Filing Scope and Business Context
The supplied filing is not for Caesars Entertainment, Inc.; it is Eldorado Resorts, Inc.’s Form 10-K for the fiscal year ended December 31, 2014, filed March 16, 2015. Although the request references 2014 Q4, the filing reports the full fiscal year and includes fourth-quarter data. Eldorado operates casinos, hotels and racetracks in Louisiana, Nevada, West Virginia, Pennsylvania and Ohio.
The September 19, 2014 merger with MTR Gaming was accounted for as a reverse acquisition. Accordingly, 2014 includes MTR results only from the merger date through December 31, while prior-year consolidated results primarily reflect Resorts operations and are not fully comparable.
Key Financial Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Net operating revenue | $361.8 million | $247.2 million | 46.4% |
| Operating income | $17.6 million | $22.6 million | (22.3%) |
| Operating margin | 4.9% | 9.1% | Down 4.2 percentage points |
| Net income attributable to ERI | $(14.4) million | $18.9 million | Turned to loss |
| Basic and diluted EPS | $(0.48) | $0.81 | Declined |
| Adjusted EBITDA | $118.0 million | $138.3 million | (14.7%) |
| Cash flow from operations | $33.9 million | $23.6 million | 43.5% |
| Capital expenditures | $10.6 million | $7.4 million | Increase |
| Cash and cash equivalents | $87.6 million | $29.8 million | Increase |
| Total debt | $778.9 million | $170.8 million | Primarily merger-related |
Casino revenue increased 55.3% to $298.8 million, including $113.7 million from MTR during the post-merger period. Food and beverage revenue rose 12.7% to $68.2 million, hotel revenue rose 4.0% to $28.0 million, and pari-mutuel commissions contributed $2.0 million. Promotional allowances increased 12.5% to $48.4 million but declined to 16.2% of casino revenue from 22.4% in 2013.
Operating expenses increased 51.2% to $339.5 million. General and administrative expense increased 45.9%, depreciation and amortization increased 68.2%, and acquisition charges rose to $7.4 million from $3.2 million. Interest expense increased to $30.8 million from $15.7 million, principally because of MTR debt included after the merger.
Material Changes Versus the Prior Comparable Period
- Reported revenue growth primarily reflects the addition of MTR Gaming for the final 103 days of 2014. Excluding incremental MTR revenue of approximately $124.2 million, Eldorado’s legacy net revenue declined 3.9%.
- Legacy Eldorado casino revenue declined 4.0%, with Eldorado Reno down 1.7% and Eldorado Shreveport down 4.8%. Management cited lower slot handle, lower table-game credit drop and increased competition.
- Legacy Adjusted EBITDA declined at Eldorado Reno to $8.0 million from $10.0 million and at Eldorado Shreveport to $24.1 million from $29.7 million. Combined Adjusted EBITDA declined to $118.0 million from $138.3 million.
- Net income deteriorated because of lower operating income, higher acquisition and interest costs, a $1.8 million income-tax provision following the change to C-corporation status, and the absence of the $12.0 million 2013 gain on extinguishment of Silver Legacy debt.
- The merger materially expanded the balance sheet: total assets increased to $1.18 billion from $270.2 million, debt increased to $778.9 million from $170.8 million, and goodwill of $66.8 million and gaming-related intangible assets of approximately $482.1 million were recorded.
Liquidity, Debt and Cash Flow
Operating cash flow was $33.9 million. Investing activities provided $38.1 million, largely because of $53.1 million of acquired cash, including restricted cash, in the merger; capital expenditures consumed $10.6 million. Financing activities used $14.2 million, including debt repayments, distributions and the MTR debt repurchase.
Debt consisted principally of $168.0 million of 8.625% Resorts Senior Secured Notes and $560.7 million principal amount of MTR Second Lien Notes, plus a $50.2 million unamortized premium. Scheduled principal maturities of approximately $728.7 million occur in 2019. Substantially all assets are pledged as collateral. The company reported compliance with applicable debt covenants at December 31, 2014.
The Resorts revolving credit facility matured and was not renewed in May 2014. MTR terminated its $20.0 million revolving credit facility in December 2014 with no borrowings outstanding. Management expected 2015 operating cash flow to fund operations, approximately $29.2 million of net capital expenditures and approximately $79.0 million of interest, but cautioned that refinancing the 2019 maturities may not be available on acceptable terms.
Guidance, Outlook, Risks and Unusual Items
- For 2015, management planned gross capital expenditures of up to $32.7 million, or approximately $29.2 million net of anticipated West Virginia reimbursements. Projects included facility improvements, information technology, Scioto Downs development, an Eldorado Reno room remodel, slot machines and racing-related expenditures.
- Management cited ongoing competitive pressure from regional casinos, Native American gaming, new Ohio facilities, new Louisiana properties and potential future expansion of gaming in Texas and surrounding markets.
- A Hancock County, West Virginia smoking ban was scheduled to become effective July 1, 2015. Management expected a potentially material adverse impact on Mountaineer.
- Key risks include high leverage, refinancing risk, restrictive debt covenants, limited ability of subsidiaries to distribute cash to the holding company, gaming-license regulation, gaming-tax increases, economic sensitivity, weather disruptions, labor and horsemen agreements, litigation, environmental liabilities and cybersecurity risks.
- Unusual 2014 items included $7.4 million of merger-related acquisition charges, a $0.7 million gain from termination of a Silver Legacy supplemental executive retirement plan, a $0.1 million loss on early debt retirement and $1.8 million of income-tax expense after becoming a taxable corporation.
- The filing reports no material unresolved staff comments, no material off-balance-sheet arrangements and an unqualified audit opinion. Management and Ernst & Young concluded that internal control over financial reporting was effective as of December 31, 2014.
Investor Verification Priorities
- Verify the issuer identity and ticker: the supplied document is Eldorado Resorts, Inc., not Caesars Entertainment, Inc.
- Reconcile reported 2014 results with a pro forma view that includes MTR for the full year; the filing provides unaudited pro forma revenue of $713.7 million and pro forma net loss of $5.2 million for 2014.
- Assess the ability to refinance approximately $728.7 million of scheduled 2019 principal maturities and the restrictions on cash transfers from MTR and Resorts to ERI.
- Monitor legacy-property revenue and EBITDA trends, particularly the effects of competition in Reno, Shreveport and the MTR markets.
- Evaluate the financial effect of the Hancock County smoking ban, gaming-license renewals, gaming taxes and required horsemen or pari-mutuel agreements.
- Review merger purchase accounting, including $66.8 million of goodwill, approximately $482.1 million of gaming licenses and other intangible assets, and the sensitivity of these assets to impairment.
- Review pending Ohio gaming litigation, the Presque Isle Downs settlement, Pennsylvania regulatory assessments and environmental obligations.