BYD

Business Context and Reporting Period

Company: Boyd Gaming Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2004
Operations: The company owns and operates twelve gaming facilities across Nevada, Mississippi, Illinois, Louisiana, and Indiana, plus a travel agency in Hawaii. It holds a 50% equity interest in the Borgata Hotel Casino and Spa in Atlantic City, New Jersey.

Key Financial Metrics

Note: Debt figures include current maturities and long-term debt net of current maturities. Adjusted EBITDA is a non-GAAP measure defined by the company as earnings before interest, taxes, depreciation, amortization, and preopening expenses.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 2.5% to $330.0 million, driven by a 1.9% increase in consolidated gaming revenues. Growth was led by Stardust (+8.0%), Sam's Town Las Vegas (+7.1%), and Sam's Town Tunica (+5.6%).
• Net Income Decline: Despite higher operating income, Net Income decreased 18.1% to $13.5 million. This was primarily due to a $5.7 million charge related to an adverse Indiana state income tax ruling, which raised the effective tax rate to 57.2% (compared to 37.5% in Q1 2003).
• Borgata Contribution: The company's 50% share of Borgata's operating income contributed $13.1 million in Q1 2004. In Q1 2003, Borgata was in the preopening stage, resulting in a $4.2 million loss recorded as preopening expenses.
• Wholly-Owned Performance: Adjusted EBITDA from wholly-owned properties decreased 4.7% to $67.5 million, largely due to increased gaming taxes and revenue declines at Par-A-Dice in Illinois.

Outlook, Risks, and Unusual Items

Strategic Transactions and Guidance

• Coast Casinos Merger: Agreed to merge with Coast Casinos, Inc. for approximately $1.3 billion (cash and stock). Boyd will assume ~$460 million of Coast's debt. Expected completion in mid-2004.
• Shreveport Acquisition: Agreed to acquire Harrah's Shreveport Hotel and Casino for ~$190 million. A $10 million deposit was made in Q1 2004.
• Expansion Projects: Ongoing expansions at Delta Downs (~$50 million total) and Blue Chip (new boat and parking structure).
• Financing: In April 2004 (subsequent event), the company issued $350 million in senior subordinated notes to refinance debt and fund the Shreveport acquisition.

Risks and Contingencies

• Legal Proceedings: A lawsuit by Alvin C. Copeland seeks revocation of the Treasure Chest Casino license. The company cannot estimate potential losses but notes a loss of license would have a significant adverse effect.
• Taxation: Increased gaming taxes in Illinois and Nevada continue to impact margins. The Indiana tax ruling is expected to normalize the effective tax rate to ~40% in future quarters.
• Liquidity: The company operates with a working capital deficit ($67 million at March 31, 2004) and relies on its bank credit facility and operating cash flows to meet obligations. Additional financing is required to close the Coast and Shreveport transactions.

Investor Verification Checklist

• Tax Liability: Verify the final outcome of the Indiana Tax Court ruling and the impact on future effective tax rates.
• Merger Financing: Confirm the closing of the Coast Casinos merger and the successful execution of the new $1.0 billion credit facility and debt issuances required to fund it.
• Legal Exposure: Monitor the status of the Copeland lawsuit regarding the Treasure Chest license.
• Debt Covenants: Review compliance with financial covenants in the bank credit facility and senior notes, particularly regarding leverage ratios and interest coverage.
• Par-A-Dice Performance: Assess the long-term viability of the Par-A-Dice property given the competitive tax environment in Illinois.