BYD

BOYD GAMING CORP - 10-Q Summary (Q1 2008)

Business Context and Reporting Period

This report covers the quarterly period ended March 31, 2008. Boyd Gaming Corporation operates 15 wholly-owned casino entertainment facilities across Nevada, Mississippi, Illinois, Louisiana, and Indiana, plus a pari-mutuel facility in Florida. The company is a 50% partner in the Borgata Hotel Casino and Spa in Atlantic City. A major ongoing development is the Echelon project on the Las Vegas Strip, expected to open in Q3 2010.

Key Financial Metrics

Note: Q1 2007 Net Income included $182.8 million from discontinued operations (Barbary Coast disposition). Q1 2008 had no discontinued operations.

Material Changes vs. Prior Period

• Revenue Decline: Net revenues decreased 8.9% year-over-year, driven by slowing economic conditions, rising fuel costs, and increased competition (specifically at Blue Chip).
• Significant Impairment Charge: The company recorded a $90.3 million non-cash write-down and other charge. This primarily consisted of an $84.0 million impairment of the Dania Jai-Alai intangible license right and property, following the decision to indefinitely postpone redevelopment due to market conditions and legal uncertainty regarding the Florida slot initiative.
• Operating Loss: The company shifted from an operating profit of $95.3 million in Q1 2007 to an operating loss of $16.3 million in Q1 2008, largely due to the impairment charge and lower segment performance.
• Capital Expenditures: Investing cash outflows increased significantly to $169.2 million (vs. $127.9 million in 2007), driven by $168.2 million in capital expenditures for the Echelon and Blue Chip expansion projects.

Outlook, Risks, and Contingencies

• Development Projects: Echelon (Las Vegas Strip) remains on track for a Q3 2010 opening. The Blue Chip hotel expansion is expected in December 2008. Borgata's Water Club expansion is expected in June 2008.
• Dania Jai-Alai Contingency: The company faces legal challenges regarding the validity of the Florida slot initiative. If invalidated, the company cannot operate slots at Dania Jai-Alai. A contingent liability of $46.6 million was recorded at acquisition; further charges may occur if the contingency is resolved unfavorably.
• Treasure Chest Litigation: Ongoing legal action by Alvin C. Copeland seeks to revoke the Treasure Chest Casino license. Management is vigorously defending the suit, but a loss could have a significant adverse effect.
• Nevada Tax Refund: A Nevada Supreme Court decision suggests the company may be entitled to a use tax refund of $12.5 million to $15.5 million. However, the state has petitioned for a rehearing, and no gain will be recorded until realized.
• Liquidity: The company maintains a $4.0 billion revolving credit facility with approximately $2.5 billion available as of March 31, 2008. Management believes cash flows and credit availability are sufficient for the next 12 months.

Investor Verification Checklist

• Impairment Details: Verify the specific assumptions used for the $84 million Dania Jai-Alai write-down and the status of the Florida slot initiative litigation.
• Echelon Financing: Confirm the funding strategy for the remaining Echelon costs, particularly the joint venture with Morgans Hotel Group, given current credit market disruptions.
• Blue Chip Competition: Assess the ongoing impact of the Four Winds Casino (Native American) on Blue Chip's revenue and the effectiveness of the new hotel expansion.
• Debt Covenants: Review compliance with the bank credit facility covenants, specifically the interest coverage and leverage ratios, given the operating loss.
• Tax Refund Realization: Monitor the outcome of the Nevada Supreme Court rehearing regarding the use tax refund claim.