Hilton(HLT) - 2023 Q4 - Annual Report

Part I Business Hilton operates a global, capital-light hospitality business focused on brand expansion and its loyalty program Company Scale and Development Pipeline as of Dec 31, 2023 | Metric | Properties | Rooms (approx.) | | :--- | :--- | :--- | | Total System | 7,530 | 1,182,937 | | Hilton Honors Members | N/A | 180 million | | 2023 Net Unit Growth | 353 | 53,100 (4.9%) | | Development Pipeline | 3,274 | 462,400 | - The business operates through two primary segments: Management and Franchise, which earns fees from managing and licensing brands to third-party owners, and an Ownership segment, which derives revenue from its consolidated owned and leased hotels[12] - Hilton's brand portfolio spans multiple market segments, from luxury (Waldorf Astoria, Conrad) to focused service (Hampton, Tru) and extended stay (Homewood Suites, Home2 Suites)[18] - The company's ESG strategy, 'Travel with Purpose,' focuses on environmental goals (net-zero future), social initiatives (career opportunities, community support), and robust governance[52][53] Our Brand Portfolio The company's portfolio features a diverse range of brands across multiple market segments, led by Hampton by Hilton Largest Brands by Room Count (Dec 31, 2023) | Brand | Properties | Rooms | % of Total Rooms | | :--- | :--- | :--- | :--- | | Hampton by Hilton | 2,971 | 327,690 | 27.7% | | Hilton Hotels & Resorts | 613 | 226,015 | 19.1% | | DoubleTree by Hilton | 677 | 154,708 | 13.1% | | Hilton Garden Inn | 1,010 | 149,130 | 12.6% | - The company launched Spark by Hilton, a premium economy brand, in 2023, which already has over 140 properties in the development pipeline[31] Our Business Segments The company's operations are divided into a capital-light Management and Franchise segment and an Ownership segment System Composition by Type (Dec 31, 2023) | Type | Properties | Rooms | | :--- | :--- | :--- | | Managed | 800 | 250,472 | | Franchised | 6,679 | 914,974 | | Owned / Leased | 51 | 17,491 | | Total System | 7,530 | 1,182,937 | - Management contracts typically have initial terms of 20-30 years, with fees based on a percentage of revenue and, in some cases, operating profits[44][45] - Franchise contracts typically have initial terms of approximately 20 years for new hotels, with franchisees paying royalty and program fees[48][49] Environmental, Social and Governance (ESG) The 'Travel with Purpose' ESG strategy sets ambitious environmental targets and focuses on social and human capital initiatives - Hilton was the first global hospitality company to set science-based targets validated by SBTi in 2018 and set more ambitious targets in 2022 aiming for a 1.5°C pathway[57] Environmental Impact Reductions (2008-2023) | Metric | Reduction Since 2008 | | :--- | :--- | | Carbon dioxide emissions per sq. meter | 45% | | Landfilled waste per sq. meter | 64% | | Water consumption per sq. meter | 26% | | Energy consumption per sq. meter | 33% | - As of December 31, 2023, the company employed or managed approximately 178,000 individuals, with a global workforce that was 43% women and a U.S. workforce that was 72% ethnically diverse[70][76] Risk Factors The company faces risks from macroeconomic conditions, competition, cybersecurity threats, and reliance on third-party owners - Key risks include macroeconomic conditions (inflation, interest rates), geopolitical activity, and public health concerns that can reduce demand for hospitality services[98] - The business is subject to significant IT and cybersecurity risks, including system failures, cyber-attacks, and costs associated with protecting personal data and incorporating AI[125][130][132] - A substantial amount of indebtedness (approx. $9.3 billion as of Dec 31, 2023) could adversely affect financial condition and limit flexibility[179] - The company relies on maintaining good relationships with third-party hotel owners; any deterioration could harm growth and financial results[110][111] Cybersecurity Cybersecurity governance is managed by a dedicated team and the Audit Committee, utilizing a formal incident response plan - A dedicated Global Information Security (GIS) team, led by the CISO, is responsible for managing cybersecurity risks[193] - The Audit Committee assists the board in monitoring cybersecurity risk, receiving at least quarterly reports from the CIO and CISO[194] - The company utilizes a Global Cybersecurity Incident Response Plan (CIRP) to manage and escalate potential incidents and a GRC platform to monitor risks[195][196] Properties The property portfolio includes interests in 5 joint venture hotels, 46 leased hotels, and various corporate offices Joint Venture Hotels (as of Dec 31, 2023) | Property | Location | Ownership % | Rooms | | :--- | :--- | :--- | :--- | | Conrad Cairo | Cairo, Egypt | 10% | 614 | | Hilton Tokyo Bay | Urayasu-shi, Japan | 24% | 828 | | Hilton Nagoya | Nagoya, Japan | 24% | 460 | | Hilton Mauritius Resort & Spa | Flic-en-Flac, Mauritius | 20% | 193 | | Hilton Imperial Dubrovnik | Dubrovnik, Croatia | 18% | 149 | - The company leases 46 hotels with 15,247 rooms, with significant properties including the Rome Cavalieri (370 rooms) and Hilton Tokyo (830 rooms)[203][204] - Corporate headquarters are leased in McLean, VA, with other key offices in Memphis, Glasgow, Dubai, Singapore, Tokyo, Shanghai, and Mexico City[207] Legal Proceedings The company is involved in ordinary course legal proceedings but does not expect a material adverse financial impact - The company is involved in ordinary course legal proceedings, including tort, employee, and consumer protection claims[208] - Management believes the ultimate outcome of pending litigation will not have a material adverse effect on the company's financial condition[208] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, and it actively returns capital through dividends and a significant share repurchase program Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased | Average Price Paid | Total Cost (approx.) | | :--- | :--- | :--- | :--- | | Oct 2023 | 1,758,248 | $151.02 | $265.5M | | Nov 2023 | 1,303,034 | $165.08 | $215.1M | | Dec 2023 | 1,503,791 | $176.57 | $265.5M | | Total Q4 | 4,565,073 | $163.45 | $746.1M | - In November 2023, the board authorized an additional $3.0 billion for the stock repurchase program, leaving approximately $3.8 billion available for repurchases as of year-end[215][278] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) In 2023, the company achieved strong RevPAR and revenue growth, maintained robust liquidity, and returned significant capital to shareholders System-Wide Comparable Hotel Operating Statistics (2023 vs. 2022) | Metric | 2023 Value | % Change vs. 2022 | | :--- | :--- | :--- | | RevPAR | $113.90 | 12.6% | | ADR | $158.62 | 5.4% | | Occupancy | 71.8% | 4.6 % pts. | Key Financial Results (in millions) | Metric | 2023 | 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $10,235 | $8,773 | 16.7% | | Net Income | $1,151 | $1,257 | (8.4%) | | Adjusted EBITDA | $3,089 | $2,599 | 18.9% | - The company returned significant capital to shareholders in 2023, repurchasing approximately 15.6 million shares for $2.3 billion and paying $158 million in dividends[278][287] Results of Operations Strong RevPAR growth drove higher fee and hotel revenues, though net income declined due to investment losses and higher taxes - Franchise and licensing fees increased by 14.6% to $2.37 billion, and total management fees increased by 25.7% to $616 million, driven by RevPAR growth[260] - Owned and leased hotel revenues increased by $168 million (15.6%), primarily due to a 36.1% RevPAR increase at comparable properties[262][263] - A loss of $92 million was recognized on an investment in an unconsolidated affiliate, comprising a $44 million impairment and $48 million in credit losses[271] - Income tax expense increased to $541 million from $477 million, mainly due to higher reserves for uncertain tax positions related to the guest loyalty program[273] Liquidity and Capital Resources The company maintained a solid liquidity position with strong operating cash flow, which funded significant share repurchases and dividends Summary of Cash Flows (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash from operating activities | $1,946 | $1,681 | | Net cash used in investing activities | ($305) | ($123) | | Net cash used in financing activities | ($2,040) | ($1,765) | - The increase in operating cash flow was supported by the resumption of cash purchases of Hilton Honors points by American Express[285] - As of Dec 31, 2023, total indebtedness was approximately $9.3 billion, with full availability of its $2.0 billion Revolving Credit Facility[288][289] Critical Accounting Estimates Key estimates requiring significant management judgment include impairment testing, loyalty program valuation, and income tax accounting - Goodwill and Brands: Impairment is assessed annually or when indicators exist, using qualitative factors or quantitative discounted cash flow models[292] - Hilton Honors: The company engages third-party actuaries to determine the fair value of the future reward redemption obligation, which involves complex estimates[297] - Income Taxes: Significant judgment is used to assess the realization of deferred tax assets and to recognize and measure uncertain tax positions[300][302] Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate and foreign currency risks, which it manages through derivatives - The primary interest rate risk exposure is to one-month SOFR on the company's Term Loans[306] Debt Structure by Rate Type (as of Dec 31, 2023) | Debt Type | Carrying Value (in millions) | Weighted Avg. Interest Rate | | :--- | :--- | :--- | | Fixed-rate long-term debt | $6,000 | 4.37% | | Variable-rate long-term debt | $3,119 | 7.38% | - The company uses forward contracts to hedge against foreign currency exchange rate volatility for certain fees and intercompany balances[311] Financial Statements and Supplementary Data This section presents the audited consolidated financial statements and the auditor's unqualified opinion on financials and internal controls - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting[321][328] - Critical Audit Matters identified by the auditor were the accounting for the Hilton Honors loyalty program and the accounting for income taxes[332] Consolidated Financial Statements In 2023, the company reported total revenues of $10.24 billion, net income of $1.15 billion, and a total deficit of $2.35 billion Consolidated Balance Sheet Highlights (in millions) | Account | Dec 31, 2023 | Dec 31, 2022 | | :--- | :--- | :--- | | Total Assets | $15,401 | $15,512 | | Total Liabilities | $17,748 | $16,610 | | Total Deficit | ($2,347) | ($1,098) | | Long-term Debt | $9,157 | $8,708 | Consolidated Statement of Operations Highlights (in millions) | Account | 2023 | 2022 | | :--- | :--- | :--- | | Total Revenues | $10,235 | $8,773 | | Operating Income | $2,225 | $2,094 | | Net Income | $1,151 | $1,257 | | Diluted EPS | $4.33 | $4.53 | Notes to Consolidated Financial Statements The notes detail key accounting policies, including a $2.73 billion loyalty program liability and a significant increase in unrecognized tax benefits - Note 9: In November 2023, the company amended its Term Loans, converting them into new tranches due 2028 and 2030 and increasing the principal by $500 million[444] - Note 11: Impairment losses of $38 million were recognized on assets associated with certain leased hotels during 2023[454] - Note 13: Unrecognized tax benefits increased significantly to $555 million, primarily due to a $263 million reserve increase related to the tax treatment of the guest loyalty program[469] - Note 15: Share-based compensation expense was $169 million in 2023[489] Controls and Procedures Management concluded that the company's disclosure controls and internal control over financial reporting were effective - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the period[521] - Management's report and the independent auditor's attestation found that the company maintained effective internal control over financial reporting as of December 31, 2023[522][317] Part III This section incorporates by reference information on governance, compensation, and ownership from the 2024 proxy statement Directors, Executive Officers and Corporate Governance Information on directors, officers, and governance is incorporated by reference from the 2024 proxy statement - Details regarding directors, executive officers, and corporate governance are not included directly in this report but are incorporated by reference from the forthcoming 2024 proxy statement[527] Executive Compensation Information on executive compensation is incorporated by reference from the 2024 proxy statement - Details regarding executive compensation are not included directly in this report but are incorporated by reference from the forthcoming 2024 proxy statement[528] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership is incorporated by reference from the 2024 proxy statement - Details regarding security ownership are not included directly in this report but are incorporated by reference from the forthcoming 2024 proxy statement[529] Certain Relationships and Related Transactions, and Director Independence Information on related transactions and director independence is incorporated by reference from the 2024 proxy statement - Details regarding related transactions and director independence are not included directly in this report but are incorporated by reference from the forthcoming 2024 proxy statement[530] Principal Accountant Fees and Services Information on accountant fees and services is incorporated by reference from the 2024 proxy statement - Details regarding principal accountant fees and services are not included directly in this report but are incorporated by reference from the forthcoming 2024 proxy statement[531] Part IV This section lists the financial statements, schedules, and exhibits filed with the annual report Exhibits and Financial Statement Schedules This section lists all documents filed, referencing financial statements in Item 8 and providing a detailed list of exhibits - The financial statements are included under Item 8 of the report[532] - A comprehensive list of exhibits is provided, including key agreements such as the Credit Agreement and various Senior Note Indentures[533][535][537]