NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Organization and Basis of Presentation
Organization: On August 4, 2022, Penn National Gaming, Inc. was renamed PENN Entertainment, Inc. PENN Entertainment, Inc., together with its subsidiaries (“PENN,” the “Company,” “we,” “our,” or “us”), is North America’s leading provider of integrated entertainment, sports content, and casino gaming experiences. PENN operates 43 properties in 20 states, online sports betting in 14 jurisdictions and iCasino in five jurisdictions, under a portfolio of well-recognized brands including Hollywood Casino®, L’Auberge®, Barstool Sportsbook®, and theScore Bet Sportsbook and Casino®. PENN’s highly differentiated strategy, which is focused on organic cross-sell opportunities, is reinforced by its investments in market-leading retail casinos, sports media assets, technology, including a state-of-the-art, fully integrated digital sports and online casino betting platform, and an in-house iCasino content studio. The Company’s portfolio is further bolstered by its industry-leading mychoice® customer loyalty program (the “mychoice program”), which offers our approximately 26 million members a unique set of rewards and experiences across business channels.
The majority of the real estate assets (i.e., land and buildings) used in our operations are subject to triple net master leases; the most significant of which are the PENN Master Lease and the Pinnacle Master Lease (as such terms are defined in Note 9, “Leases,” and collectively referred to as the “Master Leases”), with Gaming and Leisure Properties, Inc. (Nasdaq: GLPI) (“GLPI”), a real estate investment trust (“REIT”). Basis of Presentation: The unaudited Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.
Results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results that would be achieved during a full year of operations or in future periods. These unaudited Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.
Note 2—Significant Accounting Policies
Principles of Consolidation: The unaudited Consolidated Financial Statements include the accounts of PENN Entertainment, Inc. and its subsidiaries. Investments in and advances to unconsolidated affiliates that do not meet the consolidation criteria of the authoritative guidance for voting interest entities (“VOEs”) or variable interest entities (“VIEs”) are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications: Certain reclassifications have been made to conform the prior period presentation.
Use of Estimates: The preparation of unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Segment Information: We have five reportable segments: Northeast, South, West, Midwest, and Interactive. Our gaming and racing properties are grouped by geographic location, and each is viewed as an operating segment with the exception of our two properties in Jackpot, Nevada, which are viewed as one operating segment. We consider our combined Video Gaming Terminal (“VGT”) operations, by state, to be separate operating segments. Interactive includes all of our iCasino and online sports betting operations, management of retail sports betting, media, and our proportionate share of earnings attributable to our equity method investment in Barstool Sports, Inc. (“Barstool”). See Note 16, “Segment Information,” for further information. For financial reporting purposes, we aggregate our operating segments into the following reportable segments: | | | | | | | | | | | |
| Location | | Real Estate Assets Lease or Ownership Structure |
Northeast segment | | | |
Ameristar East Chicago | East Chicago, Indiana | | Pinnacle Master Lease |
Hollywood Casino at Greektown | Detroit, Michigan | | Greektown Lease |
Hollywood Casino Bangor | Bangor, Maine | | PENN Master Lease |
Hollywood Casino at Charles Town Races | Charles Town, West Virginia | | PENN Master Lease |
Hollywood Casino Columbus | Columbus, Ohio | | PENN Master Lease |
Hollywood Casino Lawrenceburg | Lawrenceburg, Indiana | | PENN Master Lease |
Hollywood Casino Morgantown | Morgantown, Pennsylvania | | Morgantown Lease |
Hollywood Casino at PENN National Race Course | Grantville, Pennsylvania | | PENN Master Lease |
Hollywood Casino Perryville | Perryville, Maryland | | Perryville Lease |
Hollywood Casino Toledo | Toledo, Ohio | | PENN Master Lease |
Hollywood Casino York | York, Pennsylvania | | Operating Lease (not with REIT Landlord) |
Hollywood Gaming at Dayton Raceway | Dayton, Ohio | | PENN Master Lease |
Hollywood Gaming at Mahoning Valley Race Course | Youngstown, Ohio | | PENN Master Lease |
Marquee by PENN (1) | Pennsylvania | | N/A |
Hollywood Casino at The Meadows | Washington, Pennsylvania | | Meadows Lease |
Plainridge Park Casino | Plainville, Massachusetts | | Pinnacle Master Lease |
| | | |
South segment | | | |
1st Jackpot Casino | Tunica, Mississippi | | PENN Master Lease |
Ameristar Vicksburg | Vicksburg, Mississippi | | Pinnacle Master Lease |
Boomtown Biloxi | Biloxi, Mississippi | | PENN Master Lease |
Boomtown Bossier City | Bossier City, Louisiana | | Pinnacle Master Lease |
Boomtown New Orleans | New Orleans, Louisiana | | Pinnacle Master Lease |
Hollywood Casino Gulf Coast | Bay St. Louis, Mississippi | | PENN Master Lease |
Hollywood Casino Tunica | Tunica, Mississippi | | PENN Master Lease |
L’Auberge Baton Rouge | Baton Rouge, Louisiana | | Pinnacle Master Lease |
L’Auberge Lake Charles | Lake Charles, Louisiana | | Pinnacle Master Lease |
Margaritaville Resort Casino | Bossier City, Louisiana | | Margaritaville Lease |
| | | |
West segment | | | |
Ameristar Black Hawk | Black Hawk, Colorado | | Pinnacle Master Lease |
Cactus Petes and Horseshu | Jackpot, Nevada | | Pinnacle Master Lease |
M Resort Spa Casino | Henderson, Nevada | | PENN Master Lease |
Tropicana Las Vegas (2) | Las Vegas, Nevada | | Tropicana Lease |
Zia Park Casino | Hobbs, New Mexico | | PENN Master Lease |
| | | |
Midwest segment | | | |
Ameristar Council Bluffs | Council Bluffs, Iowa | | Pinnacle Master Lease |
Argosy Casino Alton (3) | Alton, Illinois | | PENN Master Lease |
Argosy Casino Riverside | Riverside, Missouri | | PENN Master Lease |
Hollywood Casino Aurora | Aurora, Illinois | | PENN Master Lease |
Hollywood Casino Joliet | Joliet, Illinois | | PENN Master Lease |
Hollywood Casino at Kansas Speedway (4) | Kansas City, Kansas | | Owned - JV |
Hollywood Casino St. Louis | Maryland Heights, Missouri | | PENN Master Lease |
Prairie State Gaming (1) | Illinois | | N/A |
River City Casino | St. Louis, Missouri | | Pinnacle Master Lease |
(1)VGT route operations
(2)On September 26, 2022, PENN sold its equity interest in the Tropicana Las Vegas Hotel and Casino Inc. (“Tropicana”), which consisted of the gaming license to operate the property as described in Note 6, “Acquisitions and Dispositions”, and as a result of the sale, the Tropicana Lease (as defined in Note 9, “Leases”) was terminated. (3)The riverboat is owned by us and not subject to the PENN Master Lease.
(4)Pursuant to a joint venture (“JV”) with NASCAR and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns Hollywood Casino at Kansas Speedway.
Revenue Recognition: Our revenue from contracts with customers consists primarily of gaming wagers, inclusive of sports betting and iCasino products, food and beverage transactions, retail transactions, hotel room sales, racing wagers, and third-party revenue sharing agreements. See Note 5, “Revenue Disaggregation,” for information on our revenue by type and geographic location. Complimentaries Associated with Gaming Contracts
Food, beverage, hotel, and other services furnished to patrons for free as an inducement to gamble or through the redemption of our customers’ loyalty points are recorded as food, beverage, hotel, and other revenues, at their estimated standalone selling prices with an offset recorded as a reduction to gaming revenues. The cost of providing complimentary goods and services to patrons as an inducement to gamble as well as for the fulfillment of our loyalty point obligation is included in food, beverage, hotel, and other expenses. Revenues recorded to food, beverage, hotel and other and offset to gaming revenues were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Food and beverage | $ | 54.0 | | | $ | 46.1 | | | $ | 156.8 | | | $ | 126.3 | |
Hotel | 37.6 | | | 35.7 | | | 106.4 | | | 92.8 | |
Other | 4.0 | | | 3.2 | | | 9.3 | | | 7.2 | |
Total complimentaries associated with gaming contracts | $ | 95.6 | | | $ | 85.0 | | | $ | 272.5 | | | $ | 226.3 | |
Customer-related Liabilities
The Company has three general types of liabilities related to contracts with customers: (i) the obligation associated with its mychoice program (loyalty points and tier status benefits), (ii) advance payments on goods and services yet to be provided and for unpaid wagers, and (iii) deferred revenue associated with third-party sports betting operators for online sports betting and iCasino market access.
Our mychoice program allows members to earn loyalty points that are redeemable for slot play and complimentaries, such as food and beverage at our restaurants, lodging at our hotels, mychoice redemption mall, and products offered at our retail stores across the vast majority of our properties. In addition, members of the mychoice program earn credit toward tier status, which entitles them to receive certain other benefits, such as priority access, discounts, gifts, and free play. The obligation associated with our mychoice program, which is included in “Accrued expenses and other current liabilities” within our unaudited Consolidated Balance Sheets, was $35.8 million and $37.6 million as of September 30, 2022 and December 31, 2021, respectively, and consisted principally of the obligation associated with the loyalty points. Our loyalty point obligations are generally settled within six months of issuance. Changes between the opening and closing balances primarily relate to the timing of our customers’ election to redeem loyalty points as well as the timing of when our customers receive their earned tier status benefits.
The Company’s advance payments on goods and services yet to be provided and for unpaid wagers primarily consist of the following: (i) deposits on rooms and convention space, (ii) money deposited on behalf of a customer in advance of their property visit (referred to as “safekeeping” or “front money”), (iii) money deposited in an online wallet not yet wagered or wagered and not yet withdrawn, (iv) outstanding tickets generated by slot machine play or pari-mutuel wagering, (v) outstanding chip liabilities, (vi) unclaimed jackpots, and (vii) gift cards redeemable at our properties. Unpaid wagers generally represent obligations stemming from prior wagering events, of which revenue was previously recognized. The Company’s advance payments on goods and services yet to be provided and for unpaid wagers were $115.9 million and $112.0 million as of September 30, 2022 and December 31, 2021, respectively. Advance payments on goods and services yet to be provided and for unpaid wagers are included in “Accrued expenses and other current liabilities” within our unaudited Consolidated Balance Sheets.
PENN Interactive Ventures, LLC (“PENN Interactive”) enters into multi-year agreements with sports betting operators for online sports betting and iCasino market access across our portfolio of properties. Deferred revenue associated with third-party sports betting operators for online sports betting and iCasino market access, which is included in “Other long-term liabilities”
within our unaudited Consolidated Balance Sheets was $55.0 million and $52.2 million as of September 30, 2022 and December 31, 2021, respectively.
Advertising: The Company expenses advertising costs the first time the advertising takes place or as incurred. Advertising expenses, which generally relate to media placement costs and are primarily included in “Gaming” expenses within the unaudited Consolidated Statements of Operations, were $27.1 million, and $69.7 million for the three and nine months ended September 30, 2022, respectively, as compared to $26.4 million and $58.8 million for the three and nine months ended September 30, 2021, respectively.
Gaming and Pari-mutuel Taxes: We are subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which we operate, as well as taxes on revenues derived from arrangements which allow for third-party partners to operate online casinos and online sportsbooks under our gaming licenses. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which the wagering occurs. Also, included in gaming and pari-mutuel taxes are costs to support the operations of local regulatory authorities which some states require us to pay. Gaming and pari-mutuel taxes are recorded in “Gaming” expense or “Food, beverage, hotel, and other” expenses within the unaudited Consolidated Statements of Operations, and were $540.3 million and $1.6 billion for the three and nine months ended September 30, 2022, respectively, as compared to $505.8 million and $1.4 billion for the three and nine months ended September 30, 2021, respectively.
Foreign Currency Translation: The functional currency of the Company’s foreign subsidiaries is the local currency in which the subsidiary operates. Balance sheet accounts are translated at the exchange rate in effect at each balance sheet date. Translation adjustments resulting from this process are recorded to other comprehensive income or loss. Revenues and expenses are translated at the average exchange rates during the year. Gains or losses resulting from foreign currency transactions are included in “Other” within our unaudited Consolidated Statements of Operations.
Comprehensive Income and Accumulated Other Comprehensive Loss: Comprehensive income includes net income and all other non-stockholder changes in equity, or other comprehensive income. The balance of accumulated other comprehensive loss consists solely of foreign currency translation adjustments.
Earnings Per Share: Basic earnings per share (“EPS”) is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution, if any, for all potentially-dilutive securities such as stock options, unvested restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) (collectively with RSAs, “restricted stock”), outstanding convertible preferred stock and convertible debt.
Holders of the Company’s Series D Preferred Stock (as defined in Note 10, “Investments in and Advances to Unconsolidated Affiliates”) are entitled to participate equally and ratably in all dividends and distributions paid to holders of PENN Common Stock irrespective of any vesting requirement. Accordingly, the Series D Preferred Stock shares are considered a participating security and the Company is required to apply the two-class method to consider the impact of the preferred shares on the calculation of basic and diluted EPS. The holders of the Company’s Series D Preferred Stock are not obligated to absorb losses; therefore, in reporting periods where the Company is in a net loss position, it does not apply the two-class method. In reporting periods where the Company is in a net income position, the two-class method is applied by allocating all earnings during the period to common shares and preferred shares. See Note 14, “Earnings per Share,” for more information. Voting Interest Entities and Variable Interest Entities: The Company consolidates all subsidiaries or other entities in which it has a controlling financial interest. The consolidation guidance requires an analysis to determine if an entity should be evaluated for consolidation using the VOE model or the VIE model. Under the VOE model, controlling financial interest is generally defined as a majority ownership of voting rights. Under the VIE model, controlling financial interest is defined as (i) the power to direct activities that most significantly impact the economic performance of the entity and (ii) the obligation to absorb losses of or the right to receive benefits from the entity that could potentially be significant to the entity. For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE. The Company consolidates the financial position and results of operations of every VOE in which it has a controlling financial interest and VIEs in which it is considered to be the primary beneficiary. See Note 10, “Investments in and Advances to Unconsolidated Affiliates.” Note 3—New Accounting Pronouncements
In June 2022, the FASB issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2020-03”). ASU 2020-03 clarifies the guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and requires specific disclosures related to such
an equity security. Specifically, ASU 2022-03 clarifies that a “contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security” and is not included in the equity security’s unit of account. Accordingly, the Company is no longer permitted to apply a discount related to the contractual sale restriction, or lack of marketability, when measuring the equity security’s fair value. In addition, ASU 2020-03 prohibits an entity from recognizing a contractual sale restriction as a separate unit of account. ASU 2020-03 will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the impact of the adoption of ASU 2020-03 on our Consolidated Financial Statements.
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). ASU 2020-04 provides an optional expedient and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessation of the London Interbank Offered Rate (referred to as “LIBOR”), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 also provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The interest rates associated with the Company’s previous borrowings under its Senior Secured Credit Facilities (as defined in Note 8, “Long-term Debt”) were tied to LIBOR. Subsequent to the amendment of the Senior Secured Credit Facilities on May 3, 2022, the Company’s borrowings are tied to SOFR (see Note 8, “Long-term Debt”), upon which the Company adopted ASU 2020-04. The adoption of ASU 2020-04 did not have an impact on our unaudited Consolidated Financial Statements. In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency.
The new standard impacts the Company’s existing 2.75% convertible senior notes due May 2026 (“Convertible Notes”) which prior to adoption of the new standard, were accounted for under the cash conversion feature model. The cash conversion feature model is eliminated under the new standard and entities will no longer separately present in stockholders’ equity an embedded conversion feature of a debt instrument.
The new guidance also requires the use of the if-converted method when calculating diluted EPS for convertible instruments and the treasury stock method should no longer be used. Under the new guidance, convertible instruments that may be settled in cash or shares (e.g., the Company’s Convertible Notes) are to be included in the calculation of diluted EPS if the effect is more dilutive, with no option for rebutting the presumption of share settlement based on stated policy or past experience. Each of these requirements are consistent with the Company’s previous method for calculating diluted EPS.
The Company adopted ASU 2020-06 effective January 1, 2022, using the modified retrospective approach. Adoption of ASU 2020-06 resulted in reclassification of the $88.2 million cash conversion feature related to the Company’s Convertible Notes, from stockholders’ equity to liabilities. As a result of the adoption, the Company recognized as a cumulative effect adjustment an increase to the January 1, 2022 opening balance of retained earnings of $18.9 million, net of taxes.
Note 4—Hurricane Laura
On August 27, 2020, Hurricane Laura made landfall in Lake Charles, Louisiana, which caused significant damage to our L’Auberge Lake Charles property and closure of the property for approximately two weeks. The Company maintains insurance, subject to certain deductibles and coinsurance, that covers business interruption, including lost profits, and covers the repair or replacement of assets that suffered losses.
The Company recorded a receivable relating to our estimate of repairs and maintenance costs which have been incurred and property and equipment which have been written off, and for which we deem the recovery of such costs and property and equipment from our insurers to be probable. The insurance recovery receivable was included in “Accounts Receivable, net” within the unaudited Consolidated Balance Sheets. As we deemed it probable that the proceeds to be recovered from our insurers exceeds the total of our insurance recovery recorded and our insurers’ deductible and coinsurance, we did not record any loss associated with the impact of this natural disaster. Timing differences exist between the recognition of (i) impairment losses and capital expenditures made to repair or restore the assets and (ii) the receipt of insurance proceeds within the unaudited Consolidated Financial Statements.
As of December 31, 2021, the receivable was $28.7 million. During the three and nine months ended September 30, 2022, we received additional insurance claim proceeds totaling $1.9 million and $39.4 million, respectively, resulting in a gain of $1.9 million and $10.7 million, respectively, which is included in “General and administrative” within our unaudited Consolidated Statements of Operations.
As of November 3, 2022, the insurance claim remains open, and we expect to receive additional future proceeds.
We will record proceeds in excess of the recognized losses and lost profits under our business interruption insurance as a gain contingency in accordance with ASC 450, “Contingencies,” which we expect to recognize at the time of final settlement or when nonrefundable cash advances are made in a period subsequent to September 30, 2022.
The following table summarizes the cumulative financial impact of Hurricane Laura related matters:
| | | | | | | | | | | |
(in millions) | September 30, 2022 | | December 31, 2021 |
Insurance proceeds received through the end of the period | $ | 86.9 | | | $ | 47.5 | |
Deductible | $ | 15.0 | | | $ | 15.0 | |
Coinsurance | $ | 2.5 | | | $ | 2.5 | |
Clean-up, restoration, and other costs | $ | 52.8 | | | $ | 52.8 | |
Fixed asset write-off | $ | 23.2 | | | $ | 23.2 | |
Inventory write-off | $ | 0.2 | | | $ | 0.2 | |
Insurance receivable | $ | — | | | $ | 28.7 | |
Note 5—Revenue Disaggregation
Our revenues are generated principally by providing the following types of services: (i) gaming, including iCasino, retail and online sports betting; (ii) food and beverage; (iii) hotel; and (iv) other. Other revenues are principally comprised of ancillary gaming-related activities, such as commissions received on ATM transactions, racing, PENN Interactive’s social gaming, and revenue from third-party sports betting operators and the related gross-up for taxes. Our revenue is disaggregated by type of revenue and geographic location of the related properties, which is consistent with our reportable segments, as follows:
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| For the three months ended September 30, 2022 |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
Revenues: | | | | | | | | | | | | | | | |
Gaming | $ | 616.8 | | | $ | 260.0 | | | $ | 102.8 | | | $ | 268.7 | | | $ | 69.2 | | | $ | — | | | $ | — | | | $ | 1,317.5 | |
Food and beverage | 32.6 | | | 32.8 | | | 21.7 | | | 13.7 | | | — | | | 0.5 | | | — | | | 101.3 | |
Hotel | 13.0 | | | 26.4 | | | 25.7 | | | 9.1 | | | — | | | — | | | — | | | 74.2 | |
Other | 23.0 | | | 10.6 | | | 6.3 | | | 6.9 | | | 89.5 | | | 3.7 | | | (8.0) | | | 132.0 | |
Total revenues | $ | 685.4 | | | $ | 329.8 | | | $ | 156.5 | | | $ | 298.4 | | | $ | 158.7 | | | $ | 4.2 | | | $ | (8.0) | | | $ | 1,625.0 | |
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| For the three months ended September 30, 2021 |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
Revenues: | | | | | | | | | | | | | | | |
Gaming | $ | 616.2 | | | $ | 253.0 | | | $ | 96.7 | | | $ | 259.3 | | | $ | 31.0 | | | $ | — | | | $ | — | | | $ | 1,256.2 | |
Food and beverage | 28.0 | | | 28.7 | | | 19.5 | | | 11.0 | | | — | | | 0.4 | | | — | | | 87.6 | |
Hotel | 8.2 | | | 26.8 | | | 23.9 | | | 8.8 | | | — | | | — | | | — | | | 67.7 | |
Other | 20.0 | | | 9.7 | | | 5.6 | | | 6.6 | | | 62.0 | | | 3.1 | | | (6.7) | | | 100.3 | |
Total revenues | $ | 672.4 | | | $ | 318.2 | | | $ | 145.7 | | | $ | 285.7 | | | $ | 93.0 | | | $ | 3.5 | | | $ | (6.7) | | | $ | 1,511.8 | |
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| For the nine months ended September 30, 2022 |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
Revenues: | | | | | | | | | | | | | | | |
Gaming | $ | 1,837.3 | | | $ | 807.6 | | | $ | 295.8 | | | $ | 792.2 | | | $ | 201.4 | | | $ | — | | | $ | — | | | $ | 3,934.3 | |
Food and beverage | 96.0 | | | 96.8 | | | 62.6 | | | 39.4 | | | — | | | 3.0 | | | — | | | 297.8 | |
Hotel | 31.4 | | | 74.4 | | | 74.4 | | | 25.8 | | | — | | | — | | | — | | | 206.0 | |
Other | 64.1 | | | 31.0 | | | 18.4 | | | 20.2 | | | 253.7 | | | 14.4 | | | (23.8) | | | 378.0 | |
Total revenues | $ | 2,028.8 | | | $ | 1,009.8 | | | $ | 451.2 | | | $ | 877.6 | | | $ | 455.1 | | | $ | 17.4 | | | $ | (23.8) | | | $ | 4,816.1 | |
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| For the nine months ended September 30, 2021 |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
Revenues: | | | | | | | | | | | | | | | |
Gaming | $ | 1,745.7 | | | $ | 802.8 | | | $ | 262.5 | | | $ | 748.3 | | | $ | 84.4 | | | $ | — | | | $ | — | | | $ | 3,643.7 | |
Food and beverage | 73.0 | | | 81.2 | | | 49.6 | | | 27.7 | | | — | | | 0.7 | | | — | | | 232.2 | |
Hotel | 20.7 | | | 70.5 | | | 56.3 | | | 21.7 | | | — | | | — | | | — | | | 169.2 | |
Other | 56.4 | | | 27.8 | | | 14.3 | | | 17.5 | | | 190.9 | | | 6.1 | | | (25.6) | | | 287.4 | |
Total revenues | $ | 1,895.8 | | | $ | 982.3 | | | $ | 382.7 | | | $ | 815.2 | | | $ | 275.3 | | | $ | 6.8 | | | $ | (25.6) | | | $ | 4,332.5 | |
(1) Other revenues within the Interactive segment are inclusive of gaming tax reimbursement amounts charged to third-party partners for online sports betting and iCasino market access of $63.0 million and $168.7 million for the three and nine months ended September 30, 2022, respectively, as compared to $44.0 million and $129.5 million for the three and nine months ended September 30, 2021, respectively.
(2) Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by PENN Interactive.
Note 6—Acquisitions and Dispositions
Tropicana Las Vegas
On January 11, 2022, PENN entered into a definitive purchase agreement to sell its outstanding equity interest in Tropicana, which has the gaming license and operates the Tropicana, to Bally’s Corporation (“Bally’s”). The transaction closed on September 26, 2022.
Score Media and Gaming Inc.
On October 19, 2021, we acquired 100% of Score Media and Gaming, Inc. (“theScore”) for a purchase price of approximately $2.1 billion. The acquisition provides us with the technology, resources and audience reach to accelerate our media and sports betting strategy across North America. Under the terms of the agreement, 1317774 B.C. Ltd. (the “Purchaser”), an indirectly wholly owned subsidiary of PENN, acquired each of the issued and outstanding theScore shares (other than those held by PENN and its subsidiaries) for US$17.00 per share in cash consideration, totaling $922.8 million, and either 0.2398 of a share of common stock, par value $0.01 of PENN Common Stock or, if validly elected, 0.2398 of an exchangeable share in the capital of the Purchaser (each whole share, an “Exchangeable Share”), totaling 12,319,340 shares of PENN Common Stock and 697,539 Exchangeable Shares for approximately $1.0 billion. Each Exchangeable Share will be exchangeable into one share of PENN Common Stock at the option of the holder, subject to certain adjustments. In addition, Purchaser may redeem all outstanding Exchangeable Shares in exchange for shares of PENN Common Stock at any time following the fifth anniversary of the closing, or earlier under certain circumstances. See Note 13, “Stockholders’ Equity and Stock-Based Compensation” for further information. The Company held shares of theScore common stock prior to the acquisition and, as such, the acquisition date estimated fair value of this previously held investment was a component of the purchase consideration. Based on the acquisition date fair value of this investment of $58.9 million, the Company recorded a gain of $2.9 million related to remeasurement of the equity security investment immediately prior to the acquisition date which was included in “Other” within our Consolidated Statements of Operations.
The following table reflects the allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, with the excess recorded as goodwill. During the three months ended September 30, 2022, we made the following purchase price measurement period adjustment:
| | | | | | | | | | | | | | | | | |
(in millions) | Estimated fair value, as previously reported.(1) | | Measurement period adjustments | | Final fair value |
Cash and cash equivalents | $ | 160.3 | | $ | — | | $ | 160.3 |
Other current assets | 22.8 | | — | | 22.8 |
ROU assets | 2.6 | | — | | 2.6 |
Property and equipment | 1.8 | | — | | 1.8 |
Goodwill | 1,690.2 | | 1.5 | | 1,691.7 |
Other intangible assets | | | | | |
Gaming technology | 160.0 | | — | | 160.0 |
Media technology | 57.0 | | — | | 57.0 |
Tradename | 100.0 | | — | | 100.0 |
Advertising relationships | 11.0 | | — | | 11.0 |
Customer relationships | 8.0 | | — | | 8.0 |
Re-acquired right | 2.6 | | — | | 2.6 |
Other long-term assets | 5.2 | | — | | 5.2 |
Total assets | $ | 2,221.5 | | | $ | 1.5 | | | $ | 2,223.0 | |
| | | | | |
Accounts payable, accrued expenses and other current liabilities | $ | 67.9 | | | $ | 1.5 | | | $ | 69.4 | |
Deferred tax liabilities | 69.2 | | | — | | | 69.2 | |
Other non-current liabilities | 1.7 | | | — | | | 1.7 | |
Total liabilities | 138.8 | | | 1.5 | | | 140.3 | |
Net assets acquired | $ | 2,082.7 | | | $ | — | | | $ | 2,082.7 | |
(1)Amounts were initially reported within the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022.
The Company used the income, or cost approach for the valuation, as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to the Company in the principal or most advantageous market for the asset or liability.
Acquired identifiable intangible assets consist of gaming technology, media technology, tradename, advertising relationships, customer relationships, and a re-acquired right. Tradename is an indefinite-lived intangible asset. All other intangible assets are definite-lived with assigned useful lives primarily ranging from 1-7 years. The re-acquired right intangible asset was assigned a 17.8-year useful life based on the remaining term of a pre-acquisition market access contract between PENN and theScore.
Goodwill, none of which is deductible under the Canadian Income Tax Act, is approximately 81.2% of the net assets acquired and represents synergies, incremental market share capture and expansion into new markets not existing as of the acquisition date, and future technology development.
The following valuation approaches were utilized to determine the fair value of each intangible asset:
| | | | | |
Intangible Asset | Valuation Approach |
Gaming technology | Relief-from-royalty (variation of income approach) |
Media technology | Replacement cost |
Tradename | Relief-from-royalty (variation of income approach) |
Advertising relationships | With-and-without (variation of income approach) |
Customer relationships | Replacement cost |
Re-acquired right | Replacement cost |
Unaudited Pro Forma Financial Information
The following table includes unaudited pro forma consolidated financial information assuming our acquisition of Hitpoint Inc. and Lucky Point Inc. (collectively “Hitpoint”), Hollywood Casino Perryville (“Perryville”), Sam Houston Race Park and Valley Race Park (collectively “Sam Houston”), and theScore had occurred as of January 1, 2021. We acquired Hitpoint on May 11, 2021, Perryville on July 1, 2021, Sam Houston on August 1, 2021, and theScore on October 19, 2021. The pro forma amounts include the historical operating results of PENN and Hitpoint, Perryville, Sam Houston and theScore prior to our acquisitions. The pro forma financial information does not necessarily represent the results that may occur in the future. For the three and nine months ended September 30, 2021, pro forma adjustments directly attributable to the acquisitions include acquisition and transaction related costs of $15.8 million and $19.5 million, respectively, incurred by both PENN and the respective acquirees. For the three and nine months ended September 30, 2021, pro forma adjustments directly attributable to the acquisitions also include gains of $18.5 million and $53.4 million, respectively, related to our purchase of the remaining 50% of Sam Houston and a net unrealized gain on the equity security investment in theScore.
| | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2021 |
Revenues | $ | 1,517.5 | | | $ | 4,404.3 | |
Net income | $ | 60.9 | | | $ | 288.6 | |
Note 7—Goodwill and Other Intangible Assets
A reconciliation of goodwill and accumulated goodwill impairment losses, by reportable segment, is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other | | Total |
Balance as of December 31, 2021 | | | | | | | | | | | | | |
Goodwill, gross | $ | 923.5 | | | $ | 236.6 | | | $ | 216.8 | | | $ | 1,116.7 | | | $ | 1,724.0 | | | $ | 87.7 | | | $ | 4,305.3 | |
Accumulated goodwill impairment losses | (761.4) | | | (61.0) | | | (16.6) | | | (556.1) | | | — | | | (87.7) | | | (1,482.8) | |
Goodwill, net | $ | 162.1 | | | $ | 175.6 | | | $ | 200.2 | | | $ | 560.6 | | | $ | 1,724.0 | | | $ | — | | | $ | 2,822.5 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Effect of foreign currency exchange rates | — | | | — | | | — | | | — | | | (124.8) | | | — | | | (124.8) | |
Impairment losses during year | (37.4) | | | — | | | — | | | — | | | — | | | — | | | (37.4) | |
Other (1) | — | | | — | | | — | | | — | | | 1.5 | | | — | | | 1.5 | |
Balance as of September 30, 2022 | | | | | | | | | | | | | |
Goodwill, gross | $ | 923.5 | | | $ | 236.6 | | | $ | 216.8 | | | $ | 1,116.7 | | | $ | 1,600.7 | | | $ | 87.7 | | | $ | 4,182.0 | |
Accumulated goodwill impairment losses | (798.8) | | | (61.0) | | | (16.6) | | | (556.1) | | | — | | | (87.7) | | | (1,520.2) | |
Goodwill, net | $ | 124.7 | | | $ | 175.6 | | | $ | 200.2 | | | $ | 560.6 | | | $ | 1,600.7 | | | $ | — | | | $ | 2,661.8 | |
2022 Interim Assessment for Impairment
During the third quarter of 2022, we identified an indicator of impairment on goodwill and other intangible assets at the Hollywood Casino at Greektown reporting unit due to the majority of the hotel being out of service as a result of a longer than anticipated hotel room renovation related to water damage. As a result, we revised the cash flow projections for the reporting unit to be reflective of current operating results and the related economic environment. As a result of the interim assessment for impairment, during the third quarter of 2022, we recognized impairment charges on our goodwill and gaming licenses of $37.4 million and $65.4 million, respectively. The estimated fair value of the reporting unit was determined through a combination of a discounted cash flow model and a market-based approach, which utilized Level 3 inputs. The estimated fair value of the gaming license was determined by using a discounted cash flow model, which utilized Level 3 inputs. There were no other impairment charges recorded to goodwill and other intangible assets during the three and nine months ended September 30, 2022 and 2021.
The goodwill and gaming license impairment charges of $37.4 million and $65.4 million, respectively, pertained to our Northeast segment.
The table below presents the gross carrying amount, accumulated amortization, and net carrying amount of each major class of other intangible assets:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
(in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Indefinite-lived intangible assets | | | | | | | | | | | |
Gaming licenses | $ | 1,220.0 | | | $ | — | | | $ | 1,220.0 | | | $ | 1,285.4 | | | $ | — | | | $ | 1,285.4 | |
Trademarks | 330.5 | | | — | | | 330.5 | | | 338.2 | | | — | | | 338.2 | |
Other | 0.7 | | | — | | | 0.7 | | | 0.7 | | | — | | | 0.7 | |
Amortizing intangible assets | | | | | | | | | | | |
Customer relationships | 114.2 | | | (100.3) | | | 13.9 | | | 114.9 | | | (91.4) | | | 23.5 | |
Technology | 241.6 | | | (68.9) | | | 172.7 | | | 252.7 | | | (40.5) | | | 212.2 | |
Other | 26.6 | | | (9.8) | | | 16.8 | | | 19.4 | | | (6.8) | | | 12.6 | |
Total other intangible assets | $ | 1,933.6 | | | $ | (179.0) | | | $ | 1,754.6 | | | $ | 2,011.3 | | | $ | (138.7) | | | $ | 1,872.6 | |
Amortization expense related to our amortizing intangible assets was $14.3 million and $44.2 million for the three and nine months ended September 30, 2022, respectively, as compared to $2.0 million and $6.7 million for the three and nine months ended September 30, 2021, respectively. The following table presents the estimated amortization expense based on our amortizing intangible assets as of September 30, 2022 (in millions):
| | | | | |
Years ending December 31, | |
2022 (excluding the nine months ended September 30, 2022) | $ | 13.2 | |
2023 | 48.3 | |
2024 | 44.4 | |
2025 | 29.4 | |
2026 | 22.9 | |
Thereafter | 45.2 | |
Total | $ | 203.4 | |
Note 8—Long-term Debt
The table below presents long-term debt, net of current maturities, debt discounts and issuance costs:
| | | | | | | | | | | |
(in millions) | September 30, 2022 | | December 31, 2021 |
Senior Secured Credit Facilities: | | | |
Amended Revolving Credit Facility due 2027 | $ | — | | | $ | — | |
Amended Term Loan A Facility due 2027 | 543.1 | | | — | |
Amended Term Loan B Facility due 2029 | 997.5 | | | — | |
Term Loan A Facility due 2023 | — | | | 583.8 | |
Term Loan B-1 Facility due 2025 | — | | | 979.9 | |
5.625% Notes due 2027 | 400.0 | | | 400.0 | |
4.125% Notes due 2029 | 400.0 | | | 400.0 | |
2.75% Convertible Notes due 2026 | 330.5 | | | 330.5 | |
Other long-term obligations | 157.2 | | | 146.3 | |
| 2,828.3 | | | 2,840.5 | |
Less: Current maturities of long-term debt | (55.8) | | | (99.5) | |
Less: Debt discounts | (4.7) | | | (73.1) | |
Less: Debt issuance costs | (37.6) | | | (30.6) | |
| $ | 2,730.2 | | | $ | 2,637.3 | |
The following is a schedule of future minimum repayments of long-term debt as of September 30, 2022 (in millions):
| | | | | |
Years ending December 31: | |
2022 (excluding the nine months ended September 30, 2022) | $ | 18.1 | |
2023 | 56.2 | |
2024 | 47.6 | |
2025 | 38.2 | |
2026 | 479.2 | |
Thereafter | 2,189.0 | |
Total minimum payments | $ | 2,828.3 | |
Senior Secured Credit Facilities
In January 2017, the Company entered into an agreement to amend and restate its previous credit agreement, dated October 30, 2013, as amended (the “Credit Agreement”), which provided for: (i) a five-year $700 million revolving credit facility (the “Revolving Facility”); (ii) a five-year $300 million Term Loan A facility (the “Term Loan A Facility”); and (iii) a seven-year $500 million Term Loan B facility (the “Term Loan B Facility” and collectively with the Revolving Facility and the Term Loan A Facility, the “Senior Secured Credit Facilities”).
On October 15, 2018, in connection with the acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”), we entered into an incremental joinder agreement (the “Incremental Joinder”), which amended the Credit Agreement (the “Amended Credit Agreement”). The Incremental Joinder provided for an additional $430.2 million of incremental loans having the same terms as the existing Term Loan A Facility, with the exception of extending the maturity date, and an additional $1.1 billion of loans as a new tranche having new terms (the “Term Loan B-1 Facility”). With the exception of extending the maturity date, the Incremental Joinder did not impact the Revolving Facility.
On May 3, 2022, the Company entered into a Second Amended and Restated Credit Agreement with its various lenders (the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement provides for a $1.0 billion revolving credit facility, undrawn at close, (the “Amended Revolving Credit Facility”), a five-year $550.0 million term loan A facility (the “Amended Term Loan A Facility”) and a seven-year $1.0 billion term loan B facility (the “Amended Term Loan B Facility”) (together, the “Amended Credit Facilities”). The proceeds from the Amended Credit Facilities were used to repay the existing Term Loan A Facility and Term Loan B-1 Facility balances.
The interest rates per annum applicable to loans under the Amended Credit Facilities are, at the Company’s option, equal to either an adjusted secured overnight financing rate (“Term SOFR”) or a base rate, plus an applicable margin. The applicable margin for each of the Amended Revolving Credit Facility and the Amended Term Loan A Facility is initially 1.75% for Term SOFR loans and 0.75% for base rate loans until the Company provides financial reports for the first full fiscal quarter following closing and, thereafter, will range from 2.25% to 1.50% per annum for Term SOFR loans and 1.25% to 0.50% per annum for base rate loans, in each case depending on the Company’s total net leverage ratio (as defined within the Second Amended and Restated Credit Agreement). The applicable margin for the Amended Term Loan B Facility is 2.75% per annum for Term SOFR loans and 1.75% per annum for base rate loans. The Amended Term Loan B Facility is subject to a Term SOFR “floor” of 0.50% per annum and a base rate “floor” of 1.50% per annum. In addition, the Company will pay a commitment fee on the unused portion of the commitments under the Amended Revolving Credit Facility at a rate that is initially 0.25% per annum, until the Company provides financial reports for the first full fiscal quarter following closing, and thereafter, will range from 0.35% to 0.20% per annum, depending on the Company’s total net leverage ratio.
The Amended Credit Facilities contain customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and certain of its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, pay dividends and make other restricted payments and prepay certain indebtedness that is subordinated in right of payment to the obligations under the Amended Credit Facilities. The Amended Credit Facilities contain two financial covenants: a maximum total net leverage ratio (as defined within the Second Amended and Restated Credit Agreement) of 4.50 to 1.00, which is subject to a step up to 5.00 to 1.00 in the case of certain significant acquisitions, and a minimum interest coverage ratio (as defined within the Second Amended and Restated Credit Agreement) of 2.00 to 1.00. The Amended Credit Facilities also contain certain customary affirmative covenants and events of default, including the occurrence of a change of control (as defined in the documents governing the Second Amended and Restated Credit Agreement), termination and certain defaults under the PENN Master Lease and the Pinnacle Master Lease (both of which are defined in Note 9, “Leases”). In connection with the repayment of the previous Senior Secured Credit Facilities, the Company recorded $1.3 million in refinancing costs and a $10.4 million loss on the early extinguishment of debt for the nine months ended September 30, 2022 which is included in “Other” within our unaudited Consolidated Statements of Operations. In addition, we recorded $5.0 million of original issue discount related to the Amended Term Loan B Facility which will be amortized to interest expense over the life of the Amended Term Loan B Facility.
As of September 30, 2022, the Company had conditional obligations under letters of credit issued pursuant to the Amended Credit Facilities with face amounts aggregating to $22.7 million resulting in $977.3 million of available borrowing capacity under the Amended Revolving Credit Facility.
As of December 31, 2021, the Company had conditional obligations under letters of credit issued pursuant to the Senior Security Credit Facilities with face amounts aggregating to $26.0 million resulting in $674.0 million of available borrowing capacity under the Revolving Facility.
2.75% Unsecured Convertible Notes
In May 2020, the Company completed a public offering of $330.5 million aggregate principal amount of 2.75% unsecured convertible notes that mature, unless earlier converted, redeemed or repurchased, on May 15, 2026 at a price of par. After lender fees and discounts, net proceeds received by the Company were $322.2 million. Interest on the Convertible Notes is payable on May 15th and November 15th of each year.
The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion price of $23.40 per share, or 42.7350 shares, per $1,000 principal amount of notes, subject to adjustment if certain corporate events occur. However, in no event will the conversion exceed 55.5555 shares of common stock per $1,000 principal amount of notes. As of September 30, 2022, the maximum number of shares that could be issued to satisfy the conversion feature of the Convertible Notes is 18,360,815 and the amount by which the Convertible Notes if-converted value exceeded its principal amount was $174.6 million.
Starting in the fourth quarter of 2020 and prior to February 15, 2026, at their election, holders of the Convertible Notes may convert outstanding notes if the trading price of the Company’s common stock exceeds 130% of the initial conversion price or, starting shortly after the issuance of the Convertible Notes, if the trading price per $1,000 principal amount of notes is less than 98% of the product of the trading price of the Company’s common stock and the conversion rate then in effect. The Convertible Notes may, at the Company’s election, be settled in cash, shares of common stock of the Company, or a combination thereof. The Company has the option to redeem the Convertible Notes, in whole or in part, beginning November 20, 2023.
In addition, the Convertible Notes convert into shares of the Company’s common stock upon the occurrence of certain corporate events that constitute a fundamental change under the indenture governing the Convertible Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their Convertible Notes in connection with such corporate events or during the relevant redemption period for such Convertible Notes.
As of September 30, 2022 and December 31, 2021, no Convertible Notes have been converted into the Company’s common stock.
The Convertible Notes contain a cash conversion feature, and as a result, the Company separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, recognized as debt discount, was valued as the difference between the face value of the Convertible Notes and the fair value of the liability component. The equity component was valued at $91.8 million upon issuance of the Convertible Notes. In connection with the Convertible Notes issuance, the Company incurred debt issuance costs of $10.2 million, which were allocated on a pro rata basis to the liability component and the equity component in the amounts of $6.6 million and $3.6 million, respectively.
On January 1, 2022, the Company adopted ASU 2020-06, which resulted in a reclassification of the $88.2 million cash conversion feature related to the Company’s Convertible Notes, from stockholders’ equity to liabilities as under ASU 2020-06, bifurcation for a cash conversion feature is no longer permitted. As a result of the adoption, the Company recognized as a cumulative effect adjustment, an increase to the January 1, 2022 opening balance of retained earnings of $18.9 million, net of taxes.
The Convertible Notes consisted of the following components:
| | | | | | | | | | | |
(in millions) | September 30, 2022 | | December 31, 2021 |
Liability component: | | | |
Principal | $ | 330.5 | | | $ | 330.5 | |
Unamortized debt discount | — | | | (71.7) | |
Unamortized debt issuance costs | (6.6) | | | (5.3) | |
Net carrying amount | $ | 323.9 | | | $ | 253.5 | |
| | | |
Carrying amount of equity component | $ | — | | | $ | 88.2 | |
Interest expense, net
The table below presents interest expense, net:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Interest expense | $ | 199.1 | | | $ | 146.1 | | | $ | 556.0 | | | $ | 421.8 | |
Interest income | (5.2) | | | (0.3) | | | (7.0) | | | (0.7) | |
Capitalized interest | (0.6) | | | (0.9) | | | (1.3) | | | (2.5) | |
Interest expense, net | $ | 193.3 | | | $ | 144.9 | | | $ | 547.7 | | | $ | 418.6 | |
The table below presents interest expense related to the Convertible Notes: | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Coupon interest | $ | 2.3 | | | $ | 2.3 | | | $ | 6.8 | | | $ | 6.8 | |
Amortization of debt discount | — | | | 3.2 | | | — | | | 9.4 | |
Amortization of debt issuance costs | 0.5 | | | 0.2 | | | 1.3 | | | 0.7 | |
Convertible Notes interest expense | $ | 2.8 | | | $ | 5.7 | | | $ | 8.1 | | | $ | 16.9 | |
Subsequent to the adoption of ASU 2020-06, the debt issuance costs attributable to the liability component continues to be amortized to interest expense over the term of the Convertible Notes at an effective interest rate of 3.329%. The remaining term of the Convertible Notes was 3.6 years as of September 30, 2022.
Covenants
Our Amended Credit Facilities, 5.625% Notes and 4.125% Notes, require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests. In addition, our Amended Credit Facilities, 5.625% Notes and 4.125% notes, restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the PENN Master Lease and the Pinnacle Master Lease (both of which are defined in Note 9, “Leases”), each with GLPI. If we are unable to meet our financial covenants or in the event of a cross-default, it could trigger an acceleration of payment terms. As of September 30, 2022, the Company was in compliance with all required financial covenants. The Company believes that it will remain in compliance with all of its required financial covenants for at least the next twelve months following the date of filing this Quarterly Report on Form 10-Q with the SEC.
Other Long-Term Obligations
Other Long-term Obligation
In February 2021, we entered into a financing arrangement providing the Company with upfront cash proceeds while permitting us to participate in future proceeds on certain claims. The financing obligation has been classified as a non-current liability, which is expected to be settled in a future period of which the principal is contingent and predicated on other events. Consistent with an obligor’s accounting under a debt instrument, period interest will be accreted using an effective interest rate of 27.0% and until such time that the claims and related obligation is settled. The amount included in interest expense related to this obligation was $7.1 million and $20.0 million for the three and nine months ended September 30, 2022, respectively, as compared to $6.9 million and $12.1 million for the three and nine months ended September 30, 2021, respectively.
Ohio Relocation Fees
Other long-term obligations included $36.1 million and $44.5 million as of September 30, 2022 and December 31, 2021, respectively, related to the relocation fees for Hollywood Gaming at Dayton Raceway (“Dayton”) and Hollywood Gaming at Mahoning Valley Race Course (“Mahoning Valley”), which opened in August 2014 and September 2014, respectively. The relocation fee for each facility is payable as follows: $7.5 million upon the opening of the facilities and eighteen semi-annual payments of $4.8 million beginning one year after the commencement of operations. This obligation is accreted to interest expense at an effective yield of 5.0%.
Event Center
As of September 30, 2022 and December 31, 2021, other long-term obligations included $10.7 million and $11.4 million, respectively, related to the repayment obligation of a hotel and event center located less than a mile away from Hollywood Casino Lawrenceburg, which was constructed by the City of Lawrenceburg Department of Redevelopment. Effective in January 2015, by contractual agreement, we assumed a repayment obligation for the hotel and event center in the amount of $15.3 million, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment, in exchange for conveyance of the property. Beginning in January 2016, the Company was obligated to make annual payments on the loan of $1.0 million for 20 years. This obligation is accreted to interest expense at its effective yield of 3.0%.
Note 9—Leases
Master Leases
The components contained within the Master Leases are accounted for as either (i) operating leases, (ii) finance leases, or (iii) financing obligations. Changes to future lease payments under the Master Leases (i.e., when future escalators become known or future variable rent resets occur), which are discussed below, require the Company to either (i) increase both the Right-of-use (“ROU”) assets and corresponding lease liabilities with respect to operating and finance leases or (ii) record the incremental variable payment associated with the financing obligation to interest expense. In addition, monthly rent associated with Hollywood Casino Columbus (“Columbus”) and monthly rent in excess of the Hollywood Casino Toledo (“Toledo”) rent floor, which are discussed below, are considered contingent rent.
PENN Master Lease
Pursuant to the triple net master lease with GLPI (the “PENN Master Lease”), which became effective November 1, 2013, the Company leases real estate assets associated with 19 of the gaming facilities used in its operations. The PENN Master Lease has an initial term of 15 years with four subsequent, five-year renewal periods on the same terms and conditions, exercisable at the Company’s option. The Company has determined that the lease term is 35 years.
The payment structure under the PENN Master Lease includes a fixed component, a portion of which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue to Rent Ratio (as defined in the PENN Master Lease) of 1.8:1, and a component that is based on performance, which is prospectively adjusted (i) every five years by an amount equal to 4% of the average change in net revenues of all properties under the PENN Master Lease (other than Columbus and Toledo) compared to a contractual baseline during the preceding five years (“PENN Percentage Rent”) and (ii) monthly by an amount equal to 20% of the net revenues of Columbus and Toledo in excess of a contractual baseline and subject to a rent floor specific to Toledo.
As a result of the annual escalator effective November 1, 2022, for the lease year ended October 31, 2022, the fixed component of rent increased by $5.7 million. The next PENN Percentage Rent reset is scheduled to occur on November 1, 2023.
On January 14, 2022, the ninth amendment to the PENN Master Lease between the Company and GLPI became effective. The ninth amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at a leased property, establishes a “floor” with respect to the Hollywood Casino at PENN National Race Course Net Revenue amount used in the calculation of the annual rent escalator and PENN Percentage Rent, and modifies the rent calculations upon a lease termination event as defined in the amendment. The lease term and the four five-year optional renewal periods, which if exercised would extend the PENN Master Lease through October 31, 2048, were not modified in the ninth amendment.
We concluded the ninth amendment constituted a modification event under ASC Topic 842, “Leases” (“ASC 842”), which required us to reassess the classifications of the lease components and remeasure the associated lease liabilities. As a result of our reassessment of the lease classifications, (i) the land components of substantially all of the PENN Master Lease properties, which were previously classified as operating leases, are now primarily classified as finance leases, and (ii) the land and building components associated with the operations of Dayton and Mahoning Valley, which were previously classified as finance leases, are now classified as operating leases. As a result of our measurement of the associated lease liabilities, we recognized additional ROU assets and corresponding lease liabilities of $455.4 million. The building components of substantially all of the PENN Master Lease properties continue to be classified as financing obligations.
Subsequent to quarter end, on October 9, 2022, the Company entered into a binding term sheet (the “Term Sheet”) with GLPI. Pursuant to the Term Sheet, the Company and GLPI agreed to amend the PENN Master Lease to (i) remove the land and buildings for Hollywood Casino Aurora (“Aurora”), Hollywood Casino Joliet (“Joliet”), Columbus, Toledo and the M Resort Spa Casino (“M Resort”) and (ii) make associated adjustments to the rent under the PENN Master Lease, after which the initial Rent in the PENN Master Lease will be $284.1 million, consisting of $208.2 million of Building Base Rent, $43.0 million of Land Base Rent and $32.9 million of Percentage Rent (as such terms are defined in the PENN Master Lease).
We preliminarily concluded the pending amendment that will result from the Term Sheet (expected to be effective on January 1, 2023), constitutes a modification event under ASC 842 and are currently reassessing, remeasuring, and quantifying the impact of the modification to the Consolidated Financial Statements, which will be material. The modification event is expected to result in (i) a non-cash debt extinguishment charge recorded to our Consolidated Statements of Operations and
corresponding change in our financing obligations on our Consolidated Balance Sheets; and (ii) a revaluation of our lease ROU assets and corresponding lease liabilities on our Consolidated Balance Sheets.
New Lease
Subsequent to quarter end, as part of the Term Sheet and concurrent with the PENN Master Lease amendment described above, the Company and GLPI agreed to enter into a new master lease (the “New Lease”), expected to be effective January 1, 2023, specific to the property associated with Aurora, Joliet, Columbus, Toledo, M Resort, Hollywood Casino at The Meadows (“Meadows”), and Perryville. The New Lease will be cross-defaulted, cross-collateralized and coterminous with the PENN Master Lease, and subject to a parent guarantee.
The New Lease will include a base rent (the “New Lease Base Rent”) equal to $232.2 million and additional rent (together with the New Lease Base Rent, the “New Lease Rent”) equal to (i) 7.75% of any project funding received by PENN from GLPI for an anticipated relocation of PENN’s riverboat casino and related developments with respect to Aurora (the “Aurora Project”) and (ii) a percentage, based on then-current market conditions, of any project funding received by PENN from GLPI for certain anticipated development projects with respect to Joliet, Columbus and M Resort (the “Other Development Projects”). GLPI will fund up to $225 million for the Aurora Project, and GLPI has committed to fund, upon PENN’s request, up to $350 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set forth in the Term Sheet. The New Lease Rent will be subject to a one-time increase of $1.4 million, effective the fifth anniversary of the effective date. The New Lease Rent will be further subject to a fixed escalator of 1.5% on November 1, 2023 and annually thereafter. PENN may elect not to proceed with or to abandon any development project, provided that GLPI will be reimbursed for any out-of-pocket costs associated with an abandoned project. The Aurora Project and the Other Development projects are all subject to necessary regulatory and other government approvals.
Pinnacle Master Lease
In connection with the acquisition of Pinnacle, on October 15, 2018, the Company assumed a triple net master lease with GLPI (the “Pinnacle Master Lease”), originally effective April 28, 2016, pursuant to which the Company leases real estate assets associated with 12 of the gaming facilities used in its operations. Upon assumption of the Pinnacle Master Lease, as amended, there were 7.5 years remaining of the initial ten-year term, with five subsequent, five-year renewal periods, on the same terms and conditions, exercisable at the Company’s option. The Company has determined that the lease term is 32.5 years.
The payment structure under the Pinnacle Master Lease includes a fixed component, a portion of which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue to Rent Ratio (as defined in the Pinnacle Master Lease) of 1.8:1, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues compared to a contractual baseline during the preceding two years (“Pinnacle Percentage Rent”).
On January 14, 2022, the fifth amendment to the Pinnacle Master Lease between the Company and GLPI became effective. The fifth amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at a leased property and modifies the rent calculations upon a lease termination event as defined in the amendment. The lease term and the five five-year optional renewal periods, which if exercised would extend the Pinnacle Master Lease through April 30, 2051, were not modified in the fifth amendment.
We concluded the fifth amendment to the Pinnacle Master Lease constituted a modification event under ASC 842 (collectively with the ninth amendment to the PENN Master Lease, the “Lease Modification”). As a result of the modification, the land components of substantially all of the Pinnacle Master Lease properties, which were previously classified as operating leases, are now primarily classified as finance leases. As a result of our measurement of the associated lease liabilities, we recognized additional ROU assets and corresponding lease liabilities of $937.6 million. The building components of substantially all of the Pinnacle Master Lease properties continue to be classified as financing obligations.
As a result of the annual escalator, effective as of May 1, 2022 for the lease year ended April 30, 2022, the fixed component of rent increased by $4.6 million and an additional ROU asset and corresponding lease liability of $33.2 million were recognized associated with the finance lease components of the Pinnacle Master Lease. The next annual escalator test date is scheduled to occur on May 1, 2023.
The May 1, 2022 Pinnacle Percentage Rent reset resulted in an annual rent increase of $1.9 million, which will be in effect until the next Pinnacle Percentage Rent reset, scheduled to occur on May 1, 2024. Upon reset of the Pinnacle Percentage Rent, effective May 1, 2022, we recognized an additional finance lease ROU asset and corresponding lease liability of $26.1 million.
Morgantown Lease
On October 1, 2020, the Company entered into a triple net lease with a subsidiary of GLPI for the land underlying our development project in Morgantown, Pennsylvania (“Morgantown Lease”) in exchange for $30.0 million in rent credits which were utilized to pay rent under the Master Leases, Meadows Lease, and the Morgantown Lease.
The initial term of the Morgantown Lease is 20 years with six subsequent, five-year renewal periods, exercisable at the Company’s option. Initial annual rent under the Morgantown Lease is $3.0 million, subject to a 1.50% fixed annual escalation in each of the first three years subsequent to the facility opening, which occurred on December 22, 2021. Thereafter, the lease will be subject to an annual escalator consisting of either (i) 1.25%, if the consumer price index increase is greater than 0.50%, or (ii) zero, if the consumer price index increase is less than 0.50%. All improvements made on the land, including the constructed building, will be owned by the Company while the lease is in effect, however, on the expiration or termination of the Morgantown Lease, ownership of all tenant improvements on the land will transfer to GLPI.
Perryville Lease
In conjunction with the acquisition of the operations of Perryville on July 1, 2021, the Company entered into a triple net lease with GLPI for the real estate assets associated with the property (“Perryville Lease”) for initial annual rent of $7.8 million per year subject to escalation.
The initial term of the Perryville Lease is 20 years with three subsequent, five-year renewal periods, exercisable at the Company’s option. The building portion of the annual rent is subject to a fixed annual escalation of 1.50% in each of the following three years, with subsequent annual escalations of either (i) 1.25%, if the consumer price index increase is greater than 0.50%, or (ii) zero, if the consumer price index increase is less than 0.50%.
Subsequent to quarter end, as part of the Term Sheet and in conjunction with entering into the New Lease as described above, the Company agreed with GLPI that the Perryville Lease will be terminated effective on the expected date of January 1, 2023.
Operating Leases
In addition to any operating lease components contained within the Master Leases, the Company’s operating leases consist mainly of (i) individual triple net leases with GLPI for the real estate assets used in the operations of Tropicana (the “Tropicana Lease” which was terminated on September 26, 2022) and Hollywood Casino at The Meadows (the “Meadows Lease”), (ii) individual triple net leases with VICI Properties Inc. (NYSE: VICI) (“VICI”) for the real estate assets used in the operations of Margaritaville Resort Casino (the “Margaritaville Lease”) and Hollywood Casino at Greektown (the “Greektown Lease” and collectively with the Master Leases’ operating lease components, the Meadows Lease, the Margaritaville Lease and the Tropicana Lease, the “Triple Net Operating Leases”), (iii) ground and levee leases to landlords which were not assumed by our REIT Landlords and remain an obligation of the Company, and (iv) building and equipment not subject to the Master Leases. Certain of our lease agreements include rental payments based on a percentage of sales over specified contractual amounts, rental payments adjusted periodically for inflation, and rental payments based on usage. The Company’s leases include options to extend the lease terms. The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Subsequent to quarter end, as part of the Term Sheet and in conjunction with entering into the New Lease as described above, the Company agreed with GLPI that the Meadows Lease will be terminated effective on the expected date of January 1, 2023.
On January 14, 2022, the second amendment to the Meadows Lease between the Company and GLPI became effective. The second amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at the facility. This amendment did not result in a modification event under ASC 842.
On February 1, 2022, the Margaritaville Lease annual escalator test resulted in an annual rent increase of $0.4 million, and the recognition of an additional operating lease ROU asset and corresponding lease liability of $2.9 million. We did not incur an annual escalator for the lease year ended January 31, 2021. The next annual escalator and Margaritaville Percentage Rent reset are scheduled to occur on February 1, 2023.
In May 2020, the Greektown lease was amended to remove the escalator for the lease years ending May 31, 2021 and 2022 and to provide for a Net Revenue to Rent coverage floor to be mutually agreed upon prior to the commencement of the fourth lease year (June 1, 2022). In April 2022, the lease was further amended to provide for a Net Revenue to Rent coverage floor to be mutually agreed upon prior to the commencement of the fifth lease year (June 1, 2023).
The following is a maturity analysis of our operating leases, finance leases and financing obligations as of September 30, 2022:
| | | | | | | | | | | | | | | | | |
(in millions) | Operating Leases | | Finance Leases | | Financing Obligations |
Year ended December 31, | | | | | |
2022 (excluding the nine months ended September 30, 2022) | $ | 31.9 | | | $ | 94.6 | | | $ | 93.2 | |
2023 | 125.3 | | | 375.2 | | | 369.8 | |
2024 | 119.8 | | | 351.4 | | | 355.3 | |
2025 | 116.6 | | | 346.9 | | | 355.4 | |
2026 | 112.1 | | | 347.0 | | | 355.4 | |
Thereafter | 1,339.9 | | | 7,874.0 | | | 8,285.6 | |
Total lease payments | 1,845.6 | | | 9,389.1 | | | 9,814.7 | |
Less: Imputed interest | (798.4) | | | (4,355.2) | | | (5,765.0) | |
Present value of future lease payments | 1,047.2 | | | 5,033.9 | | | 4,049.7 | |
Less: Current portion of lease obligations | (71.7) | | | (117.0) | | | (65.0) | |
Long-term portion of lease obligations | $ | 975.5 | | | $ | 4,916.9 | | | $ | 3,984.7 | |
| | | | | |
Total payments made under the Triple Net Leases were as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
PENN Master Lease | $ | 120.2 | | | $ | 118.4 | | | $ | 360.0 | | | $ | 357.1 | |
Pinnacle Master Lease | 84.2 | | | 82.4 | | | 250.1 | | | 245.8 | |
Perryville Lease | 1.9 | | | 1.9 | | | 5.8 | | | 1.9 | |
Meadows Lease | 6.2 | | | 6.2 | | | 18.6 | | | 18.6 | |
Margaritaville Lease | 5.9 | | | 5.9 | | | 17.8 | | | 17.6 | |
Greektown Lease | 12.8 | | | 12.9 | | | 38.5 | | | 40.3 | |
Morgantown Lease | 0.8 | | | 0.8 | | | 2.3 | | | 2.3 | |
Total (1) | $ | 232.0 | | | $ | 228.5 | | | $ | 693.1 | | | $ | 683.6 | |
(1)Rent payable under the Tropicana Lease was nominal prior to termination on September 26, 2022. Therefore, it has been excluded from the table above.
The components of lease expense were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Location on unaudited Consolidated Statements of Operations | | For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | | 2022 | | 2021 | | 2022 | | 2021 |
Operating Lease Costs | | | | | | | | | |
Rent expense associated with triple net operating leases (1) | General and administrative | | $ | 31.5 | | | $ | 116.0 | | | $ | 119.6 | | | $ | 342.9 | |
Operating lease cost (2) | Primarily General and administrative | | 4.9 | | | 4.1 | | | 14.8 | | | 11.9 | |
Short-term lease cost | Primarily Gaming expense | | 19.7 | | | 17.0 | | | 56.3 | | | 45.8 | |
Variable lease cost (2) | Primarily Gaming expense | | 1.0 | | | 1.3 | | | 3.3 | | | 3.4 | |
Total | | | $ | 57.1 | | | $ | 138.4 | | | $ | 194.0 | | | $ | 404.0 | |
| | | | | | | | | |
Finance Lease Costs | | | | | | | | | |
Interest on lease liabilities (3) | Interest expense, net | | $ | 72.0 | | | $ | 4.7 | | | $ | 187.2 | | | $ | 12.1 | |
Amortization of ROU assets (3) | Depreciation and amortization | | 50.1 | | | 3.3 | | | 131.0 | | | 7.3 | |
Total | | | $ | 122.1 | | | $ | 8.0 | | | $ | 318.2 | | | $ | 19.4 | |
| | | | | | | | | |
Financing Obligation Costs | | | | | | | | | |
Interest on financing obligations (4) | Interest expense, net | | $ | 86.2 | | | $ | 104.5 | | | $ | 261.0 | | | $ | 312.4 | |
(1)Pertains to the operating lease components contained within the Master Leases, inclusive of the variable expense associated with Columbus and Toledo for the operating lease components, the Meadows Lease, the Margaritaville Lease, the Greektown Lease, and the Tropicana Lease. The Tropicana Lease was terminated on September 26, 2022.
Prior to the Lease Modification, the operating lease components contained within the Master Leases primarily consisted of the land, inclusive of the variable expense associated with Columbus and Toledo.
Subsequent to the Lease Modification, the operating lease components contained within the Master Leases consist of the land and building components associated with the operations of Dayton and Mahoning Valley.
(2)Excludes the operating lease costs and variable lease costs pertaining to our triple net leases with our REIT landlords classified as operating leases, discussed in footnote (1) above.
(3)Pertains to the finance lease components contained within the Master Leases, and the Perryville Lease which results in interest expense and amortization expense (as opposed to rent expense).
Prior to the Lease Modification, the finance lease components contained within the Master Leases consisted of the land and building components associated with the operations of Dayton and Mahoning Valley.
Subsequent to the Lease Modification, the finance lease components contained within the Master Leases consist of the land, inclusive of the variable expense associated with Columbus and Toledo.
(4) Pertains to the components contained within the Master Leases (primarily buildings) and the Morgantown Lease determined to be a financing obligation, inclusive of the variable expense associated with Columbus and Toledo for the financing obligation components (the buildings).
Note 10—Investments in and Advances to Unconsolidated Affiliates
As of September 30, 2022, investments in and advances to unconsolidated affiliates primarily consisted of the Company’s 36% interest in Barstool; its 50% investment in Kansas Entertainment, the joint venture with NASCAR that owns Hollywood Casino at Kansas Speedway; and its 50% interest in Freehold Raceway.
Investment in Barstool
As previously disclosed, in February 2020, we closed on our investment in Barstool pursuant to a stock purchase agreement with Barstool and certain stockholders of Barstool, in which we purchased 36% (inclusive of 1% on a delayed basis) of the common stock, par value $0.0001 per share, of Barstool for a purchase price of $161.2 million. The purchase price consisted of $135.0 million in cash and $23.1 million in shares of a new class of non-voting convertible preferred stock of the Company (as discussed below).
On October 1, 2021, the terms of the February 2020 stock purchase agreement were amended and restated (“Amended and Restated Stockholders’ Agreement”) to (i) set a definitive purchase price of $325.0 million on the second 50% of Barstool common stock, which eliminates the floor of 2.25 times the annual revenue of Barstool and (ii) fix a number of PENN common shares to be delivered to existing February 2020 employee holders of Barstool common stock, to the extent PENN’s stock price exceeds a specified value defined in the Amended and Restated Stockholders’ Agreement and PENN elects to settle using a combination of cash and equity.
On July 7, 2022, we entered into the first amendment to the Amended and Restated Stockholders’ Agreement (“First Amendment”). The First Amendment updated the share price specified value used to calculate the fixed number of PENN common shares to be delivered to existing February 2020 employee holders of Barstool common stock, to the extent PENN’s stock price exceeds the updated specified value and PENN elects to settle using a combination of cash and equity.
On August 17, 2022, the Company exercised its call rights to bring its ownership of Barstool to 100%. The acquisition of the remaining Barstool shares is expected to be completed in February 2023, after which Barstool will be a wholly-owned subsidiary of PENN. Completion of the acquisition at that time is subject to the satisfaction of certain conditions, including regulatory approval.
In conjunction with the February 20, 2020 stock purchase agreement, the Company issued 883 shares of Series D Preferred Stock, par value $0.01 (the “Series D Preferred Stock”) to certain individual stockholders affiliated with Barstool. 1/1,000th of a share of Series D Preferred Stock is convertible into one share of PENN Common Stock. As of September 30, 2022, 51 shares of the Series D Preferred Stock can be converted into PENN Common Stock.
During the three months ended June 30, 2022 and the year ended December 31, 2021, the Company acquired an additional 0.3%, and 0.6% of Barstool common stock, par value $0.0001 per share, respectively, which represents a partial settlement of the 1% purchase on a delayed basis as noted above. The acquisitions of the acquired Barstool common stock that occurred during the three months ended June 30, 2022 and the year ended December 31, 2021, were settled through a predetermined number of PENN Common Stock and Series D Preferred Stock, respectively, as contained within the Amended and Restated Stockholders’ Agreement (see Note 13, “Stockholders’ Equity and Stock-Based Compensation,” for further information). As a part of the stock purchase agreement, we entered into a commercial agreement that provides us with access to Barstool’s customer list and exclusive advertising on the Barstool platform over the term of the agreement. The initial term of the commercial agreement is ten years and, unless earlier terminated and subject to certain exceptions, will automatically renew for three additional ten-year terms (a total of 40 years assuming all renewals are exercised).
As of September 30, 2022 and December 31, 2021, we have an amortizing intangible asset pertaining to the customer list of $0.2 million and $0.8 million, respectively. As of September 30, 2022 and December 31, 2021, we have a prepaid expense pertaining to the advertising in the amount of $14.5 million, and $15.4 million respectively, of which $13.3 million and $14.2 million was classified as long-term, respectively. The long-term portion of the prepaid advertising expense is included in “Other assets” within our unaudited Consolidated Balance Sheets.
As of September 30, 2022 and December 31, 2021, our investment in Barstool was $160.2 million and $162.5 million, respectively. We record our proportionate share of Barstool’s net income or loss one quarter in arrears.
The Company determined that Barstool qualified as a VIE as of September 30, 2022 and December 31, 2021. The Company did not consolidate the financial position of Barstool as of September 30, 2022 and December 31, 2021, nor the results of operations for the three and nine months ended September 30, 2022 and 2021, as the Company determined that it did not qualify as the primary beneficiary of Barstool either at the commencement date of its investment or for subsequent periods, primarily as a result of the Company not having the power to direct the activities of the VIE that most significantly affect Barstool’s economic performance.
Kansas Joint Venture
As of September 30, 2022 and December 31, 2021, our investment in Kansas Entertainment was $79.9 million and $83.8 million, respectively. During the three and nine months ended September 30, 2022, the Company received distributions from Kansas Entertainment totaling $10.5 million and $27.5 million, respectively, as compared to $10.5 million and $23.9 million for the three and nine months ended September 30, 2021. The Company deems these distributions to be returns on its investment based on the source of those cash flows from the normal business operations of Kansas Entertainment.
The Company has determined that Kansas Entertainment does not qualify as a VIE. Using the guidance for entities that are not VIEs, the Company determined that it did not have a controlling financial interest in the joint venture, primarily as it did not have the ability to direct the activities of the joint venture that most significantly impacted the joint venture’s economic performance without the input of NASCAR. Therefore, the Company did not consolidate the financial position of Kansas Entertainment as of September 30, 2022 and December 31, 2021, nor the results of operations for the three and nine months ended September 30, 2022 and 2021.
Note 11—Income Taxes
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to its year-to-date pretax book income or loss. The tax effects of discrete items, including but not limited to, excess tax benefits associated with stock-based compensation, are reported in the interim period in which they occur. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 226.7% and (62.9%) for the three and nine months ended September 30, 2022, as compared to 29.7% and 22.7% for the three and nine months ended September 30, 2021. We excluded certain foreign losses from our worldwide effective tax rate calculation due to a year-to-date ordinary loss for which no benefit may be recognized. Our effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings and changes to our valuation allowance. Certain of these and other factors, including our history and projections of pretax earnings, are considered in assessing our ability to realize our net deferred tax assets.
ASC 740 requires that deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amount and the tax basis of existing assets and liabilities and are measured at the prevailing enacted tax rates that will be in effect when these differences are realized or settled. As of June 30, 2022, and December 31, 2021, the Company had a valuation allowance of $187.2 million and $124.3 million, respectively, within its unaudited Consolidated Balance Sheets. The accounting guidance also requires analysis regarding whether valuation allowances should be established based on the consideration of all available evidence using a “more-likely-than-not” realization standard. We evaluate our deferred tax assets quarterly to determine if valuation allowances are required. The realization of the deferred tax assets ultimately depends upon the existence of sufficient taxable income in future periods. We established a full valuation allowance against our deferred tax assets beginning in the first quarter of 2020 because of the mandated property-wide closures resulting in zero revenues for an extended period. The Company routinely analyzes all available positive and negative evidence in determining the continuing need for a valuation allowance. Our evaluation process considered, among other factors, historical retail operating results, our three-year cumulative earnings position, projections of future sustained profitability and the duration of statutory carryforward periods.
As of September 30, 2022, the Company determined that a valuation allowance was no longer required against its federal, foreign, and state net deferred tax assets for the portion that will be realized. As a result, the Company released $172.7 million of its total valuation allowance during the three and nine months ended September 30, 2022, due to the positive evidence outweighing the negative evidence thereby allowing the Company to achieve the “more-likely-than-not” realization standard. This reversal is reflected in our income tax benefit in the accompanying unaudited Consolidated Statements of Operations. When a change in valuation allowance is recognized during an interim period, a portion of the valuation allowance to be reversed must be allocated to the remaining interim periods. The Company continues to maintain a valuation allowance of approximately $14.5 million as of September 30, 2022 within its unaudited Consolidated Balance Sheets, for federal and foreign tax attributes in addition to certain state filing groups.
The most significant positive evidence that led to the reversal of the valuation allowance during this interim period includes the following:
Achievement and sustained growth in our three-year cumulative pretax earnings. We anticipate emerging from a three-year cumulative pretax loss position during the fourth quarter of this year. The Company has demonstrated profitability consecutively in the prior seven quarters including approximately $224.4 million and approximately $559.0 million of pretax book income for the nine months ended September 30, 2022 and for the year ended December 31 2021, respectively.
Substantial total revenue and earnings growth for the retail operating segment over the last seven quarters. Total revenue and earnings for the retail operating segment increased 58.3% and 87.2%, respectively, from 2020 to 2021 showcasing a strong finish to a transformative year in a post pandemic environment. The Company continued to have strong growth in total revenue and earnings for the retail operating segment for the nine months ended September 30, 2022.
Lack of significant asset impairment charges expected to be indicative of the Company’s retail business operations or projections for the foreseeable future. The Company had experienced significant impairment charges as a result of mandated property-wide closures pursuant to various orders from state gaming regulators or governmental authorities to combat the rapid spread of COVID-19. The Company recorded impairment charges totaling $623.4 million during the year ended December 31, 2020. There were no impairments recorded in 2021 and for the nine months ended September 30, 2022, the Company recorded impairment of $104.6 million. The impairment charge recorded in the third quarter of 2022 relates to an individual property and is specific to a prolonged hotel room renovation causing the majority of the hotel to be closed subsequent to the property reopening from the COVID-19 mandated closure, leading to amended cash flow projections to reflect the current operating results and the related economic environment.
As of September 30, 2022, and December 31, 2021, prepaid income taxes of $23.2 million and $42.5 million, respectively, were included in “Prepaid expenses” within our unaudited Consolidated Balance Sheets. The reduction in prepaid income taxes is primarily related to an Internal Revenue Service refund of $28.2 million related to the Company’s carryback claim under the CARES Act.
On July 8, 2022, the Pennsylvania House Bill 1342 was signed into law that reduces the corporate income tax rate over the next nine years from the current rate of 9.99% to 4.99% by 2031. The tax law change is accounted for in the period of enactment and therefore, we recognized an impact of approximately $10.3 million of additional expense during the three months ended September 30, 2022.
Note 12—Commitments and Contingencies
The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions, development agreements and other matters arising in the ordinary course of business. Although the Company maintains what it believes to be adequate insurance coverage to mitigate the risk of loss pertaining to covered matters, legal and administrative proceedings can be costly, time-consuming and unpredictable. The Company does not believe that the final outcome of these matters will have a material adverse effect on its financial position, results of operations, or cash flows.
Note 13—Stockholders’ Equity and Stock-Based Compensation
Common and Preferred Stock
On May 11, 2021, as part of the acquisition of Hitpoint, the Company issued 43,684 shares for a total of $3.5 million. On July 8, 2022, the Company issued 4,055 shares, in connection with the achievement of the first of three annual mutual goals established by the Company and Hitpoint for a total of $0.2 million.
On June 17, 2021, the Company filed its Second Amended and Restated Articles of Incorporation with the Department of State of the Commonwealth of Pennsylvania. These Articles of Incorporation, as amended and restated and approved by the Company’s shareholders at the 2021 Annual Meeting of Shareholders, increase the number of authorized shares of common stock from 200,000,000 to 400,000,000.
On August 1, 2021, as part of the acquisition of Sam Houston, the Company issued 198,103 shares for a total of $15.8 million.
On October 19, 2021, as part of the acquisition of theScore, the Company issued 12,319,340 shares of common stock and authorized and issued 697,539 Exchangeable Shares for approximately $1.0 billion, each with a par value of $0.01, as discussed in Note 6, “Acquisitions and Dispositions.” As of September 30, 2022 and December 31, 2021, there were 620,353 and 653,059 Exchangeable Shares outstanding, respectively. On each of February 22, 2021 and August 23, 2021, the Company issued 43 shares of Series D Preferred Stock in conjunction with acquiring additional shares of Barstool common stock. On June 1, 2022, the Company issued 64,000 shares of common stock in conjunction with acquiring additional shares of Barstool common stock from certain individual stockholders affiliated with Barstool. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act. The acquisition of the incremental Barstool common stock represents a partial settlement of the 1% purchase on a delayed basis as described in Note 10, “Investments in and Advances to Unconsolidated Affiliates.” On February 22, 2021 and August 23, 2021, 151 shares of Series D Preferred Stock and 43 shares of Series D Preferred Stock, respectively, were converted to common stock. As a result of the conversion, the Company issued 151,200 shares of common stock and 43,000 shares of common stock, respectively, each with a par value of $0.01. On February 23, 2022 and February 24, 2022, 43 shares of Series D Preferred Stock and 151 shares of Series D Preferred Stock, respectively, were converted to common stock. As a result of the conversion, the Company issued 43,000 shares of common stock and 151,200 shares of common stock, respectively, each with a par value of $0.01. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act.
As of September 30, 2022 and December 31, 2021, there were 5,000 shares authorized of Series D Preferred Stock, of which 581 shares and 775 shares were outstanding, respectively.
Share Repurchase Authorization
On February 1, 2022, the Board of Directors of PENN approved a $750.0 million share repurchase authorization. The three-year authorization expires on January 31, 2025. Repurchases by the Company will be subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. There is no minimum number of shares that the Company is required to repurchase and the repurchase authorization may be suspended or discontinued at any time without prior notice.
During the three months ended September 30, 2022, the Company repurchased 5,348,809 shares of its common stock in open market transactions for $168.0 million at an average price of $31.40 per share. During the nine months ended September 30, 2022, the Company repurchased 14,690,394 shares of its common stock in open market transactions for $510.1 million at an average price of $34.72 per share. The cost of all repurchased shares is recorded as “Treasury stock” within our unaudited Consolidated Balance Sheets.
Subsequent to the quarter ended September 30, 2022, the Company repurchased 1,005,188 shares of its common stock at an average price of $28.95 per share for an aggregate amount of $29.1 million. The remaining availability under our $750.0 million share repurchase authorization was $211.1 million as of November 2, 2022.
2022 Long Term Incentive Compensation Plan
On June 7, 2022, the Company’s shareholders, upon the recommendation of the Company’s Board of Directors, approved the Company’s 2022 Long Term Incentive Compensation Plan (the “2022 Plan”). The 2022 Plan permits the Company to issue stock options (incentive and/or non-qualified), SARs, RSAs, RSUs, performance and other equity and cash awards to executive directors and other employees of the Company and its subsidiaries. Non-employee directors and consultants are eligible to receive all such awards, other than incentive stock options. Pursuant to the 2022 Plan, 6,870,000 shares of the Company’s common stock are reserved for issuance, plus any shares of common stock subject to outstanding awards under the 2018 Plan or theScore Plan (both as defined below) as of June 7, 2022, that are forfeited or settled for cash. For purposes of determining the number of shares available for issuance under the 2022 Plan, stock options, restricted stock and SARs (except cash-settled SARs) count against the 6,870,000 limit as one share of common stock for each share granted. Any awards that are not settled in shares of common stock are not counted against the share limit. As of September 30, 2022, there are 6,575,083 shares available for future grants under the 2022 Plan.
2018 Long Term Incentive Compensation Plan
The Company’s 2018 Long Term Incentive Compensation Plan, as amended (the “2018 Plan”) permitted it to issue stock options (incentive and/or non-qualified), stock appreciation rights (“SARs”), RSAs, RSUs, cash-settled phantom stock units (“CPSUs”) and other equity and cash awards to employees and any consultant or advisor to the Company or subsidiary. Non-employee directors were eligible to receive all such awards, other than incentive stock options. Pursuant to the 2018 Plan, 12,700,000 shares of the Company’s common stock were reserved for issuance. For purposes of determining the number of shares available for issuance under the 2018 Plan, stock options and SARs (except cash-settled SARs) counted against the 12,700,000 limit as one share of common stock for each share granted and restricted stock or any other full value stock award are counted as 2.30 shares of common stock for each share granted. Any awards that were not settled in shares of common stock were not counted against the share limit. In connection with the approval of the 2022 Plan, the 2018 Plan remains in place until all of the awards previously granted thereunder have been paid, forfeited or expired. However, the shares which remained available for issuance under the 2018 Plan are no longer available for issuance and all future equity awards will be granted pursuant to the 2022 Plan.
Score Media And Gaming Inc. Second Amended And Restated Stock Option And Restricted Stock Unit Plan (“theScore Plan”)
In connection with the acquisition of theScore on October 19, 2021, the Company registered theScore Plan. theScore Plan permitted the Company to issue non-qualified stock options and RSUs to employees and service providers affiliated with theScore prior to the acquisition date. At the date of acquisition, the Company rolled over all outstanding, non-vested and unexercised stock options and non-vested RSUs equivalent to 853,904 shares of the Company. Each rollover option and RSU were subject to substantially the same terms and conditions applicable to the award immediately prior to the acquisition. In connection with the transaction, the vesting provisions of unvested options and RSUs, awarded under the theScore Plan prior to August 4, 2021, were amended to provide for a new acceleration right for legacy theScore employees and service providers. The amendment provides that, if an involuntary termination without cause occurs at any time prior to April 19, 2023, unvested
options and RSUs will automatically accelerate and become fully vested on the effective date of termination. In connection with the approval of the 2022 Plan, theScore Plan remains in place until all of the awards previously granted thereunder have been paid, forfeited or expired. However, the shares which remained available for future grants under theScore Plan are no longer available for issuance and all future equity awards will be pursuant to the 2022 Plan.
Performance Share Program
In February 2019, the Company’s Compensation Committee of the Board of Directors adopted a performance share program (the “Performance Share Program II”) pursuant to the 2018 Plan. An aggregate of 244,955 RSUs and 95,276 RSAs and RSUs with performance-based vesting conditions, at target, were granted during the nine months ended September 30, 2022 and September 30, 2021, respectively, under the Performance Share Program II, with the grant having a three-year award period consisting of three one-year performance periods and a three-year service period. The performance threshold for vesting of these awards is 50% of target and, based on the level of achievement, up to 150% of target.
Stock-based Compensation Expense
Stock-based compensation expense, which pertains principally to our stock options, RSAs and RSUs, for the three and nine months ended September 30, 2022 was $13.6 million and $45.1 million, respectively, as compared to $8.5 million and $21.9 million for the three and nine months ended September 30, 2021 and is included within the unaudited Consolidated Statements of Operations under “General and administrative.”
Stock Options
The Company granted 1,516 and 397,881 stock options during the three and nine months ended September 30, 2022, respectively, as compared to 736 and 230,901 stock options during the three and nine months ended September 30, 2021, respectively.
Cash-settled Phantom Stock Units
Our outstanding CPSUs entitle plan recipients to receive cash based on the fair value of the Company’s common stock on the vesting date. Our CPSUs vest over a period of three or four years. The cash-settled CPSUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period. The Company has a liability, which is included in “Accrued expenses and other current liabilities” within the unaudited Consolidated Balance Sheets, associated with its cash-settled CPSUs of $1.1 million and $8.6 million as of September 30, 2022 and December 31, 2021, respectively.
For CPSUs, there was $4.2 million of total unrecognized compensation cost as of September 30, 2022 that will be recognized over the awards remaining weighted-average vesting period of 0.8 years. For the three and nine months ended September 30, 2022 the Company recognized $1.0 million and $2.4 million of compensation expense associated with these awards, respectively, as compared to $5.5 million and $11.2 million for the three and nine months ended September 30, 2021, respectively. Compensation expense associated with our CPSUs is recorded in “General and administrative” within the unaudited Consolidated Statements of Operations. We paid $9.9 million and $13.5 million for the nine months ended September 30, 2022 and 2021, respectively, pertaining to cash-settled CPSUs.
Stock Appreciation Rights
Our outstanding SARs are accounted for as liability awards since they will be settled in cash and vest over a period of four years. The fair value of cash-settled SARs is calculated each reporting period and estimated using the Black-Scholes option pricing model. The Company has a liability, which is included in “Accrued expenses and other current liabilities” within the unaudited Consolidated Balance Sheets, associated with its cash-settled SARs of $7.1 million and $18.5 million as of September 30, 2022 and December 31, 2021, respectively.
For SARs, there was $7.8 million of total unrecognized compensation cost as of September 30, 2022 that will be recognized over the awards remaining weighted-average vesting period of 1.9 years. The Company recognized a reduction to compensation expense of $1.3 million and $8.1 million for the three and nine months ended September 30, 2022, and recognized compensation expense of $3.2 million and $13.6 million for the three and nine months ended September 30, 2021, respectively. Compensation expense associated with our SARs is recorded in “General and administrative” within the unaudited Consolidated Statements of Operations. We paid $2.8 million and $38.8 million during the nine months ended September 30, 2022 and 2021, respectively, related to cash-settled SARs.
Other
In the second quarter of 2021, the Company entered into two promissory notes with shareholders for a total of $9.0 million. The promissory notes are unsecured and bear interest of 2.25%. As of September 30, 2022 and December 31, 2021, the receivable is recorded as a reduction of equity within “Additional paid-in capital” in our unaudited Consolidated Balance Sheets.
Note 14—Earnings per Share
For the three and nine months ended September 30, 2022, and 2021 we recorded net income attributable to PENN. As such, we used diluted weighted-average common shares outstanding when calculating diluted income per share. Stock options, restricted stock, convertible preferred shares and convertible debt that could potentially dilute basic EPS in the future are included in the computation of diluted income per share.
The following table sets forth the allocation of net income for the three and nine months ended September 30, 2022 and 2021 under the two-class method. | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Net income attributable to PENN Entertainment | $ | 123.5 | | | $ | 86.1 | | | $ | 201.3 | | | $ | 375.8 | |
Net income applicable to preferred stock | 0.5 | | | 0.4 | | | 0.8 | | | 1.9 | |
Net income applicable to common stock | $ | 123.0 | | | $ | 85.7 | | | $ | 200.5 | | | $ | 373.9 | |
The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and nine months ended September 30, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Weighted-average common shares outstanding | 157.6 | | | 156.1 | | | 163.5 | | | 155.9 | |
Assumed conversion of: | | | | | | | |
Dilutive stock options | 1.0 | | | 2.1 | | | 1.2 | | | 2.3 | |
Dilutive restricted stock | 0.3 | | | 0.4 | | | 0.2 | | | 0.4 | |
Convertible debt | 14.1 | | | 14.1 | | | 14.1 | | | 14.1 | |
Weighted-average common shares outstanding - Diluted | 173.0 | | | 172.7 | | | 179.0 | | | 172.7 | |
Restricted stock with performance and market based vesting conditions that have not been met as of September 30, 2022 were excluded from the computation of diluted earnings per share.
Options to purchase 0.9 million and 0.8 million shares were outstanding during the three and nine months ended September 30, 2022, respectively, compared to 0.2 million during both the three and nine months ended September 30, 2021, but were not included in the computation of diluted earnings per share because they were anti-dilutive.
The assumed conversion of 0.6 million preferred shares were excluded from the computation of diluted earnings per share for both the three and nine months ended September 30, 2022, as compared to 0.8 million preferred shares for both the three and nine months ended September 30, 2021, because including them would have been anti-dilutive.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
Calculation of basic earnings per share: | | | | | | | |
Net income applicable to common stock | $ | 123.0 | | | $ | 85.7 | | | $ | 200.5 | | | $ | 373.9 | |
Weighted-average shares outstanding - PENN Entertainment | 157.0 | | | 156.1 | | | 162.9 | | | 155.9 | |
Weighted-average shares outstanding - Exchangeable Shares | 0.6 | | | — | | | 0.6 | | | — | |
Weighted-average common shares outstanding - basic | 157.6 | | | 156.1 | | | 163.5 | | | 155.9 | |
Basic earnings per share | $ | 0.78 | | | $ | 0.55 | | | $ | 1.23 | | | $ | 2.40 | |
| | | | | | | |
Calculation of diluted earnings per share: | | | | | | | |
Net income applicable to common stock | $ | 123.0 | | | $ | 85.7 | | | $ | 200.5 | | | $ | 373.9 | |
Interest expense, net of tax (1): | | | | | | | |
Convertible Notes | 1.8 | | | 4.4 | | | 5.4 | | | 13.0 | |
Diluted income applicable to common stock | $ | 124.8 | | | $ | 90.1 | | | $ | 205.9 | | | $ | 386.9 | |
Weighted-average common shares outstanding - diluted | 173.0 | | | 172.7 | | | 179.0 | | | 172.7 | |
Diluted earnings per share | $ | 0.72 | | | $ | 0.52 | | | $ | 1.15 | | | $ | 2.24 | |
(1)The three and nine months ended September 30, 2022 were tax-affected at a rate of 21%. The three and nine months ended September 30, 2021, were tax-affected at a rate of 20%.
Note 15—Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:
•Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. The fair value of the Company’s trade accounts receivable and payables approximates the carrying amounts.
Cash and Cash Equivalents
The fair value of the Company’s cash and cash equivalents approximates their carrying amount, due to the short maturity of the cash equivalents.
Equity Securities
As of September 30, 2022 and December 31, 2021, we held $20.6 million and $84.3 million in equity securities of ordinary shares, respectively, which are reported as “Other assets” in our unaudited Consolidated Balance Sheets. These equity securities are the result of PENN Interactive entering into multi-year agreements with third-party sports betting operators for online sports betting and iCasino market access across our portfolio.
During the three and nine months ended September 30, 2022, we recognized holding losses of $10.8 million and $66.4 million related to these equity securities, respectively, compared to a holding gains of $10.1 million and $28.9 million for the three and nine months ended September 30, 2021, respectively, which is included in “Other,” as reported in “Other income (expenses)” within our unaudited Consolidated Statements of Operations. During the quarter ended September 30, 2021, all warrants were exercised for ordinary shares which resulted in a loss of $20.1 million included in “Other,” as reported in “Other income (expenses)” within our unaudited Consolidated Statements of Operations.
The fair value of the equity securities was determined using Level 2 inputs, which use market approach valuation techniques. The primary inputs to those techniques include the quoted market price of the equity securities, foreign currency exchange rates, a discount for lack of marketability (“DLOM”) with respect to the ordinary shares, and a Black-Scholes option pricing model previously associated with the exercised warrants. The DLOM is based on the remaining term of the relevant lock-up periods and the volatility associated with the underlying equity securities. The Black-Scholes option pricing model utilizes the exercise price of the warrants, a risk-free rate, volatility associated with the underlying equity securities and the expected life of the warrants.
Held-to-maturity Securities and Promissory Notes
We have a management contract with Retama Development Corporation (“RDC”), a local government corporation of the City of Selma, Texas, to manage the day-to-day operations of Retama Park Racetrack, located outside of San Antonio, Texas. In addition, we own 1.0% of the equity of Retama Nominal Holder, LLC, which holds a nominal interest in the racing license used to operate Retama Park Racetrack, and a 75.5% interest in Pinnacle Retama Partners, LLC (“PRP”), which owns the contingent gaming rights that may arise if gaming under the existing racing license becomes legal in Texas in the future.
As of September 30, 2022 and December 31, 2021, PRP held $7.9 million and $15.1 million in promissory notes issued by RDC, respectively. As of September 30, 2022 and December 31, 2021, PRP held $6.7 million in local government corporation bonds issued by RDC at amortized cost. The promissory notes and the local government corporation bonds are collateralized by the assets of Retama Park Racetrack. As of September 30, 2022 and December 31, 2021, the promissory notes and the local government corporation bonds were included in “Other assets” within our unaudited Consolidated Balance Sheets.
The contractual terms of these promissory notes include interest payments due at maturity; however, we have not recorded accrued interest on these promissory notes because uncertainty exists as to RDC’s ability to make interest payments. We have the positive intent and ability to hold the local government corporation bonds to maturity and until the amortized cost is recovered. The estimated fair values of such investments are principally based on appraised values of the land associated with Retama Park Racetrack, which are classified as Level 2 inputs.
Long-term Debt
The fair value of our Term Loan A Facility, Term Loan B-1 Facility, Amended Term Loan A Facility, Amended Term Loan B Facility, 5.625% Notes, 4.125% Notes, and the Convertible Notes is estimated based on quoted prices in active markets and is classified as a Level 1 measurement.
Other long-term obligations as of September 30, 2022 and December 31, 2021 included a financing arrangement entered in February of 2021, the relocation fees for Dayton and Mahoning Valley, and the repayment obligation of the hotel and event center located near Hollywood Casino Lawrenceburg. See Note 8, “Long-term Debt” for details. The fair values of the Dayton and Mahoning Valley relocation fees and the Lawrenceburg repayment obligation are estimated based on rates consistent with the Company’s credit rating for comparable terms and debt instruments and are classified as Level 2 measurements. Additionally, in February 2021, we entered into a financing arrangement providing the Company with upfront cash proceeds while permitting us to participate in future proceeds on certain claims. The financing obligation has been classified as a non-current liability and the fair value of the financing obligation is based on what we expect to be settled in a future period of which the principal is contingent and predicated on other events, plus accreted period non-cash interest using an effective interest rate of 27.0% until the claims and related obligation is settled. The financing obligation has been classified as a Level 3 measurement and is included within our unaudited Consolidated Balance Sheets in “Long-term debt, net of current maturities, debt discount and debt issuance costs.” See Note 8, “Long-term Debt.” Other Liabilities
Other liabilities as of September 30, 2022 and December 31, 2021 includes contingent purchase price liabilities related to Plainridge Park Casino and Hitpoint, of which Hitpoint was acquired on May 11, 2021. The Hitpoint contingent purchase price liability is payable in installments up to a maximum of $1.0 million in the form of cash and equity, on the first three
anniversaries of the acquisition close date and is based on the achievement of mutual goals established by the Company and Hitpoint. As of September 30, 2022, there are two annual achievement periods remaining. The Plainridge Park Casino contingent purchase price liability is calculated based on earnings of the gaming operations over the first ten years of operations, which commenced on June 24, 2015. As of September 30, 2022, we were contractually obligated to make three additional annual payments. The fair value of the Plainridge Park Casino contingent purchase price liability is estimated based on an income approach using a discounted cash flow model. These contingent purchase price liabilities have been classified as a Level 3 measurement and are included within our unaudited Consolidated Balance Sheets in “Accrued expenses and other current liabilities” or “Other long-term liabilities,” depending on the timing of the next payment.
The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
(in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 1,728.4 | | | $ | 1,728.4 | | | $ | 1,728.4 | | | $ | — | | | $ | — | |
Equity securities | $ | 20.6 | | | $ | 20.6 | | | $ | — | | | $ | 20.6 | | | $ | — | |
Held-to-maturity securities | $ | 6.7 | | | $ | 6.7 | | | $ | — | | | $ | 6.7 | | | $ | — | |
Promissory notes | $ | 7.9 | | | $ | 7.9 | | | $ | — | | | $ | 7.9 | | | $ | — | |
Financial liabilities: | | | | | | | | | |
Long-term debt | | | | | | | | | |
Senior Secured Credit Facilities | $ | 1,511.7 | | | $ | 1,491.1 | | | $ | 1,491.1 | | | $ | — | | | $ | — | |
5.625% Notes | $ | 399.6 | | | $ | 353.6 | | | $ | 353.6 | | | $ | — | | | $ | — | |
4.125% Notes | $ | 393.6 | | | $ | 306.6 | | | $ | 306.6 | | | $ | — | | | $ | — | |
Convertible Notes | $ | 323.9 | | | $ | 457.8 | | | $ | 457.8 | | | $ | — | | | $ | — | |
Other long-term obligations | $ | 157.2 | | | $ | 155.4 | | | $ | — | | | $ | 45.0 | | | $ | 110.4 | |
Other liabilities | $ | 9.7 | | | $ | 9.4 | | | $ | — | | | $ | 2.5 | | | $ | 6.9 | |
Puts and calls related to certain Barstool shares | $ | 0.4 | | | $ | 0.4 | | | $ | — | | | $ | 0.4 | | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
(in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | |
Cash and cash equivalents | $ | 1,863.9 | | | $ | 1,863.9 | | | $ | 1,863.9 | | | $ | — | | | $ | — | |
Equity securities | $ | 84.3 | | | $ | 84.3 | | | $ | — | | | $ | 84.3 | | | $ | — | |
Held-to-maturity securities | $ | 6.7 | | | $ | 6.7 | | | $ | — | | | $ | 6.7 | | | $ | — | |
Promissory notes | $ | 15.1 | | | $ | 15.1 | | | $ | — | | | $ | 15.1 | | | $ | — | |
Puts and calls related to certain Barstool shares | $ | 1.9 | | | $ | 1.9 | | | $ | — | | | $ | 1.9 | | | $ | — | |
Financial liabilities: | | | | | | | | | |
Long-term debt | | | | | | | | | |
Senior Secured Credit Facilities | $ | 1,544.5 | | | $ | 1,559.6 | | | $ | 1,559.6 | | | $ | — | | | $ | — | |
5.625% Notes | $ | 399.6 | | | $ | 411.5 | | | $ | 411.5 | | | $ | — | | | $ | — | |
4.125% Notes | $ | 392.9 | | | $ | 389.5 | | | $ | 389.5 | | | $ | — | | | $ | — | |
Convertible notes | $ | 253.5 | | | $ | 780.0 | | | $ | 780.0 | | | $ | — | | | $ | — | |
Other long-term obligations | $ | 146.3 | | | $ | 144.3 | | | $ | — | | | $ | 53.9 | | | $ | 90.4 | |
Other liabilities | $ | 13.3 | | | $ | 13.2 | | | $ | — | | | $ | 2.7 | | | $ | 10.5 | |
The following table summarizes the changes in fair value of our Level 3 liabilities measured on a recurring basis:
| | | | | |
(in millions) | Other Liabilities |
Balance as of January 1, 2022 | $ | 100.9 | |
| |
Interest | 20.0 | |
Payment installments | (2.7) | |
Included in earnings (1) | (0.9) | |
Balance as of September 30, 2022 | $ | 117.3 | |
(1)The expense is included in “General and administrative” within our unaudited Consolidated Statements of Operations.
The following table sets forth the assets measured at fair value on a non-recurring basis as of September 30, 2022, which were all at the Hollywood Casino at Greektown reporting unit:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Valuation Date | | Valuation Technique | | Level 1 | | Level 2 | | Level 3 | | Total Balance | | Total Reduction in Fair Value Recorded |
Goodwill | 9/30/2022 | | Discounted cash flow and market approach | | $ | — | | | $ | — | | | $ | 199.2 | | | $ | 199.2 | | | $ | 37.4 | |
Gaming licenses | 9/30/2022 | | Discounted cash flow | | $ | — | | | $ | — | | | $ | 101.1 | | | $ | 101.1 | | | $ | 65.4 | |
Trademarks | 9/30/2022 | | Discounted cash flow | | $ | — | | | $ | — | | | $ | 42.7 | | | $ | 42.7 | | | $ | — | |
The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities on a recurring basis as of September 30, 2022:
| | | | | | | | | | | | | | | | | |
| Valuation Technique | | Unobservable Input | | Discount Rate |
Other long-term obligation | Discounted cash flow | | Discount rate | | 27.0% |
Contingent purchase price - Plainridge Park Casino | Discounted cash flow | | Discount rate | | 8.9% |
As discussed in Note 7, “Goodwill and Other Intangible Assets,” we recorded impairments on goodwill and our gaming licenses, which are indefinite-lived intangible assets, at the Hollywood Casino at Greektown reporting unit as a result of the third quarter of 2022 interim assessment for impairment. The following table presents quantitative information about the significant unobservable inputs used in the fair value measurements of other indefinite-lived intangible assets as of the valuation date below: | | | | | | | | | | | | | | | | | | | | | | | |
(in millions) | Fair Value | | Valuation Technique | | Unobservable Input | | Range or Amount |
As of September 30, 2022 | | | | | | | |
Goodwill | $ | 199.2 | | | Discounted cash flow | | Discount rate | | 12.0 | % |
| | | | | Long-term revenue growth rate | | 2.0 | % |
Gaming licenses | $ | 101.1 | | | Discounted cash flow | | Discount rate | | 13.0 | % |
| | | | | Long-term revenue growth rate | | 2.0 | % |
Note 16—Segment Information
We have aggregated our operating segments into five reportable segments. Retail operating segments are based on the similar characteristics within the regions in which they operate: Northeast, South, West, and Midwest. Our Interactive segment includes all of our iCasino and online sports betting operations, management of retail sports betting, media, and our proportionate share of earnings attributable to our equity method investment in Barstool. The Other category is included in the following tables to reconcile the segment information to the consolidated information.
The Company utilizes Adjusted EBITDAR (as defined below) as its measure of segment profit or loss. The following table highlights our revenues and Adjusted EBITDAR for each reportable segment and reconciles Adjusted EBITDAR on a consolidated basis to net income.
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| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Revenues: | | | | | | | |
Northeast segment | $ | 685.4 | | | $ | 672.4 | | | $ | 2,028.8 | | | $ | 1,895.8 | |
South segment | 329.8 | | | 318.2 | | | 1,009.8 | | | 982.3 | |
West segment | 156.5 | | | 145.7 | | | 451.2 | | | 382.7 | |
Midwest segment | 298.4 | | | 285.7 | | | 877.6 | | | 815.2 | |
Interactive segment | 158.7 | | | 93.0 | | | 455.1 | | | 275.3 | |
Other (1) | 4.2 | | | 3.5 | | | 17.4 | | | 6.8 | |
Intersegment eliminations (2) | (8.0) | | | (6.7) | | | (23.8) | | | (25.6) | |
Total | $ | 1,625.0 | | | $ | 1,511.8 | | | $ | 4,816.1 | | | $ | 4,332.5 | |
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Adjusted EBITDAR (3): | | | | | | | |
Northeast segment | $ | 217.9 | | | $ | 221.1 | | | $ | 637.5 | | | $ | 645.9 | |
South segment | 139.9 | | | 137.0 | | | 429.7 | | | 448.0 | |
West segment | 60.5 | | | 54.5 | | | 171.4 | | | 151.1 | |
Midwest segment | 129.4 | | | 125.8 | | | 386.2 | | | 374.0 | |
Interactive segment | (49.3) | | | (32.0) | | | (80.1) | | | (29.5) | |
Other (1) | (26.5) | | | (26.1) | | | (73.6) | | | (75.6) | |
Total (3) | 471.9 | | | 480.3 | | | 1,471.1 | | | 1,513.9 | |
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Other operating benefits (costs) and other income (expenses): | | | | | | | |
Rent expense associated with triple net operating leases (4) | (31.5) | | | (116.0) | | | (119.6) | | | (342.9) | |
Stock-based compensation | (13.6) | | | (8.5) | | | (45.1) | | | (21.9) | |
Cash-settled stock-based awards variance | 3.8 | | | (5.2) | | | 16.2 | | | (14.3) | |
Gain (loss) on disposal of assets | 0.2 | | | (0.3) | | | (7.0) | | | (0.1) | |
Contingent purchase price | (0.1) | | | (0.6) | | | 0.9 | | | (1.9) | |
Pre-opening expenses (5) | (0.5) | | | (1.6) | | | (4.1) | | | (2.8) | |
Depreciation and amortization | (148.7) | | | (83.7) | | | (417.2) | | | (246.9) | |
Impairment losses (6) | (104.6) | | | — | | | (104.6) | | | — | |
Insurance recoveries, net of deductible charges | 1.9 | | | — | | | 10.7 | | | — | |
Non-operating items of equity method investments (7) | (2.6) | | | (3.0) | | | (4.7) | | | (6.0) | |
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Interest expense, net | (193.3) | | | (144.9) | | | (547.7) | | | (418.6) | |
Other (5)(8) | (41.7) | | | 6.0 | | | (126.1) | | | 27.3 | |
Income (loss) before income taxes | (58.8) | | | 122.5 | | | 122.8 | | | 485.8 | |
Income tax benefit (expense) | 182.0 | | | (36.4) | | | 78.1 | | | (110.1) | |
Net income | $ | 123.2 | | | $ | 86.1 | | | $ | 200.9 | | | $ | 375.7 | |
(1)The Other category consists of the Company’s stand-alone racing operations, namely Sanford-Orlando Kennel Club, Sam Houston and Valley Race Parks (the remaining 50% was acquired by PENN on August 1, 2021), the Company’s joint venture interests in Freehold Raceway, and our management contract for Retama Park Racetrack. Expenses incurred for corporate and shared services activities that are directly attributable to a property or are otherwise incurred to support a property are allocated to each property. The Other category also includes corporate overhead costs, which consist of certain expenses, such as: payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate to or have not otherwise been allocated to a property.
(2)Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by PENN Interactive.
(3)We define Adjusted EBITDAR as earnings before interest expense, net, income taxes, depreciation and amortization, rent expense associated with triple net operating leases (see footnote (4) below), stock-based compensation, debt extinguishment and financing charges, which is included in “Other” (see footnote (8) below), impairment losses, insurance recoveries, net of deductible charges, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, the difference between budget and actual expense for cash-settled stock-based awards, pre-opening expenses (see footnote (5) below), and other. Adjusted EBITDAR is also inclusive of income or loss from
unconsolidated affiliates, with our share of non-operating items (see footnote (7) below) added back for Barstool and our Kansas Entertainment joint venture.
(4)Solely comprised of rent expense associated with the operating lease components contained within our triple net master lease dated November 1, 2013 with GLPI and the triple net master lease assumed in connection with our acquisition of Pinnacle Entertainment, Inc., our individual triple net leases with GLPI for the real estate assets used in the operation of Tropicana (on September 26, 2022, we sold the equity interests to Bally’s) and Hollywood Casino at The Meadows, and our individual triple net leases with VICI for the real estate assets used in the operations of Margaritaville Resort Casino and Hollywood Casino at Greektown (of which the Tropicana Lease, Meadows Lease, Margaritaville Lease and the Greektown Lease are defined in “Note 9, Leases”) and are referred to collectively as our “triple net operating leases”. As a result of the Lease Modification defined in Note 9, “Leases”, the land and building components associated with the operations of Dayton and Mahoning Valley are classified as operating leases which is recorded to rent expense, as compared to prior to the Lease Modification, whereby the land components of substantially all of the Master Lease properties were classified as operating leases and recorded to rent expense. Subsequent to the Lease Modification, the land components associated with the Master Lease properties are primarily classified as finance leases. (5)During the first quarter of 2021, acquisition costs were included within pre-opening and acquisition costs. Beginning with the quarter ended June 30, 2021, acquisition costs are presented as part of other expenses.
(6)Amount primarily relates to a $102.8 million impairment charge in the Northeast segment.
(7)Consists principally of interest expense, net, income taxes, depreciation and amortization, and stock-based compensation expense associated with Barstool and our Kansas Entertainment joint venture. We record our portion of Barstool’s net income or loss, including adjustments to arrive at Adjusted EBITDAR, one quarter in arrears.
(8)Includes holding losses on our equity securities of $10.8 million and $66.4 million for the three and nine months ended September 30, 2022, respectively, and holding gains on our equity securities of $10.1 million and $28.9 million for the three and nine months ended September 30, 2021, respectively, which are discussed in Note 15, “Fair Value Measurements.” Also consists of non-recurring acquisition and transaction costs of $31.9 million and $46.3 million for the three and nine months ended September 30, 2022, respectively, and $12.9 million and $14.7 million for the three and nine months ended September 30, 2021, respectively, finance transformation costs associated with the implementation of our new Enterprise Resource Management system, and a $10.4 million debt extinguishment and financing charge incurred in the second quarter of 2022, which is discussed in Note 8, “Long-term Debt.” The table below presents capital expenditures by segment:
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| For the three months ended September 30, | | For the nine months ended September 30, |
(in millions) | 2022 | | 2021 | | 2022 | | 2021 |
Capital expenditures: | | | | | | | |
Northeast segment | $ | 26.4 | | | $ | 35.1 | | | $ | 82.1 | | | $ | 71.3 | |
South segment | 14.8 | | | 16.4 | | | 51.1 | | | 24.5 | |
West segment | 3.3 | | | 2.3 | | | 7.3 | | | 5.5 | |
Midwest segment | 11.3 | | | 7.3 | | | 25.5 | | | 12.8 | |
Interactive segment | 6.5 | | | 2.7 | | | 9.7 | | | 4.1 | |
Other | 1.7 | | | 9.4 | | | 13.9 | | | 19.6 | |
Total capital expenditures | $ | 64.0 | | | $ | 73.2 | | | $ | 189.6 | | | $ | 137.8 | |
The table below presents investment in and advances to unconsolidated affiliates and total assets by segment:
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(in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other (1) | | Total |
Balance sheet as of September 30, 2022 | | | | | | | | | | | | | |
Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 79.9 | | | $ | 160.2 | | | $ | 6.1 | | | $ | 246.3 | |
Total assets | $ | 2,172.8 | | | $ | 1,169.7 | | | $ | 375.0 | | | $ | 1,382.4 | | | $ | 4,228.8 | | | $ | 8,206.4 | | | $ | 17,535.1 | |
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Balance sheet as of December 31, 2021 | | | | | | | | | | | | | |
Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 83.8 | | | $ | 164.4 | | | $ | 6.8 | | | $ | 255.1 | |
Total assets | $ | 2,283.6 | | | $ | 1,224.6 | | | $ | 394.8 | | | $ | 1,215.8 | | | $ | 2,618.3 | | | $ | 9,135.0 | | | $ | 16,872.1 | |
(1)The real estate assets subject to the Master Leases, which are classified as either property and equipment, operating lease ROU assets, or finance lease ROU assets, are included within the Other category.