Dow_LaToya_Project2Workbook-22121.xlsx

Instructions

Choice Hotels 10-K
In Project 2, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn 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 the box that reads Filter 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 this project was developed.
7. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the 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 accounting firm.
Choice Hotels 10-K
In Project 2, you will learn how to access US Securities and Exchange Commission public information about companies. You will also learn 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 2019 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 the box that reads Filter Results: Filing Type. Enter “10-K” and click Search.
6. You should see a 10-K with a filing date of 2020-03-02. This is the latest available at the time this project was developed.
7. There are two available formats of this 10-K data, and we will use the Documents to answer the questions. You will use the 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 accounting firm.

10-K Document Questions

Read pages 4 and 5 in the 10-K. This is the overview of the business. Use the 2018 and 2019 SEC 10-K reports to 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. 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:
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.
Answer:
5. Which 3 of the risks in Item 1A are the most significant? Explain your reasons for selecting them.

Answer:

Income Statement

(New-Old)/Old (New-Old)/Old

Horizontal Analysis 12 Months Ended

Consolidated Statements of Income – USD ($) in Thousands Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017 $ Change 2018 to 2019 % Change 2018 to 2019 $ Change 2017 to 2018 % Change 2017 to 2018

REVENUES:

Royalty fees $388,151 $376,676 $341,745

Initial franchise and relicensing fees $27,489 $26,072 $23,038

Procurement services $61,429 $52,088 $40,451

Marketing and reservation system $577,426 $543,677 $499,625

Owned Hotels $20,282 $0 $0

Other $40,043 $42,791 $36,438

Total revenues $1,114,820 $1,041,304 $941,297

OPERATING EXPENSES:

Selling, general and administrative $168,833 $170,027 $165,821

Depreciation and amortization $18,828 $14,330 $6,680

Marketing and reservation system $579,139 $534,266 $479,400

Owned Hotels $14,448 $0 $0

Total operating expenses $781,248 $718,623 $651,901

Impairment of goodwill -$3,097 -$4,289 $0

Gain on sale of assets, net $100 $82 $257

Operating income $318,642 $318,474 $289,653

OTHER INCOME AND EXPENSES, NET:

Interest expense $46,807 $45,908 $45,039

Interest income -$9,996 -$7,452 -$5,920

Loss on extinguishment of debt $7,188 $0 $0

Other (gain) loss -$4,862 $1,437 -$3,229

Equity in net (income) loss of affiliates $9,576 $5,323 $4,546

Total other income and expenses, net $48,713 $45,216 $40,436

Income before income taxes $269,929 $273,258 $249,217

Income taxes $47,051 $56,903 $126,890

Net income $222,878 $216,355 $122,327

Basic earnings per share:

Basic earnings per share (in dollars per share) $4.00 $3.83 $2.16

Diluted earnings per share (in dollars per share) $3.98 $3.80 $2.15

Questions:

1. what type of information do you get from reading income statement? Please be specific.

2. what are the examples of selling, general and administrave expenses. Please list at least 3 of them.

3. The largest item in revenue and in expense is Marketing and reservation system. What are these two items and why are the two numbers similar but not identical?

4. what’s the benefit of horizonal analysis for users of financial statements?

5. There are at least two different definition of incomes in the current statement above; operating income and net income.

Why do you think investers need to know operating income when they have net income?

Balance Sheet

(New-Old)/Old

Horizontal Analysis 12 Months Ended

Consolidated Balance Sheets – USD ($) $ in Thousands Dec. 31, 2019 Dec. 31, 2018 $ Change 2018 to 2019 % Change 2018 to 2019

Current assets

Cash and cash equivalents $33,766 $26,642

Receivables (net of allowance for doubtful accounts of $18,482 and $15,905, respectively) $141,566 $138,018

Income taxes receivable $11,126 $10,122

Notes receivable, net of allowances $25,404 $36,759

Other current assets $24,727 $32,243

Total current assets $236,589 $243,784

Property and equipment, at cost, net $351,502 $127,535

Operating lease right-of-use assets $24,088 $0

Goodwill $159,196 $168,996

Intangible assets, net $290,421 $271,188

Notes receivable, net of allowances $103,054 $83,440

Investments, employee benefit plans, at fair value $24,978 $19,398

Investments in unconsolidated entities $78,655 $109,016

Deferred income taxes $20,747 $30,613

Other assets $97,442 $84,400

Total assets $1,386,672 $1,138,370

Current liabilities

Accounts payable $73,449 $73,511

Accrued expenses and other current liabilities $90,364 $92,651

Current portion $71,594 $67,614

Liability for guest loyalty program $82,970 $83,566

Current portion of long-term debt $7,511 $1,097

Total current liabilities $325,888 $318,439

Long-term debt $844,102 $753,514

Long-term portion $112,662 $110,278

Deferred compensation and retirement plan obligations $29,949 $24,212

Income taxes payable $26,147 $26,276

Operating lease liabilities $21,270 $0

Liability for guest loyalty program $46,698 $52,327

Other liabilities $3,467 $37,096

Total liabilities $1,410,183 $1,322,142

Commitments and Contingencies

Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at December 31, 2019 and December 31, 2018; 55,702,628 and 55,679,207 shares outstanding at December 31, 2019 and December 31, 2018, respectively $951 $951

Additional paid-in-capital $231,160 $213,170

Accumulated other comprehensive loss -$4,550 -$5,446

Treasury stock, at cost; 39,363,010 and 39,386,431 shares at December 31, 2019 and December 31, 2018, respectively -$1,219,905 -$1,187,625

Retained earnings $968,833 $795,178

Total shareholders’ deficit -$23,511 -$183,772

Total liabilities and shareholders’ deficit $1,386,672 $1,138,370

Questions:

1. What types of information you can get from the balance sheet?

2. What does the “Accrued expenses and other current liabilities” item represent?

3. Why would a firm want to acquire treasury stock?

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?

Statement of Cash Flows

Consolidated Statements of Cash Flows – USD ($) $ in Thousands 12 Months Ended

Dec. 31, 2019 Dec. 31, 2018 Dec. 31, 2017

CASH FLOWS FROM OPERATING ACTIVITIES

Net income $ 222,878 $ 216,355 $ 122,327

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization $ 18,828 $ 14,330 $ 6,680

Depreciation and amortization – marketing and reservation system $ 17,294 $ 19,597 $ 20,609

Franchise agreement acquisition cost amortization $ 7,992 $ 9,239 $ 7,191

Impairment of goodwill $ 3,097 $ 4,289 $ – 0

Impairment of long-lived assets $ 7,259 $ – 0 $ – 0

Loss on sale of business $ 4,674 $ – 0 $ – 0

Loss on debt extinguishment $ 7,188 $ – 0 $ – 0

Gain on disposal of assets, net $ (2,103) $ (56) $ (237)

Provision for bad debts, net $ 8,240 $ 10,542 $ 5,514

Non-cash stock compensation and other charges $ 17,615 $ 15,986 $ 22,857

Non-cash interest and other investment (income) loss $ (4,010) $ 3,695 $ (772)

Deferred income taxes $ 9,810 $ (3,510) $ 57,106

Equity in net losses from unconsolidated joint ventures, less distributions received $ 12,562 $ 7,389 $ 6,579

Franchise agreement acquisition cost, net of reimbursements $ (38,944) $ (52,929) $ (30,638)

Change in working capital and other, net of acquisition $ (21,824) $ (2,031) $ 40,158

Net cash provided by operating activities $ 270,556 $ 242,896 $ 257,374

CASH FLOWS FROM INVESTING ACTIVITIES

Investment in property and equipment $ (57,342) $ (47,673) $ (23,437)

Investment in intangible assets $ (6,699) $ (1,803) $ (2,517)

Proceeds from sales of assets $ 10,585 $ 3,053 $ 1,000

Asset acquisition, net of cash acquired $ (168,954) $ (3,179) $ – 0

Proceeds from sale of unconsolidated joint venture $ 8,937 $ – 0 $ – 0

Business acquisition, net of cash acquired $ – 0 $ (231,317) $ – 0

Payment on business disposition, net $ (10,783) $ – 0 $ – 0

Contributions to equity method investments $ (27,828) $ (9,604) $ (50,554)

Distributions from equity method investments $ 10,241 $ 1,429 $ 4,569

Purchases of investments, employee benefit plans $ (3,175) $ (2,895) $ (2,447)

Proceeds from sales of investments, employee benefit plans $ 2,217 $ 2,825 $ 2,245

Issuance of notes receivable $ (20,722) $ (36,045) $ (19,738)

Collections of notes receivable $ 14,231 $ 4,997 $ 655

Other items, net $ (1,875) $ (1,040) $ 109

Net cash used in investing activities $ (251,167) $ (321,252) $ (90,115)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of long term debt $ 422,376 $ 9,037 $ – 0

Net (repayments) borrowings pursuant to revolving credit facilities $ (72,400) $ 20,600 $ (115,003)

Principal payments on long-term debt, including premium on extinguishment $ (256,809) $ (603) $ (660)

Debt issuance costs $ (3,936) $ (2,590) $ – 0

Purchases of treasury stock $ (50,638) $ (148,679) $ (9,807)

Dividends paid $ (48,089) $ (48,715) $ (48,651)

(Payments on) proceeds from transfer of interest in notes receivable $ (24,409) $ 173 $ 24,237

Proceeds from exercise of stock options $ 21,410 $ 41,360 $ 14,107

Net cash used in financing activities $ (12,495) $ (129,417) $ (135,777)

Net change in cash and cash equivalents $ 6,894 $ (207,773) $ 31,482

Effect of foreign exchange rate changes on cash and cash equivalents $ 230 $ (921) $ 1,391

Cash and cash equivalents at beginning of period $ 26,642 $ 235,336 $ 202,463

Cash and cash equivalents at end of period $ 33,766 $ 26,642 $ 235,336

Cash payments during the year for:

Income taxes, net of refunds $ 41,859 $ 77,357 $ 39,181

Interest, net of capitalized interest $ 48,179 $ 43,254 $ 42,405

Non-cash investing and financing activities:

Dividends declared but not paid $ 12,535 $ 11,977 $ 12,185

Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities $ 959 $ 5,949 $ 1,099

Seller-financing to purchaser $ – 0 $ – 0 $ 2,000

Questions:

1. what information could an investor get from SCF?

2. Why are depreciation and amortization expensed added back to net income to compute Operating Cash flow?

3. What is the advantage and risk of having lower balance of cash? the same for higher balance of cash?

4. Choice Hotels had signicant fluctuation in “Cash Used in Investing Activities” over the years. Why?

5. What are the risks faced by Choice hotels and its industry as they relate to the current Covid-19 crisis worldwide? Be specifc in relation to CFs

Ratio Analysis

Solvency Ratios Suggested level for a good result

1 Ability to Current Liabilities: Current Ratio

a. Calculate Current Ratio

2019 2018

Current Assets

Current Liabilities

b. Calculate Current Ratio Above 0.42

Leverage Ratios

2 Debt Ratio 2019

Total Debt

Total Assets

c. Calculate Debt Ratio Around .09

Profitability Ratios

3 Net Profit Margin 2019 2018

Net Income

Total Revenues

Calculate Net Profit Margin Above 8%

4 Basic Earning Power (BEP) 2019 2018

EBIT

Total Assets

Calculate BEP Above 12%

Asset Management Ratios

5 Evaluating Receivables: Days Sales Outstanding

a. Calculate Average Daily Sales

2019 2018

Receivables (net ……)

Total Revenues

365 days

Average Sales per day

b. Calculate Days Sales Outstanding 50 days or less

6 Explain the significance of your ratio calculations.

Answer:
Instructions
1. Please enter the data from the previous tabs by clicking on the cell and typing = and then clicking on the desired cell.
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.