Business Context and Reporting Period
Boyd Gaming Corporation filed this unaudited Form 10-Q for the quarter ended June 30, 2017. The company operated 24 wholly owned gaming properties across seven states, reported in Las Vegas Locals, Downtown Las Vegas, and Midwest and South segments. Comparisons are affected by the 2016 acquisitions of Aliante and the Cannery properties, which contributed results in 2017 but were not in the prior-year periods.
Financial Performance
Amounts below are in millions except per-share data. Q2 refers to the three months ended June 30; H1 refers to the six months ended June 30.
| Metric | Q2 2017 | Q2 2016 | H1 2017 | H1 2016 |
|---|---|---|---|---|
| Net revenues | $599.9 | $544.9 | $1,205.2 | $1,097.3 |
| Operating income | $89.4 | $80.5 | $184.2 | $162.7 |
| Income from continuing operations, net of tax | $27.6 | $11.3 | $62.7 | $32.9 |
| Income from discontinued operations, net of tax | $21.0 | $18.7 | $21.4 | $30.3 |
| Net income | $48.6 | $30.0 | $84.1 | $63.2 |
| Diluted EPS | $0.42 | $0.26 | $0.73 | $0.55 |
| Adjusted EBITDA (non-GAAP) | $151.2 | $137.9 | $307.0 | $275.6 |
Net revenue increased 10.1% in Q2 and 9.8% in H1. Operating income grew 11.0% and 13.2%, respectively. Operating margin was approximately 14.9% in Q2 2017 versus 14.8% in Q2 2016, and 15.3% in H1 2017 versus 14.8% in H1 2016. Gaming margin improved to 53.6% from 51.9% in Q2; food and beverage margin declined to 43.9% from 44.5%, and room margin to 72.0% from 74.0%.
For H1, operating cash flow was $195.2 million, compared with $160.3 million. Investing activities used $153.4 million, including $118.8 million in capital expenditures and $35.1 million advanced for the Wilton Rancheria development. Financing activities used $108.5 million. Cash and cash equivalents ended the period at $163.0 million, down from $193.9 million at year-end 2016.
At June 30, total debt principal was $3.191 billion; debt carrying value, net of discounts and issuance costs, was $3.140 billion. Cash was $163.0 million, restricted cash $21.6 million, and working capital deficit $71.6 million. The credit facility had $545.0 million of remaining contractual availability, after $12.5 million allocated to letters of credit. The company reported compliance with debt covenants. H1 average long-term debt was $3.270 billion and weighted-average interest rate was 4.2%, versus $3.538 billion and 5.5% in H1 2016.
Material Changes Versus Prior Comparable Period
- Acquisitions drove much of the revenue and Adjusted EBITDA growth. Las Vegas Locals revenue rose 38.3% in Q2 and 38.5% in H1; segment Adjusted EBITDA rose 46.2% and 47.9%, respectively.
- Midwest and South revenue fell 1.4% in Q2 and 2.3% in H1, with declines at Evangeline Downs and Amelia Belle amid localized economic weakness. Lower gaming volumes and increased Lake Charles promotional activity also pressured results.
- Downtown Las Vegas revenue increased modestly, but Adjusted EBITDA declined 11.8% in Q2. A 300-room tower at the California property was taken out of service for renovation.
- Interest expense declined as debt balances and borrowing rates fell following debt redemptions and refinancings. H1 interest expense, net, declined to $85.5 million from $113.5 million.
- Capital expenditures rose to $118.8 million from $72.4 million in H1 2016. Debt principal declined $92.1 million from December 31, 2016.
Outlook, Management Commentary, Risks and Unusual Items
- No earnings or revenue guidance was provided. Management expected operating cash flow and credit-facility borrowing capacity to fund projected operating needs and maintenance capital expenditures for at least the next 12 months, subject to covenants and working-capital requirements.
- Management estimated annual maintenance and refurbishment capital needs of $140–$160 million and total 2017 capital spending of $235–$255 million. The latter includes development spending, including the $35.1 million Wilton Rancheria site acquisition. Management also reported that the Orleans exercised an option to buy its leased land for $43.0 million.
- The California tower renovation was expected to be completed in early Q4 2017. The Cannery and Eastside Cannery purchase-price allocation remained preliminary; final valuations were expected by Q3 2017 and could differ significantly from recorded estimates.
- Discontinued operations included Boyd’s share of Borgata’s property-tax settlement benefits: $35.6 million pretax in Q2 and $36.2 million in H1, received after Boyd sold its Borgata interest in August 2016. These proceeds materially affected reported net income; Q2 2017 discontinued-operations income was $21.0 million after tax.
- Boyd reinstated a quarterly dividend of $0.05 per share, paid July 15, 2017, and repurchased 441,586 shares for $11.1 million during H1; $81.0 million remained authorized under its repurchase program.
- The company identified competition, economic weakness, gaming regulation and taxation, acquisition integration, development delays or cost overruns, refinancing risk, and interest-rate exposure among forward-looking risks. A 100-basis-point change in applicable variable rates was estimated to change annual interest costs by approximately $16.9 million.
- The company expected adoption of the revenue-recognition standard on January 1, 2018, using full retrospective application. It anticipated changes in revenue presentation, including lower reported gaming revenue by an amount equivalent to promotional allowances, but had not quantified the total effects.
- Management stated that ordinary-course legal proceedings were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting reported.
Important Facts for Investors to Verify
- Separate acquisition-driven growth from comparable-property performance, especially the weakness in Midwest and South markets.
- Assess how much reported earnings depended on the Borgata tax recovery and other discontinued-operation items.
- Review debt maturity, floating-rate exposure, covenant headroom, and continued access to the $545.0 million credit-facility availability.
- Track actual 2017 capital spending, project commitments, and completion and cost risks for Wilton Rancheria and property renovations.
- Confirm the final Cannery and Eastside Cannery purchase-price allocation and the quantified impact and presentation changes from the new revenue standard.