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. We have also recently expanded into social onling gaming offerings via our Penn Interative Ventures division and our recent acquisition of Rocket Games. As of September 30, 2016, we owned, managed, or had ownership interests in twenty-six facilities in the following sixteen jurisdictions: 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.
On June 24, 2015, we opened Plainridge Park Casino, an integrated racing and slots-only gaming facility in Plainville, Massachusetts. On August 25, 2015, we completed our acquisition of Tropicana Las Vegas Hotel and Casino (“Tropicana Las Vegas”) in Las Vegas, Nevada. On September 1, 2015, we completed our acquisition of Illinois Gaming Investors, LLC (d/b/a Prairie State Gaming), one of the largest video gaming terminal route operators in Illinois. In addition, we have developed and are now managing Hollywood Casino Jamul-San Diego on the Jamul Indian Village land in trust near San Diego, California, which opened on October 10, 2016. Finally, we recently implemented our interactive gaming strategy through our subsidiary, Penn Interactive Ventures, which included launching our HollywoodCasino.com Play4Fun social gaming platform with Scientific Games and our HollywoodSlots.com mobile social gaming platform with OpenWager. On August 1, 2016, we completed our acquisition of Rocket Games, a leading developer of social casino games.
The vast majority of our revenue is gaming revenue, derived primarily from gaming on slot machines (which represented approximately 86% and 84% of our gaming revenue in 2015 and 2014, 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 fee from Casino Rama and Hollywood Casino Jamul – San Diego, 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 27% 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. Our slot hold percentages have consistently been in the 6% to 10% range over the past several years. 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 capital maintenance 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 and President, who is the Company’s Chief Operating Decision Maker, 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. 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. 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, Hollywood Casino Columbus, Hollywood Gaming at Dayton Raceway, Hollywood Gaming at Mahoning Valley Race Course, and Plainridge Park Casino, which opened on June 24, 2015. 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, which was acquired on August 25, 2015, as well as the Hollywood Casino Jamul—San Diego project with the Jamul Tribe, 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, which the Company acquired on September 1, 2015, and includes the Company’s 50% investment in 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 and Penn Interactive Ventures, the Company’s wholly-owned subsidiary which represents its social online gaming initiatives, including the recently acquired Rocket Games, and would meet the definition of an operating segment under ASC 280, but is quantatively not significant to the Company’s operations as it represents 0.5% of net revenues and 0.4% of income from operations for the nine months ended September 30, 2016.
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 charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of contingent purchase price, 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 began softening midway through the second quarter, particularly in our unrated player category. The expansion of recently constructed gaming facilities continues to impact the overall domestic gaming industry as well as our operating results in certain markets.
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. 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, the Company has been reliant on certain key regional gaming markets (for example, its results from Hollywood Casino at Charles Town Races and Hollywood Casino Lawrenceburg). Over the past several years, the Company has diversified its operations via new development facilities and acquisitions.
Financial Highlights:
We reported net revenues and income from operations of $765.6 million and $139.3 million, respectively, for the three months ended September 30, 2016, compared to $739.3 million and $142.2 million, respectively, for the corresponding period in the prior year and net revenues and income from operations of $2,291.5 million and $429.2 million, respectively, for the nine months ended September 30, 2016 compared to $2,104.4 million and $377.2 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, 2016, as compared to the three and nine months ended September 30, 2015, were:
|
·
|
|
The opening of Plainridge Park Casino on June 24, 2015 in our Northeast segment, which generated $43.8 million and $129.7 million of net revenues for the three and nine months ended September 30, 2016, respectively.
|
|
·
|
|
The acquisition of Tropicana Las Vegas on August 25, 2015 in our South/West segment, which generated $28.7 million and $89.1 million of net revenues for the three and nine months ended September 30, 2016, respectively.
|
|
·
|
|
The acquisition of Prairie State Gaming on September 1, 2015 in our Midwest segment, which generated $14.5 million and $44.0 million of net revenues for the three and nine months ended September 30, 2016.
|
|
·
|
|
Net income increased by $41.6 million and $94.5 million for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to contributions from the new or recently acquired properties described above, as well as lower income tax provision and higher interest income, partially offset by higher depreciation expense and higher interest expense incurred under our credit facility.
|
Segment Developments:
The following are recent developments that have had or will have an impact on us by segment:
Northeast
|
·
|
|
Hollywood Casino at Charles Town Races faced increased competition from the Baltimore, Maryland market, which includes Maryland Live! and Horseshoe Casino Baltimore, which opened at the end of August 2014. In addition, in December 2013, the license for Prince George’s County, Maryland was granted to MGM. The proposed $1.3 billion National Harbor casino, which MGM plans to open in December 2016, is anticipated to adversely impact our financial results as it will create additional competition for Hollywood Casino at Charles Town Races.
|
|
·
|
|
On February 28, 2014, the Massachusetts Gaming Commission awarded the Company a Category Two slots-only gaming license for its planned Plainridge Park Casino in Plainville, Massachusetts. On June 24, 2015, the Company opened the facility, which features live harness racing and simulcasting, along with 1,250 gaming devices, various dining and entertainment options, structured and surface parking, and a two story clubhouse with approximately 55,000 square feet.
|
|
·
|
|
Construction of a tribal casino in Taunton, Massachusetts that was 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 April 5, 2013, we announced that, subject to final National Indian Gaming Commission approval, we and the Jamul Tribe had entered into definitive agreements (including management, development, branding and lending arrangements) to jointly develop a Hollywood Casino branded gaming facility on the Jamul Tribe’s trust land in San Diego County, California. The current budget of $407 million for this facility located approximately 20 miles east of downtown San Diego was increased by $17 million since the second quarter of 2016 due to a $10 million cost increase in offsite improvements and $7 million of additional preopening costs due to the delay in opening from August to October. 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. In mid-January 2014, we commenced construction activities at the site and in June 2015, we announced the “Topping Out” marking the halfway point of construction. Hollywood Casino Jamul – San Diego opened on October 10, 2016. We currently provide financing to the Jamul Tribe in connection with the project and, following the opening, 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.
|
|
·
|
|
On April 29, 2015, we announced that we entered into a definitive agreement to acquire the Tropicana Las Vegas for $360 million. The acquisition was completed on August 25, 2015. Tropicana Las Vegas is situated on 35 acres of land located on the Las Vegas Strip with 1,467 remodeled guest rooms and suites, a 50,000 square foot casino gaming floor featuring 844 slot and video poker machines and 38 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 2,950 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. Additionally, we continue to execute our master plan for the property which we expect will include additional food, beverage, retail and entertainment and other non-gaming amenities and enhancements by late next year.
|
Midwest
|
·
|
|
Hollywood Casino Lawrenceburg faced increased competition, namely the openings of a racino at Belterra Park in May 2014 and our own Dayton facility in late August 2014.
|
|
·
|
|
On September 1, 2015, we acquired Prairie State Gaming (“PSG”), a leading Illinois video gaming terminal operator. As one of the largest and most respected video gaming terminal route operators in Illinois, PSG’s operations include more than 1,100 video gaming terminals across a network of 270 bar and retail gaming establishments throughout Illinois.
|
Other
|
·
|
|
On August 1, 2016, we completed our acquisition of Rocket Games, 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 and litigation, and claims and assessments 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 consolidated financial statements are appropriate. However, if actual experience differs from the assumptions and other considerations used in estimating amounts reflected in our consolidated financial statements, the resulting changes could have a material adverse effect on our consolidated results of operations and, in certain situations, could have a material adverse effect on our consolidated financial condition.
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, 2015. There has been no material change to these estimates for the nine months ended September 30, 2016.
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 majority of our future growth to come from prudent acquisitions of gaming properties (such as our August 2015 acquisition of Tropicana Las Vegas), jurisdictional expansions (such as our June 2015 opening of a slots-only gaming facility in Massachusetts, our October 2016 opening of a Hollywood Casino branded gaming facility on the Jamul Indian Village land in trust which we will manage, the September 2014 opening of Hollywood Gaming at Mahoning Valley Race Course and the August 2014 opening of Hollywood Gaming at Dayton Raceway), expansions of gaming in existing jurisdictions (such as the introduction of table games in July 2010 at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, and at Hollywood Casino Bangor in March 2012), expansions/improvements of existing properties (such as a hotel at Zia Park Casino which opened in August 2014) and new growth opportunities (such as our acquisition of Prairie State Gaming, a leading video lottery terminal operator in Illinois, and our entry into the interactive and social gaming business through Penn Interactive Ventures, including our recent acquisition of Rocket Games).
|
|
·
|
|
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 Kentucky and Nebraska, and the introduction of tavern licenses in several states, most significantly in Illinois).
|
|
·
|
|
The 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 via 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).
|
|
·
|
|
The continued demand for, and our emphasis on, slot wagering entertainment at our properties.
|
|
·
|
|
The successful execution of our development and construction activities, as well as the risks associated with the costs, regulatory approval and the timing of these activities.
|
|
·
|
|
The risks related to economic conditions and the effect of such 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, 2016 and 2015 are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
$
|
654,591
|
|
$
|
651,284
|
|
$
|
1,974,618
|
|
$
|
1,861,539
|
|
Food, beverage, hotel and other
|
|
|
147,554
|
|
|
124,721
|
|
|
429,792
|
|
|
350,905
|
|
Management service and licensing fees
|
|
|
3,130
|
|
|
2,871
|
|
|
8,567
|
|
|
7,614
|
|
Reimbursable management costs
|
|
|
5,965
|
|
|
—
|
|
|
8,820
|
|
|
—
|
|
Revenues
|
|
|
811,240
|
|
|
778,876
|
|
|
2,421,797
|
|
|
2,220,058
|
|
Less promotional allowances
|
|
|
(45,643)
|
|
|
(39,579)
|
|
|
(130,327)
|
|
|
(115,667)
|
|
Net revenues
|
|
|
765,597
|
|
|
739,297
|
|
|
2,291,470
|
|
|
2,104,391
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
|
|
336,669
|
|
|
334,219
|
|
|
1,011,187
|
|
|
942,730
|
|
Food, beverage, hotel and other
|
|
|
102,110
|
|
|
89,151
|
|
|
302,062
|
|
|
249,883
|
|
General and administrative
|
|
|
114,376
|
|
|
107,614
|
|
|
340,854
|
|
|
342,771
|
|
Reimbursable management costs
|
|
|
5,965
|
|
|
—
|
|
|
8,820
|
|
|
—
|
|
Depreciation and amortization
|
|
|
67,903
|
|
|
66,141
|
|
|
200,105
|
|
|
191,785
|
|
Insurance recoveries
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
Total operating expenses
|
|
|
626,297
|
|
|
597,125
|
|
|
1,862,302
|
|
|
1,727,169
|
|
Income from operations
|
|
$
|
139,300
|
|
$
|
142,172
|
|
$
|
429,168
|
|
$
|
377,222
|
|
Certain information regarding our results of operations by segment for the three and nine months ended September 30, 2016 and 2015 is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
Income (loss) from Operations
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
395,748
|
|
$
|
406,552
|
|
$
|
101,752
|
|
$
|
107,148
|
|
South/West
|
|
|
135,169
|
|
|
118,266
|
|
|
19,337
|
|
|
22,307
|
|
Midwest
|
|
|
221,172
|
|
|
209,115
|
|
|
56,343
|
|
|
52,521
|
|
Other
|
|
|
13,508
|
|
|
5,364
|
|
|
(38,132)
|
|
|
(39,804)
|
|
Total
|
|
$
|
765,597
|
|
$
|
739,297
|
|
$
|
139,300
|
|
$
|
142,172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Revenues
|
|
Income (loss) from Operations
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
1,190,469
|
|
$
|
1,120,272
|
|
$
|
306,368
|
|
$
|
274,995
|
|
South/West
|
|
|
411,245
|
|
|
345,516
|
|
|
72,944
|
|
|
81,910
|
|
Midwest
|
|
|
662,506
|
|
|
622,652
|
|
|
172,013
|
|
|
160,631
|
|
Other
|
|
|
27,250
|
|
|
15,951
|
|
|
(122,157)
|
|
|
(140,314)
|
|
Total
|
|
$
|
2,291,470
|
|
$
|
2,104,391
|
|
$
|
429,168
|
|
$
|
377,222
|
|
Revenues
Revenues for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
|
Gaming
|
|
$
|
654,591
|
|
$
|
651,284
|
|
$
|
3,307
|
|
0.5
|
%
|
|
Food, beverage, hotel and other
|
|
|
147,554
|
|
|
124,721
|
|
|
22,833
|
|
18.3
|
%
|
|
Management service and licensing fees
|
|
|
3,130
|
|
|
2,871
|
|
|
259
|
|
9.0
|
%
|
|
Reimbursable management costs
|
|
|
5,965
|
|
|
—
|
|
|
5,965
|
|
N/A
|
|
|
Revenues
|
|
|
811,240
|
|
|
778,876
|
|
|
32,364
|
|
4.2
|
%
|
|
Less promotional allowances
|
|
|
(45,643)
|
|
|
(39,579)
|
|
|
(6,064)
|
|
15.3
|
%
|
|
Net revenues
|
|
$
|
765,597
|
|
$
|
739,297
|
|
$
|
26,300
|
|
3.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
|
Gaming
|
|
$
|
1,974,618
|
|
$
|
1,861,539
|
|
$
|
113,079
|
|
6.1
|
%
|
|
Food, beverage, hotel and other
|
|
|
429,792
|
|
|
350,905
|
|
|
78,887
|
|
22.5
|
%
|
|
Management service and licensing fees
|
|
|
8,567
|
|
|
7,614
|
|
|
953
|
|
12.5
|
%
|
|
Reimbursable management costs
|
|
|
8,820
|
|
|
—
|
|
|
8,820
|
|
N/A
|
|
|
Revenues
|
|
|
2,421,797
|
|
|
2,220,058
|
|
|
201,739
|
|
9.1
|
%
|
|
Less promotional allowances
|
|
|
(130,327)
|
|
|
(115,667)
|
|
|
(14,660)
|
|
12.7
|
%
|
|
Net revenues
|
|
$
|
2,291,470
|
|
$
|
2,104,391
|
|
$
|
187,079
|
|
8.9
|
%
|
|
In our business, revenue is driven by discretionary consumer spending. The expansion of newly constructed 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 began softening midway through the second quarter, primarily in our unrated player category.
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 $3.3 million, or 0.5%, and $113.1 million, or 6.1%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the variances explained below.
Gaming revenue for our Northeast segment decreased by $9.0 million, or 2.4% for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to decreased gaming revenue at Plainridge Park Casino and Hollywood Casino Toledo which was negatively impacted by road construction that impeded access to the facility, which together decreased gaming revenue $9.0 million, and to a lesser extent decreased gaming revenue at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, primarily due to the continued impact of competition in the region, namely Maryland Live! and Horseshoe Casino Baltimore, offset by increased gaming revenue at our other three Ohio properties.
Gaming revenue for our Northeast segment increased by $66.9 million, or 6.6%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015 and improved results at all of our Ohio properties, which together increased gaming revenue $78.1 million for the nine months ended September 30, 2016, all of which were partially offset by decreased gaming revenue at Hollywood Casino at Charles Town Races and to a lesser extent at Hollywood Casino at Penn National Race Course, primarily due to the continued impact of competition in the region, namely Maryland Live! and Horseshoe Casino Baltimore.
Gaming revenue for our Midwest segment increased by $11.0 million, or 5.7%, and $36.9 million, or 6.4%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Prairie State Gaming on September 1, 2015, which generated $10.2 million and $39.1 million for the three and nine months ended September 30, 2016, respectively, and improved results at Argosy Riverside and Hollywood Casino St. Louis, all of which were partially offset by decreased gaming revenue at Hollywood Casino Joliet, Argosy Alton, which was negatively impacted by flooding that occurred during the first quarter 2016, and Hollywood Casino Lawrenceburg, primarily due to the continued impact of competition in Ohio, namely the openings of a racino at Belterra Park, Horseshoe Casino in Cincinnati and our own facility in Dayton.
Gaming revenue for our South/West segment increased by $1.3 million, or 1.4%, and $9.3 million, or 3.4%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015, partially offset by decreased gaming revenue at Hollywood Casino Tunica, Zia Park Casino, as ongoing softness in oil prices have continued to affect the economy in this area, and new competition impacting Boomtown Biloxi.
Food, beverage, hotel and other revenue
Food, beverage, hotel and other revenue increased by $22.8 million, or 18.3%, and $78.9 million, or 22.5%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the variances explained below.
Food, beverage, hotel and other revenue for our Northeast segment increased by $6.8 million, or 5.2%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015.
Food, beverage, hotel and other revenue for our Midwest segment increased by $2.2 million, or 7.1%, and $3.9 million, or 4.1%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Prairie State Gaming on September 1, 2015 and improved
results at Hollywood Casino St. Louis and Argosy Riverside and higher revenues at Hollywood Casino Lawrenceburg, as a result of the new hotel and event center which opened on January 13, 2015.
Food, beverage, hotel and other revenue for our South/West segment increased by $13.4 million, or 32.6%, and $57.0 million, or 52.6%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015.
Promotional allowances
Promotional allowances increased by $6.1 million, or 15.3%, and $14.7 million, or 12.7%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015 and the acquisition of Tropicana Las Vegas on August 24, 2015.
Operating Expenses
Operating expenses for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Gaming
|
|
$
|
336,669
|
|
$
|
334,219
|
|
$
|
2,450
|
|
0.7
|
%
|
Food, beverage, hotel and other
|
|
|
102,110
|
|
|
89,151
|
|
|
12,959
|
|
14.5
|
%
|
General and administrative
|
|
|
114,376
|
|
|
107,614
|
|
|
6,762
|
|
6.3
|
%
|
Reimbursable management costs
|
|
|
5,965
|
|
|
—
|
|
|
5,965
|
|
N/A
|
|
Depreciation and amortization
|
|
|
67,903
|
|
|
66,141
|
|
|
1,762
|
|
2.7
|
%
|
Insurance recoveries
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
N/A
|
|
Total operating expenses
|
|
$
|
626,297
|
|
$
|
597,125
|
|
$
|
29,172
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Gaming
|
|
$
|
1,011,187
|
|
$
|
942,730
|
|
$
|
68,457
|
|
7.3
|
%
|
Food, beverage, hotel and other
|
|
|
302,062
|
|
|
249,883
|
|
|
52,179
|
|
20.9
|
%
|
General and administrative
|
|
|
340,854
|
|
|
342,771
|
|
|
(1,917)
|
|
(0.6)
|
%
|
Reimbursable management costs
|
|
|
8,820
|
|
|
—
|
|
|
8,820
|
|
N/A
|
|
Depreciation and amortization
|
|
|
200,105
|
|
|
191,785
|
|
|
8,320
|
|
4.3
|
%
|
Insurance recoveries
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
N/A
|
|
Total operating expenses
|
|
$
|
1,862,302
|
|
$
|
1,727,169
|
|
$
|
135,133
|
|
7.8
|
%
|
Gaming expense
Gaming expense increased by $2.5 million, or 0.7%, and $68.5 million, or 7.3%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the variances explained below.
Gaming expense for our Northeast segment decreased by $8.1 million, or 3.9%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Plainridge Park Casino and Hollywood Casino Toledo and to a lesser extent at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, primarily due to the continued impact of competition in the region, namely Maryland Live! and Horseshoe Casino Baltimore, partially offset by increased gaming taxes resulting from increased taxable gaming revenue mentioned above at our other three Ohio properties.
Gaming expense for our Northeast segment increased by $34.2 million, or 6.0%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015 and increased gaming taxes resulting from increased taxable gaming revenue mentioned above at our other three Ohio properties, which was partially offset by a decrease in gaming taxes resulting from decreased taxable gaming revenue mentioned above at Hollywood Casino Toledo, Hollywood Casino at Charles Town Races and to a lesser extent Hollywood Casino at Penn National Race Course.
Gaming expense for our Midwest segment increased by $9.5 million, or 10.4%, and $29.0 million, or 10.8%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Prairie State Gaming on September 1, 2015 and an increase in gaming taxes resulting from increased taxable gaming revenue mentioned above at Argosy Riverside and Hollywood Casino St. Louis, which was partially offset by decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Hollywood Casino Joliet, and for the nine months ended at Hollywood Casino Aurora and Argosy Alton.
Gaming expense for our South/West segment increased by $0.8 million, or 2.5%, and $5.3 million, or 5.1%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015, partially offset by decreased gaming taxes resulting from decreased taxable gaming revenue mentioned above at Zia Park Casino.
Food, beverage, hotel and other expenses
Food, beverage, hotel and other expenses increased by $13.0 million, or 14.5%, and $52.2 million, or 20.9%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the variances explained below.
Food, beverage, hotel and other expenses for our Northeast segment increased by $4.7 million, or 4.8%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015.
Food, beverage, hotel and other expenses for our Midwest segment increased by $0.7 million, or 3.1%, and $3.0 million, or 4.7%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to improved results at Hollywood Casino St. Louis, Hollywood Casino Joliet and Argosy Riverside.
Food, beverage, hotel and other expenses for our South/West segment increased by $8.7 million, or 27.8%, and $39.7 million, or 49.4%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015.
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 lobbying expenses.
General and administrative expenses increased by $6.8 million, or 6.3%, and decreased by $1.9 million, or 0.6%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the variances explained below.
General and administrative expenses for Other decreased by $12.4 million, or 17.6%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to decreased corporate overhead costs of $11.4 million for the nine months ended September 30, 2016, respectively, primarily due to decreased cash-settled stock-based compensation charges mainly due to the changes in stock price for Penn and GLPI common
stock during 2016 compared to 2015 and due to lower bonus and severance accruals in 2016, primarily due to the termination of some senior level corporate employees in 2015.
General and administrative expenses for our South/West segment increased by $2.2 million, or 9.3%, and $11.3 million, or 17.9%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015, partially offset by decreased expenses at M Resort primarily due to decreases in outside service costs.
General and administrative expenses for our Northeast segment increased by $4.4 million, or 13.1%, and $0.8 million, or 0.7% for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to a $6.9 million decrease in the estimated fair value of the contingent purchase price from lower future earning projections, partially offset by lower property taxes at Hollywood Gaming at Dayton Raceway and decreased expenses at the majority of our other properties.
Depreciation and amortization expense
Depreciation and amortization expense increased by $1.8 million, or 2.7%, and $8.3 million, or 4.3%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the opening of Plainridge Park Casino on June 24, 2015, the acquisitions of Tropicana Las Vegas on August 25, 2015 and Prairie State Gaming on September 1, 2015, and the formation of Penn Interactive Ventures, all of which were partially offset by decreased depreciation expense at the majority of our other properties as assets are becoming fully depreciated.
Other income (expenses)
Other income (expenses) for the three and nine months ended September 30, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Three Months Ended September 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Interest expense
|
|
$
|
(114,349)
|
|
$
|
(111,406)
|
|
$
|
(2,943)
|
|
2.6
|
%
|
Interest income
|
|
|
8,202
|
|
|
3,083
|
|
|
5,119
|
|
166.0
|
%
|
Income from unconsolidated affiliates
|
|
|
3,505
|
|
|
3,759
|
|
|
(254)
|
|
(6.8)
|
%
|
Other
|
|
|
404
|
|
|
2,672
|
|
|
(2,268)
|
|
(84.9)
|
%
|
Total other expenses
|
|
$
|
(102,238)
|
|
$
|
(101,892)
|
|
$
|
(346)
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
Nine Months Ended September 30,
|
|
2016
|
|
2015
|
|
Variance
|
|
Variance
|
|
Interest expense
|
|
$
|
(345,548)
|
|
$
|
(329,550)
|
|
$
|
(15,998)
|
|
4.9
|
%
|
Interest income
|
|
|
20,039
|
|
|
7,396
|
|
|
12,643
|
|
170.9
|
%
|
Income from unconsolidated affiliates
|
|
|
11,662
|
|
|
11,895
|
|
|
(233)
|
|
(2.0)
|
%
|
Other
|
|
|
(1,978)
|
|
|
4,805
|
|
|
(6,783)
|
|
(141.2)
|
%
|
Total other expenses
|
|
$
|
(315,825)
|
|
$
|
(305,454)
|
|
$
|
(10,371)
|
|
3.4
|
%
|
Interest expense
Interest expense increased by $2.9 million, or 2.6%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to $3.4 million for the three months ended September 30, 2016, from higher borrowing levels and interest rates on the Term Loan A and revolver portions of the senior secured credit facility.
Interest expense increased by $16.0 million, or 4.9%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to higher borrowing levels and interest rates on the Term Loan A and revolver portions of the senior secured credit facility which contributed to an $11.4 million
increase, higher contingent payments associated with the monthly variable components for Hollywood Casino Columbus and Hollywood Casino Toledo and higher payments of $2.1 million from the escalator on the financing obligation to GLPI which was triggered at the conclusion of the second year of the Master Lease and $1.7 million from a decrease in capitalized interest. The Company anticipates that the annual escalator at the end of the third year of the Master Lease (October 31, 2016) will be approximately $4.8 million, of which $0.8 million will be incurred in the fourth quarter of 2016.
Interest income
Interest income has increased for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to higher interest accrued on advances to the Jamul Tribe (see Note 2 to the condensed consolidated financial statements for further details).
Other
Other decreased by $2.3 million, or 84.9% and $6.8 million, or 141.2%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to foreign currency translation losses for the three and nine months ended September 30, 2016, compared to foreign currency translation gains for the corresponding periods 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 (“ETR”) to the full year projected pretax book income or loss excluding certain discrete items. The Company’s ETR (income taxes as a percentage of income from operations before income taxes) including discrete items was (25.56)% and 8.00% for the three and nine months ended September 30, 2016, as compared to 87.84% and 86.41% for the three and nine months ended September 30, 2015, primarily due to a year-over-year reduction to our federal and state valuation allowance coupled with an increase to earnings before income taxes.
As of September 30, 2016, we intend to continue maintaining a valuation allowance on our deferred tax assets until there is sufficient positive evidence to support the reversal of all or some portion of these allowances. A reduction in the valuation allowance would result in a significant decrease to income tax expense in the period the release is recorded. However, the exact timing and amount of the reduction in our valuation allowance are unknown at this time and will be subject to the earnings level we achieve in 2016 as well as our projected income levels in future periods. In the third quarter of 2016, we had an income tax benefit of $12.0 million due to the recording of net deferred tax liabilities associated with our acquisition of Rocket Games which reduced our valuation allowance need as well as a tax benefit of $9.8 million associated with a tax settlement of uncertain tax positions described below.
The Company’s annual ETR can vary each interim period depending on, among other factors, recurring items, such as lobbying, geographic and business mix of our earnings, as well as changes in forecasted earnings, the level of our tax credits and the realizability of our deferred tax assets. It is also affected by discrete items that may occur in any given year, but are not consistent from year to year. As such, the settlement of our ongoing U.S. and Canadian Competent Authority case during the three months ended September 30, 2016 had a significant impact on the difference between our statutory U.S. federal income tax rate of 35% and our effective rate for the quarter of (25.56%). We recorded a benefit of ($9.8) million related to this settlement for the three months ended September 30, 2016. Additionally, as a result of the settlement, the Company anticipates receiving a net cash refund of $31.0 million (USD) within the next twelve months.
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 charges, impairment charges, insurance recoveries and deductible charges, depreciation and amortization, changes in the estimated fair value of contingent purchase price, 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 is 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 it provides a perspective on the current effects of operating decisions separated from the substantial non-operational depreciation charges and financing costs of such projects. We 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 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. It should also be noted that other gaming companies that report adjusted EBITDA information may calculate this metric in a different manner than the Company and therefore, comparability may be limited.
A reconciliation of the Company’s net income per GAAP to adjusted EBITDA, as well as the Company’s income from operations per GAAP to adjusted EBITDA, is included below. Additionally, a reconciliation of each segment’s income from operations to adjusted EBITDA is also included below. 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 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, 2016 and 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
September 30,
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Net income
|
|
$
|
46,535
|
|
$
|
4,900
|
|
$
|
104,278
|
|
$
|
9,752
|
|
Income tax provision
|
|
|
(9,473)
|
|
|
35,380
|
|
|
9,065
|
|
|
62,016
|
|
Other
|
|
|
(404)
|
|
|
(2,672)
|
|
|
1,978
|
|
|
(4,805)
|
|
Income from unconsolidated affiliates
|
|
|
(3,505)
|
|
|
(3,759)
|
|
|
(11,662)
|
|
|
(11,895)
|
|
Interest income
|
|
|
(8,202)
|
|
|
(3,083)
|
|
|
(20,039)
|
|
|
(7,396)
|
|
Interest expense
|
|
|
114,349
|
|
|
111,406
|
|
|
345,548
|
|
|
329,550
|
|
Income from operations
|
|
$
|
139,300
|
|
$
|
142,172
|
|
$
|
429,168
|
|
$
|
377,222
|
|
Loss (gain) on disposal of assets
|
|
|
(2,781)
|
|
|
276
|
|
|
(3,440)
|
|
|
801
|
|
Charge for stock compensation
|
|
|
1,517
|
|
|
2,025
|
|
|
4,554
|
|
|
6,446
|
|
Contingent purchase price
|
|
|
(30)
|
|
|
(6,651)
|
|
|
(1,111)
|
|
|
(5,944)
|
|
Depreciation and amortization
|
|
|
67,903
|
|
|
66,141
|
|
|
200,105
|
|
|
191,785
|
|
Insurance recoveries
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
Income from unconsolidated affiliates
|
|
|
3,505
|
|
|
3,759
|
|
|
11,662
|
|
|
11,895
|
|
Non-operating items for Kansas JV
|
|
|
2,572
|
|
|
2,540
|
|
|
7,713
|
|
|
7,818
|
|
Adjusted EBITDA
|
|
$
|
211,260
|
|
$
|
210,262
|
|
$
|
647,925
|
|
$
|
590,023
|
|
The reconciliation of each segment’s income (loss) from operations to adjusted EBITDA for the three and nine months ended September 30, 2016 and 2015 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
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)
|
|
Insurance recoveries
|
|
|
—
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2015
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
107,148
|
|
$
|
22,307
|
|
$
|
52,521
|
|
$
|
(39,804)
|
|
$
|
142,172
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,025
|
|
|
2,025
|
|
Depreciation and amortization
|
|
|
24,350
|
|
|
6,971
|
|
|
9,984
|
|
|
24,836
|
|
|
66,141
|
|
Contingent purchase price
|
|
|
(6,651)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6,651)
|
|
(Gain) loss on disposal of assets
|
|
|
33
|
|
|
185
|
|
|
34
|
|
|
24
|
|
|
276
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
3,831
|
|
|
(72)
|
|
|
3,759
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
2,540
|
|
|
—
|
|
|
2,540
|
|
Adjusted EBITDA
|
|
$
|
124,880
|
|
$
|
29,463
|
|
$
|
68,910
|
|
$
|
(12,991)
|
|
$
|
210,262
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2016
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
(Loss) income from operations
|
|
$
|
306,368
|
|
$
|
72,944
|
|
$
|
172,013
|
|
$
|
(122,157)
|
|
$
|
429,168
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,554
|
|
|
4,554
|
|
Depreciation and amortization
|
|
|
69,177
|
|
|
26,701
|
|
|
28,621
|
|
|
75,606
|
|
|
200,105
|
|
Contingent purchase price
|
|
|
(1,374)
|
|
|
—
|
|
|
—
|
|
|
263
|
|
|
(1,111)
|
|
Loss (gain) on disposal of assets
|
|
|
(6)
|
|
|
58
|
|
|
18
|
|
|
(3,510)
|
|
|
(3,440)
|
|
Insurance recoveries
|
|
|
—
|
|
|
—
|
|
|
(726)
|
|
|
—
|
|
|
(726)
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, 2015
|
|
Northeast
|
|
South/West
|
|
Midwest
|
|
Other (1)
|
|
Total
|
|
Income (loss) from operations
|
|
$
|
274,995
|
|
$
|
81,910
|
|
$
|
160,631
|
|
$
|
(140,314)
|
|
$
|
377,222
|
|
Charge for stock compensation
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,446
|
|
|
6,446
|
|
Depreciation and amortization
|
|
|
70,016
|
|
|
17,091
|
|
|
29,846
|
|
|
74,832
|
|
|
191,785
|
|
Contingent purchase price
|
|
|
(5,944)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5,944)
|
|
(Gain) loss on disposal of assets
|
|
|
40
|
|
|
585
|
|
|
28
|
|
|
148
|
|
|
801
|
|
Income (loss) from unconsolidated affiliates
|
|
|
—
|
|
|
—
|
|
|
12,021
|
|
|
(126)
|
|
|
11,895
|
|
Non-operating items for Kansas JV
|
|
|
—
|
|
|
—
|
|
|
7,818
|
|
|
—
|
|
|
7,818
|
|
Adjusted EBITDA
|
|
$
|
339,107
|
|
$
|
99,586
|
|
$
|
210,344
|
|
$
|
(59,014)
|
|
$
|
590,023
|
|
|
(1)
|
|
Adjusted EBITDA excludes our share of the impact of non-operating items (such as depreciation and amortization expense) from our joint venture in Kansas Entertainment.
|
Adjusted EBITDA for our Northeast segment increased by $35.1 million, or 10.3%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to improved results at all of our Ohio properties, which together increased adjusted EBITDA by $13.3 million for the nine months ended September 30, 2016 as compared to the corresponding period in the prior year, partially offset by decreased adjusted EBITDA at Hollywood Casino at Charles Town Races and Hollywood Casino at Penn National Race Course, primarily due to the continued impact of competition in the region, namely Maryland Live! and Horseshoe Casino Baltimore.
Adjusted EBITDA for our South/West segment decreased by $1.0 million, or 3.2%, for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015, primarily due to decreased adjusted EBITDA at Zia Park Casino, as low oil prices have continued to affect the economy in this area, partially offset by the acquisition of Tropicana Las Vegas on August 25, 2015 and improved results at M Resort.
Adjusted EBITDA for our South/West segment increased by $0.1 million, or 0.1%, for the nine months ended September 30, 2016 as compared to the nine months ended September 30, 2015, primarily due to the acquisition of Tropicana Las Vegas on August 25, 2015 and improved results at M Resort, partially offset by decreased adjusted EBITDA at Hollywood Casino Gulf Coast and Boomtown Biloxi, due to new competition and Zia Park Casino. South/West segment results for the nine months ended September 30, 2016 include a $3.5 million litigation settlement gain at the Tropicana Las Vegas which is partially offset by severance charges and gaming floor disruption.
Adjusted EBITDA for our Midwest segment increased by $2.7 million, or 4.0%, and $9.6 million, or 4.5%, for the three and nine months ended September 30, 2016, as compared to the three and nine months ended September 30, 2015, primarily due to the acquisition of Prairie State Gaming on September 1, 2015 and improved results at Hollywood Casino St. Louis and Hollywood Casino Aurora, which was partially offset by decreased adjusted EBITDA at Argosy Alton resulting from flooding during the first quarter 2016, which has resulted in declines in business volumes and difficulty recovering lost business, decreased adjusted EBITDA at Hollywood Lawrenceburg, primarily due to the continued impact of competition in Ohio, namely the openings of a racino at Belterra Park, Horseshoe Casino in Cincinnati and our own facility in Dayton.
Adjusted EBITDA for Other declined by $0.3 million, or 2.5%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to increased corporate overhead costs of $2.8 million for the three months ended September 30, 2016, primarily due to increased cash-settled stock-based compensation charges mainly due to changes in stock price for Penn and GLPI common stock during the third quarter 2016 compared to the third quarter 2015.
Adjusted EBITDA for Other improved $13.2 million, or 22.3%, for the nine months ended September 30, 2016, as compared to the nine months ended September 30, 2015, primarily due to decreased corporate overhead costs of $9.2 million for the nine months ended September 30, 2016, primarily due to decreased cash-settled stock-based compensation charges mainly due to changes in stock price for Penn and GLPI common stock during 2016 compared to 2015.
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. We also have been actively assisting the Jamul Tribe to refinance their indebtedness over the last several quarters. In October 2016, the Jamul Tribe refinanced their indebtedness and the Company received approximately $274 million of the proceeds from the Credit Facilities to repay previous loans to fund the construction and development of the Casino and to retire certain debt of the Jamul Tribe. The Company used a substantial amount of the funds received from such repayment to repay borrowings under its corporate revolving credit facility and for general corporate purposes.
Net cash provided by operating activities totaled $311.5 million and $306.1 million for the nine months ended September 30, 2016 and 2015, respectively. The increase in net cash provided by operating activities of $5.4 million for nine months ended September 30, 2016, compared to the corresponding period in the prior year, was comprised primarily of an increase in cash receipts from customers of $188.4 million and a decrease in cash paid for taxes of $12.6 million due to refunds received in first quarter 2016, partially offset by an increase in cash paid to suppliers and vendors of $119.6 million, an increase in cash paid to employees of $60.5 million and an increase in cash paid for interest of $17.9 million. The increases in cash paid to suppliers and vendors, cash receipts from customers and cash paid to employees is primarily due to the opening of Plainridge Park Casino on June 24, 2015 and the acquisitions of Tropicana Las Vegas on August 25, 2015 and Prairie State Gaming on September 1, 2015. The increase in cash paid for interest is primarily due to higher borrowing levels and interest rates on the Term Loan A and revolver portions of the senior secured credit facility and contingent payments on the financing obligation to GLPI and a decrease in capitalized interest for the nine months ended September 30, 2016 compared to the nine months ended September 30, 2015.
Net cash used in investing activities totaled $277.3 million and $683.8 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease in net cash used in investing activities of $406.5 million for the nine months ended September 30, 2016, compared to the corresponding period in the prior year, was primarily due to decreased capital project expenditures of $110.7 million due to the development of Plainridge Park Casino during the nine months ended September 30, 2015, decreased expenditures from the acquisition of other property and equipment of $393.4 million due to the acquisition of Tropicana Las Vegas and Prairie State Gaming during the nine months ended September 30, 2015, partially offset by expenditures for the acquisition of Rocket Games during the nine months ended September 30, 2016 and increased proceeds related to the sale of assets held for sale of $12.8 million, all of which are partially offset by increased advances to the Jamul Tribe of $103.6 million and increased capital maintenance expenditures of $9.6 million.
Net cash (used in) provided by financing activities totaled $(69.5) million and $392.5 million for the nine months ended September 30, 2016 and 2015, respectively. The decrease in net cash used in financing activities of $462.0 million for the nine months ended September 30, 2016, compared to the corresponding period in the prior year, was primarily due to lower proceeds from our long-term debt of $443.1 million, increased payments on other long term obligations of $10.1 million, increased principal payments of $9.3 million on long-term debt, increased payments on our financing obligation with GLPI of $2.5 million and lower proceeds from the exercise of stock options of $2.4 million, all of which are partially offset by higher proceeds from insurance financing of $8.7 million.
Capital Expenditures
Capital expenditures are accounted for as either capital project or capital maintenance (replacement) expenditures. Capital project expenditures are for fixed asset additions that expand an existing facility or create a new facility. Capital maintenance 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 capital project expenditures by segment for the fiscal year ending December 31, 2016, and actual expenditures for the three and nine months ended September 30, 2016 (excluding licensing fees and net of reimbursements). The table below should not be utilized to predict future expected capital project expenditures subsequent to 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected for Year
|
|
Expenditure for
|
|
|
|
|
|
Ending December 31,
|
|
Nine Months Ended
|
|
Balance to Expend
|
|
Property
|
|
2016
|
|
September 30, 2016
|
|
in 2016
|
|
|
|
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
Northeast
|
|
$
|
6.0
|
|
$
|
4.3
|
|
$
|
1.7
|
|
South/West
|
|
|
24.4
|
|
|
10.2
|
|
|
14.2
|
|
Total
|
|
$
|
30.4
|
|
$
|
14.5
|
|
$
|
15.9
|
|
Tropicana Las Vegas was acquired on August 25, 2015 for $360 million. During the year, we have reconfigured the gaming floor with updated slot machines, altered game placements and refined the table game mix. During the coming months, we will be making further enhancements to the facility with a focus on improving the food and beverage offerings. Additionally, in April 2016, we 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 the nine months ended September 30, 2016, we spent $51.4 million for capital maintenance expenditures, with $17.6 million at our Northeast segment, $11.6 million at our South/West segment, $19.8 million at our Midwest segment, and $2.4 million for other. The majority of the capital maintenance expenditures were for slot machines and slot machine equipment.
Cash generated from operations and cash available under the revolving credit facility portion of our senior secured credit facility funded our capital projects, capital maintenance expenditures and the Jamul Tribe project in 2016 to date.
Jamul Tribe
Advances to the Jamul Tribe, which totaled $360.9 million at September 30, 2016, is accounted for as a loan on the consolidated balance sheet and as such is not included in the capital expenditures table presented above. The current budget of $407 million for this facility was increased by $17 million since the second quarter of 2016 due to a $10 million cost increase in offsite improvements and $7 million of additional preopening costs due to the delay in opening from August to October. The facility opened on October 10, 2016. The Company has been actively assisting the Jamul Tribe to refinance their indebtedness over the last several quarters. In October 2016, the Jamul Tribe refinanced their indebtedness and the Company received approximately $274 million of the proceeds from the Credit Facilities to repay previous loans to fund the construction and development of the Casino and to retire certain debt of the Jamul Tribe. The Company used a substantial amount of the funds received from such repayment to repay borrowings under its corporate revolving credit facility and for general corporate purposes.
Senior Secured Credit Facility
On April 28, 2015, the Company entered into an agreement to amend its senior secured credit facility. In August 2015, the amendment to the senior secured credit facility went into effect increasing the capacity under an existing five year revolver from $500 million to $633.2 million and increased the existing five year $500 million Term Loan A facility by $146.7 million. The seven year $250 million Term Loan B facility remained unchanged. At September 30, 2016, the Company’s senior secured credit facility had a gross outstanding balance of $1,232.8 million, consisting of a $555.7 million Term Loan A facility, a $243.1 million Term Loan B facility, and $434.0 million outstanding on the revolving credit facility. Additionally, at September 30, 2016, the Company had conditional obligations under letters of credit issued pursuant to the senior secured credit facility with face amounts aggregating $23.0 million, resulting in $176.2 million of available borrowing capacity as of September 30, 2016 under the revolving credit facility.
Corporate Airplane Loan
On September 30, 2016, the Company acquired a previously leased corporate airplane and financed the purchase price with an amortizing loan at a fixed interest rate of 5.22% for a term of five years with monthly payments of $220 thousand and a balloon payment of $12.6 million at the end of the loan term. This loan is included with other long-term obligations.
Financing Obligation with GLPI
As discussed in Note 7 to the condensed consolidated financial statements, the Company makes significant payments to GLPI under the Master Lease. As of September 30, 2016, the Company financed with GLPI real property assets associated with eighteen of the Company’s gaming and related facilities used in the Company’s operations.
Covenants
The Company’s senior secured credit facility and $300 million 5.875% senior unsecured 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 $300 million 5.875% senior unsecured 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, 2016, 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 $300 million 5.875% senior unsecured notes, to retire or redeem the $300 million 5.875% senior unsecured 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, 2015 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, 2016 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, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10/01/16 -
|
|
10/01/17 -
|
|
10/01/18 -
|
|
10/01/19 -
|
|
10/01/20 -
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
9/30/2017
|
|
9/30/2018
|
|
9/30/2019
|
|
9/30/2020
|
|
9/30/2021
|
|
Thereafter
|
|
Total
|
|
9/30/2016
|
|
|
|
(in thousands)
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed rate
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
300,000
|
|
$
|
300,000
|
|
$
|
310,500
|
|
Average interest rate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5.88
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable rate
|
|
$
|
64,244
|
|
$
|
68,360
|
|
$
|
864,589
|
|
$
|
2,500
|
|
$
|
233,125
|
|
$
|
—
|
|
$
|
1,232,818
|
|
$
|
1,231,429
|
|
Average interest rate (1)
|
|
|
3.40
|
%
|
|
3.44
|
%
|
|
3.49
|
%
|
|
4.04
|
%
|
|
3.68
|
%
|
|
—
|
%
|
|
—
|
|
|
|
|
|
(1)
|
|
Estimated rate, reflective of forward LIBOR plus the spread over LIBOR applicable to variable-rate borrowing.
|
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, 2016, which is the end of the period covered by this Quarterly Report on Form 10-Q. As described below, management has identified material weaknesses in our internal controls over financial reporting. As a result of these material weaknesses, our principal executive officer and principal financial officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2016 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.
As disclosed in Item 9A of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2015, filed on March 15, 2016, the Company did not maintain effective controls and procedures over the evaluation and accounting of certain complex and non-routine transactions including lease transactions. Specifically, we did not maintain a sufficient complement of personnel with an appropriate level of knowledge and experience to challenge our application of GAAP commensurate with the nature and complexity of certain of our transactions to prevent or detect and correct material misstatements in a timely manner. In addition, we did not maintain effective controls and procedures over the calculation of impairment charges for goodwill and indefinite-lived intangible assets. Specifically, our review controls were not designed with a sufficient level of precision and executed by personnel with an appropriate level of
experience to detect material errors in the methodologies used and in the calculation of the impairment charges that were recognized in our consolidated statements.
The Company has initiated a compensating control over the proper application of GAAP to complex and non-routine transactions, which includes the involvement of a third party consultant with relevant knowledge and experience to assist the Company with the evaluation of the accounting for highly technical accounting matters. The Company currently expects to have this material weakness remediated no later than December 31, 2016, once we have obtained sufficient evidence that the newly designed and implemented controls are operating effectively.
With respect to the material weakness over the accounting for goodwill and indefinite-lived intangible impairment measurement, the Company designed and implemented additional controls during 2015. This included the involvement of a third party consultant to provide the Company with the appropriate level of expertise to assist in the review of the assessment at a sufficient level of precision. The Company currently expects to have this material weakness remediated no later than December 31, 2016, once we have obtained sufficient evidence that the newly designed and implemented controls are operating effectively.
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.