Business Context and Reporting Period
Company: Boyd Gaming Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
Overview: Boyd Gaming operates 15 wholly-owned gaming properties and holds a controlling interest in Borgata Hotel Casino & Spa. A material event during this period was the effective consolidation of Borgata on March 24, 2010, following an amendment to the operating agreement with MGM Resorts International that terminated MGM's participating rights. The company operates in four reportable segments: Las Vegas Locals, Downtown Las Vegas, Midwest and South, and Atlantic City.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Net Revenues | $595,378 | $1,588,959 |
| Operating Income | $54,483 | $148,189 |
| Net Income (Total) | $14,866 | $36,574 |
| Net Income Attributable to Boyd | $5,591 | $17,408 |
| Diluted EPS (Boyd) | $0.06 | $0.20 |
| Operating Cash Flow (9 Months) | $240,961 | |
| Long-Term Debt (Net) | $3,175,058 | |
| Cash and Cash Equivalents | $92,675 |
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 49.5% for the three months and 26.5% for the nine months ended September 30, 2010, compared to the prior year. This growth is primarily driven by the consolidation of Borgata's results, which were previously reported under the equity method.
- Profitability: Operating income increased 16.1% (three months) and 13.8% (nine months) year-over-year. Net income attributable to Boyd Gaming increased 230% for the nine-month period, aided by a $10 million payment from the Divestiture Trust and a $2.5 million gain on equity distribution from Borgata.
- Debt Structure: Total long-term debt increased significantly due to Borgata's refinancing in August 2010, which included the issuance of $800 million in senior secured notes and a new $150 million credit facility. Borgata's debt is now consolidated on Boyd's balance sheet.
- Segment Performance (Excluding Borgata Consolidation): On a comparable basis excluding Borgata consolidation, net revenues declined 2.6% (three months) and 6.2% (nine months) due to reduced consumer spending and lower visitation.
Guidance, Outlook, and Risks
- Outlook: Management cites a highly unpredictable outlook due to the economic recession, high unemployment, and reduced consumer spending. The company is focusing on cost containment and managing operating margins.
- Echelon Project: Construction on the Echelon development project on the Las Vegas Strip remains suspended. Management does not expect to resume construction for three to five years due to weak economic conditions and unavailable financing. Capitalized costs for the project totaled approximately $924.5 million as of September 30, 2010.
- Refinancing Activities: The company intends to amend its $3 billion bank credit facility to extend maturity and reduce aggregate commitments to approximately $1.5 billion. Additionally, a tender offer for 7.75% senior subordinated notes due 2012 was announced, contingent on a new $500 million senior notes offering.
- Key Risks:
- Liquidity and Debt Covenants: The company must maintain specific leverage and interest coverage ratios. A 5% decline in EBITDA could breach the Total Leverage Ratio covenant.
- Legal Proceedings: Ongoing litigation regarding the Treasure Chest Casino license (Copeland matter) poses a risk of license revocation.
- Tax Contingencies: Significant disputes exist regarding Nevada use tax refunds (potential $16.9M-$19.2M refund vs. $12.3M assessment) and Blue Chip property taxes (accrued liability of ~$20.0M).
- Impairment Risk: Continued economic weakness could trigger future impairment charges for goodwill, intangible assets, or the Echelon project assets.
Investor Verification Checklist
- Borgata Consolidation Impact: Verify the sustainability of Borgata's contribution to earnings and cash flow, noting the one-time $10 million payment and $2.5 million gain included in the current period.
- Debt Covenant Compliance: Monitor the Total Leverage Ratio (currently 6.89 to 1.00) against the maximum permitted ratio (7.25 to 1.00) and the progress of the bank credit facility amendment.
- Echelon Asset Valuation: Assess the recoverability of the $924.5 million in capitalized costs for the suspended Echelon project and potential future impairment charges.
- Legal and Tax Exposure: Review the status of the Treasure Chest license litigation and the resolution of the Nevada use tax and Blue Chip property tax disputes.
- Refinancing Execution: Confirm the successful closing of the $500 million senior notes offering and the tender offer for the 2012 notes.