Penn National Gaming, Inc. — Q3 2011 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2011. The filing is by Penn National Gaming, Inc. (the company identified in the request as PENN Entertainment). The company operated or held interests in 25 gaming and pari-mutuel facilities across 18 jurisdictions.
Financial performance
Amounts below are in millions of dollars except per-share data. Comparisons are with the corresponding 2010 period.
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net revenue | $710.9 | $638.3 | $2,065.8 | $1,828.9 |
| Operating income | $130.3 | $110.5 | $393.7 | $254.5 |
| Operating margin | 18.3% | 17.3% | 19.1% | 13.9% |
| Net income attributable to Penn shareholders | $70.8 | $48.3 | $198.3 | $93.7 |
| Diluted EPS | $0.66 | $0.46 | $1.85 | $0.88 |
| Cash from operations | — | — | $438.1 | $369.7 |
| Capital expenditures | — | — | $203.5 | $285.3 |
Q3 net revenue increased 11.4%; operating income rose 18.0%. Nine-month net revenue increased 13.0%, while operating income rose 54.7%. Gaming revenue was $636.4 million in Q3 and $1,868.4 million year to date. Nine-month cash used in investing activities was $222.7 million and cash used in financing activities was $253.9 million; cash declined $38.6 million to $207.8 million.
At September 30, cash was $207.8 million and current assets were $370.3 million versus current liabilities of $363.7 million. Long-term debt, net of current maturities, was $1,922.2 million; total reported current and long-term debt was approximately $1.968 billion. The company had $475 million of available revolver capacity after letters of credit. It reported covenant compliance.
Material changes and unusual items
- Growth reflected the M Resort acquisition, which closed June 1, 2011, the first full comparative contribution from Hollywood Casino Perryville, and table games introduced at Charles Town and Penn National Race Course. The East/West segment drove much of the revenue increase.
- Nine-month results included an $18.5 million pre-tax insurance gain related to the Hollywood Casino Joliet fire and a $20.2 million gain on the sale of the Maryland Jockey Club interest. The Tunica flood caused a $5.2 million pre-tax insurance-deductible loss.
- Q3 and nine-month results included $17.8 million of losses on early debt extinguishment. Interest expense declined to $23.5 million for Q3 and $78.6 million year to date, partly due to lower swap-related expense.
- The effective tax rate fell to 35.1% for Q3 and 36.7% for the nine-month period, principally reflecting reversals of uncertain tax reserves and state tax benefits.
- The July refinancing established a $2.15 billion secured credit facility, including a $700 million revolver, a $700 million Term Loan A and a $750 million Term Loan B. The company also redeemed $250 million of 6.75% subordinated notes.
- Cash balances declined despite stronger operating cash flow, as the company continued substantial investment and repaid debt. The M Resort was acquired in exchange for the previously purchased $230.5 million debt, a non-cash transaction.
Outlook, risks and contingencies
Management said operating cash flow, cash on hand and revolver availability were expected to fund debt service, capital expenditures and working capital for the foreseeable future, while cautioning that future cash generation, earnings growth and borrowing availability were not assured. No quantified earnings or revenue guidance was provided.
Planned projects included Hollywood Casino Toledo, expected to open in Q2 2012, Hollywood Casino Columbus in Q4 2012, and the Kansas joint-venture casino in Q1 2012. The filing estimated 2011 capital project expenditures of $248.5 million, excluding licensing fees, and reported $52.2 million of maintenance capital expenditures through September.
Management cited weak consumer conditions, competition, potential gaming-tax or regulatory changes, construction and approval risks, and the uncertainty of future gaming expansion. New competition in Illinois had opened; proposed casinos in Cincinnati and Maryland were expected to pressure existing properties. The Casino Rama operating agreement was extended through March 31, 2012 while a new contract was being evaluated. Litigation included Kansas project-related claims seeking more than $50 million and a separate real-estate dispute seeking $37.5 million; the company stated it believed it had meritorious defenses. It reported no material changes to the risk factors in its 2010 Form 10-K.
Most important facts to verify
- How much of earnings growth came from acquired/opened properties and one-time insurance or asset-sale gains rather than comparable-property operations.
- Progress, total funding requirements and opening schedules for the Ohio and Kansas projects, including regulatory, construction and litigation developments.
- Debt terms, floating-rate exposure, maturity schedule, covenant headroom and continued availability of the $475 million revolver capacity.
- Comparable-property performance and competitive effects, particularly at Joliet, Aurora, Lawrenceburg and Charles Town.
- Final outcomes and potential exposure from the Kansas litigation and the status of the Casino Rama operating contract.