Boyd Gaming Corporation — Q2 2019 Form 10-Q
Business context and reporting period. Unaudited results cover the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. Boyd operated 29 gaming properties across ten states, reported in Las Vegas Locals, Downtown Las Vegas, and Midwest & South segments. Growth was substantially affected by acquisitions completed in 2018, including Valley Forge and the Pinnacle Properties.
Financial performance
Amounts are in U.S. dollars; financial statement figures below are rounded to millions.
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $846.1M | $616.8M | $1,673.4M | $1,222.9M |
| Operating income | $126.7M | $96.3M | $244.3M | $191.0M |
| Net income | $48.5M | $38.9M | $93.9M | $80.3M |
| Diluted EPS | $0.43 | $0.34 | $0.83 | $0.70 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $264.3M | $218.0M |
| Capital expenditures | Not presented quarterly | Not presented quarterly | $126.2M | $63.2M |
- Q2 revenue rose 37.2%, operating income 31.6%, and net income 24.5% year over year. For the first half, increases were 36.8%, 27.9%, and 16.9%, respectively. Diluted EPS increased 26.5% in Q2 and 18.6% for the half.
- Operating margin was approximately 15.0% in Q2 versus 15.6% a year earlier; first-half operating margin was approximately 14.6% versus 15.6%.
- First-half operating cash flow less capital expenditures was approximately $138.2M, compared with $154.7M in 2018. This is a simple cash-flow-minus-capex calculation, not a company-reported free-cash-flow measure.
- Q2 Adjusted EBITDAR was $232.6M, versus $163.4M; first-half Adjusted EBITDAR was $455.6M, versus $323.9M. These are non-GAAP measures; Boyd reconciles them to operating income.
Liquidity, debt and balance sheet
- At June 30, 2019, cash and cash equivalents were $239.4M and restricted cash was $23.7M. Current assets were $396.8M versus current liabilities of $530.8M.
- Gross debt principal was $3.955B, down $75.2M from December 31, 2018. Debt carrying value, including current maturities, was approximately $3.909B. Long-term debt reported net of current maturities and issuance costs was $3.882B.
- The bank credit facility had $1.696B outstanding and $574.2M of remaining contractual availability, after letters of credit. Boyd said it was in compliance with its debt covenants.
- Operating lease liabilities totaled $916.6M, including $66.1M current and $850.5M long term. Adoption of the lease accounting standard in January 2019 added lease right-of-use assets and liabilities; the company said adoption did not materially affect income or cash flow.
- Approximately 42.9% of long-term debt was variable rate. Boyd estimated that a 100-basis-point rate change would alter annual interest cost by about $17.0M.
Material changes and management commentary
- The Midwest & South segment drove most reported growth: Q2 revenue increased $225.1M and first-half revenue increased $443.0M, primarily due to the 2018 acquisitions. Its Adjusted EBITDAR increased 67.6% in Q2 and 66.8% for the first half. Las Vegas Locals revenue was nearly flat in Q2; Downtown Las Vegas revenue increased 5.4%.
- The acquired businesses contributed $174.3M of Q2 revenue and $18.6M of Q2 net income from the Pinnacle Properties; Valley Forge contributed $42.2M of Q2 revenue and $7.6M of net income. Purchase-price allocations for these acquisitions remained preliminary, with final valuations expected in Q3 2019 and potentially significantly different.
- Interest expense, net, increased to $60.4M in Q2 from $44.4M and to $121.6M for the half from $88.2M. Management attributed the increase to higher average debt and interest rates, including debt issued in 2018 ahead of acquisitions.
- Departmental margins were mixed: food and beverage margins improved, while room margins declined, partly reflecting room-cost increases that exceeded average daily rate growth.
- First-half capital expenditures were $126.2M. Management estimated annual ongoing refurbishment and maintenance capital needs of $170M–$190M. No specific earnings or revenue guidance was provided.
- Boyd continued planning a casino project with the Wilton Rancheria Tribe near Sacramento. Project financing was expected to be third-party; construction was expected to take 18–24 months once commenced and financing was in place.
- The company repurchased $27.8M of shares and paid $13.4M in dividends during the first half. A $0.07-per-share dividend declared in June was paid July 15; $72.8M remained under the 2018 repurchase authorization at quarter-end.
Risks, contingencies and unusual items
- Management cited gaming competition and regulation, gaming taxes, acquisition integration and valuation, development and construction execution, refinancing and interest-rate exposure, economic conditions, extreme weather, customer data and technology risks, and insurance availability among factors that could affect results.
- Boyd disclosed ordinary-course legal proceedings and stated that an adverse outcome was not expected to have a material adverse effect. It reported no material change in previously disclosed risk factors or off-balance-sheet arrangements.
- A material weakness in general-ledger user access and segregation of duties had been identified in 2018. Management said remediation was completed by June 30, 2019 and the weakness was remediated; disclosure controls were assessed as effective at quarter-end. The filing said the weakness had not caused identified financial-statement misstatements.
- There was a $0.5M Q2 loss on early extinguishment or modification of debt. No impairment charge was recorded in 2019, compared with a $1.0M charge in the 2018 periods.
Important facts for investors to verify
- How much of acquired-property growth and Adjusted EBITDAR translates into durable organic growth and cash generation.
- Final acquisition purchase-price allocations and their effects on goodwill, intangible assets, depreciation and amortization.
- Debt repayment capacity, covenant headroom, variable-rate exposure, and the cost and obligations of the master lease and other leases.
- Capital spending versus the stated annual maintenance range, and financing, budget and timing for the Wilton Rancheria project.
- Whether the internal-control remediation remains effective, and whether any subsequent legal, regulatory, tax or operating developments alter disclosed risks.