Boyd Gaming Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unaudited results cover Boyd’s wholly owned gaming operations; Borgata is presented as discontinued operations. Amounts below are in millions of dollars unless noted.
Business context and financial performance
Boyd operated 21 wholly owned gaming properties across seven states, reported in four segments: Las Vegas Locals, Downtown Las Vegas, Midwest and South, and Peninsula.
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Net revenue | $544.9 | $559.9 | $1,097.3 | $1,110.4 |
| Operating income | $80.5 | $83.1 | $162.7 | $155.0 |
| Adjusted EBITDA | $137.9 | $140.6 | $275.6 | $270.9 |
| Continuing-operations income (loss), net of tax | $11.3 | $(12.4) | $32.9 | $18.1 |
| Discontinued-operations income, net of tax | $18.7 | $6.0 | $30.3 | $10.6 |
| Net income (loss) | $30.0 | $(6.4) | $63.2 | $28.7 |
Q2 gaming revenue fell 3.3% and food and beverage revenue fell 2.6%; room revenue rose 2.4%. Reported gaming margins were 51.9% versus 52.0% in Q2 and 51.8% versus 51.6% for the six-month period. Adjusted EBITDA was about 25.3% of net revenue in Q2 and 25.1% for the first half, compared with about 25.1% and 24.4%, respectively.
For the six months, operating cash flow was $160.3, capital expenditures were $72.4, and cash interest paid was $92.9. Cash and cash equivalents were $628.3 at June 30, versus $158.8 at year-end 2015. Total debt principal was $3,713.8; balance-sheet debt, net of unamortized costs, was $3,657.9 including current maturities. Boyd reported $592.9 of available capacity under its credit facility and $31.1 under Peninsula’s facility.
Material changes versus comparable periods
- Q2 net revenue declined 2.7%; first-half net revenue declined 1.2%. Weakness was concentrated in Midwest and South and Peninsula, partly offset by growth in the Las Vegas Locals and Downtown Las Vegas segments.
- Q2 operating income fell 3.1%, including $4.1 more project-development, preopening and writedown costs. First-half operating income rose 5.0%, mainly reflecting lower depreciation and amortization and corporate expense.
- Q2 net income improved from a loss to profit, substantially reflecting the prior-year $31.0 debt-extinguishment loss and higher Borgata discontinued-operations income. First-half net income also benefited from the prior-year debt-extinguishment loss; a $23.2 increase in income tax provision partly offset the improvement.
- Boyd issued $750 million of 6.375% senior notes due 2026 in March. Proceeds partly repaid revolving borrowings, with the remainder held in cash equivalents; Boyd’s reported interest expense increased year over year in Q2.
- Operating cash flow increased to $160.3 from $155.8 for the first half, while capital spending increased to $72.4 from $58.1.
Outlook, transactions and risks
- Management estimated 2016 capital expenditures of approximately $184 million, excluding acquisitions, for maintenance, non-gaming amenity projects and a Delta Downs hotel expansion. It expected operating cash flow and available credit capacity to fund projected operating and maintenance needs for at least 12 months, subject to covenants and business conditions.
- Boyd agreed to acquire Aliante for $380 million and Cannery and Eastside Cannery for $230 million, subject to customary closing conditions and regulatory approvals. The company expected closings by year-end 2016; the Cannery transaction was under FTC review, and Nevada gaming approvals remained outstanding. Failure to close Aliante in specified circumstances could trigger a $30 million termination fee.
- Boyd sold its 50% Borgata interest to MGM on August 1, 2016, after quarter-end, for $900 million. Initial net cash proceeds were approximately $589 million after closing adjustments and expenses. Boyd retained rights to its 50% share of potential future property-tax settlement benefits; Borgata estimated total refunds of $160 million, including amounts tied to open appeals.
- After quarter-end, Boyd gave conditional notices to redeem $350 million of Peninsula 8.375% notes due 2018 at par on September 2, 2016, and $350 million of Boyd 9.0% notes due 2020 at 104.5% on September 3, 2016. The company expected to use cash on hand and record estimated third-quarter charges of $4.5 million and $21.7 million, respectively.
- A $231.6 million valuation allowance remained against deferred tax assets at June 30. Management said a significant release might be possible in Q3, depending on the Borgata sale, income levels and visibility into future results; any release would produce a non-cash tax benefit.
- Management cited competitive pressure and expanded gaming capacity in Illinois and Biloxi, soft markets across Peninsula’s states, and flooding in parts of Louisiana and Mississippi as operating challenges. Other disclosed risks include acquisition integration and approval, project execution, gaming regulation and taxation, refinancing, interest rates and realization of Borgata tax benefits.
- Boyd stated it was in compliance with debt covenants at June 30 and that pending ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether the Aliante and Cannery acquisitions received all approvals, closed on schedule and delivered expected benefits, and how the combined funding affected leverage and liquidity.
- Cash actually received from the Borgata sale, final closing adjustments and any subsequent property-tax settlement proceeds.
- Completion and funding of the two announced note redemptions, including actual third-quarter charges and remaining debt and cash balances.
- Whether Boyd released any deferred-tax valuation allowance, and the amount and earnings impact of any release.
- Whether Midwest and South and Peninsula revenue pressures persisted, and how segment revenue, margins and Adjusted EBITDA compared with management’s stated operating priorities.