ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Our Operations
We are a leading, diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal operations. In addition, over the last two years, we have implemented our interactive gaming strategy through our subsidiary, Penn Interactive Ventures and have expanded our social gaming offerings with the acquisition of Rocket Speed, a leading developer of social casino games, while also expanding into retail gaming through our Prairie State Gaming subsidiary. On May 1, 2017, we completed our acquisition of 1
st
Jackpot and Resorts casinos in Tunica, Mississippi. In the first half of 2017, our subsidiary, Prairie State Gaming acquired the assets of two smaller video gaming terminal operators in Illinois. As of September 30, 2017, we owned, managed, or had ownership interests in twenty-nine 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. We believe that our portfolio of assets provides us the benefit of geographically diversified cash flow from operations.
The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 87% and 86% of our gaming revenue in 2016 and 2015, respectively) and to a lesser extent, table games, which is highly dependent upon the volume and spending levels of customers at our properties. Other revenues are derived from our management service fees from Casino Rama, our hotels, dining, retail, admissions, program sales, concessions and certain other ancillary activities, and our racing operations. Our racing revenue includes our share of pari-mutuel wagering on live races after payment of amounts returned as winning wagers, our share of wagering from import and export simulcasting, and our share of wagering from our off-track wagering facilities.
Key performance indicators related to gaming revenue are slot handle and table game drop (volume indicators) and “win” or “hold” percentage. Our typical property slot hold percentage is in the range of 6% to 10% of slot handle, and our typical table game win percentage is in the range of 14% to 26% of table game drop. Slot handle is the gross amount wagered for the period cited. 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, we have not experienced significant impacts to earnings from changes in these percentages.
For table games, customers usually purchase cash 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 win is the amount of drop that is retained and recorded as casino 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 win percentages are fairly stable as the majority of these markets do not regularly experience high-end play, which can lead to volatility in win percentages. Therefore, changes in table game win percentages do not typically have a material impact to our earnings.
Our properties generate significant operating cash flow, since most of our revenue is cash-based from slot machines, table games, and pari-mutuel wagering. Our business is capital intensive, and we rely on cash flow from our properties to generate operating cash to satisfy our obligations under the Master Lease, repay debt, fund maintenance capital expenditures, fund new capital projects at existing properties and provide excess cash for future development and acquisitions.
We 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 the development of new gaming properties, particularly in attractive regional markets. Additional information regarding our capital projects is discussed in detail in the section entitled “Liquidity and Capital Resources—Capital Expenditures” below.
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, measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations.
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, 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, Tropicana Las Vegas, 1
st
Jackpot and Resorts which were acquired on May 1, 2017, 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 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 less than 2% of net revenues and 5% of income from operations for the nine months ended September 30, 2017, and its total assets represent less than 2% of the Company’s total assets at September 30, 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 they provide 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 income from operations, 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.
Executive Summary
As reported by most jurisdictions, regional gaming industry trends have shown limited revenue growth in recent years as numerous jurisdictions now permit gaming or have expanded their gaming offerings. The proliferation of new gaming facilities continues to impact the overall domestic gaming industry as well as our operating results in certain
markets. Our ability to succeed in this environment will be predicated on operating our existing facilities efficiently and offering our customers additional gaming experiences through our multi-channel distribution strategy. We will also seek to continue to expand our customer database through accretive acquisitions and capitalize on organic growth opportunities from our recent facility openings and new business lines. Additionally, the current economic environment, specifically low unemployment levels, strength in residential real estate prices, and higher levels of consumer confidence, has resulted in a stable operating environment in recent periods.
We operate a geographically diversified portfolio comprised largely of new and well maintained regional gaming facilities. This has allowed us to develop what we believe to be a solid base for future growth opportunities supported by a flexible and attractively priced capital structure. We have also made investments in joint ventures that we believe may allow us to capitalize on additional gaming opportunities in certain states if legislation or referenda are passed that permit and/or expand gaming in these jurisdictions and we are selected as a licensee.
Historically, we have been reliant on certain key regional gaming markets (for example, our results from Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg). Over the past several years, we have diversified our operations via development of new facilities and acquisitions and anticipates further diversifying its reliance on specific properties as we continue to expand our VGT and Penn Interactive Ventures operations. For example, we expect our facility in Plainville, Massachusetts and our expansion into the social gaming business and retail gaming market in Illinois, to generate significant cash flow since these operations are not part of the Master Lease and as such do not have any associated lease payments.
Financial Highlights:
We reported net revenues and income from operations of $806.2 million and $143.7 million, respectively, for the three months ended September 30, 2017, compared to $765.6 million and $139.3 million, respectively, for the corresponding period in the prior year and net revenues and income from operations of $2,378.9 million and $418.9 million, respectively, for the nine months ended September 30, 2017, compared to $2,291.5 million and $429.2 million, respectively, for the corresponding period in the prior year. The major factors affecting our results for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, were:
|
·
|
|
The acquisition of 1
st
Jackpot and Resorts on May 1, 2017 in our South/West segment, which generated net revenues of $17.5 million and $29.9 million for the three and nine months ended September 30, 2017.
|
|
·
|
|
The acquisition of Rocket Speed on August 1, 2016 in our Other segment, which generated net revenues of $6.8 million and $23.2 million for the three and nine months ended September 30, 2017.
|
|
·
|
|
Prairie State Gaming’s acquisition of the assets of Slot Kings, Bell Gaming, DSG and Advantage Gaming over the past four quarters, which collectively generated net revenues of $5.6 million and $15.2 million for the three and nine months ended September 30, 2017.
|
|
·
|
|
During the three months ended September 30, 2017, Penn Interactive Ventures reached an agreement with the former shareholders of Rocket Speed to buy out the two year contingent purchase price consideration which resulted in a benefit to general and administrative expense in the amount of $22.2 million.
|
|
·
|
|
A $25.1 million loss on the early extinguishment of debt and finance charges related to the January 2017 refinancing of our senior secured credit facility, redemption of the $300 million 5.875% senior unsecured notes and issuance of $400 million of new 5.625% senior unsecured notes
.
|
|
·
|
|
Goodwill and other impairment charges of $24.3 million and $29.9 million for the three and nine months ended September 30, 2017 for Tropicana Las Vegas, Sanford Orlando Kennel Club and the Company’s loan to the Jamul Tribe.
|
|
·
|
|
Net income increased by $742.8 million and $707.2 million for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to a $766.2 million tax
|
valuation allowance reversal and a $22.2 million benefit to expense for the buy out of the Rocket Speed contingent purchase price consideration, partially offset by the loss on the early extinguishment of debt and finance charges, goodwill and other impairment charges of $24.3 million and $29.9 million for the three and nine months ended September 30, 2017, higher interest expense and lower interest income.
|
Segment Developments:
The following are recent developments that have had, may have or will have an impact on us by segment:
Northeast
|
·
|
|
In October 2017, Pennsylvania’s House Bill 271 was signed into law. The bill extensively expands gambling in the state by introducing licenses for up to ten additional casinos limited to 750 slot machines and up to 30 table games not to be within twenty-five miles of existing casinos , up to five video gaming terminals at certain truck stops, online gambling, fantasy contests and sports wagering. We believe Hollywood Casino at Penn National Race Course and certain other facilities in adjoining states may be impacted by new competition in the near future based on the ultimate location of the additional facilities.
|
|
·
|
|
Hollywood Casino at Charles Town Races faces increased competition from the Maryland market, which includes Maryland Live!, Horseshoe Casino Baltimore and MGM National Harbor, which opened in December 2016.
|
|
·
|
|
Construction of a tribal casino in Taunton, Massachusetts, which was previously expected to open in 2017, is currently on hold following a recent judicial opinion. MGM Springfield in Western Massachusetts is expected to be completed in late 2018 and Wynn Everett in Eastern Massachusetts is scheduled to open in mid-2019. The increased competition in Massachusetts will have a negative impact on the operations of Plainridge Park Casino.
|
South/West
|
·
|
|
On October 10, 2016, we opened and began to manage Hollywood Casino Jamul – San Diego on the Jamul Tribe’s trust land in San Diego County, California. The facility is a state of the art development project which includes a three-story gaming and entertainment facility of approximately 200,000 square feet featuring 1,731 slot machines, 40 live table games, multiple restaurants, bars and lounges and a partially enclosed parking structure with over 1,800 spaces. We currently provide a portion of the financing to the Jamul Tribe in connection with the development of the project and we manage and provide branding for the casino in exchange for a management fee equal to 30% of the casino’s pretax income, a licensing fee of 2% of gross revenues for the Hollywood Casino brand, as well as interest on loans provided by the Company in connection with the project.
|
|
·
|
|
In August 2015, we completed the acquisition of Tropicana Las Vegas Hotel and Casino for $360 million. The Tropicana Las Vegas Hotel and Casino is situated on 35 acres of land located on the Las Vegas Strip with 1,470 remodeled guest rooms and suites, a 50,000 square foot casino gaming floor featuring 617 slot and video poker machines and 35 table games including blackjack, mini‑baccarat, craps and roulette, three full‑service restaurants, a 1,200 seat performance theater, a 300 seat comedy club, a nightclub, beach club and 2,095 parking spaces. During the second quarter of 2016, we refreshed the gaming floor with new slot machines and launched our Marquee Rewards player loyalty program at the Tropicana Las Vegas. During the nine months ended September 30, 2017, we have made various incremental food and beverage offerings at the facility and on July 27, 2017, we opened celebrity chef Robert Irvine’s first signature Las Vegas restaurant, the Robert Irvine Public House. Additionally, we continue to evaluate additional improvements at the property which may include additional food, beverage, retail and entertainment and other non-gaming amenities and enhancements
.
|
Midwest
|
·
|
|
On September 1, 2015, we acquired a leading Illinois video gaming terminal (“VGT”) operator, Prairie State Gaming. As one of the largest and most respected VGT operators in Illinois, Prairie State Gaming’s operations
|
include more than 1,493 terminals across a network of 333 bars and retail gaming establishments throughout Illinois. Over the last four quarters, Prairie State Gaming has acquired the assets of four smaller VGT operators in Illinois.
|
Other
|
·
|
|
On August 1, 2016, we completed our acquisition of Rocket Speed, a leading developer of social casino games.
|
Critical Accounting Estimates
We make certain judgments and use certain estimates and assumptions when applying accounting principles in the preparation of our consolidated financial statements. The nature of the estimates and assumptions are material due to the levels of subjectivity and judgment necessary to account for highly uncertain factors or the susceptibility of such factors to change. We have identified the accounting for long-lived assets, goodwill and other intangible assets, income taxes, contingent purchase price obligations and the valuation of our loan to the Jamul Tribe as critical accounting estimates, as they are the most important to our financial statement presentation and require difficult, subjective and complex judgments.
We believe the current assumptions and other considerations used to estimate amounts reflected in our condensed consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our condensed consolidated financial statements, the resulting changes could have a material adverse effect on our condensed consolidated results of operations and, in certain situations, could have a material adverse effect on our condensed consolidated financial condition.
Loans to the Jamul Tribe
For the three and nine months ended September 30, 2017, we recorded impairment charges of $6.3 million and $11.9 million within our condensed consolidated statement of income to establish a reserve on our Loan to the Jamul Tribe. Our Loan is impaired and as such the value is estimated based on the present value of expected future cash flows of the facility discounted at the loan’s effective interest rate. The estimate uses subjective assumptions such as, but not limited to, projected future earnings of the facility and future interest rates. See Note 2 to the condensed consolidated financial statements for additional information.
If projected earnings at the facility, the most significant assumption in the valuation of our Loan, were to increase or decrease by 5% the estimated impact would be a reversal of $2.2 million of the reserve or additional charges to increase our current reserves by $11.8 million, respectively.
Contingent Purchase Price
At December 31, 2016, we had contingent purchase price obligations of $14.5 million and $33.8 million in other current liabilities and other noncurrent liabilities, respectively, within our condensed consolidated balance sheet primarily related to our acquisition of Rocket Speed and Plainridge Racecourse. At September 30, 2017, we had contingent purchase price obligations of $3.6 million and $9.2 million in other current liabilities and other noncurrent liabilities, respectively, within our condensed consolidated balance sheet primarily related to our acquisition of Plainridge Racecourse. We utilize significant estimates to calculate the fair value of our contingent purchase price obligations. These estimates use subjective assumptions, such as projections of future earnings and discount rate. During the three months ended September 30, 2017, we reached an agreement with the former owners of Rocket Speed to buy out the two year contingent purchase price obligation, which resulted in a reduction of $3.9 million and $18.3 million in other current liabilities and other noncurrent liabilities, respectively.
For further information on our critical accounting estimates, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the notes to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. There has been no material change to these estimates for the nine months ended September 30, 2017 other than the reserve related to the loan to the Jamul Tribe and the contingent purchase price as discussed above.
Results of Operations
The following are the most important factors and trends that contribute to our operating performance:
|
·
|
|
Most of our properties operate in mature competitive markets. As a result, we expect a significant amount of our future growth to come from prudent acquisitions of gaming properties (such as our May 1, 2017 acquisition of 1
st
Jackpot and Resorts), our October 2016 opening of a new Hollywood Casino branded gaming facility on the Jamul Indian Village land in trust which we now manage, jurisdictional expansions (such as our June 2015 opening of a slots‑only gaming facility in Massachusetts, the September 2014 opening of Hollywood Gaming at Mahoning Valley Race Course and the August 2014 opening of Hollywood Gaming at Dayton Raceway) and new growth opportunities (such as our acquisition of Prairie State Gaming, a leading video gaming terminal operator in Illinois, and our entry into the interactive and social gaming space through Penn Interactive Ventures, including our acquisition of Rocket Speed
).
|
|
·
|
|
A number of states are currently considering or implementing legislation to legalize or expand gaming. Such legislation presents both potential opportunities to establish new properties (for example, in Massachusetts, where we opened a slots‑only gaming facility on June 24, 2015, in Kansas, where we opened a casino through a joint venture in February 2012, and in Ohio, where we opened casinos in Toledo and Columbus in May 2012 and October 2012, respectively, and opened video lottery terminal facilities at two racetracks in Ohio in the third quarter of 2014) and increased competitive threats to business at our existing properties (such as the introduction/expansion of commercial casinos in Kansas, Maryland, Ohio, and potentially Pennsylvania, Kentucky and Nebraska, and the introduction of tavern licenses in several states, most significantly in Illinois
).
|
|
·
|
|
T
he actions of government bodies can affect our operations in a variety of ways. For instance, the continued pressure on governments to balance their budgets could intensify the efforts of state and local governments to raise revenues through increases in gaming taxes and/or property taxes, or through an expansion of gaming. In addition, government bodies may restrict, prevent or negatively impact operations in the jurisdictions in which we do business (such as the implementation of smoking bans
).
|
|
·
|
|
Historically, over 85% of our gaming revenue is derived from gaming on slot machines. As a result, our results of operations are substantially dependent on the continued demand for slot wagering entertainment at our properties
.
|
|
·
|
|
General economic conditions and the effect of prolonged sluggish conditions on consumer spending for leisure and gaming activities, which may negatively impact our operating results and our ability to continue to access financing at favorable terms
.
|
The consolidated results of operations for the three and nine months ended September 30, 2017 and 2016 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
691,028
|
|
$
|
654,591
|
|
$
|
2,033,263
|
|
$
|
1,974,618
|
|
Food, beverage, hotel and other
|
|
|
153,833
|
|
|
147,554
|
|
|
453,722
|
|
|
429,792
|
|
Management service and licensing fees
|
|
|
3,550
|
|
|
3,130
|
|
|
8,809
|
|
|
8,567
|
|
Reimbursable management costs
|
|
|
6,679
|
|
|
5,965
|
|
|
19,824
|
|
|
8,820
|
|
Revenues
|
|
|
855,090
|
|
|
811,240
|
|
|
2,515,618
|
|
|
2,421,797
|
|
Less promotional allowances
|
|
|
(48,843)
|
|
|
(45,643)
|
|
|
(136,684)
|
|
|
(130,327)
|
|
Net revenues
|
|
|
806,247
|
|
|
765,597
|
|
|
2,378,934
|
|
|
2,291,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
350,847
|
|
|
336,669
|
|
|
1,028,056
|
|
|
1,011,187
|
|
Food, beverage, hotel and other
|
|
|
107,057
|
|
|
102,110
|
|
|
313,363
|
|
|
302,062
|
|
General and administrative
|
|
|
107,201
|
|
|
114,376
|
|
|
363,112
|
|
|
340,854
|
|
Reimbursable management costs
|
|
|
6,679
|
|
|
5,965
|
|
|
19,824
|
|
|
8,820
|
|
Depreciation and amortization
|
|
|
66,483
|
|
|
67,903
|
|
|
205,688
|
|
|
200,105
|
|
Impairment losses
|
|
|
24,317
|
|
|
—
|
|
|
29,952
|
|
|
—
|
|
Insurance recoveries
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
Total operating expenses
|
|
|
662,584
|
|
|
626,297
|
|
|
1,959,995
|
|
|
1,862,302
|
|
Income from operations
|
|
$
|
143,663
|
|
$
|
139,300
|
|
$
|
418,939
|
|
$
|
429,168
|
|
Certain information regarding our results of operations by segment for the three and nine months ended September 30, 2017 and 2016 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
Income (loss) from Operations
|
|
Three Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
401,818
|
|
$
|
395,748
|
|
$
|
106,575
|
|
$
|
101,752
|
|
South/West
|
|
|
160,153
|
|
|
135,169
|
|
|
4,772
|
|
|
19,337
|
|
Midwest
|
|
|
232,051
|
|
|
221,172
|
|
|
60,005
|
|
|
56,343
|
|
Other
|
|
|
12,225
|
|
|
13,508
|
|
|
(27,689)
|
|
|
(38,132)
|
|
Total
|
|
$
|
806,247
|
|
$
|
765,597
|
|
$
|
143,663
|
|
$
|
139,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
Income (loss) from Operations
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
1,200,382
|
|
$
|
1,190,469
|
|
$
|
317,327
|
|
$
|
306,368
|
|
South/West
|
|
|
453,123
|
|
|
411,245
|
|
|
51,952
|
|
|
72,944
|
|
Midwest
|
|
|
685,236
|
|
|
662,506
|
|
|
180,818
|
|
|
172,013
|
|
Other
|
|
|
40,193
|
|
|
27,250
|
|
|
(131,158)
|
|
|
(122,157)
|
|
Total
|
|
$
|
2,378,934
|
|
$
|
2,291,470
|
|
$
|
418,939
|
|
$
|
429,168
|
|
Revenues
Revenues for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Three Months Ended September 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
|
Gaming
|
|
$
|
691,028
|
|
$
|
654,591
|
|
$
|
36,437
|
|
5.6
|
%
|
|
Food, beverage, hotel and other
|
|
|
153,833
|
|
|
147,554
|
|
|
6,279
|
|
4.3
|
%
|
|
Management service and licensing fees
|
|
|
3,550
|
|
|
3,130
|
|
|
420
|
|
13.4
|
%
|
|
Reimbursable management costs
|
|
|
6,679
|
|
|
5,965
|
|
|
714
|
|
12.0
|
%
|
|
Revenues
|
|
|
855,090
|
|
|
811,240
|
|
|
43,850
|
|
5.4
|
%
|
|
Less promotional allowances
|
|
|
(48,843)
|
|
|
(45,643)
|
|
|
(3,200)
|
|
7.0
|
%
|
|
Net revenues
|
|
$
|
806,247
|
|
$
|
765,597
|
|
$
|
40,650
|
|
5.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
|
Gaming
|
|
$
|
2,033,263
|
|
$
|
1,974,618
|
|
$
|
58,645
|
|
3.0
|
%
|
|
Food, beverage, hotel and other
|
|
|
453,722
|
|
|
429,792
|
|
|
23,930
|
|
5.6
|
%
|
|
Management service and licensing fees
|
|
|
8,809
|
|
|
8,567
|
|
|
242
|
|
2.8
|
%
|
|
Reimbursable management costs
|
|
|
19,824
|
|
|
8,820
|
|
|
11,004
|
|
124.8
|
%
|
|
Revenues
|
|
|
2,515,618
|
|
|
2,421,797
|
|
|
93,821
|
|
3.9
|
%
|
|
Less promotional allowances
|
|
|
(136,684)
|
|
|
(130,327)
|
|
|
(6,357)
|
|
4.9
|
%
|
|
Net revenues
|
|
$
|
2,378,934
|
|
$
|
2,291,470
|
|
$
|
87,464
|
|
3.8
|
%
|
|
In our business, revenue is driven by discretionary consumer spending. The proliferation of new gaming facilities has increased competition in many regional markets (including at some of our key facilities). As reported by most jurisdictions, regional gaming industry trends have shown limited revenue growth in recent years as numerous jurisdictions now permit gaming or have expanded their gaming offerings.
We have no certain mechanism for determining why consumers choose to spend more or less money at our properties from period to period and as such cannot 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 were likely to account for such changes. In instances where we believe one factor may have had a significantly greater impact than the other factors, we have noted that as well. However, in all instances, such insights are based only on our reasonable judgment and professional experience, and no assurance can be given as to the accuracy of our judgments.
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.” Our promotional allowance levels are determined based on various factors such as our marketing plans, competitive factors, economic conditions, and regulations.
Gaming revenue
Gaming revenue increased by $36.4 million, or 5.6%, and $58.6 million, or 3.0%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the variances explained below.
Gaming revenue for our South/West segment increased by $21.3 million, or 23.2%, and $29.1 million or 10.2%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the acquisitions of 1
st
Jackpot and Resorts on May 1, 2017, which contributed a combined $16.6 million and $28.5 million of gaming revenue for the three and nine months ended September 30, 2017 and increased gaming revenue at Tropicana Las Vegas, M Resort and Zia Park Casino, as the local economy has shown slight
improvement this past quarter, partially offset by lower gaming revenue at Hollywood Casino Tunica and at Hollywood Casino Gulf Coast for the nine months ended September 30, 2017.
Gaming revenue for our Midwest segment increased by $9.5 million, or 4.7%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to increased gaming revenue at Prairie State Gaming resulting from the acquisition of the assets of four smaller VGT route operators in Illinois since the fourth quarter 2016 and increased gaming revenue at Argosy Casino Riverside, Hollywood Casino Joliet and Hollywood Casino Lawrenceburg, partially offset by decreased gaming revenue at Argosy Casino Alton.
Gaming revenue for our Midwest segment increased by $20.4 million or 3.3%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to increased gaming revenue at Prairie State Gaming resulting from the acquisition of the assets of four smaller VGT route operators in Illinois since the fourth quarter 2016 and increased gaming revenue at Argosy Casino Riverside and Hollywood Casino St. Louis, partially offset by decreased gaming revenue at Argosy Casino Alton and Hollywood Casino Lawrenceburg, primarily due to continued impact of competition in Ohio.
Gaming revenue for our Northeast segment increased by $5.7 million, or 1.6%, and $9.1 million or 0.8% for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to increased gaming revenue at all four of our Ohio properties and Plainridge Park Casino, partially offset by decreased gaming revenue at Hollywood Casino Bangor and Hollywood Casino Charles Town due to increased competition from the Maryland market.
Food, beverage, hotel and other revenue
Food, beverage, hotel and other revenue increased by $6.3 million, or 4.3%, and $23.9 million or 5.6%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the variances explained below.
Food, beverage, hotel and other revenue for our South/West segment increased by $6.6 million, or 12.2%, and $7.7 million, or 4.7%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the acquisitions of 1
st
Jackpot and Resorts on May 1, 2017 and increased food, beverage, hotel and other revenue at Tropicana Las Vegas and M Resort, partially offset by decreased food, beverage, hotel and other revenue at Hollywood Casino Tunica.
Food, beverage, hotel and other revenue for Other increased by $13.2 million, or 48.5%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to the acquisition of Rocket Speed on August 1, 2016, partially offset by the sale of Rosecroft Raceway on July 31, 2016.
Promotional allowances
Promotional allowances increased by $3.2 million, or 7.0%, and $6.4 million, or 4.9% for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the acquisitions of 1
st
Jackpot and Resorts on May 1, 2017 and increased marketing efforts at Tropicana Las Vegas and M Resort.
Operating Expenses
Operating expenses for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended September 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
Gaming
|
|
$
|
350,847
|
|
$
|
336,669
|
|
$
|
14,178
|
|
4.2
|
%
|
Food, beverage, hotel and other
|
|
|
107,057
|
|
|
102,110
|
|
|
4,947
|
|
4.8
|
%
|
General and administrative
|
|
|
107,201
|
|
|
114,376
|
|
|
(7,175)
|
|
(6.3)
|
%
|
Reimbursable management costs
|
|
|
6,679
|
|
|
5,965
|
|
|
714
|
|
12.0
|
%
|
Depreciation and amortization
|
|
|
66,483
|
|
|
67,903
|
|
|
(1,420)
|
|
(2.1)
|
%
|
Impairment losses
|
|
|
24,317
|
|
|
—
|
|
|
24,317
|
|
N/A
|
|
Insurance recoveries
|
|
|
—
|
|
|
(726)
|
|
|
726
|
|
N/A
|
|
Total operating expenses
|
|
$
|
662,584
|
|
$
|
626,297
|
|
$
|
36,287
|
|
5.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
Gaming
|
|
$
|
1,028,056
|
|
$
|
1,011,187
|
|
$
|
16,869
|
|
1.7
|
%
|
Food, beverage, hotel and other
|
|
|
313,363
|
|
|
302,062
|
|
|
11,301
|
|
3.7
|
%
|
General and administrative
|
|
|
363,112
|
|
|
340,854
|
|
|
22,258
|
|
6.5
|
%
|
Reimbursable management costs
|
|
|
19,824
|
|
|
8,820
|
|
|
11,004
|
|
124.8
|
%
|
Depreciation and amortization
|
|
|
205,688
|
|
|
200,105
|
|
|
5,583
|
|
2.8
|
%
|
Impairment losses
|
|
|
29,952
|
|
|
—
|
|
|
29,952
|
|
N/A
|
|
Insurance recoveries
|
|
|
—
|
|
|
(726)
|
|
|
726
|
|
N/A
|
|
Total operating expenses
|
|
$
|
1,959,995
|
|
$
|
1,862,302
|
|
$
|
97,693
|
|
5.2
|
%
|
Gaming expense
Gaming expense increased by $14.2 million, or 4.2%, and $16.9 million, or 1.7%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the variances explained below.
Gaming expense for our Midwest segment increased by $6.5 million, or 6.4%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to an increase in gaming taxes resulting from higher taxable gaming revenue mentioned above at Prairie State Gaming resulting from the acquisition of four smaller VGT route operators in Illinois since the fourth quarter 2016, Hollywood Casino Joliet and Hollywood Casino Lawrenceburg, partially offset by a decrease in gaming taxes resulting from lower taxable gaming revenue mentioned above at Argosy Casino Alton.
Gaming expense for our Midwest segment increased by $14.9 million, or 5.0%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to an increase in gaming taxes resulting from higher taxable gaming revenue mentioned above at Prairie State Gaming resulting from the acquisition of four smaller VGT route operators in Illinois since the fourth quarter 2016 and an increase in gaming taxes resulting from higher taxable gaming revenue mentioned above at Hollywood Casino Joliet, partially offset by a decrease in gaming taxes resulting from lower taxable gaming revenue mentioned above at Argosy Casino Alton, Hollywood Casino Aurora and Hollywood Casino Lawrenceburg, primarily due to continued impact of competition in Ohio.
Gaming expense for our South/West segment increased by $5.9 million, or 16.9%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to an increase in gaming taxes resulting from the acquisitions of 1
st
Jackpot and Resorts on May 1, 2017.
Gaming expense for our South/West segment increased by $4.6 million, or 4.2%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to an increase in gaming
taxes resulting from the acquisitions of 1st Jackpot and Resorts on May 1, 2017, and an increase in gaming taxes resulting from higher taxable gaming revenue mentioned above at Tropicana Las Vegas, partially offset by a decrease in gaming taxes resulting from lower taxable gaming revenue mentioned above at Hollywood Casino Tunica and at Zia Park Casino, as overall softness in oil prices during the first six months of the year affected the economy in this area.
Gaming expense for our Northeast segment increased by $1.8 million, or 0.9%, for the three months ended September 30, 2017 as compared to the three months ended September 30, 2016, primarily due to an increase in gaming taxes resulting from higher taxable gaming revenue mentioned above at all four of our Ohio properties and Plainridge Park Casino, partially offset by a decrease in gaming taxes resulting from lower taxable gaming revenue mentioned above at Hollywood Casino Bangor and Hollywood Casino Charles Town due to increased competition from the Maryland market.
Gaming expense for our Northeast segment decreased by $2.6 million, or 0.4%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to a decrease in gaming taxes resulting from lower taxable gaming revenue mentioned above at Hollywood Casino Bangor and Hollywood Casino Charles Town, primarily due to the continued impact of competition in the region, namely the Maryland market, partially offset by an increase in gaming taxes resulting from higher taxable gaming revenue mentioned above at our properties in Ohio and Plainridge Park Casino.
Food, beverage, hotel and other expenses
Food, beverage, hotel and other expenses increased by $4.9 million, or 4.8%, and $11.3 million, or 3.7%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the variances explained below.
Food, beverage, hotel and other expenses for our South/West segment increased by $5.9 million, or 14.6%, and $7.7 million, or 6.4%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the acquisition of 1
st
Jackpot and Resorts on May 1, 2017 and higher food, beverage, hotel and other expenses at Tropicana Las Vegas and M Resort.
Food, beverage, hotel and other expenses for Other decreased by $2.2 million, or 31.9%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to lower marketing expenses at Rocket Speed and the sale of Rosecroft Raceway on July 31, 2016.
Food, beverage, hotel and other expenses for Other increased by $2.1 million, or 15.2%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to the acquisition of Rocket Speed on August 1, 2016, partially offset by the sale of Rosecroft Raceway on July 31, 2016.
General and administrative expenses
General and administrative expenses include items such as compliance, facility maintenance, utilities, property and liability insurance, surveillance and security, 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 cash-settled stock based awards, development costs and lobbying expenses.
General and administrative expenses decreased by $7.2 million, or 6.3%, and increased by $22.3 million, or 6.5%, for the three and nine months ended September 30, 2017, respectively, as compared to the three and nine months ended September 30, 2016, primarily due to the variances explained below.
General and administrative expenses for Other decreased by $14.6 million, or 81.2%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to a $22.2 million benefit to expenses from the buy out of the two year contingent purchase price liability for Rocket Speed, partially offset by an increase in corporate overhead costs of $4.6 million for the three months ended September 30, 2017, primarily due to cash-settled stock compensation charges of $1.3 million from a higher Penn stock price during 2017 compared to
2016, higher acquisition and development costs of $1.4 million and higher bonus accrual expense of $1.3 million due to the Company’s better overall performance against its budget and a gain from the sale of Rosecroft Raceway on July 31, 2016, recognized in the prior year.
General and administrative expenses for Other increased by $7.3 million, or 12.6%, for the nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to an increase in corporate overhead costs of $21.0 million for the nine months ended September 30, 2017, primarily due to cash-settled stock compensation charges of $13.8 million from a higher Penn stock price during 2017 compared to 2016, higher acquisition and development costs of $2.7 million and higher bonus accrual expense of $2.9 million due to the Company’s better overall performance against its budget, partially offset by a $22.2 million benefit to expenses from the buy out of the two year contingent purchase price liability for Rocket Speed and a gain from the sale of Rosecroft Raceway on July 31, 2016, recognized in the prior year.
General and administrative expenses for our South/West segment increased by $5.9 million, or 22.6%, and $11.7 million, or 15.8% for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the acquisition of 1
st
Jackpot and Resorts on May 1, 2017, higher expenses at Tropicana Las Vegas due to a favorable legal settlement in the second quarter 2016, partially offset by costs saving measures at Hollywood Casino Gulf Coast and Hollywood Casino Tunica.
General and administrative expenses for our Northeast segment increased by $2.3 million, or 6.0%, and $5.4 million, or 4.8% for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to the increased expenses at Plainridge Park Casino as casino volumes have increased.
Depreciation and amortization expense
Depreciation and amortization expense decreased by $1.4 million, or 2.1%, for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to decreases at the majority of our properties due to assets becoming fully depreciated, partially offset by the acquisitions of 1
st
Jackpot and Resorts on May 1, 2017, the acquisition of Rocket Speed on August 1, 2016 and the acquisitions of the assets of four smaller VGT route operators in Illinois since the fourth quarter 2016.
Depreciation and amortization expense increased by $5.6 million, or 2.8%, for the nine months ended September 30, 2017, as compared to nine months ended September 30, 2016, primarily due to the acquisition of 1
st
Jackpot and Resorts on May 1, 2017, the acquisitions of the assets of four smaller VGT route operators in Illinois since fourth quarter 2016, the intangible asset amortization recognized from our acquisition of Rocket Speed on August 1, 2016 and increased depreciation at Tropicana Las Vegas due to capital improvements since acquisition, all of which were partially offset by decreases at the majority of our properties due to assets becoming fully depreciated.
Impairment losses
For the three months ended September 30, 2017, the Company recorded goodwill impairment charges of $18.0 million. The Company recorded a charge of $14.8 million for Tropicana Las Vegas which failed the quantitative goodwill impairment test, primarily due to the reversal of the Company’s valuation allowance which increased its book value significantly. In addition, the Company recorded a partial impairment charge of $3.2 million for Sanford Orlando Kennel Club which failed the quantitative goodwill impairment test based on updated long term forecasts for this property. Finally, an impairment charge of $6.3 million and $11.9 million for the three and nine months ended September 30, 2017, respectively was recorded against the Company’s loan to the Jamul Tribe. See Note 2 and Note 6 to the condensed consolidated financial statements for additional information on these impairment charges.
Other income (expenses)
Other income (expenses) for the three and nine months ended September 30, 2017 and 2016 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended September 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
Interest expense
|
|
$
|
(118,236)
|
|
$
|
(114,349)
|
|
$
|
(3,887)
|
|
3.4
|
%
|
Interest income
|
|
|
304
|
|
|
8,202
|
|
|
(7,898)
|
|
(96.3)
|
%
|
Income from unconsolidated affiliates
|
|
|
4,781
|
|
|
3,505
|
|
|
1,276
|
|
36.4
|
%
|
Other
|
|
|
(236)
|
|
|
404
|
|
|
(640)
|
|
(158.4)
|
%
|
Total other expenses
|
|
$
|
(113,387)
|
|
$
|
(102,238)
|
|
$
|
(11,149)
|
|
10.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Nine Months Ended September 30,
|
|
2017
|
|
2016
|
|
Variance
|
|
Variance
|
|
Interest expense
|
|
$
|
(350,000)
|
|
$
|
(345,548)
|
|
$
|
(4,452)
|
|
1.3
|
%
|
Interest income
|
|
|
3,185
|
|
|
20,039
|
|
|
(16,854)
|
|
(84.1)
|
%
|
Income from unconsolidated affiliates
|
|
|
14,350
|
|
|
11,662
|
|
|
2,688
|
|
23.0
|
%
|
Loss on early extinguishment of debt
|
|
|
(23,390)
|
|
|
—
|
|
|
(23,390)
|
|
N/A
|
|
Other
|
|
|
(2,202)
|
|
|
(1,978)
|
|
|
(224)
|
|
11.3
|
%
|
Total other expenses
|
|
$
|
(358,057)
|
|
$
|
(315,825)
|
|
$
|
(42,232)
|
|
13.4
|
%
|
Interest expense
Interest expense increased by $3.9 million, or 3.4%, and $4.5 million, or 1.3% for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to $3.0 million and $3.6 million from higher interest payments on the financing obligation to GLPI mainly due to the acquisition of 1
st
Jackpot and Resorts on May 1, 2017, $1.2 million and $3.7 million from higher borrowing levels on the senior unsecured notes for the three and nine months ended September 30, 2017, partially offset by $0.6 million and $2.5 million from lower borrowing levels and interest rates on the revolver portion of the senior secured credit facility and $0.2 million and $0.4 million for the three and nine months ended September 30, 2017 from lower interest on the corporate airplane loan which was paid off in January 2017. The Company anticipates that the annual escalator at the end of the fourth year of the Master Lease (October 31, 2017) will be approximately $4.0 million, of which approximately $0.7 million will be incurred in the fourth quarter of 2017.
Interest income
Interest income decreased by $7.9 million or 96.3% and $16.9 million, or 84.1%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to lower interest accrued on loans to the Jamul Tribe due to their refinancing on October 20, 2016 (see Note 2 to the condensed consolidated financial statements for further details).
Other
Other decreased by $0.6 million for the three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to foreign currency translation losses, as compared to gains in the corresponding period in the prior year.
Taxes
The Company calculates the provision for income taxes during interim reporting periods by applying an estimate of the annual effective tax rate to the full year projected pretax book income or loss excluding certain discrete items. The effective tax rate (income taxes as a percentage of income from operations before income taxes) including discrete items was (2,507.15)% and (1,232.94)% for the three and nine months ended September 30, 2017, as compared to (25.56)% and 8.00% for the three and nine months ended September 30, 2016, primarily due to a year-over-year
reduction to our federal and state valuation allowance. The impact of the valuation allowance is magnified by the year-over-year decrease in earnings before income taxes.
The Company’s effective income tax rate can vary from period to period depending on, among other factors, the geographic and business mix of our earnings, the level of our tax credits and the realizability of our deferred tax assets. Certain of these and other factors, including our history and projections of pretax earnings, are taken into account in assessing our ability to realize our net deferred tax assets.
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
. During the fourth quarter of 2016, we emerged from a three-year cumulative pretax loss position, generating a near break-even cumulative amount of pretax income. This cumulative pretax income increased to $76.6 million for the three months ended September 30, 2017 and is expected to rise substantially at year end since the Company had recorded a $161.5 million pretax loss in the fourth quarter of 2014 due to impairment charges of $155.3 million in that period.
|
|
·
|
|
Substantial pretax income in seven of the last eight quarters with the only loss reported eight quarters ago.
|
|
·
|
|
Lack of significant goodwill and intangible asset impairment charges expected in 2017.
The Company had experienced significant impairment charges in connection with the spin-off of its real estate assets to Gaming Leisure Properties, Inc. in November 2013. The Company recorded impairment charges totaling $40.0 million, $159.9 million and $798.3 million for the years ended December 31, 2015, 2014 and 2013, respectively. There were no impairments recorded in 2016 and for the nine months ended September 30, 2017, the Company recorded impairments of $29.9 million.
|
Accordingly, the valuation allowance has been significantly reduced by $766.2 million resulting in a substantial decrease to income tax expense for the three and nine months ended September 30, 2017.
Adjusted EBITDA
In addition to GAAP financial measures, adjusted EBITDA is used by management as an important measure of the Company’s operating performance. We define 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 our share of non-operating items (such as depreciation and amortization) added back for our joint venture in Kansas Entertainment. Adjusted EBITDA excludes payments associated with our Master Lease agreement with GLPI as the transaction was accounted for as a financing obligation. 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 projects because they provide a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We also 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, 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 addition, gaming companies have historically reported adjusted EBITDA as a supplement to financial measures in accordance with GAAP. 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 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 widely used measure of performance in the gaming industry, is used in the valuation of
gaming companies, and that it is considered by many to be a key indicator of the Company’s operating results. Management uses adjusted EBITDA as an important measure of the operating performance of its segments, including the evaluation of operating personnel. 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 net income or cash flows from operating activities, as a measure of liquidity, or as any other measures 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. It should also be noted that other gaming companies that report adjusted EBITDA information may calculate adjusted EBITDA in a different manner than the Company and therefore, comparability may be limited.
Adjusted EBITDA after Master Lease payments is a non-GAAP measure we believe provides useful information to investors because it is an indicator of the performance of our ongoing business operations. Finally, adjusted EBITDA after Master Lease payments is the benchmark that our executive management team is measured against for incentive based compensation purposes.
A reconciliation of the Company’s net income (loss) per GAAP to adjusted EBITDA, as well as the Company’s income (loss) from operations per GAAP to adjusted EBITDA, is included below. Additionally, a reconciliation of each segment’s income (loss) from operations to adjusted EBITDA is also included above. On a segment level, income (loss) from operations per GAAP, rather than net income (loss) per GAAP is reconciled to adjusted EBITDA due to, among other things, the impracticability of allocating interest expense, interest income, income taxes and certain other items to the Company’s segments on a segment by segment basis. Management believes that this presentation is more meaningful to investors in evaluating the performance of the Company’s segments and is consistent with the reporting of other gaming companies.
The following table presents a reconciliation of the Company’s most directly comparable GAAP financial measures to adjusted EBITDA, for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
789,340
|
|
$
|
46,535
|
|
$
|
811,523
|
|
$
|
104,278
|
|
Income tax provision
|
|
|
(759,064)
|
|
|
(9,473)
|
|
|
(750,641)
|
|
|
9,065
|
|
Other
|
|
|
236
|
|
|
(404)
|
|
|
25,592
|
|
|
1,978
|
|
Income from unconsolidated affiliates
|
|
|
(4,781)
|
|
|
(3,505)
|
|
|
(14,350)
|
|
|
(11,662)
|
|
Interest income
|
|
|
(304)
|
|
|
(8,202)
|
|
|
(3,185)
|
|
|
(20,039)
|
|
Interest expense
|
|
|
118,236
|
|
|
114,349
|
|
|
350,000
|
|
|
345,548
|
|
Income from operations
|
|
$
|
143,663
|
|
$
|
139,300
|
|
$
|
418,939
|
|
$
|
429,168
|
|
Gain on disposal of assets
|
|
|
96
|
|
|
(2,781)
|
|
|
103
|
|
|
(3,440)
|
|
Impairment losses
|
|
|
24,317
|
|
|
—
|
|
|
29,952
|
|
|
—
|
|
Charge for stock compensation
|
|
|
1,853
|
|
|
1,517
|
|
|
5,827
|
|
|
4,554
|
|
Contingent purchase price
|
|
|
(20,716)
|
|
|
(30)
|
|
|
(16,794)
|
|
|
(1,111)
|
|
Depreciation and amortization
|
|
|
66,483
|
|
|
67,903
|
|
|
205,688
|
|
|
200,105
|
|
Insurance recoveries
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
Income from unconsolidated affiliates
|
|
|
4,781
|
|
|
3,505
|
|
|
14,350
|
|
|
11,662
|
|
Non-operating items for Kansas JV
|
|
|
1,310
|
|
|
2,572
|
|
|
4,570
|
|
|
7,713
|
|
Adjusted EBITDA
|
|
$
|
221,787
|
|
$
|
211,260
|
|
$
|
662,635
|
|
$
|
647,925
|
|
Master Lease payments
|
|
|
(114,489)
|
|
|
(109,710)
|
|
|
(340,907)
|
|
|
(331,867)
|
|
Adjusted EBITDA, after Master Lease payments
|
|
$
|
107,298
|
|
$
|
101,550
|
|
|
321,728
|
|
|
316,058
|
|
The reconciliation of each segment’s income (loss) from operations to adjusted EBITDA for the three and nine months ended September 30, 2017 and 2016 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
106,575
|
|
$
|
4,772
|
|
$
|
60,005
|
|
$
|
(27,689)
|
|
$
|
143,663
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,853
|
|
|
1,853
|
|
Impairment losses
|
|
|
—
|
|
|
21,111
|
|
|
—
|
|
|
3,206
|
|
|
24,317
|
|
Depreciation and amortization
|
|
|
19,661
|
|
|
9,224
|
|
|
9,560
|
|
|
28,038
|
|
|
66,483
|
|
Contingent purchase price
|
|
|
1,480
|
|
|
—
|
|
|
(44)
|
|
|
(22,152)
|
|
|
(20,716)
|
|
(Gain) loss on disposal of assets
|
|
|
(72)
|
|
|
(61)
|
|
|
56
|
|
|
173
|
|
|
96
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
5,157
|
|
|
(376)
|
|
|
4,781
|
|
Non‑operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
1,310
|
|
|
—
|
|
|
1,310
|
|
Adjusted EBITDA
|
|
$
|
127,644
|
|
$
|
35,046
|
|
$
|
76,044
|
|
$
|
(16,947)
|
|
$
|
221,787
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2016
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
101,752
|
|
$
|
19,337
|
|
$
|
56,343
|
|
$
|
(38,132)
|
|
$
|
139,300
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,517
|
|
|
1,517
|
|
Insurance recoveries
|
|
|
—
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
Depreciation and amortization
|
|
|
22,975
|
|
|
9,097
|
|
|
9,593
|
|
|
26,238
|
|
|
67,903
|
|
Contingent purchase price
|
|
|
(293)
|
|
|
—
|
|
|
—
|
|
|
263
|
|
|
(30)
|
|
(Gain) loss on disposal of assets
|
|
|
(13)
|
|
|
72
|
|
|
64
|
|
|
(2,904)
|
|
|
(2,781)
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
3,798
|
|
|
(293)
|
|
|
3,505
|
|
Non‑operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
2,572
|
|
|
—
|
|
|
2,572
|
|
Adjusted EBITDA
|
|
$
|
124,421
|
|
$
|
28,506
|
|
$
|
71,644
|
|
$
|
(13,311)
|
|
$
|
211,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2017
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
317,327
|
|
$
|
51,952
|
|
$
|
180,818
|
|
$
|
(131,158)
|
|
$
|
418,939
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,827
|
|
|
5,827
|
|
Impairment losses
|
|
|
—
|
|
|
26,746
|
|
|
—
|
|
|
3,206
|
|
|
29,952
|
|
Depreciation and amortization
|
|
|
64,209
|
|
|
27,794
|
|
|
28,739
|
|
|
84,946
|
|
|
205,688
|
|
Contingent purchase price
|
|
|
2,662
|
|
|
—
|
|
|
(19)
|
|
|
(19,437)
|
|
|
(16,794)
|
|
Loss (gain) on disposal of assets
|
|
|
(104)
|
|
|
(56)
|
|
|
85
|
|
|
178
|
|
|
103
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
15,447
|
|
|
(1,097)
|
|
|
14,350
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
4,570
|
|
|
—
|
|
|
4,570
|
|
Adjusted EBITDA
|
|
$
|
384,094
|
|
$
|
106,436
|
|
$
|
229,640
|
|
$
|
(57,535)
|
|
$
|
662,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
306,368
|
|
$
|
72,944
|
|
$
|
172,013
|
|
$
|
(122,157)
|
|
$
|
429,168
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,554
|
|
|
4,554
|
|
Insurance recoveries
|
|
|
—
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
Depreciation and amortization
|
|
|
69,177
|
|
|
26,701
|
|
|
28,621
|
|
|
75,606
|
|
|
200,105
|
|
Contingent purchase price
|
|
|
(1,374)
|
|
|
—
|
|
|
—
|
|
|
263
|
|
|
(1,111)
|
|
Loss on disposal of assets
|
|
|
(6)
|
|
|
58
|
|
|
18
|
|
|
(3,510)
|
|
|
(3,440)
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
12,261
|
|
|
(599)
|
|
|
11,662
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
7,713
|
|
|
—
|
|
|
7,713
|
|
Adjusted EBITDA
|
|
$
|
374,165
|
|
$
|
99,703
|
|
$
|
219,900
|
|
$
|
(45,843)
|
|
$
|
647,925
|
|
Adjusted EBITDA for our Northeast segment increased by $3.2 million, or 2.6%, and $9.9 million, or 2.7% for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to improved results at all four of our Ohio properties and Plainridge Park Casino, and for the nine
months ended September 30, 2017 at Hollywood Casino at Penn National Race Course, partially offset by decreased results at Hollywood Casino Charles Town due to increased competition from the Maryland market.
Adjusted EBITDA for our Midwest segment increased by $4.4 million, or 6.1%, and $9.7 million, or 4.4% for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to improved results at Argosy Casino Riverside, Hollywood Casino Lawrenceburg and Prairie State Gaming resulting from the acquisition of four smaller VGT route operators in Illinois since the fourth quarter 2016, partially offset during the nine months ended September 30, 2017 by lower adjusted EBITDA at Hollywood Casino Joliet.
Adjusted EBITDA for our South/West segment increased by $6.5 million, or 22.9%, for three months ended September 30, 2017, as compared to the three months ended September 30, 2016, primarily due to the acquisitions of 1
st
Jackpot and Resorts on May 1, 2017 which contributed adjusted EBITDA of $4.1 million for the three months ended September 30, 2017 and higher adjusted EBITDA at Zia Park Casino, as the local economy has shown slight increases, and at Tropicana Las Vegas.
Adjusted EBITDA for our South/West segment increased by $6.7 million, or 6.8% for nine months ended September 30, 2017, as compared to the nine months ended September 30, 2016, primarily due to the acquisitions of 1st Jackpot and Resorts on May 1, 2017 and higher adjusted EBITDA at Zia Park Casino, as the local economy has shown slight improvement and M Resort, partially offset by lower adjusted EBITDA at Tropicana Las Vegas due to a favorable legal settlement in the prior year.
Adjusted EBITDA for Other declined by $3.6 million, or 27.3%, and $11.7 million, or 25.5%, for the three and nine months ended September 30, 2017, as compared to the three and nine months ended September 30, 2016, primarily due to increased corporate overhead costs of $4.4 million and $19.7 million for the three and nine months ended September 30, 2017, primarily due to cash-settled stock compensation charges from a higher Penn stock price of $1.3 million and $13.8 million during 2017 compared to 2016, higher acquisition and development costs of $1.4 million and $2.7 million and higher bonus accrual expense of $1.3 million and $2.9 million due to the Company’s better overall performance against its budget, partially offset by earnings from Rocket Speed, which was acquired on August 1, 2016.
Liquidity and Capital Resources
Historically and prospectively, our primary sources of liquidity and capital resources have been and will be cash flow from operations, borrowings from banks and proceeds from the issuance of debt and equity securities.
Net cash provided by operating activities totaled $337.3 million and $320.0 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in net cash provided by operating activities of $17.3 million for nine months ended September 30, 2017, compared to the corresponding period in the prior year, was comprised primarily of an increase in cash receipts from customers of $79.1 million, primarily due to the acquisition of 1
st
Jackpot and Resorts on May 1, 2017, Rocket Speed on August 1, 2016 and four smaller acquisitions by Prairie State Gaming and an increase in income tax refunds of $9.7 million, partially offset by an increase in cash paid to suppliers and vendors of $22.8 million, primarily due to the acquisitions noted above, cash payments for the early extinguishment of debt of $18.0 million, $17.5 million lower interest income resulting from the refinancing of the Jamul loan in October 2016, an increase in cash paid for interest of $6.2 million, a $5.9 million increase in cash paid to employees and $0.7 million of insurance proceeds in the prior year.
Net cash used in investing activities totaled $192.5 million and $277.3 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in net cash used in investing activities of $84.8 million for the nine months ended September 30, 2017, compared to the corresponding period in the prior year, was primarily due to a $167.1 million decrease in loans to the Jamul Tribe, partially offset by higher business acquisition costs of $71.3 million related to the acquisition of 1
st
Jackpot and Resorts and four smaller acquisitions by Prairie State Gaming and decreased proceeds related to the sale of assets held for sale of $12.5 million.
Net cash used in financing activities totaled $109.5 million and $78.0 million for the nine months ended September 30, 2017 and 2016, respectively. The increase in net cash used in financing activities of $31.5 million for the nine months ended September 30, 2017, compared to the corresponding period in the prior year, was primarily due to higher principal payments on long-term debt of $1,390.3 million, due to the previously mentioned refinancing, increased payments on other long-term obligations of $21.8 million for the payoff of the corporate airplane loan, higher payments of $24.8 million relating to the repurchase of common stock, higher payments of $17.7 million relating to the resolution of the contingent purchase price obligation with Rocket Speed and increased payments on our financing obligation with GLPI of $5.5 million, partially offset by higher proceeds from our long-term debt of $1,344.6 million, due to the refinancing of corporate debt, and higher proceeds of $82.6 million from GLPI for the financing acquisition.
Capital Expenditures
Capital expenditures are accounted for as either project or maintenance (replacement) capital expenditures. Project capital expenditures are for fixed asset additions that expand an existing facility or create a new facility. Maintenance capital expenditures are expenditures to replace existing fixed assets with a useful life greater than one year that are obsolete, worn out or no longer cost effective to repair.
The following table summarizes our expected project capital expenditures by segment for the fiscal year ending December 31, 2017, and actual expenditures for the three and nine months ended September 30, 2017 (excluding licensing fees and net of reimbursements). The table below should not be utilized to predict future expected project capital expenditures subsequent to 2017.
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected for Year
|
|
Expenditure for
|
|
|
|
|
|
Ending December 31,
|
|
Nine Months Ended
|
|
Balance to Expend
|
|
Property
|
|
2017
|
|
September 30, 2017
|
|
in 2017
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
0.2
|
|
$
|
0.2
|
|
$
|
—
|
|
South/West
|
|
|
29.1
|
|
|
23.3
|
|
|
5.8
|
|
Midwest
|
|
|
5.9
|
|
|
5.3
|
|
|
0.6
|
|
Total
|
|
$
|
35.2
|
|
$
|
28.8
|
|
$
|
6.4
|
|
Tropicana Las Vegas was acquired on August 25, 2015 for $360 million. During 2016, we reconfigured the gaming floor with updated slot machines, altered game placements and refined, table game mix and integrated the property into our Marquee Rewards player loyalty program which enables our regional gaming customers to redeem their loyalty reward points at the facility. During 2017, we have been making further enhancements to the facility with a focus on improving the food and beverage offerings.
During the nine months ended September 30, 2017, we spent $41.4 million for maintenance capital expenditures, with $14.9 million at our Northeast segment, $9.9 million at our South/West segment, $14.3 million at our Midwest segment, and $2.3 million for other. The majority of the maintenance capital expenditures were for slot machines, slot machine equipment and food and beverage enhancements.
Cash generated from operations and cash available under the revolving credit facility portion of our senior secured credit facility funded our project and maintenance capital expenditures in 2017 to date.
Jamul Tribe
The Loan to the Jamul Tribe, which totaled $75.5 million and $92.1 million at September 30, 2017 and December 31, 2016, is accounted for as a loan on the condensed consolidated balance sheets and as such is not included in the capital expenditures table presented above. As of September 30, 2017, we have not recorded any management fees during 2017 from this facility.
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 facility was priced at LIBOR plus 2.50%, with a 0.75% LIBOR floor. At September 30, 2017, the Company’s senior secured credit facility had a gross outstanding balance of $830.0 million, consisting of a $292.5 million Term Loan A facility, a $497.5 million Term Loan B facility, and $40.0 million outstanding on the revolving credit facility. Additionally, at September 30, 2017, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $22.1 million, resulting in $637.9 million of available borrowing capacity as of September 30, 2017 under the revolving credit facility. In connection with the repayment of the previous senior secured credit facility, the Company recorded $1.7 million in refinancing costs and a $2.3 million loss on the early extinguishment of debt for the nine months ended September 30, 2017 related to the write-off of deferred debt issuance costs and the discount on the Term Loan B facility of the previous senior secured credit facility.
Redemption of 5.875% Senior Subordinated Notes
In the first quarter of 2017, the Company redeemed all of its $300 million 5.875% senior subordinated notes, which were due in 2021 (“5.875% Notes”). In connection with this redemption, the Company recorded a $21.1 million loss on the early extinguishment of debt for the nine months ended September 30, 2017 related to the difference between the reacquisition price of the 5.875% Notes compared to its carrying value.
5.625% Senior Unsecured Notes
On January 19, 2017, the Company completed an offering of $400 million 5.625% senior unsecured notes that mature on January 15, 2027 (the “5.625% Notes”) at a price of par. Interest on the 5.625% Notes is payable on January 15
th
and July 15
th
of each year. The 5.625% Notes are senior unsecured obligations of the Company. The 5.625% Notes will not be guaranteed by any of the Company’s subsidiaries except in the event that the Company in the future issues certain subsidiary‑guaranteed debt securities. The Company may redeem the 5.625% Notes at any time on or after January 15, 2022, at the declining redemption premiums set forth in the indenture governing the 5.625% Notes, and, prior to January 15, 2022, at a “make-whole” redemption premium set forth in the indenture governing the 5.625% Notes. In addition, prior to January 15, 2020, the Company may redeem the 5.625% Notes with an amount equal to the net proceeds from one or more equity offerings, at a redemption price equal to 105.625% of the principal amount of the 5.625% Notes redeemed, together with accrued and unpaid interest to, but not including, the redemption date, so long as at least 60% of the aggregate principal amount of the notes originally issued under the indenture remains outstanding and such redemption occurs within 180 days of closing of the related equity offering.
The Company used a portion of the proceeds from the issuance of the 5.625% Notes to retire its existing 5.875% Notes and to fund related transaction fees and expenses.
The Company used loans funded under the Amended Credit Facilities and a portion of the proceeds of the 5.625% Notes to repay amounts outstanding under its existing Credit Agreement and to fund related transaction fees and expenses and for general corporate purposes.
Master Lease Financing Obligation with GLPI
As discussed in Note 9 to the condensed consolidated financial statements, the Company makes significant payments to GLPI under the Master Lease. As of September 30, 2017, the Company financed with GLPI real property assets associated with twenty of the Company’s gaming and related facilities used in the Company’s operations.
Covenants
The Company’s senior secured credit facility and $400 million 5.625% Notes require it, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including fixed charge coverage, interest coverage, senior leverage and total leverage ratios. In addition, the Company’s senior secured credit facility and $400 million 5.625% Notes restrict, among other things, its 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.
At September 30, 2017, the Company was in compliance with all required financial covenants.
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 senior secured credit facility, will be adequate to meet our financing obligation, debt service requirements, capital expenditures and working capital needs for the foreseeable future. However, we cannot be certain that our business will generate sufficient cash flow from operations, that our anticipated earnings projections will be realized, or that future borrowings will be available under our senior secured credit facility or otherwise will be available to enable us to service our indebtedness, including the senior secured credit facility and the $400 million 5.625% Notes, to retire or redeem the $400 million 5.625% Notes when required or to make anticipated capital expenditures. In addition, we expect a majority of our future growth to come from acquisitions of gaming properties at reasonable valuations, greenfield projects, jurisdictional expansions and property expansion in under-penetrated markets. 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. Our future operating performance and our ability to service or refinance our debt will be subject to future economic conditions and to financial, business and other factors, many of which are beyond our control. See “Risk Factors—Risks Related to Our Capital Structure” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of the risk related to our capital structure.
We have historically maintained a capital structure comprising a mix of equity and debt financing. We vary our leverage to pursue opportunities in the marketplace and 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The table below provides information at September 30, 2017 about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents notional amounts maturing during the period and the related weighted-average interest rates by maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged by maturity date and the weighted-average interest rates are based on implied forward LIBOR rates at September 30, 2017.
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10/01/17 -
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10/01/18 -
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10/01/19 -
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10/01/20 -
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10/01/21 -
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Fair Value
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09/30/18
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09/30/19
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09/30/20
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09/30/21
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09/30/22
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Thereafter
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Total
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09/30/17
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(in thousands)
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Long-term debt:
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Fixed rate
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$
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—
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$
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—
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$
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—
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$
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—
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$
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—
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$
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400,000
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$
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400,000
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$
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413,000
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Average interest rate
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5.63
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%
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Variable rate
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$
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20,000
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$
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23,750
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$
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31,250
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$
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35,000
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$
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247,500
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$
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472,500
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$
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830,000
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$
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832,271
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Average interest rate (1)
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4.38
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%
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4.43
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%
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4.45
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%
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4.11
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%
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4.11
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%
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4.65
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%
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—
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(1)
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Estimated rate, reflective of forward LIBOR plus the spread over LIBOR applicable to variable-rate borrowing.
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ITEM 4. CONTROLS AND PROCEDURES
Evaluation of 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 such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of September 30, 2017, which is the end of the period covered by this Quarterly Report on Form 10-Q. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well-designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. 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, 2017 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.
Changes in Internal Control over Financial Reporting
There were no changes that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonable likely to materially affect, our internal controls over financial reporting.