Business Context and Reporting Period
Eldorado Resorts, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2020. The company operated 23 gaming facilities in 11 states, with approximately 23,900 gaming positions, 660 table games and 11,300 hotel rooms. All casino properties were temporarily closed beginning March 18, 2020 due to COVID-19-related government orders.
The filing concerns Eldorado Resorts, Inc., not the post-merger Caesars Entertainment, Inc. The company expected its pending acquisition of Caesars Entertainment Corporation and related VICI Properties transactions to close in mid-2020, subject to regulatory and other conditions.
Financial Performance and Key Metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Net revenues | $473.1 million | $635.8 million | Down 25.6% |
| Operating income (loss) | $(123.2) million | $123.6 million | Declined $246.8 million |
| Net income (loss) | $(175.6) million | $38.2 million | Declined $213.9 million |
| Basic and diluted EPS | $(2.25) | $0.49 | Unfavorable change |
| Cash flow from operations | $30.5 million | $65.4 million | Down $34.9 million |
| Capital expenditures | $23.2 million | $38.4 million | Down $15.2 million |
| Adjusted EBITDA | $102.5 million | $166.7 million | Down 38.5% |
Operating margin was approximately negative 26.0% in Q1 2020 versus 19.4% in Q1 2019. Net margin was approximately negative 37.1% versus 6.0%.
- Gaming and pari-mutuel revenue declined 27.8% to $339.7 million; non-gaming revenue declined 19.3% to $133.3 million.
- Operating expenses increased 10.3% to $588.2 million, primarily because of $160.8 million of impairment charges, despite lower marketing, general and administrative, gaming and non-gaming expenses.
- Interest expense declined to $66.5 million from $73.5 million. The company recorded a $23.0 million unrealized loss on investments and marketable securities, compared with a $1.5 million loss in Q1 2019.
- The company recognized a $37.2 million income-tax benefit, compared with $10.4 million of tax expense in the prior-year period.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $671.7 million at March 31, 2020, compared with $206.3 million at December 31, 2019. Including restricted cash, total cash, cash equivalents and restricted cash was $681.8 million.
- The company borrowed $465.0 million under its revolving credit facility on March 16, 2020 as a precautionary liquidity measure. It had $16.8 million of remaining borrowing capacity after $18.2 million of outstanding letters of credit.
- Total long-term debt, including the current portion, was approximately $3.03 billion, compared with $2.57 billion at December 31, 2019. This included $488.8 million under the term loan, $465.0 million under the revolver, $1.85 billion of senior notes and a $246.0 million Lumière Loan.
- The long-term financing obligation to GLPI was $973.1 million. The Master Lease generated $22.2 million of cash payments and $24.8 million of interest expense during the quarter.
- Total liabilities were $4.95 billion and stockholders’ equity was $940.2 million at March 31, 2020.
- Management stated that the company was in compliance with debt and Master Lease covenants at quarter-end, but warned that prolonged closures could cause covenant violations, acceleration of debt or termination of the Master Lease.
Material Changes Versus the Prior Comparable Period
- COVID-19 closures materially reduced gaming, hotel, food and beverage and entertainment activity. Management reported positive year-over-year results in January and February before the March closures.
- Excluding divestitures, net revenue decreased 17.5% and operating income decreased 207.7% year over year.
- Impairment charges rose to $160.8 million from $1.0 million, including $99.5 million of goodwill impairment, $15.6 million of trade-name impairment and $45.6 million related principally to MontBleu.
- Prior-year results included a $22.2 million gain from the sales of Presque Isle and Nemacolin and included operating results from properties sold in 2019, making comparisons less comparable.
- Cash flow from financing activities changed from $209.8 million used in Q1 2019 to $447.7 million provided in Q1 2020, principally because of the $465.0 million revolver borrowing.
- Assets held for sale increased to $442.5 million from $253.1 million and included Shreveport, MontBleu, Kansas City and Vicksburg.
Guidance, Outlook, Risks and Unusual Items
- Management expected Q2 2020 results to be lower than Q1 2020 because properties remained closed for a significant portion of the quarter and new operating restrictions were expected upon reopening. Management also expected negative effects potentially through the remainder of 2020 and thereafter.
- Approximately 90% of employees were furloughed beginning April 11, 2020. Salary reductions and other cost-saving measures were implemented, while employee benefits were expected to continue through June 30, 2020.
- The company planned approximately $40.0 million of capital expenditures for the remainder of 2020, subject to reopening timing and the Caesars transaction.
- Management expected available cash, operating cash flow, revolver borrowings, planned merger financing, VICI transactions and asset-sale proceeds to fund operations, capital requirements, debt service and the Caesars acquisition for the following twelve months, but acknowledged substantial COVID-19-related uncertainty.
- The Caesars transaction contemplated cash consideration of $8.40 per Caesars share plus $0.003333 per day from March 25, 2020 until closing, together with ERI stock consideration. A delay could increase the cash consideration and transaction costs.
- Termination fees under the merger agreement could be significant, including approximately $836.8 million payable by Eldorado in certain regulatory or antitrust termination circumstances.
- The SEC investigation concerning previously disclosed subpoenas involving certain directors and officers remained ongoing, although a related securities class action was voluntarily dismissed in March 2020. Merger-related litigation was settled and dismissed.
- Other key risks included substantial leverage, fixed rent obligations, limited remaining revolver capacity, consumer demand and discretionary-spending declines, gaming regulation, competition, interest-rate exposure and the ability to obtain required financing and approvals.
Most Important Facts for Investors to Verify
- Whether and when the Caesars merger, VICI transactions and pending divestitures closed, and the final financing, ownership and lease terms.
- Actual casino reopening dates, operating restrictions, visitation trends and the pace of revenue and cash-flow recovery.
- Cash burn during closures, remaining liquidity, revolver availability and compliance with quarterly debt and Master Lease covenants.
- Refinancing or repayment requirements for the $246.0 million Lumière Loan and other near-term maturities.
- Whether additional goodwill, trade-name or property impairments were recorded after March 31, 2020.
- The status and potential consequences of the ongoing SEC investigation and any other material legal or regulatory matters.