10-Q 1 penn-20170331x10q.htm 10-Q penn_Current folio_10Q

 

 

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 March 31, 2017

 

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 NATIONAL GAMING, INC.

(Exact name of registrant as specified in its charter)

 

Pennsylvania

    

23-2234473

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

825 Berkshire Blvd., Suite 200

Wyomissing, PA 19610

(Address of principal executive offices) (Zip Code)

 

610-373-2400

(Registrant’s telephone number, including area code)

 

Not Applicable

(Former name, former address, and former fiscal year, if changed since last report)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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          (Do not check if a smaller reporting company)

       

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Title

    

Outstanding as of April 27, 2017

 

Common Stock, par value $.01 per share

 

91,099,858  (includes 293,366 shares of restricted stock)

 

 

 

 

 


 

Forward-looking Statements

 

This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.  These statements can be identified by the use of forward looking terminology such as “expects,” “believes,” “estimates,” “projects,” “intends,” “plans,” “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 may include, among others, statements concerning: our expectations of future results of operations and financial condition;  expectations for our properties or our development projects; the timing, cost and expected impact of planned capital expenditures on our results of operations; the impact of our geographic diversification; our expectations with regard to the impact of competition; our expectations with regard to further acquisitions and development opportunities, as well as the integration of any companies we have acquired or may acquire; the outcome and financial impact of the litigation in which we are or will be periodically involved; the actions of regulatory, legislative, executive or judicial decisions at the federal, state or local level with regard to our business and the impact of any such actions; our ability to maintain regulatory approvals for our existing businesses and to receive regulatory approvals for our new businesses; our expectations regarding economic and consumer conditions; and our expectations for the continued availability and cost of capital.  Actual results may vary materially from expectations.  Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business, there can be no assurance that actual results will not differ materially from our expectations.  Meaningful factors that could cause actual results to differ from expectations include, but are not limited to, risks related to the following: the assumptions included in our financial guidance; the ability of our operating teams to drive revenue and adjusted EBITDA margins; the impact of significant competition from other gaming and entertainment operations; our ability to obtain timely regulatory approvals required to own, develop and/or operate our facilities, or other delays, approvals or impediments to completing our planned acquisitions or projects, construction factors, including delays, unexpected remediation costs, local opposition, organized labor, and increased cost of labor and materials; the passage of state, federal or local legislation (including referenda) that would expand, restrict, further tax, prevent or negatively impact operations in or adjacent to the jurisdictions in which we do or seek to do business (such as a smoking ban at any of our facilities); the effects of local and national economic, credit, capital market, housing, and energy conditions on the economy in general and on the gaming and lodging industries in particular; the activities of our competitors and the rapid emergence of new competitors (traditional, internet, social, sweepstakes based and VGTs in bars and truck stops); increases in the effective rate of taxation for any of our operations or at the corporate level; our ability to identify attractive acquisition and development opportunities (especially in new business lines) and to agree to terms with, and maintain good relationships with partners/municipalities for such transactions; the costs and risks involved in the pursuit of such opportunities and our ability to complete the acquisition or development of, and achieve the expected returns from, such opportunities; our ability to maintain market share in established markets and ramp up operations at our recently opened facilities; our expectations for the continued availability and cost of capital; the impact of weather; the outcome of pending legal proceedings, changes in accounting standards; the risk of failing to maintain the integrity of our information technology infrastructure and safeguard our business, employee and customer data; factors which may cause the Company to curtail or suspend the share repurchase program; our ability to generate sufficient future taxable income to realize our deferred tax assets; with respect to the recently opened Hollywood Casino Jamul-San Diego, particular risks associated with the repayment, default or subordination of our loans to the Jamul Indian Village Development Corporation (“JIV”), the subordination of our management and intellectual property license fees (including the prohibition on payment of those fees if there is a default under JIV’s credit facilities), sovereign immunity, local opposition (including several pending lawsuits), access, and the impact of well-established regional competition on property performance; with respect to our Plainridge Park Casino in Massachusetts, the ultimate location and timing of the other gaming facilities in the state and the region; with respect to our social and other interactive gaming endeavors, including our recent acquisition of Rocket Speed, Inc., risks related to the social gaming industry, employee retention, cyber-security, data privacy, intellectual property and legal and regulatory challenges, as well as our ability to successfully develop innovative new games that attract and retain a significant number of players in order to grow our revenues and earnings; with respect to Illinois Gaming Investors, LLC, d/b/a Prairie State Gaming, risks relating to potential acquisitions and the integration of such acquisitions, our ability to successfully compete in the VGT market, our ability to retain existing customers and secure new customers, risks relating to municipal authorization of VGT operations and the implementation and the ultimate success of the products and services being offered; with respect to our recent acquisitions in Tunica, Mississippi, risks related to the successful integration of such acquisitions and our ability to realize potential synergies or projected financial results from such acquisitions; and other factors as discussed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, subsequent Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as filed with the United States Securities and Exchange Commission.  The Company does not intend to update publicly any forward-looking statements except as required by law.

 

2


 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

 

TABLE OF CONTENTS

 

PART I. 

FINANCIAL INFORMATION

4

 

 

 

ITEM 1. 

FINANCIAL STATEMENTS (Unaudited)

4

 

Condensed Consolidated Balance Sheets – March 31, 2017 and December 31, 2016

4

 

Condensed Consolidated Statements of Income —Three Months Ended March 31, 2017 and 2016

5

 

Condensed Consolidated Statements of Comprehensive Income — Three Months Ended March 31, 2017 and 2016

6

 

Condensed Consolidated Statements of Changes in Shareholders’ Deficit — Three Months Ended March 31, 2017 and 2016

7

 

Condensed Consolidated Statements of Cash Flows — Three Months Ended March 31, 2017 and 2016

8

 

Notes to the Condensed Consolidated Financial Statements

9

 

 

 

ITEM 2. 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

24

 

 

 

ITEM 3. 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

39

 

 

 

ITEM 4. 

CONTROLS AND PROCEDURES

39

 

 

 

PART II. 

OTHER INFORMATION

40

 

 

 

ITEM 1. 

LEGAL PROCEEDINGS

40

 

 

 

ITEM 1A. 

RISK FACTORS

40

 

 

 

ITEM 2. 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

40

 

 

 

ITEM 3. 

DEFAULTS UPON SENIOR SECURITIES

40

 

 

 

ITEM 4. 

MINE SAFETY DISCLOSURES

40

 

 

 

ITEM 5. 

OTHER INFORMATION

40

 

 

 

ITEM 6. 

EXHIBITS

40

 

 

 

SIGNATURES 

42

 

 

EXHIBIT INDEX 

43

 

3


 

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

 

 

    

2017

    

2016

 

Assets

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

259,488

 

$

229,510

 

Receivables, net of allowance for doubtful accounts of $3,148 and $3,180 at March 31, 2017 and December 31, 2016, respectively

 

 

49,490

 

 

61,855

 

Prepaid expenses

 

 

55,631

 

 

59,707

 

Other current assets

 

 

52,508

 

 

48,193

 

Total current assets

 

 

417,117

 

 

399,265

 

Property and equipment, net

 

 

2,774,323

 

 

2,820,383

 

Other assets

 

 

 

 

 

 

 

Investment in and advances to unconsolidated affiliates

 

 

154,974

 

 

156,176

 

Goodwill

 

 

989,859

 

 

989,685

 

Other intangible assets, net

 

 

432,558

 

 

435,494

 

Advances to the Jamul Tribe

 

 

91,843

 

 

91,401

 

Other assets

 

 

86,366

 

 

82,080

 

Total other assets

 

 

1,755,600

 

 

1,754,836

 

Total assets

 

$

4,947,040

 

$

4,974,484

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

Current portion of financing obligation to GLPI

 

$

57,936

 

$

56,595

 

Current maturities of long-term debt

 

 

35,561

 

 

85,595

 

Accounts payable

 

 

29,292

 

 

35,091

 

Accrued expenses

 

 

107,699

 

 

101,906

 

Accrued interest

 

 

5,426

 

 

6,345

 

Accrued salaries and wages

 

 

72,691

 

 

92,238

 

Gaming, pari-mutuel, property, and other taxes

 

 

53,840

 

 

60,384

 

Insurance financing

 

 

8,135

 

 

2,636

 

Other current liabilities

 

 

96,542

 

 

95,526

 

Total current liabilities

 

 

467,122

 

 

536,316

 

 

 

 

 

 

 

 

 

Long-term liabilities

 

 

 

 

 

 

 

Long-term financing obligation to GLPI, net of current portion

 

 

3,441,359

 

 

3,457,485

 

Long-term debt, net of current maturities and debt issuance costs

 

 

1,387,542

 

 

1,329,939

 

Deferred income taxes

 

 

127,576

 

 

126,924

 

Noncurrent tax liabilities

 

 

27,312

 

 

26,791

 

Other noncurrent liabilities

 

 

36,861

 

 

40,349

 

Total long-term liabilities

 

 

5,020,650

 

 

4,981,488

 

 

 

 

 

 

 

 

 

Shareholders’ deficit

 

 

 

 

 

 

 

Series B Preferred stock ($.01 par value, 1,000,000 shares authorized, no shares issued and outstanding at March 31, 2017 and December 31, 2016)

 

 

 —

 

 

 —

 

Series C Preferred stock ($.01 par value, 18,500 shares authorized, no shares issued and outstanding at March 31, 2017 and December 31, 2016)

 

 

 —

 

 

 —

 

Common stock ($.01 par value, 200,000,000 shares authorized, 93,126,159 and 93,289,701 shares issued, and 90,958,766 and 91,122,308 shares outstanding at March 31, 2017 and December 31, 2016, respectively)

 

 

931

 

 

932

 

Treasury stock, at cost (2,167,393 shares held at March 31, 2017 and December 31, 2016)

 

 

(28,414)

 

 

(28,414)

 

Additional paid-in capital

 

 

1,011,167

 

 

1,014,119

 

Retained deficit

 

 

(1,520,177)

 

 

(1,525,281)

 

Accumulated other comprehensive loss

 

 

(4,239)

 

 

(4,676)

 

Total shareholders’ deficit

 

 

(540,732)

 

 

(543,320)

 

Total liabilities and shareholders’ deficit

 

$

4,947,040

 

$

4,974,484

 

 

See accompanying notes to the condensed consolidated financial statements

4


 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Revenues

 

 

 

 

 

 

 

Gaming

 

$

661,256

 

$

656,701

 

Food, beverage, hotel and other

 

 

147,741

 

 

137,848

 

Management service and licensing fees

 

 

2,327

 

 

2,473

 

Reimbursable management costs

 

 

6,758

 

 

 —

 

Revenues

 

 

818,082

 

 

797,022

 

Less promotional allowances

 

 

(41,858)

 

 

(40,571)

 

Net revenues

 

 

776,224

 

 

756,451

 

 

 

 

 

 

 

 

 

Operating expenses

 

 

 

 

 

 

 

Gaming

 

 

332,053

 

 

335,317

 

Food, beverage, hotel and other

 

 

101,075

 

 

98,079

 

General and administrative

 

 

125,815

 

 

116,504

 

Reimbursable management costs

 

 

6,758

 

 

 —

 

Depreciation and amortization

 

 

70,236

 

 

66,020

 

Total operating expenses

 

 

635,937

 

 

615,920

 

Income from operations

 

 

140,287

 

 

140,531

 

 

 

 

 

 

 

 

 

Other income (expenses)

 

 

 

 

 

 

 

Interest expense

 

 

(114,996)

 

 

(116,512)

 

Interest income

 

 

2,646

 

 

5,240

 

Income from unconsolidated affiliates

 

 

4,548

 

 

4,609

 

Loss on early extinguishment of debt

 

 

(23,390)

 

 

 —

 

Other

 

 

(1,793)

 

 

(2,426)

 

Total other expenses

 

 

(132,985)

 

 

(109,089)

 

 

 

 

 

 

 

 

 

Income from operations before income taxes

 

 

7,302

 

 

31,442

 

Income tax provision

 

 

2,198

 

 

7,734

 

Net income

 

$

5,104

 

$

23,708

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

Basic earnings per common share

 

$

0.06

 

$

0.26

 

Diluted earnings per common share

 

$

0.06

 

$

0.26

 

 

See accompanying notes to the condensed consolidated financial statements.

5


 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

Net income

 

$

5,104

 

$

23,708

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

Foreign currency translation adjustment during the period

 

 

437

 

 

1,312

 

Other comprehensive (loss) income

 

 

437

 

 

1,312

 

Comprehensive income

 

$

5,541

 

$

25,020

 

 

See accompanying notes to the condensed consolidated financial statements.

6


 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Changes in Shareholders’ Deficit

(in thousands, except share data) (unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Retained

 

Other

 

Total

 

 

 

Preferred Stock

 

Common Stock

 

Treasury

 

Paid-In

 

(Deficit)

 

Comprehensive

 

Shareholders’

 

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Stock

    

Capital

    

Earnings

    

(Loss) Income

    

Deficit

 

Balance, December 31, 2015

 

8,624

 

$

 —

 

80,889,275

 

$

830

 

$

(28,414)

 

$

988,686

 

$

(1,634,591)

 

$

(4,554)

 

$

(678,043)

 

Share-based compensation arrangements, net of tax benefits of $689

 

 —

 

 

 —

 

394,906

 

 

 4

 

 

 —

 

 

3,922

 

 

 —

 

 

 —

 

 

3,926

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

1,312

 

 

1,312

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

23,708

 

 

 —

 

 

23,708

 

Balance, March 31, 2016

 

8,624

 

$

 —

 

81,284,181

 

$

834

 

$

(28,414)

 

$

992,608

 

$

(1,610,883)

 

$

(3,242)

 

$

(649,097)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2016

 

 —

 

$

 —

 

91,122,308

 

$

932

 

$

(28,414)

 

$

1,014,119

 

$

(1,525,281)

 

$

(4,676)

 

$

(543,320)

 

Share repurchases

 

 —

 

 

 —

 

(416,886)

 

 

(4)

 

 

 —

 

 

(5,790)

 

 

 —

 

 

 —

 

 

(5,794)

 

Share-based compensation arrangements

 

 —

 

 

 —

 

253,344

 

 

 3

 

 

 —

 

 

2,838

 

 

 —

 

 

 —

 

 

2,841

 

Foreign currency translation adjustment

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

437

 

 

437

 

Net income

 

 —

 

 

 —

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

5,104

 

 

 —

 

 

5,104

 

Balance, March 31, 2017

 

 —

 

$

 —

 

90,958,766

 

$

931

 

$

(28,414)

 

$

1,011,167

 

$

(1,520,177)

 

$

(4,239)

 

$

(540,732)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

7


 

Penn National Gaming, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands) (unaudited)

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

2017

 

2016

 

 

 

 

 

 

 

 

 

Operating activities

 

 

 

 

 

 

 

Net income

 

$

5,104

 

$

23,708

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

70,236

 

 

66,020

 

Amortization of items charged to interest expense and interest income

 

 

1,675

 

 

1,876

 

Change in fair values of contingent purchase price

 

 

2,560

 

 

(1,201)

 

Gain on sale of property and equipment and assets held for sale

 

 

(45)

 

 

(1,101)

 

Income from unconsolidated affiliates

 

 

(4,548)

 

 

(4,609)

 

Distributions from unconsolidated affiliates

 

 

5,750

 

 

7,400

 

Deferred income taxes

 

 

652

 

 

(740)

 

Charge for stock-based compensation

 

 

2,173

 

 

1,455

 

Write off of debt issuance costs

 

 

5,377

 

 

 —

 

Decrease (increase), net of businesses acquired

 

 

 

 

 

 

 

Accounts receivable

 

 

6,533

 

 

(1,803)

 

Prepaid expenses and other current assets

 

 

(8,432)

 

 

(11,579)

 

Other assets

 

 

(1,746)

 

 

3,039

 

(Decrease) increase, net of businesses acquired

 

 

 

 

 

 

 

Accounts payable

 

 

(2,470)

 

 

(1,951)

 

Accrued expenses

 

 

5,351

 

 

648

 

Accrued interest

 

 

(919)

 

 

1,550

 

Accrued salaries and wages

 

 

(19,547)

 

 

(22,220)

 

Gaming, pari-mutuel, property and other taxes

 

 

(6,544)

 

 

(4,920)

 

Income taxes

 

 

10,090

 

 

23,515

 

Other current and noncurrent liabilities

 

 

(4,430)

 

 

(7,065)

 

Net cash provided by operating activities

 

 

66,820

 

 

72,022

 

Investing activities

 

 

 

 

 

 

 

Project capital expenditures, net of reimbursements

 

 

(6,178)

 

 

(6,496)

 

Maintenance capital expenditures

 

 

(10,978)

 

 

(14,873)

 

Proceeds for insurance claim

 

 

577

 

 

 —

 

Advances to the Jamul Tribe

 

 

 —

 

 

(51,781)

 

Delayed draw term loan C commitments with Jamul Tribe

 

 

(168)

 

 

 —

 

Proceeds from sale of property and equipment and assets held for sale

 

 

309

 

 

2,091

 

Increase in cash in escrow

 

 

(4,432)

 

 

 —

 

Acquisition of businesses and other licenses

 

 

(2,441)

 

 

(148)

 

Net cash used in investing activities

 

 

(23,311)

 

 

(71,207)

 

Financing activities

 

 

 

 

 

 

 

Proceeds from exercise of options

 

 

612

 

 

1,742

 

Repurchase of common stock

 

 

(5,794)

 

 

 —

 

Principal payments on financing obligation with GLPI

 

 

(14,785)

 

 

(12,648)

 

Proceeds from issuance of long-term debt, net of issuance costs

 

 

1,359,710

 

 

12,214

 

Principal payments on long-term debt

 

 

(1,330,719)

 

 

(23,404)

 

Payments of other long-term obligations

 

 

(28,033)

 

 

(6,899)

 

Payments of contingent purchase price

 

 

(21)

 

 

 —

 

Proceeds from insurance financing

 

 

8,768

 

 

9,193

 

Payments on insurance financing

 

 

(3,269)

 

 

(3,784)

 

Net cash used in financing activities

 

 

(13,531)

 

 

(23,586)

 

Net increase (decrease) in cash and cash equivalents

 

 

29,978

 

 

(22,771)

 

Cash and cash equivalents at beginning of year

 

 

229,510

 

 

237,009

 

Cash and cash equivalents at end of period

 

$

259,488

 

$

214,238

 

 

 

 

 

 

 

 

 

Supplemental disclosure

 

 

 

 

 

 

 

Interest expense paid, net of amounts capitalized

 

$

113,825

 

$

113,629

 

Income tax refunds received

 

$

(9,303)

 

$

(12,481)

 

 

 

 

 

 

 

 

 

Non-cash investing activities

 

 

 

 

 

 

 

Accrued capital expenditures

 

$

9,279

 

$

5,795

 

Accrued advances to Jamul Tribe

 

$

1,103

 

$

36,914

 

 

 

 

 

 

 

 

 

Non-cash financing activities

 

 

 

 

 

 

 

Accrued debt issuance costs

 

$

828

 

$

 —

 

 

See accompanying notes to the condensed consolidated financial statements.

 

 

8


 

Penn National Gaming, Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

1.  Organization and Basis of Presentation

 

Penn National Gaming, Inc. (“Penn”) and together with its subsidiaries (collectively, the “Company”) is a diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations with a focus on slot machine entertainment. We have also recently expanded into social onling gaming offerings via our Penn Interative Ventures, LLC (“Penn Interactive Ventures”) division and our recent acquisition of Rocket Speed, Inc. (“Rocket Speed”) and into retail gaming with our Prairie State Gaming subsidiary.  As of March 31, 2017, the Company owned, managed, or had ownership interests in twenty-seven facilities in the following seventeen jurisdictions: California, Florida, Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri, Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West Virginia and Ontario, Canada. 

 

The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes 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.

 

The condensed consolidated financial statements include the accounts of Penn and its subsidiaries. Investment in and advances to unconsolidated affiliates, that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIE”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses for the reporting periods. Actual results could differ from those estimates.

 

Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017. The notes to the consolidated financial statements contained in the Annual Report on Form 10-K for the year ended December 31, 2016 should be read in conjunction with these condensed consolidated financial statements.  The December 31, 2016 financial information has been derived from the Company’s audited consolidated financial statements.

 

2.  Summary of Significant Accounting Policies

 

Revenue Recognition and Promotional Allowances

 

Gaming revenue consists mainly of slot and video lottery gaming machine revenue as well as to a lesser extent table game and poker revenue. Gaming revenue is the aggregate net difference between gaming wins and losses, with liabilities recognized for funds deposited by customers before gaming play occurs, for "ticket-in, ticket-out" coupons in the customers' possession, and for accruals related to the anticipated payout of progressive jackpots. Progressive slot machines, which contain base jackpots that increase at a progressive rate based on the number of coins played, are charged to revenue as the amount of the jackpots increases. Table game revenue is the aggregate of table drop adjusted for the change in aggregate table chip inventory. Table drop is the total dollar amount of the currency, coins, chips, tokens and outstanding markers (credit instruments) that are removed from the live gaming tables.

 

Food, beverage, hotel and other revenue, including racing revenue, is recognized as services are performed. Racing revenue includes the Company’s share of pari-mutuel wagering on live races after payment of amounts returned

9


 

as winning wagers, its share of wagering from import and export simulcasting, and its share of wagering from its off-track wagering facilities (“OTWs’).

 

Revenue from our management service contracts for Casino Rama and Hollywood Casino Jamul – San Diego are based upon contracted terms and are recognized when services are performed and collection is reasonably assured.

 

The Company records revenues generated from its management service contract and licensing contract with the Jamul Tribe, as well as interest income associated with advances to the Jamul Tribe in accordance with ASC 605-25 “Multiple Element Arrangements.”  The fair value of each arrangement element is based on the separate standalone selling price determined by either vendor-specific objective evidence (“VSOE”), if available, or third-party evidence ("TPE") if VSOE is not available.  We concluded revenues generated with respect to each element contained within the arrangement is representative of the separate standalone selling price which is reflective of fair value.

 

Revenues include reimbursable costs associated with the Company’s management contract with Jamul Indian Village of California (the “Jamul Tribe”), which represent amounts received or due pursuant to the Company’s management agreement for the reimbursement of expenses, primarily payroll costs, incurred on their behalf. The Company recognizes the reimbursable costs associated with this contract as revenue on a gross basis, with an offsetting amount charged to operating expense as it is the primary obligor for these costs.

 

Revenues are recognized net of certain sales incentives in accordance with ASC 605-50, “Revenue Recognition—Customer Payments and Incentives.” The Company records certain sales incentives and points earned in point-loyalty programs as a reduction of revenue.

 

The retail value of accommodations, food and beverage, and other services furnished to guests without charge is included in gross revenues and then deducted as promotional allowances. The estimated cost of providing such promotional allowances is primarily included in food, beverage and other expense.

 

The amounts included in promotional allowances for the three months ended March 31, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

 

 

(in thousands)

Rooms

 

$

9,196

 

$

9,122

 

Food and beverage

 

 

30,566

 

 

29,521

 

Other

 

 

2,096

 

 

1,928

 

Total promotional allowances

 

$

41,858

 

$

40,571

 

 

The estimated cost of providing such complimentary services for the three months ended March 31, 2017 and 2016 are as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Rooms

 

$

1,268

 

$

1,197

 

Food and beverage

 

 

11,631

 

 

11,523

 

Other

 

 

854

 

 

745

 

Total cost of complimentary services

 

$

13,753

 

$

13,465

 

 

Gaming and Racing Taxes

 

The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. 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 and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on

10


 

graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. For the three months ended March 31, 2017, these expenses, which are recorded primarily within gaming expense in the condensed consolidated statements of income, were $244.4 million, as compared to $243.2 million for the three months ended March 31, 2016.

 

Long-term asset related to the Jamul Tribe

 

The Company is accounting for the development agreement and related loan commitment letter with the Jamul Tribe as a loan (the “Loan”) with accrued interest in accordance with ASC 310, “Receivables.”  The Loan represented advances made by the Company to the Jamul Tribe for the development and construction of a gaming facility for the Jamul Tribe on reservation land.  As such, the Jamul Tribe owns the casino and its related assets and liabilities. Repayment of funds advanced to the Jamul Tribe is primarily predicated on cash flows from the operations of the facility.  San Diego Gaming Ventures, LLC (“SDGV”) (a wholly-owned subsidiary of the Company) is a separate legal entity and is the Penn entity that has the Loan with and is entitled to receive management and licensing fees from the Jamul Tribe.

 

Additionally, in December 2015, the Company entered into an agreement to purchase a $60 million subordinated note from the previous developer of the Jamul Indian Village project for $24 million.  Interest on this subordinated note, as of the effective date and at all times thereafter until the Loan has been paid in full, shall accrue as follows: as of the effective date, no interest shall accrue initially; at the opening date, interest shall accrue at a simple fixed rate of 4.25% per annum.  The subordinated note is subordinated to the Loan, and payments on the subordinated note may only be made after all necessary payments are made on the Loan subject to certain limitations.  The Company recorded the subordinated note at its acquisition price of $24 million, which was considered to be its fair value and represents the expected cash flows to be received. As described below, this subordinated note was repaid in connection with the Jamul Tribe refinancing of its existing indebtedness and the Company received a $6 million premium on such repayment which was accounted for as an origination fee on our new loan to the Tribe.

 

On October 20, 2016, the Jamul Tribe obtained long term secured financing, consisting of revolving and term loan credit facilities (the “Credit Facilities”) totaling approximately $460 million.  The Credit Facilities, all of which are due in 2022, consist of a $5 million revolving credit facility, a $340 million term loan B facility and a $98 million term loan C facility.  The revolving credit facility was provided by various commercial banks; the term loan B facility is held by an affiliate of Och-Ziff Real Estate; and the term loan C facility is held by SDGV.  SDGV will also provide up to an additional $15 million of delayed draw term loan C commitments to fund certain roadway improvement costs.  The various Credit Facilities rank pari passu with each other.  However, if, on the first anniversary of the opening of Hollywood Casino Jamul – San Diego, the Jamul Tribe has not achieved a senior secured net leverage ratio equal to or less than 5.0 to 1.0, then all or a portion of the term loan C facility will become subordinated to the other Credit Facilities to the extent necessary such that, after giving effect to such conversion, such senior secured net leverage ratio is 5.0 to 1.0.  The rights of SDGV to receive management and license fees are subordinated to the claims of the lenders under the Credit Facilities and are subject to certain conditions contained in the Credit Facilities.  SDGV’s Loan with the Jamul Tribe totaled $92.3 million (net of unamortized loan origination fees of $5.9 million and inclusive of a current portion of $0.5 million in other current assets) and $92.1 million (net of unamortized loan origination fee of $5.9 million and inclusive of a current portion of $0.7 million in other current assets) at March 31, 2017 and December 31, 2016, respectively.

 

As a condition to the Credit Facilities, SDGV provided a limited completion guarantee, in favor of the administrative agent under the Credit Facilities, to provide up to $15 million of additional loans related to the construction and opening of the Casino, as well as certain post opening construction costs.  Of these loans, $10 million may be funded under the Credit Facilities as part of the term loan C facility, while any additional loans would be subordinated loans. The term loan C facility bears interest at LIBOR plus 8.50% with a 1% LIBOR floor (or, at the Jamul Tribe’s election, a base rate determined by reference to the prime rate, the federal funds effective rate or LIBOR, as applicable, plus 8.50%), and the subordinated loans will bear interest at 14.0% (with 12.0% to be paid in cash and 2.0% to be paid-in-kind).

 

11


 

As mentioned previously, the Company is accounting for its loan in accordance with ASC 310, “Receivables”.  Although Hollywood Casino Jamul San-Diego opened to strong business and earnings volumes in October 2016, which met our expectations, results began to soften earlier and with a steeper dropoff than anticipated.  Based on the actual performance of the facility to date and projections for the second quarter of 2017, the Company believes the Jamul Tribe is likely to be in technical default of certain financial covenant requirements with respect to debt to earnings ratios at June 30, 2017, in the absence of a waiver being obtained prior to such date.  As a result, we have concluded the Loan is impaired at both March 31, 2017 and December 31, 2016.  A loan is considered impaired when, based on current information, events and projections, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when contractually due under the terms of the loan agreement.  Impairment is measured by the present value of expected future cash flows discounted at the loan’s effective interest rate.  An allowance for loan losses would be established in the event the carrying value exceeds the present value calculation previously described.

 

The Company performed a comprehensive review of various possible future cash flow projections for the facility that were benchmarked against recent openings in the Company’s regional operations.  The expected cash flows were then discounted at the Loan’s original interest rate in accordance with ASC 310 which was in excess of our Loan’s carrying value at both March 31, 2017 and December 31, 2016, and as such no reserve was required.  The unpaid principal balance of our loan at March 31, 2017 and December 31, 2016 was $98.2 million and $98.0 million, respectively.

 

Earnings Per Share

 

The Company calculates earnings per share (“EPS”) in accordance with ASC 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options and unvested restricted shares.

 

As of March 31, 2017, there were no outstanding shares of Series C Preferred Stock. At March 31, 2016, the Company had outstanding 8,624 shares of Series C Convertible Preferred Stock. The Company determined that the preferred stock qualified as a participating security as defined in ASC 260 since these securities participate in dividends with the Company’s common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common stock by the weighted-average common shares outstanding during the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method.

 

The following table sets forth the allocation of net income for the three months ended March 31, 2017 and 2016 under the two-class method:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Net income

 

$

5,104

 

$

23,708

 

Net income applicable to preferred stock

 

 

 —

 

 

2,282

 

Net income applicable to common stock

 

$

5,104

 

$

21,426

 

 

12


 

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 months ended March 31, 2017 and 2016:

 

   

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

 

 

(in thousands)

 

Determination of shares:

 

 

 

 

 

Weighted-average common shares outstanding

 

90,751

 

80,968

 

Assumed conversion of dilutive employee stock-based awards

 

1,105

 

1,448

 

Assumed conversion of restricted stock

 

61

 

51

 

Diluted weighted-average common shares outstanding before participating security

 

91,917

 

82,467

 

Assumed conversion of preferred stock

 

 —

 

8,624

 

Diluted weighted-average common shares outstanding

 

91,917

 

91,091

 

 

Options to purchase 4,545,585 shares and 2,574,719 shares were outstanding during the three months ended March 31, 2017 and 2016, respectively, but were not included in the computation of diluted EPS because they were antidilutive.

 

The following table presents the calculation of basic and diluted EPS for the Company’s common stock for the three months ended March 31, 2017 and 2016 (in thousands, except per share data):

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31,

 

Three Months Ended March 31,

 

 

    

2017

    

2016

 

Calculation of basic EPS:

 

 

 

 

 

 

 

Net income applicable to common stock

 

$

5,104

 

$

21,426

 

Weighted-average common shares outstanding

 

 

90,751

 

 

80,968

 

Basic EPS

 

$

0.06

 

$

0.26

 

 

 

 

 

 

 

 

 

Calculation of diluted EPS using two-class method:

 

 

 

 

 

 

 

Net income applicable to common stock

 

$

5,104

 

$

21,426

 

Diluted weighted-average common shares outstanding before participating security

 

 

91,917

 

 

82,467

 

Diluted EPS

 

$

0.06

 

$

0.26

 

 

Stock-Based Compensation

 

The Company accounts for stock compensation under ASC 718, “Compensation-Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant.

 

The fair value for stock options is estimated at the date of grant using the Black-Scholes option-pricing model, which requires management to make certain assumptions. The risk-free interest rate was based on the U.S. Treasury spot rate with a term equal to the expected life assumed at the date of grant. Expected volatility was estimated based on the historical volatility of the Company’s stock price over a period of 5.30 years, in order to match the expected life of the options at the grant date. Historically, at the grant date, there has been no expected dividend yield assumption since the Company has not paid any cash dividends on its common stock since its initial public offering in May 1994 and since the Company intends to retain all of its earnings to finance the development of its business for the foreseeable future. The weighted-average expected life was based on the contractual term of the stock option and expected employee exercise dates, which was based on the historical and expected exercise behavior of the Company’s employees.  The Company granted 1,446,353 stock options during the three months ended March 31, 2017.

 

13


 

Stock-based compensation expense for the three months ended March 31, 2017 was $2.2 million as compared to $1.5 million for the three months ended March 31, 2016, and is included within the condensed consolidated statements of income under general and administrative expense.

 

The Company’s cash-settled phantom stock unit awards (“PSUs”), which vest over a period of three to four years, entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date.  The PSUs 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 in accordance with ASC 718-30, “Compensation—Stock Compensation, Awards Classified as Liabilities.” The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its PSUs of $5.8 million and $5.6 million at March 31, 2017 and December 31, 2016, respectively. For PSUs held by Penn employees, there was $7.1 million of total unrecognized compensation cost at March 31, 2017 that will be recognized over the grants remaining weighted average vesting period of 2.07 years. For the three months ended March 31, 2017, the Company recognized $4.3 million of compensation expense associated with these awards, as compared to $3.0 million for the three months ended March 31, 2016.  The changes are primarily due to volatility in Penn’s stock price year-over-year. Amounts paid by the Company for the three months ended March 31, 2017 on these cash-settled awards totaled $3.5 million as compared to $4.4 million for the three months ended March 31, 2016.

 

For the Company’s stock appreciation rights (“SARs”), the fair value of the SARs is calculated during each reporting period and estimated using the Black-Scholes option pricing model based on the various inputs discussed below. The Company’s SARs, which vest over a period of four years, are accounted for as liability awards since they will be settled in cash. The Company had a liability, which is included in accrued salaries and wages within the condensed consolidated balance sheets, associated with its SARs of $10.4 million and $7.3 million at March 31, 2017 and December 31, 2016, respectively. For SARs held by Penn employees, there was $11.2 million of total unrecognized compensation cost at March 31, 2017 that will be recognized over the awards remaining weighted average vesting period of 2.99 years. For the three months ended March 31, 2017, the Company recognized compensation expense of $4.0 million associated with these awards, as compared to $1.9 million for the three months ended March 31, 2016. The changes are primarily due to volatility in Penn’s stock price year-over-year.  Amounts paid by the Company for the three months ended March 31, 2017 on these cash-settled awards totaled $1.1 million as compared to $0.4 million for the three months ended March 31, 2016.

 

The following are the weighted-average assumptions used in the Black-Scholes option-pricing model for stock option awards granted during the three months ended March 31, 2017 and 2016, respectively:

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

Three months ended  March 31,

 

2017

    

2016

 

 

Risk-free interest rate

 

1.97

%  

1.20

%  

 

Expected volatility

 

30.67

%  

31.22

%  

 

Dividend yield

 

 —

 

 —

 

 

Weighted-average expected life (years)

 

5.30

 

5.40

 

 

 

Segment Information

 

The Company’s Chief Executive Officer, who is the Company’s Chief Operating Decision Maker (“CODM”), as that term is defined in ASC 280, “Segment Reporting” (“ASC 280”), measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations. During the second quarter of 2016, the Company changed its three reportable segments from East/Midwest, West and Southern Plains to Northeast, South/West, and Midwest in connection with the addition of a new regional vice president and a realignment of responsibilities within our segments.  This realignment changed the manner in which information is provided to the CODM and therefore how performance is assessed and resources are allocated to the business. Segment information for prior periods has been restated for comparability.

 

The Northeast reportable segment consists of the following properties: Hollywood Casino at Charles Town Races, Hollywood Casino Bangor, Hollywood Casino at Penn National Race Course, Hollywood Casino Toledo,

14


 

Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley Race Course, and Plainridge Park Casino. It also includes the Company’s Casino Rama management service contract.

 

The South/West reportable segment consists of the following properties: Zia Park Casino, Hollywood Casino Tunica, Hollywood Casino Gulf Coast, Boomtown Biloxi, M Resort, and Tropicana Las Vegas, as well as our management contract with Hollywood Casino Jamul-San Diego, which opened on October 10, 2016.

 

The Midwest reportable segment consists of the following properties: Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino Alton, Argosy Casino Riverside, Hollywood Casino Lawrenceburg, Hollywood Casino St. Louis, and Prairie State Gaming, and includes the Company’s 50% investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway.

 

The Other category consists of the Company’s standalone racing operations, namely Rosecroft Raceway, which was sold on July 31, 2016, Sanford-Orlando Kennel Club, and the Company’s joint venture interests in Sam Houston Race Park, Valley Race Park, and Freehold Raceway. If the Company is successful in obtaining gaming operations at these locations, they would be assigned to one of the Company’s regional executives and reported in their respective reportable segment. The Other category also includes the Company’s corporate overhead operations, which does not meet the definition of an operating segment under ASC 280. Additionally, the Other category includes Penn Interactive Ventures, the Company’s wholly-owned subsidiary that represents its social online gaming initiatives, including the recently acquired Rocket Speed. Penn Interactive Ventures meets the definition of an operating segment under ASC 280, but is quantitatively not significant to the Company’s operations as it represents 1.5% of net revenues and $(1.4) million impact to income from operations for the three months ended March 31, 2017, and its total assets represent 2.2% of the Company’s total assets at March 31, 2017.

 

In addition to GAAP financial measures, management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel and believes it is especially relevant in evaluating large, long lived casino 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. The Company defines adjusted EBITDA as earnings before interest, taxes, stock compensation, debt extinguishment and financing charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, and other income or expenses. Adjusted EBITDA is also inclusive of income or loss from unconsolidated affiliates, with the Company’s share of non-operating items (such as depreciation and amortization) added back for its joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction is accounted for as a financing obligation. Adjusted EBITDA should not be construed as an alternative to operating income, as an indicator of the Company’s operating performance, as an alternative to cash flows from operating activities, as a measure of liquidity, or as any other measure of performance determined in accordance with GAAP. The Company has significant uses of cash flows, including capital expenditures, interest payments, taxes and debt principal repayments, which are not reflected in adjusted EBITDA.

 

See Note 7 for further information with respect to the Company’s segments.

 

Other Comprehensive Income

 

The Company accounts for comprehensive income in accordance with ASC 220, “Comprehensive Income,” which establishes standards for the reporting and presentation of comprehensive income in the consolidated financial statements. The Company presents comprehensive income in two separate but consecutive statements. For the three months ended March 31, 2017 and 2016, the only component of accumulated other comprehensive income was foreign currency translation adjustments.

 

15


 

3. New Accounting Pronouncements

 

Accounting Pronouncements Implemented in 2017

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718) – Improvements to Employee Share-Based Payment Accounting.”  The amendments are intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees.  Several aspects of the accounting for share-based payment award transactions are simplified, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification on the statement of cash flows.  The Company adopted this change in accounting principle effective January 1, 2017.  As a result of adopting the change to accounting for income taxes, for the three months ended March 31, 2017, the Company recognized an income tax benefit of $0.6 million related to excess tax deductions that would have previously been recognized as additional paid in capital within Shareholders Deficit.  The Company did not record a cumulative effect adjustment to Retained Earnings due to having a full valuation allowance against all deferred tax assets.  Deferred tax assets and the valuation allowance increased by $16.4 million at January 1, 2017 for the tax effect previously unrecognized for excess tax deductions.  The Company has elected to present the change in classification of excess /(deficient) tax deductions from a financing activity to a operating activity within its consolidated statement of cash flows on a retrospective basis.  The impact to the comparative period ended March 31, 2016 was an increase to net cash provided by operating activities and an increase in cash used in financing activities of $0.7 million, respectively.  The Company has also made an accounting policy election to account for forfeitures when they occur which had no cumulative effect to retained earnings.  Finally, effective January 1, 2017, the Company adopted the change related to diluted EPS on a prospective basis such that the net benefit/ (deficiency) attributable to taxes is no longer included in the computation of assumed proceeds.

 

New Accounting Pronouncements to be Implemented

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” which impacts virtually all aspects of an entity’s revenue recognition. The core principle of Topic 606 is that revenue should be recognized to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In July 2015, the FASB deferred the effective date of the standard by one year which results in the new standard being effective for the Company at the beginning of its first quarter of fiscal year 2018. In addition, during March, April and May 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, respectively, which clarified the guidance on certain items such as reporting revenue as a principal versus agent, identifying performance obligations, accounting for intellectual property licenses, assessing collectability and presentation of sales taxes. Management has not yet completed its assessment of the impact of the new standard on the Company’s consolidated financial statements.  Although the Company is currently assessing the impact that the adoption of the new standard will have on its consolidated financial statements and related disclosures, we believe one area that will result in changes is our accounting for loyalty points which are earned by our customers. The Company’s Marquee Rewards program allows members to utilize their rewards membership card to earn promotional points that are redeemable for slot play and complimentaries. The accumulated points can be redeemed for food and beverages at our restaurants, and products offered at our retail stores across the vast majority of Penn’s casino properties. The estimated liability for unredeemed points is currently accrued based on expected redemption rates and the estimated costs of the services or merchandise to be provided.  Under the new standard, we will need to defer the full retail value of the complimentaries until the future revenue transaction occurs.  Although the exact amount of the increase to our point liabilities has not yet been determined, we do not anticipate it will have a significant impact on our earnings.  The new standard will also require us to allocate the revenues associated with players’ activity between gaming revenue and the value of the points and to measure the liability based on the estimated standalone selling price of the points earned after factoring in the likelihood of redemption.  As a result, we expect that gaming revenues will be reduced and that promotional allowance will no longer be netted on our statement of income. The revenue associated with the points earned will be recognized in the period in which they are redeemed.   Additionally, at this time, we expect to adopt Topic 606 using the modified retrospective method on January 1, 2018.  The Company is continuing to

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evaluate the new guidance both internally and through following the industry working group and plans to provide additional information at a future date.

 

4.  Property and Equipment

 

Property and equipment, net, consists of the following:

 

 

 

 

 

 

 

 

 

 

 

    

March 31,

    

December 31,

 

 

 

 

2017

 

2016

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Property and equipment - non-master lease

 

 

 

 

 

 

 

 

Land and improvements

 

$

294,590

 

$

294,590

 

 

Building and improvements

 

 

404,875

 

 

404,158

 

 

Furniture, fixtures and equipment

 

 

1,358,002

 

 

1,355,615

 

 

Leasehold improvements

 

 

119,404

 

 

118,940

 

 

Construction in progress

 

 

26,903

 

 

16,375

 

 

 

 

 

2,203,774

 

 

2,189,678

 

 

Less Accumulated depreciation

 

 

(1,261,519)

 

 

(1,224,596)

 

 

 

 

 

942,255

 

 

965,082

 

 

Property and equipment - master lease

 

 

 

 

 

 

 

 

Land and improvements

 

 

381,680

 

 

382,246

 

 

Building and improvements

 

 

2,219,017

 

 

2,219,018

 

 

 

 

 

2,600,697

 

 

2,601,264

 

 

Less accumulated depreciation

 

 

(768,629)

 

 

(745,963)

 

 

 

 

 

1,832,068

 

 

1,855,301

 

 

Property and equipment, net

 

$

2,774,323

 

$

2,820,383

 

 

 

Property and equipment, net decreased by $46.1 million for the three months ended March 31, 2017 primarily due to depreciation expense, which is partially offset by improvements at Tropicana Las Vegas, and normal maintenance capital expenditures for the three months ended March 31, 2017.

 

Depreciation expense, for property and equipment including assets under capital leases, totaled $65.0 million and $65.6 million for the three months ended March 31, 2017 and 2016, respectively, of which $22.7 million and $22.9 million related to assets under the Master Lease, respectively. No interest was capitalized in connection with major construction projects for the three months ended March 31, 2017 and 2016.

 

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5.  Long-term Debt

 

Long-term debt, net of current maturities, is as follows:

 

 

 

 

 

 

 

 

 

 

 

March 31,

    

December 31,

 

 

 

2017

 

2016

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Senior secured credit facility

 

$

931,000

 

$

976,845

 

$300 million 5.875 % senior subordinated notes due November 1, 2021

 

 

 —

 

 

300,000

 

$400 million 5.625 % senior unsecured notes due January 15, 2027

 

 

400,000

 

 

 —

 

Other long-term obligations

 

 

126,052

 

 

154,084

 

Capital leases

 

 

1,321

 

 

1,760

 

 

 

 

1,458,373

 

 

1,432,689

 

Less current maturities of long-term debt

 

 

(35,561)

 

 

(85,595)

 

Less net discounts

 

 

(2,937)

 

 

(620)

 

Less debt issuance costs

 

 

(32,333)

 

 

(16,535)

 

 

 

$

1,387,542

 

$

1,329,939

 

 

The following is a schedule of future minimum repayments of long-term debt as of March 31, 2017 (in thousands):

 

 

 

 

 

 

Within one year

    

$

35,497

 

1-3 years

 

 

78,612

 

3-5 years

 

 

422,517

 

Over 5 years

 

 

921,747

 

Total minimum payments

 

$

1,458,373

 

 

Senior Secured Credit Facility

 

On January 19, 2017, the Company entered into a new senior secured credit facility. The new senior secured credit facility consists of a five year $700 million revolver, a five year $300 million Term Loan A facility, and a seven year $500 million Term Loan B facility (the “Amended Credit Facilities”). The Term Loan A facility was priced at LIBOR plus a spread (ranging from 3.00% to 1.25%) based on the Company’s consolidated total net leverage ratio as defined in the new senior secured credit facility. The Term Loan B fac