Market Overview

Penn National Gaming Reports Record Second Quarter Income from Operations and Exceeds Guidance for Adjusted EBITDA

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- Continued Improvement to Industry Leading Adjusted EBITDA Margins
Across all Three Operating Segments -

Penn National Gaming, Inc. (PENN: Nasdaq) ("Penn National" or the
"Company") today announced financial results for the three and six
months ended June 30, 2018, and initiated 2018 third quarter guidance.

Timothy J. Wilmott, Chief Executive Officer, commented: "Penn National
delivered another strong quarter in which we exceeded our guidance for
income from operations and adjusted EBITDA. Our solid second quarter
results are largely attributable to same store revenue growth at nearly
two-thirds of our gaming operations and the continued success of our
ongoing margin enhancement initiatives. As a result, all three of the
Company's operating segments generated year-over-year adjusted EBITDA
growth. Our margin enhancement initiatives, which began last October,
continue to yield results, with ongoing focus on procurement, marketing
and labor."

2018 Second Quarter Financial Highlights:

  • Net revenues of $826.9 million;
  • Income from operations of $181.8 million, up 34.6%;
  • Adjusted EBITDA of $247.1 million, up 8.7%;
  • Adjusted EBITDA after Master Lease payments of $131.2 million, up
    15.7%;
  • Adjusted EBITDA margins increased by 133 basis points to 29.88%, with
    18 of 23 gaming operations delivering improved margins; and
  • Reduced traditional debt by over $120 million. Traditional net debt
    ratio declined to 1.94x from 2.25x and gross and net leverage
    inclusive of master lease obligations declined to 5.21x and 4.99x,
    respectively, from 5.45x and 5.20x at March 31, 2018.

Pinnacle Acquisition Update

Mr. Wilmott continued: "Last week we secured approvals from the Ohio
Casino Control Commission and the Louisiana Gaming Control Board,
subject to customary conditions, in connection with our pending
acquisition of Pinnacle Entertainment, Inc. (PNK: Nasdaq) ("Pinnacle").

"Penn National had previously received approvals from six other gaming
regulatory bodies, subject to customary conditions, including: the
Pennsylvania Gaming Control Board and the Pennsylvania Racing
Commission; the West Virginia Lottery Commission; the Illinois Gaming
Control Board, the Mississippi Gaming Commission; and the Indiana Gaming
Commission. In addition, on March 29, shareholders of both Penn National
and Pinnacle approved the proposed merger, with over 99% of all votes
cast in favor of the transaction.

"Over the last several months, we have worked diligently with Pinnacle's
leadership to better understand the company's culture and processes and
engaged with leaders and team members from all corporate functions. With
that knowledge, we have developed a new corporate organizational
structure that blends proven leaders from both Penn National and
Pinnacle, while maintaining our corporate headquarters in Wyomissing,
Pennsylvania, and retaining a significant corporate presence at
Pinnacle's Las Vegas-based Service Center.

"Based on our progress to date in terms of regulatory approvals and
transition planning, we anticipate closing the transaction in early
fourth quarter. In addition, we remain confident our $100 million of
cost synergy objectives are well within reach," said Mr. Wilmott.

Recent Development Activity

"During the quarter, we entered into a definitive agreement to acquire
the operations of Margaritaville Resort Casino in Bossier City,
Louisiana ("Margaritaville") for approximately $115 million in a
transaction that is expected to be immediately accretive to operating
results upon closing," said Mr. Wilmott.

"Simultaneous with the closing of the transaction, which we anticipate
will occur late in the fourth quarter, Penn National will enter into a
triple net lease agreement with VICI Properties Inc. ("VICI") for
Margaritaville. We are pleased to partner with VICI to structure this
tuck-in acquisition of Bossier City's newest casino resort. With a
purchase multiple of 5.5x trailing twelve months adjusted EBITDA, which
we believe will decline to below 5.0x after synergies, this acquisition
is consistent with our criteria for transactions that are accretive to
free cash flow and present well-defined paths to the realization of
significant synergies," said Mr. Wilmott.

"During the second quarter the U.S. Supreme Court overturned the Federal
ban on sports betting. We anticipate accepting wagers on sporting events
at our casinos in Mississippi, West Virginia, and potentially
Pennsylvania, prior to the start of the National Football League's
season opener in September," said Mr. Wilmott. Meanwhile, we are
continuing to engage with state lawmakers in our other jurisdictions to
advocate for passage of sports betting laws with reasonable tax rates
and license fees, similar to legislation enacted in the West Virginia,
Mississippi and Nevada models.

"In Pennsylvania, as previously reported, Penn National was the winning
bidder for two of Pennsylvania's new Category 4 ‘satellite casino'
licenses, which were created through the gaming expansion law approved
last October. The licenses allow us to operate up to 750 slot machines
and initially up to 30 table games at each facility. We are currently
preparing our applications for these proposed facilities and will be
submitting our first application to the PGCB by September 12th
for a site in southern York County followed shortly thereafter for our
location in Berks/Lancaster counties.

"In addition, earlier this month we applied to the Pennsylvania Gaming
Control Board for the approval to operate online casino games. Despite
the state's high tax rate, we chose to proceed with the hope that we can
continue to work to bring the tax rate in line with that of other gaming
jurisdictions around the world, and if successful, we plan to market the
games to our robust database of casino and social gaming customers in
Pennsylvania.

Continued Debt Reduction

"Our strong second quarter operating performance enabled us to further
delever our balance sheet with the repayment of over $120 million of
indebtedness. Pro forma for the completion of all announced
transactions, we continue to target a net adjusted leverage ratio of
5.0x to 5.5x.

"Our solid second quarter results reflect our continued focus on driving
operating efficiencies and generating further margin expansion at our
properties. We look forward to the closing and integration of the
Pinnacle and Margaritaville transactions," concluded Mr. Wilmott.

 

Summary of First Quarter Results

 

      Three Months Ended

(in millions, except per share data)

      June 30,
        2018 Actual       2018 Guidance (3)       2017 Actual
Net Revenues       $ 826.9       $ 839.9       $ 796.5
Net income       $ 54.0       $ 45.4       $ 17.1
Adjusted EBITDA (1) (2)       $ 247.1       $ 242.7       $ 227.4
Less: Master Lease payments         115.9         116.0         114.0
Adjusted EBITDA after Master Lease payments (1) (2)       $ 131.2       $ 126.7       $ 113.4
                         
Diluted earnings per common share       $ 0.57       $ 0.49       $ 0.18
1)   During the first quarter of 2018, the Company changed its definition
of Adjusted EBITDA to exclude preopening costs, significant
transaction costs and the variance between our budgeted and actual
costs incurred on cash-settled stock based awards. See Note 2 below
for the components of the definition. We believe these changes will
enhance comparability with our competitors' definition of Adjusted
EBITDA. Prior period results were reclassified to conform to the
current period presentation.
 
2) Adjusted EBITDA is income (loss) from operations, excluding the
impact of stock compensation, debt extinguishment and financing
charges, impairment charges, insurance recoveries and deductible
charges, depreciation and amortization, changes in the estimated
fair value of our contingent purchase price obligations, gain or
loss on disposal of assets, the difference between budget and actual
expense for cash-settled stock-based awards, preopening and
significant transaction costs and other income or expenses. Adjusted
EBITDA is also inclusive of income or loss from unconsolidated
affiliates, with our share of the non-operating items added back for
our joint venture in Kansas Entertainment, LLC ("Kansas
Entertainment" or "Kansas JV"). Adjusted EBITDA excludes payments
pursuant to the Company's Master Lease (the "Master Lease") with
Gaming and Leisure Properties, Inc. ("GLPI"), as the transaction was
accounted for as a financing obligation. See below for
reconciliation of the difference between guidance and actual for the
current quarterly period, as well as the reconciliation of GAAP to
Non-GAAP measures for additional information.
 
3) The guidance figures in the table above present the guidance Penn
National provided on April 26, 2018 for the three months ended June
30, 2018.
 

Review of First Quarter 2018 Results vs. Guidance

    Three Months
Ended
June 30, 2018
Pre-tax       After-tax
(in thousands) (unaudited)
 
Income, per guidance (1) $ 61,992 $ 45,422
 
Adjusted EBITDA variances:
Favorable operating segment variance 2,814 2,194
Other variance, mainly due to Corporate overhead   1,601   1,236
Total adjusted EBITDA variances   4,415   3,430
 
Depreciation expense variance 1,167 910
Cash-settled stock-based awards variance (7,800) (6,021)
Pre-opening costs (5,879) (4,538)
Recovery on Jamul loan sale 16,985 13,111
Debt extinguishment costs (2,579) (1,991)
Other variance 929 724
Tax variance   -   2,941
Income, as reported $ 69,230 $ 53,988
(1)   The guidance figure in the table above presents the guidance Penn
National provided on April 26, 2018 for the three months ended June
30, 2018.
 

Financial Guidance for the Third Quarter and Full Year 2018

Reflecting the current operating and competitive environment, the table
below sets forth full year and third quarter 2018 guidance targets for
financial results based on the following assumptions:

  • Excludes any impact related to the Pinnacle transaction;
  • No contribution from the Company's management contract for Casino Rama
    after mid-July;
  • Corporate overhead expenses of $78.9 million, with $21.1 million to be
    incurred in the third quarter;
  • Depreciation and amortization charges of $235.1 million, with $58.4
    million in the third quarter;
  • Rent payments to GLPI of $461.7 million, with $115.9 million in the
    third quarter which continues to be fully tax deductible;
  • Maintenance capital expenditures of $103.6 million, with $45.2 million
    in the third quarter;
  • Cash interest on traditional debt of $57.9 million, with $20.6 million
    in the third quarter;
  • Interest expense of $468.5 million, with $115.6 million in the third
    quarter, inclusive of interest expense related to the Master Lease
    financing obligation with GLPI;
  • Interest expense includes the impact of the five-year variable rent
    reset related to the Master Lease effective November 1, 2018, which
    reduces 2018 annual rent by $1.9 million;
  • Interest expense also includes $0.9 million related to the maximum
    escalation that is projected to be incurred at the conclusion of year
    five of the Master Lease on October 31, 2018;
  • Cash taxes of $32.7 million, with $14.7 million in the third quarter;
  • Our share of non-operating items (such as depreciation and
    amortization expense) associated with our Kansas JV will total $5.1
    million, with $1.3 million to be incurred in the third quarter;
  • Estimated non-cash stock compensation expenses of $11.6 million, with
    $2.8 million to be incurred in the third quarter;
  • LIBOR is based on the forward yield curve;
  • A diluted share count of approximately 94.0 million shares for the
    full year; and,
  • There will be no material changes in applicable legislation,
    regulatory environment, world events, weather, recent consumer trends,
    economic conditions, oil prices, competitive landscape (other than
    listed above) or other circumstances beyond our control that may
    adversely affect the Company's results of operations.
         
Three Months Ending September 30, Full Year Ending December 31,
2018

Guidance

        2017

Actual (1)

2018 Revised
Guidance

     

2018 Prior
Guidance (2)

   

2017 Actual (1)

(in millions, except per share data)
Net revenues $ 807.1 $ 806.2 $ 3,219.0 $ 3,235.7   $ 3,148.0
 
Net income $ 40.8 $ 789.3 $ 164.1 $ 151.2 $ 473.5
Income tax provision 12.7 (759.1) 51.0 54.3 (498.5)
Other - 0.3 3.5 0.8 26.2
Income from unconsolidated affiliates (5.5) (4.7) (22.0) (21.5) (18.7)
Interest income (0.2) (0.3) (0.9) (1.0) (3.6)
Interest expense   115.6   118.2   468.5   471.6   466.8
Income from operations $ 163.4 $ 143.7 $ 664.2 $ 655.4 $ 445.7
Loss (gain) on disposal of assets 0.1 0.1 0.2 0.3 0.2
Impairment losses - 24.3 (16.4) 0.6 107.8
Insurance recoveries - - - - (0.3)
Charge for stock compensation 2.8 1.9 11.6 11.4 7.7
Contingent purchase price 0.4 (20.7) 2.1 2.4 (6.8)
Cash-settled stock award variance - 1.6 0.3 (7.5) 23.5

Pre-opening and significant transaction costs

- 1.8 12.0 6.1 9.7
Depreciation and amortization 58.4 66.5 235.1 235.8 267.0
Income from unconsolidated affiliates 5.5 4.7 22.0 21.5 18.7
Non-operating items for Kansas JV   1.3   1.3   5.1   5.2   5.9
Adjusted EBITDA $ 231.9 $ 225.2 $ 936.2 $ 931.2 $ 879.1
Master Lease payments   (115.9)   (114.5)   (461.7)   (461.8)   (455.4)
Adjusted EBITDA, after Master Lease payments $ 116.0 $ 110.7 $ 474.5 $ 469.4 $ 423.7
 
Diluted earnings per common share $ 0.44 $ 8.43 $ 1.75 $ 1.62 $ 5.07
(1)   The guidance table above includes prior period actual performance
for the comparative period.
(2) The guidance figures in the table above present the guidance Penn
National provided on April 26, 2018 for the three months ended June
30, 2018.
 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Segment Information – Operations

(in thousands) (unaudited)

                             
NET REVENUES INCOME FROM OPERATIONS ADJUSTED EBITDA
Three Months Ended June 30, Three Months Ended June 30, Three Months Ended June 30,
  2018     2017   2018           2017   2018           2017
Northeast (1) $ 422,988 $ 405,099 $ 121,746 $ 108,119 $ 136,927 $ 129,876
South/West (2) 163,370 153,151 55,352 20,062 46,648 35,049
Midwest (3) 230,460 224,847 63,646 59,283 79,010 75,490
Other (4)   10,095   13,366   (58,989)   (52,475)   (15,479)   (13,011)
Total $ 826,913 $ 796,463 $ 181,755 $ 134,989 $ 247,106 $ 227,404
 
 
 
 
NET REVENUES INCOME FROM OPERATIONS ADJUSTED EBITDA
Six Months Ended June 30, Six Months Ended June 30, Six Months Ended June 30,
  2018   2017   2018   2017   2018   2017
Northeast (1) $ 837,155 $ 798,564 $ 237,437 $ 210,752 $ 268,934 $ 256,451
South/West (2) 324,665 292,970 91,238 47,180 91,697 71,390
Midwest (3) 460,545 453,185 129,163 120,813 160,165 153,596
Other (4)   20,633   27,968   (103,949)   (103,469)   (31,144)   (26,588)
Total $ 1,642,998 $ 1,572,687 $ 353,889 $ 275,276 $ 489,652 $ 454,849
(1)   The Northeast reportable segment consists of the following
properties: Hollywood Casino at Charles Town Races, Hollywood Casino
Bangor, Hollywood Casino at Penn National Race Course, Hollywood
Casino Toledo, Hollywood Casino Columbus, Hollywood Gaming at Dayton
Raceway, Hollywood Gaming at Mahoning Valley Race Course, and
Plainridge Park Casino. It also includes the Company's Casino Rama
management service contract (which terminated on July 18, 2018).
During the three months ended June 30, 2018, net revenues were $21.1
million higher due to reimbursable costs associated with our
management service contract for Casino Rama following the
implementation of the new revenue accounting standard effective
January 1, 2018.
 
(2) The South/West reportable segment consists of the following
properties: Zia Park Casino, Hollywood Casino Tunica, Hollywood
Casino Gulf Coast, Boomtown Biloxi, the M Resort, Tropicana Las
Vegas, and 1st Jackpot Casino Tunica (f/k/a Bally's
Casino Tunica) and Resorts Casino Tunica, which were acquired on May
1, 2017. The South/West segment results for the three months ending
June 30, 2017, include earnings from our May 1, 2017 acquisition of
Bally's/Resorts in Tunica of $2.8 million, inclusive of acquisition
related charges of $0.5 million.
 
(3) The Midwest reportable segment consists of the following properties:
Hollywood Casino Aurora, Hollywood Casino Joliet, Argosy Casino
Alton, Argosy Casino Riverside, Hollywood Casino Lawrenceburg,
Hollywood Casino St. Louis, Prairie State Gaming, and includes the
Company's 50% investment in Kansas Entertainment, which owns the
Hollywood Casino at Kansas Speedway.
 
(4) The Other category consists of the Company's standalone racing
operations, namely Sanford-Orlando Kennel Club, and the Company's
joint venture interests in Sam Houston Race Park, Valley Race Park,
and Freehold Raceway. If the Company is successful in obtaining
gaming operations at these locations, they would be assigned to one
of the Company's regional executives and reported in their
respective reportable segment. The Other category also includes Penn
Interactive Ventures, the Company's interactive division which
represents Penn National's social gaming initiatives, including
Rocket Speed, Inc.
 

The Other category also includes the Company's corporate overhead costs,
which were $18.6 million and $37.4 million and $17.7 million and $36.0
million for the three and six months ended June 30, 2018 and 2017,
respectively.

                       

Reconciliation of Comparable GAAP Financial Measures To

Adjusted EBITDA

 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

(in thousands) (unaudited)

 
Three Months Ended
June 30,       March 31, December 31, September 30, June 30,
  2018         2018         2017         2017         2017
Net income $ 53,988 $ 45,437 $ (338,060) $ 789,340 $ 17,079
Income tax provision (benefit) 15,242 15,689 252,134 (759,064) 6,225
Other 2,627 878 628 236 173
Income from unconsolidated affiliates (5,734) (5,361) (4,321) (4,781) (5,021)
Interest income (241) (249) (367) (304) (235)
Interest expense   115,873         115,740         116,761         118,236         116,768
Income from operations $ 181,755 $ 172,134 $ 26,775 $ 143,663 $ 134,989
Loss (gain) on disposal of assets (52) 55 70 96 52
Charge for stock compensation 3,003 2,929 1,953 1,853 1,801
Contingent purchase price 202 1,134 9,953 (20,716) 1,362
Cash-settled stock award variance 7,800 (7,462) 10,632 1,583 6,092
Pre-opening and significant transaction costs 5,879 6,093 5,138 1,848 2,174

Recovery/provision for loan loss and unfunded loan
commitments
to the JIVDC and impairment losses (1)

(16,985) 618 77,858 24,317 5,635
Depreciation and amortization 58,559 60,390 61,374 66,483 68,969
Insurance recoveries (68) - (289) - -
Income from unconsolidated affiliates 5,734 5,361 4,321 4,781 5,021
Non-operating items for Kansas JV   1,279         1,294         1,296         1,310         1,309
Adjusted EBITDA $ 247,106       $ 242,546       $ 199,081       $ 225,218       $ 227,404
Master Lease payments   (115,916)         (115,874)         (114,532)         (114,489)         (113,968)
Adjusted EBITDA, after Master Lease payments $ 131,190       $ 126,672       $ 84,549       $ 110,729       $ 113,436
1)   A loan loss recovery of $17.0 million was recorded during the three
months ended June 30, 2018 on the sale of our Jamul loan. This
compared with provisions of $77.9 million, $6.3 million and $5.6
million for the three months ended December 31, 2017, September 30,
2017 and June 30, 2017, respectively. Goodwill impairment charges of
$18.0 million were also recorded for the three months ended
September 30, 2017.
 
      Six Months Ended
June 30,
  2018           2017
Net income $ 99,425 $ 22,183
Income tax provision 30,931 8,423
Other 3,505 25,356
Income from unconsolidated affiliates (11,095) (9,569)
Interest income (490) (2,881)
Interest expense   231,613   231,764
Income from operations $ 353,889 $ 275,276
Gain (loss) on disposal of assets 3 7
Charge for stock compensation 5,932 3,974
Contingent purchase price 1,337 3,922
Cash-settled stock award variance 338 11,256
Pre-opening and significant transaction costs 11,972 2,745
Impairment charges (16,367) 5,635
Depreciation and amortization 118,949 139,205
Insurance recoveries (68) -
Income from unconsolidated affiliates 11,095 9,569
Non-operating items for Kansas JV   2,572   3,260
Adjusted EBITDA $ 489,652 $ 454,849
Master Lease payments   (231,790)   (226,418)
Adjusted EBITDA, after Master Lease payments $ 257,862 $ 228,431
                             

Reconciliation of Comparable GAAP Financial Measures To

Adjusted EBITDA By Segment

 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

 (in thousands) (unaudited)

 

Three Months Ended June 30, 2018

 
Northeast South/West Midwest Other Total
Income (loss) from operations $ 121,746 $ 55,352 $ 63,646 $ (58,989) $ 181,755
Charge for stock compensation - - - 3,003 3,003

Recovery for loan loss and unfunded
loan commitments to the
JIVDC

- (16,985) - - (16,985)
Insurance recoveries - (68) - - (68)
Depreciation and amortization 14,911 8,396 8,012 27,240 58,559
Loss (gain) on disposal of assets (32) (47) 32 (5) (52)
Contingent purchase price 302 - (100) - 202
Cash-settled stock award variance - - - 7,800 7,800
Pre-opening and significant transaction costs - - - 5,879 5,879
Income (loss) from unconsolidated affiliates - - 6,141 (407) 5,734
Non-operating items for Kansas JV   -   -   1,279   -   1,279
Adjusted EBITDA $ 136,927 $ 46,648 $ 79,010 $ (15,479) $ 247,106
                             

Three Months Ended June 30, 2017

 
Northeast South/West Midwest Other Total
Income (loss) from operations $ 108,119 $ 20,062 $ 59,283 $ (52,475) $ 134,989
Charge for stock compensation - - - 1,801 1,801
Provision for loan loss to the JIVDC - 5,635 - - 5,635
Depreciation and amortization 21,525 9,353 9,508 28,583 68,969
Loss (gain) on disposal of assets (45) (1) 88 10 52
Contingent purchase price 277 - 16 1,069 1,362
Cash-settled stock award variance - - - 6,092 6,092
Pre-opening and significant transaction costs - - - 2,174 2,174
Income from unconsolidated affiliates - - 5,286 (265) 5,021
Non-operating items for Kansas JV   -   -   1,309   -   1,309
Adjusted EBITDA $ 129,876 $ 35,049 $ 75,490 $ (13,011) $ 227,404
                             

Six Months Ended June 30, 2018

 
Northeast South/West Midwest Other Total
Income (loss) from operations $ 237,437 $ 91,238 $ 129,163 $ (103,949) $ 353,889
Charge for stock compensation - - - 5,932 5,932

Recovery for loan loss and unfunded loan
commitments to the
JIVDC and impairment losses

- (16,985) - 618 (16,367)
Insurance recoveries - (68) - - (68)
Depreciation and amortization 30,083 17,553 16,498 54,815 118,949
Loss (gain) on disposal of assets 10 (41) 45 (11) 3
Contingent purchase price 1,404 - (67) - 1,337
Cash-settled stock award variance - - - 338 338
Pre-opening and significant transaction costs - - - 11,972 11,972
Income (loss) from unconsolidated affiliates - - 11,954 (859) 11,095
Non-operating items for Kansas JV   -   -   2,572   -   2,572
Adjusted EBITDA $ 268,934 $ 91,697 $ 160,165 $ (31,144) $ 489,652
                             

Six Months Ended June 30, 2017

 
Northeast South/West Midwest Other Total
Income (loss) from operations $ 210,752 $ 47,180 $ 120,813 $ (103,469) $ 275,276
Charge for stock compensation - - - 3,974 3,974
Provision for loan loss to the JIVDC - 5,635 - - 5,635
Depreciation and amortization 44,548 18,570 19,179 56,908 139,205
Loss (gain) on disposal of assets (31) 5 29 4 7
Contingent purchase price 1,182 - 25 2,715 3,922
Cash-settled stock award variance - - - 11,256 11,256
Pre-opening and significant transaction costs - - - 2,745 2,745
Income (loss) from unconsolidated affiliates - - 10,290 (721) 9,569
Non-operating items for Kansas JV   -   -   3,260   -   3,260
Adjusted EBITDA $ 256,451 $ 71,390 $ 153,596 $ (26,588) $ 454,849
             

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Consolidated Statements of Operations

(in thousands, except per share data) (unaudited)

 
Three Months Ended June 30, Six Months Ended June 30,
  2018           2017   2018           2017
 
Revenues
Gaming (1) $ 665,094 $ 680,979 $ 1,319,588 $ 1,342,235
Food, beverage, hotel and other (1) 133,664 152,148 264,633 299,889
Management service and licensing fees 2,968 2,932 5,406 5,259
Reimbursable management costs (1)   25,187   6,387   53,371   13,145
Revenues 826,913 842,446 1,642,998 1,660,528
Less promotional allowances (1)   -   (45,983)   -   (87,841)
Net revenues   826,913   796,463   1,642,998   1,572,687
 
Operating expenses
Gaming (1) 350,694 345,156 691,210 677,209
Food, beverage, hotel and other (1) 95,112 105,231 188,092 206,306
General and administrative 132,659 130,096 253,922 255,911
Depreciation and amortization 58,559 68,969 118,949 139,205
Reimbursable management costs (1) 25,187 6,387 53,371 13,145

Recovery/provision for loan loss and unfunded

loan commitments to the JIVDC and impairment losses

(16,985) 5,635 (16,367) 5,635
Insurance recoveries   (68)   -   (68)  
Total operating expenses   645,158   661,474   1,289,109   1,297,411
Income from operations   181,755   134,989   353,889   275,276
 
Other income (expenses)
Interest expense (115,873) (116,768) (231,613) (231,764)
Interest income 241 235 490 2,881
Income from unconsolidated affiliates 5,734 5,021 11,095 9,569
Loss on early extinguishment of debt (2,579) - (3,461) (23,390)
Other   (48)   (173)   (44)   (1,966)
Total other expenses   (112,525)   (111,685)   (223,533)   (244,670)
 
Income from operations before income taxes 69,230 23,304 130,356 30,606
Income tax provision   15,242   6,225   30,931   8,423
Net income $ 53,988 $ 17,079 $ 99,425 $ 22,183
 
Earnings per common share:
Basic earnings per common share $ 0.59 $ 0.19 $ 1.09 $ 0.24
Diluted earnings per common share $ 0.57 $ 0.18 $ 1.05 $ 0.24
 
Weighted-average common shares outstanding:
Basic 91,468 90,928 91,330 90,840
Diluted 94,995 93,239 94,834 92,543
1)   Penn adopted Accounting Standards Codification (ASC) No. 606
"Revenue from Contracts with Customers" on January 1, 2018 using the
modified retrospective method which impacts the comparability of
these line items. See the following page of this release for further
details.
 

PENN NATIONAL GAMING, INC. AND SUBSIDIARIES

Supplemental information

(in thousands) (unaudited)

                                     

2018 Impact of Adopting New Revenue Standard

 

Three Month
Period Ended
June 30, 2018
As
Reported

Balances Without
Adoption of
ASC 606

Effect of Change
Higher / (Lower)

Six Month
Period Ended
June 30, 2018
As
Reported

Balances Without
Adoption of
ASC 606

Effect of Change
Higher / (Lower)

 
 
Revenues
Gaming (1), (2) $ 665,094 $ 699,955 $ (34,861) $ 1,319,588 $ 1,386,669 $ (67,081)
Food, beverage, hotel and other (2), (4) 133,664 150,231 (16,567) 264,633 296,715 (32,082)
Management service and license fees 2,968 2,968 - 5,406 5,406 -
Reimbursable management costs (3)   25,187   4,119   21,068   53,371   10,459   42,912
Revenues 826,913 857,273 (30,360) 1,642,998 1,699,249 (56,251)
Less: promotional allowances (2)   -   (42,154)   42,154   -   (82,417)   82,417
Net revenues 826,913 815,119 11,794 1,642,998 1,616,832 26,166
 
Operating expenses
Gaming (1) 350,694 350,286 408 691,210 689,774 1,436
Food, beverage, hotel and other (4) 95,112 104,978 (9,866) 188,092 206,918 (18,826)
General and administrative 132,659 132,659 - 253,922 253,922 -
Reimbursable management costs (3) 25,187 4,119 21,068 53,371 10,459 42,912
Depreciation and amortization 58,559 58,559 - 118,949 118,949 -
Impairment losses (16,985) (16,985) - (16,367) (16,367) -
Insurance recoveries   (68)   (68)   -   (68)   (68)   -
Total operating expenses   645,158   633,548   11,610   1,289,109   1,263,587   25,522
Income from operations 181,755 181,571 184 353,889 353,245 644
1)   The new revenue standard changed the accounting for loyalty rewards
earned by our customers. The Company is now required to defer
revenue at the estimated standalone selling price of the loyalty
rewards as they are earned by our customers and recognize revenue
when the rewards are redeemed. Prior to the adoption of the new
revenue standard, the estimated liability for unredeemed rewards was
accrued based on the estimated costs of the service or merchandise
to be provided.
 
2) The new revenue standard changed the accounting for promotional
allowances. The Company is no longer permitted to report revenue for
goods and services provided to customers for free as an inducement
to gamble as gross revenue with a corresponding reduction in
promotional allowances to arrive at net revenues (discretionary
comps). The new revenue standard requires complimentaries related to
an inducement to gamble to be recorded as a reduction to gaming
revenues, and as such promotional allowances are no longer netted on
our condensed consolidated statements of income. In addition, the
new revenue standard 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
reward redemptions with a corresponding reduction in promotional
allowances to arrive at net revenue. As such, promotional allowances
related to a customer's redemption of loyalty rewards is no longer
netted on our condensed consolidated statements of income.
 
3) The new revenue standard changed the accounting for reimbursable
costs associated with our management service contract for Casino
Rama. Under the new revenue standard, reimbursable costs, which
primarily consist 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
the new revenue standard, we recorded these reimbursable amounts on
a net basis, and as such they were not recorded in revenues or
operating expenses.
 
4) The new revenue standard changed the accounting for racing revenues.
Under the new revenue standard, we are not the controlling entity to
the arrangement(s), but rather function as an agent to the
pari-mutuel pool. As such, 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 our 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, we recorded these
fees and obligations in food, beverage, hotel and other expense.
                                     
June 30, 2018 March 31, 2018 December 31, 2017 September 30, 2017 June 30, 2017
 
Cash and cash equivalents $ 201,085 $ 217,997 $ 277,953 $ 264,907 $ 224,399
 
Bank debt $ 567,350 $ 688,251 $ 730,788 $ 798,608 $ 812,002
Notes 399,291 399,270 399,249 399,229 399,208
Other long term obligations (1)   111,814   112,124   120,200   120,855   127,488
Total Traditional debt $ 1,078,455 $ 1,199,645 $ 1,250,237 $ 1,318,692 $ 1,338,698
 
Traditional net debt $ 877,370 $ 981,648 $ 972,284 $ 1,053,785 $ 1,114,299
1)   Other long-term obligations at June 30, 2018 include $98.4 million
for the present value of the relocation fees due for both Hollywood
Gaming at Dayton Raceway and Hollywood Gaming at Mahoning Valley
Race Course, and $13.2 million related to our repayment obligation
on a hotel and event center located near Hollywood Casino
Lawrenceburg.
 

The Company's definition of adjusted EBITDA adds back our share of the
impact of non-operating items (such as depreciation and amortization) at
our joint ventures that have gaming operations. At this time, Kansas
Entertainment, the operator of Hollywood Casino at Kansas Speedway, is
Penn National's only joint venture that meets this definition. Kansas
Entertainment does not currently have, nor has it ever had, any
indebtedness. The table below presents cash flow distributions we have
received from this investment for the three and six months ended June
30, 2018 and 2017.

    Three Months Ended June 30,       Six Months Ended June 30,
  2018         2017   2018         2017
 
Cash flow distributions $ 6,800 $ 7,250 $ 13,300 $ 13,000
 

The table below summarizes certain cash expenditures incurred by the
Company during the periods presented in this earnings release.

    Three Months Ended June 30,       Six Months Ended June 30,
  2018         2017   2018         2017
 
Master Lease rental payments $ 115,916 $ 113,968 $ 231,790 $ 226,418
Cash income tax (refunds)/payments 4,274 3,645 6,507 (5,659)
Cash interest expense on traditional debt 8,262 7,923 30,455 24,503
Maintenance capital expenditures 20,695 17,309 31,297 28,287
 

Share Repurchase Program

Reflecting the repurchase of 1,264,149 common shares for $24,770,470 in
the twelve month period ended December 31, 2017, Penn National has the
authority to repurchase up to an additional $75.2 million of its common
shares by February 2019.

Non-GAAP Measures

In addition to GAAP financial measures, adjusted EBITDA and adjusted
EBITDA after Master Lease payments are used by management as important
measures of the Company's operating performance.

We define adjusted EBITDA as earnings before interest, taxes, stock
compensation, debt extinguishment and financing charges, impairment
charges, insurance recoveries and deductible charges, depreciation and
amortization, changes in the estimated fair value of our contingent
purchase price obligations, gain or loss on disposal of assets, the
difference between budget and actual expense for cash-settled
stock-based awards, preopening and significant transaction costs and
other income or expenses. Adjusted EBITDA is also inclusive of income or
loss from unconsolidated affiliates, with our share of non-operating
items (such as depreciation and amortization) added back for our joint
venture in Kansas Entertainment. Adjusted EBITDA excludes payments
associated with our Master Lease agreement with GLPI as the transaction
was accounted for as a financing obligation.

During the first quarter of 2018, we changed the definition of Adjusted
EBITDA to exclude preopening costs, significant transaction costs and
the variance between our budgeted and actual costs incurred on
cash-settled stock based awards which are required to be marked to
market each reporting period. We determined to exclude preopening costs
and significant transaction costs to more closely align the Company's
calculation of Adjusted EBITDA with our competitors. Preopening costs
and significant transaction costs are also excluded from adjusted EBITDA
for bonus calculation purposes. We have excluded the favorable or
unfavorable difference between the budgeted expense and actual expense
for our cash-settled stock-based awards as it is non-operational in
nature. Additionally, this variance is excluded from adjusted EBITDA for
bonus calculation purposes. In connection with the change to the
definition of Adjusted EBITDA, we reclassified our prior period results
to conform to the current period presentation.

Adjusted EBITDA has economic substance because it is used by management
as a performance measure to analyze the performance of our business, and
is especially relevant in evaluating large, long lived casino projects
because they provide a perspective on the current effects of operating
decisions separated from the substantial non-operational depreciation
charges and financing costs of such projects. We also present adjusted
EBITDA because it is used by some investors and creditors as an
indicator of the strength and performance of ongoing business
operations, including our ability to service debt, fund capital
expenditures, acquisitions and operations. These calculations are
commonly used as a basis for investors, analysts and credit rating
agencies to evaluate and compare operating performance and value
companies within our industry. In addition, gaming companies have
historically reported adjusted EBITDA as a supplement to financial
measures in accordance with GAAP. In order to view the operations of
their casinos on a more stand-alone basis, gaming companies, including
us, have historically excluded from their adjusted EBITDA calculations
certain corporate expenses that do not relate to the management of
specific casino properties. However, adjusted EBITDA is not a measure of
performance or liquidity calculated in accordance with GAAP. Adjusted
EBITDA information is presented as a supplemental disclosure, as
management believes that it is a widely used measure of performance in
the gaming industry, is used in the valuation of gaming companies, and
that it is considered by many to be a key indicator of the Company's
operating results. Management uses adjusted EBITDA as an important
measure of the operating performance of its segments, including the
evaluation of operating personnel. Adjusted EBITDA should not be
construed as an alternative to operating income, as an indicator of the
Company's operating performance, as an alternative to cash flows from
operating activities, as a measure of liquidity, or as any other measure
of performance determined in accordance with GAAP. The Company has
significant uses of cash flows, including capital expenditures, interest
payments, taxes and debt principal repayments, which are not reflected
in adjusted EBITDA. It should also be noted that other gaming companies
that report adjusted EBITDA information may calculate adjusted EBITDA in
a different manner than the Company and therefore, comparability may be
limited.

Adjusted EBITDA after Master Lease payments is a measure we believe
provides useful information to investors because it is an indicator of
the performance of ongoing business operations after incorporating the
cash flow impact of Master Lease payments to GLPI. In addition, adjusted
EBITDA after Master Lease payments is the metric that our executive
management team is measured against for incentive based compensation
purposes.

A reconciliation of the Company's net income (loss) per GAAP to adjusted
EBITDA, as well as the Company's income (loss) from operations per GAAP
to adjusted EBITDA, is included above. Additionally, a reconciliation of
each segment's income (loss) from operations to adjusted EBITDA is also
included above. On a segment level, income (loss) from operations per
GAAP, rather than net income (loss) per GAAP is reconciled to adjusted
EBITDA due to, among other things, the impracticability of allocating
interest expense, interest income, income taxes and certain other items
to the Company's segments on a segment by segment basis. Management
believes that this presentation is more meaningful to investors in
evaluating the performance of the Company's segments and is consistent
with the reporting of other gaming companies.

Conference Call, Webcast and Replay Details

Penn National Gaming is hosting a conference call and simultaneous
webcast at 9:00 am ET today, both of which are open to the general
public. The conference call number is 303/223-0118. Please call five
minutes in advance to ensure that you are connected prior to the
presentation. Questions will be reserved for call-in analysts and
investors. Interested parties may also access the live call on the
Internet at www.pngaming.com.
Please allow 15 minutes to register and download and install any
necessary software. A replay of the call can be accessed for thirty days
on the Internet at www.pngaming.com.

This press release, which includes financial information to be discussed
by management during the conference call and disclosure and
reconciliation of non-GAAP financial measures, is available on the
Company's web site, www.pngaming.com,
in the "Investors" section (select link for "Press Releases").

About Penn National Gaming

Penn National Gaming owns, operates or has ownership interests in gaming
and racing facilities and video gaming terminal operations with a focus
on slot machine entertainment. At June 30, 2018, the Company operated
twenty-eight facilities in sixteen jurisdictions, including Florida,
Illinois, Indiana, Kansas, Maine, Massachusetts, Mississippi, Missouri,
Nevada, New Jersey, New Mexico, Ohio, Pennsylvania, Texas, West
Virginia, and Ontario, Canada. At June 30, 2018, in aggregate, Penn
National Gaming operated approximately 34,100 gaming machines, 770 table
games and 4,800 hotel rooms. The Company also offers social online
gaming through its Penn Interactive Ventures division.

Important Additional Information

In connection with the proposed transaction, on February 8, 2018, Penn
filed with the Securities and Exchange Commission (the "SEC") a
registration statement on Form S-4 that contains a joint proxy statement
of Penn and Pinnacle and also constitutes a prospectus of Penn (the
"joint proxy statement/prospectus"). The registration statement was
declared effective by the SEC on February 28, 2018 and Penn and Pinnacle
commenced mailing the definitive joint proxy statement/prospectus to
their respective shareholders and stockholders on February 28, 2018.
This communication does not constitute an offer to sell or the
solicitation of an offer to buy any securities or a solicitation of any
vote or approval. Shareholders of Penn and stockholders of Pinnacle are
urged to read the definitive joint proxy statement/prospectus regarding
the proposed transaction and any other relevant documents filed or that
will be filed with the SEC, as well as any amendments or supplements to
those documents, because they contain or will contain important
information. Investors may obtain a free copy of the registration
statement and the joint proxy statement/prospectus, as well as other
filings containing information about Penn and Pinnacle, without charge,
at the SEC's website at www.sec.gov.
Copies of the documents filed with the SEC by Penn can be obtained,
without charge, by directing a request to Justin Sebastiano, Penn
National Gaming, Inc., 825 Berkshire Boulevard, Suite 200, Wyomissing,
Pennsylvania 19610, Tel. No. (610) 401-2029. Copies of the documents
filed with the SEC by Pinnacle can be obtained, without charge, by
directing a request to Vincent Zahn, Pinnacle Entertainment, Inc., 3980
Howard Hughes Parkway, Las Vegas, Nevada 89169, Tel. No. (702) 541-7777.

Forward-looking Statements

This press release contains forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements can be identified by the use of forward looking terminology
such as "expects," "believes," "estimates," "projects," "intends,"
"plans," "seeks," "may," "will," "should" or "anticipates" or the
negative or other variations of these or similar words, or by
discussions of future events, strategies or risks and uncertainties.
Specifically, forward-looking statements may include, among others,
statements concerning: our expectations of future results of operations
and financial condition; expectations for our properties or our
development projects; the timing, cost and expected impact of planned
capital expenditures on our results of operations; our expectations with
regard to the impact of competition; our expectations with regard to
acquisitions and development opportunities, as well as the integration
of any companies we have acquired or may acquire; the outcome and
financial impact of the litigation in which we are or will be
periodically involved; the actions of regulatory, legislative, executive
or judicial decisions at the federal, state or local level with regard
to our business and the impact of any such actions; our ability to
maintain regulatory approvals for our existing businesses and to receive
regulatory approvals for our new businesses; our expectations relative
to margin improvement initiatives; our expectations regarding economic
and consumer conditions; and our expectations for the continued
availability and cost of capital. As a result, actual results may vary
materially from expectations. Although the Company believes that its
expectations are based on reasonable assumptions within the bounds of
its knowledge of its business, there can be no assurance that actual
results will not differ materially from our expectations. Meaningful
factors that could cause actual results to differ from expectations
include, but are not limited to, risks related to the following: the
assumptions included in our financial guidance; the ability of our
operating teams to drive revenue and margins; the impact of significant
competition from other gaming and entertainment operations; our ability
to obtain timely regulatory approvals required to own, develop and/or
operate our facilities, or other delays, approvals or impediments to
completing our planned acquisitions or projects, construction factors,
including delays, and increased costs; the passage of state, federal or
local legislation (including referenda) that would expand, restrict,
further tax, prevent or negatively impact operations in or adjacent to
the jurisdictions in which we do or seek to do business (such as a
smoking ban at any of our facilities or the award of additional gaming
licenses proximate to our facilities); the effects of local and national
economic, credit, capital market, housing, and energy conditions on the
economy in general and on the gaming and lodging industries in
particular; the activities of our competitors and the rapid emergence of
new competitors (traditional, internet, social, sweepstakes based and
VGTs in bars and truck stops); increases in the effective rate of
taxation for any of our operations or at the corporate level; our
ability to identify attractive acquisition and development opportunities
(especially in new business lines) and to agree to terms with, and
maintain good relationships with partners/municipalities for such
transactions; the costs and risks involved in the pursuit of such
opportunities and our ability to complete the acquisition or development
of, and achieve the expected returns from, such opportunities; our
ability to maintain market share in established markets and to continue
to ramp up operations at our recently opened facilities; our
expectations for the continued availability and cost of capital; the
impact of weather; changes in accounting standards; the risk of failing
to maintain the integrity of our information technology infrastructure
and safeguard our business, employee and customer data; factors which
may cause the Company to curtail or suspend the share repurchase
program; with respect to our Plainridge Park Casino in Massachusetts,
the ultimate location and timing of the other gaming facilities in the
state and the region; with respect to our interactive gaming endeavors,
risks related to the commencement of real money online gaming in the
state of Pennsylvania, significant competition in the social gaming
industry, employee retention, cyber-security, data privacy, intellectual
property and legal and regulatory challenges, as well as our ability to
successfully develop innovative products that attract and retain a
significant number of players in order to grow our revenues and
earnings; with respect to Illinois Gaming Investors, LLC, d/b/a Prairie
State Gaming, risks relating to potential changes in the VGT laws, our
ability to successfully compete in the VGT market, our ability to retain
existing customers and secure new customers, risks relating to municipal
authorization of VGT operations and the implementation and the ultimate
success of the products and services being offered; with respect to our
proposed Pennsylvania casinos in York and Berks or Lancaster Counties,
risks related to the ultimate location of other gaming facilities in the
state; risks related to the acquisition of Pinnacle by Penn National and
the integration of the businesses and assets to be acquired; the
possibility that the proposed transaction does not close when expected
or at all because required regulatory or other approvals are not
received or other conditions to the closing are not satisfied on a
timely basis or at all; the risk that the financing required to fund the
transaction is not obtained on the terms anticipated or at all; the
possibility that the Boyd Gaming Corporation and/or GLPI deals do not
close in a timely fashion or at all; potential adverse reactions or
changes to business or employee relationships, including those resulting
from the announcement or completion of the transaction; potential
litigation challenging the transaction; the possibility that the
anticipated benefits of the transaction are not realized when expected
or at all, including as a result of the impact of, or issues arising
from, the integration of the two companies; the possibility that the
anticipated divestitures are not completed in the anticipated timeframe
or at all; the possibility that additional divestitures may be required;
the possibility that the transaction may be more expensive to complete
than anticipated, including as a result of unexpected factors or events;
diversion of management's attention from ongoing business operations and
opportunities; litigation relating to the transaction; and risks
associated with increased leverage from the transaction; with respect to
our management contract at Casino Rama, risks relating to the transition
of management of this facility on July 18, 2018 to a newly selected
operator; with respect to our pending acquisition of the Margaritaville
operations, the possibility that the proposed transaction does not close
when expected or at all because required regulatory or other approvals
are not received or other conditions to the closing are not satisfied on
a timely basis or at all; potential adverse reactions or changes to
business or employee relationships, including those resulting from the
announcement or completion of the transaction; potential litigation
challenging the transaction; the possibility that the anticipated
benefits of the transaction are not realized when expected or at all,
including as a result of the impact of, or issues arising from, the
integration of the companies and our ability to realize potential
synergies or projected financial results; with respect to our proposed
sports betting operations, risks relating to entering into a new line of
business, including our ability to establish relationships with key
partners or vendors and generate sufficient returns on investment, as
well as risks relating to potential legislation in various
jurisdictions; and other factors as discussed in the Company's Annual
Report on Form 10-K for the year ended December 31, 2017, subsequent
Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, each as
filed with the United States Securities and Exchange Commission. The
Company does not intend to update publicly any forward-looking
statements except as required by law. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in
this press release may not occur.

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