PENN Entertainment, Inc. — Form 10-Q summary
Reporting period: Quarter ended September 30, 2022; comparisons are with the three and nine months ended September 30, 2021 unless noted. Amounts are in millions of dollars except per-share data. The company changed its name from Penn National Gaming, Inc. to PENN Entertainment, Inc. on August 4, 2022. PENN operated 43 properties in 20 states, online sports betting in 14 jurisdictions and iCasino in five jurisdictions.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1,625.0 | $1,511.8 | $4,816.1 | $4,332.5 |
| Operating income | $136.7 | $239.1 | $731.1 | $833.5 |
| Net income attributable to PENN | $123.5 | $86.1 | $201.3 | $375.8 |
| Diluted EPS | $0.72 | $0.52 | $1.15 | $2.24 |
| Adjusted EBITDA (non-GAAP) | $440.4 | $364.3 | $1,351.5 | $1,171.0 |
| Adjusted EBITDA margin (non-GAAP) | 27.1% | 24.1% | 28.1% | 27.0% |
| Adjusted EBITDAR (non-GAAP) | $471.9 | $480.3 | $1,471.1 | $1,513.9 |
| Adjusted EBITDAR margin (non-GAAP) | 29.0% | 31.8% | 30.5% | 34.9% |
Third-quarter revenue rose 7.5%, led by Interactive growth and higher food, beverage, hotel and other revenue. Gaming revenue increased 4.9%. For the first nine months, revenue increased 11.2%. Growth reflected online activity, theScore and newer properties, improved visitation and expanded amenities; the company cited increased competition affecting Ameristar East Chicago.
Operating income declined despite revenue growth, reflecting higher operating costs, a $104.6 million impairment charge and increased depreciation and amortization. Interest expense, net, rose 33.4% to $193.3 million in Q3 and 30.8% to $547.7 million year to date, primarily due to lease-accounting classification changes. Q3 pretax loss was $58.8 million, but a $182.0 million income-tax benefit produced net income of $123.2 million. The benefit included a $172.7 million release of deferred-tax valuation allowance. Year-to-date net income fell from $375.7 million to $200.9 million.
Interactive revenue grew 70.6% in Q3 to $158.7 million, but the segment reported a $49.3 million Adjusted EBITDAR loss, compared with a $32.0 million loss a year earlier. Management attributed the higher loss mainly to sportsbook launches and marketing, including in Kansas, Ontario and Louisiana. The retail segments generally posted higher revenue, while several reported lower year-to-date Adjusted EBITDAR margins amid payroll, gaming-tax and marketing costs.
Cash flow, liquidity and capital structure
- For the first nine months, operating cash flow was $760.0 million, versus $779.0 million; capital expenditures were $189.6 million, versus $137.8 million.
- Investing cash outflow was $180.0 million. Financing cash outflow was $705.2 million, including $510.1 million of share repurchases and principal payments on leases and financing obligations.
- Cash and cash equivalents were $1,728.4 million at September 30, 2022, down from $1,863.9 million at December 31, 2021. The period-end balance including restricted cash was $1,752.9 million.
- Long-term debt carrying value, including current maturities, was approximately $2.79 billion; reported aggregate principal debt and other long-term obligations totaled approximately $2.8 billion. The $1.0 billion revolving facility was undrawn, with $977.3 million available after letters of credit.
- PENN reported compliance with debt covenants and said it expected to remain compliant for at least the next 12 months. It stated cash, operating cash flow and revolver availability should be adequate for anticipated obligations and needs, while noting that this depends on business and market conditions.
- Reported lease liabilities and financing obligations were substantial: $5.03 billion of finance lease liabilities and $4.05 billion of financing obligations, in addition to operating lease liabilities. Lease payments to REIT landlords totaled $693.1 million in the first nine months.
Material changes and unusual items
- Lease accounting: Amendments to the PENN and Pinnacle master leases changed the classification of many components from operating leases to finance leases. PENN recorded approximately $1.39 billion of additional right-of-use assets and corresponding lease liabilities. This shifted costs among rent expense, depreciation and interest, affecting comparisons of operating expenses and Adjusted EBITDAR.
- Impairment: PENN recorded $37.4 million of goodwill impairment and $65.4 million of gaming-license impairment at Hollywood Casino at Greektown. The trigger was a longer-than-expected hotel renovation after water damage left most hotel rooms out of service.
- Tax: The $172.7 million valuation-allowance release was based on management’s assessment of improved earnings evidence. A Pennsylvania corporate tax-rate reduction also resulted in approximately $10.3 million of additional tax expense. The resulting effective tax rate and net income are affected by these discrete items.
- Marketable equity investments: PENN recorded $66.4 million of holding losses in the first nine months on equity securities received through market-access arrangements, versus gains in the prior-year period.
- Foreign currency: Foreign-currency translation losses were $146.7 million year to date, principally reflecting the Canadian-dollar translation of theScore results and balances; PENN reported no hedging arrangements for this exposure.
- Capital returns: PENN repurchased 14.69 million shares for $510.1 million in the first nine months under a $750 million authorization. Remaining authorization was $211.1 million as of November 2, 2022; additional repurchases occurred after quarter-end.
Outlook, developments and risks
PENN forecast approximately $300 million of capital expenditures for 2022. It gave no specific revenue, earnings or EPS guidance in the supplied filing text. Management cited strong visitation and increased length of play but cautioned that these trends may not continue. It identified inflation, rising interest rates, supply-chain disruption, competitive pressure, post-pandemic recovery, execution of acquisitions and synergies, and access to financing as uncertainties that could affect results and liquidity.
- The Tropicana Las Vegas sale to Bally’s closed on September 26, 2022, and the associated lease was terminated.
- PENN exercised its call rights to acquire the remaining Barstool interest; completion was expected in February 2023, subject to conditions including regulatory approval. The company said the transaction could be settled in cash or a combination of cash and equity.
- After quarter-end, PENN and GLPI entered into a binding term sheet for master-lease changes and a new lease expected to begin January 1, 2023. It includes $232.2 million of base rent, annual 1.5% escalators beginning November 2023, and rent linked to certain project funding. GLPI indicated funding of up to $225 million for the Aurora project and up to $350 million in aggregate for other development projects, subject to terms and approvals. PENN expected the lease modification to have a material accounting impact, including a noncash debt-extinguishment charge.
- Planned projects include relocating riverboat casinos to land-based facilities at Aurora and Joliet and developing hotels at Columbus and M Resort. Projects require regulatory and other approvals; PENN may abandon them but would reimburse GLPI for specified costs.
- Management reported no material adverse expectation from pending ordinary-course legal proceedings and no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- How sustainable are casino revenue and visitation trends given inflation, higher rates, competition and discretionary-spending sensitivity?
- How much of reported earnings reflects recurring operations versus the $172.7 million tax valuation-allowance release, impairment, investment holding losses and other unusual items?
- What are the full cash-flow, rent and balance-sheet consequences of the GLPI lease restructuring, including the expected noncash charge and any project-linked rent?
- Can Interactive revenue growth translate into improved profitability as launches, marketing and technology investments continue?
- What cash or equity consideration, regulatory conditions and timing will apply to the Barstool acquisition, and how will it affect leverage and share count?
- How will planned capital spending, lease commitments, share repurchases and variable-rate debt service affect liquidity if operating results weaken?