PENN National Gaming, Inc. (now PENN Entertainment, Inc.) — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; filed May 7, 2018. The filing reports the company under its former name, Penn National Gaming, Inc. Amounts below are in U.S. dollars; financial statement figures are generally in millions unless noted.
Business context and financial results
The company operated or held interests in 29 gaming, racing, and video gaming terminal facilities across 17 jurisdictions. Results include the Tunica casinos acquired in May 2017. Comparisons with Q1 2017 are affected by the January 1, 2018 adoption of ASC 606, which changed revenue presentation; reported revenue growth should not be read as equivalent growth in underlying activity.
| Metric | Q1 2018 | Q1 2017 | Change / context |
|---|---|---|---|
| Net revenues | $816.1 | $776.2 | Up 5.1%; presentation changes from ASC 606 materially affect comparability. |
| Income from operations | $172.1 | $140.3 | Up 22.7%; reported operating margin was approximately 21.1%, versus 18.1%. |
| Net income | $45.4 | $5.1 | Basic EPS $0.50; diluted EPS $0.48, compared with $0.06 for both in 2017. |
| Adjusted EBITDA | $242.5 | $227.4 | Up 6.6%; non-GAAP measure. After GLPI Master Lease payments: $126.7 versus $115.0. |
| Operating cash flow | $66.9 | $84.8 | Down $17.9. |
| Cash and cash equivalents | $218.0 | $278.0 at Dec. 31, 2017 | Cash declined $60.0 during the quarter. |
| Long-term debt, including current maturities, gross | $1,227.1 | $1,280.2 at Dec. 31, 2017 | Includes $715.0 of secured credit facility borrowings and $400.0 of senior notes. |
| GLPI financing obligation | $3,522.2 | $3,538.8 at Dec. 31, 2017 | Separate from reported long-term debt; Q1 Master Lease payments were $115.9. |
Liquidity: Current assets were $334.7 and current liabilities were $475.3; the resulting working-capital deficit was $140.6. The company had no revolver borrowings and reported $677.6 of available revolving capacity after letters of credit. It was in compliance with required financial covenants at quarter-end. Debt and lease obligations are substantial relative to cash.
Cash flows and investment: Investing activities used $62.5, including $50.1 for a Pennsylvania Category 4 gaming license. Financing activities used $64.4, including $45.4 of long-term debt repayments and $16.7 of GLPI obligation principal payments. Maintenance capital expenditures were $10.6; project capital expenditures were $1.2.
Material changes versus the prior comparable period
- Net income rose by $40.3, but the comparison is strongly affected by $25.1 of debt extinguishment, modification, and financing charges in Q1 2017; Q1 2018 included $0.9 of debt extinguishment loss.
- Reported net revenues increased $39.9, while revenue before promotional allowances was presented differently under ASC 606. The filing’s adoption reconciliation indicates Q1 2018 net revenue would have been $801.7 without ASC 606, versus $816.1 as reported; the company said adoption had no material continuing net-income impact.
- Operating results benefited from the Tunica acquisition, early effects of a margin improvement plan, and lower depreciation and amortization. South/West Adjusted EBITDA rose to $45.0 from $36.3; Northeast to $132.0 from $126.6; Midwest to $81.2 from $78.1. Other segment Adjusted EBITDA worsened to $(15.7) from $(13.6).
- Operating cash flow fell despite higher net income, reflecting higher cash payments to suppliers, employees, taxes, and interest. Cash declined primarily alongside investment and financing outflows.
Outlook, management commentary, and risks
- Management stated that operating cash flow, cash on hand, and revolver availability were expected to cover financing obligations, debt service, capital expenditures, and working capital for the foreseeable future, while cautioning that cash generation and future borrowing availability are not assured.
- No quantified full-year earnings or revenue guidance is provided in the supplied filing text. For 2018, the company expected $103.8 of maintenance capital expenditures and $2.1 of project capital expenditures, excluding gaming-license fees and future Pennsylvania casino development costs.
- The proposed Pinnacle acquisition, valued at approximately $2.8 billion, was expected to close in the second half of 2018, subject to remaining approvals and other conditions. Planned transactions included casino divestitures and GLPI real-estate transactions; the company had committed financing arrangements and expected to use transaction proceeds, cash, new debt, and operating cash flow. Completion, financing, integration, and divestiture risks remain.
- Penn and the Jamul Tribe agreed that Penn’s management, branding, and development services would end May 28, 2018. The JIVDC loan had an unpaid principal balance of $98.5, a net carrying value of $20.6, and reported remaining exposure of $27.6 including future unfunded commitments. Collection and impairment risks persist.
- Management cited competitive pressure, including new and planned casinos, Pennsylvania gaming expansion, online gaming and truck-stop terminals, and competition affecting Charles Town and Plainridge. Casino Rama’s management contract was expected to end shortly after June 30, 2018.
- The company adopted ASC 606 and recorded a $9.7 cumulative-effect reduction to opening retained earnings. Its revised adjusted EBITDA definition excludes certain pre-opening and transaction costs and cash-settled stock-award expense variances; this non-GAAP measure is not a substitute for GAAP earnings or cash flow.
- The company expected lease accounting standard adoption in 2019 to materially affect its balance sheet because significant operating lease commitments would be recognized as assets and liabilities. The Tax Act’s reduction in the federal corporate tax rate to 21% contributed to a lower Q1 effective tax rate; the 2017 deferred-tax remeasurement remained provisional.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. It reported no newly disclosable legal proceedings or material changes to previously reported risk factors.
Important facts for investors to verify
- How much of revenue and operating-margin growth reflects underlying property performance rather than ASC 606 presentation, acquisitions, or other comparability effects.
- The terms, final financing, regulatory approvals, divestitures, lease changes, and expected leverage associated with the Pinnacle transaction.
- Cash flow after Master Lease payments, interest, taxes, capital expenditures, and debt repayments, alongside the company’s substantial lease and debt obligations.
- Developments in the Jamul loan and transition, including recoverability of the remaining exposure and any further impairment.
- Competitive effects of Pennsylvania gaming expansion and other regional openings, and the timing and financial impact of the Casino Rama contract ending.