Boyd Gaming Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Boyd operated 22 wholly owned gaming properties across seven states, reported in Las Vegas Locals, Downtown Las Vegas, and Midwest and South segments. Borgata is reported as discontinued operations following its sale; Aliante was acquired September 27 and contributed results for only four days in the quarter.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net revenue | $531.9 million | $546.3 million | $1,629.2 million | $1,656.8 million |
| Operating income | $67.9 million | $69.4 million | $230.7 million | $224.4 million |
| Adjusted EBITDA | $121.9 million | $125.2 million | $397.5 million | $396.1 million |
| Net income | $342.6 million | $25.4 million | $405.8 million | $54.1 million |
| Operating cash flow | Not separately presented for the quarter | $256.9 million | $241.4 million |
- Q3 net revenue fell 2.6%; nine-month revenue fell 1.7%. Gaming revenue declined 3.0% and 2.3%, respectively, primarily due to weakness in the Midwest and South.
- Q3 operating income declined 2.2%, while nine-month operating income rose 2.8%. Adjusted EBITDA, a non-GAAP measure, decreased 2.6% for Q3 and increased 0.4% year to date.
- Net income included a $190.4 million income-tax benefit from releasing a valuation allowance and, in discontinued operations, a $181.7 million after-tax gain on the Borgata sale. Thus, reported earnings substantially exceed results from ongoing operations.
- Q3 continuing-operations income was $161.9 million despite a $27.8 million pretax loss, principally because of the tax benefit. Nine-month continuing-operations income was $194.7 million.
- Q3 gaming margin was 51.1% versus 50.7%; nine-month gaming margin was 51.6% versus 51.3%. Food and beverage and room margins were broadly steady.
Cash, debt, and liquidity
- At September 30, cash and cash equivalents were $159.7 million and restricted cash was $23.3 million. Nine-month capital expenditures were $117.3 million; the company estimated approximately $225 million of 2016 capital expenditures, excluding acquisitions.
- Cash used in investing activities was $486.9 million, including $372.3 million paid for Aliante. Cash provided by discontinued operations was $567.5 million, primarily reflecting Borgata sale proceeds. Cash increased by $0.9 million over the nine-month period.
- Debt principal was $3.042 billion, down from $3.322 billion at year-end 2015; debt carrying value, net of discounts and issuance costs, was $2.987 billion. Debt transactions included refinancing the credit facility and retiring Peninsula debt and high-coupon notes.
- The amended credit facility had approximately $1.5 billion outstanding and $721 million of remaining contractual availability after letters of credit. The company reported compliance with debt covenants. Approximately 50.7% of long-term debt was variable-rate; a 100-basis-point rate change would alter annual interest cost by about $15.4 million.
- Boyd reported a $118.8 million working-capital deficit for its combined operations and stated that operating cash flow and available credit were expected to cover projected operating and maintenance needs for at least 12 months, subject to covenants.
Material changes, outlook, and risks
- Boyd sold its 50% Borgata interest to MGM on August 1 for $900 million gross consideration; initial net cash proceeds were approximately $589 million. Boyd also received $4.3 million related to property-tax benefits after closing. Borgata estimated additional potential property-tax refunds of $140–$160 million, which are not assured.
- Aliante was acquired for a net purchase price of $372.3 million. Its purchase-price allocation was preliminary, with $308.5 million of goodwill recorded; final fair-value determinations were expected in Q4 2016 and could differ materially.
- The proposed $230 million acquisition of Cannery Casino Hotel and Eastside Cannery remained pending. The closing date was extended to December 31, 2016; regulatory approvals, including Nevada gaming approval and FTC review, remained outstanding. Management expected closing before year-end, subject to conditions.
- Management attributed Midwest and South weakness to soft markets, increased gaming capacity, a new Biloxi competitor, and severe flooding in Louisiana and Mississippi earlier in the year. Las Vegas Locals and Downtown Las Vegas showed stronger year-to-date performance.
- Key risks include acquisition approval and integration, gaming competition and regulation, market and weather conditions, refinancing and interest-rate exposure, and the ability to realize deferred-tax assets and Borgata-related tax benefits. The company retained a $56 million valuation allowance against certain deferred-tax assets.
- Legal proceedings were described as ordinary-course matters not expected to have a material adverse effect. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate recurring operating performance from the $190.4 million tax benefit and Borgata sale gain when assessing earnings.
- Track Midwest and South revenue, gaming volume, and EBITDA trends, and the impact of new competition and flooding.
- Confirm Cannery regulatory approvals, closing timing, final consideration, and integration costs.
- Review final Aliante purchase accounting, especially the preliminary goodwill allocation.
- Monitor debt covenants, variable-rate exposure, credit-facility availability, and the realization of remaining deferred-tax assets and potential Borgata property-tax proceeds.