Q1 2014 HWH FS and MDA
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2014
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

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

Registrant’s telephone number, including area code: (703) 883-1000


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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨
 
Accelerated filer ¨
Non -accelerated filer x
(Do not check if a smaller reporting company)
Smaller reporting company ¨
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of April 28, 2014 was 984,615,364.



HILTON WORLDWIDE HOLDINGS INC.
FORM 10-Q TABLE OF CONTENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2014

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


1


PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)

 
March 31,
 
December 31,
2014
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
435

 
$
594

Restricted cash and cash equivalents
287

 
266

Accounts receivable, net of allowance for doubtful accounts of $30 and $32
784

 
731

Inventories
397

 
396

Deferred income tax assets
23

 
23

Current portion of financing receivables, net
93

 
94

Current portion of securitized financing receivables, net
26

 
27

Prepaid expenses
182

 
148

Other
68

 
104

Total current assets (variable interest entities - $164 and $97)
2,295

 
2,383

 
 
 
 
Property, Investments and Other Assets:
 
 
 
Property and equipment, net
9,031

 
9,058

Financing receivables, net
634

 
635

Securitized financing receivables, net
184

 
194

Investments in affiliates
264

 
260

Goodwill
6,222

 
6,220

Brands
5,013

 
5,013

Management and franchise contracts, net
1,425

 
1,452

Other intangible assets, net
739

 
751

Deferred income tax assets
195

 
193

Other
391

 
403

Total property, investments and other assets (variable interest entities - $401 and $408)
24,098

 
24,179

 
 
 
 
TOTAL ASSETS
$
26,393

 
$
26,562

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
1,936

 
$
2,079

Current maturities of long-term debt
3

 
4

Current maturities of non-recourse debt
41

 
48

Income taxes payable
6

 
11

Total current liabilities (variable interest entities - $146 and $86)
1,986

 
2,142

 
 
 
 
Long-term debt
11,551

 
11,751

Non-recourse debt
918

 
920

Deferred revenues
632

 
674

Deferred income tax liabilities
5,111

 
5,053

Liability for guest loyalty program
621

 
597

Other
1,127

 
1,149

Total liabilities (variable interest entities - $641 and $583)
21,946

 
22,286

 
 
 
 
Commitments and contingencies - see Note 16


 


 
 
 
 
Equity:
 
 
 
Preferred stock, $0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of March 31, 2014 and December 31, 2013

 

Common stock, $0.01 par value; 30,000,000,000 authorized shares, 984,615,364 issued and outstanding as of March 31, 2014 and December 31, 2013
10

 
10

Additional paid-in capital
9,970

 
9,948

Accumulated deficit
(5,208
)
 
(5,331
)
Accumulated other comprehensive loss
(236
)
 
(264
)
Total Hilton stockholders' equity
4,536

 
4,363

Noncontrolling interests
(89
)
 
(87
)
Total equity
4,447

 
4,276

 
 
 
 
TOTAL LIABILITIES AND EQUITY
$
26,393

 
$
26,562


See notes to condensed consolidated financial statements.

2



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
Revenues
 
 
 
Owned and leased hotels
$
945


$
914

Management and franchise fees and other
312


262

Timeshare
279


246

 
1,536

 
1,422

Other revenues from managed and franchised properties
827

 
841

Total revenues
2,363

 
2,263

 
 
 
 
Expenses
 
 
 
Owned and leased hotels
771

 
743

Timeshare
177

 
170

Depreciation and amortization
153

 
160

General, administrative and other
97

 
97

 
1,198

 
1,170

Other expenses from managed and franchised properties
827

 
841

Total expenses
2,025

 
2,011

 
 
 
 
Operating income
338

 
252

 
 
 
 
Interest income
1

 
2

Interest expense
(153
)
 
(143
)
Equity in earnings from unconsolidated affiliates
4

 
1

Gain (loss) on foreign currency transactions
14

 
(43
)
Other gain, net
3

 
7

 
 
 
 
Income before income taxes
207

 
76

 
 
 
 
Income tax expense
(83
)
 
(38
)
 
 
 
 
Net income
124

 
38

Net income attributable to noncontrolling interests
(1
)
 
(4
)
Net income attributable to Hilton stockholders
$
123

 
$
34

 
 
 
 
Earnings per share
 
 
 
Basic and diluted
$
0.12

 
$
0.03


See notes to condensed consolidated financial statements.

3



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
Net income
$
124

 
$
38

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
Currency translation adjustment, net of tax of $36 and $(124)
28

 
(163
)
Pension liability adjustment, net of tax of $— and $(2)
1

 
4

Cash flow hedge adjustment, net of tax of $2 and $—
(3
)
 

Total other comprehensive income (loss)
26

 
(159
)
 
 
 
 
Comprehensive income (loss)
150

 
(121
)
Comprehensive loss (income) attributable to noncontrolling interests
1

 
(14
)
Comprehensive income (loss) attributable to Hilton stockholders
$
151

 
$
(135
)

See notes to condensed consolidated financial statements.

4



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)

 
Three Months Ended
 
March 31,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
124

 
$
38

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
153

 
160

Equity in earnings from unconsolidated affiliates
(4
)
 
(1
)
Loss (gain) on foreign currency transactions
(14
)
 
43

Other gain, net
(3
)
 
(7
)
Share-based compensation
19

 
2

Distributions from unconsolidated affiliates
2

 
7

Deferred income taxes
(52
)
 
7

Change in restricted cash and cash equivalents
(11
)
 
(26
)
Working capital changes and other
(67
)
 
(51
)
Net cash provided by operating activities
147

 
172

 
 
 
 
Investing Activities
 
 
 
Capital expenditures for property and equipment
(43
)
 
(57
)
Payments received on other financing receivables
1

 

Issuance of other financing receivables
(1
)
 
(7
)
Investments in affiliates
(2
)
 
(1
)
Distributions from unconsolidated affiliates
3

 
13

Contract acquisition costs
(16
)
 
(1
)
Software capitalization costs
(15
)
 
(11
)
Net cash used in investing activities
(73
)
 
(64
)
 
 
 
 
Financing Activities
 
 
 
Borrowings

 
32

Repayment of debt
(219
)
 
(134
)
Debt issuance costs
(2
)
 

Change in restricted cash and cash equivalents
(10
)
 
26

Distributions to noncontrolling interests
(1
)
 
(1
)
Net cash used in financing activities
(232
)
 
(77
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(1
)
 
(9
)
Net increase (decrease) in cash and cash equivalents
(159
)
 
22

Cash and cash equivalents, beginning of period
594

 
755

 
 
 
 
Cash and cash equivalents, end of period
$
435

 
$
777

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the year:
 
 
 
Interest
$
97

 
$
132

Income taxes, net of refunds
$
22

 
$
16


See notes to condensed consolidated financial statements.

5



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions)
(Unaudited)

 
Equity Attributable to Hilton Stockholders
 
 
 
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
Common Stock
 
 
 
 
Noncontrolling
Interests
 
 
 
Shares
 
Amount
 
 
 
 
 
Total
Balance as of December 31, 2013
985

 
$
10

 
$
9,948

 
$
(5,331
)
 
$
(264
)
 
$
(87
)
 
$
4,276

Net income

 

 

 
123

 

 
1

 
124

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment

 

 

 

 
30

 
(2
)
 
28

Pension liability adjustment

 

 

 

 
1

 

 
1

Cash flow hedge adjustment

 

 

 

 
(3
)
 

 
(3
)
Other comprehensive income (loss)

 

 

 

 
28

 
(2
)
 
26

Share-based compensation

 

 
22

 

 

 

 
22

Distributions

 

 

 

 

 
(1
)
 
(1
)
Balance as of March 31, 2014
985

 
$
10

 
$
9,970

 
$
(5,208
)
 
$
(236
)
 
$
(89
)
 
$
4,447


 
Equity Attributable to Hilton Stockholders
 
 
 
 
 
 
 
 
 
Additional
Paid-in
Capital
 
Accumulated Deficit
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
Common Stock
 
 
 
 
Noncontrolling
Interests
 
 
 
Shares(1)
 
Amount
 
 
 
 
 
Total
Balance as of December 31, 2012
921

 
$
1

 
$
8,452

 
$
(5,746
)
 
$
(406
)
 
$
(146
)
 
$
2,155

Net income

 

 

 
34

 

 
4

 
38

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
 
 
 
 
 
Currency translation adjustment

 

 

 

 
(173
)
 
10

 
(163
)
Pension liability adjustment

 

 

 

 
4

 

 
4

Other comprehensive income (loss)

 

 

 

 
(169
)
 
10

 
(159
)
Distributions

 

 

 

 

 
(1
)
 
(1
)
Balance as of March 31, 2013
921

 
$
1

 
$
8,452

 
$
(5,712
)
 
$
(575
)
 
$
(133
)
 
$
2,033

____________
(1) 
Shares of common stock outstanding have been adjusted for a stock split which occurred in December 2013.

See notes to condensed consolidated financial statements.

6



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

Note 1: Organization and Basis of Presentation

Organization

Hilton Worldwide Holdings Inc. ("Hilton" together with its subsidiaries, "we," "us," "our" or the "Company"), a Delaware corporation, is one of the largest hospitality companies in the world based upon the number of hotel rooms and timeshare units under our 10 distinct brands. We are engaged in owning, leasing, managing, developing and franchising hotels, resorts and timeshare properties. As of March 31, 2014, we owned, leased, managed or franchised 4,112 hotel and resort properties, totaling 680,117 rooms in 92 countries and territories, as well as 43 timeshare properties comprising 6,673 units.

In December 2013, we completed a 9,205,128-for-1 stock split on issued and outstanding shares, which is reflected in all share and per share data presented in our condensed consolidated financial statements and accompanying notes. Affiliates of The Blackstone Group L.P. ("Blackstone" or "our Sponsor") beneficially owned approximately 76.4 percent of our common stock outstanding as of March 31, 2014.

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements for the three months ended March 31, 2014 and 2013 have been prepared in accordance with United States of America ("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 U.S. 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, 2013.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Interim results are not necessarily indicative of full year performance.

In our opinion, the accompanying condensed consolidated financial statements reflect all adjustments, including normal recurring items, considered necessary for a fair presentation of the interim periods. All material intercompany transactions have been eliminated in consolidation.

Note 2: Recently Issued Accounting Pronouncements

Adopted Accounting Standards

In July 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2013-11 ("ASU 2013-11"), Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. This ASU provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward exists in the applicable jurisdiction to settle any additional income taxes that would result from disallowance of the tax position. The provisions of ASU 2013-11 were effective, prospectively, for reporting periods beginning after December 15, 2013. As a result of our adoption of this ASU on January 1, 2014, $108 million of unrecognized tax benefits were reclassified against deferred income tax assets.

In March 2013, the FASB issued ASU No. 2013-05 ("ASU 2013-05"), Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity. This ASU clarifies when a cumulative translation adjustment should be released to net income when a parent either sells a part or all of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a nonprofit activity or a business (other than a sale of in substance real estate) within a foreign entity. The provisions of ASU 2013-05 were effective, prospectively, for reporting periods beginning after December 15, 2013. The adoption did not have a material effect on our condensed consolidated financial statements.


7



Accounting Standards Not Yet Adopted

In April 2014, the FASB issued ASU No. 2014-08 ("ASU 2014-08"), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU amends guidance on reporting discontinued operations only if the disposal of a component of an entity or group of components of an entity represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The provisions of ASU 2014-08 should be applied prospectively for all disposals of components of an entity and for all businesses that, on acquisition, are classified as held for sale that occurred within annual periods beginning on or after December 15, 2014, and interim periods within. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In January 2014, the FASB issued ASU No. 2014-04 ("ASU 2014-04"), Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. This ASU clarifies when an in substance repossession or foreclosure occurs and when a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, as well as additional required disclosures. The provisions of ASU 2014-04 are effective for interim and annual periods beginning after December 15, 2014. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

Note 3: Property and Equipment

Property and equipment were as follows:    
 
March 31,
 
December 31,
 
2014
 
2013
 
(in millions)
Land
$
4,098

 
$
4,098

Buildings and leasehold improvements
5,530

 
5,511

Furniture and equipment
1,176

 
1,172

Construction-in-progress
92

 
67

 
10,896

 
10,848

Accumulated depreciation and amortization
(1,865
)
 
(1,790
)
 
$
9,031

 
$
9,058


Depreciation and amortization expense on property and equipment, including amortization of assets recorded under capital leases, was $77 million and $89 million during the three months ended March 31, 2014 and 2013, respectively.

As of March 31, 2014 and December 31, 2013, property and equipment included approximately $129 million and $130 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $62 million and $59 million, respectively, of accumulated depreciation and amortization.

Note 4: Financing Receivables

Financing receivables were as follows:
 
March 31, 2014
 
Securitized Timeshare
 
Unsecuritized Timeshare
 
Other
 
Total
 
(in millions)
Financing receivables
$
194

 
$
659

 
$
43

 
$
896

Less: allowance
(10
)
 
(67
)
 
(1
)
 
(78
)
 
184

 
592

 
42

 
818

 
 
 
 
 
 
 
 
Current portion of financing receivables
28

 
104

 

 
132

Less: allowance
(2
)
 
(11
)
 

 
(13
)
 
26

 
93

 

 
119

 
 
 
 
 
 
 
 
Total financing receivables
$
210

 
$
685

 
$
42

 
$
937



8



 
December 31, 2013
 
Securitized Timeshare
 
Unsecuritized Timeshare
 
Other
 
Total
 
(in millions)
Financing receivables
$
205

 
$
654

 
$
49

 
$
908

Less: allowance
(11
)
 
(67
)
 
(1
)
 
(79
)
 
194

 
587

 
48

 
829

 
 
 
 
 
 
 
 
Current portion of financing receivables
29

 
106

 

 
135

Less: allowance
(2
)
 
(12
)
 

 
(14
)
 
27

 
94

 

 
121

 
 
 
 
 
 
 
 
Total financing receivables
$
221

 
$
681

 
$
48

 
$
950


Timeshare Financing Receivables

As of March 31, 2014, we had 52,723 timeshare financing receivables with interest rates ranging from zero percent to 20.50 percent, a weighted average interest rate of 12.19 percent, a weighted average remaining term of 7.5 years and maturities through 2025. As of March 31, 2014 and December 31, 2013, we had ceased accruing interest on timeshare financing receivables with aggregate principal balances of $31 million and $32 million, respectively.

In August 2013, we completed a securitization of approximately $255 million of gross timeshare financing receivables and issued $250 million in aggregate principal amount of 2.28 percent notes that mature in January 2026 ("Securitized Timeshare Debt").

In May 2013, we entered into a revolving non-recourse timeshare financing receivables credit facility ("Timeshare Facility") that is secured by certain of our timeshare financing receivables. As of March 31, 2014 and December 31, 2013, we had $491 million and $492 million, respectively, of gross timeshare financing receivables secured under our Timeshare Facility.

The changes in our allowance for uncollectible timeshare financing receivables were as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
(in millions)
Beginning balance
$
92

 
$
93

Write-offs
(8
)
 
(6
)
Provision for uncollectibles on sales
6

 
7

Ending balance
$
90

 
$
94


Our timeshare financing receivables as of March 31, 2014 mature as follows:
 
Securitized Timeshare
 
Unsecuritized Timeshare
Year
(in millions)
2014 (remaining)
$
21

 
$
82

2015
28

 
88

2016
29

 
91

2017
30

 
94

2018
30

 
91

Thereafter
84

 
317

 
222

 
763

Less: allowance
(12
)
 
(78
)
 
$
210

 
$
685



9



The following table details an aged analysis of our gross timeshare financing receivables balance:
 
March 31,
 
December 31,
 
2014
 
2013
 
(in millions)
Current
$
940

 
$
948

30 - 89 days past due
14

 
14

90 - 119 days past due
3

 
4

120 days and greater past due
28

 
28

 
$
985

 
$
994


Note 5: Investments in Affiliates

Investments in affiliates were as follows:
 
March 31,
 
December 31,
 
2014
 
2013
 
(in millions)
Equity investments
$
248

 
$
245

Other investments
16

 
15

 
$
264

 
$
260


We maintain investments in affiliates accounted for under the equity method, which are primarily investments in entities that owned or leased 29 and 30 hotels as of March 31, 2014 and December 31, 2013, respectively. In March 2014, we sold our investment in one hotel and recorded a gain of $3 million during the three months ended March 31, 2014, which was included in other gain, net in our condensed consolidated statement of operations.

The equity investments had total debt of approximately $1.0 billion and $1.1 billion as of March 31, 2014 and December 31, 2013, respectively. Substantially all of the debt is secured solely by the affiliates' assets or is guaranteed by other partners without recourse to us. We were the creditor on $17 million of debt from unconsolidated affiliates as of March 31, 2014 and December 31, 2013, which was included in financing receivables, net in our condensed consolidated balance sheets.

Note 6: Consolidated Variable Interest Entities

As of March 31, 2014 and December 31, 2013, we consolidated four variable interest entities ("VIEs"). During the three months ended March 31, 2014 and 2013, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

Two of these VIEs lease hotels from unconsolidated affiliates in Japan. We hold a significant ownership interest in these VIEs and have the power to direct the activities that most significantly affect their economic performance. Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily comprised $40 million and $42 million of cash and cash equivalents, $27 million and $26 million of property and equipment, net, and $288 million and $284 million of non-recourse debt as of March 31, 2014 and December 31, 2013, respectively. The assets of these entities are only available to settle the obligations of these entities. Interest expense related to the non-recourse debt of these two consolidated VIEs was $5 million and $8 million during the three months ended March 31, 2014 and 2013, respectively, and was included in interest expense in our condensed consolidated statements of operations.

In February 2013, one of our consolidated VIEs in Japan signed a Memorandum of Understanding to restructure the terms of its capital lease. The effect of the capital lease restructuring was recognized during the three months ended March 31, 2013, resulting in a reduction in property and equipment, net of $44 million and a reduction in non-recourse debt of $48 million. This transaction was considered a non-cash investing and financing activity and was excluded from our condensed consolidated statement of cash flows.

In August 2013, we formed a VIE to issue our Securitized Timeshare Debt. We are the primary beneficiary of this VIE as we have the power to direct the activities that most significantly affect the VIE’s economic performance, the obligation to absorb losses and the right to receive benefits that are significant to the VIE. As of March 31, 2014 and December 31, 2013, our condensed consolidated balance sheets included the assets and liabilities of this entity, which primarily comprised $8 million of restricted cash and cash equivalents, $210 million and $221 million of securitized financing receivables, net and $209 million and $222 million of non-recourse debt, respectively. Our condensed consolidated statement of operations included interest

10



income of $7 million, included in timeshare revenue, and interest expense of $1 million, included in interest expense, for the three months ended March 31, 2014, related to this VIE. See Note 4: "Financing Receivables" and Note 7: "Debt" for additional details.

We have an additional consolidated VIE that owns one hotel that was immaterial to our condensed consolidated financial statements.

Note 7: Debt

Long-term Debt

Long-term debt balances, including obligations for capital leases, and associated interest rates were as follows:

March 31,
 
December 31,

2014
 
2013

(in millions)
Senior secured term loan facility with a rate of 3.50%, due 2020
$
5,800

 
$
6,000

Senior notes with a rate of 5.625%, due 2021
1,500

 
1,500

Commercial mortgage-backed securities loan with an average rate of 4.05%, due 2018(1)
3,500

 
3,500

Mortgage loan with a rate of 2.30%, due 2018
525

 
525

Mortgage notes with an average rate of 6.15%, due 2016
132

 
133

Other unsecured notes with a rate of 7.50%, due 2017
53

 
53

Capital lease obligations with an average rate of 5.88%, due 2015 to 2097
72

 
73


11,582


11,784

Less: current maturities of long-term debt
(3
)

(4
)
Less: unamortized discount on senior secured term loan facility
(28
)
 
(29
)

$
11,551


$
11,751

____________
(1) 
The initial maturity date of the variable-rate component of this borrowing is November 1, 2015. We assumed all extensions, which are solely at our option, were exercised.

During the three months ended March 31, 2014, we made voluntary prepayments of $200 million on our senior secured term loan facility (the "Term Loans").

As of March 31, 2014, we had $46 million of letters of credit outstanding under our $1.0 billion senior secured revolving credit facility (the "Revolving Credit Facility"), and a borrowing capacity of $954 million.

Under our commercial mortgage-backed securities loan secured by 23 of our U.S. owned real estate assets (the "CMBS Loan"), we are required to deposit with the lender certain cash reserves for restricted uses. As of March 31, 2014 and December 31, 2013, our condensed consolidated balance sheets included $32 million and $29 million, respectively, of restricted cash and cash equivalents related to the CMBS Loan.

Non-recourse Debt

Non-recourse debt, including obligations for capital leases, and associated interest rates were as follows:
 
March 31,
 
December 31,
 
2014
 
2013
 
(in millions)
Capital lease obligations of consolidated VIEs with a rate of 6.34%, due 2018 to 2026
$
260

 
$
255

Non-recourse debt of consolidated VIEs with an average rate of 3.33%, due 2015 to 2018(1)
40

 
41

Timeshare Facility with a rate of 1.45%, due 2016
450

 
450

Securitized Timeshare Debt with a rate of 2.28%, due 2026
209

 
222

 
959

 
968

Less: current maturities of non-recourse debt
(41
)
 
(48
)
 
$
918

 
$
920

____________
(1) 
Excludes the non-recourse debt of our VIE that issued the Securitized Timeshare Debt, as this is presented separately.

We are required to deposit payments received from customers on the pledged timeshare financing receivables and securitized timeshare financing receivables related to the Timeshare Facility and Securitized Timeshare Debt, respectively, into a depository account maintained by a third party. The balance in the depository account, totaling $22 million and $20 million as of March 31, 2014 and December 31, 2013, respectively, was included in restricted cash and cash equivalents in our condensed consolidated balance sheets.


11



Debt Maturities

The contractual maturities of our long-term debt and non-recourse debt as of March 31, 2014 were as follows:
Year
(in millions)
2014 (remaining)
$
34

2015
69

2016
622

2017
96

2018(1)
4,068

Thereafter
7,652

 
$
12,541

____________
(1) 
The CMBS Loan has three one-year extensions, solely at our option, that effectively extend maturity to November 1, 2018. We assumed all extensions for purposes of calculating maturity dates.

Note 8: Derivative Instruments and Hedging Activities

During the three months ended March 31, 2014 and 2013, derivatives were used to hedge the interest rate risk associated with variable-rate debt. Certain of our loan agreements require us to hedge interest rate risk using derivative instruments.

Cash Flow Hedges

As of March 31, 2014, we held four interest rate swaps with an aggregate notional amount of $1.45 billion, which swap three-month LIBOR on the Term Loans to a fixed rate of 1.87 percent and expire in October 2018. We elected to designate these interest rate swaps as cash flow hedges for accounting purposes.

Non-designated Hedges

As of March 31, 2014, we held one interest rate cap in the notional amount of $875 million, for the variable-rate component of the CMBS Loan, that expires in November 2015 and caps one-month LIBOR at 6.0 percent. We did not elect to designate this interest rate cap as a hedging instrument.

As of March 31, 2014, we also held one interest rate cap in the notional amount of $525 million that expires in November 2015 and caps one-month LIBOR on a mortgage loan secured by one property at 4.0 percent. We did not elect to designate this interest rate cap as a hedging instrument.

As of March 31, 2013, we held ten interest rate caps with an aggregate notional amount of $15.2 billion, which matured in November 2013. We did not elect to designate any of these ten interest rate caps as effective hedging instruments.

Fair Value of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated balance sheets were as follows:
 
March 31, 2014
 
December 31, 2013
 
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
 
 
 
(in millions)
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
Interest rate swaps
Other assets
 
$
5

 
Other assets
 
$
10

 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
Interest rate caps
Other assets
 

 
Other assets
 



12



Earnings Effect of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated statements of operations and condensed consolidated statements of comprehensive income (loss) before any effect for income taxes were as follows:
 
 
 
Three Months Ended March 31,
 
Classification of Loss Recognized
 
2014
 
2013
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
Interest rate swaps(1)
Other comprehensive loss
 
$
(5
)
 
$

 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
Interest rate caps
Other gain, net
 

 

____________
(1) 
There were no amounts recognized in earnings related to hedge ineffectiveness or amounts excluded from hedge effectiveness testing during the three months ended March 31, 2014.

Note 9: Fair Value Measurements

The carrying amounts and estimated fair values of our financial assets and liabilities, including related current portions, were as follows:

 
March 31, 2014
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
189

 
$

 
$
189

 
$

Restricted cash equivalents
100

 

 
100

 

Timeshare financing receivables
985

 

 

 
988

Interest rate swaps
5

 

 
5

 

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
11,482

 
58

 
1,605

 
10,121

Non-recourse debt(2)
659

 

 

 
659


 
December 31, 2013
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
309

 
$

 
$
309

 
$

Restricted cash equivalents
107

 

 
107

 

Timeshare financing receivables
994

 

 

 
996

Interest rate swaps
10

 

 
10

 

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
11,682

 
57

 
1,560

 
10,358

Non-recourse debt(2)
672

 

 

 
670

____________
(1)
Excludes capital lease obligations with a carrying value of $72 million and $73 million as of March 31, 2014 and December 31, 2013, respectively.
(2)
Represents the Securitized Timeshare Debt and the Timeshare Facility.

We believe the carrying amounts of our current financial assets and liabilities and other financing receivables approximated fair value as of March 31, 2014 and December 31, 2013. Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values. Proper classification of fair value measurements within the valuation hierarchy is considered each reporting period. The use of different market assumptions or estimation methods may have a material effect on the estimated fair value amounts.

13




Cash equivalents and restricted cash equivalents primarily consisted of short-term interest-bearing money market funds with maturities of less than 90 days, time deposits and commercial paper. The estimated fair values were based on available market pricing information of similar financial instruments.

The estimated fair values of our timeshare financing receivables were based on the expected future cash flows discounted at risk-adjusted rates. The primary sensitivity in these calculations is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value. An increase in the discount rates would result in a decrease in the fair values.

We measure our interest rate swaps at fair value which were estimated using an income approach. The primary inputs into our fair value estimate include interest rates and yield curves based on observable market inputs of similar instruments.

The estimated fair values of our Level 1 long-term debt were based on prices in active debt markets. The estimated fair values of our Level 2 long-term debt were based on bid prices in a non-active debt market. The estimated fair values of our Level 3 fixed-rate long-term debt were estimated based on the expected future cash flows discounted at risk-adjusted rates. The primary sensitivity in these estimates is based on the selection of appropriate discount rates. Fluctuations in these assumptions will result in different estimates of fair value. An increase in the discount rates would result in a decrease in the fair values. The carrying amounts of our Level 3 variable-rate long-term debt and non-recourse debt approximated fair value as the interest rates under the loan agreements approximated current market rates. The estimated fair values of our Level 3 fixed-rate non-recourse debt were primarily based on indicative quotes received for similar issuances.

No financial or nonfinancial assets were measured at fair value on a nonrecurring basis during the three months ended March 31, 2014 or 2013.

Note 10: Income Taxes

At the end of each interim period, we estimate the effective tax rate expected to be applied for the full fiscal year. The effective income tax rate is determined by the level and composition of pre-tax income or loss, which is subject to federal, foreign, state and local income taxes and reflects income tax expense or benefit resulting from our significant operations outside of the U.S.

Our total unrecognized tax benefits as of March 31, 2014 and December 31, 2013 were $442 million and $435 million, respectively. As a result of the expected resolution of examination issues with federal, state and foreign tax authorities, we believe it is reasonably possible that during the next 12 months the amount of unrecognized tax benefits will decrease up to $4 million. Included in the balance of unrecognized tax benefits as of March 31, 2014 and December 31, 2013 were $346 million and $340 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective tax rate. The increase in unrecognized tax benefits for the quarter is primarily the result of tax law changes enacted in New York.

We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. We have accrued balances of approximately $47 million and $45 million for the payment of interest and penalties as of March 31, 2014 and December 31, 2013, respectively.

Effective January 1, 2014 we adopted new regulations issued by the Internal Revenue Service ("IRS") regarding the deduction and capitalization of amounts paid to acquire, produce, or improve tangible property as well as dispositions of such property. Certain portions of the regulations required an accounting method change on a retroactive basis, requiring an adjustment related to deferred taxes. As a result of this accounting method change we reclassified $33 million out of deferred tax assets into current taxes receivable.

We file income tax returns, including returns for our subsidiaries, with federal, state and foreign jurisdictions. We are under regular and recurring audit by the IRS 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 state, local, federal and foreign tax jurisdictions or from the resolution of various proceedings between the U.S. and foreign tax authorities. We are no longer subject to U.S. federal income tax examination for years through 2004. As of March 31, 2014, we remain subject to federal examinations from 2005-2012, state examinations from 1999-2012 and foreign examinations of our income tax returns for the years 1996 through 2012. State income tax returns are generally subject to examination for a period of three to five years after filing of the respective return; however, the state impact of any federal tax return changes remains subject to examination by various states for a period generally of up to one year after formal notification to the states. The statute of limitations for the foreign jurisdictions generally ranges from three to ten years after filing the respective tax return.

Note 11: Employee Benefit Plans

We sponsor multiple domestic and international employee benefit plans. Benefits are based upon years of service and compensation.

We have a noncontributory retirement plan in the U.S. (the "Domestic Plan"), which covers certain employees not earning union benefits. This plan was frozen for participant benefit accruals in 1996. We also have multiple employee benefit plans that cover many of our international employees. These include a plan that covers workers in the United Kingdom (the "U.K. Plan"), which was frozen to further accruals in November 2013, and a number of smaller plans that cover workers in various other countries around the world (the "International Plans").


14



The components of net periodic pension cost (credit) for the Domestic Plan, U.K. Plan and International Plans were as follows:
 
Three Months Ended March 31,
 
2014
 
2013
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
2

 
$

 
$
1

 
$
1

 
$
1

 
$
1

Interest cost
4

 
5

 
1

 
4

 
4

 
1

Expected return on plan assets
(4
)
 
(6
)
 
(1
)
 
(4
)
 
(5
)
 
(1
)
Amortization of prior service cost (credit)
1

 

 

 
1

 
(1
)
 

Amortization of net loss

 

 

 
1

 
1

 

Settlement losses

 

 

 

 

 
1

Net periodic pension cost (credit)
$
3

 
$
(1
)
 
$
1

 
$
3

 
$

 
$
2


We have an outstanding bond of $76 million under a class action lawsuit against Hilton and the Domestic Plan to support potential future plan contributions from us. We funded an account, which is classified as restricted cash and cash equivalents in our condensed consolidated balance sheets, to support this requirement. If the U.S. District Court for the District of Columbia approves of our compliance with the findings from the class action lawsuit, then the bond may be released in 2014.

In May 2011, we, along with the trustees for the U.K. Plan, reached an agreement on the funded status and security for the U.K. Plan. This agreement resulted in a guarantee denominated in British Pound Sterling of 15 million (equivalent to $25 million as of March 31, 2014) from us to the U.K. Plan.

Note 12: Share-Based Compensation

2013 Omnibus Incentive Plan

In February 2014, we issued time-vesting restricted stock units ("RSUs"), nonqualified stock options ("options") and performance-vesting restricted stock units ("performance shares") under the 2013 Omnibus Incentive Plan.

We recorded share-based compensation expense for awards granted under the 2013 Omnibus Incentive Plan of $11 million during the three months ended March 31, 2014, which includes amounts reimbursed by hotel owners. As of March 31, 2014, unrecognized compensation costs for unvested awards was approximately $174 million, which is expected to be recognized over a weighted-average period of 2.4 years on a straight-line basis.

As of March 31, 2014, there were 72,314,544 shares of common stock available for future issuance under the 2013 Omnibus Incentive Plan.

Restricted Stock Units

During the three months ended March 31, 2014, we issued 7,066,153 RSUs with a grant-date fair value of $21.53. The RSUs vest in annual installments over two or three years from the date of grant, subject to the individual’s continued employment through the applicable vesting date. Vested RSUs generally will be settled for our common stock, with the exception of certain awards that will be settled in cash.

Stock Options

During the three months ended March 31, 2014, we issued 1,003,591 options with an exercise price of $21.53. As of March 31, 2014, no options were exercisable. The options vest over three years in equal installments from the date of grant, subject to the individual’s continued employment through the applicable vesting date, and will terminate 10 years from the date of grant or earlier if the individual’s service terminates. The exercise price is equal to the closing price of the Company’s common stock on the date of grant.


15



The grant date fair value of each of these option grants was $7.58, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility(1)
33.00
%
Dividend yield(2)
%
Risk-free rate(3)
1.85
%
Expected term (in years)(4)
6.0

____________
(1)
Due to limited trading history for our common stock, we did not have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of our share price. As a result, we used an average historical volatility of our peer group over a time period consistent with our expected term assumption. Our peer group was determined based upon companies in our industry with similar business models and is consistent with those used to benchmark our executive compensation.
(2)
We have no foreseeable plans to pay dividends during the expected term of these options.
(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.

Performance Shares

During the three months ended March 31, 2014, we issued 1,078,908 performance shares. The performance shares are settled at the end of the three-year performance period with 50 percent of the shares subject to achievement based on a measure of (1) the Company’s total shareholder return relative to the total shareholder returns of members of a peer company group ("relative shareholder return") and the other 50 percent of the shares subject to achievement based on (2) the Company’s earnings before interest expense, taxes and depreciation and amortization ("EBITDA") compound annual growth rate ("EBITDA CAGR"). The total number of performance shares that vest based on each performance measure (relative shareholder return and EBITDA CAGR) is based on an achievement factor which, in each case, ranges from a zero to 200 percent payout.

The grant date fair value of each of the performance shares based on relative shareholder return was $23.56, which was determined using a Monte Carlo simulation valuation model with the following assumptions:
Expected volatility(1)
30.00
%
Dividend yield(2)
%
Risk-free rate(3)
0.70
%
Expected term (in years)(4)
2.8

____________
(1)
Due to limited trading history for our common stock, we did not have sufficient information available on which to base a reasonable and supportable estimate of the expected volatility of our share price. As a result, we used an average historical volatility of our peer group over a time period consistent with our expected term assumption. Our peer group was determined based upon companies in our industry with similar business models and is consistent with those used to benchmark our executive compensation.
(2)
We have no foreseeable plans to pay dividends during the expected term of these performance shares.
(3)
Based on the yields of U.S. Department of Treasury instruments with similar expected lives.
(4)
Midpoint of the 30-calendar day period preceding the end of the performance period.

The grant-date fair value of each of the performance shares based on our EBITDA CAGR was $21.53. For these shares, we determined that the performance condition is probable of achievement and during the three months ended March 31, 2014, recognized compensation expense at the target amount of 100 percent.

As of March 31, 2014, 1,078,908 performance shares were outstanding with a remaining life of 2.8 years.

Promote Plan

Prior to December 2013, certain members of our senior management team participated in an executive compensation
plan ("the Promote plan"). Equity awards under the Promote plan were exchanged for restricted shares of common stock in connection with our initial public offering and vest as follows: (1) 40 percent vested immediately; (2) 40 percent of each award will vest on December 11, 2014, contingent upon employment through that date; and (3) 20 percent of each award will vest on the date that our Sponsor and its affiliates cease to own 50 percent or more of the shares of the Company, contingent on employment through that date.

During the three months ended March 31, 2014, the vesting conditions of these restricted shares of common stock for certain participants were modified such that the remaining 60 percent of each participant's award will vest in June 2014. As a result of this modification, we recorded incremental compensation expense of $7 million. During the three months ended

16



March 31, 2014, total compensation expense under the Promote plan was $13 million and unrecognized compensation expense as of March 31, 2014 was $84 million, $16 million of which is expected to be recognized through December 2014 and $68 million of which is subject to the achievement of a performance condition. No expense was recognized for the portion of the awards that are subject to the achievement of a performance condition in the form of a liquidity event, since such an event was not probable as of March 31, 2014.

We recorded compensation expense related to the Promote plan of $2 million during the three months ended March 31, 2013.

Cash-based Long-term Incentive Plan

In February 2014, we terminated a cash-based, long-term incentive plan and reversed the associated accruals resulting in a reduction of compensation expense of approximately $25 million for the three months ended March 31, 2014.

Note 13: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS"):
 
Three Months Ended March 31,
 
2014
 
2013
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
Numerator:
 
 
 
Net income attributable to Hilton stockholders
$
123

 
$
34

Denominator:
 
 
 
Weighted average shares outstanding
985

 
921

Basic EPS
$
0.12

 
$
0.03

 
 
 
 
Diluted EPS:
 
 
 
Numerator:
 
 
 
Net income attributable to Hilton stockholders
$
123

 
$
34

Denominator:
 
 
 
Weighted average shares outstanding
985

 
921

Diluted EPS
$
0.12

 
$
0.03


Less than 1 million options were excluded from the computation of diluted EPS for the three months ended March 31, 2014 because their effect would have been anti-dilutive under the treasury stock method.

Note 14: Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of taxes, were as follows:
 
Currency Translation Adjustment
 
Pension Liability Adjustment
 
Cash Flow Hedge Adjustment
 
Total
 
(in millions)
Balance as of December 31, 2013
$
(136
)
 
$
(134
)
 
$
6

 
$
(264
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
30

 

 
(3
)
 
27

Amounts reclassified from accumulated other comprehensive loss

 
1

 

 
1

Net current period other comprehensive income (loss)
30

 
1

 
(3
)
 
28

 
 
 
 
 
 
 
 
Balance as of March 31, 2014
$
(106
)
 
$
(133
)
 
$
3

 
$
(236
)


17



 
Currency Translation Adjustment
 
Pension Liability Adjustment
 
Total
 
(in millions)
Balance as of December 31, 2012
$
(212
)
 
$
(194
)
 
$
(406
)
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(173
)
 
3

 
(170
)
Amounts reclassified from accumulated other comprehensive loss

 
1

 
1

Net current period other comprehensive income (loss)
(173
)
 
4

 
(169
)
 
 
 
 
 
 
Balance as of March 31, 2013
$
(385
)
 
$
(190
)
 
$
(575
)

The following table presents additional information about reclassifications out of accumulated other comprehensive loss:
 
Three Months Ended March 31,
 
2014
 
2013
 
(in millions)
Pension liability adjustment:
 
 
 
Amortization of prior service cost(1)
$
(1
)
 
$

Amortization of net loss(1)

 
(2
)
Tax benefit(2)

 
1

Total pension liability adjustment reclassifications for the period, net of taxes
(1
)
 
(1
)
Total reclassifications for the period, net of tax
$
(1
)
 
$
(1
)
____________
(1) 
Reclassified out of accumulated other comprehensive loss to general, administrative and other in the condensed consolidated statements of operations. These amounts were included in the computation of net periodic pension cost. See Note 11: "Employee Benefit Plans" for additional information. Amounts in parentheses indicate a loss in our condensed consolidated statements of operations.
(2) 
Reclassified out of accumulated other comprehensive loss to income tax expense in our condensed consolidated statements of operations.

Note 15: Business Segments

We are a diversified hospitality company with operations organized in three distinct operating segments: ownership, management and franchise and timeshare. Each segment is managed separately because of its distinct economic characteristics.

The ownership segment includes all hotels that we wholly own or lease, as well as consolidated non-wholly owned entities and consolidated VIEs. As of March 31, 2014, this segment included 118 wholly owned and leased hotels and resorts, three non-wholly owned hotel properties and three hotels of consolidated VIEs. While we do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment revenues, we manage these investments in our ownership segment. Our unconsolidated affiliates are primarily investments in entities that owned or leased 29 hotels and a management company as of March 31, 2014.

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 under one of our proprietary brand names of our brand portfolio. As of March 31, 2014, this segment included 508 managed hotels and 3,450 franchised hotels. This segment also earns fees for managing properties in our ownership and timeshare segments.

The timeshare segment includes the development of vacation ownership clubs and resorts, marketing and selling of timeshare intervals, providing timeshare customer financing and resort operations. This segment also provides assistance to third-party developers in selling their timeshare inventory. As of March 31, 2014, this segment included 43 timeshare properties.

Corporate and other represents revenues and related operating expenses generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels and other rental income, as well as corporate assets and related expenditures.

The performance of our operating segments is evaluated primarily based on Adjusted EBITDA, which should not be considered an alternative to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. EBITDA, presented herein, is a non-GAAP financial measure that reflects net income attributable to Hilton stockholders, excluding interest expense, a provision for income taxes and depreciation and amortization. We define Adjusted

18



EBITDA as EBITDA, further adjusted to exclude certain items, including, but not limited to, gains, losses and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated investments; (ii) foreign currency transactions; (iii) debt restructurings/retirements; (iv) non-cash impairment losses; (v) furniture, fixtures and equipment ("FF&E") replacement reserves required under certain lease agreements; (vi) reorganization costs; (vii) share-based and certain other compensation expenses prior to and in connection with our initial public offering; (viii) severance, relocation and other expenses; and (ix) other items.

The following table presents revenues and Adjusted EBITDA for our reportable segments, reconciled to consolidated amounts:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(in millions)
Revenues
 
 
 
Ownership(1)(4)
$
952

 
$
920

Management and franchise(2)
331

 
282

Timeshare
279

 
246

Segment revenues
1,562

 
1,448

Other revenues from managed and franchised properties
827

 
841

Other revenues(3)
21

 
15

Intersegment fees elimination(1)(2)(3)(4)
(47
)
 
(41
)
Total revenues
$
2,363

 
$
2,263

 
 
 
 
Adjusted EBITDA
 
 
 
Ownership(1)(2)(3)(4)(5)
$
179

 
$
174

Management and franchise(2)
331

 
282

Timeshare(1)(2)
85

 
59

Corporate and other(3)(4)
(51
)
 
(68
)
Adjusted EBITDA
$
544

 
$
447

____________
(1)
Includes charges to timeshare operations for rental fees and fees for other amenities, which were eliminated in our condensed consolidated financial statements. These charges totaled $6 million and $5 million for the three months ended March 31, 2014 and 2013, respectively. While the net effect is zero, our measures of segment revenues and Adjusted EBITDA include these fees as a benefit to the ownership segment and a cost to timeshare Adjusted EBITDA.
(2)
Includes management, royalty and intellectual property fees of $27 million and $21 million for the three months ended March 31, 2014 and 2013, respectively. These fees are charged to consolidated owned and leased properties and were eliminated in our condensed consolidated financial statements. Also includes a licensing fee of $11 million and $12 million for the three months ended March 31, 2014 and 2013, respectively, which is charged to our timeshare segment by our management and franchise segment and is eliminated in our condensed consolidated financial statements. While the net effect is zero, our measures of segment revenues and Adjusted EBITDA include these fees as a benefit to the management and franchise segment and a cost to ownership Adjusted EBITDA and timeshare Adjusted EBITDA.
(3)
Includes charges to consolidated owned and leased properties for services provided by our wholly owned laundry business of $2 million for each of the three months ended March 31, 2014 and 2013. These charges were eliminated in our condensed consolidated financial statements.
(4) 
Includes other intercompany charges of $1 million for the three months ended March 31, 2014 and 2013.
(5) 
Includes unconsolidated affiliate Adjusted EBITDA.


19



The following table provides a reconciliation of Adjusted EBITDA to EBITDA and EBITDA to net income attributable to Hilton stockholders:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(in millions)
Adjusted EBITDA
$
544

 
$
447

Net income attributable to noncontrolling interests
(1
)
 
(4
)
Gain (loss) on foreign currency transactions
14

 
(43
)
FF&E replacement reserve
(11
)
 
(7
)
Share-based compensation expense
(13
)
 
(2
)
Other gain, net
3

 
7

Other adjustment items
(13
)
 
(11
)
EBITDA
523

 
387

Interest expense
(153
)
 
(143
)
Interest expense included in equity in earnings from unconsolidated affiliates
(3
)
 
(4
)
Income tax expense
(83
)
 
(38
)
Depreciation and amortization
(153
)
 
(160
)
Depreciation and amortization included in equity in earnings from unconsolidated affiliates
(8
)
 
(8
)
Net income attributable to Hilton stockholders
$
123

 
$
34


The following table presents assets for our reportable segments, reconciled to consolidated amounts:
 
March 31,
 
December 31,
 
2014
 
2013
 
(in millions)
Assets:
 
 
 
Ownership
$
11,685

 
$
11,936

Management and franchise
10,848

 
11,016

Timeshare
1,882

 
1,871

Corporate and other
1,978

 
1,739

 
$
26,393

 
$
26,562


The following table presents capital expenditures for property and equipment for our reportable segments, reconciled to consolidated amounts:
 
Three Months Ended
 
March 31,
 
2014

2013
 
(in millions)
Capital expenditures for property and equipment:
 
 
 
Ownership
$
42

 
$
53

Timeshare

 
1

Corporate and other
1

 
3

 
$
43

 
$
57


Note 16: Commitments and Contingencies

As of March 31, 2014, we had outstanding guarantees of $27 million, with remaining terms ranging from seven months to nine years, for debt and other obligations of third parties. We have two letters of credit for a total of $27 million that have been pledged as collateral for two of these guarantees. Although we believe it is unlikely that material payments will be required under these guarantees or letters of credit, there can be no assurance that this will be the case.

We have also provided 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 performance levels are not achieved. However, in limited cases, we are obligated to fund performance shortfalls. As of March 31, 2014, we had six contracts containing performance guarantees, with expirations ranging from 2018 to 2030, and possible cash outlays totaling

20



approximately $150 million. Our obligations under these guarantees in future periods are dependent on the operating performance levels of these hotels over the remaining terms of the performance guarantees. We do not have any letters of credit pledged as collateral against these guarantees. As of March 31, 2014 and December 31, 2013, we recorded current liabilities of approximately $9 million as of each date and non-current liabilities of approximately $49 million and $51 million, respectively, in our condensed consolidated balance sheets for obligations under our outstanding performance guarantees that are related to certain VIEs for which we are not the primary beneficiary.

As of March 31, 2014, we had outstanding commitments under third-party contracts of approximately $133 million for capital expenditures at certain owned and leased properties, including our consolidated VIEs. Our contracts contain clauses that allow us to cancel all or some portion of the work. If cancellation of a contract occurred, our commitment would be any costs incurred up to the cancellation date, in addition to any costs associated with the discharge of the contract.

We have entered into an agreement with a developer in Las Vegas, Nevada, whereby we have agreed to purchase residential units from the developer that we will convert to timeshare units to be marketed and sold under our Hilton Grand Vacations brand. Subject to certain conditions, we are required to purchase approximately $92 million of inventory ratably over a maximum period of four years, which is equivalent to purchases of approximately $6 million per quarter. We began purchasing inventory during the quarter ended March 31, 2013, and as of March 31, 2014, we had purchased $46 million of inventory under this agreement. As of March 31, 2014, our contractual obligations pursuant to this agreement for the remainder of 2014 and the years ended December 31, 2015 and 2016, respectively, were $18 million, $24 million and $4 million.

During 2010, an affiliate of our Sponsor settled a $75 million liability on our behalf in conjunction with a lawsuit settlement by entering into service contracts with the plaintiff. We recorded the portion settled by this affiliate as a capital contribution. Additionally, as part of the settlement, we entered into a guarantee with the plaintiff to pay any shortfall that this affiliate does not fund related to those service contracts up to the value of the settlement amount made by the affiliate. The remaining potential exposure under this guarantee as of March 31, 2014 was approximately $45 million. We have not accrued a liability for this guarantee as we believe the likelihood of any material funding to be remote.

We are involved in other litigation arising from the normal course of business, some of which includes claims for substantial sums. Accruals are recorded when the outcome is probable and can be reasonably estimated in accordance with applicable accounting requirements regarding accounting for contingencies. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of March 31, 2014 will not have a material effect on our condensed consolidated results of operations, financial position or cash flows.

Note 17: Subsequent Events

HGV Grand Islander

In April 2014, we completed the sale of certain land and easement rights at the Hilton Hawaiian Village to Blackstone in connection with a timeshare project. In addition, Blackstone acquired the rights to the name, plans, designs, contracts and other documents related to the timeshare project. The total consideration received for this transaction was approximately $37 million. We also executed development management, sales and marketing and other agreements with Blackstone, for which we will receive fees in connection with services provided over the term of the respective agreements.

Debt Repayment

In May 2014, we made a voluntary prepayment of $100 million on our Term Loans.



21



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.

Forward -Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements that reflect our current views with respect to, among other things, our operations and financial performance. Forward-looking statements include all statements that are not historical facts. 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," "approximately," "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. 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, 2013. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included 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 is one of the largest and fastest growing hospitality companies in the world, with 4,155 hotels, resorts and timeshare properties comprising 686,790 rooms in 92 countries and territories. Our premier brand portfolio includes our luxury hotel brands, Waldorf Astoria Hotels & Resorts and Conrad Hotels & Resorts, our full-service hotel brands, Hilton Hotels & Resorts, DoubleTree by Hilton and Embassy Suites Hotels, our focused-service hotel brands, Hilton Garden Inn, Hampton Hotels, Homewood Suites by Hilton and Home2 Suites by Hilton, and our timeshare brand, Hilton Grand Vacations. More than 318,000 team members proudly serve in our properties and corporate offices around the world, and we have approximately 41 million members in our award-winning customer loyalty program, Hilton HHonors.

Segments and Regions

Management analyzes our operations and business by both operating segments and geographic regions. Our operations consist of three reportable segments that are based on similar products or services: management and franchise; ownership; and timeshare. The management and franchise segment provides services, which include hotel management and licensing of our brands to franchisees, as well as property management at timeshare properties. This segment generates its revenue from management and franchise fees charged to hotel owners, including our owned and leased hotels, and to homeowners' associations at timeshare properties. As a manager of hotels and timeshare resorts, 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 derives earnings from providing hotel room rentals, food and beverage sales and other services at our owned and leased hotels. The timeshare segment consists of multi-unit vacation ownership properties. This segment generates revenue by marketing and selling timeshare interests owned by Hilton and third parties, providing consumer financing and resort operations.

Geographically, management conducts business through three distinct geographic regions: the Americas; Europe, Middle East and Africa ("EMEA"); and 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 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 Ireland 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 Ocean island nations. Europe and MEA are often analyzed separately by management. The Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific island nations.



22



System Growth and Pipeline

As of March 31, 2014, approximately 77 percent of our system-wide hotel rooms were located in the U.S. We expect that the percentage of our hotel rooms outside the U.S. will continue to increase in future years as hotels in our pipeline open. To support our growth strategy, we continue to expand our development pipeline. As of March 31, 2014, we had a total of 1,165 hotels in our development pipeline, representing approximately 200,000 rooms under construction or approved for development throughout 76 countries and territories. As of March 31, 2014, over 101,000 rooms, representing approximately half of our development pipeline, were under construction. Of the approximately 200,000 rooms in the pipeline, 115,000 rooms, or more than half of the pipeline, were located outside the U.S. Over 99 percent of the rooms in the pipeline and under construction are within our management and franchise segment. We do not consider any development project relating to properties under our management and franchise segment to be material to us.

Our management and franchise contracts are designed to expand our business with limited or no capital investment. The capital required to build and maintain hotels that we manage or franchise is typically provided by the owner of the respective hotel with minimal or no capital required by us as the manager or franchisor. Additionally, prior to approving the addition of new hotels to our management and franchise development pipeline, we evaluate the economic viability of the hotel based on the geographic location, the credit quality of the third-party owner and other factors. As a result, by increasing the number of management and franchise agreements with third-party owners, we expect to achieve a higher overall return on invested capital.

Additionally, in recent years we have entered into sales and marketing agreements to sell timeshare units on behalf of third-party developers. Our supply of third-party developed timeshare intervals was approximately 70,000, or 77 percent of our total supply, as of March 31, 2014.

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 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 4,112 hotels in our system as of March 31, 2014, 3,626 were classified as comparable hotels. Our 486 non-comparable hotels included 24 properties, or less than one 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, undergone 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. 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 ("ADR") levels as demand for hotel rooms increases or decreases.

Average Daily Rate

ADR represents hotel room revenue divided by total number of room nights sold in 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 we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates have a different effect on overall revenues and incremental profitability than changes in occupancy, as described above.

Revenue per Available Room ("RevPAR")

We calculate RevPAR by dividing hotel room revenue by 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 our hotels: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.


23



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 (all periods use the same exchange rates), unless otherwise noted.

EBITDA and Adjusted EBITDA

For a discussion of our definition of EBITDA and Adjusted EBITDA, see Note 15: "Business Segments" in our unaudited condensed consolidated financial statements.

EBITDA and Adjusted EBITDA are not recognized terms under U.S. GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with U.S. GAAP. In addition, our definitions of EBITDA and Adjusted EBITDA may not be comparable to similarly titled measures of other companies.

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) EBITDA and Adjusted EBITDA are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions; and (ii) EBITDA and Adjusted EBITDA 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.

EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered either in isolation or as a substitute for net income (loss), cash flow or other methods of analyzing our results as reported under U.S. 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 our tax expense or the cash requirements to pay our taxes;

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.


24



Results of Operations
Three Months Ended March 31, 2014 Compared with Three Months Ended March 31, 2013
During the three months ended March 31, 2014, we experienced occupancy increases in all segments of our business and we have been able to increase rates in market segments where demand has outpaced supply. The hotel operating statistics for our system-wide comparable hotels were as follows:
 
Three Months Ended
 
Variance
 
March 31, 2014
 
2014 vs. 2013
Owned and leased hotels
 
 
 
 
Occupancy
72.6
%
 
0.7
%
pts.
ADR
$
190.74

 
3.5
%
 
RevPAR
$
138.56

 
4.4
%
 
 
 
 
 
 
Managed and franchised hotels
 
 
 
 
Occupancy
69.5
%
 
2.0
%
pts.
ADR
$
133.63

 
3.7
%
 
RevPAR
$
92.92

 
6.8
%
 
 
 
 
 
 
System-wide
 
 
 
 
Occupancy
69.8
%
 
1.9
%
pts.
ADR
$
139.13

 
3.6
%
 
RevPAR
$
97.17

 
6.6
%
 

The system-wide increase in RevPAR was led by our Asia Pacific region, which experienced an increase of 8.7 percent due to an increase in occupancy of 2.6 percentage points and an increase in ADR of 4.4 percent. In the Americas region, which includes the U.S., RevPAR increased 6.7 percent due to increased occupancy of 2.0 percentage points and increased ADR of 3.7 percent. Our European hotels experienced a RevPAR increase of 6.5 percent, due to increased occupancy of 2.5 percentage points and increased ADR of 2.4 percent. RevPAR at our hotels in the MEA region was relatively unchanged.

Revenues
 
Three Months Ended March 31,
 
Percent Change
 
2014
 
2013
 
2014 vs. 2013
 
(in millions)
 
 
Owned and leased hotels
$
945

 
$
914

 
3.4
Management and franchise fees and other
312

 
262

 
19.1
Timeshare
279

 
246

 
13.4
 
$
1,536

 
$
1,422

 
8.0

Revenues as presented in this section excludes other revenues from managed and franchised properties of $827 million and $841 million during the three months ended March 31, 2014 and 2013, respectively.

Owned and leased hotels

During the three months ended March 31, 2014, the overall improved performance at our owned and leased hotels primarily was a result of improvement in RevPAR of 4.4 percent at our comparable owned and leased hotels.

As of March 31, 2014, we had 35 consolidated owned and leased hotels located in the U.S., comprising 24,050 rooms. Revenues at our U.S. owned and leased hotels totaled $500 million and $471 million for the three months ended March 31, 2014 and 2013, respectively. The increase of $29 million, or 6.2 percent, was primarily the result of an increase in RevPAR at our U.S. comparable owned and leased hotels of 4.9 percent, which was due to an increase in ADR of 3.9 percent, while occupancy remained relatively flat. The overall increase in RevPAR at our U.S. comparable owned and leased hotels was from both group business and transient guests, with increases in RevPAR of 3.3 percent and 3.6 percent, respectively. In addition, food and beverage revenues increased 9.6 percent, primarily due to increased spending by group business.

As of March 31, 2014, we had 89 consolidated owned and leased hotels located outside of the U.S., comprising 25,810 rooms. Revenues from our international (non-U.S.) owned and leased hotels totaled $445 million and $443 million for the three

25



months ended March 31, 2014 and 2013, respectively. The increase of $2 million, or 0.5 percent, included an unfavorable movement in foreign currency rates of $5 million. On a currency neutral basis, revenues from our international owned and leased hotels increased $7 million. This increase was primarily the result of an increase in RevPAR at our international comparable owned and leased hotels of 3.8 percent, which was primarily due to an increase in ADR of 2.8 percent, while occupancy remained relatively flat.

Management and franchise fees and other

Management and franchise fee revenue for the three months ended March 31, 2014 and 2013 totaled $293 million and $249 million, respectively. The increase of $44 million, or 17.7 percent, in our management and franchise fee business reflected increases in RevPAR of 6.9 percent and 6.8 percent at our comparable managed and franchised properties, respectively. The increases in RevPAR for managed and franchised hotels were the result of both increased occupancy and ADR.

The addition of new hotels to our managed and franchised system also contributed to the growth in revenue. From March 31, 2013 to March 31, 2014 we added 40 managed properties on a net basis, contributing an additional 11,597 rooms to our system, as well as 122 franchised properties on a net basis, providing an additional 16,819 rooms to our system. As new hotels are established in our system, we expect the fees received from such hotels to increase as they are part of our system for full periods.

Other revenues for the three months ended March 31, 2014 and 2013 were $19 million and $13 million, respectively. The increase was primarily driven by an increase in revenues earned by our purchasing operations.

Timeshare

Timeshare revenue increased $33 million due to an increase of approximately $18 million in real estate sales generated primarily from the recognition of previously deferred revenues resulting from the completed construction and opening of one of our developed properties in 2014. Sales on projects developed by third-party developers increased approximately $5 million, which we expect to continue as we further develop our capital light timeshare business. There was also an increase of approximately $11 million in revenue from our resort operations due to increased transient rentals. Financing and other revenues remained relatively flat.

Operating Expenses
 
Three Months Ended March 31,
 
Percent Change
 
2014
 
2013
 
2014 vs. 2013
 
(in millions)
 
 
Owned and leased hotels
$
771

 
$
743

 
3.8
Timeshare
177

 
170

 
4.1

Fluctuations in operating expenses at our owned and leased hotels can be attributed to various factors, including changes in occupancy levels, labor costs, utilities, taxes and insurance costs. The change in the number of occupied room nights directly affects certain variable expenses, which include payroll, supplies and other operating expenses.

U.S. owned and leased hotel expenses totaled $357 million and $343 million for the three months ended March 31, 2014 and 2013, respectively. The increase of $14 million, or 4.1 percent, was primarily due to an increase in labor and energy costs.

International owned and leased hotel expenses totaled $414 million and $400 million for the three months ended March 31, 2014 and 2013, respectively. The increase of $14 million, or 3.5 percent, included a favorable movement in foreign currency rates of $2 million. On a currency neutral basis, international owned and leased hotel expenses increased $16 million. The increase in currency neutral expenses was primarily due to a benefit of $11 million recognized as a reduction in rent expense during the three months ended March 31, 2013 relating to a termination payment received for one of our properties with a ground lease.

Timeshare expense increased $7 million primarily due to increases in sales and marketing expenses, resulting from the increase in sales volume from both our owned properties and third-party developed properties.


26



 
Three Months Ended March 31,
 
Percent Change
 
2014
 
2013
 
2014 vs. 2013
 
(in millions)
 
 
Depreciation and amortization
$
153

 
$
160

 
(4.4)

Depreciation expense decreased $12 million primarily due to $10 million in accelerated depreciation as a result of a lease termination at one of our properties during the three months ended March 31, 2013. Amortization expense increased $5 million primarily due to increases in capitalized software costs placed in service after March 31, 2013.

 
Three Months Ended March 31,
 
Percent Change
 
2014
 
2013
 
2014 vs. 2013
 
(in millions)
 
 
General, administrative and other
$
97

 
$
97

 
General and administrative expenses consist of our corporate operations, compensation and related expenses, including share-based compensation, and other operating costs.

General and administrative expenses were $80 million and $84 million for the three months ended March 31, 2014 and 2013, respectively. The decrease of $4 million was primarily due to the reversal of accruals related to the termination of a cash-based, long-term incentive plan that was replaced with a share-based compensation plan in the first quarter of 2014 resulting in an $18 million reduction in general and administrative expense. This decrease was partially offset by share-based compensation expense of $5 million due to grants made under the 2013 Omnibus Incentive Plan and an increase of $11 million of compensation expense related to the Promote plan.

Other expenses for the three months ended March 31, 2014 and 2013 were $17 million and $13 million, respectively. The increase of $4 million was primarily due to our purchasing operations, which is in line with the increase in other revenues.

Non-operating Income and Expenses
 
Three Months Ended March 31,
 
Percent Change
 
2014
 
2013
 
2014 vs. 2013
 
(in millions)
 
 
Interest expense
$
153

 
$
143

 
7.0
Interest expense increased $10 million primarily due to the amortization of debt issuance costs on debt entered into in October 2013.

 
Three Months Ended March 31,
 
Percent Change
 
2014
 
2013
 
2014 vs. 2013
 
(in millions)
 
 
Equity in earnings from unconsolidated affiliates
$
4

 
$
1

 
NM(1)
____________
(1) 
Fluctuation in terms of percentage change is not meaningful.
The $3 million increase