Business Context and Reporting Period
Company: Boyd Gaming Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2010
Overview: Boyd Gaming operates 15 wholly-owned gaming properties and holds a 50% interest in Borgata Hotel Casino & Spa. A material event during the 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 June 30, 2010 |
Six Months Ended June 30, 2010 |
|---|---|---|
| Net Revenues | $578,446 | $993,581 |
| Operating Income | $49,676 | $93,706 |
| Net Income (Consolidated) | $12,026 | $21,708 |
| Net Income Attributable to Boyd | $3,382 | $11,817 |
| Diluted EPS (Boyd) | $0.04 | $0.14 |
| Cash and Cash Equivalents | $100,173 | $100,173 |
| Operating Cash Flow (6 months) | N/A | $149,757 |
| Total Debt (Long-term + Current) | $3,146,614 | $3,146,614 |
| Working Capital Deficit | ($710,589) | ($710,589) |
Note: Working capital deficit calculated as Current Assets ($224,171) minus Current Liabilities ($934,760).
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 36.8% for the three months and 15.8% for the six months ended June 30, 2010, compared to the prior year. This growth is primarily driven by the consolidation of Borgata's results. Excluding Borgata, net revenues declined 7.4% (Q3) and 7.9% (YTD) due to reduced consumer spending and room rate pressures.
- Profitability: Operating income decreased 11.5% for the three months ended June 30, 2010, compared to the prior year, despite revenue growth, due to higher operating costs associated with Borgata consolidation. However, for the six months, operating income increased 12.4% compared to the prior year, largely due to the non-recurrence of a $28.4 million goodwill impairment charge related to Dania Jai-Alai recorded in 2009.
- Debt Structure: Total debt increased significantly due to the inclusion of Borgata's $626.9 million bank credit facility, which is classified as current due to its maturity in January 2011 and ongoing refinancing efforts.
- Segment Performance: Adjusted EBITDA for Las Vegas Locals, Downtown Las Vegas, and Midwest and South segments declined between 13.5% and 29.7% year-over-year for the six-month period, reflecting the challenging economic environment.
Guidance, Outlook, and Risks
- Borgata Refinancing: Borgata received approval from the New Jersey Casino Control Commission on August 4, 2010, for a proposed financing expected to close in August 2010. Proceeds are expected to include a distribution of approximately $125 million to Boyd Gaming.
- Echelon Project: The multibillion-dollar Echelon development project on the Las Vegas Strip remains delayed. Management does not expect to resume construction for three to five years due to weak economic conditions and lack of financing availability. Capitalized costs incurred to date are approximately $926 million.
- Liquidity and Covenants: The company maintains a $3 billion revolving credit facility with approximately $1.1 billion available. The company is currently in compliance with its Total Leverage Ratio covenant (6.91 to 1.00 vs. a maximum of 7.00 to 1.00). Management estimates that a 4.7% decline in trailing EBITDA could cause a covenant breach by September 30, 2010.
- Legal Contingencies:
- Copeland Litigation: Ongoing legal challenge regarding the Treasure Chest Casino license. A loss could result in the revocation of the license.
- Nevada Use Tax: The company is disputing a $12.3 million sales tax assessment plus interest regarding complimentary meals, with a hearing expected in September 2010.
- Blue Chip Property Taxes: An accrued liability of approximately $19.0 million exists for potential property tax assessments pending final valuation notices.
Investor Verification Checklist
- Borgata Consolidation Impact: Verify the sustainability of revenue growth once the one-time consolidation effect is normalized against the prior year's equity-method accounting.
- Borgata Refinancing Closure: Confirm the successful closing of the Borgata refinancing in August 2010 and the receipt of the anticipated $125 million distribution.
- Covenant Compliance: Monitor the Total Leverage Ratio closely, as a 4.7% drop in EBITDA could trigger a covenant breach, potentially restricting operations or requiring asset sales.
- Echelon Asset Impairment: Assess the risk of future impairment charges on the $926 million in capitalized Echelon costs if the project remains suspended or if market conditions deteriorate further.
- Legal Outcomes: Track the resolution of the Copeland litigation and the Nevada tax dispute, as adverse rulings could materially impact operations and cash flow.