Quarterly Report




UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2017
 
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from              to             
Commission File Number: 001-09614

VAILA06.JPG
Vail Resorts, Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware
 
51-0291762
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
 
 
390 Interlocken Crescent
Broomfield, Colorado
 
80021
(Address of Principal Executive Offices)
 
(Zip Code)
(303) 404-1800
(Registrant’s Telephone Number, Including Area Code)
 
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.     ý   Yes     ¨   No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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).     ý   Yes     ¨   No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer
 
ý
  
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨   (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     ¨   Yes     ý   No
As of March 6, 2017, 39,984,029 shares of the registrant’s common stock were outstanding.




Table of Contents
 
 
 
 
PART I
FINANCIAL INFORMATION
Page
 
 
 
Item 1.
Financial Statements (unaudited).
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
PART II
OTHER INFORMATION
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.




Vail Resorts, Inc.
Consolidated Condensed Balance Sheets
(In thousands, except share and per share amounts)
(Unaudited)
 
 
 
January 31, 2017
 
July 31, 2016
 
January 31, 2016
Assets
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
Cash and cash equivalents
 
$
140,909

 
$
67,897

 
$
45,368

Restricted cash
 
17,132

 
6,046

 
6,118

Trade receivables, net
 
80,758

 
147,113

 
87,055

Inventories, net
 
93,396

 
74,589

 
78,770

Other current assets
 
41,519

 
27,220

 
60,965

Total current assets
 
373,714

 
322,865

 
278,276

Property, plant and equipment, net (Note 6)
 
1,694,746

 
1,363,814

 
1,391,889

Real estate held for sale and investment
 
112,633

 
111,088

 
117,999

Goodwill, net (Note 6)
 
1,469,756

 
509,037

 
506,957

Intangible assets, net
 
289,208

 
140,007

 
141,942

Other assets
 
42,410

 
35,207

 
35,896

Total assets
 
$
3,982,467

 
$
2,482,018

 
$
2,472,959

Liabilities and Stockholders’ Equity
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
Accounts payable and accrued liabilities (Note 6)
 
$
541,335

 
$
397,488

 
$
447,770

Income taxes payable
 
51,056

 
95,639

 
34,278

Long-term debt due within one year (Note 4)
 
38,379

 
13,354

 
13,340

Total current liabilities
 
630,770

 
506,481

 
495,388

Long-term debt (Note 4)
 
1,216,721

 
686,909

 
680,002

Other long-term liabilities (Note 6)
 
271,935

 
270,168

 
252,606

Deferred income taxes
 
182,472

 
129,994

 
190,441

Total liabilities
 
2,301,898

 
1,593,552

 
1,618,437

Commitments and contingencies (Note 8)
 

 

 

Stockholders’ equity:
 
 
 
 
 
 
Preferred stock, $0.01 par value, 25,000,000 shares authorized, no shares issued and outstanding
 

 

 

Common stock, $0.01 par value, 100,000,000 shares authorized, 45,419,228, 41,614,432 and 41,578,019 shares issued, respectively
 
454

 
416

 
416

Exchangeable shares, $0.01 par value, 73,047, zero and zero shares issued and outstanding, respectively (Note 5)
 
1

 

 

Additional paid-in capital
 
1,214,064

 
635,986

 
628,168

Accumulated other comprehensive loss
 
(914
)
 
(1,550
)
 
(7,707
)
Retained earnings
 
511,487

 
486,667

 
452,922

Treasury stock, at cost, 5,436,294, 5,434,977, and 5,326,941 shares, respectively (Note 10)
 
(247,189
)
 
(246,979
)
 
(233,192
)
Total Vail Resorts, Inc. stockholders’ equity
 
1,477,903

 
874,540

 
840,607

Noncontrolling interests
 
202,666

 
13,926

 
13,915

Total stockholders’ equity
 
1,680,569

 
888,466

 
854,522

Total liabilities and stockholders’ equity
 
$
3,982,467

 
$
2,482,018

 
$
2,472,959

The accompanying Notes are an integral part of these unaudited consolidated condensed financial statements.

2



Vail Resorts, Inc.
Consolidated Condensed Statements of Operations
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2017
 
2016
 
2017
 
2016
Net revenue:
 
 
 
 
 
 
 
Mountain
$
654,099

 
$
532,872

 
$
764,866

 
$
633,805

Lodging
65,884

 
62,807

 
133,286

 
127,093

Real estate
5,215

 
3,684

 
5,311

 
13,032

Total net revenue
725,198

 
599,363

 
903,463

 
773,930

Segment operating expense (exclusive of depreciation and amortization shown separately below):
 
 
 
 
 
 
 
Mountain
355,239

 
296,256

 
523,492

 
447,414

Lodging
59,683

 
57,311

 
123,763

 
118,748

Real estate
5,841

 
4,617

 
7,326

 
13,958

Total segment operating expense
420,763

 
358,184

 
654,581

 
580,120

Other operating (expense) income:
 
 
 
 
 
 
 
Depreciation and amortization
(49,626
)
 
(40,541
)
 
(90,207
)
 
(79,241
)
Gain on sale of real property

 
632

 
6,466

 
1,791

Change in estimated fair value of contingent consideration (Note 7)
(300
)
 

 
(600
)
 

Loss on disposal of fixed assets and other, net
(2,231
)
 
(1,206
)
 
(2,781
)
 
(2,985
)
Income from operations
252,278

 
200,064

 
161,760

 
113,375

Mountain equity investment income (loss), net
157

 
(61
)
 
989

 
781

Investment income and other, net
1,148

 
161

 
5,671

 
359

Interest expense and other, net
(9,048
)
 
(10,910
)
 
(21,012
)
 
(21,505
)
Income before provision for income taxes
244,535

 
189,254

 
147,408

 
93,010

Provision for income taxes
(84,807
)
 
(72,383
)
 
(51,298
)
 
(35,809
)
Net income
159,728

 
116,871

 
96,110

 
57,201

Net (income) loss attributable to noncontrolling interests
(10,549
)
 
111

 
(9,518
)
 
194

Net income attributable to Vail Resorts, Inc.
$
149,179

 
$
116,982

 
$
86,592

 
$
57,395

Per share amounts (Note 3):
 
 
 
 
 
 
 
Basic net income per share attributable to Vail Resorts, Inc.
$
3.72

 
$
3.23

 
$
2.25

 
$
1.58

Diluted net income per share attributable to Vail Resorts, Inc.
$
3.63

 
$
3.14

 
$
2.19

 
$
1.54

Cash dividends declared per share
$
0.81

 
$
0.6225

 
$
1.62

 
$
1.245

The accompanying Notes are an integral part of these unaudited consolidated condensed financial statements.



3




Vail Resorts, Inc.
Consolidated Condensed Statements of Comprehensive Income
(In thousands)
(Unaudited)

 
 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
 
2017
 
2016
 
2017
 
2016
Net income
 
$
159,728

 
$
116,871

 
$
96,110

 
$
57,201

Foreign currency translation adjustments, net of tax
 
25,650

 
(386
)
 
1,238

 
(2,794
)
Comprehensive income
 
185,378

 
116,485

 
97,348

 
54,407

Comprehensive (income) loss attributable to noncontrolling interests
 
(17,329
)
 
111

 
(10,120
)
 
194

Comprehensive income attributable to Vail Resorts, Inc.
 
$
168,049

 
$
116,596

 
$
87,228

 
$
54,601

The accompanying Notes are an integral part of these unaudited consolidated condensed financial statements.


4



Vail Resorts, Inc.
Consolidated Condensed Statements of Stockholders’ Equity
(In thousands)
(Unaudited)
 
Common Stock
Additional Paid in Capital
Accumulated Other Comprehensive Loss
Retained Earnings
Treasury Stock
Total Vail Resorts, Inc. Stockholders’ Equity
Noncontrolling Interests
Total Stockholders’ Equity
 
Vail Resorts
Exchangeable
 
 
 
 
 
 
 
Balance, July 31, 2015
$
415

$

$
623,510

$
(4,913
)
$
440,748

$
(193,192
)
$
866,568

$
14,018

$
880,586

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income (loss)




57,395


57,395

(194
)
57,201

Foreign currency translation adjustments, net of tax



(2,794
)


(2,794
)

(2,794
)
Total comprehensive income (loss)
 
 
 
 
 
 
54,601

(194
)
54,407

Stock-based compensation expense


8,390




8,390


8,390

Issuance of shares under share award plans, net of shares withheld for taxes
1


(7,287
)



(7,286
)

(7,286
)
Tax benefit from share award plans


3,555




3,555


3,555

Repurchase of common stock (Note 10)





(40,000
)
(40,000
)
 
(40,000
)
Dividends (Note 3)




(45,221
)

(45,221
)

(45,221
)
Contributions from noncontrolling interests, net







91

91

Balance, January 31, 2016
$
416

$

$
628,168

$
(7,707
)
$
452,922

$
(233,192
)
$
840,607

$
13,915

$
854,522

 
 
 
 
 
 
 
 
 
 
Balance, July 31, 2016
$
416

$

$
635,986

$
(1,550
)
$
486,667

$
(246,979
)
$
874,540

$
13,926

$
888,466

Comprehensive income (loss):
 
 
 
 
 
 
 
 
 
Net income




86,592


86,592

9,518

96,110

Foreign currency translation adjustments, net of tax



636



636

602

1,238

Total comprehensive income
 
 
 
 
 
 
87,228

10,120

97,348

Stock-based compensation expense


9,151




9,151


9,151

Shares issued for acquisition (Note 5)
33

4

574,608




574,645


574,645

Exchangeable share transfers
3

(3
)







Issuance of shares under share award plans, net of shares withheld for taxes
2


(12,977
)



(12,975
)

(12,975
)
Tax benefit from share award plans


7,296




7,296


7,296

Repurchase of common stock (Note 10)





(210
)
(210
)

(210
)
Dividends (Note 3)




(61,772
)

(61,772
)

(61,772
)
Acquisition of noncontrolling interest (Note 5)







182,579

182,579

Distributions to noncontrolling interests, net







(3,959
)
(3,959
)
Balance, January 31, 2017
$
454

$
1

$
1,214,064

$
(914
)
$
511,487

$
(247,189
)
$
1,477,903

$
202,666

$
1,680,569

The accompanying Notes are an integral part of these unaudited consolidated condensed financial statements.

5



Vail Resorts, Inc.
Consolidated Condensed Statements of Cash Flows
(In thousands)
(Unaudited)
 
 
Six Months Ended January 31,
 
 
2017
 
2016
Cash flows from operating activities:
 
 
 
 
Net income
 
$
96,110

 
$
57,201

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
90,207

 
79,241

Cost of real estate sales
 
4,203

 
9,444

Stock-based compensation expense
 
9,151

 
8,390

Deferred income taxes, net
 
51,298

 
35,937

Gain on sale of real property
 
(6,466
)
 
(1,791
)
Foreign exchange gains on intercompany loans
 
(5,215
)
 

Other non-cash income, net
 
(7,678
)
 
(343
)
Changes in assets and liabilities:
 
 
 
 
Restricted cash
 
(4,695
)
 
6,894

Trade receivables, net
 
68,554

 
27,696

Inventories, net
 
(1,739
)
 
(5,263
)
Accounts payable and accrued liabilities
 
75,270

 
111,778

Income taxes payable
 
(50,703
)
 
(17,016
)
Other assets and liabilities, net
 
(1,379
)
 
(2,700
)
Net cash provided by operating activities
 
316,918

 
309,468

Cash flows from investing activities:
 
 
 
 
Capital expenditures
 
(93,436
)
 
(77,237
)
Acquisition of businesses, net of cash acquired
 
(512,348
)
 
(20,245
)
Cash received from the sale of real property
 
7,692

 
3,644

Other investing activities, net
 
6,271

 
317

Net cash used in investing activities
 
(591,821
)
 
(93,521
)
Cash flows from financing activities:
 
 
 
 
Proceeds from borrowings under Vail Holdings Credit Agreement term loan
 
509,375

 

Proceeds from borrowings under Vail Holdings Credit Agreement revolver
 
110,000

 
105,000

Proceeds from borrowings under Whistler Credit Agreement revolver
 
2,229

 

Repayments of borrowings under Vail Holdings Credit Agreement term loan
 
(9,375
)
 
(3,125
)
Repayments of borrowings under Vail Holdings Credit Agreement revolver
 
(185,000
)
 
(225,500
)
Repayments of borrowings under Whistler Credit Agreement revolver
 
(17,573
)
 

Dividends paid
 
(61,772
)
 
(45,221
)
Repurchases of common stock
 
(210
)
 
(40,000
)
Other financing activities, net
 
611

 
3,668

Net cash provided by (used in) financing activities
 
348,285

 
(205,178
)
Effect of exchange rate changes on cash and cash equivalents
 
(370
)
 
(860
)
Net increase in cash and cash equivalents
 
73,012

 
9,909

Cash and cash equivalents:
 
 
 
 
Beginning of period
 
67,897

 
35,459

End of period
 
$
140,909

 
$
45,368

 
 
 
 
 
Non-cash investing and financing activities:
 
 
 
 
Accrued capital expenditures
 
$
11,102

 
$
4,425

The accompanying Notes are an integral part of these unaudited consolidated condensed financial statements.

6



Vail Resorts, Inc.
Notes to Consolidated Condensed Financial Statements
(Unaudited)
 

1.
Organization and Business
Vail Resorts, Inc. (“Vail Resorts”) is organized as a holding company and operates through various subsidiaries. Vail Resorts and its subsidiaries (collectively, the “Company”) operate in three business segments: Mountain, Lodging and Real Estate.

In the Mountain segment, the Company operates ten world-class mountain resort properties and three urban ski areas including:
Mountain Resorts:
 
Location:
1.
Vail Mountain
 
Colorado
2.
Breckenridge
 
Colorado
3.
Keystone
 
Colorado
4.
Beaver Creek
 
Colorado
5.
Park City Mountain Resort (“Park City”)
 
Utah
6.
Heavenly
 
Lake Tahoe area of Nevada and California
7.
Northstar
 
Lake Tahoe area of California
8.
Kirkwood
 
Lake Tahoe area of California
9.
Perisher Ski Resort (“Perisher”)
 
New South Wales, Australia
10.
Whistler Blackcomb Resort (“Whistler Blackcomb”)
 
British Columbia, Canada
Urban Ski Areas (“Urban”):
 
Location:
1.
Wilmot Mountain (“Wilmot”)
 
Wisconsin
2.
Afton Alps
 
Minnesota
3.
Mount Brighton
 
Michigan

Additionally, the Company operates ancillary services, primarily including ski school, dining and retail/rental operations, and for Perisher including lodging and transportation operations. The resorts located in the United States (“U.S.”), except for Northstar, Park City and the Urban ski areas, operate primarily on federal land under the terms of Special Use Permits granted by the United States Department of Agriculture Forest Service. The operations of Whistler Blackcomb are conducted on land owned by the government of the Province of British Columbia, Canada within the traditional territory of the Squamish and Lil’wat nations. The operations of Perisher are conducted pursuant to a long-term lease and license on land owned by the government of New South Wales, Australia.

In the Lodging segment, the Company owns and/or manages a collection of luxury hotels and condominiums under its RockResorts brand, as well as other strategic lodging properties and a large number of condominiums located in proximity to the Company’s North American mountain resorts, National Park Service (“NPS”) concessionaire properties including the Grand Teton Lodge Company (“GTLC”), which operates destination resorts in Grand Teton National Park, Colorado Mountain Express (“CME”), a Colorado resort ground transportation company, and mountain resort golf courses.

Vail Resorts Development Company (“VRDC”), a wholly-owned subsidiary of the Company, conducts the operations of the Real Estate segment, which owns, develops and sells real estate in and around the Company’s resort communities.

The Company’s mountain business and lodging properties at or around the Company’s mountain resorts are seasonal in nature with peak operating seasons primarily from mid-November through mid-April in North America. The Company’s operating season at Perisher, its NPS concessionaire properties and its golf courses generally occur from June to early October.


7



2.
Summary of Significant Accounting Policies
Basis of Presentation
Consolidated Condensed Financial Statements— In the opinion of the Company, the accompanying Consolidated Condensed Financial Statements reflect all adjustments necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. All such adjustments are of a normal recurring nature. Results for interim periods are not indicative of the results for the entire fiscal year, particularly given the significant seasonality to the Company’s operating cycle. The accompanying Consolidated Condensed Financial Statements should be read in conjunction with the audited Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2016 . Certain information and footnote disclosures, including significant accounting policies, normally included in fiscal year financial statements prepared in accordance with accounting principles generally accepted in the U.S. (“GAAP”) have been condensed or omitted. The Consolidated Condensed Balance Sheet as of July 31, 2016 was derived from audited financial statements.

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, the disclosure of contingent assets and liabilities at the balance sheet date and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.

Fair Value Instruments— The recorded amounts for cash and cash equivalents, receivables, other current assets, and accounts payable and accrued liabilities approximate fair value due to their short-term nature. The fair value of amounts outstanding under the Vail Holdings Credit Agreement revolver and term loan, Whistler Credit Agreement revolver and the Employee Housing Bonds (all as defined in Note 4, Long-Term Debt) approximate book value due to the variable nature of the interest rate associated with the debt.

Recently Issued Accounting Standards
Adopted Standards
In April 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.” The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The guidance in the new standard is limited to the presentation of debt issuance costs and does not affect the recognition and measurement of debt issuance costs. In June 2015, the FASB issued ASU No. 2015-15, “Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements.” The guidance in ASU No. 2015-03 does not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. Given the absence of authoritative guidance within ASU No. 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff stated that they would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The standard was effective for the first interim period within fiscal years beginning after December 15, 2015 (the Company’s first quarter of fiscal 2017) and early adoption was permitted for financial statements that have not been previously issued. The standard should be applied on a retrospective basis. As such, the Company adopted these new accounting standards as of July 31, 2016, which amended presentation and disclosure requirements concerning debt issuance costs but did not affect the Company’s overall financial position or results of operations and cash flows. As a result, approximately $2.2 million of debt issuance costs have been reclassified to Long-term debt as of January 31, 2016.

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” The standard changes how deferred taxes are classified on a company’s balance sheet. The standard eliminates the current requirement for companies to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, companies will be required to classify all deferred tax assets and liabilities as noncurrent on a jurisdiction by jurisdiction basis. The standard is effective for financial statements issued for annual periods beginning after December 15, 2016 (the Company’s first quarter of fiscal 2018), with early adoption permitted, and may be applied prospectively or retrospectively. The Company adopted this new accounting standard as of July 31, 2016, which amended presentation requirements, but did not affect the Company’s overall financial position or results of operations and cash flows. The Company adopted this standard on a prospective basis, which reclassified the current deferred income tax asset to the noncurrent deferred income tax liability. Accordingly, the Consolidated Condensed Balance Sheet as of January 31, 2016 has not been retrospectively adjusted.


8



Standards Being Evaluated
The authoritative guidance listed below is currently being evaluated for its impact to Company policies upon adoption as well as any significant implementation matters yet to be addressed.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which supersedes the revenue recognition requirements in Accounting Standards Codification 605, “Revenue Recognition.” This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which defers the effective date of the new revenue standard by one year and would allow companies the option to early adopt the new revenue standard as of the original effective date. This standard will be effective for the first interim period within fiscal years beginning after December 15, 2017 (the Company’s first quarter of fiscal 2019 if it does not early adopt), using one of two retrospective application methods. The Company is evaluating the impacts, if any, the adoption of this accounting standard will have on the Company’s financial position or results of operations and cash flows and related disclosures and is determining the appropriate transition method.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which supersedes “Leases (Topic 840).” The standard requires lessees to recognize the assets and liabilities arising from all leases, including those classified as operating leases under previous accounting guidance, on the balance sheet and disclose key information about leasing arrangements. The standard also allows for an accounting policy election not to recognize on the balance sheet lease assets and liabilities for leases with a term of 12 months or less. Under the new guidance, lessees will be required to recognize a lease liability and a right-of-use asset on their balance sheets, while lessor accounting will be largely unchanged. The standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those years (the Company’s first quarter of fiscal 2020), and must be applied using a modified retrospective transition approach to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with early adoption permitted. The Company is currently evaluating the impacts the adoption of this accounting standard will have on the Company’s financial position or results of operations and cash flows and related disclosures. Additionally, the Company is evaluating the impacts of the standard beyond accounting, including system, data and process changes required to comply with the standard.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The new guidance requires companies to record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement when the awards vest or are settled. The guidance also requires companies to present excess tax benefits as an operating activity and cash paid to a taxing authority to satisfy statutory withholding as a financing activity on the statement of cash flows. Additionally, the guidance allows companies to make a policy election to account for forfeitures either upon occurrence or by estimating forfeitures. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2016 (the Company’s first quarter of fiscal 2018), with early adoption permitted. The Company is currently evaluating the impacts the adoption of this accounting standard will have on the Company’s financial position or results of operations and cash flows.

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” The standard provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2017 (the Company’s first quarter of fiscal 2019), with early adoption permitted. The Company is currently evaluating the impacts the adoption of this accounting standard will have on the Company’s cash flows.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The standard simplifies interim and annual goodwill impairment testing by eliminating step two, a hypothetical purchase price allocation, from the goodwill impairment test and leaving step one unchanged. Under the new guidance, companies will continue to complete step one by comparing the estimated fair value of their reporting units with their respective carrying amounts, and will recognize an impairment charge, if any, for the amount by which the carrying amount exceeds the reporting unit’s estimated fair value. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2019 (the Company’s first quarter of fiscal 2021), with early adoption permitted. The Company is currently analyzing provisions of the standard to determine if early adoption is warranted for purposes of simplification.


9



3.
Net Income per Share
Earnings per Share
Basic earnings per share (“EPS”) is computed by dividing net income attributable to Vail Resorts stockholders by the total weighted-average shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised, resulting in the issuance of shares of common stock that would then participate in the earnings of Vail Resorts.

In connection with the Company’s acquisition of Whistler Blackcomb in October 2016 (see Note 5, Acquisitions), the Company issued consideration in the form of shares of Vail Resorts common stock (the “Vail Shares”), and shares of the Company’s wholly-owned Canadian subsidiary (“Exchangeco”). Whistler Blackcomb shareholders elected to receive 3,327,719 Vail Shares and 418,095 shares of Exchangeco (the “Exchangeco Shares”). Both Vail Shares and Exchangeco Shares have a par value of $0.01 per share and Exchangeco Shares, while outstanding, are substantially the economic equivalent of the Vail Shares and are exchangeable, at any time prior to the seventh anniversary of the closing of the acquisition, into Vail Shares. The Company’s calculation of weighted-average shares outstanding includes the Exchangeco Shares. The Company computes the effect of dilutive securities using the treasury stock method and average market prices during the period.

Presented below is basic and diluted EPS for the three months ended January 31, 2017 and 2016 (in thousands, except per share amounts):

 
 
Three Months Ended January 31,
 
 
2017
 
2016
 
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income per share:
 
 
 
 
 
 
 
 
Net income attributable to Vail Resorts
 
$
149,179

 
$
149,179

 
$
116,982

 
$
116,982

Weighted-average Vail Resorts shares outstanding
 
39,888

 
39,888

 
36,246

 
36,246

Weighted-average Exchangeco shares outstanding
 
162

 
162

 

 

Total Weighted-average shares outstanding
 
40,050

 
40,050

 
36,246

 
36,246

Effect of dilutive securities
 

 
1,057

 

 
1,010

Total shares
 
40,050

 
41,107

 
36,246


37,256

Net income per share attributable to Vail Resorts
 
$
3.72

 
$
3.63

 
$
3.23

 
$
3.14


The number of shares issuable on the exercise of share based awards excluded from the calculation of diluted EPS because the effect of their inclusion would have been anti-dilutive totaled 2,000 and 19,000  for the three months ended January 31, 2017 and 2016 , respectively.

Presented below is basic and diluted EPS for the six months ended January 31, 2017 and 2016 (in thousands, except per share amounts):

 
 
Six Months Ended January 31,
 
 
2017
 
2016
 
 
Basic
 
Diluted
 
Basic
 
Diluted
Net income per share:
 
 
 
 
 
 
 
 
Net income attributable to Vail Resorts
 
$
86,592

 
$
86,592

 
$
57,395

 
$
57,395

Weighted-average Vail Resorts shares outstanding
 
38,327

 
38,327

 
36,359

 
36,359

Weighted-average Exchangeco shares outstanding
 
115

 
115

 

 

Total Weighted-average shares outstanding
 
38,442

 
38,442

 
36,359

 
36,359

Effect of dilutive securities
 

 
1,087

 

 
999

Total shares
 
38,442

 
39,529

 
36,359

 
37,358

Net income per share attributable to Vail Resorts
 
$
2.25

 
$
2.19

 
$
1.58

 
$
1.54


The number of shares issuable on the exercise of share based awards excluded from the calculation of diluted EPS because the effect of their inclusion would have been anti-dilutive totaled 1,000 and 10,000  for the six months ended January 31, 2017 and 2016 , respectively.

10




Dividends

During the three and six months ended January 31, 2017 , the Company paid cash dividends of $0.81 and $1.62 per share ( $32.4 million and $61.8 million , respectively, in the aggregate). During the three and six months ended January 31, 2016 , the Company paid cash dividends of $0.6225 and $1.245 per share ( $22.6 million and $45.2 million , respectively, in the aggregate). On March 9, 2017, the Company’s Board of Directors declared a quarterly cash dividend of  $1.053  per share, for Vail Shares, payable on  April 13, 2017  to stockholders of record as of  March 29, 2017 . Additionally, a Canadian dollar equivalent dividend on the Exchangeco Shares will be payable on April 13, 2017 to the shareholders of record on March 29, 2017.


4.
Long-Term Debt
Long-term debt as of January 31, 2017 July 31, 2016 and January 31, 2016 is summarized as follows (in thousands):
 
 
Maturity
 
January 31, 2017
 
July 31, 2016
 
January 31, 2016
Vail Holdings Credit Agreement term loan (a)
 
2021
 
$
740,625

 
$
240,625

 
$
246,875

Vail Holdings Credit Agreement revolver (a)
 
2021
 

 
75,000

 
64,500

Whistler Credit Agreement revolver (b)
 
2021
 
129,966

 

 

Employee housing bonds
 
2027-2039
 
52,575

 
52,575

 
52,575

Canyons obligation
 
2063
 
325,942

 
323,099

 
320,277

Other
 
2017-2028
 
10,468

 
11,021

 
11,308

Total debt
 
 
 
1,259,576

 
702,320

 
695,535

Less: Unamortized debt issuance costs (c)
 
 
 
4,476

 
2,057

 
2,193

Less: Current maturities (d)
 
 
 
38,379

 
13,354

 
13,340

Long-term debt
 
 
 
$
1,216,721

 
$
686,909


$
680,002


(a)
On October 14, 2016 , in order to finance the cash portion of the consideration and payment of associated fees and expenses of the Whistler Blackcomb acquisition (see Note 5, Acquisitions), the Company’s wholly owned subsidiary, Vail Holdings, Inc., entered into the Second Amendment to the Seventh Amended and Restated Credit Agreement, dated as of May 1, 2015 (the “Vail Holdings Credit Agreement”), with Bank of America, N.A., as administrative agent, and other lenders names therein, through which such lenders provided an additional $509.4 million in incremental term loans and agreed, on behalf of all lenders, to extend the maturity date for the outstanding term loans and revolver facility under the Vail Holdings Credit Agreement to October 14, 2021 (the “Amendment”). The Vail Holdings Credit Agreement, as amended by the Amendment, consists of a $400.0 million revolving credit facility and a term loan facility in the amount of $750.0 million . The other material terms of the Vail Holdings Credit Agreement, including those disclosed in the Company’s Annual Report on Form 10-K filed on September 26, 2016, were not altered by the Amendment. Borrowings under the Vail Holdings Credit Agreement, including the term loan facility, bear interest at approximately 2.70% , as of January 31, 2017, and interest payments are due monthly. Additionally, the term loan facility is subject to quarterly principal payments of approximately $9.4 million, which began on January 31, 2017. Final payment of the remaining amount outstanding plus accrued and unpaid interest is due upon maturity in October 2021.
(b)
The WB Partnerships (as defined in Note 5, Acquisitions) are party to a credit agreement, dated as of November 12, 2013 (as amended, the “Whistler Credit Agreement”), by and among Whistler Mountain Resort Limited Partnership (“Whistler LP”), Blackcomb Skiing Enterprises Limited Partnership (“Blackcomb LP”), certain subsidiaries of Whistler LP and Blackcomb LP party thereto as guarantors (the “Whistler Subsidiary Guarantors”), the financial institutions party thereto as lenders and The Toronto-Dominion Bank, as administrative agent.  The Whistler Credit Agreement consists of a C$300.0 million revolving credit facility which matures on November 12, 2021 .  The WB Partnerships’ obligations under the Whistler Credit Agreement are guaranteed by the Whistler Subsidiary Guarantors and are collateralized by a pledge of the capital stock of the Whistler Subsidiary Guarantors and a pledge of substantially all of the assets of Whistler LP, Blackcomb LP and the Whistler Subsidiary Guarantors. In addition, pursuant to the terms of the Whistler Credit Agreement, the WB Partnerships have the ability to increase the commitment amount by up to C$75.0 million subject to lender approval. Borrowings under the Whistler Credit Agreement are available in Canadian or U.S. dollars and bear interest annually, subject to an applicable margin based on the WB Partnerships’ Consolidated Total Leverage Ratio (as defined in the Whistler Credit Agreement), with pricing as of January 31, 2017, in the case of borrowings (i) in Canadian dollars, at the WB Partnerships’ option, either (a) at the Canadian Prime Rate plus 1.0% per annum or (b) by way of the issuance of bankers’ acceptances at a stamping fee of 2.00% per annum; and (ii) in U.S. dollars, at the WB Partnerships option, either at (a) the

11



U.S. Base Rate plus 1.00% per annum or (b) Banker’s Acceptance Rate plus 2.00% per annum (approximately 3.0% as of January 31, 2017). The Whistler Credit Agreement also includes a quarterly unused commitment fee based on the Consolidated Total Leverage Ratio, which as of January 31, 2017 is equal to 0.45% per annum.  The Whistler Credit Agreement provides for affirmative and negative covenants that restrict, among other things, the WB Partnerships’ ability to incur indebtedness and liens, dispose of assets, make capital expenditures, make distributions and make investments. In addition, the Whistler Credit Agreement includes the restrictive financial covenants (leverage ratios and interest coverage ratios) customary for facilities of this type. In connection with the Whistler Blackcomb transaction, the WB Partnerships obtained an amendment to the Whistler Credit Agreement to waive the change of control provision that otherwise would have required repayment in full of the facility as a result of the closing of the Whistler Blackcomb acquisition and to extend the maturity to November 12, 2021 .
(c)
The Company adopted ASU 2015-03 and ASU 2015-15 as of July 31, 2016 which alters the presentation of debt issuance costs. As a result, approximately $2.2 million of debt issuance costs have been reclassified to Long-term debt as of January 31, 2016.
(d)
Current maturities represent principal payments due in the next 12 months.

Aggregate maturities for debt outstanding as of January 31, 2017 reflected by fiscal year (August through July) are as follows (in thousands):
 
Total
2017 (February 2017 through July 2017)
$
19,051

2018
38,397

2019
38,455

2020
38,516

2021
38,580

Thereafter
1,086,577

Total debt
$
1,259,576



The Company incurred gross interest expense of $14.2 million and $10.9 million for the three months ended January 31, 2017 and 2016 , respectively, of which $0.3 million and $0.2 million , respectively, were amortization of deferred financing costs. The Company incurred gross interest expense of $26.2 million and $21.5 million for the six months ended January 31, 2017 and 2016 , respectively, of which $0.5 million was amortization of deferred financing costs in both periods.

In connection with the acquisition of Whistler Blackcomb, Vail Holdings, Inc. funded a portion of the purchase price through an intercompany loan to Whistler Blackcomb of $210.0 million requiring foreign currency remeasurement to Canadian dollars, the functional currency for Whistler Blackcomb. As a result, foreign currency fluctuations associated with the loan are recorded within the Company’s results of operations. The Company recognized approximately $5.2 million in foreign currency gains on the intercompany loan to Whistler Blackcomb for both the three months and six months ended January 31, 2017 within interest expense and other, net on the Company’s Consolidated Condensed Statements of Operations.

5.
Acquisitions
Whistler Blackcomb

On August 5, 2016 , the Company entered into an Arrangement Agreement (the “Arrangement Agreement”) to acquire 100% of the outstanding common shares of Whistler Blackcomb (the “Arrangement”). On October 17, 2016 , the Company, through Exchangeco, acquired all of the outstanding common shares of Whistler Blackcomb, for aggregate purchase consideration paid to Whistler Blackcomb shareholders of $1.09 billion . The consideration paid consisted of (i) approximately C$673.8 million ( $512.6 million ) in cash (or C$17.50 per Whistler Blackcomb share), (ii)  3,327,719 Vail Shares and (iii)  418,095 Exchangeco Shares.  Each Exchangeco Share is exchangeable by the holder thereof for one Vail Share (subject to customary adjustments for stock splits or other reorganizations). In addition, the Company may require all outstanding Exchangeco Shares to be exchanged into an equal number of Vail Shares upon the occurrence of certain events and at any time following the seventh anniversary of the closing of the Arrangement. While outstanding, holders of Exchangeco Shares are entitled to cast votes on matters for which holders of Vail Shares are entitled to vote and are entitled to receive dividends economically equivalent to the dividends declared by the Company with respect to the Vail Shares.`
 

12



Whistler Blackcomb owns a 75% interest in each of Whistler LP and Blackcomb LP (the “WB Partnerships”), which together operate Whistler Blackcomb resort, a year round mountain resort in British Columbia, Canada with a comprehensive offering of recreational activities, including both snow sports and summer activities. The remaining 25% limited partnership interest in each of the WB Partnerships is owned by Nippon Cable, an unrelated party to the Company. The WB Partnerships hold land leases and rights-of-way under long-term agreements with the government of the province of British Columbia, Canada within the traditional territory of the Squamish and Lil’wat nations, which provide for the use of land at Whistler Mountain and Blackcomb Mountain.

The Company executed forward contracts for the underlying Canadian dollar cash consideration to economically hedge the risk associated with the U.S. dollar to Canadian dollar exchange rates. The Company’s total cost was $509.2 million to accumulate C$673.8 million which was required for the cash component of the purchase consideration. The estimated fair value of the Canadian dollars was approximately $512.6 million upon settlement. Accordingly, the Company realized a gain of $3.4 million on foreign currency exchange rate changes. The gain on foreign currency is a separate transaction as it primarily benefited the Company and therefore the Company recorded this gain within Investment income and other, net in its Consolidated Condensed Statements of Operations. The estimated fair value of $512.6 million is considered the cash component of the purchase consideration.

The Company held shares of Whistler Blackcomb common stock prior to the acquisition and, as such, the acquisition-date estimated fair value of this previously held investment was a component of the purchase consideration. Based on the estimated fair value of this investment of $4.3 million , the Company recorded a gain of $0.8 million within Investment income and other, net in its Consolidated Condensed Statements of Operations.

Nippon Cable’s 25% limited partnership interest is a noncontrolling economic interest containing certain protective rights and no ability to participate in the day to day operations of the WB Partnerships. The WB Partnership agreements provide that distributions made out of the partnerships be made on the basis of 75% to Whistler Blackcomb and 25% to Nippon Cable. In addition, based upon the terms of the WB Partnerships agreements, the annual distribution rights are non-transferable and transfer of the limited partnership interest is limited to Nippon Cable’s entire interest. Accordingly, the estimate of fair value associated with the noncontrolling interest has been determined based on expected underlying cash flows of the WB Partnerships discounted at a rate commensurate with a market participant’s expected rate of return for an equity instrument with these associated restrictions.


13



The following summarizes the purchase consideration and the preliminary estimated fair values of the identifiable assets acquired and liabilities assumed at the date the transaction was effective (in thousands, except exchange ratio and share price):

(in thousands, except exchange ratio and share price amounts)
 
Acquisition Date Estimated Fair Value
Total Whistler Blackcomb shares acquired
 
38,500

Exchange ratio as of October 14, 2016
 
0.097294

Total Vail Resorts shares issued to Whistler Blackcomb shareholders
 
3,746

Vail Resorts closing share price on October 14, 2016
 
$
153.41

Total value of Vail Resorts shares issued
 
$
574,645

Total cash consideration paid at C$17.50 ($13.31 on October 17, 2016) per Whistler Blackcomb share
 
512,558

Total purchase consideration to Whistler Blackcomb shareholders
 
1,087,203

Estimated fair value of previously held investment in Whistler Blackcomb
 
4,308

Estimated fair value of Nippon Cable’s 25% interest in Whistler Blackcomb
 
182,579

Total estimated purchase consideration
 
$
1,274,090

 
 
 
Allocation of total estimated purchase consideration:
 
 
Estimated fair values of assets acquired:
 
 
Current assets
 
$
37,567

Property, plant and equipment
 
332,609

Real estate held for sale and investment
 
8,216

Goodwill
 
956,086

Identifiable intangibles
 
152,035

Deferred income taxes, net
 
7,861

Other assets
 
1,907

Current liabilities
 
(74,108
)
Assumed long-term debt
 
(144,922
)
Other long-term liabilities
 
(3,161
)
  Net assets acquired
 
$
1,274,090


During the three months ended January 31, 2017, the Company recorded adjustments in the measurement period to its purchase price allocation of  $8.5 million , net, which primarily increased deferred income taxes, net with a corresponding decrease to goodwill.

The estimated fair values of assets acquired and liabilities assumed in the acquisition of Whistler Blackcomb are preliminary and are based on the information that was available as of the acquisition date. The Company believes that information provides a reasonable basis for estimating the fair values of assets acquired and liabilities assumed; however, the Company is obtaining additional information necessary to finalize those estimated fair values. Therefore, the preliminary measurements of estimated fair values reflected are subject to change. The Company expects to finalize the valuation and complete the purchase consideration allocation no later than one year from the acquisition date.

The estimated fair values of definite-lived and indefinite-lived identifiable intangible assets were determined using significant estimates and assumptions. The estimated fair value and estimated useful lives of identifiable intangible assets, where applicable, are as follows.

 
Estimated Fair Value
 
Weighted Average Amortization Period
 
($ in thousands)
 
(in years) (1)
Trademarks and trade names
$
139,977

 
n/a
Season pass holder relationships
7,950

 
5
Property management contracts
4,108

 
n/a
Total acquired identifiable intangible assets
$
152,035

 
 
(1) Trademarks and trade names and property management contracts are indefinite-lived intangible assets.

14




The excess of the purchase consideration over the aggregate estimated fair values of assets acquired and liabilities assumed was recorded as goodwill. The goodwill recognized is attributable primarily to expected cost efficiencies from the elimination of certain public company costs as well as other select areas of general and administrative functions, synergies, including utilization of the Company’s yield management strategies at Whistler Blackcomb and increased season pass sales and visitation across the Company’s resort portfolio, the assembled workforce of Whistler Blackcomb and other factors. The goodwill is not expected to be deductible for income tax purposes. The operating results of Whistler Blackcomb, which are primarily recorded in the Mountain segment, contributed  $105.5 million  of net revenue for the six months ended January 31, 2017, prospectively from the acquisition date of October 17, 2016. The Company recognized  $3.0 million of transaction related expenses in Mountain operating expense in the Consolidated Condensed Statements of Operations for the six months ended January 31, 2017.

The following presents the unaudited pro forma consolidated financial information of the Company as if the acquisition of Whistler Blackcomb was completed on August 1, 2015. The following unaudited pro forma financial information includes adjustments for (i) depreciation on acquired property, plant and equipment; (ii) amortization of intangible assets recorded at the date of the transactions; (iii) transaction and business integration related costs; (iv) interest expense associated with financing the cash portion of the transaction; and (v) total weighted average shares outstanding. This unaudited pro forma financial information is presented for informational purposes only and does not purport to be indicative of the results of future operations or the results that would have occurred had the transaction taken place on August 1, 2015 (in thousands, except per share amounts).
 
 
 
Three Months Ended
January 31, 2016
 
 
Pro forma net revenue
 
$
683,902

 
Pro forma net income attributable to Vail Resorts, Inc.
 
$
133,014

 
Pro forma basic net income per share attributable to Vail Resorts, Inc.
 
$
3.33

 
Pro forma diluted net income per share attributable to Vail Resorts, Inc.
 
$
3.24

 
 
Six Months Ended January 31,
 
 
2017
 
2016
Pro forma net revenue
 
$
926,127

 
$
879,352

Pro forma net income attributable to Vail Resorts, Inc.
 
$
85,126

 
$
64,123

Pro forma basic net income per share attributable to Vail Resorts, Inc.
 
$
2.13

 
$
1.60

Pro forma diluted net income per share attributable to Vail Resorts, Inc.
 
$
2.07

 
$
1.56


Wilmot Mountain
On January 19, 2016 , the Company, through a wholly-owned subsidiary, acquired all of the assets of Wilmot, a ski area located in Wisconsin near the Illinois state line, for total cash consideration of  $20.2 million . The purchase price was allocated to identifiable tangible and intangible assets acquired and liabilities assumed based on their estimated fair value at the acquisition date. The Company has completed its purchase price allocation and has recorded  $12.5 million  in property, plant and equipment,  $0.2 million  in other assets,  $0.4 million  in other intangible assets (with a weighted-average amortization period of  10 years ) and  $0.3 million  of assumed liabilities on the date of acquisition. The excess of the purchase price over the aggregate estimated fair values of assets acquired and liabilities assumed was $7.4 million and was recorded as goodwill. The goodwill recognized is attributable primarily to expected synergies, the assembled workforce of Wilmot and other factors. The goodwill is expected to be deductible for income tax purposes. The operating results of Wilmot are reported within the Mountain segment.


15



6.
Supplementary Balance Sheet Information
The composition of property, plant and equipment follows (in thousands):
 
 
January 31, 2017
 
July 31, 2016
 
January 31, 2016
Land and land improvements
 
$
535,577

 
$
440,300

 
$
438,373

Buildings and building improvements
 
1,180,941

 
1,025,515

 
1,024,065

Machinery and equipment
 
997,225

 
866,008

 
873,045

Furniture and fixtures
 
302,446

 
284,959

 
302,077

Software
 
114,750

 
103,754

 
111,118

Vehicles
 
69,723

 
58,159

 
62,093

Construction in progress
 
23,704

 
39,396

 
24,767

Gross property, plant and equipment
 
3,224,366

 
2,818,091

 
2,835,538

Accumulated depreciation
 
(1,529,620
)
 
(1,454,277
)
 
(1,443,649
)
Property, plant and equipment, net
 
$
1,694,746

 
$
1,363,814

 
$
1,391,889



The composition of accounts payable and accrued liabilities follows (in thousands):  
 
 
January 31, 2017
 
July 31, 2016
 
January 31, 2016
Trade payables
 
$
88,814

 
$
72,658

 
$
82,913

Deferred revenue
 
259,212

 
182,506

 
190,976

Accrued salaries, wages and deferred compensation
 
50,923

 
43,086

 
43,916

Accrued benefits
 
32,269

 
29,175

 
26,199

Deposits
 
42,024

 
23,307

 
36,995

Other liabilities
 
68,093

 
46,756

 
66,771

Total accounts payable and accrued liabilities
 
$
541,335

 
$
397,488

 
$
447,770



The composition of other long-term liabilities follows (in thousands):
 
 
January 31, 2017
 
July 31, 2016
 
January 31, 2016
Private club deferred initiation fee revenue
 
$
120,659

 
$
121,750

 
$
123,886

Unfavorable lease obligation, net
 
25,953

 
27,322

 
28,593

Other long-term liabilities
 
125,323

 
121,096

 
100,127

Total other long-term liabilities
 
$
271,935

 
$
270,168

 
$
252,606



The changes in the net carrying amount of goodwill allocated between the Company’s segments for the six months ended January 31, 2017 are as follows (in thousands):
 
 
Mountain
 
Lodging
 
Goodwill, net
Balance at July 31, 2016
 
$
441,138

 
$
67,899

 
$
509,037

Whistler Blackcomb acquisition
 
956,086

 

 
956,086

Effects of changes in foreign currency exchange rates
 
4,633

 

 
4,633

Balance at January 31, 2017
 
$
1,401,857

 
$
67,899

 
$
1,469,756




16



7.    Fair Value Measurements
The FASB issued fair value guidance that establishes how reporting entities should measure fair value for measurement and disclosure purposes. The guidance establishes a common definition of fair value applicable to all assets and liabilities measured at fair value and prioritizes the inputs into valuation techniques used to measure fair value. Accordingly, the Company uses valuation techniques which maximize the use of observable inputs and minimize the use of unobservable inputs when determining fair value. The three levels of the hierarchy are as follows:

Level 1: Inputs that reflect unadjusted quoted prices in active markets that are accessible to the Company for identical assets or liabilities;

Level 2: Inputs include quoted prices for similar assets and liabilities in active and inactive markets or that are observable for the asset or liability either directly or indirectly; and

Level 3: Unobservable inputs which are supported by little or no market activity.

The table below summarizes the Company’s cash equivalents, Contingent Consideration (as described in our Annual Report on Form 10-K) and Interest Rate Swap measured at estimated fair value (all other assets and liabilities measured at fair value are immaterial) (in thousands). 
 
 
 
 
 
 
 
 
 
 
 
Estimated Fair Value Measurement as of January 31, 2017
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Money Market
 
$
3,003

 
$
3,003

 
$

 
$

Commercial Paper
 
$
2,401

 
$

 
$
2,401

 
$

Certificates of Deposit
 
$
2,626

 
$

 
$
2,626

 
$

Liabilities:
 
 
 
 
 
 
 
 
Contingent Consideration
 
$
11,700

 
$

 
$

 
$
11,700

Interest Rate Swap
 
$
1,060

 
$

 
$
1,060

 
$

 
 
 
 
 
 
 
 
 
 
 
Estimated Fair Value Measurement as of July 31, 2016
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Commercial Paper
 
$
2,401

 
$

 
$
2,401

 
$

Certificates of Deposit
 
$
2,403

 
$

 
$
2,403

 
$

Liabilities:
 
 
 
 
 
 
 
 
Contingent Consideration
 
$
11,100

 
$

 
$

 
$
11,100

 
 
 
 
 
Estimated Fair Value Measurement as of January 31, 2016
Description
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
Commercial Paper
 
$
2,401

 
$

 
$
2,401

 
$

Certificates of Deposit
 
$
2,401

 
$

 
$
2,401

 
$

Liabilities:
 
 
 
 
 
 
 
 
Contingent Consideration
 
$
6,900

 
$

 
$

 
$
6,900


The Company’s cash equivalents and Interest Rate Swap are measured utilizing quoted market prices or pricing models whereby all significant inputs are either observable or corroborated by observable market data. The Interest Rate Swap is an instrument assumed in the Whistler Blackcomb acquisition that expires in September 2020 , and is a C$125.0 million ( $95.6 million as of January 31, 2017) fixed swap on the floating interest rate on the assumed Whistler Credit Agreement. Interest Rate Swap settlements and changes in estimated fair value are recognized in Interest Expense on the Consolidated Condensed Statement of Operations.


17



The changes in Contingent Consideration during the six months ended January 31, 2017 and 2016 were as follows (in thousands):

 
 
 
 
 
Balance as of July 31, 2016 and 2015, respectively
 
$
11,100

 
$
6,900

Change in estimated fair value
 
600

 

Balance as of January 31, 2017 and 2016, respectively
 
$
11,700

 
$
6,900


During the six months ended January 31, 2017 , the Company increased the estimated fair value of the participating contingent payments by approximately $0.6 million , resulting in an estimated fair value of the Contingent Consideration of $11.7 million reflected in other long-term liabilities in the Consolidated Condensed Balance Sheets.


8.    Commitments and Contingencies
Metropolitan Districts
The Company credit-enhances $8.0 million of bonds issued by Holland Creek Metropolitan District (“HCMD”) through an $8.1 million letter of credit issued under the Vail Holdings Credit Agreement. HCMD’s bonds were issued and used to build infrastructure associated with the Company’s Red Sky Ranch residential development. The Company has agreed to pay capital improvement fees to the Red Sky Ranch Metropolitan District (“RSRMD”) until RSRMD’s revenue streams from property taxes are sufficient to meet debt service requirements under HCMD’s bonds. The Company has recorded a liability of $2.0 million , $2.0 million and $1.8 million primarily within “other long-term liabilities” in the accompanying Consolidated Condensed Balance Sheets, as of January 31, 2017 July 31, 2016 and January 31, 2016 , respectively, with respect to the estimated present value of future RSRMD capital improvement fees. The Company estimates it will make capital improvement fee payments under this arrangement through the fiscal year ending July 31, 2031 .

Guarantees/Indemnifications
As of January 31, 2017 , the Company had various other letters of credit totaling $66.1 million , consisting of $53.4 million to support the Employee Housing Bonds and $12.7 million for workers’ compensation, general liability construction related deductibles and other activities. The Company also had surety bonds of $9.3 million as of January 31, 2017 , primarily to provide collateral for its workers compensation self-insurance programs.

In addition to the guarantees noted above, the Company has entered into contracts in the normal course of business that include certain indemnifications under which it could be required to make payments to third parties upon the occurrence or non-occurrence of certain future events. These indemnities include indemnities related to licensees in connection with third-parties’ use of the Company’s trademarks and logos, liabilities associated with the infringement of other parties’ technology and software products, liabilities associated with the use of easements, liabilities associated with employment of contract workers and the Company’s use of trustees, and liabilities associated with the Company’s use of public lands and environmental matters. The duration of these indemnities generally is indefinite and generally do not limit the future payments the Company could be obligated to make.

As permitted under applicable law, the Company and certain of its subsidiaries have agreed to indemnify their directors and officers over their lifetimes for certain events or occurrences while the officer or director is, or was, serving the Company or its subsidiaries in such a capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company has a director and officer insurance policy that should enable the Company to recover a portion of any amounts paid.

Unless otherwise noted, the Company has not recorded any significant liabilities for the letters of credit, indemnities and other guarantees noted above in the accompanying Consolidated Condensed Financial Statements, either because the Company has recorded on its Consolidated Condensed Balance Sheets the underlying liability associated with the guarantee, the guarantee is with respect to the Company’s own performance and is therefore not subject to the measurement requirements as prescribed by GAAP, or because the Company has calculated the estimated fair value of the indemnification or guarantee to be immaterial based upon the current facts and circumstances that would trigger a payment under the indemnification clause. In addition, with respect to certain indemnifications it is not possible to determine the maximum potential amount of liability under these potential obligations due to the unique set of facts and circumstances likely to be involved in each particular claim and indemnification provision. Historically, payments made by the Company under these obligations have not been material.


18



As noted above, the Company makes certain indemnifications to licensees for their use of the Company’s trademarks and logos. The Company does not record any liabilities with respect to these indemnifications.

Self-Insurance
The Company is self-insured for claims under its U.S. health benefit plans and for the majority of workers’ compensation claims in the U.S. Workers compensation claims in the U.S. are subject to stop loss policies. The self-insurance liability related to workers’ compensation is determined actuarially based on claims filed. The self-insurance liability related to claims under the Company’s U.S. health benefit plans is determined based on analysis of actual claims. The amounts related to these claims are included as a component of accrued benefits in accounts payable and accrued liabilities (see Note 6, Supplementary Balance Sheet Information).

Legal
The Company is a party to various lawsuits arising in the ordinary course of business. Management believes the Company has adequate insurance coverage and/or has accrued for all loss contingencies for asserted and unasserted matters deemed to be probable losses and estimable. As of January 31, 2017 July 31, 2016 and January 31, 2016 , the accruals for the above loss contingencies were not material individually and in the aggregate.


9.    Segment Information
The Company has three reportable segments: Mountain, Lodging and Real Estate. The Mountain segment includes the operations of the Company’s mountain resorts/ski areas and related ancillary activities. The Lodging segment includes the operations of the Company’s owned hotels, RockResorts, NPS concessionaire properties, condominium management, CME and mountain resort golf operations. The Real Estate segment owns, develops and sells real estate in and around the Company’s resort communities.

The Company’s reportable segments, although integral to the success of the others, offer distinctly different products and services and require different types of management focus. As such, these segments are managed separately. The Company reports its segment results using Reported EBITDA (defined as segment net revenue less segment operating expenses, plus or minus segment equity investment income or loss, and for the Real Estate segment, plus gain or loss on sale of real property). The Company reports segment results in a manner consistent with management’s internal reporting of operating results to the chief operating decision maker (Chief Executive Officer) for purposes of evaluating segment performance.

Items excluded from Reported EBITDA are significant components in understanding and assessing financial performance. Reported EBITDA should not be considered in isolation or as an alternative to, or substitute for, net income (loss), net change in cash and cash equivalents or other financial statement data presented in the consolidated condensed financial statements as indicators of financial performance or liquidity.

The Company utilizes Reported EBITDA in evaluating performance of the Company and in allocating resources to its segments. Mountain Reported EBITDA consists of Mountain net revenue less Mountain operating expense plus or minus Mountain equity investment income or loss. Lodging Reported EBITDA consists of Lodging net revenue less Lodging operating expense. Real Estate Reported EBITDA consists of Real Estate net revenue less Real Estate operating expense plus gain or loss on sale of real property. All segment expenses include an allocation of corporate administrative expense. Assets are not allocated between segments, or used to evaluate performance, except as shown in the table below. The accounting policies specific to each segment are the same as those described in Note 2, Summary of Significant Accounting Policies.


19



The following table presents financial information by reportable segment, which is used by management in evaluating performance and allocating resources (in thousands):

 
Three Months Ended January 31,
 
Six Months Ended January 31,
 
2017
 
2016
 
2017
 
2016
Net revenue:
 
 
 
 
 
 
 
Lift
$
358,251

 
$
287,685

 
$
379,677

 
$
307,838

Ski school
78,119

 
62,040

 
81,970

 
65,424

Dining
54,366

 
44,738

 
67,734

 
57,093

Retail/rental
123,233

 
102,975

 
159,712

 
135,364

Other
40,130

 
35,434

 
75,773

 
68,086

Total Mountain net revenue
654,099

 
532,872

 
764,866

 
633,805

Lodging
65,884

 
62,807

 
133,286

 
127,093

Total Resort net revenue
719,983

 
595,679

 
898,152

 
760,898

Real estate
5,215

 
3,684

 
5,311

 
13,032

Total net revenue
$
725,198

 
$
599,363

 
$
903,463

 
$
773,930

Operating expense:
 
 
 
 
 
 
 
Mountain
$
355,239

 
$
296,256

 
$
523,492

 
$
447,414

Lodging
59,683

 
57,311

 
123,763

 
118,748

Total Resort operating expense
414,922

 
353,567

 
647,255

 
566,162

Real estate
5,841

 
4,617

 
7,326

 
13,958

Total segment operating expense
$
420,763

 
$
358,184

 
$
654,581

 
$
580,120

 
 
 
 
 
 
 
 
Gain on sale of real property
$

 
$
632

 
$
6,466

 
$
1,791

Mountain equity investment income (loss), net
$
157

 
$
(61
)
 
$
989

 
$
781

Reported EBITDA:
 
 
 
 
 
 
 
Mountain
$
299,017

 
$
236,555

 
$
242,363

 
$
187,172

Lodging
6,201

 
5,496

 
9,523

 
8,345

Resort
305,218

 
242,051

 
251,886

 
195,517

Real estate
(626
)
 
(301
)
 
4,451

 
865

Total Reported EBITDA
$
304,592

 
$
241,750

 
$
256,337

 
$
196,382

 
 
 
 
 
 
 
 
Real estate held for sale and investment
$
112,633

 
$
117,999

 
$
112,633

 
$
117,999

 
 
 
 
 
 
 
 
Reconciliation to net income attributable to Vail Resorts, Inc.:
 
 
 
 
 
 
 
Total Reported EBITDA
$
304,592

 
$
241,750

 
$
256,337

 
$
196,382

Depreciation and amortization
(49,626
)
 
(40,541
)
 
(90,207
)
 
(79,241
)
Change in estimated fair value of contingent consideration
(300
)
 

 
(600
)
 

Loss on disposal of fixed assets and other, net
(2,231
)
 
(1,206
)
 
(2,781
)
 
(2,985
)
Investment income and other, net
1,148

 
161

 
5,671

 
359

Interest expense and other, net
(9,048
)
 
(10,910
)
 
(21,012
)
 
(21,505
)
Income before provision for income taxes
244,535

 
189,254

 
147,408

 
93,010

Provision for income taxes
(84,807
)
 
(72,383
)
 
(51,298
)
 
(35,809
)
Net income
159,728

 
116,871

 
96,110

 
57,201

Net (income) loss attributable to noncontrolling interests
(10,549
)
 
111

 
(9,518
)
 
194

Net income attributable to Vail Resorts, Inc.
$
149,179

 
$
116,982

 
$
86,592

 
$
57,395




20



10.     Share Repurchase Program
On March 9, 2006, the Company’s Board of Directors approved a share repurchase program, authorizing the Company to repurchase up to 3,000,000 Vail Shares. On July 16, 2008, the Company’s Board of Directors increased the authorization by an additional 3,000,000 Vail Shares, and on December 4, 2015, the Company’s Board of Directors increased the authorization by an additional 1,500,000 Vail Shares for a total authorization to repurchase up to 7,500,000 total shares. The Company repurchased 1,317 Vail Shares (at a total cost of $0.2 million ) during the three and six months ended January 31, 2017. The Company purchased zero shares and 377,830 Vail Shares (at a total cost of $40.0 million ), respectively during the three and six months ended January 31, 2016. Since inception of its share repurchase program through January 31, 2017 , the Company has repurchased 5,436,294 Vail Shares for $247.2 million . As of January 31, 2017 , 2,063,706 Vail Shares remained available to repurchase under the existing share repurchase program which has no expiration date. Vail Shares purchased pursuant to the repurchase program will be held as treasury shares and may be used for the issuance of Vail Shares under the Company’s employee share award plan.


11.     Subsequent Events
Stowe Mountain Resort Acquisition
On February 17, 2017 , the Company entered into a purchase agreement to acquire Stowe Mountain Resort from Mt. Mansfield Company, Inc., a wholly-owned subsidiary of American International Group, Inc., for a cash purchase price of  $50.0 million , subject to certain adjustments as provided in the purchase agreement. The Company will acquire all of the assets related to the mountain operations of the resort, including base area skier services (food and beverage, retail and rental, lift ticket offices and ski and snowboard school facilities). The Company expects to fund the cash purchase price through cash on-hand and/or borrowing under the revolver portion of its Vail Holdings Credit Agreement. This transaction is subject to Vermont administrative review.

Whistler Blackcomb Master Development Agreements
On February 23, 2017 , Whistler LP, by its general partner Whistler Blackcomb Holdings Inc. (“WBHI”), a wholly-owned subsidiary of the Company, entered into a master development agreement (the “Whistler MDA”) with Her Majesty, the Queen in Right of British Columbia (the “Province”) with respect to the operation and development of Whistler Mountain. Additionally, on February 23, 2017, Blackcomb LP, by its general partner WBHI, entered into a master development agreement (the “Blackcomb MDA” and together with the Whistler MDA, the “MDAs”) with the Province with respect to the operation and development of Blackcomb Mountain. Each of Whistler LP and Blackcomb LP were operating under existing master development agreements that terminated upon execution of the new MDAs. The MDAs grant a general license to use the Whistler Mountain lands and the Blackcomb Mountain lands for the operation and development of the Whistler Blackcomb Resort. Each WB Partnership is permitted to develop new improvements to Whistler Mountain or Blackcomb Mountain, as the case may be, within standard municipal type development control conditions.

The MDAs each have a term of 60 years and are replaceable for an additional 60 years by option exercisable by the WB Partnerships after the first 30 years of the initial term. In accordance with the MDAs, each WB Partnership is obligated to pay annual fees to the Province at a rate of 2% of certain gross revenues related to the Whistler Blackcomb Resort.

21



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Vail Resorts, Inc., together with its subsidiaries, is referred to throughout this Quarterly Report on Form 10-Q for the periods ended January 31, 2017 (“Form 10-Q”) as “we,” “us,” “our” or the “Company.”

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended July 31, 2016 (“Form 10-K”) and the Consolidated Condensed Financial Statements as of January 31, 2017 and 2016 and for the three and six months then ended, included in Part I, Item 1 of this Form 10-Q, which provide additional information regarding our financial position, results of operations and cash flows. To the extent that the following MD&A contains statements which are not of a historical nature, such statements are forward-looking statements, which involve risks and uncertainties. See “Forward-Looking Statements” below. These risks include, but are not limited to, those discussed in this Form 10-Q and in our other filings with the Securities and Exchange Commission (“SEC”), including the risks described in Item 1A “Risk Factors” of Part I of the Form 10-K which was filed on September 26, 2016 and the Form 10-Q for the quarter ended October 31, 2016, which was filed on December 9, 2016.

The MD&A includes discussion of financial performance within each of our three segments. We have chosen to specifically include Reported EBITDA (defined as segment net revenue less segment operating expense, plus or minus segment equity investment income or loss and for the Real Estate segment, plus gain or loss on sale of real property) and Net Debt (defined as long-term debt plus long-term debt due within one year less cash and cash equivalents), in the following discussion because we consider these measurements to be significant indications of our financial performance and available capital resources. Total Reported EBITDA and Net Debt are not measures of financial performance or liquidity under generally accepted accounting principles (“GAAP”). We utilize segment Reported EBITDA in evaluating our performance and in allocating resources to our segments. Refer to the end of the Results of Operations section for a reconciliation of segment Reported EBITDA to net income attributable to Vail Resorts, Inc. We also believe that Net Debt is an important measurement as it is an indicator of our ability to obtain additional capital resources for our future cash needs. Refer to the end of the Results of Operations section for a reconciliation of Net Debt to long-term debt.

Items excluded from Reported EBITDA and Net Debt are significant components in understanding and assessing financial performance or liquidity. Reported EBITDA and Net Debt should not be considered in isolation or as an alternative to, or substitute for, net income (loss), net change in cash and cash equivalents or other financial statement data presented in the Consolidated Condensed Financial Statements as indicators of financial performance or liquidity. Because Reported EBITDA and Net Debt are not measurements determined in accordance with GAAP, Reported EBITDA and Net Debt, as presented herein, may not be comparable to other similarly titled measures of other companies.

Overview
Our operations are grouped into three integrated and interdependent segments: Mountain, Lodging and Real Estate. Resort is the combination of the Mountain and Lodging segments.

22




Mountain Segment
The Mountain segment is comprised of the operations of ten mountain resort properties and three urban ski areas including:
Mountain Resorts:
 
Location:
1.
Vail Mountain
 
Colorado
2.
Breckenridge
 
Colorado
3.
Keystone
 
Colorado
4.
Beaver Creek
 
Colorado
5.
Park City Mountain Resort (“Park City”)