Q2 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 June 30, 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 July 28, 2015 was 987,450,969.


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,
2015
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
511

 
$
566

Restricted cash and cash equivalents
248

 
202

Accounts receivable, net of allowance for doubtful accounts of $30 and $29
937

 
844

Inventories
424

 
404

Deferred income tax assets
20

 
20

Current portion of financing receivables, net
66

 
66

Current portion of securitized financing receivables, net
59

 
62

Prepaid expenses
146

 
133

Income taxes receivable
38

 
132

Other
52

 
70

Total current assets (variable interest entities - $133 and $136)
2,501

 
2,499

Property, Intangibles and Other Assets:
 
 
 
Property and equipment, net
9,191

 
7,483

Property and equipment, net held for sale
111

 
1,543

Financing receivables, net
502

 
416

Securitized financing receivables, net
347

 
406

Investments in affiliates
156

 
170

Goodwill
5,945

 
6,154

Brands
4,940

 
4,963

Management and franchise contracts, net
1,217

 
1,306

Other intangible assets, net
629

 
674

Deferred income tax assets
154

 
155

Other
358

 
356

Total property, intangibles and other assets (variable interest entities - $538 and $613)
23,550

 
23,626

TOTAL ASSETS
$
26,051

 
$
26,125

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
2,260

 
$
2,099

Current maturities of long-term debt
10

 
10

Current maturities of non-recourse debt
136

 
127

Income taxes payable
20

 
21

Total current liabilities (variable interest entities - $177 and $162)
2,426

 
2,257

Long-term debt
10,400

 
10,803

Non-recourse debt
644

 
752

Deferred revenues
395

 
495

Deferred income tax liabilities
5,192

 
5,216

Liability for guest loyalty program
744

 
720

Other
1,181

 
1,168

Total liabilities (variable interest entities - $681 and $788)
20,982

 
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 June 30, 2015 and December 31, 2014
—

 
—

Common stock, $0.01 par value; 30,000,000,000 authorized shares, 987,479,736 issued and 987,450,969 outstanding as of June 30, 2015 and 984,623,863 issued and outstanding as of December 31, 2014
10

 
10

Additional paid-in capital
10,115

 
10,028

Accumulated deficit
(4,347
)
 
(4,658
)
Accumulated other comprehensive loss
(673
)
 
(628
)
Total Hilton stockholders' equity
5,105

 
4,752

Noncontrolling interests
(36
)
 
(38
)
Total equity
5,069

 
4,714

TOTAL LIABILITIES AND EQUITY
$
26,051

 
$
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
 
Six Months Ended
 
June 30,
 
June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Owned and leased hotels
$
1,135

 
$
1,117

 
$
2,092


$
2,062

Management and franchise fees and other
407

 
354

 
778


666

Timeshare
319

 
276

 
640


555

 
1,861

 
1,747

 
3,510

 
3,283

Other revenues from managed and franchised properties
1,061

 
920

 
2,011

 
1,747

Total revenues
2,922

 
2,667

 
5,521

 
5,030

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Owned and leased hotels
817

 
833

 
1,585

 
1,604

Timeshare
220

 
188

 
454

 
365

Depreciation and amortization
173

 
158

 
348

 
311

General, administrative and other
221

 
133

 
348

 
230

 
1,431

 
1,312

 
2,735

 
2,510

Other expenses from managed and franchised properties
1,061

 
920

 
2,011

 
1,747

Total expenses
2,492

 
2,232

 
4,746

 
4,257

 
 
 
 
 
 
 
 
Gain (loss) on sales of assets, net
(3
)
 
—

 
142

 
—

 
 
 
 
 
 
 
 
Operating income
427

 
435

 
917

 
773

 
 
 
 
 
 
 
 
Interest income
2

 
5

 
8

 
6

Interest expense
(149
)
 
(158
)
 
(293
)
 
(311
)
Equity in earnings from unconsolidated affiliates
9

 
8

 
13

 
12

Gain (loss) on foreign currency transactions
5

 
32

 
(13
)
 
46

Other gain (loss), net
18

 
11

 
(7
)
 
14

 
 
 
 
 
 
 
 
Income before income taxes
312

 
333

 
625

 
540

 
 
 
 
 
 
 
 
Income tax expense
(145
)
 
(121
)
 
(308
)
 
(204
)
 
 
 
 
 
 
 
 
Net income
167

 
212

 
317

 
336

Net income attributable to noncontrolling interests
(6
)
 
(3
)
 
(6
)
 
(4
)
Net income attributable to Hilton stockholders
$
161

 
$
209

 
$
311

 
$
332

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.16

 
$
0.21

 
$
0.32

 
$
0.34

Diluted
$
0.16

 
$
0.21

 
$
0.31

 
$
0.34


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,
 
2015
 
2014
 
2015
 
2014
Net income
$
167

 
$
212

 
$
317

 
$
336

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
 
 
 
 
Currency translation adjustment, net of tax of $121, $66, $30 and $102
192

 
53

 
(42
)
 
81

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

 
3

 
2

 
4

Cash flow hedge adjustment, net of tax of $(1), $3, $3 and $5
2

 
(6
)
 
(5
)
 
(9
)
Total other comprehensive income (loss)
195

 
50

 
(45
)
 
76

 
 
 
 
 
 
 
 
Comprehensive income
362

 
262

 
272

 
412

Comprehensive income attributable to noncontrolling interests
(6
)
 
(3
)
 
(6
)
 
(2
)
Comprehensive income attributable to Hilton stockholders
$
356

 
$
259

 
$
266

 
$
410


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,
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
317

 
$
336

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
348

 
311

Gain on sales of assets, net
(142
)
 
—

Equity in earnings from unconsolidated affiliates
(13
)
 
(12
)
Loss (gain) on foreign currency transactions
13

 
(46
)
Other loss (gain), net
7

 
(14
)
Share-based compensation
100

 
41

Distributions from unconsolidated affiliates
20

 
11

Deferred income taxes
10

 
(42
)
Change in restricted cash and cash equivalents
(9
)
 
(1
)
Working capital changes and other
(3
)
 
(72
)
Net cash provided by operating activities
648

 
512

 
 
 
 
Investing Activities
 
 
 
Capital expenditures for property and equipment
(159
)
 
(110
)
Acquisitions, net of cash acquired
(1,410
)
 
—

Payments received on other financing receivables
2

 
2

Issuance of other financing receivables
(6
)
 
(1
)
Investments in affiliates
(5
)
 
(5
)
Distributions from unconsolidated affiliates
9

 
11

Proceeds from asset dispositions
1,869

 
35

Contract acquisition costs
(19
)
 
(21
)
Software capitalization costs
(23
)
 
(32
)
Net cash provided by (used in) investing activities
258

 
(121
)
 
 
 
 
Financing Activities
 
 
 
Borrowings
34

 
350

Repayment of debt
(961
)
 
(783
)
Debt issuance costs
—

 
(2
)
Change in restricted cash and cash equivalents
(29
)
 
(17
)
Capital contribution
—

 
13

Distributions to noncontrolling interests
(4
)
 
(2
)
Excess tax benefits from share-based compensation
8

 
—

Net cash used in financing activities
(952
)
 
(441
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(9
)
 
1

Net decrease in cash and cash equivalents
(55
)
 
(49
)
Cash and cash equivalents, beginning of period
566

 
594

 
 
 
 
Cash and cash equivalents, end of period
$
511

 
$
545

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the year:
 
 
 
Interest
$
231

 
$
257

Income taxes, net of refunds
197

 
141

 
 
 
 
Non-cash investing activities:
 
 
 
Long-term debt assumed
(450
)
 
—

Capital lease restructuring
—

 
11

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

 
—

Capital lease restructuring
(24
)
 
11


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
—

 
—

 
—

 
311

 
—

 
6

 
317

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

 
—

 
—

 
—

 
(42
)
 
—

 
(42
)
Pension liability adjustment
—

 
—

 
—

 
—

 
2

 
—

 
2

Cash flow hedge adjustment
—

 
—

 
—

 
—

 
(5
)
 
—

 
(5
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(45
)
 
—

 
(45
)
Share-based compensation
2

 
—

 
79

 
—

 
—

 
—

 
79

Excess tax benefits on equity awards
—

 
—

 
8

 
—

 
—

 
—

 
8

Distributions
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Balance as of June 30, 2015
987

 
$
10

 
$
10,115

 
$
(4,347
)
 
$
(673
)
 
$
(36
)
 
$
5,069


 
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

.

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 June 30, 2015, we owned, leased, managed or franchised 4,396 hotel and resort properties, totaling 724,943 rooms in 95 countries and territories, as well as 44 timeshare properties comprising 6,908 units.

As of June 30, 2015, affiliates of The Blackstone Group L.P. ("Blackstone" or "our Sponsor") beneficially owned approximately 45.9 percent of our common stock.

Basis of Presentation and Use of Estimates

The accompanying condensed consolidated financial statements for the three and six months ended June 30, 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 May 2015, the FASB issued ASU No. 2015-07 ("ASU 2015-07"), Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent). This ASU removes the requirement to categorize the investments for which fair value is measured using net asset value per share within the fair value hierarchy. The provisions of ASU 2015-07 are effective for reporting periods beginning after December 15, 2015 and are to be applied retrospectively; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In April 2015, the FASB issued ASU No. 2015-05 ("ASU 2015-05"), Intangibles - Goodwill and Other - Internal Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This ASU provides a basis for evaluating whether a cloud computing arrangement includes a software license, whereby if an arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the

7


acquisition of other software licenses, and if it does not, the customer should account for the arrangement as a service contract. The provisions of ASU 2015-05 are effective for reporting periods beginning after December 15, 2015; early adoption is permitted. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

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 and premiums. The provisions of ASU 2015-03 are effective for reporting periods beginning after December 15, 2015 and are to be applied retrospectively; 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; 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; however, in a July 2015 meeting, the FASB affirmed its proposal to defer the effective date by one year. The provisions of this ASU are to be applied retrospectively; early adoption prior to the original effective date 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: "Assets Held for Sale and 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.

In June 2015, we acquired the Juniper Hotel Cupertino in Cupertino, California to complete the tax deferred exchange of real property, discussed above, for a total purchase price of $112 million.

We incurred transaction costs of $7 million and $26 million recognized in other gain (loss), net in our condensed consolidated statements of operations for the three and six months ended June 30, 2015, respectively.


8


As of the acquisition dates, 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
1,868

Other intangible assets, net
4

Accounts payable, accrued expenses and other
(25
)
Long-term debt
(450
)
Net assets acquired
$
1,426


The fair value of net assets acquired are subject to adjustments as additional information relative to the fair value at the acquisition date becomes 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 statements of operations were as follows:
 
Three Months Ended
 
Six Months Ended
 
June 30, 2015
 
June 30, 2015
 
(in millions)
Total revenues
$
89

 
$
144

Income before income taxes
19

 
34



Note 4: Assets Held for Sale and Disposals

Hilton Sydney

In April 2015, we entered into an agreement to sell the Hilton Sydney, a wholly owned hotel, for a purchase price of 442 million Australian Dollars ("AUD") (equivalent to $339 million as of June 30, 2015), which is payable in cash at closing and is subject to customary pro rations and adjustments. The buyer provided a cash deposit of 44 million AUD (equivalent to $34 million as of June 30, 2015), which was held in escrow as earnest money. The sale was completed in July 2015 (see Note 20: "Subsequent Events").


9


As of June 30, 2015, assets and liabilities held for sale related to the Hilton Sydney, which is within our ownership segment, were as follows:
 
(in millions)
Assets:
 
Current assets held for sale(1)
$
12

Property and equipment, net held for sale:
 
Land
4

Buildings and leasehold improvements
134

Furniture and equipment
7

 
145

Accumulated depreciation and amortization
(34
)
Total property and equipment, net held for sale
111

Total assets held for sale
$
123

 
 
Liabilities:
 
Current liabilities related to assets held for sale(2)
$
10

Total liabilities held for sale
$
10

____________
(1) 
Amounts included in other current assets in our condensed consolidated balance sheet as of June 30, 2015.
(2) 
Amounts included in accounts payable, accrued liabilities and other in our condensed consolidated balance sheet as of June 30, 2015.

Waldorf Astoria New York

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 six months ended June 30, 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 the 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, net of transaction costs, of $144 million included in gain (loss) on sales of assets, net in our condensed consolidated statement of operations for the six months ended June 30, 2015.

Sale of Other Property and Equipment

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, from accumulated other comprehensive loss prior to the disposition. The gain was included in other gain (loss), net in our condensed consolidated statement of operations for the six months ended June 30, 2014. Additionally, during the six months ended June 30, 2014, we completed the sale of certain land and easement rights to an affiliate of Blackstone in connection with a timeshare project. As a result, the affiliate of Blackstone acquired the rights to the name, plans, designs, contracts and other documents related to the timeshare project. The total consideration received for this transaction was approximately $37 million. We 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.


10


Note 5: Property and Equipment

Property and equipment were as follows:    
 
June 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Land
$
3,487

 
$
3,009

Buildings and leasehold improvements
6,346

 
5,150

Furniture and equipment
1,249

 
1,140

Construction-in-progress
98

 
53

 
11,180

 
9,352

Accumulated depreciation and amortization
(1,989
)
 
(1,869
)
 
$
9,191

 
$
7,483


Depreciation and amortization expense on property and equipment, including amortization of assets recorded under capital leases, was $89 million and $79 million during the three months ended June 30, 2015 and 2014, respectively, and $172 million and $156 million during the six months ended June 30, 2015 and 2014, respectively.

As of June 30, 2015 and December 31, 2014, property and equipment included approximately $145 million and $149 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $65 million and $64 million, respectively, of accumulated depreciation and amortization.

Note 6: Financing Receivables

Financing receivables were as follows:
 
June 30, 2015
 
Securitized Timeshare
 
Unsecuritized Timeshare(1)
 
Other
 
Total
 
(in millions)
Financing receivables
$
366

 
$
536

 
$
34

 
$
936

Less: allowance
(19
)
 
(67
)
 
(1
)
 
(87
)
 
347

 
469

 
33

 
849

 
 
 
 
 
 
 
 
Current portion of financing receivables
62

 
73

 
2

 
137

Less: allowance
(3
)
 
(9
)
 
—

 
(12
)
 
59

 
64

 
2

 
125

 
 
 
 
 
 
 
 
Total financing receivables
$
406

 
$
533

 
$
35

 
$
974


 
December 31, 2014
 
Securitized Timeshare
 
Unsecuritized Timeshare(1)
 
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

____________
(1) 
Included in this balance, we had $164 million of gross timeshare financing receivables secured under our revolving non-recourse timeshare financing receivables credit facility (the "Timeshare Facility"), as of June 30, 2015 and December 31, 2014.




11


Timeshare Financing Receivables

As of June 30, 2015, we had 52,402 timeshare financing receivables with interest rates ranging from zero percent to 20.50 percent, a weighted average interest rate of 11.98 percent, a weighted average remaining term of 7.5 years and maturities through 2025. As of June 30, 2015 and December 31, 2014, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $31 million.

The changes in our allowance for uncollectible timeshare financing receivables were as follows:
 
Six Months Ended
 
June 30,
 
2015
 
2014
 
(in millions)
Beginning balance
$
96

 
$
92

Write-offs
(15
)
 
(16
)
Provision for uncollectibles on sales
17

 
15

Ending balance
$
98

 
$
91


Our timeshare financing receivables as of June 30, 2015 mature as follows:
 
Securitized Timeshare
 
Unsecuritized Timeshare
Year
(in millions)
2015 (remaining)
$
30

 
$
45

2016
63

 
59

2017
65

 
63

2018
64

 
64

2019
60

 
64

Thereafter
146

 
314

 
428

 
609

Less: allowance
(22
)
 
(76
)
 
$
406

 
$
533


The following table details an aged analysis of our gross timeshare financing receivables balance:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Current
$
997

 
$
980

30 - 89 days past due
9

 
13

90 - 119 days past due
3

 
2

120 days and greater past due
28

 
29

 
$
1,037

 
$
1,024


Note 7: Investments in Affiliates

Investments in affiliates were as follows:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Equity investments
$
143

 
$
153

Other investments
13

 
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 June 30, 2015 and December 31, 2014. These entities had total debt of approximately $945 million and $929 million as of June 30, 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.

12



Note 8: Consolidated Variable Interest Entities

As of June 30, 2015 and December 31, 2014, we consolidated five variable interest entities ("VIEs"). During the six months ended June 30, 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:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Cash and cash equivalents
$
30

 
$
26

Property and equipment, net
44

 
49

Non-recourse debt
205

 
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 $10 million and $5 million during the three months ended June 30, 2015 and 2014, respectively, and $15 million and $10 million during the six months ended June 30, 2015 and 2014, respectively, and was included in interest expense in our condensed consolidated statements of operations.

In June 2015, one of our consolidated VIEs in Japan modified the terms of its capital lease, resulting in a reduction in non-recourse debt of $24 million. This amount was recognized as a gain in other gain (loss), net in our condensed consolidated statement of operations during the three and six months ended June 30, 2015, as the leased asset had previously been fully impaired.

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:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Restricted cash and cash equivalents
$
17

 
$
20

Securitized financing receivables, net
406

 
468

Non-recourse debt
414

 
481


Our condensed consolidated statements of operations included interest income related to these VIEs of $13 million and $12 million during the three months ended June 30, 2015 and 2014, respectively, and $28 million and $19 million during the six months ended June 30, 2015 and 2014, respectively, included in timeshare revenue. Additionally, our condensed consolidated statements of operations included interest expense related to these VIEs of $2 million during the three months ended June 30, 2015 and 2014, and $5 million and $3 million during the six months ended June 30, 2015 and 2014, respectively. 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.


13


Note 9: Debt

Long-term Debt

Long-term debt balances, including obligations for capital leases, and associated interest rates as of June 30, 2015 were as follows:

June 30,
 
December 31,

2015
 
2014

(in millions)
Senior secured term loan facility with a rate of 3.50%, due 2020
$
4,675

 
$
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 3.99%, due 2016 to 2020(2)
647

 
721

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

 
54

Capital lease obligations with an average rate of 6.12%, due 2015 to 2097
66

 
72


10,429


10,834

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

(10
)
Less: unamortized discount on senior secured term loan facility
(19
)
 
(21
)

$
10,400


$
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 six months ended June 30, 2015, we made voluntary prepayments of $325 million on our senior secured term loan facility (the "Term Loans").

As of June 30, 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: "Assets Held for Sale and 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 lenders certain cash reserves for restricted uses. As of June 30, 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.


14


Non-recourse Debt

Non-recourse debt, including obligations for capital leases, and associated interest rates as of June 30, 2015 were as follows:
 
June 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Capital lease obligations of consolidated VIEs with a rate of 6.34%, due 2018 to 2026
$
185

 
$
216

Non-recourse debt of consolidated VIEs with an average rate of 3.75%, due 2015 to 2018(1)
31

 
32

Timeshare Facility with a rate of 1.19%, due 2017
150

 
150

Securitized Timeshare Debt with an average rate of 1.97%, due 2026
414

 
481

 
780

 
879

Less: current maturities of non-recourse debt
(136
)
 
(127
)
 
$
644

 
$
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 $21 million and $25 million as of June 30, 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 June 30, 2015 were as follows:
Year
(in millions)
2015 (remaining)
$
88

2016
213

2017
349

2018(1)
3,563

2019(1)
481

Thereafter
6,515

 
$
11,209

____________
(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 six months ended June 30, 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 six months ended June 30, 2015, derivatives were also used to hedge foreign exchange risk associated with certain foreign currency denominated cash balances.

Cash Flow Hedges

As of June 30, 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 June 30, 2015, we held 47 short-term foreign exchange forward contracts in the notional amount of $451 million to offset exposure to fluctuations in our foreign currency denominated cash balances. We elected not to designate these foreign

15


exchange forward contracts as hedging instruments.

As of June 30, 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 2016 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:
 
June 30, 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
 
$
12

 
Other liabilities
 
$
4

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

 
Other assets
 
—

Forward contracts(1)
Other assets
 
—

 
Other assets
 
—

Forward contracts(2)
Accounts payable, accrued expenses and other
 
2

 
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 June 30, 2015 and December 31, 2014.
(2) 
The fair values of our forward contracts were less than $1 million as of 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 June 30,
 
Six Months Ended June 30,
 
Classification of Gain (Loss) Recognized
 
2015
 
2014
 
2015

2014
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
Other comprehensive income (loss)
 
$
3

 
$
(9
)
 
$
(8
)
 
$
(14
)
 
 
 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
 
 
Interest rate caps
Other gain (loss), net
 
—

 
—

 
—

 
—

Forward contracts
Gain (loss) on foreign currency transactions
 
8

 
N/A

 
6

 
N/A

____________
(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, 2015 and 2014.


16


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:
 
June 30, 2015
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
250

 
$
—

 
$
250

 
$
—

Restricted cash equivalents
22

 
—

 
22

 
—

Timeshare financing receivables
1,037

 
—

 
—

 
1,036

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
10,344

 
1,623

 
—

 
8,862

Non-recourse debt(2)
564

 
—

 
—

 
561

Interest rate swaps
12

 
—

 
12

 
—


 
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 $66 million and $72 million as of June 30, 2015 and December 31, 2014, respectively.
(2) 
Excludes capital lease obligations of consolidated VIEs with a carrying value of $185 million and $216 million as of June 30, 2015 and December 31, 2014, respectively, and non-recourse debt of consolidated VIEs with a carrying value of $31 million and $32 million, respectively.

We believe the carrying amounts of our other financial assets and liabilities approximated fair value as of June 30, 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

17


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 six months ended June 30, 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
$
1,868

Long-term debt
450

____________
(1) 
Fair values were estimated using significant unobservable inputs (Level 3).

We estimated the fair values 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 six months ended June 30, 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 compensation costs incurred for the executive compensation plan that certain members of our senior management team participated in prior to December 2013 (the "Promote Plan") or for the reduction of goodwill in connection with the sale of the Waldorf Astoria New York (see Note 4: "Assets Held for Sale and Disposals" for further information). The higher effective tax rate, as compared to our statutory tax rate, for the three and six months ended June 30, 2015, was largely attributable to the reduction of goodwill in connection with the sale of the Waldorf Astoria New York and compensation costs under the Promote Plan 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 during the six months ended June 30, 2015.

Our total unrecognized tax benefits as of June 30, 2015 and December 31, 2014 were $402 million and $401 million, respectively. We had accrued approximately $26 million and $22 million for the payment of interest and penalties as of June 30, 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 $24 million. Included in the balance of unrecognized tax benefits as of June 30, 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 June 30, 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

18


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 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 June 30, 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").


19


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,
 
2015
 
2014
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
1

 
$
—

 
$
—

 
$
2

 
$
—

 
$
1

Interest cost
4

 
4

 
1

 
4

 
4

 
1

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

 
—

 
—

 
1

 
—

 
—

Amortization of net loss
1

 
—

 
1

 
1

 
—

 
—

Settlement losses
—

 
—

 
2

 
1

 
—

 
—

Net periodic pension cost (credit)
$
2

 
$
(2
)
 
$
3

 
$
4

 
$
(2
)
 
$
1

 
Six Months Ended June 30,
 
2015
 
2014
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
3

 
$
—

 
$
1

 
$
4

 
$
—

 
$
2

Interest cost
8

 
8

 
2

 
8

 
9

 
2

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

 
—

 
—

 
2

 
—

 
—

Amortization of net loss
2

 
1

 
1

 
1

 
—

 
—

Settlement losses
—

 
—

 
2

 
1

 
—

 
—

Net periodic pension cost (credit)
$
5

 
$
(3
)
 
$
4

 
$
7

 
$
(3
)
 
$
2


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. As of June 30, 2015, the bond had been released and the full amount of the cash collateral was returned to us.

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"), performance-vesting restricted stock units and restricted stock (collectively, "performance shares") and deferred share units ("DSUs").

We recognized share-based compensation expense for awards granted under the Stock Plan of $27 million and $24 million during the three months ended June 30, 2015 and 2014, respectively, and $55 million and $35 million during the six months ended June 30, 2015 and 2014, respectively, which included amounts reimbursed by hotel owners. As of June 30, 2015, unrecognized compensation costs for unvested awards was approximately $147 million, which is expected to be recognized over a weighted-average period of 2.0 years on a straight-line basis.

As of June 30, 2015, there were 68,434,143 shares of common stock available for future issuance under the Stock Plan.

Restricted Stock Units

During the six months ended June 30, 2015, we issued 2,042,032 RSUs with a weighted average grant date fair value of $27.48, 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.


20


Stock Options

During the six months ended June 30, 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 options 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 of 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 June 30, 2015, 299,615 options were exercisable.

Performance Shares

During the six months ended June 30, 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 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 the Company’s earnings before interest expense, taxes and depreciation and amortization ("EBITDA") compound annual growth rate ("EBITDA CAGR").

The grant date fair value of these performance shares 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 of 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 shares based on our EBITDA CAGR was $27.46. For performance shares based on our EBITDA CAGR, we determined that the performance condition is probable of achievement and as of June 30, 2015, we recognized compensation expense based on the anticipated achievement percentage as follows:
 
Achievement Percentage
Performance shares granted in 2014
150%
Performance shares granted in 2015
125%

Deferred Share Units

During the three months ended June 30, 2015, we issued to our independent directors 14,451 DSUs with a grant date fair value of $29.06, which are fully vested and non-forfeitable on the grant date. DSUs are settled for shares of our common stock and deliverable upon the earlier of termination of the individual's service on our Board of Directors or a change in control.

21



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 vested as of December 11, 2014. In May 2015, our Sponsor ceased to own 50 percent or more of the shares of the Company, at which point the remaining 20 percent of restricted shares of common stock vested, resulting in the recognition of compensation expense of $64 million upon occurrence of that event.

During the three months ended June 30, 2015 and 2014, total compensation expense recognized for the Promote Plan was $64 million and $6 million, respectively, and was $66 million and $19 million during the six months ended June 30, 2015 and 2014, respectively.

Note 15: 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,
 
2015
 
2014
 
2015
 
2014
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
161

 
$
209

 
$
311

 
$
332

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
987

 
985

 
986

 
985

Basic EPS
$
0.16

 
$
0.21

 
$
0.32

 
$
0.34

 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
161

 
$
209

 
$
311

 
$
332

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
989

 
985

 
989

 
985

Diluted EPS
$
0.16

 
$
0.21

 
$
0.31

 
$
0.34


Approximately 2 million and 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three and six months ended June 30, 2015, respectively, and 1 million awards were excluded for the three and six months ended June 30, 2014 because their effect would have been anti-dilutive under the treasury stock method.

22


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
(42
)
 
(2
)
 
(5
)
 
(49
)
Amounts reclassified from accumulated other comprehensive loss
—

 
4

 
—

 
4

Net current period other comprehensive income (loss)
(42
)
 
2

 
(5
)
 
(45
)
 
 
 
 
 
 
 
 
Balance as of June 30, 2015
$
(488
)
 
$
(177
)
 
$
(8
)
 
$
(673
)
 
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