PENN National Gaming, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. The registrant was named Penn National Gaming, Inc. during this period. The company operated or held interests in 26 facilities across 17 jurisdictions.
Financial results and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Net revenue | $664.1 million | $641.1 million | +3.6% |
| Income from operations | $23.5 million | $18.1 million | +30.1% |
| Operating margin | 3.5% | 2.8% | +0.7 percentage points |
| Net income | $11.0 million | $4.5 million | +$6.5 million |
| Diluted EPS | $0.12 | $0.05 | +$0.07 |
| Adjusted EBITDA | $75.4 million | $73.4 million | +$2.0 million |
| Adjusted EBITDAR | $184.2 million | $177.7 million | +$6.6 million |
| Cash from operating activities | $65.6 million | $23.6 million | +$42.0 million |
Gaming revenue rose 3.6% to $591.3 million. Operating costs increased 2.8% overall: general and administrative expense rose 7.7% to $116.1 million, and master-lease rent rose 4.3% to $108.8 million. Depreciation and amortization declined 9.4% to $42.9 million. The effective tax rate was 45.7%, down from 60.0%.
Cash and cash equivalents were $237.7 million at March 31, up from $208.7 million at year-end. Investing activities used $65.3 million, including $36.9 million of capital-project spending and $16.3 million advanced to the Jamul Tribe; financing activities provided $28.8 million. Reported debt, including current maturities and debt issuance costs, was approximately $1.276 billion. Gross senior secured credit-facility borrowings were $830.6 million; the company also had $300 million of 5.875% notes due 2021 and $169.8 million of other long-term obligations. Revolver availability was $362.3 million. The company reported compliance with its financial covenants.
Material changes and operating drivers
- East/Midwest revenue increased to $386.5 million from $349.4 million, with operating income rising to $19.1 million from $9.6 million. The Dayton and Mahoning Valley racinos, opened in 2014, contributed $47.4 million in net revenue combined.
- Southern Plains revenue fell to $210.3 million from $223.8 million, primarily reflecting the 2014 closure of Argosy Casino Sioux City and competitive pressure at Hollywood Casino Aurora.
- New competition affected Hollywood Casino Lawrenceburg and Charles Town. Management also cited sluggish economic conditions and lower discretionary consumer spending.
- Corporate and other operating loss widened to $26.7 million from $20.8 million, largely due to higher corporate overhead and cash-settled stock-compensation charges.
- Operating cash flow improved year over year, which management attributed mainly to higher customer receipts and lower cash paid to suppliers and vendors; payment timing contributed to the latter.
Outlook, significant items and risks
- Management expected Plainridge Park Casino, a slots-only facility in Massachusetts, to open June 24, 2015. Its expected project cost was $250 million; cumulative costs reported by March 31 were $144.6 million, including the license fee and racecourse acquisition.
- The Jamul casino project was expected to be completed in mid-2016. Penn reported an $86.4 million note receivable from the Tribe and anticipated funding approximately $360 million toward the development under a conditional commitment of up to $400 million. Repayment depends on casino revenues after completion; management considered collection highly certain but noted a reserve could be required if projections or timing prove inaccurate.
- After quarter-end, Penn announced an agreement to acquire Tropicana Las Vegas for approximately $360 million, funded with cash and increased credit-facility commitments. Closing was expected in Q4 2015, subject to regulatory approvals.
- Management believed operating cash flow, cash on hand and available credit would meet anticipated rent, debt service, capital spending and working-capital needs for the foreseeable future, while cautioning that cash generation, earnings projections and future borrowing availability were not assured.
- Key risks include competition, economic weakness, gaming-tax or regulatory changes, project delays and cost overruns, access to capital, and required approvals. The filing also identifies pending Ohio gaming and Western Pennsylvania project litigation among forward-looking-statement risks. The company said ordinary-course legal matters were not expected to materially harm results, but outcomes and insurance coverage could not be assured.
- At March 31, 2015, the company early adopted guidance presenting debt issuance costs as a deduction from debt carrying value; management reported no income-statement impact.
Important facts for investors to verify
- Whether Plainridge opened on schedule and achieved operating performance sufficient to support its project economics.
- Progress, funding exposure and repayment prospects for the Jamul project and the $86.4 million note receivable.
- Regulatory approvals, final financing terms and closing status for the Tropicana Las Vegas acquisition, including its effect on leverage.
- Whether new properties offset competitive pressure at established facilities, especially Lawrenceburg, Charles Town and Aurora.
- The sustainability of improved operating cash flow, considering working-capital timing, capital expenditures, debt service and master-lease obligations.