Harrah’s quarterly profit falls on higher expenses

Wednesday, Feb. 5, 2003 | 11:11 a.m.

Harrah's Entertainment Inc. today reported a slight decline in earnings for the fourth quarter as its casinos faced higher casino taxes and competitive pressures in some parts of the country.

Higher returns in Atlantic City and the West offset lower results in the Midwest and South, where results were off because of higher taxes in Illinois and Indiana and stiffer competition in its Missouri and Louisiana markets.

"Strong returns on capital improvements and the contributions from acquired properties offset the negative effect of higher gaming taxes and increased competition," Harrah's Chief Executive Officer Gary Loveman said.

"The operating results clearly demonstrate that our growth strategy continues to perform well in a challenging economic environment," he said.

Still, the company faces uncertainties as higher potential gaming taxes threaten to dampen growth in Atlantic City and it awaits the outcome of a patent infringement lawsuit against Las Vegas locals' casino operator Station Casinos Inc.

The company also is pursuing litigation against Station Casinos, alleging that the local operator's "Boarding Pass" slot club loyalty program infringes on patents for Harrah's "Total Rewards" program -- considered the first system in the casino industry to allow players to rack up rewards across multiple properties.

The company's litigation expenses are significant yet are necessary to protecting a program that has become a key driver of company profits and a distinguishing factor in the competitive landscape, Loveman said.

"This is an industry where intellectual property is increasingly important," he said. "We've put a lot of resources into this."

The company's fourth quarter litigation expenses were higher than normal because the dispute is in the discovery phase, the company said.

Major casino competitors including MGM MIRAGE, Park Place Entertainment Corp. and Mandalay Resort Group have since launched multiple property loyalty cards that bear superficial resemblances to Harrah's Total Rewards program.

Harrah's executives said today that the decision to pursue lawsuits against other companies will depend on the result of the Station Casinos suit.

The company hopes to settle with other companies if successful, executives said.

The company reported net income of $53.9 million for the fourth quarter compared to $55.1 million for the same period last year. On a per share basis, earnings declined to 48 cents from 50 cents.

Excluding non recurring items, the company earned 54 cents per share compared to an adjusted 51 cents per share a year earlier. Analysts had expected the company to earn an average of 57 cents per share.

Non recurring items in the fourth quarter included a $6.1 million charge on obligations related to the failure of Las Vegas' National Airlines Inc., a $3.9 million charge to add benefits for a new segment of customers under its "Total Rewards" slot player loyalty club, a $5 million structural repairs reserve at Harrah's Reno and about $6.5 million in income from the favorable settlement of a sales tax contingency.

One Wall Street analyst said this morning that the company appeared to be passing through its worst period.

"We believe (fourth quarter 2002) and (first quarter 2003) should represent the worst of the tax and competitive impacts for Harrah's, with (comparisons) increasingly easing thereafter," Joyce Minor of Lehman Brothers wrote in a report this morning. Minor has an "overweight" rating on the stock.

Revenue increased by 7.4 percent, to $1.02 billion.

Cash flow at its casinos increased by 1.6 percent, to $246.1 million, in the fourth quarter.

Same-store sales growth -- reflecting performance at casinos open for at least a year -- rose 1.8 percent in the quarter.

During the fourth quarter, the company completed a previously announced acquisition of Harrah's New Orleans and the Louisiana Downs racetrack in Bossier City, La. The company also announced it would build a $75 million hotel tower at Harrah's St. Louis -- more than doubling the roughly 300-room property by mid-2004. It also signed an agreement to sell Harveys Wagon Wheel Hotel & Casino in Central City, Colo., a property acquired in July 2001 as part of Harrah's purchase of the Harveys Casino Resorts chain.

In December, the company announced a letter of intent with an Indian tribe to develop a major casino resort in Rhode Island. Voters would have to approve the deal.

This year, the company expects to add 900 slot machines at the Louisiana Downs track by summer and is also scouting out other "racino" opportunities in other states such as Kentucky, Massachusetts and Pennsylvania.

"The acquisition of the Louisiana Downs racetrack is a sign of our intent to be a leader in racinos, which are expected to be one of the fastest-growing segments of the gaming industry," Loveman said.

Cost savings from the company's Harveys acquisition helped its western region post record fourth-quarter revenues, operating profit and cash flows, the company said.

A strong performance in Southern Nevada offset weaker performance in Northern Nevada.

Fourth-quarter revenues increased 2.5 percent, to $95 million, at the Rio in Las Vegas. Operating profit rose 61.5 percent, to $10.5 million, and cash flow increased by 16.7 percent, to $21 million.

Cash flow -- typically defined as earnings before interest, taxes, depreciation and amortization -- is a key indicator of casino performance.

At Harrah's Las Vegas and Laughlin properties, revenue increased 10 percent, to $110.4 million. Operating profit jumped 31.3 percent, to $21.4 million. And cash flow increased 14.1 percent, to $29.2 million.

Harrah's Reno and Lake Tahoe casinos reported declines in revenue and operating profit due to winter storms that reduced visits and weak market conditions.

Separately, Acres Gaming Inc. of Las Vegas reported record earnings of $2.3 million in its second fiscal quarter compared to $729,000 for the same period last year, an increase driven by demand for its player rewards tracking software for casinos. On a per share basis, the company earned 22 cents per share compared to 7 cents per share a year ago.

Revenue more than doubled, to $11.6 million from $5.3 million in the prior year's quarter.

Acres Chief Executive Officer Bud Glisson said he expects earnings in the company's first fiscal year to more than double last year's earnings.

"Second quarter gross profit was a record for any quarter in the company's history, and we have an estimated $19 million gross profit in our December 31 order backlog," Glisson said. "We're aggressively investing in growth initiatives, adding staff and planning for a $3.3 million increase in second half expenses."

Gross profit margin was 59 percent in the current quarter versus 63 percent in the prior year quarter, the company said. The prior year's gross profit benefited from $1.2 million in royalties received upon settlement of litigation.

The Las Vegas-based company has a contract with Station Casinos to provide player bonus software.