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

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Form 10-Q for VAIL RESORTS INC


6-Jun-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 April 30, 2013 and 2012 and for the three and nine 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.
The following Management's Discussion and Analysis includes a discussion of the financial performance of 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 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, 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) ("Urban" ski areas); 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 54% and 53% of Mountain net revenue for the three months ended April 30, 2013 and 2012, respectively, and approximately 48% of Mountain segment net revenue for both the nine months ended April 30, 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 2012/2013 and 2011/2012 ski seasons, Destination guests comprised approximately 56% and 57%, respectively, of our skier visits, while In-State guests comprised approximately 44% and 43%, respectively, of our skier visits. 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/areas, 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/areas to our Epic Season Pass that allows pass holders unlimited and


unrestricted access to all of our ski resorts/areas. 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/areas generally in advance of the ski season and typically ski more days each season at our resorts/areas 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/areas. 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 2012/2013 and 2011/2012 ski seasons, approximately 38% and 40%, respectively, of total lift ticket revenue was comprised of season pass revenue. The cost structure of our ski resort/areas operations have 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 94% and 92% of Lodging segment revenue (excluding Lodging segment revenue associated with reimbursement of payroll costs) for the three months ended April 30, 2013 and 2012, respectively, and 76% and 75% of Lodging segment revenue (excluding Lodging segment revenue associated with reimbursement of payroll costs) for the nine months ended April 30, 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. In March 2013, we began our pre-season pass sales program for the 2013/2014 ski season. Through May 28, 2013, our spring pre-season pass sales for the upcoming 2013/2014 ski season have increased approximately 18% in units and increased approximately 24% in sales dollars, compared to the prior year period ended May 29, 2012. However, we cannot predict if this favorable trend will continue through the Fall 2013 pass sales campaign or the overall impact that season pass sales will have on lift ticket revenue for the 2013/2014 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 nine months ended April 30, 2013 we have sold 20 units (with an additional one unit closing after April 30, 2013) at The Ritz-Carlton Residences, Vail and One Ski Hill Place in Breckenridge and we currently have 22 units and 30 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 anticipated 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.

During the nine months ended April 30, 2013, we announced our calendar 2013 capital expenditure plan which is estimated between approximately $130 million and $140 million and includes the largest number of planned improvements in our history; 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 approximately 10% to $0.2075 per share (or approximately $29.8 million annually). As of April 30, 2013, we had $237.7 million in cash and cash equivalents, as well as $333.8 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 $66.2 million). 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 our completed 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 (primarily occurring during our fiscal second and third quarters) 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 May 29, 2013, we entered into a lease with Talisker pursuant to which we assumed resort operations of Canyons Resort which includes the ski area and related amenities. In addition to the lease, we entered into ancillary transaction documents setting forth our rights among others, to ongoing litigation between the current operator and Talisker related to the validity of a lease of the Talisker owned land under the ski terrain of Park City Mountain Resort. If the outcome of the litigation is favorable to Talisker, the land under the ski terrain of Park City Mountain Resort will become subject to our lease with Talisker, which we expect would be beneficial to us. If the outcome of the litigation is unfavorable, we will be entitled to receive from Talisker the rent payments that Talisker receives from the current resort operator until such time as the current resort operator's lease has ended and the ski terrain under Park City Mountain Resort is then included in the lease. The lease between us and Talisker for Canyons Resort has an initial term of 50 years with six 50-year renewal options. The lease provides for $25 million in annual fixed payments, which increase each year by an inflation linked index of CPI less 1%, with a floor of 2% per annum. In addition, the lease includes participating contingent payments to Talisker of 42% of the amount by which EBITDA for the resort operations, as calculated under the lease, exceeds approximately $35 million, with such threshold amount increased by an inflation linked index and a 10% adjustment for any capital improvements or investments made under the lease by


us. The inclusion of the ski terrain of Park City Mountain Resort in the lease would require no additional consideration from us, but the financial contribution, if any, of the additional ski terrain would be included as part of the calculation of EBITDA for the resort operations, and as a result, factor into the participating contingent payment component of the lease payment as described above. We will be finalizing the accounting for the Canyons Resort transaction, including the lease, in the coming months but we expect to record an obligation on our consolidated balance sheet of approximately $305.0 million in long-term debt (including capital lease obligations). Additionally, we cannot predict whether we will realize all of the synergies expected to arise from our operation of Canyons Resort nor can we predict the resources required to integrate its operations and the ultimate impact Canyons Resort will have on our future results of operations. Furthermore, if the litigation associated with the land under the ski terrain of Park City Mountain Resort results in an unfavorable outcome it could result in a material impairment charge attributable to goodwill, certain indefinite-lived intangible assets and/or long-lived assets recorded in conjunction with this transaction, negatively impacting our results of operations and stockholders' equity.

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 nine months ended
April 30, 2013, compared to the three and nine months ended April 30, 2012 (in
thousands):

                                                   Three Months Ended           Nine Months Ended
                                                        April 30,                   April 30,
                                                   2013          2012          2013          2012
Mountain Reported EBITDA                        $ 194,330     $ 170,711     $ 279,971     $ 242,882
Lodging Reported EBITDA                             8,388         6,869        10,830         6,375
Resort Reported EBITDA                            202,718       177,580       290,801       249,257
Real Estate Reported EBITDA                        (3,156 )      (3,482 )      (9,412 )     (11,695 )
Income before provision for income taxes          157,402       132,281       156,843       116,324
Net income attributable to Vail Resorts, Inc.   $  97,640     $  79,569     $  97,611     $  70,250

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


Mountain Segment

Three months ended April 30, 2013 compared to the three months ended April 30,
2012
Mountain segment operating results for the three months ended April 30, 2013 and
2012 are presented by category as follows (in thousands, except effective ticket
price ("ETP")):


                                            Three Months Ended      Percentage
                                                April 30,            Increase
                                            2013          2012      (Decrease)
Net Mountain revenue:
Lift tickets                             $  215,163    $ 188,712        14.0  %
Ski school                                   53,531       47,040        13.8  %
Dining                                       37,876       31,388        20.7  %
Retail/rental                                66,329       60,144        10.3  %
Other                                        29,118       27,302         6.7  %
Total Mountain net revenue               $  402,017    $ 354,586        13.4  %
Mountain operating expense:
Labor and labor-related benefits         $   83,372    $  73,946        12.7  %
Retail cost of sales                         23,795       22,633         5.1  %
Resort related fees                          22,445       20,827         7.8  %
General and administrative                   31,581       27,992        12.8  %
Other                                        46,760       38,813        20.5  %
Total Mountain operating expense         $  207,953    $ 184,211        12.9  %
Mountain equity investment income, net          266          336       (20.8 )%
Mountain Reported EBITDA                 $  194,330    $ 170,711        13.8  %

Total skier visits                            3,756        3,244        15.8  %
ETP                                      $    57.29    $   58.17        (1.5 )%

Certain Mountain segment operating expenses presented above for the three months ended April 30, 2012 have been reclassified to conform to the current fiscal quarter presentation.

Mountain Reported EBITDA includes $2.1 million and $1.6 million of stock-based compensation expense for the three months ended April 30, 2013 and 2012, respectively.

Mountain Reported EBITDA for the three months ended April 30, 2013 increased $23.6 million, or 13.8%, compared to the three months ended April 30, 2012, and includes incremental EBITDA of $4.4 million from the acquisitions of Kirkwood (acquired in April 2012), Afton Alps and Mount Brighton (acquired in December 2012) (the "Acquisitions"). Our results for the three months ended April 30, 2013 were positively impacted by increased skier visitation compared to the same period in the prior year at both our Colorado and Tahoe resorts, which included strong visitation during the peak Spring Break and the Easter holiday periods at our Colorado resorts and the addition of Kirkwood to our Tahoe resorts. However, our operating results were somewhat negatively impacted by dry conditions and warm temperatures experienced at our Tahoe resorts during the current year fiscal quarter slowing the strong momentum in skier visitation experienced during the first half of the ski season. Skier visitation to our Colorado and Tahoe resorts (including Kirkwood) was up 11.8% and 14.2%, respectively, for the three months ended April 30, 2013 compared to the same period in the prior year.

Total Mountain net revenue increased $47.4 million, or 13.4%, for the three months ended April 30, 2013 compared to the three months ended April 30, 2012, which includes incremental revenue from the Acquisitions in total of $13.4 million. Excluding these incremental revenues, revenue increased $34.0 million, or 9.6%, for the three months ended April 30, 2013 compared to the three months ended April 30, 2012. Lift revenue increased $26.5 million, or 14.0%, for the three months ended April 30, 2013 compared to the same period in the prior year, resulting from a $21.3 million, or 17.4%, increase in lift revenue excluding season pass revenue, as well as a $5.2 million, or 7.8%, 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 14.6%, and an increase in ETP excluding season pass holders, of $1.78 or 2.3%. Excluding the Acquisitions, lift revenue excluding season pass holders increased $16.4 million, or 13.4%, driven by a 7.1% increase in visitation excluding season pass holders and an increase in ETP


excluding season pass holders of $4.51, or 5.9%. The increase in season pass revenue was driven by a combination of both an increase in units sold and pricing. Total ETP decreased $0.88, or 1.5%, due primarily to higher visitation from our season pass holders on a per pass basis, mostly offset by price increases in both season passes and daily lift tickets.

Ski school revenue increased $6.5 million, or 13.8%, for the three months ended April 30, 2013 compared to the same period in the prior year, with our Colorado resorts ski school revenue increasing $4.3 million, or 10.7%, and our Tahoe resorts (including Kirkwood) ski school revenue increasing $2.0 million, or 30.1%, compared to the same period in the prior year. The increase in ski school revenue at our Colorado resorts was primarily due to an increase in skier visitation and higher pricing. Ski school revenue at our Tahoe resorts benefited from the increase in skier visitation primarily from the addition of Kirkwood, as well as an increase in yield per skier visit. Excluding the Acquisitions, ski school revenue increased $5.6 million, or 11.8%, and yield per skier visit increased 2.5%.

Dining revenue increased $6.5 million, or 20.7%, for the three months ended April 30, 2013 compared to the same period in the prior year, and was primarily attributable to our Colorado resorts generating a $3.7 million, or 15.6%, increase in revenue due to increased skier visitation and an increase in yield per skier visit. Dining revenue at our Tahoe resorts increased $2.0 million, or 26.3%, driven by the addition of Kirkwood and increased revenue at Heavenly which benefited from a higher yield per skier visit. Excluding the Acquisitions, . . .

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