BYD

BOYD GAMING CORP - 10-Q Summary (Period Ended June 30, 2006)

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Boyd Gaming Corporation for the three and six-month periods ended June 30, 2006. Boyd Gaming operates 18 wholly-owned gaming entertainment facilities across Nevada, Mississippi, Illinois, Louisiana, and Indiana, and holds a 50% interest in the Borgata Hotel Casino and Spa in Atlantic City, New Jersey. The company is currently executing major expansion projects, including the Echelon Place redevelopment in Las Vegas and the Blue Chip expansion in Indiana.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Net revenues increased 12.1% to $1.26 billion for the six months ended June 30, 2006, compared to $1.12 billion in the prior year. This was driven by the opening of South Coast (Dec 2005), the Blue Chip expansion (Jan 2006), and recovery at Treasure Chest following Hurricane Katrina.
• Profitability Decline: Despite revenue growth, Net Income decreased 16.3% to $73.4 million from $88.7 million in the prior year. Operating income dropped 13.0% to $204.2 million.
• Significant Charges: The decline in operating income was primarily due to a $31.2 million charge for write-downs and other charges (including a $28 million write-off of the original Blue Chip gaming vessel) and $12.1 million in share-based compensation expense resulting from the adoption of SFAS No. 123R.
• Interest Expense: Interest expense increased to $86.1 million (from $64.9 million) due to higher debt levels financing expansion projects and rising variable interest rates.

Guidance, Outlook, and Risks

• South Coast Sale: On July 25, 2006, Boyd entered an agreement to sell South Coast to Michael J. Gaughan. The company expects to record a non-cash, pre-tax charge of approximately $65 million to write down the asset to fair value less cost to sell. Results will be reported as "discontinued operations" starting in Q3 2006.
• Expansion Projects: Major capital projects include Echelon Place (Las Vegas Strip redevelopment, estimated $4.0 billion total cost, opening mid-2010), the Dania Jai Alai acquisition in Florida ($152.5 million), and a new North Las Vegas casino. Funding is expected from operating cash flows, bank credit facilities, and debt/equity offerings.
• Insurance Claims: The company continues to work with insurers regarding Hurricane damage at Delta Downs. A deferred gain of $23.1 million is recorded on the balance sheet pending final settlement.
• Legal and Regulatory Risks:
  • Treasure Chest License: Ongoing litigation by Alvin C. Copeland seeks revocation of the Treasure Chest license. A loss would have a significant adverse effect.
  • Florida Slot Initiative: A court ruling in August 2006 overturned a lower court decision regarding the validity of the 2004 ballot initiative allowing slots at Dania Jai Alai. If invalidated, the acquisition may not proceed.
  • Competition: Intense competition in existing markets and potential new competition from Native American tribes (e.g., near Blue Chip) pose risks to market share.

Investor Verification Checklist

• South Coast Transaction: Verify the closing conditions and the final purchase price for the sale of South Coast to Michael J. Gaughan.
• Asset Write-downs: Confirm the final accounting treatment and tax implications of the $65 million expected write-down for South Coast and the $28 million Blue Chip vessel write-off.
• Insurance Recoveries: Monitor the status of the Delta Downs property damage and business interruption claims to determine if the deferred gain will be recognized or adjusted.
• Debt Covenants: Review compliance with bank credit facility covenants (fixed charge coverage, leverage ratios) given the high capital expenditure environment.
• Florida Acquisition: Track the outcome of the legal challenge to the Florida Slot Initiative, which is a condition precedent for the Dania Jai Alai acquisition.