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Section 1: 10-Q (10-Q)

eri-10q_20180930.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 September 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 every Interactive Data File required to be submitted 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 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 November 6, 2018 was 77,391,244.

 


 

 

 

 

 

 


 

ELDORADO RESORTS, INC.

QUARTERLY REPORT FOR THE THREE AND NINE MONTHS ENDED

September 30, 2018

TABLE OF CONTENTS

 

 

 

Page

PART I. FINANCIAL INFORMATION

 

2

Item 1.

FINANCIAL STATEMENTS

 

2

 

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

 

2

 

Consolidated Statements of Operations for the Three and Nine months Ended September 30, 2018 and 2017 (unaudited)

 

3

 

Consolidated Statements of Comprehensive Income (Loss) for the Three and Nine months Ended September 30, 2018 and 2017 (unaudited)

 

4

 

Consolidated Statements of Cash Flows for the Nine months Ended September 30, 2018 and 2017 (unaudited)

 

5

 

Condensed Notes to Unaudited Consolidated Financial Statements (unaudited)

 

6

Item 2.

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

 

35

Item 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

56

Item 4.

CONTROLS AND PROCEDURES

 

56

PART II. OTHER INFORMATION

 

57

Item 1.

LEGAL PROCEEDINGS

 

57

Item 1A.

RISK FACTORS

 

57

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

60

Item 3.

DEFAULTS UPON SENIOR SECURITIES

 

60

Item 4.

MINE SAFETY DISCLOSURES

 

60

Item 5.

OTHER INFORMATION

 

60

Item 6.

EXHIBITS

 

61

SIGNATURES

 

62

 

1


 

PART I-FINANCIAL INFORMATION

Item 1.  Financial Statements.

ELDORADO RESORTS, INC.

CONSOLIDATED BALANCE SHEETS

(dollars in thousands)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

 

 

 

(unaudited)

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

CURRENT ASSETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

164,086

 

 

$

 

134,596

 

Restricted cash

 

 

 

1,622

 

 

 

 

3,267

 

Marketable securities

 

 

 

17,057

 

 

 

 

17,631

 

Accounts receivable, net

 

 

 

42,002

 

 

 

 

45,797

 

Due from affiliates

 

 

 

187

 

 

 

 

243

 

Inventories

 

 

 

15,258

 

 

 

 

16,870

 

Prepaid income taxes

 

 

 

504

 

 

 

 

4,805

 

Prepaid expenses and other

 

 

 

29,578

 

 

 

 

27,823

 

Assets held for sale

 

 

 

155,914

 

 

 

 

 

Total current assets

 

 

 

426,208

 

 

 

 

251,032

 

Escrow cash

 

 

 

604,100

 

 

 

 

 

Property and equipment, net

 

 

 

1,488,866

 

 

 

 

1,502,817

 

Gaming licenses and other intangibles, net

 

 

 

1,121,573

 

 

 

 

996,816

 

Goodwill

 

 

 

788,146

 

 

 

 

747,106

 

Non-operating real property

 

 

 

17,880

 

 

 

 

18,069

 

Other assets, net

 

 

 

30,401

 

 

 

 

30,632

 

Total assets

 

$

 

4,477,174

 

 

$

 

3,546,472

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

CURRENT LIABILITIES:

 

 

 

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

 

447

 

 

$

 

615

 

Accounts payable

 

 

 

33,307

 

 

 

 

34,778

 

Due to affiliates

 

 

 

19

 

 

 

 

 

Accrued property, gaming and other taxes

 

 

 

43,339

 

 

 

 

43,212

 

Accrued payroll and related

 

 

 

58,567

 

 

 

 

53,330

 

Accrued interest

 

 

 

37,626

 

 

 

 

25,607

 

Income taxes payable

 

 

 

268

 

 

 

 

171

 

Accrued other liabilities

 

 

 

77,495

 

 

 

 

66,038

 

Liabilities related to assets held for sale

 

 

 

10,868

 

 

 

 

 

Total current liabilities

 

 

 

261,936

 

 

 

 

223,751

 

Long-term debt, less current portion

 

 

 

2,967,434

 

 

 

 

2,189,578

 

Deferred income taxes

 

 

 

194,490

 

 

 

 

162,967

 

Other long-term liabilities

 

 

 

17,163

 

 

 

 

28,579

 

Total liabilities

 

 

 

3,441,023

 

 

 

 

2,604,875

 

Commitments and contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

Common stock, 200,000,000 and 100,000,000 shares authorized, 77,391,244

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

   2018 and December 31, 2017, respectively

 

 

 

1

 

 

 

 

 

Paid-in capital

 

 

 

745,745

 

 

 

 

746,547

 

Retained earnings

 

 

 

290,326

 

 

 

 

194,971

 

Accumulated other comprehensive income

 

 

 

79

 

 

 

 

79

 

Total stockholders’ equity

 

 

 

1,036,151

 

 

 

 

941,597

 

Total liabilities and stockholders’ equity

 

$

 

4,477,174

 

 

$

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

$

 

362,877

 

 

$

 

347,537

 

 

$

 

1,046,010

 

 

$

 

764,684

 

Pari-mutuel commissions

 

 

 

5,292

 

 

 

 

5,111

 

 

 

 

14,407

 

 

 

 

9,859

 

Food and beverage

 

 

 

58,153

 

 

 

 

59,537

 

 

 

 

164,644

 

 

 

 

141,667

 

Hotel

 

 

 

44,780

 

 

 

 

45,962

 

 

 

 

114,447

 

 

 

 

99,545

 

Other

 

 

 

16,151

 

 

 

 

14,731

 

 

 

 

44,739

 

 

 

 

35,142

 

Net revenues

 

 

 

487,253

 

 

 

 

472,878

 

 

 

 

1,384,247

 

 

 

 

1,050,897

 

EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Casino

 

 

 

175,333

 

 

 

 

169,322

 

 

 

 

506,536

 

 

 

 

389,010

 

Pari-mutuel commissions

 

 

 

4,729

 

 

 

 

4,657

 

 

 

 

13,022

 

 

 

 

9,894

 

Food and beverage

 

 

 

45,381

 

 

 

 

51,220

 

 

 

 

134,927

 

 

 

 

120,041

 

Hotel

 

 

 

13,977

 

 

 

 

15,513

 

 

 

 

40,178

 

 

 

 

36,862

 

Other

 

 

 

9,315

 

 

 

 

9,632

 

 

 

 

25,030

 

 

 

 

22,702

 

Marketing and promotions

 

 

 

23,122

 

 

 

 

26,439

 

 

 

 

66,255

 

 

 

 

58,099

 

General and administrative

 

 

 

75,599

 

 

 

 

75,650

 

 

 

 

223,546

 

 

 

 

168,339

 

Corporate

 

 

 

9,217

 

 

 

 

7,718

 

 

 

 

33,018

 

 

 

 

21,734

 

Impairment charges

 

 

 

3,787

 

 

 

 

 

 

 

 

13,602

 

 

 

 

 

Depreciation and amortization

 

 

 

35,760

 

 

 

 

29,122

 

 

 

 

99,204

 

 

 

 

69,635

 

Total operating expenses

 

 

 

396,220

 

 

 

 

389,273

 

 

 

 

1,155,318

 

 

 

 

896,316

 

(Loss) gain on sale or disposal of property and equipment

 

 

 

(110

)

 

 

 

4

 

 

 

 

(393

)

 

 

 

(51

)

Proceeds from terminated sale

 

 

 

5,000

 

 

 

 

 

 

 

 

5,000

 

 

 

 

 

Transaction expenses

 

 

 

(4,091

)

 

 

 

(2,094

)

 

 

 

(10,043

)

 

 

 

(89,172

)

Equity in loss of unconsolidated affiliates

 

 

 

(63

)

 

 

 

(23

)

 

 

 

(116

)

 

 

 

(305

)

Operating income

 

 

 

91,769

 

 

 

 

81,492

 

 

 

 

223,377

 

 

 

 

65,053

 

OTHER EXPENSE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

 

(34,085

)

 

 

 

(29,183

)

 

 

 

(96,579

)

 

 

 

(69,380

)

Loss on early retirement of debt, net

 

 

 

 

 

 

 

(10,030

)

 

 

 

(162

)

 

 

 

(37,347

)

Total other expense

 

 

 

(34,085

)

 

 

 

(39,213

)

 

 

 

(96,741

)

 

 

 

(106,727

)

Net income (loss) before income taxes

 

 

 

57,684

 

 

 

 

42,279

 

 

 

 

126,636

 

 

 

 

(41,674

)

(Provision) benefit for income taxes

 

 

 

(19,980

)

 

 

 

(12,592

)

 

 

 

(31,281

)

 

 

 

26,116

 

Net income (loss)

 

$

 

37,704

 

 

$

 

29,687

 

 

$

 

95,355

 

 

$

 

(15,558

)

Net income (loss) per share of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

 

0.49

 

 

$

 

0.39

 

 

$

 

1.23

 

 

$

 

(0.24

)

Diluted

 

$

 

0.48

 

 

$

 

0.38

 

 

$

 

1.22

 

 

$

 

(0.24

)

Weighted average basic shares outstanding

 

 

 

77,522,664

 

 

 

 

76,902,070

 

 

 

 

77,445,611

 

 

 

 

63,821,705

 

Weighted average diluted shares outstanding

 

 

 

78,283,588

 

 

 

 

77,959,689

 

 

 

 

78,208,040

 

 

 

 

63,821,705

 

 

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

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Net income (loss)

 

$

 

37,704

 

 

$

 

29,687

 

 

$

 

95,355

 

 

$

 

(15,558

)

Other comprehensive income, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss), net of tax

 

$

 

37,704

 

 

$

 

29,687

 

 

$

 

95,355

 

 

$

 

(15,558

)

 

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)

 

 

 

Nine Months Ended

 

 

 

September 30,

 

 

 

2018

 

 

2017

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

 

95,355

 

 

$

 

(15,558

)

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

   activities:

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

99,204

 

 

 

 

69,635

 

Amortization of deferred financing costs, discount and debt premium

 

 

 

3,753

 

 

 

 

5,041

 

Loss on early retirement of debt

 

 

 

162

 

 

 

 

37,347

 

Stock compensation expense

 

 

 

9,645

 

 

 

 

4,454

 

Impairment charges

 

 

 

13,602

 

 

 

 

 

Provision (benefit) for deferred income taxes

 

 

 

28,345

 

 

 

 

(25,560

)

Other

 

 

 

1,626

 

 

 

 

789

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

 

 

Sale of trading securities

 

 

 

573

 

 

 

 

272

 

Accounts receivable

 

 

 

(441

)

 

 

 

(6,937

)

Inventory

 

 

 

380

 

 

 

 

17

 

Prepaid expenses and other assets

 

 

 

649

 

 

 

 

2,054

 

Interest payable

 

 

 

(6,563

)

 

 

 

(1,441

)

Income taxes payable

 

 

 

4,398

 

 

 

 

(1,268

)

Accounts payable and accrued liabilities

 

 

 

12,760

 

 

 

 

2,786

 

Net cash provided by operating activities

 

 

 

263,448

 

 

 

 

71,631

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Purchase of property and equipment, net

 

 

 

(89,082

)

 

 

 

(52,930

)

Proceeds from sale of property and equipment

 

 

 

920

 

 

 

 

 

Net cash used in business combinations

 

 

 

(306,274

)

 

 

 

(1,313,052

)

Investment in and loans to unconsolidated affiliate

 

 

 

(698

)

 

 

 

 

Net cash used in investing activities

 

 

 

(395,134

)

 

 

 

(1,365,982

)

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Proceeds from issuance of Term Loan

 

 

 

 

 

 

 

1,450,000

 

Proceeds from issuance of 6% Senior Notes due 2025

 

 

 

 

 

 

 

875,000

 

Proceeds from issuance of 6% Senior Notes due 2026

 

 

 

600,000

 

 

 

 

 

Borrowings under Revolving Credit Facility

 

 

 

215,358

 

 

 

 

207,953

 

Payments under Term Loan

 

 

 

 

 

 

 

(866,750

)

Payments under Revolving Credit Facility

 

 

 

(35,358

)

 

 

 

(236,953

)

Debt premium proceeds

 

 

 

 

 

 

 

27,500

 

Debt issuance costs

 

 

 

(5,401

)

 

 

 

(51,338

)

Taxes paid related to net share settlement of equity awards

 

 

 

(10,601

)

 

 

 

(10,927

)

Proceeds from exercise of stock options

 

 

 

154

 

 

 

 

2,900

 

Payments on other long-term payables

 

 

 

(501

)

 

 

 

(370

)

Net cash provided by financing activities

 

 

 

763,651

 

 

 

 

1,397,015

 

 

 

 

 

 

 

 

 

 

 

 

Increase in cash, cash equivalents and restricted cash

 

 

 

631,965

 

 

 

 

102,664

 

Cash, cash equivalents and restricted cash, beginning of period

 

 

 

147,749

 

 

 

 

63,444

 

Cash, cash equivalents and restricted cash, end of period

 

$

 

779,714

 

 

$

 

166,108

 

 

 

 

 

 

 

 

 

 

 

 

RECONCILIATION OF CASH, CASH EQUIVALENTS AND RESTRICTED CASH TO

   AMOUNTS REPORTED WITHIN THE CONDENSED CONSOLIDATED BALANCE SHEETS:

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

164,086

 

 

$

 

134,903

 

Restricted cash

 

 

 

1,622

 

 

 

 

21,308

 

Restricted and escrow cash included in other noncurrent assets

 

 

 

614,006

 

 

 

 

9,897

 

Total cash, cash equivalents and restricted cash

 

$

 

779,714

 

 

$

 

166,108

 

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

 

 

 

 

 

 

 

 

 

 

Interest paid

 

$

 

(86,964

)

 

$

 

(67,840

)

Income taxes refunded (paid)

 

 

 

3,953

 

 

 

 

(714

)

NON-CASH FINANCING ACTIVITIES:

 

 

 

 

 

 

 

 

 

 

Net change in payables for capital expenditures

 

 

 

(5,914

)

 

 

 

2,286

 

 

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

5


 

ELDORADO RESORTS, INC.

CONDENSED NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

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 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.

On May 1, 2017, the Company completed its acquisition of Isle of Capri Casinos, Inc. pursuant to the Agreement and Plan of Merger 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.

On August 7, 2018, the Company completed its previously announced acquisition of the outstanding partnership interests of Elgin Riverboat Resort – Riverboat Casino d/b/a Grand Victoria Casino, an Illinois partnership (“Elgin”), the owner of Grand Victoria Casino, located in Elgin, Illinois (the “Elgin Acquisition”).

As of September 30, 2018, ERI owned and operated 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;

6


 

 

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;

 

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.  

 

Grand Victoria Casino (“Elgin”)A riverboat casino 40 miles west of downtown Chicago along the banks of the Fox River in Elgin, Illinois that includes 1,088 slot machines, 30 table games and 12 poker tables.

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.

The Company has entered into definitive agreements to sell Presque Isle Downs and Lady Luck Nemacolin.

Elgin Acquisition

The Elgin Acquisition was made pursuant to a purchase agreement dated as of April 15, 2018, by and among the Company, Elgin Holdings I LLC, a Delaware limited liability company and a direct wholly owned subsidiary of the Company, Elgin Holdings II LLC, a Delaware limited liability company and an indirect wholly owned subsidiary of the Company, MGM Elgin Sub, Inc., a Nevada corporation, Illinois RBG, L.L.C., a Delaware limited liability company and Elgin. As a result of the Elgin Acquisition, Elgin became an indirect wholly-owned subsidiary of the Company. The Company purchased Elgin for $327.5 million and an estimated $1.4 million working capital adjustment subject to finalization within 100 days of the Elgin Acquisition date. The Elgin Acquisition was financed using cash on hand and borrowings under the Company’s revolving credit facility.

Transaction expenses attributed to the Elgin Acquisition are reported on the accompanying statement of operations and totaled $2.1 million and $3.4 million for the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, $0.2 million of accrued costs and expenses related to the Elgin Acquisition are included in accrued other liabilities on the accompanying consolidated balance sheet.

Reclassifications

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

7


 

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 executive decision maker of our Company reviews operating results, assesses performance and makes decisions on a “significant market” basis. Management views each of our casinos as an operating segment. Operating segments are aggregated based on their similar economic characteristics, types of customers, types of services and products provided, and their management and reporting structure. Prior to the Elgin Acquisition, the Company’s principal operating activities occurred in four geographic regions and reportable segments. Following the Elgin Acquisition and in anticipation of the acquisition of Tropicana (see Note 3), a fifth segment, Central, has been added. As of and for the three and nine months ended September 30, 2018, the Central segment only contains Elgin. The reportable segments are based on the similar characteristics of the operating segments within the regions in which they operate: West, Midwest, South, East, and Central (See Note 13 for a listing of properties included in each segment).                                                                                                      

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

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 and Form 8-K filed on September 5, 2018, which recast the Company’s form 10-K for the year ended December 31, 2017 for adoption of the new revenue recognition standard.

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.

The Company 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 nine months ended September 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,

8


 

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. The Company 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. This ASU requires a transition adoption election using either 1) a modified retrospective approach with periods prior to the adoption date being recast or 2) a prospective adoption approach with a cumulative-effect adjustment recognized to the opening balance of retained earnings on the adoption date with prior periods not recast.  The Company anticipates adopting this standard on January 1, 2019 using the prospective adoption approach and electing the practical expedients allowed under the standard. 

Currently, the Company does not have any material capital leases nor any material operating leases where the Company is 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 the Company is in the process of evaluating the full effect, including the total amount of both capital and operating leases, the new guidance will have on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, “Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement”. This amendment modifies the disclosure requirements on fair value measurements and is effective for annual and interim periods beginning after December 15, 2019, with early adoption allowed.  The Company is still evaluating the qualitative and quantitative effect of the new guidance will have on our consolidated financial statements.

 

In August 2018, the FASB issued ASU 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract”.  The amendments in this update align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license).   This generally means that an intangible asset is recognized for the software license and, to the extent that the payments attributable to the software license are made over time, a liability also is recognized. If a cloud computing arrangement does not include a software license, the entity should account for the arrangement as a service contract. This generally means that the fees associated with the hosting element (service) of the arrangement are expensed as incurred. The amendment is effective for annual and interim periods beginning after December 15, 2019, with early adoption allowed.  The Company is still evaluating the qualitative and quantitative effect of the new guidance will have on our consolidated financial statements.

In August 2018, the Securities and Exchange Commission issued a final rule “Disclosure Update and Simplification”.  The final rule is intended to update existing disclosure requirements that have become redundant, duplicative, overlapping, outdate or superseded and to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors.  Included in the final rule is a requirement to present changes in stockholders equity in the Company’s 10-Q filings.  The final rule is effective for annual filings on November 5, 2018 and for interim periods beginning after the effective date, and will be included in the Company’s 2019 first quarter filing.

 

9


 

Note 2. Revenue Recognition

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 September 30, 2017

 

 

 

As Reported

 

 

ASC 606 Adjustments

 

 

Other Reclassifications(1)

 

 

As Adjusted

 

Gross revenues

 

$

 

483,036

 

 

$

 

(39,651

)

 

$

 

29,493

 

 

$

 

472,878

 

Promotional allowances

 

 

 

(38,162

)

 

 

 

41,785

 

 

 

 

(3,623

)

 

 

 

 

Net revenues

 

$

 

444,874

 

 

$

 

2,134

 

 

$

 

25,870

 

 

$

 

472,878

 

Operating income

 

$

 

78,924

 

 

$

 

182

 

 

$

 

2,386

 

 

$

 

81,492

 

Net income

 

$

 

29,554

 

 

$

 

133

 

 

$

 

 

 

$

 

29,687

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2017

 

 

 

As Reported

 

 

ASC 606 Adjustments

 

 

Other Reclassifications(1)

 

 

As Adjusted

 

Gross revenues

 

$

 

1,088,754

 

 

$

 

(88,225

)

 

$

 

50,368

 

 

$

 

1,050,897

 

Promotional allowances

 

 

 

(87,776

)

 

 

 

93,838

 

 

 

 

(6,062

)

 

 

 

 

Net revenues

 

$

 

1,000,978

 

 

$

 

5,613

 

 

$

 

44,306

 

 

$

 

1,050,897

 

Operating income

 

$

 

60,955

 

 

$

 

172

 

 

$

 

3,926

 

 

$

 

65,053

 

Net (loss) income

 

$

 

(15,754

)

 

$

 

196

 

 

$

 

 

 

$

 

(15,558

)

 

(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.

 

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Additionally, adoption of the new standard resulted in a basic earnings per share adjustment from the as reported $0.38 per share to $0.39 per share for the three months ended September 30, 2017. There was no adjustment for the diluted earnings per share for the three months ended September 30, 2017. Adoption of the new standard resulted in a net loss per share adjustment from the as reported $0.25 per share to $0.24 per share for the nine months ended September 30 2018 for both basic and diluted earnings per share.

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 September 30, 2018

 

 

 

West

 

 

Midwest

 

 

South

 

 

East

 

 

Central

 

 

Corporate

and Other

 

 

Total

 

Casino

 

$

 

60,912

 

 

$

 

86,331

 

 

$

 

84,299

 

 

$

 

109,637

 

 

$

 

21,698