Vail Resorts, Inc. — Q2 FY2011 Form 10-Q
Reporting period: Three and six months ended January 31, 2011; amounts below are in U.S. dollars. The company operates Mountain, Lodging and Real Estate segments. Mountain and resort lodging activity is seasonal, with peak ski operations generally from mid-November through mid-April. Comparisons are with the corresponding prior-year periods unless stated otherwise.
Financial performance and liquidity
| Metric | Three months ended Jan. 31, 2011 | Six months ended Jan. 31, 2011 |
|---|---|---|
| Net revenue | $388.1 million, versus $300.5 million | $622.6 million, versus $381.3 million |
| Income from operations | $97.1 million, versus $73.5 million | $32.8 million, versus $8.8 million |
| Net income attributable to Vail Resorts | $54.6 million, versus $40.7 million | $11.5 million, versus a $0.5 million loss |
| Diluted earnings per share | $1.48, versus $1.11 | $0.31, versus a $0.01 loss |
| Operating cash flow | Not presented for the quarter | $243.7 million, versus $14.1 million |
| Reported EBITDA (non-GAAP) | $127.9 million, versus $101.5 million | $92.0 million, versus $64.3 million |
- Quarterly revenue rose 29%; Mountain revenue increased 22% and Lodging revenue 16%. Real Estate revenue was $25.1 million, compared with $0.9 million.
- Six-month revenue growth was driven largely by Real Estate: revenue was $174.4 million versus $1.1 million, primarily from closings at The Ritz-Carlton Residences, Vail. Mountain revenue rose 20% and Lodging revenue 11%.
- For the quarter, Mountain Reported EBITDA was $127.2 million versus $107.2 million; Lodging was $0.9 million versus $0.9 million; Real Estate was a $0.2 million loss versus a $6.5 million loss. For six months, the respective figures were $85.6 million versus $70.2 million, $2.4 million versus a $0.4 million loss, and $4.0 million versus a $5.4 million loss. Reported EBITDA is a company-defined non-GAAP measure, not a substitute for GAAP results.
- Cash and cash equivalents were $97.3 million at January 31, 2011, compared with $58.0 million a year earlier; restricted cash was an additional $15.9 million. The company reported $319.4 million available under its $400 million revolving credit facility, after letters of credit.
- Total debt was $497.8 million, versus $491.7 million a year earlier; net debt, a non-GAAP measure, was $400.5 million versus $433.7 million. Six-month capital expenditures were $61.9 million; investing cash use was $122.7 million, including the Northstar acquisition. Financing cash use was $38.5 million.
- Interest expense, net, increased to $8.7 million for the quarter and $16.6 million for six months, from $4.1 million and $9.0 million, respectively. Management attributed the increase principally to less interest being capitalized on substantially completed real estate projects.
Material changes and notable items
- The company acquired Northstar-at-Tahoe on October 25, 2010 for $60.5 million net of cash acquired. Northstar contributed $31.3 million of quarterly revenue. The preliminary purchase accounting included $90.0 million of goodwill and a $43.4 million unfavorable lease obligation; the acquisition assumed long-term leases with estimated remaining minimum payments of $203.3 million through the initial lease term.
- Mountain skier visits increased 22% in the quarter, including Northstar; excluding Northstar, visits rose 8.7%, with above-average early-season snowfall cited as a factor. Reported effective ticket price fell 1.8%, partly reflecting increased skiing by season-pass holders; excluding Northstar and season-pass holders, ticket pricing increased.
- The Real Estate segment recognized $6.2 million of revenue from deposits on Ritz-Carlton units whose buyers defaulted. During the six-month period, 63 Ritz-Carlton units and one One Ski Hill Place unit closed. These closings and the associated costs substantially explain the year-over-year change in Real Estate revenue and earnings.
- Cash from operations increased sharply, primarily due to $144.6 million of proceeds from real estate closings and lower investment in real estate as projects neared completion. The prior-year period had no comparable real estate closings.
- The company amended its credit agreement in January 2011, extending the revolving facility maturity to January 2016, subject to repayment or refinancing of the 6.75% Notes by November 15, 2013. The facility’s pricing increased; certain covenant restrictions were eliminated, while financial and other covenants remain. The company reported compliance at January 31, 2011.
Outlook, risks and contingencies
- No formal earnings or revenue forecast is provided. Management expected to spend $83–$93 million on 2011 resort capital expenditures excluding Northstar, plus $28–$32 million for Northstar. It also expected $25–$30 million for substantially completed real estate projects and future development; approximately $2 million had been spent by January 31.
- Management cited stronger season-pass sales: excluding Northstar, 2010/2011 season-pass sales by January 31 exceeded full-season 2009/2010 sales by $9.1 million, or about 9.1%; including Northstar, the increase was $19.0 million, or about 18.9%. Deferred season-pass revenue was $58.7 million, expected to be recognized during the third fiscal quarter.
- Real estate performance remains dependent on the timing, volume and prices of unit closings. Management noted credit-market and housing-market weakness, buyer financing constraints, possible price reductions, and that selling available units could take multiple years. It did not plan significant new development until the market improves.
- Other key risks include weather and natural disasters, economic and travel demand, seasonality, competition, seasonal labor availability and costs, reliance on government permits for public-land resorts, acquisition integration, and potential goodwill impairment if economic conditions weaken further. Management cautioned that increased wages and benefits may not be offset by revenue growth.
- The company had $390 million of 6.75% Senior Subordinated Notes due in fiscal 2014. It noted that refinancing could be considered and that failure to refinance or repay by November 15, 2013 would affect the credit facility maturity. A 100-basis-point LIBOR change was estimated to change annual interest payments by approximately $0.5 million.
- The company was pursuing a federal tax refund claim of approximately $6.2 million related to disputed net operating loss carryforwards; the outcome was uncertain, and the claimed benefits had not been reflected in the financial statements. Litigation also remained regarding one Ritz-Carlton unit contract; the other related unit cases had been resolved. Management said known legal loss contingencies were not material.
- Letters of credit totaled $73.3 million outside the facility availability calculation described by management, including $53.4 million supporting employee housing bonds. The company also disclosed guarantees and indemnities, some with potentially unlimited maximum amounts, but stated that no significant liability was recorded for most of them.
Investor facts to verify
- How much of revenue and cash generation reflects the Northstar acquisition and episodic real estate closings, rather than recurring resort operations?
- Whether season-pass demand, skier visits and pricing remain strong through the rest of the ski season, and how labor and operating costs affect segment profitability.
- Progress on remaining real estate inventory, buyer defaults, selling prices, completion costs and the expected timing of cash proceeds.
- Northstar integration and the economic burden of its assumed leases, including the recorded unfavorable lease obligation and future payment schedule.
- Refinancing or repayment plans for the 6.75% Notes, available credit-facility capacity, covenant compliance and the facility’s maturity condition.
- Developments in the IRS tax dispute and the remaining Ritz-Carlton contract litigation, as well as any changes to disclosed guarantees or contingent exposures.