BYD

Business Context and Reporting Period

Company: Boyd Gaming Corp
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Overview: Boyd Gaming is a multi-jurisdictional operator of 15 wholly-owned gaming properties and a controlling interest in Borgata Hotel Casino and Spa in Atlantic City. Operations are aggregated into four segments: Las Vegas Locals, Downtown Las Vegas, Midwest and South, and Atlantic City. The company also owns the Echelon development project on the Las Vegas Strip, which has been delayed indefinitely due to economic conditions.

Key Financial Metrics

Note: 2010 results include the full consolidation of Borgata effective March 24, 2010, following the acquisition of control from MGM Resorts International.

Material Changes vs. Prior Period

• Revenue Growth: Gross revenues increased 36.8% to $2.49 billion, driven primarily by the consolidation of Borgata (contributing $747.4 million in gross revenue). Excluding Borgata, revenues declined 4.9% due to lower consumer spending and room rate pressures.
• Profitability: Operating income improved 17.8% to $183.9 million. Net income attributable to Boyd Gaming increased 143% to $10.3 million, aided by a $10 million payment from MGM related to the Borgata operating agreement amendment and a $2.5 million gain on equity distribution.
• Debt Structure: Total long-term debt increased significantly due to Borgata's refinancing ($950 million facility) and Boyd's issuance of $500 million in senior notes. Boyd's credit facility was amended and restated, reducing aggregate commitments from $3 billion to approximately $1.5 billion.
• Segment Performance:
  • Las Vegas Locals: Gross revenues declined 5.1% and Adjusted EBITDA declined 11.5% due to cautious discretionary spending.
  • Downtown Las Vegas: Gross revenues decreased 3.7% and Adjusted EBITDA decreased 25.8%, impacted by higher fuel costs and lower ticket prices for Hawaiian charter operations.
  • Midwest and South: Gross revenues declined 3.5% and Adjusted EBITDA declined 13.2%, though the segment showed signs of stabilization in the latter half of the year.

Guidance, Outlook, and Risks

Management Commentary:

• Economic Outlook: Management notes the outlook remains highly unpredictable due to the Federal deficit, stock market volatility, and high unemployment. The company is focused on managing cost structures to generate stable cash flow.
• Echelon Project: Construction of the multibillion-dollar Echelon project remains delayed for three to five years. Financing is currently unavailable. The company expects to incur approximately $17 million annually in recurring project costs during the suspension.
• Borgata Control: Boyd obtained direct control of Borgata in March 2010. MGM's 50% interest was transferred to a Divestiture Trust for sale to a third party. Boyd does not have the ability to select the new partner.

Key Risks and Contingencies:

• Debt Covenants: The company is in compliance with its credit facility covenants. However, an 8.7% decline in trailing Consolidated EBITDA would breach the Total Leverage Ratio, and a 29.5% decline would breach the Interest Coverage Ratio.
• Legal Proceedings: Ongoing litigation regarding the Treasure Chest Casino license (Copeland case) poses a risk of license revocation. The case was removed to U.S. District Court in September 2010.
• Tax Disputes: Significant uncertainty exists regarding Nevada use tax refunds ($17.1M–$19.4M estimated) and Blue Chip property tax assessments (liability accrued at $21.0 million).
• Impairment Risk: While no impairment was recorded in 2010, the company monitors goodwill and long-lived assets. A decline in market capitalization or cash flow estimates could trigger future write-downs.

Investor Verification Checklist

• Borgata Consolidation Impact: Verify the provisional fair value adjustments for Borgata assets and liabilities, as these are subject to revision in future filings.
• Debt Covenant Compliance: Monitor trailing twelve-month Consolidated EBITDA closely, as the margin for error on leverage and interest coverage ratios is narrow (8.7% and 29.5% decline thresholds, respectively).
• Echelon Costs: Track the $17 million annual recurring costs and the $11.9 million annual periodic fee paid to LVE Energy Partners for the suspended Echelon project.
• Tax Resolution: Watch for updates on the Nevada use tax refund claim and the Blue Chip property tax assessment, which could materially impact future tax provisions.
• Treasure Chest Litigation: Monitor the status of the Copeland lawsuit, as a loss could result in the revocation of the Treasure Chest license.