Business Context and Reporting Period
Company: Penn National Gaming, Inc. (now PENN Entertainment, Inc.)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2007
Business Overview: A diversified, multi-jurisdictional owner and operator of gaming and pari-mutuel properties with 19 facilities across 15 jurisdictions. The company operates casinos, racetracks, and off-track wagering facilities.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended Sept 30, 2007 | Nine Months Ended Sept 30, 2007 |
|---|---|---|
| Net Revenues | $629,450 | $1,850,952 |
| Income from Continuing Operations | $133,879 | $387,079 |
| Net Income | $46,590 | $127,830 |
| Diluted EPS (Continuing Ops) | $0.52 | $1.45 |
| Operating Cash Flow (9 Months) | $346,135 | |
| Total Debt (Long-term + Current) | $2,925,962 | |
| Cash and Cash Equivalents | $179,137 |
Margins (Nine Months 2007):
- Operating Margin (Income from Continuing Ops / Net Revenues): ~20.9%
- Effective Tax Rate: 45.0%
Material Changes vs. Prior Period
- Revenue Growth: Net revenues increased 7.4% ($43.3 million) for the quarter and 10.7% ($179.3 million) for the nine months compared to 2006. Growth was driven by the reopening of Hurricane Katrina-damaged properties (Hollywood Casino Bay St. Louis, Boomtown Biloxi), the acquisition of Black Gold Casino and Zia Park Racetrack (April 2007), and organic growth at Charles Town and Argosy properties.
- Profitability: Income from continuing operations rose 4.5% for the quarter and 2.2% for the nine months. This growth was partially offset by increased operating expenses, including higher gaming taxes and costs related to the pending merger.
- Discontinued Operations: The prior year (2006) included a one-time gain of $114.7 million (net of tax) from the sale of The Downs Racing, Inc., which is not present in the 2007 results.
- Acquisitions: Completed the acquisition of Black Gold Casino and Zia Park Racetrack in April 2007. Announced agreements to acquire Rosecroft Raceway (closing Nov 2007) and Sanford-Orlando Kennel Club (closed Oct 2007).
Guidance, Outlook, and Risks
Merger Agreement
On June 15, 2007, the Company entered into a definitive merger agreement to be acquired by a subsidiary of funds managed by Fortress Investment Group and Centerbridge Partners. Shareholders are to receive $67.00 per share in cash. A special shareholder meeting is scheduled for December 12, 2007. The transaction is subject to regulatory approvals and shareholder vote.
Capital Projects
Significant capital expenditures are underway, including the Hollywood Casino at Penn National Race Course (expected Q1 2008 opening, $310 million budget) and the permanent Hollywood Slots Hotel and Raceway in Bangor (expected Q3 2008 opening, $131 million budget).
Risks and Contingencies
- Regulatory/Legal: Ongoing litigation regarding a 3% tax surcharge in Illinois (pending appeal to Illinois Supreme Court); arbitration with Capital Seven regarding the Bangor Historic Track purchase price ($30 million in escrow); and a shareholder class action lawsuit challenging the merger terms.
- Operational: Competitive pressure in Mississippi (Biloxi) and Illinois; potential impact of smoking bans; and the risk that the merger may not be consummated or may be delayed.
- Financial: High leverage with approximately $2.9 billion in total debt. The company is in compliance with all debt covenants as of September 30, 2007.
Investor Verification Checklist
- Merger Status: Verify the outcome of the December 12, 2007 shareholder vote and the receipt of all necessary regulatory approvals for the $67.00/share acquisition.
- Illinois Tax Litigation: Monitor the status of the Illinois Supreme Court appeal regarding the 3% tax surcharge, which could impact future effective tax rates and cash flows.
- Capital Expenditure Budgets: Track the completion and cost overruns of major projects, specifically the Penn National Race Course casino and the Bangor permanent facility.
- Debt Covenants: Confirm continued compliance with financial ratios (fixed charge coverage, leverage) given the high debt load and ongoing capital spending.
- Acquisition Integration: Assess the financial performance of the newly acquired Black Gold/Zia Park and the pending Rosecroft and Sanford-Orlando acquisitions.