Filing Summary: Eldorado Resorts, Inc. Form 10-Q
Important entity note: The supplied filing is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc. It covers the three and nine months ended September 30, 2018 and was filed November 8, 2018.
Business Context and Reporting Period
Eldorado operated 21 gaming facilities in 11 states, with approximately 21,000 slot machines and video lottery terminals, 600 table games, and more than 7,000 hotel rooms. The company completed the $328.9 million acquisition of Grand Victoria Casino in Elgin, Illinois, on August 7, 2018. The Tropicana acquisition closed on October 1, 2018, after quarter-end.
Results are not fully comparable with 2017 because the Isle of Capri acquisition closed on May 1, 2017 and the Elgin acquisition closed during the 2018 third quarter.
Financial Metrics
| Metric | Q3 2018 | Q3 2017 | Nine Months 2018 | Nine Months 2017 |
|---|---|---|---|---|
| Net revenues | $487.3 million | $472.9 million | $1.384 billion | $1.051 billion |
| Operating income | $91.8 million | $81.5 million | $223.4 million | $65.1 million |
| Net income (loss) | $37.7 million | $29.7 million | $95.4 million | $(15.6) million |
| Diluted EPS | $0.48 | $0.38 | $1.22 | $(0.24) |
| Operating margin | 18.8% | 17.2% | 16.1% | 6.2% |
| Net margin | 7.7% | 6.3% | 6.9% | (1.5)% |
- Q3 revenue increased 3.0%; nine-month revenue increased 31.7%.
- Q3 operating income rose 12.6%; nine-month operating income rose 243.4%.
- Operating cash flow for the nine months was $263.4 million versus $71.6 million in the prior-year period.
- Capital expenditures were $89.1 million versus $52.9 million in the prior-year period.
- Cash used in investing activities was $395.1 million, including $306.3 million for the Elgin acquisition.
- Cash and cash equivalents were $164.1 million at September 30, 2018. Including restricted and escrow cash, total cash was $779.7 million, of which $604.1 million was escrow cash associated with the Tropicana financing.
- Total long-term debt was $2.968 billion, compared with $2.190 billion at December 31, 2017. Debt included $956.8 million of term loans, $180.0 million drawn on the revolving facility, $875.0 million of 6% notes due 2025, $375.0 million of 7% notes due 2023, and $600.0 million of 6% notes due 2026.
- Available revolving-credit capacity was $110.9 million after $9.1 million of letters of credit. The company reported compliance with its debt covenants.
- Management presented Adjusted EBITDA of $355.7 million for the first nine months of 2018, excluding pre-acquisition results. This is a non-GAAP measure and excludes, among other items, depreciation, stock compensation, transaction expenses, impairments, and certain disposition-related items.
Material Changes Versus the Prior Comparable Period
- The nine-month revenue increase primarily reflected the inclusion of Isle properties for the full period and Elgin from August 7, 2018. Excluding incremental Isle and Elgin revenue, management stated that revenue was approximately flat for the nine-month period.
- Q3 comparable revenue excluding Elgin declined approximately 2.0%, while gaming revenue excluding Elgin declined 1.8%. Management attributed the pressure partly to reduced free play associated with unprofitable play.
- Cost-control initiatives reduced marketing and promotional expense by 12.5% in Q3 despite the addition of Elgin, and reduced comparable general and administrative expenses and variable operating costs.
- The prior-year period included significant Isle transaction expenses and debt-retirement losses, which substantially affected 2017 operating and net income.
- Interest expense increased to $96.6 million for the first nine months from $69.4 million, reflecting higher debt following the Isle acquisition and financing activities.
- The company adopted ASC 606 using the full retrospective method. The adoption primarily changed the presentation of promotional allowances and loyalty-program liabilities and did not materially affect historical net revenue, operating income, or net income.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management expected operating cash flow to fund operations, capital requirements, and debt service for the next twelve months. Planned capital expenditures for the remainder of 2018 were $60.9 million, with $37.2 million planned for interest payments.
- The Tropicana transaction added approximately $87.6 million of initial annual rent under a 15-year triple-net master lease with GLPI. The company cannot terminate the lease without GLPI’s consent and remains responsible for maintenance, insurance, taxes, utilities, and other costs.
- The $246 million Lumière loan bears interest at 9.09% through October 2019 and 9.27% through October 2020, with maturity on October 1, 2020. The company agreed to pursue a qualifying replacement-property transaction with GLPI.
- Presque Isle Downs and Nemacolin were classified as held for sale. Expected consideration was approximately $178.9 million for Presque Isle and $0.1 million for Nemacolin, subject to adjustments and regulatory approvals. The company recorded a $3.8 million Nemacolin impairment charge and a $9.8 million Vicksburg impairment charge during the first nine months. The Vicksburg sale was terminated, and the company received a $5.0 million termination fee.
- The company entered into a 25-year sports-betting agreement with William Hill, subject to regulatory approvals. Consideration includes a 20% equity interest in William Hill US and William Hill PLC shares valued at $50.0 million. Closing was expected in the first quarter of 2019.
- Key risks include substantial leverage, variable interest rates, debt-covenant restrictions, competition, discretionary consumer spending, gaming regulation and taxes, weather and road conditions, information-technology disruptions, integration of Tropicana and Elgin, lease and master-lease obligations, and regulatory approval of dispositions and sports-betting arrangements.
- Litigation-related estimated losses were described as immaterial. The company reported no material off-balance-sheet arrangements and effective disclosure controls.
Facts Investors Should Verify
- Confirm that the intended issuer is Eldorado Resorts rather than Caesars Entertainment.
- Reconcile post-quarter-end Tropicana debt, lease obligations, Lumière financing, liquidity, and operating results with the September 30, 2018 quarter-end figures.
- Assess leverage and fixed-charge coverage after including approximately $3.2 billion of debt and the $87.6 million initial annual master-lease rent.
- Track regulatory approvals and closing status for the Presque Isle and Nemacolin dispositions and the William Hill transaction.
- Evaluate whether reported growth reflects sustainable same-property performance or primarily acquisitions, and review the company’s non-GAAP Adjusted EBITDA reconciliation.
- Review the impact of reduced promotional activity, competitive pressure, gaming regulation, and variable-rate debt on future margins and cash flow.