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BYD > SEC Filings for BYD > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for BOYD GAMING CORP

Form 10-K for BOYD GAMING CORP


14-Mar-2014

Annual Report


ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information included in this Annual Report on Form 10-K. In addition to the historical information, certain statements in this discussion are forward-looking statements based on current expectations that involve risks and uncertainties. Actual results and the timing of certain events may differ significantly those projected in such forward-looking statements.

EXECUTIVE OVERVIEW
Boyd Gaming Corporation (the "Company," "Boyd Gaming," "we" or "us") is a multi-jurisdictional gaming company that has been operating for almost 40 years.

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, Indiana, Iowa, Kansas, Louisiana, Mississippi and New Jersey. We view each operating property as an operating segment. For financial reporting purposes, we aggregate our properties into the following five reportable segments:


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
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

Borgata
   Borgata Hotel Casino & Spa                      Atlantic City, New Jersey

In addition to these properties, we own and operate a travel agency and a captive insurance company that underwrites travel-related insurance, each located in Hawaii. Financial results for these operations are included in our Downtown Las Vegas segment, as our Downtown Las Vegas properties concentrate their marketing efforts on gaming customers from Hawaii.

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 number 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, repurchase our debt or equity securities, pay income taxes and pay dividends.

Our focus has been and will continue to remain on: (i) ensuring our existing operations are managed as efficiently as possible, and remain positioned for growth; (ii) improving our capital structure and strengthening our balance sheet, including paying down


debt, improving operations and diversifying our asset base; and (iii) successfully implementing our growth strategy, which is built on identifying development opportunities and acquiring assets that are a good strategic fit and provide an appropriate return to our shareholders.

Our Strategy
Our overriding strategy is to increase shareholder value. We are focused on the following strategic initiatives to improve and grow our business.

Strengthening our Balance Sheet
We are committed to finding opportunities to strengthen our balance sheet through diversifying and increasing cash flow to reduce our debt.

Operating Efficiently
We are 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 us going forward.

Evaluating Acquisition Opportunities
Our evaluations of potential transactions and acquisitions are strategic, deliberate, and disciplined. Our goal is to identify and 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 helps distinguish our Company and our brands from our competitors. Our employees are an important reason that our customers continue to choose our properties over the competition across the country.

Our Key Performance Indicators
We use several key performance measures to evaluate the operations of our
properties. These key performance measures include the following:

 Gaming revenue measures:


            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 handle and table game drop are measures of volume and/or market
             share.


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

Food and beverage revenue measures: average guest check means the average amount spent per customer visit and is a measure of volume and product offerings; number of guests served ("food covers") is an indicator of volume; and the cost per guest served is a measure of operating margin.

Room revenue measures: hotel occupancy rate measures the utilization of our available rooms; and average daily rate ("ADR") is a price measure.

RESULTS OF OPERATIONS

Overview
                                                            Year Ended December 31,
(In millions)                                          2013          2012          2011
Net revenues                                        $ 2,894.4     $ 2,482.8     $ 2,330.8
Operating income (loss)                                 278.3        (850.3 )       236.0
Net income (loss) attributable to Boyd Gaming
Corporation                                             (80.3 )      (908.9 )        (3.9 )

Net Revenues
The increases in our net revenues over the periods presented are primarily due to our strategic acquisitions. In 2013, net revenues increased approximately $411.6 million, or 16.6%, over the prior year due to the $463.4 million of incremental revenues contributed


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by Peninsula, which was acquired in November 2012 (the "Peninsula Acquisition"). Partially offsetting this increase was a $60.0 million decline in revenues from the Midwest and South segment due primarily to a decrease in slot volume.

Net revenues increased approximately $152.0 million, or 6.5%, for 2012 as compared to 2011 due primarily to the $143.0 million in incremental revenues contributed by IP Casino Resort Spa ("IP") in Biloxi, Mississippi, which was acquired in October 2011, and the addition of Peninsula, which contributed $56.9 million in net revenues during 2012 for the period following its acquisition. These increases were partially offset by reductions in revenues from our Las Vegas Locals segment and Borgata.

Operating Income (Loss)
The variations in our reported operating income (loss) over the periods presented are primarily due to $1.05 billion of non-recurring, non-cash impairment charges recorded in 2012, which included $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 2013, our operating income increased $1.13 billion over the operating loss reported for 2012, reflecting the impact of the 2012 impairment charges and the contribution of $64.8 million in incremental operating income from Peninsula.

In 2012, the reported operating loss reflected a $1.09 billion decrease from the operating income reported in 2011. The decrease is due primarily to the 2012 impairment charges and to the increase in other operating items, net, reflecting charges of $18.7 million related to the acquisition of Peninsula and the evaluation of other acquisition opportunities.

Net Loss Attributable to Boyd Gaming Corporation The variations in the net loss attributable to Boyd Gaming Corporation over the reporting periods are also primarily due to the 2012 impairment charges. Also contributing to the variations are increases in interest expense due to the incremental debt incurred to fund acquisitions and the impact on the net loss of our income tax provision. These items are discussed further below.

Operating Revenues
We derive the majority of our gross revenues from our gaming operations, which generated approximately 74%, 72% and 72% of gross revenues for 2013, 2012 and 2011, respectively. Food and beverage gross revenues represent our next most significant revenue source, generating approximately 13%, 14% and 14% of gross revenues for 2013, 2012 and 2011, respectively. Room revenues and other revenues separately contributed less than 10% of gross revenues during each year. The shift in the mix of our revenues is primarily due to the fourth quarter 2012 acquisition of Peninsula, whose properties generally offer fewer amenities than our other properties and, in particular, do not have hotels.


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                                    Year Ended December 31,
(In millions)                  2013          2012          2011
REVENUES
Gaming                      $ 2,479.0     $ 2,106.2     $ 1,982.2
Food and beverage               446.4         417.2         387.7
Room                            265.4         264.9         246.2
Other                           165.2         145.2         134.6
Gross revenues                3,356.0       2,933.5       2,750.7
Less promotional allowances     461.6         450.6         419.9
Net revenues                $ 2,894.4     $ 2,482.9     $ 2,330.8

COSTS AND EXPENSES
Gaming                      $ 1,170.8     $ 1,006.8     $   920.1
Food and beverage               240.1         219.5         199.7
Room                             54.3          55.5          56.1
Other                           121.6         111.0         108.8
                            $ 1,586.8     $ 1,392.8     $ 1,284.7
MARGINS
Gaming                          52.77 %       52.20 %       53.58 %
Food and beverage               46.21 %       47.39 %       48.49 %
Room                            79.54 %       79.05 %       77.21 %
Other                           26.39 %       23.55 %       19.17 %

Gaming
Gaming revenues are comprised primarily of the net win from our slot machine operations and to a lesser extent from table games win. Gaming revenues increased by 17.7% during 2013 as compared to the prior year primarily due to the $431.4 million increase in gaming revenues contributed by Peninsula. Partially offsetting the increase was a $63.2 million decrease in gaming revenues in our Midwest and South segment. Excluding Peninsula, our overall slot handle decreased 4.0%, while slot hold remained relatively unchanged in 2013 compared to 2012. Gaming margin increased by 0.6 percentage points due to our continuing focus on cost containment measures.

Gaming revenues increased by $124.0 million, or 6.3%, during 2012 as compared to the prior year primarily due to a $118.6 million increase in gaming revenues at IP, compared to gaming revenues contributed by IP in the prior year following its October 2011 acquisition. Excluding IP and Peninsula, overall slot handle decreased 1.7%, while slot hold remained relatively unchanged compared to the prior year. Although gaming margins decreased slightly from 53.6% to 52.2%, we continue to focus on our cost containment measures.

Food and Beverage
Food and beverage revenues increased $29.2 million, or 7.0%, during 2013 as compared to 2012 due to the $35.2 million increase in food and beverage revenues contributed by Peninsula, which was offset by a $5.2 million decline in the Midwest and South segment. Excluding Peninsula, the number of food covers decreased 7.1%, while the average guest check increased 2.7%. The $20.6 million increase in food and beverage expense is due to the inclusion of a full year of expense for Peninsula.

In 2012, food and beverage revenues increased by $29.4 million, or 7.6%, as compared to 2011 primarily due to a $28.0 million increase in food and beverage revenues at IP, compared to revenues for the period from consummation on October 4, 2011 through December 31, 2011, and the addition of $4.0 million in revenues following the acquisition of Peninsula. Excluding Peninsula, the number of food covers increased 5.9%, and the average guest check increased 2.1%. The $23.6 million increase in food and beverage expense is due to the 5.9% increase in food covers and a 3.6% increase in the cost per cover.

Room
Room revenues increased by $0.5 million in 2013 compared to 2012. Room revenues were unaffected by the Peninsula acquisition, since the Peninsula properties do not offer hotels. ADR and hotel occupancy decreased 1.5% and 0.5%, respectively, largely driven by a decrease in leisure travel. Room margins improved by 0.5% due to our focus on cost containment measures.


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In 2012, room revenues increased by $18.7 million, or 7.6%, of which IP contributed $23.1 million in incremental revenues compared to the prior year period from its acquisition consummation on October 4, 2011 through December 31, 2011. ADR increased 1.5%, which was slightly offset by a 1.7 percentage point decrease in hotel occupancy largely driven by a decrease in leisure travel. Room margins improved from 77.2% to 79.0% due to our cost containment measures, as the increase in our cost per room of less than 1.0% was more than offset by the 1.5% increase in ADR.

Other
Other revenues increased by $20.0 million, or 13.8%, of which Peninsula contributed $16.2 million in incremental revenues during 2013 compared to 2012. Other expenses increased by $10.6 million primarily due to the incremental expenses from Peninsula. Other operating margin improved 2.8 percentage points due to our cost containment measures.

During 2012, other revenues increased by $10.6 million, or 7.9%, of which IP contributed $9.0 million in incremental revenues compared to the prior year period from consummation on October 4, 2011 through December 31, 2011. Additionally, the Peninsula Acquisition that closed on November 20, 2012, resulted in $1.7 million of incremental other revenues for 2012. Related other expenses remained relatively flat as compared to the prior year due to our cost containment measures, resulting in an increase in overall margins.

Revenues by Reportable Segment
The following table presents our net revenues by Reportable Segment for 2013,
2012 and 2011.

                                         Year Ended December 31,
(In millions)                         2013         2012         2011
Net Revenues by Reportable Segment
Las Vegas Locals                   $   591.5    $   591.3    $   605.0
Downtown Las Vegas                     222.7        224.2        224.3
Midwest and South                      864.2        924.2        771.4
Peninsula                              520.3         56.9            -
Borgata                                695.7        686.2        730.3
Net revenues                       $ 2,894.4    $ 2,482.8    $ 2,331.0

Las Vegas Locals
Net revenues for our Las Vegas Locals segment in 2013 were essentially flat as compared to the prior year. Declines of 1.0% in gaming revenues and food and beverage revenues were offset by a 3.8% increase in room revenues and a 3.8% reduction in promotional allowances. The decline in gross gaming revenues reflects a 4.1% decline in slot drop, partially offset by a 1.3% increase in table drop.

In 2012, net revenues declined 2.3% as compared to the prior year. An elevated promotional environment created by local competition resulted in a 2.7% increase in promotional allowances during 2012. Additionally, gross gaming revenues decreased $13.0 million primarily due to 4.3% and 1.7% decreases in table game drop and slot drop, respectively, which were only partially offset by slight increases in table game and slot hold. These decreases were also partially offset by sales growth generated in our food and beverage outlets as food covers increased 3.2%, resulting in a $2.3 million increase in food and beverage revenues as compared to the prior year.

Downtown Las Vegas
Net revenues decreased by 0.7% in 2013 as compared to the prior year due to a 1.0% decline in gaming revenues, which was primarily due to a decline in slot drop.

In 2012, net revenues were virtually unchanged as compared to 2011. We experienced a 2.4% decrease in the hotel occupancy rate due to a challenging leisure travel market, primarily driven by a 7.3% decrease in our Hawaiian occupied rooms compared to the prior year. Additionally, we experienced a $2.2 million decrease in gaming revenue due to a 1.8% decrease in slot drop. These decreases were offset by a $1.1 million increase in food and beverage revenues and a decrease of $0.8 million in promotional allowances due to our cost containment focus.


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Midwest and South
Net revenues decreased by $60.0 million during 2013 as compared to 2012. This decrease was primarily due to a $59.2 million, or 7.0%, decrease in gaming revenues. Table game drop and slot handle decreased 5.0% and 7.2%, respectively, as compared to prior year. Food and beverage revenues and room revenues also declined by 4.0% and 3.8%, respectively. Food covers decreased 7.1%, while the average guest check increased 2.7%. Occupancy decline 2.9 percentage points and ADR decreased 0.5% in the segment.

Net revenues increased by $152.8 million during 2012, as compared to 2011. The increase in net revenues was due to the acquisition of IP, which contributed $187.9 million in net revenues in 2012 compared to $44.6 million in net revenues for the period following its acquisition in the fourth quarter of 2011, an increase of $143.3 million. Including IP, food covers increased 24.3% and the average guest check increased 8.7%. Similarly, including IP, table game drop and slot handle increased 34.3% and 16.6%, respectively, as compared to the prior year.

Peninsula
The increase in net revenues for the Peninsula segment reflects the full year contribution in 2013, as compared to only a partial year in 2012 for the period following the November 20, 2012 acquisition.

For 2012, net revenues were $56.9 million for the period of acquisition from November 20, 2012 to December 31, 2012. The segment reported growth from the prior year when Peninsula was a standalone company, due to a full year of contributions from the Kansas Star, which commenced operations on December 20, 2011.

Borgata
Net revenues for 2013, as compared to 2012, increased by $9.5 million, or 1.4%. The increase is primarily the result of a $6.6 million, or 1.1%, increase in gaming revenues and a $2.9 million, or 7.2%, increase in other revenues. Borgata launched its real-money online gaming website during fourth quarter 2013, which contributed $2.2 million of the gaming revenue increase. Borgata continues to be impacted by increased local and regional competition, particularly in the Atlantic City and Eastern Pennsylvania gaming markets. The increase in gaming revenues was attributed to a 1.6% increase of in slot drop and a 2.12 percentage point increase in table game win percentage. Borgata continues to be the market leader in Atlantic City.

Net revenues for 2012, as compared to 2011, decreased by 6.0% to $686.2 million from $730.3 million. Overall, results during 2012 were negatively impacted by the order to close Borgata from October 28, 2012 to November 2, 2012 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. Additionally, throughout the year, Borgata was adversely impacted by increased local and regional competition particularly in the Atlantic City and Eastern Pennsylvania gaming markets. As a result of these factors, gaming revenues, food and beverage revenues, and room revenues decreased by $39.3 million, $7.7 million, and $2.1 million, respectively. The decrease in gaming revenues was attributed to a decrease in table game drop and slot drop of 9.7% and 3.8%, respectively.

Other Operating Costs and Expenses
The following operating costs and expenses, as presented in our consolidated
statements of operations, are further discussed below:
                                         Year Ended December 31,
(In millions)                          2013         2012        2011
Selling, general and administrative $   490.2    $  449.3     $ 392.5
Maintenance and utilities               166.4       154.3       152.8
Depreciation and amortization           278.4       214.2       195.2
Corporate expense                        63.2        50.7        49.0
Preopening expense                        9.0        11.5         6.6
Impairment of assets                     10.4     1,053.5         6.1
Asset transactions costs                  5.6        18.4         6.6
Other operating items, net                6.0       (11.8 )       1.4

Selling, general and administrative
Selling, general and administrative expenses include marketing, technology, compliance and risk, surveillance and security. These costs, as a percentage of gross revenues, were 14.6%, 15.3% and 14.3% for 2013, 2012 and 2011, respectively. The decrease in 2013 from 2012 is due to the lower proportionate costs contributed by Peninsula and our ongoing cost containment efforts. The


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increase in selling, general and administrative expenses as a percentage of gross revenues in 2012 as compared to 2011 was largely due to a decrease in gross gaming revenues in our Las Vegas Locals, Downtown, and Borgata segments.

Maintenance and Utilities
Maintenance and utilities expenses, as a percentage of gross revenues, were 5.0%, 5.3% and 5.6% for 2013, 2012 and 2011, respectively. The decreases between the periods are primarily due to the fact that no major maintenance projects were undertaken in the periods, coupled with cost reductions associated with the Company's energy savings initiatives.

Depreciation and Amortization
Depreciation and amortization expense, as a percentage of gross revenues, was 8.3%, 7.3% and 7.1% for 2013, 2012 and 2011, respectively. The increases in this expense as a percentage of gross revenues are primarily due to the 2012 acquisition of Peninsula and the additional amortization expense for identified intangible assets. If the amortization of the Peninsula intangible assets is excluded from the calculation, the percentages for 2013 and 2012 would be 6.9% and 7.0%, respectively.

Corporate Expense
Corporate expense represents unallocated payroll, professional fees, rent and various other administrative expenses that are not directly related to our casino and/or hotel operations, in addition to the corporate portion of share-based compensation expense. The levels of corporate expense, as a percentage of gross revenues, for 2013, 2012 and 2011 were 1.9%, 1.7% and 1.8%, respectively. The increase in 2013 over the prior year is primarily due to increased share-based compensation expense.

Preopening Expenses
We expense non-recurring costs of start-up activities as incurred. Such costs include preopening activities prior to our decision to discontinue the Echelon project, our ongoing efforts to develop gaming activities in new jurisdictions and expenses related to other new business development activities, including internet gaming.

Impairment of Assets
Impairment charges for 2013 include a $5.0 million charge to impair Borgata's New Jersey Casino Reinvestment Development Authority ("CRDA")-related deposits, a $3.2 million charge to recognize the impairment of certain trademarks, and a $0.9 million charge for the impairment of the gaming license at Sam's Town Shreveport.

During 2012, we recorded non-cash impairment charges of $1.05 billion, primarily consisting of $993.9 million related to the Echelon development and $39.4 million related to various parcels of undeveloped land. Additional impairment charges included a non-cash impairment charge of $17.5 million to write-down Sam's Town Shreveport's gaming license and a $2.8 million impairment charge at Borgata related to a parking structure project that will not be further developed.

During 2011, we recorded a $5.0 million impairment of the Borgata trademark, and a $1.1 million non-cash impairment charge related to Borgata's investment in an unconsolidated subsidiary.

Asset Transactions Costs
Asset transactions costs are comprised of certain costs incurred and recoveries realized related to the activities associated with various acquisition opportunities, dispositions, including, but not limited to, the sale of Echelon, and other business development activities.

Other Operating Items, Net
Other operating items, net, is generally comprised of miscellaneous non-recurring operating charges, including direct and non-reimbursable costs associated with natural disasters and severe weather, including hurricane and flood expenses. During 2013, such costs totaled $6.0 million, including a $2.1 million charge at Borgata to adjust self-insurance reserves related to prior periods.

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