Quarterly Report — Form 10-Q — Sect. 13 / 15(d) – SEA’34 Filing Table of Contents
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35: R3 Condensed Consolidated Balance Sheets HTML 60K
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81: R4 Condensed Consolidated Statement of Operations HTML 109K
Statement
56: R5 Condensed Consolidated Statements of Comprehensive HTML 57K
Income
22: R6 Condensed Consolidated Statements of Comprehensive HTML 34K
Income (Parentheticals)
34: R7 Condensed Consolidated Statements of Cash Flows HTML 111K
84: R8 Organization HTML 28K
54: R9 Basis of Presentation and Summary of Significant HTML 43K
Accounting Policies
63: R10 Disposal HTML 28K
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41: R12 Consolidated Variable Interest Entities HTML 46K
11: R13 Amortizing Intangible Assets HTML 117K
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39: R20 Stockholders' Equity (Deficit) and Accumulated HTML 367K
Other Comprehensive Loss
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Information
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Accounting Policies (Policies)
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87: R27 Amortizing Intangible Assets (Tables) HTML 121K
38: R28 Debt (Tables) HTML 61K
30: R29 Fair Value Measurements (Tables) HTML 69K
15: R30 Leases (Tables) HTML 80K
44: R31 Share-Based Compensation (Tables) HTML 34K
71: R32 Earnings Per Share (Tables) HTML 64K
62: R33 Stockholders' Equity (Deficit) and Accumulated HTML 371K
Other Comprehensive Loss (Tables)
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Information (Tables)
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61: R37 Basis of Presentation and Summary of Significant HTML 31K
Accounting Policies Additional Information
(Details)
13: R38 Disposal (Details) HTML 30K
45: R39 Revenues from Contracts with Customers - Contract HTML 37K
Liabilities (Details)
25: R40 Revenues from Contracts with Customers - HTML 40K
Additional Information (Details)
32: R41 Consolidated Variable Interest Entities - Schedule HTML 57K
of Consolidated Variable Interest Entities
(Details)
85: R42 Consolidated Variable Interest Entities - HTML 38K
Additional Information (Details)
55: R43 Amortizing Intangible Assets - Schedule of Finite HTML 63K
Lived Intangible Assets (Details)
24: R44 Amortizing Intangible Assets - Amortization of HTML 37K
Amortizing Intangible Assets (Details)
31: R45 Amortizing Intangible Assets - Schedule of Future HTML 58K
Amortization (Details)
83: R46 Debt - Long-term Debt (Details) HTML 64K
53: R47 Debt - Additional Information (Details) HTML 67K
21: R48 Debt - Debt Maturities (Details) HTML 42K
33: R49 Fair Value Measurements (Details) HTML 49K
47: R50 Leases Supplemental Balance Sheet Information HTML 48K
Related to Leases (Details)
16: R51 Leases Components of Lease Expense (Details) HTML 36K
68: R52 Leases Components of Lease Expense 2018 (Details) HTML 33K
76: R53 Leases Supplemental Cash Flow Information Related HTML 35K
to Leases (Details)
48: R54 Leases Future Minimum Lease Payments (Details) HTML 64K
17: R55 Leases Additional Information (Details) HTML 30K
69: R56 Income Taxes - Additional Information (Details) HTML 37K
77: R57 Share-Based Compensation - Schedule of Stock HTML 39K
Options Valuation Assumptions (Details)
46: R58 Share-Based Compensation - Additional Information HTML 86K
(Details)
18: R59 Earnings Per Share (Details) HTML 52K
50: R60 Stockholders' Equity (Deficit) and Accumulated HTML 115K
Other Comprehensive Loss - Schedule of
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79: R61 Stockholders' Equity (Deficit) and Accumulated HTML 60K
Other Comprehensive Loss - Schedule of Accumulated
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Other Comprehensive Loss - Reclassifications out
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Other Comprehensive Loss - Additional Information
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51: R64 Business Segments - Hotel Properties by Segment HTML 47K
(Detail)
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Segment Amounts to Consolidated Amounts (Detail)
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Operating Income to Income Before Income Taxes
(Detail)
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(Detail)
52: R68 Business Segments - Schedule of Capital HTML 32K
Expenditures by Segment (Detail)
78: R69 Commitments and Contingencies (Details) HTML 56K
75: R70 Condensed Consolidating Guarantor Financial HTML 280K
Information - Condensed Balance Sheet (Details)
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Registrant’s telephone number, including area code: (i703) i883-1000
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
iCommon
Stock, $0.01 par value per share
iHLT
iNew 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. iYes☒ 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). iYes☒ 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:
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting
i☐
Emerging
growth company
i☐
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 i☐ No ☒
The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of October 17, 2019 was i282,162,971.
Total
intangibles and other assets (variable interest entities – $i182 and $i178)
i12,812
i12,012
TOTAL
ASSETS
$
i15,067
$
i13,995
LIABILITIES
AND EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, accrued expenses and other
$
i1,784
$
i1,549
Current
maturities of long-term debt
i38
i16
Current
portion of deferred revenues
i290
i350
Current
portion of liability for guest loyalty program
i788
i700
Total
current liabilities (variable interest entities – $i74 and $i56)
i2,900
i2,615
Long-term
debt
i7,767
i7,266
Operating
lease liabilities
i1,004
i—
Deferred
revenues
i834
i826
Deferred
income tax liabilities
i873
i898
Liability
for guest loyalty program
i1,004
i969
Other
i884
i863
Total
liabilities (variable interest entities – $i275 and $i263)
i15,266
i13,437
Commitments
and contingencies - see Note 15
i
i
Equity
(Deficit):
Preferred stock, $i0.01 par value; i3,000,000,000
authorized shares, none issued or outstanding as of September 30, 2019 and December 31, 2018
i—
i—
Common
stock, $i0.01 par value; i10,000,000,000 authorized shares, i333,095,427
issued and i283,310,197 outstanding as of September 30, 2019 and i332,105,163 issued and i294,815,890
outstanding as of December 31, 2018
Share-based
compensation tax withholdings and other
(i31)
(i42)
Other
i—
(i4)
Net
cash used in financing activities
(i808)
(i790)
Effect
of exchange rate changes on cash, restricted cash and cash equivalents
(i2)
(i14)
Net
increase in cash, restricted cash and cash equivalents
i325
i30
Cash,
restricted cash and cash equivalents, beginning of period
i484
i670
Cash,
restricted cash and cash equivalents, end of period
$
i809
$
i700
Supplemental
Disclosures:
Cash paid during the year:
Interest
$
i248
$
i208
Income
taxes, net of refunds
i238
i230
See
notes to condensed consolidated financial statements.
5
HILTON WORLDWIDE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note 1: iOrganization
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 September 30, 2019, we managed, franchised, owned or leased i5,980
hotels and resorts, including timeshare properties, totaling i954,855 rooms in i117 countries and territories.
Note
2: iBasis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements for the three and nine months ended September 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.
i
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
6
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.
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, during the term of our hotel leases, we may be required to pay some, or all, of the capital costs for furniture, equipment and leasehold improvements in the hotel property. For operating leases, lease expense relating to fixed payments is recognized on a straight-line basis over the lease term, and lease expense related to variable payments is expensed as incurred, with amounts recognized in owned and leased 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.
i
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 2018-15 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 $i256 million cumulative adjustment to accumulated deficit, net of taxes of $i81
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.
/
Note 3: iDisposal
In
September 2019, we completed the sale of the Hilton Odawara Resort & Spa ("Hilton Odawara") for a price of i13 billion Japanese yen (equivalent to $i122 million as of the closing date)
and subsequently entered into a 30-year management contract with the purchaser of the hotel. As a result of the sale, we recognized a pre-tax gain of $ii81/
million included in gain on sale of assets, net in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019.
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 nine months ended September
30, 2019:
(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 $i62 million and$i33 million during the three months ended September 30, 2019 and 2018, respectively, and $i149
million during the nine months ended September 30, 2018.
Performance Obligations
As of September 30, 2019, we had $i442 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 itwo years. Additionally, we had $i625 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 5: iConsolidated Variable Interest Entities
As of September 30, 2019
and December 31, 2018, we consolidated iitwo/
variable interest entities ("VIEs") that lease hotel properties and, as of December 31, 2018, we also consolidated ione 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 $i7 million of total assets and $i3
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 13: "Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss" for additional information.
i
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:
We did not provide any financial or other support to any consolidated VIEs that we were not previously contractually required to provide during the nine months ended September 30, 2019 and 2018.
(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 Inc. (formerly known as The Blackstone Group L.P.) (the "Merger").
/
9
i
Amortization
of our amortizing intangible assets was as follows:
Recognized in depreciation
and amortization expense(1)
$
i71
$
i67
$
i212
$
i202
Recognized
as a reduction of franchise and licensing fees and base and other management fees
i7
i6
i21
i20
____________
(1)Includes
amortization expense of $ii50/
million for the three months ended September 30, 2019 and 2018, and $i152 million and $i153
million for the nine months ended September 30, 2019 and 2018, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger.
/
i
We estimate future amortization of our
amortizing intangible assets as of September 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)
$
i73
$
i7
2020
i264
i27
2021
i115
i26
2022
i93
i24
2023
i50
i23
Thereafter
i144
i352
$
i739
$
i459
/
Note
7: iDebt
i
Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of September 30, 2019,
were as follows:
Senior secured
term loan facility with a rate of i3.77%, due 2026
$
i2,619
$
i3,119
Senior
notes with a rate of i4.250%, due 2024
i1,000
i1,000
Senior
notes with a rate of i4.625%, due 2025
i900
i900
Senior
notes with a rate of i5.125%, due 2026
i1,500
i1,500
Senior
notes with a rate of i4.875%, due 2027
i600
i600
Senior
notes with a rate of i4.875%, due 2030
i1,000
i—
Finance
lease liabilities with a weighted average rate of i5.77%, due 2019 to 2030
i255
i225
Other
debt with a rate of i3.08% due 2026
i17
i17
i7,891
i7,361
Less:
unamortized deferred financing costs and discount
(i86)
(i79)
Less:
current maturities of long-term debt(1)
(i38)
(i16)
$
i7,767
$
i7,266
____________
(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.
10
In June
2019, we amended the Term Loans to extend the maturity date to June 2026 with a discount of ii0.25/ percent.
In June 2019, we also amended the Revolving Credit Facility to increase the borrowing capacity to $i1.75 billion, $i250
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 $i7 million of debt issuance costs, which were included in other non-current assets in our condensed consolidated balance sheet as of September 30, 2019. As of September 30, 2019, we had $i59
million of outstanding letters of credit, resulting in an available borrowing capacity under the Revolving Credit Facility of $i1.69 billion. We are required to pay a commitment fee of i0.125
percent per annum under the Revolving Credit Facility in respect of the unused commitments thereunder.
In June 2019, we issued $i1.0 billion aggregate principal amount of i4.875%
Senior Notes due 2030 (the "2030 Senior Notes") and incurred $i15 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 $i500
million outstanding on our Term Loans and to repay $i225 million outstanding under our Revolving Credit Facility. In connection with the amendment and the repayment of the Term Loans, we recognized $i10
million of fees and unamortized deferred financing costs and discount, which were included in other non-operating income, net in our condensed consolidated statement of operations for the nine months ended September 30, 2019.
The i4.250% Senior Notes due 2024 (the "2024 Senior Notes"), the i4.625%
Senior Notes due 2025 (the "2025 Senior Notes"), the i5.125% Senior Notes due 2026 (the "2026 Senior Notes"), the i4.875% 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 16: "Condensed Consolidating Guarantor Financial Information" for additional information.
i
The contractual maturities of our long-term debt as of September 30,
2019 were as follows:
Year
(in millions)
2019 (remaining)
$
i10
2020
i37
2021
i30
2022
i21
2023
i20
Thereafter
i7,773
$
i7,891
/
11
Note
8: iFair Value Measurements
We did not elect the fair value measurement option for any of our financial assets or liabilities. iThe
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 September 30, 2019 and December 31, 2018:
(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 as of the balance sheet date.
Note 9: iLeases
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 September 30, 2019, we leased i52 hotels under operating leases and isix
hotels under finance leases, itwo 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.
12
i
Supplemental
balance sheet information related to leases as of September 30, 2019 was as follows:
(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 $i225 million of fixed lease expense and $i142
million of variable lease expense.
i
Supplemental cash flow information related to leases for the nine months ended September 30, 2019 was as follows:
(in millions)
Cash
paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
$
i130
Financing cash flows from finance leases
i32
ROU
assets obtained in exchange for lease liabilities in non-cash transactions:
Operating leases
i21
Finance leases
i59
/
13
i
Our
future minimum lease payments as of September 30, 2019 were as follows:
Operating Leases
Finance Leases
Year
(in millions)
2019 (remaining)
$
i43
$
i14
2020
i170
i51
2021
i160
i42
2022
i133
i32
2023
i118
i30
Thereafter
i846
i164
Total
minimum lease payments
i1,470
i333
Less:
imputed interest
(i338)
(i78)
Total
lease liabilities
$
i1,132
$
i255
/
Note
10: iIncome 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 September 30, 2019, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2018 and foreign examinations of our income tax returns for tax years from 1996 through 2018.
Our total unrecognized tax benefits as of September
30, 2019 and December 31, 2018 were $i330 million and $i318 million, respectively. As of September 30,
2019 and December 31, 2018, we had accrued approximately $i46 million and $i40
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 September 30, 2019 and December 31, 2018 was $i318 million and $i310
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 $i817 million, excluding interest and penalties and potential state
income
14
taxes. The portion of this amount related to Hilton Honors would result in a decrease to our future tax liability when the points 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 September 30, 2019, we had recorded $i56
million of unrecognized tax benefits related to these issues.
Note 11: iShare-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 $i42 million and $i35
million during the three months ended September 30, 2019 and 2018, respectively, and $i123 million and $i103
million during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, unrecognized compensation costs for unvested awards was approximately $i153 million, which are expected to be recognized over a weighted-average period of i1.8
years on a straight-line basis. As of September 30, 2019, there were i14.2 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 nine months ended September 30, 2019, we granted i1.0 million RSUs with a weighted average grant date fair value per share of $i83.41,
which generally vest in equal annual installments over two or ithree years from the date of grant.
Options
During the nine months ended September 30, 2019, we granted i0.8
million options with a weighted average exercise price per share of $i83.11, which vest over ithree
years from the date of grant in equal annual installments and terminate i10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.
i
The
weighted average grant date fair value per share of the options granted during the nine months ended September 30, 2019 was $i21.08, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected
volatility(1)
i23.51
%
Dividend yield(2)
i0.81
%
Risk-free
rate(3)
i2.47
%
Expected term (in years)(4)
i6.0
____________
(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.
During the nine months ended September 30, 2019, we granted i0.4 million performance shares with a weighted average grant date fair value per share
of $i83.11. The performance shares are settled at the end of the three-year performance period with: (i) i50
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) i50 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 izero percent to i200
percent payout, with i100 percent being the target. As of September 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 and 2018 performance shares and at target for
the 2019 performance shares.
15
Note 12: iEarnings Per Share
i
The
following table presents the calculation of basic and diluted earnings per share ("EPS"):
iiiiApproximately
1 million/// share-based compensation awards were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2019 and 2018 because their effect would have been anti-dilutive under the treasury stock method.
Note 13: iStockholders'
Equity (Deficit) and Accumulated Other Comprehensive Loss
i
The following tables present the changes in the components of stockholders' equity (deficit) for the three and nine months ended September 30, 2019 and 2018:
(1)Includes
net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature.
/
18
i
The following
table presents additional information about reclassifications out of accumulated other comprehensive loss; amounts in parentheses indicate losses in our condensed consolidated statements of operations:
Total
cash flow hedge adjustment reclassifications for the period,
net of taxes
i3
i8
Total
reclassifications for the period, net of taxes
$
i1
$
i1
____________
(1)Includes
a gain on the related net investment hedge for one of the foreign entities. Reclassified to gain (loss) on foreign currency transactions in our condensed consolidated statements of operations. The related tax benefit reclassified to income tax expense in our condensed consolidated statements of operations was iiless
than $1 million/.
(2)Reclassified to other non-operating income (loss), net in our condensed consolidated statements of operations.
(3)Reclassified to income tax expense in our condensed consolidated statements of operations.
(4)Reclassified to interest expense in our condensed consolidated statements of operations.
(5)Reclassified to franchise and licensing fees and base and other management fees in our condensed consolidated statements of operations.
/
As
of September 30, 2019, approximately $i959 million remained available for share repurchases under our $i3.5 billion
stock repurchase program.
Note 14: iBusiness Segments
We are a hospitality company with operations organized in itwo
distinct operating segments: (i) management and franchise and (ii) ownership. These segments are managed and reported separately because of their 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 operated or managed by someone other than us. As of September 30, 2019, this segment included i706 managed hotels and i5,154
franchised hotels consisting of i925,458 total rooms. This segment also earns licensing fees from Hilton Grand Vacations and co-brand credit card arrangements for the exclusive right to use certain Hilton marks and IP, as well as fees for managing properties in our ownership segment.
As of September 30, 2019, the ownership segment included i65
properties totaling i20,481 rooms, comprising i57 hotels that we wholly owned or leased, ione
hotel owned by a consolidated non-wholly owned entity, itwo hotels leased by consolidated VIEs and ifive hotels owned
or leased by unconsolidated affiliates.
The performance of our operating segments is evaluated primarily on operating income, without allocating other revenues and expenses or general and administrative expenses.
19
i
The
following table presents revenues for our reportable segments, reconciled to consolidated amounts:
Direct
reimbursements from managed and franchised properties(2)
i770
i710
i2,334
i2,139
Indirect
reimbursements from managed and franchised properties(2)
i664
i599
i1,929
i1,754
Intersegment
fees elimination(1)
(i12)
(i11)
(i31)
(i30)
Total
revenues
$
i2,395
$
i2,253
$
i7,083
$
i6,618
____________
(1)Includes
management, royalty and IP fees charged to 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.
/
i
The
following table presents operating income for our reportable segments, reconciled to consolidated income before income taxes:
Net
other expenses from managed and franchised properties
(i9)
(i28)
(i21)
(i46)
Depreciation
and amortization
(i86)
(i81)
(i256)
(i242)
General
and administrative
(i107)
(i109)
(i327)
(i328)
Gain
on sale of assets, net
i81
i—
i81
i—
Operating
income
i519
i385
i1,309
i1,070
Interest
expense
(i105)
(i99)
(i304)
(i277)
Gain
(loss) on foreign currency transactions
i7
(i6)
i4
(i7)
Other
non-operating income (loss), net
i—
i13
(i8)
i26
Income
before income taxes
$
i421
$
i293
$
i1,001
$
i812
____________
(1)Includes
management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
/
20
i
The
following table presents total assets for our reportable segments, reconciled to consolidated amounts:
We provide performance guarantees to certain owners of hotels that we operate under management contracts. Most of these guarantees allow us to terminate the contract, rather than fund shortfalls, if specified operating performance levels are not achieved.
However, in limited cases, we are obligated to fund performance shortfalls. As of September 30, 2019, we had isix performance guarantees, with expirations ranging from iDecember 2019 to 2039, and possible cash outlays totaling
approximately $i38 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. As of September 30, 2019 and December 31, 2018, we accrued current liabilities of $i3
million and $i12 million, respectively, for iione/
performance guarantee related to a hotel owned by a VIE for which we were not the primary beneficiary. We may enter into new contracts containing performance guarantees in the future, which could increase our possible cash outlays. We do not have any letters of credit pledged as collateral against our performance guarantees.
As of September 30, 2019, we guaranteed itwo
loans for ithree hotels that we franchise or will franchise for a total of $i30 million. iOne
of the loans has an initial maturity date in 2022 with two one-year extension options and the other loan will mature in 2023. Although we believe it is unlikely that material payments will be required under these guarantees, there can be no assurance that this will be the case. We do not have any letters of credit pledged as collateral against these guarantees.
We hold interests in VIEs, for which we are not the primary beneficiary, that have entered into loan agreements with third parties. Under the terms of our contractual arrangements with certain of these VIEs, we may provide financial support to such entities under specified circumstances, including default of such a VIE under a third-party loan agreement, and may have the option to acquire a controlling financial interest in such an entity at a predetermined amount. In a circumstance that we provide financial support or exercise
our option to acquire an additional interest in a VIE, we may be required to reassess whether we are the primary beneficiary of the VIE. If we determine that we are the primary beneficiary of the VIE, we would be required to consolidate the total assets, liabilities and results of operations of the VIE, which may be material upon consolidation.
We have entered into agreements with owners of certain hotels that we currently manage or will franchise to finance capital expenditures at the hotels. As of September 30, 2019, we had remaining possible cash outlays of approximately $i25 million,
of which we expect to fund $i15 million in the remainder of 2019 and $i10 million in 2020.
We
receive fees from managed and franchised properties to operate our marketing, sales and brand programs on behalf of hotel owners. As of September 30, 2019 and December 31, 2018, we had collected an aggregate of $i397 million and $i375
million in excess of amounts expended, respectively, across all programs.
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
21
ultimate resolution of all pending or threatened claims and litigation as of September 30, 2019 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.
Note
16: iCondensed Consolidating Guarantor Financial Information
Hilton Worldwide Finance LLC and Hilton Worldwide Finance Corp. (together, the "HWF Issuers"), which are i100
percent owned by Hilton Worldwide Parent LLC ("HWP"), which is i100 percent owned by the Parent, issued the 2025 Senior Notes and the 2027 Senior Notes. Hilton Domestic Operating Company Inc. ("HOC"), which is i100
percent owned by Hilton Worldwide Finance LLC, assumed the 2024 Senior Notes, issued the 2026 Senior Notes and, in June 2019, issued the 2030 Senior Notes. The 2024 Senior Notes, 2025 Senior Notes, 2026 Senior Notes, 2027 Senior Notes and 2030 Senior Notes are collectively referred to as the Senior Notes. The HWF Issuers and HOC are collectively referred to as the Subsidiary Issuers.
The Senior Notes are guaranteed jointly and severally on a senior unsecured basis by HWP, the Parent and certain of the Parent's wholly owned domestic restricted subsidiaries that are themselves not issuers of the applicable series of Senior Notes (together, the "Guarantors''). The indentures that govern the Senior Notes provide
that any subsidiary of the Company that provides a guarantee of our senior secured credit facilities will guarantee the Senior Notes. Additionally, the HWF Issuers are guarantors of the 2024 Senior Notes, the 2026 Senior Notes and the 2030 Senior Notes, and HOC is a guarantor of the 2025 Senior Notes and the 2027 Senior Notes. As of September 30, 2019, none of our foreign subsidiaries or U.S. subsidiaries owned by foreign subsidiaries or conducting foreign operations or our non-wholly owned subsidiaries
guaranteed the Senior Notes (collectively, the "Non-Guarantors").
The guarantees are full and unconditional, subject to certain customary release provisions. The indentures that govern the Senior Notes provide that any Guarantor may be released from its guarantee so long as: (i) the subsidiary is sold or sells all of its assets; (ii) the subsidiary is released from its guaranty under our senior secured credit facilities; (iii) the subsidiary is declared "unrestricted" for covenant purposes; (iv) the subsidiary is merged with or into the applicable Subsidiary Issuers or another Guarantor or the Guarantor liquidates after transferring all of its assets to the applicable Subsidiary Issuers or another Guarantor; or (v) the requirements for legal defeasance or covenant defeasance or to discharge
the indenture have been satisfied, in each case in compliance with applicable provisions of the indentures.
The following tables present the condensed consolidating financial information as of September 30, 2019 and December 31, 2018, and for the three and nine months ended September 30, 2019 and 2018, for the Parent, HWF Issuers, HOC, Guarantors and Non-Guarantors. The condensed consolidating financial information presents the financial information for all periods based on the composition of the Guarantors and Non-Guarantors
as of September 30, 2019.
Net cash provided by (used in) operating activities
$
i—
$
(i143)
$
(i7)
$
i808
$
i256
$
i—
$
i914
Investing
Activities:
Capital expenditures for property and equipment
i—
i—
(i5)
(i4)
(i42)
i—
(i51)
Payments
received on other financing receivables
i—
i—
i—
i49
i—
i—
i49
Capitalized
software costs
i—
i—
i—
(i62)
i—
i—
(i62)
Other
i—
i—
i—
(i6)
(i10)
i—
(i16)
Net
cash used in investing activities
i—
i—
(i5)
(i23)
(i52)
i—
(i80)
Financing
Activities:
Borrowings
i—
i175
i1,500
i—
i1
i—
i1,676
Repayment
of debt
i—
(i685)
i—
i—
(i16)
i—
(i701)
Debt
issuance costs
i—
i—
(i21)
i—
i—
i—
(i21)
Intercompany
transfers
i1,698
i653
(i1,451)
(i739)
(i161)
i—
i—
Dividends
paid
(i137)
i—
i—
i—
i—
i—
(i137)
Repurchases
of common stock
(i1,561)
i—
i—
i—
i—
i—
(i1,561)
Share-based
compensation tax withholdings and other
i—
i—
(i42)
i—
i—
i—
(i42)
Other
i—
i—
i—
(i3)
(i1)
i—
(i4)
Net
cash provided by (used in) financing activities
i—
i143
(i14)
(i742)
(i177)
i—
(i790)
Effect
of exchange rate changes on cash, restricted cash and cash equivalents
i—
i—
i—
i—
(i14)
i—
(i14)
Net
increase (decrease) in cash, restricted cash and cash equivalents
i—
i—
(i26)
i43
i13
i—
i30
Cash,
restricted cash and cash equivalents, beginning of period
i—
i—
i63
i28
i579
i—
i670
Cash,
restricted cash and cash equivalents, end of period
$
i—
$
i—
$
i37
$
i71
$
i592
$
i—
$
i700
30
Item
2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources and other non-historical statements. In some cases, you can identify these forward-looking statements by the use of words such as "outlook,""believes,""expects,""potential,""continues,""may,""will,""should,""could,""seeks,""projects,""predicts,""intends,""plans,""estimates,""anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties including, among others, risks inherent to the hospitality industry, macroeconomic factors beyond our control, competition for hotel guests and management and franchise contracts,
risks related to doing business with third-party hotel owners, performance of our information technology systems, growth of reservation channels outside of our system, risks of doing business outside of the U.S. and our indebtedness. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under "Part I—Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise,
except as required by law.
Overview
Our Business
Hilton isone of the largest and fastest growing hospitality companies in the world, with 5,980 properties comprising 954,855 rooms in 117 countries and territories as of September 30, 2019. Our premier brand portfolio includes: our luxury and lifestyle hotel brands, Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts, Conrad Hotels & Resorts and Canopy by Hilton; our full service hotel brands, Signia Hilton, Hilton Hotels & Resorts, Curio Collection by Hilton, DoubleTree by Hilton, Tapestry Collection by Hilton and Embassy Suites by Hilton; our focused service
hotel brands, Motto by Hilton, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; and our timeshare brand, Hilton Grand Vacations. As of September 30, 2019, we had nearly 99 million members in our award-winning guest loyalty program, Hilton Honors,a 21 percent increase from September 30, 2018.
Segments and Regions
We analyze our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products or services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel
management and licensing of our brands. This segment generates its revenue from: (i) management and franchise fees charged to third-party hotel owners; (ii) licensing fees for the exclusive right to use certain Hilton marks and IP; and (iii) fees for managing our owned and leased hotels. As a manager of hotels, we typically are responsible for supervising or operating the property in exchange for management fees. As a franchisor of hotels, we charge franchise fees in exchange for the use of one of our brand names and related commercial services, such as our reservation system, marketing and information technology services. The ownership segment primarily derives earnings from providing hotel room sales, food and beverage sales and other services at our owned and leased hotels.
Geographically, we conduct business through three distinct geographic regions: (i) the Americas; (ii) Europe,
Middle East and Africa ("EMEA"); and (iii) Asia Pacific. The Americas region includes North America, South America and Central America, including all Caribbean nations. Although the U.S. is included in the Americas, it represented 72 percent of our system-wide hotel rooms as of September 30, 2019; therefore, the U.S. is often analyzed separately and apart from the Americas geographic region and, as such, it is presented separately within the analysis herein. The EMEA region includes Europe, which represents the western-most peninsula of Eurasia stretching from Iceland in the west to Russia in the east, and the Middle East and Africa ("MEA"), which represents the Middle East region and all African nations, including the Indian
31
Ocean
island nations. Europe and MEA are often analyzed separately and, as such, are presented separately within the analysis herein. The Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific Island nations.
System Growth and Development Pipeline
Our strategic objectives include the continued expansion of our global footprint and fee-based business. As we enter into new management and franchise contracts, we expand our business with minimal or no capital investment by us as the manager or franchisor, since the capital required to build and maintain hotels is typically provided by the third-party owner of the hotel with whom we contract
to provide management services or license our brand names. Prior to approving the addition of new properties to our management and franchise development pipeline, we evaluate the economic viability of the property based on its geographic location, the credit quality of the third-party owner and other factors. By increasing the number of management and franchise contracts with third-party owners, we expect to increase overall return on invested capital and cash available for return to stockholders.
As of September 30, 2019, we had more than 2,530 hotels in our development pipeline that we expect to add as open hotels in our system, representing nearly 379,000 rooms under construction or approved for development throughout 111 countries and territories,
including 35 countries and territories where we do not currently have any open hotels. All of the rooms in the development pipeline are within our management and franchise segment. Additionally, of the rooms in the development pipeline, 205,000 rooms were located outside the U.S., and 198,000 rooms, or more than half, were under construction. We do not consider any individual development project to be material to us.
Brexit
In June 2016, the United Kingdom ("U.K.") held a referendum in which voters approved an exit from the European Union ("E.U.") (commonly referred to as "Brexit"), currently with a deadline of October 31, 2019. The effects of Brexit will depend on the final terms on which the U.K. will leave the E.U., including the terms of any trade
agreements that will dictate the U.K.’s access to E.U. markets either during any transitional period or more permanently. While our results for the nine months ended September 30, 2019 were not materially affected by Brexit, the final outcomes are not yet certain. Brexit measures could potentially disrupt the markets we serve and cause tax and foreign currency volatility, which could have adverse effects on our business. We will continue to monitor the potential impact of Brexit on our business as the deadline approaches.
Key Business and Financial Metrics Used by Management
Comparable Hotels
We define our comparable hotels as those that: (i) were active
and operating in our system for at least one full calendar year as of the end of the current period, and open January 1st of the previous year; (ii) have not undergone a change in brand or ownership type during the current or comparable periods reported; and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available. Of the 5,925 hotels in our system as of September 30, 2019, 4,633 hotels have been classified as comparable hotels. Our 1,292 non-comparable hotels included 236 hotels, or approximately four percent of the total hotels in our system, that were removed from the comparable group during the last twelve months because they sustained substantial property damage, business interruption, underwent large-scale capital projects or comparable results were not available.
Occupancy
Occupancy
represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period. Occupancy measures the utilization of our hotels' available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable average daily rate pricing levels as demand for hotel rooms increases or decreases.
Average Daily Rate ("ADR")
ADR represents hotel room revenue divided by the total number of room nights sold for a given period. ADR measures average room price attained by a hotel, and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the industry,
and
32
we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates charged to customers have a different effect on overall revenues and incremental profitability than changes in occupancy, as described above.
Revenue per Available Room ("RevPAR")
RevPAR is calculated by dividing hotel room revenue by the total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key drivers of operations at a hotel or group of hotels, as previously described: occupancy and
ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.
References to RevPAR, ADR and occupancy are presented on a comparable basis, and references to RevPAR and ADR are presented on a currency neutral basis, unless otherwise noted. As such, comparisons of these hotel operating statistics for the three and nine months ended September 30, 2019 and 2018 use the exchange rates for the three and nine months ended September 30, 2019, respectively.
EBITDA and Adjusted EBITDA
EBITDA reflects net income (loss), excluding interest expense, a provision for income
taxes and depreciation and amortization.
Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses, revenues and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated equity investments; (ii) foreign currency transactions; (iii) debt restructurings and retirements; (iv) furniture, fixtures and equipment ("FF&E") replacement reserves required under certain lease agreements; (v) reorganization costs; (vi) share-based compensation expense; (vii) non-cash impairment losses; (viii) severance, relocation and other expenses; (ix) amortization of contract acquisition costs; (x) the net effect of reimbursable costs included in other revenues and expenses from managed and franchised properties;
and (xi) other items.
We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions and (ii) these measures are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry. For instance, interest expense and the provision for income taxes are dependent on company specifics, including, among other things, capital structure and operating jurisdictions, respectively, and,
therefore could vary significantly across companies. Depreciation and amortization, as well as amortization of contract acquisition costs, are dependent upon company policies, including the method of acquiring and depreciating assets and the useful lives that are used. For Adjusted EBITDA, we also exclude items such as: (i) FF&E replacement reserves to be consistent with the treatment of FF&E for owned hotels where it is capitalized and depreciated over the life of the FF&E; (ii) share-based compensation expense, as this could vary widely among companies due to the different plans in place and the usage of them; (iii) the net effect of our cost reimbursement revenues and reimbursed expenses, as we contractually do not operate the related programs to generate a profit over the terms of the respective contracts;
and (iv) other items that are not core to our operations and are not reflective of our performance.
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:
•EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA
and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•EBITDA and Adjusted EBITDA do not reflect a provision for income taxes or the cash requirements to pay our taxes;
33
•EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes
resulting from matters that we consider not to be indicative of our future operations;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet
our obligations.
Results of Operations
The hotel operating statistics by region for our system-wide comparable hotels were as follows:
During
the three and nine months ended September 30, 2019, we experienced modest system-wide RevPAR growth. There was continued strength in Europe resulting primarily from ADR and occupancy growth in southern Europe, particularly Italy and Turkey, which, during the three months ended September 30, 2019, was partially offset by a decrease in RevPAR in Germany. In the Americas (excluding U.S.), results were attributable to demand growth in Colombia and Brazil, offset by decreases in RevPAR in Canada and Mexico. RevPAR growth in the U.S. was primarily a result of strong group performance and continued transient demand at our luxury properties. Asia Pacific results were primarily driven by declining RevPAR in
34
China
resulting from the continued economic slowdown, ongoing trade wars and the protests in Hong Kong, which, for the nine months ended September 30, 2019, was offset by growth in Japan. MEA experienced declines in RevPAR resulting from decreased demand in United Arab Emirates, partially offset by improved results in Egypt and Saudi Arabia.
The table below provides a reconciliation of net income to EBITDA and Adjusted EBITDA:
Net other expenses from managed and franchised properties
9
28
21
46
Other
adjustment items(1)
10
(3)
39
11
Adjusted EBITDA
$
605
$
557
$
1,722
$
1,557
____________
(1)Includes
adjustments for expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities for the three and nine months ended September 30, 2019 and the nine months ended September 30, 2018; and severance and other items for all periods.
Revenues
Three
Months Ended
Percent
Nine Months Ended
Percent
September 30,
Change
September 30,
Change
2019
2018
2019
vs. 2018
2019
2018
2019 vs. 2018
(in millions)
(in millions)
Franchise and licensing fees
$
443
$
407
8.8
$
1,269
$
1,142
11.1
Base
and other management fees
$
80
$
80
—
$
249
$
241
3.3
Incentive
management fees
54
57
(5.3)
167
171
(2.3)
Total management fees
$
134
$
137
(2.2)
$
416
$
412
1.0
Our
franchise and licensing fees increased during the three and nine months ended September 30, 2019, and our management fees increased during the nine months ended September 30, 2019, primarily as a result of the addition of new properties to our management and franchise segment. Including new development and ownership type transfers, from January 1, 2018 to September 30, 2019, we added 697 managed and franchised properties on a net basis, providing an additional 99,650 rooms to our management and franchise segment. As new hotels stabilize in our system, we expect the fees received from such hotels to increase as they are part of our system for full periods.
Franchise fees from our comparable
franchised properties increased for the three and nine months ended September 30, 2019, as a result of increased RevPAR of 0.3 percent and 1.1 percent, respectively, driven by increased occupancy, which was partially offset by unfavorable foreign currency exchange rates. Additionally, licensing and other fees during the three and nine months ended September 30, 2019 increased $13 million and $62 million, respectively, which for the nine months ended September 30, 2019, included an increase in termination fees of $13 million, primarily related to the redevelopment of a franchised hotel.
For the three and nine months ended September 30, 2019, management fees from our comparable managed properties increased
due to increases in RevPAR of 0.4 percent and 1.2 percent, respectively, which were offset by unfavorable foreign currency exchange rates and decreased incentive management fees that were largely due to challenges in certain markets, particularly Hong Kong.
35
Three
Months Ended
Percent
Nine Months Ended
Percent
September 30,
Change
September 30,
Change
2019
2018
2019
vs. 2018
2019
2018
2019 vs. 2018
(in millions)
(in millions)
Owned and leased hotels
$
361
$
373
(3.2)
$
1,060
$
1,099
(3.5)
Owned
and leased hotel revenues decreased during the three and nine months ended September 30, 2019 primarily as a result of unfavorable fluctuations in foreign currency exchange rates, which decreased revenues by $10 million and $52 million, respectively.
On a currency neutral basis, revenues at our comparable owned and leased hotels increased $12 million and $28 million during the three and nine months ended September 30, 2019, respectively, due to increases in RevPAR of 4.1 percent and 4.2 percent, respectively, driven by increases in both ADR and occupancy. On a currency neutral basis, revenues at our non-comparable owned and leased hotels decreased primarily due to hotel lease terminations, disposals and hotels that were under renovation during the nine months ended September
30, 2019, partially offset by increases in revenues from hotels that were under renovation in 2018.
Three Months Ended
Percent
Nine Months Ended
Percent
September 30,
Change
September 30,
Change
2019
2018
2019
vs. 2018
2019
2018
2019 vs. 2018
(in millions)
(in millions)
Other revenues
$
23
$
27
(14.8)
$
75
$
72
4.2
The
changes in other revenues during the three and nine months ended September 30, 2019 were primarily due to revenues from our purchasing operations.
Operating Expenses
Three
Months Ended
Percent
Nine Months Ended
Percent
September 30,
Change
September 30,
Change
2019
2018
2019
vs. 2018
2019
2018
2019 vs. 2018
(in millions)
(in millions)
Owned and leased hotels
$
310
$
331
(6.3)
$
942
$
1,003
(6.1)
Owned
and leased hotel expenses decreased during the three and nine months ended September 30, 2019 primarily as a result of fluctuations in foreign currency exchange rates, which decreasedexpenses by $10 million and $51 million, respectively.
On a currency neutral basis, owned and leased hotel expenses decreased $11 million and $10 million, respectively, for the three and nine months ended September 30, 2019, primarily due to decreases in expenses at our non-comparable hotels resulting from lease terminations, disposals and hotels that were under renovation during the nine months ended September
30, 2019, partially offset by increases in expenses from hotels that were under renovation in 2018. The decreases in expenses at our non-comparable hotels were partially offset by slight increases in expenses at our comparable hotels due to increases in occupancy.
Three
Months Ended
Percent
Nine Months Ended
Percent
September 30,
Change
September 30,
Change
2019
2018
2019
vs. 2018
2019
2018
2019 vs. 2018
(in millions)
(in millions)
Depreciation and amortization
$
86
$
81
6.2
$
256
$
242
5.8
General
and administrative
107
109
(1.8)
327
328
(0.3)
Other expenses
11
10
10.0
46
36
27.8
The
increases in depreciation and amortization expense during the three and nine months ended September 30, 2019 were primarily due to additions to capitalized software costs that were placed into service from January 1, 2018 to September 30, 2019.
36
General and administrative expenses remained flat during the three and nine months ended September 30, 2019 primarily as a result of increases in share-based compensation costs driven by Company performance offset by decreases in general corporate expenses.
Other
expenses increased during the three and nine months ended September 30, 2019 primarily as a result of increases in expenses from our purchasing operations.
Gain on sale of assets, net
Three
Months Ended
Percent
Nine Months Ended
Percent
September 30,
Change
September 30,
Change
2019
2018
2019
vs. 2018
2019
2018
2019 vs. 2018
(in millions)
(in millions)
Gain on sale of assets, net
81
—
NM(1)
81
—
NM(1)
____________
(1)Fluctuation
in terms of percentage change is not meaningful.
In September 2019, we recognized a gain upon completion of the sale of the Hilton Odawara. See Note 3: "Disposal" in our unaudited condensed consolidated financial statements for additional information.
Non-operating Income and Expenses
Three
Months Ended
Percent
Nine Months Ended
Percent
September 30,
Change
September 30,
Change
2019
2018
2019
vs. 2018
2019
2018
2019 vs. 2018
(in millions)
(in millions)
Interest expense
$
(105)
$
(99)
6.1
$
(304)
$
(277)
9.7
Gain
(loss) on foreign currency transactions
7
(6)
NM(1)
4
(7)
NM(1)
Other non-operating income (loss), net
—
13
(100.0)
(8)
26
NM(1)
Income
tax expense
(131)
(129)
1.6
(291)
(268)
8.6
____________
(1)Fluctuation in terms of percentage change is not meaningful.
The
increases in interest expense during the three and nine months ended September 30, 2019 were primarily due to the issuance of the 2030 Senior Notes in June 2019 and, for the nine months ended September 30, 2019, the issuance of the 2026 Senior Notes in April 2018 and draws on the Revolving Credit Facility during 2019. The increases were partially offset by decreases in interest expense related to our Term Loans, which were due to the reduction of the interest rate in April 2018 and principal repayments of $500 million and $800 million during 2019 and 2018, respectively, as well as net gains reclassified from accumulated other comprehensive loss resulting from settlements of interest rate swaps in 2018 and 2017.
The gains and losses on foreign currency transactions primarily related to
changes in foreign currency exchange rates on certain intercompany financing arrangements, including short-term cross-currency intercompany loans. For the three and nine months ended September 30, 2019, the changes were predominantly related to EUR and the Australian dollar ("AUD"). For the three and nine months ended September 30, 2018, the changes were predominantly related to EUR and the British pound and, for the three months ended September 30, 2018, also AUD.
The decrease in other non-operating income, net for the three months ended September 30, 2019 and the increase in other non-operating loss, net for the nine months ended September 30,
2019 were primarily due to a loss on the disposal of an unconsolidated real estate investment in 2019 and increased expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities. Additionally, other non-operating income, net for the three and nine months ended September 30, 2018 included a gain on the refinancing of a loan we issued to finance the construction of a hotel that we manage.
37
The increases in income tax expense during the three and nine months ended September 30, 2019 were primarily attributable to increases in income before income taxes and the
sale of Hilton Odawara, which were partially offset by: (i) adjustments to provisional amounts related to the Tax Cuts and Jobs Act of 2017 and (ii) the tax effect of a stock distribution, which were recognized during the three months ended September 30, 2018.
Segment Results
We evaluate our business segment operating performance using operating income. Refer to Note 14: "Business Segments" in our unaudited condensed consolidated financial statements for a reconciliation of segment operating income to income before income taxes and additional information on the evaluation of the performance of our segments using operating income. The following table sets forth revenues and operating income by segment:
Other
revenues from managed and franchised properties
1,434
1,309
9.5
4,263
3,893
9.5
Intersegment fees elimination(1)
(12)
(11)
9.1
(31)
(30)
3.3
Total
revenues
$
2,395
$
2,253
6.3
$
7,083
$
6,618
7.0
Operating
Income(1):
Management and franchise
$
596
$
561
6.2
$
1,737
$
1,604
8.3
Ownership
39
31
25.8
87
66
31.8
Segment
operating income
$
635
$
592
7.3
$
1,824
$
1,670
9.2
____________
(1)Includes
management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our unaudited condensed consolidated statements of operations.
Management and franchise segment revenues and operating income increased $35 million and $133 million during the three and nine months ended September 30, 2019, respectively, primarily as a result of the net addition of managed and franchised properties to our system and increases in licensing and other fees. Refer to "—Revenues" for further discussion of the increases in revenues from our managed and franchised properties.
Ownership segment revenues decreased $12 million and $39 millionduring the three and nine months
ended September 30, 2019, respectively, primarily as a result of fluctuations in foreign currency exchange rates. Ownership operating income increased $8 million and $21 million during the three and nine months ended September 30, 2019, respectively, as a result of decreases in owned and leased hotel expenses, which were primarily a result of fluctuations in foreign currency exchange rates, only partially offset by the decreases in segment revenues due to foreign currency exchange rates. Refer to "—Revenues" and "—Operating Expenses" for further discussion of the changes in revenues and operating expenses at our owned and leased hotels.
Liquidity
and Capital Resources
Overview
As of September 30, 2019, we had total cash and cash equivalents of $809 million, including $90 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents balance related to cash collateral on our self-insurance programs and cash held for FF&E reserves.
38
Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including costs associated with the management
and franchising of hotels, corporate expenses, payroll and compensation costs, taxes and compliance costs, interest payments on our outstanding indebtedness, contract acquisition costs and capital expenditures for renovations and maintenance at the hotels within our ownership segment. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements to the hotels within our ownership segment, commitments to owners in our management and franchise segment, dividends as declared, share repurchases and corporate capital and information technology expenditures.
We finance our business activities primarily with existing cash and cash generated from our operations. We believe that this cash and, from time-to-time, the use of our Revolving
Credit Facility, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments for the foreseeable future. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments and returning available capital to stockholders through dividends and share repurchases.
We may from time to time issue or incur or increase our capacity to incur new debt and/or purchase our outstanding debt through underwritten offerings, open market transactions, privately negotiated transactions or otherwise. Issuances or incurrence of new debt (or an increase
in our capacity to incur new debt) and/or purchases or retirement of outstanding debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
During the nine months ended September 30, 2019, we repurchased 13 million shares of our common stock under our stock repurchase program for $1,101 million, which we funded principally with borrowings and available cash. As of September 30, 2019, approximately $959 million remained available for share repurchases under our $3.5 billion stock repurchase program.
Sources and Uses of Our Cash and Cash Equivalents
The
following table summarizes our net cash flows:
Nine Months Ended
Percent
September 30,
Change
2019
2018
2019
vs. 2018
(in millions)
Net cash provided by operating activities
$
1,182
$
914
29.3
Net cash used in investing activities
(47)
(80)
(41.3)
Net
cash used in financing activities
(808)
(790)
2.3
Operating Activities
Cash flows from operating activities were primarily generated from management and franchise fee revenue and operating income from our owned and leased hotels.
The $268 million increase in net cash provided by operating activities was primarily the result of improved operating results from our management and
franchise business, including net property additions and an increase in licensing and other fees. The increase was partially offset by increases in cash paid for interest and income taxes.
Investing Activities
For the nine months ended September 30, 2019 and 2018, net cash used in investing activities consisted primarily of capital expenditures for property and equipment and capitalized software costs. Our capital expenditures for property and equipment primarily consisted of expenditures related to the renovation of hotels in our ownership segment and our corporate facilities. Our capitalized software costs related to various systems initiatives, for the benefit of both our hotel owners and our overall corporate
operations. Additionally, cash used for investing activities during the nine months ended September 30, 2019 was offset by the proceeds from the sale of the Hilton Odawara, and, during the nine months ended September 30, 2018, by the repayment of a loan we issued that financed the construction of a hotel we manage.
39
Financing Activities
The increase in net cash used in financing activities during the nine months ended September 30, 2019 was primarily attributable to a decrease in net proceeds
from borrowings and repayments attributable to a $500 million decrease in proceeds received from the June 2019 and April 2018 issuances of senior notes, which were both used to repay $500 million outstanding on the Term Loans in each respective period. The decrease in proceeds was largely offset by a decrease in repurchases of common stock due to the 2018 repurchases of shares from HNA Tourism Group Co., Ltd and certain affiliates of The Blackstone Group Inc. as part of the full divestiture of their respective investments in Hilton.
Debt and Borrowing Capacity
As of September 30, 2019, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $7.9 billion. For additional information on our total indebtedness, including
our recent financing transactions, availability under our Revolving Credit Facility and guarantees on our debt, refer to Note 7: "Debt" and Note 16: "Condensed Consolidating Guarantor Financial Information" in our unaudited condensed consolidated financial statements.
If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to reduce capital expenditures, issue additional equity securities or make draws on our Revolving Credit Facility. Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hospitality industry that may be beyond our control.
Contractual Obligations
Other
than the issuance of the 2030 Senior Notes and the repayment of a portion of the Term Loans as described above, there were no material changes to our contractual obligations from what we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Off-Balance Sheet Arrangements
See Note 15: "Commitments and Contingencies" in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated
financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Since the date of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we adopted ASU 2016-02, which has changed our critical accounting policies and estimates related to leases. See Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our unaudited condensed consolidated financial statements and the discussion below for additional information.
Leases
We
record lease liabilities as the present value of the future minimum lease payments using a discount rate that is either the rate implicit in the lease, if available, or our incremental borrowing rate, adjusted for collateral. The collateralized incremental borrowing rate is estimated on a portfolio basis and reflects factors such as the term of the lease and the currency in which the lease payments will be made. Our estimation utilizes various assumptions that require judgment, including our adjustment for collateral, economic factors, including currency data, and our credit risk.
The ROU asset is measured at the amount of the lease liability, with applicable adjustments. We evaluate the carrying value of our ROU assets for impairment in a method consistent with our evaluation of property and equipment, including the determination of impairment indicators, projecting the undiscounted
future cash flows and determining an asset's fair value. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for additional information.
As of September 30, 2019, we had $0.9 billion and $1.4 billion of ROU assets and lease liabilities, respectively. Changes in the estimates used in determining the collateralized incremental borrowing rate could result in material changes to our lease liabilities and, accordingly, our ROU assets.
40
Item 3. Quantitative and Qualitative
Disclosures About Market Risk
We are exposed to market risk primarily from changes in interest rates and foreign currency exchange rates, which may affect future income, cash flows and the fair value of the Company, depending on changes to interest rates or foreign currency exchange rates. In certain situations, we may seek to reduce cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into derivative financial instruments intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. We enter into derivative financial instruments to the extent they meet the objectives described above, and we do not use derivatives for trading or speculative purposes.
Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures as that term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by the Company
in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission ("SEC") rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule
13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective to provide reasonable assurance that information required to be disclosed by the
Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has
materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
41
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums, including proceedings involving tort and other general liability
claims, employee claims, consumer protection claims and claims related to our management of certain hotel properties. We recognize a liability when we believe the loss is probable and can be reasonably estimated. Most occurrences involving liability, claims of negligence and employees are covered by insurance with solvent insurance carriers. The ultimate results of claims and litigation cannot be predicted with certainty. We believe we have adequate reserves against such matters. We currently believe that the ultimate outcome of such lawsuits and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations in a particular period.
Item
1A. Risk Factors
As of September 30, 2019, there have been no material changes from the risk factors previously disclosed in response to "Part I —Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Securities
None.
(b) Use of Proceeds
None.
(c)
Issuer Purchases of Equity Securities
The following table sets forth information regarding our purchases of shares of our common stock during the three months ended September 30, 2019:
Total Number of Shares Purchased
Average
Price Paid per Share(1)
Total Number of Shares Purchased as Part of Publicly Announced Program(2)
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(2)
(1)This
price includes per share commissions paid.
(2)In February 2019, our board of directors authorized the repurchase of an additional $1.5 billion of our common stock under our existing stock repurchase program, which was initially announced in February 2017 and increased in November 2017. Under this publicly announced program, we are authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The repurchase program does not have an expiration date and may be suspended or discontinued at any time.
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The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.
43
Signatures
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
