Eldorado Resorts, Inc. — Form 10-Q Summary
Business context and reporting period
The provided filing is for Eldorado Resorts, Inc., not Caesars Entertainment, Inc. It covers the three and six months ended June 30, 2015. Eldorado operates casino, racetrack, hotel and pari-mutuel properties in Nevada, Louisiana, West Virginia, Pennsylvania and Ohio. The September 2014 merger with MTR Gaming materially expanded the company; therefore, 2014 consolidated comparisons are not fully comparable because MTR Gaming was not included before the merger date.
Key financial metrics
| Metric | Three months ended June 30, 2015 | Three months ended June 30, 2014 | Six months ended June 30, 2015 | Six months ended June 30, 2014 |
|---|---|---|---|---|
| Net operating revenues | $182.6 million | $61.7 million | $350.1 million | $118.8 million |
| Operating income | $23.1 million | $6.8 million | $35.1 million | $8.3 million |
| Operating margin | 12.6% | 11.0% | 10.0% | 7.0% |
| Net income (loss) | $4.8 million | $2.9 million | $(1.4) million | $0.6 million |
| Diluted EPS | $0.10 | $0.12 | $(0.03) | $0.02 |
| Adjusted EBITDA | $36.4 million | $35.4 million | $64.1 million | $63.9 million |
Casino revenue was $156.8 million in the second quarter and $304.5 million year to date. MTR Gaming contributed $120.8 million and $229.9 million of net operating revenue, respectively, in those periods. Promotional allowances were 10.0% of casino revenue in the quarter and 10.2% year to date, down from 22.8% and 22.7% in the comparable 2014 periods.
Six-month cash flow from operations was $19.2 million, compared with $6.8 million in 2014. Capital expenditures were $17.9 million, compared with $1.9 million in 2014, producing cash flow before financing of approximately $1.1 million. Cash and cash equivalents were $88.6 million at June 30, 2015, excluding $9.6 million of restricted cash.
Long-term debt was $773.4 million at June 30, 2015, consisting primarily of $168.0 million of Resorts Senior Secured Notes and $605.4 million of MTR Second Lien Notes, including an unamortized premium. Scheduled maturities were approximately $728.7 million in 2019. The company reported compliance with debt covenants at quarter-end. Interest expense was $17.2 million in the quarter and $34.5 million year to date.
Material changes versus the prior comparable period
- Reported revenue increased 195.8% in the quarter and 194.7% year to date, primarily because MTR Gaming was included after the September 2014 merger.
- On a comparable basis excluding incremental MTR Gaming revenue, net operating revenue increased approximately $0.1 million in the quarter and 1.2% year to date.
- Quarterly operating income increased to $23.1 million, while operating margin improved to 12.6% from 11.0%, reflecting improved property margins and lower acquisition charges.
- Year-to-date net income declined to a $1.4 million loss, primarily because the company became a taxable C corporation after the merger and recorded $2.0 million of income tax expense. The company expects continuing non-cash deferred tax expense related to tax amortization of indefinite-lived gaming licenses.
- Eldorado Shreveport revenue and operating income improved, while Eldorado Reno experienced lower revenue and hotel occupancy, partly because of fewer bowlers in the Reno market. MTR Gaming Adjusted EBITDA declined to $48.8 million from $51.0 million year to date.
Outlook, transactions, risks and unusual items
- Management expected operating cash flow to fund operations, maintenance capital expenditures and debt service for the foreseeable future, but stated that it could not assure sufficient cash flow.
- The company planned approximately $10.0 million of additional qualified capital expenditures for the remainder of 2015, net of anticipated West Virginia reimbursements.
- On July 7, 2015, the company agreed to acquire Circus Circus Reno and the remaining 50% interest in the Silver Legacy Joint Venture for proposed consideration of $72.5 million, subject to adjustments, plus assumption of approximately $82.0 million of Silver Legacy debt. Closing was expected by year-end 2015, subject to regulatory and other conditions.
- On July 23, 2015, the company issued $375.0 million of 7.0% senior notes due 2023, entered into a $425.0 million term loan and a $150.0 million revolving facility, and borrowed $40.0 million under the revolver. These transactions were used to refinance the existing debt and support the proposed acquisition.
- The new debt agreements impose leverage and interest-coverage tests, including a maximum total leverage ratio of 6.75 to 1.00 through December 31, 2015 and a minimum interest coverage ratio of 2.50 to 1.00 during that period.
- The company filed for an equity offering of up to $80.0 million, expecting approximately $60.0 million of net proceeds, primarily to fund the proposed acquisition and related debt repayment. A $3.0 million acquisition escrow could be forfeited if the transaction fails to close for reasons other than seller breach.
- Key risks include substantial indebtedness, refinancing and covenant compliance, regulatory approvals, integration of MTR Gaming and proposed acquisitions, intense regional and Native American gaming competition, discretionary consumer spending, gaming regulation, weather, and the July 1, 2015 smoking ban at Mountaineer.
- Material litigation losses were not expected. The company had an environmental remediation matter backed by a $10.0 million insurance policy expiring in October 2015 and an estimated Pennsylvania gaming assessment obligation of $4.7 million at June 30, 2015.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is Eldorado Resorts, Inc., while the request metadata names Caesars Entertainment, Inc.
- Reconcile reported growth with the September 2014 MTR Gaming acquisition and use pro forma or segment information for meaningful comparisons.
- Verify the July 2015 refinancing, debt balances, interest costs, leverage ratios and covenant headroom after the quarter-end transactions.
- Track regulatory approval and closing status of the Circus Circus Reno/Silver Legacy acquisition, including the $50.0 million escrow and potential mandatory redemption provisions.
- Assess liquidity after capital expenditures, acquisition funding, the equity offering and the $40.0 million revolver draw.
- Evaluate the effect of new taxes, non-cash deferred tax expense, competition, Mountaineer’s smoking ban and Reno occupancy trends on future earnings and cash flow.