PENN National Gaming, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2013; unaudited. The filing is by Penn National Gaming, Inc. (the company now identified in the request as PENN Entertainment). Unless stated otherwise, amounts below are in millions of dollars.
Business context
The company operated or held interests in 28 gaming and pari-mutuel facilities across 18 jurisdictions at quarter-end. It sold its Bullwhackers property on July 1, 2013. On November 1, 2013, after the reporting date, Penn completed the spin-off of Gaming and Leisure Properties, Inc. (GLPI), which received substantially all of Penn’s former real estate assets and leases most of them back to Penn under a 15-year triple-net master lease.
Financial results and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net revenue | $714.4 | $707.0 | $2,274.1 | $2,155.7 |
| Income from operations | $93.3 | $98.7 | $273.5 | $369.3 |
| Net income | $41.3 | $46.4 | $94.4 | $191.7 |
| Diluted EPS | $0.40 | $0.44 | $0.92 | $1.81 |
| Adjusted EBITDA | $182.1 | $168.6 | $614.2 | $559.1 |
- Q3 operating margin was approximately 13.1% versus 14.0%; nine-month operating margin was approximately 12.0% versus 17.1%. Net margin was approximately 5.8% versus 6.6% for Q3 and 4.2% versus 8.9% for nine months.
- Nine-month operating cash flow was $428.0, compared with $337.8 in 2012. Investing cash outflow was $119.2 and financing cash outflow was $301.3. Capital project and maintenance expenditures totaled $159.1. Cash and cash equivalents were $267.9 at September 30.
- At September 30, current assets were $401.2 and current liabilities $478.2 (current ratio approximately 0.84). Debt was approximately $2.40 billion, including current maturities. The prior revolver had no balance drawn and $762.2 of available capacity, after letters of credit.
- Management reported compliance with the then-existing debt covenants at September 30. In October, Penn replaced its prior credit facility with a $500 million revolver, $500 million Term Loan A and $250 million Term Loan B; it also issued $300 million of 5.875% senior unsecured notes due 2021 and repurchased or called its 8.75% notes. The company expected a $34.7 million debt-extinguishment charge in Q4.
Material changes and drivers
- Nine-month net revenue rose 5.5%, but operating income fell 25.9% and net income fell 50.8%. Q3 net revenue increased 1.0%, while operating income declined 5.5% and net income declined 11.0%.
- Revenue benefited from the additions of Hollywood Casino Columbus and Toledo and the 2012 acquisition of Harrah’s St. Louis. These gains were offset by increased competition, including at Lawrenceburg and in Maryland, and weaker results at certain established properties.
- Adjusted EBITDA rose in both reported periods, but it is a non-GAAP measure and excludes significant costs such as interest, taxes, capital spending and debt principal repayments.
- Nine-month results included a $71.8 million pre-tax impairment charge related to Argosy Casino Sioux City after Iowa awarded a new casino license to another operator. Depreciation and amortization also increased substantially, and interest expense rose to $80.0 million from $55.8 million.
Outlook, risks and unusual items
- Management said operating cash flow, cash on hand and borrowing availability were expected to cover debt service, capital spending and working capital for the foreseeable future, but cautioned that cash generation, earnings growth and future financing availability were uncertain.
- Management expected 2013 capital project spending of $164.5 million, excluding licensing fees and net of reimbursements; $97.0 million had been spent through September 30. The Dayton and Austintown Ohio projects were expected to open in the second half of 2014.
- The GLPI spin-off materially changes the company’s structure. The master lease requires Penn to pay more than half of operating cash flow as rent, plus facility maintenance, insurance, property taxes and utilities. Management warned this could constrain investment, debt service capacity and responsiveness to competition. The lease arrangement and its effect on future results were not reflected in the pre-spin-off quarter’s operating results.
- Major risks include competition and weak consumer spending, regulatory and gaming-license outcomes, construction and permitting risks, tax treatment of the spin-off, reliance on GLPI and the master lease, and substantial indebtedness. The company highlighted ongoing Iowa litigation concerning the Sioux City license; it could operate there only until the replacement casino opens, subject to the dispute. The Ohio Roundtable challenge to video lottery terminals and litigation concerning a proposed racetrack relocation also remained relevant.
- Other unusual items included a $2.5 million tornado deductible charge at Hollywood Casino St. Louis and a 53.9% nine-month effective tax rate, driven mainly by the largely nondeductible Sioux City impairment and a tax write-off associated with the Bullwhackers sale.
Important facts for investors to verify
- Post-spin-off rent obligations, lease terms and the resulting cash flow available for debt service and investment.
- Final debt balances, borrowing availability, interest costs and covenant headroom after the October refinancing and spin-off-related transactions.
- Progress and costs for the Ohio projects, and the financial and licensing outcome for Argosy Casino Sioux City.
- Whether new competition continues to pressure key properties, especially Charles Town, Lawrenceburg and other affected regional markets.
- The final tax treatment of the spin-off and any fourth-quarter debt-extinguishment, impairment or transaction charges.