Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

eri-10q_20180630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period                 to                 

Commission File No. 001‑36629

ELDORADO RESORTS, INC.

(Exact name of registrant as specified in its charter)

 

Nevada

46‑3657681

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

100 West Liberty Street, Suite 1150, Reno, Nevada 89501

(Address and zip code of principal executive offices)

(775) 328‑0100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S‑T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non‑accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b‑2 of the Exchange Act.

 

Large accelerated filer

 

Accelerated filer

Non‑accelerated filer

(Do not check if a smaller reporting company)

Smaller reporting company

Emerging growth company

 

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b‑2 of the Exchange Act).    Yes  ☐    No  ☒

The number of shares of the Registrant’s Common Stock, $0.00001 par value per share, outstanding as of August 3, 2018 was 77,337,667.

 

 

 

 


 

ELDORADO RESORTS, INC.

QUARTERLY REPORT FOR THE THREE AND SIX MONTHS ENDED

June 30, 2018

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

2

Item 1.

FINANCIAL STATEMENTS

 

2

 

Consolidated Balance Sheets at June 30, 2018 (unaudited) and December 31, 2017

 

2

 

Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

 

3

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Six Months Ended June 30, 2018 and 2017 (unaudited)

 

4

 

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (unaudited)

 

5

 

Condensed Notes to Unaudited Consolidated Financial Statements

 

6

Item 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

33

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

50

Item 4.

CONTROLS AND PROCEDURES

 

51

PART II. OTHER INFORMATION

 

52

Item 1.

LEGAL PROCEEDINGS

 

52

Item 1A.

RISK FACTORS

 

52

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

55

Item 3.

DEFAULTS UPON SENIOR SECURITIES

 

55

Item 4.

MINE SAFETY DISCLOSURES

 

55

Item 5.

OTHER INFORMATION

 

55

Item 6.

EXHIBITS

 

56

SIGNATURES

 

57

 

1


 

PART I-FINANCIAL INFORMATION

Item 1.  Financial Statements.

ELDORADO RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

June 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

(unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

202,016

 

 

$

 

134,596

 

Restricted cash

 

 

 

4,683

 

 

 

 

3,267

 

Marketable securities

 

 

 

17,066

 

 

 

 

17,631

 

Accounts receivable, net

 

 

 

34,808

 

 

 

 

45,797

 

Due from affiliates

 

 

 

125

 

 

 

 

243

 

Inventories

 

 

 

14,847

 

 

 

 

16,870

 

Prepaid income taxes

 

 

 

187

 

 

 

 

4,805

 

Prepaid expenses and other

 

 

 

30,469

 

 

 

 

27,823

 

Assets held for sale

 

 

 

201,202

 

 

 

 

 

Total current assets

 

 

 

505,403

 

 

 

 

251,032

 

Property and equipment, net

 

 

 

1,400,088

 

 

 

 

1,502,817

 

Gaming licenses and other intangibles, net

 

 

 

915,936

 

 

 

 

996,816

 

Goodwill

 

 

 

719,254

 

 

 

 

747,106

 

Non-operating real property

 

 

 

14,030

 

 

 

 

18,069

 

Other assets, net

 

 

 

45,035

 

 

 

 

30,632

 

Total assets

 

$

 

3,599,746

 

 

$

 

3,546,472

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

486

 

 

$

 

615

 

Accounts payable

 

 

 

28,949

 

 

 

 

34,778

 

Due to affiliates

 

 

 

20

 

 

 

 

 

Accrued property, gaming and other taxes

 

 

 

35,133

 

 

 

 

43,212

 

Accrued payroll and related

 

 

 

50,936

 

 

 

 

53,330

 

Accrued interest

 

 

 

26,788

 

 

 

 

25,607

 

Income taxes payable

 

 

 

222

 

 

 

 

171

 

Accrued other liabilities

 

 

 

69,341

 

 

 

 

66,037

 

Liabilities related to assets held for sale

 

 

 

5,817

 

 

 

 

 

Total current liabilities

 

 

 

217,692

 

 

 

 

223,750

 

Long-term debt, less current portion

 

 

 

2,190,749

 

 

 

 

2,189,578

 

Deferred income taxes

 

 

 

176,607

 

 

 

 

162,967

 

Other long-term liabilities

 

 

 

17,975

 

 

 

 

28,579

 

Total liabilities

 

 

 

2,603,023

 

 

 

 

2,604,874

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

Common stock, 200,000,000 and 100,000,000 shares authorized, 77,326,124

  and 76,825,966 issued and outstanding, par value $0.00001 as of June 30, 2018

  and December 31, 2017, respectively

 

 

 

1

 

 

 

 

 

Paid-in capital

 

 

 

744,020

 

 

 

 

746,547

 

Retained earnings

 

 

 

252,623

 

 

 

 

194,972

 

Accumulated other comprehensive income

 

 

 

79

 

 

 

 

79

 

Total stockholders’ equity

 

 

 

996,723

 

 

 

 

941,598

 

Total liabilities and stockholders’ equity

 

$

 

3,599,746

 

 

$

 

3,546,472

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

2


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(dollars in thousands, except per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

 

343,675

 

 

$

 

275,593

 

 

$

 

683,133

 

 

$

 

417,147

 

Pari-mutuel commissions

 

 

 

5,045

 

 

 

 

4,112

 

 

 

 

9,115

 

 

 

 

4,748

 

Food and beverage

 

 

 

54,293

 

 

 

 

49,709

 

 

 

 

106,491

 

 

 

 

82,130

 

Hotel

 

 

 

38,926

 

 

 

 

34,278

 

 

 

 

69,667

 

 

 

 

53,583

 

Other

 

 

 

14,863

 

 

 

 

11,934

 

 

 

 

28,588

 

 

 

 

20,411

 

Net revenues

 

 

 

456,802

 

 

 

 

375,626

 

 

 

 

896,994

 

 

 

 

578,019

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

 

165,353

 

 

 

 

139,707

 

 

 

 

331,203

 

 

 

 

219,688

 

Pari-mutuel commissions

 

 

 

4,592

 

 

 

 

4,030

 

 

 

 

8,293

 

 

 

 

5,237

 

Food and beverage

 

 

 

44,770

 

 

 

 

42,803

 

 

 

 

89,546

 

 

 

 

68,821

 

Hotel

 

 

 

13,695

 

 

 

 

12,270

 

 

 

 

26,201

 

 

 

 

21,349

 

Other

 

 

 

8,310

 

 

 

 

6,901

 

 

 

 

15,715

 

 

 

 

13,070

 

Marketing and promotions

 

 

 

21,832

 

 

 

 

21,531

 

 

 

 

43,133

 

 

 

 

31,660

 

General and administrative

 

 

 

73,745

 

 

 

 

60,887

 

 

 

 

147,947

 

 

 

 

92,687

 

Corporate

 

 

 

12,232

 

 

 

 

7,442

 

 

 

 

23,801

 

 

 

 

14,016

 

Impairment charges

 

 

 

 

 

 

 

 

 

 

 

9,815

 

 

 

 

 

Depreciation and amortization

 

 

 

31,910

 

 

 

 

24,909

 

 

 

 

63,444

 

 

 

 

40,513

 

Total operating expenses

 

 

 

376,439

 

 

 

 

320,480

 

 

 

 

759,098

 

 

 

 

507,041

 

Gain (loss) on sale or disposal of property and equipment

 

 

 

423

 

 

 

 

(89

)

 

 

 

(283

)

 

 

 

(57

)

Transaction expenses

 

 

 

(3,404

)

 

 

 

(85,464

)

 

 

 

(5,952

)

 

 

 

(87,078

)

Equity in income (loss) of unconsolidated affiliates

 

 

 

32

 

 

 

 

(60

)

 

 

 

(53

)

 

 

 

(282

)

Operating income (loss)

 

 

 

77,414

 

 

 

 

(30,467

)

 

 

 

131,608

 

 

 

 

(16,439

)

OTHER INCOME (EXPENSE):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

(31,405

)

 

 

 

(27,527

)

 

 

 

(62,494

)

 

 

 

(40,197

)

Loss on early retirement of debt, net

 

 

 

 

 

 

 

(27,317

)

 

 

 

(162

)

 

 

 

(27,317

)

Total other expense

 

 

 

(31,405

)

 

 

 

(54,844

)

 

 

 

(62,656

)

 

 

 

(67,514

)

Net income (loss) before income taxes

 

 

 

46,009

 

 

 

 

(85,311

)

 

 

 

68,952

 

 

 

 

(83,953

)

(Provision) benefit for income taxes

 

 

 

(9,213

)

 

 

 

39,121

 

 

 

 

(11,301

)

 

 

 

38,708

 

Net income (loss)

 

$

 

36,796

 

 

$

 

(46,190

)

 

$

 

57,651

 

 

$

 

(45,245

)

Net income (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

0.48

 

 

$

 

(0.68

)

 

$

 

0.74

 

 

$

 

(0.79

)

Diluted

 

$

 

0.47

 

 

$

 

(0.68

)

 

$

 

0.74

 

 

$

 

(0.79

)

Weighted average basic shares outstanding

 

 

 

77,458,584

 

 

 

 

67,453,095

 

 

 

 

77,406,447

 

 

 

 

57,405,834

 

Weighted average diluted shares outstanding

 

 

 

78,258,629

 

 

 

 

67,453,095

 

 

 

 

78,169,629

 

 

 

 

57,405,834

 

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

3


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(dollars in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

 

36,796

 

 

$

 

(46,190

)

 

$

 

57,651

 

 

$

 

(45,245

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss), net of tax

 

$

 

36,796

 

 

$

 

(46,190

)

 

$

 

57,651

 

 

$

 

(45,245

)

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

4


 

ELDORADO RESORTS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(dollars in thousands)

(unaudited)

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

 

57,651

 

 

$

 

(45,245

)

Adjustments to reconcile net income (loss) to net cash provided by operating

   activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

63,444

 

 

 

 

40,513

 

Amortization of deferred financing costs, discount and debt premium

 

 

 

2,533

 

 

 

 

3,034

 

Loss on early retirement of debt

 

 

 

162

 

 

 

 

27,317

 

Stock compensation expense

 

 

 

7,151

 

 

 

 

3,062

 

Impairment charges

 

 

 

9,815

 

 

 

 

 

Provision (benefit) for deferred income taxes

 

 

 

10,461

 

 

 

 

(38,072

)

Other

 

 

 

1,212

 

 

 

 

1,132

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Sale of trading securities

 

 

 

565

 

 

 

 

295

 

Accounts receivable

 

 

 

7,507

 

 

 

 

4,037

 

Inventory

 

 

 

198

 

 

 

 

(630

)

Prepaid expenses and other assets

 

 

 

(1,722

)

 

 

 

(4,415

)

Accounts payable and accrued liabilities

 

 

 

(10,473

)

 

 

 

12,015

 

Net cash provided by operating activities

 

 

 

148,504

 

 

 

 

3,043

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment, net

 

 

 

(55,181

)

 

 

 

(29,824

)

Proceeds from sale of property and equipment

 

 

 

840

 

 

 

 

 

Net cash used in business combinations

 

 

 

 

 

 

 

(1,313,051

)

Escrow deposit

 

 

 

(15,000

)

 

 

 

 

Net cash used in investing activities

 

 

 

(69,341

)

 

 

 

(1,342,875

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of Term Loan

 

 

 

 

 

 

 

1,450,000

 

Proceeds from issuance of 6% Senior Notes

 

 

 

 

 

 

 

375,000

 

Borrowings under Revolving Credit Facility

 

 

 

 

 

 

 

189,953

 

Payments under Term Loan

 

 

 

 

 

 

 

(422,250

)

Payments under Revolving Credit Facility

 

 

 

 

 

 

 

(128,953

)

Debt issuance costs

 

 

 

(305

)

 

 

 

(44,992

)

Taxes paid related to net share settlement of equity awards

 

 

 

(9,677

)

 

 

 

(8,993

)

Proceeds from exercise of stock options

 

 

 

 

 

 

 

2,898

 

Payments on other long-term payables

 

 

 

(344

)

 

 

 

(210

)

Net cash (used in) provided by financing activities

 

 

 

(10,326

)

 

 

 

1,412,453

 

 

 

 

 

 

 

 

 

 

 

 

Increase in cash, cash equivalents and restricted cash

 

 

 

68,837

 

 

 

 

72,621

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

 

147,749

 

 

 

 

63,444

 

Cash, cash equivalents and restricted cash, end of period

 

$

 

216,586

 

 

$

 

136,065

 

 

 

 

 

 

 

 

 

 

 

 

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO

   AMOUNTS REPORTED WITHIN THE CONDENSED CONSOLIDATED BALANCE SHEETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

202,016

 

 

$

 

103,624

 

Restricted cash

 

 

 

4,683

 

 

 

 

22,566

 

Restricted cash included in other noncurrent assets

 

 

 

9,887

 

 

 

 

9,875

 

Total cash, cash equivalents and restricted cash

 

$

 

216,586

 

 

$

 

136,065

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

 

58,694

 

 

$

 

30,742

 

Income taxes (refunded) paid

 

 

 

(3,829

)

 

 

 

589

 

NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net change in payables for capital expenditures

 

 

 

(5,018

)

 

 

 

(1,156

)

 

The accompanying condensed notes are an integral part of these consolidated financial statements.

5


 

ELDORADO RESORTS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Organization and Basis of Presentation

Organization

The accompanying unaudited consolidated financial statements include the accounts of Eldorado Resorts, Inc. (“ERI” or the “Company”), a Nevada corporation formed in September 2013, and its consolidated subsidiaries. The Company acquired Mountaineer, Presque Isle Downs and Scioto Downs in September 2014 pursuant to a merger (the “MTR Merger”) with MTR Gaming Group, Inc. (“MTR Gaming”) and in November 2015 it acquired Circus Reno and the interests in the Silver Legacy that it did not own prior to such date (the “Reno Acquisition”).

On May 1, 2017 (the “Isle Acquisition Date”), the Company completed its acquisition of Isle of Capri Casinos, Inc. pursuant to the Agreement and Plan of Merger (the “Merger Agreement”) dated as of September 19, 2016 with Isle of Capri Casinos, Inc. (“Isle” or “Isle of Capri”). As a result of the Isle Merger, Isle became a wholly-owned subsidiary of ERI.

ERI owns and operates the following properties:

 

Eldorado Resort Casino Reno (Eldorado Reno)A 814-room hotel, casino and entertainment facility connected via an enclosed skywalk to Silver Legacy and Circus Reno located in downtown Reno, Nevada that includes 1,128 slot machines and 36 table games;

 

Silver Legacy Resort Casino (Silver Legacy)A 1,685-room themed hotel and casino connected via an enclosed skywalk to Eldorado Reno and Circus Reno that includes 1,208 slot machines, 58 table games and a 13 table poker room;

 

Circus Circus Reno (Circus Reno)A 1,571-room hotel-casino and entertainment complex connected via an enclosed skywalk to Eldorado Reno and Silver Legacy that includes 706 slot machines and 24 table games;

 

Eldorado Resort Casino Shreveport (Eldorado Shreveport)A 403-room, all suite art deco-style hotel and tri-level riverboat dockside casino situated on the Red River in Shreveport, Louisiana that includes 1,388 slot machines, 52 table games and an eight table poker room;

 

Mountaineer Casino, Racetrack & Resort (Mountaineer)A 357-room hotel, casino, entertainment and live thoroughbred horse racing facility located on the Ohio River at the northern tip of West Virginias northwestern panhandle that includes 1,487 slot machines and 36 table games, including a 10 table poker room;

 

Presque Isle Downs & Casino (Presque Isle Downs)A casino and live thoroughbred horse racing facility with 1,596 slot machines, 32 table games and a seven table poker room located in Erie, Pennsylvania;

 

Eldorado Gaming Scioto Downs (Scioto Downs)A modern racino offering 2,237 video lottery terminals (“VLTs”), harness racing and a 118-room third party hotel connected to Scioto Downs located 15 minutes from downtown Columbus, Ohio;

 

Isle Casino HotelBlack Hawk (“Isle Black Hawk”)A land-based casino on an approximately 10-acre site in Black Hawk, Colorado that includes 1,005 slot machines, 30 table games, a nine table poker room and a 238-room hotel;

 

Lady Luck CasinoBlack Hawk (“Lady Luck Black Hawk”)A land-based casino across the intersection from Isle Casino Hotel in Black Hawk Colorado, that includes 472 slot machines, eleven table games and a 164-room hotel with a parking structure connecting Isle Casino Hotel-Black Hawk and Lady Luck Casino-Black Hawk;

 

Isle Casino Racing Pompano Park (“Pompano”)A casino and harness racing track on an approximately 223-acre owned site in Pompano Beach, Florida that includes 1,461 slot machines and a 45 table poker room. In April 2018, the Company announced the formation of a joint venture with the Cordish Companies to master plan and develop a mixed-use entertainment and hospitality destination expected to be located on unused land adjacent to the casino and racetrack;

 

Isle Casino Bettendorf (“Bettendorf”)A land-based single-level casino located off Interstate 74 in Bettendorf, Iowa that includes 974 slot machines and 20 table games with two hotel towers with 509 hotel rooms;

6


 

 

Isle Casino Waterloo (“Waterloo”)A single-level land-based casino in Waterloo, Iowa that includes 936 slot machines, 25 table games, and a 194-room hotel;

 

Isle of Capri Casino Hotel Lake Charles (“Lake Charles”)A gaming vessel on an approximately 19 acre site in Lake Charles, Louisiana, with 1,173 slot machines, 45 table games, including 13 poker tables, and two hotels offering 493 rooms;

 

Isle of Capri Casino Lula (“Lula”)Two dockside casinos in Lula, Mississippi with 871 slot machines and 19 table games, two on-site hotels with a total of 486 rooms and a 28-space RV Park;

 

Lady Luck Casino Vicksburg (“Vicksburg”)A dockside casino in Vicksburg, Mississippi that includes 603 slot machines, eight table games and a hotel with a total of 89 rooms;

 

Isle of Capri Casino Boonville (“Boonville”)A single-level dockside casino in Boonville, Missouri that includes 885 slot machines, 20 table games and a 140-room hotel;

 

Isle Casino Cape Girardeau (“Cape Girardeau”)A dockside casino and pavilion and entertainment center in Cape Girardeau, Missouri that includes 870 slot machines and 24 table games, including four poker tables;

 

Lady Luck Casino Caruthersville (“Caruthersville”)—A riverboat casino located along the Mississippi River in Caruthersville, Missouri that includes 512 slot machines and nine table games;

 

Isle of Capri Casino Kansas City (“Kansas City”)A dockside casino located close to downtown Kansas City, Missouri offering 969 slot machines and 13 table games; and

 

Lady Luck Casino Nemacolin (“Nemacolin”)A casino property located on the 2,000-acre Nemacolin Woodlands Resort in Western Pennsylvania that includes 600 slot machines and 27 table games.  

In addition, Scioto Downs, through its subsidiary RacelineBet, Inc., also operates Racelinebet.com, a national account wagering service that offers online and telephone wagering on horse races as a marketing affiliate of TwinSpires.com, an affiliate of Churchill Downs Incorporated.

Reclassifications

Certain reclassifications of prior year presentations have been made to conform to the current period presentation.

Basis of Presentation

The accompanying unaudited consolidated financial statements of the Company and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by US GAAP for complete financial statements. In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, all of which are normal and recurring, considered necessary for a fair presentation and have been included herein. The results of operations for these interim periods are not necessarily indicative of the operating results for other quarters, for the full year or any future period.

The financial information included for periods prior to our acquisition of Isle are those of ERI and its subsidiaries. The presentation of information herein for periods prior to our acquisition of Isle and after our acquisition of Isle are not fully comparable because the results of operations for Isle are not included for periods prior to our acquisition of Isle.

These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Recently Issued Accounting Pronouncements – New Developments and Adoptions of New Accounting Standards

In May 2014 (amended January 2017), the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” (ASC Topic 606) which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and eliminates existing industry guidance, including revenue recognition guidance specific to the gaming industry. The core principle of the revenue model indicates that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

7


 

We adopted this standard effective January 1, 2018, and elected to apply the full retrospective adoption method. The most significant impacts of the adoption are summarized below in Note 2.

In November 2016, ASU No. 2016-18 was issued related to the inclusion of restricted cash in the statement of cash flows. This new guidance requires that a statement of cash flows present the change during the period in the total of cash, cash equivalents and amounts generally described as restricted cash or restricted cash equivalent. This update is effective in fiscal years, including interim periods, beginning after December 15, 2017. The Company retrospectively adopted this guidance on December 31, 2017. Upon adoption, the Company included a reconciliation of Cash and cash equivalents and restricted cash reported within the Consolidated Balance Sheets to the total shown in the Consolidated Statements of Cash Flows. Adoptions of this guidance had no other impact on the Consolidated Financial Statements or disclosures.

Certain amounts have been retrospectively reclassified for the three and six months ended June 30, 2017 to conform to the current period presentation and reflect the change in the Company’s Consolidated Statements of Cash Flows required with the adoption of ASU No. 2016-15.

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations – Clarifying the Definition of a Business.” This amendment is intended to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisition (or disposals) of assets or businesses. Amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business and to provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments are effective for interim and annual periods beginning after December 15, 2017, with early adoption allowed as follows: (1) transactions for which acquisition date occurs before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance and (2) transactions in which a subsidiary is deconsolidated or a group of assets is derecognized that occur before the issuance date or effective date of the amendments, only when the transaction has not been reported in financial statements that have been issued or made available for issuance. We adopted this accounting standard during the first quarter of 2018, which did not have an impact on our consolidated financial statements, and will result in future acquisitions which do not involve substantive processes being accounted for as asset acquisitions.

In February 2016, the FASB issued ASU No. 2016-02 which addresses the recognition and measurement of leases. Under the new guidance, for all leases (with the exception of short-term leases), at the commencement date, lessees will be required to recognize a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and a right-of-use (“ROU”) asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged. Further, the new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and liabilities, which no longer provides a source for off balance sheet financing. The effective date for this update is for the annual and interim periods beginning after December 15, 2018 with early adoption permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the consolidated financial statements.

Currently, we do not have any material capital leases nor any material operating leases where we are the lessor. Our operating leases, primarily relating to certain ground leases and slot machines or VLTs, will be recorded on the balance sheet as an ROU asset with a corresponding lease liability, which will be amortized using the effective interest rate method as payments are made. The ROU asset will be depreciated on a straight-line basis and recognized as lease expense. The qualitative and quantitative effects of adoption of ASU 2016-02 are still being analyzed, and we are in the process of evaluating the full effect the new guidance will have on our consolidated financial statements.

Note 2. Revenue Recognition

The Company’s revenue contracts with customers consists primarily of casino wagers, pari-mutuel commissions, food and beverage transactions, hotel, retail and entertainment sales.

Casino Revenue and Pari-mutuel Commissions

The Company recognizes as casino revenue (transaction price) the net win from gaming activities, which is the difference between gaming wins and losses, not the total amount wagered. Progressive jackpots are accrued and charged to revenue at the time the obligation to pay the jackpot is established. Gaming revenues are recognized net of certain cash and free play incentives. Pari-mutuel commissions consist of commissions earned from thoroughbred and harness racing and importing of simulcast signals from other race tracks and are recognized at the time wagers are made. Such commissions are a designated portion of the wagering handle as determined by state racing commissions, and are shown net of the taxes assessed by state and local agencies, as well as purses and other contractual amounts paid to horsemen associations. The Company recognizes revenues from fees earned through the exporting of simulcast signals to other race tracks at the time wagers are made. Such fees are based upon a predetermined percentage of handle as contracted with the other race tracks.

8


 

Gaming wager contracts involve two performance obligations for those customers earning points under the Company’s loyalty program and a single performance obligation for customers who don’t participate in the program. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as such wagers have similar characteristics and the Company reasonably expects the effects on the financial statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract.

Loyalty Programs and Other Contract Obligations

The Company offers programs at its properties whereby our participating customers can accumulate points for wagering that can be redeemed for credits for free play on slot machines, lodging, food and beverage, merchandise and in limited situations, cash. The incentives earned by customers under these programs are based on previous revenue transactions and represent separate performance obligations. Points earned, less estimated breakage, are recorded as a reduction of casino revenues at the retail value of such benefits owed to the customer and recognized as departmental revenue based on where such points are redeemed, upon fulfillment of the performance obligation. The loyalty program liability represents a deferral of revenue until redemption occurs, which is typically less than one year.

For purposes of allocating the transaction price in a wagering contract between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a point that can be redeemed for a non-gaming good or service. An amount is allocated to the gaming wager performance obligation using the residual approach as the stand-alone price for wagers is highly variable and no set established price exists for such wagers. The allocated revenue for gaming wagers is recognized when the wagers occur as all such wagers settle immediately. The loyalty point contract liability amount is deferred and recognized as revenue when the customer redeems the points for the non-gaming good or service at the time such goods or services are delivered to the customer.

The Company’s liability for its loyalty point performance obligations totaled $11.0 million and $11.8 million at June 30, 2018 and December 31, 2017, respectively, inclusive of liabilities associated with assets held for sale. Historically, the Company’s loyalty points earned and redeemed are substantially constant over time, which results in the loyalty point performance obligation balance remaining fairly consistent across our reporting periods.

Non-gaming Revenue

Hotel, food and beverage, and other operating revenues are recognized as services are performed. The transaction price for hotel, food and beverage contracts is the net amount collected from the customer for such goods and services. Hotel, food and beverage services have been determined to be separate, stand-alone performance obligations and the transaction price for such contracts is recorded as revenue as the good or service is transferred to the customer over the customer’s stay at the hotel or when the delivery is made for the food and beverage. Advance deposits for future hotel occupancy, convention space or food and beverage services contracts are recorded as deferred income until the revenue recognition criteria has been met.

The Company also provides goods and services that may include multiple performance obligations, such as for packages, for which revenues are allocated on a pro rata basis based on each service's stand-alone selling price.

Complimentaries

The Company offers discretionary coupons and other discretionary complimentaries to customers outside of the loyalty program. The retail value of complimentary food, beverage, hotel rooms and other services provided to customers, including loyalty point redemptions, is recognized in revenues when the goods or services are transferred to the customer. Complimentaries provided by third parties at the discretion and under the control of the Company is recorded as an expense when incurred. The Company’s revenues included complimentaries and loyalty point redemptions of $48.9 million and $43.2 million for the three months ended June 30, 2018 and 2017, respectively, and $96.1 million and $66.9 million for the six months ended June 30, 2018 and 2017, respectively.

9


 

Adoption of ASC Topic 606

The adoption of ASC Topic 606 on January 1, 2018 principally affected the presentation of promotional allowances and how the Company measured the liability associated with our customer loyalty programs. The presentation of gross revenues for complimentary goods and services provided to guests with a corresponding offsetting amount included in promotional allowances was eliminated. This adjustment in presentation of promotional allowances did not have an impact on the Company’s historically reported net operating revenues. The majority of such amounts previously included in promotional allowances now offset casino revenues based on an allocation of revenues to performance obligations using stand-alone selling price. Food, beverage, lodging and other services furnished to our guests on a complimentary basis are measured at the respective estimated standalone selling prices and included as revenues within food and beverage, lodging, and retail, entertainment and other, which generally resulted in a corresponding decrease in gaming revenues. The costs of providing such complimentary goods and services are included as expenses within food and beverage, lodging, and retail, entertainment and other.

Additionally, as a result of the adoption of the new standard, certain adjustments and other reclassifications to and between revenue categories and to and between expense categories were required; however, the amounts associated with such adjustments did not have a significant impact on the Company’s previously reported operating income or net income.  

Liabilities associated with our customer loyalty programs are no longer valued at cost; rather a deferred revenue model is used to account for the classification and timing of revenue to be recognized related to the redemption of loyalty program liabilities by our customers. Points earned under the Company’s loyalty programs are deemed to be separate performance obligations, and recorded as a reduction of casino revenues when earned at the retail value of such benefits owed to the customer and recognized as departmental revenue based on where such points are redeemed, upon fulfillment of the performance obligation.

The Company elected to adopt the full retrospective method to apply the new guidance to each prior reporting period presented as if it had been in effect since January 1, 2015, with a pre-tax cumulative effect adjustment to our retained earnings upon adoption of $4.7 million. Net of tax, the cumulative effect adjustment to our retained earnings upon adoption was $3.5 million. This was primarily related to our loyalty program point liability, which increased from an estimated incremental cost model to a deferred revenue model at retail value.

Adoption of the new standard did not have a significant impact on our previously reported net revenue, expenses, operating income, and net income. The impact of adoption of the new standard to previously reported selected financial statement information was as follows (in thousands):

 

 

 

Three Months Ended June 30, 2017

 

 

 

As Reported

 

 

ASC 606

Adjustments

 

 

Other

Reclassifications(1)

 

 

As Adjusted

 

Gross revenues

 

$

 

389,237

 

 

$

 

(31,215

)

 

$

 

17,604

 

 

$

 

375,626

 

Promotional allowances

 

 

 

(34,057

)

 

 

 

33,226

 

 

 

 

831

 

 

 

 

 

Net revenues

 

$

 

355,180

 

 

$

 

2,011

 

 

$

 

18,435

 

 

$

 

375,626

 

Operating (loss) income

 

$

 

(32,116

)

 

$

 

110

 

 

$

 

1,539

 

 

$

 

(30,467

)

Net (loss) income

 

$

 

(46,328

)

 

$

 

138

 

 

$

 

 

 

$

 

(46,190

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2017

 

 

 

As Reported

 

 

ASC 606

Adjustments

 

 

Other

Reclassifications(1)

 

 

As Adjusted

 

Gross revenues

 

$

 

608,783

 

 

$

 

(48,235

)

 

$

 

17,471

 

 

$

 

578,019

 

Promotional allowances

 

 

 

(52,678

)

 

 

 

51,713

 

 

 

 

965

 

 

 

 

 

Net revenues

 

$

 

556,105

 

 

$

 

3,478

 

 

$

 

18,436

 

 

$

 

578,019

 

Operating (loss) income

 

$

 

(17,967

)

 

$

 

(11

)

 

$

 

1,539

 

 

$

 

(16,439

)

Net (loss) income

 

$

 

(45,307

)

 

$

 

62

 

 

$

 

 

 

$

 

(45,245

)

 

(1)

Other reclassifications are comprised of the reversal of our Lake Charles property from discontinued operations and other reclassifications to conform to current period presentations.

 

10


 

Additionally, adoption of the new standard resulted in a net loss per share adjustment from the as reported $0.69 per share to $0.68 per share for the three months ended June 30, 2017. There was no adjustment for the net loss per share for the six months ended June 30, 2017.

The Company’s consolidated statement of operations presents net revenue disaggregated by type or nature of the good or service (i.e., casino, pari-mutuel, food and beverage, hotel and other). A summary of net revenues disaggregated by type of revenue and reportable segment is presented below (amounts in thousands). Refer to Note 13 for a discussion of the Company’s reportable segments.

 

 

 

Three Months Ended June 30, 2018

 

 

 

West

 

 

Midwest

 

 

South

 

 

East

 

 

Corporate

and Other

 

 

Total

 

Casino

 

$

 

57,696

 

 

$

 

87,448

 

 

$

 

88,994

 

 

$

 

109,537

 

 

$

 

 

 

$

 

343,675

 

Pari-mutuel commissions

 

 

 

 

 

 

 

 

 

 

 

2,590

 

 

 

 

2,455

 

 

 

 

 

 

 

 

5,045

 

Food and beverage

 

 

 

25,812

 

 

 

 

6,744

 

 

 

 

12,583

 

 

 

 

9,154

 

 

 

 

 

 

 

 

54,293

 

Hotel

 

 

 

26,222

 

 

 

 

4,418

 

 

 

 

6,301