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HLT Hilton Worldwide

Filed: 24 Jul 19, 11:20am


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading symbol(s) Name of each exchange on which registered
Common Stock, $0.01 par value per share HLT New York Stock Exchange

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 No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act:
Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting
   Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange
Act. ☐    
    
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No

The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of July 18, 2019 was 286,854,529.




HILTON WORLDWIDE HOLDINGS INC.
FORM 10-Q TABLE OF CONTENTS

  Page No.
PART IFINANCIAL 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 IIOTHER 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,
20192018
 (unaudited)  
ASSETS   
Current Assets:   
Cash and cash equivalents$635
 $403
Restricted cash and cash equivalents83
 81
Accounts receivable, net of allowance for doubtful accounts of $44 and $421,190
 1,150
Prepaid expenses117
 160
Other190
 189
Total current assets (variable interest entities  $92 and $90)
2,215
 1,983
Intangibles and Other Assets:   
Goodwill5,157
 5,160
Brands4,874
 4,869
Management and franchise contracts, net817
 872
Other intangible assets, net400
 415
Operating lease right-of-use assets891
 
Property and equipment, net418
 367
Deferred income tax assets146
 90
Other222
 239
Total intangibles and other assets (variable interest entities  $186 and $178)
12,925
 12,012
TOTAL ASSETS$15,140
 $13,995
LIABILITIES AND EQUITY (DEFICIT)   
Current Liabilities:   
Accounts payable, accrued expenses and other$1,657
 $1,549
Current maturities of long-term debt37
 16
Current portion of deferred revenues298
 350
Current portion of liability for guest loyalty program788
 700
Total current liabilities (variable interest entities  $68 and $56)
2,780
 2,615
Long-term debt7,772
 7,266
Operating lease liabilities1,066
 
Deferred revenues822
 826
Deferred income tax liabilities861
 898
Liability for guest loyalty program986
 969
Other876
 863
Total liabilities (variable interest entities  $272 and $263)
15,163
 13,437
Commitments and contingencies - see Note 14


 


Equity (Deficit):   
Preferred stock, $0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of June 30, 2019 and December 31, 2018
 
Common stock, $0.01 par value; 10,000,000,000 authorized shares, 333,019,440 issued and 287,693,211 outstanding as of June 30, 2019 and 332,105,163 issued and 294,815,890 outstanding as of December 31, 20183
 3
Treasury stock, at cost; 45,326,229 shares as of June 30, 2019 and 37,289,273 shares as of December 31, 2018(3,304) (2,625)
Additional paid-in capital10,419
 10,372
Accumulated deficit(6,342) (6,417)
Accumulated other comprehensive loss(806) (782)
Total Hilton stockholders' equity (deficit)(30) 551
Noncontrolling interests7
 7
Total equity (deficit)(23) 558
TOTAL LIABILITIES AND EQUITY (DEFICIT)$15,140
 $13,995


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,
 2019 2018 2019 2018
Revenues       
Franchise and licensing fees$444
 $404
 $826
 $735
Base and other management fees89
 84
 169
 161
Incentive management fees58
 59
 113
 114
Owned and leased hotels387
 392
 699
 726
Other revenues26
 22
 52
 45
 1,004
 961
 1,859
 1,781
Other revenues from managed and franchised properties1,480
 1,330
 2,829
 2,584
Total revenues2,484
 2,291
 4,688
 4,365
        
Expenses       
Owned and leased hotels334
 352
 632
 672
Depreciation and amortization86
 79
 170
 161
General and administrative113
 115
 220
 219
Other expenses15
 12
 35
 26
 548
 558
 1,057
 1,078
Other expenses from managed and franchised properties1,458
 1,327
 2,841
 2,602
Total expenses2,006
 1,885
 3,898
 3,680
     

  
Operating income478
 406
 790
 685
        
Interest expense(101) (95) (199) (178)
Loss on foreign currency transactions(3) (12) (3) (1)
Other non-operating income (loss), net(12) (1) (8) 13

       
Income before income taxes362
 298
 580
 519
        
Income tax expense(101) (81) (160) (139)
        
Net income261
 217
 420
 380
Net income attributable to noncontrolling interests(1) 
 (2) (2)
Net income attributable to Hilton stockholders$260
 $217
 $418
 $378
        
Earnings per share:       
Basic$0.90
 $0.72
 $1.43
 $1.22
Diluted$0.89
 $0.71
 $1.42
 $1.21
        
Cash dividends declared per share$0.15
 $0.15
 $0.30
 $0.30


See notes to condensed consolidated financial statements.

3



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
Net income$261
 $217
 $420
 $380
Other comprehensive income (loss), net of tax benefit (expense):       
Currency translation adjustment, net of tax of $9, $—, $1 and $115
 (77) 12
 (45)
Pension liability adjustment, net of tax of $—, $(1), $(1) and $(1)2
 2
 4
 3
Cash flow hedge adjustment, net of tax of $8, $(4), $13 and $(14)(25) 13
 (40) 41
Total other comprehensive loss(8) (62) (24) (1)
        
Comprehensive income253
 155
 396
 379
Comprehensive income attributable to noncontrolling interests(1) 
 (2) (2)
Comprehensive income attributable to Hilton stockholders$252
 $155
 $394
 $377

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,
 2019 2018
Operating Activities:   
Net income$420
 $380
Adjustments to reconcile net income to net cash provided by operating activities:   
Amortization of contract acquisition costs14
 14
Depreciation and amortization170
 161
Loss on foreign currency transactions3
 1
Share-based compensation81
 68
Deferred income taxes1
 (39)
Contract acquisition costs(43) (38)
Working capital changes and other4
 (15)
Net cash provided by operating activities650
 532
Investing Activities:   
Capital expenditures for property and equipment(46) (28)
Capitalized software costs(44) (38)
Other(5) (9)
Net cash used in investing activities(95) (75)
Financing Activities:   
Borrowings1,795
 1,650
Repayment of debt(1,317) (672)
Debt issuance costs(27) (21)
Dividends paid(87) (92)
Repurchases of common stock(653) (1,439)
Share-based compensation tax withholdings and other(34) (42)
Net cash used in financing activities(323) (616)
    
Effect of exchange rate changes on cash, restricted cash and cash equivalents2
 (6)
Net increase (decrease) in cash, restricted cash and cash equivalents234
 (165)
Cash, restricted cash and cash equivalents, beginning of period484
 670
Cash, restricted cash and cash equivalents, end of period$718
 $505
    
Supplemental Disclosures:   
Cash paid during the year:   
Interest$190
 $149
Income taxes, net of refunds157
 149

See notes to condensed consolidated financial statements.

5



HILTON WORLDWIDE HOLDINGS INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)

Note 1: 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 and is engaged in managing, franchising, owning and leasing hotels and resorts and licensing its brands and intellectual property ("IP"). As of June 30, 2019, we managed, franchised, owned or leased 5,872 hotels and resorts, including timeshare properties, totaling 939,297 rooms in 114 countries and territories.

Note 2: Basis of Presentation and Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed consolidated financial statements for the three and six months ended June 30, 2019 and 2018 have been prepared in accordance with United States ("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 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, 2018. Certain prior year amounts in our condensed consolidated balance sheets have been reclassified to conform to current year presentation.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported and, accordingly, ultimate results could differ from those estimates. Additionally, 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.

Summary of Significant Accounting Policies

Our significant accounting policies are detailed in Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. On January 1, 2019, we adopted the requirements of Accounting Standards Update ("ASU") No. 2016-02 ("ASU 2016-02"), Leases (Topic 842), and the significant accounting policies that changed as a result of the adoption are set forth below.

Leases

We determine if a contract is or contains a lease at the inception of the contract, and we classify that lease as a finance lease if it meets certain criteria or as an operating lease when it does not. We reassess if a contract is or contains a leasing arrangement upon modification of the contract. For a contract, in which we are a lessee, that contains fixed payments for both lease and non-lease components, we have elected to account for the components as a single lease component, as permitted.

At the commencement date of a lease, we recognize a lease liability for future fixed lease payments and a right-of-use ("ROU") asset representing our right to use the underlying asset during the lease term. The lease liability is initially measured as the present value of the future fixed lease payments that will be made over the lease term. The lease term includes lessee options to extend the lease and periods occurring after a lessee early termination option, only to the extent it is reasonably certain that we will exercise such extension options and not exercise such early termination options, respectively. The future fixed lease payments are discounted using the rate implicit in the lease, if available, or our incremental borrowing rate. Our incremental borrowing rate is estimated on a portfolio basis and incorporates lease term, currency risk, credit risk and an adjustment for collateral. Upon adoption of ASU 2016-02, we elected to use the remaining lease term as of January 1, 2019 in our estimation of the applicable discount rate for leases that were in place at adoption. For the initial measurement of the lease liability for leases commencing after January 1, 2019, we use the discount rate as of the commencement date of the lease, incorporating the entire lease term. Additionally, we elected not to recognize leases with lease terms of 12 months or less at the commencement date in our consolidated balance sheets. Current maturities and long-term portions of operating lease liabilities are classified as accounts payable, accrued expenses and other and operating lease liabilities, respectively, and current maturities and long-term portions of finance lease liabilities are classified as current maturities of long-term debt and long-term debt, respectively, in our consolidated balance sheets.

6



The ROU asset is measured at the amount of the lease liability with adjustments, if applicable, for lease prepayments made prior to or at lease commencement, initial direct costs incurred by us and lease incentives. We evaluate the carrying value of ROU assets if there are indicators of impairment and review the recoverability of the related asset group. If the carrying value of the asset group is determined to not be recoverable and is in excess of the estimated fair value, we record an impairment loss in our consolidated statements of operations. ROU assets of operating leases are classified as operating lease right-of-use assets and ROU assets of finance leases are classified as property and equipment, net in our consolidated balance sheets.

Our operating leases require: (i) fixed lease payments, or minimum payments, as contractually stated in the lease agreement; (ii) variable lease payments, which, for our hotels, are generally based on a percentage of the underlying asset's revenues or profits, or are dependent on changes in an index; or (iii) lease payments equal to the greater of the fixed or variable lease payments. In addition, we may be required to pay some, or all, of the capital costs for furniture, equipment and leasehold improvements in a hotel property that we lease during the term of the lease. For operating leases, lease expense relating to fixed payments is recognized on a straight-line basis over the lease term, and lease expense relating to variable payments is expensed as incurred, with amounts recognized in owned and leased hotel expenses, general and administrative expenses and other expenses from managed and franchised properties in our consolidated statements of operations. For finance leases, the amortization of the asset is recognized over the shorter of the lease term or useful life of the underlying asset within depreciation and amortization expense and other expenses from managed and franchised properties in our consolidated statements of operations. The interest expense related to finance leases, including any variable lease payments, is recognized in interest expense in our consolidated statements of operations.

Recently Issued Accounting Pronouncements

In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15 ("ASU 2018-15"), Intangibles – Goodwill and Other – Internal-use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns guidance for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with guidance for capitalizing implementation costs to develop or obtain internal-use software. Capitalized implementation costs will be amortized over the term of the arrangement and presented in the same line item in the statement of operations as the fees associated with the service contract. We elected, as permitted by the standard, to early adopt ASU 2018-05 on a prospective basis as of January 1, 2019. The adoption did not have a material effect on our condensed consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02, 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 of lessees as ROU assets and lease liabilities, with certain practical expedients available. Subsequent to ASU 2016-02, the FASB issued related ASUs, including ASU No. 2018-11 ("ASU 2018-11"), Leases (Topic 842): Targeted Improvements, which provides for another transition method in addition to the modified retrospective approach required by ASU 2016-02. This option allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative adjustment to the opening balance of retained earnings in the period of adoption.

As described above, we adopted ASU 2016-02 on January 1, 2019 and applied the package of practical expedients included therein, as well as utilized the transition method included in ASU 2018-11. By applying ASU 2016-02 at the adoption date, as opposed to at the beginning of the earliest period presented, the presentation of financial information for periods prior to January 1, 2019 remain unchanged and in accordance with Leases (Topic 840). On January 1, 2019, we recognized a $256 million cumulative adjustment to accumulated deficit, net of taxes of $81 million related to a decrease to our deferred tax liability, as a result of the impairment of ROU assets that occurred in periods prior to the adoption date.


7



Note 3: Revenues from Contracts with Customers

Contract Liabilities

The following table summarizes the activity of our contract liabilities, which are classified as a component of current and long-term deferred revenues, during the six months ended June 30, 2019:
 (in millions)
Balance as of December 31, 2018$1,060
Cash received in advance and not recognized as revenue(1)
220
Revenue recognized(1)
(135)
Other(2)
(92)
Balance as of June 30, 2019$1,053
____________
(1) 
Primarily related to Hilton Honors, our guest loyalty program.
(2) 
Primarily the result of changes in estimated transaction prices for our performance obligations related to points issued under Hilton Honors, which had no effect on revenues.

We recognized revenues that were previously deferred as contract liabilities of $78 million and $56 million during the three months ended June 30, 2019 and 2018, respectively, and $116 million during the six months ended June 30, 2018.

Performance Obligations

As of June 30, 2019, we had $438 million of deferred revenues related to unsatisfied performance obligations related to Hilton Honors that will be recognized as revenues when the points are redeemed, which we estimate will occur over the next two years. Additionally, we had $615 million of deferred revenues related to application, initiation and licensing fees, which are expected to be recognized as revenues in future periods over the terms of the related contracts.

Note 4: Consolidated Variable Interest Entities

As of June 30, 2019 and December 31, 2018, we consolidated two variable interest entities ("VIEs") that lease hotel properties and, as of December 31, 2018, we also consolidated one VIE that is a management company. We consolidated these VIEs, since we are the primary beneficiary, having 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 consolidated VIEs are only available to settle the obligations of the respective entities.

In June 2019, the VIE that is a management company, which we had previously consolidated, sold its assets. As a result of the sale, we deconsolidated $7 million of total assets and $3 million of total liabilities, as we no longer had the power to direct the activities that most significantly affect the VIE's economic performance. See Note 12: "Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss" for additional information.

Our condensed consolidated balance sheets included the assets and liabilities of the VIEs that we consolidated as of the respective periods, which primarily comprised the following:
 June 30, December 31,
 2019 2018
 (in millions)
Cash and cash equivalents$72
 $71
Property and equipment, net73
 68
Deferred income tax assets51
 53
Other non-current assets61
 58
Accounts payable, accrued expenses and other52
 41
Long-term debt(1)
204
 205
Other long-term liabilities15
 15

____________
(1) 
Includes finance lease liabilities of $186 million and $187 million as of June 30, 2019 and December 31, 2018, respectively.

We did not provide any financial or other support to any VIEs that we were not previously contractually required to provide during the six months ended June 30, 2019 and 2018.

8



Note 5: Amortizing Intangible Assets

Amortizing intangible assets were as follows:
 June 30, 2019
 Gross Carrying Value Accumulated Amortization Net Carrying Value
 (in millions)
Management and franchise contracts:     
Management and franchise contracts recorded at Merger(1)
$2,232
 $(1,960) $272
Contract acquisition costs548
 (108) 440
Development commissions and other122
 (17) 105
 $2,902
 $(2,085) $817
      
Other intangible assets:     
Leases(1)
$287
 $(167) $120
Capitalized software costs547
 (358) 189
Hilton Honors(1)
338
 (247) 91
Other(1)
34
 (34) 
 $1,206
 $(806) $400

 December 31, 2018
 Gross Carrying Value Accumulated Amortization Net Carrying Value
 (in millions)
Management and franchise contracts:     
Management and franchise contracts recorded at Merger(1)
$2,228
 $(1,873) $355
Contract acquisition costs525
 (101) 424
Development commissions and other108
 (15) 93
 $2,861
 $(1,989) $872
      
Other intangible assets:     
Leases(1)
$288
 $(161) $127
Capitalized software costs503
 (321) 182
Hilton Honors(1)
338
 (236) 102
Other(1)
38
 (34) 4
 $1,167
 $(752) $415
____________
(1) 
Represents intangible assets that were initially recorded at their fair value as part of the October 24, 2007 transaction whereby we became a wholly owned subsidiary of affiliates of The Blackstone Group L.P (the "Merger").

Amortization of our amortizing intangible assets was as follows:
 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
 (in millions)
Recognized in depreciation and amortization expense(1)
$71
 $66
 $141
 $135
Recognized as a reduction of franchise and licensing fees and base and other management fees7
 7
 14
 14
____________
(1) 
Includes amortization expense of $51 million and $52 million for the three months ended June 30, 2019 and 2018, respectively, and $102 million and $103 million for the six months ended June 30, 2019 and 2018, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger.


9



We estimate future amortization of our amortizing intangible assets as of June 30, 2019 to be as follows:
 Recognized in Depreciation and Amortization Expense Recognized as a Reduction of Franchise and Licensing Fees and Base and Other Management Fees
Year(in millions)
2019 (remaining)$141
 $13
2020250
 26
2021110
 25
202281
 23
202351
 23
Thereafter144
 330
 $777
 $440


Note 6: Debt

Long-term debt balances, including obligations for finance leases, and associated interest rates and maturities as of June 30, 2019, were as follows:

June 30, December 31,

2019 2018

(in millions)
Senior secured term loan facility with a rate of 4.15%, due 2026$2,619
 $3,119
Senior notes with a rate of 4.250%, due 20241,000
 1,000
Senior notes with a rate of 4.625%, due 2025900
 900
Senior notes with a rate of 5.125%, due 20261,500
 1,500
Senior notes with a rate of 4.875%, due 2027600
 600
Senior notes with a rate of 4.875%, due 20301,000
 
Finance lease liabilities with an average rate of 5.80%, due 2019 to 2030260
 225
Other debt with a rate of 3.08% due 202618
 17

7,897
 7,361
Less: unamortized deferred financing costs and discount(88) (79)
Less: current maturities of long-term debt(1)
(37) (16)

$7,772
 $7,266

____________
(1) 
Represents current maturities of finance lease liabilities.

Our senior secured credit facilities consist of a senior secured revolving credit facility (the "Revolving Credit Facility") and a senior secured term loan facility (the "Term Loans"). The obligations of our senior secured credit facilities are unconditionally and irrevocably guaranteed by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries.

In June 2019, we amended the Term Loans to extend the maturity date to June 2026 with a discount of 0.25 percent and also incurred $2 million of debt issuance costs. We also amended the Revolving Credit Facility to increase the borrowing capacity to $1.75 billion, $250 million of which is available in the form of letters of credit, and extended the maturity date to June 2024. In connection with this amendment, we incurred $7 million of debt issuance costs, which were included in other non-current assets in our condensed consolidated balance sheet as of June 30, 2019. As of June 30, 2019, we had $59 million of outstanding letters of credit, resulting in an available borrowing capacity under the Revolving Credit Facility of $1.69 billion. We are required to pay a commitment fee of 0.125 percent per annum under the Revolving Credit Facility in respect of the unused commitments thereunder.

In June 2019, we issued $1.0 billion aggregate principal amount of 4.875% Senior Notes due 2030 (the "2030 Senior Notes"), and incurred $13 million of debt issuance costs. Interest on the 2030 Senior Notes is payable semi-annually in arrears on January 15 and July 15 of each year, beginning January 2020. We used a portion of the net proceeds from the issuance of the 2030 Senior Notes to repay $500 million outstanding on our Term Loans and to repay $225 million outstanding under our Revolving Credit Facility. In connection with the repayment of the Term Loans, we recognized $8 million of fees and

10



unamortized deferred financing costs and discount, which were included in other non-operating income (loss), net, in our condensed consolidated statements of operations for the three and six months ended June 30, 2019.

The 4.250% Senior Notes due 2024 (the "2024 Senior Notes"), the 4.625% Senior Notes due 2025 (the "2025 Senior Notes"), the 5.125% Senior Notes due 2026 (the "2026 Senior Notes"), the 4.875% Senior Notes due 2027 (the "2027 Senior Notes") and the 2030 Senior Notes are guaranteed on a senior unsecured basis by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries that are themselves not issuers of the applicable series of senior notes. See Note 15: "Condensed Consolidating Guarantor Financial Information" for additional information.

The contractual maturities of our long-term debt as of June 30, 2019 were as follows:
Year(in millions)
2019 (remaining)$19
202035
202128
202220
202321
Thereafter7,774
 $7,897


Note 7: Fair Value Measurements

We did not elect the fair value measurement option for any of our financial assets or liabilities. The fair values of certain financial instruments and the hierarchy level we used to estimate the fair values are shown below; the fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of June 30, 2019 and December 31, 2018:
 June 30, 2019
   Hierarchy Level
 Carrying Value Level 1 Level 2 Level 3
 (in millions)
Assets:       
Cash equivalents$265
 $
 $265
 $
Restricted cash equivalents19
 
 19
 
Liabilities:       
Long-term debt(1)
7,531
 5,149
 
 2,624
Interest rate swaps35
 
 35
 

 December 31, 2018
   Hierarchy Level
 Carrying Value Level 1 Level 2 Level 3
 (in millions)
Assets:       
Cash equivalents$87
 $
 $87
 $
Restricted cash equivalents18
 
 18
 
Interest rate swaps16
 
 16
 
Liabilities:       
Long-term debt(1)
7,040
 3,809
 
 3,039
____________
(1)
The carrying values include unamortized deferred financing costs and discount. The carrying values and fair values exclude finance lease liabilities and other debt.

We measure our interest rate swaps at fair value, which were estimated using a discounted cash flow analysis that reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs of similar instruments, including interest rate curves, as applicable. Our interest rate swaps are included in other non-current assets or other long-term liabilities in our condensed consolidated balance sheets depending on their fair value.


11



Note 8: Leases

We lease hotel properties, land, corporate office space and equipment used at hotels and corporate offices, with our most significant lease liabilities related to hotel properties. As of June 30, 2019, we leased 53 hotels under operating leases and six hotels under finance leases, two of which were the liabilities of consolidated VIEs and were non-recourse to us. Our hotel leases expire at various dates, with varying renewal and termination options.
 
Supplemental balance sheet information related to leases as of June 30, 2019 was as follows:
 
(dollars
 in millions)
Operating leases: 
Operating lease right-of-use assets$891
Accounts payable, accrued expenses and other131
Operating lease liabilities1,066
Finance leases: 
Property and equipment, net$57
Current maturities of long-term debt37
Long-term debt223
  
Weighted average remaining lease term: 
Operating leases13.0 years
Finance leases8.9 years
 ��
Weighted average discount rate: 
Operating leases3.74%
Finance leases5.80%


The components of lease expense were as follows:
 Three Months Ended Six Months Ended
 June 30, 2019 June 30, 2019
 (in millions)
Operating lease expense for fixed payments$36
 $73
Finance lease expense:  

Amortization of ROU assets8
 16
Interest on lease liabilities3
 7
Variable lease expense(1)
52
 82
____________
(1) 
Includes amounts related to operating leases and interest payments on finance leases.

Lease expense for our operating leases for the year ended December 31, 2018 included $225 million of fixed lease expense and $142 million of variable lease expense.

Supplemental cash flow information related to leases for the six months ended June 30, 2019 was as follows:
 (in millions)
Cash paid for amounts included in the measurement of lease liabilities: 
Operating cash flows from operating leases$90
Financing cash flows from finance leases21
ROU assets obtained in exchange for lease liabilities in non-cash transactions: 
Operating leases21
Finance leases52




12



Our future minimum lease payments as of June 30, 2019 were as follows:
 Operating
Leases
 Finance
Leases
Year(in millions)
2019 (remaining)$89
 $26
2020175
 49
2021161
 40
2022137
 31
2023122
 30
Thereafter872
 166
Total minimum lease payments1,556
 342
Less: imputed interest(359) (82)
Total lease liabilities$1,197
 $260


Note 9: Income Taxes

At the end of each quarter, we estimate the effective income tax rate expected to be applied for the full year. The effective income tax rate is determined by the level and composition of income (loss) before income taxes, which is subject to federal, state, local and foreign income taxes.

We file income tax returns, including returns for our subsidiaries, with federal, state, local and foreign tax jurisdictions. We are under regular and recurring audit by the Internal Revenue Service ("IRS") and other taxing authorities on open tax positions. The timing of the resolution of tax audits is highly uncertain, as are the amounts, if any, that may ultimately be paid upon such resolution. Changes may result from the conclusion of ongoing audits, appeals or litigation in federal, state, local and foreign tax jurisdictions or from the resolution of various proceedings between the U.S. and foreign tax authorities. As of June 30, 2019, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2017 and foreign examinations of our income tax returns for tax years from 1996 through 2018.

Our total unrecognized tax benefits as of June 30, 2019 and December 31, 2018 were $323 million and $318 million, respectively. As of June 30, 2019 and December 31, 2018, we had accrued approximately $44 million and $40 million, respectively, for interest and penalties related to our unrecognized tax benefits in our condensed consolidated balance sheets. Included in the balances of unrecognized tax benefits as of June 30, 2019 and December 31, 2018 was $312 million and $310 million, respectively, associated with positions that, if favorably resolved, would provide a benefit to our effective income tax rate.

In April 2014, we received 30-day Letters from the IRS and the Revenue Agents Report ("RAR") for the 2006 and October 2007 tax years. We disagreed with several of the proposed adjustments in the RAR, filed a formal appeals protest with the IRS and did not make any tax payments related to this audit. The issues being protested in appeals relate to assertions by the IRS that: (i) 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; (ii) in calculating the amount of U.S. taxable income resulting from Hilton Honors, 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 (iii) certain foreign currency denominated loans issued by one of our Luxembourg subsidiaries whose functional currency is the U.S. dollar ("USD"), should instead be treated as issued by one of our Belgian subsidiaries whose functional currency is the euro ("EUR"), and thus foreign currency gains and losses with respect to such loans should have been measured in EUR, instead of USD. In January 2016, we received a 30-day Letter from the IRS and the RAR for the December 2007 through 2010 tax years, which included proposed adjustments that reflect the carryover effect of the three protested issues from the 2006 through October 2007 tax years. These proposed adjustments are also being protested in appeals and formal appeals protests have been submitted. In April 2016, we requested a Technical Advice Memorandum ("TAM") from the IRS with respect to the treatment of the gains and losses recognized as a result of changes in foreign currency exchange rates on loans issued by our Luxembourg subsidiary. We received a taxpayer favorable TAM in October 2018 and this issue is no longer being pursued by the IRS for any of the open tax years. In September 2018, we received a 30-day Letter from the IRS and the RAR for the 2011 through 2013 tax years, which reflects proposed adjustments for the carryover effect of the two remaining protested issues from the 2006 through October 2007 tax years. The adjustments for the 2011 through 2013 tax years will also be protested in appeals and formal protests have been submitted. After receipt of the TAM relating to the Luxembourg subsidiary, the two remaining proposed adjustments sought by the IRS would result in additional U.S. federal tax owed of approximately $817 million, excluding interest and penalties and potential state income taxes. The portion of this amount related to Hilton Honors would result in a decrease to our future tax liability when the points

13



are redeemed. We disagree with the IRS's position on each of these assertions and intend to vigorously contest them. However, based on continuing appeals process discussions with the IRS, we believe that 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, 2019, we had recorded $55 million of unrecognized tax benefits related to these issues.

Note 10: Share-Based Compensation

We grant time-vesting restricted stock units and restricted stock (collectively, "RSUs"), nonqualified stock options ("options") and performance-vesting RSUs ("performance shares") to our employees and deferred share units ("DSUs") to members of our board of directors. We recognized share-based compensation expense of $47 million and $40 million during the three months ended June 30, 2019 and 2018, respectively, and $81 million and $68 million during the six months ended June 30, 2019 and 2018, respectively. As of June 30, 2019, unrecognized compensation costs for unvested awards was approximately $190 million, which are expected to be recognized over a weighted-average period of 1.9 years on a straight-line basis. As of June 30, 2019, there were 14.2 million shares of common stock available for future issuance under the Hilton 2017 Omnibus Incentive Plan, plus any shares subject to awards outstanding under our 2013 Omnibus Incentive Plan, which will become available for issuance under the Hilton 2017 Omnibus Incentive Plan if such outstanding awards expire or are terminated or are canceled or forfeited.

RSUs

During the six months ended June 30, 2019, we granted 1.0 million RSUs with a weighted average grant date fair value per share of $83.38, 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, 2019, we granted 0.8 million options with a weighted average exercise price per share of $83.11, which vest over three years from the date of grant in equal annual installments and terminate 10 years from the date of grant or earlier if the individual’s service terminates under certain circumstances.

The weighted average grant date fair value per share of the options granted during the six months ended June 30, 2019 was $21.08, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility(1)
23.51%
Dividend yield(2)
0.81%
Risk-free rate(3)
2.47%
Expected term (in years)(4)
6.0
____________
(1) 
Estimated using historical movement of Hilton's stock price.
(2) 
Estimated based on the quarterly dividend and the three-month average stock price at the date of grant.
(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, 2019, 1.6 million options were exercisable.

Performance Shares

During the six months ended June 30, 2019, we granted 0.4 million performance shares with a weighted average grant date fair value per share of $83.11. The performance shares are settled at the end of the three-year performance period with: (i) 50 percent of the awards subject to achievement based on the compound annual growth rate ("CAGR") of the Company's earnings before interest expense, a provision for income taxes and depreciation and amortization ("EBITDA"), adjusted to exclude certain items ("Adjusted EBITDA"), referred to as EBITDA CAGR and (ii) 50 percent of the awards subject to achievement based on the Company’s free cash flow ("FCF") per share CAGR, referred to as FCF CAGR. The total number of performance shares that vest related to each performance measure is based on an achievement factor that ranges from a zero percent to 200 percent payout, with 100 percent being the target. As of June 30, 2019, we determined that the performance conditions for the performance shares are probable of achievement and we recognized compensation expense, for both our outstanding EBITDA CAGR and FCF CAGR performance shares, at the maximum achievement percentage for the 2017 grants, between target and maximum for the 2018 grants and at target for the 2019 grants.


14



Note 11: 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,
 2019 2018 2019 2018
 (in millions, except per share amounts)
Basic EPS:       
Numerator:       
Net income attributable to Hilton stockholders$260
 $217
 $418
 $378
Denominator:       
Weighted average shares outstanding290
 301
 291
 308
Basic EPS$0.90
 $0.72
 $1.43
 $1.22
        
Diluted EPS:       
Numerator:       
Net income attributable to Hilton stockholders$260
 $217
 $418
 $378
Denominator:       
Weighted average shares outstanding292
 303
 294
 311
Diluted EPS$0.89
 $0.71
 $1.42
 $1.21


Less than 1 million share-based compensation awards were excluded from the computation of diluted EPS for the three and six months ended June 30, 2019 and 2018 because their effect would have been anti-dilutive under the treasury stock method.

Note 12: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss

The following tables present the changes in the components of stockholders' equity (deficit) for the three and six months ended June 30, 2019 and 2018:
 Three Months Ended June 30, 2019
 Equity (Deficit) Attributable to Hilton Stockholders    
     Treasury Stock Additional
Paid-in
Capital
 Accumulated Deficit 
Accumulated
Other
Comprehensive
Loss
    
 Common Stock     Noncontrolling
Interests
  
 Shares Amount      Total
 (in millions)
Balance as of March 31, 2019292
 $3
 $(2,921) $10,374
 $(6,558) $(798) $8
 $108
Net income
 
 
 
 260
 
 1
 261
Other comprehensive loss
 
 
 
 
 (8) 
 (8)
Dividends
 
 
 
 (44) 
 
 (44)
Repurchases of common stock(4) 
 (383) 
 
 
 
 (383)
Share-based compensation
 
 
 45
 
 
 
 45
Deconsolidation of a VIE
 
 
 
 
 
 (2) (2)
Balance as of June 30, 2019288
 $3
 $(3,304) $10,419
 $(6,342) $(806) $7
 $(23)


15



 Three Months Ended June 30, 2018
 Equity (Deficit) Attributable to Hilton Stockholders    
     Treasury Stock Additional
Paid-in
Capital
 Accumulated Deficit 
Accumulated
Other
Comprehensive
Loss
    
 Common Stock     
Noncontrolling
Interests
  
 Shares Amount      Total
 (in millions)
Balance as of March 31, 2018317
 $3
 $(1,001) $10,288
 $(6,868) $(680) $5
 $1,747
Net income
 
 
 
 217
 
 
 217
Other comprehensive loss
 
 
 
 
 (62) 
 (62)
Dividends
 
 
 
 (46) 
 
 (46)
Repurchases of common stock(19) 
 (1,329) 
 
 
 
 (1,329)
Share-based compensation
 
 
 33
 
 
 
 33
Balance as of June 30, 2018298
 $3
 $(2,330) $10,321
 $(6,697) $(742) $5
 $560


 Six Months Ended June 30, 2019
 Equity (Deficit) Attributable to Hilton Stockholders    
     Treasury Stock Additional
Paid-in
Capital
 Accumulated Deficit 
Accumulated
Other
Comprehensive
Loss
    
 Common Stock     Noncontrolling
Interests
  
 Shares Amount      Total
 (in millions)
Balance as of December 31, 2018295
 $3
 $(2,625) $10,372
 $(6,417) $(782) $7
 $558
Net income
 
 
 
 418
 
 2
 420
Other comprehensive loss
 
 
 
 
 (24) 
 (24)
Dividends
 
 
 
 (87) 
 
 (87)
Repurchases of common stock(8) 
 (679) 
 
 
 
 (679)
Share-based compensation1
 
 
 47
 
 
 
 47
Cumulative effect of the adoption of ASU 2016-02
 
 
 
 (256) 
 
 (256)
Deconsolidation of a VIE
 
 
 
 
 
 (2) (2)
Balance as of June 30, 2019288
 $3
 $(3,304) $10,419
 $(6,342) $(806) $7
 $(23)


 Six Months Ended June 30, 2018
 Equity (Deficit) Attributable to Hilton Stockholders    
     Treasury Stock Additional
Paid-in
Capital
 Accumulated Deficit 
Accumulated
Other
Comprehensive
Loss
    
 Common Stock     
Noncontrolling
Interests
  
 Shares Amount      Total
 (in millions)
Balance as of December 31, 2017317
 $3
 $(891) $10,298
 $(6,981) $(741) $3
 $1,691
Net income
 
 
 
 378
 
 2
 380
Other comprehensive loss
 
 
 
 
 (1) 
 (1)
Dividends
 
 
 
 (94) 
 
 (94)
Repurchases of common stock(20) 
 (1,439) 
 
 
 
 (1,439)
Share-based compensation1
 
 
 23
 
 
 
 23
Balance as of June 30, 2018298
 $3
 $(2,330) $10,321
 $(6,697) $(742) $5
 $560


The changes in 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, 2018$(545) $(260) $23
 $(782)
Other comprehensive income (loss) before reclassifications11
 
 (35) (24)
Amounts reclassified from accumulated other comprehensive loss1
 4
 (5) 
Net current period other comprehensive income (loss)12
 4
 (40) (24)
Balance as of June 30, 2019$(533) $(256) $(17) $(806)

16



 
Currency Translation Adjustment(1)
 Pension Liability Adjustment Cash Flow Hedge Adjustment Total
 (in millions)
Balance as of December 31, 2017$(513) $(229) $1
 $(741)
Other comprehensive income (loss) before reclassifications(45) 
 36
 (9)
Amounts reclassified from accumulated other comprehensive loss
 3
 5
 8
Net current period other comprehensive income (loss)(45) 3
 41
 (1)
Balance as of June 30, 2018$(558) $(226) $42
 $(742)
____________
(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, 2019 June 30, 2019
 (in millions)
Currency translation adjustment:   
Liquidation of investment in a foreign entity(1)
$(1) $(1)
Total currency translation adjustment reclassifications for the period, net of taxes(1) (1)
    
Pension liability adjustment:   
Amortization of prior service cost(3)
(1) (2)
Amortization of net loss(3)
(1) (3)
Tax benefit(2)

 1
Total pension liability adjustment reclassifications for the period, net of taxes(2) (4)
    
Cash flow hedge adjustment:   
Dedesignated interest rate swaps(4)
3
 6
Tax expense(2)

 (1)
Total cash flow hedge adjustment reclassifications for the period, net of taxes3
 5
Total reclassifications for the period, net of taxes$
 $
____________
(1) 
Includes a gain on the related net investment hedge. Reclassified to loss on foreign currency transactions in our condensed consolidated statements of operations. The related tax benefit reclassified to income tax expense in our condensed consolidated statements of operations was less than $1 million.
(2) 
Reclassified to income tax expense in our condensed consolidated statements of operations.
(3) 
Reclassified to other non-operating income (loss), net in our condensed consolidated statements of operations.
(4) 
Reclassified to interest expense in our condensed consolidated statements of operations.

As of June 30, 2019, approximately $1.4 billion remained available for share repurchases under our $3.5 billion stock repurchase program.

Note 13: Business Segments

We are a hospitality company with operations organized in two distinct operating segments: (i) management and franchise and (ii) ownership. These segments are managed and reported separately because of their distinct economic characteristics.

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, 2019, this segment included 691 managed hotels and 5,059 franchised hotels consisting of 909,453 total rooms. This segment also earns licensing fees from Hilton Grand Vacations and co-brand credit card arrangements for the exclusive right to use certain Hilton marks and IP, as well as fees for managing properties in our ownership segment.

As of June 30, 2019, the ownership segment included 67 properties totaling 20,928 rooms, comprising 59 hotels that we wholly owned or leased, one hotel owned by a consolidated non-wholly owned entity, two hotels leased by consolidated VIEs and five hotels owned or leased by unconsolidated affiliates.

17



The performance of our operating segments is evaluated primarily on operating income, without allocating other revenues and expenses or general and administrative expenses.

The following table presents revenues for our reportable segments, reconciled to consolidated amounts:
 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
 (in millions)
Franchise and licensing fees$445
 $405
 $830
 $738
Base and other management fees(1)
106
 101
 198
 191
Incentive management fees58
 59
 113
 114
Management and franchise609
 565
 1,141
 1,043
Ownership387
 392
 699
 726
Segment revenues996
 957
 1,840
 1,769
Amortization of contract acquisition costs(7) (7) (14) (14)
Other revenues26
 22
 52
 45
Direct reimbursements from managed and franchised properties(2)
789
 730
 1,564
 1,429
Indirect reimbursements from managed and franchised properties(2)
691
 600
 1,265
 1,155
Intersegment fees elimination(1)
(11) (11) (19) (19)
Total revenues$2,484
 $2,291
 $4,688
 $4,365
____________
(1) 
Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.
(2) 
Included in other revenues from managed and franchised properties in our condensed consolidated statements of operations.

The following table presents operating income for our reportable segments, reconciled to consolidated income before income taxes:
 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
 (in millions)
Management and franchise(1)
$609
 $565
 $1,141
 $1,043
Ownership(1)
42
 29
 48
 35
Segment operating income651
 594
 1,189
 1,078
Amortization of contract acquisition costs(7) (7) (14) (14)
Other revenues, less other expenses11
 10
 17
 19
Net other revenues (expenses) from managed and franchised properties

22
 3
 (12) (18)
Depreciation and amortization(86) (79) (170) (161)
General and administrative(113) (115) (220) (219)
Operating income478
 406
 790
 685
Interest expense(101) (95) (199) (178)
Loss on foreign currency transactions(3) (12) (3) (1)
Other non-operating income (loss), net(12) (1) (8) 13
Income before income taxes$362
 $298
 $580
 $519
____________
(1) 
Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our condensed consolidated statements of operations.


18



The following table presents total assets for our reportable segments, reconciled to consolidated amounts:
 June 30, December 31,
 2019 2018
 (in millions)
Management and franchise$11,399
 $11,362
Ownership1,731
 927
Corporate and other2,010
 1,706
 $15,140
 $13,995

The following table presents capital expenditures for property and equipment for our reportable segments, reconciled to consolidated amounts:
 Six Months Ended
 June 30,
 2019 2018
 (in millions)
Ownership$25
 $19
Corporate and other21
 9
 $46
 $28


Note 14: Commitments and Contingencies

We provide performance guarantees to certain owners of hotels that we operate under management contracts. Most of these guarantees allow us to terminate the contract, rather than fund shortfalls, if specified operating performance levels are not achieved. However, in limited cases, we are obligated to fund performance shortfalls. As of June 30, 2019, we had six performance guarantees, with expirations ranging from December 2019 to 2039, and possible cash outlays totaling approximately $39 million. Our obligations under these guarantees in future periods are dependent on the operating performance level of the related hotel over the remaining term of the performance guarantee. As of June 30, 2019 and December 31, 2018, we accrued current liabilities of $7 million and $12 million, respectively, for one performance guarantee related to a hotel owned by a VIE for which we were not the primary beneficiary. We may enter into new contracts containing performance guarantees in the future, which could increase our possible cash outlays.

As of June 30, 2019, we had a $20 million guarantee for debt of a hotel that we franchise, which has an initial maturity date of February 2022 with two one-year extension options. Although we believe it is unlikely that material payments will be required under this guarantee, there can be no assurance that this will be the case. We do not have any letters of credit pledged as collateral against this guarantee or our performance guarantees.

We hold interests in VIEs, for which we are not the primary beneficiary, that have entered into loan agreements with third parties. Under the terms of our contractual arrangements with certain of these VIEs, we may provide financial support to such entities under specified circumstances, including default of such a VIE under a third-party loan agreement, and may have the option to acquire a controlling financial interest in such an entity at a predetermined amount. In a circumstance that we provide financial support or exercise our option to acquire an additional interest in a VIE, we may be required to reassess whether we are the primary beneficiary of the VIE. If we determine that we are the primary beneficiary of the VIE, we would be required to consolidate the total assets, liabilities and results of operations of the VIE, which may be material upon consolidation.

We have entered into agreements with owners of certain hotels that we currently manage or will franchise to finance capital expenditures at the hotels for approximately $29 million. As of June 30, 2019, we expect to fund $19 million of these commitments in the remainder of 2019 and $10 million in 2020.

We receive fees from managed and franchised properties to operate our marketing, sales and brand programs on behalf of
hotel owners. As of June 30, 2019 and December 31, 2018, we had collected an aggregate of $392 million and $375 million in excess of amounts expended, respectively, across all programs.

We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of June 30, 2019 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.


19



Note 15: Condensed Consolidating Guarantor Financial Information

Hilton Worldwide Finance LLC and Hilton Worldwide Finance Corp. (together, the "HWF Issuers"), which are 100 percent owned by Hilton Worldwide Parent LLC ("HWP"), which is 100 percent owned by the Parent, issued the 2025 Senior Notes and the 2027 Senior Notes. Hilton Domestic Operating Company Inc. ("HOC"), which is 100 percent owned by Hilton Worldwide Finance LLC, assumed the 2024 Senior Notes, issued the 2026 Senior Notes and, in June 2019, issued the 2030 Senior Notes. The 2024 Senior Notes, 2025 Senior Notes, 2026 Senior Notes, 2027 Senior Notes and 2030 Senior Notes are collectively referred to as the Senior Notes. The HWF Issuers and HOC are collectively referred to as the Subsidiary Issuers.

The Senior Notes are guaranteed jointly and severally on a senior unsecured basis by HWP, the Parent and certain of the Parent's wholly owned domestic restricted subsidiaries that are themselves not issuers of the applicable series of Senior Notes (together, the "Guarantors''). The indentures that govern the Senior Notes provide that any subsidiary of the Company that provides a guarantee of our senior secured credit facilities will guarantee the Senior Notes. Additionally, the HWF Issuers are guarantors of the 2024 Senior Notes, the 2026 Senior Notes and the 2030 Senior Notes and HOC is a guarantor of the 2025 Senior Notes and the 2027 Senior Notes. As of June 30, 2019, none of our foreign subsidiaries or U.S. subsidiaries owned by foreign subsidiaries or conducting foreign operations or our non-wholly owned subsidiaries guarantee the Senior Notes (collectively, the "Non-Guarantors").

The guarantees are full and unconditional, subject to certain customary release provisions. The indentures that govern the Senior Notes provide that any Guarantor may be released from its guarantee so long as: (i) the subsidiary is sold or sells all of its assets; (ii) the subsidiary is released from its guaranty under our senior secured credit facilities; (iii) the subsidiary is declared "unrestricted" for covenant purposes; (iv) the subsidiary is merged with or into the applicable Subsidiary Issuers or another Guarantor or the Guarantor liquidates after transferring all of its assets to the applicable Subsidiary Issuers or another Guarantor; or (v) the requirements for legal defeasance or covenant defeasance or to discharge the indenture have been satisfied, in each case in compliance with applicable provisions of the indentures.

The following tables present the condensed consolidating financial information as of June 30, 2019 and December 31, 2018, and for the three and six months ended June 30, 2019 and 2018, for the Parent, HWF Issuers, HOC, Guarantors and Non-Guarantors. The condensed consolidating financial information presents the financial information for all periods based on the composition of the Guarantors and Non-Guarantors as of June 30, 2019.

20



 June 30, 2019
Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
ASSETS             
Current Assets:             
Cash and cash equivalents$
 $
 $3
 $23
 $609
 $
 $635
Restricted cash and cash equivalents
 
 34
 16
 33
 
 83
Accounts receivable, net
 
 14
 852
 324
 
 1,190
Intercompany receivables
 
 
 
 40
 (40) 
Prepaid expenses
 
 16
 48
 55
 (2) 117
Other
 1
 1
 48
 147
 (7) 190
Total current assets
 1
 68
 987
 1,208
 (49) 2,215
Intangibles and Other Assets:             
Investments in subsidiaries2
 4,113
 7,850
 2
 
 (11,967) 
Goodwill
 
 
 3,824
 1,333
 
 5,157
Brands
 
 
 4,405
 469
 
 4,874
Management and franchise contracts, net
 
 1
 502
 314
 
 817
Other intangible assets, net
 
 
 279
 121
 
 400
Operating lease right-of-use assets
 
 36
 10
 845
 
 891
Property and equipment, net
 
 61
 67
 290
 
 418
Deferred income tax assets4
 7
 86
 
 146
 (97) 146
Other
 12
 31
 17
 162
 
 222
Total intangibles and other assets6
 4,132
 8,065
 9,106
 3,680
 (12,064) 12,925
TOTAL ASSETS$6
 $4,133
 $8,133
 $10,093
 $4,888
 $(12,113) $15,140
LIABILITIES AND EQUITY (DEFICIT)             
Current Liabilities:             
Accounts payable, accrued expenses and other$36
 $20
 $201
 $664
 $743
 $(7) $1,657
Current maturities of long-term debt
 
 20
 
 17
 
 37
Current portion of deferred revenues
 
 47
 241
 12
 (2) 298
Intercompany payables
 
 40
 
 
 (40) 
Current portion of liability for guest loyalty program
 
 
 788
 
 
 788
Total current liabilities36
 20
 308
 1,693
 772
 (49) 2,780
Long-term debt
 4,076
 3,473
 
 223
 
 7,772
Operating lease liabilities
 
 43
 8
 1,015
 
 1,066
Deferred revenues
 
 
 754
 68
 
 822
Deferred income tax liabilities
 
 
 958
 
 (97) 861
Liability for guest loyalty program
 
 
 986
 
 
 986
Other
 35
 196
 94
 551
 
 876
Total liabilities36
 4,131
 4,020
 4,493
 2,629
 (146) 15,163
Equity (Deficit):             
Total Hilton stockholders' equity (deficit)(30) 2
 4,113
 5,600
 2,252
 (11,967) (30)
Noncontrolling interests
 
 
 
 7
 
 7
Total equity (deficit)(30) 2
 4,113
 5,600
 2,259
 (11,967) (23)
TOTAL LIABILITIES AND EQUITY (DEFICIT)$6
 $4,133
 $8,133
 $10,093
 $4,888
 $(12,113) $15,140



21



 December 31, 2018
Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
ASSETS             
Current Assets:             
Cash and cash equivalents$
 $
 $3
 $17
 $383
 $
 $403
Restricted cash and cash equivalents
 
 34
 15
 32
 
 81
Accounts receivable, net
 
 10
 735
 405
 
 1,150
Intercompany receivables
 
 
 
 40
 (40) 
Prepaid expenses
 
 52
 37
 80
 (9) 160
Other
 1
 1
 36
 154
 (3) 189
Total current assets
 1
 100
 840
 1,094
 (52) 1,983
Intangibles and Other Assets:             
Investments in subsidiaries557
 5,131
 7,930
 557
 
 (14,175) 
Goodwill
 
 
 3,824
 1,336
 
 5,160
Brands
 
 
 4,404
 465
 
 4,869
Management and franchise contracts, net
 
 
 556
 316
 
 872
Other intangible assets, net
 
 
 287
 128
 
 415
Property and equipment, net
 
 27
 65
 275
 
 367
Deferred income tax assets4
 
 94
 
 90
 (98) 90
Other
 23
 33
 22
 161
 
 239
Total intangibles and other assets561
 5,154
 8,084
 9,715
 2,771
 (14,273) 12,012
TOTAL ASSETS$561
 $5,155
 $8,184
 $10,555
 $3,865
 $(14,325) $13,995
LIABILITIES AND EQUITY             
Current Liabilities:             
Accounts payable, accrued expenses and other$10
 $19
 $229
 $529
 $765
 $(3) $1,549
Current maturities of long-term debt
 
 
 
 16
 
 16
Current portion of deferred revenues
 
 106
 239
 14
 (9) 350
Intercompany payables
 
 40
 
 
 (40) 
Current portion of liability for guest loyalty program
 
 
 700
 
 
 700
Total current liabilities10
 19
 375
 1,468
 795
 (52) 2,615
Long-term debt
 4,573
 2,467
 
 226
 
 7,266
Deferred revenues
 
 
 762
 64
 
 826
Deferred income tax liabilities
 6
 
 962
 28
 (98) 898
Liability for guest loyalty program
 
 
 969
 
 
 969
Other
 
 211
 93
 559
 
 863
Total liabilities10
 4,598
 3,053
 4,254
 1,672
 (150) 13,437
Equity:             
Total Hilton stockholders' equity551
 557
 5,131
 6,301
 2,186
 (14,175) 551
Noncontrolling interests
 
 
 
 7
 
 7
Total equity551
 557
 5,131
 6,301
 2,193
 (14,175) 558
TOTAL LIABILITIES AND EQUITY$561
 $5,155
 $8,184
 $10,555
 $3,865
 $(14,325) $13,995



22



 Three Months Ended June 30, 2019
 Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
Revenues             
Franchise and licensing fees$
 $
 $69
 $338
 $41
 $(4) $444
Base and other management fees
 
 
 57
 32
 
 89
Incentive management fees
 
 
 21
 37
 
 58
Owned and leased hotels
 
 
 
 387
 
 387
Other revenues
 
 1
 20
 5
 
 26
 
 
 70
 436
 502
 (4) 1,004
Other revenues from managed and franchised properties
 
 81
 1,247
 152
 
 1,480
Total revenues
 
 151
 1,683
 654
 (4) 2,484
              
Expenses             
Owned and leased hotels
 
 
 
 334
 
 334
Depreciation and amortization
 
 1
 63
 22
 
 86
General and administrative
 
 89
 
 31
 (7) 113
Other expenses
 
 3
 2
 7
 3
 15
 
 
 93
 65
 394
 (4) 548
Other expenses from managed and franchised properties
 
 87
 1,224
 147
 
 1,458
Total expenses
 
 180
 1,289
 541
 (4) 2,006
              
Operating income (loss)
 
 (29) 394
 113
 
 478
              
Interest expense
 (52) (33) 
 (16) 
 (101)
Gain (loss) on foreign currency transactions
 
 (1) (9) 7
 
 (3)
Other non-operating income (loss), net
 (9) 
 (5) 2
 
 (12)
              
Income (loss) before income taxes and equity in earnings from subsidiaries
 (61) (63) 380
 106
 
 362
              
Income tax benefit (expense)
 15
 14
 (94) (36) 
 (101)
              
Income (loss) before equity in earnings from subsidiaries
 (46) (49) 286
 70
 
 261
              
Equity in earnings from subsidiaries260
 306
 355
 260
 
 (1,181) 
              
Net income260
 260
 306
 546
 70
 (1,181) 261
Net income attributable to noncontrolling interests
 
 
 
 (1) 
 (1)
Net income attributable to Hilton stockholders$260
 $260
 $306
 $546
 $69
 $(1,181) $260
              
Comprehensive income$252
 $235
 $308
 $546
 $85
 $(1,173) $253
Comprehensive income attributable to noncontrolling interests
 
 
 
 (1) 
 (1)
Comprehensive income attributable to Hilton stockholders$252
 $235
 $308
 $546
 $84
 $(1,173) $252

23



 Three Months Ended June 30, 2018
 Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
Revenues             
Franchise and licensing fees$
 $
 $50
 $322
 $36
 $(4) $404
Base and other management fees
 
 1
 55
 28
 
 84
Incentive management fees
 
 
 22
 37
 
 59
Owned and leased hotels
 
 
 
 392
 
 392
Other revenues
 
 1
 17
 3
 1
 22
 
 
 52
 416
 496
 (3) 961
Other revenues from managed and franchised properties
 
 62
 1,110
 158
 
 1,330
Total revenues
 
 114
 1,526
 654
 (3) 2,291
              
Expenses             
Owned and leased hotels
 
 
 
 352
 
 352
Depreciation and amortization
 
 2
 58
 19
 
 79
General and administrative
 
 83
 
 32
 
 115
Other expenses
 
 2
 8
 6
 (4) 12
 
 
 87
 66
 409
 (4) 558
Other expenses from managed and franchised properties
 
 62
 1,114
 151
 
 1,327
Total expenses
 
 149
 1,180
 560
 (4) 1,885
              
Operating income (loss)
 
 (35) 346
 94
 1
 406
              
Interest expense
 (57) (31) 
 (9) 2
 (95)
Gain (loss) on foreign currency transactions
 
 6
 (89) 71
 
 (12)
Other non-operating income (loss), net
 (7) 1
 4
 4
 (3) (1)
              
Income (loss) before income taxes and equity in earnings from subsidiaries
 (64) (59) 261
 160
 
 298
              
Income tax benefit (expense)
 16
 14
 (61) (50) 
 (81)
              
Income (loss) before equity in earnings from subsidiaries
 (48) (45) 200
 110
 
 217
              
Equity in earnings from subsidiaries217
 265
 310
 217
 
 (1,009) 
              
Net income217
 217
 265
 417
 110
 (1,009) 217
Net income attributable to noncontrolling interests
 
 
 
 
 
 
Net income attributable to Hilton stockholders$217
 $217
 $265
 $417
 $110
 $(1,009) $217
              
Comprehensive income$155
 $227
 $266
 $416
 $38
 $(947) $155
Comprehensive income attributable to noncontrolling interests
 
 
 
 
 
 
Comprehensive income attributable to Hilton stockholders$155
 $227
 $266
 $416
 $38
 $(947) $155


24



 Six Months Ended June 30, 2019
 Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
Revenues             
Franchise and licensing fees$
 $
 $130
 $632
 $73
 $(9) $826
Base and other management fees
 
 
 109
 60
 
 169
Incentive management fees
 
 
 44
 69
 
 113
Owned and leased hotels
 
 
 
 699
 
 699
Other revenues
 
 1
 43
 8
 
 52
 
 
 131
 828
 909
 (9) 1,859
Other revenues from managed and franchised properties
 
 156
 2,386
 287
 
 2,829
Total revenues
 
 287
 3,214
 1,196
 (9) 4,688
              
Expenses             
Owned and leased hotels
 
 
 
 632
 
 632
Depreciation and amortization
 
 3
 125
 42
 
 170
General and administrative
 
 171
 
 62
 (13) 220
Other expenses
 
 4
 10
 17
 4
 35
 
 
 178
 135
 753
 (9) 1,057
Other expenses from managed and franchised properties
 
 159
 2,402
 280
 
 2,841
Total expenses
 
 337
 2,537
 1,033
 (9) 3,898
              
Operating income (loss)
 
 (50) 677
 163
 
 790
              
Interest expense
 (103) (68) 
 (28) 
 (199)
Gain (loss) on foreign currency transactions
 
 1
 (27) 23
 
 (3)
Other non-operating income (loss), net
 (9) 
 (5) 6
 
 (8)
              
Income (loss) before income taxes and equity in earnings from subsidiaries
 (112) (117) 645
 164
 
 580
              
Income tax benefit (expense)
 27
 27
 (159) (55) 
 (160)
              
Income (loss) before equity in earnings from subsidiaries
 (85) (90) 486
 109
 
 420
              
Equity in earnings from subsidiaries418
 503
 593
 418
 
 (1,932) 
              
Net income418
 418
 503
 904
 109
 (1,932) 420
Net income attributable to noncontrolling interests
 
 
 
 (2) 
 (2)
Net income attributable to Hilton stockholders$418
 $418
 $503
 $904
 $107
 $(1,932) $418
              
Comprehensive income$394
 $378
 $506
 $904
 $122
 $(1,908) $396
Comprehensive income attributable to noncontrolling interests
 
 
 
 (2) 
 (2)
Comprehensive income attributable to Hilton stockholders$394
 $378
 $506
 $904
 $120
 $(1,908) $394


25



 Six Months Ended June 30, 2018
 Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
Revenues             
Franchise and licensing fees$
 $
 $94
 $584
 $65
 $(8) $735
Base and other management fees
 
 1
 106
 54
 
 161
Incentive management fees
 
 
 43
 71
 
 114
Owned and leased hotels
 
 
 
 726
 
 726
Other revenues
 
 3
 41
 5
 (4) 45
 
 
 98
 774
 921
 (12) 1,781
Other revenues from managed and franchised properties
 
 106
 2,180
 298
 
 2,584
Total revenues
 
 204
 2,954
 1,219
 (12) 4,365
              
Expenses             
Owned and leased hotels
 
 
 
 672
 
 672
Depreciation and amortization
 
 3
 118
 40
 
 161
General and administrative
 
 156
 
 67
 (4) 219
Other expenses
 
 4
 15
 15
 (8) 26
 
 
 163
 133
 794
 (12) 1,078
Other expenses from managed and franchised properties
 
 108
 2,198
 296
 
 2,602
Total expenses
 
 271
 2,331
 1,090
 (12) 3,680
              
Operating income (loss)
 
 (67) 623
 129
 
 685
              
Interest expense
 (118) (44) 
 (19) 3
 (178)
Gain (loss) on foreign currency transactions
 
 3
 (81) 77
 
 (1)
Other non-operating income (loss), net
 (7) 4
 12
 7
 (3) 13
              
Income (loss) before income taxes and equity in earnings from subsidiaries
 (125) (104) 554
 194
 
 519
              
Income tax benefit (expense)
 31
 27
 (134) (63) 
 (139)
              
Income (loss) before equity in earnings from subsidiaries
 (94) (77) 420
 131
 
 380
              
Equity in earnings from subsidiaries378
 472
 549
 378
 
 (1,777) 
              
Net income378
 378
 472
 798
 131
 (1,777) 380
Net income attributable to noncontrolling interests
 
 
 
 (2) 
 (2)
Net income attributable to Hilton stockholders$378
 $378
 $472
 $798
 $129
 $(1,777) $378
              
Comprehensive income$377
 $417
 $473
 $798
 $90
 $(1,776) $379
Comprehensive income attributable to noncontrolling interests
 
 
 
 (2) 
 (2)
Comprehensive income attributable to Hilton stockholders$377
 $417
 $473
 $798
 $88
 $(1,776) $377



26



 Six Months Ended June 30, 2019
 Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
Operating Activities:             
Net cash provided by (used in) operating activities$
 $(85) $
 $675
 $75
 $(15) $650
Investing Activities:             
Capital expenditures for property and equipment
 
 (5) (3) (38) 
 (46)
Capitalized software costs
 
 
 (44) 
 
 (44)
Other
 
 
 1
 (6) 
 (5)
Net cash used in investing activities
 
 (5) (46) (44) 
 (95)
Financing Activities:             
Borrowings
 795
 1,000
 
 
 
 1,795
Repayment of debt
 (1,295) (14) 
 (8) 
 (1,317)
Debt issuance costs
 (13) (14) 
 
 
 (27)
Intercompany transfers740
 598
 (933) (622) 217
 
 
Dividends paid(87) 
 
 
 
 
 (87)
Repurchases of common stock(653) 
 
 
 
 
 (653)
Intercompany dividends
 
 
 
 (15) 15
 
Share-based compensation tax withholdings and other
 
 (34) 
 
 
 (34)
Net cash provided by (used in) financing activities
 85
 5
 (622) 194
 15
 (323)
Effect of exchange rate changes on cash, restricted cash and cash equivalents
 
 
 
 2
 
 2
Net increase in cash, restricted cash and cash equivalents
 
 
 7
 227
 
 234
Cash, restricted cash and cash equivalents, beginning of period
 
 37
 32
 415
 
 484
Cash, restricted cash and cash equivalents, end of period$
 $
 $37
 $39
 $642
 $
 $718


 Six Months Ended June 30, 2018
 Parent HWF Issuers HOC Guarantors Non-Guarantors Eliminations Total
 (in millions)
Operating Activities:             
Net cash provided by (used in) operating activities$
 $(102) $(8) $494
 $148
 $
 $532
Investing Activities:             
Capital expenditures for property and equipment
 
 (4) (1) (23) 
 (28)
Capitalized software costs
 
 
 (38) 
 
 (38)
Other
 
 
 (3) (6) 
 (9)
Net cash used in investing activities
 
 (4) (42) (29) 
 (75)
Financing Activities:             
Borrowings
 150
 1,500
 
 
 
 1,650
Repayment of debt
 (660) 
 
 (12) 
 (672)
Debt issuance costs
 
 (21) 
 
 
 (21)
Intercompany transfers1,531
 612
 (1,451) (450) (242) 
 
Dividends paid(92) 
 
 
 
 
 (92)
Repurchases of common stock(1,439) 
 
 
 
 
 (1,439)
Share-based compensation tax withholdings and other
 
 (42) 
 
 
 (42)
Net cash provided by (used in) financing activities
 102
 (14) (450) (254) 
 (616)
Effect of exchange rate changes on cash, restricted cash and cash equivalents
 
 
 
 (6) 
 (6)
Net increase (decrease) in cash, restricted cash and cash equivalents
 
 (26) 2
 (141) 
 (165)
Cash, restricted cash and cash equivalents, beginning of period
 
 63
 28
 579
 
 670
Cash, restricted cash and cash equivalents, end of period$
 $
 $37
 $30
 $438
 $
 $505



27



Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include, but are not limited to, statements related to our expectations regarding the performance of our business, our financial results, our liquidity and capital resources and other non-historical statements. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties including, among others, risks inherent to the hospitality industry, macroeconomic factors beyond our control, competition for hotel guests and management and franchise contracts, risks related to doing business with third-party hotel owners, performance of our information technology systems, growth of reservation channels outside of our system, risks of doing business outside of the U.S. and our indebtedness. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include but are not limited to those described under "Part I—Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included elsewhere in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.

Overview

Our Business

Hilton is one of the largest and fastest growing hospitality companies in the world, with 5,872 properties comprising 939,297 rooms in 114 countries and territories as of June 30, 2019. Our premier brand portfolio includes: our luxury and lifestyle hotel brands, Waldorf Astoria Hotels & Resorts, LXR Hotels & Resorts, Conrad Hotels & Resorts and Canopy by Hilton; our full service hotel brands, Signia Hilton, Hilton Hotels & Resorts, Curio Collection by Hilton, DoubleTree by Hilton, Tapestry Collection by Hilton and Embassy Suites by Hilton; our focused service hotel brands, Motto by Hilton, Hilton Garden Inn, Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; and our timeshare brand, Hilton Grand Vacations. As of June 30, 2019, we had more than 94 million members in our award-winning guest loyalty program, Hilton Honors, a 21 percent increase from June 30, 2018.

Segments and Regions

Management analyzes our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products or services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel management and licensing of our brands. This segment generates its revenue from: (i) management and franchise fees charged to third-party hotel owners; (ii) licensing fees for the exclusive right to use certain Hilton marks and IP; and (iii) fees for managing our owned and leased hotels. As a manager of hotels, we typically are responsible for supervising or operating the property in exchange for management fees. As a franchisor of hotels, we charge franchise fees in exchange for the use of one of our brand names and related commercial services, such as our reservation system, marketing and information technology services. The ownership segment primarily derives earnings from providing hotel room sales, food and beverage sales and other services at our owned and leased hotels.

Geographically, management conducts business through three distinct geographic regions: (i) the Americas; (ii) Europe, Middle East and Africa ("EMEA"); and (iii) Asia Pacific. The Americas region includes North America, South America and Central America, including all Caribbean nations. Although the U.S. is included in the Americas, it represented 73 percent of our system-wide hotel rooms as of June 30, 2019; therefore, the U.S. is often analyzed separately and apart from the Americas geographic region and, as such, it is presented separately within the analysis herein. The EMEA region includes Europe, which represents the western-most peninsula of Eurasia stretching from Iceland in the west to Russia in the east, and the Middle East and Africa ("MEA"), which represents the Middle East region and all African nations, including the Indian Ocean island nations. Europe and MEA are often analyzed separately and, as such, are presented separately within the analysis herein. The

28



Asia Pacific region includes the eastern and southeastern nations of Asia, as well as India, Australia, New Zealand and the Pacific Island nations.

System Growth and Development Pipeline

Our strategic objectives include the continued expansion of our global footprint and fee-based business. As we enter into new management and franchise contracts, we expand our business with minimal or no capital investment by us as the manager or franchisor, since the capital required to build and maintain hotels is typically provided by the third-party owner of the hotel with whom we contract to provide management services or license our brand names. Prior to approving the addition of new properties to our management and franchise development pipeline, we evaluate the economic viability of the property based on its geographic location, the credit quality of the third-party owner and other factors. By increasing the number of management and franchise contracts with third-party owners, we expect to increase overall return on invested capital and cash available for return to stockholders.

As of June 30, 2019, we had nearly 2,490 hotels in our development pipeline that we expect to add as open hotels in our system, representing approximately 373,000 rooms under construction or approved for development throughout 109 countries and territories, including 37 countries and territories where we do not currently have any open hotels. All of the rooms in the development pipeline are within our management and franchise segment. Additionally, 201,000 rooms in the development pipeline were located outside the U.S., and 192,000 rooms, or more than half, were under construction. We do not consider any individual development project to be material to us.

Brexit

In June 2016, the United Kingdom ("U.K.") held a referendum in which voters approved an exit from the European Union ("E.U.") (commonly referred to as "Brexit"), currently with a deadline of October 31, 2019. The effects of Brexit will depend on the final terms on which the U.K. will leave the E.U., including the terms of any trade agreements that will dictate the U.K.’s access to E.U. markets either during any transitional period or more permanently. While our results for the six months ended June 30, 2019 were not materially affected by Brexit, the final outcomes are not yet certain. Brexit measures could potentially disrupt the markets we serve and cause tax and foreign currency volatility, which could have adverse effects on our business. We will continue to monitor the potential impact of Brexit on our business as the deadline approaches later this year.

Key Business and Financial Metrics Used by Management

Comparable Hotels

We define our comparable hotels as those that: (i) were active and operating in our system for at least one full calendar year as of the end of the current period, and open January 1st of the previous year; (ii) have not undergone a change in brand or ownership type during the current or comparable periods reported; and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results are not available. Of the 5,817 hotels in our system as of June 30, 2019, 4,692 hotels have been classified as comparable hotels. Our 1,125 non-comparable hotels included 234 hotels, or approximately four percent of the total hotels in our system, that were removed from the comparable group during the last twelve months because they sustained substantial property damage, business interruption, underwent large-scale capital projects or comparable results were not available.

Occupancy

Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period. Occupancy measures the utilization of our hotels' available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable average daily rate pricing levels as demand for hotel rooms increases or decreases.

Average Daily Rate ("ADR")

ADR represents hotel room revenue divided by the total number of room nights sold for a given period. ADR measures average room price attained by a hotel, and ADR trends provide useful information concerning the pricing environment and the nature of the customer base of a hotel or group of hotels. ADR is a commonly used performance measure in the industry, and we use ADR to assess pricing levels that we are able to generate by type of customer, as changes in rates charged to customers have a different effect on overall revenues and incremental profitability than changes in occupancy, as described above.


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Revenue per Available Room ("RevPAR")

RevPAR is calculated by dividing hotel room revenue by the total number of room nights available to guests for a given period. We consider RevPAR to be a meaningful indicator of our performance as it provides a metric correlated to two primary and key drivers of operations at a hotel or group of hotels, as previously described: occupancy and ADR. RevPAR is also a useful indicator in measuring performance over comparable periods for comparable hotels.

References to RevPAR, ADR and occupancy are presented on a comparable basis, and references to RevPAR and ADR are presented on a currency neutral basis, unless otherwise noted. As such, comparisons of these hotel operating statistics for the three and six months ended June 30, 2019 and 2018 use the exchange rates for the three and six months ended June 30, 2019, respectively.

EBITDA and Adjusted EBITDA

EBITDA reflects net income (loss), excluding interest expense, a provision for income taxes and depreciation and amortization.

Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted to exclude certain items, including gains, losses, revenues and expenses in connection with: (i) asset dispositions for both consolidated and unconsolidated equity investments; (ii) foreign currency transactions; (iii) debt restructurings and retirements; (iv) furniture, fixtures and equipment ("FF&E") replacement reserves required under certain lease agreements; (v) reorganization costs; (vi) share-based compensation expense; (vii) non-cash impairment losses; (viii) severance, relocation and other expenses; (ix) amortization of contract acquisition costs; (x) the net effect of reimbursable costs included in other revenues and expenses from managed and franchised properties; and (xi) other items.

We believe that EBITDA and Adjusted EBITDA provide useful information to investors about us and our financial condition and results of operations for the following reasons: (i) these measures are among the measures used by our management team to evaluate our operating performance and make day-to-day operating decisions and (ii) these measures are frequently used by securities analysts, investors and other interested parties as a common performance measure to compare results or estimate valuations across companies in our industry. Additionally, these measures exclude certain items that can vary widely across different industries and among competitors within our industry. For instance, interest expense and the provision for income taxes are dependent on company specifics, including, among other things, capital structure and operating jurisdictions, respectively, and, therefore could vary significantly across companies. Depreciation and amortization, as well as amortization of contract acquisition costs, are dependent upon company policies, including the method of acquiring and depreciating assets and the useful lives that are used. For Adjusted EBITDA, we also exclude items such as: (i) FF&E replacement reserves to be consistent with the treatment of FF&E for owned and leased hotels where it is capitalized and depreciated over the life of the FF&E; (ii) share-based compensation expense, as this could vary widely among companies due to the different plans in place and the usage of them; (iii) the net effect of our cost reimbursement revenues and reimbursed expenses, as we contractually do not operate the related programs to generate a profit over the terms of the respective contracts; and (iv) other items that are not core to our operations and are not reflective of our performance.

EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be considered as alternatives to net income (loss) or other measures of financial performance or liquidity derived in accordance with GAAP. EBITDA and Adjusted EBITDA have limitations as analytical tools and should not be considered as alternatives, either in isolation or as a substitute, for net income (loss), cash flow or other methods of analyzing our results as reported under GAAP. Some of these limitations are:

EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;

EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;

EBITDA and Adjusted EBITDA do not reflect a provision for income taxes or the cash requirements to pay our taxes;

EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;

EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;

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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and

other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.

Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations.

Results of Operations
The hotel operating statistics by region for our system-wide comparable hotels were as follows:
 Three Months Ended Variance Six Months Ended Variance
 June 30, 2019 2019 vs. 2018 June 30, 2019 2019 vs. 2018
U.S.         
Occupancy80.7% 0.2 %pts. 76.6% 0.4 %pts.
ADR$152.75
 0.7 %  $150.35
 0.9 % 
RevPAR$123.32
 1.0 %  $115.09
 1.4 % 
          
Americas (excluding U.S.)         
Occupancy72.2% 1.0 %pts. 69.4% 1.0 %pts.
ADR$123.37
 1.9 %  $124.84
 2.6 % 
RevPAR$89.09
 3.3 %  $86.59
 4.1 % 
          
Europe         
Occupancy80.6% 2.0 %pts. 74.8% 0.9 %pts.
ADR$147.36
 2.4 %  $138.55
 2.9 % 
RevPAR$118.77
 5.0 %  $103.64
 4.2 % 
          
MEA         
Occupancy70.8% 2.5 %pts. 73.0% 2.6 %pts.
ADR$153.48
 (3.3)%  $147.03
 (6.3)% 
RevPAR$108.62
 0.2 %  $107.32
 (2.8)% 
          
Asia Pacific         
Occupancy72.0% 0.9 %pts. 70.5% 1.3 %pts.
ADR$123.25
 0.7 %  $126.03
 (0.4)% 
RevPAR$88.76
 2.0 %  $88.88
 1.6 % 
          
System-wide         
Occupancy79.4% 0.5 %pts. 75.5% 0.6 %pts.
ADR$148.93
 0.7 %  $146.33
 0.9 % 
RevPAR$118.27
 1.4 %  $110.48
 1.6 % 

During the three and six months ended June 30, 2019, we experienced system-wide RevPAR growth, largely driven by improved ADR, led by strong growth trends in Europe and the Americas (excluding U.S.). Continued strength in Europe resulted primarily from ADR growth in southern Europe, particularly in Italy and Turkey, as well as RevPAR growth in Germany driven by increased ADR and occupancy. In the Americas (excluding U.S.), RevPAR growth was attributable to increased demand in the Caribbean and Latin America, as well as RevPAR growth in Colombia and Brazil driven by increases in both ADR and occupancy. RevPAR growth in the U.S. was driven by improved ADR, primarily due to transient demand, particularly at our luxury properties. Growth in Asia Pacific was primarily attributable to RevPAR growth in Japan due to increased demand, partially offset by relatively flat results in China due to a decline in domestic travel. For the three months ended June 30, 2019, RevPAR remained constant in the MEA region as occupancy increases in Saudi Arabia and Egypt helped offset transient declines in the United Arab Emirates, while RevPAR decreases in the United Arab Emirates overshadowed demand growth in Egypt for the six months ended June 30, 2019.



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The table below provides a reconciliation of net income to EBITDA and Adjusted EBITDA:
 Three Months Ended Six Months Ended
 June 30, June 30,
 2019 2018 2019 2018
 (in millions)
Net income$261
 $217
 $420
 $380
Interest expense101
 95
 199
 178
Income tax expense101
 81
 160
 139
Depreciation and amortization86
 79
 170
 161
EBITDA549
 472
 949
 858
Loss on foreign currency transactions3
 12
 3
 1
FF&E replacement reserves15
 15
 29
 27
Share-based compensation expense47
 40
 81
 68
Amortization of contract acquisition costs7
 7
 14
 14
Net other expenses (revenues) from managed and franchised properties(22) (3) 12
 18
Other adjustment items(1)
19
 12
 29
 14
Adjusted EBITDA$618
 $555
 $1,117
 $1,000
____________
(1) 
Includes adjustments for expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities, severance and other items.

Revenues
 Three Months Ended Percent Six Months Ended Percent
 June 30, Change June 30, Change
 2019 2018 2019 vs. 2018 2019 2018 2019 vs. 2018
 (in millions)   (in millions)  
Franchise and licensing fees$444
 $404
 9.9 $826
 $735
 12.4
            
Base and other management fees$89
 $84
 6.0 $169
 $161
 5.0
Incentive management fees58
 59
 (1.7) 113
 114
 (0.9)
Total management fees$147
 $143
 2.8 $282
 $275
 2.5

Franchise and licensing fees increased during the three and six months ended June 30, 2019 as a result of increases in RevPAR at our comparable franchised hotels of 1.2 percent and 1.5 percent, respectively, driven by increases in both occupancy and ADR, which were partially offset by unfavorable foreign currency exchange rates. Additionally, licensing and other fees increased $16 million and $49 million during the three and six months ended June 30, 2019, respectively, which, for the six months ended June 30, 2019, included an increase in termination fees of $13 million, primarily related to the redevelopment of a franchised hotel.

Management fees increased during the three and six months ended June 30, 2019, primarily as a result of increases in RevPAR at our comparable managed hotels of 1.7 percent and 1.6 percent, respectively, mainly driven by increases in occupancy, which were offset by unfavorable foreign currency exchange rates.

Including new development and ownership type transfers, from January 1, 2018 to June 30, 2019, we added 587 managed and franchised properties on a net basis, providing an additional 83,645 rooms to our management and franchise segment. As new hotels stabilize in our system, we expect the fees received from such hotels to increase as they are part of our system for full periods.


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 Three Months Ended Percent Six Months Ended Percent
 June 30, Change June 30, Change
 2019 2018 2019 vs. 2018 2019
2018 2019 vs. 2018
 (in millions)   (in millions)  
Owned and leased hotels$387
 $392
 (1.3) $699
 $726
 (3.7)

Owned and leased hotel revenues decreased during the three and six months ended June 30, 2019 primarily as a result of unfavorable fluctuations in foreign currency exchange rates, which decreased revenues by $20 million and $42 million, respectively.

On a currency neutral basis, revenues at our comparable owned and leased hotels increased $14 million and $16 million during the three and six months ended June 30, 2019, respectively, due to increases in RevPAR of 5.9 percent and 4.2 percent, respectively, driven by increases in ADR of 5.3 percent and 4.4 percent, respectively, while occupancy broadly remained flat. Revenues at our non-comparable owned and leased hotels remained relatively flat for the three and six months ended June 30, 2019, primarily due to hotels that were under renovation in 2018, offset by hotel lease terminations that occurred during the six months ended June 30, 2019.

 Three Months Ended Percent Six Months Ended Percent
 June 30, Change June 30, Change
 2019 2018 2019 vs. 2018 2019 2018 2019 vs. 2018
 (in millions)   (in millions)  
Other revenues$26
 $22
 18.2 $52
 $45
 15.6

Other revenues increased during the three and six months ended June 30, 2019 primarily as a result of increases in revenues from our purchasing operations.

Operating Expenses
 Three Months Ended Percent Six Months Ended Percent
 June 30, Change June 30, Change
 2019 2018 2019 vs. 2018 2019 2018 2019 vs. 2018
 (in millions)   (in millions)  
Owned and leased hotels$334
 $352
 (5.1) $632
 $672
 (6.0)

Owned and leased hotel expenses decreased during the three and six months ended June 30, 2019 primarily as a result of fluctuations in foreign currency exchange rates, which decreased expenses by $19 million and $41 million, respectively.

On a currency neutral basis, owned and leased hotel expenses remained flat for the three and six months ended June 30, 2019, primarily due to occupancy remaining flat at our comparable hotels and, at our non-comparable hotels, decreases in expenses resulting from lease terminations that occurred during the six months ended June 30, 2019, offset by increases in expenses from hotels that were under renovation in 2018.

 Three Months Ended Percent Six Months Ended Percent
 June 30, Change June 30, Change
 2019 2018 2019 vs. 2018 2019 2018 2019 vs. 2018
 (in millions)   (in millions)  
Depreciation and amortization$86
 $79
 8.9 $170
 $161
 5.6
General and administrative113
 115
 (1.7) 220
 219
 0.5
Other expenses15
 12
 25.0 35
 26
 34.6

The increases in depreciation and amortization expense during the three and six months ended June 30, 2019 were primarily the result of additions to capitalized software that were placed into service from January 1, 2018 to June 30, 2019.

General and administrative expenses remained flat during the three and six months ended June 30, 2019 primarily as a result of increases in share-based compensation costs driven by Company performance being offset by other general corporate expenses.


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Other expenses increased during the six months ended June 30, 2019 primarily as a result of increases in expenses from our purchasing operations.

Non-operating Income and Expenses
 Three Months Ended Percent Six Months Ended Percent
 June 30, Change June 30, Change
 2019 2018 2019 vs. 2018 2019 2018 2019 vs. 2018
 (in millions)   (in millions)  
Interest expense$(101) $(95) 6.3 $(199) $(178) 11.8
Loss on foreign currency transactions(3) (12) (75.0) (3) (1) 
NM(1)
Other non-operating income (loss), net(12) (1) 
NM(1)
 (8) 13
 
NM(1)
Income tax expense(101) (81) 24.7 (160) (139) 15.1
___________
(1) 
Fluctuation in terms of percentage change is not meaningful.

The increases in interest expense during the three and six months ended June 30, 2019 were primarily due to the issuance of the 2026 Senior Notes in April 2018 and draws on the Revolving Credit Facility during 2019, partially offset by decreases in interest expense due to principal repayments on our Term Loans totaling $800 million during 2018 and a reduction in the interest rate on our Term Loans in 2018. The increases in interest expense were further reduced by net gains reclassified from accumulated other comprehensive loss resulting from settlements of interest rate swaps in 2018 and 2017.

The net losses on foreign currency transactions primarily related to changes in foreign currency exchange rates on our short-term cross-currency intercompany loans. For the three and six months ended June 30, 2019, the changes were predominantly for loans denominated in EUR and the Australian dollar ("AUD"). For the three and six months ended June 30, 2018, the changes were predominantly for loans denominated in the British pound ("GBP") and EUR, and, for the six months ended June 30, 2018, also AUD.

The increases in other non-operating loss, net for the three and six months ended June 30, 2019 were primarily due to a loss on the disposal of an unconsolidated real estate investment in 2019 and expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities. Additionally, for the six months ended June 30, 2019, we recognized a gain on the 2018 refinancing of a loan we issued to finance the construction of a hotel that we manage.

The increases in income tax expense during the three and six months ended June 30, 2019 were primarily attributable to increases in income before income taxes during the periods.


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Segment Results

We evaluate our business segment operating performance using operating income. Refer to Note 13: "Business Segments" in our unaudited condensed consolidated financial statements for a reconciliation of segment operating income to income before income taxes and additional information on the evaluation of the performance of our segments using operating income. The following table sets forth revenues and operating income by segment:
 Three Months Ended Percent Six Months Ended Percent
 June 30, Change June 30, Change
 2019 2018 2019 vs. 2018 2019 2018 2019 vs. 2018
 (in millions)   (in millions)  
Revenues:           
Management and franchise(1)
$609
 $565
 7.8 $1,141
 $1,043
 9.4
Ownership387
 392
 (1.3) 699
 726
 (3.7)
Segment revenues996
 957
 4.1 1,840
 1,769
 4.0
Amortization of contract acquisition costs(7) (7)  (14) (14) 
Other revenues26
 22
 18.2 52
 45
 15.6
Other revenues from managed and franchised properties1,480
 1,330
 11.3 2,829
 2,584
 9.5
Intersegment fees elimination(1)
(11) (11)  (19) (19) 
Total revenues$2,484
 $2,291
 8.4 $4,688
 $4,365
 7.4
            
Operating Income(1):
           
Management and franchise$609
 $565
 7.8 $1,141
 $1,043
 9.4
Ownership42
 29
 44.8 48
 35
 37.1
Segment operating income$651
 $594
 9.6 $1,189
 $1,078
 10.3
____________
(1) 
Includes management, royalty and IP fees charged to our ownership segment by our management and franchise segment, which were eliminated in our unaudited condensed consolidated statements of operations.

Management and franchise segment revenues and operating income increased $44 million and $98 million during the three and six months ended June 30, 2019, respectively, as a result of increases in RevPAR at our comparable managed and franchised hotels of 1.3 percent and 1.6 percent, respectively, increases in licensing and other fees and the net addition of managed and franchised properties to our system. Refer to "—Revenues" for further discussion of the increases in revenues from our managed and franchised properties.

Ownership segment revenues decreased $5 million and $27 million during the three and six months ended June 30, 2019, respectively, primarily as a result of fluctuations in foreign currency exchange rates. Ownership operating income increased $13 million during both the three and six months ended June 30, 2019, as a result of decreases in owned and leased hotel expenses, which was primarily a result of fluctuations in foreign currency exchange rates, only partially offset by the decreases in segment revenues due to foreign currency exchange rates. Refer to "—Revenues" and "—Operating Expenses" for further discussion of the changes in revenues and operating expenses at our owned and leased hotels.
 
Liquidity and Capital Resources

Overview

As of June 30, 2019, we had total cash and cash equivalents of $718 million, including $83 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents balance related to cash collateral on our self-insurance programs.

In June 2019, we issued the $1.0 billion 2030 Senior Notes, and used a portion of the net proceeds to repay $500 million and $225 million outstanding on our Term Loans and Revolving Credit Facility, respectively. The remaining proceeds will be used for general corporate purposes, including, but not limited to, funding certain share repurchases under our stock repurchase program. We also increased the borrowing capacity of our Revolving Credit Facility to $1.75 billion while extending the maturity to 2024 and extended the maturity of the remaining outstanding Term Loans to 2026.


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Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including costs associated with the management and franchising of hotels, corporate expenses, payroll and compensation costs, taxes and compliance costs, interest payments on our outstanding indebtedness, contract acquisition costs and capital expenditures for renovations and maintenance at the hotels within our ownership segment. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements to the hotels within our ownership segment, commitments to owners in our management and franchise segment, dividends as declared, share repurchases and corporate capital and information technology expenditures.

We finance our business activities primarily with existing cash and cash generated from our operations. We believe that this cash and, from time-to-time, the use of our Revolving Credit Facility, will be adequate to meet anticipated requirements for operating and other expenditures, including corporate expenses, payroll and related benefits, taxes and compliance costs and other commitments for the foreseeable future. The objectives of our cash management policy are to maintain existing leverage levels and the availability of liquidity, while minimizing operational costs. Further, we have an investment policy that is focused on the preservation of capital and maximizing the return on new and existing investments and returning available capital to stockholders through dividends and share repurchases.

We may from time to time issue or incur or increase our capacity to incur new debt and/or purchase our outstanding debt through underwritten offerings, open market transactions, privately negotiated transactions or otherwise. Issuances or incurrence of new debt (or an increase in our capacity to incur new debt) and/or purchases or retirement of outstanding debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

During the six months ended June 30, 2019, we repurchased 8 million shares of our common stock under our stock repurchase program for $679 million, which we funded principally with available cash. As of June 30, 2019, approximately $1.4 billion remained available for share repurchases under our $3.5 billion stock repurchase program.

Sources and Uses of Our Cash and Cash Equivalents

The following table summarizes our net cash flows:
 Six Months Ended Percent
 June 30, Change
 2019 2018 2019 vs. 2018
 (in millions)  
Net cash provided by operating activities$650
 $532
 22.2
Net cash used in investing activities(95) (75) 26.7
Net cash used in financing activities(323) (616) (47.6)

Operating Activities

Cash flows from operating activities were primarily generated from management and franchise fee revenue and operating income from our owned and leased hotels.

The $118 million increase in net cash provided by operating activities was primarily the result of improved operating results from our management and franchise business, including net growth in properties, as well as an increase in licensing and other fees. The increase was partially offset by an increase in cash paid for interest and income taxes.

Investing Activities

For the six months ended June 30, 2019 and 2018, net cash used in investing activities consisted primarily of capital expenditures for property and equipment and capitalized software costs. Our capital expenditures for property and equipment primarily consisted of expenditures related to the renovation of hotels in our ownership segment and our corporate facilities. Our capitalized software costs related to various systems initiatives, for the benefit of both our hotel owners and our overall corporate operations.

Financing Activities

The decrease in net cash used in financing activities during the six months ended June 30, 2019 was primarily attributable to a decrease in repurchases of common stock due to the repurchases of shares from HNA Tourism Group Co., Ltd and certain

36



affiliates of The Blackstone Group Inc. (formerly known as the Blackstone Group L.P.) as part of the full divestiture of their investments in Hilton in April and May 2018, respectively. The decrease in cash used in financing activities was partially offset by the net decrease in borrowings and repayments attributable to a $500 million decrease in proceeds received from the June 2019 and April 2018 issuances of senior notes. The proceeds from the issuances of the 2030 Senior Notes and the 2026 Senior Notes were both used to repay $500 million outstanding on the Term Loans in each respective period.

Debt and Borrowing Capacity

As of June 30, 2019, our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately $7.9 billion. For additional information on our total indebtedness, including our recent financing transactions, availability under our Revolving Credit Facility and guarantees on our debt, refer to Note 6: "Debt" and Note 15: "Condensed Consolidating Guarantor Financial Information" in our unaudited condensed consolidated financial statements.

If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to reduce capital expenditures, issue additional equity securities or make draws on our Revolving Credit Facility. Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hospitality industry that may be beyond our control.

Contractual Obligations

Other than the issuance of the 2030 Senior Notes and the repayment of the Term Loans as described above, there were no material changes to our contractual obligations from what we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Off-Balance Sheet Arrangements

See Note 14: "Commitments and Contingencies" in our unaudited condensed consolidated financial statements for a discussion of our off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018. Since the date of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018, we adopted ASU 2016-02, which has changed our critical accounting policies and estimates related to leases. See Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" in our unaudited condensed consolidated financial statements and the discussion below for additional information.

Leases

We record lease liabilities as the present value of the future minimum lease payments using a discount rate that is either the rate implicit in the lease, if available, or our incremental borrowing rate, adjusted for collateral. The collateralized incremental borrowing rate is estimated on a portfolio basis and reflects factors such as the term of the lease and the currency in which the lease payments will be made. Our estimation utilizes various assumptions that require judgment, including our adjustment for collateral, economic factors, including currency data, and our credit risk.

We evaluate the carrying value of our ROU assets for impairment in a method consistent with our evaluation of property and equipment, including the determination of impairment indicators, projecting the undiscounted future cash flows and determining an asset's fair value. Refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 for additional information.

As of June 30, 2019, we had $1.5 billion of operating and finance lease liabilities. Changes in the estimates used in determining the collateralized incremental borrowing rate could result in material changes to our lease liabilities.

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

We are exposed to market risk primarily from changes in interest rates and foreign currency exchange rates, which may affect future income, cash flows and the fair value of the Company, depending on changes to interest rates or foreign currency

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exchange rates. In certain situations, we may seek to reduce cash flow volatility associated with changes in interest rates and foreign currency exchange rates by entering into derivative financial instruments intended to provide a hedge against a portion of the risks associated with such volatility. We continue to have exposure to such risks to the extent they are not hedged. We enter into derivative financial instruments to the extent they meet the objectives described above, and we do not use derivatives for trading or speculative purposes. Our exposure to market risk has not materially changed from what we previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 4.    Controls and Procedures

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures as that term is defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, that are designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission ("SEC") rules and forms, and that such information is accumulated and communicated to the Company's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. The design of any disclosure controls and procedures is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute, assurance of achieving the desired control objectives. In accordance with Rule 13a-15(b) of the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q, an evaluation was carried out under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this Quarterly Report on Form 10-Q, were effective to provide reasonable assurance that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and is accumulated and communicated to the Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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PART II. OTHER INFORMATION

Item 1.     Legal Proceedings

We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums, including proceedings involving tort and other general liability claims, employee claims, consumer protection claims and claims related to our management of certain hotel properties. We recognize a liability when we believe the loss is probable and can be reasonably estimated. Most occurrences involving liability, claims of negligence and employees are covered by insurance with solvent insurance carriers. The ultimate results of claims and litigation cannot be predicted with certainty. We believe we have adequate reserves against such matters. We currently believe that the ultimate outcome of such lawsuits and proceedings will not, individually or in the aggregate, have a material adverse effect on our consolidated financial position, results of operations or cash flows. However, depending on the amount and timing, an unfavorable resolution of some or all of these matters could materially affect our future results of operations in a particular period.

Item 1A.     Risk Factors

As of June 30, 2019, there have been no material changes from the risk factors previously disclosed in response to "Part I —Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.

Item 2.     Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Securities
    
None.

(b) Use of Proceeds

None.

(c) Issuer Purchases of Equity Securities

The following table sets forth information regarding our purchases of shares of our common stock during the three months ended June 30, 2019:
 Total Number of Shares Purchased 
Average Price Paid per Share(1)
 
Total Number of Shares Purchased as Part of Publicly Announced Program(2)
 
Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program(2)
(in millions)
April 1, 2019 to April 30, 2019817,246
 $87.30
 817,246
 $1,693
May 1, 2019 to May 31, 20191,438,604
 91.09
 1,438,604
 1,562
June 1, 2019 to June 30, 20191,920,936
 93.92
 1,920,936
 1,381
Total4,176,786
 91.65
 4,176,786
 
____________
(1) 
This price includes per share commissions paid.
(2) 
In February 2019, our board of directors authorized the repurchase of an additional $1.5 billion of our common stock under our existing stock repurchase program, which was initially announced in February 2017 and increased in November 2017. Under this publicly announced program, we are authorized to repurchase shares through open market purchases, privately-negotiated transactions or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Exchange Act. The repurchase program does not have an expiration date and may be suspended or discontinued at any time.

Item 3.     Defaults Upon Senior Securities

None.

Item 4.     Mine Safety Disclosures

Not applicable.


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Item 5.     Other Information

None.


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Item 6.     Exhibits
Exhibit Number Exhibit Description
3.1 
3.2 
3.3 
4.1 
4.2 
4.3 
10.1 
10.2 
10.3 
31.1 
31.2 
32.1 
32.2 
101.INS XBRL Instance Document - this instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH XBRL Taxonomy Extension Schema Document.
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEF XBRL Taxonomy Extension Definition Linkbase Document.
101.LAB XBRL Taxonomy Extension Label Linkbase Document.
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document.
____________
*This document has been identified as a management contract or compensatory plan or arrangement.

The agreements and other documents filed as exhibits to this report are not intended to provide factual information or other disclosure other than with respect to the terms of the agreements or other documents themselves, and you should not rely on them for that purpose. In particular, any representations and warranties made by us in these agreements or other documents

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were made solely within the specific context of the relevant agreement or document and may not describe the actual state of affairs as of the date they were made or at any other time.


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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
HILTON WORLDWIDE HOLDINGS INC.
   
By: /s/ Christopher J. Nassetta
Name: Christopher J. Nassetta
  President and Chief Executive Officer
   
By: /s/ Kevin J. Jacobs
Name: Kevin J. Jacobs
  Executive Vice President and Chief Financial Officer

Date: July 24, 2019

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