Penn National Gaming, Inc. — FY 2015 Form 10-K
Period and entity: Fiscal year ended December 31, 2015; filed March 15, 2016. The registrant’s name at filing was Penn National Gaming, Inc. (now identified in the request as PENN Entertainment). This is an annual filing, not a standalone fourth-quarter report. Financial statements are audited; 2014 and 2013 statements were restated.
Business context and reporting period
Penn operated or held interests in 27 gaming, racing, and video gaming terminal facilities across 17 jurisdictions. It opened Plainridge Park Casino in Massachusetts and acquired Tropicana Las Vegas and Illinois route operator Prairie State Gaming during 2015. Its business is predominantly slot-focused regional gaming. Most real estate for 18 facilities is subject to the GLPI Master Lease, accounted for as a financing obligation.
Financial and operating results
| Metric | FY 2015 | FY 2014 |
|---|---|---|
| Net revenue | $2.838 billion | $2.591 billion |
| Operating income | $467.8 million | $257.2 million |
| Net income (loss) | $0.7 million | ($183.8 million) |
| Diluted EPS | $0.01 | ($2.34) |
| Adjusted EBITDA | $796.3 million | $710.0 million |
| Cash from operating activities | $399.0 million | $262.2 million |
| Capital expenditures | $199.2 million | $228.1 million |
- Net revenue rose 9.6%; gaming revenue increased 8.7%. Management attributed much of the increase to Plainridge, a full year of operations at the two Ohio racinos, and the Tropicana and Prairie State acquisitions.
- Operating margin was approximately 16.5%, versus 9.9% in 2014. Net margin was approximately 0.02%, reflecting substantial interest and income tax expense despite higher operating income.
- Impairment charges were $40.0 million, down from $159.9 million in 2014. The 2015 charge wrote off the Plainridge gaming license and partially impaired the Dayton gaming license after lower long-term earnings forecasts.
- Interest expense was $443.1 million, including $390.1 million on the GLPI financing obligation. The 2014 interest expense was $425.1 million.
- Cash and cash equivalents were $237.0 million at year-end; current assets were $372.5 million and current liabilities $557.8 million. The resulting current ratio was approximately 0.67x. Revolver availability was $187.7 million after borrowings and letters of credit.
- Year-end long-term debt was reported at $1.711 billion before applicable balance-sheet deductions; the GLPI financing obligation was a further $3.565 billion. Shareholders’ deficit was $678.0 million.
- Investing cash outflow was $781.0 million, principally reflecting the acquisitions and Jamul project funding; financing cash inflow was $410.4 million. Operating cash flow less capital expenditures was approximately $199.7 million.
- Fourth-quarter 2015 net revenue was $734.0 million, operating income $90.6 million, and net loss $9.1 million; diluted loss per share was $0.11.
Material changes versus the prior comparable period
- Revenue and adjusted EBITDA improved, supported by new openings and acquisitions. The East/Midwest segment’s adjusted EBITDA increased 15.6% to $508.4 million; Southern Plains increased 8.5% to $299.9 million; West rose 3.8% to $68.5 million. Other remained loss-making, with adjusted EBITDA of ($80.4 million).
- Growth was partly offset by continuing competition affecting Charles Town and Lawrenceburg, as well as softness at some Southern Plains properties. A new Biloxi casino opened in December 2015.
- Net income turned slightly positive from a substantial 2014 loss. Lower impairment expense contributed, but interest expense remained high and the effective tax rate was 98.8% on low pretax income.
- Debt increased: gross senior secured facility borrowings reached $1.260 billion from $807.5 million, while total reported debt rose to $1.711 billion from $1.241 billion. The 2015 increase largely funded the acquisitions and other needs.
Outlook, risks, contingencies, and unusual items
- Management said cash from operations, cash on hand, and available credit should cover anticipated lease payments, debt service, capital spending, and working capital for the foreseeable future, while warning that cash generation and future borrowing availability are not assured. No numerical earnings or revenue guidance was provided.
- Management expected the Jamul casino near San Diego to open in mid-2016. Penn had advanced $197.7 million to the Tribe at year-end; repayment depends on casino revenues, and management noted that inaccurate profitability or timing assumptions could require a reserve. The project’s stated budget was $390 million.
- Planned 2016 capital project spending was $31.4 million, including $27.7 million for Tropicana Las Vegas renovations. The company also reported $62.3 million of 2015 capital maintenance spending.
- The Master Lease entails substantial fixed payments: $437.0 million was paid to GLPI in 2015. The undiscounted future minimum payments disclosed were $10.848 billion, including renewal options; the recorded financing obligation was $3.565 billion. Lease termination or payment difficulties could impair operations and debt service capacity.
- Restatement: the 2013 GLPI spin-off and Master Lease did not qualify for sale-leaseback accounting; Penn instead retained the real estate assets and recorded a financing obligation. Other errors, including impairment accounting and tax items, were also corrected for 2013–2014 and interim 2015 periods.
- Internal controls over financial reporting were ineffective at December 31, 2015 due to material weaknesses in accounting for complex/non-routine transactions and goodwill and intangible impairment calculations. The auditor issued an adverse opinion on internal controls, while giving an unqualified opinion on the financial statements. Management targeted remediation by year-end 2016. Tropicana and Prairie State were excluded from the control assessment because integration was incomplete.
- Other risks include high leverage and variable-rate debt exposure, gaming regulation and taxation, competition and consumer spending, labor agreements, cyber risk, and acquisition/development execution. MGM National Harbor was expected to open in late 2016 and could pressure Charles Town.
- A bankruptcy-related dispute assumed with Tropicana concerned approximately $13.5 million of professional fees. A court order supported Tropicana’s position limiting potential exposure to the approximately $3.8 million escrow balance, but an appeal was pending; management could not predict the outcome.
Most important facts for investors to verify
- Review the restated statements and the detailed effects of the GLPI lease accounting change; distinguish GAAP earnings from adjusted EBITDA.
- Track remediation of the material weaknesses and whether future filings show effective controls, including integration of the acquired businesses.
- Assess debt maturities, revolver availability, covenant headroom, interest-rate exposure, and the cash burden of the Master Lease.
- Verify Jamul’s opening schedule, remaining funding needs, regulatory and legal status, and recoverability of Penn’s advances.
- Test whether organic property performance supports reported growth, particularly amid competition at Charles Town and Lawrenceburg and the planned Tropicana investment.
- Monitor the Tropicana litigation appeal, gaming-license impairment assumptions, deferred-tax valuation allowance, and potential additional impairments.