NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization
Penn National Gaming, Inc., together with its subsidiaries, is a leading, diversified, multi-jurisdictional owner and manager of gaming and racing facilities and video gaming terminal (“VGT”) operations with a focus on slot machine entertainment. In the second half of 2018, we launched live sports wagering at our facilities in Mississippi, Pennsylvania and West Virginia. In addition, the Company operates an interactive gaming division through its subsidiary, Penn Interactive Ventures, LLC (“PIV”).
As of
December 31, 2018
, we owned, managed, or had ownership interests in
40
facilities in
18
jurisdictions. The majority of the gaming facilities used in the Company’s operations are subject to triple net master leases; the most significant of which are the
Penn Master Lease
and the
Pinnacle Master Lease
(as such terms are defined in
Note 10, “Master Lease Financing Obligations and Lease Obligations”
and collectively referred to as the “
Master Leases
”), with Gaming and Leisure Properties, Inc. (“GLPI”), a publicly-traded real estate investment trust (“REIT”), as the landlord under the
Master Leases
. References in these footnotes
to “Penn,” the “Company,” “we,” “our” or “us” refer to Penn National Gaming, Inc. and its subsidiaries, except where stated or the context otherwise indicates.
In October 2018, the Company completed the acquisition of Pinnacle Entertainment, Inc. (“Pinnacle”), a leading regional gaming operator (the “Pinnacle Acquisition”). In conjunction with the Pinnacle Acquisition, the Company divested the membership interests of certain Pinnacle subsidiaries which operated the casinos known as Ameristar Casino Resort St. Charles, Ameristar Casino Hotel Kansas City, Belterra Casino Resort and Belterra Park (referred to collectively as the “Divested Properties”), to Boyd Gaming Corporation (“Boyd”). Additionally, as a part of the transaction, (i) GLPI acquired the real estate assets associated with the Plainridge Park Casino, and concurrently leased back the real estate assets to the Company (the “Plainridge Park Casino Sale-Leaseback”) and (ii) a subsidiary of Boyd acquired the real estate assets associated with Belterra Park from a subsidiary of GLPI. In connection with the sale of the Divested Properties to Boyd as well as the Plainridge Park Casino Sale-Leaseback, the
Pinnacle Master Lease
, which was assumed by the Company concurrent with the closing of the Pinnacle Acquisition, was amended (see
Note 10, “Master Lease Financing Obligations and Lease Obligations”
for more information). The Pinnacle Acquisition added
twelve
gaming properties to our holdings and provides us with greater operational scale and geographic diversity.
In May 2017, we completed the acquisitions of 1
st
Jackpot Casino Tunica (f/k/a Bally’s Casino Tunica) and Resorts Casino Tunica. In 2016, Prairie State Gaming (“PSG”) acquired
two
small VGT route operators in Illinois and in the first half of 2017, it acquired
two
additional Illinois-based VGT operators. Further, in August 2016, we enhanced our social gaming offerings with the acquisition of Rocket Speed, Inc. (“Rocket Speed”), a leading developer of social casino games.
Note 2—Basis of Presentation, Principles of Consolidation, Use of Estimates and Reclassifications
Basis of Presentation:
The
Consolidated Financial Statements
have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (the “SEC”).
Principles of Consolidation:
The
Consolidated Financial Statements
include the accounts of Penn National Gaming, Inc. and its subsidiaries. Investments in and advances to unconsolidated affiliates that do not meet the consolidation criteria of the authoritative guidance for voting interest, controlling interest or variable interest entities (“VIEs”), are accounted for under the equity method. All intercompany accounts and transactions have been eliminated in consolidation.
Use of Estimates:
The preparation of
Consolidated Financial Statements
in conformity with GAAP requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities at the date of the
Consolidated Financial Statements
, and (iii) the reported amounts of revenues and expenses during the reporting period. Estimates used by us include, among other things, the useful lives for depreciable and amortizable assets, the allowance for doubtful accounts receivable, income tax provisions, the evaluation of the future realization of deferred tax assets, determining the adequacy of reserves for self-insured liabilities and our customer loyalty programs, the initial measurements of financing obligations associated with the
Master Leases
, projected cash flows in assessing the recoverability of long-lived assets, asset impairments, goodwill and other intangible assets, projected cash flows in assessing the initial valuation of intangible assets in conjunction with acquisitions, the initial selection of useful lives for depreciable and amortizable assets in conjunction with acquisitions, contingencies and litigation, and the expected term of stock-based compensation awards and stock price volatility when computing stock-based compensation expense. Actual results may differ from those estimates.
Reclassifications:
Certain amounts in the Consolidated Statements of Cash Flows for the years ended December 31, 2017 and 2016 have been reclassified to be consistent with the current year presentation. The reclassifications had no impact the Company’s financial condition, results of operations or cash flows.
Note 3—Summary of Significant Accounting Policies
Revenue Recognition:
The Company’s revenue from contracts with customers consists of gaming wagers, food and beverage transactions, retail transactions, hotel room sales, racing wagers, management services related to the management of external casinos, and reimbursable costs associated with management contracts. During the second quarter 2018, our management contract with Hollywood Casino-Jamul San Diego, which is located on the Jamul Tribe’s trust land in San Diego, California, was terminated and our management contract with Casino Rama, which is located in Ontario, Canada, was terminated during the third quarter 2018.
On January 1, 2018, the Company adopted Financial Accounting Standards Board (the “FASB”) Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU No. 2014-09”), and all related amendments, which introduced a new revenue standard, ASC Topic 606, “Revenue from Contracts with Customers” (“ASC 606” or the “new revenue standard”). As described in
Note 4, “New Accounting Pronouncements,”
the adoption of ASC 606 principally affects the presentation of promotional allowances and the measurement of the liability associated with our customer loyalty programs. We adopted ASC 606 using a modified retrospective approach, which did not require us to retrospectively restate prior year amounts. See
Note 4, “New Accounting Pronouncements,”
for the current year impacts of adopting the new revenue standard on our Consolidated Financial Statements.
The transaction price for a gaming wagering contract is the difference between gaming wins and losses, not the total amount wagered. The transaction price for food and beverage, hotel and retail contracts is the net amount collected from the customer for such goods and services. Sales tax and other taxes collected on behalf of governmental authorities are accounted for on the net basis and are not included in revenues or expenses. The transaction price for our racing operations, inclusive of live racing events conducted at our racing facilities and our import and export arrangements, is the commission received from the pari-mutuel pool less contractual fees and obligations primarily consisting of purse funding requirements, simulcasting fees, tote fees and certain pari-mutuel taxes that are directly related to the racing operations. The transaction price for our former management service contracts was the amount collected for services rendered in accordance with the contractual terms. The transaction price for the reimbursable costs associated with our former management contracts was the gross amount of the reimbursable expenditure, which primarily consisted of payroll costs incurred by the Company for the benefit of the managed entity. Since the Company was the controlling entity to the arrangement, the reimbursement was recorded on a gross basis with an offsetting amount charged to operating expense.
Gaming revenue contracts involve two performance obligations for those customers earning points under the Company’s loyalty reward programs and a single performance obligation for customers that do not participate in the programs. The Company applies a practical expedient by accounting for its gaming contracts on a portfolio basis as such wagers have similar characteristics and the Company reasonably expects the effects on its Consolidated Financial Statements of applying the revenue recognition guidance to the portfolio to not differ materially from that which would result if applying the guidance to an individual wagering contract. For purposes of allocating the transaction price in a wagering contract between the wagering performance obligation and the obligation associated with the loyalty points earned, the Company allocates an amount to the loyalty point contract liability based on the stand-alone selling price of the points earned, which is determined by the value of a point that can be redeemed for slot play and complimentaries such as food and beverage at our restaurants, lodging at our hotels and products offered at our retail stores, less estimated breakage. The allocated revenue for gaming wagers is recognized when the wagering occurs as all such wagers settle immediately. The loyalty reward contract liability amount is deferred and recognized as revenue when the customer redeems the loyalty points for slot play and complimentaries and such goods and services are delivered to the customer.
Food and beverage, hotel and retail services have been determined to be separate, standalone performance obligations and the transaction price for such contracts is recorded as revenue as the good or service is transferred to the customer over their stay at the hotel or when the delivery is made for the food and beverage or retail product. Cancellation fees for hotel and meeting space services are recognized upon cancellation by the customer and are included in food, beverage, hotel and other revenue.
Racing revenue contracts, inclusive of the Company’s (i) host racing facilities, (ii) import arrangements that permit the Company to simulcast in live racing events occurring at other racetracks, and (iii) export arrangements that permit the Company’s live racing event to be simulcast at other racetracks, provide access to and the processing of wagers into the pari-mutuel pool. The Company has concluded it is not the controlling entity to the arrangement, but rather functions as an agent to
the pari-mutuel pool. Commissions earned from the pari-mutuel pool less contractual fees and obligations are recognized on a net basis, which is included within food, beverage, hotel and other revenues.
Management services have been determined to be separate, standalone performance obligations and the transaction price for such contracts was recorded as services were performed. The Company recorded revenues on a monthly basis calculated by applying the contractual rate called for in the contracts.
PIV
generates in-app purchase and advertising revenues from free-to-play social casino games, which can be downloaded to mobile phones and tablets from digital storefronts. Players can purchase virtual playing credits within our social casino games, which allows for increased playing opportunities and functionality.
PIV
records deferred revenue from the sale of virtual playing credits and recognizes this revenue over the average redemption period of the credits, which is approximately
three days
. Advertising revenues are recognized in the period when the advertising impression, click or install delivery occurs.
PIV
also generates revenue through revenue-sharing arrangements with third-party content providers whereby revenues are recognized on a net basis since
PIV
is not the controlling entity in the arrangement.
Complimentaries associated Gaming Contracts
Food and beverage, hotel, and other services furnished to patrons for free as an inducement to gamble or through the redemption of our customers’ loyalty points are recorded as food and beverage, hotel, and other revenues, at their estimated standalone selling prices with an offset recorded as a reduction to gaming revenues. The cost of providing complimentary goods and services to patrons for free as an inducement to gamble as well as for the fulfillment of our loyalty point obligation is included in food, beverage, hotel, and other expenses. Revenues recorded to food and beverage, hotel, and other and offset to gaming revenues for the year ended December 31, 2018 were as follows:
|
|
|
|
|
(in thousands)
|
For the year ended December 31, 2018
|
Food and beverage
|
$
|
137,179
|
|
Hotel
|
60,859
|
|
Other
|
8,099
|
|
Total complimentaries associated with gaming contracts
|
$
|
206,137
|
|
Revenue Disaggregation
We generate revenues at our owned, managed, or operated properties principally by providing the following types of services: (i) gaming, (ii) food and beverage, (iii) hotel, (iv) racing, (v) reimbursable management costs and (vi) other. In addition, we assess our revenues based on geographic location of the related properties, which is consistent with our reportable segments (see
Note 15, “Segment Information,”
for further information). Our revenue disaggregation by type of revenue and geographic location was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
(in thousands)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
1,644,176
|
|
|
$
|
302,842
|
|
|
$
|
228,055
|
|
|
$
|
719,753
|
|
|
$
|
35
|
|
|
$
|
2,894,861
|
|
Food and beverage
|
109,645
|
|
|
56,631
|
|
|
89,566
|
|
|
57,886
|
|
|
1,084
|
|
|
314,812
|
|
Hotel
|
23,208
|
|
|
23,320
|
|
|
90,824
|
|
|
26,323
|
|
|
—
|
|
|
163,675
|
|
Racing
|
20,275
|
|
|
—
|
|
|
580
|
|
|
—
|
|
|
5,926
|
|
|
26,781
|
|
Reimbursable management costs
|
46,822
|
|
|
—
|
|
|
10,459
|
|
|
—
|
|
|
—
|
|
|
57,281
|
|
Other
|
47,388
|
|
|
11,558
|
|
|
18,403
|
|
|
19,755
|
|
|
33,404
|
|
|
130,508
|
|
Revenues
|
$
|
1,891,514
|
|
|
$
|
394,351
|
|
|
$
|
437,887
|
|
|
$
|
823,717
|
|
|
$
|
40,449
|
|
|
$
|
3,587,918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2017
|
(in thousands)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
1,583,882
|
|
|
$
|
202,967
|
|
|
$
|
219,743
|
|
|
$
|
685,429
|
|
|
$
|
—
|
|
|
$
|
2,692,021
|
|
Food and beverage
|
114,993
|
|
|
35,532
|
|
|
82,406
|
|
|
58,414
|
|
|
1,052
|
|
|
292,397
|
|
Hotel
|
21,513
|
|
|
10,340
|
|
|
76,147
|
|
|
21,959
|
|
|
—
|
|
|
129,959
|
|
Racing
|
49,596
|
|
|
—
|
|
|
2,340
|
|
|
—
|
|
|
10,759
|
|
|
62,695
|
|
Reimbursable management costs
|
—
|
|
|
—
|
|
|
26,060
|
|
|
—
|
|
|
—
|
|
|
26,060
|
|
Other
|
48,645
|
|
|
6,263
|
|
|
16,605
|
|
|
16,404
|
|
|
40,417
|
|
|
128,334
|
|
|
1,818,629
|
|
|
255,102
|
|
|
423,301
|
|
|
782,206
|
|
|
52,228
|
|
|
3,331,466
|
|
Less: Promotional allowances
|
(62,050
|
)
|
|
(30,855
|
)
|
|
(42,883
|
)
|
|
(47,173
|
)
|
|
(535
|
)
|
|
(183,496
|
)
|
Revenues
|
$
|
1,756,579
|
|
|
$
|
224,247
|
|
|
$
|
380,418
|
|
|
$
|
735,033
|
|
|
$
|
51,693
|
|
|
$
|
3,147,970
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2016
|
(in thousands)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
1,572,378
|
|
|
$
|
166,509
|
|
|
$
|
211,788
|
|
|
$
|
655,587
|
|
|
$
|
—
|
|
|
$
|
2,606,262
|
|
Food and beverage
|
115,834
|
|
|
30,692
|
|
|
80,003
|
|
|
58,370
|
|
|
1,313
|
|
|
286,212
|
|
Hotel
|
20,888
|
|
|
8,843
|
|
|
73,180
|
|
|
22,493
|
|
|
—
|
|
|
125,404
|
|
Racing
|
48,063
|
|
|
—
|
|
|
2,331
|
|
|
—
|
|
|
15,596
|
|
|
65,990
|
|
Reimbursable management costs
|
—
|
|
|
—
|
|
|
15,997
|
|
|
—
|
|
|
—
|
|
|
15,997
|
|
Other
|
46,900
|
|
|
5,646
|
|
|
16,260
|
|
|
15,454
|
|
|
24,916
|
|
|
109,176
|
|
|
1,804,063
|
|
|
211,690
|
|
|
399,559
|
|
|
751,904
|
|
|
41,825
|
|
|
3,209,041
|
|
Less: Promotional allowances
|
(62,254
|
)
|
|
(25,858
|
)
|
|
(38,783
|
)
|
|
(47,632
|
)
|
|
(134
|
)
|
|
(174,661
|
)
|
Revenues
|
$
|
1,741,809
|
|
|
$
|
185,832
|
|
|
$
|
360,776
|
|
|
$
|
704,272
|
|
|
$
|
41,691
|
|
|
$
|
3,034,380
|
|
Customer-related Liabilities
The Company has two general types of liabilities related to contracts with customers: (i) our loyalty credit obligation and (ii) advance payments on goods and services yet to be provided and for unpaid wagers.
The Company’s loyalty reward programs allow members to utilize their reward membership cards to earn loyalty points that are redeemable for slot play and complimentaries, such as food and beverage at our restaurants, lodging at our hotels and products offered at our retail stores across the vast majority of the Company’s casino properties. The Company accounts for the loyalty credit obligation utilizing a deferred revenue model, which defers revenue at the point in time when the loyalty points are earned by our customers. Revenue associated with the loyalty credit obligation is subsequently recognized into revenue when the loyalty points are redeemed by our customers. The deferred revenue liability is based on the estimated standalone selling price of the loyalty points earned after factoring in the likelihood of redemption.
The Company’s loyalty credit obligation, which is included in “Accrued expenses” within our Consolidated Balance Sheets, was
$39.9 million
as of
December 31, 2018
compared to
$24.7 million
upon the adoption of the new revenue standard on January 1, 2018. Our loyalty credit obligations are generally settled within
six months
of issuance. Changes between the opening and closing balances primarily relate to (i) the Pinnacle Acquisition, in which all acquired gaming properties have a loyalty reward program and (ii) the timing of the customer’s election to redeem loyalty points for complimentaries and products offered at our food and beverage outlets, hotels and retail stores.
The Company’s advance payments on goods and services yet to be provided and for unpaid wagers primarily consist of the following: (i) deposits on rooms and convention space, (ii) money deposited on behalf of a customer in advance of their property visitation (i.e., front money), (iii) outstanding tickets generated by slot machine play or pari-mutuel wagering, (iv) outstanding chip liabilities, (v) unclaimed jackpots, and (vi) gift cards redeemable at our properties. Advance payments on goods and services are recognized as revenue when the good or service is transferred to the customer. Unpaid wagers primarily relate to the Company’s obligation to settle outstanding slot tickets, pari-mutuel racing tickets and gaming chips with customers and generally represent obligations stemming from prior wagering events, of which revenue was previously recognized. The
Company’s advance payments on goods and services yet to be provided and for unpaid wagers were
$34.3 million
and
$21.5 million
as of
December 31, 2018
and
2017
, respectively, of which
$0.7 million
and
$1.3 million
are classified as long-term, respectively.
Cash and Cash Equivalents:
The Company considers all cash balances and highly-liquid investments with original maturities of three months or less at the date of purchase to be cash and cash equivalents.
Concentration of Credit Risk:
Financial instruments that subject the Company to credit risk consist of cash and cash equivalents and accounts receivable. The Company’s policy is to limit the amount of credit exposure to any one financial institution, and place investments with financial institutions evaluated as being creditworthy, or in short-term money market and tax-free bond funds which are exposed to minimal interest rate and credit risk. The Company has bank deposits and overnight repurchase agreements that exceed federally-insured limits.
Concentration of credit risk, with respect to casino receivables, is limited through the Company’s credit evaluation process. The Company issues markers to approved casino customers only following investigations of creditworthiness.
The Company’s receivables as of
December 31, 2018
and
2017
primarily consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
Markers issued to customers
|
$
|
17,242
|
|
|
$
|
5,237
|
|
Cash, credit card, and other advances to customers
|
20,925
|
|
|
13,891
|
|
Receivables from automatic teller machine and cash kiosk transactions
|
19,244
|
|
|
2,785
|
|
Hotel and banquet receivables
|
8,142
|
|
|
4,566
|
|
Receivables due from the West Virginia Lottery
(1)
|
4,358
|
|
|
6,088
|
|
Racing settlements
|
6,064
|
|
|
5,493
|
|
Reimbursement of payroll expenses
(2)
|
3,439
|
|
|
3,366
|
|
Receivables due from platform providers for social casino game revenues
|
2,255
|
|
|
3,019
|
|
Other
|
28,329
|
|
|
21,343
|
|
Allowance for doubtful accounts
|
(3,161
|
)
|
|
(2,983
|
)
|
|
$
|
106,837
|
|
|
$
|
62,805
|
|
|
|
(1)
|
Related to gaming revenue settlements and capital reinvestment projects at Hollywood Casino at Charles Town Races
|
|
|
(2)
|
Reimbursement of payroll expenses paid on behalf of our joint venture in Kansas Entertainment (as defined below)
|
Accounts are written off when management determines that an account is uncollectible. Recoveries of accounts previously written off are recorded when received. An allowance for doubtful accounts is determined to reduce the Company’s receivables to their carrying amount, which approximates fair value. The allowance is estimated based on historical collection experience, specific review of individual customer accounts, and current economic and business conditions. Historically, the Company has not incurred any significant credit-related losses.
Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation. Capital expenditures are accounted for as either project capital 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. Maintenance and repairs that neither add materially to the value of the asset nor appreciably prolong its useful life are charged to expense as incurred. Gains or losses on the disposal of property and equipment are included in the determination of income.
The estimated useful lives of property and equipment are determined based on the nature of the assets as well as the Company’s current operating strategy. Depreciation of property and equipment is recorded using the straight-line method over the following useful lives:
|
|
|
|
Years
|
Land improvements
|
15
|
Buildings and improvements
|
5 to 31
|
Vessels
|
10 to 35
|
Furniture, fixtures and equipment
|
3 to 31
|
All costs funded by the Company considered to be an improvement to the real estate assets owned by GLPI under the Master Leases are recorded as leasehold improvements. Leasehold improvements are depreciated over the shorter of the estimated useful life of the improvement or the related lease term.
The Company reviews the carrying amount of its property and equipment for possible impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable based on undiscounted estimated future cash flows expected to result from its use and eventual disposition. The factors considered by the Company in performing this assessment include current operating results, trends and prospects, as well as the effect of obsolescence, demand, competition and other economic factors. For purposes of recognizing and measuring impairment in accordance with ASC Topic 360, “Property, Plant, and Equipment,” assets are grouped at the individual property level representing the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. In assessing the recoverability of the carrying amount of property and equipment, the Company must make assumptions regarding future cash flows and other factors. If these estimates or the related assumptions change in the future, the Company may be required to record an impairment loss for these assets. Such an impairment loss would be recognized as a non-cash component of operating income.
Goodwill and Other Intangible Assets:
Goodwill represents the future economic benefits of a business combination measured as the excess of the purchase price over the fair value of net assets acquired and has been allocated to our reporting units. Goodwill is tested annually, or more frequently if indicators of impairment exist. An income approach, in which a discounted cash flow model is utilized and a market-based approach utilizing guideline public company (“GPC”) multiples of
Adjusted EBITDAR
(as defined in
Note 15, “Segment Information”
) from the Company’s peer group is utilized to estimate the fair value of the Company’s reporting units.
For the quantitative goodwill impairment test, the current fair value of each reporting unit is estimated using a combination of the discounted cash flow model and the GPC multiples approach which is then compared to the carrying amount of each reporting unit. The Company adjusts the carrying amount of each reporting unit that utilizes property subject to either of the
Master Leases
by an allocation of a pro-rata portion of the applicable financing obligation based on the reporting unit’s estimated fair value as a percentage of the aggregate estimated fair value of all reporting units that utilize property that is subject to either the
Penn Master Lease
or the
Pinnacle Master Lease
, as applicable. The Company compares the aggregate weighted average fair value to the carrying amount of its reporting units. If the carrying amount of the reporting unit exceeds the aggregate weighted average fair value, an impairment is recorded equal to the amount of the excess not to exceed the amount of goodwill allocated to the reporting unit.
The Company considers its gaming licenses and certain other intangible assets to be indefinite-lived based on the Company’s future expectations to operate its gaming facilities indefinitely as well as its historical experience in renewing these intangible assets at minimal cost with various state commissions. Rather, these indefinite-lived intangible assets are tested annually for impairment, or more frequently if indicators of impairment exist, by comparing the fair value of the recorded assets to their carrying amount. If the carrying amounts of the indefinite-lived intangible assets exceed their fair value, an impairment is recognized. The Company completes its testing of its indefinite-lived intangible assets prior to assessing the realizability of its goodwill.
The Company assesses the fair value of its indefinite-lived intangible assets (which are primarily gaming licenses) using the Greenfield Method under the income approach. The Greenfield Method estimates the fair value of the gaming license using a discounted cash flow model assuming the Company built a casino with similar utility to that of the existing facility. The method assumes a theoretical start-up company going into business without any assets other than the intangible asset being valued. As such, the value of the gaming license is a function of the following items:
|
|
•
|
Projected revenues and operating cash flows (including an allocation of the Company’s projected financing payments to its reporting units consistent with how the financing obligations associated with the Master Leases are allocated);
|
|
|
•
|
Theoretical construction costs and duration;
|
|
|
•
|
Pre-opening expenses; and
|
|
|
•
|
Discounting that reflects the level of risk associated with receiving future cash flows attributable to the license.
|
Once an impairment of goodwill or other intangible asset has been recorded, it cannot be reversed. Other intangible assets that have a definite-life are amortized on a straight-line basis over their estimated useful lives or related service contract. The Company reviews the carrying amount of its amortizing intangible assets for possible impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. If the carrying amount of the amortizing intangible assets exceed their fair value, an impairment loss is recognized. See
Note 8, “Goodwill and Other Intangible Assets.”
Master Lease Financing Obligations:
The Company’s spin-off of its real estate assets into GLPI on November 1, 2013 (the “Spin-Off”) and corresponding entrance into the Penn Master Lease did not meet all of the requirements for sale-leaseback accounting treatment under ASC Topic 840, “Leases,” (“ASC 840”); specifically, the Penn Master Lease contains provisions that indicate the Company has prohibited forms of continuing involvement in the leased assets which are not a normal leaseback. Therefore, the Penn Master Lease is accounted for as a financing obligation rather than as a lease. The Company calculated a financing obligation at the inception of the Penn Master Lease based on the future minimum lease payments discounted at the Company’s estimated incremental borrowing rate at lease inception over the lease term of
35 years
, which included renewal options that were reasonably assured of being exercised, and the funded construction of certain leased real estate assets in development at the commencement of the
Penn Master Lease
, which was determined to be
9.7%
.
Within a business combination, an arrangement that did not meet all of the requirements for sale-leaseback accounting treatment under ASC 840, and previously accounted for as a financing obligation by the acquiree, retains its classification as a financing obligation on the acquiring company’s consolidated balance sheets at the business combination date. The Company calculated the financing obligation associated with the Pinnacle Master Lease based on the future minimum lease payments discounted at a rate determined to be fair value at the business combination date. The financing obligation associated with Pinnacle Master Lease was calculated at the October 15, 2018 closing date, assuming a remaining lease term of
32.5 years
, which included renewal options that were reasonably assured of being exercised, and a discount rate of
7.3%
. Furthermore, in conjunction with the Pinnacle Acquisition, GLPI acquired the real estate assets associated with Plainridge Park Casino for
$250.0 million
and leased back the real estate assets to the Company pursuant to an amendment to the Pinnacle Master Lease for a fixed annual rent of
$25.0 million
over the remaining term of the Pinnacle Master Lease, which resulted in an effective yield of
9.6%
.
Minimum lease payments under our Master Leases are recorded as interest expense and, in part, as repayments of principal reducing the associated financing obligations. Contingent payments are recorded as interest expense as incurred. The real estate assets subject to the Master Leases are included on the Company’s Consolidated Balance Sheets and are depreciated over their remaining useful lives. For more information, see
Note 10, “Master Lease Financing Obligations and Lease Obligations.”
Debt Issuance Costs:
Debt issuance costs that are incurred by the Company in connection with the issuance of debt are deferred and amortized to interest expense using the effective interest method over the contractual term of the underlying indebtedness. These costs are classified as a direct reduction of long-term debt within the Company’s Consolidated Balance Sheets.
Self-Insurance Reserves:
The Company is self-insured for employee health coverage, general liability and workers compensation up to certain stop loss amounts. The Company uses a reserve method for each reported claim plus an allowance for claims incurred but not yet reported to a fully developed claims reserve method based on an actuarial computation of ultimate liability. Self-insurance reserves are included in “Accrued expenses” within the Company’s Consolidated Balance Sheets.
Contingent Purchase Price:
The consideration for the Company’s acquisitions may include future payments that are contingent upon the occurrence of a particular event. The Company records an obligation for such contingent payments at fair value as of the acquisition date. The Company revalues its contingent consideration obligations each reporting period. Changes in the fair value of the contingent purchase price obligation can result from changes to one or multiple inputs, including adjustments to the discount rate and changes in the assumed probabilities of successful achievement of certain financial targets. The changes in the fair value of contingent consideration are recognized within the Company’s Consolidated Statements of Operations as a component of “General and administrative” expense.
Income Taxes:
The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes” (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are determined based on the differences between the financial
statement carrying amounts and the tax bases of existing assets and liabilities and are measured at the prevailing enacted tax rates that will be in effect when these differences are settled or realized. ASC 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized.
The realizability of the net deferred tax assets is evaluated quarterly by assessing the valuation allowance and by adjusting the amount of the allowance, if necessary. The Company considers all available positive and negative evidence including projected future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The evaluation of both positive and negative evidence is a requirement pursuant to ASC 740 in determining more-likely-than-not the net deferred tax assets will be realized. In the event the Company determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes.
ASC 740 also creates a single model to address uncertainty in tax positions and clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements by prescribing the minimum recognition threshold a tax position is required to meet before being recognized in an enterprise’s financial statements. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.
Gaming and Racing Taxes:
The Company is subject to gaming and pari-mutuel taxes based on gross gaming revenue and pari-mutuel revenue in the jurisdictions in which it operates. The Company primarily recognizes gaming and pari-mutuel tax expense based on the statutorily required percentage of revenue that is required to be paid to state and local jurisdictions in the states where or in which wagering occurs. In certain states in which the Company operates, gaming taxes are based on graduated rates. The Company records gaming tax expense at the Company’s estimated effective gaming tax rate for the year, considering estimated taxable gaming revenue and the applicable rates. Such estimates are adjusted each interim period. If gaming tax rates change during the year, such changes are applied prospectively in the determination of gaming tax expense in future interim periods. For the years ended
December 31, 2018
,
2017
and
2016
, these expenses, which were recorded primarily within gaming expense within the Consolidated Statements of Operations, were
$1,102.3 million
,
$983.3 million
, and
$962.7 million
, respectively.
Earnings Per Share:
The Company calculates earnings per share (“EPS”) in accordance with ASC Topic 260, “Earnings Per Share” (“ASC 260”). Basic EPS is computed by dividing net income applicable to common stock by the weighted-average number of common shares outstanding during the period. Diluted EPS reflects the additional dilution for all potentially-dilutive securities such as stock options and unvested restricted shares.
During the year ended December 31, 2016, the Company’s
8,624
outstanding shares of Series C Preferred Stock were sold by the holders of these securities, and therefore automatically converted to
8,624,000
shares of common stock under previously agreed upon terms. As a result, there are
no
longer any outstanding shares of Series C Preferred Stock as of
December 31, 2018
and
2017
. The Company determined that the preferred stock qualified as a participating security as defined in ASC 260 since these securities participate in dividends with the Company’s common stock. In accordance with ASC 260, a company is required to use the two-class method when computing EPS when a company has a security that qualifies as a “participating security.” The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. A participating security is included in the computation of basic EPS using the two-class method. Under the two-class method, basic EPS for the Company’s common stock is computed by dividing net income applicable to common stock by the weighted-average common shares outstanding during the period. Diluted EPS for the Company’s common stock is computed using the more dilutive of the two-class method or the if-converted method. For more information on our Series C Preferred Stock, refer to
Note 13, “Stockholders’ Equity (Deficit).”
The following table sets forth the allocation of net income for the years ended
December 31, 2018
,
2017
and
2016
under the two-class method:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Net income attributable to Penn National Gaming, Inc.
|
$
|
93,519
|
|
|
$
|
473,463
|
|
|
$
|
109,310
|
|
Net income applicable to preferred stock
|
—
|
|
|
—
|
|
|
8,662
|
|
Net income applicable to common stock
|
$
|
93,519
|
|
|
$
|
473,463
|
|
|
$
|
100,648
|
|
The following table reconciles the weighted-average common shares outstanding used in the calculation of basic EPS to the weighted-average common shares outstanding used in the calculation of diluted EPS for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Determination of shares:
|
|
|
|
|
|
Weighted-average common shares outstanding
|
97,105
|
|
|
90,854
|
|
|
82,929
|
|
Assumed conversion of dilutive employee stock-based awards
|
3,018
|
|
|
2,431
|
|
|
1,299
|
|
Assumed conversion of restricted stock
|
215
|
|
|
93
|
|
|
42
|
|
Diluted weighted-average common share outstanding before participating security
|
100,338
|
|
|
93,378
|
|
|
84,270
|
|
Assumed conversion of preferred stock
|
—
|
|
|
—
|
|
|
7,137
|
|
Diluted weighted-average common shares outstanding
|
100,338
|
|
|
93,378
|
|
|
91,407
|
|
Options to purchase
656,588
shares;
51,803
shares; and
3,036,819
shares were outstanding during the years ended
December 31, 2018
,
2017
and
2016
, respectively, but were not included in the computation of diluted EPS because they were antidilutive.
The following table presents the calculation of basic and diluted EPS for the Company’s common stock for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands, except per share data)
|
2018
|
|
2017
|
|
2016
|
Calculation of basic EPS:
|
|
|
|
|
|
Net income applicable to common stock
|
$
|
93,519
|
|
|
$
|
473,463
|
|
|
$
|
100,648
|
|
Weighted-average common shares outstanding
|
97,105
|
|
|
90,854
|
|
|
82,929
|
|
Basic EPS
|
$
|
0.96
|
|
|
$
|
5.21
|
|
|
$
|
1.21
|
|
Calculation of diluted EPS using two-class method:
|
|
|
|
|
|
Net income applicable to common stock
|
93,519
|
|
|
473,463
|
|
|
100,648
|
|
Diluted weighted-average common share outstanding before participating security
|
100,338
|
|
|
93,378
|
|
|
84,270
|
|
Diluted EPS
|
$
|
0.93
|
|
|
$
|
5.07
|
|
|
$
|
1.19
|
|
Stock-Based Compensation:
The Company accounts for stock compensation under ASC Topic 718, “Compensation-Stock Compensation,” which requires the Company to expense the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. This expense is recognized ratably over the requisite service period following the date of grant. The Company accounts for forfeitures in the period in which they occur based on actual amounts.
The fair value of stock options is estimated at the grant date using the Black-Scholes option-pricing model, which requires management to make assumptions, including the expected term, which is based on the contractual term of the stock option and historical exercise data of the Company’s employees; the risk-free interest rate; which is based on the U.S. Treasury spot rate with a term equal to the expected term assumed at the grant date; the expected volatility, which is estimated based on the historical volatility of the Company’s stock price over the expected term assumed at the grant date; and the expected dividend yield, which we expect to be
zero
since the Company has not paid any cash dividends on its common stock since its initial public offering in May 1994 and intends to retain all of its earnings to finance the development of its business for the foreseeable future. See
Note 14, “Stock-based Compensation,”
for further information.
Variable Interest Entities:
In accordance with the authoritative guidance of ASC Topic 810, “Consolidation” (“ASC 810”), the Company consolidates a VIE if the Company is the primary beneficiary, defined as the party that has both the power to direct the activities that most significantly impact the VIE’s economic performance and the obligation to absorb losses of or the right to receive benefits from the VIE that could potentially be significant to the VIE. A variable interest is a contractual, ownership or other interest that changes with changes in the fair value of the VIE’s net assets exclusive of variable interests. To determine whether a variable interest the Company holds could potentially be significant to the VIE, the Company considers both qualitative and quantitative factors regarding the nature, size and form of its involvement with the VIE. The Company
assesses whether it is the primary beneficiary of a VIE or the holder of a significant variable interest in a VIE on an on-going basis for each such interest.
Application of Business Combination Accounting:
The Company utilizes the acquisition method of accounting in accordance with ASC Topic 805, “Business Combinations,” which requires us to allocate the purchase price to tangible and identifiable intangible assets based on their fair values. The excess of the purchase price over the fair value ascribed to tangible and identifiable intangible assets is recorded as goodwill. If the fair value ascribed to tangible and identifiable intangible assets changes during the measurement period (due to additional information being available and related Company analysis), the measurement period adjustment is recognized in the reporting period in which the adjustment amount is determined and offset against goodwill. The measurement period for our acquisitions are no more than one year in duration.
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 Topic 280, “Segment Reporting,” measures and assesses the Company’s business performance based on regional operations of various properties grouped together based primarily on their geographic locations.
We view each of our gaming and racing facilities as an operating segment with the exception of our
two
facilities in Jackpot, Nevada, which we view as
one
operating segment. We view our combined VGT operations as an operating segment. See
Note 15, “Segment Information,”
for further information. For financial reporting purposes, as of
December 31, 2018
, we aggregate our operating segments into the following reportable segments:
|
|
|
Northeast segment
(1)
|
Location
|
Ameristar East Chicago
|
East Chicago, Indiana
|
Hollywood Casino Bangor
|
Bangor, Maine
|
Hollywood Casino at Charles Town Races
|
Charles Town, West Virginia
|
Hollywood Casino Columbus
|
Columbus, Ohio
|
Hollywood Casino Lawrenceburg
|
Lawrenceburg, Indiana
|
Hollywood Casino at Penn National Race Course
|
Grantville, Pennsylvania
|
Hollywood Casino Toledo
|
Toledo, Ohio
|
Hollywood Gaming at Dayton Raceway
|
Dayton, Ohio
|
Hollywood Gaming at Mahoning Valley Race Course
|
Youngstown, Ohio
|
Meadows Racetrack and Casino
|
Washington, Pennsylvania
|
Plainridge Park Casino
|
Plainville, Massachusetts
|
|
|
South segment
|
Location
|
1
st
Jackpot Casino Tunica
|
Tunica, Mississippi
|
Ameristar Vicksburg
|
Vicksburg, Mississippi
|
Boomtown Biloxi
|
Biloxi, Mississippi
|
Boomtown Bossier City
|
Bossier City, Louisiana
|
Boomtown New Orleans
|
New Orleans, Louisiana
|
Hollywood Casino Tunica
|
Tunica, Mississippi
|
Hollywood Casino Gulf Coast
|
Bay St. Louis, Mississippi
|
L’Auberge Baton Rouge
|
Baton Rouge, Louisiana
|
L’Auberge Lake Charles
|
Lake Charles, Louisiana
|
Resorts Casino Tunica
|
Tunica, Mississippi
|
|
|
West segment
(2)
|
Location
|
Ameristar Black Hawk
|
Black Hawk, Colorado
|
Cactus Petes and Horseshu
|
Jackpot, Nevada
|
M Resort
|
Henderson, Nevada
|
Tropicana Las Vegas
|
Las Vegas, Nevada
|
Zia Park Casino
|
Hobbs, New Mexico
|
|
|
Midwest segment
|
Location
|
Ameristar Council Bluffs
|
Council Bluffs, Iowa
|
Argosy Casino Alton
|
Alton, Illinois
|
Argosy Casino Riverside
|
Riverside, Missouri
|
Hollywood Casino Aurora
|
Aurora, Illinois
|
Hollywood Casino Joliet
|
Joliet, Illinois
|
Hollywood Casino at Kansas Speedway
(3)
|
Kansas City, Kansas
|
Hollywood Casino St. Louis
|
Maryland Heights, Missouri
|
Prairie State Gaming
|
Illinois
|
River City Casino
|
St. Louis, Missouri
|
|
|
(1)
|
The Northeast segment also included the Company’s Casino Rama management service contract, which terminated in July 2018.
|
|
|
(2)
|
The West segment also included a management service contract with the JIVDC, which terminated in May 2018.
|
|
|
(3)
|
Pursuant to a joint venture with International Speedway Corporation (“International Speedway”) and includes the Company’s
50%
investment in Kansas Entertainment, LLC (“Kansas Entertainment”), which owns the Hollywood Casino at Kansas Speedway.
|
Note 4—New Accounting Pronouncements
Accounting Pronouncement Implemented in 2017
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU No. 2016-09”), which simplified the accounting for share-based payment awards, including: (a) income tax consequences; (b) classification of awards as either equity or liabilities; and (c) classification
on the statement of cash flows. The Company adopted ASU 2016-09 effective January 1, 2017. For the year ended December 31, 2017, the Company recognized an income tax benefit of
$6.3 million
related to excess tax deductions that previously would have been recognized as additional paid-in capital within “Total Stockholders’ equity (deficit).” The Company did not record a cumulative effect adjustment to retained earnings due to having a full valuation allowance against all deferred tax assets as of January 1, 2017. Deferred tax assets and the valuation allowance increased by
$15.4 million
at January 1, 2017 for the tax effect previously unrecognized for excess tax deductions. The Company elected to present the change in classification of excess/deficient tax deductions from a financing activity to an operating activity within its Consolidated Statement of Cash Flows on a retrospective basis. As a result, for the year ended December 31, 2016, there was an increase to net cash provided by operating activities of
$6.9 million
and a decrease to net cash used in financing activities of
$6.9 million
.
Accounting Pronouncements Implemented in 2018
On January 1, 2018, the Company adopted ASU No. 2014-09 and all related amendments, which introduced ASC 606, to all contracts using the modified retrospective method. As part of the adoption, the Company utilized a practical expedient that permits the evaluation of incomplete contracts (such as our loyalty point obligations) as completed contracts. The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of accumulated deficit. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. The adoption of the new revenue standard did not have a material effect on net income for the year ended December 31, 2018 and the Company does not expect it to have a material impact on a continuing basis.
In accordance with the new revenue standard requirement, the disclosure of the impact of adoption on our Consolidated Statement of Operations and Consolidated Balance Sheet as of and for the year ended December 31, 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2018
|
|
As Reported
|
|
Impacts of:
|
|
Balances Without Adoption of ASC 606
|
|
Effect of Change Higher / (Lower)
|
(in thousands)
|
|
Loyalty
Points
(1)
|
|
Promotional Allowances
(2)
|
|
Reimbursable Expense - Casino Rama
(3)
|
|
Racing Revenue
(4)
|
|
Tier Status and Other Benefits
(5)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
$
|
2,894,861
|
|
|
$
|
(2,608
|
)
|
|
$
|
206,137
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,575
|
|
|
$
|
3,100,965
|
|
|
$
|
(206,104
|
)
|
Food, beverage, hotel and other
|
629,733
|
|
|
(252
|
)
|
|
30,629
|
|
|
—
|
|
|
38,975
|
|
|
—
|
|
|
699,085
|
|
|
(69,352
|
)
|
Management service and license fees
|
6,043
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
6,043
|
|
|
—
|
|
Reimbursable management costs
|
57,281
|
|
|
—
|
|
|
—
|
|
|
(46,822
|
)
|
|
—
|
|
|
—
|
|
|
10,459
|
|
|
46,822
|
|
|
3,587,918
|
|
|
(2,860
|
)
|
|
236,766
|
|
|
(46,822
|
)
|
|
38,975
|
|
|
2,575
|
|
|
3,816,552
|
|
|
(228,634
|
)
|
Less: Promotional allowance
|
—
|
|
|
—
|
|
|
(236,766
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(236,766
|
)
|
|
236,766
|
|
Revenues
|
3,587,918
|
|
|
(2,860
|
)
|
|
—
|
|
|
(46,822
|
)
|
|
38,975
|
|
|
2,575
|
|
|
3,579,786
|
|
|
8,132
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gaming
|
1,551,430
|
|
|
(1,443
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,258
|
|
|
1,554,245
|
|
|
(2,815
|
)
|
Food, beverage, hotel and other
|
439,253
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
38,975
|
|
|
(1,683
|
)
|
|
476,545
|
|
|
(37,292
|
)
|
General and administrative
|
618,951
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
618,951
|
|
|
—
|
|
Reimbursable management costs
|
57,281
|
|
|
—
|
|
|
—
|
|
|
(46,822
|
)
|
|
—
|
|
|
—
|
|
|
10,459
|
|
|
46,822
|
|
Depreciation and amortization
|
268,990
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
268,990
|
|
|
—
|
|
Impairment losses, net of recovery on loan loss and unfunded loan commitments to the JIVDC
|
17,921
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
17,921
|
|
|
—
|
|
Total operating expenses
|
2,953,826
|
|
|
(1,443
|
)
|
|
—
|
|
|
(46,822
|
)
|
|
38,975
|
|
|
2,575
|
|
|
2,947,111
|
|
|
6,715
|
|
Operating income (loss)
|
634,092
|
|
|
(1,417
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
632,675
|
|
|
1,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
89,921
|
|
|
(1,417
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
88,504
|
|
|
1,417
|
|
Income tax benefit (expense)
|
3,593
|
|
|
323
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,916
|
|
|
(323
|
)
|
Net income (loss)
|
$
|
93,514
|
|
|
$
|
(1,094
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
92,420
|
|
|
$
|
1,094
|
|
|
|
(1)
|
As discussed in
Note 3, “Summary of Significant Accounting Policies,”
the Company’s loyalty reward programs allow members to utilize their reward membership cards to earn loyalty points that are redeemable for slot play and complimentaries. Under the new revenue standard, the Company is required to utilize a deferred revenue model, which defers revenue at the point in time when the loyalty points are earned by our customers and recognize revenue when the loyalty points are redeemed at the estimated standalone selling price. Prior to the adoption of the new revenue standard, the estimated liability for unredeemed points was accrued and recorded to gaming expense based on expected redemption rates and the estimated cost of the goods and services to be provided.
|
|
|
(2)
|
Under ASC 606, the Company is no longer permitted to report revenue for goods and services provided to customers (i) for free as an inducement to gamble or (ii) on a discretionary basis outside of gaming play (i.e., customer appeasements) as gross revenue with a corresponding reduction in promotional allowances to arrive at net revenues. The new revenue standard requires complimentaries related to an inducement to gamble to be recorded as a reduction to gaming revenues and discretionary complimentaries provided outside of gaming play to be recorded as a reduction to food, beverage, hotel and other revenues. As such, promotional allowances provided to customers (i) as an inducement to gamble or (ii) on a discretionary basis outside of gaming play are no longer netted within our Consolidated Statements of Operations. In addition, ASC 606 changed the accounting for promotional allowances with respect to non-discretionary complimentaries (i.e., a customer’s redemption of loyalty points). Under the new revenue standard, the Company is no longer permitted to report revenue for goods and services provided to a customer resulting from loyalty point redemptions with a corresponding reduction in promotional allowances to arrive at net revenue. Instead, ASC 606 requires the utilization of a deferred revenue
|
model in which previously deferred revenue is recognized as revenue when the loyalty points are redeemed. As such, promotional allowances related to a customer’s redemption of loyalty points is no longer netted within our Consolidated Statements of Operations.
|
|
(3)
|
The Company revised its accounting for reimbursable costs associated with our management service contract for Casino Rama. Under the new revenue standard, because we are the controlling entity in the arrangement, reimbursable costs, which primarily consisted of payroll costs, must be recognized as revenue on a gross basis, with an offsetting amount charged to reimbursable management costs within operating expenses. Prior to the adoption of ASC 606, the Company recorded these reimbursable amounts on a net basis.
|
|
|
(4)
|
Under ASC 606, as it pertains to our racing operations, we concluded that the Company is not the controlling entity in the arrangements; but rather, functions as an agent to the pari-mutuel pool. Consequently, fees and obligations related to the Company’s share of purse funding requirements, simulcasting fees, tote fees, certain pari-mutuel taxes and other fees directly related to the Company’s racing operations must be reported on a net basis and included as a deduction to food, beverage, hotel and other revenue. Prior to the adoption of the new revenue standard, the Company recorded these fees and obligations in food, beverage, hotel and other expense.
|
|
|
(5)
|
Under ASC 606, certain tier status and other benefits provided to our customers, most notably, an annual gift to members of our top tiers, are considered separate performance obligations associated with gaming contracts. Therefore, under the new revenue standard, the amount of the transaction price allocated to these performance obligations is recorded as a reduction to gaming revenue rather than as a gaming expense. Consequently, certain of the expenses associated with other benefits are now recorded as food, beverage, hotel and other.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
As Reported as of December 31, 2018
|
|
Balances Without the Adoption of ASC 606
|
|
Effect of Change Higher (Lower)
|
Balance Sheet
|
|
|
|
|
|
Other assets - Deferred income taxes
|
$
|
80,612
|
|
|
$
|
78,953
|
|
|
$
|
1,659
|
|
Current liabilities - Accrued expenses
|
$
|
204,656
|
|
|
$
|
191,404
|
|
|
$
|
13,252
|
|
Stockholders’ equity - Accumulated deficit
|
$
|
(967,949
|
)
|
|
$
|
(956,418
|
)
|
|
$
|
(11,531
|
)
|
The cumulative effect of the changes made to our consolidated January 1, 2018 balance sheet for the adoption of ASC 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Balance as of December 31, 2017
|
|
Adjustment due to ASC 606
|
|
Balance as of January 1, 2018
|
Balance Sheet
|
|
|
|
|
|
Other assets - Deferred income taxes
|
$
|
390,943
|
|
|
$
|
2,044
|
|
|
$
|
392,987
|
|
Current liabilities - Accrued expenses
|
$
|
125,688
|
|
|
$
|
11,694
|
|
|
$
|
137,382
|
|
Stockholders’ equity - Accumulated deficit
|
$
|
(1,051,818
|
)
|
|
$
|
(9,650
|
)
|
|
$
|
(1,061,468
|
)
|
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Clarification of Certain Cash Receipts and Cash Payments.” The amendments are intended to address diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments provide guidance on the following specific cash flow issues: (a) debt prepayment or debt extinguishment costs; (b) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing; (c) contingent consideration payments made after a business combination; (d) proceeds from the settlement of insurance claims; (e) proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies; (f) distributions received from equity method investees; (g) beneficial interest in securitization transactions; and (h) separately identifiable cash flows and application of the predominance principle. The Company adopted this new guidance on January 1, 2018 on a retrospective basis. As a result of adopting this new guidance, the impact to the year ended December 31, 2017 was an increase to both net cash provided by operating activities and net cash used in financing activities of
$18.0 million
within the Company’s Statements of Cash Flows.
In November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash.”
The new guidance requires a statement of cash flows to explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. As such, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company adopted this new guidance on January 1, 2018 using a retrospective transition method to each period presented. As a result of adopting this new guidance, the impact to the years ended December 31, 2017 and 2016 was an increase of
$0.7 million
and a decrease of
$3.8 million
, respectively, to net cash provided by operating activities within the Company’s Statements of Cash Flows.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805), Clarifying the Definition of a Business.” The new guidance narrows the existing definition of a business and provides a framework for evaluating whether a transaction should be accounted for as an acquisition of assets or a business. Under this guidance, when substantially all of the fair value of gross assets acquired is concentrated in a single asset (or group of similar assets), the assets acquired would not represent a business. In addition, in order to be considered a business, an acquisition would have to include at a minimum an input and a substantive process that together significantly contributes to the ability to create an output. The guidance is effective
for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted and should be applied prospectively. The Company adopted this standard on January 1, 2018, which was applied prospectively to all applicable transactions after the adoption date.
New Accounting Pronouncements to be Implemented in Fiscal Year 2019
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”), which supersedes leases accounting as contained within ASC 840. The core principle of ASU No. 2016-02 is that a lessee should recognize on the balance sheet the lease assets and lease liabilities that arise from all lease arrangements with terms greater than 12 months. Recognition of these lease assets and lease liabilities represents a change from previous GAAP, which did not require lease assets and lease liabilities to be recognized for operating leases. Qualitative disclosures along with specific quantitative disclosures will be required to provide enough information to supplement the amounts recorded in the financial statements so that users can understand the nature of the Company’s leasing activities.
The Company has a team in place to evaluate and implement the new guidance and the Company has substantially completed the implementation of a third-party software solution to facilitate compliance with accounting and reporting requirements. The Company continues to enhance accounting systems and update business processes and controls related to the new guidance for leases. Collectively, these activities are expected to enable the Company to meet the new accounting and disclosure requirements upon adoption in the first quarter 2019.
The provisions of ASU No. 2016-02 are effective for the Company’s fiscal year beginning January 1, 2019, including interim periods within that fiscal year. The Company plans to elect the package of practical expedients included in this guidance, which allows us (i) to not reassess whether any expired or existing contracts contain leases; (ii) to not reassess the lease classification for any expired or existing leases; (iii) to account for a lease and non-lease component as a single component for certain classes of assets; and (iv) to not reassess the initial direct costs for existing leases. In addition, the Company does not plan to recognize short-term leases on its Consolidated Balance Sheets and will recognize the expense for those lease payments in the Consolidated Statements of Operations.
In July 2018, the FASB issued ASU No. 2018-11, “Leases - Targeted Improvements,” as an update to the previously-issued guidance. This update added a transition option which allows for the recognition of a cumulative effect adjustment to the opening balance of retained earnings in the period of adoption without recasting the financial statements in periods prior to adoption. The Company plans to elect this transition option.
We expect the most significant judgments and impacts upon adoption of ASU No. 2016-02 to include the following items:
|
|
•
|
The Company believes the most significant impact of the adoption of ASU No. 2016-02 relates to the accounting for our triple net leases, which requires us to determine the classification (operating or financing) of each component contained within each of our Master Leases with our REIT landlords which will impact the initial valuation of the right-of-use asset and corresponding lease liability at the January 1, 2019 adoption date as well as the subsequent expense recognition within our Consolidated Statements of Operations. We continue to evaluate our existing sales and leaseback transactions and are evaluating if certain properties building and/or land would be considered a financing or operating lease. If certain properties are derecognized, upon adoption on January 1, 2019, we would derecognize our existing financial obligation and the net book value of the property associated with the previously failed sale-leaseback transaction. A change in the sale-leaseback accounting conclusion would also result in the recognition of a lease liability and right of use asset and a material impact to opening retained earnings. This change will also increase operating expenses and decrease interest expense and a reclassification of certain cash payments from financing outflows to operating outflows in our Consolidated Statements of Cash Flows.
|
|
|
•
|
Upon adoption on January 1, 2019, we will recognize right-of-use assets and lease liabilities that have not previously been recorded. The lease liability for operating leases is based on the net present value of future minimum lease payments. The right-of-use asset for operating leases is based on the lease liability adjusted for the reclassification of certain balance sheet amounts such as deferred rent. Deferred and prepaid rent will not be presented separately after the adoption of the new lease standard.
|
We expect this standard to have a material impact on our Consolidated Financial Statements and related disclosures. We are finalizing the impact of the standard to our accounting policies, processes, disclosures, and internal control over financial reporting.
The adoption of this standard will have no impact on the Company’s covenant compliance under its current debt agreements.
In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, “Compensation - Stock Compensation” (which currently only includes share-based payments to employees), to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This new standard supersedes Subtopic 505-50, “Equity - Equity-Based Payments to Non-Employees.” The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2018 with early adoption permitted, but no earlier than a company’s adoption date of ASC 606. The Company does not expect the adoption to have a material impact to its Consolidated Financial Statements.
New Accounting Pronouncements to be Implemented in Fiscal Year 2020
In August 2018, the FASB issued ASU No. 2018-15, “Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” These amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contact with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by these amendments. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact to its Consolidated Financial Statements.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement.” The ASU removes the requirement to disclose: (a) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (b) the policy for timing of transfers between levels; and (c) the valuation processes for Level 3 fair value measurements. This new standard requires disclosure of changes in unrealized gains and losses for the period included in other comprehensive income (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments should be applied retrospectively to all periods presented upon their effective date. The guidance is effective for public companies for fiscal years, and interim fiscal periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. The Company is currently evaluating this guidance to determine the impact on its disclosures.
Note 5—Acquisitions and Other Investments
Pinnacle Acquisition
On October 15, 2018, the Company acquired all of the outstanding shares of Pinnacle for a total purchase price of
$2,816.2 million
, which consisted of (i) a cash payment of
$20.00
per share of Pinnacle common stock, totaling
$1,252.2 million
; (ii) issuance of Penn common stock in the amount of
$749.7 million
; and (iii) the retirement of
$814.3 million
of Pinnacle debt obligations. As discussed in
Note 1, “Organization,”
in conjunction with the Pinnacle Acquisition, the Company divested the membership interests of certain Pinnacle subsidiaries which operated the Divested Properties to Boyd for
$604.9 million
of cash, subject to customary final working capital adjustments; GLPI acquired the real estate assets associated with the Plainridge Park Casino for
$250.0 million
, and concurrently leased back the real estate assets to the Company; and a subsidiary of Boyd acquired the real estate assets associated with Belterra Park from a subsidiary of GLPI, from which Penn received proceeds of
$57.7 million
. Additionally, as a part of the transaction, the Pinnacle Master Lease was assumed and amended by the Company. For more information on the Pinnacle Master Lease and related amendment, see
Note 10, “Master Lease Financing Obligations and Lease Obligations.”
The primary reasons for the acquisition are as follows: (i) the expectation that the Pinnacle Acquisition will create economies of scale and other geographic advantages by broadening the Company’s portfolio of properties to
40
properties across
18
jurisdictions; (ii) the opportunity to combine two of the top customer loyalty programs in the industry to drive incremental revenue while also benefiting from enhanced promotional opportunities in online and social gaming across the Company’s portfolio; and (iii) the identification of revenue and cost synergies driven by the elimination of corporate overhead redundancies and improved property level efficiencies, with limited incremental costs required to scale operations and integrate Pinnacle.
In completing the acquisition, each share of Pinnacle common stock (other than treasury shares held by Pinnacle) outstanding as of October 12, 2018, on a fully-diluted basis, was automatically converted into the right to receive (i)
0.42
of a fully-paid and nonassessable share of Penn common stock (the “Share Exchange Ratio”) plus (ii)
$20.00
in cash. The stock price used to determine the fair value of the stock portion of the purchase price, was based on the volume-weighted average price of a share of Penn common stock as quoted on NASDAQ Global Select Market for the ten trading days between September 28, 2018 and October 11, 2018, which was
$29.80
. The actual number of shares of Penn common stock issued to Pinnacle shareholders upon closing was
26,295,439
and the value of those shares was based on the closing price of Penn common stock on October 15, 2018, which was
$28.51
.
The following table presents the calculation of the total purchase price:
|
|
|
|
|
(in thousands, except per share data)
|
October 15, 2018
|
Pinnacle diluted shares outstanding
|
62,608,188
|
|
Share Exchange Ratio
|
0.42
|
|
Shares of Penn common stock issued to former Pinnacle shareholders
|
26,295,439
|
|
Price per share of Penn common stock
|
$
|
28.51
|
|
Fair value of Penn common stock issued to former Pinnacle shareholders
|
749,683
|
|
Cash paid to former Pinnacle shareholders
|
1,252,259
|
|
Cash paid by Penn to retire Pinnacle debt, inclusive of accrued interest
|
814,273
|
|
Purchase price
|
$
|
2,816,215
|
|
The purchase price excludes
$89.7 million
of transaction costs, which were expensed as incurred and included in “General and administrative” within our Consolidated Statement of Operations for the year ended December 31, 2018.
Due primarily to the scale and complexity of the Pinnacle Acquisition, the Company has not yet finalized its valuation analysis and is in the process of evaluating key assumptions that derive the fair value of the assets acquired and liabilities assumed, including the income tax balances. Therefore, the allocation of the purchase price is preliminary and subject to change. The following table reflects the preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed, with the excess recorded as goodwill:
|
|
|
|
|
(in thousands)
|
October 15, 2018
|
Cash and restricted cash
|
$
|
124,231
|
|
Assets held for sale
(1)
|
667,036
|
|
Other current assets
(2)
|
80,622
|
|
Property and equipment - non-Pinnacle Master Lease
|
318,856
|
|
Property and equipment - Pinnacle Master Lease
|
3,984,119
|
|
Goodwill
|
219,531
|
|
Other intangible assets
|
|
Gaming licenses
|
1,046,000
|
|
Trademarks
|
298,000
|
|
Customer relationships
|
22,400
|
|
Other long-term assets
(2)
|
38,767
|
|
Total assets
|
$
|
6,799,562
|
|
|
|
Long-term financing obligation, including current portion
(3)
|
$
|
3,427,016
|
|
Other current liabilities
(4)
|
200,547
|
|
Deferred tax liabilities
|
339,149
|
|
Other long-term liabilities
(4)
|
16,635
|
|
Total liabilities
|
3,983,347
|
|
Net assets acquired
|
$
|
2,816,215
|
|
|
|
(1)
|
Assets held for sale represents (i) the proceeds and working capital adjustments related to the divested properties which were sold to Boyd; and (ii) proceeds received from GLPI related to the sale of the Belterra Park real estate assets.
|
|
|
(2)
|
Other current assets consist primarily of accounts receivable, prepaid expenses and inventories. Other long-term assets consist primarily of long-term notes receivables and deposits.
|
|
|
(3)
|
Long-term financing obligation, including current portion represents the financing obligation associated with Pinnacle Master Lease, as amended.
|
|
|
(4)
|
Other current liabilities consist primarily of accounts payable, accrued compensation and accrued taxes. Other long-term liabilities primarily relate to deferred compensation.
|
The Company used the income, market, or cost approach (or a combination thereof) for the valuation as appropriate and used valuation inputs in these models and analyses that were based on market participant assumptions. Market participants are considered to be buyers and sellers unrelated to Penn in the principal or most advantageous market for the asset or liability. For certain items, the carrying amount was determined to be a reasonable approximation of fair value based on information available to Penn management. Property acquired is inclusive of (i) non-Pinnacle Master Lease property related to our operations (such as equipment for use in gaming operations, land/leasehold improvements and furniture and equipment), which was determined to have a fair value of approximately
$319 million
and (ii) Pinnacle Master Lease property (such as buildings, boats, vessels, barges, and implied land and land use rights), which was determined to have a fair value of approximately
$3,984 million
at the acquisition date. Land use rights represent the intangible value of the Company’s ability to utilize and access land associated with long term ground lease agreements that give the Company the exclusive rights to operate the casino gaming facilities associated with such agreements. Management determined the fair value of its (i) vessels based on valuations performed by third-party specialists; (ii) land and land use rights based on the land residual technique; (iii) office equipment, computer equipment and slot machine gaming devises based on the market approach; and (iv) other property based on the cost approach supported where available by observable market data which includes consideration of obsolescence.
Acquired identifiable intangible assets consist of gaming licenses and trademarks, which are both indefinite-lived intangible assets, and customer relationships, which are amortizing intangible assets and have been assigned a useful life of
2.0 years
. Management valued (i) gaming licenses using the Greenfield Method under the income approach, which estimates the fair value of the gaming license using a discounted cash flow model assuming the Company built a casino with similar utility to that of the existing facility and assumes a theoretical start-up company going into business without any assets other than the intangible asset being valued; (ii) trademarks using the relief-from-royalty method under the income approach; and (iii) customer relationships (rated player databases) using the with-and-without method of the income approach. All valuation methods are forms of the income approach supported by observable market data for peer casino operator companies.
The goodwill is partially attributable to Penn reporting units that existed prior to the Pinnacle Acquisition as it is expected that these reporting units will experience revenue growth and cost synergies resulting from the combination of the Penn and Pinnacle businesses. Goodwill from the Pinnacle Acquisition, of which
$92.4 million
is deductible for tax purposes, has been preliminarily allocated to the Company’s reportable segments as follows:
|
|
|
|
|
|
(in thousands)
|
|
Goodwill
|
Reportable segment:
|
|
|
Northeast
|
|
$
|
56,400
|
|
South
|
|
48,300
|
|
West
|
|
51,431
|
|
Midwest
|
|
63,400
|
|
Total
|
|
$
|
219,531
|
|
The following table includes the financial results of the Pinnacle properties since the acquisition date which is included within our Consolidated Statement of Operations for the year ended December 31, 2018:
|
|
|
|
|
(in thousands)
|
Period from October 15, 2018 through December 31, 2018
|
Revenues
|
$
|
385,863
|
|
Net income
|
$
|
4,664
|
|
The following table includes unaudited pro forma consolidated financial information assuming our acquisition of Pinnacle had occurred as of January 1, 2017. The pro forma financial information does not necessarily represent the results that may occur in the future. The pro forma amounts include the historical operating results of Penn and Pinnacle prior to the acquisition, with adjustments directly attributable to the acquisition, inclusive of adjustments for acquisition costs.
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands, unaudited)
|
2018
|
|
2017
|
Revenues
|
$
|
5,069,425
|
|
|
$
|
5,036,559
|
|
Net income (loss)
|
$
|
83,155
|
|
|
$
|
(38,045
|
)
|
Greektown Casino-Hotel
On November 14, 2018, the Company announced that it had entered into a definitive agreement to acquire the operations of Greektown Casino-Hotel in Detroit, Michigan for approximately
$300 million
in cash. Simultaneous with the closing of the transaction, the Company will enter into a triple net lease agreement with VICI Properties, Inc. (“VICI”), a publicly-traded REIT, for the real estate assets used in the operations of the property. The lease will have an initial annual rent of
$55.6 million
and an initial term of
15 years
, with
four
five
-year renewal options. The transaction will be financed with a combination of cash on hand and debt. The transaction, which is expected to close in the second quarter 2019, is subject to approval of the Michigan Gaming Control Board and other customary closing conditions.
1
st
Jackpot Casino Tunica and Resorts Casino Tunica
On May 1, 2017, the Company acquired RIH Acquisitions MS I, LLC and RIH Acquisitions MS II, LLC, the holding companies for the gaming operations of 1
st
Jackpot Casino Tunica and Resorts Casino Tunica, for total cash consideration of
$47.0 million
. The Company leases the underlying real estate assets associated with these properties from GLPI pursuant to the
Penn Master Lease
. For more information, see
Note 10, “Master Lease Financing Obligations and Lease Obligations.”
Rocket Speed
On August 1, 2016, the Company acquired
100%
of the outstanding equity securities of social casino game developer, Rocket Speed, for initial cash consideration of
$60.5 million
subject to customary working capital adjustments. The stock purchase agreement included contingent consideration payments over the next
two years
that were based on a multiple of
6.25
times Rocket Games’ then trailing-
twelve
-months earnings before interest, taxes, depreciation and amortization (“EBITDA”), subject to a cap of
$110 million
. Up to
$10 million
of the contingent consideration was accounted for as compensation as it was tied to continued employment over a
two
-year period. The fair value of the contingent purchase price was estimated to be
$34.4 million
at the acquisition date.
In September 2017,
PIV
reached an agreement with the former shareholders of Rocket Speed to buy out the remaining contingent consideration, which resulted in a benefit of
$22.2 million
, which is included within “General and administrative” within our Consolidated Statements of Operations for the year ended December 31, 2017.
Jamul Indian Village Development Corporation
On April 5, 2013, the Company announced that, subject to final National Indian Gaming Commission approval, it and the Jamul Tribe entered into definitive agreements to assist the Jamul Tribe in the development of a Hollywood Casino-branded casino on the Jamul Tribe’s trust land in San Diego County, California. The definitive agreements were entered into to: (i) secure the development, management, and branding services of the Company to assist the Jamul Tribe during the pre-development and entitlement phase of the project; (ii) set forth the terms and conditions under which the Company would provide a loan or loans to the JIVDC to fund certain development costs; and (iii) create an exclusive arrangement between the parties.
The Jamul Tribe is a federally recognized Indian Tribe holding a government-to-government relationship with the U.S. through the U.S. Department of the Interior’s Bureau of Indian Affairs and possessing certain inherent powers of self-government. The Jamul Tribe is the beneficial owner of approximately six acres of reservation land located within the exterior boundaries of the State of California held by the U.S. in trust for the Jamul Tribe (the “Property”). The Jamul Tribe exercises jurisdiction over the Property pursuant to its powers of self-government and consistent with the resolutions and ordinances of the Jamul Tribe.
In January 2014, the Company announced the commencement of construction activities at the site. The facility opened to the public on October 10, 2016. The Company provided a portion of the financing to the JIVDC in connection with the project and, following the opening, had managed and provided branding for the casino.
The Company accounted for the development agreement and related loan commitment letter with the JIVDC as a loan (the “Loan”) with accrued interest in accordance with ASC Topic 310, “Receivables” (“ASC 310”). The Loan represented advances made by the Company to the JIVDC for the development and construction of a gaming facility for the Jamul Tribe on reservation land. As such, the Jamul Tribe owned the casino and its related assets and liabilities. Repayment of funds advanced to the Jamul Tribe was primarily predicated on cash flows from the operations of the facility.
In December 2015, the Company entered into an agreement to purchase a
$60 million
subordinated note from the previous developer of the Jamul Indian Village project for
$24 million
. Interest on this subordinated note, as of the effective date and at all times thereafter until the Loan has been paid in full, were to accrue as follows: as of the effective date, no interest shall
accrue initially; at the opening date, interest shall accrue at a simple fixed rate of
4.25%
per annum. The subordinated note is subordinated to the Loan, and payments on the subordinated note may only be made after all necessary payments are made on the Loan subject to certain limitations. The Company recorded the subordinated note at its acquisition price of
$24 million
, which was considered to be its fair value. As described below, this subordinated note was repaid in connection with the Jamul Tribe refinancing of its existing indebtedness and the Company received a
$6 million
premium, which was accounted for as an origination fee on our new loan with the JIVDC.
On October 20, 2016, the JIVDC obtained long-term secured financing, consisting of revolving and term loan credit facilities (the “Credit Facilities”) totaling approximately
$460 million
. The Credit Facilities, all of which were due in 2022, consisted of a
$5 million
revolving credit facility, a
$340 million
term loan B facility and a
$98 million
term loan C facility (the “Term Loan C”). The revolving credit facility was provided by various commercial banks; the term loan B facility was held by an affiliate of Och-Ziff Real Estate; and the Term Loan C was held by the Company. The Company accounted for the Term Loan C with the JIVDC as a loan in accordance with ASC 310.
Additionally, on October 20, 2016, the Company was repaid a net amount of
$274.9 million
(consisting of reimbursements totaling
$372.9 million
less funds advanced of
$98.0 million
) of the advances to the JIVDC for the development and construction of the property as well as previously purchased Jamul Tribal debt.
Although Hollywood Casino Jamul-San Diego opened to strong business and earnings volumes in October 2016, which met our expectations, results began to soften earlier and with a steeper drop-off than anticipated. As a result, we concluded the Term Loan C was impaired as of December 31, 2016 and at all time periods subsequent to this date. A loan is considered impaired when, based on current information, events and projections, it is probable that the Company will be unable to collect the scheduled payments of principal and/or interest when contractually due under the terms of the loan agreement. The fair value of the Loan was not observable, nor secured by any significant levels of collateral. Therefore, the Loan was not measured using a practical expedient (observable market rate of interest or fair value of collateral) under ASC 310. As such, an impairment charge recorded to the extent the present value of expected future cash flows discounted at the loan’s effective interest rate exceeded the carrying amount of the loan. The Company recorded interest income on a cash basis to the extent a reserve was not required for the impaired loan.
As of June 30, 2017, the JIVDC was effectively in breach of a financial covenant requirement with respect to debt-to-earnings ratios and as of September 30, 2017, the JIVDC was in active negotiations with its lenders to modify certain terms of its loan agreements, including the elimination of its June 30, 2017 financial covenant requirement. Amended terms that were negotiated during the fourth quarter 2017, were not accepted by the Jamul Tribe. As of December 31, 2017, the JIVDC was in default on its obligations. The Term Loan C was fully subordinated to the other lenders that had extended credit to the JIVDC.
In February 2018, the Company and the Jamul Tribe mutually agreed that Penn would no longer manage the facility or provide branding and development services as of May 28, 2018. The Company performed a comprehensive analysis of the future cash flows that we expected to receive on the Term Loan C based upon our best estimates of the operations of the facility and the concessions we would grant to the JIVDC. The expected cash flows to be received by the Company on the Term Loan C were then discounted at the Term Loan C’s effective interest rate in accordance with ASC 310, which was less than its carrying amount as of December 31, 2017. Therefore, the Company recorded a charge of
$86.0 million
within its Consolidated Statements of Operations for the year ended December 31, 2017, of which
$64.0 million
was recorded to an allowance for loan loss and
$22.0 million
was recorded as a reserve for unfunded loan commitments. The reserve for unfunded loan commitments is included in “Other noncurrent liabilities” within the Consolidated Balance Sheets as of December 31, 2017. In addition to the reserves mentioned above, the Company recorded charges of
$3.8 million
related to certain advances made to the JIVDC.
The unpaid principal balance of the Term Loan C as of December 31, 2017 was
$98.3 million
and the net carrying amount was
$20.9 million
. The Company’s remaining exposure as of December 31, 2017 was
$27.9 million
, inclusive of future unfunded commitments on the Term Loan C.
On May 25, 2018, the Company entered into a purchase agreement (the “Purchase Agreement”) with the senior lender under the credit facility for the gaming facility to sell them all of the Company’s outstanding rights and obligations under the Term Loan C and the JIVDC commitments. Pursuant to the Purchase Agreement and related agreements, the Company received cash proceeds of
$15.2 million
from the sale and has been relieved of all rights and obligations with respect to the JIVDC. The sale of the loan resulted in a recovery of loan losses and unfunded loan commitments of
$17.0 million
for the year ended
December 31, 2018
.
Retama Park Racetrack
We have a management contract with Retama Development Corporation (“RDC”), a local government corporation of the City of Selma, Texas, to manage the day-to-day operations of Retama Park Racetrack, located outside of San Antonio, Texas. In addition, we own
1.0%
of the equity of Retama Nominal Holder, LLC, which holds a nominal interest in the racing license used to operate Retama Park Racetrack. Additionally, we own a
75.5%
interest in Pinnacle Retama Partners, LLC (“PRP”), which owns the contingent gaming rights that may arise if gaming under the existing racing license becomes legal in Texas in the future.
As of December 31, 2018, PRP held
$16.9 million
in promissory notes issued by RDC and
$7.5 million
in local government corporation bonds issued by RDC, at amortized cost. The promissory notes and local government corporation bonds, which are included in “Other assets” within our Consolidated Balance Sheets, have long-term contractual maturities and are collateralized by the assets of Retama Park Racetrack. The contractual terms of these promissory notes include interest payments due at maturity; however, we have not recorded accrued interest on these promissory notes because uncertainty exists as to RDC’s ability to make interest payments. We have the positive intent and ability to hold the local government corporation bonds to maturity and until the amortized cost is recovered.
Note 6—Investments in and Advances to Unconsolidated Affiliates
As of
December 31, 2018
, investment in and advances to unconsolidated affiliates primarily included the Company’s
50%
investment in Kansas Entertainment, which is a joint venture with International Speedway, its
50%
interest in Freehold Raceway, and its
50%
joint venture with MAXXAM, Inc. (“MAXXAM”) that owns and operates racetracks in Texas.
Kansas Joint Venture
The Company has a
50%
investment in Kansas Entertainment, which owns the Hollywood Casino at Kansas Speedway. As of
December 31, 2018
and
2017
, the Company’s investment balance was
$89.4 million
and
$88.3 million
, respectively. During the years ended
December 31, 2018
,
2017
and
2016
, the Company received distributions from Kansas Entertainment totaling
$27.0 million
,
$26.0 million
and
$25.8 million
, respectively, which the Company deemed to be returns on its investment based on the source of those cash flows from the normal business operations of Kansas Entertainment.
As of and for the years ended
December 31, 2018
and
2017
, the Company determined that Kansas Entertainment is a VIE that should not be consolidated since the Company does not qualify as the primary beneficiary. In making this determination, the Company concluded that it does not have the ability to direct the activities of Kansas Entertainment that most significantly impact Kansas Entertainment’s economic performance without the approval of International Speedway. Furthermore, International Speedway has substantive participating rights in Kansas Entertainment.
For the year ended
December 31, 2018
, the Company’s investment in Kansas Entertainment met the requirements of Regulation S-X Rule 4-08(g) to provide summarized financial information. The following table provides summary balance sheet and income statement information of Kansas Entertainment as required under Regulation S-X Rule 1-02(bb) for the comparative periods that are included within the Company’s Consolidated Financial Statements:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Current assets
|
$
|
18,260
|
|
|
$
|
18,452
|
|
|
$
|
16,638
|
|
Noncurrent assets
|
$
|
161,031
|
|
|
$
|
165,801
|
|
|
$
|
176,050
|
|
Current liabilities
|
$
|
15,099
|
|
|
$
|
17,861
|
|
|
$
|
15,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Revenues
|
$
|
159,017
|
|
|
$
|
155,636
|
|
|
$
|
152,926
|
|
Operating expenses
|
110,409
|
|
|
114,681
|
|
|
121,006
|
|
Operating income
|
48,608
|
|
|
40,955
|
|
|
31,920
|
|
Net income
|
$
|
48,608
|
|
|
$
|
40,955
|
|
|
$
|
31,920
|
|
|
|
|
|
|
|
Net income attributable to Penn National Gaming, Inc.
|
$
|
24,304
|
|
|
$
|
20,478
|
|
|
$
|
15,960
|
|
In addition to the assessment performed by the Company of its investment in Kansas Entertainment under the requirements of Regulation S-X Rule 4-08(g), the Company also assessed its investment in Kansas Entertainment under the requirements of Regulation S-X Rule 3-09(b) for the year ended
December 31, 2018
and determined it was required to provide audited financial statements of Kansas Entertainment. The audited financial statements of Kansas Entertainment for the years ended June 30, 2018,
2017
and
2016
are provided as exhibits to this document to comply with this rule.
Texas and New Jersey Joint Ventures
The Company has a
50%
interest in a joint venture with MAXXAM, which owns and operates the Sam Houston Race Park in Houston, Texas and the Valley Race Park in Harlingen, Texas, and holds a license for a racetrack in Austin, Texas. Sam Houston Race Park hosts thoroughbred and quarter-horse racing and offers daily simulcast operations, and Valley Race Park features dog racing and simulcasting. In addition, through a separate arrangement, the Company has a
50%
interest in a joint venture with Greenwood Limited Jersey, Inc. (“Greenwood”), which owns and operates Freehold Raceway, in Freehold, New Jersey. The property features a half-mile standardbred racetrack and a grandstand.
As of
December 31, 2018
and
2017
, the Company has determined that neither its Texas joint venture nor its New Jersey joint venture qualify as a VIE. Using the guidance for entities that are not VIEs, in both cases, the Company determined that it did not have a controlling financial interest in either of the joint ventures as of and for the years ended
December 31, 2018
and
2017
, primarily as it did not have the ability to direct the activities of either of the joint ventures that most significantly impacted the joint ventures’ economic performance without the input of MAXXAM or Greenwood, respectively. Therefore, the Company did not consolidate either of its investment in the joint ventures as of and for the years ended
December 31, 2018
and
2017
.
Note 7—Property and Equipment
Property and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
Property and equipment - non-Master Leases
|
|
|
|
Land and improvements
|
$
|
343,987
|
|
|
$
|
294,695
|
|
Building, vessels and improvements
|
342,944
|
|
|
429,015
|
|
Furniture, fixtures and equipment
|
1,565,830
|
|
|
1,385,889
|
|
Leasehold improvements
|
152,943
|
|
|
130,801
|
|
Construction in progress
|
25,473
|
|
|
15,617
|
|
|
2,431,177
|
|
|
2,256,017
|
|
Less: Accumulated depreciation
|
(1,400,198
|
)
|
|
(1,345,147
|
)
|
|
1,030,979
|
|
|
910,870
|
|
Property and equipment - Master Leases
|
|
|
|
Land and improvements
|
2,970,969
|
|
|
424,700
|
|
Building, vessels and improvements
|
3,845,062
|
|
|
2,258,577
|
|
|
6,816,031
|
|
|
2,683,277
|
|
Less: Accumulated depreciation
|
(978,242
|
)
|
|
(837,478
|
)
|
|
5,837,789
|
|
|
1,845,799
|
|
Property and equipment, net
|
$
|
6,868,768
|
|
|
$
|
2,756,669
|
|
Depreciation expense for all of our property and equipment was
$251.9 million
,
$248.2 million
and
$261.9 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively, of which,
$112.1 million
,
$92.4 million
and
$91.1 million
, pertained to real estate assets subject to either of our Master Leases, respectively. Interest capitalized in connection with major construction projects was
zero
,
$0.2 million
and
$0.1 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
During the year ended December 31, 2018, we recorded
$34.3 million
of impairment on the property and equipment associated with our Resorts Casino Tunica property, principally relating to the real estate assets subject to the Penn Master Lease. The charge was the result of an impairment assessment performed after reviewing the financial results and projected results of this facility, which has been impacted by nearby competition. This impairment is included in “Provision for loan loss
and unfunded loan commitments to the JIVDC, net of recoveries, and impairment losses” within our Consolidated Statements of Operations. For additional information, see
Note 16, “Fair Value Measurements.”
Note 8—Goodwill and Other Intangible Assets
A reconciliation of goodwill and accumulated goodwill impairment losses, by reportable segment, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Northeast Segment
|
|
South Segment
|
|
West Segment
|
|
Midwest Segment
|
|
Other
|
|
Total
|
Balance as of January 1, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
$
|
792,024
|
|
|
$
|
100,929
|
|
|
$
|
158,992
|
|
|
$
|
1,045,983
|
|
|
$
|
155,322
|
|
|
$
|
2,253,250
|
|
Accumulated goodwill impairment losses
|
(707,593
|
)
|
|
(34,522
|
)
|
|
(1,812
|
)
|
|
(435,283
|
)
|
|
(84,355
|
)
|
|
(1,263,565
|
)
|
Goodwill, net
|
84,431
|
|
|
66,407
|
|
|
157,180
|
|
|
610,700
|
|
|
70,967
|
|
|
989,685
|
|
Goodwill acquired during year
(1)
|
—
|
|
|
35,929
|
|
|
—
|
|
|
669
|
|
|
—
|
|
|
36,598
|
|
Impairment losses during year
|
—
|
|
|
—
|
|
|
(14,821
|
)
|
|
—
|
|
|
(3,205
|
)
|
|
(18,026
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(160
|
)
|
|
(160
|
)
|
Balance as of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
792,024
|
|
|
136,858
|
|
|
158,992
|
|
|
1,046,652
|
|
|
155,322
|
|
|
2,289,848
|
|
Accumulated goodwill impairment losses
|
(707,593
|
)
|
|
(34,522
|
)
|
|
(16,633
|
)
|
|
(435,283
|
)
|
|
(87,720
|
)
|
|
(1,281,751
|
)
|
Goodwill, net
|
84,431
|
|
|
102,336
|
|
|
142,359
|
|
|
611,369
|
|
|
67,602
|
|
|
1,008,097
|
|
Goodwill acquired during year
|
56,400
|
|
|
48,300
|
|
|
51,431
|
|
|
63,400
|
|
|
794
|
|
|
220,325
|
|
Balance as of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
848,424
|
|
|
185,158
|
|
|
210,423
|
|
|
1,110,052
|
|
|
156,116
|
|
|
2,510,173
|
|
Accumulated goodwill impairment losses
|
(707,593
|
)
|
|
(34,522
|
)
|
|
(16,633
|
)
|
|
(435,283
|
)
|
|
(87,720
|
)
|
|
(1,281,751
|
)
|
Goodwill, net
|
$
|
140,831
|
|
|
$
|
150,636
|
|
|
$
|
193,790
|
|
|
$
|
674,769
|
|
|
$
|
68,396
|
|
|
$
|
1,228,422
|
|
As of September 30, 2017, the Company identified an indicator of impairment on its goodwill as a result of a reversal of a significant deferred tax valuation allowance, which caused increases in the carrying amounts of certain of our reporting units. As a result of an interim assessment for impairment, the goodwill at Tropicana Las Vegas was fully impaired, resulting in an impairment charge of
$14.8 million
, and the goodwill at Sanford-Orlando Kennel Club was partially impaired, resulting in an impairment charge of
$3.2 million
. The estimated fair values of the reporting units were determined by using discounted cash flow models, which utilized Level 3 inputs. These impairments are included in “Provision for loan loss and unfunded loan commitments to the JIVDC, net of recoveries, and impairment losses” within our Consolidated Statements of Operations.
As of
December 31, 2018
,
six
reporting units had negative carrying amounts. The amount of goodwill at these reporting units was as follows (in thousands):
|
|
|
|
|
Northeast segment
|
|
Hollywood Casino at Charles Town Races
|
$
|
8,654
|
|
Hollywood Casino Columbus
|
$
|
6,200
|
|
Hollywood Casino Toledo
|
$
|
5,800
|
|
South segment
|
|
Hollywood Casino Gulf Coast
|
$
|
2,700
|
|
Midwest segment
|
|
Argosy Casino Alton
|
$
|
11,863
|
|
Hollywood Casino Joliet
|
$
|
4,600
|
|
The table below presents the gross carrying amount, accumulated amortization, and net carrying amount of each major class of other intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
|
December 31, 2017
|
(in thousands)
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net Carrying Amount
|
Indefinite-lived intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Gaming licenses
|
$
|
1,498,309
|
|
|
$
|
—
|
|
|
$
|
1,498,309
|
|
|
$
|
374,709
|
|
|
$
|
—
|
|
|
$
|
374,709
|
|
Trademarks
|
298,000
|
|
|
—
|
|
|
298,000
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
696
|
|
|
—
|
|
|
696
|
|
|
696
|
|
|
—
|
|
|
696
|
|
Amortizing intangible assets
|
|
|
|
|
|
|
|
|
|
|
|
Customer relationships
|
98,752
|
|
|
(51,544
|
)
|
|
47,208
|
|
|
75,252
|
|
|
(42,432
|
)
|
|
32,820
|
|
Other
|
61,918
|
|
|
(49,263
|
)
|
|
12,655
|
|
|
56,231
|
|
|
(41,850
|
)
|
|
14,381
|
|
Total other intangible assets
|
$
|
1,957,675
|
|
|
$
|
(100,807
|
)
|
|
$
|
1,856,868
|
|
|
$
|
506,888
|
|
|
$
|
(84,282
|
)
|
|
$
|
422,606
|
|
Other intangible assets increased by
$1,434.3 million
for the year ended
December 31, 2018
primarily due to the Pinnacle Acquisition, which is discussed in
Note 5, “Acquisitions and Other Investments.”
Additionally, we purchased two Category 4 gaming licenses to operate up to 750 slot machines and initially up to 30 table games, under each license, in York County, Pennsylvania for
$50.1 million
and in Berks County, Pennsylvania for
$7.5 million
, and real money iGaming and sports betting licenses in Pennsylvania for
$20.0 million
, all of which have been classified as indefinite-lived intangible assets. There were
no
impairment charges recorded on other intangible assets for the years ended
December 31, 2018
,
2017
or
2016
.
Our amortizing intangible assets have a weighted-average remaining amortization period of
3.5 years
. Amortization expense relating to our amortizing intangible assets were
$17.1 million
,
$18.9 million
, and
$9.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively. The following table presents the estimated amortization expense based on our amortizing intangible assets as of
December 31, 2018
(in thousands):
|
|
|
|
|
Years ending December 31:
|
|
2019
|
$
|
22,085
|
|
2020
|
16,472
|
|
2021
|
4,795
|
|
2022
|
4,063
|
|
2023
|
4,003
|
|
Thereafter
|
8,445
|
|
Total
|
$
|
59,863
|
|
Note 9—Long-term Debt
Long-term debt, net of current maturities, was as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
Senior Secured Credit Facilities:
|
|
|
|
Revolving Credit Facility due 2023
|
$
|
112,000
|
|
|
$
|
—
|
|
Term Loan A Facility due 2023
|
707,674
|
|
|
288,750
|
|
Term Loan B Facility due 2024
|
—
|
|
|
471,250
|
|
Term Loan B-1 Facility due 2025
|
1,128,750
|
|
|
—
|
|
5.625% Notes due 2027
|
400,000
|
|
|
400,000
|
|
Other long-term obligations
|
104,583
|
|
|
119,310
|
|
Capital leases
|
381
|
|
|
891
|
|
|
2,453,388
|
|
|
1,280,201
|
|
Less: Current maturities of long-term debt
|
(62,140
|
)
|
|
(35,612
|
)
|
Less: Debt discount
|
(2,748
|
)
|
|
(2,558
|
)
|
Less: Debt issuance costs
|
(38,412
|
)
|
|
(27,406
|
)
|
|
$
|
2,350,088
|
|
|
$
|
1,214,625
|
|
The following is a schedule of future minimum repayments of long-term debt as of
December 31, 2018
(in thousands):
|
|
|
|
|
Year ending December 31:
|
|
2019
|
$
|
62,140
|
|
2020
|
63,114
|
|
2021
|
81,474
|
|
2022
|
99,919
|
|
2023
|
655,069
|
|
Thereafter
|
1,491,672
|
|
Total minimum payments
|
$
|
2,453,388
|
|
Senior Secured Credit Facilities
On October 30, 2013, the Company entered into a credit agreement (the “2013 Credit Agreement”) providing for: (i) a
five
-year
$500 million
revolving credit facility (the “
2013 Revolving Credit Facility
”), (ii) a
five
-year
$500 million
term loan A facility (the “
2013 Term Loan A Facility
”) and (iii) a
seven
-year
$250 million
term loan B facility (the “
2013 Term Loan B Facility
” and collectively with the
2013 Revolving Credit Facility
and the
2013 Term Loan A Facility
, the “
2013 Senior Secured Credit Facilities
”). The
2013 Term Loan A Facility
was priced at LIBOR plus a spread (ranging from
1.25%
to
2.75%
) based on the Company’s Consolidated Total Net Leverage Ratio (as defined in the 2013 Credit Agreement). The
2013 Term Loan B Facility
was priced at LIBOR plus
2.50%
, with a
0.75%
LIBOR floor.
On April 28, 2015, the Company entered into an agreement to amend its 2013 Credit Agreement (the “Amended 2013 Credit Agreement”). In August 2015, the Amended 2013 Credit Agreement went into effect, which increased the capacity under the
2013 Revolving Credit Facility
to
$633.2 million
and increased the
2013 Term Loan A Facility
to
$646.7 million
. The Amended 2013 Credit Agreement did not impact the
2013 Term Loan B Facility
.
On January 19, 2017, the Company entered into an agreement to amend and restate its Amended 2013 Credit Agreement (the “2017 Credit Agreement”), which provided for: (i) a
five
-year
$700 million
revolving credit facility (the “Revolving Credit Facility”), a
five
-year
$300 million
term loan A facility (the “Term Loan A Facility”), and a
seven
-year
$500 million
Term Loan B facility (the “Term Loan B Facility” and collectively with the Revolving Credit Facility and the Term Loan A Facility, the “Senior Secured Credit Facilities”).
On October 15, 2018, in connection with the Pinnacle Acquisition, the Company entered into an incremental joinder agreement (the “Incremental Joinder”), which amended the 2017 Credit Agreement (the “Amended 2017 Credit Agreement”). The Incremental Joinder provided for an additional
$430.2 million
of incremental loans having the same terms as the existing
Term Loan A Facility, with the exception of extending the maturity date, and an additional
$1,128.8 million
of loans as a new tranche having new terms (the “Term Loan B-1 Facility”). The proceeds resulting from the Incremental Joinder were used; together with cash on hand and proceeds received from (i) newly-issued shares of the Company’s common stock, (ii) the sale of the Divested Properties to Boyd, (iii) the Plainridge Park Casino Sale-Leaseback, and (iv) the sale of the real estate assets associated with Belterra Park to GLPI; to (a) acquire all of the issued and outstanding equity interests of Pinnacle, (b) repay in full Pinnacle’s existing senior secured credit facilities at the time of the acquisition, (c) redeem, repurchase, defease or satisfy and discharge in full Pinnacle’s outstanding
5.625%
senior notes due 2024, (d) repay in full the Company’s outstanding borrowings under its Term Loan B Facility at the time of the acquisition, and (e) pay fees, costs and expenses associated with the foregoing. With the exception of extending the maturity date, the Incremental Joinder did not impact the Revolving Credit Facility.
The final maturity dates for the Term Loan A Facility and Term Loan B-1 Facility are October 19, 2023 and October 15, 2025, respectively. The applicable margin for the Term Loan A Facility ranges from
1.25%
to
3.00%
per annum for LIBOR loans and
0.25%
to
2.00%
per annum for base rate loans, in each case depending on the Consolidated Total Net Leverage Ratio (as defined in the Amended 2017 Credit Agreement) as of the most recent fiscal quarter. The applicable margin for the Term Loan B-1 Facility is
2.25%
per annum for LIBOR loans and
1.25%
per annum for base rate loans. The Term Loan B-1 Facility is subject to a LIBOR “floor” of
0.75%
. Prior to extinguishment, the applicable margin for the Term Loan B Facility was
2.50%
per annum for LIBOR loans and
1.50%
per annum for base rate loans. In addition, we pay a commitment fee on the unused portion of the commitments under the Revolving Credit Facility at a rate that ranges from
0.20%
to
0.50%
per annum, depending on the Consolidated Total Net Leverage Ratio as of the most recent fiscal quarter.
As of
December 31, 2018
and
2017
, the Company had conditional obligations under letters of credit issued pursuant to the Senior Secured Credit Facilities with face amounts aggregating
$30.0 million
and
$22.1 million
, respectively, resulting in
$558.0 million
and
$677.9 million
of available borrowing capacity under the Revolving Credit Facility, respectively.
For the year ended December 31, 2018, in connection with the debt financing transactions relating to the Pinnacle Acquisition and principal repayments on the Term Loan B Facility, the Company recorded
$5.5 million
in refinancing costs and a
$21.0 million
loss on early extinguishment of debt, related to refinancing costs on the extinguishment of the Term Loan B Facility and the write-off of debt issuance costs and the discount on the Term Loan B Facility. For the year ended December 31, 2017, in connection with the repayment of the
2013 Senior Secured Credit Facilities
, the Company recorded
$1.7 million
in refinancing costs and a
$2.3 million
loss on early extinguishment of debt, related to the write-off of debt issuance costs and the discount on the
2013 Term Loan B Facility
. The refinancing costs are included in “Other” within our Consolidated Statements of Operations.
The payment and performance of obligations under the Senior Secured Credit Facilities are guaranteed by a lien on and security interest in substantially all of the assets (other than excluded property such as gaming licenses) of the Company and its subsidiaries.
5.625%
Senior Unsecured Notes
On January 19, 2017, the Company completed an offering of
$400 million
aggregate principal amount of
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 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 (as defined below) and, along with loans funded under the 2017 Credit Agreement, repay amounts outstanding under its Amended 2013 Credit Agreement, including to fund related transaction fees and expenses. The remaining proceeds from the issuance of the
5.625%
Notes were used for general corporate purposes.
Redemption of
5.875%
Senior Subordinated Notes
During the year ended December 31, 2017, the Company redeemed all of its
$300 million
5.875%
senior subordinated notes (“
5.875%
Notes”), which were due in 2021. In connection with this redemption, the Company recorded a
$21.1 million
loss on early extinguishment of debt for the year ended December 31, 2017 related to the difference between the reacquisition price of the
5.875%
Notes and their carrying amount.
Other Long-Term Obligations
Ohio Relocation Fees
As of
December 31, 2018
and
2017
, other long-term obligations included
$91.3 million
and
$105.4 million
, respectively, related to the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course.
In June 2013, the Company finalized the terms of its memorandum of understanding with the State of Ohio, which included an agreement by the Company to pay a relocation fee in return for being able to relocate its existing racetracks in Toledo and Grove City to Dayton and Mahoning Valley, respectively. Upon opening of these two racinos in Ohio in September 2014, the relocation fee for each new racino was recorded at the present value of the contractual obligation, which was calculated as
$75.0 million
based on the
5.0%
discount rate included in the agreement. The relocation fee for each facility is payable as follows:
$7.5 million
upon the opening of the facility and
eighteen
semi-annual payments of
$4.8 million
beginning one year after the commencement of operations. This obligation is accreted to interest expense at an effective yield of
5.0%
. The amount included in interest expense related to this obligation was
$4.8 million
,
$5.5 million
and
$6.2 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
Event Center
As of
December 31, 2018
and
2017
, other long-term obligations included
$13.2 million
and
$13.8 million
, respectively, related to the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg.
The City of Lawrenceburg Department of Redevelopment completed construction of a hotel and event center located less than a mile away from Hollywood Casino Lawrenceburg. Effective in January 2015, by contractual agreement, a repayment obligation for the hotel and event center was assumed by a wholly-owned subsidiary of the Company in the amount of
$15.3 million
, which was financed through a loan with the City of Lawrenceburg Department of Redevelopment, in exchange for conveyance of the property. The Company is obligated to make annual payments on the loan of
$1.0 million
for
20 years
, which began in January 2016. This obligation is accreted to interest expense at its effective yield of
3.0%
. The amount included in interest expense related to this obligation was
$0.4 million
for each of the years ended
December 31, 2018
,
2017
and
2016
.
Corporate Airplane Loan
On September 30, 2016, the Company acquired a previously-leased corporate airplane that was accounted for as a capital lease, which was financed through an amortizing loan at a fixed interest rate of
5.22%
for a term of
five years
with monthly payments of
$0.2 million
and a balloon payment of
$12.6 million
at the end of the loan term. We repaid the loan in full on January 19, 2017.
Covenants
Our Senior Secured Credit Facilities and
5.625%
Notes require us, among other obligations, to maintain specified financial ratios and to satisfy certain financial tests, including the Maximum Consolidated Total Net Leverage Ratio, Maximum Consolidated Senior Secured Net Leverage Ratio and Minimum Interest Coverage Ratio (as such terms are defined in our Amended 2017 Credit Agreement) as well as the Fixed Charge Coverage Ratio (as defined in the indenture governing our
5.625%
Notes). In addition, the Company’s Senior Secured Credit Facilities and
5.625%
Notes restrict, among other things, our ability to incur additional indebtedness, incur guarantee obligations, amend debt instruments, pay dividends, create liens on assets, make investments, engage in mergers or consolidations, and otherwise restrict corporate activities. As of
December 31, 2018
, the Company was in compliance with all required financial covenants.
Note 10—Master Lease Financing Obligations and Lease Obligations
Master Lease Financing Obligations
The majority of the gaming facilities used in the Company’s operations are subject to triple net master leases; the most significant of which are the
Penn Master Lease
and the
Pinnacle Master Lease
. As discussed in
Note 3, “Summary of Significant Accounting Policies,”
the Company’s
Master Leases
are accounted for as financing obligations. Contingent rental payments, such as escalators and the percentage rents not considered to be fixed at lease inception under the Penn Master Lease and the Pinnacle Master Lease are recorded as interest expense as incurred.
Penn Master Lease
Pursuant to a triple net master lease with GLPI (the “
Penn Master Lease
”), which became effective November 1, 2013, the Company leases real estate assets associated with
20
of the gaming facilities used in its operations. The
Penn Master Lease
has an initial term of
15
years with
four
subsequent,
five
-year renewal periods on the same terms and conditions, exercisable at the Company’s option.
The payment structure under the
Penn Master Lease
includes a fixed component, a portion of which is subject to an annual escalator of up to
2%
, depending on the Adjusted Revenue to Rent Ratio (as defined in the
Penn Master Lease
) of
1.8
:1, and a component that is based on the performance of the facilities, which is prospectively adjusted (i) every
five years
by an amount equal to
4%
of the average change in net revenues of all facilities under the
Penn Master Lease
compared to a contractual baseline (other than Hollywood Casino Columbus and Hollywood Casino Toledo) during the preceding
five years
(“Penn Percentage Rent”) and (ii) monthly by an amount equal to
20%
of the revenues of Hollywood Casino Columbus and Hollywood Casino Toledo in excess of a contractual baseline.
In April 2014, we entered into an amendment to the
Penn Master Lease
in order to revise certain provisions relating to our former Argosy Casino Sioux City property. In accordance with that amendment, upon the cessation of gaming operations at Argosy Casino Sioux City on July 30, 2014, due to the termination of its gaming license, the annual payment to GLPI was reduced by
$6.2 million
. In addition, with the openings of Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course in September 2014, our annual payment increased by
$19 million
, which approximated
10%
of the real estate construction costs paid for by GLPI related to these facilities.
In connection with the acquisitions of 1
st
Jackpot Casino Tunica and Resorts Casino Tunica in May 2017, the Company’s
Penn Master Lease
financing obligation increased by
$82.6 million
, which was the price paid by GLPI for the casinos’ underlying real estate assets. As a result of the addition of these
two
properties to the
Penn Master Lease
, the annual rent payment increased by
$9.0 million
.
The Company has incurred annual escalators under the Penn Master Lease, which resulted in increases to the Company’s annual payment of
$5.4 million
,
$2.4 million
and
$4.5 million
commencing on November 1,
2018
,
2017
and
2016
, respectively. Additionally, effective November 1, 2018, the Penn Percentage Rent reset resulted in an annual rent reduction of
$11.3 million
, which will be in effect until the next Penn Percentage Rent reset, occurring on November 1, 2023.
Total lease payments under the
Penn Master Lease
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Reduction of financing obligation
|
$
|
60,061
|
|
|
$
|
57,859
|
|
|
$
|
50,548
|
|
Interest expense attributable to financing obligation
|
401,483
|
|
|
397,580
|
|
|
391,738
|
|
Total lease payments under the Penn Master Lease
|
$
|
461,544
|
|
|
$
|
455,439
|
|
|
$
|
442,286
|
|
The interest expense recognized for the years ended
December 31, 2018
,
2017
and
2016
includes
$48.9 million
,
$46.8 million
and
$43.8 million
, respectively, from contingent payments associated with the monthly variable components for Hollywood Casino Columbus and Hollywood Casino Toledo.
Pinnacle Master Lease
In connection with the Pinnacle Acquisition, the Company assumed a triple net master lease with GLPI, originally effective April 28, 2016 (“
Pinnacle Master Lease
”). Concurrent with the closing of the Pinnacle Acquisition on October 15, 2018, the Company entered into an amendment to the
Pinnacle Master Lease
to, among other things, (i) remove Ameristar Casino Resort St. Charles, Ameristar Casino Hotel Kansas City and Belterra Casino Resort, which were sold to Boyd, and (ii) add Plainridge
Park Casino, whose real estate assets were sold to GLPI and concurrently leased back to the Company for a fixed annual rent of
$25.0 million
. Further, the rent payment under the
Pinnacle Master Lease
was increased by a fixed annual amount of
$13.9 million
to adjust the rent to reflect current market conditions. Reflecting this amendment, the Company leases real estate assets associated with
twelve
of the gaming facilities used in the Company’s operations from GLPI.
Upon assumption of the
Pinnacle Master Lease
, as amended, there were
7.5 years
remaining of the initial
10
-year term, with
five
subsequent,
five
-year renewal periods exercisable at the Company’s option. The payment structure under the Pinnacle Master Lease includes a fixed component, which is subject to an annual escalator of up to
2%
, depending on the Adjusted Revenue to Rent Ratio (as defined in the
Pinnacle Master Lease
) of
1.8
:1, and a component that is based on the performance of the facilities, which is prospectively adjusted every
two years
by an amount equal to
4%
of the average change in net revenues of all facilities under the Pinnacle Master Lease compared to a contractual baseline during the preceding
two
years (“Pinnacle Percentage Rent”). The next Pinnacle Percentage Rent reset will occur effective May 1, 2020.
Total lease payments under the
Pinnacle Master Lease
were as follows:
|
|
|
|
|
(in thousands)
|
For the Year Ended December 31, 2018
|
Reduction of financing obligation
|
$
|
7,351
|
|
Interest expense attributable to financing obligation
|
62,993
|
|
Total lease payments under the Pinnacle Master Lease
(1)
|
$
|
70,344
|
|
|
|
(1)
|
Includes
$13.6 million
pertaining to the period from October 15, 2018 through October 31, 2018, which was prepaid by Pinnacle.
|
The future minimum payments related to the
Penn Master Lease
and
Pinnacle Master Lease
as of
December 31, 2018
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Penn Master Lease
|
|
Pinnacle Master Lease
|
|
Total
|
Year ending December 31:
|
|
|
|
|
|
2019
|
$
|
347,384
|
|
|
$
|
329,245
|
|
|
$
|
676,629
|
|
2020
|
347,384
|
|
|
308,067
|
|
|
655,451
|
|
2021
|
347,384
|
|
|
297,478
|
|
|
644,862
|
|
2022
|
347,384
|
|
|
297,478
|
|
|
644,862
|
|
2023
|
347,384
|
|
|
297,478
|
|
|
644,862
|
|
Thereafter
|
8,626,711
|
|
|
8,131,064
|
|
|
16,757,775
|
|
Total minimum lease payments
|
10,363,631
|
|
|
9,660,810
|
|
|
20,024,441
|
|
Less: Amounts representing interest
|
(7,100,050
|
)
|
|
(7,285,956
|
)
|
|
(14,386,006
|
)
|
Plus: Residual values
|
215,179
|
|
|
1,294,801
|
|
|
1,509,980
|
|
Present value of future minimum lease payments
|
3,478,760
|
|
|
3,669,655
|
|
|
7,148,415
|
|
Less: Current portion of financing obligation
|
(21,114
|
)
|
|
(46,663
|
)
|
|
(67,777
|
)
|
Long-term portion of financing obligation
|
$
|
3,457,646
|
|
|
$
|
3,622,992
|
|
|
$
|
7,080,638
|
|
Operating Lease Commitments
The Company is liable under numerous operating leases for various assets, including, but not limited to ground leases, the Meadows Lease (as defined and discussed below), automobiles, and other equipment. Total rental expense under all operating lease agreements was
$58.1 million
,
$45.4 million
and
$40.3 million
for the years ended
December 31, 2018
,
2017
and
2016
, respectively.
The future minimum lease commitments relating to the base lease rent portion of noncancelable operating leases as of
December 31, 2018
were as follows (in thousands):
|
|
|
|
|
Year ending December 31:
|
|
2019
|
$
|
43,913
|
|
2020
|
40,510
|
|
2021
|
30,497
|
|
2022
|
30,109
|
|
2023
|
28,454
|
|
Thereafter
|
272,492
|
|
Total
|
$
|
445,975
|
|
Meadows Lease
In connection with the Pinnacle Acquisition, the Company assumed a triple net lease of the real estate assets used in the operation of Meadows Racetrack and Casino, originally effective September 9, 2016 (the “
Meadows Lease
”), with GLPI as the landlord. The Meadows Lease is accounted for as an operating lease.
Upon assumption of the
Meadows Lease
, there were
8.0 years
remaining of the initial
10
-year term, with
three
subsequent, five-year renewal options followed by
one
four-year renewal option on the same terms and conditions, exercisable at the Company’s option. The payment structure under the Meadows Lease includes a fixed component (“Meadows Base Rent”), which is subject to an annual escalator of up to
5%
for the initial term or until the lease year in which Meadows Base Rent plus Meadows Percentage Rent (see defined below) is a total of
$31.0 million
, subject to certain adjustments, and up to
2%
thereafter, subject to an Adjusted Revenue to Rent Ratio (as defined in the
Meadows Lease
) of
2.0
:1. The Meadows Percentage Rent is based on the performance of the facilities, which is prospectively adjusted for the next
two
-year period equal to
4%
of the average annual net revenues during the trailing
two
-year period. The next Meadows Percentage Rent reset will occur effective October 1, 2020.
Total lease payments under the
Meadows Lease
were
$5.6 million
during the year ended December 31, 2018, of which
$3.8 million
was recorded as rent expense, which is included in “General and administrative” within our Consolidated Statements of Operations.
Note 11—Commitments and Contingencies
Litigation
The Company is subject to various legal and administrative proceedings relating to personal injuries, employment matters, commercial transactions, development agreements and other matters arising in the ordinary course of business. The Company does not believe that the final outcome of these matters will have a material adverse effect on the Company’s consolidated financial position or results of operations. In addition, the Company maintains what it believes is adequate insurance coverage to further mitigate the risks of such proceedings. However, such proceedings can be costly, time consuming and unpredictable and; therefore, no assurance can be given that the final outcome of such proceedings may not materially impact the Company’s consolidated financial condition or results of operations. Further, no assurance can be given that the amount or scope of existing insurance coverage will be sufficient to cover losses arising from such matters.
Legal proceedings could result in costs, settlements, damages, or rulings that materially impact the Company’s consolidated financial condition or operating results. The Company believes that it has meritorious defenses, claims and/or counter-claims with respect to these proceedings, and intends to vigorously defend itself or pursue its claims.
Location Share Agreements
The Company’s subsidiary, PSG, enters into location share agreements with bar and retail establishments in Illinois. These agreements are contracts which allow PSG to place VGTs in the bar or retail establishment in exchange for a percentage of the variable revenue generated by the VGTs. PSG holds the gaming license with the state of Illinois and the location share percentage is determined by the state of Illinois. For the years ended
December 31, 2018
,
2017
and
2016
, the total location share payments made by PSG, which are recorded within our Consolidated Statements of Operations as gaming expenses, were
$34.7 million
,
$29.7 million
, and
$21.2 million
, respectively.
Purchase Obligations
The Company has obligations to purchase various goods and services totaling
$97.2 million
as of
December 31, 2018
, of which
$64.9 million
will be incurred in
2019
.
Capital Expenditure Commitments
The Company’s properties that are subject to either of the
Master Leases
are obligated to spend a minimum of
1%
of annual net revenues for the maintenance of those facilities.
Labor Agreements
The Company is required to have agreements with the horsemen at the majority of its racetracks to conduct its live racing and/or simulcasting activities. In addition, in order to operate gaming machines and table games in West Virginia, the Company must maintain agreements with each of the Charles Town horsemen, pari-mutuel clerks and breeders.
At Hollywood Casino at Charles Town Races, the Company has an agreement with the Charles Town Horsemen’s Benevolent and Protective Association, which expired on June 18, 2018, but has been extended until April 18, 2019. Hollywood Casino at Charles Town Races also has an agreement with the breeders that expires on June 30, 2019. Additionally, the pari-mutuel clerks at Charles Town are represented under a collective bargaining agreement with the West Virginia Union of Mutuel Clerks, which expired on December 31, 2010, but has been extended on a month-to-month basis.
The Company’s agreement with the Pennsylvania Horsemen’s Benevolent and Protective Association at Hollywood Casino at Penn National Race Course was renewed through January 31, 2020. The Company has an agreement with Laborers’ International Union of North America Local 108, regarding both on-track and off-track pari-mutuel clerks and admission staff, which expires on December 1, 2021. The Company has an agreement, which runs through August 2021, with the International Chapter of Horseshoers and Allied Equine Trades Local 947 regarding starting gate and jockey valet staff.
The Company’s agreement with the Meadows Standardbred Owners Clubs Association was renewed through December 31, 2018. Meadows Racetrack and Casino has existing collective bargaining agreements with (1) The International Union, Security, Police and Fire Professionals of America and Local #508, which expires August 16, 2020, (2) UNITE/Hotel Employees and Restaurant Employees (“HERE”) Local 57, which expires on September 11, 2020, and (3) Laborers Local Union #108 On-Track and Off-Track, which expires on March 31, 2022.
We are in the process of extending the Company’s agreement with the Maine Harness Horsemen Association at Bangor Raceway through the conclusion of the 2020 racing season.
In March 2014, Hollywood Gaming at Mahoning Valley Race Course entered into an agreement with the Ohio Horsemen’s Benevolent and Protective Association. The term is for a period of
ten years
from the September 2014 commencement of video lottery terminal operations at that facility. Hollywood Gaming at Dayton Raceway entered into a
ten
-year agreement with the Ohio Harness Horsemen’s Association for racing at the property in September 2015. In January 2014, Plainridge Park Casino entered into an agreement with the Harness Horsemen’s Association of New England, which expired on December 31, 2018 and is currently under negotiation.
Across certain of the Company’s properties, Seafarers Entertainment and Allied Trade Union (“SEATU”) represents approximately
1,628
of the Company’s employees under a National Agreement that expires on January 24, 2032 and Local Addenda that expire at various times between June 2021 and October 2024.
SEATU agreements are in place at Hollywood Casino Joliet, Hollywood Casino Lawrenceburg, Argosy Casino Riverside, Argosy Casino Alton, Hollywood Casino at Kansas Speedway, Hollywood Gaming Dayton, Hollywood Gaming at Mahoning Valley, Plainridge Park Casino, and Ameristar East Chicago. Argosy Alton has a wage reopener in 2019; Plainridge Park Casino wage reopener from October 2018 is still outstanding. The remainder of the SEATU agreements have expiration dates in 2020 and beyond.
At Hollywood Casino Joliet, the Hotel Employees and Restaurant Employees Union Local 1 represents approximately
172
employees under a collective bargaining agreement which expires on March 31, 2019. At Hollywood Casino Columbus and Hollywood Casino Toledo, a council comprised of the United Auto Workers and the United Steel Workers represents approximately
1,254
employees under a collective bargaining agreement which ends on November 15, 2019.
Ameristar East Chicago has existing collective bargaining agreements with (1) SEATU, which expires on July 30, 2023 and (2) UNITE/HERE Best and Final, which expired April 30, 2018 and has been extended on a year-to-year basis.
Tropicana Las Vegas has
seven
existing collective bargaining agreements with the following unions: (1) Culinary & Bartenders, which expired on May 31, 2018 and continues year to year at the discretion of either party, (2) United Brotherhood of Carpenters, which expires on July 31, 2019, (3) International Brotherhood of Electrical Workers, which expires on February 28, 2021, (4) International Alliance of Theatrical Stage Employees, which expired on December 31, 2018 and continues year to year at the discretion of either party, (5) International Union of Painters and Allied Trades, which expired on June 30, 2018 and continues year to year at the discretion of either party, and (6)/(7) Teamsters, regarding front and back of the house; both agreements expired on March 31, 2018 and have been extended on a year-to-year basis.
If the Company fails to maintain operative agreements with the horsemen at a track, it will not be permitted to conduct live racing and export and import simulcasting at that track and off-track wagering facilities (“OTWs”) and, in West Virginia, the Company will not be permitted to operate its gaming machines and table games unless the state intervenes or changes the statute. In addition, the Company’s simulcasting agreements are subject to the horsemen’s approval. If the Company fails to renew or modify existing agreements on satisfactory terms, this failure could have a material adverse effect on its business, financial condition and results of operations. Except for the closure of the facilities at Hollywood Casino at Penn National Race Course and its OTWs from February 16, 1999 to March 24, 1999 due to a horsemen’s strike, and a few days at other times and locations, the Company has been able to maintain the necessary agreements. There can be no assurance that the Company will be able to maintain the required agreements.
Employee Benefit Plans
The Company maintains a qualified retirement plan under the provisions of Section 401(k) of the Internal Revenue Code of 1986, as amended, which covers all eligible employees (the “Penn 401(k) Plan”). The Penn 401(k) Plan enables participating employees to defer a portion of their salary in a retirement fund to be administered by the Company. The Company makes a discretionary match contribution, where applicable, of
50%
of employees’ elective salary deferrals, up to a maximum of
6%
of eligible employee compensation. The matching contributions to the Penn 401(k) Plan for the years ended
December 31, 2018
,
2017
and
2016
were
$6.5 million
,
$6.0 million
, and
$5.3 million
, respectively.
The Company also has a defined contribution plan, the Charles Town Races Future Service Retirement Plan, covering substantially all of its union employees at Hollywood Casino at Charles Town Races. Hollywood Casino at Charles Town Races makes annual contributions to the defined contribution plan for the eligible union employees and to the Penn 401(k) Plan for the eligible non-union employees for an amount equal to the amount accrued for retirement expense, which is calculated as
0.25%
of the daily mutual handle,
1.0%
of net video lottery revenue up to a base and, after the base is met, it reverts to
0.5%
and
0.84%
of table and poker revenue, respectively. The contributions for the
two
plans at Hollywood Casino at Charles Town Races for the years ended
December 31, 2018
,
2017
and
2016
were
$2.6 million
,
$2.6 million
, and
$2.8 million
, respectively.
The Company maintains a non-qualified deferred compensation plan (the “EDC Plan”) that covers most management and other highly-compensated employees. The EDC Plan was effective beginning March 1, 2001. The EDC Plan allows the participants to defer, on a pre-tax basis, a portion of their base annual salary and/or their annual bonus and earn tax-deferred earnings on these deferrals. The EDC Plan also provides for matching Company contributions that vest over a
five
-year period. The Company has established a trust, and transfers to the trust, on a periodic basis, an amount necessary to provide for its respective future liabilities with respect to participant deferral and Company contribution amounts. The Company’s matching contributions for the EDC Plan for the years ended
December 31, 2018
,
2017
and
2016
were
$2.3 million
,
$2.2 million
, and
$2.2 million
, respectively. The Company’s deferred compensation liability, which is included in “Other current liabilities” within the Consolidated Balance Sheets, was
$64.1 million
and
$64.7 million
as of
December 31, 2018
and
2017
, respectively.
Note 12—Income Taxes
On December 22, 2017, the President of the United States signed into law comprehensive tax reform legislation commonly known as Tax Cuts and Jobs Act (the “Tax Act”), which introduces significant changes to the United States tax law. The Tax Act provides numerous provisions including, but not limited to, a reduction to the U.S. federal corporate tax rate from 35% to 21% effective January 1, 2018, a temporary provision allowing
100%
expensing of qualifying capital improvements, a one-time transition tax on foreign earnings, a general elimination of U.S. federal income taxes on dividends received from foreign subsidiaries and a new provision designed to tax global intangible low-taxed income (“GILTI”).
Also on December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provided accounting guidance for the Tax Act. SAB 118 provided a measurement period similar to a business combination whereby a company recognizes provisional amounts to the extent that they are reasonably estimable and adjusts them over time as more information becomes available, not to extend beyond one year from the Tax Act enactment date. In accordance with SAB 118, a company must reflect the income tax effects of the Tax Act for which the accounting under ASC 740 is complete. To the extent
the accounting related to the Tax Act is incomplete but a reasonable estimate is attainable, a provisional estimate should be reflected within the financial statements.
For the year ended December 31, 2017, the Company recorded a provisional amount for certain enactment-date effects of the Tax Act by applying the guidance in SAB 118 for the effects of the following aspects: remeasurement of deferred tax assets and liabilities, one-time transition tax, and tax on GILTI. As of December 31, 2018, the accounting for all enactment-date income tax effects of the Tax Act was complete resulting in an adjustment to income tax expense of
$1.2 million
, which increased the effective tax rate for the year ended December 31, 2018 by
1.3%
.
In connection with our initial analysis of the Tax Act impact during 2017, we recorded a provisional decrease to net deferred tax assets of
$261.3 million
with a corresponding increase to deferred tax expense to account for the change in the federal tax rate to 21%. The Company’s computations were complete as of December 22, 2018, and a change of
$0.3 million
was recorded in the current year for the remeasurement of our net deferred tax assets. Beginning in 2018, the new federal rate of 21% has been reflected in the current federal tax expense within our Consolidated Statement of Operations.
Additionally, there was a one-time deemed repatriation tax on undistributed foreign earnings and profits (the “transition tax”). The application of the transition tax was relevant to certain undistributed and previously untaxed post-1986 foreign earnings and profits from our management service contract with Casino Rama located in Orillia, Ontario. The Company recognized a provisional tax expense of
$2.6 million
related to the transition tax in 2017 and the new law allows a Company to pay this liability over an eight-year period without interest. Upon further analysis of the Tax Act and published guidance issued and proposed by the U.S. Department of the Treasury and the Internal Revenue Service, we finalized our calculations of the transition tax liability during 2018. We increased our December 31, 2017 provisional amount by
$0.9 million
, which is included as a component of income tax expense. We have elected to pay our transition tax over the eight-year period provided in the Tax Act. As of December 31, 2018, the remaining balance of our transition tax obligation was
$3.2 million
, which will be paid over the next
seven years
. The Tax Act also contained a new GILTI tax provision and due to the complexity and timing of the enactment, the Company did not record any provisional amount in the December 31, 2017 Consolidated Financial Statements, or make a policy decision regarding whether to record deferred taxes related to GILTI. In accordance with U.S. GAAP, the Company has made an accounting policy election to treat taxes due under the GILTI tax provision as a current period expense. The GILTI provision resulted in a current period expense of
$0.3 million
.
The following table summarizes the tax effects of temporary differences between the Consolidated Financial Statements carrying amount of assets and liabilities and their respective tax basis, which are recorded at the prevailing enacted tax rate that will be in effect when these differences are settled or realized. These temporary differences result in taxable or deductible amounts in future years. The Company assessed all available positive and negative evidence to estimate whether sufficient future taxable income will be generated to realize our existing net deferred tax assets. In connection with the failed spin-off-leaseback, the Company continued to record real estate assets and a financing obligation of
$2.0 billion
and
$3.5 billion
, respectively, on November 1, 2013, which resulted in a substantial increase to our net deferred tax assets of
$599.9 million
. ASC 740 suggests that additional scrutiny should be given to deferred taxes of an entity with cumulative pre-tax losses during the most recent three years. Positive evidence of sufficient quantity and quality is required to overcome such significant negative evidence to conclude that a valuation allowance is not warranted.
The components of the Company’s deferred tax assets and liabilities were as follows:
|
|
|
|
|
|
|
|
|
|
December 31,
|
(in thousands)
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Stock-based compensation expense
|
$
|
8,998
|
|
|
$
|
15,038
|
|
Accrued expenses
|
42,897
|
|
|
39,474
|
|
Loan to the JIVDC
|
—
|
|
|
26,237
|
|
Financing obligations associated with Master Leases
|
1,919,718
|
|
|
900,311
|
|
Unrecognized tax benefits
|
6,732
|
|
|
6,565
|
|
Investments in unconsolidated affiliates
|
3,579
|
|
|
—
|
|
Net operating losses, interest limitation and tax credit carryforwards
|
122,785
|
|
|
59,842
|
|
Gross deferred tax assets
|
2,104,709
|
|
|
1,047,467
|
|
Less: Valuation allowance
|
(89,508
|
)
|
|
(113,699
|
)
|
Net deferred tax assets
|
2,015,201
|
|
|
933,768
|
|
Deferred tax liabilities:
|
|
|
|
Property and equipment, non-Master Leases
|
(47,308
|
)
|
|
(33,148
|
)
|
Property and equipment, Master Leases
|
(1,599,907
|
)
|
|
(469,363
|
)
|
Investments in unconsolidated affiliates
|
—
|
|
|
(1,218
|
)
|
Undistributed foreign earnings
|
(349
|
)
|
|
(2,061
|
)
|
Intangibles
|
(287,025
|
)
|
|
(37,035
|
)
|
Net deferred tax liabilities
|
(1,934,589
|
)
|
|
(542,825
|
)
|
Noncurrent deferred tax assets, net
|
$
|
80,612
|
|
|
$
|
390,943
|
|
We recorded a
$1.0 billion
increase in gross deferred income tax assets and
$1.4 billion
increase in gross deferred tax liabilities in connection with the acquisition of Pinnacle, which were primarily related to temporary differences associated with the financing obligation on the Pinnacle Master Lease, acquired net operating losses, and property and equipment assumed under the Pinnacle Master Lease, as amended. Pinnacle properties will now be included in our consolidated federal and state tax returns, which impacted our effective tax rate in certain jurisdictions in the fourth quarter 2018.
The realizability of the net deferred tax assets is evaluated quarterly by assessing the need for a valuation allowance and by adjusting the amount of the allowance, if necessary. The Company gives appropriate consideration to all available positive and negative evidence including projected future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. The evaluation of both positive and negative evidence is a requirement pursuant to ASC 740 in determining the net deferred tax assets will be realized. In the event the Company determines that the deferred income tax assets would be realized in the future in excess of their net recorded amount, an adjustment to the valuation allowance would be recorded, which would reduce the provision for income taxes.
The Company determined that a valuation allowance was no longer required against its federal and state net deferred tax assets for the portion that will be realized. The most significant evidence that led to the reversal of the valuation allowance during the three months ended September 30, 2017 included the following:
|
|
•
|
Achievement and sustained growth in our three-year cumulative pretax earnings.
During the fourth quarter 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
as of September 30, 2017 and was expected to rise substantially at year-end since the Company had recorded a
$161.5 million
pretax loss in the fourth quarter 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 GLPI 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
.
|
For the three months ended December 31, 2017, there were no material changes to our core business operations that altered our prior interim conclusion to release the valuation allowance against the federal and state net deferred tax assets for the portion that is more-likely-than-not to be realized. As such, the Company released
$741.9 million
of its total valuation allowance for the year ended December 31, 2017 due to the positive evidence outweighing the negative evidence thereby allowing the Company to achieve the “more-likely-than-not” realization standard. Moreover, the Company continued to experience significant three-year cumulative pretax income of
$185.5 million
as of December 31, 2018 supporting the position that a federal valuation allowance is not necessary excluding the valuation allowance recorded on the federal capital loss carryforwards. During the three months ended December 31, 2018, we released a partial valuation allowance on a capital loss carryforward in the amount of
$22.4 million
that offset the capital gain realized on the Plainridge Park Casino Sale-Leaseback. This reversal is reflected in our income tax benefit within the Consolidated Statements of Operations. The Company continued to maintain a valuation allowance of
$89.5 million
as of December 31, 2018 primarily related to certain state filing groups where we continue to be in a cumulative three-year pretax loss position.
Following the ownership changes of the Tropicana Las Vegas and more recently the Pinnacle Acquisition, the Company had
$252.8 million
of total federal net operating loss carryforwards and a Section 163(j) interest limitation carryforward of
$18.0 million
. The portion of tax attributes that will expire on various dates from 2020 through 2037 is
$182.1 million
. The remaining tax attributes do not expire. The utilization of indefinite federal net operating loss carryforwards is limited to 80% of taxable income in any given year. As management receives additional information during the measurement period, the tax attributes acquired from Pinnacle may be adjusted through goodwill and accounted for in the period they arise. All acquired tax attributes are subject to limitations under the Internal Revenue Code and underlying Treasury Regulations, however, we believe it is more-likely-than-not that the benefit from these tax attributes will be realized.
For state income tax reporting, the Company had gross state net operating loss carryforwards aggregating approximately
$835.2 million
available to reduce future state income taxes, primarily for the Commonwealth of Pennsylvania and the States of Missouri, New Mexico, Louisiana, Iowa, Illinois, and Ohio localities as of December 31, 2018. The tax benefit associated with these net operating loss carryforwards was approximately
$53.2 million
. Due to statutorily limited operating loss carryforwards and income and loss projections in the applicable jurisdictions, a valuation allowance has been recorded to reflect the net operating losses which are not presently expected to be realized in the amount of
$32.1 million
. If not used, substantially all the carryforwards will expire at various dates from December 31, 2019 to December 31, 2038. The increase in total gross state net operating loss carryforwards was largely due to the tax attributes acquired upon closing the Pinnacle Acquisition. Following the ownership change, the Company acquired approximately
$382.0 million
of gross state net operating loss carryforwards available to reduce future state income taxes.
Overall, the Company’s valuation allowance decreased year-over-year by a net amount of
$24.2 million
, primarily due to the partial recognition of a capital loss carryforward associated with the loan to the JIVDC that offset the capital gain recognized from the Plainridge Park Casino Sale-Leaseback. The tax effects of the Pinnacle Acquisition were immaterial to the Company’s valuation allowance; however, they are preliminary and subject to change during the measurement period. A change in purchase accounting may affect the recorded deferred tax assets and liabilities and our effective rate in a future period.
The domestic and foreign components of income (loss) before income taxes for the years ended
December 31, 2018
,
2017
and
2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Domestic
|
$
|
89,582
|
|
|
$
|
(29,538
|
)
|
|
$
|
116,693
|
|
Foreign
|
339
|
|
|
4,494
|
|
|
3,924
|
|
Total
|
$
|
89,921
|
|
|
$
|
(25,044
|
)
|
|
$
|
120,617
|
|
The provision for income taxes charged to operations for the years ended
December 31, 2018
,
2017
and
2016
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Current tax benefit (expense)
|
|
|
|
|
|
Federal
|
$
|
(15,336
|
)
|
|
$
|
(16,318
|
)
|
|
$
|
(8,721
|
)
|
State
|
(6,402
|
)
|
|
(6,062
|
)
|
|
(3,489
|
)
|
Foreign
|
(1,349
|
)
|
|
2,981
|
|
|
9,639
|
|
Total current
|
(23,087
|
)
|
|
(19,399
|
)
|
|
(2,571
|
)
|
Deferred tax benefit (expense)
|
|
|
|
|
|
Federal
|
14,576
|
|
|
480,712
|
|
|
(4,701
|
)
|
State
|
10,945
|
|
|
39,255
|
|
|
(3,279
|
)
|
Foreign
|
1,159
|
|
|
(2,061
|
)
|
|
(756
|
)
|
Total deferred
|
26,680
|
|
|
517,906
|
|
|
(8,736
|
)
|
Total income tax benefit (expense)
|
$
|
3,593
|
|
|
$
|
498,507
|
|
|
$
|
(11,307
|
)
|
The following table reconciles the statutory federal income tax rate to the actual effective income tax rate for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Percent of pretax income
|
|
|
|
|
|
Federal statutory rate
|
21.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
State and local income taxes - net of federal benefits
|
(6.2
|
)
|
|
6.3
|
|
|
1.2
|
|
Nondeductible expenses
|
6.9
|
|
|
(16.0
|
)
|
|
0.3
|
|
Goodwill impairment
|
—
|
|
|
(20.5
|
)
|
|
—
|
|
Compensation
|
(3.8
|
)
|
|
29.5
|
|
|
(1.5
|
)
|
Contingent liability settlement
|
—
|
|
|
22.9
|
|
|
0.6
|
|
Foreign
|
(0.1
|
)
|
|
11.3
|
|
|
(8.5
|
)
|
Valuation allowance
|
(20.3
|
)
|
|
2,962.3
|
|
|
(17.1
|
)
|
Tax Act - deferred rate change
|
—
|
|
|
(1,043.5
|
)
|
|
—
|
|
Other miscellaneous items
|
(1.5
|
)
|
|
3.3
|
|
|
(0.6
|
)
|
Total effective tax rate
|
(4.0
|
)%
|
|
1,990.6
|
%
|
|
9.4
|
%
|
The income tax benefit (expense) differs from the federal statutory amount due to the effect of the items detailed in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Amount of pretax income
|
|
|
|
|
|
Federal statutory rate
|
$
|
(18,883
|
)
|
|
$
|
8,765
|
|
|
$
|
(42,216
|
)
|
State and local income taxes - net of federal benefits
|
5,615
|
|
|
1,567
|
|
|
(1,498
|
)
|
Nondeductible expenses
|
(6,161
|
)
|
|
(4,018
|
)
|
|
(371
|
)
|
Goodwill impairment
|
—
|
|
|
(5,131
|
)
|
|
—
|
|
Compensation
|
3,369
|
|
|
7,376
|
|
|
1,817
|
|
Contingent liability settlement
|
—
|
|
|
5,740
|
|
|
(756
|
)
|
Foreign
|
117
|
|
|
2,840
|
|
|
10,268
|
|
Valuation allowance
|
18,275
|
|
|
741,872
|
|
|
20,675
|
|
Tax Act - deferred rate change
|
—
|
|
|
(261,329
|
)
|
|
—
|
|
Other miscellaneous items
|
1,261
|
|
|
825
|
|
|
774
|
|
Total income tax benefit (expense)
|
$
|
3,593
|
|
|
$
|
498,507
|
|
|
$
|
(11,307
|
)
|
A reconciliation of the beginning and ending amounts for the liability for unrecognized tax benefits was as follows:
|
|
|
|
|
(in thousands)
|
Unrecognized tax benefits
|
Unrecognized tax benefits as of January 1, 2017
|
$
|
26,792
|
|
Additions based on current year positions
|
2,979
|
|
Additions based on prior year positions
|
2,836
|
|
Decreases due to settlements and/or reduction in reserves
|
(1,322
|
)
|
Currency translation adjustments
|
(119
|
)
|
Settlement payments
|
(216
|
)
|
Unrecognized tax benefits as of December 31, 2017
|
30,950
|
|
Additions based on current year positions
|
—
|
|
Additions based on prior year positions
|
775
|
|
Decreases due to settlements and/or reduction in reserves
|
(2,005
|
)
|
Currency translation adjustments
|
(39
|
)
|
Settlement payments
|
—
|
|
Unrecognized tax benefits as of December 31, 2018
|
$
|
29,681
|
|
The Company is required under ASC 740 to disclose its accounting policy for classifying interest and penalties, the amount of interest and penalties charged to expense each period, as well as the cumulative amounts recorded within the Consolidated Balance Sheets. The Company will continue to classify any income tax related penalties and interest accrued related to unrecognized tax benefits in the income tax provisions within the Consolidated Statements of Operations.
During the year ended December 31, 2018, the Company did
no
t record any new tax reserves, and accrued interest or penalties related to current year uncertain tax positions. The tax reserves acquired through the Pinnacle Acquisition were immaterial and as such we did not disclose separately in the reconciliation above. In regard to prior year tax positions, the Company recorded
$0.8 million
of tax reserves and accrued interest and reversed
$2.2 million
of previously recorded tax reserves and accrued interest for uncertain tax positions that are anticipated to settle and/or close within the next 12 months. We recognize accrued interest and penalties related to uncertain tax positions as a component of income taxes. The unrecognized tax benefits of
$30.4 million
are included in “Noncurrent tax liabilities” within the Company’s Consolidated Balance Sheets. Overall, the Company recorded a net tax expense of
$0.5 million
in connection with its uncertain tax positions for the year ended December 31, 2018.
Included in the liability for unrecognized tax benefits as of
December 31, 2018
and
2017
were
$23.6 million
and
$25.1 million
, respectively, of tax positions that, if reversed, would affect the effective tax rate. Also included in the reserve as of
December 31, 2018
and
2017
, was less than
$0.1 million
and
$0.1 million
, respectively, of currency translation gain related to foreign currency tax positions and the settlement receivable on account.
During the years ended
December 31, 2018
and
2017
, the Company recognized approximately
$0.5 million
and
$1.7 million
, respectively, of interest and penalties, net of deferred taxes. In addition, due to settlements and/or reductions in previously recorded liabilities, the Company had reductions in previously accrued interest and penalties of
$0.2 million
, net of deferred taxes. These accruals are included in “Noncurrent tax liabilities” within the Company’s Consolidated Balance Sheets.
The Company is currently in various stages of the examination process in connection with its open audits. Generally, it is difficult to determine when these examinations will be closed, but the Company reasonably expects that its ASC 740 liabilities will not significantly change over the next twelve months.
As of
December 31, 2018
, the Company is subject to U.S. federal income tax examinations for the tax years
2015
,
2016
, and
2017
. In addition, the Company is subject to state and local income tax examinations for various tax years in the taxing jurisdictions in which the Company operates.
As of
December 31, 2018
and
2017
, “Prepaid expenses” within the Company’s Consolidated Balance Sheets included prepaid income taxes of
$14.9 million
and
$12.0 million
, respectively.
Note 13—Stockholders’
Equity (Deficit)
Share Repurchase Program
On February 3, 2017, the Company announced a share repurchase program pursuant to which the Board of Directors authorized to repurchase up to
$100 million
of the Company’s common stock, which expired on February 1, 2019. During the years ended
December 31, 2018
and 2017, the Company repurchased
2,299,498
and
1,264,149
shares, respectively, of its common stock in open market transactions for
$50.0 million
at an average price of
$21.74
per share and
$24.8 million
at an average price of
$19.59
per share, respectively. All repurchased shares were retired.
Preferred Equity Investment
On June 15, 2007, the Company announced that it had entered into a merger agreement that, at the effective time of the transactions contemplated thereby, would have resulted in the Company’s shareholders receiving
$67
per share. Specifically, the Company, PNG Acquisition Company Inc. (“Parent”) and PNG Merger Sub Inc., a wholly-owned subsidiary of Parent, announced that they had entered into an Agreement and Plan of Merger, dated as of June 15, 2007 (the “Merger Agreement”), that provided, among other things, for PNG Merger Sub, Inc. to be merged with and into the Company, as a result of which the Company would have continued as the surviving corporation and would have become a wholly-owned subsidiary of Parent. Parent was indirectly owned by certain funds managed by affiliates of Fortress Investment Group LLC (“Fortress”) and Centerbridge Partners, L.P. (“Centerbridge”).
On July 3, 2008, the Company entered into an agreement with certain affiliates of Fortress and Centerbridge, terminating the Merger Agreement. In connection with the termination of the Merger Agreement, certain affiliates of Fortress and Centerbridge agreed to pay the Company a total of
$1.475 billion
, consisting of a nonrefundable
$225 million
cash termination fee and a
$1.25 billion
, zero coupon, preferred equity investment (the “Investment”). On October 30, 2008, the Company closed the sale of the Investment and issued
12,500
shares of the Series B Preferred Stock. During the year ended December 31, 2010, the Company repurchased
225
shares of Series B Preferred Stock for
$11.2 million
.
As part of the Spin-Off, the Company entered into an agreement (the “Exchange Agreement”) with FIF V PFD LLC, an affiliate of Fortress, providing for the exchange of shares of the Company’s Series B Preferred Stock for shares of a new class of preferred stock, Series C Preferred Stock, in contemplation of the Spin-Off.
The Exchange Agreement provided Fortress with the right to exchange its
9,750
shares of Series B Preferred Stock for fractional shares of Series C Preferred Stock at an exchange ratio that treated each such fractional share (and therefore each share of common stock into which such fractional share was convertible) as worth
$67
per share, which was the “ceiling price” at which the shares of Series B Preferred Stock were redeemable by the Company at maturity. Any shares of Series B Preferred Stock that were not exchanged for shares of Series C Preferred Stock prior to the second business day before October 16, 2013, the record date established for the distribution of GLPI common stock in the Spin-Off, were automatically exchanged for shares of Series C Preferred Stock on such date. Subsequently, the Company had the right to purchase from Fortress, prior to the record date for the Spin-Off, a number of shares of Series C Preferred Stock, at a price of
$67
per fractional share of Series C Preferred Stock, such that, immediately following the consummation of the Spin-Off, Fortress would not own more than
9.9%
of GLPI’s common stock.
On October 11, 2013, the Company completed its exchange and repurchase transactions with Fortress and repurchased all of the
2,300
shares of Series B Preferred Stock held by Centerbridge at par and issued to the affiliate of Fortress
14,553
shares of non-voting Series C Preferred Stock in order to redeem all of the previously outstanding shares of Series B Preferred Stock. The Company then repurchased
5,929
shares of Series C Preferred Stock from Fortress. Additionally, in February 2013, the Company repurchased
225
shares of Series B Preferred Stock from WF Investment Holdings, LLC at a slight discount to par. In these transactions, the Company paid a total of
$649.5 million
, which was primarily funded by borrowings under the
2013 Revolving Credit Facility
, to the affiliates of Fortress, Centerbridge and WF Investment Holdings, LLC.
In 2016, Fortress sold all
8,624
shares of Series C Preferred Stock, which converted upon sale into
8,624,000
shares of common stock under previously agreed upon terms. As a result,
no
shares of Series C Preferred Stock were outstanding as of
December 31, 2018
and
2017
.
Note 14—Stock-Based Compensation
2008 Long Term Incentive Compensation Plan
On August 20, 2008, the Company’s Board of Directors approved, subject to shareholder approval, the 2008 Long Term Incentive Compensation Plan (the “2008 Plan”) and on November 12, 2008, the Company’s shareholders approved the 2008
Plan, which permitted the Company to issue stock options (incentive and/or non-qualified), stock appreciation rights (“SARs”), restricted stock, phantom stock units (“PSUs”) and other equity and cash awards to employees. Non-employee directors were eligible to receive all such awards, other than incentive stock options. On June 9, 2011 and June 12, 2014, the Company’s shareholders approved amendments to the 2008 Plan, which collectively increased the aggregate number of shares of common stock that may be issued from
6,900,000
to
16,350,000
. Awards of stock options and SARs were counted against the
16,350,000
limit as
one
share of common stock for each share granted; however, each share awarded in the form of restricted stock, or any other full value stock award, was counted as issuing
2.44
shares of common stock for purposes of determining the number of shares available for issuance under the 2008 Plan. Any awards that were not settled in shares of common stock were not counted against the limit. The 2008 Plan remains in place until all of the awards granted thereunder have been paid, forfeited or expired. However, the shares which remained available for issuance under such plan as of June 13, 2018 are no longer available for issuance and all future equity awards will be pursuant to the 2018 Long Term Incentive Compensation Plan (the “2018 Plan”) described below.
2018 Long Term Incentive Compensation Plan
On March 21, 2018, the Company’s Board of Directors approved, subject to shareholder approval, the 2018 Plan and on June 13, 2018, the Company’s shareholders approved the 2018 Plan, which permits the Company to issue stock options (incentive and/or non-qualified), SARs, restricted stock, PSUs and other equity and cash awards to employees. Non-employee directors are eligible to receive all such awards, other than incentive stock options. Pursuant to the 2018 Plan,
12,700,000
shares of the Company’s common stock are reserved for issuance. Awards of stock options and SARs will be counted against the
12,700,000
limit as
one
share of common stock for each share granted. However, each share awarded in the form of restricted stock, or any other full value stock award, will be counted as issuing
2.30
shares of common stock for purposes of determining the number of shares available for issuance under the plan. Any awards that are not settled in shares of common stock shall not count against the limit. As of
December 31, 2018
, there were
11,921,545
shares available for future grants under the 2018 Plan.
Performance Share Programs
On February 9, 2016, the Company’s Compensation Committee of the Board of Directors adopted a performance share program (the “
2016 Performance Share Program
”) pursuant to the 2008 Plan, which provides for the issuance of restricted stock awards with performance-based vesting conditions. An aggregate of
172,245
and
189,085
performance shares were granted on February 17, 2017 and February 9, 2016, respectively, with each grant having a
three
-year award period consisting of
three
one
-year performance periods and a
three
-year service period.
On February 6, 2018, the Company’s Compensation Committee of the Board of Directors adopted a performance share program (the “2018 Performance Share Program” and together with the
2016 Performance Share Program
, the “
Performance Share Programs
”) pursuant to the 2018 Plan, which provides for the issuance of restricted stock awards with performance-based vesting conditions. An aggregate of
197,727
performance shares were granted on February 6, 2018 with the grant having a
three
-year award period consisting of
three
one
-year performance periods and a
three
-year service period.
The Company’s named executive officers and other key executives were/are eligible to participate in the
Performance Share Programs
. The
Performance Share Programs
were adopted in order to provide key executives with stock-based compensation tied directly to the Company’s performance to further align their interests with those of shareholders and provide compensation only if the designated performance goals are met for the applicable performance periods. For all awards granted under the
Performance Share Programs
as of
December 31, 2018
, the performance goal for each performance period is based on EBITDA, adjusted for certain other items, as established for each
one
-year performance period. The awards have the potential to be earned at between
0%
and
150%
of the number of shares granted in one-third increments depending on achievement of the annual performance goals, but remain subject to vesting for the full
three
-year service period.
As of
December 31, 2018
, the adjusted EBITDA target for the third tranche of the performance awards granted in 2017 and the second and third tranches of the performance awards granted in 2018 were not yet established. Therefore, for accounting purposes, the Company concluded that a grant date has not yet occurred. Stock-based compensation expense will be measured for each tranche based on the fair value of the restricted stock awards using the Company’s closing stock price on the grant date since all key terms for the specific tranche were established and mutually understood by the Company and the individuals receiving the awards. At each reporting period, accruals of stock-based compensation expense are based on the probable outcome of the performance condition. See “Restricted Stock Awards” section below.
Stock-based Compensation Expense
Stock-based compensation expense for the years ended
December 31, 2018
,
2017
and
2016
totaled
$12.0 million
,
$7.8 million
and
$6.9 million
, respectively, and is included within the Consolidated Statements of Operations under “General and administrative.”
Stock Options
Stock options that expire between January 3, 2019 and January 3, 2029, have been granted to officers, directors, employees, and predecessor employees to purchase common stock at prices ranging from
$8.88
to
$32.90
per share. All options were granted at the fair market value of the common stock on the grant date (as defined in the respective plan document) and have contractual lives ranging from
1
to
10
years. The Company issues new authorized common shares to satisfy stock option exercises.
The following table contains information about our stock options:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Option
Shares
|
|
Weighted-Average
Exercise Price
|
|
Weighted-
Average
Remaining
Contractual
Term (in years)
|
|
Aggregate
Intrinsic Value
(in thousands)
|
Outstanding as of January 1, 2018
|
6,551,314
|
|
|
$
|
12.29
|
|
|
|
|
|
|
Granted
|
663,343
|
|
|
$
|
30.75
|
|
|
|
|
|
|
Exercised
|
(1,302,501
|
)
|
|
$
|
8.70
|
|
|
|
|
|
|
Forfeited
|
(42,945
|
)
|
|
$
|
16.67
|
|
|
|
|
|
|
Outstanding as of December 31, 2018
|
5,869,211
|
|
|
$
|
15.14
|
|
|
3.97
|
|
$
|
28,470
|
|
Exercisable as of December 31, 2018
|
3,099,460
|
|
|
$
|
12.83
|
|
|
3.25
|
|
$
|
17,992
|
|
The weighted-average grant-date fair value of options granted during the years ended
December 31, 2018
,
2017
and
2016
was
$9.88
,
$4.48
and
$3.97
, respectively. The aggregate intrinsic value of stock options exercised during the years ended
December 31, 2018
,
2017
and
2016
was
$28.7 million
,
$15.8 million
and
$10.3 million
, respectively.
The following table summarizes information about our outstanding stock options as of
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercise Price Range
|
|
Total
|
|
$8.88 to
$13.35
|
|
$13.50 to
$20.52
|
|
$20.75 to
$32.90
|
|
$8.88 to
$32.90
|
Outstanding options
|
|
|
|
|
|
|
|
Number outstanding
|
3,637,366
|
|
|
1,570,183
|
|
|
661,662
|
|
|
5,869,211
|
|
Weighted-average remaining contractual life (years)
|
3.22
|
|
|
4.87
|
|
|
6.01
|
|
|
3.97
|
|
Weighted-average exercise price
|
$
|
12.65
|
|
|
$
|
14.38
|
|
|
$
|
30.67
|
|
|
$
|
15.14
|
|
Exercisable options
|
|
|
|
|
|
|
|
Number outstanding
|
2,645,735
|
|
|
452,466
|
|
|
1,259
|
|
|
3,099,460
|
|
Weighted-average exercise price
|
$
|
12.53
|
|
|
$
|
14.56
|
|
|
$
|
20.75
|
|
|
$
|
12.83
|
|
As of
December 31, 2018
, the unamortized compensation costs not yet recognized related to stock options granted totaled
$9.7 million
. This cost is expected to be recognized over the remaining vesting periods, which will not exceed
four years
.
The following are the weighted-average assumptions used in the Black-Scholes option-pricing model for the years ended
December 31, 2018
,
2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2018
|
|
2017
|
|
2016
|
Risk-free interest rate
|
2.26
|
%
|
|
1.97
|
%
|
|
1.20
|
%
|
Expected volatility
|
30.80
|
%
|
|
30.66
|
%
|
|
31.23
|
%
|
Dividend yield
|
—
|
|
|
—
|
|
|
—
|
|
Weighted-average expected life (in years)
|
5.30
|
|
|
5.30
|
|
|
5.40
|
|
Restricted Stock Awards
As noted above, the Company issues restricted stock awards with performance-based vesting conditions under its Performance Share Programs. Additionally, in conjunction with the Pinnacle Acquisition, the Company awarded
129,961
restricted stock awards to new employees of the Company. The following table contains information on our restricted stock awards:
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average Grant Date Fair Value
|
Outstanding as of January 1, 2018
|
267,655
|
|
|
$
|
13.83
|
|
Awarded
|
333,478
|
|
|
$
|
30.00
|
|
Released
|
(30,979
|
)
|
|
$
|
14.15
|
|
Canceled
|
(11,333
|
)
|
|
$
|
17.96
|
|
Outstanding at December 31, 2018
|
558,821
|
|
|
$
|
23.38
|
|
As of
December 31, 2018
, the unamortized compensation costs not yet recognized related to restricted stock awarded totaled
$7.4 million
. This cost is expected to be recognized over the remaining vesting periods, which will not exceed
four years
.
Phantom Stock Units
The Company’s PSUs, which vest over a period of
three
to
four years
, entitle employees and directors to receive cash based on the fair value of the Company’s common stock on the vesting date. The PSUs are accounted for as liability awards and are re-measured at fair value each reporting period until they become vested with compensation expense being recognized over the requisite service period in accordance with ASC Subtopic 718-30, “Compensation—Stock Compensation, Awards Classified as Liabilities.” The Company has a liability, which is included in “Accrued salaries and wages” within the Consolidated Balance Sheets, associated with its PSUs of
$1.7 million
and
$4.8 million
as of
December 31, 2018
and
2017
, respectively.
For PSUs held by employees and directors of the Company, there was
$3.0 million
of total unrecognized compensation cost as of
December 31, 2018
that will be recognized over the awards remaining weighted average vesting period of
2.05
years. For the years ended
December 31, 2018
,
2017
and
2016
, the Company recognized
$1.1 million
,
$11.9 million
, and
$8.5 million
of compensation expense associated with these awards, respectively. Amounts paid by the Company for the years ended
December 31, 2018
,
2017
and
2016
on these cash-settled awards totaled
$4.2 million
,
$12.7 million
, and
$10.7 million
, respectively.
Stock Appreciation Rights
The fair value of SARs is calculated each reporting period and estimated using the Black-Scholes option pricing model. The Company’s SARs, which vest over a period of
four years
, are accounted for as liability awards since they will be settled in cash. Accordingly, the Company has a liability, which is included in “Accrued salaries and wages” within the Consolidated Balance Sheets, associated with its SARs of
$6.8 million
and
$24.0 million
as of
December 31, 2018
and
2017
, respectively.
For SARs held by employees of the Company, there was
$4.5 million
of total unrecognized compensation cost as of
December 31, 2018
that will be recognized over the awards remaining weighted average vesting period of
1.95
years. For the year ended
December 31, 2018
, the Company recognized a reduction to compensation expense of
$6.7 million
associated with these awards compared to a charge to compensation expense of
$21.9 million
and
$2.4 million
for the years ended December 31,
2017
and
2016
, respectively. Amounts paid by the Company for the years ended
December 31, 2018
,
2017
and
2016
on these cash-settled awards totaled
$10.5 million
,
$6.2 million
and
$3.3 million
, respectively.
Note 15—Segment Information
We have aggregated our operating segments into
four
reportable segments based on the similar characteristics of the operating segments within the regions in which they operate: Northeast, South, West and Midwest. The Other category is included in the following tables in order to reconcile the segment information to the consolidated information. Inter-segment revenues were not material in any of the years presented below. During the fourth quarter 2018, the Company made revisions to its reportable segments upon the consummation of the Pinnacle Acquisition. Apart from the addition of the new properties, the most significant change was dividing the South/West segment into
two
separate reportable segments. The financial information presented below reflects such changes, including restating prior year financial information.
The Company utilizes
Adjusted EBITDAR
(as defined below) as its measure of segment profit or loss. The following table highlights our revenues and
Adjusted EBITDAR
for each reportable segment and reconciles
Adjusted EBITDAR
to Income (loss) before income taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Revenues:
|
|
|
|
|
|
Northeast segment
|
$
|
1,891,514
|
|
|
$
|
1,756,579
|
|
|
$
|
1,741,809
|
|
South segment
|
394,351
|
|
|
224,247
|
|
|
185,832
|
|
West segment
|
437,887
|
|
|
380,418
|
|
|
360,776
|
|
Midwest segment
|
823,717
|
|
|
735,033
|
|
|
704,272
|
|
Other
(1)
|
40,449
|
|
|
51,693
|
|
|
41,691
|
|
Revenues
|
$
|
3,587,918
|
|
|
$
|
3,147,970
|
|
|
$
|
3,034,380
|
|
|
|
|
|
|
|
Adjusted EBITDAR
(2)
:
|
|
|
|
|
|
Northeast segment
|
$
|
583,791
|
|
|
$
|
549,304
|
|
|
$
|
536,446
|
|
South segment
|
118,962
|
|
|
62,580
|
|
|
56,060
|
|
West segment
|
114,267
|
|
|
72,744
|
|
|
72,509
|
|
Midwest segment
|
294,332
|
|
|
249,744
|
|
|
239,899
|
|
Other
(1)
|
(68,111
|
)
|
|
(55,223
|
)
|
|
(67,773
|
)
|
Adjusted EBITDAR
(2)
|
1,043,241
|
|
|
879,149
|
|
|
837,141
|
|
|
|
|
|
|
|
Other operating benefits (costs) and other income (expenses):
|
|
|
|
|
|
Rent expense associated with triple net operating lease
(3)
|
(3,797
|
)
|
|
—
|
|
|
—
|
|
Charge for stock compensation
|
(12,034
|
)
|
|
(7,780
|
)
|
|
(6,871
|
)
|
Cash-settled stock award variance
|
19,611
|
|
|
(23,471
|
)
|
|
6,688
|
|
Gain (loss) on disposal of assets
|
(3,168
|
)
|
|
(172
|
)
|
|
2,471
|
|
Contingent purchase price
|
(454
|
)
|
|
6,840
|
|
|
(1,277
|
)
|
Pre-opening and acquisition costs
|
(95,020
|
)
|
|
(9,732
|
)
|
|
—
|
|
Depreciation and amortization
|
(268,990
|
)
|
|
(267,062
|
)
|
|
(271,214
|
)
|
Provision for loan loss and unfunded loan commitments to the JIVDC, net of recoveries, and impairment losses
|
(17,921
|
)
|
|
(107,810
|
)
|
|
—
|
|
Insurance recoveries, net of deductible charges
|
68
|
|
|
289
|
|
|
726
|
|
Non-operating items for Kansas JV
|
(5,118
|
)
|
|
(5,866
|
)
|
|
(10,311
|
)
|
Interest expense
|
(539,417
|
)
|
|
(466,761
|
)
|
|
(459,243
|
)
|
Interest income
|
1,005
|
|
|
3,552
|
|
|
24,186
|
|
Loss on early extinguishment of debt
|
(20,964
|
)
|
|
(23,963
|
)
|
|
—
|
|
Other
|
(7,121
|
)
|
|
(2,257
|
)
|
|
(1,679
|
)
|
Income (loss) before income taxes
|
$
|
89,921
|
|
|
$
|
(25,044
|
)
|
|
$
|
120,617
|
|
|
|
(1)
|
The Other category consists of the Company's standalone racing operations, namely Sanford-Orlando Kennel Club, located in Longwood, Florida, and the Company’s joint venture interests in Texas and New Jersey (see
Note 6, “Investments in and Advances to Unconsolidated Affiliates”
). The Other category also includes PIV, our management contract for Retama Park Racetrack, and our live and televised poker tournament series that
|
operates under the trade name, Heartland Poker Tour. Expenses incurred for corporate and shared services activities that are directly attributable to a property or are otherwise incurred to support a property are allocated to each property. The Other category also includes corporate overhead costs, which consist of certain expenses, such as: payroll, professional fees, travel expenses and other general and administrative expenses that do not directly relate to or have otherwise been allocated to a property.
|
|
(2)
|
The Company defines
Adjusted EBITDAR
as earnings before interest income and expense, income taxes, depreciation and amortization, rent expense associated with our triple net operating leases, stock compensation, debt extinguishment and financing charges, impairment charges, insurance recoveries and deductible charges, changes in the estimated fair value of our contingent purchase price obligations, gain or loss on disposal of assets, the difference between budget and actual expense for cash-settled stock-based awards, pre-opening and acquisition costs, and other income or expenses.
Adjusted EBITDAR
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 EBITDAR
excludes payments associated with our
Master Leases
with GLPI as these leases are accounted for as financing obligations.
|
|
|
(3)
|
During the year ended December 31, 2018, the Company's only triple net operating lease was the Meadow Lease.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
(in thousands)
|
2018
|
|
2017
|
|
2016
|
Capital expenditures:
|
|
|
|
|
|
Northeast segment
|
$
|
38,873
|
|
|
$
|
26,283
|
|
|
$
|
34,380
|
|
South segment
|
10,587
|
|
|
6,354
|
|
|
6,249
|
|
West segment
|
12,816
|
|
|
35,671
|
|
|
24,209
|
|
Midwest segment
|
25,285
|
|
|
26,176
|
|
|
27,218
|
|
Other
|
4,996
|
|
|
4,777
|
|
|
5,189
|
|
Total capital expenditures
|
$
|
92,557
|
|
|
$
|
99,261
|
|
|
$
|
97,245
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Northeast
|
|
South
|
|
West
|
|
Midwest
|
|
Other
|
|
Total
|
As of December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
Investment in and advances to unconsolidated affiliates
|
$
|
105
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
89,350
|
|
|
$
|
39,033
|
|
|
$
|
128,488
|
|
Total assets
(1)
|
$
|
1,330,256
|
|
|
$
|
1,082,304
|
|
|
$
|
755,665
|
|
|
$
|
1,411,468
|
|
|
$
|
6,381,319
|
|
|
$
|
10,961,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
Investment in and advances to unconsolidated affiliates
|
$
|
102
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
88,296
|
|
|
$
|
60,514
|
|
|
$
|
148,912
|
|
Total assets
(1)
|
$
|
921,044
|
|
|
$
|
169,255
|
|
|
$
|
625,019
|
|
|
$
|
970,809
|
|
|
$
|
2,548,685
|
|
|
$
|
5,234,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Investment in and advances to unconsolidated affiliates
|
$
|
76
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
93,768
|
|
|
$
|
62,332
|
|
|
$
|
156,176
|
|
Total assets
(1)
|
$
|
973,423
|
|
|
$
|
121,619
|
|
|
$
|
718,457
|
|
|
$
|
991,759
|
|
|
$
|
2,169,226
|
|
|
$
|
4,974,484
|
|
|
|
(1)
|
Total assets of the Other category includes the carrying amount of the real estate assets under the
Master Leases
.
|
Note 16—Fair Value Measurements
ASC Topic 820, “Fair Value Measurements and Disclosures,” establishes a hierarchy that prioritizes fair value measurements based on the types of inputs used for the various valuation techniques (market approach, income approach and cost approach). The levels of the hierarchy are described below:
|
|
•
|
Level 1: Observable inputs such as quoted prices in active markets for identical assets or liabilities.
|
|
|
•
|
Level 2: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly; these include quoted prices for similar assets or liabilities in active markets, such as interest rates and yield curves that are observable at commonly quoted intervals.
|
|
|
•
|
Level 3: Unobservable inputs that reflect the reporting entity’s own assumptions, as there is little, if any, related market activity.
|
The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the valuation of assets and liabilities and their placement within the fair value hierarchy.
The following methods and assumptions are used to estimate the fair value of each class of financial instruments for which it is practicable to estimate. The fair value of the Company’s trade accounts receivable and payables approximates the carrying amounts.
Cash and cash equivalents
The fair value of the Company’s cash and cash equivalents approximates the carrying amount of the Company’s cash and cash equivalents, due to the short maturity of the cash equivalents.
Held-to-maturity Securities and Promissory Notes
As discussed in
Note 5, “Acquisitions and Other Investments,”
the Company holds local government bonds, which are classified as held-to-maturity securities, and promissory notes. The fair values of such investments are principally based on appraised values of the land associated with Retama Park Racetrack, which are classified as Level 2 inputs.
Loan to the JIVDC
The fair value of the Company’s Term Loan C to the JIVDC as of December 31, 2017 was based on the present value of the projected future cash flows discounted at
14%
, which we believed approximated the return a market participant would require. Since the projections are based on management’s internal projections, the Company concluded that this instrument should be classified as a Level 3 measurement. As discussed in
Note 5, “Acquisitions and Other Investments,”
during the year ended December 31, 2018, the Company sold all outstanding rights and obligations under the JIVDC commitments.
Long-term debt
The fair value of the Company’s Term Loan A Facility, Term Loan B-1 Facility and
5.625%
Notes is estimated based on quoted prices in active markets and as such is a Level 1 measurement. The fair value of the Company’s Revolving Credit Facility approximates its carrying amount as it is revolving, variable rate debt, which we classify as a Level 2 measurement.
Other long-term obligations as of
December 31, 2018
and 2017 include the relocation fees for Hollywood Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley Race Course and the repayment obligation of a hotel and event center located near Hollywood Casino Lawrenceburg, which are discussed in
Note 9, “Long-term Debt.”
The fair values of these long-term obligations are estimated based on rates consistent with the Company’s credit rating for comparable terms and debt instruments and as such are Level 2 measurements.
Other Liabilities
Other liabilities as of
December 31, 2018
and 2017 principally consists of contingent consideration relating to Plainridge Park Casino, which was acquired in September 2013. The contingent consideration is calculated based on actual earnings of the gaming operations over the first
10
years of operations, which commenced on June 24, 2015. As of
December 31, 2018
and
2017
, we were contractually obligated to make
seven
and
eight
remaining annual payments, respectively. The fair value of this liability, which is included within our Consolidated Balance Sheet in “Other current liabilities” or “Other noncurrent liabilities,” depending on the timing of the next payment, is estimated based on an income approach using a discounted cash flow model and has been classified as a Level 3 measurement.
The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2018
|
(in thousands)
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
479,598
|
|
|
$
|
479,598
|
|
|
$
|
479,598
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Held-to-maturity securities
|
$
|
7,466
|
|
|
$
|
7,879
|
|
|
$
|
—
|
|
|
$
|
7,879
|
|
|
$
|
—
|
|
Promissory notes
|
$
|
16,853
|
|
|
$
|
17,415
|
|
|
$
|
—
|
|
|
$
|
17,415
|
|
|
$
|
—
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
|
$
|
1,907,932
|
|
|
$
|
1,886,333
|
|
|
$
|
1,886,333
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5.625% Notes
|
$
|
399,332
|
|
|
$
|
360,000
|
|
|
$
|
360,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other long-term obligations
|
$
|
104,583
|
|
|
$
|
96,338
|
|
|
$
|
—
|
|
|
$
|
96,338
|
|
|
$
|
—
|
|
Other liabilities
|
$
|
21,863
|
|
|
$
|
21,857
|
|
|
$
|
—
|
|
|
$
|
2,815
|
|
|
$
|
19,042
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
(in thousands)
|
Carrying Amount
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Financial assets:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
277,953
|
|
|
$
|
277,953
|
|
|
$
|
277,953
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Loan to the JIVDC
|
$
|
20,900
|
|
|
$
|
16,533
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
16,533
|
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
|
|
|
|
|
|
|
|
Senior Secured Credit Facilities
|
$
|
730,787
|
|
|
$
|
760,456
|
|
|
$
|
760,456
|
|
|
$
|
—
|
|
|
$
|
—
|
|
5.625% Notes
|
$
|
399,249
|
|
|
$
|
412,000
|
|
|
$
|
412,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other long-term obligations
|
$
|
119,310
|
|
|
$
|
113,460
|
|
|
$
|
—
|
|
|
$
|
113,460
|
|
|
$
|
—
|
|
Other liabilities
|
$
|
22,696
|
|
|
$
|
22,696
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,696
|
|
The following table summarizes the changes in fair value of the Company’s Level 3 liabilities measured on a recurring basis:
|
|
|
|
|
|
Other Liabilities
|
(in thousands)
|
Contingent
Purchase Price
|
Balance at January 1, 2016
|
$
|
13,815
|
|
Additions
|
34,945
|
|
Payments
|
(1,793
|
)
|
Included in earnings
(1)
|
1,277
|
|
Balance at December 31, 2016
|
48,244
|
|
Additions
|
905
|
|
Payments
|
(19,613
|
)
|
Included in earnings
(1)
|
(6,840
|
)
|
Balance at December 31, 2017
|
22,696
|
|
Payments
|
(4,108
|
)
|
Included in earnings
(1)
|
454
|
|
Balance at December 31, 2018
|
$
|
19,042
|
|
|
|
(1)
|
The charge (benefit) is included within “General and administrative” within our Consolidated Statement of Operations.
|
The following table sets forth the assets measured at fair value on a non-recurring basis during the years ended December 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands)
|
Valuation Date
|
|
Valuation Technique
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total Balance
|
|
Total
Reduction in
Fair Value
Recorded
|
Goodwill
(1)
|
9/30/2017
|
|
Discounted Cash Flow
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
598
|
|
|
$
|
598
|
|
|
$
|
(18,026
|
)
|
Property and equipment
(2)
|
12/31/2018
|
|
Cost and Market Approach
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(34,288
|
)
|
|
|
(2)
|
The fair value, which was concluded to be zero, of our property and equipment associated with Resorts Casino Tunica was determined using Level 2 inputs. See
Note 7, “Property and Equipment”
for more information.
|
The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities as of December 31, 2018:
|
|
|
|
|
|
|
|
Valuation
Technique
|
|
Unobservable
Input
|
|
Discount Rate
|
Recurring basis:
|
|
|
|
|
|
Contingent purchase price - Plainridge Park Casino
|
Discounted cash flow
|
|
Discount rate
|
|
7.53%
|
Note 17—Related Party Transactions
The Company currently leases executive office buildings in Wyomissing, Pennsylvania from affiliates of its Chairman of the Board of Directors. Rent expense for the years ended
December 31, 2018
,
2017
and
2016
was
$1.3 million
,
$1.2 million
and
$1.2 million
, respectively. The leases for the office space expire in May 2019 and August 2024. The future minimum lease commitments relating to these leases as of
December 31, 2018
were
$3.2 million
.
Note 18—Summarized Quarterly Data (Unaudited)
The following table summarizes the quarterly results of operations for the years ended
December 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
(in thousands, except per share data)
|
First
|
|
Second
(1)
|
|
Third
|
|
Fourth
(2)
|
2018
|
|
|
|
|
|
|
|
Revenues
|
$
|
816,085
|
|
|
$
|
826,913
|
|
|
$
|
789,651
|
|
|
$
|
1,155,269
|
|
Operating income
|
$
|
172,134
|
|
|
$
|
181,755
|
|
|
$
|
155,843
|
|
|
$
|
124,360
|
|
Net income (loss)
|
$
|
45,437
|
|
|
$
|
53,988
|
|
|
$
|
36,125
|
|
|
$
|
(42,036
|
)
|
Earnings (loss) per common share
:
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
$
|
0.50
|
|
|
$
|
0.59
|
|
|
$
|
0.39
|
|
|
$
|
(0.37
|
)
|
Diluted earnings (loss) per common share
|
$
|
0.48
|
|
|
$
|
0.57
|
|
|
$
|
0.38
|
|
|
$
|
(0.37
|
)
|
|
|
|
|
|
|
|
|
|
Fiscal Quarter
|
(in thousands, except per share data)
|
First
(3)
|
|
Second
(4)
|
|
Third
(5)
|
|
Fourth
(6)
|
2017
|
|
|
|
|
|
|
|
Revenues
|
$
|
776,224
|
|
|
$
|
796,463
|
|
|
$
|
806,247
|
|
|
$
|
769,036
|
|
Operating income
|
$
|
140,287
|
|
|
$
|
134,989
|
|
|
$
|
143,663
|
|
|
$
|
26,775
|
|
Net income (loss)
|
$
|
5,104
|
|
|
$
|
17,079
|
|
|
$
|
789,340
|
|
|
$
|
(338,060
|
)
|
Earnings (loss) per common share:
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
$
|
0.06
|
|
|
$
|
0.19
|
|
|
$
|
8.68
|
|
|
$
|
(3.72
|
)
|
Diluted earnings (loss) per common share
|
$
|
0.06
|
|
|
$
|
0.18
|
|
|
$
|
8.43
|
|
|
$
|
(3.72
|
)
|
|
|
(2)
|
During the fourth quarter 2018, we acquired Pinnacle, which resulted in the incurrence of
$74.7 million
in pre-opening and acquisition costs. See
Note 5, “Acquisitions and Other Investments,”
for further details. In addition, we recorded a
$34.3 million
impairment of long-lived assets. See
|
|
|
(3)
|
During the first quarter 2017, PSG acquired DSG Amusement, Ltd., which operated
two
VGT routes. Additionally, we recorded a
$23.4 million
loss on early extinguishment of debt. See
Note 9, “Long-term Debt,”
for more details.
|
|
|
(4)
|
During the second quarter 2017, PSG acquired Advantage Gaming LLC, which operated
two
VGT routes, and the Company acquired 1
st
Jackpot Casino Tunica and Resorts Casino Tunica.
|
|
|
(5)
|
During the third quarter 2017, we released
$766.2 million
of our total valuation allowance, as discussed in
Note 12, “Income Taxes.”
In addition, we recorded
$18.0 million
of goodwill impairment, as discussed in
Note 8, “Goodwill and Other Intangible Assets.”
Lastly, PIV reached an agreement with the former shareholders of Rocket Speed to buy out the remaining contingent consideration, which resulted in a benefit in the amount of
$22.2 million
.
|
|
|
(6)
|
During the fourth quarter 2017, we wrote off
$257.0 million
of deferred tax assets due to the Tax Act. See
Note 12, “Income Taxes,”
for further information. We also recorded a
$77.9 million
provision relating to JIVDC loan losses and unfunded loan commitments.
|
Note 19—Subsequent Events
Margaritaville Resort Casino
On January 1, 2019, the Company acquired the operations of Margaritaville Resort Casino for an aggregate purchase price of approximately
$115 million
pursuant to (i) an agreement and plan of merger (the “Margaritaville Merger Agreement”) among VICI, Riverview Merger Sub Inc., a wholly-owned subsidiary of VICI (“Merger Sub”), Penn Tenant II, LLC (“Buyer”), a wholly-owned subsidiary of the Company, the Company, Bossier Casino Venture (HoldCo), Inc. (“Holdco”) and Silver Slipper Gaming, LLC and (ii) a membership interest purchase agreement (the “MIPA”) among VICI, Merger Sub, Buyer and the Company.
Pursuant to the Margaritaville Merger Agreement, Merger Sub merged with and into Holdco with Holdco surviving the merger as a wholly-owned subsidiary of VICI (the “Merger”) and owner of the land and real estate assets relating to Margaritaville Resort Casino. Pursuant to the MIPA, immediately following the consummation of the Merger, HoldCo sold the limited liability company interests in Holdco’s sole direct subsidiary, BCV (Intermediate) LLC, owner of the Margaritaville Resort Casino operating assets, to the Buyer. On the closing date, Buyer and VICI entered into a triple net lease agreement for the Margaritaville Resort Casino facility having an initial annual rent of
$23.2 million
and an initial term of
15 years
, with
four
5
-year renewal options. The acquisition was financed through incremental borrowings under the Company’s Revolving Credit Facility.
Due to the recent acquisition date of Margaritaville Resort Casino, the Company has not yet finalized its valuation analysis and is in the process of evaluating key assumptions that derive the fair value of the assets acquired and liabilities assumed, including the income tax balances. Therefore, we are unable to provide the preliminary allocation of the purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed.
New Share Repurchase Program
On January 9, 2019, the Company announced a new share repurchase program pursuant to which the Board of Directors authorized to repurchase up to
$200 million
of the Company’s common stock. The new share repurchase program covers an authorization period of
two years
, expiring on December 31, 2020.