Boyd Gaming Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. The company operated 15 wholly owned gaming properties and a controlling interest in Borgata across four reportable segments.
Financial performance
- Q2 revenue: Net revenue was $574.4 million, down 0.7% from $578.4 million. Operating income rose 24.8% to $62.0 million; operating margin increased to approximately 10.8% from 8.6%.
- Q2 earnings: Boyd-attributable net loss was $3.0 million, or $0.03 per share, versus net income of $3.4 million, or $0.04 per share. Higher interest expense and state income taxes contributed to the decline.
- First-half revenue and income: Net revenue was $1.139 billion. For a comparable period including Borgata for all of 2010, revenue was $1.152 billion and operating income was $101.9 million, versus $110.1 million in 2011. Boyd-attributable results shifted to a $6.5 million loss from $11.8 million of income. The reported 2010 first-half figures exclude Borgata before March 24, 2010, so reported and pro forma comparisons differ.
- Segment Adjusted EBITDA: Q2 was $128.9 million, up from $124.7 million. Midwest and South improved to $42.3 million from $35.6 million; Atlantic City declined to $38.7 million from $43.0 million. First-half segment Adjusted EBITDA was $250.4 million versus $225.8 million, with the 2010 comparison reflecting Borgata’s partial-period equity-method results.
- Cash flow: First-half operating cash flow was $97.6 million, down from $149.8 million. Capital expenditures were $30.9 million, and cash increased by $30.2 million to $175.8 million.
- Debt and liquidity: Long-term debt, including current maturities, was approximately $3.180 billion, excluding $248.1 million of LVE non-recourse obligations. Cash was $175.8 million; Boyd’s credit facility had approximately $555.7 million of remaining availability. Working capital deficit was $381.3 million, largely reflecting debt classified as due within 12 months.
- Interest and margins: First-half interest expense was $124.0 million versus $63.7 million reported in 2010; the increase reflects higher interest costs and consolidated Borgata and LVE debt. Boyd reported compliance with its credit-facility covenants, but the cushion was limited: an estimated 8.0% EBITDA decline could breach the secured leverage limit, and a 10.3% decline could breach total leverage.
Changes and notable items
- Q2 net revenue was broadly stable: gaming revenue declined 0.7%, while room revenue rose 3.0%. Management cited improved gaming margins, cost controls, and lower depreciation for the increase in operating income.
- Atlantic City faced increased regional competition and higher promotional spending; Borgata’s first-half Adjusted EBITDA was $70.3 million versus $81.0 million on a pro forma comparable basis. Las Vegas Locals and Midwest and South posted Q2 Adjusted EBITDA gains despite slightly lower segment revenue.
- A $5.0 million Borgata trademark impairment reflected weaker outlook amid competition and anticipated cannibalization. Blue Chip property-tax settlements reduced accrued expense by approximately $5.9 million in the first half.
- Sam’s Town Tunica closed from May 1 to May 28 due to Mississippi River flooding. Flood-related expense, net of recoveries, was $1.1 million; the insurance settlement remained unresolved.
- The company agreed to sell Dania Jai-Alai for $80 million, subject to closing conditions, and anticipated a third-quarter 2011 closing. Subsequent to quarter-end, it paid a $10 million deposit toward the proposed $278 million acquisition of IP Casino Resort Spa; the deal also contemplates $10 million in charitable contributions and approximately $44 million of capital improvements.
Outlook, risks, and contingencies
- No quantified earnings or revenue guidance was provided. Management described business trends as stabilizing and emphasized operating efficiency, balance-sheet improvement, and disciplined acquisition evaluation.
- Echelon remains suspended; management did not expect construction to resume for three to five years and said financing was not currently available. The company expects $15–$17 million in annual recurring suspension-period costs, in addition to other project costs. The related LVE construction loan was in default and classified as current; Boyd stated the LVE debt is non-recourse.
- Key risks include substantial leverage, refinancing needs, covenant sensitivity, restricted availability of Borgata cash flows, continued gaming competition, economic weakness, and potential impairment of development and intangible assets.
- A lawsuit challenging the Treasure Chest gaming license remained pending; an adverse outcome could materially affect the business. A Nevada meal-tax refund claim estimated at $17.5–$19.9 million remained subject to appeal, and the company had not recorded a gain. Blue Chip property-tax assessments also remained uncertain.
- The company reported that its annual goodwill and gaming-license impairment tests did not require charges, but future impairment remains possible if cash-flow assumptions weaken.
Important facts for investors to verify
- Progress and final terms for the Dania sale and IP Casino acquisition, including funding, approvals, and closing dates.
- Debt maturities and refinancing plans, covenant headroom, and whether operating performance can support interest costs.
- Whether Borgata can sustain results amid regional competition and increased promotional spending, and whether it can make distributions to Boyd.
- Insurance recovery for the Tunica closure, outcomes of the Treasure Chest litigation and tax appeals, and any changes to the $18 million Blue Chip property-tax accrual.
- Ongoing Echelon carrying costs, LVE default status, and recoverability of development assets and intangible assets.