Caesars Entertainment(CZR) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS This section presents the unaudited consolidated financial statements of Eldorado Resorts, Inc. for the periods ended September 30, 2019, and December 31, 2018, including balance sheets, statements of income, comprehensive income, stockholders' equity, and cash flows, along with condensed notes providing further details on accounting policies, acquisitions, debt, and other financial matters Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity as of September 30, 2019, and December 31, 2018 Consolidated Balance Sheet Highlights (dollars in thousands) | Metric | Sep 30, 2019 (unaudited) | Dec 31, 2018 | | :----- | :----------------------- | :----------- | | Total current assets | $963,539 | $573,196 | | Assets held for sale | $605,947 | $155,771 | | Property and equipment, net | $2,635,111 | $2,882,606 | | Right-of-use assets | $245,344 | $0 | | Total assets | $6,081,241 | $5,911,462 | | Total current liabilities | $414,971 | $402,177 | | Long-term debt, less current portion | $2,950,955 | $3,261,273 | | Long-term lease obligation | $229,297 | $0 | | Total liabilities | $4,954,463 | $4,882,309 | | Total stockholders' equity | $1,126,778 | $1,029,153 | Consolidated Statements of Income This section presents the company's financial performance, including net revenues, operating income, and net income for the three and nine months ended September 30, 2019 and 2018 Consolidated Statements of Income Highlights (dollars in thousands, except per share data) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net revenues | $663,181 | $487,253 | $1,936,125 | $1,384,247 | | Operating income | $124,907 | $91,769 | $351,061 | $223,377 | | Net income | $37,055 | $37,704 | $94,220 | $95,355 | | Basic EPS | $0.48 | $0.49 | $1.21 | $1.23 | | Diluted EPS | $0.47 | $0.48 | $1.20 | $1.22 | Consolidated Statements of Comprehensive Income This section details the company's comprehensive income, which for the reported periods mirrored net income due to the absence of other comprehensive income items - The company's comprehensive income for both the three and nine months ended September 30, 2019, mirrored its net income, as there were no other comprehensive income items recognized during these periods[16] Consolidated Statements of Stockholders' Equity This section outlines the changes in the company's stockholders' equity, including the impact of accounting principle changes, stock issuances, and net income, from December 31, 2018, to September 30, 2019 Changes in Stockholders' Equity (dollars in thousands) | Metric | December 31, 2018 | September 30, 2019 | | :----- | :---------------- | :----------------- | | Balance, Total | $1,029,153 | $1,126,778 | | Cumulative change in accounting principle, net of tax | -$4,744 | N/A | | Issuance of restricted stock units (9 months) | N/A | +$15,723 | | Net income (9 months) | N/A | +$94,220 | | Shares withheld related to net share settlement of stock awards (9 months) | N/A | -$7,574 | Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the nine months ended September 30, 2019 and 2018 Consolidated Statements of Cash Flows Highlights (Nine Months Ended September 30, dollars in thousands) | Activity | 2019 (unaudited) | 2018 (unaudited) | Change | | :------- | :--------------- | :--------------- | :----- | | Net cash provided by operating activities | $260,083 | $263,448 | -$3,365 | | Net cash provided by (used in) investing activities | $38,492 | -$395,134 | +$433,626 | | Net cash (used in) provided by financing activities | -$323,404 | $763,651 | -$1,087,055 | | (Decrease) Increase in cash, cash equivalents and restricted cash | -$24,829 | $631,965 | -$656,794 | | Cash, cash equivalents and restricted cash, end of period | $221,862 | $779,714 | -$557,852 | - Investing cash flow shifted from a significant outflow in 2018 to an inflow in 2019, primarily driven by $169.4 million in net proceeds from asset sales (Presque Isle Downs and Nemacolin) in 2019, compared to $306.3 million used in the Elgin Acquisition in 2018[23][323] - Financing cash flow saw a substantial decrease in cash provided, primarily due to $245 million of net payments under the Revolving Credit Facility and $70.0 million of payments under the Term Loan in 2019, contrasting with $600.0 million from senior notes issuance and $180.0 million from revolving credit facility borrowings in 2018[23][324] Condensed Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, covering accounting policies, acquisitions, debt, and other financial matters Note 1. Organization and Basis of Presentation This note outlines the company's corporate history, including key acquisitions and divestitures, its reportable segments, and the adoption of new accounting pronouncements, notably ASC 842 for leases - Significant acquisitions include Isle of Capri Casinos, Inc. (May 1, 2017), Elgin Riverboat Resort (August 7, 2018), and Tropicana Entertainment, Inc. (October 1, 2018)[27][28] - Divestitures completed in 2019 include Presque Isle Downs & Casino (January 11, 2019) and Lady Luck Casino Nemacolin (March 8, 2019)[29] - The company adopted ASC 842, Leases, on January 1, 2019, using a prospective approach, leading to the recognition of Right-of-Use (ROU) assets and lease liabilities on the balance sheet and a cumulative adjustment to retained earnings of $4.7 million, net of tax[40][41][42] Note 2. Leases This note provides detailed information on the company's lease accounting under ASC 842, including the classification of operating and finance leases, the recognition of ROU assets and liabilities, and a breakdown of lease expenses and cash flows Leases Recorded on the Balance Sheet (September 30, 2019, dollars in thousands) | Classification | Amount | | :------------- | :----- | | Operating lease ROU assets | $245,344 | | Finance lease ROU assets | $646,353 | | Short-term lease obligation (Current) | $21,963 | | Current portion of long-term debt (Finance) | $133 | | Long-term lease obligation (Noncurrent) | $229,297 | | Long-term financing obligation and debt (Noncurrent) | $968,138 | Weighted Averages (September 30, 2019) | Metric | Value | | :----- | :---- | | Remaining Lease Term (Operating leases) | 34.1 years | | Remaining Lease Term (Finance leases) | 34.0 years | | Discount Rate (Operating leases) | 7.2% | | Discount Rate (Finance leases) | 10.2% | Components of Lease Expense (Nine Months Ended September 30, 2019, dollars in thousands) | Component | Amount | | :-------- | :----- | | Operating lease cost | $22,729 | | Short-term and variable lease cost | $5,211 | | Interest expense on lease liabilities | $73,931 | | Amortization of ROU assets | $7,766 | | Total lease cost | $109,637 | Note 3. Revenue Recognition This note details the company's revenue recognition policies across its diverse operations, including casino, pari-mutuel commissions, hotel, food and beverage, and player loyalty programs, with a disaggregated view of net revenues by type and segment - Casino revenue is recognized as the net win from gaming activities, which is the difference between gaming wins and losses, net of certain cash and free play incentives[59] - Player loyalty program incentives are recorded as a reduction of casino revenues at their standalone selling price when earned and recognized as departmental revenue upon redemption[61] Net Revenues by Segment (Three Months Ended September 30, 2019, dollars in thousands) | Segment | Casino and Pari-Mutuel | Food and Beverage | Hotel | Other | Net Revenues | | :------ | :--------------------- | :---------------- | :---- | :---- | :----------- | | West | $62,081 | $32,897 | $41,352 | $15,088 | $151,418 | | Midwest | $84,249 | $5,570 | $4,240 | $1,807 | $95,866 | | South | $87,331 | $12,049 | $6,647 | $1,990 | $108,017 | | East | $129,244 | $16,280 | $33,039 | $7,999 | $186,562 | | Central | $95,095 | $11,639 | $9,040 | $3,636 | $119,410 | | Corporate and Other | $0 | $0 | $0 | $1,908 | $1,908 | | Total | $458,000 | $78,435 | $94,318 | $32,428 | $663,181 | Note 4. Purchase Price Accounting and Pro Forma Information This note details the final purchase price accounting for the Tropicana and Elgin acquisitions, including the allocation of consideration to identifiable assets and liabilities, resulting goodwill, and unaudited pro forma financial information - The Tropicana Acquisition (October 1, 2018) had a total purchase consideration of $927.3 million; the final allocation resulted in $211.2 million in goodwill and $248.0 million in intangible assets (gaming licenses, trade names, player loyalty programs)[71][72][74] - For the period from January 1 to September 30, 2019, Tropicana generated net revenues of $643.8 million and net income of $14.7 million[84] - The Elgin Acquisition (August 7, 2018) had a total purchase consideration of $328.8 million; the allocation resulted in $59.8 million in goodwill and $205.3 million in intangible assets (gaming license, trade names, player relationships)[88][89] - For the period from January 1 to September 30, 2019, Elgin generated net revenues of $115.7 million and net income of $17.4 million[97] Note 5. Assets Held for Sale This note identifies properties classified as assets held for sale as of September 30, 2019, detailing their associated assets and liabilities, and reviews completed divestitures including gains on sale - As of September 30, 2019, Lady Luck Casino Vicksburg and Isle of Capri Casino Kansas City are pending sale to Twin River Worldwide Holdings, Inc. for approximately $230 million[104] - The real property of Mountaineer, Cape Girardeau, and Caruthersville is pending sale to VICI Properties, Inc. for approximately $278 million, with equity interests to be sold to Century Casinos, Inc. for approximately $107 million[105] Assets and Liabilities Held for Sale (September 30, 2019, dollars in thousands) | Category | Amount | | :------- | :----- | | Total Assets Held for Sale | $605,947 | | Total Liabilities Related to Assets Held for Sale | $56,058 | - The sale of Presque Isle Downs closed on January 11, 2019, resulting in a gain on sale of $22.1 million; the sale of Nemacolin closed on March 8, 2019, resulting in a gain on sale of $0.1 million[113] Note 6. Stock-Based Compensation and Stockholders' Equity This note details the company's stock repurchase program, stock-based compensation expense, and a summary of restricted stock unit activity, highlighting significant increases in compensation expense - The company's Board of Directors authorized a $150 million common stock repurchase program in November 2018, but no shares were repurchased during the nine months ended September 30, 2019[117][118] Stock-Based Compensation Expense (dollars in thousands) | Period | 2019 | 2018 | | :----- | :--- | :--- | | Three months ended Sep 30 | $4,300 | $2,500 | | Nine months ended Sep 30 | $15,700 | $9,600 | - As of September 30, 2019, the company had $22.6 million of unrecognized compensation expense related to RSUs, expected to be recognized over a weighted-average period of 1.48 years[122] Note 7. Investments in and Advances to Unconsolidated Affiliates This note describes the company's equity method investments, including the Pompano Joint Venture and its 25-year agreement with William Hill, detailing ownership interests, shares received, and associated deferred revenue - The company holds a 50% variable interest in the Pompano Joint Venture, accounted for using the equity method, with an investment of $1.1 million as of September 30, 2019[123] - Under a 25-year agreement with William Hill (effective January 29, 2019), the company received a 20% ownership interest in William Hill US (initial fair value $128.9 million) and 13.4 million ordinary shares of William Hill PLC (fair value $27.1 million as of September 30, 2019)[125][126][127] - The company recorded deferred revenue associated with the William Hill US and William Hill PLC shares, recognizing $3.9 million for the nine months ended September 30, 2019, with a balance of $143.6 million as of that date[127] Note 8. Intangible Assets, net and Other Long-Term Assets This note provides a breakdown of the company's intangible assets, including goodwill, gaming licenses, trade names, and player loyalty programs, along with their useful lives and amortization schedules, and details other long-term assets Intangible Assets, Net (September 30, 2019, dollars in thousands) | Asset Type | Amount | Useful Life | | :--------- | :----- | :---------- | | Goodwill | $909,717 | Indefinite | | Gaming licenses | $893,271 | Indefinite | | Trade names | $165,479 | Indefinite | | Player loyalty programs | $97,035 | 3-4 years | | Total gaming licenses and other intangible assets, net | $1,118,855 | | Amortization Expense for Player Loyalty Programs (dollars in thousands) | Period | 2019 | 2018 | | :----- | :--- | :--- | | Three months ended Sep 30 | $7,600 | $2,400 | | Nine months ended Sep 30 | $22,800 | $5,100 | Other Assets, Net (September 30, 2019, dollars in thousands) | Asset Type | Amount | | :--------- | :----- | | CRDA bonds and deposits, net | $4,974 | | Restricted cash and investments | $36,761 | | William Hill PLC shares | $27,100 | | Total other assets, net | $78,879 | - An impairment charge of $1.0 million was recorded for non-operating real property for the nine months ended September 30, 2019[134] Note 9. Income Taxes This note details the company's income tax expense for the three and nine months ended September 30, 2019 and 2018, explaining factors contributing to the effective tax rate difference and confirming no unrecognized tax benefits Income Tax Expense (dollars in thousands) | Period | 2019 | 2018 | | :----- | :--- | :--- | | Three months ended Sep 30 | $18,069 | $19,980 | | Nine months ended Sep 30 | $38,892 | $31,281 | - For the three and nine months ended September 30, 2019, the effective tax rate difference was primarily due to excess tax benefits from stock compensation, state and local income taxes, and changes in the valuation allowance[139] - As of September 30, 2019, there were no unrecognized tax benefits, and no significant increase or decrease is expected within the next twelve months[140] Note 10. Long-Term Financing Obligation This note describes the company's Master Lease with GLPI, accounted for as a financing obligation, outlining lease terms, rent structure, and the schedule of future minimum lease payments - The Master Lease with GLPI is accounted for as a failed sale-leaseback financing obligation, with a value of $967.982 million as of September 30, 2019[142][150] - The lease has an initial term of fifteen years with options for up to four five-year renewal terms; the initial annual rent is approximately $87.6 million, subject to annual escalation[144][145][147] Future Minimum Payments Related to Master Lease Financing Obligation (September 30, 2019, dollars in thousands) | Year Ending December 31, | Amount | | :----------------------- | :----- | | 2019 (remaining) | $22,214 | | 2020 | $89,168 | | 2021 | $90,417 | | 2022 | $91,691 | | 2023 | $92,990 | | Thereafter | $3,506,672 | | Total future payments | $3,893,152 | Note 11. Long-Term Debt This note provides a comprehensive breakdown of the company's long-term debt, including various Senior Notes, the Term Loan, Revolving Credit Facility, and Lumière Loan, detailing outstanding balances, maturities, interest rates, and covenant compliance Long-Term Debt (dollars in thousands) | Debt Type | Sep 30, 2019 | Dec 31, 2018 | | :-------- | :----------- | :----------- | | Term Loan (net) | $871,782 | $938,324 | | 6% Senior Notes due 2026 (net) | $581,513 | $580,370 | | 6% Senior Notes due 2025 (net) | $879,479 | $880,086 | | 7% Senior Notes due 2023 (net) | $369,761 | $368,925 | | Revolving Credit Facility | $0 | $245,000 | | Lumière Loan | $246,000 | $246,000 | | Total long-term debt | $2,950,955 | $3,261,273 | - As of September 30, 2019, the company had $886.8 million outstanding on the Term Loan and no outstanding balance under the Revolving Credit Facility, with $483.7 million of available borrowing capacity[157] - Scheduled maturities of long-term debt include $246.2 million in 2020, $375.1 million in 2023, and $2.4 billion thereafter[155] - The company was in compliance with all covenants under its 7% Senior Notes due 2023, 6% Senior Notes due 2025, 6% Senior Notes due 2026, the Credit Facility, and the Lumière Loan as of September 30, 2019[166] Note 12. Fair Value Measurements This note explains the fair value hierarchy for financial instruments and summarizes assets measured at fair value on a recurring basis, detailing the company's investment in The Stars Group common shares and associated deferred revenue Assets Measured at Fair Value on a Recurring Basis (September 30, 2019, dollars in thousands) | Asset Type | Level 1 | Level 2 | Level 3 | Total | | :--------- | :------ | :------ | :------ | :---- | | Restricted cash and investments | $13,857 | $2,221 | $42,925 | $59,003 | | Marketable securities | $12,665 | $7,768 | $0 | $20,433 | - The company received 1.1 million TSG common shares, with a fair value of $15.8 million as of September 30, 2019, included in restricted cash and investments[175][176] - Deferred revenue associated with the TSG shares totaled $17.7 million as of September 30, 2019; the company also has an estimated obligation of $7.9 million to William Hill US for 50% of the proceeds from selling TSG shares[176] Note 13. Earnings per Share This note provides a reconciliation of the numerators and denominators for basic and diluted net income per share computations, illustrating the impact of dilutive securities for the three and nine months ended September 30, 2019 and 2018 Net Income Per Share of Common Stock | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Basic | $0.48 | $0.49 | $1.21 | $1.23 | | Diluted | $0.47 | $0.48 | $1.20 | $1.22 | - Weighted average diluted shares outstanding for the nine months ended September 30, 2019, were 78,588,517, reflecting the dilutive effect of stock options and RSUs[180] Note 14. Commitments and Contingencies This note outlines the company's involvement in various legal and administrative proceedings, including class action lawsuits related to the pending Caesars Merger and ongoing requirements for agreements with horsemen and pari-mutuel clerks - As of November 6, 2019, eight putative class action lawsuits have been filed challenging the adequacy of disclosures in the joint proxy statement/prospectus related to the Caesars Merger[182] - A securities class action complaint was filed on September 23, 2019, alleging violations of the Securities Exchange Act of 1934 due to alleged material misstatements/omissions and SEC subpoenas to directors and officers[184] - The company is required to maintain written agreements with horse owners, trainers, and pari-mutuel clerks in West Virginia and Ohio to operate simulcast races and slot machines, which are currently in place[185] Note 15. Related Affiliates This note identifies Recreational Enterprises, Inc. (REI) as a significant affiliate with substantial common stock ownership and executive representation, detailing a lease agreement with a partially REI-owned entity - Recreational Enterprises, Inc. (REI) owned approximately 14.4% of the company's outstanding common stock as of September 30, 2019, with its directors also serving as company executives, providing significant influence[186] - The company leases approximately 30,000 square feet of the Eldorado Reno property from C. S. & Y. Associates, an entity partially owned by REI, with an annual rent of $0.6 million and a lease expiring on June 30, 2057[187] Note 16. Segment Information This note provides detailed operating data for the company's five reportable segments and Corporate, including net operating revenues, depreciation, amortization, and operating income, highlighting the impact of acquisitions on performance - The company's operations are managed and reported across five geographic segments: West, Midwest, South, East, and Central, with a Corporate segment for unallocated items[189] Net Operating Revenues by Reportable Segment (Nine Months Ended September 30, 2019, dollars in thousands) | Segment | Net Operating Revenues | | :------ | :--------------------- | | West | $397,241 | | Midwest | $289,890 | | South | $357,669 | | East | $523,249 | | Central | $362,675 | | Corporate | $5,401 | | Total | $1,936,125 | Operating Income by Reportable Segment (Nine Months Ended September 30, 2019, dollars in thousands) | Segment | Operating Income | | :------ | :--------------- | | West | $66,772 | | Midwest | $87,066 | | South | $61,723 | | East | $107,715 | | Central | $80,896 | | Corporate | -$53,111 | | Total | $351,061 | - Total capital expenditures, net, for the nine months ended September 30, 2019, amounted to $135.0 million[192] Note 17. Consolidating Condensed Financial Information This note provides consolidating condensed financial statements for the parent company, guarantor, and non-guarantor subsidiaries, required due to certain subsidiaries fully and unconditionally guaranteeing the company's senior notes and credit facility - A comprehensive list of wholly-owned subsidiaries that serve as joint and several guarantors for the company's 7% Senior Notes due 2023, 6% Senior Notes due 2025, 6% Senior Notes due 2026, and Credit Facility is provided[194] Consolidated Financial Information (September 30, 2019, dollars in thousands) | Metric | Consolidated | | :----- | :----------- | | Total assets | $6,081,241 | | Total liabilities and stockholders' equity | $6,081,241 | | Net revenues (9 months) | $1,936,125 | | Net income (9 months) | $94,220 | | Net cash provided by operating activities (9 months) | $260,083 | | Net cash provided by investing activities (9 months) | $38,492 | | Net cash used in financing activities (9 months) | -$323,404 | Note 18. Pending Acquisitions This note details the pending merger with Caesars Entertainment Corporation, outlining the consideration structure, post-merger ownership, termination fees, associated debt financing commitments, and strategic real estate transactions with VICI Properties - The company entered into an Agreement and Plan of Merger with Caesars Entertainment Corporation on June 24, 2019, with the merger expected to be consummated in the first half of 2020[208][219] - Consideration for Caesars stockholders will include $8.40 in cash per share (plus a daily increment if closing is delayed past March 25, 2020) and 0.0899 shares of Eldorado common stock per Caesars share; post-merger, Eldorado stockholders will hold approximately 51% and former Caesars stockholders 49% of the combined company[208][210] - The merger agreement includes significant termination fees: Eldorado may pay Caesars $154.9 million or $836.8 million under certain circumstances, while Caesars may pay Eldorado $418.4 million[212] - Debt financing commitments include a $1.0 billion senior secured revolving credit facility, a $3.0 billion senior secured term loan B, a $3.6 billion senior secured 364-day bridge facility, and a $1.8 billion senior unsecured bridge loan facility for Eldorado, plus a $2.4 billion senior secured incremental term loan B facility for a Caesars subsidiary[214] - The company also entered into a Master Transaction Agreement with VICI Properties L.P. for sale and leaseback transactions of properties like Harrah's New Orleans, Harrah's Laughlin, and Harrah's Atlantic City, with proceeds intended to fund a portion of the merger cash consideration and transaction expenses[217][218] Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's perspective on the company's financial condition and results of operations for the three and nine months ended September 30, 2019, covering business overview, acquisitions, divestitures, key metrics, and liquidity Overview This section provides a high-level overview of Eldorado Resorts, Inc. as a geographically diversified gaming and hospitality company, detailing its facilities, primary revenue sources, and recent significant acquisitions and divestitures - Eldorado Resorts, Inc. is a geographically diversified gaming and hospitality company with 26 gaming facilities in 12 states as of September 30, 2019, featuring approximately 26,600 slot machines, 750 table games, and 11,800 hotel rooms[222] - The company's primary revenue source is gaming operations, supplemented by hotels, restaurants, bars, entertainment, racing, sportsbook offerings, and retail shops[222] - Recent significant acquisitions include Isle of Capri Casinos, Inc. (May 2017), Grand Victoria Casino (August 2018), and Tropicana Entertainment, Inc. (October 2018); recent divestitures include Presque Isle Downs & Casino (January 2019) and Lady Luck Casino Nemacolin (March 2019)[223] Acquisitions and Development Opportunities This section details the company's strategic growth initiatives, including pending mergers, partnerships, and recent acquisitions, outlining their financial implications and operational impacts Caesars Entertainment This section details the pending merger with Caesars Entertainment, including the cash and stock consideration, expected post-merger ownership, substantial termination fees, closing conditions, debt financing, and related real estate transactions - The company entered into a Merger Agreement with Caesars Entertainment Corporation on June 24, 2019, with the merger expected to close in the first half of 2020[227][237] - Consideration for Caesars stockholders includes $8.40 in cash per share (plus a daily increment if closing is delayed past March 25, 2020) and 0.0899 shares of Eldorado common stock per Caesars share; post-merger, Eldorado stockholders will hold approximately 51% and former Caesars stockholders 49% of the combined company[227] - Termination fees range from $154.9 million (ERI) to $836.8 million (ERI for regulatory/antitrust failure) or $418.4 million (Caesars)[229] - Debt financing commitments total $11.8 billion, including revolving credit, term loans, and bridge facilities, to fund the merger and refinance existing debt; additionally, a Master Transaction Agreement with VICI Properties involves sale and leaseback transactions for properties like Harrah's New Orleans, Harrah's Laughlin, and Harrah's Atlantic City to provide further funding[233][235] William Hill This section describes the 25-year agreement with William Hill, granting betting rights and providing the company with ownership interests in William Hill US and William Hill PLC shares, recognizing associated deferred revenues and profit shares - A 25-year agreement with William Hill, effective January 2019, grants William Hill rights to conduct betting activities in retail and online channels[238] - The company received a 20% ownership interest in William Hill US (valued at $128.9 million) and 13.4 million ordinary shares of William Hill PLC (valued at $27.3 million)[238] - Amortization of deferred revenues from these agreements totaled $1.3 million for the three months and $3.9 million for the nine months ended September 30, 2019[238] The Stars Group This section outlines the 20-year agreement with The Stars Group (TSG), providing TSG with options for online sports wagering and real money gaming, and detailing the TSG common shares received and associated deferred revenue - A 20-year agreement with The Stars Group (TSG) provides TSG with options to access the company's second and third skins for online sports wagering and real money gaming[240] - The company received 1.1 million TSG common shares (valued at $18.6 million) and expects an additional $5.0 million in shares upon TSG's first option exercise[240] - Deferred revenue recognized from the TSG agreement was $0.3 million for the three months and $0.9 million for the nine months ended September 30, 2019[240] Tropicana Entertainment Inc. This section details the October 1, 2018, acquisition of Tropicana Entertainment Inc. for $1.9 billion, explaining the concurrent real estate sale to GLPI, the company's acquisition of Lumière's real estate, and the subsequent triple net master lease - The company acquired Tropicana Entertainment Inc. on October 1, 2018, in a $1.9 billion cash transaction[241] - Concurrently, GLPI acquired most of Tropicana's real estate for $964 million, and the company acquired Lumière's real estate for $246 million using a loan from GLPI[241][243] - A triple net master lease was entered into with GLPI for the acquired Tropicana properties, with an initial annual rent of approximately $87.6 million, subject to annual escalation[242][243] Grand Victoria Casino This section summarizes the acquisition of Grand Victoria Casino in Elgin, Illinois, on August 7, 2018, for $328.8 million. The acquisition was financed using cash on hand and borrowings from the company's revolving credit facility - The Grand Victoria Casino in Elgin, Illinois, was acquired on August 7, 2018, for $328.8 million, including a working capital adjustment[245] - The acquisition was financed using existing cash and borrowings under the company's revolving credit facility[245] Pompano Joint Venture This section describes the joint venture with Cordish Companies, formed in April 2018, to develop a mixed-use entertainment and hospitality destination adjacent to the Pompano property. The company holds a 50% variable interest, accounted for using the equity method, and contributes land to the project - In April 2018, the company entered a joint venture with Cordish Companies to develop a mixed-use entertainment and hospitality destination at its Pompano property[246] - The company holds a 50% variable interest, accounted for using the equity method, and has agreed to contribute 130 to 200 acres of land to the joint venture[246] Divestitures This section outlines current and past divestiture activities, including pending sales of Lady Luck Casino Vicksburg and Isle of Capri Casino Kansas City to Twin River Worldwide Holdings, Inc., and the real property and equity interests of Mountaineer, Cape Girardeau, and Caruthersville to VICI Properties Inc. and Century Casinos, Inc., respectively. It also recaps the completed sales of Presque Isle Downs and Nemacolin - Lady Luck Casino Vicksburg and Isle of Capri Casino Kansas City are pending sale to Twin River Worldwide Holdings, Inc. for approximately $230 million, expected to close in early 2020[247][248] - The real property of Mountaineer, Cape Girardeau, and Caruthersville is pending sale to VICI Properties Inc. for approximately $278 million, with equity interests to be sold to Century Casinos, Inc. for approximately $107 million, also expected to close in early 2020[249][250] - The sales of Presque Isle Downs and Nemacolin were completed on January 11, 2019, and March 8, 2019, respectively; an impairment charge of $3.8 million was recorded in Q3 2018 for Nemacolin[256][257] Reportable Segments This section explains the aggregation of the company's operating segments into five reportable segments: West, Midwest, South, East, and Central, based on similar economic characteristics, customer types, services, regulatory environments, and management structure - The company's operating segments are aggregated into five reportable segments: West, Midwest, South, East, and Central, based on similar economic characteristics, customer types, services, regulatory environments, and management structure[258] Presentation of Financial Information This section clarifies that financial information for periods prior to the Elgin and Tropicana acquisitions and after the divestitures of Presque Isle Downs and Nemacolin are not fully comparable due to these significant transactions - Financial information for periods prior to the Elgin and Tropicana acquisitions (August 7, 2018, and October 1, 2018, respectively) and after the divestitures of Presque Isle Downs and Nemacolin (January 11, 2019, and March 8, 2019, respectively) are not fully comparable[259] Key Performance Metrics This section identifies the primary revenue sources and key performance indicators used to measure the company's operational success, including gaming metrics, hotel occupancy, and average daily rate - Primary revenue is from gaming operations, with hotels, restaurants, bars, entertainment, racing, sportsbook offerings, and retail shops used to attract customers[263] - Key performance metrics include table games drop, slot handle (amounts wagered), casino win/hold (volume retained), hotel occupancy, and average daily rate (ADR)[263] Significant Factors Impacting Financial Results This section discusses the major influences on the company's financial results, including the impact of acquisitions, the Master Lease, divestitures, synergy programs, capital expenditures, and negative impacts from severe weather and construction disruption - Financial results for the three and nine months ended September 30, 2019, were significantly impacted by the Elgin and Tropicana acquisitions, contributing incremental revenues and expenses[264] - The Master Lease with GLPI, effective October 1, 2018, resulted in $24.7 million and $73.8 million in interest expense for the three and nine months ended September 30, 2019, respectively[264] - Divestitures of Presque Isle Downs and Nemacolin in early 2019 led to a $22.1 million gain on sale for Presque Isle Downs and a $0.1 million gain for Nemacolin[264] - The company continued to execute synergy and cost savings programs across acquired properties, focusing on operating and cost efficiencies, and made property enhancement capital expenditures, including spa and room renovations[266] - Negative impacts included severe weather (flooding, hurricane/tropical storm activity) across segments and construction disruption at the Black Hawk property during renovations[267] Results of Operations This section provides a detailed analysis of the company's financial performance, comparing net revenues and operating expenses for the three and nine months ended September 30, 2019 and 2018, highlighting the impact of acquisitions and divestitures Consolidated Operating Results (dollars in thousands) | Metric | Three Months Ended Sep 30, 2019 | Three Months Ended Sep 30, 2018 | Nine Months Ended Sep 30, 2019 | Nine Months Ended Sep 30, 2018 | | :----- | :------------------------------ | :------------------------------ | :----------------------------- | :----------------------------- | | Net revenues | $663,181 | $487,253 | $1,936,125 | $1,384,247 | | Operating income | $124,907 | $91,769 | $351,061 | $223,377 | | Net income | $37,055 | $37,704 | $94,220 | $95,355 | - Net revenues increased by 36.1% for the three months and 39.9% for the nine months ended September 30, 2019, primarily due to incremental revenues from the Elgin and Tropicana acquisitions ($264.7 million and $759.5 million, respectively); excluding acquisitions and divestitures, net revenues decreased by 9.6% and 6.6% for the respective periods[268] - Operating income increased by 36.1% for the three months and 57.2% for the nine months ended September 30, 2019, mainly driven by the acquired Elgin and Tropicana properties; excluding acquisitions and divestitures, operating income decreased by 18.4% for the three months but increased by 1.3% for the nine months (due to a $22.2 million net gain on asset sales)[270] - Net income decreased slightly by 1.7% for the three months and 1.2% for the nine months ended September 30, 2019, primarily due to higher interest expense from increased debt and Master Lease amortization, and a higher income tax provision in 2019[271] Three Months Ended September 30, 2019 Compared to the Three Months Ended September 30, 2018 This section provides a detailed comparison of net revenues and operating expenses for the three months ended September 30, 2019, versus the same period in 2018, highlighting the significant impact of acquisitions on gaming and non-gaming revenues and expenses - Gaming revenues and pari-mutuel commissions increased by 24.4% (+$89.8 million), with Elgin and Tropicana contributing $171.2 million; excluding acquisitions/divestitures, gaming revenues decreased by 11.9% due to reduced promotional offers and severe weather[274][275][276] - Non-gaming revenues increased by 72.3% (+$86.1 million), with Elgin and Tropicana contributing $93.5 million; excluding acquisitions/divestitures, non-gaming revenues decreased by 3.0% due to changes in promotional activity and reduced restaurant offerings[277][278] - Total operating expenses increased by 32.3% (+$127.8 million); marketing and promotions expenses increased by 44.0%, but decreased by 25.7% excluding acquisitions/divestitures due to contract terminations and reduced direct mail costs[274][283][284] - General and administrative expenses increased by 62.4%, but decreased by 3.9% excluding acquisitions/divestitures, driven by centralization of services and consolidated purchasing programs[285][286] - Depreciation and amortization expense increased by 47.1%, but decreased by 27.0% excluding acquisitions/divestitures, mainly due to ceasing depreciation on assets held for sale[289][290] Nine Months Ended September 30, 2019 Compared to the Nine Months Ended September 30, 2018 This section provides a detailed comparison of net revenues and operating expenses for the nine months ended September 30, 2019, versus the same period in 2018, highlighting the substantial impact of acquisitions on overall growth and underlying declines in certain revenue and expense categories - Gaming revenues and pari-mutuel commissions increased by 30.7% (+$325.4 million), with Elgin and Tropicana contributing $512.4 million; excluding acquisitions/divestitures, gaming revenues decreased by 7.7% due to reduced promotional activity, construction disruption, and severe weather[293][294] - Non-gaming revenues increased by 69.9% (+$226.4 million), with Elgin and Tropicana contributing $247.1 million; excluding acquisitions/divestitures, non-gaming revenues decreased by 3.2% primarily due to changes in promotional activity, construction disruption, and weather in the West segment[295][296] - Total operating expenses increased by 37.0% (+$427.7 million); marketing and promotions expenses increased by 47.4%, but decreased by 24.7% excluding acquisitions/divestitures due to contract terminations and reduced direct mail costs[291][301][302] - General and administrative expenses increased by 61.1%, but decreased by 4.4% excluding acquisitions/divestitures, driven by centralization of services and consolidated purchasing programs[303][305] - Depreciation and amortization expense increased by 68.2%, but decreased by 6.8% excluding acquisitions/divestitures, mainly due to ceasing depreciation on assets held for sale[308][309] - Impairment charges for the nine months ended September 30, 2019, totaled $1.0 million related to non-operating real property, significantly lower than the $13.6 million in 2018 which included charges for Vicksburg and Nemacolin[307] Supplemental Unaudited Presentation of Consolidated Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") and Adjusted EBITDA This section presents Adjusted EBITDA as a non-GAAP financial measure to provide a supplemental understanding of the company's core operating results, excluding specific non-operating or non-cash items, along with detailed reconciliations - Adjusted EBITDA is presented as a non-GAAP financial measure to provide a supplemental understanding of the company's core operating results, excluding items like depreciation, amortization, stock-based compensation, transaction expenses, and impairment charges[310] Adjusted EBITDA Reconciliation (Three Months Ended September 30, 2019, dollars in thousands) | Metric | Operating Income (Loss) | Depreciation and Amortization | Stock-Based Compensation | Transaction Expenses | Other | Adjusted EBITDA | | :----- | :---------------------- | :---------------------------- | :----------------------- | :------------------- | :---- | :-------------- | | West | $35,358 | $13,934 | $0 | $0 | $191 | $49,483 | | Midwest | $30,221 | $4,515 | $4 | $0 | $953 | $35,693 | | South | $15,185 | $9,000 | $2 | $0 | $512 | $24,699 | | East | $45,341 | $11,630 | $0 | $0 | $220 | $57,191 | | Central | $25,793 | $11,627 | $0 | $0 | $21 | $37,441 | | Corporate and Other | -$26,991 | $1,886 | $4,260 | $12,442 | $1,684 | -$6,719 | | Total | $124,907 | $52,592 | $4,266 | $12,442 | $3,581 | $197,788 | Adjusted EBITDA Reconciliation (Nine Months Ended September 30, 2019, dollars in thousands) | Metric | Operating Income (Loss) | Depreciation and Amortization | Stock-Based Compensation | Transaction Expenses | Other | Adjusted EBITDA | | :----- | :---------------------- | :---------------------------- | :----------------------- | :------------------- | :---- | :-------------- | | West | $66,772 | $40,585 | $0 | $0 | $474 | $107,831 | | Midwest | $87,066 | $20,650 | $29 | $0 | $1,025 | $108,770 | | South | $61,723 | $29,865 | $11 | $0 | $880 | $92,479 | | East | $107,715 | $36,019 | $7 | $0 | $372 | $144,113 | | Central | $80,896 | $34,317 | $0 | $0 | $153 | $115,366 | | Corporate and Other | -$53,111 | $5,446 | $15,676 | $21,628 | -$15,097 | -$25,458 | | Total | $351,061 | $166,882 | $15,723 | $21,628 | -$12,193 | $543,101 | Liquidity and Capital Resources This section discusses the company's sources and uses of liquidity, including existing cash, operating cash flow, credit facilities, and proceeds from debt issuance and asset sales, outlining capital requirements and funding for the Caesars acquisition - Primary sources of liquidity include existing cash, cash flow from operations, borrowings under the revolving credit facility, proceeds from debt issuance, and proceeds from asset dispositions[317] - As of September 30, 2019, the company had $483.7 million of available borrowing capacity under its Revolving Credit Facility, with no outstanding balance[317] - Anticipated capital requirements include operations, taxes, debt servicing, Master Lease rent payments (initial $87.6 million annually), and funding the Caesars acquisition, which will be financed through debt, VICI sale-leaseback transactions, asset divestitures, and existing cash[318][319][320] - The company expects cash generated from operations to be sufficient to fund operations, capital requirements, and service outstanding indebtedness for the next twelve months[321] Operating Cash Flow This section details the company's cash flows provided by operating activities, noting a slight decrease for the nine months ended September 30, 2019, primarily due to cash tax payments related to the Tropicana Acquisition - For the nine months ended September 30, 2019, cash flows provided by operating activities totaled $260.1 million, a slight decrease from $263.4 million in the same prior year period, primarily due to cash tax payments related to the Tropicana Acquisition[322] Investing Cash Flow and Capital Expenditures This section analyzes the company's investing cash flows, highlighting a significant shift from an outflow in the prior year to an inflow in 2019, driven by net proceeds from asset sales partially offset by capital expenditures - Net cash flows provided by investing activities totaled $38.5 million for the nine months ended September 30, 2019, a significant shift from $395.1 million used in the prior year; this was driven by $169.4 million in net proceeds from asset sales (Presque Isle Downs and Nemacolin), partially offset by $135.0 million in capital expenditures[323] Financing Cash Flow This section details the company's financing cash flows, noting a substantial change from cash provided in the prior year to cash used in 2019, primarily due to net payments under the Revolving Credit Facility and Term Loan - Net cash used in financing activities for the nine months ended September 30, 2019, totaled $323.4 million, a substantial change from $763.7 million provided in the prior year; this was primarily due to $245 million of net payments under the Revolving Credit Facility and $70.0 million of payments under the Term Loan[324] Share Repurchase Program This section describes the company's authorized $150 million common stock repurchase program, noting that no shares were repurchased during the nine months ended September 30, 2019 - The company's Board of Directors authorized a $150 million common stock repurchase program in November 2018; no shares were repurchased under this program during the nine months ended September 30, 2019[325][326] Debt Obligations and Master Lease This section details the company's outstanding Term Loan and available Revolving Credit Facility capacity, confirms compliance with all debt and Master Lease covenants, and addresses the monitoring of LIBOR discontinuation - As of September 30, 2019, the company had $886.8 million outstanding on its Term Loan and $483.7 million of available borrowing capacity under its Revolving Credit Facility (with no outstanding balance)[330] - The company was in compliance with all covenants under its 7% Senior Notes due 2023, 6% Senior Notes due 2025, 6% Senior Notes due 2026, the Credit Facility, and the Lumière Loan as of September 30, 2019[339] - The Master Lease with GLPI, accounted for as a financing obligation, totaled $968.0 million as of September 30, 2019; the company was in compliance with all Master Lease covenants[340] - The company is monitoring the potential discontinuation of LIBOR after 2021, as its Credit Facility interest rates are tied to LIBOR[356] Contractual Obligations This section states that there have been no material changes to the company's contractual obligations for the nine months ended September 30, 2019, compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018 - There have been no material changes to the company's contractual obligations for the nine months ended September 30, 2019, as compared to those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018[341] Other Liquidity Matters This section addresses other factors impacting liquidity, including contingencies related to litigation and environmental remediation, and the potential material impact of new competition on revenues and liquidity - The company faces contingencies related to litigation and environmental remediation, and new competition could materially impact revenues and liquidity[342] Critical Accounting Policies This section states that no material changes to critical accounting policies have occurred since December 31, 2018, except for those described in Note 2 (Leases) to the consolidated financial statements - No material changes to critical accounting policies have occurred since December 31, 2018, except as described in Note 2 (Leases) to the consolidated financial statements[344] Off-Balance Sheet Arrangements This section confirms that the company does not currently have any off-balance sheet arrangements - The company does not currently have any off-balance sheet arrangements[345] Cautionary Statement Regarding Forward-Looking Information This section advises that the report contains forward-looking statements regarding strategies, future development, acquisitions, operating results, market trends, debt compliance, capital resources, and regulatory impacts, which are subject to known and unknown risks and uncertainties - This report contains forward-looking statements regarding strategies, future development, acquisitions, operating results, market trends, debt compliance, capital resources, and regulatory impacts, which are subject to known and unknown risks and uncertainties[346] - Key risks include substantial indebtedness, significant financial commitments (including Master Lease obligations), competitive environments, regulatory changes, ability to realize acquisition benefits, and risks associated with the pending Caesars acquisition[347][348][349][350][351] Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK This section discusses the company's exposure to market risk, primarily from variable interest rates on its long-term debt, detailing variable-rate borrowings, weighted average interest rates, and the monitoring of LIBOR discontinuation - The company is exposed to market risk primarily from variable interest rates on its long-term debt, with $886.8 million in variable-rate borrowings under the Term Loan as of September 30, 2019, representing approximately 30% of its long-term debt[354][355] - During the nine months ended September 30, 2019, the weighted average interest rates on variable and fixed rate debt were 4.3% and 6.5%, respectively[355] - No material quantitative changes in market risk exposure or management occurred for the three months ended September 30, 2019; the company does not use derivative financial instruments for trading purposes[358] - The company is monitoring the expected discontinuation of LIBOR after 2021 and its potential impact on Credit Facility interest rates[356] Item 4. CONTROLS AND PROCEDURES This section confirms that the company's Chief Executive Officer and Chief Financial Officer evaluated the effectiveness of its disclosure controls and procedures as of September 30, 2019, concluding they were effective. No material changes in internal control over financial reporting occurred during the three months ended September 30, 2019 - The Chief Executive Officer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of September 30, 2019[360] - No material changes in internal control over financial reporting occurred during the three months ended September 30, 2019[360] PART II. OTHER INFORMATION Item 1. LEGAL PROCEEDINGS This section details material pending litigation, including eight putative class action lawsuits challenging the pending Caesars Merger and a securities action alleging material misstatements and omissions. The company intends to vigorously defend against these claims and notes that estimated losses for normal course lawsuits are not material - As of November 6, 2019, eight putative class action lawsuits have been filed challenging the adequacy of disclosures in the joint proxy statement/prospectus related to the Caesars Merger[363] - A securities class action complaint was filed on September 23, 2019, alleging violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and SEC Rule 10b-5, related to alleged material misstatements/omissions and SEC subpoenas[364] - Estimated losses for lawsuits arising in the normal course of business are accrued when probable and estimable, and are not material to the company's consolidated financial condition or results of operations[365] Item 1A. RISK FACTORS This section updates the risk factors, primarily focusing on new and significant risks associated with the pending Caesars Merger. These include restrictions on business activities during the merger, potential delays or failure to consummate the merger, significant transaction costs and termination fees, challenges in integrating the two businesses, inability to realize anticipated synergies, increased debt levels, and substantial lease obligations post-merger - The Merger Agreement imposes restrictions on the company's business activities during the pendency of the Merger, potentially limiting its ability to pursue opportunities or respond to competitive pressures[368] - Delay or failure to consummate the Merger could increase the cash portion of the Merger Consideration, result in significant transaction costs, and trigger termination fees (e.g., $154.9 million or $836.8 million to Caesars, $75.0 million to VICI)[370] - The Merger is subject to governmental approvals (antitrust, gaming regulatory) which may be delayed, not received, or impose burdensome conditions, including divestitures, potentially impacting the combined company's operations[374][376][379][382] - The company faces risks in securing the necessary debt financing and consummating real estate transactions with VICI, which could require incurring additional debt or impact the merger's financial terms[384][385] - Post-merger, the combined company will have a substantial amount of debt and significant lease obligations, which could restrict cash flow for operations, capital expenditures, and dividends, and increase vulnerability to economic downturns[398][402][403] - Integrating Caesars' businesses presents significant challenges, with risks of business disruption, failure to realize anticipated synergies, and unanticipated costs that could adversely affect future earnings per share[394][395][396] Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section states that there were no unregistered sales of equity securities or use of proceeds to report for the period Item 3. DEFAULTS UPON SENIOR SECURITIES This section indicates that there were no defaults upon senior securities to report for the period Item 4. MINE SAFETY DISCLOSURES This section states that mine safety disclosures are not applicable to the company's operations Item 5. OTHER INFORMATION This section indicates that there is no other information to report for the period Item 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including various Purchase and Sale Agreements with VICI Properties L.P. related to property divestitures, Amendment No. 1 to the Agreement and Plan of Merger with Caesars Entertainment Corporation, and certifications by the Chief Executive Officer and Chief Financial Officer - Key exhibits include Purchase and Sale Agreements with VICI Properties L.P. for Harrah's New Orleans, Harrah's Resort Atlantic City, and Harrah's Laughlin Hotel and Casino, all dated September 26, 2019[414] - Amendment No. 1 to the Agreement and Plan of Merger with Caesars Entertainment Corporation, dated August 15, 2019, was also filed[414] - Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14a and 18 U.S.C. Section 1350 are included[414] SIGNATURES This section contains the official signatures for the Form 10-Q report, confirming its submission on behalf of Eldorado Resort