PENN National Gaming, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; comparative period is Q1 2020. The filing is under the company’s then-current name, Penn National Gaming, Inc. Penn operated or held interests in 41 gaming and racing properties across 19 states and was expanding its retail and online sports betting and iGaming businesses.
Financial performance and liquidity
| Metric | Q1 2021 | Q1 2020 | Change / context |
|---|---|---|---|
| Total revenue | $1,274.9 million | $1,116.1 million | Up 14.2% |
| Gaming revenue | $1,082.0 million | $902.9 million | Up 19.8% |
| Food, beverage, hotel and other revenue | $192.9 million | $213.2 million | Down 9.5% |
| Operating income (loss) | $216.5 million | $(560.6) million | Q1 2020 included $616.1 million in impairment losses |
| Net income (loss) | $90.9 million | $(608.6) million | Q1 2021 diluted EPS was $0.55; Q1 2020 diluted loss per share was $5.26 |
| Adjusted EBITDA (non-GAAP) | $336.6 million | $154.8 million | Margins were 26.4% and 13.9%, respectively |
| Adjusted EBITDAR (non-GAAP) | $447.0 million | $252.3 million | Margins were 35.1% and 22.6%, respectively; excludes triple-net lease rent |
| Operating cash flow | $180.5 million | $(33.2) million | Improved by $213.7 million |
| Cash and cash equivalents | $2,062.2 million | $1,853.8 million at Dec. 31, 2020 | $2,083.7 million including restricted cash |
| Gross debt principal | $2,488.8 million | — | No revolver borrowings; $672.0 million available capacity |
Investing cash outflow was $27.3 million, including $25.7 million of capital expenditures; financing cash inflow was $60.1 million. Cash increased by $213.3 million during the quarter. Debt included $1,612.0 million under senior secured facilities, $400.0 million of 5.625% notes, $330.5 million of 2.75% convertible notes and $146.3 million of other long-term obligations. The company reported no debt maturities before 2023 and compliance with required financial covenants. Debt is only part of the funding burden: the balance sheet also included $4,087.0 million of long-term financing obligations and $4,547.7 million of long-term lease liabilities.
Changes versus the prior comparable period
- Revenue and operating results improved as gaming spend per visit and visitation increased. The comparison is heavily affected by Q1 2020 temporary property closures due to COVID-19 and $616.1 million of impairment charges recorded then; the improvement is not solely a like-for-like growth comparison.
- Gaming revenue rose, while food, beverage, hotel and other revenue fell amid capacity limits and restricted amenities. Management cited cost controls, reduced staffing and marketing, and a greater mix of higher-margin gaming activity as contributors to margin improvement.
- Adjusted EBITDAR increased across the Northeast, South, West and Midwest segments; the Other category, which includes Penn Interactive and corporate costs, reported a $21.3 million loss versus an $18.9 million loss.
- Interest expense increased to $135.7 million from $129.8 million, including interest on the 2020 convertible-note issuance. Other income included a $26.1 million unrealized holding gain on operator-related equity securities, compared with a $21.8 million holding loss in Q1 2020.
- General and administrative expense rose 6.3%, partly due to cash-settled stock awards and higher rent expense; management cited a $30.4 million year-over-year increase in expense associated with cash-settled awards. Capital expenditures declined to $25.7 million from $42.8 million.
Outlook, risks and unusual items
- No specific numerical revenue or earnings guidance was provided. Management said cash from operations and cash on hand, together with available credit, were expected to cover anticipated lease payments, debt service, capital expenditures and working capital needs for the foreseeable future. This outlook is subject to substantial uncertainty.
- Management reported that all properties except Valley Race Park had reopened as of March 31, 2021. Zia Park was temporarily closed again from April 8 through April 20, 2021. Capacity limits and COVID-19 restrictions remained in effect at properties.
- Management observed higher spend per visit and visitation approaching 2019 levels in most markets, but cautioned that these trends might not continue. It cited pent-up demand, customer mix, stimulus payments and limited alternative leisure activities as possible influences.
- Development and transaction plans included two Pennsylvania Category 4 casinos, expected to open by year-end 2021; a proposed $56.0 million purchase of the remaining 50% interest in Texas racing assets, expected to close in Q2 2021; and the proposed $31.1 million Perryville operations purchase, subject to approvals. A proposed Tropicana Las Vegas transaction announced by GLPI and Bally’s was expected to close in early 2022, subject to definitive agreements and regulatory approval.
- In February 2021, Penn entered a financing arrangement against potential future proceeds from certain claims. It received $72.5 million in proceeds shown in financing cash flow; the obligation’s principal is contingent and interest accrues at an effective 25% rate until settlement. Penn recorded $1.5 million of related interest expense in Q1.
- Hurricane Laura insurance receivable was $27.0 million at March 31, 2021; no insurer proceeds were received in the quarter. Recovery beyond recognized losses and lost profits was to be recognized only upon settlement or qualifying nonrefundable advances.
- Key risks include renewed pandemic-related closures or restrictions, consumer and economic conditions, competition, regulatory approvals and changes in gaming laws, execution of online betting and iGaming plans, debt covenant and refinancing requirements, and substantial triple-net lease obligations. Management said pending legal proceedings were not expected to have a material effect and reported no material changes to the prior Form 10-K risk factors.
Important facts for investors to verify
- How much of the revenue, cash-flow and margin rebound reflects recovery from Q1 2020 closures and restrictions versus sustainable underlying growth.
- Whether higher spend per visit and visitation persist as public-health conditions and competing leisure options change, and as capacity and amenity limits ease.
- The cash cost and economics of triple-net leases and financing obligations, in addition to reported debt, and Penn’s headroom under financial covenants after the covenant relief period.
- The terms, timing, regulatory approvals and funding requirements for the Texas, Perryville and Tropicana transactions, and the Pennsylvania casino developments.
- The volatility of equity-security gains and cash-settled stock awards, and the ultimate settlement cost of the contingent, 25%-accreting claims financing obligation.
- Potential dilution from convertible notes: the filing reported a maximum of 18.36 million shares issuable under their conversion feature; diluted Q1 EPS already included assumed conversion for EPS purposes.