Q2 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 June 30, 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 July 28, 2014 was 984,617,365.


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

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


1

PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

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

 
June 30,
 
December 31,
2014
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
545

 
$
594

Restricted cash and cash equivalents
284

 
266

Accounts receivable, net of allowance for doubtful accounts of $30 and $32
858

 
731

Inventories
359

 
396

Deferred income tax assets
23

 
23

Current portion of financing receivables, net
52

 
94

Current portion of securitized financing receivables, net
65

 
27

Prepaid expenses
166

 
148

Other
65

 
104

Total current assets (variable interest entities - $216 and $97)
2,417

 
2,383

 
 
 
 
Property, Investments and Other Assets:
 
 
 
Property and equipment, net
9,036

 
9,058

Financing receivables, net
359

 
635

Securitized financing receivables, net
462

 
194

Investments in affiliates
257

 
260

Goodwill
6,227

 
6,220

Brands
5,016

 
5,013

Management and franchise contracts, net
1,390

 
1,452

Other intangible assets, net
727

 
751

Deferred income tax assets
196

 
193

Other
410

 
403

Total property, investments and other assets (variable interest entities - $694 and $408)
24,080

 
24,179

 
 
 
 
TOTAL ASSETS
$
26,497

 
$
26,562

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
1,999

 
$
2,079

Current maturities of long-term debt
3

 
4

Current maturities of non-recourse debt
107

 
48

Income taxes payable
11

 
11

Total current liabilities (variable interest entities - $219 and $86)
2,120

 
2,142

 
 
 
 
Long-term debt
11,314

 
11,751

Non-recourse debt
890

 
920

Deferred revenues
593

 
674

Deferred income tax liabilities
5,058

 
5,053

Liability for guest loyalty program
630

 
597

Other
1,145

 
1,149

Total liabilities (variable interest entities - $987 and $583)
21,750

 
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 June 30, 2014 and December 31, 2013
—

 
—

Common stock, $0.01 par value; 30,000,000,000 authorized shares, 984,617,365 issued and outstanding as of June 30, 2014 and 984,615,364 issued and outstanding as of December 31, 2013
10

 
10

Additional paid-in capital
10,009

 
9,948

Accumulated deficit
(4,999
)
 
(5,331
)
Accumulated other comprehensive loss
(186
)
 
(264
)
Total Hilton stockholders' equity
4,834

 
4,363

Noncontrolling interests
(87
)
 
(87
)
Total equity
4,747

 
4,276

 
 
 
 
TOTAL LIABILITIES AND EQUITY
$
26,497

 
$
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014

2013
 
2014
 
2013
Revenues
 
 
 
 
 
 
 
Owned and leased hotels
$
1,117


$
1,070

 
$
2,062


$
1,984

Management and franchise fees and other
354


299

 
666


561

Timeshare
276


261

 
555


507

 
1,747

 
1,630

 
3,283

 
3,052

Other revenues from managed and franchised properties
920

 
750

 
1,747

 
1,591

Total revenues
2,667

 
2,380

 
5,030

 
4,643

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Owned and leased hotels
833

 
804

 
1,604

 
1,547

Timeshare
188

 
181

 
365

 
351

Depreciation and amortization
158

 
149

 
311

 
309

General, administrative and other
133

 
92

 
230

 
189

 
1,312

 
1,226

 
2,510

 
2,396

Other expenses from managed and franchised properties
920

 
750

 
1,747

 
1,591

Total expenses
2,232

 
1,976

 
4,257

 
3,987

 
 
 
 
 
 
 
 
Operating income
435

 
404

 
773

 
656

 
 
 
 
 
 
 
 
Interest income
5

 
1

 
6

 
3

Interest expense
(158
)
 
(131
)
 
(311
)
 
(274
)
Equity in earnings from unconsolidated affiliates
8

 
7

 
12

 
8

Gain (loss) on foreign currency transactions
32

 
(39
)
 
46

 
(82
)
Other gain (loss), net
11

 
(1
)
 
14

 
6

 
 
 
 
 
 
 
 
Income before income taxes
333

 
241

 
540

 
317

 
 
 
 
 
 
 
 
Income tax expense
(121
)
 
(84
)
 
(204
)
 
(122
)
 
 
 
 
 
 
 
 
Net income
212

 
157

 
336

 
195

Net income attributable to noncontrolling interests
(3
)
 
(2
)
 
(4
)
 
(6
)
Net income attributable to Hilton stockholders
$
209

 
$
155

 
$
332

 
$
189

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic and diluted
$
0.21

 
$
0.17

 
$
0.34

 
$
0.20


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
212

 
$
157

 
$
336

 
$
195

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
 
 
 
 
Currency translation adjustment, net of tax of $66, $(31), $102 and $(155)
53

 
(18
)
 
81

 
(181
)
Pension liability adjustment, net of tax of $(1), $(5), $(1) and $(7)
3

 
8

 
4

 
12

Cash flow hedge adjustment, net of tax of $3, $—, $5 and $—
(6
)
 
—

 
(9
)
 
—

Total other comprehensive income (loss)
50

 
(10
)
 
76

 
(169
)
 
 
 
 
 
 
 
 
Comprehensive income
262

 
147

 
412

 
26

Comprehensive income attributable to noncontrolling interests
(3
)
 
(8
)
 
(2
)
 
(22
)
Comprehensive income attributable to Hilton stockholders
$
259

 
$
139

 
$
410

 
$
4


See notes to condensed consolidated financial statements.

4


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

 
Six Months Ended
 
June 30,
 
2014
 
2013
Operating Activities
 
 
 
Net income
$
336

 
$
195

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
311

 
309

Equity in earnings from unconsolidated affiliates
(12
)
 
(8
)
Loss (gain) on foreign currency transactions
(46
)
 
82

Other gain, net
(14
)
 
(6
)
Share-based compensation
41

 
3

Distributions from unconsolidated affiliates
11

 
10

Deferred income taxes
(42
)
 
25

Change in restricted cash and cash equivalents
(1
)
 
(46
)
Working capital changes and other
(72
)
 
74

Net cash provided by operating activities
512

 
638

 
 
 
 
Investing Activities
 
 
 
Capital expenditures for property and equipment
(110
)
 
(121
)
Acquisitions
—

 
(30
)
Payments received on other financing receivables
2

 
1

Issuance of other financing receivables
(1
)
 
(7
)
Investments in affiliates
(5
)
 
(3
)
Distributions from unconsolidated affiliates
11

 
13

Proceeds from asset dispositions
35

 
—

Contract acquisition costs
(21
)
 
(10
)
Software capitalization costs
(32
)
 
(26
)
Net cash used in investing activities
(121
)
 
(183
)
 
 
 
 
Financing Activities
 
 
 
Borrowings
350

 
451

Repayment of debt
(783
)
 
(952
)
Debt issuance costs
(2
)
 
—

Change in restricted cash and cash equivalents
(17
)
 
(30
)
Capital contribution
13

 
—

Distributions to noncontrolling interests
(2
)
 
(3
)
Net cash used in financing activities
(441
)
 
(534
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
1

 
(15
)
Net decrease in cash and cash equivalents
(49
)
 
(94
)
Cash and cash equivalents, beginning of period
594

 
755

 
 
 
 
Cash and cash equivalents, end of period
$
545

 
$
661

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the year:
 
 
 
Interest
$
257

 
$
288

Income taxes, net of refunds
$
141

 
$
40

 
 
 
 
Non-cash investing activity:
 
 
 
Capital lease restructuring
$
11

 
$
(44
)
 
 
 
 
Non-cash financing activity:
 
 
 
Capital lease restructuring
$
11

 
$
(48
)

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
—

 
—

 
—

 
332

 
—

 
4

 
336

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

 
—

 
—

 
—

 
83

 
(2
)
 
81

Pension liability adjustment
—

 
—

 
—

 
—

 
4

 
—

 
4

Cash flow hedge adjustment
—

 
—

 
—

 
—

 
(9
)
 
—

 
(9
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
78

 
(2
)
 
76

Share-based compensation
—

 
—

 
48

 
—

 
—

 
—

 
48

Capital contribution
—

 
—

 
13

 
—

 
—

 
—

 
13

Distributions
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Balance as of June 30, 2014
985

 
$
10

 
$
10,009

 
$
(4,999
)
 
$
(186
)
 
$
(87
)
 
$
4,747


 
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
—

 
—

 
—

 
189

 
—

 
6

 
195

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

 
—

 
—

 
—

 
(197
)
 
16

 
(181
)
Pension liability adjustment
—

 
—

 
—

 
—

 
12

 
—

 
12

Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(185
)
 
16

 
(169
)
Distributions
—

 
—

 
—

 
—

 
—

 
(3
)
 
(3
)
Balance as of June 30, 2013
921

 
$
1

 
$
8,452

 
$
(5,557
)
 
$
(591
)
 
$
(127
)
 
$
2,178

____________
(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 11 distinct brands. We are engaged in owning, leasing, managing, developing and franchising hotels, resorts and timeshare properties. As of June 30, 2014, we owned, leased, managed or franchised 4,158 hotel and resort properties, totaling 687,222 rooms in 93 countries and territories, as well as 44 timeshare properties comprising 6,758 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.

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements for the three and six months ended June 30, 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 May 2014, the FASB issued ASU No. 2014-09 ("ASU 2014-09"), Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in "Revenue Recognition (Topic 605)," and requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The provisions of ASU 2014-09 are effective for annual periods beginning after December 15, 2016, including interim periods within that reporting period and are to be applied retrospectively; early application is not permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

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. The adoption of ASU 2014-08 is not expected to materially affect our consolidated financial statements.

Note 3: Property and Equipment

Property and equipment were as follows:    
 
June 30,
 
December 31,
 
2014
 
2013
 
(in millions)
Land
$
4,097

 
$
4,098

Buildings and leasehold improvements
5,609

 
5,511

Furniture and equipment
1,193

 
1,172

Construction-in-progress
81

 
67

 
10,980

 
10,848

Accumulated depreciation and amortization
(1,944
)
 
(1,790
)
 
$
9,036

 
$
9,058


Depreciation and amortization expense on property and equipment, including amortization of assets recorded under capital leases, was $79 million and $77 million during the three months ended June 30, 2014 and 2013, respectively, and $156 million and $166 million during the six months ended June 30, 2014 and 2013, respectively.

As of June 30, 2014 and December 31, 2013, property and equipment included approximately $150 million and $130 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $65 million and $59 million, respectively, of accumulated depreciation and amortization.

In April 2014, we completed the sale of certain land and easement rights to a related party in connection with a timeshare project. In addition, the related party 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 recognized $13 million, net of tax, as a capital contribution within additional paid-in capital, representing the excess of the fair value of the consideration received over the carrying value of the assets sold.

During the six months ended June 30, 2014, we completed the sale of one hotel for approximately $4 million and a vacant parcel of land for approximately $6 million. As a result of these sales, we recognized a pre-tax gain of $12 million, including the reclassification of a currency translation adjustment of $4 million, which was previously recognized in accumulated other comprehensive loss. The gain was included in other gain (loss), net in our condensed consolidated statement of operations.

During the six months ended June 30, 2013, we acquired a parcel of land for $28 million, which we previously leased under a long-term ground lease.


8


Note 4: Financing Receivables

Financing receivables were as follows:
 
June 30, 2014
 
Securitized Timeshare
 
Unsecuritized Timeshare
 
Other
 
Total
 
(in millions)
Financing receivables
$
491

 
$
370

 
$
40

 
$
901

Less: allowance
(29
)
 
(50
)
 
(1
)
 
(80
)
 
462

 
320

 
39

 
821

 
 
 
 
 
 
 
 
Current portion of financing receivables
69

 
58

 
2

 
129

Less: allowance
(4
)
 
(8
)
 
—

 
(12
)
 
65

 
50

 
2

 
117

 
 
 
 
 
 
 
 
Total financing receivables
$
527

 
$
370

 
$
41

 
$
938


 
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 June 30, 2014, we had 51,840 timeshare financing receivables with interest rates ranging from zero to 20.50 percent, a weighted average interest rate of 12.16 percent, a weighted average remaining term of 7.4 years and maturities through 2025. As of June 30, 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 June 2014, we completed a securitization of approximately $357 million of gross timeshare financing receivables and issued approximately $304 million of 1.77 percent notes and approximately $46 million of 2.07 percent notes, which have a stated maturity date in November 2026. The securitization transaction did not qualify as a sale for accounting purposes and, accordingly, no gain or loss was recognized. In August 2013, we completed a securitization of approximately $255 million of gross timeshare financing receivables and issued $250 million of 2.28 percent notes that have a stated maturity date in January 2026. The proceeds from both transactions are presented as debt (collectively, the "Securitized Timeshare Debt"). See Note 7: "Debt" for additional details.

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 June 30, 2014 and December 31, 2013, we had $169 million and $492 million, respectively, of gross timeshare financing receivables secured under our Timeshare Facility.


9


The changes in our allowance for uncollectible timeshare financing receivables were as follows:
 
Six Months Ended June 30,
 
2014
 
2013
 
(in millions)
Beginning balance
$
92

 
$
93

Write-offs
(16
)
 
(11
)
Provision for uncollectibles on sales
15

 
13

Ending balance
$
91

 
$
95


Our timeshare financing receivables as of June 30, 2014 mature as follows:
 
Securitized Timeshare
 
Unsecuritized Timeshare
Year
(in millions)
2014 (remaining)
$
34

 
$
35

2015
70

 
45

2016
73

 
48

2017
75

 
49

2018
75

 
48

Thereafter
233

 
203

 
560

 
428

Less: allowance
(33
)
 
(58
)
 
$
527

 
$
370


The following table details an aged analysis of our gross timeshare financing receivables balance:
 
June 30,
 
December 31,
 
2014
 
2013
 
(in millions)
Current
$
947

 
$
948

30 - 89 days past due
10

 
14

90 - 119 days past due
3

 
4

120 days and greater past due
28

 
28

 
$
988

 
$
994


Note 5: Investments in Affiliates

Investments in affiliates were as follows:
 
June 30,
 
December 31,
 
2014
 
2013
 
(in millions)
Equity investments
$
240

 
$
245

Other investments
17

 
15

 
$
257

 
$
260


We maintain investments in affiliates accounted for under the equity method, which are primarily investments in entities that owned or leased 27 and 30 hotels as of June 30, 2014 and December 31, 2013, respectively. These entities had total debt of approximately $1.0 billion and $1.1 billion as of June 30, 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 June 30, 2014 and December 31, 2013, which was included in financing receivables, net in our condensed consolidated balance sheets.


10


Note 6: Consolidated Variable Interest Entities

As of June 30, 2014 and December 31, 2013, we consolidated five and four variable interest entities ("VIEs"), respectively. During the six months ended June 30, 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 $34 million and $42 million of cash and cash equivalents, $38 million and $26 million of property and equipment, net, and $287 million and $284 million of non-recourse debt as of June 30, 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 $7 million during the three months ended June 30, 2014 and 2013, respectively, and $10 million and $15 million during the six months ended June 30, 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.

In August 2013 and June 2014, we formed VIEs associated with each of our securitization transactions to issue our Securitized Timeshare Debt. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance, the obligation to absorb their losses and the right to receive benefits that are significant to them. As of June 30, 2014 and December 31, 2013, our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily comprised $22 million and $8 million of restricted cash and cash equivalents, $527 million and $221 million of securitized financing receivables, net and $548 million and $222 million of non-recourse debt, respectively. Our condensed consolidated statements of operations for the three and six months ended June 30, 2014 included interest income related to these VIEs of $12 million and $19 million, respectively, included in timeshare revenue, and interest expense related to these VIEs of $2 million and $3 million, respectively, included in interest expense. 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:

June 30,
 
December 31,

2014
 
2013

(in millions)
Senior secured term loan facility with a rate of 3.50%, due 2020
$
5,550

 
$
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
54

 
53

Capital lease obligations with an average rate of 6.04%, due 2015 to 2097
82

 
73


11,343


11,784

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

(4
)
Less: unamortized discount on senior secured term loan facility
(26
)
 
(29
)

$
11,314


$
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.


11


During the six months ended June 30, 2014, we made voluntary prepayments of $450 million on our senior secured term loan facility (the "Term Loans").

As of June 30, 2014, we had $48 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 $952 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 June 30, 2014 and December 31, 2013, our condensed consolidated balance sheets included $33 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:
 
June 30,
 
December 31,
 
2014
 
2013
 
(in millions)
Capital lease obligations of consolidated VIEs with a rate of 6.34%, due 2018 to 2026
$
259

 
$
255

Non-recourse debt of consolidated VIEs with an average rate of 3.38%, due 2015 to 2018(1)
40

 
41

Timeshare Facility with a rate of 1.48%, due 2016
150

 
450

Securitized Timeshare Debt with an average rate of 1.98%, due 2026
548

 
222

 
997

 
968

Less: current maturities of non-recourse debt
(107
)
 
(48
)
 
$
890

 
$
920

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

In June 2014, we issued approximately $304 million of 1.77 percent notes and $46 million of 2.07 percent notes due November 2026, which are secured by a pledge of certain assets, consisting primarily of a pool of our timeshare financing receivables that are secured by a first mortgage or first deed of trust on a timeshare interest. We are required to make monthly payments of principal and interest under the notes. A majority of the proceeds from the asset-backed notes were used to reduce the outstanding balance on our Timeshare Facility.

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. On a monthly basis, the depository account will first be utilized to make any required principal, interest and other payments due with respect to the Timeshare Facility and Securitized Timeshare Debt. After payment of all amounts due under the respective agreements, any remaining amounts will be remitted to us for use in our operations. The balance in the depository account, totaling $27 million and $20 million as of June 30, 2014 and December 31, 2013, respectively, was included in restricted cash and cash equivalents in our condensed consolidated balance sheets.

Debt Maturities

The contractual maturities of our long-term debt and non-recourse debt as of June 30, 2014 were as follows:
Year
(in millions)
2014 (remaining)
$
61

2015
109

2016
363

2017
139

2018(1)
4,110

Thereafter
7,558

 
$
12,340

____________
(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.


12


Note 8: Derivative Instruments and Hedging Activities

During the six months ended June 30, 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 June 30, 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 June 30, 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 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 either of these interest rate caps as hedging instruments.

As of June 30, 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:
 
June 30, 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 liabilities
 
$
5

 
Other assets
 
$
10

 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
Interest rate caps
Other assets
 
—

 
Other assets
 
—


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
 
Six Months Ended
 
 
 
June 30,
 
June 30,
 
Classification of Loss Recognized
 
2014
 
2013
 
2014

2013
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
Other comprehensive loss
 
$
(9
)
 
$
—

 
$
(14
)
 
$
—

 
 
 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
 
 
Interest rate caps
Other gain (loss), net
 
—

 
—

 
—

 
—

____________
(1) 
There were no amounts recognized in earnings related to hedge ineffectiveness or amounts excluded from hedge effectiveness testing during the three and six months ended June 30, 2014.


13


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:

 
June 30, 2014
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
291

 
$
—

 
$
291

 
$
—

Restricted cash equivalents
94

 
—

 
94

 
—

Timeshare financing receivables
988

 
—

 
—

 
990

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
11,235

 
59

 
1,598

 
9,862

Non-recourse debt(2)
698

 
—

 
—

 
701

Interest rate swaps
5

 
—

 
5

 
—


 
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 $82 million and $73 million as of June 30, 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 June 30, 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.

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

14


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 as of June 30, 2014.

Note 10: Income Taxes

At the end of each quarter we estimate the effective tax rate expected to be applied for the full 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 June 30, 2014 and December 31, 2013 were $379 million and $435 million, respectively. We had accrued balances of approximately $17 million and $45 million for the payment of interest and penalties as of June 30, 2014 and December 31, 2013, respectively. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense. The net decrease to unrecognized tax benefits of $56 million and accrued interest and penalties of $28 million relates to a reduction to uncertain tax positions for calendar years 2006 and 2007 that were effectively settled during the second quarter in connection with the receipt of a Revenue Agent Report from the Internal Revenue Service ("IRS").

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 $1 million. Included in the balance of unrecognized tax benefits as of June 30, 2014 and December 31, 2013 were $342 million and $340 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective tax rate.

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 June 30, 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 2013. State income tax returns are generally subject to examination for a period of three to five years after filing the respective return; however, the state effect 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").


15


The components of net periodic pension cost (credit) for the Domestic Plan, U.K. Plan and International Plans were as follows:
 
Three Months Ended June 30,
 
2014
 
2013
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
2

 
$
—

 
$
1

 
$
1

 
$
1

 
$
—

Interest cost
4

 
4

 
1

 
5

 
4

 
1

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

 
—

 
—

 
1

 
—

 
—

Amortization of net loss
1

 
—

 
—

 
1

 
1

 
1

Settlement losses
1

 
—

 
—

 
—

 
—

 
—

Net periodic pension cost (credit)
$
4

 
$
(2
)
 
$
1

 
$
2

 
$
—

 
$
1


 
Six Months Ended June 30,
 
2014
 
2013
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
4

 
$
—

 
$
2

 
$
2

 
$
2

 
$
1

Interest cost
8

 
9

 
2

 
9

 
8

 
2

Expected return on plan assets
(9
)
 
(12
)
 
(2
)
 
(10
)
 
(11
)
 
(2
)
Amortization of prior service cost (credit)
2

 
—

 
—

 
2

 
(1
)
 
—

Amortization of net loss
1

 
—

 
—

 
2

 
2

 
1

Settlement losses
1

 
—

 
—

 
—

 
—

 
1

Net periodic pension cost (credit)
$
7

 
$
(3
)
 
$
2

 
$
5

 
$
—

 
$
3


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 requirements of the ruling from the class action lawsuit, then the bond may be released in 2014.

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 $24 million and $35 million during the three and six months ended June 30, 2014, respectively, which includes amounts reimbursed by hotel owners. As of June 30, 2014, unrecognized compensation costs for unvested awards was approximately $146 million, which is expected to be recognized over a weighted-average period of 2.2 years on a straight-line basis.

As of June 30, 2014, there were 72,404,038 shares of common stock available for future issuance under the 2013 Omnibus Incentive Plan.

Restricted Stock Units

During the six months ended June 30, 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.


16


Stock Options

During the six months ended June 30, 2014, we issued 1,003,591 options with an exercise price of $21.53. As of June 30, 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. 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.

Performance Shares

During the six months ended June 30, 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 that 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. 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 and six months ended June 30, 2014, we recognized compensation expense over the vesting period at the target amount of 100 percent. As of June 30, 2014, 1,078,908 performance shares were outstanding with a remaining life of 2.5 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 The Blackstone Group L.P. and its affiliates ("Blackstone" or "our Sponsor") cease to own 50 percent or more of the shares of the Company, contingent on employment through that date.

In March 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 vested in June 2014. As a result of this modification, we recorded incremental compensation expense of $7 million during the six months ended June 30, 2014. During the three and six months ended June 30, 2014, total compensation expense under the Promote plan was $6 million and $19 million, respectively, and unrecognized compensation expense as of June 30, 2014 was $78 million, including $10 million that is expected to be recognized through December 2014 and $68 million that 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 June 30, 2014.

We recorded compensation expense related to the Promote plan of $1 million and $3 million during the three and six months ended June 30, 2013, respectively.

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 six months ended June 30, 2014.


17


Note 13: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS"):
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
209

 
$
155

 
$
332

 
$
189

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
985

 
921

 
985

 
921

Basic EPS
$
0.21

 
$
0.17

 
$
0.34

 
$
0.20

 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
209

 
$
155

 
$
332

 
$
189

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
985

 
921

 
985

 
921

Diluted EPS
$
0.21

 
$
0.17

 
$
0.34

 
$
0.20


Approximately 1 million options were excluded from the computation of diluted EPS for the three and six months ended June 30, 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(1)
 
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
87

 
2

 
(9
)
 
80

Amounts reclassified from accumulated other comprehensive loss
(4
)
 
2

 
—

 
(2
)
Net current period other comprehensive income (loss)
83

 
4

 
(9
)
 
78

 
 
 
 
 
 
 
 
Balance as of June 30, 2014
$
(53
)
 
$
(130
)
 
$
(3
)
 
$
(186
)

 
Currency Translation Adjustment(1)
 
Pension Liability Adjustment
 
Total
 
(in millions)
Balance as of December 31, 2012
$
(212
)
 
$
(194
)
 
$
(406
)
 
 
 
 
 
 
Other comprehensive income (loss) before reclassifications
(197
)
 
8

 
(189
)
Amounts reclassified from accumulated other comprehensive loss
—

 
4

 
4

Net current period other comprehensive income (loss)
(197
)
 
12

 
(185
)
 
 
 
 
 
 
Balance as of June 30, 2013
$
(409
)
 
$
(182
)
 
$
(591
)
____________
(1) 
Includes net investment hedges.


18


The following table presents additional information about reclassifications out of accumulated other comprehensive loss:
 
Six Months Ended June 30,
 
2014
 
2013
 
(in millions)
Currency translation adjustment:
 
 
 
Sale and liquidation of foreign assets(1)
$
4

 
$
(1
)
Gains on net investment hedges(2)
—

 
1

Tax benefit(3)(4)
—

 
—

Total currency translation adjustment reclassifications for the period, net of taxes
4

 
—

 
 
 
 
Pension liability adjustment:
 
 
 
Amortization of prior service cost(5)
(2
)
 
(1
)
Amortization of net loss(5)
(1
)
 
(5
)
Tax benefit(3)
1

 
2

Total pension liability adjustment reclassifications for the period, net of taxes
(2
)
 
(4
)
 
 
 
 
Total reclassifications for the period, net of tax
$
2

 
$
(4
)
____________
(1) 
Reclassified out of accumulated other comprehensive loss to other gain (loss), net in our condensed consolidated statements of operations. Amounts in parentheses indicate a loss in our condensed consolidated statements of operations.
(2) 
Reclassified out of accumulated other comprehensive loss to gain (loss) on foreign currency transactions in our condensed consolidated statements of operations.
(3) 
Reclassified out of accumulated other comprehensive loss to income tax expense in our condensed consolidated statements of operations.
(4) 
The respective tax benefit was less than $1 million for the six months ended June 30, 2013.
(5) 
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.

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 June 30, 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 27 hotels and one condominium management company as of June 30, 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 June 30, 2014, this segment included 517 managed hotels and 3,489 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 June 30, 2014, this segment included 44 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 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")

19


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
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Revenues
 
 
 
 
 
 
 
Ownership(1)(2)
$
1,126


$
1,078

 
$
2,078

 
$
1,998

Management and franchise(3)
371


326

 
702

 
608

Timeshare
276


261

 
555

 
507

Segment revenues
1,773


1,665

 
3,335

 
3,113

Other revenues from managed and franchised properties
920


750

 
1,747

 
1,591

Other revenues(4)
25


15

 
46

 
30

Intersegment fees elimination(1)(2)(3)(4)
(51
)

(50
)
 
(98
)
 
(91
)
Total revenues
$
2,667


$
2,380

 
$
5,030

 
$
4,643

 
 
 
 
 
 
 
 
Adjusted EBITDA
 
 
 
 
 
 
 
Ownership(1)(2)(3)(4)(5)
$
291


$
271

 
$
470

 
$
445

Management and franchise(3)
371


326

 
702

 
608

Timeshare(1)(3)
69


60

 
154

 
119

Corporate and other(2)(4)
(80
)

(67
)
 
(131
)
 
(135
)
Adjusted EBITDA
$
651


$
590

 
$
1,195

 
$
1,037

____________
(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 $8 million and $7 million for the three months ended June 30, 2014 and 2013, respectively, and $14 million and $12 million for the six months ended June 30, 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 other intercompany charges of $1 million for the three months ended June 30, 2014 and 2013 and $2 million for the six months ended June 30, 2014 and 2013.
(3)
Includes management, royalty and intellectual property fees of $29 million and $26 million for the three months ended June 30, 2014 and 2013, respectively, and $56 million and $47 million for the six months ended June 30, 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 $13 million for the three months ended June 30, 2014 and 2013, respectively, and $22 million and $25 million for the six months ended June 30, 2014 and 2013, respectively, which is charged to our timeshare segment by our management and franchise segment and was 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.
(4) 
Includes charges to consolidated owned and leased properties for services provided by our wholly owned laundry business of $2 million and $3 million for the three months ended June 30, 2014 and 2013, respectively, and $4 million and $5 million for the six months ended June 30, 2014 and 2013, respectively. These charges were eliminated in our condensed consolidated financial statements.
(5) 
Includes unconsolidated affiliate Adjusted EBITDA.


20


The following table provides a reconciliation of Adjusted EBITDA to EBITDA and EBITDA to net income attributable to Hilton stockholders:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
(in millions)
Adjusted EBITDA
$
651

 
$
590

 
$
1,195

 
$
1,037

Net income attributable to noncontrolling interests
(3
)
 
(2
)
 
(4
)
 
(6
)
Gain (loss) on foreign currency transactions
32

 
(39
)
 
46

 
(82
)
FF&E replacement reserve
(12