Comfort Inn 2014 Annual Report Download - page 38

Table of Contents
expense increasing by approximately $14.2 million and a loss on extinguishment of debt totaling $0.5 million. Net income was favorably
impacted by a $4.5 million tax benefit related to a change in estimate of the tax benefit from foreign operations. These items represented a net
decline in diluted EPS of $0.12 per share.
• Operating and net income in 2013 reflect an increased investment in the Company's SkyTouch division, a new division launched that develops
and markets cloud-based technology products, totaling approximately $6.6 million. Net income was further reduced by the issuance of
unsecured senior notes in the principal amount of $400 million as well as a $350 million senior secured credit facility to pay a special cash
dividend totaling approximately $600.7 million in the second and third quarters of 2012. The issuance of this debt resulted in interest expense
for the year ended December 31, 2013 increasing by approximately $15.3 million over the prior year. These items represented a net decline in
diluted EPS of $0.24 per share.
• Operating and net income in 2014 reflect a full year of operations for the Company’s SkyTouch division which was publicly announced in
2013 as well as an increased investment in the sales and marketing capabilities of the division. As a result, the net operating loss of the division
increased by approximately $7.1 million. In addition, 2014 operating and net income were reduced by termination benefits of $1.2 million
resulting from the termination of certain employees. Discontinued operations for 2014 reflect the sale of the Company’s three company-owned
MainStay Suites hotels which resulted in a $2.8 million pre-tax gain.
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The following Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to help the reader
understand Choice Hotels International, Inc. and its subsidiaries (together the "Company"). MD&A is provided as a supplement to—and should be read in
conjunction with—our consolidated financial statements and the accompanying notes.
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We are primarily a hotel franchisor with franchise agreements representing 6,379 hotels open and 603 hotels under construction, awaiting conversion or
approved for development as of December 31, 2014, with 505,278 rooms and 47,951 rooms, respectively, in 50 states, the District of Columbia and more than
35 countries and territories outside the United States. Our brand names include Comfort Inn, Comfort Suites, Quality, Clarion, Ascend Hotel Collection, Sleep
Inn, Econo Lodge, Rodeway Inn, MainStay Suites, Suburban Extended Stay Hotel and Cambria hotels & suites (collectively, the "Choice brands").
The Company's domestic franchising operations are conducted through direct franchising relationships while its international franchise operations are
conducted through a combination of direct franchising and master franchising relationships. Master franchising relationships are governed by master
franchising agreements which generally provide the master franchisee with the right to use our brands and sub-license the use of our brands in a specific
geographic region, usually for a fee.
Our business philosophy has been to conduct direct franchising in those international markets where both franchising is an accepted business model
and we believe our brands can achieve significant scale. We elect to enter into master franchise agreements in those markets where direct franchising is
currently not a prevalent or viable business model. When entering into master franchising relationships, we strive to select partners that have professional
hotel and asset management capabilities together with the financial capacity to invest in building the Choice brands in their respective markets. Master
franchising relationships typically provide lower revenues to the Company as the master franchisees are responsible for managing certain necessary services
(such as training, quality assurance, reservations and marketing) to support the franchised hotels in the master franchise area and therefore retain a larger
percentage of the hotel franchise fees to cover their expenses. In certain circumstances, the Company has and may continue to make equity investments in our
master franchisees.
As a result of our use of master franchising relationships and international market conditions, revenues from international franchising operations
comprised 8% of our total revenues in both 2014 and 2013 while representing approximately 18% of our franchise system hotels open at December 31, 2014
and 2013, respectively. Therefore, our description of the franchise system is primarily focused on the domestic operations.
Our Company generates revenues, income and cash flows primarily from initial, relicensing and continuing royalty fees attributable to our franchise
agreements. Revenues are also generated from qualified vendor arrangements and other sources. The hotel industry is seasonal in nature. For most hotels,
demand is lower in November through February than during the remainder of the year. Our principal source of revenues is franchise fees based on the gross
room revenues of our franchised properties. The Company’s franchise fee revenues reflect the industry’s seasonality and historically have been lower in the
first and fourth quarters than in the second and third quarters.
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