Boyd Gaming Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; filed May 4, 2012. The interim financial statements are unaudited. Boyd operated gaming and entertainment properties across six states, reported in four segments, and consolidated Borgata and the variable-interest entity LVE. The quarter includes IP Casino Resort Spa, acquired in October 2011; the prior-year quarter did not.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 |
|---|---|---|
| Net revenue | $633.1 million | $564.9 million |
| Operating income | $76.6 million | $48.1 million |
| Operating margin | 12.1% | 8.5% |
| Net income (loss) attributable to Boyd | $5.9 million | ($3.5 million) |
| Diluted earnings (loss) per share | $0.07 | ($0.04) |
| Net cash provided by operations | $77.5 million | $77.3 million |
| Capital expenditures | $32.8 million | $20.9 million |
| Cash and cash equivalents | $156.7 million | $178.8 million at Dec. 31, 2011 |
Net revenue grew 12.1% year over year. Operating income rose 59.2%, which management attributed to IP, incremental revenue and improved operating margins. Interest expense increased 11.4% to $63.8 million. The income-tax line was a benefit of $6.3 million; the effective tax rate was 49.3%.
Cash declined $22.0 million during the quarter. Operating cash flow less capital expenditures was approximately $44.7 million. Current assets were $313.2 million versus current liabilities of $483.5 million, a working-capital deficit of $170.3 million. Boyd reported about $175.8 million of contractual availability under its credit facility, subject to covenants. Some consolidated cash and assets relate to LVE and are not available to service Boyd’s obligations.
Balance-sheet long-term debt, net of current maturities, was $3.272 billion, with $53.4 million of current maturities. LVE had an additional $223.3 million of non-recourse obligations, which are consolidated but not guaranteed by Boyd. Stockholders’ equity totaled $1.386 billion.
Material changes and segment trends
- Midwest and South: Revenue increased 32.4% to $243.7 million and Adjusted EBITDA increased 41.1% to $58.1 million. IP contributed $49.0 million of revenue and $12.7 million of Adjusted EBITDA.
- Atlantic City: Revenue rose 4.2% to $176.2 million; Adjusted EBITDA increased 22.7% to $38.9 million, with management citing stronger table-game results, non-gaming revenue and operating efficiencies.
- Downtown Las Vegas: Revenue rose 2.4% to $57.0 million, while Adjusted EBITDA declined 6.4% to $8.4 million, mainly due to higher Hawaiian charter fuel costs.
- Las Vegas Locals: Revenue was essentially flat at $154.8 million; Adjusted EBITDA declined 2.9% to $38.5 million, reflecting higher marketing and promotional pressure and weaker table-game hold at some properties.
Company-defined Adjusted EBITDA was $133.8 million versus $111.7 million. Promotional allowances increased to $110.6 million from $98.7 million. Other operating charges fell to $0.2 million from $4.7 million, primarily because Q1 2011 included a $5.0 million Borgata trademark impairment; no such impairment was recorded in Q1 2012.
Outlook, risks and unusual items
- Management described improving trends in visitation, room rates and convention activity, while noting the continuing effects of the recession and competition. The filing provides no specific quantitative earnings guidance.
- Echelon construction remains suspended. Boyd does not expect to resume construction for three to five years and reported approximately $1.09 billion of assets held for development. It expects annual suspended-project costs of $15.5–$17.0 million, plus a $4.2 million 2012 capitalized site-beautification cost and recurring capitalized costs. Management reported no impairment but will continue to assess recoverability.
- Under agreements related to Echelon’s central energy facility, Boyd pays LVE a periodic fee fixed at $11.9 million annually through November 2013, with an estimated $10.8 million annually thereafter, plus operation and maintenance fees subject to specified limits. Boyd also has an option to purchase LVE’s assets for $195.1 million, subject to adjustments. LVE’s construction loan was in default after the facility was not completed; lenders agreed not to exercise remedies through December 2013, subject to conditions.
- Boyd stated it was in compliance with credit-facility covenants, but reported limited cushion. The filing gives differing covenant ratios and downside thresholds in separate sections; one disclosure says a 10.6% EBITDA decline could breach the secured leverage limit, while another says 7.6%. Verify the controlling figures. Boyd also disclosed that Borgata’s indenture coverage ratio was below 2.0x, restricting new debt incurrence under that indenture, although borrowing under its amended revolver remained available.
- Key contingencies include the Treasure Chest license litigation, which Boyd says could materially affect its business if the license were revoked; Nevada meal-tax refund and assessment disputes, for which no gain was recorded pending final appeals; and uncertain Blue Chip property taxes, accrued at $15.4 million within a stated estimated range of $11.2–$15.4 million.
- Borgata participates in underfunded multiemployer pension plans. Its estimated unfunded vested liability to the principal fund was $47.1 million, and a hypothetical complete withdrawal could entail liability exceeding $47 million, subject to uncertainty.
- The quarterly dividend remained suspended; no shares were repurchased. Management cited consumer discretionary-spending sensitivity, regional gaming competition, refinancing and covenant risks, weather and energy costs, and potential asset impairments.
Most important facts for investors to verify
- Reconcile the inconsistent covenant ratios and EBITDA-decline thresholds disclosed in the filing; assess headroom under the covenants.
- Confirm liquidity available to Boyd versus cash consolidated from Borgata and LVE, and the terms and conditions on credit-facility availability.
- Review debt maturities, refinancing needs, and restrictions on additional borrowing, especially for Boyd and Borgata.
- Track Echelon’s carrying value, suspension costs, LVE obligations and default-related arrangements, and whether revised development plans trigger impairment.
- Monitor the Treasure Chest litigation, Nevada tax proceedings, Blue Chip property-tax assessments and Borgata pension exposure.
- Separate underlying operating trends from IP’s contribution and compare segment EBITDA using the company’s stated non-GAAP definitions.