Filing Scope and Business Context
Important identity note: The provided filing is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc. It is an unaudited Form 10-Q for the quarter and nine months ended September 30, 2014, filed November 14, 2014.
The company operates Eldorado Reno, Eldorado Shreveport, and, following the September 19, 2014 merger, MTR Gaming properties in West Virginia, Pennsylvania, and Ohio. The merger was accounted for as a reverse acquisition, with HoldCo treated as the accounting acquirer. Pre-merger periods primarily reflect Resorts; MTR Gaming results are included only from the merger date onward.
Financial Results and Key Metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net operating revenues | $78.9 million, up 24.1% | $197.7 million, up 3.2% |
| Operating income | $2.8 million, down 60.8% | $11.1 million, down 53.0% |
| Net income (loss) | $(4.1) million versus $3.2 million | $(3.5) million versus $11.8 million |
| Basic and diluted EPS | $(0.16) versus $0.14 | $(0.14) versus $0.51 |
| Operating margin | 3.5% versus 11.1% | 5.6% versus 12.3% |
| Cash flow from operating activities | Not separately provided | $18.5 million versus $26.8 million |
Reported net revenues benefited from $16.3 million of MTR Gaming revenue recorded after the merger. Excluding this incremental contribution, net operating revenues declined 1.6% in the third quarter and 5.3% for the nine-month period. Reported operating expenses rose 27.3% in the quarter and 7.5% year to date, while acquisition charges increased to $4.5 million and $6.9 million, respectively.
Pro forma results, assuming the merger occurred January 1, 2013, show revenue of $191.1 million for the third quarter and $549.6 million for the nine months, compared with $192.5 million and $574.6 million, respectively, in the prior-year periods. Pro forma adjusted EBITDA was $32.6 million for the quarter and $95.9 million year to date, versus $35.9 million and $112.3 million.
Balance Sheet, Debt, Liquidity, and Cash Flow
- Cash and cash equivalents were $91.1 million at September 30, 2014, compared with $29.8 million at December 31, 2013. Total restricted cash was $6.5 million.
- Total assets increased to $1.17 billion from $270.2 million, primarily because of the merger and the recognition of acquired property, gaming licenses, goodwill, and other intangible assets.
- Long-term debt was $792.5 million, compared with $168.0 million at year-end 2013. Debt consisted primarily of $168.0 million of 8.625% Resorts Senior Secured Notes and $570.7 million principal amount of MTR Second Lien Notes, with a $53.8 million unamortized premium.
- Scheduled debt maturities were $738.7 million in 2019. The company reported compliance with applicable debt covenants at September 30, 2014.
- The MTR revolving credit facility had $20.0 million of availability and no borrowings outstanding. The Resorts credit facility matured May 30, 2014 and was not renewed.
- Investing activities provided $51.0 million, principally from $55.5 million of cash, including restricted cash, acquired in the merger. Capital expenditures were $4.6 million.
- Financing activities used $8.2 million, including $2.5 million of debt repayments, $5.0 million of stock repurchases, and $0.6 million of distributions.
- Management stated that cash balances, operating cash flow, credit availability, and potential non-core asset sales were expected to fund liquidity needs for the next twelve months, while noting that additional financing may be required if conditions change.
Material Changes Versus Prior Comparable Period
- The September 19, 2014 merger added MTR Gaming and materially expanded the balance sheet, revenue base, debt burden, and asset portfolio.
- Third-quarter consolidated revenue increased because of the partial-period MTR contribution, but legacy Eldorado revenue declined excluding MTR.
- Eldorado Reno revenue and adjusted EBITDA declined, reflecting lower slot handle, table-games credit drop, hotel occupancy, ADR, and entertainment attendance.
- Eldorado Shreveport revenue increased slightly in the quarter but declined year to date, with management citing new competition in the Shreveport/Bossier City market.
- Higher general and administrative costs, merger-related executive bonuses, acquisition charges, interest expense, and the new corporate income-tax provision drove the decline in earnings.
- The company became a C corporation in connection with the merger and recorded $1.2 million of income-tax expense for the quarter and nine months, compared with no tax expense in 2013 when it was taxed as a partnership.
- In October 2014, MTR repurchased $10.0 million principal amount of second-lien notes. Management estimated annual interest savings of approximately $1.2 million.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal revenue, earnings, or EBITDA guidance. Management expected continued pressure from weak discretionary spending, regional gaming competition, Native American gaming expansion, economic uncertainty, and severe weather. Management also planned approximately $8.0 million of additional capital expenditures for the remainder of 2014, excluding a potential $3.0 million Scioto Downs development allocation.
- A West Virginia regulation effective July 1, 2015 was expected to ban smoking in public places, including Mountaineer; management stated that the change could materially affect the property’s operations.
- The company is highly leveraged, with substantial debt service and refinancing risk, and debt agreements restrict distributions among subsidiaries and the parent company.
- Regulatory gaming assessments related to Pennsylvania infrastructure were estimated at $5.1 million at September 30, 2014; approximately $0.3 million was paid during the nine months.
- Environmental remediation exposure related to the International Paper site is supported by a $10.0 million insurance policy expiring in October 2015. Management believed the coverage exceeded its potential exposure.
- Three merger-related stockholder lawsuits were pending in Delaware, although plaintiffs had separately moved to voluntarily dismiss their claims. Other ordinary-course litigation was not considered material.
- The company’s 48.1% Silver Legacy interest generated $2.3 million of equity income during the nine months. The related subordinated loan and $5.0 million collateral deposit remain subject to restrictions and senior debt terms.
- Goodwill of $104.7 million and merger-related intangible assets were based on preliminary purchase accounting and remained subject to measurement-period adjustments.
Investor Verification Priorities
- Confirm that the intended issuer is Eldorado Resorts, Inc., rather than Caesars Entertainment, Inc.
- Reconcile reported results with pro forma results because MTR Gaming was consolidated only from September 19, 2014.
- Verify the final purchase-price allocation, including the $104.7 million goodwill balance and $436.6 million of acquired intangible assets.
- Assess debt maturity and refinancing risk associated with approximately $738.7 million of scheduled 2019 maturities, interest rates, premiums, and covenant requirements.
- Evaluate whether operating cash flow and subsidiary-level cash restrictions are sufficient to support debt service and planned capital spending.
- Monitor the Mountaineer smoking ban, Pennsylvania regulatory assessments, environmental obligations, litigation outcomes, and competitive developments.
- Review the company’s non-GAAP adjusted EBITDA definition and reconcile it to GAAP results before using it for valuation or leverage analysis.