10-Q 1 p65705e10-q.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-Q QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended September 30, 2001 Commission file number 001-11015 VIAD CORP (Exact name of registrant as specified in its charter) DELAWARE 36-1169950 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1850 N. CENTRAL AVE., PHOENIX, ARIZONA 85077 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (602) 207-4000 Indicate by check mark whether the registrant (1) has filed all Exchange Act reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes x No ----- -----
As of September 28, 2001, 88,571,215 shares of Common Stock ($1.50 par value) were outstanding. PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS VIAD CORP CONSOLIDATED BALANCE SHEETS
September 30, 2001 December 31, (000 omitted, except share data) (Unaudited) 2000 ----------------------------------------------------------------------------------------------------- ASSETS Current assets: Cash and cash equivalents $ 35,366 $ 42,298 Short-term investments 104,161 42,538 Receivables 82,204 115,792 Inventories 75,017 87,131 Deferred income taxes 44,144 40,050 Other current assets 38,107 32,511 ----------------------------------------------------------------------------------------------------- 378,999 360,320 Funds, agents' receivables and current maturities of investments restricted for payment service obligations 633,960 1,194,545 ----------------------------------------------------------------------------------------------------- Total current assets 1,012,959 1,554,865 Investments in securities 45,926 41,018 Investments restricted for payment service obligations 4,975,547 3,630,615 Property and equipment 261,319 286,157 Other investments and assets 83,113 102,967 Deferred income taxes 65,636 46,596 Intangibles 626,585 638,013 ----------------------------------------------------------------------------------------------------- $ 7,071,085 $ 6,300,231 ===================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Short-term bank loans $ -- $ 2,666 Accounts payable 63,232 81,146 Other current liabilities 202,359 180,738 Current portion of long-term debt 41,427 67,134 ----------------------------------------------------------------------------------------------------- 307,018 331,684 Payment service obligations 5,305,957 4,607,296 ----------------------------------------------------------------------------------------------------- Total current liabilities 5,612,975 4,938,980 Long-term debt 362,074 377,306 Pension and other postretirement benefits 74,806 74,280 Derivative financial instruments 139,651 Other deferred items and insurance liabilities 146,627 135,588 Minority interests 4,486 4,263 $4.75 Redeemable preferred stock 6,673 6,658 Common stock and other equity: Common stock, $1.50 par value, 200,000,000 shares authorized, 99,739,925 shares issued 149,610 149,610 Additional capital 219,747 245,634 Retained income 757,214 755,041 Unearned employee benefits and other (70,934) (94,804) Accumulated other comprehensive income: Unrealized gain on securities classified as available-for-sale 63,271 656 Unrealized loss on derivative financial instruments (88,078) Cumulative translation adjustments (12,618) (8,612) Minimum pension liability adjustment (1,795) (1,795) Common stock in treasury, at cost, 11,168,710 and 10,676,444 shares (292,624) (282,574) ----------------------------------------------------------------------------------------------------- Total common stock and other equity 723,793 763,156 ----------------------------------------------------------------------------------------------------- $ 7,071,085 $ 6,300,231 =====================================================================================================
See Notes to Consolidated Financial Statements. Page 2 VIAD CORP CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Quarter ended September 30, Nine months ended September 30, (000 omitted, except per share data) 2001 2000 2001 2000 ---------------------------------------------------------------------------------------------------------------------------- Revenues $ 390,086 $ 429,016 $ 1,294,216 $ 1,313,763 ---------------------------------------------------------------------------------------------------------------------------- Costs and expenses: Costs of sales and services 352,911 373,054 1,154,154 1,156,288 Corporate activities and minority interests 2,353 3,414 11,033 13,440 Net interest expense 4,997 3,281 16,560 7,712 Restructuring charges and other items 67,370 (2,091) 96,644 (2,091) ---------------------------------------------------------------------------------------------------------------------------- 427,631 377,658 1,278,391 1,175,349 ---------------------------------------------------------------------------------------------------------------------------- Income (loss) before income taxes (37,545) 51,358 15,825 138,414 Income tax expense (benefit) (21,781) 7,346 (10,122) 26,041 ---------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ (15,764) $ 44,012 $ 25,947 $ 112,373 ============================================================================================================================ DILUTED NET INCOME (LOSS) PER COMMON SHARE $ (0.19) $ 0.48 $ 0.29 $ 1.22 Average outstanding and potentially dilutive common shares 86,280 91,287 86,347 91,747 ============================================================================================================================ BASIC NET INCOME (LOSS) PER COMMON SHARE $ (0.19) $ 0.49 $ 0.29 $ 1.25 Average outstanding common shares 85,560 88,977 85,426 89,398 ============================================================================================================================ Dividends declared per common share $ 0.09 $ 0.09 $ 0.27 $ 0.27 ============================================================================================================================ Preferred stock dividends $ 285 $ 283 $ 853 $ 850 ============================================================================================================================
See Notes to Consolidated Financial Statements. Page 3 VIAD CORP CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
Quarter ended September 30, Nine months ended September 30, (000 omitted) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $(15,764) $ 44,012 $ 25,947 $ 112,373 ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss), net of tax: Unrealized gain (loss) on securities classified as available-for-sale: Transition adjustment, effective January 1, 2001, resulting from the transfer of securities classified as held-to-maturity to securities classified as available-for-sale 3,772 Holding gains arising during the period 53,601 19,658 65,124 36,494 Reclassification adjustment for net realized gains included in net income (1,814) (244) (6,281) (1,063) ------------------------------------------------------------------------------------------------------------------------------------ 51,787 19,414 62,615 35,431 ------------------------------------------------------------------------------------------------------------------------------------ Unrealized gain (loss) on derivative financial instruments: Cumulative effect of transition adjustment upon initial application of Statement of Financial Accounting Standards No. 133 on January 1, 2001 (7,501) Holding losses arising during the period (66,602) (97,046) Net reclassifications from other comprehensive income to net income 8,982 16,469 ------------------------------------------------------------------------------------------------------------------------------------ (57,620) -- (88,078) -- ------------------------------------------------------------------------------------------------------------------------------------ Unrealized foreign currency translation adjustments: Holding losses arising during the period (2,820) (1,864) (4,006) (4,048) ------------------------------------------------------------------------------------------------------------------------------------ Other comprehensive income (loss) (8,653) 17,550 (29,469) 31,383 ------------------------------------------------------------------------------------------------------------------------------------ Comprehensive income (loss) $(24,417) $ 61,562 $ (3,522) $ 143,756 ====================================================================================================================================
See Notes to Consolidated Financial Statements. Page 4 VIAD CORP CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Nine months ended September 30, (000 omitted) 2001 2000 ---------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: Net income $ 25,947 $ 112,373 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 52,582 52,708 Deferred income taxes (6,634) 9,945 Restructuring charges and other items 96,644 8,165 Other noncash items, net 75 (6,933) Change in operating assets and liabilities: Receivables and inventories 33,792 (84,346) Accounts payable and accrued compensation (18,721) (17,242) Other assets and liabilities, net (21,332) (8,218) ---------------------------------------------------------------------------------------------------------- 162,353 66,452 Change in payment service assets and obligations, net 1,249,134 448,122 ---------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 1,411,487 514,574 ---------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES: Capital expenditures (36,259) (30,955) Acquisitions of businesses, net of cash acquired (865) (24,155) Proceeds from disposals of businesses, property and other assets, net 309 43,731 Proceeds from sales and maturities of securities 1,754,215 1,105,179 Purchases of securities (3,048,231) (1,565,738) Cash provided by discontinued operations 10,585 ---------------------------------------------------------------------------------------------------------- Net cash used by investing activities (1,330,831) (461,353) ---------------------------------------------------------------------------------------------------------- CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES: Payments on long-term borrowings (26,203) (31,073) Net change in short-term borrowings (17,272) 71,415 Dividends on common and preferred stock (23,967) (25,047) Exercise of stock options 14,476 7,372 Common stock purchased for treasury (34,622) (62,753) ---------------------------------------------------------------------------------------------------------- Net cash used by financing activities (87,588) (40,086) ---------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (6,932) 13,135 Cash and cash equivalents, beginning of year 42,298 33,106 ---------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS, END OF PERIOD $ 35,366 $ 46,241 ==========================================================================================================
See Notes to Consolidated Financial Statements. Page 5 VIAD CORP NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE A - BASIS OF PREPARATION The Consolidated Financial Statements of Viad Corp ("Viad") include the accounts of Viad and all of its subsidiaries. This information should be read in conjunction with the financial statements set forth in the Viad Corp Annual Report on Form 10-K for the year ended December 31, 2000. Accounting policies utilized in the preparation of the financial information herein presented are the same as set forth in Viad's annual financial statements except as modified for interim accounting policies which are within the guidelines set forth in Accounting Principles Board Opinion No. 28, "Interim Financial Reporting" and the adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" as discussed in Note D. The interim consolidated financial information is unaudited. In the opinion of management, all adjustments, consisting only of normal recurring accruals, necessary to present fairly Viad's financial position as of September 30, 2001, and its results of operations and its cash flows for the quarters and nine months ended September 30, 2001 and 2000 have been included. Interim results of operations are not necessarily indicative of the results of operations for the full year. Certain prior year amounts have been reclassified to conform with the 2001 presentation. NOTE B - ASSETS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS Viad's Payment Services subsidiaries generate funds from the sale of money orders and other payment instruments, with the related liabilities classified as "Payment service obligations." Substantially all of the proceeds of such sales, along with certain additional subsidiary funds, are invested in permissible securities, principally debt instruments. Such investments, along with related cash and funds in transit, are restricted by state regulatory agencies for use by the subsidiaries to satisfy the liability to pay, upon presentment, the face amount of such payment service obligations. In addition, certain other assets of Payment Services subsidiaries are available if necessary to meet such obligations. Accordingly, such assets are not available to satisfy working capital or other financing requirements of Viad. As described in notes to Viad's annual financial statements, a Payment Services subsidiary hedges a substantial portion of the variable-rate commission payments to its selling agents and the net proceeds of selling receivables from its bill payment and money order agents through swap agreements (see Note D). The swap agreements effectively convert such variable rates to fixed rates. Under normal circumstances, the swap agreements will not be terminated prior to maturity, nor is there any requirement to sell long-term debt securities prior to maturity, as the funds flow from ongoing sales of money orders and other payment instruments and funds from maturing long-term and short-term investments are expected to be adequate to settle payment service items as they are presented. Page 6 The following is a summary of asset and liability carrying amounts related to the payment service obligations, including additional subsidiary funds and the fair value of related swap agreements:
September 30, December 31, (000 omitted) 2001 2000 ------------------------------------------------------------------------------------------------------ Funds, agents' receivables and current maturities of investments restricted for payment service obligations $ 633,960 $ 1,194,545 Investments restricted for payment service obligations (1) 4,975,547 3,630,615 Other assets available for payment service obligations 7,746 24,781 Payment service obligations (5,305,957) (4,607,296) Fair value of swap agreements (2) (143,602) (12,297) ------------------------------------------------------------------------------------------------------ Total $ 167,694 $ 230,348 ======================================================================================================
(1) Securities classified as "available-for-sale" are carried at market value, and securities classified as "held-to-maturity" are carried at amortized cost in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" (see Note C). (2) The fair value represents the estimated amounts that Viad would pay to counterparties to terminate the swap agreements at September 30, 2001 and December 31, 2000. At December 31, 2000, the fair value of such swap agreements was not included in Viad's Consolidated Balance Sheet (see Note D). NOTE C - INVESTMENTS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS Effective January 1, 2001, Viad elected to transfer $260,026,000 in carrying value of securities classified as held-to-maturity to securities classified as available-for-sale as permitted in conjunction with the initial application of SFAS No. 133 without calling into question management's intent or ability to hold other securities as held-to-maturity. The transfer was reflected as an increase in the carrying value of the investments of $6,184,000, with a corresponding deferred tax liability of $2,412,000 and a transition adjustment of $3,772,000 reflected in other comprehensive income. Investments restricted for payment service obligations are classified as follows:
September 30, December 31, (000 omitted) 2001 2000 ---------------------------------------------------------------------------------------------------- Securities classified as available-for-sale, at fair value (amortized cost of $3,356,070 and $2,309,645) $ 3,459,454 $2,310,493 Securities classified as held-to-maturity, at amortized cost (fair value of $1,567,199 and $1,357,531) 1,516,093 1,325,225 ---------------------------------------------------------------------------------------------------- 4,975,547 3,635,718 Less current maturities (5,103) ---------------------------------------------------------------------------------------------------- $ 4,975,547 $3,630,615 ====================================================================================================
Page 7 NOTE D - DERIVATIVE FINANCIAL INSTRUMENTS Viad uses derivative financial instruments as part of its risk management strategy to manage exposure to fluctuations in interest and foreign currency rates. Derivatives are not used for speculative purposes. A portion of Viad's Payment Services business involves the payment of variable-rate commissions to selling agents of its official check program. In addition, a Viad Payment Services subsidiary has agreements to sell, on a periodic basis, undivided percentage ownership interests in certain receivables from bill payment and money order agents. The receivables are sold at a discount, based on short-term variable interest rates. Variable-to-fixed rate swap agreements have been entered into to mitigate the effects of fluctuations on commission expense and on the net proceeds from the agents' receivable sales. On January 1, 2001, Viad adopted SFAS No. 133 and its related amendments and interpretations. SFAS No. 133 requires that entities record all derivatives as either assets or liabilities, measured at fair value, with the change in fair value of the derivative recognized in earnings or in other comprehensive income, depending on the use of the derivative and whether it qualifies for hedge accounting. Viad's swap agreements have been designated and qualify as cash flow hedges. The length of time over which future cash flows are hedged ranges from two to seven years. Upon adoption of SFAS No. 133, Viad recorded a liability of $12,297,000 (representing the fair value of Viad's swap agreements), a corresponding deferred tax asset of $4,796,000, and a transition adjustment of $7,501,000 reflected in other comprehensive income. At September 30, 2001, the current portion of the fair value of the swap agreements totaling $3,951,000 is included under the caption, "Other current liabilities." The $139,651,000 noncurrent portion of the swap agreements is included under the caption, "Derivative financial instruments." The effective portion of the change in fair values of derivatives that qualify as cash flow hedges under SFAS No. 133 is recorded in other comprehensive income. Amounts receivable or payable under the swap agreements are reclassified from other comprehensive income to net income as an adjustment to the expense of the related transaction. These amounts are included in the Consolidated Income Statements under "Costs of sales and services." The amount recognized in earnings due to ineffectiveness of the cash flow hedges was not material. No cash flow hedges were discontinued during the quarter. Viad is also exposed to foreign currency exchange risk. Forward contracts used to hedge assets and liabilities denominated in foreign currencies are recorded on the Consolidated Balance Sheets at fair value, with the change in fair value reflected in earnings. Viad records these forward contracts consistent with the accounting requirements under SFAS No. 52, "Foreign Currency Translation." While these contracts economically hedge Viad's foreign currency risk, they are not designated as hedges for accounting purposes under SFAS No. 133. The effect of changes in foreign exchange rates on the foreign-denominated receivables and payables, net of the effect of the related forward contracts, was not significant. NOTE E - DEBT Effective August 31, 2001, Viad completed credit facilities totaling $425,000,000 to replace its previous $300,000,000 revolving bank credit agreement and to support letters of credit and a Canadian facility without increasing Viad's overall credit capacity. The $425,000,000 includes a $225,000,000 five-year facility and a $200,000,000 364-day facility. At September 30, 2001 and December 31, 2000, Viad classified as long-term debt $130,833,000 and $145,503,000, respectively, of short-term borrowings supported by unused commitments under the applicable long-term revolving credit facility. Page 8 NOTE F - INCOME TAXES A reconciliation of the provision (benefit) for income taxes and the amount that would be computed using statutory federal income tax rates on income before income taxes for the nine months ended September 30, is as follows:
(000 omitted) 2001 2000 ------------------------------------------------------------------------------------------------------------ Computed income taxes at statutory federal income tax rate $ 5,539 35.0% $ 48,445 35.0% Nondeductible goodwill amortization 2,614 16.5% 2,536 1.8% State income taxes 402 2.5% 2,598 1.9% Other, net 1,596 10.1% 1,272 0.9% ------------------------------------------------------------------------------------------------------------ 10,151 64.1% 54,851 39.6% Tax-exempt income (20,548) (129.7%) (27,310) (19.7%) Adjustment to estimated annual effective rate (1) 275 1.7% (1,500) (1.1%) ------------------------------------------------------------------------------------------------------------ Income tax expense (benefit) $ (10,122) (63.9%) $ 26,041 18.8% ============================================================================================================
(1) Generally accepted accounting principles for interim financial reporting (APB Opinion No. 28) requires that income taxes be provided based on the estimated effective tax rate expected to be applicable for the entire fiscal year. Excluding the effect of the total restructuring charges and other items on pre-tax income (see Note H), the estimated effective tax rate for the first nine months of 2001 and 2000 was 25.0 percent and 18.2 percent, respectively. The estimated 25 percent effective tax rate for 2001 is higher than the comparable 2000 tax rate due to lower tax-exempt income in proportion to total pre-tax income, resulting from a shift in the mix of investments from nontaxable to taxable investments. Even though nontaxable investments generally have higher after-tax yields than taxable investments, Viad has shifted its mix of nontaxable and taxable investments to balance its alternative minimum tax position. A reconciliation of the provision for income taxes and the amount that would be computed using statutory federal income tax rates on pre-tax income before total restructuring charges and other items for the nine months ended September 30, is as follows:
(000 omitted) 2001 2000 -------------------------------------------------------------------------------------------- Computed income taxes at statutory federal income tax rate $ 40,670 35.0% $ 47,713 35.0% Nondeductible goodwill amortization 2,614 2.3% 2,536 1.9% State income taxes (1) 4,657 4.0% 2,509 1.8% Other, net 1,381 1.2% 879 0.6% -------------------------------------------------------------------------------------------- 49,322 42.5% 53,637 39.3% Tax-exempt income (20,548) (17.7%) (27,310) (20.0%) Adjustment to estimated annual effective rate 275 0.2% (1,500) (1.1%) -------------------------------------------------------------------------------------------- Income tax expense $ 29,049 25.0% $ 24,827 18.2% ============================================================================================
(1) Due to lower operating income in the Convention and Events Services segment, tax savings associated with filing consolidated state income tax returns is lower than anticipated, resulting in a higher effective state tax rate. NOTE G - SEGMENT INFORMATION Viad measures profit and performance of its operations on the basis of operating income before restructuring charges and other items. An adjustment is made to the Payment Services segment to present revenues and operating income on a fully taxable equivalent basis as though amounts were invested in taxable investments. Intersegment sales and transfers are not significant. Corporate activities include expenses not allocated to Page 9 operations. Consolidated revenues, operating income and interest expense in 2000 reflect the elimination of intercompany interest payments on investments in Viad commercial paper by a Payment Services subsidiary. Disclosures regarding Viad's reportable segments along with a reconciliation to income (loss) before income taxes as presented in the Consolidated Statements of Income are shown below.
Quarter ended September 30, Nine months ended September 30, (000 omitted) 2001 2000 2001 2000 ------------------------------------------------------------------------------------------------------------------------------------ Revenues: Payment Services $ 192,033 $ 173,533 $ 558,351 $ 493,018 Convention and Event Services 171,090 228,276 715,046 785,766 ------------------------------------------------------------------------------------------------------------------------------------ Reportable segments 363,123 401,809 1,273,397 1,278,784 Travel and Recreation Services 37,913 43,825 57,448 66,740 ------------------------------------------------------------------------------------------------------------------------------------ SUBTOTAL, ONGOING OPERATIONS 401,036 445,634 1,330,845 1,345,524 Sold travel and recreation businesses 1,359 19,023 Intercompany interest elimination (452) (2,074) Less taxable equivalent adjustment (10,950) (17,525) (36,629) (48,710) ------------------------------------------------------------------------------------------------------------------------------------ $ 390,086 $ 429,016 $ 1,294,216 $ 1,313,763 ==================================================================================================================================== Operating income before total restructuring charges and other items: Payment Services $ 44,391 $ 43,566 $ 122,868 $ 111,622 Convention and Event Services (1) (7,110) 12,803 41,118 73,593 ------------------------------------------------------------------------------------------------------------------------------------ Reportable segments 37,281 56,369 163,986 185,215 Travel and Recreation Services 14,574 17,260 16,435 20,577 ------------------------------------------------------------------------------------------------------------------------------------ SUBTOTAL, ONGOING OPERATIONS 51,855 73,629 180,421 205,792 Sold travel and recreation businesses 310 2,467 Corporate activities and minority interests (2,353) (3,414) (11,033) (13,440) Intercompany interest elimination (452) (2,074) Less taxable equivalent adjustment (10,950) (17,525) (36,629) (48,710) ------------------------------------------------------------------------------------------------------------------------------------ 38,552 52,548 132,759 144,035 Other investment income 1,326 2,642 4,096 10,863 Interest expense (6,323) (5,923) (20,656) (18,575) Total restructuring charges and other items (71,100) 2,091 (100,374) 2,091 ------------------------------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes $ (37,545) $ 51,358 $ 15,825 $ 138,414 ====================================================================================================================================
(1) Before $3,730,000 of inventory write-downs included in total restructuring charges and other items. NOTE H - RESTRUCTURING CHARGES AND OTHER ITEMS In July 2001, Viad announced its intent to develop a restructuring plan designed to realign its cost structure in response to the economic downturn. Accordingly, in the 2001 third quarter, Viad recorded restructuring charges totaling $66,100,000 ($39,910,000 after-tax, or $0.46 per diluted share) of which $3,730,000 (relating to the write-down of certain inventories) was charged to "Cost of sales and services." The remaining $62,370,000 was classified under the caption, "Restructuring charges and other items." The charges, relating primarily to the Convention and Event Services segment, consist of costs associated with the closure and consolidation of certain facilities and severance and other employee benefits related to the elimination of approximately 800 positions across numerous regions, business functions and job classes. Page 10 The charges also include amounts for the write-down (net of estimated sales proceeds) of certain inventories and assets, facilities closure and lease termination costs (less estimated sublease income) and other exit costs. The write-down of assets was based on impairment analyses, including discounted cash flow and estimates of the net realizable value of the assets to be disposed of. A summary of the restructuring charges and amounts utilized is as follows: Severance and benefits $ 13,914,000 Facility closure and lease termination 30,252,000 Asset impairment 20,322,000 Other 1,612,000 ------------ Total restructuring charges 66,100,000 Less reductions to reserve: Cash paid, primarily severance and benefits (2,200,000) Asset write-downs (20,322,000) ------------ Reserve balance at September 30, 2001 $ 43,578,000 ============
Viad expects to substantially complete the restructuring activities by December 31, 2001. However, payments due under long-term lease obligations will continue to be made over the remaining terms of the leases. As of September 30, 2001, approximately 150 employees have left Viad under this restructuring plan. During the 2001 third quarter, Viad's Payment Services subsidiary recorded a noncash charge totaling $5,000,000 ($3,026,000 after-tax, or $0.04 per diluted share) resulting from the bankruptcy of a large money order agent in late September. On August 18, 2000, Key3Media Group, Inc. ("Key3Media"), a company spun off by Ziff-Davis Inc., terminated a long-term agreement with GES Exposition Services, Inc. ("GES") to produce tradeshows. The companies have been involved in litigation regarding the contract termination. GES and Key3Media have agreed to end the litigation. As a result of the settlement, Viad recorded a second quarter 2001 noncash provision totaling $29,274,000 ($18,267,000 after-tax, or $0.21 per diluted share) representing primarily the write-off of net receivables and prepayments made to Key3Media. The settlement will have no adverse impact on future operations. Nonrecurring income of $2,091,000 ($877,000 after-tax, or $0.01 per diluted share) was recorded in the 2000 third quarter. The nonrecurring income included a gain of $10,256,000 ($5,655,000 after-tax) on the July 13, 2000 sale of Viad's concession operations, after deducting costs of sale and related expense provisions. Also included in this item was a charge of $8,165,000 ($4,778,000 after-tax) taken to streamline and consolidate certain operations in Viad's Convention and Event Services segment. In addition to costs related to reductions in headcount, the charge included the write-down of certain fixed assets and facility closure costs, all of which were incurred or recorded (assets written down) by June 30, 2001. NOTE I - RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" (effective July 1, 2001) and SFAS No. 142, "Goodwill and Other Intangible Assets" (effective for Viad on January 1, 2002). SFAS No. 141 prohibits pooling-of-interests accounting for acquisitions. SFAS No. 142 specifies that goodwill and some intangible assets will no longer be amortized but instead will be subject to periodic impairment testing. Because some goodwill amortization is nondeductible for tax purposes, the impact of ceasing goodwill amortization (based on Viad's current levels of goodwill) is estimated to increase Viad's annual net income by approximately $14,400,000, or $0.17 per diluted share. Viad is in the process of evaluating the impact of SFAS No. 142 on its other intangible assets and has not yet determined if a cumulative effect adjustment will be required upon adoption. Page 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS: Viad Corp ("Viad") focuses on two principal service businesses: Payment Services and Convention and Event Services. There were no material changes in the nature of Viad's business, nor were there any changes in the general characteristics of its operations as described and discussed in the "Results of Operations" section of Management's Discussion and Analysis of Results of Operations and Financial Condition presented in the Viad Corp Annual Report on Form 10-K for the year ended December 31, 2000. All per share figures discussed are stated on the diluted basis. COMPARISON OF THIRD QUARTER OF 2001 TO THE THIRD QUARTER OF 2000: In the third quarter of 2001, revenues decreased 9.1 percent, to $390.1 million from $429.0 million in 2000. Payment Services invests in an appropriate mix of tax-exempt and taxable investments. The tax-exempt investments have lower pre-tax yields but produce higher income on an after-tax basis than comparable taxable investments. Fully taxable equivalent information is used by management to measure profit and performance of Viad's operations. This information is supplemental to results presented under generally accepted accounting principles. Revenues of ongoing operations on a fully taxable equivalent basis were $401.0 million in the 2001 third quarter, down 10.0 percent. Operating income on the same basis (excluding total restructuring charges and other items) was $51.9 million for the 2001 third quarter compared with $73.6 million for the prior year, and operating margins were 12.9 percent in 2001 compared to 16.5 percent in 2000. See Note G of Notes to Consolidated Financial Statements. In addition to previous actions to reduce costs, during the third quarter of 2001, Viad recorded total restructuring charges and other items of $71.1 million ($42.9 million after-tax, or $0.50 per share). Restructuring charges associated with the closure and consolidation of facilities and severance totaled $66.1 million ($39.9 million after-tax) of which $3.7 million (relating to the write-down of certain inventories) was charged to "Cost of sales and services" and $62.4 million was classified under the caption, "Restructuring charges and other items." The charges were higher than previously announced as management determined that more facilities needed to be closed or consolidated in response to the continued deterioration in the economy. In addition, the impact of the September 11th terrorist attacks on the World Trade Center and the Pentagon compounded the cancellation and reduced attendance trends at certain tradeshows and events and added to a sharp drop in orders for new exhibits. By realigning its cost structure, especially in the Convention and Event Services segment, Viad expects annualized pre-tax cost savings of $30 million to $35 million. Also in the 2001 third quarter, Viad's Payment Services subsidiary recorded a noncash charge of $5 million ($3 million after-tax) resulting from the bankruptcy of a large money order agent in late September. The charge was included under the caption "Restructuring charges and other items." During the 2000 third quarter, Viad recorded nonrecurring income, net, totaling $2.1 million ($877,000 after-tax, or $0.01 per share). See Note H of Notes to Consolidated Financial Statements. The net loss for the third quarter of 2001 was $15.8 million, or $0.19 per share, compared to net income of $44.0 million, or $0.48 per share, for the third quarter of 2000. Excluding the total restructuring charges and other items described above, third quarter 2001 income was $27.2 million, or $0.31 per share, compared to $43.1 million, or $0.47 per share, for the third quarter of 2000. Page 12
Quarter ended September 30, (000 omitted, except per share data) 2001 2000 ------------------------------------------------------------------------------------- Income before restructuring charges and other items $ 27,172 $ 43,135 Total restructuring charges and other items (42,936) 877 ------------------------------------------------------------------------------------- Net income (loss) $ (15,764) $ 44,012 ===================================================================================== Diluted net income per common share: Income before restructuring charges and other items $ 0.31 $ 0.47 Total restructuring charges and other items (0.50) 0.01 ------------------------------------------------------------------------------------- Net income (loss) per share $ (0.19) $ 0.48 =====================================================================================
Cash earnings per share, defined as income before total restructuring charges and other items plus after-tax goodwill amortization, was $0.35, down 31 percent from the 2000 third quarter. Cash earnings per share does not represent a measure of cash flows from operations as defined by generally accepted accounting principles and may not be comparable to similarly titled measures reported by other companies. The $0.04 increase between the $0.31 diluted earnings per share before restructuring charges and other items and the $0.35 cash earning per share represents the pro forma impact resulting from applying Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets," which will be effective for Viad on January 1, 2002. See Note I of Notes to Consolidated Financial Statements. There were 5.0 million fewer average outstanding and potentially dilutive common shares in the third quarter of 2001 than in the third quarter of 2000, due primarily to share repurchases during 2000 and in the first quarter of 2001. PAYMENT SERVICES. On a fully taxable equivalent basis, third quarter 2001 revenues of the Payment Services segment were $192.0 million, up $18.5 million, or 10.7 percent, from 2000 third quarter revenues. On the same basis and before the restructuring charges and other items described above, operating income increased $825,000, or 1.9 percent. Operating margins on a fully taxable equivalent basis were 23.1 percent in the third quarter of 2001 compared with 25.1 percent in the 2000 third quarter. Official check operations continued to report excellent growth, reflecting the ramp-up of new business. MoneyGram transaction volume grew 29 percent in the 2001 quarter, with all corridors showing improvement. MoneyGram's agent base expanded by 18 percent over the 2000 quarter. Money order transaction volume was essentially flat this quarter due to stricter credit requirements imposed by management for new and existing agents. Game Financial results declined from historic levels due to a heightened competitive pricing environment. In addition, results were impacted by increased credit reserves during the third quarter and to a lesser degree business disruptions following the September 11th tragedy. Average investable funds were $4.9 billion, up 25 percent from the 2000 quarter. The growth in investable balances was partially offset by lower effective interest rates on new investments. Results were impacted by the effects of a shift in a portion of the mix of investments from nontaxable to taxable investments. Even though nontaxable investments generally have higher after-tax yields than taxable investments, Viad has shifted its mix of nontaxable and taxable investments to balance its alternative minimum tax position. At December 31, 2000, tax-exempt investments represented 45% of the total investment portfolio versus 24% at September 30, 2001. Page 13 CONVENTION AND EVENT SERVICES. Convention and Event Services revenues decreased $57.2 million, or 25.1 percent, to $171.1 million in the third quarter of 2001. Excluding the total restructuring charges described above, the third quarter operating loss was $7.1 million compared with operating income of $12.8 million in the prior year. Results for the third quarter were negatively affected by continued overall softness in the economy and by show rotation. Customers continue to delay or cancel exhibit construction or refurbish old exhibits rather than build new exhibits. Following the events of September 11, certain shows and exhibit orders were canceled, and convention attendance trends declined due to travel concerns. Pressure on the segment is expected to continue throughout the remainder of the year. The segment continues to focus on eliminating and controlling overhead and other costs. As previously described, Viad expanded its restructuring plans to lower the segment's fixed cost structure. TRAVEL AND RECREATION SERVICES. Revenues of the ongoing travel and recreation businesses were $37.9 million for the third quarter of 2001, down $5.9 million, or 13.5 percent, from 2000 third quarter revenues. Operating income was $14.6 million in the 2001 third quarter compared to $17.3 million in the 2000 third quarter. Operating margins were 38.4 percent in the third quarter of 2001 compared with 39.4 percent in the prior year. The decrease in revenues and operating income from the prior year is primarily due to a decline in tourism to Canada and Glacier National Park (Montana) resulting from continued uncertainty in the economy and the September 11th terrorist attacks. NET INTEREST EXPENSE. Other investment income was $1.3 million and $2.6 million in the third quarter of 2001 and 2000, respectively. The decline in interest income is due primarily to the use of investment proceeds for the purchase of treasury shares throughout 2000 and in the first quarter of 2001. Interest expense in the third quarter of 2001 increased to $6.3 million compared to $5.9 million in the third quarter of 2000. Lower short-term interest rates were offset by higher average borrowings during the 2001 quarter. INCOME TAXES. Excluding the total restructuring charges and other items, the effective tax rate in the 2001 third quarter was 19.0 percent compared to 12.4 percent for the third quarter of 2000. The relatively low effective tax rate compared to the statutory federal rate is primarily attributable to tax-exempt income from Viad's Payment Services businesses. COMPARISON OF FIRST NINE MONTHS OF 2001 TO THE FIRST NINE MONTHS OF 2000: Revenues for the first nine months of 2001 decreased $19.5 million, or 1.5 percent, to $1.294 billion from $1.314 billion in 2000. Revenues of ongoing operations on a fully taxable equivalent basis decreased 1.1 percent to $1.331 billion. Operating income on the same basis (excluding total restructuring charges and other items) was $180.4 million for the first nine months of 2001 compared with $205.8 million for the prior year, and operating margins were 13.6 percent in 2001 compared to 15.3 percent in 2000. See Note G of Notes to Consolidated Financial Statements. Net income for the first nine months of 2001 was $25.9 million, or $0.29 per share, compared to $112.4 million, or $1.22 per share, for the first nine months of 2000. Before the total restructuring charges and other items previously discussed, net income for the first nine months of 2001 was $87.2 million, or $1.00 per share, compared with $111.5 million, or $1.21 per share in 2000. Page 14
Nine months ended September 30, (000 omitted, except per share data) 2001 2000 ------------------------------------------------------------------------------------------- Income before restructuring charges and other items $ 87,150 $ 111,496 Total restructuring charges and other items (61,203) 877 ------------------------------------------------------------------------------------------- Net income $ 25,947 $ 112,373 =========================================================================================== Diluted net income per common share: Income before restructuring charges and other items $ 1.00 $ 1.21 Total restructuring charges and other items (0.71) 0.01 ------------------------------------------------------------------------------------------- Net income per share $ 0.29 $ 1.22 ===========================================================================================
Cash earnings per share, as defined above, was $1.12 for the first nine months of 2001, down 15.8 percent from the comparable 2000 period. There were 5.4 million fewer average outstanding and potentially dilutive common shares in the first nine months of 2001 than in the first nine months of 2000, due primarily to share repurchase programs throughout 2000 and during the first quarter of 2001. PAYMENT SERVICES. On a fully taxable equivalent basis, revenues of the Payment Services segment for the first nine months of 2001 were $558.4 million, up $65.3 million, or 13.3 percent, from 2000 nine month revenues. On the same basis and before the restructuring charges and other items previously described, operating income increased $11.2 million, or 10.1 percent. Operating margins on the fully taxable equivalent basis were 22.0 percent for the first nine months of 2001, compared with 22.6 percent in the first nine months of 2000. Official check operations continued strong growth, reflecting the ramp-up of key new accounts. Transaction volume for MoneyGram grew 22 percent over the prior year, with strong growth in Express Payment and in the Latin America and international corridors. Money order results were even with last year. Game Financial results declined from historic levels due to a heightened competitive pricing environment. Average investable funds were 27 percent higher in 2001 than in the 2000 period, resulting in higher investment income. In addition, results were impacted by the effects of a shift in a portion of the mix of investments from higher-yield nontaxable to lower-yield taxable investments as discussed previously. CONVENTION AND EVENT SERVICES. Convention and Event Services revenues decreased $70.7 million, or 9.0 percent, to $715.0 million in 2001 from $785.8 million in the 2000 nine month period. Excluding the total restructuring charges described previously, operating income for the segment was $41.1 million, down $32.5 million from $73.6 million in the 2000 period. Operating margins were 5.8 percent compared with 9.4 percent in 2000. Results for the year have been impacted by overall softness in the economy and by show rotation. Many customers have delayed or canceled exhibit construction and attendance at tradeshows in response to the uncertain economy. Following the events of September 11, certain shows and exhibit orders were canceled, and convention attendance trends declined due to travel concerns. Pressure on the segment is expected to continue throughout the remainder of the year. As described previously, the segment has begun implementation of restructuring plans to change its organizational structure to make operations more efficient and competitive. TRAVEL AND RECREATION SERVICES. For the first nine months of 2001, revenues of the ongoing travel and recreation businesses were $57.4 million, down $9.3 million, or 13.9 percent, from the first nine months of 2000, while operating income decreased $4.1 million for the same period. The decrease in revenue and operating income relates primarily to a decline in tourism due a soft economy, higher fuel costs, and the September 11 terrorist attacks. Page 15 NET INTEREST EXPENSE. Other investment income was $4.1 and $10.9 million in the first nine months of 2001 and 2000, respectively. The decline in interest income is due primarily to the use of investment proceeds for the purchase of treasury shares throughout 2000 and during the first quarter of 2001. Interest expense for the first nine months of 2001 was $20.7 million compared to $18.6 million for the comparable 2000 period. Higher average borrowings during 2001 were partially offset by the effects of a decrease in short-term interest rates. INCOME TAXES. Excluding the total restructuring charges and other items, the effective tax rate for the first nine months of 2001 was 25.0 percent compared to 18.2 percent for the first nine months of 2000. The relatively low effective tax rate compared to the statutory federal rate is primarily attributable to tax-exempt income from Viad's Payment Services businesses. APB Opinion No. 28 requires that income taxes be provided based on the estimated effective tax rate expected to be applicable for the entire fiscal year. The estimated annual tax rate for 2001 is expected to be higher than the rate in 2000 due to lower tax-exempt income in proportion to total pre-tax income, resulting from a shift in the mix of investments from nontaxable to taxable investments. Even though nontaxable investments generally have higher after-tax yields than taxable investments, Viad has shifted its mix of nontaxable and taxable investments to balance its alternative minimum tax position. In addition, due to lower operating income in the Convention and Events Services segment, tax savings associated with filing consolidated state income tax returns is lower than anticipated, resulting in a higher effective state tax rate. See Note F of Notes to Consolidated Financial Statements. LIQUIDITY AND CAPITAL RESOURCES: Viad's total debt at September 30, 2001 was $403.5 million compared with $447.1 million at December 31, 2000. The debt-to-capital ratio was 0.35 to 1 at September 30, 2001 and 0.37 to 1 at December 31, 2000. Effective August 31, 2001, Viad completed credit facilities totaling $425 million to replace its previous $300 million revolving bank credit agreement and to support letters of credit and a Canadian facility without increasing Viad's overall credit capacity. The $425 million includes a $225 million five-year facility and a $200 million 364-day facility. During the first nine months of 2001 (primarily in the first quarter), Viad purchased 1.4 million treasury shares for $34.6 million under Viad's stock repurchase programs. Net proceeds from the exercise of stock options totaled $14.5 million during the first nine months of 2001. EBITDA is a measure of Viad's ability to service debt, fund capital expenditures and finance growth, and should be considered in addition to, but not as a substitute for, other measures of financial performance reported in accordance with generally accepted accounting principles. EBITDA is defined by Viad as net income before interest expense, income taxes, depreciation and amortization and restructuring charges and other items and includes the fully taxable equivalent adjustment. EBITDA for the first nine months of 2001 was $226.1 million, down from $256.3 million in the 2000 period, resulting from lower operating income and the decline in investment income. There were no other material changes in Viad's financial condition nor were there any substantive changes relative to matters discussed in the "Liquidity and Capital Resources" section of Management's Discussion and Analysis of Results of Operations and Financial Condition as presented in Viad Corp's Annual Report on Form 10-K for the year ended December 31, 2000. Page 16 FORWARD-LOOKING STATEMENTS: As provided by the safe harbor provision under the "Private Securities Litigation Reform Act of 1995," Viad cautions readers that, in addition to the historical information contained herein, this Quarterly Report on Form 10-Q includes certain forward-looking statements, assumptions and discussions, including those relating to estimates, plans, expectations of or current trends in future growth, productivity improvements, consumer demand, new business, investment policies, ongoing cost reduction efforts, efficiency, competitiveness, tax rates, restructuring plans (including timing and realization of cost savings), and market risk disclosures. Such statements involve risks and uncertainties which may cause results to differ materially from those set forth in those statements. Among other things, gains and losses of customers, consumer demand patterns, labor relations, purchasing decisions related to customer demand for convention and event services, existing and new competition, industry alliances and consolidation and growth patterns within the industries in which Viad competes may individually or in combination impact future results. In addition to the factors mentioned elsewhere, economic, competitive, governmental, technological, capital marketplace and other factors could affect the forward-looking statements contained in this filing. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Viad's primary market risk exposures are fluctuations in interest rates and foreign exchange rates. Certain derivative financial instruments are used as part of Viad's risk management strategy to manage exposure to changes in these rates. Derivatives are not used for speculative purposes. As described in Notes B and C, debt and equity securities classified as "available-for-sale" are carried at fair value, with the net unrealized holding gain or loss included in the Consolidated Balance Sheets as a component of "Accumulated other comprehensive income." A portion of Viad's Payment Services business involves the payment of commissions to selling agents of its official check program as described in Note D. A Viad Payment Services subsidiary has also entered into agreements to sell receivables from its bill payment and money order agents. The agent commissions and net proceeds from the agents' receivables sales are computed based on short-term variable interest rates that subject Viad to risk arising from changes in such rates. Viad has hedged a substantial portion of this risk through swap agreements that convert the variable-rate payments to fixed rates. Viad is also exposed to short-term interest rate risk on certain of its debt obligations. Based on a hypothetical 10 percent proportionate increase in interest rates from the average level of interest rates during the last twelve months, and taking into consideration expected investment positions, commissions payable to selling agents, growth in new business, the effects of the swap agreements and the expected borrowing level of variable-rate debt, the annual increase in pre-tax income would be approximately $2.6 million. A hypothetical 10 percent proportionate decrease in interest rates, based on the same set of assumptions, would result in an annual decrease in pre-tax income of approximately $3.6 million. The fair value of securities classified as available-for-sale, the fair value of the swap agreements and the fair value of fixed-rate debt are sensitive to changes in interest rates. A 10 percent proportionate increase in interest rates would result in an estimated decrease in the fair value of securities classified as available-for-sale of approximately $78.1 million (along with an after-tax decrease in accumulated other comprehensive income of approximately $47.7 million), an estimated increase in the fair value of Viad's swap agreements of approximately $44.0 million (along with an after-tax increase in accumulated other comprehensive income of $26.9 million) and an estimated off-balance-sheet decrease in the fair value of Viad's fixed-rate debt of approximately $1.5 million. A 10 percent proportionate decrease in interest rates would result in an estimated increase in the fair value of securities classified as available-for-sale of approximately $74.9 million (along with an after-tax increase in accumulated other comprehensive income of approximately $45.7 million), an estimated Page 17 off-balance-sheet decrease in the fair value of Viad's swap agreements of approximately $44.0 million (along with an after-tax decrease in accumulated other comprehensive income of $26.9 million) and an estimated off-balance-sheet increase in the fair value of Viad's fixed-rate debt of approximately $1.5 million. PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the third quarter of 2001. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit No. 4.A - Copy of U.S. $225,000,000 Amended and Restated Credit Agreement (Long-Term Revolving Credit Facility) dated as of August 31, 2001, among Viad Corp and Greyhound Canada Holdings, Inc., the Banks parties thereto, the Lenders parties thereto, Bank One, NA, as Issuing Lender, Citicorp USA, Inc. as Administrative Agent and Citibank Canada as Canadian Agent. Exhibit No. 4.B - Copy of U.S. $200,000,000 Credit Agreement (Short-Term Revolving Credit Facility) dated as of August 31, 2001, among Viad Corp, the Banks parties thereto, the Lenders parties thereto, and Citicorp USA, Inc. as Administrative Agent. Exhibit No. 10.A - Copy of Travelers Express Company, Inc. Supplemental Pension Plan restated as of January 1, 2001. Exhibit No. 10.B - Copy of GES Exposition Services, Inc. Supplemental Executive Retirement Plan, restated as of January 1, 2001. (b) No reports on Form 8-K were filed by the registrant during the quarter for which this report is filed. SIGNATURES 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. VIAD CORP (Registrant) October 23, 2001 By /s/ Catherine L. Stevenson ----------------------------- Catherine L. Stevenson Vice President - Controller (Chief Accounting Officer and Authorized Officer) Page 18 EXHIBITS INDEX
EXHIBIT # 4.A Copy of U.S. $225,000,000 Amended and Restated Credit Agreement (Long-Term Revolving Credit Facility) dated as of August 31, 2001, among Viad Corp and Greyhound Canada Holdings, Inc., the Banks parties thereto, the Lenders parties thereto, Bank One, NA, as Issuing Lender, Citicorp USA, Inc. as Administrative Agent and Citibank Canada as Canadian Agent. 4.B Copy of U.S. $200,000,000 Credit Agreement (Short-Term Revolving Credit Facility) dated as of August 31, 2001, among Viad Corp, the Banks parties thereto, the Lenders parties thereto, and Citicorp USA, Inc. as Administrative Agent. 10.A Copy of Travelers Express Company, Inc. Supplemental Pension Plan restated as of January 1, 2001. 10.B Copy of GES Exposition Services, Inc. Supplemental Executive Retirement Plan, restated as of January 1, 2001.