Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

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 their carrying amount, due to the short maturity of the cash equivalents.

Equity Securities

As of March 31, 2020 and December 31, 2019, we held $18.7 million and $40.5 million in equity securities, respectively, including ordinary shares and warrants, which are reported as “Other assets” in our unaudited Condensed Consolidated Balance Sheet. These equity securities are the result of Penn Interactive entering into multi-year agreements with third-party sports betting operators for online sports betting and related iGaming market access across our portfolio during the third quarter of 2019. During the three months ended March 31, 2020, we recognized a holding loss of $21.8 million related to these equity securities, which is included in “Other,” as reported in “Other income (expenses)” within our unaudited Condensed Consolidated Statements of Operations.

The fair value of the equity securities was determined using Level 2 inputs, which use market approach valuation techniques. The primary inputs to those techniques include the quoted market price of the equity securities, foreign currency exchange rates, a discount for lack of marketability (“DLOM”) with respect to the ordinary shares, and a Black-Scholes option pricing model with respect to the warrants. The DLOM is based on the remaining term of the relevant lock-up periods and the volatility associated with the underlying equity securities. The Black-Scholes option pricing model utilizes the exercise price of the warrants, a risk-free rate, volatility associated with the underlying equity securities and the expected life of the warrants.

Held-to-maturity Securities and Promissory Notes

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, and 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 March 31, 2020 and December 31, 2019, PRP held $15.1 million at each date in promissory notes issued by RDC and $6.6 million and $6.7 million, respectively, in local government corporation bonds issued by RDC, at amortized cost. The promissory notes and the local government corporation bonds are collateralized by the assets of Retama Park Racetrack. As of March 31, 2020 and December 31, 2019, the promissory notes and the local government corporation bonds, which have long-term contractual maturities, were included in “Other assets” within our unaudited Condensed Consolidated Balance Sheets.

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. The estimated 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.

Long-term Debt

The fair value of our Term Loan A Facility, Term Loan B-1 Facility and 5.625% Notes is estimated based on quoted prices in active markets and is classified as a Level 1 measurement. The fair value of our Revolving Credit Facility approximates its carrying amount as it is revolving, variable rate debt, which we also classify as a Level 1 measurement.

Other long-term obligations as of March 31, 2020 and December 31, 2019 included the relocation fees for Dayton and Mahoning Valley, which are discussed in Note 9, “Long-term Debt,” and the repayment obligation of the hotel and event center located near Hollywood Casino Lawrenceburg. 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 are classified as Level 2 measurements.

Other Liabilities

Other liabilities as of March 31, 2020 and December 31, 2019 principally consisted of contingent purchase price related to Plainridge Park Casino and Absolute Games, LLC, which was acquired by Penn Interactive during the second quarter of 2018. The Plainridge Park Casino contingent purchase price is calculated based on earnings of the gaming operations over the first ten years of operations, which commenced in June 24, 2015. As of March 31, 2020 and December 31, 2019, we were contractually obligated to make six additional annual payments. The Absolute Games, LLC contingent purchase price is calculated based on earnings over the first two years of operations after the acquisition. As of March 31, 2020, we were contractually obligated to make one additional payment, corresponding to the second year of operations after the acquisition. The fair value of these liabilities, which are estimated based on an income approach using a discounted cash flow model and have been classified as Level 3 measurements, are included within our unaudited Condensed Consolidated Balance Sheets in “Accrued expenses and other current liabilities” or “Other long-term liabilities,” depending on the timing of the next payment.

The carrying amounts and estimated fair values by input level of the Company’s financial instruments were as follows:

	March 31, 2020
(in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	730.7	$	730.7	$	730.7	$	—	$	—
Equity securities	$	18.7	$	18.7	$	—	$	18.7	$	—
Held-to-maturity securities	$	6.6	$	6.6	$	—	$	6.6	$	—
Promissory notes	$	15.1	$	15.2	$	—	$	15.2	$	—
Financial liabilities:
Long-term debt
Senior Secured Credit Facilities	$	2,416.7	$	2,120.0	$	2,120.0	$	—	$	—
5.625% Notes	$	399.5	$	296.0	$	296.0	$	—	$	—
Other long-term obligations	$	80.8	$	81.1	$	—	$	81.1	$	—
Other liabilities	$	18.1	$	18.1	$	—	$	2.8	$	15.3

	December 31, 2019
(in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	437.4	$	437.4	$	437.4	$	—	$	—
Equity securities	$	40.5	$	40.5	$	—	$	40.5	$	—
Held-to-maturity securities	$	6.7	$	6.7	$	—	$	6.7	$	—
Promissory notes	$	15.1	$	15.1	$	—	$	15.1	$	—
Financial liabilities:
Long-term debt
Senior Secured Credit Facilities	$	1,896.5	$	1,930.6	$	1,930.6	$	—	$	—
5.625% Notes	$	399.4	$	426.0	$	426.0	$	—	$	—
Other long-term obligations	$	89.2	$	89.7	$	—	$	89.7	$	—
Other liabilities	$	20.3	$	20.3	$	—	$	2.8	$	17.5

The following table summarizes the changes in fair value of our Level 3 liabilities measured on a recurring basis:

	Other Liabilities
(in millions)	Contingent Purchase Price
Balance as of January 1, 2020	$	17.5
Included in earnings (loss) (1)	(2.2		)
Balance as of March 31, 2020	$	15.3

(1) The reduction in expense is included in “General and administrative” within our unaudited Condensed Consolidated Statements of Operations.

The following table sets forth the assets measured at fair value on a non-recurring basis during the three months ended March 31, 2020:

(in millions)	Valuation Date	Valuation Technique	Level 1		Level 2		Level 3		Total Balance		Total Reduction in Fair Value Recorded
Goodwill	3/31/2020	Discounted cash flow and market approach	$	—	$	—	$	160.5	$	160.5	$	(113.0	)
Gaming licenses	3/31/2020	Discounted cash flow	$	—	$	—	$	568.0	$	568.0	$	(437.0	)
Trademarks	3/31/2020	Discounted cash flow	$	—	$	—	$	216.5	$	216.5	$	(61.5	)

The following table summarizes the significant unobservable inputs used in calculating fair value for our Level 3 liabilities on a recurring basis as of March 31, 2020:

	Valuation Technique	Unobservable Input	Discount Rate
Contingent consideration - Plainridge Park Casino	Discounted cash flow	Discount rate	11.45%

As discussed in Note 7, “Goodwill and Other Intangible Assets,” we recorded impairments on our gaming licenses and trademarks, which are indefinite-lived intangible assets, as a result of the first quarter of 2020 interim assessment for impairment. The following table presents quantitative information about the significant unobservable inputs used in the fair value measurements of other indefinite-lived intangible assets as of the valuation date below:

(in millions)	Fair Value		Valuation Technique	Unobservable Input	Range or Amount
As of March 31, 2020
Gaming licenses	$	568.0	Discounted cash flow	Discount rate	13.25% - 14.0%
				Long-term revenue growth rate	2.0	%
Trademarks	$	216.5	Discounted cash flow	Discount rate	13.25% - 14.0%
				Long-term revenue growth rate	2.0	%
				Pretax royalty rate	1.0% - 2.0%