0001585689-18-000086.txt : 20180426 0001585689-18-000086.hdr.sgml : 20180426 20180426114034 ACCESSION NUMBER: 0001585689-18-000086 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 92 CONFORMED PERIOD OF REPORT: 20180331 FILED AS OF DATE: 20180426 DATE AS OF CHANGE: 20180426 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Hilton Worldwide Holdings Inc. CENTRAL INDEX KEY: 0001585689 STANDARD INDUSTRIAL CLASSIFICATION: HOTELS & MOTELS [7011] IRS NUMBER: 274384691 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36243 FILM NUMBER: 18777154 BUSINESS ADDRESS: STREET 1: 7930 JONES BRANCH DRIVE, SUITE 1100 CITY: MCLEAN STATE: VA ZIP: 22102 BUSINESS PHONE: 703-883-1000 MAIL ADDRESS: STREET 1: 7930 JONES BRANCH DRIVE, SUITE 1100 CITY: MCLEAN STATE: VA ZIP: 22102 10-Q 1 q12018hwhfsandmda.htm 10-Q Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to

Commission File Number 001-36243
Hilton Worldwide Holdings Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
27-4384691
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
7930 Jones Branch Drive, Suite 1100, McLean, VA
 
22102
(Address of Principal Executive Offices)
 
(Zip Code)

Registrant’s telephone number, including area code: (703) 883-1000

N/A
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act:

Large accelerated filer x
 
Accelerated filer ¨
Non-accelerated filer ¨
(Do not check if a smaller reporting company)
Smaller reporting company ¨
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 x

The number of shares outstanding of the registrant's common stock, par value $0.01 per share, as of April 19, 2018 was 300,416,906.




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

 
 
Page No.
PART I
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
Item 4.
Controls and Procedures
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Legal Proceedings
Item 1A.
Risk Factors
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.
Defaults Upon Senior Securities
Item 4.
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
 
Signatures


1



PART I. FINANCIAL INFORMATION

Item 1.    Financial Statements

HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share data)
(unaudited)
 
March 31,
 
December 31,
2018
2017
ASSETS
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
610

 
$
570

Restricted cash and cash equivalents
73

 
100

Accounts receivable, net of allowance for doubtful accounts of $32 and $29
980

 
1,005

Prepaid expenses
161

 
127

Income taxes receivable

 
36

Other
184

 
169

Total current assets (variable interest entities - $99 and $93)
2,008

 
2,007

Intangibles and Other Assets:
 
 
 
Goodwill
5,211

 
5,190

Brands
4,902

 
4,890

Management and franchise contracts, net
928

 
953

Other intangible assets, net
428

 
433

Property and equipment, net
358

 
353

Deferred income tax assets
111

 
111

Other
314

 
291

Total intangibles and other assets (variable interest entities - $180 and $171)
12,252

 
12,221

TOTAL ASSETS
$
14,260

 
$
14,228

LIABILITIES AND EQUITY
 
 
 
Current Liabilities:
 
 
 
Accounts payable, accrued expenses and other
$
1,344

 
$
1,416

Current portion of deferred revenues
342

 
366

Current maturities of long-term debt
47

 
46

Income taxes payable
63

 
12

Current portion of liability for guest loyalty program
692

 
622

Total current liabilities (variable interest entities - $55 and $58)
2,488

 
2,462

Long-term debt
6,558

 
6,556

Deferred revenues
828

 
829

Deferred income tax liabilities
901

 
931

Liability for guest loyalty program
841

 
839

Other
897

 
920

Total liabilities (variable interest entities - $278 and $271)
12,513

 
12,537

Commitments and contingencies - see Note 14


 


Equity:
 
 
 
Preferred stock, $0.01 par value; 3,000,000,000 authorized shares, none issued or outstanding as of March 31, 2018 and December 31, 2017

 

Common stock, $0.01 par value; 10,000,000,000 authorized shares, 331,864,584 issued and 316,904,646 outstanding as of March 31, 2018 and 331,054,014 issued and 317,420,933 outstanding as of December 31, 2017
3

 
3

Treasury stock, at cost; 14,959,938 shares as of March 31, 2018 and 13,633,081 shares as of December 31, 2017
(1,001
)
 
(891
)
Additional paid-in capital
10,288

 
10,298

Accumulated deficit
(6,868
)
 
(6,981
)
Accumulated other comprehensive loss
(680
)
 
(741
)
Total Hilton stockholders' equity
1,742

 
1,688

Noncontrolling interests
5

 
3

Total equity
1,747

 
1,691

TOTAL LIABILITIES AND EQUITY
$
14,260

 
$
14,228


See notes to condensed consolidated financial statements.

2



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)
 
Three Months Ended
 
March 31,
 
2018
 
2017
Revenues
 
 
 
Franchise fees
$
331

 
$
282

Base and other management fees
77

 
81

Incentive management fees
55

 
49

Owned and leased hotels
334

 
296

Other revenues
23

 
37

 
820

 
745

Other revenues from managed and franchised properties
1,254

 
1,151

Total revenues
2,074

 
1,896

 
 
 
 
Expenses
 
 
 
Owned and leased hotels
320

 
268

Depreciation and amortization
82

 
86

General and administrative
104

 
106

Other expenses
14

 
23

 
520

 
483

Other expenses from managed and franchised properties
1,275

 
1,196

Total expenses
1,795

 
1,679

 


 
 
Operating income
279

 
217

 
 
 
 
Interest expense
(83
)
 
(89
)
Gain (loss) on foreign currency transactions
11

 
(4
)
Loss on debt extinguishment

 
(60
)
Other non-operating income, net
14

 
2


 
 
 
Income before income taxes
221

 
66

 
 
 
 
Income tax expense
(58
)
 
(18
)
 
 
 
 
Net income
163

 
48

Net income attributable to noncontrolling interests
(2
)
 
(1
)
Net income attributable to Hilton stockholders
$
161

 
$
47

 
 
 
 
Earnings per share:
 
 
 
Basic
$
0.51

 
$
0.14

Diluted
$
0.51

 
$
0.14

 
 
 
 
Cash dividends declared per share
$
0.15

 
$
0.15


See notes to condensed consolidated financial statements.

3



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in millions)
(unaudited)
 
Three Months Ended
 
March 31,
 
2018
 
2017
Net income
$
163

 
$
48

Other comprehensive income (loss), net of tax benefit (expense):
 
 
 
Currency translation adjustment, net of tax of $1 and $1
32

 
20

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

 
1

Cash flow hedge adjustment, net of tax of $(10) and $2
28

 
(2
)
Total other comprehensive income
61

 
19

 
 
 
 
Comprehensive income
224

 
67

Comprehensive income attributable to noncontrolling interests
(2
)
 

Comprehensive income attributable to Hilton stockholders
$
222

 
$
67


See notes to condensed consolidated financial statements.

4



HILTON WORLDWIDE HOLDINGS INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Three Months Ended
 
March 31,
 
2018
 
2017
Operating Activities:
 
 
 
Net income
$
163

 
$
48

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
82

 
86

Amortization of contract acquisition costs
7

 
3

Loss (gain) on foreign currency transactions
(11
)
 
4

Loss on debt extinguishment

 
60

Share-based compensation
28

 
25

Deferred income taxes
(37
)
 
(67
)
Contract acquisition costs
(14
)
 
(13
)
Working capital changes and other
25

 
(96
)
Net cash provided by operating activities
243

 
50

Investing Activities:
 
 
 
Capital expenditures for property and equipment
(10
)
 
(9
)
Capitalized software costs
(15
)
 
(9
)
Other
(1
)
 
(19
)
Net cash used in investing activities
(26
)
 
(37
)
Financing Activities:
 
 
 
Borrowings

 
1,823

Repayment of debt
(14
)
 
(1,824
)
Debt issuance costs and redemption premium

 
(66
)
Dividends paid
(47
)
 
(49
)
Cash transferred in spin-offs of Park and HGV

 
(501
)
Repurchases of common stock
(110
)
 
(70
)
Distributions to noncontrolling interests

 
(1
)
Tax withholdings on share-based compensation
(40
)
 
(28
)
Net cash used in financing activities
(211
)
 
(716
)
 
 
 
 
Effect of exchange rate changes on cash, restricted cash and cash equivalents
7

 
5

Net increase (decrease) in cash, restricted cash and cash equivalents
13

 
(698
)
Cash, restricted cash and cash equivalents from continuing operations, beginning of period
670

 
1,183

Cash, restricted cash and cash equivalents from discontinued operations, beginning of period

 
501

Cash, restricted cash and cash equivalents, beginning of period
670

 
1,684

Cash, restricted cash and cash equivalents, end of period
$
683

 
$
986

 
 
 
 
Supplemental Disclosures:
 
 
 
Cash paid during the year:
 
 
 
Interest
$
72

 
$
113

Income taxes, net of refunds
9

 
6

Non-cash financing activities:
 
 
 
Spin-offs of Park and HGV
$

 
$
17


See notes to condensed consolidated financial statements.

5



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

Note 1: Organization

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, including timeshare properties. As of March 31, 2018, we managed, franchised, owned or leased 5,339 hotels and resorts, totaling 863,241 rooms in 106 countries and territories.

As of March 31, 2018, HNA Tourism Group Co., Ltd. and certain of its affiliates (together, "HNA") beneficially owned approximately 26 percent of our common stock. In April 2018, HNA sold its entire ownership interest in Hilton's common stock. See Note 16: "Subsequent Events" for additional information.

On January 3, 2017, we completed the spin-offs of a portfolio of hotels and resorts, as well as our timeshare business, into two independent, publicly traded companies: Park Hotels & Resorts Inc. ("Park") and Hilton Grand Vacations Inc. ("HGV"), respectively (the "spin-offs").

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

Basis of Presentation

The accompanying condensed consolidated financial statements for the three months ended March 31, 2018 and 2017 have been prepared in accordance with United States of America ("U.S.") generally accepted accounting principles ("GAAP") and are unaudited. We have condensed or omitted certain information and footnote disclosures normally included in financial statements presented in accordance with 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, 2017.

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.

On January 1, 2018, we adopted the requirements of Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09") using the full retrospective approach as of January 1, 2016. All amounts and disclosures set forth in this Form 10-Q reflect the necessary adjustments required for the adoption of this standard, including the reclassification of prior year balances to conform to current year presentation. See "Summary of Significant Accounting Policies" below for additional information.

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, 2017. The significant accounting policies that changed as a result of the adoption of ASU 2014-09 are set forth below.

Revenue Recognition

Revenues are primarily derived from management and franchise contracts with third-party hotel and resort owners, as well as from our owned and leased hotels. The majority of our performance obligations are a series of distinct goods or services, for which we receive variable consideration through our management and franchise fees or fixed consideration through our owned and leased hotels. We allocate the variable fees to the distinct services to which they relate applying the prescribed variable consideration allocation guidance, and we allocate fixed consideration to the related performance obligations based on the present value of the allocated variable cash flows. We do not adjust the promised amount of consideration for the effects of a significant financing component when we expect, at contract inception, that the period between our transfer of a promised good

6



or service to a customer and when the customer pays for that good or service will be one year or less, which it is in substantially all cases. Additionally, we do not typically include extended payment terms in our contracts with customers.

Management and franchise revenues

We identified the following performance obligations in connection with our management and franchise contracts:

Intellectual Property ("IP") licenses grant the right to access our hotel system IP, including brand IP, reservations systems and property management systems.
Hotel management services include providing day-to-day management services of the hotels for the property owners.
Development services include providing consultative services (e.g., design assistance and contractor selection) to the property owner to assist with the construction of the hotel prior to the hotel opening.
Pre-opening services include providing services (e.g., advertising, budgeting, e-commerce strategies, food and beverage testing) to the property owner to assist in preparing for the hotel opening.
Material rights for free or discounted goods or services to hotel guests are satisfied at the earlier point in time of either when the material right expires or the underlying free or discounted good or service is provided to the hotel guest.

Each of the identified performance obligations related to management and franchise revenues is considered to be a series of distinct services transferred over time. While the underlying activities may vary from day to day, the nature of the promises are the same each day, and the property owner can independently benefit from each day's services. Management and franchise fees are typically based on the sales or usage of the underlying hotel, with the exception of fixed upfront fees that usually represent an insignificant portion of the transaction price.

Franchise fees represent fees earned in connection with the licensing of one of our brands, usually under long-term contracts with the property owner, and include the following:

Royalty fees are generally based on a percentage of a hotel's monthly gross room revenue and, in some cases, may also include a percentage of gross food and beverage revenues and other revenues, where applicable. These fees are typically billed and collected monthly, and revenue is generally recognized at the same time the fees are billed.
Application, initiation and other fees are charged when: (i) new hotels enter our system; (ii) there is a change of ownership; or (iii) contracts with properties already in our system are extended. These fees are typically fixed and collected upfront and are recognized as revenue over the term of the franchise contract. We do not consider this advance consideration to include a significant financing component, since it is used to protect us from the property owner failing to adequately complete some or all of its obligations under the contract.
License fees are earned from: (i) a license agreement with HGV to use certain Hilton marks and IP in its timeshare business, which are typically billed and collected monthly, and revenue is generally recognized at the same time the fees are billed; and (ii) co-brand credit card arrangements and are recognized as revenue when Hilton Honors points are issued, generally as spend on the co-branded credit card occurs; see further discussion below under "Hilton Honors."

Franchise fees are reduced by any consideration paid or anticipated to be paid to incentivize hotel owners to enter into franchise contracts.

Base management fees and incentive management fees represent fees earned from hotels that we manage, usually under long-term contracts with the property owner, and include the following:

Base fees are generally based on a percentage of a hotel's monthly gross revenue. Base fees are typically billed and collected monthly, and revenue is generally recognized at the same time the fees are billed.
Incentive fees are generally based on a percentage of a hotel's operating profits and in some cases may be subject to a stated return threshold to the property owner, normally over a one-calendar year period (the "incentive period"). Incentive fee revenue is recognized on a monthly basis, but only to the extent the cumulative fee earned does not exceed the probable fee for the incentive period. Incentive fee payment terms vary, but they are generally billed and collected monthly or annually upon completion of the incentive period.

Base and other management fees are reduced by any consideration paid or anticipated to be paid to incentivize hotel owners to enter into management contracts.


7



Other revenues from managed and franchised properties represent amounts that are contractually reimbursed to us by property owners directly as costs are incurred or fees that are billed and collected in advance related to certain indirect costs and expenses of the related properties, and include the following:

Direct reimbursements include payroll and related costs and certain other operating costs of the managed and franchised properties’ operations, which are contractually reimbursed to us by the property owners as expenses are incurred. Revenue is recognized based on the amount of expenses incurred by Hilton, which are presented as other expenses from managed and franchised properties in our consolidated statements of operations, that are then reimbursed by the property owner typically on a monthly basis, which results in no net effect on operating income (loss) or net income (loss).
Indirect reimbursements include marketing expenses and other expenses associated with our brands and shared services, which are paid from fees collected by Hilton from the managed and franchised properties. Revenue is generally recognized as fees are billed, which are based on the underlying hotel's sales or usage (e.g., gross room revenues and number of reservations processed). System implementation fees charged to property owners are deferred and recognized as revenue over the term of the management or franchise contract. The corresponding expenses are expensed as incurred and are presented as other expenses from managed and franchised properties in our consolidated statements of operations and are expected to equal the revenues earned from indirect reimbursements over time.

The management and franchise fees and reimbursements from third-party hotel owners are allocated to the performance obligations and the distinct services to which they relate using their estimated standalone selling prices. The terms of the fees earned under the contract relate to a specific outcome of providing the services (e.g., hotel room sales) or to Hilton's efforts (e.g., costs) to satisfy the performance obligations. We use time as the measure of progress to recognize as revenue the fees that are allocated to the period earned per the contract or to the period when the reimbursable costs are incurred.

Owned and leased hotel revenues

We identified the following performance obligations in connection with our owned and leased hotel revenues, for which revenue is recognized as the respective performance obligations are satisfied, which results in recognizing the amount we expect to be entitled to for providing the goods or services:

Cancellable room reservations or ancillary services are typically satisfied as the good or service is transferred to the hotel guest, which is generally when the room stay occurs.
Noncancellable room reservations and banquet or conference reservations represent a series of distinct goods or services provided over time satisfied as each distinct good or service is provided, which is reflected by the duration of the room reservation.
Material rights for free or discounted goods or services are satisfied at the earlier point in time when the material right expires or the underlying free or discounted good or service is provided to the hotel guest.
Other ancillary goods and services are purchased independently of the room reservation at standalone selling prices and are considered separate performance obligations, which are satisfied when the related good or service is provided to the hotel guest.
Components of package reservations for which each component could be sold separately to other hotel guests are considered separate performance obligations and are satisfied as set forth above.

Owned and leased hotel revenues primarily consist of hotel room rentals, revenue from accommodations sold in conjunction with other services (e.g., package reservations), food and beverage sales and other ancillary goods and services (e.g., parking) related to owned, leased and consolidated non-wholly owned hotel properties. Revenue is recognized when rooms are occupied or goods and services have been delivered or rendered, respectively. Payment terms typically align with when the goods and services are provided. Owned and leased hotel revenues are reduced upon issuance of points for our guest loyalty program, Hilton Honors, for Hilton Honors members' paid stay transactions and are recognized when Hilton Honors points are redeemed for a free stay at an owned or leased hotel (see "Hilton Honors" section below for additional information).

Although the transaction prices of room rentals, goods and other services are generally fixed and based on the respective room reservation or other agreement, an estimate to reduce the transaction price is required if a discount is expected to be provided to the customer. For package reservations, the transaction price is allocated to the performance obligations within the package based on the estimated standalone selling prices of each component. On occasion, the hotel may also provide the customer with a material right to a free or discounted good or service in conjunction with a room reservation or banquet contract (e.g., free breakfast and free room night for every four nights booked). These material rights are considered separate performance obligations to which a portion of the transaction price is allocated based on the estimated standalone selling prices of the good or service, adjusted for the likelihood the hotel guest will exercise the right.

8




Other revenues

Other revenues include revenues generated by the incidental support of hotel operations for owned, leased, managed and franchised hotels, including purchasing operations, and other operating income. Purchasing revenues include any amounts received for vendor rebate arrangements that we participate in as a manager of hotel properties.

Taxes and fees collected on behalf of governmental agencies

We are required to collect certain taxes and fees from customers on behalf of governmental agencies and remit these back to the applicable governmental agencies on a periodic basis. We have a legal obligation to act as a collection agent. We do not retain these taxes and fees and, therefore, they are not included in our measurement of transaction prices. We have elected to present revenue net of sales taxes and other similar taxes. We record a liability when the amounts are collected and relieve the liability when payments are made to the applicable taxing authority or other appropriate governmental agency.

Contract Assets

Contract assets relate to incentive management fees for which the period of service has passed, but for which our right to consideration is conditional upon completing the requirements of the incentive fee period. Contract assets are included in other current assets in our consolidated balance sheets and are transferred to accounts receivable when our right to consideration becomes unconditional.

Contract Liabilities

Contract liabilities relate to: (i) advance consideration received from hotel owners at contract inception for services considered to be part of the contract performance obligations, such as management or franchise contract application, initiation, renewal and other fees; (ii) advance consideration received for certain indirect reimbursements, such as system implementation fees; and (iii) amounts received when points are issued under Hilton Honors, but for which revenue is not yet recognized, since the related points are not yet redeemed. Contract liabilities related to advance consideration received for fees, excluding Hilton Honors, and certain indirect reimbursements are recognized as revenue over the term of the related contract. Contract liabilities related to amounts received for Hilton Honors are recognized as revenue at the point in time when the points are redeemed for a free good or service by the Hilton Honors member, which typically occurs within two years of points issuance. Contract liabilities are included in deferred revenues in our consolidated balance sheets.

Intangible Assets with Finite Useful Lives

We have certain finite lived intangible assets that were initially recorded at their fair value in connection with the October 24, 2007 transaction whereby we became a wholly owned subsidiary of an affiliate of The Blackstone Group L.P. (the "Merger"). These intangible assets consist of management contracts, franchise contracts, leases, certain proprietary technologies and our Hilton Honors guest loyalty program. Additionally, we capitalize cash consideration paid to incentivize hotel owners to enter into management and franchise contracts as contract acquisition costs, as well as the incremental costs to obtain or fulfill the contracts as development commissions, which are generally fixed. We also capitalize as finite lived intangible assets costs incurred to develop internal-use computer software and costs to acquire software licenses, as well as internal and external costs incurred in connection with development of upgrades or enhancements that result in additional information technology functionality.

Intangible assets with finite useful lives are amortized using the straight-line method over their respective estimated useful lives, which for contract acquisition costs and development commissions is the contract term, including any renewal periods at our sole option. These estimated useful lives are generally as follows: management contracts recorded at the Merger (13 to 16 years); management contract acquisition costs and development commissions (20 to 30 years); franchise contracts recorded at the Merger (12 to 13 years); franchise contract acquisition costs and development commissions (10 to 20 years); leases (12 to 35 years); Hilton Honors (16 years); and capitalized software development costs (3 years).The amortization of our intangible assets, excluding contract acquisition costs, is included in depreciation and amortization expense, and the amortization of contract acquisition costs is recognized as a reduction to franchise fees and base and other management fees (based on the contract type) in our consolidated statements of operations. Costs incurred prior to the acquisition of a contract (e.g., external legal costs) are expensed as incurred and included in general and administrative expenses in our consolidated statements of operations. Cash flows for contract acquisition costs and development commissions are included as operating activities in our consolidated statements of cash flows.


9



We review all finite lived intangible assets for impairment when circumstances indicate that their carrying values may not be recoverable. If the carrying value of an asset group is not recoverable, we recognize an impairment loss for the excess carrying value over the fair value in our consolidated statements of operations.

Hilton Honors

Hilton Honors is our guest loyalty and marketing program provided to hotel and resort properties. Nearly all of our owned, leased, managed and franchised properties participate in the Hilton Honors program. Hilton Honors members earn points based on their spending at our participating properties and through participation in affiliated partner programs. When points are earned by Hilton Honors members, they are provided with a material right to free or discounted goods or services in the future upon accumulation of the required level of Hilton Honors points. Points may be redeemed for the right to stay at participating properties, as well as for other goods and services from third parties, including, but not limited to, airlines, car rentals, cruises, vacation packages, shopping and dining. As the points are issued to a Hilton Honors member, the property or affiliated partner pays Hilton Honors based on an estimated cost per point for the costs of operating the program, which include marketing, promotion, communication and administrative expenses, as well as the estimated cost of award redemptions.

We record liabilities for the payments received from participating hotels and program partners, which are typically due when the points are issued to a Hilton Honors member. Amounts equal to the estimated cost per point of the future redemption obligation are included in the liability for guest loyalty program and any amounts received in excess of the estimated cost per point are included in deferred revenues in our consolidated balance sheets. We engage outside actuaries to assist in determining the fair value of the future redemption obligation using statistical formulas that project future point redemptions based on factors that include historical experience, an estimate of points that will eventually be redeemed, which includes an estimate of "breakage" for points that will never be redeemed, and the cost of reimbursing properties and other third parties in respect to other redemption opportunities available to members. When points are issued as a result of a stay at our owned or leased hotel, we recognize a reduction in owned and leased hotel revenues, since we are also the guest loyalty program sponsor. For the Hilton Honors fees that are charged to the participating properties, we allocate the fees to the material right created by Hilton Honors points issued using the variable consideration allocation guidance, since the fees are directly related to the issuance of Hilton Honors points to the Hilton Honors member and Hilton's efforts to satisfy the future redemption of those Hilton Honors points.

The transaction prices for the Hilton Honors points are reduced by the expected payments to the third parties that will provide the free or discounted room or service using the actuarial projection of the cost per point. The remaining transaction price is then further allocated to the points that are expected to be redeemed, adjusting the points that are issued for estimated breakage, and recognized when those points are redeemed. While the points are outstanding, both the estimate of the expected payments to third parties (cost per point) and the estimated breakage are reevaluated, and the amount of revenue recognized when each point is redeemed is adjusted so that the final amount allocated to the material right is reflective of the amount retained for providing all of the free or discounted goods and services, net of the payments to third parties and points not redeemed.

We also earn license fees from co-brand credit card arrangements (see "Management and franchise revenues" within the "Revenue Recognition" section above). The co-brand license fee is allocated between two performance obligations based on their estimated standalone selling prices: (i) an IP license using the relief-from-royalty method; and (ii) material rights for free or discounted goods or services to the credit card customers using a cost plus method based on an evaluation of other third-party administrators.

We satisfy our performance obligation related to points issued under the Hilton Honors guest loyalty program at a point in time when points are redeemed for a free good or service by the Hilton Honors member, and we satisfy our remaining performance obligations over time as the customer simultaneously receives and consumes the benefits of the goods or services provided. Hilton Honors reimburses participating properties when points are redeemed by members at the respective properties, at which time the redemption obligation is reduced and the related deferred revenue is recognized in other revenues from managed and franchised properties in our consolidated statements of operations. Additionally, when Hilton Honors members redeem award certificates at our owned and leased hotels, we recognize room revenue, included in owned and leased hotels revenue in our consolidated statements of operations.


10



Recently Issued Accounting Pronouncements

Adopted Accounting Standards

In March 2017, the Financial Accounting Standards Board ("FASB") issued ASU No. 2017-07 ("ASU 2017-07"), Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires employers to report the service cost component of net periodic pension cost in the same line item or items of the statement of operations as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net periodic pension cost must be presented separately from the service cost component and outside of a subtotal of income (loss) from operations. We adopted ASU 2017-07 on January 1, 2018 on a retrospective basis in our condensed consolidated statements of operations, which includes presenting: (i) the service cost component of net periodic pension cost in owned and leased hotel expenses and general and administrative expenses; and (ii) the other components of net periodic pension cost in other non-operating income (loss), net in our condensed consolidated statements of operations. Prior to adoption, all net periodic pension costs were presented in owned and leased hotel expenses and general and administrative expenses. We have applied the practical expedient permitting us to use the amounts disclosed in our Employee Benefits Plans note in our Annual Report on Form 10-K for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements. See the "Prior Period Financial Information" below for the effect of the adoption of ASU 2017-07 on our condensed consolidated statement of operations for the three months ended March 31, 2017.

In May 2014, the FASB issued ASU 2014-09. This ASU supersedes the revenue recognition requirements in Revenue Recognition (Topic 605) and requires entities to recognize revenue when a customer obtains control of promised goods or services and in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. Subsequent to ASU 2014-09, the FASB issued several related ASUs to clarify the application of the new revenue recognition standard, collectively referred to herein as ASU 2014-09. We adopted the requirements of ASU 2014-09 on January 1, 2018 using the full retrospective approach, as permitted by the standard, resulting in a cumulative adjustment to accumulated deficit of $212 million as of January 1, 2016.

The provisions of ASU 2014-09 affected our revenue recognition as follows:

Application, initiation and other fees are recognized over the term of the franchise contract, rather than upon execution of the contract and the unamortized portion of these fees is included in deferred revenues in our condensed consolidated balance sheets.
Certain contract acquisition costs related to our management and franchise contracts are recognized over the term of the contracts as a reduction to revenue, instead of as amortization expense. This change does not affect net income (loss).
Incentive management fees are recognized to the extent that it is probable that a significant reversal will not occur as a result of future hotel profits or cash flows, as opposed to recognizing amounts that would be due if the management contract was terminated at the end of the reporting period. This change does not affect net income (loss) for any full year period.
Revenue related to our Hilton Honors guest loyalty program is recognized upon point redemption, net of any reward reimbursement paid to a third party, as opposed to recognized on a gross basis at the time points are issued in conjunction with the accrual of the expected future cost of the reward reimbursement. Additionally, points issued at owned and leased hotels are accounted for as a reduction of revenue from owned and leased hotels, as opposed to expenses of owned and leased hotels. Fees received in excess of the estimated liability for guest loyalty program are included in deferred revenues in our condensed consolidated balance sheets.
Reimbursable fees related to our management and franchise contracts are recognized as they are billed, as opposed to when we incur the related expenses. Timing differences related to the receipt and spend of these fees will no longer be recorded in other assets and other liabilities in our condensed consolidated balance sheets.

We have not retrospectively restated for management and franchise contracts modified before January 1, 2016 for the contract modifications. Instead, we have reflected the aggregate effect of all contract modifications when identifying the satisfied and unsatisfied performance obligations, determining the transaction price and allocating the transaction price. The estimated effect of applying this practical expedient is to use a longer period over which to straight line any fixed consideration either received from the customer or paid to the customer, since all fees will be amortized over the full contract term beginning on the date of initial execution, rather than amortizing fees received upon contract modifications prospectively from the contract modification date. We do not anticipate that this effect is material given the insignificance of the fixed consideration compared to the overall consideration we expect to earn over the term of the contract. See the "Prior Period Financial

11



Information" below for the effect of the adoption of ASU 2014-09 on our condensed consolidated balance sheet as of December 31, 2017 and our condensed consolidated statement of operations for the three months ended March 31, 2017.

Prior Period Financial Information

The following table presents the effect of the adoption of ASU 2014-09 for the line items affected on our condensed consolidated balance sheet:
 
December 31, 2017
 
As Previously Reported
 
Adoption of ASU 2014-09
 
As Adjusted
 
(in millions)
ASSETS
 
 
 
 
 
Accounts receivable, net
$
998

 
$
7

 
$
1,005

Prepaid expenses
111

 
16

 
127

Other current assets
171

 
(2
)
 
169

Management and franchise contracts, net
909

 
44

 
953

Deferred income tax assets
113

 
(2
)
 
111

Other non-current assets
434

 
(143
)
 
291

TOTAL ASSETS
14,308

 
(80
)
 
14,228

 
 
 
 
 
 
LIABILITIES AND EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable, accrued expenses and other(1)(2)
1,487

 
(71
)
 
1,416

Current portion of deferred revenues(1)
41

 
325

 
366

Deferred revenues
97

 
732

 
829

Deferred income tax liabilities
1,063

 
(132
)
 
931

Other non-current liabilities
1,470

 
(550
)
 
920

Total liabilities
12,233

 
304

 
12,537

Equity:
 
 
 
 
 
Accumulated deficit
(6,596
)
 
(385
)
 
(6,981
)
Accumulated other comprehensive loss
(742
)
 
1

 
(741
)
Total equity
2,075

 
(384
)
 
1,691

TOTAL LIABILITIES AND EQUITY
14,308

 
(80
)
 
14,228

____________
(1) 
The current portion of deferred revenues has been separated from accounts payable, accrued expenses and other in the "As Previously Reported" column following the adoption of ASU 2014-09.
(2) 
The current portion of liability for guest loyalty program has been separated from accounts payable, accrued expenses and other to conform with current presentation. The balance was $622 million as of December 31, 2017 and did not change as a result of the adoption of ASU 2014-09.


12



The following table presents the effect of the adoption of ASU 2014-09 and ASU 2017-07 on our condensed consolidated statement of operations:
 
Three Months Ended March 31, 2017
 
As Previously Reported
 
Adoption of ASU 2014-09
 
Adoption of ASU 2017-07
 
As Adjusted
 
(in millions)
Revenues
 
 
 
 
 
 
 
Franchise fees
$
294

 
$
(12
)
 
$

 
$
282

Base and other management fees
83

 
(2
)
 

 
81

Incentive management fees
52

 
(3
)
 

 
49

Owned and leased hotels
300

 
(4
)
 

 
296

Other revenues
37

 

 

 
37

 
766

 
(21
)
 

 
745

Other revenues from managed and franchised properties
1,395

 
(244
)
 

 
1,151

Total revenues
2,161

 
(265
)
 

 
1,896

 
 
 
 
 
 
 
 
Expenses
 
 
 
 
 
 
 
Owned and leased hotels
272

 
(4
)
 

 
268

Depreciation and amortization
89

 
(3
)
 

 
86

General and administrative
105

 

 
1

 
106

Other expenses
23

 

 

 
23

 
489

 
(7
)
 
1

 
483

Other expenses from managed and franchised properties
1,395

 
(199
)
 

 
1,196

Total expenses
1,884

 
(206
)
 
1

 
1,679

 
 
 
 
 
 
 
 
Operating income
277

 
(59
)
 
(1
)
 
217

 
 
 
 
 
 
 
 
Interest expense
(104
)
 
15

 

 
(89
)
Loss on foreign currency transactions
(4
)
 

 

 
(4
)
Loss on debt extinguishment
(60
)
 

 

 
(60
)
Other non-operating income, net
1

 

 
1

 
2

 
 
 
 
 
 
 
 
Income before income taxes
110

 
(44
)
 

 
66

 
 
 
 
 
 
 
 
Income tax expense
(35
)
 
17

 

 
(18
)
 
 
 
 
 
 
 
 
Net income
75

 
(27
)
 

 
48

Net income attributable to noncontrolling interests
(1
)
 

 

 
(1
)
Net income attributable to Hilton stockholders
$
74

 
$
(27
)
 
$

 
$
47

 
 
 
 
 
 
 
 
Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.22

 
 
 
 
 
$
0.14

Diluted
$
0.22

 
 
 
 
 
$
0.14


Accounting Standards Not Yet Adopted

In February 2018, the FASB issued ASU No. 2018-02 ("ASU 2018-02"), Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU permits a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects that do not reflect the appropriate tax rates as a result of the Tax Cuts and Jobs Act of 2017 (the "TCJ Act"). The provisions of ASU 2018-02 are effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years and should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the tax rate in the TCJ Act is recognized. Early adoption is permitted. We are currently evaluating the effect that ASU 2018-02 will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02 ("ASU 2016-02"), Leases (Topic 842), which supersedes existing guidance on accounting for leases in Leases (Topic 840) and generally requires all leases, including operating leases, to be

13



recognized in the statement of financial position as right-of-use assets and lease liabilities by lessees. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach and are effective for reporting periods beginning after December 15, 2018; early adoption is permitted. We intend to adopt the standard on January 1, 2019 and apply the package of practical expedients available to us upon adoption. We are continuing to evaluate the effect that this ASU will have on our consolidated financial statements, but we expect this ASU to have a material effect on our consolidated balance sheet.

Note 3: Revenues from Contracts with Customers

Contract Liabilities

The following table summarizes the activity of our contract liabilities, which are classified as a component of current and long-term deferred revenues, during the three months ended March 31, 2018:
 
(in millions)
Balance as of December 31, 2017
$
1,087

Cash received in advance and not recognized as revenue
115

Revenue recognized
(60
)
Other(1)
(53
)
Balance as of March 31, 2018
$
1,089

____________
(1) 
Represents the reclassification from deferred revenues to the current portion of liability for guest loyalty program in our condensed consolidated balance sheet. The reclassification is the result of changes in estimated transaction prices for our performance obligations related to points issued under Hilton Honors due to a change in our expected costs to the third parties providing the good or service associated with the Hilton Honors points.

Performance Obligations

Estimated revenues expected to be recognized related to performance obligations that were unsatisfied as of March 31, 2018, including revenues related to application, initiation and other fees and excluding revenues related to Hilton Honors, royalty fees, base management fees and incentive management fees, were as follows:
Year
(in millions)
2018 (remaining)
$
32

2019
43

2020
47

2021
52

2022
57

Thereafter
323

 
$
554


As of March 31, 2018, we had $535 million of deferred revenues related to unsatisfied performance obligations under Hilton Honors, which are not included in the table above. Revenue will be recognized as the points are redeemed, which is expected to occur over the next two years.

We did not estimate revenues expected to be recognized related to our unsatisfied performance obligations for our: (i) royalty fees since they are considered sales-based royalty fees recognized as hotel room sales occur in exchange for licenses of our brand names over the terms of the franchise contracts; and (ii) base management fees and incentive management fees since they are allocated entirely to the wholly unsatisfied promise to transfer management services, which form part of a single performance obligation in a series, over the term of the management contract. Therefore, there are no amounts included in the table above related to these revenues.

As part of the adoption of ASU 2014-09, we elected not to disclose the amount of the transaction price allocated to the same remaining performance obligations, disclosed above, as of December 31, 2017 or provide an explanation of when we expect to recognize that amount as revenue.


14



Note 4: Consolidated Variable Interest Entities

As of March 31, 2018 and December 31, 2017, we consolidated three variable interest entities ("VIEs"): two entities that lease hotel properties and one management company. We are the primary beneficiaries of these consolidated VIEs as we have the power to direct the activities that most significantly affect their economic performance. Additionally, we have the obligation to absorb their losses and the right to receive benefits that could be significant to them. The assets of our consolidated VIEs are only available to settle the obligations of the respective entities. Our condensed consolidated balance sheets included the assets and liabilities of these entities, which primarily comprised the following:
 
March 31,
 
December 31,
 
2018
 
2017
 
(in millions)
Cash and cash equivalents
$
78

 
$
73

Accounts receivable, net
15

 
16

Property and equipment, net
59

 
57

Deferred income tax assets
60

 
56

Other non-current assets
61

 
57

Accounts payable, accrued expenses and other
39

 
43

Long-term debt(1)
222

 
212

____________
(1) 
Includes capital lease obligations of $199 million and $191 million as of March 31, 2018 and December 31, 2017, respectively.

During the three months ended March 31, 2018 and 2017, we did not provide any financial or other support to any VIEs that we were not previously contractually required to provide, nor do we intend to provide such support in the future.

Note 5: Amortizing Intangible Assets

Amortizing intangible assets were as follows:
 
March 31, 2018
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
(in millions)
Management and franchise contracts:
 
 
 
 
 
Management and franchise contracts recorded at Merger(1)
$
2,247

 
$
(1,761
)
 
$
486

Contract acquisition costs
436

 
(81
)
 
355

Development commissions
100

 
(13
)
 
87

 
$
2,783

 
$
(1,855
)
 
$
928

 
 
 
 
 
 
Other amortizing intangible assets:
 
 
 
 
 
Leases(1)
$
310

 
$
(162
)
 
$
148

Capitalized software
596

 
(440
)
 
156

Hilton Honors(1)
343

 
(223
)
 
120

Other
38

 
(34
)
 
4

 
$
1,287

 
$
(859
)
 
$
428



15



 
December 31, 2017
 
Gross Carrying Value
 
Accumulated Amortization
 
Net Carrying Value
 
(in millions)
Management and franchise contracts:
 
 
 
 
 
Management and franchise contracts recorded at Merger(1)
$
2,242

 
$
(1,716
)
 
$
526

Contract acquisition costs
416

 
(74
)
 
342

Development commissions
97

 
(12
)
 
85

 
$
2,755

 
$
(1,802
)
 
$
953

 
 
 
 
 
 
Other amortizing intangible assets:
 
 
 
 
 
Leases(1)
$
301

 
$
(153
)
 
$
148

Capitalized software
585

 
(428
)
 
157

Hilton Honors(1)
341

 
(217
)
 
124

Other
38

 
(34
)
 
4

 
$
1,265

 
$
(832
)
 
$
433

____________
(1) 
Represents intangible assets that were initially recorded at their fair value at the time of the Merger.

Amortization of our amortizing intangible assets included in depreciation and amortization expense in our condensed consolidated statements of operations was $69 million and $70 million for the three months ended March 31, 2018 and 2017, respectively, including $1 million of amortization expense on our development commissions in each period. Amortization of our contract acquisition costs recognized as a reduction in franchise fee and base and other management fee revenues was $7 million and $3 million for the three months ended March 31, 2018 and 2017, respectively.

We estimated future amortization for our amortizing intangible assets as of March 31, 2018 to be as follows:
 
Recognized in Depreciation and Amortization Expense
 
Recognized as a Reduction of Franchise Fee and Base and Other Management Fee Revenues
Year
(in millions)
2018 (remaining)
$
205

 
$
16

2019
261

 
22

2020
210

 
22

2021
71

 
21

2022
61

 
21

Thereafter
193

 
253

 
$
1,001

 
$
355



16



Note 6: Debt

Long-term Debt

Long-term debt balances, including obligations for capital leases, and associated interest rates as of March 31, 2018, were as follows:

March 31,
 
December 31,

2018
 
2017

(in millions)
Senior notes with a rate of 4.250%, due 2024
1,000

 
1,000

Senior notes with a rate of 4.625%, due 2025
900

 
900

Senior notes with a rate of 4.875%, due 2027
600

 
600

Senior secured term loan facility with a rate of 3.87%, due 2023
3,919

 
3,929

Capital lease obligations with an average rate of 6.33%, due 2021 to 2030
241

 
233

Other debt with an average rate of 2.65%, due 2018 to 2026
23

 
21


6,683

 
6,683

Less: unamortized deferred financing costs and discount
(78
)
 
(81
)
Less: current maturities of long-term debt(1)
(47
)
 
(46
)

$
6,558

 
$
6,556

____________
(1) 
Net of unamortized deferred financing costs and discount attributable to current maturities of long-term debt.

Senior Notes

In April 2018, we issued $1.5 billion aggregate principal amount of senior notes, see Note 16: "Subsequent Events" for additional information.

In March 2017, we issued $900 million aggregate principal amount of 4.625% Senior Notes due 2025 (the "2025 Senior Notes") and $600 million aggregate principal amount of 4.875% Senior Notes due 2027 (the "2027 Senior Notes"), and incurred $21 million of debt issuance costs. We used the net proceeds of the 2025 Senior Notes and the 2027 Senior Notes, along with available cash, to redeem in full our $1.5 billion 5.625% Senior Notes due 2021 (the "2021 Senior Notes"), plus accrued and unpaid interest. In connection with the repayment, we paid a redemption premium of $42 million and accelerated the recognition of $18 million of unamortized debt issuance costs, which were included in loss on debt extinguishment in our condensed consolidated statement of operations for the three months ended March 31, 2017.

The 4.250% Senior Notes due 2024 (the "2024 Senior Notes"), the 2025 Senior Notes and the 2027 Senior Notes are guaranteed on a senior unsecured basis by the Parent and certain of its wholly owned subsidiaries. See Note 15: "Condensed Consolidating Guarantor Financial Information" for additional details.

Senior Secured Credit Facility

Our senior secured credit facility consists of a $1.0 billion senior secured revolving credit facility (the "Revolving Credit Facility") and a senior secured term loan facility (the "Term Loans"). The obligations of our senior secured credit facility are unconditionally and irrevocably guaranteed by the Parent and substantially all of its direct and indirect wholly owned domestic subsidiaries.

As of March 31, 2018, we had $64 million of letters of credit outstanding under our Revolving Credit Facility and a borrowing capacity of $936 million.

In April 2018, we repaid approximately $500 million of our Term Loans and reduced the interest rate 25 basis points to LIBOR plus 175 basis points. See Note 16: "Subsequent Events" for additional information.


17



Debt Maturities

The contractual maturities of our long-term debt as of March 31, 2018 were as follows:
Year
(in millions)
2018 (remaining)
$
41

2019
56

2020
58

2021
59

2022
59

Thereafter
6,410

 
$
6,683


Note 7: Derivative Instruments and Hedging Activities

Cash Flow Hedges

In May 2017, we began hedging foreign exchange-based cash flow variability in certain of our foreign currency denominated management and franchise fees using forward contracts (the "Fee Forward Contracts"). We elected to designate these Fee Forward Contracts as cash flow hedges for accounting purposes. As of March 31, 2018, the Fee Forward Contracts had an aggregate notional amount of $68 million and maturities of 24 months or less.

As of March 31, 2018, we held two interest rate swap agreements with notional amounts of $1.6 billion and $750 million, which swap one-month LIBOR on the Term Loans to fixed rates of 1.98 percent and 2.02 percent, respectively, and expire in March 2022. We elected to designate these interest rate swaps as cash flow hedges for accounting purposes.

Non-designated Hedges

As of March 31, 2018, we held short-term forward contracts with an aggregate notional amount of $336 million to offset exposure to fluctuations in certain of our foreign currency denominated cash balances. We elected not to designate these forward contracts as hedging instruments. Depending on the fair value of each contract, we classify it as an asset or liability.

Fair Value of Derivative Instruments

We measure our derivative instruments at fair value, which is estimated using a discounted cash flow analysis, and we consider the inputs used to measure the fair value as Level 2 within the fair value hierarchy. The discounted cash flow analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs of similar instruments, including interest rate curves and spot and forward rates, as applicable, as well as option volatility. The fair values of our derivative instruments in our condensed consolidated balance sheets were as follows:
 
 
 
March 31,
 
December 31,
 
Balance Sheet Classification
 
2018
 
2017
 
 
 
(in millions)
Cash Flow Hedges:
 
 
 
 
 
Interest rate swaps
Other non-current assets
 
$
47

 
$
11

Forward contracts
Accounts payable, accrued expenses and other
 
1

 
1

 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
Forward contracts
Other current assets
 
1

 
4

Forward contracts
Accounts payable, accrued expenses and other
 
2

 
1



18



Earnings Effect of Derivative Instruments

The gains and losses recognized in our condensed consolidated statements of operations and condensed consolidated statements of comprehensive income before any effect for income taxes were as follows: 
 
 
 
Three Months Ended
 
 
 
March 31,
 
Classification of Gain (Loss) Recognized
 
2018
 
2017
 
 
 
(in millions)
Cash Flow Hedges(1)(2):
 
 
 
 
 
Interest rate swaps
Other comprehensive income
 
$
34

 
$
(9
)
Interest rate swaps
Interest expense
 
(2
)
 
(2
)
Forward contracts
Other comprehensive income
 
(1
)
 
N/A

 
 
 
 
 
 
Non-designated Hedges:
 
 
 
 
 
Interest rate swaps
Other non-operating income, net
 
N/A

 
2

Interest rate swaps(3)
Interest expense
 
(3
)
 
(3
)
Forward contracts
Gain (loss) on foreign currency transactions
 
1

 
1

____________
(1) 
There were no amounts recognized in earnings related to hedge ineffectiveness or amounts excluded from hedge effectiveness testing during the three months ended March 31, 2018 and 2017.
(2) 
The earnings effect of the Fee Forward Contracts on fee revenues for the three months ended March 31, 2018 was less than $1 million.
(3) 
These amounts are related to the dedesignation of interest rate swaps in 2016 that no longer met the criteria for hedge accounting and were settled in 2017. The amounts were reclassified from accumulated other comprehensive loss as the underlying transactions occurred.

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, see Note 7: "Derivative Instruments and Hedging Activities" for the fair value information of our derivatives:
 
March 31, 2018
 
 
 
Hierarchy Level
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
237

 
$

 
$
237

 
$

Restricted cash equivalents
12

 

 
12

 

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
6,341

 
2,471

 

 
3,951


 
December 31, 2017
 
 
 
Hierarchy Level
 
Carrying Value
 
Level 1
 
Level 2
 
Level 3
 
(in millions)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
284

 
$

 
$
284

 
$

Restricted cash equivalents
12

 

 
12

 

Liabilities:
 
 
 
 
 
 
 
Long-term debt(1)
6,348

 
2,575

 

 
3,954

____________
(1)
The carrying values include unamortized deferred financing costs and discount. The carrying values and fair values exclude capital lease obligations and other debt.

The fair values of financial instruments not included in these tables are estimated to be equal to their carrying values as of March 31, 2018 and December 31, 2017. Our estimates of the fair values were determined using available market information and appropriate valuation methods. Considerable judgment is necessary to interpret market data and develop the estimated fair values.

19




Cash equivalents and restricted cash equivalents primarily consisted of short-term interest-bearing money market funds with maturities of less than 90 days and time deposits. The estimated fair values were based on available market pricing information of similar financial instruments.

The estimated fair values of our Level 1 long-term debt were based on prices in active debt markets. The estimated fair values of our Level 3 long-term debt were based on indicative quotes received for similar issuances.

Note 9: Income Taxes

On December 22, 2017, the TCJ Act, which permanently reduces the federal corporate income tax rate from a graduated 35 percent to a flat 21 percent rate and imposes a one-time transition tax on earnings of foreign subsidiaries that were previously deferred, was signed into law. As of March 31, 2018, we had not completed our accounting for the tax effects of enactment of the TCJ Act; however, where possible, as described below, we made a reasonable estimate of the effects on our existing deferred tax balances and the one-time transition tax. In other cases, we were not able to make a reasonable estimate and continued to account for those items based on the provisions of the tax laws that were in effect immediately prior to enactment. For the items for which were able to determine a reasonable estimate, we recognized a provisional benefit at December 31, 2017 of $665 million, of which $517 million was the result of the remeasurement of U.S. deferred tax assets and other tax liabilities. The provisional benefit of $517 million recorded at December 31, 2017 on our existing deferred tax balances excludes the income tax impact of the adoption of ASU 2014-09. Other than the effects of the adoption of ASU 2014-09 on our balance sheet as of December 31, 2017, as of March 31, 2018, we have not recognized any adjustments to the provisional amounts recorded at December 31, 2017.

Provisional Amounts

Deferred tax assets and liabilities and other tax liabilities. We remeasured deferred tax assets and liabilities and other tax liabilities based on the rates at which they are expected to reverse in the future, which is generally 21 percent. The provisional amounts recorded at December 31, 2017 related to the remeasurement of our deferred tax assets and liabilities, uncertain tax position reserves, and other tax liabilities were income tax benefits of $517 million, $33 million and $84 million, respectively. However, this remeasurement is based on estimates as of the enactment date of the TCJ Act and our existing analysis of the numerous complex tax law changes in the TCJ Act. As we finalize our analysis of the tax law changes in the TCJ Act, including the impact on our 2017 tax return filing positions throughout the 2018 fiscal year, we will update our provisional amounts for this remeasurement. As of March 31, 2018, our provisional amounts remain unchanged.

Foreign taxation changes. A one-time transition tax is applied to foreign earnings previously not subjected to U.S. tax. The one-time transition tax is based on our total post-1986 earnings and profits ("E&P") that were previously deferred from U.S. income taxes, but is assessed at a lower tax rate than the federal corporate tax rate of 35 percent. We recorded a provisional amount for our one-time transition tax liability for our foreign subsidiaries based on estimates, as of the enactment date of the TCJ Act, for our controlled foreign subsidiaries and estimates of the total post-1986 E&P for noncontrolled foreign subsidiaries. Additionally, the language in the TCJ Act is not specific enough to address all aspects of the calculation of the transition tax and leaves certain components of the calculation open to interpretation. The U.S. Treasury department is expected to issue regulations to provide clarification. We will update our provisional amounts related to the transition tax for the E&P of our noncontrolled foreign subsidiaries, as further guidance is provided by the U.S. Treasury department. We previously recorded a federal deferred tax liability for our deferred earnings at the statutory 35 percent rate. The application of the transition tax results in the deferred earnings previously recorded at 35 percent being subjected to a lower rate, resulting in a provisional income tax benefit at December 31, 2017 of $15 million. We had not recorded certain deferred tax assets, related primarily to E&P deficits, for some foreign subsidiaries based upon an expectation that no tax benefit from such assets would be realized within the foreseeable future. The recognition of tax benefits from the deferred tax assets previously not recorded resulted in a provisional income tax benefit at December 31, 2017 of $16 million. As of March 31, 2018, our provisional amounts remain unchanged. We continue to analyze and refine our calculations related to the measurement of these balances.

We continue to analyze the impact of the TCJ Act on our recognition of deferred tax assets and liabilities for outside basis differences in our investments in foreign subsidiaries and due to the complexity of these calculations on both our U.S. and foreign tax positions and uncertainty regarding the impact of new taxes on certain foreign earnings, we have not recorded provisional amounts. As of March 31, 2018, we had not recorded any deferred tax assets or liabilities for outside basis differences in our investments in foreign subsidiaries. We will further analyze the impact of these new taxes on foreign earnings and their impact on our tax positions throughout fiscal year 2018 to allow us to complete the required accounting for our

20



outside basis differences in our investments in foreign subsidiaries. We continued to apply Accounting Standards Codification 740 based on the provisions of the tax laws that were in effect immediately prior to the TCJ Act being enacted.

Global Intangible Low-Taxed Income ("GILTI") and Foreign Derived Intangible Income ("FDII")

The TCJ Act subjects a U.S. shareholder to current tax on GILTI earned by certain foreign subsidiaries. In addition, the TCJ Act provides for FDII to be taxed at a lower effective rate than the statutory rate by allowing a tax deduction against the income. Interpretive guidance on the accounting for GILTI states than an entity can make an accounting policy election to either recognize deferred taxes for temporary basis differences expected to reverse as GILTI in future years or provide for the tax expense related to GILTI in the year the tax is incurred as a period expense only. Given the complexity of the GILTI provisions, we are still evaluating the effects of the GILTI provisions and have not yet determined our accounting policy. At March 31, 2018, because we are still evaluating the GILTI provisions and our analysis of future taxable income that is subject to GILTI, we have included GILTI and the FDII deduction related to current-year operations only in our estimated annual effective tax rate and have not provided additional GILTI on deferred items.

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 pre-tax income or loss, which is subject to federal, state, local and foreign income taxes.

Our total unrecognized tax benefit as of March 31, 2018 was $284 million. We accrued approximately $35 million for the payment of interest and penalties as of March 31, 2018. Included in the balance of unrecognized tax benefits as of March 31, 2018 was $285 million 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 Internal Revenue Service ("IRS") and the Revenue Agents Report ("RAR") for the 2006 and October 2007 tax years. We disagreed with several of the proposed adjustments in the RAR, filed a formal appeals protest with the IRS and did not make any tax payments related to this audit. The issues being protested in appeals relate to assertions by the IRS that: (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 our Hilton Honors guest loyalty program, we should not reduce gross income by the estimated costs of future redemptions, but rather such costs would be deductible at the time the points are redeemed; and (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, and thus foreign currency gains and losses with respect to such loans should have been measured in euros, instead of USD. Additionally, in January 2016, we received a 30-day Letter from the IRS and the RAR for the December 2007 through 2010 tax years. The RAR includes the proposed adjustments for tax years December 2007 through 2010, which reflect the carryover effect of the three protested issues from 2006 through October 2007. These proposed adjustments will also be protested in appeals and formal appeals protests have been submitted. In total, the proposed adjustments sought by the IRS would result in additional U.S. federal tax owed of approximately $874 million, excluding interest and penalties and potential state income taxes. The portion of this amount related to 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 March 31, 2018, we have recorded $45 million of unrecognized tax benefits related to these issues.

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 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. We are no longer subject to U.S. federal income tax examination for years through 2004. As of March 31, 2018, we remain subject to federal examinations from 2005 through 2016, state examinations from 2005 through 2016 and foreign examinations of our income tax returns for the years 1996 through 2017.

Note 10: Share-Based Compensation

We grant time-vesting restricted stock units and restricted stock (collectively, "RSUs"), nonqualified stock options ("options") and performance-vesting restricted stock units and restricted stock (collectively, "performance shares") to our

21



employees and deferred share units ("DSUs") to members of our board of directors. We recognized share-based compensation expense of $28 million and $25 million during the three months ended March 31, 2018 and 2017, respectively. As of March 31, 2018, unrecognized compensation costs for unvested awards was approximately $223 million, which are expected to be recognized over a weighted-average period of 2.0 years on a straight-line basis. As of March 31, 2018, there were 16.2 million shares of common stock available for future issuance under our 2017 Omnibus Incentive Plan, plus any shares subject to awards outstanding under our 2013 Omnibus Incentive Plan, which will become available for issuance under our 2017 Omnibus Incentive Plan if such outstanding awards expire or are terminated or are canceled or forfeited.

RSUs

During the three months ended March 31, 2018, we granted 0.9 million RSUs with a weighted average grant date fair value per share of $79.37, which generally vest in equal annual installments over two or three years from the date of grant.

Options

During the three months ended March 31, 2018, we granted 0.6 million options with an exercise price per share of $79.35, 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 three months ended March 31, 2018 was $23.78, which was determined using the Black-Scholes-Merton option-pricing model with the following assumptions:
Expected volatility(1)
27.99
%
Dividend yield(2)
0.74
%
Risk-free rate(3)
2.73
%
Expected term (in years)(4)
6.0

____________
(1) 
Estimated using historical movement of Hilton's stock price.
(2) 
Estimated based on the current 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 March 31, 2018, 1.2 million options were exercisable.

Performance Shares

During the three months ended March 31, 2018, we granted 0.3 million performance shares with a weighted average grant date fair value per share of $79.35. The performance shares are settled at the end of the three-year performance period with 50 percent of the awards subject to achievement based on the Company's adjusted earnings before interest expense, a provision for income taxes and depreciation and amortization ("Adjusted EBITDA") compound annual growth rate ("CAGR") ("EBITDA CAGR") and the other 50 percent of the awards subject to achievement based on the Company’s free cash flow ("FCF") per share CAGR ("FCF CAGR"). We determined that the performance conditions for performance shares issued in 2018 and 2017 are probable of achievement and, as of March 31, 2018, we recognized compensation expense based on the following anticipated achievement percentages for these performance shares:
 
EBITDA CAGR
 
FCF CAGR
2017 performance shares
200
%
 
200
%
2018 performance shares
150
%
 
125
%


22



Note 11: Stockholders' Equity and Accumulated Other Comprehensive Loss

The changes in the components of stockholders' equity were as follows:
 
Equity Attributable to Hilton Stockholders
 
 
 
 
 
 
 
 
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit(1)
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
Common Stock
 
 
 
 
 
Noncontrolling
Interests
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Total
 
(in millions)
Balance as of December 31, 2017
317

 
$
3

 
$
(891
)
 
$
10,298

 
$
(6,981
)
 
$
(741
)
 
$
3

 
$
1,691

Share-based compensation
1

 

 

 
(10
)
 

 

 

 
(10
)
Repurchases of common stock
(1
)
 

 
(110
)
 

 

 

 

 
(110
)
Net income

 

 

 

 
161

 

 
2

 
163

Other comprehensive income

 

 

 

 

 
61

 

 
61

Dividends

 

 

 

 
(48
)
 

 

 
(48
)
Balance as of March 31, 2018
317

 
$
3

 
$
(1,001
)
 
$
10,288

 
$
(6,868
)
 
$
(680
)
 
$
5

 
$
1,747


 
Equity Attributable to Hilton Stockholders
 
 
 
 
 
 
 
 
 
Treasury Stock
 
Additional
Paid-in
Capital
 
Accumulated Deficit(1)
 
Accumulated
Other
Comprehensive
Loss
 
 
 
 
 
Common Stock
 
 
 
 
 
Noncontrolling
Interests(2)
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Total
 
(in millions)
Balance as of December 31, 2016
329

 
$
3

 
$

 
$
10,220

 
$
(3,545
)
 
$
(1,001
)
 
$
(50
)
 
$
5,627

Share-based compensation
2

 

 

 
(7
)
 

 

 

 
(7
)
Repurchases of common stock
(1
)
 

 
(70
)
 

 

 

 

 
(70
)
Net income

 

 

 

 
47

 

 
1

 
48

Other comprehensive income (loss)

 

 

 

 

 
20

 
(1
)
 
19

Dividends

 

 

 

 
(50
)
 

 

 
(50
)
Spin-offs of Park and HGV

 

 

 

 
(4,318
)
 
63

 
49

 
(4,206
)
Cumulative effect of the adoption of ASU 2016-09

 

 

 
1

 
(1
)
 

 

 

Distributions

 

 

 

 

 

 
(1
)
 
(1
)
Balance as of March 31, 2017
330

 
$
3

 
$
(70
)
 
$
10,214

 
$
(7,867
)
 
$
(918
)
 
$
(2
)
 
$
1,360

___________
(1) 
Includes adjustments of $385 million and $222 million as of December 31, 2017 and 2016, respectively, as a result of the adoption of ASU 2014-09 as of January 1, 2016. See Note 2: "Basis of Presentation and Summary of Significant Accounting Policies" for additional information.
(2) 
Other comprehensive loss was related to a currency translation adjustment.

During 2017, our board of directors authorized stock repurchases of up to $2.0 billion of the Company's common stock. During the three months ended March 31, 2018, we repurchased 1.3 million shares of common stock under the program. As of March 31, 2018, approximately $1.0 billion remained available for share repurchases under the program. In April 2018, we repurchased 16.5 million shares of Hilton common stock from HNA for $1.17 billion, which was made apart from, and not pursuant to, the stock repurchase program. See Note 16: "Subsequent Events" for additional information.

The changes in the components of accumulated other comprehensive loss, net of taxes, were as follows:
 
Currency Translation Adjustment(1)
 
Pension Liability Adjustment(2)
 
Cash Flow Hedge Adjustment(3)
 
Total
 
(in millions)
Balance as of December 31, 2017
$
(513
)
 
$
(229
)
 
$
1

 
$
(741
)
Other comprehensive income (loss) before reclassifications
32

 
(1
)
 
24

 
55

Amounts reclassified from accumulated other comprehensive loss

 
2

 
4

 
6

Net current period other comprehensive income
32

 
1

 
28

 
61

Balance as of March 31, 2018
$
(481
)
 
$
(228
)
 
$
29

 
$
(680
)


23



 
Currency Translation Adjustment(1)
 
Pension Liability Adjustment(2)
 
Cash Flow Hedge Adjustment(3)
 
Total
 
(in millions)
Balance as of December 31, 2016
$
(738
)
 
$
(251
)
 
$
(12
)
 
$
(1,001
)
Other comprehensive income (loss) before reclassifications
21

 
(1
)
 
(5
)
 
15

Amounts reclassified from accumulated other comprehensive loss

 
2

 
3

 
5

Net current period other comprehensive income (loss)
21

 
1

 
(2
)
 
20

Spin-offs of Park and HGV
63

 

 

 
63

Balance as of March 31, 2017
$
(654
)
 
$
(250
)
 
$
(14
)
 
$
(918
)
____________
(1) 
Includes net investment hedges and intra-entity foreign currency transactions that are of a long-term investment nature.
(2) 
Amounts reclassified include the amortization of prior service cost and the amortization of net loss that were included in our computation of net periodic pension cost. They were recognized in other non-operating income, net in our condensed consolidated statements of operations and are presented net of a $1 million tax benefit for the three months ended March 31, 2018 and 2017.
(3) 
Amounts reclassified relate to the designated interest rate swaps, as well as the interest rate swaps that were dedesignated in 2016 and settled in 2017. The amounts were recognized in interest expense in our condensed consolidated statements of operations and are presented net of a tax benefit of $1 million and $2 million for the three months ended March 31, 2018 and 2017, respectively.

Note 12: Earnings Per Share

The following table presents the calculation of basic and diluted earnings per share ("EPS"):
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(in millions, except per share amounts)
Basic EPS:
 
 
 
Numerator:
 
 
 
Net income attributable to Hilton stockholders
$
161

 
$
47

Denominator:
 
 
 
Weighted average shares outstanding
316

 
330

Basic EPS
$
0.51

 
$
0.14

 
 
 
 
Diluted EPS:
 
 
 
Numerator:
 
 
 
Net income attributable to Hilton stockholders
$
161

 
$
47

Denominator:
 
 
 
Weighted average shares outstanding
319

 
331

Diluted EPS
$
0.51

 
$
0.14


Less than 1 million share-based compensation awards were excluded from the weighted average shares outstanding in the computation of diluted EPS for the three months ended March 31, 2018 and 2017 because their effect would have been anti-dilutive under the treasury stock method.

Note 13: Business Segments

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

The management and franchise segment includes all of the hotels we manage for third-party owners, as well as all franchised hotels operated or managed by someone other than us. As of March 31, 2018, this segment included 650 managed hotels and 4,570 franchised hotels consisting of 833,421 total rooms. This segment also earns license fees from HGV and co-brand credit card arrangements and fees for managing properties in our ownership segment.


24



As of March 31, 2018, the ownership segment included 71 properties totaling 21,718 rooms, comprising 62 hotels that we wholly owned or leased, one hotel owned by a consolidated non-wholly owned entity, two hotels leased by consolidated VIEs and six hotels owned or leased by unconsolidated affiliates.

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

The following table presents revenues for our reportable segments, reconciled to consolidated amounts:
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(in millions)
Franchise fees
$
333

 
$
283

Base and other management fees(1)
90

 
90

Incentive management fees
55

 
49

Management and franchise
478

 
422

Ownership
334

 
296

Segment revenues
812

 
718

Amortization of contract acquisition costs
(7
)
 
(3
)
Other revenues
23

 
37

Direct reimbursements from managed and franchised properties

699

 
663

Indirect reimbursements from managed and franchised properties

555

 
488

Intersegment fees elimination(1)
(8
)
 
(7
)
Total revenues
$
2,074

 
$
1,896

____________
(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.

The following table presents operating income for our reportable segments, reconciled to consolidated income before income taxes:
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(in millions)
Management and franchise(1)
$
478

 
$
422

Ownership(1)
6

 
21

Segment operating income
484

 
443

Amortization of contract acquisition costs
(7
)
 
(3
)
Other revenues, less other expenses
9

 
14

Net other expenses from managed and franchised properties


(21
)
 
(45
)
Depreciation and amortization
(82
)
 
(86
)
General and administrative
(104
)
 
(106
)
Operating income
279

 
217

Interest expense
(83
)
 
(89
)
Gain (loss) on foreign currency transactions
11

 
(4
)
Loss on debt extinguishment

 
(60
)
Other non-operating income, net
14

 
2

Income before income taxes
$
221

 
$
66

____________
(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.

25




The following table presents total assets for our reportable segments, reconciled to consolidated amounts:
 
March 31,
 
December 31,
 
2018
 
2017
 
(in millions)
Management and franchise
$
11,435

 
$
11,505

Ownership
994

 
964

Corporate and other
1,831

 
1,759

 
$
14,260

 
$
14,228


The following table presents capital expenditures for property and equipment for our reportable segments, reconciled to consolidated amounts:
 
Three Months Ended
 
March 31,
 
2018
 
2017
 
(in millions)
Ownership
$
7

 
$
6

Corporate and other
3

 
3

 
$
10

 
$
9


Note 14: Commitments and Contingencies

We provide performance guarantees to certain owners of hotels that we operate under management contracts. Most of these guarantees allow us to terminate the contract, rather than fund shortfalls, if specified operating performance levels are not achieved. However, in limited cases, we are obligated to fund performance shortfalls. As of March 31, 2018, we had four contracts containing performance guarantees, with expirations ranging from 2019 to 2030, and possible cash outlays totaling approximately $47 million. Our obligations under these guarantees in future periods are dependent on the operating performance levels of these hotels over the remaining terms of the performance guarantees. We do not have any letters of credit pledged as collateral against these guarantees. As of March 31, 2018 and December 31, 2017, we recorded $14 million and $12 million, respectively, in accounts payable, accrued expenses and other and $7 million and $9 million, respectively, in other liabilities in our condensed consolidated balance sheets for one and two outstanding performance guarantees, respectively, that are related to VIEs for which we are not the primary beneficiary.

We receive fees from managed and franchise properties to operate our marketing, sales and brand programs on behalf of hotel owners. As of March 31, 2018 and December 31, 2017, we had collected an aggregate of $397 million and $402 million in excess of net amounts expended, respectively, across all programs.

We are involved in various claims and lawsuits arising in the ordinary course of business, some of which include claims for substantial sums. While the ultimate results of claims and litigation cannot be predicted with certainty, we expect that the ultimate resolution of all pending or threatened claims and litigation as of March 31, 2018 will not have a material adverse effect on our consolidated financial position, results of operations or cash flows.

Note 15: Condensed Consolidating Guarantor Financial Information

Hilton Worldwide Finance LLC and Hilton Worldwide Finance Corp. (the "HWF Issuers"), entities that are 100 percent owned by Hilton Worldwide Parent LLC ("HWP"), which is 100 percent owned by the Parent, issued the 2025 Senior Notes and 2027 Senior Notes in March 2017 and are guarantors of the 2024 Senior Notes. In September 2016, Hilton Domestic Operating Company Inc. ("HOC"), an entity incorporated in July 2016 that is 100 percent owned by Hilton Worldwide Finance LLC and is a guarantor of the 2025 Senior Notes and 2027 Senior Notes, assumed the 2024 Senior Notes that were issued in August 2016 by escrow issuers. The 2024 Senior Notes, 2025 Senior Notes and 2027 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 100 percent 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 facility will guarantee the Senior Notes. As of March 31, 2018, none of

26



our foreign subsidiaries or U.S. subsidiaries owned by foreign subsidiaries or conducting foreign operations or our non-wholly owned subsidiaries guarantee the Senior Notes (collectively, the "Non-Guarantors").

The condensed consolidating financial information presents the financial information based on the composition of the Guarantors and Non-Guarantors as of March 31, 2018.

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 facility; (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 March 31, 2018 and December 31, 2017, and for the three months ended March 31, 2018 and 2017, for the Parent, HWF Issuers, HOC, Guarantors and Non-Guarantors.

27



 
March 31, 2018
Parent
 
HWF Issuers
 
HOC
 
Guarantors
 
Non-Guarantors
 
Eliminations
 
Total
 
(in millions)
ASSETS
 
 
 
 
 
 
 
 
 
 
 
 
 
Current Assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$

 
$
2

 
$
14

 
$
594

 
$

 
$
610

Restricted cash and cash equivalents

 

 
33

 
10

 
30

 

 
73

Accounts receivable, net

 

 
17

 
700

 
263

 

 
980

Intercompany receivables

 

 

 

 
40

 
(40
)
 

Prepaid expenses

 

 
18

 
51

 
95

 
(3
)
 
161

Other

 

 
1

 
17

 
166

 

 
184

Total current assets

 

 
71

 
792

 
1,188