Boyd Gaming Corporation — FY 2018 Form 10-K
Reporting period: Year ended December 31, 2018. The filing also provides fourth-quarter results; this is an annual report, not a standalone quarterly filing. Boyd operated 29 wholly owned gaming properties across 10 states, reported in Las Vegas Locals, Downtown Las Vegas, and Midwest & South segments.
Financial performance and condition
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $2.627 billion | $2.401 billion |
| Operating income | $355.3 million | $343.8 million |
| Income from continuing operations, net | $114.7 million | $168.0 million |
| Net income | $115.0 million | $189.4 million |
| Diluted earnings per share | $1.00 | $1.64 |
| Cash provided by operating activities | $434.5 million | $422.6 million |
| Cash and cash equivalents at year-end | $249.4 million | $203.1 million |
| Long-term debt, face amount | $4.030 billion | $3.122 billion |
- Revenue rose 9.4%, driven principally by acquisitions. Operating income increased 3.3%; net income declined 39.2%, reflecting higher interest expense and the absence of the prior-year $60.1 million tax benefit and $21.4 million of discontinued-operations income.
- Gaming provided about 73% of 2018 revenue. Gaming revenue increased 10.6%; reported gaming margin was 56.1%, versus 56.4%. Food and beverage margin improved to 5.5% from 3.1%.
- Adjusted EBITDA, a company-defined measure, was $660.6 million versus $595.9 million. This includes the effect of acquired properties and should be considered alongside GAAP results.
- Fourth-quarter revenue was $791.6 million, operating income $94.7 million, and net income $22.9 million. Fourth-quarter 2017 figures were $595.1 million, $80.5 million, and $82.1 million, respectively; the prior-year net result included discontinued-operations income.
- Capital expenditures were $161.5 million. Net cash used in investing was $1.135 billion, primarily reflecting $934.1 million of acquisition payments. Financing activities provided $746.2 million, principally from debt issuance and credit-facility activity.
- Year-end working capital deficit was $70.0 million. The company reported $562.5 million of remaining contractual availability under its revolving credit facility, after borrowings and letters of credit. Management stated operating cash flow and facility capacity should meet needs for the next 12 months, subject to covenants and availability.
- Debt increased substantially to finance acquisitions. The company issued $700 million of 6.000% senior notes due 2026; weighted-average interest rate was 5.4% in 2018 versus 4.4% in 2017. Approximately 44% of year-end debt was variable-rate; a 100-basis-point rate change was estimated to change annual interest cost by about $17.7 million.
Material changes and management commentary
- Boyd acquired Lattner, an Illinois distributed-gaming operator, in June; Valley Forge in September; and four Pinnacle properties in October 2018. Acquisitions added properties in Pennsylvania, Missouri, Indiana, and Ohio and expanded the Midwest & South segment. Purchase-price allocations remained preliminary at year-end, with final valuations expected in first-quarter 2019.
- Acquisition-related debt and interest expense rose: net interest expense increased to $200.5 million from $171.3 million. Operating income benefited from acquisitions and cost controls, while 2018 project development, preopening, and writedown costs increased to $45.7 million from $14.5 million.
- Management’s priorities include operating efficiency, balance-sheet strengthening, cash-flow growth, targeted non-gaming investment, and disciplined acquisitions. Estimated annual maintenance and refurbishment capital needs are $150–$170 million.
- Boyd entered online gaming and sports-wagering partnerships with MGM Resorts and FanDuel, subject to applicable laws and regulatory approvals. Sportsbooks opened at two Mississippi properties in August 2018.
- The Wilton Rancheria casino project in California was in planning and financing preparation; construction was expected to take 18–24 months once commenced and financed with third-party funding.
- Dividends declared totaled $0.23 per share for 2018, and Boyd repurchased 1.9 million shares for $59.6 million. A new $100 million repurchase authorization was approved in December; repurchases and dividends remain subject to debt restrictions.
Risks, contingencies, and unusual items
- Control weakness: Management and Deloitte reported ineffective internal control over financial reporting at December 31, 2018, due to inadequate general-ledger user-role controls and segregation of duties. No misstatement was identified, and the financial-statement audit opinion was unqualified. Acquired businesses representing 19.9% of assets were excluded from the company’s ICFR assessment. Management expected remediation before the end of second-quarter 2019.
- Leverage and fixed obligations: Debt covenants restrict borrowing, dividends, repurchases, and other actions. The three acquired casino properties are subject to a GLPI master lease; annual rent was stated as $97.2 million, with escalators and additional property obligations. The filing lists $1.18 billion of future minimum operating-lease payments.
- Interest-rate and refinancing risk: Variable-rate debt, significant maturities including approximately $1.85 billion in 2023, and dependence on refinancing or continued credit availability expose the company to higher financing costs and liquidity pressure.
- Industry and regulatory exposure: Intense competition, expanded gaming (including tribal and online gaming), gaming taxes, licensing requirements, and changing regulation could affect results. Consumer discretionary spending and regional economic conditions are important demand drivers.
- Operational and property risks: Severe weather and flooding, insurance limits, riverboat compliance, leased-property dependence, environmental obligations, cyber incidents, and labor negotiations may disrupt operations or increase costs. Management stated pending ordinary-course legal claims were not expected to have a material adverse effect.
- Accounting and unusual items: The 2018 annual impairment tests recorded no impairment charge; acquisition accounting remained preliminary. The company adopted revenue-recognition guidance retrospectively, changing the presentation of revenues and certain costs. 2017 results included a $60.1 million tax benefit; 2016 results included a $181.7 million after-tax Borgata-sale gain and a $203.9 million tax benefit.
Most important facts for investors to verify
- How the acquired properties perform on a comparable, full-year basis, including integration progress and finalized purchase-price allocations.
- Debt and liquidity trajectory, covenant headroom, refinancing plans, and sensitivity to interest-rate increases.
- Cash generation after maintenance capital expenditures, dividends, repurchases, and master-lease obligations.
- Progress and independent validation of remediation of the material weakness, including controls at acquired businesses.
- Regulatory approvals, funding, budget, and timetable for sports betting and the Wilton Rancheria project.