Caesars Entertainment, Inc. — Q2 2020 Form 10-Q Summary
Business context and reporting period
The filing covers the three and six months ended June 30, 2020. The company was formerly Eldorado Resorts, Inc.; the Caesars Entertainment Corporation merger closed on July 20, 2020, after the reporting period. Accordingly, the reported financial statements primarily reflect the pre-merger Eldorado business, which operated 23 gaming facilities in 11 states as of June 30, 2020.
All casino properties were temporarily closed from mid-March through mid-May because of COVID-19-related government orders. Reopenings began May 18 with capacity, health and safety, hotel, food and beverage, entertainment, and other operating restrictions. Elgin and Tropicana Atlantic City reopened July 1 and July 2, respectively.
Financial performance and key metrics
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net revenues | $126.5 million | $637.1 million | $599.5 million | $1.273 billion |
| Operating income (loss) | $(78.3) million | $102.6 million | $(201.5) million | $226.2 million |
| Net income (loss) | $(100.0) million | $18.9 million | $(275.6) million | $57.2 million |
| Adjusted EBITDA | $(10.4) million | $178.7 million | $92.2 million | $345.3 million |
| Operating margin | (61.9%) | 16.1% | (33.6%) | 17.8% |
| Net margin | (79.1%) | 3.0% | (46.0%) | 4.5% |
| Loss per diluted share | $(1.25) | $0.24 | $(3.49) | $0.73 |
- Q2 revenue declined 80.1%; six-month revenue declined 52.9%. Excluding divestitures, revenue decreased 78.2% and 48.1%, respectively.
- Q2 casino and pari-mutuel revenue fell 77.8%, while non-gaming revenue fell 86.1%, reflecting closures and limited reopening operations.
- Six-month operating expenses declined 26.5%, primarily from lower activity, furloughs, payroll reductions, and other cost controls, but included $160.8 million of impairment charges.
- Impairments included $99.5 million of goodwill, $15.6 million of trade names, and $45.6 million related primarily to the planned sale of MontBleu.
- Interest expense was $68.1 million in Q2 and $134.6 million for the six months. The GLPI financing obligation was $975.8 million at June 30.
Cash flow, debt, and liquidity
- Six-month operating cash flow was $(80.5) million versus $127.9 million provided in the prior-year period.
- Six-month investing cash flow was $(41.4) million, including $41.0 million of capital expenditures.
- Six-month financing cash flow was $862.7 million, driven by $772.4 million of net common-stock proceeds and $465.0 million of revolver borrowings, partly offset by $357.0 million of revolver repayments and $10.0 million of term-loan repayments.
- Cash and cash equivalents were $950.5 million at June 30, 2020. Reported cash, cash equivalents, and restricted cash totaled $957.4 million.
- Available revolver capacity was $372.9 million after outstanding letters of credit; cash plus revolver capacity was approximately $1.323 billion.
- Reported long-term debt was $2.671 billion, plus the $975.8 million GLPI financing obligation. The company also had a $246.0 million Lumière Loan scheduled to mature in October 2020, expected to be refinanced through a long-term lease or financing obligation.
- The company obtained credit-facility covenant relief through September 30, 2021, subject to a minimum liquidity requirement of $200 million. The GLPI lease amendment provided additional covenant relief for closures and government restrictions and became effective after June 30.
Material changes and subsequent events
- On June 19, 2020, the company issued 20.7 million common shares at $39.00 per share and received $772.4 million net proceeds.
- On July 1, 2020, the company completed the sales of Kansas City and Vicksburg. Eldorado Shreveport and MontBleu were agreed to be sold for approximately $155 million, subject to approvals and expected to close in the first quarter of 2021.
- The Indiana Gaming Commission required divestiture of three Indiana properties as a condition to merger approval. The company planned to divest Evansville and two additional acquired properties before December 31, 2020.
- The July 20 merger created the combined Caesars organization. Implied merger consideration was approximately $8.46 billion, consisting of approximately $6.09 billion in cash and $2.37 billion in company stock; former Eldorado and former Caesars stockholders owned approximately 56% and 44%, respectively, after closing.
- In connection with the merger, the company issued or assumed $3.4 billion of 6.250% secured notes due 2025, $1.8 billion of 8.125% senior notes due 2027, and $1.0 billion of CRC secured notes due 2025. Existing Eldorado debt facilities and certain notes were repaid or redeemed.
- VICI transactions generated approximately $1.82 billion of sale-leaseback proceeds and a $1.38 billion one-time lease-amendment payment. The company also expected an additional approximately $500 million from a proposed land sale and mortgage transaction.
Outlook, risks, and unusual items
- Management expected continued significant COVID-19 effects on demand, operations, cash flow, profitability, and liquidity. It cited potential renewed closures, capacity restrictions, reduced discretionary spending, consumer concerns, and prolonged recovery times.
- Management estimated $150 million to $175 million of capital expenditures for the remainder of 2020, approximately $200 million of debt service for the remainder of 2020, and approximately $540 million of lease payments for the remainder of 2020.
- Following the merger-related financing and transactions, management estimated total liquidity of approximately $4.3 billion, including approximately $2.3 billion of cash and $2.0 billion of revolver availability. This estimate included expected regulatory approvals and other future transactions.
- The company estimated a cash payment of approximately $1.3 billion to settle assumed convertible notes during 2020 and warned that debt extinguishment losses in the third quarter could be significant.
- Key risks include substantial debt and lease obligations, covenant compliance, gaming regulation and approvals, required divestitures, competition and online gaming, interest-rate and LIBOR transition risk, litigation, labor and employee-retention issues, and the uncertain duration of COVID-19 impacts.
- Adjusted EBITDA is a non-GAAP measure and excludes significant cash requirements, including capital expenditures, interest, taxes, debt repayments, and lease payments.
Important facts for investors to verify
- Post-merger consolidated debt, lease obligations, liquidity, rent burden, and the final allocation of purchase price.
- Whether COVID-19 restrictions, property closures, consumer demand, and operating capacity materially changed after June 30, 2020.
- Completion, timing, proceeds, and regulatory approval of the required Indiana and other property divestitures.
- Settlement of the assumed convertible notes and any third-quarter 2020 debt extinguishment loss.
- Actual availability under the combined revolving facilities and receipt of the expected incremental capacity and VICI proceeds.
- Progress toward the estimated capital expenditures, debt service, lease payments, and liquidity assumptions for the remainder of 2020.