Q1 2015 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, 2015
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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:

Large accelerated filer x
 
Accelerated filer ¨
Non-accelerated filer ¨
(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, 2015 was 987,448,909.


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)
 
March 31,
 
December 31,
2015
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
547

 
$
566

Restricted cash and cash equivalents
269

 
202

Accounts receivable, net of allowance for doubtful accounts of $29 and $29
899

 
844

Inventories
421

 
404

Deferred income tax assets
20

 
20

Current portion of financing receivables, net
60

 
66

Current portion of securitized financing receivables, net
60

 
62

Prepaid expenses
153

 
133

Income taxes receivable
29

 
132

Other
31

 
70

Total current assets (variable interest entities - $137 and $136)
2,489

 
2,499

Property, Investments and Other Assets:
 
 
 
Property and equipment, net
9,193

 
7,483

Property and equipment, net held for sale
—

 
1,543

Financing receivables, net
451

 
416

Securitized financing receivables, net
376

 
406

Investments in affiliates
156

 
170

Goodwill
5,916

 
6,154

Brands
4,925

 
4,963

Management and franchise contracts, net
1,252

 
1,306

Other intangible assets, net
639

 
674

Deferred income tax assets
159

 
155

Other
349

 
356

Total property, investments and other assets (variable interest entities - $576 and $613)
23,416

 
23,626

TOTAL ASSETS
$
25,905

 
$
26,125

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
2,132

 
$
2,099

Current maturities of long-term debt
10

 
10

Current maturities of non-recourse debt
137

 
127

Income taxes payable
19

 
21

Total current liabilities (variable interest entities - $171 and $162)
2,298

 
2,257

Long-term debt
10,572

 
10,803

Non-recourse debt
711

 
752

Deferred revenues
447

 
495

Deferred income tax liabilities
5,344

 
5,216

Liability for guest loyalty program
742

 
720

Other
1,169

 
1,168

Total liabilities (variable interest entities - $741 and $788)
21,283

 
21,411

Commitments and contingencies - see Note 18


 


Equity:
 
 
 
Preferred stock, $0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of March 31, 2015 and December 31, 2014
—

 
—

Common stock, $0.01 par value; 30,000,000,000 authorized shares, 987,474,411 issued and 987,445,644 outstanding as of March 31, 2015 and 984,623,863 issued and outstanding as of December 31, 2014
10

 
10

Additional paid-in capital
10,028

 
10,028

Accumulated deficit
(4,508
)
 
(4,658
)
Accumulated other comprehensive loss
(868
)
 
(628
)
Total Hilton stockholders' equity
4,662

 
4,752

Noncontrolling interests
(40
)
 
(38
)
Total equity
4,622

 
4,714

TOTAL LIABILITIES AND EQUITY
$
25,905

 
$
26,125


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,
 
 
2015
 
2014
Revenues
 
 
 
 
Owned and leased hotels
 
$
957


$
945

Management and franchise fees and other
 
371


312

Timeshare
 
321


279

 
 
1,649

 
1,536

Other revenues from managed and franchised properties
 
950

 
827

Total revenues
 
2,599

 
2,363

 
 
 
 
 
Expenses
 
 
 
 
Owned and leased hotels
 
768

 
771

Timeshare
 
234

 
177

Depreciation and amortization
 
175

 
153

General, administrative and other
 
127

 
97

 
 
1,304

 
1,198

Other expenses from managed and franchised properties
 
950

 
827

Total expenses
 
2,254

 
2,025

 
 
 
 
 
Gain on sales of assets, net
 
145

 
—

 
 
 
 
 
Operating income
 
490

 
338

 
 
 
 
 
Interest income
 
6

 
1

Interest expense
 
(144
)
 
(153
)
Equity in earnings from unconsolidated affiliates
 
4

 
4

Gain (loss) on foreign currency transactions
 
(18
)
 
14

Other gain (loss), net
 
(25
)
 
3

 
 
 
 
 
Income before income taxes
 
313

 
207

 
 
 
 
 
Income tax expense
 
(163
)
 
(83
)
 
 
 
 
 
Net income
 
150

 
124

Net income attributable to noncontrolling interests
 
—

 
(1
)
Net income attributable to Hilton stockholders
 
$
150

 
$
123

 
 
 
 
 
Earnings per share
 
 
 
 
Basic and diluted
 
$
0.15

 
$
0.12


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,
 
 
2015
 
2014
Net income
 
$
150

 
$
124

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
 
Currency translation adjustment, net of tax of $(91) and $36
 
(234
)
 
28

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

 
1

Cash flow hedge adjustment, net of tax of $4 and $2
 
(7
)
 
(3
)
Total other comprehensive income (loss)
 
(240
)
 
26

 
 
 
 
 
Comprehensive income (loss)
 
(90
)
 
150

Comprehensive loss attributable to noncontrolling interests
 
—

 
1

Comprehensive income (loss) attributable to Hilton stockholders
 
$
(90
)
 
$
151


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,
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
150

 
$
124

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
175

 
153

Gain on sale of assets
(145
)
 
—

Equity in earnings from unconsolidated affiliates
(4
)
 
(4
)
Loss (gain) on foreign currency transactions
18

 
(14
)
Other loss (gain), net
25

 
(3
)
Share-based compensation
19

 
19

Distributions from unconsolidated affiliates
12

 
2

Deferred income taxes
40

 
(52
)
Change in restricted cash and cash equivalents
(2
)
 
(11
)
Working capital changes and other
(2
)
 
(67
)
Net cash provided by operating activities
286

 
147

 
 
 
 
Investing Activities
 
 
 
Capital expenditures for property and equipment
(88
)
 
(43
)
Acquisitions, net of cash acquired
(1,298
)
 
—

Payments received on other financing receivables
1

 
1

Issuance of other financing receivables
(2
)
 
(1
)
Investments in affiliates
—

 
(2
)
Distributions from unconsolidated affiliates
2

 
3

Proceeds from asset dispositions
1,869

 
—

Contract acquisition costs
(11
)
 
(16
)
Software capitalization costs
(8
)
 
(15
)
Net cash provided by (used in) investing activities
465

 
(73
)
 
 
 
 
Financing Activities
 
 
 
Repayment of debt
(710
)
 
(219
)
Debt issuance costs
—

 
(2
)
Change in restricted cash and cash equivalents
(57
)
 
(10
)
Distributions to noncontrolling interests
(2
)
 
(1
)
Excess tax benefits from share-based compensation
8

 
—

Net cash used in financing activities
(761
)
 
(232
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(9
)
 
(1
)
Net decrease in cash and cash equivalents
(19
)
 
(159
)
Cash and cash equivalents, beginning of period
566

 
594

 
 
 
 
Cash and cash equivalents, end of period
$
547

 
$
435

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the year:
 
 
 
Interest
$
88

 
$
97

Income taxes, net of refunds
20

 
22

 
 
 
 
Non-cash financing activities:
 
 
 
Long-term debt assumed
450

 
—


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, 2014
985

 
$
10

 
$
10,028

 
$
(4,658
)
 
$
(628
)
 
$
(38
)
 
$
4,714

Net income
—

 
—

 
—

 
150

 
—

 
—

 
150

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

 
—

 
—

 
—

 
(234
)
 
—

 
(234
)
Pension liability adjustment
—

 
—

 
—

 
—

 
1

 
—

 
1

Cash flow hedge adjustment
—

 
—

 
—

 
—

 
(7
)
 
—

 
(7
)
Other comprehensive loss
—

 
—

 
—

 
—

 
(240
)
 
—

 
(240
)
Share-based compensation
2

 
—

 
(8
)
 
—

 
—

 
—

 
(8
)
Excess tax benefits on equity awards
—

 
—

 
8

 
—

 
—

 
—

 
8

Distributions
—

 
—

 
—

 
—

 
—

 
(2
)
 
(2
)
Balance as of March 31, 2015
987

 
$
10

 
$
10,028

 
$
(4,508
)
 
$
(868
)
 
$
(40
)
 
$
4,622


 
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

.

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," the "Company" or the "Parent"), 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 12 distinct brands. We are engaged in owning, leasing, managing, developing and franchising hotels, resorts and timeshare properties. As of March 31, 2015, we owned, leased, managed or franchised 4,318 hotel and resort properties, totaling 713,883 rooms in 94 countries and territories, as well as 44 timeshare properties comprising 6,818 units.

As of March 31, 2015, affiliates of The Blackstone Group L.P. ("Blackstone" or "our Sponsor") beneficially owned approximately 55.2 percent of our common stock.

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements for the three months ended March 31, 2015 and 2014 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, 2014.

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 January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-01 ("ASU 2015-01"), Income Statement-Extraordinary and Unusual Items (Subtopic 225-20). This ASU eliminates the concept of extraordinary items and the related income statement presentation of such items. The provisions of ASU 2015-01 are effective for reporting periods beginning after December 15, 2015. We elected, as permitted by the standard, to early adopt ASU 2015-01 on a prospective basis as of January 1, 2015. The adoption did not have an effect on our condensed consolidated financial statements.

Accounting Standards Not Yet Adopted

In April 2015, the FASB issued ASU No. 2015-03 ("ASU 2015-03"), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This ASU requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the debt liability rather than as an asset, which is consistent with the presentation of debt discounts or premiums. The provisions of ASU 2015-03 are effective for reporting periods beginning after December 31, 2015; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In February 2015, the FASB issued ASU No. 2015-02 ("ASU 2015-02"), Consolidation (Topic 810) - Amendments to the Consolidation Analysis. This ASU modifies existing consolidation guidance for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. All legal entities are subject to reevaluation under the revised consolidation model. The provisions of ASU 2015-02 are effective for reporting periods beginning after December 15, 2015;

7


early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In August 2014, the FASB issued ASU No. 2014-15 ("ASU 2014-15"), Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern. This ASU requires management to assess and evaluate whether conditions or events exist, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the financial statements issue date. The provisions of ASU 2014-15 are effective for reporting periods beginning after December 15, 2016; early adoption is permitted. The adoption of this ASU is not expected to have a material effect on our consolidated financial statements.

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 in exchange for those goods or services. The provisions of ASU 2014-09 are effective for reporting periods beginning after December 15, 2016 and are to be applied retrospectively; early adoption is not permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

Note 3: Acquisitions

In February 2015, we used proceeds from the sale of the Waldorf Astoria New York (see Note 4: "Disposals") to acquire, as part of a tax deferred exchange of real property, the following properties from sellers affiliated with Blackstone for a total purchase price of $1.76 billion:

•
the resort complex consisting of the Waldorf Astoria Orlando and the Hilton Orlando Bonnet Creek in Orlando, Florida (the "Bonnet Creek Resort");
•
the Casa Marina Resort in Key West, Florida;
•
the Reach Resort in Key West, Florida; and
•
the Parc 55 hotel in San Francisco, California.

We incurred transaction costs of $19 million recognized in other gain (loss), net in our condensed consolidated statement of operations for the three months ended March 31, 2015.

As of the acquisition date, the fair value of the assets and liabilities acquired were as follows:

(in millions)
Cash and cash equivalents
$
16

Restricted cash and cash equivalents
8

Inventories
1

Prepaid expenses
3

Other current assets
1

Property and equipment
1,756

Other intangible assets, net
4

Accounts payable, accrued expenses and other
(25
)
Long-term debt
(450
)
Net assets acquired
$
1,314


The fair value of net assets acquired are subject to adjustments as additional information relative to the fair value at the acquisition date become available through the measurement period, which can extend for up to one year after the acquisition date. See Note 11: "Fair Value Measurements" for additional details on the fair value techniques and inputs used for the measurement of the assets and liabilities.

The results of operations from these properties included in the condensed consolidated statement of operations for the three months ended March 31, 2015 following the acquisitions were not material.


8


Note 4: Disposals

In February 2015, we completed the sale of the Waldorf Astoria New York for a purchase price of $1.95 billion and we repaid in full the existing mortgage loan secured by our Waldorf Astoria New York property (the "Waldorf Astoria Loan") of approximately $525 million. As a result of this repayment, we recognized a loss of $6 million in other gain (loss), net in our condensed consolidated statement of operations for the three months ended March 31, 2015 related to the reduction of the Waldorf Astoria Loan's remaining carrying amount of debt issuance costs. Additionally, the Waldorf Astoria New York property was considered a business within our ownership segment; therefore, we reduced the carrying amount of our goodwill and reduced the gain recognized on sale by $185 million, the amount representing the fair value of the business disposed of relative to the portion of our ownership reporting unit goodwill that was retained. As a result of the sale, we recognized a gain of $146 million included in gain on sales of assets, net in our condensed consolidated statement of operations for the three months ended March 31, 2015.

Note 5: Property and Equipment

Property and equipment were as follows:    
 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Land
$
3,450

 
$
3,009

Buildings and leasehold improvements
6,345

 
5,150

Furniture and equipment
1,228

 
1,140

Construction-in-progress
97

 
53

 
11,120

 
9,352

Accumulated depreciation and amortization
(1,927
)
 
(1,869
)
 
$
9,193

 
$
7,483


Depreciation and amortization expense on property and equipment, including amortization of assets recorded under capital leases, was $83 million and $77 million during the three months ended March 31, 2015 and 2014, respectively.

As of March 31, 2015 and December 31, 2014, property and equipment included approximately $144 million and $149 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $62 million and $64 million, respectively, of accumulated depreciation and amortization.

Note 6: Financing Receivables

Financing receivables were as follows:
 
March 31, 2015
 
Securitized Timeshare
 
Unsecuritized Timeshare
 
Other
 
Total
 
(in millions)
Financing receivables
$
398

 
$
483

 
$
32

 
$
913

Less: allowance
(22
)
 
(63
)
 
(1
)
 
(86
)
 
376

 
420

 
31

 
827

 
 
 
 
 
 
 
 
Current portion of financing receivables
63

 
67

 
2

 
132

Less: allowance
(3
)
 
(9
)
 
—

 
(12
)
 
60

 
58

 
2

 
120

 
 
 
 
 
 
 
 
Total financing receivables
$
436

 
$
478

 
$
33

 
$
947



9


 
December 31, 2014
 
Securitized Timeshare
 
Unsecuritized Timeshare
 
Other
 
Total
 
(in millions)
Financing receivables
$
430

 
$
454

 
$
22

 
$
906

Less: allowance
(24
)
 
(58
)
 
(2
)
 
(84
)
 
406

 
396

 
20

 
822

 
 
 
 
 
 
 
 
Current portion of financing receivables
66

 
74

 
2

 
142

Less: allowance
(4
)
 
(10
)
 
—

 
(14
)
 
62

 
64

 
2

 
128

 
 
 
 
 
 
 
 
Total financing receivables
$
468

 
$
460

 
$
22

 
$
950


Timeshare Financing Receivables

As of March 31, 2015, we had 51,478 timeshare financing receivables with interest rates ranging from zero percent to 20.50 percent, a weighted average interest rate of 12.04 percent, a weighted average remaining term of 7.4 years and maturities through 2025. As of March 31, 2015 and December 31, 2014, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $31 million.

As of March 31, 2015 and December 31, 2014, we had $162 million and $164 million, respectively, of gross timeshare financing receivables secured under our revolving non-recourse timeshare financing receivables credit facility (the "Timeshare Facility").

The changes in our allowance for uncollectible timeshare financing receivables were as follows:
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(in millions)
Beginning balance
$
96

 
$
92

Write-offs
(6
)
 
(8
)
Provision for uncollectibles on sales
7

 
6

Ending balance
$
97

 
$
90


Our timeshare financing receivables as of March 31, 2015 mature as follows:
 
Securitized Timeshare
 
Unsecuritized Timeshare
Year
(in millions)
2015 (remaining)
$
47

 
$
53

2016
65

 
56

2017
67

 
59

2018
67

 
60

2019
63

 
59

Thereafter
152

 
263

 
461

 
550

Less: allowance
(25
)
 
(72
)
 
$
436

 
$
478



10


The following table details an aged analysis of our gross timeshare financing receivables balance:
 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Current
$
965

 
$
980

30 - 89 days past due
15

 
13

90 - 119 days past due
3

 
2

120 days and greater past due
28

 
29

 
$
1,011

 
$
1,024


Note 7: Investments in Affiliates

Investments in affiliates were as follows:
 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Equity investments
$
139

 
$
153

Other investments
17

 
17

 
$
156

 
$
170


We maintain investments in affiliates accounted for under the equity method, which are primarily investments in entities that owned or leased 16 hotels as of March 31, 2015 and December 31, 2014. These entities had total debt of approximately $925 million and $929 million as of March 31, 2015 and December 31, 2014, respectively. Substantially all of the debt is secured solely by the affiliates' assets or is guaranteed by other partners without recourse to us.

Note 8: Consolidated Variable Interest Entities

As of March 31, 2015 and December 31, 2014, we consolidated five variable interest entities ("VIEs"). During the three months ended March 31, 2015 and 2014, 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 our 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 the following:
 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Cash and cash equivalents
$
28

 
$
26

Property and equipment, net
49

 
49

Non-recourse debt
236

 
237


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 during the three months ended March 31, 2015 and 2014 and was included in interest expense in our condensed consolidated statements of operations.

We have two VIEs associated with our securitization transactions that both issued debt (collectively, "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. Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily comprised the following:

11


 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Restricted cash and cash equivalents
$
20

 
$
20

Securitized financing receivables, net
436

 
468

Non-recourse debt
450

 
481


Our condensed consolidated statements of operations included interest income related to these VIEs of $15 million and $7 million during the three months ended March 31, 2015 and 2014, respectively, included in timeshare revenue, as well as interest expense related to these VIEs of $3 million and $1 million, respectively, included in interest expense. See Note 6: "Financing Receivables" and Note 9: "Debt" for additional details.

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

Note 9: Debt

Long-term Debt

Long-term debt balances, including obligations for capital leases, and associated interest rates as of March 31, 2015 were as follows:

March 31,
 
December 31,

2015
 
2014

(in millions)
Senior secured term loan facility with a rate of 3.50%, due 2020
$
4,850

 
$
5,000

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

 
1,500

Commercial mortgage-backed securities loan with an average rate of 4.06%, due 2018(1)
3,487

 
3,487

Mortgage loans with an average rate of 4.13%, due 2016 to 2019(2)
646

 
721

Other unsecured notes with a rate of 7.50%, due 2017
54

 
54

Capital lease obligations with an average rate of 6.08%, due 2015 to 2097
65

 
72


10,602


10,834

Less: current maturities of long-term debt
(10
)

(10
)
Less: unamortized discount on senior secured term loan facility
(20
)
 
(21
)

$
10,572


$
10,803

____________
(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.
(2) 
For mortgage loans with extensions that are solely at our option, we assumed they were exercised.

During the three months ended March 31, 2015, we made a voluntary prepayment of $150 million on our senior secured term loan facility (the "Term Loans").

As of March 31, 2015, we had $45 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 $955 million.

In February 2015, we repaid the $525 million Waldorf Astoria Loan concurrent with the sale of the Waldorf Astoria New York. See Note 4: "Disposals" for further information on the transaction.

In February 2015, we assumed a $450 million mortgage loan secured by the Bonnet Creek Resort (the "Bonnet Creek Loan") as a result of an acquisition. See Note 3: "Acquisitions" for further information on the transaction. Principal payments, commencing in April 2016, are payable monthly over a 25-year amortization period with the unamortized portion due in full upon maturity. The Bonnet Creek Loan, maturing on April 29, 2018, with an option to extend for one year, bears interest at a variable rate based on one-month LIBOR plus 350 basis points, which is payable monthly.

Our commercial mortgage-backed securities loan secured by 23 of our U.S. owned real estate assets (the "CMBS Loan") and the Bonnet Creek Loan require us to deposit with the lender certain cash reserves for restricted uses. As of March 31, 2015 and December 31, 2014, our condensed consolidated balance sheets included $69 million and $19 million, respectively, of restricted cash and cash equivalents related to these loans.

12



Non-recourse Debt

Non-recourse debt, including obligations for capital leases, and associated interest rates as of March 31, 2015 were as follows:
 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Capital lease obligations of consolidated VIEs with a rate of 6.34%, due 2018 to 2026
$
213

 
$
216

Non-recourse debt of consolidated VIEs with an average rate of 3.51%, due 2015 to 2018(1)
35

 
32

Timeshare Facility with a rate of 1.17%, due 2017
150

 
150

Securitized Timeshare Debt with an average rate of 1.97%, due 2026
450

 
481

 
848

 
879

Less: current maturities of non-recourse debt
(137
)
 
(127
)
 
$
711

 
$
752

____________
(1) 
Excludes the non-recourse debt of our VIEs that issued the Securitized Timeshare Debt, as it 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. 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 $24 million and $25 million as of March 31, 2015 and December 31, 2014, 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 March 31, 2015 were as follows:
Year
(in millions)
2015 (remaining)
$
116

2016
245

2017
359

2018(1)
3,564

2019(1)
485

Thereafter
6,681

 
$
11,450

____________
(1) 
We assumed all extensions on the CMBS Loan and Bonnet Creek Loan for purposes of calculating maturity dates.

Note 10: Derivative Instruments and Hedging Activities

During the three months ended March 31, 2015 and 2014, 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.

During the three months ended March 31, 2015, derivatives were also used to hedge foreign exchange risk associated with certain foreign currency denominated cash balances.

Cash Flow Hedges

As of March 31, 2015, 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, 2015, we held 24 short-term foreign exchange forward contracts in the notional amount of $79 million to

13


offset exposure to fluctuations in our foreign currency denominated cash balances. We elected not to designate these foreign exchange forward contracts as hedging instruments.

As of March 31, 2015, we held the following interest rate caps:

•
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;
•
one interest rate cap in the notional amount of $525 million that expires in November 2015 and caps one-month LIBOR at 4.0 percent; and
•
one interest rate cap in the notional amount of $338 million that expires in May 2015 and caps one-month LIBOR at 3.0 percent on the Bonnet Creek Loan.

We did not elect to designate any of these interest rate caps as hedging instruments.

Fair Value of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated balance sheets were as follows:
 
March 31, 2015
 
December 31, 2014
 
Balance Sheet Classification
 
Fair Value
 
Balance Sheet Classification
 
Fair Value
 
 
 
(in millions)
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
Interest rate swaps
Other liabilities
 
$
15

 
Other liabilities
 
$
4

 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
Interest rate caps(1)
Other assets
 
—

 
Other assets
 
—

Forward contracts(1)
Other assets / Accounts payable, accrued expenses and other
 
—

 
Other assets / Accounts payable, accrued expenses and other
 
—

____________
(1) 
The fair values of our interest rate caps and forward contracts were less than $1 million as of March 31, 2015 and December 31, 2014.

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 Gain (Loss) Recognized
 
2015

2014
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
Interest rate swaps(1)
Other comprehensive income (loss)
 
$
(11
)
 
$
(5
)
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
Interest rate caps
Other gain (loss), net
 
—

 
—

Forward contracts
Gain (loss) on foreign currency transactions
 
(2
)
 
N/A

____________
(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, 2015 and 2014.


14


Note 11: Fair Value Measurements

The carrying amounts and estimated fair values of our financial assets and liabilities, which included related current portions, were as follows:
 
March 31, 2015
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
301

 
$
—

 
$
301

 
$
—

Restricted cash equivalents
41

 
—

 
41

 
—

Timeshare financing receivables
1,011

 
—

 
—

 
1,010

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
10,517

 
1,641

 
—

 
9,052

Non-recourse debt(2)
600

 
—

 
—

 
597

Interest rate swaps
15

 
—

 
15

 
—


 
December 31, 2014
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
326

 
$
—

 
$
326

 
$
—

Restricted cash equivalents
38

 
—

 
38

 
—

Timeshare financing receivables
1,024

 
—

 
—

 
1,021

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
10,741

 
1,630

 
—

 
9,207

Non-recourse debt(2)
631

 
—

 
—

 
626

Interest rate swaps
4

 
—

 
4

 
—

____________
(1)
Excludes capital lease obligations with a carrying value of $65 million and $72 million as of March 31, 2015 and December 31, 2014, respectively.
(2) 
Excludes capital lease obligations of consolidated VIEs with a carrying value of $213 million and $216 million as of March 31, 2015 and December 31, 2014, respectively, and non-recourse debt of consolidated VIEs with a carrying value of $35 million and $32 million, respectively.

We believe the carrying amounts of our other financial assets and liabilities approximated fair value as of March 31, 2015 and December 31, 2014. 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.

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 rate 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 certain of our Level 3 fixed-rate and variable-rate long-term debt were 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 rate would result in a decrease in the fair values. The carrying amounts of certain of our Level 3 variable-rate long-term debt and our Level 3 variable-rate non-recourse debt approximated fair value as the interest rates under the loan agreements approximated current

15


market rates. The estimated fair values of certain of our Level 3 variable-rate long-term debt and our Level 3 fixed-rate non-recourse debt were primarily based on indicative quotes received for similar issuances.

As a result of our acquisition of certain properties during the three months ended March 31, 2015, we measured financial and nonfinancial assets at fair value on a nonrecurring basis (see Note 3: "Acquisitions"), as follows:
 
Fair Value(1)
 
(in millions)
Property and equipment
$
1,756

Long-term debt
450

____________
(1) 
Fair value measurements using significant unobservable inputs (Level 3).

We estimated the fair value of the property and equipment using discounted cash flow analysis, with an estimated stabilized growth rate of 3 percent to 4 percent, discounted cash flow terms ranging from 10 years to 11 years, a terminal capitalization rate of 7 percent to 8 percent and a discount rate of 9 percent to 10 percent. The discount and terminal capitalization rates used for the fair value of the assets reflect the risk profile of the individual markets where the assets are located and are not necessarily indicative of our hotel portfolio as a whole.

The fair value of the long-term debt assumed was estimated based on the expected future cash flows discounted at a risk-adjusted rate of one-month LIBOR plus 275 basis points.

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

Note 12: 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. The annual effective tax rate expected to be applied for the full year is higher than our statutory tax rate primarily because no tax benefit was recognized for the reduction of goodwill in connection with the sale of the Waldorf Astoria New York (see Note 4: "Disposals" for further information). The higher effective tax rate, as compared to our statutory tax rate, for the three months ended March 31, 2015, was largely attributable to the reduction of goodwill in connection with the sale of the Waldorf Astoria New York and losses incurred by certain foreign subsidiaries for which no tax benefits were recognized. In addition, a foreign jurisdiction where we had deferred tax assets reduced its statutory tax rate, resulting in a reduction to the deferred tax asset and a corresponding recognition of income tax expense of $6 million.

Our total unrecognized tax benefits as of March 31, 2015 and December 31, 2014 were $401 million. We had accrued approximately $25 million and $22 million for the payment of interest and penalties as of March 31, 2015 and December 31, 2014, respectively. We recognize interest and penalties accrued related to unrecognized tax benefits in income tax expense.

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 $25 million. Included in the balance of unrecognized tax benefits as of March 31, 2015 and December 31, 2014 were $369 million and $367 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 and other taxing authorities on open tax positions. The timing of the resolution of tax audits is highly uncertain, as are the amounts, if any, that may ultimately be paid upon such resolution. Changes may result from the conclusion of ongoing audits, appeals or litigation in 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, 2015, we remain subject to federal examinations from 2005-2013, state examinations from 1999-2013 and foreign examinations of our income tax returns for the years 1996 through 2014.

In April 2014, we received 30-day Letters from the IRS and the Revenue Agents Report ("RAR") for the 2006 and October 2007 tax years. We disagreed with several of the proposed adjustments in the RAR, filed a formal appeals protest with the IRS and did not make any tax payments related to this audit. The issues being protested in appeals relate to assertions by the IRS that: (1) certain foreign currency-denominated, intercompany loans from our foreign subsidiaries to certain U.S. subsidiaries should be recharacterized as equity for U.S. federal income tax purposes and constitute deemed dividends from such foreign

16


subsidiaries to our U.S. subsidiaries; (2) in calculating the amount of U.S. taxable income resulting from our Hilton HHonors guest loyalty program, we should not reduce gross income by the estimated costs of future redemptions, but rather such costs would be deductible at the time the points are redeemed; and (3) certain foreign-currency denominated loans issued by one of our Luxembourg subsidiaries whose functional currency is USD, should instead be treated as issued by one of our Belgian subsidiaries whose functional currency is the Euro, and thus foreign currency gains and losses with respect to such loans should have been measured in Euros, instead of USD. In total, the proposed adjustments sought by the IRS would result in additional U.S. federal tax owed of approximately $696 million, excluding interest and penalties and potential state income taxes. The portion of this amount related to our Hilton HHonors guest loyalty program would result in a decrease to our future tax liability when the points are redeemed. We disagree with the IRS's position on each of these assertions and intend to vigorously contest them. We plan to pursue all available administrative remedies, and if we are not able to resolve these matters administratively, we plan to pursue judicial remedies. Accordingly, as of March 31, 2015, no accrual has been made for these amounts.

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 13: 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").

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,
 
2015
 
2014
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
2

 
$
—

 
$
1

 
$
2

 
$
—

 
$
1

Interest cost
4

 
4

 
1

 
4

 
5

 
1

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

 
—

 
—

 
1

 
—

 
—

Amortization of net loss
1

 
1

 
—

 
—

 
—

 
—

Net periodic pension cost (credit)
$
3

 
$
(1
)
 
$
1

 
$
3

 
$
(1
)
 
$
1


In February 2012, we were required to post a bond of $76 million under a class action lawsuit against Hilton and the Domestic Plan to support potential future plan contributions from us. We were required by our insurers to fund a cash account as collateral for the bond. In November 2014, $57 million of the cash collateral was released to us based on the requirements of our insurer, and as of March 31, 2015, $19 million that remained in the account was classified as restricted cash and cash equivalents in our condensed consolidated balance sheet. In February 2015, the bond was ordered to be released, and we expect to receive the remaining cash collateral during 2015.

Note 14: Share-Based Compensation

Stock Plan

Under the Hilton Worldwide Holdings Inc. 2013 Omnibus Incentive Plan (the "Stock Plan"), we issue time-vesting restricted stock units ("RSUs"), nonqualified stock options ("options") and performance-vesting restricted stock units and restricted stock (collectively, "performance shares").


17


We recognized share-based compensation expense for awards granted under the Stock Plan of $28 million and $11 million during the three months ended March 31, 2015 and 2014, respectively, which includes amounts reimbursed by hotel owners. As of March 31, 2015, unrecognized compensation costs for unvested awards was approximately $172 million, which is expected to be recognized over a weighted-average period of 2.1 years on a straight-line basis.

As of March 31, 2015, there were 68,334,884 shares of common stock available for future issuance under the Stock Plan.

Restricted Stock Units

During the three months ended March 31, 2015, we issued 2,017,138 RSUs with a grant date fair value of $27.46, which generally vest in annual installments over two or three years from the date of grant. Vested RSUs generally are settled for our common stock, with the exception of certain awards that are settled in cash.

Stock Options

During the three months ended March 31, 2015, we issued 928,585 options with an exercise price of $27.46, which vest over three years from the date of grant, and terminate 10 years from the date of grant or earlier if the individual’s service terminates.

The grant date fair value of these option grants was $8.39, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility(1)
28.00
%
Dividend yield(2)
—
%
Risk-free rate(3)
1.67
%
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 in addition to our historical volatility. 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) 
At the date of grant we had no 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.

As of March 31, 2015, 304,940 options were exercisable.

Performance Shares

During the three months ended March 31, 2015, we issued 1,227,140 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").


18


The grant date fair value of these performance share grants based on relative shareholder return was $32.98, which was determined using a Monte Carlo simulation valuation model with the following assumptions:
Expected volatility(1)
24.00
%
Dividend yield(2)
—
%
Risk-free rate(3)
1.04
%
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 in addition to our historical volatility. 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) 
At the date of grant we had no 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 these performance share grants based on our EBITDA CAGR was $27.46. For these shares, we determined that the performance condition is probable of achievement and as of March 31, 2015, we recognized compensation expense as follows:
 
Achievement Percentage
Performance shares granted in 2014
150%
Performance shares granted in 2015
100%

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 80 percent have vested as of December 11, 2014. The remaining 20 percent will vest on the date that our Sponsor ceases to own 50 percent or more of the shares of the Company, contingent on employment through that date, or on the separation date for employees terminated under certain circumstances specified in the Promote Plan agreement.

During the three months ended March 31, 2015, the vesting conditions of these restricted shares of common stock were modified to accelerate vesting for two participants such that the remaining 20 percent of each participant's award would vest on their respective termination dates, whereas the award would not have otherwise vested. As a result of this modification, we recorded incremental compensation expense of $1 million during the three months ended March 31, 2015.

During the three months ended March 31, 2015 and 2014, total compensation expense recognized for the Promote Plan was $2 million and $13 million, respectively. As of March 31, 2015, unrecognized compensation expense was $64 million, which is subject to the achievement of a performance condition in the form of a liquidity event that was not probable as of March 31, 2015.


19


Note 15: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS"):
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
Numerator:
 
 
 
Net income attributable to Hilton stockholders
$
150

 
$
123

Denominator:
 
 
 
Weighted average shares outstanding
986

 
985

Basic EPS
$
0.15

 
$
0.12

 
 
 
 
Diluted EPS:
 
 
 
Numerator:
 
 
 
Net income attributable to Hilton stockholders
$
150

 
$
123

Denominator:
 
 
 
Weighted average shares outstanding
988

 
985

Diluted EPS
$
0.15

 
$
0.12


Less than 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three months ended March 31, 2015 and 2014 because their effect would have been anti-dilutive under the treasury stock method.

20


Note 16: 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, 2014
$
(446
)
 
$
(179
)
 
$
(3
)
 
$
(628
)
 
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
(234
)
 
(1
)
 
(7
)
 
(242
)
Amounts reclassified from accumulated other comprehensive loss
—

 
2

 
—

 
2

Net current period other comprehensive income (loss)
(234
)
 
1

 
(7
)
 
(240
)
 
 
 
 
 
 
 
 
Balance as of March 31, 2015
$
(680
)
 
$
(178
)
 
$
(10
)
 
$
(868
)
 
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
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
)
____________
(1) 
Includes net investment hedges.

The following table presents additional information about reclassifications out of accumulated other comprehensive loss:
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(in millions)
Pension liability adjustment:
 
 
 
Amortization of prior service cost(1)
$
(1
)
 
$
(1
)
Amortization of net loss(1)
(2
)
 
—

Tax benefit(2)(3)
1

 
—

Total pension liability adjustment reclassifications for the period, net of taxes
(2
)
 
(1
)
 
 
 
 
Total reclassifications for the period, net of tax
$
(2
)
 
$
(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 (credit). See Note 13: "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.
(3) 
The tax benefit was less than $1 million for the three months ended March 31, 2014.

Note 17: 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 131 hotels consisting of 52,133 rooms that we wholly own or lease, as well as consolidated non-wholly owned entities and consolidated VIEs. As of March 31, 2015, this segment included 125 wholly owned and leased hotels, three non-wholly owned hotels 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 16 hotels and one condominium management company totaling 8,399 rooms as of March 31, 2015.


21


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 in our brand portfolio. As of March 31, 2015, this segment included 518 managed hotels and 3,652 franchised hotels totaling 4,170 hotels consisting of 653,351 rooms. 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, 2015, this segment included 44 timeshare properties totaling 6,818 units.

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. 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") replacement reserves required under certain lease agreements; (vi) reorganization costs; (vii) share-based and certain other compensation expenses; (viii) severance, relocation and other expenses; and (ix) other items. To align with management's view of allocating resources and assessing the performance of our segments and to facilitate comparisons with our competitors, beginning in the first quarter of 2015 Adjusted EBITDA excluded all share-based compensation expense, not just share-based compensation recognized in connection with equity issued prior to and in connection with our initial public offering. We have applied this change in the definition to 2014 historical results presented to allow for comparability.


22


The following table presents revenues and Adjusted EBITDA for our reportable segments, reconciled to consolidated amounts:
 
Three Months Ended
 
March 31,
 
2015
 
2014
 
(in millions)
Revenues
 
 
 
Ownership(1)(2)
$
964


$
952

Management and franchise(3)
391


331

Timeshare
321


279

Segment revenues
1,676


1,562

Other revenues from managed and franchised properties
950


827

Other revenues(4)
21


21

Intersegment fees elimination(1)(2)(3)(4)
(48
)

(47
)
Total revenues
$
2,599


$
2,363

 
 
 
 
Adjusted EBITDA
 
 
 
Ownership(1)(2)(3)(4)(5)
$
190


$
175

Management and franchise(3)
391


331

Timeshare(1)(3)
74


82

Corporate and other(2)(4)
(56
)

(80
)
Adjusted EBITDA
$
599


$
508

____________
(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 for the three months ended March 31, 2015 and 2014. 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 March 31, 2015 and 2014, which were eliminated in our condensed consolidated financial statements.
(3)
Includes management, royalty and intellectual property fees of $30 million and $27 million for the three months ended March 31, 2015 and 2014, 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 $9 million and $11 million for the three months ended March 31, 2015 and 2014, 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 for the three months ended March 31, 2015 and 2014. These charges were eliminated in our condensed consolidated financial statements.
(5) 
Includes unconsolidated affiliate Adjusted EBITDA.


23


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,
 
2015
 
2014
 
(in millions)
Adjusted EBITDA
$
599

 
$
508

Net income attributable to noncontrolling interests
—

 
(1
)
Gain on sales of assets, net
145

 
—

Gain (loss) on foreign currency transactions
(18
)
 
14

FF&E replacement reserve
(13
)
 
(11
)
Share-based and other compensation benefit (expense)(1)
(30
)
 
23

Other gain (loss), net
(25
)
 
3

Other adjustment items
(19
)
 
(13
)
EBITDA
639

 
523

Interest expense
(144
)
 
(153
)
Interest expense included in equity in earnings from unconsolidated affiliates
(2
)
 
(3
)
Income tax expense
(163
)
 
(83
)
Depreciation and amortization
(175
)
 
(153
)
Depreciation and amortization included in equity in earnings from unconsolidated affiliates
(5
)
 
(8
)
Net income attributable to Hilton stockholders
$
150

 
$
123

____________
(1) 
The three months ended March 31, 2014 includes a benefit of $47 million resulting from the reversal of accruals associated with a cash-based, long-term incentive plan that was terminated in February 2014 and replaced by the Stock Plan.

The following table presents assets for our reportable segments, reconciled to consolidated amounts:
 
March 31,
 
December 31,
 
2015
 
2014
 
(in millions)
Assets:
 
 
 
Ownership
$
11,446

 
$
11,595

Management and franchise
10,458

 
10,530

Timeshare
1,895

 
1,840

Corporate and other
2,106

 
2,160

 
$
25,905

 
$
26,125


The following table presents capital expenditures for property and equipment for our reportable segments, reconciled to consolidated amounts:
 
Three Months Ended
 
March 31,
 
2015

2014
 
(in millions)
Capital expenditures for property and equipment:
 
 
 
Ownership
$
82

 
$
42

Timeshare
2

 
—

Corporate and other
4

 
1

 
$
88

 
$
43


Note 18: Commitments and Contingencies

As of March 31, 2015, we had outstanding guarantees of $25 million, with remaining terms ranging from five years to eight years, for debt and other obligations of third parties. We have one letter of credit for $25 million that has been pledged as collateral for one 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.


24


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, 2015, we had seven contracts containing performance guarantees, with expirations ranging from 2018 to 2030, and possible cash outlays totaling approximately $109 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, 2015 and December 31, 2014, we recorded current liabilities of approximately $7 million and $8 million, respectively, and non-current liabilities of approximately $31 million and $37 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, 2015, we had outstanding commitments under third-party contracts of approximately $110 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 an affiliate of the owner of a hotel whereby we have agreed to provide a $60 million junior mezzanine loan to finance the construction of a new hotel. The junior mezzanine loan will be subordinated to a senior mortgage loan and senior mezzanine loan provided by third parties unaffiliated with us and will be funded on a pro rata basis with these loans as the construction costs are incurred. During the three months ended March 31, 2015, we funded $2 million of this commitment, which was included in financing receivables, net in our condensed consolidated balance sheet as of March 31, 2015. We currently expect to fund the remainder of our commitment as follows: $22 million in the remainder of 2015, $34 million in 2016 and $2 million in 2017.

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. During the three months ended March 31, 2015 and 2014, we purchased $5 million and $11 million, respectively, of inventory under this agreement. As of March 31, 2015, our contractual obligations pursuant to this agreement for the remainder of 2015 and the year ended December 31, 2016 were $19 million and $4 million, respectively.

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, 2015 was approximately $30 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, 2015 will not have a material effect on our condensed consolidated results of operations, financial position or cash flows.


25


Note 19: Condensed Consolidating Guarantor Financial Information

In October 2013, Hilton Worldwide Finance LLC and Hilton Worldwide Finance Corp. (the "Subsidiary Issuers"), entities formed in August 2013 which are 100 percent owned by the Parent, issued the $1.5 billion of 5.625% senior notes due in 2021 (the "Senior Notes"). The obligations of the Subsidiary Issuers are guaranteed jointly and severally on a senior unsecured basis by the Parent, and certain of the Parent's 100 percent owned domestic restricted subsidiaries (the "Guarantors"). The indenture that governs the Senior Notes provides that any subsidiary of the Company that provides a guarantee of a senior secured credit facility consisting of the Revolving Credit Facility and the Term Loans (the "Senior Secured Credit Facility") will guarantee the Senior Notes. None of our foreign subsidiaries or U.S. subsidiaries owned by foreign subsidiaries or conducting foreign operations; our non-wholly owned subsidiaries; our subsidiaries that secure the CMBS Loan and $514 million in mortgage loans; or certain of our special purpose subsidiaries formed in connection with our Timeshare Facility and Securitized Timeshare Debt guarantee the Senior Notes (collectively, the "Non-Guarantors").

The guarantees are full and unconditional, subject to certain customary release provisions. The indenture that governs the Senior Notes provides that any Guarantor may be released from its guarantee so long as: (a) the subsidiary is sold or sells all of its assets; (b) the subsidiary is released from its guaranty under the Senior Secured Credit Facility; (c) the subsidiary is declared "unrestricted" for covenant purposes; or (d) the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied.

The following schedules present the condensed consolidating financial information as of March 31, 2015 and December 31, 2014, and for the three months ended March 31, 2015 and 2014, for the Parent, Subsidiary Issuers, Guarantors and Non-Guarantors.



26


 
March 31, 2015
Parent
 
Subsidiary Issuers
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
 
(in millions)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
—

 
$
—

 
$
238

 
$
309

 
$
—

 
$
547

Restricted cash and cash equivalents
—

 
—

 
137

 
132

 
—

 
269

Accounts receivable, net
—

 
—

 
515

 
384

 
—

 
899

Intercompany receivables
—

 
—

 
50

 
—

 
(50
)
 
—

Inventories
—

 
—

 
397

 
24

 
—

 
421

Deferred income tax assets
—

 
—

 
9

 
11

 
—

 
20

Current portion of financing receivables, net
—

 
—

 
41

 
19

 
—

 
60

Current portion of securitized financing receivables, net
—

 
—

 
—