Filing Overview
Registrant: Eldorado Resorts, Inc. The request metadata identifies Caesars Entertainment, Inc., but the supplied Form 10-Q is for Eldorado Resorts, Inc. for the three and nine months ended September 30, 2016. The financial statements are unaudited and prior-period comparisons are affected by the November 2015 acquisition of Circus Reno and the remaining interest in Silver Legacy.
Business Context and Reporting Period
Eldorado operated casino, hotel, racetrack and pari-mutuel properties in Nevada, Louisiana, West Virginia, Pennsylvania and Ohio. Reportable segments were Nevada, Louisiana and Eastern. The company had 47.1 million common shares outstanding as of October 31, 2016.
The company entered into an agreement on September 19, 2016 to acquire Isle of Capri Casinos. The transaction was expected to close in the second quarter of 2017, subject to stockholder, gaming-regulatory and other approvals. The acquisition would add 12 properties after planned dispositions by Isle.
Financial Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net operating revenues | $241.6 million, up 31.6% | $686.4 million, up 28.6% |
| Operating income | $28.1 million, up 16.7% | $76.0 million, up 28.3% |
| Net income | $9.7 million, up 79.3% | $23.8 million, up 491.6% |
| Diluted earnings per share | $0.20 versus $0.12 | $0.50 versus $0.09 |
| Operating margin | 11.6% versus 13.1% | 11.1% versus 11.1% |
| Net margin | 4.0% versus 2.9% | 3.5% versus 0.8% |
| Adjusted EBITDA | $49.7 million; prior-year reported comparison was not fully comparable | $134.7 million versus $100.5 million excluding pre-Reno acquisition results |
Revenue growth was driven primarily by the Reno properties acquired in November 2015. Casino revenue was $184.6 million in the third quarter and $532.1 million for the nine months. Food and beverage revenue was $38.0 million and $108.7 million, while hotel revenue was $28.0 million and $73.8 million, respectively.
Cash flow from operating activities was $72.3 million for the nine months, compared with $20.5 million in the prior-year period. Capital expenditures were $32.9 million, partially offset by $4.1 million of West Virginia reimbursements. Cash used in financing activities was $78.7 million, primarily reflecting $74.5 million of revolving-credit-facility repayments and $3.2 million of term-loan payments.
Cash and cash equivalents were $44.6 million at September 30, 2016, with restricted cash of $2.4 million. Management separately described consolidated cash including restricted cash as $47.0 million. Total debt carrying value, including current maturities, was approximately $790.7 million, consisting principally of $375.0 million of 7.0% senior notes due 2023, a $419.7 million term loan and $19.0 million drawn on the revolving facility. Available revolver capacity was $131.0 million.
Material Changes Versus the Prior Comparable Period
- Net revenue increased substantially because 2016 included a full period of consolidated Circus Reno and Silver Legacy operations, which were not fully included in the 2015 reported comparison.
- Nevada revenue increased to $89.7 million in the third quarter and $246.6 million for the nine months, from $29.0 million and $80.0 million, respectively, in the prior periods.
- Louisiana revenue declined 1.9% for the quarter and 3.3% for the nine months, reflecting weaker Shreveport gaming activity, lower high-end play and continued energy-sector weakness.
- Eastern revenue declined 1.7% for the quarter and 3.0% for the nine months. Mountaineer was adversely affected by the West Virginia smoking ban and fewer live racing days, partly offset by improvements at Scioto Downs and Presque Isle Downs.
- Interest expense decreased by $1.9 million for the quarter and $10.6 million for the nine months following the 2015 refinancing and debt reduction.
- The company reported $4.8 million of third-quarter and $5.3 million of year-to-date acquisition charges, primarily related to the proposed Isle acquisition.
- The cost-savings program exceeded its stated annual target, producing just over $12.5 million of savings after one year versus a $10 million target.
- Promotional allowances rose to 13.1% of gaming revenue and pari-mutuel commissions in the third quarter and 12.9% year to date, versus 10.0% in both prior-year periods.
Guidance, Outlook, Risks and Unusual Items
- Management expected to spend approximately $23.1 million on capital expenditures during the remainder of 2016, including property enhancements and maintenance.
- The company planned more than $50 million of phased enhancements to the Reno Tri-Properties over three years, including room renovations, restaurants, nightlife and resort amenities.
- Management stated that operating cash flow was expected to fund operations, capital requirements and debt service for the foreseeable future, but the Isle transaction was expected to require substantial new borrowings.
- The Isle financing commitment contemplated up to $1.75 billion of senior secured facilities plus at least $375 million of senior unsecured notes or bridge financing. The company expected approximately $2.2 billion of debt after completing the transaction and related refinancing.
- Completion of the Isle transaction remained subject to stockholder and gaming-regulatory approvals and other conditions. Termination fees could be $60 million for Eldorado or $30 million for Isle in specified circumstances.
- Key operating risks included substantial leverage, variable interest rates, competition, discretionary consumer spending, gaming regulation and taxes, smoking-ban effects, technology disruptions, weather and catastrophic events.
- The company had $438.7 million of variable-rate borrowings, representing approximately 54% of long-term debt, creating exposure to LIBOR and other interest-rate changes.
- A non-cash Ohio regulatory change reduced Scioto Downs net slot win by approximately $1.0 million and operating income by approximately $0.6 million for the nine months.
- The company estimated Pennsylvania gaming-related assessments of approximately $4.1 million for the Property Tax Reserve Fund and $1.9 million to $2.1 million for General Fund borrowings. The recorded residual accrual was $1.9 million at September 30, 2016.
- Routine litigation losses were considered immaterial. A shareholder class-action complaint concerning the Isle transaction was filed after quarter-end, on November 8, 2016.
- The Internal Revenue Service notified the company in October 2016 that its 2014 federal tax return had been selected for examination.
Investor Verification Checklist
- Confirm the registrant identity and ticker because the supplied filing is for Eldorado Resorts, not Caesars Entertainment.
- Reconcile reported cash of $44.6 million with management’s $47.0 million figure including restricted cash.
- Assess the comparability of year-over-year revenue and EBITDA growth after the Reno acquisition, including pro forma results.
- Review the financing terms, leverage and covenant capacity required to complete the Isle acquisition and refinance existing debt.
- Verify gaming-regulatory approvals, stockholder approvals, planned Isle property dispositions and the expected closing timeline.
- Monitor Mountaineer performance under the smoking ban, Shreveport market weakness and competitive and regulatory developments.
- Evaluate the sustainability of cost savings and the impact of acquisition charges, planned Reno capital spending and increased interest expense after the proposed transaction.