Business Context and Reporting Period
Filing identity: The supplied filing is Eldorado Resorts, Inc. Form 10-Q for the three and nine months ended September 30, 2017, not Caesars Entertainment, Inc. The company operated casino, hotel, racing and entertainment properties across the West, Midwest, South and East regions.
On May 1, 2017, Eldorado completed its $1.93 billion acquisition of Isle of Capri Casinos. Accordingly, 2017 results include five months of Isle operations and are not fully comparable with 2016 results. Lake Charles was classified as discontinued operations and held for sale.
Key Financial Metrics
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net operating revenues | $444.9 million | $241.6 million | $1,001.0 million | $686.4 million |
| Operating income | $78.9 million | $28.1 million | $61.0 million | $76.0 million |
| Net income (loss) | $29.6 million | $9.7 million | $(15.8) million | $23.8 million |
| Diluted earnings per share | $0.38 | $0.20 | $(0.25) | $0.50 |
| Cash flow from operations | Not separately provided | Not separately provided | $71.8 million | $72.3 million |
| Capital expenditures | Not separately provided | Not separately provided | $53.2 million | $32.9 million |
Margins: Q3 operating margin was approximately 17.7%, compared with 11.6% in Q3 2016. Nine-month operating margin was approximately 6.1%, compared with 11.1% in the prior-year period. Q3 net margin was approximately 6.6%; the nine-month net margin was approximately negative 1.6%.
- Q3 adjusted EBITDA was $112.1 million, compared with $96.5 million on the filing’s “including pre-acquisition” comparison basis for Q3 2016. The measure is non-GAAP and excludes, among other items, depreciation, transaction expenses and stock compensation.
- Cash and cash equivalents were $134.9 million at September 30, 2017. Including $21.3 million of restricted cash, consolidated cash totaled $156.2 million.
- Total long-term debt, including current maturities, was approximately $2.225 billion, compared with $800.4 million at December 31, 2016. Principal debt consisted primarily of a $1.002 billion New Term Loan, $875.0 million of 6% Senior Notes and $375.0 million of 7% Senior Notes.
- The New Revolving Credit Facility had no borrowings outstanding and $291.6 million of available capacity after $8.4 million of letters of credit.
- Total assets increased to $3.585 billion from $1.294 billion at December 31, 2016, primarily because of the Isle acquisition.
Material Changes Versus the Prior Comparable Period
- Net revenues increased 84.2% in Q3 and 45.8% for the first nine months, primarily from the newly acquired Isle properties. Isle contributed $201.1 million of Q3 revenue and $335.3 million from May 1 through September 30.
- Excluding incremental Isle gaming revenue, Q3 gaming and pari-mutuel revenue declined 1.3%; for the nine-month period, it declined 3.0%. Weakness reflected lower high-end play, severe weather, reduced visitation and lower table-game hold in Shreveport.
- Operating income increased 180.8% in Q3 but declined 19.8% for the first nine months. The nine-month decline primarily reflected $89.2 million of Isle acquisition charges.
- Net income improved in Q3 but the company reported a nine-month loss. The nine-month result included $89.2 million of acquisition charges and a $37.3 million loss on early retirement of debt.
- Interest expense increased to $69.4 million for the first nine months from $38.4 million, reflecting substantially higher debt after the Isle acquisition.
- Promotional allowances declined as a percentage of gaming and pari-mutuel revenue to 10.2% in Q3 from 13.1%, and to 10.5% for the first nine months from 12.9%, as management reduced unprofitable promotional offers.
- The company issued an additional $500.0 million of 6% Senior Notes in September and used proceeds to repay $78.0 million of revolving borrowings and $444.5 million of term-loan borrowings.
Outlook, Commentary, Risks and Unusual Items
- Management expected cash generated from operations to fund operations, approximately $26.8 million of remaining 2017 capital expenditures and approximately $8.6 million of remaining 2017 interest payments for the following twelve months.
- Management continued to pursue cost savings, purchasing efficiencies, targeted marketing and integration synergies from the Isle acquisition.
- Hurricanes Harvey and Irma disrupted the South region, including a four-day closure at Pompano. Severe winter weather in northern Nevada also reduced first-quarter visitation and gaming activity.
- Lake Charles remained subject to Louisiana Gaming Control Board approval and other closing conditions under a planned sale for aggregate consideration of $134.5 million. A $20.0 million deposit was held in restricted cash.
- The company was in compliance with the covenants under its senior-note indentures and New Credit Facility at September 30, 2017. The credit agreement includes leverage and interest-coverage requirements that become more restrictive beginning in 2019 and 2020.
- Key risks include substantial leverage, variable-rate debt exposure, intense gaming competition, gaming-license and regulatory requirements, dependence on third-party agreements and leased land, cybersecurity, weather-related disruptions, and the ability to integrate Isle and achieve expected synergies.
- Management anticipated adopting the new revenue-recognition standard on January 1, 2018 using full retrospective application. The filing stated that the effect was likely to be material, particularly for customer loyalty programs and the presentation of promotional allowances, although the quantitative impact had not been determined.
- The filing reported no material litigation losses, no defaults upon senior securities and no off-balance-sheet arrangements.
Most Important Facts to Verify
- Confirm the issuer discrepancy: the provided document identifies Eldorado Resorts, Inc., while the request identifies Caesars Entertainment, Inc.
- Assess post-acquisition performance on a comparable basis, separating Isle’s five-month contribution from underlying results.
- Verify leverage, interest coverage and refinancing requirements under the New Credit Facility, including exposure to LIBOR and mandatory repayments.
- Monitor integration costs, expected synergies and whether acquisition-related charges and debt-refinancing losses recur.
- Track the status and proceeds of the Lake Charles disposition and related restricted cash.
- Evaluate the potential accounting and reported-revenue effects of the 2018 revenue-recognition adoption.
- Review competitive and regulatory developments, particularly Pennsylvania gaming expansion and the renewal of racing, gaming and third-party operating agreements.