HILTON WORLDWIDE HOLDINGS INC. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and with our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 .
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These statements include, but are not limited to, statements related to our expectations regarding the recovery of the travel and hospitality industry from the pandemic, the performance of our business, our financial results, our liquidity and capital resources and other non-historical statements. In some cases, you can identify these forward-looking statements by the use of words such as "outlook," "believes," "expects," "potential," "continues," "may," "will," "should," "could," "seeks," "projects," "predicts," "intends," "plans," "estimates," "anticipates" or the negative version of these words or other comparable words. Such forward-looking statements are subject to various risks and uncertainties including, among others, risks inherent to the hospitality industry, macroeconomic factors beyond our control, such as inflation, changes in interest rates and challenges due to labor shortages and supply chain disruptions, risks related to the impact of the pandemic, including as a result of new strains and variants of the virus and uncertainty of the acceptance and continued effectiveness of the COVID-19 vaccines, competition for hotel guests and management and franchise contracts, risks related to doing business with third-party hotel owners, performance of our information technology systems, growth of reservation channels outside of our system, risks of doing business outside of theU.S. , risks associated with the Russian invasion ofUkraine and our indebtedness. Accordingly, there are or will be important factors that could cause actual outcomes or results to differ materially from those indicated in these statements. We believe these factors include, but are not limited to, those described under "Part I-Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 and under "Part II-Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2022 . These factors should not be construed as exhaustive and should be read in conjunction with the other cautionary statements that are included in this Quarterly Report on Form 10-Q. We undertake no obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise, except as required by law.
Overview
Our Business
Hilton is one of the largest hospitality companies in the world, with 7,061 properties comprising 1,111,147 rooms in 123 countries and territories as ofSeptember 30, 2022 . Our premier brand portfolio includes: our luxury hotel brands,Waldorf Astoria Hotels & Resorts ,LXR Hotels & Resorts andConrad Hotels & Resorts ; our emerging lifestyle hotel brands, Canopy by Hilton, Tempo by Hilton and Motto by Hilton; our full service hotel brands, Signia by Hilton,Hilton Hotels & Resorts , Curio Collection by Hilton,DoubleTree by Hilton and Tapestry Collection by Hilton; our focused service hotel brands,Hilton Garden Inn , Hampton by Hilton and Tru by Hilton; our all-suites hotel brands,Embassy Suites by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; and our timeshare brand, Hilton Grand Vacations. As ofSeptember 30, 2022 , we had 146 million members in our award-winning guest loyalty program,Hilton Honors , a 19 percent increase fromSeptember 30, 2021 .
Segments and Regions
We analyze our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products and services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel management and licensing of our IP. This segment generates its revenue from: (i) management and franchise fees charged to third-party hotel owners; (ii) licensing fees from HGV and strategic partnerships, including co-branded credit card arrangements, for the right to use our IP; and (iii) fees for managing hotels in our ownership segment. As a manager of hotels, we typically are responsible for supervising or operating the hotel in exchange for management fees. As a franchisor of hotels, we charge franchise fees in exchange for the use of one of our brand names and related commercial services, such as our reservation system, marketing and information technology services, while a third party manages or operates such franchised hotels. The ownership segment primarily derives revenues from providing nightly hotel room sales, food and beverage sales and other services at our consolidated owned and leased hotels. Geographically, we conduct business through three distinct geographic regions: (i) theAmericas ; (ii)Europe ,Middle East andAfrica ("EMEA"); and (iii)Asia Pacific . TheAmericas region includesNorth America ,South America and Central 16 -------------------------------------------------------------------------------- America, including allCaribbean nations. Although theU.S. , which represented 69 percent of our system-wide hotel rooms as ofSeptember 30, 2022 , is included in theAmericas region, it is often analyzed separately and apart from theAmericas region and, as such, it is presented separately within the analysis herein. The EMEA region includesEurope , which represents the western-most peninsula of Eurasia stretching fromIceland in the west toRussia in the east, and theMiddle East andAfrica ("MEA"), which represents theMiddle East region and all African nations, including theIndian Ocean island nations.Europe and MEA are often analyzed separately and, as such, are presented separately within the analysis herein. TheAsia Pacific region includes the eastern and southeastern nations ofAsia , as well asIndia ,Australia ,New Zealand and thePacific Island nations.
System Growth and Development Pipeline
Our strategic objectives include the continued expansion of our global hotel
network, as well as of our fee-based business. As we enter into new management
and franchise contracts, we expand our business with minimal or no capital
investment by us as the manager or franchisor, since the capital required to
build and maintain hotels is typically provided by the third-party owner of the
hotel with whom we contract to provide management services or license our IP.
Prior to approving the addition of new hotels to our management and franchise
development pipeline, we evaluate the economic viability of the hotel based on
its geographic location, the credit quality of the third-party owner and other
factors. By increasing the number of management and franchise contracts with
third-party owners, over time we expect to increase revenues, overall return on
invested capital and cash available to support our business needs; see further
discussion on our cash management policy in "-Liquidity and Capital Resources."
While these objectives have not changed as a result of the pandemic, the current
economic environment has posed certain challenges to the execution of our
strategy, which have included and may continue to include delays in openings and
new development.
We are focused on the growth of our business by expanding our global hotel
network through our development pipeline, which represents hotels that we expect
to add to our system in the future. The following table summarizes our
development activity:
As of and for the
Nine Months Ended
September 30, 2022
Hotels Rooms(1)
Hotel system
Openings 247 40,500
Net additions(2) 211 33,200
Development pipeline(3)
Additions 509 65,700
Count as of period end(4) 2,812 415,700
____________
(1)Rounded to the nearest hundred. (2)Represents room additions, net of rooms removed from our system, during the period. Contributed to net unit growth fromSeptember 30, 2021 of 4.5 percent. (3)Hotels in our system are under development throughout 112 countries and territories, including 29 countries and territories where we do not currently have any existing hotels. (4)In our development pipeline, as ofSeptember 30, 2022 , 204,200 of the rooms were under construction and 242,600 of the rooms were located outside of theU.S. Nearly all of the rooms in our development pipeline are within our management and franchise segment. We do not consider any individual development project to be material to us. Recent Developments COVID-19 Pandemic The pandemic significantly impacted the global economy and strained the hospitality industry beginning in 2020. Since the beginning of the pandemic, the pervasiveness and severity of travel restrictions and stay-at-home directives varied by country and state; however, as ofSeptember 30, 2022 , most of the countries we operate in had completely lifted or eased restrictions. While the pandemic negatively affected certain of our results for the three and nine months endedSeptember 30, 2022 and 2021, we have experienced strong signs of economic recovery since early 2021 with comparable system-wide RevPAR in the third quarter of 2022 exceeding levels of performance achieved in the same period in 2019. Although all periods were impacted by the pandemic, none of these periods are considered comparable, and no periods affected by the pandemic are expected to be comparable to future periods. The continued spreading of COVID-19 and its related variants could result in travel and other 17 --------------------------------------------------------------------------------
restrictions being reinstated or demand for our hotel properties being reduced in the affected areas in the future, yielding negative effects on our operations.
Russian Invasion of
InFebruary 2022 ,Russia commenced a military invasion ofUkraine . While this has affected our operations inUkraine andRussia , our financial results for the nine months endedSeptember 30, 2022 were not materially affected by this conflict, as hotels in these countries represented less than 1 percent of our total managed and franchised hotels as ofSeptember 30, 2022 and, for all periods presented and the year endedDecember 31, 2021 , contributed less than 1 percent of total management and franchise fee revenues. We continue to prioritize the safety and security of our employees and the guests of these hotels and, inMarch 2022 , we took the following actions in response to this crisis: •pledged to donate up to 1 million room nights across EMEA to support Ukrainian refugees and humanitarian relief efforts, in partnership with American Express, #HospitalityHelps and our community of owners;
•closed our corporate office in
•suspended all new development activity in
•pledged to donate any Hilton profits from business operations in
•contributed funds through our
Key Business and Financial Metrics Used by Management
We define our comparable hotels as those that: (i) were active and operating in our system for at least one full calendar year as of the end of the current period, and openJanuary 1st of the previous year; (ii) have not undergone a change in brand or ownership type during the current or comparable periods reported; and (iii) have not sustained substantial property damage, business interruption, undergone large-scale capital projects or for which comparable results were not available. Of the 6,988 hotels in our system as ofSeptember 30, 2022 , 5,847 hotels were classified as comparable hotels. Our 1,141 non-comparable hotels as ofSeptember 30, 2022 included 260 hotels, or less than four percent of the total hotels in our system, that were removed from the comparable group during the last twelve months because they have sustained substantial property damage, business interruption, undergone large-scale capital projects or comparable results were otherwise not available. When considering business interruption in the context of our definition of comparable hotels, no hotel that had completely or partially suspended operations on a temporary basis at any time as a result of the pandemic was excluded from the definition of comparable hotels on that basis alone. Despite these temporary suspensions of hotel operations, we believe that including these hotels within our hotel operating statistics of occupancy, average daily rate ("ADR") and revenue per available room ("RevPAR"), if they would have otherwise been included, reflects the underlying results of our business for the three and nine months endedSeptember 30, 2022 and 2021.
Occupancy
Occupancy represents the total number of room nights sold divided by the total number of room nights available at a hotel or group of hotels for a given period. Occupancy measures the utilization of our hotels' available capacity. Management uses occupancy to gauge demand at a specific hotel or group of hotels in a given period. Occupancy levels also help us determine achievable ADR pricing levels as demand for hotel rooms increases or decreases.
ADR
ADR represents hotel room revenue divided by the total number of room nights
sold for a given period. ADR measures the average room price attained by a
hotel, and ADR trends provide useful information concerning the pricing
environment and the nature of the customer base of a hotel or group of hotels.
ADR is a commonly used performance measure in the industry, and
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we use ADR to assess pricing levels that we are able to generate by type of
customer, as changes in rates charged to customers have different effects on
overall revenues and incremental profitability than changes in occupancy, as
described above.
RevPAR
RevPAR is calculated by dividing hotel room revenue by the total number of room
nights available to guests for a given period. We consider RevPAR to be a
meaningful indicator of our performance as it provides a metric correlated to
two primary and key drivers of operations at a hotel or group of hotels, as
previously described: occupancy and ADR. RevPAR is also a useful indicator in
measuring performance over comparable periods for comparable hotels.
References to occupancy, ADR and RevPAR are presented on a comparable basis,
based on the comparable hotels as of September 30, 2022 , and references to ADR
and RevPAR are presented on a currency neutral basis, unless otherwise noted. As
such, comparisons of these hotel operating statistics for the three and nine
months ended September 30, 2022 and 2021 or 2019, use the foreign currency
exchange rates used to translate the results of the Company's foreign operations
within its unaudited condensed consolidated financial statements for the three
and nine months ended September 30, 2022 , respectively.
EBITDA and Adjusted EBITDA
EBITDA reflects net income (loss), excluding interest expense, a provision for
income tax benefit (expense) and depreciation and amortization expenses.
Adjusted EBITDA is calculated as EBITDA, as previously defined, further adjusted
to exclude certain items, including gains, losses, revenues and expenses in
connection with: (i) asset dispositions for both consolidated and unconsolidated
investments; (ii) foreign currency transactions; (iii) debt restructurings and
retirements; (iv) furniture, fixtures and equipment ("FF&E") replacement
reserves required under certain lease agreements; (v) share-based compensation;
(vi) reorganization, severance, relocation and other expenses; (vii) non-cash
impairment; (viii) amortization of contract acquisition costs; (ix) the net
effect of reimbursable costs included in other revenues and other expenses from
managed and franchised properties; and (x) other items.
We believe that EBITDA and Adjusted EBITDA provide useful information to
investors about us and our financial condition and results of operations for the
following reasons: (i) these measures are among the measures used by our
management team to evaluate our operating performance and make day-to-day
operating decisions and (ii) these measures are frequently used by securities
analysts, investors and other interested parties as a common performance measure
to compare results or estimate valuations across companies in our industry.
Additionally, these measures exclude certain items that can vary widely across
different industries and among competitors within our industry. For instance,
interest expense and income taxes are dependent on company specifics, including,
among other things, capital structure and operating jurisdictions, respectively,
and, therefore, could vary significantly across companies. Depreciation and
amortization expenses, as well as amortization of contract acquisition costs,
are dependent upon company policies, including the method of acquiring and
depreciating assets and the useful lives that are used for accounting purposes.
For Adjusted EBITDA, we also exclude items such as: (i) FF&E replacement
reserves for leased hotels to be consistent with the treatment of capital
expenditures for property and equipment, where depreciation of such capitalized
assets is reported within depreciation and amortization expenses; (ii)
share-based compensation, as this could vary widely among companies due to the
different plans in place and the usage of them; (iii) the net effect of our cost
reimbursement revenues and reimbursed expenses, as we contractually do not
operate the related programs to generate a profit over the terms of the
respective contracts; and (iv) other items, such as amounts related to debt
restructurings and debt retirements and reorganization and related severance
costs, that are not core to our operations and are not reflective of our
operating performance.
EBITDA and Adjusted EBITDA are not recognized terms under GAAP and should not be
considered as alternatives, either in isolation or as a substitute, for net
income (loss) or other measures of financial performance or liquidity, including
cash flows, derived in accordance with GAAP. Further, EBITDA and Adjusted EBITDA
have limitations as analytical tools, including:
•EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•EBITDA and Adjusted EBITDA do not reflect income tax expenses or the cash requirements to pay our taxes;
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--------------------------------------------------------------------------------•EBITDA and Adjusted EBITDA do not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments;
•EBITDA and Adjusted EBITDA do not reflect the effect on earnings or changes resulting from matters that we consider not to be indicative of our future operations;
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and EBITDA and Adjusted EBITDA do not reflect any cash requirements for such replacements; and
•other companies in our industry may calculate EBITDA and Adjusted EBITDA differently, limiting their usefulness as comparative measures.
Because of these limitations, EBITDA and Adjusted EBITDA should not be considered as discretionary cash available to us to reinvest in the growth of our business or as measures of cash that will be available to us to meet our obligations. Results of Operations
The hotel operating statistics by region for our system-wide comparable hotels were as follows:
Three Months Ended Change Nine Months Ended Change
September 30, 2022 2022 vs. 2021 September 30, 2022 2022 vs. 2021
U.S.
Occupancy 74.5 % 6.0 % pts. 70.5 % 10.3 % pts.
ADR $ 163.32 12.1 % $ 157.50 22.1 %
RevPAR $ 121.71 22.0 % $ 111.09 42.9 %
Americas (excluding U.S. )
Occupancy 71.4 % 17.6 % pts. 63.0 % 23.1 % pts.
ADR $ 147.08 31.2 % $ 138.05 31.4 %
RevPAR $ 104.99 74.2 % $ 87.04 107.7 %
Europe
Occupancy 77.4 % 18.5 % pts. 65.9 % 29.4 % pts.
ADR $ 159.10 45.9 % $ 147.18 51.5 %
RevPAR $ 123.15 91.7 % $ 97.02 173.2 %
MEA
Occupancy 63.9 % 11.7 % pts. 63.9 % 17.2 % pts.
ADR $ 128.39 18.7 % $ 146.86 28.3 %
RevPAR $ 82.10 45.2 % $ 93.83 75.5 %
Asia Pacific
Occupancy 63.6 % 13.7 % pts. 52.3 % 2.5 % pts.
ADR $ 104.50 14.9 % $ 102.22 11.3 %
RevPAR $ 66.46 46.3 % $ 53.46 16.8 %
System-wide
Occupancy 73.2 % 8.7 % pts. 67.6 % 11.9 % pts.
ADR $ 155.86 14.5 % $ 150.86 23.2 %
RevPAR $ 114.04 29.9 % $ 102.02 49.6 %
We experienced significant improvement in our results during the three and nine
months ended September 30, 2022 compared to the same periods in 2021 with the
continued recovery of the travel and hospitality industry from the pandemic and
the rebound of cross-border international travel. All regions showed improvement
in RevPAR, occupancy and ADR during the three and nine months ended September
30, 2022 as compared to the same periods in 2021. Although ADR was the primary
driver of the increase in RevPAR during the periods, the occupancy increase
experienced during the United States summer
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months continued beyond the Labor Day holiday, demonstrating continued recovery
in business transient and group meeting travel, in addition to sustained leisure
demand.
The three months ended September 30, 2022 was the first period, since the
beginning of the pandemic, that system-wide RevPAR on a comparable and currency
neutral basis exceeded system-wide RevPAR for the same period in 2019. For the
three months ended September 30, 2022 , as compared to the same period in 2019 on
a comparable and currency neutral basis, our system-wide RevPAR was up 5.0
percent due to an increase in ADR of 10.9 percent, partially offset by a
decrease in occupancy of 4.1 percentage points. For the nine months ended
September 30, 2022 , as compared to the same period in 2019 on a comparable and
currency neutral basis, RevPAR was down 4.0 percent due to a decrease in
occupancy of 7.2 percentage points, partially offset by an increase in ADR of
6.2 percent. All regions showed improvement in ADR during both the three and
nine months ended September 30, 2022 when compared to the same periods in 2019
with the exception of Asia Pacific as a result of continued lockdowns in China
limiting demand.
The table below provides a reconciliation of net income to EBITDA and Adjusted
EBITDA:
Three Months Ended Nine Months Ended
September 30, September 30,
2022 2021 2022 2021
(in millions)
Net income $ 346 $ 240 $ 924 $ 259
Interest expense 106 98 295 302
Income tax expense 181 100 407 64
Depreciation and amortization expenses 39 46 123 143
EBITDA 672 484 1,749 768
Loss on sale of assets, net - 8 - 8
Gain on foreign currency transactions - - (4) (1)
Loss on debt extinguishment - - - 69
FF&E replacement reserves 13 15 40 30
Share-based compensation expense 42 52 126 144
Amortization of contract acquisition 10 9 28 23
costs
Net other expenses (revenues) from managed and franchised properties (7) (62) (73) 57 Other adjustments(1) 2 13 (7) 19 Adjusted EBITDA$ 732 $ 519 $ 1,859 $ 1,117 ____________ (1)Amount for the nine months endedSeptember 30, 2022 primarily includes a gain related to investments in unconsolidated affiliates. Amounts for the three and nine months endedSeptember 30, 2021 include costs recognized for certain legal settlements. All periods include severance and other items. Revenues Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 (in millions) (in millions) Franchise and licensing fees$ 573 $ 451 27.1$ 1,531 $ 1,062 44.2 Base and other management fees$ 76 $ 49 55.1$ 206 $ 116 77.6 Incentive management fees 52 26 100.0 132 60 NM(1) Total management fees$ 128 $ 75 70.7$ 338 $ 176 92.0 ____________
(1)Fluctuation in terms of percentage change is not meaningful.
During the three and nine months endedSeptember 30, 2022 , revenue recognized from fees increased primarily as a result of improved demand for travel and tourism, including the ability and desire of our customers to travel, due to the ongoing recovery that began in early 2021 from the negative impacts of the pandemic. Accordingly, on a comparable basis, franchise and management fees increased for the three months endedSeptember 30, 2022 as a result of increases in RevPAR of 21.7 percent and 62.2 percent at our comparable franchised and managed properties, 21 -------------------------------------------------------------------------------- respectively. These increases in RevPAR at our comparable franchised and managed properties were the result of increased occupancy of 6.0 percentage points and 16.9 percentage points, respectively, and increased ADR of 11.9 percent and 21.4 percent, respectively. For the nine months endedSeptember 30, 2022 , on a comparable basis, franchise and management fees increased as a result of increases in RevPAR of 40.7 percent and 82.5 percent at our comparable franchised and managed properties, respectively. These increases in RevPAR at our comparable franchised and managed properties were the result of increased occupancy of 10.2 percentage points and 16.8 percentage points, respectively, and increased ADR of 20.3 percent and 30.9 percent, respectively. Further, as new hotels are part of our system for full periods, we expect such hotels to increase our franchise and management fees during the periods. Including new development and ownership type transfers, fromJanuary 1, 2021 toSeptember 30, 2022 , we added over 570 managed and franchised properties on a net basis, providing an additional 89,600 rooms to our management and franchise segment, which also contributed to the increases in franchise and management fees. Additionally, licensing fees increased$32 million and$103 million during the three and nine months endedSeptember 30, 2022 , respectively, primarily due to increases in fees from: (i) our strategic partnerships, which resulted from new cardholder acquisitions and increased cardholder spend under our co-branded credit card arrangements, and (ii) HGV, which resulted from increased timeshare revenues, both driven by the rise in travel and tourism, as well as increased overall consumer spending. Incentive management fees increased during the periods as they are based on hotels' operating profits, which have improved from the prior year as a result of increased demand in line with the recovery from the pandemic and flow through of improved topline results to managed hotel profits. Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 (in millions) (in millions)
Owned and leased hotel$ 295 $ 199 48.2$ 727 $ 376 93.4 revenues The increase in owned and leased hotel revenues during the three months endedSeptember 30, 2022 was primarily due to a$128 million increase, on a currency neutral basis, from our comparable owned and leased hotels, which was partially offset by a$32 million decrease as a result of unfavorable fluctuations in foreign currency exchange rates. The currency neutral increase in revenues from our comparable owned and leased hotels was the result of increased RevPAR of 121.3 percent, due to increases in occupancy of 27.4 percentage points and ADR of 36.6 percent, reflective of the ongoing recovery that began in 2021 from the pandemic and has been particularly strong during 2022 inEurope where the majority of our owned and leased properties are located. Revenues from our non-comparable owned and leased hotels were flat on a currency neutral basis as the increase in revenues that resulted from increased RevPAR at these hotels was offset by a$15 million decrease from properties which were sold or for which the lease agreements were terminated during 2021. The increase in owned and leased hotel revenues during the nine months endedSeptember 30, 2022 included increases of$384 million and$20 million , on a currency neutral basis, from our comparable and non-comparable owned and leased hotels, respectively, which were partially offset by a$53 million decrease as a result of unfavorable fluctuations in foreign currency exchange rates. The currency neutral increase in revenues from our comparable owned and leased hotels was primarily the result of increased RevPAR of 207.3 percent, due to increases in occupancy of 31.9 percentage points and ADR of 40.6 percent, reflective of the ongoing recovery from the pandemic, and was net of a$29 million decrease in COVID-19 relief subsidies from international governments. The currency neutral increase in revenues from our non-comparable owned and leased hotels, which also benefited from an increase in RevPAR, was partially offset by a$25 million decrease from properties which were sold or for which the lease agreements were terminated during 2021. Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 (in millions) (in millions) Other revenues$ 28 $ 18 55.6$ 71 $ 56 26.8 The increases in other revenues were primarily due to increased revenues from our purchasing operations related to improved hotel demand resulting from the rise in travel and tourism during both the three and nine months endedSeptember 30, 2022 . 22 --------------------------------------------------------------------------------
Operating Expenses
Three Months Ended Percent Nine Months Ended Percent
September 30, Change September 30, Change
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
(in millions) (in millions)Owned and leased hotel$ 263 $ 200 31.5$ 705 $ 452 56.0 expenses The increase in owned and leased hotel expenses during the three months endedSeptember 30, 2022 was primarily due to a$94 million increase, on a currency neutral basis, from our comparable owned and leased hotels, which was partially offset by a$31 million decrease as a result of favorable fluctuations in foreign currency exchange rates, while expenses from our non-comparable owned and leased hotels were flat on a net basis. The increase in owned and leased hotel expenses during the nine months endedSeptember 30, 2022 included$294 million and$15 million of increases, on a currency neutral basis, from our comparable and non-comparable owned and leased hotels, respectively, which were partially offset by a$56 million decrease as a result of favorable fluctuations in foreign currency exchange rates. The currency neutral increases in expenses from our non-comparable owned and leased hotels during the three and nine months endedSeptember 30, 2022 were net of$10 million and$21 million currency neutral decreases, respectively, from properties which were sold or for which the lease agreements were terminated during 2021. Our owned and leased hotels had currency neutral increases in certain operating expenses as a result of increased occupancy during the three and nine months endedSeptember 30, 2022 , including variable rent costs, which are generally based on a percentage of hotel revenues or profits, which increased in line with the recovery from the pandemic, as well as increased expenses related to FF&E replacement reserves, which are generally computed as a percentage of hotel revenues. Three Months Ended Percent Nine Months Ended Percent September 30, Change September 30, Change 2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021 (in millions) (in millions) Depreciation and amortization$ 39 $ 46 (15.2)$ 123 $ 143 (14.0)
expenses
General and administrative 93 107 (13.1) 287 302 (5.0) expenses Other expenses 13 12 8.3 35 31 12.9 The decreases in depreciation and amortization expenses were primarily due to decreases in amortization expense, driven by the full amortization of certain software project costs between the periods. The decreases in general and administrative expenses were primarily due to continued cost control, as well as costs recognized during the three and nine months endedSeptember 30, 2021 for certain legal settlements, for which no such expenses were recognized during 2022.
The increases in other expenses were primarily due to higher volume in our purchasing operations related to improved hotel demand.
Non-operating Income and Expenses
Three Months Ended Percent Nine Months Ended Percent
September 30, Change September 30, Change
2022 2021 2022 vs. 2021 2022 2021 2022 vs. 2021
(in millions) (in millions)
Interest expense $ (106) $ (98) 8.2 $ (295) $ (302) (2.3)
Gain on foreign currency NM(1) 4 1 NM(1)
transactions - -
Loss on debt extinguishment - - NM(1) - (69) (100.0)
Other non-operating income, net 10 6 66.7 32 16 100.0
Income tax expense (181) (100) 81.0 (407) (64) NM(1)
____________
(1)Fluctuation in terms of percentage change is not meaningful.
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The changes in interest expense during the three and nine months ended September
30, 2022 included increases related to the interest rate increase on the
variable rate Term Loan during the periods, as well as the amortization of
previously dedesignated interest rate swaps. Additionally, the decrease for the
nine months ended September 30, 2022 included a decrease related to our
Revolving Credit Facility, which was partially drawn during the nine months
ended September 30, 2021 , but was fully repaid as of June 30, 2021 , as well a
decrease resulting from the February 2021 issuance of new senior unsecured notes
and the use of such proceeds for the redemption of previously outstanding senior
unsecured notes, which reduced the weighted average interest rate on our
outstanding senior unsecured notes. See Note 5: "Debt" in our unaudited
condensed consolidated financial statements for additional information on the
interest rates on our indebtedness.
The gains and losses on foreign currency transactions primarily included the
impact of changes in foreign currency exchange rates on certain intercompany
financing arrangements, including short-term cross-currency intercompany loans,
and other transactions denominated in foreign currencies.
Loss on debt extinguishment related to the February 2021 redemption of senior
unsecured notes and included a redemption premium of $55 million and the
accelerated recognition of unamortized deferred financing costs on those senior
unsecured notes of $14 million .
Other non-operating income, net consists of interest income, equity in earnings
(losses) from unconsolidated affiliates, certain components of net periodic
pension cost or credit related to our employee defined benefit pension plans and
other non-operating gains and losses. Other non-operating income, net for the
nine months ended September 30, 2022 included an $11 million gain resulting from
the remeasurement of certain investments in unconsolidated affiliates.
The increases in income tax expense during the three and nine months ended
September 30, 2022 were primarily attributable to the increases in income before
income taxes, as well as losses in certain foreign entities where we do not
expect to recognize a tax benefit. Further, during the nine months ended
September 30, 2021 , we recognized benefits as a result of the change in tax rate
implemented as part of the United Kingdom's Finance Act 2021.
Segment Results
Refer to Note 11: "Business Segments" in our unaudited condensed consolidated financial statements for reconciliations of revenues for our reportable segments to consolidated total revenues and of segment operating income to consolidated income before income taxes. Refer to "-Revenues" for further discussion of the increases in revenues from our managed and franchised properties, which are correlated to our management and franchise segment revenues and segment operating income. Refer to "-Revenues" and "-Operating Expenses" for further discussion of the increases in revenues and operating expenses at our owned and leased hotels, which are correlated with our ownership segment revenues and segment operating income.
Liquidity and Capital Resources
Overview
As of
Our known short-term liquidity requirements primarily consist of funds necessary
to pay for operating and other expenditures, including: (i) costs associated
with the management and franchising of hotels; (ii) costs, other than
compensation and rent that are noted separately, associated with the operations
of owned and leased hotels, including, but not limited to, utilities and
operating supplies; (iii) corporate expenses; (iv) payroll and compensation
costs; (v) taxes and compliance costs; (vi) scheduled debt maturities and
interest payments on our outstanding indebtedness; (vii) lease payments under
our finance and operating leases; (viii) committed contract acquisition costs;
(ix) dividends as declared; (x) share repurchases; and
(xi) capital expenditures for required renovations and maintenance at the hotels
within our ownership segment.
Our known long-term liquidity requirements primarily consist of funds necessary
to pay for: (i) scheduled debt maturities and interest payments on our
outstanding indebtedness; (ii) lease payments under our finance and operating
leases; (iii) committed contract acquisition costs; (iv) capital improvements to
the hotels within our ownership segment; (v) corporate capital and information
technology expenditures; (vi) dividends as declared; (vii) share repurchases;
and (viii) commitments to
24
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owners in our management and franchise segment made in the normal course of
business for which we are reimbursed by these owners through program fees to
operate our marketing, sales and brands programs. There were no material changes
to our contractual obligations from what we previously disclosed in our Annual
Report on Form 10-K for the fiscal year ended December 31, 2021 .
In March 2022 , we resumed share repurchases, which we had previously suspended
in an effort to preserve cash during the pandemic. Since they were resumed, as
of September 30, 2022 , we had repurchased approximately 8.5 million shares of
our common stock for $1,107 million . As of September 30, 2022 , approximately
$1.1 billion remained available for share repurchases under our $5.5 billion
stock repurchase program. In June 2022 , we resumed payment of regular quarterly
cash dividends, which we had also previously suspended in an effort to preserve
cash during the pandemic.
In circumstances where we have the opportunity to support our strategic
objective of growing our global hotel network, we may provide performance or
debt guarantees or loan commitments, as necessary, for hotels that we currently
or plan to manage or franchise, as applicable, as well as letters of credit that
support hotel financing or other obligations of hotel owners. See Note 12:
"Commitments and Contingencies" in our unaudited condensed consolidated
financial statements for additional information on our commitments that were
outstanding as of September 30, 2022 .
We have a long-term investment policy that is focused on the preservation of
capital and maximizing the return on new and existing investments and returning
available capital to stockholders through dividends and share repurchases.
Within the framework of our investment policy, we currently intend to continue
to finance our business activities primarily with cash on our balance sheet as
of September 30, 2022 , cash generated from our operations and, as needed, the
use of the available capacity of our Revolving Credit Facility. Additionally, we
have continued access to debt markets and expect to be able to obtain financing
as a source of liquidity as required and to extend maturities of existing
borrowings, if necessary.
After considering our approach to liquidity and our available sources of cash,
we believe that our cash position and sources of liquidity will meet anticipated
requirements for operating and other expenditures, including corporate expenses,
payroll and other compensation costs, taxes and compliance costs and other
commitments for the foreseeable future based on current conditions. The
objectives of our cash management policy are to maintain the availability of
liquidity while minimizing operational costs.
We may from time to time issue or incur or increase our capacity to incur new
debt and/or purchase our outstanding debt through underwritten offerings, open
market transactions, privately negotiated transactions or otherwise. Issuances
or incurrence of new debt (or an increase in our capacity to incur new debt)
and/or purchases or retirements of outstanding debt, if any, will depend on
prevailing market conditions, liquidity requirements, contractual restrictions
and other factors. The amounts involved may be material.
Sources and Uses of Our Cash and Cash Equivalents
The following table summarizes our net cash flows:
Nine Months Ended Percent
September 30, Change
2022 2021 2022 vs. 2021
(in millions)
Net cash provided by (used in) operating activities $ 1,199 $ (22) NM(1)
Net cash used in investing activities (98) (34) NM(1)
Net cash used in financing activities (1,230) (1,814) (32.2)
____________
(1)Fluctuation in terms of percentage change is not meaningful.
Operating Activities
As we recover from the negative impacts of the pandemic and our system-wide RevPAR increases, we are returning to a position where cash flows are being generated from our operations, which for the nine months endedSeptember 30, 2022 was primarily due to the increase in cash inflows generated from our management and franchise segment, largely as a result of the increase in RevPAR at our comparable managed and franchised properties of 48.1 percent. Additionally, there was a$99 million decrease in payments of contract acquisition costs based on the timing of certain strategic hotel developments 25 --------------------------------------------------------------------------------
supporting our net unit growth. The increase in cash provided by operating
activities was partially offset by a
InApril 2020 , we pre-soldHilton Honors points to American Express and, before the end of the second quarter of 2022, all of those points had been used by American Express. As such, American Express resumed purchasingHilton Honors points with cash in connection with a co-branded credit card arrangement with them, which also contributed to the increase in our operating cash flows during the period. We expect American Express to continue to purchase points with cash under the co-branded credit card arrangement in future periods.
Investing Activities
Net cash used in investing activities included capitalized software costs that were related to various systems initiatives for the benefit of both our hotel owners and our overall corporate operations, as well as capital expenditures for property and equipment related to our corporate facilities and the renovation of certain hotels in our ownership segment. Net cash used in investing activities was partially offset by the net cash inflows resulting from our undesignated derivative financial instruments that we have in place to hedge against changes in foreign currency exchange rates, primarily as a result of the British pound depreciating againstthe United States dollar during the nine months endedSeptember 30, 2022 . Additionally, during the nine months endedSeptember 30, 2022 , we provided equity and debt financing to unconsolidated affiliates and owners of certain hotels that we will in the future or do currently manage or franchise to support our strategic objectives.
Financing Activities
Net cash used in financing activities during the nine months endedSeptember 30, 2022 primarily related to the return of capital to shareholders, including share repurchases, which resumed inMarch 2022 , and quarterly dividend payments, which resumed inJune 2022 , after both programs were suspended in 2020. Net cash used in financing activities during the nine months endedSeptember 30, 2021 primarily comprised the full repayment of the$1.69 billion outstanding debt balance on our Revolving Credit Facility, as well as the debt issuance costs and redemption premium associated with the issuance of new senior unsecured notes and the use of such proceeds for the redemption of previously outstanding senior unsecured notes.
Debt and Borrowing Capacity
As ofSeptember 30, 2022 , our total indebtedness, excluding the deduction for unamortized deferred financing costs and discount, was approximately$8.8 billion , and we had$60 million of letters of credit outstanding under our Revolving Credit Facility. For additional information on our total indebtedness, availability under our Revolving Credit Facility and guarantees on our debt, refer to Note 5: "Debt" in our unaudited condensed consolidated financial statements. If we are unable to generate sufficient cash flow from operations in the future to service our debt, we may be required to reduce capital expenditures or issue additional equity securities. However, we do not have any material indebtedness outstanding that matures prior toMay 2025 . Our ability to make scheduled principal payments and to pay interest on our debt depends on our future operating performance, which is subject to general conditions in or affecting the hospitality industry that may be beyond our control. Although the pandemic negatively impacted our cash flows from operations as compared to periods prior to the onset of the pandemic, we are returning to a position where we are generating cash flows from our core operations as reflected in our cash flows provided by operating activities during the nine months endedSeptember 30, 2022 .
Critical Accounting Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the estimates and assumptions that we believe are critical because they involve a higher degree of judgment in their application and are based on information that is inherently uncertain in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2021 , and, during the nine months endedSeptember 30, 2022 , there were no material changes to those critical accounting estimates that were previously disclosed.
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