Boyd Gaming Corporation (10-Q): Quarter Ended September 30, 2013
Unaudited results for the three and nine months ended September 30, 2013. Boyd operated 21 wholly owned gaming properties and a controlling interest in Borgata across eight states. The periods include Peninsula Gaming, acquired in November 2012, so reported year-over-year growth is not wholly comparable on an existing-property basis. Dollar amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Net revenue | $738.6 | $612.4 | $2,212.9 | $1,858.1 |
| Operating income | $78.3 | $49.4 | $239.1 | $186.5 |
| Operating margin | 10.6% | 8.1% | 10.8% | 10.0% |
| Net loss attributable to Boyd | $(37.3) | $(15.8) | $(32.9) | $(9.0) |
| Net loss per share | $(0.37) | $(0.18) | $(0.35) | $(0.10) |
| Net interest expense | $82.6 | $73.8 | $265.2 | $202.0 |
Management-reported Adjusted EBITDA was $155.3 million in Q3 versus $103.6 million, and $478.9 million for nine months versus $351.2 million. Peninsula contributed $130.7 million of Q3 net revenue and $400.4 million for the nine-month period. Adjusted EBITDA is a non-GAAP measure.
- Cash flow: Nine-month operating cash flow was $233.8 million, compared with $147.5 million. Capital expenditures were $100.6 million; cash from operations less capital expenditures was approximately $133.2 million.
- Cash and liquidity: September 30 cash and cash equivalents were $165.8 million, with restricted cash of $27.2 million. Working capital was negative; management reported deficits totaling approximately $147.7 million across Boyd, Peninsula and Borgata. Boyd’s new credit facility had $293.6 million of availability after letters of credit; Peninsula had $31.8 million and Borgata $40.5 million.
- Debt: Balance-sheet long-term debt, net of current maturities, was $4.313 billion, with $29.8 million of current maturities. The company also reported substantial separately managed Peninsula and Borgata borrowings. Management said all relevant credit-facility covenants were met at quarter-end.
- Equity: Boyd sold 18.975 million shares in August, raising approximately $216.7 million before expenses. Shares outstanding were 107.8 million at September 30.
Material changes versus the prior comparable period
- Net revenue increased 20.6% in Q3 and 19.1% for nine months, mainly reflecting Peninsula; same-property results were mixed. Midwest and South revenue declined 7.8% in Q3 and 5.0% for nine months. Las Vegas Locals improved modestly, while Atlantic City grew in Q3 but was flat year to date.
- Operating income increased, but Boyd’s attributable net loss widened. Management cited higher selling, general and administrative costs, depreciation and amortization, and interest expense. Q3 included a $27.1 million loss on early debt extinguishments.
- Same-property gaming indicators weakened: excluding Peninsula, Q3 slot drop fell 3.8% and table-game drop 1.9%; for nine months, slot drop fell 3.7% and table-game drop 3.4%.
- Boyd sold the Echelon site for $350 million gross and received approximately $157 million net after costs and the LVE-related payment. It also sold Dania Jai-Alai for $65.5 million, recording an $18.9 million pretax gain ($12.2 million after tax); Dania results are presented as discontinued operations.
- The company refinanced its principal credit facility and redeemed its 6.75% and 7.125% subordinated notes; Borgata partially redeemed its 9.5% notes. These transactions contributed to debt-extinguishment charges.
Outlook, risks and unusual items
- Management described an uneven economic recovery and reduced discretionary spending, particularly among casual players. It emphasized balance-sheet improvement, debt reduction, operating efficiency and selective, disciplined acquisition opportunities. No specific earnings or revenue guidance was provided.
- Management expected cash flows and credit-facility availability to cover projected operating and maintenance needs for at least 12 months, subject to working-capital requirements, covenants and continued access to financing. It cautioned that additional financing may not be available on acceptable terms.
- Peninsula’s Kansas Star development continued; the full project was contractually due by January 14, 2015. Management cited potential construction, cost, approval and competition risks. Borgata received a New Jersey Internet Gaming Permit on October 9, 2013, after quarter-end, and was preparing an online gaming launch.
- Material exposures include the Copeland litigation, which could threaten Treasure Chest’s license if resolved adversely; Blue Chip property-tax assessments, for which $14.7 million was accrued; and Borgata property-tax appeals. A court decision issued after quarter-end reduced Borgata’s assessed real-property values for 2009 and 2010, with estimated refunds and interest of about $57 million, but the city indicated it would appeal and Boyd recorded no gain pending a final decision.
- Other notable items include a $5.0 million CRDA-related impairment, a $1.3 million Echelon-materials write-down, and a preliminary Peninsula purchase-price allocation subject to revision. The annual 2013 goodwill and indefinite-lived intangible impairment test was still in progress, with any resulting charge unclear.
Important facts for investors to verify
- Separate Peninsula’s acquired revenue and EBITDA from underlying same-property trends, particularly the continued weakness in Midwest and South gaming activity.
- Review the complete debt maturities, covenant calculations, restricted-payment terms and actual borrowing availability across Boyd, Peninsula and Borgata; access to cash is not fully fungible among them.
- Assess whether operating cash flow can sustain maintenance and development spending while servicing high debt and interest costs.
- Track the Copeland case, Blue Chip tax assessments, Borgata’s expected property-tax appeal and refund, and the outcome of the annual impairment test.
- Consider the effects of share issuance and dilution, competitive pressure, discretionary-spending weakness, and the execution and financing risks of Kansas Star development and online gaming.