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MTN > SEC Filings for MTN > Form 10-Q on 6-Mar-2013All Recent SEC Filings

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Form 10-Q for VAIL RESORTS INC


6-Mar-2013

Quarterly Report


ITEM 2. 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 our Annual Report on Form 10-K for the year ended July 31, 2012 ("Form 10-K") and the Consolidated Condensed Financial Statements as of January 31, 2013 and 2012 and for the three and six months then ended, included in Part I, Item 1 of this Form 10-Q, which provide additional information regarding our financial position, results of operations and cash flows. 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. See "Forward-Looking Statements" below. These risks include, but are not limited to those discussed in this Form 10-Q and in our other filings with the Securities and Exchange Commission ("SEC"), including the risks described in Item 1A "Risk Factors" of Part I of the 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 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 measures 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 accounting principles generally accepted in the United States of America ("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 (loss) 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 to long-term 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 (loss), net change in cash and cash equivalents or other financial statement data presented in the Consolidated Condensed 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.
Mountain Segment
The Mountain segment is comprised of the operations of ski resort properties at the Vail, Breckenridge, Keystone and Beaver Creek mountain resorts in Colorado ("Colorado" resorts), the Heavenly, Northstar and Kirkwood (acquired in April 2012) mountain resorts in the Lake Tahoe area of California and Nevada ("Tahoe" resorts), and Afton Alps ski area in Minnesota and Mount Brighton ski area in Michigan (both acquired in December 2012), as well as ancillary services, primarily including ski school, dining and retail/rental operations. Our ski resorts are typically open for business 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 49% of Mountain net revenue for both the three months ended January 31, 2013 and 2012.
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 at our Colorado and Tahoe resorts 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 three months ended January 31, 2013, Destination guests comprised approximately 51% of our skier visits, while In-State guests comprised approximately 49% of our skier visits, which compares to approximately 52% and 48%, respectively, for the three months ended January 31, 2012. 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 the 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 one or a combination of our ski 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 Condensed Statement of Operations ratably over the ski season. For the three months ended January 31, 2013 and 2012, approximately 43% and 45%, respectively, of the total lift revenue recognized was comprised of season pass revenue (of which revenue recognized represents approximately 52% of total season pass sales for both the 2012/2013 and 2011/2012 ski seasons, with the remaining season pass sales recognized as lift ticket revenue in our third fiscal quarter ending April 30). The cost structure of our ski resort operations has a significant fixed component with variable expenses including, but not limited to, USDA Forest Service ("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, including several proximate to our ski resorts; (ii) ownership/management of non-RockResorts branded hotels and condominiums proximate to our ski resorts; (iii) National Park Service ("NPS") concessionaire properties including Grand Teton Lodge Company ("GTLC"); (iv) Colorado Mountain Express ("CME"), a Colorado resort ground transportation company; and (v) mountain resort golf courses. The performance of lodging properties (including managed condominium rooms) at or around 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 92% and 91% of Lodging segment revenue (excluding Lodging segment revenue associated with reimbursement of payroll costs) for the three months ended January 31, 2013 and 2012, 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, as well as occasionally the sale of land to third-party developers. 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
Together with those risk factors that we have identified in our Form 10-K, our management has identified the following important factors (as well as risks and uncertainties associated with such factors) that could impact our future financial performance or condition:

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 partially mitigate the impact to our operating results from the timing and amount of snowfall, 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 within the second and third fiscal quarters, when the season pass sales are recorded as revenue. Additionally, our season pass products provide a value option to our guests, which in turn creates a guest commitment predominately prior to the start of the ski season. For the 2011/2012 ski season pass revenue represented approximately 40% of total lift revenue for the entire ski season. Due to increased pass sales for the 2012/2013 ski season compared to the 2011/2012 ski season, season pass revenue has increased approximately $6.9 million, or 9.9%, for the three months ended January 31, 2013 compared to the same period in the prior year. Additionally, deferred revenue related to season pass sales was $70.7 million as of January 31, 2013 (compared to $64.2 million as of January 31, 2012) which will be recognized as lift revenue during our third fiscal quarter ending April 30, 2013.

Slow or declining economic growth currently present or recently present in the United States, Europe and parts of the rest of the world, including the pending resolution of the Federal deficit issues, European debt crisis and continued high unemployment, may have negative effects on the travel and leisure industry and on our results of operations. We cannot predict what impact these uncertainties may have on overall travel and leisure or more specifically, on our guest visitation, guest spending or other related trends for the remainder of the 2012/2013 ski season.

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. For the six months ended January 31, 2013 we have sold 11 units (with an additional 7 units closing after January 31, 2013) at The Ritz-Carlton Residences, Vail and One Ski Hill Place in Breckenridge and we currently have 22 units and 33 units, respectively, remaining 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 generate cash flow from placing unsold units into our rental program until such time selling prices are at acceptable levels to us. Furthermore, if 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.

At January 31, 2013, we had $136.6 million in cash and cash equivalents as well as $332.7 million available under the revolver component of our senior credit facility ("Credit Agreement") (which represents the total commitment of $400.0 million less certain letters of credit outstanding of $67.3 million). During the three months ended January 31, 2013, we completed the acquisition of two ski areas, Afton Alps in Minnesota and Mount Brighton in Michigan, for net cash consideration of approximately $20.0 million, and on March 4, 2013 our Board of Directors increased our regular quarterly cash dividend on our common stock to $0.2075 per share (or approximately $29.8 million annually). Additionally, we believe that the terms of our 6.50% Senior Subordinated Notes due 2019 ("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.

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 goodwill 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. 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

Below is a summary of operating results for both the three and six months ended
January 31, 2013, compared to the three and six months ended January 31, 2012
(in thousands):

                                              Three Months Ended           Six Months Ended
                                                  January 31,                 January 31,
                                              2013          2012          2013          2012
Mountain Reported EBITDA                   $ 140,843     $ 120,627     $  85,641     $  72,172
Lodging Reported EBITDA                        1,740         1,213         2,442          (494 )
Resort Reported EBITDA                       142,583       121,840        88,083        71,678
Real Estate Reported EBITDA                   (2,572 )      (3,475 )      (6,256 )      (8,213 )
Income (loss) before (provision) benefit
from income taxes                             97,627        76,164          (559 )     (15,957 )
Net income (loss) attributable to Vail
Resorts, Inc.                              $  60,551     $  46,389     $     (29 )   $  (9,320 )

A discussion of the segment results and other items can be found below.

Mountain Segment

Three months ended January 31, 2013 compared to the three months ended January 31, 2012
Mountain segment operating results for the three months ended January 31, 2013 and 2012 are presented by category as follows (in thousands, except effective ticket price ("ETP")):

                                            Three Months Ended      Percentage
                                               January 31,           Increase
                                            2013          2012      (Decrease)
Net Mountain revenue:
Lift tickets                             $  175,658    $ 153,699        14.3  %
Ski school                                   41,723       37,252        12.0  %
Dining                                       29,826       24,722        20.6  %
Retail/rental                                83,748       73,850        13.4  %
Other                                        30,786       26,415        16.5  %
Total Mountain net revenue               $  361,741    $ 315,938        14.5  %
Mountain operating expense:
Labor and labor-related benefits         $   83,684    $  72,730        15.1  %
Retail cost of sales                         35,244       29,427        19.8  %
Resort related fees                          17,396       16,742         3.9  %
General and administrative                   34,813       31,699         9.8  %
Other                                        49,860       44,891        11.1  %
Total Mountain operating expense         $  220,997    $ 195,489        13.0  %
Mountain equity investment income, net           99          178       (44.4 )%
Mountain Reported EBITDA                 $  140,843    $ 120,627        16.8  %

Total skier visits                            3,220        2,900        11.0  %
ETP                                      $    54.55    $   53.00         2.9  %


Certain Mountain segment operating expenses presented above for the three months ended January 31, 2012 have been reclassified to conform to the current fiscal quarter presentation.

Mountain Reported EBITDA includes $2.2 million and $1.8 million of stock-based compensation expense for the three months ended January 31, 2013 and 2012, respectively.

Mountain Reported EBITDA for the three months ended January 31, 2013 increased $20.2 million, or 16.8%, compared to the three months ended January 31, 2012. Our results for the three months ended January 31, 2013 reflect an increase in revenues from higher overall visitation due to more normal weather conditions, particularly at our Tahoe resorts, compared to the same period in the prior year. These results also benefited from a very strong Christmas and New Year holiday period, higher pricing, increase average guest spend on ancillary services and higher pass sales. However, our results were tempered by poor snowfall and unseasonably warm temperatures at our Colorado resorts which occurred from the start of the ski season to the pre-Christmas holiday period in December (the "Early Season") which adversely impacted our skier visitation to our Colorado resorts. As a result, skier visitation to our Colorado resorts was down 4.4% for the three months ended January 31, 2013 compared to the same period in the prior year. Our Tahoe resorts experienced significantly better snowfall and weather conditions during the current year fiscal quarter compared to the same period in the prior year which resulted in an increase in skier visitation of 56.1% (including Kirkwood which was acquired in April 2012). Additionally, the acquisitions of Kirkwood, Skiinfo (acquired on February 1, 2012), Afton Alps and Mount Brighton (acquired in December 2012) contributed incremental EBITDA of $3.6 million for the three months ended January 31, 2013 (the "Acquisitions").

Total Mountain net revenue increased $45.8 million, or 14.5%, for the three months ended January 31, 2013 compared to the three months ended January 31, 2012, which includes incremental revenue from the Acquisitions in total of $15.6 million. Excluding these incremental revenues, revenue increased $30.2 million, or 9.5%, for the three months ended January 31, 2013 compared to the three months ended January 31, 2012. Lift revenue increased $22.0 million, or 14.3%, for the three months ended January 31, 2013 compared to the same period in the prior year, resulting from a $15.1 million, or 17.9%, increase in lift revenue excluding season pass revenue, as well as a $6.9 million, or 9.9%, increase in season pass revenue. The increase in lift revenue excluding season pass revenue was driven by an increase in visitation excluding season pass holders of 14.3%, and an increase in ETP excluding season pass holders, of $2.23, or 3.1%. Excluding the Acquisitions, lift revenue excluding season pass holders increased $10.1 million, or 11.9%, and ETP excluding season pass holders increased $5.46, or 7.6%, driven by price increases implemented during the current fiscal quarter. The increase in season pass revenue was driven by a combination of both an increase in units sold and pricing. Total ETP increased $1.55, or 2.9%, due primarily to price increases in both our lead/window lift ticket products and season pass products, partially offset by slightly higher visitation from our season pass holders on a per pass basis.

Ski school revenue increased $4.5 million, or 12.0%, for the three months ended January 31, 2013 compared to the same period in the prior year, with our Tahoe resorts (including Kirkwood) ski school revenue increasing $2.8 million, or 51.1%, and our Colorado resorts ski school revenue increasing $1.4 million, or 4.4%, compared to the same period in the prior year. Ski school revenue benefited from the increase in skier visitation at our Tahoe resorts (as discussed above) and an increase in yield per skier visit of 9.2% at our Colorado resorts. Excluding the Acquisitions, ski school revenue increased $3.5 million, or 9.5%.

Dining revenue increased $5.1 million, or 20.6%, for the three months ended January 31, 2013 compared to the same period in the prior year, and was primarily attributable to our Tahoe resorts (including Kirkwood) generating a $3.6 million increase in revenue due to increased skier visitation and higher yields per skier visit. Dining revenue at our Colorado resorts increased $0.7 million driven by an increase in yield per skier visit of 8.6%. Excluding the Acquisitions, dining revenue increased $2.9 million, or 11.7%.

Retail/rental revenue increased $9.9 million, or 13.4%, for the three months ended January 31, 2013 compared to the same period in the prior year, which was driven by an increase in retail sales of $7.5 million, or 13.5%, as well as an increase in rental revenue of $2.4 million, or 13.3%. The increase in retail sales was generated primarily from a $2.3 million increase in sales from our on-line retailer, and our Any Mountain stores (in the San Francisco bay area) along with our stores proximate to our Tahoe resorts (including Kirkwood) which sales were up a combined $4.6 million which benefited from increased skier visitation and more normal weather conditions as discussed above. Additionally, our retail sales from our Colorado stores were essentially flat for the current period as compared to the same period in the prior year as strong holiday period sales offset lower sales volumes from the Early Season due to poor snowfall and highly unusual warm temperatures in Colorado as discussed above. The increase in rental revenue was driven by stores proximate to our Tahoe resorts (including Kirkwood) and Any Mountain stores (in the San Francisco bay area) which were up a combined $1.7 million.


Other revenue mainly consists of private club revenue (which includes both club dues and amortization of initiation fees), mountain activities revenue, marketing and internet advertising revenue, commercial leasing revenue, employee housing revenue, municipal services revenue and other recreation activity revenue. For the three months ended January 31, 2013, other revenue increased $4.4 million, or 16.5%, compared to the same period in the prior year, primarily due to incremental internet advertising revenue from Skiinfo of $1.9 million, an increase in marketing revenue, primarily attributable to an increase in strategic alliance marketing revenue, increased employee housing revenue and additional revenue associated with other mountain recreation activity.

Operating expense increased $25.5 million, or 13.0%, for the three months ended January 31, 2013 compared to the three months ended January 31, 2012, which includes incremental operating expense from the Acquisitions in total of $12.0 million. Excluding these incremental expenses, operating expense increased $13.5 million, or 6.9%, for the three months ended January 31, 2013 compared to the . . .

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