Eldorado Resorts, Inc. — Form 10-Q Summary
Important identification note: The supplied filing is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc. It covers the three months ended March 31, 2018 and was filed May 8, 2018. Results include the 13 Isle properties acquired on May 1, 2017, so the prior-year comparison is not fully comparable.
Business context and reporting period
Eldorado operated 20 gaming facilities in 10 states, with approximately 21,000 slot machines and video lottery terminals, 600 table games, and more than 7,000 hotel rooms. Gaming was the primary revenue source, supplemented by hotels, food and beverage, entertainment, racing, and retail operations.
The company reported four geographic segments: West, Midwest, South, and East. It adopted ASC 606 revenue recognition effective January 1, 2018 using the full retrospective method; the adoption primarily changed promotional-allowance presentation and loyalty-program accounting and did not materially affect historically reported operating income or net income.
Key financial metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net revenues | $440.2 million | $202.4 million | 117.5% increase |
| Operating income | $54.2 million | $14.0 million | 286.3% increase |
| Net income | $20.9 million | $0.9 million | $19.9 million increase |
| Basic diluted EPS | $0.27 | $0.02 | Improved |
| Operating margin | 12.3% | 6.9% | Improved |
| Net margin | 4.7% | 0.5% | Improved |
| Cash flow from operations | $78.0 million | $5.2 million | Increased |
| Capital expenditures | $21.3 million | $6.2 million | Increased |
| Adjusted EBITDA | $103.5 million | $96.3 million (including Isle pre-acquisition results) | Comparable non-GAAP presentation |
Isle contributed $231.9 million of revenue and $30.4 million of net income in Q1 2018. Excluding incremental Isle revenue, consolidated net revenue increased 2.9% year over year, primarily due to West segment growth. Excluding Isle, gaming and pari-mutuel revenue increased 2.3% and non-gaming revenue increased 4.4%.
Revenue consisted of casino revenue of $339.5 million, pari-mutuel commissions of $4.1 million, food and beverage revenue of $52.2 million, hotel revenue of $30.7 million, and other revenue of $13.7 million. Operating expenses included $9.8 million of impairment charges, primarily related to Vicksburg, and $2.5 million of transaction expenses.
Cash, debt, and liquidity
- Cash and cash equivalents were $183.1 million at March 31, 2018, compared with $134.6 million at December 31, 2017. Total cash, cash equivalents, and restricted cash were $196.7 million.
- Long-term debt, including current maturities, had a carrying value of approximately $2.19 billion. Principal debt consisted primarily of a $956.8 million New Term Loan, $875.0 million of 6% Senior Notes, and $375.0 million of 7% Senior Notes.
- The New Term Loan had a weighted-average interest rate of 3.9% during the quarter. Fixed-rate debt had a weighted-average rate of 6.3%.
- The $300 million revolving credit facility had no borrowings outstanding and approximately $291.5 million of available capacity after $8.5 million of letters of credit.
- Interest expense increased to $31.3 million from $12.7 million, primarily because of debt incurred in connection with the Isle acquisition.
- Management expected cash generated from operations to fund operations, capital requirements, and debt service for the next 12 months. Planned capital expenditures for the remainder of 2018 were $128.4 million, and planned interest payments were $96.4 million, excluding the expected impact of pending acquisitions.
Material changes versus the prior comparable period
- The Isle acquisition substantially expanded the company’s scale and drove most of the reported revenue and operating-income growth.
- Operating income benefited from incremental Isle earnings, cost savings, purchasing efficiencies, and improved departmental margins.
- Interest expense, depreciation and amortization, general and administrative expenses, corporate expenses, and stock-based compensation increased because of the larger post-acquisition organization and debt structure.
- Q1 2017 results were negatively affected by severe Northern Nevada winter weather. Q1 2018 also experienced challenging weather in January and February, with additional Reno impact in March, although conditions were less disruptive than in the prior year.
- Cash flow from operations improved materially, while investing cash use declined because Q1 2017 included $376.8 million of escrowed cash related to the Isle acquisition.
- The company finalized Isle purchase-price accounting during Q1 2018, with minimal changes other than a $6.1 million net-of-tax goodwill-related adjustment associated with certain Bettendorf and Nemacolin liabilities.
Outlook, transactions, risks, and unusual items
- The company agreed to sell Presque Isle Downs for approximately $178.9 million and Vicksburg for approximately $50.6 million to Churchill Downs. The properties were classified as held for sale, and Vicksburg generated a $9.8 million impairment charge. Closing was expected in the third or fourth quarter of 2018, subject to regulatory and other conditions. A Federal Trade Commission Second Request received May 7, 2018 extended the Hart-Scott-Rodino review period.
- The company agreed to acquire Grand Victoria Casino in Elgin, Illinois for $327.5 million in cash, subject to customary adjustments and approvals.
- The company also agreed to acquire Tropicana Entertainment for a transaction value of $1.85 billion. Gaming and Leisure Properties was expected to acquire substantially all related real estate for $1.21 billion, while Eldorado would fund approximately $640 million and enter into a 15-year triple-net master lease with expected initial annual rent of approximately $110 million.
- The company obtained commitments to increase its revolving credit facility from $300 million to $500 million upon closing the Tropicana acquisition and had $600 million of committed debt financing for the transaction.
- Management identified substantial indebtedness, higher future rent and debt-service obligations, regulatory approvals, antitrust review, integration risk, competition, discretionary consumer spending, interest rates, weather, gaming taxes, technology disruptions, and labor retention as material risks.
- Management stated that it expected the pending acquisitions to be accretive to earnings per share in 2019, but emphasized that this expectation depended on preliminary estimates, transaction completion, financing, and achievement of projected synergies.
- The company reported no material off-balance-sheet arrangements, no material litigation accruals, and compliance with its senior-note and credit-facility covenants as of March 31, 2018.
Investor verification items
- Confirm the correct issuer and ticker: the supplied filing is Eldorado Resorts, Inc., not Caesars Entertainment, Inc.
- Reconcile reported growth against a comparable pro forma baseline that includes Isle for both periods.
- Track completion, regulatory approval, and proceeds from the Presque Isle Downs and Vicksburg dispositions.
- Verify financing, leverage, interest expense, and covenant capacity after any Tropicana and Grand Victoria transactions.
- Assess the fixed obligations and operating risks of the proposed $110 million annual Tropicana master-lease rent.
- Review the $9.8 million Vicksburg impairment and the accounting effects of ASC 606 adoption when comparing periods.
- Confirm whether the planned acquisitions and dispositions closed on the anticipated timeline and terms.