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We believe these value drivers, when properly implemented, will enhance our profitability, maximize our financial returns and continue to generate value for our shareholders. The ultimate measure of our success will be reflected in the items below.
Results of Operations. Royalty fees, operating income, net income and diluted earnings per share represent key measurements of these value drivers. In 2003, royalty fees revenue totaled approximately $151.3 million, a 6% increase from 2002. Operating income totaled $114.0 million in 2003, a 9% increase from 2002. Net income increased to $71.9 million, an 18% increase from 2002. Diluted earnings per share were $1.96, a 29% improvement over 2002. Net income and diluted earnings per share include a $3.4 million gain from the prepayment of a note receivable during 2003. These measurements will continue to be a key management focus in 2004 and beyond. Refer to MD&A heading “Operations Review” for additional analysis of our results.
Liquidity and Capital Resources. In 2003, net cash provided by operating activities was $115.5 million, a 17% increase from 2002. Since our business does not require significant reinvestment of capital, we utilize cash in ways that management believes provides the greatest returns to our shareholders which include share repurchases and dividends. We believe the Company’s cash flow from operations and available financing capacity are sufficient to meet the expected future operating, investing and financing needs of the business.
Refer to MD&A heading “Liquidity and Capital Resources” for additional analysis.
The principal factors that affect the Company’s results are: the number and relative mix of franchised hotels; growth in the number of hotels under franchise; occupancy and room rates achieved by the hotels under franchise; the effective royalty rate achieved; and our ability to manage costs. The number of rooms at franchised properties and occupancy and room rates at those properties significantly affect the Company’s results because our fees are based upon room revenues at franchised hotels. The key industry standard for measuring hotel operating performance is revenue per available room (“RevPAR”), which is calculated by multiplying the percentage of occupied rooms by the average daily room rate realized. Our variable overhead costs associated with franchise system growth have historically been less than incremental royalty fees generated from new franchisees. Accordingly, continued growth of our franchise business should enable us to realize benefits from the operating leverage in place and improve operating results.
Operations Review
Comparison of 2003 Operating Results and 2002 Operating Results
The Company recorded net income of $71.9 million for the year ended December 31, 2003, an increase of $11.1 million from $60.8 million for the year ended December 31, 2002. Net income in 2003 included a $3.4 million gain on the prepayment of the Sunburst Hospitality note. In addition to the note prepayment gain, the increase in net income for the period is attributable to improved operating income resulting from a $15.0 million, or 8.7%, increase in franchise revenues partially offset by increased selling, general and administrative costs.
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