Filing Overview
Registrant: Eldorado Resorts, Inc. The supplied metadata identifies Caesars Entertainment, Inc., but the filing text is a Form 10-Q for Eldorado Resorts, Inc., filed for the quarter ended June 30, 2017. Results cover the three and six months ended June 30, 2017, compared with the corresponding 2016 periods.
Eldorado operated casino, hotel, racing, food and beverage, and entertainment properties across the West, Midwest, South, and East regions. On May 1, 2017, it completed the $1.93 billion acquisition of Isle of Capri Casinos, adding twelve properties and materially changing period comparability.
Financial Results and Liquidity
| Metric | Three months ended June 30, 2017 | Three months ended June 30, 2016 | Six months ended June 30, 2017 | Six months ended June 30, 2016 |
|---|---|---|---|---|
| Net operating revenues | $355.2 million | $231.3 million | $556.1 million | $444.9 million |
| Operating income (loss) | $(32.1) million | $29.7 million | $(18.0) million | $47.9 million |
| Net income (loss) | $(46.3) million | $10.8 million | $(45.3) million | $14.2 million |
| Net income (loss) per diluted share | $(0.69) | $0.23 | $(0.79) | $0.30 |
| Operating margin | (9.0)% | 12.8% | (3.2)% | 10.8% |
| Net margin | (13.0)% | 4.7% | (8.1)% | 3.2% |
- Gross revenues increased 52.6% to $389.2 million in the quarter and 24.4% to $608.8 million for the six-month period. Gaming and pari-mutuel revenue increased 66.7% and 32.6%, respectively, primarily because of the Isle acquisition.
- Promotional allowances increased in absolute dollars but declined as a percentage of gaming and pari-mutuel revenue to 11.3% from 13.1% for the quarter and to 11.3% from 12.7% for the six months.
- Operating results included $85.5 million of Isle acquisition charges in the quarter and $87.1 million for the six months. Interest expense was $27.5 million and $40.2 million, respectively, versus $12.8 million and $25.8 million in the prior-year periods.
- The company recognized a $27.3 million loss on early retirement of debt for the quarter and six months, substantially related to the Isle acquisition refinancing.
- Six-month adjusted EBITDA, as presented by management on a non-GAAP basis, was $113.4 million excluding pre-acquisition periods. Management also presented $192.3 million including non-GAAP pre-acquisition Isle results; this presentation is not GAAP or SEC pro forma information.
- Cash provided by operating activities was $3.5 million for the six months, down from $48.7 million. Capital expenditures were $29.8 million, compared with $20.3 million in the prior-year period.
- Cash used in investing activities was $1.37 billion, including $1.34 billion of cash used in the Isle acquisition. Financing activities provided $1.41 billion, principally from new borrowings.
- At June 30, 2017, cash and cash equivalents were $103.6 million; including $22.6 million of restricted cash, consolidated cash totaled $126.2 million. Marketable securities were $17.4 million.
- Total long-term debt, including current maturities and net of issuance costs, was approximately $2.23 billion, compared with approximately $800.4 million at December 31, 2016. The company had $201.3 million of available borrowing capacity under its new revolving facility after letters of credit.
Material Changes Versus the Prior Comparable Period
- The Isle acquisition added $134.3 million of net operating revenue and $5.3 million of net income from the acquisition date through June 30, 2017. Isle contributed approximately $22.1 million of operating income during that period.
- Reported revenue growth was largely acquisition-driven. Excluding incremental Isle activity, gaming and pari-mutuel revenue declined 4.4% in the quarter and 4.1% for the six months.
- The West region was affected by severe northern Nevada winter weather, reduced feeder-market access, lower visitation, and the absence of a major Reno bowling tournament. Shreveport and the South region were also affected by weaker high-end play and continued energy-sector weakness.
- Management reported lower operating costs excluding acquired Isle expenses, supported by reductions in variable gaming costs, marketing changes, purchasing efficiencies, and other cost-saving initiatives.
- Corporate operating loss increased to $93.2 million in the quarter and $101.6 million for the six months, primarily because of acquisition charges and related corporate costs.
- Shares outstanding increased materially following the issuance of approximately 28.5 million Eldorado shares as part of the Isle consideration. Period-end shares outstanding were 76.6 million.
Guidance, Outlook, Risks, and Unusual Items
- Management expected to spend $50.2 million on capital expenditures, $52.3 million on interest, and $7.3 million on term-loan principal payments during the remainder of 2017.
- Management stated that cash generated from operations was expected to fund operations, capital requirements, and debt service for the foreseeable future, but operating cash flow was only $3.5 million during the first six months.
- The company planned continued enhancements at the Reno properties, including guest-room renovations, new restaurants, entertainment offerings, and other amenities. Capital plans for the acquired Isle properties remained under evaluation.
- Lake Charles was classified as held for sale and discontinued operations. The expected sale price was $134.5 million, subject to adjustments and regulatory approval; the company had received a $20.0 million deposit.
- The company was in compliance with its senior-note and new-credit-facility covenants as of June 30, 2017. The new facility included leverage and interest-coverage tests that become more restrictive over time.
- Approximately 67% of long-term debt was variable-rate debt at June 30, 2017, creating exposure to LIBOR and other interest-rate changes. The company did not use derivatives for trading or speculative purposes.
- Key risks included substantial leverage, debt covenant restrictions, integration of Isle operations and systems, competition, discretionary consumer spending, gaming regulation and taxes, licensing and third-party agreements, weather, leased-property exposure, cybersecurity, litigation, and the ability to realize expected synergies.
- The company disclosed an IRS examination of its 2014 federal tax return; no proposed adjustments had been made as of June 30, 2017. Management stated that ordinary-course litigation losses were not material.
- The company anticipated adopting the new revenue-recognition standard on January 1, 2018 and expected it to have a potentially material effect, particularly for loyalty programs and promotional allowances, although quantitative effects had not been determined.
Important Facts for Investors to Verify
- Confirm that the filing belongs to Eldorado Resorts, Inc., not Caesars Entertainment, Inc., because the supplied metadata and filing registrant do not match.
- Assess the sustainability of operating cash flow and the company’s ability to service approximately $2.2 billion of debt following the Isle acquisition.
- Separate acquisition-related charges, debt-refinancing losses, and non-GAAP pre-acquisition results from recurring operating performance.
- Review the final purchase-price accounting for Isle, including the $679.7 million of preliminary goodwill and $470.8 million of acquired intangible assets.
- Monitor integration costs, expected cost synergies, acquired-property performance, and the impact of Reno visitation trends and competitive conditions.
- Verify completion and proceeds of the planned Lake Charles disposition, including required Louisiana regulatory approval.
- Evaluate variable-rate exposure, scheduled debt maturities, covenant headroom, and available revolver capacity.
- Review the potential presentation and earnings effects of the pending revenue-recognition and lease-accounting standards.