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EX-32.2 - EXHIBIT 32.2 - Red Rock Resorts, Inc.rrr-09302018xex322certific.htm
EX-32.1 - EXHIBIT 32.1 - Red Rock Resorts, Inc.rrr-09302018xex321certific.htm
EX-31.2 - EXHIBIT 31.2 - Red Rock Resorts, Inc.rrr-09302018xex312certific.htm
EX-31.1 - EXHIBIT 31.1 - Red Rock Resorts, Inc.rrr-09302018xex311certific.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark one)
þ    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 from                    to     
Commission file number 001-37754
RED ROCK RESORTS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
47-5081182
(I.R.S. Employer
Identification No.)
1505 South Pavilion Center Drive, Las Vegas, Nevada
(Address of principal executive offices)
89135
(Zip Code)
(702) 495-3000
Registrant’s telephone number, including area code
N/A
(Former name, former address and former fiscal year, if changed since last report)
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 þ    No o
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 þ    No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
Emerging growth company o
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. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o    No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
 
Outstanding at October 31, 2018
Class A Common Stock, $0.01 par value
 
69,666,990
Class B Common Stock, $0.00001 par value
 
46,884,413



RED ROCK RESORTS, INC.
INDEX

 
 
 
 
 
 
 
 
 
 




Part I.    Financial Information
Item 1.    Financial Statements
RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share data)
(unaudited)
 
September 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
110,585

 
$
231,465

Restricted cash
3,613

 
3,279

Receivables, net
52,322

 
48,730

Income tax receivable
80

 
256

Inventories
12,667

 
12,572

Prepaid gaming tax
24,965

 
21,597

Prepaid expenses and other current assets
39,599

 
19,373

Assets held for sale

 
4,290

Total current assets
243,831

 
341,562

Property and equipment, net of accumulated depreciation of $805,897 and $689,856 at September 30, 2018 and December 31, 2017, respectively
2,882,543

 
2,542,111

Goodwill
195,676

 
195,676

Intangible assets, net of accumulated amortization of $45,939 and $105,370 at September 30, 2018 and December 31, 2017, respectively
119,398

 
128,000

Land held for development
177,182

 
177,182

Investments in joint ventures
9,211

 
10,133

Native American development costs
17,727

 
17,270

Deferred tax asset, net
109,354

 
132,731

Other assets, net
111,154

 
75,456

Total assets
$
3,866,076

 
$
3,620,121

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
31,848

 
$
21,626

Accrued interest payable
14,866

 
10,611

Other accrued liabilities
257,725

 
182,903

Current portion of payable pursuant to tax receivable agreement

 
17

Current portion of long-term debt
34,892

 
30,094

Total current liabilities
339,331

 
245,251

Long-term debt, less current portion
2,674,904

 
2,587,728

Deficit investment in joint venture
2,187

 
2,235

Other long-term liabilities
10,543

 
11,289

Payable pursuant to tax receivable agreement, net of current portion
25,211

 
141,906

Total liabilities
3,052,176

 
2,988,409

Commitments and contingencies (Note 15)

 

Stockholders’ equity:
 
 
 
Preferred stock, par value $0.01 per share, 100,000,000 shares authorized; none issued and outstanding

 

Class A common stock, par value $0.01 per share, 500,000,000 shares authorized; 69,662,248 and 68,897,563 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
697

 
689

Class B common stock, par value $0.00001 per share, 100,000,000 shares authorized; 46,884,413 and 47,264,413 shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively
1

 
1

Additional paid-in capital
360,615

 
349,430

Retained earnings
153,878

 
26,138

Accumulated other comprehensive income
1,489

 
2,473

Total Red Rock Resorts, Inc. stockholders’ equity
516,680

 
378,731

Noncontrolling interest
297,220

 
252,981

Total stockholders’ equity
813,900

 
631,712

Total liabilities and stockholders’ equity
$
3,866,076

 
$
3,620,121

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

3





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(amounts in thousands, except per share data)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Operating revenues:
 
 
 
 
 
 
 
Casino
$
230,723

 
$
221,771

 
$
699,726

 
$
664,443

Food and beverage
94,666

 
87,311

 
280,226

 
277,453

Room
39,306

 
43,447

 
128,655

 
139,401

Other
26,385

 
23,817

 
73,858

 
70,027

Management fees
21,252

 
29,602

 
67,094

 
90,505

Net revenues
412,332

 
405,948

 
1,249,559

 
1,241,829

Operating costs and expenses:
 
 
 
 
 
 
 
Casino
82,772

 
77,570

 
242,126

 
231,698

Food and beverage
87,097

 
80,019

 
252,320

 
247,663

Room
19,595

 
20,056

 
59,126

 
62,471

Other
13,216

 
11,013

 
34,111

 
30,258

Selling, general and administrative
104,360

 
98,840

 
297,540

 
288,715

Depreciation and amortization
44,235

 
42,661

 
133,391

 
134,721

Write-downs and other charges, net
6,439

 
15,239

 
21,070

 
25,931

Tax receivable agreement liability adjustment

 
214

 
(90,375
)
 
(230
)
Related party lease termination

 
1,950

 

 
100,343

Asset impairment

 
1,829

 

 
1,829

 
357,714

 
349,391

 
949,309

 
1,123,399

Operating income
54,618

 
56,557

 
300,250

 
118,430

Earnings from joint ventures
499

 
407

 
1,606

 
1,242

Operating income and earnings from joint ventures
55,117

 
56,964

 
301,856

 
119,672

Other (expense) income:
 
 
 
 
 
 
 
Interest expense, net
(33,590
)
 
(31,330
)
 
(96,299
)
 
(100,127
)
Loss on extinguishment/modification of debt, net

 
(558
)
 

 
(3,552
)
Change in fair value of derivative instruments
4,229

 
(310
)
 
27,353

 
3,059

Other
(66
)
 
(86
)
 
(287
)
 
(258
)
 
(29,427
)
 
(32,284
)
 
(69,233
)
 
(100,878
)
Income before income tax
25,690

 
24,680

 
232,623

 
18,794

Provision for income tax
(623
)
 
(2,364
)
 
(26,324
)
 
(1,230
)
Net income
25,067

 
22,316

 
206,299

 
17,564

Less: net income attributable to noncontrolling interests
10,387

 
10,531

 
57,704

 
11,613

Net income attributable to Red Rock Resorts, Inc.
$
14,680

 
$
11,785

 
$
148,595

 
$
5,951

 
 
 
 
 
 
 
 
Earnings per common share (Note 14):
 
 
 
 
 
 
 
Earnings per share of Class A common stock, basic
$
0.21

 
$
0.17

 
$
2.15

 
$
0.09

Earnings per share of Class A common stock, diluted
$
0.20

 
$
0.16

 
$
1.66

 
$
0.08

 
 
 
 
 
 
 
 
Weighted-average common shares outstanding:
 
 
 
 
 
 
 
Basic
69,250

 
68,060

 
69,059

 
67,030

Diluted
117,074

 
115,941

 
117,006

 
115,877

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.10

 
$
0.10

 
$
0.30

 
$
0.30


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

4





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(amounts in thousands)
(unaudited)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
25,067

 
$
22,316

 
$
206,299

 
$
17,564

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
(Loss) gain on interest rate swaps:
 
 
 
 
 
 
 
Unrealized loss arising during period

 

 

 
(1,491
)
Reclassification into income
(674
)
 
(496
)
 
(1,884
)
 
1,515

(Loss) gain on interest rate swaps recognized in other comprehensive loss
(674
)
 
(496
)
 
(1,884
)
 
24

Loss on available-for-sale securities:
 
 
 
 
 
 
 
Unrealized gain arising during period

 

 

 
8

Reclassification into income

 

 

 
(120
)
Loss on available-for-sale securities recognized in other comprehensive loss

 

 

 
(112
)
Other comprehensive loss, net of tax
(674
)
 
(496
)
 
(1,884
)
 
(88
)
Comprehensive income
24,393

 
21,820

 
204,415

 
17,476

Less: comprehensive income attributable to noncontrolling interests
10,081

 
10,268

 
56,839

 
11,576

Comprehensive income attributable to Red Rock Resorts, Inc.
$
14,312

 
$
11,552

 
$
147,576

 
$
5,900


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


5





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(amounts in thousands)
(unaudited)

 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
206,299

 
$
17,564

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
133,391

 
134,721

Change in fair value of derivative instruments
(27,353
)
 
(3,059
)
Reclassification of unrealized (gain) loss on derivative instruments into income
(2,156
)
 
1,897

Write-downs and other charges, net
885

 
17,667

Tax receivable agreement liability adjustment
(90,375
)
 
(230
)
Asset impairment

 
1,829

Amortization of debt discount and debt issuance costs
12,083

 
13,210

Share-based compensation
8,872

 
5,727

Earnings from joint ventures
(1,606
)
 
(1,242
)
Distributions from joint ventures
1,344

 
761

Loss on extinguishment/modification of debt, net

 
3,552

Deferred income tax
26,324

 
84

Changes in assets and liabilities:
 
 
 
Receivables, net
(3,380
)
 
2,069

Inventories and prepaid expenses
(17,805
)
 
(5,148
)
Accounts payable
6,758

 
(4,226
)
Accrued interest payable
4,255

 
(11,269
)
Income tax payable/receivable, net
176

 
716

Other accrued liabilities
8,766

 
2,766

Other, net
(5,495
)
 
4,171

Net cash provided by operating activities
260,983

 
181,560

Cash flows from investing activities:
 
 
 
Capital expenditures, net of related payables
(407,612
)
 
(168,012
)
Proceeds from asset sales
4,692

 
986

Acquisition of land from related party

 
(23,440
)
Distributions in excess of earnings from joint ventures
1,136

 
859

Native American development costs
(443
)
 
(2,489
)
Net settlement of derivative instruments
6,766

 
345

Other, net
(8,928
)
 
(7,625
)
Net cash used in investing activities
(404,389
)
 
(199,376
)
 
 
 
 

6





RED ROCK RESORTS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(amounts in thousands)
(unaudited)

 
Nine Months Ended September 30,
 
2018
 
2017
Cash flows from financing activities:
 
 
 
Borrowings under credit agreements with original maturity dates greater than
three months
165,000

 
800,592

Payments under credit agreements with original maturity dates greater than three months
(79,631
)
 
(627,453
)
Proceeds from issuance of 5.00% Senior Notes

 
550,000

Partial redemption of 7.50% Senior Notes

 
(250,000
)
Cash paid for early extinguishment of debt

 
(9,401
)
Proceeds from exercise of stock options
5,054

 
2,292

Distributions to members and noncontrolling interests
(15,251
)
 
(32,288
)
Dividends
(20,770
)
 
(20,130
)
Payment of debt issuance costs

 
(29,379
)
Payments on other debt
(1,756
)
 
(4,627
)
Payments on tax receivable agreement liability
(28,865
)
 

Acquisition of subsidiary noncontrolling interests

 
(4,484
)
Other, net
(921
)
 
(6,624
)
Net cash provided by financing activities
22,860

 
368,498

(Decrease) increase in cash, cash equivalents and restricted cash
(120,546
)
 
350,682

Balance, beginning of period
234,744

 
136,153

Balance, end of period
$
114,198

 
$
486,835

Cash, cash equivalents and restricted cash:
 
 
 
Cash and cash equivalents
$
110,585

 
$
222,427

Restricted cash
3,613

 
264,408

Balance, end of period
$
114,198

 
$
486,835

Supplemental cash flow disclosures:
 
 
 
Cash paid for interest, net of $5,949 and $508 capitalized, respectively
$
82,746

 
$
96,383

Cash paid for income taxes, net of refunds received
$
(176
)
 
$
430

Non-cash investing and financing activities:
 
 
 
Capital expenditures incurred but not yet paid
$
108,939

 
$
22,364


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

7





RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1.    Organization, Basis of Presentation and Significant Accounting Policies
Organization
Red Rock Resorts, Inc. (“Red Rock,” or the “Company”) was formed as a Delaware corporation in September 2015 to own an equity interest in and manage Station Casinos LLC (“Station LLC”). In May 2016, the Company completed an initial public offering (“IPO”) and used the proceeds to purchase newly issued limited liability company interests in Station Holdco LLC (“Station Holdco” and such units, the “LLC Units”), and outstanding LLC Units from existing members of Station Holdco. The Company owns all of the outstanding voting interests in Station LLC and has an indirect economic interest in Station LLC through its ownership interest in Station Holdco, which owns all of the economic interests in Station LLC. Station LLC, a Nevada limited liability company, is a gaming, development and management company that owns and operates ten major gaming and entertainment facilities and ten smaller casino properties (three of which are 50% owned) in the Las Vegas regional market. Station LLC also manages Graton Resort in Sonoma County, California on behalf of a Native American tribe. Station LLC managed Gun Lake Casino in Allegan County, Michigan on behalf of another Native American tribe through February 6, 2018.
At September 30, 2018, the Company held approximately 59.8% of the economic interests in Station Holdco as well as 100% of the voting interest in Station LLC and 100% of the voting power in Station Holdco, subject to certain limited exceptions, and is the designated sole managing member of both Station Holdco and Station LLC. The Company controls and operates all of the business and affairs of Station Holdco and Station LLC, and conducts all of its operations through these entities. The Company is subject to federal income taxes and is subject to state income taxes in California and Michigan.
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although management believes that the disclosures are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary for a fair presentation of the results for the interim periods have been made, and such adjustments were of a normal recurring nature. The interim results reflected in these condensed consolidated financial statements are not necessarily indicative of results to be expected for the full fiscal year. These financial statements should be read in conjunction with the audited financial statements and related notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. Certain amounts in the condensed consolidated financial statements for the prior year have been reclassified to be consistent with the current year presentation.
Principles of Consolidation
Station Holdco and Station LLC are variable interest entities (“VIEs”), of which the Company is the primary beneficiary. Accordingly, the Company consolidates the financial position and results of operations of Station LLC and its consolidated subsidiaries and Station Holdco, and presents the interest in Station Holdco not owned by Red Rock within noncontrolling interest in the condensed consolidated financial statements. All intercompany accounts and transactions have been eliminated.
The amounts shown in the accompanying condensed consolidated financial statements also include the accounts of MPM Enterprises, LLC (“MPM”), which is a 50% owned, consolidated VIE that managed Gun Lake Casino through February 2018. The Company is the primary beneficiary of MPM. As such, it consolidates MPM, and the financial position and results of operations attributable to third party holdings of MPM are reported within noncontrolling interest in the condensed consolidated financial statements. The net assets of MPM reflected in the Condensed Consolidated Balance Sheet at December 31, 2017 totaled $2.1 million. The Gun Lake Casino management agreement expired on February 6, 2018.
The Company has investments in three 50% owned smaller casino properties which are joint ventures accounted for using the equity method. The carrying amount of the Company’s investment in one of the smaller casino properties has been reduced below zero and is presented as a deficit investment balance on the Condensed Consolidated Balance Sheets.
Use of Estimates
The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect amounts reported and disclosed. Actual results could differ from those estimates.

8




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Significant Accounting Policies
A description of the Company’s significant accounting policies is included in the audited financial statements within its Annual Report on Form 10-K for the year ended December 31, 2017.
The Company updated its revenue recognition accounting policy as described in Note 2 in conjunction with the adoption of the new accounting standard for revenue recognition.
Recently Issued and Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board (“FASB”) issued amended accounting guidance for costs of implementing a cloud computing service arrangement. Under the amended guidance, the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract will be aligned 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). The amended guidance may be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The amended guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, and early adoption is permitted. The Company expects to adopt this guidance prospectively in the fourth quarter of 2018.
In May 2017, the FASB issued accounting guidance that amends the scope of modification accounting for share-based payment arrangements. The amended guidance clarifies which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting. The Company adopted this guidance in the first quarter of 2018. The adoption did not have an impact on the Company’s financial position or results of operations.
In March 2017, the FASB issued amended accounting guidance on the presentation of net periodic pension and postretirement cost. The amendment requires that the service cost component must be separated from the other components and classified as compensation expense in the same income statement line item as payroll costs for the employees who are receiving the retirement benefit. Further, only the service cost component is eligible for capitalization in inventory or other internally constructed assets. Other cost components are required to be reported below the subtotal for operating results, and their classification is required to be disclosed. The Company adopted this guidance in the first quarter of 2018. The Company’s defined benefit pension plan has been curtailed since 2009 and as a result, no service cost is being incurred. Accordingly, upon adoption of the amended guidance, the Company reclassified the expense associated with the defined benefit pension plan to other expense for all periods presented, and the adoption did not have an impact on net income.
In November 2016, the FASB issued amended accounting guidance on the presentation of restricted cash in the statement of cash flows. This amendment requires that a statement of cash flows explain the change during the reporting period in the total of cash, cash equivalents, and restricted cash or restricted cash equivalents. The Company adopted this guidance in the first quarter of 2018 using the retrospective transition method, as required by the new standard. The adoption did not have an impact on the Company’s financial position or results of operations.
In August 2016, the FASB issued amended accounting guidance intended to reduce diversity in practice in how cash receipts and cash payments are presented and classified in the statement of cash flows. The amendment addresses specific cash flow issues including the presentation and classification of debt prepayment or debt extinguishment costs and distributions received from equity method investees. The amended guidance also addresses the presentation and classification of separately identifiable cash flows and the application of the predominance principle. The Company adopted this guidance in the first quarter of 2018 using the retrospective transition method, as required by the new standard. The adoption did not have an impact on the Company’s statement of cash flows.
In February 2016, the FASB issued a new accounting standard that changes the accounting for leases and requires expanded disclosures about leasing activities. Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability, measured on a discounted basis, at the commencement date for leases with terms greater than twelve months. Lessor accounting will remain largely unchanged, other than certain targeted improvements intended to align lessor accounting with the lessee accounting model and with the new revenue recognition guidance discussed in Note 2. An optional transition approach is permitted, allowing companies to forgo comparative reporting and instead adopt the guidance on a prospective basis. The amended guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, and early adoption is permitted. The Company will adopt this standard as of the first quarter of 2019 using the optional transition approach, and is in the process of implementing changes to its systems and processes for lease accounting and reporting. The Company is currently evaluating the financial statement impacts of adopting the amended guidance, which will include recognizing lease liabilities and related right-of-use assets for operating leases on the opening balance sheet in the period of adoption. The Company does not expect the adoption to have a material impact on the pattern of lease expense recognition in its statements of income or its cash flows.

9




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

In May 2014, the FASB issued a new accounting standard for revenue recognition which requires entities to recognize revenue when it transfers 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 guidance in the first quarter of 2018 and elected to apply the full retrospective adoption method.
Under the new standard, the historical presentation of gross revenues for complimentary goods and services provided to guests with a corresponding offsetting amount included in promotional allowances has been eliminated. Promotional allowances are recorded primarily as reductions to casino revenue based on the standalone selling price of the complimentary goods and services provided. The adoption of the new standard also eliminated the historical practice of reclassifying the total cost associated with complimentaries from the expense line of the department fulfilling the complimentary to the expense line of the department that granted the complimentary to the guest. Under the new standard, revenues and expenses associated with providing complimentaries are classified based on the goods and services provided. When guests earn points under the Company’s player rewards program (the “Rewards Program”), the Company recognizes a liability for future performance obligations, which is measured at the redemption value of such points. The recognition of the Rewards Program point liability primarily reduces casino revenue. Previously, the Company recorded a liability for the estimated incremental cost of providing complimentary services earned under the Rewards Program. Additionally, amounts paid for wide area progressive operator fees and mandatory service charges that were previously recorded net in revenue are recorded gross, resulting in an increase in revenue with a corresponding increase in expense. See Note 2 for additional information.
Adoption of the new standard using the full retrospective method required the Company to apply the new guidance to each prior reporting period presented. The adoption did not have a significant impact on net income for the periods presented. The following tables present the impact of adoption of the new standard to previously reported selected financial statement information (in thousands, except per share data):
 
Three Months Ended September 30, 2017
 
Nine Months Ended September 30, 2017
 
As Reported
 
Adjustments
 
As Adjusted
 
As Reported
 
Adjustments
 
As Adjusted
Gross revenues
$
431,549

 
$
(25,601
)
 
$
405,948

 
$
1,310,162

 
$
(68,333
)
 
$
1,241,829

Promotional allowances
(31,179
)
 
31,179

 

 
(88,567
)
 
88,567

 

Net revenues
400,370

 
5,578

 
405,948

 
1,221,595

 
20,234

 
1,241,829

Net income
22,308

 
8

 
22,316

 
17,028

 
536

 
17,564

Net income attributable to Red Rock Resorts, Inc.
11,780

 
5

 
11,785

 
5,643

 
308

 
5,951

Earnings per share of Class A common stock, basic
0.17

 

 
0.17

 
0.08

 
0.01

 
0.09

Earnings per share of Class A common stock, diluted
0.16

 

 
0.16

 
0.07

 
0.01

 
0.08

 
December 31, 2017
 
As Reported
 
Adjustments
 
As Adjusted
Deferred tax asset, net
$
132,220

 
$
511

 
$
132,731

Other accrued liabilities
176,813

 
6,090

 
182,903

Total stockholders’ equity
637,291

 
(5,579
)
 
631,712

 
December 31, 2016
 
As Reported
 
Adjustments
 
As Adjusted
Total stockholders’ equity
$
633,352

 
$
(5,754
)
 
$
627,598

The Company’s historical net cash flows from operating, investing and financing activities were not impacted by the adoption of the new standard.
2.    Revenue
The Company’s revenue contracts with customers consist of gaming wagers, sales of food, beverage, hotel rooms and other amenities, and agreements to provide management services. Revenues are recognized when control of the promised goods or services is transferred to the guest, in an amount that reflects the consideration that the Company expects to be entitled to

10




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

receive in exchange for those goods or services, referred to as the transaction price. Other revenues also include rental income from tenants, which is recognized over the lease term, and contingent rental income, which is recognized when the right to receive such rental income is established according to the lease agreements. Revenue is recognized net of cash sales incentives and discounts and excludes sales and other taxes collected from guests on behalf of governmental authorities.
The Company applies a practical expedient and accounts for its gaming and non-gaming contracts on a portfolio basis. This is because individual customer contracts have similar characteristics, and the Company reasonably expects the effects on the financial statements of applying its revenue recognition policy to the portfolio would not differ materially from applying its policy to the individual contracts.
A summary of net revenues disaggregated by type of revenue and reportable segment is presented below (amounts in thousands). Refer to Note 16 for a discussion of the Company’s reportable segments.
 
Three Months Ended September 30, 2018
 
Three Months Ended September 30, 2017
 
Las Vegas operations
 
Native American management
 
Corporate and other
 
Total
 
Las Vegas operations
 
Native American management
 
Corporate and other
 
Total
Casino
$
230,723

 
$

 
$

 
$
230,723

 
$
221,771

 
$

 
$

 
$
221,771

Food and beverage
94,666

 

 

 
94,666

 
87,311

 

 

 
87,311

Room
39,306

 

 

 
39,306

 
43,447

 

 

 
43,447

Other (a)
24,840

 

 
1,545

 
26,385

 
22,418

 

 
1,399

 
23,817

Management fees
133

 
21,119

 

 
21,252

 
124

 
29,478

 

 
29,602

Net revenues
$
389,668

 
$
21,119

 
$
1,545

 
$
412,332

 
$
375,071

 
$
29,478

 
$
1,399

 
$
405,948

 
Nine Months Ended September 30, 2018
 
Nine Months Ended September 30, 2017
 
Las Vegas operations
 
Native American management
 
Corporate and other
 
Total
 
Las Vegas operations
 
Native American management
 
Corporate and other
 
Total
Casino
$
699,726

 
$

 
$

 
$
699,726

 
$
664,443

 
$

 
$

 
$
664,443

Food and beverage
280,226

 

 

 
280,226

 
277,453

 

 

 
277,453

Room
128,655

 

 

 
128,655

 
139,401

 

 

 
139,401

Other (a)
69,463

 

 
4,395

 
73,858

 
65,781

 

 
4,246

 
70,027

Management fees
450

 
66,644

 

 
67,094

 
379

 
90,126

 

 
90,505

Net revenues
$
1,178,520

 
$
66,644

 
$
4,395

 
$
1,249,559

 
$
1,147,457

 
$
90,126

 
$
4,246

 
$
1,241,829

____________________________________
(a)
Other revenue included revenue from tenant leases of $6.0 million and $5.7 million for the three months ended September 30, 2018 and 2017, respectively, and $18.3 million and $17.8 million for the nine months ended September 30, 2018 and 2017, respectively. Revenue from tenant leases is accounted for under the lease accounting guidance and does not represent revenue recognized from contracts with customers.
Casino Revenue
Casino revenue includes gaming activities such as slot, table game and sports wagering. The transaction price for a gaming wagering contract is the difference between gaming wins and losses, not the total amount wagered. The transaction price is reduced for consideration payable to a guest, such as cash sales incentives and the change in progressive jackpot liabilities. Gaming contracts are typically completed daily based on the outcome of the wagering transaction and include a distinct performance obligation to provide gaming activities.
Guests may receive discretionary incentives for complimentary food, beverage, rooms, entertainment and merchandise to encourage additional gaming, or may earn loyalty points based on their gaming activity. The Company allocates the transaction price to each performance obligation in the gaming wagering contract. The amount allocated to loyalty points earned is based on an estimate of the standalone selling price of the loyalty points, which is determined by the redemption value less an estimate for points not expected to be redeemed. The amount allocated to discretionary complimentaries is the standalone selling price of the underlying goods or services, which is determined using the retail price at which those goods or services would be sold separately in similar transactions. The remaining amount of the transaction price is allocated to wagering

11




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

activity using the residual approach as the standalone selling price for gaming wagers is highly variable and no set established price exists for gaming wagers. Amounts allocated to wagering are recognized as casino revenue when the result of the wager is determined, and amounts allocated to loyalty points and discretionary complimentaries are recognized as revenue when the goods or services are provided.
Non-gaming Revenue
Non-gaming revenues include sales of food, beverage, hotel rooms and other amenities such as retail merchandise, bowling, spa services and entertainment. The transaction price is the net amount collected from the guest and includes a distinct performance obligation to provide such goods or services. Non-gaming revenues are recognized when the goods or services are provided to the guest. Guests may also earn loyalty points from non-gaming purchases or receive discretionary complimentaries that require the transaction price to be allocated to each performance obligation on a relative standalone selling price basis.
Non-gaming revenues also include the portion of the transaction price from gaming or non-gaming contracts allocated to discretionary complimentaries and the value of loyalty points redeemed for food, beverage, room and other amenities. Discretionary complimentaries are classified in the departmental revenue category fulfilling the complimentary with a corresponding reduction in the departmental revenues that provided the complimentary, which is primarily casino revenue. Included in non-gaming revenues are discretionary complimentaries and loyalty point redemptions of $53.2 million and $47.2 million for the three months ended September 30, 2018 and 2017, respectively, and $151.8 million and $137.8 million for the nine months ended September 30, 2018 and 2017, respectively.
Management Fee Revenue
Management fee revenue primarily represents fees earned from the Company’s management agreements with Native American tribes. The transaction price for management contracts is the management fee to which the Company is entitled for its management services. The management fee represents variable consideration as it is based on a percentage of net income of the managed property, as defined in the management agreements. The management services are a single performance obligation to provide a series of distinct services over the term of the management agreement. The Company allocates and recognizes the management fee monthly as the management services are performed because there is a consistent measure throughout the contract period that reflects the value to the Native American tribe each month.
Rewards Program
The Rewards Program point liability represents deferred gaming and non-gaming revenue at the redemption value of loyalty points earned under the Rewards Program that management ultimately believes will be redeemed. The loyalty points earned represent future performance obligations of the Company. Guests are able to accumulate loyalty points over time that they may redeem at their discretion under the terms of the Rewards Program. Loyalty points may be redeemed for cash, free slot play, food, beverage, rooms, entertainment and merchandise.
When points are redeemed for cash, the point liability is reduced for the amount of cash paid out. When points are redeemed for free slot play, food, beverage, rooms, entertainment and merchandise, revenues are recognized when the goods or services are provided, and such revenues are classified based on the type of goods or services provided with a corresponding reduction to the point liability.
The Company’s performance obligation related to its loyalty point liability is generally completed within one year, as a guest’s loyalty point balance is forfeited after six months of inactivity for a local guest and after thirteen months for an out-of-town guest, as defined in the Rewards Program. The Company’s loyalty point liability was $21.0 million and $20.3 million at September 30, 2018 and December 31, 2017, respectively. Loyalty points are generally earned and redeemed continually over time. As a result, the loyalty point liability balance remains relatively constant.
Contract Balances
The Company’s accounts receivable primarily represent receivables from contracts with customers and consist mainly of casino, hotel, ATM, cash advance, retail, management fees and other receivables, which are typically non-interest bearing. The Company has no material contract assets.
Customer contract liabilities related to future performance obligations consist of the Rewards Program point liability, advance deposits on goods or services yet to be provided and wagers for future sporting events. Customer contract liabilities are included in Other accrued liabilities on the Condensed Consolidated Balance Sheets. Excluding the Rewards Program point liability, contract liabilities were $27.7 million and $24.8 million at September 30, 2018 and December 31, 2017, respectively. Advance deposits and wagers for future sporting events represent cash payments received from guests that are typically

12




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

recognized in revenues within one year from the date received. Fluctuations in these balances are a result of normal operating activities.
The Company also has other customer-related liabilities that primarily include unpaid wagers and outstanding chips. Other customer-related liabilities were $7.5 million and $8.5 million at September 30, 2018 and December 31, 2017, respectively, and are primarily included in Other accrued liabilities on the Condensed Consolidated Balance Sheets. Unpaid wagers include unredeemed gaming tickets that are exchanged for cash, and outstanding chips represent amounts owed to guests in exchange for gaming chips in their possession that may be redeemed for cash or recognized as revenue. Changes in other customer-related liabilities are a result of normal operating activities.
3.    Noncontrolling Interest in Station Holdco
As discussed in Note 1, Red Rock holds a controlling interest in and consolidates the financial position and results of operations of Station LLC and its subsidiaries and Station Holdco, and the interests in Station Holdco not owned by Red Rock are presented within noncontrolling interest in the condensed consolidated financial statements. During the nine months ended September 30, 2018, approximately 0.4 million LLC Units, together with an equal number of Class B common shares, held by noncontrolling interest holders were exchanged for Class A common shares, which increased Red Rock’s ownership interest in Station Holdco. During the three and nine months ended September 30, 2017, approximately 0.5 million and 2.5 million, respectively, of such units and shares were exchanged for Class A common shares.
The ownership of the LLC Units is summarized as follows:        
 
September 30, 2018
 
December 31, 2017
 
Units
 
Ownership %
 
Units
 
Ownership %
Red Rock
69,662,248

 
59.8
%
 
68,897,563

 
59.3
%
Noncontrolling interest holders
46,884,413

 
40.2
%
 
47,264,413

 
40.7
%
Total
116,546,661

 
100.0
%
 
116,161,976

 
100.0
%
 
 
 
 
 
 
 
 
The Company uses monthly weighted-average LLC Unit ownership to calculate the pretax income and other comprehensive loss of Station Holdco attributable to Red Rock and the noncontrolling interest holders. Station Holdco equity attributable to Red Rock and the noncontrolling interest holders is rebalanced, as needed, to reflect LLC Unit ownership at period end.
4.    Native American Development
Following is information about the Company’s Native American development activities.
North Fork Rancheria of Mono Indian Tribe
The Company has development and management agreements with the North Fork Rancheria of Mono Indians (the “Mono”), a federally recognized Native American tribe located near Fresno, California, which were originally entered into in 2003. In August 2014, the Mono and the Company entered into the Second Amended and Restated Development Agreement (the “Development Agreement”) and the Second Amended and Restated Management Agreement. Pursuant to those agreements, the Company will assist the Mono in developing and operating a gaming and entertainment facility (the “North Fork Project”) to be located in Madera County, California. The Company purchased a 305-acre parcel of land adjacent to Highway 99 north of the city of Madera (the “North Fork Site”), which was taken into trust for the benefit of the Mono by the Department of the Interior (“DOI”) in February 2013.
As currently contemplated, the North Fork Project is expected to include approximately 2,000 slot machines, approximately 40 table games and several restaurants, and the cost of the project is expected to be between $250 million and $300 million. Development of the North Fork Project is subject to certain governmental and regulatory approvals, including, but not limited to, approval of the Management Agreement by the Chairman of the National Indian Gaming Commission (“NIGC”).
Under the terms of the Development Agreement, the Company has agreed to arrange the financing for the ongoing development costs and construction of the facility. The Company will contribute significant financial support to the North Fork Project. Through September 30, 2018, the Company has paid approximately $32.8 million of reimbursable advances to the Mono, primarily to complete the environmental impact study, purchase the North Fork Site and pay the costs of litigation. The advances are expected to be repaid from the proceeds of third-party financing or from the Mono’s gaming revenues; however, there can be no assurance that the advances will be repaid. The carrying amount of the advances was reduced to fair value upon

13




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

the Company’s adoption of fresh-start reporting in 2011. At September 30, 2018, the carrying amount of the advances was $17.7 million. In accordance with the Company’s accounting policy, accrued interest on the advances will not be recognized in income until the carrying amount of the advances has been recovered.
The Company will receive a development fee of 4% of the costs of construction (as defined in the Development Agreement) for its development services, which will be paid upon the commencement of gaming operations at the facility. In March 2018, the Mono submitted a proposed Third Amended and Restated Management Agreement (the “Management Agreement”) to the NIGC. The Management Agreement allows the Company to receive a management fee of 30% of the North Fork Project’s net income. The Management Agreement and the Development Agreement have a term of seven years from the opening of the North Fork Project. The Management Agreement includes termination provisions whereby either party may terminate the agreement for cause, and the Management Agreement may also be terminated at any time upon agreement of the parties. There is no provision in the Management Agreement allowing the tribe to buy-out the agreement prior to its expiration. The Management Agreement provides that the Company will train the Mono tribal members such that they may assume responsibility for managing the North Fork Project upon the expiration of the agreement.
Upon termination or expiration of the Management Agreement and Development Agreement, the Mono will continue to be obligated to repay any unpaid principal and interest on the advances from the Company, as well as certain other amounts that may be due, such as management fees. Amounts due to the Company under the Development Agreement and Management Agreement are secured by substantially all of the assets of the North Fork Project except the North Fork Site. In addition, the Development Agreement and Management Agreement contain waivers of the Mono’s sovereign immunity from suit for the purpose of enforcing the agreements or permitting or compelling arbitration and other remedies.
The timing of this type of project is difficult to predict and is dependent upon the receipt of the necessary governmental and regulatory approvals. There can be no assurance as to when, or if, these approvals will be obtained. The Company currently estimates that construction of the North Fork Project may begin in the next 18 to 30 months and estimates that the North Fork Project would be completed and opened for business approximately 18 months after construction begins. There can be no assurance, however, that the North Fork Project will be completed and opened within this time frame or at all. The Company expects to assist the Mono in obtaining third-party financing for the North Fork Project once all necessary regulatory approvals have been received and prior to commencement of construction; however, there can be no assurance that the Company will be able to obtain such financing for the North Fork Project on acceptable terms or at all.
The Company has evaluated the likelihood that the North Fork Project will be successfully completed and opened, and has concluded that the likelihood of successful completion is in the range of 65% to 75% at September 30, 2018. The Company’s evaluation is based on its consideration of all available positive and negative evidence about the status of the North Fork Project, including, but not limited to, the status of required regulatory approvals, as well as the progress being made toward the achievement of all milestones and the successful resolution of all litigation and contingencies. There can be no assurance that the North Fork Project will be successfully completed or that future events and circumstances will not change the Company’s estimates of the timing, scope, and potential for successful completion or that any such changes will not be material. In addition, there can be no assurance that the Company will recover all of its investment in the North Fork Project even if it is successfully completed and opened for business.


14




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The following table summarizes the Company’s evaluation at September 30, 2018 of each of the critical milestones necessary to complete the North Fork Project.
 
As of September 30, 2018
Federally recognized as an Indian tribe by the Bureau of Indian Affairs (“BIA”)
Yes
Date of recognition
Federal recognition was terminated in 1966 and restored in 1983.
Tribe has possession of or access to usable land upon which the project is to be built
The DOI accepted approximately 305 acres of land for the project into trust for the benefit of the Mono in February 2013.

Status of obtaining regulatory and governmental approvals:
 
Tribal-state compact
A compact was negotiated and signed by the Governor of California and the Mono in August 2012. The California State Assembly and Senate passed Assembly Bill 277 (“AB 277”) which ratified the Compact in May 2013 and June 2013, respectively. Opponents of the North Fork Project qualified a referendum, “Proposition 48,” for a state-wide ballot challenging the legislature’s ratification of the Compact. In November 2014, Proposition 48 failed. The State took the position that the failure of Proposition 48 nullified the ratification of the Compact and, therefore, the Compact did not take effect under California law. In March 2015, the Mono filed suit against the State (see North Fork Rancheria of Mono Indians v. State of California) to obtain a compact with the State or procedures from the Secretary of the Interior under which Class III gaming may be conducted on the North Fork Site. In July 2016, the DOI issued Secretarial procedures (the “Secretarial Procedures”) pursuant to which the Mono may conduct Class III gaming on the North Fork Site.
Approval of gaming compact by DOI
The Compact was submitted to the DOI in July 2013. In October 2013, notice of the Compact taking effect was published in the Federal Register. The Secretarial Procedures supersede and replace the Compact.
Record of decision regarding environmental impact published by BIA
In November 2012, the record of decision for the Environmental Impact Statement for the North Fork Project was issued by the BIA. In December 2012, the Notice of Intent to take land into trust was published in the Federal Register.
BIA accepting usable land into trust on behalf of the tribe
The North Fork Site was accepted into trust in February 2013.
Approval of management agreement by NIGC
In December 2015, the Mono submitted a Second Amended and Restated Management Agreement, and certain related documents, to the NIGC. In July 2016, the Mono received a deficiency letter from the NIGC seeking additional information concerning the Second Amended and Restated Management Agreement. In March 2018, the Mono submitted the Management Agreement and certain related documents to the NIGC. In June 2018, the Mono received a deficiency letter from the NIGC seeking additional information concerning the Management Agreement. Approval of the Management Agreement by the NIGC is expected to occur following the Mono’s response to the deficiency letter. The Company believes the Management Agreement will be approved because the terms and conditions thereof are consistent with the provisions of the Indian Gaming Regulatory Act (“IGRA”).
Gaming licenses:
 
Type
The North Fork Project will include the operation of Class II and Class III gaming, which are allowed pursuant to the terms of the Secretarial Procedures and IGRA, following approval of the Management Agreement by the NIGC.
Number of gaming devices allowed
The Secretarial Procedures allow for the operation of a maximum of 2,000 Class III slot machines at the facility during the first two years of operation and thereafter up to 2,500 Class III slot machines. There is no limit on the number of Class II gaming devices that the Mono can offer.
Agreements with local authorities
The Mono has entered into memoranda of understanding with the City of Madera, the County of Madera and the Madera Irrigation District under which the Mono agreed to pay one-time and recurring mitigation contributions, subject to certain contingencies. The memoranda of understanding with the City and County were amended in December 2016 to restructure the timing of certain payments due to delays in the development of the North Fork Project.


15




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Following is a discussion of legal matters related to the North Fork Project.
Stand Up For California! v. Dept. of the Interior. In December 2012, Stand Up for California!, several individuals and the Ministerial Association of Madera (collectively, the “Stand Up” plaintiffs) filed a complaint in the United States District Court for the District of Columbia against the DOI, the BIA and the Secretary of Interior and Assistant Secretary of the Interior, in their official capacities, seeking to overturn the Secretary’s determination to take the North Fork Site into trust for the purposes of gaming (the “North Fork Determination”) and seeking declaratory and injunctive relief to prevent the United States from taking the North Fork Site into trust. The Mono filed a motion to intervene as a party to the lawsuit, which was granted. In January 2013, the Court denied the Stand Up plaintiffs’ Motion for Preliminary Injunction and the United States accepted the North Fork Site into trust for the benefit of the Mono in February 2013. The parties subsequently filed motions for summary judgment. In September 2016, the Court denied the Stand Up plaintiffs’ motions for summary judgment and granted the defendants’ and the Mono’s motions for summary judgment in part and dismissed the remainder of the Stand Up plaintiffs’ claims. The Stand Up plaintiffs appealed the district court’s decision to the United States Court of Appeals for the District of Columbia Circuit, which heard oral argument on the appeal on October 13, 2017. On January 12, 2018, the United States Court of Appeals for the District of Columbia Circuit affirmed the decision of the district court in favor of the defendants and the Mono. On February 26, 2018, the Stand Up plaintiffs filed a petition for rehearing en banc of the January 12, 2018 decision, which petition for rehearing was denied on April 10, 2018. On July 9, 2018, the Stand Up plaintiffs filed a Petition for Writ of Certiorari in the Supreme Court of the United States. The defendants and the Mono expect to file their responses with the Supreme Court of the United States on or prior to November 26, 2018.
Stand Up For California! v. Brown. In March 2013, Stand Up for California! and Barbara Leach, a local resident, filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against California Governor Edmund G. Brown, Jr., alleging that Governor Brown violated the California constitutional separation-of-powers doctrine when he concurred in the North Fork Determination. The complaint sought to vacate and set aside the Governor’s concurrence. Plaintiffs’ complaint was subsequently amended to include a challenge to the constitutionality of AB 277. The Mono intervened as a defendant in the lawsuit. In March 2014, the court dismissed plaintiffs’ amended complaint, which dismissal was appealed by plaintiffs. In December 2016, an appellate court ruled in favor of the Stand Up plaintiffs concluding that Governor Brown exceeded his authority in concurring in the Secretary’s determination that gaming on the North Fork Site would be in the best interest of the Tribe and not detrimental to the surrounding community. The appellate court’s decision reversed the trial court’s previous ruling in favor of the Mono. The Mono and the State filed petitions in the Supreme Court of California seeking review of the appellate court’s decision. In March 2017, the Supreme Court of California granted the Mono and State’s petitions for review and deferred additional briefing or other action in this matter pending consideration and disposition of a similar issue in United Auburn Indian Community of Auburn Rancheria v. Brown. The United Auburn case was fully briefed in December 2017. Oral argument has not yet been scheduled.
Picayune Rancheria of Chukchansi Indians v. Brown. In March 2016, Picayune Rancheria of Chukchansi Indians (“Picayune”) filed a complaint for declaratory relief and petition for writ of mandate in California Superior Court for the County of Madera against Governor Edmund G. Brown, Jr., alleging that the referendum that invalidated the Compact also invalidated Governor Brown’s concurrence with the North Fork Determination. The complaint seeks to vacate and set aside the Governor’s concurrence. In July 2016, the court granted the Mono’s application to intervene and the Mono filed a demurrer seeking to dismiss the case. In November 2016, the district court dismissed Picayune’s complaint, but the court subsequently vacated its ruling based on the December 2016 decision by the Fifth District Court of Appeal in Stand Up for California! v. Brown. In May 2017, the court stayed the case for six months by agreement of the parties and scheduled a status conference on November 13, 2017 to address how the case should proceed in light of the California Supreme Court’s granting of the Mono and State’s petitions for review in Stand Up for California! v. Brown. The case remains stayed.
Picayune Rancheria of Chukchansi Indians v. United States Department of the Interior. In July 2016, Picayune filed a complaint in the United States District Court for the Eastern District of California for declaratory and injunctive relief against the DOI. The complaint sought a declaration that the North Fork Site did not come under one of the exceptions to the general prohibition against gaming on lands taken into trust after October 1988 set forth in IGRA and therefore was not eligible for gaming. It also sought a declaration that the North Fork Determination had expired because the legislature never ratified Governor Brown’s concurrence, and sought injunctive relief prohibiting the DOI from taking any action under IGRA concerning the North Fork Site. The Mono filed a motion to intervene in September 2016, which was subsequently granted. The Mono and federal defendants filed motions for summary judgment in March 2017. On August 8, 2017, Picayune filed a brief arguing that the court should stay the proceedings in light of the Fifth District Court’s decision in Stand Up for California! v. Brown and the appeal pending in the California Supreme Court. On August 18, 2017, the court denied the Picayune’s motion to stay the proceedings and granted the summary judgment motions of the Mono and the federal defendants. Picayune has not filed a timely notice of appeal.

16




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Stand Up for California! et. al. v. United States Department of the Interior. In November 2016, Stand Up for California! and other plaintiffs filed a complaint in the United States District Court for the Eastern District of California alleging that the DOI’s issuance of Secretarial Procedures for the Mono was subject to the National Environmental Policies Act and the Clean Air Act, and violate the Johnson Act. The complaint further alleges violations of the Freedom of Information Act and the Administrative Procedures Act. The DOI filed its answer to the complaint in February 2017 denying plaintiffs’ claims and asserting certain affirmative defenses. A motion to intervene filed by the Mono was granted in March 2017. Plaintiffs subsequently filed a motion to stay the proceedings in May 2017. Briefing on the contested stay request concluded in July 2017 and briefing on cross-motions for summary judgment was concluded in September 2017. On July 18, 2018, the court denied plaintiffs’ motion to stay the proceedings and granted the summary judgment motions of the Mono and the federal defendants. On September 11, 2018, plaintiffs filed a notice of appeal of the District Court decision and a briefing schedule has been established with the United States Court of Appeals for the Ninth Circuit.
5.    Other Accrued Liabilities
Other accrued liabilities consisted of the following (amounts in thousands):
 
September 30,
2018
 
December 31, 2017
Accrued gaming and related
$
61,068

 
$
57,070

Accrued payroll and related
50,174

 
51,095

Construction payables and equipment purchase accruals
105,179

 
39,673

Advance deposits
15,191

 
13,914

Other
26,113

 
21,151

 
$
257,725

 
$
182,903

6.    Long-term Debt
Long-term debt consisted of the following indebtedness of Station LLC (amounts in thousands):
 
September 30,
2018
 
December 31, 2017
Term Loan B Facility, due June 8, 2023, interest at a margin above LIBOR or base rate (4.75% and 4.06% at September 30, 2018 and December 31, 2017, respectively), net of unamortized discount and deferred issuance costs of $46.2 million and $53.2 million at September 30, 2018 and December 31, 2017, respectively
$
1,777,717

 
$
1,780,193

Term Loan A Facility, due June 8, 2022, interest at a margin above LIBOR or base rate (4.22% and 3.36% at September 30, 2018 and December 31, 2017, respectively), net of unamortized discount and deferred issuance costs of $4.3 million and $5.2 million at September 30, 2018 and December 31, 2017, respectively
254,552

 
263,860

$781 million Revolving Credit Facility, due June 8, 2022, interest at a margin above LIBOR or base rate (4.24% weighted average at September 30, 2018)
105,000

 

5.00% Senior Notes, due October 1, 2025, net of unamortized deferred issuance costs of $5.9 million and $6.4 million at September 30, 2018 and December 31, 2017, respectively
544,110

 
543,596

Other long-term debt, weighted-average interest of 4.04% and 3.95% at September 30, 2018 and December 31, 2017, respectively, maturity dates ranging from 2027 to 2037
28,417

 
30,173

Total long-term debt
2,709,796

 
2,617,822

Current portion of long-term debt
(34,892
)
 
(30,094
)
Total long-term debt, net
$
2,674,904

 
$
2,587,728

Credit Facility
Station LLC’s credit facility consists of the Term Loan B Facility, the Term Loan A Facility and the Revolving Credit Facility (collectively, the “Credit Facility”). The credit agreement governing the Credit Facility contains a number of customary covenants, including requirements that Station LLC maintain throughout the term of the Credit Facility and measured as of the end of each quarter, an interest coverage ratio of not less than 2.50 to 1.00 and a maximum consolidated total leverage ratio ranging from 6.50 to 1.00 at September 30, 2018 to 5.25 to 1.00 at December 31, 2020 and thereafter. A breach of the financial ratio covenants shall only become an event of default under the Term Loan B Facility if the lenders providing the Term Loan A

17




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Facility and the Revolving Credit Facility take certain affirmative actions after the occurrence of a default of such financial ratio covenants. At September 30, 2018, Station LLC’s interest coverage ratio was 4.41 to 1.00 and its consolidated total leverage ratio was 5.15 to 1.00, both as defined in the Credit Facility. In the opinion of management, the Company was in compliance with all applicable covenants at September 30, 2018.
Revolving Credit Facility Availability
At September 30, 2018, Station LLC’s borrowing availability under its Revolving Credit Facility, subject to continued compliance with the terms of the Credit Facility, was $642.0 million, which was net of $105.0 million in outstanding borrowings and $34.0 million in outstanding letters of credit and similar obligations.
7.    Derivative Instruments
The Company’s objective in using derivative instruments is to manage its exposure to interest rate movements. To accomplish this objective, the Company uses interest rate swaps as a primary part of its cash flow hedging strategy. The Company does not use derivative financial instruments for trading or speculative purposes.
The Company’s hedging strategy includes the use of forward-starting interest rate swaps that are not designated in cash flow hedging relationships. The interest rate swap agreements allow Station LLC to receive variable-rate payments in exchange for fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Station LLC’s interest rate swaps each have one-year terms that run consecutively through July 2021, with predetermined fixed pay rates that increase with each new term to more closely align with the one-month LIBOR forward curve as of the trade date of the interest rate swap. At September 30, 2018, the weighted-average fixed pay rate for Station LLC’s interest rate swaps was 1.46%, which will increase to 1.94% over the exposure period. Certain of these interest rate swaps were previously designated in cash flow hedging relationships until their dedesignation in June 2017 as discussed in more detail below. At September 30, 2018, Station LLC’s interest rate swaps had a combined notional amount of $1.5 billion.
Station LLC has not posted any collateral related to its interest rate swap agreements; however, Station LLC’s obligations under the interest rate swap agreements are subject to the security and guarantee arrangements applicable to the Credit Facility. The interest rate swap agreements contain a cross-default provision under which Station LLC could be declared in default on its obligation under such agreements if certain conditions of default exist on the Credit Facility. At September 30, 2018, the termination value of Station LLC’s interest rate swaps, including accrued interest, was a net asset of $43.0 million.
In June 2017, the Company dedesignated the hedge accounting relationships of Station LLC’s interest rate swaps that were previously designated and accounted for as cash flow hedges of forecasted interest payments. As such, the gain or loss on the effective portion of changes in their fair values was recorded as a component of other comprehensive loss until the interest payments being hedged were recorded as interest expense, at which time the amounts in accumulated other comprehensive income were reclassified as an adjustment to interest expense. The Company recognized the gain or loss on any ineffective portion of the derivatives’ change in fair value in the period in which the change occurred as a component of Change in fair value of derivative instruments in the Condensed Consolidated Statements of Income. At September 30, 2018, $5.0 million of cumulative deferred net gains previously recognized in accumulated other comprehensive income will be amortized as a reduction of interest expense through July 2020 as the hedged interest payments continue to occur. Of this amount, approximately $2.9 million of deferred net gains is expected to be reclassified into earnings during the next twelve months.
As a result of and subsequent to (i) the Company’s election not to apply hedge accounting for Station LLC’s interest rate swaps and (ii) the June 2017 dedesignation of Station LLC’s then-outstanding interest rate swaps, the changes in fair value of all of Station LLC’s derivative instruments are reflected in Change in fair value of derivative instruments in the Condensed Consolidated Statements of Income in the period in which the change occurs. As such, the amount of interest expense reported for the period subsequent to the dedesignation does not reflect a fixed rate as it previously did under hedge accounting for that portion of the debt hedged. However, the economics are unchanged and the Company continues to meet its risk management objective and achieve fixed cash flows attributable to interest payments on the debt principal being hedged by its interest rate swaps.
At September 30, 2018, Station LLC’s interest rate swaps effectively converted $1.5 billion of Station LLC’s variable interest rate debt to a fixed rate of 4.08%.

18




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The fair values of Station LLC’s interest rate swaps, exclusive of accrued interest, as well as their classification on the Condensed Consolidated Balance Sheets, are presented below (amounts in thousands):
 
September 30,
2018
 
December 31, 2017
Interest Rate Swaps Not Designated in Hedge Accounting Relationships
 
 
 
Prepaid expenses and other current assets
$
12,496

 
$
3,620

Other assets, net
29,725

 
18,383

Information about pretax gains and losses on derivative financial instruments that were not designated in hedge accounting relationships is presented below (amounts in thousands):
Derivatives Not Designated in Hedge Accounting Relationships
 
Location of Gain (Loss) on Derivatives Recognized in Income
 
Amount of Gain (Loss) on Derivatives Recognized in Income
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Interest rate swaps
 
Change in fair value of derivative instruments
 
$
4,229

 
$
(310
)
 
$
27,353

 
$
3,057

Information about pretax gains and losses on derivative financial instruments that were designated in cash flow hedging relationships is presented below (amounts in thousands):
Derivatives Designated in Cash Flow Hedging Relationships
 
Amount of Gain (Loss) on Derivatives Recognized in Other Comprehensive Loss (Effective Portion)
 
Location of Gain Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
 
Amount of Gain Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
 
Location of Gain on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain (Loss) on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Three Months Ended September 30,
 
 
Three Months Ended September 30,
 
 
Three Months Ended September 30,
 
2018
 
2017
 
 
2018
 
2017
 
 
2018
 
2017
Interest rate swaps
 
$

 
$

 
Interest expense, net
 
$
769

 
$
624

 
Change in fair value of derivative instruments
 
$

 
$

Derivatives Designated in Cash Flow Hedging Relationships
 
Amount of Loss on Derivatives Recognized in Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)
 
Location of Gain on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Amount of Gain on Derivatives Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
 
Nine Months Ended September 30,
 
 
Nine Months Ended September 30,
 
 
Nine Months Ended September 30,
 
2018
 
2017
 
 
2018
 
2017
 
 
2018
 
2017
Interest rate swaps
 
$

 
$
(1,875
)
 
Interest expense, net
 
$
2,156

 
$
(1,897
)
 
Change in fair value of derivative instruments
 
$

 
$
2


19




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

8.    Fair Value Measurements
Assets Measured at Fair Value on a Recurring Basis
Information about the Company’s financial assets measured at fair value on a recurring basis, aggregated by the level in the fair value hierarchy within which those measurements fall, is presented below (amounts in thousands):
 
 
 
Fair Value Measurement at Reporting Date Using
 
Balance at September 30, 2018
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate swaps
$
42,221

 
$

 
$
42,221

 
$

 
 
 
Fair Value Measurement at Reporting Date Using
 
Balance at December 31, 2017
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets
 
 
 
 
 
 
 
Interest rate swaps
$
22,003

 
$

 
$
22,003

 
$

The fair values of Station LLC’s interest rate swaps were determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the interest rate swaps. This analysis reflects the contractual terms of the interest rate swaps, including the period to maturity, and uses observable market-based inputs, including forward interest rate curves. Station LLC incorporated credit valuation adjustments to appropriately reflect both its own nonperformance risk and the counterparty’s nonperformance risk in the fair value measurement. The Company had no financial liabilities measured at fair value on a recurring basis at September 30, 2018 or December 31, 2017.
Assets Measured at Fair Value on a Nonrecurring Basis
In September 2017, the Company recorded an asset impairment charge of $1.8 million to write down an approximately 31-acre parcel of land held for development in Las Vegas to its estimated fair value of $5.2 million as a result of entering into an agreement to sell a portion of the land at a price less than its carrying amount. At December 31, 2017, the land subject to the agreement was presented within Assets held for sale on the Condensed Consolidated Balance Sheet, and the sale was completed in the second quarter of 2018.
Fair Value of Long-term Debt
The estimated fair value of Station LLC’s long-term debt compared with its carrying amount is presented below (amounts in millions):
 
September 30,
2018
 
December 31, 2017
Aggregate fair value
$
2,747

 
$
2,677

Aggregate carrying amount
2,710

 
2,618

The estimated fair value of Station LLC’s long-term debt is based on quoted market prices from various banks for similar instruments, which is considered a Level 2 input under the fair value measurement hierarchy.

20




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

9.    Stockholders’ Equity    
The changes in stockholders’ equity and noncontrolling interest for the nine months ended September 30, 2018 were as follows (amounts in thousands):
 
Red Rock Resorts, Inc. Stockholders’ Equity
 
 
 
 
Common stock
 
Additional paid-in capital
 
Retained earnings
 
Accumulated other comprehensive income
Noncontrolling interest
Total stockholders’ equity
Class A
 
Class B
Shares
 
Amount
Shares
 
Amount
Balances,
December 31, 2017
68,898

 
$
689

 
47,264

 
$
1

 
$
349,430

 
$
26,138

 
$
2,473

 
$
252,981

 
$
631,712

Net income

 

 

 

 

 
148,595

 

 
57,704

 
206,299

Other comprehensive loss, net of tax

 

 

 

 

 

 
(1,019
)
 
(865
)
 
(1,884
)
Share-based compensation

 

 

 

 
8,985

 

 

 

 
8,985

Distributions

 

 

 

 

 

 

 
(15,251
)
 
(15,251
)
Dividends

 

 

 

 

 
(20,855
)
 

 

 
(20,855
)
Issuance of restricted stock awards, net of forfeitures
137

 
1

 

 

 
(1
)
 

 

 

 

Repurchases of Class A common stock
(10
)
 

 

 

 
(307
)
 

 

 

 
(307
)
Stock option exercises
257

 
3

 

 

 
5,051

 

 

 

 
5,054

Exchanges of noncontrolling interests for Class A common stock
380

 
4

 
(380
)
 

 
2,149

 

 
21

 
(2,174
)
 

Recognition of tax receivable agreement liability resulting from exchanges of noncontrolling interests for Class A common stock

 

 

 

 
(2,528
)
 

 

 

 
(2,528
)
Deferred tax assets resulting from exchanges of noncontrolling interests for Class A common stock

 

 

 

 
2,675

 

 

 

 
2,675

Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco

 

 

 

 
(4,839
)
 

 
14

 
4,825

 

Balances,
September 30, 2018
69,662

 
$
697

 
46,884

 
$
1

 
$
360,615

 
$
153,878

 
$
1,489

 
$
297,220

 
$
813,900

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
At September 30, 2018, noncontrolling interest primarily represented the 40.2% ownership interest in Station Holdco not held by Red Rock.
On November 2, 2018, the Company announced that it would pay a dividend of $0.10 per share of Class A common stock to holders of record as of December 14, 2018 to be paid on December 31, 2018. Prior to the payment of the dividend, Station Holdco will declare a distribution to all LLC Unit holders, including the Company, of $0.10 per unit, a portion of which will be paid to its noncontrolling interest holders.

21




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

Changes in Accumulated Other Comprehensive Income
The following table presents changes in accumulated other comprehensive income, net of tax and noncontrolling interest, by component for the nine months ended September 30, 2018 (amounts in thousands):
 
Accumulated Other Comprehensive Income
 
Unrealized gain on interest rate swaps
 
Unrecognized pension liability
 
Total
Balances, December 31, 2017
$
2,510

 
$
(37
)
 
$
2,473

Amounts reclassified from accumulated other comprehensive income (loss) into income (a)
(1,019
)
 

 
(1,019
)
Net current-period other comprehensive loss
(1,019
)
 

 
(1,019
)
Exchanges of noncontrolling interests for Class A common stock
21

 

 
21

Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco
14

 

 
14

Balances, September 30, 2018
$
1,526

 
$
(37
)
 
$
1,489

____________________________________
(a)
Net of $0.3 million tax benefit.
Net Income Attributable to Red Rock Resorts, Inc. and Transfers from (to) Noncontrolling Interests
The table below presents the effect on Red Rock Resorts, Inc. stockholders’ equity from net income and transfers from (to) noncontrolling interests (amounts in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income attributable to Red Rock Resorts, Inc.
$
14,680

 
$
11,785

 
$
148,595

 
$
5,951

Transfers from (to) noncontrolling interests:
 
 
 
 
 
 
 
Exchanges of noncontrolling interests for Class A common stock

 
2,731

 
2,174

 
14,131

Acquisition of subsidiary noncontrolling interests

 

 

 
2,850

Rebalancing of ownership percentage between the Company and noncontrolling interests in Station Holdco
(1,471
)
 
(1,064
)
 
(4,825
)
 
(3,989
)
Net transfers (to) from noncontrolling interests
(1,471
)
 
1,667

 
(2,651
)
 
12,992

Change from net income attributable to Red Rock Resorts, Inc. and net transfers (to) from noncontrolling interests
$
13,209

 
$
13,452

 
$
145,944

 
$
18,943

 
 
 
 
 
 
 
 
10.    Share-based Compensation
The Company maintains an equity incentive plan which is designed to attract, retain and motivate employees and to align the interests of those individuals with the interests of the Company. A total of 11,585,479 shares of Class A common stock is reserved for issuance under the plan, of which approximately 3.3 million shares were available for issuance at September 30, 2018.

22




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

The following table presents information about share-based compensation awards under the equity incentive plan:
 
Restricted Class A
 Common Stock
 
Stock Options
 
Shares
 
Weighted-average grant date fair value
 
Shares
 
Weighted-average exercise price
Outstanding at January 1, 2018
308,310

 
$
21.60

 
4,248,465

 
$
21.29

Activity during the period:
 
 
 
 
 
 
 
Granted
158,912

 
32.75

 
2,142,926

 
32.73

Vested/exercised
(55,798
)
 
21.41

 
(257,038
)
 
19.65

Forfeited
(22,010
)
 
21.04

 
(578,437
)
 
23.76

Outstanding at September 30, 2018
389,414

 
$
26.21

 
5,555,916

 
$
25.52

 
 
 
 
 
 
 
 
The Company recognized share-based compensation expense of $3.3 million and $8.9 million, respectively, for the three and nine months ended September 30, 2018 and $2.0 million and $5.7 million, respectively, for the three and nine months ended September 30, 2017. At September 30, 2018, unrecognized share-based compensation cost was $36.3 million, which is expected to be recognized over a weighted-average period of 2.9 years.        
11.    Write-downs and Other Charges, Net    
Write-downs and other charges, net include various charges related to non-routine transactions, such as Palms Casino Resort (“Palms”) redevelopment expenses, preopening, lease termination, development and severance, as well as net losses on asset disposals. For the three and nine months ended September 30, 2018, write-downs and other charges, net were $6.4 million and $21.1 million, respectively. These amounts included $2.5 million and $14.1 million, respectively, related to the redevelopment of Palms, including the brand repositioning campaign, costs associated with the grand opening of the first phase of the project in May 2018, and preopening expense related to new restaurants, nightclubs, bars and other amenities.
For the three and nine months ended September 30, 2017, write-downs and other charges, net were $15.2 million and $25.9 million, respectively. These amounts included $13.2 million and $18.8 million, respectively, in losses on fixed asset disposals for the same periods, primarily comprised of $11.5 million in losses on asset disposals during the three months ended September 30, 2017 related to the redevelopment of Palms. In addition, write-downs and other charges, net for the nine months ended September 30, 2017 included $3.5 million in tenant lease termination expenses at Palms.
12.    Income Taxes
Red Rock is taxed as a corporation and pays corporate federal and state taxes on income allocated to it from Station Holdco based upon Red Rock’s economic interest held in Station Holdco. Station Holdco is treated as a pass-through partnership for income tax reporting purposes. Station Holdco’s members, including the Company, are liable for federal, state and local income taxes based on their share of Station Holdco’s pass-through taxable income.     
The Tax Cuts and Jobs Act (the “Act”) was enacted in December 2017. The Act reduced the U.S. federal corporate rate from 35% to 21%. At December 31, 2017, the Company was able to reasonably estimate the effects of the Act and recorded provisional adjustments associated with the effects on existing deferred tax balances. The Company will continue to make and refine its calculations as additional analysis is completed and further guidance is provided. The provisional amount recorded related to the remeasurement of its deferred tax balance was $85.3 million at December 31, 2017 and remains so at September 30, 2018.
The Company’s tax provision or benefit from income taxes for interim periods is determined using an estimate of the Company’s annual effective tax rate, adjusted for discrete items, if any, that are taken into account in the relevant period. Each quarter the Company updates the estimate of the annual effective tax rate and makes necessary cumulative adjustments to the total tax provision or benefit. The current taxes are estimated for the period and the balance sheet is adjusted to reflect such taxes currently payable or receivable. The remaining tax provision or benefit is recorded as deferred taxes.
The Company’s effective tax rate for the three and nine months ended September 30, 2018 was 2.43% and 11.32%, respectively, including discrete items, as compared to 9.58% and 6.54% for the three and nine months ended September 30, 2017. The Company’s effective tax rate is less than the statutory rate of 21% primarily because its effective tax rate includes a rate benefit attributable to the fact that Station Holdco operates as a limited liability company which is not subject to federal income tax. Accordingly, the Company is not liable for income taxes on the portion of Station Holdco’s earnings attributable to

23




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

noncontrolling interests. Station Holdco operates in Nevada and California and had taxable operations in Michigan until February 2018. Nevada does not impose a state income tax and the Company’s activities in California and Michigan are minimal; as a result, state income taxes do not have a significant impact on the Company’s effective rate. In addition, during the nine months ended September 30, 2018, the Company recognized income related to transactions pursuant to which the tax receivable agreement (“TRA”) liabilities owed to pre-IPO owners of Station Holdco were assigned to the Company. As a result of the TRA transactions, the effective tax rate was impacted by a net discrete $19.1 million write-down to the deferred tax asset as updated for adjustments to the blended rate.
As a result of the IPO and certain reorganization transactions, the Company recorded a net deferred tax asset resulting from the outside basis difference of its interest in Station Holdco. The Company also recorded a deferred tax asset for its liability related to payments to be made pursuant to the TRA representing 85% of the tax savings the Company expects to realize from the amortization deductions associated with the step up in the basis of depreciable assets under Section 754 of the Internal Revenue Code. This deferred tax asset will be recovered as cash payments are made to the TRA participants.
The Company determined that the deferred tax asset related to the LLC Units issued in the IPO and reorganization transactions is not expected to be realized unless the Company disposes of its investment in Station Holdco. As such, the Company established a valuation allowance against this portion of its deferred tax asset. The Company recognizes changes to the valuation allowance through the provision for income tax or other comprehensive income, as applicable, and at September 30, 2018 and December 31, 2017, the valuation allowance was $45.3 million and $57.3 million, respectively.
Tax Receivable Agreement
In connection with the IPO, the Company entered into the TRA with certain pre-IPO owners of Station Holdco. In the event that such parties exchange any or all of their LLC Units for Class A common stock, the TRA requires the Company to make payments to such holders for 85% of the tax benefits realized by the Company as a result of such exchange. The Company expects to realize these tax benefits based on current projections of taxable income. The annual tax benefits are computed by calculating the income taxes due, including such tax benefits, and the income taxes due without such benefits. At September 30, 2018 and December 31, 2017, the Company’s liability under the TRA was $25.2 million and $141.9 million, respectively. For the nine months ended September 30, 2018, exchanges of LLC Units resulted in an increase in the amount payable under the TRA liability of $2.5 million and a net increase in deferred tax assets of $2.7 million, both of which were recorded through stockholders’ equity.
During the nine months ended September 30, 2018, the Company paid a total of $28.9 million to two pre-IPO owners of Station Holdco in exchange for which the owners assigned to the Company all of their rights under the TRA. As a result, the Company’s liability under the TRA was reduced by $119.2 million, and the Company recognized nontaxable income of $90.4 million, which is presented in Tax receivable agreement liability adjustment in the Condensed Consolidated Statements of Income for the nine months ended September 30, 2018.
The timing and amount of aggregate payments due under the TRA may vary based on a number of factors, including the amount and timing of the taxable income the Company generates each year and the tax rate then applicable. The payment obligations under the TRA are Red Rock’s obligations and are not obligations of Station Holdco or Station LLC. Payments are generally due within a specified period of time following the filing of the Company’s annual tax return and interest on such payments will accrue from the original due date (without extensions) of the income tax return until the date paid. Payments not made within the required period after the filing of the income tax return generally accrue interest at a rate of LIBOR plus 5.00%.
The TRA will remain in effect until all such tax benefits have been utilized or expired, unless the Company exercises its right to terminate the TRA. The TRA will also terminate if the Company breaches its obligations under the TRA or upon certain mergers, asset sales or other forms of business combinations, or other changes of control. If the Company exercises its right to terminate the TRA, or if the TRA is terminated early in accordance with its terms, Red Rock’s payment obligations would be accelerated based upon certain assumptions, including the assumption that the Company would have sufficient future taxable income to utilize such tax benefits.
13.    Related Party Transactions
Under the TRA described in Note 12, the Company is required to make payments to certain pre-IPO owners of Station Holdco for 85% of the tax benefits realized by the Company as a result of certain transactions with the pre-IPO owners. At September 30, 2018 and December 31, 2017, $25.2 million and $141.9 million, respectively, was payable to certain pre-IPO owners of Station Holdco, including current and former executives of the Company or members of their respective family group. Of these amounts, $9.2 million was payable to entities related to Frank J. Fertitta III and Lorenzo J. Fertitta.

24




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

14.    Earnings Per Share
Basic earnings per share is calculated by dividing net income attributable to Red Rock by the weighted-average number of shares of Class A common stock outstanding during the period. The calculation of diluted earnings per share gives effect to all potentially dilutive shares, including shares issuable pursuant to outstanding stock options and nonvested restricted shares of Class A common stock, based on the application of the treasury stock method, and outstanding Class B common stock that is exchangeable, along with an equal number of LLC Units, for Class A common stock, based on the application of the if-converted method. Dilutive shares included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2018 and 2017 represent outstanding shares of Class B common stock, nonvested restricted shares of Class A common stock and outstanding stock options. All other potentially dilutive securities have been excluded from the calculation of diluted earnings per share because their inclusion would have been antidilutive.
A reconciliation of the numerator and denominator used in the calculation of basic and diluted earnings per share is presented below (amounts in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net income
$
25,067

 
$
22,316

 
$
206,299

 
$
17,564

Less: net income attributable to noncontrolling interests
(10,387
)
 
(10,531
)
 
(57,704
)
 
(11,613
)
Net income attributable to Red Rock, basic
$
14,680

 
$
11,785

 
$
148,595

 
$
5,951

 
 
 
 
 
 
 
 
Net income attributable to Red Rock, basic
$
14,680

 
$
11,785

 
$
148,595

 
$
5,951

Effect of dilutive securities
8,205

 
6,503

 
45,518

 
2,969

Net income attributable to Red Rock, diluted
$
22,885

 
$
18,288

 
$
194,113

 
$
8,920

 
 
 
 
 
 
 
 
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Weighted-average shares of Class A common stock outstanding, basic
69,250

 
68,060

 
69,059

 
67,030

Effect of dilutive securities
47,824

 
47,881

 
47,947

 
48,847

Weighted-average shares of Class A common stock outstanding, diluted
117,074

 
115,941

 
117,006

 
115,877

 
 
 
 
 
 
 
 
The calculation of diluted earnings per share of Class A common stock excluded the following potentially dilutive shares that were outstanding at the end of the period because their inclusion would have been antidilutive (amounts in thousands):
 
 
As of September 30,
 
 
2018
 
2017
Shares issuable upon exercise of stock options
 
2,071

 
3,962

Shares issuable upon vesting of restricted stock
 
64

 

Shares of Class B common stock are not entitled to share in the earnings of the Company and are not participating securities. Accordingly, earnings per share of Class B common stock under the two-class method has not been presented.
15.    Commitments and Contingencies
The Company and its subsidiaries are defendants in various lawsuits relating to routine matters incidental to their business. No assurance can be provided as to the outcome of any legal matters and litigation inherently involves significant costs.
16.    Segments
The Company views each of its Las Vegas casino properties and each of its Native American management arrangements as individual operating segments. The Company aggregates all of its Las Vegas operating segments into one

25




RED ROCK RESORTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(UNAUDITED)

reportable segment because all of its Las Vegas properties offer similar products, cater to the same customer base, have the same regulatory and tax structure, share the same marketing techniques, are directed by a centralized management structure and have similar economic characteristics. The Company also aggregates its Native American management arrangements into one reportable segment.
The Company utilizes Adjusted EBITDA as its primary performance measure. The Company’s segment information and a reconciliation of net income to Adjusted EBITDA are presented below (amounts in thousands):
 
Three Months Ended
September 30,
 
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
Net revenues
 
 
 
 
 
 
 
Las Vegas operations
$
389,668

 
$
375,071

 
$
1,178,520

 
$
1,147,457

Native American management
21,119

 
29,478

 
66,644

 
90,126

Reportable segment net revenues
410,787

 
404,549

 
1,245,164

 
1,237,583

Corporate and other
1,545

 
1,399

 
4,395

 
4,246

Net revenues
$
412,332

 
$
405,948

 
$
1,249,559

 
$
1,241,829

 
 
 
 
 
 
 
 
Net income
$
25,067

 
$
22,316

 
$
206,299

 
$
17,564

Adjustments
 
 
 
 
 
 
 
Depreciation and amortization
44,235

 
42,661

 
133,391

 
134,721

Share-based compensation
3,315

 
1,989

 
8,872

 
5,727
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