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 September 30, 20222023
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 Entertainment, Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | |
| Pennsylvania | | | 23-2234473 |
| (State or other jurisdiction of incorporation or organization) | | | (I.R.S. employer identification no.) |
| 825 Berkshire Blvd., Suite 200 | Wyomissing, | Pennsylvania | 19610 |
| (Address of principal executive offices) | (Zip code) |
(610) 373-2400
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | |
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock, $0.01 par value per share | PENN | The Nasdaq Stock Market LLC |
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 every Interactive Data File required to be submitted 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 such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, 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 | ☐ | 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 Act). Yes ☐ No ☑
As of October 28, 2022,26, 2023, the number of shares of the registrant’s common stock outstanding was 155,117,678151,758,888 (including 620,282560,342 shares of a subsidiary of registrant which are exchangeable into registrant’s common stock).
PENN ENTERTAINMENT, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PENN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
| | (in millions, except share and per share data) | (in millions, except share and per share data) | September 30,
2022 | | December 31,
2021 | (in millions, except share and per share data) | September 30,
2023 | | December 31,
2022 |
| Assets | Assets | | | | Assets | | | |
| Current assets | Current assets | | | | Current assets | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,728.4 | | | $ | 1,863.9 | | Cash and cash equivalents | $ | 1,317.9 | | | $ | 1,624.0 | |
| Accounts receivable, net | Accounts receivable, net | 155.8 | | | 195.0 | | Accounts receivable, net | 252.8 | | | 246.4 | |
| Prepaid expenses | Prepaid expenses | 111.8 | | | 132.3 | | Prepaid expenses | 168.0 | | | 106.1 | |
| Inventory, net | | Inventory, net | 11.4 | | | 11.1 | |
| Other current assets | Other current assets | 62.5 | | | 32.4 | | Other current assets | 30.6 | | | 25.8 | |
| Total current assets | Total current assets | 2,058.5 | | | 2,223.6 | | Total current assets | 1,780.7 | | | 2,013.4 | |
| Property and equipment, net | Property and equipment, net | 4,517.2 | | | 4,582.2 | | Property and equipment, net | 3,461.3 | | | 4,515.5 | |
| Investment in and advances to unconsolidated affiliates | Investment in and advances to unconsolidated affiliates | 246.3 | | | 255.1 | | Investment in and advances to unconsolidated affiliates | 82.6 | | | 248.6 | |
| Goodwill | Goodwill | 2,661.8 | | | 2,822.5 | | Goodwill | 2,687.3 | | | 2,689.5 | |
| Other intangible assets, net | Other intangible assets, net | 1,754.6 | | | 1,872.6 | | Other intangible assets, net | 1,721.4 | | | 1,738.9 | |
| | Lease right-of-use assets | Lease right-of-use assets | 6,108.9 | | | 4,853.0 | | Lease right-of-use assets | 6,261.8 | | | 6,103.3 | |
| Other assets | Other assets | 187.8 | | | 263.1 | | Other assets | 173.5 | | | 192.9 | |
| Total assets | Total assets | $ | 17,535.1 | | | $ | 16,872.1 | | Total assets | $ | 16,168.6 | | | $ | 17,502.1 | |
| | Liabilities | Liabilities | | | | Liabilities | | | |
| Current liabilities | Current liabilities | | | | Current liabilities | | | |
| Accounts payable | Accounts payable | $ | 40.9 | | | $ | 53.3 | | Accounts payable | $ | 44.5 | | | $ | 40.1 | |
| Current maturities of long-term debt | Current maturities of long-term debt | 55.8 | | | 99.5 | | Current maturities of long-term debt | 56.7 | | | 56.2 | |
| Current portion of financing obligations | Current portion of financing obligations | 65.0 | | | 39.0 | | Current portion of financing obligations | 40.8 | | | 63.4 | |
| Current portion of lease liabilities | Current portion of lease liabilities | 188.7 | | | 142.9 | | Current portion of lease liabilities | 321.0 | | | 194.3 | |
| Accrued expenses and other current liabilities | Accrued expenses and other current liabilities | 797.9 | | | 798.5 | | Accrued expenses and other current liabilities | 789.8 | | | 804.7 | |
| Total current liabilities | Total current liabilities | 1,148.3 | | | 1,133.2 | | Total current liabilities | 1,252.8 | | | 1,158.7 | |
| Long-term debt, net of current maturities, debt discount and debt issuance costs | Long-term debt, net of current maturities, debt discount and debt issuance costs | 2,730.2 | | | 2,637.3 | | Long-term debt, net of current maturities, debt discount and debt issuance costs | 2,715.4 | | | 2,721.3 | |
| Long-term portion of financing obligations | Long-term portion of financing obligations | 3,984.7 | | | 4,057.8 | | Long-term portion of financing obligations | 2,396.5 | | | 3,970.7 | |
| Long-term portion of lease liabilities | Long-term portion of lease liabilities | 5,892.4 | | | 4,628.6 | | Long-term portion of lease liabilities | 5,968.6 | | | 5,903.0 | |
| Deferred income taxes | Deferred income taxes | 37.8 | | | 189.1 | | Deferred income taxes | 154.6 | | | 33.9 | |
| Other long-term liabilities | Other long-term liabilities | 125.7 | | | 129.0 | | Other long-term liabilities | 199.9 | | | 117.9 | |
| Total liabilities | Total liabilities | 13,919.1 | | | 12,775.0 | | Total liabilities | 12,687.8 | | | 13,905.5 | |
| | | | | | | | |
| Stockholders’ equity | Stockholders’ equity | | | Stockholders’ equity | | |
| Series B Preferred stock ($0.01 par value, 1,000,000 shares authorized, no shares issued and outstanding) | Series B Preferred stock ($0.01 par value, 1,000,000 shares authorized, no shares issued and outstanding) | — | | | — | | Series B Preferred stock ($0.01 par value, 1,000,000 shares authorized, no shares issued and outstanding) | — | | | — | |
| Series C Preferred stock ($0.01 par value, 18,500 shares authorized, no shares issued and outstanding) | Series C Preferred stock ($0.01 par value, 18,500 shares authorized, no shares issued and outstanding) | — | | | — | | Series C Preferred stock ($0.01 par value, 18,500 shares authorized, no shares issued and outstanding) | — | | | — | |
| Series D Preferred stock ($0.01 par value, 5,000 shares authorized, 969 shares issued in both periods, and 581 and 775 shares outstanding) | 19.4 | | | 25.8 | | |
| Common stock ($0.01 par value, 400,000,000 shares authorized in both periods, 172,305,996 and 171,729,276 shares issued, and 155,448,209 and 169,561,883 shares outstanding) | 1.7 | | | 1.7 | | |
| Exchangeable shares ($0.01 par value, 697,539 shares authorized and issued in both periods, 620,353 and 653,059 shares outstanding) | — | | | — | | |
| Treasury stock, at cost, (16,857,787 and 2,167,393 shares) | (538.5) | | | (28.4) | | |
| Series D Preferred stock ($0.01 par value, 5,000 shares authorized, 969 shares issued in both periods, and no shares and 581 shares outstanding) | | Series D Preferred stock ($0.01 par value, 5,000 shares authorized, 969 shares issued in both periods, and no shares and 581 shares outstanding) | — | | | 19.4 | |
| Common stock ($0.01 par value, 400,000,000 shares authorized in both periods, 176,320,721 and 172,632,389 shares issued, and 151,153,819 and 152,903,708 shares outstanding) | | Common stock ($0.01 par value, 400,000,000 shares authorized in both periods, 176,320,721 and 172,632,389 shares issued, and 151,153,819 and 152,903,708 shares outstanding) | 1.8 | | | 1.7 | |
| Exchangeable shares ($0.01 par value, 768,441 shares authorized in both periods, 700,393 and 697,539 shares issued, 560,388 and 620,019 shares outstanding) | | Exchangeable shares ($0.01 par value, 768,441 shares authorized in both periods, 700,393 and 697,539 shares issued, 560,388 and 620,019 shares outstanding) | — | | | — | |
| Treasury stock, at cost, (25,166,902 and 19,728,681 shares) | | Treasury stock, at cost, (25,166,902 and 19,728,681 shares) | (779.6) | | | (629.5) | |
| Additional paid-in capital | Additional paid-in capital | 4,201.9 | | | 4,239.6 | | Additional paid-in capital | 4,406.5 | | | 4,220.2 | |
| Retained earnings (accumulated deficit) | 133.7 | | | (86.5) | | |
| Retained earnings | | Retained earnings | 22.6 | | | 154.5 | |
| Accumulated other comprehensive loss | Accumulated other comprehensive loss | (201.1) | | | (54.4) | | Accumulated other comprehensive loss | (168.7) | | | (168.6) | |
| Total PENN Entertainment stockholders’ equity | Total PENN Entertainment stockholders’ equity | 3,617.1 | | | 4,097.8 | | Total PENN Entertainment stockholders’ equity | 3,482.6 | | | 3,597.7 | |
| Non-controlling interest | Non-controlling interest | (1.1) | | | (0.7) | | Non-controlling interest | (1.8) | | | (1.1) | |
| Total stockholders’ equity | Total stockholders’ equity | 3,616.0 | | | 4,097.1 | | Total stockholders’ equity | 3,480.8 | | | 3,596.6 | |
| Total liabilities and stockholders’ equity | Total liabilities and stockholders’ equity | $ | 17,535.1 | | | $ | 16,872.1 | | Total liabilities and stockholders’ equity | $ | 16,168.6 | | | $ | 17,502.1 | |
See accompanying notes to the unaudited Consolidated Financial Statements.
PENN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions, except per share data) | (in millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 | (in millions, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues | Revenues | | | | | | | | Revenues | | | | | | | |
| Gaming | Gaming | $ | 1,317.5 | | | $ | 1,256.2 | | | $ | 3,934.3 | | | $ | 3,643.7 | | Gaming | $ | 1,252.1 | | | $ | 1,317.5 | | | $ | 3,869.5 | | | $ | 3,934.3 | |
| Food, beverage, hotel and other | 307.5 | | | 255.6 | | | 881.8 | | | 688.8 | | |
| Food, beverage, hotel, and other | | Food, beverage, hotel, and other | 367.3 | | | 307.5 | | | 1,098.0 | | | 881.8 | |
| Total revenues | Total revenues | 1,625.0 | | | 1,511.8 | | | 4,816.1 | | | 4,332.5 | | Total revenues | 1,619.4 | | | 1,625.0 | | | 4,967.5 | | | 4,816.1 | |
| Operating expenses | Operating expenses | | | | | | | | Operating expenses | | | | | | | |
| Gaming | Gaming | 757.9 | | | 652.4 | | | 2,158.1 | | | 1,801.1 | | Gaming | 709.0 | | | 757.9 | | | 2,149.1 | | | 2,158.1 | |
| Food, beverage, hotel and other | 199.2 | | | 160.1 | | | 557.9 | | | 431.8 | | |
| Food, beverage, hotel, and other | | Food, beverage, hotel, and other | 261.4 | | | 199.2 | | | 773.5 | | | 557.9 | |
| General and administrative | General and administrative | 277.9 | | | 376.5 | | | 847.2 | | | 1,019.2 | | General and administrative | 406.4 | | | 277.9 | | | 1,179.6 | | | 847.2 | |
| Depreciation and amortization | Depreciation and amortization | 148.7 | | | 83.7 | | | 417.2 | | | 246.9 | | Depreciation and amortization | 105.8 | | | 148.7 | | | 323.9 | | | 417.2 | |
| Impairment losses | Impairment losses | 104.6 | | | — | | | 104.6 | | | — | | Impairment losses | — | | | 104.6 | | | — | | | 104.6 | |
| Loss on disposal of Barstool | | Loss on disposal of Barstool | 923.2 | | | — | | | 923.2 | | | — | |
| Total operating expenses | Total operating expenses | 1,488.3 | | | 1,272.7 | | | 4,085.0 | | | 3,499.0 | | Total operating expenses | 2,405.8 | | | 1,488.3 | | | 5,349.3 | | | 4,085.0 | |
| Operating income | 136.7 | | | 239.1 | | | 731.1 | | | 833.5 | | |
| Operating income (loss) | | Operating income (loss) | (786.4) | | | 136.7 | | | (381.8) | | | 731.1 | |
| Other income (expenses) | Other income (expenses) | | Other income (expenses) | |
| Interest expense, net | Interest expense, net | (193.3) | | | (144.9) | | | (547.7) | | | (418.6) | | Interest expense, net | (117.5) | | | (198.5) | | | (346.1) | | | (554.7) | |
| Interest income | | Interest income | 10.2 | | | 5.2 | | | 30.5 | | | 7.0 | |
| Income from unconsolidated affiliates | Income from unconsolidated affiliates | 6.6 | | | 9.1 | | | 17.1 | | | 27.8 | | Income from unconsolidated affiliates | 7.2 | | | 6.6 | | | 17.0 | | | 17.1 | |
| | Gain on Barstool Acquisition, net | | Gain on Barstool Acquisition, net | — | | | — | | | 83.4 | | | — | |
| Gain on REIT transactions, net | | Gain on REIT transactions, net | — | | | — | | | 500.8 | | | — | |
| Loss on early extinguishment of debt | | Loss on early extinguishment of debt | — | | | — | | | — | | | (10.4) | |
| Other | Other | (8.8) | | | 19.2 | | | (77.7) | | | 43.1 | | Other | (0.3) | | | (8.8) | | | 4.5 | | | (67.3) | |
| Total other expenses | Total other expenses | (195.5) | | | (116.6) | | | (608.3) | | | (347.7) | | Total other expenses | (100.4) | | | (195.5) | | | 290.1 | | | (608.3) | |
| Income (loss) before income taxes | Income (loss) before income taxes | (58.8) | | | 122.5 | | | 122.8 | | | 485.8 | | Income (loss) before income taxes | (886.8) | | | (58.8) | | | (91.7) | | | 122.8 | |
| Income tax benefit (expense) | Income tax benefit (expense) | 182.0 | | | (36.4) | | | 78.1 | | | (110.1) | | Income tax benefit (expense) | 161.7 | | | 182.0 | | | (40.9) | | | 78.1 | |
| Net income | 123.2 | | | 86.1 | | | 200.9 | | | 375.7 | | |
| Net income (loss) | | Net income (loss) | (725.1) | | | 123.2 | | | (132.6) | | | 200.9 | |
| Less: Net loss attributable to non-controlling interest | Less: Net loss attributable to non-controlling interest | 0.3 | | | — | | | 0.4 | | | 0.1 | | Less: Net loss attributable to non-controlling interest | 0.3 | | | 0.3 | | | 0.7 | | | 0.4 | |
| Net income attributable to PENN Entertainment | $ | 123.5 | | | $ | 86.1 | | | $ | 201.3 | | | $ | 375.8 | | |
| Net income (loss) attributable to PENN Entertainment | | Net income (loss) attributable to PENN Entertainment | $ | (724.8) | | | $ | 123.5 | | | $ | (131.9) | | | $ | 201.3 | |
| | Earnings per share: | Earnings per share: | | | | | | | | Earnings per share: | | | | | | | |
| Basic earnings per share | $ | 0.78 | | | $ | 0.55 | | | $ | 1.23 | | | $ | 2.40 | | |
| Diluted earnings per share | $ | 0.72 | | | $ | 0.52 | | | $ | 1.15 | | | $ | 2.24 | | |
| Basic earnings (loss) per share | | Basic earnings (loss) per share | $ | (4.80) | | | $ | 0.78 | | | $ | (0.87) | | | $ | 1.23 | |
| Diluted earnings (loss) per share | | Diluted earnings (loss) per share | $ | (4.80) | | | $ | 0.72 | | | $ | (0.87) | | | $ | 1.15 | |
| | Weighted-average common shares outstanding—basic | Weighted-average common shares outstanding—basic | 157.6 | | | 156.1 | | | 163.5 | | | 155.9 | | Weighted-average common shares outstanding—basic | 150.9 | | | 157.6 | | | 152.3 | | | 163.5 | |
| Weighted-average common shares outstanding—diluted | Weighted-average common shares outstanding—diluted | 173.0 | | | 172.7 | | | 179.0 | | | 172.7 | | Weighted-average common shares outstanding—diluted | 150.9 | | | 173.0 | | | 152.3 | | | 179.0 | |
See accompanying notes to the unaudited Consolidated Financial Statements.
PENN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Net income | $ | 123.2 | | | $ | 86.1 | | | $ | 200.9 | | | $ | 375.7 | | |
| Net income (loss) | | Net income (loss) | $ | (725.1) | | | $ | 123.2 | | | $ | (132.6) | | | $ | 200.9 | |
| Other comprehensive loss: | Other comprehensive loss: | | Other comprehensive loss: | |
| Foreign currency translation adjustment during the period | Foreign currency translation adjustment during the period | (119.8) | | | — | | | (146.7) | | | — | | Foreign currency translation adjustment during the period | (44.7) | | | (119.8) | | | (0.1) | | | (146.7) | |
| Other comprehensive loss | Other comprehensive loss | (119.8) | | | — | | | (146.7) | | | — | | Other comprehensive loss | (44.7) | | | (119.8) | | | (0.1) | | | (146.7) | |
| Total comprehensive income | 3.4 | | | 86.1 | | | 54.2 | | | 375.7 | | |
| Total comprehensive income (loss) | | Total comprehensive income (loss) | (769.8) | | | 3.4 | | | (132.7) | | | 54.2 | |
| Less: Comprehensive loss attributable to non-controlling interest | Less: Comprehensive loss attributable to non-controlling interest | 0.3 | | | — | | | 0.4 | | | 0.1 | | Less: Comprehensive loss attributable to non-controlling interest | 0.3 | | | 0.3 | | | 0.7 | | | 0.4 | |
| Comprehensive income attributable to PENN Entertainment | $ | 3.7 | | | $ | 86.1 | | | $ | 54.6 | | | $ | 375.8 | | |
| Comprehensive income (loss) attributable to PENN Entertainment | | Comprehensive income (loss) attributable to PENN Entertainment | $ | (769.5) | | | $ | 3.7 | | | $ | (132.0) | | | $ | 54.6 | |
See accompanying notes to the unaudited Consolidated Financial Statements.
PENN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
| | | Three Months Ended September 30, 2022 and 2021 | | Three Months Ended September 30, 2023 and 2022 |
| | Preferred Stock | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Total PENN Stockholders’ Equity | | Non-Controlling Interest | | Total Stockholders’ Equity | | Preferred Stock | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Total PENN Stockholders’ Equity | | Non-Controlling Interest | | Total Stockholders’ Equity |
| (in millions, except share data) | (in millions, except share data) | Shares | | Amount | | PENN Entertainment Shares | | Amount | | Exchangeable Shares | | Amount | | (in millions, except share data) | Shares | | Amount | | PENN Entertainment Shares | | Amount | | Exchangeable Shares | | Amount | |
| Balance as of July 1, 2023 | | Balance as of July 1, 2023 | 354 | | | $ | 11.8 | | | 150,373,466 | | | $ | 1.8 | | | 560,388 | | | $ | — | | | $ | (779.7) | | | $ | 4,353.0 | | | $ | 747.4 | | | $ | (124.0) | | | $ | 4,210.3 | | | $ | (1.5) | | | $ | 4,208.8 | |
| Share-based compensation arrangements | | Share-based compensation arrangements | — | | | — | | | 426,553 | | | — | | | — | | | — | | | — | | | 35.2 | | | — | | | — | | | 35.2 | | | — | | | 35.2 | |
| | Preferred stock conversions | | Preferred stock conversions | (354) | | | (11.8) | | | 353,800 | | | — | | | — | | | — | | | — | | | 11.8 | | | — | | | — | | | — | | | — | | | — | |
| | Currency translation adjustment | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (44.7) | | | (44.7) | | | — | | | (44.7) | |
| Net loss | | Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (724.8) | | | — | | | (724.8) | | | (0.3) | | | (725.1) | |
| Other | | Other | — | | | — | | | — | | | — | | | — | | | — | | | 0.1 | | | 6.5 | | | — | | | — | | | 6.6 | | | — | | | 6.6 | |
| Balance as of September 30, 2023 | | Balance as of September 30, 2023 | — | | | $ | — | | | 151,153,819 | | | $ | 1.8 | | | 560,388 | | | $ | — | | | $ | (779.6) | | | $ | 4,406.5 | | | $ | 22.6 | | | $ | (168.7) | | | $ | 3,482.6 | | | $ | (1.8) | | | $ | 3,480.8 | |
| | Balance as of July 1, 2022 | Balance as of July 1, 2022 | 581 | | | $ | 19.4 | | | 160,725,723 | | | $ | 1.7 | | | 624,658 | | | $ | — | | | $ | (370.5) | | | $ | 4,187.3 | | | $ | 10.2 | | | $ | (81.3) | | | $ | 3,766.8 | | | $ | (0.8) | | | $ | 3,766.0 | | Balance as of July 1, 2022 | 581 | | | $ | 19.4 | | | 160,725,723 | | | $ | 1.7 | | | 624,658 | | | $ | — | | | $ | (370.5) | | | $ | 4,187.3 | | | $ | 10.2 | | | $ | (81.3) | | | $ | 3,766.8 | | | $ | (0.8) | | | $ | 3,766.0 | |
| Share-based compensation arrangements | Share-based compensation arrangements | — | | | — | | | 62,935 | | | — | | | — | | | — | | | — | | | 13.6 | | | — | | | — | | | 13.6 | | | — | | | 13.6 | | Share-based compensation arrangements | — | | | — | | | 62,935 | | | — | | | — | | | — | | | — | | | 13.6 | | | — | | | — | | | 13.6 | | | — | | | 13.6 | |
| Share repurchases (Note 13) | — | | | — | | | (5,348,809) | | | — | | | — | | | — | | | (168.0) | | | — | | | — | | | — | | | (168.0) | | | — | | | (168.0) | | |
| | Common stock issuance (Note 13) | — | | | — | | | 4,055 | | | — | | | — | | | — | | | — | | | 0.2 | | | — | | | — | | | 0.2 | | | — | | | 0.2 | | |
| Exchangeable shares conversions (Note 13) | — | | | — | | | 4,305 | | | — | | | (4,305) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| Share repurchases | | Share repurchases | — | | | — | | | (5,348,809) | | | — | | | — | | | — | | | (168.0) | | | — | | | — | | | — | | | (168.0) | | | — | | | (168.0) | |
| Common stock issuance | | Common stock issuance | — | | | — | | | 4,055 | | | — | | | — | | | — | | | — | | | 0.2 | | | — | | | — | | | 0.2 | | | — | | | 0.2 | |
| Exchangeable shares conversions | | Exchangeable shares conversions | — | | | — | | | 4,305 | | | — | | | (4,305) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Currency translation adjustment | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (119.8) | | | (119.8) | | | — | | | (119.8) | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (119.8) | | | (119.8) | | | — | | | (119.8) | |
| | Net income (loss) | Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 123.5 | | | — | | | 123.5 | | | (0.3) | | | 123.2 | | Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 123.5 | | | — | | | 123.5 | | | (0.3) | | | 123.2 | |
| Other | Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.8 | | | — | | | — | | | 0.8 | | | — | | | 0.8 | | Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.8 | | | — | | | — | | | 0.8 | | | — | | | 0.8 | |
| Balance as of September 30, 2022 | Balance as of September 30, 2022 | 581 | | | $ | 19.4 | | | 155,448,209 | | | $ | 1.7 | | | 620,353 | | | $ | — | | | $ | (538.5) | | | $ | 4,201.9 | | | $ | 133.7 | | | $ | (201.1) | | | $ | 3,617.1 | | | $ | (1.1) | | | $ | 3,616.0 | | Balance as of September 30, 2022 | 581 | | | $ | 19.4 | | | 155,448,209 | | | $ | 1.7 | | | 620,353 | | | $ | — | | | $ | (538.5) | | | $ | 4,201.9 | | | $ | 133.7 | | | $ | (201.1) | | | $ | 3,617.1 | | | $ | (1.1) | | | $ | 3,616.0 | |
| | Balance as of July 1, 2021 | 775 | | | $ | 24.2 | | | 156,786,873 | | | $ | 1.6 | | | — | | | $ | — | | | $ | (28.4) | | | $ | 3,178.5 | | | $ | (217.6) | | | $ | — | | | $ | 2,958.3 | | | $ | (0.5) | | | $ | 2,957.8 | | |
| Share-based compensation arrangements | — | | | — | | | 17,318 | | | — | | | — | | | — | | | — | | | 8.5 | | | — | | | — | | | 8.5 | | | — | | | 8.5 | | |
| Share issuance (Note 13) | 43 | | | 3.0 | | | 198,103 | | | — | | | — | | | — | | | — | | | 15.8 | | | — | | | — | | | 18.8 | | | — | | | 18.8 | | |
| Conversion of Preferred Stock (Note 13) | (43) | | | (1.4) | | | 43,000 | | | — | | | — | | | — | | | — | | | 1.4 | | | — | | | — | | | — | | | — | | | — | | |
| Net income | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 86.1 | | | — | | | 86.1 | | | — | | | 86.1 | | |
| Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 0.2 | | | — | | | — | | | 0.2 | | | — | | | 0.2 | | |
| Balance as of September 30, 2021 | 775 | | | $ | 25.8 | | | 157,045,294 | | | $ | 1.6 | | | — | | | $ | — | | | $ | (28.4) | | | $ | 3,204.4 | | | $ | (131.5) | | | $ | — | | | $ | 3,071.9 | | | $ | (0.5) | | | $ | 3,071.4 | | |
See accompanying notes to the unaudited Consolidated Financial Statements.
| | | Nine Months Ended September 30, 2022 and 2021 | | Nine Months Ended September 30, 2023 and 2022 |
| | Preferred Stock | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Total PENN Stockholders’ Equity | | Non-Controlling Interest | | Total Stockholders’ Equity | | Preferred Stock | | Common Stock | | Treasury Stock | | Additional
Paid-In
Capital | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Loss | | Total PENN Stockholders’ Equity | | Non-Controlling Interest | | Total Stockholders’ Equity |
| (in millions, except share data) | (in millions, except share data) | Shares | | Amount | | PENN Entertainment Shares | | Amount | | Exchangeable Shares | | Amount | | (in millions, except share data) | Shares | | Amount | | PENN Entertainment Shares | | Amount | | Exchangeable Shares | | Amount | |
| Balance as of January 1, 2023 | | Balance as of January 1, 2023 | 581 | | | $ | 19.4 | | | 152,903,708 | | | $ | 1.7 | | | 620,019 | | | $ | — | | | $ | (629.5) | | | $ | 4,220.2 | | | $ | 154.5 | | | $ | (168.6) | | | $ | 3,597.7 | | | $ | (1.1) | | | $ | 3,596.6 | |
| Share-based compensation arrangements | | Share-based compensation arrangements | — | | | — | | | 598,383 | | | — | | | — | | | — | | | — | | | 71.4 | | | — | | | — | | | 71.4 | | | — | | | 71.4 | |
| Share issuance in connection with acquisitions | | Share issuance in connection with acquisitions | — | | | — | | | 2,442,809 | | | — | | | — | | | — | | | — | | | 80.8 | | | — | | | — | | | 80.8 | | | — | | | 80.8 | |
| Share repurchases | | Share repurchases | — | | | — | | | (5,438,221) | | | — | | | — | | | — | | | (149.8) | | | — | | | — | | | — | | | (149.8) | | | — | | | (149.8) | |
| Preferred stock conversions | | Preferred stock conversions | (581) | | | (19.4) | | | 580,600 | | | — | | | — | | | — | | | — | | | 19.4 | | | — | | | — | | | — | | | — | | | — | |
| Common stock issuance | | Common stock issuance | — | | | — | | | 4,055 | | | — | | | — | | | — | | | — | | | 0.1 | | | — | | | — | | | 0.1 | | | — | | | 0.1 | |
| Exchangeable share issuance | | Exchangeable share issuance | — | | | — | | | — | | | — | | | 2,854 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Exchangeable shares conversions | | Exchangeable shares conversions | — | | | — | | | 62,485 | | | — | | | (62,485) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Currency translation adjustment | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (0.1) | | | (0.1) | | | — | | | (0.1) | |
| Net loss | | Net loss | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (131.9) | | | — | | | (131.9) | | | (0.7) | | | (132.6) | |
| Other | | Other | — | | | — | | | — | | | 0.1 | | | — | | | — | | | (0.3) | | | 14.6 | | | — | | | — | | | 14.4 | | | — | | | 14.4 | |
| Balance as of September 30, 2023 | | Balance as of September 30, 2023 | — | | | $ | — | | | 151,153,819 | | | $ | 1.8 | | | 560,388 | | | $ | — | | | $ | (779.6) | | | $ | 4,406.5 | | | $ | 22.6 | | | $ | (168.7) | | | $ | 3,482.6 | | | $ | (1.8) | | | $ | 3,480.8 | |
| | Balance as of January 1, 2022 | Balance as of January 1, 2022 | 775 | | | $ | 25.8 | | | 169,561,883 | | | $ | 1.7 | | | 653,059 | | | $ | — | | | $ | (28.4) | | | $ | 4,239.6 | | | $ | (86.5) | | | $ | (54.4) | | | $ | 4,097.8 | | | $ | (0.7) | | | $ | 4,097.1 | | Balance as of January 1, 2022 | 775 | | | $ | 25.8 | | | 169,561,883 | | | $ | 1.7 | | | 653,059 | | | $ | — | | | $ | (28.4) | | | $ | 4,239.6 | | | $ | (86.5) | | | $ | (54.4) | | | $ | 4,097.8 | | | $ | (0.7) | | | $ | 4,097.1 | |
| Share-based compensation arrangements | Share-based compensation arrangements | — | | | — | | | 281,759 | | | — | | | — | | | — | | | — | | | 45.1 | | | — | | | — | | | 45.1 | | | — | | | 45.1 | | Share-based compensation arrangements | — | | | — | | | 281,759 | | | — | | | — | | | — | | | — | | | 45.1 | | | — | | | — | | | 45.1 | | | — | | | 45.1 | |
| Share repurchases (Note 13) | — | | | — | | | (14,690,394) | | | — | | | — | | | — | | | (510.1) | | | — | | | — | | | — | | | (510.1) | | | — | | | (510.1) | | |
| Preferred stock conversions (Note 13) | (194) | | | (6.4) | | | 194,200 | | | — | | | — | | | — | | | — | | | 6.4 | | | — | | | — | | | — | | | — | | | — | | |
| Common stock issuance (Note 13) | — | | | — | | | 68,055 | | | — | | | — | | | — | | | — | | | 2.2 | | | — | | | — | | | 2.2 | | | — | | | 2.2 | | |
| Exchangeable shares conversions (Note 13) | — | | | — | | | 32,706 | | | — | | | (32,706) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | |
| Share repurchases | | Share repurchases | — | | | — | | | (14,690,394) | | | — | | | — | | | — | | | (510.1) | | | — | | | — | | | — | | | (510.1) | | | — | | | (510.1) | |
| Preferred stock conversions | | Preferred stock conversions | (194) | | | (6.4) | | | 194,200 | | | — | | | — | | | — | | | — | | | 6.4 | | | — | | | — | | | — | | | — | | | — | |
| Common stock issuance | | Common stock issuance | — | | | — | | | 68,055 | | | — | | | — | | | — | | | — | | | 2.2 | | | — | | | — | | | 2.2 | | | — | | | 2.2 | |
| Exchangeable shares conversions | | Exchangeable shares conversions | — | | | — | | | 32,706 | | | — | | | (32,706) | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Currency translation adjustment | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (146.7) | | | (146.7) | | | — | | | (146.7) | | Currency translation adjustment | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (146.7) | | | (146.7) | | | — | | | (146.7) | |
| Cumulative-effect adjustment upon adoption of ASU 2020-06 | Cumulative-effect adjustment upon adoption of ASU 2020-06 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (88.2) | | | 18.9 | | | — | | | (69.3) | | | — | | | (69.3) | | Cumulative-effect adjustment upon adoption of ASU 2020-06 | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (88.2) | | | 18.9 | | | — | | | (69.3) | | | — | | | (69.3) | |
| Net income (loss) | Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 201.3 | | | — | | | 201.3 | | | (0.4) | | | 200.9 | | Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 201.3 | | | — | | | 201.3 | | | (0.4) | | | 200.9 | |
| Other | Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3.2) | | | — | | | — | | | (3.2) | | | — | | | (3.2) | | Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (3.2) | | | — | | | — | | | (3.2) | | | — | | | (3.2) | |
| Balance as of September 30, 2022 | Balance as of September 30, 2022 | 581 | | | $ | 19.4 | | | 155,448,209 | | | $ | 1.7 | | | 620,353 | | | $ | — | | | $ | (538.5) | | | $ | 4,201.9 | | | $ | 133.7 | | | $ | (201.1) | | | $ | 3,617.1 | | | $ | (1.1) | | | $ | 3,616.0 | | Balance as of September 30, 2022 | 581 | | | $ | 19.4 | | | 155,448,209 | | | $ | 1.7 | | | 620,353 | | | $ | — | | | $ | (538.5) | | | $ | 4,201.9 | | | $ | 133.7 | | | $ | (201.1) | | | $ | 3,617.1 | | | $ | (1.1) | | | $ | 3,616.0 | |
| | Balance as of January 1, 2021 | 883 | | | $ | 23.1 | | | 155,700,834 | | | $ | 1.6 | | | — | | | $ | — | | | $ | (28.4) | | | $ | 3,167.2 | | | $ | (507.3) | | | $ | — | | | $ | 2,656.2 | | | $ | (0.4) | | | $ | 2,655.8 | | |
| Share-based compensation arrangements | — | | | — | | | 908,473 | | | — | | | — | | | — | | | — | | | 21.9 | | | — | | | — | | | 21.9 | | | — | | | 21.9 | | |
| Share issuance (Note 13) | 86 | | | 8.1 | | | 241,787 | | | — | | | — | | | — | | | — | | | 19.3 | | | — | | | — | | | 27.4 | | | — | | | 27.4 | | |
| Preferred stock conversion (Note 13) | (194) | | | (5.4) | | | 194,200 | | | — | | | — | | | — | | | — | | | 5.4 | | | — | | | — | | | — | | | — | | | — | | |
| Net income (loss) | — | | | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 375.8 | | | — | | | 375.8 | | | (0.1) | | | 375.7 | | |
| Other | — | | | — | | | — | | | — | | | — | | | — | | | — | | | (9.4) | | | — | | | — | | | (9.4) | | | — | | | (9.4) | | |
| Balance as of September 30, 2021 | 775 | | | $ | 25.8 | | | 157,045,294 | | | $ | 1.6 | | | — | | | $ | — | | | $ | (28.4) | | | $ | 3,204.4 | | | $ | (131.5) | | | $ | — | | | $ | 3,071.9 | | | $ | (0.5) | | | $ | 3,071.4 | | |
See accompanying notes to the unaudited Consolidated Financial Statements.
PENN ENTERTAINMENT, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| | | | For the nine months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | (in millions) | 2023 | | 2022 |
| Operating activities | Operating activities | | | | Operating activities | | | |
| Net income | $ | 200.9 | | | $ | 375.7 | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Net income (loss) | | Net income (loss) | $ | (132.6) | | | $ | 200.9 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | Adjustments to reconcile net income (loss) to net cash provided by operating activities: | |
| Depreciation and amortization | Depreciation and amortization | 417.2 | | | 246.9 | | Depreciation and amortization | 323.9 | | | 417.2 | |
| Amortization of debt discount and debt issuance costs | Amortization of debt discount and debt issuance costs | 7.0 | | | 16.9 | | Amortization of debt discount and debt issuance costs | 6.2 | | | 7.0 | |
| Noncash interest expense | 20.0 | | | 12.1 | | |
| Noncash operating lease expense | 67.8 | | | 117.1 | | |
| Non-cash interest expense | | Non-cash interest expense | 26.1 | | | 20.0 | |
| Non-cash operating lease expense | | Non-cash operating lease expense | 224.9 | | | 67.8 | |
| | Gain on acquisition of Sam Houston | — | | | (29.9) | | |
| Holding loss (gain) on equity securities | 66.4 | | | (8.7) | | |
| | Loss on disposal of Barstool | | Loss on disposal of Barstool | 923.2 | | | — | |
| Gain on Barstool Acquisition, net | | Gain on Barstool Acquisition, net | (83.4) | | | — | |
| Gain on REIT transactions, net | | Gain on REIT transactions, net | (500.8) | | | — | |
| Holding loss on equity securities | | Holding loss on equity securities | 8.5 | | | 66.4 | |
| | Loss on sale or disposal of property and equipment | Loss on sale or disposal of property and equipment | 7.0 | | | 0.1 | | Loss on sale or disposal of property and equipment | — | | | 7.0 | |
| | Gain on Hurricane Laura | Gain on Hurricane Laura | (10.7) | | | — | | Gain on Hurricane Laura | (13.9) | | | (10.7) | |
| Income from unconsolidated affiliates | Income from unconsolidated affiliates | (17.1) | | | (27.8) | | Income from unconsolidated affiliates | (17.0) | | | (17.1) | |
| Return on investment from unconsolidated affiliates | Return on investment from unconsolidated affiliates | 27.5 | | | 23.9 | | Return on investment from unconsolidated affiliates | 27.8 | | | 27.5 | |
| Deferred income taxes | Deferred income taxes | (146.1) | | | 19.4 | | Deferred income taxes | 4.9 | | | (146.1) | |
| Stock-based compensation | Stock-based compensation | 45.1 | | | 21.9 | | Stock-based compensation | 71.4 | | | 45.1 | |
| Impairment losses | Impairment losses | 104.6 | | | — | | Impairment losses | — | | | 104.6 | |
| Loss on early extinguishment of debt | Loss on early extinguishment of debt | 10.4 | | | — | | Loss on early extinguishment of debt | — | | | 10.4 | |
| Changes in operating assets and liabilities, net of businesses acquired | Changes in operating assets and liabilities, net of businesses acquired | | Changes in operating assets and liabilities, net of businesses acquired | |
| Accounts receivable | Accounts receivable | 9.1 | | | (57.3) | | Accounts receivable | (9.7) | | | 9.1 | |
| Inventory | | Inventory | (0.1) | | | (1.0) | |
| Prepaid expenses and other current assets | Prepaid expenses and other current assets | (24.5) | | | (21.8) | | Prepaid expenses and other current assets | (19.9) | | | (23.5) | |
| Other assets | Other assets | 10.7 | | | (3.9) | | Other assets | (23.5) | | | 10.7 | |
| Accounts payable | Accounts payable | (12.6) | | | (1.2) | | Accounts payable | (0.8) | | | (12.6) | |
| Accrued expenses | Accrued expenses | 19.0 | | | 131.6 | | Accrued expenses | (36.1) | | | 19.0 | |
| Income taxes | Income taxes | 19.3 | | | 11.1 | | Income taxes | (39.2) | | | 19.3 | |
| Operating lease liabilities | Operating lease liabilities | (63.6) | | | (97.6) | | Operating lease liabilities | (230.8) | | | (63.6) | |
| Other current and long-term liabilities | Other current and long-term liabilities | (10.0) | | | 47.4 | | Other current and long-term liabilities | 20.1 | | | (10.0) | |
| Other | Other | 12.6 | | | 3.1 | | Other | 11.5 | | | 12.6 | |
| Net cash provided by operating activities | Net cash provided by operating activities | 760.0 | | | 779.0 | | Net cash provided by operating activities | 540.7 | | | 760.0 | |
| Investing activities | | | | |
| | Capital expenditures | (189.6) | | | (137.8) | | |
| | Proceeds from sale of property and equipment | 4.9 | | | 0.7 | | |
| Hurricane Laura insurance proceeds | 25.4 | | | — | | |
| Consideration paid for acquisitions of businesses, net of cash acquired | — | | | (34.4) | | |
| Consideration paid for remaining interest of Sam Houston | — | | | (42.0) | | |
| | Acquisition of equity securities | — | | | (26.0) | | |
| Consideration paid for a cost method investment | (15.0) | | | — | | |
| | Consideration paid for gaming licenses and other intangible assets | (4.1) | | | (20.6) | | |
| Other | (1.6) | | | (9.4) | | |
| Net cash used in investing activities | (180.0) | | | (269.5) | | |
| | | | For the nine months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | (in millions) | 2023 | | 2022 |
| Investing activities | | Investing activities | | | |
| | Capital expenditures | | Capital expenditures | (207.8) | | | (189.6) | |
| Consideration paid for Barstool, net of cash acquired | | Consideration paid for Barstool, net of cash acquired | (314.6) | | | — | |
| Sale of Barstool, net of cash disposed | | Sale of Barstool, net of cash disposed | (50.9) | | | — | |
| Proceeds from sale of property and equipment | | Proceeds from sale of property and equipment | 0.2 | | | 4.9 | |
| Hurricane Laura insurance proceeds | | Hurricane Laura insurance proceeds | 9.0 | | | 25.4 | |
| | Cost method investment proceeds received (consideration paid) | | Cost method investment proceeds received (consideration paid) | 8.0 | | | (15.0) | |
| | Consideration paid for gaming licenses and other intangible assets | | Consideration paid for gaming licenses and other intangible assets | (17.1) | | | (4.1) | |
| Other | | Other | (12.8) | | | (1.6) | |
| Net cash used in investing activities | | Net cash used in investing activities | (586.0) | | | (180.0) | |
| Financing activities | Financing activities | | | | Financing activities | | | |
| | Proceeds from issuance of long-term debt, net of discounts | Proceeds from issuance of long-term debt, net of discounts | 1,545.0 | | | 400.0 | | Proceeds from issuance of long-term debt, net of discounts | — | | | 1,545.0 | |
| Repayments on credit facilities (Note 8) | (1,543.2) | | | — | | |
| Repayments on credit facilities | | Repayments on credit facilities | — | | | (1,543.2) | |
| Principal payments on long-term debt | Principal payments on long-term debt | (29.9) | | | (48.3) | | Principal payments on long-term debt | (28.1) | | | (29.9) | |
| Debt issuance costs | Debt issuance costs | (18.2) | | | (7.5) | | Debt issuance costs | — | | | (18.2) | |
| Proceeds from other long-term obligations | — | | | 72.5 | | |
| | Payments of other long-term obligations | Payments of other long-term obligations | (9.2) | | | (8.6) | | Payments of other long-term obligations | (9.6) | | | (9.2) | |
| Principal payments on financing obligations | Principal payments on financing obligations | (47.5) | | | (26.8) | | Principal payments on financing obligations | (29.3) | | | (47.5) | |
| Principal payments on finance leases | Principal payments on finance leases | (81.9) | | | (6.1) | | Principal payments on finance leases | (35.1) | | | (81.9) | |
| | Proceeds from exercise of options | Proceeds from exercise of options | 3.1 | | | 8.8 | | Proceeds from exercise of options | 1.7 | | | 3.1 | |
| Repurchase of common stock | Repurchase of common stock | (510.1) | | | — | | Repurchase of common stock | (149.8) | | | (510.1) | |
| | Proceeds from insurance financing | — | | | 26.6 | | |
| Payments on insurance financing | — | | | (25.6) | | |
| | Other | Other | (13.3) | | | (9.8) | | Other | (7.7) | | | (13.3) | |
| Net cash (used in) provided by financing activities | (705.2) | | | 375.2 | | |
| Net cash used in financing activities | | Net cash used in financing activities | (257.9) | | | (705.2) | |
| Effect of currency rate changes on cash, cash equivalents, and restricted cash | Effect of currency rate changes on cash, cash equivalents, and restricted cash | (2.0) | | | — | | Effect of currency rate changes on cash, cash equivalents, and restricted cash | 1.0 | | | (2.0) | |
| | Change in cash, cash equivalents, and restricted cash | Change in cash, cash equivalents, and restricted cash | (127.2) | | | 884.7 | | Change in cash, cash equivalents, and restricted cash | (302.2) | | | (127.2) | |
| Cash, cash equivalents and restricted cash at the beginning of the year | 1,880.1 | | | 1,870.4 | | |
| Cash, cash equivalents and restricted cash at the end of the period | $ | 1,752.9 | | | $ | 2,755.1 | | |
| Cash, cash equivalents, and restricted cash at the beginning of the year | | Cash, cash equivalents, and restricted cash at the beginning of the year | 1,644.2 | | | 1,880.1 | |
| Cash, cash equivalents, and restricted cash at the end of the period | | Cash, cash equivalents, and restricted cash at the end of the period | $ | 1,342.0 | | | $ | 1,752.9 | |
| | | Reconciliation of cash, cash equivalents and restricted cash: | Reconciliation of cash, cash equivalents and restricted cash: | | Reconciliation of cash, cash equivalents and restricted cash: | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,728.4 | | | $ | 2,729.3 | | Cash and cash equivalents | $ | 1,317.9 | | | $ | 1,728.4 | |
| Restricted cash included in Other current assets | Restricted cash included in Other current assets | 23.3 | | | 24.6 | | Restricted cash included in Other current assets | 22.9 | | | 23.3 | |
| Restricted cash included in Other assets | Restricted cash included in Other assets | 1.2 | | | 1.2 | | Restricted cash included in Other assets | 1.2 | | | 1.2 | |
| Total cash, cash equivalents and restricted cash | $ | 1,752.9 | | | $ | 2,755.1 | | |
| Total cash, cash equivalents, and restricted cash | | Total cash, cash equivalents, and restricted cash | $ | 1,342.0 | | | $ | 1,752.9 | |
| | Supplemental disclosure: | Supplemental disclosure: | | Supplemental disclosure: | |
| Cash paid for interest, net of amounts capitalized | Cash paid for interest, net of amounts capitalized | $ | 535.2 | | | $ | 418.9 | | Cash paid for interest, net of amounts capitalized | $ | 321.1 | | | $ | 535.2 | |
| Cash payments related to income taxes, net | Cash payments related to income taxes, net | $ | 46.3 | | | $ | 75.6 | | Cash payments related to income taxes, net | $ | 73.9 | | | $ | 46.3 | |
| | Non-cash activities: | Non-cash activities: | | Non-cash activities: | |
| Commencement of operating leases | $ | 39.4 | | | $ | 31.6 | | |
| Commencement of finance leases | $ | 1,417.3 | | | $ | 102.9 | | |
| | Accrued capital expenditures | Accrued capital expenditures | $ | 28.7 | | | $ | 25.0 | | Accrued capital expenditures | $ | 30.1 | | | $ | 28.7 | |
See accompanying notes to the unaudited Consolidated Financial Statements.
PENN ENTERTAINMENT, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1—Organization and Basis of Presentation
Organization:Organization On August 4, 2022, Penn National Gaming, Inc. was renamed PENN Entertainment, Inc.: PENN Entertainment, Inc., together with its subsidiaries (“PENN,” the “Company,” “we,” “our,” or “us”), is North America’s leading provider of integrated entertainment, sports content, and casino gaming experiences. As of September 30, 2023, PENN operatesoperated 43 properties in 20 states, online sports betting in 1418 jurisdictions and iCasino in five jurisdictions, under a portfolio of well-recognized brands including Hollywood Casino®Casino®, L’Auberge®L’Auberge®, Barstool Sportsbook®,Sportsbook® and theScore Bet Sportsbook and Casino®Casino®. In August 2023, PENN entered into a transformative, exclusive long-term strategic alliance with ESPN, Inc. and ESPN Enterprises, Inc. (together, “ESPN”) relating to online sports betting within the United States. In November 2023, pending regulatory approval, the existing Barstool Sportsbook will be rebranded and launched across all online platforms in the United States as ESPN BET, and our online product will include a Hollywood-branded integrated iCasino where permitted. PENN’s ability to leverage the leading sports media brands in the United States (ESPN) and Canada (theScore) will position us to significantly expand our digital footprint and efficiently grow our customer ecosystem. This highly differentiated strategy, which is focused on organic cross-sell opportunities, is reinforced by its investmentsour investment in market-leading retail casinos, sports media assets and technology, including a proprietary state-of-the-art, fully integrated digital sports and online casinoiCasino betting platform and an in-house iCasino content studio. The Company’sPENN’s portfolio is further bolstered by itsour industry-leading myPENN Playchoice®TM customer loyalty program, (the “mychoice program”), which offers our approximately 26over 27 million members a unique set of rewards and experiences across business channels.
The majority of the real estate assets (i.e., land and buildings) used in our operations are subject to triple net master leases; the most significant of which are the PENN Master Lease and the Pinnacle Master Lease (as such terms are defined in Note 9, “Leases,” and collectively referred to as the “Master Leases”), with Gaming and Leisure Properties, Inc. (Nasdaq: GLPI) (“GLPI”), a real estate investment trust (“REIT”), and include the AR PENN Master Lease, 2023 Master Lease, PENN Master Lease (prior to January 1, 2023), and Pinnacle Master Lease (as such terms are defined in Note 9, “Leases” and collectively referred to as the “Master Leases”). Basis of Presentation: The unaudited Consolidated Financial Statements of the Company have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) for interim financial information and with the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and notes 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.
Results of operations and cash flows for the interim periods presented herein are not necessarily indicative of the results that would be achieved during a full year of operations or in future periods. These unaudited Consolidated Financial Statements and notes thereto should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021.2022.
Note 2—Significant Accounting Policies
Principles of Consolidation: The unaudited Consolidated Financial Statements include the accounts of PENN Entertainment, Inc. and its subsidiaries. Investments in and advances to unconsolidated affiliates that do not meet the consolidation criteria of the authoritative guidance for voting interest entities (“VOEs”) or variable interest entities (“VIEs”) are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications: Certain reclassifications have been made to conform the prior period presentation.
Use of Estimates: The preparation of unaudited Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the financial statements, and (iii) the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates.
Segment Information: We have five reportable segments: Northeast, South, West, Midwest, and Interactive. Our gaming and racing properties are grouped by geographic location, and each is viewed as an operating segment with the exception of our two properties in Jackpot, Nevada, which are viewed as one operating segment. We consider our combined Video Gaming Terminal (“VGT”) operations, by state, to be separate operating segments. Interactive includes all of our iCasino and online sports betting, iCasino and social gaming operations, management of retail sports betting, media, and our proportionate sharethe operating results of earnings attributable to our equity method investment in Barstool Sports, Inc. (“Barstool” or “Barstool Sports”). We owned 36% of Barstool common stock prior to the February 17, 2023 Barstool Acquisition (as defined in Note 6, “Acquisitions and Dispositions,”) pursuant to which we acquired the remaining 64% of Barstool common stock. On August 8, 2023, we entered into a stock purchase agreement with David Portnoy (the “Barstool SPA”), and we sold 100% of the outstanding shares of Barstool common stock. See Note 16, “Segment Information,”Information” and Note 9, “Leases” for further information.segment and lease structure information, respectively. For financial reporting purposes, we aggregate our operating segments into the following reportable segments:
| | | | | | | | | | | |
| Location | | Real Estate Assets Lease or Ownership Structure |
| Northeast segment | | | |
| Ameristar East Chicago | East Chicago, Indiana | | Pinnacle Master Lease |
Hollywood Casino at Greektown | Detroit, Michigan | | Greektown Lease |
Hollywood Casino Bangor | Bangor, Maine | | AR PENN Master Lease |
| Hollywood Casino at Charles Town Races | Charles Town, West Virginia | | AR PENN Master Lease |
| Hollywood Casino Columbus | Columbus, Ohio | | PENN2023 Master Lease |
| Hollywood Casino at Greektown | Detroit, Michigan | | Greektown Lease |
| Hollywood Casino Lawrenceburg | Lawrenceburg, Indiana | | AR PENN Master Lease |
| Hollywood Casino Morgantown | Morgantown, Pennsylvania | | Morgantown Lease(1) |
| Hollywood Casino at PENN National Race Course | Grantville, Pennsylvania | | AR PENN Master Lease |
| Hollywood Casino Perryville | Perryville, Maryland | | Perryville2023 Master Lease |
| Hollywood Casino at The Meadows | Washington, Pennsylvania | | 2023 Master Lease |
| Hollywood Casino Toledo | Toledo, Ohio | | PENN2023 Master Lease |
| Hollywood Casino York | York, Pennsylvania | | Operating Lease (not with REIT Landlord) |
| Hollywood Gaming at Dayton Raceway | Dayton, Ohio | | AR PENN Master Lease |
| Hollywood Gaming at Mahoning Valley Race Course | Youngstown, Ohio | | AR PENN Master Lease |
Marquee by PENN(1) (2) | Pennsylvania | | N/A |
Hollywood Casino at The Meadows | Washington, Pennsylvania | | Meadows Lease |
| Plainridge Park Casino | Plainville, Massachusetts | | Pinnacle Master Lease |
| | | |
South segment | | | |
1st Jackpot Casino | Tunica, Mississippi | | AR PENN Master Lease |
| Ameristar Vicksburg | Vicksburg, Mississippi | | Pinnacle Master Lease |
| Boomtown Biloxi | Biloxi, Mississippi | | AR PENN Master Lease |
| Boomtown Bossier City | Bossier City, Louisiana | | Pinnacle Master Lease |
| Boomtown New Orleans | New Orleans, Louisiana | | Pinnacle Master Lease |
| Hollywood Casino Gulf Coast | Bay St. Louis, Mississippi | | AR PENN Master Lease |
| Hollywood Casino Tunica | Tunica, Mississippi | | AR PENN Master Lease |
| L’Auberge Baton Rouge | Baton Rouge, Louisiana | | Pinnacle Master Lease |
| L’Auberge Lake Charles | Lake Charles, Louisiana | | Pinnacle Master Lease |
| Margaritaville Resort Casino | Bossier City, Louisiana | | Margaritaville Lease |
| | | |
| West segment | | | |
| Ameristar Black Hawk | Black Hawk, Colorado | | Pinnacle Master Lease |
| Cactus Petes and Horseshu | Jackpot, Nevada | | Pinnacle Master Lease |
| M Resort Spa Casino | Henderson, Nevada | | PENN2023 Master Lease |
Tropicana Las Vegas (2)
| Las Vegas, Nevada | | Tropicana Lease |
| Zia Park Casino | Hobbs, New Mexico | | AR PENN Master Lease |
| | | |
| Midwest segment | | | |
| Ameristar Council Bluffs | Council Bluffs, Iowa | | Pinnacle Master Lease |
Argosy Casino Alton (3) | Alton, Illinois | | AR PENN Master Lease |
| Argosy Casino Riverside | Riverside, Missouri | | AR PENN Master Lease |
| Hollywood Casino Aurora | Aurora, Illinois | | PENN2023 Master Lease |
| Hollywood Casino Joliet | Joliet, Illinois | | PENN2023 Master Lease |
Hollywood Casino at Kansas Speedway (4) | Kansas City, Kansas | | Owned - JVJoint Venture |
| Hollywood Casino St. Louis | Maryland Heights, Missouri | | AR PENN Master Lease |
Prairie State Gaming (1)(2) | Illinois | | N/A |
| River City Casino | St. Louis, Missouri | | Pinnacle Master Lease |
(1)VGT route operations
(2)On September 26, 2022, PENN sold its equity interest in the Tropicana Las Vegas Hotel and Casino Inc. (“Tropicana”), which consisted of the gaming license to operate the property as described in Note 6, “Acquisitions and Dispositions”, and as a result of the sale, the Tropicana Lease (as defined in Note 9, “Leases”) was terminated.VGT route operations. (3)The riverboat is owned by us and not subject to the AR PENN Master Lease.
(4)Pursuant to a joint venture (“JV”) with NASCAR and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns Hollywood Casino at Kansas Speedway.
Revenue Recognition: Our revenue from contracts with customers consists primarily of gaming wagers, inclusive of sports betting and iCasino products, food and beverage transactions, retail transactions, hotel room sales, retail transactions, racing wagers, and third-partythird-
Complimentaries Associated with Gaming Contracts
Food, beverage, hotel, and other services furnished to patrons for free as an inducement to gamble or through the redemption of our customers’ loyalty points are recorded as food,“Food, beverage, hotel, and otherother” revenues at their estimated standalone selling prices, with an offset recorded as a reduction to gaming“Gaming” revenues. The cost of providing complimentary goods and services to patrons as an inducement to gamble as well as for the fulfillment of our loyalty point obligation is included in food,“Food, beverage, hotel, and otherother” expenses. Revenues recorded to food,“Food, beverage, hotel, and otherother” and offset to gaming“Gaming” revenues were as follows:
| | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Food and beverage | Food and beverage | $ | 54.0 | | | $ | 46.1 | | | $ | 156.8 | | | $ | 126.3 | | Food and beverage | $ | 54.0 | | | $ | 54.0 | | | $ | 163.1 | | | $ | 156.8 | |
| Hotel | Hotel | 37.6 | | | 35.7 | | | 106.4 | | | 92.8 | | Hotel | 39.1 | | | 37.6 | | | 104.8 | | | 106.4 | |
| Other | Other | 4.0 | | | 3.2 | | | 9.3 | | | 7.2 | | Other | 3.5 | | | 4.0 | | | 9.8 | | | 9.3 | |
| Total complimentaries associated with gaming contracts | Total complimentaries associated with gaming contracts | $ | 95.6 | | | $ | 85.0 | | | $ | 272.5 | | | $ | 226.3 | | Total complimentaries associated with gaming contracts | $ | 96.6 | | | $ | 95.6 | | | $ | 277.7 | | | $ | 272.5 | |
Customer-related Liabilities
The Company has three general types of liabilities related to contracts with customers: (i) the obligation associated with its mychoicePENN Play program (loyalty points and tier status benefits), (ii) advance payments on goods and services yet to be provided and for unpaid wagers, and (iii) deferred revenue associated with third-party online sports betting and/or iCasino operators for online sports betting and iCasino market access.
Our myPENN Playchoice program connects the Company’s brands under one loyalty program and allows members to earn loyalty points, that areor “PENN Cash”, redeemable for slot play and complimentaries, such as food and beverage at our restaurants, lodging at our hotels, mythe PENN Playchoice redemption mall,marketplace that features popular retailers, and products offered at our retail stores across the vast majority of our properties. In addition, members of the mychoicePENN Play program earn credit toward tier status, which entitles them to receive certain other benefits, such as priority access, discounts, gifts, trips to PENN destinations, partner experiences, and free play.PENN Cash. The obligation associated with our mychoicePENN Play program, which is included in “Accrued expenses and other current liabilities” within our unaudited Consolidated Balance Sheets, was $35.8$34.4 million and $37.6$39.3 million as of September 30, 20222023 and December 31, 2021,2022, respectively, and consisted principally of the obligation associated with the loyalty points. Our loyalty point obligations are generally settled within six months of issuance. Changes between the opening and closing balances primarily relate to the timing of our customers’ election to redeem loyalty points as well as the timing of when our customers receive their earned tier status benefits.
The Company’s advance payments on goods and services yet to be provided and for unpaid wagers primarily consist of the following: (i) deposits on rooms and convention space, (ii) money deposited on behalf of a customer in advance of their property visit (referred to as “safekeeping” or “front money”), (iii) money deposited in an online wallet not yet wagered or wagered and not yet withdrawn, (iv) outstanding tickets generated by slot machine play, sports betting, or pari-mutuel wagering, (v) outstanding chip liabilities, (vi) unclaimed jackpots, and (vii) gift cards redeemable at our properties. Unpaid wagers generally represent obligations stemming from prior wagering events, of which revenue was previously recognized. The Company’s advance payments on goods and services yet to be provided and for unpaid wagers were $115.9$114.9 million and $112.0$125.8 million as of September 30, 20222023 and December 31, 2021, respectively. Advance payments on goods2022, respectively, and services yet to be provided and for unpaid wagers are included in “Accrued expenses and other current liabilities” within our unaudited Consolidated Balance Sheets.
The Company’s deferred revenue is primarily related to PENN Interactive, Ventures, LLC (“PENN Interactive”)our wholly-owned interactive division, which enters into multi-year agreements with third-party online sports betting and/or iCasino operators for online sports betting and iCasino market access across our portfolio of properties. We recognized $0.7 million and $0.5 million of previously deferred revenue during the three months ended September 30, 2023 and 2022, respectively, and $2.4 million and $4.2 million during the nine months ended September 30, 2023 and 2022, respectively. Deferred revenue primarily associated with third-party online sports betting and/or iCasino operators for online sports betting and iCasino market access, which is included in “Other long-term liabilities” within our unaudited Consolidated Balance Sheets, was $56.5 million and $46.5 million as of September 30, 2023 and December 31, 2022, respectively.
within our unaudited Consolidated Balance Sheets was $55.0 million and $52.2 million as of September 30, 2022 and December 31, 2021, respectively.
Advertising: The Company expenses advertising costs the first time the advertising takes place or as incurred. Advertising expenses, which generally relate to media placement costs and are primarily included in “Gaming” expenses within the unaudited Consolidated Statements of Operations, were $18.4 million and $27.1 million for the three months ended September 30, 2023 and 2022, respectively, and $62.8 million and $69.7 million for the three and nine months ended September 30, 2022, respectively, as compared to $26.4 million2023 and $58.8 million for the three and nine months ended September 30, 2021,2022, respectively.
Gaming and Pari-mutuel Taxes: We are subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which we operate, as well as taxes on revenues derived from arrangements which allow for third-party online sports betting and/or iCasino partners to operate online casinossportsbooks and online sportsbooksiCasinos under our gaming licenses. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state, andprovincial and/or local jurisdictions in the states and provinces where or in which the wagering occurs. Also, included in gaming and pari-mutuel taxes are costs to support the operations of local regulatory authorities which some statesjurisdictions require us to pay. Gaming and pari-mutuel taxes are recorded in “Gaming” expenseexpenses or “Food, beverage, hotel, and other” expenses within the unaudited Consolidated Statements of Operations, and were $562.9 million and $540.3 million for the three months ended September 30, 2023 and 2022, respectively, and $1.7 billion and $1.6 billion for the three and nine months ended September 30, 2023 and 2022, respectively, as compared to $505.8respectively.
Inventory, net: Inventory is accounted for using the average cost or first-in or first-out (“FIFO”) method. Inventory accounted for under the average cost and FIFO methods are stated at the lower of cost or net realizable value. Inventory balances substantially consist of finished goods and were $5.3 million and $1.4 billion for the three and nine months ended$5.0 million as of September 30, 2021,2023 and December 31, 2022, respectively.
Foreign Currency Translation: The functional currency of the Company’s foreign subsidiaries is the local currency in which the subsidiary operates. Balance sheet accounts are translated at the exchange rate in effect at each balance sheet date. Translation adjustments resulting from this process are recorded to other comprehensive income or loss. Revenues and expenses are translated at the average exchange rates during the year. Gains or losses resulting from foreign currency transactions are included in “Other” within our unaudited Consolidated Statements of Operations.
Comprehensive Income (Loss) and Accumulated Other Comprehensive Loss: Comprehensive income (loss) includes net income (loss) and all other non-stockholder changes in equity, or other comprehensive income.income (loss). The balance of accumulated other comprehensive loss consists solely of foreign currency translation adjustments.
Earnings (Loss) Per Share: Basic earnings (loss) per share (“EPS”) is computed by dividing net income (loss) applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution, if any, for all potentially-dilutive securities such as warrants, stock options, unvested restricted stock awards (“RSAs”) and restricted stock units (“RSUs”) (collectively with RSAs, “restricted stock”), outstanding convertible preferred stock and convertible debt.
HoldersAs described in Note 13, “Stockholders’ Equity and Stock-based Compensation,” on August 11, 2023 all remaining 354 outstanding shares of the Company’s Series D Preferred Stock (as defined in Note 10, “Investments in13, “Stockholders’ Equity and Advances to Unconsolidated Affiliates”Stock-based Compensation”) became eligible for the conversion and were converted to common stock. There are no outstanding shares of Series D Preferred Stock as of September 30, 2023. Holders of the Company’s Series D Preferred Stock were entitled to participate equally and ratably in all dividends and distributions paid to holders of PENN Common Stockcommon stock irrespective of any vesting requirement. Accordingly, the Series D Preferred Stock shares arewere considered a participating security and the Company is required to apply the two-class method to consider the impact of the preferred shares on the calculation of basic and diluted EPS. The previous holders of the Company’s Series D Preferred Stock arewere not obligated to absorb losses; therefore, in reporting periods where the Company is in a net loss position, it doesdid not apply the two-class method. In reporting periods where the Company iswas in a net income position, the two-class method iswas applied by allocating all earnings during the period to common shares and preferred shares. See Note 14, “Earnings per Share,”Share” for more information.Guarantees and Indemnifications: The Company accounts for indemnity obligations in accordance with the Accounting Standards Codification (“ASC”) 460-20, “Contingencies” and records a liability at fair value. Pursuant to the Barstool SPA (as defined within Note 6, “Acquisitions and Dispositions,”) the Company agreed to indemnify Barstool and its subsidiaries and David Portnoy for certain tax matters. The indemnity provisions generally provide for the Company’s control of defense and settlement of claims, as well as certain other costs associated with potential tax matters related to Barstool and its subsidiaries and David Portnoy. The Company has not previously incurred costs to settle claims under this indemnification obligation. The Company has recorded liabilities of $70.0 million and none for this agreement as of September 30, 2023 and December 31, 2022, respectively. See Note 6, “Acquisitions and Dispositions” for more information.
Voting Interest Entities and Variable Interest Entities: The Company consolidates all subsidiaries or other entities in which it has a controlling financial interest. The consolidation guidance requires an analysis to determine if an entity should be evaluated for consolidation using the VOE model or the VIE model. Under the VOE model, controlling financial interest is generally defined as a majority ownership of voting rights. Under the VIE model, controlling financial interest is defined as (i) the power to direct activities that most significantly impact the economic performance of the entity and (ii) the obligation to absorb losses of or the right to receive benefits from the entity that could potentially be significant to the entity. For those entities that qualify as a VIE, the primary beneficiary is generally defined as the party who has a controlling financial interest in the VIE. The Company consolidates the financial position and results of operations of every VOE in which it has a controlling financial interest and VIEs in which it is considered to be the primary beneficiary. See Note 10, “Investments in and Advances to Unconsolidated Affiliates.” Note 3—New Accounting Pronouncements
In June 2022, the FASBFinancial Accounting Standard Board (the “FASB”) issued ASU 2022-03, “Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions” (“ASU 2020-03”2022-03”). ASU 2020-032022-03 clarifies the guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and requires specific disclosures related to such
an equity security. Specifically, ASU 2022-03 clarifies that a “contractual sale restriction prohibiting the sale of an equity security is a characteristic of the reporting entity holding the equity security” and is not included in the equity security’s unit of account. Accordingly, the Company is no longer permitted to apply a discount related to the contractual sale restriction, or lack of marketability, when measuring the equity security’s fair value. In addition, ASU 2020-032022-03 prohibits an entity from recognizing a contractual sale restriction as a separate unit of account. ASU 2020-032022-03 will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluatingAlthough we are still finalizing our assessment of the impact of the adoption of ASU 2020-032022-03, which is effective January 1, 2024, we currently do not expect it to have a material impact on our Consolidated Financial Statements.
In March 2020,2023, the FASB issued ASU 2020-04, “Reference Rate Reform2023-02, “Investments—Equity Method and Joint Ventures (Topic 848)323): FacilitationAccounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Effects of Reference Rate Reform on Financial Reporting”Emerging Issues Task Force)” (“ASU 2020-04”2023-02”). ASU 2020-04 provides an optional expedient and exceptions2023-02 introduced the option to apply the proportional amortization method to account for applying GAAP to contracts, hedging relationships,investments made primarily for the purpose of receiving income tax credits and other transactions affected by reference rate reform ifincome tax benefits when certain criteriarequirements are met. In responseaddition, ASU 2023-02 limited the proportional amortization method to the concerns about structural risks of interbank offered rates and, particularly, the risk of cessationinvestments in low-income-housing tax credit structures. ASU 2023-02 will be effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Although we are still finalizing our assessment of the London Interbank Offered Rate (referred to as “LIBOR”), regulators in several jurisdictions around the world have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction-based and less susceptible to manipulation. ASU 2020-04 also provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. The interest rates associated with the Company’s previous borrowings under its Senior Secured Credit Facilities (as defined in Note 8, “Long-term Debt”) were tied to LIBOR. Subsequent to the amendmentimpact of the Senior Secured Credit Facilities on May 3, 2022, the Company’s borrowings are tied to SOFR (see Note 8, “Long-term Debt”), upon which the Company adopted ASU 2020-04. The adoption of ASU 2020-04 did2023-02, which is effective January 1, 2024, we currently do not expect it to have ana material impact on our unaudited Consolidated Financial Statements. In August 2020, the FASB issued ASU 2020-06, “Debt—Debt with Conversion and Other Options (Topic 470) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Topic 814): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity” (“ASU 2020-06”). ASU 2020-06 eliminates the number of accounting models used to account for convertible debt instruments and convertible preferred stock. The update also amends the disclosure requirements for convertible instruments and EPS in an effort to increase financial reporting transparency.
The new standard impacts the Company’s existing 2.75% convertible senior notes due May 2026 (“Convertible Notes”) which prior to adoption of the new standard, were accounted for under the cash conversion feature model. The cash conversion feature model is eliminated under the new standard and entities will no longer separately present in stockholders’ equity an embedded conversion feature of a debt instrument.
The new guidance also requires the use of the if-converted method when calculating diluted EPS for convertible instruments and the treasury stock method should no longer be used. Under the new guidance, convertible instruments that may be settled in cash or shares (e.g., the Company’s Convertible Notes) are to be included in the calculation of diluted EPS if the effect is more dilutive, with no option for rebutting the presumption of share settlement based on stated policy or past experience. Each of these requirements are consistent with the Company’s previous method for calculating diluted EPS.
The Company adopted ASU 2020-06 effective January 1, 2022, using the modified retrospective approach. Adoption of ASU 2020-06 resulted in reclassification of the $88.2 million cash conversion feature related to the Company’s Convertible Notes, from stockholders’ equity to liabilities. As a result of the adoption, the Company recognized as a cumulative effect adjustment an increase to the January 1, 2022 opening balance of retained earnings of $18.9 million, net of taxes.
Note 4—Hurricane Laura
On August 27, 2020, Hurricane Laura made landfall in Lake Charles, Louisiana, which caused significant damage to our L’Auberge Lake Charles property, and closure of the propertywhich closed for approximately two weeks. The Company maintains insurance, subject to certain deductibles and coinsurance, that covers business interruption, including lost profits, and covers the repair or replacement of assets that suffered losses.
The Company recorded a receivable relating to our estimate of repairs and maintenance costs which have been incurred and property and equipment which have been written off, and for which we deem the recovery of such costs and property and equipment from our insurers to be probable. The insurance recovery receivable was included in “Accounts Receivable, net” within the unaudited Consolidated Balance Sheets. As we deemed it probable that the proceeds to be recovered from our insurers exceedswould exceed the total of our insurance recovery recorded and our insurers’ deductible and coinsurance, we did not record any loss associated with the impact of this natural disaster. Timing differences exist between the recognition of (i) impairment losses and capital expenditures made to repair or restore the assets and (ii) the receipt of insurance proceeds within the unaudited Consolidated Financial Statements.
During the three months ended September 30, 2023 and 2022, we received $0.3 million and $1.9 million of insurance claim proceeds related to property damage, respectively, which resulted in a gain of $0.3 million and $1.9 million, respectively. During the nine months ended September 30, 2023 and 2022, we received $13.9 million and $39.4 million of insurance claim proceeds related to property damage, respectively, which resulted in a gain of $13.9 million and $10.7 million, respectively. The property damage proceeds are included in “Other” expenses within the unaudited Consolidated Statements of Operations.
Additionally, during the three and nine months ended September 30, 2023, we received $14.0 million in business interruption insurance proceeds, which are included in “General and administrative” expenses within the unaudited Consolidated Statements of Operations.
As of December 31, 2021, the receivable was $28.7 million. During the three and nine months ended September 30, 2022, we received additional insurance claim proceeds totaling $1.9 million and $39.4 million, respectively, resulting in a gain of $1.9 million and $10.7 million, respectively, which is included in “General and administrative” within our unaudited Consolidated Statements of Operations.
As of November 3, 2022, the insurance claim remains open, and we expect to receive additional future proceeds.
We will record proceeds in excess of the recognized losses and lost profits under our business interruption insurance as a gain contingency in accordance with ASC 450, “Contingencies,” which we expect to recognize at the time of final settlement or when nonrefundable cash advances are made in a period subsequentSubsequent to September 30, 2022.2023, the Company received its final insurance payment related to business interruption proceeds totaling $5.6 million.
The following table summarizes the cumulative financial impact of Hurricane Laura related matters:
| | | | | | | | | | | | | Life to date through |
| (in millions) | (in millions) | September 30, 2022 | | December 31, 2021 | (in millions) | September 30, 2023 | | December 31, 2022 |
| Insurance proceeds received through the end of the period | $ | 86.9 | | | $ | 47.5 | | |
| Insurance proceeds related to property damage received through the end of the period | | Insurance proceeds related to property damage received through the end of the period | $ | 100.8 | | | $ | 86.9 | |
| Insurance proceeds related to business interruption received through the end of the period | | Insurance proceeds related to business interruption received through the end of the period | $ | 14.0 | | | $ | — | |
| Deductible | Deductible | $ | 15.0 | | | $ | 15.0 | | Deductible | $ | 15.0 | | | $ | 15.0 | |
| Coinsurance | Coinsurance | $ | 2.5 | | | $ | 2.5 | | Coinsurance | $ | 2.5 | | | $ | 2.5 | |
| Clean-up, restoration, and other costs | Clean-up, restoration, and other costs | $ | 52.8 | | | $ | 52.8 | | Clean-up, restoration, and other costs | $ | 52.8 | | | $ | 52.8 | |
| Fixed asset write-off | Fixed asset write-off | $ | 23.2 | | | $ | 23.2 | | Fixed asset write-off | $ | 23.2 | | | $ | 23.2 | |
| Inventory write-off | Inventory write-off | $ | 0.2 | | | $ | 0.2 | | Inventory write-off | $ | 0.2 | | | $ | 0.2 | |
| Insurance receivable | $ | — | | | $ | 28.7 | | |
Note 5—Revenue Disaggregation
Our revenues are generated principally by providing the following types of services: (i) gaming, includinginclusive of retail sports betting, iCasino, retail and online sports betting; (ii) food and beverage; (iii) hotel; (iv) advertising; (v) retail; and (iv)(vi) other. Other revenues are principally comprised of ancillary gaming-related activities, such as commissions received on ATM transactions, racing, PENN Interactive’s social gaming, and revenue from third-party online sports betting and/or iCasino operators and the related gross-up for taxes.taxes, racing operations, and commissions received on ATM transactions. Our revenue is disaggregated by type of revenue and geographic location of the related properties, which is consistent with our reportable segments, as follows:
| | | For the three months ended September 30, 2022 | | For the three months ended September 30, 2023 |
| (in millions) | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
| Revenues: | Revenues: | | | | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 616.8 | | | $ | 260.0 | | | $ | 102.8 | | | $ | 268.7 | | | $ | 69.2 | | | $ | — | | | $ | — | | | $ | 1,317.5 | | Gaming | $ | 610.8 | | | $ | 236.8 | | | $ | 94.5 | | | $ | 260.1 | | | $ | 49.9 | | | $ | — | | | $ | — | | | $ | 1,252.1 | |
| Food and beverage | Food and beverage | 32.6 | | | 32.8 | | | 21.7 | | | 13.7 | | | — | | | 0.5 | | | — | | | 101.3 | | Food and beverage | 35.4 | | | 35.5 | | | 18.2 | | | 15.0 | | | — | | | 0.5 | | | — | | | 104.6 | |
| Hotel | Hotel | 13.0 | | | 26.4 | | | 25.7 | | | 9.1 | | | — | | | — | | | — | | | 74.2 | | Hotel | 16.9 | | | 25.5 | | | 17.5 | | | 10.8 | | | — | | | — | | | — | | | 70.7 | |
| Advertising | | Advertising | — | | | — | | | — | | | — | | | 19.8 | | | — | | | — | | | 19.8 | |
| Retail | | Retail | 1.8 | | | 1.5 | | | 1.4 | | | 1.0 | | | 6.0 | | | — | | | — | | | 11.7 | |
| Other | Other | 23.0 | | | 10.6 | | | 6.3 | | | 6.9 | | | 89.5 | | | 3.7 | | | (8.0) | | | 132.0 | | Other | 22.1 | | | 8.9 | | | 3.5 | | | 6.5 | | | 120.6 | | | 4.0 | | | (5.1) | | | 160.5 | |
| Total revenues | Total revenues | $ | 685.4 | | | $ | 329.8 | | | $ | 156.5 | | | $ | 298.4 | | | $ | 158.7 | | | $ | 4.2 | | | $ | (8.0) | | | $ | 1,625.0 | | Total revenues | $ | 687.0 | | | $ | 308.2 | | | $ | 135.1 | | | $ | 293.4 | | | $ | 196.3 | | | $ | 4.5 | | | $ | (5.1) | | | $ | 1,619.4 | |
| | | For the three months ended September 30, 2021 | | For the three months ended September 30, 2022 |
| (in millions) | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
| Revenues: | Revenues: | | | | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 616.2 | | | $ | 253.0 | | | $ | 96.7 | | | $ | 259.3 | | | $ | 31.0 | | | $ | — | | | $ | — | | | $ | 1,256.2 | | Gaming | $ | 616.8 | | | $ | 260.0 | | | $ | 102.8 | | | $ | 268.7 | | | $ | 69.2 | | | $ | — | | | $ | — | | | $ | 1,317.5 | |
| Food and beverage | Food and beverage | 28.0 | | | 28.7 | | | 19.5 | | | 11.0 | | | — | | | 0.4 | | | — | | | 87.6 | | Food and beverage | 32.6 | | | 32.8 | | | 21.7 | | | 13.7 | | | — | | | 0.5 | | | — | | | 101.3 | |
| Hotel | Hotel | 8.2 | | | 26.8 | | | 23.9 | | | 8.8 | | | — | | | — | | | — | | | 67.7 | | Hotel | 13.0 | | | 26.4 | | | 25.7 | | | 9.1 | | | — | | | — | | | — | | | 74.2 | |
| Advertising | | Advertising | — | | | — | | | — | | | — | | | 7.2 | | | — | | | — | | | 7.2 | |
| Retail | | Retail | 1.6 | | | 1.6 | | | 1.8 | | | 0.4 | | | — | | | — | | | — | | | 5.4 | |
| Other | Other | 20.0 | | | 9.7 | | | 5.6 | | | 6.6 | | | 62.0 | | | 3.1 | | | (6.7) | | | 100.3 | | Other | 21.4 | | | 9.0 | | | 4.5 | | | 6.5 | | | 82.3 | | | 3.7 | | | (8.0) | | | 119.4 | |
| Total revenues | Total revenues | $ | 672.4 | | | $ | 318.2 | | | $ | 145.7 | | | $ | 285.7 | | | $ | 93.0 | | | $ | 3.5 | | | $ | (6.7) | | | $ | 1,511.8 | | Total revenues | $ | 685.4 | | | $ | 329.8 | | | $ | 156.5 | | | $ | 298.4 | | | $ | 158.7 | | | $ | 4.2 | | | $ | (8.0) | | | $ | 1,625.0 | |
| | | For the nine months ended September 30, 2022 | | For the nine months ended September 30, 2023 |
| (in millions) | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
| Revenues: | Revenues: | | | | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 1,837.3 | | | $ | 807.6 | | | $ | 295.8 | | | $ | 792.2 | | | $ | 201.4 | | | $ | — | | | $ | — | | | $ | 3,934.3 | | Gaming | $ | 1,856.6 | | | $ | 728.0 | | | $ | 281.3 | | | $ | 787.5 | | | $ | 216.1 | | | $ | — | | | $ | — | | | $ | 3,869.5 | |
| Food and beverage | Food and beverage | 96.0 | | | 96.8 | | | 62.6 | | | 39.4 | | | — | | | 3.0 | | | — | | | 297.8 | | Food and beverage | 108.3 | | | 100.8 | | | 53.5 | | | 44.4 | | | — | | | 2.7 | | | — | | | 309.7 | |
| Hotel | Hotel | 31.4 | | | 74.4 | | | 74.4 | | | 25.8 | | | — | | | — | | | — | | | 206.0 | | Hotel | 42.9 | | | 72.1 | | | 45.5 | | | 28.4 | | | — | | | — | | | — | | | 188.9 | |
| Advertising | | Advertising | — | | | — | | | — | | | — | | | 92.5 | | | — | | | — | | | 92.5 | |
| Retail | | Retail | 5.6 | | | 4.5 | | | 4.0 | | | 2.4 | | | 29.8 | | | — | | | — | | | 46.3 | |
| Other | Other | 64.1 | | | 31.0 | | | 18.4 | | | 20.2 | | | 253.7 | | | 14.4 | | | (23.8) | | | 378.0 | | Other | 62.1 | | | 25.9 | | | 10.5 | | | 19.3 | | | 348.9 | | | 13.8 | | | (19.9) | | | 460.6 | |
| Total revenues | Total revenues | $ | 2,028.8 | | | $ | 1,009.8 | | | $ | 451.2 | | | $ | 877.6 | | | $ | 455.1 | | | $ | 17.4 | | | $ | (23.8) | | | $ | 4,816.1 | | Total revenues | $ | 2,075.5 | | | $ | 931.3 | | | $ | 394.8 | | | $ | 882.0 | | | $ | 687.3 | | | $ | 16.5 | | | $ | (19.9) | | | $ | 4,967.5 | |
| | | For the nine months ended September 30, 2021 | | For the nine months ended September 30, 2022 |
| (in millions) | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total | (in millions) | Northeast | | South | | West | | Midwest | | Interactive (1) | | Other | | Intersegment Eliminations (2) | | Total |
| Revenues: | Revenues: | | | | | | | | | | | | | | | | Revenues: | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 1,745.7 | | | $ | 802.8 | | | $ | 262.5 | | | $ | 748.3 | | | $ | 84.4 | | | $ | — | | | $ | — | | | $ | 3,643.7 | | Gaming | $ | 1,837.3 | | | $ | 807.6 | | | $ | 295.8 | | | $ | 792.2 | | | $ | 201.4 | | | $ | — | | | $ | — | | | $ | 3,934.3 | |
| Food and beverage | Food and beverage | 73.0 | | | 81.2 | | | 49.6 | | | 27.7 | | | — | | | 0.7 | | | — | | | 232.2 | | Food and beverage | 96.0 | | | 96.8 | | | 62.6 | | | 39.4 | | | — | | | 3.0 | | | — | | | 297.8 | |
| Hotel | Hotel | 20.7 | | | 70.5 | | | 56.3 | | | 21.7 | | | — | | | — | | | — | | | 169.2 | | Hotel | 31.4 | | | 74.4 | | | 74.4 | | | 25.8 | | | — | | | — | | | — | | | 206.0 | |
| Advertising | | Advertising | — | | | — | | | — | | | — | | | 23.9 | | | — | | | — | | | 23.9 | |
| Retail | | Retail | 4.6 | | | 5.0 | | | 4.6 | | | 1.5 | | | — | | | — | | | — | | | 15.7 | |
| Other | Other | 56.4 | | | 27.8 | | | 14.3 | | | 17.5 | | | 190.9 | | | 6.1 | | | (25.6) | | | 287.4 | | Other | 59.5 | | | 26.0 | | | 13.8 | | | 18.7 | | | 229.8 | | | 14.4 | | | (23.8) | | | 338.4 | |
| Total revenues | Total revenues | $ | 1,895.8 | | | $ | 982.3 | | | $ | 382.7 | | | $ | 815.2 | | | $ | 275.3 | | | $ | 6.8 | | | $ | (25.6) | | | $ | 4,332.5 | | Total revenues | $ | 2,028.8 | | | $ | 1,009.8 | | | $ | 451.2 | | | $ | 877.6 | | | $ | 455.1 | | | $ | 17.4 | | | $ | (23.8) | | | $ | 4,816.1 | |
(1) Other revenues within the Interactive segment are inclusive of gaming tax reimbursement amounts chargedrelated to third-party online sports betting and/or iCasino partners for online sports betting and iCasino market access of $102.6 million and $63.0 million for the three months ended September 30, 2023 and 2022, respectively, and $283.4 million and $168.7 million for the three and nine months ended September 30, 2022, respectively, as compared to $44.0 million2023, and $129.5 million for the three and nine months ended September 30, 2021,2022, respectively.
(2) Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by PENN Interactive.
Note 6—Acquisitions and Dispositions
Tropicana Las Vegas
On January 11, 2022, PENN entered into a definitive purchase agreement to sell its outstanding equity interest in Tropicana, which has the gaming licenseBarstool Acquisition and operates the Tropicana, to Bally’s Corporation (“Bally’s”). The transaction closed on September 26, 2022.
Score Media and Gaming Inc.Disposition
On October 19, 2021,February 17, 2023, we acquired the remaining 64% of the outstanding shares of Barstool common stock not already owned by us for consideration of approximately $405.5 million, which is inclusive of cash and common stock issuance, repayment of Barstool indebtedness of $23.8 million, transaction expenses and other purchase price adjustments in accordance with GAAP (the “Barstool Acquisition”). Prior to the acquisition, we held a 36% ownership interest, which was accounted for under the equity method. At the closing of the Barstool Acquisition, we obtained 100% of Score Mediathe Barstool common stock, and Gaming, Inc. (“theScore”) for a purchase pricedetermined the fair value of approximately $2.1 billion. The acquisition provides us withBarstool to be $660.0 million based on market participant assumptions, as discussed below. Upon the technology, resources and audience reach to accelerate our media and sports betting strategy across North America. Under the termscompletion of the agreement, 1317774 B.C. Ltd. (the “Purchaser”),Barstool Acquisition, Barstool became an indirectlyindirect wholly owned subsidiary of PENN, acquired eachPENN. We issued 2,442,809 shares of the issued and outstanding theScore shares (other than those held by PENN and its subsidiaries) for US$17.00 per share in cash consideration, totaling $922.8 million, and either 0.2398 of a share ofour common stock par value $0.01 of PENN Common Stock or, if validly elected, 0.2398 of an exchangeable share in the capital of the Purchaser (each whole share, an “Exchangeable Share”), totaling 12,319,340 shares of PENN Common Stock and 697,539 Exchangeable Shares for approximately $1.0 billion. Each Exchangeable Share will be exchangeable into one share of PENN Common Stock at the option of the holder, subject to certain adjustments. In addition, Purchaser may redeem all outstanding Exchangeable Shares in exchangeformer stockholders of Barstool for shares of PENN Common Stock at any time following the fifth anniversary of the closing, or earlier under certain circumstances. SeeBarstool Acquisition (see Note 13, “Stockholders’ Equity and Stock-Based Compensation” for further information.information) and utilized $315.3 million of cash to complete the Barstool Acquisition, inclusive of transaction expenses and repayment of Barstool indebtedness. The Company held 36% of the outstanding shares of theScoreBarstool common stock prior to the acquisitionBarstool Acquisition and, as such, the acquisition date estimated fair value of this previously held investment was a component of the purchase consideration. Based on the acquisition date fair value of Barstool of $660.0 million and the carrying amount of this investment of $58.9$171.1 million, the Company recorded a gain of $2.9$66.5 million related to remeasurement of the equity security investment immediately prior to the acquisition date, which wasis included in “Other”“Gain on Barstool Acquisition, net” within our unaudited Consolidated Statements of Operations. The Company also recorded a gain of $16.9 million related to the acquisition of the remaining 64% of Barstool common stock, which is included in “Gain on Barstool Acquisition, net” within our unaudited Consolidated Statements of Operations.
The following table reflects the allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, with the excess recorded as goodwill. Duringgoodwill, at the three months ended September 30, 2022, we made the following purchase price measurement period adjustment:February 17, 2023 acquisition date.
| | | | | | | | | | | | | | | | | |
| (in millions) | Estimated fair value, as previously reported.(1) | | Measurement period adjustments | | Final fair value |
| Cash and cash equivalents | $ | 160.3 | | $ | — | | $ | 160.3 |
| Other current assets | 22.8 | | — | | 22.8 |
| ROU assets | 2.6 | | — | | 2.6 |
| Property and equipment | 1.8 | | — | | 1.8 |
| Goodwill | 1,690.2 | | 1.5 | | 1,691.7 |
| Other intangible assets | | | | | |
| Gaming technology | 160.0 | | — | | 160.0 |
| Media technology | 57.0 | | — | | 57.0 |
| Tradename | 100.0 | | — | | 100.0 |
| Advertising relationships | 11.0 | | — | | 11.0 |
| Customer relationships | 8.0 | | — | | 8.0 |
| Re-acquired right | 2.6 | | — | | 2.6 |
| Other long-term assets | 5.2 | | — | | 5.2 |
| Total assets | $ | 2,221.5 | | | $ | 1.5 | | | $ | 2,223.0 | |
| | | | | | |
| Accounts payable, accrued expenses and other current liabilities | $ | 67.9 | | | $ | 1.5 | | | $ | 69.4 | |
| Deferred tax liabilities | 69.2 | | | — | | | 69.2 | |
| Other non-current liabilities | 1.7 | | | — | | | 1.7 | |
| Total liabilities | 138.8 | | | 1.5 | | | 140.3 | |
| Net assets acquired | $ | 2,082.7 | | | $ | — | | | $ | 2,082.7 | |
(1)Amounts were initially reported within the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022. | | | | | |
| (in millions) | Fair value |
| Cash and cash equivalents | $ | 10.1 |
| Accounts receivable | 44.8 |
| Inventory | 25.2 |
| Other current assets | 5.0 |
| Lease right-of-use assets | 13.5 |
| Property and equipment | 3.8 |
| Goodwill | 231.9 |
| Other intangible assets | |
| Barstool tradename | 420.0 |
| Advertising relationships | 32.0 |
| Other tradenames and brands | 29.0 |
| Customer relationships | 11.0 |
| Other long-term assets | 18.7 |
| Total assets | $ | 845.0 | |
| | |
| Accounts payable, accrued expenses and other current liabilities | $ | 38.7 | |
| Deferred income taxes | 115.9 | |
| Other long-term liabilities | 30.4 | |
| Total liabilities | 185.0 | |
| Net assets acquired | $ | 660.0 | |
The Company used the income, or cost approach for the valuation, as appropriate, and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to the Company in the principal or most advantageous market for the asset or liability.
Acquired identifiable intangible assets consistconsisted of gaming technology, media technology,the Barstool tradename, advertising relationships, other tradenames and brands, and customer relationships, and a re-acquired right. Tradename isrelationships. The Barstool tradename was determined to be an indefinite-lived intangible asset. All other intangible assets arewere determined to be definite-lived with assigned useful lives primarily ranging from 1-72-5 years. The re-acquired right intangible asset was assigned a 17.8-year useful life based on the remaining term of a pre-acquisition market access contract between PENN and theScore.
Goodwill, none of which iswas deductible under the Canadian Income Tax Act, isfor tax purposes, represented approximately 81.2%35.1% of the net assets acquired and representswas allocated to the Company’s Interactive segment. Goodwill was primarily attributable to synergies incremental market share capture and expansion into new markets notcross selling opportunities to Barstool’s existing as of the acquisition date, and future technology development.customer base.
The following valuation approaches were utilized to determine the fair value of each intangible asset:asset at the February 17, 2023 acquisition date:
| | | | | | | | |
| Intangible Asset | | Valuation Approach |
Gaming technologyBarstool tradename | Relief-from-royalty (variation of income approach) |
Media technology | Replacement cost |
Tradename | Relief-from-royalty (variation of income approach) |
| Advertising relationships | | With-and-without (variation of income approach) |
| Other tradenames and brands | | Relief-from-royalty (variation of income approach) |
| Customer relationships | Replacement cost |
Re-acquired right | Replacement cost |
Barstool’s revenue and net loss were included in our results for the period beginning February 17, 2023 through August 7, 2023, the day prior to the Barstool SPA, as described below. Barstool’s revenue and net loss for the period beginning July 1, 2023 through August 7, 2023, included in the unaudited Consolidated Statements of Operations, were $18.3 million and $7.8 million, respectively. Barstool’s revenue and net loss for the period beginning February 17, 2023 through August 7, 2023, included in the unaudited Consolidated Statements of Operations, were $99.2 million and $23.9 million, respectively.
Unaudited Pro Forma Financial InformationOn August 8, 2023, PENN entered into a Sportsbook Agreement (the “Sportsbook Agreement”) with ESPN, which provides for a long-term strategic relationship between PENN and ESPN relating to online sports betting in the United States. Pursuant to the Sportsbook Agreement, PENN will rebrand its existing Barstool Sportsbook across all online platforms in the United States as ESPN BET (the “Sportsbook”) and will oversee daily operations of the Sportsbook. See Note 12, “Commitments and Contingencies” for more information related to the Sportsbook Agreement.In connection with PENN’s decision to rebrand our online sports betting business from Barstool Sportsbook to ESPN BET pursuant to the Sportsbook Agreement as discussed above, PENN entered into the Barstool SPA with David Portnoy on August 8, 2023. Pursuant to the Barstool SPA, PENN sold 100% of the outstanding shares of Barstool to David Portnoy in exchange for nominal cash consideration (one dollar) and certain non-compete and other restrictive covenants. Pursuant to the Barstool SPA, PENN has the right to receive 50% of the gross proceeds received by David Portnoy in any subsequent sale or other monetization event of Barstool.
On August 8, 2023, the Company’s Board of Directors approved the sale of Barstool Sports to David Portnoy, and we classified the assets and liabilities to be disposed of as held-for-sale. These assets and liabilities were measured at the lower of (i) the carrying value when we classified the disposal group as held-for-sale or (ii) the fair value of the disposal group, less costs to sell. The Company recognized a pre-tax loss on disposal of $923.2 million (inclusive of $714.8 million in goodwill and intangible assets write offs and a $70.0 million indemnification liability discussed below) during the third quarter of 2023, included in “Loss on disposal of Barstool” within our unaudited Consolidated Statements of Operations. Pursuant to the Barstool SPA, PENN will indemnify Barstool and its subsidiaries and David Portnoy for certain tax matters. Liabilities associated with the indemnification of $70.0 million were recorded at September 30, 2023, in “Other long-term liabilities” within our unaudited Consolidated Balance Sheets. The indemnity provisions generally provide for the Company’s control of defense and settlement of claims, as well as certain other costs, associated with potential tax matters related to Barstool and its subsidiaries and David Portnoy. Claims under the indemnification are paid upon demand. The Company has not previously incurred costs to settle claims under this indemnification obligation and provisions in the Barstool SPA limit the time within which an indemnification claim can be made to the later of the resolution of the indemnification claim or the relevant statutes of limitations. The maximum potential amount of future payments the Company could be required to make under this indemnification agreement is not estimable at this time due to uncertainties related to potential outcomes and other unique facts and circumstances involved in the Barstool SPA.
The following table includes unaudited pro forma consolidated financial information assuming our acquisitionreflects the major classes of Hitpoint Inc.assets and Lucky Point Inc. (collectively “Hitpoint”), Hollywood Casino Perryville (“Perryville”), Sam Houston Race Park and Valley Race Park (collectively “Sam Houston”), and theScore had occurred asliabilities disposed of January 1, 2021. We acquired Hitpoint on May 11, 2021, Perryville on July 1, 2021, Sam Houston on August 1, 2021, and theScore on October 19, 2021. The pro forma amounts include the historical operating results of PENN and Hitpoint, Perryville, Sam Houston and theScore prior to our acquisitions. The pro forma financial information does not necessarily represent the results that may occur in the future. For the three and nine months ended September 30, 2021, pro forma adjustments directly attributablepursuant to the acquisitions include acquisition and transaction related costs of $15.8 million and $19.5 million, respectively, incurred by both PENN and the respective acquirees. For the three and nine months ended September 30, 2021, pro forma adjustments directly attributable to the acquisitions also include gains of $18.5 million and $53.4 million, respectively, related to our purchaseBarstool SPA, which were part of the remaining 50% of Sam Houston and a net unrealized gain on the equity security investment in theScore.Interactive Segment:
| | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | 2021 |
| Revenues | $ | 1,517.5 | | | $ | 4,404.3 | |
| Net income | $ | 60.9 | | | $ | 288.6 | |
| | | | | |
| (in millions) | August 8, 2023 |
| Current assets | |
| Cash and cash equivalents | $ | 50.9 | |
| Accounts receivable, net | 53.5 | |
| Inventory, net | 21.9 | |
| Other current assets | 6.4 | |
| Total current assets | 132.7 | |
| Property and equipment, net | 8.8 | |
| Goodwill | 231.9 | |
| Other intangible assets, net | 482.9 | |
| Lease right-of-use assets | 21.4 | |
| Other assets | 21.0 | |
| Total assets | $ | 898.7 | |
| |
| Current liabilities | |
| Accounts payable | $ | 11.1 | |
| Accrued expenses and other current liabilities | 23.1 | |
| Total current liabilities | 34.2 | |
| Other long-term liabilities | 19.9 | |
| Total liabilities | $ | 54.1 | |
Note 7—Goodwill and Other Intangible Assets
A reconciliation of goodwill and accumulated goodwill impairment losses, by reportable segment, is as follows:
| | (in millions) | (in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other | | Total | (in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other | | Total |
| Balance as of December 31, 2021 | | | | | | | | | | | | | | |
| Balance as of December 31, 2022 | | Balance as of December 31, 2022 | | | | | | | | | | | | | |
| Goodwill, gross | Goodwill, gross | $ | 923.5 | | | $ | 236.6 | | | $ | 216.8 | | | $ | 1,116.7 | | | $ | 1,724.0 | | | $ | 87.7 | | | $ | 4,305.3 | | Goodwill, gross | $ | 923.5 | | | $ | 236.6 | | | $ | 216.8 | | | $ | 1,116.7 | | | $ | 1,628.4 | | | $ | 87.7 | | | $ | 4,209.7 | |
| Accumulated goodwill impairment losses | Accumulated goodwill impairment losses | (761.4) | | | (61.0) | | | (16.6) | | | (556.1) | | | — | | | (87.7) | | | (1,482.8) | | Accumulated goodwill impairment losses | (798.8) | | | (61.0) | | | (16.6) | | | (556.1) | | | — | | | (87.7) | | | (1,520.2) | |
| Goodwill, net | Goodwill, net | $ | 162.1 | | | $ | 175.6 | | | $ | 200.2 | | | $ | 560.6 | | | $ | 1,724.0 | | | $ | — | | | $ | 2,822.5 | | Goodwill, net | $ | 124.7 | | | $ | 175.6 | | | $ | 200.2 | | | $ | 560.6 | | | $ | 1,628.4 | | | $ | — | | | $ | 2,689.5 | |
| | Goodwill acquired during the period | | Goodwill acquired during the period | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 231.9 | | | $ | — | | | $ | 231.9 | |
| Goodwill disposed of during the period | | Goodwill disposed of during the period | — | | | — | | | — | | | — | | | (231.9) | | | — | | | (231.9) | |
| Effect of foreign currency exchange rates | | Effect of foreign currency exchange rates | — | | | — | | | — | | | — | | | (2.2) | | | — | | | (2.2) | |
| | Effect of foreign currency exchange rates | — | | | — | | | — | | | — | | | (124.8) | | | — | | | (124.8) | | |
| Impairment losses during year | (37.4) | | | — | | | — | | | — | | | — | | | — | | | (37.4) | | |
Other (1) | — | | | — | | | — | | | — | | | 1.5 | | | — | | | 1.5 | | |
| Balance as of September 30, 2022 | | |
| | Balance as of September 30, 2023 | | Balance as of September 30, 2023 | |
| Goodwill, gross | Goodwill, gross | $ | 923.5 | | | $ | 236.6 | | | $ | 216.8 | | | $ | 1,116.7 | | | $ | 1,600.7 | | | $ | 87.7 | | | $ | 4,182.0 | | Goodwill, gross | $ | 923.5 | | | $ | 236.6 | | | $ | 216.8 | | | $ | 1,116.7 | | | $ | 1,626.2 | | | $ | 87.7 | | | $ | 4,207.5 | |
| Accumulated goodwill impairment losses | Accumulated goodwill impairment losses | (798.8) | | | (61.0) | | | (16.6) | | | (556.1) | | | — | | | (87.7) | | | (1,520.2) | | Accumulated goodwill impairment losses | (798.8) | | | (61.0) | | | (16.6) | | | (556.1) | | | — | | | (87.7) | | | (1,520.2) | |
| Goodwill, net | Goodwill, net | $ | 124.7 | | | $ | 175.6 | | | $ | 200.2 | | | $ | 560.6 | | | $ | 1,600.7 | | | $ | — | | | $ | 2,661.8 | | Goodwill, net | $ | 124.7 | | | $ | 175.6 | | | $ | 200.2 | | | $ | 560.6 | | | $ | 1,626.2 | | | $ | — | | | $ | 2,687.3 | |
2022 Interim Assessment for Impairment
During the third quarter of 2022, we identified an indicator of impairment on goodwill and other intangible assets at the Hollywood Casino at Greektown reporting unit due to the majority of the hotel being out of service as a result of a longer than anticipated hotel room renovation related to water damage. As a result, we revised the cash flow projections for the reporting unit to be reflective of current operating results and the related economic environment. As a result of the interim assessment for impairment, during the third quarter of 2022, we recognized impairment charges on our goodwill and gaming licenses of $37.4 million and $65.4 million, respectively. The estimated fair value of the reporting unit was determined through a combination of a discounted cash flow model and a market-based approach, which utilized Level 3 inputs. The estimated fair value of the gaming license was determined by using a discounted cash flow model, which utilized Level 3 inputs. There were no other impairment charges recorded to goodwill and other intangible assets during the three and nine months ended September 30, 2023, as compared to a $37.4 million impairment charge recorded to goodwill during both the three and nine months ended September 30, 2022 and 2021.which pertained to our Northeast segment.
The table below presents the gross carrying amount, accumulated amortization, and net carrying amount of each major class of other intangible assets:
| | | September 30, 2022 | | December 31, 2021 | | September 30, 2023 | | December 31, 2022 |
| (in millions) | (in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | (in millions) | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| Indefinite-lived intangible assets | Indefinite-lived intangible assets | | | | | | | | | | | | Indefinite-lived intangible assets | | | | | | | | | | | |
| Gaming licenses | Gaming licenses | $ | 1,220.0 | | | $ | — | | | $ | 1,220.0 | | | $ | 1,285.4 | | | $ | — | | | $ | 1,285.4 | | Gaming licenses | $ | 1,207.8 | | | $ | — | | | $ | 1,207.8 | | | $ | 1,207.6 | | | $ | — | | | $ | 1,207.6 | |
| Trademarks | Trademarks | 330.5 | | | — | | | 330.5 | | | 338.2 | | | — | | | 338.2 | | Trademarks | 332.1 | | | — | | | 332.1 | | | 332.2 | | | — | | | 332.2 | |
| Other | Other | 0.7 | | | — | | | 0.7 | | | 0.7 | | | — | | | 0.7 | | Other | 0.7 | | | — | | | 0.7 | | | 0.7 | | | — | | | 0.7 | |
| Amortizing intangible assets | Amortizing intangible assets | | Amortizing intangible assets | |
| Customer relationships | Customer relationships | 114.2 | | | (100.3) | | | 13.9 | | | 114.9 | | | (91.4) | | | 23.5 | | Customer relationships | 112.0 | | | (102.6) | | | 9.4 | | | 114.4 | | | (102.0) | | | 12.4 | |
| Technology | Technology | 241.6 | | | (68.9) | | | 172.7 | | | 252.7 | | | (40.5) | | | 212.2 | | Technology | 273.2 | | | (116.3) | | | 156.9 | | | 249.6 | | | (80.4) | | | 169.2 | |
| Other | Other | 26.6 | | | (9.8) | | | 16.8 | | | 19.4 | | | (6.8) | | | 12.6 | | Other | 28.5 | | | (14.0) | | | 14.5 | | | 27.7 | | | (10.9) | | | 16.8 | |
| Total other intangible assets | $ | 1,933.6 | | | $ | (179.0) | | | $ | 1,754.6 | | | $ | 2,011.3 | | | $ | (138.7) | | | $ | 1,872.6 | | |
| Total other intangible assets, net | | Total other intangible assets, net | $ | 1,954.3 | | | $ | (232.9) | | | $ | 1,721.4 | | | $ | 1,932.2 | | | $ | (193.3) | | | $ | 1,738.9 | |
There were no impairment charges recorded to other intangible assets, net during the three and nine months ended September 30, 2023, as compared to a $65.4 million impairment charge recorded to other intangible assets, net during both the three and nine months ended September 30, 2022 which pertained to our Northeast segment.
During the three months ended September 30, 2023, in connection with the Barstool SPA, we recorded a pre-tax loss on disposal of $923.2 million, inclusive of trademarks and other intangible assets write-offs of $482.9 million in our Interactive segment. See Note 6, “Acquisitions and Dispositions.” Amortization expense related to our amortizing intangible assets was $14.3 million for both the three months ended September 30, 2023 and 2022, and $46.2 million and $44.2 million for the three and nine months ended September 30, 2022, respectively, as compared to $2.0 million2023 and $6.7 million for the three and nine months ended September 30, 2021,2022, respectively. The following table presents the estimated amortization expense based on our amortizing intangible assets as of September 30, 20222023 (in millions):
| | Years ending December 31, | Years ending December 31, | | Years ending December 31, | |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 13.2 | | |
| 2023 | 48.3 | | |
| 2023 (excluding the nine months ended September 30, 2023) | | 2023 (excluding the nine months ended September 30, 2023) | $ | 15.0 | |
| 2024 | 2024 | 44.4 | | 2024 | 57.2 | |
| 2025 | 2025 | 29.4 | | 2025 | 37.4 | |
| 2026 | 2026 | 22.9 | | 2026 | 24.3 | |
| 2027 | | 2027 | 21.7 | |
| Thereafter | Thereafter | 45.2 | | Thereafter | 25.2 | |
| Total | Total | $ | 203.4 | | Total | $ | 180.8 | |
Note 8—Long-term Debt
The table below presents long-term debt, net of current maturities, debt discounts and issuance costs:
| | (in millions) | (in millions) | September 30,
2022 | | December 31,
2021 | (in millions) | September 30,
2023 | | December 31,
2022 |
| Senior Secured Credit Facilities: | Senior Secured Credit Facilities: | | | | Senior Secured Credit Facilities: | | | |
| Amended Revolving Credit Facility due 2027 | Amended Revolving Credit Facility due 2027 | $ | — | | | $ | — | | Amended Revolving Credit Facility due 2027 | $ | — | | | $ | — | |
| Amended Term Loan A Facility due 2027 | Amended Term Loan A Facility due 2027 | 543.1 | | | — | | Amended Term Loan A Facility due 2027 | 515.6 | | | 536.2 | |
| Amended Term Loan B Facility due 2029 | Amended Term Loan B Facility due 2029 | 997.5 | | | — | | Amended Term Loan B Facility due 2029 | 987.5 | | | 995.0 | |
| Term Loan A Facility due 2023 | — | | | 583.8 | | |
| Term Loan B-1 Facility due 2025 | — | | | 979.9 | | |
| | 5.625% Notes due 2027 | 5.625% Notes due 2027 | 400.0 | | | 400.0 | | 5.625% Notes due 2027 | 400.0 | | | 400.0 | |
| 4.125% Notes due 2029 | 4.125% Notes due 2029 | 400.0 | | | 400.0 | | 4.125% Notes due 2029 | 400.0 | | | 400.0 | |
| 2.75% Convertible Notes due 2026 | 2.75% Convertible Notes due 2026 | 330.5 | | | 330.5 | | 2.75% Convertible Notes due 2026 | 330.5 | | | 330.5 | |
| Other long-term obligations | Other long-term obligations | 157.2 | | | 146.3 | | Other long-term obligations | 172.6 | | | 156.1 | |
| | 2,828.3 | | | 2,840.5 | | | 2,806.2 | | | 2,817.8 | |
| Less: Current maturities of long-term debt | Less: Current maturities of long-term debt | (55.8) | | | (99.5) | | Less: Current maturities of long-term debt | (56.7) | | | (56.2) | |
| Less: Debt discounts | Less: Debt discounts | (4.7) | | | (73.1) | | Less: Debt discounts | (4.1) | | | (4.6) | |
| Less: Debt issuance costs | Less: Debt issuance costs | (37.6) | | | (30.6) | | Less: Debt issuance costs | (30.0) | | | (35.7) | |
| | $ | 2,730.2 | | | $ | 2,637.3 | | | $ | 2,715.4 | | | $ | 2,721.3 | |
The following is a schedule of future minimum repayments of long-term debt as of September 30, 20222023 (in millions):
| | Years ending December 31: | Years ending December 31: | | Years ending December 31: | |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 18.1 | | |
| 2023 | 56.2 | | |
| 2023 (excluding the nine months ended September 30, 2023) | | 2023 (excluding the nine months ended September 30, 2023) | $ | 18.5 | |
| 2024 | 2024 | 47.6 | | 2024 | 47.6 | |
| 2025 | 2025 | 38.2 | | 2025 | 38.2 | |
| 2026 | 2026 | 479.2 | | 2026 | 512.9 | |
| 2027 | | 2027 | 837.0 | |
| Thereafter | Thereafter | 2,189.0 | | Thereafter | 1,352.0 | |
| Total minimum payments | Total minimum payments | $ | 2,828.3 | | Total minimum payments | $ | 2,806.2 | |
Senior Secured Credit Facilities
In January 2017, the Company entered into an agreement to amend and restate its previous credit agreement, dated October 30, 2013, as amended (the “Credit Agreement”), which provided for: (i) a five-year $700 million revolving credit facility (the “Revolving Facility”); (ii) a five-year $300 million Term Loan A facility (the “Term Loan A Facility”); and (iii) a seven-year $500 million Term Loan B facility (the “Term Loan B Facility” and collectively with the Revolving Facility and the Term Loan A Facility, the “Senior Secured Credit Facilities”).
On October 15, 2018, in connection with the acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”), wethe Company entered into an incremental joinder agreement (the “Incremental Joinder”), which amended the Credit Agreement (the “Amended Credit Agreement”). The Incremental Joinder provided for an additional $430.2 million of incremental loans having the same terms as the existing Term Loan A Facility, with the exception of extending the maturity date, and an additional $1.1 billion of loans as a new tranche having new terms (the “Term Loan B-1 Facility”). With the exception of extending the maturity date, the Incremental Joinder did not impact the Revolving Facility.
On May 3, 2022, the Company entered into a Second Amended and Restated Credit Agreement with its various lenders (the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement provides for a $1.0 billion revolving credit facility, undrawn at close, (the “Amended Revolving Credit Facility”), a five-year $550.0 million term loan A facility (the “Amended Term Loan A Facility”) and a seven-year $1.0 billion term loan B facility (the “Amended Term Loan B Facility”) (together, the “Amended Credit Facilities”). The proceeds from the Amended Credit Facilities were used to repay the existing Term Loan A Facility and Term Loan B-1 Facility balances.
The interest rates per annum applicable to loans under the Amended Credit Facilities are, at the Company’s option, equal to either an adjusted secured overnight financing rate (“Term SOFR”) or a base rate, plus an applicable margin. The applicable
margin for each of the Amended Revolving Credit Facility and the Amended Term Loan A Facility iswas initially 1.75% for Term SOFR loans and 0.75% for base rate loans until the Company providesprovided financial reports for the first full fiscal quarter following closing and, thereafter, will rangeranges from 2.25% to 1.50% per annum for Term SOFR loans and 1.25% to 0.50% per annum for base rate loans, in each case depending on the Company’s total net leverage ratio (as defined within the Second Amended and Restated Credit Agreement). The applicable margin for the Amended Term Loan B Facility is 2.75% per annum for Term SOFR loans and 1.75% per annum for base rate loans. The Amended Term Loan B Facility is subject to a Term SOFR “floor” of 0.50% per annum and a base rate “floor” of 1.50% per annum. In addition, the Company will paypays a commitment fee on the unused portion of the commitments under the Amended Revolving Credit Facility at a rate that iswas initially 0.25% per annum, until the Company providesprovided financial reports for the first full fiscal quarter following closing, and thereafter, will rangeranges from 0.35% to 0.20% per annum, depending on the Company’s total net leverage ratio.ratio (as defined within the Second Amended and Restated Credit Agreement).
The Amended Credit Facilities contain customary covenants that, among other things, restrict, subject to certain exceptions, the ability of the Company and certain of its subsidiaries to grant liens on their assets, incur indebtedness, sell assets, make investments, engage in acquisitions, mergers or consolidations, pay dividends and make other restricted payments and prepay certain indebtedness that is subordinated in right of payment to the obligations under the Amended Credit Facilities. The Amended Credit Facilities contain two financial covenants: a maximum total net leverage ratio (as defined within the Second Amended and Restated Credit Agreement) of 4.50 to 1.00, which is subject to a step up to 5.00 to 1.00 in the case of certain significant acquisitions, and a minimum interest coverage ratio (as defined within the Second Amended and Restated Credit Agreement) of 2.00 to 1.00. The Amended Credit Facilities also contain certain customary affirmative covenants and events of default, including the occurrence of a change of control (as defined in the documents governing the Second Amended and Restated Credit Agreement), termination and certain defaults under the PENN Master Lease and the Pinnacle Master Lease (both of whichLeases (which are defined in Note 9, “Leases”). In connection with the repayment of the previous Senior Secured Credit Facilities, the Company recorded $1.3 million in refinancing costs and a $10.4 million loss on the early extinguishment of debt for the nine months ended September 30, 20222022. Additionally, we recorded $1.3 million in refinancing costs, which is included in “Other”“General and administrative” within our unaudited Consolidated Statements of Operations. In addition, we recorded $5.0 million of original issue discount related to the Amended Term Loan B Facility which will be amortized to interest expense over the life of the Amended Term Loan B Facility.
As of September 30, 2023 and December 31, 2022, the Company had conditional obligations under letters of credit issued pursuant to the Amended Credit Facilities with face amounts aggregating to $22.7$21.8 million and $22.5 million, respectively, resulting in $977.3$978.2 million and $977.5 million of available borrowing capacity under the Amended Revolving Credit Facility.
As of December 31, 2021, the Company had conditional obligations under letters of credit issued pursuant to the Senior Security Credit Facilities with face amounts aggregating to $26.0 million resulting in $674.0 million of available borrowing capacity under the Revolving Facility.Facility, respectively.
2.75% Unsecured Convertible Notes
In May 2020, the Company completed a public offering of $330.5 million aggregate principal amount of 2.75% unsecured convertible notes (the “Convertible Notes”) that mature, unless earlier converted, redeemed or repurchased, on May 15, 2026 at a price of par. After lender fees and discounts, net proceeds received by the Company were $322.2 million. Interest on the Convertible Notes is payable on May 15th and November 15th of each year.
The Convertible Notes are convertible into shares of the Company’s common stock at an initial conversion price of $23.40 per share, or 42.7350 shares, per $1,000 principal amount of notes, subject to adjustment if certain corporate events occur. However, in no event will the conversion exceed 55.5555 shares of common stock per $1,000 principal amount of notes. As of September 30, 2023 and December 31, 2022, no Convertible Notes have been converted into the Company’s common stock. The maximum number of shares that could be issued to satisfy the conversion feature of the Convertible Notes iswas 18,360,815 and the amount by which the Convertible Notes if-converted value exceeded its principal amount was $174.6 million.
Starting in the fourth quarter of 2020 and prior to February 15, 2026, at their election, holders of the Convertible Notes may convert outstanding notes if the trading price of the Company’s common stock exceeds 130% of the initial conversion price or, starting shortly after the issuance of the Convertible Notes, if the trading price per $1,000 principal amount of notes is less than 98% of the product of the trading price of the Company’s common stock and the conversion rate then in effect. The Convertible Notes may, at the Company’s election, be settled in cash, shares of common stock of the Company, or a combination thereof. The Company has the option to redeem the Convertible Notes, in whole or in part, beginning November 20, 2023.
In addition, the Convertible Notes convert into shares of the Company’s common stock upon the occurrence of certain corporate events that constitute a fundamental change under the indenture governing the Convertible Notes at a purchase price equal to 100% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the date of repurchase. In connection with certain corporate events or if the Company issues a notice of redemption, it will, under certain circumstances, increase the conversion rate for holders who elect to convert their Convertible Notes in connection with such corporate events or during the relevant redemption period for such Convertible Notes.
As$90.9 million, as of September 30, 2022 and December 31, 2021, no Convertible Notes have been converted into the Company’s common stock.
The Convertible Notes contain a cash conversion feature, and as a result, the Company separated it into liability and equity components. The Company valued the liability component based on its borrowing rate for a similar debt instrument that does not contain a conversion feature. The equity component, recognized as debt discount, was valued as the difference between the face value of the Convertible Notes and the fair value of the liability component. The equity component was valued at $91.8 million upon issuance of the Convertible Notes. In connection with the Convertible Notes issuance, the Company incurred debt issuance costs of $10.2 million, which were allocated on a pro rata basis to the liability component and the equity component in the amounts of $6.6 million and $3.6 million, respectively.
On January 1, 2022, the Company adopted ASU 2020-06, which resulted in a reclassification of the $88.2 million cash conversion feature related to the Company’s Convertible Notes, from stockholders’ equity to liabilities as under ASU 2020-06, bifurcation for a cash conversion feature is no longer permitted. As a result of the adoption, the Company recognized as a cumulative effect adjustment, an increase to the January 1, 2022 opening balance of retained earnings of $18.9 million, net of taxes.2023.
The Convertible Notes consisted of the following components:
| | (in millions) | (in millions) | September 30,
2022 | | December 31,
2021 | (in millions) | September 30,
2023 | | December 31,
2022 |
| Liability component: | | | | |
| Liability: | | Liability: | | | |
| Principal | Principal | $ | 330.5 | | | $ | 330.5 | | Principal | $ | 330.5 | | | $ | 330.5 | |
| Unamortized debt discount | — | | | (71.7) | | |
| | Unamortized debt issuance costs | Unamortized debt issuance costs | (6.6) | | | (5.3) | | Unamortized debt issuance costs | (4.9) | | | (6.2) | |
| Net carrying amount | Net carrying amount | $ | 323.9 | | | $ | 253.5 | | Net carrying amount | $ | 325.6 | | | $ | 324.3 | |
| | Carrying amount of equity component | $ | — | | | $ | 88.2 | | |
|
Interest expense, net
The table below presents interest expense, net:
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Interest expense | $ | 199.1 | | | $ | 146.1 | | | $ | 556.0 | | | $ | 421.8 | |
| Interest income | (5.2) | | | (0.3) | | | (7.0) | | | (0.7) | |
| Capitalized interest | (0.6) | | | (0.9) | | | (1.3) | | | (2.5) | |
| Interest expense, net | $ | 193.3 | | | $ | 144.9 | | | $ | 547.7 | | | $ | 418.6 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Interest expense | $ | 119.2 | | | $ | 199.1 | | | $ | 350.1 | | | $ | 556.0 | |
| Capitalized interest | (1.7) | | | (0.6) | | | (4.0) | | | (1.3) | |
| Interest expense, net | $ | 117.5 | | | $ | 198.5 | | | $ | 346.1 | | | $ | 554.7 | |
The table below presents interest expense related to the Convertible Notes: | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Coupon interest | Coupon interest | $ | 2.3 | | | $ | 2.3 | | | $ | 6.8 | | | $ | 6.8 | | Coupon interest | $ | 2.3 | | | $ | 2.3 | | | $ | 6.8 | | | $ | 6.8 | |
| Amortization of debt discount | — | | | 3.2 | | | — | | | 9.4 | | |
| | Amortization of debt issuance costs | Amortization of debt issuance costs | 0.5 | | | 0.2 | | | 1.3 | | | 0.7 | | Amortization of debt issuance costs | 0.4 | | | 0.5 | | | 1.3 | | | 1.3 | |
| Convertible Notes interest expense | Convertible Notes interest expense | $ | 2.8 | | | $ | 5.7 | | | $ | 8.1 | | | $ | 16.9 | | Convertible Notes interest expense | $ | 2.7 | | | $ | 2.8 | | | $ | 8.1 | | | $ | 8.1 | |
Subsequent to the adoption of ASU 2020-06, the debtDebt issuance costs attributable to the liability component continues to beare amortized to interest expense over the term of the Convertible Notes at an effective interest rate of 3.329%. The remaining term of the Convertible Notes was 3.62.6 years as of September 30, 2022.2023.
Covenants
Our Amended Credit Facilities, 5.625% Notes and 4.125% Notes, require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests. In addition, our Amended Credit Facilities, 5.625% Notes and 4.125% notes, restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the PENN Master Lease and the Pinnacle Master Lease (both of whichLeases (which are defined in Note 9, “Leases”), each with GLPI. If we are unable to meet our financial covenants or in the event of a cross-default, it could trigger an acceleration of payment terms. As of September 30, 2022,2023, the Company was in compliance with all required financial covenants. The Company believes that it will remain in compliance with all of its required financial covenants for at least the next twelve months following the date of filing this Quarterly Report on Form 10-Q with the SEC.
Other Long-Term Obligations
Other Long-term Obligation
In February 2021, we entered into a financing arrangement providing the Company with upfront cash proceeds while permitting us to participate in future proceeds on certain claims. The financing obligation has been classified as a non-current liability, which is expected to be settled in a future period of which the principal is contingent and predicated on other events. Consistent with an obligor’s accounting under a debt instrument, period interest will be accreted using an effective interest rate of 27.0% and until such time that the claims and related obligation is settled. The amount included in interest expense related to this obligation was $9.3 million and $7.1 million for the three months ended September 30, 2023 and 2022, respectively, and $26.1 million and $20.0 million for the three and nine months ended September 30, 2022, respectively, as compared to $6.9 million2023 and $12.1 million for the three and nine months ended September 30, 2021,2022, respectively.
Ohio Relocation Fees
Other long-term obligations included $36.1$18.5 million and $44.5$27.4 million as ofat September 30, 20222023 and December 31, 2021,2022, respectively, related to the relocation fees for Hollywood Gaming at Dayton Raceway (“Dayton”) and Hollywood Gaming at Mahoning Valley Race Course (“Mahoning Valley”), which opened in August 2014 and September 2014, respectively. The relocation fee for each facility is payable as follows: $7.5 million upon the opening of the facilities and eighteen semi-annual payments of $4.8 million beginning one year after the commencement of operations. This obligation isThese obligations are accreted to interest expense at an effective yield of 5.0%.
Event Center
As of September 30, 20222023 and December 31, 2021,2022, other long-term obligations included $10.7$9.9 million and $11.4$10.7 million, respectively, related to the repayment obligation of a hotel and event center located less than a mile away from Hollywood Casino Lawrenceburg, which was constructed by the City of Lawrenceburg Department of Redevelopment. Effective in January 2015, by contractual agreement, we assumed a repayment obligation for the hotel and event center in the amount of $15.3 million, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment, in exchange for conveyance of the property. Beginning in January 2016, the Company was obligated to make annual payments on the loan of $1.0 million for 20 years. This obligation is accreted to interest expense at its effective yield of 3.0%.
Note 9—Leases
Master Leases
The components contained within the Master Leases are accounted for as either (i) operating leases, (ii) finance leases, or (iii) financing obligations. Changes to future lease payments underthat are not fixed within the Master Leases (i.e., when future escalators become known or future variable rent resets occur), which are discussed below, require the Company to either (i) increase both the Right-of-use (“ROU”) assets and corresponding lease liabilities with respect to operating and finance leases or (ii) record the incremental variable payment associated with the financing obligation to interest expense. In addition, prior to the effective date of the AR PENN Master Lease (as defined and as discussed below), monthly rent associated with Hollywood Casino Columbus (“Columbus”) and monthly rent in excess of the Hollywood Casino Toledo (“Toledo”) rent floor which areas contained within the PENN Master Lease (as defined and discussed below, arebelow), were considered contingent rent.
AR PENN Master Lease
PursuantPrior to the effective date of the AR PENN Master Lease (as defined and discussed below) the Company leased real estate assets associated with 19 of the gaming facilities used in its operations via a triple net master lease with GLPI (the “PENN Master Lease”), which became effective November 1, 2013, the Company leases real estate assets associated with 19 of the gaming facilities used in its operations.2013. The PENN Master Lease hashad an initial term of 15 years with four subsequent, five-year renewal periods on the same terms and conditions, exercisable at the Company’s option.
On February 21, 2023, the Company and GLPI entered into an agreement to amend and restate the PENN Master Lease (the “AR PENN Master Lease”), effective January 1, 2023, to (i) remove the land and buildings for Hollywood Casino Aurora (“Aurora”), Hollywood Casino Joliet (“Joliet”), Columbus, Toledo and the M Resort Spa Casino (“M Resort”), and (ii) make associated adjustments to the rent after which the initial rent in the AR PENN Master Lease will be $284.1 million, consisting of $208.2 million of building base rent, $43.0 million of land base rent and $32.9 million of percentage rent (as such terms are defined in the AR PENN Master Lease). Subsequent to the execution of the AR PENN Master Lease, the Company leases real estate assets associated with 14 of the gaming facilities used in its operations via a triple net master lease. The Company has determined thatcurrent term of the lease term is 35 years.AR PENN Master Lease expires on October 31, 2033 and thereafter contains three renewal terms of five years each on the same terms and conditions, exercisable at the Company’s option. The AR PENN Master Lease along with the 2023 Master Lease (as defined and discussed below) are cross-defaulted, cross-collateralized, and coterminous, and subject to a parent guarantee.
The payment structure under the AR PENN Master Lease includes a fixed component, a portion of which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue to Rent Ratio (as defined in the AR PENN Master Lease) of 1.8:1, and a component that is based on performance, which is prospectively adjusted (i) every five years by an amount equal to 4% of the average change in net revenues of all properties underassociated with the AR PENN Master Lease (other than Columbus and Toledo) compared to a contractual baseline during the preceding five years (“PENN Percentage Rent”) and (ii) monthly by an amount equal to 20% of the net revenues of Columbus and Toledo in excess of a contractual baseline and subject to a rent floor specific to Toledo..
As a result of the annual escalator, effective November 1, 2022,2023, for the lease year endedending October 31, 2022,2023, the fixed component of rent increased by $5.7$4.2 million. The next PENN Percentage Rent reset is scheduled to occurtest date occurred on November 1, 2023.2023 of which we are currently determining the impact to the performance component of rent which will be in effect until October 31, 2028.
We concluded the execution of the AR PENN Master Lease constituted a modification event under ASC Topic 842, “Leases” (“ASC 842”), which required us to reassess the classifications of the lease components and remeasure the associated lease liabilities. We concluded the lease term should end at the current lease expiration date of October 31, 2033 and the optional three renewal terms of five years each were not included in the lease term. The Company continues to evolve from a leading retail gaming operator to a leading provider of integrated entertainment, sports content, and casino gaming experiences. The execution of our omni-channel strategy continues to diversify our earning streams and precluded us from concluding all renewal periods were reasonably assured to be exercised.
As a result of the January 1, 2023 lease modification event, we concluded (i) the land components contained within the AR PENN Master Lease, which were previously primarily classified as finance leases under the PENN Master Lease, to be classified as operating leases, and (ii) control of the building assets have transferred from the Company to the lessor allowing for sale recognition in accordance with ASC 842 which results in the building components to be classified as operating leases. Prior to the January 1, 2023 lease modification event, control of substantially all of the building components were concluded not to have passed from the Company to the lessor in accordance with ASC 842 which required recognition of a financing obligation in accordance with ASC Topic 470, “Debt” (“ASC 470”) and continued recognition of the underlying asset in Property and Equipment, net within our unaudited Consolidated Balance Sheets. In conjunction with the sale recognition on the building components, we (i) derecognized $1.6 billion of financing obligations within our unaudited Consolidated Balance Sheets, offset to “Gain on REIT transaction, net” within our unaudited Statements of Operations; and (ii) derecognized $1.1 billion of Property and Equipment, net associated with the building assets within our unaudited Consolidated Balance Sheets, offset to “Gain on REIT transaction, net” within our unaudited Consolidated Statements of Operations. As a result of our measurement of the associated operating lease liabilities, we recognized a reduction of the ROU assets and corresponding lease liabilities of $1.2 billion within our unaudited Consolidated Balance Sheets. Lease components classified as an operating lease are recorded to “General and Administrative” within our unaudited Consolidated Statements of Operations.
On January 14, 2022, the ninth amendment to the PENN Master Lease between the Company and GLPI became effective. The ninth amendment restatesrestated the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at a leased property, establishesestablished a “floor” with respect to the Hollywood Casino at PENN National Race Course Net Revenue amount used in the calculation of the annual rent escalator and PENN Percentage Rent, and modifiesmodified the rent calculations upon a lease termination event as defined in the amendment. The lease term and the four five-year optional renewal periods, which if exercised would extend the PENN Master Lease through October 31, 2048, were not modified in the ninth amendment.
We concluded the ninth amendment constituted a modification event under ASC Topic 842, “Leases” (“ASC 842”), which required us to reassess the classifications of the lease components and remeasure the associated lease liabilities. As a result of our reassessment of the lease classifications, (i) the land components of substantially all of the PENN Master Lease properties, which were previously classified as operating leases, are nowwere then primarily classified as finance leases, and (ii) the land and building components associated with the operations of Dayton and Mahoning Valley, which were previously classified as finance leases, are nowwere then classified as operating leases. As a result of our measurement of the associated lease liabilities, we recognized additional ROU assets and corresponding lease liabilities of $455.4 million. The building components of substantially all of the PENN Master Lease properties continuecontinued to be classified as financing obligations.
Subsequent to quarter end, on October 9, 2022,2023 Master Lease
Concurrent with the Company entered into a binding term sheet (the “Term Sheet”) with GLPI. Pursuant toexecution of the Term Sheet,AR PENN Master Lease, the Company and GLPI agreed to amend the PENN Master Lease to (i) remove the land and buildings for Hollywood Casino Aurora (“Aurora”), Hollywood Casino Joliet (“Joliet”), Columbus, Toledo and the M Resort Spa Casino (“M Resort”) and (ii) make associated adjustments to the rent under the PENN Master Lease, after which the initial Rent in the PENN Master Lease will be $284.1 million, consisting of $208.2 million of Building Base Rent, $43.0 million of Land Base Rent and $32.9 million of Percentage Rent (as such terms are defined in the PENN Master Lease).
We preliminarily concluded the pending amendment that will result from the Term Sheet (expected to be effective on January 1, 2023), constitutes a modification event under ASC 842 and are currently reassessing, remeasuring, and quantifying the impact of the modification to the Consolidated Financial Statements, which will be material. The modification event is expected to result in (i) a non-cash debt extinguishment charge recorded to our Consolidated Statements of Operations and
corresponding change in our financing obligations on our Consolidated Balance Sheets; and (ii) a revaluation of our lease ROU assets and corresponding lease liabilities on our Consolidated Balance Sheets.
New Lease
Subsequent to quarter end, as part of the Term Sheet and concurrent with the PENN Master Lease amendment described above, the Company and GLPI agreed to enterentered into a new triple net master lease (the “New“2023 Master Lease”), expected to be effective January 1, 2023, specific to the property associated with Aurora, Joliet, Columbus, Toledo, M Resort, Hollywood Casino at The Meadows (“Meadows”), and Hollywood Casino Perryville (“Perryville”) and a master development agreement (the “Master Development Agreement”). The 2023 Master Lease has an initial term through October 31, 2033 with three subsequent five-year renewal periods on the same terms and conditions, exercisable at the Company’s option. The 2023 Master Lease terminated the individual triple net leases associated with Meadows and Perryville. The New2023 Master Lease will beand AR PENN Master Lease are cross-defaulted, cross-collateralized, and coterminous, with the PENN Master Lease, and subject to a parent guarantee.
The NewAR PENN Master Lease willand the 2023 Master Lease are coterminous, as such consistent with the AR PENN Master Lease, we concluded the 2023 Master Lease term ends at the current lease expiration date of October 31, 2033 and does not include any of the remaining three renewal terms of five years each. (See above lease term discussion for AR PENN Master Lease.)
As a result of our lease classification assessment, we concluded all land and building components contained within the 2023 Master Lease to be operating leases. As a result of our measurement of the operating lease liabilities, we recognized ROU assets and corresponding lease liabilities of $1.8 billion. Additionally, in connection with the termination of the prior Meadows Lease and Perryville Lease (both defined and discussed below), we (i) derecognized $171.9 million in ROU assets within our unaudited Consolidated Balance Sheets; (ii) derecognized $165.5 million in lease liabilities within our unaudited Consolidated Balance Sheets; and (iii) recognized a $6.5 million loss on the termination which is recorded in “Gain on REIT transaction, net” within our unaudited Consolidated Statements of Operations. Lease components classified as an operating lease are recorded to “General and Administrative” within our unaudited Consolidated Statements of Operations.
The 2023 Master Lease includes a base rent (the “New“2023 Master Lease Base Rent”) equal to $232.2 million and the Master Development Agreement contains additional rent (together with the New2023 Master Lease Base Rent, the “New“2023 Master Lease Rent”) equal to (i) 7.75% of any project funding received by PENN from GLPI for an anticipated relocation of PENN’s riverboat casino and related developments with respect to Aurora (the “Aurora Project”) and (ii) a percentage, based on the
then-current market conditions,GLPI stock price, of any project funding received by PENN from GLPI for certain anticipated development projects with respect to Joliet, Columbus and M Resort (the “Other Development Projects”). The Master Development Agreement provides that GLPI will fund up to $225$225.0 million for the Aurora Project and, GLPI has committed to fund, upon PENN’s request, up to $350$350.0 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set forth in the Term Sheet.Master Development Agreement. These funding obligations of GLPI expire on January 1, 2026. The New2023 Master Lease Rent will be subject to a one-time increase of $1.4 million, effective the fifth anniversary of the effective date.November 1, 2027. The New2023 Master Lease Rent will be furtherwas subject to a fixed escalator of 1.5% on November 1, 2023 and will be annually thereafter. The Master Development Agreement provides that PENN may elect not to proceed with or to abandon anya development project prior to GLPI’s commencement of any equity or debt offering or credit facility draw intended to fund such a project or after such time in certain instances, provided that GLPI will be reimbursed for any out-of-pocketall costs associatedand expenses incurred in connection with an abandonedsuch discontinued project. The Aurora Project and the Other Development projectsProjects are all subject to necessary regulatory and other government approvals.
Pinnacle Master Lease
In connection with the acquisition of Pinnacle, on October 15, 2018, the Company assumed a triple net master lease with GLPI (the “Pinnacle Master Lease”), originally effective April 28, 2016, pursuant to which the Company leases real estate assets associated with 12 of the gaming facilities used in its operations. Upon assumption of the Pinnacle Master Lease, as amended, there were 7.5 years remaining of the initial ten-year term, with five subsequent, five-year renewal periods, on the same terms and conditions, exercisable at the Company’s option. The Company has determined that the lease term is 32.5 years.
The payment structure under the Pinnacle Master Lease includes a fixed component, a portion of which is subject to an annual escalator of up to 2%, depending on the Adjusted Revenue to Rent Ratio (as defined in the Pinnacle Master Lease) of 1.8:1, and a component that is based on performance of the properties, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues compared to a contractual baseline during the preceding two years (“Pinnacle Percentage Rent”).
As a result of the annual escalator, effective May 1, 2023 for the lease year ended April 30, 2023, the fixed component of rent increased by $4.7 million and an additional ROU asset and corresponding lease liability of $33.3 million were recognized associated with the finance lease components of the Pinnacle Master Lease. Both the next annual escalator and the next Pinnacle Percentage Rent reset are scheduled to occur on May 1, 2024.
On January 14, 2022, the fifth amendment to the Pinnacle Master Lease between the Company and GLPI became effective. The fifth amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at a leased property and modifies the rent calculations upon a lease termination event as defined in the amendment. The lease term and the five five-year optional renewal periods, which if exercised would extend the Pinnacle Master Lease through April 30, 2051, were not modified in the fifth amendment.
We concluded the fifth amendment to the Pinnacle Master Lease constituted a modification event under ASC 842 (collectively with the ninth amendment to the PENN Master Lease, the “Lease“2022 Lease Modification”). As a result of the modification, the land components of substantially all of the Pinnacle Master Lease properties, which were previously classified as operating leases, are now primarily classified as finance leases. As a result of our measurement of the associated lease liabilities, we recognized additional ROU assets and corresponding lease liabilities of $937.6 million. The building components of substantially all of the Pinnacle Master Lease properties continue to be classified as financing obligations.
As Lease components classified as a resultfinance lease are recorded to “Depreciation and amortization” and “Interest expense, net” within our unaudited Consolidated Statements of the annual escalator, effective as of May 1, 2022 forOperations. The Company recognizes interest expense on the lease year ended April 30, 2022,payments related to the fixed component of rent increased by $4.6 million and an additional ROU asset and corresponding lease liability of $33.2 million were recognized associatedfinancing obligation under the effective yield method.
Other Triple Net Leases with the finance lease components of the Pinnacle Master Lease. The next annual escalator test date is scheduled to occur on May 1, 2023.
The May 1, 2022 Pinnacle Percentage Rent reset resulted in an annual rent increase of $1.9 million, which will be in effect until the next Pinnacle Percentage Rent reset, scheduled to occur on May 1, 2024. Upon reset of the Pinnacle Percentage Rent, effective May 1, 2022, we recognized an additional finance lease ROU asset and corresponding lease liability of $26.1 million.
Morgantown Lease
On October 1, 2020, the Company entered into a triple net lease with a subsidiary of GLPI for the land underlying our development project in Morgantown, Pennsylvania (“Morgantown Lease”) in exchange for $30.0 million in rent credits which were utilized to pay rent under the Master Leases, Meadows Lease (as defined and discussed below), and the Morgantown Lease.Lease during the year ended December 31, 2020.
The initial term of the Morgantown Lease is 20 years with six subsequent, five-year renewal periods, exercisable at the Company’s option. Initial annual rent under the Morgantown Lease is $3.0 million, subject to a 1.50% fixed annual escalation in each of the first three years subsequent to the facility opening, which occurred on December 22, 2021. Thereafter, the lease will be subject to an annual escalator consisting of either (i) 1.25%, if the consumer price index increase is greater than 0.50%, or (ii) zero, if the consumer price index increase is less than 0.50%. All improvements made on the land, including the constructed building, will be owned by the Company while the lease is in effect, however, on the expiration or termination of the Morgantown Lease, ownership of all tenant improvements on the land will transfer to GLPI.
We concluded control of the land underlying the Morgantown facility was not passed from the Company to the lessor in accordance with ASC 842. As such we recognized a financing obligation in accordance with ASC 470 and continue to recognize the underlying asset in Property and Equipment, net within our unaudited Consolidated Balance Sheets. The Company recognizes interest expense on the lease payments related to the financing obligation under the effective yield method.
Perryville Lease
In conjunction with the acquisition of the operations of Perryville on July 1, 2021, the Company entered into a triple net lease with GLPI for the real estate assets associated with the property (“Perryville Lease”) for initial annual rent of $7.8 million per year subject to escalation.
The initial termAs discussed above, as a result of entering into the 2023 Master Lease, the Perryville Lease is 20was terminated effective January 1, 2023.
Prior to the lease termination, the land and building components were classified as finance leases. Lease components classified as a finance lease were recorded to “Depreciation and amortization” and “Interest expense, net” within our unaudited Consolidated Statements of Operations.
Meadows Lease
In connection with the acquisition of Pinnacle, we assumed a triple net operating lease associated with the real estate assets at Meadows (“Meadows Lease”), originally effective September 9, 2016. Upon assumption of the Meadows Lease, there were eight years remaining of the initial ten-year term, with three subsequent, five-year renewal periods,options followed by one four-year renewal option on the same terms and conditions, exercisable at the Company’s option. The building portion
As discussed above, as a result of the annual rent is subject to a fixed annual escalation of 1.50% in each of the following three years, with subsequent annual escalations of either (i) 1.25%, if the consumer price index increase is greater than 0.50%, or (ii) zero, if the consumer price index increase is less than 0.50%.
Subsequent to quarter end, as part of the Term Sheet and in conjunction with entering into the New2023 Master Lease, as described above, the Company agreed with GLPI that the PerryvilleMeadows Lease will bewas terminated effective on the expected date of January 1, 2023.
Operating Leases
In additionPrior to anythe termination of the Meadows Lease, the land and building components were classified as operating leases. Lease components classified as an operating lease components containedwere recorded to “General and Administrative” within our unaudited Consolidated Statements of Operations.
Margaritaville Lease
On January 1, 2019, the Master Leases, the Company’s operating leases consist mainly of (i)Company entered into an individual triple net leases with GLPI for the real estate assets used in the operations of Tropicana (the “Tropicana Lease” which was terminated on September 26, 2022) and Hollywood Casino at The Meadows (the “Meadows Lease”), (ii) individual triple net leaseslease with VICI Properties Inc. (NYSE: VICI) (“VICI”) for the real estate assets used in the operations of Margaritaville Resort Casino (the “Margaritaville Lease”). The Margaritaville Lease has an initial term of 15 years, with four subsequent five-year renewal options on the same terms and conditions, exercisable at the Company’s option. The payment structure under the Margaritaville Lease includes a fixed component, a portion that is subject to an annual escalator of up to 2% depending on a minimum coverage floor ratio of Net Revenue to Rent of 6.1:1, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of the property compared to a contractual baseline during the preceding two years (“Margaritaville Percentage Rent”).
On February 1, 2023, the Margaritaville Lease annual escalator test resulted in an annual rent increase of $0.4 million and the recognition of an additional operating lease ROU asset and corresponding lease liability of $2.8 million. The next annual escalator test date is scheduled to occur on February 1, 2024. Additionally, on February 1, 2023, the Margaritaville Percentage Rent reset resulted in an annual rent increase of $2.3 million which will be in effect until the next Margaritaville Percentage Rent reset, scheduled to occur on February 1, 2025. Upon reset of the Margaritaville Percentage Rent, effective February 1, 2023, we recognized an additional operating lease ROU asset and corresponding lease liability of $9.8 million.
The land and building components contained within the Margaritaville Lease are classified as operating leases. Lease components classified as an operating lease are recorded to “General and Administrative” within our unaudited Consolidated Statements of Operations.
Greektown Lease
On May 23, 2019, the Company entered into an individual triple net lease with VICI for the real estate assets used in the operations of Hollywood Casino at Greektown (the “Greektown Lease”). The Greektown Lease has an initial term of 15 years, with four subsequent five-year renewal options on the same terms and collectively withconditions, exercisable at the Master Leases’Company’s option. The payment structure under the Greektown Lease includes a fixed component, a portion subject to an annual escalator of up to 2%
depending on an Adjusted Revenue to Rent Ratio (as defined in the Greektown Lease) of 1.85:1, and a component that is based on performance, which is prospectively adjusted every two years by an amount equal to 4% of the average change in net revenues of the property compared to a contractual baseline during the preceding two years (Greektown Percentage Rent”).
On June 1, 2023, the Greektown Percentage Rent reset resulted in an annual rent increase of $1.5 million, which will be in effect until the next Greektown Percentage Rent reset, scheduled to occur on June 1, 2025. Upon reset of the Greektown Percentage Rent, effective June 1, 2023, we recognized an additional operating lease ROU asset and corresponding lease liability of $7.0 million. We did not incur an annual escalator for the lease year ended May 31, 2023. On April 1, 2023, the lease was amended to provide for a Net Revenue to Rent coverage floor to be mutually agreed upon prior to the commencement of the sixth lease year (June 1, 2024).
The land and building components contained within the Greektown Lease are classified as operating leases. Lease components classified as an operating lease are recorded to “General and Administrative” within our unaudited Consolidated Statements of Operations.
Tropicana Lease
Prior to the closing of the sale of PENN’s outstanding equity interest in Tropicana Las Vegas (“Tropicana”) on September 26, 2022, the Company leased the real estate assets used in the operations of Tropicana for nominal cash rent (the “Tropicana Lease”). The term of the Tropicana Lease was for two years (subject to three one-year extensions at GLPI’s option) or until the real estate assets and the operations of the Tropicana were sold. Upon execution of the Tropicana Lease, we recorded an operating lease ROU asset of $61.6 million, which was included in “Lease right-of-use assets” within our unaudited Consolidated Balance Sheets.
The land and building components contained within the Tropicana Lease were classified as operating leases. Lease components classified as an operating lease were recorded to “General and Administrative” within our unaudited Consolidated Statements of Operations.
Non-REIT Operating Leases
In addition to any operating lease components contained within the Master Leases, Meadows Lease, the Margaritaville Lease, Greektown Lease and the Tropicana Lease the “Triple Net Operating Leases”(referred to as “triple net operating leases”), (iii)the Company’s operating leases consists of (i) ground and levee leases to landlords which were not assumed by our REIT Landlords and remain an obligation of the Company, and (iv) building(ii) buildings and equipment not subject to the Master Leases.associated with our REIT Landlords. Certain of our lease agreements include rental payments based on a percentage of sales over specified contractual amounts, rental payments adjusted periodically for inflation, and rental payments based on usage. The Company’s leases include options to extend the lease terms. The Company’s operating lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Subsequent to quarter end, as part of the Term Sheet and in conjunction with entering into the New Lease as described above, the Company agreed with GLPI that the Meadows Lease will be terminated effective on the expected date of January 1, 2023.
On January 14, 2022, the second amendment to the Meadows Lease between the Company and GLPI became effective.The second amendment restates the definition of “Net Revenue” to clarify the inclusion of online-based revenues derived when a patron is physically present at the facility. This amendment did not result in a modification event under ASC 842.
On February 1, 2022, the Margaritaville Lease annual escalator test resulted in an annual rent increase of $0.4 million, and the recognition of an additional operating lease ROU asset and corresponding lease liability of $2.9 million. We did not incur an annual escalator for the lease year ended January 31, 2021. The next annual escalator and Margaritaville Percentage Rent reset are scheduled to occur on February 1, 2023.
In May 2020, the Greektown lease was amended to remove the escalator for the lease years ending May 31, 2021 and 2022 and to provide for a Net Revenue to Rent coverage floor to be mutually agreed upon prior to the commencement of the fourth lease year (June 1, 2022). In April 2022, the lease was further amended to provide for a Net Revenue to Rent coverage floor to be mutually agreed upon prior to the commencement of the fifth lease year (June 1, 2023).
The following is a maturity analysis of our operating leases, finance leases and financing obligations as of September 30, 2022:2023:
| | (in millions) | (in millions) | Operating Leases | | Finance Leases | | Financing Obligations | (in millions) | Operating Leases | | Finance Leases | | Financing Obligations |
| Year ended December 31, | Year ended December 31, | | | | | | Year ended December 31, | | | | | |
| 2022 (excluding the nine months ended September 30, 2022) | $ | 31.9 | | | $ | 94.6 | | | $ | 93.2 | | |
| 2023 | 125.3 | | | 375.2 | | | 369.8 | | |
| 2023 (excluding the nine months ended September 30, 2023) | | 2023 (excluding the nine months ended September 30, 2023) | $ | 148.4 | | | $ | 39.7 | | | $ | 41.6 | |
| 2024 | 2024 | 119.8 | | | 351.4 | | | 355.3 | | 2024 | 585.2 | | | 149.3 | | | 166.5 | |
| 2025 | 2025 | 116.6 | | | 346.9 | | | 355.4 | | 2025 | 578.4 | | | 144.7 | | | 166.6 | |
| 2026 | 2026 | 112.1 | | | 347.0 | | | 355.4 | | 2026 | 579.1 | | | 144.7 | | | 166.6 | |
| 2027 | | 2027 | 581.9 | | | 144.6 | | | 166.6 | |
| Thereafter | Thereafter | 1,339.9 | | | 7,874.0 | | | 8,285.6 | | Thereafter | 3,889.1 | | | 3,366.9 | | | 3,996.0 | |
| Total lease payments | Total lease payments | 1,845.6 | | | 9,389.1 | | | 9,814.7 | | Total lease payments | 6,362.1 | | | 3,989.9 | | | 4,703.9 | |
| Less: Imputed interest | Less: Imputed interest | (798.4) | | | (4,355.2) | | | (5,765.0) | | Less: Imputed interest | (2,187.3) | | | (1,875.1) | | | (2,266.6) | |
| Present value of future lease payments | Present value of future lease payments | 1,047.2 | | | 5,033.9 | | | 4,049.7 | | Present value of future lease payments | 4,174.8 | | | 2,114.8 | | | 2,437.3 | |
| Less: Current portion of lease obligations | Less: Current portion of lease obligations | (71.7) | | | (117.0) | | | (65.0) | | Less: Current portion of lease obligations | (277.8) | | | (43.2) | | | (40.8) | |
| Long-term portion of lease obligations | Long-term portion of lease obligations | $ | 975.5 | | | $ | 4,916.9 | | | $ | 3,984.7 | | Long-term portion of lease obligations | $ | 3,897.0 | | | $ | 2,071.6 | | | $ | 2,396.5 | |
|
Total payments made under the Triple Net Leases were as follows:
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| AR PENN Master Lease | | AR PENN Master Lease | $ | 71.1 | | | $ | — | | | $ | 213.1 | | | $ | — | |
| 2023 Master Lease | | 2023 Master Lease | 58.0 | | | — | | | 174.1 | | | — | |
| PENN Master Lease | PENN Master Lease | $ | 120.2 | | | $ | 118.4 | | | $ | 360.0 | | | $ | 357.1 | | PENN Master Lease | — | | | 120.2 | | | — | | | 360.0 | |
| Pinnacle Master Lease | Pinnacle Master Lease | 84.2 | | | 82.4 | | | 250.1 | | | 245.8 | | Pinnacle Master Lease | 85.3 | | | 84.2 | | | 254.2 | | | 250.1 | |
| Perryville Lease | Perryville Lease | 1.9 | | | 1.9 | | | 5.8 | | | 1.9 | | Perryville Lease | — | | | 1.9 | | | — | | | 5.8 | |
| Meadows Lease | Meadows Lease | 6.2 | | | 6.2 | | | 18.6 | | | 18.6 | | Meadows Lease | — | | | 6.2 | | | — | | | 18.6 | |
| Margaritaville Lease | Margaritaville Lease | 5.9 | | | 5.9 | | | 17.8 | | | 17.6 | | Margaritaville Lease | 6.6 | | | 5.9 | | | 19.6 | | | 17.8 | |
| Greektown Lease | Greektown Lease | 12.8 | | | 12.9 | | | 38.5 | | | 40.3 | | Greektown Lease | 13.2 | | | 12.8 | | | 39.0 | | | 38.5 | |
| Morgantown Lease | Morgantown Lease | 0.8 | | | 0.8 | | | 2.3 | | | 2.3 | | Morgantown Lease | 0.8 | | | 0.8 | | | 2.4 | | | 2.3 | |
Total (1) | Total (1) | $ | 232.0 | | | $ | 228.5 | | | $ | 693.1 | | | $ | 683.6 | | Total (1) | $ | 235.0 | | | $ | 232.0 | | | $ | 702.4 | | | $ | 693.1 | |
(1)RentFor the three and nine months ended September 30, 2022, rent payable under the Tropicana Lease was nominal prior to termination on September 26, 2022.nominal. Therefore, it has been excluded from the table above. The Tropicana Lease was terminated on September 26, 2022.
Information related to lease term and discount rate was as follows:
| | | | | | | | | | | |
| September 30, 2023 | | December 31, 2022 |
| Weighted-Average Remaining Lease Term | | | |
| Operating leases | 11.4 years | | 19.1 years |
| Finance leases | 27.6 years | | 26.7 years |
| Financing obligations | 27.8 years | | 27.5 years |
| | | |
| Weighted-Average Discount Rate | | | |
| Operating leases | 7.7 | % | | 5.8 | % |
| Finance leases | 5.2 | % | | 5.2 | % |
| Financing obligations | 5.2 | % | | 7.7 | % |
The components of lease expense were as follows:
| | | Location on unaudited
Consolidated Statements of Operations | | For the three months ended September 30, | | For the nine months ended September 30, | | Location on unaudited
Consolidated Statements of Operations | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | | 2023 | | 2022 | | 2023 | | 2022 |
| Operating Lease Costs | Operating Lease Costs | | | | | | | | | | Operating Lease Costs | | | | | | | | | |
Rent expense associated with triple net operating leases (1) | Rent expense associated with triple net operating leases (1) | General and administrative | | $ | 31.5 | | | $ | 116.0 | | | $ | 119.6 | | | $ | 342.9 | | Rent expense associated with triple net operating leases (1) | General and administrative | | $ | 146.6 | | | $ | 31.5 | | | $ | 439.0 | | | $ | 119.6 | |
Operating lease cost (2) | Operating lease cost (2) | Primarily General and administrative | | 4.9 | | | 4.1 | | | 14.8 | | | 11.9 | | Operating lease cost (2) | Primarily General and administrative | | 5.6 | | | 4.9 | | | 16.9 | | | 14.8 | |
| Short-term lease cost | Short-term lease cost | Primarily Gaming expense | | 19.7 | | | 17.0 | | | 56.3 | | | 45.8 | | Short-term lease cost | Primarily Gaming expenses | | 21.3 | | | 19.7 | | | 60.2 | | | 56.3 | |
Variable lease cost (2) | Variable lease cost (2) | Primarily Gaming expense | | 1.0 | | | 1.3 | | | 3.3 | | | 3.4 | | Variable lease cost (2) | Primarily Gaming expenses | | 0.8 | | | 1.0 | | | 2.7 | | | 3.3 | |
| Total | Total | | $ | 57.1 | | | $ | 138.4 | | | $ | 194.0 | | | $ | 404.0 | | Total | | $ | 174.3 | | | $ | 57.1 | | | $ | 518.8 | | | $ | 194.0 | |
| | Finance Lease Costs | Finance Lease Costs | | Finance Lease Costs | |
Interest on lease liabilities (3) | Interest on lease liabilities (3) | Interest expense, net | | $ | 72.0 | | | $ | 4.7 | | | $ | 187.2 | | | $ | 12.1 | | Interest on lease liabilities (3) | Interest expense, net | | $ | 27.7 | | | $ | 72.0 | | | $ | 83.0 | | | $ | 187.2 | |
Amortization of ROU assets (3) | Amortization of ROU assets (3) | Depreciation and amortization | | 50.1 | | | 3.3 | | | 131.0 | | | 7.3 | | Amortization of ROU assets (3) | Depreciation and amortization | | 22.0 | | | 50.1 | | | 65.6 | | | 131.0 | |
| Total | Total | | $ | 122.1 | | | $ | 8.0 | | | $ | 318.2 | | | $ | 19.4 | | Total | | $ | 49.7 | | | $ | 122.1 | | | $ | 148.6 | | | $ | 318.2 | |
| | Financing Obligation Costs | Financing Obligation Costs | | Financing Obligation Costs | |
Interest on financing obligations (4) | Interest on financing obligations (4) | Interest expense, net | | $ | 86.2 | | | $ | 104.5 | | | $ | 261.0 | | | $ | 312.4 | | Interest on financing obligations (4) | Interest expense, net | | $ | 36.8 | | | $ | 86.2 | | | $ | 110.0 | | | $ | 261.0 | |
(1)PertainsFor the three and nine months ended September 30, 2023, pertains to the following operating leases: (i) AR PENN Master Lease; (ii) 2023 Master Lease; (iii) Margaritaville Lease; and (iv) Greektown Lease.
For the three and nine months ended September 30, 2022, pertains to the operating lease components contained within the (i) PENN Master Leases, inclusive of the variable expense associated with Columbus and Toledo for the operating lease components, the Meadows Lease the Margaritaville Lease, the Greektown Lease, and the Tropicana Lease. The Tropicana Lease was terminated on September 26, 2022.
Prior(specific to the Lease Modification, the operating lease components contained within the Master Leases primarily consisted of the land, inclusive of the variable expense associated with Columbus and Toledo.
Subsequent to the Lease Modification, the operating lease components contained within the Master Leases consist of the land and building components associated with the operations of Dayton and Mahoning Valley.Valley); (ii) Meadows Lease; (iii) Margaritaville Lease; (iv) Greektown Lease; and (v) Tropicana Lease (which terminated on September 26, 2022).
(2)Excludes the operating lease costs and variable lease costs pertaining to our triple net leases with our REIT landlords classified as operating leases, discussed in footnote (1) above.
(3)PertainsFor the three and nine months ended September 30, 2023, pertains to the finance lease components associated with the Pinnacle Master Lease.
For the three and nine months ended September 30, 2022, pertains to the finance lease components associated with the (i) PENN Master Lease; (ii) Pinnacle Master Lease; and (iii) Perryville Lease. The finance lease components contained within the PENN Master Leases,Lease and the PerryvillePinnacle Master Lease which results in interest expense and amortization expense (as opposed to rent expense).
Prior to the Lease Modification, the finance lease components contained within the Master Leases consisted of the land and building components associated with the operations of Dayton and Mahoning Valley.
Subsequent to the Lease Modification, the finance lease components contained within the Master Leases consist of the land, inclusive of the variable expense associated with Columbus and Toledo.
(4) PertainsFor the three and nine months ended September 30, 2023, pertains to the components contained within the Pinnacle Master LeasesLease (primarily buildings) and the Morgantown Lease.
For the three and nine months ended September 30, 2022, pertains to the components contained within the PENN Master Lease determined to be a financing obligation,(primarily buildings) inclusive of the variable expense associated with Columbus and Toledo for the financing obligation components, (thePinnacle Master Lease (primarily buildings)., and the Morgantown Lease.
Supplemental cash flow information related to leases was as follows:
| | | | | | | | | | | |
| For the nine months ended September 30, |
| (in millions) | 2023 | | 2022 |
| Non-cash lease activities: | | | |
| Commencement of operating leases | $ | 3,674.4 | | | $ | 39.4 | |
| Derecognition of operating lease liabilities | $ | 307.7 | | | $ | — | |
| Commencement of finance leases | $ | 33.3 | | | $ | 1,417.3 | |
| Derecognition of finance lease liabilities | $ | 2,933.6 | | | $ | — | |
| Derecognition of finance obligations | $ | 1,567.8 | | | $ | — | |
Note 10—Investments in and Advances to Unconsolidated Affiliates
As of September 30, 2022,2023, investments in and advances to unconsolidated affiliates primarily consisted of the Company’s 36% interest in Barstool; its 50% investment in Kansas Entertainment, the joint venture with NASCAR that owns Hollywood Casino at Kansas Speedway; and its 50% interest in Freehold Raceway.
Investment in Barstool
As previously disclosed, in February 2020, we closed on our investment in Barstool pursuant to a stock purchase agreement with Barstool and certain stockholders of Barstool, in which we purchased 36% (inclusive of 1% on a delayed basis) of the common stock, par value $0.0001 per share, of Barstool for a purchase price of $161.2 million. The purchase price consisted of $135.0 million in cash and $23.1 million in shares of a new class of non-voting convertible preferred stock of the Company (as discussed below).
On October 1, 2021, the terms of the February 2020 stock purchase agreement were amended and restated (“Amended and Restated Stockholders’ Agreement”) to (i) set a definitive purchase price of $325.0 million on the second 50% of Barstool common stock, which eliminates the floor of 2.25 times the annual revenue of Barstool and (ii) fix a number of PENN common shares to be delivered to existing February 2020 employee holders of Barstool common stock, to the extent PENN’s stock price exceeds a specified value defined in the Amended and Restated Stockholders’ Agreement and PENN elects to settle using a combination of cash and equity.Speedway.
On July 7, 2022, we entered into the first amendment to the Amended and Restated Stockholders’ Agreement (“First Amendment”). The First Amendment updated the share price specified value used to calculate the fixed number of PENN common shares to be delivered to existing February 2020 employee holders of Barstool common stock, to the extent PENN’s stock price exceeds the updated specified value and PENN elects to settle using a combination of cash and equity.
On August 17, 2022, the Company exercised its call rights to bring its ownership of Barstool to 100%. The acquisition of the remaining Barstool shares is expected to be completed in February 2023, after which Barstool will be a wholly-owned subsidiary of PENN. Completion of the acquisition at that time is subject to the satisfaction of certain conditions, including regulatory approval.
In conjunction with the February 20, 2020 stock purchase agreement, the Company issued 883 shares of Series D Preferred Stock, par value $0.01 (the “Series D Preferred Stock”) to certain individual stockholders affiliated with Barstool. 1/1,000th of a share of Series D Preferred Stock is convertible into one share of PENN Common Stock. As of September 30, 2022, 51 shares of the Series D Preferred Stock can be converted into PENN Common Stock.
During the three months ended June 30, 2022 and the year ended December 31, 2021, the Company acquired an additional 0.3%, and 0.6% of Barstool common stock, par value $0.0001 per share, respectively, which represents a partial settlement of the 1% purchase on a delayed basis as noted above. The acquisitions of the acquired Barstool common stock that occurred during the three months ended June 30, 2022 and the year ended December 31, 2021, were settled through a predetermined number of PENN Common Stock and Series D Preferred Stock, respectively, as contained within the Amended and Restated Stockholders’ Agreement (see Note 13, “Stockholders’ Equity and Stock-Based Compensation,” for further information).As a part of the stock purchase agreement, we entered into a commercial agreement that provides us with access to Barstool’s customer list and exclusive advertising on the Barstool platform over the term of the agreement. The initial term of the commercial agreement is ten years and, unless earlier terminated and subject to certain exceptions, will automatically renew for three additional ten-year terms (a total of 40 years assuming all renewals are exercised).
As of September 30, 2022 and December 31, 2021, we have an amortizing intangible asset pertaining to the customer list of $0.2 million and $0.8 million, respectively. As of September 30, 2022 and December 31, 2021, we have a prepaid expense pertaining to the advertising in the amount of $14.5 million, and $15.4 million respectively, of which $13.3 million and $14.2 million was classified as long-term, respectively. The long-term portion of the prepaid advertising expense is included in “Other assets” within our unaudited Consolidated Balance Sheets.
As of September 30, 2022 and December 31, 2021, our investment in Barstool was $160.2 million and $162.5 million, respectively. We record our proportionate share of Barstool’s net income or loss one quarter in arrears.
The Company determined that Barstool qualified as a VIE as of September 30, 2022 and December 31, 2021. The Company did not consolidate the financial position of Barstool as of September 30, 2022 and December 31, 2021, nor the results of operations for the three and nine months ended September 30, 2022 and 2021, as the Company determined that it did not qualify as the primary beneficiary of Barstool either at the commencement date of its investment or for subsequent periods, primarily as a result of the Company not having the power to direct the activities of the VIE that most significantly affect Barstool’s economic performance.
Kansas Entertainment Joint Venture
As of September 30, 20222023 and December 31, 2021,2022, our investment in Kansas Entertainment was $79.9$77.8 million and $83.8$81.5 million, respectively. During the three and nine months ended September 30, 2022, theThe Company received distributions from Kansas Entertainment totaling $11.0 million and $10.5 million for the three months ended September 30, 2023 and 2022, respectively, and $27.8 million and $27.5 million respectively, as compared to $10.5 million and $23.9 million for the three and nine months ended September 30, 2021.2023 and 2022, respectively. The Company deems these distributions to be returns on its investment based on the source of those cash flows from the normal business operations of Kansas Entertainment.
The Company has determined that Kansas Entertainment does not qualify as a VIE. Using the guidance for entities that are not VIEs, the Company determined that it did not have a controlling financial interest in the joint venture, primarily as it did not have the ability to direct the activities of the joint venture that most significantly impacted the joint venture’s economic performance without the input of NASCAR. Therefore, the Company did not consolidate the financial position of Kansas Entertainment as of September 30, 20222023 and December 31, 2021,2022, nor the results of operations for the three and nine months ended September 30, 20222023 and 2021.2022.
Note 11—Income Taxes
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to its year-to-date pretax book income or loss. The tax effects of discrete items, including but not limited to, excess tax benefits associated with stock-based compensation, are reported in the interim period in which they occur. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 226.7%19.0% and (62.9%)226.7% for the three months ended September 30, 2023 and 2022, respectively. The effective tax rate (income taxes as a percentage of income or loss before income taxes) including discrete items was 1,698.9% and (62.9)% for the nine months ended September 30, 2023 and 2022, as compared to 29.7% and 22.7% for the three and nine months ended September 30, 2021. We excluded certain foreign losses from our worldwide effective tax rate calculation due to a year-to-date ordinary loss for which no benefit may be recognized.respectively. Our effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings, acquisitions and dispositions, and changes to our valuation allowance. Certain of theseallowance positions. The primary drivers causing fluctuations in our effective tax rate each period were (i) the Barstool transactions, (ii) excluding certain foreign losses for which no tax benefit can be recognized in our worldwide effective tax rate calculation, and other factors, including our history and projections of pretax earnings, are considered in assessing our ability(iii) changes to realize our net deferred tax assets.the valuation allowance.
ASC 740 requires that deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amount and the tax basis of existing assets and liabilities and are measured at the prevailing enacted tax rates that will be in effect when these differences are realized or settled.
As of June 30, 2022, and December 31, 2021,each reporting date, the Company had a valuation allowance of $187.2 million and $124.3 million, respectively, within its unaudited Consolidated Balance Sheets. The accounting guidance also requires analysis regarding whether valuation allowances should be established based on the consideration of all available evidence using a “more-likely-than-not” realization standard. We evaluate our deferred tax assets quarterly to determine if valuation allowances are required. The realization of the deferred tax assets ultimately depends upon the existence of sufficient taxable income in future periods. We established a full valuation allowance against our deferred tax assets beginning in the first quarter of 2020 because of the mandated property-wide closures resulting in zero revenues for an extended period. The Company routinely analyzesconsiders all available positive and negative evidence in determiningthat could affect its view of the continuing need for a valuation allowance. Our evaluation process considered, among other factors, historical retail operating results, our three-year cumulative earnings position, projectionsfuture realization of future sustained profitability and the duration of statutory carryforward periods.
deferred tax assets pursuant to ASC Topic 740, “Income Taxes.” As of September 30, 2022, the Company determined that2023, we intend to continue maintaining a valuation allowance was no longer required against its federal, foreign, and state neton our deferred tax assets forthat are not more likely than not to be realized, until there is sufficient positive evidence to support the reversal of all or some portion that will be realized. As a result,of these allowances. A reduction in the Company released $172.7 million of its total valuation allowance duringcould result in a significant decrease to income tax expense in the period the release is recorded. Although the exact timing and valuation reversal amount are estimated, the actual determination is contingent upon the earnings level we achieve in 2023 as well as our projected income levels in future periods. During the three and nine months ended September 30, 2022,2023, the Company’s valuation allowance increased in the amount of $53.0 million and $50.9 million, respectively, primarily due to a capital loss carryforward generated on the positive evidence outweighingBarstool disposition, that is more likely than not to be realized.
During the negative evidence thereby allowingthree months ended March 31, 2023, the Company recorded a net deferred tax liability of $115.9 million with respect to achieve the “more-likely-than-not” realization standard. This reversal is reflectedBarstool stock acquisition on February 17, 2023, which was subsequently written off to income tax expense on August 8, 2023, as part of the Barstool disposition, as discussed in Note 6, “Acquisitions and Dispositions.” These temporary differences were primarily related to the fair value accounting adjustments on the acquired intangible assets (excluding goodwill) and existing carryover tax basis, including acquired federal and state net operating losses. Barstool’s operations are included in our incomeconsolidated federal, state and local tax benefitreturns for the stub period ended August 8, 2023, which has an immaterial impact on our effective tax rate in the accompanying unaudited Consolidated Statements of Operations. When a change in valuation allowance is recognized during an interim period, a portion of the valuation allowance to be reversed must be allocated to the remaining interim periods. certain jurisdictions.
The Company continues to maintain a valuation allowancerecorded prepaid income taxes of approximately $14.5$54.4 million and $15.2 million as of September 30, 2022 within its unaudited Consolidated Balance Sheets, for federal and foreign tax attributes in addition to certain state filing groups.
The most significant positive evidence that led to the reversal of the valuation allowance during this interim period includes the following:
Achievement and sustained growth in our three-year cumulative pretax earnings.We anticipate emerging from a three-year cumulative pretax loss position during the fourth quarter of this year. The Company has demonstrated profitability consecutively in the prior seven quarters including approximately $224.4 million and approximately $559.0 million of pretax book income for the nine months ended September 30, 2022 and for the year ended December 31 2021, respectively.
Substantial total revenue and earnings growth for the retail operating segment over the last seven quarters.Total revenue and earnings for the retail operating segment increased 58.3% and 87.2%, respectively, from 2020 to 2021 showcasing a strong finish to a transformative year in a post pandemic environment. The Company continued to have strong growth in total revenue and earnings for the retail operating segment for the nine months ended September 30, 2022.
Lack of significant asset impairment charges expected to be indicative of the Company’s retail business operations or projections for the foreseeable future. The Company had experienced significant impairment charges as a result of mandated property-wide closures pursuant to various orders from state gaming regulators or governmental authorities to combat the rapid spread of COVID-19. The Company recorded impairment charges totaling $623.4 million during the year ended December 31, 2020. There were no impairments recorded in 2021 and for the nine months ended September 30, 2022, the Company recorded impairment of $104.6 million. The impairment charge recorded in the third quarter of 2022 relates to an individual property and is specific to a prolonged hotel room renovation causing the majority of the hotel to be closed subsequent to the property reopening from the COVID-19 mandated closure, leading to amended cash flow projections to reflect the current operating results and the related economic environment.
As of September 30, 2022,2023 and December 31, 2021, prepaid income taxes of $23.2 million and $42.5 million,2022, respectively, werewhich are included in “Prepaid expenses” within our unaudited Consolidated Balance Sheets. The reduction in prepaid income taxes is primarily related to an Internal Revenue Service refund of $28.2 million related to the Company’s carryback claim under the CARES Act.
On July 8, 2022, the Pennsylvania House Bill 1342 was signed into law that reduces the corporate income tax rate over the next nine years from the current rate of 9.99% to 4.99% by 2031. The tax law change is accounted for in the period of enactment and therefore, we recognized an impact of approximately $10.3 million of additional expense during the three months ended September 30, 2022.
Note 12—Commitments and Contingencies
The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions, development agreements and other matters arising in the ordinary course of business. Although the Company maintains what it believes to be adequate insurance coverage to mitigate the risk of loss pertaining to covered matters, legal and administrative proceedings can be costly, time-consuming and unpredictable. The Company does not believe that the final outcome of these matters will have a material adverse effect on its financial position, results of operations, or cash flows.
ESPN Sportsbook and Investment Agreements
On August 8, 2023, PENN entered into the Sportsbook Agreement with ESPN which provides for a long-term strategic relationship between PENN and ESPN relating to online sports betting in the United States.
Pursuant to the Sportsbook Agreement, PENN will rebrand its existing Barstool Sportsbook across all online platforms in the United States as ESPN BET and will oversee daily operations of the Sportsbook. The Sportsbook Agreement provides PENN with an exclusive license to use the ESPN BET trademark in the United States in connection with the Sportsbook. In addition, ESPN will provide certain marketing, content integration and promotional services in support of the Sportsbook, including access to ESPN talent, and will exclusively promote the Sportsbook in the United States, subject to certain exceptions, in accordance with a mutually agreed on-channel marketing plan. The Sportsbook will be deeply integrated within the broader ESPN editorial, content, digital product and sports programming ecosystem, with access to ESPN’s industry leading audience and database.
The Sportsbook Agreement has an initial 10-year term and may be extended for an additional ten years upon mutual agreement of PENN and ESPN. In consideration for the media marketing services and brand and other rights provided by ESPN, PENN will pay $150.0 million per year in cash pursuant to the Sportsbook Agreement for the initial 10-year term and issue the warrants pursuant to the Investment Agreement (as defined and described in more detail below). In addition, the Sportsbook Agreement may be terminated by either party (i) in the case of an uncured material breach by or bankruptcy of the other party, (ii) if at the end of year 3 of the term the Sportsbook has not achieved a specified level of market share based on gross gaming revenue in the states in which the Sportsbook operates while branded ESPN BET, (iii) in certain circumstances, if the other party or certain of its officers is the subject of a criminal or other investigation by federal or state authorities, is charged with certain crimes or commits certain other acts, including those which would reasonably be expected to cause material damage to the terminating party’s reputation or brand, or (iv) in certain circumstances involving non-compliance with data privacy laws. In addition, ESPN has the right to terminate the Sportsbook Agreement if (i) a repeated material breach by PENN of the terms of the ESPN intellectual property license or an uncured material breach by PENN of the terms of the ESPN intellectual property license that results in material harm to the reputation or goodwill associated with the ESPN brand or name, (ii) in certain circumstances where PENN commits a material failure of specified product and technology guidelines or certain customer service level metrics, (iii) if at the end of year 3 or year 7 of the term the Sportsbook’s market access is not at least a specified percentage of the total market access by the online sportsbook operator with the most expansive market access, subject to certain exceptions, (iv) if ESPN undergoes certain transactions involving a significant change in ownership of ESPN, subject to the payment of a termination fee to PENN or (v) in certain circumstances if PENN undergoes certain transactions involving a significant change in ownership of PENN, including such a transaction involving a competitor of The Walt Disney Company (“TWDC”). PENN has the right to terminate the Sportsbook Agreement (i) if ESPN undergoes certain transactions resulting in a significant change in ownership of ESPN involving a competitor of PENN, (ii) in certain circumstances related to the suitability of ESPN, TWDC or certain of their respective officers for gaming regulatory purposes or (iii) in certain circumstances if PENN is unable to utilize the ESPN BET brand in states comprising a specified percentage of the aggregate population for all states in which PENN conducts online sports betting in the United States.
In connection with the Sportsbook Agreement, PENN and ESPN, Inc. entered into an Investment Agreement (the “Investment Agreement”) on August 8, 2023. The Investment Agreement provides for the issuance to ESPN, Inc. of certain warrants to purchase shares of PENN common stock, par value $0.01 per share, and setting forth certain other governance rights of ESPN, Inc. Pursuant to the Investment Agreement PENN issued to ESPN, Inc. warrants to purchase approximately 31.8 million shares of PENN common stock. The warrants are classified as equity and contain three separate tranches which vest quarterly over ten years from the date of the Investment Agreement, provided that any remaining unvested portion of the first tranche of warrants will vest on August 8, 2032. If the Sportsbook Agreement is terminated due to certain breaches of the Sportsbook Agreement by PENN, then all unvested warrants will immediately vest. If the Sportsbook Agreement is terminated for any other reason, then all unvested warrants will immediately be forfeited, subject to certain exceptions. At the grant date, the $550.4 million fair value of the awards was determined using the Black Scholes pricing model with contractual terms ranging from 9.5 to 11.5 years, and strike prices ranging from $26.08 to $32.60. Additionally, if after February 29, 2024 and during the term of the Sportsbook Agreement PENN achieves specified performance conditions based on an average market share based on gross gaming revenue in the states in which the Sportsbook operates (as defined within the Investment Agreement), PENN could issue to ESPN, Inc. warrants to purchase up to an additional 6.4 million shares of PENN common stock. The additional warrants will be fully vested upon issuance, have an exercise price of $28.95 and will be exercisable for 10.5 years from the date of issuance.
Note 13—Stockholders’ Equity and Stock-Based Compensation
Common and Preferred Stock
On May 11, 2021,February 17, 2023, as part of the acquisition of Hitpoint, the Company issued 43,684 shares for a total of $3.5 million. On July 8, 2022, the Company issued 4,055 shares, in connection with the achievement of the first of three annual mutual goals established by the Company and Hitpoint for a total of $0.2 million.
On June 17, 2021, the Company filed its Second Amended and Restated Articles of Incorporation with the Department of State of the Commonwealth of Pennsylvania. These Articles of Incorporation, as amended and restated and approved by the Company’s shareholders at the 2021 Annual Meeting of Shareholders, increase the number of authorized shares of common stock from 200,000,000 to 400,000,000.
On August 1, 2021, as part of the acquisition of Sam Houston, the Company issued 198,103 shares for a total of $15.8 million.
On October 19, 2021, as part of the acquisition of theScore, the Company issued 12,319,340 shares of common stock and authorized and issued 697,539 Exchangeable Shares for approximately $1.0 billion, each with a par value of $0.01,Barstool Acquisition as discussed in Note 6, “Acquisitions and Dispositions.Dispositions,” As of September 30, 2022 and December 31, 2021, there were 620,353 and 653,059 Exchangeable Shares outstanding, respectively.On each of February 22, 2021 and August 23, 2021, the Company issued 432,442,809 shares of common stock with a par value of $0.01, to certain former stockholders of Barstool (the “Share Consideration”). The issuance of the Share Consideration was exempt from the registration requirements of the Securities Act of 1933, as amended, pursuant to Section 4(a)(2) thereof, because such issuance did not involve a public offering. The Share Consideration was subject to transfer restrictions which were waived on August 11, 2023, pursuant to the Barstool SPA. See Note 6, “Acquisitions and Dispositions” for additional information related to the Barstool SPA.In conjunction with the February 20, 2020 stock purchase agreement between PENN and Barstool, the Company issued 883 shares of Series D Preferred Stock,
in conjunction with acquiring additional shares of Barstool common stock. On June 1, 2022, the Company issued 64,000 shares of common stock in conjunction with acquiring additional shares of Barstool common stock frompar value $0.01 (the “Series D Preferred Stock”) to certain individual stockholders affiliated with Barstool.
1/1,000th of a share of Series D Preferred Stock was convertible into one share of PENN common stock. The
issuancesSeries D Preferred stockholders were
exempt from registration pursuantentitled to
Section 4(a)(2)participate equally and ratably in all dividends and distributions paid to holders of
the Securities Act. The acquisition of the incremental BarstoolPENN common stock
represents a partial settlementbased on the number of
the 1% purchase on a delayed basis as described in Note 10, “Investments in and Advances to Unconsolidated Affiliates.”shares of PENN common stock into which such Series D Preferred Stock could convert. Series D Preferred Stock is nonvoting stock. On February 22, 2021 and August 23, 2021, 151March 3, 2023, 227 shares of Series D Preferred Stock and 43 shares of Series D Preferred Stock, respectively, were converted to common stock. As a result of the conversion, the Company issued 151,200226,800 shares of common stock and 43,000 shares of common stock, respectively, each with a par value of $0.01. On February 23, 2022 and February 24, 2022, 43Pursuant to the Barstool SPA, on August 11, 2023, all remaining 354 outstanding shares of Series D Preferred Stock became eligible for conversion and 151 shares of Series D Preferred Stock, respectively, were converted to common stock. As a result of the conversion, the Company issued 43,000353,800 shares of common stock and 151,200 shares of common stock, respectively, each with a par value of $0.01. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act.
As of September 30, 2022 and December 31, 2021, there were 5,000 There are no outstanding shares authorized of Series D Preferred Stock as of September 30, 2023.
On June 29, 2023, in connection with the acquisition of HitPoint Inc. and Lucky Point Inc. (collectively, “Hitpoint”) which were acquired in 2021, the Company issued 4,055 shares of common stock with a par value of $0.01, representing the achievement of the second of three annual mutual goals established by the Company and Hitpoint.
In connection with the acquisition of theScore in October 2021, the Company issued 12,319,340 of common stock with a par value of $0.01, and 697,539 exchangeable shares (“Exchangeable Shares”) through the capital of an indirect wholly-owned subsidiary of PENN, in addition to cash consideration. Each Exchangeable Share is exchangeable into one share of PENN Common Stock at the option of the holder, subject to certain adjustments. Upon the acquisition of theScore, certain employees of theScore elected to have their outstanding equity awards, which were assumed under theScore plan (as defined below), issued as Exchangeable Shares, once the shares vest or are exercised. In addition, the Company may redeem all outstanding Exchangeable Shares in exchange for shares of PENN common stock at any time following the fifth anniversary of the closing, or earlier under certain circumstances.
We issued no Exchangeable Shares during the three months ended September 30, 2023 or 2022. During the nine months ended September 30, 2023, we issued 2,854 Exchangeable Shares. No Exchangeable Shares were issued during the nine months ended September 30, 2022. As of both September 30, 2023 and December 31, 2022, there were 768,441 Exchangeable Shares authorized, of which 581560,388 shares and 775620,019 shares were outstanding, respectively.
Share Repurchase Authorization
On February 1, 2022,During the second quarter of 2023, we completed our $750.0 million share repurchase authorization approved by the Board of Directors of PENN approvedon February 1, 2022 (the “February 2022 Authorization”).
On December 6, 2022, a second share repurchase program was authorized for an additional $750.0 million share repurchase authorization.(the “December 2022 Authorization”). The three-year authorizationDecember 2022 Authorization expires on JanuaryDecember 31, 2025.
The Company utilized the capacity under the February 2022 Authorization prior to effecting any repurchases under the December 2022 Authorization. Repurchases by the Company will beare subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a Rule 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. There is no minimum number of shares that the Company is required to repurchase and the repurchase authorization may be suspended or discontinued at any time without prior notice.
No shares of the Company’s common stock were repurchased during the three months ended September 30, 2023. During the three months ended September 30, 2022, the Company repurchased 5,348,809 shares of its common stock in open market transactions for $168.0 million, at an average price of $31.40 per share. share under the February 2022 Authorization.
During the nine months ended September 30, 2023 and 2022, respectively, the Company repurchased 5,438,221 and 14,690,394 shares of its common stock in open market transactions for $149.8 million and $510.1 million, at an average price of $27.54 and $34.72 per share. share under the February 2022 and December 2022 Authorizations.
The cost of all repurchased shares is recorded as “Treasury stock” within our unaudited Consolidated Balance Sheets.
SubsequentNo shares of the Company’s common stock were repurchased subsequent to the quarter ended September 30, 2022,2023. As of November 1, 2023, the Company repurchased 1,005,188 shares of its common stock at an average price of $28.95 per share for an aggregate amount of $29.1 million. The remaining availability under our $750.0 million share repurchase authorizationDecember 2022 Authorization was $211.1 million as of November 2, 2022.$749.5 million.
2022 Long Term Incentive Compensation Plan
On June 7, 2022, the Company’s shareholders, upon the recommendation of the Company’s Board of Directors, approved the Company’s 2022 Long Term Incentive Compensation Plan (the “2022 Plan”). The 2022 Plan permitsauthorizes the Company to issue stock options (incentive and/or non-qualified), SARs, RSAs, RSUs,stock appreciation rights (“SARs”), restricted stock (shares and/or units), performance and other equityawards (shares and/or units), and cash awards to executive officers, non-employee directors, and other employees, consultants, and advisors of the Company and its subsidiaries. Non-employee directors and consultants are eligible to receive all such awards, other than incentive stock options. Pursuant to the 2022 Plan, an initial 6,870,000 shares of the Company’s common stock arewere reserved for issuance, plus any shares of common stock subject to outstanding awards under both the previous 2018 Long Term Incentive Compensation Plan, or theScoreas amended (“2018 Plan”) and the Score Media and Gaming Inc. Second Amended and Restated Stock Option and Restricted Stock Unit Plan (both as defined below)(the “theScore Plan”) as of June 7, 2022, and outstanding awards that are forfeited or settled for cash.cash under each of the prior plans.
On June 6, 2023, the Company’s shareholders, upon the recommendation of the Company’s Board of Directors, approved an amendment to the 2022 Plan (as amended, the “2022 Amended Plan”), which increased the number of shares reserved for issuance under the plan by 7,000,000 shares to 13,870,000 shares. For purposes of determining the number of shares available for issuance under the 2022 Amended Plan, stock options, restricted stock and SARs (except cash-settled SARs)all other equity settled awards count against the 6,870,00013,870,000 share limit as one share of common stock for each share granted. Any awards that are not settled in shares of common stock are not counted against the share limit. As of September 30, 2022,2023, there are 6,575,08310,960,721 shares available for future grants under the 2022 Amended Plan.
2018 Long Term Incentive Compensation Plan
The Company’s 2018 Long Term Incentive Compensation Plan, as amended (the “2018 Plan”) permitted it to issue stock options (incentive and/or non-qualified), stock appreciation rights (“SARs”), RSAs, RSUs, cash-settled phantom stock units (“CPSUs”) and other equity and cash awards to employees and any consultant or advisor to the Company or subsidiary. Non-employee directors were eligible to receive all such awards, other than incentive stock options. Pursuant to the 2018 Plan, 12,700,000 shares of the Company’s common stock were reserved for issuance. For purposes of determining the number of shares available for issuance under the 2018 Plan, stock options and SARs (except cash-settled SARs) counted against the 12,700,000 limit as one share of common stock for each share granted and restricted stock or any other full value stock award are counted as 2.30 shares of common stock for each share granted. Any awards that were not settled in shares of common stock were not counted against the share limit. In connection with the approval of the 2022 Plan, the 2018 Plan remains in place until all of the awards previously granted thereunder have been paid, forfeited or expired. However, the shares which remained available for issuance under the 2018 Plan are no longer available for issuance and all future equity awards will be granted pursuant to the 2022 Plan.
Score Media And Gaming Inc. Second Amended And Restated Stock Option And Restricted Stock Unit Plan (“theScore Plan”)
In connection with the acquisition of theScore on October 19, 2021, the Company registered theScore Plan. theScore Plan permitted the Company to issue non-qualified stock options and RSUs to employees and service providers affiliated with theScore prior to the acquisition date. At the date of acquisition, the Company rolled over all outstanding, non-vested and unexercised stock options and non-vested RSUs equivalent to 853,904 shares of the Company. Each rollover option and RSU were subject to substantially the same terms and conditions applicable to the award immediately prior to the acquisition. In connection with the transaction, the vesting provisions of unvested options and RSUs, awarded under the theScore Plan prior to August 4, 2021, were amended to provide for a new acceleration right for legacy theScore employees and service providers. The amendment provides that, if an involuntary termination without cause occurs at any time prior to April 19, 2023, unvested
options and RSUs will automatically accelerate and become fully vested on the effective date of termination. In connection with the approval of the 2022 Plan, theScore Plan remains in place until all of the awards previously granted thereunder have been paid, forfeited or expired. However, the shares which remained available for future grants under theScore Plan are no longer available for issuance and all future equity awards will be pursuant to the 2022 Plan.
Performance Share Program
In February 2019,The Company’s performance share programs were adopted to provide our NEOs and certain other key executives with stock-based compensation tied directly to the Company’s Compensation Committee ofperformance, which further aligns their interests with our shareholders and provides compensation only if the Board of Directors adopted adesignated performance share program (the “Performance Share Program II”) pursuant togoals are met for the 2018 Plan. applicable performance periods.
An aggregate of 461,747 and 244,955 RSUs and 95,276 RSAs and RSUsrestricted units with performance-based vesting conditions, at target, were granted during the nine months ended September 30, 2023 and 2022, and September 30, 2021, respectively,respectively. Restricted performance units granted prior to the adoption of the 2022 Plan were awarded under a performance share program (“the Performance Share Program II, withII”). Subsequent restricted performance units are governed by the grant having a three-year award period consisting2022 Plan. Restricted performance units consist of three one-year performance periods andover a three-year service period. The awards have the potential to be earned at between 0% and 150% of the number of shares granted, depending on achievement of the annual performance thresholdgoals, and remain subject to vesting for the full three-year service period.
In addition to the above, during the nine months ended September 30, 2023, the Company granted employees of theScore 200,634 restricted units with performance-based vesting of these awards is 50% of target and, basedconditions that are dependent on the levelachievement of achievement, upcertain milestones. The awards have the potential to 150%be earned at between 0% and 100% and consist of target.two, one-year performance periods, each containing an applicable milestone. The awards also contain a one-year vesting requirement and vesting is subject to: (a) the satisfaction of the milestones on or before the applicable expiration date and (b) continued service through the date on which the respective portion of the awards vests.
Stock-based Compensation Expense
Stock-based compensation expense, which pertains principally to our stock options RSAs and RSUs, for the three and nine months ended September 30, 2022 was $13.6 million and $45.1 million, respectively, as compared to $8.5 million and $21.9 million for the three and nine months ended September 30, 2021 andrestricted stock, including restricted stock with performance conditions, is included within the unaudited Consolidated Statements of Operations under “General and administrative.administrative,” and was $35.2 million and $13.6 million for the three months ended September 30, 2023 and 2022, respectively, and $71.4 million and $45.1 million for the nine months ended September 30, 2023 and 2022, respectively.
Stock Options
The Company granted 1,516 and 397,881 stock options duringStock-based compensation expense for the three and nine months ended September 30, 2022, respectively, as compared2023 included $14.5 million related to 736immediate vesting, pursuant to the Barstool SPA, of all unvested restricted shares and 230,901stock appreciation rights issued under
Stock Options
The Company granted 905 and 1,516 stock options during the three months ended September 30, 2023 and 2022, respectively, and 841,140 and 397,881 during the nine months ended September 30, 2021,2023 and 2022, respectively.
Cash-settled Phantom Stock Units
Our outstanding CPSUsphantom stock units (“CPUs”), are settled in cash and entitle plan recipients to receive a cash payment based on the fair value of the Company’s common stock which is based on the vestingclosing stock price of the trading day preceding the vest date. Our CPSUsCPUs vest over a period of threeone orto four years. The cash-settled CPSUsCPUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period. The Company has a liability, which is included in “Accrued expenses and other current liabilities” within the unaudited Consolidated Balance Sheets, associated with its cash-settled CPSUsCPUs of $1.1$0.8 million and $8.6$2.1 million as of September 30, 20222023 and December 31, 2021,2022, respectively.
For CPSUs,As of September 30, 2023, there was $4.2a total of $0.8 million of total unrecognized compensation cost as of September 30, 2022related to CPUs that will be recognized over the awards remaining weighted-average vesting period of 0.81.5 years. For the three and nine months ended September 30, 2022 theThe Company recognized $1.0$1.3 million and $2.4$1.0 million of compensation expense associated with these awards respectively, as compared to $5.5 million and $11.2 million for the three months ended September 30, 2023 and 2022, respectively, and $2.9 million and $2.4 million for the nine months ended September 30, 2021,2023 and 2022, respectively. Compensation expense associated with our CPSUsCPUs is recorded in “General and administrative” within the unaudited Consolidated Statements of Operations. We paid $4.2 million and $9.9 million and $13.5 million forduring the nine months ended September 30, 20222023 and 2021,2022, respectively, pertaining to cash-settled CPSUs.CPUs.
Stock Appreciation Rights
Our outstanding SARs are settled in cash and are accounted for as liability awards, since they will be settled in cash and generally vest over a period of four years. The fair value of cash-settled SARs is calculated each reporting period and estimated using the Black-Scholes option pricing model. The Company has a liability, which is included in “Accrued expenses and other current liabilities” within the unaudited Consolidated Balance Sheets, associated with its cash-settled SARs of $7.1$4.7 million and $18.5$9.2 million as of September 30, 20222023 and December 31, 2021,2022, respectively.
For SARs held by employees of the Company, there was $7.8$1.6 million of total unrecognized compensation cost as of September 30, 20222023 that will be recognized over the awards remaining weighted-average vesting period of 1.91.6 years. The Company recognized a reduction to compensation expense of $0.7 million and $1.3 million for the three months ended September 30, 2023 and 2022, respectively, and a reduction to compensation expense of $4.4 million and $8.1 million for the three and nine months ended September 30, 2022,2023 and recognized compensation expense of $3.2 million and $13.6 million for the three and nine months ended September 30, 2021,2022, respectively. Compensation expense associated with our SARs is recorded in “General and administrative” within the unaudited Consolidated Statements of Operations. We paid $2.8$0.6 million and $38.8$2.8 million during the nine months ended September 30, 20222023 and 2021,2022, respectively, related to cash-settled SARs.
Other
In the second quarter of 2021, the Company entered into two promissory notes with shareholders for a total of $9.0 million. The promissory notes arewere unsecured and bearwith interest of 2.25%. AsDuring the first quarter of September 30, 20222023, the outstanding loan balance was settled and December 31, 2021, the receivable is recorded as a reductionan increase of equity within “Additional paid-in capital” in our unaudited Consolidated Balance Sheets.
Note 14—Earnings per Share
For the three and nine months ended September 30, 2022,2023, we recorded a net loss attributable to PENN. As such, because the dilution from potential common shares was anti-dilutive, we used basic weighted-average common shares outstanding, rather than diluted weighted-average common shares outstanding when calculating diluted loss per share for the three and 2021nine months ended September 30, 2023. Stock options, restricted stock, convertible preferred shares and convertible debt that could potentially dilute basic EPS in the future that were not included in the computation of diluted loss per share were as follows:
| | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | 2023 |
| Assumed conversion of dilutive stock options | 0.5 | | | 0.7 | |
| Assumed conversion of dilutive restricted stock | 0.4 | | | 0.4 | |
| Assumed conversion of convertible preferred shares | 0.2 | | | 0.3 | |
| Assumed conversion of convertible debt | 14.1 | | | 14.1 | |
For the three and nine months ended September 30, 2022, we recorded net income attributable to PENN. As such, we used diluted weighted-average common shares outstanding when calculating diluted income per share.share for the three and nine months ended September 30, 2022. Stock options, restricted stock, convertible preferred shares and convertible debt that could potentially dilute basic EPS in the future are included in the computation of diluted income per share.
The following table sets forth the allocation of net income (loss) for the three and nine months ended September 30, 20222023 and 20212022 under the two-class method. | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | 2022 | | 2021 | | 2022 | | 2021 |
| Net income attributable to PENN Entertainment | $ | 123.5 | | | $ | 86.1 | | | $ | 201.3 | | | $ | 375.8 | |
| Net income applicable to preferred stock | 0.5 | | | 0.4 | | | 0.8 | | | 1.9 | |
| Net income applicable to common stock | $ | 123.0 | | | $ | 85.7 | | | $ | 200.5 | | | $ | 373.9 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Net income (loss) attributable to PENN Entertainment | $ | (724.8) | | | $ | 123.5 | | | $ | (131.9) | | | $ | 201.3 | |
| Net income applicable to preferred stock | — | | | 0.5 | | | — | | | 0.8 | |
| Net income (loss) applicable to common stock | $ | (724.8) | | | $ | 123.0 | | | $ | (131.9) | | | $ | 200.5 | |
The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the three and nine months ended September 30, 20222023 and 2021:2022:
| | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Weighted-average common shares outstanding | 157.6 | | | 156.1 | | | 163.5 | | | 155.9 | | |
| Weighted-average common shares outstanding — basic | | Weighted-average common shares outstanding — basic | 150.9 | | | 157.6 | | | 152.3 | | | 163.5 | |
| Assumed conversion of: | Assumed conversion of: | | Assumed conversion of: | |
| Dilutive stock options | Dilutive stock options | 1.0 | | | 2.1 | | | 1.2 | | | 2.3 | | Dilutive stock options | — | | | 1.0 | | | — | | | 1.2 | |
| Dilutive restricted stock | Dilutive restricted stock | 0.3 | | | 0.4 | | | 0.2 | | | 0.4 | | Dilutive restricted stock | — | | | 0.3 | | | — | | | 0.2 | |
| Convertible debt | Convertible debt | 14.1 | | | 14.1 | | | 14.1 | | | 14.1 | | Convertible debt | — | | | 14.1 | | | — | | | 14.1 | |
| Weighted-average common shares outstanding - Diluted | 173.0 | | | 172.7 | | | 179.0 | | | 172.7 | | |
| Weighted-average common shares outstanding — diluted | | Weighted-average common shares outstanding — diluted | 150.9 | | | 173.0 | | | 152.3 | | | 179.0 | |
Restricted stock with performance and market based vesting conditions that have not been met as of September 30, 20222023 were excluded from the computation of diluted earnings per share.EPS.
OptionsIn addition to purchase 0.9the 0.5 million and 0.80.7 million shares were outstanding duringoptions included in the table above for the three and nine months ended September 30, 2023, respectively, options to purchase 2.0 million and 0.9 million shares were outstanding during the three months ended September 30, 2023 and 2022, respectively, compared to 0.2and 1.7 million and 0.8 million during both the three and nine months ended September 30, 2021,2023 and 2022, respectively, but were not included in the computation of diluted earnings per shareEPS because they were anti-dilutive.
The assumed conversion of 0.2 million and 0.6 million preferred shares were excluded from the computation of diluted earnings per shareEPS for both the three months ended September 30, 2023 and 2022, respectively, and 0.3 million and 0.6 million preferred shares for the nine months ended September 30, 2023 and 2022, as compared to 0.8 million preferred shares for both the three and nine months ended September 30, 2021,respectively, because including them would have been anti-dilutive.
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions, except per share data) | 2022 | | 2021 | | 2022 | | 2021 |
| Calculation of basic earnings per share: | | | | | | | |
| Net income applicable to common stock | $ | 123.0 | | | $ | 85.7 | | | $ | 200.5 | | | $ | 373.9 | |
| Weighted-average shares outstanding - PENN Entertainment | 157.0 | | | 156.1 | | | 162.9 | | | 155.9 | |
| Weighted-average shares outstanding - Exchangeable Shares | 0.6 | | | — | | | 0.6 | | | — | |
| Weighted-average common shares outstanding - basic | 157.6 | | | 156.1 | | | 163.5 | | | 155.9 | |
| Basic earnings per share | $ | 0.78 | | | $ | 0.55 | | | $ | 1.23 | | | $ | 2.40 | |
| | | | | | | |
| Calculation of diluted earnings per share: | | | | | | | |
| Net income applicable to common stock | $ | 123.0 | | | $ | 85.7 | | | $ | 200.5 | | | $ | 373.9 | |
Interest expense, net of tax (1): | | | | | | | |
| Convertible Notes | 1.8 | | | 4.4 | | | 5.4 | | | 13.0 | |
| Diluted income applicable to common stock | $ | 124.8 | | | $ | 90.1 | | | $ | 205.9 | | | $ | 386.9 | |
| Weighted-average common shares outstanding - diluted | 173.0 | | | 172.7 | | | 179.0 | | | 172.7 | |
| Diluted earnings per share | $ | 0.72 | | | $ | 0.52 | | | $ | 1.15 | | | $ | 2.24 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions, except per share data) | 2023 | | 2022 | | 2023 | | 2022 |
| Calculation of basic earnings (loss) per share: | | | | | | | |
| Net income (loss) applicable to common stock | $ | (724.8) | | | $ | 123.0 | | | $ | (131.9) | | | $ | 200.5 | |
| Weighted-average shares outstanding — PENN Entertainment | 150.3 | | | 157.0 | | | 151.7 | | | 162.9 | |
| Weighted-average shares outstanding — Exchangeable Shares | 0.6 | | | 0.6 | | | 0.6 | | | 0.6 | |
| Weighted-average common shares outstanding — basic | 150.9 | | | 157.6 | | | 152.3 | | | 163.5 | |
| Basic earnings (loss) per share | $ | (4.80) | | | $ | 0.78 | | | $ | (0.87) | | | $ | 1.23 | |
| | | | | | | |
| Calculation of diluted earnings (loss) per share: | | | | | | | |
| Net income (loss) applicable to common stock | $ | (724.8) | | | $ | 123.0 | | | $ | (131.9) | | | $ | 200.5 | |
Interest expense, net of tax (1): | | | | | | | |
| Convertible Notes | — | | | 1.8 | | | — | | | 5.4 | |
| Diluted income (loss) applicable to common stock | $ | (724.8) | | | $ | 124.8 | | | $ | (131.9) | | | $ | 205.9 | |
| Weighted-average common shares outstanding — diluted | 150.9 | | | 173.0 | | | 152.3 | | | 179.0 | |
| Diluted earnings (loss) per share | $ | (4.80) | | | $ | 0.72 | | | $ | (0.87) | | | $ | 1.15 | |
(1)The three and nine months ended September 30, 2022 were tax-affected at a rate of 21%. The three and nine months ended September 30, 2021, were tax-affected at a rate of 20%.
Note 15—Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach, and cost approach). The levels of the hierarchy are described below:
•Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
•Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
•Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy. The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. The fair value of the Company’s trade accounts receivable and payables approximates the carrying amounts.
Cash and Cash Equivalents
The fair value of the Company’s cash and cash equivalents approximates their carrying amount, due to the short maturity of the cash equivalents.
Equity Securities
As of September 30, 20222023 and December 31, 2021,2022, we held $20.6$8.6 million and $84.3$17.1 million in equity securities of ordinary shares, respectively, which are reported as “Other assets” in our unaudited Consolidated Balance Sheets. These equity securities are the result of PENN Interactive entering into multi-year agreements with third-party online sports betting and/or iCasino operators for online sports betting and iCasino market access across our portfolio.
We recognized unrealized holding losses of $11.6 million and $10.8 million related to these equity securities during the three months ended September 30, 2023 and 2022, respectively, and unrealized holding losses of $8.5 million and $66.4 million
Duringfor the three and nine months ended September 30, 2022, we recognized holding losses of $10.8 million2023 and $66.4 million related to these equity securities, respectively, compared to a holding gains of $10.1 million and $28.9 million for the three and nine months ended September 30, 2021,2022, respectively, which is included in “Other,” as reported in “Other income (expenses)” within our unaudited Consolidated Statements of Operations. During the quarter ended September 30, 2021, all warrants were exercised for ordinary shares which resulted in a loss of $20.1 millionare included in “Other,” as reported in “Other income (expenses)” within our unaudited Consolidated Statements of Operations.
As of September 30, 2023, the fair value of the equity securities was determined using Level 1 inputs, which use market approach valuation techniques. The primary inputs to those techniques include the quoted market price of the equity securities and foreign currency exchange rates.
As of December 31, 2022, the fair value of the equity securities was determined using Level 2 inputs, which use market approach valuation techniques. The primary inputs to those techniques include the quoted market price of the equity securities, foreign currency exchange rates, a discount for lack of marketability (“DLOM”) with respect to the ordinary shares, and a Black-Scholes option pricing model previously associated with the exercised warrants.shares. The DLOM iswas based on the remaining term of the relevant lock-up periods and the volatility associated with the underlying equity securities.
Available-for-Sale Debt Securities
The Black-Scholes option pricing model utilizesCompany acquired 12.0% secured convertible notes on April 7, 2023 for $20.0 million, due on the exercise pricethird-year anniversary of the warrants, a risk-free rate, volatility associated withdate of issuance, which are reported in “Other assets” in our unaudited Consolidated Balance Sheets. The terms contain optional and mandatory conversion provisions pursuant to which we will receive common stock upon conversion. As of September 30, 2023, the underlying equity securities and the expected lifefair value of the warrants.convertible notes approximates the transaction price, as such we did not record any unrealized gains or losses to “Other comprehensive income (loss)” within our unaudited Consolidated Statements of Comprehensive Income (Loss).
Held-to-maturityThe fair value of the convertible notes was determined using a binomial lattice model and is categorized as a Level 3 measurement.
Held-to-Maturity Securities and Promissory Notes
We have a management contract with Retama Development Corporation (“RDC”), a local government corporation of the City of Selma, Texas, to manage the day-to-day operations of Retama Park Racetrack, located outside of San Antonio, Texas. In addition, we own 1.0% of the equity of Retama Nominal Holder, LLC, which holds a nominal interest in the racing license used to operate Retama Park Racetrack, and a 75.5% interest in Pinnacle Retama Partners, LLC (“PRP”), which owns the contingent gaming rights that may arise if gaming under the existing racing license becomes legal in Texas in the future.
As of September 30, 20222023 and December 31, 2021,2022, PRP held $7.9 million and $15.1 million in promissory notes issued by RDC respectively. As of September 30, 2022 and December 31, 2021, PRP held $6.7 million in local government corporation bonds issued by RDC, at amortized cost. The promissory notes and the local government corporation bonds are collateralized by the assets of Retama Park Racetrack. As of September 30, 20222023 and December 31, 2021,2022, the promissory notes and the local government corporation bonds were included in “Other assets” within our unaudited Consolidated Balance Sheets.
The contractual terms of these promissory notes include interest payments due at maturity; however, we have not recorded accrued interest on these promissory notes because uncertainty exists as to RDC’s ability to make interest payments. We have the positive intent and ability to hold the local government corporation bonds to maturity and until the amortized cost is recovered. The estimated fair values of such investments are principally based on appraised values of the land associated with Retama Park Racetrack, which are classified as Level 2 inputs.
Long-term Debt
The fair value of our Term Loan A Facility, Term Loan B-1 Facility, Amended Term Loan A Facility, Amended Term Loan B Facility, 5.625% Notes, 4.125% Notes, and the Convertible Notes is estimated based on quoted prices in active markets and is classified as a Level 1 measurement.
Other long-term obligations as of September 30, 20222023 and December 31, 20212022 included a financing arrangement entered in February of 2021, the relocation fees for Dayton and Mahoning Valley, and the repayment obligation of the hotel and event center located near Hollywood Casino Lawrenceburg. See Note 8, “Long-term Debt” for details. The fair values of the Dayton and Mahoning Valley relocation fees and the Lawrenceburg repayment obligation are estimated based on rates consistent with the Company’s credit rating for comparable terms and debt instruments and are classified as Level 2 measurements. Additionally, in February 2021, we entered into a third-party financing arrangement providing the Company with upfront cash proceeds while permitting us to participate in future proceeds on certain claims. The financing obligation has been classified as a non-current liability and the fair value of the financing obligation is based on what we expect to be settled in a future period of which the principal is contingent and predicated on other events, plus accreted period non-cash interest using an effective interest rate of 27.0% until the claims and related obligation is settled. The financing obligation has been classified as
a Level 3 measurement and is included within our unaudited Consolidated Balance Sheets in “Long-term debt, net of current maturities, debt discount and debt issuance costs.” See Note 8, “Long-term Debt.” Other Liabilities
Other liabilities as of September 30, 20222023 and December 31, 20212022 includes contingent purchase price liabilities related to Plainridge Park Casino and Hitpoint, of which Hitpoint was acquired on May 11, 2021. The Hitpoint contingent purchase price liability is payable in installments up to a maximum of $1.0 million in the form of cash and equity, on the first three
anniversaries of the acquisition close date and is based on the achievement of mutual goals established by the Company and Hitpoint. As of September 30, 2022,2023, there are twois one annual achievement periodsperiod remaining. The Plainridge Park Casino contingent purchase price liability is calculated based on earnings of the gaming operations over the first ten years of operations, which commenced on June 24, 2015. As of September 30, 2022,2023, we were contractually obligated to make threetwo additional annual payments. The fair value of the Plainridge Park Casino contingent purchase price liability is estimated based on an income approach using a discounted cash flow model. These contingent purchase price liabilities have been classified as a Level 3 measurement and are included within our unaudited Consolidated Balance Sheets in “Accrued expenses and other current liabilities” or “Other long-term liabilities,” depending on the timing of the next payment.
Additionally, Other liabilities as of September 30, 2023, includes the $70.0 million indemnification as described in Note 6, “Acquisitions and Dispositions.” The indemnification liabilities were recorded at September 30, 2023, in “Other long-term liabilities” within our unaudited Consolidated Balance Sheets and have been classified as a Level 3 measurement. Key assumptions used to estimate the fair value of the indemnification include the expected tax rate and the probability of potential outcomes based on valuation methods that utilize unobservable inputs that are significant to the overall fair value as of September 30, 2023. The assessment of the significance of a particular input to the fair value measurement requires judgment.
The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:
| | | September 30, 2022 | | September 30, 2023 |
| (in millions) | (in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | (in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | Financial assets: | | | | | | | | | | Financial assets: | | | | | | | | | |
| Cash and cash equivalents | Cash and cash equivalents | $ | 1,728.4 | | | $ | 1,728.4 | | | $ | 1,728.4 | | | $ | — | | | $ | — | | Cash and cash equivalents | $ | 1,317.9 | | | $ | 1,317.9 | | | $ | 1,317.9 | | | $ | — | | | $ | — | |
| Equity securities | Equity securities | $ | 20.6 | | | $ | 20.6 | | | $ | — | | | $ | 20.6 | | | $ | — | | Equity securities | $ | 8.6 | | | $ | 8.6 | | | $ | 8.6 | | | $ | — | | | $ | — | |
| Available-for-sale debt securities | | Available-for-sale debt securities | $ | 20.0 | | | $ | 20.0 | | | $ | — | | | $ | — | | | $ | 20.0 | |
| Held-to-maturity securities | Held-to-maturity securities | $ | 6.7 | | | $ | 6.7 | | | $ | — | | | $ | 6.7 | | | $ | — | | Held-to-maturity securities | $ | 6.7 | | | $ | 6.7 | | | $ | — | | | $ | 6.7 | | | $ | — | |
| Promissory notes | Promissory notes | $ | 7.9 | | | $ | 7.9 | | | $ | — | | | $ | 7.9 | | | $ | — | | Promissory notes | $ | 7.9 | | | $ | 7.9 | | | $ | — | | | $ | 7.9 | | | $ | — | |
| Financial liabilities: | Financial liabilities: | | Financial liabilities: | |
| Long-term debt | Long-term debt | | Long-term debt | |
| Senior Secured Credit Facilities | $ | 1,511.7 | | | $ | 1,491.1 | | | $ | 1,491.1 | | | $ | — | | | $ | — | | |
| Amended Credit Facilities | | Amended Credit Facilities | $ | 1,479.7 | | | $ | 1,495.5 | | | $ | 1,495.5 | | | $ | — | | | $ | — | |
| 5.625% Notes | 5.625% Notes | $ | 399.6 | | | $ | 353.6 | | | $ | 353.6 | | | $ | — | | | $ | — | | 5.625% Notes | $ | 399.7 | | | $ | 372.0 | | | $ | 372.0 | | | $ | — | | | $ | — | |
| 4.125% Notes | 4.125% Notes | $ | 393.6 | | | $ | 306.6 | | | $ | 306.6 | | | $ | — | | | $ | — | | 4.125% Notes | $ | 394.5 | | | $ | 322.0 | | | $ | 322.0 | | | $ | — | | | $ | — | |
| Convertible Notes | Convertible Notes | $ | 323.9 | | | $ | 457.8 | | | $ | 457.8 | | | $ | — | | | $ | — | | Convertible Notes | $ | 325.6 | | | $ | 400.7 | | | $ | 400.7 | | | $ | — | | | $ | — | |
| Other long-term obligations | Other long-term obligations | $ | 157.2 | | | $ | 155.4 | | | $ | — | | | $ | 45.0 | | | $ | 110.4 | | Other long-term obligations | $ | 172.6 | | | $ | 171.3 | | | $ | — | | | $ | 27.1 | | | $ | 144.2 | |
| Other liabilities | Other liabilities | $ | 9.7 | | | $ | 9.4 | | | $ | — | | | $ | 2.5 | | | $ | 6.9 | | Other liabilities | $ | 78.9 | | | $ | 78.8 | | | $ | — | | | $ | 2.7 | | | $ | 76.1 | |
| Puts and calls related to certain Barstool shares | $ | 0.4 | | | $ | 0.4 | | | $ | — | | | $ | 0.4 | | | $ | — | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| (in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 1,863.9 | | | $ | 1,863.9 | | | $ | 1,863.9 | | | $ | — | | | $ | — | |
| Equity securities | $ | 84.3 | | | $ | 84.3 | | | $ | — | | | $ | 84.3 | | | $ | — | |
| Held-to-maturity securities | $ | 6.7 | | | $ | 6.7 | | | $ | — | | | $ | 6.7 | | | $ | — | |
| Promissory notes | $ | 15.1 | | | $ | 15.1 | | | $ | — | | | $ | 15.1 | | | $ | — | |
| Puts and calls related to certain Barstool shares | $ | 1.9 | | | $ | 1.9 | | | $ | — | | | $ | 1.9 | | | $ | — | |
| Financial liabilities: | | | | | | | | | |
| Long-term debt | | | | | | | | | |
| Senior Secured Credit Facilities | $ | 1,544.5 | | | $ | 1,559.6 | | | $ | 1,559.6 | | | $ | — | | | $ | — | |
| 5.625% Notes | $ | 399.6 | | | $ | 411.5 | | | $ | 411.5 | | | $ | — | | | $ | — | |
| 4.125% Notes | $ | 392.9 | | | $ | 389.5 | | | $ | 389.5 | | | $ | — | | | $ | — | |
| Convertible notes | $ | 253.5 | | | $ | 780.0 | | | $ | 780.0 | | | $ | — | | | $ | — | |
| Other long-term obligations | $ | 146.3 | | | $ | 144.3 | | | $ | — | | | $ | 53.9 | | | $ | 90.4 | |
| Other liabilities | $ | 13.3 | | | $ | 13.2 | | | $ | — | | | $ | 2.7 | | | $ | 10.5 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2022 |
| (in millions) | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| Financial assets: | | | | | | | | | |
| Cash and cash equivalents | $ | 1,624.0 | | | $ | 1,624.0 | | | $ | 1,624.0 | | | $ | — | | | $ | — | |
| Equity securities | $ | 17.1 | | | $ | 17.1 | | | $ | — | | | $ | 17.1 | | | $ | — | |
| Held-to-maturity securities | $ | 6.7 | | | $ | 6.7 | | | $ | — | | | $ | 6.7 | | | $ | — | |
| Promissory notes | $ | 7.9 | | | $ | 7.9 | | | $ | — | | | $ | 7.9 | | | $ | — | |
| Financial liabilities: | | | | | | | | | |
| Long-term debt | | | | | | | | | |
| Amended Credit Facilities | $ | 1,503.6 | | | $ | 1,514.7 | | | $ | 1,514.7 | | | $ | — | | | $ | — | |
| 5.625% Notes | $ | 399.7 | | | $ | 371.0 | | | $ | 371.0 | | | $ | — | | | $ | — | |
| 4.125% Notes | $ | 393.8 | | | $ | 327.0 | | | $ | 327.0 | | | $ | — | | | $ | — | |
| Convertible Notes | $ | 324.3 | | | $ | 550.8 | | | $ | 550.8 | | | $ | — | | | $ | — | |
| Other long-term obligations | $ | 156.1 | | | $ | 154.4 | | | $ | — | | | $ | 36.4 | | | $ | 118.0 | |
| Other liabilities | $ | 9.9 | | | $ | 9.6 | | | $ | — | | | $ | 2.4 | | | $ | 7.2 | |
| Puts and calls related to certain Barstool shares | $ | 0.4 | | | $ | 0.4 | | | | | $ | 0.4 | | | $ | — | |
The following table summarizes the changes in fair value of our Level 3 assets and liabilities measured on a recurring basis:
| | | | | |
| (in millions) | Other Assets and Liabilities |
Balance as of January 1, 20222023 | $ | 100.9125.2 | |
| Additions | 90.0 | |
| Interest | 20.026.1 | |
| Payment installments | (2.7)(2.8) | |
Included in earnings (1) | (0.9)1.8 | |
Balance as of September 30, 20222023 | $ | 117.3240.3 | |
(1)The expense is included in “General and administrative” within our unaudited Consolidated Statements of Operations.
The following table sets forth the assets measured at fair value on a non-recurring basis as
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Valuation Date | | Valuation Technique | | Level 1 | | Level 2 | | Level 3 | | Total Balance | | Total Reduction in Fair Value
Recorded |
| Goodwill | 9/30/2022 | | Discounted cash flow and market approach | | $ | — | | | $ | — | | | $ | 199.2 | | | $ | 199.2 | | | $ | 37.4 | |
| Gaming licenses | 9/30/2022 | | Discounted cash flow | | $ | — | | | $ | — | | | $ | 101.1 | | | $ | 101.1 | | | $ | 65.4 | |
| Trademarks | 9/30/2022 | | Discounted cash flow | | $ | — | | | $ | — | | | $ | 42.7 | | | $ | 42.7 | | | $ | — | |
The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 assets and liabilities on a recurring basis as of September 30, 2022:2023:
| | | | | | | | | | | | | | | | | |
| | Valuation Technique | | Unobservable Input | | Discount Rate |
| Available-for-sale debt securities | Discounted cash flow | | Discount rate | | 35.0 | % |
| Other long-term obligation | Discounted cash flow | | Discount rate | | 27.0%27.0 | % |
| Contingent purchase price - Plainridge Park Casino | Discounted cash flow | | Discount rate | | 8.9%8.1 | % |
As discussed in Note 7, “Goodwill and Other Intangible Assets,” we recorded impairments on goodwill and our gaming licenses, which are indefinite-lived intangible assets, at the Hollywood Casino at Greektown reporting unit as a result of the third quarter of 2022 interim assessment for impairment. The following table presents quantitative information about the significant unobservable inputs used in the fair value measurements of other indefinite-lived intangible assets as of the valuation date below: | | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Fair Value | | Valuation Technique | | Unobservable Input | | Range or Amount |
| As of September 30, 2022 | | | | | | | |
| Goodwill | $ | 199.2 | | | Discounted cash flow | | Discount rate | | 12.0 | % |
| | | | | Long-term revenue growth rate | | 2.0 | % |
| Gaming licenses | $ | 101.1 | | | Discounted cash flow | | Discount rate | | 13.0 | % |
| | | | | Long-term revenue growth rate | | 2.0 | % |
Note 16—Segment Information
We have aggregated our operating segments into five reportable segments. Retail operating segments are based on the similar characteristics within the regions in which they operate:segments: Northeast, South, West, Midwest, and Midwest.Interactive. Our gaming and racing properties are grouped by geographic location, and each is viewed as an operating segment with the exception of our two properties in Jackpot, Nevada, which are viewed as one operating segment. We consider our combined VGT operations, by state, to be separate operating segments. Interactive segment includes all of our iCasino and online sports betting, iCasino and social gaming operations, management of retail sports betting, media, and our proportionate sharethe operating results of earnings attributable to our equity method investment in Barstool. The Other category is included in the following tables to reconcile the segment informationWe owned 36% of Barstool common stock prior to the consolidated information.February 17, 2023 Barstool Acquisition (as defined in Note 6, “Acquisitions and Dispositions,”) pursuant to which we acquired the remaining 64% of Barstool common stock. On August 8, 2023, we entered into the Barstool SPA, and we sold 100% of the outstanding shares of Barstool common stock (as defined in Note 6, “Acquisitions and Dispositions”). The Company utilizes Adjusted EBITDAR (as defined below) as its measure of segment profit or loss. The following table highlights our revenues and Adjusted EBITDAR for each reportable segment and reconciles Adjusted EBITDAR on a consolidated basis to net income.income (loss).
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | |
| Northeast segment | Northeast segment | $ | 685.4 | | | $ | 672.4 | | | $ | 2,028.8 | | | $ | 1,895.8 | | Northeast segment | $ | 687.0 | | | $ | 685.4 | | | $ | 2,075.5 | | | $ | 2,028.8 | |
| South segment | South segment | 329.8 | | | 318.2 | | | 1,009.8 | | | 982.3 | | South segment | 308.2 | | | 329.8 | | | 931.3 | | | 1,009.8 | |
| West segment | West segment | 156.5 | | | 145.7 | | | 451.2 | | | 382.7 | | West segment | 135.1 | | | 156.5 | | | 394.8 | | | 451.2 | |
| Midwest segment | Midwest segment | 298.4 | | | 285.7 | | | 877.6 | | | 815.2 | | Midwest segment | 293.4 | | | 298.4 | | | 882.0 | | | 877.6 | |
| Interactive segment | Interactive segment | 158.7 | | | 93.0 | | | 455.1 | | | 275.3 | | Interactive segment | 196.3 | | | 158.7 | | | 687.3 | | | 455.1 | |
Other (1) | Other (1) | 4.2 | | | 3.5 | | | 17.4 | | | 6.8 | | Other (1) | 4.5 | | | 4.2 | | | 16.5 | | | 17.4 | |
Intersegment eliminations (2) | Intersegment eliminations (2) | (8.0) | | | (6.7) | | | (23.8) | | | (25.6) | | Intersegment eliminations (2) | (5.1) | | | (8.0) | | | (19.9) | | | (23.8) | |
| Total | Total | $ | 1,625.0 | | | $ | 1,511.8 | | | $ | 4,816.1 | | | $ | 4,332.5 | | Total | $ | 1,619.4 | | | $ | 1,625.0 | | | $ | 4,967.5 | | | $ | 4,816.1 | |
| Adjusted EBITDAR (3): | Adjusted EBITDAR (3): | | Adjusted EBITDAR (3): | |
| Northeast segment | Northeast segment | $ | 217.9 | | | $ | 221.1 | | | $ | 637.5 | | | $ | 645.9 | | Northeast segment | $ | 208.3 | | | $ | 217.9 | | | $ | 638.5 | | | $ | 637.5 | |
| South segment | South segment | 139.9 | | | 137.0 | | | 429.7 | | | 448.0 | | South segment | 136.6 | | | 139.9 | | | 381.1 | | | 429.7 | |
| West segment | West segment | 60.5 | | | 54.5 | | | 171.4 | | | 151.1 | | West segment | 54.7 | | | 60.5 | | | 153.4 | | | 171.4 | |
| Midwest segment | Midwest segment | 129.4 | | | 125.8 | | | 386.2 | | | 374.0 | | Midwest segment | 123.8 | | | 129.4 | | | 376.5 | | | 386.2 | |
| Interactive segment | Interactive segment | (49.3) | | | (32.0) | | | (80.1) | | | (29.5) | | Interactive segment | (50.2) | | | (49.3) | | | (68.7) | | | (80.1) | |
Other (1) | Other (1) | (26.5) | | | (26.1) | | | (73.6) | | | (75.6) | | Other (1) | (28.1) | | | (26.5) | | | (80.7) | | | (73.6) | |
Total (3) | Total (3) | 471.9 | | | 480.3 | | | 1,471.1 | | | 1,513.9 | | Total (3) | 445.1 | | | 471.9 | | | 1,400.1 | | | 1,471.1 | |
| | Other operating benefits (costs) and other income (expenses): | Other operating benefits (costs) and other income (expenses): | | Other operating benefits (costs) and other income (expenses): | |
Rent expense associated with triple net operating leases (4) | Rent expense associated with triple net operating leases (4) | (31.5) | | | (116.0) | | | (119.6) | | | (342.9) | | Rent expense associated with triple net operating leases (4) | (146.6) | | | (31.5) | | | (439.0) | | | (119.6) | |
| Stock-based compensation | Stock-based compensation | (13.6) | | | (8.5) | | | (45.1) | | | (21.9) | | Stock-based compensation | (35.2) | | | (13.6) | | | (71.4) | | | (45.1) | |
| Cash-settled stock-based awards variance | Cash-settled stock-based awards variance | 3.8 | | | (5.2) | | | 16.2 | | | (14.3) | | Cash-settled stock-based awards variance | 2.9 | | | 3.8 | | | 12.0 | | | 16.2 | |
| Gain (loss) on disposal of assets | Gain (loss) on disposal of assets | 0.2 | | | (0.3) | | | (7.0) | | | (0.1) | | Gain (loss) on disposal of assets | — | | | 0.2 | | | — | | | (7.0) | |
| Contingent purchase price | Contingent purchase price | (0.1) | | | (0.6) | | | 0.9 | | | (1.9) | | Contingent purchase price | (1.3) | | | (0.1) | | | (1.8) | | | 0.9 | |
Pre-opening expenses (5) | Pre-opening expenses (5) | (0.5) | | | (1.6) | | | (4.1) | | | (2.8) | | Pre-opening expenses (5) | — | | | (0.5) | | | — | | | (4.1) | |
| Depreciation and amortization | Depreciation and amortization | (148.7) | | | (83.7) | | | (417.2) | | | (246.9) | | Depreciation and amortization | (105.8) | | | (148.7) | | | (323.9) | | | (417.2) | |
Impairment losses (6)(5) | Impairment losses (6)(5) | (104.6) | | | — | | | (104.6) | | | — | | Impairment losses (6)(5) | — | | | (104.6) | | | — | | | (104.6) | |
| Insurance recoveries, net of deductible charges | Insurance recoveries, net of deductible charges | 1.9 | | | — | | | 10.7 | | | — | | Insurance recoveries, net of deductible charges | 0.3 | | | 1.9 | | | 13.9 | | | 10.7 | |
Non-operating items of equity method investments (7)(6) | Non-operating items of equity method investments (7)(6) | (2.6) | | | (3.0) | | | (4.7) | | | (6.0) | | Non-operating items of equity method investments (7)(6) | (1.0) | | | (2.6) | | | (6.4) | | | (4.7) | |
| | Interest expense, net | Interest expense, net | (193.3) | | | (144.9) | | | (547.7) | | | (418.6) | | Interest expense, net | (117.5) | | | (198.5) | | | (346.1) | | | (554.7) | |
Other (5)(8) | (41.7) | | | 6.0 | | | (126.1) | | | 27.3 | | |
| Interest income | | Interest income | 10.2 | | | 5.2 | | | 30.5 | | | 7.0 | |
Loss on disposal of Barstool (7) | | Loss on disposal of Barstool (7) | (923.2) | | | — | | | (923.2) | | | — | |
Gain on Barstool Acquisition, net (8) | | Gain on Barstool Acquisition, net (8) | — | | | — | | | 83.4 | | | — | |
Gain on REIT transactions, net (9) | | Gain on REIT transactions, net (9) | — | | | — | | | 500.8 | | | — | |
| Loss on early extinguishment of debt | | Loss on early extinguishment of debt | — | | | — | | | — | | | (10.4) | |
Other (10) | | Other (10) | (14.7) | | | (41.7) | | | (20.6) | | | (115.7) | |
| Income (loss) before income taxes | Income (loss) before income taxes | (58.8) | | | 122.5 | | | 122.8 | | | 485.8 | | Income (loss) before income taxes | (886.8) | | | (58.8) | | | (91.7) | | | 122.8 | |
| Income tax benefit (expense) | Income tax benefit (expense) | 182.0 | | | (36.4) | | | 78.1 | | | (110.1) | | Income tax benefit (expense) | 161.7 | | | 182.0 | | | (40.9) | | | 78.1 | |
| Net income | $ | 123.2 | | | $ | 86.1 | | | $ | 200.9 | | | $ | 375.7 | | |
| Net income (loss) | | Net income (loss) | $ | (725.1) | | | $ | 123.2 | | | $ | (132.6) | | | $ | 200.9 | |
(1)The Other category consists of the Company’s stand-alone racing operations, namely Sanford-Orlando Kennel Club, Sam Houston and Valley Race Parks (the remaining 50% was acquired by PENN on August 1, 2021),Park, the Company’s joint venture interests in Freehold Raceway, and our management contract for Retama Park Racetrack. Expenses incurred for corporate and shared services activities that are directly attributable to a property or are otherwise incurred to support a property are allocated to each property. The Other category also includes corporate overhead costs, which consist of certain expenses, such as: payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate to or have not otherwise been allocated to a property.allocated. Corporate overhead costs were $27.0 million and $26.5 million for the three months ended September 30, 2023 and 2022, respectively, and $78.1 million and $74.9 million for the nine months ended September 30, 2023 and 2022, respectively.
(2)Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by PENN Interactive.
(3)We define Adjusted EBITDAR as earnings before interest expense, net, interest income, income taxes, depreciation and amortization, rent expense associated with triple net operating leases (see footnote (4) below), stock-based compensation, debt extinguishment and financing charges, which is included in “Other” (see footnote (8) below), impairment losses, insurance recoveries, net of deductible charges, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, the difference between budget and actual expense for cash-settled stock-based awards,awards; pre-opening expenses (see footnote (5) below),expenses; loss on disposal of a business; non-cash gains/losses associated with REIT transactions; non-cash gains/losses associated with partial and step acquisitions as measured in accordance with ASC 805 “Business Combinations”; and other. Adjusted EBITDAR is also inclusive of income or loss from
unconsolidated affiliates, with our share of non-operating items (see footnote (7)(6) below) added back for Barstool and our Kansas Entertainment joint venture.
(4)Solely comprised of rent expense associated withFor the three and nine months ended September 30, 2023, pertains to the operating lease components contained within our triple net masterthe: (i) AR PENN Master Lease; (ii) 2023 Master Lease; (iii) Margaritaville Lease; and (iv) Greektown Lease.
For the three and nine months ended September 30, 2022, pertains to the operating lease
dated November 1, 2013 with GLPI andcomponents contained within the
triple net master lease assumed in connection with our acquisition of Pinnacle Entertainment, Inc., our individual triple net leases with GLPI for the real estate assets used in the operation of Tropicana (on September 26, 2022, we sold the equity interests(i) PENN Master Lease (specific to
Bally’s) and Hollywood Casino at The Meadows, and our individual triple net leases with VICI for the real estate assets used in the operations of Margaritaville Resort Casino and Hollywood Casino at Greektown (of which the Tropicana Lease, Meadows Lease, Margaritaville Lease and the Greektown Lease are defined in “Note 9, Leases”) and are referred to collectively as our “triple net operating leases”. As a result of the Lease Modification defined in Note 9, “Leases”, the land and building components associated with the operations of Dayton and Mahoning Valley are classified as operating leases which is recorded to rent expense, as compared to prior to theValley); (ii) Meadows Lease; (iii) Margaritaville Lease; (iv) Greektown Lease; and (v) Tropicana Lease Modification, whereby the land components of substantially all of the Master Lease properties were classified as operating leases and recorded to rent expense. Subsequent to the Lease Modification, the land components associated with the Master Lease properties are primarily classified as finance leases.(which terminated on September 26, 2022).(5)During the first quarter of 2021, acquisition costs were included within pre-opening and acquisition costs. Beginning with the quarter ended June 30, 2021, acquisition costs are presented as part of other expenses.
(6)Amount primarily relates to a $102.8 million impairment charge in the Northeast segment.
(7)(6)Consists principally of interest expense, net, income taxes, depreciation and amortization, and stock-based compensation expense associated with Barstool prior to us acquiring the remaining 64% of Barstool common stock (see Note 6, “Acquisitions and Dispositions”) and our Kansas Entertainment joint venture. We record our portionventure(7)Relates to the loss incurred on the sale of Barstool’s net income or loss, including adjustments to arrive at Adjusted EBITDAR, one quarter in arrears.100% of the outstanding shares of Barstool which was completed on August 8, 2023 (see Note 6, “Acquisitions and Dispositions”). (8)Includes a gain of $66.5 million associated with Barstool related to remeasurement of the equity investment immediately prior to the acquisition date of February 17, 2023 and a gain of $16.9 million related to the acquisition of the remaining 64% of Barstool common stock (see Note 6, “Acquisitions and Dispositions”). (9)Upon the execution of the February 21, 2023 AR PENN Master Lease and the 2023 Master Lease, both effective January 1, 2023, we recognized a gain of $500.8 million as a result of the reclassification and remeasurement of lease components (see Note 9, “Leases”). (10)Primarily relates to unrealized holding losses on our equity securities of $11.6 million and $10.8 million for the three months ended September 30, 2023 and 2022, respectively. Primarily relates to unrealized holding losses of $8.5 million and $66.4 million for the nine months ended September 30, 2023 and 2022, respectively. In addition, during the three and nine months ended September 30, 2022, respectively, and2023, the unrealized holding gains on our equity securities of $10.1 million and $28.9 million for the three and nine months ended September 30, 2021, respectively, which are discussed inlosses were partially offset by dividend income received (see Note 15, “Fair Value Measurements.”Measurements”). Also consists of non-recurring acquisition and transaction costs of $31.9 million and $46.3 million for the three and nine months ended September 30, 2022, respectively, and $12.9 million and $14.7 million for the three and nine months ended September 30, 2021, respectively, finance transformation costs associated with the implementation of our new Enterprise Resource Management system, and a $10.4 million debt extinguishment and financing charge incurred in the second quarter of 2022, which is discussed in Note 8, “Long-term Debt.”respectively. The table below presents capital expenditures by segment:
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Capital expenditures: | Capital expenditures: | | | | | | | | Capital expenditures: | | | | | | | |
| Northeast segment | Northeast segment | $ | 26.4 | | | $ | 35.1 | | | $ | 82.1 | | | $ | 71.3 | | Northeast segment | $ | 27.1 | | | $ | 26.4 | | | $ | 74.6 | | | $ | 82.1 | |
| South segment | South segment | 14.8 | | | 16.4 | | | 51.1 | | | 24.5 | | South segment | 20.3 | | | 14.8 | | | 49.4 | | | 51.1 | |
| West segment | West segment | 3.3 | | | 2.3 | | | 7.3 | | | 5.5 | | West segment | 5.6 | | | 3.3 | | | 15.9 | | | 7.3 | |
| Midwest segment | Midwest segment | 11.3 | | | 7.3 | | | 25.5 | | | 12.8 | | Midwest segment | 11.1 | | | 11.3 | | | 40.7 | | | 25.5 | |
| Interactive segment | Interactive segment | 6.5 | | | 2.7 | | | 9.7 | | | 4.1 | | Interactive segment | 8.6 | | | 6.5 | | | 18.3 | | | 9.7 | |
| Other | Other | 1.7 | | | 9.4 | | | 13.9 | | | 19.6 | | Other | 2.3 | | | 1.7 | | | 8.9 | | | 13.9 | |
| Total capital expenditures | Total capital expenditures | $ | 64.0 | | | $ | 73.2 | | | $ | 189.6 | | | $ | 137.8 | | Total capital expenditures | $ | 75.0 | | | $ | 64.0 | | | $ | 207.8 | | | $ | 189.6 | |
The table below presents investment in and advances to unconsolidated affiliates and total assets by segment:
| | (in millions) | (in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other (1) | | Total | (in millions) | Northeast | | South | | West | | Midwest | | Interactive | | Other (1) | | Total |
| Balance sheet as of September 30, 2022 | | | | | | | | | | | | | | |
| Balance sheet as of September 30, 2023 | | Balance sheet as of September 30, 2023 | | | | | | | | | | | | | |
| Investment in and advances to unconsolidated affiliates | Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 79.9 | | | $ | 160.2 | | | $ | 6.1 | | | $ | 246.3 | | Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 77.8 | | | $ | — | | | $ | 4.7 | | | $ | 82.6 | |
| Total assets | Total assets | $ | 2,172.8 | | | $ | 1,169.7 | | | $ | 375.0 | | | $ | 1,382.4 | | | $ | 4,228.8 | | | $ | 8,206.4 | | | $ | 17,535.1 | | Total assets | $ | 1,993.6 | | | $ | 1,250.0 | | | $ | 382.1 | | | $ | 1,260.8 | | | $ | 2,366.6 | | | $ | 8,915.5 | | | $ | 16,168.6 | |
| | Balance sheet as of December 31, 2021 | | |
| Balance sheet as of December 31, 2022 | | Balance sheet as of December 31, 2022 | |
| Investment in and advances to unconsolidated affiliates | Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 83.8 | | | $ | 164.4 | | | $ | 6.8 | | | $ | 255.1 | | Investment in and advances to unconsolidated affiliates | $ | 0.1 | | | $ | — | | | $ | — | | | $ | 81.5 | | | $ | 160.9 | | | $ | 6.1 | | | $ | 248.6 | |
| Total assets | Total assets | $ | 2,283.6 | | | $ | 1,224.6 | | | $ | 394.8 | | | $ | 1,215.8 | | | $ | 2,618.3 | | | $ | 9,135.0 | | | $ | 16,872.1 | | Total assets | $ | 2,231.8 | | | $ | 1,191.9 | | | $ | 372.4 | | | $ | 1,305.5 | | | $ | 4,233.7 | | | $ | 8,166.8 | | | $ | 17,502.1 | |
(1)The real estate assets subject to the Master Leases, which are classified as either property and equipment, operating lease ROU assets, or finance lease ROU assets, are included within the Other category.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition, results of operations, liquidity and capital resources should be read in conjunction with, and is qualified in its entirety by, the unaudited Consolidated Financial Statements and the notes thereto included in this Quarterly Report on Form 10-Q, and the Consolidated Financial Statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year ended December 31, 2021.2022.
EXECUTIVE OVERVIEW
Our Business
On August 4, 2022, Penn National Gaming, Inc. was renamed PENN Entertainment, Inc. PENN Entertainment, Inc., together with its subsidiaries (“PENN,” the “Company,” “we,” “our,” or “us”), is North America’s leading provider of integrated entertainment, sports content, and casino gaming experiences. As of September 30, 2023, PENN operatesoperated 43 properties in 20 states, online sports betting in 1418 jurisdictions and iCasino in five jurisdictions, under a portfolio of well-recognized brands including Hollywood Casino®Casino®, L’Auberge®L’Auberge®, Barstool Sportsbook®,Sportsbook® and theScore Bet Sportsbook and Casino®Casino®. In August 2023, PENN entered into a transformative, exclusive long-term strategic alliance with ESPN, Inc. and ESPN Enterprises, Inc. (together, “ESPN”) relating to online sports betting within the United States. In November 2023, pending regulatory approval, the existing Barstool Sportsbook will be rebranded and launched across all online platforms in the United States as ESPN BET, and our online product will include a Hollywood-branded integrated iCasino where permitted. PENN’s ability to leverage the leading sports media brands in the United States (ESPN) and Canada (theScore) will position us to significantly expand our digital footprint and efficiently grow our customer ecosystem. This highly differentiated strategy, which is focused on organic cross-sell opportunities, is reinforced by its investmentsour investment in market-leading retail casinos, sports media assets and technology, including a proprietary state-of-the-art, fully integrated digital sports and online casinoiCasino betting platform and an in-house iCasino content studio. The Company’sPENN’s portfolio is further bolstered by itsour industry-leading myPENN Playchoice®TM customer loyalty program, (the “mychoice program”), which offers our approximately 26over 27 million members a unique set of rewards and experiences across business channels.
The majority of the real estate assets (i.e., land and buildings) used in our operations are subject to triple net master leases; the most significant of which are the PENN Master Lease and the Pinnacle Master Lease (as such terms are defined in “Liquidity and Capital Resources” and collectively referred to as the “Master Leases”), with Gaming and Leisure Properties, Inc. (Nasdaq: GLPI) (“GLPI”), a real estate investment trust (“REIT”), and include the AR PENN Master Lease, 2023 Master Lease, PENN Master Lease (prior to January 1, 2023), and Pinnacle Master Lease (as such terms are defined in “Liquidity and Capital Resources” and collectively referred to as the “Master Leases”). Recent Acquisitions, Dispositions, Development Projects, and Other
On January 11, 2022, PENN entered into a definitive purchase agreement to sell itsFebruary 17, 2023, we acquired the remaining 64% of the outstanding equity interest in Tropicana Las Vegas Hotel and Casino, Inc. (“Tropicana”), which has the gaming license and operates the Tropicana, to Bally’s Corporation. The transaction closed on September 26, 2022.
On August 17, 2022, the Company exercised its call rights to bring its ownershipshares of Barstool Sports, Inc. (“Barstool”) common stock not already owned by us for a consideration of approximately $405.5 million, which is inclusive of cash and common stock issuance, repayment of Barstool indebtedness of $23.8 million, transaction expenses and other purchase price adjustments in accordance with GAAP (the “Barstool Acquisition”). Prior to 100%. Thethe acquisition, we held a 36% ownership interest, which was accounted for under the equity method. At the closing of the remaining Barstool shares is expectedAcquisition, we obtained 100% of the Barstool common stock and determined the fair value of Barstool to be completed in February 2023, after which$660.0 million based on market participant assumptions, and Barstool will be a wholly-ownedbecame an indirect wholly owned subsidiary of PENN. Completion of the acquisition at that time is subject to the satisfaction of certain conditions, including regulatory approval.
On August 8, 2023, PENN entered into a binding term sheetSportsbook Agreement (the “Term Sheet”“Sportsbook Agreement”) with GLPI. As partESPN, which provides for a long-term strategic relationship between PENN and ESPN relating to online sports betting in the United States. Pursuant to the Sportsbook Agreement, PENN will rebrand its existing Barstool Sportsbook across all online platforms in the United States as ESPN BET (the “Sportsbook”) and will oversee daily operations of the Term Sheet,Sportsbook. The Sportsbook will be deeply integrated within the broader ESPN editorial, content, digital product and sports programming ecosystem, with access to ESPN’s industry leading audience and database. In addition to the Sportsbook Agreement, on August 8, 2023, PENN plansand ESPN, Inc. entered into an Investment Agreement (the “Investment Agreement”) providing for the issuance to relocate its riverboat casinosESPN, Inc. of certain warrants to new land-based facilities atpurchase shares of PENN common stock, par value $0.01 per share, and setting forth certain other governance rights of ESPN, Inc., as discussed in Note 12, “Commitments and Contingencies” in the notes to our unaudited Consolidated Financial Statements. In connection with PENN’s decision to rebrand our online sports betting business from Barstool Sportsbook to ESPN BET pursuant to the Sportsbook Agreement as discussed above, PENN concurrently entered into a stock purchase agreement with
David Portnoy (the “Barstool SPA”) pursuant to which PENN sold 100% of the outstanding shares of Barstool to David Portnoy in exchange for nominal cash consideration (one dollar) and certain non-compete and other restrictive covenants. Pursuant to the Barstool SPA, PENN has the right to receive 50% of the gross proceeds received by David Portnoy in any subsequent sale or other monetization event of Barstool. In connection with the Barstool SPA, we recognized a pre-tax loss on disposal of $923.2 million (inclusive of $714.8 million in goodwill and intangible assets write-offs and a $70.0 million indemnification liability) during the third quarter of 2023. See Note 6, “Acquisitions and Dispositions” in the notes to our unaudited Consolidated Financial Statements. For information on the tax-related impacts from the Barstool transaction, see Note 11, “Income Taxes” in the notes to our unaudited Consolidated Financial Statements. On February 21, 2023, as described in “Liquidity and Capital Resources,” the Company and GLPI entered into an agreement to amend and restate the PENN Master Lease (the “AR PENN Master Lease”), effective January 1, 2023, to (i) remove the land and buildings for Hollywood Casino Aurora (“Aurora”) and, Hollywood Casino Joliet (“Joliet”), and to build a hotel at Hollywood Casino Columbus (“Columbus”), Hollywood Casino Toledo (“Toledo”), and a second hotel tower at the M Resort Spa Casino (“M Resort”). Pursuant to the Term Sheet, the Company and GLPI agreed to amend the PENN Master Lease to (i) remove the land and buildings for Aurora, Joliet, Columbus, Hollywood Casino Toledo (“Toledo”) and M Resort, and (ii) make associated adjustments to the rent underafter which the initial rent in the AR PENN Master Lease; (iii) terminateLease will be $284.1 million, consisting of $208.2 million of building base rent, $43.0 million of land base rent and $32.9 million of percentage rent (as such terms are defined in the existingAR PENN Master Lease). Subsequent to the execution of the AR PENN Master Lease, the Company leases real estate assets associated with 14 of the gaming facilities used in its operations via a triple net master lease. The current term of the AR PENN Master Lease expires on October 31, 2033 and thereafter contains three renewal terms of five years each on the same terms and conditions, exercisable at the Company’s option.
Concurrent with the execution of the AR PENN Master Lease, the Company and GLPI entered into a new master lease (the “2023 Master Lease”), effective January 1, 2023, specific to the properties associated with Aurora, Joliet, Columbus, Toledo, M Resort, Hollywood Casino at The Meadows (“Meadows”) and Hollywood Casino Perryville (“Perryville”); and (iv) enter into a new master leasedevelopment agreement (the “New Lease”“Master Development Agreement”), effective. The 2023 Master Lease has an initial term through October 31, 2033 with three subsequent five-year renewal periods on the expected date of January 1,same terms and conditions, exercisable at the Company’s option. The 2023 specific toMaster Lease terminated the propertyindividual triple net leases associated with Aurora, Joliet, Columbus, Toledo, M Resort, Meadows and Perryville. The New2023 Master Lease will beand AR PENN Master Lease are cross-defaulted, cross-collateralized, and coterminous, with the PENN Master Lease, and subject to a parent guarantee.
The New2023 Master Lease will includeincludes a base rent (the “New“2023 Master Lease Base Rent”) equal to $232.2 million and the Master Development Agreement contains additional rent (together with the New2023 Master Lease Base Rent, the “New“2023 Master Lease Rent”) equal to (i) 7.75% of any project funding received by PENN from GLPI for an anticipated relocation of PENN’s riverboat casino and related developments with respect to Aurora (the “Aurora Project”) and (ii) a percentage, based on the then-current market conditions,GLPI stock price, of any project funding received by PENN from GLPI for certain anticipated development projects with respect to Joliet, Columbus, and M Resort (the “Other Development Projects”). The Master Development Agreement provides that GLPI will fund up to $225 million for the Aurora Project and, GLPI has committed to fund, upon PENN’s request, up to $350 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set
forth in the Term Sheet.Master Development Agreement. These funding obligations of GLPI expire on January 1, 2026. The New2023 Master Lease Rent will be subject to a one-time increase of $1.4 million, effective the fifth anniversary of the effective date.November 1, 2027. The New2023 Master Lease Rent will be further subject to a fixed escalator of 1.5% on November 1, 2023 and annually thereafter. The Master Development Agreement provides that PENN may elect not to proceed with or to abandon anya development project prior to GLPI’s commencement of any equity or debt offering or credit facility draw intended to fund such a project or after such time in certain instances, provided that GLPI will be reimbursed for any out-of-pocketall costs associatedand expenses incurred in connection with an abandonedsuch discontinued project. The Aurora Project and the Other Development projectsProjects are all subject to necessary regulatory and other government approvals.
We believe that our portfolio of assets provides us with the benefit of geographically-diversified cash flow from operations. We expect to continue to expand our gaming operations through the implementation and execution of a disciplined capital expenditure program at our existing properties, the pursuit of strategic acquisitions and investments, and the development of new gaming properties. In addition, the partnership with Barstool and the acquisition of Score MediatheScore and Gaming, Inc. (“theScore”) reflectour Sportsbook Agreement with ESPN reflects our strategy to continue evolving from the nation’s largest regional gaming operator to a best-in-class omni-channel provider of retail and online gaming and sports betting entertainment.
Operating and Competitive Environment
Most of our properties operate in mature, competitive markets. We expect that the majority of our future growth willto come from new business lines or distribution channels, such ascross-sell opportunities between our retail casino, online sports betting and online gaming and sports betting;businesses; improvements, expansions or relocations of our existing properties; entrance into new jurisdictions; expansions of gaming in existing jurisdictions; and strategic investments and acquisitions. Our portfolio is comprised largely of well-maintained regional gaming facilities, which has allowed us to develop what we believe to be a solid base for future growth opportunities.
We continue tocontinuously adjust operations, offerings, and cost structures at our properties to reflect changing economic and health and safety conditions. We also continue to focus on revenue and cost synergies from recent acquisitions, technology enhancements, and offeringproviding our customers with additional gaming experiences through our omni-channel distribution strategy. We seek to grow our customer database by partnering with third-party operators to expand ourand loyalty program such as Choice Hotels International, Inc., as well as through accretive investments or acquisitions, such as Barstool and theScore, to capitalize on organic growth opportunities from the development of new properties, or the expansion of recently-developedproperties and other business lines as well as through partnerships with third-party operators, such as Live Nation Entertainment and to develop partnerships that allowChoice Hotels International, Inc. Acquisitions such as theScore and our Sportsbook Agreement with ESPN enable us to enter new jurisdictions for iCasinofurther our omnichannel strategy by adding additional revenue streams and sports betting.customer acquisition.
The gaming industry is characterized by an increasingly high degree of competition among a large number of participants, including riverboat casinos; dockside casinos; land-based casinos; video lottery; “iGaming” (which includes online sports bettingiCasinos and online social casino, bingo, and iCasino products);casinos; online and retail sports betting; sports media companies; gaming at taverns; gaming at truck stop establishments; sweepstakes and poker machines not located in casinos; the potential for increased fantasy sports; significant growth of Native American gaming, tribes, historic racing or state-sponsored i-lottery products in or adjacent to states we operate in; and other forms of gaming in the U.S. See the “Segment comparison of the three and nine months ended September 30, 20222023 and 2021”2022” section below for discussions of the impact of competition on our results of operations by reportable segment. Key Performance Indicators
In our business, revenue is driven by discretionary consumer spending. We have no certain mechanism for determining why consumers choose to spend more or less money at our properties or on our iGaming productsonline offerings from period-to-period; therefore, we are unable to quantify a dollar amount for each factor that impacts our customers’ spending behaviors. However, based on our experience, we can generally offer some insight into the factors that we believe are likely to account for such changes and which factors may have a greater impact than others. For example, decreases in discretionary consumer spending have historically been brought about by weakened general economic conditions, such as recessions, inflation, rising interest rate environments, high unemployment levels, higher income taxes, low levels of consumer confidence, weakness in the housing market, high fuel or other transportation costs, and the effects of the COVID-19 pandemic. In addition, visitation and the volume of play have historically been negatively impacted by significant construction surrounding our properties, adverse regional weather conditions and natural disasters. In all instances, such insights are based solely on our judgment and professional experience, and no assurance can be given as to the accuracy of our judgments.
The vast majority of our revenues is gaming revenue, which is highly dependent upon the volume and spending levels of customers at our properties. Our gaming revenue is derived primarily from slot machines (which represented approximately 83%85% and 85%83% of our gaming revenue for the nine months ended September 30, 20222023 and 2021,2022, respectively) and, to a lesser extent, table games and online gaming consisting of online slots, online table games, and online sports betting. Aside from gaming revenue, our revenues are primarily derived from our hotel, dining, retail, commissions, program sales, admissions, concessions and certain other ancillary activities, and our racing operations.
Key performance indicators related to gaming revenue are slot handle and table game drop, which are volume indicators, and “win” or “hold” percentage. Our typical property slot win percentage is in the range of approximately 7% to 11% of slot handle, and our typical table game hold percentage is in the range of approximately 15% to 27%28% of table game drop.
Slot handle is the gross amount wagered during a given period. The win or hold percentage is the net amount of gaming wins and losses, with liabilities recognized for accruals related to the anticipated payout of progressive jackpots. Given the stability in our slot hold percentages on a historical basis, we have not experienced significant impacts to net income (loss) from changes in these percentages. For table games, customers usually purchase chips at the gaming tables. The cash and markers (extensions of credit granted to certain credit-worthy customers) are deposited in the gaming table’s drop box. Table game hold is the amount of drop that is retained and recorded as gaming revenue, with liabilities recognized for funds deposited by customers before gaming play occurs and for unredeemed gaming chips. As we are primarily focused on regional gaming markets, our table game hold percentages are fairly stable since the majority of these markets do not regularly experience high-end play, which can lead to volatility in hold percentages. Therefore, changes in table game hold percentages do not typically have a material impact to our results of operations and cash flows.
Under normal operating conditions, our properties generate significant operating cash flow since most of our revenue is cash-based from slot machines, table games, and online gaming, including sports betting and pari-mutuel wagering.betting. Our business is capital intensive, and we rely on cash flow from our properties to generate sufficient cash to satisfy our obligations under the Triple Net Leases (as defined in “Liquidity and Capital Resources”), repay debt, fund maintenance capital expenditures, repurchase our common stock, fund new capital projects at existing properties and provide excess cash for future development and acquisitions. Additional information regarding our capital projects is discussed in “Liquidity and Capital Resources” below.
Reportable Segments
We have aggregated our operating segments into five reportable segments. Retail operating segments are based on the similar characteristics within the regions in which they operate: Northeast, South, West, and Midwest. OurThe Interactive segment includes all of our iCasino and online sports betting, iCasino and social gaming operations, management of retail sports betting, media, and our proportionate sharethe operating results of earnings attributableBarstool. We owned 36% of Barstool common stock prior to our equity method investmentthe February 17, 2023 Barstool Acquisition (as defined in Barstool.Note 6, “Acquisitions and Dispositions”), pursuant to which we acquired the remaining 64% of Barstool common stock. On August 8, 2023, we entered into the Barstool SPA, and we sold 100% of the outstanding shares of Barstool common stock. We view each of our gaming and racing properties as an operating segment with the exception of our two properties in Jackpot, Nevada, which we view as one operating segment. We consider our combined Video Gaming Terminal (“VGT”) operations, by state, to be separate operating segments. For a listing of our gaming properties and VGT operations included in each reportable segment, see Note 2, “Significant Accounting Policies,”Policies” in the notes to our unaudited Consolidated Financial Statements.
RESULTS OF OPERATIONS
The following table highlights our revenues, net income (loss), and Adjusted EBITDA, on a consolidated basis, as well as our revenues and Adjusted EBITDAR by reportable segment. Such segment reporting is consistent with how we measure our business and allocate resources internally. We consider net income (loss) to be the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the United States (“GAAP”) to Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP financial measures. Refer to “Non-GAAP Financial Measures” below for the definitions of Adjusted EBITDA, Adjusted EBITDA margin, Adjusted EBITDAR, and Adjusted EBITDAR margin; as well as a reconciliation of net income (loss) to Adjusted EBITDA and Adjusted EBITDAR and related margins.
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | 2023 | | 2022 | | 2023 | | 2022 |
| Revenues: | Revenues: | | | | | | | | Revenues: | | | | | | | |
| Northeast segment | Northeast segment | $ | 685.4 | | $ | 672.4 | | $ | 2,028.8 | | $ | 1,895.8 | Northeast segment | $ | 687.0 | | $ | 685.4 | | $ | 2,075.5 | | $ | 2,028.8 |
| South segment | South segment | 329.8 | | 318.2 | | 1,009.8 | | 982.3 | South segment | 308.2 | | 329.8 | | 931.3 | | 1,009.8 |
| West segment | West segment | 156.5 | | 145.7 | | 451.2 | | 382.7 | West segment | 135.1 | | 156.5 | | 394.8 | | 451.2 |
| Midwest segment | Midwest segment | 298.4 | | 285.7 | | 877.6 | | 815.2 | Midwest segment | 293.4 | | 298.4 | | 882.0 | | 877.6 |
| Interactive segment | Interactive segment | 158.7 | | 93.0 | | 455.1 | | 275.3 | Interactive segment | 196.3 | | 158.7 | | 687.3 | | 455.1 |
Other (1) | Other (1) | 4.2 | | 3.5 | | 17.4 | | 6.8 | Other (1) | 4.5 | | 4.2 | | 16.5 | | 17.4 |
Intersegment eliminations (2) | Intersegment eliminations (2) | (8.0) | | (6.7) | | (23.8) | | (25.6) | Intersegment eliminations (2) | (5.1) | | (8.0) | | (19.9) | | (23.8) |
| Total | Total | $ | 1,625.0 | | $ | 1,511.8 | | $ | 4,816.1 | | $ | 4,332.5 | Total | $ | 1,619.4 | | $ | 1,625.0 | | $ | 4,967.5 | | $ | 4,816.1 |
| | Net income | $ | 123.2 | | $ | 86.1 | | $ | 200.9 | | $ | 375.7 | |
| Net income (loss) | | Net income (loss) | $ | (725.1) | | $ | 123.2 | | $ | (132.6) | | $ | 200.9 |
| | Adjusted EBITDAR: | Adjusted EBITDAR: | | | | | | | | Adjusted EBITDAR: | | | | | | | |
| Northeast segment | Northeast segment | $ | 217.9 | | $ | 221.1 | | $ | 637.5 | | $ | 645.9 | Northeast segment | $ | 208.3 | | $ | 217.9 | | $ | 638.5 | | $ | 637.5 |
| South segment | South segment | 139.9 | | 137.0 | | 429.7 | | 448.0 | South segment | 136.6 | | 139.9 | | 381.1 | | 429.7 |
| West segment | West segment | 60.5 | | 54.5 | | 171.4 | | 151.1 | West segment | 54.7 | | 60.5 | | 153.4 | | 171.4 |
| Midwest segment | Midwest segment | 129.4 | | 125.8 | | 386.2 | | 374.0 | Midwest segment | 123.8 | | 129.4 | | 376.5 | | 386.2 |
| Interactive segment | Interactive segment | (49.3) | | (32.0) | | (80.1) | | (29.5) | Interactive segment | (50.2) | | (49.3) | | (68.7) | | (80.1) |
Other (1) | Other (1) | (26.5) | | (26.1) | | (73.6) | | (75.6) | Other (1) | (28.1) | | (26.5) | | (80.7) | | (73.6) |
| Total (3) | Total (3) | 471.9 | | 480.3 | | 1,471.1 | | 1,513.9 | Total (3) | 445.1 | | 471.9 | | 1,400.1 | | 1,471.1 |
Rent expense associated with triple net operating leases (4) | Rent expense associated with triple net operating leases (4) | (31.5) | | (116.0) | | (119.6) | | (342.9) | Rent expense associated with triple net operating leases (4) | (146.6) | | (31.5) | | (439.0) | | (119.6) |
| Adjusted EBITDA | Adjusted EBITDA | $ | 440.4 | | $ | 364.3 | | $ | 1,351.5 | | $ | 1,171.0 | Adjusted EBITDA | $ | 298.5 | | $ | 440.4 | | $ | 961.1 | | $ | 1,351.5 |
| | Net income margin | 7.6 | % | | 5.7 | % | | 4.2 | % | | 8.7 | % | |
| Net income (loss) margin | | Net income (loss) margin | (44.8) | % | | 7.6 | % | | (2.7) | % | | 4.2 | % |
Adjusted EBITDAR margin | Adjusted EBITDAR margin | 29.0 | % | | 31.8 | % | | 30.5 | % | | 34.9 | % | Adjusted EBITDAR margin | 27.5 | % | | 29.0 | % | | 28.2 | % | | 30.5 | % |
Adjusted EBITDA margin | Adjusted EBITDA margin | 27.1 | % | | 24.1 | % | | 28.1 | % | | 27.0 | % | Adjusted EBITDA margin | 18.4 | % | | 27.1 | % | | 19.3 | % | | 28.1 | % |
(1)The Other category consists of the Company’s stand-alone racing operations, namely Sanford-Orlando Kennel Club, and Sam Houston and Valley Race Parks (the remaining 50% was acquired by PENN on August 1, 2021),Park, the Company’s joint venture interests in Freehold Raceway, and our management contract for Retama Park Racetrack. Expenses incurred for corporate and shared services activities that are directly attributable to a property or are otherwise incurred to support a property are allocated to each property. The Other category also includes corporate overhead costs, which consist of certain expenses, such as: payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate to or have not otherwise been allocated to a property.allocated. Corporate overhead costs were $27.0 million and $26.5 million for the three months ended September 30, 2023 and 2022, respectively, and $78.1 and $74.9 million for the nine months ended September 30, 2023 and 2022, respectively.
(2)Primarily represents the elimination of intersegment revenues associated with our internally-branded retail sportsbooks, which are operated by PENN Interactive.
(3)The total is a mathematical calculation derived from the sum of reportable segments (as well as the Other category). As noted within “Non-GAAP Financial Measures” below, Adjusted EBITDAR, and the related margin, is presented on a consolidated basis outside the financial statements solely as a valuation metric.
(4)Solely comprised of rent expense associated withFor the three and nine months ended September 30, 2023, pertains to the following operating leases: (i) AR PENN Master Lease; (ii) 2023 Master Lease; (iii) Margaritaville Lease; and (iv) Greektown Lease.
For the three and nine months ended September 30, 2022, pertains to the operating lease components contained within our triple net master lease dated November 1, 2013 with GLPI and the triple net master lease assumed in connection with our acquisition of Pinnacle Entertainment, Inc., our individual triple net leases with GLPI for the real estate assets used in the operation of Tropicana (terminated on September 26, 2022) and Hollywood Casino at The Meadows, and our individual triple net leases with VICI Properties Inc. (NYSE: VICI) (“VICI”) for the real estate assets used in the operations of
Margaritaville Resort Casino and Hollywood Casino at Greektown (of which the Tropicana(i) PENN Master Lease Meadows Lease, Margaritaville Lease and the Greektown Lease are defined in “Liquidity and Capital Resources”) and are referred(specific to collectively as our “triple net operating leases”.As a result of the Lease Modification defined in Note 9, “Leases” to our unaudited Consolidated Financial Statements, the land and building components associated with the operations of Hollywood Gaming at Dayton Raceway and Hollywood Gaming at
Mahoning Valley Race Course are classified as operating leases which is recorded to rent expense, as compared to prior to theCourse); (ii) Meadows Lease; (iii) Margaritaville Lease; (iv) Greektown Lease; and (v) Tropicana Lease Modification, whereby the land components of substantially all of the Master Lease properties were classified as operating leases and recorded to rent expense. Subsequent to the Lease Modification, the land components associated with the Master Lease properties are primarily classified as finance leases.(which terminated on September 26, 2022).
Consolidated comparison of the three and nine months ended September 30, 20222023 and 20212022
Revenues
The following table presents our consolidated revenues:
| | | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues | Revenues | | | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 1,317.5 | | | $ | 1,256.2 | | | $ | 61.3 | | | 4.9 | % | | $ | 3,934.3 | | | $ | 3,643.7 | | | $ | 290.6 | | | 8.0 | % | Gaming | $ | 1,252.1 | | | $ | 1,317.5 | | | $ | (65.4) | | | (5.0) | % | | $ | 3,869.5 | | | $ | 3,934.3 | | | $ | (64.8) | | | (1.6) | % |
| Food, beverage, hotel and other | 307.5 | | | 255.6 | | | 51.9 | | | 20.3 | % | | 881.8 | | | 688.8 | | | 193.0 | | | 28.0 | % | |
| Food, beverage, hotel, and other | | Food, beverage, hotel, and other | 367.3 | | | 307.5 | | | 59.8 | | | 19.4 | % | | 1,098.0 | | | 881.8 | | | 216.2 | | | 24.5 | % |
| Total revenues | Total revenues | $ | 1,625.0 | | | $ | 1,511.8 | | | $ | 113.2 | | | 7.5 | % | | $ | 4,816.1 | | | $ | 4,332.5 | | | $ | 483.6 | | | 11.2 | % | Total revenues | $ | 1,619.4 | | | $ | 1,625.0 | | | $ | (5.6) | | | (0.3) | % | | $ | 4,967.5 | | | $ | 4,816.1 | | | $ | 151.4 | | | 3.1 | % |
Gaming revenues for the three months ended September 30, 2022 increased $61.32023 decreased $65.4 million compared to the corresponding prior year period, primarily due to increasesa decrease in visitation in the South segment, decreases in online gaming revenues in our Interactive segment, resulting from continued growth in our online revenues, partially due toand the acquisition of theScore on October 19, 2021, and the inclusionsale of the fullTropicana Las Vegas operations in September 2022. The prior year quarter operating results of two new properties: Hollywood Casino York, which opened August 12, 2021, and Hollywood Casino Morgantown, which opened December 22, 2021.included Tropicana Las Vegas revenues through the sale on September 26, 2022, compared to none in the current year quarter.
ForGaming revenues for the nine months ended September 30, 2022, gaming revenues increased2023 decreased by $290.6$64.8 million compared to the corresponding prior year period, primarily due to increasesa decrease in our Interactivevisitation in the South segment and resulting from continued growth in our online revenues, partially due to the acquisition of theScore, the inclusionsale of the fullTropicana Las Vegas operations in September 2022. The prior year period operating results of three new properties, including Hollywood Casino Perryville, which was acquiredincluded Tropicana Las Vegas revenues through the sale on July 1, 2021, Hollywood Casino York, and Hollywood Casino Morgantown, and increases in gaming revenues in most of our properties in the West and Midwest segments, partially offset by decreases in gaming revenues in our Northeast segment properties primarily relatedSeptember 26, 2022, compared to our Ameristar East Chicago property due to increased competitionnone in the Indiana region.current year period.
Food, beverage, hotel, and other revenues for the three and nine months ended September 30, 20222023 increased $51.9$59.8 million and $193.0$216.2 million, respectively, compared to the corresponding prior year corresponding periods, primarily due to the inclusion of 100% of the operating results of Barstool subsequent to the Barstool Acquisition on February 17, 2023, until the disposition on August 8, 2023, as well as increases in gaming tax reimbursement amounts charged to third-party online sports betting and/or iCasino partners for online sports betting and iCasino market access the inclusion of the operating results from our new properties as discussed above, and revenues from theScore, as well as the impact of easing of restrictions, strong visitation levels to our food and beverage outlets, and increased offerings and hours of operations from the prior periods.
Operating expenses
The following table presents our consolidated operating expenses:
| | | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Operating expenses | Operating expenses | | | | | | | | | | | | | | | | Operating expenses | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 757.9 | | | $ | 652.4 | | | $ | 105.5 | | | 16.2 | % | | $ | 2,158.1 | | | $ | 1,801.1 | | | $ | 357.0 | | | 19.8 | % | Gaming | $ | 709.0 | | | $ | 757.9 | | | $ | (48.9) | | | (6.5) | % | | $ | 2,149.1 | | | $ | 2,158.1 | | | $ | (9.0) | | | (0.4) | % |
| Food, beverage, hotel and other | 199.2 | | | 160.1 | | | 39.1 | | | 24.4 | % | | 557.9 | | | 431.8 | | | 126.1 | | | 29.2 | % | |
| Food, beverage, hotel, and other | | Food, beverage, hotel, and other | 261.4 | | | 199.2 | | | 62.2 | | | 31.2 | % | | 773.5 | | | 557.9 | | | 215.6 | | | 38.6 | % |
| General and administrative | General and administrative | 277.9 | | | 376.5 | | | (98.6) | | | (26.2) | % | | 847.2 | | | 1,019.2 | | | (172.0) | | | (16.9) | % | General and administrative | 406.4 | | | 277.9 | | | 128.5 | | | 46.2 | % | | 1,179.6 | | | 847.2 | | | 332.4 | | | 39.2 | % |
| Depreciation and amortization | Depreciation and amortization | 148.7 | | | 83.7 | | | 65.0 | | | 77.7 | % | | 417.2 | | | 246.9 | | | 170.3 | | | 69.0 | % | Depreciation and amortization | 105.8 | | | 148.7 | | | (42.9) | | | (28.9) | % | | 323.9 | | | 417.2 | | | (93.3) | | | (22.4) | % |
| Impairment losses | Impairment losses | 104.6 | | | — | | | 104.6 | | | — | % | | 104.6 | | | — | | | 104.6 | | | — | % | Impairment losses | — | | | 104.6 | | | (104.6) | | | N/M | | — | | | 104.6 | | | (104.6) | | | N/M |
| Loss on disposal of Barstool | | Loss on disposal of Barstool | 923.2 | | | — | | | 923.2 | | | N/M | | 923.2 | | | — | | | 923.2 | | | N/M |
| Total operating expenses | Total operating expenses | $ | 1,488.3 | | | $ | 1,272.7 | | | $ | 215.6 | | | 16.9 | % | | $ | 4,085.0 | | | $ | 3,499.0 | | | $ | 586.0 | | | 16.7 | % | Total operating expenses | $ | 2,405.8 | | | $ | 1,488.3 | | | $ | 917.5 | | | 61.6 | % | | $ | 5,349.3 | | | $ | 4,085.0 | | | $ | 1,264.3 | | | 30.9 | % |
Gaming expenses consist primarily of gaming taxes, payroll, marketing and promotional, and other expenses associated with our gaming operations. Gaming expenses for the three and nine months ended September 30, 2022 increased $105.52023 decreased $48.9 million and $357.0$9.0 million, respectively, compared to the corresponding prior year corresponding periods, primarily due to higher third-party service provider fees from higher online gaming activity, higher payroll expenses, and an increasethe decreases in gaming taxes resulting from the increase in gaming revenues. Also included in gaming expenses are non-recurring transaction costs of $26.0 million for both the three and nine months ended September 30, 2022, related to third-party contract termination feesrevenues as we execute on our strategy to deploy our internally built technology stack, consisting of a player account management system and proprietary risk and trading platform, specific to the Interactive segment. Additionally, the nine months ended September 30, 2022 includesdescribed above, partially offset by increased variable marketing and promotional expenses compared to the prior period.payroll costs.
Food, beverage, hotel, and other expenses consist primarily of payroll expenses,costs, costs of goods sold, and other costs associated with our food, beverage, hotel, retail, racing, and interactive operations. Food, beverage, hotel, and other expenses for the three and nine months ended September 30, 20222023 increased $39.1$62.2 million and $126.1$215.6 million, respectively, compared to the corresponding prior year corresponding periods, primarily due to increased volumes, which resulted in increases in payrollthe inclusion of operating expenses and cost of sales, andrelated to Barstool subsequent to the Barstool Acquisition on February 17, 2023, until the disposition on August 8, 2023, as well as increases in gaming tax reimbursement amounts chargedrelated to third-party online sports betting and/or iCasino partners for online sports betting and iCasino market access.
General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, and lobbying expenses, and certain housekeeping services, as well as all expenses for administrative departments such as accounting, purchasing, human resources, legal and internal audit. General and administrative expenses also include stock-based compensation expense; pre-opening expenses; acquisition and transaction costs; gains and losses on disposal of assets; insurance recoveries, net of deductible charges; changes in the fair value of our contingent purchase price obligations; expense associated with cash-settled stock-based awards (including changes in fair value thereto); and rent expense associated with our triple net operating leases.
For the threethree and nine months ended September 30, 2022,2023, general and administrative expenses decreasedincreased by $98.6$128.5 million and $172.0$332.4 million, respectively, compared to the corresponding prior year periods, primarily due to a decreasean increase in rent costsexpense associated with our Master Leasestriple net operating leases of $84.5$115.1 million and $223.3$319.4 million, respectively, representing changesstemming from the execution on February 21, 2023 of both the AR PENN Master Lease and 2023 Master Lease. The impact of these aforementioned lease transactions resulted in lease classifications fromthe classification of all land components and building components to be operating leases of which the associated rent expense is recorded to finance as a result of the Lease Modification“General and Administrative” as described in Note 9, “Leases” to our unaudited Consolidated Financial Statements. For thenine months ended September 30, 2022, the decrease was partially offset by increased payroll costs of $35.4 million, which reflect the current operating environment, a $12.4 million increase in facility costs due to increased volumes, and a $6.4 million loss on the sale of land. Depreciation and amortization for the three and nine months ended September 30, 2022 increased period over period2023 decreased $42.9 million and $93.3 million, respectively, compared to the corresponding prior year periods, primarily due to increaseda decrease in depreciation and amortization costs stemming from the execution on February 21, 2023 of both the AR PENN Master Lease and 2023 Master Lease. Prior to the execution of the aforementioned lease transactions, primarily all of the building components of the PENN Master Lease were classified as financing obligations of which depreciation of the associated property and equipment assets were previously recorded to “Depreciation and amortization” expense. Additionally, primarily all of the land components contained within the PENN Master Lease and the land and building components contained within the Perryville Lease (as defined in “Liquidity and Capital Resources”) were classified as finance leases of which amortization of the lease right-of-use assets (“ROU”) were recorded to “Depreciation and Amortization” expense. The impact of these aforementioned lease transactions resulted in the classification of all land components and building components associated with ourthe AR PENN Master Leases of $46.8 millionLease to be operating leases with the associated rent expense recorded to “General and $123.7 million, respectively, representing changes in lease classifications from operating to finance as a result of the Lease ModificationAdministrative” as described in Note 9, “Leases” to our unaudited Consolidated Financial Statements. In addition, for the three and nine months ended September 30, 2022, amortization on other intangible assets increased by $12.3 million and $37.5 million, respectively, primarily due to the amortization of other intangible assets that resulted from our acquisition of theScore. Impairment losses for both the three and nine months ended September 30, 2022 primarily relate to impairment charges at our Hollywood Casino at Greektown property for goodwill and other intangible assets of $37.4 million and $65.4 million, respectively, as a result of an interim impairment assessment during the third quarter of 2022. See Note 7, “Goodwill and Other Intangible Assets” to our unaudited Consolidated Financial Statements for further discussion. There were no impairment losses duringfor the three and nine months ended September 30, 2021.2023. Loss on disposal of Barstoolrelates to the loss on the sale of 100% of the outstanding shares of Barstool to David Portnoy in exchange for nominal cash consideration (one dollar) as described in Note 6, “Acquisitions and Dispositions” in the notes to our unaudited Consolidated Financial Statements.
Other income (expenses)
The following table presents our consolidated other income (expenses):
| | | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Other income (expenses) | Other income (expenses) | | | | | | | | | | | | | | | | Other income (expenses) | | | | | | | | | | | | | | | |
| Interest expense, net | Interest expense, net | $ | (193.3) | | | $ | (144.9) | | | $ | (48.4) | | | 33.4 | % | | $ | (547.7) | | | $ | (418.6) | | | $ | (129.1) | | | 30.8 | % | Interest expense, net | $ | (117.5) | | | $ | (198.5) | | | $ | 81.0 | | | (40.8) | % | | $ | (346.1) | | | $ | (554.7) | | | $ | 208.6 | | | (37.6) | % |
| Interest income | | Interest income | $ | 10.2 | | | $ | 5.2 | | | $ | 5.0 | | | 96.2 | % | | $ | 30.5 | | | $ | 7.0 | | | $ | 23.5 | | | 335.7 | % |
| Income from unconsolidated affiliates | Income from unconsolidated affiliates | $ | 6.6 | | | $ | 9.1 | | | $ | (2.5) | | | (27.5) | % | | $ | 17.1 | | | $ | 27.8 | | | $ | (10.7) | | | (38.5) | % | Income from unconsolidated affiliates | $ | 7.2 | | | $ | 6.6 | | | $ | 0.6 | | | 9.1 | % | | $ | 17.0 | | | $ | 17.1 | | | $ | (0.1) | | | (0.6) | % |
| | Gain on Barstool Acquisition, net | | Gain on Barstool Acquisition, net | $ | — | | | $ | — | | | $ | — | | | N/M | | $ | 83.4 | | | $ | — | | | $ | 83.4 | | | N/M |
| Gain on REIT transactions, net | | Gain on REIT transactions, net | $ | — | | | $ | — | | | $ | — | | | N/M | | $ | 500.8 | | | $ | — | | | $ | 500.8 | | | N/M |
| Loss on early extinguishment of debt | | Loss on early extinguishment of debt | $ | — | | | $ | — | | | $ | — | | | N/M | | $ | — | | | $ | (10.4) | | | $ | 10.4 | | | N/M |
| Other | Other | $ | (8.8) | | | $ | 19.2 | | | $ | (28.0) | | | N/M | | $ | (77.7) | | | $ | 43.1 | | | $ | (120.8) | | | N/M | Other | $ | (0.3) | | | $ | (8.8) | | | $ | 8.5 | | | (96.6) | % | | $ | 4.5 | | | $ | (67.3) | | | $ | 71.8 | | | N/M |
| Income tax benefit (expense) | Income tax benefit (expense) | $ | 182.0 | | | $ | (36.4) | | | $ | 218.4 | | | N/M | | $ | 78.1 | | | $ | (110.1) | | | $ | 188.2 | | | N/M | Income tax benefit (expense) | $ | 161.7 | | | $ | 182.0 | | | $ | (20.3) | | | (11.2) | % | | $ | (40.9) | | | $ | 78.1 | | | $ | (119.0) | | | N/M |
Interest expense, net increaseddecreased by $81.0 million and $208.6 million for the three and nine months ended September 30, 2022 as2023, respectively, compared to the corresponding prior year corresponding periods, primarily due to a net increasedecrease in Master Lease interest costs due to changes in lease classifications as a result of the amendment of the PENN Master Lease, Modification as described in Note 9, “Leases”“Liquidity and Capital Resources,” to our unaudited Consolidated Financial Statements of $49.0$93.7 million and $123.7$255.2 million, respectively.respectively, partially offset by an increase in interest expense on our Senior Secured Credit Facilities related to an overall increase in interest rates. Interest incomeincreased by $5.0 million and $23.5 million for the three and nine months ended September 30, 2023, respectively, compared to the corresponding prior year periods, primarily due to executing on our short term investing strategy utilizing money market funds which commenced during the year ended December 31, 2022.
Income from unconsolidated affiliates relates principally to our investment in Barstool and our Kansas Entertainment and Freehold Raceway joint ventures. The decrease for the three and nine months ended September 30, 2022, comparedventures, as well as Barstool (prior to the Barstool Acquisition on February 17, 2023). The change in income from the corresponding prior year corresponding periods is due to lower income earnedfluctuations in earnings from our investments in unconsolidated affiliates. We record
Gain on Barstool Acquisition, netrelates to the gain on our proportionate shareacquisition of Barstool’sall the outstanding shares of Barstool common stock not already owned by us on February 17, 2023 as described in Note 6, “Acquisitions and Dispositions” in the notes to our unaudited Consolidated Financial Statements. The gain consists of $66.5 million related to the remeasurement of our equity investment immediately prior to the acquisition date and $16.9 million related to the acquisition of the remaining 64% of Barstool common stock. Gain on REIT transactions, net income orrelates to the amendment and restatement of the PENN Master Lease which resulted in the (i) derecognition of $1.6 billion of financing obligations and (ii) derecognition of $1.1 billion of Property and Equipment, net. In conjunction with entering into the 2023 Master Lease, the individual triple net leases associated with the Meadows Lease (as such terms are defined in “Liquidity and Capital Resources”) and the Perryville Lease (as such terms are defined in “Liquidity and Capital Resources”) were terminated which resulted in a $6.5 million loss one quarterfrom the derecognition of ROU assets and lease liabilities. See Note 9, “Leases” to our unaudited Consolidated Financial Statements for additional details on both of these transactions. Loss on extinguishment of debtrelates to the refinancing of the previous Senior Secured Credit Facilities in arrears.the prior year. See Note 8, “Long-term Debt” in the notes to our unaudited Consolidated Financial Statements for further discussion. Other primarily relates to realized and unrealized gains and losses on equity securities, (including warrants), held by PENN Interactive, losses on early retirement of debt, unrealized gains and losses related to certain Barstool shares (prior to the Barstool Acquisition on February 17, 2023) as well as miscellaneous income and expense items. Equity securities were provided to the Company in conjunction with entering into multi-year agreements with sports betting operators for online sports betting and iCasino market access across our portfolio. For the three months ended September 30, 2023 and 2022, other income primarily consisted of unrealized holding losses of $11.6 million and $10.8 million.million, respectively. For the threenine months ended September 30, 2021, other income primarily consisted of a realized loss of $20.1 million offset by an unrealized holding gain of $10.1 million,2023 and a $29.9 million gain related to the valuation of our joint venture investment in Sam Houston and Valley Race Parks prior to the acquisition of the remaining 50% on August 1, 2021.
For the nine months ended September 30, 2022, other income primarily
consisted of unrealized holding losses of
$8.5 million and $66.4 million,
on equity shares, as well as a $10.4 million loss onrespectively. In addition, during the
early extinguishment of debt in connection with refinancing our Senior Secured Credit Facilities, as described in “Liquiditythree and Capital Resources.” For the nine months ended September 30, 2021, other income primarily consisted of a realized loss of $20.1 million2023, these losses were partially offset by an unrealized holding gain of $28.9 million, and a $29.9 million gain related to our investment in Sam Houston and Valley Race Parks as previously described.dividend income received.Income tax benefit (expense) was a $182.0benefit of $161.7 million and $78.1$182.0 million benefit for the three and nine monthsmonths ended September 30, 2023 and 2022, respectively, and an expense of $40.9 million as compared to a $36.4benefit of $78.1 million and $110.1 million expense for the nine mthree and nineonths ended months ended September 30, 2021,2023 and 2022, respectively. Our effective tax rate (income taxes as a percentage of income from operations before income taxes), including discrete items, was 226.7%19.0% and (62.9%)226.7% for the three months ended September 30, 2023 and 2022, respectively, and 1,698.9% and (62.9)% for the nine months ended September 30, 2022 as compared to 29.7%2023 and 22.7% for the three and nine months ended September 30, 2021,2022, respectively. The change in the effective rate for both the three and nine months ended September 30, 2022 as2023 compared to the corresponding prior year corresponding periods was primarily due to the decreasesprojections of pre-tax income, changes to income before taxes and the release of our valuation allowance.
The reversal of our valuation allowance during the three and nine months ended September 30, 2022 was primarily due to (i) sustained growth in our three-year cumulative pretax earnings; (ii) substantial total revenues and earnings growth for the retail operating segment measured over prior periods, and (iii) lack of significant asset impairment charges. Accordingly, the valuation allowance, has been reduced by $172.7 million resultingand the Barstool transactions discussed in a substantial decrease to incomeNote 6, “Acquisitions and Dispositions” and Note 11, “Income Taxes.” Excluding the Barstool transactions, the Company’s annualized effective tax expenserate for the three and nine months ended September 30, 2022. See Note 11, “Income Taxes” to our unaudited Consolidated Financial Statements for further discussion.2023 would have been approximately 28%.Our effective income tax rate can vary each reporting period depending on, among other factors, the geographic and business mix of our earnings, changes to our valuation allowance, and the level of our tax credits. Certain of these and other factors, including our history and projections of pre-tax earnings, are considered in assessing our ability to realize our net deferred tax assets.
Additionally, as a result of the Barstool SPA entered into in August 2023, the $115.9 million deferred tax liability associated with the Barstool tradename and other intangibles was written off to income tax expense, which had a material impact on our unaudited Consolidated Statements of Operations and unaudited Consolidated Balance Sheets, as discussed in Note 11, “Income Taxes” to our unaudited Consolidated Financial Statements.
Segment comparison of the three and nine months ended September 30, 20222023 and 20212022
Northeast Segment
| | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues | Revenues | | | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 616.8 | | | $ | 616.2 | | | $ | 0.6 | | | 0.1 | % | | $ | 1,837.3 | | | $ | 1,745.7 | | | $ | 91.6 | | | 5.2 | % | Gaming | $ | 610.8 | | | $ | 616.8 | | | $ | (6.0) | | | (1.0) | % | | $ | 1,856.6 | | | $ | 1,837.3 | | | $ | 19.3 | | | 1.1 | % |
| Food, beverage, hotel and other | 68.6 | | | 56.2 | | | 12.4 | | | 22.1 | % | | 191.5 | | | 150.1 | | | 41.4 | | | 27.6 | % | |
| Food, beverage, hotel, and other | | Food, beverage, hotel, and other | 76.2 | | | 68.6 | | | 7.6 | | | 11.1 | % | | 218.9 | | | 191.5 | | | 27.4 | | | 14.3 | % |
| Total revenues | Total revenues | $ | 685.4 | | | $ | 672.4 | | | $ | 13.0 | | | 1.9 | % | | $ | 2,028.8 | | | $ | 1,895.8 | | | $ | 133.0 | | | 7.0 | % | Total revenues | $ | 687.0 | | | $ | 685.4 | | | $ | 1.6 | | | 0.2 | % | | $ | 2,075.5 | | | $ | 2,028.8 | | | $ | 46.7 | | | 2.3 | % |
| | Adjusted EBITDAR | Adjusted EBITDAR | $ | 217.9 | | | $ | 221.1 | | | $ | (3.2) | | | (1.4) | % | | $ | 637.5 | | | $ | 645.9 | | | $ | (8.4) | | | (1.3) | % | Adjusted EBITDAR | $ | 208.3 | | | $ | 217.9 | | | $ | (9.6) | | | (4.4) | % | | $ | 638.5 | | | $ | 637.5 | | | $ | 1.0 | | | 0.2 | % |
| Adjusted EBITDAR margin | Adjusted EBITDAR margin | 31.8 | % | | 32.9 | % | | -110 bps | | 31.4 | % | | 34.1 | % | | -270 bps | Adjusted EBITDAR margin | 30.3 | % | | 31.8 | % | | -150 bps | | 30.8 | % | | 31.4 | % | | -60 bps |
The Northeast segment’s revenues for the three months ended September 30, 20222023 increased by $13.0$1.6 million over the prior year period, primarily due to inclusionan increase in hotel and food and beverage revenues, primarily due to the completion of full quarter operating results of two new properties:room renovations at our Hollywood Casino York, which opened August 12, 2021,at Greektown property, as well as increased visitation to our food and Hollywood Casino Morgantown, which opened December 22, 2021, partiallybeverage outlets, offset by a decreasereduction in totalgaming revenues, primarily at ourHollywood Casino Lawrenceburg and Ameristar East Chicago propertyproperties due to increased competition in the Indiana region.competition.
The NortheastNortheast segment’s revenues for the nine months ended September 30, 20222023 increased by $133.0$46.7 million, over the prior year period, primarily due to increases in gaming and non-gaming revenues at our Hollywood Casino at Greektown property due to the inclusioncompletion of room renovations, an increase in non-gaming revenues as visitation to our food and beverage outlets increased, and strong visitation in the first quarter of the operating results of the two new properties discussed above as well as the inclusion of Perryville, which was acquired on July 1, 2021. In addition, food, beverage, hotel and other revenues increased as we operated with increased offerings and extended hours of operations, andyear. These increases were partially offset by a decreasedecreases in gaming revenues at our Hollywood Casino Lawrenceburg and Ameristar East Chicago property mentionedproperties as described above.
For the ninethree months ended September 30, 2021, our Northeast segment’s operating results were negatively impacted as our properties operated within locally-restricted gaming capacity and limited food and beverage and other amenity offerings. Additionally, our Pennsylvania properties were temporarily closed for three days in January 2021, due to COVID-19 restrictions.
For the three months ended September 30, 2022, 2023, the Northeast segment’s Adjusted EBITDAREBITDAR decreased $3.2$9.6 million primarily due to the decrease in revenues at our Hollywood Casino Lawrenceburg and Ameristar East Chicago as described above. Adjusted EBITDAR margin decreased to 31.8%30.3%, primarily due to additionalincreases in payroll costs.and other operating costs at our food and beverage outlets driven by increased volumes as discussed above.
For the nine months ended September 30, 2022,2023, the Northeast segment’s Adjusted EBITDAR decreased $8.4increased $1.0 million, primarily due to increased gaming taxes,and non-gaming revenues. variable marketing and promotional expenses, which remain below pre-pandemic levels, and payroll expensesAd, resulting in an Adjustedjusted EBITDAR margin of 31.4%.
South Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Gaming | $ | 260.0 | | | $ | 253.0 | | | $ | 7.0 | | | 2.8 | % | | $ | 807.6 | | | $ | 802.8 | | | $ | 4.8 | | | 0.6 | % |
| Food, beverage, hotel and other | 69.8 | | | 65.2 | | | 4.6 | | | 7.1 | % | | 202.2 | | | 179.5 | | | 22.7 | | | 12.6 | % |
| Total revenues | $ | 329.8 | | | $ | 318.2 | | | $ | 11.6 | | | 3.6 | % | | $ | 1,009.8 | | | $ | 982.3 | | | $ | 27.5 | | | 2.8 | % |
| | | | | | | | | | | | | | | |
| Adjusted EBITDAR | $ | 139.9 | | | $ | 137.0 | | | $ | 2.9 | | | 2.1 | % | | $ | 429.7 | | | $ | 448.0 | | | $ | (18.3) | | | (4.1) | % |
| Adjusted EBITDAR margin | 42.4 | % | | 43.1 | % | | | | -70 bps | | 42.6 | % | | 45.6 | % | | | | -300 bps |
The South segment’s revenues for the three months ended September 30, 2022 increased by $11.6 million from the prior year period,decreased to 30.8% primarily due to the negative impact of temporary closures during the hurricane season for the three months ended September 30, 2021. Revenues for the nine months ended September 30, 2022 increased by $27.5 million from the prior year period, primarily due to strong visitation levels to our food and beverage outlets, and increased spend per guest during the first quarter of 2022.payroll costs.
For the three months ended September 30, 2022, the South segment’s Adjusted EBITDAR of $139.9 million and Adjusted EBITDAR margin of 42.4% remained relatively unchanged compared to the prior year quarter. For the nine months ended September 30, 2022, theSegment
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Gaming | $ | 236.8 | | | $ | 260.0 | | | $ | (23.2) | | | (8.9) | % | | $ | 728.0 | | | $ | 807.6 | | | $ | (79.6) | | | (9.9) | % |
| Food, beverage, hotel, and other | 71.4 | | | 69.8 | | | 1.6 | | | 2.3 | % | | 203.3 | | | 202.2 | | | 1.1 | | | 0.5 | % |
| Total revenues | $ | 308.2 | | | $ | 329.8 | | | $ | (21.6) | | | (6.5) | % | | $ | 931.3 | | | $ | 1,009.8 | | | $ | (78.5) | | | (7.8) | % |
| | | | | | | | | | | | | | | |
| Adjusted EBITDAR | $ | 136.6 | | | $ | 139.9 | | | $ | (3.3) | | | (2.4) | % | | $ | 381.1 | | | $ | 429.7 | | | $ | (48.6) | | | (11.3) | % |
| Adjusted EBITDAR margin | 44.3 | % | | 42.4 | % | | | | 190 bps | | 40.9 | % | | 42.6 | % | | | | -170 bps |
The South segment’s Adjusted EBITDAR decreased $18.3 million and Adjusted EBITDAR margin decreased to 42.6% primarily due to higher payroll expenses associated with hotel and food and beverage offerings and higher variable marketing and promotional expenses in previous quarters, which remain below pre-pandemic levels.
West Segment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Gaming | $ | 102.8 | | | $ | 96.7 | | | $ | 6.1 | | | 6.3 | % | | $ | 295.8 | | | $ | 262.5 | | | $ | 33.3 | | | 12.7 | % |
| Food, beverage, hotel and other | 53.7 | | | 49.0 | | | 4.7 | | | 9.6 | % | | 155.4 | | | 120.2 | | | 35.2 | | | 29.3 | % |
| Total revenues | $ | 156.5 | | | $ | 145.7 | | | $ | 10.8 | | | 7.4 | % | | $ | 451.2 | | | $ | 382.7 | | | $ | 68.5 | | | 17.9 | % |
| | | | | | | | | | | | | | | |
| Adjusted EBITDAR | $ | 60.5 | | | $ | 54.5 | | | $ | 6.0 | | | 11.0 | % | | $ | 171.4 | | | $ | 151.1 | | | $ | 20.3 | | | 13.4 | % |
| Adjusted EBITDAR margin | 38.7 | % | | 37.4 | % | | | | 130 bps | | 38.0 | % | | 39.5 | % | | | | -150 bps |
The West segment’s revenues for the three months ended September 30, 2022 increased by $10.8 million over the prior year period, primarily due to increased spend per guest. Revenues for theand nine months ended September 30, 20222023 decreased by $21.6 million and $78.5 million, respectively, compared to the corresponding prior year periods, primarily due to a decrease in visitation at many properties, partially due to increased by $68.5 million overcompetition that affected our L’Auberge Lake Charles and Margaritaville properties and inclement weather during the first half of the year. During the prior year period, primarily dueperiods, particularly in the first quarter, there were COVID restrictions in place in downtown New Orleans which increased visitation to increased visitation.
During the nine months ended September 30, 2021, our West segment’s operating results were negatively impacted by the temporary closure of our Zia Park property due to the COVID-19 pandemic, which remained closed until March 5, 2021Hollywood Casino Gulf Coast, Boomtown New Orleans, and for an additional thirteen days in April of 2021, and our properties operated within locally restricted gaming and hotel capacity and limited food and beverage and other amenities offerings.L’Auberge Baton Rouge properties.
For the three months ended September 30, 2022, 2023, the WestSouth segment’s Adjusted EBITDAR decreased $3.3 million, primarily due to the decrease in gaming revenue combined with increased $6.0 millionpayroll costs and cost of sales, partially offset by the receipt of business interruption insurance proceeds related to the loss experienced in 2020 due to Hurricane Laura, resulting in an overall increase in Adjusted EBITDAR margin increased to 38.7%, primarily due to increases in gaming and non gaming revenues from the prior year quarter.of 190 basis points.
For the nine months ended September 30, 2023, the South segment’s Adjusted EBITDAR decreased $48.6 million and Adjusted EBITDAR margin decreased to 40.9%, primarily due to the decrease in gaming revenues as described above, combined with increased payroll costs.
West Segment
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| For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Gaming | $ | 94.5 | | | $ | 102.8 | | | $ | (8.3) | | | (8.1) | % | | $ | 281.3 | | | $ | 295.8 | | | $ | (14.5) | | | (4.9) | % |
| Food, beverage, hotel, and other | 40.6 | | | 53.7 | | | (13.1) | | | (24.4) | % | | 113.5 | | | 155.4 | | | (41.9) | | | (27.0) | % |
| Total revenues | $ | 135.1 | | | $ | 156.5 | | | $ | (21.4) | | | (13.7) | % | | $ | 394.8 | | | $ | 451.2 | | | $ | (56.4) | | | (12.5) | % |
| | | | | | | | | | | | | | | |
| Adjusted EBITDAR | $ | 54.7 | | | $ | 60.5 | | | $ | (5.8) | | | (9.6) | % | | $ | 153.4 | | | $ | 171.4 | | | $ | (18.0) | | | (10.5) | % |
| Adjusted EBITDAR margin | 40.5 | % | | 38.7 | % | | | | 180 bps | | 38.9 | % | | 38.0 | % | | | | 90 bps |
The West segment’s revenues for the three and nine months ended September 30, 2023 decreased by $21.4 million and $56.4 million, respectively, compared to the corresponding prior year periods, primarily due to the sale of the Tropicana Las Vegas operations in September 2022, partially offset by an increase in revenues at Zia Park Casino. The corresponding prior year periods included Tropicana Las Vegas revenues through the sale on September 26, 2022, compared to none in the current year periods.
For the three months ended September 30, 2023, the West segment’s Adjusted EBITDAR decreased $5.8 million, primarily due to the sale of Tropicana Las Vegas, discussed above. Adjusted EBITDAR margin increased $20.3to 40.5% primarily resulting from the sale of Tropicana Las Vegas which had a negative impact on margins in the prior year quarter.
For the nine months ended September 30, 2023, the West segment’s Adjusted EBITDAR decreased $18.0 million primarily due to increases in gaming and non gaming revenues, offset by higher payroll expenses related to volume increases and higher variable marketing and promotional expenses, which remain below pre-pandemic levels, reflected inthe sale of Tropicana Las Vegas, as discussed above. Additionally, Adjusted EBITDAR margin increased to 38.9% primarily due to the sale of Tropicana which decreased by 150 basis points to 38.0%.had a negative impact on margins in the prior year period.
Midwest Segment
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| For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Gaming | $ | 268.7 | | | $ | 259.3 | | | $ | 9.4 | | | 3.6 | % | | $ | 792.2 | | | $ | 748.3 | | | $ | 43.9 | | | 5.9 | % |
| Food, beverage, hotel and other | 29.7 | | | 26.4 | | | 3.3 | | | 12.5 | % | | 85.4 | | | 66.9 | | | 18.5 | | | 27.7 | % |
| Total revenues | $ | 298.4 | | | $ | 285.7 | | | $ | 12.7 | | | 4.4 | % | | $ | 877.6 | | | $ | 815.2 | | | $ | 62.4 | | | 7.7 | % |
| | | | | | | | | | | | | | | |
| Adjusted EBITDAR | $ | 129.4 | | | $ | 125.8 | | | $ | 3.6 | | | 2.9 | % | | $ | 386.2 | | | $ | 374.0 | | | $ | 12.2 | | | 3.3 | % |
| Adjusted EBITDAR margin | 43.4 | % | | 44.0 | % | | | | -60 bps | | 44.0 | % | | 45.9 | % | | | | -190 bps |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues | | | | | | | | | | | | | | | |
| Gaming | $ | 260.1 | | | $ | 268.7 | | | $ | (8.6) | | | (3.2) | % | | $ | 787.5 | | | $ | 792.2 | | | $ | (4.7) | | | (0.6) | % |
| Food, beverage, hotel, and other | 33.3 | | | 29.7 | | | 3.6 | | | 12.1 | % | | 94.5 | | | 85.4 | | | 9.1 | | | 10.7 | % |
| Total revenues | $ | 293.4 | | | $ | 298.4 | | | $ | (5.0) | | | (1.7) | % | | $ | 882.0 | | | $ | 877.6 | | | $ | 4.4 | | | 0.5 | % |
| | | | | | | | | | | | | | | |
| Adjusted EBITDAR | $ | 123.8 | | | $ | 129.4 | | | $ | (5.6) | | | (4.3) | % | | $ | 376.5 | | | $ | 386.2 | | | $ | (9.7) | | | (2.5) | % |
| Adjusted EBITDAR margin | 42.2 | % | | 43.4 | % | | | | -120 bps | | 42.7 | % | | 44.0 | % | | | | -130 bps |
The Midwest segment’s revenues for the three months ended September 30, 2022 increased2023 decreased by $12.7$5.0 million, overcompared to the prior year period. quarter, primarily due to a decrease in gaming revenues as new competition in the region negatively impacted several properties within our Midwest segment, partially offset by increases in non-gaming revenues due to increased visitation at our hotel, and food and beverage outlets.
The Midwest segment’s revenues for the nine months ended September 30, 20222023 increased by $62.4$4.4 million, overcompared to the corresponding prior year period, primarily due to increased length of playvisitation at our hotels, and increased spend per guest, particularly at table games. During the nine months ended September 30, 2021, our Midwest segment’s operating results were negatively impacted as our properties operated within locally-restricted gaming capacity and limited food and beverage and other amenity offerings. Additionally, our
Illinois properties were temporarily closed for periods between fifteen and twenty-two daysoutlets, partially offset by declines in January 2021,gaming revenues due to COVID-19 restrictions.new competition in the region.
For the three months ended September 30, 2022,2023, the Midwest segment’s Adjusted EBITDAR increased $3.6decreased $5.6 million primarily due to increaseda decrease in gaming and non gaming revenues, partially offset by higher payroll expenses,revenues. reflected in Adjusted EBITDAR margin which decreased to 42.2% primarily due to a decrease in gaming margins driven by 60 basis points to 43.4%.an increase in payroll costs,
For the nine months ended September 30, 2022,2023, the Midwest segment’s Adjusted EBITDAR increased $12.2decreased $9.7 million primarily due to increasesincrease in gaming and non gaming revenues,payroll costs, partially offset by increased non-gaming revenues, reflectedhigher payroll expenses and higher variable marketing and promotional expenses, which remain below pre-pandemic levels in A, reflected in Adjusteddjusted EBITDAR margin, which decreased by 190 basis points to 44.0%42.7%.
Interactive Segment | | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues | Revenues | | | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | | |
| Gaming | Gaming | $ | 69.2 | | | $ | 31.0 | | | $ | 38.2 | | | 123.2 | % | | $ | 201.4 | | | $ | 84.4 | | | $ | 117.0 | | | 138.6 | % | Gaming | $ | 49.9 | | | $ | 69.2 | | | $ | (19.3) | | | (27.9) | % | | $ | 216.1 | | | $ | 201.4 | | | $ | 14.7 | | | 7.3 | % |
| Food, beverage, hotel and other | 89.5 | | | 62.0 | | | 27.5 | | | 44.4 | % | | 253.7 | | | 190.9 | | | 62.8 | | | 32.9 | % | |
| Food, beverage, hotel, and other | | Food, beverage, hotel, and other | 146.4 | | | 89.5 | | | 56.9 | | | 63.6 | % | | 471.2 | | | 253.7 | | | 217.5 | | | 85.7 | % |
| Total revenues | Total revenues | $ | 158.7 | | | $ | 93.0 | | | $ | 65.7 | | | 70.6 | % | | $ | 455.1 | | | $ | 275.3 | | | $ | 179.8 | | | 65.3 | % | Total revenues | $ | 196.3 | | | $ | 158.7 | | | $ | 37.6 | | | 23.7 | % | | $ | 687.3 | | | $ | 455.1 | | | $ | 232.2 | | | 51.0 | % |
| | Adjusted EBITDAR | Adjusted EBITDAR | $ | (49.3) | | | $ | (32.0) | | | $ | (17.3) | | | 54.1 | % | | $ | (80.1) | | | $ | (29.5) | | | $ | (50.6) | | | 171.5 | % | Adjusted EBITDAR | $ | (50.2) | | | $ | (49.3) | | | $ | (0.9) | | | N/M | | $ | (68.7) | | | $ | (80.1) | | | $ | 11.4 | | | N/M |
| Adjusted EBITDAR margin | Adjusted EBITDAR margin | (31.1) | % | | (34.4) | % | | 330 bps | | (17.6) | % | | (10.7) | % | | -690 bps | Adjusted EBITDAR margin | (25.6) | % | | (31.1) | % | | N/M | | (10.0) | % | | (17.6) | % | | N/M |
The Interactive segment’s revenues for the three and nine months ended September 30, 20222023 increased by $65.7$37.6 million, and $179.8 million, respectively, overcompared to the corresponding prior year corresponding periods, primarilyperiod, due to continued increasesthe inclusion of 100% of the operating results of Barstool, until the disposition on August 8, 2023, partially offset by a decrease in U.S. online activity withgaming revenues during the transition period prior to the launch of theScore Bet Sportsbook and Casino in Ontario and the Barstool Sportsbook in additional states, as well as the inclusion of revenues from theScore, which was acquired on October 19, 2021. ESPN BET. Additionally, revenues are inclusive of a tax gross-up of $102.6 million and $63.0 million for the three months ended September 30, 2023 and 2022, respectively.
The Interactive segment’s revenues for the nine months ended September 30, 2023 increased by $232.2 million, compared to the corresponding prior year period, due to the inclusion of 100% of the operating results of Barstool subsequent to the Barstool Acquisition on February 17, 2023 until the disposition on August 8, 2023, as well as an increase in gaming revenue related to operating in additional jurisdictions, inclusive of the launch of theScore Bet in April 2022. Additionally, revenues are inclusive of a tax gross-up of $283.4 million and $168.7 million for the three and nine months ended September 30, 2023 and 2022, respectively, compared to $44.0 million and $129.5 million for the three and nine months ended September 30, 2021, respectively.
For the three months ended September 30, 2022,2023, the Interactive segment’s Adjusted EBITDAR decreased primarily due to the inclusion of 100% of the operating results of Barstool until the disposition on August 8, 2023 and a decrease in U.S. online
gaming revenues driven by minimal external marketing of the existing platforms in the U.S. Additionally, the third quarter results were negatively impacted by increased expenses associated withrelated to ramping and preparing for the November launch of online sports betting in Kansas, as well as increased expenses due to increased marketing initiatives related to our first football season in the Ontario and Louisiana markets.ESPN BETFor the three months ended September 30, 2022, . Adjusted EBITDAR margin increased due to revenues increasing at a highergreater rate year-over-year than expenses.the rate at which operating expenses increased.
For the nine months ended September 30, 2022,2023, the Interactive segment’s Adjusted EBITDAR andincreased primarily due to increases in total revenues due to operating in additional gaming jurisdictions over the prior year. Adjusted EBITDAR margin decreased primarilyincreased due to increasedrevenues increasing at a greater rate year-over-year than the rate at which operating expenses related to ramping and launching theScore Bet Sportsbook and Casino in Ontario and the Barstool Sportsbook in additional states.increased.
Other | | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change | | For the three months ended September 30, | | Change | | For the nine months ended September 30, | | Change |
| (dollars in millions) | (dollars in millions) | 2022 | | 2021 | | $ | | % | | 2022 | | 2021 | | $ | | % | (dollars in millions) | 2023 | | 2022 | | $ | | % | | 2023 | | 2022 | | $ | | % |
| Revenues | Revenues | | | | | | | | | | | | | | | | Revenues | | | | | | | | | | | | | | | |
| | Food, beverage, and other | Food, beverage, and other | $ | 4.2 | | | $ | 3.5 | | | $ | 0.7 | | | 20.0 | % | | $ | 17.4 | | | $ | 6.8 | | | $ | 10.6 | | | 155.9 | % | Food, beverage, and other | $ | 4.5 | | | $ | 4.2 | | | $ | 0.3 | | | 7.1 | % | | $ | 16.5 | | | $ | 17.4 | | | $ | (0.9) | | | (5.2) | % |
| Total revenues | Total revenues | $ | 4.2 | | | $ | 3.5 | | | $ | 0.7 | | | 20.0 | % | | $ | 17.4 | | | $ | 6.8 | | | $ | 10.6 | | | 155.9 | % | Total revenues | $ | 4.5 | | | $ | 4.2 | | | $ | 0.3 | | | 7.1 | % | | $ | 16.5 | | | $ | 17.4 | | | $ | (0.9) | | | (5.2) | % |
| | Adjusted EBITDAR | Adjusted EBITDAR | $ | (26.5) | | | $ | (26.1) | | | $ | (0.4) | | | 1.5 | % | | $ | (73.6) | | | $ | (75.6) | | | $ | 2.0 | | | 2.6 | % | Adjusted EBITDAR | $ | (28.1) | | | $ | (26.5) | | | $ | (1.6) | | | N/M | | $ | (80.7) | | | $ | (73.6) | | | $ | (7.1) | | | N/M |
Other consists of the Company’s stand-alone racing operations, as well as corporate overhead costs, which primarily includes certain expenses such as payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate to or have not otherwise been allocated to a property.allocated. Revenues for the three and nine months ended September 30, 20222023 have increased and decreased respectively, as compared to the prior year corresponding periods, primarily due to the acquisition of Sam Houston, the remaining 50% of which was acquired on August 1, 2021.fluctuations in racing revenues.
Changes in Adjusted EBITDAR for the three and nine months ended September 30, 20222023 primarily relate to changesan increase in corporate overhead costs, which are reflective of the current operating environment.payroll costs.
Non-GAAP Financial Measures
Use and Definitions
In addition to GAAP financial measures, management uses Adjusted EBITDA, Adjusted EBITDAR, Adjusted EBITDA margin, and Adjusted EBITDAR margin as non-GAAP financial measures. These non-GAAP financial measures should not be considered a substitute for, nor superior to, financial results and measures determined or calculated in accordance with GAAP. Each of these non-GAAP financial measures is not calculated in the same manner by all companies and, accordingly, may not be an appropriate measure of comparing performance among different companies.
We define Adjusted EBITDA as earnings before interest expense, net; interest income; income taxes; depreciation and amortization; stock-based compensation; debt extinguishment and financing charges (which are included in “other (income) expenses”);charges; impairment losses; insurance recoveries, net of deductible charges; changes in the estimated fair value of our contingent purchase price obligations; gain or loss on disposal of assets; the difference between budget and actual expense for cash-settled stock-based awards; pre-opening expenses; loss on disposal of a business; non-cash gains/losses associated with REIT transactions as described in Note 9, “Leases” to our unaudited Consolidated Financial Statements; non-cash gains/losses associated with partial and step acquisitions as measured in accordance with ASC 805 “Business Combinations”;and other. Adjusted EBITDA is inclusive of income or loss from unconsolidated affiliates, with our share of non-operating items (such as interest expense, net; income taxes; depreciation and amortization; and stock-based compensation expense) added back for Barstool Sports, Inc. (prior to our acquisition of the remaining 64% of Barstool common stock on February 17, 2023) and our Kansas Entertainment, LLC joint venture. Adjusted EBITDA is inclusive of rent expense associated with our triple net operating leases (the operating lease components contained within our triple net master lease dated November 1, 2013 with GLPI and the triple net master lease assumed in connection with our acquisition of Pinnacle Entertainment, Inc., our individual triple net leases with GLPI for the real estate assets used in the operation of Tropicana Las Vegas Hotel and Casino (terminated on September 26, 2022), Inc. and Hollywood Casino at The Meadows, and our individual triple net leases with VICI for the real estate assets used in the operations of Margaritaville Casino Resort and Hollywood Casino at Greektown).REIT landlords. Although Adjusted EBITDA includes rent expense associated with our triple net operating leases, we believe Adjusted EBITDA is useful as a supplemental measure in evaluating the performance of our consolidated results of operations. We define Adjusted EBITDA margin as Adjusted EBITDA divided by consolidated revenues. Adjusted EBITDA has economic substance because it is used by management as a performance measure to analyze the performance of our business, and is especially relevant in evaluating large, long-lived casino-hotel projects because it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We present Adjusted EBITDA because it is used by some investors and creditors as an indicator of the strength and performance of ongoing business operations, including our ability to service debt, and to fund capital expenditures, acquisitions and operations. These calculations are commonly used as a basis for investors, analysts and
credit rating agencies to evaluate and compare operating performance and value companies within our industry. In order to view the operations of their casinos on a more stand-alone basis, gaming companies, including us, have historically excluded from their Adjusted EBITDA calculations of certain corporate expenses that do not relate to the management of specific casino properties. However, Adjusted EBITDA is not a measure of performance or liquidity calculated in accordance with GAAP. Adjusted EBITDA information is presented as a supplemental disclosure, as management believes that it is a commonly used measure of performance in the gaming industry and that it is considered by many to be a key indicator of the Company’s operating results.
We define Adjusted EBITDAR as Adjusted EBITDA (as defined above) plus rent expense associated with triple net operating leases (which is a normal, recurring cash operating expense necessary to operate our business). Adjusted EBITDAR is presented on a consolidated basis outside the financial statements solely as a valuation metric. Management believes that Adjusted EBITDAR is an additional metric traditionally used by analysts in valuing gaming companies subject to triple net leases since it eliminates the effects of variability in leasing methods and capital structures. This metric is included as a supplemental disclosure because (i) we believe Adjusted EBITDAR is traditionally used by gaming operator analysts and investors to determine the equity value of gaming operators and (ii) Adjusted EBITDAR is one of the metrics used by other financial analysts in valuing our business. We believe Adjusted EBITDAR is useful for equity valuation purposes because (i) its calculation isolates the effects of financing real estate; and (ii) using a multiple of Adjusted EBITDAR to calculate enterprise value allows for an adjustment to the balance sheet to recognize estimated liabilities arising from operating leases related to real estate. However, Adjusted EBITDAR when presented on a consolidated basis is not a financial measure in accordance with GAAP, and should not be viewed as a measure of overall operating performance or considered in isolation or as an alternative to net income because it excludes the rent expense associated with our triple net operating leases and is provided for the limited purposes referenced herein.
Adjusted EBITDAR margin is defined as Adjusted EBITDAR on a consolidated basis divided by revenues on a consolidated basis. Adjusted EBITDAR margin is presented on a consolidated basis outside the financial statements solely as a valuation metric. We further define Adjusted EBITDAR margin by reportable segment as Adjusted EBITDAR for each segment divided by segment revenues.
Reconciliation of GAAP Financial Measures to Non-GAAP Financial Measures
The following table includes a reconciliation of net income (loss), which is determined in accordance with GAAP, to Adjusted EBITDA and Adjusted EBITDAR, which are non-GAAP financial measures, as well as related margins:
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended September 30, | | For the nine months ended September 30, |
| (dollars in millions) | (dollars in millions) | 2022 | | 2021 | | 2022 | | 2021 | (dollars in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Net income | $ | 123.2 | | $ | 86.1 | | $ | 200.9 | | | $ | 375.7 | | |
| Net income (loss) | | Net income (loss) | $ | (725.1) | | $ | 123.2 | | $ | (132.6) | | | $ | 200.9 | |
| Income tax (benefit) expense | Income tax (benefit) expense | (182.0) | | 36.4 | | (78.1) | | | 110.1 | | Income tax (benefit) expense | (161.7) | | (182.0) | | 40.9 | | | (78.1) | |
| | Interest expense, net | | Interest expense, net | 117.5 | | 198.5 | | 346.1 | | | 554.7 | |
| Interest income | | Interest income | (10.2) | | (5.2) | | (30.5) | | | (7.0) | |
| Income from unconsolidated affiliates | Income from unconsolidated affiliates | (6.6) | | (9.1) | | (17.1) | | | (27.8) | | Income from unconsolidated affiliates | (7.2) | | (6.6) | | (17.0) | | | (17.1) | |
| Interest expense, net | 193.3 | | 144.9 | | 547.7 | | | 418.6 | | |
| Gain on Barstool Acquisition, net | | Gain on Barstool Acquisition, net | — | | — | | (83.4) | | | — | |
| Gain on REIT transactions, net | | Gain on REIT transactions, net | — | | — | | (500.8) | | | — | |
| Loss on early extinguishment of debt | | Loss on early extinguishment of debt | — | | — | | — | | | 10.4 | |
| Other (income) expenses | Other (income) expenses | 8.8 | | (19.2) | | 77.7 | | | (43.1) | | Other (income) expenses | 0.3 | | 8.8 | | (4.5) | | | 67.3 | |
| Operating income | 136.7 | | 239.1 | | 731.1 | | | 833.5 | | |
| Operating income (loss) | | Operating income (loss) | (786.4) | | 136.7 | | (381.8) | | | 731.1 | |
| Loss on disposal of Barstool | | Loss on disposal of Barstool | 923.2 | | — | | 923.2 | | | — | |
Stock-based compensation (1) | Stock-based compensation (1) | 13.6 | | 8.5 | | 45.1 | | | 21.9 | | Stock-based compensation (1) | 35.2 | | 13.6 | | 71.4 | | | 45.1 | |
Cash-settled stock-based award variance (1)(2) | Cash-settled stock-based award variance (1)(2) | (3.8) | | 5.2 | | (16.2) | | | 14.3 | | Cash-settled stock-based award variance (1)(2) | (2.9) | | (3.8) | | (12.0) | | | (16.2) | |
Loss (gain) on disposal of assets (1) | Loss (gain) on disposal of assets (1) | (0.2) | | 0.3 | | 7.0 | | | 0.1 | | Loss (gain) on disposal of assets (1) | — | | (0.2) | | — | | | 7.0 | |
Contingent purchase price (1) | Contingent purchase price (1) | 0.1 | | 0.6 | | (0.9) | | | 1.9 | | Contingent purchase price (1) | 1.3 | | 0.1 | | 1.8 | | | (0.9) | |
Pre-opening expenses (1)(3) | 0.5 | | 1.6 | | 4.1 | | | 2.8 | | |
Pre-opening expenses (1) | | Pre-opening expenses (1) | — | | 0.5 | | — | | | 4.1 | |
| Depreciation and amortization | Depreciation and amortization | 148.7 | | 83.7 | | 417.2 | | | 246.9 | | Depreciation and amortization | 105.8 | | 148.7 | | 323.9 | | | 417.2 | |
Impairment losses (4) | 104.6 | | — | | 104.6 | | | — | | |
Impairment losses (3) | | Impairment losses (3) | — | | 104.6 | | — | | | 104.6 | |
| Insurance recoveries, net of deductible charges (1) | Insurance recoveries, net of deductible charges (1) | (1.9) | | — | | (10.7) | | | — | | Insurance recoveries, net of deductible charges (1) | (0.3) | | (1.9) | | (13.9) | | | (10.7) | |
| Income from unconsolidated affiliates | Income from unconsolidated affiliates | 6.6 | | 9.1 | | 17.1 | | | 27.8 | | Income from unconsolidated affiliates | 7.2 | | 6.6 | | 17.0 | | | 17.1 | |
Non-operating items of equity method investments (5) | 2.6 | | 3.0 | | 4.7 | | | 6.0 | | |
Other expenses (1)(3)(6) | 32.9 | | 13.2 | | 48.4 | | | 15.8 | | |
Non-operating items of equity method investments (4) | | Non-operating items of equity method investments (4) | 1.0 | | 2.6 | | 6.4 | | | 4.7 | |
Other expenses (1)(5) | | Other expenses (1)(5) | 14.4 | | 32.9 | | 25.1 | | | 48.4 | |
| Adjusted EBITDA | Adjusted EBITDA | 440.4 | | 364.3 | | 1,351.5 | | | 1,171.0 | | Adjusted EBITDA | 298.5 | | 440.4 | | 961.1 | | | 1,351.5 | |
Rent expense associated with triple net operating leases (1) | Rent expense associated with triple net operating leases (1) | 31.5 | | 116.0 | | 119.6 | | | 342.9 | | Rent expense associated with triple net operating leases (1) | 146.6 | | 31.5 | | 439.0 | | | 119.6 | |
| Adjusted EBITDAR | Adjusted EBITDAR | $ | 471.9 | | $ | 480.3 | | $ | 1,471.1 | | | $ | 1,513.9 | | Adjusted EBITDAR | $ | 445.1 | | $ | 471.9 | | $ | 1,400.1 | | | $ | 1,471.1 | |
| | Net income margin | 7.6 | % | | 5.7 | % | | 4.2 | % | | 8.7 | % | |
| Net income (loss) margin | | Net income (loss) margin | (44.8) | % | | 7.6 | % | | (2.7) | % | | 4.2 | % |
| Adjusted EBITDA margin | Adjusted EBITDA margin | 27.1 | % | | 24.1 | % | | 28.1 | % | | 27.0 | % | Adjusted EBITDA margin | 18.4 | % | | 27.1 | % | | 19.3 | % | | 28.1 | % |
| Adjusted EBITDAR margin | Adjusted EBITDAR margin | 29.0 | % | | 31.8 | % | | 30.5 | % | | 34.9 | % | Adjusted EBITDAR margin | 27.5 | % | | 29.0 | % | | 28.2 | % | | 30.5 | % |
(1) These items are included in “General and administrative” within the Company’s unaudited Consolidated Statements of Operations.
(2) Our cash-settled stock-based awards are adjusted to fair value each reporting period based primarily on the price of the Company’s common stock. As such, significant fluctuations in the price of the Company’s common stock during any reporting period could cause significant variances to budget on cash-settled stock-based awards.
(3) During the first quarter of 2021, acquisition costs were included within pre-opening and acquisition costs. Beginning with the quarter ended June 30, 2021, acquisition costs are presented as part of other expenses.
(4)(3) Amount primarily relates to a $102.8 million impairment charge in the Northeast segment.
(5)(4) Consists principally of interest expense, net, income taxes, depreciation and amortization, and stock-based compensation expense associated with Barstool and our Kansas Entertainment joint venture. We recordventure and Barstool, prior to us acquiring the remaining 64% of Barstool common stock (see Note 6, “Acquisitions and Dispositions” in the notes to our portion of Barstool’s net income or loss, including adjustments to arrive at Adjusted EBITDAR, one quarter in arrears.unaudited Consolidated Financial Statements).(6)(5) Consists of non-recurring acquisition and transaction costs, and finance transformation costs associated with the implementation of our new Enterprise Resource Management system.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources have been and are expected to be cash flow from operations, borrowings from banks, and proceeds from the issuance of debt and equity securities. Our ongoing liquidity will depend on a number of factors, including available cash resources, cash flow from operations, acquisitions or investments, funding of construction for development projects, and our compliance with covenants contained under our debt agreements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the nine months ended September 30, | | Change |
| (dollars in millions) | | 2022 | | 2021 | | $ | | % |
| Net cash provided by operating activities | | $ | 760.0 | | | $ | 779.0 | | | $ | (19.0) | | | (2.4)% |
| Net cash used in investing activities | | $ | (180.0) | | | $ | (269.5) | | | $ | 89.5 | | | (33.2)% |
| Net cash (used in) provided by financing activities | | $ | (705.2) | | | $ | 375.2 | | | $ | (1,080.4) | | | N/M |
N/M - Not meaningful | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | For the nine months ended September 30, | | Change |
| (dollars in millions) | | 2023 | | 2022 | | $ | | % |
| Net cash provided by operating activities | | $ | 540.7 | | | $ | 760.0 | | | $ | (219.3) | | | (28.9)% |
| Net cash used in investing activities | | $ | (586.0) | | | $ | (180.0) | | | $ | (406.0) | | | 225.6% |
| Net cash used in financing activities | | $ | (257.9) | | | $ | (705.2) | | | $ | 447.3 | | | (63.4)% |
Operating Cash Flow
Trends in our operating cash flows tend to follow trends in operating income before taxes excluding non-cash charges, but can be affected by changes in working capital, the timing of significant interest payments, tax payments or refunds, and distributions from unconsolidated affiliates. Net cash provided by operating activities decreased by $19.0$219.3 million for the nine months ended September 30, 2022,2023, primarily due to a negative impactdecrease in changes in working capital related to gamingincome before taxes and other gaming liabilities and payroll related liabilities, partially offset by a decrease inadditional cash paid for income taxes.
Investing Cash Flow
Cash used in investing activities for the nine months ended September 30, 2023 of $586.0 million is primarily due to consideration paid for the Barstool Acquisition, net of cash acquired, of $314.6 million and capital expenditures of $207.8 million. For the nine months ended September 30, 2022, cash used in investing activities of $180.0 million is primarily duerelated to capital expenditures of $189.6 million and the acquisition of a $15.0 million cost method investment, offset by insurance proceeds received for losses incurred due to Hurricane Laura in 2020. For the nine months ended September 30, 2021, cash used in investing activities of $269.5 million was primarily due to the acquisitions of HitPoint, Perryville, and the remaining 50% interest of Sam Houston, purchases of gaming licenses, and capital expenditures.
Capital Expenditures
Capital expenditures are accounted for as either project capital (new facilities expansions or return generating growth projects)expansions) or maintenance (replacement) capital expenditures.which is inclusive of projects such as our retail sportsbooks, our cashless, cardless and contactless technology and hotel renovations. Cash provided by operating activities, as well as cash available under our Amended Revolving Credit Facility and Revolving Facility, was available to fund our capital expenditures for the nine months ended September 30, 2023 and 2022, and 2021, respectively.as applicable.
Capital expenditures for the nine months ended September 30, 2023 and 2022 were $207.8 million and 2021 were $189.6 million, and $137.8 million, respectively. Capital expenditures related to our York and Morgantown development projects were $15.2 million and $46.6 million for the nine months ended September 30, 2022 and 2021, respectively. During the nine months endedSeptember 30, 2022, capital expenditures also included $20.8 million in construction costs related to hurricane damage sustained at our Lake Charles property of which insurance proceeds were previously received. For the year ending December 31, 2022,2023, our anticipated capital expenditures, inclusive of insurance proceeds, are approximately $300$368.0 million, which include capital expenditures of $189.6$207.8 million incurred for the nine months ended September 30, 20222023 and capital expenditures required under our Triple Net Leases, which require us to spend a specified percentage of nettotal revenues.
Financing Cash Flow
For the nine months ended September 30, 2023, net cash used in financing activities totaled $257.9 million, primarily related to repurchases of our common stock of $149.8 million, as well as $64.4 million in principal payments on our finance leases and finance obligations and debt repayments of $28.1 million.
For the nine months ended September 30, 2022, net cash used in financing activities totaled $705.2 million, primarily related to $510.1 million common stock repurchases, net debt repayments of $28.1 million, $18.2 million in debt issuance costs, and $129.4 million in principal payments on our finance leases and finance obligations.
During the nine months ended September 30, 2021, cash provided by financing activities of $375.2 million was primarily due to net cash proceeds of $400.0 million related to the issuance of our 4.125% Notes due 2029.
Borrowings and Repayments of Long-term Debt
On May 3, 2022, the Company entered into a Second Amended and Restated Credit Agreement with its various lenders (the “Second Amended and Restated Credit Agreement”). The Second Amended and Restated Credit Agreement provides for a $1.0 billion revolving credit facility, undrawn at close, (the “Amended Revolving Credit Facility”), a five-year $550.0 million term loan A facility (the “Amended Term Loan A Facility”) and a seven-year $1.0 billion term loan B facility (the “Amended Term Loan B Facility”) (together, the “Amended Credit Facilities”). The proceeds from the Amended Credit Facilities were used to repay the existing Term Loan A Facility and Term Loan B-1 Facility balances.
At September 30, 2022,2023, we had $2.8 billion in aggregate principal amount of indebtedness, including $1.5 billion outstanding under our Amended Credit Facilities, $400.0 million outstanding under our 5.625% senior unsecured notes, $400.0 million outstanding under our 4.125% senior unsecured notes, $330.5 million outstanding under our 2.75% Convertible Notes, and $157.2$172.6 million outstanding in other long-term obligations. No amounts were drawn on our Amended Revolving Credit Facility. After the refinancing of our Senior Secured Credit Facilities discussed above, weWe have no debt maturing prior to 2026. As of September 30, 20222023 we had conditional obligations under letters of
credit issued pursuant to the Amended Credit Facilities with face amounts aggregating to $22.7$21.8 million resulting in $977.3$978.2 million available borrowing capacity under our Amended Revolving Credit Facility.
Covenants
Our Amended Credit Facilities, 5.625% Notes and 4.125% Notes require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests. In addition, our Amended Credit Facilities, 5.625% Notes and 4.125% Notes, restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. Our debt agreements also contain customary events of default, including cross-default provisions that require us to meet certain requirements under the AR PENN Master Lease, the 2023 Master Lease, PENN Master Lease (prior to January 1, 2023), and the Pinnacle Master Lease (both(all of which are defined in Note 9, “Leases” to our unaudited Consolidated Financial Statements)below), each with GLPI. If we are unable to meet our financial covenants or in the event of a cross-default, it could trigger an acceleration of payment terms. As of September 30, 2022,2023, the Company was in compliance with all required financial covenants. The Company believes that it will remain in compliance with all of its required financial covenants for at least the next twelve months following the date of filing this Quarterly Report on Form 10-Q with the SEC.
See Note 8, “Long-term Debt,”Debt” in the notes to our unaudited Consolidated Financial Statements for additional information of the Company’s debt and other long-term obligations. Share Repurchase Authorization
On February 1, 2022,During the second quarter of 2023, we completed our $750.0 million share repurchase authorization approved by the Board of Directors of PENN approvedon February 1, 2022 (the “February 2022 Authorization”).
On December 6, 2022, a second share repurchase program was authorized for an additional $750.0 million share repurchase authorization.(the “December 2022 Authorization”). The three-year authorizationDecember 2022 Authorization expires on JanuaryDecember 31, 2025.
The Company utilized the capacity under the February 2022 Authorization prior to effecting any repurchases under the December 2022 Authorization. Repurchases by the Company will beare subject to available liquidity, general market and economic conditions, alternate uses for the capital and other factors. Share repurchases may be made from time to time through a Rule 10b5-1 trading plan, open market transactions, block trades or in private transactions in accordance with applicable securities laws and regulations and other legal requirements. There is no minimum number of shares that the Company is required to repurchase and the repurchase authorization may be suspended or discontinued at any time without prior notice.
DuringNo shares of the Company’s common stock were repurchased during the three months ended September 30, 2022,2023. During the nine months ended September 30, 2023, the Company repurchased 5,348,8095,438,221 shares of its common stock in open market transactions for $168.0$149.8 million, at an average price of $31.40$27.54 per share. Duringshare under the nine months ended September 30,February 2022 the Company repurchased 14,690,394 shares of its common stock in open market transactions for $510.1 million at an average price of $34.72 per share.and December 2022 Authorizations. The cost of all repurchased shares is recorded as “Treasury stock” within our unaudited Consolidated Balance Sheets.
SubsequentNo shares of the Company’s common stock were repurchased subsequent to the quarter ended September 30, 2022,2023. As of November 1, 2023, the Company repurchased 1,005,188 million shares of its common stock at an average price of $28.95 per share for an aggregate amount of $29.1 million. The remaining availability under our $750.0 million share repurchase authorizationDecember 2022 Authorization was $211.1 million as of November 2, 2022.
Barstool
On August 17, 2022, the Company exercised its call rights to bring its ownership of Barstool to 100%. The acquisition of the remaining Barstool shares, which can be settled in cash or a combination of cash and equity at PENN’s election, is expected$749.5 million.
Other Factors Affecting Liquidity
ESPN BET Sportsbook Agreement
On August 8, 2023, PENN entered into the Sportsbook Agreement with ESPN which provides for a long-term strategic relationship between PENN and ESPN relating to be completedonline sports betting in Februarythe United States. In November 2023, after whichpending regulatory approval, the existing Barstool Sportsbook will be rebranded and launched across all online platforms in the United States as ESPN BET, and our online product will include a wholly-owned subsidiaryHollywood-branded integrated iCasino where permitted. The Sportsbook Agreement has an initial 10-year term and may be extended for an additional ten years upon mutual agreement of PENN. Completion ofPENN and ESPN. In consideration for the acquisition at that time is subjectmedia marketing services and brand and other rights provided by ESPN, PENN will pay $150.0 million per year in cash pursuant to the satisfaction of certain conditions, including regulatory approval. SeeSportsbook Agreement for the initial 10-year term and issue the warrants pursuant to the Investment Agreement (see Note 10, “Investments in12, “Commitments and Advances to Unconsolidated Affiliates,”Contingencies” in the notes to our unaudited Consolidated Financial Statements for further discussion.additional information). Triple Net Leases
The majority of the real estate assets (i.e., land and buildings) used in the Company’sour operations are subject to triple net master leases; the most significant of which are with GLPI, and include the AR PENN Master Lease, 2023 Master Lease, PENN Master Lease (prior to January 1, 2023), and the Pinnacle Master Lease. In addition, six ofLease (as such terms are defined in Note 9, “Leases” in the gaming facilities used innotes to our operations are subjectunaudited Consolidated Financial Statements, and collectively referred to individual triple net leases.as the “Master Leases”). We refer to the PENN Master Lease, the Pinnacle Master Lease, theLeases, Perryville Lease (where applicable), the Meadows Lease (where applicable), the Margaritaville Lease, the Greektown Lease, the Tropicana Lease (terminated September 26, 2022) and the Morgantown Lease, collectively, as our Triple“Triple Net Leases.Leases”. The Company’s Triple Net Leases are accounted for as either operating leases, finance leases, or financing obligations. Subsequent to quarter end, on October 9, 2022,On February 21, 2023, as described in Note 9, “Leases,”“Leases” in the notes to our unaudited Consolidated Financial Statements, the Company and GLPI entered into the Term Sheet with GLPI. Pursuant to the Term Sheet, the Company and GLPI agreed to amend theAR PENN Master Lease, effective January 1, 2023, to (i) remove the land and buildings for Aurora, Joliet, Columbus, Toledo and the M Resort, and (ii) make associated adjustments to the rent underafter which the initial rent in the AR PENN Master Lease; (iii) terminateLease will be $284.1 million, consisting of $208.2 million of building base rent, $43.0 million of land base rent and $32.9 million of percentage rent (as such terms are defined in the existingAR PENN Master Lease). Subsequent to the execution of the AR PENN Master Lease, the Company leases real estate assets associated with Meadows14 of the gaming facilities used in its operations via a triple net master lease. The current term of the AR PENN Master Lease expires on October 31, 2033 and Perryville;thereafter contains three renewal terms of five years each on the same terms and (iv) enterconditions, exercisable at the Company’s option.Concurrent with the execution of the AR PENN Master Lease, the Company and GLPI entered into the New2023 Master Lease, effective on the expected date of January 1, 2023, specific to the propertyproperties associated with Aurora, Joliet, Columbus, Toledo, M Resort, Meadows, and Perryville and the Master Development Agreement. The 2023 Master Lease has an initial term through October 31, 2033 with three subsequent five-year renewal periods on the same terms and conditions, exercisable at the Company’s option. The 2023 Master Lease terminated the individual triple net leases associated with Meadows and Perryville. The New2023 Master Lease will beand AR PENN Master Lease are cross-defaulted, cross-collateralized, and coterminous, with the PENN Master Lease, and subject to a parent guarantee.
The New2023 Master Lease will include Newincludes the 2023 Master Lease Base Rent equal to $232.2 million and the Master Development Agreement contains additional rent (together with the 2023 Master Lease Base Rent, the “2023 Master Lease Rent”) equal to (i) 7.75% of any project funding received by PENN from GLPI for the Aurora Project and (ii) a percentage, based on the then-current market conditions,GLPI stock price, of any project funding received by PENN from GLPI for the Other Development Projects. The Master Development Agreement provides that GLPI will fund up to $225 million for the Aurora Project and, GLPI has committed to fund, upon PENN’s request, up to $350 million in the aggregate for the Other Development Projects, in accordance with certain terms and conditions set forth in the Term Sheet.Master Development Agreement. These funding obligations of GLPI expire on January 1, 2026. The New2023 Master Lease Rent will be subject to a one-time increase of $1.4 million, effective the fifth anniversary of the effective date.November 1, 2027. The New2023 Master Lease Rent will be further subject to a fixed escalator of 1.5% on November 1, 2023 and annually thereafter. The Master Development Agreement provides that PENN may elect not to proceed with a development project prior to GLPI’s commencement of any equity or debt offering or credit facility draw intended to fund such a project or after such time in certain instances, provided that GLPI will be reimbursed for all costs and expenses incurred in connection with such discontinued project. The Aurora Project and the Other Development Projects are all subject to necessary regulatory and other government approvals.
Under our Triple Net Leases, in addition to lease payments for the real estate assets, we are required to pay the following, among other things: (i) all facility maintenance; (ii) all insurance required in connection with the leased properties and the business conducted on the leased properties; (iii) taxes levied on or with respect to the leased properties (other than taxes on the income of the lessor); (iv) all tenant capital improvements; and (v) all utilities and other services necessary or appropriate for the leased properties and the business conducted on the leased properties. Additionally, our Triple Net Leases are subject to
annual escalators and periodic percentage rent resets, as applicable. See Note 9, “Leases,”“Leases” in the notes to our unaudited Consolidated Financial Statements for further discussion and disclosure related to the Company’s leases.
Payments to our REIT Landlords under Triple Net Leases
Total payments made to our REIT Landlords, GLPI and VICI, were as follows:
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | | For the three months ended September 30, | | For the nine months ended September 30, | |
| (in millions) | (in millions) | 2022 | | 2021 | | 2022 | | 2021 | | (in millions) | 2023 | | 2022 | | 2023 | | 2022 | |
| AR PENN Master Lease | | AR PENN Master Lease | $ | 71.1 | | | $ | — | | | $ | 213.1 | | | $ | — | | |
| 2023 Master Lease | | 2023 Master Lease | 58.0 | | | — | | | 174.1 | | | — | | |
| PENN Master Lease | PENN Master Lease | $ | 120.2 | | | $ | 118.4 | | | $ | 360.0 | | | $ | 357.1 | | | PENN Master Lease | — | | | 120.2 | | | — | | | 360.0 | | |
| Pinnacle Master Lease | Pinnacle Master Lease | 84.2 | | | 82.4 | | | 250.1 | | | 245.8 | | | Pinnacle Master Lease | 85.3 | | | 84.2 | | | 254.2 | | | 250.1 | | |
| Perryville Lease | Perryville Lease | 1.9 | | | 1.9 | | | 5.8 | | | 1.9 | | | Perryville Lease | — | | | 1.9 | | | — | | | 5.8 | | |
| Meadows Lease | Meadows Lease | 6.2 | | | 6.2 | | | 18.6 | | | 18.6 | | | Meadows Lease | — | | | 6.2 | | | — | | | 18.6 | | |
| Margaritaville Lease | Margaritaville Lease | 5.9 | | | 5.9 | | | 17.8 | | | 17.6 | | | Margaritaville Lease | 6.6 | | | 5.9 | | | 19.6 | | | 17.8 | | |
| Greektown Lease | Greektown Lease | 12.8 | | | 12.9 | | | 38.5 | | | 40.3 | | | Greektown Lease | 13.2 | | | 12.8 | | | 39.0 | | | 38.5 | | |
| Morgantown Lease | Morgantown Lease | 0.8 | | | 0.8 | | | 2.3 | | | 2.3 | | | Morgantown Lease | 0.8 | | | 0.8 | | | 2.4 | | | 2.3 | | |
Total (1) | Total (1) | $ | 232.0 | | | $ | 228.5 | | | $ | 693.1 | | | $ | 683.6 | | | Total (1) | $ | 235.0 | | | $ | 232.0 | | | $ | 702.4 | | | $ | 693.1 | | |
(1)RentFor the three and nine months ended September 30, 2022, rent payable under the Tropicana Lease was nominal prior to termination on September 26, 2022.nominal. Therefore, this leaseit has been excluded from the table above. The Tropicana Lease was terminated on September 26, 2022.
Outlook
Based on our current level of operations, we believe that cash generated from operations and cash on hand, together with amounts available under our Amended Credit Facilities, will be adequate to meet our anticipated obligations under our Triple Net Leases, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, our ability to generate sufficient cash flow from operations will depend on a range of economic, competitive and business factors, many of which are outside our control. We cannot be certain: (i) of the impact of global supply chain disruptions, price inflation, and rising interest rates on the U.S. economy, slowing economic growth, geopolitical uncertainty, and instability in the ability of our business to maintain its recovery from the impacts of the COVID-19 pandemic;banking sector following multiple bank failures; (ii) that our anticipated earnings projections will be realized; (iii) that we will achieve the expected synergies from our acquisitions; and (iv) that future borrowings will be available under our Amended Credit Facilities or otherwise will be available in the credit markets to enable us to service our indebtedness or to make anticipated capital expenditures. We caution you that the performance and trends seen atacross our properties, such as strong visitation and increased length of play,portfolio may not continue. In addition, while we anticipated that a significant amount of our future growth would come through the pursuit of opportunities within other distribution channels, such as media, retail and online sports betting, iCasino, and social gaming, retail gaming, and iGaming;gaming; from acquisitions of gaming properties at reasonable valuations; greenfield projects; development projects; and jurisdictional expansions and property expansion in under-penetrated markets; there can be no assurance that this will be the case. If we consummate significant acquisitions in the future or undertake any significant property expansions, our cash requirements may increase significantly and we may need to make additional borrowings or complete equity or debt financings to meet these requirements. See Part I, Item 1A. “Risk Factors” of the Company’s Form 10-K for the year ended December 31, 20212022 for a discussion of additional risks related to the Company’s capital structure.
We have historically maintained a capital structure comprised of a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace in an effort to maximize our enterprise value for our shareholders. We expect to meet our debt obligations as they come due through internally-generated funds from operations and/or refinancing them through the debt or equity markets prior to their maturity.
CRITICAL ACCOUNTING ESTIMATES
A complete discussion of our critical accounting estimates is included in our Form 10-K for the year ended December 31, 2021. With the exception of the table below, which provides updated sensitivity on the impairment of goodwill and the gaming license at Hollywood Casino at Greektown, as2022. Other than discussed in Note 7, “Goodwill and Other Intangible Assets,” and the income tax valuation allowance discussion below, there have been no significant changes in our critical accounting estimates during the nine months ended September 30, 2022.2023. | | | | | | | | | | | | | | | | | | | |
| | | | | Increase (decrease) in the Recorded Amount of Impairment Loss as a Result of: |
| (in millions) | Carrying Amount | | | | Discount Rate
+100 bps | | Terminal Growth Rate -50 bps |
| Goodwill | | | | | | | |
| Hollywood Casino at Greektown | $ | 67.4 | | | | | $ | 0.4 | | | $ | (0.1) | |
| | | | | | | |
| Gaming licenses | | | | | | | |
| Hollywood Casino at Greektown | $ | 166.4 | | | | | $ | 14.0 | | | $ | 1.0 | |
Leases
AsThe assessment of September 30, 2022,lease classifications of land and building components contained within each of the Company determined that a valuation allowance was no longer required against its federal, foreign,AR PENN Master Lease and state net deferred tax assets for the portion that will be realized, as discussed in detail2023 Master Lease (as described in Note 11, “Income Taxes”9, “Leases”. As in the notes to our unaudited Consolidated Financial Statements) required management to make significant estimates and assumptions. These included estimates for the (i) fair value of the land and building assets; (ii) the term of the lease, including whether any renewal terms are reasonably assured of being exercised; and (iii) the discount rate (collateralized incremental borrowing rate) over the lease term. Additionally, management assessed whether the agreements should be accounted for as a separate or combined contract and whether the AR PENN Master Lease should be considered a lease modification or a new lease.Business Combination
In connection with the Company’s acquisition of Barstool (as described in Note 6, “Acquisitions and Dispositions” in the notes to our unaudited Consolidated Financial Statements), valuations were completed to determine the allocation of the purchase price. The factors considered in the valuation include data gathered as a result of the Company released $172.7 millionCompany’s due diligence in connection with the acquisition, projections for future operations, and data obtained from third-party valuation specialists, as deemed appropriate. We allocated the business combination purchase price to tangible and identifiable intangible assets acquired and liabilities assumed based on their fair values. The excess of its total valuation allowance during the threepurchase price over those fair values was recorded as goodwill.
Accounting for this business combination required management to make significant estimates and nine months ended September 30, 2022, due toassumptions, including our estimate of intangible assets, such as the positive evidence outweighingBarstool trade name, advertising relationships, other tradenames and brands, and customer relationships. Although we believe the negative evidence thereby allowing the Company to achieve the “more-likely-than-not” realization standard.estimates and assumptions made have been reasonable and appropriate, they are inherently uncertain. The most significant positive evidence that ledof the assumptions used in the valuations included: (1) revenue growth; (2) discount rates; (3) effective income tax rates; (4) future terminal values; and (5) gaming royalties for the use of the Barstool tradename assumptions. These assumptions were developed based on historical trends in the current competitive markets in which Barstool and PENN operate as well as projections of future performance. Significant assumptions with respect to our trade names and customer relationships involved selecting the appropriate royalty rates and cost estimates for replacement cost analyses. Advertising relationships were valued utilizing a with-and-without method. Where a relief-from-royalty method was utilized, significant assumptions included projecting revenues attributable to the reversal ofasset, royalty rates, obsolescence factors, estimated synergies and discount rates. Where a replacement cost method was utilized, significant assumptions included estimating cost and time required to replace, determining the valuation allowance during this interim period included the achievement and sustained growth in our three-year cumulative pretax earnings, substantial total revenue and earnings for the retail operating segment growthopportunity cost over the last seven quarters,replacement period, and estimating a lack ofmark-up on development costs. Where a with-and-without method was utilized, significant asset impairment charges expected for the Company’s retail business operations or projections for the foreseeable future.assumptions included projecting revenues with direct advertising relationships and projecting revenues without direct advertising relationships, and determining discount rates.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
For information with respect to new accounting pronouncements and the impact of these pronouncements on our unaudited Consolidated Financial Statements, see Note 3, “New Accounting Pronouncements,”Pronouncements” in the notes to our unaudited Consolidated Financial Statements. IMPORTANT FACTORS REGARDING FORWARD-LOOKING STATEMENTS
This Form 10-Q contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements can be identified usingby the use of forward-looking terminology such as “expects,” “believes,” “estimates,” “projects,” “intends,” “plans,” “goal,” “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 include, but are not limited to, statements regarding: the Company’s anticipated share repurchases; the Company’s expectations of future results of operations and financial condition, the assumptions provided regarding the guidance, including the scale and timing of the Company’s product and technology investments; the Company’s anticipated share repurchases; the Company’s expectations regarding results, and the impact of competition, in retail/mobile/online sportsbooks, iGamingiCasino, social gaming, and land-basedretail operations; the Company’s development and launch of its Interactive segment’s products in new jurisdictions and enhancements to existing Interactive segment products, including the content for the BarstoolESPN BET and theScore Bet iCasinoSportsbook and Casino apps and the migrationrelaunch of the Barstool Sportsbook into bothas ESPN BET on our proprietary player account management system and risk and trading platforms; the expected timing of the rebrand of Barstool Sportsbook; the benefits of the agreement between the Company and ESPN; the Company’s expectations regarding its future investmentsSportsbook Agreement with ESPN and the future success of its products; the Company’s expectations with respect to the integration and synergies related to the Company’s acquisitionintegration of Barstool Sports;theScore and the continued growth and monetization of the Company’s media business; the Company’s
expectations with respect to the ongoing introduction and the potential benefits of the cashless, cardless and contactless (3C’s) technology; the Company’s development projects, including the recently-announced prospective development projects at Hollywood Casinos Aurora, Joliet, Columbus, and the M Resort;Resort Spa Casino; our ability to obtain financing for our development projects on attractive terms; and the timing, cost and expected impact of planned capital expenditures on the Company’s results of operations.operations; the actions of regulatory, legislative, executive or judicial decisions at the federal, state, provincial or local level with regard to our business and the impact of any such actions.
Such statements are all subject to risks, uncertainties and changes in circumstances that could significantly affect the Company’s future financial results and business. Accordingly, the Company cautions that the forward-looking statements contained herein are qualified by important factors that could cause actual results to differ materially from those reflected by such statements. Such factors include: the effects of economic and market conditions in the markets in which the Company operates; competition with other entertainment, sports content, and casino gaming experiences; the timing, cost and expected
impact of product and technology investments; risks relating to international operations, permits, licenses, financings, approvals and other contingencies in connection with growth in new or existing jurisdictions; collective bargaining activity and strikes; the Company may not be able to achieve the anticipated financial returns from the Sportsbook Agreement with ESPN, including due to fees, costs, taxes or circumstances beyond the Company’s or ESPN’s control; the rebranding of the Barstool Sportsbook as ESPN BET may be delayed, or in certain jurisdictions may not occur at all, for reasons beyond our control, including due to any delays in the receipt of, or failure to receive, any required regulatory approvals; potential adverse reactions or changes to business or regulatory relationships resulting from the announcement or performance of the Sportsbook Agreement with ESPN or the divestiture of Barstool Sports; the occurrence of any event, change or other circumstances that could give rise to the right of one or both of the Company and ESPN to terminate the Sportsbook Agreement between the companies; liabilities, costs and fees in connection with the divestiture of Barstool Sports and the transition from the Barstool Sportsbook and other uses of intellectual property of Barstool Sports, including in the Company’s retail locations; the ability of the Company and ESPN to agree to extend the initial 10-year term of the Sportsbook Agreement on mutually satisfactory terms, if at all, and the costs and obligations of such terms if agreed; the outcome of any legal proceedings that may be instituted against the Company, ESPN or their respective directors, officers or employees; the ability of the Company or ESPN to retain and hire key personnel; the impact of new or changes in current laws, regulations, rules or other industry standards; and additional risks and uncertainties described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021,2022, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the U.S. Securities and Exchange Commission. The Company does not intend to update publicly any forward-looking statements except as required by law. Considering these risks, uncertainties and assumptions, the forward-looking events discussed in this Form 10-Q may not occur.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to market risk from adverse changes in interest rates with respect to the short-term floating interest rates on borrowings under our Amended Credit Facilities. As of September 30, 2022,2023, the Company’s Amended Credit Facilities had a gross outstanding balance of $1.5 billion, consisting of a $543.1$515.6 million Amended Term Loan A Facility and a $997.5$987.5 million Amended Term Loan B Facility. As of September 30, 2022,2023, we have $977.3$978.2 million of available borrowing capacity under our Amended Revolving Credit Facility.
The table below provides information as of September 30, 20222023 about our long-term debt obligations that are sensitive to changes in interest rates, including the notional amounts maturing during the twelve month period presented and the related weighted-average interest rates by maturity dates.
| | (dollars in millions) | (dollars in millions) | 10/01/22 - 9/30/23 | | 10/01/23 - 9/30/24 | | 10/01/24 - 9/30/25 | | 10/01/25 - 9/30/26 | | 10/01/26 - 9/30/27 | | Thereafter | | Total | | Fair Value | (dollars in millions) | 10/1/23 - 9/30/24 | | 10/1/24 - 9/30/25 | | 10/1/25 - 9/30/26 | | 10/1/26 - 9/30/27 | | 10/1/27 - 9/30/28 | | Thereafter | | Total | | Fair Value |
| Fixed rate | Fixed rate | $ | — | | $ | — | | $ | — | | $ | — | | $ | 400.0 | | $ | — | | $ | 400.0 | | | $ | 353.6 | | Fixed rate | $ | — | | $ | — | | $ | — | | $ | 400.0 | | $ | — | | $ | — | | $ | 400.0 | | | $ | 372.0 | |
| Average interest rate | Average interest rate | | 5.625 | % | | Average interest rate | | 5.625 | % | |
| Fixed rate | Fixed rate | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 400.0 | | $ | 400.0 | | | $ | 306.6 | | Fixed rate | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 400.0 | | $ | 400.0 | | | $ | 322.0 | |
| Average interest rate | Average interest rate | | 4.125 | % | | Average interest rate | | 4.125 | % | |
| Fixed rate | Fixed rate | $ | — | | $ | — | | $ | — | | $ | 330.5 | | $ | — | | $ | — | | $ | 330.5 | | | $ | 457.8 | | Fixed rate | $ | — | | $ | — | | $ | 330.5 | | $ | — | | $ | — | | $ | — | | $ | 330.5 | | | $ | 400.7 | |
| Average interest rate | Average interest rate | | 2.75 | % | | Average interest rate | | 2.750 | % | |
| Variable rate | Variable rate | $ | 37.5 | | $ | 37.5 | | $ | 37.5 | | $ | 37.5 | | $ | 443.1 | | $ | 947.5 | | $ | 1,540.6 | | | $ | 1,491.1 | | Variable rate | $ | 37.5 | | $ | 37.5 | | $ | 37.5 | | $ | 443.1 | | $ | 10.0 | | $ | 937.5 | | $ | 1,503.1 | | | $ | 1,495.5 | |
Average interest rate (1) | Average interest rate (1) | 5.51 | % | | 5.46 | % | | 5.41 | % | | 5.37 | % | | 5.06 | % | | 6.16 | % | | Average interest rate (1) | 6.033 | % | | 6.065 | % | | 6.084 | % | | 5.880 | % | | 6.801 | % | | 6.801 | % | |
(1)Estimated rate, reflective of forward SOFR as of September 30, 20222023 plus the spread over SOFR applicable to variable-rate borrowing.
Foreign Currency Exchange Rate Risk
We are exposed to currency translation risk because the results of our international entities are reported in local currency, which we then translate to U.S. dollars for inclusion in our unaudited Consolidated Financial Statements. As a result, changes between the foreign exchange rates, in particular the Canadian dollar compared to the U.S. dollar, affect the amounts we record for our foreign assets, liabilities, revenues and expenses, and could have a negative effect on our financial results. The results of theScore are reported in Canadian dollars, which we then translate to U.S. dollars for inclusion in our unaudited Consolidated Financial Statements. We do not currently enter into hedging arrangements to minimize the impact of foreign currency fluctuations on our operations. For the three months ended September 30, 2023 and 2022, we incurred unrealized foreign currency translation adjustment losses of $44.7 million and $119.8 million, respectively, and incurred unrealized foreign currency translation adjustment losses of $0.1 million and $146.7 million for the nine months ended September 30, 2023 and 2022, we incurred an unrealized foreignrespectively, as reported in “Foreign currency translation adjustment lossduring the period” within our unaudited Consolidated Statements of $119.8 million and $146.7 million, respectively.Comprehensive Income (Loss).
ITEM 4.CONTROLS AND PROCEDURES
The Company’s management, under the supervision and with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), as of September 30, 2022.2023. Based on this evaluation, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 20222023 to ensure that information required to be disclosed by the Company in reports we file or submit under the Exchange Act is (i) recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the United States Securities and Exchange Commission’s rules and forms and (ii) accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures.
During the quarter ended September 30, 2022,2023, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to a number of other pending legal proceedings. Management does not expect that the outcome of such proceedings, either individually or in the aggregate, will have a material effect on our financial position, results of operations or cash flows.
ITEM 1A.RISK FACTORS
We refer you to our 20212022 Annual Report on Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2023 for a discussion of the risk factors that affect our business and financial results. There have been no material changes to those risk factors.factors, except as discussed below.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSCollective bargaining activity and strikes could disrupt our operations, increase our labor costs, and interfere with the ability of our management to focus on executing our business strategies.
The following table presents the totalA significant number of sharesteam members at our properties are currently covered by collective bargaining agreements. Numerous collective bargaining agreements are typically subject to negotiation each year, and our ability in the past to resolve such negotiations does not mean that we will be able to resolve future negotiations without strikes, disruptions, or on terms that we consider reasonable. If relationships with our organized associates or the unions that represent them become adverse, then the properties we operate could experience labor disruptions such as strikes, lockouts, boycotts, and public demonstrations. Labor disputes and disruptions have in the past, and could in the future, result in adverse publicity and negatively affect operations and revenues at affected properties. For example, our collective bargaining agreement with the Detroit Casino Council expired on October 16, 2023 and, in mid-October 2023, members of our common stockstaff represented by the Detroit Casino Council went on strike at our Hollywood Casino at Greektown after negotiations with the Detroit Casino Council failed to yield a new contract. Labor disputes and disruptions, such as the Detroit Casino Council strike, and further strikes or work stoppages could harm our relationship with our team members, result in increased regulatory inquiries and enforcement by governmental authorities, harm our relationships with our guests and customers, divert management attention, and reduce customer demand for our services, all of which could have an adverse effect on our reputation, business, financial condition, or results of operations.
In addition, labor regulation and the negotiation of new or existing collective bargaining agreements could lead to higher wage and benefit costs, changes in work rules that raise operating expenses and legal costs, and could impose limitations on our ability or the ability of our third-party property owners to take cost saving measures during economic downturns.
Given the large number of employees, labor unions are making a concerted effort to recruit more employees in the gaming industry, and, we have experienced attempts by labor organizations to organize certain of our non-union employees. These efforts have achieved some success to date. We cannot provide any assurance that we repurchased duringwill not experience additional and successful union activity in the third quarterfuture. The impact of 2022,this union activity is undetermined and could negatively impact our results of operations. Increased unionization of our workforce, new labor legislation or changes in regulations could disrupt our operations, reduce our profitability or interfere with the average price paid per share,ability of our management to focus on executing our business strategies.
We lease facilities that are located in areas that experience extreme weather conditions, which may increase in frequency and severity as a result of climate change and adversely affect our business.
We have been and may continue to be adversely impacted by increases in the frequency, duration, and severity of extreme weather events and changes in precipitation and temperature which may be increasing consequences of climate change. Extreme weather conditions may interrupt our operations and reduce the number of shares that we repurchased as partcustomers who visit our facilities in the affected areas. Our properties in Colorado, Illinois, Indiana, Iowa, Kansas, Louisiana, Maine, Massachusetts, Mississippi, Missouri, Ohio, and Pennsylvania are at risk of our share repurchase program, and the approximate dollar value of shares that still could have been repurchased at the end of the applicable fiscal period pursuant to our share repurchase program:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in millions, except per share data) | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program (2) | | Maximum Dollar Value of Shares that May Yet Be Purchased Under the Plans or Program |
| July 1, 2022 - July 31, 2022 | | 2,798,379 | | | $ | 31.26 | | | 2,798,008 | | | $ | 320.6 | |
| August 1, 2022 - August 31, 2022 | | 1,210,946 | | | $ | 33.92 | | | 1,210,091 | | | $ | 279.6 | |
| September 1, 2022 - September 30, 2022 | | 1,374,161 | | | $ | 29.44 | | | 1,340,710 | | | $ | 240.2 | |
| Total | | 5,383,486 | | | $ | 31.40 | | | 5,348,809 | | | |
(1)Includes 371, 855, and 33,451 shares withheld to pay taxes due upon the vesting of employee restricted stock for the months ended July 31, August 31, and September 30, 2022, respectively.
(2)On February 1, 2022, our Board of Directors authorized and announced the repurchase of up to $750.0 million of our common stock from time to time on the open market experiencing extreme weather conditions, including snowstorms, tornadoes, hurricanes and/or in privately negotiated transactions. The share purchase authorization expires on January 31, 2025. Stock repurchases, if any, will be funded using our available liquidity. The timing and amount of stock repurchases will depend on a variety of factors, including the market conditions as well as corporate and regulatory considerations. As of September 30, 2022, we have repurchased a total of 14,690,394 shares of our common stock at an average price of $34.72.
ITEM 5. OTHER INFORMATION
The Company entered into a new Executive Agreement with its Chief Executive Officer, Jay Snowden on November 2, 2022. The Executive Agreement supersedes Mr. Snowden’s prior executive agreement (scheduled to expire on January 1, 2023), is effective as of November 2, 2022, and terminates on January 1, 2026 (the “Term”) unless earlier terminated by either party. The Executive Agreement provides that, effective January 1, 2023, Mr. Snowden’s annual base salary will be $1.8 million and his target annual bonus will be 250% of his base salary.flooding.
In the event Mr. Snowden’s employment is terminated without cause (as definedpast, adverse weather conditions, potentially exacerbated by climate change, have interrupted our operations, damaged property, and reduced the number of customers who visit our facilities in an affected area. For example, we have experienced interrupted operations and property damage due to hurricanes in the Executive Agreement), or Mr. Snowden resigns for good reason (as definedareas around the Gulf of Mexico and due to certain snowstorms in the Executive Agreement),Midwest and Northeast. If any of our properties are damaged or the Executive Agreementthere is not reneweda prolonged disruption at the endany of the Term, Mr. Snowden willour properties due to natural disasters or other catastrophic weather events, our business, results of operations, and financial condition could be entitled to (i) severance payments equal to a multiple of the sum of (a) his annual base salary and (b) his target annual bonus, and (ii) pro rata annual bonus for the fiscal year in which termination occurs. The severance multiple is two times (2x) in the case of a termination that occurs outside of the CoC Protection Period and two and one-half times (2.5x) in the case of a termination that occurs during the twenty-four months following a change of control (the “CoC Protection Period”).
Prior to receipt of any severance payments, Mr. Snowden must execute a general release in favor of the Company and its affiliates.
The Executive Agreement also contains customary confidentiality, non-competition and non-solicitation provisions. Mr. Snowden has agreed not to disclose or use the Company’s confidential information. In addition, Mr. Snowden has agreed not to compete with the Company for a period of (i) twelve months following the termination date if he is terminated in a manner in which no severance is paid or (ii) the twenty-four months following the termination date if he receives severance. Mr. Snowdenmaterially adversely affected.
Although a majority of our repair, clean-up, and lost business expenses have been covered by insurance in the past, there is no assurance that, given the increasing burdens on insurance companies from extreme weather events, we will be able to continue to obtain adequate insurance against these types of losses, or that our insurers will in the future be in a position to satisfy our claims. In addition, the costs of insurance against these types of events have increased in recent years. For example, the Company’s cost of insurance premiums on an annual basis was approximately $25.0 million in 2022 as compared to $21.0 million in 2021.
Additionally, our retail casino gaming, sports betting, and online gaming operations rely heavily on technology services and an uninterrupted supply of electrical power. Any unscheduled disruption in our technology services or interruption in the supply of electrical power as a result of extreme weather, or otherwise, could result in an immediate, and possibly substantial, loss of revenues due to a shutdown of our retail casino gaming (including slot machines and security systems), sports betting, and online gaming operations.
Climate change regulations and greenhouse gas effects may adversely impact our operations.
There is a growing consensus that greenhouse gas (“GHG”) emissions continue to alter the composition of the global atmosphere in ways that are affecting, and are expected to continue affecting, the global climate. We may become subject to legislation and regulation regarding climate change, and compliance with any new rules could be difficult, burdensome and costly. Concerned parties, such as legislators and regulators, stockholders, and nongovernmental organizations, as well as companies in many business sectors, are considering ways to reduce GHG emissions. Many states have announced or adopted programs to stabilize and reduce GHG emissions and, in the past, federal legislation has agreedbeen proposed in Congress. If such legislation is enacted, we could incur increased energy, environmental and other costs, and capital expenditures to comply with the limitations. Unless and until legislation is enacted and its terms are known, we cannot reasonably or reliably estimate its impact on our financial condition, results of operations, or ability to compete. Further, regulation of GHG emissions may limit our customers’ ability to travel to our properties (e.g. as a result of increased fuel costs or restrictions on transport-related emissions).
Investors’ and other stakeholders’ expectations of our performance relating to environmental, social and governance factors may impose additional costs and expose us to new risks.
There is an increasing focus from certain investors, customers, partners, employees, other stakeholders, and regulators concerning environmental, social, and governance matters (“ESG”). Some investors may use these non-financial performance factors to guide their investment strategies and, in some cases, may choose not to solicitinvest in us if they believe our policies and actions relating to ESG are inadequate. We may face reputational damage in the event that we do not meet the ESG standards set by various constituencies.
As ESG best practices and reporting standards continue to develop, we may incur increasing costs related to ESG monitoring and reporting and compliance with ESG initiatives. We publish an annual Corporate Social Responsibility Report, which highlights, among other things, our climate change mitigation activities and how we are supporting our workforce, including our diversity, equity, inclusion, and belonging efforts. Our disclosures on these matters, or hire an executivea failure to meet evolving stakeholder expectations for ESG practices and reporting, may potentially harm our reputation and customer relationships.
Furthermore, if our competitors’ ESG performance is perceived to be better than ours, potential or management level employeecurrent investors may elect to invest with our competitors instead. In addition, in the event that we communicate certain initiatives or goals regarding ESG matters, we could fail, or be perceived to fail, in our achievement of such initiatives or goals, or we could be criticized for the scope of such initiatives or goals. If we fail to satisfy the expectations of investors, customers, employees, and other stakeholders, or our initiatives are not executed as planned, our business, financial condition, results of operations, and prospects could be adversely affected.
ITEM 5. OTHER INFORMATION
Rule 10b5-1 Trading Plans
During the three months ended September 30, 2023, none of the CompanyCompany’s directors or its affiliatesexecutive officers adopted or terminated any contract, instruction or written plan for a period of 18 months following termination.
The summarythe purchase or sale of the material termsCompany’s securities that was intended to satisfy the affirmative defense conditions of the Executive Agreement described above is qualified in its entirety by reference to the Executive Agreement, a copy of which is attached hereto as Exhibit 10.2 and is incorporated herein by reference.Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
The Company entered into a new Executive Agreement with its Executive Vice President – Operations, Todd George, on November 2, 2022. The Executive Agreement supersedes Mr. George’s prior executive agreement (scheduled to expire on January 1, 2023), is effective as of November 2, 2022, and terminates on January 1, 2026 (the “Term”) unless earlier terminated by either party. The Executive Agreement provides that, effective January 1, 2023, Mr. George’s annual base salary will be $900,000 and his target annual bonus will be 100% of his base salary.
In the event Mr. George’s employment is terminated without cause (as defined in the Executive Agreement), or Mr. George resigns for good reason (as defined in the Executive Agreement), or the Executive Agreement is not renewed at the end of the Term, Mr. George will be entitled to (i) severance payments equal to the sum of (a) two times his annual base salary and (b) and one and one half times his target annual bonus (or two times his target annual bonus if the termination occurs during the twenty-four months following a change of control), and (ii) pro rata annual bonus for the fiscal year in which termination occurs.
Prior to receipt of any severance payments, Mr. George must execute a general release in favor of the Company and its affiliates.
The Executive Agreement also contains customary confidentiality, non-competition and non-solicitation provisions. Mr. George has agreed not to disclose or use the Company’s confidential information. In addition, Mr. George has agreed not to compete with the Company for a period of (i) twelve months following the termination date if he is terminated in a manner in which no severance is paid or (ii) the twenty-four months following the termination date if he receives severance. Mr. George has agreed not to solicit or hire an executive or management level employee of the Company or its affiliates for a period of 18 months following termination.
The summary of the material terms of the Executive Agreement described above is qualified in its entirety by reference to the Executive Agreement, a copy of which is attached hereto as Exhibit 10.3 and is incorporated herein by reference.
ITEM 6. EXHIBITS
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| Exhibit | | |
| Number | | Description of Exhibit |
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10.1*†4.1 | | | |
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10.2*†4.2 | | | |
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10.3*†4.3 | | | |
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| 10.1*† | | |
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| 10.2*† | | |
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| 10.3*† | | |
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| 10.4*† | | |
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| 10.5*† | | |
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| 31.1* | | |
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| 31.2* | | |
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| 32.1** | | |
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| 32.2** | | |
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| 101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
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| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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| 104 | | Cover Page Inline XBRL File (included in Exhibit 101) |
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| * | | Filed herewith. |
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| ** | | Furnished herewith. |
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| † | | Management contract or compensatory plan or arrangement |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | | PENN ENTERTAINMENT, INC. |
| Dated: | November 3, 20222, 2023 | By: | /s/ Christine LaBombard |
| | | Christine LaBombard |
| | | Senior Vice President and Chief Accounting Officer |