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HLT Hilton Worldwide

Filed: 23 Oct 19, 11:16am

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 September 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)

Delaware27-4384691
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
7930 Jones Branch Drive, Suite 1100, McLean, VA22102
(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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, $0.01 par value per shareHLTNew 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 filerAccelerated filer
Non-accelerated filerSmaller 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 October 17, 2019 was 282,162,971.



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)
September 30,December 31,
20192018
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents$719  $403  
Restricted cash and cash equivalents90  81  
Accounts receivable, net of allowance for doubtful accounts of $45 and $421,193  1,150  
Prepaid expenses115  160  
Other138  189  
Total current assets (variable interest entities $103 and $90)
2,255  1,983  
Intangibles and Other Assets:
Goodwill5,137  5,160  
Brands4,864  4,869  
Management and franchise contracts, net794  872  
Other intangible assets, net404  415  
Operating lease right-of-use assets839  —  
Property and equipment, net380  367  
Deferred income tax assets146  90  
Other248  239  
Total intangibles and other assets (variable interest entities $182 and $178)
12,812  12,012  
TOTAL ASSETS$15,067  $13,995  
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, accrued expenses and other$1,784  $1,549  
Current maturities of long-term debt38  16  
Current portion of deferred revenues290  350  
Current portion of liability for guest loyalty program788  700  
Total current liabilities (variable interest entities $74 and $56)
2,900  2,615  
Long-term debt7,767  7,266  
Operating lease liabilities1,004  —  
Deferred revenues834  826  
Deferred income tax liabilities873  898  
Liability for guest loyalty program1,004  969  
Other884  863  
Total liabilities (variable interest entities $275 and $263)
15,266  13,437  
Commitments and contingencies - see Note 15
Equity (Deficit):
Preferred stock, $0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of September 30, 2019 and December 31, 2018—  —  
Common stock, $0.01 par value; 10,000,000,000 authorized shares, 333,095,427 issued and 283,310,197 outstanding as of September 30, 2019 and 332,105,163 issued and 294,815,890 outstanding as of December 31, 2018  
Treasury stock, at cost; 49,785,230 shares as of September 30, 2019 and 37,289,273 shares as of December 31, 2018(3,726) (2,625) 
Additional paid-in capital10,460  10,372  
Accumulated deficit(6,097) (6,417) 
Accumulated other comprehensive loss(848) (782) 
Total Hilton stockholders' equity (deficit)(208) 551  
Noncontrolling interests  
Total equity (deficit)(199) 558  
TOTAL LIABILITIES AND EQUITY (DEFICIT)$15,067  $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 EndedNine Months Ended
September 30,September 30,
2019201820192018
Revenues
Franchise and licensing fees$443  $407  $1,269  $1,142  
Base and other management fees80  80  249  241  
Incentive management fees54  57  167  171  
Owned and leased hotels361  373  1,060  1,099  
Other revenues23  27  75  72  
961  944  2,820  2,725  
Other revenues from managed and franchised properties1,434  1,309  4,263  3,893  
Total revenues2,395  2,253  7,083  6,618  
Expenses
Owned and leased hotels310  331  942  1,003  
Depreciation and amortization86  81  256  242  
General and administrative107  109  327  328  
Other expenses11  10  46  36  
514  531  1,571  1,609  
Other expenses from managed and franchised properties1,443  1,337  4,284  3,939  
Total expenses1,957  1,868  5,855  5,548  
Gain on sale of assets, net81  —  81  —  
Operating income519  385  1,309  1,070  
Interest expense(105) (99) (304) (277) 
Gain (loss) on foreign currency transactions (6)  (7) 
Other non-operating income (loss), net—  13  (8) 26  
Income before income taxes421  293  1,001  812  
Income tax expense(131) (129) (291) (268) 
Net income290  164  710  544  
Net income attributable to noncontrolling interests(2) (2) (4) (4) 
Net income attributable to Hilton stockholders$288  $162  $706  $540  
Earnings per share:
Basic$1.01  $0.55  $2.44  $1.77  
Diluted$1.00  $0.54  $2.42  $1.76  
Cash dividends declared per share$0.15  $0.15  $0.45  $0.45  

See notes to condensed consolidated financial statements.
3


HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
Three Months EndedNine Months Ended
September 30,  September 30,  
2019201820192018
Net income$290  $164  $710  $544  
Other comprehensive income (loss), net of tax benefit (expense):
Currency translation adjustment, net of tax of $7, $(1), $8 and $—(35) (11) (23) (56) 
Pension liability adjustment, net of tax of $—, $—, $(1) and $(1)    
Cash flow hedge adjustment, net of tax of $3, $(2), $16 and $(16)(8)  (48) 47  
Total other comprehensive loss(42) (4) (66) (5) 
Comprehensive income248  160  644  539  
Comprehensive income attributable to noncontrolling interests(2) (2) (4) (4) 
Comprehensive income attributable to Hilton stockholders$246  $158  $640  $535  

See notes to condensed consolidated financial statements.
4


HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
Nine Months Ended
September 30,  
20192018
Operating Activities:  
Net income$710  $544  
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of contract acquisition costs21  20  
Depreciation and amortization  256  242  
Gain on sale of assets, net(81) —  
Loss (gain) on foreign currency transactions(4)  
Share-based compensation123  103  
Deferred income taxes22  29  
Contract acquisition costs(49) (82) 
Working capital changes and other184  51  
Net cash provided by operating activities1,182  914  
Investing Activities:  
Capital expenditures for property and equipment(66) (51) 
Payments received on other financing receivables—  49  
Proceeds from asset disposition120  —  
Capitalized software costs(79) (62) 
Other(22) (16) 
Net cash used in investing activities(47) (80) 
Financing Activities:  
Borrowings1,795  1,676  
Repayment of debt(1,327) (701) 
Debt issuance costs(29) (21) 
Dividends paid(130) (137) 
Repurchases of common stock(1,086) (1,561) 
Share-based compensation tax withholdings and other(31) (42) 
Other—  (4) 
Net cash used in financing activities(808) (790) 
Effect of exchange rate changes on cash, restricted cash and cash equivalents  (2) (14) 
Net increase in cash, restricted cash and cash equivalents325  30  
Cash, restricted cash and cash equivalents, beginning of period  484  670  
Cash, restricted cash and cash equivalents, end of period  $809  $700  
Supplemental Disclosures:  
Cash paid during the year:
Interest$248  $208  
Income taxes, net of refunds238  230  

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 September 30, 2019, we managed, franchised, owned or leased 5,980 hotels and resorts, including timeshare properties, totaling 954,855 rooms in 117 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 nine months ended September 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
6


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.

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, during the term of our hotel leases, we may be required to pay some, or all, of the capital costs for furniture, equipment and leasehold improvements in the hotel property. For operating leases, lease expense relating to fixed payments is recognized on a straight-line basis over the lease term, and lease expense related 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 2018-15 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.

Note 3: Disposal

In September 2019, we completed the sale of the Hilton Odawara Resort & Spa ("Hilton Odawara") for a price of 13 billion Japanese yen (equivalent to $122 million as of the closing date) and subsequently entered into a 30-year management contract with the purchaser of the hotel. As a result of the sale, we recognized a pre-tax gain of $81 million included in gain on sale of assets, net in our condensed consolidated statements of operations for the three and nine months ended September 30, 2019.

7


Note 4: 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 nine months ended September 30, 2019:

(in millions)
Balance as of December 31, 2018  $1,060  
Cash received in advance and not recognized as revenue(1)
329  
Revenue recognized(1)
(197) 
Other(2)
(125) 
Balance as of September 30, 2019$1,067  
____________
(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 $62 million and $33 million during the three months ended September 30, 2019 and 2018, respectively, and $149 million during the nine months ended September 30, 2018.

Performance Obligations

As of September 30, 2019, we had $442 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 $625 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 5: Consolidated Variable Interest Entities

As of September 30, 2019 and December 31, 2018, we consolidated 2 variable interest entities ("VIEs") that lease hotel properties and, as of December 31, 2018, we also consolidated 1 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 13: "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:

September 30,  December 31,  
20192018
(in millions)
Cash and cash equivalents$81  $71  
Property and equipment, net71  68  
Deferred income tax assets50  53  
Other non-current assets61  58  
Accounts payable, accrued expenses and other59  41  
Long-term debt(1)
200  205  
Other long-term liabilities15  15  
____________
(1)Includes finance lease liabilities of $182 million and $187 million as of September 30, 2019 and December 31, 2018, respectively.

8


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

Note 6: Amortizing Intangible Assets

Amortizing intangible assets were as follows:

September 30, 2019
Gross Carrying ValueAccumulated AmortizationNet Carrying Value
(in millions)
Management and franchise contracts:
Management and franchise contracts recorded at Merger(1)
$2,226  $(1,997) $229  
Contract acquisition costs573  (114) 459  
Development commissions and other124  (18) 106  
$2,923  $(2,129) $794  
Other intangible assets:
Leases(1)
$279  $(166) $113  
Capitalized software costs583  (377) 206  
Hilton Honors(1)
336  (251) 85  
Other(1)
34  (34) —  
$1,232  $(828) $404  

December 31, 2018
Gross Carrying ValueAccumulated AmortizationNet 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)  
$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 Inc. (formerly known as The Blackstone Group L.P.) (the "Merger").

9


Amortization of our amortizing intangible assets was as follows:

Three Months EndedNine Months Ended
September 30,September 30,
2019201820192018
(in millions)
Recognized in depreciation and amortization expense(1)
$71  $67  $212  $202  
Recognized as a reduction of franchise and licensing fees and base and other management fees  21  20  
____________
(1)Includes amortization expense of $50 million for the three months ended September 30, 2019 and 2018, and $152 million and $153 million for the nine months ended September 30, 2019 and 2018, respectively, associated with assets that were initially recorded at their fair value at the time of the Merger.

We estimate future amortization of our amortizing intangible assets as of September 30, 2019 to be as follows:

Recognized in Depreciation and Amortization ExpenseRecognized as a Reduction of Franchise and Licensing Fees and Base and Other Management Fees
Year(in millions)
2019 (remaining)$73  $ 
2020264  27  
2021115  26  
202293  24  
202350  23  
Thereafter144  352  
$739  $459  

Note 7: Debt

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

September 30,December 31,
20192018
(in millions)
Senior secured term loan facility with a rate of 3.77%, 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 a weighted average rate of 5.77%, due 2019 to 2030255  225  
Other debt with a rate of 3.08% due 202617  17  
7,891  7,361  
Less: unamortized deferred financing costs and discount  (86) (79) 
Less: current maturities of long-term debt(1)
(38) (16) 
$7,767  $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.
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In June 2019, we amended the Term Loans to extend the maturity date to June 2026 with a discount of 0.25 percent. In June 2019, 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 September 30, 2019. As of September 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 $15 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 amendment and the repayment of the Term Loans, we recognized $10 million of fees and unamortized deferred financing costs and discount, which were included in other non-operating income, net in our condensed consolidated statement of operations for the nine months ended September 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 16: "Condensed Consolidating Guarantor Financial Information" for additional information.

The contractual maturities of our long-term debt as of September 30, 2019 were as follows:

Year(in millions)
2019 (remaining)$10  
202037  
202130  
202221  
202320  
Thereafter7,773  
$7,891  

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Note 8: 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 September 30, 2019 and December 31, 2018:

September 30, 2019
Hierarchy Level
Carrying ValueLevel 1Level 2Level 3
(in millions)
Assets:
Cash equivalents$174  $—  $174  $—  
Restricted cash equivalents33  —  33  —  
Liabilities:
Long-term debt(1)
7,533  5,217  —  2,639  
Interest rate swaps45  —  45  —  

December 31, 2018
Hierarchy Level
Carrying ValueLevel 1Level 2Level 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 as of the balance sheet date.

Note 9: 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 September 30, 2019, we leased 52 hotels under operating leases and 6 hotels under finance leases, 2 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.
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Supplemental balance sheet information related to leases as of September 30, 2019 was as follows:

(dollars
in millions)
Operating leases:
Operating lease right-of-use assets$839  
Accounts payable, accrued expenses and other128  
Operating lease liabilities1,004  
Finance leases:
Property and equipment, net$57  
Current maturities of long-term debt38  
Long-term debt217  
Weighted average remaining lease term:
Operating leases12.9 years
Finance leases8.7 years
Weighted average discount rate:
Operating leases3.75 %
Finance leases5.77 %

The components of lease expense were as follows:

Three Months EndedNine Months Ended
September 30, 2019September 30, 2019
(in millions)
Operating lease expense for fixed payments$35  $108  
Finance lease expense:
Amortization of ROU assets 23  
Interest on lease liabilities 10  
Variable lease expense(1)
41  123  
____________
(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 nine months ended September 30, 2019 was as follows:

(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases$130  
Financing cash flows from finance leases32  
ROU assets obtained in exchange for lease liabilities in non-cash transactions:
Operating leases21  
Finance leases59  


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Our future minimum lease payments as of September 30, 2019 were as follows:

Operating
Leases
Finance
Leases
Year(in millions)
2019 (remaining)$43  $14  
2020170  51  
2021160  42  
2022133  32  
2023118  30  
Thereafter846  164  
Total minimum lease payments1,470  333  
Less: imputed interest(338) (78) 
Total lease liabilities$1,132  $255  

Note 10: 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 September 30, 2019, we remain subject to federal and state examinations of our income tax returns for tax years from 2005 through 2018 and foreign examinations of our income tax returns for tax years from 1996 through 2018.

Our total unrecognized tax benefits as of September 30, 2019 and December 31, 2018 were $330 million and $318 million, respectively. As of September 30, 2019 and December 31, 2018, we had accrued approximately $46 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 September 30, 2019 and December 31, 2018 was $318 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
14


taxes. The portion of this amount related to Hilton Honors would result in a decrease to our future tax liability when the points are redeemed. We disagree with the IRS's position on each of these assertions and intend to vigorously contest them. However, 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 September 30, 2019, we had recorded $56 million of unrecognized tax benefits related to these issues.

Note 11: 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 $42 million and $35 million during the three months ended September 30, 2019 and 2018, respectively, and $123 million and $103 million during the nine months ended September 30, 2019 and 2018, respectively. As of September 30, 2019, unrecognized compensation costs for unvested awards was approximately $153 million, which are expected to be recognized over a weighted-average period of 1.8 years on a straight-line basis. As of September 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 nine months ended September 30, 2019, we granted 1.0 million RSUs with a weighted average grant date fair value per share of $83.41, which generally vest in equal annual installments over two or three years from the date of grant.

Options

During the nine months ended September 30, 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 nine months ended September 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 September 30, 2019, 1.5 million options were exercisable.

Performance Shares

During the nine months ended September 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 0 percent to 200 percent payout, with 100 percent being the target. As of September 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 and 2018 performance shares and at target for the 2019 performance shares.
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Note 12: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS"):

Three Months EndedNine Months Ended
September 30,September 30,
2019  2018  2019  2018  
(in millions, except per share amounts)
Basic EPS:
Numerator:
Net income attributable to Hilton stockholders$288  $162  $706  $540  
Denominator:
Weighted average shares outstanding285  297  289  305  
Basic EPS$1.01  $0.55  $2.44  $1.77  
Diluted EPS:
Numerator:
Net income attributable to Hilton stockholders$288  $162  $706  $540  
Denominator:
Weighted average shares outstanding288  300  292  307  
Diluted EPS$1.00  $0.54  $2.42  $1.76  

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

Note 13: 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 nine months ended September 30, 2019 and 2018:

Three Months Ended September 30, 2019
Equity (Deficit) Attributable to Hilton Stockholders
Treasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated
Other
Comprehensive
Loss
Common StockNoncontrolling
Interests
SharesAmountTotal
(in millions) 
Balance as of June 30, 2019288  $ $(3,304) $10,419  $(6,342) $(806) $ $(23) 
Net income—  —  —  —  288  —   290  
Other comprehensive loss—  —  —  —  —  (42) —  (42) 
Dividends—  —  —  —  (43) —  —  (43) 
Repurchases of common stock(5) —  (422) —  —  —  —  (422) 
Share-based compensation—  —  —  41  —  —  —  41  
Balance as of September 30, 2019283  $ $(3,726) $10,460  $(6,097) $(848) $ $(199) 

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Three Months Ended September 30, 2018
Equity (Deficit) Attributable to Hilton Stockholders
Treasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated
Other
Comprehensive
Loss
Common StockNoncontrolling
Interests
SharesAmountTotal
(in millions) 
Balance as of June 30, 2018298  $ $(2,330) $10,321  $(6,697) $(742) $ $560  
Net income—  —  —  —  162  —   164  
Other comprehensive loss—  —  —  —  —  (4) —  (4) 
Dividends—  —  —  —  (45) —  —  (45) 
Repurchases of common stock(1) —  (122) —  —  —  —  (122) 
Share-based compensation—  —  —  31  —  —  —  31  
Acquisition of noncontrolling
interest
—  —  —  (3) —  —  —  (3) 
Distributions—  —  —  —  —  —  (1) (1) 
Balance as of September 30, 2018297  $ $(2,452) $10,349  $(6,580) $(746) $ $580  

Nine Months Ended September 30, 2019
Equity (Deficit) Attributable to Hilton Stockholders
Treasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated
Other
Comprehensive
Loss
Common StockNoncontrolling
Interests
SharesAmountTotal
(in millions) 
Balance as of December 31, 2018295  $ $(2,625) $10,372  $(6,417) $(782) $ $558  
Net income—  —  —  —  706  —   710  
Other comprehensive loss—  —  —  —  —  (66) —  (66) 
Dividends—  —  —  —  (130) —  —  (130) 
Repurchases of common stock(13) —  (1,101) —  —  —  —  (1,101) 
Share-based compensation —  —  88  —  —  —  88  
Cumulative effect of the adoption of ASU 2016-02—  —  —  —  (256) —  —  (256) 
Deconsolidation of a VIE—  —  —  —  —  —  (2) (2) 
Balance as of September 30, 2019283  $ $(3,726) $10,460  $(6,097) $(848) $ $(199) 

Nine Months Ended September 30, 2018
Equity (Deficit) Attributable to Hilton Stockholders
Treasury StockAdditional
Paid-in
Capital
Accumulated DeficitAccumulated
Other
Comprehensive
Loss
Common StockNoncontrolling
Interests
SharesAmountTotal
(in millions) 
Balance as of December 31, 2017317  $ $(891) $10,298  $(6,981) $(741) $ $1,691  
Net income—  —  —  —  540  —   544  
Other comprehensive loss—  —  —  —  —  (5) —  (5) 
Dividends—  —  —  —  (139) —  —  (139) 
Repurchases of common stock(21) —  (1,561) —  —  —  —  (1,561) 
Share-based compensation —  —  54  —  —  —  54  
Acquisition of noncontrolling
interest
—  —  —  (3) —  —  —  (3) 
Distributions—  —  —  —  —  —  (1) (1) 
Balance as of September 30, 2018297  $ $(2,452) $10,349  $(6,580) $(746) $ $580  

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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 AdjustmentTotal
(in millions) 
Balance as of December 31, 2018  $(545) $(260) $23  $(782) 
Other comprehensive loss before reclassifications(24) (1) (40) (65) 
Amounts reclassified from accumulated other comprehensive loss  (8) (1) 
Net current period other comprehensive income (loss)(23)  (48) (66) 
Balance as of September 30, 2019  $(568) $(255) $(25) $(848) 
Currency Translation Adjustment(1)
Pension Liability Adjustment  Cash Flow Hedge AdjustmentTotal
(in millions) 
Balance as of December 31, 2017  $(513) $(229) $ $(741) 
Other comprehensive income (loss) before reclassifications(56) (2) 41  (17) 
Amounts reclassified from accumulated other comprehensive loss—    12  
Net current period other comprehensive income (loss)(56)  47  (5) 
Balance as of September 30, 2018  $(569) $(225) $48  $(746) 
____________
(1)Includes net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature.

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The following table presents additional information about reclassifications out of accumulated other comprehensive loss; amounts in parentheses indicate losses in our condensed consolidated statements of operations:

Three Months EndedNine Months Ended
September 30, 2019September 30, 2019
(in millions)
Currency translation adjustment:
Liquidation of investments in foreign entities(1)
$—  $(1) 
Total currency translation adjustment reclassifications for the period,
net of taxes
—  (1) 
Pension liability adjustment:
Amortization of prior service cost(2)
(1) (3) 
Amortization of net loss(2)
(2) (5) 
Tax benefit(3)
  
Total pension liability adjustment reclassifications for the period,
net of taxes
(2) (6) 
Cash flow hedge adjustment:  
Interest rate swaps(4)
  
Forward contracts(5)
  
Tax expense(3)
(1) (2) 
Total cash flow hedge adjustment reclassifications for the period,
net of taxes
  
Total reclassifications for the period, net of taxes$ $ 
____________
(1)Includes a gain on the related net investment hedge for one of the foreign entities. Reclassified to gain (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 other non-operating income (loss), net in our condensed consolidated statements of operations.
(3)Reclassified to income tax expense in our condensed consolidated statements of operations.
(4)Reclassified to interest expense in our condensed consolidated statements of operations.
(5)Reclassified to franchise and licensing fees and base and other management fees in our condensed consolidated statements of operations.

As of September 30, 2019, approximately $959 million remained available for share repurchases under our $3.5 billion stock repurchase program.

Note 14: Business Segments

We are a hospitality company with operations organized in 2 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 September 30, 2019, this segment included 706 managed hotels and 5,154 franchised hotels consisting of 925,458 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 September 30, 2019, the ownership segment included 65 properties totaling 20,481 rooms, comprising 57 hotels that we wholly owned or leased, 1 hotel owned by a consolidated non-wholly owned entity, 2 hotels leased by consolidated VIEs and 5 hotels owned or leased by unconsolidated affiliates.

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


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The following table presents revenues for our reportable segments, reconciled to consolidated amounts:

Three Months EndedNine Months Ended
September 30,September 30,
2019201820192018
(in millions) 
Franchise and licensing fees  $447  $409  $1,277  $1,147  
Base and other management fees(1)
95  95  293  286  
Incentive management fees  54  57  167  171  
Management and franchise596  561  1,737  1,604  
Ownership361  373  1,060  1,099  
Segment revenues957  934  2,797  2,703  
Amortization of contract acquisition costs(7) (6) (21) (20) 
Other revenues23  27  75  72  
Direct reimbursements from managed and franchised properties(2)
770  710  2,334  2,139  
Indirect reimbursements from managed and franchised properties(2)
664  599  1,929  1,754  
Intersegment fees elimination(1)
(12) (11) (31) (30) 
Total revenues  $2,395  $2,253  $7,083  $6,618  
____________
(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 EndedNine Months Ended
September 30,September 30,
2019201820192018
(in millions) 
Management and franchise(1)
$596  $561  $1,737  $1,604  
Ownership(1)
39  31  87  66  
Segment operating income635  592  1,824  1,670  
Amortization of contract acquisition costs(7) (6) (21) (20) 
Other revenues, less other expenses12  17  29  36  
Net other expenses from managed and franchised properties

(9) (28) (21) (46) 
Depreciation and amortization(86) (81) (256) (242) 
General and administrative  (107) (109) (327) (328) 
Gain on sale of assets, net  81  —  81  —  
Operating income  519  385  1,309  1,070  
Interest expense  (105) (99) (304) (277) 
Gain (loss) on foreign currency transactions  (6)  (7) 
Other non-operating income (loss), net —  13  (8) 26  
Income before income taxes$421  $293  $1,001  $812  
____________
(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.


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The following table presents total assets for our reportable segments, reconciled to consolidated amounts:

September 30,December 31,
20192018
(in millions) 
Management and franchise  $11,345  $11,362  
Ownership  1,627  927  
Corporate and other2,095  1,706  
$15,067  $13,995  

The following table presents capital expenditures for property and equipment for our reportable segments, reconciled to consolidated amounts:

Nine Months Ended
September 30,
20192018
(in millions) 
Ownership$31  $34  
Corporate and other35  17  
$66  $51  

Note 15: 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 September 30, 2019, we had 6 performance guarantees, with expirations ranging from December 2019 to 2039, and possible cash outlays totaling approximately $38 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 September 30, 2019 and December 31, 2018, we accrued current liabilities of $3 million and $12 million, respectively, for 1 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. We do not have any letters of credit pledged as collateral against our performance guarantees.

As of September 30, 2019, we guaranteed 2 loans for 3 hotels that we franchise or will franchise for a total of $30 million. One of the loans has an initial maturity date in 2022 with two one-year extension options and the other loan will mature in 2023. Although we believe it is unlikely that material payments will be required under these guarantees, there can be no assurance that this will be the case. We do not have any letters of credit pledged as collateral against these 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. As of September 30, 2019, we had remaining possible cash outlays of approximately $25 million, of which we expect to fund $15 million 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 September 30, 2019 and December 31, 2018, we had collected an aggregate of $397 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
21


ultimate resolution of all pending or threatened claims and litigation as of September 30, 2019 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Note 16: 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 September 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 guaranteed 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 September 30, 2019 and December 31, 2018, and for the three and nine months ended September 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 September 30, 2019.
22


September 30, 2019
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
ASSETS
Current Assets:
Cash and cash equivalents$—  $—  $17  $26  $676  $—  $719  
Restricted cash and cash equivalents—  —  34  23  33  —  90  
Accounts receivable, net—  —  13  850  332  (2) 1,193  
Intercompany receivables—  —  —  —  39  (39) —  
Prepaid expenses—  —  26  37  57  (5) 115  
Other—    56  102  (24) 138  
Total current assets—   91  992  1,239  (70) 2,255  
Intangibles and Other Assets:
Investments in subsidiaries(187) 3,948  7,709  (187) —  (11,283) —  
Goodwill—  —  —  3,824  1,313  —  5,137  
Brands—  —  —  4,404  460  —  4,864  
Management and franchise contracts, net—  —   464  329  —  794  
Other intangible assets, net—  —  —  290  114  —  404  
Operating lease right-of-use assets—  —  34   796  —  839  
Property and equipment, net—  —  60  68  252  —  380  
Deferred income tax assets 11  85  —  146  (99) 146  
Other—  11  31  37  169  —  248  
Total intangibles and other assets(184) 3,970  7,920  8,909  3,579  (11,382) 12,812  
TOTAL ASSETS$(184) $3,973  $8,011  $9,901  $4,818  $(11,452) $15,067  
LIABILITIES AND EQUITY (DEFICIT)
Current Liabilities:
Accounts payable, accrued expenses and other$24  $37  $264  $711  $770  $(22) $1,784  
Current maturities of long-term debt—  —  20  —  18  —  38  
Current portion of deferred revenues—  —  38  241  20  (9) 290  
Intercompany payables—  —  39  —  —  (39) —  
Current portion of liability for guest loyalty program—  —  —  788  —  —  788  
Total current liabilities24  37  361  1,740  808  (70) 2,900  
Long-term debt—  4,078  3,474  —  215  —  7,767  
Operating lease liabilities—  —  39   958  —  1,004  
Deferred revenues—  —  —  764  70  —  834  
Deferred income tax liabilities—  —  —  957  15  (99) 873  
Liability for guest loyalty program—  —  —  1,004  —  —  1,004  
Other—  45  189  96  554  —  884  
Total liabilities24  4,160  4,063  4,568  2,620  (169) 15,266  
Equity (Deficit):
Total Hilton stockholders' equity (deficit)(208) (187) 3,948  5,333  2,189  (11,283) (208) 
Noncontrolling interests—  —  —  —   —   
Total equity (deficit)(208) (187) 3,948  5,333  2,198  (11,283) (199) 
TOTAL LIABILITIES AND EQUITY (DEFICIT)$(184) $3,973  $8,011  $9,901  $4,818  $(11,452) $15,067  

23


December 31, 2018
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
ASSETS
Current Assets:
Cash and cash equivalents$—  $—  $ $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—    36  154  (3) 189  
Total current assets—   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 assets —  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—   —  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—  —  —  —   —   
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  


24


Three Months Ended September 30, 2019  
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
Revenues
Franchise and licensing fees$—  $—  $68  $338  $41  $(4) $443  
Base and other management fees—  —   48  31  —  80  
Incentive management fees—  —  —  16  38  —  54  
Owned and leased hotels—  —  —  —  361  —  361  
Other revenues—  —  —  20   —  23  
—  —  69  422  474  (4) 961  
Other revenues from managed and franchised properties—  —  79  1,195  160  —  1,434  
Total revenues—  —  148  1,617  634  (4) 2,395  
Expenses
Owned and leased hotels—  —  —  —  310  —  310  
Depreciation and amortization—  —   63  21  —  86  
General and administrative—  —  88  —  28  (9) 107  
Other expenses—  —   —    11  
—  —  91  63  364  (4) 514  
Other expenses from managed and franchised properties—  —  85  1,200  158  —  1,443  
Total expenses—  —  176  1,263  522  (4) 1,957  
Gain on sale of assets, net—  —  —  —  81  —  81  
Operating income (loss)—  —  (28) 354  193  —  519  
Interest expense—  (45) (49) —  (11) —  (105) 
Gain (loss) on foreign currency transactions—  —   (43) 46  —   
Other non-operating income (loss), net—  (2) —  (3)  —  —  
Income (loss) before income taxes and equity in earnings from subsidiaries—  (47) (73) 308  233  —  421  
Income tax benefit (expense)—  11  15  (79) (78) —  (131) 
Income (loss) before equity in earnings from subsidiaries—  (36) (58) 229  155  —  290  
Equity in earnings from subsidiaries288  324  382  288  —  (1,282) —  
Net income288  288  324  517  155  (1,282) 290  
Net income attributable to noncontrolling interests—  —  —  —  (2) —  (2) 
Net income attributable to Hilton stockholders$288  $288  $324  $517  $153  $(1,282) $288  
Comprehensive income$246  $279  $324  $516  $123  $(1,240) $248  
Comprehensive income attributable to noncontrolling interests—  —  —  —  (2) —  (2) 
Comprehensive income attributable to Hilton stockholders$246  $279  $324  $516  $121  $(1,240) $246  
25


Three Months Ended September 30, 2018  
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
Revenues
Franchise and licensing fees$—  $—  $57  $316  $39  $(5) $407  
Base and other management fees—  —  —  49  31  —  80  
Incentive management fees—  —  —  15  42  —  57  
Owned and leased hotels—  —  —  —  373  —  373  
Other revenues—  —   19    27  
—  —  58  399  488  (1) 944  
Other revenues from managed and franchised properties—  —  70  1,076  163  —  1,309  
Total revenues—  —  128  1,475  651  (1) 2,253  
Expenses
Owned and leased hotels—  —  —  —  331  —  331  
Depreciation and amortization—  —   58  21  —  81  
General and administrative—  —  81  —  30  (2) 109  
Other expenses—  —      10  
—  —  84  60  388  (1) 531  
Other expenses from managed and franchised properties—  —  70  1,106  161  —  1,337  
Total expenses—  —  154  1,166  549  (1) 1,868  
Operating income (loss)—  —  (26) 309  102  —  385  
Interest expense—  (54) (34) —  (8) (3) (99) 
Gain (loss) on foreign currency transactions—  —  —   (7) —  (6) 
Other non-operating income, net—  —      13  
Income (loss) before income taxes and equity in earnings from subsidiaries—  (54) (59) 314  92  —  293  
Income tax benefit (expense)—  13   (70) (80) —  (129) 
Income (loss) before equity in earnings from subsidiaries—  (41) (51) 244  12  —  164  
Equity in earnings from subsidiaries162  203  254  162  —  (781) —  
Net income162  162  203  406  12  (781) 164  
Net income attributable to noncontrolling interests—  —  —  —  (2) —  (2) 
Net income attributable to Hilton stockholders$162  $162  $203  $406  $10  $(781) $162  
Comprehensive income$158  $168  $204  $405  $ $(777) $160  
Comprehensive income attributable to noncontrolling interests—  —  —  —  (2) —  (2) 
Comprehensive income attributable to Hilton stockholders$158  $168  $204  $405  $—  $(777) $158  

26


Nine Months Ended September 30, 2019  
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
Revenues
Franchise and licensing fees$—  $—  $198  $970  $114  $(13) $1,269  
Base and other management fees—  —   157  91  —  249  
Incentive management fees—  —  —  60  107  —  167  
Owned and leased hotels—  —  —  —  1,060  —  1,060  
Other revenues—  —   63  11  —  75  
—  —  200  1,250  1,383  (13) 2,820  
Other revenues from managed and franchised properties—  —  235  3,581  447  —  4,263  
Total revenues—  —  435  4,831  1,830  (13) 7,083  
Expenses
Owned and leased hotels—  —  —  —  942  —  942  
Depreciation and amortization—  —   188  63  —  256  
General and administrative—  —  259  —  90  (22) 327  
Other expenses—  —   10  22   46  
—  —  269  198  1,117  (13) 1,571  
Other expenses from managed and franchised properties—  —  244  3,602  438  —  4,284  
Total expenses—  —  513  3,800  1,555  (13) 5,855  
Gain on sale of assets, net—  —  —  —  81  —  81  
Operating income (loss)—  —  (78) 1,031  356  —  1,309  
Interest expense—  (148) (117) —  (39) —  (304) 
Gain (loss) on foreign currency transactions—  —   (70) 69  —   
Other non-operating income (loss), net—  (11) —  (8) 11  —  (8) 
Income (loss) before income taxes and equity in earnings from subsidiaries—  (159) (190) 953  397  —  1,001  
Income tax benefit (expense)—  38  42  (238) (133) —  (291) 
Income (loss) before equity in earnings from subsidiaries—  (121) (148) 715  264  —  710  
Equity in earnings from subsidiaries706  827  975  706  —  (3,214) —  
Net income706  706  827  1,421  264  (3,214) 710  
Net income attributable to noncontrolling interests—  —  —  —  (4) —  (4) 
Net income attributable to Hilton stockholders$706  $706  $827  $1,421  $260  $(3,214) $706  
Comprehensive income$640  $657  $830  $1,420  $245  $(3,148) $644  
Comprehensive income attributable to noncontrolling interests—  —  —  —  (4) —  (4) 
Comprehensive income attributable to Hilton stockholders$640  $657  $830  $1,420  $241  $(3,148) $640  
27


Nine Months Ended September 30, 2018  
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
Revenues
Franchise and licensing fees$—  $—  $151  $900  $104  $(13) $1,142  
Base and other management fees—  —   155  85  —  241  
Incentive management fees—  —  —  58  113  —  171  
Owned and leased hotels—  —  —  —  1,099  —  1,099  
Other revenues—  —   60   —  72  
—  —  156  1,173  1,409  (13) 2,725  
Other revenues from managed and franchised properties—  —  176  3,256  461  —  3,893  
Total revenues—  —  332  4,429  1,870  (13) 6,618  
Expenses
Owned and leased hotels—  —  —  —  1,003  —  1,003  
Depreciation and amortization—  —   176  61  —  242  
General and administrative—  —  237  —  97  (6) 328  
Other expenses—  —   17  21  (7) 36  
—  —  247  193  1,182  (13) 1,609  
Other expenses from managed and franchised properties—  —  178  3,304  457  —  3,939  
Total expenses—  —  425  3,497  1,639  (13) 5,548  
Operating income (loss)—  —  (93) 932  231  —  1,070  
Interest expense—  (172) (78) —  (27) —  (277) 
Gain (loss) on foreign currency transactions—  —   (80) 70  —  (7) 
Other non-operating income (loss), net—  (7)  16  12  —  26  
Income (loss) before income taxes and equity in earnings from subsidiaries—  (179) (163) 868  286  —  812  
Income tax benefit (expense)—  44  35  (204) (143) —  (268) 
Income (loss) before equity in earnings from subsidiaries—  (135) (128) 664  143  —  544  
Equity in earnings from subsidiaries540  675  803  540  —  (2,558) —  
Net income540  540  675  1,204  143  (2,558) 544  
Net income attributable to noncontrolling interests—  —  —  —  (4) —  (4) 
Net income attributable to Hilton stockholders$540  $540  $675  $1,204  $139  $(2,558) $540  
Comprehensive income$535  $585  $677  $1,203  $92  $(2,553) $539  
Comprehensive income attributable to noncontrolling interests—  —  —  —  (4) —  (4) 
Comprehensive income attributable to Hilton stockholders$535  $585  $677  $1,203  $88  $(2,553) $535  

28


Nine Months Ended September 30, 2019  
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
Operating Activities:
Net cash provided by (used in) operating activities$—  $(122) $(17) $1,157  $229  $(65) $1,182  
Investing Activities:
Capital expenditures for property and equipment—  —  (6) (5) (55) —  (66) 
Proceeds from asset disposition—  —  —  —  120  —  120  
Capitalized software costs—  —  —  (79) —  —  (79) 
Other—  —  —  (18) (4) —  (22) 
Net cash provided by (used in) investing activities—  —  (6) (102) 61  —  (47) 
Financing Activities:
Borrowings—  795  1,000  —  —  —  1,795  
Repayment of debt—  (1,295) (20) —  (12) —  (1,327) 
Debt issuance costs—  (13) (16) —  —  —  (29) 
Intercompany transfers1,216  635  (896) (1,038) 83  —  —  
Dividends paid(130) —  —  —  —  —  (130) 
Repurchases of common stock(1,086) —  —  —  —  —  (1,086) 
Intercompany dividends—  —  —  —  (65) 65  —  
Share-based compensation tax withholdings and other—  —  (31) —  —  —  (31) 
Net cash provided by (used in) financing activities—  122  37  (1,038)  65  (808) 
Effect of exchange rate changes on cash, restricted cash and cash equivalents—  —  —  —  (2) —  (2) 
Net increase in cash, restricted cash and cash equivalents—  —  14  17  294  —  325  
Cash, restricted cash and cash equivalents, beginning of period—  —  37  32  415  —  484  
Cash, restricted cash and cash equivalents, end of period$—  $—  $51  $49  $709  $—  $809  


29


Nine Months Ended September 30, 2018  
ParentHWF IssuersHOCGuarantorsNon-GuarantorsEliminationsTotal
(in millions)
Operating Activities:
Net cash provided by (used in) operating activities$—  $(143) $(7) $808  $256  $—  $914  
Investing Activities:
Capital expenditures for property and equipment—  —  (5) (4) (42) —  (51) 
Payments received on other financing receivables—  —  —  49  —  —  49  
Capitalized software costs—  —  —  (62) —  —  (62) 
Other—  —  —  (6) (10) —  (16) 
Net cash used in investing activities—  —  (5) (23) (52) —  (80) 
Financing Activities:
Borrowings—  175  1,500  —   —  1,676  
Repayment of debt—  (685) —  —  (16) —  (701) 
Debt issuance costs—  —  (21) —  —  —  (21) 
Intercompany transfers1,698  653  (1,451) (739) (161) —  —  
Dividends paid(137) —  —  —  —  —  (137) 
Repurchases of common stock(1,561) —  —  —  —  —  (1,561) 
Share-based compensation tax withholdings and other—  —  (42) —  —  —  (42) 
Other—  —  —  (3) (1) —  (4) 
Net cash provided by (used in) financing activities—  143  (14) (742) (177) —  (790) 
Effect of exchange rate changes on cash, restricted cash and cash equivalents—  —  —  —  (14) —  (14) 
Net increase (decrease) in cash, restricted cash and cash equivalents—  —  (26) 43  13  —  30  
Cash, restricted cash and cash equivalents, beginning of period—  —  63  28  579  —  670  
Cash, restricted cash and cash equivalents, end of period$—  $—  $37  $71  $592  $—  $700  

30


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 5,980 properties comprising 954,855 rooms in 117 countries and territories as of September 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 September 30, 2019, we had nearly 99 million members in our award-winning guest loyalty program, Hilton Honors, a 21 percent increase from September 30, 2018.

Segments and Regions

We analyze 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, we conduct 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 72 percent of our system-wide hotel rooms as of September 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
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Ocean island nations. Europe and MEA are often analyzed separately and, as such, are presented separately within the analysis herein. The 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 September 30, 2019, we had more than 2,530 hotels in our development pipeline that we expect to add as open hotels in our system, representing nearly 379,000 rooms under construction or approved for development throughout 111 countries and territories, including 35 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, of the rooms in the development pipeline, 205,000 rooms were located outside the U.S., and 198,000 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 nine months ended September 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.

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 5,925 hotels in our system as of September 30, 2019, 4,633 hotels have been classified as comparable hotels. Our 1,292 non-comparable hotels included 236 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
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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.

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 nine months ended September 30, 2019 and 2018 use the exchange rates for the three and nine months ended September 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 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;

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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;

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 EndedVarianceNine Months EndedVariance
September 30, 20192019 vs. 2018September 30, 20192019 vs. 2018
U.S.
Occupancy79.4 %0.3 %pts.  77.6 %0.4 %pts.  
ADR$149.12  — %$149.84  0.6 %
RevPAR$118.37  0.4 %$116.27  1.1 %
Americas (excluding U.S.)
Occupancy74.8 %(0.1)%pts.  71.3 %0.6 %pts.  
ADR$122.65  (0.2)%$123.12  1.4 %
RevPAR$91.77  (0.4)%$87.74  2.3 %
Europe
Occupancy84.0 %1.6 %pts.  78.0 %1.2 %pts.  
ADR$143.12  0.5 %$140.42  2.0 %
RevPAR$120.27  2.4 %$109.50  3.5 %
MEA
Occupancy71.6 %1.5 %pts.  72.5 %2.2 %pts.  
ADR$141.95  (2.3)%$145.34  (5.0)%
RevPAR$101.57  (0.2)%$105.38  (2.0)%
Asia Pacific
Occupancy75.4 %(0.2)%pts.  72.2 %0.8 %pts.  
ADR$120.55  (2.4)%$123.85  (1.0)%
RevPAR$90.92  (2.7)%$89.47  0.1 %
System-wide
Occupancy79.1 %0.4 %pts.  76.8 %0.6 %pts.  
ADR$145.11  (0.1)%$145.81  0.5 %
RevPAR$114.78  0.4 %$111.98  1.2 %

During the three and nine months ended September 30, 2019, we experienced modest system-wide RevPAR growth. There was continued strength in Europe resulting primarily from ADR and occupancy growth in southern Europe, particularly Italy and Turkey, which, during the three months ended September 30, 2019, was partially offset by a decrease in RevPAR in Germany. In the Americas (excluding U.S.), results were attributable to demand growth in Colombia and Brazil, offset by decreases in RevPAR in Canada and Mexico. RevPAR growth in the U.S. was primarily a result of strong group performance and continued transient demand at our luxury properties. Asia Pacific results were primarily driven by declining RevPAR in
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China resulting from the continued economic slowdown, ongoing trade wars and the protests in Hong Kong, which, for the nine months ended September 30, 2019, was offset by growth in Japan. MEA experienced declines in RevPAR resulting from decreased demand in United Arab Emirates, partially offset by improved results in Egypt and Saudi Arabia.

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

Three Months EndedNine Months Ended
September 30,September 30,
2019201820192018
(in millions)
Net income  $290  $164  $710  $544  
Interest expense105  99  304  277  
Income tax expense131  129  291  268  
Depreciation and amortization86  81  256  242  
EBITDA  612  473  1,561  1,331  
Gain on sale of assets, net(81) —  (81) —  
Loss (gain) on foreign currency transactions(7)  (4)  
FF&E replacement reserves13  12  42  39  
Share-based compensation expense42  35  123  103  
Amortization of contract acquisition costs  21  20  
Net other expenses from managed and franchised properties 28  21  46  
Other adjustment items(1)
10  (3) 39  11  
Adjusted EBITDA  $605  $557  $1,722  $1,557  
____________
(1)Includes adjustments for expenses recognized in connection with the refinancings and repayments of our senior secured credit facilities for the three and nine months ended September 30, 2019 and the nine months ended September 30, 2018; and severance and other items for all periods.

Revenues

Three Months EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions)(in millions)
Franchise and licensing fees$443  $407  8.8  $1,269  $1,142  11.1  
Base and other management fees$80  $80  —  $249  $241  3.3  
Incentive management fees54  57  (5.3) 167  171  (2.3) 
Total management fees$134  $137  (2.2) $416  $412  1.0  

Our franchise and licensing fees increased during the three and nine months ended September 30, 2019, and our management fees increased during the nine months ended September 30, 2019, primarily as a result of the addition of new properties to our management and franchise segment. Including new development and ownership type transfers, from January 1, 2018 to September 30, 2019, we added 697 managed and franchised properties on a net basis, providing an additional 99,650 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.

Franchise fees from our comparable franchised properties increased for the three and nine months ended September 30, 2019, as a result of increased RevPAR of 0.3 percent and 1.1 percent, respectively, driven by increased occupancy, which was partially offset by unfavorable foreign currency exchange rates. Additionally, licensing and other fees during the three and nine months ended September 30, 2019 increased $13 million and $62 million, respectively, which for the nine months ended September 30, 2019, included an increase in termination fees of $13 million, primarily related to the redevelopment of a franchised hotel.

For the three and nine months ended September 30, 2019, management fees from our comparable managed properties increased due to increases in RevPAR of 0.4 percent and 1.2 percent, respectively, which were offset by unfavorable foreign currency exchange rates and decreased incentive management fees that were largely due to challenges in certain markets, particularly Hong Kong.
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Three Months EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions)(in millions)
Owned and leased hotels$361  $373  (3.2) $1,060  $1,099  (3.5) 

Owned and leased hotel revenues decreased during the three and nine months ended September 30, 2019 primarily as a result of unfavorable fluctuations in foreign currency exchange rates, which decreased revenues by $10 million and $52 million, respectively.

On a currency neutral basis, revenues at our comparable owned and leased hotels increased $12 million and $28 million during the three and nine months ended September 30, 2019, respectively, due to increases in RevPAR of 4.1 percent and 4.2 percent, respectively, driven by increases in both ADR and occupancy. On a currency neutral basis, revenues at our non-comparable owned and leased hotels decreased primarily due to hotel lease terminations, disposals and hotels that were under renovation during the nine months ended September 30, 2019, partially offset by increases in revenues from hotels that were under renovation in 2018.

Three Months EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions)(in millions)
Other revenues$23  $27  (14.8) $75  $72  4.2  

The changes in other revenues during the three and nine months ended September 30, 2019 were primarily due to revenues from our purchasing operations.

Operating Expenses

Three Months EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions)(in millions)
Owned and leased hotels$310  $331  (6.3) $942  $1,003  (6.1) 

Owned and leased hotel expenses decreased during the three and nine months ended September 30, 2019 primarily as a result of fluctuations in foreign currency exchange rates, which decreased expenses by $10 million and $51 million, respectively.

On a currency neutral basis, owned and leased hotel expenses decreased $11 million and $10 million, respectively, for the three and nine months ended September 30, 2019, primarily due to decreases in expenses at our non-comparable hotels resulting from lease terminations, disposals and hotels that were under renovation during the nine months ended September 30, 2019, partially offset by increases in expenses from hotels that were under renovation in 2018. The decreases in expenses at our non-comparable hotels were partially offset by slight increases in expenses at our comparable hotels due to increases in occupancy.

Three Months EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions)(in millions)
Depreciation and amortization$86  $81  6.2  $256  $242  5.8  
General and administrative107  109  (1.8) 327  328  (0.3) 
Other expenses11  10  10.0  46  36  27.8  

The increases in depreciation and amortization expense during the three and nine months ended September 30, 2019 were primarily due to additions to capitalized software costs that were placed into service from January 1, 2018 to September 30, 2019.
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General and administrative expenses remained flat during the three and nine months ended September 30, 2019 primarily as a result of increases in share-based compensation costs driven by Company performance offset by decreases in general corporate expenses.

Other expenses increased during the three and nine months ended September 30, 2019 primarily as a result of increases in expenses from our purchasing operations.

Gain on sale of assets, net

Three Months EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions)(in millions)
Gain on sale of assets, net81  —  
NM(1)
81  —  
NM(1)
____________
(1)Fluctuation in terms of percentage change is not meaningful.

In September 2019, we recognized a gain upon completion of the sale of the Hilton Odawara. See Note 3: "Disposal" in our unaudited condensed consolidated financial statements for additional information.

Non-operating Income and Expenses

Three Months EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions)(in millions)
Interest expense$(105) $(99) 6.1  $(304) $(277) 9.7  
Gain (loss) on foreign currency transactions (6) 
NM(1)
 (7) 
NM(1)
Other non-operating income (loss), net—  13  (100.0)(8) 26  
NM(1)
Income tax expense(131) (129) 1.6  (291) (268) 8.6  
____________
(1)Fluctuation in terms of percentage change is not meaningful.

The increases in interest expense during the three and nine months ended September 30, 2019 were primarily due to the issuance of the 2030 Senior Notes in June 2019 and, for the nine months ended September 30, 2019, the issuance of the 2026 Senior Notes in April 2018 and draws on the Revolving Credit Facility during 2019. The increases were partially offset by decreases in interest expense related to our Term Loans, which were due to the reduction of the interest rate in April 2018 and principal repayments of $500 million and $800 million during 2019 and 2018, respectively, as well as net gains reclassified from accumulated other comprehensive loss resulting from settlements of interest rate swaps in 2018 and 2017.

The gains and losses on foreign currency transactions primarily related to changes in foreign currency exchange rates on certain intercompany financing arrangements, including short-term cross-currency intercompany loans. For the three and nine months ended September 30, 2019, the changes were predominantly related to EUR and the Australian dollar ("AUD"). For the three and nine months ended September 30, 2018, the changes were predominantly related to EUR and the British pound and, for the three months ended September 30, 2018, also AUD.

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

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The increases in income tax expense during the three and nine months ended September 30, 2019 were primarily attributable to increases in income before income taxes and the sale of Hilton Odawara, which were partially offset by: (i) adjustments to provisional amounts related to the Tax Cuts and Jobs Act of 2017 and (ii) the tax effect of a stock distribution, which were recognized during the three months ended September 30, 2018.

Segment Results

We evaluate our business segment operating performance using operating income. Refer to Note 14: "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 EndedPercentNine Months EndedPercent
September 30,ChangeSeptember 30,Change
201920182019 vs. 2018201920182019 vs. 2018
(in millions) (in millions) 
Revenues:  
Management and franchise(1)
$596  $561  6.2  $1,737  $1,604  8.3  
Ownership361  373  (3.2) 1,060  1,099  (3.5) 
Segment revenues957  934  2.5  2,797  2,703  3.5  
Amortization of contract acquisition costs(7) (6) 16.7  (21) (20) 5.0  
Other revenues23  27  (14.8) 75  72  4.2  
Other revenues from managed and franchised properties1,434  1,309  9.5  4,263  3,893  9.5  
Intersegment fees elimination(1)
(12) (11) 9.1  (31) (30) 3.3  
Total revenues  $2,395  $2,253  6.3  $7,083  $6,618  7.0  
Operating Income(1):
Management and franchise$596  $561  6.2  $1,737  $1,604  8.3  
Ownership39  31  25.8  87  66  31.8  
Segment operating income$635  $592  7.3  $1,824  $1,670  9.2  
____________
(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 $35 million and $133 million during the three and nine months ended September 30, 2019, respectively, primarily as a result of the net addition of managed and franchised properties to our system and increases in licensing and other fees. Refer to "—Revenues" for further discussion of the increases in revenues from our managed and franchised properties.

Ownership segment revenues decreased $12 million and $39 million during the three and nine months ended September 30, 2019, respectively, primarily as a result of fluctuations in foreign currency exchange rates. Ownership operating income increased $8 million and $21 million during the three and nine months ended September 30, 2019, respectively, as a result of decreases in owned and leased hotel expenses, which were 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 September 30, 2019, we had total cash and cash equivalents of $809 million, including $90 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 and cash held for FF&E reserves.

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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 nine months ended September 30, 2019, we repurchased 13 million shares of our common stock under our stock repurchase program for $1,101 million, which we funded principally with borrowings and available cash. As of September 30, 2019, approximately $959 million 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:
Nine Months EndedPercent
September 30,Change
201920182019 vs. 2018
(in millions)
Net cash provided by operating activities$1,182  $914  29.3  
Net cash used in investing activities(47) (80) (41.3) 
Net cash used in financing activities(808) (790) 2.3  

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 $268 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 property additions and an increase in licensing and other fees. The increase was partially offset by increases in cash paid for interest and income taxes.

Investing Activities

For the nine months ended September 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. Additionally, cash used for investing activities during the nine months ended September 30, 2019 was offset by the proceeds from the sale of the Hilton Odawara, and, during the nine months ended September 30, 2018, by the repayment of a loan we issued that financed the construction of a hotel we manage.

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Financing Activities

The increase in net cash used in financing activities during the nine months ended September 30, 2019 was primarily attributable to a decrease in net proceeds from borrowings and repayments attributable to a $500 million decrease in proceeds received from the June 2019 and April 2018 issuances of senior notes, which were both used to repay $500 million outstanding on the Term Loans in each respective period. The decrease in proceeds was largely offset by a decrease in repurchases of common stock due to the 2018 repurchases of shares from HNA Tourism Group Co., Ltd and certain affiliates of The Blackstone Group Inc. as part of the full divestiture of their respective investments in Hilton.

Debt and Borrowing Capacity

As of September 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 7: "Debt" and Note 16: "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 a portion 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 15: "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.

The ROU asset is measured at the amount of the lease liability, with applicable adjustments. 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 September 30, 2019, we had $0.9 billion and $1.4 billion of ROU assets and lease liabilities, respectively. Changes in the estimates used in determining the collateralized incremental borrowing rate could result in material changes to our lease liabilities and, accordingly, our ROU assets.

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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 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 September 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 September 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)
July 1, 2019 to July 31, 20191,334,507  $98.19  1,334,507  $1,250  
August 1, 2019 to August 31, 20191,627,790  92.98  1,627,790  1,099  
September 1, 2019 to September 30, 20191,496,704  93.52  1,496,704  959  
Total4,459,001  94.72  4,459,001  
____________
(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.

Item 6.  Exhibits

Exhibit NumberExhibit Description
3.1
3.2
3.3
4.1
31.1
31.2
32.1
32.2
101.INSInline 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.SCHInline XBRL Taxonomy Extension Schema Document.
101.CALInline XBRL Taxonomy Extension Calculation Linkbase Document.
101.DEFInline XBRL Taxonomy Extension Definition Linkbase Document.
101.LABInline XBRL Taxonomy Extension Label Linkbase Document.
101.PREInline XBRL Taxonomy Extension Presentation Linkbase Document.
104Cover Page Interactive Data File (embedded within the Inline XBRL document).

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 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: October 23, 2019
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