Boyd Gaming Corporation (10-Q): Q2 2012
Reporting period: Quarter and six months ended June 30, 2012. Unaudited results; comparisons are with the corresponding 2011 periods. Boyd operated gaming properties across six states, reported in four segments, and consolidated Borgata and the variable-interest entity LVE.
Financial results
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net revenue | $615.2 million | $574.4 million | $1,248.3 million | $1,139.3 million |
| Operating income | $58.2 million | $62.0 million | $134.8 million | $110.1 million |
| Net income (loss) attributable to Boyd | $1.0 million | $(3.0) million | $6.8 million | $(6.5) million |
| Basic EPS | $0.01 | $(0.03) | $0.08 | $(0.07) |
| Operating cash flow | Not separately presented | Not separately presented | $108.8 million | $97.6 million |
- Net revenue increased 7.1% in Q2 and 9.6% for the six-month period. IP, acquired in October 2011, contributed $47.3 million and $96.4 million, respectively.
- Operating income declined 6.1% in Q2, but rose 22.5% for six months. Operating margin was approximately 9.5% in Q2 versus 10.8% a year earlier, and 10.8% for six months versus 9.7%.
- Segment Adjusted EBITDA was $113.8 million in Q2 versus $118.4 million, and $247.6 million for six months versus $230.2 million. Midwest and South growth, including IP, offset weakness in Las Vegas and Atlantic City.
- Q2 consolidated net loss was $0.7 million, while net income attributable to Boyd was $1.0 million, reflecting losses attributable to noncontrolling interests. The six-month consolidated net income was $5.8 million.
- Six-month operating cash flow was $108.8 million; capital expenditures were $70.4 million, up from $30.9 million. Cash increased to $360.5 million from $178.8 million at year-end.
- At June 30, total debt principal was approximately $3.58 billion, excluding $224.1 million of LVE non-recourse obligations. Boyd’s reported long-term debt, net of current maturities and discounts/fees, was $3.48 billion; Borgata had $815.7 million of debt principal.
- Boyd’s credit facility had approximately $300.4 million of availability; Borgata’s facility had $50.8 million. Consolidated working capital was $35.1 million, compared with a $129.1 million deficit at year-end; the filing says this was affected by $200 million funded to an acquisition subsidiary and held in short-term investments.
Material changes and notable items
- Q2 net revenue benefited from IP, while Boyd’s Las Vegas Locals and Downtown Las Vegas revenues fell 1.8% and 1.1%; Borgata revenue fell 4.0%. Borgata Adjusted EBITDA fell 20.5% in Q2 amid lower table-game and slot activity and increased competition.
- Midwest and South revenue grew 28.6% in Q2 and 30.5% for six months, substantially reflecting IP. Excluding IP, management cited strength at certain Louisiana properties.
- Q2 operating expenses included $6.2 million of acquisition-related costs. Net other operating items included insurance gains associated with Tunica flooding and the Borgata construction fire; for six months, net gains in this category were $1.9 million. These items helped comparisons with 2011, which included a $5.0 million Borgata trademark impairment and flood-related costs.
- Interest expense was $64.8 million in Q2, down from $66.7 million, and $128.6 million for six months, up from $124.0 million. Boyd issued $350 million of 9.00% senior notes due 2020 in June.
Outlook, risks and contingencies
- Management said early-2012 trends had shown some recovery, but economic weakness, slower job creation and declining consumer confidence emerged from May; Q2 results were below expectations. No quantified earnings or revenue guidance was provided.
- Boyd agreed to acquire Peninsula Gaming for approximately $1.45 billion, subject to closing conditions and regulatory approvals, with closing anticipated in Q4 2012. Planned funding included an $825 million term loan, a $50 million revolver, $350 million of senior notes and a seller promissory note initially expected to be approximately $144 million. A potential 2016 earnout is tied to Kansas Star EBITDA. Failure to close under specified circumstances could trigger a termination fee of up to $45 million.
- After quarter-end, Boyd priced an additional $350 million of acquisition-related notes at 8.375%, due 2018; closing was expected August 16, 2012. The notes were subject to special mandatory redemption if the acquisition did not close by the stated outside date.
- Boyd was in compliance with its credit-facility covenants at June 30, but reported total leverage of 7.05x against a 7.50x maximum. Management estimated a 9.2% decline in trailing EBITDA, assuming debt unchanged, could breach the total leverage covenant. The filing also reports a 3.69x secured leverage ratio against a 4.25x limit and 2.55x interest coverage against a 2.00x minimum.
- Echelon remained suspended; management did not expect construction to resume for another three to five years and cited lack of suitable financing. The project carried approximately $1.09 billion in development assets. Recurring suspension-period costs were estimated at $15.5–$17.0 million annually, in addition to other project costs and obligations under the energy agreement.
- Key exposures include intense competition and discretionary consumer spending, refinancing and covenant headroom, acquisition financing and integration, possible asset impairments, and weather-related disruptions. The Copeland litigation could threaten the Treasure Chest gaming license; the filing says an adverse outcome could materially affect the company.
- Other matters include an unresolved Nevada meal-tax dispute and an estimated $10.4–$15.0 million Blue Chip property-tax obligation, against which Boyd had accrued approximately $15.0 million. Borgata’s pension plans were in critical status; its estimated potential withdrawal liability was over $47 million for one plan and approximately $4.0 million for other plans.
- 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 Peninsula Gaming closed on the expected timetable, the final purchase consideration and financing, and resulting consolidated debt and covenant capacity.
- Current credit-facility availability, covenant calculations and headroom, particularly if EBITDA weakens.
- Underlying property performance excluding IP and one-time insurance, acquisition and tax items; monitor trends in Las Vegas and Borgata.
- Cash conversion and capital spending, including the uses and availability of cash held for the acquisition.
- Developments in the Treasure Chest litigation, Nevada tax proceedings, Blue Chip assessments, Borgata pension obligations and Echelon impairment assumptions.