CHH-10Q-03.31.2015
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________________________
FORM 10-Q
_____________________________________________
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED March 31, 2015
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 001-13393
_____________________________________________
CHOICE HOTELS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
_____________________________________________
|
| | |
DELAWARE | | 52-1209792 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
1 CHOICE HOTELS CIRCLE, SUITE 400
ROCKVILLE, MD 20850
(Address of principal executive offices)
(Zip Code)
(301) 592-5000
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
_____________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months. Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
| | | | |
Large accelerated filer | x | | Accelerated filer | o |
Non-accelerated filer | o | | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
|
| | |
CLASS | | SHARES OUTSTANDING AT March 31, 2015 |
Common Stock, Par Value $0.01 per share | | 57,587,566 |
| | |
| | |
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
| |
ITEM 1. | FINANCIAL STATEMENTS |
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
REVENUES: | | | |
Royalty fees | $ | 62,431 |
| | $ | 58,540 |
|
Initial franchise and relicensing fees | 5,717 |
| | 3,740 |
|
Procurement services | 4,807 |
| | 4,778 |
|
Marketing and reservation | 98,713 |
| | 89,606 |
|
Other | 3,577 |
| | 3,072 |
|
Total revenues | 175,245 |
| | 159,736 |
|
| | | |
OPERATING EXPENSES: | | | |
Selling, general and administrative | 32,438 |
| | 26,680 |
|
Depreciation and amortization | 2,690 |
| | 2,278 |
|
Marketing and reservation | 98,713 |
| | 89,606 |
|
Total operating expenses | 133,841 |
| | 118,564 |
|
| | | |
Operating income | 41,404 |
| | 41,172 |
|
OTHER INCOME AND EXPENSES, NET: | | | |
Interest expense | 10,179 |
| | 10,171 |
|
Interest income | (346 | ) | | (503 | ) |
Other (gains) and losses | (468 | ) | | (59 | ) |
Equity in net loss of affiliates | 1,005 |
| | 35 |
|
Total other income and expenses, net | 10,370 |
| | 9,644 |
|
Income from continuing operations before income taxes | 31,034 |
| | 31,528 |
|
Income taxes | 9,440 |
| | 10,059 |
|
Income from continuing operations, net of income taxes | 21,594 |
| | 21,469 |
|
Income from discontinued operations, net of income taxes | — |
| | 1,641 |
|
Net income | $ | 21,594 |
| | $ | 23,110 |
|
| | | |
Basic earnings per share | | | |
Continuing operations | $ | 0.38 |
| | $ | 0.37 |
|
Discontinued operations | — |
| | 0.03 |
|
| $ | 0.38 |
| | $ | 0.40 |
|
Diluted earnings per share | | | |
Continuing operations | $ | 0.37 |
| | $ | 0.36 |
|
Discontinued operations | — |
| | 0.03 |
|
| $ | 0.37 |
| | $ | 0.39 |
|
| | | |
Cash dividends declared per share | $ | 0.195 |
| | $ | 0.185 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED, IN THOUSANDS)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
| | | |
Net income | $ | 21,594 |
| | $ | 23,110 |
|
Other comprehensive income (loss), net of tax: | | | |
Amortization of loss on cash flow hedge | 215 |
| | 215 |
|
Foreign currency translation adjustment | (1,447 | ) | | 521 |
|
Other comprehensive income (loss), net of tax | (1,232 | ) | | 736 |
|
Comprehensive income | $ | 20,362 |
| | $ | 23,846 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED, IN THOUSANDS, EXCEPT SHARE AMOUNTS)
|
| | | | | | | |
| March 31,
2015 | | December 31,
2014 |
ASSETS | | | |
Current assets | | | |
Cash and cash equivalents | $ | 200,544 |
| | $ | 214,879 |
|
Receivables (net of allowance for doubtful accounts of $9,842 and $10,084, respectively) | 102,013 |
| | 91,681 |
|
Deferred income taxes | 25,674 |
| | 23,860 |
|
Income taxes receivable | — |
| | 1,458 |
|
Investments, employee benefit plans, at fair value | 177 |
| | 214 |
|
Other current assets | 28,864 |
| | 19,322 |
|
Total current assets | 357,272 |
| | 351,414 |
|
Property and equipment, at cost, net | 80,057 |
| | 77,309 |
|
Goodwill | 65,813 |
| | 65,813 |
|
Franchise rights and other identifiable intangibles, net | 8,001 |
| | 8,912 |
|
Notes receivable, net of allowances | 48,781 |
| | 40,441 |
|
Investments, employee benefit plans, at fair value | 17,916 |
| | 17,539 |
|
Deferred income taxes | 18,921 |
| | 20,546 |
|
Other assets | 64,361 |
| | 65,296 |
|
Total assets | $ | 661,122 |
| | $ | 647,270 |
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | |
Current liabilities | | | |
Accounts payable | $ | 54,631 |
| | $ | 57,124 |
|
Accrued expenses | 39,414 |
| | 63,530 |
|
Deferred revenue | 73,908 |
| | 66,382 |
|
Current portion of long-term debt | 12,362 |
| | 12,349 |
|
Deferred compensation and retirement plan obligations | 177 |
| | 628 |
|
Income taxes payable | 1,396 |
| | 85 |
|
Total current liabilities | 181,888 |
| | 200,098 |
|
Long-term debt | 799,628 |
| | 782,082 |
|
Deferred compensation and retirement plan obligations | 24,259 |
| | 23,987 |
|
Other liabilities | 68,840 |
| | 69,904 |
|
Total liabilities | 1,074,615 |
| | 1,076,071 |
|
Commitments and Contingencies |
|
| |
|
|
Common stock, $0.01 par value, 160,000,000 shares authorized; 95,065,638 shares issued at March 31, 2015 and December 31, 2014 and 57,587,566 and 57,337,720 shares outstanding at March 31, 2015 and December 31, 2014, respectively | 576 |
| | 573 |
|
Additional paid-in-capital | 131,711 |
| | 127,661 |
|
Accumulated other comprehensive loss | (8,203 | ) | | (6,971 | ) |
Treasury stock (37,478,072 and 37,727,918 shares at March 31, 2015 and December 31, 2014, respectively), at cost | (979,828 | ) | | (982,463 | ) |
Retained earnings | 442,251 |
| | 432,399 |
|
Total shareholders’ deficit | (413,493 | ) | | (428,801 | ) |
Total liabilities and shareholders’ deficit | $ | 661,122 |
| | $ | 647,270 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED, IN THOUSANDS)
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
| | | |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | |
Net income | $ | 21,594 |
| | $ | 23,110 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
|
Depreciation and amortization | 2,690 |
| | 2,278 |
|
Gain on sale of assets | (292 | ) | | (2,572 | ) |
Provision for bad debts, net | 823 |
| | 1,399 |
|
Non-cash stock compensation and other charges | 2,509 |
| | 2,875 |
|
Non-cash interest and other (income) loss | 506 |
| | 416 |
|
Deferred income taxes | (233 | ) | | 2,344 |
|
Equity (earnings) losses from unconsolidated joint ventures, net of distributions received | 1,205 |
| | 216 |
|
Changes in assets and liabilities: | | | |
Receivables | (11,624 | ) | | (19,931 | ) |
Advances to/from marketing and reservation activities, net | 4,626 |
| | 10,903 |
|
Forgivable notes receivable, net | (13,371 | ) | | (3,623 | ) |
Accounts payable | (1,152 | ) | | 2,080 |
|
Accrued expenses | (24,052 | ) | | (19,861 | ) |
Income taxes payable/receivable | 2,773 |
| | 3,160 |
|
Deferred revenue | 7,552 |
| | 7,932 |
|
Other assets | (9,826 | ) | | (3,103 | ) |
Other liabilities | 437 |
| | (2,359 | ) |
Net cash provided (used) by operating activities | (15,835 | ) | | 5,264 |
|
CASH FLOWS FROM INVESTING ACTIVITIES: | | |
|
Investment in property and equipment | (6,804 | ) | | (3,015 | ) |
Proceeds from sales of assets | 1,592 |
| | 8,703 |
|
Equity method investments | (1,921 | ) | | (3,379 | ) |
Purchases of investments, employee benefit plans | (1,089 | ) | | (890 | ) |
Proceeds from sales of investments, employee benefit plans | 925 |
| | 281 |
|
Issuance of mezzanine and other notes receivable | — |
| | (587 | ) |
Collections of mezzanine and other notes receivable | 105 |
| | 68 |
|
Other items, net | (77 | ) | | (154 | ) |
Net cash provided (used) by investing activities | (7,269 | ) | | 1,027 |
|
CASH FLOWS FROM FINANCING ACTIVITIES: | | |
|
Net borrowings pursuant to revolving credit facility | 20,700 |
| | 15,000 |
|
Principal payments on long-term debt | (3,082 | ) | | (2,052 | ) |
Purchases of treasury stock | (6,227 | ) | | (4,530 | ) |
Dividends paid | (11,710 | ) | | (10,784 | ) |
Excess tax benefits from stock-based compensation | 4,473 |
| | 1,024 |
|
Proceeds from exercise of stock options | 5,619 |
| | 1,547 |
|
Net cash provided by financing activities | 9,773 |
| | 205 |
|
Net change in cash and cash equivalents | (13,331 | ) | | 6,496 |
|
Effect of foreign exchange rate changes on cash and cash equivalents | (1,004 | ) | | 587 |
|
Cash and cash equivalents at beginning of period | 214,879 |
| | 167,795 |
|
Cash and cash equivalents at end of period | $ | 200,544 |
| | $ | 174,878 |
|
Supplemental disclosure of cash flow information: | | | |
Cash payments during the period for: | | | |
Income taxes, net of refunds | $ | 2,357 |
| | $ | 5,842 |
|
Interest, net of capitalized interest | $ | 18,729 |
| | $ | 19,613 |
|
Non-cash investing and financing activities: | | | |
Dividends declared but not paid | $ | 11,230 |
| | $ | 11,173 |
|
Issuance of common stock pursuant to share based compensation plans | $ | 6,952 |
| | $ | 7,253 |
|
Investment in property and equipment acquired in accounts payable | $ | 1,380 |
| | $ | 603 |
|
The accompanying notes are an integral part of these consolidated financial statements.
CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| |
1. | Company Information and Significant Accounting Policies |
The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and subsidiaries (together the "Company") have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). These unaudited consolidated financial statements include all adjustments that are necessary, in the opinion of management, to fairly present our financial position and results of operations. Except as otherwise disclosed, all adjustments are of a normal recurring nature.
Certain information and footnote disclosures normally included in financial statements presented in accordance with accounting principles generally accepted in the United States of America ("GAAP") have been omitted. The Company believes the disclosures made are adequate to make the information presented not misleading.
The consolidated financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2014 and notes thereto included in the Company’s Form 10-K, filed with the SEC on March 2, 2015 (the "10-K"). Interim results are not necessarily indicative of the entire year results. All inter-company transactions and balances between Choice Hotels International, Inc. and its subsidiaries have been eliminated in consolidation.
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Discontinued Operations
In the first quarter of 2014, the Company's management approved a plan to dispose of the three Company owned Mainstay Suites hotels. As a result, the Company has reported the operations related to these three hotels as discontinued operations in this Quarterly Report on Form 10-Q. For additional information regarding discontinued operations, see Note 17, Discontinued Operations.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a maturity of three months or less at the date of purchase to be cash equivalents. As of March 31, 2015 and December 31, 2014, $6.7 million and $5.4 million, respectively, of book overdrafts representing outstanding checks in excess of funds on deposit are included in accounts payable in the accompanying consolidated balance sheets.
The Company maintains cash balances in domestic banks, which at times, may exceed the limits of amounts insured by the Federal Deposit Insurance Corporation. In addition, as of March 31, 2015, the Company maintains cash balances of $195.1 million in international banks which do not provide deposit insurance.
Recently Adopted Accounting Guidance
In April 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements and Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity ("ASU No. 2014-08"). ASU No. 2014-08 changes the definition of a discontinued operation to include only those disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity's operations and financial results. ASU No. 2014-08 is effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within those years. The Company adopted this ASU on January 1, 2015 and it did not have a material impact on its financial statements.
Future Adoption of Recently Announced Accounting Guidance
In May 2014, the FASB issued ASU No. 2014-09, Revenue From Contracts with Customers ("ASU 2014-09"), which impacts virtually all aspects of an entity's revenue recognition. ASU No. 2014-09 supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, as well as most industry-specific guidance, and significantly enhances comparability of revenue recognition practices across entities and industries by providing a principles-based, comprehensive framework for addressing revenue recognition issues. In order for a provider of promised goods or services to recognize as revenue the
consideration that it expects to receive in exchange for the promised goods or services, the provider should apply the following five steps: (1) identify the contract with a customer(s); (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASU No. 2014-09 also specifies the accounting for some costs to obtain or fulfill a contract with a customer and provides enhanced disclosure requirements. The FASB has tentatively deferred ASU No. 2014-09 for one year, and with that deferral, the standard will be effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, which will be our 2018 first quarter. We are permitted to use either the retrospective or modified retrospective method when adopting ASU No. 2014-09. We are still assessing the potential impact that ASU No. 2014-09 will have on its financial statements and disclosures.
In January 2015, the FASB issued ASU No. 2015-01, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20) (“ASU No. 2015-01”). ASU No. 2015-01 was issued changing the requirements for reporting extraordinary and unusual items in the income statement. The update eliminates the concept of extraordinary items. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. ASU No. 2015-01 is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The adoption of this newly issued guidance is not expected to have an impact to our consolidated financial statements.
In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810) (“ASU No. 2015-02”). ASU No. 2015-02 changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. This guidance must be applied using one of two retrospective application methods and will be effective for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. The Company is currently evaluating the impact, if any, the adoption of this newly issued guidance will have on its consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30) (“ASU No. 2015-03”). ASU No. 2015-03 changes the presentation of debt issuance costs in the financial statements to present such costs as a direct deduction from the related debt liability rather than as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. This standard is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted and the standard is to be applied on retrospective basis. The Company currently does not believe that ASU No. 2015-03 will have a material impact on its consolidated financial position, results of operations, or cash flows.
In April 2015, the FASB issued ASU No. 2015-05, Intangibles-Goodwill - Internal Use Software (Subtopic 350-40) (“ASU No. 2015-05”). ASU No. 2015-05 provides guidance to customers about whether a cloud computing arrangement includes a software license or should be accounted for as a service contract. The standard is effective for annual reporting periods, including interim periods within those annual periods beginning after December 15, 2015. Early adoption is permitted and an entity can elect to adopt the amendment either (1) prospectively to all arrangements entered into or materially modified after the effective date or (2) retrospectively. The adoption of this newly issued guidance is not expected to have a material impact to our consolidated financial statements.
2. Other Current Assets
Other current assets consist of the following:
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
| (in thousands) |
Notes receivable, net of allowances (See Note 3) | $ | 3,966 |
| | $ | 3,961 |
|
Prepaid expenses | 19,653 |
| | 12,280 |
|
Other current assets | 5,245 |
| | 3,081 |
|
Total | $ | 28,864 |
| | $ | 19,322 |
|
| |
3. | Notes Receivable and Allowance for Losses |
The Company segregates its notes receivable for the purposes of evaluating allowances for credit losses between two categories: Mezzanine and Other Notes Receivable and Forgivable Notes Receivable. The Company utilizes the level of
security it has in the various notes receivable as its primary credit quality indicator (i.e. senior, subordinated or unsecured) when determining the appropriate allowances for uncollectible loans within these categories.
The Company considers loans to be past due and in default when payments are not made when due. Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due. The Company applies payments received for loans on non-accrual status first to interest and then principal. The Company does not resume interest accrual until all delinquent payments are received. For impaired loans, the Company recognizes interest income on a cash basis.
The following table shows the composition of our notes receivable balances:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2015 | | December 31, 2014 |
| (in thousands) | | (in thousands) |
Credit Quality Indicator | Forgivable
Notes
Receivable | | Mezzanine
& Other
Notes
Receivable | | Total | | Forgivable
Notes
Receivable |
| Mezzanine
& Other
Notes
Receivable |
| Total |
Senior | $ | — |
| | $ | 10,152 |
| | $ | 10,152 |
| | $ | — |
| | $ | 10,152 |
| | $ | 10,152 |
|
Subordinated | — |
| | 3,844 |
| | 3,844 |
| | — |
| | 3,863 |
| | 3,863 |
|
Unsecured | 41,558 |
| | 3,888 |
| | 45,446 |
| | 32,379 |
| | 3,995 |
| | 36,374 |
|
Total notes receivable | 41,558 |
| | 17,884 |
| | 59,442 |
| | 32,379 |
| | 18,010 |
| | 50,389 |
|
Allowance for losses on non-impaired loans | 4,399 |
| | 1,510 |
| | 5,909 |
| | 3,661 |
| | 1,540 |
| | 5,201 |
|
Allowance for losses on receivables specifically evaluated for impairment | — |
| | 786 |
| | 786 |
| | — |
| | 786 |
| | 786 |
|
Total loan reserves | 4,399 |
| | 2,296 |
| | 6,695 |
| | 3,661 |
| | 2,326 |
| | 5,987 |
|
Net carrying value | $ | 37,159 |
| | $ | 15,588 |
| | $ | 52,747 |
| | $ | 28,718 |
| | $ | 15,684 |
| | $ | 44,402 |
|
Current portion, net | $ | 162 |
| | $ | 3,804 |
| | $ | 3,966 |
| | $ | 124 |
| | $ | 3,837 |
| | $ | 3,961 |
|
Long-term portion, net | 36,997 |
| | 11,784 |
| | 48,781 |
| | 28,594 |
| | 11,847 |
| | 40,441 |
|
Total | $ | 37,159 |
| | $ | 15,588 |
| | $ | 52,747 |
| | $ | 28,718 |
| | $ | 15,684 |
| | $ | 44,402 |
|
| | | | | | | | | | | |
The Company classifies notes receivable due within one year as other current assets in the Company’s consolidated balance sheets.
The following table summarizes the activity related to the Company’s Forgivable Notes Receivable and Mezzanine and Other Notes Receivable allowance for losses for the three months ended March 31, 2015:
|
| | | | | | | |
| Forgivable Notes Receivable | | Mezzanine & Other Notes Receivable |
| (in thousands) |
Beginning balance | $ | 3,661 |
| | $ | 2,326 |
|
Provisions | 952 |
| | — |
|
Recoveries | (194 | ) | | (30 | ) |
Write-offs | (149 | ) | | — |
|
Other(1) | 129 |
| | — |
|
Ending balance | $ | 4,399 |
| | $ | 2,296 |
|
(1) Consists of default rate assumption changes
Forgivable Notes Receivable
As of March 31, 2015 and December 31, 2014, the unamortized balance of the Company's forgivable notes receivable totaled $41.6 million and $32.4 million, respectively. The Company recorded an allowance for credit losses on these forgivable notes receivable of $4.4 million and $3.7 million at March 31, 2015 and December 31, 2014, respectively. Amortization expense included in the accompanying consolidated statements of income related to the notes for the three months ended March 31, 2015 and 2014 was $1.8 million and $1.2 million, respectively.
Past due balances of forgivable notes receivable are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| 30-89 days Past Due | | > 90 days Past Due | | Total Past Due | | Current | | Total Notes Receivable |
| (in thousands) |
As of March 31, 2015 | | | | | | | | | |
Forgivable Notes | $ | — |
| | $ | 1,168 |
| | $ | 1,168 |
| | $ | 40,390 |
| | $ | 41,558 |
|
| $ | — |
| | $ | 1,168 |
| | $ | 1,168 |
| | $ | 40,390 |
| | $ | 41,558 |
|
| | | | | | | | | |
As of December 31, 2014 | | | | | | | | | |
Forgivable Notes | $ | — |
| | $ | 1,227 |
| | $ | 1,227 |
| | $ | 31,152 |
| | $ | 32,379 |
|
| $ | — |
| | $ | 1,227 |
| | $ | 1,227 |
| | $ | 31,152 |
| | $ | 32,379 |
|
Mezzanine and Other Notes Receivable
The Company determined that approximately $0.8 million of its mezzanine and other notes receivable were impaired at both March 31, 2015 and December 31, 2014, respectively. The Company recorded allowance for credit losses on these impaired loans at both March 31, 2015 and December 31, 2014 totaling $0.8 million. For the three months ended March 31, 2015 and 2014, the average mezzanine and other notes receivable on non-accrual status was approximately $0.8 million and $12.5 million, respectively. The Company recognized approximately $33 thousand and $54 thousand of interest income on impaired loans during the three months ended March 31, 2015 and 2014, respectively, on the cash basis. The Company provided loan reserves on non-impaired loans totaling $1.5 million at both March 31, 2015 and December 31, 2014.
Past due balances of mezzanine and other notes receivable by credit quality indicators are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| 30-89 days Past Due | | > 90 days Past Due | | Total Past Due | | Current | | Total Notes Receivable |
| (in thousands) |
As of March 31, 2015 | | | | | | | | | |
Senior | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,152 |
| | $ | 10,152 |
|
Subordinated | 3,359 |
| | — |
| | 3,359 |
| | 485 |
| | 3,844 |
|
Unsecured | — |
| | 47 |
| | 47 |
| | 3,841 |
| | 3,888 |
|
| $ | 3,359 |
| | $ | 47 |
| | $ | 3,406 |
| | $ | 14,478 |
| | $ | 17,884 |
|
As of December 31, 2014 | | | | | | | | | |
Senior | $ | — |
| | $ | — |
| | $ | — |
| | $ | 10,152 |
| | $ | 10,152 |
|
Subordinated | — |
| | — |
| | — |
| | 3,863 |
| | 3,863 |
|
Unsecured | — |
| | 47 |
| | 47 |
| | 3,948 |
| | 3,995 |
|
| $ | — |
| | $ | 47 |
| | $ | 47 |
| | $ | 17,963 |
| | $ | 18,010 |
|
| |
4. | Marketing and Reservation Activities |
The Company’s franchise agreements require the payment of franchise fees, which include marketing and reservation system fees. The Company is obligated to use the marketing and reservation system revenues it collects from the current franchisees comprising its various hotel brands to provide marketing and reservation services appropriate to support the operation of the overall system. In discharging its obligation to provide sufficient and appropriate marketing and reservation services, the Company has the right to expend funds in an amount reasonably necessary to ensure the provision of such services, whether or
not such amount is currently available to the Company for reimbursement. The franchise agreements provide the Company the right to advance monies to the franchise system when the needs of the system surpass the balances currently available. As a result, expenditures by the Company in support of marketing and reservation services in excess of available revenues are deferred and recorded as an asset in the Company’s financial statements. Conversely, cumulative marketing and reservation system revenues not expended in the current period are deferred and recorded as a liability in the financial statements and are carried over to the next fiscal year and expended in accordance with the franchise agreements or utilized to reimburse the Company for prior year advances.
Under the terms of these agreements, the Company has the contractually enforceable right to assess and collect from its current franchisees, fees sufficient to pay for the marketing and reservation services the Company has procured for the benefit of the franchise system, including fees to reimburse the Company for past services rendered. The Company has the contractual authority to require that the franchisees in the system at any given point repay any deficits related to marketing and reservation activities. The Company’s current franchisees are contractually obligated to pay any assessment the Company imposes on its franchisees to obtain reimbursement of such deficit regardless of whether those constituents continue to generate gross room revenue and whether or not they joined the system following the deficit's occurrence.
At March 31, 2015 and December 31, 2014, cumulative marketing and reservation system fees billed exceeded expenses by $42.6 million and $44.3 million, respectively, with the excess reflected as an other long-term liability in the accompanying consolidated balance sheets. Depreciation and amortization expense attributable to marketing and reservation activities for the three months ended March 31, 2015 and March 31, 2014 were $5.4 million and $3.8 million, respectively. Interest expense attributable to marketing and reservation activities for the three months ended March 31, 2015 and 2014 was $9 thousand and $0.6 million, respectively.
Other assets consist of the following:
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
| (in thousands) |
Equity method investments | $ | 51,239 |
| | $ | 50,605 |
|
Deferred financing fees, net | 6,690 |
| | 7,228 |
|
Land | 2,711 |
| | 4,011 |
|
Other assets | 3,721 |
| | 3,452 |
|
Total | $ | 64,361 |
| | $ | 65,296 |
|
Equity Method Investments - Variable Interest Entities
Equity method investments include investments in joint ventures totaling $47.8 million and $47.1 million at March 31, 2015 and December 31, 2014, respectively that the Company determined to be variable interest entities ("VIEs"). These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria hotel & suites hotels in strategic markets. Based on an analysis of who has the power to direct the activities that most significantly impact these entities performance and who has an obligation to absorb losses of these entities or a right to receive benefits from these entities that could potentially be significant to the entity, the Company determined that it is not the primary beneficiary of any of its VIEs. The Company based its qualitative analysis on its review of the design of the entity, its organizational structure including decision-making ability and the relevant development, operating management and financial agreements. Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method. For the three months ended March 31, 2015 and 2014, the Company recognized losses totaling $1.2 million and $44 thousand, respectively, from these investments. The Company's maximum exposure to losses related to its investments in VIEs is limited to its equity investments as well as certain guarantees described in Note 16 "Commitments and Contingencies" of these financial statements.
Deferred revenue consists of the following:
|
| | | | | | | |
| March 31,
2015 | | December 31,
2014 |
| (in thousands) |
Loyalty programs | $ | 61,092 |
| | $ | 57,757 |
|
Initial, relicensing and franchise fees | 4,973 |
| | 6,439 |
|
Procurement service fees | 2,711 |
| | 1,936 |
|
Other | 5,132 |
| | 250 |
|
Total | $ | 73,908 |
| | $ | 66,382 |
|
Debt consists of the following at:
|
| | | | | | | |
| March 31, 2015 | | December 31, 2014 |
| (in thousands) |
$400 million senior unsecured notes with an effective interest rate of 6.0% at March 31, 2015 and December 31, 2014 | $ | 400,000 |
| | $ | 400,000 |
|
$250 million senior unsecured notes with an effective interest rate of 6.19% less discount of $0.3 million and $0.4 million at March 31, 2015 and December 31, 2014, respectively | 249,652 |
| | 249,636 |
|
$350 million senior secured credit facility with an effective interest rate of 2.26% and 2.17% at March 31, 2015 and December 31, 2014, respectively | 147,263 |
| | 129,375 |
|
Fixed rate collateralized mortgage plus a fair value adjustment of $1.1 million and $1.2 million at March 31, 2015 and December 31, 2014, respectively with an effective interest rate of 4.57% | 10,502 |
| | 10,667 |
|
Economic development loans with an effective interest rate of 3.00% at March 31, 2015 and December 31, 2014 | 3,536 |
| | 3,536 |
|
Capital lease obligations due 2016 with an effective interest rate of 3.18% at March 31, 2015 and December 31, 2014 | 971 |
| | 1,149 |
|
Other notes payable | 66 |
| | 68 |
|
Total debt | $ | 811,990 |
| | $ | 794,431 |
|
Less current portion | 12,362 |
| | 12,349 |
|
Total long-term debt | $ | 799,628 |
| | $ | 782,082 |
|
Senior Unsecured Notes Due 2022
On June 27, 2012, the Company issued unsecured senior notes in the principal amount of $400 million (the "2012 Senior Notes") at par, bearing a coupon of 5.75% with an effective rate of 6.0%. The 2012 Senior Notes will mature on July 1, 2022, with interest to be paid semi-annually on January 1st and July 1st. The Company used the net proceeds of this offering, after deducting underwriting discounts and commissions and other offering expenses, together borrowings under the Company's senior credit facility, to pay a special cash dividend in 2012 totaling approximately $600.7 million. The Company's 2012 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations by certain of the Company’s domestic subsidiaries.
Senior Unsecured Notes Due 2020
On August 25, 2010, the Company issued unsecured senior notes in the principal amount of $250 million (the "2010 Senior Notes") at a discount of $0.6 million, bearing a coupon of 5.7% with an effective rate of 6.19%. The 2010 Senior Notes will mature on August 28, 2020, with interest to be paid semi-annually on February 28th and August 28th. The Company used the net proceeds from the offering, after deducting underwriting discounts and other offering expenses, to repay outstanding borrowings and for other general corporate purposes. The Company's 2010 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations by certain of the Company’s domestic subsidiaries.
Revolving Credit Facility
On July 25, 2012, the Company entered into a $350 million senior secured credit facility, comprised of a $200 million revolving credit tranche (the "Revolver") and a $150 million term loan tranche (the "Term Loan") with Deutsche Bank AG New York Branch, as administrative agent, Wells Fargo Bank, National Association, as administrative agent and a syndication of lenders (the "Credit Facility"). The Credit Facility has a final maturity date of July 25, 2016, subject to an optional one-year extension provided certain conditions are met. Up to $25 million of the borrowings under the Revolver may be used for letters of credit, up to $10 million of borrowings under the Revolver may be used for swing-line loans and up to $35 million of borrowings under the Revolver may be used for alternative currency loans. The Term Loan requires quarterly amortization payments (a) during the first two years, in equal installments aggregating 5% of the original principal amount of the Term Loan per year, (b) during the second two years, in equal installments aggregating 7.5% of the original principal amount of the Term Loan per year, and (c) during the one-year extension period (if exercised), equal installments aggregating 10% of the original principal amount of the Term Loan.
The Credit Facility is unconditionally guaranteed, jointly and severally, by certain of the Company's domestic subsidiaries. The subsidiary guarantors currently include all subsidiaries that guarantee the obligations under the Company's Indenture governing the terms of its 2010 and 2012 Senior Notes.
The Credit Facility is secured by first priority pledges of (i) 100% of the ownership interests in certain domestic subsidiaries owned by the Company and the guarantors, (ii) 65% of the ownership interests in (a) the top-tier foreign holding company of the Company's foreign subsidiaries, and (b) the domestic subsidiary that owns the top-tier foreign holding company of the Company's foreign subsidiaries and (iii) all presently existing and future domestic franchise agreements (the "Franchise Agreements") between the Company and individual franchisees, but only to the extent that the Franchise Agreements may be pledged without violating any law of the relevant jurisdiction or conflicting with any existing contractual obligation of the Company or the applicable franchisee. At the time that the maximum total leverage ratio is required to be no greater than 4.0 to 1.0 (beginning of year 4 of the Credit Facility), the security interest in the Franchise Agreements will be released.
The Company may at any time prior to the final maturity date increase the amount of the Credit Facility by up to an additional $100 million to the extent that any one or more lenders commit to being a lender for the additional amount and certain other customary conditions are met. Such additional amounts may take the form of an increased revolver or term loan.
The Company may elect to have borrowings under the Credit Facility bear interest at a rate equal to (i) LIBOR, plus a margin ranging from 200 to 425 basis points based on the Company's total leverage ratio or (ii) a base rate plus a margin ranging from 100 to 325 basis points based on the Company's total leverage ratio.
The Credit Facility requires the Company to pay a fee on the undrawn portion of the Revolver, calculated on the basis of the average daily unused amount of the Revolver multiplied by 0.30% per annum.
The Company may reduce the Revolver commitment and/or prepay the Term Loan in whole or in part at any time without penalty, subject to reimbursement of customary breakage costs, if any. Any Term Loan prepayments made by the Company shall be applied to reduce the scheduled amortization payments in direct order of maturity.
Additionally, the Credit Facility requires that the Company and its restricted subsidiaries comply with various covenants, including with respect to restrictions on liens, incurring indebtedness, making investments, paying dividends or repurchasing stock, and effecting mergers and/or asset sales. With respect to dividends, the Company may not make any payment if there is an existing event of default or if the payment would create an event of default. In addition, if the Company's total leverage ratio exceeds 4.50 to 1.00, the Company is generally restricted from paying aggregate dividends in excess of $50.0 million during any calendar year.
The Credit Facility also imposes financial maintenance covenants requiring the Company to maintain:
| |
• | a total leverage ratio of not more than 5.75 to 1.00 in year 1, 5.00 to 1.00 in year 2, 4.50 to 1.00 in year 3 and 4.00 to 1.00 thereafter, |
| |
• | a maximum secured leverage ratio of not more than 2.50 to 1.00 in year 1, 2.25 to 1.00 in year 2, 2.00 to 1.00 in year 3 and 1.75 to 1.00 thereafter, and |
| |
• | a minimum fixed charge coverage ratio of not less than 2.00 to 1.00 in years 1 and 2, 2.25 to 1.00 in year 3 and 2.50 to 1.00 thereafter. |
The Credit Facility includes customary events of default, the occurrence of which, following any applicable cure period, would permit the lenders to, among other things, declare the principal, accrued interest and other obligations of the Company under the Credit Facility to be immediately due and payable. At March 31, 2015, the Company was in compliance with all financial covenants under the Credit Facility.
At March 31, 2015, the Company had $126.6 million under the Term Loan and $20.7 million outstanding under the Revolver. At December 31, 2014, the Company had $129.4 million outstanding under the Term Loan and no amounts outstanding under the Revolver.
Fixed Rate Collateralized Mortgage
On December 30, 2014, a court awarded the Company title to an office building as settlement for a portion of an outstanding loan receivable for which the building was pledged as collateral. In conjunction with the court award, the Company also assumed the $9.5 million mortgage on the property with a fixed interest rate of 7.26%. The mortgage which is collateralized by the office building requires monthly payments of principal and interest and matures in December 2020 with a a balloon payment due of $6.9 million. At the time of acquisition, the Company determined that the fixed interest rate of 7.26% exceeded market interest rates and therefore the Company increased the carrying value of the debt by $1.2 million to record the debt at fair value. The fair value adjustment will be amortized over the remaining term of the mortgage utilizing the effective interest method.
Economic Development Loans
The Company entered into economic development agreements with various governmental entities in conjunction with the relocation of its corporate headquarters in April 2013. In accordance with these agreements, the governmental entities agreed to advance approximately $4.4 million to the Company to offset a portion of the corporate headquarters relocation and tenant improvement costs in consideration of the employment of permanent, full-time employees within the jurisdictions. At March 31, 2015, the Company had been advanced approximately $3.5 million pursuant to these agreements and expects to receive the remaining $0.9 million over the next several years, subject to annual appropriations by the governmental entities. These advances bear interest at a rate of 3% per annum.
Repayment of the advances is contingent upon the Company achieving certain performance conditions. Performance conditions are measured annually on December 31st and primarily relate to maintaining certain levels of employment within the various jurisdictions. If the Company fails to meet an annual performance condition, the Company may be required to repay a portion or all of the advances including accrued interest by April 30th following the measurement date. Any outstanding advances at the expiration of the Company's 10 year corporate headquarters lease in 2023 will be forgiven in full. The advances will be included in long-term debt in the Company's consolidated balance sheets until the Company determines that the future performance conditions will be met over the entire term of the agreement and the Company will not be required to repay the advances. The Company accrues interest on the portion of the advances that it expects to repay. The Company was in compliance with all current performance conditions as of March 31, 2015.
| |
8. | Accumulated Other Comprehensive Income (Loss) |
The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the three months ended March 31, 2015:
|
| | | | | | | | | | | |
| Loss on Cash Flow Hedge | | Foreign Currency Items | | Total |
| (in thousands) |
Beginning balance, December 31, 2014 | $ | (4,884 | ) | | $ | (2,087 | ) | | $ | (6,971 | ) |
Other comprehensive income (loss) before reclassification | — |
| | (1,447 | ) | | (1,447 | ) |
Amounts reclassified from accumulated other comprehensive income (loss) | 215 |
| | — |
| | 215 |
|
Net current period other comprehensive income (loss) | 215 |
| | (1,447 | ) | | (1,232 | ) |
Ending balance, March 31, 2015 | $ | (4,669 | ) | | $ | (3,534 | ) | | $ | (8,203 | ) |
The amounts reclassified from accumulated other comprehensive income (loss) during the three months ended March 31, 2015 were reclassified to the following line items in the Company's Consolidated Statements of Income.
|
| | | | | | |
Component | | Amount Reclassified from Accumulated Other Comprehensive Income(Loss) | | Affected Line Item in the Consolidated Statement of Net Income |
| | Three Months Ended March 31, 2015 | | |
| | (in thousands) | | |
Loss on cash flow hedge | | | | |
Interest rate contract | | $ | 215 |
| | Interest expense |
| | — |
| | Tax (expense) benefit |
| | $ | 215 |
| | Net of tax |
| |
9. | Non-Qualified Retirement, Savings and Investment Plans |
The Company sponsors two non-qualified retirement savings and investment plans for certain employees and senior executives. Employee and Company contributions are maintained in separate irrevocable trusts. Legally, the assets of the trusts remain those of the Company; however, access to the trusts' assets is severely restricted. The trusts cannot be revoked by the Company or an acquirer, but the assets are subject to the claims of the Company's general creditors. The participants do not have the right to assign or transfer contractual rights in the trusts.
In 2002, the Company adopted the Choice Hotels International, Inc. Executive Deferred Compensation Plan ("EDCP") which became effective January 1, 2003. Under the EDCP, certain executive officers may defer a portion of their salary into an irrevocable trust. Prior to January 1, 2010, participants could elect an investment return of either the annual yield of the Moody's Average Corporate Bond Rate Yield Index plus 300 basis points, or a return based on a selection of available diversified investment options. Effective January 1, 2010, the Moody's Average Corporate Bond Rate Yield Index plus 300 basis points is no longer an investment option for salary deferrals made on compensation earned after December 31, 2009. The Company recorded current and long-term deferred compensation liabilities of $10.2 million and $10.2 million, as of March 31, 2015 and December 31, 2014, respectively, related to these deferrals and credited investment returns. Compensation expense is recorded in SG&A expense on the Company's consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. Compensation expense recorded in SG&A related to the EDCP for the three months ended March 31, 2015 and 2014 was $0.3 million and $0.1 million, respectively.
The Company has invested the employee salary deferrals in diversified long-term investments which are intended to provide investment returns that partially offset the earnings credited to the participants. The diversified investments held in the trusts totaled $5.2 million and $4.6 million as of March 31, 2015 and December 31, 2014, respectively, and are recorded at their fair value, based on quoted market prices. At March 31, 2015, the Company expects $0.2 million of the assets held in the trusts to be distributed to participants during the next twelve months. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying consolidated statements of income. The Company recorded investment gains related to the EDCP during the three months ended March 31, 2015 and 2014 of approximately $99 thousand and $30 thousand, respectively. In addition, the EDCP Plan held shares of the Company's common stock with a market value of $0.3 million and $0.2 million at March 31, 2015 and December 31, 2014 respectively, which were recorded as a component of shareholders' deficit.
In 1997, the Company adopted the Choice Hotels International, Inc. Non-Qualified Retirement Savings and Investment Plan ("Non-Qualified Plan"). The Non-Qualified Plan allows certain employees who do not participate in the EDCP to defer a portion of their salary and invest these amounts in a selection of available diversified investment options. As of March 31, 2015 and December 31, 2014, the Company had recorded a deferred compensation liability of $14.2 million and $14.4 million, respectively, related to these deferrals. Compensation expense is recorded in SG&A expense on the Company's consolidated statements of income based on the change in the deferred compensation obligation related to earnings credited to participants as well as changes in the fair value of diversified investments. The net increase (decrease) in compensation expense recorded in SG&A related to the Non-Qualified Plan for the three months ended March 31, 2015 and 2014 was $0.2 million and $(0.1) million, respectively.
The diversified investments held in the trusts were $12.9 million and $13.1 million as of March 31, 2015 and December 31, 2014, respectively, and are recorded at their fair value, based on quoted market prices. These investments are considered trading securities and therefore the changes in the fair value of the diversified assets is included in other gains and losses in the accompanying consolidated statements of income. The Company recorded investment gains related to the Non-Qualified Plan during the three months ended March 31, 2015 and 2014 of approximately $77 thousand and $37 thousand, respectively. In addition, the Non-Qualified Plan held shares of the Company's common stock with a market value of $1.4 million and $1.3 million at March 31, 2015 and December 31, 2014, respectively, which are recorded as a component of shareholders' deficit.
| |
10. | Fair Value Measurements |
The Company estimates the fair value of its financial instruments utilizing a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The following summarizes the three levels of inputs, as well as the assets that the Company values using those levels of inputs.
Level 1: Quoted prices in active markets for identical assets and liabilities. The Company’s Level 1 assets consist of marketable securities (primarily mutual funds) held in the Company’s EDCP and Non-Qualified Plan deferred compensation plans.
Level 2: Observable inputs, other than quoted prices in active markets for identical assets and liabilities, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable. The Company’s Level 2 assets consist of money market funds held in the Company’s EDCP and Non-Qualified Plan deferred compensation plans and those recorded in cash and cash equivalents.
Level 3: Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument.
The Company's policy is to recognize transfers in and transfers out of the three levels of the fair value hierarchy as of the end of each quarterly reporting period. There were no transfers between Level 1, 2 and 3 assets during the three months ended March 31, 2015.
As of March 31, 2015 and December 31, 2014, the Company had the following assets measured at fair value on a recurring basis:
|
| | | | | | | | | | | | | | | |
| Fair Value Measurements at Reporting Date Using |
| Total | | Level 1 | | Level 2 | | Level 3 |
Assets | (in thousands) |
As of March 31, 2015 | | | | | | | |
Money market funds, included in cash and cash equivalents | $ | 50,001 |
| | $ | — |
| | $ | 50,001 |
| | $ | — |
|
Mutual funds(1) | 17,030 |
| | 17,030 |
| | — |
| | — |
|
Money market funds(1) | 1,063 |
| | — |
| | 1,063 |
| | — |
|
| $ | 68,094 |
| | $ | 17,030 |
| | $ | 51,064 |
| | $ | — |
|
As of December 31, 2014 | | | | | | | |
Money market funds, included in cash and cash equivalents | $ | 50,001 |
| | $ | — |
| | $ | 50,001 |
| | $ | — |
|
Mutual funds(1) | 16,405 |
| | 16,405 |
| | — |
| | — |
|
Money market funds(1) | 1,348 |
| | — |
| | 1,348 |
| | — |
|
| $ | 67,754 |
| | $ | 16,405 |
| | $ | 51,349 |
| | $ | — |
|
________________________
| |
(1) | Included in Investments, employee benefit plans fair value on the consolidated balance sheets. |
Other Financial Instruments
The Company believes that the fair value of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items. In addition, the interest rates of the Company's Credit Facility adjust frequently based on current market rates; accordingly its carrying amount approximates fair value.
The Company estimates the fair value of notes receivable which approximate their carrying value, utilizing an analysis of future cash flows and credit worthiness for similar types of arrangements. Based upon the availability of market data, the notes receivable have been classified as Level 3 inputs. The primary sensitivity in these calculations is based on the selection of appropriate interest and discount rates. For further information on the notes receivables, see Note 3.
The fair value of the Company's $250 million and $400 million senior notes are classified as Level 2 as the significant inputs are observable in an active market. At March 31, 2015 and December 31, 2014, the $250 million senior notes had an approximate fair value of $280.0 million and $268.9 million, respectively. At March 31, 2015 and December 31, 2014, the $400 million senior notes had an approximate fair value of $438.0 million and $437.7 million, respectively.
Fair values estimated are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment. Settlement of such fair value amounts may not be possible and may not be a prudent management decision.
The Company's effective income tax rates for income from continuing operations were 30.4% and 31.9% for the three months ended March 31, 2015 and 2014, respectively. The effective income tax rates for the three months ended March 31, 2015 and 2014 were lower than the U.S federal income tax rate of 35% due to the recurring impact of foreign operations, partially offset by state income taxes. The effective income tax rate for the three months ended March 31, 2015 was further reduced due to the settlement of unrecognized tax positions.
| |
12. | Share-Based Compensation and Capital Stock |
The Company granted 0.5 million and 0.7 million options to certain employees of the Company at a fair value of $6.2 million and $5.7 million for the three months ended March 31, 2015 and 2014, respectively. The stock options granted by the Company had an exercise price equal to the market price of the Company's common stock on the date of grant. The fair value of the options granted was estimated on the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions:
|
| | | | | | | |
| 2015 Grants | | 2014 Grants |
Risk-free interest rate | 1.45 | % | | 1.56 | % |
Expected volatility | 23.94 | % | | 25.01 | % |
Expected life of stock option | 4.6 years |
| | 4.5 years |
|
Dividend yield | 1.23 | % | | 1.62 | % |
Requisite service period | 4 years |
| | 4 years |
|
Contractual life | 7 years |
| | 7 years |
|
Weighted average fair value of options granted (per option) | $ | 12.39 |
| | $ | 8.82 |
|
The expected life of the options and volatility are based on historical data which is believed to be indicative of future exercise patterns or actual volatility. Historical volatility is calculated based on a period that corresponds to the expected term of the stock option. The dividend yield and the risk-free rate of return are calculated on the grant date based on the then current dividend rate and the risk-free rate of return for the period corresponding to the expected life of the stock option. Compensation expense related to the fair value of these awards is recognized straight-line over the requisite service period based on those awards that ultimately vest.
The aggregate intrinsic value of the stock options outstanding and exercisable at March 31, 2015 was $50.2 million and $37.0 million, respectively. The total intrinsic value of options exercised during the three months ended March 31, 2015 and 2014 was approximately $8.5 million and $1.3 million, respectively.
The Company received approximately $5.6 million and $1.5 million in proceeds from the exercise of 228,963 and 58,749 employee stock options during the three months ended March 31, 2015 and 2014, respectively.
Restricted Stock
The following table is a summary of activity related to restricted stock grants:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
Restricted share grants | 85,792 |
| | 129,793 |
|
Weighted average grant date fair value per share | $ | 63.46 |
| | $ | 46.71 |
|
Aggregate grant date fair value ($000) | $ | 5,445 |
| | $ | 6,062 |
|
Restricted shares forfeited | 4,778 |
| | 1,332 |
|
Vesting service period of shares granted | 3-4 years |
| | 4 years |
|
Fair value of shares vested ($000) | 10,684 |
| | 7,269 |
|
Compensation expense related to the fair value of these awards is recognized straight-line over the requisite service period based on those restricted stock grants that ultimately vest. The fair value of grants is measured by the market price of the Company’s stock on the date of grant. Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date. Awards granted to retirement eligible non-employee directors are recognized over the shorter of the requisite service period or the length of time until retirement since the terms of the grant provide that the awards will vest upon retirement.
Performance Vested Restricted Stock Units
The Company has granted performance vested restricted stock units ("PVRSU") to certain employees. The fair value is measured by the market price of the Company's common stock on the date of the grant. The vesting of these stock awards is contingent upon the Company achieving performance targets at the end of specified performance periods and the employees' continued employment. The performance conditions affect the number of shares that will ultimately vest. The range of possible stock-based award vesting is generally between 0% and 200% of the initial target. If minimum performance targets are not attained then no awards will vest under the terms of the various PVRSU agreements. Compensation expense related to these awards is recognized over the requisite service period based on the Company's estimate of the achievement of the various performance targets. The Company has currently estimated that between 0% and 180% of the various award targets will be achieved. Compensation expense is recognized ratably over the requisite service period only on those PVRSUs that ultimately vest.
The following table is a summary of activity related to PVRSU grants:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
| 2015 | | 2014 |
Performance vested restricted stock units granted at target | 30,353 |
| | 43,871 |
|
Weighted average grant date fair value per share | $ | 63.47 |
| | $ | 45.59 |
|
Aggregate grant date fair value ($000) | $ | 1,927 |
| | $ | 2,000 |
|
Stock units forfeited | — |
| | — |
|
Requisite service period | 3 years |
| | 3 years |
|
During the three months ended March 31, 2015, a total of 42,326 PVRSU grants vested at a grant date fair value of $1.5 million. These PVRSU grants were initially granted at a target of 38,476 units. However, since the Company achieved 110% of the targeted performance conditions contained in the stock awards granted in prior periods, an additional 3,850 shares were earned and issued.
During the three months ended March 31, 2014, a total of 28,886 PVRSU grants vested at a grant date fair value of $1.4 million. These PVRSU grants were initially granted at a target of 18,635 units. However, since the Company achieved 155% of the targeted performance conditions contained in the stock awards granted in prior periods, an additional 10,251 shares were earned and issued.
A summary of stock-based award activity as of March 31, 2015 and changes during the three months ended are presented below:
|
| | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | Restricted Stock | | Performance Vested Restricted Stock Units |
| Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Term | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
Outstanding at January 1, 2015 | 1,903,177 |
| | $ | 33.03 |
| | | | 479,556 |
| | $ | 40.14 |
| | 200,286 |
| | $ | 38.28 |
|
Granted | 498,911 |
| | $ | 63.47 |
| | | | 85,792 |
| | $ | 63.46 |
| | 30,353 |
| | $ | 63.47 |
|
Performance based leveraging (1) | — |
| | $ | — |
| | | | — |
| | $ | — |
| | 3,850 |
| | $ | 35.60 |
|
Exercised/Vested | (228,963 | ) | | $ | 24.54 |
| | | | (172,165 | ) | | $ | 38.82 |
| | (42,326 | ) | | $ | 35.60 |
|
Expired | — |
| | $ | — |
| | | | — |
| | $ | — |
| | — |
| | $ | — |
|
Forfeited | (3,685 | ) | | $ | 45.59 |
| | | | (4,778 | ) | | $ | 39.89 |
| | — |
| | $ | — |
|
Outstanding at March 31, 2015 | 2,169,440 |
| | $ | 40.91 |
| | 4.6 years | | 388,405 |
| | $ | 45.88 |
| | 192,163 |
| | $ | 42.79 |
|
Options exercisable at March 31, 2015 | 1,057,276 |
| | $ | 29.08 |
| | 2.9 years | | | | | | | | |
_________________________________
(1)PVRSU units outstanding have been increased by 3,850 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods during the three months ended March 31, 2015.
The components of the Company’s pretax share-based compensation expense and associated income tax benefits are as follows for the three months ended March 31, 2015 and 2014:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(in millions) | 2015 | | 2014 |
Stock options | $ | 0.7 |
| | $ | 0.4 |
|
Restricted stock | 1.8 |
| | 1.9 |
|
Performance vested restricted stock units | 0.3 |
| | 0.7 |
|
Total | $ | 2.8 |
| | $ | 3.0 |
|
Income tax benefits | $ | 1.0 |
| | $ | 1.1 |
|
Dividends
The Company currently pays a quarterly dividend on its common stock of $0.195 per share, however the declaration of future dividends are subject to the discretion of the board of directors. During the three months ended March 31, 2015, the Company's board of directors declared dividends totaling $0.195 per share or approximately $11.2 million in the aggregate.
In addition, during the three months ended March 31, 2015, the Company recorded dividends totaling $0.5 million related to previously declared dividends that were contingent upon the vesting of performance vested restricted stock units.
Share Repurchases and Redemptions
No shares of common stock were purchased by the Company under the share repurchase program during the three months ended March 31, 2015.
During the three months ended March 31, 2015, the Company redeemed 102,457 shares of common stock at a total cost of approximately $6.2 million from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants. These redemptions were outside the share repurchase program.
The computation of basic and diluted earnings per common share is as follows:
|
| | | | | | | |
| Three Months Ended |
| March 31, |
(In thousands, except per share amounts) | 2015 | | 2014 |
| | | |
Computation of Basic Earnings Per Share: | | | |
Numerator: | | | |
Net income from continuing operations | $ | 21,594 |
| | $ | 21,469 |
|
Net income from discontinued operations | — |
| | 1,641 |
|
Net income | 21,594 |
| | 23,110 |
|
Income allocated to participating securities | (164 | ) | | (202 | ) |
Net income available to common shareholders | $ | 21,430 |
| | $ | 22,908 |
|
Denominator: | | | |
Weighted average common shares outstanding – basic | 57,003 |
| | 57,807 |
|
| | | |
Basic earnings per share - Continuing operations | $ | 0.38 |
| | $ | 0.37 |
|
Basic earnings per share - Discontinued operations | — |
| | 0.03 |
|
| $ | 0.38 |
| | $ | 0.40 |
|
| | | |
Computation of Diluted Earnings Per Share: | | | |
Numerator: | | | |
Net income from continuing operations | $ | 21,594 |
| | $ | 21,469 |
|
Net income from discontinued operations | — |
| | 1,641 |
|
Net income | 21,594 |
| | 23,110 |
|
Income allocated to participating securities | (164 | ) | | (201 | ) |
Net income available to common shareholders | $ | 21,430 |
| | $ | 22,909 |
|
Denominator: | | | |
Weighted average common shares outstanding – basic | 57,003 |
| | 57,807 |
|
Diluted effect of stock options and PVRSUs | 583 |
| | 493 |
|
Weighted average common shares outstanding – diluted | 57,586 |
| | 58,300 |
|
| | | |
Diluted earnings per share - Continuing operations | $ | 0.37 |
| | $ | 0.36 |
|
Diluted earnings per share - Discontinued operations | — |
| | 0.03 |
|
| $ | 0.37 |
| | $ | 0.39 |
|
The Company's unvested restricted shares contain rights to receive non-forfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share ("EPS"). The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator.
At March 31, 2015 and 2014, the Company had 2.2 million and 2.3 million outstanding stock options, respectively. Stock options are included in the diluted earnings per share calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive. For the three months ended March 31, 2015, the Company excluded 0.5 million of anti-dilutive stock options from the diluted earnings per share calculation. At March 31, 2014, the Company did not exclude any anti-dilutive stock options from the diluted EPS calculation.
PVRSUs are also included in the diluted earnings per share calculation when the performance conditions have been met at the reporting date. However, at March 31, 2015 and 2014, PVRSUs totaling 192,163 and 241,578, respectively, were excluded from the computation since the performance conditions had not been met.
| |
14. | Condensed Consolidating Financial Statements |
The Company’s 2010 and 2012 Senior Notes are guaranteed jointly, severally, fully and unconditionally, subject to certain customary limitations, by certain of the Company’s domestic subsidiaries. There are no legal or regulatory restrictions on the payment of dividends to Choice Hotels International, Inc. from subsidiaries that do not guarantee the Senior Notes. As a result of the guarantee arrangements, the following condensed consolidating financial statements are presented. Investments in subsidiaries are accounted for under the equity method of accounting.
Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2015
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Eliminations | | Consolidated |
REVENUES: | | | | | | | | | |
Royalty fees | $ | 57,587 |
| | $ | 31,240 |
| | $ | 11,155 |
| | $ | (37,551 | ) | | $ | 62,431 |
|
Initial franchise and relicensing fees | 5,496 |
| | — |
| | 221 |
| | — |
| | 5,717 |
|
Procurement services | 4,666 |
| | — |
| | 141 |
| | — |
| | 4,807 |
|
Marketing and reservation | 88,236 |
| | 90,385 |
| | 3,621 |
| | (83,529 | ) | | 98,713 |
|
Other | 3,102 |
| | — |
| | 475 |
| | — |
| | 3,577 |
|
Total revenues | 159,087 |
| | 121,625 |
| | 15,613 |
| | (121,080 | ) | | 175,245 |
|
| | | | | | | | | |
OPERATING EXPENSES: | | | | | | | | | |
Selling, general and administrative | 38,699 |
| | 28,052 |
| | 3,238 |
| | (37,551 | ) | | 32,438 |
|
Marketing and reservation | 92,024 |
| | 86,811 |
| | 3,407 |
| | (83,529 | ) | | 98,713 |
|
Depreciation and amortization | 774 |
| | 1,705 |
| | 211 |
| | — |
| | 2,690 |
|
Total operating expenses | 131,497 |
| | 116,568 |
| | 6,856 |
| | (121,080 | ) | | 133,841 |
|
| | | | | | | | | |
Operating income | 27,590 |
| | 5,057 |
| | 8,757 |
| | — |
| | 41,404 |
|
| | | | | | | | | |
OTHER INCOME AND EXPENSES, NET: | | | | | | | | | |
Interest expense | 10,032 |
| | — |
| | 147 |
| | — |
| | 10,179 |
|
Equity in earnings of consolidated subsidiaries | (11,332 | ) | | 138 |
| | — |
| | 11,194 |
| | — |
|
Other items, net | (292 | ) | | 297 |
| | 186 |
| | — |
| | 191 |
|
Total other income and expenses, net | (1,592 | ) | | 435 |
| | 333 |
| | 11,194 |
| | 10,370 |
|
|
| |
| |
| |
| |
|
|
Income from continuing operations before income taxes | 29,182 |
| | 4,622 |
| | 8,424 |
| | (11,194 | ) | | 31,034 |
|
Income taxes | 7,588 |
| | 2,284 |
| | (432 | ) | | — |
| | 9,440 |
|
Income from continuing operations, net of income taxes | 21,594 |
| | 2,338 |
| | 8,856 |
| | (11,194 | ) | | 21,594 |
|
Net income from discontinued operations, net of income taxes | — |
| | — |
| | — |
| | — |
| | — |
|
Net income | $ | 21,594 |
| | $ | 2,338 |
| | $ | 8,856 |
| | $ | (11,194 | ) | | $ | 21,594 |
|
Choice Hotels International, Inc.
Condensed Consolidating Statement of Income
For the Three Months Ended March 31, 2014
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | | | | | | |
| | Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Eliminations | | Consolidated |
REVENUES: | | | | | | | | | | |
Royalty fees | | $ | 52,995 |
| | $ | 24,215 |
| | $ | 10,522 |
| | $ | (29,192 | ) | | $ | 58,540 |
|
Initial franchise and relicensing fees | | 3,584 |
| | — |
| | 156 |
| | — |
| | 3,740 |
|
Procurement services | | 4,631 |
| | — |
| | 147 |
| | — |
| | 4,778 |
|
Marketing and reservation | | 78,821 |
| | 73,899 |
| | 4,135 |
| | (67,249 | ) | | 89,606 |
|
Other | | 2,956 |
| | — |
| | 116 |
| | — |
| | 3,072 |
|
Total revenues | | 142,987 |
| | 98,114 |
| | 15,076 |
| | (96,441 | ) | | 159,736 |
|
OPERATING EXPENSES: | | | | | | | | | | |
Selling, general and administrative | | 30,574 |
| | 22,091 |
| | 3,207 |
| | (29,192 | ) | | 26,680 |
|
Marketing and reservation | | 81,585 |
| | 70,944 |
| | 4,326 |
| | (67,249 | ) | | 89,606 |
|
Depreciation and amortization | | 751 |
| | 1,318 |
| | 209 |
| | — |
| | 2,278 |
|
Total operating expenses | | 112,910 |
| | 94,353 |
| | 7,742 |
| | (96,441 | ) | | 118,564 |
|
Operating income | | 30,077 |
| | 3,761 |
| | 7,334 |
| | — |
| | 41,172 |
|
OTHER INCOME AND EXPENSES, NET: | |
| |
| |
| |
| |
|
Interest expense | | 10,168 |
| | 1 |
| | 2 |
| | — |
| | 10,171 |
|
Equity in earnings of consolidated subsidiaries | | (10,926 | ) | | 61 |
| | — |
| | 10,865 |
| | — |
|
Other items, net | | (428 | ) | | (67 | ) | | (32 | ) | | — |
| | (527 | ) |
Total other income and expenses, net | | (1,186 | ) | | (5 | ) | | (30 | ) | | 10,865 |
| | 9,644 |
|
Income from continuing operations before income taxes | | 31,263 |
| | 3,766 |
| | 7,364 |
| | (10,865 | ) | | 31,528 |
|
Income taxes | | 8,153 |
| | 1,804 |
| | 102 |
| | — |
| | 10,059 |
|
Income from continuing operations, net of income taxes | | 23,110 |
|
| 1,962 |
|
| 7,262 |
|
| (10,865 | ) | | 21,469 |
|
Income from discontinued operations, net of income taxes | | — |
| | 1,641 |
| | — |
| | — |
| | 1,641 |
|
Net income | | $ | 23,110 |
| | $ | 3,603 |
| | $ | 7,262 |
| | $ | (10,865 | ) | | $ | 23,110 |
|
Choice Hotels International, Inc.
Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2015
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Eliminations | | Consolidated |
| | | | | | | | | |
Net income | $ | 21,594 |
| | $ | 2,338 |
| | $ | 8,856 |
| | $ | (11,194 | ) | | $ | 21,594 |
|
Other comprehensive income (loss), net of tax: |
| |
| |
| |
| | |
Amortization of loss on cash flow hedge | 215 |
| | — |
| | — |
| | — |
| | 215 |
|
Foreign currency translation adjustment | (1,447 | ) | | — |
| | (1,447 | ) | | 1,447 |
| | (1,447 | ) |
Other comprehensive income (loss), net of tax | (1,232 | ) | | — |
| | (1,447 | ) | | 1,447 |
| | (1,232 | ) |
Comprehensive income | $ | 20,362 |
| | $ | 2,338 |
| | $ | 7,409 |
| | $ | (9,747 | ) | | $ | 20,362 |
|
Choice Hotels International, Inc.
Condensed Consolidating Statement of Comprehensive Income
For the Three Months Ended March 31, 2014
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Eliminations | | Consolidated |
| | | | | | | | | |
Net income | $ | 23,110 |
| | $ | 3,603 |
| | $ | 7,262 |
| | $ | (10,865 | ) | | $ | 23,110 |
|
Other comprehensive income (loss), net of tax: | | | | | | | | | |
Amortization of loss on cash flow hedge | 215 |
| | — |
| | — |
| | — |
| | 215 |
|
Foreign currency translation adjustment | 521 |
| | — |
| | 521 |
| | (521 | ) | | 521 |
|
Other comprehensive income (loss), net of tax | 736 |
| | — |
| | 521 |
| | (521 | ) | | 736 |
|
Comprehensive income | $ | 23,846 |
| | $ | 3,603 |
| | $ | 7,783 |
| | $ | (11,386 | ) | | $ | 23,846 |
|
Choice Hotels International, Inc.
Condensed Consolidating Balance Sheet
As of March 31, 2015
(Unaudited, in thousands)
|
| | | | | | | | | | | | | | | | | | | |
| Parent | | Guarantor
Subsidiaries | | Non-Guarantor
Subsidiaries | | Eliminations | | Consolidated |
ASSETS | | | | | | | | | |
Cash and cash equivalents | $ | 5,460 |
| | $ | 20 |
| | $ | 195,064 |
| | $ | — |
| | $ | 200,544 |
|
Receivables, net | 92,210 |
| | 1,856 |
| | 7,947 |
| | — |
| | 102,013 |
|
Other current assets | 15,840 |
| | 44,814 |
| | 3,071 |
| | (9,010 | ) | | 54,715 |
|
Total current assets | 113,510 |
| | 46,690 |
| | 206,082 |
| | (9,010 | ) | | 357,272 |
|
Property and equipment, at cost, net | 28,756 |
| | 37,171 |
| | 14,130 |
| | — |
| | 80,057 |
|
Goodwill | 60,620 |
| | 5,193 |
| | — |
| | — |
| | 65,813 |
|
Franchise rights and other identifiable intangibles, net | 3,766 |
| | 1,323 |
| | 2,912 |
| | — |
| | 8,001 |
|
Notes receivable, net of allowances | 11,783 |
| | 36,319 |
| | 679 |
| | — |
| | 48,781 |
|
Investments, employee benefit plans, at fair value | — |
| | 17,916 |
| | — |
| | — |
| | 17,916 |
|
Investment in affiliates | 438,965 |
| | 29,443 |
| | — |
| | (468,408 | ) | | — |
|
Advances to affiliates | 16,594 |
| | 201,673 |
| | 8,706 |
| | (226,973 | ) | | — |
|
Deferred income taxes | 11,706 |
| | 7,132 |
| | 83 |
| | — |
| | 18,921 |
|
Other assets | 6,691 |
| | 25,009 |
| | 32,661 |
| | — |
| | 64,361 |
|
Total assets | $ | 692,391 |
| | $ | 407,869 |
| | $ | 265,253 |
| | $ | (704,391 | ) | | $ | 661,122 |
|
LIABILITIES AND SHAREHOLDERS’ DEFICIT | | | | | | | | | |
Accounts payable | $ | 10,035 |
| | |