BOYD GAMING CORP annual report, FY2011

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Boyd Gaming Corporation — FY2011 Form 10-K Summary

Business context and reporting period

Fiscal year ended December 31, 2011; fourth-quarter figures are also noted below. Boyd operated gaming and hospitality properties across six states, reported in Las Vegas Locals, Downtown Las Vegas, Midwest and South, and Atlantic City segments. The filing’s year-over-year comparisons are affected by the acquisition of IP in October 2011 and Boyd’s consolidation of Borgata beginning in March 2010; pro forma comparisons are used where available.

Financial performance and condition

  • Revenue: FY2011 gross revenue was $2.756 billion and net revenue was $2.336 billion, up 1.6% from FY2010 pro forma net revenue of $2.299 billion. Promotional allowances increased to $419.9 million from $353.8 million.
  • Profitability: Operating income was $233.1 million, versus $197.5 million on a FY2010 pro forma basis, an 18.0% increase. Management attributed the improvement primarily to operating efficiencies and cost containment. Net loss attributable to Boyd was $3.9 million, compared with net income of $10.3 million in 2010, largely reflecting higher interest expense. Adjusted EBITDA, a non-GAAP measure, was $506.3 million.
  • Fourth quarter: Net revenue was $606.7 million, operating income was $54.8 million, and net loss attributable to Boyd was $0.5 million (loss per share of $0.01). In Q4 2010, these were $551.9 million, $41.2 million, and a $7.1 million loss, respectively.
  • Cash flow and investment: Operating cash flow was $253.5 million, down from $269.4 million. Cash capital expenditures were $87.2 million; investing activities used $362.8 million, including $278.5 million paid for IP. Cash and cash equivalents ended the year at $178.8 million. Management forecast approximately $142 million of 2012 capital expenditures, including $44 million of IP improvements.
  • Debt and liquidity: Long-term debt, net of current maturities, was $3.347 billion; reported current maturities were $43.2 million. Boyd’s credit facility had approximately $1.633 billion outstanding and $136.8 million of contractual availability. Working capital was negative $129.1 million on a consolidated basis; excluding non-recourse LVE, Boyd and Borgata reported deficits of $91.9 million and $8.5 million, respectively.
  • Covenants and interest-rate exposure: Boyd reported compliance with its credit facility covenants at year-end. It estimated that a 5.3% decline in trailing EBITDA, with secured debt unchanged, would breach the secured leverage limit; the corresponding estimated declines were 12.3% for total leverage and 20.1% for interest coverage. Boyd also disclosed that 62.8% of its debt was variable-rate at year-end; a 100-basis-point rate change was estimated to change annual interest costs by about $16.3 million for Boyd and $0.4 million for Borgata.

Material changes versus the prior comparable period

  • IP contributed $44.6 million of net revenue and $3.2 million of operating income from its October 4 acquisition through year-end. The net purchase price was approximately $280.6 million; Boyd planned an additional $44 million of improvements.
  • On a pro forma basis, Las Vegas Locals revenue was nearly flat while Adjusted EBITDA rose 6.1%; Downtown Las Vegas revenue and Adjusted EBITDA rose 2.8% and 2.9%. Midwest and South revenue and Adjusted EBITDA rose 5.8% and 16.3%, respectively, with IP contributing to the increases.
  • Borgata’s FY2011 net revenue was $730.3 million, down 1.1% from FY2010 pro forma, and Adjusted EBITDA was $158.1 million, down 6.7%. Competition and higher promotional spending weighed on results.
  • Interest expense increased to $250.7 million from $185.6 million on a FY2010 pro forma basis. Boyd cited higher borrowing costs and Borgata’s 2010 refinancing as key factors.

Outlook, management commentary, risks and unusual items

  • Management described business trends as stabilizing and noted improving visitation, room rates and convention activity in some markets, while emphasizing that the economic and consumer-spending outlook remained uncertain. Cost control, operating efficiency, balance-sheet strengthening and selective acquisitions were stated priorities.
  • Echelon, Boyd’s multibillion-dollar Las Vegas Strip project, remained suspended; the company did not expect to resume construction for three to five years and gave no assurance that it would resume. The project’s carrying value was approximately $1.09 billion, with no impairment recorded. Boyd expected $15.5–$17.0 million in annual recurring suspension-period expenses and capitalized preservation costs.
  • Under its Echelon energy-facility agreement, Boyd agreed to periodic fees fixed at $11.9 million annually through November 2013 and estimated at approximately $10.8 million annually thereafter, plus operation and maintenance fees capped at $0.6 million annually without approval. Boyd also held an option to purchase the facility assets for $195.1 million, subject to adjustments.
  • Unusual FY2011 items included a $7.0 million gain from forfeited deposits after the proposed Dania Jai-Alai sale failed to close; a $4.6 million bargain-purchase gain on IP; a $9.7 million reduction in Blue Chip property-tax accruals; a $5.0 million Borgata trademark impairment; and a $1.1 million impairment of Borgata’s investment in an unconsolidated venture.
  • Key risks include substantial leverage and refinancing needs, tight secured-leverage covenant headroom, competition and economic sensitivity, gaming regulation and taxes, severe weather, and Borgata’s regional competitive pressures. The Copeland litigation could threaten Treasure Chest’s gaming license. Nevada meal-tax refund litigation remained unresolved; Boyd recorded no expected refund gain. Flood-related insurance recovery for Tunica was still under discussion.
  • Borgata had $47.1 million of estimated unfunded vested liability to a critical-status multiemployer pension fund, with estimated withdrawal exposure potentially exceeding that amount. Boyd suspended its dividend in 2008 and paid none in FY2011. Its proposed online-poker arrangements with bwin.party depended on U.S. legalization and regulatory approvals.

Important facts for investors to verify

  • Reconcile reported FY2011 results with pro forma comparisons, especially the effects of Borgata consolidation and the IP acquisition.
  • Track debt maturities, refinancing access, credit-facility availability and covenant headroom as EBITDA and interest rates change.
  • Assess whether IP’s planned $44 million investment and ongoing operations produce the expected returns.
  • Monitor Echelon’s carrying value, annual suspension costs, LVE obligations and any decision to restart, restructure or abandon the project.
  • Follow Borgata’s promotional spending, market competition, pension exposure and 2014 credit-facility maturity, along with the Treasure Chest litigation and Nevada tax appeal.