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MTN > SEC Filings for MTN > Form 10-K on 27-Sep-2013All Recent SEC Filings

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Form 10-K for VAIL RESORTS INC


27-Sep-2013

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 77%, 19% and 4%, respectively, of our net revenue for Fiscal 2013. Mountain Segment
The Mountain segment is comprised of the operations of eight ski resort properties at the Vail, Breckenridge, Keystone and Beaver Creek mountain resorts in Colorado ("Colorado" resorts); the Heavenly, Northstar and Kirkwood mountain resorts in the Lake Tahoe area of California and Nevada ("Tahoe" resorts); the Canyons mountain resort in Park City, Utah (acquired in May 2013); and the ski areas of Afton Alps in Minnesota and Mount Brighton 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 mountain ski resorts were open for business for the 2012/2013 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%, 45% and 46% of Mountain segment net revenue for Fiscal 2013, Fiscal 2012 and Fiscal 2011, respectively.

Lift 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: (1) out-of-state and international ("Destination") guests and (2) in-state and local ("In-State") guests. For the 2012/2013 ski season, Destination guests comprised approximately 56% of our mountain resort skier visits, while In-State guests comprised approximately 44% of our mountain resort skier visits, which compares to approximately 57% and 43%, respectively, for the 2011/2012 and 2010/11 ski seasons.

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/ski areas, 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 and Urban ski 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 predominately sold 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 2012/2013, 2011/2012 and 2010/2011 ski seasons, approximately 38%, 40% and 35%, respectively, of total lift revenue recognized was derived from 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 Colorado resort ground transportation company; and (v) mountain resort 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%, 66% and 67% of Lodging segment net revenue (excluding Lodging segment revenue associated with reimbursement of payroll costs) for Fiscal 2013, Fiscal 2012 and Fiscal 2011, respectively. Management primarily focuses on Lodging net revenue excluding payroll cost reimbursements 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); mountain resort 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 occasional sales 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, sale of strategic land parcels, 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 associated with 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 2013, we began our pre-season pass sales program for the
              2013/2014 ski season. Through September 22, 2013, our


pre-season pass sales for the upcoming 2013/2014 ski season (including the Urban ski areas and Canyons for both the current and prior year, which prior year includes pass sales that occurred before our acquisition of the Urban ski areas and the Canyons transaction) have increased approximately 19% in units and increased approximately 23% in sales dollars, compared to the prior year period ended September 23, 2012. We cannot predict if this favorable trend will continue through the fall 2013 pass sales campaign, nor can we predict the overall impact that season pass sales will have on lift revenue for the 2013/2014 ski season.

             In Fiscal 2013, our lift revenue was favorably impacted by price
              increases at our mountain resorts that were implemented for the
              2012/2013 ski season. Prices for the 2013/2014 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.


             Our Fiscal 2013 results for our Mountain and Lodging segments
              showed significant improvement over Fiscal 2012 largely due to the
              unprecedented low snowfall conditions throughout the 2011/2012 ski
              season. However, our Fiscal 2013 results were tempered by poor
              snowfall and unseasonably warm temperatures that occurred during
              the early 2012/2013 ski season in Colorado and during the latter
              half of the 2012/2013 ski season in Tahoe. We cannot predict
              whether snowfall levels will return to historical averages for the
              upcoming 2013/2014 ski season nor can we estimate the impact there
              may be to advance bookings, guest travel, season pass sales, lift
              revenue (excluding season passes), retail/rental sales or other
              ancillary services revenue next ski season as a result of the past
              two ski seasons' snowfall conditions, or if snowfall levels do not
              return to their historical average levels.


             Although many key economic indicators have improved recently
              including growth in the US stock markets, rising consumer
              confidence, and housing prices and lower unemployment, the US
              economy has struggled to gain momentum amid sweeping federal budget
              cuts, higher taxes, uncertainty over monetary policy and slow
              growth in many economies around the world. Given these economic
              trends and uncertainties, we cannot predict what the impact will be
              on overall travel and leisure or more specifically, on our guest
              visitation, guest spending or other related trends for the upcoming
              2013/2014 ski season.


             On May 29, 2013, we entered into a long-term lease with Talisker
              pursuant to which we assumed resort operations of Canyons which
              includes the ski area and related amenities. The lease between us
              and Talisker for Canyons 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. As a result of this
              transaction, we recorded $306.3 million in long-term debt
              (including capital lease obligations) and other liabilities
              including an estimate for future participating contingent payments.
              In addition to the lease, we entered into ancillary transaction
              documents setting forth our rights among others, to ongoing
              litigation between the current operator of Park City Mountain
              Resort 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 as the inclusion of the ski terrain of Park City
              Mountain Resort in the lease would require no additional
              consideration from us but any earnings derived from that ski
              terrain would accrue to our benefit. Any such financial
              contribution from 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. 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. We cannot predict
              whether we will realize all of the synergies expected from our
              operation of Canyons nor can we predict the resources required to
              integrate its operations and the ultimate impact Canyons 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 other assets recorded in
              conjunction with this transaction, negatively impacting our results
              of operations and stockholders' equity.


             During Fiscal 2013, in addition to the Canyons transaction as
              discussed above, we announced our calendar 2013 capital expenditure
              plan which is estimated between approximately $130 million and $140
              million, including resort capital expenditures for the first phase
              of our new summer activities plans, and is 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 by
              approximately 11% to $0.2075 per share (or approximately $29.8
              million annually based on our shares outstanding as of July 31,
              2013). We cannot predict that any strategic initiatives undertaken
              will achieve the anticipated results.


             As of July 31, 2013, we had $138.6 million in cash and cash
              equivalents, as well as $333.8 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 $66.2 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 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 second and third fiscal quarters) less capital
              expenditures has and is anticipated to continue to provide us with
              significant liquidity which we believe will allow us to consider
              additional strategic investments and other forms of returning value
              to our stockholders including the continued payment of a quarterly
              cash dividend.


             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. As of July 31, 2013, we
              had 22 units (of which two units sold subsequent to July 31, 2013)
              at The Ritz-Carlton Residences, Vail and 29 units (of which one
              unit sold subsequent to July 31, 2013) 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
              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 (see Critical Accounting
              Policies in this section of this Form 10-K).


             In accordance with 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. We also
              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 2013 annual impairment test did not result
              in a goodwill or significant 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 2013, Fiscal 2012 and
Fiscal 2011 (in thousands):

                                                        Year Ended July 31,
                                                 2013          2012          2011
Mountain Reported EBITDA                      $ 228,699     $ 198,908     $ 213,167
Lodging Reported EBITDA                          12,161         6,353         8,755
Resort Reported EBITDA                          240,860       205,261       221,922
Real Estate Reported EBITDA                      (9,106 )     (16,007 )      (5,035 )
Income before provision for income taxes         59,229        27,092        55,520
Net income attributable to Vail Resorts, Inc. $  37,743     $  16,453     $  34,489

Mountain Segment
Mountain segment operating results for Fiscal 2013, Fiscal 2012 and Fiscal 2011
are presented by category as follows (in thousands, except ETP):

                                                                               Percentage
                                    Year Ended July 31,                   Increase/(Decrease)
                             2013           2012           2011        2013/2012       2012/2011
Net Mountain revenue:
Lift                     $  390,820     $  342,500     $  342,514          14.1 %             -  %
Ski school                   95,254         84,292         83,818          13.0 %           0.6  %
Dining                       81,175         68,376         68,052          18.7 %           0.5  %
Retail/rental               199,418        181,772        174,339           9.7 %           4.3  %
Other                       100,847         89,668         83,468          12.5 %           7.4  %
Total Mountain net
revenue                  $  867,514     $  766,608     $  752,191          13.2 %           1.9  %

Mountain operating
expense:
Labor and labor-related
benefits                 $  238,479     $  207,269     $  200,475          15.1 %           3.4  %
Retail cost of sales         88,500         79,657         71,961          11.1 %          10.7  %
Resort related fees          41,970         39,557         39,476           6.1 %           0.2  %
General and
administrative              119,938        107,483        102,296          11.6 %           5.1  %
Other                       150,819        134,612        126,158          12.0 %           6.7  %
Total Mountain operating
expense                  $  639,706     $  568,578     $  540,366          12.5 %           5.2  %
Mountain equity
investment income, net          891            878          1,342           1.5 %         (34.6 )%
Mountain Reported EBITDA $  228,699     $  198,908     $  213,167          15.0 %          (6.7 )%
Total skier visits            6,977          6,144          6,991          13.6 %         (12.1 )%
ETP                      $    56.02     $    55.75     $    48.99           0.5 %          13.8  %

Certain Mountain segment operating expenses presented above for Fiscal 2012 and Fiscal 2011, have been reclassified to conform to the current fiscal year presentation.
Mountain Reported EBITDA includes $9.0 million, $7.6 million and $7.1 million of . . .

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