Note 8 - Litigation, Contractual Commitments, and Contingent Liabilities
Note 9 - Debt
Note 10 - Earnings per Share
Note 11 - Revenue Recognition
Note 12 - Stock-Based Compensation
Note 13 - Income Taxes
Note 14 - Related Party Transactions
Note 15 - Segment Reporting
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part Ii-Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
Exhibits
EX-3.1
a2019q1cecex31bylaws.htm
EX-10.4
a2019q1cecex104hession.htm
EX-31.1
a2019q1cecex312cfosect.htm
EX-32.1
a2019q1cecex322cfosect.htm
Caesars Entertainment Earnings 2019-03-31
CZR 10Q Quarterly Report
Balance Sheet
Income Statement
Cash Flow
Document
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Amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this ASU. We are currently assessing the effect the adoption of this standard will have on our financial statements.Fair Value Measurement - ASU 2018-13: Amended guidance modifies fair value measurement disclosure requirements including (i) removing certain disclosure requirements such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) modifying certain disclosure requirements, and (iii) adding certain disclosure requirements such as changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently assessing the effect the adoption of this standard will have on our financial statements.Intangibles - Goodwill and Other - Internal-Use Software - ASU 2018-15: Amended guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently assessing the effect the adoption of this standard will have on our financial statements.Collaborative Arrangements - ASU 2018-18: Amended guidance makes targeted improvements to GAAP for collaborative arrangements including: (i) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in ASC 808 to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606, and (iii) requiring that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied retrospectively to the date of initial application of ASC 606. An entity may elect to apply the amendments in this ASU retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of ASC 606. An entity should disclose its election. An entity may elect to apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in ASC 606. We are currently assessing the effect the adoption of this standard will have on our financial 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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_________________________
FORM 10-Q
_________________________
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2019
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to __________
Commission File No. 1-10410
_________________________
CAESARS ENTERTAINMENT CORPORATION
(Exact name of registrant as specified in its charter)
_________________________
Delaware
62-1411755
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
One Caesars Palace Drive, Las Vegas, Nevada
89109
(Address of principal executive offices)
(Zip Code)
(702) 407-6000
(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 x 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 x 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 an 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
x
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 x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Cash and cash equivalents ($14 and $14 attributable to our VIEs)
$
1,395
$
1,491
Restricted cash
119
115
Receivables, net
449
457
Due from affiliates, net
5
6
Prepayments and other current assets ($4 and $6 attributable to our VIEs)
184
155
Inventories
39
41
Total current assets
2,191
2,265
Property and equipment, net ($169 and $137 attributable to our VIEs)
15,922
16,045
Goodwill
4,044
4,044
Intangible assets other than goodwill
2,961
2,977
Restricted cash
52
51
Deferred income taxes
10
10
Deferred charges and other assets ($32 and $35 attributable to our VIEs)
856
383
Total assets
$
26,036
$
25,775
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable ($69 and $41 attributable to our VIEs)
$
411
$
399
Accrued expenses and other current liabilities ($2 and $1 attributable to our VIEs)
1,169
1,217
Interest payable
137
56
Contract liabilities
161
144
Current portion of financing obligations
21
20
Current portion of long-term debt
64
164
Total current liabilities
1,963
2,000
Financing obligations
9,990
10,057
Long-term debt
8,789
8,801
Deferred income taxes
692
730
Deferred credits and other liabilities ($8 and $5 attributable to our VIEs)
1,480
849
Total liabilities
22,914
22,437
Commitments and contingencies (Note 8)
Stockholders’ equity
Caesars stockholders’ equity
3,039
3,250
Noncontrolling interests
83
88
Total stockholders’ equity
3,122
3,338
Total liabilities and stockholders’ equity
$
26,036
$
25,775
See accompanying Notes to Consolidated Condensed Financial Statements.
3
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(UNAUDITED)
Three Months Ended March 31,
(In millions, except per share data)
2019
2018
Revenues
Casino
$
1,083
$
983
Food and beverage
398
383
Rooms
386
367
Other revenue
181
172
Management fees
15
15
Reimbursed management costs
52
52
Net revenues
2,115
1,972
Operating expenses
Direct
Casino
618
562
Food and beverage
269
264
Rooms
117
114
Property, general, administrative, and other
460
427
Reimbursable management costs
52
52
Depreciation and amortization
247
280
Corporate expense
83
82
Other operating costs
29
66
Total operating expenses
1,875
1,847
Income from operations
240
125
Interest expense
(349
)
(330
)
Other income/(loss)
(138
)
184
Loss before income taxes
(247
)
(21
)
Income tax benefit/(provision)
29
(13
)
Net loss
(218
)
(34
)
Net loss attributable to noncontrolling interests
1
—
Net loss attributable to Caesars
$
(217
)
$
(34
)
Loss per share - basic and diluted
Basic and diluted loss per share
$
(0.32
)
$
(0.05
)
Weighted-average common shares outstanding
670
697
Comprehensive loss
Foreign currency translation adjustments
$
—
$
3
Change in fair market value of interest rate swaps, net of tax
(17
)
4
Other
2
1
Other comprehensive income/(loss), net of income taxes
(15
)
8
Comprehensive loss
(233
)
(26
)
Amounts attributable to noncontrolling interests:
Foreign currency translation adjustments
2
(2
)
Comprehensive (income)/loss attributable to noncontrolling interests
3
(2
)
Comprehensive loss attributable to Caesars
$
(230
)
$
(28
)
See accompanying Notes to Consolidated Condensed Financial Statements.
4
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
Caesars Stockholders’ Equity
(In millions)
Common
Stock
Treasury
Stock
Additional
Paid-in-
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income/(Loss)
Total
Caesars
Stockholders’
Equity
Noncontrolling
Interests
Total Stockholders’ Equity
Balance as of December 31, 2017
$
7
$
(152
)
$
14,040
$
(10,675
)
$
6
$
3,226
$
71
$
3,297
Net loss
—
—
—
(34
)
—
(34
)
—
(34
)
Stock-based compensation
—
(12
)
22
—
—
10
—
10
Other comprehensive income, net of tax
—
—
—
—
9
9
—
9
Change in noncontrolling interest, net of distributions and contributions
—
—
—
—
—
—
21
21
Other
—
(1
)
—
—
—
(1
)
—
(1
)
Balance as of March 31, 2018
$
7
$
(165
)
$
14,062
$
(10,709
)
$
15
$
3,210
$
92
$
3,302
Balance as of December 31, 2018
$
7
$
(485
)
$
14,124
$
(10,372
)
$
(24
)
$
3,250
$
88
$
3,338
Net loss
—
—
—
(217
)
—
(217
)
(1
)
(218
)
Stock-based compensation
—
(5
)
21
—
—
16
—
16
Other comprehensive loss, net of tax
—
—
—
—
(13
)
(13
)
(2
)
(15
)
Change in noncontrolling interest, net of distributions and contributions
—
—
—
—
—
—
(2
)
(2
)
Other
—
3
—
—
—
3
—
3
Balance as of March 31, 2019
$
7
$
(487
)
$
14,145
$
(10,589
)
$
(37
)
$
3,039
$
83
$
3,122
See accompanying Notes to Consolidated Condensed Financial Statements.
5
CAESARS ENTERTAINMENT CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
(In millions)
2019
2018
Cash flows provided by operating activities
$
255
$
22
Cash flows from investing activities
Acquisitions of property and equipment, net of change in related payables
(218
)
(85
)
Proceeds from the sale and maturity of investments
5
16
Payments to acquire investments
(7
)
(14
)
Other
2
—
Cash flows used in investing activities
(218
)
(83
)
Cash flows from financing activities
Debt issuance costs and fees
—
(1
)
Repayments of long-term debt and revolving credit facilities
(116
)
(16
)
Proceeds from the issuance of common stock
—
3
Taxes paid related to net share settlement of equity awards
(5
)
(12
)
Financing obligation payments
(5
)
(2
)
Contributions from noncontrolling interest owners
—
20
Distributions to noncontrolling interest owners
(2
)
—
Other
—
2
Cash flows used in financing activities
(128
)
(6
)
Net decrease in cash, cash equivalents, and restricted cash
(91
)
(67
)
Cash, cash equivalents, and restricted cash, beginning of period
1,657
2,709
Cash, cash equivalents, and restricted cash, end of period
$
1,566
$
2,642
Supplemental Cash Flow Information:
Cash paid for interest
$
231
$
247
Cash received/(paid) for income taxes
2
(2
)
Non-cash investing and financing activities:
Change in accrued capital expenditures
(7
)
(2
)
See accompanying Notes to Consolidated Condensed Financial Statements.
6
CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
In this filing, the name “CEC” refers to the parent holding company, Caesars Entertainment Corporation, exclusive of its consolidated subsidiaries and variable interest entities, unless otherwise stated or the context otherwise requires. The words “Company,” “Caesars,” “Caesars Entertainment,” “we,” “our,” and “us” refer to Caesars Entertainment Corporation, inclusive of its consolidated subsidiaries and variable interest entities, unless otherwise stated or the context otherwise requires.
This Form 10-Q should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018 (“2018 Annual Report”). Capitalized terms used but not defined in this Form 10-Q have the same meanings as in the 2018 Annual Report.
We also refer to (i) our Consolidated Condensed Financial Statements as our “Financial Statements,” (ii) our Consolidated Condensed Balance Sheets as our “Balance Sheets,” (iii) our Consolidated Condensed Statements of Operations and Comprehensive Loss as our “Statements of Operations,” and (iv) our Consolidated Condensed Statements of Cash Flows as our “Statements of Cash Flows.”
Note 1 — Description of Business
Organization
CEC is primarily a holding company with no independent operations of its own. Caesars Entertainment operates the business primarily through its wholly owned subsidiaries CEOC, LLC (“CEOC LLC”) and Caesars Resort Collection, LLC (“CRC”). Caesars Entertainment operates a total of 53 properties in 14 U.S. states and five countries outside of the U.S., including 49 casino properties. Nine casinos are in Las Vegas, which represented 45% of net revenues for the three months endedMarch 31, 2019.
We lease certain real property assets from VICI Properties Inc. and/or its subsidiaries (“VICI”).
Note 2 — Basis of Presentation and Principles of Consolidation
Basis of Presentation and Use of Estimates
The accompanying unaudited consolidated condensed financial statements of Caesars have been prepared under the rules and regulations of the Securities and Exchange Commission (the “SEC”) applicable for interim periods, and therefore, do not include all information and footnotes necessary for complete financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”). The results for the interim periods reflect all adjustments (consisting primarily of normal recurring adjustments) that management considers necessary for a fair presentation of financial position, results of operations, and cash flows. The results of operations for our interim periods are not necessarily indicative of the results of operations that may be achieved for the entire 2019 fiscal year.
GAAP requires the use of estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses and the disclosure of contingent assets and liabilities. Management believes the accounting estimates are appropriate and reasonably determined. Actual amounts could differ from those estimates.
Reportable Segments
We view each property as an operating segment and aggregate all such properties into three regionally-focused reportable segments: (i) Las Vegas, (ii) Other U.S., and (iii) All Other, which is consistent with how we manage the business. See Note 15.
7
CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Cash, Cash Equivalents, and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents, and restricted cash reported on the Balance Sheets that sum to amounts reported on the Statements of Cash Flows.
(In millions)
March 31, 2019
December 31, 2018
Cash and cash equivalents
$
1,395
$
1,491
Restricted cash, current
119
115
Restricted cash, non-current
52
51
Total cash, cash equivalents, and restricted cash
$
1,566
$
1,657
Consolidation of Subsidiaries and Variable Interest Entities
Our consolidated financial statements include the accounts of Caesars Entertainment and its subsidiaries after elimination of all intercompany accounts and transactions.
We consolidate all subsidiaries in which we have a controlling financial interest and variable interest entities (“VIEs”) for which we or one of our consolidated subsidiaries is the primary beneficiary. Control generally equates to ownership percentage, whereby (i) affiliates that are more than 50% owned are consolidated; (ii) investments in affiliates of 50% or less but greater than 20% are generally accounted for using the equity method where we have determined that we have significant influence over the entities; and (iii) investments in affiliates of 20% or less are generally accounted for using the cost method.
We review our investments for VIE consideration if a reconsideration event occurs to determine if the investment continues to qualify as a VIE. If we determine an investment no longer qualifies as a VIE, a gain or loss may be recognized upon deconsolidation.
Consolidation of Korea Joint Venture
CEC has a joint venture to acquire, develop, own, and operate a casino resort project in Incheon, South Korea (the “Korea JV”). We determined that the Korea JV is a VIE and CEC is the primary beneficiary, and therefore, we consolidate the Korea JV into our financial statements.
The Financial Accounting Standards Board (the “FASB”) issued the following authoritative guidance amending the FASB Accounting Standards Codification (“ASC”).
In 2019, we adopted Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), and all related amendments (see Note 7).
The following ASUs were not effective as of March 31, 2019:
Previously Disclosed
Collaborative Arrangements - ASU 2018-18: Amended guidance makes targeted improvements to GAAP for collaborative arrangements including: (i) clarifying that certain transactions between collaborative arrangement participants should be accounted for as revenue under ASC 606 when the collaborative arrangement participant is a customer in the context of a unit of account, (ii) adding unit-of-account guidance in ASC 808 to align with the guidance in ASC 606 (that is, a distinct good or service) when an entity is assessing whether the collaborative arrangement or a part of the arrangement is within the scope of ASC 606, and (iii) requiring that in a transaction with a collaborative arrangement participant that is not directly related to sales to third parties, presenting the transaction together with revenue recognized under ASC 606 is precluded if the collaborative arrangement participant is not a customer. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments should be applied retrospectively to the date of initial application of ASC 606. An entity may elect to apply the amendments in this ASU retrospectively either to all contracts or only to contracts that are not completed at the date of initial application of ASC 606. An entity should disclose its election. An entity may elect to apply the practical expedient for contract modifications that is permitted for entities using the modified retrospective transition method in ASC 606. We are currently assessing the effect the adoption of this standard will have on our financial statements.
8
CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Intangibles - Goodwill and Other - Internal-Use Software - ASU 2018-15: Amended guidance aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The accounting for the service element of a hosting arrangement that is a service contract is not affected. The amendments in this update are effective for public entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this ASU should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently assessing the effect the adoption of this standard will have on our financial statements.
Fair Value Measurement - ASU 2018-13: Amended guidance modifies fair value measurement disclosure requirements including (i) removing certain disclosure requirements such as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, (ii) modifying certain disclosure requirements, and (iii) adding certain disclosure requirements such as changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period. The amendments in this update are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. We are currently assessing the effect the adoption of this standard will have on our financial statements.
Financial Instruments - Credit Losses - ASU 2016-13 (amended through April 2019): Amended guidance replaces the incurred loss impairment methodology with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. Amendments affect entities holding financial assets and net investments in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables and any other financial assets not excluded from the scope that have the contractual right to receive cash. Amendments are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted. An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this ASU. We are currently assessing the effect the adoption of this standard will have on our financial statements.
Note 4 — Property and Equipment
(In millions)
March 31, 2019
December 31, 2018
Land
$
4,774
$
4,871
Buildings, riverboats, and leasehold and land improvements
12,253
12,243
Furniture, fixtures, and equipment
1,621
1,563
Construction in progress
537
406
Total property and equipment
19,185
19,083
Less: accumulated depreciation
(3,263
)
(3,038
)
Total property and equipment, net
$
15,922
$
16,045
Our property and equipment is subject to various operating leases for which we are the lessor. We lease our property and equipment related to our hotel rooms, convention space and retail space through various short-term and long-term operating leases. See Note 7 for further discussion of our leases.
Depreciation Expense and Capitalized Interest
Three Months Ended March 31,
(In millions)
2019
2018
Depreciation expense
$
229
$
264
Capitalized interest
5
2
9
CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 5 — Goodwill and Other Intangible Assets
Changes in Carrying Value of Goodwill and Other Intangible Assets
Amortizing Intangible Assets
Non-Amortizing Intangible Assets
(In millions)
Goodwill
Other
Balance as of December 31, 2018
$
342
$
4,044
$
2,635
Amortization
(18
)
—
—
Other
—
—
2
Balance as of March 31, 2019
$
324
$
4,044
$
2,637
Gross Carrying Value and Accumulated Amortization of Intangible Assets Other Than Goodwill
March 31, 2019
December 31, 2018
(Dollars in millions)
Weighted
Average
Remaining
Useful Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Gross
Carrying
Amount
Accumulated
Amortization
Net
Carrying
Amount
Amortizing intangible assets
Trade names and trademarks
1.8
$
14
$
(4
)
$
10
$
14
$
(3
)
$
11
Customer relationships
4.2
1,071
(772
)
299
1,071
(756
)
315
Contract rights
5.8
3
(2
)
1
3
(2
)
1
Gaming rights and other
5.3
43
(29
)
14
43
(28
)
15
$
1,131
$
(807
)
324
$
1,131
$
(789
)
342
Non-amortizing intangible assets
Trademarks
790
790
Gaming rights
1,594
1,592
Caesars Rewards
253
253
2,637
2,635
Total intangible assets other than goodwill
$
2,961
$
2,977
10
CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
Note 6 — Fair Value Measurements
Items Measured at Fair Value on a Recurring Basis
The following table shows the fair value of our financial assets and financial liabilities that are required to be measured at fair value as of the date shown:
Estimated Fair Value
(In millions)
Balance
Level 1
Level 2
Level 3
March 31, 2019
Assets
Government bonds
$
16
$
—
$
16
$
—
Derivative instruments - interest rate swaps
1
—
1
—
Total assets at fair value
$
17
$
—
$
17
$
—
Liabilities
Derivative instruments - interest rate swaps
$
38
$
—
$
38
$
—
Derivative instruments - CEC Convertible Notes
486
—
486
—
Disputed claims liability
44
—
44
—
Total liabilities at fair value
$
568
$
—
$
568
$
—
December 31, 2018
Assets
Government bonds
$
15
$
—
$
15
$
—
Derivative instruments - interest rate swaps
6
—
6
—
Total assets at fair value
$
21
$
—
$
21
$
—
Liabilities
Derivative instruments - interest rate swaps
$
22
$
—
$
22
$
—
Derivative instruments - CEC Convertible Notes
324
—
324
—
Disputed claims liability
45
—
45
—
Total liabilities at fair value
$
391
$
—
$
391
$
—
Government Bonds
Investments primarily consist of debt securities held by our captive insurance entities that are traded in active markets, have readily determined market values, and have maturity dates of greater than three months from the date of purchase. These investments primarily represent collateral for several escrow and trust agreements with third-party beneficiaries and are recorded in Deferred charges and other assets while a portion is included in Prepayments and other current assets in our Balance Sheets.
Derivative Instruments
We do not purchase or hold any derivative financial instruments for trading purposes.
CEC Convertible Notes - Derivative Liability
On October 6, 2017, CEC issued $1.1 billion aggregate principal amount of 5.00% convertible senior notes maturing in 2024 (the “CEC Convertible Notes”) pursuant to the Indenture, dated as of October 6, 2017.
11
CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The CEC Convertible Notes are convertible at the option of holders into a number of shares of CEC common stock that is equal to approximately 0.139 shares of CEC common stock per $1.00 principal amount of CEC Convertible Notes, which is equal to an initial conversion price of $7.19 per share. If all the shares were issued on October 6, 2017, they would have represented approximately 17.9% of the shares of CEC common stock outstanding on a fully diluted basis. The holders of the CEC Convertible Notes can convert them at any time after issuance. CEC can convert the CEC Convertible Notes beginning in October 2020 if the last reported sale price of CEC common stock equals or exceeds 140% of the conversion price for the CEC Convertible Notes in effect on each of at least 20 trading days during any 30 consecutive trading day period. As of March 31, 2019, an immaterial amount of the CEC Convertible Notes were converted into shares of CEC common stock. An aggregate of 156 million shares of CEC common stock are issuable upon conversion of the CEC Convertible Notes, of which 151 million shares are net of amounts held by CEC. As of March 31, 2019, the remaining life of the CEC Convertible Notes is 5.5 years.
Management analyzed the conversion features for derivative accounting consideration under ASC Topic 815, Derivatives and Hedging, (“ASC 815”) and determined that the CEC Convertible Notes contain bifurcated derivative features and qualify for derivative accounting. In accordance with ASC 815, CEC has bifurcated the conversion features of the CEC Convertible Notes and recorded a derivative liability. The CEC Convertible Notes derivative features are not designated as hedging instruments. The derivative features of the CEC Convertible Notes are carried on CEC’s Balance Sheet at fair value in Deferred credits and other liabilities. The derivative liability is marked-to-market each measurement period and the changes in fair value of a loss of $162 million and income of $160 million, respectively, were recorded as components of Other income/(loss) for the three months endedMarch 31, 2019 and 2018 in the Statements of Operations. The derivative liability associated with the CEC Convertible Notes will remain in effect until such time as the underlying convertible notes are exercised or terminated and the resulting derivative liability will be transitioned from a liability to equity as of such date.
Valuation Methodology
The CEC Convertible Notes have a face value of $1.1 billion, a term of 7 years, and a coupon rate of 5%.
As of March 31, 2019 and December 31, 2018, we estimated the fair value of the CEC Convertible Notes using a market-based approach that incorporated the value of both the straight debt and conversion features of the notes. The valuation model incorporated actively traded prices of the CEC Convertible Notes as of the reporting date, the value of CEC’s equity into which these notes could convert, and assumptions regarding the incremental cost of borrowing for CEC. Since the key assumption used in the valuation model is the actively traded price of CEC Convertible Notes but the incremental cost of borrowing is an unobservable input, the fair value for the conversion features of the CEC Convertible Notes was classified as Level 2.
Key Assumptions as of March 31, 2019 and December 31, 2018:
•
Actively traded price of CEC Convertible Notes - $143.01 and $122.38, respectively
•
Incremental cost of borrowing - 6.0% and 7.0%, respectively
Interest Rate Swap Derivatives
We use interest rate swaps to manage the mix of our debt between fixed and variable rate instruments. As of March 31, 2019, we have entered into a total of ten interest rate swap agreements for notional amounts totaling $3.0 billion to fix the interest rate on variable rate debt. The interest rate swaps are designated as cash flow hedging instruments.
12
CAESARS ENTERTAINMENT CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
The major terms of the interest rate swap agreements as of March 31, 2019 are as follows: