Eldorado Resorts, Inc. 2019 Q3 SEC Filing Summary
Filing identity: The provided Form 10-Q is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc. It covers the quarter and nine months ended September 30, 2019 and was filed November 6, 2019.
Business context and reporting period
Eldorado operated 26 gaming facilities in 12 states, with approximately 26,600 gaming positions, 750 table games and 11,800 hotel rooms. Results include the Grand Victoria Casino acquisition completed in August 2018 and the Tropicana acquisition completed October 1, 2018; therefore, prior-year comparisons are not fully comparable. Presque Isle Downs and Nemacolin were sold in January and March 2019, respectively.
The company adopted ASC 842 lease accounting prospectively on January 1, 2019, recording $245.3 million of operating lease right-of-use assets and a $4.7 million cumulative after-tax adjustment to retained earnings.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenues | $663.2 million, up 36.1% | $1.936 billion, up 39.9% |
| Operating income | $124.9 million, up 36.1% | $351.1 million, up 57.2% |
| Operating margin | 18.8%, versus 18.8% | 18.1%, versus 16.1% |
| Net income | $37.1 million, down 1.7% | $94.2 million, down 1.2% |
| Net margin | 5.6%, versus 7.7% | 4.9%, versus 6.9% |
| Diluted EPS | $0.47, versus $0.48 | $1.20, versus $1.22 |
| Adjusted EBITDA | $197.8 million | $543.1 million |
Gaming and pari-mutuel revenue increased 24.4% in the quarter and 30.7% year to date, while non-gaming revenue increased 72.3% and 69.9%, respectively. Acquired properties drove much of the reported growth. Excluding acquisitions and divestitures, net revenue declined 9.6% in the quarter and 6.6% year to date.
Cash flow from operations was $260.1 million for the nine months, compared with $263.4 million in the prior-year period. Capital expenditures were $135.0 million, compared with $89.1 million. Investing cash flow was positive $38.5 million, primarily reflecting $169.4 million of proceeds from business and property sales. Financing cash flow was negative $323.4 million, including $245.0 million of revolving-facility repayments and $70.0 million of Term Loan repayments.
At September 30, 2019, cash and cash equivalents were $208.8 million, or $221.9 million including restricted cash. Total assets were $6.081 billion and stockholders’ equity was $1.127 billion.
Long-term debt, net of current maturities, was $2.951 billion, and the GLPI financing obligation was $968.0 million. The company also had $246.0 million outstanding under the Lumière Loan. The Revolving Credit Facility had no balance outstanding and $483.7 million of available capacity after letters of credit. The company reported compliance with its debt and Master Lease covenants.
Material changes versus the prior comparable period
- Reported revenue and operating income rose substantially because the comparison period did not include a full period of Tropicana and included less of Elgin.
- Reported net income declined modestly despite higher operating income because interest expense increased to $71.9 million in the quarter and $217.2 million year to date, reflecting acquisition debt and GLPI Master Lease financing costs.
- Excluding acquisitions and divestitures, operating performance weakened in the quarter, reflecting lower casino volume, reduced promotional activity, severe weather, hurricane activity and construction disruption.
- Marketing and promotions expense decreased 25.7% on an adjusted comparable basis in the quarter and 24.7% year to date; management attributed the reduction to terminated marketing contracts, lower direct-mail spending and revised promotional activity.
- Five properties were classified as held for sale at September 30, 2019: Mountaineer, Cape Girardeau, Caruthersville, Kansas City and Vicksburg. Related assets totaled $605.9 million and liabilities totaled $56.1 million.
- The company recorded a $22.2 million net gain from the Presque Isle Downs and Nemacolin sales during the first nine months of 2019. These operations were not classified as discontinued operations.
Guidance, outlook, commentary, risks and unusual items
Management expected approximately $65.0 million of capital expenditures during the remainder of 2019 and stated that operating cash flow should be sufficient to fund operations, capital requirements and debt service for the following twelve months. The filing does not provide formal revenue or EBITDA guidance.
The company was pursuing its proposed acquisition of Caesars Entertainment Corporation, announced June 24, 2019, with expected completion in the first half of 2020. Consideration consisted primarily of $8.40 per Caesars share plus 0.0899 Eldorado shares per Caesars share, subject to specified adjustments. The proposed transaction was expected to result in approximately 51% ownership by existing Eldorado holders and 49% by former Caesars holders.
Committed merger financing included a $1.0 billion revolving facility, $3.0 billion senior secured term loan, $3.6 billion 364-day secured bridge facility, $1.8 billion senior unsecured bridge facility and a $2.4 billion Caesars subsidiary term loan. The company also expected approximately $1.8 billion from VICI sale-leaseback transactions and approximately $1.4 billion from lease amendments.
Material transaction risks included regulatory and antitrust approvals, an FTC Second Request, required gaming approvals, shareholder approvals, financing availability, integration risk and materially higher leverage and lease obligations. Potential termination fees included approximately $154.9 million or $836.8 million payable by Eldorado to Caesars in specified circumstances, up to $50.0 million of expense reimbursement, and a possible $75.0 million fee to VICI.
Eight putative class actions had been filed in connection with the merger as of November 6, 2019; Eldorado was named in three. A separate securities class action alleged misstatements or omissions relating to SEC subpoenas involving certain directors and officers. Management stated that it intended to vigorously defend these matters. Normal-course litigation losses were considered immaterial, although final outcomes could differ.
Other unusual items included $12.4 million of quarterly transaction expenses, a $1.2 million loss on early debt retirement and a $3.3 million unrealized gain on restricted investments. The filing also identifies interest-rate exposure on $886.8 million of variable-rate Term Loan borrowings and potential uncertainty from the expected discontinuation of LIBOR after 2021.
Important facts for investors to verify
- Confirm that the intended issuer is Eldorado Resorts, Inc.; the supplied company metadata identifies Caesars Entertainment, Inc.
- Assess comparable-property performance separately from acquisition-driven revenue growth, particularly the reported declines excluding acquisitions and divestitures.
- Reconcile total debt, the $968.0 million GLPI financing obligation, the $246.0 million Lumière Loan and future lease commitments with operating cash flow.
- Track the status, financing, regulatory approvals, litigation and termination-fee exposure associated with the Caesars merger.
- Verify completion and proceeds from the five pending property divestitures and the planned application of sale proceeds to debt reduction or qualifying capital expenditures.
- Evaluate the effect of weather, construction disruption, promotional reductions, competition, gaming regulation and discretionary consumer spending on same-property results.
- Review the non-GAAP Adjusted EBITDA reconciliation and remember that it excludes capital expenditures, interest, taxes, debt principal and Master Lease cash payments.