Hilton(HLT) - 2023 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements Hilton's unaudited condensed consolidated financial statements for Q3 and YTD 2023 are presented, with detailed notes Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (in millions) | Metric | Sep 30, 2023 (in millions) | Dec 31, 2022 (in millions) | |:----------------------------|:---------------------------|:---------------------------| | ASSETS | | | | Total current assets | $2,484 | $2,870 | | Total intangibles and other assets | $12,716 | $12,642 | | TOTAL ASSETS | $15,200 | $15,512 | | LIABILITIES AND EQUITY (DEFICIT) | | | | Total current liabilities | $3,561 | $3,372 | | Long-term debt | $8,682 | $8,708 | | Total liabilities | $16,953 | $16,610 | | Total Hilton stockholders' deficit | $(1,763) | $(1,102) | | Total deficit | $(1,753) | $(1,098) | | TOTAL LIABILITIES AND EQUITY (DEFICIT) | $15,200 | $15,512 | - Total assets decreased from $15,512 million at December 31, 2022, to $15,200 million at September 30, 2023 Total liabilities increased from $16,610 million to $16,953 million over the same period[8] - Hilton stockholders' deficit widened from $(1,102) million at December 31, 2022, to $(1,763) million at September 30, 2023[8] Condensed Consolidated Statements of Operations Condensed Consolidated Statements of Operations (in millions, except per share data) | Metric (in millions, except per share data) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:--------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Total revenues | $2,673 | $2,368 | $7,626 | $6,329 | | Total expenses | $2,020 | $1,745 | $5,801 | $4,739 | | Operating income | $653 | $623 | $1,825 | $1,590 | | Income before income taxes | $548 | $527 | $1,418 | $1,331 | | Net income | $379 | $346 | $1,001 | $924 | | Net income attributable to Hilton stockholders | $377 | $347 | $994 | $927 | | Basic EPS | $1.45 | $1.27 | $3.77 | $3.35 | | Diluted EPS | $1.44 | $1.26 | $3.74 | $3.32 | | Cash dividends declared per share | $0.15 | $0.15 | $0.45 | $0.30 | - Total revenues increased by 12.9% for the three months ended September 30, 2023, and by 20.5% for the nine months ended September 30, 2023, compared to the same periods in 2022[11] - Net income attributable to Hilton stockholders increased by 8.6% for the three months ended September 30, 2023, and by 7.2% for the nine months ended September 30, 2023, year-over-year[11] Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (in millions) | Metric (in millions) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:----------------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Net income | $379 | $346 | $1,001 | $924 | | Total other comprehensive income (loss) | $(25) | $29 | $(23) | $94 | | Comprehensive income | $354 | $375 | $978 | $1,018 | | Comprehensive income attributable to Hilton stockholders | $352 | $376 | $972 | $1,021 | - Total other comprehensive income shifted from a gain of $29 million in Q3 2022 to a loss of $25 million in Q3 2023, primarily due to currency translation adjustments[13][56] Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (in millions) | Metric (in millions) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:----------------------------------------------------|:-------------------------------|:-------------------------------| | Net cash provided by operating activities | $1,481 | $1,199 | | Net cash used in investing activities | $(228) | $(98) | | Net cash used in financing activities | $(1,744) | $(1,230) | | Net decrease in cash, restricted cash and cash equivalents | $(507) | $(150) | | Cash, restricted cash and cash equivalents, end of period | $779 | $1,362 | - Net cash provided by operating activities increased by 23.5% to $1,481 million for the nine months ended September 30, 2023, compared to the same period in 2022[16][117] - Net cash used in investing activities more than doubled to $(228) million, driven by increased capital expenditures and capitalized software costs[16][120] - Net cash used in financing activities increased by 41.8% to $(1,744) million, primarily due to higher share repurchases[16][117][121] Note 1: Organization and Basis of Presentation - Hilton Worldwide Holdings Inc. is a global hospitality company engaged in managing, franchising, owning, and leasing hotels and resorts, and licensing its intellectual property[19] - The condensed consolidated financial statements are unaudited and prepared in accordance with U.S. GAAP, with certain disclosures condensed or omitted[20] Note 2: Revenues from Contracts with Customers Contract Liabilities Activity (in millions) | Contract Liabilities Activity (in millions) | Amount | |:--------------------------------------------|:-------| | Balance as of December 31, 2022 | $1,331 | | Cash received in advance | $508 | | Revenue recognized | $(271) | | Other | $(75) | | Balance as of September 30, 2023 | $1,493 | - As of September 30, 2023, deferred revenues for unsatisfied performance obligations totaled $1,493 million, primarily related to the Hilton Honors guest loyalty program ($761 million) and advance consideration from hotel owners ($713 million)[23][24] Note 3: Consolidated Variable Interest Entities - Hilton consolidates two variable interest entities (VIEs) in Japan, each leasing one hotel property, due to being the primary beneficiary[25] VIE Assets/Liabilities (in millions) | VIE Assets/Liabilities (in millions) | Sep 30, 2023 | Dec 31, 2022 | |:-------------------------------------|:-------------|:-------------| | Cash and cash equivalents | $52 | $29 | | Property and equipment, net | $36 | $45 | | Long-term debt | $112 | $152 | - During Q3 2023, one consolidated VIE made prepayments of approximately $7 million on borrowings[26] Note 4: Loss on Investments in Unconsolidated Affiliate - Hilton recognized a $44 million other-than-temporary impairment loss on an equity method investment and $48 million in credit losses on financing receivables from an unconsolidated affiliate (the 'Fund') in March 2023[28] - These losses were due to the Fund's failure to comply with debt agreements, triggered by rising market-based interest rates[28] Note 5: Debt Long-term Debt (in millions) | Long-term Debt (in millions) | Sep 30, 2023 | Dec 31, 2022 | |:-----------------------------|:-------------|:-------------| | Senior secured term loan | $2,619 | $2,619 | | Senior notes (various rates) | $5,500 | $5,500 | | Finance lease liabilities | $138 | $164 | | Other debt of consolidated VIEs | $26 | $37 | | Total gross debt | $8,783 | $8,820 | | Net long-term debt | $8,682 | $8,708 | - In January 2023, Hilton amended its Revolving Credit Facility, increasing borrowing capacity from $1.75 billion to $2.0 billion, with an expected maturity date of January 2028[31] - As of September 30, 2023, no debt was outstanding under the Revolving Credit Facility, with $1,940 million available borrowing capacity[31] Note 6: Fair Value Measurements Financial Instruments Fair Value (in millions) | Financial Instruments (in millions) | Carrying Value (Sep 30, 2023) | Fair Value (Sep 30, 2023) | |:------------------------------------|:------------------------------|:--------------------------| | Interest rate swap (asset) | $110 | $110 | | Long-term debt (liability) | $8,619 | $7,904 | - During the nine months ended September 30, 2023, Hilton recognized a $44 million other-than-temporary impairment loss on an equity method investment (the Fund), valuing it at zero using Level 3 inputs due to debt agreement non-compliance[36] Note 7: Income Taxes - Hilton is reassessing its uncertain tax positions related to its guest loyalty program following an October 2023 U.S. Tax Court decision, which could increase uncertain tax position reserves by up to $218 million (excluding interest) and income tax expense by up to $65 million (including interest) in future periods[38][39] - Hilton is contesting proposed IRS adjustments from June 2023 regarding a 2016 IP transfer, which could increase taxable income for 2016-2018, but believes existing reserves of $73 million accurately reflect the estimated benefit not expected to be realized[40][41] Note 8: Share-Based Compensation Share-Based Compensation Expense (in millions) | Share-Based Compensation Expense (in millions) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:-----------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Total expense | $48 | $42 | $133 | $126 | - During the nine months ended September 30, 2023, Hilton granted 602,000 RSUs, 341,000 options, and 244,000 performance shares[43][44][46] - The weighted average grant date fair value for RSUs and performance shares was $146.18 per share, and for options, it was $52.27 per share[43][44][46] Note 9: Earnings Per Share Earnings Per Share | EPS Metric | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:-----------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Basic EPS | $1.45 | $1.27 | $3.77 | $3.35 | | Diluted EPS | $1.44 | $1.26 | $3.74 | $3.32 | - Basic EPS increased by 14.2% and diluted EPS by 14.3% for the three months ended September 30, 2023, compared to the prior year[49] - Weighted average shares outstanding for diluted EPS decreased from 275 million in Q3 2022 to 262 million in Q3 2023[49] Note 10: Stockholders' Equity (Deficit) and Accumulated Other Comprehensive Loss Stockholders' Equity (Deficit) (in millions) | Stockholders' Equity (Deficit) (in millions) | Balance as of Dec 31, 2022 | Balance as of Sep 30, 2023 | |:---------------------------------------------|:---------------------------|:---------------------------| | Common Stock | $3 | $3 | | Treasury Stock | $(6,040) | $(7,647) | | Additional Paid-in Capital | $10,831 | $10,925 | | Accumulated Deficit | $(5,190) | $(4,316) | | Accumulated Other Comprehensive Loss | $(706) | $(728) | | Total Hilton Stockholders' Deficit | $(1,102) | $(1,763) | | Noncontrolling Interests | $4 | $10 | | Total Deficit | $(1,098) | $(1,753) | - Hilton repurchased 11.0 million shares of common stock for $1,615 million during the nine months ended September 30, 2023[53] - Accumulated other comprehensive loss increased from $(706) million at December 31, 2022, to $(728) million at September 30, 2023, primarily due to currency translation adjustments[53][56] Note 11: Business Segments - Hilton operates in two segments: management and franchise, and ownership, generating revenue from fees and hotel room sales respectively[57][58] Segment Revenues (in millions) | Segment Revenues (in millions) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:-------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Management and franchise | $804 | $718 | $2,262 | $1,911 | | Ownership | $335 | $295 | $924 | $727 | | Total segment revenues | $1,139 | $1,013 | $3,186 | $2,638 | Segment Operating Income (in millions) | Segment Operating Income (in millions) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:---------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Management and franchise | $804 | $718 | $2,262 | $1,911 | | Ownership | $28 | $25 | $58 | $8 | | Total segment operating income | $832 | $743 | $2,320 | $1,919 | Note 12: Commitments and Contingencies - As of September 30, 2023, Hilton had performance guarantees with possible cash outlays totaling approximately $7 million, expiring between 2025 and 2043[64] - Hilton also had debt guarantees and letters of credit totaling $122 million, expiring between 2025 and 2031, for owners of managed or franchised hotels[64] Note 13: Supplemental Disclosures of Cash Flow Information Supplemental Cash Flow Information (in millions) | Cash Flow Information (in millions) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:------------------------------------|:-------------------------------|:-------------------------------| | Cash interest paid | $345 | $260 | | Income tax payments, net of refunds | $349 | $253 | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Analysis of Hilton's Q3 and YTD 2023 financial condition and results, highlighting RevPAR improvements and increased operating cash flows Forward-Looking Statements - The report contains forward-looking statements regarding business performance, financial results, liquidity, and capital resources, subject to various risks and uncertainties inherent to the hospitality industry and macroeconomic factors[68] Recent Developments - Global growth in 2023 is normalizing as travel patterns recover from the COVID-19 pandemic, with certain regions and segments still in recovery[69] - Adverse developments in the financial services industry in 2023 have not materially impacted Hilton's operations directly, but could pose future risks[70] Overview - As of September 30, 2023, Hilton operated 7,399 properties with 1,159,785 rooms across 124 countries, and its Hilton Honors loyalty program had 173 million members[71][72] - Hilton's development pipeline included 3,194 hotels and 457,300 rooms as of September 30, 2023, with 223,000 rooms under construction[78] - Net unit growth from September 30, 2022, to September 30, 2023, was 4.3%[78] Key Business and Financial Metrics Used by Management - Key metrics include Occupancy, Average Daily Rate (ADR), and Revenue per Available Room (RevPAR), all presented on a comparable and currency-neutral basis[80][81][82][83] - EBITDA and Adjusted EBITDA are non-GAAP measures used to evaluate operating performance, excluding items like interest, taxes, depreciation, amortization, and share-based compensation[84][85] Results of Operations Hotel Operating Statistics (System-wide Comparable Hotels) | Hotel Operating Statistics (System-wide Comparable Hotels) | Three Months Ended Sep 30, 2023 | Change 2023 vs. 2022 | Nine Months Ended Sep 30, 2023 | Change 2023 vs. 2022 | |:-----------------------------------------------------------|:--------------------------------|:---------------------|:-------------------------------|:---------------------| | Occupancy | 75.3% | 2.2% pts. | 72.7% | 5.5% pts. | | ADR | $161.20 | 3.6% | $159.59 | 6.3% | | RevPAR | $121.37 | 6.8% | $116.01 | 14.9% | - All regions showed RevPAR improvement, driven by ADR and occupancy gains, with Asia Pacific leading with a 39.3% RevPAR increase in Q3 2023[89] Reconciliation of Net Income to Adjusted EBITDA (in millions) | Reconciliation of Net Income to Adjusted EBITDA (in millions) | Three Months Ended Sep 30, 2023 | Three Months Ended Sep 30, 2022 | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | |:--------------------------------------------------------------|:--------------------------------|:--------------------------------|:-------------------------------|:-------------------------------| | Net income | $379 | $346 | $1,001 | $924 | | EBITDA | $701 | $672 | $1,872 | $1,749 | | Adjusted EBITDA | $834 | $732 | $2,286 | $1,859 | - Adjusted EBITDA increased by 13.9% to $834 million for the three months and by 22.9% to $2,286 million for the nine months ended September 30, 2023[90] Revenues (in millions) | Revenues (in millions) | Three Months Ended Sep 30, 2023 | % Change YoY | Nine Months Ended Sep 30, 2023 | % Change YoY | |:---------------------------------------|:--------------------------------|:-------------|:-------------------------------|:-------------| | Franchise and licensing fees | $643 | 12.2% | $1,769 | 15.5% | | Total management fees | $144 | 12.5% | $444 | 31.4% | | Owned and leased hotels revenues | $335 | 13.6% | $924 | 27.1% | | Other revenues | $45 | 60.7% | $126 | 77.5% | - Increases in franchise and management fees were driven by RevPAR growth and the addition of 538 net franchised and managed hotels since January 2022[91][92] - Owned and leased hotel revenues increased by 13.6% in Q3 2023 and 27.1% for the nine months, primarily due to RevPAR increases[95][96] Operating Expenses (in millions) | Operating Expenses (in millions) | Three Months Ended Sep 30, 2023 | % Change YoY | Nine Months Ended Sep 30, 2023 | % Change YoY | |:---------------------------------|:--------------------------------|:-------------|:-------------------------------|:-------------| | Owned and leased hotels expenses | $301 | 14.4% | $849 | 20.4% | | Depreciation and amortization | $40 | 2.6% | $114 | (7.3)% | | General and administrative | $96 | 3.2% | $298 | 3.8% | | Other expenses | $26 | 100.0% | $80 | NM | - Owned and leased hotel expenses increased due to higher occupancy, labor costs, utilities, rent, and cost inflation[99] - Interest expense increased by 6.6% in Q3 2023 and 15.3% for the nine months, mainly due to higher interest rates on variable rate debt[102] - A $92 million loss on investments in unconsolidated affiliate was recognized for the nine months ended September 30, 2023, including a $44 million impairment loss and $48 million in credit losses[103] Liquidity and Capital Resources - As of September 30, 2023, Hilton had $779 million in cash and cash equivalents, including $81 million of restricted cash[109] - During the nine months ended September 30, 2023, Hilton repurchased approximately 11.0 million shares of common stock for $1.6 billion, with $1.5 billion remaining available under its stock repurchase program[112] - Net cash provided by operating activities increased by 23.5% to $1,481 million, driven by higher management and franchise fees and American Express resuming cash purchases of Hilton Honors points[117][118][119] - Net cash used in investing activities increased significantly to $(228) million, primarily due to increased capital expenditures for property and equipment and capitalized software costs[117][120] - Net cash used in financing activities increased to $(1,744) million, mainly due to increased share repurchases and dividends paid[117][121] - Total indebtedness was approximately $8.8 billion as of September 30, 2023, with $1,940 million available under the Revolving Credit Facility[122] Critical Accounting Estimates - No material changes occurred to Hilton's critical accounting estimates during the nine months ended September 30, 2023, from those disclosed in the 2022 Annual Report on Form 10-K[124] Item 3. Quantitative and Qualitative Disclosures About Market Risk Hilton faces market risks from interest rates and foreign currency, using derivatives for hedging, with no material change in exposure - Hilton's primary market risks are from changes in interest rates and foreign currency exchange rates[125] - Derivative financial instruments are used to hedge a portion of these risks, not for speculative purposes[125] - There has been no material change in market risk exposure since December 31, 2022[125] Item 4. Controls and Procedures Hilton's disclosure controls and procedures are effective, with no material changes in internal control over financial reporting reported Disclosure Controls and Procedures - Hilton's disclosure controls and procedures were evaluated and deemed effective as of September 30, 2023, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[126][127] Changes in Internal Control Over Financial Reporting - No material changes in internal control over financial reporting occurred during the most recent fiscal quarter[128] PART II. OTHER INFORMATION Item 1. Legal Proceedings Hilton is involved in various legal claims and lawsuits, believing reserves are adequate and that these will not materially affect financials - Hilton is involved in various claims and lawsuits, including tort, employee, and consumer protection claims[130] - The company believes its reserves are adequate and that the ultimate resolution of pending litigation will not materially adversely affect its financial position, results of operations, or cash flows[130] Item 1A. Risk Factors No material changes to risk factors were reported as of September 30, 2023, compared to the 2022 Annual Report - No material changes to risk factors were reported as of September 30, 2023, compared to the prior annual report[131] Item 2. Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchasers of Equity Securities This section reports no unregistered sales of equity securities or use of proceeds, detailing Hilton's Q3 2023 common stock repurchases Issuer Purchases of Equity Securities Issuer Purchases of Equity Securities | Period (2023) | Total Shares Purchased | Average Price Paid per Share | |:--------------------------|:-----------------------|:-----------------------------| | July 1 to July 31 | 1,205,554 | $150.16 | | August 1 to August 31 | 1,773,696 | $151.74 | | September 1 to September 30 | 1,545,047 | $151.47 | | Total | 4,524,297 | $151.22 | - As of September 30, 2023, $1,528 million remained available under Hilton's $8 billion stock repurchase program, which has no expiration date[133] Item 3. Defaults Upon Senior Securities Hilton reported no defaults upon senior securities during the period - There were no defaults upon senior securities[134] Item 4. Mine Safety Disclosures This item is not applicable to Hilton Worldwide Holdings Inc - This disclosure is not applicable to the registrant[134] Item 5. Other Information No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during Q3 2023 - No director or officer adopted or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended September 30, 2023[135] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including organizational documents, certifications, and XBRL documents - Exhibits include the Certificate of Incorporation, Amended and Restated By-Laws, and Section 302 and 906 certifications from the CEO and CFO[136] - Inline XBRL documents (Instance, Schema, Calculation, Definition, Label, Presentation Linkbase Documents) are also filed[136] Signatures The report is duly signed by Christopher J. Nassetta, President and CEO, and Kevin J. Jacobs, CFO, on October 25, 2023 - The report was signed by Christopher J. Nassetta, President and CEO, and Kevin J. Jacobs, CFO and President, Global Development, on October 25, 2023[138][139]