PENN Entertainment, Inc. quarterly report, Q2 FY2023

PENN Entertainment, Inc. — Q2 2023 Form 10-Q

Reporting period: Three and six months ended June 30, 2023; unaudited. Comparisons are to the corresponding 2022 periods. PENN operated 43 properties in 20 states, online sports betting in 17 jurisdictions, and iCasino in five jurisdictions.

Financial performance and liquidity

Metric	Q2 2023	Q2 2022	First half 2023	First half 2022
Revenue	$1,674.8 million	$1,626.9 million	$3,348.1 million	$3,191.1 million
Operating income	$205.5 million	$302.4 million	$404.6 million	$594.4 million
Net income	$78.1 million	$26.1 million	$592.5 million	$77.7 million
Adjusted EBITDA (non-GAAP)	$330.4 million	$476.5 million	$662.6 million	$911.1 million
Adjusted EBITDAR (non-GAAP)	$476.8 million	$504.5 million	$955.0 million	$999.2 million

Q2 revenue increased 2.9%, while operating income fell 32.1%. Adjusted EBITDA margin declined to 19.7% from 29.3%; Adjusted EBITDAR margin declined to 28.5% from 31.0%.
First-half revenue rose 4.9%, but Adjusted EBITDA declined about 27%. First-half net income included a $500.8 million noncash gain from lease transactions and an $83.4 million gain on the Barstool acquisition; reported net income therefore does not represent operating performance alone.
Gaming revenue was $1,292.8 million in Q2, down 2.5%; food, beverage, hotel and other revenue was $382.0 million, up 26.8%. The latter increase partly reflected Barstool consolidation and higher gaming-tax reimbursements to online partners.
Q2 interest expense, net, was $115.6 million, down from $195.0 million, primarily because lease changes reduced reported interest costs. Higher rent expense under the revised lease classifications offset part of that reduction.
First-half operating cash flow was $323.7 million, versus $436.4 million a year earlier. Investing cash use was $462.9 million, including $314.6 million for Barstool and $132.8 million of capital expenditures. Financing cash use was $214.1 million, including $149.8 million of share repurchases.
Cash and cash equivalents were $1,271.6 million at June 30, down from $1,624.0 million at year-end 2022. Funded debt was approximately $2.8 billion; the revolving facility was undrawn, with $976.6 million available. No debt maturity was disclosed before 2026. The company reported compliance with debt covenants and expected to remain compliant for at least the next 12 months.
Total liabilities included substantial lease-related obligations: $4.3 billion of operating lease liabilities, $2.1 billion of finance lease liabilities, and $2.4 billion of financing obligations, net of current portions as applicable.

Material changes versus the prior period

Regional casino performance was mixed. Q2 revenue declined in the South and West, and modestly in the Midwest; the Northeast grew slightly. South segment Adjusted EBITDAR fell 15.6%, amid lower visitation, weather and competition. West results reflected the 2022 sale of Tropicana Las Vegas.
Interactive revenue grew 66.2% in Q2 to $257.5 million, while its Adjusted EBITDAR loss narrowed to $12.8 million from $20.8 million. Growth included Barstool results after the February acquisition, additional jurisdictions, and gaming-tax reimbursement gross-ups.
The GLPI lease restructuring, effective January 1, 2023, materially changed expense presentation: rent shifted into general and administrative expense while depreciation and lease interest declined. Q2 general and administrative expense rose 38.9%, in large part because of the revised lease accounting; period comparisons are affected by this reclassification.
PENN repurchased $99.8 million of stock in Q2 and $149.8 million in the first half. The company completed its prior $750 million authorization during Q2; $749.5 million remained under the newer authorization as of August 8, 2023.

Outlook, commentary, risks and unusual items

Management said cash from operations, cash on hand and available credit were expected to cover lease payments, debt service, capital spending and working capital for the foreseeable future, while cautioning that results depend on economic, competitive and other factors. The filing gives no specific revenue or earnings guidance.
Anticipated 2023 capital expenditures were approximately $413 million, inclusive of insurance proceeds; $132.8 million had been incurred in the first half.
After quarter-end, PENN agreed to rebrand its U.S. online sportsbook as ESPN Bet under a 10-year strategic agreement. PENN disclosed annual cash payments of $150 million, plus warrants to purchase approximately 31.8 million shares; up to an additional 6.4 million warrants may be issued if specified performance conditions are met. The agreement has termination provisions and depends on regulatory approvals and operating performance.
Also after quarter-end, PENN sold Barstool to David Portnoy for nominal cash consideration and certain restrictive covenants, retaining a right to 50% of gross proceeds from a future sale or monetization. PENN estimated a third-quarter pre-tax, noncash disposal loss of $800–$850 million, including $705–$720 million of goodwill and intangible asset write-offs. It also expected reversal of an approximately $115.9 million deferred tax liability, with a significant tax impact. The company said it was still quantifying the financial statement effects.
Key risks include casino and online betting competition, discretionary consumer spending, inflation and interest rates, floating-rate debt exposure, foreign-currency movements, regulatory approvals, and significant ongoing lease commitments. Management identified no expected material effect from pending ordinary-course legal proceedings; a tax indemnity connected to the Barstool sale could not be quantified.
Hurricane Laura insurance recoveries generated a $13.6 million gain in the first half; the claim remained open as of the filing, with additional proceeds expected. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.

Most important facts for investors to verify

Whether the ESPN Bet launch, customer acquisition and retention, and market-share performance justify the $150 million annual fee and equity-warrant dilution.
The final third-quarter Barstool disposal loss, tax effects, and any liabilities or costs arising from the sale and related indemnities.
Underlying casino and Interactive trends excluding acquisition effects, gaming-tax gross-ups, lease reclassification and one-time gains.
Cash generation and capital allocation relative to debt service, share repurchases, planned capital spending and substantial lease payments.
Progress on planned GLPI-funded development projects, including regulatory approvals, project costs, rent consequences and funding deadlines.

Adjusted EBITDA and Adjusted EBITDAR are company-defined non-GAAP measures and should be considered alongside, not as substitutes for, GAAP results.