Caesars Entertainment, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020. The July 20, 2020 merger with Former Caesars materially expanded the company and makes comparisons with 2019 not fully comparable. The combined company owned, leased or managed 56 domestic properties in 16 states, with approximately 48,800 hotel rooms as of September 30, 2020.
Financial Performance and Liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Net revenues | $1.377 billion, up 107.7% | $1.977 billion, up 2.1% |
| Operating income (loss) | $(152) million | $(354) million |
| Net income (loss) attributable to Caesars | $(926) million | $(1.202) billion |
| Net loss per diluted share | $(6.09) | $(11.56) |
| Adjusted EBITDA | $351 million | $441 million |
| Adjusted EBITDA margin | 25.5% | 22.3% |
| Cash flow from operating activities | Not separately presented | $(220) million |
- Quarterly revenue growth primarily reflected the merger, while COVID-19 closures, capacity restrictions, reduced travel and lower convention, entertainment, food and beverage activity adversely affected results.
- Interest expense increased to $473 million for the quarter and $608 million year to date, compared with $72 million and $217 million, respectively, in the prior-year periods.
- The company recorded $161 million of impairment charges during the first nine months, including $100 million of goodwill, $16 million of trade names and $45 million related to MontBleu.
- Transaction and other operating costs were $219 million for the quarter and $242 million year to date, primarily related to the merger, exit costs, professional fees and severance.
- Cash and cash equivalents were $1.037 billion at September 30, 2020. Cash, cash equivalents and restricted cash totaled $3.701 billion, including $2.1 billion deposited into escrow for the proposed William Hill acquisition.
- Net cash used in investing activities was $6.258 billion, including $6.374 billion for the Former Caesars acquisition. Net cash provided by financing activities was $9.943 billion.
- Capital expenditures were $98 million for the first nine months, and management expected approximately $50 million to $75 million of additional capital expenditures during the remainder of 2020.
Debt, Leases and Liquidity
- Total debt had a face value of $16.221 billion and a book value of $15.270 billion at September 30, 2020; long-term debt, net of current maturities, was $15.203 billion.
- Major financing included $3.4 billion of 6.25% secured notes due 2025, $1.8 billion of 8.125% unsecured notes due 2027, $1.0 billion of 5.75% secured notes due 2025, and an incremental $1.8 billion CRC term loan.
- Financing obligations totaled $12.547 billion, including approximately $11.325 billion related to VICI leases and $1.225 billion related to GLPI leases.
- At September 30, the company reported $1.037 billion of cash and $1.310 billion of revolver capacity, less $83 million committed to letters of credit, for total reported liquidity of $2.264 billion.
- The company had $900 million outstanding under the CEI revolving facility at September 30, 2020; it repaid that balance after quarter-end following release of William Hill escrow funds.
- Management stated that current liquidity, operating cash flows, committed facilities and announced asset sales were expected to fund operations, capital requirements and debt service for the next twelve months, while warning that COVID-19 could adversely affect future liquidity.
Material Changes Versus the Prior Comparable Period
- The merger transformed the company’s scale and financial profile. Former Caesars contributed $924 million of revenue and a $564 million net loss from July 20 through September 30, 2020.
- Quarterly revenue increased from $663 million to $1.377 billion, but the company shifted from $37 million of net income to a $926 million net loss attributable to Caesars.
- Year-to-date Adjusted EBITDA declined from $542 million to $441 million, and Adjusted EBITDA margin declined from 28.0% to 22.3%.
- Regional quarterly Adjusted EBITDA increased to $331 million from $205 million, partly due to acquired properties and cost reductions; however, year-to-date Regional Adjusted EBITDA declined to $439 million from $569 million.
- Operating cash flow changed from $260 million provided in the prior-year period to $220 million used in the first nine months of 2020.
- Debt increased substantially from $2.571 billion of total debt at December 31, 2019 to $16.221 billion at September 30, 2020, primarily due to the merger and related financing.
Guidance, Outlook, Risks and Unusual Items
- All properties were temporarily closed from mid-March through mid-May 2020. At September 30, The Cromwell, Planet Hollywood, Rio and Caesars Windsor remained closed; Planet Hollywood and Caesars Windsor reopened October 8, and The Cromwell reopened October 29.
- Management expected COVID-19 to continue having a significant impact on demand, operating capacity, hotel occupancy, entertainment, conventions, financial condition and results of operations. Approximately 90% of employees were furloughed beginning April 11, 2020, with benefits for furloughed employees subsequently extended indefinitely.
- The company obtained covenant waivers and lease relief related to COVID-19. Financial covenant measurement periods under the CEI and CRC credit agreements were suspended through September 30, 2021, subject to minimum liquidity requirements. The company reported compliance with applicable debt and lease covenants as of September 30.
- On September 30, the company announced a proposed approximately £2.9 billion, or $3.7 billion, cash acquisition of William Hill plc. Completion depended on shareholder and regulatory approvals and would require additional financing and integration efforts.
- The company completed or planned substantial divestitures, including Harrah’s Reno, Eldorado Shreveport, MontBleu, Harrah’s Louisiana Downs, Evansville, Caesars Southern Indiana, Horseshoe Hammond and certain international properties. Several transactions remained subject to regulatory approvals and closing conditions.
- Hurricane Laura severely damaged Isle of Capri Casino Lake Charles, which remained closed. The company recorded a $31 million insurance receivable, including $15 million for fixed-asset impairments and $16 million for remediation and repairs.
- Other significant items included a $173 million loss on extinguishment of debt, a $87 million quarterly loss from remeasurement of the convertible-notes derivative liability, and a $45 million MontBleu impairment.
- Key risks include prolonged or renewed COVID-19 restrictions, discretionary-spending weakness, substantial debt and lease obligations, interest-rate and LIBOR transition risk, regulatory and gaming-license requirements, required divestitures, acquisition execution risk, litigation and severe weather or other catastrophic events.
Most Important Facts for Investors to Verify
- Whether post-pandemic visitation, operating capacity and consumer demand recover sufficiently to support positive operating cash flow.
- The company’s ability to service approximately $16.2 billion of debt and substantial VICI and GLPI financing obligations while maintaining covenant compliance.
- Final terms, financing, regulatory approvals, closing status and leverage implications of the William Hill acquisition.
- Timing, proceeds and regulatory conditions for announced divestitures, including the required Indiana property sales.
- The final purchase-price allocation for Former Caesars, including goodwill and intangible valuations, which remained preliminary.
- Insurance recoveries, repair costs and reopening prospects for Lake Charles.
- Whether reported Adjusted EBITDA trends translate into sustainable GAAP earnings and operating cash flow; Adjusted EBITDA is non-GAAP and excludes significant interest, rent, capital expenditure, debt repayment and other cash requirements.