UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31,June 30, 2002
Commission file number 001-11015
VIAD CORP
(Exact
| DELAWARE (State or other jurisdiction of incorporation or organization) | 36-1169950 (I.R.S. Employer Identification No.) |
| 1850 N. CENTRAL AVE., PHOENIX, ARIZONA (Address of principal executive offices) | 85077 (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
----- -----
| Yes |  | No |  |
As of March 31,June 28, 2002, 88,863,72789,199,040 shares of Common Stock ($1.50 par value) were outstanding.
PART I. FINANCIAL INFORMATION
ITEM
Item 1. FINANCIAL STATEMENTS
Financial Statements
VIAD CORP
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(000 omitted, except share data) 2002 2001
----------- -----------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 45,746 $ 46,593
Short-term investments 131,070 118,021
Receivables 95,504 64,134
Inventories 49,470 55,682
Deferred income taxes 45,501 45,916
Other current assets 38,429 48,555
----------- -----------
405,720 378,901
Funds, agents' receivables and current maturities of investments
restricted for payment service obligations 1,394,070 1,476,475
----------- -----------
Total current assets 1,799,790 1,855,376
Investments in securities 44,434 51,535
Investments restricted for payment service obligations 5,432,422 5,422,899
Property and equipment 254,424 260,480
Other investments and assets 101,748 67,715
Deferred income taxes 76,270 82,764
Goodwill 587,135 587,365
Other intangible assets 35,511 35,925
----------- -----------
$ 8,331,734 $ 8,364,059
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short-term bank loans $ -- $ 457
Accounts payable 64,517 60,913
Other current liabilities 236,071 203,702
Current portion of long-term debt 42,221 42,224
----------- -----------
342,809 307,296
Payment service obligations 6,579,923 6,649,722
----------- -----------
Total current liabilities 6,922,732 6,957,018
Long-term debt 348,902 354,147
Pension and other postretirement benefits 94,531 94,424
Derivative financial instruments 64,160 91,414
Other deferred items and insurance liabilities 134,883 135,420
Minority interests 5,720 5,284
$4.75 Redeemable preferred stock 6,685 6,679
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 235,072 225,003
Retained income 786,368 762,008
Unearned employee benefits and other (87,303) (82,952)
Accumulated other comprehensive income:
Unrealized gain on securities classified as available for sale 6,773 29,876
Unrealized loss on derivative financial instruments (24,308) (53,875)
Cumulative translation adjustments (13,552) (13,211)
Minimum pension liability adjustment (13,739) (13,739)
Common stock in treasury, at cost, 10,876,198 and 10,806,006 shares (284,800) (283,047)
----------- -----------
Total common stock and other equity 754,121 719,673
----------- -----------
$ 8,331,734 $ 8,364,059
=========== ===========
| June 30, 2002 | December 31, | |||||||||
| (000 omitted, except share data) | (Unaudited) | 2001 | ||||||||
ASSETS | ||||||||||
| Current assets: | ||||||||||
| Cash and cash equivalents | $ | 55,341 | $ | 46,593 | ||||||
| Short-term investments | 174,306 | 118,021 | ||||||||
| Receivables | 76,606 | 64,134 | ||||||||
| Inventories | 51,248 | 55,682 | ||||||||
| Deferred income taxes | 40,635 | 45,916 | ||||||||
| Other current assets | 34,842 | 48,555 | ||||||||
| 432,978 | 378,901 | |||||||||
| Funds, agents’ receivables and current maturities of investments restricted for payment service obligations | 1,902,554 | 1,476,475 | ||||||||
| Total current assets | 2,335,532 | 1,855,376 | ||||||||
| Investments in securities | 41,212 | 51,535 | ||||||||
| Investments restricted for payment service obligations | 5,488,219 | 5,422,899 | ||||||||
| Property and equipment | 256,263 | 260,480 | ||||||||
| Other investments and assets | 77,875 | 67,715 | ||||||||
| Deferred income taxes | 75,434 | 82,764 | ||||||||
| Goodwill | 548,787 | 587,365 | ||||||||
| Other intangible assets | 35,041 | 35,925 | ||||||||
| $ | 8,858,363 | $ | 8,364,059 | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||||
| Current liabilities: | ||||||||||
| Short-term bank loans | $ | — | $ | 457 | ||||||
| Accounts payable | 55,156 | 60,913 | ||||||||
| Other current liabilities | 219,353 | 203,702 | ||||||||
| Current portion of long-term debt | 142,516 | 42,224 | ||||||||
| 417,025 | 307,296 | |||||||||
| Payment service obligations | 7,075,335 | 6,649,722 | ||||||||
| Total current liabilities | 7,492,360 | 6,957,018 | ||||||||
| Long-term debt | 244,619 | 354,147 | ||||||||
| Pension and other postretirement benefits | 95,141 | 94,424 | ||||||||
| Derivative financial instruments | 119,616 | 91,414 | ||||||||
| Other deferred items and insurance liabilities | 135,232 | 135,420 | ||||||||
| Minority interests | 6,600 | 5,284 | ||||||||
| $4.75 Redeemable preferred stock | 6,691 | 6,679 | ||||||||
| 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 | 223,370 | 225,003 | ||||||||
| Retained income | 772,846 | 762,008 | ||||||||
| Unearned employee benefits and other | (76,017 | ) | (82,952 | ) | ||||||
| Accumulated other comprehensive income: | ||||||||||
| Unrealized gain on securities classified as available for sale | 63,314 | 29,876 | ||||||||
| Unrealized loss on derivative financial instruments | (76,484 | ) | (53,875 | ) | ||||||
| Cumulative translation adjustments | (8,344 | ) | (13,211 | ) | ||||||
| Minimum pension liability adjustment | (13,739 | ) | (13,739 | ) | ||||||
| Common stock in treasury, at cost, 10,540,885 and 10,806,006 shares | (276,452 | ) | (283,047 | ) | ||||||
| Total common stock and other equity | 758,104 | 719,673 | ||||||||
| $ | 8,858,363 | $ | 8,364,059 | |||||||
See Notes to Consolidated Financial Statements.
Page 2
VIAD CORP
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
Three months ended March 31,
(000 omitted, except per share data) 2002 2001
-------- --------
Revenues $444,405 $459,564
-------- --------
Costs and expenses:
Costs of sales and services 391,880 414,678
Corporate activities and minority interests 4,560 4,567
Net interest expense 3,789 6,265
-------- --------
400,229 425,510
-------- --------
Income before income taxes 44,176 34,054
Income taxes 11,832 9,752
-------- --------
NET INCOME $ 32,344 $ 24,302
======== ========
DILUTED NET INCOME PER COMMON SHARE $ 0.37 $ 0.28
Average outstanding and potentially dilutive common shares 86,728 86,672
======== ========
BASIC NET INCOME PER COMMON SHARE $ 0.37 $ 0.28
Average outstanding common shares 86,095 85,560
======== ========
Dividends declared per common share $ 0.09 $ 0.09
======== ========
Preferred stock dividends $ 285 $ 284
======== ========
| Quarter ended June 30, | Six months ended June 30, | ||||||||||||||||
| (000 omitted, except per share data) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
| Revenues | $ | 408,511 | $ | 444,566 | $ | 853,532 | $ | 904,130 | |||||||||
| Costs and expenses: | |||||||||||||||||
| Costs of sales and services | 351,940 | 386,565 | 744,436 | 801,243 | |||||||||||||
| Corporate activities and minority interests | 7,291 | 4,113 | 11,851 | 8,680 | |||||||||||||
| Net interest expense | 3,575 | 5,298 | 7,364 | 11,563 | |||||||||||||
| Nonrecurring item | — | 29,274 | — | 29,274 | |||||||||||||
| 362,806 | 425,250 | 763,651 | 850,760 | ||||||||||||||
| Income before income taxes and change in accounting principle | 45,705 | 19,316 | 89,881 | 53,370 | |||||||||||||
| Income taxes | 13,439 | 1,907 | 25,271 | 11,659 | |||||||||||||
| Net income before change in accounting principle | 32,266 | 17,409 | 64,610 | 41,711 | |||||||||||||
| Change in accounting principle, net of tax | — | — | (37,739 | ) | — | ||||||||||||
| NET INCOME | $ | 32,266 | $ | 17,409 | $ | 26,871 | $ | 41,711 | |||||||||
| DILUTED NET INCOME PER COMMON SHARE | |||||||||||||||||
| Net income per share before change in accounting principle | $ | 0.36 | $ | 0.20 | $ | 0.73 | $ | 0.48 | |||||||||
| Change in accounting principle, net of tax | — | — | (0.43 | ) | — | ||||||||||||
| Net income per share | $ | 0.36 | $ | 0.20 | $ | 0.30 | $ | 0.48 | |||||||||
| Average outstanding and potentially dilutive common shares | 87,672 | 86,090 | 87,200 | 86,381 | |||||||||||||
| BASIC NET INCOME PER COMMON SHARE | |||||||||||||||||
| Net income per share before change in accounting principle | $ | 0.37 | $ | 0.20 | $ | 0.74 | $ | 0.48 | |||||||||
| Change in accounting principle, net of tax | — | — | (0.44 | ) | — | ||||||||||||
| Net income per share | $ | 0.37 | $ | 0.20 | $ | 0.30 | $ | 0.48 | |||||||||
| Average outstanding common shares | 86,693 | 85,158 | 86,394 | 85,359 | |||||||||||||
| Dividends declared per common share | $ | 0.09 | $ | 0.09 | $ | 0.18 | $ | 0.18 | |||||||||
| Preferred stock dividends | $ | 285 | $ | 284 | $ | 570 | $ | 568 | |||||||||
See Notes to Consolidated Financial Statements.
Page 3
VIAD CORP
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
Three months ended March 31,
(000 omitted) 2002 2001
-------- --------
Net income $ 32,344 $ 24,302
-------- --------
Other comprehensive income, net of tax:
Unrealized gains (losses) on securities classified as available for sale:
Statement of Financial Accounting Standards ("SFAS") No. 133
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 (losses) arising during the period (20,954) 25,200
Reclassification adjustment for net realized gains included in net income (2,149) (2,933)
-------- --------
(23,103) 26,039
-------- --------
Unrealized gains (losses) on derivative financial instruments:
Cumulative effect of transition adjustment upon initial application of
SFAS No. 133 on January 1, 2001 -- (7,501)
Holding gains (losses) arising during the period 10,855 (34,850)
Net reclassifications from other comprehensive income to net income 18,712 1,646
-------- --------
29,567 (40,705)
-------- --------
Unrealized foreign currency translation adjustments:
Holding losses arising during the period (341) (3,820)
-------- --------
Other comprehensive income (loss) 6,123 (18,486)
-------- --------
Comprehensive income $ 38,467 $ 5,816
======== ========
| Quarter ended June 30, | Six months ended June 30, | |||||||||||||||||
| (000 omitted) | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| Net income | $ | 32,266 | $ | 17,409 | $ | 26,871 | $ | 41,711 | ||||||||||
| Other comprehensive income, net of tax: | ||||||||||||||||||
| Unrealized gains (losses) on securities classified as available-for-sale: | ||||||||||||||||||
| Statement of Financial Accounting Standards (“SFAS”) No. 133 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 (losses) arising during the period | 57,845 | (13,677 | ) | 36,891 | 11,523 | |||||||||||||
| Reclassification adjustment for net realized gains included in net income | (1,304 | ) | (1,534 | ) | (3,453 | ) | (4,467 | ) | ||||||||||
| 56,541 | (15,211 | ) | 33,438 | 10,828 | ||||||||||||||
| Unrealized gains (losses) on derivative financial instruments: | ||||||||||||||||||
| Cumulative effect of transition adjustment upon initial application of SFAS No. 133 on January 1, 2001 | — | — | — | (7,501 | ) | |||||||||||||
| Holding gains (losses) arising during the period | (72,071 | ) | 4,406 | (61,216 | ) | (30,444 | ) | |||||||||||
| Net reclassifications from other comprehensive income to net income | 19,895 | 5,841 | 38,607 | 7,487 | ||||||||||||||
| (52,176 | ) | 10,247 | (22,609 | ) | (30,458 | ) | ||||||||||||
| Unrealized foreign currency translation adjustments: | ||||||||||||||||||
| Holding gains (losses) arising during the period | 5,208 | 2,634 | 4,867 | (1,186 | ) | |||||||||||||
| Other comprehensive income (loss) | 9,573 | (2,330 | ) | 15,696 | (20,816 | ) | ||||||||||||
| Comprehensive income | $ | 41,839 | $ | 15,079 | $ | 42,567 | $ | 20,895 | ||||||||||
See Notes to Consolidated Financial Statements.
Page 4
VIAD CORP
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three months ended March 31,
(000 omitted) 2002 2001
--------- ---------
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES:
Net income $ 32,344 $ 24,302
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 13,157 17,144
Deferred income taxes 2,990 5,128
Other noncash items, net 1,477 (3,062)
Change in operating assets and liabilities:
Receivables and inventories (27,008) (32,776)
Accounts payable and accrued compensation 13,022 9,231
Other assets and liabilities, net 20,478 13,288
--------- ---------
56,460 33,255
Change in payment service assets and obligations, net 9,360 62,069
--------- ---------
Net cash provided by operating activities 65,820 95,324
--------- ---------
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES:
Capital expenditures (7,004) (12,445)
Proceeds from dispositions of property and other assets, net 11 161
Proceeds from sales and maturities of securities 882,790 792,229
Purchases of securities (930,659) (841,370)
--------- ---------
Net cash used by investing activities (54,862) (61,425)
--------- ---------
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES:
Payments on long-term borrowings (210) (25,164)
Net change in short-term borrowings (5,457) 24,186
Dividends on common and preferred stock (8,043) (8,001)
Exercise of stock options 3,124 7,532
Common stock purchased for treasury (1,219) (34,018)
--------- ---------
Net cash used by financing activities (11,805) (35,465)
--------- ---------
Net decrease in cash and cash equivalents (847) (1,566)
Cash and cash equivalents, beginning of year 46,593 42,298
--------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 45,746 $ 40,732
========= =========
| Six months ended June 30, | ||||||||||
| (000 omitted) | 2002 | 2001 | ||||||||
CASH FLOWS PROVIDED (USED) BY OPERATING ACTIVITIES: | ||||||||||
| Net income | $ | 26,871 | $ | 41,711 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||
| Depreciation and amortization | 25,753 | 34,922 | ||||||||
| Deferred income taxes | 7,840 | 13,749 | ||||||||
| Change in accounting principle | 40,000 | — | ||||||||
| Nonrecurring item | — | 29,274 | ||||||||
| Other noncash items, net | (457 | ) | (7,198 | ) | ||||||
| Change in operating assets and liabilities: | ||||||||||
| Receivables and inventories | (12,495 | ) | 1,459 | |||||||
| Accounts payable | (5,757 | ) | (7,700 | ) | ||||||
| Other assets and liabilities, net | 11,627 | (18,020 | ) | |||||||
| 93,382 | 88,197 | |||||||||
| Change in payment service assets and obligations, net | (766 | ) | 856,384 | |||||||
| Net cash provided by operating activities | 92,616 | 944,581 | ||||||||
CASH FLOWS PROVIDED (USED) BY INVESTING ACTIVITIES: | ||||||||||
| Capital expenditures | (17,711 | ) | (24,788 | ) | ||||||
| Proceeds from disposals of property and other assets, net of purchases | 543 | (640 | ) | |||||||
| Proceeds from sales and maturities of securities | 1,532,098 | 1,249,628 | ||||||||
| Purchases of securities | (1,578,693 | ) | (2,116,951 | ) | ||||||
| Net cash used by investing activities | (63,763 | ) | (892,751 | ) | ||||||
CASH FLOWS PROVIDED (USED) BY FINANCING ACTIVITIES: | ||||||||||
| Payments on long-term borrowings | (418 | ) | (25,333 | ) | ||||||
| Net change in short-term borrowings | (10,457 | ) | 6,211 | |||||||
| Dividends on common and preferred stock | (16,150 | ) | (15,972 | ) | ||||||
| Exercise of stock options | 8,965 | 12,097 | ||||||||
| Common stock purchased for treasury | (2,045 | ) | (34,622 | ) | ||||||
| Net cash used by financing activities | (20,105 | ) | (57,619 | ) | ||||||
| Net increase (decrease) in cash and cash equivalents | 8,748 | (5,789 | ) | |||||||
| Cash and cash equivalents, beginning of year | 46,593 | 42,298 | ||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 55,341 | $ | 36,509 | ||||||
See Notes to Consolidated Financial Statements.
Page 5
VIAD CORP
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE A - BASIS OF PREPARATION
– Basis of Preparation
The Consolidated Financial Statements of Viad Corp ("Viad"(“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, 2001.
Accounting policies utilized in the preparation of the financial information herein presented are the same as set forth in Viad'sViad’s annual financial statements except as modified for interim accounting policies which are within the guidelines set forth in Accounting Principles Board ("APB"(“APB”) Opinion No. 28, "Interim“Interim Financial Reporting"Reporting” and the adoption of Statement of Financial Accounting Standards ("SFAS"(“SFAS”) No. 142, "Goodwill“Goodwill and Other Intangible Assets"Assets” and SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-Lived Assets"Assets” 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'sViad’s financial position as of March 31,June 30, 2002, and its results of operations and its cash flows for the threequarters and six months ended March 31,June 30, 2002 and 2001 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 2002 presentation.
NOTE B - ASSETS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS
Viad's– Assets Restricted for Payment Service Obligations
Viad’s Payment Services subsidiaries generate funds from the sale of official checks, money orders and other payment instruments, with the related liabilities classified as "Payment“Payment service obligations."” Substantially all of the proceeds of such sales are invested in permissible securities,accordance with state regulations, principally in high-quality debt instruments. These investments, along with related cash and funds in transit, are restricted by state regulatory agencies for use byto the subsidiariesextent that they represent proceeds from the sale of payment instruments to satisfy the liability to pay, upon presentment, the face amount of the payment service obligations. In addition, certain other assets of the Payment Services subsidiaries are available if necessary to meet such obligations. Such assets are not available to satisfy working capital or other financing requirements of Viad. Securities are included in the Consolidated Balance Sheets under the caption, "Investments“Investments restricted for payment service obligations."” Certain additional assets of the Payment Services subsidiaries relating to payment service obligations, including cash on hand, funds in transit from agents, and securities expected to be sold or maturing within one year, are included under the caption, "Funds, agents'“Funds, agents’ receivables and current maturities of investments restricted for payment service obligations."
”
As described in notes to Viad'sViad’s annual financial statements, a Payment Services subsidiary hedges a substantial portionbusiness involves the payment of the variable rate commission paymentscommissions to selling financial institutions of its selling agents and the net proceeds of sellingofficial check program. In addition, it has also entered into agreements to sell receivables primarily from its money order agentsagents. The commissions and net proceeds from the agents’ receivables are computed based on short-term variable interest rates that are hedged through swap agreements (see Note E). The swap agreements that effectively convert suchthe variable ratesrate payments 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, along withincluding additional subsidiary funds and the fair value of related swap agreements:
| June 30, | December 31, | |||||||
| (000 omitted) | 2002 | 2001 | ||||||
| Funds, agents’ receivables and current maturities of investments restricted for payment service obligations | $ | 1,902,554 | $ | 1,476,475 | ||||
| Investments restricted for payment service obligations (1) | 5,488,219 | 5,422,899 | ||||||
| Payment service obligations | (7,075,335 | ) | (6,649,722 | ) | ||||
| Fair value of derivative financial instruments (2) | (124,611 | ) | (87,187 | ) | ||||
| Total | $ | 190,827 | $ | 162,465 | ||||
| (1) | Securities classified as “available-for-sale” are carried at market value and securities classified as “held-to-maturity” are carried at amortized cost (see Note C). | |
| (2) | The fair value represents the estimated amounts that Viad would pay to counterparties to terminate the swap agreements at June 30, 2002 and December 31, |
NOTE C - INVESTMENTS RESTRICTED FOR PAYMENT SERVICE OBLIGATIONS
– Investments Restricted for Payment Service Obligations
Investments restricted for payment service obligations include the following debt and equity securities:
March 31, December 31,
(000 omitted) 2002 2001
----------- -----------
Securities classified as available for sale, at fair value
(amortized cost of $3,866,404 and $3,947,971) $ 3,877,431 $ 3,997,058
Securities classified as held to maturity, at amortized cost
(fair value of $1,600,341 and $1,478,178) 1,578,538 1,449,641
----------- -----------
5,455,969 5,446,699
Less current maturities (23,547) (23,800)
----------- -----------
$ 5,432,422 $ 5,422,899
=========== ===========
| June 30, | December 31, | |||||||
| (000 omitted) | 2002 | 2001 | ||||||
| Securities classified as available-for-sale, at fair value (amortized cost of $3,780,781 and $3,947,971) | $ | 3,884,018 | $ | 3,997,058 | ||||
| Securities classified as held-to-maturity, at amortized cost (fair value of $1,669,811 and $1,478,178) | 1,627,701 | 1,449,641 | ||||||
| 5,511,719 | 5,446,699 | |||||||
| Less current maturities | (23,500 | ) | (23,800 | ) | ||||
| $ | 5,488,219 | $ | 5,422,899 | |||||
NOTE D - GOODWILL AND OTHER INTANGIBLE ASSETS
– Goodwill and Other Intangible Assets
In January 2002, Viad adopted SFAS No. 142, "Goodwill“Goodwill and Other Intangible Assets."” SFAS No. 142 specifies that goodwill and certain intangible assets with indefinite lives no longer be amortized but instead be subject to periodic impairment testing. At March 31, 2002, Viad completed the transitional impairment test for certain intangible assets with indefinite lives and found that no impairment exists. As required by SFAS No. 142,Viad completed the transitional impairment test for goodwill will be completed during the second quarter of 2002. The test was performed as of January 1, 2002 and concluded that a transitional impairment loss of $40.0 million ($37.7 million after-tax) should be recognized related to goodwill at the Exhibitgroup/Giltspur reporting unit of the Convention and Event Services segment. The fair value of that reporting unit was estimated using the expected present value of future cash flows. The impairment resulted from a change in the criteria for measurement of impairment from an undiscounted to a discounted cash flow method. This impairment was retroactively restated to the first quarter of 2002 in accordance with SFAS No. 142 and is included in the Consolidated Statements of Income under the caption “Change in accounting principle.”
Intangible assets with finite lives will continue to be amortized over their respective useful lives and will be tested for impairment in accordance with SFAS No. 144, "Accounting“Accounting for the Impairment or Disposal of Long-LivedLong- Lived Assets."” This statement, adopted in January 2002, supersedes SFAS No. 121, "Accounting“Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"” and the accounting and
Page 7
reporting provisions of APB Opinion No. 30, "Reporting“Reporting the Results of Operations -– Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions."” SFAS No. 144 requires that one accounting model be used for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired, and it broadens the presentation of discontinued operations to include more disposal transactions.
Page 7
A summary of intangible assets at March 31,June 30, 2002 is presented below:
Gross Net
Carrying Accumulated Carrying
(000 omitted) Value Amortization Value
-------- ------------ --------
Amortized intangible assets:
Customer lists $27,523 $15,263 $12,260
Patents 13,200 9,290 3,910
Other 6,897 6,728 169
------- ------- -------
47,620 31,281 16,339
------- ------- -------
Unamortized intangible assets:
Trademarks 13,182 -- 13,182
Pension intangible assets 5,990 -- 5,990
------- ------- -------
19,172 -- 19,172
------- ------- -------
Total intangible assets: $66,792 $31,281 $35,511
======= ======= =======
| Gross | Net | ||||||||||||
| Carrying | Accumulated | Carrying | |||||||||||
| (000 omitted) | Value | Amortization | Value | ||||||||||
| Amortized intangible assets: | |||||||||||||
| Customer lists | $ | 27,523 | $ | 15,583 | $ | 11,940 | |||||||
| Patents | 13,200 | 9,446 | 3,754 | ||||||||||
| Other | 6,379 | 6,223 | 156 | ||||||||||
| 47,102 | 31,252 | 15,850 | |||||||||||
| Unamortized intangible assets: | |||||||||||||
| Trademarks | 13,182 | — | 13,182 | ||||||||||
| Pension intangible assets | 6,009 | — | 6,009 | ||||||||||
| 19,191 | — | 19,191 | |||||||||||
| Total intangible assets | $ | 66,293 | $ | 31,252 | $ | 35,041 | |||||||
Intangible asset amortization expense for the threequarter and six months ended March 31,June 30, 2002 was $490,000.$489,000 and $979,000, respectively. Estimated amortization expense for the five succeeding fiscal years is as follows:
(000 omitted)
-----------------------------------
2002 $ 1,887
2003 1,868
2004 1,806
2005 1,779
2006 1,570
| (000 omitted) | ||||
| 2002 | $ | 1,961 | ||
| 2003 | 1,938 | |||
| 2004 | 1,882 | |||
| 2005 | 1,861 | |||
| 2006 | 1,570 | |||
The changes in the carrying amount of goodwill for the period ended March 31,June 30, 2002 are as follows:
Convention
Payment and Event
(000 omitted) Services Services Other Total
--------- ----------- --------- ---------
Balance at beginning of year $ 297,705 $ 262,243 $ 27,417 $ 587,365
Foreign currency translation adjustments -- (209) (21) (230)
--------- --------- --------- ---------
Balance at end of period $ 297,705 $ 262,034 $ 27,396 $ 587,135
========= ========= ========= =========
| Convention | ||||||||||||||||
| Payment | and Event | |||||||||||||||
| (000 omitted) | Services | Services | Other | Total | ||||||||||||
| Balance at beginning of year | $ | 297,705 | $ | 262,243 | $ | 27,417 | $ | 587,365 | ||||||||
| Transitional impairment loss | — | (40,000 | ) | — | (40,000 | ) | ||||||||||
| Foreign currency translation adjustments | — | 940 | 482 | 1,422 | ||||||||||||
| Balance at end of period | $ | 297,705 | $ | 223,183 | $ | 27,899 | $ | 548,787 | ||||||||
Page 8
Amortization expense of goodwill and intangible assets with indefinite lives for the three monthsquarter ended March 31,June 30, 2001 was $4,112,000$4,126,000 ($3,501,0003,512,000 after-tax) and $98,000 ($61,000 after-tax), respectively. For the six months ended June 30, 2001, amortization expense of goodwill and intangible assets with indefinite lives amounted to $8,238,000 ($7,013,000 after-tax) and $196,000 ($122,000 after-tax), respectively. Net income as reported and as adjusted withfor the adoption of SFAS No. 142 is presented below:
Three months ended March 31,
(000 omitted, except per share data) 2002 2001
---------- ----------
Reported net income $ 32,344 $ 24,302
Amortization of goodwill and intangible assets with indefinite lives -- 3,562
---------- ----------
Adjusted net income $ 32,344 $ 27,864
========== ==========
Diluted earnings per share:
Reported net income $ 0.37 $ 0.28
Amortization of goodwill and intangible assets with indefinite lives -- 0.04
---------- ----------
Adjusted net income $ 0.37 $ 0.32
========== ==========
Basic earnings per share:
Reported net income $ 0.37 $ 0.28
Amortization of goodwill and intangible assets with indefinite lives -- 0.04
---------- ----------
Adjusted net income $ 0.37 $ 0.32
========== ==========
| Quarter ended June 30, | Six months ended June 30, | ||||||||||||||||
| (000 omitted, except per share data) | 2002 | 2001 | 2002 | 2001 | |||||||||||||
| Reported net income | $ | 32,266 | $ | 17,409 | $ | 26,871 | $ | 41,711 | |||||||||
| Amortization of goodwill and intangible assets with indefinite lives, net of tax | — | 3,573 | — | 7,135 | |||||||||||||
| Adjusted net income | $ | 32,266 | $ | 20,982 | $ | 26,871 | $ | 48,846 | |||||||||
| Diluted earnings per share: | |||||||||||||||||
| Reported net income | $ | 0.36 | $ | 0.20 | $ | 0.30 | $ | 0.48 | |||||||||
| Amortization of goodwill and intangible assets with indefinite lives, net of tax | — | 0.04 | — | 0.08 | |||||||||||||
| Adjusted net income | $ | 0.36 | $ | 0.24 | $ | 0.30 | $ | 0.56 | |||||||||
| Basic earnings per share: | |||||||||||||||||
| Reported net income | $ | 0.37 | $ | 0.20 | $ | 0.30 | $ | 0.48 | |||||||||
| Amortization of goodwill and intangible assets with indefinite lives, net of tax | — | 0.04 | — | 0.09 | |||||||||||||
| Adjusted net income | $ | 0.37 | $ | 0.24 | $ | 0.30 | $ | 0.57 | |||||||||
NOTE E - DERIVATIVE FINANCIAL INSTRUMENTS
– 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'sViad’s Payment Services business involves the payment of variable-rate commissions to selling agentsfinancial institutions 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 primarily from money order agents in an amount not to exceed $450,000,000.$450 million. The agreement expires in June 2003. The receivables, sold at a discount based on short-term variable interest rates, are sold in order to accelerate Payment Services'Services’ cash flow for investment in permissible securities. Variable-to-fixed derivative financial instruments (swap agreements) have been entered into to mitigate the effects of fluctuations primarily on commission expense and to a lesser extent on the net proceeds from agents'agents’ receivable sales.
Viad records 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'sViad’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 one to six years.
The effective portion of the change in fair values of derivatives qualifying as cash flow hedges 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 Statements of Income under "Costs“Costs of sales and services."” The amount recognized in earnings due to the ineffectiveness of the cash flow hedges was not material. No cash flow hedges were discontinued during the quarter.
quarter or six months ended June 30, 2002 or 2001.
Page 9
Viad is also exposed to foreign currency exchange risk. Forward derivative contracts are used to hedge assets and liabilities denominated in foreign currencies. While these contracts economically hedge Viad'sViad’s foreign
Page 9
NOTE F - DEBT
– Debt
At March 31,June 30, 2002 and December 31, 2001, Viad classified as long-term debt $161,000,000$156 million and $166,000,000,$166 million, respectively, of short-term borrowings. These borrowings are supported by unused commitments under $425,000,000$425 million of long-term credit facilities.
NOTE G - INCOME TAXES
– Income Taxes
A reconciliation of the provision for income taxes and the amount that would be computed using statutory federal income tax rates on income before income taxes and change in accounting principle for the threesix months ended March 31,June 30, is as follows:
| (000 omitted) | 2002 | 2001 | ||||||||||||||
| Computed income taxes at statutory federal income tax rate | $ | 31,458 | 35.0 | % | $ | 18,680 | 35.0 | % | ||||||||
| Nondeductible goodwill amortization | — | 0.0 | % | 1,743 | 3.3 | % | ||||||||||
| State income taxes | 3,777 | 4.2 | % | 2,126 | 4.0 | % | ||||||||||
| Other, net | 2,247 | 2.5 | % | 1,261 | 2.3 | % | ||||||||||
| 37,482 | 41.7 | % | 23,810 | 44.6 | % | |||||||||||
| Tax-exempt income | (11,261 | ) | (12.5 | %) | (14,451 | ) | (27.1 | %) | ||||||||
| Adjustment to estimated annual effective rate (1) | (950 | ) | (1.1 | %) | 2,300 | 4.3 | % | |||||||||
| Provision for income taxes (2) | $ | 25,271 | 28.1 | % | $ | 11,659 | 21.8 | % | ||||||||
| (1) | Accounting principles generally accepted in the United States of America for interim financial reporting (APB Opinion No. 28) require that income taxes | |
| (2) | Excluding the effect of the nonrecurring item, the effective tax rate |
NOTE H - SEGMENT INFORMATION
– Segment Information
Viad measures profit and performance of its operations on the basis of operating income before restructuring charges and othernonrecurring 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 operations. Disclosures regarding Viad'sViad’s reportable segments along with the reconciliationreconciliations to consolidated totals are presented below.
Page 10
Three months ended March 31,
(000 omitted) 2002 2001
--------- ---------
Revenues:
Payment Services $ 196,685 $ 179,298
Convention and Event Services 254,807 289,509
--------- ---------
Reportable segments 451,492 468,807
Travel and Recreation Services 3,170 3,659
--------- ---------
454,662 472,466
Less taxable equivalent adjustment (10,257) (12,902)
--------- ---------
$ 444,405 $ 459,564
========= =========
Operating income:
Payment Services $ 42,041 $ 34,795
Convention and Event Services 22,244 24,743
--------- ---------
Reportable segments 64,285 59,538
Travel and Recreation Services (1,503) (1,750)
--------- ---------
62,782 57,788
Corporate activities and minority interests (4,560) (4,567)
Less taxable equivalent adjustment (10,257) (12,902)
--------- ---------
47,965 40,319
Other investment income 1,292 1,280
Interest expense (5,081) (7,545)
--------- ---------
Income before income taxes $ 44,176 $ 34,054
========= =========
| Quarter ended June 30, | Six months ended June 30, | |||||||||||||||||
| (000 omitted) | 2002 | 2001 | 2002 | 2001 | ||||||||||||||
| Revenues: | ||||||||||||||||||
| Payment Services | $ | 205,968 | $ | 187,020 | $ | 403,269 | $ | 366,318 | ||||||||||
| Convention and Event Services | 199,450 | 254,447 | 454,257 | 543,956 | ||||||||||||||
| Reportable segments | 405,418 | 441,467 | 857,526 | 910,274 | ||||||||||||||
| Travel and Recreation Services | 13,129 | 15,876 | 16,299 | 19,535 | ||||||||||||||
| 418,547 | 457,343 | 873,825 | 929,809 | |||||||||||||||
| Less taxable equivalent adjustment | (10,036 | ) | (12,777 | ) | (20,293 | ) | (25,679 | ) | ||||||||||
| $ | 408,511 | $ | 444,566 | $ | 853,532 | $ | 904,130 | |||||||||||
| Operating income before nonrecurring item: | ||||||||||||||||||
| Payment Services | $ | 49,290 | $ | 43,682 | $ | 91,331 | $ | 78,477 | ||||||||||
| Convention and Event Services | 14,410 | 23,485 | 36,654 | 48,228 | ||||||||||||||
| Reportable segments | 63,700 | 67,167 | 127,985 | 126,705 | ||||||||||||||
| Travel and Recreation Services | 2,907 | 3,611 | 1,404 | 1,861 | ||||||||||||||
| 66,607 | 70,778 | 129,389 | 128,566 | |||||||||||||||
| Corporate activities and minority interests | (7,291 | ) | (4,113 | ) | (11,851 | ) | (8,680 | ) | ||||||||||
| Less taxable equivalent adjustment | (10,036 | ) | (12,777 | ) | (20,293 | ) | (25,679 | ) | ||||||||||
| 49,280 | 53,888 | 97,245 | 94,207 | |||||||||||||||
| Other investment income | 1,351 | 1,490 | 2,643 | 2,770 | ||||||||||||||
| Interest expense | (4,926 | ) | (6,788 | ) | (10,007 | ) | (14,333 | ) | ||||||||||
| Nonrecurring item | — | (29,274 | ) | — | (29,274 | ) | ||||||||||||
| Income before income taxes and change in accounting principle | $ | 45,705 | $ | 19,316 | $ | 89,881 | $ | 53,370 | ||||||||||
NOTE I - RESTRUCTURING CHARGES AND OTHER ITEMS
– Restructuring Charges and Nonrecurring Item
In the 2001 third quarter, Viad recorded restructuring charges totaling $66,100,000$66.1 million ($39,910,00039.9 million after-tax) associated with the closure and consolidation of certain facilities, severance and other employee benefits. At March 31,June 30, 2002, there was $30,238,000$25.7 million of remaining accrued liability,liabilities, of which $10,042,000$5.9 million and $20,196,000$19.8 million were included in the Consolidated Balance Sheets under the captions "Other“Other current liabilities"liabilities” and "Other“Other deferred items and insurance liabilities,"” respectively.
Payments under long-term lease obligations for closed facilities will continue to be made over the remaining terms of the leases. Approximately 9097 percent of the facility closures and consolidation had been completed and approximately 9098 percent of the positions had been eliminated as of March 31,June 30, 2002. Severance and benefits payments will continue to be made over the varying terms of the individual separation agreements.
Page 11
A summary of the change in the accrued liability balanceliabilities is as follows:
Facility Closure
Severance and Lease
(000 omitted) and Benefits Termination Total
------------ ---------------- --------
Balance at December 31, 2001 $ 7,007 $ 27,917 $ 34,924
Cash payments (2,922) (1,764) (4,686)
-------- -------- --------
Balance at March 31, 2002 $ 4,085 $ 26,153 $ 30,238
======== ======== ========
Page 11
| Facility Closure | ||||||||||||
| Severance | and Lease | |||||||||||
| (000 omitted) | and Benefits | Termination | Total | |||||||||
| Balance at December 31, 2001 | $ | 7,007 | $ | 27,917 | $ | 34,924 | ||||||
| Cash payments | (4,985 | ) | (4,200 | ) | (9,185 | ) | ||||||
| Balance at June 30, 2002 | $ | 2,022 | $ | 23,717 | $ | 25,739 | ||||||
In August 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 entered into litigation regarding the contract termination, and after reaching an agreement to end the litigation, Viad recorded a second quarter 2001 noncash provision totaling $29.3 million ($18.3 million after-tax). This provision represented primarily the write-off of net receivables and prepayments made to Key3Media.
NOTE J - RECENT ACCOUNTING PRONOUNCEMENT
– Recent Accounting Pronouncements
In November 2001, the Emerging Issues Task Force reached a consensus on Issue 01-14, "Income“Income Statement Characterization of Reimbursements Received for `Out-of
Pocket'‘Out-of Pocket’ Expenses Incurred" ("Incurred” (“EITF 01-14"01-14”), which became effective for Viad on January 1, 2002. Under EITF 01-14, reimbursements received for out-of-pocket expenses incurred should be characterized as revenue in the income statement. Upon adoption of EITF 01-14, comparative financial statements for prior periods should be reclassified to comply with the current presentation. The adoption of EITF 01-14 does not have any impact on Viad'sViad’s consolidated financial statements.
In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This Statement rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishment of Debt,” SFAS No. 44, “Accounting for Intangible Assets of Motor Carriers” and SFAS No. 64, “Extinguishment of Debt Made to Satisfy Sinking Fund Requirements.” This statement amends SFAS No. 13, “Accounting for Leases,” to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. SFAS No. 145 is generally effective for the Company for fiscal year 2003. Viad does not expect the adoption of SFAS No. 145 to have a significant effect on its results of operations or financial position.
Page 12
ITEM
Item 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS RESULTS:
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS:
Viad Corp ("Viad"(“Viad”) focuses on two principal service businesses: Payment Services and Convention and Event Services.
There were no material changes in the nature of Viad'sViad’s business, nor were there any other changes in the general characteristics of its operations as described and discussed in the "Results“Results of Operations"Operations” section of Management'sManagement’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, 2001.
Effective January 1, 2002, Viad adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets,” which requires that goodwill and certain other intangible assets no longer be amortized, but instead tested for impairment. The following discussion compares 2002 results with 2001 results as originally reported and also on an as adjusted for SFAS No. 142 basis.
All per share figures discussed are stated on the diluted basis.
COMPARISON OF FIRSTSECOND QUARTER OF 2002 TO THE FIRSTSECOND QUARTER OF 2001:
In the firstsecond quarter of 2002, revenues decreased $15.2 million, or 3.38.1 percent, to $444.4$408.5 million from $459.6$444.6 million in the first quarter 2001.2001 second quarter. Payment Services invests in a 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'sViad’s operations. This information is supplemental to results presented under accounting principles generally accepted in the United States of America. Revenues on the fully taxable equivalent basis decreased 3.8were $418.5 million in the 2002 second quarter, down 8.5 percent forfrom $457.3 million in the 2001 second quarter. OperatingSegment operating income on the same basis (before corporate activities and minority interests) was $62.8$66.6 million for the first2002 second quarter compared with $70.8 million for the 2001 second quarter (down 5.9 percent), and operating margins were 15.9 percent in the second quarter of 2002 compared with $57.8 million for
the first quarter 2001, and operating margins for the first quarter 2002 were
13.8 percent compared to 12.215.5 percent in the firstsecond quarter of 2001. Segment operating income and the operating margin in the second quarter of 2001 when adjusted for SFAS No. 142 would have been $75.0 million (down in 2002 by 11.2 percent) and 16.4 percent, respectively. See Note H of Notes to Consolidated Financial Statements.
Statements for segment information.
Net income for the firstsecond quarter of 2002 was $32.3 million, or $0.37$0.36 per share, compared to $24.3$17.4 million, or $0.28$0.20 per share, for the firstsecond quarter of 2001. Cash earningsExcluding a nonrecurring, noncash provision related to the resolution of the Key3Media litigation (described further in Note I of Notes to Consolidated Financial Statements), second quarter 2001 income was $35.7 million, or $0.41 per share defined as income plus after-tax goodwill amortization,
was $0.37, an increase(with a 2002 decrease of $0.0512.2 percent on a per share from $0.32basis). When adjusted for SFAS No. 142, net income for the firstsecond quarter of 2001. Cash earnings2001 would have been $21.0 million ($0.24 per share does not represent a measure of cash flows from
operations as defined by accounting principles generally accepted inshare) or $39.2 million ($0.45 per share) excluding the United
States of America, and may not be comparable to similarly titled measures
reported by other companies.
nonrecurring item.
Page 13
| Quarter ended June 30, | ||||||||
| (000 omitted, except per share data) | 2002 | 2001 | ||||||
| Income before nonrecurring item | $ | 32,266 | $ | 35,676 | ||||
| Nonrecurring item, net of tax | — | (18,267 | ) | |||||
| Net income | $ | 32,266 | $ | 17,409 | ||||
| Diluted net income per common share: | ||||||||
| Income before nonrecurring item | $ | 0.36 | $ | 0.41 | ||||
| Nonrecurring item | — | (0.21 | ) | |||||
| Diluted net income per common share | $ | 0.36 | $ | 0.20 | ||||
PAYMENT SERVICES.SERVICES. On the fully taxable equivalent basis, firstsecond quarter 2002 revenues of the Payment Services segment were $196.7$206.0 million, up $17.4 million,
or 9.710.1 percent, from 2001 firstsecond quarter revenues.revenues of $187.0 million. On the same basis, operating income increased $7.2to $49.3 million, or 20.8 percent.up 12.8 percent from 2001 second quarter operating income of $43.7 million. Operating margins on the fully taxable equivalent basis were 21.4improved to 23.9 percent in the firstsecond quarter of 2002 compared with 19.423.4 percent in the 2001 firstsecond quarter. Results wereWhen adjusting the second quarter of 2001 for the impact of SFAS No. 142, operating income would have been $45.7 million (with a 2002 increase of 7.8 percent) and the operating margin would have been 24.5 percent. Revenue growth was driven by continuing strong growth in money transfer transactions and average investable balances. MoneyGram continued to show improvement with transaction volume growing over 32 percent, led by strong International and Express Payment transaction volume growth. MoneyGram’s agent base expanded by 25 percent over the 2001 second quarter. Overall, Payment Services average investable balances were up 18.5 percent in the 2002 second quarter compared to the 2001 second quarter. This increase was primarily a result of strong growth in the official check and money transfer operations, offset
slightlybusiness driven by the lower interest rate environment which resulted in slower revenue
growth.new customer signings. The money order business continues to contribute significantly to the segment's operating margin. MoneyGram continued to show improvement with
transactionmargin, however, money order volume growing over 33 percent, led by strong International and Express Payment transaction volume growth and a sizable turnaround in the
U.S.-to-Mexico corridor. MoneyGram's agent base expanded by 32.7 percent over
the 2001 first quarter. The official check business continues to be a strong
driver of revenue growth for the Payment Services segment. Averagerelated average investable balances were up 32.8 percent in the 2002 first quarterdown slightly compared to the 2001 firstsecond quarter resulting inas some agents were eliminated to improve the credit profile of the money order business. Revenue and operating growth were negatively impacted due to the lower interest rate environment. Specifically, revenue and operating growth were impacted by lower yields on overnight cash balances, lower yields on new balances from the official check business and lower yields on reinvested funds which resulted from the prepayment of mortgage-backed securities associated with higher investment income.
Page 13
CONVENTION AND EVENT SERVICES.Convention and Event Services revenues decreased $34.7$55.0 million, or 12.021.6 percent, to $254.8$199.5 million in the firstsecond quarter of 2002.2002 from $254.4 million in the second quarter of 2001. Operating income for the segment decreased $2.5to $14.4 million, or 10.1down 38.6 percent, from 2001 second quarter operating income of $23.5 million. Operating margins were 7.2 percent in the firstsecond quarter of 2002 versus 9.2 percent in the second quarter of 2001. Operating margins increased to 8.7 percent in the
first quarter of 2002 compared with 8.5 percent in the first quarter of 2001.
The segment benefited from show rotation, cost savings from the impact of the
fourthSecond quarter 2001 restructuring activities,operating income would have been $25.4 million (with a 2002 decrease of 43.3 percent) and labor efficiencies throughthe operating margin would have been 10.0 percent when adjusted for SFAS No. 142. Show shrinkage, a show management process instituted during 2001. These were offset by anticipated
show shrinkage, lower attendanceheavier mix of technology shows and morea shift in corporate spending from new exhibits to exhibit refurbishments instead of new
exhibit builds. In spite ofresulted in lower revenue for the quarter. Given the weakness in most business sectors, particularly telecommunications and technology, the segment continues to focus on reducing theits cost structure in order to position the segment to take advantage of new opportunities.
TRAVEL AND RECREATION SERVICES.Revenues of the travel and recreation businesses decreased to $3.2were $13.1 million for the firstsecond quarter of 2002, down 17.3 percent, from 2001 second quarter of $15.9 million. Operating income was $2.9 million in the 2002 second quarter, down 19.5 percent, compared to $3.6 million in the 2001 second quarter. Operating margins were 22.1 percent in the second quarter of 2002 compared with $3.722.7 percent in the prior year second quarter. When adjusted for SFAS No. 142, second quarter 2001 operating income and the operating margin would have been $3.8 million (down in 2002 by 24.1 percent) and 24.1 percent, respectively. These results are primarily due to a decline in tourism to Canada related to the post September 11, 2001 travel concerns and the current economic conditions.
Page 14
CORPORATE ACTIVITIES AND MINORITY INTERESTS.The increase in corporate activities expense in the second quarter of 2002 of $2.4 million as compared to the second quarter of 2001 relates to $2.3 million in legal, investment banking and other costs incurred in connection with a contemplated initial public offering and spin-off of Travelers Express/MoneyGram. Further consideration and implementation of the firstinitial public offering and spin-off has been delayed pending improvement in overall economic and capital market conditions. The increase in minority interests in the second quarter of 2002 of $0.8 million as compared to the second quarter of 2001 mainly duerelates primarily to significant declinesstrong revenue and transaction volume growth in booking
levelsthe Payment Services segment’s 51 percent interest in an international money transfer services joint venture.
NET INTEREST EXPENSE.The decrease in net interest expense from all markets throughout the world. The seasonal operating loss was
$1.5 million compared with $1.8$5.3 million in the 2001 quarter. The first and
fourth quarters are historically the slowest periods for these businesses duesecond quarter to the seasonal slowdown and the winter closure of the Glacier Park facilities.
NET INTEREST EXPENSE. Other investment income was $1.3$3.6 million in the firstsecond quarter of both 2002 and 2001 aswas primarily related to the effectdecrease in interest expense in the 2002 firstsecond quarter of higher
average investment balances was offset by lower average interest rates as
compared2002 to the 2001 first quarter. Interest expense decreased to $5.1$4.9 million from $6.8 million in the first quarter 2002 compared to $7.5 million in the firstsecond quarter of 2001,
primarily as a result of lower average debt levels and2001. Lower short-term interest rates and reduced debt resulted in lower interest expense during the 2002 period.
quarter.
INCOME TAXES. TheExcluding the 2001 nonrecurring item, the effective tax rate in the 2002 firstsecond quarter was 26.829.4 percent compared to 28.626.6 percent (25.7 percent as adjusted for SFAS No. 142) for the firstsecond quarter of 2001. The relatively low effective tax rate compared to the statutory federal rate is primarily attributable to tax-exempt income from Viad'sViad’s Payment Services businesses.
COMPARISON OF FIRST SIX MONTHS OF 2002 TO THE FIRST SIX MONTHS OF 2001:
Revenues for the first six months of 2002 decreased $50.6 million, or 5.6 percent, to $853.5 million from $904.1 million in 2001. Revenues on the fully taxable equivalent basis decreased 6.0 percent to $873.8 million from $929.8 million. Segment operating income on the same basis (before corporate activities and minority interests) was $129.4 million for the first six months of 2002, up 0.6 percent, compared with $128.6 million for the prior year, and operating margins were 14.8 percent in 2002 compared to 13.8 percent in 2001. Segment operating income and the operating margin for the six months ended June 30, 2001 when adjusted for SFAS No. 142 would have been $137.0 million (with a 2002 decrease of 5.6 percent) and 14.7 percent, respectively. See Note H of Notes to Consolidated Financial Statements for segment information.
Net income for the first six months of 2002 was $26.9 million, or $0.30 per share, compared to $41.7 million, or $0.48 per share, for the first six months of 2001. Before the change in accounting principle and nonrecurring item previously discussed, income for the first six months of 2002 and 2001 was $64.6 million, or $0.73 per share and $60.0 million, or $0.69 per share, respectively, with a 5.8 percent increase on a per share basis. Net income for the first six months of 2001 when adjusted for SFAS No. 142 would have been $48.8 million ($0.56 per share) or $67.1 million ($0.77 per share) excluding the nonrecurring item.
Page 15
| Six months ended June 30, | ||||||||
| (000 omitted, except per share data) | 2002 | 2001 | ||||||
| Income before change in accounting principle and nonrecurring item | $ | 64,610 | $ | 59,978 | ||||
| Change in accounting principle, net of tax | (37,739 | ) | — | |||||
| Nonrecurring item, net of tax | — | (18,267 | ) | |||||
| Net income | $ | 26,871 | $ | 41,711 | ||||
| Diluted net income per common share: | ||||||||
| Income before change in accounting principle and nonrecurring item | $ | 0.73 | $ | 0.69 | ||||
| Change in accounting principle | (0.43 | ) | — | |||||
| Nonrecurring item | — | (0.21 | ) | |||||
| Diluted net income per common share | $ | 0.30 | $ | 0.48 | ||||
In June 2002, in accordance with the adoption of SFAS No. 142, Viad completed a transitional impairment test for goodwill. The test was performed as of January 1, 2002 and concluded that a transitional impairment loss of $40.0 million ($37.7 million after-tax) should be recognized related to goodwill at the Exhibitgroup/Giltspur reporting unit of the Convention and Event Services segment. The impairment was retroactively restated to the first quarter of 2002 as a cumulative effect of a change in accounting principle in accordance with SFAS No. 142.
PAYMENT SERVICES.On the fully taxable equivalent basis, revenues of the Payment Services segment for the first six months of 2002 were $403.3 million, up 10.1 percent, from 2001 six month revenues of $366.3 million. On the same basis, operating income increased to $91.3 million, up 16.4 percent from $78.5 million in the 2001 period. Operating margins on the fully taxable equivalent basis were 22.6 percent for the first six months of 2002, compared with 21.4 percent in the first six months of 2001. When adjusting the six month period ended June 30, 2001 for the impact of SFAS No. 142, operating income and the operating margin would have been $82.6 million (with a 2002 increase of 10.6 percent) and 22.5 percent, respectively. Average investable balances were 25.3 percent higher in 2002 compared to the same period in 2001, primarily driven by the strong growth in the official check business reflecting the ramp-up of key new accounts. Transaction volume for MoneyGram grew 33 percent over the prior year, with strong growth in Express Payment and in the international corridors.
CONVENTION AND EVENT SERVICES.Convention and Event Services revenues decreased $89.7 million, or 16.5 percent, to $454.3 million from $544.0 million in the 2001 six month period. Operating income for the segment was $36.7 million, down 24.0 percent, from $48.2 million in the 2001 period (or $52.1 million, down 29.7 percent, when 2001 is adjusted for SFAS No. 142). Operating margins were 8.1 percent compared with 8.9 percent in 2001 (or 9.6 percent when 2001 is adjusted for SFAS No. 142). The segment was impacted by show shrinkage, lower attendance and exhibit refurbishments instead of new builds, somewhat offset by the impact of the restructuring plan implemented last year.
TRAVEL AND RECREATION SERVICES.For the first six months of 2002, revenues of the travel and recreation businesses were $16.3 million, down 16.6 percent, from $19.5 million in the first six months of 2001, while operating income decreased $0.5 million from $1.9 million to $1.4 million for the same period. Operating income for the 2002 period would have been down 38.6 percent from $2.3 million in the six month period ended June 30, 2001, when adjusted for SFAS No. 142. The decrease in revenue and operating income relates primarily to a decrease in package tour volume as a result of a softened economy.
CORPORATE ACTIVITIES AND MINORITY INTERESTS.The increase in corporate activities expense in the first six months of 2002 of $1.7 million as compared to the first six months of 2001 primarily relates to $2.3 million in legal, investment banking and other costs incurred in connection with
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a contemplated initial public offering and spin-off of Travelers Express/MoneyGram. The increase in minority interests for the first six months of 2002 of $1.5 million as compared to the same period in 2001 relates primarily to strong revenue and transaction volume growth in the Payment Services segment’s 51 percent interest in an international money transfer services joint venture.
NET INTEREST EXPENSE.Net interest expense of $7.4 million for the first six months of 2002 decreased 36.3 percent as compared to $11.6 million for the first six months of 2001. This was driven by a decrease in interest expense to $10.0 million for the first six months of 2002 from $14.3 million for the first six months of 2001. The lower interest expense was a result of steadily decreasing interest rates as well as lower average debt balances.
INCOME TAXES.Excluding the 2002 effect of change in accounting principle and the 2001 nonrecurring item, the effective tax rate for the first six months of 2002 was 28.1 percent as compared to 27.4 percent for the first six months of 2001 (26.3 percent as adjusted for SFAS No. 142). 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 of 26.828.1 percent for 2002 is expected to be higher than the annual effective tax rate of 23.6 percent in 2001, or 22.8 percent when adjusted for SFAS No. 142, (excluding the effect of the restructuring charges and other items)nonrecurring item) due to lower tax-exempt income in proportion to total pre-tax income, resulting from a shift in the mix of investments in tax-exempt securities in the Payment Services segment.
segment from nontaxable to taxable investments.
LIQUIDITY AND CAPITAL RESOURCES:
Viad's
Viad’s total debt at March 31,June 30, 2002 was $391.1$387.1 million compared with $396.8 million at December 31, 2001. The debt-to-capital ratio was 0.340.33 to 1 at March
31,June 30, 2002, compared with 0.35 to 1 at December 31, 2001. Capital is defined as total debt plus minority interests, preferred stock, common stock and other equity.
Under a Shelf Registration filed in 1994 with the Securities and Exchange Commission, Viad can issue up to an aggregate $500 million of debt and equity securities. WhileIn the second quarter of 2002, Viad filed an amended Shelf Registration is effective, it requires amendmentwith the Securities and Exchange Commission to ensure immediate access to the capital markets. Viad isupdate disclosures in the process of
preparingoriginal 1994 registration statement and filing such amendment.to maintain Viad’s financial flexibility. No securities have been issued under the program.
Viad began its stock repurchase program in July 1998 for the purpose of replacing common shares issued upon exercise of stock options and in connection with other stock compensation plans, with the intended effect of reducing dilution caused by the issuance of such shares. GivenWhile this program was on hold for most of 2001 and the uncertaintyfirst six months of 2002, Viad recently announced its intent to repurchase one to two million shares of its common stock in the economy, the share repurchase program has been deferredlast half of 2002. This will replace common stock issued upon exercise of stock options and in order to prudently
conserve cash.connection with other stock compensation plans. Net proceeds from the exercise of stock options totaled $3.1$9.0 million during the first quartersix months of 2002.
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EBITDA is a measure of Viad'sViad’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 accounting principles generally accepted in the United States of America. EBITDA is defined by Viad as net income from continuing operations before interest expense, income taxes, depreciation and amortization, change in accounting principle and restructuring
charges and other itemsnonrecurring item and includes the fully taxable equivalent adjustment. EBITDA for the first quartersix months of 2002 was $72.7$145.8 million, updown from $71.6$157.6 million forin the first quarter of 2001.
2001 period.
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There were no other material changes in Viad'sViad’s financial condition nor were there any substantive changes relative to matters discussed in the "Liquidity“Liquidity and Capital Resources"Resources” section of Management'sManagement’s Discussion and Analysis of Results of Operations and Financial Condition as presented in Viad Corp'sCorp’s Annual Report on Form 10-K for the year ended December 31, 2001.
FORWARD-LOOKING STATEMENTS:
As provided by the safe harbor provision under the "Private“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 information, assumptions and discussions that may constitute forward-looking statements. These forward-looking statements are not historical facts, but reflect current estimates, projections, or expectations of or current trends in future growth, operating cash flows, availability of short-term borrowings, consumer demand, new business, investment policies, productivity improvements, ongoing cost reduction efforts, efficiency, competitiveness, tax rates, restructure plans (including timing and realization of cost savings) and market risk disclosures. Actual results could differ materially from those projected in forward-looking statements. Viad'sViad’s businesses can be affected by a host of risks and uncertainties. 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
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Viad's
Viad’s market risk exposures relate to fluctuations in interest rates and, to a lesser degree, to fluctuations in foreign exchange rates. Interest rate risk is the risk that changing interest rates will adversely affect the market value and earnings of Viad. Foreign exchange risk is the risk that fluctuating exchange rates will adversely affect earnings. Viad'sViad’s exposure to these risks is primarily associated with its Payment Services business. Certain derivative financial instruments are used as part of Viad'sViad’s risk management strategy to manage these exposures. Derivatives are not used for speculative purposes.
Stockholders'
Stockholders’ equity can be adversely affected by changing interest rates, as after-tax changes in the fair value of securities classified as available for sale and in the fair value of derivative financial instruments are included as a component of stockholders'stockholders’ equity. The fair value of derivative financial instruments generally increases when the market value of fixed rate, long-term debt investments decline and vice versa. However, an increase or decrease in stockholders'stockholders’ equity related to changes in the fair value of securities classified as available for sale, may not be offset, in whole or in part, by the decrease or increase in stockholders'stockholders’ equity related to changes in the fair value of derivative financial instruments.
A portion of Viad'sViad’s Payment Services business involves the payment of commissions to selling agentsfinancial institutions of its official check program as described in Note E. A Viad Payment Services subsidiary has also
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agents'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 which convert the variable rate payments to fixed rates.
Viad is also exposed to short-term interest rate risk on certain of its debt obligations. Viad currently does not use derivative financial instruments to hedge cash flows for such obligations.
EARNINGS SENSITIVITY TO INTEREST RATE CHANGES.
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Earnings Sensitivity to Interest Rate Changes.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 paid to selling agents,financial institutions, growth in new business, the effects of the swap agreements and the expected borrowing level of variable-rate debt, the increasedecrease in pre-tax income would be approximately $1.0$0.2 million. A hypothetical 10 percent proportionate decrease in interest rates, based on the same set of assumptions, would result in a decreasean increase in pre-tax income of approximately $0.8$2.4 million. These amounts are estimated based on a certain set of assumptions about interest rates and portfolio balance growth and do not represent expected results. FAIR VALUE SENSITIVITY TO INTEREST RATE CHANGES. In addition, refer to Management’s Discussion and Analysis of Results of Operations and Financial Condition for a discussion of Viad’s current period results of operations and the impact of interest rate fluctuations.
Fair Value Sensitivity to Interest Rate Changes.The fair value of securities classified as available-for-sale, derivative financial instruments and fixed-rate debt is 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 $84.2$84.5 million (along with an after-tax decrease in accumulated other comprehensive income of approximately $51.3$51.5 million), an estimated increase in the fair value of Viad'sViad’s swap agreements of approximately $48.1$43.1 million (along with an after-tax increase in accumulated other comprehensive income of $29.3$26.3 million) and an estimated off-balance-sheet decrease in the fair value of Viad'sViad’s fixed-rate debt of approximately $1.4$1.1 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 $80.4$78.1 million (along with an after-tax increase in accumulated other comprehensive income of approximately $49.0$47.7 million), an estimated decrease in the fair value of Viad'sViad’s swap agreements of approximately $48.1$43.1 million (along with an after-tax decrease in accumulated other comprehensive income of $29.3$26.3 million) and an estimated off-balance-sheet increase in the fair value of Viad'sViad’s fixed-rate debt of approximately $1.5$1.1 million. These amounts are estimated based on a certain set of assumptions about interest rates and portfolio balance growth.
INTEREST RATE RISK AND MARKET RISK OVERSIGHT.
Interest Rate Risk and Market Risk Oversight.Viad has established several levels of risk management oversight and control. An investment committee, comprised of senior officers of Viad and Payment Services, and reporting to the Chief Executive Officer of Viad, routinely reviews investment and risk management strategies and results. Additionally, Viad employs an independent advisor to its investment committee. Viad maintains formal procedures for entering into derivative transactions, and management regularly monitors and reports to the Audit Committee of the Board of Directors on such activity. The agreements are with major financial institutions which are currently expected to fully perform under the terms of the agreements, thereby mitigating the credit risk from the transactions in the event of nonperformance by the counterparties. In addition, Viad regularly monitors the credit ratings of the counterparties, and the likelihood of default is considered remote.
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PART II. OTHER INFORMATION
ITEM
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
| (a) | The annual meeting of stockholders of Viad Corp was held May 14, 2002. | ||
| (b) | Not applicable-(i) proxies for the meeting were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934; (ii) there was no solicitation in opposition to management’s nominees as listed in the proxy statement; and (iii) all such nominees were elected. |
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| (c) | Matters voted upon at the annual meeting for which proxies were solicited pursuant to Regulation 14 under the Securities Exchange Act of 1934: |
| 1. | The election of Directors as follows: | |||||||
| Judith K. Hofer | ||||||||
| Affirmative Vote | 72,255,749 | |||||||
| Withheld Authority | 1,811,504 | |||||||
| Jack F. Reichert | ||||||||
| Affirmative Vote | 72,235,526 | |||||||
| Withheld Authority | 1,831,727 | |||||||
| 2. | The appointment of Deloitte & Touche LLP to audit the accounts of Viad and its subsidiaries for the fiscal year 2002. | |||||||
| Affirmative Vote | 71,439,414 | |||||||
| Against | 2,523,178 | |||||||
| Abstentions | 104,661 | |||||||
| 3. | Approve material terms of the performance goals of the 1997 Viad Corp Omnibus Incentive Plan. | |||||||
| Affirmative Vote | 65,527,517 | |||||||
| Against | 7,902,540 | |||||||
| Abstentions | 637,196 | |||||||
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. 10.A - Copy of Viad Corp Management Incentive Plan as
amended March 26, 2002.
Exhibit No. 10.B - Copy of Restricted Stock Agreement, as amended March
26, 2002, pursuant to the Viad Corp 1997 Omnibus Incentive Plan.
Exhibit No. 10.C - Copy of Performance Driven Restricted Stock
Agreement, as amended March 26, 2002, pursuant to the Viad Corp 1997
Omnibus Incentive Plan.
(b) Reports on Form 8-K filed in the first quarter 2002.
A report on Form 8-K dated January 24, 2002, was filed January 24, 2002
by the Registrant. The Form 8-K reported under item 5 the announcement
by the Registrant of financial results for the fourth quarter and 2001
fiscal year (subject to audit) and the restatement of Registrant's
audited financial statements for the fiscal years 2000, 1999, and 1998.
A report on Form 8-K dated February 21, 2002, was filed on February 28,
2002 by the Registrant. The Form 8-K reported under item 5 the
declaration of a dividend of one preferred share purchase right for
each outstanding share of common stock, par value $1.50 per share, of
Registrant.
| (a) | Exhibit No. 10.A – Copy of Viad Corp Omnibus Incentive Plan as amended through May 14, 2002. | ||
| (b) | No reports on Form 8-K were filed by the registrant during the quarter for which this report is filed. |
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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)
May
| VIAD CORP (Registrant) | ||
| August 1, 2002 | By /s/ Ellen M. Ingersoll | |
| Ellen M. Ingersoll | ||
| Chief Financial Officer | ||
| (Principle Financial Officer | ||
| and Authorized Officer) |
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CERTIFICATION
Pursuant to 18 U.S.C. § 1350 (Sarbanes-Oxley Act of 2002, By /s/ Ellen M. Ingersoll
-------------------------
Ellen M. Ingersoll
Vice President - Controller
(Chief Accounting Officer§ 906), we hereby certify that this report fully complies with the requirements of section 13(a) or 15(d) of the Securities and Authorized Officer)
Exchange Act of 1934 and that information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Viad Corp.
| VIAD CORP | VIAD CORP | |||
| August 1, 2002 | By /s/ Robert H. Bohannon | By /s/ Ellen M. Ingersoll | ||
| Robert H. Bohannon | Ellen M. Ingersoll | |||
| Chairman of the Board, President | Chief Financial Officer | |||
| and Chief Executive Officer |
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EXHIBIT INDEX
| Exhibit | ||||||||
| No. | Description | |||||||
| 10.A | Copy of Viad Corp | |||||||