Business Context and Reporting Period
This Form 10-Q is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc. (as stated in the request metadata), for the three and six months ended June 30, 2018. The filing was signed August 7, 2018. Eldorado operated 20 gaming facilities in 10 states, with gaming as its primary revenue source. The 2018 results include a full six months of the 13 properties acquired from Isle of Capri, while the 2017 comparable period includes Isle results only from May 1, 2017.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net revenues | $456.8 million, up 21.6% | $897.0 million, up 55.2% |
| Operating income (loss) | $77.4 million vs. $(30.5) million | $131.6 million vs. $(16.4) million |
| Net income (loss) | $36.8 million vs. $(46.2) million | $57.7 million vs. $(45.2) million |
| Diluted EPS | $0.47 vs. $(0.68) | $0.74 vs. $(0.79) |
| Operating margin | 16.9% | 14.7% |
| Net margin | 8.1% | 6.4% |
| Adjusted EBITDA | $118.0 million | $221.6 million |
- Six-month revenue consisted of $683.1 million of casino revenue, $106.5 million of food and beverage revenue, $69.7 million of hotel revenue, $28.6 million of other revenue and $9.1 million of pari-mutuel commissions.
- Cash flow from operating activities was $148.5 million for the six months, compared with $3.0 million in the prior-year period.
- Capital expenditures were $55.2 million, compared with $29.8 million in the prior-year period. Net cash used in investing activities was $69.3 million.
- Cash and cash equivalents were $202.0 million at June 30, 2018; total cash, cash equivalents and restricted cash were $216.6 million.
- Total assets were $3.60 billion and stockholders’ equity was $996.7 million at June 30, 2018.
- Long-term debt was $2.19 billion, with approximately $2.21 billion including the current portion. The debt comprised a $956.8 million term loan, $875.0 million of 6% senior notes, $375.0 million of 7% senior notes and smaller obligations.
- No revolving credit borrowings were outstanding; available revolving capacity was $290.9 million after $9.1 million of letters of credit.
- The weighted-average term-loan interest rate was 4.1%. The company stated that it was in compliance with all debt covenants.
Material Changes Versus the Prior Comparable Period
- Net revenue growth was driven primarily by the Isle acquisition. Excluding incremental Isle revenue, revenue increased approximately 1.4% for the quarter and 1.9% for the six-month period.
- Operating income and net income benefited from the absence of the $85.5 million of Isle-related transaction expenses recognized in the second quarter of 2017 and the absence of the $27.3 million loss on early retirement of debt recorded in the 2017 six-month period.
- Higher 2018 interest expense, totaling $62.5 million for six months versus $40.2 million, reflected the higher debt balance following the Isle acquisition.
- Management reported cost savings in marketing, food and beverage, labor and corporate functions. Excluding Isle, gaming expenses were down 1.5% in the quarter and broadly flat for six months despite higher gaming revenue.
- The company adopted ASC Topic 606 using the full retrospective method. The adoption changed revenue presentation and loyalty-program accounting but did not significantly affect previously reported operating income or net income; retained earnings received a $3.5 million after-tax cumulative adjustment.
- A $9.8 million impairment charge was recorded for Vicksburg during the six months in connection with its planned disposition.
Outlook, Transactions, Risks and Unusual Items
- The company expected cash generated from operations to fund operations, capital requirements and debt service for the next twelve months. It planned approximately $94.8 million of additional 2018 capital expenditures and $61.4 million of interest payments.
- The Grand Victoria Casino acquisition for approximately $327.5 million closed August 7, 2018, after the reporting date, funded with operating cash and revolving-credit borrowings. The filing did not provide a clear estimate of its post-acquisition financial impact.
- The company agreed to acquire Tropicana Entertainment in a transaction valued at approximately $1.85 billion. GLPI was expected to acquire approximately $1.21 billion of real estate, while Eldorado would fund approximately $640 million and enter into a master lease with expected initial annual rent of approximately $110 million. Closing was expected in the fourth quarter of 2018.
- The revolving facility was expected to increase from $300 million to $500 million in connection with the Tropicana transaction, and the company had a $600 million debt-financing commitment.
- The company agreed to sell Presque Isle Downs for approximately $178.9 million. The Vicksburg sale was terminated July 6, 2018 after an FTC Second Request; Eldorado agreed to pursue a transaction under which Churchill Downs would acquire and assume the rights and obligations to operate Nemacolin and could pay a $5.0 million termination fee, subject to specified conditions.
- Management cited substantial indebtedness, variable interest-rate exposure, gaming regulation, competition, discretionary consumer spending, weather and road conditions, technology disruptions, transaction execution, integration risk and regulatory approvals as key risks.
- The expected Tropicana master lease would be triple-net, leaving Eldorado responsible for rent, maintenance, insurance, property taxes and utilities. The company warned that lease defaults could result in loss of casino properties and potential debt defaults.
- The company estimated approximately $2.8 billion of debt and an additional $110 million of annual master-lease obligations following the acquisitions and dispositions.
Important Facts an Investor Should Verify
- Confirm the correct registrant: the supplied filing is Eldorado Resorts, Inc., not Caesars Entertainment, Inc.
- Reconcile year-over-year growth for the Isle acquisition and assess comparable-property trends excluding acquired operations.
- Verify completion, financing and integration of the Grand Victoria and Tropicana transactions, including the resulting debt, rent obligations and required regulatory approvals.
- Review the final status and proceeds of the Presque Isle Downs and Nemacolin transactions and the treatment of the terminated Vicksburg sale.
- Assess debt-service capacity, variable-rate exposure, covenant compliance and the effect of the expected increase in rent and capital expenditures.
- Distinguish Adjusted EBITDA from GAAP cash flow and net income; Adjusted EBITDA excludes interest, taxes, capital expenditures, debt principal repayments and other cash obligations.