UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 0-24206
PENN NATIONAL GAMING, INC.
(Exact name of registrant as specified in its charter)
|
Pennsylvania |
|
23-2234473 |
|
(State or other jurisdiction of |
|
(I.R.S. Employer |
|
incorporation or organization) |
|
Identification No.) |
825 Berkshire Blvd., Suite 200
Wyomissing, PA 19610
(Address of principal executive offices) (Zip Code)
610-373-2400
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address, and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Accelerated filer ◻Non-accelerated filer ◻ (Do not check if a smaller reporting company)
Smaller reporting company ◻ Emerging growth company ◻
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
|
Title |
|
Outstanding as of April 30, 2018 |
|
|
Common Stock, par value $.01 per share |
|
91,859,333 (includes 438,899 shares of restricted stock) |
|
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified by the use of forward looking terminology such as “expects,” “believes,” “estimates,” “projects,” “intends,” “plans,” “seeks,” “may,” “will,” “should” or “anticipates” or the negative or other variations of these or similar words, or by discussions of future events, strategies or risks and uncertainties. Specifically, forward-looking statements may include, among others, statements concerning: our expectations of future results of operations and financial condition; expectations for our properties or our development projects; the timing, cost and expected impact of planned capital expenditures on our results of operations; our expectations with regard to the impact of competition; our expectations with regard to acquisitions and development opportunities, as well as the integration of any companies we have acquired or may acquire; the outcome and financial impact of the litigation in which we are or will be periodically involved; the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions; our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new businesses; our expectations relative to margin improvement initiatives; our expectations regarding economic and consumer conditions; and our expectations for the continued availability and cost of capital. As a result, actual results may vary materially from expectations. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business, there can be no assurance that actual results will not differ materially from our expectations. Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: the assumptions included in our financial guidance; the ability of our operating teams to drive revenue and margins and maintain market share; the impact of significant competition from other gaming and entertainment operations; the impact of potential sportsbetting laws; our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays, approvals or impediments to completing our planned acquisitions or projects, construction factors, including delays, and increased costs; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our facilities or the award of additional gaming licenses proximate to our facilities); the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; the activities of our competitors and the rapid emergence of new competitors (traditional, internet, social, sweepstakes based and VGTs in bars and truck stops); increases in the effective rate of taxation for any of our operations or at the corporate level; our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; our expectations for the continued availability and cost of capital; the impact of weather; changes in accounting standards; the risk of failing to maintain the integrity of our information technology infrastructure and safeguard our business, employee and customer data; factors which may cause the Company to curtail or suspend the share repurchase program; with respect to our loan and related funding commitments to the Jamul Indian Village Development Corporation, particular risks associated with the collectability of our loan and the risk of future impairment charges as well as the risks associated with the pending transition and termination of our management, license and development agreements; with respect to our Plainridge Park Casino in Massachusetts, the ultimate location and timing of the other gaming facilities in the state and the region; with respect to our social gaming endeavors, risks related to employee retention, cyber-security, data privacy, intellectual property and legal and regulatory challenges, as well as our ability to successfully develop new games that attract and retain a significant number of players; with respect to Illinois Gaming Investors, LLC, d/b/a Prairie State Gaming, risks relating to recent acquisitions of additional assets and the integration of such acquisitions, potential changes in the VGT laws, our ability to successfully compete in the VGT market, our ability to retain existing customers and secure new customers, risks relating to municipal authorization of VGT operations; with respect to our proposed Pennsylvania Category 4 casinos, risks related to ongoing litigation surrounding Pennsylvania’s gaming legislation and the ultimate location of other gaming facilities in the state; risks related to the acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”) by Penn National and the integration of the businesses and assets to be acquired; the possibility that the proposed transaction does not close when expected or at all because required regulatory or other approvals are not received or other conditions to the closing are not satisfied on a timely basis or at all; the risk that the financing required to fund the transaction is not obtained on the terms anticipated or at all; the possibility that the Boyd Gaming Corporation and/or Gaming and Leisure Properties, Inc. (“GLPI”) deals do not close in a timely fashion or at all; potential adverse reactions or changes to business or employee relationships, including those resulting from the announcement or completion of the transaction; potential litigation challenging the transaction; the possibility that the anticipated benefits of the transaction are not realized when expected or at all, including as a result of the impact of, or issues arising from, the integration of the two companies; the possibility that the anticipated divestitures are not completed in the anticipated timeframe or at all; the possibility that additional divestitures may be required; the possibility that the transaction may be more expensive to complete than anticipated, including as a result of unexpected factors or events; diversion of management’s attention from ongoing business operations and opportunities; litigation
2
relating to the transaction; risks associated with increased leverage from the transaction; with respect to our management contract at Casino Rama, risks relating to the near term transition of management of this facility to a newly selected operator; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the United States Securities and Exchange Commission. The Company does not intend to update publicly any forward-looking statements except as required by law.
3
PENN NATIONAL GAMING, INC. AND SUBSIDIARIES
4
Penn National Gaming, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except share and per share data) (unaudited)
|
|
|
March 31, |
|
December 31, |
|
||
|
|
|
2018 |
|
2017 |
|
||
|
Assets |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
217,997 |
|
$ |
277,953 |
|
|
Receivables, net of allowance for doubtful accounts of $3,097 and $2,983 at March 31, 2018 and December 31, 2017, respectively |
|
|
56,563 |
|
|
62,805 |
|
|
Prepaid expenses |
|
|
44,252 |
|
|
43,780 |
|
|
Other current assets |
|
|
15,871 |
|
|
16,494 |
|
|
Total current assets |
|
|
334,683 |
|
|
401,032 |
|
|
Property and equipment, net |
|
|
2,710,652 |
|
|
2,756,669 |
|
|
Other assets |
|
|
|
|
|
|
|
|
Investment in and advances to unconsolidated affiliates |
|
|
147,658 |
|
|
148,912 |
|
|
Goodwill |
|
|
1,008,097 |
|
|
1,008,097 |
|
|
Other intangible assets, net |
|
|
469,578 |
|
|
422,606 |
|
|
Deferred income taxes |
388,058 |
390,943 |
|||||
|
Loan to the JIVDC, net of allowance for loan losses of $64,052 at March 31, 2018 and December 31, 2017 |
|
|
20,613 |
|
|
20,900 |
|
|
Other assets |
|
|
86,194 |
|
|
85,653 |
|
|
Total other assets |
|
|
2,120,198 |
|
|
2,077,111 |
|
|
Total assets |
|
$ |
5,165,533 |
|
$ |
5,234,812 |
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current portion of financing obligation to GLPI |
|
$ |
45,386 |
|
$ |
56,248 |
|
|
Current maturities of long-term debt |
|
|
35,498 |
|
|
35,612 |
|
|
Accounts payable |
|
|
18,782 |
|
|
26,048 |
|
|
Accrued expenses |
|
|
134,312 |
|
|
125,688 |
|
|
Accrued interest |
|
|
6,223 |
|
|
13,528 |
|
|
Accrued salaries and wages |
|
|
76,982 |
|
|
111,252 |
|
|
Gaming, pari-mutuel, property, and other taxes |
|
|
63,153 |
|
|
69,645 |
|
|
Insurance financing |
|
|
7,038 |
|
|
2,404 |
|
|
Other current liabilities |
|
|
87,945 |
|
|
89,584 |
|
|
Total current liabilities |
|
|
475,319 |
|
|
530,009 |
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities |
|
|
|
|
|
|
|
|
Long-term financing obligation to GLPI, net of current portion |
|
|
3,476,785 |
|
|
3,482,573 |
|
|
Long-term debt, net of current maturities and debt issuance costs |
|
|
1,164,147 |
|
|
1,214,625 |
|
|
Noncurrent tax liabilities |
|
|
35,101 |
|
|
34,099 |
|
|
Other noncurrent liabilities |
|
|
47,820 |
|
|
46,652 |
|
|
Total long-term liabilities |
|
|
4,723,853 |
|
|
4,777,949 |
|
|
|
|
|
|
|
|
|
|
|
Shareholders' deficit |
|
|
|
|
|
|
|
|
Series B Preferred stock ($.01 par value, 1,000,000 shares authorized, no shares issued and outstanding at March 31, 2018 and December 31, 2017) |
|
|
— |
|
|
— |
|
|
Series C Preferred stock ($.01 par value, 18,500 shares authorized, no shares issued and outstanding at March 31, 2018 and December 31, 2017) |
|
|
— |
|
|
— |
|
|
Common stock ($.01 par value, 200,000,000 shares authorized, 93,822,683 and 93,392,635 shares issued, and 91,655,290 and 91,225,242 shares outstanding at March 31, 2018 and December 31, 2017, respectively) |
|
|
937 |
|
|
933 |
|
|
Treasury stock, at cost (2,167,393 shares held at March 31, 2018 and December 31, 2017) |
|
|
(28,414) |
|
|
(28,414) |
|
|
Additional paid-in capital |
|
|
1,011,322 |
|
|
1,007,606 |
|
|
Retained deficit |
|
|
(1,016,031) |
|
|
(1,051,818) |
|
|
Accumulated other comprehensive loss |
|
|
(1,453) |
|
|
(1,453) |
|
|
Total shareholders' deficit |
|
|
(33,639) |
|
|
(73,146) |
|
|
Total liabilities and shareholders' deficit |
|
$ |
5,165,533 |
|
$ |
5,234,812 |
|
See accompanying notes to the condensed consolidated financial statements.
5
Penn National Gaming, Inc. and Subsidiaries
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2018 |
|
2017 |
|
||
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
Gaming |
|
$ |
654,494 |
|
$ |
661,256 |
|
|
Food, beverage, hotel and other |
|
|
130,969 |
|
|
147,741 |
|
|
Management service fees |
|
|
2,438 |
|
|
2,327 |
|
|
Reimbursable management costs |
|
|
28,184 |
|
|
6,758 |
|
|
Revenues |
|
|
816,085 |
|
|
818,082 |
|
|
Less promotional allowances |
|
|
— |
|
|
(41,858) |
|
|
Net revenues |
|
|
816,085 |
|
|
776,224 |
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
Gaming |
|
|
340,516 |
|
|
332,053 |
|
|
Food, beverage, hotel and other |
|
|
92,980 |
|
|
101,075 |
|
|
General and administrative |
|
|
121,263 |
|
|
125,815 |
|
|
Reimbursable management costs |
|
|
28,184 |
|
|
6,758 |
|
|
Depreciation and amortization |
|
|
60,390 |
|
|
70,236 |
|
|
Impairment losses |
|
|
618 |
|
|
— |
|
|
Total operating expenses |
|
|
643,951 |
|
|
635,937 |
|
|
Income from operations |
|
|
172,134 |
|
|
140,287 |
|
|
|
|
|
|
|
|
|
|
|
Other income (expenses) |
|
|
|
|
|
|
|
|
Interest expense |
|
|
(115,740) |
|
|
(114,996) |
|
|
Interest income |
|
|
249 |
|
|
2,646 |
|
|
Income from unconsolidated affiliates |
|
|
5,361 |
|
|
4,548 |
|
|
Loss on early extinguishment of debt and modification costs |
|
|
(882) |
|
|
(23,390) |
|
|
Other |
|
|
4 |
|
|
(1,793) |
|
|
Total other expenses |
|
|
(111,008) |
|
|
(132,985) |
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes |
|
|
61,126 |
|
|
7,302 |
|
|
Income tax provision |
|
|
15,689 |
|
|
2,198 |
|
|
Net income |
|
$ |
45,437 |
|
$ |
5,104 |
|
|
|
|
|
|
|
|
|
|
|
Earnings per common share: |
|
|
|
|
|
|
|
|
Basic earnings per common share |
|
$ |
0.50 |
|
$ |
0.06 |
|
|
Diluted earnings per common share |
|
$ |
0.48 |
|
$ |
0.06 |
|
See accompanying notes to the condensed consolidated financial statements.
6
Penn National Gaming, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands) (unaudited)
|
|
|
Three Months Ended March 31, |
|
||||
|
|
|
2018 |
|
2017 |
|
||
|
Net income |
|
$ |
45,437 |
|
$ |
5,104 |
|
|
Other comprehensive income (loss), net of tax: |
|
|
|
|
|
|
|
|
Foreign currency translation adjustment during the period |
|
|
— |
|
|
437 |
|
|
Other comprehensive income (loss) |
|
|
— |
|
|
437 |
|
|
Comprehensive income |
|
$ |
45,437 |
|
$ |
5,541 |
|
See accompanying notes to the condensed consolidated financial statements.
7
Penn National Gaming, Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Shareholders’ (Deficit) Equity
(in thousands, except share data) (unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
Other |
|
Total |
|
||||
|
|
|
Preferred Stock |
|
Common Stock |
|
Treasury |
|
Paid-In |
|
Retained |
|
Comprehensive |
|
Shareholders’ |
|
|||||||||||
|
|
|
Shares |
|
|
Amount |
|
Shares |
|
|
Amount |
|
Stock |
|
Capital |
|
(Deficit) |
|
(Loss) |
|
Deficit |
|
|||||
|
Balance, December 31, 2017 |
|
— |
|
|
— |
|
91,225,242 |
|
|
933 |
|
|
(28,414) |
|
|
1,007,606 |
|
|
(1,051,818) |
|
|
(1,453) |
|
|
(73,146) |
|
|
Share-based compensation arrangements |
|
— |
|
|
— |
|
430,048 |
|
|
4 |
|
|
— |
|
|
3,716 |
|
|
— |
|
|
— |
|
|
3,720 |
|
|
Cumulative-effect adjustment upon adoption of ASC 606 "Revenue from Contracts with Customers" |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
(9,650) |
|
|
— |
|
|
(9,650) |
|
|
Net income |
|
— |
|
|
— |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
45,437 |
|
|
— |
|
|
45,437 |
|
|
Balance, March 31, 2018 |
|
— |
|
$ |
— |
|
91,655,290 |
|
$ |
937 |
|
$ |
(28,414) |
|
$ |
1,011,322 |
|
$ |
(1,016,031) |
|
$ |
(1,453) |
|
$ |
(33,639) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to the condensed consolidated financial statements.
8
Penn National Gaming, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands) (unaudited)
|
Three Months Ended March 31, |
|
2018 |
|
2017 |
|
||
|
Operating activities |
|
|
|
|
|
|
|
|
Net income |
|
$ |
45,437 |
|
$ |
5,104 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
60,390 |
|
|
70,236 |
|
|
Amortization of items charged to interest expense and interest income |
|
|
1,603 |
|
|
1,675 |
|
|
Change in fair values of contingent purchase price |
|
|
1,134 |
|
|
2,560 |
|
|
Loss/(gain) on sale of property and equipment |
|
|
55 |
|
|
(45) |
|
|
Income from unconsolidated affiliates |
|
|
(5,361) |
|
|
(4,548) |
|
|
Distributions from unconsolidated affiliates |
|
|
6,500 |
|
|
5,750 |
|
|
Deferred income taxes |
|
|
5,926 |
|
|
652 |
|
|
Charge for stock-based compensation |
|
|
2,929 |
|
|
2,173 |
|
|
Impairment losses |
|
|
618 |
|
|
— |
|
|
Write off of debt issuance costs and discounts |
|
|
882 |
|
|
5,377 |
|
|
Loss on early extinguishment and modification of debt |
|
|
— |
|
|
18,012 |
|
|
Decrease (increase), net of businesses acquired |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
3,973 |
|
|
6,533 |
|
|
Prepaid expenses and other current assets |
|
|
(7,248) |
|
|
(8,432) |
|
|
Other assets |
|
|
(555) |
|
|
(1,746) |
|
|
(Decrease) increase, net of businesses acquired |
|
|
|
|
|
|
|
|
Accounts payable |
|
|
(4,142) |
|
|
(2,470) |
|
|
Accrued expenses |
|
|
(2,567) |
|
|
5,351 |
|
|
Accrued interest |
|
|
(7,305) |
|
|
(919) |
|
|
Accrued salaries and wages |
|
|
(34,270) |
|
|
(19,547) |
|
|
Gaming, pari-mutuel, property and other taxes |
|
|
(6,492) |
|
|
(6,544) |
|
|
Income taxes |
|
|
6,072 |
|
|
10,090 |
|
|
Other current and noncurrent liabilities |
|
|
(642) |
|
|
(4,430) |
|
|
Net cash provided by operating activities |
|
|
66,937 |
|
|
84,832 |
|
|
Investing activities |
|
|
|
|
|
|
|
|
Project capital expenditures |
|
|
(1,211) |
|
|
(6,178) |
|
|
Maintenance capital expenditures |
|
|
(10,602) |
|
|
(10,978) |
|
|
Insurance remediation proceeds |
|
|
— |
|
|
577 |
|
|
Loan to the JIVDC |
|
|
(339) |
|
|
(168) |
|
|
Receipts applied against nonaccrual loan to the JIVDC |
|
|
512 |
|
|
— |
|
|
Proceeds from sale of property and equipment |
|
|
49 |
|
|
309 |
|
|
Additional contributions to joint ventures |
|
|
(500) |
|
|
— |
|
|
Increase in cash in escrow |
|
|
— |
|
|
(4,432) |
|
|
Consideration paid for acquisitions of businesses, gaming licenses, and other intangibles |
|
|
(50,379) |
|
|
(2,441) |
|
|
Net cash used in investing activities |
|
|
(62,470) |
|
|
(23,311) |
|
|
Financing activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of options |
|
|
791 |
|
|
612 |
|
|
Repurchase of common stock |
|
|
— |
|
|
(5,794) |
|
|
Principal payments on financing obligation with GLPI |
|
|
(16,650) |
|
|
(14,785) |
|
|
Proceeds from issuance of long-term debt, net of issuance costs |
|
|
— |
|
|
1,175,275 |
|
|
Proceeds from revolving credit facility draws |
|
|
30,000 |
|
|
184,435 |
|
|
Repayments on long-term debt |
|
|
(45,441) |
|
|
(1,086,284) |
|
|
Prepayment penalties and modification payments incurred with debt refinancing |
|
|
— |
|
|
(18,012) |
|
|
Repayments on revolving credit facility |
|
|
(30,000) |
|
|
(244,435) |
|
|
Payments of other long-term obligations |
|
|
(7,636) |
|
|
(28,033) |
|
|
Payments of contingent purchase price |
|
|
(121) |
|
|
(21) |
|
|
Proceeds from insurance financing |
|
|
8,541 |
|
|
8,768 |
|
|
Payments on insurance financing |
|
|
(3,907) |
|
|
(3,269) |
|
|
Net cash used in financing activities |
|
|
(64,423) |
|
|
(31,543) |
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(59,956) |
|
|
29,978 |
|
|
Cash and cash equivalents at beginning of year |
|
|
277,953 |
|
|
229,510 |
|
|
Cash and cash equivalents at end of period |
|
$ |
217,997 |
|
$ |
259,488 |
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure |
|
|
|
|
|
|
|
|
Interest expense paid, net of amounts capitalized |
|
$ |
120,229 |
|
$ |
113,825 |
|
|
Income taxes paid (refunds received) |
|
$ |
2,233 |
|
$ |
(9,303) |
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing activities |
|
|
|
|
|
|
|
|
Accrued capital expenditures |
|
$ |
786 |
|
$ |
9,279 |
|
|
Accrued advances to Jamul Tribe |
|
$ |
82 |
|
$ |
1,103 |
|
|
Non-cash financing activities |
|
|
|
|
|
|
|
|
Accrued debt issuance costs |
|
$ |
— |
|
$ |
828 |
|
Non-cash transactions: On January 1, 2018, the Company adopted the new revenue standard ASC 606, “Revenue from Contracts with Customers,” and all the related amendments to all contracts using the modified retrospective method. See Note 2 for further information regarding the net non-cash impact of the January 1, 2018 adoption.
See accompanying notes to the condensed consolidated financial statements.
9
Penn National Gaming, Inc. and Subsidiaries
Notes to the Condensed Consolidated Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company,” “we,” “our,” or “us”) is a diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment. We have also expanded into social online gaming offerings via our Penn Interactive Ventures, LLC (“Penn Interactive Ventures”) division and our acquisition of Rocket Speed, Inc. (“Rocket Speed”) and into retail gaming in Illinois with our Prairie State Gaming subsidiary. On May 1, 2017, we completed our acquisition of 1st Jackpot Casino Tunica (formerly known as Bally’s Casino Tunica, (“1st Jackpot”)) and Resorts Casino Tunica (“Resorts”). As of March 31, 2018, the Company owned, managed, or had ownership interests in twenty-nine facilities in the following seventeen jurisdictions: California, Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia and Ontario, Canada.
The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes 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.
The condensed consolidated financial statements include the accounts of Penn and its subsidiaries. Investment in and advances to unconsolidated affiliates, that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIE”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.
Operating results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. The notes to the consolidated financial statements contained in our Annual Report on Form 10-K for the year ended December 31, 2017 should be read in conjunction with these condensed consolidated financial statements. The December 31, 2017 financial information has been derived from the Company’s audited consolidated financial statements.
10
2. New Accounting Pronouncements
Accounting Pronouncements Implemented in 2018
ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” - On January 1, 2018, the Company adopted the new revenue standard ASC 606, “Revenue from Contracts with Customers (Topic 606),” and all the related amendments (“new revenue standard”) to all contracts using the modified retrospective method. As part of the adoption, the Company utilized a practical expedient that permits the evaluation of incomplete contracts (such as our loyalty point obligations) as completed contracts. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company does not expect the adoption of the new revenue standard to have a material impact to its net income on a continuing basis and did not have a material effect for the three months ended March 31, 2018.
In accordance with the new revenue standard requirement, the disclosure of the impact of adoption on our condensed consolidated statements of income and condensed consolidated balance sheets at and for the period ended March 31, 2018 are as follows (in thousands):
|
|
|
Three |
|
Loyalty Point Impact (1) |
|
Promotional Allowance (Discretionary Comps) Impact (2) |
|
Promotional Allowance (Point Redemptions) Impact (2) |
|
Reimbursable Expense - Casino Rama Impact (3) |
|
Racing Revenue Impact (4) |
|
Balances |
|
Effect of |
||||||||
|
Income Statement |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming |
|
$ |
654,494 |
|
$ |
(1,419) |
|
$ |
33,639 |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
686,714 |
|
$ |
(32,220) |
|
Food, beverage, hotel and other |
|
|
130,969 |
|
|
(69) |
|
|
- |
|
|
6,624 |
|
|
- |
|
|
8,960 |
|
|
146,484 |
|
|
(15,515) |
|
Management service fees |
|
|
2,438 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
2,438 |
|
|
- |
|
Reimbursable management costs |
|
|
28,184 |
|
|
- |
|
|
- |
|
|
- |
|
|
(21,844) |
|
|
- |
|
|
6,340 |
|
|
21,844 |
|
Revenues |
|
|
816,085 |
|
|
(1,488) |
|
|
33,639 |
|
|
6,624 |
|
|
(21,844) |
|
|
8,960 |
|
|
841,976 |
|
|
(25,891) |
|
Less: promotional allowances |
|
|
- |
|
|
- |
|
|
(33,639) |
|
|
(6,624) |
|
|
- |
|
|
- |
|
|
(40,263) |
|
|
40,263 |
|
Net Revenue |
|
|
816,085 |
|
|
(1,488) |
|
|
- |
|
|
- |
|
|
(21,844) |
|
|
8,960 |
|
|
801,713 |
|
|
14,372 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming |
|
|
340,516 |
|
|
(1,027) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
339,489 |
|
|
1,027 |
|
Food, beverage, hotel and other |
|
|
92,980 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
8,960 |
|
|
101,940 |
|
|
(8,960) |
|
General and administrative |
|
|
121,263 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
121,263 |
|
|
- |
|
Reimbursable management costs |
|
|
28,184 |
|
|
- |
|
|
- |
|
|
- |
|
|
(21,844) |
|
|
- |
|
|
6,340 |
|
|
21,844 |
|
Depreciation and amortization |
|
|
60,390 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
60,390 |
|
|
- |
|
Impairment losses |
|
|
618 |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
618 |
|
|
- |
|
Insurance recoveries |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
|
|
|
- |
|
|
- |
|
Total operating expenses |
|
|
643,951 |
|
|
(1,027) |
|
|
- |
|
|
- |
|
|
(21,844) |
|
|
8,960 |
|
|
630,040 |
|
|
13,911 |
|
Income from operations |
|
|
172,134 |
|
|
(461) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
171,673 |
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from operations before income taxes |
|
|
61,126 |
|
|
(461) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
60,665 |
|
|
461 |
|
Income tax (benefit) provision |
|
|
15,689 |
|
|
(118) |
|
|
- |
|
|
- |
|
|
- |
|
|
- |
|
|
15,571 |
|
|
118 |
|
Net income |
|
$ |
45,437 |
|
$ |
(343) |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
- |
|
$ |
45,094 |
|
$ |
343 |
11
As a result of the adoption of the new revenue standard, the following areas resulted in significant changes to the Company’s accounting:
|
(1) |
The new revenue standard changed the accounting for loyalty points earned by our customers. The Company’s loyalty reward programs allow members to utilize their reward membership cards to earn loyalty points that are redeemable for slot play and complimentaries such as food and beverage at our restaurants, lodging at our hotels, and products offered at our retail stores across the vast majority of the Company’s casino properties. Under the new revenue standard, the Company is required to utilize a deferred revenue model and defer revenue at the estimated fair value when the loyalty points are earned by our customers and recognize revenue when the loyalty points are redeemed. The deferred revenue liability is based on the estimated standalone selling price of the loyalty points earned after factoring in the likelihood of redemption. Prior to the adoption of the new revenue standard, the estimated liability for unredeemed points was accrued based on expected redemption rates and the estimated costs of the service or merchandise to be provided. |
|
(2) |
The new revenue standard changed the accounting for promotional allowances. Under the new revenue standard, the Company will no longer be permitted to report revenue for goods and services provided to customers for free as an inducement to gamble as gross revenue with a corresponding reduction in promotional allowances to arrive at net revenues. The new revenue standard requires complimentaries related to an inducement to gamble to be recorded as a reduction to gaming revenues, and as such promotional allowances provided to customer’s as an inducement to gamble is no longer netted on our condensed consolidated statements of income. |
In addition, the new revenue standard changed the accounting for promotional allowances with respect to non-discretionary complimentaries (i.e. a customer’s redemption of loyalty points). Under the new revenue standard, the Company is no longer permitted to report revenue for goods and services provided to a customer resulting from loyalty point redemption with a corresponding reduction in promotional allowances to arrive at net revenue, as the new revenue standard requires the utilization of a deferred revenue model in which previously deferred revenue is recognized as revenue when the loyalty points are redeemed. As such, promotional allowances related to a customer’s redemption of loyalty points is no longer netted on our condensed consolidated statements of income.
|
(3) |
The Company revised its accounting for reimbursable costs associated with our management service contract for Casino Rama. Under the new revenue standard, reimbursable costs, which primarily consist of payroll costs, must be recognized as revenue on a gross basis, with an offsetting amount charged to reimbursable management costs within operating expenses, as we are the controlling entity to the arrangement. Prior to this revision, the Company recorded these reimbursable amounts on a net basis. |
|
(4) |
The new revenue standard changed the accounting for racing revenues. Under the new revenue standard, we concluded that the Company is not the controlling entity to the arrangement(s), but rather functions as an agent to the pari-mutuel pool. As such, fees and obligations related to the Company’s share of purse funding requirements, simulcasting fees, tote fees, certain pari-mutuel taxes and other fees directly related to the Company’s racing operations must be reported on a net basis and included as a deduction to food, beverage, hotel and other revenue. Prior to the adoption of the new revenue standard, the Company recorded these fees and obligations in food, beverage, hotel and other expense. |
12
|
|
|
As Reported At March 31, 2018 |
|
Balances Without the Adoption of ASC 606 |
|
Effect of Change Higher (Lower) |
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
|
Deferred income taxes |
|
388,058 |
|
386,271 |
|
1,787 |
|
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Accrued expenses |
|
134,312 |
|
123,078 |
|
11,234 |
|
|
|
|
|
|
|
|
|
Shareholders' (deficit) |
|
|
|
|
|
|
|
Retained deficit |
|
(1,016,031) |
|
(1,007,175) |
|
(8,856) |
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” were as follows (in thousands):
|
|
Balance at December 31, 2017 |
|
Adjustment Due to ASU 2014-09 |
|
Balance at January 1, 2018 |
|
|
|
|
|
|
|
|
Balance Sheet |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other assets |
|
|
|
|
|
|
Deferred income taxes |
390,943 |
|
2,044 |
|
392,987 |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
Accrued expenses |
125,688 |
|
11,694 |
|
137,382 |
|
|
|
|
|
|
|
|
Shareholders' (deficit) |
|
|
|
|
|
|
Retained deficit |
(1,051,818) |