Choice Hotels 10-K
In Project 2, you will learn how to access US Securities and Exchange Commission public information about compa
how to complete a horizontal analysis and to calculate and analyze ratios.
Start by looking up the 10-K for Choice Hotels (CHH) for year 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.
4. Click Search
5. EDGAR search results will appear. Notice the name and address for Choice Hotels. Also notice
Results: Filing Type. Enter “10-K” and click Search.
6. You should see a 10-K with a filing date of 2019-02-26. This is the latest available at the time th
7. There are two available formats of this 10-K data, and we will use the Documents to answer th
data provided in the worksheets to complete the Ratio Analysis and to answer related questions.
8. Complete the horizontal analysis of financial statements by filling in each grey box.
9. Answer all questions on each tab in this workbook.
10. Explain the significance of your ratio calculations.
Note: Quarterly Financial Statements are not audited. Only annual financial statements are audited by a public ac
c information about companies. You will also learn
Follow these steps:
Choice Hotels. Also notice the box that reads Filter
est available at the time this project was developed.
Documents to answer the questions. You will use the
each grey box.
are audited by a public accounting firm.
Open the 10-K document, chh1231201810-k.htm and read pages 4 and 5. This
is the overview of the business. Answer the following questions:
1. Discuss Choice Hotels’ business model.
Answer:
2. On page 5, there is a sentence that reads in part, “Historically, we have
returned value to our shareholders in two primary ways:”
What are the two ways?
Answer:
3. Choice Hotels is a company that has grown to over $1 billion in assets in 2018.
So $100 million is a big number for Choice. Also on page 5, how much did
Choice Hotels pay as a Special Dividend in 2012?
Answer:
Note:
The Business section continues to page 23, where the Risk section begins. A
consultant would be well advised to read all of both sections. The items in 10-K
Risk section are designed to give full disclosure.
Of more interest is a section starting on page 37:
Of more interest is a section starting on page 37:
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations. (MD&A)
This is where management tells shareholders what happened and why.
The following questions apply to the MD&A.
4. What happened on February 1, 2018? Hint: You may find it useful to read
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Pages 37 and 51 are especially useful. Item 25 on Page 106 gives details.
Answer:
5. Which 3 of the risks in Item 1A are the most significant? Explain your reasons
for selecting them.
Answer:
6. On Page 46, at the bottom, what does management say is the reason for the
$101 million increase in Income Before Income Tax?
Horizontal Analysis
Consolidated Statements of Income – USD ($)
REVENUES:
Royalty fees
Initial franchise and relicensing fees
Procurement services
Marketing and reservation system
Other
Total revenues
OPERATING EXPENSES:
Selling, general and administrative
Depreciation and amortization
Marketing and reservation system
Total operating expenses
Impairment of goodwill
Gain on sale of assets, net
Operating income
OTHER INCOME AND EXPENSES, NET:
Interest expense
Interest income
Other (gain) loss
Equity in net (income) loss of affiliates
Total other income and expenses, net
Income before income taxes
Income taxes
Net income
Basic earnings per share:
Dec. 31, 2018
Dec. 31, 2017
$376,676,000
$26,072,000
$52,088,000
$543,677,000
$42,791,000
$1,041,304,000
$341,745,000
$23,038,000
$40,451,000
$499,625,000
$36,438,000
$941,297,000
$170,027,000
$14,330,000
$534,266,000
$718,623,000
-$4,289,000
$82,000
$318,474,000
$165,821,000
$6,680,000
$479,400,000
$651,901,000
$0
$257,000
$289,653,000
$45,908,000
-$7,452,000
$1,437,000
$5,323,000
$45,216,000
$273,258,000
$56,903,000
$216,355,000
$45,039,000
-$5,920,000
-$3,229,000
$4,546,000
$40,436,000
$249,217,000
$126,890,000
$122,327,000
Basic earnings per share (in dollars per share)
$3.83
$2.16
Diluted earnings per share (in dollars per share)
$3.80
$2.15
Questions:
1. Many of Choice Hotels Income Statement accounts have remained consistent for the past 3 years. However, the
Services revenue. What caused this difference? Hint: See page 44 in the 10-K report.
2. In comparing year-over-year expenses, there is a significant change in Depreciation and Amortization expense. W
3. There is a significant decrease in income taxes in 2018 from previous years. What caused this decrease in incom
4. The largest item in revenue and in expense is Marketing and reservation system. What are these two items and
5. What is the most significant trend based on your horizontal analysis over this three-year period? Why?
12 Months Ended
Dec. 31, 2016
$ Change 2017 to 2018 % Change 2017 to 2018 $ Change 2016 to 2017
$317,699,000
$19,720,000
$35,844,000
$409,120,000
$25,526,000
$807,909,000
$154,720,000
$6,996,000
$459,765,000
$621,481,000
$0
$627,000
$187,055,000
$44,446,000
-$3,535,000
-$1,504,000
-$492,000
$38,915,000
$148,140,000
$41,428,000
$106,712,000
$1.90
$1.89
for the past 3 years. However, there is a notable difference from 2017 to 2018 in the Procurement
port.
iation and Amortization expense. What caused this change? Hint: See page 44 of the 10-K report.
% Change 2016 to 2017
12 Mo
Horizontal Analysis
Consolidated Balance Sheets – USD ($) $ in Thousands
Dec. 31, 2018
Current assets
Cash and cash equivalents
Receivables (net of allowance for doubtful accounts of $15,905 and
$12,221, respectively)
Income taxes receivable
Notes receivable, net of allowances
Other current assets
Total current assets
Property and equipment, at cost, net
Goodwill
Intangible assets, net
Notes receivable, net of allowances
Investments, employee benefit plans, at fair value
Investments in unconsolidated entities
Deferred income taxes
Other assets
Total assets
Current liabilities
Accounts payable
Accrued expenses and other current liabilities
Deferred Revenue
Liability for guest loyalty program
Current portion of long-term debt
Total current liabilities
Long-term debt
Long-term portion
Deferred compensation and retirement plan obligations
Income taxes payable
Deferred income taxes
Liability for guest loyalty program
Other liabilities
Total liabilities
Commitments and Contingencies
Common stock, $0.01 par value; 160,000,000 shares authorized;
95,065,638 shares issued at December 31, 2018 and December 31,
2017; 55,679,207 and 56,679,968 shares outstanding at December 31,
2018 and December 31, 2017, respectively
Additional paid-in-capital
Accumulated other comprehensive loss
Treasury stock, at cost; 39,386,431 and 38,385,670 shares at December
31, 2018 and December 31, 2017, respectively
Retained earnings
$26,642
$138,018
$10,122
$36,759
$32,243
$243,784
$127,535
$168,996
$271,188
$83,440
$19,398
$109,016
$30,613
$84,400
$1,138,370
$73,511
$92,651
$67,614
$83,566
$1,097
$318,439
$753,514
$110,278
$24,212
$26,276
$0
$52,327
$37,096
$1,322,142
$951
$213,170
-$5,446
-$1,187,625
$795,178
Total shareholders’ deficit
Total liabilities and shareholders’ deficit
-$183,772
$1,138,370
Questions:
1. Choice Hotels works with franchisees who operate hotels under one of the Choice Hotels’ brands such as Camb
called Property and equipment, at cost, net. What is Property and equipment, at cost, net and why was there a sig
2. What does the “Accrued expenses and other current liabilities” item represent?
3. Treasury Stock is a negative account that is almost as large as the Total Assets. What would have been the Tota
4. What does the “Long-term debt” item represent?
5.
What is the most significant trend based on your horizontal analysis over this two-year period? Why?
12 Months Ended
Dec. 31, 2017
$235,336
$125,870
$0
$13,256
$25,967
$400,429
$83,374
$80,757
$100,492
$80,136
$20,838
$134,226
$27,224
$67,715
$995,191
$67,839
$84,315
$52,142
$79,123
$1,232
$284,651
$725,292
$98,459
$25,566
$29,041
$39
$48,701
$42,043
$1,253,792
$951
$182,448
-$4,699
-$1,064,573
$627,272
$ Change 2017 to 2018 % Change 2017 to 2018
-$258,601
$995,191
Choice Hotels’ brands such as Cambria Hotels, Sleep Inn, and Econo Lodge. The Balance Sheet lists an account
at cost, net and why was there a significant difference from 2017 to 2018?
ets. What would have been the Total Shareholders’ Equity if there had been no purchases of Treasury Stock?
this two-year period? Why?
Consolidated Statements of Cash Flows
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Depreciation and amortization – marketing and reservation
system
Franchise agreement acquisition cost amortization
Impairment of goodwill
Gain on disposal of assets, net
Provision for bad debts, net
Non-cash stock compensation and other charges
Non-cash interest and other investment (income) loss
Deferred income taxes
Equity in net losses from unconsolidated joint ventures, less
distributions received
Franchise agreement acquisition cost, net of reimbursements
Change in working capital and other, net of acquisition
Net cash provided by operating activities
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment
Investment in intangible assets
Proceeds from sales of assets
Asset acquisition, net of cash acquired
Business acquisition, net of cash acquired
Contributions to equity method investments
Distributions from equity method investments
Purchases of investments, employee benefit plans
Proceeds from sales of investments, employee benefit plans
Issuance of notes receivable
Collections of notes receivable
Other items, net
Net cash used in investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of long term debt
Net (repayments) borrowings pursuant to revolving credit
facilities
Principal payments on long-term debt
Proceeds from other debt agreements
Debt issuance costs
Purchases of treasury stock
Dividends paid
Proceeds from transfer of interest in notes receivable
Dec. 31, 2018
$216,355,000
$14,330,000
$19,597,000
$9,239,000
$4,289,000
-$56,000
$10,542,000
$15,986,000
$3,695,000
-$3,510,000
$7,389,000
-$52,929,000
-$2,031,000
$242,896,000
-$47,673,000
-$1,803,000
$3,053,000
-$3,179,000
-$231,317,000
-$9,604,000
$1,429,000
-$2,895,000
$2,825,000
-$36,045,000
$4,997,000
-$1,040,000
-$321,252,000
$9,037,000
$20,600,000
-$603,000
$0
-$2,590,000
-$148,679,000
-$48,715,000
$173,000
Proceeds from exercise of stock options
Net cash used in financing activities
Net change in cash and cash equivalents
Effect of foreign exchange rate changes on cash and cash
equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
Cash payments during the year for:
Income taxes, net of refunds
Interest, net of capitalized interest
Non-cash investing and financing activities:
Dividends declared but not paid
Investment in property, equipment and intangibles acquired in
accounts payable and accrued liabilities
Sale of investment in unconsolidated joint venture
Seller-financing to purchaser
$41,360,000
-$129,417,000
-$207,773,000
-$921,000
$235,336,000
$26,642,000
$77,357,000
$43,254,000
$11,977,000
$5,949,000
$0
$0
Questions:
1. When you examine the Statement of Cash Flows, you recognize an Asset Acquisition. What business did Choice
2. What does the “Investment in intangible assets” item represent?
3. What does the “Principal payments on long-term debt” item represent?
Dec. 31, 2017
Dec. 31, 2016
$122,327,000
$106,712,000
$6,680,000
$6,996,000
$20,609,000
$7,191,000
$0
-$237,000
$5,514,000
$22,857,000
-$772,000
$57,106,000
$20,663,000
$6,423,000
$0
-$571,000
$3,365,000
$15,346,000
$1,059,000
-$29,723,000
$6,579,000
$1,025,000
-$30,638,000
$40,158,000
$257,374,000
-$17,410,000
$38,150,000
$152,035,000
-$23,437,000
-$2,517,000
$1,000,000
$0
$0
-$50,554,000
$4,569,000
-$2,447,000
-$25,191,000
-$2,580,000
$11,462,000
-$28,583,000
-$1,341,000
-$34,661,000
$3,700,000
-$1,661,000
$2,245,000
-$19,738,000
$655,000
$109,000
-$90,115,000
$1,911,000
-$32,604,000
$11,070,000
$11,000
-$98,467,000
$0
$0
-$115,003,000
-$660,000
$0
$0
-$9,807,000
-$48,651,000
$24,237,000
$25,795,000
-$988,000
$550,000
-$284,000
-$35,926,000
-$46,182,000
$0
$14,107,000
-$135,777,000
$31,482,000
$12,951,000
-$44,084,000
$9,484,000
$1,391,000
$202,463,000
$235,336,000
-$462,000
$193,441,000
$202,463,000
$39,181,000
$42,405,000
$65,683,000
$41,992,000
$12,185,000
$12,112,000
$1,099,000
$0
$2,000,000
$3,648,000
$2,350,000
$0
set Acquisition. What business did Choice Hotels acquire in 2016? And how much did Choice Hotels spend? Hint: See the page 51 in the 1
d? Hint: See the page 51 in the 10-K report.
Instructions
1. Please enter the data from the previous tabs by clicking on the cell and typing = and then clicking on the desire
For example to enter Net Income for 2018 type = and go to the income statement tab and click on cell I27.
2. Complete the calculations.
3. Explain the significance of your ratio calculations.
Be careful, only Balance sheet numbers are in thousands. Income Statement and Cash Flow Statement numbe
Brigham, E; Ehrhardt, M. (2017). Chapter 3. Financial Management, Theory and Practice. Boston, MA: Cengage Le
Solvency Ratios
1 Ability to Current Liabilities: Current Ratio
a. Calculate Current Ratio
2018
Current Assets
Current Liabilities
b. Calculate Current Ratio
Leverage Ratios
2 Debt Ratio
Total Debt
Total Assets
2018
c. Calculate Debt Ratio
Profitability Ratios
3 Net Profit Margin
Net Income
Total Revenues
2018
Calculate Net Profit Margin
4 Basic Earning Power (BEP)
EBIT
Total Assets, Multiply by 1,000 to compare
2018
Calculate BEP
Asset Management Ratios
5 Evaluating Receivables: Days Sales Outstanding
a. Calculate Average Daily Sales
Total revenues
365 days
Average Sales per day
365
Receivables (net ……) X 1000
Average Sales per Day
b. Calculate Days Sales Outstanding
6 Explain the significance of your ratio calculations.
nd then clicking on the desired cell.
ab and click on cell I27.
Cash Flow Statement numbers are as presented.
. Boston, MA: Cengage Learning
Suggested level for a good result
2017
Above 0.42
Around .09
2017
Above 8%
2017
Above 12%
365
50 days or less

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