What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-11-05 compared with 2020-08-06 · 189 added, 164 removed, 453 unchanged (44% of the section changed)

5 unchanged sentences

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

Initial franchise and relicensing fees

6 unchanged sentences

Marketing and reservation system

Provision for credit losses

Total operating expenses

8 unchanged sentences

Loss on extinguishment of debt

Other (gains) losses

Other gains, net

Equity in net loss of affiliates

Total other income and expenses, net

Income (loss) before income taxes

Income tax (benefit) expense

Net (loss) income

Basic (losses) earnings per share

Diluted (losses) earnings per share

Income before income taxes

Income tax expense (benefit)

Basic earnings per share

Diluted earnings per share

Cash dividends declared per share

5 unchanged sentences

Three Months Ended

Six Months Ended

Net (loss) income

Other comprehensive (loss) income, net of tax:

Nine Months Ended

September 30,

Other comprehensive income (loss), net of tax:

Amortization of loss on cash flow hedge

Foreign currency translation adjustment

Other comprehensive (loss) income, net of tax

Comprehensive (loss) income

Other comprehensive income (loss), net of tax

Comprehensive income

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

3 unchanged sentences

(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

June 30, 2020

September 30, 2020

December 31, 2019

34 unchanged sentences

160,000,000 shares authorized;

95,065,638 shares issued at June 30, 2020 and December 31, 2019;

55,363,895 and 55,702,628 shares outstanding at June 30, 2020 and December 31, 2019, respectively

95,065,638 shares issued at September 30, 2020 and December 31, 2019;

55,458,248 and 55,702,628 shares outstanding at September 30, 2020 and December 31, 2019, respectively

Additional paid-in-capital

Accumulated other comprehensive loss

Treasury stock, at 39,701,743 and 39,363,010 shares at June 30, 2020 and December 31, 2019, respectively

Treasury stock, at cost;

39,607,390 and 39,363,010 shares at September 30, 2020 and December 31, 2019, respectively

Retained earnings

6 unchanged sentences

(IN THOUSANDS)

Six Months Ended

Nine Months Ended

September 30,

CASH FLOWS FROM OPERATING ACTIVITIES:

4 unchanged sentences

Gain on disposal of assets

Provision for credit losses, net

Loss on sale of business

3 unchanged sentences

Non-cash stock compensation and other charges

Non-cash interest and other loss (income)

Non-cash interest and other income

Deferred income taxes

8 unchanged sentences

Payment on business disposition, net

Asset acquisition, net of cash acquired

Proceeds from sale of unconsolidated joint venture

Contributions to equity method investments

4 unchanged sentences

Collections of notes receivable

Proceeds from sale of tax credits

Other items, net

1 unchanged sentence

CASH FLOWS FROM FINANCING ACTIVITIES:

Net borrowings pursuant to revolving credit facilities

Net borrowings pursuant to term loan

Net (repayments) borrowings pursuant to revolving credit facilities

Proceeds from issuance of Term Loan

Proceeds from issuance of 2020 Senior Notes

Principal payments on long-term debt

Payments to extinguish long-term debt

Purchase of treasury stock

4 unchanged sentences

Proceeds from exercise of stock options

Net cash provided by (used in) financing activities

Net cash provided by financing activities

Net change in cash and cash equivalents

2 unchanged sentences

Cash and cash equivalents at end of period

CHOICE HOTELS INTERNATIONAL, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

(IN THOUSANDS)

Supplemental disclosure of cash flow information:

23 unchanged sentences

Balance as of June 30, 2019

Other comprehensive income (loss)

Share based payment activity

Dividends declared ($0.215 per share)

Treasury purchases

Balance as of September 30, 2019

Comprehensive

12 unchanged sentences

Balance as of June 30, 2020

Other comprehensive income (loss)

Share based payment activity (4)

Dividends declared (4)

Treasury purchases

Balance as of September 30, 2020

(1) Impact of adoption of Financial Accounting Standards Board ("FASB") Accounting Standards Update (“ASU”) No.

2014-09, Revenue From Contracts with Customers (Topic 606) and subsequent amendments to the initial guidance ("Topic 606") related to a foreign joint venture accounted for as an equity method investment.

(2) Impact of transaction resulting in an increase in ownership of a consolidated joint venture for the construction and operation of a Cambria Hotel.

(3) Reflects the cumulative effect of ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), which was adopted on January 1, 2020.

3 unchanged sentences

The dividend was payable on April 16, 2020 to shareholders of record on April 2, 2020.

In light of uncertainty resulting from the COVID-19 pandemic, we have taken the action to suspend future, undeclared dividends for at least the remainder of 2020.

In the second quarter of 2020, dividends were paid upon vesting of certain performance-based stock grants which are captured in Share based payment activity.

Subsequent to the payment of the dividend, in light of uncertainty resulting from the COVID-19 pandemic, we suspended future, undeclared dividends for at least the remainder of 2020.

In the second and third quarters of 2020, dividends were paid to certain shareholders upon vesting of certain performance-based stock grants which are captured in Share based payment activity.

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

25 unchanged sentences

The Company adopted Topic 326 on January 1, 2020 using the modified retrospective approach resulting in a cumulative-effect adjustment of $ 6.8 million (inclusive of deferred taxes) recorded in retained earnings as of the date of adoption.

The scope and provisions of Topic 326 most significantly impacted the allowance for the Company's Notes receivables.

While Trade receivables are in the scope, the provisions of Topic 326 did not significantly alter the accounting policy for allowance for trade receivables given the duration of such receivables is typically 30 days.

The scope and provisions of Topic 326 impact the allowance for the Company's Notes and Trade receivables.

During the three and nine months ended September 30, 2020 , the Company recorded provisions for credit losses of $ 3.7 million and $ 14.6 million , respectively, with contemplation to economic and credit conditions resulting from the COVID-19 pandemic and estimates of other expected credit losses.

Refer to Note 3 for further details on the adoption of Topic 326 and the impact to the Company's accounting policies for Notes receivable.

5 unchanged sentences

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40) :

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15").

ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain

internal-use software (and hosting arrangements that include an internal-use software license).

Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract

("ASU 2018-15").

The Company adopted ASU 2018-15 on a prospective basis on January 1, 2020.

18 unchanged sentences

Loyalty points are typically redeemed within three years of issuance.

Significant changes in the contract liabilities balances during the period December 31, 2019 to June 30, 2020 are as follows:

Significant changes in the contract liabilities balances during the period December 31, 2019 to September 30, 2020 are as follows:

(in thousands)

2 unchanged sentences

Revenue recognized in the period

Balance as of June 30, 2020

Balance as of September 30, 2020

Remaining Performance Obligations

The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $ 160.7 million as of June 30, 2020 .

This amount represents fixed transaction price that will be recognized as revenue in future periods, which is primarily captured in the consolidated balance sheet as current and non-current deferred revenue.

The aggregate amount of transaction price allocated to unsatisfied or partially unsatisfied performance obligations is $ 158.5 million as of September 30, 2020 .

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 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.

2 unchanged sentences

Three Months Ended

June 30, 2020

June 30, 2019

September 30, 2020

September 30, 2019

(in thousands)

7 unchanged sentences

Total revenues

Six Months Ended

June 30, 2020

June 30, 2019

Nine Months Ended

September 30, 2020

September 30, 2019

(in thousands)

8 unchanged sentences

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 $ 4.5 million and $ 4.1 million for the three months ended June 30, 2020 and 2019 , respectively, $ 15.4 million and $ 7.4 million for the six months ended June 30, 2020 and 2019 , respectively, and are included in the Over time column of Other revenues and the Owned Hotels and Non-Topic 606 revenues rows.

As presented in Note 11 , the Corporate & Other segment amounts represent $ 6.4 million and $ 10.2 million for the three months ended September 30, 2020 and 2019 , respectively, and $ 21.8 million and $ 17.6 million for the nine months ended September 30, 2020 and 2019 , respectively, and are included in the Over time column of Other revenues and the Owned Hotels and Non-Topic 606 revenues rows.

The remaining revenues relate to the Hotel Franchising segment.

Royalty fees and Marketing and reservation system revenues are presented net of $ 0.1 million in intersegment revenues for the three months ended June 30, 2020 and $ 0.9 million in intersegment revenues for the six months ended June 30, 2020 , as described in Note 11 .

Royalty fees and Marketing and reservation system revenues are presented net of intersegment revenues of $ 0.3 million and $ 0.8 million for the three months ended September 30, 2020 and 2019, respectively, and $ 1.2 million and $ 0.8 million for the nine months ended September 30, 2020 and 2019, respectively, as described in Note 11 .

Notes Receivable and Allowance for Credit Losses

The Company has provided financing in the form of notes receivable loans to franchisees to support the development of properties in strategic markets.

As of June 30, 2020 and December 31, 2019 , the Company had $ 143.7 million and $ 133.0 million , respectively, in notes receivable loans outstanding.

As of September 30, 2020 and December 31, 2019 , the Company had $ 139.7 million and $ 133.0 million , respectively, in notes receivable loans outstanding.

The Company has developed a systematic methodology to determine its allowance for credit losses across our portfolio of notes receivable loans.

10 unchanged sentences

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

7 unchanged sentences

Total notes receivable

As disclosed in Note 1 , Topic 326 requires a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance is effective.

As disclosed in Note 1 , Topic 326 required a cumulative-effect adjustment to the consolidated balance sheet as of the beginning of the first reporting period in which the guidance was effective.

As of the adoption date of January 1, 2020, the Company established a credit allowance on its notes receivable loans of $ 12.9 million , an increase from a previous loan allowance of $ 4.6 million as of December 31, 2019.

1 unchanged sentence

The following table summarizes the activity related to the Company’s notes receivable allowance for credit losses, including the impacts of adopting Topic 326.

The provisions recorded in the six months ended June 30, 2020 reflect the increased likelihood of adverse outcomes on loans to borrowers with contemplation to impacts of the COVID-19 pandemic and estimates of other expected credit losses.

The provisions recorded in the nine months ended September 30, 2020 reflect the increased likelihood of adverse outcomes on loans to borrowers with contemplation to impacts of the COVID-19 pandemic and estimates of other expected credit losses.

(in thousands)

June 30, 2020

September 30, 2020

December 31, 2019

5 unchanged sentences

Although the Company considers loans to be in default if payments are not received on the due date, the Company does not suspend the accrual of interest until those payments are more than 30 days past due.

The Company applies payments received for loans on non-accrual

status first to interest and then to principal.

The Company applies payments received for loans on non-accrual status first to interest and then to principal.

The Company does not resume interest accrual until all delinquent payments are received.

The amortized cost basis of notes receivable on non-accrual status was $ 29.9 million and $ 1.7 million at June 30, 2020 and December 31, 2019 , respectively.

The Company has identified loans totaling approximately $ 14.2 million and $ 16.3 million , respectively, with stated interest rates that are less than market rate, representing a total discount of $ 1.1 million and $ 1.3 million as of June 30, 2020 and December 31, 2019 , respectively.

The amortized cost basis of notes receivable on non-accrual status was $ 28.9 million and $ 1.7 million at September 30, 2020 and December 31, 2019 , respectively.

The Company has identified loans totaling approximately $ 13.1 million and $ 16.3 million , respectively, with stated interest rates that are less than market rate, representing a total discount of $ 1.0 million and $ 1.3 million as of September 30, 2020 and December 31, 2019 , respectively.

These discounts are reflected as a reduction of the outstanding loan amounts and are amortized over the life of the related loan.

2 unchanged sentences

Notes Receivable

As of June 30, 2020

As of September 30, 2020

As of December 31, 2019

The Company evaluated its off-balance-sheet credit exposure for loan commitments and determined the likelihood of having to perform is remote as of June 30, 2020 .

The Company evaluated its off-balance-sheet credit exposure for loan commitments and determined the likelihood of having to perform is remote as of September 30, 2020 .

Refer to Note 12 .

Variable Interest through Notes Issued

The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $ 125.8 million and $ 126.5 million as of June 30, 2020 and December 31, 2019 , respectively.

The Company has issued notes receivables to certain entities that have created variable interests in these borrowers totaling $ 121.5 million and $ 126.5 million as of September 30, 2020 and December 31, 2019 , respectively.

The Company has determined that it is not the primary beneficiary of these variable interest entities ("VIEs").

2 unchanged sentences

The Company maintains a portfolio of investments owned through noncontrolling interests in equity method investments with one or more partners.

The Company has equity method investments in joint ventures that represent VIEs totaling $ 72.7 million and $ 74.4 million on the consolidated balance sheets at June 30, 2020 and December 31, 2019 , respectively.

The Company has equity method investments in joint ventures that represent VIEs totaling $ 71.9 million and $ 74.4 million on the consolidated balance sheets at September 30, 2020 and December 31, 2019 , respectively.

These investments relate to the Company's program to offer equity support to qualified franchisees to develop and operate Cambria Hotels in strategic markets.

2 unchanged sentences

Although the Company is not the primary beneficiary of these VIEs, it does exercise significant influence through its equity ownership and as a result the Company's investment in these entities is accounted for under the equity method.

For the three months ended June 30, 2020 and 2019 , the Company recognized losses totaling $ 2.6 million and $ 1.6 million , respectively, from these investments.

For the six months ended June 30, 2020 and 2019 , the Company recognized losses totaling $ 4.6 million and $ 4.0 million , respectively, from these investments.

For the three months ended September 30, 2020 and 2019 , the Company recognized losses totaling $ 2.3 million and $ 6.9 million , respectively, from these investments.

For the nine months ended September 30, 2020 and 2019 , the Company recognized losses totaling $ 6.9 million and $ 10.9 million , respectively, from these investments.

The Company's maximum exposure to losses related to its investments in VIEs is limited to its equity investments as well as certain limited payment guaranties described in Note 12 of these financial statements.

Debt consists of the following:

June 30, 2020

September 30, 2020

December 31, 2019

(in thousands)

$400 million senior unsecured notes due 2022 with an effective interest rate of 6.0% less deferred issuance costs of $1.9 million and $2.3 million at June 30, 2020 and December 31, 2019, respectively

$400 million senior unsecured notes due 2029 with an effective interest rate of 3.88%, less a discount and deferred issuance costs of $5.7 million and $6.0 million at June 30, 2020 and December 31, 2019, respectively

$600 million senior unsecured revolving credit facility with an effective interest rate of 1.49% and 2.76%, less deferred issuance costs of $2.4 million and $2.7 million at June 30, 2020 and December 31, 2019, respectively

$250 million term loan due 2021 with an effective interest rate of 3.25%, less a discount and deferred issuance costs of $0.8 million at June 30, 2020

$400 million senior unsecured notes due 2022 with an effective interest rate of 6.0%, less deferred issuance costs of $0.9 million and $2.3 million at September 30, 2020 and December 31, 2019, respectively

$400 million senior unsecured notes due 2029 with an effective interest rate of 3.88%, less a discount and deferred issuance costs of $5.5 million and $6.0 million at September 30, 2020 and December 31, 2019, respectively

$600 million senior unsecured revolving credit facility with an effective interest rate of 2.76%, less deferred issuance costs of $2.7 million at December 31, 2019 (1)

$450 million senior unsecured notes due 2031 with an effective interest rate of 3.86%, less a discount and deferred issuance costs of $6.3 million at September 30, 2020

Construction loan with an effective interest rate of 6.23%, less deferred issuance costs of $0.6 million at December 31, 2019.

Fixed rate collateralized mortgage with an effective interest rate of 4.57%, plus a fair value adjustment of $0.1 million and $0.2 million at June 30, 2020 and December 31, 2019, respectively

Economic development loans with an effective interest rate of 3.0% at June 30, 2020 and December 31, 2019, respectively

Fixed rate collateralized mortgage with an effective interest rate of 4.57%, plus a fair value adjustment of $34 thousand and $0.2 million at September 30, 2020 and December 31, 2019, respectively

Economic development loans with an effective interest rate of 3.0% at September 30, 2020 and December 31, 2019, respectively

Current portion of long-term debt

Long-term debt

The Company increased borrowings on its senior unsecured revolving credit facility by $ 170.3 million and entered into a $ 250 million unsecured term loan in the six months ended June 30, 2020, primarily to increase liquidity in response to the COVID-19 pandemic.

The additional drawn amounts that were not otherwise utilized for operational purposes during the quarter are being held as cash on the Company’s consolidated balance sheet.

See the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.

(1) In September 2020, the Company utilized excess cash on hand to pay down its senior unsecured revolving credit facility balance in full.

As there are no outstanding borrowings at September 30, 2020 , deferred issuance costs of $ 2.5 million for the senior unsecured revolving credit facility are presented in non-current Other Assets in the Consolidated Balance Sheets.

In April 2020, the Company entered into a $ 250 million unsecured term loan (the "Term Loan") with a scheduled maturity date of April 15, 2021 .

In July 2020, the Company issued $ 450 million aggregate principal amount of 3.70 % senior unsecured notes due 2031 (the "2020 Senior Notes") and announced the early tender results of a cash tender offer (the "Tender Offer") for the purchase of approximately $ 183.4 million aggregate principal amount of the Company's 5.75 % senior unsecured notes due 2022 (the "2012 Senior Notes").

The Company used the net proceeds from the 2020 Senior Notes offering to repay the Term Loan in full and fund the $ 197.8 million purchase price of the 2012 Senior Notes tendered, inclusive of the aggregate principal, an early tender premium, settlement fees, and accrued interest paid.

As a result of the early redemption of the 2012 Senior Notes and the early payoff of the Term Loan, the Company recognized a total charge of $ 16.0 million loss on extinguishment of debt.

On February 18, 2020, the Company entered into the First Amendment (the "Amendment") to the Amended and Restated Senior Unsecured Credit Agreement (the “Credit Agreement”) among the Company, Deutsche Bank AG New York Branch, as administrative agent and the lenders party thereto.

The Amendment amended the Credit Agreement.

Prior to the Amendment, the Credit Agreement provided that if certain subsidiaries of the Company were to incur certain recourse debt or become obligors in respect of certain recourse debt of the Company or certain of its other subsidiaries, those obligated subsidiaries were required to guarantee the Company’s obligations under the unsecured revolving credit facility provided pursuant to the Restated Credit Agreement (the “springing guarantee”).

1 unchanged sentence

On March 5, 2020 , the Company paid off the construction loan in the amount $ 33.1 million inclusive of accrued and unpaid interest and recorded a loss on extinguishment of debt of $ 0.6 million .

On April 16, 2020 , the Company entered into a senior unsecured credit agreement, which provides for a $ 250 million unsecured term loan (the "Term Loan") with a scheduled maturity date of April 15, 2021 , subject to an optional one-year extension that can be requested by the Company prior to the initial maturity date, with any such extension subject to the consent of the lenders under the Credit Agreement and certain customary conditions.

On July 23, 2020 , the Company issued $ 450 million aggregate principal amount of 3.700 % senior unsecured notes due 2031 (the "2020 Senior Notes").

The 2020 Senior Notes mature on January 15, 2031.

Interest on the 2020 Senior Notes is payable semi-annually on January 15 th and July 15 th of each year, commencing January 15, 2021.

In connection with the closing of the sale of the 2020 Senior Notes, on July 23, 2020 , the Company announced the early tender results of a cash tender offer (the “Tender Offer”) for the purchase of approximately $ 183.4 million aggregate principal amount of the Company’s 5.750 % senior unsecured notes due 2022 (the “2012 Senior Notes”).

The Company used the net proceeds of the 2020 Senior Note offering, after deducting underwriting discounts, commissions and other offering expenses, to repay the Term Loan in full and fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for purchase pursuant to the Tender Offer.

In contemplation of the Term Loan repayment from proceeds of the 2020 Senior Note issuance, the Term Loan has been classified as a long-term liability at June 30, 2020.

On August 12, 2020, the Company executed a one-year extension on the senior unsecured credit facility for $ 525 million of the $ 600 million total capacity in exchange for a fee of $ 0.3 million .

The extended maturity date is August 20, 2025.

Refer to Note 12 and the Liquidity and Capital Resources header of "Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information.

Accumulated Other Comprehensive Loss

The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the six months ended June 30, 2020 and 2019 :

The following represents the changes in accumulated other comprehensive loss, net of tax, by component for the nine months ended September 30, 2020 and 2019 :

(in thousands)

4 unchanged sentences

Net current period other comprehensive income (loss)

Balance as of June 30, 2020

Balance as of September 30, 2020

(in thousands)

5 unchanged sentences

Net current period other comprehensive income (loss)

Balance as of June 30, 2019

During the three and six months ended June 30, 2019 , $ 0 and $ 0.4 million , respectively, was reclassified from accumulated other comprehensive loss to Interest expense in the Company's Consolidated Statements of Income with reference to a cash flow hedge loss on an interest rate contract.

Balance as of September 30, 2019

During the three and nine ended September 30, 2019 , $ 0.2 million and $ 0.6 million , respectively, was reclassified from accumulated other comprehensive loss to Interest expense in the Company's Consolidated Statements of Income with reference to a cash flow hedge loss on an interest rate contract.

There was no income tax expense or benefit.

There were no amounts reclassified during the three and six months ended June 30, 2020 , as the debt related to the Interest rate contract was paid off in December 2019.

There were no amounts reclassified during the three and nine months ended September 30, 2020 , as the debt related to the Interest rate contract was paid off in December 2019.

Fair Value Measurements

8 unchanged sentences

Unobservable inputs, supported by little or no market data available, where the reporting entity is required to develop its own assumptions to determine the fair value of the instrument.

The Company does not currently have any assets recorded at fair value whose fair value was determined using Level 3 inputs and there were no transfers of Level 3 assets during the three and six months ended June 30, 2020 .

As of June 30, 2020 and December 31, 2019 , the Company had the following assets recorded in the consolidated balance sheets measured at fair value on a recurring basis:

As of September 30, 2020 and December 31, 2019 , the Company had the following assets recorded in the consolidated balance sheets measured at fair value on a recurring basis:

Fair Value Measurements at Reporting Date Using

(in thousands)

As of June 30, 2020

As of September 30, 2020

Mutual funds (1)

5 unchanged sentences

Other financial instruments disclosure

The Company believes that the fair value of its current assets and current liabilities, including the Term Loan prior to its repayment in July 2020, approximate their reported carrying amounts due to the short-term nature of these items.

The Company believes that the fair value of its current assets and current liabilities approximate their reported carrying amounts due to the short-term nature of these items.

In addition, the interest rates of the Company's senior unsecured revolving credit facility adjust frequently based on current market rates;

4 unchanged sentences

For further information on notes receivable, refer to Note 3 .

The fair values of the Company's $ 400 million senior unsecured notes due 2022 and $ 400 million senior unsecured notes due 2029 are classified as Level 2, as the significant inputs are observable in an active market.

At June 30, 2020 and December 31, 2019 , the $ 400 million senior unsecured notes due 2022 had an approximate fair value of $ 423.3 million and $ 432.0 million , respectively.

At June 30, 2020 and December 31, 2019 , the $ 400.0 million senior unsecured notes due 2029 had an approximate fair value of $ 400.6 million and $ 403.4 million , respectively.

The fair values of the Company's $ 400 million 2012 Senior Notes, $ 400 million senior unsecured notes due 2029 and $ 450 million 2020 Senior Notes are classified as Level 2, as the significant inputs are observable in an active market.

At December 31, 2019 , the $ 400 million 2012 Senior Notes had an approximate fair value of $ 432.0 million .

On July 23, 2020, the Company purchased approximately $ 183.4 million aggregate principal amount of the 2012 Senior Notes.

At September 30, 2020 , the $ 216.6 million remaining 2012 Senior Notes had an approximate fair value of $ 231.7 million .

At September 30, 2020 and December 31, 2019 , the $ 400.0 million senior unsecured notes due 2029 had an approximate fair value of $ 426.8 million and $ 403.4 million , respectively.

At September 30, 2020 , the $ 450 million 2020 Senior Notes had an approximate fair value of $ 474.7 million .

Fair value estimates are made at a specific point in time, are subjective in nature and involve uncertainties and matters of significant judgment.

Settlement of such fair value amounts may not be possible and may not be a prudent management decision.

The effective income tax rates were 11.8 % and 21.0 % for the three months ended June 30, 2020 and 2019 , respectively.

The effective income tax rates were ( 92.3 )% and 20.0 % for the six months ended June 30, 2020 and 2019 , respectively.

The effective income tax rate for the three months ended June 30, 2020 was lower than the U.S.

federal income tax rate of 21.0% due to excess tax benefits from share-based compensation and the impact of foreign operations, partially offset by state income taxes and a change in estimated uncertain tax positions.

The effective income tax rate for the three months ended June 30, 2019 was the same as the U.S.

federal income tax rate of 21.0% due to excess tax benefits from share-based compensation of $ 1.0 million and the impact of foreign operations, offset by state income taxes.

The effective income tax rates were 39.4 % and 11.3 % for the three months ended September 30, 2020 and 2019 , respectively.

The effective income tax rates were ( 30.8 )% and 16.6 % for the nine months ended September 30, 2020 and 2019 , respectively.

On January 1, 2018, the Company adopted ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other than Inventory ("ASU 2016-16"), which provides guidance on recognition of current income tax consequences for inter-company asset transfers (other than inventory) at the time of transfer.

1 unchanged sentence

In accordance with ASU 2016-16, the Company recorded the $ 30.6 million benefit and a corresponding deferred tax asset in the first quarter of 2020.

The effective income tax rate for the six months ended June 30, 2020 was lower than the U.S.

federal income tax rate of 21.0% due to this $ 30.6 million benefit, $ 2.7 million of excess tax benefits from share-based compensation, and the impact of foreign operations, partially offset by state income taxes and a change in estimated uncertain tax positions.

The effective income tax

rate for the six months ended June 30, 2019 was lower than the U.S.

federal income tax rate of 21.0% due to excess tax benefits from share-based compensation of $ 3.0 million and the impact of foreign operations, partially offset by state income taxes.

Due to a decrease in the forecasted income of international entities resulting from adverse impacts of the COVID-19 pandemic, the Company recorded a valuation allowance of $ 5.1 million in the third quarter of 2020 reflecting a change in the anticipated realizability of this deferred tax asset.

The effective income tax rate for the three months ended September 30, 2020 was higher than the U.S.

federal income tax rate of 21.0% due to the establishment of a valuation allowance of $ 5.1 million and state income taxes, partially offset by the impact of foreign operations, a $ 1.5 million adjustment to our deferred taxes, and $ 0.7 million of excess tax benefits from share-based compensation.

The effective income tax rate for the three months ended September 30, 2019 was lower than the U.S.

income tax rate of 21.0% due to $ 12.2 million of tax credits recognized in the period, $ 0.3 million of excess tax benefits from share-based compensation and the impact of foreign operations, offset by state income taxes.

The effective income tax rate for the nine months ended September 30, 2020 was lower than the U.S.

federal income tax rate of 21.0% due to the impacts of ASU-2016 and the corresponding valuation allowance, $ 3.4 million of excess tax benefits from share-based compensation, an adjustment to our deferred taxes, and the impact of foreign operations, partially offset by state income taxes and a change in estimated uncertain tax positions.

The effective income tax rate for the nine months ended September 30, 2019 was lower than the U.S.

federal income tax rate of 21.0% due to $ 12.2 million of tax credits recognized in the period, $ 3.3 million of excess tax benefits from share-based compensation and the impact of foreign operations, partially offset by state income taxes.

Share-Based Compensation and Capital Stock

The components of the Company’s pretax share-based compensation activity and associated income tax (expense) benefit are as follows for the three and six months ended June 30, 2020 and 2019 :

Three Months Ended June 30,

Six Months Ended June 30,

The components of the Company’s pretax share-based compensation activity and associated income tax benefit are as follows for the three and nine months ended September 30, 2020 and 2019 :

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

2 unchanged sentences

Performance vested restricted stock units

Total share-based compensation expense (benefit)

Income tax expense (benefit)

Total share-based compensation expense

Income tax benefit

Refer to the discussion of Performance Vested Restricted Stock Units (“PVRSUs”) leveraging for unvested grants below.

A summary of stock-based award activity as of June 30, 2020 and changes during the six months ended are presented below:

A summary of stock-based award activity as of and changes during the nine months ended September 30, 2020 are presented below:

Stock Options

5 unchanged sentences

Exercised/Vested

Outstanding at June 30, 2020

Options exercisable at June 30, 2020

(1) PVRSUs outstanding have been increased by 30,116 units due to the Company exceeding the targeted performance conditions contained in PVRSUs granted in prior periods which vested in the three months ending June 30, 2020 .

Outstanding at September 30, 2020

Options exercisable at September 30, 2020

The stock options granted by the Company had an exercise price equal to the market price of the Company's common stock on the date of grant.

7 unchanged sentences

Weighted average fair value of options granted (per option)

The fair value of restricted stock grants is measured by the market price of the Company's common stock on the date of grant.

Restricted stock awards generally vest ratably over the service period beginning with the first anniversary of the grant date.

Vesting service period of shares granted during the six months ended June 30, 2020 range from 12 to 48 months .

The Company has granted PVRSUs to certain employees.

The vesting of these stock awards is contingent upon the Company achieving performance targets over a 36 month requisite service period and the employees' continued employment.

The performance conditions affect the number of shares that will ultimately vest and can range between 0 % and 200 % of the shares

Management monitors the leveraging of unvested PVRSUs and adjusts the leveraging percentages based on estimated achievement of performance targets.

During the six months ended June 30, 2020 , the Company reduced the leveraging factor for 239,437 unvested PVRSUs to 0 % , based on management's estimate of achievement of performance targets with contemplation to impacts from the COVID-19 pandemic, contained in PVRSUs granted in the current and prior periods.

Vesting service period of shares granted during the nine months ended September 30, 2020 range from 12 to 48 months .

The Company grants two types of PVRSU awards:

PVRSUs with performance conditions based on internal performance metrics and PVRSUs with market conditions based on the Company's total shareholder return ("TSR") relative to a predetermined peer group.

The vesting of PVRSU stock awards is contingent upon the Company achieving internal performance or TSR targets over a specified period and the employees' continued employment for a service period.

These performance and market conditions affect the number of shares that will ultimately vest.

During the three months ended September 30, 2020 , PVRSU awards granted had a service period of 31 months with award vesting ranges between 0 % and 200 % of the initial units granted.

The fair value of PVRSUs based on internal performance metrics is measured by the market price of the Company's common stock on the date of award grant.

Compensation expense is recognized ratably over the requisite service period based on the Company's estimate of the achievement of the performance conditions.

Management monitors current results and forecasts of the relevant internal performance metrics and, as necessary, adjusts the performance-based leveraging of unvested PVRSUs.

During the nine months ended September 30, 2020 , the Company reduced the leveraging factor for 230,647 unvested PVRSUs granted in the current and prior periods to 0 % , based on management's estimate of achievement of performance targets with contemplation to impacts from the COVID-19 pandemic.

The fair value of TSR PVRSUs are estimated using a Monte Carlo simulation method as of the date of award grant.

Compensation expense is recognized ratably over the requisite service period, regardless of whether the market conditions are achieved and the awards ultimately vest.

Share Repurchases and Redemptions

There were no purchases of common stock under the share repurchase program during the three months ended June 30, 2020 .

The Company purchased 548,031 shares of common stock under the share repurchase program at a total cost of $ 43.3 million during six months ended June 30, 2020 .

During the three and six months ended June 30, 2020 , the Company redeemed 6,525 and 115,525 shares of common stock at a total cost of approximately $ 0.5 million and $ 11.2 million , respectively, from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants.

There were no purchases of common stock under the share repurchase program during the three months ended September 30, 2020 .

The Company purchased 548,031 shares of common stock under the share repurchase program at a total cost of $ 43.3 million during the nine months ended September 30, 2020 .

During the three and nine months ended September 30, 2020 , the Company redeemed 7,504 and 123,029 shares of common stock at a total cost of approximately $ 0.7 million and $ 11.9 million , respectively, from employees to satisfy the option exercise price and statutory minimum tax-withholding requirements related to the exercising of stock options and vesting of performance vested restricted stock units and restricted stock grants.

These redemptions were outside the share repurchase program.

2 unchanged sentences

Earnings Per Share

The computation of basic and diluted (losses) earnings per common share is as follows:

The computation of basic and diluted earnings per common share is as follows:

Three Months Ended

Six Months Ended

Nine Months Ended

September 30,

(in thousands, except per share amounts)

Net (loss) income

Loss (income) allocated to participating securities

Net (loss) income available to common shareholders

Income allocated to participating securities

Net income available to common shareholders

Weighted average common shares outstanding – basic

Basic (losses) earnings per share

Net (loss) income

Loss (income) allocated to participating securities

Net (loss) income available to common shareholders

Basic earnings per share

Income allocated to participating securities

Net income available to common shareholders

Weighted average common shares outstanding – basic

1 unchanged sentence

Weighted average common shares outstanding – diluted

Diluted (losses) earnings per share

Diluted earnings per share

The Company's unvested restricted shares contain rights to receive nonforfeitable dividends, and thus are participating securities requiring the two-class method of computing earnings per share ("EPS").

The calculation of EPS for common stock shown above excludes the income attributable to the unvested restricted share awards from the numerator and excludes the dilutive impact of those awards from the denominator.

The Company had 1.0 million outstanding stock options at both June 30, 2020 and 2019 .

As of both September 30, 2020 and 2019 , the Company had 0.9 million outstanding stock options.

Stock options are included in the diluted EPS calculation using the treasury stock method and average market prices during the period, unless the stock options would be anti-dilutive.

For the three months ended June 30, 2020 , 1.0 million anti-dilutive stock options were excluded from the diluted EPS calculation.

For the six months ended June 30, 2020 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.

For the three months ended June 30, 2019 , no anti-dilutive stock options were excluded from the diluted EPS

For the six months ended June 30, 2019 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.

For both the three and nine months ended September 30, 2020 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.

For the three months ended September 30, 2019 , no anti-dilutive stock options were excluded from the diluted EPS calculation.

For the nine months ended September 30, 2019 , 0.2 million anti-dilutive stock options were excluded from the diluted EPS calculation.

PVRSUs are also included in the diluted EPS calculation when the performance conditions have been met at the reporting date.

However, at June 30, 2020 and 2019 , PVRSUs totaling 245,593 and 315,561 , respectively, were excluded from the computation since the performance conditions had not been met.

However, at September 30, 2020 and 2019 , PVRSUs totaling 233,713 and 314,795 , respectively, were excluded from the computation since the performance conditions had not been met.

Reportable Segment Information

7 unchanged sentences

The Company evaluates its hotel franchising segment based primarily on the results of the segment without allocating corporate expenses, income taxes or indirect general and administrative expenses, which are included in the Corporate & Other column.

Corporate & Other revenues include owned hotel revenues and rental income related to an office building owned by the Company, as well as revenues related to the Company's vacation rental activities and its SaaS technology solutions divisions which provide cloud-based property management software to non-franchised hoteliers and vacation rental management companies.

Corporate & Other revenues include owned hotel revenues and rental income related to a commercial office building owned by the Company, as well as revenues related to the Company's SaaS technology solutions divisions which provide cloud-based property management software to non-franchised hoteliers.

Equity in earnings or losses from hotel franchising related joint ventures is allocated to the Company's hotel franchising segment.

3 unchanged sentences

The following table presents the financial information for the Company's segments:

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

(in thousands)

3 unchanged sentences

Income (loss) before income taxes

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

Nine Months Ended September 30, 2020

Nine Months Ended September 30, 2019

(in thousands)

10 unchanged sentences

The maximum exposure of principal incidental to these limited payment guaranties is $ 5.7 million , plus unpaid expenses and accrued unpaid interest.

As of June 30, 2020 and December 31, 2019 , the Company believed the likelihood of having to perform under the aforementioned limited payment guaranties was remote.

As of September 30, 2020 and December 31, 2019 , the Company believed the likelihood of having to perform under the aforementioned limited payment guaranties was remote.

In the event of performance, the Company has recourse for one of the transactions in the form of a membership interest pledge as collateral for the guaranty.

The Company has the following commitments outstanding at June 30, 2020 :

The Company has the following commitments outstanding at September 30, 2020 :

The Company provides financing in the form of franchise agreement acquisition payments to franchisees for property improvements, hotel development efforts and other purposes.

These payments are typically made at commencement of construction or hotel opening, in accordance with agreed upon provisions in individual franchise agreements.

At June 30, 2020 , the Company had commitments to extend an additional $ 288.2 million for these purposes provided the conditions of the payment are met by its franchisees.

At September 30, 2020 , the Company had commitments to extend an additional $ 290.0 million for these purposes provided the conditions of the payment are met by its franchisees.

To the extent existing unconsolidated joint ventures proceed to the hotel construction phase, the Company is committed to make capital contributions totaling $ 8.8 million to support their efforts to construct Cambria hotels.

The Company committed to provide financing in the form of mezzanine loans or credit facilities to franchisees for Choice brand development efforts.

The Company has committed to provide an aggregate of approximately $ 15.6 million , upon certain conditions being met.

As of June 30, 2020 , $ 13.4 million have been disbursed.

In the third quarter of 2020, the Company has committed to provide an aggregate of approximately $ 1.0 million , upon certain conditions being met.

As of September 30, 2020 , no amounts have been disbursed.

In March 2018, the Company entered into a construction loan agreement for the rehabilitation and development of a former office building into a hotel through a consolidated joint venture with a commercial lender, which is secured by the building.

9 unchanged sentences

In addition, these parties are also generally indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement.

While some of these indemnities extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute

of limitations).

There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under these indemnities, nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these indemnifications as the triggering events are not subject to predictability.

2 unchanged sentences

The Company has a management fee arrangement for marketing services with a joint venture partner.

For the three months ended June 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.1 million and $ 0.6 million , respectively.

For the six months ended June 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.5 million and $ 0.9 million , respectively.

For the three months ended September 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.5 million and $ 0.8 million , respectively.

For the nine months ended September 30, 2020 and 2019 , fees earned and payroll costs reimbursed under this arrangement totaled $ 0.9 million and $ 1.7 million , respectively.

The Company has entered into franchise agreements with certain of the unconsolidated joint ventures discussed in Note 4 .

Pursuant to these franchise agreements, for the three months ended June 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of approximately $ 2.2 million and $ 7.0 million , respectively.

For the six months ended June 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of approximately $ 6.8 million and $ 11.6 million , respectively.

The Company recorded $ 1.8 million and $ 1.4 million as a receivable due from these joint ventures as of June 30, 2020 and December 31, 2019 , respectively.

In addition, the Company paid commissions of $ 12 thousand and $ 0.1 million for three months ended June 30, 2020 and 2019 , respectively, and $ 49 thousand and $ 0.1 million for the six months ended June 30, 2020 and 2019 , respectively, to an on-line travel agent for which the Company is a joint venture member.

Subsequent Events

On July 9, 2020 , the Company announced it entered into an underwriting agreement for the issuance and sale of the 2020 Senior Notes.

Concurrent with the offering of the 2020 Senior Notes, the Company commenced the Tender Offer to purchase up to $ 160.0 million aggregate principal of the 2012 Senior Notes, subject to increase or decrease.

The Tender Offer was subsequently upsized to $ 180.0 million aggregate principal amount of the 2012 Senior Notes.

On July 23, 2020 , the Company closed its sale of $ 450.0 million aggregate principal amount of the 2020 Senior Notes.

The Company used the net proceeds of the 2020 Senior Notes offering, after deducting underwriting discounts, commissions and other offering expenses, to repay the Term Loan in full and fund the purchase price of the 2012 Senior Notes tendered and accepted by the Company for purchase pursuant to the Tender Offer.

We estimate the 2012 Senior Notes tender and full repayment of the Term Loan will result in a loss on extinguishment of debt of approximately $ 16.0 million in the third quarter of 2020.

Interest on the 2020 Senior Notes is payable semi-annually on January 15 th and July 15 th of each year, commencing on January 15, 2021.

The interest rate payable on the 2020 Senior Notes will be subject to adjustment based on certain rating events.

The Company may redeem the 2020 Senior Notes, in whole or in part, at its option at the applicable redemption price before maturity.

If the Company redeems the 2020 Senior Notes prior to October 15, 2030 (three months prior to the maturity date), the redemption price will be equal to 100 % of the principal amount of the 2020 Senior Notes being redeemed plus accrued and unpaid interest thereon to, but not including, the redemption date.

Additionally, at the option of the holders of the 2020 Senior Notes, the Company may be required to repurchase all or a portion of the 2020 Senior Notes of a holder upon the occurrence of a change of control event at a price equal to 101 % of their aggregate principal amount, plus accrued and unpaid interest, to the date of repurchase.

Additionally, on July 23, 2020 , the Company issued a press release announcing the early tender results and an increase in the aggregate principal maximum tender amount from $ 180.0 million to $ 183.4 million .

The Tender Offer expired on August 5, 2020 .

Pursuant to these franchise agreements, for the three months ended September 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of approximately $ 3.6 million and $ 7.4 million , respectively.

For the nine months ended September 30, 2020 and 2019 , the Company recorded royalty and marketing reservation system fees of

approximately $ 10.4 million and $ 19.0 million , respectively.

The Company recorded $ 2.4 million and $ 1.4 million as a receivable due from these joint ventures as of September 30, 2020 and December 31, 2019 , respectively.

Impairment of Long-Lived Assets

On December 30, 2014, a court awarded the Company title to a commercial office building as settlement of a portion of an outstanding loan receivable for which the building was pledged as collateral.

At the time of settlement, a single tenant fully occupied the building.

The initial lease term expiration is in December 2020 and the tenant has extension options for up to 30 years .

The tenant has recently provided notice that the lease renewal options will not be exercised.

Management identified this as a triggering event requiring the interim reevaluation of the commercial office building's long-lived assets, comprised of $ 11.1 million in property and equipment and $ 0.2 million in intangible assets.

Recoverability of the long-lived asset group is assessed based on net, undiscounted expected cash flows of the asset group.

We have prepared undiscounted expected cash flows aligned with Management’s present long-term strategy for the building and concluded the undiscounted expected cash flows are less than the carrying amount of the asset group.

An impairment charge was recorded for the excess of the carrying value over the fair value of the asset group.

To estimate the fair value of the long-lived asset group, the Company utilized a combination of market and income approach valuation methods.

The Company recognized a non-cash pretax long-lived asset group impairment charge in the amount of $ 4.3 million .

The results of the commercial office building are included in the Corporate & Other segment in Note 11 .

The impairment charge does not have an impact on the Company's liquidity or compliance with financial covenants under existing debt arrangements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements