PENN National Gaming, Inc. (now PENN Entertainment, Inc.) — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial figures are unaudited and in U.S. dollars. The filing is under the name Penn National Gaming, Inc.
Business context
The company operated or held interests in 43 gaming and racing properties across 20 states and pursued an omni-channel strategy spanning casinos, online gaming and sports betting, and sports media. All properties had reopened by quarter-end, with most operating at full capacity subject to health and safety protocols. Its Barstool Sportsbook app was live in 10 states, including three with online casino play; its my choice loyalty program had more than 24 million members.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,511.8 million | $1,129.7 million | $4,332.5 million | $2,551.3 million |
| Operating income (loss) | $239.1 million | $196.2 million | $833.5 million | $(529.8) million |
| Net income (loss) | $86.1 million | $141.2 million | $375.7 million | $(681.8) million |
| Diluted EPS | $0.52 | $0.93 | $2.24 | $(5.36) |
| Adjusted EBITDA (non-GAAP) | $364.3 million | $343.6 million | $1,171.0 million | $419.1 million |
| Adjusted EBITDA margin (non-GAAP) | 24.1% | 30.4% | 27.0% | 16.4% |
Q3 revenue rose 33.8% year over year; nine-month revenue rose 69.8%. Management attributed growth primarily to stronger visitation and longer play, eased capacity restrictions, growth in online and sports betting, and the addition of Hollywood Casino Perryville and Hollywood Casino York. The prior-year comparison was significantly affected by COVID-19 closures and operating restrictions.
Despite higher Q3 operating income and Adjusted EBITDA, net income and diluted EPS fell from Q3 2020. Q3 adjusted EBITDA margin declined 6.3 percentage points, reflecting higher operating costs and an increased mix of non-gaming activity, among other factors. Nine-month 2020 results included $616.1 million of impairment losses; no impairment losses were recorded in 2021.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $779.0 million, versus $220.8 million in 2020. Investing cash outflow was $269.5 million; financing cash inflow was $375.2 million.
- Cash and cash equivalents were $2,729.3 million at September 30, 2021, up from $1,853.8 million at December 31, 2020. Cash, cash equivalents and restricted cash totaled $2,755.1 million.
- Capital expenditures were $137.8 million for the nine months, including $46.6 million for York and Morgantown development projects.
- Aggregate principal indebtedness was approximately $2.9 billion; no revolving-credit borrowings were outstanding, and $673.6 million of revolving capacity was available. The company reported no debt maturity before 2023 and compliance with required financial covenants at quarter-end.
- Total liabilities were $12,677.3 million. Lease liabilities, financing obligations and their long-term commitments are substantial; the filing reports $683.6 million of payments to REIT landlords for the first nine months of 2021.
Material changes and unusual items
- In July, the company issued $400 million of 4.125% senior notes due 2029. In February, it entered into a financing arrangement tied to claims, with interest accreting at an effective rate of 27.0%; $12.1 million of related interest expense was recorded for the first nine months.
- Acquisitions during 2021 included Perryville for $39.4 million and the remaining 50% interest in Sam Houston-area racing assets for $57.8 million. The latter resulted in a $29.9 million gain on the prior equity-method investment.
- After quarter-end, on October 19, Penn completed its approximately $1.9 billion acquisition of theScore, funded with approximately $0.9 billion cash and approximately $1.0 billion in stock or exchangeable shares. The purchase-price allocation was still being determined.
- Other Q3 income included the $29.9 million Sam Houston gain, partly offset by a $20.1 million loss on exercised warrants; the quarter also included a $10.1 million holding gain on equity securities. The company contributed $12.5 million to a California sports-betting initiative.
- A $28.6 million Hurricane Laura insurance receivable was recorded at September 30; no insurance proceeds were received in the first nine months of 2021. The company said the claim remained under review.
Outlook, commentary and risks
The filing provides no specific numerical earnings or revenue guidance. Management said operating cash flow, cash on hand and available credit were expected to cover anticipated lease obligations, debt service, capital expenditures and working capital for the foreseeable future. It cautioned that visitation trends may not continue and that COVID-19, renewed restrictions or closures, economic conditions, competition, regulatory decisions, acquisitions, construction costs and access to capital could affect results and liquidity. Management also highlighted execution, integration costs and uncertain synergies from theScore acquisition. The company’s debt covenants include leverage and interest-coverage tests; a breach or lease-related cross-default could accelerate repayment obligations.
Most important facts for investors to verify
- Whether strong property visitation and gaming activity persist, and whether margins recover from the Q3 decline as operating costs and the digital business evolve.
- The cash and financing impact of theScore acquisition, its integration costs, potential synergies and the final purchase-price allocation.
- Debt covenant headroom, the effect of variable interest rates, and the company’s ability to meet significant lease and financing obligations.
- The economics and cash demands of online sports betting and iGaming, including the distinction between reported revenue and gaming-tax reimbursement gross-ups.
- The timing and recoverability of Hurricane Laura insurance claims, and any material changes in COVID-19 conditions or regulatory requirements.