Filing Overview
Registrant: Eldorado Resorts, Inc., not Caesars Entertainment, Inc. The filing is an unaudited Form 10-Q for the three months ended March 31, 2015, filed May 11, 2015. The September 2014 merger with MTR Gaming was accounted for as a reverse acquisition; therefore, the reported 2014 period does not include MTR Gaming and is not fully comparable.
Business Context and Reporting Period
The company operated Eldorado Reno, Eldorado Shreveport, and MTR Gaming properties in West Virginia, Pennsylvania, and Ohio, and held a 48.1% interest in the Silver Legacy Joint Venture. MTR Gaming contributed a full quarter of results in 2015 but none in the reported 2014 period.
Key Financial Metrics
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net operating revenue | $167.5 million | $57.0 million | 193.6% |
| Operating income | $12.1 million | $1.6 million | 678.6% |
| Operating margin | 7.2% | 2.7% | Improved |
| Net loss | $6.2 million | $2.3 million | Loss increased |
| Net loss per share | $0.13 | $0.10 | Loss increased |
| Adjusted EBITDA | $27.7 million | $28.4 million | 2.5% decrease |
| Cash flow from operations | $(5.9) million | $6.3 million | Declined |
| Capital expenditures | $7.5 million | $0.5 million | Increased |
Reported net loss margin was approximately negative 3.7% in 2015 versus negative 4.1% in 2014. A more comparable combined presentation showed 2014 net revenues of $171.9 million and Adjusted EBITDA of $28.4 million, versus $167.5 million and $27.7 million in 2015. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, interest, taxes, depreciation, amortization, management fees, certain regulatory assessments, and acquisition costs.
- Casino revenue was $147.7 million, including $101.3 million from MTR Gaming.
- Promotional allowances were $15.4 million, or 10.4% of casino revenue, compared with 22.5% in the prior-year reported period.
- Interest expense increased to $17.2 million from $3.9 million, primarily because MTR Gaming was included in the 2015 results.
- Cash and cash equivalents totaled $71.9 million at March 31, 2015, excluding restricted cash of $10.9 million.
- Total assets were $1.15 billion and stockholders’ equity was $146.0 million at March 31, 2015.
Debt and Liquidity
- Long-term debt was $776.1 million, consisting principally of $168.0 million of 8.625% Resorts Senior Secured Notes and $608.1 million of MTR Second Lien Notes, including an unamortized premium.
- Scheduled maturities were $728.7 million in 2019. Both major debt instruments mature in 2019.
- The company expected approximately $21.7 million of remaining 2015 capital expenditures, net of anticipated West Virginia reimbursements, and approximately $46.8 million of interest payments.
- Management stated that operating cash flow was expected to fund operations, capital requirements, and debt service for the foreseeable future, but acknowledged that future operating cash flow may be insufficient and refinancing in 2019 may not be available on acceptable terms.
- The company was in compliance with the covenants governing both major note issuances at March 31, 2015. Debt agreements restrict distributions from subsidiaries and could limit parent-company liquidity.
Material Changes Versus the Prior Comparable Period
- The MTR Gaming merger materially expanded the consolidated revenue and expense base. Excluding incremental MTR Gaming revenue, net operating revenue increased 2.4% year over year, principally from improved casino revenue at Eldorado Reno and Eldorado Shreveport.
- Reported operating income improved by $10.5 million, while operating income excluding MTR Gaming increased approximately $2.0 million, aided by improved Eldorado Reno margins and lower acquisition charges.
- Combined Adjusted EBITDA declined modestly because MTR Gaming Adjusted EBITDA fell to $21.7 million from $23.4 million on a comparable basis, while Eldorado Reno improved to $2.4 million from a loss of $0.1 million.
- Operating cash flow shifted from a $6.3 million source to a $5.9 million use, primarily due to merger-related and other working-capital changes.
- Capital expenditures increased to $7.5 million, primarily reflecting $5.5 million at MTR Gaming properties.
- Interest expense rose substantially, and the company began recording corporate income tax expense after becoming a C corporation in connection with the merger.
Outlook, Commentary, Risks, and Unusual Items
- Management planned continued cost-control efforts and expected the 2015 USBC tournament in Reno to attract approximately 16,000 women bowlers from March through July.
- Management expected the July 1, 2015 smoking ban at Mountaineer in West Virginia to negatively affect business and results, potentially materially.
- Key risks include substantial leverage, 2019 refinancing needs, restrictive debt covenants, intense regional and Native American gaming competition, economic sensitivity of discretionary spending, gaming regulation and taxes, and merger integration risks.
- The company had an estimated $4.9 million liability for Pennsylvania regulatory gaming assessments at March 31, 2015; the estimate is subject to changes in revenue assumptions.
- A $0.7 million settlement of the Presque Isle Downs surveillance-system litigation was under review, with dismissal anticipated by June 30, 2015. Recovery of a separate $2.7 million default judgment against Dwayne Cooper Enterprises was considered uncertain.
- The company maintained a $10.0 million environmental risk insurance policy relating to the International Paper site, expiring in October 2015, and believed coverage exceeded its potential exposure.
- Silver Legacy reported a $1.1 million net loss for the quarter, and Eldorado recognized $0.5 million of equity losses from the joint venture.
- No material changes to previously disclosed risk factors, contractual obligations, or off-balance-sheet arrangements were reported. Disclosure controls were deemed effective.
Investor Verification Checklist
- Confirm that the filing belongs to Eldorado Resorts, Inc., rather than Caesars Entertainment, Inc.
- Reconcile reported 2014 results with the pro forma or combined MTR Gaming presentation before assessing year-over-year performance.
- Review the company’s ability to refinance approximately $728.7 million of debt due in 2019 and the restrictions on subsidiary distributions.
- Assess whether negative operating cash flow and planned capital spending are consistent with management’s liquidity expectations.
- Monitor Mountaineer results after the July 2015 smoking ban and the effect of regional gaming competition.
- Evaluate the sustainability of Adjusted EBITDA, particularly the decline in comparable MTR Gaming EBITDA and the reliance on non-GAAP adjustments.
- Track Pennsylvania regulatory assessments, litigation settlements, environmental obligations, and other contingencies for changes in recorded liabilities.