Caesars Entertainment, Inc. — Q2 2021 Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2021. Results are not fully comparable with 2020 because of the July 2020 merger with Former Caesars, the April 2021 acquisition of William Hill, property divestitures, and COVID-19-related closures and restrictions.
Business context
Caesars operates casino, hospitality, entertainment, racing, sportsbook and online gaming businesses. As of June 30, 2021, it owned, leased or managed 52 domestic properties in 16 states, with approximately 55,300 gaming positions and 46,200 hotel rooms. It conducted sports wagering in 17 states plus the District of Columbia and operated regulated online real-money gaming in five states.
The April 22, 2021 acquisition of William Hill expanded Caesars Digital and sports-betting operations. William Hill International was classified as held for sale and reported within discontinued operations.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net revenues | $2.502 billion | $127 million | $4.294 billion | $600 million |
| Operating income (loss) | $590 million | $(79) million | $806 million | $(202) million |
| Net income (loss) | $72 million | $(100) million | $(352) million | $(276) million |
| Net income (loss) attributable to Caesars | $71 million | $(100) million | $(352) million | $(276) million |
| Adjusted EBITDA | $1.004 billion | $(11) million | $1.539 billion | $92 million |
| Net income margin | 2.9% | (78.7)% | (8.2)% | (46.0)% |
| Adjusted EBITDA margin | 40.1% | (8.7)% | 35.8% | 15.3% |
Q2 revenue comprised casino and pari-mutuel commissions of $1.571 billion, food and beverage revenue of $281 million, hotel revenue of $396 million and other revenue of $254 million. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, interest, taxes, depreciation and amortization, transaction costs, stock-based compensation and certain unusual items.
Segment Q2 revenue and Adjusted EBITDA were $855 million and $423 million in Las Vegas, $1.490 billion and $602 million in Regional, $86 million and $(5) million in Caesars Digital, and $66 million and $26 million in Managed and International. Caesars Digital’s results reflected higher marketing and promotional spending associated with sportsbook and iGaming expansion.
Cash flow, liquidity and balance sheet
- Operating cash flow for the first six months was $672 million, compared with $(81) million in the prior-year period.
- Investing cash flow was $(1.980) billion, including $2.042 billion for the William Hill acquisition and $272 million for gaming rights and trademarks, partially offset by $460 million of asset-sale proceeds.
- Capital expenditures were $177 million through June 30, compared with $41 million in the prior-year period.
- Cash and cash equivalents were $1.128 billion at June 30, down from $1.776 billion at December 31, 2020. Cash, cash equivalents and restricted cash totaled $2.170 billion.
- The company reported $2.210 billion of total revolving capacity, with $2.210 billion of stated capacity reduced by $92 million committed to letters of credit and $48 million committed for regulatory purposes; reported available liquidity, including cash, was $3.198 billion.
- Face value of total debt was $14.673 billion and book value was $13.922 billion, excluding the current portion and deferred financing charges as separately presented. Long-term debt on the balance sheet was $13.838 billion, and long-term financing obligations were $12.374 billion.
- Interest expense was $576 million in Q2 and $1.155 billion for the first six months, compared with $68 million and $135 million, respectively, in the prior-year periods.
Material changes versus the prior comparable period
- Revenue and operating profitability improved substantially as properties reopened, capacity restrictions eased and customer demand recovered from the severe COVID-19 disruption in 2020.
- The comparison includes a much larger business following the Former Caesars merger and William Hill acquisition; therefore, reported year-over-year growth is not an organic comparison.
- The company recorded no impairment charges in the first six months of 2021, compared with $161 million in the prior-year period, including COVID-19-related goodwill and trade-name impairments and a MontBleu impairment.
- William Hill acquisition-related costs were $62 million in Q2 and $67 million for the first six months. Merger-related costs were $3 million and $15 million, respectively.
- All outstanding 5% Convertible Notes were converted in June 2021, resulting in $367 million of cash payments, approximately five million shares issued and a $23 million loss on debt extinguishment.
- Caesars sold MontBleu and Evansville during the period and recorded a gain of less than $1 million on MontBleu and approximately $12 million on Evansville. Horseshoe Hammond was reclassified from held for sale to held and used after an Indiana Gaming Commission order change.
Guidance, outlook, unusual items and risks
Management stated that current liquidity, operating cash flow, revolving capacity and expected asset-sale proceeds are expected to fund operations, capital requirements and debt service for the next twelve months. The filing does not provide formal revenue or EBITDA guidance.
- Remaining 2021 capital expenditures were estimated at $580 million to $745 million, producing estimated full-year spending of approximately $757 million to $922 million when combined with the $177 million spent through June 30.
- Management expects significant additional marketing expenditure for the launch and expansion of Caesars-branded sportsbook and iGaming applications. Digital profitability may remain pressured by customer-acquisition costs and competition.
- William Hill International is expected to be sold, with proceeds intended to repay borrowings under the William Hill bridge financing. The filing warns that the sale may not occur on acceptable terms or at all.
- The company expected approximately $442 million of remaining 2021 debt service and approximately $600 million of remaining 2021 lease payments to VICI and GLPI.
- COVID-19 remained a material uncertainty, including potential variants, renewed restrictions, travel impacts, consumer demand and vaccine acceptance. Debt covenant testing was suspended through September 30, 2021, subject to minimum liquidity requirements.
- Lake Charles remained closed after Hurricane Laura and was expected to remain closed until completion of a new land-based casino in the third quarter of 2022. The company received approximately $40 million of insurance proceeds and recorded an approximately $22 million gain.
- Caesars filed a lawsuit seeking insurance recovery for COVID-19 losses expected to exceed $2 billion; insurers denied coverage, and the outcome was uncertain.
- The company was subject to substantial leverage, lease obligations, variable-rate debt and LIBOR-transition risk. As of June 30, $4.0 billion of debt remained subject to variable interest rates after hedging arrangements.
Investor verification checklist
- Verify the sustainability of the Q2 recovery, including Las Vegas and Regional segment margins, once comparisons normalize after the COVID-19 and acquisition effects.
- Reconcile Adjusted EBITDA to GAAP earnings and assess the significance of excluded acquisition, marketing, restructuring, litigation and other unusual costs.
- Track the timing, valuation and proceeds of planned sales, particularly William Hill International, Caesars Southern Indiana, Harrah’s Louisiana Downs and Baton Rouge.
- Assess leverage, upcoming 2024–2025 maturities, lease obligations, bridge-financing repayment requirements and compliance with post-September 2021 covenant testing.
- Evaluate the cash requirements and expected returns of Caesars Digital expansion, including marketing, technology, licensing and third-party platform costs.
- Monitor COVID-19 developments, Lake Charles reconstruction, the insurance litigation and other regulatory or legal contingencies.