10-Q 1 chh-20210930.htm 10-Q chh-20210930
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 _____________________________________________ 
FORM 10-Q
 _____________________________________________ 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 2021
OR
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)
_____________________________________________ 
Delaware52-1209792
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1 Choice Hotels Circle,Suite 40020850
Rockville,Maryland
(Address of Principal Executive Offices)(Zip Code)

(Registrant’s telephone number, including area code): (301) 592-5000
(Former name, former address and former fiscal year, if changed since last report): N/A
 ________________________________________________________ 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each ClassTrading Symbol(s)Name of Each Exchange on Which Registered
Common Stock, Par Value $0.01 per shareCHHNew York Stock Exchange
_____________________________________________  
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes       No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  No  
The number of shares of common stock outstanding on October 29, 2021 was 55,629,330.


CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
INDEX
 
 PAGE NO.

2

PART I. FINANCIAL INFORMATION
 
ITEM 1.FINANCIAL STATEMENTS

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
        
Three Months EndedNine Months Ended
 September 30,September 30,
 2021202020212020
REVENUES
Royalty fees$127,317 $79,666 $299,606 $200,157 
Initial franchise and relicensing fees6,149 6,071 18,904 20,031 
Procurement services13,010 10,115 36,293 34,609 
Marketing and reservation system156,871 107,141 384,380 297,203 
Owned hotels11,377 4,201 24,724 15,731 
Other8,645 3,577 20,753 12,948 
Total revenues323,369 210,771 784,660 580,679 
OPERATING EXPENSES
Selling, general and administrative35,110 31,779 99,847 104,098 
Depreciation and amortization5,883 6,382 18,477 19,309 
Marketing and reservation system116,216 113,808 327,674 333,564 
Owned hotels7,054 3,812 16,534 12,822 
       Total operating expenses
164,263 155,781 462,532 469,793 
Loss on impairment of assets (4,290) (5,516)
Operating income159,106 50,700 322,128 105,370 
OTHER INCOME AND EXPENSES, NET
Interest expense11,638 12,691 35,106 37,153 
Interest income(1,202)(1,744)(3,717)(6,277)
Loss on extinguishment of debt 15,958  16,565 
Other (gains) losses407 (2,030)(2,906)(858)
Equity in net (gain) loss of affiliates(3,326)1,731 1,492 7,172 
Total other income and expenses, net7,517 26,606 29,975 53,755 
Income before income taxes151,589 24,094 292,153 51,615 
Income tax expense (benefit)34,934 9,594 67,279 (15,907)
Net income$116,655 $14,500 $224,874 $67,522 
Basic earnings per share$2.10 $0.26 $4.05 $1.22 
Diluted earnings per share$2.08 $0.26 $4.01 $1.21 
Cash dividends declared per share$0.225 $ $0.450 $0.225 
The accompanying notes are an integral part of these consolidated financial statements.
3

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)
 
        
Three Months EndedNine Months Ended
 September 30,September 30,
2021202020212020
Net income$116,655 $14,500 $224,874 $67,522 
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustment(57)240 66 (237)
Other comprehensive income (loss), net of tax(57)240 66 (237)
Comprehensive income$116,598 $14,740 $224,940 $67,285 
The accompanying notes are an integral part of these consolidated financial statements.
4

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
September 30, 2021December 31, 2020
ASSETS
Current assets
Cash and cash equivalents$415,116 $234,779 
Accounts receivable (net of allowance for credit losses of $48,275 and $59,424, respectively)
197,999 149,921 
Income taxes receivable 4,186 
Notes receivable (net of allowance for credit losses of $7,428 and $4,179, respectively)
71,334 24,048 
Prepaid expenses and other current assets26,520 19,980 
Total current assets710,969 432,914 
Property and equipment, at cost (net of accumulated depreciation and amortization of $248,693 and $223,421, respectively)
351,768 334,901 
Operating lease right-of-use assets10,655 17,688 
Goodwill159,196 159,196 
Intangible assets (net of accumulated amortization of $175,548 and $163,128, respectively)
306,008 303,725 
Notes receivable (net of allowance for credit losses of $12,611 and $15,305, respectively)
67,755 95,785 
Investments, employee benefit plans, at fair value31,285 29,104 
Investments in unconsolidated entities42,961 57,879 
Deferred income taxes101,922 67,745 
Other assets83,415 88,396 
Total assets$1,865,934 $1,587,333 
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable$88,056 $83,329 
Accrued expenses and other current liabilities129,173 78,920 
Deferred revenue80,607 50,290 
Current portion of long-term debt216,217  
Liability for guest loyalty program76,541 43,308 
Total current liabilities590,594 255,847 
Long-term debt843,820 1,058,738 
Long-term deferred revenue106,410 122,406 
Deferred compensation and retirement plan obligations35,958 33,756 
Income taxes payable20,642 23,394 
Operating lease liabilities5,666 12,739 
Liability for guest loyalty program40,236 77,071 
Other liabilities10,462 9,134 
Total liabilities1,653,788 1,593,085 
Commitments and Contingencies
Common stock, $0.01 par value; 160,000,000 shares authorized; 95,065,638 shares issued at September 30, 2021 and December 31, 2020; 55,630,704 and 55,535,554 shares outstanding at September 30, 2021 and December 31, 2020, respectively
951 951 
Additional paid-in-capital253,361 233,921 
Accumulated other comprehensive loss(4,580)(4,646)
Treasury stock, at cost; 39,434,934 and 39,530,084 shares at September 30, 2021 and December 31, 2020, respectively
(1,261,926)(1,260,478)
Retained earnings1,224,340 1,024,500 
Total shareholders’ equity (deficit)212,146 (5,752)
Total liabilities and shareholders’ equity (deficit)$1,865,934 $1,587,333 
The accompanying notes are an integral part of these consolidated financial statements.
5

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

Nine Months Ended
 September 30,
 20212020
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$224,874 $67,522 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization18,477 19,309 
Depreciation and amortization – marketing and reservation system18,364 14,994 
Franchise agreement acquisition cost amortization9,734 8,343 
Loss on impairment of assets 5,516 
Loss on extinguishment of debt 16,565 
Non-cash stock compensation and other charges24,277 4,748 
Non-cash interest and other investment income(11,039)(465)
Deferred income taxes(34,285)(31,411)
Equity in net losses from unconsolidated joint ventures, less distributions received8,421 7,320 
Franchise agreement acquisition costs, net of reimbursements(28,466)(16,960)
Change in working capital and other14,887 (25,801)
Net cash provided by operating activities245,244 69,680 
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment(46,098)(32,176)
Investment in intangible assets(3,113)(1,212)
Proceeds from sale of tax credits for rehabilitation of historic building 9,197 
Contributions to equity method investments(2,150)(4,620)
Distributions and sale proceeds from equity method investments15,554 3,362 
Purchases of investments, employee benefit plans(1,279)(2,254)
Proceeds from sales of investments, employee benefit plans2,487 2,372 
Purchase/issuance of notes receivable(17,918)(9,845)
Collection of notes receivable63 5,113 
Other items, net(115)(473)
Net cash used in investing activities(52,569)(30,536)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Term Loan 249,500 
Proceeds from issuance of 2020 Senior Notes 447,723 
Net borrowings pursuant to revolving credit facilities (18,200)
Principal payments on long-term debt (466,915)
Payments to extinguish long-term debt (14,347)
Debt issuance costs(365)(4,620)
Purchase of treasury stock(10,039)(55,158)
Dividends paid(12,528)(25,274)
Proceeds from exercise of stock options10,817 6,615 
Net cash (used in) provided by financing activities(12,115)119,324 
Net change in cash and cash equivalents180,560 158,468 
Effect of foreign exchange rate changes on cash and cash equivalents(223)(267)
Cash and cash equivalents at beginning of period234,779 33,766 
Cash and cash equivalents at end of period$415,116 $191,967 
Supplemental disclosure of cash flow information
Cash payments during the period for:
Income taxes, net of refunds$58,229 $41 
Interest, net of capitalized interest$36,519 $37,338 
Non-cash investing and financing activities:
Dividends declared but not paid$12,517 $ 
Investment in property, equipment and intangibles acquired in accounts payable and accrued liabilities$6,920 $757 

The accompanying notes are an integral part of these consolidated financial statements.
6

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)

Common
Stock -
Shares
Outstanding
Common
Stock -
Par
Value
Additional
Paid-in-
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Retained
Earnings
Total
Balance as of December 31, 201955,702,628 $951 $231,160 $(4,550)$(1,219,905)$968,833 $(23,511)
Cumulative-effect adjustment (1)
— — — — — (6,831)(6,831)
Net income— — — — — 55,463 55,463 
Other comprehensive income (loss)— — — (664)— — (664)
Share-based payment activity (2)
294,826 — (9,607)— 8,089 (269)(1,787)
Dividends declared ($0.225 per share) (2)
— — — — — (12,452)(12,452)
Treasury purchases(657,031)— — — (54,072)— (54,072)
Balance as of March 31, 202055,340,423 $951 $221,553 $(5,214)$(1,265,888)$1,004,744 $(43,854)
Net income— — — — — (2,441)(2,441)
Other comprehensive income (loss)— — — 187 — — 187 
Share-based payment activity (2)
29,997 — 2,166 — 1,825 (171)3,820 
Dividends declared (2)
— — — — — —  
Treasury purchases(6,525)— — — (464)— (464)
Balance as of June 30, 202055,363,895 $951 $223,719 $(5,027)$(1,264,527)$1,002,132 $(42,752)
Net income— — — — — 14,500 14,500 
Other comprehensive income (loss)— — — 240 — — 240 
Share based payment activity (2)
101,857 — 4,802 — 2,424 3 7,229 
Dividends declared (2)
— — — — — —  
Treasury purchases(7,504)— — — (621)— (621)
Balance as of September 30, 202055,458,248 951 228,521 (4,787)(1,262,724)1,016,635 (21,404)

Common
Stock -
Shares
Outstanding
Common
Stock -
Par
Value
Additional
Paid-in-
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Treasury
Stock
Retained
Earnings
Total
Balance as of December 31, 202055,535,554 $951 $233,921 $(4,646)$(1,260,478)$1,024,500 $(5,752)
Net income     22,337 22,337 
Other comprehensive income (loss)   52   52 
Share-based payment activity (2)
48,781  3,617  4,030 (3)7,644 
Dividends declared (2)
       
Treasury purchases(46,499)   (5,046) (5,046)
Balance as of March 31, 202155,537,836 $951 $237,538 $(4,594)$(1,261,494)$1,046,834 $19,235 
Net income     85,882 85,882 
Other comprehensive income (loss)   71   71 
Share-based payment activity (2)
111,895  9,066  3,516 1 12,583 
Dividends declared ($0.225 per share) (2)
     (12,521)(12,521)
Treasury purchases(2,738)   (317) (317)
Balance as of June 30, 202155,646,993 $951 $246,604 $(4,523)$(1,258,295)$1,120,196 $104,933 
Net income     116,655 116,655 
Other comprehensive income (loss)   (57)  (57)
Share based payment activity (2)
23,757  6,757  1,045 6 7,808 
Dividends declared ($0.225 per share) (2)
     (12,517)(12,517)
Treasury purchases(40,046)   (4,676) (4,676)
Balance as of September 30, 202155,630,704 951 253,361 (4,580)(1,261,926)1,224,340 212,146 
7

(1) Reflects the cumulative effect of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326) and subsequent amendments issued thereafter (collectively "Topic 326"), which was adopted on January 1, 2020. Refer to Note 3.
(2) During the fourth quarter of 2019, the Company's board of directors announced a 5% increase to the quarterly dividend rate to $0.225 per share from $0.215 per share, beginning with the dividend payable in the first quarter of 2020. On February 28, 2020, the Company’s board of directors declared a quarterly cash dividend of $0.225 per share of common stock. The dividend was payable on April 16, 2020 to shareholders of record on April 2, 2020. In April 2020, subsequent to the payment of the dividend and in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends. During 2020 and 2021, accumulated dividends were paid to certain shareholders upon vesting of certain performance vested restricted stock units ("PVRSU") which are captured in Share-based payment activity. On May 7, 2021 and September 9, 2021, the Company's board of directors declared a quarterly cash dividend of $0.225 per share of common stock.


The accompanying notes are an integral part of these consolidated financial statements.


8

CHOICE HOTELS INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1.    Basis of Presentation and Significant Accounting Policies
Basis of Presentation
The accompanying unaudited consolidated financial statements of Choice Hotels International, Inc. and its subsidiaries (together the "Company") have been prepared by the Company in accordance with accounting principles generally accepted in the United States of America ("GAAP") pursuant to the rules and regulations of the Securities and Exchange Commission ("SEC"). All significant intercompany accounts and transactions between the Company 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. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments that are necessary to fairly present the Company's 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 GAAP have been omitted. Although we believe the disclosures made are adequate to prevent the information presented from being misleading, these financial statements should be read in conjunction with the consolidated financial statements for the year ended December 31, 2020 and notes thereto included in the Company’s Annual Report on Form 10-K, filed with the SEC on February 26, 2021. Interim results are not necessarily indicative of the entire year results.
Certain prior year amounts in our consolidated financial statements have been reclassified in order to maintain comparability with current year presentation. Foreign currency transaction gains and losses that were previously presented in selling, general and administrative ("SG&A") expenses are now presented within other gain (loss) in the consolidated statements of income. The reclassification had no effect on the Company’s previously reported results of operations.
Summary of Significant Accounting Policies
The Company’s significant accounting policies are detailed in the “Summary of Significant Accounting Policies” section of Note 1 in the Annual Report on Form 10-K for the year ended December 31, 2020. The significant accounting policies that changed in 2021 are set forth below.
Recently Adopted Accounting Standards
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes ("ASU 2019-12"). ASU 2019-12 enhances and simplifies various aspects of the income tax accounting guidance in Accounting Standards Codification ("ASC") 740, Income Taxes. The Company adopted ASU 2019-12 on January 1, 2021 and the adoption does not have material impacts on our consolidated financial statements and disclosures.
2.    Revenue
Contract Liabilities
Contract liabilities relate to (i) advance consideration received, such as initial franchise and relicensing fees paid when a franchise agreement is executed and system implementation fees paid at time of installation, for services considered to be part of the brand intellectual property performance obligation and (ii) amounts received when Choice Privileges points are issued, but for which revenue is not yet recognized since the related points have not been redeemed.
Deferred revenues from initial and relicensing fees and system implementation fees will typically be recognized over a five- to ten-year period, unless the franchise agreement is terminated and the hotel exits the franchise system whereby remaining deferred amounts will be recognized to revenue in the period of termination. Loyalty points are typically redeemed within three years of issuance.
Significant changes in the contract liabilities balances during the period December 31, 2020 to September 30, 2021 are as follows:
(in thousands)
Balance as of December 31, 2020$156,227 
Increases to the contract liability balance due to cash received76,936 
Revenue recognized in the period(58,264)
Balance as of September 30, 2021$174,899 
Remaining Performance Obligations
The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $174.9 million as of September 30, 2021. This amount represents fixed transaction price that will be recognized as revenue in future periods, which is captured in the consolidated balance sheet as current and non-current deferred revenue.
Based on practical expedient elections permitted by ASU 2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments ("Topic 606"), the Company does not disclose the value of unsatisfied performance obligations for (i) variable consideration subject to the sales or usage-based royalty constraint or comprising a component of a series (including franchise, partnership, qualified vendor, and software as a service ("SaaS") agreements), (ii) variable consideration for which we recognize revenue at the amount to which we have the right to invoice for services performed, or (iii) contracts with an expected original duration of one year or less.
Disaggregation of Revenue
Three Months EndedThree Months Ended
September 30, 2021September 30, 2020
(in thousands)Over timePoint in timeTotalOver timePoint in timeTotal
Royalty fees$127,317 $ $127,317 $79,666 $ $79,666 
Initial franchise and relicensing fees6,149  6,149 6,071  6,071 
Procurement services12,285 725 13,010 9,620 495 10,115 
Marketing and reservation system145,216 11,655 156,871 93,327 13,814 107,141 
Owned hotels9,614 1,652 11,266 3,498 595 4,093 
Other8,645  8,645 3,317  3,317 
Total Topic 606 revenues$309,226 $14,032 323,258 $195,499 $14,904 210,403 
Non-Topic 606 revenues111 368 
Total revenues$323,369 $210,771 
Nine Months EndedNine Months Ended
September 30, 2021September 30, 2020
(in thousands)Over timePoint in timeTotalOver timePoint in timeTotal
Royalty fees$299,606 $ $299,606 $200,157 $ $200,157 
Initial franchise and relicensing fees18,904  18,904 20,031  20,031 
Procurement services34,526 1,767 36,293 33,069 1,540 34,609 
Marketing and reservation system346,211 38,169 384,380 247,092 50,111 297,203 
Owned hotels20,683 3,709 24,392 13,159 2,248 15,407 
Other20,753  20,753 12,167  12,167 
Total Topic 606 revenues$740,683 $43,645 784,328 $525,675 $53,899 579,574 
Non-Topic 606 revenues332 1,105 
Total revenues$784,660 $580,679 
Non-Topic 606 revenues primarily represent revenue from leasing and are presented in Owned hotels and Other revenues in the consolidated statements of income.
As presented in Note 11, the Corporate & Other segment amounts represent $