Penn National Gaming, Inc. — FY 2011 Form 10-K
Reporting period: Year ended December 31, 2011; filed February 24, 2012. Although the request identifies PENN Entertainment, the filing names the registrant as Penn National Gaming, Inc. The filing reports annual results, with fourth-quarter data summarized below.
Business context
The company owned, managed, or held interests in 25 gaming and pari-mutuel facilities across 18 jurisdictions. Operations were reported in Midwest, East/West, Southern Plains, and Other categories. Gaming—principally slots—was the principal revenue source. The 2011 portfolio expanded through the M Resort acquisition and other investments; Kansas Casino opened in February 2012, after year-end.
Financial results and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net revenue | $2,742.3 million | $2,459.1 million |
| Income (loss) from operations | $499.6 million | $153.2 million |
| Net income (loss) attributable to shareholders | $242.4 million | $(59.5) million |
| Basic / diluted EPS | $2.52 / $2.26 | $(0.76) / $(0.76) |
| Operating cash flow | $567.4 million | $493.2 million |
| Capital expenditures | $293.1 million | $363.0 million |
| Cash and cash equivalents at year-end | $238.4 million | $246.4 million |
| Total debt | $2,043.2 million | $2,171.1 million |
Net revenue increased 11.5%; operating margin was approximately 18.2% versus 6.2%, and net margin approximately 8.8% versus a loss. Gaming revenue rose 10.1% to $2,468.6 million. The filing attributes much of East/West growth to the M Resort, Perryville, and table games introduced in 2010. 2011 operating income included no impairment charge, compared with $224.7 million of impairment losses in 2010. Interest expense declined to $99.6 million from $130.2 million.
At year-end, current assets were $415.8 million and current liabilities $426.3 million (current ratio approximately 0.98). The company reported $388.1 million of available revolver capacity. It stated operating cash, cash on hand, and available credit should cover expected near-term needs, but noted this depends on cash generation and financing availability.
Fourth-quarter results
Q4 2011 net revenue was $676.5 million, operating income $105.9 million, net income $44.0 million, and basic/diluted EPS $0.46/$0.41. Q4 2010 net revenue was $630.2 million, with an operating loss of $101.3 million and net loss of $153.1 million, largely reflecting impairment charges.
Material changes and unusual items
- The company acquired the M Resort on June 1, 2011, in exchange for debt it had purchased for $230.5 million.
- A new $2.15 billion senior secured credit facility refinanced the prior facility; the company also redeemed $250 million of 6.75% notes. Debt-extinguishment losses totaled $17.8 million.
- The company repurchased about 3.0 million common shares for $105.2 million in 2011. It has not paid common dividends and does not anticipate doing so in the foreseeable future.
- Joliet fire insurance recoveries contributed an $18.5 million pretax gain in 2011; Tunica flooding resulted in a $5.2 million pretax deductible-related loss. Net insurance recoveries reduced operating expenses by $13.3 million.
- A $20.2 million gain on sale of the Maryland Jockey Club interest contributed to results from unconsolidated affiliates.
Outlook, risks, and contingencies
- Management expected Toledo to open by the end of May 2012 and Columbus on November 1, 2012. Forecast 2012 capital project spending was $452.4 million, including licensing fees; the Ohio projects accounted for most of it. Kansas Casino opened February 3, 2012, with Penn’s estimated share of project cost about $155 million.
- Management cited weak consumer conditions and cost controls, while identifying new regional markets and development as growth opportunities. It also warned that planned openings, returns, cash flow, and access to financing were uncertain.
- Competition was a major risk: new or planned casinos in Ohio, Maryland, Illinois, Louisiana, and other markets could pressure existing properties. Charles Town and Lawrenceburg together generated approximately 37.4% of 2011 net revenue.
- Casino Rama’s interim management agreement was extended through September 30, 2012; the company’s selection for a new contract was uncertain, and proposed fees were capped at $5 million annually. The Sioux City gaming operation also faced uncertainty over renewal of its charitable-sponsor agreement and docking lease.
- Other material exposures include gaming-license and tax changes, economic weakness, weather and flooding, labor agreements, interest-rate exposure on variable-rate debt, and execution risks on construction. The company reported compliance with debt covenants at year-end and no outstanding interest-rate swaps.
- Litigation included a Cherokee County, Kansas claim seeking more than $50 million, with a $25 million privilege fee attached. The filing states ordinary-course proceedings are not expected to materially affect results, but outcomes and insurance coverage are not assured.
Investor verification priorities
- Separate recurring property performance from acquisition-driven growth, insurance gains, asset-sale gains, and prior-year impairment effects.
- Check the timing, total remaining cost, licensing, and expected returns of the Ohio projects and the company’s Kansas joint-venture investment.
- Assess refinancing terms, variable-rate exposure, debt maturities, revolver availability, and the 2015 preferred-stock redemption obligation.
- Monitor competitive impacts at Charles Town, Lawrenceburg, Aurora/Joliet, and other exposed markets, along with the Casino Rama and Sioux City contract outcomes.
- Review quarterly trends and the preferred stock’s effect on diluted EPS; 2011 diluted weighted-average shares included assumed preferred-stock conversion.
The filing includes unqualified audit opinions on the financial statements and internal control over financial reporting.