Choice Hotels International, Inc. (NYSE: CHH) today announced that the Company will change its practice of accounting for royalty and certain marketing and reservation fees in order to comply with generally accepted accounting principles in the United States by reporting these fees in the same period that the underlying gross room revenues are earned by the Company's franchisees rather than one month in arrears, as more fully described below. This change will result in immaterial upward adjustments to annual statements and will result in certain quarterly and interim periods being restated.
The Company believes that this change in the timing of its revenue recognition is more consistent with how other hotel companies report similar fees and will make it easier for analysts and investors to compare the Company's results to those of other hotel companies.
The Company also announced that it is raising its guidance for full-year 2014 for diluted EPS, EBITDA and other metrics, as described in more detail further below.
Restatements of Quarterly Periods
The impact of this correction to the Company's revenue recognition practice is expected to result in immaterial upwards revisions of total revenues, operating income and earnings per share for the Company's annual financial statements for each of the years ended December 31, 2013, 2012 and 2011. Due to the seasonality of its business, the impact of this change on previously reported quarterly revenues, operating income and earnings per share as reported in the Company's consolidated income statements varies for individual past quarters and is generally positive in the first two quarters of the year and negative in the final two quarters of the year. The impact on certain prior quarterly and interim periods is expected to be material, and as a result, the Company will restate its previously issued financial statements for the interim periods ended March 31, 2014 and September 30, 2013and corresponding prior year periods through the filing of amended Quarterly Reports on Form 10-Q for the periods ended March 31, 2014 and September 30, 2013. In addition, the Company will restate its previously-issued interim financial statements for the periods ended June 30, 2013 in connection with its Quarterly Report on Form 10-Q for the quarter ended June 30, 2014.
None of the adjustments impact previously reported cash balances or reported net change in cash or cash equivalents for any period. The adjustments do not impact the Company's day-to-day operations, liquidity or materially alter previously reported year-over-year earnings growth rate trends. Additionally, the adjustments do not impact management compensation for any previous period.
Background on Restatement
In connection with the Company's preparation of its second quarter 2014 financial statements, the Company reviewed its accounting policies and practices, including its historical practice of reporting royalty and certain marketing and reservation fees one month in arrears. As a result of this review, on August 4, 2014, the Audit Committee of the Company's Board of Directors, after consultation with management and its current and former independent registered public accounting firms, determined that the Company needed to change its accounting for these fees in order to comply with GAAP by reporting these fees in the same period that the underlying gross room revenues are earned by our franchisees rather than one month in arrears.
Under a practice that was initiated prior to the Company becoming a public company in 1997, the Company historically has recognized royalty and certain marketing and reservation fee revenues one month in arrears as compared to when the related gross room revenues (on which the fees are based) are earned by the Company's franchisees. The Company believes that the initial implementation of this practice more than 17 years ago was due to the fact that the Company historically relied on a manual, paper based system used by our franchisees to report gross room revenues, which are required to calculate royalty and certain marketing and reservation fees. Over time, the Company developed electronic reporting capabilities to gather franchisee gross room revenue information and, therefore, reliable information became available on which to estimate these fees in the current month. The Company did not previously revise its revenue recognition practice with respect to these fees because it believed that its prior practice, while not consistent with GAAP, was not material to its financial statements.
This historical practice has been consistently applied since 1997 in the Company's annual and quarterly financial reports and previously disclosed as it relates to the RevPAR statistics that correspond with the Company's previously reported revenues in its prior periodic reports as well as its prior quarterly earnings releases and conference calls. As a result, the Company believes this historical practice was well understood by the investment community.
The estimated adjustments related to the above as well as the correction of other immaterial items to certain annual and quarterly periods, based on currently available information, can be found in Exhibit 1.
Further information about the restatement can be found in the Company's Form 8-K filed today with the SEC.
Based upon the Company's preliminary year-to-date results through June 30, 2014 and management's assessment of expected business conditions for the back-half of 2014 and including the anticipated impact of the change in accounting for revenues related to royalty and certain marketing and reservation fees described above, the Company expects for full-year 2014:
- Diluted EPS to range between $1.92 and $1.96.
- Consolidated EBITDA to range between $211 million and $214 million.
- Approximately $2.5 million of the $3 million increase of the mid-point of our consolidated EBITDA outlook compared to the outlook we furnished on April 28, 2014 in conjunction with our first quarter 2014 earnings announcement is due to year-to-date performance through June 30, 2014 and anticipated improved operating fundamentals and performance for the second-half of 2014. The remainder of the increase is due to the change in accounting for royalty and certain marketing and reservation fees described above.
- Domestic unit growth to range between 1% and 2%.
- Domestic RevPAR growth to range between 6.25% and 7.25%.
- Domestic effective royalty rate to decrease by 4 basis points.
- Consistent with our outlook released on April 28, 2014, consolidated EBITDA excludes the three company-owned Mainstay Suites hotels which generated EBITDA of approximately $1.1 million in 2013. Diluted EPS projections for full-year 2014 include a gain on the sale of these three hotels totaling $0.03 per share.
- The effective tax rate for continuing operations is expected to be 30.7%.
- All figures assume no repurchases of common stock under the company's share repurchase program.
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