Caesars Entertainment, Inc. — FY2020 Form 10-K Summary
Business context and reporting period
Caesars Entertainment, formerly Eldorado Resorts, filed this Form 10-K for the year ended December 31, 2020. The July 20, 2020 merger with Former Caesars materially expanded the company to approximately 54 domestic properties in 16 states, about 54,600 gaming positions, 3,200 table games and 47,700 hotel rooms, plus international operations in five countries. Because Former Caesars was consolidated only from the merger date, 2020 results are not directly comparable with 2019.
Gaming was approximately 67% of 2020 net revenue, with food and beverage at approximately 10% and hotel operations at approximately 13%. The business was heavily affected by COVID-19-related closures, capacity limits, travel reductions and restrictions on entertainment, conventions and food and beverage operations.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Net revenue | $3.474 billion | $2.528 billion | Up 37.4%; primarily reflects the merger, partly offset by COVID-19 |
| Operating income (loss) | $(437) million | $410 million | Declined materially |
| Net income (loss) attributable to Caesars | $(1.757) billion | $81 million | Turned to a significant loss |
| Basic and diluted EPS | $(13.50) | $1.04 and $1.03 | Declined materially |
| Adjusted EBITDA | $737 million | $697 million | Up 5.7%; non-GAAP |
| Adjusted EBITDA margin | 21.2% | 27.6% | Down 6.4 percentage points |
| Net loss margin | (50.6)% | 3.2% | Down 53.8 percentage points |
| Cash flow from operations | $(582) million | $313 million | Declined by $895 million |
| Capital expenditures | $163 million | $171 million | Down $8 million |
Revenue by category was casino and pari-mutuel commissions of $2.337 billion, food and beverage of $337 million, hotel of $450 million and other revenue of $350 million. Operating expenses increased to $3.911 billion, including $215 million of impairment charges, $583 million of depreciation and amortization, and $268 million of transaction and other operating costs.
Interest expense increased to $1.174 billion from $286 million, and the company recorded a $197 million loss on extinguishment of debt. Other income was $176 million, substantially influenced by foreign-exchange gains related to the proposed William Hill acquisition and gains on investments and convertible-note conversions.
Liquidity, debt and balance sheet
| Balance-sheet metric | December 31, 2020 |
|---|---|
| Cash and cash equivalents | $1.758 billion |
| Restricted cash and investments | $2.021 billion |
| Total cash, cash equivalents and restricted cash | $4.216 billion |
| Face value of long-term debt | $15.023 billion |
| Long-term financing obligations | $12.295 billion total; VICI $11.004 billion and GLPI $1.231 billion |
| Revolver capacity | $2.210 billion before $84 million committed to letters of credit |
| Total stockholders’ equity | $5.034 billion |
The company estimated 2021 debt service, including principal and interest, at approximately $907 million and lease payments at approximately $1.1 billion. Estimated 2021 capital expenditures were $605 million to $765 million. Management stated that existing liquidity, operating cash flow, committed facilities and expected asset-sale proceeds should fund operations, capital requirements and debt service for the next twelve months, while warning that COVID-19 could adversely affect future liquidity.
Debt issued in connection with the merger included $3.4 billion of 6.25% senior secured notes due 2025, $1.8 billion of 8.125% senior notes due 2027 and $1.0 billion of 5.75% senior secured notes due 2025. The company also assumed or retained substantial CRC term loans and notes. At year-end, $6.4 billion of debt was variable-rate before interest-rate swaps, and $4.1 billion remained exposed to variable rates after swaps. A 100-basis-point increase in LIBOR was estimated to increase annual interest cost by approximately $41 million.
The company was in compliance with applicable debt and lease covenants at December 31, 2020. COVID-19-related covenant relief and waivers deferred certain financial covenant testing through September 30, 2021, subject to minimum liquidity requirements. The company does not pay cash dividends and does not anticipate paying them in the foreseeable future.
Material changes versus the prior comparable period
- The merger added Former Caesars’ Las Vegas, regional, managed and international businesses. Former Caesars contributed approximately $2.0 billion of revenue and a $1.2 billion net loss for the period from July 20 through December 31, 2020.
- Consolidated revenue increased, but Regional Adjusted EBITDA declined to $671 million from $732 million and Regional margin fell to 26.4% from 29.0% because of COVID-19 disruptions.
- COVID-19 caused property closures from mid-March through mid-May, reduced operating capacity after reopening and significant declines in destination markets such as Las Vegas, Atlantic City, Northern Nevada and New Orleans.
- Operating cash flow shifted from $313 million of inflow to $582 million of outflow, while interest expense rose by $888 million.
- The company recorded $215 million of impairment charges, including $100 million for goodwill, $16 million for trade names and approximately $99 million related to properties and corporate assets held for sale.
- Two equity offerings generated net proceeds of approximately $772 million in June and $1.9 billion in October. The October proceeds were placed in restricted cash to fund the proposed William Hill acquisition.
- The company sold Kansas City and Vicksburg for $230 million, Eldorado Shreveport for $140 million, Harrah’s Reno and Bally’s Atlantic City, and agreed to sell additional properties to satisfy regulatory and strategic objectives.
Guidance, outlook, risks and unusual items
The filing does not provide conventional revenue or earnings guidance. Management expected COVID-19 to continue having a significant effect on operating results, liquidity and financial condition, with recovery dependent on restrictions, vaccination, consumer demand, travel and discretionary spending.
- The proposed acquisition of William Hill was valued at approximately £2.9 billion, or $3.7 billion, and remained subject to gaming, court and other regulatory approvals at year-end. The company expected closing shortly after a UK court hearing scheduled for late March 2021.
- Announced or expected divestitures included MontBleu, Evansville, Belle of Baton Rouge, Harrah’s Louisiana Downs, Caesars Southern Indiana and Horseshoe Hammond. Several transactions remained subject to regulatory approvals and could produce additional impairment charges if sale proceeds are below carrying value.
- Hurricane Laura severely damaged the Lake Charles property, which remained closed pending construction of a new land-based casino. The company recorded a $44 million insurance receivable.
- The company is required to make a $325 million capital investment at Harrah’s New Orleans by July 15, 2024, in addition to other contractual payments.
- Risks include substantial leverage and fixed rent obligations, competition from casinos and online gaming, gaming-license and regulatory requirements, interest-rate and LIBOR transition risk, cybersecurity, labor relations, gaming receivable collectability, litigation and the uncertain integration of Former Caesars and William Hill.
- Goodwill and indefinite-lived intangible assets were $9.7 billion and $3.8 billion, respectively, at year-end. The filing highlights sensitivity to COVID-19 recovery assumptions, projected cash flows, discount rates and expected merger synergies.
Most important facts for investors to verify
- Whether post-pandemic visitation, capacity, hotel occupancy, conventions and entertainment revenue recover sufficiently to support the company’s fixed debt and lease obligations.
- The timing, financing, regulatory approvals and final economics of the William Hill acquisition, including any resulting increase in leverage.
- Actual cash generation after interest, rent, taxes, capital expenditures and required property investments, rather than relying solely on Adjusted EBITDA.
- Compliance with debt and lease covenants after temporary COVID-19 relief expires, particularly the minimum-liquidity requirements.
- Completion proceeds and accounting treatment for announced property divestitures, including potential additional impairment charges.
- The sustainability of the company’s $1.758 billion unrestricted cash balance after considering the approximately $1.9 billion restricted for William Hill and other restricted uses.
- The recoverability of goodwill, gaming licenses and other intangible assets, which depend on uncertain operating forecasts and valuation assumptions.
- Potential dilution from the remaining convertible notes, which could require approximately $379 million of cash and issuance of approximately 4.5 million shares upon conversion.