Business Context and Reporting Period
The source is Eldorado Resorts, Inc. (“ERI”), not Caesars Entertainment, Inc.; the filing is a Form 10-K for the fiscal year ended December 31, 2017, with quarterly data for the fourth quarter ended December 31, 2017. ERI operated 20 gaming facilities in 10 states, with approximately 21,000 slot machines and VLTs, 600 table games, and more than 7,000 hotel rooms.
On May 1, 2017, ERI acquired Isle of Capri Casinos for total purchase consideration of approximately $1.93 billion, adding 13 properties. Consequently, 2017 results include eight months of Isle operations and are not fully comparable with 2016.
Financial Performance and Key Metrics
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net operating revenue | $1.474 billion | $892.9 million | 65.0% |
| Operating income | $94.9 million | $89.1 million | 6.5% |
| Operating margin | 6.4% | 10.0% | Down |
| Net income | $73.9 million | $24.8 million | 198.1% |
| Diluted EPS | $1.09 | $0.52 | 109.6% |
| Cash flow from operations | $130.2 million | $97.6 million | 33.5% |
| Capital expenditures | $83.5 million | $47.4 million | 76.2% |
| Cash and cash equivalents | $134.6 million | $61.0 million | 120.5% |
| Total debt | $2.190 billion | $800.4 million | 173.6% |
Gaming and pari-mutuel revenue was $1.243 billion, or approximately 84% of net revenue. Gross revenue was $1.607 billion, reduced by $133.1 million of promotional allowances. Promotional allowances declined to 10.7% of gaming and pari-mutuel revenue from 12.9% in 2016.
Fourth-quarter 2017 net revenue was $428.2 million, operating income was $30.0 million, and net income was $89.7 million. Fourth-quarter net income benefited materially from the tax accounting impact of the Tax Cuts and Jobs Act.
Adjusted EBITDA, a non-GAAP measure, was $322.2 million excluding pre-acquisition Isle results and $407.2 million including pre-acquisition results. These figures are not GAAP liquidity measures and exclude, among other items, capital expenditures, interest, taxes, and debt repayments.
Liquidity, Debt, and Capital Structure
- At year-end, debt consisted principally of $956.8 million outstanding under the term loan, $875.0 million of 6% senior notes due 2025, and $375.0 million of 7% senior notes due 2023.
- The $300.0 million revolving credit facility had no borrowings outstanding; availability was $291.6 million after $8.4 million of letters of credit.
- Variable-rate term-loan borrowings totaled $956.8 million. A 100-basis-point increase in LIBOR would increase annual interest expense by approximately $9.6 million, based on year-end borrowings.
- Contractual cash obligations totaled approximately $3.287 billion, including $2.210 billion of debt principal, $773.4 million of estimated interest, and $188.2 million of operating leases.
- Management expected 2018 operating cash flow to fund operations, planned capital expenditures of $150.0 million, estimated cash interest of $115.4 million, and debt service for the next twelve months.
- Debt agreements impose restrictions on additional borrowings, asset sales, investments, dividends, acquisitions, and other corporate actions. ERI reported compliance with its debt covenants at December 31, 2017.
Material Changes Versus the Prior Comparable Period
- The Isle acquisition drove $599.6 million of incremental revenue and $82.3 million of incremental operating income for the eight months after closing.
- Excluding incremental Isle revenue, net revenue declined 2.1%, primarily because of severe winter weather in northern Nevada and storms affecting Southern properties.
- Operating margin decreased despite higher operating income, reflecting acquisition-related costs, impairment charges, higher depreciation, and increased corporate expenses.
- Transaction expenses increased to $92.8 million from $8.6 million, principally due to the Isle acquisition.
- Interest expense increased to $99.8 million from $50.9 million, and ERI recorded a $38.4 million loss on early retirement of debt related to the 2017 refinancing.
- Cash used in investing activities increased to $1.408 billion, primarily because of the Isle acquisition. Financing activities provided $1.351 billion, principally from new debt issuance.
- Total assets increased to $3.546 billion from $1.294 billion, while stockholders’ equity increased to $945.1 million from $298.5 million, largely reflecting the acquisition and issuance of ERI shares.
Guidance, Outlook, Risks, and Unusual Items
- Management planned approximately $150.0 million of 2018 capital expenditures, including property maintenance and enhancement projects. Planned initiatives included hotel upgrades and new Brew Brothers outlets at selected acquired properties.
- The company cited cost savings from purchasing power, marketing changes, lower variable expenses, and integration of acquired operations. It also expected further property-level margin opportunities.
- The Tax Cuts and Jobs Act generated a provisional $112.4 million net deferred tax benefit in 2017. The accounting was not complete at filing and remained subject to subsequent analysis and guidance.
- ERI recorded $38.0 million of fourth-quarter impairment charges relating to goodwill and trade names at Lake Charles, Lula, and Vicksburg because of lower expected cash flows and competitive pressures.
- ERI retained a $20.0 million deposit after terminating the proposed sale of Lake Charles when the buyer failed to obtain required gaming approvals. Lake Charles was returned to continuing operations.
- Severe snowfall in northern Nevada and Hurricanes Harvey and Irma reduced visitation and disrupted operations. Pompano was closed for four days because of storms.
- Key risks include substantial leverage, variable interest rates, restrictive debt covenants, intense gaming competition, discretionary consumer spending, gaming-license renewals, gaming-tax increases, weather and natural disasters, labor negotiations, cybersecurity, environmental liabilities, litigation, and acquisition integration.
- Three collective bargaining agreements covering approximately 970 employees were scheduled to expire in 2018. Certain horsemen and pari-mutuel agreements also required renewal, including agreements affecting Mountaineer’s gaming and racing licenses.
- Management’s internal-control assessment and the auditor’s attestation excluded Isle controls, although Isle represented 53% of total assets and 41% of 2017 net revenue. The company and auditor nevertheless reported effective controls for the assessed population.
Investor Verification Items
- Verify the issuer identity: the supplied filing is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc.
- Separate organic performance from the eight months of acquired Isle results and review pro forma information, which showed 2017 revenue of $1.804 billion and net income of $173.6 million as if the acquisition occurred January 1, 2016.
- Assess sustainable operating margins excluding the $92.8 million of transaction costs, $38.0 million of impairment charges, $20.0 million terminated-sale proceeds, and tax-related benefit.
- Evaluate leverage, debt maturities, refinancing needs, covenant headroom, and exposure to LIBOR and other interest-rate changes.
- Confirm the amount and timing of 2018 capital expenditures, cash interest, mandatory debt repayments, and other contractual obligations.
- Review the final purchase-price accounting for Isle, which remained preliminary at December 31, 2017, including goodwill of $715.2 million recorded from the acquisition.
- Monitor acquired-property performance, particularly Lake Charles, Lula, and Vicksburg, where impairment indicators were identified.