UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2020
or
☐
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: 001-11015
Viad Corp
(Exact name of registrant as specified in its charter)
Delaware
36-1169950
State or other jurisdiction of
incorporation or organization
(I.R.S. Employer
Identification No.)
1850 North Central Avenue, Suite 1900
Phoenix, Arizona
85004-4565
(Address of principal executive offices)
(Zip Code)
(602) 207-1000
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $1.50 Par Value
VVI
New York Stock Exchange
Preferred Stock Purchase Rights
--
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.) Yes ☒ No ☐
Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of October 30, 2020, there were 20,428,448 shares of Common Stock ($1.50 par value) outstanding.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1.
Financial Statements
1
Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019
2
Condensed Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine Months Ended September 30, 2020 and 2019
3
Condensed Consolidated Statements of Stockholders’ Equity and Mezzanine Equity for the Three and Nine Months Ended September 30, 2020 and 2019
4
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
35
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
47
Item 4.
Controls and Procedures
48
PART II - OTHER INFORMATION
Legal Proceedings
49
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
53
Item 6.
Exhibits
54
Items 3-5
Not applicable
SIGNATURES
56
In this report, for periods presented, “we,” “us,” “our,” “the Company,” and “Viad Corp” refer to Viad Corp and its subsidiaries.
Item 1. Financial Statements
VIAD CORP
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
September 30,
December 31,
(in thousands, except share data)
2020
2019
Assets
Current assets
Cash and cash equivalents
$
56,452
61,999
Accounts receivable, net of allowances for doubtful accounts of $10,105 and $1,200,
respectively
21,154
126,246
Inventories
16,296
17,269
Current contract costs
7,649
24,535
Other current assets
16,196
30,854
Total current assets
117,747
260,903
Property and equipment, net
477,445
500,901
Other investments and assets
19,937
45,119
Operating lease right-of-use assets
88,394
103,314
Deferred income taxes
—
26,163
Goodwill
96,931
287,983
Other intangible assets, net
68,638
94,308
Total Assets
869,092
1,318,691
Liabilities, Mezzanine Equity, and Stockholders’ Equity
Current liabilities
Accounts payable
22,069
86,660
Contract liabilities
17,153
50,671
Accrued compensation
8,392
32,658
Operating lease obligations
17,872
22,180
Other current liabilities
30,127
39,824
Current portion of debt and finance lease obligations
4,040
5,330
Total current liabilities
99,653
237,323
Long-term debt and finance lease obligations
252,152
335,162
Pension and postretirement benefits
25,789
26,247
Long-term operating lease obligations
73,688
82,851
Other deferred items and liabilities
75,174
83,707
Total liabilities
526,456
765,290
Commitments and contingencies
Convertible Series A Preferred Stock, $0.01 par value, 180,000 shares authorized,
135,000 shares issued and outstanding at September 30, 2020
126,897
Redeemable noncontrolling interest
5,271
6,172
Stockholders’ equity
Viad Corp stockholders’ equity:
Common stock, $1.50 par value, 200,000,000 shares authorized, 24,934,981 shares
issued and outstanding
37,402
Additional capital
570,447
574,473
Retained earnings (deficit)
(202,691
)
122,971
Accumulated other comprehensive loss
(42,687
(35,699
Common stock in treasury, at cost, 4,507,957 and 4,588,084 shares, respectively
(227,623
(231,649
Total Viad stockholders’ equity
134,848
467,498
Non-redeemable noncontrolling interest
75,620
79,731
Total stockholders’ equity
210,468
547,229
Total Liabilities, Mezzanine Equity, and Stockholders’ Equity
Refer to Notes to Condensed Consolidated Financial Statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended
Nine Months Ended
(in thousands, except per share data)
Revenue:
Services
43,702
291,701
335,383
858,071
Products
19,370
62,042
54,480
151,615
Total revenue
63,072
353,743
389,863
1,009,686
Costs and expenses:
Costs of services
51,730
247,551
395,432
785,131
Costs of products
18,107
51,370
60,332
134,527
Business interruption gain
(141
Corporate activities
2,645
2,680
5,902
7,795
Interest income
(58
(79
(313
(260
Interest expense
5,508
3,740
14,712
9,612
Multi-employer pension plan withdrawal
462
15,508
Other expense
210
281
894
1,192
Restructuring charges
11,259
1,702
12,370
6,845
Legal settlement
8,500
Impairment charges
676
203,076
Total costs and expenses
90,077
307,245
692,867
968,709
Income (loss) from continuing operations before income taxes
(27,005
46,498
(303,004
40,977
Income tax expense
735
11,891
20,454
10,861
Income (loss) from continuing operations
(27,740
34,607
(323,458
30,116
Income (loss) from discontinued operations
(989
(1,822
32
Net income (loss)
(28,729
34,466
(325,280
30,148
Net (income) loss attributable to non-redeemable noncontrolling
interest
(2,331
(3,418
636
(3,329
Net loss attributable to redeemable noncontrolling interest
302
368
1,023
644
Net income (loss) attributable to Viad
(30,758
31,416
(323,621
27,463
Diluted income (loss) per common share:
Continuing operations attributable to Viad common stockholders
(1.54
1.54
(15.98
1.33
Discontinued operations attributable to Viad common stockholders
(0.05
(0.01
(0.09
Net income (loss) attributable to Viad common stockholders
(1.59
1.53
(16.07
Weighted-average outstanding and potentially dilutive common
shares
20,293
20,311
20,263
20,267
Basic income (loss) per common share:
Weighted-average outstanding common shares
20,168
20,129
Dividends declared per common share
0.10
0.30
Amounts attributable to Viad common stockholders
(29,769
31,557
(321,799
27,431
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Other comprehensive income (loss):
Unrealized foreign currency translation adjustments
11,032
(5,229
(7,342
3,868
Change in net actuarial loss, net of tax (1)
70
83
436
Change in prior service cost, net of tax (1)
(27
(35
(82
(106
Comprehensive income (loss)
(17,654
29,285
(332,268
34,212
Non-redeemable noncontrolling interest:
Comprehensive (income) loss attributable to non-redeemable
noncontrolling interest
1,837
(682
(1,949
94
Redeemable noncontrolling interest:
Comprehensive loss attributable to redeemable noncontrolling interest
Comprehensive income (loss) attributable to Viad
(17,846
25,553
(332,558
31,621
(1)
The tax effect on other comprehensive income (loss) is not significant.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY
Mezzanine Equity
Common
Stock
Additional
Capital
Retained
Earnings (Deficit)
Accumulated Other Comprehensive Income (Loss)
Stock in
Treasury
Total
Viad
Equity
Non-Redeemable Non-Controlling
Interest
Stockholders’
Redeemable Non-Controlling
Convertible Series A Preferred Stock
Balance, December 31, 2019
Net loss
(86,585
(1,333
(87,918
(517
Dividends on common stock ($0.10 per share)
(2,038
Distributions to noncontrolling interest
(1,526
Payment of payroll taxes on stock-based compensation through shares withheld
(1,059
Common stock purchased for treasury
(2,785
Employee benefit plans
(3,810
5,722
1,912
Share-based compensation - equity awards
276
Unrealized foreign currency translation adjustment
(28,158
(5,719
(33,877
(873
Amortization of net actuarial loss, net of tax
341
Amortization of prior service cost, net of tax
Other, net
(80
(3
126
Balance, March 31, 2020
570,859
34,345
(63,543
(229,770
349,293
71,153
420,446
4,908
(206,278
(1,634
(207,912
(204
282
330
602
9,784
1,933
11,717
102
25
(28
46
(1
45
332
Balance, June 30, 2020
571,555
(171,933
(53,762
(229,492
153,770
71,452
225,222
5,138
2,331
(28,427
(302
Issuance of Series A convertible preferred stock
-
125,763
Dividends on convertible preferred stock
(1,134
1,134
(2,123
1,870
(253
2,135
12,869
(33
14
13
468
Balance, September 30, 2020
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND MEZZANINE EQUITY (Continued)
Earnings
Unearned
Employee Benefits
and Other
Balance, December 31, 2018
575,339
109,032
199
(47,975
(237,790
436,207
14,348
450,555
5,909
(17,777
(420
(18,197
(24
(2,028
(2,905
(4,302
5,522
1,220
780
4,780
(310
120
16
24
41
87
Balance, March 31, 2019
571,833
89,227
223
(43,110
(235,172
420,403
13,928
434,331
5,662
Net income
13,824
331
14,155
(252
(2,006
(89
301
1,301
1,602
781
4,317
776
5,093
(81
99
(36
Acquisition of Mountain Park Lodges
49,711
(223
221
179
Balance, June 30, 2019
572,931
101,045
(38,730
(233,739
438,909
64,746
503,655
3,418
34,834
(368
(2,026
(25
212
1,059
1,271
938
(5,911
27
8
(42
(265
264
Balance, September 30, 2019
574,039
130,435
(43,911
(232,928
465,037
67,490
532,527
5,431
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization
43,051
44,061
20,428
5,261
(Income) loss from discontinued operations
1,822
(32
Gains on dispositions of property and other assets
(14,935
(938
Share-based compensation expense
649
6,448
Other non-cash items, net
10,371
2,772
Change in operating assets and liabilities:
Receivables
104,722
(37,028
833
389
16,418
(13,929
(76,355
20,121
Restructuring liabilities
(4,606
(5,012
(25,268
2,308
(32,650
29,177
Income taxes payable
1,290
3,777
Other assets and liabilities, net
17,696
(17,236
Net cash (used in) provided by operating activities
(45,906
101,140
Cash flows from investing activities
Capital expenditures
(40,057
(60,868
Cash surrender value of life insurance policies
24,767
Cash paid for acquisitions, net
(90,992
Proceeds from dispositions of property and other assets
21,788
1,022
Net cash provided by (used in) investing activities
6,498
(150,838
Cash flows from financing activities
Proceeds from borrowings
191,733
170,459
Payments on debt and finance lease obligations
(273,663
(99,340
Dividends paid on common stock
(4,064
(6,060
Debt issuance costs
(1,585
Payment of payroll taxes on stock-based compensation through shares withheld or repurchased
(1,062
(3,019
Proceeds from issuance of Convertible Series A Preferred Stock, net of issuance costs
Proceeds from exercise of stock options
2,077
92
Net cash provided by financing activities
34,888
62,132
Effect of exchange rate changes on cash and cash equivalents
(1,027
(689
Net change in cash and cash equivalents
(5,547
11,745
Cash and cash equivalents, beginning of year
44,893
Cash and cash equivalents, end of period
56,638
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Overview and Basis of Presentation
Nature of Business
We are an international experiential services company with operations in the United States, Canada, the United Kingdom, continental Europe, the United Arab Emirates, and Iceland. We are committed to providing unforgettable experiences to our clients and guests. We operate through three reportable business segments: GES North America, GES EMEA (collectively, “GES”), and Pursuit.
GES
GES is a global, full-service live events company offering a comprehensive range of services to event organizers and corporate brand marketers. Event organizers schedule and run events from start to finish. Corporate brand marketers include exhibitors and domestic and international corporations that want to promote their brands, services and innovations, feature new products, and build business relationships. GES serves corporate brand marketers when they exhibit at shows and when GES is engaged to manage their global exhibit program or produce their proprietary corporate events.
Pursuit
Pursuit is a collection of inspiring and unforgettable travel experiences that include recreational attractions, unique hotels and lodges, food and beverage, retail, sightseeing, and ground transportation services. Pursuit comprises the Banff Jasper Collection, the Alaska Collection, the Glacier Park Collection, and FlyOver.
Impact of COVID-19
On March 11, 2020, the World Health Organization declared COVID-19 a “pandemic.” COVID-19 has spread rapidly, with a high concentration of confirmed cases in the U.S. and other countries in which we operate. The rapid spread has resulted in authorities around the world implementing numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders, and business shutdowns. The COVID-19 pandemic and these containment measures have had, and are expected to continue to have, a substantial negative impact on businesses around the world and on global, regional, and national economies.
The COVID-19 pandemic is having and will likely continue to have a significant and negative impact on our operations and financial performance, with live events largely shut down and tourism activity disruptions. In response to the COVID-19 pandemic, we implemented aggressive cost reduction measures to preserve cash, including furloughs, layoffs, mandatory unpaid time off, or salary reductions for all employees, and the elimination of discretionary spending. We continue to implement measures to successfully adapt for the long-term impact of COVID-19. During the third quarter of 2020, we secured additional capital to strengthen our liquidity position and amended our Second Amended and Restated Credit Agreement (the “2018 Credit Agreement”) to provide financial flexibility.
Investment Agreement
On August 5, 2020, we entered into an investment agreement with funds managed by private equity firm Crestview Partners (the “Investment Agreement”) who made an initial investment of $135 million, offset in part by $9.2 million in fees, in newly issued perpetual convertible preferred stock that carries a 5.5% cumulative quarterly dividend, which is payable in cash or in-kind at Viad’s option (the “Convertible Preferred Stock”). The Convertible Preferred Stock is convertible into shares of our common stock at a conversion price of $21.25 per share. The Investment Agreement also includes a delayed draw commitment of up to $45 million in additional Convertible Preferred Stock, which we may access during the 12 months following the August 5, 2020 closing date on the same terms and conditions as the initial investment. The proceeds from Crestview’s initial investment were used to repay a portion of our 2018 Credit Facility, will provide additional short-term liquidity, will fund capital expenditures, and will support general corporate purposes. Pursuant to the Investment Agreement, two Crestview Partners’ designees joined our Board of Directors, increasing the size of our board from seven to nine directors.
Credit Agreement Amendment
On August 5, 2020, we entered into an amendment to our 2018 Credit Agreement, which, among other things, (i) waives our financial covenants until September 30, 2022 (the “Covenant Waiver Period”) and (ii) requires us to maintain minimum liquidity of $125 million with a step down to $100 million at December 31, 2020. The interest rate on the borrowings is equal to the London Interbank
Offered Rate (“LIBOR”) plus 350 basis points, with a LIBOR floor of one percent during the Covenant Waiver Period. The LIBOR floor continues until the end of the 2018 Credit Agreement. Viad pledged 100% of the capital stock of its wholly-owned domestic subsidiaries and its top-tier foreign subsidiaries (other than Esja Attractions ehf.). Fees related to the amendment were approximately $1.7 million.
Management anticipates that the initial cash proceeds from Crestview Partners, existing cash and cash equivalents, and the amendment to waive financial covenants within the 2018 Credit Agreement until September 30, 2022 will be sufficient to fund operations for at least the next 12 months.
Goodwill Impairment
Due to the deteriorating macroeconomic environment, disruptions to our operations, and the sustained decline in our stock price caused by COVID-19, we determined an interim triggering event had occurred in the first and second quarters of 2020, which required us to assess the carrying values of goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”) No. 350, Intangibles – Goodwill and Other. Based on this assessment, we recorded non-cash goodwill impairment charges of $186.1 million during the first half of 2020, including a full impairment charge to the remaining GES goodwill balance of $113.1 million in the second quarter of 2020. Our remaining goodwill balance as of September 30, 2020 of $96.9 million pertains to our Pursuit business. The duration and impact of COVID-19 may result in additional future impairment charges as facts and circumstances evolve. Refer to Note 9 – Goodwill and Other Intangible Assets for additional information.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these financial statements do not include all of the information required by GAAP or SEC rules and regulations for complete financial statements. These financial statements reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of the results for the interim periods presented. Interim results are not necessarily indicative of the results for the full year. These unaudited condensed consolidated financial statements should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2019, filed with the SEC on February 26, 2020 (“2019 Form 10-K”). Subsequent to the filing of the 2019 Form 10-K, we corrected the classification of debt as of December 31, 2019. Refer to Note 12 – Debt and Finance Lease Obligations.
The condensed consolidated financial statements include the accounts of Viad and its subsidiaries. We have eliminated all significant intercompany account balances and transactions in consolidation.
Correction to Prior Period Financial Statements
During the third quarter of 2020, we identified a prior period error related to the recognition of revenue of our GES’ Corporate Accounts’ third-party services. Revenue from these services should have been recorded on a net basis to reflect only the fees we receive from arranging these services. Previously, we recorded this revenue on a gross basis, thus overstating revenue and cost of services by the same amount. As a result, we corrected the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 related to this gross-to-net adjustment. We determined that the error is not material to the previously issued financial statements. Note 2 – Revenue and Related Contract Costs and Contract Liabilities and Note 22 – Segment Information reflects this change.
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Services Revenue
Cost of Services
As previously reported
300,446
256,296
898,746
825,806
Gross to net correction for GES North America
(6,859
(32,081
Gross to net correction for GES EMEA
(1,886
(8,594
Total as corrected
Impact of Recent Accounting Pronouncements
The following table provides a brief description of recent accounting pronouncements:
Standard
Description
Date of adoption
Effect on the financial statements
Standards Not Yet Adopted
ASU 2019-12, Income Taxes (Topic 740) Simplifying the Accounting for Income Taxes
The amendment enhances and simplifies various aspects of the income tax accounting guidance, including requirements such as ownership changes in investments, and interim-period accounting for enacted changes in tax law.
1/1/2021
We are currently evaluating the potential impact of the adoption of this new guidance on our consolidated financial statements. We do not expect this new guidance to have a material impact on our consolidated financial statements.
ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40)
The amendment simplifies the accounting for convertible instruments by reducing the number of accounting models available for convertible debt instruments and convertible preferred stock. The amendment also requires expanded disclosures about the terms and features of convertible instruments. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.
1/1/2022
We are currently evaluating the potential impact of the adoption of this new guidance on our consolidated financial statements and if there are applicable provisions that will simplify our accounting or reporting we will likely pursue early adoption.
Standards Recently Adopted
ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments
The amendment eliminates the incurred credit loss impairment methodology and replaces it with an expected credit loss concept based on historical experience, current conditions, and reasonable and supportable forecasts.
1/1/2020
We adopted this new standard on a modified retrospective basis. The adoption of this new standard on January 1, 2020 did not have a material impact on our condensed consolidated financial statements.
ASU 2020-04, Reference Rate Reform (Topic 848)
The amendment provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. Topic 848 provides optional expedients and exceptions for applying U.S. GAAP to transactions affected by reference rate reform if certain criteria are met.
3/12/2020
Topic 848 was effective beginning on March 12, 2020, and we will apply the amendments prospectively through December 31, 2022. There was no impact to our condensed consolidated financial statements as a result of adopting this amendment.
Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Estimates and assumptions are used in accounting for, among other things: impairment testing of recorded goodwill and intangible assets and long-lived assets; allowances for uncollectible accounts receivable; sales reserve allowances; provisions for income taxes, including uncertain tax positions; valuation allowances related to deferred tax assets; liabilities for losses related to self-insured liability claims; liabilities for losses related to environmental remediation obligations; sublease income associated with restructuring liabilities; pension and postretirement benefit costs and obligations; share-based compensation costs; the discount rates used to value lease obligations; the redemption value of redeemable noncontrolling interests; and the allocation of purchase price of acquired businesses. Actual results could differ from these and other estimates.
Revenue Recognition
Revenue is measured based on a specified amount of consideration in a contract with a customer, net of commissions paid to customers and amounts collected on behalf of third parties. We recognize revenue when a performance obligation is satisfied by transferring control of a product or service to a customer.
GES’ service revenue is primarily derived through its comprehensive range of services to event organizers and corporate brand marketers including Core Services, Event Technology, and Audio-Visual. GES’ service revenue is earned over time over the duration
9
of the exhibition, conference, or corporate event, which generally lasts one to three days. GES’ product revenue is derived from the build of exhibits and environments and graphics. GES’ product revenue is recognized at a point in time upon delivery of the product.
Pursuit’s service revenue is derived through its admissions, accommodations, transportation, and travel planning services. Pursuit’s product revenue is derived through food and beverage and retail sales. Pursuit’s revenue is recognized at the time services are performed or upon delivery of the product. Pursuit’s service revenue is recognized over time as the customer simultaneously receives and consumes the benefits. Pursuit’s product revenue is recognized at a point in time.
Noncontrolling Interests – Non-redeemable and Redeemable
Non-redeemable noncontrolling interest represents the portion of equity in a subsidiary that is not attributable, directly or indirectly, to us. Our non-redeemable noncontrolling interest relates to the 20% equity ownership interest that we do not own in Glacier Park, Inc., the 40% equity interest that we do not own in the Mountain Park Lodges, and the 49% equity interest that we do not own in the new entity that will operate the Pursuit Sky Lagoon attraction. We report non-redeemable noncontrolling interest within stockholders’ equity in the Condensed Consolidated Balance Sheets. The amount of consolidated net income or loss attributable to Viad and the non-redeemable noncontrolling interest is presented in the Condensed Consolidated Statements of Operations.
We consider noncontrolling interests with redemption features that are not solely within our control to be redeemable noncontrolling interests. Our redeemable noncontrolling interest relates to our 54.5% equity ownership interest in Esja Attractions ehf. (“Esja”), which owns the FlyOver Iceland attraction. The Esja shareholders agreement contains a put option that gives the minority Esja shareholders the right to sell (or “put”) their Esja shares to us based on a calculated formula within a predefined term. This redeemable noncontrolling interest is considered temporary equity and we report it between liabilities and stockholders’ equity in the Condensed Consolidated Balance Sheets. The amount of the net income or loss attributable to redeemable noncontrolling interests is recorded in the Condensed Consolidated Statements of Operations and the accretion of the redemption value is recorded as an adjustment to retained earnings and is included in our income per share. Refer to Note 21 – Redeemable Noncontrolling Interest for additional information.
Convertible Preferred Stock
We record shares of convertible preferred stock at fair value on the date of issuance, net of issuance costs. Redeemable preferred stock (including preferred stock that features redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control) is classified as temporary equity and is reported between liabilities and stockholders’ equity on the Condensed Consolidated Balance Sheets.
Leases
We recognize a right-of-use (“ROU”) asset and lease liability on the balance sheet and classify leases as either finance or operating leases. The classification of the lease determines whether we recognize the lease expense on an effective interest method basis (finance lease) or on a straight-line basis (operating lease) over the lease term. In determining whether an agreement contains a lease, we consider if we have a right to control the use of the underlying asset during the lease term in exchange for an obligation to make lease payments arising from the lease. We recognize ROU assets and lease liabilities at commencement date, which is when the underlying asset is available for use to a lessee, based on the present value of lease payments over the lease term.
Our operating and finance leases are primarily facility, equipment, and land leases. Our facility leases comprise mainly manufacturing facilities, sales and design facilities, offices, storage and/or warehouses, and truck marshaling yards. These facility leases generally have lease terms ranging up to 23 years. Our equipment leases comprise mainly vehicles, hardware, and office equipment, each with various lease terms. Our land leases comprise mainly leases in Canada and Iceland on which our hotels or attractions are located and have lease terms ranging up to 47 years.
If a lease contains a renewal option that is reasonably certain to be exercised, then the lease term includes the optional periods in measuring a ROU asset and lease liability. We evaluate the reasonably certain threshold at lease commencement, and it is typically met if we identify substantial economic incentives or termination penalties. We do not include variable leases and variable non-lease components in the calculation of the ROU asset and corresponding lease liability. For facility leases, variable lease costs include the costs of common area maintenance, taxes, and insurance for which we pay our lessors an estimate that we adjust to actual expense on a quarterly or annual basis depending on the underlying contract terms. We expense these variable lease payments as incurred. Our lease agreements do not contain any significant residual value guarantees or restrictive covenants.
Substantially all of our lease agreements do not specify an implicit borrowing rate, and as such, we utilize an incremental borrowing rate based on lease term and country, in order to calculate the present value of our future lease payments. The discount rate represents a risk-adjusted rate on a collateralized basis and is the expected rate at which we would borrow funds to satisfy the scheduled lease liability payment streams commensurate with the lease term and the country.
10
We are also a lessor to third party tenants who either lease certain portions of facilities that we own or sublease certain portions of facilities that we lease. We record lease income from owned facilities as rental income and we record sublease income from leased facilities against lease expense in the Condensed Consolidated Statements of Operations. We classify all of our leases for which we are the lessor as operating leases.
Note 2. Revenue and Related Contract Costs and Contract Liabilities
GES’ performance obligations consist of services or product(s) outlined in a contract. While we often sign multi-year contracts for recurring events, the obligations for each occurrence are well defined and conclude upon the occurrence of each event. The obligations are typically the provision of services and/or sale of a product in connection with an exhibition, conference, or other event. GES’ revenue is earned over time over the duration of the event, but as a practical expedient we recognize revenue when we have a right to invoice at the close of the exhibition, conference, or corporate event, which typically lasts one to three days, or when a customer cancels a contract. We recognize revenue for consumer events over the duration of the event. We recognize revenue for products either upon delivery to the customer’s location, upon delivery to an event that we are serving, or when we have the right to invoice, generally at the close of the exhibition, conference, or corporate event, or when a customer cancels a contract. If a customer cancels a contract, then GES is generally contractually able to invoice the customer for contract costs that have been incurred by GES in preparing for the exhibition, conference, or corporate event. Payment terms are generally within 30-60 days and contain no significant financing components.
Pursuit’s performance obligations are short-term in nature. They include the provision of a hotel room, an attraction admission, a chartered or ticketed bus or van ride, the fulfillment of travel planning itineraries, and/or the sale of food, beverage, or retail products. We recognize revenue when the service has been provided or the product has been delivered. When we extend credit, payment terms are generally within 30 days and contain no significant financing components.
Contract Liabilities
GES and Pursuit typically receive customer deposits prior to transferring the related product or service to the customer. We record these deposits as a contract liability, which are recognized as revenue upon satisfaction of the related contract performance obligation(s). GES also provides customer rebates and volume discounts to certain event organizers that we recognize as a reduction of revenue. We include these amounts in the Condensed Consolidated Balance Sheets under the captions “Contract liabilities” and “Other deferred items and liabilities.”
Changes to contract liabilities are as follows:
Balance at December 31, 2019
50,796
Cash additions
130,018
Revenue recognized
(162,954
Foreign exchange translation adjustment
(84
Balance at September 30, 2020
17,776
Contract Costs
GES capitalizes certain incremental costs incurred in obtaining and fulfilling contracts. Capitalized costs principally relate to direct costs of materials and services incurred in fulfilling services of future exhibitions, conferences, and events, and also include up-front incentives and commissions incurred upon contract signing. We expense costs associated with preliminary contract activities (i.e. proposal activities) as incurred. Capitalized contract costs are expensed upon the transfer of the related goods or services and are included in cost of services or cost of products, as applicable. We include the deferred incremental costs of obtaining and fulfilling contracts in the Condensed Consolidated Balance Sheets under the captions “Current contract costs” and “Other investments and assets.”
11
Changes to contract costs are as follows:
28,496
Additions
16,710
Expenses
(22,774
Cancelled
(9,840
(479
12,113
As of September 30, 2020, capitalized contract costs consisted of $1.2 million to obtain contracts and $10.9 million to fulfill contracts. We did not recognize an impairment loss with respect to capitalized contract costs during the three and nine months ended September 30, 2020 or 2019.
Disaggregation of Revenue
The following tables disaggregate GES and Pursuit revenue by major product line, timing of revenue recognition, and markets served:
Three Months Ended September 30, 2020
GES North America
GES EMEA
Intersegment Eliminations
Services:
Core services
7,987
2,003
9,990
Audio-visual
933
(40
893
Event technology
1,283
414
1,697
Intersegment eliminations
(284
Total services
10,203
2,377
12,296
Products:
Core products
1,564
397
1,961
11,767
2,774
14,257
Timing of revenue recognition:
Services transferred over time
Products transferred over time(1)
232
15
247
Products transferred at a point in time
1,332
382
1,714
Markets:
Exhibitions
4,890
2,323
7,213
Conferences
1,099
367
1,466
Corporate events
4,537
67
4,604
Consumer events
1,241
17
1,258
GES’ graphics product revenue is earned over time over the duration of the event as it is considered a part of the single performance obligation satisfied over time.
12
Nine Months Ended September 30, 2020
225,414
33,350
258,764
18,661
3,549
22,210
7,946
4,126
12,072
(3,258
252,021
41,025
289,788
21,402
11,071
32,473
273,423
52,096
322,261
11,035
2,407
13,442
10,367
8,664
19,031
203,671
39,001
242,672
39,626
7,618
47,244
24,012
5,308
29,320
6,114
169
6,283
148,722
20,539
169,261
18,742
4,402
23,144
4,760
1,414
6,174
(5,724
172,224
26,355
192,855
12,900
12,945
25,845
185,124
39,300
218,700
10,558
2,305
12,863
2,342
10,640
12,982
79,589
29,140
108,729
60,537
4,938
65,475
39,370
5,020
44,390
5,628
202
5,830
GES’ graphics product revenue is earned over time over the duration of an event as it is considered a part of the single performance obligation satisfied over time.
531,485
86,715
618,200
61,323
15,171
76,494
23,368
6,501
29,869
(14,731
616,176
108,387
709,832
50,649
48,086
98,735
666,825
156,473
808,567
33,601
10,595
44,196
17,048
37,491
54,539
349,106
119,189
468,295
195,635
17,170
212,805
102,525
19,165
121,690
19,559
949
20,508
Admissions
12,229
49,353
17,865
76,034
Accommodations
18,021
41,292
23,994
56,636
Transportation
445
6,868
2,513
12,817
Travel planning
855
2,004
1,484
4,107
(144
(671
(261
(1,355
Total services revenue
31,406
98,846
45,595
148,239
Food and beverage
6,783
19,333
9,047
28,903
Retail operations
10,626
16,864
12,960
23,977
Total products revenue
17,409
36,197
22,007
52,880
48,815
135,043
67,602
201,119
Banff Jasper Collection
26,395
75,337
39,234
116,433
Alaska Collection
5,436
26,909
6,167
39,287
Glacier Park Collection
14,929
28,098
16,813
36,296
FlyOver
2,055
4,699
5,388
9,103
Note 3. Share-Based Compensation
We grant share-based compensation awards to our officers, directors, and certain key employees pursuant to the 2017 Viad Corp Omnibus Incentive Plan (the “2017 Plan”). The 2017 Plan has a 10-year term and provides for the following types of awards: (a) incentive and non-qualified stock options; (b) restricted stock awards and restricted stock units; (c) performance units or performance shares; (d) stock appreciation rights; (e) cash-based awards; and (f) certain other stock-based awards. In June 2017, we registered 1,750,000 shares of common stock issuable under the 2017 Plan. As of September 30, 2020, there were 1,077,197 shares available for future grant under the 2017 Plan.
The following table summarizes share-based compensation (income) expense:
Performance unit incentive plan (“PUP”)
149
1,033
(2,596
4,013
Restricted stock awards and restricted stock units
1,698
798
3,155
2,435
Stock options
90
Share-based compensation expense before income tax
1,937
1,831
Income tax benefit(1)
(460
(1,625
Share-based compensation expense, net of income tax
1,371
4,823
There was no income tax benefit for the three and nine months ended September 30, 2020 due to the valuation allowance on our deferred tax assets. Refer to Note 16 – Income Taxes.
PUP Awards
PUP awards are performance-based restricted stock units that are tied to our stock price and the expected achievement of certain performance-based criteria. The vesting of PUP award shares is based upon the achievement of the performance-based criteria over a three-year period. We account for PUP awards that will be settled in shares of our common stock as equity-based awards. We measure share-based compensation expense of equity-based awards at fair value on the grant date on a straight-line basis over the vesting period. The estimated number of shares to be achieved is updated each reporting period. We account for PUP awards that will be settled in cash as liability-based awards. We measure share-based compensation expense of liability-based awards at fair value at each reporting date until the date of settlement. Forfeitures are accounted for as they occur.
During the nine months ended September 30, 2020, we granted PUP awards with a grant date fair value of $4.8 million of which $1.8 million are payable in shares. Liabilities related to PUP awards were $0.4 million as of September 30, 2020 and $5.3 million as of December 31, 2019. During the nine months ended September 30, 2020, the value of the PUP awards decreased due to the reduction of our estimated performance achievement and the decline in our stock price as a result of the COVID-19 pandemic.
In 2020, PUP awards granted in 2017 vested and we paid $2.6 million in cash. No PUP awards were paid in shares in 2020. In 2019, PUP awards granted in 2016 vested and we paid $5.6 million in cash and $3.4 million in shares. In 2019, we withheld 25,771 shares for $1.5 million related to tax withholding requirements on vested PUP awards paid in shares.
The following table summarizes the activity of the outstanding PUP awards:
Equity-Based
Liability-Based
Shares
Weighted-Average
Grant Date
Fair Value
59,714
52.10
155,190
52.53
Granted
32,367
56.23
52,531
56.10
Vested
(67,866
47.43
Forfeited
(18,370
56.40
92,081
55.49
121,485
55.08
Restricted Stock Awards and Restricted Stock Units
Restricted stock awards and restricted stock units are service-based awards. We account for restricted stock awards and restricted stock units that will be settled in shares of our common stock as equity-based awards. We measure share-based compensation expense of equity-based awards at fair value on the grant date on a straight-line basis over the vesting period.
We account for restricted stock units that will be settled in cash as liability-based awards. We measure share-based compensation expense of liability-based awards at fair value at each reporting date until the date of settlement. Forfeitures are accounted for as they occur.
As of September 30, 2020, the unamortized cost of outstanding equity-based restricted stock awards and restricted stock units was $2.6 million, which we expect to recognize over a weighted-average period of approximately 1.2 years. We repurchased 17,961 shares for $1.1 million during the nine months ended September 30, 2020 and 24,586 shares for $1.4 million during the nine months ended September 30, 2019 related to tax withholding requirements on vested share-based awards.
Aggregate liabilities related to liability-based restricted stock units were $0.8 million as of September 30, 2020 and $0.4 million as of December 31, 2019. During the nine months ended September 30, 2020, restricted stock units vested, and we paid $0.2 million in cash and $0.8 million in shares. During the nine months ended September 30, 2019, restricted stock units vested, and we paid $0.3 million in cash and $0.2 million in shares.
The following table summarizes the activity of the outstanding restricted stock awards and restricted stock units:
Restricted Stock Awards
Restricted Stock Units
136,123
52.66
11,623
52.17
55,171
51.06
232,435
19.44
3,952
50.43
(64,684
49.85
(38,982
19.30
(2,815
47.45
(15,192
56.54
(2,183
56.59
111,418
52.97
191,270
19.47
11,126
Stock Options
We grant non-qualified stock options that are performance-based, as well as non-qualified options that are service-based. The performance-based awards are recognized on a straight-line basis over the performance period ranging from 1.4 to 3.4 years, and the underlying shares expected to be settled are adjusted each reporting period based on estimated future achievement of the respective performance metrics. The service-based awards are recognized on a straight-line basis over the requisite service period on a graded-vesting schedule over three years.
The following table summarizes stock option activity:
Exercise Price
Aggregate Intrinsic Value(1)
Options outstanding and exercisable at December 31, 2019
41,143
16.62
204,150
19.98
Exercised
(41,143
Options outstanding at September 30, 2020
229,500
Options exercisable at September 30, 2020
The aggregate intrinsic value of stock options outstanding represents the difference between our closing stock price at the end of the reporting period and the exercise price, multiplied by the number of in-the-money stock options.
The following table summarizes stock options outstanding and exercisable as of September 30, 2020:
Options Outstanding
Options Exercisable
Range of exercise prices
Remaining Contractual Life
(in years)
150,000
8.25
21.85
54,150
6.91
$19.30 - $21.85
7.89
18
The fair value of stock options granted in 2020 was estimated on the date of grant using the Black-Scholes option pricing model. Following is additional information on stock options and the underlying assumptions used in assessing fair value:
September 30, 2020
Assumptions used to estimate fair value of stock options granted:
Risk-free interest rate
0.27% - 0.31%
Expected life
4.3 - 5.4 years
Expected volatility
46.9% - 52.2%
Expected dividend yield
Weighted average grant-date fair value per share of options granted
8.38
Cash received from exercise of options (in thousands)
As of September 30, 2020, the total unrecognized compensation cost related to non-vested stock option awards was $1.6 million. We expect to recognize such costs over a weighted-average period of approximately 2.5 years. No stock options were granted in 2019.
Note 4. Acquisitions
2019 Acquisitions
Belton Chalet
On May 16, 2019, we acquired the Belton Chalet in Glacier National Park for total cash consideration of $3.2 million. Transaction costs associated with the acquisition were $0.3 million during 2019, which are included in “Cost of services” in the Consolidated Statements of Operations. We included these assets in the consolidated financial statements from the date of acquisition.
Mountain Park Lodges
On June 8, 2019, we acquired a 60% equity interest in Mountain Park Lodges’ group of seven hotels and an undeveloped land parcel located in Jasper National Park for total consideration of $100.6 million Canadian dollars (approximately $76 million U.S. dollars).
As the majority owner of these properties, we consolidate 100% of the results of operations in our consolidated financial statements and record the 40% owners’ share of the income or loss attributable to non-redeemable noncontrolling interest.
Transaction costs associated with the Mountain Park Lodges were $0.9 million in 2019, which are included in “Corporate activities” in the Consolidated Statements of Operations. We included these assets and results of operations in the consolidated financial statements from the date of acquisition. During the three months ended September 30, 2020, revenue and operating income related to the Mountain Park Lodges were $8.9 million and $4.4 million, respectively. During the nine months ended September 30, 2020, revenue and operating income related to the Mountain Park Lodges were $12.9 million and $0.2 million, respectively.
Identifiable intangible assets acquired in the Mountain Park Lodges acquisition were $20.2 million and consist primarily of in-place leases, customer relationships, and trade names. The weighted average amortization period related to the intangible assets was approximately 30.8 years.
Sky Lagoon Attraction
On July 25, 2019, we announced plans for a new geothermal lagoon attraction that will be located on an oceanfront lot just outside downtown Reykjavik, Iceland. We acquired a 51% controlling interest for $13.2 million in the new entity that will manage the Sky Lagoon attraction, which we will operate in partnership with Geothermal Lagoon ehf., the Icelandic entity that owns the lagoon assets. The noncontrolling interest’s carrying value was determined by the fair value of the noncontrolling interest as of the acquisition date and the noncontrolling interest’s share of the subsequent net income or loss. The amortization of the resulting operating contract intangible is not deductible for tax purposes. We expect to open our new attraction in 2021.
19
Supplementary pro forma financial information
The following table summarizes the unaudited pro forma results of operations attributable to Viad, assuming the completion of the Mountain Park Lodges acquisition was on January 1, 2019. We do not consider the Sky Lagoon attraction or the Belton Chalet significant acquisitions and accordingly, they are not included in the following pro forma results of operations:
September 30, 2019
Revenue
362,488
1,058,622
16,347
46,695
Income from continuing operations
28,709
Net income attributable to Viad
26,765
Diluted income per share
1.29
Basic income per share
Note 5. Inventories
We state inventories, which consist primarily of exhibit design and construction materials and supplies, as well as retail inventory, at the lower of cost (first-in, first-out and specific identification methods) or net realizable value.
The components of inventories consisted of the following:
Raw materials
10,796
11,788
Finished goods
5,500
5,481
Note 6. Other Current Assets
Other current assets consisted of the following:
Prepaid software maintenance
4,045
3,875
Prepaid insurance
2,565
5,573
Prepaid vendor payments
2,106
4,698
Prepaid taxes
1,087
917
Income tax receivable
162
13,250
Prepaid other
2,097
1,904
Other
4,134
637
20
Note 7. Property and Equipment
Property and equipment consisted of the following:
Land and land interests
32,481
34,532
Buildings and leasehold improvements
374,549
377,754
Equipment and other
400,085
417,239
Gross property and equipment
807,115
829,525
Accumulated depreciation
(352,456
(353,974
Property and equipment, net (excluding finance leases)
454,659
475,551
Finance lease right-of-use assets, net
22,786
25,350
Depreciation expense was $11.5 million for the three months ended September 30, 2020 and $35.1 million for the nine months ended September 30, 2020. Depreciation expense was $12.7 million for the three months ended September 30, 2019 and $34.0 million for the nine months ended September 30, 2019.
Amortization expense on finance lease assets was $0.9 million for the three months ended September 30, 2020 and $2.8 million for the nine months ended September 30, 2020. Amortization expense on finance lease assets was $0.7 million for the three months ended September 30, 2019 and $1.9 million for the nine months ended September 30, 2019.
Property and equipment purchased through accounts payable and accrued liabilities decreased $6.3 million during the nine months ended September 30, 2020 and increased $2.0 million during the nine months ended September 30, 2019.
We recorded fixed asset impairment charges primarily related to capitalized software of $0.7 million during the three months ended September 30, 2020.
Note 8. Other Investments and Assets
Other investments and assets consisted of the following:
Self-insured liability receivable
9,982
Contract costs
4,464
3,961
Other mutual funds
3,136
3,107
Cash surrender value of life insurance
24,873
2,355
3,196
Note 9. Goodwill and Other Intangible Assets
The changes in the carrying amount of goodwill are as follows:
155,276
30,829
101,878
Goodwill impairment
(155,276
(29,042
(1,757
(186,075
Foreign currency translation adjustments
(1,787
(3,190
(4,977
21
Goodwill is tested for impairment at the reporting unit level on an annual basis as of October 31, and 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 value. We use a discounted expected future cash flow methodology (income approach) in order to estimate the fair value of our reporting units for purposes of goodwill impairment testing.
In early March 2020, as a result of COVID-19 concerns, we began to see event postponements and cancellations at GES, as well as cancelled bookings at Pursuit. This quickly escalated into the shut-down of event activity and tourism as government mandated closures and stay-at-home orders went more broadly into effect around the world. As demand halted, we essentially placed our businesses into a state of hibernation to preserve cash. As government mandated closures and stay-at-home orders started to be lifted, we began to restart our business with enhanced health and safety protocols in place. We phased in most of Pursuit’s attractions and lodging operations starting in May and continuing into July. However, exhibition and event activity remain largely closed. For GES, we believe that as governments continue to lift restrictions, events in certain geographies will gradually increase.
During the three months ended March 31, 2020, we determined that an interim triggering event had occurred due to the deteriorating macroeconomic environment, disruptions to our operations, and the sustained decline in our stock price caused by COVID-19. As such, we performed an interim evaluation of goodwill as of March 31, 2020. As a result, we recorded non-cash goodwill impairment charges of $41.9 million associated with GES U.S., $29.0 million associated with GES EMEA, and $1.8 million associated with Pursuit’s Glacier Park Collection. We recorded an income tax benefit of $12.4 million during the three months ended March 31, 2020 related to these goodwill impairment charges. This income tax benefit was reversed during the second quarter of 2020 due to the recording of a valuation allowance. Refer to Note 16 – Income Taxes.
During the three months ended June 30, 2020, GES continued to experience event postponements and cancellations and we experienced further declines in our stock price. There had also been an increased spread of the COVID-19 virus throughout the United States, which resulted in further closures and government orders that we believed had increased the uncertainty regarding when the live event industry would re-commence and how long it would take to get back to similar pre-COVID-19 business levels. The uncertainty regarding the duration of the current domestic and global economic conditions and whether further deterioration in the macroeconomic environment would continue as a result of the COVID-19 pandemic was factored into our second quarter goodwill impairment analysis. As a result, we recorded a full impairment charge to the remaining GES goodwill balance of $113.1 million during the three months ended June 30, 2020. Our remaining goodwill balance as of September 30, 2020 of $96.9 million pertains to our Pursuit business.
During the three months ended September 30, 2020, the travel and hospitality industry continued to be negatively impacted by the COVID-19 pandemic. Although Pursuit’s reporting units continued to operate at a loss due to travel restrictions, as there were no significant changes to our outlook for the future years and the risk profile of the reporting units had not changed, we did not record any additional impairment charges during the third quarter. Additionally, we experienced a slight increase in our stock price during the three months ended September 30, 2020.
Given the evolving, uncertain nature of COVID-19, and the uncertain government and consumer reactions, the estimates and assumptions regarding expected future cash flows, discount rates, and terminal values used in our goodwill impairment analysis require considerable judgment and are based on our current estimates of market conditions, financial forecasts, and industry trends. These estimates, however, have inherent uncertainties and different assumptions could lead to materially different results including additional impairment charges in the future.
Other intangible assets consisted of the following:
December 31, 2019
Useful Life
(Years)
Gross Carrying
Value
Accumulated
Amortization
Net Carrying Value
Intangible assets subject to amortization:
Customer contracts and relationships
6.4
40,006
(27,381
12,625
72,219
(40,866
31,353
Operating contracts and licenses
36.8
39,156
(2,258
36,898
43,329
(1,881
41,448
In-place lease
13.8
14,670
(532
14,138
15,044
(231
14,813
Tradenames
5.5
5,687
(2,155
3,532
9,423
(4,338
5,085
Non-compete agreements
1.3
736
(552
184
(1,775
7.4
783
(90
693
802
(66
Total amortized intangible assets
101,038
(32,968
68,070
142,894
(49,157
93,737
Indefinite-lived intangible assets:
Business licenses
568
571
Other intangible assets
101,606
143,465
22
Intangible asset amortization expense was $1.5 million for the three months ended September 30, 2020 and $5.2 million for the nine months ended September 30, 2020. Intangible asset amortization expense was $2.9 million for the three months ended September 30, 2019 and $8.2 million for the nine months ended September 30, 2019. We recorded an impairment charge to intangible assets of $15.7 million during the nine months ended September 30, 2020 related to our U.S. audio-visual production business. The duration and impact of COVID-19 may result in additional future impairment charges as facts and circumstances evolve.
At September 30, 2020, the estimated future amortization expense related to intangible assets subject to amortization is as follows:
Year ending December 31,
Remainder of 2020
1,278
2021
5,089
2022
4,968
2023
4,322
2024
3,383
Thereafter
49,030
Note 10. Other Current Liabilities
Other current liabilities consisted of the following:
Continuing operations:
Self-insured liability
6,227
5,668
Accrued restructuring
4,574
2,130
Accrued sales and use taxes
2,914
5,451
Commissions payable
2,541
8,274
Accrued employee benefit costs
2,108
3,564
Current portion of pension and postretirement liabilities
1,722
1,899
Accrued professional fees
1,137
1,248
Accrued legal settlement
2,500
Accrued dividends
2,019
Other taxes
1,655
278
Accommodation services deposits
506
959
6,204
5,187
Total continuing operations
29,588
39,177
Discontinued operations:
422
260
Environmental remediation liabilities
60
311
57
76
Total discontinued operations
539
647
Total other current liabilities
23
Note 11. Other Deferred Items and Liabilities
Other deferred items and liabilities consisted of the following:
Foreign deferred tax liability
25,127
32,570
Multi-employer pension plan withdrawal liability
15,970
15,693
Self-insured excess liability
8,046
8,682
4,806
7,485
2,447
2,383
623
125
3,487
2,423
70,488
79,343
2,186
1,964
1,824
2,018
4,686
4,364
Total other deferred items and liabilities
Note 12. Debt and Finance Lease Obligations
The components of long-term debt and finance lease obligations consisted of the following:
(in thousands, except interest rates)
2018 Credit Facility, 4.6% weighted-average interest rate at September 30, 2020 and 3.9% at December 31, 2019, due through 2023(1)
230,543
311,464
FlyOver Iceland Credit Facility, 4.9% weighted-average interest rate at September 30, 2020 and December 31, 2019, due through 2022(1)
5,584
5,607
Less unamortized debt issuance costs
(2,953
(1,836
Total debt (2)
233,174
315,235
Finance lease obligations, 7.9% weighted-average interest rate at September 30, 2020 and 7.7% at December 31, 2019, due through 2039
23,018
25,257
Total debt and finance lease obligations (3)
256,192
340,492
Current portion (4)
(4,040
(5,330
Represents the weighted-average interest rate in effect at the respective periods, including any applicable margin. The interest rates do not include amortization of debt issuance costs or commitment fees.
(2)
The estimated fair value of total debt and finance leases was $222.0 million as of September 30, 2020 and $339.4 million as of December 31, 2019. The fair value of debt was estimated by discounting the future cash flows using rates currently available for debt of similar terms and maturity, which is a Level 2 measurement. Refer to Note 13 – Fair Value Measurements.
(3)
Cash paid for interest on debt was $12.1 million for the nine months ended September 30, 2020 and $8.8 million for the nine months ended September 30, 2019.
(4)
Subsequent to the filing of our 2019 Form 10-K, we identified a correction related to the classification of the 2018 Credit Facility (as defined below) from current to long-term given that the 2018 Credit Facility’s contractual maturity was not within 12 months of the balance sheet date, and we were in compliance with all applicable covenants as of December 31, 2019. As a result, we corrected the classification of the debt on the accompanying condensed consolidated balance sheet and the disclosure related to classification of debt in the table above as of December 31, 2019 to present the 2018 Credit Facility as long-term. Except for this change, the correction had no impact upon this Quarterly Report on Form 10-Q. We determined that the error is not material to the previously issued financial statements.
2018 Credit Agreement
Effective October 24, 2018, we entered into a Second Amended and Restated Credit Agreement (the “2018 Credit Agreement”). The 2018 Credit Agreement has a maturity date of October 24, 2023 and provides for a $450 million revolving credit facility (“2018 Credit Facility”). Borrowings and letters of credit can be denominated in U.S. dollars, Euros, Canadian dollars, or British pounds. Under the 2018 Credit Agreement, our lenders have a first perfected security interest in all of our personal property. As of September 30, 2020, we were not in compliance with our financial covenants, however, we obtained financial covenant relief until September 30, 2022 pursuant to the amendment to the 2018 Credit Agreement described below.
Effective August 5, 2020, we entered into an amendment to the 2018 Credit Agreement, which, among other things, (i) waives our financial covenants until September 30, 2022 (the “Covenant Waiver Period”) and (ii) requires us to maintain minimum liquidity of $125 million with a step down to $100 million at December 31, 2020. The Covenant Waiver Period will be in effect until the earlier of September 30, 2022 or the fiscal quarter when our leverage ratio is less than or equal to 4.00 to 1.00. Post Covenant Waiver Period, the maximum leverage ratio will be less than or equal to 4.50 to 1.00 at September 30, 2022 with a step down to less than or equal to 4.00 to 1.00 at December 31, 2022 and thereafter until the maturity date. The minimum interest coverage ratio will be greater than or equal to 2.00 to 1.00 post Covenant Waiver Period and until maturity of the facility. The interest rate on the borrowings is equal to LIBOR plus 350 basis points, with a LIBOR floor of one percent during the Covenant Waiver Period. The LIBOR floor continues until the end of the 2018 Credit Agreement. A revised pricing grid goes into effect after the Covenant Waiver Period ends. Additionally, we are precluded from paying cash dividends, from issuing unsecured debt, and from accessing the $250 million expansion feature during the Covenant Waiver Period. The amendment allows us to make acquisitions under certain conditions. Viad pledged 100% of the capital stock of its wholly-owned domestic subsidiaries and it top-tier foreign subsidiaries (other than Esja). Fees related to the amendment were approximately $1.7 million. Refer to Note 1 – Overview and Basis of Presentation (Impact of COVID-19) for additional information.
During the three months ended September 30, 2020, we repaid approximately $217 million of principal on our outstanding 2018 Credit Facility. As of September 30, 2020, capacity remaining under the 2018 Credit Facility was $209.8 million, reflecting borrowings of $230.5 million and $9.7 million in outstanding letters of credit.
We index borrowings under the 2018 Credit Facility to the prime rate or the LIBOR, plus appropriate spreads tied to our leverage ratio. As LIBOR will be phased out in 2021, our 2018 Credit Facility includes a method for determining an alternative or successor rate of interest that considers the new prevailing market convention. The vast majority of our borrowings under the 2018 Credit Facility are indexed to LIBOR. Commitment fees and letters of credit fees are also tied to our leverage ratio. The fees on the unused portion of the 2018 Credit Facility were 0.50% annually as of September 30, 2020. We index only our borrowings under the 2018 Credit Facility and the discount rates we use to account for some leases to LIBOR. We do not expect the alternative or successor rate to LIBOR to have a material impact on either our 2018 Credit Facility or the accounting for our leases.
FlyOver Iceland Credit Facility
Effective February 15, 2019, FlyOver Iceland ehf., a wholly-owned subsidiary of Esja, entered into a credit agreement with a €5.0 million (approximately $5.6 million U.S. dollars) credit facility (the “FlyOver Iceland Credit Facility”) with a maturity date of March 1, 2022. We used the loan proceeds to complete the development of the FlyOver Iceland attraction. In response to COVID-19, we entered into an addendum to the FlyOver Iceland Credit Facility effective May 14, 2020 wherein the principal and interest payments were deferred for six months beginning June 1, 2020, with the first payment due December 1, 2020. The addendum also extended the maturity date to September 1, 2022. There were no other changes to the terms of the FlyOver Iceland Credit Facility. Effective July 31, 2020, we obtained a waiver of certain covenants to the FlyOver Iceland Credit Facility through 2021.
Note 13. Fair Value Measurements
The fair value of an asset or liability is defined as the price that would be received by selling an asset or paying to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value guidance requires an entity to maximize the use of quoted prices and other observable inputs and minimize the use of unobservable inputs when measuring fair value, and also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Observable inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value.
Money market mutual funds and certain other mutual fund investments are measured at fair value on a recurring basis using Level 1 inputs. The fair value information related to these assets is summarized in the following tables:
Fair Value Measurements at Reporting Date Using
Quoted Prices in
Active
Markets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Unobservable
(Level 3)
Assets:
Money market funds (1)
Other mutual funds (2)
Total assets at fair value on a recurring basis
3,138
Quoted Prices
in Active
123
3,230
We include money market funds in “Cash and cash equivalents” in the Condensed Consolidated Balance Sheets. We classify these investments as available-for-sale and record them at fair value. There have been no realized gains or losses related to these investments and we have not experienced any redemption restrictions with respect to any of the money market mutual funds.
We include other mutual funds in “Other investments and assets” in the Condensed Consolidated Balance Sheets.
The carrying values of cash and cash equivalents, receivables, and accounts payable approximate fair value due to the short-term nature of these instruments. Refer to Note 12 – Debt and Finance Lease Obligations for the estimated fair value of debt obligations.
Note 14. Accumulated Other Comprehensive Income (Loss)
Changes in accumulated other comprehensive income (“AOCI”) by component are as follows:
Cumulative
Foreign Currency Translation Adjustments
Unrecognized Net Actuarial Loss and Prior Service Credit, Net
Comprehensive
Income (Loss)
(23,799
(11,900
Other comprehensive loss before reclassifications
Amounts reclassified from AOCI, net of tax
354
Net other comprehensive income (loss)
(6,988
(31,141
(11,546
26
Balance at December 31, 2018
(36,332
(11,643
Other comprehensive income before reclassifications
196
Net other comprehensive income
4,064
Balance at September 30, 2019
(32,464
(11,447
Amounts reclassified that relate to our defined benefit pension and postretirement plans include the amortization of prior service costs and actuarial net losses recognized during each period presented. We recorded these costs as components of net periodic cost for each period presented. Refer to Note 17 – Pension and Postretirement Benefits for additional information.
Note 15. Income (Loss) Per Share
The components of basic and diluted income per share are as follows:
Net income (loss) attributable to Viad (diluted)
Less: Allocation to non-vested shares
(226
(196
Convertible preferred stock dividends
Adjustment to the redemption value of redeemable noncontrolling interest
(468
(264
(926
(530
Net income (loss) allocated to Viad common stockholders (basic)
(32,360
30,926
(325,681
26,737
Basic weighted-average outstanding common shares
Additional dilutive shares related to share-based compensation
143
138
Diluted weighted-average outstanding shares
Income (loss) per share:
Basic income (loss) attributable to Viad common stockholders
Diluted income (loss) attributable to Viad common stockholders(1)
Diluted loss per share amount cannot exceed basic loss per share.
The dilutive effect of the outstanding common shares, excluding the Convertible Series A Preferred Stock, is reflected in diluted loss per share by application of the treasury stock method. The dilutive effect of the Convertible Series A Preferred Stock is reflected in the diluted loss per share by application of the if-converted method.
Note 16. Income Taxes
The effective tax rate was a negative 2.7% for the three months ended September 30, 2020 and 25.6% for the three months ended September 30, 2019. The effective tax rate was a negative 6.8% for the nine months ended September 30, 2020 and 26.5% for the nine months ended September 30, 2019.
The negative effective tax rates for the three and nine months ended September 30, 2020 were due to no tax benefits being recorded on our U.S., United Kingdom, and other European jurisdictions as a result of recording a valuation allowance during the second quarter of 2020 against our net deferred tax assets in these jurisdictions due to our belief that it is more likely than not that we will not realize the tax benefits from the current year losses realized in these jurisdictions.
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures may include deferring the due dates of tax payments or other changes to income and non-income-based tax
laws. For the three and nine months ended September 30, 2020, there were no material tax impacts to our condensed consolidated financial statements as they relate to COVID-19 measures.
We received $6.8 million and $14.7 million of tax refunds in excess of payments for the three and nine months ended September 30, 2020, respectively. Net cash paid for income taxes was $4.1 million and $12.1 million for the three and nine months ended September 30, 2019, respectively.
Note 17. Pension and Postretirement Benefits
The components of net periodic benefit cost of our pension and postretirement benefit plans for the three months ended September 30, 2020 and 2019 consist of the following:
Domestic Plans
Pension Plans
Postretirement Benefit Plans
Foreign Pension Plans
Service cost
112
101
Interest cost
209
64
93
Expected return on plan assets
(74
(134
(122
Amortization of prior service credit
(47
Recognized net actuarial loss
130
96
(26
(43
37
Net periodic benefit cost
218
285
113
108
The components of net periodic benefit cost of our pension and postretirement benefit plans for the nine months ended September 30, 2020 and 2019 consist of the following:
38
303
490
646
222
343
254
(109
(394
(364
395
84
111
920
164
334
328
We expect to contribute $1.3 million to our funded pension plans, $0.9 million to our unfunded pension plans, and $1.0 million to our postretirement benefit plans in 2020. During the nine months ended September 30, 2020, we contributed $0.2 million to our funded pension plans, $0.7 million to our unfunded pension plans, and $0.6 million to our postretirement benefit plans.
Note 18. Restructuring Charges
As part of our efforts to drive efficiencies and simplify our business operations, we took certain restructuring actions designed to simplify and transform GES for greater profitability. In response to the COVID-19 pandemic in 2020, we accelerated our transformation and streamlining efforts at GES to significantly reduce costs and create a lower and more flexible cost structure focused on servicing our more profitable market segments. These initiatives included recording restructuring charges related to the elimination of positions and facility closures at GES, as well as charges related to the closure and liquidation of GES’ United Kingdom-based audio-visual services business.
Other Restructurings
We recorded restructuring charges in connection with the consolidation of certain support functions at our corporate headquarters. These charges primarily consist of severance and related benefits due to headcount reductions and charges related to the downsizing of facilities.
28
Changes to the restructuring liability by major restructuring activity are as follows:
Severance &
Employee
Benefits
Facilities
2,935
1,339
239
4,513
5,332
6,039
999
Cash payments
(3,261
(197
(569
(4,027
Non-cash items(1)
(5,152
Adjustment to liability
(54
(17
(612
(683
4,952
2,012
7,021
Represents the FX impact related to the closure and liquidation of GES’ United Kingdom-based audio-visual services business during the three months ended September 30, 2020.
As of September 30, 2020, we expect to pay all but $1.5 million of the liabilities related to severance and employee benefits by the end of 2020. The liability related to future lease payments will be paid over the remaining lease terms. Refer to Note 22 – Segment Information, for information regarding restructuring charges by segment.
Note 19. Leases and Other
The balance sheet presentation of our operating and finance leases is as follows:
Classification on the Condensed Consolidated Balance Sheet
Operating lease assets
Finance lease assets
Total lease assets
111,180
128,664
Liabilities:
Current:
Finance lease obligations
2,895
3,386
Noncurrent:
20,123
21,871
Total lease liabilities
114,578
130,288
The components of lease expense consisted of the following:
Finance lease cost:
Amortization of right-of-use assets
926
697
2,767
1,895
Interest on lease liabilities
429
379
Operating lease cost
6,596
6,625
20,235
19,456
Short-term lease cost
465
1,348
Variable lease cost
1,557
1,478
4,615
4,695
Sublease income(1)
226
Total lease cost, net
9,631
9,727
29,340
27,773
(1) Sublease income excludes rental income from owned assets, which is recorded in revenue.
29
Other information related to operating and finance leases are as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
5,644
7,250
18,268
20,853
Operating cash flows from finance leases
839
1,705
459
Financing cash flows from finance leases
665
525
2,235
1,537
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
(3,059
49,123
1,018
62,375
Finance leases
14,893
1,894
35,844
Weighted-average remaining lease term (years):
8.30
8.17
13.58
14.01
Weighted-average discount rate:
5.89
%
5.77
7.91
7.73
As of September 30, 2020, the estimated future minimum lease payments under non-cancellable leases, excluding variable leases and variable non-lease components, are as follows:
Operating Leases
Finance Leases
6,188
1,458
7,646
20,043
4,284
24,327
15,844
3,796
19,640
13,407
3,276
16,683
10,265
2,609
12,874
54,410
23,556
77,966
Total future lease payments
120,157
38,979
159,136
Less: Amount representing interest
(28,597
(15,961
(44,558
Present value of minimum lease payments
91,560
Current portion
20,767
Long-term portion
93,811
As of September 30, 2020, the estimated future minimum rentals under non-cancellable leases, which includes rental income from facilities that we own, are as follows:
431
1,499
1,046
830
612
1,765
Total minimum rents
6,183
Leases Not Yet Commenced
As of September 30, 2020, we had executed certain facility and land leases for which we did not have control of the underlying assets. Accordingly, we did not record the lease liabilities and right-of-use assets on our Condensed Consolidated Balance Sheets. These leases include future planned attractions for Pursuit that are currently in the planning or development phase and that we expect the lease commencement dates to begin between fiscal years 2021 and 2022 with lease terms of 15 to 47 years.
30
Note 20. Litigation, Claims, Contingencies, and Other
We 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 us. During the three months ended March 31, 2019, we recorded an $8.5 million charge to resolve a legal dispute at GES involving a former industry contractor. Although the amount of liability as of September 30, 2020 with respect to unresolved legal matters is not ascertainable, we believe that any resulting liability, after taking into consideration amounts already provided for and insurance coverage, will not have a material effect on our business, financial position, or results of operations.
On July 18, 2020, an off-road Ice Explorer operated by our Pursuit business was involved in an accident enroute with 27 people to the Athabasca Glacier, resulting in three fatalities and multiple other serious injuries. We continue to support the victims and their families, and we are fully cooperating with the applicable regulatory authorities to investigate this accident. We immediately reported the accident to our relevant insurance carriers, who are also supporting the investigation. Subject to customary deductibles, we believe that our insurance coverage is sufficient to cover potential claims related to this accident.
We are 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 we have or had operations. If we fail to comply with these environmental laws and regulations, civil and criminal penalties could be imposed, and we could become subject to regulatory enforcement actions in the form of injunctions and cease and desist orders. As is the case with many companies, we also face exposure to actual or potential claims and lawsuits involving environmental matters relating to our past operations. As of September 30, 2020, we had recorded environmental remediation liabilities of $2.2 million related to previously sold operations. Although we are a party to certain environmental disputes, we believe that any resulting liabilities, after taking into consideration amounts already provided for and insurance coverage, will not have a material effect on our financial position or results of operations.
As of September 30, 2020, on behalf of our subsidiaries, we had certain obligations under guarantees to third parties. These guarantees are not subject to liability recognition in the condensed consolidated financial statements and relate to leased facilities and equipment leases entered into by our subsidiary operations. We 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 we would be required to make under all guarantees existing as of September 30, 2020 would be $75.5 million. These guarantees relate to our leased equipment and facilities through January 2040. There are no recourse provisions that would enable us to recover from third parties any payments made under the guarantees. Furthermore, there are no collateral or similar arrangements pursuant to which we could recover payments.
A significant number of our employees are unionized and we are a party to approximately 100 collective-bargaining agreements, with approximately one-third requiring renegotiation each year. If we are unable to reach an agreement with a union during the collective-bargaining process, the union may call for a strike or work stoppage, which may, under certain circumstances, adversely impact our business and results of operations. We believe that relations with our employees are satisfactory and that collective-bargaining agreements expiring in 2020 will be renegotiated in the ordinary course of business. Although our labor relations are currently stable, disruptions could occur, with the possibility of an adverse impact on the operating results of GES. During the three months ended June 30, 2019, we finalized the terms of a new collective-bargaining agreement with the Teamsters Local 727 union. The terms included a withdrawal from the underfunded Central States Pension Plan. Accordingly, we recorded a charge of $15.5 million, which represents the estimated present value of future contributions we will be required to make to the plan as a result of this withdrawal and $0.2 million of other withdrawal costs.
We are self-insured up to certain limits for workers’ compensation and general liabilities, which includes automobile, product general liability, and client property loss claims. The aggregate amount of insurance liabilities (up to our retention limit) related to our continuing operations was $14.3 million as of September 30, 2020, which includes $9.8 million related to workers’ compensation liabilities, and $4.5 million related to general liability claims. We have also retained and provided for certain workers’ compensation insurance liabilities in conjunction with previously sold businesses of $2.2 million as of September 30, 2020. We are also self-insured for certain employee health benefits and the estimated employee health benefit claims incurred but not yet reported was $1.5 million as of September 30, 2020. Provisions for losses for claims incurred, including actuarially derived estimated claims incurred but not yet reported, are made based on our historical experience, claims frequency, and other factors. A change in the assumptions used could result in an adjustment to recorded liabilities. We have purchased insurance for amounts in excess of the self-insured levels, which generally range from $0.2 million to $0.5 million on a per claim basis. We do not maintain a self-insured retention pool fund as claims are paid from current cash resources at the time of settlement. Our net cash payments in connection with these insurance liabilities were $1.6 million for the three months ended September 30, 2020 and $4.4 million for the nine months ended September 30, 2020 and $2.0 million for the three months ended September 30, 2019 and $5.3 million for the nine months ended September 30, 2019.
In addition, as of September 30, 2020, we have recorded insurance liabilities of $10.0 million related to continuing operations, which represents the amount for which we remain the primary obligor after self-insured insurance limits, without taking into consideration
31
the above-referenced insurance coverage. Of this total, $6.5 million related to workers’ compensation liabilities and $3.5 million related to general/auto liability claims, which are recorded in other deferred items and liabilities in the Condensed Consolidated Balance Sheets with a corresponding receivable in other investments.
Note 21. Redeemable Noncontrolling Interest
On November 3, 2017, we acquired the controlling interest (54.5% of the common stock) in Esja, a private corporation in Reykjavik, Iceland. Through Esja and its wholly-owned subsidiary, we are operating a new FlyOver Iceland attraction.
The minority Esja shareholders have the right to sell (or “put”) their Esja shares to us based on a multiple of 5.0x EBITDA as calculated on the trailing 12 months from the most recently completed quarter before the put option exercise. The put option is only exercisable after 36 months of business operation (the “Reference Date”) and if the FlyOver Iceland attraction has earned a minimum of €3.25 million in unadjusted EBITDA during the most recent fiscal year and during the trailing 12-month period prior to exercise (the “Put Option Condition”). The put option is exercisable during a period of 12 months following the Reference Date (the “Option Period”) if the Put Option Condition has been met. If the Put Option Condition has not been met during the first Option Period, the Reference Date will be extended for an additional 12 months up to three times. If after 72 months, the FlyOver Iceland attraction has not achieved the Put Option Condition, the put option expires. If the Put Option Condition is met during any of the Option Periods, yet the shares are not exercised prior to the end of the 12-month Option Period, the put option will expire.
The noncontrolling interest’s carrying value is determined by the fair value of the noncontrolling interest as of the acquisition date and the noncontrolling interest’s share of the subsequent net income or loss. This value is benchmarked against the redemption value of the sellers’ put option. The carrying value is adjusted to the redemption value, provided that it does not fall below the initial carrying value, as determined by the purchase price allocation. We have made a policy election to reflect any changes caused by such an adjustment to retained earnings, rather than to current earnings.
Changes in the redeemable noncontrolling interest are as follows:
(1,023
Adjustment to the redemption value
Foreign currency translation adjustment
(804
Note 22. Segment Information
We measure the profit and performance of our operations on the basis of segment operating income (loss), which excludes restructuring charges and recoveries and impairment charges. Intersegment sales are eliminated in consolidation and intersegment transfers are not significant. Corporate activities include expenses not allocated to operations. Depreciation and amortization and share-based compensation expense are the only significant non-cash items for the reportable segments.
Our reportable segments, with reconciliations to consolidated totals, are as follows:
GES:
Total GES
Segment operating income (loss):
(10,986
(8,562
(28,194
22,635
(7,262
(3,024
(11,256
2,775
(18,248
(11,586
(39,450
25,410
11,467
66,392
(26,499
64,710
Segment operating income (loss)
(6,781
54,806
(65,949
90,120
Corporate eliminations (1)
(2,645
(2,680
(5,902
(7,795
Operating income (loss)
(9,410
52,142
(71,803
82,374
58
79
313
(5,508
(3,740
(14,712
(9,612
(462
(15,508
(210
(281
(894
(1,192
Restructuring recoveries (charges):
(2,310
(881
(2,277
(5,139
(8,376
(759
(9,094
(1,501
(45
Corporate
(585
(62
(954
(205
Impairment charges:
(171,094
(676
(30,225
Legal settlement:
(8,500
Corporate eliminations represent the elimination of depreciation expense recorded by Pursuit associated with previously eliminated intercompany profit realized by GES for renovations to Pursuit’s Banff Gondola.
33
Note 23. Common and Preferred Stock
On August 5, 2020, we entered into an Investment Agreement with funds managed by private equity firm Crestview Partners, relating to the issuance of 135,000 shares of newly issued Convertible Series A Preferred Stock, par value $0.01 per share, for an aggregate purchase price of $135 million or $1,000 per share. The $135 million issuance was offset in part by $9.2 million of expenses related to the capital raise. The Investment Agreement also includes a delayed draw commitment of up to $45 million in additional Convertible Series A Preferred Stock, which we may access during the 12 months following the August 5, 2020 closing date on the same terms and conditions as the initial investment. We have classified the convertible preferred stock as temporary equity in our consolidated balance sheet due to the existence of certain change in control provisions that are not solely within our control.
The Convertible Series A Preferred Stock carries a 5.5% cumulative quarterly dividend, which is payable in cash or in-kind at Viad’s option and is convertible at the option of the holders into shares of our common stock at a conversion price of $21.25 per share. Upon the occurrence of a change in control event, the holders have a right to require Viad to repurchase such preferred stock. During the three months ended September 30, 2020, $1.1 million of dividends were deemed declared and paid in-kind.
Holders of the Convertible Series A Preferred Stock are entitled to vote with holders of Viad’s common stock on an as-converted basis.
Common Stock Repurchases
We previously announced our Board of Directors’ authorization to repurchase shares of our common stock from time to time at prevailing market prices. Effective February 7, 2019, our Board of Directors authorized the repurchase of an additional 500,000 shares.
During the nine months ended September 30, 2020, we repurchased 53,784 shares on the open market for $2.8 million. As of September 30, 2020, 546,283 shares remain available for repurchase. No shares were purchased on the open market during the nine months ended September 30, 2019. Additionally, we repurchase shares related to tax withholding requirements on vested restricted stock awards. Refer to Note 3 – Share-Based Compensation.
In March 2020, our Board of Directors suspended our share repurchase program for the foreseeable future.
Stockholder Rights Plan
On March 29, 2020, our Board of Directors adopted a short-term stockholder rights plan and declared a dividend payable to stockholders of record on April 13, 2020 of one preferred stock purchase right per each outstanding share of Viad common stock to purchase one one-hundredth of a share of Viad’s Junior Participating Preferred Stock at an exercise price of $115.00. Our Board of Directors will be able to redeem the rights at $0.01 per right at any time before a person or group acquired 10% (20% in the case of a passive institutional investor) or more of the outstanding common stock. On August 5, 2020, the stockholder rights plan was amended, whereby Crestview and affiliated parties were designated as exempt persons, and as such the issuance of preferred stock to Crestview did not result in a triggering event. The rights otherwise expire on February 28, 2021, subject to our right to extend the date, unless we redeem, exchange, or terminate the rights earlier.
Subject to limited exceptions, if a person or group acquires 10% (20% in the case of a passive institutional investor) or more of our common stock (including shares that are synthetically owned pursuant to derivative transactions or ownership of derivative securities) or announces a tender offer, and the consummation of that offer would result in such ownership (we refer to such a person or group as an “acquiring person”), each right will entitle its holder to purchase, at the right’s then-current exercise price, a number of shares of common stock having a market value at that time of twice the right’s exercise price. Rights held by the acquiring person will become void and will not be exercisable. If the Company is acquired in a merger or other business combination transaction that has not been approved by our Board of Directors after the rights become exercisable, each right will entitle its holder to purchase, at the right’s then-current exercise price, a number of shares of the acquiring company’s common stock having a market value at that time of twice the right’s exercise price.
34
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
This Form 10-Q contains a number of forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Words, and variations of words, such as “will,” “may,” “expect,” “would,” “could,” “might,” “intend,” “plan,” “believe,” “estimate,” “anticipate,” “deliver,” “seek,” “aim,” “potential,” “target,” “outlook,” and similar expressions are intended to identify our forward-looking statements. Forward-looking statements in this Form 10-Q include, among others, statements about our plans, business strategies, initiatives, intentions, goals and the outlook related to the effects of the COVID-19 pandemic, including on the demand for travel, event business and travel experiences, the timing of event and attraction re-openings, financial performance, prospects or future events. There are a number of risks, uncertainties and other important factors, many of which are beyond our control, that could cause our actual results to differ materially from the forward-looking statements contained in this Quarterly Report on Form 10-Q. Such risks, uncertainties and other important factors include, among others: the factors set forth under “Risk Factors” (Part I, Item 1A) and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part II, Item 7) in our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (the “SEC”), as may be updated elsewhere in this report; and the information set forth in other Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we have filed or will file with the SEC; the short- and longer-term effects of the COVID-19 pandemic, including on the demand for travel, event business and travel experiences, and levels of consumer confidence; actions that governments, businesses, and individuals take in response to the COVID-19 pandemic or any future resurgence, including limiting or banning travel; the impact of the COVID-19 pandemic, and actions taken in response to the COVID-19 pandemic or any future resurgence, on global and regional economies, travel, and economic activity, including the duration and magnitude of its impact on unemployment rates and consumer discretionary spending; the pace of recovery following the COVID-19 pandemic or any future resurgence; COVID-19 may cause us to incur additional expenses. These forward-looking statements are not historical facts and are subject to a host of risks and uncertainties, many of which are beyond our control, which could cause actual results to differ materially from those in the forward-looking statements. We disclaim and do not undertake any obligation to update or revise any forward-looking statement except as required by applicable law or regulation.
The following Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with our 2019 Form 10-K and the condensed consolidated financial statements and related notes included in this Form 10-Q. The MD&A is intended to assist in understanding our financial condition and results of operations.
Overview
We are an international experiential services company with operations in the United States, Canada, the United Kingdom, continental Europe, the United Arab Emirates, and Iceland. We are committed to providing unforgettable experiences to our clients and guests. We operate through three reportable business segments: GES North America, GES EMEA, (collectively, “GES”), and Pursuit.
GES is a global, full-service live events company offering a comprehensive range of services to event organizers and corporate brand marketers. Event organizers schedule and run events from start to finish. Corporate brand marketers include exhibitors and domestic and international corporations that want to promote their brands, services and innovation, feature new products and build business relationships. GES serves corporate brand marketers when they exhibit at shows and when GES is engaged to manage their global exhibit program or produce their proprietary corporate events.
Pursuit is a collection of inspiring and unforgettable travel experiences that include recreational attractions, unique hotels and lodges, food and beverage, retail, sightseeing, and ground transportation services.
The COVID-19 pandemic is having and will likely continue to have a significant and negative impact on our operations and financial performance, with live events largely shut down and tourism activity disruptions. In response to the COVID-19 pandemic, we implemented aggressive cost reduction measures to preserve cash, including furloughs, layoffs, mandatory unpaid time off, or salary
reductions for all employees and the elimination of discretionary spending. We continue to implement measures to successfully adapt for the long-term impact of COVID-19. During the third quarter of 2020, we secured additional capital to strengthen our liquidity position and amended our Second Amended and Restated Credit Agreement (the “2018 Credit Agreement”) to provide financial flexibility.
On August 5, 2020, we entered into an amendment to our 2018 Credit Agreement, which, among other things, (i) waives our financial covenants until September 30, 2022 (the “Covenant Waiver Period”) and (ii) requires us to maintain minimum liquidity of $125 million with a step down to $100 million at December 31, 2020. The interest rate on the borrowings is equal to the London Interbank Offered Rate (“LIBOR”) plus 350 basis points, with a LIBOR floor of one percent during the Covenant Waiver Period. The LIBOR floor continues until the end of the 2018 Credit Agreement. Viad pledged 100% of the capital stock of its wholly-owned domestic subsidiaries and its top-tier foreign subsidiaries (other than Esja Attractions ehf.). Fees related to the amendment were approximately $1.7 million.
Due to the deteriorating macroeconomic environment, disruptions to our operations, and the sustained decline in our stock price caused by COVID-19, we determined an interim triggering event had occurred in the first and second quarters of 2020, which required us to assess the carrying values of goodwill and intangible assets in accordance with Accounting Standards Codification (“ASC”) No. 350, Intangibles – Goodwill and Other. Based on this assessment, we recorded non-cash goodwill impairment charges of $186.1 million during the first half of 2020, including a full impairment charge to the remaining GES goodwill balance of $113.1 million in the second quarter of 2020. Our remaining goodwill balance as of September 30, 2020 of $96.9 million pertains to our Pursuit business. The duration and impact of COVID-19 may result in additional future impairment charges as facts and circumstances evolve.
Seasonality
GES’ exhibition and event activity can vary significantly from quarter to quarter and year to year depending on the frequency and timing of shows. Some shows are not held annually, and some shift between quarters. During 2019, GES reported its highest revenue during the second and fourth quarters.
Pursuit experiences peak activity during the summer months. During 2019, 85% of Pursuit’s revenue was earned in the second and third quarters.
As a result of COVID-19 concerns, we continue to see event postponements and cancellations at GES, as well as some cancelled bookings at Pursuit. To help reduce the spread of COVID-19, Pursuit’s year-round attractions and lodging properties were closed temporarily starting in mid-March and remained closed during most of the second quarter of 2020. As government mandated closures and stay-at-home orders were lifted, we began to restart our business with enhanced health and safety protocols in place. We phased in most of Pursuit’s attractions and lodging operations starting in May with most open and operational during the third quarter of 2020. However, exhibition and event activity remain largely closed. For GES, we believe that, as governments continue to lift restrictions, events in certain geographies will gradually increase and we stand ready to reactivate areas of that business when it makes sense to do so. Additionally, in the event of a future resurgence of the virus, we may be required to re-close certain attractions or events based on local or governmental restrictions implemented.
The extent of the COVID-19 pandemic’s effect on our operational and financial performance will depend on future developments including the duration, spread, and intensity of the virus, all of which are uncertain and difficult to predict. Due to the evolving and uncertain nature of COVID-19, we are not able at this time to fully estimate the effect of these factors on our business, however, the
36
adverse impact on our business, results of operations, and cash flows has been material. We will continue to evaluate and implement additional cost-cutting measures as are necessary to mitigate the negative financial and operational impact of COVID-19 on our business. For a discussion of the risks and uncertainties that may affect our business or financial results, refer to “Risk Factors” (Part II, Item 1A of this Form 10-Q).
Results of Operations
Financial Highlights
Change
Total revenue (1)
(82.2
)%
(61.4
**
Segment operating income (loss) (2)
Diluted income (loss) per common share
from continuing operations attributable
to Viad common stockholders
During the third quarter of 2020, we identified a prior period error related to the recognition of revenue of GES’ Corporate Accounts’ third-party services. Revenue from these services should have been recorded on a net basis to reflect only the fees we receive from arranging these services. Previously, we recorded this revenue on a gross basis, thus overstating revenue and cost of services by the same amount. As a result, GES’ revenue for the three and nine months ended September 30, 2019 has been corrected to reflect this gross-to-net adjustment.
Refer to Note 22 – Segment Information of the Notes to Condensed Consolidated Financial Statements for a reconciliation of the non-GAAP financial measure, segment operating income (loss), to the most directly comparable GAAP measure.
** Change is greater than +/- 100%
•
Total revenue decreased $290.7 million or 82.2%, during the three months ended September 30, 2020 and decreased $619.8 million or 61.4% during the nine months ended September 30, 2020. These decreases are primarily due to the impact of the COVID-19 pandemic as GES experienced show postponements and cancellations and Pursuit temporarily closed its properties in mid-March through most of the second quarter of 2020 and driven by lower visitation due to continued border closures and other travel restrictions.
Net loss attributable to Viad was $30.8 million during the three months ended September 30, 2020 as compared to income of $31.4 million during the three months ended September 30, 2019. Net loss attributable to Viad was $323.6 million during the nine months ended September 30, 2020 as compared to income of $27.5 million during the nine months ended September 30, 2019. The 2020 net losses are primarily due to lower revenue and impairment charges of $0.7 million and $203.1 million during the three and nine months ended September 30, 2020, respectively, restructuring charges of $11.3 million and $12.4 million during the three and nine months ended September 30, 2020, respectively, related to transformation efforts at GES to significantly reduce costs and create a lower and more flexible cost structure, offset in part by lower performance-based compensation expense as we reduced our estimated performance achievement to zero as a result of COVID-19.
Total segment operating loss(1) was $6.8 million during the three months ended September 30, 2020 as compared to income of $54.8 million during the three months ended September 30, 2019. Segment operating loss was $65.9 million during the nine months ended September 30, 2020 as compared to income of $90.1 million during the nine months ended September 30, 2019. The 2020 losses are primarily due to lower revenue at GES and Pursuit as a result of the COVID-19 pandemic, offset in part by the elimination of performance-based incentives.
Foreign Exchange Rate Variances
We conduct our foreign operations primarily in Canada, the United Kingdom, Iceland, the Netherlands, Germany, and to a lesser extent, in certain other countries.
The following table summarizes the foreign exchange rate variance effects (or “FX Impact”) on revenue and segment operating income (loss) from our significant international operations for the three and nine months ended September 30, 2020 and 2019:
Three months ended September 30, 2020 compared with the three months ended September 30, 2019
Segment Operating Income (Loss)
Exchange Rates
FX Impact
GES North America:
Canada (CAD)
0.75
0.76
(2
GES EMEA:
United Kingdom (GBP)
1.30
1.24
1.23
(233
Europe (EUR)
1.17
1.10
1.11
(39
128
(272
Pursuit:
(232
(48
Iceland (ISK)
0.01
(257
(131
(262
Nine months ended September 30, 2020 compared with the nine months ended September 30, 2019
0.73
(366
(19
1.28
1.27
(711
1.26
(323
1.12
(168
(12
(879
(335
(317
0.74
(342
378
(1,587
Revenue and segment operating income (loss) were primarily impacted by variances of the British pound, the Canadian dollar, and the Euro relative to the U.S. dollar. Future changes in exchange rates may impact overall expected profitability and historical period-to-period comparisons when revenue and segment operating income (loss) are translated into U.S. dollars.
Analysis of Revenue and Operating Results by Reportable Segment
The following table presents a comparison of GES’ reported revenue and segment operating income (loss) to organic revenue(1) and organic segment operating income (loss)(1) for the three and nine months ended September 30, 2020 and 2019.
Change vs. 2019
As Reported
Acquisitions
Organic(2)
Organic(1)
GES(1):
North America
11,769
(93.6
EMEA
2,646
(92.9
(93.3
95.0
14,131
(93.5
Segment operating income (loss)(3):
(10,998
(28.3
(28.5
(6,990
(17,988
(57.5
(55.3
273,789
(59.0
(58.9
52,975
(66.7
(66.1
77.9
(1,245
323,506
(60.1
(60.0
(28,175
(10,921
(354
(39,096
Organic revenue and organic segment operating income (loss) are non-GAAP financial measures that adjust for the impacts of exchange rate variances and acquisitions, if any, until such acquisitions are included in the entirety of both comparable periods presented. For more information about organic revenue and organic segment operating income (loss), see the “Non-GAAP Measures” section of this MD&A.
39
GES North America revenue decreased $173.4 million or 93.6% during the three months ended September 30, 2020 and $393.4 million or 59.0% during the nine months ended September 30, 2020, primarily due to show postponements and cancellations due to the COVID-19 pandemic as well as negative show rotation of approximately $23 million during the three months ended September 30, 2020. Revenue earned during 2020 was primarily driven by shows completed during Q1 2020, compensation for work completed on cancelled shows, storage, the conversion of convention centers into temporary hospitals in early April, and virtual and hybrid events completed during the third quarter. Organic revenue* decreased $173.4 million or 93.6% during the three months ended September 30, 2020 and $393.0 million or 58.9% during the nine months ended September 30, 2020.
GES North America segment operating loss was $11.0 million during the three months ended September 30, 2020 as compared to a loss of $8.6 million during the three months ended September 30, 2019. Segment operating loss was $28.2 million during the nine months ended September 30, 2020 as compared to income of $22.6 million during the nine months ended September 30, 2019. The 2020 losses are primarily due to the decrease in revenue, offset in part by the elimination of performance-based incentives and by the reduction in operating costs by eliminating wages and discretionary costs. Organic segment operating loss* was $11.0 million during the three months ended September 30, 2020 as compared to a loss of $8.6 million during the three months ended September 30, 2019. Organic segment operating loss* was $28.2 million during the nine months ended September 30, 2020 as compared to income of $22.6 million during the nine months ended September 30, 2019.
GES EMEA revenue decreased $36.5 million or 92.9% during the three months ended September 30, 2020 and $104.4 million or 66.7% during the nine months ended September 30, 2020, primarily due to show postponements and cancellations due to the COVID-19 pandemic as well as negative show rotation of approximately $7 million and $32 million during the three and nine months ended September 30, 2020, respectively. Revenue earned during 2020 was primarily driven by shows completed during Q1 2020, compensation for work completed on cancelled shows, and virtual events and hybrid events completed during the third quarter. Organic revenue* decreased $36.7 million or 93.3% during the three months ended September 30, 2020 and $103.5 million or 66.1% during the nine months ended September 30, 2020.
GES EMEA segment operating loss was $7.3 million during the three months ended September 30, 2020 as compared to a loss of $3.0 million during the three months ended September 30, 2019. Segment operating loss was $11.3 million during the nine months ended September 30, 2020 as compared to income of $2.8 million during the nine months ended September 30, 2019. The 2020 losses are primarily due to the decrease in revenue, offset in part by the reduction in operating costs by eliminating wages and discretionary costs. Organic segment operating loss* was $7.0 million during the three months ended September 30, 2020 as compared to a loss of $3.0 million during the three months ended September 30, 2019. Organic segment operating loss* was $10.9 million during the nine months ended September 30, 2020 as compared to income of $2.8 million during the nine months ended September 30, 2019.
* Refer to footnote (1) in the above table for more information about the non-GAAP financial measures of organic revenue and organic segment operating income (loss).
40
The following table presents a comparison of Pursuit’s reported revenue and segment operating income (loss) to organic revenue(3) and organic segment operating loss(3) for the three and nine months ended September 30, 2020 and 2019.
Organic(3)
Revenue(1):
Attractions
17,699
(145
17,844
63,581
(72.2
(71.9
Hospitality
30,403
(107
30,510
62,522
(51.4
(51.2
444
6,861
Travel Planning
160
161
2,388
Intra-Segment Eliminations & Other
109
(4
(309
Total Pursuit
49,072
(63.9
(63.7
Segment operating income (4):
11,469
(82.7
Acquisitions(2)
25,141
(189
25,330
98,085
(74.4
(74.2
39,382
13,600
(135
25,917
86,773
16,068
70,705
(54.6
(63.3
2,604
(11
2,615
13,018
(80.0
(79.9
361
364
3,985
(90.9
114
118
(742
54,344
185,051
(66.4
(70.6
Segment operating income (loss)(4):
567
(27,444
7,419
57,291
Revenue by line of business does not agree to Note 2 – Revenue and Related Contract Costs and Contract Liabilities in the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) as the amounts in the above table include product revenue from food and beverage and retail operations within each line of business.
Acquisitions include Mountain Park Lodges (acquired June 2019) and Belton Chalet (acquired May 2019).
Pursuit revenue decreased $86.2 million or 63.9% during the three months ended September 30, 2020 and $133.5 million or 66.4% during the nine months ended September 30, 2020, primarily due to the impact of the COVID-19 pandemic as Pursuit temporarily closed its properties in mid-March through most of the second quarter of 2020. We phased in most of Pursuit’s attractions and lodging operations starting in May with most open and operational during the third quarter of 2020. However, the travel and hospitality
industry continue to be negatively impacted by the COVID-19 pandemic as travel restrictions and border closures largely remain in place. Organic revenue* decreased $86.0 million or 63.7% during the three months ended September 30, 2020 and $130.7 million or 70.6% during the nine months ended September 30, 2020.
Pursuit segment operating income was $11.5 million during the three months ended September 30, 2020 as compared to income of $66.4 million during the three months ended September 30, 2019. Segment operating loss was $26.5 million during the nine months ended September 30, 2020 as compared to income of $64.7 million during the nine months ended September 30, 2019. The 2020 declines are primarily due to the decrease in revenue, offset in part by the reduction in operating costs through efforts to maximize profitability. Organic segment operating income* was $11.5 million during the three months ended September 30, 2020 as compared to income of $66.4 million during the three months ended September 30, 2019. Organic segment operating loss* was $27.4 million during the nine months ended September 30, 2020 as compared to income of $57.3 million during the nine months ended September 30, 2019.
* Refer to footnote (3) in the above table for more information about the non-GAAP financial measures of organic revenue and organic segment operating loss.
Performance Measures
We use the following key business metrics to evaluate the performance of Pursuit’s attractions business:
Number of visitors. The number of visitors allows us to assess the volume of tickets sold at each attraction during the period.
Revenue per attraction visitor. Revenue per attraction visitor is calculated as total attractions revenue divided by the total number of visitors at all Pursuit attractions during the period. Total attractions revenue includes ticket sales and ancillary revenue generated by attractions, such as food and beverage and retail revenue. Total attractions revenue per visitor measures the total spend per visitor that attraction properties are able to capture, which is important to the profitability of the attractions business.
Effective ticket price. Effective ticket price is calculated as revenue from the sale of attraction tickets divided by the total number of visitors at all comparable Pursuit attractions during the period.
We use the following key business metrics, common in the hospitality industry, to evaluate Pursuit’s hospitality business:
Revenue per Available Room. RevPAR is calculated as total rooms revenue divided by the total number of room nights available for all comparable Pursuit hospitality properties during the period. Total rooms revenue does not include non-rooms revenue, which consists of ancillary revenue generated by hospitality properties, such as food and beverage and retail revenue. RevPAR measures the period-over-period change in rooms revenue per available room for comparable hospitality properties. RevPAR is affected by average daily rate and occupancy, which have different implications on profitability.
Average Daily Rate. ADR is calculated as total rooms revenue divided by the total number of room nights sold for all comparable Pursuit hospitality properties during the period. ADR is used to assess the pricing levels that the hospitality properties are able to realize. Increases in ADR lead to increases in rooms revenue with no substantial effect on variable costs, therefore having a greater impact on margins than increases in occupancy.
Occupancy. Occupancy is calculated as the total number of room nights sold divided by the total number of room nights available for all comparable Pursuit hospitality properties during the period. Occupancy measures the utilization of the available capacity at the hospitality properties. Increases in occupancy result in increases in rooms revenue and additional variable operating costs (including housekeeping services, utilities, and room amenity costs), as well as increases in ancillary non-rooms revenue (including food and beverage and retail revenue).
The following table provides Pursuit’s same-store key performance indicators. The same-store metrics indicate the performance of all Pursuit’s properties and attractions that we owned and operated at full capacity, considering seasonal closures, for the entirety of both periods presented. For Pursuit properties and attractions located outside of the U.S., comparisons to the prior year are on a constant U.S. dollar basis, using the current year quarterly average exchange rates for previous periods, to eliminate the FX Impact. We believe this same-store constant currency basis provides better comparability between reporting periods.
42
% Change
Same-Store Key Performance Indicators (1)
Attractions:
Number of visitors
343,000
1,274,808
(73.1
485,996
2,076,698
(76.6
Revenue per attraction visitor
(2.0
(4.3
Effective ticket price
(13.2
(13.9
Hospitality:
Room nights available (2)
156,444
195,715
(20.1
135,357
242,435
(44.2
RevPAR (2)
106
195
(45.6
77
159
(51.6
ADR
177
216
(18.1
155
215
(27.9
Occupancy (2)
59.7
90.4
(30.7
49.8
73.8
(24.0
Attractions Same-Store Key Performance Indicators for the three and nine months ended September 30, 2020 and 2019 exclude FlyOver Iceland (opened August 2019) and Open Top Touring (opened September 2020). Hospitality Same-Store Key Performance Indicators for the three months ended September 30, 2020 excludes the Glacier Basecamp Lodge (purchased January 2020). Hospitality Same-Store Key Performance Indicators for the nine months ended September 30, 2020 and 2019 excludes the Glacier Basecamp Lodge (purchased January 2020), West Glacier RV Park & Cabins (opened July 2019), Mountain Park Lodges (acquired in June 2019), and the Belton Chalet (acquired May 2019).
The rooms that were out of service as a result of property closures due to the COVID-19 pandemic were excluded from room nights available when calculating hospitality RevPAR and occupancy.
For the health and well-being of our employees, guests, and community, Pursuit’s year-round attractions and lodging properties were closed temporarily starting in mid-March and remained closed during most of the second quarter of 2020. The majority of Pursuit’s properties were open and operational during the third quarter of 2020. St. Mary Lodge and Glacier Park Lodge remained closed during the third quarter of 2020 due to a government-imposed closure at the East Glacier entrance at Glacier National Park. In order to mitigate the negative financial and operational impacts, we eliminated all non-essential capital expenditures during the first and second quarters of 2020 resulting in the delay of the opening of FlyOver Canada Toronto, which is now anticipated to open in 2023. We resumed important growth investments in September of 2020, and we are on track to open FlyOver Las Vegas in the third quarter of 2021 and the Sky Lagoon in the second quarter of 2021.
Attractions. The decrease in same-store visitors and revenue per attraction was driven by the temporary closure of our attractions and lower visitation due to the continued border closures and travel restrictions as a result of COVID-19.
Hospitality. The decrease in RevPAR and ADR was driven by lower demand as a result of COVID-19.
During 2019, Pursuit derived approximately 66% of its revenue and 88% of its segment operating income from its Canadian operations, which are largely dependent on foreign customer visitation. Accordingly, the timing of reopening of borders and the strengthening or weakening of the Canadian dollar, relative to other currencies, would affect customer volumes and the results of operations.
Other Expenses
(1.3
(24.3
47.3
53.1
(97.0
80.7
(100.0
(93.8
88.3
43
Corporate Activities – The decrease in corporate activities expense during the nine months ended September 30, 2020 relative to 2019 was primarily due to lower headcount, lower performance-based compensation expense as we reduced our estimated performance achievement to zero as a result of COVID-19, and higher acquisition transaction-related costs in 2019, offset in part by fees and expenses related to the equity raise and credit facility amendment.
Interest Expense – The increase in interest expense during the three and nine months ended September 30, 2020 was primarily due to higher debt balances in 2020.
Multi-employer pension plan withdrawal – During 2019, we finalized the terms of a new collective-bargaining agreement with the Teamsters 727 union. The terms included a withdrawal from the under-funded Central States Pension Plan. Accordingly, we recorded a charge of $15.5 million, which represented the estimated present value of future contributions we will be required to make to the plan as a result of this withdrawal from the plan. Additionally, in 2020 we recorded $0.5 million related to the withdrawal from one of our multi-employer plans.
Restructuring Charges – Restructuring charges during the three and nine months ended September 30, 2020 and 2019 were primarily related to the elimination of positions and facility closures at GES, as well as charges related to the closure and liquidation of GES’ United Kingdom-based audio-visual services business during the third quarter of 2020. The 2019 actions arose in connection with our ongoing efforts to simplify and transform GES for greater profitability. In response to the COVID-19 pandemic in 2020, we accelerated our transformation and streamlining efforts at GES to significantly reduce costs and create a lower and more flexible cost structure focused on servicing our more profitable market segments. The 2020 charges also included amounts related to the elimination of positions at our corporate office in response to the pandemic.
Legal Settlement – During the nine months ended September 30, 2019, we recorded a charge to resolve a legal dispute at GES involving a former industry contractor.
Impairment Charges – During the three months ended September 30, 2020, we recorded a fixed asset impairment charge of $0.7 million. During the nine months ended September 30, 2020, we recorded non-cash goodwill impairments of $185.8 million, a non-cash impairment charge to intangible assets of $15.7 million, and fixed asset impairment charges of $1.6 million.
Income Tax Benefit – The effective tax rate was a negative 2.7% for the three months ended September 30, 2020 and 25.6% for the three months ended September 30, 2019. The effective tax rate was a negative 6.8% for the nine months ended September 30, 2020 and 26.5% for the nine months ended September 30, 2019. The negative effective tax rates for the three and nine months ended September 30, 2020 were due to no tax benefits being recorded in our U.S., United Kingdom, and other European jurisdictions as a result of recording a valuation allowance during the second quarter of 2020 against our net deferred tax assets in these jurisdictions due to our belief that it is more likely than not that we will be unable to realize the tax benefits from our current year losses in these jurisdictions.
Income (Loss) from Discontinued Operations – Loss from discontinued operations during the three and nine months ended September 30, 2020 was primarily due to a settlement and legal expenses related to previously sold operations. Income from discontinued operations for the nine months ended September 30, 2019 was primarily related to a favorable legal settlement related to previously sold operations partially offset by legal expenses.
Liquidity and Capital Resources
Cash and cash equivalents were $56.5 million as of September 30, 2020, as compared to $62.0 million as of December 31, 2019. Our total available liquidity was $311.3 million, including the available capacity on our 2018 Credit Facility of $209.8 million, and an additional $45 million available through the delayed draw commitment from Crestview Partners. During the nine months ended September 30, 2020, we used net cash from operating activities of $45.9 million.
On August 5, 2020, we entered into an investment agreement with funds managed by private equity firm Crestview Partners (the “Investment Agreement”) who made an initial investment of $135 million, offset in part by $9.2 million in fees, in newly issued perpetual convertible preferred stock that carries a 5.5% cumulative quarterly dividend, which is payable in cash or in-kind at Viad’s option (the “Convertible Preferred Stock”). The Convertible Preferred Stock is convertible into shares of our common stock at a conversion price of $21.25 per share. The Investment Agreement also includes a delayed draw commitment of up to $45 million in additional Convertible Preferred Stock, which we may access during the 12 months following the August 5, 2020 closing date on the same terms and conditions as the initial investment. The proceeds from Crestview’s initial investment were used to repay a portion of our 2018 Credit Facility, will provide additional short-term liquidity, will fund capital expenditures, and will support general corporate purposes. On August 5, 2020, we entered into an amendment to our 2018 Credit Agreement, which, among other things, (i) waives our financial covenants until September 30, 2022 (the “Covenant Waiver Period”) and (ii) requires us to maintain minimum liquidity of
44
$125 million with a step down to $100 million at December 31, 2020. The interest rate on the borrowings is equal to the London Interbank Offered Rate (“LIBOR”) plus 350 basis points, with a LIBOR floor of one percent during the Covenant Waiver Period. The LIBOR floor continues until the end of the 2018 Credit Agreement. Viad pledged 100% of the capital stock of its wholly-owned domestic subsidiaries and its top-tier foreign subsidiaries (other than Esja Attractions ehf.). Fees related to the amendment were approximately $1.7 million.
As of September 30, 2020, we held approximately $53.7 million of our cash and cash equivalents outside of the United States, consisting of $25.3 million in Canada, $9.9 million in the United Kingdom, $8.1 million in the United Arab Emirates, $6.8 million in the Netherlands, and $3.6 million in certain other countries.
Cash Flows
Operating Activities
Other non-cash items
Changes in assets and liabilities
2,080
(17,433
The change in net cash (used in) provided by operating activities of $147.0 million was due to net losses at GES and Pursuit due to the COVID-19 pandemic, offset in part by a favorable change in working capital primarily driven by a focus on working capital management.
Investing Activities
The change in net cash provided by (used in) investing activities of $157.3 million was primarily due to proceeds from the termination of our life insurance policies, proceeds from dispositions of property and other assets in 2020, including $17.1 million from the sale of the GES warehouse in San Diego, cash paid for acquisitions in 2019, and a decrease in capital expenditures.
Financing Activities
The decrease in cash provided by financing activities of $27.2 million was primarily due to net debt payments of $81.9 million during the nine months ended September 30, 2020 compared to net debt proceeds of $71.1 million under the 2018 Credit Facility, offset in part by proceeds from the issuance of Convertible Series A Preferred Stock.
Debt and Finance Lease Obligations
Refer to Note 12 – Debt and Finance Lease Obligations of the Notes to Condensed Consolidated Financial Statements for further discussion, all of which is incorporated by reference herein.
Share Repurchases
Our Board of Directors previously authorized us to repurchase shares of our common stock from time to time at prevailing market prices. Effective February 7, 2019, our Board of Directors authorized the repurchase of an additional 500,000 shares. During the nine months ended September 30, 2020, we repurchased 53,784 shares on the open market for $2.8 million. No shares were repurchased on the open market during the nine months ended September 30, 2019. As of September 30, 2020, 546,283 shares remained available for repurchase. The Board of Directors’ authorization does not have an expiration date.
Additionally, we repurchased shares related to tax withholding requirements on vested restricted share-based awards.
Off-Balance Sheet Arrangements
We have not entered into any off-balance sheet arrangements with unconsolidated special-purpose or other entities that would materially affect our financial position, results of operations, liquidity, or capital resources. Furthermore, we do 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 may expose us to liability or risks of loss that are not reflected in the condensed consolidated financial statements and related notes. Refer to Note 12 – Debt and Finance Lease Obligations, Note 19 – Leases and Other, and Note 20 – Litigation, Claims, Contingencies, and Other of the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this quarterly report on Form 10-Q) for further information, which information is incorporated by reference herein.
Critical Accounting Policies and Estimates
Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” (Part II, Item 7) of our 2019 Form 10-K, for a discussion of our critical accounting policies and estimates.
Refer to Note 1 – Overview and Basis of Presentation of the Notes to Condensed Consolidated Financial Statements for further information.
Non-GAAP Measures
In addition to disclosing financial results that are determined in accordance with U.S. generally accepted accounting principles (“GAAP”), we also disclose the following non-GAAP financial measures: Segment operating income (loss), organic revenue, and organic segment operating income (loss) (collectively, the “Non-GAAP Measures”). Our use of Non-GAAP Measures is supplemental to, but not as a substitute for, other measures of financial performance reported in accordance with GAAP. As not all companies use identical calculations, our Non-GAAP Measures may not be comparable to similarly titled measures used by other companies. We believe that our use of Non-GAAP Measures provides useful information to investors regarding our results of operations for trending, analyzing, and benchmarking our performance and the value of our business.
“Segment operating income (loss)” is net loss attributable to Viad before loss from discontinued operations, corporate activities, interest expense and interest income, income taxes, restructuring charges, impairment charges, and the reduction for income attributable to noncontrolling interest. Segment operating income (loss) is used to measure the profit and performance of our operating segments to facilitate period-to-period comparisons. Refer to Note 22 – Segment Information of the Notes to Condensed Consolidated Financial Statements for a reconciliation of segment operating income (loss) to loss from continuing operations before income taxes.
“Organic revenue” and “organic segment operating income (loss)” are revenue and segment operating income (loss) (as defined above), respectively, without the impact of exchange rate variances and acquisitions, if any, until such acquisitions are included in the entirety of both comparable periods. The impact of exchange rate variances is calculated as the difference between current period activity translated at the current period’s exchange rates and the comparable prior period’s exchange rates. We believe the presentation of “organic” results permits investors to better understand our performance without the effects of exchange rate variances or acquisitions and to facilitate period-to-period comparisons and analysis of our operating performance. Refer to the “Results of Operations” section of this MD&A for reconciliations of organic revenue and organic segment operating income (loss) to the most directly comparable GAAP measures.
We believe non-GAAP Measures are useful operating metrics as they eliminate potential variations arising from taxes, debt service costs, impairment charges, and the effects of discontinued operations, resulting in additional measures considered to be indicative of our ongoing operations and segment performance. Although we use Non-GAAP Measures to assess the performance of our business, the use of these measures is limited because these measures do not consider material costs, expenses, and other items necessary to operate our business. These items include debt service costs, expenses related to U.S. federal, state, local and foreign income taxes, impairment charges, and the effects of discontinued operations. As the Non-GAAP Measures do not consider these items, you should consider net income attributable to Viad as an important measure of financial performance because it provides a more complete measure of our performance.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our market risk exposure relates to fluctuations in foreign exchange rates and interest rates. Foreign exchange risk is the risk that fluctuating exchange rates will adversely affect our financial condition or results of operations. Interest rate risk is the risk that changing interest rates will adversely affect our financial position or results of operations.
Our foreign operations are primarily in Canada, the United Kingdom, Iceland, the Netherlands, and Germany. The functional currency of our foreign subsidiaries is their local currency. Accordingly, for purposes of consolidation, we translate the assets and liabilities of our 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 loss in the Condensed Consolidated Balance Sheets. As a result, significant fluctuations in foreign exchange rates relative to the U.S. dollar may result in material changes to our net equity position reported in the Condensed Consolidated Balance Sheets. We do not currently hedge our equity risk arising from the translation of foreign denominated assets and liabilities. We recorded cumulative unrealized foreign currency translation losses in stockholders’ equity of $31.1 million as of September 30, 2020 and $23.8 million as of December 31, 2019. We recorded unrealized foreign currency translation losses in other comprehensive income of $7.3 million during the nine months ended September 30, 2020 and unrealized foreign currency translation gains of $3.9 million during the nine months ended September 30, 2019.
For purposes of consolidation, revenue, expenses, gains, and losses related to our foreign operations are translated into U.S. dollars at the average foreign exchange rates for the period. As a result, our consolidated results of operations are exposed to fluctuations in foreign exchange rates as revenue and segment operating income (loss) of our 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. We do not currently hedge our net earnings exposure arising from the translation of our foreign revenue and segment operating income (loss). Refer to “Foreign Exchange Rate Variances” section of this MD&A.
We are exposed to foreign exchange transaction risk, as our foreign subsidiaries have certain revenue transactions denominated in currencies other than the functional currency of the respective subsidiary. From time to time, we utilize forward contracts to mitigate the impact on earnings related to these transactions due to fluctuations in foreign exchange rates. As of September 30, 2020 and December 31, 2019, we did not have any outstanding foreign currency forward contracts.
We are exposed to short-term and long-term interest rate risk on certain of our debt obligations. We do not currently use derivative financial instruments to hedge cash flows for such obligations.
Item 4. Controls and Procedures
We have established disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and such information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure. Management, together with our CEO and CFO, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2020. Based on this evaluation, the CEO and CFO concluded that our disclosure controls and procedures were effective as of September 30, 2020.
There were no changes in our internal control over financial reporting during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 1. Legal Proceedings
Refer to Note 20 – Litigation, Claims, Contingencies, and Other of the Notes to Condensed Consolidated Financial Statements (Part I, Item 1 of this Form 10-Q) for information regarding our legal proceedings that is incorporated by reference herein.
Item 1A. Risk Factors
Our operations and financial results are subject to known and unknown risks. As a result, past financial performance and historical trends may not be reliable indicators of our future performance.
The COVID-19 pandemic and related responsive actions have adversely affected our financial condition, liquidity and cash flow, and may continue to do so in the future. The COVID-19 pandemic forced the cancellation of many of our events and the temporary closure of substantially all of our attractions, hotels, and other operations. The substantial reduction in our operations will result in near-term losses and negative cash flow from operations. The full impact of the pandemic on our longer-term operational and financial performance is highly uncertain and will depend on future developments that we cannot predict, including the duration and spread of the pandemic, any future resurgence of COVID-19, and related social-distancing orders, travel restrictions, and/or government limitations on group gatherings. Our GES business depends on exhibitions, conferences, and other live events and the size of marketing expenditures relating to those events. The continuation of government orders prohibiting large group gatherings will continue to significantly and adversely affect our revenue and results of operations. Even if exhibitions or other live events do occur, we also could suffer from reduced spending for our services because many exhibitors’ marketing budgets are partly discretionary and are frequently among the first expenditures reduced when economic conditions deteriorate, and people may be unwilling to attend large group events. In addition, the attractions and hospitality operations within our Pursuit business may be subject to government closure orders designed to limit the spread of COVID-19, which adversely affects our profitability and cash flow. Future revenue from our Pursuit operations will depend on any further spread of the pandemic, our ability to keep our operations open, the willingness of people to travel to our locations, and the amount of disposable income that consumers have available for travel and vacations, which decreases during periods of weak general economic conditions. Both our GES and Pursuit businesses may also experience increased costs in order to supply our customers or guests with personal protection equipment, conduct comprehensive cleaning regiments, and other measures that we determine are in the best interests of our employees, customers, guests, and/or event participants. Even with additional personal protection measures in place, there can be no assurance that employees, customers, guests, and/or event participants will not contact COVID-19. Any such occurrence could result in litigation, legal costs, and reputational risk. The prolonged recovery from the COVID-19 pandemic or a resurgence in cases of COVID-19 could further materially and adversely affect our business, financial condition, and results of operations.
Completed acquisitions may not perform as anticipated or be integrated as planned. We regularly evaluate and pursue opportunities to acquire businesses that complement, enhance, or expand our current business, or offer growth opportunities. Our acquired businesses might not meet our financial and non-financial expectations or yield anticipated benefits. Our success depends, in part, on our ability to conform controls, policies and procedures, and business cultures; consolidate and streamline operations and infrastructures; identify and eliminate redundant and underperforming operations and assets; manage inefficiencies associated with the integration of operations; and retain the acquired business’s key personnel and customers. Moreover, our acquisition activity may subject us to new regulatory requirements, distract our senior management and employees, and expose us to unknown liabilities or contingencies that we may fail to identify prior to closing. If we are forced to make changes to our business strategy or if external conditions adversely affect our business operations, including the duration and impact of COVID-19, we may be required to record additional future impairment charges, as we did in the first and second quarters of 2020. Additionally, we may borrow funds to finance strategic acquisitions. Debt leverage resulting from future acquisitions would reduce our debt capacity, increase our interest expense, and limit our ability to capitalize on future business opportunities. Such borrowings may also be subject to fluctuations in interest rates. Any of these risks could materially and adversely affect our business, product and service sales, financial condition, and results of operations.
We are vulnerable to deterioration in general economic conditions. Our business is sensitive to fluctuations in general economic conditions in the U.S. and other global markets in which we operate, including as a result of the effects caused by the COVID-19 pandemic. The recent decline in global and regional economic conditions, and consumers’ fears that economic conditions will further decline, has caused declining consumer confidence, unemployment, fluctuations in stock markets and interest rates, contraction of credit availability, and other dynamic factors affecting economic conditions generally. The success of our GES business largely depends on the number of exhibitions held, the size of exhibitors’ marketing expenditures, and on the strength of particular industries in which exhibitors operate. The number and size of exhibitions generally decrease when the economy weakens, which our business has experienced in 2020 due to the COVID-19 pandemic. We also could suffer from reduced spending for our services because many exhibitors’ marketing budgets are partly discretionary and are frequently among the first expenditures reduced when economic conditions deteriorate. In addition, revenue from our Pursuit operations depends largely on the amount of disposable income that
consumers have available for travel and vacations, which decreases during periods of weak general economic conditions. As a result, any deterioration in general economic conditions could further materially and adversely affect our business, product sales, financial condition, and results of operations.
We depend on our large exhibition event clients to renew their service contracts and on our exclusive right to provide those services. GES has a number of large exhibition event organizers and large customer accounts. If any of these large clients do not renew their service contracts, our results of operations could be materially and adversely affected.
Moreover, when event organizers hire GES as the official services contractor, they usually also grant GES an exclusive right to perform material handling, electrical, rigging, and other services at the exhibition facility. However, some exhibition facilities have taken certain steps to in-source certain event services (either by performing the services themselves or by hiring a separate service provider) as a result of conditions generally affecting their industry, such as an increased supply of exhibition space. If exhibition facilities choose to in-source certain event services, GES will lose the ability to provide certain event services, and our results of operations could be materially and adversely affected.
Our business is relationship driven. Our GES business is heavily focused on client relationships, and, specifically, on having close collaboration and interaction with our clients. To be successful, our account teams must be able to understand clients’ desires and expectations in order to provide top-quality service. If we are unable to maintain our client relationships, including due to the loss of key members of our account teams, we could also lose customers and our results of operations could be materially and adversely affected.
We operate in highly competitive and dynamic industries. Competition in the Live Events markets is driven by price and service quality, among other factors. To the extent competitors seek to gain or retain market presence through aggressive underpricing strategies, we may be required to lower our prices and rates to avoid the loss of related business. Moreover, customer consolidations and other actions have caused downward pricing pressure for our products and services and could affect our ability to negotiate favorable terms with our customers. If we are unable to anticipate and respond as effectively as our competitors to changing business conditions, including new technologies and business models, we could lose market share. Our inability to meet the challenges presented by the competitive and dynamic environment of our industry could materially and adversely affect our results of operations.
Travel industry disruptions, particularly those affecting the hotel and airline industries, could adversely affect our business. Our business depends largely on the ability and willingness of people, whether exhibitors, exhibition attendees, tourists, or others, to travel. Factors adversely affecting the travel industry, and particularly the airline and hotel industries, generally also adversely affect our business and results of operations. Factors that could adversely affect the travel industry include high or rising fuel prices, increased security and passport requirements, weather conditions, health epidemics and pandemics, airline accidents, acts of terrorism, and international political instability and hostilities. For example, the COVID-19 pandemic and social distancing orders resulted in severe global travel restrictions, mandatory shutdowns of show and event venues, hotels, attractions and other operations, and limitations on large gatherings of people. These circumstances had severe effects on our businesses. The occurrence of additional disruptions, a prolonged recovery from the COVID-19 pandemic or a spike or resurgence in cases of COVID-19, or other unexpected events that affect the availability and pricing of air travel and accommodations, could further materially and adversely affect our business and results of operations.
New capital projects may not be commercially successful. From time to time, we pursue capital projects, such as our current construction of FlyOver Las Vegas, FlyOver Canada Toronto, the Sky Lagoon, and other efforts to upgrade some of our Pursuit offerings, in order to enhance and expand our business. Capital projects are subject to a number of risks, including unanticipated delays, cost overruns, and the failure to achieve established financial and strategic goals, as well as additional project-specific risks. A prolonged delay in these capital projects could prevent them from performing in accordance with our commercial expectations and could materially and adversely affect our future success, business, and results of operations.
The seasonality of our business makes us particularly sensitive to adverse events during peak periods. The peak activity for our Pursuit business is during the summer months, as 85% of Pursuit’s 2019 revenue was earned in the second and third quarters. Our GES exhibition and event activity varies significantly because it is based on the frequency and timing of shows, many of which are not held each year, and which may shift between quarters. If adverse events or conditions occur during these peak periods, such as the COVID-19 pandemic, our results of operations could be materially and adversely affected.
Transportation disruptions and increases in transportation costs could adversely affect our business and results of operations. GES relies on independent transportation carriers to send materials and exhibits to and from exhibition, warehouse, and customer facilities. If our customers and suppliers are unable to secure the services of those independent transportation carriers at favorable rates, it could materially and adversely affect our business and results of operations. In addition, disruption of transportation services due to weather-
50
related problems, labor strikes, lockouts, or other events could adversely affect our ability to supply services to customers and could cause the cancellation of exhibitions, which could materially and adversely affect our business and results of operations.
Natural disasters, weather conditions, and other catastrophic events could negatively affect our business. The occurrence of catastrophic events ranging from natural disasters (such as hurricanes, fires, floods, and earthquakes), acts of war or terrorism, accidents involving our travel offerings or experiences, the effects of climate change, including any impact of global warming, or the prospect of these events could disrupt our business. Changes in climates may increase the frequency and intensity of adverse weather patterns and make certain destinations less desirable. Such catastrophic events have, and could have, an adverse impact on Pursuit, which is heavily dependent on the ability and willingness of its guests to travel and/or visit our attractions. Pursuit guests tend to delay or postpone vacations if natural conditions differ from those that typically prevail at competing lodges, resorts, and attractions, and catastrophic events and heightened travel security measures instituted in response to such events could impede the guests’ ability to travel, and interrupt our business operations, including damaging our properties. Such catastrophic events could also have a negative impact on GES, causing a cancellation of exhibitions and other events held in public venues or disrupt the services we provide to our customers at convention centers, exhibition halls, hotels, and other public venues. Such events could also have a negative impact on GES’ production facilities, preventing us from timely completing exhibit fabrication and other projects for customers. In addition, unfavorable media attention, or negative publicity, in the wake of any catastrophic event or accident could damage our reputation or reduce the demand for our services. If the conditions arising from such events persist or worsen, they could materially and adversely affect our results of operations and financial condition.
Our participation in multi-employer pension plans could substantially increase our pension costs. We sponsor a number of defined benefit plans for our U.S. and Canada-based employees. In addition, we are obligated to contribute to multi-employer pension plans under collective bargaining agreements covering our union-represented employees. We contributed $27.3 million in 2019, $26.4 million in 2018, and $26.6 million in 2017 to those multi-employer pension plans. Third-party boards of trustees manage these multi-employer plans. Based upon the information we receive from plan administrators; we believe that several of those multi-employer plans are underfunded. The Pension Protection Act of 2006 requires us to reduce the underfunded status over defined time periods. Moreover, we would be required to make additional payments of our proportionate share of a plan’s unfunded vested liabilities if a plan terminates, or other contributing employers withdraw, due to insolvency or other reasons, or if we voluntarily withdraw from a plan. In 2019, we finalized the terms of a new collective bargaining agreement with the Teamsters Local 727 union. The terms included a withdrawal from the underfunded Central States Pension Plan. Accordingly, we recorded a charge of $15.5 million, which represents the estimated present value of future contributions we will be required to make as a result of the union’s withdrawal and $0.2 million of other withdrawal costs. At this time, we do not anticipate triggering any withdrawal from any other multi-employer pension plan to which we currently contribute. However, significant plan contribution increases could materially and adversely affect our consolidated financial condition, results of operations, and cash flows. Refer to Note 18 – Pension and Postretirement Benefits of the Notes to Consolidated Financial Statements (Part II, Item 8 of the 2019 Form 10-K) for further information.
Union-represented labor increases our risk of higher labor costs and work stoppages. Significant portions of our employees are unionized. We have approximately 100 collective bargaining agreements, and we are required to renegotiate approximately one-third of those each year. If we increase wages or benefits as a result of labor negotiations, either our operating margins will suffer, or we could increase the cost of our services to our customers, which could lead those customers to turn to other vendors with lower prices. Either event could materially and adversely affect our business and results of operations.
Additionally, if we are unable to reach an agreement with a union during the collective bargaining process, the union may strike or carry out other types of work stoppages. If that happens, we might be unable to find substitute workers with the necessary skills to perform many of the services, or we may incur additional costs to do so, both of which could materially and adversely affect our business and results of operations.
Liabilities relating to prior and discontinued operations may adversely affect our results of operations. We and our predecessors have a corporate history spanning decades and involving diverse businesses. Some of those businesses owned properties and used raw materials that have been, and may continue to be, subject to litigation. Moreover, some of the raw materials used and the waste produced by those businesses have been and are the subject of U.S. federal and state environmental regulations, including laws enacted under the Comprehensive Environmental Response, Compensation and Liability Act, or its state law counterparts. In addition, we may incur other liabilities resulting from indemnification claims involving previously sold properties and subsidiaries, or obligations under defined benefit plans or other employee plans, as well as claims from past operations of predecessors or their subsidiaries. Although we believe we have adequate reserves and sufficient insurance coverage to cover those future liabilities, future events or proceedings could render our reserves or insurance protections inadequate, any of which could materially and adversely affect our business and results of operations.
Show rotation affects our profitability and makes comparisons between periods difficult. GES results are largely dependent upon the frequency, timing, and location of exhibitions and events. Some large exhibitions are not held annually (they may be held once every
51
two, three, or four years) or may be held at different times of the year from when they were previously held. In addition, the same exhibition may change locations from year to year resulting in lower margins if the exhibition shifts to a higher-cost location. Any of these factors could cause our results of operations to fluctuate significantly from quarter to quarter or from year to year, making periodic comparisons difficult.
We are subject to currency exchange rate fluctuations. We have operations outside of the U.S. primarily in Canada, the United Kingdom, Iceland, the Netherlands, and Germany. During 2019, GES EMEA, GES Canada, and Pursuit’s international operations accounted for approximately 33% of our consolidated revenue and 66% of our segment operating income. Consequently, a significant portion of our business is exposed to currency exchange rate fluctuations. We do not currently hedge equity risk arising from the translation of non-U.S. denominated assets and liabilities. Our financial results and capital ratios are sensitive to movements in currency exchange rates because a large portion of our assets, liabilities, revenue, and expenses must be translated into U.S. dollars for reporting purposes. The unrealized gains or losses resulting from the currency translation are included as a component of accumulated other comprehensive income (loss) in our consolidated balance sheets. As a result, significant fluctuations in currency exchange rates could result in material changes to the net equity position we report in our consolidated balance sheets.
We are vulnerable to cybersecurity attacks and threats. We regularly collect and process credit, financial, and other personal and confidential information from individuals and entities who attend or participate in events and exhibitions that we produce, or who visit our attractions and other offerings. In addition, our devices, servers, computer systems, and business systems are vulnerable to cybersecurity risk, including cyberattacks, or we may be the target of email scams that attempt to acquire personal information and company assets. Despite our efforts to protect ourselves with insurance, and create security barriers to such threats, including regularly reviewing our systems for vulnerabilities and continually updating our protections, we might not be able to entirely mitigate these risks. Our failure to effectively prevent, detect, and recover from the increasing number and sophistication of information security threats could lead to business interruptions, delays or loss of critical data, misuse, modification, or destruction of information, including trade secrets and confidential business information, reputational damage, and third-party claims, any of which could materially and adversely affect our results of operations.
Laws and regulations relating to the handling of personal data are evolving and could result in increased costs, legal claims, or fines. We store and process the personally identifiable information of our customers, employees, and third parties with whom we have business relationships. The legal requirements restricting the way we store, collect, handle, and transfer personal data continue to evolve, and there are an increasing number of authorities issuing privacy laws and regulations. These data privacy laws and regulations are subject to differing interpretations, creating uncertainty and inconsistency across jurisdictions. Our compliance with these myriad requirements could involve making changes in our services, business practices, or internal systems, any of which could increase our costs, lower revenue, or reduce efficiency. Our failure to comply with existing or new rules could result in significant penalties or orders to stop the alleged noncompliant activity, litigation, adverse publicity, or could cause our customers to lose trust in our services. In addition, if the third parties we work with violate applicable laws, contractual obligations, or suffer a security breach, those violations could also put us in breach of our obligations under privacy laws and regulations. In addition, the costs of maintaining adequate protection, including insurance protection against such threats, as they develop in the future (or as legal requirements related to data security increase) are expected to increase and could be material. Any of these risks could materially and adversely affect our business and results of operations.
The United Kingdom’s exit from the European Union (“EU”) could adversely affect our business. We operate substantial parts of our EU businesses from U.K.-based entities. On January 31, 2020, the U.K. officially withdrew from the EU. The final terms of the withdrawal are being negotiated with the transition period ending on December 31, 2020. The withdrawal could disrupt the free movement of goods, services, and people between the U.K. and the EU. Moreover, the regulatory and legal environment that will govern our U.K. operations is uncertain. Any new arrangements may require us to make changes to our operations in Europe, which could result in a higher cost and less efficient operating model across our European business. These new arrangements could adversely affect our business and results of operations.
Changes affecting the availability of the London Inter-bank Offered Rate (“LIBOR”) or increases in interest rates may have consequences for us that cannot yet be reasonably predicted. We have outstanding debt with variable interest rates based on LIBOR. Borrowings under the 2018 Credit Facility are indexed to the prime rate or LIBOR, plus appropriate spreads tied to our leverage ratio. The LIBOR benchmark has been the subject of national, international, and other regulatory guidance and proposals to reform. In July 2017, the United Kingdom Financial Conduct Authority (the authority that regulates LIBOR) announced that it intends to stop compelling banks to submit rates for the calculation of LIBOR after 2021. These reforms may cause LIBOR to perform differently than in the past and LIBOR may ultimately cease to exist after 2021. Our 2018 Credit Facility includes a method for determining an alternative or successor rate of interest that gives consideration to the new prevailing market convention. The alternative rate could affect our debt and debt payments. At this time, it is not possible to predict the effect of any changes to LIBOR, any phase out of LIBOR or any establishment of alternative benchmark rates. Any new benchmark rate will likely not replicate LIBOR exactly, which could impact our contracts which terminate after 2021. There is uncertainty about how applicable law, the courts or the Company will
52
address the replacement of LIBOR with alternative rates. If LIBOR ceases to exist after 2021, the interest rates under our revolving credit facility and the discount rates we apply to finance lease obligations will be based on the alternative rate, which may result in higher interest rates and debt obligations. In addition, any increases to our benchmark interest rates could have an uncertain impact on our cost of funds and our access to the capital markets, which could impact our results of operations and cash flows. Uncertainty as to the nature of such potential changes may also adversely affect the trading market for our securities.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes the total number of shares of our common stock that were repurchased during the three months ended September 30, 2020 pursuant to publicly announced plans or programs, as well as certain previously owned shares of common stock that were surrendered by employees, former employees, and non-employee directors for tax withholding requirements on vested share-based awards.
ISSUER PURCHASES OF EQUITY SECURITIES
Period
Total Number of Shares Purchased
Average Price Paid
Per Share
Total Number of Shares
Purchased as Part of Publicly
Announced Plans or Programs
Maximum Number of Shares
That May Yet Be Purchased
Under the Plans or Programs
July 1, 2020 - July 31, 2020
14.46
546,283
August 1, 2020 - August 31, 2020
18.28
September 1, 2020 - September 30, 2020
80
15.89
Pursuant to previously announced authorizations, our Board of Directors has authorized us to repurchase shares of our common stock from time to time at prevailing market prices. Effective February 7, 2019, our Board of Directors approved an additional 500,000 shares to repurchase. During the nine months ended September 30, 2020 we repurchased 53,784 shares on the open market for $2.8 million. The Board’s authorization has no expiration date. In March 2020, our Board of Directors suspended our share repurchase program for the foreseeable future.
Item 6. Exhibits
Incorporated by Reference
Exhibit
Number
Exhibit Description
Form
Ending
Filing Date
3.1
Certificate of Designations of 5.5% Series A Convertible Preferred Stock.
8-K
8/5/2020
4.1
Rights Agreement, dated as of March 30, 2020, between Viad Corp and Equiniti Trust Company, which includes the Form of Right Certificate as Exhibit A and the Summary of Rights to Purchase Preferred Stock as Exhibit B.
3/30/2020
4.2
Amendment No. 2 to $450 million Second Amended and Restated Credit Agreement, dated May 8, 2020.
4.A3
5/11/2020
4.3
Registration Rights Agreement, dated August 5, 2020, by and among Viad Corp, Crestview IV VC TE Holdings, LLC, Crestview IV VC Holdings, L.P., and Crestview IV VC CI Holdings, L.P.
10.1
Investment Agreement, dated August 5, 2020, by and among Viad Corp, Crestview IV VC TE Holdings, LLC, Crestview IV VC Holdings, L.P., and Crestview IV VC CI Holdings, L.P.
10.2
Stockholders Agreement, dated August 5, 2020, by and among Viad Corp, Crestview IV VC TE Holdings, LLC, Crestview IV VC Holdings, L.P., and Crestview IV VC CI Holdings, L.P.
10.3
Amendment to Rights Agreement, dated August 5, 2020, by and between Viad Corp and Equiniti Trust Company.
10.4
Form of Indemnification Agreement.
10.5
Form of Crestview Designee Indemnification Agreement.
10.6
Amendment No. 3 to Second Amended and Restated Credit Agreement and Amendment No. 1 to Security Agreements, dated August 5, 2020, by and among Viad Corp, the guarantors party thereto, JPMorgan Chase Bank, N.A., and the lenders party thereto.
10.7
*
Form of Incentive Stock Option Agreement, effective as of August 26, 2020, pursuant to the 2017 Viad Corp Omnibus Incentive Award Plan.
31.1
Certification of Chief Executive Officer of Viad Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the period ended September 30, 2020.
31.2
Certification of Chief Financial Officer of Viad Corp pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, for the period ended September 30, 2020.
32.1
Certifications of Chief Executive Officer and Chief Financial Officer of Viad Corp pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, for the period ended September 30, 2020.
101.INS
***
XBRL Instance Document
101.SCH
****
XBRL Taxonomy Extension Schema Document.
101.CAL
XBRL Taxonomy Extension Calculation Linkbase Document.
101.LAB
XBRL Taxonomy Extension Label Linkbase Document.
101.PRE
XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF
XBRL Taxonomy Extension Definition Linkbase Document.
104
Cover Page Interactive Data File
Filed herewith.
Furnished herewith.
The XBRL Instance Document and Cover Page Interactive Data File do not appear in the Interactive Data File because their XBRL tags are embedded within the Inline XBRL document.
Submitted electronically herewith.
55
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
(Registrant)
November 6, 2020
By:
/s/ Leslie S. Striedel
(Date)
Leslie S. Striedel
Chief Accounting Officer (Duly Authorized Officer)