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 September 30, 2019
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 November 1, 2019 was 111,165,446.
QUARTERLY REPORT ON FORM 10-Q
FOR THE PERIOD ENDED SEPTEMBER 30, 2019
TABLE OF CONTENTS
Page
No.
PART I. FINANCIAL INFORMATION
Item 1.
Financial Statements (Unaudited)
3
Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018
4
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018
5
Condensed Consolidated Statements of Changes in Stockholders' Equity for each of the quarters within the nine months ended September 30, 2019 and 2018
6
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018
7
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
40
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
51
Item 4.
Controls and Procedures
52
PART II. OTHER INFORMATION
Legal Proceedings
53
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Item 6.
Exhibits
54
Signature Page
55
PART I. Financial Information
Item 1. Financial Statements (Unaudited)
BOYD GAMING CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
September 30,
December 31,
(In thousands, except share data)
2019
2018
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 7 and 9)
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
Nine 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
Impairment of assets
Other operating items, net
Total operating costs and expenses
Operating income
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 before income taxes
Income tax provision
Income from continuing operations, net of tax
Income from discontinued operations, net of tax
Net income
Basic net income per common share
Continuing operations
Discontinued operations
Weighted average basic shares outstanding
Diluted net income per common share
Weighted average diluted shares outstanding
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
(In thousands)
Other comprehensive income (loss), net of tax:
Fair value adjustments to available-for-sale securities, net of tax
Comprehensive income
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, 2019
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
Dividends declared ($0.06 per share)
Share-based compensation costs
Balances, March 31, 2019
Comprehensive loss, net of tax
Dividends declared ($0.07 per share)
Balances, June 30, 2019
Balances, September 30, 2019
Balances, January 1, 2018
Cumulative effect of change in accounting principle, adoption of Update 2018-02
Dividends declared ($0.05 per share)
Balances, March 31, 2018
Balances, June 30, 2018
Balances, September 30, 2018
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Cash Flows from Operating Activities
Adjustments to reconcile net income 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
Net cash provided by discontinued operations
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 September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018
______________________________________________________________________________________________________
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.
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, 2018, as filed with the U.S. Securities and Exchange Commission ("SEC") on March 1, 2019.
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.
2017
Total cash, cash equivalents and restricted cash
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) — (Continued)
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.
Operating leases are included in operating lease right-of-use assets, accrued liabilities and operating lease liabilities on our condensed consolidated balance sheets.
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 5, 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 5, 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 5, 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 $136.2 million and $83.1 million for the three months ended September 30, 2019 and 2018, respectively, and $411.0 million and $241.5 million for the nine months ended September 30, 2019 and 2018, 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.
Recently Adopted Accounting Pronouncements
Accounting Standards Update ("ASU") 2018-02, Income Statement - Reporting Comprehensive Income ("Update 2018-02")
In first quarter 2018, the Company adopted ASU 2018-02 which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Act. The effect of this change in accounting principle is to record an other comprehensive income tax effect of $0.3 million as a reduction in retained earnings on the condensed consolidated statement of changes in stockholders' equity for the nine months ended September 30, 2018.
ASU 2016-02, Leases ("Update 2016-02"); ASU 2018-10, Targeted Improvements ("Update 2018-10"); ASU 2018-01, Land Easement Practical Expedient for Transition to Topic 842 ("Update ASU 2018-01"); ASU 2018-11, Codification Improvements to Topic 842, Leases ("Update 2018-11"); ASU 2019-01, Codification Improvements to Topic 842, Leases ("Update 1901-01") (collectively, the “Lease Standard”)
The Lease Standard provides for transparency and comparability among organizations by requiring the recognition of lease assets and lease liabilities on the balance sheet and the disclosure of key information about leasing arrangements to enable users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
The Company adopted the Lease Standard effective January 1, 2019, using the modified retrospective approach, which allows the initial application of the new guidance as of the adoption date without adjusting comparative periods presented. We elected the package of practical expedients for leases that commenced prior to the adoption date whereby we elected to not reassess (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. We also made an accounting policy election that leases with an initial term of 12 months or less are not recognized on our condensed consolidated balance sheet. Adoption of the Lease Standard resulted in the recognition of $926.7 million of ROU assets and $921.8 million of lease liabilities on our condensed consolidated balance sheet as of the date of adoption, primarily related to land, buildings and office space. The difference of $4.9 million represented deferred rent for leases that existed as of the date of adoption, which was an offset to the opening balance of right-of-use assets. The adoption of the Lease Standard did not have a material impact on our condensed consolidated statements of income, stockholders’ equity and cash flows.
See Note 8, Leases, for further information regarding our leases.
Recently Issued Accounting Pronouncements
ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments ("Update 2019-04") and ASU 2019-05, Financial Instruments - Credit Losses ("Update 2019-05")
In April and May 2019, the FASB issued Update 2019-04 and Update 2019-05, respectively, to provide clarification and corrections to ASU 2016-13, Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments ("Update 2016-13"). The impact to the consolidated financial statements of Update 2016-13 is currently being evaluated by the Company. Update 2019-04 and Update 2019-05, along with Update 2016-13, are effective for financial statements issued for annual periods and interim periods within those annual periods beginning after December 15, 2019, and early adoption is permitted. The Company is evaluating the impact of the adoption of Update 2019-04 and Update 2019-05 to the 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. ACQUISITIONS & DIVESTITURES
Ameristar Casino Hotel Kansas City; Ameristar Casino Resort Spa St. Charles; Belterra Casino Resort; Belterra Park
On October 15, 2018, we completed the acquisition of Ameristar Casino Kansas City, LLC ("Ameristar Kansas City"), the owner and operator of Ameristar Casino Hotel Kansas City; Ameristar Casino St. Charles, LLC ("Ameristar St. Charles"), the owner and operator of Ameristar Casino Resort Spa St. Charles; Belterra Resort Indiana LLC ("Belterra Resort"), the owner and operator of Belterra Casino Resort located in Florence, Indiana; and PNK (Ohio) LLC ("Belterra Park"), the owner and operator of Belterra Park, located in Cincinnati, Ohio (collectively, the "Pinnacle Properties"), pursuant to a Membership Interest Purchase Agreement (as amended, the "Pinnacle Purchase Agreement"), dated as of December 17, 2017, as amended as of January 29, 2018 ("Amendment No. 1") and October 15, 2018 ("Amendment No. 2"), in each case by and among Boyd Gaming, Boyd TCIV, LLC, a wholly owned subsidiary of Boyd Gaming ("Boyd TCIV"), Penn National Gaming, Inc. ("Penn"), and, solely following the execution and delivery of a joinder to the Pinnacle Purchase Agreement, Pinnacle Entertainment, Inc. ("Pinnacle Entertainment") and its wholly owned subsidiary, Pinnacle MLS, LLC (collectively with Pinnacle Entertainment, "Pinnacle").
Pursuant to the Pinnacle Purchase Agreement, Boyd Gaming acquired from Pinnacle all of the issued and outstanding membership interests of the Acquired Companies as well as certain other assets (and assumed certain other liabilities) of Pinnacle related to the Acquired Companies (collectively, the "Pinnacle Acquisition"). Each of the Acquired Companies is now a wholly owned subsidiary of Boyd Gaming. The acquired companies are aggregated into our Midwest & South segment (See Note 11, Segment Information). The net purchase price was $576.1 million.
Pursuant to the Pinnacle Purchase Agreement, Boyd TCIV entered into a Master Lease, dated October 15, 2018 (the "Master Lease"), with Gold Merger Sub, LLC ("Gold Merger Sub"), as landlord, and Boyd TCIV, as tenant, pursuant to which the landlord agreed to lease to Boyd TCIV the real estate associated with Ameristar Kansas City, Ameristar St. Charles, Belterra Resort and Ogle Haus, LLC, a wholly owned subsidiary of Belterra Resort ("Ogle Haus"), commencing on October 15, 2018 and ending on April 30, 2026 as the initial term, with options for renewal.
The Pinnacle Acquisition occurred substantially concurrently with the acquisition of Pinnacle Entertainment by Penn pursuant to the Merger Agreement, dated December 17, 2017, by and among Pinnacle Entertainment, Penn and Franchise Merger Sub, Inc., a wholly owned subsidiary of Penn.
Concurrently with the Pinnacle Acquisition, Boyd (Ohio) PropCo, LLC, a wholly owned subsidiary of Boyd TCIV ("Boyd PropCo"), acquired the real estate associated with Belterra Park in Cincinnati, Ohio (the "Belterra Park Real Property Sale") utilizing mortgage financing from a subsidiary of Gaming and Leisure Properties, Inc. ("GLPI"), pursuant to a purchase agreement, dated December 17, 2017 ("Belterra Park Purchase Agreement"), by and among Penn, Gold Merger Sub, a wholly owned subsidiary of GLPI, Belterra Park and Pinnacle Entertainment, and a Novation and Amendment Agreement, dated October 15, 2018 (the "Novation Agreement"), by and among Penn, Gold Merger Sub, Boyd PropCo, Belterra Park and Pinnacle Entertainment. Pursuant to the Novation Agreement, Gold Merger Sub, the original purchaser under the Belterra Park Purchase Agreement, assigned, transferred and conveyed to Boyd PropCo and Boyd PropCo accepted Gold Merger Sub’s rights, title and interest in the Belterra Park Purchase Agreement.
Consideration Transferred
The fair value of the consideration transferred pursuant to the Pinnacle Purchase Agreement represented the purchase price of the net assets acquired. The total gross cash consideration was $615.1 million.
Status of Purchase Price Allocation
The Company followed the acquisition method of accounting per FASB Accounting Standards Codification Topic 805 ("ASC 805") guidance. In accordance with ASC 805, we have allocated the purchase price to the assets acquired and the liabilities assumed based on their fair values as determined by management with the assistance from third-party specialists. The excess of the purchase price over those fair values has been recorded as goodwill. The preliminary purchase price allocation below represents the opening balance sheet on October 15, 2018, which was reported in our Form 10-K for the annual period ended December 31, 2018. During the measurement period, which ended on September 30, 2019, opening balance sheet adjustments were made to finalize the preliminary fair value estimates, resulting in a $0.4 million decrease in current assets, a $36.7 million decrease in property and equipment, a $39.0 million increase in intangible assets, and a $0.2 million decrease in current liabilities, with a corresponding increase of $5.8 million in goodwill. The tax impact related to the measurement period adjustments was considered immaterial to our condensed consolidated financial statements.
The following table presents the components of the allocation of the purchase price as of the acquisition date, including the measurement period adjustments:
Preliminary
Adjustments
Property and equipment
Other assets
Intangible assets
Total acquired assets
Other liabilities
Total liabilities assumed
Net identifiable assets acquired
Goodwill
Net assets acquired
The following table summarizes the final values assigned to acquired property and equipment and estimated useful lives:
Useful Lives (in years)
As Recorded
Land
Buildings and improvements
Furniture and equipment
Property and equipment acquired
The following table summarizes the acquired intangible assets and weighted average useful lives of definite-lived intangible assets.
Customer relationship
Trademark
Gaming license right
Total intangible assets acquired
The goodwill recognized is the excess of the purchase price over the final values assigned to the assets acquired and liabilities assumed. All of the goodwill was assigned to the Midwest & South reportable segment and is expected to be deductible for income tax purposes.
The Company recognized $0.7 million and $2.8 million of acquisition related costs that were expensed for the three months ended September 30, 2019 and 2018, respectively, and $2.2 million and $4.2 million for the nine months ended September 30, 2019 and 2018. These costs are included in the Project development, preopening and writedowns line in the condensed consolidated statements of operations.
Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2019
The following supplemental information presents the financial results of the Pinnacle Properties included in the Company's condensed consolidated statement of operations for the three and nine months ended September 30, 2019:
September 30, 2019
Valley Forge Convention Center Partners
On September 17, 2018, we completed the acquisition of Valley Forge Convention Center Partners, L.P., the owner and operator of Valley Forge Casino Resort ("Valley Forge"), pursuant to an Agreement and Plan of Merger (as amended, the "Valley Forge Merger Agreement"), dated as of December 20, 2017, as amended as of September 17, 2018, in each case by and among Boyd, Boyd TCV, LP, a Pennsylvania limited partnership and a wholly owned subsidiary of Boyd (“Boyd TCV”), Valley Forge, and VFCCP SR LLC, a Pennsylvania limited liability company, solely in its capacity as the representative of Valley Forge’s limited partners.
Pursuant to the Valley Forge Merger Agreement, Boyd TCV merged with and into Valley Forge (the "Valley Forge Merger"), with Valley Forge surviving the merger. Valley Forge is now a wholly owned subsidiary of Boyd. Valley Forge is a modern casino and hotel in King of Prussia, Pennsylvania that offers premium accommodations, gaming, dining, entertainment and retail services, and is aggregated into our Midwest & South segment (See Note 11, Segment Information). The net purchase price was $264.3 million.
The fair value of the consideration transferred pursuant to the Valley Forge Merger Agreement represented the purchase price of the net assets acquired. The total gross consideration was $289.1 million.
The Company followed the acquisition method of accounting per ASC 805 guidance. In accordance with ASC 805, we have allocated the purchase price to the assets acquired and the liabilities assumed based on their fair values as determined by management with the assistance from third-party specialists. The excess of the purchase price over those fair values was recorded as goodwill. The purchase price allocation below represents Valley Forge's opening balance sheet on September 17, 2018, which was reported in our Form 10-K for the annual period ended December 31, 2018. During the measurement period, which concluded on September 1, 2019, opening balance sheet adjustments were made to finalize the preliminary fair value estimates, resulting in $0.6 million decrease in current assets, a $0.6 million increase in property and equipment, a $2.4 million increase in other assets, a $12.0 million decrease in intangible assets and a $9.2 million increase in other liabilities, with a corresponding increase of $16.5 million to goodwill. The measurement period adjustments and the related tax impact were immaterial to our condensed consolidated financial statements.
The Company recognized $0.2 million and $2.9 million of acquisition related costs that were expensed for the three months ended September 30, 2019 and 2018 and $0.7 million and $3.4 million for the nine months ended September 30, 2019 and 2018, respectively. These costs are included in the Project development, preopening and writedowns line in the condensed consolidated statements of operations.
The following supplemental information presents the financial results of Valley Forge included in the Company's condensed consolidated statement of operations for the three and nine months ended September 30, 2019:
Lattner Entertainment Group Illinois
On June 1, 2018, we completed the acquisition of Lattner Entertainment Group Illinois, LLC ("Lattner"), a distributed gaming operator headquartered in Ottawa, Illinois, pursuant to an Agreement and Plan of Merger (the "Lattner Merger Agreement") dated as of May 1, 2018, by and among Boyd, Boyd TCVI Acquisition, LLC, a wholly owned subsidiary of Boyd ("Boyd TCVI"), Lattner, and Lattner Capital, LLC, solely in its capacity as the representative of the equity holders of Lattner.
Pursuant to the Lattner Merger Agreement, Boyd TCVI merged with and into Lattner (the "Lattner Merger"), with Lattner surviving the Lattner Merger and becoming a wholly owned subsidiary of Boyd. Lattner operates nearly 1,000 gaming units in approximately 220 locations across the state of Illinois and is aggregated into our Midwest & South segment (See Note 11, Segment Information). The net purchase price was $100.0 million.
The fair value of the consideration transferred pursuant to the Lattner Merger Agreement represented the purchase price of the net assets acquired. The total gross consideration was $110.5 million.
The Company followed the acquisition method of accounting per ASC 805 guidance. In accordance with ASC 805, we allocated the purchase price to the assets acquired and the liabilities assumed based on their fair values as determined by management with assistance from third-party appraisals. The excess of the purchase price over those fair values was recorded as goodwill. The purchase price allocation below represents Lattner's opening balance sheet on June 1, 2018, which was reported in our Form 10-K for the annual period ended December 31, 2018. During the measurement period, which concluded on March 31, 2019, opening balance sheet adjustments were made to finalize the preliminary fair value estimates, resulting in a $1.0 million increase in other assets and a $0.2 million increase in property and equipment, with a corresponding decrease of $1.2 million to goodwill. The measurement period adjustments and the related tax impact were immaterial to our condensed consolidated financial statements.
The following table summarizes the acquired intangible asset and weighted average useful lives of the definite-lived intangible asset.
Host agreements
The Company did not incur any acquisition related costs for the three months ended September 30, 2019. The Company recognized $0.1 million of acquisition related costs that were expensed for the three months ended September 30, 2018, and $0.4 million and $0.6 million for the nine months ended September 30, 2019 and 2018, respectively. These costs are included in the Project development, preopening and writedowns line in the condensed consolidated statements of operations.
We have not provided the amount of revenue and earnings included in our consolidated financial results from the Lattner acquisition for the period subsequent to its acquisition as such amounts are not material for the three and nine months ended September 30, 2019.
Supplemental Unaudited Pro Forma Information
The following table presents pro forma results of the Company, as though Lattner, Valley Forge and the Pinnacle Properties (the "Acquired Companies") had been acquired as of January 1, 2018. The pro forma results do not necessarily represent the results that may occur in the future. The pro forma amounts include the historical operating results of the Company, Lattner, Valley Forge and the Pinnacle Properties, prior to the acquisition, with adjustments directly attributable to the acquisitions.
Nine Months Ended September 30, 2018
Acquired Companies
Net income from continuing operations, net of tax
Basic net income per share
Diluted net income per share
Pro Forma and Other Adjustments
The unaudited pro forma results, as presented above, include adjustments to record: (i) rent expense under the Master Lease; (ii) the net incremental depreciation expense for the adjustment of property and equipment to fair value and the allocation of a portion of the purchase price to amortizing intangible assets; (iii) the increase in interest expense incurred on the incremental borrowings incurred by Boyd to fund the acquisition, including the Belterra Park Mortgage; (iv) the estimated tax effect of the pro forma adjustments on the historical taxable income of the Acquired Companies; and (v) miscellaneous adjustments as a result of the purchase price allocations on the amortization of certain assets and liabilities.
Divestiture of Borgata
On August 1, 2016, Boyd Gaming completed the sale of its 50% equity interest in the parent company of Borgata in Atlantic City, New Jersey, to MGM Resorts International ("MGM") pursuant to the Purchase Agreement entered into on May 31, 2016, as amended on July 19, 2016, by and among the Company, Boyd Atlantic City, Inc., a wholly owned subsidiary of the Company, and MGM. During the nine months ended September 30, 2018, we recognized $0.3 million in income, net of tax, for the cash we received for our share of miscellaneous recoveries realized by Borgata during that period. This payment is included in discontinued operations in the condensed consolidated financial statements.
NOTE 3. 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 4. INTANGIBLE ASSETS, NET
Intangible assets, net consist of the following:
Weighted
Gross
Cumulative
Average Life
Carrying
Impairment
Intangible
Remaining (in years)
Value
Amortization
Losses
Assets, Net
Amortizing intangibles
Customer relationships
Favorable lease rates
Development agreement
Indefinite lived intangible assets
Trademarks
Gaming license rights
December 31, 2018
Indefinite
Balances, December 31, 2018
_________________________________________________________________________
_____________________________
NOTE 5. ACCRUED LIABILITIES
Accrued liabilities consist of the following:
Total accrued liabilities
NOTE 6. 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
6.875% senior notes due 2023
6.375% senior notes due 2026
6.000% senior notes due 2026
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, $265.0 million was borrowed on the Revolving Credit Facility, $31.3 million was borrowed on the Swing Loan and $12.7 million allocated to support various letters of credit, leaving a remaining contractual availability of $636.5 million as of September 30, 2019.
Covenant Compliance
As of September 30, 2019, we believe that we were in compliance with the financial and other covenants of our debt instruments.
NOTE 7. COMMITMENTS AND CONTINGENCIES
Commitments
As of September 30, 2019, 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, 2018, as filed with the SEC on March 1, 2019.
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 8. 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 68 years, and some of which include options to terminate the leases within one year. Certain of our lease agreements, including 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 and nine months ended September 30, 2019 was not material.
The components of lease expense were as follows:
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 9. STOCKHOLDERS' EQUITY AND STOCK INCENTIVE PLANS
Share Repurchase Program
On May 2, 2017 the Company announced that its Board of Directors had reaffirmed the Company's existing share repurchase program (the "2008 Plan"). On December 12, 2018, our Board of Directors authorized a new share repurchase program of $100 million which is in addition to the existing repurchase authorization (the "2018 Plan"). As of September 30, 2019, the 2008 Plan was fully depleted and $72.5 million remained under the 2018 Plan. The Company intends 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.
The following table provides information regarding share repurchases during the referenced periods.(1)
Shares repurchased (2)
Total cost, including brokerage fees
Average repurchase price per share (3)
(1) Shares repurchased reflect repurchases settled during the three and nine months ended September 30, 2019 and 2018. These amounts exclude repurchases traded but not yet settled on or before September 30, 2019 and 2018.
(2) All shares repurchased have been retired and constitute authorized but unissued shares.
(3) 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, 2017
December 28, 2017
January 15, 2018
March 2, 2018
March 16, 2018
April 15, 2018
December 7, 2018
December 28, 2018
January 15, 2019
March 4, 2019
March 15, 2019
April 15, 2019
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 2015 and 2014 vested during first quarter 2019 and 2018, 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 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.
The PSU grant awarded in December 2014 resulted in a total of 486,805 shares being issued during first quarter 2018, representing approximately 1.57 shares per PSU. Of the 486,805 shares issued, a total of 149,268 were surrendered by the participants for payroll taxes, resulting in a net issuance of 337,537 shares due to the vesting of the 2014 grant. The actual achievement level under the award metrics equaled the estimated performance as of year-end 2017; therefore, the vesting of the PSUs did not impact compensation costs in our 2018 condensed consolidated statement of operations.
NOTE 10. 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 September 30, 2019 and December 31, 2018.
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 September 30, 2019 and December 31, 2018 is a discount rate of 10.3% and 11.2%, 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 September 30, 2019 and December 31, 2018, $0.6 million and $0.5 million, respectively, 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 September 30, 2019 and December 31, 2018, $16.2 million and $15.3 million, respectively, is included in other assets on the condensed consolidated balance sheets. The discount associated with this investment of $2.7 million and $2.8 million, as of September 30, 2019 and December 31, 2018, 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 September 30, 2019 and December 31, 2018, is a discount rate of 6.9% and 6.8%, respectively. At September 30, 2019 and December 31, 2018, there was a current liability of $0.9 million and $0.8 million, respectively, related to this agreement, which is recorded in accrued liabilities on the respective condensed consolidated balance sheets, and long-term obligation at September 30, 2019 and December 31, 2018, of $1.0 million and $1.6 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:
September 30, 2018
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 September 30, 2019 and December 31, 2018. The estimated fair values of our Senior Notes are based on quoted market prices as of September 30, 2019 and December 31, 2018. 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) capital leases with various maturity dates from 2019 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 nine months ended September 30, 2019 and 2018.
NOTE 11. 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 September 30, 2019
Gaming Revenue
Room Revenue
Other Revenue
Total Revenue
Total Revenues
Three Months Ended September 30, 2018
Nine Months Ended September 30, 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 12. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Separate condensed consolidating financial information for our subsidiary guarantors and non-guarantors of our 6.875% Notes, our 6.375% Notes and our 6.000% Notes is presented below. The 6.875% Notes and 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, 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 are the same as for our 6.375% Notes and 6.875% 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.
On January 10, 2019, Ameristar Kansas City, Ameristar St. Charles, Belterra Resort, Belterra Park and Valley Forge became guarantors of the 6.875% Notes, the 6.375% Notes, the 6.000% Notes and the Credit Facility.
The tables below present the condensed consolidating balance sheets as of September 30, 2019 and December 31, 2018, the condensed consolidating statements of operations for the three and nine months ended September 30, 2019 and 2018, and the condensed consolidating statements of cash flows for the nine months ended September 30, 2019 and 2018. We have reclassified certain prior year amounts in the current year presentation to reflect the designation of the additional restricted subsidiaries listed above as subsidiary guarantors.
Condensed Consolidating Balance Sheets
Non-
Guarantor
Subsidiary
Subsidiaries
(Not 100%
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
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 6.875% Notes and is a 100% owned non-guarantor of the 6.000% Notes.
Condensed Consolidating Balance Sheets - continued
(100%
Accumulated losses of subsidiaries in excess of investment
Condensed Consolidating Statements of Operations
Operating income (loss)
Total other expense (income), net
Income (loss) before income taxes
Net income (loss)
Condensed Consolidating Statements of Operations - continued
Operating
Intercompany expenses
Equity in earnings (losses) of subsidiaries
Interest expense, net
Income tax benefit (provision)
Comprehensive income (loss)
Income (loss) from continuing operations before income taxes
Income (loss) from continuing operations, net of tax
Income (loss) from discontinued operations, net of tax
Condensed Consolidating Statements of Cash Flows
Cash flows from operating activities
Cash flows from investing activities
Net cash from investing activities
Cash flows from financing activities
Other financing activities
Net cash from financing activities
Condensed Consolidating Statements of Cash Flows - continued
Net cash from operating activities
Capital expenditures
Net activity with affiliates
Other investing activities
Borrowings under bank credit facility
Payments under bank credit facility
Debt financing costs, net
Share-based compensation activities, net
Dividends paid
Cash, cash equivalents and restricted cash, beginning of period
NOTE 13. SUBSEQUENT EVENTS
We have evaluated all events or transactions that occurred after September 30, 2019. During this period, up to the filing date, we did not identify any additional subsequent events, other than the payment of the cash dividend disclosed in Note 9, Stockholders’ Equity and Stock Incentive Plans, the effects of 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
Overview
(In millions)
Total revenues increased $207.4 million, or 33.9%, for the three months ended September 30, 2019, compared to the prior year period due primarily to the Midwest & South segment increasing $201.4 million over the prior year comparable period. The increase in total revenues in the Midwest & South segment are attributable to the acquisitions of Lattner on June 1, 2018, Valley Forge on September 17, 2018 and Ameristar Kansas City, Ameristar St. Charles, Belterra Resort and Belterra Park on October 15, 2018 (collectively, the "Acquisitions").
Total revenues increased $657.9 million, or 35.8%, for the nine months ended September 30, 2019, compared to the prior year period due primarily to the Midwest & South segment increasing $644.4 million over the prior year comparable period as a result of the Acquisitions.
Operating Income
Operating income increased $43.8 million, or 63.0%, for the three months ended September 30, 2019 and $97.1 million, or 37.3%, for the nine months ended September 30, 2019, compared to the prior year comparable periods primarily due to the Acquisitions and cost control efforts surrounding our operating cost. In addition, project development, preopening and writedowns expense declined $13.3 million and $13.6 million for the three and nine months ended September 30, 2019, respectively, over the prior year comparable period. The decline is due to lower costs related to the Acquisitions, the Wilton Rancheria development and the redesigned B-Connected program.
Income from continuing operations, net of tax for the nine months ended September 30, 2019 was $133.3 million, as compared to $91.8 million in the comparable prior year period, resulting in an increase of $41.5 million. This increase is attributable to the $97.1 million operating income increase, as discussed above, offset by a $38.3 million increase in interest expense, net of amounts capitalized, due to an increase in the average long-term debt balance of $740.7 million reflecting the additional debt issued to fund Acquisitions and a 0.3 percentage point increase in the weighted average interest rate. In addition, the income tax provision increased $14.6 million from the prior year comparable period due to an increase in income.
Income from Discontinued Operations, net of tax
Income from discontinued operations, net of tax reflects the results of our equity method investment in Borgata, which we sold in August 2016. The results for the nine months ended September 30, 2018 include our share of miscellaneous recoveries realized by Borgata in the period.
Net Income
Net income increased $27.6 million for the three months ended September 30, 2019, compared to the prior year period due primarily to the increase in income from continuing operations, net of tax of $27.6 million, as discussed above.
Net income increased $41.2 million for the nine months ended September 30, 2019, compared to the prior year period due primarily to the increase in income from continuing operations, net of tax of $41.5 million, as discussed above, offset by a $0.3 million decrease in net income from discontinued operations, net of tax.
Operating Revenues
We derive the majority of our revenues from our gaming operations, which produced approximately 75% and 73% of revenues for the three- and nine-month periods ended September 30, 2019 and 2018, respectively. Food & beverage revenues represent our next most significant revenue source, generating approximately 13% and 14% of revenues for the three- and nine-month periods ended September 30, 2019 and 2018, respectively. 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 $166.7 million, or 37.3%, increase in gaming revenues during the three months ended September 30, 2019, as compared to the corresponding period of the prior year, was primarily due to the Midwest & South segment. The Midwest & South segment experienced a $163.1 million increase in gaming revenue primarily due to the Acquisitions.
Gaming revenues increased $532.4 million, or 39.9%, during the nine months ended September 30, 2019, as compared to the corresponding period of the prior year, due to the Acquisitions, which generated $523.4 million of gaming revenue for the Midwest & South segment.
Food & Beverage
Food & beverage revenues increased $72.2 million, or 27.9% during the nine months ended September 30, 2019, as compared to the corresponding period of the prior year. The increase is due to the Acquisitions as the Midwest & South segment experienced growth of $70.6 million over the prior year comparable period. Overall food & beverage margins increased to 7.1% from 4.8% over the comparable period, primarily due to an increase in average check of 8.9% while cost per cover increased by only 5.8%.
Room revenues increased$12.7 million, or 26.5%, during the three months ended September 30, 2019, as compared to the corresponding period of the prior year due primarily to the Acquisitions. Overall room margins remained consistent period over period.
Room revenues increased$33.7 million, or 23.2%, during the nine months ended September 30, 2019, as compared to the corresponding period of the prior year due primarily to the Acquisitions. Overall room margins decreased to 53.6% from 55.3% from the prior year comparable period, due primarily to the cost per room increasing 13.2% and the average daily rate increasing by only 6.9%.
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 increased $5.9 million or 18.6%, and $19.6 million or 20.4% during the three and nine months ended September 30, 2019, respectively, as compared to the corresponding periods of the prior year, primarily due to the Acquisitions.
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 11, 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 increased by $4.5 million, or 2.2%, during the three months ended September 30, 2019, as compared to the corresponding period of the prior year, primarily due to increases in gaming revenue and room revenue. Gaming revenue increased $2.5 million over the prior year comparable period which was driven by a 2.0% increase in table game win and a 1.7% increase in slot win, and room revenue increased $2.4 million over the prior year comparable period which was driven by 6.4% increase in hotel occupancy rate.
Total revenues increased by $6.2 million, or 0.9%, during the nine months ended September 30, 2019, as compared to the corresponding period of the prior year, primarily due to increases in gaming revenue and room revenue. Gaming revenue increased $3.3 million over the prior year comparable period which was driven by a 1.3% increase in table game drop and a 4.9% increase in table game win, and room revenue increased $3.2 million over the prior year comparable period which was driven by a 2.1% increase in hotel occupancy rate.
Adjusted EBITDAR increased by $4.0 million or 6.7%, and $8.4 million or 4.2% for the three and nine months ended September 30, 2019, respectively, over the comparable prior year periods due primarily to our revenue growth, ongoing refinements to marketing programs and solid regional economic conditions.
Total revenues increased by $7.3 million, or 4.0%, during the nine months ended September 30, 2019, as compared to the corresponding period of the prior year. Gaming revenue increased by $4.6 million due to a 1.0% increase in slot handle and a 6.2% increase in slot win. Room revenue increased $1.5 million primarily as a result of a 2.8% increase in hotel occupancy rate. Food & beverage revenue increased $1.4 million as a result of average check increasing 5.1% over the prior year comparable period. Our Hawaiian market represented 51% and 52% during the nine months ended September 30, 2019 and 2018, respectively, of our occupied rooms in this segment.
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 14.3% and 14.4% during the three months ended September 30, 2019 and 2018, respectively, and 14.0% and 14.4% during the nine months ended September 30, 2019 and 2018, respectively. We continue to focus on disciplined and targeted marketing spend, and our ongoing cost containment efforts.
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.
Maintenance and Utilities
Maintenance and utilities expenses, as a percentage of revenues, were relatively consistent at 5.0% and 5.4% during the three months ended September 30, 2019 and 2018, respectively, and 4.8% and 4.9% during the nine months ended September 30, 2019 and 2018.
Depreciation and Amortization
Depreciation and amortization expenses, as a percentage of revenues, were 7.9% and 8.9% during the three months ended September 30, 2019 and 2018, respectively, and 8.0% and 8.7% during the nine months ended September 30, 2019 and 2018, respectively. The decline in the percentage versus the prior year period is attributable to there not being depreciation on the real property for three of the Acquisition properties which are subject to the master lease agreement.
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 2.6% and 4.1% of revenues during the three months ended September 30, 2019 and 2018, respectively, and 3.2% and 4.1% during the nine months ended September 30, 2019 and 2018, 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. Project development, preopening and writedowns expense declined from the prior year comparable periods due to lower costs related to the Acquisitions, the Wilton Rancheria development and the redesigned B-Connected program.
Impairment of Assets
Impairments of assets for the nine months ended September 30, 2018 included non-cash impairment charges related to a nonoperating asset.
Other Operating Items, net
Other operating items, net, is generally comprised of miscellaneous non-recurring operating charges, including direct and non-reimbursable costs associated with natural disasters and severe weather, including hurricane and flood expenses and subsequent recoveries of such costs, as applicable.
Other Expenses
Interest Expense, net
The following table summarizes information with respect to our interest expense on outstanding indebtedness:
(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 and nine months ended September 30, 2019, increased $6.7 million or 12.9%, and $40.1 million or 28.5%, respectively, as compared to the prior year. The impact is attributable to an increase in the average long-term debt balance of $332.1 million for the three months ended September 30, 2019 and $740.7 million for the nine months ended September 30, 2019, which is driven by the issuance in June 2018 of the $700.0 million aggregate principal amount of 6.000% senior notes due August 2026 issued in anticipation of the Acquisitions and incremental revolver borrowings incurred in October 2018 to fund the Pinnacle Acquisition. In addition, the weighted average interest rate percentage point increased by 0.3 for the nine months ended September 30, 2019, respectively, which is driven by an increase in the underlying Eurodollar rate.
The effective tax rate on income during the nine months ended September 30, 2019 and 2018 were 24.4% and 23.6%, respectively. Our provisions for the nine months ended September 30, 2019 and 2018 were unfavorably impacted by state taxes and certain nondeductible expenses. Our tax rates were favorably impacted by the inclusion of excess tax benefits, related to equity compensation, as a component of the provision for income taxes.
LIQUIDITY AND CAPITAL RESOURCES
Financial Position
We generally operate with minimal or negative levels of working capital in order to minimize borrowings and related interest costs. At September 30, 2019 and December 31, 2018, we had balances of cash and cash equivalents of $235.1 million and $249.4 million, respectively. In addition, we held restricted cash balances of $26.4 million and $23.8 million at September 30, 2019 and December 31, 2018, respectively.
Our bank credit facility generally provides all necessary funds for the day-to-day operations, interest and tax payments, as well as capital expenditures. On a daily basis, we evaluate our cash position and adjust the balance under our bank credit facility as necessary, by either borrowing or paying down debt with excess cash. We also plan the timing and the amounts of capital expenditures. We believe that the borrowing capacity under the bank credit facility, subject to restrictive covenants, and cash flows from operating activities 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. The source of funds available to us for repayment of debt or to fund development projects is derived primarily from cash flows from operations and availability under our bank credit facility, to the extent availability exists after we meet working capital needs, and subject to restrictive covenants. See "Indebtedness", below, for further detail regarding funds available through our bank credit facility.
The Company could also 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
Cash paid for acquisitions, net of cash received
Net payments under bank credit facility
Proceeds from issuance of senior notes
Debt issuance costs
Increase (decrease) in cash, cash equivalents and restricted cash
During the nine months ended September 30, 2019 and 2018, we generated net operating cash flow of $415.4 million and $332.2 million, respectively. Generally, operating cash flows increased during 2019 as compared to the prior year period due to the Acquisitions 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 nine months ended September 30, 2019 and 2018, we incurred net cash outflows for investing activities of $195.6 million and $485.6 million, respectively. During the nine months ended September 30, 2019, we incurred cash outflows of $166.8 million primarily related to the purchase of real estate, information technology purchases for new software and acquisition-related costs. During the nine months ended September 30, 2018, we incurred cash outflows of $367.3 million related to the Lattner and Valley Forge acquisitions.
We rely upon our financing cash flows to provide funding for investment opportunities, repayments of obligations and ongoing operations.
The net cash outflows from financing activities in the nine months ended September 30, 2019, reflect primarily the use of cash flow to reduce our outstanding debt, repurchase outstanding common stock under our share repurchase program and pay cash dividends to our shareholders. The net cash inflows from financing activities in the nine months ended September 30, 2018, reflect primarily the proceeds received for the issuance of our 6.000% Senior Notes due August 2026. The Company utilized the net proceeds from the debt issuance to pay down the outstanding amounts under the Revolving Credit Facility and Swing Loan and invested the balance of the net proceeds in cash equivalents and short-term marketable securities at a qualified institution. The remaining outflows reflect 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
The blended interest rate for outstanding borrowings under the bank credit facility was 4.2% at September 30, 2019 and 4.7% at December 31, 2018.
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 6.000% to 6.875%) and principal repayments of our 6.875% senior notes due May 2023, our 6.375% senior notes due April 2026, and our 6.000% senior notes due August 2026.
As of September 30, 2019, we believe that we were in compliance with the financial and other covenants contained in our debt instruments.
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, 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. We intend to fund the repurchases under the stock repurchase program with existing cash resources and availability under our bank credit facility. In July 2008, our Board of Directors authorized an amendment to our existing share repurchase program to increase the amount of common stock available to be repurchased to $100 million. On May 2, 2017 the Company announced that its Board of Directors had reaffirmed the Company's existing share repurchase program (the "2008 Plan"). On December 12, 2018, our Board of Directors authorized a new share repurchase program of $100 million which is in addition to the existing repurchase authorization (the "2018 Plan"). We are not obligated to purchase any shares under our stock repurchase program. During the nine months ended September 30, 2019 and 2018, we repurchased 1.1 million shares and 1.3 million shares, respectively, of our common stock. We are currently authorized to repurchase up to an additional $72.5 million in shares of our common stock under the 2018 share repurchase program. The 2008 share repurchase program has been depleted.
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 and availability under our Revolving Credit Facility, to the extent availability 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 to maintain our quality standards ranges from between $170 million and $190 million. We fund our capital expenditures through 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 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.
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, 2018, as filed with the SEC on March 1, 2019.
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, 2018, as filed with the SEC on March 1, 2019.
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, 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, 2018, 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 September 30, 2019, our long-term variable-rate borrowings represented approximately 41.4% of total long-term debt. Based on September 30, 2019 debt levels, a 100 basis point change in the interest rate would cause our annual interest costs to change by approximately $15.9 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
There were no 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, 2018.
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 September 30, 2019. For additional information, see below under Share Repurchase Program.
Period
July 1, 2019 through July 31, 2019
August 1, 2019 through August 31, 2019
Totals
As of September 30, 2019, the Company’s 2018 share repurchase program had $72.5 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.
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 September 30, 2019, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018, (ii) Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2019 and 2018, (iii) Condensed Consolidated Statements of Changes in Stockholders' Equity for each of the quarters within the nine months ended September 30, 2019 and 2018, iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018, 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 November 7, 2019.
By:
/s/ Anthony D. McDuffie
Anthony D. McDuffie
Vice President and Chief Accounting Officer