Business Context and Reporting Period
This filing is an unaudited Form 10-Q for the three and six months ended June 30, 2016. The filing identifies the registrant as Eldorado Resorts, Inc., not Caesars Entertainment, Inc. The company operated casino, hotel, racetrack and pari-mutuel properties in Nevada, Louisiana, West Virginia, Pennsylvania and Ohio, reported in Nevada, Louisiana and Eastern segments.
Comparability with 2015 is affected by the November 2015 acquisition of Circus Reno and the remaining interest in Silver Legacy. The 2016 results include the acquired properties for the full reporting periods, while prior-year GAAP results do not.
Key Financial Metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Net operating revenues | $231.3 million, up 26.7% | $444.9 million, up 27.1% |
| Operating income | $29.7 million, up 28.6% | $47.9 million, up 36.3% |
| Operating margin | 12.8% | 10.8% |
| Net income (loss) | $10.8 million versus $4.8 million | $14.2 million versus $(1.4) million |
| Net margin | 4.7% | 3.2% |
| Diluted earnings per share | $0.23 versus $0.10 | $0.30 versus $(0.03) |
| Adjusted EBITDA | $46.7 million versus $45.7 million | $85.0 million versus $78.5 million |
Revenue growth was led by the Nevada segment, which contributed $84.2 million of second-quarter revenue and $156.9 million for the first six months, primarily reflecting the acquisition and stronger performance at Eldorado Reno. Louisiana revenue declined to $32.1 million in the quarter and $66.5 million year to date. Eastern revenue declined to $115.1 million in the quarter and $221.4 million year to date.
Six-month cash flow from operating activities was $48.7 million versus $19.2 million in the prior-year period. Investing cash flow was $(15.4) million, including $20.3 million of capital expenditures, partly offset by $3.7 million of West Virginia reimbursements. Financing cash flow was $(74.4) million, primarily from $71.5 million of net revolver repayments and $2.1 million of term-loan payments. Cash and cash equivalents declined to $37.1 million from $78.3 million at December 31, 2015; including restricted cash, reported liquidity was approximately $41.0 million.
At June 30, 2016, long-term debt consisted principally of $375.0 million of 7.0% senior notes due 2023, $420.8 million outstanding under the term loan and $22.0 million under the revolving facility, plus capital leases. The balance sheet reported $793.9 million of current and long-term debt, net of issuance costs and discounts. Revolving-facility availability was $128.0 million. The company reported compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- The Circus Reno/Silver Legacy acquisition materially increased Nevada revenue, expenses and depreciation. The final purchase consideration was $223.6 million, with no goodwill recorded.
- Management reported more than $12.5 million of annualized cost savings after exceeding its $10 million target. Savings supported improved operating margins and included marketing, food and beverage, selling, general and administrative and corporate efficiencies.
- The July 2015 refinancing reduced annualized cash interest payments by approximately $35.0 million. Interest expense fell by $4.4 million in the second quarter and $8.7 million for the six-month period.
- Mountaineer continued to be negatively affected by the Hancock County, West Virginia smoking ban, despite a new smoking pavilion and additional gaming machines.
- Louisiana results were pressured by weaker high-end play associated with energy-sector weakness and a lower table-games hold percentage. Eastern results were affected by Mountaineer weakness and fewer live racing days, partly offset by growth at Scioto Downs.
- Promotional allowances increased as a percentage of gaming and pari-mutuel revenue to 13.1% from 9.8% in the quarter and to 12.7% from 10.1% year to date.
Guidance, Outlook, Risks and Unusual Items
Management expected operating cash flow to fund operations, planned capital requirements and debt service for the foreseeable future. For the remainder of 2016, it planned approximately $29.7 million of net capital expenditures, $22.7 million of interest payments and $2.1 million of term-loan principal payments. A 118-room Hampton Inn at Scioto Downs was expected to open in the fourth quarter of 2016, and additional property enhancements were planned in Nevada, Shreveport and the Eastern properties.
- The company recorded a $1.0 million progressive slot liability at Scioto Downs due to an Ohio regulatory change, reducing net slot win; the net non-cash effect on operating income was approximately $0.6 million.
- First-quarter 2016 executive departures resulted in $1.4 million of severance expense and accelerated vesting of restricted stock units, contributing to $2.0 million of six-month stock-based compensation expense.
- A $0.8 million loss related to the disposal of a Mountaineer fitness-center building and equipment partially offset earnings.
- Capital spending plans depend partly on approximately $2.1 million of available West Virginia modernization-fund reimbursements, which may expire if qualifying expenditures are not made.
- Risks include substantial leverage, variable interest rates, debt covenant compliance, gaming regulation and licensing, intense competition, discretionary consumer spending, property-specific operating weakness, litigation, environmental remediation and potential changes in gaming taxes and fees.
- The company estimated Pennsylvania gaming-related assessments of approximately $4.1 million plus $2.0 million to $2.1 million for General Fund obligations. These estimates may change with future revenue assumptions.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Eldorado Resorts, Inc., although the request metadata names Caesars Entertainment, Inc.
- Separate acquisition-driven growth from same-property performance, particularly in Nevada.
- Reconcile debt balances, interest rates, maturity dates, revolver availability and the required leverage and interest-coverage ratios.
- Assess whether operating cash flow and available revolver capacity are sufficient for planned capital spending, interest and principal payments.
- Monitor the continuing effects of the Mountaineer smoking ban, energy-sector weakness in Louisiana and regulatory changes affecting Scioto Downs.
- Review the non-GAAP Adjusted EBITDA reconciliation and distinguish recurring operating improvement from acquisition, severance, stock compensation and regulatory adjustments.