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, 2020 .
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 impact of and recovery from the COVID-19 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, risks related to the impact of the COVID-19 pandemic, including as a result of new strains and variants of the virus, 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. 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, 2020 . 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.
COVID-19 Pandemic
The COVID-19 pandemic has significantly impacted the global economy and strained the hospitality industry since the beginning of 2020. OurAsia Pacific region began experiencing the effects of the COVID-19 pandemic inJanuary 2020 , while the pronounced negative results and suspensions of hotel operations in theAmericas andEurope ,Middle East andAfrica ("EMEA") regions did not begin untilmid-March 2020 . Since the beginning of the pandemic, the pervasiveness and severity of travel restrictions and stay-at-home directives have varied by country and state and have fluctuated with COVID-19 infection surges and contractions, as well as the distribution of COVID-19 vaccinations, which commenced in late 2020, and the emergence of new strains and variants of the virus. As such, the pandemic had a material adverse impact on our results for the three and six months endedJune 30, 2021 and 2020 when compared to periods prior to the onset of the pandemic, and although all periods were significantly 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. We are still unable to predict when normal economic activity and business operations will fully resume. Accordingly, given the ongoing nature of the pandemic, the ultimate impact that it will have on the Company's business, financial performance and results of operations remains uncertain. However, during recent months, the broader distribution of COVID-19 vaccinations and the easing of travel and other restrictions have generated renewed travel and tourism activities in many markets around the globe. Additionally, although the restrictions and reduction in travel resulted in the suspensions of operations at certain hotels throughout 2020 and the operations of approximately 300 hotels were suspended for some period of time during the six months endedJune 30, 2021 , reopenings have significantly outpaced suspensions during 2021 and only 95 hotels remained suspended as ofJuly 21, 2021 . We expect nearly all of our hotel properties that were suspended for some period of time as a result of the pandemic to be open by the end of 2021.
Overview
Our Business
Hilton is one of the largest hospitality companies in the world, with 6,676 properties comprising 1,050,331 rooms in 119 countries and territories as ofJune 30, 2021 . Our premier brand portfolio includes: our luxury and lifestyle hotel brands,Waldorf Astoria Hotels & Resorts ,LXR Hotels & Resorts ,Conrad Hotels & Resorts , 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, 18 --------------------------------------------------------------------------------DoubleTree by Hilton, Tapestry Collection by Hilton andEmbassy Suites by Hilton; our focused service hotel brands,Hilton Garden Inn , Hampton by Hilton, Tru by Hilton, Homewood Suites by Hilton and Home2 Suites by Hilton; and our timeshare brand, Hilton Grand Vacations. As ofJune 30, 2021 , we had more than 118 million members in our award-winning guest loyalty program,Hilton Honors .
Segments and Regions
We analyze our operations and business by both operating segments and geographic regions. Our operations consist of two reportable segments that are based on similar products or services: (i) management and franchise and (ii) ownership. The management and franchise segment provides services, including hotel management and the licensing of our brands and 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 certain Hilton marks and IP; and (iii) fees for managing properties in our ownership segment. As a manager of hotels, we typically are responsible for supervising or operating the property in exchange for management fees. As a franchisor of hotels, we charge franchise fees in exchange for the use of one of our brand names and related commercial services, such as our reservation systems, marketing and information technology services, while a third party manages or operates such franchised hotels. The ownership segment primarily derives earnings from providing nightly hotel room sales, food and beverage sales and other services at our owned and leased hotels. Geographically, we conduct business through three distinct geographic regions: (i) theAmericas ; (ii) EMEA; and (iii)Asia Pacific . TheAmericas region includesNorth America ,South America andCentral America , including allCaribbean nations. Although theU.S. , which represented 71 percent of our system-wide hotel rooms as ofJune 30, 2021 , 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 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 footprint and fee-based business. As we enter into new management and franchise contracts, we expand our business with minimal or no capital investment by us as the manager or franchisor, since the capital required to build and maintain hotels is typically provided by the third-party owner of the hotel with whom we contract to provide management services or license our brand names and IP. Prior to approving the addition of new properties to our management and franchise development pipeline, we evaluate the economic viability of the property based on its geographic location, the credit quality of the third-party owner and other factors. By increasing the number of management and franchise contracts with third-party owners, over time we expect to increase revenues, overall return on invested capital and cash available to support our business needs. While these objectives have not changed as a result of the COVID-19 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. During the six months endedJune 30, 2021 , we added over 220 hotels, consisting of over 36,300 rooms, to our system, contributing to nearly 30,900 net additional hotel rooms. As ofJune 30, 2021 , we had nearly 2,590 hotels in our development pipeline that we expect to add to our system in the future, representing 401,000 rooms under construction or approved for development throughout 115 countries and territories, including 30 countries and territories where we do not currently have any existing hotels. Nearly all of the rooms in the development pipeline are within our management and franchise segment. Additionally, of the rooms in the development pipeline, 247,000 rooms were located outside theU.S. , and 203,000 rooms were under construction. We do not consider any individual development project to be material to us.
Brexit
InJune 2016 , theU.K. held a referendum in which voters approved an exit from theEuropean Union ("E.U.") (commonly referred to as "Brexit"). InDecember 2020 , theU.K. and the E.U. reached a new bilateral trade and cooperation deal governing their future relationship (the "EU-UK Trade and Cooperation Agreement"), which was fully implemented fromMay 1, 2021 . While our results as of and for the three and six months endedJune 30, 2021 were not materially affected by Brexit specifically, the final outcomes are not yet certain. In addition, while the EU-UK Trade and Cooperation Agreement provides clarity in respect of the intended future relationship between theU.K. and the E.U. and some detailed matters of trade and cooperation, it 19 -------------------------------------------------------------------------------- remains unclear what general long-term economic, financial, trade and legal implications theU.K. withdrawal from the E.U. will have and how it will ultimately affect our business. Brexit measures could potentially disrupt the markets we serve and cause tax and foreign currency exchange rate volatility, which could have adverse effects on our business. We will continue to monitor the potential impact of Brexit on our business in future periods.
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 6,619 hotels in our system as ofJune 30, 2021 , 5,617 hotels were classified as comparable hotels. Our 1,002 non-comparable hotels included 43 hotels, or less than one 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, underwent 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 COVID-19 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") reflects the underlying results of our business for the three and six months endedJune 30, 2021 and 2020. 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 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 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 RevPAR, ADR and occupancy are presented on a comparable basis, and references to RevPAR and ADR are presented on a currency neutral basis, unless otherwise noted. As such, comparisons of these hotel operating statistics for the three and six months endedJune 30, 2021 and 2020 use the exchange rates for the three and six months endedJune 30, 2021 , respectively.
EBITDA and Adjusted EBITDA
EBITDA reflects net income (loss), excluding interest expense, a provision for
income tax benefit (expense) and depreciation and amortization. Adjusted EBITDA
is calculated as EBITDA, as previously defined, further adjusted to exclude
certain items, including gains, losses, revenues and expenses in connection
with: (i) asset dispositions for both consolidated and unconsolidated equity
investments; (ii) foreign currency transactions; (iii) debt restructurings and
retirements; (iv) furniture, fixtures and equipment ("FF&E") replacement
reserves required under certain lease agreements; (v) share-based compensation;
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(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, as well as amortization of contract acquisition costs, are
dependent upon company policies, including the method of acquiring and
depreciating assets and the useful lives that are used. For Adjusted EBITDA, we
also exclude items such as: (i) FF&E replacement reserves for leased hotels to
be consistent with the treatment of capital expenditures for property and
equipment, where it is capitalized and depreciated over the life of the FF&E;
(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 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 to net income (loss) or other measures of financial
performance or liquidity derived in accordance with GAAP. EBITDA and Adjusted
EBITDA have limitations as analytical tools and should not be considered as
alternatives, either in isolation or as a substitute, for net income (loss),
cash flow or other methods of analyzing our results as reported under GAAP. Some
of these limitations are:
•EBITDA and Adjusted EBITDA do not reflect changes in, or cash requirements for, our working capital needs;
•EBITDA and Adjusted EBITDA do not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our indebtedness;
•EBITDA and Adjusted EBITDA do not reflect income tax expenses or the cash requirements to pay our taxes;
•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.
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The hotel operating statistics by region for our system-wide comparable hotels were as follows:
Three Months Ended Change Six Months Ended Change
June 30, 2021 2021 vs. 2020 June 30, 2021 2021 vs. 2020
U.S.
Occupancy 63.7 % 39.2 % pts. 55.7 % 14.7 % pts.
ADR $ 129.30 28.1 % $ 119.91 (6.6) %
RevPAR $ 82.32 233.6 % $ 66.83 26.9 %
Americas (excluding U.S. )
Occupancy 37.3 % 27.5 % pts. 33.8 % 3.1 % pts.
ADR $ 108.05 28.7 % $ 102.34 (13.3) %
RevPAR $ 40.34 389.9 % $ 34.60 (4.7) %
Europe
Occupancy 31.9 % 25.1 % pts. 25.7 % (3.8) % pts.
ADR $ 105.83 22.6 % $ 96.81 (20.1) %
RevPAR $ 33.80 470.2 % $ 24.87 (30.5) %
MEA
Occupancy 48.8 % 32.7 % pts. 45.7 % 8.5 % pts.
ADR $ 131.06 28.1 % $ 128.18 1.0 %
RevPAR $ 64.00 286.6 % $ 58.59 24.0 %
Asia Pacific
Occupancy 56.1 % 27.2 % pts. 49.9 % 16.8 % pts.
ADR $ 98.71 25.4 % $ 98.26 (5.1) %
RevPAR $ 55.39 143.1 % $ 49.08 43.3 %
System-wide
Occupancy 58.5 % 36.1 % pts. 51.3 % 12.6 % pts.
ADR $ 124.75 28.0 % $ 116.51 (7.1) %
RevPAR $ 73.03 233.8 % $ 59.75 23.2 %
During the three and six months ended June 30, 2021 , the COVID-19 pandemic
continued to negatively impact our business and our hotel operating statistics.
However, we experienced improvement in our results as compared to previous
periods during the COVID-19 pandemic, particularly during the three months ended
June 30, 2021 , as a result of an upward trend in travel and tourism with the
easing of COVID-19 restrictions. The negative impact of the COVID-19 pandemic
affected the Asia Pacific region in January 2020 , before spanning to the U.S. ,
Americas (excluding the U.S. ), Europe and MEA regions in mid-March 2020 .
Therefore, the results for the six months ended June 30, 2021 and 2020 for the
U.S. , Americas (excluding the U.S. ), Europe and MEA regions are less comparable
than the Asia Pacific region and reflect less improvement, if any, in RevPAR
between the two periods, as those regions were not affected for the entirety of
the six months ended June 30, 2020 . Although all regions showed significant
improvement compared to the three months ended June 30, 2020 , Europe's recovery
was outpaced by the other regions during the six months ended June 30, 2021 due
to continued COVID-19 restrictions and travel barriers across the region. The
three months ended June 30, 2020 reflected the lowest occupancy and RevPAR of
any period for all regions since the start of the pandemic. Further, as a result
of the pandemic, certain hotels suspended operations at various times throughout
2020, but the majority of those hotels were reopened by 2021.
Overall, we are recovering from the negative impact of the pandemic and while
some hotels suspended operations during the six months ended June 30, 2021 ,
reopenings significantly outpaced suspensions. As such, the operations of only
approximately 300 hotels, primarily located in the U.S. and Europe , were
suspended for some period of time during the six months ended June 30, 2021 , as
compared to approximately 1,205 hotels during the six months ended June 30,
2020 . Further, as of June 30, 2021 , the number of hotels with suspended
operations was the fewest as of any period end since the start of the pandemic,
with more than 98 percent of our global hotel properties open. And while most
properties, including those that reopened following suspensions of their
operations, experienced significantly lower occupancy during 2020 and 2021 as
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compared to periods prior to the onset of the pandemic, we experienced
sequential monthly improvement in occupancy, ADR and RevPAR on a system-wide
basis during the six months ended
The table below provides a reconciliation of net income (loss) to EBITDA and Adjusted EBITDA:
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
(in millions)
Net income (loss) $ 128 $ (432) $ 19 $ (414)
Interest expense 101 106 204 200
Income tax benefit (1) (12) (36) (47)
Depreciation and amortization expenses 46 88 97 179
EBITDA 274 (250) 284 (82)
Loss (gain) on foreign currency 1 13 (1) 4
transactions
Loss on debt extinguishment - - 69 -
FF&E replacement reserves 11 7 15 21
Share-based compensation expense 53 24 92 12
Reorganization costs - 38 - 38
Impairment losses - 15 - 127
Amortization of contract acquisition 7 7 14 15
costs
Net other expenses from managed and franchised properties 55 166 119 237 Other adjustments(1) (1) 31 6 42 Adjusted EBITDA$ 400 $ 51 $ 598 $ 414 ____________ (1)Includes severance not related to the reorganization activities undertaken in response to the COVID-19 pandemic and other items. The three and six months endedJune 30, 2020 also include losses related to the disposal of an investment and the settlement of a debt guarantee for a franchised hotel. Revenues Three Months Ended Percent Six Months Ended Percent June 30, Change June 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Franchise and licensing fees$ 369 $ 132 NM(1)$ 611 $ 471 29.7 Base and other management fees$ 42 $ 8 NM(1)$ 67 $ 68 (1.5) Incentive management fees 21 (5) NM(1) 34 18 88.9 Total management fees$ 63 $ 3 NM(1)$ 101 $ 86 17.4 ____________
(1)Fluctuation in terms of percentage change is not meaningful.
The COVID-19 pandemic began to significantly impact our franchise and licensing fees and management fees inMarch 2020 . The increases in fees that were recognized in 2021, as compared to fees recognized during the same periods in 2020, were driven by an upward trend in travel and tourism in 2021 resulting from increased confidence and desire to travel by our customers, as COVID-19 vaccinations were distributed more broadly and COVID-19 restrictions began to ease. Additionally, there were decreases in the number of hotels that had suspended operations as a result of the pandemic during the respective periods, with approximately 1,170 managed and franchised hotels with suspended operations for some period of time during the six months endedJune 30, 2020 , while only approximately 285 managed and franchised hotels had suspended operations for some period of time during the six months endedJune 30, 2021 . As ofJune 30, 2021 , all but approximately 100 of these hotels had reopened. For the three months endedJune 30, 2021 , RevPAR increased 218.1 percent at our comparable franchised properties and 308.3 percent at our comparable managed properties, as a result of increases in occupancy of 38.3 percentage points and 29.5 percentage points, respectively, and increased ADR of 24.2 percent and 46.2 percent, respectively. For the six months endedJune 30, 2021 , RevPAR increased 29.6 percent at our comparable franchised properties and 6.5 percent at our comparable 23 -------------------------------------------------------------------------------- managed properties as a result of increased occupancy of 14.8 percentage points and 6.5 percentage points, respectively, partially offset by decreased ADR of 5.0 percent and 10.9 percent, respectively. Including new development and ownership type transfers, fromJanuary 1, 2020 toJune 30, 2021 , we added nearly 570 managed and franchised properties on a net basis, providing an additional 79,700 rooms to our management and franchise segment. As new hotels were part of our system for full periods and as they recovered from the negative impact of the COVID-19 pandemic, such hotels increased our franchise and management fees during the periods, and we expect this trend to continue in future periods. Additionally, licensing and other fees increased$48 million and$28 million during the three and six months endedJune 30, 2021 , respectively, primarily due to increases in licensing fees from HGV and our strategic partnerships, which were the result of increases in timeshare revenues and higher co-branded credit cardholder spend, respectively, both resulting from the rise in travel and tourism during the periods. Incentive fees increased during the periods as they are based on hotels' operating profits, which have improved from the prior year as a result of increased demand at our properties. Incentive fees during the three months endedJune 30, 2020 were negative due to the reversal in that period of certain incentive fees that were recognized during the three months endedMarch 31, 2020 , as a result of revisions of the estimates of the expected operating profit for certain managed hotels during that reporting period. Three Months Ended Percent Six Months Ended Percent June 30, Change June 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions)
Owned and leased hotels$ 121 $ 31 NM(1)$ 177 $ 241 (26.6) ____________
(1)Fluctuation in terms of percentage change is not meaningful.
As a result of the COVID-19 pandemic, the operations of approximately 15 and 35 of our owned and leased hotels were suspended for some period of time during the six months endedJune 30, 2021 and 2020, respectively, and, as ofJune 30, 2021 , all of these hotels had reopened. The increase in owned and leased hotel revenues during the three months endedJune 30, 2021 was primarily attributable to a$73 million increase in revenues from our comparable owned and leased hotels that was due to an increase in RevPAR of 492.6 percent, resulting from increases in occupancy and ADR of 21.8 percentage points and 14.1 percent, respectively, as well as the decrease in the number of these hotels that had suspended operations during the periods. Additionally, the increase included a$23 million increase in COVID-19 relief subsidies from international governments. Although the three months endedJune 30, 2021 reflected signs of recovery from the COVID-19 pandemic, we still experienced a decrease in revenues from owned and leased hotels during the six months endedJune 30, 2021 , as the majority of our owned and leased hotels did not suspend operations or otherwise sustain negative results because of the pandemic untilMarch 2020 . Revenues from our comparable owned and leased hotels decreased$41 million during the six months endedJune 30, 2021 , due to reduced RevPAR of 40.8 percent, resulting from decreases in occupancy and ADR of 7.6 percentage points and 19.0 percent, respectively. However, the decrease in revenues during the six months endedJune 30, 2021 was partially offset by a$28 million increase in COVID-19 relief subsidies from international governments and an$11 million increase due to favorable foreign currency exchange rates. Three Months Ended Percent Six Months Ended Percent June 30, Change June 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Other revenues$ 21 $ 10 NM(1)$ 38 $ 33 15.2 ____________
(1)Fluctuation in terms of percentage change is not meaningful.
For the three months endedJune 30, 2021 , other revenues increased primarily due to increased revenue from our purchasing operations related to improving hotel demand resulting from the rise in travel and tourism during the period. 24 -------------------------------------------------------------------------------- Operating Expenses Three Months Ended Percent Six Months Ended Percent June 30, Change June 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions)
Owned and leased hotels$ 142 $ 95 49.5$ 252 $ 334 (24.6) The changes in our owned and leased hotel expenses primarily reflect the changes in occupancy during the three and six months endedJune 30, 2021 , as discussed in "-Revenues," which drove food and beverage expenses and certain of the variable operating costs of the hotels. Additionally, there were changes in rent expense for our leased hotels, particularly variable rent expense, which is generally based on hotel performance, consistent with the changes in owned and leased hotel revenues. Further, although the operations of certain owned and leased hotels were suspended for some period of time during the six months endedJune 30, 2021 and 2020, and most remaining open hotels were operating with low occupancy, particularly during the three months endedJune 30, 2020 , certain fixed costs of maintaining these hotels, such as fixed rent and certain minimum maintenance and utility costs, could not be reduced at the same rate that those hotels' revenues may have decreased. The changes during the three and six months endedJune 30, 2021 also included increases in owned and leased hotel expenses of$7 million and$20 million , respectively, as a result of unfavorable foreign currency exchange rates. Three Months Ended Percent Six Months Ended Percent June 30, Change June 30, Change 2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020 (in millions) (in millions) Depreciation and amortization$ 46 $ 88 (47.7)$ 97 $ 179 (45.8) expenses General and administrative 98 63 55.6 195 123 58.5 expenses Reorganization costs - 38 (100.0) - 38 (100.0) Impairment losses - 15 (100.0) - 127 (100.0) Other expenses 9 13 (30.8) 19 27 (29.6) The decreases in depreciation and amortization expenses were due to decreases in amortization expenses, primarily resulting from certain management and franchise contract intangible assets that were recorded at the Merger becoming fully amortized during 2020. The increases in general and administrative expenses were primarily due to increased share-based compensation expense as a result of expenses recognized during the three and six months endedJune 30, 2021 for all of the outstanding performance shares, which were probable of achievement as ofJune 30, 2021 , while the expenses recognized during the three and six months endedJune 30, 2020 were net of the reversal of expenses recognized in prior periods as a result of the determination that the performance conditions of the performance shares that were originally awarded in 2018 and 2019 were no longer probable of achievement. See Note 8: "Share-Based Compensation" in our unaudited condensed consolidated financial statements for additional information.
During the three and six months ended
During the three months endedJune 30, 2020 , we recognized impairment losses of$6 million for operating lease ROU assets, and, during the six months endedJune 30, 2020 , we recognized impairment losses of$51 million ,$21 million and$46 million for operating lease ROU assets, property and equipment, net and other intangible assets, net, respectively, related to our leased hotel properties. Additionally, during the three and six months endedJune 30, 2020 , we recognized impairment losses of$9 million related to management contract acquisition costs. These impairment losses were due to a decline in results and expected future performance at the related hotels as a result of the COVID-19 pandemic. Other expenses decreased primarily as a result of expenses related to performance guarantees being recognized during the three and six months endedJune 30, 2020 . Additionally, the decrease during the six months endedJune 30, 2021 included decreased expenses from our purchasing operations. 25 --------------------------------------------------------------------------------
Non-operating Income and Expenses
Three Months Ended Percent Six Months Ended Percent
June 30, Change June 30, Change
2021 2020 2021 vs. 2020 2021 2020 2021 vs. 2020
(in millions) (in millions)
Interest expense $ (101) $ (106) (4.7) $ (204) $ (200) 2.0
Gain (loss) on foreign currency
transactions (1) (13) (92.3) 1 (4) NM(1)
Loss on debt extinguishment - - NM(1) (69) - NM(1)
Other non-operating income
(loss), net 5 (23) NM(1) 10 (23) NM(1)
Income tax benefit 1 12 (91.7) 36 47 (23.4)
____________(1)Fluctuation in terms of percentage change is not meaningful.
The changes in interest expense during the three and six months endedJune 30, 2021 included the increase in interest expense due to the issuances of the 2025 Senior Notes and the 2028 Senior Notes inApril 2020 , as well as decreases resulting from the issuances of new senior unsecured notes and extinguishments of existing senior unsecured notes inDecember 2020 andFebruary 2021 , which reduced the weighted average interest rates on our outstanding senior unsecured notes. Additionally, our variable interest expense decreased during the three and six months endedJune 30, 2021 due to declines in the variable interest rate on our Term Loan, as well as significant principal repayments that were made on the Revolving Credit Facility during the periods, while no such payments were made during 2020 after our full draw down on the Revolving Credit Facility inMarch 2020 . See Note 5: "Debt" in our unaudited condensed consolidated financial statements for additional information on our indebtedness. The gains and losses on foreign currency transactions included changes in foreign currency exchange rates on certain intercompany financing arrangements, including short-term cross-currency intercompany loans. The changes were the result of various currencies, but primarily the Australian dollar. Loss on debt extinguishment for the six months endedJune 30, 2021 related to the redemption of the 2026 Senior Notes and included a redemption premium of$55 million and the accelerated recognition of unamortized deferred financing costs on the 2026 Senior Notes of$14 million . See Note 5: "Debt" in our unaudited condensed consolidated financial statements for additional information.
Other non-operating loss, net for the three and six months ended
The decreases in income tax benefit during the three and six months endedJune 30, 2021 were primarily attributable to changes in income before income taxes, partially offset by benefits recognized as a result of the tax rate change implemented as part of theU.K. Finance Act and increases in tax benefits recognized for net operating losses generated in 2021 in certain foreign jurisdictions. For additional information, see Note 7: "Income Taxes" in our unaudited condensed consolidated financial statements.
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 amounts and of segment operating income to consolidated income
(loss) before income taxes. We primarily evaluate our business segment operating
performance using segment operating income (loss), without allocating other
revenues and other expenses from managed and franchised properties, other
revenues, other expenses or general and administrative expenses.
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 changes in
revenues and operating expenses at our owned and leased hotels, which are
correlated with our ownership segment revenues and segment operating losses.
26
--------------------------------------------------------------------------------Liquidity and Capital Resources
Overview
As ofJune 30, 2021 , we had total cash and cash equivalents of$1,127 million , including$83 million of restricted cash and cash equivalents. The majority of our restricted cash and cash equivalents are related to cash collateral and cash held for FF&E reserves. In response to the global crisis resulting from the COVID-19 pandemic, in addition to the actions we took to prioritize the safety and security of our guests, employees and owners and support our communities, we took certain proactive measures in 2020 to help our business withstand this uncertain time. This included securing our liquidity position to be able to meet our obligations for the foreseeable future, including issuing senior notes, drawing down on the full capacity of our Revolving Credit Facility and consummating the Honors Points Pre-Sale. Further, inFebruary 2021 , we issued the 2032 Senior Notes to continue to extend debt maturities and reduce our cost of debt by repaying the 2026 Senior Notes. Based on our continued recovery and expectations of the foreseeable demands on our available cash and our liquidity in future periods, we fully repaid the$1,690 million outstanding debt balance on the Revolving Credit Facility during the six months endedJune 30, 2021 , including$1,190 million inJune 2021 . Our known short-term liquidity requirements primarily consist of funds necessary to pay for operating and other expenditures, including costs associated with the management and franchising of hotels, corporate expenses, payroll and compensation costs, taxes and compliance costs, interest payments on our outstanding indebtedness, contract acquisition costs and capital expenditures for required renovations and maintenance at the hotels within our ownership segment. While our accounts receivable balance as ofJune 30, 2021 is less than periods prior to the start of the pandemic, we are generally experiencing slower payment of certain fees due to us. As such, we have considered the implications of these delayed payment trends in developing our estimates of expected future credit losses. However, during the current period, we experienced some improvement with respect to the timing of customer payments in comparison to previous periods impacted by the pandemic. Our long-term liquidity requirements primarily consist of funds necessary to pay for scheduled debt maturities, capital improvements to the hotels within our ownership segment, commitments to owners in our management and franchise segment and corporate capital and information technology expenditures. We formally suspended share repurchases inMarch 2020 given the economic environment and our efforts to preserve cash, and no share repurchases have been made since then. However, the stock repurchase program remains authorized by the board of directors, with approximately$2.2 billion remaining available for share repurchases under the program, and we may resume share repurchases in the future at any time, depending on market conditions, our capital needs and other factors. Additionally, we suspended dividend payments in 2020, but we expect that both share repurchases and dividend payments will be reinstated in future periods and result in uses of liquidity. Although the COVID-19 pandemic has caused us to temporarily change our cash management strategy, 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, which we expect to reimplement at some time in the future. 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 ofJune 30, 2021 , cash generated from our operations and, as needed, the use of the available capacity of our Revolving Credit Facility. 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 related benefits, 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 retirement of outstanding debt, if any, will depend on prevailing market conditions, liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. 27 --------------------------------------------------------------------------------
Sources and Uses of Our Cash and Cash Equivalents
The following table summarizes our net cash flows:
Six Months Ended Percent
June 30, Change
2021 2020 2021 vs. 2020
(in millions)
Net cash provided by (used in) operating activities $ (300) $ 946 NM(1)
Net cash used in investing activities (14) (76) (81.6)
Net cash provided by (used in) financing activities (1,818) 2,082 NM(1)
____________
(1)Fluctuation in terms of percentage change is not meaningful.
Operating Activities
The change in cash flows from operating activities was primarily attributable to the$1.0 billion of cash received in connection with the Honors Points Pre-Sale during the six months endedJune 30, 2020 . Excluding the impact of this transaction, cash flows provided by (used in) operating activities were flat during the six months endedJune 30, 2021 , as the increase in cash inflows generated from our properties, largely as a result of an increase in system-wide RevPAR related to recovery from the COVID-19 pandemic, and the decreases in cash paid for interest and income taxes, were offset by a$92 million increase in payments of contract acquisition costs that, despite the current challenging conditions, continue our strategic investment in growing our system by adding hotels to our management and franchise segment.
Investing Activities
Net cash used in investing activities primarily related to capitalized software costs that were related to various systems initiatives for the benefit of both our hotel owners and our overall corporate operations and to capital expenditures for property and equipment related to our corporate facilities and the renovation of certain hotels in our ownership segment. Beginning inMarch 2020 , we took steps to temporarily reduce such expenditures in response to the COVID-19 pandemic; however, we expect such costs to increase in future periods, aligned to our recovery from the pandemic.
Financing Activities
The change in cash flows from financing activities was primarily attributable to our Revolving Credit Facility, which we fully drew down during the six months endedJune 30, 2020 in response to the COVID-19 pandemic, resulting in net cash inflows of$1.5 billion , while we fully repaid the$1.69 billion outstanding debt balance during the six months endedJune 30, 2021 . Additionally, during the six months endedJune 30, 2020 , we had an additional net$1.0 billion of senior notes borrowings as compared to the six months endedJune 30, 2021 . Further, cash outflows decreased$338 million as a result of decreases in share repurchases and dividend payments, as both programs remained suspended during the six months endedJune 30, 2021 .
Debt and Borrowing Capacity
As ofJune 30, 2021 , our total indebtedness, excluding unamortized deferred financing costs and discount, was approximately$8.9 billion . For additional information on our total indebtedness, including financing transactions executed during the six months endedJune 30, 2021 , 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. 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. The COVID-19 pandemic negatively impacted our cash flows from operations as compared to periods prior to the onset of the pandemic, and will continue to do so for an indeterminate period of time. During 2020, we took precautions to secure our cash position, as discussed above, and, with our business recovering during the current period, we were able to repay outstanding debt borrowings on our Revolving Credit facility and we expect to be able to meet our current obligations. Furthermore, we do not have any material indebtedness outstanding that matures prior toMay 2025 . 28 --------------------------------------------------------------------------------
Contractual Obligations
During the six months endedJune 30, 2021 , we issued the 2032 Senior Notes, redeemed the 2026 Senior Notes and fully repaid the$1,690 million outstanding debt balance on our Revolving Credit Facility. Otherwise, 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 endedDecember 31, 2020 .
Summarized Guarantor Financial Information
HOC is the issuer of the Senior Notes and is 100 percent owned directly byHilton Worldwide Parent LLC ("HWP"), which, in turn, is 100 percent owned directly by the Parent. The Senior Notes are guaranteed jointly and severally on a senior unsecured basis by the Parent, HWP and substantially all of the Parent's direct and indirect wholly owned domestic restricted subsidiaries, except for HOC (together, the "Guarantors"). The indentures that govern the Senior Notes provide that any subsidiary of the Company that provides a guarantee of our senior secured credit facilities will guarantee the Senior Notes. As ofJune 30, 2021 , none of our foreign subsidiaries or domestic subsidiaries owned by foreign subsidiaries or our non-wholly owned subsidiaries guaranteed the Senior Notes. 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 guarantee under our senior secured credit facilities; (iii) the subsidiary is declared "unrestricted" for covenant purposes; or (iv) 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. Neither HOC nor any of the Guarantors has any reporting obligation under the Exchange Act in respect of the Senior Notes; however, we are supplementally providing the information set forth below. The following tables present summarized financial information for HOC, along with the Parent and all other Guarantors, on a combined basis: As of June 30, 2021 (in millions) ASSETS Total current assets $ 992 Intangible assets, net 8,798 Total intangibles and other assets 9,283 TOTAL ASSETS 10,275 LIABILITIES AND EQUITY (DEFICIT) Total current liabilities 2,284 Long-term debt 8,533 Total liabilities 14,282Total Hilton stockholders' deficit (4,007) TOTAL LIABILITIES AND EQUITY (DEFICIT) 10,275 29 --------------------------------------------------------------------------------
Six Months Ended June
30, 2021
(in millions)
Revenues
Revenues $ 617
Other revenues from managed and franchised properties 1,100
Total revenues $ 1,717
Expenses
Expenses $ 185
Other expenses from managed and franchised properties 1,229
Total expenses $ 1,414
Operating income $ 303
Interest expense (196)
Income tax expense (12)
Net income 36
Net income attributable to Hilton stockholders 36
Critical Accounting Policies and Estimates
The preparation of our unaudited condensed consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect reported amounts and related disclosures. We have discussed the policies and estimates that we believe are critical and require the use of complex judgment in their application in our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , and, during the six months endedJune 30, 2021 , there were no material changes to those previously disclosed.
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