PENN Entertainment, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Amounts are in U.S. dollars; financial figures are in millions unless stated otherwise. PENN operated 43 properties in 20 states, online sports betting in 17 jurisdictions, and iCasino in five jurisdictions.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 | Change / context |
|---|---|---|---|
| Revenue | $1,673.3 | $1,564.2 | Up 7.0% |
| Operating income | $199.1 | $292.0 | Down 31.8%; operating margin about 11.9%, versus 18.7% |
| Net income | $514.4 | $51.6 | Includes $584.2 of gains on the Barstool acquisition and REIT transactions |
| Diluted EPS | $3.05 | $0.29 | GAAP EPS also reflects the unusual gains |
| Adjusted EBITDA | $332.2 | $434.6 | Margin 19.9%, down from 27.8% |
| Adjusted EBITDAR | $478.2 | $494.7 | Margin 28.6%, down from 31.6% |
| Cash from operations | $147.7 | $224.9 | Down $77.2 |
| Capital expenditures | $63.2 | $65.6 | Cash from operations less capital expenditures was $84.5 |
At March 31, cash and cash equivalents were $1,311.3, down from $1,624.0 at year-end 2022. Current assets were $1,753.4 and current liabilities $1,271.0. Investing cash outflow was $378.2, principally reflecting $314.6 paid for Barstool, net of cash acquired. Financing cash outflow was $83.0, including $50.0 of share repurchases.
Gross principal indebtedness was approximately $2.8 billion, including $1.5 billion under credit facilities. No revolving-credit borrowings were outstanding; $976.5 of revolving capacity was available. PENN reported compliance with financial covenants and no debt maturities before 2026. Debt excludes substantial lease and financing obligations; the filing presents future lease payments and their present values separately.
Material changes versus Q1 2022
- Revenue increased $109.1. Gaming revenue rose 2.6%; food, beverage, hotel, and other revenue rose 27.7%, partly due to gaming-tax reimbursements from digital partners and Barstool results consolidated after February 17.
- Operating expenses rose 15.9% to $1,474.2. General and administrative expense increased 33.0%, primarily because the new lease arrangements increased reported triple-net operating rent expense by $85.9.
- Interest expense, net declined $48.3, mainly because of lease-accounting changes, partly offset by higher interest rates on credit facilities.
- Adjusted EBITDA fell $102.4. The South segment’s Adjusted EBITDAR declined $22.9 amid lower visitation, weather disruptions, and new competition; Interactive’s revenue increased to $233.5 and its Adjusted EBITDAR loss narrowed to $5.7.
- Operating cash flow declined, which management attributed chiefly to working-capital timing, including accrued racing liabilities, capital expenditures, payroll liabilities, and payments to service providers.
Transactions, outlook, and risks
- Barstool acquisition: PENN acquired the remaining 64% on February 17 for approximately $405.5 in total consideration, including cash and shares; $315.3 of cash was used. The filing recorded an $83.4 acquisition gain. From acquisition through quarter-end, Barstool contributed $28.2 of revenue and a $3.3 net loss. Purchase accounting remained preliminary.
- GLPI lease transactions: New and amended master leases effective January 1 changed lease classifications and produced a $500.8 gain. The arrangements also created significant ongoing rent obligations; the leases are cross-defaulted and cross-collateralized. The 2023 Master Lease provides for $232.2 base rent, escalators, and potential additional rent tied to development funding.
- Outlook: Management said cash from operations, cash on hand, and credit availability should be adequate for anticipated lease payments, debt service, capital expenditures, and working capital for the foreseeable future. Expected 2023 capital expenditures, inclusive of insurance proceeds, were approximately $413. The filing provides no clear numerical revenue or earnings guidance.
- Development: GLPI may fund up to $225 for the Aurora project and up to $350 in aggregate for certain other projects, subject to contract terms and approvals. Funding obligations expire January 1, 2026; projects require regulatory and other government approvals.
- Risks and contingencies: Management cited uncertain effects from inflation, rising rates, slowing growth, supply-chain disruption, geopolitical uncertainty, banking-sector instability, competition, acquisition synergies, and access to future financing. The company is exposed to floating-rate debt and Canadian-dollar translation risk and does not currently hedge foreign exchange exposure. Legal proceedings were not expected to have a material effect. The Hurricane Laura insurance claim remained open; no additional proceeds were received in Q1, and future recovery was not assured.
Important facts for investors to verify
- How much of reported earnings reflects the $500.8 REIT-related gain and $83.4 Barstool gain, versus recurring operating performance.
- Whether Interactive growth and Barstool integration improve profitability after acquisition-related and ongoing operating costs.
- The cash-flow capacity to meet debt service, capital spending, and substantial lease obligations, including future rent escalators and development-related rent.
- Progress, funding terms, approvals, and expected returns for the Aurora, Joliet, Columbus, and M Resort projects.
- Whether regional visitation, competition, weather, and consumer-spending conditions continue to affect segment results; and whether the open Hurricane Laura claim produces further proceeds.