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CZR > SEC Filings for CZR > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for CAESARS ENTERTAINMENT CORP


9-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of the financial position and operating results of Caesars Entertainment for the quarters ended March 31, 2013 and 2012 should be read in conjunction with Management's Discussion and Analysis of Financial Condition and Results of Operations presented in our 2012 10-K. Regional Aggregation
The executive officers of the Company review operating results, assess performance, and make decisions related to the allocation of resources on a property-by-property basis. We believe, therefore, that each property is an operating segment and that it is appropriate to aggregate and present the operations of the Company as one reportable segment. To provide more meaningful information than would be possible on a consolidated basis, the Company's casino properties (as of March 31, 2013 or otherwise noted below), have been grouped into seven regions as shown in the table below to facilitate discussion of the Company's operating results.

Las Vegas              Atlantic City         Louisiana/Mississippi      Iowa/Missouri
Caesars Palace         Harrah's Atlantic
                       City                  Harrah's New Orleans       Harrah's North Kansas City
Bally's Las Vegas      Showboat Atlantic
                       City                  Harrah's Louisiana Downs   Harrah's Council Bluffs
Flamingo Las Vegas     Bally's Atlantic                                 Horseshoe Council
(a)                    City                  Horseshoe Bossier City     Bluffs/Bluffs Run
Harrah's Las Vegas     Caesars Atlantic
                       City                  Grand Biloxi
Paris Las Vegas        Harrah's
                       Philadelphia (c)      Harrah's Tunica
Rio                                          Horseshoe Tunica
The Quad Resort &                            Tunica Roadhouse Hotel &
Casino                                       Casino
Bill's Gamblin'
Hall & Saloon (b)
Planet Hollywood
Resort & Casino


Illinois/Indiana             Other Nevada          Managed and International
Horseshoe Southern Indiana   Harrah's Reno         Harrah's Ak-Chin (e)
Harrah's Joliet (d)          Harrah's Lake Tahoe   Harrah's Cherokee (e)
Harrah's Metropolis          Harveys Lake Tahoe    Harrah's Rincon (e)
Horseshoe Hammond            Harrah's Laughlin     Horseshoe Cleveland (f)
                                                   Horseshoe Cincinnati (f)
                                                   Conrad Punta del Este (g)
                                                   Caesars Windsor (h)
                                                   London Clubs International (i)


__________________


(a) Includes O'Shea's Casino, which is adjacent to this property. O'Shea's Casino temporarily ceased operations on April 30, 2012 and is expected to reopen in 2013 as part of The Quad Resort & Casino.

(b) Bill's Gamblin' Hall & Saloon temporarily closed in early February 2013 to accommodate the renovations into a boutique lifestyle hotel that includes a dayclub/nightclub. The renovated hotel, casino, and restaurant are expected to re-open as the Gansevoort Las Vegas in early 2014 and the dayclub/nightclub is expected to open in the first half of 2014.

(c) We have a 99.5% ownership interest in and manage this property.

(d) We have an 80% ownership interest in and manage this property.

(e) Managed.

(f) We manage this property and have a 20% interest in Rock Ohio Caesars, LLC, which owns this property.

(g) We have an approximately 95% ownership interest in and manage this property. In November 2012, we entered into a definitive agreement with Enjoy to sell 45% of Baluma S.A., our subsidiary that owns and operates Conrad. Upon consummation of the transaction we will have an approximate 52% ownership in this property and will no longer manage the property.

(h) We operate this property and the province of Ontario owns the complex through the Ontario Lottery and Gaming Corporation.

(i) We own, operate, or manage nine casino clubs in the provinces of the United Kingdom and two in Egypt. We have a 70% ownership interest in and manage one casino in South Africa.


Consolidated Operating Results

                                                          Quarter Ended March 31,          Percent
                                                                                          Favorable/
(Dollars in millions)                                       2013            2012        (Unfavorable)
Casino revenues                                        $    1,495.1      $ 1,625.0            (8.0 )%
Net revenues                                                2,143.2        2,206.1            (2.9 )%
Income from operations                                        141.8           61.3           131.3  %
Loss from continuing operations, net of income taxes         (175.7 )       (288.4 )          39.1  %
(Loss)/income from discontinued operations, net of
income taxes                                                  (41.0 )          7.3               *
Net loss attributable to Caesars                             (217.6 )       (280.6 )          22.5  %
Operating Margin (1)                                            6.6 %          2.8 %       3.8 pts
Property EBITDA (2)                                           487.4          556.6           (12.4 )%

Net revenues, income from operations, and loss from continuing operations, net of income taxes for all periods presented in the table above exclude the results of the Harrah's St. Louis casino which was sold in November 2012, the results of Alea Leeds casino which was closed in March 2013 and the results of the subsidiaries that hold our land concession in Macau, all of which are presented as discontinued operations.

See footnotes following the Managed, International, and Other Region results discussion later in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

* Not meaningful. Quarter ended March 31, 2013 compared with March 31, 2012 Net revenues decreased $62.9 million and casino revenues declined $129.9 million in the first quarter 2013 compared to the very strong prior year quarter, as a result of declines in overall visitation to our properties, likely related to weakness in consumer sentiment, particularly among less affluent consumers. Revenues dropped most significantly in the Atlantic City region due to continued competitive pressure in the region, weakness in the economic environment, and the slow recovery from Hurricane Sandy. In addition, revenues in Las Vegas were impacted by the continuing construction activity for Project Linq, including the ongoing renovation of The Quad Resort & Casino (the "Quad"), and the closure of Bill's Gamblin' Hall & Saloon ("Bill's") in February 2013 for renovation. Revenues attributable to Caesars Interactive Entertainment, Inc. ("CIE") increased from the prior year quarter due partially to the late-2012 acquisition of substantially all of the assets of Buffalo Studios, LLC ("Buffalo"), creator of Bingo Blitz, and continued strength in the social and mobile games business. Revenues for the Company's Managed properties increased $60.7 million from the prior year quarter, mainly due to new managed projects, including Horseshoe Cleveland, which opened in May 2012, Horseshoe Cincinnati, which opened in March 2013, and the management company for Caesars Windsor, which the Company is now consolidating due to the fact that it increased its ownership from 50% to 100%. First quarter 2013 income from operations increased $80.5 million, or 131.3%, compared to the first quarter 2012. The increase was primarily due to $174.0 million of tangible asset impairment charges in the first quarter 2012, compared to a $20.0 million intangible asset impairment charge in the first quarter 2013. Additionally, the following items adversely impacted the comparability of income from operations:
• a first quarter 2012 property tax refund of approximately $10 million that did not recur in 2013,

• a first quarter 2012 benefit from the receipt of business interruption insurance proceeds of approximately $7 million that did not recur in 2013,

• an approximately $6 million to $8 million decrease in first quarter 2013 operating income due to the continuing construction activity for Project Linq, and

• a $52.4 million charge for a contingent earnout liability recorded during the first quarter 2013 related to CIE's acquisition of Buffalo's assets.

Aside from these items affecting comparability, income from operations increased slightly due mainly to a first quarter 2013 benefit from decreases in certain costs when compared to the prior year quarter, including a $17.8 million decrease in depreciation expense resulting from assets that became fully depreciated early in the current quarter, a $16.1 million decrease in corporate expense due primarily to a reduction in stock-based compensation expense, and decreases in expenses resulting from the Company's cost savings initiatives. These declines in expenses were partially offset by lower casino revenues in the first quarter 2013 when compared to the prior year quarter.


Net loss attributable to Caesars decreased $63.0 million, or 22.5%, in the first quarter 2013 from 2012. The decrease was due mainly to the $80.5 million increase in income from operations described above and a $131.9 million increase in the benefit for income taxes. Partially offsetting the impact of the above factors was a $12.7 million increase in interest expense, net of interest capitalized, a $82.5 million unfavorable change in (loss)/gain on early extinguishments of debt, and a $48.3 million unfavorable change in the
(loss)/income from discontinued operations, net of income taxes, partially as a result of the sale of Harrah's St. Louis, all of which are further described in "Other Factors Affecting Net Loss" that follow herein. The decline in first quarter 2013 Property EBITDA from 2012 is primarily driven by the factors described above. Further details on this non-GAAP financial measure follows herein. On a consolidated basis, first-quarter cash average daily room rates for 2013 remained flat from 2012 as lower rates caused by reduced business in Atlantic City and the change in the mix of group business in the Las Vegas region were offset by rate increases in the Louisiana/Mississippi and Other Nevada regions. Total occupancy percentage decreased 2.9 percentage points in the first quarter 2013 from 2012 due to declines in all U.S. regions but most significantly in Atlantic City.

Regional Operating Results
Las Vegas Region

                           Quarter Ended March 31,          Percent
                                                           Favorable/
(Dollars in millions)       2013             2012        (Unfavorable)
Casino revenues        $     393.5       $     417.2            (5.7 )%
Net revenues                 751.7             771.6            (2.6 )%
Income from operations       104.3             120.1           (13.2 )%
Operating Margin (1)          13.9 %            15.6 %     (1.7) pts
Property EBITDA (2)          197.9             211.3            (6.3 )%

Net revenues decreased $19.9 million, or 2.6%, in the first quarter 2013 compared with the prior year quarter. Construction activities associated with Project Linq and activities associated with the renovations of the Quad and Bill's have unfavorably impacted the revenues in the region, as well as the comparison to a strong quarter in the prior year. We estimate that these development and construction activities reduced first quarter 2013 revenues in Las Vegas by approximately $10 million to $13 million and reduced income from operations and Property EBITDA by approximately $6 million to $8 million. Casino revenues were down $23.7 million, or 5.7%, due to an overall reduction in visitation to the region's properties.
Food and Beverage revenues increased $16.3 million, or 8.2%, due to the addition of several new restaurant offerings such as Bacchanal Buffet and Nobu at Caesars Palace and Gordon Ramsay-branded restaurants at Caesars Palace, Paris, and Planet Hollywood.
Hotel revenues were down $6.6 million, or 3.4%, as a result of a decrease in cash average daily room rates from $95 in 2012 to $94 in 2013 and a decrease in occupancy of 1.4 percentage points driven mainly by a change in the mix of group business, and the impact of the renovations of the Quad and Bill's and the Project Linq construction activities.
Overall, property operating expenses in the region declined as a result of decreases in costs attributable to our cost savings initiatives which were partially offset by an increase in bad debt expense and increases in variable costs associated with higher Food and Beverage revenue. Depreciation expense in the region decreased as a result of assets becoming fully depreciated, while write-downs, reserves, and project opening costs, net of recoveries increased as a result of additional remediation costs in 2013 when compared with 2012. Property EBITDA declined $13.4 million, or 6.3% , due mainly to the factors above.


During 2012, we secured $185.0 million in financing to fund the complete renovation of Bill's into a boutique lifestyle hotel that includes a dayclub/nightclub. The renovation will include a complete remodeling of the guest rooms, casino floor, and common areas, the addition of a second floor restaurant, and the construction of an approximately 65,000 square foot rooftop pool and dayclub/nightclub. We will own the property and manage the casino, hotel, and food and beverage operations, and the dayclub/nightclub will be leased to a third party. Bill's temporarily closed in early February 2013 to accommodate these renovations. The renovated hotel, casino, and restaurant are expected to re-open as the Gansevoort Las Vegas in early 2014 and the dayclub/nightclub is expected to open in the first half of 2014. Through March 31, 2013, $4.6 million had been spent on this project, of which $1.6 million was spent in 2013.
During 2011, we commenced construction on Project Linq, a dining, entertainment, and retail development between the Flamingo casino and the Quad, on the east side of the Las Vegas Strip, which is scheduled to open in phases beginning in late 2013. Project Linq also includes the construction of a 550-foot observation wheel, the High Roller, which is expected to open in early 2014. Through March 31, 2013, $312.4 million had been spent on this project, of which $71.8 million was spent in 2013.
Atlantic City Region

                                 Quarter Ended March 31,         Percent
                                                                Favorable/
(Dollars in millions)              2013             2012      (Unfavorable)
Casino revenues               $     310.6        $  372.4           (16.6 )%
Net revenues                        365.3           432.5           (15.5 )%
(Loss)/income from operations        (3.2 )          18.8               *
Operating Margin (1)                 (0.9 )%          4.3 %     (5.2) pts
Property EBITDA (2)                  51.2            69.9           (26.8 )%


___________________


* Not meaningful. The Atlantic City region continues to be affected by a weak economic environment, and the very slow recovery from the effects of Hurricane Sandy, which made landfall in the fourth quarter 2012. This, combined with continued competitive pressure in the region, has caused a significant decline in visitation to the region's properties as compared to 2012. As a result, net revenues in the region declined $67.2 million, or 15.5%, in the first quarter of 2013 from the year-earlier period. However, property operating expenses in 2013 were also lower than in 2012 as a result of significant decreases in costs attributable to our cost savings initiatives and more efficient marketing spending, partially offset by an increase in write-downs, reserves and project opening costs, net of recoveries. The 2012 quarter income from operations also included approximately $10 million for property tax refund benefits that did not recur in 2013. The above factors contributed to the decrease in Property EBITDA of $18.7 million, or 26.8% . We expect that the region will continue to be challenged as a result of the slow recovery from the hurricane and competitive pressures. In response, the Company will continue to focus on controlling costs to align the cost structure with lower revenue levels. Louisiana/Mississippi Region

                                 Quarter Ended March 31,         Percent
                                                                Favorable/
(Dollars in millions)              2013            2012       (Unfavorable)
Casino revenues               $     252.9       $  270.3             (6.4 )%
Net revenues                        278.9          303.4             (8.1 )%
Income/(loss) from operations        44.3         (121.0 )              *
Operating Margin (1)                 15.9 %        (39.9 )%      55.8 pts
Property EBITDA (2)                  67.1           77.1            (13.0 )%


___________________


* Not meaningful.


Casino revenues declined significantly during the first quarter 2013 as compared to the same quarter in 2012 due to the weakening in consumer sentiment, contributing to declines in visitation to the region's properties. Additionally, in the first quarter 2012, the region benefited from the receipt of business interruption insurance proceeds of $7.0 million related to the mid-2011 floods with no similar amount received in the first quarter 2013. As a result, net revenues in the first quarter 2013 decreased $24.5 million, or 8.1%, from 2012. Property operating expenses in 2013 were lower than in 2012 as a result of decreases in variable costs associated with lower revenues and cost decreases attributable to our cost savings initiatives. In the first quarter 2012, we recorded $167.5 million of non-cash tangible asset impairment charges and $4.5 million of write-downs, reserves, and project opening costs, net of recoveries related to a halted development project in Biloxi, Mississippi, with no comparable charges in the first quarter 2013. Prior to consideration of these 2012 charges and business interruption insurance proceeds, income from operations in the first quarter 2013 was relatively flat compared with 2012. Lower revenues, partially offset by lower property operating expenses, resulted in a decrease in Property EBITDA of $10.0 million, or 13.0%.

Iowa/Missouri Region
The following results for all periods exclude the Harrah's St. Louis casino
which was sold in November 2012 and has been classified as a discontinued
operation in our Consolidated Condensed Statements of Operations for the quarter
ended March 31, 2012 as a result of the sale of this property.

                           Quarter Ended March 31,          Percent
                                                           Favorable/
(Dollars in millions)       2013             2012        (Unfavorable)
Casino revenues        $     103.5       $     111.0            (6.8 )%
Net revenues                 110.5             118.7            (6.9 )%
Income from operations        29.4              27.6             6.5  %
Operating Margin (1)          26.6 %            23.3 %       3.3 pts
Property EBITDA (2)           36.7              35.0             4.9  %

We experienced lower visitation to the region's properties in the first quarter of 2013 as compared to the prior year period, likely attributable to weakness in consumer sentiment combined with favorable weather conditions in the prior year quarter. The decline in visitation was primarily concentrated in certain lower value guest segments. As a result, casino revenues declined $7.5 million compared to 2012.
Property operating expenses in 2013 were lower than in 2012 as a result of significant decreases in costs attributable to our cost savings initiatives and more efficient marketing spending. These decreases more than offset the income impact of revenue declines resulting in an increase in income from operations and Property EBITDA.

Illinois/Indiana Region

                           Quarter Ended March 31,          Percent
                                                           Favorable/
(Dollars in millions)       2013             2012        (Unfavorable)
Casino revenues        $     248.3       $     260.7            (4.8 )%
Net revenues                 260.5             273.1            (4.6 )%
Income from operations        22.4              38.2           (41.4 )%
Operating Margin (1)           8.6 %            14.0 %     (5.4) pts
Property EBITDA (2)           60.7              57.7             5.2  %

We experienced lower visitation to the region's properties in the first quarter of 2013 as compared to the prior year period, likely attributable to weakness in consumer sentiment combined with favorable weather in the prior year quarter. The decline in visitation was primarily concentrated in certain lower value guest segments. As a result, casino revenues declined $12.4 million compared to 2012.


Property operating expenses in 2013 were lower than in 2012 as a result of decreases in costs attributable to our cost savings initiatives and more efficient marketing spending. In addition, we recorded a non-cash intangible asset impairment charge related to gaming rights of $20.0 million in the first quarter 2013, with no comparable charge in the first quarter 2012. The decline in property operating expenses more than offset the decline in revenues, resulting in an increase in Property EBITDA of $3.0 million, or 5.2%.

Other Nevada Region

                           Quarter Ended March 31,          Percent
                                                           Favorable/
(Dollars in millions)       2013             2012        (Unfavorable)
Casino revenues        $      76.1       $      78.8            (3.4 )%
Net revenues                  99.4             100.7            (1.3 )%
Income from operations         5.2               5.7            (8.8 )%
Operating Margin (1)           5.2 %             5.7 %     (0.5) pts
Property EBITDA (2)           13.6              16.8           (19.0 )%

Net revenues in the region were slightly lower in the first quarter 2013 compared with 2012. Income from operations and Property EBITDA decreased as a result of lower revenues combined with an increase in property operating expenses. Also impacting income from operations, but not Property EBITDA, is a decline in depreciation expense as a result of assets becoming fully depreciated.

Managed, International, and Other
The Managed region includes companies that operate three Indian-owned casinos, as well as Horseshoe Cleveland, Horseshoe Cincinnati (which opened in March 2013) and Caesars Windsor, and the results of Thistledown through August 2012 when the racetrack was contributed to Rock Ohio Caesars, LLC, a joint venture in which we hold a 20% ownership interest. Subsequent to August 2012, the Managed region includes the results of the subsidiary that manages Thistledown upon video lottery terminal operations commencing in April 2013. The International region includes the results of our international operations. The Other region is comprised of corporate expenses, including administrative, marketing, and development costs, income from certain non-consolidated affiliates, and the results of CIE, which consists of the businesses related to the World Series of Poker® ("WSOP") brand, an online real-money business in the U.K. and alliances with online gaming providers in Italy and France, and the results of our social and mobile games businesses.
In the fourth quarter 2012, we began discussions with interested parties with respect to a sale of the subsidiaries that hold our land concession in Macau. As a result of this plan of disposal, those assets and liabilities have been classified as held for sale at March 31, 2013 and December 31, 2012 and their operating results have been classified as discontinued operations for all periods presented and are excluded from the table below.


On March 4, 2013, we closed the Alea Leeds casino in England and its operating results have been classified as discontinued operations for all periods presented and are excluded from the table below.

                                    Quarter Ended March 31,          Percent
                                                                    Favorable/
(Dollars in millions)                2013             2012        (Unfavorable)
Net revenues
   Managed                      $      71.7       $      11.0           551.8  %
   International                      124.2             130.4            (4.8 )%
   Other                               81.0              64.7            25.2  %
     Total net revenues         $     276.9       $     206.1            34.4  %
(Loss)/income from operations
   Managed                      $       4.6       $       2.0           130.0  %
   International                       21.7              21.8            (0.5 )%
   Other                              (86.9 )           (51.9 )         (67.4 )%
     Total loss from operations $     (60.6 )     $     (28.1 )        (115.7 )%
Operating Margin (1)
Managed                                 6.4 %            18.2 %    (11.8) pts
International                          17.5 %            16.7 %       0.8 pts

Managed

Revenues for our Managed properties increased $60.7 million from the prior year quarter, primarily due to new managed projects, including Horseshoe Cleveland, which opened in May 2012, Horseshoe Cincinnati, which opened in March 2013, and the management company for Caesars Windsor, the results of which have been consolidated into our financial statements since June 2012 when we increased our 50% ownership to 100%. A large portion of these revenues represent reimbursable payroll expenses that are presented on a gross revenue basis, resulting in an increase in revenues and an equally offsetting increase in operating expenses.

International
Visitation to the London Clubs properties declined from the first quarter 2012 due to competitive pressures which largely resulted in revenue declines of $9.0 million for these casinos. The revenues at our property in Uruguay rose $2.8 million for the first quarter 2013 compared with 2012. Property operating expenses in 2013 were lower than in 2012 as a result of decreases in variable costs associated with lower revenues from London Clubs and a decrease in costs attributable to our cost savings initiatives. As a result of the above, income from operations decreased $0.1 million, or 0.5%. Other
In late 2012, CIE acquired substantially all of the assets of Buffalo, a social media and mobile games developer and owner of Bingo Blitz, a social and mobile bingo game. This acquisition, combined with the continued strength in CIE's social and mobile games business drove most of the $16.3 million, or 25.2%, increase in revenues for the Other region in the first quarter 2013 from 2012. Expenses rose due to increases in variable costs associated with higher revenues . . .

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