8-K

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 8-K

CURRENT REPORT

PURSUANT TO SECTION 13 OR 15 (d) OF THE

SECURITIES EXCHANGE ACT OF 1934

Date of Report (Date of earliest event reported): October 28, 2004

CHOICE HOTELS INTERNATIONAL, INC.

(Exact name of registrant as specified in its charter)

Delaware	001-13393	52-1209792
(State or other jurisdiction of incorporation)	(Commission File Number)	(IRS Employer Identification Number)

10750 Columbia Pike, Silver Spring, Maryland	20901
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (301) 592-5000

Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):

¨ Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)

¨ Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)

¨ Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))

¨ Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))

Item 2.02. Results of Operations and Financial Condition

On October 28, 2004, Choice Hotels International, Inc. issued a press release announcing earnings for the quarter ended September 30, 2004. A copy of the release is furnished herewith as Exhibit 99.1.

Item 9.01. Financial Statements and Exhibits.

(c) Exhibit 99.1—Press Release issued by Choice Hotels International, Inc. dated October 28, 2004.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

Date: October 29, 2004	/s/ Joseph M. Squeri
	Joseph M. Squeri
	Executive Vice President and Chief Financial Officer

EX-99.1

Exhibit 99.1

Contact: John Hawkins	Joseph M. Squeri
Vice President,	Executive Vice President
Corporate Communications	and Chief Financial Officer
Tel: (301) 592-5075	Tel: (301) 592-5006
Fax: (301) 592-6177
john_hawkins@choicehotels.com

For Immediate Release

CHOICE HOTELS REPORTS 3rd QUARTER EARNINGS PER SHARE

GAIN OF 11% AND OPERATING INCOME INCREASE OF 7%

Domestic Unit Growth Rises 5.4%; New Domestic Hotel

Franchise Contracts Exceed 350 Year to Date, Up 20%

SILVER SPRING, Md. (October 28, 2004) – Choice Hotels International, Inc. (NYSE:CHH) today reported the following highlights for the third quarter of 2004:

• Diluted earnings per share for the third quarter was $0.73, an 11% increase compared to $0.66 in the third quarter of 2003;

• Adjusted diluted EPS for the third quarter up 16% to $0.74, excluding the effects of third quarter 2004 debt extinguishment costs, compared to $0.64 for third quarter 2003, excluding interest earned in that quarter related to a note receivable from Sunburst, which was repaid in December 2003;

• Domestic unit growth of 5.4%;

• Year-to-date net domestic property additions were 160 hotels, up 34%;

• Year-to-date new domestic hotel franchise contracts up 20% to 354;

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• The domestic hotel pipeline is up more than 17% to 397 hotels representing 30,776 rooms; the worldwide pipeline grew 15% to 492 hotels, representing 39,127 rooms;

• Year-to-date royalty revenues up 10%;

• Year-to-date total revenues up 11%;

• Third quarter operating income up 7% to $42.5 million.

“We added nearly 6,000 rooms to the domestic hotel system in the third quarter and close to 15,000 rooms during the last twelve months,” said Charles A. Ledsinger, Jr., president and chief executive officer. “We are extremely pleased with this robust development, as unit growth is critical to our financial success. We now have almost 500 hotels under development worldwide. As evidenced by a 34% increase in net domestic hotel additions this year, our sharp focus on bringing properties on-line quickly has paid off.”

He added, “We also are greatly encouraged by growth of almost 30% in new construction projects year-to-date, which enhances the overall quality of the system. As we continue to focus on enhancing consistency in our brands, we will be better positioned to build guest loyalty through improved guest satisfaction.”

Third Quarter Performance

Choice reported third quarter 2004 net income of $24.9 million, or $0.73 diluted earnings per share (EPS), an 11% increase in diluted EPS over the same period of a year ago. At the end of third quarter 2003, the company reported net income of $24.3 million, or $0.66 diluted EPS.

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The company also reported total revenues of $127.5 million for third quarter 2004, compared to $105.9 million for the same period in 2003, an increase of 20%. Franchising revenues, which include royalty revenues, initial and relicensing fees, partner services and other revenue, for the third quarter of 2004 were $61.1 million, an increase of 9% from the $56.3 million reported in the same period a year ago.

Royalty revenues for third quarter 2004 were $51.8 million, compared to $48.3 million for the same period in 2003, an increase of 7%.

System-wide domestic revenue per available room (RevPAR) was $44.35 in third quarter 2004, compared to $43.44 for the third quarter of 2003, an increase of 2%.

For the first nine months of 2004, Choice reported net income of $54.0 million or $1.55 diluted EPS, increases of 6% and 12% respectively over the $51.1 million and $1.38 diluted EPS reported for the first nine months of 2003. Operating income through September 30, 2004 increased 9% to $93.5 million, compared to $85.7 million for the same period a year ago. Franchising margins increased to 61.9% for the nine months ended September 30, 2004 compared to 61.4% for the same period in 2003.

Total revenues were $321.9 million for the nine months ended September 30, 2004, an increase of 11%, compared to $290.9 million for the same period in 2003. Franchising revenues for the first nine months of 2004 increased 8% to $150.0 million, compared to $138.7 million for the same period a year ago.

Royalty revenues for the first nine months of 2004 were $124.2 million, compared to $113.2 million for the same period a year ago, an increase of 10%. Domestic RevPAR was $35.95 for the first nine months of 2004, compared to $34.50 for the first nine months of 2003, a gain of 4%.

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Net income and diluted EPS for the third quarter and nine months ended September 30, 2004 include a loss of approximately $0.7 million ($0.4 million, net of the related tax effect) related to the extinguishment of debt. This item represented diluted EPS of $0.01 for the three and nine months ended September 30, 2004.

Net income and diluted earnings per share for the quarter and nine months ended September 30, 2003 included approximately $1.2 million ($0.7 million, net of the related tax effect) and $3.5 million ($2.2 million, net of the related tax effect) respectively of interest income attributable to a note receivable from Sunburst Hospitality Corporation, which was repaid to the Company in December 2003. Revenues, operating income, net income and diluted earnings per share for the nine months ended September 30, 2003 also included approximately $1.7 million ($1.1 million, net of the related tax effect) of liquidated damages received from Sunburst for franchise terminations. Those items represented diluted EPS of $0.02 and $0.09 respectively for the three and nine months ended September 30, 2003.

2004 Unit Growth

The total number of domestic Choice hotels on-line grew by 5.4% to 3,796 (306,797 rooms on-line) as of September 30, 2004 from 3,601 (291,827 rooms on-line) as of the same period a year ago. Net domestic property additions in the third quarter of 2004 were 73 compared to 39 net domestic additions in the same period of 2003, an 87% increase. For the first nine months of this year, net domestic property additions were 160, an increase of 34% compared to 119 for the same period of a year ago.

Choice executed 122 new domestic hotel franchise contracts representing 10,162 rooms in third quarter 2004, compared to 108 new contracts representing 8,269 rooms for the same period a year ago, increases of approximately 13% and 23% respectively. For

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the year 2004 through September 30, Choice has executed 354 new domestic hotel franchise contracts, representing 30,149 rooms, compared to 294 contracts, representing 25,964 rooms, for the same period in 2003, increases of 20% and 16% respectively. These increases in executed contracts and an increase in the number of existing franchise relicensings have contributed to 22% and 20% increases in initial franchise and relicensing fees respectively for the three and nine months ended September 30, 2004, compared to the same periods in 2003.

In third quarter 2004, 40 contracts for new construction hotels, representing 2,732 rooms were executed, compared to 30 contracts, representing 2,052 rooms for the same period a year ago, each representing an increase of approximately 33%. For the nine months ended September 30, 2004, 100 contracts for new construction hotels representing 6,868 rooms were executed, both representing increases of better than 27%, compared to 78 contracts, representing 5,399 rooms, for new construction hotels for the same period a year ago.

As of September 30, 2004, the total number of Choice hotels worldwide grew 4% to 4,959 from 4,773 as of the same date a year ago. This growth represents an increase of 5% in the number of rooms open to 402,519 from 384,814. At the end of third quarter 2004, Choice had 492 hotels under development worldwide, representing 39,127 rooms, compared to 426 hotels and 35,417 rooms in 2003, increases of 15% and 10%, respectively.

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Use of Free Cash Flow

The company has consistently used the free cash flow generated from its operations to return value to its shareholders. This is primarily achieved through share repurchases and, more recently, dividends.

During the third quarter of this year, the company purchased 0.4 million shares of common stock at a total cost of $21.6 million. For the nine months ended September 30, 2004, the company purchased 2.3 million shares of common stock at a total cost of $101.3 million. The company has remaining authorization to purchase up to 2.8 million shares. Since Choice announced its stock repurchase program on June 25, 1998, the company has purchased 31.6 million shares of common stock at an average price of $19.49 per share and a total cost of $616 million, as of October 28, 2004. Total shares outstanding as of September 30, 2004, are 33.0 million.

On September 15, 2004, Choice’s Board of Directors declared a cash dividend of $0.225 on outstanding shares of common stock payable on October 22, 2004 to holders of record on October 8, 2004. This dividend represents a 12.5% increase over the previous quarterly rate of $0.20 and raises the indicated annual dividend rate on the company’s common stock from $0.80 to $0.90 per share.

The company expects to continue to return value to its shareholders through a combination of share repurchases and dividends.

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Fourth Quarter & Full-Year 2004

The company’s fourth quarter 2004 diluted EPS is expected to be $0.53 to $0.55. Full year 2004 diluted EPS is expected to be $2.09 to $2.11, excluding the effect of the third quarter 2004 loss on extinguishment of debt. These estimates assume the existing share count and RevPAR growth in the fourth quarter of approximately 6% to 7%.

Non-GAAP Financial Measures

Franchising revenues, franchising margins and adjusted diluted EPS are non-GAAP financial measurements. These financial measurements are presented as supplemental disclosures because they are used by management in reviewing and analyzing the company’s performance. This information should not be considered as an alternative to any measure of performance as promulgated under accounting principles generally accepted in the United States (GAAP), such as total revenues, operating income margins and diluted EPS. The company’s calculation of these measurements may be different from the calculation used by other companies and therefore comparability may be limited. The company has included an exhibit accompanying this release which reconcile these measures to the comparable GAAP measurement.

Conference Call

Choice will conduct a conference call on Friday, October 29, 2004 at 10 a.m. Eastern time to discuss the third quarter and year-to-date 2004 results. The call-in number to listen to the call is 1-800-553-5260. The conference call also will be Webcast simultaneously via the company’s Web site, www.choicehotels.com.

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The audio of the call will be archived and available on the company’s Web site and also available for replay until November 29, 2004 by calling 1-800-475-6701. The access code for the replay is: 745600.

Choice Hotels International franchises more than 4,900 hotels, representing approximately 400,000 rooms, in the United States and 40 other countries and territories. As of September 30, 2004, 397 hotels are under development in the United States, representing 30,776 rooms, and an additional 95 hotels, representing 8,351 rooms, are under development in 22 countries and territories. Its Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and MainStay Suites brands serve guests worldwide.

# # #

Certain matters discussed in this press release may constitute forward-looking statements within the meaning of the federal securities law. Such statements are based on management’s beliefs, assumptions and expectations, which in turn are based on information currently available to management. Actual performance and results could differ from those expressed in or contemplated by the forward-looking statements due to a number of risks, uncertainties and other factors, many of which are beyond Choice’s ability to predict or control. For further information on factors that could impact Choice and the statements contained therein, we refer you to the filings made by Choice with the Securities and Exchange Commission, including its Form 10-K for the period ended December 31, 2003.

Additional corporate information may be found on the Choice Hotels’ Internet site, which may be accessed at www.choicehotels.com.

Comfort Inn, Comfort Suites, Quality, Clarion, Sleep Inn, Econo Lodge, Rodeway Inn and MainStay Suites are registered trademarks, service marks and trade names of Choice Hotels International, Inc.

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Exhibit 1

Choice Hotels International, Inc.

Consolidated Statements of Income

(Unaudited)

	Three Months Ended						Nine Months Ended
(In thousands, except per share amounts)	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
REVENUES:
Royalty fees	$	51,846		$	48,346		$	124,237		$	113,196
Initial franchise and relicensing fees		4,927			4,026			13,546			11,285
Partner services		3,027			2,953			9,282			9,630
Marketing and reservation		65,380			48,639			169,109			149,549
Hotel operations		1,018			955			2,762			2,739
Other		1,312			974			2,984			4,547
Total revenues		127,510			105,893			321,920			290,946
OPERATING EXPENSES:
Selling, general and administrative		16,374			14,135			49,612			45,037
Depreciation and amortization		2,489			2,583			7,525			8,472
Marketing and reservation		65,380			48,639			169,109			149,549
Hotel operations		778			764			2,150			2,217
Total operating expenses		85,021			66,121			228,396			205,275
Operating income		42,489			39,772			93,524			85,671
OTHER INCOME AND EXPENSES:
Interest expense		2,921			2,893			8,277			8,985
Interest and other investment income		(99	)		(1,675	)		(767	)		(4,917	)
Loss on extinguishment of debt		696			—			696			—
Total other income and expenses		3,518			1,218			8,206			4,068
Income before income taxes		38,971			38,554			85,318			81,603
Income taxes		14,055			14,209			31,305			30,460
Net income	$	24,916		$	24,345		$	54,013		$	51,143
Weighted average shares outstanding-basic		32,807			35,635			33,489			36,045
Weighted average shares outstanding-diluted		34,259			36,745			34,870			36,936
Basic earnings per share	$	0.76		$	0.68		$	1.61		$	1.42
Diluted earnings per share	$	0.73		$	0.66		$	1.55		$	1.38

Exhibit 2

Choice Hotels International, Inc.

Consolidated Balance Sheets

(In thousands)	September 30, 2004			December 31, 2003
	(Unaudited)
ASSETS
Cash and cash equivalents	$	30,548		$	20,031
Accounts receivable, net		42,500			33,631
Deferred income taxes		2,256			1,957
Other current assets		3,377			3,613
Total current assets		78,681			59,232
Fixed assets and intangibles, net		141,055			150,256
Receivable - marketing and reservation fees		21,315			32,368
Other assets		29,566			25,416
Total assets		270,617			267,272
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current portion of long-term debt		8,746			23,829
Other current liabilities		86,005			78,382
Total current liabilities		94,751			102,211
Long-term debt		299,379			222,823
Deferred income taxes		13,195			21,562
Other liabilities		38,163			38,863
Total liabilities		445,488			385,459
Total shareholders’ deficit		(174,871	)		(118,187	)
Total liabilities and shareholders’ deficit	$	270,617		$	267,272

Exhibit 3

Choice Hotels International, Inc.

Consolidated Statements of Cash Flow

(Unaudited)

	Nine Months Ended
(In thousands)	September 30, 2004			September 30, 2003
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	54,013		$	51,143
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		7,525			8,472
Provision for bad debts		215			213
Non-cash stock compensation		3,100			1,489
Non-cash interest and other investment income		(215	)		(1,032	)
Loss on extinguishment of debt		695			—
Equity in net income of affiliates		(451	)		(335	)
Changes in assets and liabilities, net of acquisitions:
Receivables		(9,032	)		(5,602	)
Receivable—marketing and reservation fees, net		18,222			13,438
Current liabilities		22			2,362
Income taxes payable and current other assets		10,356			10,628
Deferred income taxes, other non current assets and liabilities		(9,227	)		929
NET CASH PROVIDED BY OPERATING ACTIVITIES		75,223			81,705
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in property and equipment		(4,266	)		(7,076	)
Proceeds from disposition of property		—			498
Acquisition of flag		—			(1,211	)
Issuance of notes receivable		(1,781	)		(3,244	)
Purchases of investments, net		(2,772	)		(418	)
Other items, net		(431	)		344
NET CASH USED IN INVESTING ACTIVITIES		(9,250	)		(11,107	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt		383,425			66,800
Principal payments of long-term debt		(454,000	)		(78,573	)
Net borrowings (repayments) pursuant to revolving credit facility		132,000			(16,000	)
Debt issue costs		(1,010	)		—
Purchase of treasury stock		(101,336	)		(43,725	)
Dividends paid		(20,125	)		—
Proceeds from exercise of stock options		5,590			4,370
NET CASH USED IN FINANCING ACTIVITIES		(55,456	)		(67,128	)
Net change in cash and cash equivalents		10,517			3,470
Cash and cash equivalents at beginning of period		20,031			12,227
CASH AND CASH EQUIVALENTS AT END OF PERIOD	$	30,548		$	15,697

Exhibit 4

CHOICE HOTELS INTERNATIONAL, INC.

SUPPLEMENTAL OPERATING INFORMATION BY BRAND

DOMESTIC HOTEL SYSTEM

(UNAUDITED)

	Three Months Ended						Nine Months Ended
	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
COMFORT INN
Hotels		1,433			1,404			1,433			1,404
Rooms		112,323			110,646			112,323			110,646
Avg. Daily Rate	$	70.21		$	68.84		$	65.47		$	64.48
Occupancy%		69.7	%		69.3	%		59.7	%		58.1	%
RevPAR	$	48.95		$	47.74		$	39.06		$	37.44
COMFORT SUITES
Hotels		383			367			383			367
Rooms		30,210			29,057			30,210			29,057
Avg. Daily Rate	$	76.49		$	75.21		$	73.95		$	73.23
Occupancy%		71.7	%		69.6	%		64.2	%		61.4	%
RevPAR	$	54.87		$	52.34		$	47.45		$	44.94
QUALITY
Hotels		549			503			549			503
Rooms		56,522			51,865			56,522			51,865
Avg. Daily Rate	$	68.88		$	70.52		$	64.24		$	65.36
Occupancy%		63.4	%		61.7	%		54.2	%		51.6	%
RevPAR	$	43.68		$	43.52		$	34.80		$	33.71
CLARION
Hotels		157			135			157			135
Rooms		23,555			20,385			23,555			20,385
Avg. Daily Rate	$	74.98		$	76.29		$	72.33		$	72.82
Occupancy%		58.4	%		57.5	%		51.3	%		49.3	%
RevPAR	$	43.82		$	43.84		$	37.07		$	35.92
SLEEP
Hotels		311			305			311			305
Rooms		23,807			23,387			23,807			23,387
Avg. Daily Rate	$	62.94		$	61.02		$	59.44		$	58.27
Occupancy%		67.4	%		66.7	%		59.3	%		57.2	%
RevPAR	$	42.45		$	40.71		$	35.23		$	33.33
MAINSTAY
Hotels		27			24			27			24
Rooms		2,150			1,903			2,150			1,903
Avg. Daily Rate	$	64.37		$	64.46		$	60.78		$	62.08
Occupancy%		67.9	%		72.4	%		61.1	%		62.8	%
RevPAR	$	43.71		$	46.65		$	37.14		$	39.00
ECONO LODGE
Hotels		770			728			770			728
Rooms		47,468			45,504			47,468			45,504
Avg. Daily Rate	$	53.38		$	52.59		$	48.97		$	48.17
Occupancy%		56.7	%		57.6	%		48.3	%		47.9	%
RevPAR	$	30.26		$	30.27		$	23.64		$	23.06
RODEWAY
Hotels		166			135			166			135
Rooms		10,762			9,080			10,762			9,080
Avg. Daily Rate	$	57.92		$	56.65		$	53.13		$	50.65
Occupancy%		58.6	%		54.8	%		48.5	%		45.2	%
RevPAR	$	33.93		$	31.05		$	25.78		$	22.91
TOTAL CHOICE - DOMESTIC
Hotels		3,796			3,601			3,796			3,601
Rooms		306,797			291,827			306,797			291,827
Avg. Daily Rate	$	67.80		$	67.08		$	63.70		$	63.06
Occupancy%		65.4	%		64.8	%		56.4	%		54.7	%
RevPAR	$	44.35		$	43.44		$	35.95		$	34.50
Effective Royalty Rate		4.04	%		4.03	%		4.04	%		4.00	%

Exhibit 5

CHOICE HOTELS INTERNATIONAL, INC.

SUPPLEMENTAL INFORMATION

CALCULATION OF FRANCHISING REVENUES AND FRANCHISING MARGINS

(UNAUDITED)

	Three Months Ended						Nine Months Ended
(dollar amounts in thousands)	September 30, 2004			September 30, 2003			September 30, 2004			September 30, 2003
Franchising Revenues:
Total Revenues	$	127,510		$	105,893		$	321,920		$	290,946
Adjustments:
Marketing and Reservation Revenues		(65,380	)		(48,639	)		(169,109	)		(149,549	)
Hotel Operations		(1,018	)		(955	)		(2,762	)		(2,739	)
Franchising Revenues	$	61,112		$	56,299		$	150,049		$	138,658
Franchising Margins:
Operating Margin:
Total Revenues	$	127,510		$	105,893		$	321,920		$	290,946
Operating Income	$	42,489		$	39,772		$	93,524		$	85,671
Operating Margin		33.3	%		37.6	%		29.1	%		29.4	%
Franchising Margin:
Franchising Revenues	$	61,112		$	56,299		$	150,049		$	138,658
Operating Income	$	42,489		$	39,772		$	93,524		$	85,671
Less: Hotel Operations		240			191			612			522
	$	42,249		$	39,581		$	92,912		$	85,149
Franchising Margins		69.1	%		70.3	%		61.9	%		61.4	%

Exhibit 6

CHOICE HOTELS INTERNATIONAL, INC.

SUPPLEMENTAL INFORMATION

CALCULATION OF ADJUSTED NET INCOME AND ADJUSTED DILUTED EARNINGS PER SHARE (EPS)

(UNAUDITED)

	Three Months Ended					Nine Months Ended
(In thousands, except per share amounts)	September 30, 2004		September 30, 2003			September 30, 2004		September 30, 2003
Adjusted Net Income
Net Income	$	24,916	$	24,345		$	54,013	$	51,143
Adjustments:
Debt Extinguishment Costs		433					433
Interest Income Attributable to a Note Receivable from Sunburst Hospitality Corporation (Sunburst)		—		(731	)		—		(2,195	)
Liquidated Damages from Sunburst for Franchise Terminations		—		—			—		(1,058	)
Adjusted Net Income	$	25,349	$	23,614		$	54,446	$	47,890
Weighted average shares outstanding-diluted		34,259		36,745			34,870		36,936
Diluted Earnings Per Share	$	0.73	$	0.66		$	1.55	$	1.38
Adjustments:
Debt Extinguishment Costs		0.01		—			0.01		—
Interest Income Attributable to a Note Receivable from Sunburst Hospitality Corporation (Sunburst)		—		(0.02	)		—		(0.06	)
Liquidated Damages from Sunburst for Franchise Terminations		—		—			—		(0.03	)
Adjusted Diluted Earnings Per Share (EPS)	$	0.74	$	0.64		$	1.56	$	1.29