Document
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, 2016
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 22, 2016 was 989,776,458.


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,
2016
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
810

 
$
609

Restricted cash and cash equivalents
271

 
247

Accounts receivable, net of allowance for doubtful accounts of $33 and $30
1,005

 
876

Inventories
459

 
442

Current portion of financing receivables, net
129

 
129

Prepaid expenses
186

 
147

Income taxes receivable
18

 
97

Other
52

 
38

Total current assets (variable interest entities - $171 and $141)
2,930

 
2,585

Property, Intangibles and Other Assets:
 
 
 
Property and equipment, net
9,107

 
9,119

Financing receivables, net
905

 
887

Investments in affiliates
129

 
138

Goodwill
5,862

 
5,887

Brands
4,911

 
4,919

Management and franchise contracts, net
1,077

 
1,149

Other intangible assets, net
543

 
586

Deferred income tax assets
76

 
78

Other
313

 
274

Total property, intangibles and other assets (variable interest entities - $637 and $481)
22,923

 
23,037

TOTAL ASSETS
$
25,853

 
$
25,622

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
2,370

 
$
2,206

Current maturities of long-term debt
98

 
94

Current maturities of timeshare debt
88

 
110

Income taxes payable
107

 
33

Total current liabilities (variable interest entities - $253 and $157)
2,663

 
2,443

Long-term debt
9,900

 
9,857

Timeshare debt
357

 
392

Deferred revenues
161

 
283

Deferred income tax liabilities
4,533

 
4,630

Liability for guest loyalty program
833

 
784

Other
1,060

 
1,282

Total liabilities (variable interest entities - $803 and $627)
19,507

 
19,671

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, 2016 and December 31, 2015
—

 
—

Common stock, $0.01 par value; 30,000,000,000 authorized shares, 989,805,225 issued and 989,776,458 outstanding as of June 30, 2016 and 987,487,127 issued and 987,458,360 outstanding as of December 31, 2015
10

 
10

Additional paid-in capital
10,175

 
10,151

Accumulated deficit
(2,984
)
 
(3,392
)
Accumulated other comprehensive loss
(826
)
 
(784
)
Total Hilton stockholders' equity
6,375

 
5,985

Noncontrolling interests
(29
)
 
(34
)
Total equity
6,346

 
5,951

TOTAL LIABILITIES AND EQUITY
$
25,853

 
$
25,622


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,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Owned and leased hotels
$
1,105

 
$
1,135

 
$
2,072


$
2,092

Management and franchise fees and other
444

 
407

 
830


778

Timeshare
336

 
319

 
662


640

 
1,885

 
1,861

 
3,564

 
3,510

Other revenues from managed and franchised properties
1,166

 
1,061

 
2,237

 
2,011

Total revenues
3,051

 
2,922

 
5,801

 
5,521

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Owned and leased hotels
808

 
817

 
1,564

 
1,585

Timeshare
223

 
220

 
440

 
454

Depreciation and amortization
171

 
173

 
340

 
348

Impairment loss
—

 
—

 
15

 
—

General, administrative and other
132

 
221

 
245

 
348

 
1,334

 
1,431

 
2,604

 
2,735

Other expenses from managed and franchised properties
1,166

 
1,061

 
2,237

 
2,011

Total expenses
2,500

 
2,492

 
4,841

 
4,746

 
 
 
 
 
 
 
 
Gain (loss) on sales of assets, net
2

 
(3
)
 
2

 
142

 
 
 
 
 
 
 
 
Operating income
553

 
427

 
962

 
917

 
 
 
 
 
 
 
 
Interest income
4

 
2

 
7

 
8

Interest expense
(147
)
 
(149
)
 
(286
)
 
(293
)
Equity in earnings from unconsolidated affiliates
8

 
9

 
11

 
13

Gain (loss) on foreign currency transactions
(13
)
 
5

 
(25
)
 
(13
)
Other gain (loss), net
(5
)
 
18

 
(5
)
 
(7
)
 
 
 
 
 
 
 
 
Income before income taxes
400

 
312

 
664

 
625

 
 
 
 
 
 
 
 
Income tax expense
(156
)
 
(145
)
 
(110
)
 
(308
)
 
 
 
 
 
 
 
 
Net income
244

 
167

 
554

 
317

Net income attributable to noncontrolling interests
(5
)
 
(6
)
 
(6
)
 
(6
)
Net income attributable to Hilton stockholders
$
239

 
$
161

 
$
548

 
$
311

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.24

 
$
0.16

 
$
0.56

 
$
0.32

Diluted
$
0.24

 
$
0.16

 
$
0.55

 
$
0.31

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.07

 
$
—

 
$
0.14

 
$
—


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,
 
2016
 
2015
 
2016
 
2015
Net income
$
244

 
$
167

 
$
554

 
$
317

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
 
 
 
 
Currency translation adjustment, net of tax of $(12), $121, $(15) and $30
(53
)
 
192

 
(40
)
 
(42
)
Pension liability adjustment, net of tax of $—, $—, $(1) and $(1)
1

 
1

 
2

 
2

Cash flow hedge adjustment, net of tax of $—, $(1), $4 and $3
—

 
2

 
(6
)
 
(5
)
Total other comprehensive income (loss)
(52
)
 
195

 
(44
)
 
(45
)
 
 
 
 
 
 
 
 
Comprehensive income
192

 
362

 
510

 
272

Comprehensive income attributable to noncontrolling interests
(5
)
 
(6
)
 
(4
)
 
(6
)
Comprehensive income attributable to Hilton stockholders
$
187

 
$
356

 
$
506

 
$
266


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,
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
554

 
$
317

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
340

 
348

Impairment loss
15

 
—

Gain on sales of assets, net
(2
)
 
(142
)
Equity in earnings from unconsolidated affiliates
(11
)
 
(13
)
Loss on foreign currency transactions
25

 
13

Other loss, net
5

 
7

Share-based compensation
27

 
100

Distributions from unconsolidated affiliates
11

 
20

Deferred income taxes
(100
)
 
10

Change in restricted cash and cash equivalents
(6
)
 
(9
)
Working capital changes and other
(203
)
 
(3
)
Net cash provided by operating activities
655

 
648

 
 
 
 
Investing Activities
 
 
 
Capital expenditures for property and equipment
(169
)
 
(159
)
Acquisitions, net of cash acquired
—

 
(1,410
)
Payments received on other financing receivables
1

 
2

Issuance of other financing receivables
(18
)
 
(6
)
Investments in affiliates
—

 
(5
)
Distributions from unconsolidated affiliates
2

 
9

Proceeds from asset dispositions
1

 
1,869

Change in restricted cash and cash equivalents
14

 
—

Contract acquisition costs
(18
)
 
(19
)
Capitalized software costs
(35
)
 
(23
)
Net cash provided by (used in) investing activities
(222
)
 
258

 
 
 
 
Financing Activities
 
 
 
Borrowings
—

 
34

Repayment of debt
(64
)
 
(961
)
Change in restricted cash and cash equivalents
(32
)
 
(29
)
Dividends paid
(138
)
 
—

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

 
8

Net cash used in financing activities
(238
)
 
(952
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
6

 
(9
)
Net increase (decrease) in cash and cash equivalents
201

 
(55
)
Cash and cash equivalents, beginning of period
609

 
566

 
 
 
 
Cash and cash equivalents, end of period
$
810

 
$
511

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the year:
 
 
 
Interest
$
225

 
$
231

Income taxes, net of refunds
242

 
197

 
 
 
 
Non-cash investing activities:
 
 
 
Conversion of property and equipment to timeshare inventory
(22
)
 
—

Long-term debt assumed
—

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

 
450

Capital lease restructuring
—

 
(24
)

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, 2015
987

 
$
10

 
$
10,151

 
$
(3,392
)
 
$
(784
)
 
$
(34
)
 
$
5,951

Share-based compensation
3

 
—

 
24

 
—

 
—

 
—

 
24

Net income
—

 
—

 
—

 
548

 
—

 
6

 
554

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

 
—

 
—

 
—

 
(38
)
 
(2
)
 
(40
)
Pension liability adjustment
—

 
—

 
—

 
—

 
2

 
—

 
2

Cash flow hedge adjustment
—

 
—

 
—

 
—

 
(6
)
 
—

 
(6
)
Other comprehensive loss
—

 
—

 
—

 
—

 
(42
)
 
(2
)
 
(44
)
Dividends
—

 
—

 
—

 
(140
)
 
—

 
—

 
(140
)
Cumulative effect of the adoption of ASU 2015-02
—

 
—

 
—

 
—

 
—

 
5

 
5

Distributions
—

 
—

 
—

 
—

 
—

 
(4
)
 
(4
)
Balance as of June 30, 2016
990

 
$
10

 
$
10,175

 
$
(2,984
)
 
$
(826
)
 
$
(29
)
 
$
6,346


 
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

Share-based compensation
2

 
—

 
87

 
—

 
—

 
—

 
87

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 loss
—

 
—

 
—

 
—

 
(45
)
 
—

 
(45
)
Distributions
—

 
—

 
—

 
—

 
—

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

 
$
10

 
$
10,115

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


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. We are engaged in owning, leasing, managing and franchising hotels, resorts and timeshare properties. As of June 30, 2016, we owned, leased, managed or franchised 4,680 hotel and resort properties, totaling 768,221 rooms in 104 countries and territories, as well as 47 timeshare properties comprising 7,645 units.

As of June 30, 2016, affiliates of The Blackstone Group L.P. ("Blackstone") beneficially owned approximately 45.8 percent of our common stock.

Spin-off

In June 2016, Hilton Grand Vacations Inc. and Park Hotels & Resorts Inc. filed initial Registration Statements on Form 10 with the U.S. Securities and Exchange Commission ("SEC") in which they disclosed financial and other details of our previously announced spin-off transactions of a substantial portion of our ownership business, consisting primarily of our owned hotels located in the U.S., as well as our timeshare business resulting in two additional publicly traded companies. Completion of the spin-offs is subject to several conditions, including the SEC declaring effective the registration statements and final approval of the transactions by our board of directors.

Basis of Presentation

The accompanying condensed consolidated financial statements for the three and six months ended June 30, 2016 and 2015 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, 2015.

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 April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("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 ("ASU 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 SEC 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. We adopted ASU 2015-03 and ASU 2015-15 retrospectively as of January 1, 2016. As a result, approximately $94 million of debt issuance costs that were previously

7


presented in other long-term assets as of December 31, 2015 are now included within long-term debt and timeshare debt. We elected to continue presenting the debt issuance costs related to our line-of-credit arrangements within other long-term assets.

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. We elected, as permitted by the standard, to adopt ASU 2015-02 using a modified retrospective approach by recording a cumulative-effect adjustment to equity as of January 1, 2016 of approximately $5 million. Additionally, certain consolidated entities that were not previously considered variable interest entities ("VIEs") prior to the adoption of ASU 2015-02 were considered to be VIEs for which we are the primary beneficiary and continue to be consolidated following adoption; prior period VIE disclosures do not include the balances or activity associated with these VIEs.

Accounting Standards Not Yet Adopted

In March 2016, the FASB issued ASU No. 2016-09 ("ASU 2016-09"), Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This ASU is intended to simplify several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provisions of ASU 2016-09 are effective for reporting periods beginning after December 15, 2016; early adoption is permitted. The provisions of this ASU contain specific transition guidance for each amendment. We are currently evaluating the effect that this ASU will have on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02 ("ASU 2016-02"), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases, including operating leases, to be recognized in the statement of financial position as right-of-use assets and lease liabilities by lessees. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after December 15, 2018; 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. Subsequent to ASU 2014-09, the FASB has issued several related ASUs. The provisions of ASU 2014-09 and the related ASUs are to be applied retrospectively or using a modified retrospective approach. We are currently evaluating our method of adoption and the effect that this ASU will have on our consolidated financial statements.

Note 3: Acquisitions

Tax Deferred Exchange

During the six months ended June 30, 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 and an unrelated third party, for a total purchase price of $1.87 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;
•
the Parc 55 in San Francisco, California; and
•
the Juniper Hotel Cupertino in Cupertino, California.

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.

The results of operations from these properties included in the condensed consolidated statements of operations were as follows:

8


 
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: Disposals

In February 2015, we completed the sale of the Waldorf Astoria New York for a purchase price of $1.95 billion, and we repaid in full the existing mortgage loan secured by the Waldorf Astoria New York property (the "Waldorf Astoria Loan") of approximately $525 million. As a result of the sale, we recognized a gain 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. 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 six months ended June 30, 2015 related to the reduction of the Waldorf Astoria Loan's remaining carrying amount of debt issuance costs.

Note 5: Property and Equipment

Property and equipment were as follows:    
 
June 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Land
$
3,473

 
$
3,486

Buildings and leasehold improvements
6,476

 
6,410

Furniture and equipment
1,321

 
1,263

Construction-in-progress
137

 
80

 
11,407

 
11,239

Accumulated depreciation
(2,300
)
 
(2,120
)
 
$
9,107

 
$
9,119


Depreciation of property and equipment, including assets recorded for capital lease assets, was $90 million and $89 million during the three months ended June 30, 2016 and 2015, respectively, and $177 million and $172 million during the six months ended June 30, 2016 and 2015, respectively.

As of June 30, 2016 and December 31, 2015, property and equipment included approximately $155 million and $144 million, respectively, of capital lease assets primarily consisting of buildings and leasehold improvements, net of $82 million and $71 million, respectively, of accumulated depreciation.

Note 6: Financing Receivables

Financing receivables were as follows:
 
June 30, 2016
 
Securitized Timeshare
 
Unsecuritized Timeshare(1)
 
Other
 
Total
 
(in millions)
Financing receivables
$
254

 
$
699

 
$
51

 
$
1,004

Less: allowance for loan loss
(11
)
 
(88
)
 
—

 
(99
)
 
243

 
611

 
51

 
905

 
 
 
 
 
 
 
 
Current portion of financing receivables
53

 
87

 
2

 
142

Less: allowance for loan loss
(2
)
 
(11
)
 
—

 
(13
)
 
51

 
76

 
2

 
129

 
 
 
 
 
 
 
 
Total financing receivables
$
294

 
$
687

 
$
53

 
$
1,034


9



 
December 31, 2015
 
Securitized Timeshare
 
Unsecuritized Timeshare(1)
 
Other
 
Total
 
(in millions)
Financing receivables
$
309

 
$
632

 
$
39

 
$
980

Less: allowance for loan loss
(14
)
 
(79
)
 
—

 
(93
)
 
295

 
553

 
39

 
887

 
 
 
 
 
 
 
 
Current portion of financing receivables
58

 
83

 
1

 
142

Less: allowance for loan loss
(3
)
 
(10
)
 
—

 
(13
)
 
55

 
73

 
1

 
129

 
 
 
 
 
 
 
 
Total financing receivables
$
350

 
$
626

 
$
40

 
$
1,016

____________
(1) 
Included in this balance, we had $164 million and $163 million of gross timeshare financing receivables securing our revolving non-recourse timeshare financing receivables credit facility (the "Timeshare Facility"), as of June 30, 2016 and December 31, 2015, respectively.

Timeshare Financing Receivables

As of June 30, 2016, our timeshare financing receivables had interest rates ranging from 5.15 percent to 20.50 percent, a weighted average interest rate of 11.88 percent, a weighted average remaining term of 7.7 years and maturities through 2026.

Our timeshare financing receivables as of June 30, 2016 mature as follows:
 
Securitized Timeshare
 
Unsecuritized Timeshare
Year
(in millions)
2016 (remaining)
$
26

 
$
51

2017
54

 
74

2018
53

 
78

2019
50

 
80

2020
45

 
83

Thereafter
79

 
420

 
307

 
786

Less: allowance for loan loss
(13
)
 
(99
)
 
$
294

 
$
687


As of June 30, 2016 and December 31, 2015, we had ceased accruing interest on timeshare financing receivables with an aggregate principal balance of $34 million and $32 million, respectively. The following table details an aged analysis of our gross timeshare financing receivables balance:
 
June 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Current
$
1,046

 
$
1,035

30 - 89 days past due
13

 
15

90 - 119 days past due
4

 
4

120 days and greater past due
30

 
28

 
$
1,093

 
$
1,082


10



The changes in our allowance for loan loss were as follows:
 
Six Months Ended
 
June 30,
 
2016
 
2015
 
(in millions)
Beginning balance
$
106

 
$
96

Write-offs
(17
)
 
(15
)
Provision for loan loss
23

 
17

Ending balance
$
112

 
$
98


Note 7: Investments in Affiliates

Investments in affiliates were as follows:
 
June 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Equity investments
$
120

 
$
129

Other investments
9

 
9

 
$
129

 
$
138


We maintain investments in affiliates accounted for under the equity method, which are primarily investments in entities that owned or leased 15 and 16 hotels as of June 30, 2016 and December 31, 2015, respectively. These entities had total debt of approximately $956 million and $959 million as of June 30, 2016 and December 31, 2015, respectively. Substantially all of the debt is secured solely by the affiliates' assets or is guaranteed by other partners without recourse to us.

Note 8: Consolidated Variable Interest Entities

As of June 30, 2016, we consolidated nine VIEs: six that own or lease hotel properties; two that are associated with our timeshare financing receivables securitization transactions that both issued debt (collectively, the "Securitized Timeshare Debt"); and one management company. As of December 31, 2015 and prior to adoption of ASU 2015-02, we consolidated three VIEs that owned or leased hotel properties and two that issued our securitized timeshare debt. Of the four additional entities considered to be VIEs following the adoption of ASU 2015-02, two were previously consolidated by us and two were unconsolidated investments in affiliates.

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. As of June 30, 2016 and December 31, 2015, our condensed consolidated balance sheets included the assets and liabilities of the nine and five VIEs, respectively, which primarily comprised the following:
 
June 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Cash and cash equivalents
$
68

 
$
46

Restricted cash and cash equivalents
23

 
15

Accounts receivable, net
18

 
19

Property and equipment, net
264

 
72

Financing receivables, net
294

 
350

Deferred income tax assets
68

 
62

Other non-current assets
61

 
52

Accounts payable, accrued expenses and other
49

 
35

Long-term debt
391

 
219

Timeshare debt
295

 
353


During the six months ended June 30, 2016 and 2015, 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.

11



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

Note 9: Debt

Long-term Debt

Long-term debt balances, including obligations for capital leases, and associated interest rates as of June 30, 2016, were as follows:

June 30,
 
December 31,

2016
 
2015

(in millions)
Senior secured term loan facility with a rate of 3.50%, due 2020
$
4,225

 
$
4,225

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

 
1,500

Commercial mortgage-backed securities loan with an average rate of 4.15%, due 2018(1)
3,418

 
3,418

Mortgage loans and other property debt with an average rate of 4.22%, due 2016 to 2022(2)
622

 
616

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

 
54

Capital lease obligations with an average rate of 6.38%, due 2018 to 2097
274

 
245


10,093

 
10,058

Less: current maturities of long-term debt(3)
(98
)
 
(94
)
Less: unamortized deferred financing costs and discount
(95
)
 
(107
)

$
9,900

 
$
9,857

____________
(1) 
The current maturity date of the variable-rate component of this borrowing is November 1, 2016. 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.
(3) 
Net of unamortized deferred financing costs expected to be amortized in the next twelve months.

As of June 30, 2016, 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. We also 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.

Our commercial mortgage-backed securities loan secured by 22 of our U.S. owned real estate assets (the "CMBS Loan") and other mortgage loans require us to deposit with the lenders certain cash reserves for restricted uses. As of June 30, 2016 and December 31, 2015, our condensed consolidated balance sheets included $80 million and $49 million, respectively, of restricted cash and cash equivalents related to these loans.

Timeshare Debt

Timeshare debt, and associated interest rates as of June 30, 2016, were as follows:
 
June 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Timeshare Facility with a rate of 1.44%, due 2017
$
150

 
$
150

Securitized Timeshare Debt with an average rate of 1.97%, due 2026
298

 
356

 
448

 
506

Less: current maturities of timeshare debt(1)
(88
)
 
(110
)
Less: unamortized deferred financing costs
(3
)
 
(4
)
 
$
357

 
$
392

____________
(1) 
Net of unamortized deferred financing costs expected to be amortized in the next twelve months.


12


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 used 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 $17 million as of June 30, 2016 and December 31, 2015, was included in restricted cash and cash equivalents in our condensed consolidated balance sheets.

Debt Maturities

The contractual maturities of our debt as of June 30, 2016 were as follows:
 
Long-term Debt
 
Timeshare Debt
Year
(in millions)
2016 (remaining)
$
112

 
$
48

2017
71

 
225

2018(1)
3,451

 
52

2019(1)
445

 
38

2020
4,255

 
28

Thereafter(1)
1,759

 
57

 
$
10,093

 
$
448

____________
(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 six months ended June 30, 2016 and 2015, derivatives were used to hedge the interest rate risk associated with variable-rate debt as required by certain loan agreements, as well as foreign exchange risk associated with certain foreign currency denominated cash balances.

Cash Flow Hedges

As of June 30, 2016, we held four interest rate swaps with an aggregate notional amount of $1.45 billion, which swap three-month LIBOR on the senior secured term loan facility (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, 2016, we also held one interest rate cap in the notional amount of $862 million, for the variable-rate component of the CMBS Loan, that expires in November 2016 and caps one-month LIBOR at 6.9 percent, and one interest rate cap in the notional amount of $337 million that expires in May 2017 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.

As of June 30, 2016, we held 63 short-term foreign exchange forward contracts with an aggregate notional amount of $340 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.


13


Fair Value of Derivative Instruments

The effects of our derivative instruments on our condensed consolidated balance sheets were as follows:
 
 
 
Fair Value
 
 
 
June 30,
 
December 31,
 
Balance Sheet Classification
 
2016
 
2015
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
Interest rate swaps
Other liabilities
 
$
25

 
$
15

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

 
—

Forward contracts
Other assets
 
7

 
1

Forward contracts
Accounts payable, accrued expenses and other
 
3

 
1

____________
(1) 
The fair values of our interest rate caps were less than $1 million as of June 30, 2016 and December 31, 2015.

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
 
2016
 
2015
 
2016

2015
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
Other comprehensive income (loss)
 
$
—

 
$
3

 
$
(10
)
 
$
(8
)
 
 
 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
 
 
Forward contracts
Gain (loss) on foreign currency transactions
 
2

 
8

 
3

 
6

____________
(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, 2016 and 2015.

Note 11: Fair Value Measurements

We did not elect the fair value measurement option for any of our financial assets or liabilities. The fair value of certain financial instruments and the hierarchy level we used to estimate fair values are shown below:
 
June 30, 2016
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
488

 
$
—

 
$
488

 
$
—

Restricted cash equivalents
20

 
—

 
20

 
—

Timeshare financing receivables(1)
981

 
—

 
—

 
1,092

Liabilities:
 
 
 
 
 
 
 
Long-term debt(2)(3)
9,685

 
1,616

 
—

 
8,290

Timeshare debt(3)
445

 
—

 
—

 
448

Interest rate swaps
25

 
—

 
25

 
—


14



 
December 31, 2015
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
327

 
$
—

 
$
327

 
$
—

Restricted cash equivalents
18

 
—

 
18

 
—

Timeshare financing receivables(1)
976

 
—

 
—

 
1,080

Liabilities:
 
 
 
 
 
 
 
Long-term debt(2)(3)
9,673

 
1,619

 
—

 
8,267

Timeshare debt(3)
502

 
—

 
—

 
506

Interest rate swaps
15

 
—

 
15

 
—

____________
(1)
Carrying amount includes allowance for loan loss.
(2) 
Excludes capital lease obligations with a carrying value of $274 million and $245 million as of June 30, 2016 and December 31, 2015, respectively, and debt of consolidated VIEs with a carrying value of $39 million and $32 million, respectively.
(3) 
Carrying amount includes unamortized deferred financing costs and discount.

The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts as of June 30, 2016 and December 31, 2015. 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 creditworthiness 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, where the interest rates approximated current market rates.

The estimated fair values of our Level 3 timeshare debt were based on the carrying values, excluding unamortized deferred financing costs, as the interest rates approximated current market rates.

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.

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 lower effective tax rate, as compared to our statutory tax rate, for the six months ended June 30, 2016, was primarily attributable to changes in our uncertain tax positions.

Our total unrecognized tax benefits as of June 30, 2016 and December 31, 2015 were $252 million and $407 million, respectively. During the six months ended June 30, 2016, we released $218 million of reserves related to unrecognized tax benefits that we have either settled or determined that we are more likely than not to receive the full benefit for.

In April 2014, we received 30-day Letters from the Internal Revenue Service ("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

15


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. Additionally, in January 2016, we received a 30-day Letter from the IRS and the RAR for the December 2007 through 2010 tax years. The RAR includes the proposed adjustments for tax years December 2007 through 2010 which reflect the carryover effect of the three protested issues from 2006 through October 2007. These proposed adjustments will also be protested in appeals and formal appeals protests have been submitted. In total, the proposed adjustments sought by the IRS would result in additional U.S. federal tax owed of approximately $874 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. However, as a result of recent developments related to the appeals process discussions that have taken place during 2016, we have determined based on on-going discussions with the IRS, it is more likely than not that we will not recognize the full benefit related to certain of the issues being appealed. Accordingly, as of June 30, 2016, we have recognized a $46 million unrecognized tax benefit.

We recognize interest and penalties accrued related to uncertain tax positions in income tax expense. We had accrued approximately $27 million for the payment of interest and penalties as of June 30, 2016 and December 31, 2015. As a result of the expected resolution of examination issues with federal, state and foreign tax authorities, we believe it is reasonably possible that during the next 12 months the amount of unrecognized tax benefits will decrease up to $1 million. Included in the balance of unrecognized tax benefits as of June 30, 2016 and December 31, 2015 were $209 million and $377 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, 2016, 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 2015.

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., 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, 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 net periodic pension cost for our employee benefit plans was $2 million and $3 million for the three months ended June 30, 2016 and 2015, respectively, and $3 million and $6 million for the six months ended June 30, 2016 and 2015, respectively.

Note 14: Share-Based Compensation

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 of $26 million and $91 million during the three months ended June 30, 2016 and 2015, respectively, and $44 million and $121 million during the six months ended June 30, 2016 and 2015, respectively, which included amounts reimbursed by hotel owners. Share-based compensation expense for the three and six months ended June 30, 2015 included $64 million of compensation expense that was recognized when certain remaining awards granted in connection with our initial public offering vested in May 2015. As of June 30, 2016, unrecognized compensation costs for unvested awards

16


was approximately $143 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, 2016, there were 62,117,847 shares of common stock available for future issuance.

RSUs

During the six months ended June 30, 2016, we issued 3,508,885 RSUs with a weighted average grant date fair value of $19.91, which generally vest in equal annual installments over two or three years from the date of grant.

Options

During the six months ended June 30, 2016, we issued 1,509,451 options with an exercise price of $19.61, 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 in certain circumstances.

The grant date fair value of these options was $5.47, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility(1)
32.00
%
Dividend yield(2)
1.43
%
Risk-free rate(3)
1.36
%
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 and implied 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) 
Estimated based on the expected annualized dividend payment.
(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, 2016, 885,644 options outstanding were exercisable.

Performance Shares

During the six months ended June 30, 2016, we issued 1,804,706 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 $20.81, which was determined using a Monte Carlo simulation valuation model with the following assumptions:
Expected volatility(1)
31.00
%
Dividend yield(2)
—
%
Risk-free rate(3)
0.92
%
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 and implied 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) 
As dividends are assumed to be reinvested in shares of common stock and dividends will not be paid to the participants of the performance shares unless the shares vest, we utilized a dividend yield of zero percent.
(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.


17


The grant date fair value of these performance shares based on our EBITDA CAGR was $19.61. For these shares, we determined that the performance condition is probable of achievement and as of June 30, 2016, we recognized compensation expense based on the anticipated achievement percentage as follows:
 
Achievement Percentage
2014 grants
125%
2015 grants
88%
2016 grants
63%

DSUs

During the six months ended June 30, 2016, we issued to our independent directors 34,099 DSUs with a grant date fair value of $22.04, 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.

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,
 
2016
 
2015
 
2016
 
2015
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
239

 
$
161

 
$
548

 
$
311

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
988

 
987

 
988

 
986

Basic EPS
$
0.24

 
$
0.16

 
$
0.56

 
$
0.32

 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
239

 
$
161

 
$
548

 
$
311

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
991

 
989

 
990

 
989

Diluted EPS
$
0.24

 
$
0.16

 
$
0.55

 
$
0.31


Approximately 3 million and 4 million share-based compensation awards were excluded from the computation of diluted EPS for the three and six months ended June 30, 2016, respectively, and 2 million and 1 million awards were excluded for the three and six months ended June 30, 2015, respectively, because their effect would have been anti-dilutive under the treasury stock method.

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, 2015
$
(580
)
 
$
(194
)
 
$
(10
)
 
$
(784
)
 
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
(37
)
 
(1
)
 
(6
)
 
(44
)
Amounts reclassified from accumulated other comprehensive loss
(1
)
 
3

 
—

 
2

Net current period other comprehensive income (loss)
(38
)
 
2

 
(6
)
 
(42
)
 
 
 
 
 
 
 
 
Balance as of June 30, 2016
$
(618
)
 
$
(192
)
 
$
(16
)
 
$
(826
)

18


 
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
)
____________
(1) 
Includes net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature.

The following table presents additional information about reclassifications out of accumulated other comprehensive loss; amounts in parentheses indicate a loss in our condensed consolidated statements of operations:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Currency translation adjustment:
 
 
 
 
 
 
 
Gains on net investment hedges(1)
1

 
—

 
1

 
—

Tax benefit(2)(3)
—

 
—

 
—

 
—

Total currency translation adjustment reclassifications for the period, net of taxes
1

 
—

 
1

 
—

 
 
 
 
 
 
 
 
Pension liability adjustment:
 
 
 
 
 
 
 
Amortization of prior service cost(4)
$
(1
)
 
$
(1
)
 
$
(2
)
 
$
(2
)
Amortization of net loss(4)
(2
)
 
(2
)
 
(3
)
 
(4
)
Tax benefit(2)
1

 
1

 
2

 
2

Total pension liability adjustment reclassifications for the period, net of taxes
(2
)
 
(2
)
 
(3
)
 
(4
)
 
 
 
 
 
 
 
 
Total reclassifications for the period, net of tax
$
(1
)
 
$
(2
)
 
$
(2
)
 
$
(4
)
____________
(1) 
Reclassified out of accumulated other comprehensive loss to other gain (loss), net in our condensed consolidated statements of operations.
(2) 
Reclassified out of accumulated other comprehensive loss to income tax expense in our condensed consolidated statements of operations.
(3) 
The tax benefit was less than $1 million for the three and six months ended June 30, 2016.
(4) 
Reclassified out of accumulated other comprehensive loss to general, administrative and other in our condensed consolidated statements of operations. These amounts were included in the computation of net periodic pension cost (credit).

Note 17: Business Segments

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

The ownership segment included 143 properties totaling 57,996 rooms, comprising 121 hotels that we wholly owned or leased, one hotel owned by a consolidated non-wholly owned entity, six hotels owned or leased by consolidated VIEs and 15 hotels that are owned or leased by unconsolidated investments in affiliates, as of June 30, 2016. While we do not include equity in earnings (losses) from unconsolidated affiliates in our measures of segment revenues, we manage these investments in our ownership segment and the results are included in our measure of segment profit.

The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels operated or managed by someone other than us. As of June 30, 2016, this segment included 537 managed hotels and 4,000 franchised hotels totaling 4,537 hotels consisting of 710,225 rooms. This segment also earns fees for managing properties in our ownership and timeshare segments.

The timeshare segment includes the development of vacation ownership clubs and resorts, marketing and selling of timeshare intervals, providing timeshare customer financing and resort operations. This segment also provides assistance to

19


third-party developers in selling their timeshare inventory. As of June 30, 2016, this segment included 47 timeshare properties totaling 7,645 units.

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

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

The following table presents revenues for our reportable segments, reconciled to consolidated amounts:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Revenues
 
 
 
 
 
 
 
Ownership
$
1,114


$
1,141

 
$
2,088

 
$
2,105

Management and franchise
471


434

 
880

 
825

Timeshare
336


319

 
662

 
640

Segment revenues
1,921


1,894

 
3,630

 
3,570

Other revenues from managed and franchised properties
1,166

 
1,061

 
2,237

 
2,011

Other revenues
23


21

 
45

 
42

Intersegment fees elimination(1)
(59
)

(54
)
 
(111
)
 
(102
)
Total revenues
$
3,051


$
2,922

 
$
5,801

 
$
5,521

____________
(1)Included the following intercompany charges that were eliminated in our condensed consolidated financial statements:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Rental and other fees(a)
$
7

 
$
5

 
$
13

 
$
11

Management, royalty and intellectual property fees(b)
38

 
36

 
71

 
66

Licensing fee(c)
11

 
11

 
21

 
20

Laundry services(d)
1

 
1

 
3

 
3

Other(e)
2

 
1

 
3

 
2

Intersegment fees elimination
$
59

 
$
54

 
$
111

 
$
102

____________
(a)    Represents charges to our timeshare segment by our ownership segment.
(b)    Represents fees charged to our ownership segment by our management and franchise segment.
(c)    Represents fees charged to our timeshare segment by our management and franchise segment.
(d)    Represents charges to our ownership segment for services provided by our wholly owned laundry business. Revenues from our laundry business
are included in other revenues.
(e)    Represents other intercompany charges, which are a benefit to the ownership segment and a cost to corporate and other.


20


The table below provides a reconciliation of segment Adjusted EBITDA to consolidated net income:
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