Penn National Gaming, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited. The filing identifies the registrant as Penn National Gaming, Inc. (now PENN Entertainment, Inc.); amounts below are in U.S. dollars.
Business context and reporting period
The company owned, managed, or held interests in 27 gaming, racing, and video gaming terminal facilities across 17 jurisdictions. Recent growth initiatives included Plainridge Park Casino, opened in June 2015, and the 2015 acquisitions of Tropicana Las Vegas and Prairie State Gaming. Jamul Casino near San Diego was under development, with an opening anticipated in mid-summer 2016.
Financial performance and condition
| Metric | Q1 2016 | Q1 2015 or prior balance-sheet date |
|---|---|---|
| Net revenues | $756.5 million | $664.1 million |
| Income from operations | $140.5 million | $111.7 million |
| Operating margin | 18.6% | 16.8% |
| Net income | $23.7 million | $1.9 million |
| Basic and diluted EPS | $0.26 | $0.02 |
| Adjusted EBITDA | $212.9 million | $184.4 million |
| Operating cash flow | $71.3 million | $78.0 million |
| Cash and cash equivalents | $214.2 million | $237.0 million at Dec. 31, 2015 |
| Total assets | $5.129 billion | $5.139 billion at Dec. 31, 2015 |
| Shareholders’ deficit | $649.1 million | $678.0 million at Dec. 31, 2015 |
Net revenue rose 13.9%, while operating income rose 25.8%; net margin improved to approximately 3.1% from 0.3%. Adjusted EBITDA margin was approximately 28.1%, versus 27.8%. These adjusted EBITDA figures are non-GAAP and exclude significant cash uses, including capital spending, interest, taxes, debt repayments, and GLPI master lease payments.
Long-term debt, including current maturities, was approximately $1.694 billion net of issuance costs; scheduled gross long-term debt was $1.717 billion. The separate GLPI financing obligation was $3.552 billion, including current portion. The revolving facility had $185.7 million of available capacity after letters of credit. The company reported compliance with required debt covenants. Current assets were $340.4 million against current liabilities of $530.3 million.
Investing cash outflow was $71.2 million, including $51.8 million of additional Jamul advances; financing cash outflow was $22.9 million. Cash decreased by $22.8 million during the quarter. Capital expenditures were $21.4 million: $6.5 million for projects and $14.9 million for maintenance.
Material changes versus the prior comparable period
- Net revenue increased $92.3 million, principally reflecting $42.3 million from Plainridge, $29.9 million from Tropicana Las Vegas, and $14.5 million from Prairie State Gaming in Q1 2016.
- Management attributed stronger results in several markets to improved customer spending and added capacity; East/Midwest and Southern Plains adjusted EBITDA increased, while West operating income declined despite higher segment revenue.
- Interest expense increased $8.2 million to $116.5 million, partly due to higher borrowing levels and interest rates and GLPI-related financing costs. Interest income rose to $5.2 million, primarily from accrued interest on the Jamul loan.
- Operating cash flow fell $6.7 million year over year, despite higher customer receipts, reflecting increased payments to suppliers, employees, and for interest.
Outlook, risks, and unusual items
- Management said cash from operations, cash on hand, and revolver availability were expected to cover anticipated lease obligations, debt service, capital expenditures, and working capital for the foreseeable future, but cautioned that cash flow, earnings, and future borrowing availability were uncertain. No quantified earnings guidance was provided.
- Management anticipated $33.7 million of 2016 capital project expenditures, excluding licensing fees and net of reimbursements; $6.5 million had been spent through March 31. Jamul’s project budget was $390 million, and Penn had advanced $246.8 million to the Tribe. Repayment depends on casino revenues; management considered collection highly certain but acknowledged that delays or weaker profitability could require a reserve.
- Competition, gaming-tax or regulatory changes, economic and consumer-spending conditions, project execution, and weather were identified as risks. The company cited flooding at Argosy Alton, low oil prices affecting Zia Park’s market, and competition affecting several properties.
- Disclosure controls were deemed ineffective at March 31, 2016 because of material weaknesses involving accounting for complex/non-routine transactions, including leases, and goodwill and indefinite-lived intangible impairment measurements. Remediation was expected by December 31, 2016, subject to evidence that new controls operate effectively.
- The filing reported no new material legal proceedings or material changes to previously disclosed risk factors. It referenced ongoing Ohio gaming litigation among forward-looking risks. The company also continued to maintain a valuation allowance on some deferred tax assets; its timing and amount of any release were uncertain.
Important facts for investors to verify
- Whether Jamul opened on schedule and whether its financing, repayment prospects, and projected returns matched management’s expectations.
- How much of revenue and EBITDA growth came from acquired or newly opened operations versus comparable-property performance, and whether competitive pressures persist.
- Cash generation after required GLPI payments, debt service, maintenance spending, and continued Jamul funding; the filing’s adjusted EBITDA excludes certain significant cash obligations.
- Progress in remediating the disclosed material weaknesses and any subsequent developments relating to the company’s prior restatement and internal controls.
- Debt maturity and refinancing exposure: the filing schedules $986.6 million of gross debt repayments within one to three years and identifies leverage, interest-rate, covenant, and capital-access risks.