Business Context and Reporting Period
Company: Boyd Gaming Corporation
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended September 30, 2007
Business Overview: Boyd Gaming operates 16 wholly-owned gaming entertainment facilities across Nevada, Mississippi, Illinois, Louisiana, Indiana, and Florida, plus a 50% joint venture interest in Borgata Hotel Casino and Spa in Atlantic City. The company is heavily focused on the development of the Echelon project on the Las Vegas Strip and the expansion of its Blue Chip and Dania Jai-Alai properties.
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2007 | 9 Months Ended Sep 30, 2006 |
|---|---|---|---|
| Net Revenues | $490,055 | $1,518,476 | $1,671,798 |
| Operating Income | $91,051 | $273,495 | $281,550 |
| Income from Continuing Operations | $31,885 | $89,931 | $105,711 |
| Net Income (Total) | $31,828 | $271,806 | $60,470 |
| Diluted EPS (Total) | $0.36 | $3.07 | $0.67 |
| Adjusted EBITDA | $144,030 | $443,150 | $506,024 |
| Cash from Operating Activities | N/A | $218,496 | $328,225 |
| Total Debt (Long-term + Current) | N/A | $2,207,952 | $2,137,460 |
| Cash and Cash Equivalents | N/A | $152,845 | $169,397 |
Note: Net Income for the nine months ended Sep 30, 2007, includes a significant gain of $285 million from the disposition of the Barbary Coast property, classified as discontinued operations.
Material Changes vs. Prior Period
- Revenue Decline: Net revenues decreased 7.4% for the nine months ended September 30, 2007, compared to the prior year. This was driven by the closure of the Stardust (Nov 2006), the sale of South Coast (Oct 2006), and increased competition in the Midwest and South segments (specifically Blue Chip and Treasure Chest).
- Discontinued Operations Impact: The nine-month 2007 net income was significantly boosted by a $285 million non-cash gain from the exchange of the Barbary Coast property for land on the Las Vegas Strip. Without this gain, income from continuing operations was lower than the prior year.
- Operating Income: Operating income from continuing operations decreased slightly ($8 million) year-over-year for the nine-month period, despite cost reductions, due to lower revenue volumes.
- Debt Restructuring: The company entered a new $4.0 billion revolving credit facility in May 2007 and redeemed $250 million of 8.75% senior subordinated notes in April 2007, incurring a $16.9 million loss on early retirement of debt.
- Capital Expenditures: Capital spending for the nine months ended September 30, 2007, was $203.7 million, down from $367.0 million in the prior year, reflecting the completion of the Blue Chip expansion and the sale of South Coast.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
- Echelon Project: Construction commenced in June 2007 on the Echelon Las Vegas Strip development, with an expected opening in Q3 2010. Total estimated cost for wholly-owned components is approximately $3.3 billion.
- Blue Chip Expansion: A $130 million hotel tower expansion is underway, expected to open in late 2008.
- Competition: Management notes increased competition in the Las Vegas Locals market and the adverse impact of the new Four Winds Casino on Blue Chip's performance.
- Liquidity: The company maintains a working capital deficit of $56.7 million, which is typical for the industry to minimize borrowing costs. Management believes cash flows and the $2.7 billion available under the credit facility are sufficient for the next 12 months.
Risks and Contingencies
- Borgata Fire: On September 23, 2007, a fire at the Borgata's "The Water Club" expansion caused approximately $12 million in damage. While insurance is expected to cover most costs, the opening is delayed, and business interruption claims are pending.
- Dania Jai-Alai Legal Risk: The company acquired Dania Jai-Alai with the intent to operate slot machines. However, the validity of the Florida slot initiative is currently under litigation. If invalidated, the facility may not be able to operate slots, materially affecting expected cash flows.
- Treasure Chest License Challenge: Ongoing litigation by Alvin C. Copeland seeks to revoke the Treasure Chest Casino license. A loss could have a significant adverse effect on operations.
- Blue Chip Property Taxes: An unanticipated 400% increase in assessed property value could result in an additional tax liability between $4 million and $11 million.
Investor Verification Checklist
- Discontinued Operations Gain: Verify the sustainability of earnings by excluding the $285 million non-cash gain from the Barbary Coast exchange when analyzing core profitability.
- Dania Jai-Alai Contingency: Monitor the status of the Florida Supreme Court litigation regarding the slot initiative, as this determines the viability of the $81 million acquisition.
- Borgata Insurance Recovery: Track the confirmation of insurance coverage for the $12 million fire damage and potential business interruption claims at the Borgata joint venture.
- Debt Covenants: Confirm continued compliance with the new $4.0 billion credit facility covenants, particularly the interest coverage and leverage ratios, given the high capital expenditure requirements for Echelon.
- Blue Chip Tax Assessment: Await the final property tax assessment for Blue Chip to determine the exact financial impact of the 400% valuation increase.