BYD

Business Context and Reporting Period

Company: Boyd Gaming Corporation
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2004
Operations: The company owns and operates thirteen gaming facilities across Nevada, Mississippi, Illinois, Louisiana, and Indiana. It also holds a 50% equity interest in the Borgata Hotel Casino and Spa in Atlantic City, New Jersey. As of July 30, 2004, there were 86,684,077 shares of common stock outstanding.

Key Financial Metrics

Note: Adjusted EBITDA is a non-GAAP measure defined by the company as earnings before interest, taxes, depreciation, amortization, and preopening/acquisition expenses.

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 9.4% for the three months and 5.9% for the six months ended June 30, 2004, compared to the prior year. This was primarily driven by the acquisition of Sam's Town Shreveport (operating for 41 days in Q2) and increased wagering at Stardust and Sam's Town Las Vegas.
• Profitability Surge: Net income increased 250% for the quarter and 39% for the six-month period. The significant jump in operating income (115% for the quarter) is largely attributable to the Borgata joint venture transitioning from preopening losses in 2003 to operating income in 2004.
• Acquisition Impact: The company recorded $5.9 million in acquisition and transition expenses related to the Shreveport acquisition. Excluding these, organic growth was strong.
• Debt Structure: Long-term debt increased significantly to $1.27 billion (from $1.10 billion at year-end 2003) due to the issuance of $350 million in senior subordinated notes in April 2004 to fund the Shreveport acquisition and pay down the old credit facility.
• Tax Provision: The effective tax rate for the six months ended June 30, 2004, was 49.2%, compared to 38.0% in the prior year. This increase was due to a $5.7 million charge related to an adverse Indiana state tax ruling.

Guidance, Outlook, and Risks

• Coast Casinos Merger: On July 1, 2004, the company consummated a $1.3 billion merger with Coast Casinos. This transaction significantly expanded the company's presence in the Las Vegas locals market. The company expects to record approximately $225 million in goodwill related to this merger.
• Expansion Projects:
  • Blue Chip: A $150 million expansion is underway, expected to complete by end of 2005. Permits are in place but face third-party challenges.
  • Delta Downs: A $55 million expansion is in progress, with the second phase expected to complete in early 2005.
  • Borgata: Planning for a $200 million expansion has commenced, with construction expected to start in December 2004. Funding will rely on Borgata renegotiating its credit agreement; Boyd does not expect to make further capital contributions.
  • South Coast: Following the Coast merger, the company expects to spend approximately $425 million to complete the new South Coast hotel-casino in Las Vegas, targeted for a Q4 2005 opening.
• Liquidity: The company operates with minimal working capital, relying on a new $1.6 billion bank credit facility (effective July 1, 2004) and operating cash flows to fund operations and capital expenditures.
• Legal Risks:
  • Treasure Chest License: A lawsuit by Alvin C. Copeland seeks to revoke the Treasure Chest Casino license. The company cannot estimate potential losses but intends to defend vigorously.
  • Blue Chip Competition: The Pokagon Band of Potawatomi Indians received a favorable Supreme Court ruling regarding a compact for a land-based casino near Blue Chip, which could materially impact operations if constructed.

Investor Verification Checklist

• Merger Accounting: Verify the final valuation of assets and liabilities for the Coast Casinos merger and the resulting goodwill amount (currently estimated at $225 million).
• Indiana Tax Liability: Confirm the final resolution of the Indiana Department of Revenue assessment and its impact on future effective tax rates (management expects ~39% going forward).
• Borgata Funding: Monitor the status of Borgata's credit agreement renegotiation required to fund its $200 million expansion, as Boyd is not providing additional capital.
• Blue Chip Permitting: Track the outcome of the third-party challenges to the Blue Chip expansion permits, which could delay the project or increase costs.
• Debt Covenants: Review compliance with the new $1.6 billion bank credit facility covenants, particularly regarding leverage ratios and expansion capital expenditure limits.