Boyd Gaming Corporation — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. Unaudited results; amounts below are in U.S. dollars. Boyd operated 15 wholly owned gaming properties and controlled Borgata, reported across Las Vegas Locals, Downtown Las Vegas, Midwest and South, and Atlantic City.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $590.2m | $595.4m | $1,729.6m | $1,589.0m reported; $1,747.2m pro forma |
| Operating income | $68.2m | $54.5m | $178.3m | $148.2m reported; $156.3m pro forma |
| Net income (loss) attributable to Boyd | $3.1m | $5.6m | $(3.4)m | $17.4m |
| Basic earnings (loss) per share | $0.04 | $0.06 | $(0.04) | $0.20 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $182.9m | $241.0m |
Q3 net revenue fell about 0.9%, while operating income rose about 25%, reflecting cost control and lower depreciation and amortization. Operating margin was approximately 11.5%, versus 9.1%. Boyd-attributable earnings nevertheless declined, principally because of higher interest expense and prior-period nonrecurring income. Nine-month revenue and profit comparisons are affected by Borgata consolidation: on a pro forma basis assuming Borgata was consolidated from January 1, 2010, revenue declined modestly and 2011 operating income of $178.3m compared with $156.3m. Nine-month net loss also reflects higher interest costs and the absence of prior-year nonrecurring gains and fee income.
Management’s segment Adjusted EBITDA was $122.0m for Q3, versus $115.4m; for nine months it was $352.2m versus $312.1m reported. The nine-month comparison is not fully comparable because Borgata was consolidated for only part of the 2010 reported period. Management’s comparable pro forma segment figures show Atlantic City Adjusted EBITDA down 10.8% to $120.6m; the other wholly owned segments collectively improved.
Liquidity, debt and financial position
- Cash and cash equivalents were $187.1m at September 30, up from $145.6m at December 31, 2010. Working capital was negative $387.3m, versus negative $87.5m, primarily because $363.6m of debt was classified as current.
- Long-term debt, net of current maturities, was $2.802bn; current maturities were $363.6m. These figures exclude $221.9m of LVE non-recourse obligations, classified as current. Consolidated debt carrying value including current maturities was approximately $3.166bn.
- Boyd’s credit facility had approximately $564.5m of contractual availability and a 3.3% blended borrowing rate. Boyd reported covenant ratios of 7.15x total leverage against a 7.75x maximum, 4.25x secured leverage against a 4.50x maximum, and 2.26x interest coverage against a 2.00x minimum. Management said it was in compliance; covenant headroom was limited.
- Borgata had $15m drawn and $135m available on its $150m revolving facility. Boyd is not a guarantor of Borgata’s facility or senior secured notes. Borgata reported covenant EBITDA of $155.4m and liquidity of $135m, above its respective $150m and $30m minimums.
- Nine-month operating cash flow was $182.9m, down $58.0m year over year. Capital expenditures were $55.5m; investing cash use was $62.8m and financing cash use was $78.6m. Cash increased $41.5m over the period.
- Interest expense was $60.1m in Q3 versus $45.8m, and $184.1m for nine months versus $109.4m reported. Cash paid for interest in the nine months was $221.0m.
Changes, outlook and notable items
- Management described operating trends as stabilizing amid improving tourism, room rates and convention activity, but gave no quantified earnings or revenue guidance. It cited cost discipline and margin improvement as ongoing priorities.
- Performance varied by market: Q3 Adjusted EBITDA improved in Las Vegas Locals and Midwest and South; Atlantic City declined amid regional competition and a three-day Borgata closure for Hurricane Irene. Sam’s Town Tunica also closed from May 1 to May 28 because of Mississippi River flooding.
- On October 4, 2011, Boyd completed the IP Casino Resort Spa acquisition for $278m cash, made a separate $10m charitable commitment, and planned approximately $44m of improvements. Management reported financing about $200m of the acquisition with a credit-facility borrowing. IP results begin in Q4.
- On November 2, Boyd entered a lender joinder for a $350m term-loan increase, expected to fund November 10 and repay debt otherwise due in May 2012. The filing said the funding remained subject to continuing representations, warranties and covenant compliance.
- The proposed $80m Dania Jai-Alai sale was extended to on or before November 28, 2011; closing was not assured. Boyd had received $5m previously and an additional non-refundable $2m extension payment, $1m of which would be credited to the purchase price.
- Echelon remained suspended; Boyd did not expect construction to resume for three to five years and said acceptable financing was unavailable. Assets held for development totaled $1.120bn. Boyd estimated annual suspension-period project expenses of $15m–$17m, in addition to capitalized costs and the LVE periodic-fee arrangement.
- LVE’s construction loan was in default and all $221.9m of its non-recourse obligations were classified current. Boyd said this debt was not guaranteed by Boyd and would not require Boyd’s working capital to service; however, the consolidated entity reported LVE operating cash outflows and the facility’s pledged collateral.
- Unusual items included a $5m Borgata trademark impairment, $9.7m of nine-month Blue Chip property-tax accrual reductions, $1.6m of net Tunica flood expenses, and acquisition-related costs. The Blue Chip property-tax liability was approximately $14.6m at quarter-end, subject to unresolved assessments.
- Boyd estimated a potential Nevada use-tax refund of $17.5m–$19.9m, but recorded no gain. A November 8, 2011 administrative decision denied the claims; Boyd intended to appeal. The Treasure Chest license litigation remained pending, and an adverse outcome could materially affect the business.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The quarterly dividend remained suspended; no shares were repurchased during the nine-month period.
Key facts for investors to verify
- Whether the $350m term-loan increase funded as expected and how the May 2012 maturity exposure changed after the IP acquisition.
- Current covenant calculations and headroom, particularly secured leverage, following the subsequent borrowing and acquisition.
- Comparable operating performance excluding Borgata consolidation effects, and Borgata’s results amid regional competition and promotional spending.
- Closing status and proceeds from the Dania Jai-Alai sale, and the actual cash and debt effects of the IP acquisition and planned improvements.
- Developments in Echelon/LVE obligations and default, the Nevada tax appeal, Blue Chip assessments, and the Treasure Chest litigation.