filings.toolsItem 1. Financial Statements
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Item 1. Financial Statements
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
| September 30, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| (unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current Assets: | |||||||||||
| Cash and cash equivalents | $ | 698 | $ | 1,209 | |||||||
| Restricted cash and cash equivalents | 81 | 77 | |||||||||
| Accounts receivable, net of allowance for credit losses of $124 and $117 | 1,396 | 1,327 | |||||||||
| Prepaid expenses | 157 | 105 | |||||||||
| Other | 152 | 152 | |||||||||
| Total current assets (variable interest entities – $65 and $43) | 2,484 | 2,870 | |||||||||
| Intangibles and Other Assets: | |||||||||||
| Goodwill | 5,033 | 5,032 | |||||||||
| Brands | 4,831 | 4,840 | |||||||||
| Management and franchise contracts, net | 986 | 887 | |||||||||
| Other intangible assets, net | 167 | 161 | |||||||||
| Operating lease right-of-use assets | 645 | 662 | |||||||||
| Property and equipment, net | 305 | 280 | |||||||||
| Deferred income tax assets | 204 | 204 | |||||||||
| Other | 545 | 576 | |||||||||
| Total intangibles and other assets (variable interest entities – $110 and $152) | 12,716 | 12,642 | |||||||||
| TOTAL ASSETS | $ | 15,200 | $ | 15,512 | |||||||
| LIABILITIES AND EQUITY (DEFICIT) | |||||||||||
| Current Liabilities: | |||||||||||
| Accounts payable, accrued expenses and other | $ | 1,876 | $ | 1,790 | |||||||
| Current maturities of long-term debt | 37 | 39 | |||||||||
| Current portion of deferred revenues | 460 | 433 | |||||||||
| Current portion of liability for guest loyalty program | 1,188 | 1,110 | |||||||||
| Total current liabilities (variable interest entities – $45 and $45) | 3,561 | 3,372 | |||||||||
| Long-term debt | 8,682 | 8,708 | |||||||||
| Operating lease liabilities | 804 | 832 | |||||||||
| Deferred revenues | 1,098 | 986 | |||||||||
| Deferred income tax liabilities | 706 | 735 | |||||||||
| Liability for guest loyalty program | 1,411 | 1,285 | |||||||||
| Other | 691 | 692 | |||||||||
| Total liabilities (variable interest entities – $148 and $188) | 16,953 | 16,610 | |||||||||
| Commitments and contingencies – see Note 12 | |||||||||||
| Equity (Deficit): | |||||||||||
| Common stock, $0.01 par value; 10,000,000,000 authorized shares, 257,879,258 outstanding as of September 30, 2023 and 267,860,301 outstanding as of December 31, 2022 | 3 | 3 | |||||||||
| Treasury stock, at cost; 76,241,976 shares as of September 30, 2023 and 65,217,085 shares as of December 31, 2022 | (7,647) | (6,040) | |||||||||
| Additional paid-in capital | 10,925 | 10,831 | |||||||||
| Accumulated deficit | (4,316) | (5,190) | |||||||||
| Accumulated other comprehensive loss | (728) | (706) | |||||||||
| Total Hilton stockholders' deficit | (1,763) | (1,102) | |||||||||
| Noncontrolling interests | 10 | 4 | |||||||||
| Total deficit | (1,753) | (1,098) | |||||||||
| TOTAL LIABILITIES AND EQUITY (DEFICIT) | $ | 15,200 | $ | 15,512 |
See notes to condensed consolidated financial statements.
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Revenues | |||||||||||||||||||||||
| Franchise and licensing fees | $ | 643 | $ | 573 | $ | 1,769 | $ | 1,531 | |||||||||||||||
| Base and other management fees | 81 | 76 | 247 | 206 | |||||||||||||||||||
| Incentive management fees | 63 | 52 | 197 | 132 | |||||||||||||||||||
| Owned and leased hotels | 335 | 295 | 924 | 727 | |||||||||||||||||||
| Other revenues | 45 | 28 | 126 | 71 | |||||||||||||||||||
| 1,167 | 1,024 | 3,263 | 2,667 | ||||||||||||||||||||
| Other revenues from managed and franchised properties | 1,506 | 1,344 | 4,363 | 3,662 | |||||||||||||||||||
| Total revenues | 2,673 | 2,368 | 7,626 | 6,329 | |||||||||||||||||||
| Expenses | |||||||||||||||||||||||
| Owned and leased hotels | 301 | 263 | 849 | 705 | |||||||||||||||||||
| Depreciation and amortization | 40 | 39 | 114 | 123 | |||||||||||||||||||
| General and administrative | 96 | 93 | 298 | 287 | |||||||||||||||||||
| Other expenses | 26 | 13 | 80 | 35 | |||||||||||||||||||
| 463 | 408 | 1,341 | 1,150 | ||||||||||||||||||||
| Other expenses from managed and franchised properties | 1,557 | 1,337 | 4,460 | 3,589 | |||||||||||||||||||
| Total expenses | 2,020 | 1,745 | 5,801 | 4,739 | |||||||||||||||||||
| Operating income | 653 | 623 | 1,825 | 1,590 | |||||||||||||||||||
| Interest expense | (113) | (106) | (340) | (295) | |||||||||||||||||||
| Gain (loss) on foreign currency transactions | (7) | — | (13) | 4 | |||||||||||||||||||
| Loss on investments in unconsolidated affiliate | — | — | (92) | — | |||||||||||||||||||
| Other non-operating income, net | 15 | 10 | 38 | 32 | |||||||||||||||||||
| Income before income taxes | 548 | 527 | 1,418 | 1,331 | |||||||||||||||||||
| Income tax expense | (169) | (181) | (417) | (407) | |||||||||||||||||||
| Net income | 379 | 346 | 1,001 | 924 | |||||||||||||||||||
| Net loss (income) attributable to noncontrolling interests | (2) | 1 | (7) | 3 | |||||||||||||||||||
| Net income attributable to Hilton stockholders | $ | 377 | $ | 347 | $ | 994 | $ | 927 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 1.45 | $ | 1.27 | $ | 3.77 | $ | 3.35 | |||||||||||||||
| Diluted | $ | 1.44 | $ | 1.26 | $ | 3.74 | $ | 3.32 | |||||||||||||||
| Cash dividends declared per share | $ | 0.15 | $ | 0.15 | $ | 0.45 | $ | 0.30 |
See notes to condensed consolidated financial statements.
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| Net income | $ | 379 | $ | 346 | $ | 1,001 | $ | 924 | |||||||||||||||
| Other comprehensive income (loss), net of tax benefit (expense): | |||||||||||||||||||||||
| Currency translation adjustment, net of tax of $(2), $12, $(3) and $18 | (31) | (22) | (33) | (47) | |||||||||||||||||||
| Pension liability adjustment, net of tax of $(1), $—(1), $(2) and $(1) | 2 | 1 | 6 | 4 | |||||||||||||||||||
| Cash flow hedge adjustment, net of tax of $(1), $(17), $(1) and $(46) | 4 | 50 | 4 | 137 | |||||||||||||||||||
| Total other comprehensive income (loss) | (25) | 29 | (23) | 94 | |||||||||||||||||||
| Comprehensive income | 354 | 375 | 978 | 1,018 | |||||||||||||||||||
| Comprehensive loss (income) attributable to noncontrolling interests | (2) | 1 | (6) | 3 | |||||||||||||||||||
| Comprehensive income attributable to Hilton stockholders | $ | 352 | $ | 376 | $ | 972 | $ | 1,021 |
(1)Amount was less than $1 million.
See notes to condensed consolidated financial statements.
HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
| Nine Months Ended | |||||||||||
| September 30, | |||||||||||
| 2023 | 2022 | ||||||||||
| Operating Activities: | |||||||||||
| Net income | $ | 1,001 | $ | 924 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Amortization of contract acquisition costs | 32 | 28 | |||||||||
| Depreciation and amortization expenses | 114 | 123 | |||||||||
| Loss (gain) on foreign currency transactions | 13 | (4) | |||||||||
| Loss on investments in unconsolidated affiliate | 92 | — | |||||||||
| Share-based compensation expense | 133 | 126 | |||||||||
| Deferred income taxes | (38) | 54 | |||||||||
| Contract acquisition costs, net of refunds | (164) | (61) | |||||||||
| Change in deferred revenues | 140 | (133) | |||||||||
| Change in liability for guest loyalty program | 204 | 219 | |||||||||
| Working capital changes and other | (46) | (77) | |||||||||
| Net cash provided by operating activities | 1,481 | 1,199 | |||||||||
| Investing Activities: | |||||||||||
| Capital expenditures for property and equipment | (109) | (19) | |||||||||
| Issuance of financing receivables | (8) | (46) | |||||||||
| Undesignated derivative financial instruments | (28) | 65 | |||||||||
| Capitalized software costs | (68) | (43) | |||||||||
| Investments in unconsolidated affiliates | (15) | (53) | |||||||||
| Other | — | (2) | |||||||||
| Net cash used in investing activities | (228) | (98) | |||||||||
| Financing Activities: | |||||||||||
| Borrowings | 3 | 23 | |||||||||
| Repayment of debt | (40) | (35) | |||||||||
| Debt issuance costs | (9) | — | |||||||||
| Dividends paid | (120) | (82) | |||||||||
| Repurchases of common stock | (1,595) | (1,092) | |||||||||
| Share-based compensation tax withholdings | (53) | (56) | |||||||||
| Proceeds from share-based compensation | 32 | 16 | |||||||||
| Settlements of interest rate swap with financing component | 38 | (4) | |||||||||
| Net cash used in financing activities | (1,744) | (1,230) | |||||||||
| Effect of exchange rate changes on cash, restricted cash and cash equivalents | (16) | (21) | |||||||||
| Net decrease in cash, restricted cash and cash equivalents | (507) | (150) | |||||||||
| Cash, restricted cash and cash equivalents, beginning of period | 1,286 | 1,512 | |||||||||
| Cash, restricted cash and cash equivalents, end of period | $ | 779 | $ | 1,362 |
See notes to condensed consolidated financial statements. For supplemental disclosures, see Note 13: "Supplemental Disclosures of Cash Flow Information."
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.
Basis of Presentation
The accompanying condensed consolidated financial statements for the three and nine months ended September 30, 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; however, 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 nine months ended September 30, 2023:
| (in millions) | |||||
| Balance as of December 31, 2022 | $ | 1,331 | |||
| Cash received in advance and not recognized as revenue | 508 | ||||
| Revenue recognized(1) | (271) | ||||
| Other(2) | (75) | ||||
| Balance as of September 30, 2023 | $ | 1,493 |
(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 September 30, 2023, deferred revenues for unsatisfied performance obligations consisted of: (i) $761 million related to Hilton Honors that will be recognized as revenue over approximately the next two years; (ii) $713 million related to advance consideration received from hotel owners for application, initiation and other fees and certain indirect reimbursements; and (iii) $19 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.
Note 3: Consolidated Variable Interest Entities
As of September 30, 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:
| September 30, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Cash and cash equivalents | $ | 52 | $ | 29 | |||||||
| Property and equipment, net | 36 | 45 | |||||||||
| Deferred income tax assets | 33 | 52 | |||||||||
| Other non-current assets | 41 | 55 | |||||||||
| Accounts payable, accrued expenses and other | 25 | 21 | |||||||||
| Long-term debt(1)(2) | 112 | 152 |
(1)Includes finance lease liabilities of $86 million and $115 million as of September 30, 2023 and December 31, 2022, respectively.
(2)Includes current maturities of $18 million and $22 million as of September 30, 2023 and December 31, 2022, respectively. During the three months ended September 30, 2023, one of our consolidated VIEs made prepayments of JPY1.0 billion (approximately $7 million) on borrowings that were outstanding as of December 31, 2022 and had original maturity dates in 2029.
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 March 2023, as a result of the rise in market-based 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, we determined that: (i) our investment in the Fund was fully impaired and (ii) short-term subordinated financing receivables due to us from the Fund 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. These losses were recognized in loss on investments in unconsolidated affiliate in our condensed consolidated statement of operations for the nine months ended September 30, 2023. See Note 6: "Fair Value Measurements" for additional information.
Note 5: Debt
Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of September 30, 2023, were as follows:
| September 30, | December 31, | ||||||||||
| 2023 | 2022 | ||||||||||
| (in millions) | |||||||||||
| Senior secured term loan facility with a rate of 7.17%, 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 5.98%, due 2023 to 2030(2) | 138 | 164 | |||||||||
| Other debt of consolidated VIEs with a weighted average rate of 1.13%, due 2024 to 2029(2) | 26 | 37 | |||||||||
| 8,783 | 8,820 | ||||||||||
| Less: unamortized deferred financing costs and discount | (64) | (73) | |||||||||
| Less: current maturities of long-term debt(3) | (37) | (39) | |||||||||
| $ | 8,682 | $ | 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 are 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 under 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 of 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. No debt amounts were outstanding under the Revolving Credit Facility as of September 30, 2023, which had an available borrowing capacity of $1,940 million after considering $60 million of outstanding letters of credit.
Note 6: Fair Value Measurements
The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below:
| September 30, 2023 | |||||||||||||||||||||||
| Hierarchy Level | |||||||||||||||||||||||
| Carrying Value**(1)** | Level 1 | Level 2 | Level 3 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Assets: | |||||||||||||||||||||||
| Interest rate swap | $ | 110 | $ | — | $ | 110 | $ | — | |||||||||||||||
| Liabilities: | |||||||||||||||||||||||
| Long-term debt(2) | 8,619 | 5,281 | — | 2,623 |
| 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 nine months ended September 30, 2023, we measured a financial asset at fair value on a non-recurring basis and recognized an other-than-temporary impairment loss of $44 million. In March 2023, the financial asset, an equity method investment in the Fund, which derives its market value from the underlying hotel assets it owns, failed to comply with its debt agreements, as discussed in Note 4: "Loss on Investments in Unconsolidated Affiliate." Given the lack of an active market or observable inputs for the fair value of the Fund, we determined that at March 31, 2023 our investment had a fair value of zero using Level 3 valuation inputs.
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.
We are under regular and recurring audit by the Internal Revenue Service ("IRS"). The IRS previously proposed material increases to our income tax liability related to our Hilton Honors guest loyalty program, which we have resolved through settlement through the tax year ended December 31, 2018. We expect the Hilton Honors program to be audited for periods subsequent to 2018. The IRS may propose tax assessments similar to those which were resolved through the 2018 tax year, and the amounts of any such future proposed assessments may be material.
In October 2023, the U.S. Tax Court issued an opinion deciding that a third-party taxpayer was not entitled to apply the method of accounting provided for in Treasury Regulation Section 1.451-4 (the "Regulation") to its hotel loyalty program. We currently apply this method of accounting to our guest loyalty program for federal income tax purposes. Based on this decision, we are reassessing our uncertain tax positions in relation to our guest loyalty program. Under U.S. GAAP, we are required to assess and reflect the impact of a change in our assessment of our uncertain tax positions within the period that we become aware of new information, which, in this case, was the aforementioned ruling. Given that this decision was rendered after September 30, 2023, we will continue to assess this issue and reflect any changes in the fourth quarter of 2023 and future periods as applicable.
While we believe our facts and circumstances are distinguishable from those described in the decision, if we do not conclude that we are more-likely-than-not eligible to apply the Regulation to our guest loyalty program, our uncertain tax position reserves could increase by up to approximately $218 million, excluding interest. Because this issue concerns only the timing of taxable income and deductions, this potential increase in tax reserves would be materially offset by a corresponding increase in our deferred tax assets. Including interest on prior years potentially assessed under audit, income tax expense could increase by up to approximately $65 million in the period that we increase reserves.
In June 2023, we received a draft of proposed adjustments from the IRS regarding our 2016 transfer of certain IP to a foreign jurisdiction that would increase taxable income for the tax years under audit from 2016 through 2018. If the IRS's proposed adjustments are upheld, future periods beyond the years currently under audit would be similarly impacted. We disagree with the proposed adjustments, intend to vigorously contest them and are currently evaluating action, which could include litigation to dispute the adjustments. We previously recorded reserves of $73 million related to this matter. We
evaluated the amount of benefit more-likely-than-not to be realized related to this issue based on this draft notice, and we have determined that our existing reserves for unrecognized tax benefits accurately reflect the estimated benefit that we do not expect to realize related to this issue.
Note 8: Share-Based Compensation
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"). We recognized share-based compensation expense of $48 million and $42 million during the three months ended September 30, 2023 and 2022, respectively, and $133 million and $126 million during the nine months ended September 30, 2023 and 2022, respectively, which includes amounts reimbursed by hotel owners.
RSUs
During the nine months ended September 30, 2023, we granted 602,000 RSUs with a weighted average grant date fair value per share of $146.18, which vest in equal annual installments over two or three years from the date of grant.
Options
During the nine months ended September 30, 2023, we granted 341,000 options with a weighted average exercise price per share of $146.18, which vest in equal annual installments over three years from the date of grant and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.
The weighted average grant date fair value per share of the options granted during the nine months ended September 30, 2023 was $52.27, which was determined using the Black-Scholes-Merton option-pricing model with the following weighted average assumptions:
| Expected volatility(1) | 30.16 | % | |||
| Dividend yield(2) | 0.43 | % | |||
| Risk-free rate(3) | 4.00 | % | |||
| 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 terms of the options.
(2)Estimated based on the quarterly dividend and the three-month average stock price at the dates of grant.
(3)Based on the yields of U.S. Department of Treasury instruments with similar expected terms of the options at the dates of grant.
(4)Estimated using the midpoint of the vesting periods and the contractual terms of the options.
Performance Shares
During the nine months ended September 30, 2023, we granted 244,000 performance shares with a weighted average grant date fair value per share of $146.18, which vest three years from the date of grant based on the projected achievement of various performance measures. As of September 30, 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 | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions, except per share amounts) | |||||||||||||||||||||||
| Basic EPS: | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to Hilton stockholders | $ | 377 | $ | 347 | $ | 994 | $ | 927 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares outstanding | 260 | 273 | 264 | 277 | |||||||||||||||||||
| Basic EPS | $ | 1.45 | $ | 1.27 | $ | 3.77 | $ | 3.35 | |||||||||||||||
| Diluted EPS: | |||||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income attributable to Hilton stockholders | $ | 377 | $ | 347 | $ | 994 | $ | 927 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average shares outstanding(1) | 262 | 275 | 266 | 279 | |||||||||||||||||||
| Diluted EPS | $ | 1.44 | $ | 1.26 | $ | 3.74 | $ | 3.32 |
(1)Certain shares related to share-based compensation were excluded from the calculations of diluted EPS because their effect would have been anti-dilutive under the treasury stock method, including 1 million shares or less for all periods.
Note 10: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss
The following tables present the changes in the components of stockholders' equity (deficit):
| Three Months Ended September 30, 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 June 30, 2023 | 262.3 | $ | 3 | $ | (6,956) | $ | 10,879 | $ | (4,654) | $ | (703) | $ | 8 | $ | (1,423) | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | 377 | — | 2 | 379 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | — | (25) | — | (25) | |||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | (39) | — | — | (39) | |||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock(1) | (4.5) | — | (691) | — | — | — | — | (691) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 0.1 | — | — | 46 | — | — | — | 46 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | 257.9 | $ | 3 | $ | (7,647) | $ | 10,925 | $ | (4,316) | $ | (728) | $ | 10 | $ | (1,753) |
| Three Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity (Deficit) Attributable to Hilton Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||
| Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of June 30, 2022 | 275.5 | $ | 3 | $ | (5,048) | $ | 10,753 | $ | (5,783) | $ | (714) | $ | — | $ | (789) | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | 347 | — | (1) | 346 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 29 | — | 29 | |||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | (41) | — | — | (41) | |||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (4.0) | — | (497) | — | — | — | — | (497) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | — | — | — | 38 | — | — | — | 38 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 271.5 | $ | 3 | $ | (5,545) | $ | 10,791 | $ | (5,477) | $ | (685) | $ | (1) | $ | (914) |
| Nine Months Ended September 30, 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 | — | — | — | — | 994 | — | 7 | 1,001 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss(2) | — | — | — | — | — | (22) | (1) | (23) | |||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | (120) | — | — | (120) | |||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock(1) | (11.0) | — | (1,615) | — | — | — | — | (1,615) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 1.0 | — | 8 | 94 | — | — | — | 102 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2023 | 257.9 | $ | 3 | $ | (7,647) | $ | 10,925 | $ | (4,316) | $ | (728) | $ | 10 | $ | (1,753) |
| Nine Months Ended September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||
| Equity (Deficit) Attributable to Hilton Stockholders | |||||||||||||||||||||||||||||||||||||||||||||||
| Treasury Stock | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Loss | ||||||||||||||||||||||||||||||||||||||||||||
| Common Stock | Noncontrolling Interests | ||||||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Total | |||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||
| Balance as of December 31, 2021 | 279.1 | $ | 3 | $ | (4,443) | $ | 10,720 | $ | (6,322) | $ | (779) | $ | 2 | $ | (819) | ||||||||||||||||||||||||||||||||
| Net income (loss) | — | — | — | — | 927 | — | (3) | 924 | |||||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | — | 94 | — | 94 | |||||||||||||||||||||||||||||||||||||||
| Dividends | — | — | — | — | (82) | — | — | (82) | |||||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (8.5) | — | (1,107) | — | — | — | — | (1,107) | |||||||||||||||||||||||||||||||||||||||
| Share-based compensation | 0.9 | — | 5 | 71 | — | — | — | 76 | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 30, 2022 | 271.5 | $ | 3 | $ | (5,545) | $ | 10,791 | $ | (5,477) | $ | (685) | $ | (1) | $ | (914) |
(1)Beginning January 1, 2023, amount includes excise tax as imposed by the Inflation Reduction Act of 2022.
(2)Amount for noncontrolling interests relates to currency translation adjustments.
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 income (loss) before reclassifications | (32) | — | 31 | (1) | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | — | 6 | (27) | (21) | |||||||||||||||||||
| Net current period other comprehensive income (loss) | (32) | 6 | 4 | (22) | |||||||||||||||||||
| Balance as of September 30, 2023 | $ | (580) | $ | (253) | $ | 105 | $ | (728) |
| Currency Translation Adjustment**(1)** | Pension Liability Adjustment**(2)** | Cash Flow Hedge Adjustment**(3)** | Total | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Balance as of December 31, 2021 | $ | (540) | $ | (210) | $ | (29) | $ | (779) | |||||||||||||||
| Other comprehensive income (loss) before reclassifications | (48) | (2) | 121 | 71 | |||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive loss | 1 | 6 | 16 | 23 | |||||||||||||||||||
| Net current period other comprehensive income (loss) | (47) | 4 | 137 | 94 | |||||||||||||||||||
| Balance as of September 30, 2022 | $ | (587) | $ | (206) | $ | 108 | $ | (685) |
(1)Includes net investment hedge gains and intra-entity foreign currency transactions that are of a long-term investment nature. Amount reclassified during the nine months ended September 30, 2022 relates to the liquidation of an investment in a foreign entity and was recognized in gain 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. The ownership segment primarily derives revenues from nightly hotel room sales, food and beverage sales and other services at our consolidated owned and leased hotels.
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:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Franchise and licensing fees | $ | 647 | $ | 578 | $ | 1,782 | $ | 1,544 | |||||||||||||||
| Base and other management fees(1) | 94 | 88 | 283 | 235 | |||||||||||||||||||
| Incentive management fees | 63 | 52 | 197 | 132 | |||||||||||||||||||
| Management and franchise | 804 | 718 | 2,262 | 1,911 | |||||||||||||||||||
| Ownership | 335 | 295 | 924 | 727 | |||||||||||||||||||
| Segment revenues | 1,139 | 1,013 | 3,186 | 2,638 | |||||||||||||||||||
| Amortization of contract acquisition costs | (11) | (10) | (32) | (28) | |||||||||||||||||||
| Other revenues | 45 | 28 | 126 | 71 | |||||||||||||||||||
| Direct reimbursements from managed and franchised properties(2) | 722 | 643 | 2,167 | 1,764 | |||||||||||||||||||
| Indirect reimbursements from managed and franchised properties(2) | 784 | 701 | 2,196 | 1,898 | |||||||||||||||||||
| Intersegment fees elimination(1) | (6) | (7) | (17) | (14) | |||||||||||||||||||
| Total revenues | $ | 2,673 | $ | 2,368 | $ | 7,626 | $ | 6,329 |
(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 for each of our reportable segments, reconciled to consolidated income before income taxes:
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| September 30, | September 30, | ||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | ||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||
| Management and franchise(1) | $ | 804 | $ | 718 | $ | 2,262 | $ | 1,911 | |||||||||||||||
| Ownership(1) | 28 | 25 | 58 | 8 | |||||||||||||||||||
| Segment operating income | 832 | 743 | 2,320 | 1,919 | |||||||||||||||||||
| Amortization of contract acquisition costs | (11) | (10) | (32) | (28) | |||||||||||||||||||
| Other revenues, less other expenses | 19 | 15 | 46 | 36 | |||||||||||||||||||
| Net other revenues (expenses) from managed and franchised properties | (51) | 7 | (97) | 73 | |||||||||||||||||||
| Depreciation and amortization expenses | (40) | (39) | (114) | (123) | |||||||||||||||||||
| General and administrative expenses | (96) | (93) | (298) | (287) | |||||||||||||||||||
| Operating income | 653 | 623 | 1,825 | 1,590 | |||||||||||||||||||
| Interest expense | (113) | (106) | (340) | (295) | |||||||||||||||||||
| Gain (loss) on foreign currency transactions | (7) | — | (13) | 4 | |||||||||||||||||||
| Loss on investments in unconsolidated affiliate | — | — | (92) | — | |||||||||||||||||||
| Other non-operating income, net | 15 | 10 | 38 | 32 | |||||||||||||||||||
| Income before income taxes | $ | 548 | $ | 527 | $ | 1,418 | $ | 1,331 |
(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 September 30, 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 September 30, 2023, we had extended debt guarantees and letters of credit with expirations ranging from 2025 to 2031 and possible cash outlays totaling $122 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 September 30, 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 September 30, 2023 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Note 13: Supplemental Disclosures of Cash Flow Information
Cash interest paid included within operating activities in our condensed consolidated statements of cash flows was $345 million and $260 million during the nine months ended September 30, 2023 and 2022, respectively. These amounts exclude $38 million of cash receipts and $4 million of cash payments, respectively, related to settlements of our interest rate swap with a financing component, which are separately disclosed within financing activities in our condensed consolidated statements of cash flows.
Income tax payments, net of refunds received, were $349 million and $253 million for the nine months ended September 30, 2023 and 2022, respectively.
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