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BYD > SEC Filings for BYD > Form 10-K on 18-Mar-2013All Recent SEC Filings

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Form 10-K for BOYD GAMING CORP


18-Mar-2013

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Executive Overview
Boyd Gaming Corporation (the "Company," "Boyd Gaming," "we" or "us") is a multi-jurisdictional gaming company that has been operating for approximately 37 years.

Our Properties
We are a diversified operator of 21 wholly-owned gaming entertainment properties and one controlling interest in a limited liability company. Headquartered in Las Vegas, we have gaming operations in Nevada, Illinois, Louisiana, Mississippi, Indiana, Kansas, Iowa and New Jersey, which we aggregate in order to present the following five reportable segments:


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Las Vegas Locals
   Gold Coast Hotel and Casino                     Las Vegas, Nevada
   The Orleans Hotel and Casino                    Las Vegas, Nevada
   Sam's Town Hotel and Gambling Hall              Las Vegas, Nevada
   Suncoast Hotel and Casino                       Las Vegas, Nevada
   Eldorado Casino                                 Henderson, Nevada
   Jokers Wild Casino                              Henderson, Nevada

Downtown Las Vegas
   California Hotel and Casino                     Las Vegas, Nevada
   Fremont Hotel and Casino                        Las Vegas, Nevada
   Main Street Station Casino, Brewery and Hotel   Las Vegas, Nevada

Midwest and South
   Sam's Town Hotel and Gambling Hall              Tunica, Mississippi
   IP Casino Resort Spa                            Biloxi, Mississippi
   Par-A-Dice Hotel and Casino                     East Peoria, Illinois
   Blue Chip Casino, Hotel & Spa                   Michigan City, Indiana
   Treasure Chest Casino                           Kenner, Louisiana
   Delta Downs Racetrack Casino & Hotel            Vinton, Louisiana
   Sam's Town Hotel and Casino                     Shreveport, Louisiana

Peninsula Gaming
Diamond Jo Dubuque                                 Dubuque, Iowa
Diamond Jo Worth                                   Northwood, Iowa
Evangeline Downs Racetrack and Casino              Opelousas, Louisiana
Amelia Belle Casino                                Amelia, Louisiana
Kansas Star Casino                                 Mulvane, Kansas

Atlantic City
   Borgata Hotel Casino & Spa                      Atlantic City, New Jersey

Hawaiian Operations
In addition to these properties, we own and operate a travel agency in Hawaii, and a captive insurance company, also in Hawaii, that underwrites travel-related insurance.

Dania Jai-Alai
We also own and operate Dania Jai-Alai, which is a pari-mutuel jai-alai facility with approximately 47 acres of related land located in Dania Beach, Broward County, Florida. The results of Dania Jai-Alai are included as part of the "Other" category in our segment information. As discussed in Note 24, Subsequent Events, on February 22, 2013, we and Dania Entertainment entered into the New Dania Agreement for the sale of certain assets and liabilities of the Dania Jai-Alai Business, for a purchase price of $65.5 million. The closing of the transactions contemplated by the New Dania Agreement is expected to occur on or prior to May 24, 2013, subject to certain closing conditions. Echelon Development
We owned 87 acres of land on the Las Vegas Strip, where our multibillion dollar Echelon development project was to be located. On August 1, 2008, we announced the delay of Echelon. We originally expected to resume development in the project in three to five years. However, as discussed in Note 5, Assets Held for Development, and Note 24, Subsequent Events, during the three months ended December 31, 2012, we reconsidered our commitment to complete the Echelon project and concluded that we would not resume development.


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On March 1, 2013, we entered into a definitive agreement with Genting to sell the Echelon site for $350.0 million in cash. The sale agreement included the 87-acre land parcel as well as site improvements, including the district energy system and central energy center that was to be built by LVE. The transaction was completed on March 4, 2013, and we received $157.0 million of net proceeds after payment of a portion of the proceeds to a third party to fulfill our obligations to LVE Energy Partners, LLC.

Our Emphasis
We operate gaming entertainment properties, most of which also include hotel, dining, retail and other amenities. Our main business emphasis is on slot revenues, which are highly dependent upon the volume and spending levels of customers at our properties, which affects our operating results.

Our properties have historically generated significant operating cash flow, with the majority of our revenue being cash-based. While we do provide casino credit, subject to certain gaming regulations and jurisdictions, most of our customers wager with cash and pay for non-gaming services by cash or credit card.

Our industry is capital intensive and we rely heavily on the ability of our properties to generate operating cash flow in order to fund maintenance capital expenditures, fund acquisitions, provide excess cash for future development, repay debt financing and associated interest costs, purchase our debt or equity securities, pay income taxes and pay dividends.

Our Key Performance Indicators
We use several key performance indicators to evaluate the operations of our
wholly owned properties and Borgata. These key performance indicators include
the following indicators in the following categories:

 Gaming revenue indicators:


?            Slot handle and table game drop are indicators of volume and/or
             market share. Slot handle means the dollar amount wagered in slot
             machines and table game drop means the total amount of cash
             deposited in table games drop boxes, plus the sum of markers issued
             at all table games.


?            Slot win and table game hold percentages represent the relationship
             between slot handle and table game drop to gaming wins and losses.
             Slot win and table game hold means the difference between customer
             wagers and customer winnings on slot machines and table games,
             respectively.

Food and beverage revenue indicators: average guest check is an indicator of volume and product offerings and is defined as the average amount spent per customer visit; number of guests served is an indicator of volume; and the cost per guest served is an indicator of operating margin.

Room revenue indicators: hotel occupancy rate is an indicator of volume measuring the utilization of our available rooms; and average daily rate ("ADR") is a price indicator.

Our Strategy
Our overriding strategy is to increase shareholder value. We follow several strategic initiatives on which we are focused to improve and grow our business.

Strengthening our Balance Sheet: We remain committed to strengthening our balance sheet through diversifying and increasing cash flows to provide for deleveraging.

Operating Efficiently: We also remain committed to operating more efficiently and endeavor to prevent unneeded expense in our business. The efficiencies of our business model position us to flow a substantial portion of revenue gains directly to the bottom line. Margin improvements will remain a driver of profit growth for the Company going forward.

Evaluating Acquisition Opportunities: We evaluate potential transactions and acquisitions in a way that is strategic, deliberate, and disciplined. Our intention is to pursue opportunities that are a good fit for our business, deliver a solid return for shareholders, and are available at the right price.

Maintaining our Brand: The ability of our employees to deliver great customer service remains a key differentiator for our Company and our brands. Our employees are an important reason that our customers continue to choose our properties over the competition across the country.

Our Focus
Our focus has been and will remain on: (i) ensuring our existing operations are managed as efficiently as possible, improving profitability and remaining positioned for growth; (ii) our capital structure and strengthening our balance sheet, not just by paying


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down debt, but also by strengthening our operations and diversifying our asset base; and (iii) our growth strategy, which is built on finding those assets that are a good strategic fit and provide an appropriate return to our shareholders. Overall Outlook
We believe that our key operating results for the year ended December 31, 2012 demonstrate some recovering trends in our business with certain regions showing more favorable results than others. Although the severe economic recession over the course of the past several years has had a profound effect on consumer confidence and has shifted spending away from discretionary items, such as leisure, hospitality, gaming and entertainment activities, we realized some recoverability in our business, as we saw several consecutive quarters of encouraging trends and anticipated that this recovery would continue. However, starting in May 2012, we began to experience weakness in economic trends locally, nationally and globally, due to a variety of factors. We believe the economic recovery slowed and consumer confidence retracted during the second quarter of 2012 and as a result, our results for the second quarter did not meet our expectations, which also impacted our results for the year ended December 31, 2012. During the fourth quarter, we were encouraged to see sequential growth in our Las Vegas Locals business. We recognized $993.9 million in non-cash impairment charges related to our Echelon project. The disposal of Echelon represents our priority to strengthen our balance sheet and improve our long-term financial position.

Economic Influence
Due to a number of factors affecting consumers, including the increasing Federal deficit and uncertainties surrounding the ability to achieve reconciliation to avoid the fiscal cliff, volatility in the stock market, the European debt crisis and high unemployment levels, all of which have resulted in reduced levels of consumer spending, the outlook for the gaming industry remains unpredictable. We believe the severity and length of recovery from this economic recession has had a profound effect on consumer behavior and has led to a shift in spending from discretionary items. Because of these uncertain conditions, we have increasingly focused on managing our operating margins and increasing our brand awareness. Our present objective is to manage our cost and expense structure to address current business volumes, generate strong and stable cash flows and position the Company to benefit from improved flow through of revenue growth.

Positioning
We continually work to position our Company for greater success by strengthening our existing operations and growing through capital investment and other strategic initiatives. For instance, in November 2012, we completed the Peninsula Acquisition and added five properties to our portfolio; the Kansas Star Casino, Hotel and Event Center in Mulvane, Kansas, Diamond Jo Casino in Dubuque, Iowa, Diamond Jo Casino in Northwood, Iowa, Evangeline Downs Racetrack and Casino in Opelousas, Louisiana, and Amelia Belle Casino in Amelia, Louisiana.

In October 2011, we purchased the IP Casino Resort Spa (the "IP") which is a premier casino resort on the Mississippi gulf coast and includes 1,100 guest rooms and suites, a 70,000 square-foot casino, a 1,400-seat theater offering regular headline entertainment, a spa and salon, 73,000 square feet of meeting and convention space, as well as eight restaurants. Additionally, in January 2009, we opened our 22-story hotel at Blue Chip Casino, Hotel and Spa in Michigan City, Indiana ("Blue Chip"), which includes 300 guest rooms, a spa and fitness center, additional meeting and event space, as well as new dining and nightlife venues.

Boyd Brand Awareness
We have also established a nationwide branding initiative and loyalty program. Previously, players were able to use their "Club Coast" or "B Connected" cards to earn and redeem points at nearly all of our wholly-owned Boyd Gaming properties in Nevada, Illinois, Indiana, Louisiana and Mississippi. In June 2010, we launched an enhanced, multi-property player loyalty program under the "B Connected" brand, which replaced the "Club Coast" program. Customers under the "Club Coast" program were able to keep all earned benefits and club points they had previously earned under the program. The new "B Connected" club, among other benefits, extends the time period over which players may qualify for promotion and increases the credits awarded to reel slot and table games players.
In addition to the "B Connected" player loyalty program, we launched the "B Connected Mobile" program in July 2010. "B Connected Mobile," the first multi-property, loyalty program based iPhone application of its kind in the gaming industry, is a personalized mobile application that delivers customized offers and information directly to a customer's iPhone, iPad. or Android device, making "B Connected Mobile" the first application of its kind available on multiple platforms. The application further expands the benefits of the "B Connected" program. "B Connected Mobile" provides real-time personalized information when a customer visits a Boyd property, including hotel, dining and gaming offers, such as "Best Rates Available" on hotel rooms for "B Connected" members, instant access to event information, schedules and special offers at all Boyd Gaming properties using a search engine which allows customers to find Boyd Gaming casinos that have their favorite machines and displays the games' locations on a casino floor map, the ability to track "B Connected" point balances in real time, and the ability to make immediate hotel or restaurant reservations. These tools help customers get the greatest value out of their B Connected membership, and ensure that our marketing is as effective as possible.


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We have continued to improve our B Connected loyalty program with the introduction of "B Connected Social" in the first quarter of 2012, which rewards users for using B Connected Online, B Connected Mobile, or sharing offers and events on social networks. B Connected Social is a dynamic network loyalty program that allows B Connected members to share offers with friends, connect to their favorite social networks, check in online via certain social networks, as well as, participate in a variety of online activities including interfacing with B Connected Online or B Connected Mobile, participate in online contests, and register for alerts to deliver targeted information specific to the B Connected member.

Borgata Brand Awareness
Borgata sponsors its own program to expand its brand awareness and leverage its strong loyalty card program, predicated on efforts to use marketing and promotional programs to serve an important role: to retain existing customers, maintain trip frequency and acquire new customers. Borgata offer its guests comprehensive, competitive and targeted marketing and promotion programs. The "My Borgata Rewards" program, for example, offers players a hassle-free way of earning slot dollars, comp dollars and other rewards and benefits based on game play, with convenient on-line access of account balances and other program information. In addition, Borgata strives to differentiate its casino with high-quality guest services to further enhance overall brand and customer experience to position Borgata as the must visit property in Atlantic City.

Other Promotional Activities
From time to time, we offer other promotional offers and discounts targeted towards new customers, frequent customers, inactive customers, customers of various levels of play, and prospective customers who have not yet visited our properties, as well as mid-week and other promotional activities that seek to generate visits to our properties during slower periods. Comp dollars, generally in the form of monetary discounts, and other rewards generally can only be redeemed at our restaurants, retail and spa facilities. Development Activities
Echelon
On August 1, 2008, we announced the delay of Echelon. We originally expected to resume development in the project of three to five years. As discussed in Note 5, Assets Held for Development, and Note 24, Subsequent Events, in December 2012, we reconsidered our commitment to complete the Echelon project and concluded that we would not resume development.

On March 1, 2013, we entered into a definitive agreement with Genting to sell the Echelon site for $350.0 million in cash. The sale agreement included the 87-acre land parcel as well as site improvements, including the district energy system and central energy center that was to be built by LVE. The transaction was completed on March 4, 2013, and we received $157.0 million of net proceeds after payment of a portion of the proceeds to a third party to fulfill our obligations to LVE Energy Partners, LLC.

Central Energy Facility
LVE is a joint venture between Marina Energy LLC and DCO ECH Energy, LLC. We had entered into an ESA with LVE to design, build, own (other than the underlying real property which is leased from Echelon) and operate a district energy system and central energy center for our planned Echelon resort development to provide electricity, emergency electricity generation, and chilled and hot water to Echelon and potentially other joint venture entities associated with the Echelon development project or other third parties.

LVE began construction of the facility in 2007 and expected to provide full energy services to Echelon in 2010, when we originally expected to open. However, LVE suspended construction in January 2009, after our announcement of the delay of Echelon. On April 3, 2009, LVE notified us that, in its view, Echelon would be in breach of the ESA unless it recommences and proceeds with construction of the Echelon development project by May 6, 2009.

On March 1, 2013, as part of the sale of the Echelon site, we entered into a definitive agreement with LVE to permit Genting to acquire LVE's power plant improvements on the Echelon site. The transaction was completed on March 4, 2013 and Genting paid LVE $187.0 million at the closing.
We regularly evaluate opportunities for growth through the development of gaming operations in existing or new markets, along with opportunities associated with acquiring other gaming entertainment facilities.

Other Events
Acquisition of Peninsula Gaming
On November 20, 2012, we completed the Peninsula Acquisition pursuant to an Agreement and Plan of Merger, under which an indirect wholly-owned subsidiary of the Company acquired the assets and assumed the liabilities. Accordingly, the acquired assets and liabilities of Peninsula Gaming are included in our consolidated balance sheet as of December 31, 2012 and the results of its operations and cash flows are reported in our consolidated statements of operations and cash flows from November 20, 2012


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through December 31, 2012, during the year ended December 31, 2012. The Peninsula Acquisition added five properties to our portfolio: the Kansas Star Casino, Hotel and Event Center in Mulvane, Kansas; Diamond Jo Casino in Dubuque, Iowa; Diamond Jo Casino in Northwood, Iowa; Evangeline Downs Racetrack and Casino in Opelousas, Louisiana; and Amelia Belle Casino in Amelia, Louisiana.

New Development Agreements
On July 24, 2012, we announced that we had entered into a development agreement with Sunrise Sports Entertainment, LLP, the operator of the BB&T Center, a major entertainment venue in South Florida and home to the NHL's Florida Panthers, for a new project in Broward County, Florida. The agreement provides the Company the opportunity to take advantage of the potential to expand gaming in South Florida at the site of the BB&T Center.

On July 24, 2012, we announced a development agreement and management agreement with Wilton Rancheria, a federally-recognized tribe located about 30 miles southeast of Sacramento, California, to develop and manage a gaming entertainment complex.

Borgata Closure Due to Post-Tropical Storm The Borgata was ordered to close from October 28, 2012 to November 2, 2012 by the Division of Gaming Enforcement Office of the Attorney General of the State of New Jersey ("NJDGE") due to a post-tropical storm. As a result of the storm, the property suffered minor property damage, however, the surrounding area experienced severe flooding and significant property damage.

RESULTS OF OPERATIONS
Summary
Years Ended December 31, 2012, 2011 and 2010 We believe that our key operating results for the year ended December 31, 2012 demonstrate some recovering trends in our business with certain regions showing more favorable operating results than others. Although over the course of the past several years, the severe economic recession has had a profound effect on consumer confidence, and has shifted spending away from discretionary items, such as leisure, hospitality, gaming and entertainment activities, results during the year ended December 31, 2012 indicate that we continue to face a challenging economic environment despite having realized some stabilizing trends in our business. Generally, the job market is strengthening, as the national unemployment rate has continued to decline throughout 2012; however, these favorable factors were offset by fluctuating consumer confidence and uncertainties regarding government fiscal policies. Starting in May 2012, we began to experience weakness in economic trends locally and nationally, that were further amplified by the global macro-economic issues, due to a variety of factors. As the job market recovers and expands, we believe that consumer confidence will strengthen further.

Specifically, in our Las Vegas Locals region, visitor counts, room rates and convention sales began to stabilize and slightly increase over the prior year. Our Downtown Las Vegas segment is benefiting from successful marketing efforts to our Hawaiian customers, and the strength of the local Hawaiian economy. The economy in the Midwest and South region has been more resilient than the national and Las Vegas economies. Although we continue to be the market leader in Atlantic City, the entire market continues to experience a difficult period, due to increased local and regional competition, as well as the recovery that is ongoing due to the post-tropical storm that closed the Borgata from October 28, 2012 to November 2, 2012.

As discussed in Note 3, Consolidation of Certain Interests, we concluded that a change in control of the Borgata had occurred and we began consolidating the Borgata into our financial statements effective March 24, 2010. We had previously accounted for and reported the Borgata as an equity method investment. Given the significance of the impact of this change in accounting method on our financial statements and to enhance the understanding of our financial results, in addition to a comparison of our actual results, we are also providing a supplemental comparison of certain line items in our results of operations for the year ended December 31, 2010 on a pro forma basis, giving effect to the consolidation of Borgata as if it had occurred on January 1, 2010, rather than March 24, 2010. The pro forma presentations are provided for the purposes of comparability, and all such results and discussions reflecting these pro forma adjustments are identified as such.


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Overview of Key Operating Results
Years Ended December 31, 2011, 2010 and 2009
                                                            Years Ended December 31,
                                              2012            2011            2010            2010
                                                                             Actual         Pro Forma
                                                                 (In thousands)
Net revenues                              $ 2,487,426     $ 2,336,238     $ 2,140,899     $ 2,299,188
Operating income (loss)                      (854,875 )       233,104         189,359         197,504
Net income (loss) attributable to Boyd
Gaming Corporation                           (908,865 )        (3,854 )        10,310          10,310

Years Ended December 31, 2012 and 2011
Net Revenues
Net revenues were $2.5 billion for the year ended December 31, 2012 as compared to $2.3 billion for the comparable period in the prior year, an increase of approximately $151 million or 6.5%. The Peninsula Acquisition, which occurred on November 20, 2012, renumerated $56.9 million in net revenues during the year ended December 31, 2012. Additionally, the IP, acquired on October 4, 2011, contributed $187.9 million in net revenues during the year ended December 31, 2012, as compared to $44.6 million in net revenues during the period from October 4, 2011 through December 31, 2011. Our year to date results were impacted by weaker than expected mid-year results, and our increase in net revenues were partially offset by increased promotional activities. Promotional allowances increased by $30.7 million primarily due to $2.2 million related to the acquisition of Peninsula Gaming on November 20, 2012, and a full year of IP promotional allowances of $47.1 million, compared to $11.6 million in the prior year for the period from October 4, 2011 to December 31, 2011. The incremental increase in promotional allowances from Peninsula Gaming and IP was offset by a $6.9 million decrease in promotional activities at Borgata. As discussed below, we saw stabilizing and improving trends throughout the year ended December 31, 2012, which were offset by a decline in certain local markets, the most significant decrease of which was in Atlantic City.

Operating Income (Loss)
Operating loss was $854.9 million for the year ended December 31, 2012 as compared to operating income of $233.1 million for the year ended December 31, 2011. The primary decrease was due to $1.1 billion of non-cash impairment charges, of which $993.9 million related to the Echelon project and $17.5 million related to the write-down of the Sam's Town Shreveport gaming license in connection with our annual impairment test. Additionally, the decrease in operating income was due to an increase in gaming, food and beverage, and selling, general and administrative expenses that were not offset by a proportionate increase in net revenues. Although Peninsula Gaming contributed $56.9 million in incremental net revenues, this increase was offset by a $44.1 million decrease in net revenues at Borgata, which was closed from October 28, 2012 to November 2, 2012, due to a post-tropical storm. Operating income was also negatively impacted by other operating items, net, which included charges of $18.7 million of acquisition costs related primarily to the acquisition of Peninsula Gaming and the evaluation of other acquisition opportunities during the year ended December 31, 2012.

Net Loss Attributable to Boyd Gaming Corporation Net loss attributable to Boyd Gaming Corporation was $908.9 million for the year ended December 31, 2012, compared to a net loss of $3.9 million for the . . .

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