PENN National Gaming, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; the filing also provides fourth-quarter results. The company operated 29 gaming, racing, and video-gaming businesses across 17 jurisdictions. It reported under the name Penn National Gaming, Inc.
Financial performance and liquidity
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Net revenue | $3,148.0 million | $3,034.4 million | +3.7% |
| Income from operations | $445.7 million | $543.0 million | -17.9% |
| Net income | $473.5 million | $109.3 million | Higher, materially affected by tax items |
| Adjusted EBITDA | $845.9 million | $843.8 million | +0.3% |
| Operating cash flow | $459.1 million | $411.7 million | +$47.4 million |
| Cash and cash equivalents at year-end | $278.0 million | $229.5 million | +$48.4 million |
| Capital expenditures | $99.3 million | $97.2 million | +$2.0 million |
Operating margin was approximately 14.2%, down from 17.9%. The net income figure is not a straightforward indicator of operating improvement: the company recorded a $741.9 million release of its tax valuation allowance, partly offset by a $261.3 million deferred-tax charge from the Tax Cuts and Jobs Act. Pretax loss was $25.0 million; the reported income-tax benefit was $498.5 million. Adjusted EBITDA is a non-GAAP measure and excludes, among other items, GLPI Master Lease payments; it should not be treated as cash flow or liquidity.
Interest expense was $466.8 million, versus $459.2 million. Reported total debt was $1.25 billion; the senior secured facility had $760 million outstanding and $677.9 million of revolver capacity available. The separate GLPI financing obligation was $3.54 billion. The company reported compliance with debt covenants at year-end. Current assets were $401.0 million and current liabilities $530.0 million.
Material changes versus the prior year
- Revenue growth reflected acquisitions, including the May 2017 purchase of 1st Jackpot and Resorts Casino Tunica, which contributed $46.4 million in revenue for the eight months reported, and Prairie State Gaming route acquisitions. Revenue also benefited from growth at several Ohio properties and improved results at some South/West properties.
- Operating income declined despite higher revenue, primarily because of $89.8 million of provisions for the Jamul loan and unfunded commitments, $18.0 million of goodwill impairments, higher general and administrative costs, and $25.1 million of debt-refinancing and extinguishment charges.
- Adjusted EBITDA was nearly flat. Northeast and Midwest improved, while corporate and Other results weakened; Other adjusted EBITDA declined to negative $88.4 million from negative $61.1 million.
- Cash from operations increased. Investing cash outflow rose to $221.6 million, including acquisition spending and the absence of significant Jamul loan-refinancing proceeds received in 2016. Financing cash outflow was $189.0 million, including debt repayment and $24.8 million of share repurchases.
- The company refinanced its credit facilities, issued $400 million of 5.625% senior notes due 2027, and redeemed $300 million of 5.875% notes, recording an early-extinguishment loss.
Outlook, risks, and unusual items
- Management believed cash from operations, cash on hand, and revolver availability would cover anticipated lease obligations, debt service, capital spending, and working capital needs for the foreseeable future, while cautioning that operating results and borrowing availability were uncertain. Planned 2018 capital spending was approximately $105.5 million, including $103.7 million maintenance and $1.8 million project spending; this excluded the York County casino project.
- The pending Pinnacle acquisition was valued at approximately $2.8 billion, including assumed debt, and was expected to close in the second half of 2018 subject to approvals and other conditions. Planned related transactions included approximately $575 million of casino divestitures to Boyd and a $250 million sale-leaseback of Plainridge real estate to GLPI. Management projected $100 million in annual run-rate synergies within 24 months and expected to use incremental cash flow to accelerate debt repayment; these were forward-looking expectations, not achieved results.
- In late February 2018, Penn and the Jamul Tribe agreed Penn would cease management, branding, and development services by May 28, 2018. The Jamul borrower was in default, Penn’s loan was subordinated to other lenders, and Penn recorded $89.8 million of 2017 loan-related provisions. Remaining exposure, including unfunded commitments, was approximately $27.9 million; further loss was possible.
- Casino Rama’s management contract was expected to end shortly after June 30, 2018. Competitive pressure, gaming expansion, tax and regulatory changes, weather, labor agreements, and the substantial GLPI lease burden were significant risks. Management also identified cyber and data-security risks and potential future impairment charges.
- Fourth-quarter 2017 net revenue was $769.0 million, operating income $26.8 million, and net loss $338.1 million. The quarter included $77.9 million of Jamul-related charges and a tax-reform-related deferred-tax asset write-down; quarterly results were therefore unusually volatile.
Important facts for investors to verify
- Reconcile the $473.5 million annual net income and $5.07 diluted EPS to pretax loss, the valuation-allowance release, and provisional Tax Act charges; assess the resulting ongoing tax profile.
- Review Jamul loan collectability, the remaining $27.9 million exposure, subordination and default terms, and the financial effect of ending Penn’s management agreement.
- Assess debt service and lease obligations together: $1.25 billion reported total debt, $3.54 billion GLPI financing obligation, and the cash and borrowing capacity available to meet them.
- Track Pinnacle closing conditions, financing, required divestitures and lease amendments, and whether projected synergies and deleveraging materialize.
- Compare underlying property performance and adjusted EBITDA with GAAP results, noting that adjusted EBITDA excludes Master Lease payments and other significant cash uses.