Penn National Gaming, Inc. — Q1 2013 Form 10-Q
Period: Three months ended March 31, 2013; unaudited, with comparison to Q1 2012. The filing company was Penn National Gaming, Inc. (now PENN Entertainment). It owned, managed, or held interests in 29 gaming and pari-mutuel facilities across 19 jurisdictions.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Net revenue | $798.2 million | $736.1 million | +8.4% |
| Income from operations | $133.3 million | $142.6 million | -6.5% |
| Net income | $65.3 million | $78.6 million | -17.0% |
| Basic / diluted EPS | $0.68 / $0.63 | $0.83 / $0.74 | Both declined |
| Operating margin | 16.7% | 19.4% | Down 2.7 percentage points |
| Net margin | 8.2% | 10.7% | Down 2.5 percentage points |
Gaming revenue rose 9.4% to $717.9 million; food, beverage and other revenue rose 7.9% to $121.9 million. Promotional allowances increased 22.6% to $44.6 million and are deducted in arriving at net revenue. The effective tax rate increased to 39.6% from 37.3%.
Operating cash flow was $133.8 million, versus $122.6 million. Investing cash use was $35.8 million and financing cash use was $110.7 million. Capital expenditures were $62.7 million; cash declined by $12.8 million to $247.7 million. Interest expense increased to $27.9 million from $18.0 million.
Balance sheet and liquidity
At March 31, 2013, cash was $247.7 million, current assets were $427.5 million, and current liabilities were $471.7 million. Long-term debt, net of current maturities, was $2.525 billion; current maturities were $88.4 million. The senior secured credit facility had $2.278 billion outstanding, and the company also had $325 million of 8.75% senior subordinated notes. No revolver borrowings were outstanding; reported available revolving capacity was $711.8 million, after letters of credit. The company reported compliance with all financial covenants.
Changes and management commentary
- Revenue growth reflected the 2012 openings of Hollywood Casino Toledo and Columbus and the November 2012 acquisition of Harrah’s St. Louis. Q1 2013 net revenue contributions reported for these properties were $51.1 million, $63.6 million, and $57.8 million, respectively.
- Growth was partly offset by competition and weaker results at several existing properties. East/West segment revenue fell to $317.0 million from $370.6 million; Midwest revenue increased to $287.3 million from $205.1 million. Operating income declined despite higher consolidated revenue.
- Higher depreciation and amortization, up $23.7 million to $77.1 million, reflected new facilities and asset-life reductions related to planned Ohio racetrack relocations. Higher interest expense and the absence of a $3.9 million insurance gain recognized in Q1 2012 also weighed on comparisons.
- Management said operating cash flow, cash on hand, and available credit were expected to meet foreseeable debt service, capital expenditure, and working-capital needs, while cautioning that cash generation, earnings growth, and future borrowing availability were not assured.
Outlook, transactions, and risks
- Proposed REIT spin-off: The company planned to separate most real estate into Gaming and Leisure Properties, Inc. (GLPI), with most properties leased back to the operating company under a proposed 15-year triple-net master lease. Completion remained subject to approvals and other conditions; regulatory approvals were anticipated in the second half of 2013. The company estimated an approximately $1.1 billion GLPI earnings-and-profits dividend if GLPI elected REIT status as of January 1, 2014, with at least 20% payable in cash. The transaction was not assured, and debt refinancing and substantial financing needs were contemplated.
- Sioux City: On April 18, 2013, after quarter-end, Iowa awarded a new casino license to another operator. Penn expected to continue operating its Sioux City facility only until the new casino opens and anticipated a $65–$80 million goodwill and intangible-asset impairment in Q2 2013. The facility reported $14.0 million of Q1 net revenue and $3.7 million of operating income. Related litigation remained pending.
- Development: Ohio approved the proposed racetrack relocations on May 1, 2013; the Dayton and Austintown projects were expected to open in 2014, with stated budgets of approximately $257 million and $265 million. Planned 2013 capital project expenditures were $273 million. A proposed $360 million Jamul, California casino project was also disclosed, with construction potentially beginning later in 2013, subject to financing and other risks.
- Principal risks: Increased competition, economic and discretionary-spending weakness, gaming-tax or regulatory changes, construction and permitting delays, litigation, and execution, approval, tax, and financing risks associated with the proposed spin-off. Management stated there had been no material change to the risk factors in the 2012 Form 10-K.
Key facts for investors to verify
- Whether the proposed GLPI spin-off, financing, tax treatment, approvals, and anticipated dividend terms proceeded as described.
- The final Sioux City impairment charge, facility operating timeline, and outcome of related Iowa litigation.
- Whether new competition and the Ohio projects affected property-level results and the company’s planned capital spending.
- Debt maturities, available revolver capacity, covenant compliance, and the ability to fund operations and development while refinancing obligations.