Document
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 001-36243
Hilton Worldwide Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-4384691
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7930 Jones Branch Drive,
Suite 1100,
McLean,
VA
 
22102
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (703) 883-1000
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Common Stock, $0.01 par value per share
 
HLT
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐    
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of July 18, 2019 was 286,854,529.




HILTON WORLDWIDE HOLDINGS INC.
FORM 10-Q TABLE OF CONTENTS

 
 
Page No.
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
Signatures


1



PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
 
June 30,
 
December 31,
2019
2018
 
(unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
635

 
$
403

Restricted cash and cash equivalents
83

 
81

Accounts receivable, net of allowance for doubtful accounts of $44 and $42
1,190

 
1,150

Prepaid expenses
117

 
160

Other
190

 
189

Total current assets (variable interest entities  $92 and $90)
2,215

 
1,983

Intangibles and Other Assets:
 
 
 
Goodwill
5,157

 
5,160

Brands
4,874

 
4,869

Management and franchise contracts, net
817

 
872

Other intangible assets, net
400

 
415

Operating lease right-of-use assets
891

 

Property and equipment, net
418

 
367

Deferred income tax assets
146

 
90

Other
222

 
239

Total intangibles and other assets (variable interest entities  $186 and $178)
12,925

 
12,012

TOTAL ASSETS
$
15,140

 
$
13,995

LIABILITIES AND EQUITY (DEFICIT)
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
1,657

 
$
1,549

Current maturities of long-term debt
37

 
16

Current portion of deferred revenues
298

 
350

Current portion of liability for guest loyalty program
788

 
700

Total current liabilities (variable interest entities  $68 and $56)
2,780

 
2,615

Long-term debt
7,772

 
7,266

Operating lease liabilities
1,066

 

Deferred revenues
822

 
826

Deferred income tax liabilities
861

 
898

Liability for guest loyalty program
986

 
969

Other
876

 
863

Total liabilities (variable interest entities  $272 and $263)
15,163

 
13,437

Commitments and contingencies - see Note 14


 


Equity (Deficit):
 
 
 
Preferred stock, $0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of June 30, 2019 and December 31, 2018

 

Common stock, $0.01 par value; 10,000,000,000 authorized shares, 333,019,440 issued and 287,693,211 outstanding as of June 30, 2019 and 332,105,163 issued and 294,815,890 outstanding as of December 31, 2018
3

 
3

Treasury stock, at cost; 45,326,229 shares as of June 30, 2019 and 37,289,273 shares as of December 31, 2018
(3,304
)
 
(2,625
)
Additional paid-in capital
10,419

 
10,372

Accumulated deficit
(6,342
)
 
(6,417
)
Accumulated other comprehensive loss
(806
)
 
(782
)
Total Hilton stockholders' equity (deficit)
(30
)
 
551

Noncontrolling interests
7

 
7

Total equity (deficit)
(23
)
 
558

TOTAL LIABILITIES AND EQUITY (DEFICIT)
$
15,140

 
$
13,995



See notes to condensed consolidated financial statements.

2



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Revenues
 
 
 
 
 
 
 
Franchise and licensing fees
$
444

 
$
404

 
$
826

 
$
735

Base and other management fees
89

 
84

 
169

 
161

Incentive management fees
58

 
59

 
113

 
114

Owned and leased hotels
387

 
392

 
699

 
726

Other revenues
26

 
22

 
52

 
45

 
1,004

 
961

 
1,859

 
1,781

Other revenues from managed and franchised properties
1,480

 
1,330

 
2,829

 
2,584

Total revenues
2,484

 
2,291

 
4,688

 
4,365

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Owned and leased hotels
334

 
352

 
632

 
672

Depreciation and amortization
86

 
79

 
170

 
161

General and administrative
113

 
115

 
220

 
219

Other expenses
15

 
12

 
35

 
26

 
548

 
558

 
1,057

 
1,078

Other expenses from managed and franchised properties
1,458

 
1,327

 
2,841

 
2,602

Total expenses
2,006

 
1,885

 
3,898

 
3,680

 
 
 
 
 


 
 
Operating income
478

 
406

 
790

 
685

 
 
 
 
 
 
 
 
Interest expense
(101
)
 
(95
)
 
(199
)
 
(178
)
Loss on foreign currency transactions
(3
)
 
(12
)
 
(3
)
 
(1
)
Other non-operating income (loss), net
(12
)
 
(1
)
 
(8
)
 
13


 
 
 
 
 
 
 
Income before income taxes
362

 
298

 
580

 
519

 
 
 
 
 
 
 
 
Income tax expense
(101
)
 
(81
)
 
(160
)
 
(139
)
 
 
 
 
 
 
 
 
Net income
261

 
217

 
420

 
380

Net income attributable to noncontrolling interests
(1
)
 

 
(2
)
 
(2
)
Net income attributable to Hilton stockholders
$
260

 
$
217

 
$
418

 
$
378

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.90

 
$
0.72

 
$
1.43

 
$
1.22

Diluted
$
0.89

 
$
0.71

 
$
1.42

 
$
1.21

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.15

 
$
0.15

 
$
0.30

 
$
0.30



See notes to condensed consolidated financial statements.

3



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
Net income
$
261

 
$
217

 
$
420

 
$
380

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
 
 
 
 
Currency translation adjustment, net of tax of $9, $—, $1 and $1
15

 
(77
)
 
12

 
(45
)
Pension liability adjustment, net of tax of $—, $(1), $(1) and $(1)
2

 
2

 
4

 
3

Cash flow hedge adjustment, net of tax of $8, $(4), $13 and $(14)
(25
)
 
13

 
(40
)
 
41

Total other comprehensive loss
(8
)
 
(62
)
 
(24
)
 
(1
)
 
 
 
 
 
 
 
 
Comprehensive income
253

 
155

 
396

 
379

Comprehensive income attributable to noncontrolling interests
(1
)
 

 
(2
)
 
(2
)
Comprehensive income attributable to Hilton stockholders
$
252

 
$
155

 
$
394

 
$
377


See notes to condensed consolidated financial statements.

4



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Six Months Ended
 
June 30,
 
2019
 
2018
Operating Activities:
 
 
 
Net income
$
420

 
$
380

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Amortization of contract acquisition costs
14

 
14

Depreciation and amortization
170

 
161

Loss on foreign currency transactions
3

 
1

Share-based compensation
81

 
68

Deferred income taxes
1

 
(39
)
Contract acquisition costs
(43
)
 
(38
)
Working capital changes and other
4

 
(15
)
Net cash provided by operating activities
650

 
532

Investing Activities:
 
 
 
Capital expenditures for property and equipment
(46
)
 
(28
)
Capitalized software costs
(44
)
 
(38
)
Other
(5
)
 
(9
)
Net cash used in investing activities
(95
)
 
(75
)
Financing Activities:
 
 
 
Borrowings
1,795

 
1,650

Repayment of debt
(1,317
)
 
(672
)
Debt issuance costs
(27
)
 
(21
)
Dividends paid
(87
)
 
(92
)
Repurchases of common stock
(653
)
 
(1,439
)
Share-based compensation tax withholdings and other
(34
)
 
(42
)
Net cash used in financing activities
(323
)
 
(616
)
 
 
 
 
Effect of exchange rate changes on cash, restricted cash and cash equivalents
2

 
(6
)
Net increase (decrease) in cash, restricted cash and cash equivalents
234

 
(165
)
Cash, restricted cash and cash equivalents, beginning of period
484

 
670

Cash, restricted cash and cash equivalents, end of period
$
718

 
$
505

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid during the year:
 
 
 
Interest
$
190

 
$
149

Income taxes, net of refunds
157

 
149


See notes to condensed consolidated financial statements.

5



HILTON WORLDWIDE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

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 brands and intellectual property ("IP"). As of June 30, 2019, we managed, franchised, owned or leased 5,872 hotels and resorts, including timeshare properties, totaling 939,297 rooms in 114 countries and territories.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements for the three and six months ended June 30, 2019 and 2018 have been prepared in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") and are unaudited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with GAAP. 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, 2018. Certain prior year amounts in our condensed consolidated balance sheets have been reclassified to conform to current year presentation.

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.

Summary of Significant Accounting Policies

Our significant accounting policies are detailed 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, 2018. On January 1, 2019, we adopted the requirements of Accounting Standards Update ("ASU") No. 2016-02 ("ASU 2016-02"), Leases (Topic 842), and the significant accounting policies that changed as a result of the adoption are set forth below.

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 leasing arrangement upon modification of the contract. For a contract, in which we are a lessee, that contains fixed payments for both lease and non-lease components, we have elected to account for the components as a single lease component, as permitted.

At the commencement date of a lease, we recognize a lease liability for future fixed lease payments and a right-of-use ("ROU") asset representing our right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term. The lease term includes lessee options to extend the lease and periods occurring after a lessee early termination option, only to the extent it is reasonably certain that we will exercise such extension options and not exercise such early termination options, respectively. The future fixed lease payments are discounted using the rate implicit in the lease, if available, or our incremental borrowing rate. Our incremental borrowing rate is estimated on a portfolio basis and incorporates lease term, currency risk, credit risk and an adjustment for collateral. Upon adoption of ASU 2016-02, we elected to use the remaining lease term as of January 1, 2019 in our estimation of the applicable discount rate for leases that were in place at adoption. For the initial measurement of the lease liability for leases commencing after January 1, 2019, we use the discount rate as of the commencement date of the lease, incorporating the entire lease term. Additionally, we elected not to recognize leases with lease terms of 12 months or less at the commencement date in our consolidated balance sheets. Current maturities and long-term portions of operating lease liabilities are classified as accounts payable, accrued expenses and other and operating lease liabilities, respectively, and current maturities 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.

6



The ROU asset is measured at 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 and lease incentives. We evaluate the carrying value of ROU assets if there are indicators of impairment and review the recoverability of the related asset group. If the carrying value of the asset group is determined to not be recoverable and is in excess of the estimated fair value, we record an impairment loss in our consolidated statements of operations. ROU assets of operating leases are classified as operating lease right-of-use assets and ROU assets of finance leases are classified as property and equipment, net in our consolidated balance sheets.

Our operating leases require: (i) fixed lease payments, or minimum payments, as contractually stated in the lease agreement; (ii) variable lease payments, which, for our hotels, are generally based on a percentage of the underlying asset's revenues or profits, or are dependent on changes in an index; or (iii) lease payments equal to the greater of the fixed or variable lease payments. In addition, we may be required to pay some, or all, of the capital costs for furniture, equipment and leasehold improvements in a hotel property that we lease during the term of the lease. For operating leases, lease expense relating to fixed payments is recognized on a straight-line basis over the lease term, and lease expense relating to variable payments is expensed as incurred, with amounts recognized in owned and leased hotel expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statements of operations. For 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 expense and other expenses from managed and franchised properties in our consolidated statements of operations. The interest expense related to finance leases, including any variable lease payments, is recognized in interest expense in our consolidated statements of operations.

Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15 ("ASU 2018-15"), Intangibles – Goodwill and Other – Internal-use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns guidance for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with guidance for capitalizing implementation costs to develop or obtain internal-use software. Capitalized implementation costs will be amortized over the term of the arrangement and presented in the same line item in the statement of operations as the fees associated with the service contract. We elected, as permitted by the standard, to early adopt ASU 2018-05 on a prospective basis as of January 1, 2019. The adoption did not have a material effect on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases, including operating leases, to be recognized in the statement of financial position of lessees as ROU assets and lease liabilities, with certain practical expedients available. Subsequent to ASU 2016-02, the FASB issued related ASUs, including ASU No. 2018-11 ("ASU 2018-11"), Leases (Topic 842): Targeted Improvements, which provides for another transition method in addition to the modified retrospective approach required by ASU 2016-02. This option allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative adjustment to the opening balance of retained earnings in the period of adoption.

As described above, we adopted ASU 2016-02 on January 1, 2019 and applied the package of practical expedients included therein, as well as utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to January 1, 2019 remain unchanged and in accordance with Leases (Topic 840). On January 1, 2019, we recognized a $256 million cumulative adjustment to accumulated deficit, net of taxes of $81 million related to a decrease to our deferred tax liability, as a result of the impairment of ROU assets that occurred in periods prior to the adoption date.


7



Note 3: Revenues from Contracts with Customers

Contract Liabilities

The following table summarizes the activity of our contract liabilities, which are classified as a component of current and long-term deferred revenues, during the six months ended June 30, 2019:
 
(in millions)
Balance as of December 31, 2018
$
1,060

Cash received in advance and not recognized as revenue(1)
220

Revenue recognized(1)
(135
)
Other(2)
(92
)
Balance as of June 30, 2019
$
1,053

____________
(1) 
Primarily related to Hilton Honors, our guest loyalty program.
(2) 
Primarily the result of changes in estimated transaction prices for our performance obligations related to points issued under Hilton Honors, which had no effect on revenues.

We recognized revenues that were previously deferred as contract liabilities of $78 million and $56 million during the three months ended June 30, 2019 and 2018, respectively, and $116 million during the six months ended June 30, 2018.

Performance Obligations

As of June 30, 2019, we had $438 million of deferred revenues related to unsatisfied performance obligations related to Hilton Honors that will be recognized as revenues when the points are redeemed, which we estimate will occur over the next two years. Additionally, we had $615 million of deferred revenues related to application, initiation and licensing fees, which are expected to be recognized as revenues in future periods over the terms of the related contracts.

Note 4: Consolidated Variable Interest Entities

As of June 30, 2019 and December 31, 2018, we consolidated two variable interest entities ("VIEs") that lease hotel properties and, as of December 31, 2018, we also consolidated one VIE that is a management company. 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 their losses and the right to receive benefits that could be significant to them. The assets of our consolidated VIEs are only available to settle the obligations of the respective entities.

In June 2019, the VIE that is a management company, which we had previously consolidated, sold its assets. As a result of the sale, we deconsolidated $7 million of total assets and $3 million of total liabilities, as we no longer had the power to direct the activities that most significantly affect the VIE's economic performance. See Note 12: "Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss" for additional information.

Our condensed consolidated balance sheets included the assets and liabilities of the VIEs that we consolidated as of the respective periods, which primarily comprised the following:
 
June 30,
 
December 31,
 
2019
 
2018
 
(in millions)
Cash and cash equivalents
$
72

 
$
71

Property and equipment, net
73

 
68

Deferred income tax assets
51

 
53

Other non-current assets
61

 
58

Accounts payable, accrued expenses and other
52

 
41

Long-term debt(1)
204

 
205

Other long-term liabilities
15

 
15


____________
(1) 
Includes finance lease liabilities of $186 million and $187 million as of June 30, 2019 and December 31, 2018, respectively.

We did not provide any financial or other support to any VIEs that we were not previously contractually required to provide during the six months ended June 30, 2019 and 2018.

8



Note 5: Amortizing Intangible Assets

Amortizing intangible assets were as follows:
 
June 30, 2019
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
(in millions)
Management and franchise contracts:
 
 
 
 
 
Management and franchise contracts recorded at Merger(1)
$
2,232

 
$
(1,960
)
 
$
272

Contract acquisition costs
548

 
(108
)
 
440

Development commissions and other
122

 
(17
)
 
105

 
$
2,902

 
$
(2,085
)
 
$
817

 
 
 
 
 
 
Other intangible assets:
 
 
 
 
 
Leases(1)
$
287

 
$
(167
)
 
$
120

Capitalized software costs
547

 
(358
)
 
189

Hilton Honors(1)
338

 
(247
)
 
91

Other(1)
34

 
(34
)
 

 
$
1,206

 
$
(806
)
 
$
400


 
December 31, 2018
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
(in millions)
Management and franchise contracts:
 
 
 
 
 
Management and franchise contracts recorded at Merger(1)
$
2,228

 
$
(1,873
)
 
$
355

Contract acquisition costs
525

 
(101
)
 
424

Development commissions and other
108

 
(15
)
 
93

 
$
2,861

 
$
(1,989
)
 
$
872

 
 
 
 
 
 
Other intangible assets:
 
 
 
 
 
Leases(1)
$
288

 
$
(161
)
 
$
127

Capitalized software costs
503

 
(321
)
 
182

Hilton Honors(1)
338

 
(236
)
 
102

Other(1)
38

 
(34
)
 
4

 
$
1,167

 
$
(752
)
 
$
415

____________
(1) 
Represents intangible assets that were initially recorded at their fair value as part of the October 24, 2007 transaction whereby we became a wholly owned subsidiary of affiliates of The Blackstone Group L.P (the "Merger").

Amortization of our amortizing intangible assets was as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions)
Recognized in depreciation and amortization expense(1)
$
71

 
$
66

 
$
141

 
$
135

Recognized as a reduction of franchise and licensing fees and base and other management fees
7

 
7

 
14

 
14

____________
(1) 
Includes amortization expense of $51 million and $52 million for the three months ended June 30, 2019 and 2018, respectively, and $102 million and $103 million for the six months ended June 30, 2019 and 2018, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger.


9



We estimate future amortization of our amortizing intangible assets as of June 30, 2019 to be as follows:
 
Recognized in Depreciation and Amortization Expense
 
Recognized as a Reduction of Franchise and Licensing Fees and Base and Other Management Fees
Year
(in millions)
2019 (remaining)
$
141

 
$
13

2020
250

 
26

2021
110

 
25

2022
81

 
23

2023
51

 
23

Thereafter
144

 
330

 
$
777

 
$
440



Note 6: Debt

Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of June 30, 2019, were as follows:

June 30,
 
December 31,

2019
 
2018

(in millions)
Senior secured term loan facility with a rate of 4.15%, due 2026
$
2,619

 
$
3,119

Senior notes with a rate of 4.250%, due 2024
1,000

 
1,000

Senior notes with a rate of 4.625%, due 2025
900

 
900

Senior notes with a rate of 5.125%, due 2026
1,500

 
1,500

Senior notes with a rate of 4.875%, due 2027
600

 
600

Senior notes with a rate of 4.875%, due 2030
1,000

 

Finance lease liabilities with an average rate of 5.80%, due 2019 to 2030
260

 
225

Other debt with a rate of 3.08% due 2026
18

 
17


7,897

 
7,361

Less: unamortized deferred financing costs and discount
(88
)
 
(79
)
Less: current maturities of long-term debt(1)
(37
)
 
(16
)

$
7,772

 
$
7,266


____________
(1) 
Represents current maturities of finance lease liabilities.

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 Loans"). 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 subsidiaries.

In June 2019, we amended the Term Loans to extend the maturity date to June 2026 with a discount of 0.25 percent and also incurred $2 million of debt issuance costs. We also amended the Revolving Credit Facility to increase the borrowing capacity to $1.75 billion, $250 million of which is available in the form of letters of credit, and extended the maturity date to June 2024. In connection with this amendment, we incurred $7 million of debt issuance costs, which were included in other non-current assets in our condensed consolidated balance sheet as of June 30, 2019. As of June 30, 2019, we had $59 million of outstanding letters of credit, resulting in an available borrowing capacity under the Revolving Credit Facility of $1.69 billion. We are required to pay a commitment fee of 0.125 percent per annum under the Revolving Credit Facility in respect of the unused commitments thereunder.

In June 2019, we issued $1.0 billion aggregate principal amount of 4.875% Senior Notes due 2030 (the "2030 Senior Notes"), and incurred $13 million of debt issuance costs. Interest on the 2030 Senior Notes is payable semi-annually in arrears on January 15 and July 15 of each year, beginning January 2020. We used a portion of the net proceeds from the issuance of the 2030 Senior Notes to repay $500 million outstanding on our Term Loans and to repay $225 million outstanding under our Revolving Credit Facility. In connection with the repayment of the Term Loans, we recognized $8 million of fees and

10



unamortized deferred financing costs and discount, which were included in other non-operating income (loss), net, in our condensed consolidated statements of operations for the three and six months ended June 30, 2019.

The 4.250% Senior Notes due 2024 (the "2024 Senior Notes"), the 4.625% Senior Notes due 2025 (the "2025 Senior Notes"), the 5.125% Senior Notes due 2026 (the "2026 Senior Notes"), the 4.875% Senior Notes due 2027 (the "2027 Senior Notes") and the 2030 Senior Notes are guaranteed on a senior unsecured basis by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries that are themselves not issuers of the applicable series of senior notes. See Note 15: "Condensed Consolidating Guarantor Financial Information" for additional information.

The contractual maturities of our long-term debt as of June 30, 2019 were as follows:
Year
(in millions)
2019 (remaining)
$
19

2020
35

2021
28

2022
20

2023
21

Thereafter
7,774

 
$
7,897



Note 7: Fair Value Measurements

We did not elect the fair value measurement option for any of our financial assets or liabilities. The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below; the fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of June 30, 2019 and December 31, 2018:
 
June 30, 2019
 
 
 
Hierarchy Level
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
265

 
$

 
$
265

 
$

Restricted cash equivalents
19

 

 
19

 

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
7,531

 
5,149

 

 
2,624

Interest rate swaps
35

 

 
35

 


 
December 31, 2018
 
 
 
Hierarchy Level
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
87

 
$

 
$
87

 
$

Restricted cash equivalents
18

 

 
18

 

Interest rate swaps
16

 

 
16

 

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
7,040

 
3,809

 

 
3,039

____________
(1)
The carrying values include unamortized deferred financing costs and discount. The carrying values and fair values exclude finance lease liabilities and other debt.

We measure our interest rate swaps at fair value, which were estimated using a discounted cash flow analysis that reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs of similar instruments, including interest rate curves, as applicable. Our interest rate swaps are included in other non-current assets or other long-term liabilities in our condensed consolidated balance sheets depending on their fair value.


11



Note 8: 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 June 30, 2019, we leased 53 hotels under operating leases and six hotels under finance leases, two of which were the liabilities of consolidated VIEs and were non-recourse to us. Our hotel leases expire at various dates, with varying renewal and termination options.
 
Supplemental balance sheet information related to leases as of June 30, 2019 was as follows:
 
(dollars
 in millions)
Operating leases:
 
Operating lease right-of-use assets
$
891

Accounts payable, accrued expenses and other
131

Operating lease liabilities
1,066

Finance leases:
 
Property and equipment, net
$
57

Current maturities of long-term debt
37

Long-term debt
223

 
 
Weighted average remaining lease term:
 
Operating leases
13.0 years

Finance leases
8.9 years

 
 
Weighted average discount rate:
 
Operating leases
3.74
%
Finance leases
5.80
%


The components of lease expense were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2019
 
June 30, 2019
 
(in millions)
Operating lease expense for fixed payments
$
36

 
$
73

Finance lease expense:
 
 


Amortization of ROU assets
8

 
16

Interest on lease liabilities
3

 
7

Variable lease expense(1)
52

 
82

____________
(1) 
Includes amounts related to operating leases and interest payments on finance leases.

Lease expense for our operating leases for the year ended December 31, 2018 included $225 million of fixed lease expense and $142 million of variable lease expense.

Supplemental cash flow information related to leases for the six months ended June 30, 2019 was as follows:
 
(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
90

Financing cash flows from finance leases
21

ROU assets obtained in exchange for lease liabilities in non-cash transactions:
 
Operating leases
21

Finance leases
52





12



Our future minimum lease payments as of June 30, 2019 were as follows:
 
Operating
Leases
 
Finance
Leases
Year
(in millions)
2019 (remaining)
$
89

 
$
26

2020
175

 
49

2021
161

 
40

2022
137

 
31

2023
122

 
30

Thereafter
872

 
166

Total minimum lease payments
1,556

 
342

Less: imputed interest
(359
)
 
(82
)
Total lease liabilities
$
1,197

 
$
260



Note 9: 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 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 June 30, 2019, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2017 and foreign examinations of our income tax returns for tax years from 1996 through 2018.

Our total unrecognized tax benefits as of June 30, 2019 and December 31, 2018 were $323 million and $318 million, respectively. As of June 30, 2019 and December 31, 2018, we had accrued approximately $44 million and $40 million, respectively, for interest and penalties related to our unrecognized tax benefits in our condensed consolidated balance sheets. Included in the balances of unrecognized tax benefits as of June 30, 2019 and December 31, 2018 was $312 million and $310 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective income tax rate.

In April 2014, we received 30-day Letters from the IRS and the Revenue Agents Report ("RAR") for the 2006 and October 2007 tax years. We disagreed with several of the proposed adjustments in the RAR, filed a formal appeals protest with the IRS and did not make any tax payments related to this audit. The issues being protested in appeals relate to assertions by the IRS that: (i) certain foreign currency denominated intercompany loans from our foreign subsidiaries to certain U.S. subsidiaries should be recharacterized as equity for U.S. federal income tax purposes and constitute deemed dividends from such foreign subsidiaries to our U.S. subsidiaries; (ii) in calculating the amount of U.S. taxable income resulting from Hilton Honors, we should not reduce gross income by the estimated costs of future redemptions, but rather such costs would be deductible at the time the points are redeemed; and (iii) certain foreign currency denominated loans issued by one of our Luxembourg subsidiaries whose functional currency is the U.S. dollar ("USD"), should instead be treated as issued by one of our Belgian subsidiaries whose functional currency is the euro ("EUR"), and thus foreign currency gains and losses with respect to such loans should have been measured in EUR, instead of USD. In January 2016, we received a 30-day Letter from the IRS and the RAR for the December 2007 through 2010 tax years, which included proposed adjustments that reflect the carryover effect of the three protested issues from the 2006 through October 2007 tax years. These proposed adjustments are also being protested in appeals and formal appeals protests have been submitted. In April 2016, we requested a Technical Advice Memorandum ("TAM") from the IRS with respect to the treatment of the gains and losses recognized as a result of changes in foreign currency exchange rates on loans issued by our Luxembourg subsidiary. We received a taxpayer favorable TAM in October 2018 and this issue is no longer being pursued by the IRS for any of the open tax years. In September 2018, we received a 30-day Letter from the IRS and the RAR for the 2011 through 2013 tax years, which reflects proposed adjustments for the carryover effect of the two remaining protested issues from the 2006 through October 2007 tax years. The adjustments for the 2011 through 2013 tax years will also be protested in appeals and formal protests have been submitted. After receipt of the TAM relating to the Luxembourg subsidiary, the two remaining proposed adjustments sought by the IRS would result in additional U.S. federal tax owed of approximately $817 million, excluding interest and penalties and potential state income taxes. The portion of this amount related to Hilton Honors would result in a decrease to our future tax liability when the points

13



are redeemed. We disagree with the IRS's position on each of these assertions and intend to vigorously contest them. However, based on continuing appeals process discussions with the IRS, we believe that it is more likely than not that we will not recognize the full benefit related to certain of the issues being appealed. Accordingly, as of June 30, 2019, we had recorded $55 million of unrecognized tax benefits related to these issues.

Note 10: Share-Based Compensation

We grant time-vesting restricted stock units and restricted stock (collectively, "RSUs"), nonqualified stock options ("options") and performance-vesting RSUs ("performance shares") to our employees and deferred share units ("DSUs") to members of our board of directors. We recognized share-based compensation expense of $47 million and $40 million during the three months ended June 30, 2019 and 2018, respectively, and $81 million and $68 million during the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, unrecognized compensation costs for unvested awards was approximately $190 million, which are expected to be recognized over a weighted-average period of 1.9 years on a straight-line basis. As of June 30, 2019, there were 14.2 million shares of common stock available for future issuance under the Hilton 2017 Omnibus Incentive Plan, plus any shares subject to awards outstanding under our 2013 Omnibus Incentive Plan, which will become available for issuance under the Hilton 2017 Omnibus Incentive Plan if such outstanding awards expire or are terminated or are canceled or forfeited.

RSUs

During the six months ended June 30, 2019, we granted 1.0 million RSUs with a weighted average grant date fair value per share of $83.38, which generally vest in equal annual installments over two or three years from the date of grant.

Options

During the six months ended June 30, 2019, we granted 0.8 million options with a weighted average exercise price per share of $83.11, which 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 weighted average grant date fair value per share of the options granted during the six months ended June 30, 2019 was $21.08, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility(1)
23.51
%
Dividend yield(2)
0.81
%
Risk-free rate(3)
2.47
%
Expected term (in years)(4)
6.0

____________
(1) 
Estimated using historical movement of Hilton's stock price.
(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 lives.
(4) 
Estimated using the average of the vesting periods and the contractual term of the options.

As of June 30, 2019, 1.6 million options were exercisable.

Performance Shares

During the six months ended June 30, 2019, we granted 0.4 million performance shares with a weighted average grant date fair value per share of $83.11. The performance shares are settled at the end of the three-year performance period with: (i) 50 percent of the awards subject to achievement based on the compound annual growth rate ("CAGR") of the Company's earnings before interest expense, a provision for income taxes and depreciation and amortization ("EBITDA"), adjusted to exclude certain items ("Adjusted EBITDA"), referred to as EBITDA CAGR and (ii) 50 percent of the awards subject to achievement based on the Company’s free cash flow ("FCF") per share CAGR, referred to as FCF CAGR. The total number of performance shares that vest related to each performance measure is based on an achievement factor that ranges from a zero percent to 200 percent payout, with 100 percent being the target. As of June 30, 2019, we determined that the performance conditions for the performance shares are probable of achievement and we recognized compensation expense, for both our outstanding EBITDA CAGR and FCF CAGR performance shares, at the maximum achievement percentage for the 2017 grants, between target and maximum for the 2018 grants and at target for the 2019 grants.


14



Note 11: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS"):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
260

 
$
217

 
$
418

 
$
378

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
290

 
301

 
291

 
308

Basic EPS
$
0.90

 
$
0.72

 
$
1.43

 
$
1.22

 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
260

 
$
217

 
$
418

 
$
378

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
292

 
303

 
294

 
311

Diluted EPS
$
0.89

 
$
0.71

 
$
1.42

 
$
1.21



Less than 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three and six months ended June 30, 2019 and 2018 because their effect would have been anti-dilutive under the treasury stock method.

Note 12: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss

The following tables present the changes in the components of stockholders' equity (deficit) for the three and six months ended June 30, 2019 and 2018:
 
Three Months Ended June 30, 2019
 
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 March 31, 2019
292

 
$
3

 
$
(2,921
)
 
$
10,374

 
$
(6,558
)
 
$
(798
)
 
$
8

 
$
108

Net income

 

 

 

 
260

 

 
1

 
261

Other comprehensive loss

 

 

 

 

 
(8
)
 

 
(8
)
Dividends

 

 

 

 
(44
)
 

 

 
(44
)
Repurchases of common stock
(4
)
 

 
(383
)
 

 

 

 

 
(383
)
Share-based compensation

 

 

 
45

 

 

 

 
45

Deconsolidation of a VIE

 

 

 

 

 

 
(2
)
 
(2
)
Balance as of June 30, 2019
288

 
$
3

 
$
(3,304
)
 
$
10,419

 
$
(6,342
)
 
$
(806
)
 
$
7

 
$
(23
)


15



 
Three Months Ended June 30, 2018
 
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 March 31, 2018
317

 
$
3

 
$
(1,001
)
 
$
10,288

 
$
(6,868
)
 
$
(680
)
 
$
5

 
$
1,747

Net income

 

 

 

 
217

 

 

 
217

Other comprehensive loss

 

 

 

 

 
(62
)
 

 
(62
)
Dividends

 

 

 

 
(46
)
 

 

 
(46
)
Repurchases of common stock
(19
)
 

 
(1,329
)
 

 

 

 

 
(1,329
)
Share-based compensation

 

 

 
33

 

 

 

 
33

Balance as of June 30, 2018
298

 
$
3

 
$
(2,330
)
 
$
10,321

 
$
(6,697
)
 
$
(742
)
 
$
5

 
$
560



 
Six Months Ended June 30, 2019
 
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, 2018
295

 
$
3

 
$
(2,625
)
 
$
10,372

 
$
(6,417
)
 
$
(782
)
 
$
7

 
$
558

Net income

 

 

 

 
418

 

 
2

 
420

Other comprehensive loss

 

 

 

 

 
(24
)
 

 
(24
)
Dividends

 

 

 

 
(87
)
 

 

 
(87
)
Repurchases of common stock
(8
)
 

 
(679
)
 

 

 

 

 
(679
)
Share-based compensation
1

 

 

 
47

 

 

 

 
47

Cumulative effect of the adoption of ASU 2016-02

 

 

 

 
(256
)
 

 

 
(256
)
Deconsolidation of a VIE