UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

For the quarterly period ended September 30, 2017

or

For the transition period from ____________ to

Commission file number: 001-11015

 

Viad Corp

(Exact name of registrant as specified in its charter)

 

 

(602) 207-1000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  ☒    No  ☐

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

As of October 27, 2017, there were 20,411,480 shares of Common Stock ($1.50 par value) outstanding.

 

 

 

 

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INDEX

 

 

 

 

 

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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

VIAD CORP

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

 

Refer to Notes to Condensed Consolidated Financial Statements.

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VIAD CORP

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

 

Refer to Notes to Condensed Consolidated Financial Statements.

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VIAD CORP

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

 

 

Refer to Notes to Condensed Consolidated Financial Statements.

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VIAD CORP

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

Refer to Notes to Condensed Consolidated Financial Statements.

 

 

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VIAD CORP

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Basis of Presentation and Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements of Viad Corp (“Viad” or the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information required by GAAP or Securities and Exchange Commission (“SEC”) rules and regulations for complete financial statements. In the opinion of management, these financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with Viad’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the SEC on March 6, 2017.

The condensed consolidated financial statements include the accounts of Viad and its subsidiaries. All significant intercompany account balances and transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Estimates and assumptions are used in accounting for, among other things, the fair value of Viad’s reporting units used to perform annual impairment testing of recorded goodwill; allowances for uncollectible accounts receivable; provisions for income taxes, including uncertain tax positions; valuation allowances related to deferred tax assets; liabilities for losses related to self-insured liability claims; liabilities for losses related to environmental remediation obligations; sublease income associated with restructuring liabilities; assumptions used to measure pension and postretirement benefit costs and obligations; assumptions used to determine share-based compensation costs under the fair value method; and the allocation of purchase price of acquired businesses. Actual results could differ from these and other estimates.

Insurance Recoveries

Receipts from insurance up to the amount of the recognized losses are considered recoveries and are accounted for when they are probable of receipt. Anticipated proceeds in excess of the recognized loss are considered a gain contingency. A contingency gain for anticipated insurance proceeds in excess of losses already recognized is not recognized until all contingencies relating to the insurance claim have been resolved.

On December 29, 2016, the Mount Royal Hotel was damaged by a fire and closed. During the fourth quarter of 2016, the Company recorded an asset impairment loss of $2.2 million and an offsetting impairment recovery (and related insurance receivable) as the losses related to the fire were covered by Viad’s property and business interruption insurance. During July 2017, Viad resolved its property and business interruption insurance claims for a total of $36.3 million, of which $9.0 million was received during the first six months of 2017 with the remainder received during the third quarter. The Company allocated $2.2 million to an insurance receivable, $29.3 million was recorded as an impairment recovery (partially offset by impairment charges of $0.2 million) related to construction costs to re-open the hotel, $2.2 million was recorded as a business interruption gain for the recovery of lost profits, $1.1 million was recorded as contra-expense to offset non-capitalizable costs incurred by the Company, and the remaining $1.5 million was recorded as deferred revenue, which will be recognized over the periods when the business interruption losses are actually incurred.

Nature of Business

Viad is an international experiential services company with operations in the United States, Canada, the United Kingdom, continental Europe, the United Arab Emirates, and Hong Kong. Viad is committed to providing unforgettable experiences to its clients and guests. Viad operates through three reportable business segments: GES U.S., GES International (collectively, “GES”), and Pursuit.

GES

GES is a global, full-service provider for live events that produces exhibitions, conferences, corporate events, and consumer events. GES offers a comprehensive range of live event services and a full suite of audio-visual services from creative and technology to content and design, along with online tools powered by next generation technologies that help clients easily manage the complexities of their events.

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GES’ clients include event organizers and corporate brand marketers. Corporate brand marketers include exhibitors and domestic and international corporations that want to promote their brands, services and innovations, feature new products, and build business relationships. GES serves corporate brand marketers when they exhibit at shows and when GES is engaged to manage their global exhibit program or produce their proprietary corporate events.

Pursuit

Pursuit is a collection of iconic natural and cultural destination travel experiences that enjoy perennial demand. Pursuit offers guests distinctive and world renowned experiences through its collection of unique hotels, lodges, recreational attractions, and transportation services. Pursuit is composed of four lines of business: (i) Hospitality; (ii) Attractions; (iii) Transportation, and (iv) Travel Planning. These four lines of business work together, driving economies of scope and meaningful scale in and around the iconic destinations of Banff, Jasper, and Waterton Lakes National Parks and Vancouver in Canada, and Glacier, Denali, and Kenai Fjords National Parks in the United States. Pursuit is composed of Brewster Travel Canada, the Alaska Collection, Glacier Park, Inc., and FlyOver Canada.

 

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Impact of Recent Accounting Pronouncements

The following table provides a brief description of recent accounting pronouncements:

 

 

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Note 2. Share-Based Compensation

The following table summarizes share-based compensation expense:

Viad did not record any share-based compensation expense through restructuring expense during the three months ended September 30, 2017 or 2016, and recorded zero and $0.2 million for the nine months ended September 30, 2017 and 2016, respectively.

The following table summarizes the activity of the outstanding share-based compensation awards:

 

Viad Corp Omnibus Incentive Plan

The 2017 Viad Corp Omnibus Incentive Plan (the “2017 Plan”) was approved by Viad stockholders and was effective May 18, 2017. The 2017 Plan replaced the Company’s 2007 Viad Corp Omnibus Stock Plan (the “2007 Plan”). No further awards may be made under the 2007 Plan, although awards previously granted under the 2007 Plan will remain outstanding in accordance with their respective terms. The 2017 Plan has a 10-year life and provides for the following types of awards: (a) incentive and non-qualified stock options, (b) restricted stock and restricted stock units, (c) performance units or performance shares, (d) stock appreciation rights, (e) cash-based awards, and (f) certain other stock-based awards. In June 2017, Viad registered 1,750,000 shares of common stock issuable under the 2017 Plan. As of September 30, 2017, there were 1,746,927 shares available for future grant under the 2017 Plan.

PUP Awards

In February 2016, the PUP Plan was amended to provide that PUP awards earned under the 2007 Plan may be payable in the form of cash or in shares of Viad common stock (or a combination of both). Previously, payouts could only be made in cash. The vesting of shares is based upon achievement of certain performance-based criteria. The performance period of the shares is three years.

During the nine months ended September 30, 2017, Viad granted $3.5 million of PUP awards of which $1.4 million are payable in shares. As of September 30, 2017 and December 31, 2016, Viad had recorded liabilities of $10.3 million and $7.6 million, respectively, related to PUP awards. In March 2017, the PUP awards granted in 2014 vested and cash payouts of $3.7 million were distributed. In March 2016, the PUP awards granted in 2013 vested and cash payouts of $0.2 million were distributed.

Restricted Stock

As of September 30, 2017, the unamortized cost of all outstanding restricted stock awards was $3.1 million, which Viad expects to recognize in the consolidated financial statements over a weighted-average period of approximately 1.2 years. During the nine months ended September 30, 2017 and 2016, the Company repurchased 26,916 shares for $1.3 million and 24,432 shares for $0.7 million, respectively, related to tax withholding requirements on vested share-based awards.

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Restricted Stock Units

As of both September 30, 2017 and December 31, 2016, Viad had aggregate liabilities recorded of $0.4 million related to restricted stock units. In February 2017, portions of the 2012 and 2014 restricted stock units vested and cash payouts of $0.3 million were distributed. In February 2016, portions of the 2011, 2012, and 2013 restricted stock units vested and cash payouts of $0.2 million were distributed.

Stock Options

During the three and nine months ended September 30, 2017, there was no stock option activity. As of both September 30, 2017 and December 31, 2016, there were 63,773 stock options outstanding and exercisable with a weighted-average exercise price of $16.62. As of September 30, 2017, there were no unrecognized costs related to non-vested stock option awards.

Note 3. Acquisition of Businesses

FlyOver Canada

On December 29, 2016, the Company acquired the assets and operations of FlyOver Canada, a recreational attraction that provides a virtual flight ride experience with a combination of motion seating, spectacular media, and visual effects including wind, scents, and mist. The purchase price was $68.8 million Canadian dollars (approximately $50.9 million U.S. dollars) in cash, subject to certain adjustments.

The following table summarizes the allocation of the aggregate purchase price paid and the amounts of assets acquired and liabilities assumed based on the estimated fair value as of the acquisition date. The allocation of the purchase price was completed as of March 31, 2017. 

 

Under the acquisition method of accounting, the purchase price as shown in the table above is allocated to the tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values. The excess purchase price over the fair value of net assets acquired was recorded as goodwill. Goodwill of FlyOver Canada is included in the Pursuit business group and is a separate reporting unit. The primary factor that contributed to the purchase price resulting in the recognition of goodwill relates to future growth opportunities and the expansion of the FlyOver concept. Goodwill is expected to be deductible for tax purposes pursuant to Canadian tax regulations. The estimated values of current assets and liabilities were based upon their historical costs on the date of acquisition due to their short-term nature. Transaction costs associated with the acquisition of FlyOver Canada were $0.1 million in 2017 and $0.5 million in 2016 and are included in cost of services in Viad’s condensed consolidated statements of operations.

Identified intangible assets acquired in the FlyOver Canada acquisition totaled $6.0 million and consisted of trade names of $3.7 million, customer relationships of $1.6 million, and non-compete agreements of $0.7 million. The weighted-average amortization period related to the intangible assets is 9.4 years.

The results of operations of FlyOver Canada have been included in Viad’s condensed consolidated financial statements from the date of acquisition. During the three and nine months ended September 30, 2017, revenue related to FlyOver Canada was $4.2 million and $8.0 million, respectively, and operating income was $2.2 million and $2.5 million, respectively.

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Other Acquisitions

In March 2017, the Company completed the acquisition of the Poken event engagement technology for total cash consideration of $1.7 million, subject to certain adjustments. These assets have been included in Viad’s condensed consolidated financial statements from the date of acquisition.

Supplementary pro forma financial information

The following table summarizes the unaudited pro forma results of operations attributable to Viad, assuming the 2016 acquisitions of CATC Alaska Tourism Corporation (“CATC”) (acquired March 2016), the business of ON Event Services, LLC (“ON Services”) (acquired August 2016), and FlyOver Canada (acquired December 2016) had been completed on January 1, 2016:

 

  

 

Note 4. Inventories

The components of inventories consisted of the following:

 

 

Note 5. Other Current Assets

Other current assets consisted of the following:

 

 

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Note 6. Property and Equipment

Property and equipment consisted of the following:

 

 

Depreciation expense was $12.5 million and $10.0 million for the three months ended September 30, 2017 and 2016, respectively, and $32.9 million and $25.1 million for the nine months ended September 30, 2017 and 2016, respectively.

Non-cash increases to property and equipment related to assets acquired under capital leases were $1.1 million and $1.0 million for the nine months ended September 30, 2017 and 2016, respectively. Non-cash increases to property and equipment purchases in accounts payable and accrued liabilities were $0.8 million and $5.6 million for the nine months ended September 30, 2017 and 2016, respectively.

 

 

Note 7. Other Investments and Assets

Other investments and assets consisted of the following:

 

 

Note 8. Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill were as follows:

 

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Other intangible assets consisted of the following:

 

Intangible asset amortization expense was $3.3 million and $2.7 million for the three months ended September 30, 2017 and 2016, respectively, and $9.6 million and $6.1 million for the nine months ended September 30, 2017 and 2016, respectively. The weighted-average amortization period of customer contracts and relationships is approximately 8.8 years, operating contracts and licenses is approximately 26.5 years, tradenames is approximately 7.2 years, non-compete agreements is approximately 2.5 years, and other amortizable intangible assets is approximately 2.6 years. The estimated future amortization expense related to amortized intangible assets held at September 30, 2017 is as follows:

 

 

 

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Note 9. Other Current Liabilities

Other current liabilities consisted of the following:

 

 

 

Note 10. Other Deferred Items and Liabilities

Other deferred items and liabilities consisted of the following:

 

 

 

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Note 11. Debt and Capital Lease Obligations

The components of long-term debt and capital lease obligations consisted of the following:

 

Effective December 22, 2014, Viad entered into a $300 million Amended and Restated Credit Agreement (the “Credit Agreement”). The Credit Agreement provides for a senior credit facility in the aggregate amount of $300 million, which consists of a $175 million revolving credit facility (the “Revolving Credit Facility”) and a $125 million term loan (the “Term Loan”). Loans under the Credit Agreement have a maturity date of December 22, 2019. Proceeds from the loans made under the Credit Agreement were used to refinance certain outstanding debt of the Company and will be used for the Company’s general corporate purposes in the ordinary course of its business. Under the Credit Agreement, the Revolving Credit Facility and/or the Term Loan may be increased up to an additional $100 million under certain circumstances. If such circumstances are met, the Company may obtain the additional borrowings under the Revolving Credit Facility, the Term Loan, or a combination of the two. The Revolving Credit Facility has a $40 million sublimit for letters of credit. Borrowings and letters of credit can be denominated in U.S. dollars, Euros, Canadian dollars, or British pounds. Viad’s lenders under the Credit Agreement have a first perfected security interest in all of the personal property of Viad, GES, GES Event Intelligence Services, Inc., CATC, and ON Services including 65 percent of the capital stock of top-tier foreign subsidiaries.

Effective February 24, 2016, Viad executed an amendment (the “Credit Agreement Amendment”) to the Credit Agreement. The Credit Agreement Amendment modified the terms of the financial covenants and the negative covenants related to acquisitions, restricted payments, and indebtedness. The overall maximum leverage ratio and minimum fixed charge coverage ratio are 3.50 to 1.00 and 1.75 to 1.00, respectively, and will remain at those levels for the entire remaining term of the Credit Agreement. Acquisitions in substantially the same or related lines of business are permitted under the Credit Agreement Amendment, as long as the pro forma leverage ratio is less than or equal to 3.00 to 1.00. Viad can make dividends, distributions, and repurchases of its common stock up to $20 million per calendar year. Stock dividends, distributions, and repurchases above the $20 million limit are not subject to a liquidity covenant, and are permitted as long as the Company’s pro forma leverage ratio is less than or equal to 2.50 to 1.00 and there is no default or unmatured default, as defined in the Credit Agreement. Unsecured debt is allowed as long as the Company’s pro forma leverage ratio is less than or equal to 3.00 to 1.00. Significant other covenants under the Credit Agreement that remain unchanged by the Credit Agreement Amendment include limitations on investments, sales/leases of assets, consolidations or mergers, and liens on property. As of September 30, 2017, the fixed charge coverage ratio was 3.18 to 1.00, the leverage ratio was 1.26 to 1.00, and Viad was in compliance with all covenants under the Credit Agreement.

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Effective December 28, 2016, Brewster Inc., part of Pursuit, entered into a credit agreement (the “Brewster Credit Agreement”) with a $38 million revolving credit facility (the “Brewster Revolving Credit Facility”). The Brewster Credit Agreement was used in connection with the Company’s acquisition of FlyOver Canada and has a maturity date of December 28, 2017. The Company intends to amend and extend the Brewster Revolving Credit Facility for one year. Additional loan proceeds will be used for potential future acquisitions in Canada and other general corporate purposes of Brewster Inc. Brewster Inc.’s lender has a first perfected security interest in all of the personal property of Brewster Inc. under the Brewster Revolving Credit Facility and a guaranty from Brewster Travel Canada Inc., the immediate parent of Brewster Inc., (secured by its present and future personal property), Viad, and all current or future subsidiaries of Viad that are required to be guarantors under Viad’s Credit Agreement.

As of September 30, 2017, Viad’s total debt and capital lease obligations were $185.2 million, consisting of outstanding borrowings under the Term Loan of $79.7 million, the Revolving Credit Facility of $105.0 million, and capital lease obligations of $1.6 million, offset in part by unamortized debt issuance costs of $1.1 million. As of September 30, 2017, Viad had $68.7 million of capacity remaining under the Revolving Credit Facility, reflecting borrowings of $105.0 million and $1.3 million in outstanding letters of credit. As of September 30, 2017, Brewster Inc. had $38.0 million of capacity remaining under the Brewster Revolving Credit Facility.

Borrowings under the Revolving Credit Facility (of which GES, GES Event Intelligence Services, Inc., CATC, and ON Services are guarantors) are indexed to the prime rate or the London Interbank Offered Rate, plus appropriate spreads tied to Viad’s leverage ratio. Commitment fees and letters of credit fees are also tied to Viad’s leverage ratio. The fees on the unused portion of the Credit Facility are currently 0.35 percent annually.

As of September 30, 2017, Viad, on behalf of its subsidiaries, had certain obligations under guarantees to third parties. These guarantees are not subject to liability recognition in the condensed consolidated financial statements and relate to leased facilities entered into by Viad’s subsidiary operations. The Company would generally be required to make payments to the respective third parties under these guarantees in the event that the related subsidiary could not meet its own payment obligations. The maximum potential amount of future payments that Viad would be required to make under all guarantees existing as of September 30, 2017 would be $7.5 million. These guarantees relate to facilities leased by the Company through September 2021. There are no recourse provisions that would enable Viad to recover from third parties any payments made under the guarantees. Furthermore, there are no collateral or similar arrangements whereby Viad could recover payments.

The estimated fair value of total debt was $179.8 million and $252.8 million as of September 30, 2017 and December 31, 2016, respectively. The fair value of debt was estimated by discounting the future cash flows using rates currently available for debt of similar terms and maturity.

Cash paid for interest on debt was $5.5 million and $3.7 million for the nine months ended September 30, 2017 and 2016, respectively.

Note 12. Fair Value Measurements

The fair value of an asset or liability is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value guidance requires an entity to maximize the use of quoted prices and other observable inputs and minimize the use of unobservable inputs when measuring fair value, and also establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.

Level 2 - Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value.

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Viad measures its money market mutual funds and certain other mutual fund investments at fair value on a recurring basis using Level 1 inputs. The fair value information related to these assets is summarized in the following tables:

 

 

The carrying values of cash and cash equivalents, receivables, and accounts payable approximate fair value due to the short-term maturities of these instruments. Refer to Note 11 – Debt and Capital Lease Obligations, for the estimated fair value of debt obligations.

Note 13. Stockholders’ Equity

The following represents a reconciliation of the carrying amounts of stockholders’ equity attributable to Viad and the noncontrolling interest for the nine months ended September 30, 2017 and 2016:

 

 

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Changes in AOCI by component are as follows:

 

 

The following table presents information about reclassification adjustments out of AOCI:

 

 

 

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Note 14. Income Per Share

The components of basic and diluted income per share are as follows:

 

 

During the nine months ended September 30, 2017, 11,000 shares of share-based awards were not included in the computation of dilutive shares outstanding because the effect would be anti-dilutive.

 

Note 15. Income Taxes

The effective tax rates for the three months ended September 30, 2017 and 2016 were 30.4 percent and 33.8 percent, respectively. The effective tax rates for the nine months ended September 30, 2017 and 2016 were 29.0 percent and 33.1 percent, respectively.

The income tax provision was computed based on the Company’s estimated effective tax rate and forecasted income by jurisdiction expected for the full year, including the impact of any unusual, infrequent, or non-recurring items. The effective tax rate for the nine months ended September 30, 2017 was less than the federal statutory rate of 35.0 percent primarily due to foreign income taxed at lower rates, the release of the valuation allowance against certain foreign net operating losses, and the adoption of new accounting guidance, which requires the excess tax benefit on share-based compensation to be recorded to income tax expense rather than equity. The effective tax rate for the nine months ended September 30, 2016 was less than the federal statutory rate primarily due to foreign income taxed at lower rates.

During the nine months ended September 30, 2017 and 2016, cash paid for income taxes was $10.9 million and $8.4 million, respectively.

 

Note 16. Pension and Postretirement Benefits

The components of net periodic benefit cost of Viad’s pension and postretirement benefit plans for the three months ended September 30, 2017 and 2016 included the following:

 

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The components of net periodic benefit cost of Viad’s pension and postretirement benefit plans for the nine months ended September 30, 2017 and 2016 included the following:

 

 

Viad expects to contribute $1.6 million to its funded pension plans, $0.9 million to its unfunded pension plans, and $1.1 million to its postretirement benefit plans in 2017. During the nine months ended September 30, 2017, Viad contributed $1.4 million to its funded pension plans, $0.5 million to its unfunded pension plans, and $1.1 million to its postretirement benefit plans.

 

Note 17. Restructuring Charges

The Company has taken certain restructuring actions designed to reduce the Company’s cost structure primarily within GES U.S. and GES International, as well as the elimination of certain positions at the corporate office. As a result, the Company recorded restructuring charges primarily consisting of severance and related benefits as a result of workforce reductions and charges related to the consolidation and downsizing of facilities representing the remaining operating lease obligations (net of estimated sublease income) and related costs.

Changes to the restructuring liability by major restructuring activity are as follows:

 

 

As of September 30, 2017, the liabilities related to severance and employee benefits are expected to be paid by the end of 2018. Additionally, the liability related to future lease payments will be paid over the remaining lease terms for GES. Refer to Note 19 – Segment Information, for information regarding restructuring charges by segment.

 

Note 18. Litigation, Claims, Contingencies, and Other

Viad and certain of its subsidiaries are plaintiffs or defendants to various actions, proceedings, and pending claims, some of which involve, or may involve, compensatory, punitive, or other damages. Litigation is subject to many uncertainties and it is possible that some of the legal actions, proceedings, or claims could be decided against Viad. Although the amount of liability as of September 30, 2017 with respect to these matters is not ascertainable, Viad believes that any resulting liability, after taking into consideration amounts already provided for and insurance coverage, will not have a material effect on Viad’s business, financial position, or results of operations.

Viad is subject to various U.S. federal, state, and foreign laws and regulations governing the prevention of pollution and the protection of the environment in the jurisdictions in which Viad has or had operations. If the Company fails to comply with these environmental laws and regulations, civil and criminal penalties could be imposed and Viad could become subject to regulatory enforcement actions in the form of injunctions and cease and desist orders. As is the case with many companies, Viad also faces exposure to actual or potential claims and lawsuits involving environmental matters relating to its past operations. As of September 30, 2017, Viad had recorded environmental remediation liabilities of $2.4 million related to previously sold operations. Although it is a party to certain environmental disputes, Viad believes that any resulting liabilities, after taking into consideration amounts already provided for and insurance coverage, will not have a material effect on the Company’s financial position or results of operations.

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As of September 30, 2017, Viad, on behalf of its subsidiaries, had certain obligations under guarantees to third parties. These guarantees are not subject to liability recognition in the condensed consolidated financial statements and relate to leased facilities entered into by Viad’s subsidiary operations. The Company would generally be required to make payments to the respective third parties under these guarantees in the event that the related subsidiary could not meet its own payment obligations. The maximum potential amount of future payments that Viad would be required to make under all guarantees existing as of September 30, 2017 would be $7.5 million. These guarantees relate to facilities leased by the Company through September 2021. There are no recourse provisions that would enable Viad to recover from third parties any payments made under the guarantees. Furthermore, there are no collateral or similar arrangements whereby Viad could recover payments.

A significant portion of Viad’s employees are unionized and the Company is a party to approximately 100 collective-bargaining agreements, with approximately one-third requiring renegotiation each year. If the Company was unable to reach an agreement with a union during the collective-bargaining process, the union may call for a strike or work stoppage, which may, under certain circumstances, adversely impact the Company’s businesses and results of operations. Viad believes that relations with its employees are satisfactory and that collective-bargaining agreements expiring in 2017 will be renegotiated in the ordinary course of business without having a material adverse effect on Viad’s operations. The Company entered into showsite and warehouse agreements with the Chicago Teamsters Local 727, effective January 1, 2014, and those agreements contain provisions that allow the parties to re-open negotiation of the agreements on pension-related issues. The Company is in informal discussions regarding those issues with all relevant parties to resolve those issues in a manner that will be reasonable and equitable to employees, customers, and stockholders. Although the Company’s labor relations are currently stable, disruptions pending the outcome of the Chicago Teamsters Local 727 negotiations could occur, as they could with any collective-bargaining agreement negotiation, with the possibility of an adverse impact on the operating results of GES.

Viad’s businesses contribute to various multi-employer pension plans based on obligations arising under collective-bargaining agreements covering its union-represented employees. Based upon the information available to Viad from plan administrators, management believes that several of these multi-employer plans are underfunded. The Pension Protection Act of 2006 requires pension plans underfunded at certain levels to reduce, over defined time periods, the underfunded status. In addition, under current laws, the termination of a plan, or a voluntary withdrawal from a plan by Viad, or a shrinking contribution base to a plan as a result of the insolvency or withdrawal of other contributing employers to such plan, would require Viad to make payments to such plan for its proportionate share of the plan’s unfunded vested liabilities. As of September 30, 2017, the amount of additional funding, if any, that Viad would be required to make related to multi-employer pension plans is not ascertainable.

Viad is self-insured up to certain limits for workers’ compensation, employee health benefits, automobile, product and general liability, and property loss claims. The aggregate amount of insurance liabilities (up to the Company’s retention limit) related to Viad’s continuing operations was $20.2 million as of September 30, 2017 which includes $14.3 million related to workers’ compensation liabilities and $5.9 million related to general/auto liability claims. Viad has also retained and provided for certain insurance liabilities in conjunction with previously sold businesses of $3.3 million as of September 30, 2017, related to workers’ compensation liabilities. Provisions for losses for claims incurred, including estimated claims incurred but not yet reported, are made based on Viad’s historical experience, claims frequency, and other factors. A change in the assumptions used could result in an adjustment to recorded liabilities. Viad has purchased insurance for amounts in excess of the self-insured levels, which generally range from $0.2 million to $0.5 million on a per claim basis. Viad does not maintain a self-insured retention pool fund as claims are paid from current cash resources at the time of settlement. Viad’s net cash payments in connection with these insurance liabilities were $1.3 million and $1.5 million for the three months ended September 30, 2017 and 2016, respectively, and $3.8 million and $3.9 million for the nine months ended September 30, 2017 and 2016, respectively.

In addition, as of September 30, 2017, Viad recorded insurance liabilities of $10.5 million related to continuing operations, which represents the amount for which Viad remains the primary obligor after self-insured insurance limits, without taking into consideration the above-referenced insurance coverage. Of this total, $6.9 million related to workers’ compensation liabilities and $3.6 million related to general/auto liability claims which are recorded in other deferred items and liabilities in Viad’s condensed consolidated balance sheets with a corresponding receivable in other investments.

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Note 19. Segment Information

Viad measures profit and performance of its operations on the basis of segment operating income (loss) which excludes restructuring charges and recoveries and impairment charges and recoveries. Intersegment sales are eliminated in consolidation and intersegment transfers are not significant. Corporate activities include expenses not allocated to operations. Depreciation and amortization and share-based compensation expense are the only significant non-cash items for the reportable segments.

Viad’s reportable segments, with reconciliations to consolidated totals, are as follows:

 

 

 

Note 20. Discontinued Operations

Discontinued operations in 2017 includes reserves to resolve certain environmental matters and legal fees related to previously sold operations. During 2016, Viad recorded liability reserve adjustments and legal fees related to previously sold operations.

 

Note 21.  Subsequent Event

On November 3, 2017, the Company acquired the controlling interest (54.5% of the common stock) in Esja Attractions ehf. (“Esja”), for a purchase price of €8.2 million (approximately $9.5 million) in cash. Esja, a private corporation in Reykjavik, Iceland, is developing and will operate the new FlyOver Iceland attraction. The FlyOver Iceland attraction is expected to open in 2019.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with the Annual Report on Form 10-K of Viad Corp (“Viad” or the “Company”) for the year ended December 31, 2016 and the condensed consolidated financial statements and accompanying notes included in this Form 10-Q. The MD&A is intended to assist in providing an understanding of the Company’s financial condition and results of operations. This discussion contains forward-looking statements that involve risks and uncertainties. Viad’s actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this Form 10-Q.

Overview

Viad operates through three reportable business segments: GES U.S., GES International (collectively, “GES”), and Pursuit.

GES

GES is a global, full-service provider for live events that produces exhibitions, conferences, corporate events, and consumer events. GES offers a comprehensive range of live event services and a full suite of audio-visual services from creative and technology to content and design, along with online tools powered by next generation technologies that help clients easily manage the complexities of their events.

GES’ clients include event organizers and corporate brand marketers. Corporate brand marketers include exhibitors and domestic and international corporations that want to promote their brands, services and innovations, feature new products, and build business relationships. GES serves corporate brand marketers when they exhibit at shows and when GES is engaged to manage their global exhibit program or produce their proprietary corporate events.

Markets Served

GES U.S. and GES International both offer a full suite of services for event organizers and corporate brand marketers across four live event markets: (i) Exhibitions; (ii) Conferences; (iii) Corporate Events, and (iv) Consumer Events (collectively, “Live Events”).

Services Offered

GES offers a comprehensive range of services and innovative technology to event organizers and corporate brand marketers including (i) Core Services; (ii) Event Technology, and (iii) Audio-Visual:

 

 

Seasonality

GES U.S. and GES International exhibition and event activity can vary significantly from quarter to quarter and year to year depending on the frequency and timing of shows, as some shows are not held each year and some may shift between quarters.

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Pursuit

Pursuit is a collection of iconic natural and cultural destination travel experiences that enjoy perennial demand. Pursuit offers guests distinctive and world renowned experiences through its collection of unique hotels, lodges, recreational attractions, and transportation services. Pursuit is composed of the following collections:

 

 

 

Pursuit is composed of four lines of business: (i) Hospitality (including food and beverage services and retail operations); (ii) Attractions (including food and beverage services and retail operations); (iii) Transportation; and (iv) Travel Planning. These four lines of business work together, driving economies of scope and meaningful scale in and around the iconic destinations of Banff, Jasper, and Waterton Lakes National Parks and Vancouver in Canada, and Glacier, Denali, and Kenai Fjords National Parks in the United States.

Seasonality

Pursuit experiences peak activity during the summer months. During 2016, 90 percent of Pursuit’s revenue was earned in the second and third quarters.

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Results of Operations

Financial Highlights

Three months ended September 30, 2017 compared with the three months ended September 30, 2016

Nine months ended September 30, 2017 compared with the nine months ended September 30, 2016

 

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Foreign Exchange Rate Variances

Viad conducts its foreign operations primarily in Canada, the United Kingdom, the Netherlands, Germany, and to a lesser extent, in certain other countries.

The following tables summarize the effects of foreign exchange rate variances on revenue and segment operating results (or “FX Impact”) from Viad’s significant international operations for the three and nine months ended September 30, 2017 and 2016, excluding the effect of acquisitions completed during 2017 and 2016:

Three months ended September 30, 2017 compared with the three months ended September 30, 2016

Nine months ended September 30, 2017 compared with the nine months ended September 30, 2016

Viad’s three months ended September 30, 2017 revenue and segment operating results were primarily impacted by the strengthening of the Canadian dollar relative to the U.S. dollar. Viad’s nine months ended September 30, 2017 revenue and segment operating results were primarily impacted by the weakening of the British pound and the strengthening of the Canadian dollar relative to the U.S. dollar. Future changes in the exchange rates may impact overall expected profitability and historical period-to-period comparisons when revenue and segment operating results are translated into U.S. dollars.

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Analysis of Revenue and Operating Results by Reportable Segment

GES

The following tables provide a comparison of GES’ reported revenue and segment operating results to organic revenue⁽³⁾ and organic segment operating results⁽³⁾ for the three and nine months ended September 30, 2017 and 2016 in order to better understand the underlying performance of the segment without the effects of acquisitions or FX Impact.

 

 

 

** Change is greater than +/- 100 percent

 

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Three months ended September 30, 2017 compared with the three months ended September 30, 2016

GES U.S.

GES U.S. revenue decreased $47.7 million or 20.5 percent, primarily due to negative show rotation of approximately $63 million and other non-recurring business in the comparable prior period, offset in part by incremental revenue of $8.7 million from the acquisitions of ON Services and Poken, new business wins, and U.S. base same-show revenue growth of 1.6 percent. U.S. base same-show revenue growth was lower due to one event with a reduced scope of service as result of a venue change. Base same-shows represented 37.0 percent of GES’ U.S. organic revenue*. Organic revenue* decreased $56.4 million or 25.4 percent.

GES U.S. operating results decreased $17.4 million to an operating loss of $2.9 million. This decrease was primarily due to the decrease in revenue driven by negative show rotation, offset in part by lower performance-based compensation expense and income of $2.8 million from a contract settlement. Organic operating income* decreased $15.9 million.

GES International

GES International revenue decreased $6.9 million or 11.3 percent, primarily due to negative show rotation of approximately $12 million, offset in part by new business wins and a favorable FX Impact of $1.3 million. Organic revenue* decreased $8.3 million or 13.7 percent.

GES International operating results decreased $3.5 million to an operating loss of $2.9 million. This decrease was primarily due to the decrease in revenue driven by negative show rotation. Organic operating income* decreased $3.4 million.

Nine months ended September 30, 2017 compared with the nine months ended September 30, 2016

GES U.S.

GES U.S. revenue increased $47.7 million or 7.5 percent, primarily due to incremental revenue of $41.1 million from the acquisitions of ON Services and Poken and U.S. base same-show revenue growth of 4.4 percent, offset in part by negative show rotation of approximately $7 million. Base same-shows represented 35.4 percent of GES’ U.S. organic revenue*. Organic revenue* increased $6.6 million or 1.1 percent.

GES U.S. operating income increased $1.4 million or 3.7 percent, primarily due to higher revenue, offset in part by a $7.5 million increase in depreciation and amortization expense primarily due to the acquisition of ON Services. Organic operating income* increased $2.9 million or 7.7 percent.

GES International

GES International revenue increased $15.5 million or 8.3 percent, primarily due to new business wins, offset in part by an unfavorable FX Impact of $11.7 million. GES International had positive show rotation of approximately $1.0 million. Organic revenue* increased $26.5 million or 14.1 percent.

GES International operating income increased $3.5 million or 71.5 percent, primarily due to higher revenue. Organic operating income* increased $4.5 million or 90.3 percent.

* Refer to footnote (3) in the above tables for more information about the non-GAAP financial measures of organic revenue and organic segment operating results.

2017 Outlook

Although GES has a diversified revenue base and long-term contracts for future shows, its revenue is affected by general economic and industry-specific conditions. The prospects for individual shows tend to be driven by the success of the industry related to those shows. In general, the exhibition and event industry is experiencing modest growth.

For the 2017 full year, management expects GES’ revenue to increase 6 percent to 7 percent versus 2016. The August 2016 acquisition of ON Services and the March 2017 acquisition of Poken are expected to provide incremental revenue of $43 million to $45 million and incremental Adjusted Segment EBITDA of $5 million to $7 million. Show rotation is expected to have a net negative impact on GES’ revenue of approximately $10 million compared to 2016. GES U.S. base same-show revenue is expected to increase at a mid-single digit rate. Management anticipates an unfavorable FX Impact on GES’ 2017 full year revenue and segment operating income of approximately $7 million and $0.2 million, respectively. The expected FX Impact reflects the assumption that the U.S. dollar to the British pound exchange rate will be $1.31 and the U.S. dollar to the Canadian dollar exchange rate will be $0.81 during the fourth quarter of 2017. For more information about Adjusted Segment EBITDA and segment operating income, see the “Non-GAAP Measures” section of this MD&A.

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Management is executing a strategic growth plan to position GES as the preferred global, full-service provider for Live Events, with further reach to corporate events, consumer events, conferences, and exhibitions. In support of this strategy, the Company has acquired two leading audio-visual production businesses and four leading event technology businesses since 2014 that complement, enhance, and expand the current business and offer higher-margin growth opportunities. Management continues to pursue additional opportunities to acquire businesses with proven products and services to create the most comprehensive suite of services for the Live Events industry. During 2017, management intends to make selective investments in additional resources to capitalize on continued growth opportunities in under-penetrated categories of Live Events, such as corporate events and consumer events, and in cross-selling new services.

Additionally, management remains focused on improving the profitability of GES through continued efforts to more effectively manage labor costs by driving productivity gains through rigorous and strategic pre-show planning that reduces the ratio of labor costs to revenue. Improving this metric is a top priority of management and the Company continues to develop and enhance tools to support and systematize show site labor planning, measurement, and benchmarking.

Pursuit

The following tables provide a comparison of Pursuit’s reported revenue and segment operating results to organic revenue⁽²⁾ and organic segment operating results⁽²⁾ for the three and nine months ended September 30, 2017 and 2016 in order to better understand the underlying performance of the segment without the effects of acquisitions or FX Impact.

 

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Three months ended September 30, 2017 compared with the three months ended September 30, 2016

Pursuit revenue increased $9.6 million or 9.8 percent, due to strong growth from attractions, primarily the Banff Gondola and Columbia Icefield Glacier Adventure attractions, incremental revenue of $4.2 million from the acquisition of FlyOver Canada, and a favorable FX Impact of $2.1 million. This increase was offset in part by a reduction in travel planning as the Company completes the previously announced downsizing of Brewster Travel Canada’s package tours line of business and a revenue decline of $2.1 million due to the fire-related closure of the Mount Royal Hotel. Organic revenue* increased $3.2 million or 3.3 percent.

Pursuit operating income increased $9.6 million or 21.7 percent, primarily due to the increase in revenue from high-margin attractions. Operating income included a $1.1 million business interruption gain for the recovery of lost profits from the Mount Royal Hotel. Organic operating income* increased $6.2 million or 13.9 percent.

Nine months ended September 30, 2017 compared with the nine months ended September 30, 2016

Pursuit revenue increased $16.5 million or 11.5 percent, due to strong growth from attractions primarily driven by the re-opening of the Banff Gondola (which was closed for renovations from October 2015 through April 2016), incremental revenue of $7.9 million from the acquisitions of FlyOver Canada and CATC, and a favorable FX Impact of $1.1 million. This increase was offset in part by a reduction in travel planning as the Company completes the previously announced downsizing of Brewster Travel Canada’s package tours line of business and a revenue decline of $4.6 million due to the fire-related closure of the Mount Royal Hotel. Organic revenue* increased $7.4 million or 6.5 percent.

Pursuit operating income increased $8.8 million or 19.6 percent, primarily due to the increase in revenue from high-margin attractions. Operating income included a $2.2 million business interruption gain for the recovery of lost profits from the Mount Royal Hotel. Organic operating income* increased $8.5 million or 23.6 percent.

* Refer to footnote (2) in the above tables for more information about the non-GAAP financial measures of organic revenue and organic segment operating results.

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Performance Measures

Management uses the following key business metrics to evaluate Pursuit’s hospitality business: revenue per available room (“RevPAR”), average daily rate (“ADR”), and occupancy. These metrics are commonly used in the hospitality industry to measure performance.

Management evaluates the performance of Pursuit’s attractions business utilizing the number of passengers and total attractions revenue per passenger. The number of passengers allows management to assess the volume of visitor activity at each attraction during the period. Total attractions revenue per passenger is calculated as total attractions revenue divided by the total number of passengers at all Pursuit attractions during the period. Total attractions revenue includes ticket sales and ancillary revenue generated by attractions, such as food and beverage and retail revenue. Total attractions revenue per passenger measures the total spend per visitor that attraction properties are able to capture, which is important to the profitability of the attractions business.

The following table provides Pursuit’s same-store key performance indicators for the three and nine months ended September 30, 2017 and 2016. The same-store metrics below indicate the performance of all Pursuit properties and attractions that were owned by Viad and operating at full capacity, considering seasonal closures, for the entirety of both periods presented. For Pursuit properties and attractions located in Canada, comparisons to the prior year are on a constant U.S. dollar basis, using the current year quarterly average exchange rates for previous periods, to eliminate the FX Impact. Management believes that this same-store constant currency basis provides better comparability between reporting periods.

 

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Hospitality. Room nights available increased during the nine months ended September 30, 2017 primarily due to changes in the opening dates for certain seasonal properties. RevPAR increased during the three months ended September 30, 2017 primarily due to an increase in ADR driven by management’s focus on yield management, offset in part by lower occupancy primarily due to forest fires in the Glacier National Park area. RevPAR increased during the nine months ended September 30, 2017 primarily due to an increase in occupancy and an increase in ADR driven by management’s focus on yield management, as well as an increase in occupancy reflecting strong park visitation during the first nine months of 2017.

Attractions. The increase in the number of passengers during the three months ended September 30, 2017 was primarily due to management’s efforts to enhance the guest experience and its focus on yield management, combined with strong park visitation in Canada. The increase in the number of passengers during the nine months ended September 30, 2017 was primarily due to the Banff Gondola being closed for renovations during the first four months of 2016. Excluding the Banff Gondola passengers, total same-store attraction passengers for the nine month period would have increased 36,158 in 2017 driven by management’s efforts to enhance the guest experience and its focus on yield management, combined with strong park visitation in Canada.

Revenue per passenger increased during 2017 primarily due to higher effective ticket prices driven by management’s focus on yield management, and higher revenue from ancillary food and beverage and retail services primarily resulting from management’s recent renovations of the retail and food and beverage operations at the Banff Gondola and the food and beverage operations at the Columbia Icefield Glacier Discovery Center.

During 2016, Pursuit derived approximately 59 percent of its revenue and 74 percent of its segment operating income from its Canadian operations, which are largely dependent on foreign customer visitation. Accordingly, the strengthening or weakening of the Canadian dollar, relative to other currencies, could affect customer volumes and the results of operations. Additionally, Pursuit is affected by consumer discretionary spending on tourism activities.

2017 Outlook

For the 2017 full year, management expects Pursuit’s revenue to increase 12 percent to 14 percent. The December 2016 acquisition of FlyOver Canada and the March 2016 acquisition of CATC, combined, are expected to provide incremental revenue of $10 million to $11 million and incremental Adjusted Segment EBITDA of $2 million to $3.5 million, which includes an incremental first quarter seasonal operating loss of approximately $2.3 million from CATC.

Additionally, management expects Pursuit’s revenue to be negatively impacted by approximately $13 million as the Company completes the previously announced downsizing of Brewster Travel Canada’s package tours line of business. The fire-related closure of the Mount Royal Hotel is expected to negatively impact revenue by approximately $5 million. Management anticipates a favorable FX Impact on Pursuit’s 2017 full year revenue and segment operating income of approximately $2 million and $0.7 million, respectively. Management expects these factors will be more than offset by organic growth across the rest of Pursuit’s lines of business.

In July 2017, Viad resolved its property and business interruption insurance claims related to the Mount Royal Hotel fire for a total of $36.3 million, inclusive of $9.0 million received during the first and second quarters of 2017. Viad recorded an additional impairment recovery of approximately $24.7 million related to construction costs to re-open the hotel, $1.1 million was recorded as a business interruption gain for the recovery of lost profits, and the remaining $1.5 million was recorded as deferred income that will be recognized over the periods the business interruption losses are actually incurred. Management anticipates recognizing approximately $0.5 million of the business interruption recovery during the remainder of 2017 with approximately $1 million being deferred to the first half of 2018.

The Pursuit guidance ranges include approximately $1 million in revenue and approximately $3 million in adjusted segment EBITDA related to the Mount Royal Hotel, which reflects the 2017 portion of business interruption insurance recoveries (including both business interruption gains for lost profits and contra-expense for on-going operating costs) and the re-opening of most of the property’s retail tenants and one of its dining operations. The hotel itself is expected to remain closed until mid-2018. For more information about Adjusted Segment EBITDA and segment operating income, see the “Non-GAAP Measures” section of this MD&A.

Corporate Activities

The increase in corporate activities expense for the three and nine months ended September 30, 2017 was primarily due to an increase in performance-based compensation expense driven by Viad’s common stock price appreciation.

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Interest Expense

The increase in interest expense for the three and nine months ended September 30, 2017 was primarily due to higher debt balances in 2017 resulting from acquisitions completed during August and December of 2016.

Restructuring Charges

Restructuring charges during the three and nine months ended September 30, 2017 and 2016 were primarily related to the elimination of certain positions and facility consolidations in GES.

Impairment Charges (Recoveries)

** Change is greater than +/- 100 percent

On December 29, 2016, the Mount Royal Hotel was damaged by a fire and closed. During July 2017, the Company resolved its property and business interruption insurance claims related to the fire for a total of $36.3 million.  During the three months ended September 30, 2017, the Company received insurance proceeds of $27.3 million, of which $24.7 million was recorded as an impairment recovery (partially offset by impairment charges of $0.2 million) related to construction costs to re-open the hotel, $1.1 million was recorded as a business interruption gain for the recovery of lost profits, and the remaining $1.5 million was recorded as deferred income, which will be recognized over the periods the business interruption losses are actually incurred. During the nine months ended September 30, 2017, the Company received $36.3 million in insurance proceeds, of which $2.2 million was allocated to an insurance receivable, $29.3 million was recorded as an impairment recovery (partially offset by impairment charges of $0.2 million) related to construction costs to re-open the hotel, $2.2 million was recorded as a business interruption gain for the recovery of lost profits, $1.1 million was recorded as contra-expense to offset non-capitalizable costs incurred by the Company, and the remaining $1.5 million was recorded as deferred income, which will be recognized over the periods the business interruption losses are actually incurred.

Income Taxes

The effective tax rates for the three months ended September 30, 2017 and 2016 were 30.4 percent and 33.8 percent, respectively. The effective tax rates for the nine months ended September 30, 2017 and 2016 were 29.0 percent and 33.1 percent, respectively. The decrease for the three months was primarily due to higher foreign income taxed at lower rates. The decrease for the nine months was primarily due to higher foreign income taxed at lower rates, the release of a valuation allowance related to foreign net operating losses, and the adoption of new accounting guidance, effective in the first quarter of 2017, which requires the excess tax benefit on share-based compensation to be recorded to income tax expense rather than equity.

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Discontinued Operations

The loss from discontinued operations, during the three months ended September 30, 2017, was primarily related to legal expenses associated with previously sold operations. The loss from discontinued operations, during the nine months ended September 30, 2017, was primarily related to legal expenses associated with previously sold operations, offset in part by a reduction in an uncertain tax position due to the lapse of a statute.

Liquidity and Capital Resources

Cash and cash equivalents were $53.5 million as of September 30, 2017, as compared to $20.9 million as of December 31, 2016. During the nine months ended September 30, 2017, the Company generated net cash flow from operating activities of $114.6 million primarily from results of operations. Management believes that Viad’s existing sources of liquidity will be sufficient to fund operations and capital commitments for at least the next 12 months.

As of September 30, 2017, the Company had approximately $49.0 million of its cash and cash equivalents held outside of the United States, consisting of $31.9 million in Canada, $7.8 million in the Netherlands, $7.0 million in the United Kingdom, $1.2 million in Germany, $0.9 million in the United Arab Emirates, and $0.2 million in certain other countries. There are certain earnings related to the Company’s Canadian and Netherlands operations that have historically been deemed permanently reinvested. As of September 30, 2017, the incremental tax associated with these earnings if the cash balances were repatriated to the United States would approximate $1.6 million.

Cash Flows

Operating Activities

Net cash provided by operating activities decreased $0.8 million, primarily due to changes in working capital, offset in part by an increase in results of operations.

Investing Activities

Net cash used in investing activities decreased $168.7 million, primarily due to cash payments, net of cash acquired, of $145.7 million for the 2016 acquisitions of ON Services, CATC, and the business of Maligne Lake Tours Ltd., and the Mount Royal Hotel fire-related insurance proceeds received in 2017, offset in part by an increase in capital expenditures.

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Financing Activities

Net cash used in financing activities increased $134.6 million primarily due to net debt payments of $68.2 million during the nine months ended September 30, 2017 compared to net debt proceeds of $66.0 million during the nine months ended September 30, 2016.

Debt and Capital Lease Obligations

Refer to Note 11 – Debt and Capital Lease Obligations of the Notes to Condensed Consolidated Financial Statements for further discussion.

Share Repurchases

The Board of Directors authorized the Company to repurchase shares of its common stock from time to time at prevailing market prices. No open market repurchases were made during the nine months ended September 30, 2017 or 2016. As of September 30, 2017, 440,540 shares remained available for repurchase. The authorization of the Board of Directors does not have an expiration date. In addition, during the nine months ended September 30, 2017 and 2016, the Company repurchased 26,916 shares for $1.3 million and 24,432 shares for $0.7 million, respectively, related to tax withholding requirements on vested share-based awards.

Critical Accounting Policies and Estimates

Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part II, Item 7) of Viad’s Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of critical accounting policies and estimates.

Impact of Recent Accounting Pronouncements

Refer to Note 1 – Basis of Presentation and Principles of Consolidation of the Notes to Condensed Consolidated Financial Statements for further information.

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Forward-Looking Statements

As provided by the safe harbor provision under the Private Securities Litigation Reform Act of 1995, Viad cautions readers that, in addition to historical information contained herein, this quarterly report includes certain information, assumptions, and discussions that may constitute forward-looking statements. These forward-looking statements are not historical facts, but reflect current estimates, projections, expectations, or trends concerning future growth, operating cash flows, availability of short-term borrowings, consumer demand, new or renewal business, investment policies, productivity improvements, ongoing cost reduction efforts, efficiency, competitiveness, legal expenses, tax rates and other tax matters, foreign exchange rates, and the realization of restructuring cost savings. Actual results could differ materially from those discussed in the forward-looking statements. Viad’s businesses can be affected by a host of risks and uncertainties. Among other things, natural disasters, gains and losses of customers, consumer demand patterns, labor relations, purchasing decisions related to customer demand for exhibition and event services, existing and new competition, industry alliances, consolidation and growth patterns within the industries in which Viad competes, acquisitions, capital allocations, adverse developments in liabilities associated with discontinued operations, changes in the levels of interest rates, and any deterioration in the economy, may individually or in combination impact future results. In addition to factors mentioned elsewhere, economic, competitive, governmental, technological, capital marketplace, and other factors, including terrorist activities or war, a pandemic health crisis, and international conditions, could affect the forward-looking statements in this quarterly report. Additional information concerning business and other risk factors that could cause actual results to materially differ from those in the forward looking statements are discussed in the “Risk Factors” section in Viad’s 2016 Annual Report.

Information about Viad obtained from sources other than the Company may be out-of-date or incorrect. Please rely only on Company press releases, SEC filings, and other information provided by the Company, keeping in mind that forward-looking statements speak only as of the date made. Viad undertakes no obligation to update any forward-looking statements, including prior forward-looking statements, to reflect events or circumstances arising after the date as of which the forward-looking statements were made.

Non-GAAP Measures

In addition to disclosing financial results that are determined in accordance with U.S. generally accepted accounting principles (“GAAP”), the Company also discloses non-GAAP financial measures of Adjusted EBITDA, Segment operating income, Adjusted Segment EBITDA, organic revenue, and organic segment operating income (collectively, the “Non-GAAP Measures”). The presentation of the Non-GAAP Measures is supplemental to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. As not all companies use identical calculations, the Non-GAAP Measures may not be comparable to similarly titled measures used by other companies. Management believes that the presentation of the Non-GAAP Measures provides useful information to investors regarding Viad’s results of operations for trending, analyzing, and benchmarking the performance and value of Viad’s business.

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The Non-GAAP Measures are considered useful operating metrics as potential variations arising from taxes, depreciation and amortization, debt service costs, impairment charges and recoveries, changes in accounting principles, and the effects of discontinued operations are eliminated, thus resulting in additional measures considered to be indicative of Viad’s ongoing operations and segment performance. Although the Non-GAAP Measures are used as financial measures to assess the performance of the business, the use of these measures is limited because these measures do not consider material costs, expenses, and other items necessary to operate the business. These items include debt service costs, non-cash depreciation and amortization expense associated with long-lived assets, expenses related to U.S. federal, state, local and foreign income taxes, impairment charges or recoveries, and the effects of accounting changes and discontinued operations. Since the Non-GAAP Measures do not consider the above items, a user of Viad’s financial information should consider net income attributable to Viad as an important measure of financial performance because it provides a more complete measure of the Company’s performance.

A reconciliation of net income attributable to Viad to Adjusted EBITDA is as follows:

 

The decrease in Adjusted EBITDA for the three months ended September 30, 2017 was primarily due to lower segment operating income at GES. The increase in Adjusted EBITDA for the nine months ended September 30, 2017 was primarily due to higher segment operating income at GES and Pursuit. Refer to the “Results of Operations” section of this MD&A for a discussion of fluctuations.

Forward-Looking Non-GAAP Financial Measures

The Company has also provided Adjusted Segment EBITDA and segment operating income as forward-looking Non-GAAP Measures within the “Results of Operations” section of this MD&A. The Company does not provide reconciliations of these forward-looking Non-GAAP Measures to the most directly comparable GAAP financial measures because, due to variability and difficulty in making accurate forecasts and projections and/or certain information not being ascertainable or accessible, not all of the information necessary for quantitative reconciliations of these forward-looking Non-GAAP Measures to the most directly comparable GAAP financial measures is available to the Company without unreasonable efforts. Consequently, any attempt to disclose such reconciliations would imply a degree of precision that could be confusing or misleading to investors. It is probable that these forward-looking Non-GAAP Measures may be materially different from the corresponding GAAP Measures.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Viad’s market risk exposures relate to fluctuations in foreign exchange rates, interest rates, and certain commodity prices. Foreign exchange risk is the risk that fluctuating exchange rates will adversely affect Viad’s financial condition or results of operations. Interest rate risk is the risk that changing interest rates will adversely affect the earnings of Viad. Commodity risk is the risk that changing prices will adversely affect results of operations.

Viad conducts its foreign operations primarily in Canada, the United Kingdom, the Netherlands, Germany, and to a lesser extent, in certain other countries. The functional currency of Viad’s foreign subsidiaries is their local currency. Accordingly, for purposes of consolidation, Viad translates the assets and liabilities of its foreign subsidiaries into U.S. dollars at the foreign exchange rates in effect at the balance sheet date. The unrealized gains or losses resulting from the translation of these foreign denominated assets and liabilities are included as a component of accumulated other comprehensive income in Viad’s condensed consolidated balance sheets. As a result, significant fluctuations in foreign exchange rates relative to the U.S. dollar may result in material changes to Viad’s net equity position reported in its condensed consolidated balance sheets. Viad does not currently hedge its equity risk

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arising from the translation of foreign denominated assets and liabilities. Viad had cumulative unrealized foreign currency translation losses recorded in stockholders’ equity of $10.3 million and $29.1 million as of September 30, 2017 and December 31, 2016, respectively. During the three and nine months ended September 30, 2017, unrealized foreign currency translation gains of $9.1 million and $18.8 million, respectively, were recorded in other comprehensive income. During the three and nine months ended September 30, 2016 an unrealized foreign currency translation loss of $3.8 million and a gain of $0.7 million, respectively, were recorded in other comprehensive income.

For purposes of consolidation, revenue, expenses, gains, and losses related to Viad’s foreign operations are translated into U.S. dollars at the average foreign exchange rates for the period. As a result, Viad’s consolidated results of operations are exposed to fluctuations in foreign exchange rates as revenue and segment operating results of its foreign operations, when translated, may vary from period to period, even when the functional currency amounts have not changed. Such fluctuations may adversely impact overall expected profitability and historical period-to-period comparisons. Viad does not currently hedge its net earnings exposure arising from the translation of its foreign revenue and segment operating results. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a discussion on the “Foreign Exchange Rate Variances.”

Viad is exposed to foreign exchange transaction risk, as its foreign subsidiaries have certain revenue transactions denominated in currencies other than the functional currency of the respective subsidiary. From time to time, Viad utilizes forward contracts to mitigate the impact on earnings related to these transactions due to fluctuations in foreign exchange rates. As of September 30, 2017, Viad did not have any foreign currency forward contracts outstanding.

Viad is exposed to short-term and long-term interest rate risk on certain of its debt obligations. Viad currently does not use derivative financial instruments to hedge cash flows for such obligations.

Item 4. Controls and Procedures

Under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer of Viad, the effectiveness of the design and operation of disclosure controls and procedures has been evaluated as of September 30, 2017, and, based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective as of September 30, 2017. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in such reports is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, internal control over financial reporting.

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

Refer to Note 18 – Litigation, Claims, Contingencies, and Other of the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding legal proceedings involving the Company.

Item 1A. Risk Factors

There were no material changes to the risk factors disclosed in Viad’s Annual Report on Form 10-K for the year ended December 31, 2016, or in our Form 10-Q for the quarter ended March 31, 2017.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes the total number of shares of Viad’s common stock that were repurchased during the three months ended September 30, 2017 by Viad pursuant to publicly announced plans or programs, as well as from employees, former employees, and non-employee directors surrendering previously owned Viad common stock (outstanding shares) to pay the taxes in connection with the vesting of restricted stock awards.

ISSUER PURCHASES OF EQUITY SECURITIES

 

The Board of Directors authorized the Company to repurchase shares of its common stock from time to time at prevailing market prices. No shares were repurchased on the open market during the three and nine months ended September 30, 2017. As of September 30, 2017, 440,540 shares remain available for repurchase. The authorization of the Board of Directors does not have an expiration date.

Item 5. OTHER INFORMATION

Not applicable.

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Item 6. Exhibits

 

 

 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

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