Boyd Gaming Corporation (NYSE: BYD) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Boyd operated 24 wholly owned gaming properties across seven states, reported in Las Vegas Locals, Downtown Las Vegas, and Midwest & South segments. Financial statements are unaudited. Prior-year comparisons reflect retrospective adoption of the revenue recognition standard.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $616.8 million | $604.1 million | $1,222.9 million | $1,214.2 million |
| Operating income | $96.3 million | $89.6 million | $191.0 million | $184.4 million |
| Income from continuing operations, net of tax | $38.6 million | $27.7 million | $80.0 million | $62.8 million |
| Net income | $38.9 million | $48.7 million | $80.3 million | $84.2 million |
| Diluted EPS | $0.34 | $0.42 | $0.70 | $0.73 |
| Adjusted EBITDA | $163.4 million | $151.4 million | $323.9 million | $307.1 million |
- Q2 revenue rose 2.1% and operating income rose 7.5%; six-month revenue increased 0.7% and operating income increased 3.6%. Management attributed operating-income growth primarily to higher revenue, cost control, and operating efficiencies.
- Q2 revenue growth included $3.5 million from the June Lattner acquisition. Across the first half, segment Adjusted EBITDA increased in Las Vegas Locals and Midwest & South; Downtown Las Vegas posted modest growth.
- Q2 gaming revenue increased 2.4%; room revenue increased 3.3%, while food and beverage revenue was flat. Food and beverage margins improved to 6.8% from 3.7%; room margins rose to 56.1% from 55.2%. Gaming margins were 56.7% versus 56.6%.
- Net income declined despite higher continuing-operations earnings because prior-year discontinued operations included substantial Borgata property-tax settlement proceeds. Discontinued-operations income was $0.3 million in Q2 2018 versus $21.0 million in Q2 2017, and $0.3 million versus $21.4 million for the first half.
- The first-half effective tax rate on continuing operations was 22.4%, down from 35.7%, primarily reflecting the Tax Act’s reduction of the federal corporate tax rate. Interest expense increased as higher benchmark rates outweighed lower average debt balances.
Cash flow, debt, and liquidity
- First-half operating cash flow was $218.0 million, compared with $200.4 million. Capital expenditures were $63.2 million, compared with $118.8 million; cash paid for the Lattner acquisition was $100.7 million.
- At June 30, cash and cash equivalents were $632.8 million and restricted cash was $26.1 million, versus $203.1 million and $24.2 million, respectively, at year-end. The June cash balance included proceeds from the new senior notes.
- Gross principal debt was $3.564 billion, versus $3.122 billion at December 31, 2017. The increase reflected issuance of $700 million of 6.000% senior notes due 2026, partly offset by reduced bank-facility borrowings. The notes’ net proceeds were used to repay revolving and swing-loan borrowings, with the balance retained in cash and short-term investments.
- Quarter-end revolving-credit availability was $762.3 million after letters of credit. On August 2, 2018, the company increased revolving commitments by $170.5 million to $945.5 million and arranged an additional $49.5 million of Term A loans. Boyd reported covenant compliance at June 30.
- Management stated that cash on hand, operating cash flow, and available credit were expected to meet liquidity and capital needs for the next 12 months, subject to debt covenants. Estimated annual maintenance and refurbishment capital needs were $140–$160 million.
Material developments, outlook, and risks
- Boyd acquired Lattner Entertainment Group Illinois on June 1 for approximately $100.7 million net cash consideration. Lattner operated nearly 1,000 gaming units at about 220 Illinois locations. Preliminary purchase accounting recorded $88.6 million of goodwill; valuation remained incomplete and could change materially.
- Two larger acquisitions remained pending, with expected closings in the second half of 2018, subject to customary regulatory and other conditions: four properties from Penn National for $575 million net cash consideration, and Valley Forge Casino Resort for $280.5 million. The Penn transaction also depended on Penn National completing its Pinnacle acquisition.
- Boyd continued planning the Wilton Rancheria casino project in California. The $35.1 million land cost was expected to be reimbursed when the Tribe obtained permanent financing; construction planning was underway, with an anticipated 18–24-month construction period after financing and commencement.
- No formal earnings guidance was provided. Management cited competition, acquisition execution and integration, project timing and cost overruns, gaming regulation and taxation, interest rates and refinancing, economic conditions, weather, customer preferences, and cybersecurity among factors that could affect results. Management said pending ordinary-course legal claims were not expected to have a material adverse effect; no material changes to previously disclosed risk factors were reported.
- The company adopted the revenue standard retrospectively, changing revenue and expense presentation; management said the impact on annual results was not expected to be material. Adoption of the new lease standard was expected to significantly increase balance-sheet assets and liabilities, with likely insignificant impact on operating results.
Most important facts for investors to verify
- Whether the Penn National and Valley Forge transactions closed on expected terms and timing, and their eventual funding and integration impact.
- Final Lattner purchase-price allocation, including goodwill, identifiable intangibles, and acquired-business performance.
- Whether operating cash flow and liquidity support acquisition spending, maintenance capital needs, dividends, and share repurchases while managing debt and interest costs.
- The sustainability of segment growth and margin improvements, particularly given modest consolidated revenue growth and higher interest rates.
- Progress and financing arrangements for Wilton Rancheria, including reimbursement of the land investment and construction costs.