Filing Context and Reporting Period
This is Eldorado Resorts, Inc.’s Form 10-K for the fiscal year ended December 31, 2019, filed February 27, 2020. It is an annual filing, not a standalone fourth-quarter filing. The request identifies Caesars Entertainment, but the source filing is for Eldorado Resorts, Inc. (NASDAQ: ERI), which had agreed to acquire Caesars.
Eldorado operated 23 gaming facilities in 11 states, with approximately 23,900 gaming machines, 659 table games and 11,335 hotel rooms. Gaming was the primary revenue source, supplemented by hotel, food and beverage, entertainment, racing and sportsbook operations.
Financial Performance and Liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Net revenues | $2.528 billion | $2.056 billion | +23.0% |
| Operating income | $410.0 million | $310.1 million | +32.2% |
| Operating margin | 16.2% | 15.1% | +110 bps |
| Net income | $81.0 million | $95.2 million | -14.9% |
| Diluted EPS | $1.03 | $1.22 | -15.6% |
| Operating cash flow | $312.5 million | $323.3 million | -3.3% |
| Capital expenditures | $170.8 million | $147.4 million | +15.8% |
| Adjusted EBITDA | $697.5 million | $516.9 million | +34.9% |
Gaming and pari-mutuel revenue increased 16.4% to $1.808 billion, while non-gaming revenue increased 43.3% to $720.1 million. Elgin and Tropicana contributed $991.4 million of incremental revenue following their acquisitions, substantially driving the consolidated increase.
Net income declined despite higher operating income because interest expense increased to $286.2 million from $171.7 million, primarily reflecting acquisition-related debt and Master Lease financing costs. The company also recorded a $7.5 million loss on early debt retirement and a $44.0 million income-tax provision. Adjusted EBITDA is a non-GAAP measure and excludes interest, taxes, capital expenditures, debt principal payments, Master Lease payments and other items.
Cash and cash equivalents were $206.3 million at December 31, 2019, compared with $230.8 million a year earlier. Total debt was $2.571 billion, down from $3.262 billion, including $498.8 million outstanding under the term loan and no revolver balance. Revolver availability was $482.0 million after $18.0 million of letters of credit. The company reported compliance with its debt and Master Lease covenants.
The GLPI Master Lease was accounted for as a financing obligation of $970.5 million. Annual rent was at least approximately $88.9 million and subject to escalation. Total contractual cash obligations were approximately $8.0 billion, including $2.6 billion of long-term debt obligations, $725.5 million of estimated debt interest and $3.9 billion of GLPI financing-obligation payments.
Material Changes Versus the Prior Comparable Period
- Revenue and operating income benefited from a full year of Elgin and Tropicana operations, acquired in 2018.
- Reported net revenue growth was partly offset by a 5.1% decrease excluding acquisitions and divestitures. Management cited lower casino volume, promotional changes, severe weather and construction disruption.
- Operating income benefited from a $49.6 million net gain on business and property dispositions, including a $28.6 million gain on the sales of Mountaineer, Cape Girardeau and Caruthersville and a $22.2 million gain on the sales of Presque and Nemacolin.
- Transaction expenses increased substantially to $84.7 million, primarily due to the pending Caesars merger. The company also accrued approximately $55.4 million for its share of a VICI prepayment penalty.
- Term-loan borrowings declined by approximately $458.0 million, supported by $360.0 million of net disposition proceeds and other cash resources.
- The company adopted ASC 842 lease accounting prospectively, recording $188.2 million of operating lease right-of-use assets and $196.9 million of operating lease liabilities at year-end.
- No shares were repurchased in 2019, compared with $9.1 million of repurchases in 2018. The company did not pay dividends.
Outlook, Transactions, Risks and Unusual Items
Management expected the Caesars merger to close in the first half of 2020. Consideration consisted of $8.40 in cash per Caesars share, subject to a potential daily increase after March 25, 2020, plus 0.0899 Eldorado shares per Caesars share. Based on year-end share counts, Eldorado and former Caesars stockholders were expected to own approximately 50.5% and 49.5%, respectively, of the combined company.
Planned merger financing included a $3.0 billion senior secured term loan, a $3.25 billion 364-day secured bridge facility, a $1.8 billion unsecured bridge facility, a $1.0 billion revolving facility and a $2.4 billion incremental Caesars term loan. The company also expected approximately $1.8 billion from VICI sale-leasebacks and approximately $1.4 billion from VICI lease amendments. These transactions were subject to regulatory approvals and other closing conditions.
If the merger failed under specified circumstances, Eldorado could owe Caesars approximately $836.8 million and VICI approximately $75.0 million. Eight lawsuits challenged the merger; the parties had an agreement in principle to settle, but no assurance was provided that settlement would be completed.
The company expected approximately $240.0 million of 2020 capital expenditures and stated that operating cash flow, merger financing, VICI proceeds, asset-sale proceeds and existing cash were expected to fund operations, capital needs and debt service for the next twelve months. The filing provides no formal revenue or earnings guidance.
Other pending dispositions included the planned sale of Kansas City and Vicksburg for approximately $230 million, expected in the first half of 2020, and the January 2020 agreement to sell Eldorado Shreveport for approximately $230 million. The company also began construction of a new land-based Lake Charles facility in February 2020.
Principal risks include substantial indebtedness and fixed lease commitments, merger execution and integration risk, antitrust and gaming-regulatory approvals, competition from casinos and online gaming, sensitivity to discretionary spending, weather and natural disasters, labor negotiations, cybersecurity, litigation, environmental liabilities and potential impairment of goodwill and gaming licenses. The company held approximately $2.0 billion of goodwill and other intangible assets at year-end.
Investor Verification Checklist
- Verify that the filing entity is Eldorado Resorts, Inc., not Caesars Entertainment Corporation, and distinguish annual 2019 results from fourth-quarter results.
- Reconcile reported revenue growth and Adjusted EBITDA growth to the contribution from Elgin and Tropicana and to the divestitures.
- Assess recurring cash generation after interest, capital expenditures, debt repayment and GLPI Master Lease payments, rather than relying solely on Adjusted EBITDA.
- Review the maturity and refinancing requirements for the $246.2 million current debt obligation, the $375.0 million 2023 notes, the $875.0 million 2025 notes and the $600.0 million 2026 notes.
- Confirm the final status, financing, regulatory approvals, divestitures, ownership dilution and leaseback terms associated with the Caesars merger.
- Evaluate exposure to the GLPI Master Lease, including rent escalations, minimum capital expenditures and the $970.5 million financing obligation.
- Review the pending SEC-related securities litigation and merger litigation, as well as the potential termination fees.
- Monitor operating trends excluding acquisitions, particularly casino volume, promotional activity, weather effects and construction disruption.