Pursuit Attractions & Hospitality, Inc. annual report, FY2017

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Viad Corp 2017 Form 10-K

Reporting period: Fiscal year ended December 31, 2017. The filing is for Viad Corp (NYSE: VVI); Pursuit is one of its business groups, not the registrant named on the filing.

Business context

Viad operates two principal businesses: GES, a live-event services provider, and Pursuit, a portfolio of destination hospitality, attractions, transportation, and travel-planning businesses. GES generated 87% of 2017 consolidated revenue and 51% of segment operating income; Pursuit generated 13% and 49%, respectively. Results are seasonal: Pursuit earned 87% of its revenue in the second and third quarters, while GES results vary with show timing and rotation.

Financial performance and liquidity

  • Revenue: $1.307 billion, up 8.5% from $1.205 billion in 2016. Reported growth reflected $52.6 million of incremental acquisition revenue and underlying growth, partly offset by approximately $8 million of negative show rotation and $5.6 million of unfavorable foreign exchange impact.
  • Profit: Net income attributable to Viad was $57.7 million, up 36.5% from $42.3 million. Diluted continuing-operations EPS was $2.84 versus $2.12; diluted net EPS was $2.83 versus $2.09. Income from continuing operations was $58.5 million.
  • Operating results: Segment operating income, a non-GAAP measure, increased 12.9% to $97.1 million. GES segment operating income declined slightly to $50.0 million from $50.2 million, while Pursuit rose to $47.1 million from $35.7 million. Adjusted EBITDA, also non-GAAP, was $137.6 million versus $112.4 million.
  • Margins: GAAP operating income was $84.2 million, approximately 6.4% of revenue, compared with $74.9 million, or 6.2%, in 2016. Segment operating income was approximately 7.4% of revenue versus 7.1% (calculated from reported figures).
  • Cash flow and investment: Operating cash flow was $112.2 million, up from $100.3 million. Capital expenditures were $56.6 million; operating cash flow less capital expenditures was approximately $55.6 million. Investing cash flow included $31.6 million of fire-related insurance proceeds.
  • Cash and liquidity: Cash and equivalents were $53.7 million at year-end, compared with $20.9 million. Management said existing liquidity would fund operations and commitments for at least 12 months. Approximately $52 million of cash was held outside the U.S.; another $9.6 million in Iceland was designated for FlyOver Iceland development.
  • Debt: Debt and capital lease obligations totaled $209.2 million, down from $249.2 million. The reported balance included $207.3 million of borrowings before unamortized issuance costs and $2.9 million of capital leases. The weighted-average borrowing rate was 3.1% at year-end. Viad reported a 1.45-to-1 leverage ratio and 3.10-to-1 fixed-charge coverage ratio, and said it complied with credit covenants.
  • Shareholder returns: Dividends declared were $0.40 per share, unchanged from 2016. No open-market repurchases occurred in 2017.

Changes versus 2016 and unusual items

  • GES revenue grew 7.4% as reported. GES U.S. operating income fell 14.9%, reflecting revenue mix, higher costs, and acquisition-related depreciation and amortization; GES International operating income increased 59.6% on higher revenue. GES U.S. organic revenue grew only 0.5%, while GES International organic revenue grew 16.3% (company-defined non-GAAP measures).
  • Pursuit revenue grew 13.4% as reported and 7.1% organically. Growth was led by attractions, including the full-year operation of the renovated Banff Gondola and acquired businesses. Pursuit operating income included a $2.5 million business-interruption gain.
  • The Mount Royal Hotel fire insurance settlement totaled $36.3 million. Viad recorded a net $29.1 million impairment recovery, a $2.5 million business-interruption gain, $1.3 million as a reduction of expenses, and $1.0 million as deferred revenue; the hotel remained closed during 2017 and was expected to reopen in mid-2018.
  • The Tax Cuts and Jobs Act resulted in a $16.1 million income-tax charge: $8.0 million from remeasuring deferred taxes and $8.1 million for deemed repatriation taxes. Viad described these amounts as provisional and said its analysis was not complete. The reported effective tax rate was 44.0%, compared with 32.8% in 2016.
  • Interest expense rose 40.8% to $8.3 million, primarily due to higher debt balances following acquisitions. Restructuring charges declined to $1.0 million from $5.2 million.

Outlook, risks, and contingencies

  • 2018 outlook: Viad expected GES revenue to increase slightly, despite approximately $40 million of negative show rotation, and expected mid-single-digit growth in GES U.S. base same-show revenue. Pursuit revenue was expected to increase at a high-single- to low-double-digit rate, including approximately $5 million from the planned Mount Royal reopening. Management also forecast favorable foreign-exchange effects, while anticipating approximately $1 million of FlyOver Iceland start-up costs.
  • Investment plans: FlyOver Iceland was expected to open in 2019. A new RV and cabin park near Glacier National Park was under development, with partial opening targeted for 2019 and the remainder for 2020. Viad also planned selective GES investment in underpenetrated event categories and continued labor-productivity initiatives.
  • Principal risks: show rotation and seasonality; loss or insourcing of GES event-service contracts; competition and economic weakness; travel disruptions, weather, disasters, or terrorism; foreign-exchange exposure (not hedged for translation exposure); union negotiations and potential work stoppages; cybersecurity and privacy regulation, including GDPR; acquisition integration and capital-project execution; and uncertainty around U.S. tax-law implementation and Brexit.
  • Pensions and other obligations: Viad contributed $26.6 million to multi-employer plans in 2017 and noted several plans were underfunded; potential additional funding or withdrawal liabilities were not ascertainable. Contractual obligations totaled $438.5 million, including $156.6 million of operating leases. Separate lease guarantees had a maximum potential payment of $19.3 million. The filing said pending litigation was not expected to have a material effect, after reserves and insurance.
  • Other oversight: Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls and internal controls were effective at year-end.

Most important facts for investors to verify

  • How much of 2017 earnings and cash generation is repeatable without the Mount Royal insurance recovery and other fire-related gains?
  • Whether the provisional $16.1 million Tax Act charge changes as Viad completes its tax analysis, and the future cash-tax effects of the legislation.
  • Whether GES can offset the projected $40 million negative show rotation with organic growth, new business, and improved labor productivity.
  • Whether Pursuit meets its 2018 growth expectations, including the Mount Royal reopening, and delivers the planned FlyOver Iceland and Glacier-area projects on schedule and budget.
  • Debt repayment and refinancing needs, including the substantial scheduled 2018 borrowings, alongside capital spending and seasonal liquidity needs.
  • Potential pension-plan contribution increases, union-contract outcomes, and material developments in legacy claims or self-insurance liabilities.