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MTN > SEC Filings for MTN > Form 10-K on 25-Sep-2012All Recent SEC Filings

Show all filings for VAIL RESORTS INC

Form 10-K for VAIL RESORTS INC


25-Sep-2012

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Consolidated Financial Statements and notes related thereto included in this Form 10-K. To the extent that the following Management's Discussion and Analysis contains statements which are not of a historical nature, such statements are forward-looking statements which involve risks and uncertainties. These risks include, but are not limited to, those discussed in Item 1A, "Risk Factors" in this Form 10-K. The following discussion and analysis should be read in conjunction with the Forward-Looking Statements section and Item 1A, "Risk Factors" each included in this Form 10-K.
Management's Discussion and Analysis includes discussion of financial performance within each of our segments. We have chosen to specifically include Reported EBITDA (defined as segment net revenue less segment operating expense, plus or minus segment equity investment income or loss and for the Real Estate segment, plus gain on sale of real property) and Net Debt (defined as long-term debt plus long-term debt due within one year less cash and cash equivalents), in the following discussion because we consider these measurements to be significant indications of our financial performance and available capital resources. Reported EBITDA and Net Debt are not measures of financial performance or liquidity under GAAP. We utilize Reported EBITDA in evaluating our performance and in allocating resources to our segments. Refer to the end of the Results of Operations section for a reconciliation of Reported EBITDA to net income attributable to Vail Resorts, Inc. We also believe that Net Debt is an important measurement as it is an indicator of our ability to obtain additional capital resources for our future cash needs. Refer to the end of the Results of Operations section for a reconciliation of Net Debt.
Items excluded from Reported EBITDA and Net Debt are significant components in understanding and assessing financial performance or liquidity. Reported EBITDA and Net Debt should not be considered in isolation or as an alternative to, or substitute for, net income, net change in cash and cash equivalents or other financial statement data presented in the Consolidated Financial Statements as indicators of financial performance or liquidity. Because Reported EBITDA and Net Debt are not measurements determined in accordance with GAAP and are thus susceptible to varying calculations, Reported EBITDA and Net Debt as presented may not be comparable to other similarly titled measures of other companies.

Overview
Our operations are grouped into three integrated and interdependent segments:
Mountain, Lodging and Real Estate. Resort is the combination of the Mountain and Lodging segments. Revenue from the Mountain, Lodging and Real Estate segments represented 75%, 21% and 4%, respectively, of our net revenue for Fiscal 2012. Mountain Segment
The Mountain segment is comprised of the operations of seven ski resort properties at the Vail, Breckenridge, Keystone and Beaver Creek mountain resorts in Colorado ("Colorado" resorts) and the Heavenly, Northstar and Kirkwood (acquired on April 12, 2012) mountain resorts in the Lake Tahoe area of California and Nevada ("Tahoe" resorts) as well as ancillary services, primarily including ski school, dining and retail/rental operations. Our seven ski resorts were open for business for the 2011/2012 ski season primarily from mid-November through mid-April, which is the peak operating season for the Mountain segment. Our single largest source of Mountain segment revenue is the sale of lift tickets (including season passes), which represented approximately 45%, 46% and 45% of Mountain segment net revenue for Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively.

Lift ticket revenue is driven by volume and pricing. Pricing is impacted by both absolute pricing as well as the demographic mix of guests, which impacts the price points at which various products are purchased. The demographic mix of guests is divided into two primary categories: (i) out-of-state and international ("Destination") guests and (ii) in-state and local ("In-State") guests. For the 2011/2012 and the 2010/2011 ski seasons, Destination guests comprised approximately 57% of our skier visits, while In-State guests comprised approximately 43% of our skier visits, which compares to approximately 58% and 42%, respectively, for the 2009/2010 ski season.

Destination guests generally purchase our higher-priced lift ticket products and utilize more ancillary services such as ski school, dining and retail/rental, as well as lodging at or around our resorts. Destination guest visitation is less likely to be impacted by changes in the weather, but can be more impacted by adverse economic conditions or the global geopolitical climate. In-State guests tend to be more value-oriented and weather sensitive. We offer a variety of season pass products for all of our ski resorts, marketed towards both Destination and In-State guests. Our season pass product offerings range from providing access to a combination of our resorts to our Epic Season Pass that allows pass holders unlimited and unrestricted access to all of our ski resorts. Our season pass products provide a value option to our guests, which in turn assists us in


developing a loyal base of customers who commit to ski at our resorts generally in advance of the ski season and typically ski more days each season at our resorts than those guests who do not buy season passes. As such, our season pass program drives strong customer loyalty; mitigates exposure to many weather sensitive guests; and generates additional ancillary spending. In addition, our season pass products attract new guests to our resorts. All of our season pass products, including the Epic Season Pass, are sold predominately prior to the start of the ski season. Season pass revenue, although primarily collected prior to the ski season, is recognized in the Consolidated Statement of Operations ratably over the ski season. For the 2011/2012, 2010/2011 and 2009/2010 ski seasons approximately 40%, 35% and 35%, respectively, of total lift ticket revenue recognized was comprised of season pass revenue.
The cost structure of our ski resort operations has a significant fixed component with variable expenses including, but not limited to, Forest Service fees, credit card fees, retail/rental cost of sales and labor, ski school labor and dining operations; as such, profit margins can fluctuate greatly based on the level of revenues.
Lodging Segment
Operations within the Lodging segment include (i) ownership/management of a group of luxury hotels through the RockResorts brand, the majority of which are proximate to our ski resorts; (ii) ownership/management of non-RockResorts branded hotels and condominiums proximate to our ski resorts; (iii) NPS concessionaire properties including GTLC; (iv) CME, a resort ground transportation company; and (v) golf courses.

The performance of lodging properties (including managed condominium rooms) proximate to our ski resorts, and CME, is closely aligned with the performance of the Mountain segment and generally experiences similar seasonal trends, particularly with respect to visitation by Destination guests, and represented approximately 67%, 69% and 67% of Lodging segment net revenue (excluding Lodging segment revenue associated with reimbursement of payroll costs) for Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively. Management primarily focuses on Lodging net revenue excluding payroll cost reimbursement and Lodging operating expense excluding reimbursed payroll costs (which are not measures of financial performance under GAAP) as the reimbursements are made based upon the costs incurred with no added margin, as such the revenue and corresponding expense have no effect on our Lodging Reported EBITDA which we use to evaluate Lodging segment performance. Revenue of the Lodging segment during our first and fourth fiscal quarters is generated primarily by the operations of our NPS concessionaire properties (as their operating season generally occurs from mid-May to mid-October); golf operations and seasonally low operations from our other owned and managed properties and businesses. Real Estate Segment
The Real Estate segment owns and develops real estate in and around our resort communities and primarily engages in vertical development of projects. Currently, the principal activities of our Real Estate segment include the marketing and selling of remaining condominium units that are available for sale, planning for future real estate development projects, including zoning and acquisition of applicable permits and the purchase of selected strategic land parcels for future development. Revenue from vertical development projects is not recognized until closing of individual units within a project, which occurs after substantial completion of the project. We attempt to mitigate the risk of vertical development by often utilizing guaranteed maximum price construction contracts (although certain construction costs may not be covered by contractual limitations), pre-selling a portion of the project, requiring significant non-refundable deposits, and potentially obtaining non-recourse financing for certain projects (although our last two major vertical development projects have not incurred any such direct third party financing). Additionally, our real estate development projects most often result in the creation of certain resort assets that provide additional benefit to the Mountain and Lodging segments. Our revenue from the Real Estate segment, and associated expense, can fluctuate significantly based upon the timing of closings and the type of real estate being sold, causing volatility in the Real Estate segment's operating results from period to period.
Recent Trends, Risks and Uncertainties
The data provided in this section should be read in conjunction with the risk factors identified in Item 1A and elsewhere in this Form 10-K. We have identified the following important factors (as well as uncertainties associated with such factors) that could impact our future financial performance:

             The timing and amount of snowfall can have an impact on Mountain
              and Lodging revenue particularly in regards to skier visits and the
              duration and frequency of guest visitation. To help mitigate this
              impact, we sell a variety of season pass products prior to the
              beginning of the ski season resulting in a more stabilized stream
              of lift revenue. Additionally, our season pass products provide a
              value option to our guests, which in turn creates a guest
              commitment predominantly prior to the start of the ski season. In
              March 2012, we began our pre-season pass sales program for the
              2012/2013 ski season. Through September 23, 2012, our pre-season
              pass sales for the upcoming 2012/2013 ski season (including
              Kirkwood for both the current and


prior year, which prior year includes pass sales that occurred before our acquisition of Kirkwood) have increased approximately 17% in units and increased approximately 21% in sales dollars, compared to the prior year period ended September 25, 2011. We cannot predict if this favorable trend will continue through the fall 2012 pass sales campaign, nor can we predict the overall impact that season pass sales will have on lift ticket revenue for the 2012/2013 ski season.

             In Fiscal 2012 there was unprecedented low snowfall conditions
              throughout the ski season across the United States that resulted in
              a reduction of approximately 9.6 million, or 15.8%, visits industry
              wide and a 12.1% decline in our total visitation as compared to the
              prior year which had record snowfall. Despite the decline in
              visitation our lift revenue and ancillary services revenue did not
              decline at those levels given the strength of our operating model,
              including the high proportion of season pass sales, the demographic
              mix of our guests, and the quality of our mountain resorts,
              including significant snowmaking capabilities. There can be no
              certainty that snowfall levels will return to historical averages
              for the 2012/2013 ski season or the impact to advance bookings,
              guest travel, season pass sales, lift ticket revenue (excluding
              season passes), retail/rental sales or other ancillary services
              revenue next season as a result of last season's low snowfall or if
              snowfall levels do not return to their historical average levels.


             Weak economic conditions currently present or recently present in
              the United States, Europe and parts of the rest of the world
              including high unemployment, erosion of consumer confidence,
              sovereign debt issues, and financial instability in the global
              markets, may potentially have negative effects on the travel and
              leisure industry and on our results of operations. Given the
              current uncertainties around global economic trends, we cannot
              predict what impact this will have on overall travel and leisure or
              more specifically, on our guest visitation, guest spending or other
              related trends for the upcoming 2012/2013 ski season.


             In Fiscal 2012, our lift ticket revenue was favorably impacted by
              price increases that were implemented during the 2011/2012 ski
              season which was offset by lower skier visitation excluding season
              pass holders which we believe was a result of historically low
              snowfall. Prices for the 2012/2013 ski season have not yet been
              finalized; and as such, there can be no assurances as to the level
              of price increases, if any, which will occur and the impact that
              pricing may have on visitation or revenue.


             In July 2012, we announced our new comprehensive summer activities
              plan for Epic Discovery, a Summer Mountain Adventure at Vail
              Mountain. The plan includes a number of new activities, including
              among other activities, zip lines, ropes courses, mountain
              excursions and Forest Flyers. The construction of the new
              activities and amenities at Vail Mountain will be implemented in
              two phases based upon permitting and approvals. We anticipate
              investing approximately $25.0 million in resort capital
              expenditures for both phases. Similar sized plans are being
              finalized for Breckenridge and Heavenly with smaller scale
              improvements planned for our other resorts. We anticipate that if
              our proposed plans are approved and implemented, and once these
              summer activities mature, we could realize substantial incremental
              summer guest visitation and revenue. However, our new summer
              activities plan may not generate the initial projected revenue and
              profit margins we expect, and even if our plans are successful, we
              do not expect that these enhanced summer operations will fully
              mitigate the seasonal losses that our mountain operations
              experience from late spring to late fall.


             Real Estate Reported EBITDA is highly dependent on, among other
              things, the timing of closings on condominium units available for
              sale, which determines when revenue and associated cost of sales is
              recognized. Changes to the anticipated timing or mix of closing on
              one or more real estate projects, or unit closings within a real
              estate project, could materially impact Real Estate Reported EBITDA
              for a particular quarter or fiscal year. We currently have 32 units
              at The Ritz-Carlton Residences, Vail and 41 units at One Ski Hill
              Place in Breckenridge available for sale. We cannot predict the
              ultimate number of units that we will sell, the ultimate price we
              will receive, or when the units will sell, although we currently
              believe the selling process will take multiple years. Additionally,
              if a prolonged weakness in the real estate market or general
              economic conditions were to occur we may have to adjust our selling
              prices more than currently anticipated in an effort to sell and
              close on units available for sale. However, our risk associated
              with adjusting selling prices to levels that may not be acceptable
              to us is partially mitigated by the fact that we do generate cash
              flow from placing unsold units into our rental program until such
              time selling prices are at acceptable levels to us. Furthermore, if
              the current weakness in the real estate market were to persist for
              multiple years thus requiring us to sell remaining units below
              recent pricing levels (including any sales concessions and
              discounts) for the remaining inventory of units at The Ritz-Carlton
              Residences, Vail or One Ski Hill Place in Breckenridge, it may
              result in an impairment charge on one or both projects (see
              Critical Accounting Policies in this section of this Form 10-K).


             We had $46.1 million in cash and cash equivalents as of July 31,
              2012 as well as $332.7 million available


under the revolver component of our Credit Agreement (which represents the total commitment of $400.0 million less certain letters of credit outstanding of $67.3 million). Additionally, we believe that the terms of our 6.50% Notes and our Credit Agreement allow for sufficient flexibility in our ability to make future acquisitions, investments, distributions to stockholders and incur additional debt. This, combined with the completion of our real estate projects where the proceeds from future real estate closings on The Ritz-Carlton Residences, Vail, and One Ski Hill Place in Breckenridge are expected to significantly exceed future carrying costs, and the continued positive cash flow from operating activities less capital expenditures has and is anticipated to continue to provide us with significant liquidity which we believe will allow us to consider strategic investments and other forms of providing return to our stockholders including the continued payment of a quarterly cash dividend. We cannot predict that any strategic initiatives undertaken will achieve the anticipated results.
On March 5, 2012, our Board of Directors approved a 25% increase to the annual cash dividend to an annual rate of $0.75 per share, subject to quarterly declaration. This increased our regular quarterly cash dividend on our common stock by approximately $1.3 million (or approximately $5.3 million annually). Our dividends have been funded through available cash on hand. Subject to the discretion of the Board of Directors, applicable law and contractual restrictions, we anticipate paying regular quarterly dividends on our common stock for the foreseeable future. The amount, if any, of the dividends to be paid in the future will depend upon our available cash on hand, anticipated cash needs, overall financial condition, restrictions contained in our Credit Agreement and the Indenture governing our 6.50% Notes, future prospects for earnings and cash flows, as well as other factors considered relevant by our Board of Directors.

             Under GAAP we test goodwill and indefinite-lived intangible assets
              for impairment annually as well as on an interim basis to the
              extent factors or indicators become apparent that could reduce the
              fair value of our reporting units or indefinite-lived intangible
              assets below book value and we evaluate long-lived assets for
              potential impairment whenever events or change in circumstances
              indicate that the carrying amount of an asset may not be
              recoverable. We evaluate the recoverability of our goodwill by
              estimating the future discounted cash flows of our reporting units
              and terminal values of the businesses using projected future levels
              of income as well as business trends, prospects and market and
              economic conditions. We evaluate the recoverability of
              indefinite-lived intangible assets using the income approach based
              upon estimated future revenue streams, and we evaluate long-lived
              assets based upon estimated undiscounted future cash flows. Our
              Fiscal 2012 annual impairment test did not result in a goodwill or
              indefinite-lived intangible asset impairment (see Critical
              Accounting Policies in this section of this Form 10-K). However, if
              lower than projected levels of cash flows were to occur due to
              prolonged abnormal weather conditions or a prolonged weakness in
              general economic conditions, among other risks, it could cause less
              than expected growth and/or a reduction in terminal values and cash
              flows and could result in an impairment charge attributable to
              certain goodwill, indefinite-lived intangible assets and/or
              long-lived assets (particularly related to our Lodging operations),
              negatively impacting our results of operations and stockholders'
              equity.

Results of Operations

Summary
Shown below is a summary of operating results for Fiscal 2012, Fiscal 2011 and
Fiscal 2010 (in thousands):

                                                        Year Ended July 31,
                                                 2012          2011          2010
Mountain Reported EBITDA                      $ 198,908     $ 213,167     $ 184,036
Lodging Reported EBITDA                           6,353         8,755         2,392
Resort Reported EBITDA                          205,261       221,922       186,428
Real Estate Reported EBITDA                     (16,007 )      (5,035 )      (4,308 )
Income before provision for income taxes         27,092        55,520        53,797
Net income attributable to Vail Resorts, Inc. $  16,453     $  34,489     $  30,385

Mountain Segment
Mountain segment operating results for Fiscal 2012, Fiscal 2011 and Fiscal 2010
are presented by category as follows (in

                                       35
--------------------------------------------------------------------------------


thousands, except ETP):

                                                                         Percentage
                                   Year Ended July 31,               Increase/(Decrease)
                              2012         2011         2010       2012/2011     2011/2010
Net Mountain revenue:
Lift tickets               $ 342,500    $ 342,514    $ 289,289         -  %          18.4 %
Ski school                    84,292       83,818       70,694       0.6  %          18.6 %
Dining                        68,376       68,052       53,322       0.5  %          27.6 %
Retail/rental                181,772      174,339      154,846       4.3  %          12.6 %
Other                         89,668       83,468       70,344       7.4  %          18.7 %
Total Mountain net revenue $ 766,608    $ 752,191    $ 638,495       1.9  %          17.8 %


Mountain operating
expense:
Labor and labor-related
benefits                 $  203,515     $  198,659     $  166,378           2.4  %        19.4  %
Retail cost of sales         79,657         71,961         65,545          10.7  %         9.8  %
Resort related fees          39,557         39,476         35,431           0.2  %        11.4  %
General and
administrative              112,879        104,848         88,705           7.7  %        18.2  %
Other                       132,970        125,422         99,958           6.0  %        25.5  %
Total Mountain operating
expense                  $  568,578     $  540,366     $  456,017           5.2  %        18.5  %
Mountain equity
investment income, net          878          1,342          1,558         (34.6 )%       (13.9 )%
Mountain Reported EBITDA $  198,908     $  213,167     $  184,036          (6.7 )%        15.8  %
Total skier visits            6,144          6,991          6,010         (12.1 )%        16.3  %
ETP                      $    55.75     $    48.99     $    48.13          13.8  %         1.8  %

Mountain Reported EBITDA includes $7.6 million, $7.1 million and $5.3 million of stock-based compensation expense for Fiscal 2012, Fiscal 2011 and Fiscal 2010, respectively.
Fiscal 2012 compared to Fiscal 2011
During Fiscal 2012, our resorts experienced historically low snowfall (with cumulative snowfall down more than 50% over the prior ski season) and one of the mildest winters on record, including over the key Christmas, Spring Break and Easter periods. These weather conditions adversely impacted our skier visitation which was down 12.1% (with our Colorado and Tahoe resorts down 8.9% and 22.3%, respectively) for the 2011/2012 ski season compared to the prior ski season. Despite these unprecedented adverse conditions, revenues were generally stabilized by increased season pass sales, higher pricing and increased average guest spend. Additionally, Mountain Reported EBITDA for Fiscal 2012 was unfavorably impacted as compared to Fiscal 2011 due to the inclusion of first quarter operating results and transaction costs of Northstar (acquired on October 25, 2010) in Fiscal 2012 which generated $7.2 million of negative EBITDA due to no ski operations (partially offset by prior year acquisition costs of $4.1 million), and due to the timing of the acquisition of Kirkwood (acquired on April 12, 2012) which generated $1.0 million of negative EBITDA and acquisition related costs incurred on Kirkwood and Skiinfo (acquired on February 1, 2012) of $1.6 million.
Lift revenue remained relatively flat for Fiscal 2012, compared to Fiscal 2011, resulting from a $15.8 million, or 13.2%, increase in season pass revenue, offset by a $15.9 million, or 7.1%, decrease in lift revenue excluding season pass revenue. The increase in season pass revenue was driven primarily by an increase in pricing for season pass products as well as a 3% increase in unit sales. The decline in lift revenue excluding season pass revenue was due to a decline in visitation excluding season pass holders of 15.0%, compared to Fiscal 2011, partially offset by an increase in ETP excluding season pass holders of $6.30, or 9.3%. The increase in ETP excluding season pass holders was due primarily to price increases and a change in mix as a greater percentage of higher priced lead/window lift ticket products were sold in Fiscal 2012 compared to Fiscal 2011. Total ETP increased $6.76, or 13.8%, compared to Fiscal 2011, due primarily to price increases, as discussed above, and a decline from Fiscal 2011 in visitation from our season pass holders of approximately 1.2 days per pass, or 11.3%.

Ski school revenue increased $0.5 million, or 0.6%, for Fiscal 2012 compared to Fiscal 2011, with our Colorado resorts ski school revenue increasing $2.4 million, or 3.4%, compared to Fiscal 2011. Although all of our resorts were negatively impacted by a decline in skier visitation as discussed above, the impact to ski school revenue resulting from lower visitation was entirely


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