Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
____________________________________________________
FORM 10-Q
(Mark One)
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number: 1-12882
___________________________________________________
BOYD GAMING CORPORATION
(Exact name of registrant as specified in its charter)
Nevada
88-0242733
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3883 Howard Hughes Parkway, Ninth Floor, Las Vegas, NV 89169
(Address of principal executive offices) (Zip Code)
(702) 792-7200
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class
Trading Symbol
Name of each exchange on which registered
Common stock, $0.01 par value
BYD
New York Stock Exchange
The number of shares outstanding of the registrant’s common stock as of May 4, 2020 was 111,251,684.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED MARCH 31, 2020
TABLE OF CONTENTS
Page
No.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
3
Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019
Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019
4
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019
5
Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2020 and 2019
6
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
33
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
44
Item 4.
Controls and Procedures
45
PART II. OTHER INFORMATION
Legal Proceedings
46
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
47
Signature Page
48
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
BOYD GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31,
December 31,
(In thousands, except share data)
2020
2019
ASSETS
Current assets
Cash and cash equivalents
Restricted cash
Total current assets
Operating lease right-of-use assets
Total assets
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Total current liabilities
Commitments and contingencies (Notes 6 and 8)
Stockholders' equity
Total stockholders' equity
Total liabilities and stockholders' equity
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
Three Months Ended
(In thousands, except per share data)
Revenues
Gaming
Food & beverage
Room
Other
Total revenues
Operating costs and expenses
Selling, general and administrative
Master lease rent expense
Maintenance and utilities
Depreciation and amortization
Corporate expense
Project development, preopening and writedowns
Other operating items, net
Total operating costs and expenses
Operating income (loss)
Other expense (income)
Interest income
Interest expense, net of amounts capitalized
Loss on early extinguishments and modifications of debt
Other, net
Total other expense, net
Income (loss) before income taxes
Income tax benefit (provision)
Net income (loss)
Basic net income (loss) per common share
Weighted average basic shares outstanding
Diluted net income (loss) per common share
Weighted average diluted shares outstanding
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Other comprehensive income, net of tax:
Fair value adjustments to available-for-sale securities, net of tax
Comprehensive income (loss)
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
Accumulated Other
Common Stock
Additional
Retained
Comprehensive
Shares
Amount
Paid-in Capital
Earnings
Income (Loss), Net
Total
Balances, January 1, 2020
Net loss
Comprehensive income, net of tax
Stock options exercised
Release of restricted stock units, net of tax
Release of performance stock units, net of tax
Shares repurchased and retired
Share-based compensation costs
Balances, March 31, 2020
Balances, January 1, 2019
Net income
Dividends declared ($0.06 per share)
Balances, March 31, 2019
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash Flows from Operating Activities
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Changes in operating assets and liabilities:
Net cash provided by operating activities
Cash Flows from Investing Activities
Net cash used in investing activities
Cash Flows from Financing Activities
Net cash provided by (used in) financing activities
Change in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, end of period
Supplemental Disclosure of Cash Flow Information
Supplemental Schedule of Non-cash Investing and Financing Activities
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
as of March 31, 2020 and December 31, 2019 and for the three months ended March 31, 2020 and 2019
______________________________________________________________________________________________________
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
Boyd Gaming Corporation (and together with its subsidiaries, the "Company," "Boyd," "Boyd Gaming," "we" or "us") was incorporated in the state of Nevada in 1988 and has been operating since 1975. The Company's common stock is traded on the New York Stock Exchange under the symbol "BYD."
We are a geographically diversified operator of 29 wholly owned gaming entertainment properties. Headquartered in Las Vegas, we have gaming operations in Nevada, Illinois, Indiana, Iowa, Kansas, Louisiana, Mississippi, Missouri, Ohio and Pennsylvania.
Going Concern Matters and Management's Assessment
As a result of the COVID-19 global pandemic, all of our gaming facilities have been closed since mid- March 2020 in compliance with orders issued by state officials as precautionary measures intended to slow the spread of the COVID-19 virus. We cannot predict when we will be permitted to re-open our casinos, the conditions on which we will be permitted or decide to operate upon re-opening, the extent of consumer demand upon re-opening or the negative effects on our workforce, suppliers, contractors and other partners. Although certain states have indicated that operations of non-essential businesses, including our gaming facilities, are suspended only through a given deadline, we cannot predict whether such deadlines will be extended. Such closures have had and will continue to have a material impact on our business. COVID-19, the associated impacts on customer behavior and the requirements of health and safety protocols are expected to continue to have a material impact on our business following the re-opening of our facilities. The severity and duration of such business impacts cannot currently be estimated.
In responding to these circumstances, the safety and well-being of our team members and customers is our utmost priority. We are developing a broad range of safety protocols to be implemented at our properties when we do re-open to ensure the health and safety of our team members and our customers.
We have taken significant additional measures in response to the impact of the COVID-19 pandemic on our business, including:
•
placing most of our team members on unpaid furlough, effective April 11, 2020;
enacting significant salary reductions among our executive leadership team and for all non-furloughed management team members;
suspending board of director compensation;
suspending all non-essential spending, including non-essential capital investment; and,
suspending our quarterly cash dividend and share repurchase programs.
In addition, on March 16, 2020, we borrowed $660 million under our Revolving Credit Facility and an additional $10 million under the Swing Loan facility of the Credit Facility (effectively utilizing the full borrowing capacity under the Revolving Credit Facility) as a precautionary measure in order to increase our cash position and preserve financial flexibility in light of current uncertainty in the global markets.
Due to the adverse impacts of COVID-19 on our business, we anticipate funding our operations over the next 12 months with the cash we currently have available and the revenues to be generated after our properties re-open. We assessed the recoverability of our assets as of the end of first quarter considering our current expectations of the timing of re-openings and the expected level of operations to be achieved post re-opening. Based on this review, we recognized pre-tax, non-cash impairment charges of $171.1 million in the first quarter of 2020. If our expectations regarding re-openings or our estimates of projected revenues and cash flows related to our assets are not achieved, we may be subject to additional impairment charges in the future, which could have a material adverse impact on our consolidated financial statements.
Although we were in compliance with our debt covenants as of the end of first quarter, the effects of the COVID-19 pandemic on our Company made it reasonably possible that we may not meet one or more of our financial covenants under our existing debt agreements in subsequent quarters of 2020. On May 8, 2020, we amended our credit facility to, among other things, waive the financial covenants for the period beginning on March 30, 2020 through the earlier of (x) the date on which the Company delivers to the administrative agent a covenant relief period termination notice, (y) the date on which the administrative agent receives a compliance certificate with respect to the Company’s fiscal quarter ending June 30, 2021, and (z) the date on which the Company fails to satisfy the conditions to covenant relief set forth in the amendment. See Note 12, Subsequent Events, for further discussion of the amendment.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all information and footnote disclosures necessary for complete financial statements in conformity with accounting principles generally accepted in the United States of America ("GAAP"). These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2019, as filed with the U.S. Securities and Exchange Commission ("SEC") on February 27, 2020.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
The results for the periods indicated are unaudited, but reflect all adjustments (consisting only of normal recurring adjustments) that management considers necessary for a fair presentation of financial position, results of operations and cash flows. Results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results that would be achieved during a full year of operations or in future periods.
The accompanying condensed consolidated financial statements include the accounts of Boyd Gaming and its wholly owned subsidiaries. Investments in unconsolidated affiliates, which do not meet the consolidation criteria of the authoritative accounting guidance for voting interest, controlling interest or variable interest entities, are accounted for under the equity method. All significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
Cash and cash equivalents include highly liquid investments, which include cash on hand and in banks, interest-bearing deposits and money market funds with maturities of three months or less at their date of purchase. The instruments are not restricted as to withdrawal or use and are on deposit with high credit quality financial institutions. Although these balances may at times exceed the federal insured deposit limit, we believe such risk is mitigated by the quality of the institution holding such deposit. The carrying values of these instruments approximate their fair values as such balances are generally available on demand.
Restricted Cash
Restricted cash consists primarily of advance payments related to: (i) future bookings with our Hawaiian travel agency; and (ii) amounts restricted by regulation for gaming and racing purposes. These restricted cash balances are invested in highly liquid instruments with a maturity of 90 days or less. These restricted cash balances are held by high credit quality financial institutions. The carrying value of these instruments approximates their fair value due to their short maturities.
The following table provides a reconciliation of cash, cash equivalents and restricted cash balances reported within the condensed consolidated balance sheets to the total balance shown in the condensed consolidated statements of cash flows.
2018
Total cash, cash equivalents and restricted cash
Leases
Management determines if a contract is or contains a lease at inception or modification of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period in exchange for consideration. Control over the use of the identified asset means the lessee has both (a) the right to obtain substantially all of the economic benefits from the use of the asset and (b) the right to direct the use of the asset. Operating lease liabilities are recognized based on the present value of the remaining lease payments, discounted using the discount rate for the lease at the commencement date. For our operating leases for which the rate implicit in the lease is not readily determinable, we generally use an incremental borrowing rate based on information available at the commencement date to determine the present value of future lease payments. Operating right-of-use ("ROU") assets and finance lease assets are recognized based on the amount of the initial measurement of the lease liability. Lease expense is recognized on a straight-line basis over the lease term. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease and non-lease components are accounted for separately.
Revenue Recognition
The Company’s revenue contracts with customers consist of gaming wagers, hotel room sales, food & beverage offerings and other amenity transactions. The transaction price for a gaming wagering contract is the difference between gaming wins and losses, not the total amount wagered. Cash discounts, commissions and other cash incentives to customers related to gaming play are recorded as a reduction of gross gaming revenues. The transaction price for hotel, food & beverage and other contracts is the net amount collected from the customer for such goods and services. Hotel, food & beverage and other services have been determined to be separate, stand-alone performance obligations and the transaction price for such contracts is recorded as revenue as the good or service is transferred to the customer over their stay at the hotel, when the delivery is made for the food & beverage or when the service is provided for other amenity transactions.
Gaming wager contracts involve two performance obligations for those customers earning points under the Company’s player loyalty programs and a single performance obligation for customers who do not participate in the programs. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as such wagers have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract. For purposes of allocating the transaction price in a wagering contract between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a point that can be redeemed for a hotel room stay, food & beverage or other amenities. Sales and usage-based taxes are excluded from revenues. An amount is allocated to the gaming wager performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. The allocated revenue for gaming wagers is recognized when the wagers occur as all such wagers settle immediately. The loyalty point contract liability amount is deferred and recognized as revenue when the customer redeems the points for a hotel room stay, food & beverage or other amenities and such goods or services are delivered to the customer. See Note 4, Accrued Liabilities, for the balance outstanding related to player loyalty programs.
The Company collects advanced deposits from hotel customers for future reservations representing obligations of the Company until the hotel room stay is provided to the customer. See Note 4, Accrued Liabilities, for the balance outstanding related to advance deposits.
The Company's outstanding chip liability represents the amounts owed in exchange for gaming chips held by a customer. Outstanding chips are expected to be recognized as revenue or redeemed for cash within one year of being purchased. See Note 4, Accrued Liabilities, for the balance outstanding related to the chip liability.
The retail value of hotel accommodations, food & beverage, and other services furnished to guests without charge is recorded as departmental revenues. Gaming revenues are net of incentives earned in our slot bonus program such as cash and the estimated retail value of goods and services (such as complimentary hotel rooms and food & beverage). We reward customers, through the use of bonus programs, with points based on amounts wagered that can be redeemed for a specified period of time for complimentary slot play, food & beverage, and to a lesser extent for other goods or services, depending upon the property.
The estimated retail value related to goods and services provided to customers without charge or upon redemption of points under our player loyalty programs, included in departmental revenues and therefore reducing our gaming revenues, are as follows:
Rooms
Gaming Taxes
We are subject to taxes based on gross gaming revenues in the jurisdictions in which we operate. These gaming taxes are recorded as a gaming expense in the condensed consolidated statements of operations. These taxes totaled approximately $110.0 million and $135.7 million for the three months ended March 31, 2020 and 2019, respectively.
Income Taxes
Income taxes are recorded under the asset and liability method, whereby deferred tax assets and liabilities are recognized based on the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. We reduce the carrying amounts of deferred tax assets by a valuation allowance if, based on the available evidence, it is more likely than not that such assets will not be realized. Use of the term "more likely than not" indicates the likelihood of occurrence is greater than 50%. Accordingly, the need to establish valuation allowances for deferred tax assets is continually assessed based on a more-likely-than-not realization threshold. This assessment considers, among other matters, the nature, frequency and severity of current and cumulative losses, forecasts of profitability, the duration of statutory carryforward periods, our experience with the utilization of operating loss and tax credit carryforwards before expiration and tax planning strategies. In making such judgments, significant weight is given to evidence that can be objectively verified.
Other Long-Term Tax Liabilities
The Company's income tax returns are subject to examination by the Internal Revenue Service and other tax authorities in the locations where it operates. The Company assesses potentially unfavorable outcomes of such examinations based on accounting standards for uncertain income taxes, which prescribe a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.
Uncertain tax position accounting standards apply to all tax positions related to income taxes. These accounting standards utilize a two-step approach for evaluating tax positions. Recognition occurs when the Company concludes that a tax position, based on its technical merits, is more likely than not to be sustained upon examination. Measurement is only addressed if the position is deemed to be more likely than not to be sustained. The tax benefit is measured as the largest amount of benefit that is more likely than not to be realized upon settlement.
Tax positions failing to qualify for initial recognition are recognized in the first subsequent interim period that they meet the "more likely than not" standard. If it is subsequently determined that a previously recognized tax position no longer meets the "more likely than not" standard, it is required that the tax position is derecognized. Accounting standards for uncertain tax positions specifically prohibit the use of a valuation allowance as a substitute for derecognition of tax positions. As applicable, the Company will recognize accrued penalties and interest related to unrecognized tax benefits in the provision for income taxes. Accrued interest and penalties are included in other long-term tax liabilities on the condensed consolidated balance sheets.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates, especially given that the full impact of COVID-19 is not yet known, and could have a material adverse impact on our consolidated financial statements.
Recently Adopted Accounting Pronouncement
Accounting Standards Update 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement ("Update 2018-13")
In August 2018, the Financial Accounting Standards Board ("FASB") issued Update 2018-13 to modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The standard is effective for financial statements issued for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company adopted Update 2018-13 during first quarter 2020 and the impact of the adoption to its condensed consolidated financial statements was not material.
Recently Issued Accounting Pronouncements
ASU ("ASU") 2020-04, Reference Rate Reform, Topic 848 ("Update 2020-04")
In March 2020, the FASB issued Update 2020-04 to provide optional guidance for a limited period of time to ease the potential burden in accounting for reference rate reform on financial reporting. Update 2020-04 is effective for all entities as of March 12, 2020 through December 31, 2022. The Company is evaluating the impact of the adoption of Update 2020-04 to the condensed consolidated financial statements.
ASU 2020-01, Investments - Equity Securities, Topic 321, Investments - Equity Method and Joint Ventures, Topic 323, and Derivative and Hedging, Topic 815 ("Update 2020-01")
In January 2020, the FASB issued Update 2020-01 to clarify guidance in accounting for certain equity securities under Topic 321, the guidance to account for investments under the equity method of accounting in Topic 323, and the guidance in Topic 815, which could change how an entity accounts for an equity security under the measurement alternative. Update 2020-01 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is evaluating the impact of the adoption of Update 2020-01 to the condensed consolidated financial statements.
A variety of proposed or otherwise potential accounting standards are currently being studied by standard-setting organizations and certain regulatory agencies. Because of the tentative and preliminary nature of such proposed standards, we have not yet determined the effect, if any, that the implementation of such proposed standards would have on our consolidated financial statements.
NOTE 2. PROPERTY AND EQUIPMENT, NET
Property and equipment, net consists of the following:
Total property and equipment
Property and equipment, net
Depreciation expense is as follows:
Depreciation expense
NOTE 3. GOODWILL AND INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
March 31, 2020
Weighted
Gross
Accumulated
Useful Life
Carrying
Impairment
Intangible
Remaining (in years)
Value
Amortization
Losses
Assets, Net
Amortizing intangibles
Customer relationships
Host agreements
Development agreement
Indefinite lived intangible assets
Trademarks
Gaming license rights
December 31, 2019
Indefinite
Balances, December 31, 2019
For the three months ended March 31, 2020, we evaluated whether events or circumstances had occurred that would indicate it is more likely than not that any of our goodwill or other intangible assets were impaired. Factors considered in this evaluation included, among other things, the amount of the fair value over carrying value from the annual impairment testing performed as of October 1, 2019, changes in discount rates, and the expected impact of the temporary property closures due to the COVID-19 pandemic on future revenues and cash flows. Based on this evaluation, we concluded that triggering events had occurred, and we reviewed our assets for impairment. For purposes of this review, we updated the discount rates to reflect the increased uncertainty of the cash flows and also updated revenue and cash flow forecasts. As a result of this review, we recorded impairment changes in our first quarter 2020 results totaling $171.1 million. Of this total, $112.0 million was for impairments of goodwill, $42.2 million for impairments of gaming license rights and $16.9 million for the impairments of trademarks.
NOTE 4. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Total accrued liabilities
NOTE 5. LONG-TERM DEBT
Long-term debt, net of current maturities and debt issuance costs, consists of the following:
Unamortized
Interest
Origination
Rates at
Outstanding
Fees and
Long-Term
Principal
Discount
Costs
Debt, Net
Bank credit facility
6.375% senior notes due 2026
6.000% senior notes due 2026
4.750% senior notes due 2027
Total long-term debt
Less current maturities
Long-term debt, net
The outstanding principal amounts under our bank credit facility are comprised of the following:
Total outstanding principal amounts under the bank credit facility
With a total revolving credit commitment of $945.5 million available under the bank credit facility, $865.0 million was borrowed on the Revolving Credit Facility, $64.9 million was borrowed on the Swing Loan and $12.6 million allocated to support various letters of credit, leaving a remaining contractual availability of $3.0 million as of March 31, 2020. As a precautionary measure to increase liquidity during the uncertainty of COVID-19, the Company increased the borrowings on its Revolving Credit Facility by $670.0 million on March 16, 2020.
See Note 12, Subsequent Events, for a discussion of an amendment to our bank credit facility.
Covenant Compliance
As of March 31, 2020, we believe that we were in compliance with the financial and other covenants of our debt instruments.
NOTE 6. COMMITMENTS AND CONTINGENCIES
Commitments
As of March 31, 2020, there have been no material changes to our commitments described under Note 9, Commitments and Contingencies, in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 27, 2020.
Contingencies
Legal Matters
We are parties to various legal proceedings arising in the ordinary course of business. We believe that all pending claims, if adversely decided, would not have a material adverse effect on our business, financial position or results of operations.
NOTE 7. LEASES
We have operating and finance leases primarily for three casino hotel properties, corporate offices, parking ramps, and gaming and other equipment. Our leases have remaining lease terms of one year to 57 years, some of which include options to extend the leases for up to 66 years, and some of which include options to terminate the leases within one year. Certain of our lease agreements, including the master lease agreement entered into by Boyd TCIV, LLC, dated October 15, 2018 (the "Master Lease"), include provisions for variable lease payments, which represent lease payments that vary due to changes in facts or circumstances occurring after the commencement date other than the passage of time. Such variable lease payments are expensed in the period in which the obligation for these payments is incurred. Variable lease expense recognized in the three months ended March 31, 2020 was not material. The Company's finance leases are not considered material.
The components of lease expense were as follows:
March 31, 2019
Operating lease cost
Short-term lease cost
Supplemental cash flow information related to leases was as follows:
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases
Right-of-use assets obtained in exchange for lease obligations:
Operating leases
Supplemental balance sheet information related to leases was as follows:
(In thousands, except lease term and discount rate)
Operating Leases
Current lease liabilities (included in accrued liabilities)
Operating lease liabilities
Total operating lease liabilities
Weighted Average Remaining Lease Term
Operating leases (in years)
Weighted Average Discount Rate
Maturities of lease liabilities were as follows:
For the period ending December 31,
Total lease payments
Long-term portion of operating lease liabilities
NOTE 8. STOCKHOLDERS' EQUITY AND STOCK INCENTIVE PLANS
Share Repurchase Program
On December 12, 2018, our Board of Directors authorized a share repurchase program of $100 million which as of March 31, 2020, had $61.4 million remaining under the plan. On March 16, 2020, the Company suspended share repurchases under the program in order to preserve liquidity during the property closure period.
The following table provides information regarding share repurchases during the referenced periods.
Shares repurchased (1)
Total cost, including brokerage fees
Average repurchase price per share (2)
(1) All shares repurchased have been retired and constitute authorized but unissued shares.
(2) Amounts in the table may not recalculate exactly due to rounding. Average repurchase price per share is calculated based on unrounded numbers.
Dividends
The dividends declared by the Board of Directors and reflected in the periods presented are:
Declaration date
Record date
Payment date
December 7, 2018
December 28, 2018
January 15, 2019
March 4, 2019
March 15, 2019
April 15, 2019
December 17, 2019
December 27, 2019
January 15, 2020
On March 25, 2020, the Company announced that the cash dividend program has been suspended to help mitigate the financial impact of the COVID-19 pandemic.
Share-Based Compensation
We account for share-based awards exchanged for employee services in accordance with the authoritative accounting guidance for share-based payments. Under the guidance, share-based compensation expense is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense, net of estimated forfeitures, over the employee's requisite service period.
The following table provides classification detail of the total costs related to our share-based employee compensation plans reported in our condensed consolidated statements of operations.
Total share-based compensation expense
Performance Shares
Our stock incentive plan provides for the issuance of Performance Share Unit ("PSU") grants which may be earned, in whole or in part, upon passage of time and the attainment of performance criteria. We periodically review our estimates of performance against the defined criteria to assess the expected payout of each outstanding PSU grant and adjust our stock compensation expense accordingly.
The PSU grants awarded in fourth quarter 2016 and 2015 vested during first quarter 2020 and 2019, respectively. Common shares were issued based on the determination by the Compensation Committee of the Board of Directors of our actual achievement of net revenue growth, Earnings Before Interest, Taxes, Depreciation and Amortization ("EBITDA") growth and customer service scores for the three-year performance period of each grant. As provided under the provisions of our stock incentive plan, certain of the participants elected to surrender a portion of the shares to be received to pay the withholding and other payroll taxes payable on the compensation resulting from the vesting of the PSUs.
The PSU grant awarded in November 2016 resulted in a total of 364,810 shares being issued during first quarter 2020, representing approximately 1.53 shares per PSU. Of the 364,810 shares issued, a total of 126,465 were surrendered by the participants for payroll taxes, resulting in a net issuance of 238,345 shares due to the vesting of the 2016 grant. The actual achievement level under the award metrics equaled the estimated performance as of year-end 2019; therefore, the vesting of the PSUs did not impact compensation costs in our 2020 condensed consolidated statement of operations.
The PSU grant awarded in October 2015 resulted in a total of 395,964 shares being issued during first quarter 2019, representing approximately 1.67 shares per PSU. Of the 395,964 shares issued, a total of 125,004 were surrendered by the participants for payroll taxes, resulting in a net issuance of 270,960 shares due to the vesting of the 2015 grant. The actual achievement level under the award metrics equaled the estimated performance as of year-end 2018; therefore, the vesting of the PSUs did not impact compensation costs in our 2019 condensed consolidated statement of operations.
NOTE 9. FAIR VALUE MEASUREMENTS
The authoritative accounting guidance for fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company's market assumptions. These inputs create the following fair value hierarchy:
Level 1: Quoted prices for identical instruments in active markets.
Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. Thus, assets and liabilities categorized as Level 3 may be measured at fair value using inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Management's assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy levels.
Balances Measured at Fair Value
The following tables show the fair values of certain of our financial instruments:
Balance
Level 1
Level 2
Level 3
Assets
Investment available for sale
Liabilities
Contingent payments
Cash and Cash Equivalents and Restricted Cash
The fair values of our cash and cash equivalents and restricted cash, classified in the fair value hierarchy as Level 1, are based on statements received from our banks at March 31, 2020 and December 31, 2019.
Investment Available for Sale
We have an investment in a single municipal bond issuance of $19.5 million aggregate principal amount of 7.5% Urban Renewal Tax Increment Revenue Bonds, Taxable Series 2007 with a maturity date of June 1, 2037 that is classified as available for sale. We are the only holder of this instrument and there is no quoted market price for this instrument. As such, the fair value of this investment is classified as Level 3 in the fair value hierarchy. The fair value of the instrument is estimated using a discounted cash flows approach and the significant unobservable input used in the valuation at March 31, 2020 and December 31, 2019 is a discount rate of 9.4% and 10.5%, respectively. Unrealized gains and losses on this instrument resulting from changes in the fair value of the instrument are not charged to earnings, but rather are recorded as other comprehensive income (loss) in the stockholders' equity section of the condensed consolidated balance sheets. At both March 31, 2020 and December 31, 2019, $0.6 million of the carrying value of the investment available for sale is included as a current asset in prepaid expenses and other current assets, and at March 31, 2020 and December 31, 2019, $17.2 million and $15.6 million, respectively, is included in other assets on the condensed consolidated balance sheets. The discount associated with this investment of $2.6 million and $2.7 million, as of March 31, 2020 and December 31, 2019, respectively, is netted with the investment balance and is being accreted over the life of the investment using the effective interest method. The accretion of such discount is included in interest income on the condensed consolidated statements of operations.
Contingent Payments
In connection with the development of the Kansas Star Casino ("Kansas Star"), Kansas Star agreed to pay a former casino project promoter 1% of Kansas Star's EBITDA each month for a period of ten years commencing on December 20, 2011. The liability is recorded at the estimated fair value of the contingent payments using a discounted cash flows approach and the significant unobservable input used in the valuation at March 31, 2020 and December 31, 2019, is a discount rate of 6.1% and 6.2%, respectively. At March 31, 2020 and December 31, 2019, there was a current liability of $0.8 million and $0.9 million, respectively, related to this agreement, which is recorded in accrued liabilities on the respective condensed consolidated balance sheets, and long-term obligation at March 31, 2020 and December 31, 2019, of $0.7 million and $0.8 million, respectively, which is included in other liabilities on the respective condensed consolidated balance sheets.
The following tables summarize the changes in fair value of the Company's Level 3 assets and liabilities:
Liability
Balance at beginning of reporting period
Total gains (losses) (realized or unrealized):
Included in interest income (expense)
Included in other comprehensive income (loss)
Included in other items, net
Purchases, sales, issuances and settlements:
Settlements
Balance at end of reporting period
We are exposed to valuation risk on our Level 3 financial instruments. We estimate our risk exposure using a sensitivity analysis of potential changes in the significant unobservable inputs of our fair value measurements. Our Level 3 financial instruments are most susceptible to valuation risk caused by changes in the discount rate. If the discount in our fair value measurements increased or decreased by 100 basis points, the change would not cause the value of our fair value measurements to change significantly.
Balances Disclosed at Fair Value
The following tables provide the fair value measurement information about our obligation under minimum assessment agreements and other financial instruments:
Outstanding Face Amount
Carrying Value
Estimated Fair Value
Fair Value Hierarchy
Obligation under assessment arrangements
The following tables provide the fair value measurement information about our long-term debt:
Total debt
The estimated fair value of our bank credit facility is based on a relative value analysis performed on or about March 31, 2020 and December 31, 2019. The estimated fair values of our Senior Notes are based on quoted market prices as of March 31, 2020 and December 31, 2019. The other debt is fixed-rate debt consisting of the following: (i) Belterra Park Mortgage payable in 96 monthly installments, beginning in 2018; and (2) finance leases with various maturity dates from 2020 to 2026. The other debt is not traded and does not have an observable market input; therefore, we have estimated its fair value to be equal to the carrying value.
There were no transfers between Level 1, Level 2 and Level 3 measurements during the three months ended March 31, 2020 and 2019.
NOTE 10. SEGMENT INFORMATION
We aggregate certain of our gaming entertainment properties in order to present three Reportable Segments: (i) Las Vegas Locals; (ii) Downtown Las Vegas; and (iii) Midwest & South. The table below lists the classification of each of our properties.
Las Vegas Locals
Gold Coast Hotel and Casino
Las Vegas, Nevada
The Orleans Hotel and Casino
Sam's Town Hotel and Gambling Hall
Suncoast Hotel and Casino
Eastside Cannery Casino and Hotel
Aliante Casino + Hotel + Spa
North Las Vegas, Nevada
Cannery Casino Hotel
Eldorado Casino
Henderson, Nevada
Jokers Wild Casino
Downtown Las Vegas
California Hotel and Casino
Fremont Hotel and Casino
Main Street Station Casino, Brewery and Hotel
Midwest & South
Par-A-Dice Hotel Casino
East Peoria, Illinois
Belterra Casino Resort
Florence, Indiana
Blue Chip Casino, Hotel & Spa
Michigan City, Indiana
Diamond Jo Dubuque
Dubuque, Iowa
Diamond Jo Worth
Northwood, Iowa
Kansas Star Casino
Mulvane, Kansas
Amelia Belle Casino
Amelia, Louisiana
Delta Downs Racetrack Casino & Hotel
Vinton, Louisiana
Evangeline Downs Racetrack and Casino
Opelousas, Louisiana
Sam's Town Hotel and Casino
Shreveport, Louisiana
Treasure Chest Casino
Kenner, Louisiana
IP Casino Resort Spa
Biloxi, Mississippi
Tunica, Mississippi
Ameristar Casino Hotel Kansas City
Kansas City, Missouri
Ameristar Casino Resort Spa St. Charles
St. Charles, Missouri
Belterra Park
Cincinnati, Ohio
Valley Forge Casino Resort
King of Prussia, Pennsylvania
Total Reportable Segment Departmental Revenues and Adjusted EBITDAR
We evaluate each of our property's profitability based upon Property Adjusted EBITDAR, which represents each property's earnings before interest expense, income taxes, depreciation and amortization, deferred rent, share-based compensation expense, project development, preopening and writedowns expenses, impairments of assets, other operating items, net, gain or loss on early retirements of debt, and master lease rent expense, as applicable. Total Reportable Segment Adjusted EBITDAR is the aggregate sum of the Property Adjusted EBITDAR for each of the properties included in our Las Vegas Locals, Downtown Las Vegas, and Midwest & South segments. Results for Downtown Las Vegas include the results of our Hawaii-based travel agency and captive insurance company. Results for Lattner, our Illinois distributed gaming operator, are included in our Midwest & South segment.
The following tables set forth, for the periods indicated, departmental revenues for our Reportable Segments:
Three Months Ended March 31, 2020
Gaming Revenue
Room Revenue
Other Revenue
Total Revenue
Total Revenues
Three Months Ended March 31, 2019
The following table reconciles, for the periods indicated, Total Reportable Segment Adjusted EBITDAR to operating income, as reported in our accompanying condensed consolidated statements of operations:
Adjusted EBITDAR
Total Reportable Segment Adjusted EBITDAR
Other operating costs and expenses
Deferred rent
Share-based compensation expense
Total other operating costs and expenses
For purposes of this presentation, corporate expense excludes its portion of share-based compensation expense. Corporate expense represents unallocated payroll, professional fees, aircraft expenses and various other expenses not directly related to our casino and hotel operations.
Total Reportable Segment Assets
The Company's assets by Reportable Segment consisted of the following amounts:
Total Assets
NOTE 11. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Separate condensed consolidating financial information for our subsidiary guarantors and non-guarantors of our 6.375% Notes, our 6.000% Notes and our 4.750% Notes is presented below. The 6.375% Notes are fully and unconditionally guaranteed, on a joint and several basis, by certain of our current and future domestic restricted subsidiaries, all of which are 100% owned by us. The non-guarantors primarily represent special purpose entities, tax holding companies, our less significant operating subsidiaries and our less than wholly owned subsidiaries.
The 6.000% Notes and 4.750% Notes are fully and unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our current and future domestic restricted subsidiaries. With the exception of one subsidiary, the guarantors of the 6.000% Notes and 4.750% Notes are the same as for our 6.375% Notes. The non-guarantors primarily represent our special purpose entities, tax holding companies, our less significant operating subsidiaries and our less than wholly owned subsidiaries.
The tables below present the condensed consolidating balance sheets as of March 31, 2020 and December 31, 2019, the condensed consolidating statements of operations for the three months ended March 31, 2020 and 2019, and the condensed consolidating statements of cash flows for the three months ended March 31, 2020 and 2019.
Condensed Consolidating Balance Sheets
Non-
Guarantor
Subsidiary
Subsidiaries
Parent
Owned)*
Owned)
Eliminations
Consolidated
Other current assets
Investments in subsidiaries
Intercompany receivable
Operating leases right-of-use assets
Other long-term assets
Intangible assets, net
Goodwill, net
Liabilities and Stockholders' Equity
Current maturities of long-term debt
Other current liabilities
Accumulated losses of subsidiaries in excess of investment
Intercompany payable
Long-term debt, net of current maturities and debt issuance costs
Operating lease liabilities, net of current portion
Other long-term liabilities
Total stockholders' equity (deficit)
*Subsidiary is a 100% owned guarantor of the 6.375% Notes and is a 100% owned non-guarantor of the 6.000% Notes and 4.750% Notes.
Condensed Consolidating Balance Sheets - continued
Condensed Consolidating Statements of Operations
Operating
Intercompany expenses
Equity in earnings (losses) of subsidiaries
Interest expense, net
Total other expense (income), net
Income tax benefit
Condensed Consolidating Statements of Operations - continued
Impairment of assets
Condensed Consolidating Statements of Cash Flows
Cash flows from operating activities
Net cash from operating activities
Cash flows from investing activities
Capital expenditures
Net activity with affiliates
Net cash from investing activities
Cash flows from financing activities
Borrowings under bank credit facility
Payments under bank credit facility
Share-based compensation activities, net
Dividends paid
Other financing activities
Net cash from financing activities
Cash, cash equivalents and restricted cash, beginning of period
Condensed Consolidating Statements of Cash Flows - continued
Other investing activities
Debt financing costs, net
NOTE 12. SUBSEQUENT EVENTS
We have evaluated all events or transactions that occurred after March 31, 2020.
Belterra Park Agreement
On May 6, 2020 we entered into an agreement with Gold Merger Sub, LLC ("Gold Merger Sub"), a wholly owned subsidiary of Gaming and Leisure Properties, Inc. ("GLP"), for the acquisition of Boyd (Ohio) PropCo, LLC ("BP PropCo"), the entity that owns the real estate of Belterra Park (the "Real Estate"), with the merger consummated and the transaction closed at the time of the execution of the merger agreement.
That agreement provided that Gold Merger Sub would acquire BP PropCo via a merger (the "Merger"), which would be treated for income tax purposes as a taxable asset acquisition consisting of the exchange of the Real Estate by us in satisfaction of the $57.7 million promissory note (the "Note") and mortgage executed in connection with GLP’s initial financing of our acquisition of the Real Estate in October 2018.
Prior to the Merger, PNK (Ohio), LLC ("BP OpCo"), which owns the business operations of Belterra Park, leased the Real Estate from BP PropCo pursuant to a master lease that is the same in all material respects as the Master Lease between Boyd TCIV, LLC and Gold Merger Sub (the "BP Master Lease" and "GLP Master Lease," respectively). Rent paid under the BP Master Lease to BP PropCo by BP OpCo was then paid by BP PropCo to Gold Merger Sub as interest on the Note. As a result of the Merger, Gold Merger Sub has become the Landlord under the BP Master Lease and now receives rent payable under the BP Master Lease (equal to, and in lieu of, the interest payments on the Note received prior to consummation of the Merger). As an additional step in connection with the Merger, we expect to add BP OpCo as a subtenant to the GLP Master Lease (in connection with the termination of the BP Master Lease), resulting in a single Master Lease with GLP, subject to the prior receipt of all required governmental approvals.
Credit Agreement Amendment
The Company is party to a Third Amended and Restated Credit Agreement, dated as of August 14, 2013 (as amended, amended and restated, supplemented or otherwise modified from time to time, the "Boyd Credit Agreement"), governing its senior secured revolving credit facility (the "Revolving Credit Facility"), senior secured term loan A facility (the "Term Loan A Facility") and senior secured term loan B facility (collectively with the Revolving Credit Facility and the Term Loan A Facility, the "Credit Facilities"). The Boyd Credit Agreement includes, for the benefit of the Revolving Credit Facility and the Term Loan A Facility, certain financial covenants, including a maximum total net leverage ratio covenant, a maximum secured net leverage ratio covenant and a minimum interest coverage ratio covenant (collectively, the "Financial Covenants").
The calculations used to determine the Company’s compliance with the respective Financial Covenants are dependent on its Consolidated EBITDA, as defined by the Boyd Credit Agreement. Due to the closure of the Company’s properties, the Company’s Consolidated EBITDA was significantly affected whereby it became reasonably possible that the Company may be unable to maintain compliance with the Financial Covenants.
On May 8, 2020 (the "Amendment Effective Date"), the Company entered into an Amendment No. 3 to the Boyd Credit Agreement (the "Credit Agreement Amendment"), by and among the Company, the subsidiaries of the Company party thereto, the administrative agent and the lenders party thereto.
The Credit Agreement Amendment provides that during the period (the "Covenant Relief Period") beginning on March 30, 2020 and ending on the earlier of (x) the date on which the Company delivers to the administrative agent a covenant relief period termination notice, (y) the date on which the administrative agent receives a compliance certificate with respect to the Company’s fiscal quarter ending June 30, 2021, and (z) the date on which the Company fails to satisfy the conditions to covenant relief set forth in the Credit Agreement Amendment, the Financial Covenants under the Boyd Credit Agreement will not be tested. Instead, during the Covenant Relief Period, the Company will be required to maintain a minimum level of liquidity (calculated to include unrestricted cash and cash equivalents and unused commitments under the Revolving Credit Facility) of $250.0 million and, through the later of the end of the Covenant Relief Period and the date on which the company achieves a total net leverage ratio of no greater than 6.00 to 1.00, the Company will be subject to limitations on its ability to incur debt and liens, make investments and restricted payments and certain other transactions. In addition, the Credit Agreement Amendment, among other things, (i) amends the Financial Covenant levels that are applicable after the Covenant Relief Period and permits the Company to annualize Consolidated EBITDA for certain periods for purposes of the Financial Covenants, (ii) provides that, during the Covenant Relief Period, loans under the Revolving Credit Facility and the Term Loan A Facility shall bear interest at either (a) a base rate or (b) an adjusted LIBOR rate, in each case, plus an applicable margin, in the case of base rate loans, of 1.75%, and in the case of adjusted LIBOR rate loans, of 2.75%, (iii) provides for a 0.50% LIBOR floor and a 1.50% base rate floor, in each case, applicable to LIBOR rate loans and base rate loans under the Revolving Credit Facility and the Term Loan A Facility, (iv) provides that, for purposes of determining compliance with the conditions to credit extensions under the Revolving Credit Facility during the Covenant Relief Period, the definition of “Material Adverse Effect” shall not include effects, events, occurrences, facts, conditions or changes arising out of or resulting from or in connection with the COVID-19 pandemic and (v) makes certain other changes to the covenants and other provisions of the Existing Credit Agreement.
During this period, up to the filing date, we did not identify any additional subsequent events which would require disclosure or adjustment to our financial position or results of operations.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Executive Overview
We are a geographically diversified operator of 29 gaming entertainment properties. Headquartered in Las Vegas, Nevada, we have gaming operations in Nevada, Illinois, Indiana, Iowa, Kansas, Louisiana, Mississippi, Missouri, Ohio and Pennsylvania. We view each operating property as an operating segment. For financial reporting purposes, we aggregate our properties into the following three reportable segments:
Par-A-Dice Hotel and Casino
Ameristar Casino Report Spa St. Charles
We also 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.
Results for Lattner Entertainment Group Illinois, LLC ("Lattner"), our Illinois distributed gaming operator, are included in our Midwest & South segment.
Most of our gaming entertainment properties also include hotel, dining, retail and other amenities. Our main business emphasis is on slot revenues, which are highly dependent upon the number of visits and spending levels of customers at our properties.
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 with cash or by 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, and pay income taxes and dividends.
Our Strategy
Our strategy is to increase shareholder value by pursuing strategic initiatives that 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. As we continue to experience revenue growth in both our gaming and non-gaming operations, the efficiencies of our business model position us to flow a substantial portion of the revenue growth directly to the bottom line.
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, which means the dollar amount wagered in slot machines, and table game drop, which means the total amount of cash deposited in table games drop boxes, plus the sum of markers issued at all table games, are measures of volume and/or market share. Slot win and table game hold, which mean the difference between customer wagers and customer winnings on slot machines and table games, respectively, represent the amount of wagers retained by us and recorded as gaming revenues. Slot win percentage and table game hold percentage, which are not fully controllable by us, represent the relationship between slot handle to slot win and table game drop to table game hold, respectively.
Food & beverage revenue measures: average guest check, which means the average amount spent per customer visit and is a measure of volume and product offerings; number of guests served ("food covers"), which is an indicator of volume; and the cost per guest served, which is a measure of operating margin.
Room revenue measures: hotel occupancy rate, which measures the utilization of our available rooms; and average daily rate ("ADR"), which is a price measure.
RESULTS OF OPERATIONS
Recent Developments
As a result of the COVID-19 global pandemic, all of our gaming facilities have been closed since mid-March 2020 in compliance with orders issued by state officials as precautionary measures intended to slow the spread of the COVID-19 virus. We cannot predict when we will be permitted to re-open our casinos, the conditions on which we will be permitted or decide to operate upon re-opening, the extent of consumer demand upon re-opening or the negative effects on our workforce, suppliers, contractors and other partners. Although certain states have indicated that operations of non-essential businesses, including our gaming facilities, are suspended only through a given deadline, we cannot predict whether such deadlines will be extended. Such closures have had and will continue to have a material impact on our business. COVID-19, the associated impacts on customer behavior and the requirements of health and safety protocols are expected to continue to have a material impact on our business following the re-opening of our facilities. The severity and duration of such business impacts cannot currently be estimated.
The ultimate impact of the COVID-19 pandemic on the Company’s operations is unknown and will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the COVID-19 outbreak, new information which may emerge concerning the severity of the COVID-19 pandemic, its impact on the economy and consumer behavior and demand, and any additional preventative and protective actions that governments, or the Company, may direct, which may result in an extended period of continued business disruption, reduced customer traffic and reduced operations. Any resulting financial impact cannot be reasonably estimated at this time but is anticipated to have a material adverse impact on our business, financial condition and results of operations.
Overview
(In millions)
Total revenues decreased $146.8 million, or 17.7%, for the three months ended March 31, 2020, compared to the prior year period due primarily to the COVID-19 property closures that occurred in mid-March 2020 (the "Property Closures").
Operating Income (Loss)
Operating income (loss) decreased $255.4 million, or 217.1%, for the three months ended March 31, 2020, compared to the prior year comparable period primarily due to the Property Closures which included a $171.1 million impairment charge.
Net income (loss) decreased $193.0 million for the three months ended March 31, 2020, compared to the prior year comparable period. The decline is attributable to the operating income decrease of $255.4 million, as discussed above. The decline was offset by a $52.3 million decrease in the income tax provision due to the net loss and a $9.5 million decrease in interest expense, net of amounts capitalized, due to a decrease in the weighted average long-term debt balance of $156.2 million and a 0.7 percentage point decrease in the weighted average interest rate. The decline in the weighted average long-term debt balance is driven by the retirement of the $750.0 million aggregate principal amount of 6.875% senior notes due May 2023 and the early repayments of the Refinancing Term B Loans of $365.0 million, offset by the issuance in December 2019 of the $1.0 billion aggregate principal amount of 4.750% senior notes due December 2027 issued in anticipation of retiring the 6.875% senior notes and prepayments on the Refinancing Term B Loans.
Operating Revenues
We derive the majority of our revenues from our gaming operations, which produced approximately 75% of revenues for both the three-month periods ended March 31, 2020 and 2019. Food & beverage revenues represent our next most significant revenue source, generating approximately 13% of revenues for both the three-month periods ended March 31, 2020 and 2019. Room revenues and other revenues separately contributed less than 10% of revenues during these periods.
REVENUES
COSTS AND EXPENSES
Total costs and expenses
MARGINS
Gaming revenues are comprised primarily of the net win from our slot machine operations and to a lesser extent from table games win. The $110.5 million, or 17.8%, decrease in gaming revenues during the three months ended March 31, 2020, as compared to the corresponding period of the prior year, was due primarily to the Property Closures. Overall gaming revenue margins remained consistent period over period.
Food & Beverage
Room revenues decreased$10.5 million, or 18.4%, during the three months ended March 31, 2020, as compared to the corresponding period of the prior year due primarily to the Property Closures. Overall room revenue margins remained consistent period over period.
Other revenues relate to patronage visits at the amenities at our properties, including entertainment and nightclub revenues, retail sales, theater tickets and other venues. Other revenues decreased $4.6 million or 11.8% during the three months ended March 31, 2020, as compared to the corresponding period of the prior year, due primarily to the Property Closures.
Revenues and Adjusted EBITDAR by Reportable Segment
We determine each of our properties' profitability based upon Adjusted Earnings Before Interest, Taxes, Depreciation, Amortization and Rent expense related to the master lease ("Adjusted EBITDAR"), which represents earnings before interest expense, income taxes, depreciation and amortization, deferred rent, master lease rent expense, share-based compensation expense, project development, preopening and writedowns expenses, impairments of assets and other operating items, net, as applicable. Reportable Segment Adjusted EBITDAR is the aggregate sum of the Adjusted EBITDAR for each of the properties comprising our Las Vegas Locals, Downtown Las Vegas and Midwest & South segments before net amortization, preopening and other items. Results for Downtown Las Vegas include the results of our travel agency and captive insurance company in Hawaii. Results for our Illinois distributed gaming operator are included in our Midwest & South segment. Corporate expense represents unallocated payroll, professional fees, aircraft expenses and various other expenses not directly related to our casino and hotel operations. Furthermore, corporate expense excludes its portion of share-based compensation expense.
EBITDAR is a commonly used measure of performance in our industry that we believe, when considered with measures calculated in accordance with GAAP, provides our investors a more complete understanding of our operating results before the impact of investing and financing transactions and income taxes and facilitates comparisons between us and our competitors. Management has historically adjusted EBITDAR when evaluating operating performance because we believe that the exclusion of certain recurring and non-recurring items is necessary to provide a full understanding of our core operating results and as a means to evaluate period-to-period results.
The following table presents our total revenues and Adjusted EBITDAR by Reportable Segment:
Adjusted EBITDA (1)
(1) Refer to Note 10, Segment Information, in the notes to the condensed consolidated financial statements (unaudited) for a reconciliation of Total Reportable Segment Adjusted EBITDAR to operating income, as reported in accordance with GAAP in our accompanying condensed consolidated statements of operations.
Total revenues and Adjusted EBITDAR decreased by $42.1 million, or 18.9% and $27.5 million or 37.0%, respectively, during the three months ended March 31, 2020, as compared to the corresponding period of the prior year, due to the Property Closures.
Other Operating Costs and Expenses
The following costs and expenses, as presented in our condensed consolidated statements of operations, are further discussed below:
Selling, General and Administrative
Selling, general and administrative expenses, as a percentage of revenues, were 16.7% and 14.0% during the three months ended March 31, 2020 and 2019, respectively. The increase is due to the reduction of revenues as a result of Property Closures along with the continued fixed costs incurred during the closure period.
Master Lease Rent Expense
Master lease rent expense represents rent expense incurred by those properties that we acquired in October 2018 which are subject to a master lease agreement with a real estate investment trust. Master lease rent expense, as a percentage of revenues, was 3.6% and 2.9% during the three months ended March 31, 2020 and 2019, respectively.
Maintenance and Utilities
Maintenance and utilities expenses, as a percentage of revenues, were relatively consistent at 4.9% and 4.6% during the three months ended March 31, 2020 and 2019, respectively.
Depreciation and Amortization
Depreciation and amortization expenses, as a percentage of revenues, were 9.8% and 8.1% during the three months ended March 31, 2020 and 2019, respectively. Depreciation and amortization expense remained consistent from period to period therefore the percentage increase is attributable to the revenue decline as a result of the Property Closures.
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. Corporate expense represented 3.7% and 3.8% of revenues during the three months ended March 31, 2020 and 2019, respectively.
Project Development, Preopening and Writedowns
Project development, preopening and writedowns represent: (i) certain costs incurred and recoveries realized related to the activities associated with various acquisition opportunities, strategic initiatives, dispositions and other business development activities in the ordinary course of business; (ii) certain costs of start-up activities that are expensed as incurred in our ongoing efforts to develop gaming activities in new jurisdictions and expenses related to other new business development activities that do not qualify as capital costs; and (iii) asset write-downs.
Impairment of Assets
Impairment of assets for the three months ended March 31, 2020 include non-cash impairment charges of $8.0 million for trademarks and $22.6 million for goodwill in our Las Vegas Locals segment and non-cash impairment charges of $8.9 million for trademarks, $42.2 million for gaming license rights and $89.4 million for goodwill in our Midwest & South segment.
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 the Property Closures, natural disasters and severe weather, including hurricane and flood expenses, and subsequent recoveries of such costs, as applicable. During the three months ended March 31, 2020, $7.2 million of other operating items, net, related to incremental, nonrecurring costs associated with the Property Closures.
Other Expenses
Interest Expense, net
The following table summarizes information with respect to our interest expense on outstanding indebtedness:
Average Long-Term Debt Balance (1)
Weighted Average Interest Rates
(1) Average debt balance calculation does not include the related discounts or deferred finance charges.
Interest expense, net of capitalized interest and interest income, for the three months ended March 31, 2020, decreased $9.8 million or 16.0%, as compared to the prior year. The impact is attributable to a decrease in the average long-term debt balance of $156.2 million for the three months ended March 31, 2020, which is driven by the retirement of the $750.0 million aggregate principal amount of 6.875% senior notes due May 2023 and the early repayments of the Refinancing Term B Loans of $365.0 million, offset by the issuance in December 2019 of the $1.0 billion aggregate principal amount of 4.750% senior notes due December 2027 issued in anticipation of retiring the 6.875% senior notes and prepayments on the Refinancing Term B Loans. In addition, the weighted average interest rate percentage point decreased by 0.7 for the three months ended March 31, 2020, respectively, which is driven by a decrease in the underlying Eurodollar rate.
The effective tax rate on income during the three months ended March 31, 2020 and 2019 were 21.9% and 19.3%, respectively. The tax provision for the three months ended March 31, 2020 was adversely impacted by the creation of a valuation allowance applied to certain state deferred tax assets, including state net operating loss carryforwards. Certain state operations forecasted losses for the year have resulted in negative evidence that tax attributes may expire before utilization or the jurisdiction no longer has recent cumulative earnings to support an objective and verifiable source of income. In addition, the provision for the three months ended March 31, 2020 was unfavorably impacted by certain nondeductible expenses. Our tax rates for the three months ended March 31, 2020 and 2019 were favorably impacted by the inclusion of excess tax benefits, related to equity compensation, as a component of the provision for income taxes. The tax provision for the three months ended March 31, 2019 was unfavorably impacted by state taxes and certain nondeductible expenses.
As a result of and response to the COVID-19 pandemic, the U.S. government enacted Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") and it was signed into law on March 27, 2020. Included in the CARES Act are provisions relating to payroll tax credits and deferrals, net operating loss carryback periods, interest expense deductions, alternative minimum tax credits and technical corrections to tax depreciation methods for qualified improvement property. We are currently evaluating the impact of the provisions of the CARES Act but we expect to benefit from the payroll tax credits offered therein.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position
At March 31, 2020 and December 31, 2019, we had balances of cash and cash equivalents of $831.2 million and $250.0 million, respectively. In addition, we held restricted cash balances of $18.5 million and $20.5 million at March 31, 2020 and December 31, 2019, respectively. On March 16, 2020 the Company drew down $670.0 million under our revolving credit facility leaving availability of $3.0 million as of March 31, 2020, effectively utilizing the full borrowing capacity under the revolving credit facility.
During the Property Closures, the Company will use cash on hand to fund day-to-day operational expenses, interest and tax payments, as well as other necessary business expenditures. We believe that current cash balances together with cash flows from operating activities following the reopening of our facilities will be sufficient to meet our liquidity and capital resource needs for the next twelve months, including our projected operating requirements and maintenance capital expenditures. See "Indebtedness", below, for further detail regarding the bank credit facility.
The Company may seek to secure additional working capital, repay respective current debt maturities, or fund respective development projects, in whole or in part, through incremental bank financing and additional debt or equity offerings.
Cash Flows Summary
Net borrowings (payments) under bank credit facility
Debt issuance costs
Increase (decrease) in cash, cash equivalents and restricted cash
During the three months ended March 31, 2020 and 2019, we generated net operating cash flow of $23.5 million and $164.1 million, respectively. Generally, operating cash flows decreased during 2020 as compared to the prior year period due to the Property Closures in March 2020 and timing of working capital spending.
Our industry is capital intensive and we use cash flows for acquisitions, facility expansions, investments in future development or business opportunities and maintenance capital expenditures.
During the three months ended March 31, 2020 and 2019, we incurred net cash outflows for investing activities of $48.0 million and $101.2 million, respectively, related primarily to the purchase of real estate, information technology purchases for new software and acquisition-related costs.
We rely upon our financing cash flows to provide funding for investment opportunities, repayments of obligations and ongoing operations.
The net cash inflows from financing activities in the three months ended March 31, 2020, reflect primarily the additional borrowings under our Revolving Credit Facility to preserve liquidity during the closure period. The outflows in 2020 reflect the use of cash flow to repurchase outstanding common stock under our share repurchase program and pay cash dividends to our shareholders. The net cash outflows from financing activities in the three months ended March 31, 2019, reflect primarily the use of excess cash to reduce our outstanding debt, repurchase outstanding common stock under our share repurchase program and pay dividends to our shareholders.
Indebtedness
The outstanding principal balances of long-term debt, before unamortized discounts and fees, and the changes in those balances are as follows:
Long-term debt, net of current maturities
Amounts Outstanding
The principal amounts under the bank credit facility are comprised of the following:
Revolving Credit Facility
Term A Loan
Refinancing Term B Loans
Swing Loan
With a total revolving credit commitment of $945.5 million available under the bank credit facility, $865.0 million was borrowed on the Revolving Credit Facility, $64.9 million was borrowed on the Swing Loan and $12.6 million allocated to support various letters of credit, leaving a remaining contractual availability of $3.0 million as of March 31, 2020. As discussed in the Overview section above, as a precautionary measure to increase liquidity during the uncertainty of COVID-19, the Company has increased the borrowings on its Revolving Credit Facility by $670.0 million on March 16, 2020.
The blended interest rate for outstanding borrowings under the bank credit facility was 2.8% at March 31, 2020 and 3.8% at December 31, 2019.
Debt Service Requirements
Debt service requirements under our current outstanding senior notes consist of semi-annual interest payments (based upon fixed annual interest rates ranging from 4.750% to 6.375%) and principal repayments of our 6.375% senior notes due April 2026, our 6.000% senior notes due August 2026 and our 4.750% senior notes due December 2027.
As of March 31, 2020, we believe that we were in compliance with the financial and other covenants contained in our debt instruments.
Although we were in compliance with our debt covenants as of the end of first quarter, the effects of the COVID-19 pandemic on our Company made it reasonably possible that we may not meet one or more of our financial covenants under our existing debt agreements in subsequent quarters of 2020. On May 8, 2020, we amended our credit facility to, among other things, waive the financial covenants for the period beginning on March 30, 2020 through the earlier of (x) the date on which the Company delivers to the administrative agent a covenant relief period termination notice, (y) the date on which the administrative agent receives a compliance certificate with respect to the Company’s fiscal quarter ending June 30, 2021, and (z) the date on which the Company fails to satisfy the conditions to covenant relief set forth in the amendment. See Note 12, Subsequent Events, in the notes to the condensed consolidated financial statements (unaudited) for further discussion of the amendment.
The indentures governing the senior notes contain provisions that allow for the incurrence of additional indebtedness, if after giving effect to such incurrence, the fixed charge coverage ratio (as defined in the respective indentures, essentially a ratio of our consolidated EBITDA to fixed charges, including interest) for the trailing four quarter period on a pro forma basis would be at least 2.0 to 1.0. Should this provision prohibit the incurrence of additional debt, we may still borrow under our existing bank credit facility, to the extent that borrowing capacity remains under that agreement, as well as from other funding sources as provided under our debt agreements.
Subject to applicable corporate securities laws, repurchases under our stock repurchase program may be made at such times and in such amounts as we deem appropriate. We are subject to certain limitations regarding the repurchase of common stock, such as restricted payment limitations related to our outstanding notes and bank credit facility. Purchases under our stock repurchase program can be discontinued at any time at our sole discretion. On December 12, 2018, our Board of Directors authorized a share repurchase program of $100 million. During the three months ended March 31, 2020 and 2019, we repurchased 0.7 million shares and 0.8 million shares, respectively, of our common stock. We are currently authorized to repurchase up to an additional $61.4 million in shares of our common stock under the share repurchase program. We are not obligated to purchase any shares under our stock repurchase program. We suspended share repurchases in March 2020 in order to preserve liquidity due to the Property Closures.
We have in the past, and may in the future, acquire our debt or equity securities, through open market purchases, privately negotiated transactions, tender offers, exchange offers, redemptions or otherwise, upon such terms and at such prices as we may determine.
Quarterly Dividend Program
The dividends declared by the Board of Directors under this program and reflected in the periods presented are:
Other Items Affecting Liquidity
We anticipate funding our capital requirements using cash on hand, cash flows from operations following the reopening of our facilities and availability under our Revolving Credit Facility, to the extent borrowing capacity exists after we meet our working capital needs for the next twelve months. Any additional financing that is needed may not be available to us or, if available, may not be on terms favorable to us. The outcome of the specific matters discussed herein, including our commitments and contingencies, may also affect our liquidity.
Capital Spending and Development
We currently estimate that our annual cash capital requirements to perform on-going refurbishment and maintenance at our properties ranges from between $90 million and $110 million. We fund our capital expenditures through cash on hand, our bank credit facility and operating cash flows.
In addition to the capital spending discussed above, we continue to pursue other potential development projects that may require us to invest significant amounts of capital. For example, we continue to work with the Wilton Rancheria Tribe (the "Tribe"), a federally-recognized Native American tribe, to develop and manage a gaming entertainment complex to be located about 15 miles southeast of Sacramento, California. In January 2017, we funded the acquisition of land that is the intended site of the Wilton Rancheria casino for $35.1 million. This cost will be reimbursed to us from the cash flows of the business following the opening of the facility. In September 2017, the California State Legislature unanimously approved, and the Governor of California executed, a tribal-state gaming compact with the tribe allowing the development of the casino. In October 2018, the National Indian Gaming Commission approved the Company's management contract with the Tribe. With the compact now in place, we are in the process of finalizing the project budget, design and construction planning. The project will be constructed using third-party financing. Once commenced and project financing put in place, the construction timeline is expected to span 18 to 24 months.
Other Opportunities
We regularly investigate and pursue additional expansion opportunities in markets where casino gaming is currently permitted. We also pursue expansion opportunities in jurisdictions where casino gaming is not currently permitted in order to be prepared to develop projects upon approval of casino gaming. Such expansions will be affected and determined by several key factors, which may include the following:
the outcome of gaming license selection processes;
the approval of gaming in jurisdictions where we have been active but where casino gaming is not currently permitted;
identification of additional suitable investment opportunities in current gaming jurisdictions; and
availability of acceptable financing.
Additional projects may require us to make substantial investments or may cause us to incur substantial costs related to the investigation and pursuit of such opportunities, which investments and costs we may fund through cash flow from operations or availability under our bank credit facility. To the extent such sources of funds are not sufficient, we may also seek to raise such additional funds through public or private equity or debt financings or from other sources, to the extent such financing is available.
Off Balance Sheet Arrangements
There have been no material changes to our off balance sheet arrangements as defined in Item 303(a)(4)(ii) and described under Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2019, as filed with the SEC on February 27, 2020.
Critical Accounting Policies
There have been no material changes to our critical accounting policies described under Part II. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the period ended December 31, 2019, as filed with the SEC on February 27, 2020.
For information with respect to recent accounting pronouncements and the impact of these pronouncements on our condensed consolidated financial statements, see Note 1, Summary of Significant Accounting Policies - Recently Issued Accounting Pronouncements, in the notes to the condensed consolidated financial statements (unaudited).
Important Information Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such statements contain words such as "may," "will," "might," "expect," "believe," "anticipate," "could," "would," "estimate," "pursue," "target," "project," "intend," "plan," "seek," "should," "assume," and "continue," or the negative thereof or comparable terminology. Forward-looking statements involve certain risks and uncertainties, and actual results may differ materially from those discussed in any such statement. Factors that could cause actual results to differ materially from such forward-looking statements include:
The effects of intense competition that exists in the gaming industry.
The risk that our acquisitions and other expansion opportunities divert management’s attention or incur substantial costs, or that we are otherwise unable to develop, profitably manage or successfully integrate the businesses we acquire.
The fact that our expansion, development, maintenance and renovation projects (including enhancements to improve property performance) are subject to many risks inherent in expansion, development or construction of a new or existing project.
The risk that any of our projects may not be completed, if at all, on time or within established budgets, or that any project will not result in increased earnings to us.
The risk that significant delays, cost overruns, or failures of any of our projects to achieve market acceptance could have a material adverse effect on our business, financial condition and results of operations.
Our ability to take advantage of, and to realize the anticipated benefits of, any past or future financing, mergers and acquisitions, dispositions, partnerships, and other corporate opportunities, and the risks associated with such or similar transactions, arrangements or opportunities.
The risk that new gaming licenses or jurisdictions become available (or implement new or different gaming regulations or increased or additional taxes) that results in increased competition or cost to us.
The risk that negative industry or economic trends, reduced estimates of future cash flows, disruptions to our business, slower growth rates or lack of growth in our business, may result in significant write-downs or impairments in future periods.
The risk that regulatory authorities may revoke, suspend, condition or limit our gaming or other licenses, certificates and concessions, impose substantial fines and take other adverse actions against any of our casino operations or any current or future online gaming and sports wagering operations.
The risk that we may be unable to refinance our respective outstanding indebtedness as it comes due, or that if we do refinance, the terms are not favorable to us.
The effects of the extensive governmental gaming regulation and taxation policies to which we are subject and the costs of compliance or failure to comply with such regulations, as well as any changes in laws and regulations, including increased taxes, which could harm our business.
The effects of federal, state and local laws affecting our business such as the regulation of smoking, the regulation of directors, officers, key employees and partners and regulations affecting business in general.
The effects of extreme weather conditions or natural disasters on our facilities and the geographic areas from which we draw our customers, and our ability to recover insurance proceeds (if any).
The effects of events adversely impacting the economy or the regions from which we draw a significant percentage of our customers, including the effects of economic recession, pandemic, war, terrorist or similar activity or natural or man-made disasters in, at, or around our properties.
The risk that we fail to adapt our business and amenities to changing customer preferences.
Financial community and rating agency perceptions of us, and the effect of economic, credit and capital market conditions on the economy and the gaming and hotel industry.
The effect of the expansion of legalized gaming in the regions in which we operate.
The risk of failing to maintain the integrity of our information technology infrastructure causing unintended distribution to third parties of, or access by third parties to, our customer or company data, and any litigation, fines, disruption to our operations or reputational harm resulting from such loss of data integrity.
Our estimated effective income tax rates, estimated tax benefits, and merits of our tax positions.
Our ability to utilize our net operating loss carryforwards and certain other tax attributes.
The risks relating to owning our equity, including price and volume fluctuations of the stock market that may harm the market price of our common stock and the potential of certain of our stockholders owning large interest in our capital stock to significantly influence our affairs.
Other statements regarding our future operations, financial condition and prospects, and business strategies.
The risk that we may be unable to retain our key management and personnel, including key employees of the acquired companies.
Our current and future insurance coverage levels, including the risk we have not obtained sufficient coverage, may not be able to obtain sufficient coverage in the future, or will only be able to obtain additional coverage at significantly increased rates.
Additional factors that could cause actual results to differ are discussed in Part I. Item 1A. Risk Factors of our Annual Report on Form 10-K for the period ended December 31, 2019, and in other current and periodic reports filed from time to time with the SEC. All forward-looking statements in this document are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Market risk is the risk of loss arising from adverse changes in market rates and prices, such as interest rates, foreign currency exchange rates and commodity prices. We do not hold any market risk sensitive instruments for trading purposes. Our primary exposure to market risk is interest rate risk, specifically long-term U.S. treasury rates and the applicable spreads in the high-yield investment market, short-term and long-term LIBOR rates, and short-term Eurodollar rates, and their potential impact on our long-term debt. We attempt to limit our exposure to interest rate risk by managing the mix of our long-term fixed-rate borrowings and short-term borrowings under our bank credit facility. We do not currently utilize derivative financial instruments for trading or speculative purposes.
As of March 31, 2020, our long-term variable-rate borrowings represented approximately 43.5% of total long-term debt. Based on March 31, 2020 debt levels, a 100 basis point change in the interest rate would cause our annual interest costs to change by approximately $19.3 million.
See also "Liquidity and Capital Resources" above.
Item 4. Controls and Procedures
As of the end of the period covered by this Report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act")). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on the evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Report.
There has been no change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
The outbreak of the novel coronavirus (“COVID-19”) and the public response has had and will likely continue to have an adverse effect on our business, operations, financial condition and results.
As a result of the COVID-19 global pandemic and related measures to prevent its spread, all of our gaming facilities have been closed since mid-March 2020 in response to orders from public officials and government regulations. We cannot predict for how long public officials in each state will require that our operations remain closed, nor the extent to which our operations will be restricted by capacity or social-distancing or other requirements once we are permitted to re-open or the effect of any such restrictions. Decisions by public officials in this regard will depend on many factors beyond our control and that remain uncertain in light of on-going developments related to the pandemic, including development of preventative or treatment protocols. Our inability to operate our facilities is having a negative impact on all aspects of our business, operations, financial condition and results and such negative impacts will persist to the extent we are unable to safely re-open our facilities at normal capacity.
We cannot predict over any time period the extent to which the global pandemic and public response will negatively affect demand for our facilities once re-opened.
The extent to which our customers will be willing to return to our facilities will depend on, among other factors, the public perception of continuing health risks associated with public gatherings and the impact on the customer experience of necessary health and safety measures implemented at the direction of State and local governments and gaming regulators. For example, we may be required for some period of time to reduce the offering of certain amenities (because such amenities must remain closed) or otherwise limit the availability of certain offerings, such as deactivating a substantial number of gaming devices to maintain social distancing (e.g., only operating every other device) and substantially limiting restaurant seating (e.g., removing every other seat). Such measures may impact customer behavior and business demand, and the duration of such potential impact is unknown at this time. Our business, operations, financial condition and results would be materially, negatively affected to the extent demand for our casinos and customer preference and behavior is altered as a result of the COVID-19 pandemic and public response.
Our business, operations, financial condition and results has been, and will continue to be, negatively affected as a result of closing all of our gaming facilities due to the COVID-19 pandemic. In addition, to the extent that the impact of the COVID-19 pandemic and public response on the economy negatively affects discretionary spending patterns following the reopening of our facilities, we may continue to be negatively affected. The COVID-19 pandemic has had and is expected to continue to have lingering impacts with respect to unemployment and discretionary spending. For example, as a result of the COVID-19 pandemic, we have furloughed substantially all of our 25,000 employees, as have many other businesses in the gaming and hospitality industries. Such measures have significantly increased economic and demand uncertainty and may potentially cause regional, national or global recessions. Potential significant increases in unemployment (and the lingering impacts of temporary unemployment after furloughed workers return to work) is likely to have a negative impact on demand for gaming facilities once our operations resume, and these impacts could exist for an extensive period of time. Demand for gaming facilities may further be negatively impacted by the adverse changes in the perceived or actual economic climate and declines in income levels and loss of personal wealth. The consequences of the foregoing on our expectations of our future earnings may require us to recognize impairments or other negative accounting outcomes.
The foregoing may also negatively affect our workforce, suppliers, contractors and other partners. We cannot predict the extent to which the above factors will cause our costs to increase, supply chain disruptions, labor shortages, logistics constraints or business failures or inability to provide services or products for our partners.
As a result of all of the foregoing, we may be required to raise additional capital in the future and our access to and terms of financing will depend on, among other things, economic conditions, conditions in the financial markets, the availability of sufficient amounts of financing, our prospects and our credit ratings. If our credit ratings were to be downgraded, or general market conditions were to ascribe higher risk to our rating levels, our industry, or us, our access to capital and the cost of any debt or equity financing will be further negatively impacted. In addition, the terms of future debt agreements could include more restrictive covenants, or require incremental collateral, which may further restrict our business operations or be unavailable due to our covenant restrictions then in effect. There is no guarantee that debt or equity financings will be available in the future to fund our obligations, or that they will be available on terms consistent with our expectations. Although we expect to attempt to utilize any tax or other benefits created pursuant to legislation responses to the COVID-19 pandemic, we cannot assure you that we will remain eligible for such benefits or that such benefits will not be reduced, eliminated or delayed.
The current and future impact of the COVID-19 pandemic and public response is expected to continue to impact our results, operations, outlooks, plans, goals, growth, reputation, cash flows and liquidity. To the extent the COVID-19 pandemic and public response adversely affects our business, operations, financial condition and operating results, it may also exacerbate many of the other risks described in the “Risk Factors” section of our Annual Report on Form 10-K for the year ended December 31, 2019, including, but not limited to, those relating to our high level of indebtedness, our need to generate sufficient cash flows to service our indebtedness, and our ability to comply with the covenants contained in the agreements that govern our indebtedness.
There were no other material changes from the risk factors previously disclosed in Part I. Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table discloses share repurchases that we have made pursuant to our share repurchase program during the three months ended March 31, 2020. For additional information, see below under Share Repurchase Program.
Period
January 1, 2020 through January 31, 2020
March 1, 2020 through March 31, 2020
Totals
As of March 31, 2020, the Company’s share repurchase program had $61.4 million remaining. The share repurchase program does not have an expiration date and we are not obligated to purchase any shares under the program. Subject to applicable corporate securities laws, repurchases under our stock repurchase program may be made at such times and in such amounts as we deem appropriate. Purchases under our stock repurchase program can be discontinued at any time that we feel additional purchases are not warranted. We intend to fund the repurchases under the stock repurchase program with existing cash resources and availability under our bank credit facility.
We are subject to certain limitations regarding the repurchase of common stock, such as restricted payment limitations related to our outstanding notes and our bank credit facility.
We intend to make purchases of its common stock from time to time under this program through open market purchases, privately negotiated transactions, tender offers, exchange offers, redemptions or otherwise, upon such terms and at such prices as we may determine.
We suspended share repurchases in March 2020 in order to preserve liquidity due to the Property Closures.
Exhibit Number
Document of Exhibit
Method of Filing
31.1
Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act rule 13a-14(a).
Filed electronically herewith
31.2
Certification of the Chief Financial Officer of the Registrant pursuant to Exchange Act rule 13a-14(a).
32.1
Certification of the Chief Executive Officer of the Registrant pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. § 1350.
32.2
Certification of the Chief Financial Officer of the Registrant pursuant to Exchange Act Rule 13a-14(b) and 18 U.S.C. § 1350.
101
The following materials from the Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2020 and December 31, 2019, (ii) Condensed Consolidated Statements of Operations for the three months ended March 31, 2020 and 2019, (iii) Condensed Consolidated Statements of Changes in Stockholders' Equity for each of the quarters within the three months ended March 31, 2020 and 2019, iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019, and (vi) Notes to Condensed Consolidated Financial Statements.
Inline XBRL for cover page of the Company's Quarterly Report on Form 10-Q, included in the Exhibit 101 Inline XBRL Document Set.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on May 11, 2020.
By:
/s/ Anthony D. McDuffie
Anthony D. McDuffie
Vice President and Chief Accounting Officer