Boyd Gaming Corporation — Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; financial statements are unaudited. Boyd operated 16 wholly owned gaming properties and a controlling interest in Borgata, across six states.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net revenue | $613.3 million | $590.2 million | $1,861.6 million | $1,729.6 million |
| Operating income | $48.3 million | $68.2 million | $183.2 million | $178.3 million |
| Net income (loss) attributable to Boyd | $(15.8) million | $3.1 million | $(9.0) million | $(3.4) million |
| Basic diluted EPS | $(0.18) | $0.04 | $(0.10) | $(0.04) |
| Company-defined Adjusted EBITDA | $103.6 million | $122.0 million | $351.2 million | $352.2 million |
Q3 net revenue rose about 3.9%, but operating income fell about 29.1%; nine-month revenue rose about 7.6% and operating income about 2.8%. Q3 gaming costs grew faster than gaming revenue: gaming revenue increased 3.2%, while gaming expense increased 9.8%. Gaming margin fell to 51.0% from 53.9% for Q3 and to 52.6% from 53.7% year to date. Higher selling, general and administrative expense and interest costs weighed on results. Q3 income tax benefit reflected settlements of uncertain tax positions and releases of prior reserves.
By segment, Midwest and South was the strongest contributor, including IP Casino, acquired in October 2011. Las Vegas Locals and Atlantic City weakened: Q3 segment Adjusted EBITDA was $24.3 million versus $30.8 million and $33.4 million versus $50.3 million, respectively. Borgata revenue fell 7.4% in Q3 and its Adjusted EBITDA fell 33.7%, amid lower table-game activity and regional competition.
Operating cash flow was $145.8 million for the first nine months, down from $182.9 million. Capital expenditures were $101.7 million, up from $55.5 million. Cash and cash equivalents were $343.8 million at September 30, versus $178.8 million at year-end; however, $364.2 million of current assets was restricted acquisition financing escrow. Balance-sheet current assets exceeded current liabilities by approximately $25.4 million.
Debt carrying value was approximately $3.87 billion, excluding $224.6 million of non-recourse LVE obligations; total outstanding principal, including $350 million of acquisition notes held in escrow, was about $3.91 billion. Boyd’s revolving credit availability was about $300.3 million. Interest expense was $74.1 million in Q3, up from $60.1 million, and $202.7 million year to date, up from $184.1 million. Boyd reported compliance with its credit-facility covenants, but limited headroom: its secured leverage ratio was 3.84 against a 4.25 maximum, and management estimated a 2.1% decline in trailing EBITDA could cause a breach. Dividends remained suspended; no shares were repurchased during the period.
Material developments, outlook and risks
- Peninsula Gaming acquisition: Boyd agreed to acquire Peninsula for approximately $1.45 billion and expected to close in Q4 2012, subject to approvals and other conditions. Financing included $350 million of 8.375% notes held in escrow and a proposed $825 million term loan plus $50 million revolver. If the acquisition did not close by February 1, 2013, the notes were subject to mandatory redemption. The transaction would materially increase debt; the filing estimated Peninsula would have approximately $1.155 billion of debt after refinancing, in addition to a roughly $144 million seller note and a possible 2016 earnout.
- Management commentary: Management described some recovery in the first part of 2012, followed by weaker economic trends and consumer confidence beginning in May; it said trends stabilized later in the quarter. Midwest and South showed relative resilience, while Las Vegas Locals faced weaker casual-customer play and aggressive promotions. Atlantic City faced intensified competition.
- Echelon development: Construction remained suspended. Boyd did not expect to resume for another three to five years and reported approximately $1.09 billion in development assets, with no impairment recorded. The company expected recurring suspension-period costs of $15.5–$17.0 million annually, in addition to other project costs; future impairment remains possible.
- Contingencies: A continuing lawsuit seeks to revoke the Treasure Chest gaming license; a September 2012 ruling limited the plaintiff’s recovery, but discovery continued. Nevada meal-tax and refund disputes remained unresolved; Boyd recorded no gain and estimated a reasonably possible adverse tax assessment of up to $0.5 million. Blue Chip property-tax exposure was accrued at $13.3 million, with final assessments pending.
- Other exposures: Borgata participates in underfunded multiemployer pension plans; its estimated withdrawal liability to the principal fund alone exceeded $47 million, assuming hypothetical immediate withdrawal. Natural disasters and interruptions can affect operations; Borgata was ordered closed October 28–November 2, 2012 after a post-tropical storm, with minor reported damage and financial impact still being assessed.
- No quantified earnings guidance was provided. Management said operating cash flows and available credit were expected to meet operating and maintenance capital needs for at least 12 months, while noting that financing availability and terms were uncertain.
Important facts for investors to verify
- Whether the Peninsula acquisition closed as expected, its final purchase-price adjustments, financing and resulting consolidated leverage.
- Quarterly covenant calculations and headroom, particularly the secured leverage and interest-coverage tests.
- Whether operating weakness in Las Vegas and Atlantic City persists, and whether Midwest and South growth offsets it.
- Final outcomes and cash impacts of the Nevada tax disputes, Blue Chip property assessments and Treasure Chest litigation.
- Recoverability of Echelon’s approximately $1.09 billion carrying value and the continuing costs of the suspended project.
- The extent of storm-related Borgata losses and insurance recovery, and the evolving exposure from multiemployer pension plans.