Business Context and Reporting Period
This filing is the fiscal-year 2016 Form 10-K of Eldorado Resorts, Inc. (ERI), not Caesars Entertainment, Inc. It covers the year ended December 31, 2016; the filing does not represent a standalone Q4 filing, although quarterly data are included. ERI operated gaming, hotel, food and beverage, entertainment, and racing properties in Nevada, Louisiana, West Virginia, Pennsylvania, and Ohio, with three reportable segments: Nevada, Louisiana, and Eastern.
At December 31, 2016, ERI operated approximately 503,000 square feet of casino space, 9,746 slot machines and VLTs, 256 table games, and approximately 4,900 hotel rooms. The company had approximately 7,400 employees.
Key Financial Metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Net operating revenues | $892.9 million | $719.8 million | +24.1% |
| Operating income | $89.1 million | $72.5 million | +22.9% |
| Operating margin | 10.0% | 10.1% | Approximately flat |
| Net income attributable to ERI | $24.8 million | $114.2 million | -78.3% |
| Diluted earnings per share | $0.52 | $2.43 | Declined |
| Adjusted EBITDA, non-GAAP | $168.3 million | $160.6 million* | +4.8%* |
| Net cash from operating activities | $97.6 million | $56.7 million | +72.0% |
| Capital expenditures | $47.4 million | $36.8 million | +28.9% |
| Cash and cash equivalents | $61.0 million | $78.3 million | Declined |
| Total debt | $823.2 million | $892.2 million | Declined $69.0 million |
* The 2015 Adjusted EBITDA comparison includes the company’s supplemental presentation, which includes pre-Reno Acquisition results that are not presented under GAAP. Adjusted EBITDA is a non-GAAP measure and is not a liquidity measure.
- Gross revenue was $983.2 million, reduced by $90.3 million of promotional allowances.
- Casino revenue was $693.0 million; food and beverage revenue was $142.0 million; hotel revenue was $94.3 million.
- Net income before taxes was $38.0 million, compared with $44.6 million in 2015. The 2016 income tax provision was $13.2 million, versus a $69.6 million tax benefit in 2015.
- Interest expense declined to $50.9 million from $61.6 million, reflecting the 2015 refinancing and debt reductions during 2016.
- At year-end, total liabilities were $995.6 million and stockholders’ equity was $298.5 million.
- The company had $29.0 million drawn on its $150.0 million revolving facility, with approximately $121.0 million of availability. The term loan balance was $418.6 million and the senior notes had $375.0 million principal outstanding.
Material Changes Versus the Prior Comparable Period
- Revenue growth primarily reflected a full year of operations from the 2015 acquisition of Circus Reno and the remaining interest in Silver Legacy. Nevada revenue increased 152% to $321.9 million, while Nevada operating income increased to $41.6 million from $14.0 million.
- Louisiana revenue declined 3.6% to $131.5 million, although operating income increased to $23.4 million from $21.4 million. Management cited lower high-limit play and continued weakness in the energy sector.
- Eastern revenue declined 3.5% to $439.5 million and operating income declined 5.1% to $53.6 million. Mountaineer was adversely affected by the West Virginia smoking ban and related volume declines; Scioto Downs continued to improve.
- Net income fell sharply because 2015 included a $35.6 million gain on the valuation of the pre-existing Silver Legacy investment and a $69.6 million income tax benefit. In 2016, ERI recorded $9.2 million of acquisition charges, including $8.5 million related to the Isle transaction.
- Operating cash flow increased by $40.9 million, but cash declined by $17.2 million after capital expenditures, debt repayment, debt issuance costs, and other financing uses.
- Promotional allowances increased to $90.3 million from $64.8 million, representing 12.9% of gaming and pari-mutuel revenue versus 10.4% in 2015.
Guidance, Outlook, Commentary, Risks and Unusual Items
- ERI agreed to acquire Isle of Capri Casinos for consideration targeted at 58% cash and 42% ERI stock. Closing was expected in the second quarter of 2017, subject to gaming approvals and other conditions. Stockholders of both companies approved the transaction on January 25, 2017, and the HSR waiting period terminated on October 21, 2016.
- The transaction was expected to add 12 properties after planned dispositions of Isle of Capri Casino Hotel Lake Charles and Lady Luck Casino Marquette. ERI expected approximately $2.2 billion of debt after closing and committed financing of approximately $2.1 billion, including a $1.75 billion secured credit facility and at least $375 million of unsecured notes or bridge financing.
- Management expected 2017 capital expenditures of $60.1 million, net of West Virginia reimbursements, cash interest of $44.6 million, and term-loan principal payments of $4.3 million, before incremental spending and interest associated with the Isle transaction.
- ERI planned to invest more than $50.0 million over three years in the Reno Tri-Properties, including room renovations, restaurants, nightlife, resort amenities, and a luxury spa.
- Principal risks include substantial leverage, debt covenant compliance, variable interest rates, competition from regional, tribal, internet, and other gaming operators, regulatory and license requirements, gaming taxes, discretionary consumer spending, weather and access conditions, labor relations, cybersecurity, construction execution, litigation, environmental liabilities, and integration and financing risks related to the Isle acquisition.
- The Ohio Lottery Commission’s 2016 rule change created a $1.0 million non-cash progressive slot liability and reduced Scioto Downs gaming revenue by $1.0 million and operating income by $0.6 million.
- Management reported no impairment losses for goodwill, gaming licenses, or long-lived assets in 2016. The company stated that no known conditions raised substantial doubt about going concern and that it was in compliance with its debt covenants at December 31, 2016.
- The company expected the adoption of the new revenue standard in 2018 to materially affect presentation, particularly loyalty-program accounting and promotional allowances, but had not quantified the impact.
- ERI did not expect to pay cash dividends in the foreseeable future; debt agreements restrict dividend payments.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Eldorado Resorts, Inc., whereas the request identifies Caesars Entertainment, Inc.
- Reconcile reported 2016 results with and without the acquired Reno properties and distinguish GAAP results from management’s non-GAAP Adjusted EBITDA presentation.
- Assess the financing, closing conditions, regulatory approvals, final consideration, and post-closing leverage associated with the Isle of Capri acquisition.
- Review debt maturity schedules, interest-rate exposure, covenant thresholds, and available revolver capacity in light of the expected acquisition financing.
- Evaluate the sustainability of cash flow after maintenance capital expenditures, Reno enhancement spending, debt service, gaming taxes, and required racing-related commitments.
- Monitor Mountaineer performance following the smoking ban, competitive conditions in each regional market, and the potential impact of additional gaming capacity.
- Review the pending merger-related shareholder litigation, termination-fee provisions, and any subsequent regulatory, financing, or integration developments.
- Verify the eventual quantitative effects of revenue-recognition and lease-accounting changes, which were not clear from the filing.