Project 2 Choice Hotels
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MBAProject2-19TBcontd.xlsxInstructions
Choice Hotels 10-Q In Project 2, you will learn how to access US Securities and Exchange Commission public information about companies. We will also start with ratio calculations. Some ratios can be useful using quarterly financial statements, and some will need annual financial statements. We will start with quarterly statements, the 10-Q. Start by looking up the 10-Q for Choice Hotels (CHH) for quarter 3, 2018 on the SEC website. Follow these steps: 1. Go to www.SEC.gov. 2. At the top on the right, click Company Filings. 3. In the fast search box, enter the Ticker Symbol for Choice Hotels, CHH. You can find the ticker symbol for any company in Yahoo Finance or other financial sites. 4. Click Search 5. EDGAR search results will appear. Notice the name and address for Choice Hotels. Also notice the box that reads Filter Results: Filing Type. Enter "10-Q" and click Search. 6. You should see a 10-Q with a filing date in November 2018 and another with a filing date of 2018-08-08. This is the latest available at the time this project was developed. 7. There are two available formats of this 10-Q data, and we will use both. Use Documents to answer the qualitative and word questions. Use Interactive Data to calculate quantitative questions, percentages, and ratios. 8. To prepare for this assignment, download the Choice Hotels 2018-11-08 10-Q Interactive Data. Click Interactive Data, and see “View Filing Data. Choice Hotels International. Print Document and View Excel Document.” 9. Click View Excel Document. Open the file and save the file as "Your Name Choice 10Q September 2018." 10. Open the documents to find a list of four documents and click the red chh-10q09302018.htm next to the caption 10-Q. We will use this document for question two. Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public accounting firm. Incorrect information may still be a felony for management.
Income Statement
| Consolidated Statements of Income - USD ($ in Thousands) | 3 Months Ended | 9 Months Ended | |||||
| Sep. 30, 2018 | Sep. 30, 2017 | Sep. 30, 2018 | Sep. 30, 2017 | ||||
| REVENUES | |||||||
| Royalty fees | $ 111,009 | $ 103,322 | $ 290,926 | $ 263,215 | |||
| Initial franchise and relicensing fees | $ 6,262 | $ 5,729 | $ 18,957 | $ 17,263 | |||
| Procurement services | $ 11,620 | $ 8,810 | $ 39,391 | $ 30,545 | |||
| Marketing and reservation system | $ 152,367 | $ 142,915 | $ 416,715 | $ 382,245 | |||
| Other | $ 10,232 | $ 9,154 | $ 30,336 | $ 26,546 | |||
| Total revenues | $ 291,490 | $ 269,930 | $ 796,325 | $ 719,814 | |||
| OPERATING EXPENSES | |||||||
| Selling, general and administrative | $ 38,191 | $ 46,573 | $ 125,325 | $ 124,356 | |||
| Answer: | $ 76,511 | 10.63% | Depreciation and amortization | $ 3,815 | $ 1,601 | $ 10,537 | $ 4,986 |
| Marketing and reservation system | $ 138,316 | $ 128,661 | $ 394,112 | $ 365,435 | |||
| Total operating expenses | $ 180,322 | $ 176,835 | $ 529,974 | $ 494,777 | |||
| Gain (loss) on sale of land and building, net | $ - 0 | $ (32) | $ 82 | $ (32) | |||
| Operating income | $ 111,168 | $ 93,063 | $ 266,433 | $ 225,005 | |||
| Answer: | $ 416,715 | $ 394,112 | OTHER INCOME AND EXPENSES, NET | ||||
| Interest expense | $ 11,706 | $ 11,399 | $ 34,720 | $ 33,884 | |||
| Interest income | $ (1,966) | $ (1,575) | $ (5,218) | $ (4,277) | |||
| Other gains | $ (972) | $ (778) | $ (1,355) | $ (2,251) | |||
| Equity in net (income) loss of affiliates | $ (43) | $ 274 | $ 5,358 | $ 3,213 | |||
| Total other income and expenses, net | $ 8,725 | $ 9,320 | $ 33,505 | $ 30,569 | |||
| Income before income taxes | $ 102,443 | $ 83,743 | $ 232,928 | $ 194,436 | |||
| Income tax expense | $ 22,484 | $ 26,554 | $ 48,044 | $ 62,293 | |||
| Net income | $ 79,959 | $ 57,189 | $ 184,884 | $ 132,143 | |||
| Basic earnings per share (in dollars per share) | $ 1.42 | $ 1.01 | $ 3.27 | $ 2.34 | |||
| Diluted earnings per share (in dollars per share) | $ 1.41 | $ 1.01 | $ 3.24 | $ 2.33 | |||
| Cash dividends declared per share (in dollars per share) | $ 0.215 | $ 0.215 | $ 0.645 | $ 0.645 | |||
| Answer: | $ 35,197 | 6.64% | |||||
| Answer: | $ 41,428 | 15.55% | |||||
| Answer: | $ 38,492 | 16.53% | |||||
| Answer: | $ (14,249) | -29.66% | |||||
| Answer: | $ 52,741 | 28.53% | |||||
| Answer: | 2018 | 2017 | |||||
| 23.22% | 18.36% | ||||||
| Answer: | 2018 | 2017 | |||||
| 45.97% | 37.29% | ||||||
Use the data provided to the right to answer the following questions. We will use only the nine-month ended data. Some questions will require you to use the 10-Q document. Note that all dollar amounts are in thousands of dollars, so a net income of $79,959 really means $79,959,000. We don't need the last three zeros.
1. In US dollars ($), how much did total revenue increase from the nine months ended September 30, 2017 to the nine months ended September 30, 2018? We will use only the nine-month figures. What is the percent change? You can copy and paste numbers or click on the cell and type the equal sign (=), then click on the number you need.
2a. In the revenues for 2018, what is the amount for marketing and reservation system? In operating expense, what is the amount for marketing and reservation system?
2b. In past years, the revenue from marketing and reservation system was equal to the marketing and reservation operating expense. Now open the Documents 10-Q data. There is a heading title "Recently Adopted Accounting Standards” on page 7. On page 8 there is a paragraph that starts, “Topic 606 also impacted the Company’s accounting for surpluses and deficits generated from marketing and reservation system activities.” Has the company earned a profit in the past from a marketing and reservation system? Does it intend to do so in the future?
Note: This is how financial analysts use SEC documents. They look at numbers and look for an explanation in the words. There is more explanation on page 11 in the footnote that begins “Marketing and reservation system expenses are those expenses incurred to facilitate the delivery of marketing and reservation system service.”
4. Going back to your Excel file income statement, what is the dollar increase in operating income? What is the percent increase?
5. Going back to your Excel file income statement, what is the dollar increase in income before income tax? What is the percent increase?
6. Going back to your Excel file income statement, what is the increase or decrease in dollars and percent for income tax?
7. What is the increase in dollars and percent for net income?
8. Looking at your work above, what contributed to the increase in net income?
9. Calculate profit margin in percent for both years. Profit margin is defined as net income / total revenues. The typical company has a profit margin near 10 percent.
10. Management accounting uses data differently from GAAP accounting and this can be included in the 10-Q or 10-K. Management would like to know the profit margin in percent if we exclude the revenue for marketing and reservation system. Please calculate these numbers for September 30, 2018 and 2017.
11. Based on your experience as a financial analyst, why is net income up?
Consolidated Statements of Income - USD ($) in thousands
3. Going back to your Excel file income statement, what is the dollar increase in total operating expenses? What is the percent increase?
Answer: Because of a decrease in taxe payable and also that acquisition beefed up revenue.
Answer: ? I can speculate that, in the long run, the company will break-even based upon how company's managements are balancing their budget.
Answer: It is the tax payed because of an increase in net income.
Balance Sheet
| Consolidated Balance Sheets - USD ($ in Thousands) | Sep. 30, 2018 | Dec. 31, 2017 | |||
| $ in Thousands | |||||
| Current assets | |||||
| Cash and cash equivalents | $ 30,916 | $ 235,336 | |||
| Receivables (net of allowance for doubtful accounts of $15,509 and $12,221, respectively) | $ 185,586 | $ 125,870 | |||
| Income taxes receivable | $ 308 | $ - 0 | |||
| Notes receivable, net of allowance | $ 32,642 | $ 13,256 | |||
| Other current assets | $ 31,163 | $ 25,967 | |||
| Answer: | Yes, it does equal based upon the calculation. | 1,161,037 | Total current assets | $ 280,615 | $ 400,429 |
| 1,329,116 | Property and equipment, at cost, net | $ 117,610 | $ 83,374 | ||
| -168,079 | Goodwill | $ 173,641 | $ 80,757 | ||
| 1,161,037 | Intangible assets, net | $ 263,923 | $ 100,492 | ||
| Notes receivable, net of allowances | $ 83,034 | $ 80,136 | |||
| Investments, employee benefit plans, at fair value | $ 21,542 | $ 20,838 | |||
| Investments in unconsolidated entities | $ 107,905 | $ 134,226 | |||
| Answer: | -5317 | -1148441 | Deferred income taxes | $ 32,730 | $ 27,224 |
| Other assets | $ 80,037 | $ 67,715 | |||
| Total assets | $ 1,161,037 | $ 995,191 | |||
| Current liabilities | |||||
| Accounts payable | $ 71,684 | $ 67,839 | |||
| Accrued expenses and other current liabilities | $ 78,591 | $ 84,315 | |||
| Deferred revenue | $ 65,810 | $ 52,142 | |||
| Current portion of long-term debt | $ 1,099 | $ 1,232 | |||
| Liability for guest loyalty program | $ 82,346 | $ 79,123 | |||
| Total current liabilities | $ 299,530 | $ 284,651 | |||
| Long-term debt | $ 781,433 | $ 725,292 | |||
| Long-term deferred revenue | $ 107,370 | $ 98,459 | |||
| Deferred compensation and retirement plan obligations | $ 26,137 | $ 25,566 | |||
| Income taxes payable | $ 26,276 | $ 29,041 | |||
| Deferred income taxes | $ - 0 | $ 39 | |||
| Liability for guest loyalty program | $ 50,085 | $ 48,701 | |||
| Other liabilities | $ 38,285 | $ 42,043 | |||
| Total liabilities | $ 1,329,116 | $ 1,253,792 | |||
| Commitments and Contingencies | |||||
| SHAREHOLDERS' DEFICIT | |||||
| Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at September 30, 2018 and December 31, 2017; 56,223,839 and 56,679,968 shares outstanding at September 30, 2018 and December 31, 2017, respectively | $ 951 | $ 951 | |||
| Additional paid-in-capital | $ 209,053 | $ 182,448 | |||
| Accumulated other comprehensive loss | $ (5,317) | $ (4,699) | |||
| Treasury stock, at cost; 38,841,799 and 38,385,670 shares at September 30, 2018 and December 31, 2017, respectively | $ (1,148,441) | $ (1,064,573) | |||
| Retained earnings | $ 775,675 | $ 627,272 | |||
| Total shareholders’ deficit | $ (168,079) | $ (258,601) | |||
| Answer: | Current | Long-Term | |||
| Notes receivable, net of allowance | 32,642 | 83,034 | |||
| Answer: | $ 0 | 0.16649617 | |||
| 782,532 | 4,700,000.00 | ||||
| Answer: | 2018 | 2017 | |||
| $ (18,915) | $ 115,778 | ||||
Use the data to the right to answer the following questions. We will use only the nine-month ended data. Some questions will require you to use the 10-Q Document. You should see that the balance sheets are only for September 30, not June 30.
1. Does total assets equal total liabilities and shareholders' deficit? What are the amounts of each in 2018?
2. Look at the line items in shareholders' deficit. Which items are negative? How much is ”accumulated other comprehensive loss”? How much is the negative amount in treasury stock?
3. Now look at the words in the document section. Footnote 7 on page 12 explains the two items in “Accumulated Other Comprehensive Loss.” What are they?
4. On Page 15, how much money did the company spend on buying stock for the treasury stock purchase program in the first 9 months of 2018? On Page 37 and 38 management explains why they buy stock for treasury stock. Why do they do it?
5. Can you find any record of any inventory? If not, why not?
6. What is “Notes Receivables, net of allowances”? There are notes receivable in current assets and notes receivable in long-term assets. How much were they it in September 2018? Here is a statement that describes the reason for equity investments and financing. Choice loans money to hotel owners and records the loans as “Notes Receivables.” “Our direct lodging property real estate exposure is limited to activity in the United States and consists of three parcels of real estate that the Company has acquired and intends to resell to incent franchise development in strategic markets or to pursue hotel development through joint ventures. In addition, our development activities that involve financing, equity investments and guaranty support to hotel developers create limited additional exposure to the real estate markets.”
7. On Page 25, how many hotels and hotel rooms were under domestic franchise at the end of September 30, 2018? Also on page 25, how many hotels and rooms were under construction as of September 30, 2018?
8. Before companies bought large amounts of their own stock for treasury stock, financial analysts would calculate the debt to equity ratio. Since the balance sheet of Choice Hotels shows negative equity, this ratio makes no sense. In recent years, analysts have looked at the total stock market value of the company. As of September 28, 2018 according to Yahoo Finance, Choice Hotels has a total stock value called market cap (capitalization) of $4.7 billion. The total equity on the financial statements as of June 30, 2018 was a negative $204 million. Calculate the debt to equity ratio using $4.7 billion for equity.
9. Another calculation that is important for manufacturing companies is working capital. Of course, Choice Hotels manufactures nothing. But this will be good to know. Working capital is current assets minus current liabilities. Calculate working capital for Choice for September 30, 2018 and December 31, 2017.
10. Choice has unusual liabilities. One is the liability for the guest loyalty program. What is that liability for?
Consolidated Balance Sheets - USD ($) in thousands
Answer: Loss on Cash Flow Hedge & Foreign Currency
Answ. er: They spent 6587096. The amount allocated to treasury stock. Treasury stock is common and preferred shares of an entity that were issued, repurchased by the entity, and are held in its tyeasure
Answer: No, because the business doesn't have sales' inventory.
Answer: 6,800 hotels and 550,000 rooms under domestic francise. 968 hotels and : and rooms.
Answer: It is for rewards program that Choice thatg ives out to its clients. It is a liability until it is redeemed. Value of deferred revenue or cost for products or services that business provides, which is expected to be recognized in income or incurred after one year. It also, includes liability associated with customer loyalty programs for other businesses, for example, but is not limited to, hotels, supermarkets, credit card companies, automobile rental companies, and book sellers.
Cash Flow Statement
| Consolidated Statements of Cash Flows - USD ($) | 9 Months Ended | |||||
| $ in Thousands | Sep. 30, 2018 | Sep. 30, 2017 | ||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||
| Net income | $ 184,884.00 | $ 132,143.00 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||
| Depreciation and amortization | $ 10,537.00 | $ 4,986.00 | ||||
| Depreciation and amortization – marketing and reservation system | $ 14,687.00 | $ 15,454.00 | ||||
| Franchise agreement acquisition cost amortization | $ 6,662.00 | $ 5,190.00 | ||||
| Answer: | $ 184,884.00 | (Gain) loss on disposal of assets | $ (58.00) | $ 32.00 | ||
| Provision for bad debts, net | $ 6,279.00 | $ 3,694.00 | ||||
| Non-cash stock compensation and other charges | $ 11,455.00 | $ 20,215.00 | ||||
| Non-cash interest and other (income) loss | $ 492.00 | $ (451.00) | ||||
| Deferred income taxes | $ (5,610.00) | $ 51,126.00 | ||||
| Equity in net losses from unconsolidated joint ventures, less distributions received | $ 7,122.00 | $ 4,278.00 | ||||
| Answer: | $ 146,837.00 | Franchise agreement acquisition cost, net of reimbursements | $ (40,554.00) | $ (21,443.00) | ||
| Change in working capital and other, net of acquisition | $ (49,059.00) | $ (50,205.00) | ||||
| Net cash provided by operating activities | $ 146,837.00 | $ 165,019.00 | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||
| Investment in property and equipment | $ (34,129.00) | $ (17,514.00) | ||||
| Investment in intangible assets | $ (1,665.00) | $ (2,376.00) | ||||
| Proceeds from sales of assets | $ 3,053.00 | $ - 0 | ||||
| Business acquisition, net of cash acquired | $ (231,317.00) | $ - 0 | ||||
| Asset acquisition, net of cash acquired | $ (3,179.00) | $ - 0 | ||||
| Contributions to equity method investments | $ (9,050.00) | $ (44,876.00) | ||||
| Distributions from equity method investments | $ 1,429.00 | $ 4,307.00 | ||||
| Purchases of investments, employee benefit plans | $ (2,441.00) | $ (2,140.00) | ||||
| Answer: | $ (299,847.00) | Hotel Name: | WoodSpring Hotels | Proceeds from sales of investments, employee benefit plans | $ 2,646.00 | $ 2,150.00 |
| Issuance of notes receivable | $ (28,876.00) | $ (18,565.00) | ||||
| Collections of notes receivable | $ 4,747.00 | $ 630.00 | ||||
| Other items, net | $ (1,065.00) | $ 109.00 | ||||
| Net cash used in investing activities | $ (299,847.00) | $ (78,275.00) | ||||
| Answer: | $ (34,129.00) | CASH FLOWS FROM FINANCING ACTIVITIES: | ||||
| Net borrowings (repayments) pursuant to revolving credit facilities | $ 56,400.00 | $ (39,974.00) | ||||
| Principal payments on long-term debt | $ (477.00) | $ (484.00) | ||||
| Purchase of treasury stock | $ (109,266.00) | $ (8,887.00) | ||||
| Dividends paid | $ (36,628.00) | $ (36,483.00) | ||||
| Answer: | $ (28,876.00) | Debt issuance costs | $ (2,590.00) | $ - 0 | ||
| Proceeds from issuance of long term debt | $ 528.00 | $ - 0 | ||||
| Proceeds from transfer of interest in notes receivable | $ 173.00 | $ 24,237.00 | ||||
| Proceeds from exercise of stock options | $ 41,155.00 | $ 9,799.00 | ||||
| Net cash used in financing activities | $ (50,705.00) | $ (51,792.00) | ||||
| Net change in cash and cash equivalents | $ (203,715.00) | $ 34,952.00 | ||||
| Answer: | $ 56,400.00 | Effect of foreign exchange rate changes on cash and cash equivalents | $ (705.00) | $ 1,433.00 | ||
| Cash and cash equivalents at beginning of period | $ 235,336.00 | $ 202,463.00 | ||||
| Cash and cash equivalents at end of period | $ 30,916.00 | $ 238,848.00 | ||||
| Cash payments during the period for: | ||||||
| Income taxes, net of refunds | $ 50,806.00 | $ 31,254.00 | ||||
| Answer: | $ (109,266.00) | Interest, net of capitalized interest | $ 41,746.00 | $ 41,119.00 | ||
| Non-cash investing and financing activities: | ||||||
| Dividends declared but not paid | $ 12,087.00 | $ 12,167.00 | ||||
| Answer: | $ (36,628.00) | |||||
| Answer: | $ 41,155.00 | |||||
| Answer: | $ 30,916.00 | |||||
| Answer: | $ 235,336.00 | |||||
Consolidated Statements of Cash Flows - USD ($) in Thousands
Cash flow numbers that are positive mean that cash flowed into the company. Negative numbers means that cash flowed out. Please use the statement to the right to answer the questions below.
1. How much cash flowed in as a result of net income in the first nine months of 2018?
2. In cash from operating activities, what was the total cash from operating activities for the same period?
3. Which two operating activities had significant cash outflow in 2018 and how much were they?
4. In cash flows from investing activities, how much cash was spent (net) on the business acquisition? Do you recall what business was acquired?
5. How much did the company spend on its own property and equipment?
6. How much did Choice loan to hotel owners (issuance of mezzanine and other notes receivable)?
7. In cash flows from financing activities, how much did the company borrow?
8. How much did the company spend for purchases of treasury stock? In the next project we will look at the stock price over time.
9. How much did the company spend on dividend payments?
10. How much cash did the company receive get from employees exercising stock options?
11. How much cash did the company have as of September 30, 2017?
12. How much cash did the company have as of September 30, 2018?
Answer: Change in working capital and other, net of acquisition: $(49,059.00) & Franchise agreement acquisition cost, net of reimbursements : $(40,554.00)
Business Performance Ratios
| Choice Hotels | |||
| Ratios | September 30, 2018 9 Month End | Dec. 31, 2017 | Formulas |
| Quick ratio | quick ratio = (cash + cash equivalents + current receivables + short term investments) / current liabilities | ||
| Debt-to-assets ratio | debt-to-total assets ratio = total liabilities / total assets | ||
| Times Interest Earned ratio | times interest earned ratio (TIE) = earnings before interest and taxes / total interest payable on bonds and other contractual debt | ||
Questions from Choice Hotels: Note: Use the ratios in your answers, and explain what the ratios mean. Shareholder equity remains negative at the end of 2017. The deficit is decline. The large negative equity was caused by earlier purchases of treasury stock. This will make the equity multiplier, return on equity, and the debt to equity ratios meaningless. 1. To measure our company's solvency, which of these ratios would we use and why? For companies with deficits in shareholder equity, many analysts look to consistent strong cash flow from operations as the best indication of solvency. The times interest earned ratio is best for measuring solvency for Choice Hotels because it is a service business. 2. In an effort to help us improve our overall debt situation, we would like you to provide us with an assessment of our company's solvency and leverage. What would be your plan to achieve positive equity? Slovency ratios also called leverage ratios measure a business ability to foot its debts mostly in long-term. The general rule of thumb stipulates that higher than 20% the company is financially sound to foot its debts, in another term creditworthness. If that is not the case of the company I am managing, I would suggest to commence pay down as quick as possible short and long-term debts, and avoid applying for new credits. [ $1,329,116 / $1,161,037 = 1.1447662736] In our situation, Choice Hotels has more debts than assets. 3. Why might the ratios have increased or decreased? You may want to explore recent changes such as increased advertising and the February 2018 acquisition, and the expansion of the Cambria Suites brand.
Balance Sheet Ratios
| Choice Hotels | ||||
| Ratios | September 30, 2018 9 Month End | Dec. 31, 2017 | Formulas | |
| Current ratio | current ratio = current assets / current liabilities | |||
| Working capital | working capital = current assets – current liabilities | |||
| Total Asset Turnover ratio | total asset turnover ratio = net sales / total assets | Note: Net sales can be described as operating income from the income statement. | ||
| Deferred Revenue | ||||
| Deferred revenue consists of the following: | ||||
| December 31, | ||||
| 2017 | 2016 | |||
| (in thousands) | ||||
| Loyalty programs | $ | 127,921 | $ | 115,851 |
| Initial, relicensing and franchise fees | 8,905 | 9,352 | ||
| Procurement services fees | 3,939 | 7,668 | ||
| Other | 346 | 347 | ||
| Total | $ | 141,111 | $ | 133,218 |
Questions from Choice Hotels: Note: Use the ratios in your answers, and explain what the ratios mean. 1. Based on your calculations of current ratio and total-asset turnover ratio, what would you recommend we do to improve our asset management? Compaing current ratiosof both year 2018 and 2017 : [280,615/299,530 =0.9368 and 400,429/284,651 =1.4067] respectively. It says that 2018 was better than 2017. The company has been paying down its debts. With regard to total asset turnover ratio: 291,490/1,161,037 =0.25106 xxxxxxxxxx????? 2. We would like to improve the use of our working capital. Based on your ratio calculations. What are your specific recommendations? Please note that the current liability for deferred revenue consists primarily of amounts owed to customers in loyalty programs. This will limit what can be done to increase working capital. See the table below. ??????????????
