10-Q
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 September 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 October 26, 2015 was 987,451,862.


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)
 
September 30,
 
December 31,
2015
2014
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
628

 
$
566

Restricted cash and cash equivalents
276

 
202

Accounts receivable, net of allowance for doubtful accounts of $30 and $29
929

 
844

Inventories
430

 
404

Deferred income tax assets
20

 
20

Current portion of financing receivables, net
68

 
66

Current portion of securitized financing receivables, net
56

 
62

Prepaid expenses
182

 
133

Income taxes receivable
19

 
132

Other
38

 
70

Total current assets (variable interest entities - $136 and $136)
2,646

 
2,499

Property, Intangibles and Other Assets:
 
 
 
Property and equipment, net
9,132

 
7,483

Property and equipment, net held for sale
—

 
1,543

Financing receivables, net
544

 
416

Securitized financing receivables, net
321

 
406

Investments in affiliates
154

 
170

Goodwill
5,902

 
6,154

Brands
4,929

 
4,963

Management and franchise contracts, net
1,176

 
1,306

Other intangible assets, net
603

 
674

Deferred income tax assets
157

 
155

Other
368

 
356

Total property, intangibles and other assets (variable interest entities - $519 and $613)
23,286

 
23,626

TOTAL ASSETS
$
25,932

 
$
26,125

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
2,261

 
$
2,099

Current maturities of long-term debt
116

 
10

Current maturities of non-recourse debt
132

 
127

Income taxes payable
49

 
21

Total current liabilities (variable interest entities - $183 and $162)
2,558

 
2,257

Long-term debt
9,945

 
10,803

Non-recourse debt
623

 
752

Deferred revenues
341

 
495

Deferred income tax liabilities
5,293

 
5,216

Liability for guest loyalty program
754

 
720

Other
1,238

 
1,168

Total liabilities (variable interest entities - $667 and $788)
20,752

 
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 September 30, 2015 and December 31, 2014
—

 
—

Common stock, $0.01 par value; 30,000,000,000 authorized shares, 987,480,629 issued and 987,451,862 outstanding as of September 30, 2015 and 984,623,863 issued and outstanding as of December 31, 2014
10

 
10

Additional paid-in capital
10,134

 
10,028

Accumulated deficit
(4,137
)
 
(4,658
)
Accumulated other comprehensive loss
(793
)
 
(628
)
Total Hilton stockholders' equity
5,214

 
4,752

Noncontrolling interests
(34
)
 
(38
)
Total equity
5,180

 
4,714

TOTAL LIABILITIES AND EQUITY
$
25,932

 
$
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Revenues
 
 
 
 
 
 
 
Owned and leased hotels
$
1,082

 
$
1,079

 
$
3,174


$
3,141

Management and franchise fees and other
416

 
364

 
1,194


1,030

Timeshare
334

 
295

 
974


850

 
1,832

 
1,738

 
5,342

 
5,021

Other revenues from managed and franchised properties
1,063

 
906

 
3,074

 
2,653

Total revenues
2,895

 
2,644

 
8,416

 
7,674

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Owned and leased hotels
798

 
816

 
2,383

 
2,420

Timeshare
219

 
199

 
673

 
564

Depreciation and amortization
171

 
159

 
519

 
470

General, administrative and other
145

 
119

 
493

 
349

 
1,333

 
1,293

 
4,068

 
3,803

Other expenses from managed and franchised properties
1,063

 
906

 
3,074

 
2,653

Total expenses
2,396

 
2,199

 
7,142

 
6,456

 
 
 
 
 
 
 
 
Gain on sales of assets, net
164

 
—

 
306

 
—

 
 
 
 
 
 
 
 
Operating income
663

 
445

 
1,580

 
1,218

 
 
 
 
 
 
 
 
Interest income
3

 
2

 
11

 
8

Interest expense
(138
)
 
(156
)
 
(431
)
 
(467
)
Equity in earnings from unconsolidated affiliates
9

 
4

 
22

 
16

Gain (loss) on foreign currency transactions
(8
)
 
(5
)
 
(21
)
 
41

Other gain (loss), net
1

 
24

 
(6
)
 
38

 
 
 
 
 
 
 
 
Income before income taxes
530

 
314

 
1,155

 
854

 
 
 
 
 
 
 
 
Income tax expense
(247
)
 
(127
)
 
(555
)
 
(331
)
 
 
 
 
 
 
 
 
Net income
283

 
187

 
600

 
523

Net income attributable to noncontrolling interests
(4
)
 
(4
)
 
(10
)
 
(8
)
Net income attributable to Hilton stockholders
$
279

 
$
183

 
$
590

 
$
515

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.28

 
$
0.19

 
$
0.60

 
$
0.52

Diluted
$
0.28

 
$
0.19

 
$
0.60

 
$
0.52

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.07

 
$
—

 
$
0.07

 
$
—


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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
Net income
$
283

 
$
187

 
$
600

 
$
523

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
 
 
 
 
Currency translation adjustment, net of tax of $(79), $(95), $(49) and $7
(115
)
 
(212
)
 
(157
)
 
(131
)
Pension liability adjustment, net of tax of $(1), $(2), $(2) and $(3)
1

 
(1
)
 
3

 
3

Cash flow hedge adjustment, net of tax of $4, $(3), $7 and $2
(6
)
 
5

 
(11
)
 
(4
)
Total other comprehensive loss
(120
)
 
(208
)
 
(165
)
 
(132
)
 
 
 
 
 
 
 
 
Comprehensive income (loss)
163

 
(21
)
 
435

 
391

Comprehensive income attributable to noncontrolling interests
(4
)
 
(8
)
 
(10
)
 
(10
)
Comprehensive income (loss) attributable to Hilton stockholders
$
159

 
$
(29
)
 
$
425

 
$
381


See notes to condensed consolidated financial statements.

4


HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
 
Nine Months Ended
 
September 30,
 
2015
 
2014
Operating Activities
 
 
 
Net income
$
600

 
$
523

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
519

 
470

Gain on sales of assets, net
(306
)
 
—

Equity in earnings from unconsolidated affiliates
(22
)
 
(16
)
Loss (gain) on foreign currency transactions
21

 
(41
)
Other loss (gain), net
6

 
(38
)
Share-based compensation
114

 
57

Distributions from unconsolidated affiliates
22

 
20

Deferred income taxes
34

 
(62
)
Change in restricted cash and cash equivalents
(13
)
 
(3
)
Working capital changes and other
16

 
(11
)
Net cash provided by operating activities
991

 
899

 
 
 
 
Investing Activities
 
 
 
Capital expenditures for property and equipment
(214
)
 
(184
)
Acquisitions, net of cash acquired
(1,410
)
 
—

Payments received on other financing receivables
3

 
18

Issuance of other financing receivables
(9
)
 
(1
)
Investments in affiliates
(5
)
 
(6
)
Distributions from unconsolidated affiliates
18

 
32

Proceeds from asset dispositions
2,197

 
40

Contract acquisition costs
(27
)
 
(54
)
Software capitalization costs
(38
)
 
(45
)
Net cash provided by (used in) investing activities
515

 
(200
)
 
 
 
 
Financing Activities
 
 
 
Borrowings
35

 
350

Repayment of debt
(1,342
)
 
(1,075
)
Debt issuance costs
—

 
(9
)
Change in restricted cash and cash equivalents
(53
)
 
(19
)
Capital contribution
—

 
13

Dividends paid
(69
)
 
—

Distributions to noncontrolling interests
(6
)
 
(3
)
Excess tax benefits from share-based compensation
8

 
—

Net cash used in financing activities
(1,427
)
 
(743
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(17
)
 
(7
)
Net increase (decrease) in cash and cash equivalents
62

 
(51
)
Cash and cash equivalents, beginning of period
566

 
594

 
 
 
 
Cash and cash equivalents, end of period
$
628

 
$
543

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the year:
 
 
 
Interest
$
329

 
$
353

Income taxes, net of refunds
359

 
284

 
 
 
 
Non-cash investing activities:
 
 
 
Acquisition of property and equipment
—

 
144

Acquisition of other intangible assets
—

 
1

Disposition of equity investments
—

 
(59
)
Long-term debt assumed
(450
)
 
—

Capital lease restructuring
—

 
11

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

 
64

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
—

 
—

 
—

 
590

 
—

 
10

 
600

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

 
—

 
—

 
—

 
(157
)
 
—

 
(157
)
Pension liability adjustment
—

 
—

 
—

 
—

 
3

 
—

 
3

Cash flow hedge adjustment
—

 
—

 
—

 
—

 
(11
)
 
—

 
(11
)
Other comprehensive loss
—

 
—

 
—

 
—

 
(165
)
 
—

 
(165
)
Dividends
—

 
—

 
—

 
(69
)
 
—

 
—

 
(69
)
Share-based compensation
2

 
—

 
98

 
—

 
—

 
—

 
98

Excess tax benefits on equity awards
—

 
—

 
8

 
—

 
—

 
—

 
8

Distributions
—

 
—

 
—

 
—

 
—

 
(6
)
 
(6
)
Balance as of September 30, 2015
987

 
$
10

 
$
10,134

 
$
(4,137
)
 
$
(793
)
 
$
(34
)
 
$
5,180


 
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
—

 
—

 
—

 
515

 
—

 
8

 
523

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

 
—

 
—

 
—

 
(133
)
 
2

 
(131
)
Pension liability adjustment
—

 
—

 
—

 
—

 
3

 
—

 
3

Cash flow hedge adjustment
—

 
—

 
—

 
—

 
(4
)
 
—

 
(4
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

 
(134
)
 
2

 
(132
)
Share-based compensation
—

 
—

 
73

 
—

 
—

 
—

 
73

Capital contribution
—

 
—

 
13

 
—

 
—

 
—

 
13

Distributions
—

 
—

 
—

 
—

 
—

 
(3
)
 
(3
)
Equity contributions to consolidated variable interest entities
—

 
—

 
(34
)
 
—

 
(6
)
 
40

 
—

Balance as of September 30, 2014
985

 
$
10

 
$
10,000

 
$
(4,816
)
 
$
(404
)
 
$
(40
)
 
$
4,750

.

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. (the "Parent," or together with its subsidiaries, "Hilton," "we," "us," "our" or the "Company"), a Delaware corporation, is one of the largest hospitality companies in the world 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 September 30, 2015, we owned, leased, managed or franchised 4,480 hotel and resort properties, totaling 737,922 rooms in 97 countries and territories, as well as 45 timeshare properties comprising 7,152 units.

As of September 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 nine months ended September 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

Accounting Standards Not Yet Adopted

In September 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-16 ("ASU 2015-16"), Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. This ASU requires adjustments to provisional amounts that are identified during the measurement period of a business combination to be recognized in the reporting period in which the adjustment amounts are determined. Acquirers are no longer required to revise comparative information for prior periods as if the accounting for the business combination had been completed as of the acquisition date. The provisions of ASU 2015-16 are effective for reporting periods beginning after December 15, 2015. We have elected, as permitted by the standard, to early adopt ASU 2015-16 on a prospective basis as of October 1, 2015. The adoption is not expected to have a material effect on our consolidated financial position or results of operations.

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

7


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 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. The adoption is not expected to have a material effect on our consolidated financial position or results of operations.

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. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarifies that absent authoritative guidance in ASU 2015-03 for debt issuance costs related to line-of-credit arrangements, the staff of the Securities and Exchange Commission would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. 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. The adoption of this ASU is not expected to have a material effect on our consolidated financial position or results of operations.

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 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. In August 2015, the FASB issued ASU No. 2015-14 ("ASU 2015-14"), Revenue from Contracts with Customers (Topic 606) - Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 for reporting periods beginning after December 15, 2016 to reporting periods beginning after December 15, 2017. The provisions of this ASU 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

Tax Deferred Exchange

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 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 $26 million recognized in other gain (loss), net in our condensed consolidated statement of operations for the nine months ended September 30, 2015.


8


As of the acquisition dates, the fair values of the assets acquired and liabilities assumed 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
4

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


These fair values are subject to adjustments as additional information relative to the fair values 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
 
Nine Months Ended
 
September 30, 2015
 
September 30, 2015
 
(in millions)
Total revenues
$
84

 
$
228

Income before income taxes
10

 
44


Equity Investments Exchange

In July 2014, we entered into an agreement to exchange our ownership interest in six hotels for the remaining interest in five other hotels that were part of an equity investment portfolio we owned with one other partner. As a result of this exchange, we have a 100 percent ownership interest in five hotels and no longer have any ownership interest in the remaining six hotels. This transaction was accounted for as a business combination achieved in stages, resulting in a remeasurement gain based upon the fair values of the equity investments. The carrying values of these equity investments immediately before the exchange totaled $59 million and the fair values of these equity investments immediately before the exchange totaled $83 million, resulting in a pre-tax gain of $23 million, net of transaction costs, recognized in other gain (loss), net in our condensed consolidated statements of operations for the three and nine months ended September 30, 2014.

Note 4: Disposals

Hilton Sydney

In July 2015, we completed the sale of the Hilton Sydney for a purchase price of 442 million Australian Dollars ("AUD") (equivalent to $340 million as of the closing date). As a result of the sale, we recognized a pre-tax gain of $163 million included in gain on sales of assets, net in our condensed consolidated statements of operations for the three and nine months ended September 30, 2015. The pre-tax gain was net of transaction costs, a goodwill reduction of $36 million and reclassification of a currency translation adjustment of $25 million from accumulated other comprehensive loss into earnings concurrent with the disposition. The goodwill reduction was due to our consideration of the Hilton Sydney property as a business within our ownership segment; therefore, we reduced the carrying amount of our goodwill by the amount representing the fair value of the business disposed relative to the fair value of the portion of our ownership reporting unit goodwill that was retained.


9


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 the sale, we recognized a gain of $143 million included in gain on sales of assets, net in our condensed consolidated statement of operations for the nine months ended September 30, 2015. The gain was net of transaction costs and a goodwill reduction of $185 million. The goodwill reduction was due to our consideration of the Waldorf Astoria New York property as a business within our ownership segment; therefore, we reduced the carrying amount of our goodwill by the amount representing the fair value of the business disposed relative to the fair value of the portion of our ownership reporting unit goodwill that was retained. Additionally, we recognized a loss of $6 million in other gain (loss), net in our condensed consolidated statement of operations for the nine months ended September 30, 2015 related to the reduction of the Waldorf Astoria Loan's remaining carrying amount of debt issuance costs.

Sale of Other Property and Equipment

During the nine months ended September 30, 2014, we completed the sales of two hotels and a vacant parcel of land for approximately $15 million. As a result of these sales, we recognized a pre-tax gain of $13 million, including the reclassification of a currency translation adjustment of $3 million, from accumulated other comprehensive loss concurrent with the disposition. The gain was included in other gain (loss), net in our condensed consolidated statement of operations for the nine months ended September 30, 2014. Additionally, during the nine months ended September 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.

Note 5: Property and Equipment

Property and equipment were as follows:    
 
September 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Land
$
3,484

 
$
3,009

Buildings and leasehold improvements
6,349

 
5,150

Furniture and equipment
1,258

 
1,140

Construction-in-progress
102

 
53

 
11,193

 
9,352

Accumulated depreciation and amortization
(2,061
)
 
(1,869
)
 
$
9,132

 
$
7,483


Depreciation and amortization expense on property and equipment, including amortization of assets recorded under capital leases, was $88 million and $79 million during the three months ended September 30, 2015 and 2014, respectively, and $260 million and $235 million during the nine months ended September 30, 2015 and 2014, respectively.

As of September 30, 2015 and December 31, 2014, property and equipment included approximately $143 million and $149 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $69 million and $64 million, respectively, of accumulated depreciation and amortization.


10


Note 6: Financing Receivables

Financing receivables were as follows:
 
September 30, 2015
 
Securitized Timeshare
 
Unsecuritized Timeshare(1)
 
Other
 
Total
 
(in millions)
Financing receivables
$
337

 
$
582

 
$
36

 
$
955

Less: allowance
(16
)
 
(74
)
 
—

 
(90
)
 
321

 
508

 
36

 
865

 
 
 
 
 
 
 
 
Current portion of financing receivables
59

 
75

 
2

 
136

Less: allowance
(3
)
 
(9
)
 
—

 
(12
)
 
56

 
66

 
2

 
124

 
 
 
 
 
 
 
 
Total financing receivables
$
377

 
$
574

 
$
38

 
$
989


 
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 September 30, 2015 and December 31, 2014, respectively.

Timeshare Financing Receivables

As of September 30, 2015, we had 52,840 timeshare financing receivables with interest rates ranging from zero percent to 20.50 percent, a weighted average interest rate of 11.92 percent, a weighted average remaining term of 7.6 years and maturities through 2026.

Our timeshare financing receivables as of September 30, 2015 mature as follows:
 
Securitized Timeshare
 
Unsecuritized Timeshare
Year
(in millions)
2015 (remaining)
$
15

 
$
29

2016
60

 
62

2017
62

 
66

2018
61

 
68

2019
57

 
69

Thereafter
141

 
363

 
396

 
657

Less: allowance
(19
)
 
(83
)
 
$
377

 
$
574



11


As of September 30, 2015 and December 31, 2014, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $30 million and $31 million, respectively. The following table details an aged analysis of our gross timeshare financing receivables balance:
 
September 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Current
$
1,011

 
$
980

30 - 89 days past due
12

 
13

90 - 119 days past due
3

 
2

120 days and greater past due
27

 
29

 
$
1,053

 
$
1,024


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

 
$
92

Write-offs
(23
)
 
(24
)
Provision for uncollectibles on sales
29

 
25

Ending balance
$
102

 
$
93


Note 7: Investments in Affiliates

Investments in affiliates were as follows:
 
September 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Equity investments
$
145

 
$
153

Other investments
9

 
17

 
$
154

 
$
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 September 30, 2015 and December 31, 2014. These entities had total debt of approximately $949 million and $929 million as of September 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 September 30, 2015 and December 31, 2014, we consolidated five variable interest entities ("VIEs"); two lease hotels from unconsolidated affiliates in Japan, two are associated with our timeshare financing receivables securitization transactions that both issued debt (collectively, "Securitized Timeshare Debt") and one owns a hotel in the U.S. We are the primary beneficiaries of these VIEs as we have the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our VIEs are only available to settle the obligations of these entities. Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily comprised the following:
 
September 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Cash and cash equivalents
$
38

 
$
27

Restricted cash and cash equivalents
17

 
22

Property and equipment, net
73

 
77

Securitized financing receivables, net
377

 
468

Other non-current assets
53

 
56

Non-recourse debt
605

 
729


During the nine months ended September 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.

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 nine months ended September 30, 2015, as the leased asset had previously been fully impaired.

In September 2014, we acquired an additional ownership interest in one of our consolidated VIEs in Japan. The effect of this acquisition was recognized during the nine months ended September 30, 2014, resulting in a decrease in additional paid-in capital of $6 million, a decrease in accumulated other comprehensive loss of $1 million and an increase in noncontrolling interests of $5 million.

Note 9: Debt

Long-term Debt

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

September 30,
 
December 31,

2015
 
2014

(in millions)
Senior secured term loan facility with a rate of 3.50%, due 2020
$
4,325

 
$
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 4.07%, due 2018(1)
3,487

 
3,487

Mortgage loans with an average rate of 4.00%, due 2016 to 2020(2)
648

 
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


10,080


10,834

Less: current maturities of long-term debt
(116
)

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

$
9,945


$
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 maturity date extensions that are solely at our option, we assumed they were exercised.


13


During the nine months ended September 30, 2015, we made prepayments of $675 million on our senior secured term loan facility (the "Term Loans"), including a contractually required prepayment using the net proceeds from the sale of the Hilton Sydney. See Note 4: "Disposals" for further information on the transaction.

As of September 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: "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 September 30, 2015 and December 31, 2014, our condensed consolidated balance sheets included $91 million and $19 million, respectively, of restricted cash and cash equivalents related to these loans.

Non-recourse Debt

Non-recourse debt, including obligations for capital leases, and associated interest rates as of September 30, 2015 were as follows:
 
September 30,
 
December 31,
 
2015
 
2014
 
(in millions)
Capital lease obligations of consolidated VIEs with a rate of 6.34%, due 2018 to 2026
$
189

 
$
216

Non-recourse debt of consolidated VIEs with an average rate of 3.74%, due 2015 to 2018(1)
32

 
32

Timeshare Facility with a rate of 1.20%, due 2017
150

 
150

Securitized Timeshare Debt with an average rate of 1.97%, due 2026
384

 
481

 
755

 
879

Less: current maturities of non-recourse debt
(132
)
 
(127
)
 
$
623

 
$
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 be utilized to make any required principal, interest and other payments due with respect to the Timeshare Facility and Securitized Timeshare Debt. The balance in the depository account, totaling $19 million and $25 million as of September 30, 2015 and December 31, 2014, respectively, was included in restricted cash and cash equivalents in our condensed consolidated balance sheets.


14


Debt Maturities

The contractual maturities of our long-term debt and non-recourse debt as of September 30, 2015 were as follows:
Year
(in millions)
2015 (remaining)
$
48

2016
229

2017
348

2018(1)
3,562

2019(1)
481

Thereafter
6,167

 
$
10,835

____________
(1) 
We assumed all extensions that are solely at our option for purposes of calculating maturity dates.

Note 10: Derivative Instruments and Hedging Activities

During the nine months ended September 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 nine months ended September 30, 2015, derivatives were also used to hedge foreign exchange risk associated with certain foreign currency denominated cash balances.

Cash Flow Hedges

As of September 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 September 30, 2015, we held 29 short-term foreign exchange forward contracts with an aggregate notional amount of $92 million to 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 September 30, 2015, we also 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.


15


Fair Value of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated balance sheets were as follows:
 
September 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
 
$
22

 
Other liabilities
 
$
4

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

 
Other assets
 
—

Forward contracts(2)
Other assets
 
1

 
Other assets
 
—

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

 
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 September 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 September 30,
 
Nine Months Ended September 30,
 
Classification of Gain (Loss) Recognized
 
2015
 
2014
 
2015

2014
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
Other comprehensive income (loss)
 
$
(10
)
 
$
8

 
$
(18
)
 
$
(6
)
 
 
 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
 
 
Interest rate caps
Other gain (loss), net
 
—

 
—

 
—

 
—

Forward contracts
Gain (loss) on foreign currency transactions
 
6

 
N/A

 
12

 
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 nine months ended September 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:
 
September 30, 2015
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
355

 
$
—

 
$
355

 
$
—

Restricted cash equivalents
25

 
—

 
25

 
—

Timeshare financing receivables
1,053

 
—

 
—

 
1,053

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
9,995

 
1,616

 
—

 
8,525

Non-recourse debt(2)
534

 
—

 
—

 
534

Interest rate swaps
22

 
—

 
22

 
—


 
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 September 30, 2015 and December 31, 2014, respectively.
(2) 
Excludes capital lease obligations of consolidated VIEs with a carrying value of $189 million and $216 million as of September 30, 2015 and December 31, 2014, respectively, and non-recourse debt of consolidated VIEs with a carrying value of $32 million as of September 30, 2015 and December 31, 2014.

We believe the carrying amounts of our other financial assets and liabilities approximated fair value as of September 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 weighted-average interest rates of the current portfolio, which reflect the risk of the underlying notes, primarily determined by the credit worthiness of the borrowers.

The estimated fair values of our Level 1 long-term debt were based on prices in active debt markets. The estimated fair values of our Level 3 long-term debt were based on indicative quotes received for similar issuances, the expected future cash flows discounted at risk-adjusted rates or the carrying value as the interest rates under the loan agreements approximated current market rates.

The estimated fair values of our Level 3 non-recourse debt approximated carrying values as the interest rates under the loan agreements either approximated current market rates or there were not significant fluctuations in current market rates to change the fair values of the underlying instruments.

17



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.

As a result of our acquisition of certain properties during the nine months ended September 30, 2015, we measured financial and nonfinancial assets and liabilities at fair value on a nonrecurring basis (see Note 3: "Acquisitions") as follows:
 
(in millions)
 
 
Property and equipment
$
1,868

Long-term debt
450


We estimated the fair values of these financial and nonfinancial assets and liabilities using discounted cash flow analyses with the following significant unobservable inputs (Level 3):
Property and equipment:
 
Estimated stabilized growth rate
3 to 4 percent
Term
10 to 11 years
Terminal capitalization rate(1)
7 to 8 percent
Discount rate(1)
9 to 10 percent
 
 
Long-term debt:
 
Risk adjusted rate
One-month LIBOR plus 275 basis points
____________
(1) 
Reflects the risk profile of the individual markets where the assets are located and are not necessarily indicative of our hotel portfolio as a whole.

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 sales of the Waldorf Astoria New York and the Hilton Sydney (see Note 4: "Disposals" for further information). The higher effective tax rate, as compared to our statutory tax rate, for the three and nine months ended September 30, 2015, was largely attributable to the reduction of goodwill in connection with the sales of the Waldorf Astoria New York and the Hilton Sydney as well as 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 nine months ended September 30, 2015.

Our total unrecognized tax benefits as of September 30, 2015 and December 31, 2014 were $407 million and $401 million, respectively. We had accrued approximately $26 million and $22 million for the payment of interest and penalties as of September 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 $21 million. Included in the balance of unrecognized tax benefits as of September 30, 2015 and December 31, 2014 were $377 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 Internal Revenue Service ("IRS") and other taxing authorities on open tax positions. The timing of the resolution of tax audits is highly uncertain, as are the amounts, if any, that may ultimately be paid upon such resolution. Changes may result from the conclusion of ongoing audits, appeals or litigation in state, local, federal and foreign

18


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 September 30, 2015, we remain subject to federal examinations from 2005-2014, state examinations from 1999-2014 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 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 U.S. Dollar ("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 September 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").

The components of net periodic pension cost (credit) for the Domestic Plan, U.K. Plan and International Plans were as follows:
 
Three Months Ended September 30,
 
2015
 
2014
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
2

 
$
1

 
$
1

 
$
1

 
$
1

 
$
—

Interest cost
4

 
3

 
1

 
5

 
4

 
1

Expected return on plan assets
(4
)
 
(7
)
 
(1
)
 
(5
)
 
(7
)
 
(1
)
Amortization of prior service cost
1

 
—

 
—

 
1

 
—

 
—

Amortization of net loss
—

 
—

 
—

 
—

 
1

 
—

Settlement losses
—

 
—

 
1

 
1

 
—

 
—

Net periodic pension cost (credit)
$
3

 
$
(3
)
 
$
2

 
$
3

 
$
(1
)
 
$
—


19


 
Nine Months Ended September 30,
 
2015
 
2014
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
Domestic Plan
 
U.K. Plan
 
International Plans
 
(in millions)
Service cost
$
5

 
$
1

 
$
2

 
$
5

 
$
1

 
$
2

Interest cost
12

 
11

 
3

 
13

 
13

 
3

Expected return on plan assets
(14
)
 
(19
)
 
(3
)
 
(14
)
 
(19
)
 
(3
)
Amortization of prior service cost
3

 
—

 
—

 
3

 
—

 
—

Amortization of net loss
2

 
1

 
1

 
1

 
1

 
—

Settlement losses
—

 
—

 
3

 
2

 
—

 
—

Net periodic pension cost (credit)
$
8

 
$
(6
)
 
$
6

 
$
10

 
$
(4
)
 
$
2


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 $22 million and $25 million during the three months ended September 30, 2015 and 2014, respectively, and $77 million and $60 million during the nine months ended September 30, 2015 and 2014, respectively, which included amounts reimbursed by hotel owners. As of September 30, 2015, unrecognized compensation costs for unvested awards was approximately $119 million, which is expected to be recognized over a weighted-average period of 1.8 years on a straight-line basis.

As of September 30, 2015, there were 68,524,469 shares of common stock available for future issuance under the Stock Plan.

Restricted Stock Units

During the nine months ended September 30, 2015, we issued 2,052,145 RSUs with a weighted average grant date fair value of $27.47, 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 nine months ended September 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 September 30, 2015, 299,615 options were exercisable.

20



Performance Shares

During the nine months ended September 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 September 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 nine months ended September 30, 2015, we issued to our independent directors 18,538 DSUs with a weighted average grant date fair value of $28.32, 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.

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.

Total compensation expense recognized for the Promote Plan was $6 million during the three months ended September 30, 2014, and was $66 million and $25 million during the nine months ended September 30, 2015 and 2014, respectively.


21


Note 15: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS"):
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2015
 
2014
 
2015
 
2014
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
279

 
$
183

 
$
590

 
$
515

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
987

 
985

 
986

 
985

Basic EPS
$
0.28

 
$
0.19

 
$
0.60

 
$
0.52

 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
279

 
$
183

 
$
590

 
$
515

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
989

 
987

 
989

 
986

Diluted EPS
$
0.28

 
$
0.19

 
$
0.60

 
$
0.52


Approximately 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three and nine months ended September 30, 2015 and 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
(173
)
 
(1
)
 
(11
)
 
(185
)
Amounts reclassified from accumulated other comprehensive loss
16

 
4

 
—

 
20

Net current period other comprehensive income (loss)
(157
)
 
3

 
(11
)
 
(165
)
 
 
 
 
 
 
 
 
Balance as of September 30, 2015
$
(603
)
 
$
(176
)
 
$
(14
)
 
$
(793
)
 
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 loss before reclassifications
(129
)
 
—

 
(4
)
 
(133
)
Amounts reclassified from accumulated other comprehensive loss
(4
)
 
3