Eldorado Resorts, Inc. (ERI) Form 10-Q Summary
Important identification note: The provided filing is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc. It covers the quarter and six months ended June 30, 2019 and was filed August 9, 2019.
Business Context and Reporting Period
Eldorado operated 26 gaming facilities in 12 states, with approximately 26,700 slot machines and video lottery terminals, 750 table games and 12,700 hotel rooms. The period includes the August 2018 Elgin acquisition and October 2018 Tropicana acquisition, while Presque Isle Downs and Nemacolin were sold in January and March 2019. Accordingly, year-over-year comparisons are not fully comparable.
Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Net revenues | $637.1 million | $456.8 million | $1.273 billion | $897.0 million |
| Operating income | $102.6 million | $77.4 million | $226.2 million | $131.6 million |
| Net income | $18.9 million | $36.8 million | $57.2 million | $57.7 million |
| Diluted EPS | $0.24 | $0.47 | $0.73 | $0.74 |
| Operating margin | 16.1% | 16.9% | 17.8% | 14.7% |
| Net margin | 3.0% | 8.1% | 4.5% | 6.4% |
| Adjusted EBITDA | $178.7 million | $118.0 million | $345.3 million | $221.6 million |
Gaming and pari-mutuel revenue increased 31.0% in the second quarter and 34.0% year to date. Non-gaming revenue increased 66.7% in the quarter and 68.5% year to date, primarily from the acquired properties.
Net income declined despite higher revenue and operating income because of substantially higher interest expense, including interest associated with the GLPI Master Lease and additional Tropicana-related debt. Interest expense increased to $71.8 million from $31.4 million in the quarter and to $145.3 million from $62.7 million year to date.
Cash Flow, Liquidity and Debt
- Operating cash flow was $127.9 million for the six months ended June 30, 2019, compared with $148.5 million in the prior-year period.
- Capital expenditures were $97.1 million, compared with $55.2 million in the prior-year period. Management expected approximately $102.9 million of additional capital expenditures for the remainder of 2019.
- Investing activities provided $75.5 million, primarily reflecting proceeds from the Presque Isle Downs and Nemacolin sales.
- Financing activities used $253.2 million, principally from repaying $245.0 million under the revolving credit facility.
- Cash and cash equivalents were $183.1 million at June 30, 2019; cash, cash equivalents and restricted cash totaled $196.8 million.
- Long-term debt, net of discounts and issuance costs, was $3.018 billion, including $956.8 million under the term loan, $600.0 million of 2026 notes, $875.0 million of 2025 notes, $375.0 million of 2023 notes and a $246.0 million Lumière Loan.
- The GLPI financing obligation was $965.2 million. Including this obligation, reported debt and financing obligations were approximately $4.0 billion, before other lease liabilities.
- The revolving credit facility had no outstanding balance and $483.7 million of available capacity after $16.3 million of letters of credit.
- The company reported compliance with its debt and Master Lease covenants.
Material Changes Versus the Prior Comparable Period
- Reported revenue rose 39.5% in the quarter and 41.9% year to date, primarily because Elgin and Tropicana were included in 2019 but not in the comparable 2018 periods.
- On an adjusted basis excluding acquisitions and divestitures, revenue declined 6.0% in the quarter and 4.9% year to date. Management cited lower casino volume, changes in promotional activity, weather and construction disruption.
- Operating income increased 32.5% in the quarter and 71.8% year to date, helped by acquired properties and the $22.1 million gain on the Presque Isle Downs sale.
- Net income decreased 48.5% in the quarter and 0.8% year to date, primarily because of higher interest expense and financing costs.
- Depreciation and amortization increased 77.2% in the quarter and 80.1% year to date, reflecting acquired assets and capital additions.
- Corporate expenses increased, including higher stock compensation, acquisition-related costs and severance.
- The company adopted ASC 842 lease accounting on January 1, 2019, recording a $4.7 million after-tax cumulative adjustment to retained earnings without an impact on net income.
Guidance, Outlook, Risks and Unusual Items
- Management expected operating cash flow to fund operations, capital requirements and debt service for the next twelve months, but noted that requirements would remain elevated because of debt service, Master Lease rent, capital spending and the proposed Caesars transaction.
- On June 24, 2019, Eldorado agreed to acquire Caesars Entertainment Corporation for $8.40 cash plus 0.0899 Eldorado shares per Caesars share. Expected ownership of the combined company was approximately 51% for Eldorado shareholders and 49% for former Caesars shareholders.
- The Caesars transaction was expected to close in the first half of 2020, subject to shareholder, antitrust, gaming regulatory, financing and other conditions.
- Committed merger financing included a $1.0 billion revolving facility, $3.0 billion term loan B, $3.6 billion secured bridge facility, $1.8 billion unsecured bridge loan and a $2.4 billion Caesars-related term loan facility.
- Eldorado entered into a Master Transaction Agreement with VICI involving expected sale-leaseback and lease-amendment proceeds to help finance the Caesars transaction. The filing indicated expected proceeds of approximately $1.8 billion from sale-leasebacks and approximately $1.4 billion from lease amendments, subject to closing conditions.
- Potential termination fees related to the Caesars transaction included approximately $154.9 million payable by Eldorado in certain circumstances and approximately $836.8 million if specified regulatory or antitrust-related conditions were not satisfied. A $75.0 million fee could also be payable to VICI if the related agreement were terminated in specified circumstances.
- Eldorado agreed to sell Mountaineer, Cape Girardeau and Caruthersville for approximately $385 million in aggregate and later agreed to sell Kansas City and Vicksburg for approximately $230 million. These transactions were expected to close in early 2020, subject to regulatory approvals and other conditions.
- Key risks included high leverage, substantial rent obligations to GLPI and anticipated VICI leases, gaming regulation, competition and online gaming legalization, consumer discretionary spending, weather, construction disruption, interest rates and the ability to obtain financing and regulatory approvals for the Caesars transaction.
Most Important Facts for Investors to Verify
- Confirm that the intended issuer is Eldorado Resorts rather than Caesars Entertainment.
- Reconcile reported growth with the impact of the Elgin and Tropicana acquisitions and the Presque Isle Downs and Nemacolin divestitures.
- Assess cash interest, Master Lease payments and scheduled debt maturities, particularly the $246 million Lumière Loan due October 2020 and $375 million of 2023 notes.
- Verify the availability and conditions of the proposed Caesars merger financing and the expected VICI sale-leaseback proceeds.
- Monitor required shareholder, antitrust and gaming regulatory approvals, potential divestiture requirements and termination-fee exposure.
- Evaluate whether underlying same-property revenue trends recover from the reported declines excluding acquisitions and divestitures.
- Review the sustainability of Adjusted EBITDA because it excludes interest, capital expenditures, debt repayments, Master Lease payments and other significant cash obligations.