PENN National Gaming, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; filed May 5, 2022. The filing names the issuer as Penn National Gaming, Inc. It operates 44 properties in 20 states, online sports betting in 13 jurisdictions, and iCasino in five.
Financial performance
Unless otherwise stated, amounts are in millions of dollars. Comparisons are with Q1 2021.
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1,564.2 | $1,274.9 | +22.7% |
| Operating income | $292.0 | $216.5 | +34.9% |
| Operating margin | 18.7% | 17.0% | +1.7 percentage points |
| Net income | $51.6 | $90.9 | −43.2% |
| Net income attributable to Penn | $51.7 | $91.0 | −43.2% |
| Diluted EPS | $0.29 | $0.55 | −47.3% |
| Adjusted EBITDA (non-GAAP) | $434.6 | $336.6 | +29.1% |
| Adjusted EBITDA margin (non-GAAP) | 27.8% | 26.4% | +1.4 percentage points |
| Adjusted EBITDAR margin (non-GAAP) | 31.6% | 35.1% | −3.5 percentage points |
| Cash from operations | $224.9 | $180.5 | +$44.4 |
| Capital expenditures | $65.6 | $25.7 | +$39.9 |
Gaming revenue rose 19.3%; food, beverage, hotel and other revenue rose 41.5%. Management attributed growth to easing pandemic restrictions, stronger visitation and guest spending, expanded online activity, and the addition of Perryville, York and Morgantown. Higher gaming and non-gaming activity also increased payroll, promotional and cost-of-sales expenses.
Net income declined despite higher revenue and operating income. Interest expense, net increased to $160.8 from $135.7, income tax expense rose to $47.6 from $20.6, and “Other” shifted from $21.1 of income to $40.7 of expense. The latter primarily reflected a $38.7 unrealized holding loss on equity securities, versus a $26.1 unrealized gain in Q1 2021. The effective tax rate was 48.0%, compared with 18.5%.
Liquidity, debt and balance sheet
- Cash and cash equivalents were $1,805.5 at March 31, down from $1,863.9 at December 31, 2021. Net cash used in financing was $239.2, primarily reflecting $175.1 of share repurchases.
- At March 31, reported long-term debt, including current maturities, was approximately $2.8 billion in principal. No revolving-facility borrowings were outstanding; $674.3 of capacity was available after letters of credit.
- Current assets were $2,113.0 and current liabilities were $1,122.9. Total liabilities were $14,118.4, compared with $12,775.0 at year-end.
- Lease and financing obligations are substantial: their reported present values were $5.0 billion for finance leases, $1.1 billion for operating leases, and $4.1 billion for financing obligations. These are separate from reported debt.
- The company was in compliance with debt covenants at quarter-end and said it expected to remain compliant for at least the following 12 months.
Material changes, outlook and risks
- Lease accounting change: January 2022 amendments to the Penn and Pinnacle master leases changed the classification of many land components from operating to finance leases. The company recognized an additional $1.393 billion of right-of-use assets and corresponding lease liabilities. This shifted costs among rent, depreciation and interest, affecting period comparisons and reported margins.
- Accounting adoption: Adoption of ASU 2020-06 reclassified an $88.2 million convertible-note conversion feature from equity to liabilities and increased opening retained earnings by $18.9 million, net of tax.
- Capital allocation and spending: The company authorized up to $750 million in repurchases through January 2025 and repurchased $175.1 million of stock during the quarter. It anticipated approximately $300 million of 2022 capital expenditures.
- Post-quarter refinancing: On May 3, 2022, the company entered into new facilities comprising a $1.0 billion revolver, a $550 million five-year term loan A and a $1.0 billion seven-year term loan B, using the term-loan proceeds to repay prior term-loan balances. The new facilities use SOFR-based pricing and include leverage and interest-coverage covenants.
- Outlook: Management said cash on hand, operating cash flow and available credit were expected to cover lease payments, debt service, capital spending and working capital for the foreseeable future. This is not a guarantee; the filing provides no specific earnings guidance value.
- Key uncertainties: Management cited inflation and supply-chain disruption, uncertain recovery from COVID-19, competition, discretionary consumer spending, the continuation of strong visitation, online-gaming launch costs, acquisition synergies, and the availability and cost of future borrowing. Interactive Adjusted EBITDAR was a loss of $10.0, versus income of $1.3, primarily reflecting expansion costs and theScore results.
- Other items: The company recorded an $8.8 million Hurricane Laura insurance-recovery gain; further potential proceeds were contingent on final settlement or nonrefundable advances. The planned Tropicana sale to Bally’s was expected to close in the second half of 2022, subject to agreements and regulatory approval.
- Management said pending legal proceedings were not expected to have a material effect, and that there were no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether operating cash flow and visitation trends remain strong, and whether the company can fund roughly $300 million of 2022 capital expenditures alongside lease and debt obligations.
- How to interpret margins and expense trends after the master-lease reclassifications; Adjusted EBITDA and Adjusted EBITDAR are non-GAAP measures and exclude or adjust specified costs.
- The scale and volatility of Interactive losses, unrealized equity-security gains or losses, and the tax valuation allowance; management said a significant valuation-allowance release might be possible depending on earnings and future projections.
- Completion and terms of the Tropicana sale, the effect of the May 2022 refinancing, and ongoing covenant compliance.
- Whether share repurchases remain consistent with liquidity needs and the company’s substantial lease and financing obligations.