Filing Overview
Registrant: Eldorado Resorts, Inc. The request identifies Caesars Entertainment, Inc., but the supplied Form 10-Q is for Eldorado Resorts, Inc.; this identity mismatch should be verified. The filing covers the three months ended March 31, 2016, and was filed May 10, 2016. Results are unaudited and include the acquired Circus Reno and Silver Legacy operations for the 2016 quarter, making year-over-year comparisons only partially comparable.
Business Context and Reporting Period
Eldorado operated casino, hotel, racetrack and gaming properties in Nevada, Louisiana, West Virginia, Pennsylvania and Ohio. Reportable segments were Nevada, Louisiana and Eastern. The November 2015 acquisition of Circus Reno and the remaining interest in Silver Legacy materially expanded the Nevada segment.
Key Financial Metrics
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net operating revenues | $213.6 million | $167.5 million | 27.5% increase |
| Operating income | $18.3 million | $12.1 million | 51.1% increase |
| Net income (loss) | $3.4 million | $(6.2) million | Improved by $9.5 million |
| Basic diluted EPS | $0.07 | $(0.13) | Improved |
| Adjusted EBITDA | $38.3 million | $32.7 million | 17.3% increase |
| Operating margin | 8.6% | 7.2% | Improved |
| Net margin | 1.6% | (3.7)% | Improved |
| Cash flow from operations | $10.9 million | $(8.5) million | Improved by $19.4 million |
| Capital expenditures | $10.6 million | $7.5 million | Increased |
Gross revenue was $234.6 million, reduced by $21.0 million of promotional allowances. Casino revenue was $169.1 million, food and beverage revenue was $33.7 million, hotel revenue was $20.2 million and other revenue was $10.9 million.
At March 31, 2016, cash and cash equivalents were $44.1 million and restricted cash was $9.1 million. Total assets were $1.29 billion, total liabilities were $1.01 billion and stockholders’ equity was $275.0 million.
Debt and Liquidity
- Total long-term debt, including the current portion, was approximately $831.3 million at March 31, 2016, consisting primarily of $375.0 million of 7.0% senior notes due 2023, $421.8 million outstanding under the term loan and $59.0 million under the revolving facility, before related discounts and issuance costs.
- The company had $91.0 million of available borrowing capacity under its $150.0 million revolving credit facility.
- Variable-rate borrowings totaled $480.8 million, or approximately 56% of long-term debt, creating exposure to changes in LIBOR and other interest rates.
- Interest expense declined to $13.0 million from $17.2 million, primarily following the July 2015 refinancing. Management stated that the refinancing reduced annualized cash interest payments by approximately $35.0 million.
- Cash used in financing activities was $36.4 million, primarily reflecting net repayments under the revolving credit facility and term-loan amortization.
- Management expected approximately $39.4 million of net capital expenditures, $27.4 million of interest payments and $3.2 million of term-loan principal payments during the remainder of 2016. Management expected operating cash flow to fund operations, capital requirements and debt service, but provided no assurance.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by the Circus Reno/Silver Legacy acquisition and higher revenue at Scioto Downs and Presque Isle Downs.
- Nevada net revenue increased to $72.8 million from $23.8 million, while Nevada operating income improved to $5.6 million from a $0.02 million loss, primarily because the acquired properties were consolidated in 2016.
- Louisiana revenue declined slightly to $34.4 million, but operating income increased to $6.5 million from $5.2 million due to lower variable operating costs.
- Eastern revenue decreased to $106.4 million from $109.1 million, but operating income increased to $13.7 million from $11.2 million due to cost savings and lower expenses.
- Mountaineer was adversely affected by the West Virginia smoking ban, which management expected to continue affecting results materially during the first half of 2016.
- Corporate expense increased to $6.9 million from $4.2 million, including $1.4 million of severance and $0.5 million of additional stock-based compensation related to accelerated vesting.
- The company early adopted ASU 2016-09 and recognized a $0.4 million reduction in income tax expense from excess tax benefits.
Guidance, Outlook, Risks and Unusual Items
- Planned 2016 projects included a new Brew Brothers venue at Presque Isle Downs, a second smoking patio and additional video lottery terminals at Scioto Downs, a 118-room Hampton Inn expected to open in the fourth quarter, and renovations at Eldorado Shreveport.
- An Ohio regulatory change created a $1.0 million progressive slot liability and reduced Scioto Downs net slot win; the impact was non-cash and reduced operating income by approximately $0.6 million.
- The acquisition accounting remained preliminary, with final valuation, tax implications, working-capital adjustments and purchase-price allocation still subject to completion.
- Management identified substantial indebtedness, debt covenants, competition, regulatory requirements, consumer discretionary spending, interest rates, integration of the acquired properties and loss of gaming licenses as significant risks.
- The company estimated a $4.1 million obligation for Pennsylvania gaming regulatory assessments and an additional future General Fund-related obligation of approximately $2.0 million to $2.1 million. The timing of the General Fund payments was uncertain.
- Environmental remediation obligations related to the former International Paper site remained outstanding; the company maintained a $10.0 million environmental insurance policy and believed coverage exceeded its exposure.
- Routine litigation losses were described as immaterial. The Ohio gaming referendum challenge was concluded as to the racetrack defendants, although one plaintiff was permitted to continue an equal-protection claim against casinos.
- The company reported compliance with its Senior Notes and New Credit Facility covenants and stated that disclosure controls were effective. No material changes to risk factors or internal controls were reported.
Investor Verification Checklist
- Verify whether the intended filing is Eldorado Resorts, Inc. or Caesars Entertainment, Inc.
- Separate acquisition-driven revenue and EBITDA growth from organic performance using the company’s pro forma and segment disclosures.
- Monitor Mountaineer results and the continuing effects of the West Virginia smoking ban.
- Reconcile reported cash of $44.1 million with restricted cash of $9.1 million and assess liquidity against scheduled interest, capital spending and debt amortization.
- Review leverage and interest-coverage covenant calculations, particularly given $480.8 million of variable-rate debt.
- Track completion of the preliminary purchase-price allocation and any resulting changes to goodwill, intangible assets, depreciation or taxes.
- Assess the effect of competitive expansion, gaming regulation, Pennsylvania assessments and other contingent obligations on future cash flow.