billion 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 $ 9 million of debt issuance costs, which were recognized in other non-current assets in our condensed consolidated balance sheet. As of March 31, 2023, there were no borrowings outstanding and $ 60 million of letters of credit outstanding under the Revolving Credit Facility, resulting in an available borrowing capacity of $ 1,940 million.
Note 6: Fair Value Measurements
The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below:
March 31, 2023
Hierarchy Level
Carrying Value (1)
Level 1 Level 2 Level 3
(in millions)
Assets:
Interest rate swap $ 86 $ — $ 86 $ —
Liabilities:
Long-term debt (2)
8,619 5,503 — 2,619
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December 31, 2022
Hierarchy Level
Carrying Value (1)
Level 1 Level 2 Level 3
(in millions)
Assets:
Interest rate swap $ 108 $ — $ 108 $ —
Liabilities:
Long-term debt (2)
8,619 5,292 — 2,616
____________
(1) The fair values of cash equivalents and restricted cash equivalents approximate their carrying values due to their short-term maturities. The fair values of all other financial instruments not included in these tables are estimated to be equal to their carrying values.
(2) The carrying values 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 5: "Debt" for additional information.
We measure our interest rate swap at fair value, which is determined using a discounted cash flow analysis that reflects the contractual terms of the interest rate swap, including the period to maturity, and uses observable market-based inputs of similar instruments, including interest rate curves, as applicable.
During the three months ended March 31, 2023, we measured a financial asset, an equity method investment in the Fund, which derives its market value from the underlying hotel assets it owns, at fair value on a non-recurring basis. Given the Fund's failure to comply with its debt agreements in the current period, as discussed in Note 4: "Loss on Investments in Unconsolidated Affiliate," and the lack of an active market or observable inputs for the fair value of the Fund, we determined that our investment had no market value as of March 31, 2023 using Level 3 valuation inputs. As a result of the non-recurring fair value measurement, we recognized an other-than-temporary impairment loss of $ 44 million during the three months ended March 31, 2023.
Note 7: Income Taxes
At the end of each quarter, we estimate the effective income tax rate expected to be applied for the full year. The effective income tax rate is determined by the level and composition of income (loss) before income taxes, which is subject to federal, state, local and foreign income taxes.
Note 8: Share-Based Compensation
We recognized share-based compensation expense of $ 33 million and $ 37 million during the three months ended March 31, 2023 and 2022, respectively, which included amounts reimbursed by hotel owners.
Our share-based compensation primarily consists of awards that we grant to eligible employees under the Hilton 2017 Omnibus Incentive Plan (the "2017 Plan") and includes time-vesting restricted stock units ("RSUs"), nonqualified stock options ("options") and performance-vesting RSUs ("performance shares"). As of March 31, 2023, unrecognized compensation costs for unvested awards under the 2017 Plan were approximately $ 233 million, which are expected to be recognized over a weighted-average period of 1.9 years on a straight-line basis.
RSUs
During the three months ended March 31, 2023, we granted 588,000 RSUs with a grant date fair value per share of $ 146.19 , which vest in equal annual installments over two or three years from the date of grant.
Options
During the three months ended March 31, 2023, we granted 333,000 options with an exercise price per share of $ 146.19 , which vest in equal annual installments over three years from the date of grant and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.
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The grant date fair value per share of the options granted during the three months ended March 31, 2023 was $ 52.32 , which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility (1)
30.16 %
Dividend yield (2)
0.43 %
Risk-free rate (3)
4.01 %
Expected term (in years) (4)
6.0
____________
(1) Estimated using a blended approach of historical and implied volatility. Historical volatility is based on the historical movement of Hilton's stock price for a period that corresponds to the expected term of the options.
(2) Estimated based on the quarterly dividend and the three-month average stock price at the date of grant.
(3) Based on the yields of U.S. Department of Treasury instruments with similar expected terms at the date of grant.
(4) Estimated using the midpoint of the vesting period and the contractual term of the options.
Performance Shares
During the three months ended March 31, 2023, we granted 238,000 performance shares with a grant date fair value per share of $ 146.19 . We recognize compensation expense based on the total number of performance shares that are expected to vest three years from the date of grant, as determined by the projected achievement of each of the performance measures, which are estimated each reporting period and range from zero percent to 200 percent, with 100 percent being the target. As of March 31, 2023, 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 for the performance shares granted in 2021 and 2022 and at the target achievement percentage for the performance shares granted in 2023.
Note 9: Earnings Per Share
The following table presents the calculation of basic and diluted earnings per share ("EPS"):
Three Months Ended
March 31,
2023 2022
(in millions, except per share amounts)
Basic EPS:
Numerator:
Net income attributable to Hilton stockholders
$ 206 $ 212
Denominator:
Weighted average shares outstanding 266 279
Basic EPS $ 0.77 $ 0.76
Diluted EPS:
Numerator:
Net income attributable to Hilton stockholders
$ 206 $ 212
Denominator:
Weighted average shares outstanding (1)
269 282
Diluted EPS $ 0.77 $ 0.75
____________
(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 each of the three months ended March 31, 2023 and 2022.
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Note 10: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss
The following tables present the changes in the components of stockholders' equity (deficit):
Three Months Ended March 31, 2023
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of December 31, 2022 267.9 $ 3 $ ( 6,040 ) $ 10,831 $ ( 5,190 ) $ ( 706 ) $ 4 $ ( 1,098 )
Net income — — — — 206 — 3 209
Other comprehensive income
— — — — — ( 18 ) — ( 18 )
Dividends (1)
— — — — ( 41 ) — — ( 41 )
Repurchases of common stock (2)
( 3.2 ) — ( 449 ) — — — — ( 449 )
Share-based compensation
0.7 — — ( 16 ) — — — ( 16 )
Balance as of March 31, 2023 265.4 $ 3 $ ( 6,489 ) $ 10,815 $ ( 5,025 ) $ ( 724 ) $ 7 $ ( 1,413 )
Three Months Ended March 31, 2022
Equity (Deficit) Attributable to Hilton Stockholders
Treasury Stock Additional
Paid-in
Capital Accumulated Deficit Accumulated
Other
Comprehensive
Loss
Common Stock Noncontrolling
Interests
Shares Amount Total
(in millions)
Balance as of December 31, 2021 279.1 $ 3 $ ( 4,443 ) $ 10,720 $ ( 6,322 ) $ ( 779 ) $ 2 $ ( 819 )
Net income (loss) — — — — 212 — ( 1 ) 211
Other comprehensive income
— — — — — 59 — 59
Repurchases of common stock (2)
( 0.9 ) — ( 130 ) — — — — ( 130 )
Share-based compensation
0.8 — — ( 18 ) — — — ( 18 )
Balance as of March 31, 2022 279.0 $ 3 $ ( 4,573 ) $ 10,702 $ ( 6,110 ) $ ( 720 ) $ 1 $ ( 697 )
____________
(1) During the three months ended June 30, 2022, we resumed payment of regular quarterly cash dividends.
(2) During the three months ended March 31, 2022, we resumed share repurchases under our previously authorized stock repurchase program. Beginning January 1, 2023, amount includes excise tax as imposed by the Inflation Reduction Act of 2022.
The changes in the components of accumulated other comprehensive loss, net of taxes, were as follows:
Currency Translation Adjustment (1)
Pension Liability Adjustment (2)
Cash Flow Hedge Adjustment (3)
Total
(in millions)
Balance as of December 31, 2022 $ ( 548 ) $ ( 259 ) $ 101 $ ( 706 )
Other comprehensive loss before reclassifications
( 6 ) — ( 11 ) ( 17 )
Amounts reclassified from accumulated other comprehensive loss
— 2 ( 3 ) ( 1 )
Net current period other comprehensive income (loss)
( 6 ) 2 ( 14 ) ( 18 )
Balance as of March 31, 2023 $ ( 554 ) $ ( 257 ) $ 87 $ ( 724 )
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Currency Translation Adjustment (1)
Pension Liability Adjustment (2)
Cash Flow Hedge Adjustment (3)
Total
(in millions)
Balance as of December 31, 2021 $ ( 540 ) $ ( 210 ) $ ( 29 ) $ ( 779 )
Other comprehensive income (loss) before reclassifications
( 3 ) ( 1 ) 55 51
Amounts reclassified from accumulated other comprehensive loss
1 2 5 8
Net current period other comprehensive income (loss)
( 2 ) 1 60 59
Balance as of March 31, 2022 $ ( 542 ) $ ( 209 ) $ 31 $ ( 720 )
____________
(1) Includes net investment hedge gains and intra-entity foreign currency transactions that are of a long-term investment nature. Amount reclassified during the three months ended March 31, 2022 relates to the liquidation of an investment in a foreign entity and was recognized in loss on foreign currency transactions in our condensed consolidated statement of operations.
(2) Amounts reclassified relate to the amortization of prior service cost and amortization of net loss and were recognized in other non-operating income, net in our condensed consolidated statements of operations.
(3) Amounts reclassified were the result of hedging instruments, including: (a) interest rate swaps, inclusive of interest rate swaps that were dedesignated, with related amounts recognized in interest expense in our condensed consolidated statements of operations and (b) forward contracts that hedge our foreign currency denominated fees, with related amounts recognized in various revenue line items, as applicable, in our condensed consolidated statements of operations .
Note 11: Business Segments
We are a hospitality company with operations organized in two distinct operating segments: (i) management and franchise and (ii) ownership, each of which is reported as a segment based on (a) delivering a similar set of products and services and
(b) being managed separately given its distinct economic characteristics.
The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels that license our IP and where we provide other contracted services to third-party owners, but the day-to-day services of the hotels are operated or managed by someone other than us. 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 Hilton Grand Vacations Inc. ("HGV") for the right to use our IP; and (iii) fees for managing hotels in our ownership segment. As of March 31, 2023, this segment included 774 managed hotels and 6,308 franchised hotels consisting of 1,101,539 total rooms.
As of March 31, 2023, our ownership segment included 51 hotels totaling 17,485 rooms. The segment comprised 44 hotels that we leased, two hotels that were each leased by a consolidated VIE and five hotels owned or leased by unconsolidated affiliates.
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.
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The following table presents revenues for our reportable segments, reconciled to consolidated amounts:
Three Months Ended
March 31,
2023 2022
(in millions)
Franchise and licensing fees $ 513 $ 417
Base and other management fees (1)
89 61
Incentive management fees 65 34
Management and franchise 667 512
Ownership 248 150
Segment revenues 915 662
Amortization of contract acquisition costs ( 10 ) ( 8 )
Other revenues 35 18
Direct reimbursements from managed and franchised properties (2)
712 511
Indirect reimbursements from managed and franchised properties (2)
645 540
Intersegment fees elimination (1)
( 4 ) ( 2 )
Total revenues $ 2,293 $ 1,721
____________
(1) Includes management, royalty and IP fees charged to consolidated hotels in our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
(2) Included in other revenues from managed and franchised properties in our condensed consolidated statements of operations.
The following table presents operating income (loss) for each of our reportable segments, reconciled to consolidated income before income taxes:
Three Months Ended
March 31,
2023 2022
(in millions)
Management and franchise (1)
$ 667 $ 512
Ownership (1)
( 7 ) ( 37 )
Segment operating income 660 475
Amortization of contract acquisition costs ( 10 ) ( 8 )
Other revenues, less other expenses 14 7
Net other revenues (expenses) from managed and franchised properties
( 38 ) 30
Depreciation and amortization expenses ( 37 ) ( 44 )
General and administrative expenses ( 91 ) ( 91 )
Operating income 498 369
Interest expense ( 116 ) ( 90 )
Loss on foreign currency transactions — ( 4 )
Loss on investments in unconsolidated affiliate ( 92 ) —
Other non-operating income, net 12 16
Income before income taxes $ 302 $ 291
____________
(1) Includes management, royalty and IP fees charged to consolidated hotels in our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
Note 12: Commitments and Contingencies
In limited cases, we provide performance guarantees to certain owners of hotels that we operate under management contracts that obligate us to fund performance shortfalls if specified operating performance levels are not achieved. As of March 31, 2023, 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. Additionally, as of March 31, 2023, we had extended debt guarantees and letters of credit with expirations ranging from 2023 to 2031 and possible
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cash outlays totaling $ 124 million to owners of certain hotels that we currently or in the future will manage or franchise. These guarantees create variable interests in the ownership entities of the hotels, of which we are not the primary beneficiary.
We receive fees from managed and franchised properties that we are contractually required to use to operate our marketing, sales and brands programs on behalf of 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 March 31, 2023 and December 31, 2022, the amounts expended on behalf of these programs exceeded the amounts collected.
We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of March 31, 2023 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
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