Comfort Inn 2007 Annual Report Download - page 33

Operations Review
Comparison of 2007 Operating Results and 2006 Operating Results
The Company recorded net income of $111.3 million for the year ended December 31, 2007, a $1.5 million or 1%
decline from the $112.8 million for the year ended December 31, 2006. The decrease in net income is primarily
attributable to the resolution of income tax contingencies totaling $12.8 million during 2006 resulting in an effective
income tax rate of 27.4% in 2006 compared to 36.0% for 2007. The increase in the effective income tax rate was partially
offset by an $18.6 million or 11% increase in operating income. Operating income increased as a result of a $31.8 million,
or 12% increase in franchising revenues (total revenues excluding marketing and reservation revenues and hotel
operations) partially offset by a $14.5 million or 17% increase in selling, general and administrative expense. The increase
in selling, general and administration expenses was partially due to the commencement of direct franchising operations in
continental Europe and termination benefit expenses incurred related to the termination of certain executive officers.
Summarized financial results for the years ended December 31, 2007 and 2006 are as follows:
2007
2006
(In thousands, except
per share amounts)
REVENUES:
Royalty fees ............................................................................................................................................. $ 236,346 $ 211,645
Initial franchise and relicensing fees........................................................................................................ 33,389 29,629
Brand solutions ........................................................................................................................................ 16,283 13,945
Marketing and reservation ....................................................................................................................... 316,827 273,267
Hotel operations....................................................................................................................................... 4,692 4,505
Other ........................................................................................................................................................ 7,957 6,912
Total revenues ................................................................................................................................ 615,494 539,903
OPERATING EXPENSES:
Selling, general and administrative.......................................................................................................... 101,590 87,112
Depreciation and amortization................................................................................................................. 8,637 9,705
Marketing and reservation ....................................................................................................................... 316,827 273,267
Hotel operations....................................................................................................................................... 3,241 3,194
Total operating expenses ................................................................................................................ 430,295 373,278
Operating income..................................................................................................................................... 185,199 166,625
OTHER INCOME AND EXPENSES:
Interest expense........................................................................................................................................ 14,293 14,098
Interest and other investment income ...................................................................................................... (1,750) (2,041)
Equity in net income of affiliates............................................................................................................. (1,230) (1,052)
Loss on extinguishment of debt ............................................................................................................... — 342
Other income and expenses, net ..................................................................................................... 11,313 11,347
Income before income taxes .................................................................................................................... 173,886 155,278
Income taxes ............................................................................................................................................ 62,585 42,491
Net income............................................................................................................................................... $ 111,301 $ 112,787
Weighted average shares outstanding-diluted.......................................................................................... 65,331 67,050
Diluted earnings per share ....................................................................................................................... $ 1.70 $ 1.68
Management analyzes its business based on franchising revenues, which is total revenues excluding marketing and
reservation revenues and hotel operations, and franchise operating expenses that are reflected as selling, general and
administrative expenses.
Franchising Revenues: Franchising revenues were $294.0 million for the year ended December 31, 2007 compared
to $262.1 million for the year ended December 31, 2006. The growth in franchising revenues is primarily due to increases
in royalty revenues and initial and relicensing fees, brand solutions and other revenues of approximately 12%, 13%, 17%
and 15%, respectively.
Domestic royalty fees increased $18.6 million to $214.1 million from $195.5 million in 2006, an increase of 10%.
The increase in royalties is attributable to a combination of factors including a 4.3% increase in the number of domestic
franchised hotel rooms, a 4.0% increase in RevPAR and an increase in the effective royalty rate of the domestic hotel
31