# Pursuit Attractions & Hospitality, Inc.: Form 10-Q for the period ended Jun 30, 2011

- Company: [Pursuit Attractions & Hospitality, Inc.](/companies/prsu.md) (CIK 884219)
- Form: 10-Q
- Filed: 2011-08-09
- Accepted by EDGAR: Aug 9, 2011, 13:04 ET
- Period: 2011-06-30
- Accession: 0000950123-11-074885
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/884219/000095012311074885/c19702e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/884219/000095012311074885/

## Management's discussion and analysis

As filed, 50,155 characters.

The following discussion should be read in conjunction with Viad Corp’s condensed consolidated financial statements and related notes. This discussion contains forward-looking statements that involve risks and uncertainties. Viad Corp’s actual results could differ materially from those anticipated due to various factors discussed under “Forward-Looking Statements” and elsewhere in this quarterly report.

### Overview:

Viad Corp (“Viad” or the “Company”) operates in three reportable business segments: Marketing & Events U.S., Marketing & Events International and Travel & Recreation Group.

The Marketing & Events Group, comprised of Global Experience Specialists, Inc. and affiliates (“GES”), specializes in all aspects of the design, planning and production of face-to-face events, immersive environments and brand-based experiences for clients, including show organizers, corporate brand marketers and retail shopping centers. In addition, the Marketing & Events Group provides a variety of immersive, entertaining attractions and brand-based experiences, sponsored events, mobile marketing and other branded entertainment and face-to-face marketing solutions for clients and venues, including shopping malls, movie studios, museums, leading consumer brands and casinos.

The Travel & Recreation Group segment consists of Brewster Inc. (“Brewster”) and Glacier Park, Inc. (“Glacier Park”). Brewster provides tourism services in the Canadian Rockies in Alberta and in other parts of Western Canada. Brewster’s operations include the Banff Gondola, Columbia Icefield Glacier Adventure, motorcoach services, charter and sightseeing services, tour boat operations, inbound package tour operations and hotel operations. Glacier Park operates five lodges, three motor inns and one four-season resort hotel and provides food and beverage operations, retail operations and tour and transportation services in and around Glacier National Park in Montana and Waterton Lakes National Park in Alberta, Canada. Glacier Park is an 80 percent owned subsidiary of Viad.

The following are financial highlights of the second quarter of 2011 presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”):

### Viad Corp (Consolidated)

- Total revenues of $238.7 million compared to $218.3 million in the second quarter of 2010
- Net income attributable to Viad of $4.5 million compared to $3.0 million in the second quarter of 2010
- Diluted income per share of $0.22 compared to $0.15 in the second quarter of 2010
- Purchase of St. Mary Lodge & Resort for $15.3 million
- Restructuring charges of $1.2 million primarily related to reorganization activities in the Marketing & Events Group, comprised of the elimination of certain positions as well as facility consolidations
- Cash and cash equivalents totaled $107.3 million as of June 30, 2011
- Debt was $4.2 million as of June 30, 2011

### Marketing & Events U.S.

- Revenues of $150.2 million, an increase of 4.0 percent from the second quarter of 2010
- Segment operating income of $205,000, as compared to a loss of $2.3 million in the second quarter of 2010

### Marketing & Events International

- Revenues of $67.0 million, an increase of 19.5 percent from the second quarter of 2010
- Segment operating income of $6.7 million, an increase of 1.8 percent from the second quarter of 2010

### Travel & Recreation Group

- Revenues of $24.0 million, an increase of 7.0 percent from the second quarter of 2010
- Segment operating income of $3.0 million, a decrease of 13.8 percent from the second quarter of 2010

### Non-GAAP Measure:

The following discussion includes a presentation of Adjusted EBITDA, which is utilized by management to measure the profit and performance of Viad’s operations and to facilitate period-to-period comparisons. “Adjusted EBITDA” is defined by Viad as net income attributable to Viad before interest expense, income taxes, depreciation and amortization, impairment losses and recoveries, changes in accounting principles and the effects of discontinued operations. The presentation of Adjusted EBITDA is supplemental to results presented under GAAP and may not be comparable to similarly titled measures used by other companies. Adjusted EBITDA is considered a useful operating metric as potential variations arising from taxes, depreciation, debt service costs, impairment losses and recoveries, changes in accounting principles and the effects of discontinued operations are eliminated, thus resulting in an additional measure considered to be indicative of Viad’s ongoing operations. This non-GAAP measure should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP.

Management believes that the presentation of Adjusted EBITDA provides useful information to investors regarding Viad’s results of operations for trending, analyzing and benchmarking the performance and value of Viad’s business. Management uses Adjusted EBITDA primarily as a performance measure and believes that the GAAP financial measure most directly comparable to this non-GAAP measure is net income attributable to Viad. Although Adjusted EBITDA is used as a financial measure to assess the performance of the business, the use of Adjusted EBITDA is limited because it does 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 losses or recoveries and the effects of accounting changes and discontinued operations. Because Adjusted EBITDA does 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 Adjusted EBITDA to net income attributable to Viad is as follows:

*(in thousands)*

|  | Three months ended June 30, 2011 | 2010 | Six months ended June 30, 2011 | 2010 |
| --- | ---: | ---: | ---: | ---: |
| Adjusted EBITDA | $14,775 | $12,491 | $37,845 | $17,014 |
| Interest expense | (380) | (473) | (792) | (966) |
| Income tax expense | (2,588) | (1,790) | (8,488) | (1,998) |
| Depreciation and amortization | (7,322) | (7,200) | (14,293) | (14,004) |
| Net income attributable to Viad | $4,485 | $3,028 | $14,272 | $46 |

The increase in Adjusted EBITDA of $2.3 million for the second quarter of 2011 compared to the second quarter of 2010 was primarily driven by higher segment operating results at the Marketing & Events U.S. segment. The increase in Adjusted EBITDA of $20.8 million for the first six months of 2011 compared to 2010 was primarily due to higher segment operating results at the Marketing & Events U.S. segment and lower restructuring charges, partially offset by lower segment operating results at the Travel & Recreation Group. See “Results of Operations” below for a discussion of fluctuations.

### Results of Operations:

### Comparison of Second Quarter of 2011 to the Second Quarter of 2010

Revenues for the second quarter of 2011 increased 9.3 percent to $238.7 million compared to $218.3 million in the second quarter of 2010. Viad’s income before income taxes was $6.9 million for the second quarter of 2011 compared to $4.7 million in the second quarter of 2010. Net income attributable to Viad for the second quarter of 2011 was $4.5 million, or $0.22 per diluted share, compared to $3.0 million, or $0.15 per diluted share, in the second quarter of 2010. The improved results were primarily due to higher revenues from the Marketing & Events Group. Restructuring charges in the second quarter of 2011 were $1.2 million compared to $559,000 in the 2010 second quarter, both primarily related to reorganization activities in the Marketing & Events Group, including the elimination of certain positions as well as facility consolidations.

During the second quarter of 2011, foreign exchange rate variances resulted in increases of $7.2 million in revenues and $916,000 in segment operating income as compared to the second quarter of 2010. Viad conducts its foreign operations primarily in Canada and the United Kingdom and to a lesser extent in certain other countries. The following table summarizes the effect of foreign exchange rate variances on revenues and segment operating results from Viad’s significant international operations for the second quarter:

| Marketing & Events Group: | Revenues Weighted-Average Exchange Rates 2011 | 2010 | Effect of Rate Variance (thousands) | Segment Operating Results Weighted-Average Exchange Rates 2011 | 2010 | Effect of Rate Variance (thousands) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Canada | $1.04 | $0.97 | $1,355 | $1.05 | $0.97 | $102 |
| United Kingdom | $1.64 | $1.50 | $3,831 | $1.64 | $1.50 | $467 |
| Travel & Recreation Group: |  |  |  |  |  |  |
| Canada | $1.04 | $0.96 | $1,448 | $1.04 | $0.95 | $377 |

Accordingly, Viad’s second quarter results were impacted by the strengthening of the Canadian dollar and British pound relative to the U.S. dollar. Future changes in the exchange rates may impact overall expected profitability and historical period-to-period comparisons when operating results are translated into U.S. dollars.

**Marketing & Events Group.** Revenues for the Marketing & Events U.S. segment were $150.2 million for the second quarter of 2011, up 4.0 percent compared to $144.5 million in the second quarter of 2010. The increase was primarily due to base same-show revenue increases of 5.8 percent and increased exhibitor spending, partially offset by negative show rotation revenue of approximately $2 million. Management defines base same-show revenue as revenue from exhibitions and events that occur in the same quarter and same city every year. Base same-shows represented 29.4 percent of 2011 second quarter Marketing & Events U.S. revenues. Segment operating income was $205,000 in the second quarter of 2011, compared to a loss of $2.3 million in the second quarter of 2010. The improved operating results were primarily due to increases in revenues and continued cost control.

Revenues for the Marketing & Events International segment were $67.0 million for the second quarter of 2011, up 19.5 percent compared to $56.1 million in the second quarter of 2010. Segment operating income was $6.7 million in the second quarter of 2011, compared to $6.5 million in the second quarter of 2010. As discussed above, period-to-period comparisons for this segment were affected by exchange rate variances, which resulted in increases of $5.7 million in revenue and $540,000 in segment operating income, as compared to the second quarter of 2010. Excluding exchange rate variances, 2011 second quarter revenues increased by $5.2 million, or 9.2 percent, due to positive show rotation revenue of about $8 million, and operating income decreased by $422,000 primarily due to a less favorable mix of revenues and higher compensation expenses, including merit increases and the reinstatement of temporary wage reductions.

Although the Marketing & Events Group has a diversified revenue base and long-term contracts for future shows, its revenues are 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 improvement. Following quarterly declines from the third quarter of 2008 through the first quarter of 2010, Marketing & Events U.S. base same-show revenues were essentially flat in the 2010 second quarter and increased in each of the following four quarters.

For the 2011 full year, management expects U.S. same-show revenues to increase at a mid to high single-digit rate and that show rotation will positively impact revenues by approximately $15 million as revenue from non-annual shows during 2011 is expected to exceed revenues from non-annual shows that took place during 2010. Additionally, management anticipates that foreign currency exchange rate variances versus 2010 will have a favorable impact on Marketing & Events Group 2011 full year revenues and operating income of approximately $12 million and $700,000, respectively. Management remains focused on improving the profitability of the U.S. segment through continued integration and consolidation of operations to increase capacity utilization and reduce costs. Additional restructuring charges may be incurred as further cost structure improvements are made.

The Marketing & Events Group is subject to multiple collective bargaining agreements that affect labor costs, about one-fourth of which expire each year. Although labor relations between the Company and labor are currently stable, disruptions during future contract negotiations could occur, with the possibility of an adverse impact on the operating results of the Marketing & Events Group.

**Travel & Recreation Group.** Revenues for the Travel & Recreation Group segment were $24.0 million for the second quarter of 2011, up 7.0 percent compared to second quarter 2010 revenues of $22.4 million. Segment operating income was $3.0 million, as compared to $3.5 million in the second quarter of 2010. As discussed above, foreign exchange rate variances had a favorable impact on segment revenues and operating income of $1.4 million and $377,000, respectively, as compared to the 2010 second quarter. Excluding exchange rate variances, 2011 second quarter revenues increased by $120,000, or 0.5 percent, and operating income decreased by $860,000. The revenue growth was primarily due to the addition of Grouse Mountain Lodge and stronger demand for Brewster’s packaged tours and attractions. These improvements were largely offset by lower revenues from Many Glacier Hotel, a property operated by Glacier Park, resulting from planned construction that reduced the number of rooms available during 2011 as compared to 2010, as well as poor weather conditions in Glacier National Park. The decrease in segment operating income versus the 2010 second quarter was primarily due to lower revenues at Many Glacier Hotel (which has a high flow through to operating income) and a seasonal operating loss at Grouse Mountain Lodge.

The Travel & Recreation Group segment is affected by consumer discretionary spending on tourism activities. Management expects 2011 results from the Travel & Recreation Group segment to benefit from improved tourism demand versus 2010. Management anticipates lower revenues at Many Glacier Hotel due to the planned construction discussed above. However, management expects the acquisitions of Grouse Mountain Lodge and St. Mary Lodge & Resort (“St. Mary”), which are located near Glacier National Park, to more than offset the revenue decline at Many Glacier Hotel. The Company acquired the 145-room Grouse Mountain Lodge on January 5, 2011 for $10.5 million in cash and the 115-room St. Mary Lodge & Resort on June 29, 2011 for $15.3 million in cash. Additionally, management anticipates that foreign currency exchange rate variances versus 2010 will have a favorable impact on Travel & Recreation Group segment 2011 full year revenues and operating income of approximately $4.7 million and $1.3 million, respectively.

During 2010, approximately 73 percent of revenue and 79 percent of segment operating income generated in the Travel & Recreation Group segment was derived through its Canadian operations. These operations are largely affected by foreign customer visitation, and, accordingly, increases in the value of the Canadian dollar compared to other currencies could adversely affect customer volumes, revenue and segment operating income for the Travel & Recreation Group.

Glacier Park operates the concession portion of its business under a concession contract with the U.S. National Park Service (the “Park Service”) for Glacier National Park. Glacier Park’s original 25-year concession contract with the Park Service that was to expire on December 31, 2005, has been extended for six one-year periods and now expires on December 31, 2011. The Park Service, in its sole discretion, may continue extending Glacier Park’s concession contract in one-year increments. When this contract ultimately expires, Glacier Park will have the opportunity to bid on a new concession contract. If Glacier Park does secure a new contract, possible terms would be for 10, 15 or 20 years. Glacier Park generated approximately 70 percent of its 2010 revenue through its concession contract for services provided within Glacier National Park. If a new concessionaire is selected by the Park Service, Glacier Park’s remaining business would consist of its operations at Waterton Lakes National Park, Alberta, Canada; East Glacier, Montana; Whitefish, Montana and St. Mary, Montana. In such a circumstance, Glacier Park would be entitled to an amount equal to its “possessory interest,” which generally means the value of the structures acquired or constructed, fixtures installed and improvements made to the concession property at Glacier National Park during the term of the concession contract. Glacier Park owns its Glacier Park Lodge operations in East Glacier, Montana, Grouse Mountain Lodge in Whitefish, Montana and St. Mary Lodge & Resort in St. Mary, Montana. Glacier Park also owns the Prince of Wales Hotel in Waterton Lakes National Park, which is operated under a 42-year ground lease with the Canadian government running through January 31, 2052. Glacier Park generated 25 percent of Travel & Recreation Group’s full year 2010 segment operating income.

**Restructuring Charges.** Viad recorded restructuring charges of $1.2 million in the second quarter of 2011, compared to $559,000 in the second quarter of 2010. Both charges primarily related to reorganization activities, comprised of the elimination of certain positions as well as facility consolidations.

**Income Taxes.** The effective tax rate in the second quarter of 2011 was 37.6 percent, compared to 37.9 percent in the second quarter of 2010.

### Comparison of First Six Months of 2011 to the First Six Months of 2010

Revenues for the first six months of 2011 increased 19.5 percent to $528.8 million from $442.7 million during the first six months of 2010. Viad’s income before income taxes was $22.4 million compared to $1.8 million in 2010. Net income attributable to Viad for the first six months of 2011 was $14.3 million, or $0.70 per diluted share, compared to $46,000 during the first six months of 2010. These increases were primarily due to higher revenues from the Marketing & Events Group. Net restructuring charges in the first six months of 2011 were $1.5 million compared to $2.6 million in the first six months of 2010, both primarily related to reorganization activities in the Marketing & Events Group, including the elimination of certain positions as well as facility consolidations. During the first six months of 2011, foreign exchange rate variances resulted in increases of $9.7 million and $929,000 in revenues and segment operating income, respectively, as compared to the first six months of 2010.

Viad conducts its foreign operations primarily in Canada and the United Kingdom and to a lesser extent in certain other countries. The following table summarizes the effect of foreign exchange rate variances on revenues and segment operating results from Viad’s significant international operations for the first six months of the year:

| Marketing & Events Group: | Revenues Weighted-Average Exchange Rates 2011 | 2010 | Effect of Rate Variance (thousands) | Segment Operating Results Weighted-Average Exchange Rates 2011 | 2010 | Effect of Rate Variance (thousands) |
| --- | ---: | ---: | ---: | ---: | ---: | ---: |
| Canada | $1.03 | $0.96 | $2,476 | $1.06 | $0.97 | $125 |
| United Kingdom | $1.62 | $1.52 | $4,882 | $1.63 | $1.51 | $621 |
| Travel & Recreation Group: |  |  |  |  |  |  |
| Canada | $1.03 | $0.96 | $1,777 | $1.09 | $0.95 | $193 |

Accordingly, Viad’s six-month results were impacted by the strengthening of the Canadian dollar and the British pound relative to the U.S. dollar. Future decreases in the exchange rates may adversely impact overall expected profitability and historical period to period comparisons when operating results are translated into U.S. dollars.

**Marketing & Events Group.** Revenues for the Marketing & Events U.S. segment were $381.9 million for the first six months of 2011, up 21.7 percent from $313.9 million in 2010. Segment operating income was $18.1 million in the first six months of 2011, compared to an operating loss of $2.3 million in 2010. These increases were primarily due to positive show rotation of about $38 million, base same-show revenue increases of 11.1 percent and increased exhibitor spending. Management defines base same-show revenue as revenue from exhibitions and events that occur in the same quarter and same city every year. Base same-shows represented approximately 38 percent of revenues for the first six months of 2011 for the Marketing & Events U.S. segment.

Revenues for the Marketing & Events International segment were $120.9 million for the first six months of 2011, up 13.6 percent from $106.4 million in 2010. Segment operating income was $10.4 million in the first six months of 2011 compared to $9.2 million in 2010. As discussed above, results in this segment were impacted by exchange rates during the first six months of 2011 resulting in increases of $8.0 million and $736,000 in revenues and segment operating income, respectively, as compared to 2010. Excluding exchange rate variances, revenues for the first six months of 2011 increased by $6.5 million, or 6.1 percent, and segment operating income increased by $530,000. These increases were primarily due to positive show rotation revenue of about $10 million and new show wins, which more than offset 2010 first quarter revenues from a major project for the 2010 Winter Olympic Games in Canada. Operating results for the first six months of 2011 also reflect higher compensation expenses, including merit increases and the reinstatement of temporary wage reductions, as compared to the first six months of 2010.

**Travel & Recreation Group.** Revenues from the Travel & Recreation Group segment were $29.7 million for the first six months of 2011, down 0.3 percent compared to 2010 revenues of $29.8 million. Segment operating loss was $1.5 million compared to operating income of $1.1 million in 2010. As discussed above, results in this segment were impacted by exchange rate variances during the first six months of 2011 resulting in increases of $1.8 million and $193,000 in revenues and segment operating income, respectively, as compared to 2010. Excluding exchange rate variances, revenues for the first six months of 2011 decreased by $1.9 million, or 6.2 percent, and operating results decreased by $2.7 million. Results for the first six months of 2010 included higher revenue from transportation business related to the 2010 Winter Olympic and Paralympic Games and higher revenues from Many Glacier Hotel, which had fewer rooms available during the 2011 period due to planned construction. Results for the first six months of 2011 included the year-round Grouse Mountain Lodge, acquired on January 5, 2011, which provided incremental revenues with a seasonal operating loss.

**Restructuring Charges.** Viad recorded restructuring charges of $1.5 million in the first six months of 2011, compared to $2.6 million in the 2010 period. The charges both primarily related to reorganization activities in the Marketing & Events Group, comprised of the elimination of certain positions as well as facility consolidations.

**Income Taxes.** The effective tax rate in the first six months of 2011 on income before income taxes was 37.9 percent, compared to 109.3 percent in the comparable period in 2010. The high rate in 2010 was primarily due to the charge in 2010 of $1.3 million related to healthcare legislation. Excluding this item, the effective tax rate in the first six months of 2010 would have been 39.3 percent.

### Liquidity and Capital Resources:

Cash and cash equivalents were $107.3 million as of June 30, 2011 as compared to $145.8 million as of December 31, 2010, with the decrease primarily due to business acquisitions and capital expenditures. During the six months ended June 30, 2011, the Company generated net cash flows from operating activities of $6.0 million primarily driven by operating results, mostly offset by changes in working capital (primarily an increase in accounts receivable of $43.6 million). 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.

Viad’s total debt as of June 30, 2011 was $4.2 million compared to $9.1 million as of December 31, 2010. The debt-to-capital ratio was 0.010 to 1 as of June 30, 2011 compared with 0.023 to 1 as of December 31, 2010. Capital is defined as total debt and capital lease obligations plus total stockholders’ equity.

On May 18, 2011, Viad entered into an amended and restated secured revolving credit agreement (the “Credit Facility”). The Credit Facility provides for a $130 million revolving line of credit and may be increased up to an additional $50 million under certain circumstances. The Credit Facility expires on May 18, 2016 and borrowings are to be used for general corporate purposes (including permitted acquisitions) and to support up to $50 million of letters of credit. The lenders have a first perfected security interest in all of the personal property of Viad and GES, including 65 percent of the capital stock of top-tier foreign subsidiaries. On April 28, 2011, Viad paid off its outstanding borrowing under the previous credit facility of $4.2 million. As of June 30, 2011, Viad had $125.4 million of capacity remaining under its Credit Facility reflecting issued letters of credit of $4.6 million.

Borrowings under the Credit Facility (of which GES is a guarantor) are indexed to the London Interbank Offered Rate (“LIBOR”), 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.

Viad’s financial covenants include a fixed-charge coverage ratio of not less than 2.25 to 1 (and a ratio of not less than 2.50 to 1 after the fiscal quarter ending September 30, 2012) and a leverage ratio (defined as total debt to Adjusted EBITDA) of not greater than 2.50 to 1. Additionally, Viad must maintain a consolidated minimum cash and cash equivalents balance of $50 million. As of June 30, 2011, the fixed-charge coverage and leverage ratios were 3.16 to 1 and 0.25 to 1, respectively. The terms of the Credit Facility allow Viad to pay up to $10 million in dividends in the aggregate in any calendar year and also allow the Company to purchase up to $10 million in any calendar year of the Company’s common stock. Significant other covenants include limitations on: investments, additional indebtedness, sales/leases of assets, acquisitions, consolidations or mergers and liens on property. As of June 30, 2011, Viad was in compliance with all covenants.

As of June 30, 2011, Viad had certain obligations under guarantees to third parties on behalf of its subsidiaries. These guarantees are not subject to liability recognition in the 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 June 30, 2011 would be $32.4 million. These guarantees relate to leased facilities expiring through October 2017. 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.

Capital expenditures for the first six months of 2011 totaled $12.8 million and primarily related to the purchase of rental inventory, equipment and computer hardware primarily at the Marketing & Events U.S. segment. For the first six months of 2010, capital expenditures totaled $8.4 million and primarily related to the purchase of rental inventory, equipment and computer hardware primarily at the Marketing & Events U.S. segment and building improvements and equipment at the Travel & Recreation Group.

On January 5, 2011, Viad completed the acquisition of Grouse Mountain Lodge for $10.5 million in cash. On June 29, 2011, Viad completed the acquisition of St. Mary for $15.3 million in cash.

In March 2010, Viad completed the sale of a non-strategic real estate asset for $14.3 million (net of selling costs). The asset was previously held for sale at the Travel & Recreation Group.

Viad has announced its intent to repurchase shares of the Company’s common stock from time to time at prevailing market prices. No shares were repurchased during the first six months of 2011 or 2010. As of June 30, 2011, 304,381 shares remain available for repurchase. Subsequent to June 30, 2011 and prior to the filing of this quarterly report, during the period from August 5, 2011 through August 8, 2011, Viad repurchased an additional 28,900 shares for $528,000. Additionally, during the first six months of 2011 and 2010, the Company repurchased 28,627 shares for $679,000 and 28,407 shares for $573,000, respectively, related to tax withholding requirements on share-based awards.

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 June 30, 2011 with respect to certain of these matters is not ascertainable, Viad believes that any resulting liability, after taking into consideration amounts already provided for, including insurance coverage, will not have a material impact 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 has failed 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. Although it is a party to certain environmental disputes, Viad believes that any resulting liabilities, after taking into consideration amounts already provided for, including insurance coverage, will not have a material effect on the Company’s financial position, results of operations or liquidity. As of June 30, 2011, there was a remaining environmental remediation liability of $6.0 million related to previously sold operations of which $1.1 million was included in the consolidated balance sheets under the caption “Other current liabilities” and $4.9 million under the caption “Other deferred items and liabilities.”

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 June 30, 2011, the amount of additional funding, if any, that Viad would be required to make related to multi-employer pension plans is not ascertainable.

### Off-Balance Sheet Arrangements:

Viad does not have any “off-balance sheet” arrangements with unconsolidated special-purpose or other entities that would materially affect the Company’s financial position, results of operations, liquidity or capital resources. Furthermore, Viad does not have any relationships with special-purpose or other entities that provide off-balance sheet financing; liquidity, market risk or credit risk support; or engage in leasing or other services that expose the Company to liability or risks of loss that are not reflected in Viad’s consolidated financial statements.

### Critical Accounting Policies and Estimates:

The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements. The SEC has defined a company’s most critical accounting policies as those that are most important to the portrayal of a company’s financial position and results of operations, and that require a company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on these criteria, Viad has identified and discussed with its audit committee the following critical accounting policies and estimates pertaining to Viad, and the methodology and disclosures related to those estimates:

*Goodwill —* Goodwill is not amortized, but tested for impairment at the reporting unit level on an annual basis on October 31 of each year. Goodwill is also tested for impairment between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Viad’s reporting units are defined, and goodwill is tested, at either an operating segment level, or at the component level of an operating segment, depending on various factors including the internal reporting structure of the operating segment, the level of integration among components, the sharing of assets among components, and the benefits and likely recoverability of goodwill by the component’s operations.

As of June 30, 2011, Viad had total goodwill of $133.8 million consisting of $85.8 million related to the Marketing & Events Group and $48.0 million related to the Travel & Recreation Group. Within the Marketing & Events Group, goodwill of $62.7 million relates to the Marketing & Events U.S. segment and $23.1 million relates to the Marketing & Events International segment. For impairment testing purposes, the goodwill related to the Marketing & Events U.S. segment is assigned to and tested at the operating segment level, which represents all domestic operations of GES. Furthermore, the goodwill related to the Marketing & Events International segment is assigned to and tested at the component level within the segment’s geographical operations. As of June 30, 2011, the amount of goodwill assigned to the reporting units in the United Kingdom (Melville) and Canada was $13.7 million and $9.4 million, respectively. Also, as of June 30, 2011, the Brewster and Glacier Park operating segments (within the Travel & Recreation Group) had goodwill of $44.1 million and $3.9 million (acquired in the first six months of 2011), respectively. Brewster and Glacier Park are considered reporting units for goodwill impairment testing purposes.

Viad uses a discounted expected future cash flow methodology (income approach) in order to estimate the fair value of its reporting units for purposes of goodwill impairment testing. The estimates and assumptions regarding expected future cash flows, discount rates and terminal values require considerable judgment and are based on market conditions, financial forecasts, industry trends and historical experience.

The most critical assumptions and estimates in determining the estimated fair value of its reporting units relate to the amounts and timing of expected future cash flows for each reporting unit and the reporting unit cost of capital (discount rate) applied to those cash flows. Furthermore, the assumed reporting unit cost of capital rates (discount rates) are estimated using a build-up method based on the perceived risk associated with the cash flows pertaining to the specific reporting unit. In order to assess the reasonableness of its fair value estimates, the Company performs a reconciliation of the aggregate fair values of its reporting units to Viad’s market capitalization.

As noted above, the estimates and assumptions regarding expected future cash flows, discount rates and terminal values require considerable judgment and are based on market conditions, financial forecasts, industry trends and historical experience. These estimates, however, have inherent uncertainties and different assumptions could lead to materially different results. As of June 30, 2011, Viad had aggregate goodwill of $133.8 million recorded in the consolidated balance sheets. Furthermore, as a result of the Company’s most recent impairment analysis performed in the fourth quarter of 2010, the excess of the estimated fair values over the carrying values (expressed as a percentage of the carrying amounts) under step one of the impairment test were 80 percent, 69 percent and 69 percent, respectively, for each of the Marketing & Events Group reporting units in the United States, the United Kingdom (Melville) and Canada. For the Brewster reporting unit, the excess of the estimated fair value over the carrying value was 50 percent as of the most recent impairment test. Due to continued uncertainties in the current economic environment, reductions in the Company’s expected future revenue, operating income or cash flow forecasts and projections, or an increase in reporting unit cost of capital, could trigger additional goodwill impairment testing, which may result in impairment losses. Furthermore, management continues to monitor the market capitalization of the Company as ongoing declines in market capitalization could be indicative of possible goodwill impairment.

*Income taxes —* As of June 30, 2011 and December 31, 2010, Viad had gross deferred tax assets of $63.5 million and $67.1 million, respectively. These deferred tax assets reflect the expected future tax benefits to be realized upon reversal of deductible temporary differences, and the utilization of net operating loss and tax credit carryforwards.

During 2010 and 2009, Viad recorded pre-tax losses from its operations in the United States. The Company considered the negative evidence of these domestic pre-tax operating losses on the future recoverability of its deferred tax assets. Viad also considered positive evidence regarding the realization of deferred tax assets including the Company’s historical and forecasted taxable income, taxpaying history and future reversals of deferred tax liabilities. Furthermore, Viad also considered the fact that goodwill impairment losses were not tax deductible and thus did not contribute to tax losses in 2009. As of both June 30, 2011 and December 31, 2010, Viad had a valuation allowance of $411,000 related to certain state deferred tax assets. With respect to all other deferred tax assets, management believes that recovery from future taxable income is more-likely-than-not.

Viad uses considerable judgment in forming a conclusion regarding the recoverability of its deferred tax assets. As a result, there are inherent uncertainties regarding the ultimate realization of these assets, which is primarily dependent on Viad’s ability to generate sufficient taxable income in future periods. In light of the Company’s domestic operating losses in 2010 and 2009, and the continued uncertainties in the current economic environment, it is possible that the relative weight of positive and negative evidence regarding the recoverability of Viad’s deferred tax assets may change, which could result in a material increase in the Company’s valuation allowance. If such an increase in the valuation allowance were to occur, it would result in increased income tax expense in the period the assessment was made.

Viad exercises judgment in determining its income tax provision due to transactions, credits and calculations where the ultimate tax determination is uncertain. As of June 30, 2011 and December 31, 2010, Viad did not have any accrued gross liabilities associated with uncertain tax positions for continuing operations. However, as of June 30, 2011 and December 31, 2010, Viad had accrued interest and penalties related to uncertain tax positions for continuing operations of $64,000 and $146,000, respectively.

In addition to the above, Viad had accrued gross liabilities associated with uncertain tax positions for discontinued operations of $636,000 as of both June 30, 2011 and December 31, 2010. In addition, as of June 30, 2011 and December 31, 2010, Viad had accrued interest and penalties related to uncertain tax positions for discontinued operations of $369,000 and $351,000, respectively. Future tax resolutions or settlements that may occur related to these uncertain tax positions would be recorded through discontinued operations (net of federal tax effects, if applicable).

*Insurance liabilities —* Viad is self-insured up to certain limits for workers’ compensation, automobile, product and general liability and property loss claims. The aggregate amount of insurance liabilities related to Viad’s continuing operations was $22.7 million as of June 30, 2011. Of this total, $15.4 million related to workers’ compensation liabilities and the remaining $7.3 million related to general/auto liability claims. Viad has also retained and provided for certain insurance liabilities in conjunction with previously sold businesses totaling $7.3 million as of June 30, 2011, primarily 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 $200,000 to $500,000 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 $3.4 million and $2.7 million for the first six months of 2011 and 2010, respectively.

*Pension and postretirement benefits —* Viad’s pension plans use traditional defined benefit formulas based on years of service and final average compensation. Funding policies provide that payments to defined benefit pension trusts shall be at least equal to the minimum funding required by applicable regulations. The Company presently anticipates contributing $1.7 million to its funded pension plans and $959,000 to its unfunded pension plans in 2011, of which the Company has contributed $524,000 and $476,000 as of June 30, 2011, respectively.

Viad and certain of its subsidiaries have defined benefit postretirement plans that provide medical and life insurance for certain eligible employees, retirees and dependents. The related postretirement benefit liabilities are recognized over the period that services are provided by employees. In addition, Viad retained the obligations for these benefits for retirees of certain sold businesses. While the plans have no funding requirements, Viad expects to contribute $500,000 to the plans in 2011, of which $71,000 has been contributed as of June 30, 2011.

The assumed health care cost trend rate used in measuring the December 31, 2010 accumulated postretirement benefit obligation was nine and one-half percent, declining one-half percent each year to the ultimate rate of five percent by the year 2019 and remaining at that level thereafter.

A one-percentage-point increase in the assumed health care cost trend rate for each year would increase the accumulated postretirement benefit obligation as of December 31, 2010 by approximately $1.6 million and the total of service and interest cost components by approximately $124,000. A one-percentage-point decrease in the assumed health care cost trend rate for each year would decrease the accumulated postretirement benefit obligation as of December 31, 2010 by approximately $1.4 million and the total of service and interest cost components by approximately $104,000.

The weighted-average assumptions used to determine the postretirement benefit obligation as of December 31, 2010 were as follows:

|  | Domestic Plans Funded Plans | Unfunded Plans | Postretirement Benefit Plans | Foreign Plans |
| --- | ---: | ---: | ---: | ---: |
| Discount rate | 5.45% | 5.10% | 5.10% | 5.10% |

The weighted-average assumptions used to determine the 2010 net periodic benefit cost were as follows:

|  | Domestic Plans Funded Plans | Unfunded Plans | Postretirement Benefit Plans | Foreign Plans |
| --- | ---: | ---: | ---: | ---: |
| Discount rate | 5.90% | 5.70% | 5.60% | 5.60% |
| Expected return on plan assets | 6.35% | N/A | 6.10% | 5.75% |

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The discount rates used in determining future pension and postretirement benefit obligations are based on rates determined by actuarial analysis and management review, and reflect the estimated rates of return on a high-quality, hypothetical bond portfolio whose cash flows match the timing and amounts of expected benefit payments.

*Share-based compensation —* The fair values of restricted stock and performance-based restricted stock awards are based on Viad’s stock price on the date of grant. Liability-based awards are recorded at estimated fair value, based on the number of units expected to vest and the level of achievement of predefined performance goals (where applicable) and are remeasured on each balance sheet date based on Viad’s stock price until the time of settlement. Viad uses the Black-Scholes option pricing model for purposes of determining the fair value of each stock option grant for which key assumptions are necessary. These assumptions include Viad’s expected stock price volatility; the expected period of time the stock option will remain outstanding; the expected dividend yield on Viad common stock, and the risk-free interest rate. Changes in the assumptions could result in different estimates of the fair value of stock option grants, and consequently impact Viad’s results of operations.

### Impact of Recent Accounting Pronouncements:

For a description of recently issued accounting pronouncements, including the expected dates of adoption and estimated effects, if any, on Viad’s consolidated financial statements, see Note 17 of notes to consolidated financial statements.

### 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 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, adverse developments in liabilities associated with discontinued operations, 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 “Risk Factors” in the risk factors sections included in Viad’s 2010 Annual Report.

## Market risk

As filed, 5,036 characters.

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 and the United Kingdom 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 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 consolidated balance sheets. Viad does not currently hedge its equity risk arising from the translation of foreign denominated assets and liabilities. Viad had cumulative unrealized foreign currency translation gains recorded in equity of $44.6 million and $39.0 million as of June 30, 2011 and December 31, 2010, respectively. During the three and six months ended June 30, 2011, unrealized foreign currency translation gains of $2.1 million and $5.6 million, respectively, were recorded in other comprehensive income.

In addition, for purposes of consolidation, the revenues, 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 the 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 operating results. As noted above, Viad primarily conducts its foreign operations in Canada and the United Kingdom.

The following table summarizes the effect of foreign exchange rate variances on segment operating income from Viad’s Canadian and United Kingdom operations for the three months ended June 30:

| Canadian Operations: | Weighted-Average Exchange Rates 2011 | 2010 | Effect of Rate Variance (thousands) |
| --- | ---: | ---: | ---: |
| Marketing & Events Group | $1.05 | $0.97 | $102 |
| Travel & Recreation Group | $1.04 | $0.95 | $377 |
| United Kingdom Operations: |  |  |  |
| Marketing & Events Group | $1.64 | $1.50 | $467 |

The following table summarizes the effect of foreign exchange rate variances on segment operating income from Viad’s Canadian and United Kingdom operations for the six months ended June 30:

| Canadian Operations: | Weighted Average Exchange Rates 2011 | 2010 | Effect of Rate Variance (thousands) |
| --- | ---: | ---: | ---: |
| Marketing & Events Group | $1.06 | $0.97 | $125 |
| Travel & Recreation Group | $1.09 | $0.95 | $193 |
| United Kingdom Operations: |  |  |  |
| Marketing & Events Group | $1.63 | $1.51 | $621 |

As the Canadian operations generated aggregate operating income for the second quarter of 2011, Viad’s segment operating income has been favorably impacted by $479,000 from the strengthening of the Canadian dollar relative to the U.S. dollar. As the United Kingdom operations generated aggregate operating income in the second quarter of 2011, Viad’s segment operating income has been favorably impacted by $467,000 from the strengthening of the British pound relative to the U.S. dollar. As the Canadian operations generated aggregate operating income for the first six months of 2011, Viad’s segment operating income has been favorably impacted by $318,000 from the strengthening of the Canadian dollar relative to the U.S. dollar. As the United Kingdom operations generated aggregate operating income in the first six months of 2011, Viad’s segment operating income has been favorably impacted by $621,000 from the strengthening of the British pound relative to the U.S. dollar.

Viad is exposed to short-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. On April 28, 2011, Viad paid off its outstanding borrowing under the previous credit facility of $4.2 million. As of June 30, 2011, Viad did not have any variable rate debt outstanding under the Credit Facility.

## Controls and procedures

As filed, 1,913 characters.

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 June 30, 2011, 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 June 30, 2011. 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.

During the second quarter of 2011, there were changes in the Company’s internal control over financial reporting that have materially affected the Company’s internal control over financial reporting. In particular, for the Marketing & Events U.S. segment, the Company consolidated its Roselle, Illinois accounting office into the existing accounting operation in Las Vegas, Nevada. The consolidated accounting function continues to utilize the Oracle financial application; however, additional functionality was added to Oracle to accommodate the Marketing & Events U.S. segment’s billing process for a portion of the business. The consolidation of these accounting functions was part of a planned business upgrade and was not made in response to any deficiency in the Company’s internal control over financial reporting.

## Risk factors

As filed, 434 characters.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Item 1A. Risk Factors” of Part 1 and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of Viad’s Annual Report on Form 10-K for the year ended December 31, 2010, which could materially affect the Company’s business, financial condition and/or future results.

Filed Aug 9, 2011.
Source: SEC EDGAR, the filing index for accession 0000950123-11-074885. Last ingested by Listed: Nov 4, 2026, 17:36 ET. No prices; not investment advice.