Boyd Gaming Corporation — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; comparisons are with the corresponding 2013 periods. Boyd operated 21 wholly owned gaming properties and a controlling interest in Borgata, across eight states. Financial statements are unaudited.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net revenue | $722.5m | $738.7m | $1,430.9m | $1,474.3m |
| Operating income | $87.0m | $79.4m | $155.5m | $160.8m |
| Net income (loss) attributable to Boyd | $0.7m | $11.6m | $(5.5)m | $4.3m |
| Operating cash flow | Not separately stated for the quarter | $138.3m | $165.8m |
- Margins: Operating margin was approximately 12.0% in Q2 versus 10.7% a year earlier, and approximately 10.9% for both six-month periods. Gaming margin declined to 53.4% from 54.2% in Q2 and to 53.3% from 53.6% year to date.
- Adjusted EBITDA: Management reported $160.6m for Q2 versus $160.2m, and $305.1m for the first half versus $323.7m. This is a non-GAAP measure; management’s reconciliation and definition are in the filing.
- Cash flow and investment: First-half capital expenditures were $53.5m, implying operating cash flow less capital expenditures of about $84.8m, compared with about $107.3m in 2013. Cash and cash equivalents were $162.5m at June 30, down from $177.8m at year-end; restricted cash was $28.5m.
- Debt and liquidity: Debt principal totaled approximately $4.329bn ($4.293bn carrying value, including current maturities). Current assets of $336.7m were below current liabilities of $447.9m. Undrawn credit availability was approximately $292.3m at Boyd, $27.2m at Peninsula and $23.7m at Borgata. Management said cash flows and facilities should cover projected operating and maintenance needs for at least 12 months, subject to facility covenants.
- Interest: Net interest expense was $74.8m in Q2 and $149.9m year to date, down from $87.6m and $182.6m, respectively. Management attributed the reduction primarily to refinancing and lower debt balances. A 100-basis-point rate increase was estimated to add annual interest expense of about $14.1m at Boyd, $7.7m at Peninsula and $4.1m at Borgata.
Material changes and management commentary
- Net revenue fell 2.2% in Q2 and 2.9% for the first half. Management cited soft casual-player demand and consumer spending; unusually severe first-quarter winter weather particularly affected Midwest and South and Peninsula properties.
- Midwest and South revenue declined 6.8% in Q2 and 7.2% year to date; Peninsula revenue declined 5.9% and 7.3%. Management also cited increased gaming capacity and competition in certain markets.
- Borgata revenue rose 5.2% in Q2 and 3.1% year to date. Its online gaming site contributed $6.7m and $14.4m, respectively, partly offsetting weaker land-based results in the first half. Q2 Borgata Adjusted EBITDA also benefited from an $11.8m adjustment to its year-to-date property-tax accrual following a settlement.
- Q2 operating income improved despite lower revenue, partly because the prior-year quarter included a $5.0m impairment charge and higher Peninsula intangible amortization. First-half operating income declined, reflecting lower revenue and higher corporate expense.
- Boyd’s Q2 attributable net income was much lower than in 2013 largely because the prior-year period included $11.8m of income from discontinued operations related to the Dania Jai-Alai sale. The 2014 first-half loss likewise compares with prior-year discontinued-operation income of $10.8m.
Outlook, risks and contingencies
- The filing provides no specific revenue, earnings or EBITDA guidance. Management emphasized balance-sheet strengthening, operating efficiency and disciplined acquisition evaluation.
- Borgata’s 2011–2014 property-tax settlement provides for an $88.25m refund for 2011–2013 and an estimated $17.85m credit for 2014. The company had not recognized the refund because payment depends on the City issuing bonds or securing other dedicated funding. Separate 2009–2010 appeals remain under appeal; estimated refunds and interest total approximately $57m, but no gain will be recognized until a final non-appealable decision.
- Boyd stated that it, Peninsula and Borgata were in compliance with their debt covenants at June 30. Significant leverage, refinancing needs, restrictive covenants and exposure to variable interest rates remain key financial risks.
- Other prominent risks include gaming competition and regulatory changes, economic weakness and discretionary-spending trends, severe weather, development and construction costs, and Borgata’s ownership/partner uncertainty. The final phase of Kansas Star development was required to be completed by January 2015 under its state contract.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Atlantic City funds and pays Borgata’s $88.25m property-tax refund and estimated $17.85m credit, and the outcome of the separate 2009–2010 appeals.
- Current debt balances, maturities, covenant headroom and refinancing plans, especially for Peninsula and Borgata.
- Whether revenue and EBITDA trends improve in the Midwest and South and Peninsula, and how competition and weather affect operating results.
- The contribution, profitability and market position of Borgata’s online gaming business, alongside land-based performance.
- Progress, cost and contractual completion of the Kansas Star final development phase.