PENN National Gaming, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing is an annual report, not a standalone Q4 filing; it also reports unaudited fourth-quarter results. The company name in the filing is Penn National Gaming, Inc. (now associated with the PENN Entertainment name).
Business context and major structural change
Penn operated or held interests in 26 gaming, racing, and related facilities across 17 jurisdictions. On November 1, 2013, it completed the spin-off of Gaming and Leisure Properties, Inc. (GLPI), transferring substantially all real estate assets and the Baton Rouge and Perryville properties to GLPI. Penn retained gaming operations and licenses at most leased casinos, along with certain other assets, and entered a 15-year triple-net master lease with GLPI, with four five-year renewal options. Consequently, 2013 results include the transferred properties only through October 31, and comparisons with 2012 are not fully like-for-like.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Net revenue | $2,918.8 million | $2,899.5 million |
| Operating income (loss) | $(772.0) million | $442.6 million |
| Net income (loss) | $(794.3) million | $212.0 million |
| Adjusted EBITDA (non-GAAP) | $695.0 million | $711.4 million |
| Adjusted EBITDAR (non-GAAP) | $764.5 million | $711.4 million |
| Cash from operating activities | $440.8 million | $507.2 million |
| Cash used in investing activities | $(415.0) million | $(1,188.5) million |
| Cash and cash equivalents, year-end | $293.0 million | $260.5 million |
| Total debt, year-end | Approximately $1,050.8 million | $2,730.6 million |
Net revenue increased 0.7%; gaming revenue rose 1.0%, while food, beverage and other revenue rose 5.1%. Reported operating margin was approximately negative 26.4% and net margin approximately negative 27.2%, principally reflecting large impairment charges rather than a comparable deterioration in recurring operations. Adjusted EBITDA declined about 2.3%. These non-GAAP measures are company-defined and should not be treated as substitutes for GAAP results or cash flow.
Operating cash flow fell $66.4 million year over year. Capital expenditures were $199.9 million, including $119.1 million of capital projects and $80.9 million of maintenance spending. Year-end current assets were $508.9 million and current liabilities were $361.5 million. Cash used in financing was limited to a net $6.7 million despite substantial refinancing activity and $649.5 million of preferred-stock repurchases.
Year-end debt included $750 million under the new secured credit facility and $300 million of 5.875% senior notes due 2021, plus capital leases, net of applicable discounts and current maturities. The $500 million revolver had no borrowings outstanding; $477.9 million remained available after letters of credit. Penn redeemed its $325 million 8.75% notes in 2013. Interest expense was $97.1 million, up 19.2%. The filing reports compliance with financial covenants at year-end.
Material changes versus the prior period
- Pre-tax impairment charges totaled $1,132.4 million: $1,058.4 million primarily associated with the spin-off and post-spin-off lease structure, $71.8 million for Argosy Sioux City, and $2.2 million related to Ohio racetrack relocation land. The charges drove the swing to a large reported operating and net loss.
- The spin-off reduced Penn’s reported assets and debt and introduced $69.5 million of 2013 master-lease expense. Future fixed base rent commitments under the initial lease term totaled $5,118.7 million; this excludes potential variable rent and other triple-net costs.
- New Ohio casinos in Toledo and Columbus, and the acquisition of the St. Louis casino in November 2012, supported revenue. Their contribution was offset by competitive pressure, including declines at Lawrenceburg and Charles Town. Management attributed Charles Town’s revenue decline largely to Maryland competition.
- Segment adjusted EBITDAR moved in different directions: Midwest increased 13.7%, East/West decreased 11.3%, and Southern Plains increased 13.0%, with new openings, competitive conditions, acquisition effects, and the spin-off affecting comparisons.
- The company repurchased $649.5 million of preferred stock and refinanced its debt; early-extinguishment losses were $61.7 million. The fourth-quarter 2013 net loss was $888.7 million, including the major impairment charge.
Outlook, risks, and contingencies
Management stated that operating cash flow, cash on hand, and revolver availability were expected to cover anticipated rent, debt service, capital expenditures, and working capital for the foreseeable future, while cautioning that cash generation and future financing were uncertain. It anticipated approximately $111.5 million of 2014 capital project spending, excluding licensing and relocation fees, and expected the Dayton and Austintown racing and gaming facilities to open in the second half of 2014. The proposed $360 million Jamul, California project was expected to open in early 2016, subject to approvals and other project risks.
- Lease and leverage: Rent, debt service, restrictive covenants, and the triple-net structure could constrain cash available for investment and make underperforming properties costly to exit. The company also disclosed variable-rate exposure and no interest-rate hedges at year-end.
- Competition and economic sensitivity: Management cited sluggish economic conditions and expanded gaming capacity. Further competition was expected in Ohio and Maryland; discretionary customer spending, gaming taxes, and regulatory changes could also affect results.
- Iowa license and litigation: The Sioux City license had been denied renewal after another operator received the Woodbury County license. Penn challenged regulatory decisions, but disclosed that Sioux City might not remain open through 2014. The filing also describes Ohio litigation over video lottery terminals and racetrack relocation.
- Spin-off and tax matters: The tax-free treatment of the spin-off depends on representations and other conditions; failure to qualify could result in significant tax exposure. The filing also identifies possible disputes with GLPI and conflicts arising from overlapping directors.
- Other exposures: Risks include regulatory licensing, labor and horsemen agreements, construction delays and approvals, weather and casualty events, cybersecurity, and potential future impairment charges. Management said all reporting units could remain at risk of impairment.
The financial statements received an unqualified audit opinion, and management and the auditor reported effective internal control over financial reporting as of December 31, 2013.
Important facts for investors to verify
- How the master lease’s fixed and variable rent, escalators, and triple-net obligations affect sustainable post-spin-off cash flow and debt-service capacity.
- Whether reported operating trends and segment performance remain comparable after the transferred properties and 2014 segment realignment.
- The status and financial consequences of the Sioux City license and related Iowa proceedings, including the potential closure timing.
- Progress, total funding needs, approvals, and opening schedules for the Ohio projects and Jamul development, including Penn’s obligations versus GLPI’s.
- Whether the substantial impairment charges signal additional write-down risk, and whether the assumptions underlying the remaining goodwill and intangible-asset values are supportable.
- Available revolver capacity, covenant headroom, refinancing needs, and the impact of higher interest rates and committed lease payments.