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MTN > SEC Filings for MTN > Form 10-Q on 12-Mar-2014All Recent SEC Filings

Show all filings for VAIL RESORTS INC

Form 10-Q for VAIL RESORTS INC


12-Mar-2014

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, 2013 ("Form 10-K") and the Consolidated Condensed Financial Statements as of January 31, 2014 and 2013 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 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 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.
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 mountain resorts in the Lake Tahoe area of California and Nevada ("Tahoe" resorts); the Canyons mountain resort in Park City, Utah (transaction entered into in May 2013); 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 50% and 49% of Mountain net revenue for the three months ended January 31, 2014 and 2013, 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 visiting our 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, 2014, Destination guests comprised approximately 52% of our skier visits, while In-State guests comprised approximately 48% of our skier visits, which compares to approximately 51% and 49%, respectively, for the three months ended January 31, 2013.
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/ski 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 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 compelling value


proposition 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 three months ended January 31, 2014 and 2013, approximately 46% and 43%, respectively, of the total lift revenue recognized was comprised of season pass revenue (of which revenue recognized represents approximately 50% and 52% of total season pass sales for the 2013/2014 and 2012/2013 ski seasons, with the remaining season pass sales recognized as lift 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 and condominiums 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) 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 93% and 92% of Lodging segment revenue (excluding Lodging segment revenue associated with reimbursement of payroll costs) for the three months ended January 31, 2014 and 2013, 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), 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. 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 occasional purchase of selected strategic land parcels for future development as well as the sale of land parcels to third-party developers. 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, we have 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 compelling value proposition to our guests, which in turn creates a guest commitment predominately prior to the start of the ski season. For the 2012/2013 ski season pass revenue represented approximately 38% of total lift revenue for the entire ski season. Due to increased pass sales for the 2013/2014 ski season compared to the 2012/2013 ski season, season pass revenue increased approximately $13.7 million, or 18.0%, for the three months ended January 31, 2014 compared to the same period in the prior year (which prior year excludes Canyons season pass sales that occurred prior to our transaction). Additionally, deferred revenue related to season pass sales was $89.4 million as of January 31, 2014 (compared to $70.7 million as of January 31, 2013), which will be mostly recognized as lift revenue during our third fiscal quarter ending April 30, 2014.

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 remainder of the 2013/2014 ski season.

In May 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. 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 ("PCMR") and Talisker related to the validity of a lease of the Talisker owned land under the ski terrain of PCMR. If the outcome of the litigation is favorable to Talisker, the land under the ski terrain of PCMR can become subject to our lease with Talisker, which we expect would be beneficial to us as the inclusion of the ski terrain of PCMR in the lease would require no additional consideration from us but the earnings derived from that ski terrain would accrue to our benefit. 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 PCMR 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 all of 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 PCMR 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. Additionally, the estimated fair values of assets acquired and liabilities assumed in the Canyons transaction are preliminary and are based on the information that was available as of the transaction date to estimate the fair value of assets acquired and liabilities assumed. We believe that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed, but we are obtaining additional information necessary to finalize those fair values. Therefore, the preliminary measurements of fair value reflected within the Consolidated Condensed Balance Sheets as of January 31, 2014 are subject to change.

As of January 31, 2014, we had $205.3 million in cash and cash equivalents, as well as $333.3 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 $66.7 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. We believe this, combined with the continued positive cash flow from operating activities, including future proceeds from the sale of completed real estate projects, less capital expenditures allows us to consider strategic investments and other forms of providing return to our stockholders, including the continuation of share repurchases and the payment of a quarterly cash dividend of which, on March 10, 2014 our Board of Directors approved a 100% increase in our regular quarterly cash dividend on our common stock to $0.4150 per share (or approximately $15.0 million quarterly based upon shares outstanding as of January 31, 2014).

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 January 31, 2014, we had 20 units (of which 3 units sold subsequent to January 31, 2014) at The Ritz-Carlton Residences, Vail and 25 units (of which 5 units sold subsequent to January 31, 2014) 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 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.

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 2013 annual impairment test did not result in a goodwill or significant 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, 2014, compared to the three and six months ended January 31, 2013
(in thousands):

                                                  Three Months Ended           Six Months Ended
                                                      January 31,                January 31,
                                                  2014          2013          2014          2013
Mountain Reported EBITDA                       $ 148,158     $ 140,843     $  81,318     $ 85,641
Lodging Reported EBITDA                            2,928         1,740         3,237        2,442
Resort Reported EBITDA                           151,086       142,583        84,555       88,083
Real Estate Reported EBITDA                       (3,129 )      (2,572 )      (3,514 )     (6,256 )
Income (loss) before (provision) benefit                                     (22,964 )       (559 )
from income taxes                                 94,540        97,627
Net income (loss) attributable to Vail                                     $ (14,113 )   $    (29 )
Resorts, Inc.                                  $  59,263     $  60,551

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


Mountain Segment

Three months ended January 31, 2014 compared to the three months ended
January 31, 2013
Mountain segment operating results for the three months ended January 31, 2014
and 2013 are presented by category as follows (in thousands, except effective
ticket price ("ETP")):


                                            Three Months Ended      Percentage
                                               January 31,           Increase
                                            2014          2013      (Decrease)
Net Mountain revenue:
Lift                                     $  195,357    $ 175,658        11.2  %
Ski school                                   46,930       41,723        12.5  %
Dining                                       32,602       29,826         9.3  %
Retail/rental                                85,717       83,748         2.4  %
Other                                        31,050       30,786         0.9  %
Total Mountain net revenue               $  391,656    $ 361,741         8.3  %
Mountain operating expense:
Labor and labor-related benefits         $   94,500    $  83,684        12.9  %
Retail cost of sales                         33,989       35,244        (3.6 )%
Resort related fees                          19,528       17,396        12.3  %
General and administrative                   37,788       34,813         8.5  %
Other                                        57,707       49,860        15.7  %
Total Mountain operating expense         $  243,512    $ 220,997        10.2  %
Mountain equity investment income, net           14           99       (85.9 )%
Mountain Reported EBITDA                 $  148,158    $ 140,843         5.2  %

Total skier visits                       $    3,512    $   3,220         9.1  %
ETP                                      $    55.63    $   54.55         2.0  %

Mountain Reported EBITDA includes $2.5 million and $2.2 million of stock-based compensation expense for the three months ended January 31, 2014 and 2013, respectively.

Mountain Reported EBITDA for the three months ended January 31, 2014 increased $7.3 million, or 5.2%, compared to the three months ended January 31, 2013. Our results for the three months ended January 31, 2014 compared to the same period in the prior year reflect strong pass sales growth for the 2013/2014 ski season, improved results for our Colorado resorts which saw an increase in visitation of 11.9% and a commensurate improvement in ancillary guest spend in ski school, dining and retail/rental operations at the resorts, as well as the addition of Canyons (transaction entered into in May 2013). However, our results were negatively impacted by very poor conditions in the Tahoe region during the three months ended January 31, 2014, with cumulative snowfall down 73% as of January 31, 2014, compared to the same period in the prior year, which adversely impacted skier visitation and guest spending at our Tahoe resorts. These challenging conditions resulted in a 27.7% decline in skier visitation at our Tahoe resorts.

Lift revenue increased $19.7 million, or 11.2%, for the three months ended January 31, 2014, compared to the same period in the prior year, driven largely by a $13.7 million, or 18.0%, increase in season pass revenue. The increase in season pass revenue was driven by a combination of both an increase in pricing and units sold, which was favorably impacted by our entry into the Utah ski market with the addition of Canyons. Additionally, our lift revenue excluding season pass revenue increased $6.0 million, or 6.0%, driven by increases at our Colorado resorts primarily due to an increase in ETP excluding season pass holders of 6.8%, and incremental revenue from Canyons, partially offset by lower lift revenue excluding season pass revenue at our Tahoe resorts which was driven by a decline in visitation excluding season pass holders of 27.9%. Total ETP increased $1.08, or 2.0%, due primarily to price increases in both our lead/window lift ticket products and season pass products, partially offset by a higher mix of season pass revenue which has a lower associated ETP.

Ski school revenue increased $5.2 million, or 12.5%, for the three months ended January 31, 2014, compared to the same period in the prior year, due primarily to a $3.2 million, or 9.7%, increase in ski school revenue at our Colorado resorts and


incremental revenue of $2.9 million from Canyons, partially offset by declines in ski school revenue of $1.0 million, or 11.6%, at our Tahoe resorts driven by a decline in skier visitation as discussed above.

Dining revenue increased $2.8 million, or 9.3%, for the three months ended January 31, 2014, compared to the same period in the prior year, which was primarily attributable to our Colorado resorts generating an increase of $3.2 million, or 16.0%, due to increased skier visitation and higher yields per skier visit, and incremental dining revenue from Canyons of $1.5 million. Dining revenue at our Tahoe resorts decreased $2.5 million, or 27.5%, compared to the same period in the prior year due to decreased skier visitation and fewer on-mountain locations being open as a result of the significant decline in snowfall as discussed above.

Retail/rental revenue increased $2.0 million, or 2.4%, for the three months ended January 31, 2014 compared to the same period in the prior year, which was primarily due to an increase in rental revenue of $2.4 million, or 11.8%, partially offset by a decrease in retail sales of $0.4 million, or 0.7%. The increase in rental revenue was driven by stores proximate to our Colorado resorts which experienced higher volumes due to increased skier visitation and the addition of Canyons; partially offset by revenue declines at stores proximate to our Tahoe resorts as a result of the challenging weather conditions in the Tahoe region. Retail sales was driven by an increase in sales volume at our Colorado stores; incremental retail revenue generated by Hoigaard's (our mid-west retailer acquired in April 2013); and the addition of Canyons. These retail revenue increases were more than offset by a decrease in on-line sales due to the shutdown of our on-line retail platform as we are transitioning to a different approach to on-line sales, and a decline in revenue at our Any Mountain stores (in the San Francisco Bay Area) along with our stores proximate to our Tahoe resorts which were impacted by the poor snowfall in the Tahoe region.

Other revenue mainly consists of other mountain activities revenue, commercial . . .

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