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 September 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 October 21, 2016 was 989,783,195.


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,
2016
2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
859

 
$
609

Restricted cash and cash equivalents
272

 
247

Accounts receivable, net of allowance for doubtful accounts of $33 and $30
1,021

 
876

Inventories
508

 
442

Current portion of financing receivables, net
128

 
129

Prepaid expenses
171

 
147

Income taxes receivable
17

 
97

Other
48

 
38

Total current assets (variable interest entities - $176 and $141)
3,024

 
2,585

Property, Intangibles and Other Assets:
 
 
 
Property and equipment, net
9,020

 
9,119

Financing receivables, net
929

 
887

Investments in affiliates
132

 
138

Goodwill
5,855

 
5,887

Brands
4,908

 
4,919

Management and franchise contracts, net
1,044

 
1,149

Other intangible assets, net
525

 
586

Deferred income tax assets
75

 
78

Other
359

 
274

Total property, intangibles and other assets (variable interest entities - $616 and $481)
22,847

 
23,037

TOTAL ASSETS
$
25,871

 
$
25,622

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
2,354

 
$
2,206

Current maturities of long-term debt
101

 
94

Current maturities of timeshare debt
80

 
110

Income taxes payable
63

 
33

Total current liabilities (variable interest entities - $248 and $157)
2,598

 
2,443

Long-term debt
9,883

 
9,857

Timeshare debt
337

 
392

Deferred revenues
96

 
283

Deferred income tax liabilities
4,487

 
4,630

Liability for guest loyalty program
853

 
784

Other
1,126

 
1,282

Total liabilities (variable interest entities - $779 and $627)
19,380

 
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 September 30, 2016 and December 31, 2015
—

 
—

Common stock, $0.01 par value; 30,000,000,000 authorized shares, 989,810,812 issued and 989,782,045 outstanding as of September 30, 2016 and 987,487,127 issued and 987,458,360 outstanding as of December 31, 2015
10

 
10

Additional paid-in capital
10,198

 
10,151

Accumulated deficit
(2,866
)
 
(3,392
)
Accumulated other comprehensive loss
(826
)
 
(784
)
Total Hilton stockholders' equity
6,516

 
5,985

Noncontrolling interests
(25
)
 
(34
)
Total equity
6,491

 
5,951

TOTAL LIABILITIES AND EQUITY
$
25,871

 
$
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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
Revenues
 
 
 
 
 
 
 
Owned and leased hotels
$
1,033

 
$
1,082

 
$
3,105


$
3,174

Management and franchise fees and other
446

 
416

 
1,276


1,194

Timeshare
358

 
334

 
1,020


974

 
1,837

 
1,832

 
5,401

 
5,342

Other revenues from managed and franchised properties
1,105

 
1,063

 
3,342

 
3,074

Total revenues
2,942

 
2,895

 
8,743

 
8,416

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Owned and leased hotels
771

 
798

 
2,335

 
2,383

Timeshare
257

 
219

 
697

 
673

Depreciation and amortization
169

 
171

 
509

 
519

Impairment loss
—

 
—

 
15

 
—

General, administrative and other
147

 
145

 
392

 
493

 
1,344

 
1,333

 
3,948

 
4,068

Other expenses from managed and franchised properties
1,105

 
1,063

 
3,342

 
3,074

Total expenses
2,449

 
2,396

 
7,290

 
7,142

 
 
 
 
 
 
 
 
Gain on sales of assets, net
—

 
164

 
2

 
306

 
 
 
 
 
 
 
 
Operating income
493

 
663

 
1,455

 
1,580

 
 
 
 
 
 
 
 
Interest income
3

 
3

 
10

 
11

Interest expense
(148
)
 
(138
)
 
(434
)
 
(431
)
Equity in earnings from unconsolidated affiliates
7

 
9

 
18

 
22

Loss on foreign currency transactions
(8
)
 
(8
)
 
(33
)
 
(21
)
Other gain (loss), net
(10
)
 
1

 
(15
)
 
(6
)
 
 
 
 
 
 
 
 
Income before income taxes
337

 
530

 
1,001

 
1,155

 
 
 
 
 
 
 
 
Income tax expense
(145
)
 
(247
)
 
(255
)
 
(555
)
 
 
 
 
 
 
 
 
Net income
192

 
283

 
746

 
600

Net income attributable to noncontrolling interests
(5
)
 
(4
)
 
(11
)
 
(10
)
Net income attributable to Hilton stockholders
$
187

 
$
279

 
$
735

 
$
590

 
 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.19

 
$
0.28

 
$
0.74

 
$
0.60

Diluted
$
0.19

 
$
0.28

 
$
0.74

 
$
0.60

 
 
 
 
 
 
 
 
Cash dividends declared per share
$
0.07

 
$
0.07

 
$
0.21

 
$
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,
 
2016
 
2015
 
2016
 
2015
Net income
$
192

 
$
283

 
$
746

 
$
600

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
 
 
 
 
Currency translation adjustment, net of tax of $1, $(79), $(14) and $(49)
(2
)
 
(115
)
 
(42
)
 
(157
)
Pension liability adjustment, net of tax of $(1), $(1), $(2) and $(2)
—

 
1

 
2

 
3

Cash flow hedge adjustment, net of tax of $(1), $4, $3 and $7
3

 
(6
)
 
(3
)
 
(11
)
Total other comprehensive income (loss)
1

 
(120
)
 
(43
)
 
(165
)
 
 
 
 
 
 
 
 
Comprehensive income
193

 
163

 
703

 
435

Comprehensive income attributable to noncontrolling interests
(6
)
 
(4
)
 
(10
)
 
(10
)
Comprehensive income attributable to Hilton stockholders
$
187

 
$
159

 
$
693

 
$
425


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,
 
2016
 
2015
Operating Activities
 
 
 
Net income
$
746

 
$
600

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
509

 
519

Impairment loss
15

 
—

Gain on sales of assets, net
(2
)
 
(306
)
Equity in earnings from unconsolidated affiliates
(18
)
 
(22
)
Loss on foreign currency transactions
33

 
21

Other loss, net
15

 
6

Share-based compensation
50

 
114

Distributions from unconsolidated affiliates
15

 
22

Deferred income taxes
(147
)
 
34

Change in restricted cash and cash equivalents
(20
)
 
(13
)
Working capital changes and other
(260
)
 
16

Net cash provided by operating activities
936

 
991

 
 
 
 
Investing Activities
 
 
 
Capital expenditures for property and equipment
(227
)
 
(214
)
Acquisitions, net of cash acquired
—

 
(1,410
)
Payments received on other financing receivables
2

 
3

Issuance of other financing receivables
(33
)
 
(9
)
Investments in affiliates
—

 
(5
)
Distributions from unconsolidated affiliates
2

 
18

Proceeds from asset dispositions
1

 
2,197

Change in restricted cash and cash equivalents
14

 
—

Contract acquisition costs
(35
)
 
(27
)
Capitalized software costs
(56
)
 
(38
)
Net cash provided by (used in) investing activities
(332
)
 
515

 
 
 
 
Financing Activities
 
 
 
Borrowings
1,000

 
35

Repayment of debt
(1,094
)
 
(1,342
)
Debt issuance costs
(35
)
 
—

Change in restricted cash and cash equivalents
(19
)
 
(53
)
Dividends paid
(207
)
 
(69
)
Distributions to noncontrolling interests
(6
)
 
(6
)
Excess tax benefits from share-based compensation
—

 
8

Net cash used in financing activities
(361
)
 
(1,427
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
7

 
(17
)
Net increase in cash and cash equivalents
250

 
62

Cash and cash equivalents, beginning of period
609

 
566

 
 
 
 
Cash and cash equivalents, end of period
$
859

 
$
628

 
 
 
 
Supplemental Disclosures
 
 
 
Cash paid during the year:
 
 
 
Interest
$
341

 
$
329

Income taxes, net of refunds
476

 
359

 
 
 
 
Non-cash investing activities:
 
 
 
Conversion of property and equipment to timeshare inventory
(79
)
 
—

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

 
—

 
47

 
—

 
—

 
—

 
47

Net income
—

 
—

 
—

 
735

 
—

 
11

 
746

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

 
—

 
—

 
—

 
(41
)
 
(1
)
 
(42
)
Pension liability adjustment
—

 
—

 
—

 
—

 
2

 
—

 
2

Cash flow hedge adjustment
—

 
—

 
—

 
—

 
(3
)
 
—

 
(3
)
Other comprehensive loss
—

 
—

 
—

 
—

 
(42
)
 
(1
)
 
(43
)
Dividends
—

 
—

 
—

 
(209
)
 
—

 
—

 
(209
)
Cumulative effect of the adoption of ASU 2015-02
—

 
—

 
—

 
—

 
—

 
5

 
5

Distributions
—

 
—

 
—

 
—

 
—

 
(6
)
 
(6
)
Balance as of September 30, 2016
990

 
$
10

 
$
10,198

 
$
(2,866
)
 
$
(826
)
 
$
(25
)
 
$
6,491


 
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

 
—

 
106

 
—

 
—

 
—

 
106

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
)
Distributions
—

 
—

 
—

 
—

 
—

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

 
$
10

 
$
10,134

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


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 September 30, 2016, we owned, leased, managed or franchised 4,774 hotel and resort properties, totaling 781,272 rooms in 104 countries and territories, as well as 46 timeshare properties comprising 7,592 units.

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

Spin-off

Hilton Grand Vacations Inc. ("HGV") and Park Hotels & Resorts Inc. ("Park") have each filed 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 (the "spin-offs") 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 independent, publicly traded companies. Completion of each 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 nine months ended September 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 presented in other

7


non-current 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 non-current 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 as of January 1, 2016 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. The adoption is not expected to have a material effect 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 effective for reporting periods beginning after December 15, 2017 and 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

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


8


The results of operations from these properties included in our 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


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 a 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.

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 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 $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.

Note 5: Property and Equipment

Property and equipment were as follows:    
 
September 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Land
$
3,451

 
$
3,486

Buildings and leasehold improvements
6,478

 
6,410

Furniture and equipment
1,369

 
1,263

Construction-in-progress
112

 
80

 
11,410

 
11,239

Accumulated depreciation
(2,390
)
 
(2,120
)
 
$
9,020

 
$
9,119


Depreciation expense of property and equipment, including assets recorded for capital lease assets, was $86 million and $88 million during the three months ended September 30, 2016 and 2015, respectively, and $263 million and $260 million during the nine months ended September 30, 2016 and 2015, respectively.

As of September 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 $85 million and $71 million, respectively, of accumulated depreciation.


9


Note 6: Financing Receivables

Financing receivables were as follows:
 
September 30, 2016
 
Securitized Timeshare
 
Unsecuritized Timeshare(1)
 
Other
 
Total
 
(in millions)
Financing receivables
$
228

 
$
741

 
$
63

 
$
1,032

Less: allowance for loan loss
(9
)
 
(94
)
 
—

 
(103
)
 
219

 
647

 
63

 
929

 
 
 
 
 
 
 
 
Current portion of financing receivables
51

 
88

 
2

 
141

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

 
(13
)
 
49

 
77

 
2

 
128

 
 
 
 
 
 
 
 
Total financing receivables
$
268

 
$
724

 
$
65

 
$
1,057


 
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 September 30, 2016 and December 31, 2015, respectively.

Timeshare Financing Receivables

As of September 30, 2016, our timeshare financing receivables had interest rates ranging from 5.15 percent to 20.50 percent, a weighted average interest rate of 11.94 percent, a weighted average remaining term of 7.7 years and maturities through 2028.

Our timeshare financing receivables as of September 30, 2016 mature as follows:
 
Securitized Timeshare
 
Unsecuritized Timeshare
Year
(in millions)
2016 (remaining)
$
13

 
$
31

2017
51

 
76

2018
50

 
81

2019
47

 
84

2020
43

 
88

Thereafter
75

 
469

 
279

 
829

Less: allowance for loan loss
(11
)
 
(105
)
 
$
268

 
$
724



10


As of September 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:
 
September 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Current
$
1,061

 
$
1,035

30 - 89 days past due
13

 
15

90 - 119 days past due
4

 
4

120 days and greater past due
30

 
28

 
$
1,108

 
$
1,082


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

 
$
96

Write-offs
(27
)
 
(23
)
Provision for loan loss
37

 
29

Ending balance
$
116

 
$
102


Note 7: Investments in Affiliates

Investments in affiliates were as follows:
 
September 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Equity investments
$
123

 
$
129

Other investments
9

 
9

 
$
132

 
$
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 September 30, 2016 and December 31, 2015, respectively. These entities had total debt of approximately $960 million and $959 million as of September 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 September 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, 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.


11


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 September 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:
 
September 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Cash and cash equivalents
$
73

 
$
46

Restricted cash and cash equivalents
22

 
15

Accounts receivable, net
18

 
19

Property and equipment, net
265

 
72

Financing receivables, net
268

 
350

Deferred income tax assets
69

 
62

Other non-current assets
63

 
52

Accounts payable, accrued expenses and other
51

 
35

Long-term debt
395

 
219

Timeshare debt
268

 
353


During the nine months ended September 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.

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 statement of operations during the nine months ended September 30, 2015, as the capital lease 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 September 30, 2016, were as follows:

September 30,
 
December 31,

2016
 
2015

(in millions)
Senior notes with a rate of 5.625%, due 2021
$
1,500

 
$
1,500

Senior notes with a rate of 4.25%, due 2024
1,000

 
—

Senior secured term loan facility with a rate of 3.50%, due 2020
1,000

 
4,225

Senior secured term loan facility with an average rate of 3.10%, due 2023
3,217

 
—

Commercial mortgage-backed securities loan with a rate of 4.47%, due 2018
2,427

 
3,418

Mortgage loans and other property debt with an average rate of 4.28%, due 2016 to 2022(1)
620

 
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
277

 
245


10,095

 
10,058

Less: current maturities of long-term debt(2)
(101
)
 
(94
)
Less: unamortized deferred financing costs and discounts
(111
)
 
(107
)

$
9,883

 
$
9,857

____________
(1) 
For mortgage loans with maturity date extensions that are solely at our option, we assumed they were exercised.
(2) 
Net of unamortized deferred financing costs expected to be amortized in the next twelve months.

Senior Notes

In August 2016, we issued $1.0 billion aggregate principal amount of 4.25% senior notes due 2024 (the "2024 Senior Notes") and incurred $20 million of debt issuance costs. Interest on the 2024 Senior Notes is payable semi-annually in cash in arrears on March 1 and September 1 of each year, beginning on March 1, 2017. The 2024 Senior Notes are guaranteed on a senior unsecured basis by us and certain of our wholly owned subsidiaries.

12



Senior Secured Credit Facility

Our senior secured credit facility (the "Senior Secured Credit Facility") consists of a $1.0 billion senior secured revolving credit facility (the "Revolving Credit Facility") and a senior secured term loan facility (the "Term Loans"). In August 2016, we amended the Term Loans pursuant to which $3,225 million of outstanding Term Loans were converted into a new tranche of Term Loans due October 25, 2023 with interest of LIBOR plus 2.50 percent. In connection with the modification of the Term Loans, we recognized an $8 million discount as a reduction to long-term debt and $4 million of other debt issuance costs included in other gain (loss), net.

As of September 30, 2016, we had $45 million of letters of credit outstanding under our Revolving Credit Facility and a borrowing capacity of $955 million.

CMBS and Mortgage Loans

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.

In September 2016, we made prepayments of $991 million on our commercial mortgage-backed securities loan (the "CMBS Loan") in exchange for the release of certain collateral.

Our CMBS Loan, which was secured by 20 of our U.S. owned real estate assets as of September 30, 2016, and the Bonnet Creek Loan require us to deposit with the lenders certain cash reserves for restricted uses. As of September 30, 2016 and December 31, 2015, our condensed consolidated balance sheets included $68 million and $49 million, respectively, of restricted cash and cash equivalents related to these loans.

Timeshare Debt

Timeshare debt balances, and associated interest rates as of September 30, 2016, were as follows:
 
September 30,
 
December 31,
 
2016
 
2015
 
(in millions)
Timeshare Facility with a rate of 1.83%, due 2019
$
150

 
$
150

Securitized Timeshare Debt with an average rate of 1.97%, due 2026
270

 
356

 
420

 
506

Less: current maturities of timeshare debt(1)
(80
)
 
(110
)
Less: unamortized deferred financing costs
(3
)
 
(4
)
 
$
337

 
$
392

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

In August 2016, we amended the terms of the Timeshare Facility to, among other things, increase the borrowing capacity from $300 million to $450 million, allowing us to borrow up to the maximum amount until August 2018 and requiring all amounts borrowed to be repaid in August 2019. As a result of the modification, we incurred $3 million of debt issuance costs recognized in other non-current assets.

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 $15 million and $17 million as of September 30, 2016 and December 31, 2015, respectively, was included in restricted cash and cash equivalents in our condensed consolidated balance sheets.


13


Debt Maturities

The contractual maturities of our debt as of September 30, 2016 were as follows:
 
Long-term Debt
 
Timeshare Debt
Year
(in millions)
2016 (remaining)
$
116

 
$
23

2017
104

 
74

2018(1)
2,492

 
51

2019(1)
478

 
186

2020
1,062

 
47

Thereafter(1)
5,843

 
39

 
$
10,095

 
$
420

____________
(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, 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.

During the three months ended September 30, 2016, we dedesignated four interest rate swaps that were previously designated as cash flow hedges as they no longer met the criteria for hedge accounting. These interest rate swaps, which swapped three-month LIBOR on the Term Loans to a fixed rate of 1.87 percent, expire in October 2018 and, as of September 30, 2016, had an aggregate notional amount of $1.45 billion.

As of September 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 September 30, 2016, we held 65 short-term foreign exchange forward contracts with an aggregate notional amount of $348 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.

Fair Value of Derivative Instruments

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

 
$
15

 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
Interest rate swaps
Other liabilities
 
$
21

 
N/A

Interest rate caps(1)
Other current assets
 
—

 
—

Forward contracts
Other current assets
 
2

 
1

Forward contracts
Accounts payable, accrued expenses and other
 
1

 
1

____________
(1) 
The fair value of our interest rate caps was less than $1 million as of December 31, 2015.


14


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
 
2016
 
2015
 
2016

2015
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps(1)
Other comprehensive income (loss)
 
$
3

 
$
(10
)
 
$
(7
)
 
$
(18
)
 
 
 
 
 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
Other gain (loss), net
 
(1
)
 
N/A

 
(1
)
 
N/A

Interest rate swaps(2)
Interest expense
 
(1
)
 
N/A

 
(1
)
 
N/A

Forward contracts
Loss on foreign currency transactions
 
4

 
6

 
7

 
12

____________
(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, 2016 and 2015.
(2) 
The amounts recognized during the three and nine months ended September 30, 2016 are related to the dedesignation of these instruments as cash flow hedges and were reclassified from accumulated other comprehensive loss as the underlying transactions occurred.


15


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:
 
September 30, 2016
 
 
 
Hierarchy Level
 
Carrying Amount
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
513

 
$
—

 
$
513

 
$
—

Restricted cash equivalents
12

 
—

 
12

 
—

Timeshare financing receivables(1)
992

 
—

 
—

 
1,110

Liabilities:
 
 
 
 
 
 
 
Long-term debt(2)(3)
9,668

 
1,603

 
—

 
8,248

Timeshare debt(3)
417

 
—

 
—

 
420

Interest rate swaps
21

 
—

 
21

 
—


 
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 $277 million and $245 million as of September 30, 2016 and December 31, 2015, respectively, and debt of certain consolidated VIEs with a carrying value of $39 million and $32 million, respectively.
(3) 
Carrying amount includes unamortized deferred financing costs and discounts.

The fair values of financial instruments not included in this table are estimated to be equal to their carrying amounts as of September 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: (i) indicative quotes received for similar issuances; (ii) the expected future cash flows discounted at risk-adjusted rates; or (iii) 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.


16


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 nine months ended September 30, 2016, was primarily attributable to changes in our uncertain tax positions.

Our total unrecognized tax benefits as of September 30, 2016 and December 31, 2015 were $248 million and $407 million, respectively. During the nine months ended September 30, 2016, we released $220 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 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 September 30, 2016, we have recognized a $44 million unrecognized tax benefit.

We recognize interest and penalties accrued related to uncertain tax positions in income tax expense. We had accrued approximately $26 million and $27 million for the payment of interest and penalties as of September 30, 2016 and December 31, 2015, respectively. 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 September 30, 2016 and December 31, 2015 were $208 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 September 30, 2016, we remain subject to federal examinations from 2005-2015, state examinations from 2003-2015 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.


17


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 $1 million and $2 million for the three months ended September 30, 2016 and 2015, respectively, and $4 million and $8 million for the nine months ended September 30, 2016 and 2015, respectively.


18


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 $22 million during the three months ended September 30, 2016 and 2015, respectively, and $70 million and $143 million during the nine months ended September 30, 2016 and 2015, respectively, which included amounts reimbursed by hotel owners. Share-based compensation expense for the nine months ended September 30, 2015 included $66 million of compensation expense that was recognized when certain remaining awards granted in connection with our initial public offering vested during 2015. As of September 30, 2016, unrecognized compensation costs for unvested awards was approximately $116 million, which is expected to be recognized over a weighted-average period of 1.9 years on a straight-line basis. As of September 30, 2016, there were 62,204,701 shares of common stock available for future issuance.

RSUs

During the nine months ended September 30, 2016, we issued 3,507,714 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 nine months ended September 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 September 30, 2016, 885,644 options outstanding were exercisable.

Performance Shares

During the nine months ended September 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 ("CAGR").


19


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.

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 September 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 nine months ended September 30, 2016, we issued to our independent directors 34,259 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
187

 
$
279

 
$
735

 
$
590

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
988

 
987

 
988

 
986

Basic EPS
$
0.19

 
$
0.28

 
$
0.74

 
$
0.60

 
 
 
 
 
 
 
 
Diluted EPS:
 
 
 
 
 
 
 
Numerator:
 
 
 
 
 
 
 
Net income attributable to Hilton stockholders
$
187

 
$
279

 
$
735

 
$
590

Denominator:
 
 
 
 
 
 
 
Weighted average shares outstanding
992

 
989

 
991

 
989

Diluted EPS
$
0.19

 
$
0.28

 
$
0.74

 
$
0.60


Approximately 2 million share-based compensation awards were excluded from the weighted average shares outstanding in the computation of diluted EPS for the three and nine months ended September 30, 2016, and 1 million awards were excluded for the three and nine months ended September 30, 2015 because their effect would have been anti-dilutive under the treasury stock method.


20


Note 16: Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss, net of taxes, were as follows:
 
Currency Translation Adjustment(1)
 
Pension Liability Adjustment
 
Cash Flow Hedge Adjustment
 
Total
 
(in millions)
Balance as of December 31, 2015
$
(580
)
 
$
(194
)
 
$
(10
)
 
$
(784
)
 
 
 
 
 
 
 
 
Other comprehensive loss before reclassifications
(40
)
 
(2
)
 
(4
)
 
(46
)
Amounts reclassified from accumulated other comprehensive loss
(1
)
 
4

 
1

 
4

Net current period other comprehensive income (loss)
(41
)
 
2

 
(3
)
 
(42
)
 
 
 
 
 
 
 
 
Balance as of September 30, 2016
$
(621
)
 
$
(192
)
 
$
(13
)
 
$
(826
)
 
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
)
____________
(1) 
Includes net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature.


21


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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Currency translation adjustment:
 
 
 
 
 
 
 
Sale and liquidation of foreign assets(1)
$
—

 
$
(25
)
 
$
—

 
$
(25
)
Gains on net investment hedges(2)
—

 
—

 
1

 
—

Tax benefit(3)(4)
—

 
9

 
—

 
9

Total currency translation adjustment reclassifications for the period, net of tax
—

 
(16
)
 
1

 
(16
)
 
 
 
 
 
 
 
 
Pension liability adjustment:
 
 
 
 
 
 
 
Amortization of prior service cost(5)
(1
)
 
(1
)
 
(3
)
 
(3
)
Amortization of net loss(5)
(1
)
 
—

 
(4
)
 
(4
)
Tax benefit(3)
1

 
1

 
3

 
3

Total pension liability adjustment reclassifications for the period, net of tax
(1
)
 
—

 
(4
)
 
(4
)
 
 
 
 
 
 
 
 
Cash flow hedge adjustment:
 
 
 
 
 
 
 
Dedesignation of interest rate swaps(6)
(1
)
 
—

 
(1
)
 
—

Tax benefit(3)(7)
—

 
—

 
—

 
—

Total cash flow hedge adjustment reclassifications for the period, net of tax
(1
)
 
—

 
(1
)
 
—

 
 
 
 
 
 
 
 
Total reclassifications for the period, net of tax
$
(2
)
 
$
(16
)
 
$
(4
)
 
$
(20
)
____________
(1) 
Reclassified out of accumulated other comprehensive loss to gain on sales of assets, net for the three and nine months ended September 30, 2015 in our condensed consolidated statements of operations. See Note 4: "Disposals" for additional information.
(2) 
Reclassified out of accumulated other comprehensive loss to other gain (loss), net in our condensed consolidated statements of operations.
(3) 
Reclassified out of accumulated other comprehensive loss to income tax expense in our condensed consolidated statements of operations.
(4) 
The tax benefit was less than $1 million for the nine months ended September 30, 2016.
(5) 
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).
(6) 
Reclassified out of accumulated other comprehensive loss to interest expense in our condensed consolidated statements of operations.
(7) 
The tax benefit was less than $1 million for the three and nine months ended September 30, 2016.

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 142 properties totaling 57,868 rooms, comprising 120 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 affiliates, as of September 30, 2016. While we do not include equity in earnings (losses) from unconsolidated affiliates in our measure of segment revenues, we manage these investments in our ownership segment and the results are included in our measure of segment profits.

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 September 30, 2016, this segment included 545 managed hotels and 4,087 franchised hotels totaling 4,632 hotels consisting of 723,404 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, resort operations and providing timeshare customer financing for the timeshare interests. This segment also provides assistance to third-party developers in selling their timeshare inventory. As of September 30, 2016, this segment included 46 timeshare properties totaling 7,592 units.


22


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 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
 
Nine Months Ended
 
September 30,
 
September 30,
 
2016
 
2015
 
2016
 
2015
 
(in millions)
Revenues
 
 
 
 
 
 
 
Ownership
$
1,040


$
1,089

 
$
3,128

 
$
3,194

Management and franchise
470


438

 
1,350

 
1,263

Timeshare
358


334