Business Context and Reporting Period
Company: Boyd Gaming Corp
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2003
Operations: The company owns and operates twelve gaming facilities across Nevada, Mississippi, Illinois, Louisiana, and Indiana. A significant development during the period was the commencement of operations on July 3, 2003, for the Borgata Hotel Casino and Spa in Atlantic City, New Jersey, a 50% joint venture with MGM Mirage.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2003 | Nine Months Ended Sep 30, 2002 |
|---|---|---|---|
| Net Revenues | $310,528 | $944,887 | $922,805 |
| Operating Income | $36,214 | $105,506 | $129,656 |
| Net Income | $7,714 | $28,597 | $36,132 |
| Diluted EPS | $0.12 | $0.43 | $0.55 |
| Cash from Operating Activities | N/A | $132,173 | $139,085 |
| Cash and Equivalents (End of Period) | $73,216 | $73,216 | $69,841 |
| Total Debt (Long-term + Current) | $1,075,607 | $1,075,607 | $1,228,811 |
| Working Capital | ($17,814) | ($17,814) | ($48,000) |
Note: Working capital is calculated as Total Current Assets minus Total Current Liabilities. The company historically operates with negative working capital to minimize borrowings.
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 0.8% for the quarter and 2.4% for the nine-month period compared to the prior year. Gaming revenues rose 1.2% (quarter) and 3.4% (nine months), driven by growth at Blue Chip and Delta Downs, partially offset by declines at Par-A-Dice due to competition.
- Profitability Decline: Operating income decreased 8.8% for the quarter and 18.6% for the nine-month period. Net income fell 31.6% (quarter) and 20.9% (nine months). The decline is primarily attributed to increased gaming taxes in Illinois and Indiana, higher marketing costs at the Stardust, and preopening expenses associated with Borgata.
- Debt Reduction: Total long-term debt decreased by approximately $153 million year-over-year due to refinancing activities and debt retirements. Interest expense was lower in 2003 due to lower average outstanding debt and favorable interest rate swaps.
- Borgata Impact: Borgata contributed a $5.4 million operating income for the quarter (including preopening expenses) but a $10.7 million operating loss for the nine-month period. Borgata's non-operating expenses (primarily interest) reduced consolidated income by $2.8 million for the quarter and nine months.
Guidance, Outlook, Risks, and Unusual Items
- Expansion Projects: The company is pursuing a $50 million expansion at Delta Downs (casino and hotel) and a new boat expansion at Blue Chip. Borgata project costs are estimated at $1.1 billion; Boyd and MGM are expected to contribute an additional $20 million each in Q4 2003 to fund costs up to $1.073 billion.
- Dividends and Buybacks: The Board instituted a quarterly cash dividend policy in July 2003 ($0.075/share). The company repurchased 1.07 million shares for $13.4 million during the nine-month period.
- Legal Contingencies:
- Copeland Litigation: Ongoing litigation regarding the Treasure Chest Casino license. If the license is revoked, it would have a significant adverse effect on operations. No loss amount can be estimated.
- Harrah's Litigation: Suit seeking to revoke the building permit at Delta Downs. If successful, it would materially affect cash flow and asset value.
- Astoria Settlement: Settled a lawsuit regarding Treasure Chest for $375,000 in October 2003.
- Unusual Items:
- Indiana Tax Charge: Blue Chip recorded a one-time $3.5 million charge for retroactive gaming taxes in the nine-month period.
- Accounting Change: The prior year (2002) included an $8.2 million cumulative effect charge related to the write-down of Stardust goodwill under SFAS No. 142.
- Outlook Risks: Management notes that operating expenses will continue to be negatively impacted by increased gaming taxes in Illinois, Indiana, Nevada, and New Jersey. Borgata faces risks related to new market competition and regulatory changes.
Investor Verification Checklist
- Borgata Funding: Verify the final project cost estimates and the company's ability to fund the remaining equity contributions without dilution or additional debt.
- Tax Impact: Assess the long-term impact of increased gaming tax rates in Illinois (Par-A-Dice) and Indiana (Blue Chip) on future EBITDA margins.
- Legal Exposure: Monitor the status of the Copeland and Harrah's lawsuits, as adverse outcomes could threaten key operating licenses.
- Debt Covenants: Confirm compliance with bank credit facility covenants, particularly the requirement to maintain $50 million in unused availability until Borgata is complete.
- Stardust Performance: Evaluate the turnaround strategy for the Stardust property, which reported negative Adjusted EBITDA for the quarter.