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VVI > SEC Filings for VVI > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for VIAD CORP


8-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with Viad Corp's condensed consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Viad Corp's actual results could differ materially from those anticipated due to various factors discussed under "Forward-Looking Statements" and elsewhere in this quarterly report.

Overview:

Viad Corp ("Viad" or the "Company") operates in three reportable business segments: Marketing & Events U.S., Marketing & Events International and Travel & Recreation Group.

The Marketing & Events Group, comprised of Global Experience Specialists, Inc. and affiliates ("GES"), specializes in all aspects of the design, planning and production of face-to-face events, immersive environments and brand-based experiences for clients, including show organizers, corporate brand marketers and retail shopping centers. In addition, the Marketing & Events Group provides a variety of immersive, entertaining attractions and brand-based experiences, sponsored events, mobile marketing and other branded entertainment and face-to-face marketing solutions for clients and venues, including shopping malls, movie studios, museums, leading consumer brands and casinos.

The Travel & Recreation Group segment consists of Brewster Inc. ("Brewster"), Glacier Park, Inc. ("Glacier Park") and Alaskan Park Properties, Inc. ("Alaska Denali Travel"). Brewster provides tourism services in the Canadian Rockies in Alberta and in other parts of Western Canada. Brewster's operations include the Banff Gondola, Columbia Icefield Glacier Adventure, motorcoach services, charter and sightseeing services, tour boat operations, inbound package tour operations and hotel operations. Brewster also operates the Banff International Hotel acquired on March 7, 2012. The Banff International Hotel is a 162-guest room hotel located in downtown Banff, Alberta, Canada. Glacier Park operates five lodges, three motor inns and one four-season resort hotel and provides food and beverage operations, retail operations and tour and transportation services in and around Glacier National Park in Montana and Waterton Lakes National Park in Alberta, Canada. Glacier Park is an 80 percent owned subsidiary of Viad. Alaska Denali Travel operates Denali Backcountry Lodge and Denali Cabins. Denali Backcountry Lodge is a 42-guest room lodge located within Denali National Park and Preserve in Alaska and Denali Cabins are 46 guest cabins located near the entrance to Denali National Park and Preserve. In addition to lodging, Alaska Denali Travel also provides food and beverage operations and package tour and transportation services in and around Denali National Park and Preserve.

The following are financial highlights of the third quarter of 2012 presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"):

Viad Corp (Consolidated)

Total revenues of $307.5 million, as compared to $216.2 million in the third quarter of 2011

Net income attributable to Viad of $20.0 million, as compared to $1.2 million in the third quarter of 2011

Diluted income per share of $0.99, as compared to $0.06 in the third quarter of 2011

Cash and cash equivalents totaled $124.2 million as of September 30, 2012

Debt was $2.3 million as of September 30, 2012

Marketing & Events U.S.

Revenues of $168.4 million, an increase of 44.1 percent from the third quarter of 2011

Segment operating loss of $585,000, as compared to a loss of $17.1 million in the third quarter of 2011

Marketing & Events International

Revenues of $67.8 million, an increase of 76.0 percent from the third quarter of 2011

Segment operating income of $3.4 million, as compared to a segment operating loss of $3.1 million in the third quarter of 2011

Travel & Recreation Group

Revenues of $77.2 million, an increase of 19.7 percent from the third quarter of 2011

Segment operating income of $31.3 million, as compared to $25.6 million in the third quarter of 2011

Non-GAAP Measure:

The following discussion includes a presentation of Adjusted EBITDA which is utilized by management to measure the profit and performance of Viad's operations and to facilitate period-to-period comparisons. Management believes that the presentation of Adjusted EBITDA provides useful information to investors regarding Viad's results of operations for trending, analyzing and benchmarking the performance and value of Viad's business. Management uses Adjusted EBITDA primarily as a performance measure and believes that the GAAP financial measure most directly comparable to Adjusted EBITDA is net income attributable to Viad.

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"Adjusted EBITDA" is defined by Viad as net income attributable to Viad before interest expense, income taxes, depreciation and amortization, impairment charges and recoveries, changes in accounting principles and the effects of discontinued operations. The presentation of such measures are supplemental to results presented under GAAP and may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is considered a useful operating metric as potential variations arising from taxes, depreciation, debt service costs, impairment charges and recoveries, changes in accounting principles and the effects of discontinued operations are eliminated, thus resulting in an additional measure considered to be indicative of Viad's ongoing operations. This non-GAAP measure should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

Although Adjusted EBITDA is used as a financial measure to assess the performance of the business, the use of Adjusted EBITDA is limited because it does not consider material costs, expenses and other items necessary to operate the business. These items include debt service costs, non-cash depreciation and amortization expense associated with long-lived assets, expenses related to U.S. federal, state, local and foreign income taxes, impairment charges or recoveries and the effects of accounting changes and discontinued operations. Because Adjusted EBITDA does not consider the above items, a user of Viad's financial information should consider net income attributable to Viad as an important measure of financial performance because it provides a more complete measure of the Company's performance.

A reconciliation of net income attributable to Viad to Adjusted EBITDA is as follows:

                                           Three months ended September 30,              Nine months ended September 30,
                                             2012                     2011                 2012                   2011
                                                                          (in thousands)
Net income attributable to Viad        $          19,976         $         1,245      $       27,093         $       15,517
Interest expense                                     331                     373                 991                  1,165
Income tax expense                                10,304                     523              13,084                  9,011
Depreciation and amortization                      8,560                   7,589              23,560                 21,882
Income from discontinued operations                   -                       -                 (639 )                   -

Adjusted EBITDA                        $          39,171         $         9,730      $       64,089         $       47,575

The increase in Adjusted EBITDA of $29.4 million for the third quarter of 2012, as compared to the third quarter of 2011, was primarily driven by higher segment operating results at the Marketing & Events Group due to increases in both non-annual show revenues and base same-show revenues. The Travel & Recreation Group also contributed to the increase in Adjusted EBITDA primarily due to an increase in hospitality and attractions revenues. The increase in Adjusted EBITDA of $16.5 million for the first nine months of 2012, as compared to the first nine months of 2011 was primarily driven by higher segment operating results at each of Viad's reporting segments, partially offset by higher restructuring charges in 2012. See "Results of Operations" below for a discussion of fluctuations

Results of Operations:

Comparison of Third Quarter of 2012 to the Third Quarter of 2011

Revenues for the third quarter of 2012 increased 42.2 percent to $307.5 million, as compared to $216.2 million in the third quarter of 2011. Viad's income before income taxes was $31.4 million for the third quarter of 2012, as compared to $2.8 million in the third quarter of 2011. These increases were primarily due to positive show rotation revenues and strong throughput at Viad's Marketing & Events Group, as well as expanded revenues at the Company's Travel & Recreation Group.

Net income attributable to Viad for the third quarter of 2012 was $20.0 million, or $0.99 per diluted share, as compared to $1.2 million, or $0.06 per diluted share, in the third quarter of 2011.

During the third quarter of 2012, foreign exchange rate variances had an unfavorable impact of $2.5 million on revenues and $382,000 on segment operating results, as compared to the third quarter of 2011. Viad conducts its foreign operations primarily in Canada, the United Kingdom, Germany and to a lesser extent in certain other countries.

The following table summarizes the effect of foreign exchange rate variances on revenues and segment operating results from Viad's significant international operations for the third quarter:

                                                      Revenues                                Segment Operating Results
                                       Weighted-Average         Effect of Rate          Weighted-Average          Effect of Rate
                                        Exchange Rates             Variance              Exchange Rates              Variance
                                       2012          2011        (thousands)           2012           2011         (thousands)
Marketing & Events Group:
Canada                               $    1.00      $ 1.00     $           (103 )    $    1.00       $  1.09     $            105
United Kingdom                       $    1.58      $ 1.60     $           (964 )    $    1.59       $  1.71     $            (12 )
Germany                              $    1.26      $ 1.41     $           (525 )    $    1.27       $  1.57     $            (24 )
Travel & Recreation Group:
Canada                               $    1.00      $ 1.02     $           (918 )    $    1.00       $  1.03     $           (451 )

Accordingly, Viad's third quarter results were impacted by the strengthening of the U.S. dollar relative to the Canadian dollar, British pound and Euro. Future changes in the exchange rates may impact overall expected profitability and historical period-to-period comparisons when operating results are translated into U.S. dollars.

Marketing & Events Group. Revenues for the Marketing & Events U.S. segment were $168.4 million for the third quarter of 2012, up 44.1 percent, as compared to $116.8 million in the third quarter of 2011. The increase was primarily due to positive show rotation revenues of approximately $56 million and base same-show revenue increases of 7.3 percent. Management defines base same-show revenues as revenues from exhibitions and events that occur in the same quarter and same city every year. Base same-shows represented approximately 29 percent of 2012 third quarter Marketing & Events U.S. revenues. Segment operating loss was $585,000 in the third quarter of 2012, as compared to a loss of $17.1 million in the third quarter of 2011. The improved operating results were primarily due to an increase in revenues with a continued focus on margin improvements, as well as ongoing efforts to drive operating efficiencies and control discretionary expenses.

The Company is continuing to execute against a number of margin improvement initiatives designed to more effectively manage labor costs across the Marketing & Events Group and to reduce the physical footprint and the overhead associated with the U.S. warehousing operation. As it relates to labor costs, the focus is on driving productivity gains through rigorous and strategic pre-show planning on the highest opportunity events. The benefits of such measures are shown by a 100 basis point improvement in the variable labor-to-revenue ratio on a U.S. base same-show basis. The Company is also working to develop new tools to support and systematize show site labor planning, measurement and benchmarking. On the facility side, approximately 400,000 square feet of warehouse space has been eliminated during 2012, reducing the total U.S. warehouse footprint to approximately 2.4 million square feet as of September 30, 2012. Due to the cost saving efforts, the Company has recognized a U.S. facility cost savings improvement of approximately $410,000 for the third quarter of 2012, as compared to the third quarter of 2011.

Revenues for the Marketing & Events International segment were $67.8 million for the third quarter of 2012, up 76.0 percent, as compared to $38.5 million in the third quarter of 2011. Segment operating income was $3.4 million in the third quarter of 2012, as compared to a segment operating loss of $3.1 million in the third quarter of 2011. As discussed above, period-to-period comparisons for this segment were affected by exchange rate variances, which had an unfavorable impact on revenues by $1.6 million and increased segment operating income by $69,000, as compared to the third quarter of 2011. The favorable impact on segment operating income was the result of a relatively stronger U.S. dollar during months in

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which the foreign operations generated operating losses. Excluding exchange rate variances, 2012 third quarter revenues increased by $30.9 million, or 80.1 percent, and segment operating income increased by $6.5 million, as compared to 2011. These increases were primarily driven by services provided for the 2012 London Summer Olympic and Paralympic Games, as well as positive show rotation revenues of approximately $11 million.

Although the Marketing & Events Group has a diversified revenue base and long-term contracts for future shows, its revenues are affected by general economic and industry-specific conditions. The prospects for individual shows tend to be driven by the success of the industry related to those shows. In general, the exhibition and event industry is experiencing modest improvement. Following quarterly declines from the third quarter of 2008 through the first quarter of 2010, Marketing & Events U.S. base same-show revenues were essentially flat in the second quarter of 2010, and have increased in each of the following nine quarters.

For the 2012 full year, management expects U.S. base same-show revenues to increase at a mid-single digit rate and show rotation revenues are expected to have a positive impact on full year revenues of approximately $16 million. Additionally, management anticipates that foreign currency exchange rate variances versus 2011 will have an unfavorable impact on the Marketing & Events Group's 2012 full year revenues and segment operating income of approximately $4.6 million and $150,000, respectively. Management remains focused on improving the profitability of the Marketing & Events U.S. segment through continued integration and consolidation of operations to increase capacity utilization and reduce costs. Additional restructuring charges may be incurred as further cost structure improvements are made.

The Marketing & Events Group is subject to multiple collective-bargaining agreements that affect labor costs, approximately one-third of which expire each year. Although labor relations between the Company and labor are currently stable, disruptions during future contract negotiations could occur, with the possibility of an adverse impact on the operating results of the Marketing & Events Group.

Travel & Recreation Group. Revenues for the Travel & Recreation Group were $77.2 million for the third quarter of 2012, up 19.7 percent, as compared to third quarter 2011 revenues of $64.5 million. Segment operating income was $31.3 million in the third quarter of 2012, as compared to $25.6 million in the third quarter of 2011. As discussed above, period-to-period comparisons for this segment were affected by exchange rate variances, which had an unfavorable impact on revenues of $918,000 and segment operating income of $451,000, as compared to the third quarter of 2011. Excluding exchange rate variances, 2012 third quarter revenues increased by $13.6 million, or 21.1 percent, and segment operating income increased by $6.2 million. In addition to increased revenues, as discussed below, operating results also reflect higher selling, general and administrative expenses, including costs related to additional resources to support the Company's growth strategy of "Refresh-Build-Buy."

The following table provides Travel & Recreation Group revenues by line of business, as well as key performance indicators, for the third quarter:

                                                         Three months ended September 30,
                                              2012                 2011                    Change
                                                 (in thousands, except key performance indicators)
Revenues:
Hospitality                               $      36,943        $      27,871        $  9,072         32.5 %
Attractions                                      23,688               21,496           2,192         10.2 %
Package tours                                    10,692               10,329             363          3.5 %
Transportation                                    7,162                6,060           1,102         18.2 %
Intra-segment eliminations & other               (1,332 )             (1,284 )           (48 )       -3.7 %

Total                                     $      77,153        $      64,472        $ 12,681         19.7 %

Key Performance Indicators:
Room nights available (Hospitality) 1           123,203               92,852          30,351         32.7 %
RevPAR (Hospitality) 2                    $         160        $         155        $      5          3.2 %
Passengers (Attractions)                        591,895              546,002          45,893          8.4 %
Revenue per passenger (Attractions) 3     $          44        $          42        $      2          4.8 %

1 Excludes rooms closed for renovation at Many Glacier Hotel during 2011.

2 Calculated as revenues from room sales divided by the number of room nights available during the period. Amounts shown represent simple average of RevPAR for all Travel & Recreation Group hospitality properties.

3 Calculated as total attractions revenues divided by the number of passengers during the period. Amounts shown represent simple average of revenue per passenger at all Travel & Recreation Group attractions.

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Revenue growth from hospitality properties benefitted from the initial peak season contributions from the recently acquired Alaska Denali Travel business (acquired on September 16, 2011) and the Banff International Hotel (acquired on March 7, 2012), with approximately $4.9 million of incremental revenues. St. Mary Lodge & Resort and Grouse Mountain Lodge, both in their second year as part of the Travel & Recreation Group and renovated as part of the Company's Refresh-Build-Buy strategy, also increased revenue over the 2011 period. Additionally, rooms that were under renovation at the Many Glacier Hotel in 2011 provided a full revenue contribution in the third quarter of 2012.

Revenues for the quarter were also favorably impacted by increased passenger volumes at the Travel & Recreation Group's attractions. As compared to the third quarter of 2011, passenger volumes increased by 8.4 percent.

During 2011, approximately 70 percent of revenues and 86 percent of segment operating income generated in the Travel & Recreation Group were derived through its Canadian operations. These operations are largely affected by foreign customer visitation and, accordingly, increases in the value of the Canadian dollar as compared to other currencies could adversely affect customer volumes, revenues and segment operating income for the Travel & Recreation Group. Additionally, the Travel & Recreation Group is affected by consumer discretionary spending on tourism activities.

Management anticipates that foreign currency exchange rate variances versus 2011 will have an unfavorable impact on Travel & Recreation Group 2012 full year revenues and segment operating income of approximately $1.9 million and $750,000, respectively. Management also anticipates the four acquisitions completed by Viad since the beginning of 2011 will generate approximately $23 million in revenues in 2012 with an average Adjusted EBITDA margin (defined as Adjusted EBITDA divided by revenues) of more than 30 percent. By leveraging economies of scale and scope and repositioning the acquired assets for higher-returns, management expects to grow this revenue base at a high single-digit compound annual growth rate from 2012 to 2015, with expanding Adjusted EBITDA margins over that time period.

Glacier Park operates the concession portion of its business under a concession contract with the U.S. National Park Service (the "Park Service") for Glacier National Park. Glacier Park's original 25-year concession contract with the Park Service that was to expire on December 31, 2005, has been extended for seven one-year periods and now expires on December 31, 2012. The Park Service, in its sole discretion, may continue extending Glacier Park's concession contract in one-year increments beyond 2012. Glacier Park expects to receive another one-year extension through 2013. In connection with the expiration of the contract, Glacier Park will have the opportunity to bid on a new concession contract. If Glacier Park does secure a new contract, possible terms would be for 10, 15 or 20 years. Glacier Park generated approximately 45 percent of its 2011 revenue through its concession contract for services provided within Glacier National Park. If a new concessionaire is selected by the Park Service, Glacier Park's remaining business would consist of its operations at Waterton Lakes National Park, Alberta, Canada; East Glacier, Montana; Whitefish, Montana and St. Mary, Montana. In such a circumstance, Glacier Park would be entitled to an amount equal to its "possessory interest" of $25 million, which generally means the value of the structures acquired or constructed, fixtures installed and improvements made to the concession property at Glacier National Park during the term of the concession contract. Glacier Park would also be entitled to the value of personal property located within the in-park concession business. Glacier Park owns Glacier Park Lodge in East Glacier, Montana; Grouse Mountain Lodge in Whitefish, Montana and St. Mary Lodge & Resort in St. Mary, Montana. Glacier Park also owns the Prince of Wales Hotel in Waterton Lakes National Park, which is operated under a 42-year ground lease with the Canadian government running through January 31, 2052. Glacier Park generated 19 percent of Travel & Recreation Group's full year 2011 segment operating income.

Income Taxes. The effective tax rate in the third quarter of 2012 was 32.9 percent, as compared to 18.6 percent in the comparable period in 2011. The relatively low effective rate in 2011, as compared to the statutory rates, was primarily due to the favorable resolution of tax matters and the realization of certain foreign tax credits.

Comparison of First Nine Months of 2012 to the First Nine Months of 2011

Revenues for the first nine months of 2012 increased 10.4 percent to $822.7 million from $745.0 million during the first nine months of 2011. Viad's income before income taxes was $40.2 million, as compared to $25.2 million in 2011. These increases were primarily due to increased revenues from the Marketing & Events Group resulting from positive show rotation revenues of $11 million, U.S. base same-show revenue increases and increased hospitality and attractions revenues in the Travel & Recreation Group. Restructuring charges in the first nine months of 2012 were $3.5 million, as compared to $1.6 million in the first nine months of 2011, both primarily related to facility consolidations and the elimination of certain positions in the Marketing & Events Group.

Net income attributable to Viad for the first nine months of 2012 was $27.1 million, or $1.34 per diluted share, as compared to $15.5 million, or $0.76 per diluted share, during the first nine months of 2011. These results include income from discontinued operations of $639,000, or $0.03 per diluted share, in 2012 related to the sale of land associated with previously sold operations.

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During the first nine months of 2012, foreign exchange rate variances had an unfavorable impact on revenues and segment operating income of $7.5 million and $843,000, respectively, as compared to the first nine months of 2011. Viad conducts its foreign operations primarily in Canada, the United Kingdom, Germany and to a lesser extent in certain other countries. The following table summarizes the effect of foreign exchange rate variances on revenues and segment operating results from Viad's significant international operations for the first nine months of the year:

                                                     Revenues                                Segment Operating Results
                                       Weighted-Average        Effect of Rate          Weighted-Average          Effect of Rate
                                        Exchange Rates            Variance              Exchange Rates              Variance
                                       2012          2011        (thousands)          2012           2011         (thousands)
Marketing & Events Group:
Canada                               $    1.00      $ 1.03     $        (1,245 )    $    1.00       $  1.02     $             10
United Kingdom                       $    1.59      $ 1.62     $        (2,534 )    $    1.60       $  1.61     $            (67 )
Germany                              $    1.29      $ 1.42     $        (1,495 )    $    1.28       $  1.42     $            (91 )

Travel & Recreation Group:
Canada                               $    1.00      $ 1.03     $        (2,191 )    $    1.00       $  1.03     $           (695 )

Accordingly, Viad's nine-month results were impacted by the strengthening of the U.S. dollar relative to the Canadian dollar, the British pound and the Euro. Future changes in the exchange rates may adversely impact overall expected profitability and historical period-to-period comparisons when operating results are translated into U.S. dollars.

Marketing & Events Group. Revenues for the Marketing & Events U.S. segment were $540.7 million for the first nine months of 2012, an increase of 8.4 percent from $498.7 million in 2011. Segment operating income was $12.2 million in the first nine months of 2012, as compared to $1.1 million in 2011. These increases . . .

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