Business Context and Reporting Period
This is Eldorado Resorts, Inc.’s Form 10-K for the fiscal year ended December 31, 2018, filed March 1, 2019. The supplied request identifies Caesars Entertainment, Inc.; however, the filing text identifies the registrant as Eldorado Resorts, Inc. (NASDAQ: ERI), which later became associated with Caesars Entertainment.
Eldorado operated 28 gaming facilities in 13 states at year-end, with approximately 29,813 slot machines and video lottery terminals, 843 table and poker games, and 12,594 hotel rooms. Gaming was the primary revenue source, supplemented by hotel, food and beverage, entertainment, racing and other operations.
Key Financial Metrics
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Net revenues | $2.056 billion | $1.481 billion | 38.8% |
| Operating income | $310.1 million | $94.8 million | 227.1% |
| Net income | $95.2 million | $73.4 million | 29.8% |
| Diluted EPS | $1.22 | $1.08 | 13.0% |
| Operating margin | 15.1% | 6.4% | Up 8.7 points |
| Net margin | 4.6% | 5.0% | Down 0.4 points |
| Cash flow from operations | $323.3 million | $129.9 million | Increase of $193.4 million |
| Capital expenditures | $147.4 million | $83.2 million | Increase of $64.3 million |
| Cash and cash equivalents | $230.8 million | $134.6 million | Increase of $96.2 million |
Casino revenue was $1.535 billion, pari-mutuel commissions were $18.4 million, food and beverage revenue was $247.3 million, hotel revenue was $183.8 million, and other revenue was $71.5 million. Adjusted EBITDA, a non-GAAP measure, was $516.9 million excluding pre-acquisition results; including pre-acquisition results on an unaudited pro forma basis, Adjusted EBITDA was $695.6 million.
Total assets were $5.911 billion and stockholders’ equity was $1.029 billion at December 31, 2018. Reported long-term debt was $3.262 billion, with total principal debt obligations of approximately $3.301 billion. The company also reported a $959.8 million financing obligation related to the GLPI Master Lease.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected the August 2018 acquisition of Grand Victoria Casino in Elgin, Illinois, and the October 2018 acquisition of Tropicana Entertainment, which added seven properties. Acquired properties contributed $575.5 million of incremental 2018 revenue after their respective acquisition dates.
- Excluding incremental revenue from Isle, Elgin and Tropicana, consolidated revenue was approximately flat versus 2017. Gaming and non-gaming revenue excluding those acquisitions were also broadly flat.
- Operating income benefited from acquisition contributions, operating synergies, departmental cost controls, lower impairment charges, and a $71.9 million reduction in transaction expenses.
- Operating expenses increased 31.7%, less than the 38.8% revenue increase, supporting the improvement in operating margin.
- Net income growth was restrained by higher interest expense of $171.7 million, compared with $99.8 million in 2017, and the absence of the $111.9 million favorable tax benefit recognized in 2017 from the Tax Cuts and Jobs Act.
- Impairment charges declined to $13.6 million from $38.0 million. The 2018 charges included $9.8 million related to Vicksburg and $3.8 million related to Nemacolin.
- Investing cash outflows included $307.3 million for Elgin and $806.0 million for Tropicana. Financing activities generated $1.044 billion, including $600 million of 6% senior notes due 2026, a $246 million Lumière Loan, and net revolver borrowings.
- The company repurchased 223,823 shares for $9.1 million during the fourth quarter and had a $150 million authorized repurchase program.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal revenue, earnings or EBITDA guidance in the filing. It planned approximately $200 million of capital expenditures for 2019, including spending at the Elgin and Tropicana properties.
- Management expected operating cash flow to fund operations, capital requirements and debt service for the next twelve months. It expected to pay approximately $45 million in cash taxes in 2019 after utilizing federal net operating losses and tax credits.
- The GLPI Master Lease has an initial annual rent obligation of approximately $87.6 million, subject to escalation, and is accounted for as a financing obligation rather than a conventional lease. The lease has a 15-year initial term and may be renewed for up to four additional five-year periods.
- The $246 million Lumière Loan bears interest at 9.09% through October 1, 2019 and 9.27% thereafter, maturing October 1, 2020. The company agreed to pursue a qualifying replacement-property transaction with GLPI; otherwise, the loan must be repaid at maturity and Master Lease rent may increase.
- The company was in compliance with its debt, Master Lease and Lumière Loan covenants at December 31, 2018. Revolver availability was $242.3 million after outstanding letters of credit.
- Interest-rate exposure remained material: approximately $1.2 billion, or 36% of long-term debt, was variable-rate debt. A 100-basis-point increase in LIBOR was estimated to increase annual interest cost by approximately $9.6 million.
- Sports betting and online gaming represented expansion opportunities. A 25-year William Hill agreement became effective in January 2019, and a 20-year agreement with The Stars Group provided options for online sports wagering, casino gaming and poker. Returns depend on regulatory approvals, tax rates, market development and competitive conditions.
- Presque Isle Downs was sold on January 11, 2019. Nemacolin was classified as held for sale and was expected to be sold in the first quarter of 2019, subject to regulatory approval.
- Principal risks include substantial debt and fixed rent commitments, competition and legalized online gaming, gaming-license and regulatory requirements, discretionary consumer spending, weather and natural disasters, cybersecurity, labor negotiations, environmental liabilities, litigation, acquisitions and impairment of goodwill or gaming licenses.
- Management and the auditor concluded that internal controls were effective, but the assessment excluded Elgin and Tropicana, which represented 37% of total assets and 13% of 2018 revenue because their controls had not yet been fully integrated.
Important Facts for Investors to Verify
- Confirm the correct issuer and ticker because the supplied metadata names Caesars Entertainment while the filing is for Eldorado Resorts, Inc.
- Reconcile reported debt of approximately $3.3 billion with the separate $959.8 million GLPI financing obligation and the Master Lease’s projected $3.959 billion of future payments.
- Assess post-acquisition performance of Tropicana and Elgin on a full-year comparable basis, since 2018 includes only three months of Tropicana and approximately five months of Elgin.
- Review 2019 debt maturities, including the $246.2 million scheduled in 2020 and approximately $620.1 million scheduled in 2023, together with interest and rent obligations.
- Monitor compliance with leverage and interest-coverage covenants as thresholds tighten beginning in 2019 and 2020.
- Verify completion and proceeds of the Nemacolin sale, the effect of the Presque Isle disposition, and the status of the Lumière replacement-property transaction.
- Evaluate whether the planned $200 million of 2019 capital expenditures and property renovations generate sufficient operating returns.
- Review the final purchase-price accounting for Tropicana and Elgin, impairment sensitivity for approximately $2.4 billion of goodwill and other intangible assets, and the integration of acquired-company controls.