PENN Entertainment, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise stated. PENN operated 43 properties in 20 states, online sports betting in 18 jurisdictions and iCasino in five jurisdictions.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Change |
|---|---|---|---|
| Revenue | $1,619.4 | $1,625.0 | Down $5.6 (0.3%) |
| Gaming revenue | $1,252.1 | $1,317.5 | Down $65.4 (5.0%) |
| Food, beverage, hotel and other revenue | $367.3 | $307.5 | Up $59.8 (19.4%) |
| Operating income (loss) | $(786.4) | $136.7 | Declined $923.1 |
| Net income (loss) | $(725.1) | $123.2 | Declined $848.3 |
| Adjusted EBITDA (non-GAAP) | $298.5 | $440.4 | Down 32.2% |
| Adjusted EBITDAR (non-GAAP) | $445.1 | $471.9 | Down 5.7% |
| Adjusted EBITDA margin | 18.4% | 27.1% | Down 8.7 percentage points |
| Adjusted EBITDAR margin | 27.5% | 29.0% | Down 1.5 percentage points |
For the nine months, revenue was $4,967.5, up 3.1%; net loss was $132.6; Adjusted EBITDA was $961.1 versus $1,351.5; and Adjusted EBITDAR was $1,400.1 versus $1,471.1. Adjusted EBITDA and EBITDAR are company-defined non-GAAP measures and should be considered alongside GAAP results.
- Cash flow: Nine-month operating cash flow was $540.7, down from $760.0. Capital expenditures were $207.8. Investing cash outflow was $586.0, including $314.6 paid for the Barstool acquisition, partly offset by $50.9 in proceeds from its sale. Financing cash outflow was $257.9, including $149.8 of share repurchases.
- Liquidity: Cash and cash equivalents were $1,317.9 at September 30, versus $1,624.0 at year-end 2022. Current assets were $1,780.7 and current liabilities $1,252.8.
- Debt and lease obligations: Aggregate principal debt was approximately $2.8 billion, with no revolver borrowings and $978.2 of available revolving capacity. The company reported compliance with debt covenants and said no debt matures before 2026. In addition to debt, balance-sheet long-term lease liabilities were $6,290 million and financing obligations were $2,437 million.
Material changes versus comparable periods
- Q3’s large GAAP loss principally reflects a $923.2 pre-tax loss on the August sale of Barstool, including $714.8 of goodwill and intangible-asset write-offs and a $70.0 tax-indemnification liability. PENN sold Barstool to David Portnoy for nominal cash consideration and retained a right to 50% of proceeds from a future sale or monetization.
- PENN acquired the remaining 64% of Barstool in February 2023 for approximately $405.5, then sold all of it in August. The company recognized an $83.4 gain on the acquisition during the first nine months, including remeasurement gains.
- Gaming revenue fell in Q3, while non-gaming revenue rose, reflecting Barstool results included before its sale and higher gaming-tax reimbursements from third-party online operators. The South and West segments reported lower revenue; Interactive revenue increased, but its Q3 Adjusted EBITDAR remained negative at $50.2.
- New and amended GLPI master leases effective January 1, 2023 materially changed lease accounting. Lease reclassifications contributed to a $500.8 nine-month gain on REIT transactions, lower reported interest and depreciation, and substantially higher operating rent expense. Q3 triple-net operating lease rent expense was $146.6 versus $31.5 a year earlier.
- For the first nine months, the South segment’s Adjusted EBITDAR fell $48.6, and the West segment’s fell $18.0. The company attributed regional pressure to lower visitation, competition, weather, and the absence of Tropicana Las Vegas operations sold in September 2022.
Outlook, commentary and risks
- PENN expected to rebrand its U.S. Barstool Sportsbook platforms as ESPN BET in November 2023, subject to regulatory approval. The 10-year agreement calls for $150 million in annual cash payments to ESPN. PENN also issued warrants for approximately 31.8 million shares; up to 6.4 million additional warrants may be issued upon specified performance conditions. Warrants vest over time, subject to agreement terms.
- Management stated that cash from operations and cash on hand, together with revolving-credit availability, should meet anticipated lease payments, debt service, capital expenditures and working-capital needs for the foreseeable future. This is not a quantified earnings or EBITDA forecast. Planned 2023 capital expenditures, inclusive of insurance proceeds, were approximately $368 million.
- Management cautioned that results depend on economic conditions, competition, anticipated earnings and acquisition synergies, and access to financing. It identified inflation, rising interest rates, slower growth, supply-chain disruption and geopolitical uncertainty as risks.
- The filing reported that Detroit Casino Council members went on strike at Hollywood Casino at Greektown in mid-October 2023 after the collective bargaining agreement expired. Potential effects include operating disruption, higher labor costs and reduced customer demand.
- Other disclosed risks include extreme weather and potentially higher or unavailable insurance, dependence on uninterrupted power and technology, foreign-currency exposure without hedging, and regulatory, execution and market-share risks under the ESPN agreement. Legal proceedings were not expected by management to have a material effect.
Most important facts for investors to verify
- Progress and regulatory approvals for the ESPN BET launch, customer acquisition and market-share performance, and whether the product can support the $150 million annual ESPN fee and related investment.
- Potential dilution from ESPN’s warrants and the conditions for vesting or issuance of additional warrants.
- Underlying casino and Interactive performance apart from the Barstool disposal, lease-accounting changes and other unusual items; assess non-GAAP measures against GAAP results.
- Liquidity and debt-covenant headroom after recurring lease payments, planned capital spending, and any development projects; note the substantial long-term lease and financing obligations.
- Resolution and operating impact of the Greektown labor strike, and exposure to competition, weather-related disruption, insurance costs and the $70 million Barstool tax indemnity, for which the maximum potential payments were not estimable.